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					Comfortable.
Responsible.



2008 Annual Report

Municipal Gas
Authority of Georgia
Table of Contents                                Corporate Profile
Mission, Corporate Profile                  1
                                                 The Municipal Gas Authority of Georgia
Letter to Our Members                       2
Year in Review & A Look Ahead               5    (the Gas Authority) is the largest non-profit
Board Members, Officers                          natural gas joint action agency in the United
    and General Counsel                   14     States, serving 76 Members in Georgia,
Key Operating Statistics                  15     Alabama, Pennsylvania, Tennessee, and
Financial Results                         16
    - Auditors’ Reports                          Florida that meet the gas needs of more than
    - Management Discussion & Analysis           248,000 customers. In addition, the agency
    - Financial Statements                       provides services to 8 other agencies and
 General Corporate                               public systems referred to as “Partners”. The
    Information            Outside back cover    Gas Authority serves as the manager of both
                                                 Public Gas Partners, Inc. (PGP) and Main
                                                 Street Natural Gas, Inc. (Main Street), which
                                                 acquire and provide economical natural gas
Our Mission                                      reserves, in the case of PGP, and long-term
                                                 prepaid natural gas supplies, in the case of
To provide municipalities a reliable,            Main Street, to the Gas Authority and other
economical supply of natural gas and to assist   public systems. The Gas Authority was
them in developing and growing their gas         formed in 1987 by an Act of the Georgia
systems to optimize the benefits of public       General Assembly to assist municipal
ownership.                                       Members who own and operate natural gas
                                                 distribution systems. Member and Partner
                                                 systems are located on the pipeline facilities
                                                 of seven interstate pipelines. The Gas
                                                 Authority provides a broad array of gas
                                                 supply, marketing and financial services,
                                                 which deliver significant benefits to its
                                                 Members, Partners and the customers
                                                 they serve. Services include gas supply
                                                 and storage management, supply and
                                                 capacity planning, regulatory representation,
                                                 industrial customer assistance, budget
                                                 assistance, rate design, budget forecasting,
                                                 market development, communications,
                                                 project financing, risk management assis-
                                                 tance, regulatory compliance, and training.
When one tugs at a single thing
in nature, he finds it attached
   to the rest of the world.
            John Muir
Letter to Our Members




    $14
            DAILY NATURAL GAS PRICING
                                                                     I      n 2008, energy prices climbed to record highs and
                                                                              DAILY NATURAL GAS PRICING
                                                                     then by early 2009 had dropped to levels not seen in
                                                                        $14

                                                                     over five years. The financial markets moved from open
    $12                                                                 $12
                                                                     and accessible to strained and constrained. The overall
    $10                                                              economy sank from modest growth to decline. Even
                                                                        $10


     $8
                                                                     in these challenging times, through a strong supply
                                                                         $8
                                                                     portfolio, solid credit and a hard working, dedicated
     $6
                                                                     team, your Gas Authority again delivered reliable service
                                                                        $6


     $4                                                              at substantial savings to your community and the
                                                                         $4
                                                                     customers you serve.
     $2                                                                  $2


     $-                                                              Supplies were delivered without interruption and
                                                                        $-
           Jan.   Apr.      Jul.      Oct.        Jan.        Apr.
          2008    2008     2008       2008       2009         2009
                                                                          Jan-08
                                                                     with savings to Members reaching Jul-08 million in
                                                                                       Apr-08          $11            Oct-08     Jan

                                                                     2008, down from the record $12.8 million achieved in
                                                                     2007 but well above the previous 5 year (2002-2006)
                                                                     average of $8.8 million. An additional $1 million was
                                                                     added to the working capital reserve. Members also
                                                                     received capacity release credits of $4 million in 2008,
                                                                     comparable to 2007 credits, and margins on storage gas
                                                                     exceeded $2.6 million, $100,000 better than the record
                                                                     level achieved in 2007.


                                                                     Our long-term supply portfolio is well positioned to
                                                                     continue providing Members significant savings for
                                                                     many years to come. We plan to grow our ownership of
                                                                     natural gas reserves through Public Gas Partners, which
                                                                     today supplies about 17% of our Members’ needs. In
                                                                     January, we began taking delivery from the first Georgia
                                                                     facility to convert landfill gas to pipeline quality gas.




2                        Municipal Gas Authority Of Georgia
We do not inherit the earth from our ancestors,
we borrow it from our children.             Native American Proverb

In 2008, Standard & Poor’s upgraded the rating on our            On behalf of our Board and all of our employees,
bonds to AA-, with Moody’s and Fitch affirming our               we thank you for the opportunity to serve you, your
ratings of A1 and A+, respectively. All 76 Members               customers and your communities.
signed contract amendments to extend the strong
underlying credit structure of the Gas Authority. As a
result, the Gas Authority continues to experience good
access to capital at a low cost.                                 Luther L. (Buddy) Duke, III
                                                                 Chairman of the Board
Throughput volumes increased 3 percent in 2008
and are expected to continue growing in 2009. Load
reductions resulting from the slowdown in the economy            Arthur Corbin
have been more than offset by new service to the                 President & CEO
first ethanol plant in Georgia through our Member
Camilla and a new long-term supply arrangement with
Richmond, Virginia.


As we look ahead for the remainder of 2009 and
into 2010, we expect the business environment will
continue to challenge even the best of companies. We
are prepared. The Gas Authority and its Members have
what it takes to succeed – a strong supply portfolio,
good access to low cost capital and a talented, dedicated
team of employees focused on service. Natural gas,
with lower prices, abundant domestic supplies and
clear environmental benefits, is the comfortable and
responsible choice, and our Members, with the help
of their Gas Authority, are ready to deliver that
choice to businesses and residences in and around
their communities!

                                         Luther L. (Buddy) Duke, III
                                              Chairman of the Board
                                                       Arthur Corbin
                                                    President & CEO
                                                                                                                       3
Municipal Gas Authority Of Georgia
                                                      T               oday, as natural gas industry leaders from
                                                                      all sectors join to roll out an unprecedented
                                                                      industry branding and marketing effort
                                                       centered around the message “Natural Gas: Comfortable.
                                                       Responsible”, the Municipal Gas Authority of Georgia
                                                       wholeheartedly embraces this message, concept and effort. In
                                                       fact, the Gas Authority’s 21-year history of responsible supply
                                                       management, financial stewardship, and service record to its
                                                       Members and Partners exemplifies, from a broad perspective,
                                                       the “Natural Gas: Comfortable. Responsible.” message.
The Gas Authority and its Members became members
of the Council for Responsible Energy in 2008.
                                                      In 2008 the Gas Authority continued to build on its diverse,
                                                      long-term supply portfolio to meet the future needs of its
Members and Partners. For much of its history, the Gas Authority has relied on long-term prepayments and spot
supplies to serve those needs, but today’s dynamic energy marketplace requires a more diverse supply strategy. The
Gas Authority took several steps in 2008 to prepare for this evolving strategy, including having its Members amend
contracts authorizing broader acquisitions and extending contract terms.


In a period of unprecedented turbulence in the capacity-constrained financial markets, the Gas Authority received
a credit upgrade and issued new debt at low effective rates. Standard & Poor’s upgraded its rating on the Gas
Authority to AA- from A, while Moody’s and Fitch affirmed their ratings of A1 and A+, respectively. These strong
ratings reflect the value of the Gas Authority’s underlying legal structure, diverse membership, and long-term supply
assets, which enabled it to access the short-term note market at rates below 2 percent and increase its working capital
through new bank lines.


Through its participation in Public Gas Partners (PGP), the Gas Authority
continued building its portfolio of gas reserves in 2008, with plans for a new
PGP Supply Pool to be formed in 2009. PGP plans to secure additional
financing to support its ongoing acquisition program in 2009. PGP also
reached a milestone with the commencement of physical deliveries to
participants in January 2009.




                                                                    Great chefs insist
                                                                     on natural gas.
                                                                                                                         5
Municipal Gas Authority Of Georgia
SUPPLY PORTFOLIO 2007 - 2008




    44%
       11%

             42%
                          Reserves

                          Prepay

                          LNG & Seasonal

                          Spot
                                                      T                   he Gas Authority and other municipal gas and electric
                                                                          systems receive substantial prepayment supplies at a
                                                                          discount to spot market pricing through Main Street
                                                     Natural Gas, Inc. In 2008, Main Street completed one prepayment
                                                     transaction that was later terminated due to the Lehman Brothers
                                                     bankruptcy. The Gas Authority will continue to look for market
                   3%
                                                     opportunities to secure additional prepaid supplies through
 SUPPLY PORTFOLIO - Estimated 2009                   Main Street.
                          Reserves

     18%
             41%
                          Prepay
                                                     In 2008, work was completed on a landfill methane extraction project
                          LNG, Seasonal & Landfill

                          Spot
                                                     to serve the cities of Buford and Winder. Initial deliveries from the
     33%     10%                                     high-Btu project commenced in January 2009. The Gas Authority has
                                                     a 20-year agreement with Winder Renewable Methane, LLC securing
                                                     as much as 2,500 Dth/day of discounted gas from the project, and
agreements with the cities of Winder and Buford to take this new source of supply.


While reshaping its gas supply portfolio, the Gas Authority was experiencing declining throughput volumes
as the result of the culmination of some supply contracts in recent years and the economic downturn reducing
industrial demand. However, in 2008 the Gas Authority executed a long-term contract with Richmond, Virginia
and commenced service in late 2008 to the First United Ethanol LLC (FUEL) plant through the city of Camilla.
Combined, these new services will add approximately 7 Bcf/year
of throughput.




                                          First United Ethanol, LLC (FUEL),
                                       located near Camilla, Georgia, converts
                                               corn into ethanol, a high-octane,
                                                clean-burning, American-made
                                      renewable fuel. In addition to its uses for
                                         motor and aviation fuel, ethanol is an
                                      ingredient in some deodorants, soaps and
                                      lotions. FUEL has brought much needed
                                      economic growth into southwest Georgia.

                                                                                                                                 7
Municipal Gas Authority Of Georgia
 80,000


 70,000


 60,000
            HISTORICAL ANNUAL THROUGHPUT
            (1,000s Dth)

                                                           Partners
                                                           MGAG           C                       hanges in the Gas Authority’s supply portfolio
                                                                                                  -- the reduction in prepayments, growing
                                                                                                  acquisitions of natural gas reserves, new
                                                                            landfill gas supplies, and the mix of seasonal and spot market
                                                                            supplies -- and changes in demand pose new challenges and
                                                                            opportunities in the day-to-day management and delivery
 50,000
                                                                            of gas to Members and Partners. Always, the Gas Authority’s
 40,000                                                                     mission to provide Members “reliable, economical supply of
                                                                            natural gas and to assist them in developing and growing their
 30,000
                                                                            gas systems to optimize the benefits of public ownership” drives
 20,000                                                                     the organization. It is this clear focus of mission with which
                                                                            our Members and Partners have grown comfortable and know
 10,000
               02     03     04     05     06     07     08 09 Proj.        the organization strives for day-in and day-out.


 The Gas Authority adopted revised pricing strategies in 2008 to lower its Members monthly cost, while still
                           NYMEX Close 2008
 effectively managing the intra-month load and price swings. While all gas supply to Members fluctuates with market
$15
 prices,
$14           the Gas Authority lowered its monthly swing pricing by approximately $2 million in 2008, through the
$13
 initiation     of monthly portfolio returns and by capturing discounted spot purchase opportunities associated with our
$12
 pipeline
$11            capacity in the production area. The monthly portfolio returns began at 3 cents per Dth in January, 2008,
 and
$10     increased to 5 cents per Dth in January 2009.
 $9
 $8
 T
 $7 o   manage intra-month load and price swings, the Gas Authority
 $6
 proactively        collects $2 million in Swing Supply Charges (SSC)
 $5
 from
 $4         its Members. In 2008, daily volume swings ranged from
 $3
 38,898       Dth to 332,397 Dth and price swings ranged from a high
 $2
 of $13.30 per Dth in July to a low of $5.33 in December. While
 $1
 load
 $0         and price swings were extreme, the Gas Authority returned
      Jan    Feb Mar Apr May June July Aug Sep Oct Nov Dec
 just under $1.7 million of the $2 million SSC collected in 2008.


                                     While “The City of Roses”, Thomasville, Georgia, pays
                                      homage to its more than 7,000 roses every spring, it is
                                  its 329-year-old Live Oak tree that steals the show. With
                                       a 24-foot circumference and a limb span of 162 feet,
                                     it is considered one of the largest Live Oak trees east of
                                       the Mississippi, and has borne witness to the growth,
                                    development and history of this southwest Georgia city.
                                           Photo courtesy of the Thomasville Visitor’s Center.
                                                                                                                                                   9
Municipal Gas Authority Of Georgia
              $5.0

              $4.5

              $4.0

              $3.5
                     ANNUAL AMOUNTS RETURNED
                     TO MEMBERS
                        Swing Supply Refunds
                        CSS Storage Program Margin
                        Capacity Credits
                                                            W                            ith pipeline and storage capacity
                                                                                         costs totaling just over $30 million
                                                                                         per year for our Members, the
                                                            Gas Authority returned value by releasing excess capacity
                                                            to other Members in need of capacity or to third parties,
              $3.0                                          yielding nearly $4 million in monthly returns during
 (Millions)




              $2.5                                          2008. In addition, by carefully managing withdrawals
              $2.0                                          and injections of storage supplies during critical periods
              $1.5                                          and locking in summer and winter pricing spreads, the

              $1.0                                          Gas Authority surpassed the record margins achieved the

              $0.5
                                                            previous storage year with margins of $2.5 million for
                                                            the 2008-2009 storage year. This margin is particularly
              $0.0
                       2004   2005    2006    2007   2008
                                                            noteworthy given that gas was injected during the spring
                                                            and summer when gas prices were at record high levels.
These volumes were hedged by the Gas Authority and delivered to Members in the peak winter months at much
lower index-priced gas, avoiding over $16 million of costs above current market prices.


The economic downturn and competing energy
marketing messages have also had an impact on
residential customer load and slowed customer growth
significantly. Facing reduced natural gas sales on a
national level, the Gas Authority, its Members, and
the natural gas industry as a whole are embarking on
exciting new marketing concepts and themes. In 2008,
the Gas Authority and its Members became charter
members of the Council for Responsible Energy, a
national, natural gas marketing consortium that is
branding natural gas as the “Comfortable, Responsible”
energy. As energy providers vie for the consumer’s
perception as “green friendly” and efficient, natural gas
is well-positioned to stand out.                            Morning Glories awaken on the front lawn of the Hunter House, a circa
                                                            1883 Victorian home, which is said to be the most photographed house
                                                            in “The Prettiest Small Town in America” as named by Holiday Travel
                                                            magazine (Madison, Georgia). Nearly 100 lovingly restored Antebellum
                                                            homes still stand in the town spared by General William Sherman during
                                                            his Civil War “March to the Sea” because of his familial ties to the town.
                                                            Photo courtesy of the Georgia Department of Economic Development.
                                                                                                                                     11
Municipal Gas Authority Of Georgia
                                                          T              he Gas Authority is encouraging its Members to
                                                                         embrace the “Comfortable. Responsible.” brand and
                                                                         incorporate it locally, in advance of national marketing
                                                          support materials expected in 2009 and beyond. In addition, the
                                                          Gas Authority restructured its Member Services group in 2008 and
Ribbon cutting ceremony of the Winder Renewable           is developing its own marketing materials and initiatives through
Methane Facility. This facility converts methane gas
collected from a landfill into pipeline quality natural   a regional marketing and sales model to further assist Members in
gas, providing cost-effective, clean, reliable energy     retaining and growing their customer base.
to the region. The first of its kind in Georgia, this
facility will produce enough gas for the heating
and cooking needs of over 10,000 homes.                   Members continue to experience growing state and federal regulatory
                                                          demands on the operations of their gas systems. In 2006 the Gas
Authority created the Subscribed Regulatory Compliance Service (SRCS) to help Members face these growing
responsibilities, and in 2008, SRCS grew to serve 45 municipal systems and three master meter operators. SRCS is
in the forefront of procedural document development, report and inspection preparation, and representation before
regulatory and legislative bodies statewide and nationally for its subscribers.


Technology provides the backbone to extensively track and manage the Gas Authority’s growing responsibilities and
services and deliver the level of results expected by Members and Partners. In 2008, the Gas Authority upgraded its
network, developed new applications and enhanced existing applications to further support the increasing amount
of data required to effectively monitor and manage the needs of its Members and Partners. Many of these enhanced
capabilities help the Gas Authority better track and manage its gas reserves and communicate more effectively and
timely with its Members and Partners via online tools. The
Gas Authority recognizes the ever-changing requirements
of its business and technology and will continue to focus
resources to optimize its operations.


From all perspectives, the Municipal Gas Authority of
Georgia, its staff, management and Board of Directors
strives to deliver the reliability, excellence and service
its Members and Partners have come to expect. In these
challenging times, it is reassuring to know that the
Municipal Gas Authority of Georgia and natural gas are                    In Thomson, Georgia, The Depot has stood watch over “The
                                                                          Camellia City of the South” since the mid-1800s. Renovated in
indeed: “Comfortable. Responsible.”                                       1981, today it houses the Thomson-McDuffie County Tourism
                                                                          Convention and Visitor’s Bureau, and plays host to community special
                                                                          events and celebrations. Photo taken by Jason B. Smith.

                                                                                                                                            13
The Municipal Gas Authority of Georgia Board Members




                     Front Row, from left to right: G. Terry Farmer, Gas Superintendent - Lawrenceville; Terry Horton, Council Member - Warner
                     Robins; Luther L. (Buddy) Duke, III, Chairman/Council Member - Adel; Henry Barfield, Gas Superintendent - Americus
                     Back row, from left to right: Carter Crawford, City Manager - Sylvania; Doug White, City Manager - Social Circle; Steve
                     Sykes, Vice Chairman/City Manager - Thomasville; Bill Hatcher, Secretary/Treasurer/Mayor - Statesboro; Julian Jackson, City
                     Administrator - Monroe

Officers and General Counsel




                                                                                     Left to right:
                                                                                     Chris Strippelhoff - Vice President, Member Services
                                                                                     Della Wager-Wells - General Counsel
                                                                                     Arthur Corbin - President & CEO
                                                                                     Mike Frey - Vice President, Gas Supply & Operations
                                                                                     Susan Reeves - Chief Financial Officer


14                   Municipal Gas Authority Of Georgia
Key Operating Statistics


                                                                            2004     2005     2006     2007     2008
                       Number of Members/Partners
                           Southern Natural                                   24       26       25       25       25
                           Southern Natural - South Georgia Facilities        25       25       25       25       25
                           Transco                                            23       23       23       23       23
                           Texas Eastern/Midwestern                            9        9        3        3        3
                           Other Partners                                      3        4       10       10        8
                       Total Number of Members/Partners                       84       87       86       86       84


                       Total Throughput By Member & Partner (000 MMBtu)
                           Member                                          35,273   37,279   39,981   40,784   39,513
                           Partner                                         33,250   32,739   25,549   19,293   17,764
                       Total Throughput                                    68,523   70,017   65,530   60,077   57,277


                       Total Throughput By Pipelines (000 MMBtu)
                           Southern Natural                                25,826   28,158   26,751   23,840   18,018
                           Southern Natural - South Georgia Facilities      6,563    6,115    5,536    5,357    5,768
                           Transco                                         18,653   17,752   18,284   24,045   25,711
                           Texas Eastern/Midwestern                         6,492    6,974    5,075    4,110    3,810
                           Florida Gas Transmission                         2,531    2,514    2,720    1,804    2,153
                           Other                                            8,458    8,504    7,164     921     8,817
                       Total Throughput By Pipelines                       68,523   70,017   65,530   60,077   57,277


                       Heating Degree Days - Actual
                           South Georgia                                    1,640    1,494    1,292    1,377    1,579
                           Middle Georgia                                   2,094    2,177    2,102    2,087    2,293
                           North Georgia                                    2,591    2,739    2,455    2,360    2,751


                       Heating Degree Days - 10 Year Average
                           South Georgia                                    1,557    1,545    1,490    1,485    1,518
                           Middle Georgia                                   2,276    2,254    2,200    2,179    2,215
                           North Georgia                                    2,665    2,667    2,621    2,583    2,607


                       Average Spot Price ($/MMBtu)                         $6.14    $8.62    $7.23    $6.86    $9.03


                       Members’ Customers - By Pipeline
                           Southern Natural                                53,825   58,020   55,993   56,039   55,813
                           Southern - South Georgia Facilities             34,890   36,970   34,212   34,753   34,111
                           Transco                                        117,058 123,167 129,113 138,067 137,171
                           Texas Eastern/Midwestern                            –    23,727   23,711   24,751   21,085
                       Total Customers                                    205,773 241,884 243,029 253,610 248,180


                       System Load Factors                                  44%      44%      41%      41%      34%




                                                                                                                        15
Independent Auditor’s Report




                     To the Board of Directors of the Municipal Gas Authority of Georgia

                     We have audited the accompanying basic financial statements of the Municipal Gas Authority of
                     Georgia (the “Company”) as of and for the year ended December 31, 2008, on pages 27 to 46.
                     These financial statements are the responsibility of the Company’s management. Our responsibility
                     is to express an opinion on these financial statements based on our audit.

                     We conducted our audit in accordance with auditing standards generally accepted in the United
                     States of America. Those standards require that we plan and perform the audit to obtain reasonable
                     assurance about whether the financial statements are free of material misstatement. An audit includes
                     consideration of internal control over financial reporting as a basis for designing audit procedures
                     that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
                     effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no
                     such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and
                     disclosures in the financial statements. An audit also includes assessing the accounting principles used
                     and significant estimates made by management, as well as evaluating the overall financial statement
                     presentation. We believe that our audit provides a reasonable basis for our opinion.

                     In our opinion, the financial statements referred to previously present fairly, in all material respects,
                     the financial position of the Municipal Gas Authority of Georgia as of December 31, 2008, and the
                     changes in its financial position and its cash flows for the year then ended in conformity with ac-
                     counting principles generally accepted in the United States of America.

                     Management Discussion and Analysis, on pages 18 to 26, is not a required part of the basic financial
                     statements but is supplementary information required by the Governmental Accounting Standards
                     Board. We have applied certain limited procedures, which consisted principally of inquiries of
                     management regarding the methods of measurement and presentation of the required supplementary
                     information. However, we did not audit the information and express no opinion on it.




                     April 13, 2009




16                   Municipal Gas Authority Of Georgia
Independent Auditor’s Report




                     To the Board of Directors of the Municipal Gas Authority of Georgia
                         Kennesaw, Georgia:

                     We have audited the accompanying balance sheet of the Municipal Gas Authority of Georgia (the
                     “Gas Authority”) as of December 31, 2007, and the related statements of revenues, expenses, and
                     changes in net assets and cash flows for the year then ended. These financial statements are the re-
                     sponsibility of the Gas Authority’s management. Our responsibility is to express an opinion on these
                     financial statements based on our audit.

                     We conducted our audit in accordance with auditing standards generally accepted in the United
                     States of America. Those standards require that we plan and perform the audit to obtain reasonable
                     assurance about whether the financial statements are free of material misstatement. An audit includes
                     consideration of internal control over financial reporting as a basis for designing audit procedures
                     that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
                     effectiveness of the Gas Authority’s internal control over financial reporting. Accordingly, we express
                     no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
                     and disclosures in the financial statements, assessing the accounting principles used and significant
                     estimates made by management, as well as evaluating the overall financial statement presentation. We
                     believe that our audit provides a reasonable basis for our opinion.

                     In our opinion, such financial statements present fairly, in all material respects, the financial position
                     of the Gas Authority as of December 31, 2007, and the results of its operations and its cash flows for
                     the year then ended in conformity with accounting principles generally accepted in the United States
                     of America.

                     Management’s discussion and analysis on pages 18 through 26, which is the responsibility of the Gas
                     Authority’s management, is not a required part of the basic financial statements but is supplementary
                     information required by the Governmental Accounting Standards Board. We have applied certain
                     limited procedures, which consisted principally of inquiries of management regarding the methods
                     of measurement and presentation of the supplementary information. However, we did not audit the
                     information and express no opinion on it.




                     April 25, 2008




                                                                                                                             17
Management Discussion and Analysis (Unaudited)




Overview            Corporate Structure
                    Municipal Gas Authority of Georgia (the “Gas Authority”) is a nonprofit, joint-action agency created
                    in 1987 by an Act of the General Assembly of the State of Georgia (the “Act”). The Gas Authority
                    is a public corporation whose primary purpose is to provide reliable and economic gas supplies to
                    municipal gas distribution systems.

                    Joint Action
                    Eighty-six municipal gas utilities have entered into both long- and short-term gas supply contracts
                    with the Gas Authority. Each utility is locally owned and operated; however, municipal utilities share
                    common interests and concerns that can best be solved by working together. For example, by con-
                    tracting with the Gas Authority, the municipal utilities can diversify their source of supplies through a
                    portfolio of supply arrangements rather than depending on the services of a single provider. Through
                    joint action, these municipal utilities use economies of scale to reduce the overall cost of natural gas to
                    their ultimate customers.

                    Members and Partners
                    Seventy-six municipal gas utilities (the “Members”), serving approximately 248,000 retail customers
                    in Georgia, Alabama, Florida, Pennsylvania, and Tennessee, have signed long-term gas supply con-
                    tracts, with an original term of twenty-five years, requiring that they take their entire gas supply from
                    the Gas Authority and requiring the Gas Authority to provide that supply. The Gas Authority has also
                    contracted to provide services to eight other agencies and municipal utilities (“Partners”) on a lim-
                    ited basis for the benefit of the Members. The Gas Authority is governed by a nine-member Board of
                    Directors, which is elected from the membership and serves in staggered three-year terms.

                    Authority
                    The Act provides that the Gas Authority will establish rates and charges to produce revenues sufficient
                    to cover its costs, including debt service. It may not operate for profit unless such profit inures to the
                    benefit of the public. The Gas Authority is specifically authorized by the Act to undertake joint proj-
                    ects for its Members and to issue tax-exempt bonds and other obligations to finance the costs of such
                    projects.

                    Long-Term Gas Supply
                    Members can elect to participate in joint projects undertaken by the Gas Authority and authorize
                    issuance of project debt by entering into a supplemental contract (“Supplemental Contract”). These
                    Supplemental Contracts authorize the Gas Authority to issue gas revenue bonds and other debt
                    obligations to acquire a portfolio of gas supplies and gas-related assets to fulfill, in whole or in part,
                    its obligation to supply gas to Members. Two such projects, Portfolio II and Agency, expired during
                    2007, and final principal payments were made. The Portfolio III project was initiated in November
                    2002 with the execution of amended gas supply contracts and Supplemental Contracts with all
                    Members. Those contracts were amended in 2008 to extend the full requirements gas supply
                    services to Members through at least the date on which all Portfolio III bonds are fully retired and
                    authorize the issuance of up to $1,500,000,000 in debt to secure long-term gas supplies. Through
                    these contracts, the Gas Authority may issue additional debt, in series, through December 31, 2014,
                    with maturities not exceeding fifteen years from issuance.

                    The Gas Authority has completed four gas reserve acquisitions in Portfolio III. In January 2003, the
                    Gas Authority executed its first Portfolio III transaction with the acquisition of working and royalty




18                  Municipal Gas Authority Of Georgia
interests in coalbed methane reserves in Alabama’s Black Warrior Basin for $72,000,000. In January
2006, the Gas Authority acquired coalbed methane natural gas reserves and a related gathering system
in Kansas’ Cherokee Basin for $61,250,000. In two transactions in 2008, the Gas Authority acquired
gas reserves and development acreage in Louisiana and Oklahoma for $18,000,000.

In November 2004 and June 2005, the Gas Authority executed production sharing agreements
(PSAs) with Public Gas Partners, Inc. (PGP), a Georgia nonprofit corporation that acquires and
manages separate pools of gas supplies for its municipal members. The PSAs authorized PGP to ac-
quire specified gas supplies for the benefit of the Gas Authority and other pool participants over three-
year acquisition periods, which ended in 2008. Through December 2008, PGP had completed reserve
acquisitions of $327,900,000 in Pool 1 and $151,500,000 in Pool 2. The Gas Authority utilized a
portion of the Portfolio III authorized debt to make an advance payment to PGP for its 46% Pool 1
and 54% Pool 2 share of acquisitions. See further discussion in liquidity and capital resources below.

A significant portion of price risk related to the sales of gas from gas reserves has been hedged through
the use of natural gas swaps that convert the cost of these future sales from a fixed to a variable price
based on a spot market index. The use of these hedging instruments ensures the Gas Authority’s
Members and Partners that future billings will be consistent with prevailing market pricing while
preserving the discounts obtained in the original acquisitions.

In 2006 and 2007, the Gas Authority entered into five long-term supply arrangements, including
three with Main Street Natural Gas, Inc. described below, that are expected to deliver a firm supply
of discounted gas during their 10-20 year terms. Under these pay-as-you-go arrangements, the Gas
Authority has committed to buy specified volumes of gas at prevailing market prices less a discount
when, and if, gas is delivered.

Main Street Natural Gas, Inc.
Main Street Natural Gas, Inc. (“Main Street”) is a nonprofit corporation organized under Georgia
law, formed on November 6, 2006. Main Street was formed to facilitate long-term supply transac-
tions on behalf of the Gas Authority as well as other municipal Customers within and outside the
State of Georgia. Under IRS regulations, Main Street is authorized to issue tax-exempt bonds on
behalf of the Gas Authority. Main Street is governed by a Board of Directors consisting of five
directors of the Gas Authority. Accordingly, Main Street is considered a blended component unit of
the Gas Authority and is included within the Gas Authority’s financial statements. Audited finan-
cial statements of Main Street are available from the Gas Authority. Main Street’s daily activities are
managed by the Gas Authority under services agreements with durations consistent with the related
supply agreements.

In January 2007, Main Street issued revenue bonds totaling $528,255,000 to fund a fifteen-year
natural gas prepayment transaction for 108,600,131 Mcf (“Series 2006 A”). In January 2007,
Main Street issued revenue bonds totaling $527,630,000 to fund a fifteen-year natural gas prepay-
ment transaction for 108,600,131 Mcf (“Series 2006 B”). In September 2007, Main Street issued
revenue bonds totaling $496,710,000 to fund a twenty-year and eight-month natural gas prepayment
transaction for 118,783,750 Mcf (“Series 2007A”).

In April 2008, Main Street issued revenue bonds totaling $709,060,000 to fund a thirty-year natural
gas prepayment transaction for 160,040,000 Mcf (“Series 2008A”) supplied by Lehman Brothers




                                                                                                       19
Management Discussion and Analysis (Unaudited)




                    Commodities Services Inc. (LBCI). In September 2008, Main Street exercised its option to terminate
                    the transaction after LBCI failed to deliver gas for five consecutive days. Termination of the Gas Pur-
                    chase Agreement (GPA) triggered mandatory redemption of the outstanding bonds under the Series
                    2008A Trust Indenture as well as the termination of all other related transaction agreements including
                    the supply agreements with Customers, the commodity swap agreement, and the guaranteed invest-
                    ment contract. Under the transaction agreements, LBCI is obligated to make a termination payment
                    to the bond trustee on behalf of Main Street sufficient to redeem the bonds, and Lehman Brothers
                    Holdings Inc. (LBHI) as guarantor is obligated to make such payment in the event of LBCI’s failure.
                    Also in September 2008, LBHI filed for bankruptcy. On September 30, 2008, LBCI and LBHI
                    failed to make the required termination payment, resulting in the default of the Series 2008A bonds.
                    In October 2008, LBCI filed for bankruptcy. Upon termination of the GPA with LBCI, Main Street
                    expensed the remaining prepaid gas asset. Main Street is not obligated to pay the excess of the bonds’
                    redemption price over amounts held by the Series 2008A bond trustee. Therefore, Main Street derec-
                    ognized the obligation for the Series 2008A bonds upon termination of the LBCI GPA. Main Street
                    has recorded a termination payment receivable and offsetting obligation to the trustee. See further
                    discussion in the financial statement notes.

                    In Series 2006A and 2006B, five municipalities including the Gas Authority signed long-term gas
                    supply contracts, with an original term of fifteen years, to acquire specified volumes from Main Street
                    and requiring Main Street to provide that supply. In Series 2007A, the Gas Authority signed a long-
                    term gas supply contract with an original term of twenty years and eight months. The gas is priced to
                    Customers at a discount to spot market pricing. Additional margins may be distributed annually by
                    Main Street at the discretion of its Board.

                    Price risk related to the future deliveries of gas under these prepayments has been fully hedged
                    through the use of natural gas swaps that convert the revenues that Main Street will receive from
                    Customers for reselling future deliveries of gas from a variable price based on a spot market index to
                    a fixed price. These fixed prices are sufficient to pay project costs, while preserving the discounts ob-
                    tained in the original prepayments. Main Street’s prepayments for these rights are secured by guaran-
                    ties provided by large financial institutions.

                    Short-Term Gas Supplies and Sales
                    In addition to gas supplies obtained from long-term arrangements, the Gas Authority obtains short-
                    term supplies on a daily, monthly, and seasonal basis from a variety of suppliers. These supplies
                    are used by the Gas Authority to fulfill and balance its Members’ and Partners’ daily requirements.
                    Because of the highly seasonal nature of its Members’ and Partners’ gas supply requirements, the
                    Gas Authority also occasionally remarkets excess gas supplies on a short-term basis to a variety
                    of suppliers.

                    Proprietary Funds
                    The Gas Authority follows proprietary fund accounting. Proprietary funds are used to report
                    business-type activities, as contrasted with tax-supported governmental activities.

                    Overview of the Financial Statements
                    This discussion and analysis is intended to serve as an introduction to the Gas Authority’s basic
                    financial statements. These financial statements are designed to provide readers with a broad overview
                    of the Gas Authority’s finances in a manner similar to a private-sector business.

                    The balance sheet presents information on all of the Gas Authority’s assets and liabilities, with
                    the differences between the two reported as net assets. Because the Gas Authority is a nonprofit


20                   Municipal Gas Authority Of Georgia
organization, net assets are somewhat limited since billings and revenues in excess of actual costs
are generally returned to Members in the form of billing credits and annual cash returns. The only
significant exception is net assets that have been designated by the Gas Authority’s Board of Directors
as reserve accounts and have been funded by a reduction in Member billing credits or returns. The
statement of revenues, expenses, and changes in net assets presents information showing how the Gas
Authority’s net assets changed during the most recent calendar year. All changes in net assets are re-
ported on the accrual basis as soon as the underlying event giving rise to the change occurs, regardless
of the timing of related cash flows. Therefore, revenues and expenses are reported in this statement
for some items that will result in cash flows in future fiscal periods (e.g., costs recoverable from future
billings and accrued employee vacation).

Notes to Financial Statements
The notes provide additional information that is essential to a full understanding of the data provided
in the financial statements.

Financial Analysis
2008 Compared to 2007

Following are condensed balance sheets as of December 31:

                                                                  2008                              2007

Total assets                                     $      2,617,719,967               $    2,174,494,384

Current liabilities                              $        677,834,654               $      164,785,003
Long-term liabilities                                   1,914,784,266                    1,985,419,129

Total liabilities                                $      2,592,618,920               $    2,150,204,132

Net assets:
 Invested in capital assets                      $          2,814,521               $         2,949,201
 Unrestricted                                              22,286,526                        21,341,051
Total net assets                                 $         25,101,047               $        24,290,252

Assets
The increase in total assets of $443,225,583 is primarily due to advances made to PGP of
$340,288,940 as discussed in Liquidity and Capital Resources below, the $190,378,124 termination
payment receivable from LBHI for the Main Street 2008A transaction, an increase in cash and invest-
ment securities of $61,869,563 as discussed in Liquidity and Capital Resources below, an increase in
gas properties of $28,755,971 primarily due to acquisitions and ongoing capital development of gas
reserves net of depletion of existing reserves, an increase in cost recoverable from future billings of
$4,719,627 and an increase of $6,164,080 in gas inventories due to less gas withdrawals from stor-
age as a result of warmer weather in late 2008 compared to 2007. These increases were offset by a
$105,521,456 decrease in the fair value of forward contracts and a $92,315,871 decrease in prepaid
gas supplies due to the amortization of Main Street’s prepaid gas supplies.

Liabilities
Current liabilities increased $513,049,651 primarily due to the issuance of term notes and line of
credit draws totaling $476,126,128 to fund an advance to PGP, repay existing debt, and fund the
storage program and gas reserve acquisitions as discussed in Liquidity and Capital Resources below,
and an increase in the fair value of forward contracts of $30,731,441. Long-term liabilities

                                                                                                         21
Management Discussion and Analysis (Unaudited)




                     decreased $70,634,863 primarily due to the refunding of $75,000,000 of Portfolio III bonds, reclas-
                     sifications to current liabilities of $64,522,679 on limited-obligation debt, decreases in the fair value
                     of forward contracts of $137,457,486, and a decrease in costs recoverable from future billings of
                     $5,012,158 offset by the Lehman termination payment due to trustee of $190,378,124 and restricted
                     cash from the Main Street 2008A transaction that is on deposit with the trustee of $20,445,038.

                     Following is a summary of operations for the years ended December 31:

                                                                                             2008                     2007

                     Operating revenues                                       $      503,007,824         $    375,765,712

                     Operating expenses:
                      Gas operations                                                 311,736,354              229,992,934
                      Depletion and delivery of gas                                  108,528,905               85,635,813
                      General and administrative                                       8,181,617                7,773,627

                         Total operating expenses                                    428,446,876              323,402,374

                     Operating income                                                 74,560,948                52,363,338

                     Nonoperating expense - net                                       (73,750,153)             (51,303,634)

                     Increase in net assets                                               810,795                1,059,704

                     Net assets - beginning of year                                   24,290,252                23,230,548

                     Net assets - end of year                                 $       25,101,047         $      24,290,252

                     Operating Revenues
                     Operating revenues, which represent gas supplies, pipeline charges, and other services provided
                     to Members, Partners, and customers, increased by $127,242,112 or 33.9%. Approximately
                     $109,000,000 of this increase resulted from the expiration of the Portfolio II project in 2007. The
                     Portfolio II volumes, which consisted of ten-year gas prepayments that accounted for nearly 25% of
                     2007 throughput to members, resulted in net hedged revenues of $1.55 per DT in 2007, and were
                     replaced in 2008 primarily with spot market gas priced at an average of $9.03 per DT. The remain-
                     ing increase of $18,242,112 was primarily due to gas prices that were 31.6% higher than 2007,
                     increases in Main Street volumes to non-Gas Authority customers, and improvements in storage
                     program margins. These increases were offset somewhat by the expiration of the Agency project.

                     The Gas Authority manages natural gas prices through a hedging program under which a portion of
                     estimated firm volumes is protected from some of the price volatility within the natural gas market.
                     Results of these hedging activities are passed through to participating Members and Partners as a
                     billing adjustment in the months that the offsetting physical volumes are delivered. Main Street also
                     manages natural gas prices through long-term hedges to lock in the economics on the related gas
                     supply acquisitions. The results of these hedges are recorded in operating revenues.




22                   Municipal Gas Authority Of Georgia
Operating Expenses
Gas operations, which include production, transportation, storage, and commodity costs of deliver-
ing natural gas to Members and Partners, increased by $81,743,420 or 35.5%. A majority of this
increase is due to the incremental acquisition of spot market gas due to the expiration of Portfolio II
as discussed above. Depletion and delivery of gas, which represent costs associated with long-term
project gas supplies including the delivery of secured prepaid gas supplies as well as depletion of gas
reserves, increased by $22,893,092 in 2008. This increase is primarily the result of an increase in
Main Street depletion of $59,578,694, due to a 162% increase in volumes, offset by a decrease of
$35,106,444 due to the expiration of the Portfolio II projects. General and administrative expenses
increased by $407,990, or 5.2% in 2008, primarily due to increases in payroll expense for normal
salary increases, an increase in computer maintenance, travel, legal and lobbying expenses, offset by
decreases in rentals and building maintenance expenses.

Nonoperating Income and Expenses
Interest expense increased by $29,566,892 to $90,297,814 in 2008 as compared to $60,730,922
in 2007. The increase was primarily attributable to having a full year of Main Street 2007A bonds
outstanding in 2008 as compared to only three months outstanding in 2007, as well as having Main
Street 2008A bonds outstanding for four months in 2008.

Liquidity and Capital Resources
The Gas Authority had cash and investment securities of $137,923,972 at December 31, 2008, as
compared to $76,054,409 at December 31, 2007. The increase of $61,869,563 was primarily due to
an increase in cash flows from Main Street deliveries to customers as prepayment volumes in 2008
were 162% higher than 2007, as well as line of credit draws to fund anticipated working capital
needs.

Following is a summary of debt activity in 2008:

                                                                                   2008A
                         December 31, 2007     Issuances        Payments         Termination       December 31, 2008    Maturity
Line of credit            $            -   $ 147,778,670     $          -    $                 -    $ 147,778,670      Dec. 2009
Portfolio II Series C        35,600,000                       (35,600,000)                                       -           N/A
Portfolio III Series A       55,510,000                       (20,000,000)                              35,510,000     Feb. 2012
Portfolio III Series B       55,000,000                       (55,000,000)                                       -           N/A
Portfolio III Series C                       200,000,000                                               200,000,000     Dec. 2009
Portfolio III Series D                        50,000,000                                                50,000,000     Dec. 2009
Portfolio III Series E                        75,000,000                                                75,000,000     Dec. 2009
Total                    $ 146,110,000     $ 472,778,670   $ (110,600,000)   $                 -    $ 508,288,670

Limited Obligation Debt:
 Main Street bonds       $1,552,595,000    $ 709,060,000   $ (20,290,000)    $ (709,060,000)       $ 1,532,305,000     2013-2028
 Bond premium                82,198,153                       (7,639,699)                               74,558,454           N/A
 Direct financing leases     37,479,998                       (1,694,347)                               35,785,651     2009-2026
Total                    $1,672,273,151    $ 709,060,000   $ (29,624,046)    $ (709,060,000)       $ 1,642,649,105




                                                                                                                               23
Management Discussion and Analysis (Unaudited)




                    Portfolio II debt was repaid in conjunction with the expiration of the project. The Portfolio III Series
                    C and D issuances are one year term notes issued in December 2008 to fund an advance payment to
                    PGP. Under the advance payment agreement, PGP is obligated to repay these funds by the December
                    2009 maturity date of the term notes. Depending on market conditions, the Gas Authority may refi-
                    nance some or all of this debt in 2009 and extend the term of the PGP advance payment accordingly.
                    Series E is also a one-year term note which proceeds were used to repay all $55,000,000 of Series
                    B debt and $20,000,000 of Series A debt. The Gas Authority intends to refinance this issuance in
                    2009. The Gas Authority also entered into two lines of credit with a total capacity of $210,000,000.
                    As of December 31, 2008, $147,778,670 was drawn on those lines to fund an advance payment to
                    PGP, gas reserve acquisitions, and gas storage activities.

                    Revenues from the sale of financed gas to Members, Partners, and others are expected to be sufficient
                    to fully retire the debt and produce net margins as compared to spot market pricing. A portion of the
                    estimated total margins produced from long-term supply arrangements, after consideration of work-
                    ing capital and portfolio reserve levels, is returned to Members each year at the direction of the Board
                    of Directors. A total of $11,352,859 and $11,570,807 was returned to Members for fiscal years 2008
                    and 2007, respectively.

                    The Gas Authority invested $18,000,000 in gas reserve acquisitions and $21,432,950 in capital devel-
                    opment of reserves in 2008. The Gas Authority has no capital commitments. However, development
                    of gas reserves is expected to resume when increases in gas prices support economic drilling. Future
                    acquisitions of gas reserves are expected to occur through PGP Pool 3, which is expected to be formed
                    in 2009.

                    The Gas Authority is exposed to credit risk in its arrangements with financial counterparties, suppli-
                    ers, Partners, and others. The Gas Authority has adopted policies and procedures to minimize this
                    risk. Cash and investment securities balances are composed of working capital and rate stabiliza-
                    tion reserves as well as cash balances generated by the Gas Authority’s long-term supply projects and
                    provide sufficient liquidity for planned operations.


                    Financial Analysis
                    2007 Compared to 2006

                    Following are condensed balance sheets as of December 31:

                                                                                2007                               2006

                    Total assets                                $     2,174,494,384                  $     527,081,966

                    Current liabilities                         $       164,785,003                  $     295,909,713
                    Long-term liabilities                             1,985,419,129                        207,941,705

                    Total liabilities                           $     2,150,204,132                  $     503,851,418

                    Net assets:
                     Invested in capital assets                 $         2,949,201                  $        2,762,164
                    Unrestricted                                         21,341,051                          20,468,384
                    Total net assets                            $        24,290,252                  $       23,230,548




24                   Municipal Gas Authority Of Georgia
Assets
The increase in total assets of $1,647,412,418 is primarily due to Main Street’s purchases of prepaid
gas supplies of $1,531,004,579, an increase in unamortized debt expense of $10,124,607 as a result
of the Main Street revenue bonds issued to purchase prepaid gas supplies, an increase in gas proper-
ties of $8,330,925 primarily due to the ongoing capital development of gas reserves, an increase in the
fair value of forward contracts of $216,078,021, and a net increase in cash and investment securi-
ties of $10,349,119 primarily due to guaranteed investment contracts entered into by Main Street
offset by the expiration of the Agency and Portfolio II projects. These increases were partially offset
by a decrease in the costs recoverable from future billings – forward contracts of $110,578,109 and a
decrease in receivables of $21,636,717 primarily due to lower natural gas prices and milder weather in
late 2007 as compared to late 2006.

Liabilities
Current liabilities decreased $131,124,710 due to decreases in the current portion of long-term debt
of $48,940,000 with the final debt payments on some projects, a decrease in accounts payable and
accrued expenses of $6,082,233 due to lower natural gas prices and milder weather in late 2007
partially offset by accrued interest on Main Street bonds, and a change in the current portion of the
fair value of forward contracts of $104,647,486, offset by increases in the current portion of bond
premium and limited-obligation debt of $7,639,699 and $20,380,000 respectively, related to the
issuance of Main Street revenue bonds to finance prepaid gas supply acquisitions, and an increase in
accounts payable due to members of $525,310 due to increased Member refunds. Long-term li-
abilities increased $1,777,477,424 primarily due to the increase in long-term limited obligation debt
and bond premium of $1,530,593,141 and $74,558,454 respectively, related to the issuance of Main
Street revenue bonds, and a change in the long-term portion of the fair value of forward contracts
of $210,147,398, offset by a decrease in long-term debt of $35,600,000 and costs recoverable from
future billings of $2,089,527.

Following is a summary of operations for the years ended December 31:

                                                               2007                            2006

Operating revenues                                  $ 375,765,712              $       370,462,992

Operating expenses:
 Gas operations                                         229,992,934                    276,893,901
 Depletion and delivery of gas                           85,635,813                     65,219,687
 General and administrative                               7,773,627                      6,574,413

       Total operating expenses                         323,402,374                    348,688,001

Operating income                                         52,363,338                      21,774,991

Nonoperating expense — net                              (51,303,634)                    (20,815,741)

Increase in net assets                                    1,059,704                         959,250

Net assets — beginning of year                           23,230,548                      22,271,298

Net assets — end of year                            $    24,290,252            $         23,230,548




                                                                                                    25
Management Discussion and Analysis (Unaudited)




                    Operating Revenues
                    Operating revenues, which represent gas supplies, pipeline charges, and other services provided to
                    Members, Partners, and customers, increased by $5,302,720 or 1.4% primarily as a result of Main
                    Street revenues of $15,256,868 related to the delivery of gas supplies to customers under new long-
                    term supply agreements. This increase was offset by a decrease of $11,397,791 in Gas Authority
                    revenues due to the expiration of the Agency project and natural gas prices that were 5.1% lower than
                    2006, as well as, a 8.3% decrease in volumes delivered due primarily to weather that was 3.9% warmer
                    than 2006.

                    The Gas Authority manages natural gas prices through a hedging program under which a portion of
                    estimated firm volumes is protected from some of the price volatility within the natural gas market.
                    Results of these hedging activities are passed through to participating Members and Partners as a bill-
                    ing adjustment in the months that the offsetting physical volumes are delivered. Main Street also man-
                    ages natural gas prices through long-term hedges to lock in the economics on the related gas supply
                    acquisitions. The results of these hedges are recorded in operating revenues.

                    Operating Expenses
                    Gas operations, which include transportation, storage, and commodity costs of delivering nonproject
                    natural gas to Members and Partners, decreased by $46,900,967, while depletion and delivery of gas,
                    which represent costs associated with long-term project gas supplies including the delivery of secured
                    prepaid gas supplies as well as depletion of gas reserves, increased by $20,416,126 in 2007. The net
                    decrease in these two accounts of $26,484,841, or 7.7%, resulted primarily from the expiration of
                    the Agency project and a decrease in demand due to the volumetric and price factors described above,
                    offset partially by new Main Street transactions.

                    General and administrative expenses increased by $1,199,214, or 18.2% in 2007, primarily due
                    to increases in payroll expense for normal salary increases, an increase in the employer matching
                    contribution to employees’ deferred compensation plan, and the addition of staff to support the Gas
                    Authority’s Subscribed Regulatory Compliance Service and services to PGP; increases in legal and
                    consulting costs primarily related to service territory issues between Member cities and a non-Member
                    utility; and building maintenance expenses.

                    Nonoperating Income and Expenses
                    Interest expense increased by $47,952,961 to $60,730,922 in 2007 as compared to $12,777,961 in
                    2006. The increase was primarily attributable to the issuance of $1,552,895,000 of bonds by Main
                    Street to acquire long-term gas supplies, offset by principal payments on existing debt.




26                   Municipal Gas Authority Of Georgia
Balance Sheets
As of December 31, 2008 and 2007



                                                                                                   2008                2007

                        Assets

                        Current assets:
                          Cash and cash equivalents                                    $     52,546,485    $     39,120,791
                          Restricted cash and cash equivalents                                9,569,835           8,723,059
                          Investment securities                                                       -           3,415,000
                          Investment securities — restricted                                 55,362,614          24,795,559
                          Accounts receivable — Members                                      52,942,800          55,730,633
                          Accounts receivable — other                                        20,035,236           7,982,396
                          Advance payment due from Public Gas Partners                      340,288,940                   -
                          Prepaid gas supplies                                               92,315,872          91,818,693
                          Gas inventories                                                    22,847,718          16,683,638
                          Fair value of forward contracts                                    34,219,220          12,489,464
                          Interest receivable and other assets                                  424,361             291,294
                               Total current assets                                         680,553,081         261,050,527
                        Noncurrent assets:
                          Investments:
                            Direct financing leases                                          34,694,299          36,465,580
                            Operating partnerships                                           21,618,658          19,515,718
                          Gas properties and supplies:
                            Gas properties — net                                             156,207,461         127,451,490
                            Prepaid gas supplies                                           1,381,976,459       1,474,292,330
                          Capital assets — net                                                 2,814,521           2,949,201
                          Fair value of forward contracts                                     84,596,898         211,848,110
                          Costs recoverable from future billings — forward contracts          23,983,967          25,188,557
                          Costs recoverable from future billings                               4,719,627                   -
                          Restricted cash                                                     20,445,038                   -
                          Termination payment receivable                                     190,378,124                   -
                          Other assets                                                        15,731,833          15,732,871
                               Total noncurrent assets                                     1,937,166,885       1,913,443,857
                        Total assets                                                   $   2,617,719,967   $   2,174,494,384


                        Liabilities and net assets

                        Current liabilities:
                         Accounts payable and accrued expenses                         $     69,468,747    $     61,306,383
                         Due to Members                                                      13,266,535          14,535,450
                         Current portion of long-term debt                                            -          35,600,000
                         Current portion of limited-obligation debt                          64,803,332          29,904,699
                         Term notes payable                                                 328,347,458                   -
                         Line of credit                                                     147,778,670                   -
                         Fair value of forward contracts                                     54,169,912          23,438,471
                              Total current liabilities                                     677,834,654         164,785,003

                        Noncurrent liabilities:
                          Long-term debt                                                     35,510,000         110,510,000
                          Costs refundable from future billings                                       -           5,012,158
                          Fair value of forward contracts                                    88,630,174         226,087,660
                          Asset retirement obligation                                         1,851,525           1,440,859
                          Limited obligation liabilities:
                            Limited obligation debt                                        1,577,845,773       1,642,368,452
                            Restricted cash due to trustee                                    20,445,038                   -
                            Termination payment due to trustee                               190,378,124                   -
                            Other limited obligation liabilities                                 123,632                   -
                                Total noncurrent liabilities                               1,914,784,266       1,985,419,129
                        Total liabilities                                                  2,592,618,920       2,150,204,132

                        Net assets:
                          Invested in capital assets                                           2,814,521           2,949,201
                          Unrestricted                                                        22,286,526          21,341,051
                                Total net assets                                              25,101,047          24,290,252
                        Total liabilities and net assets                               $   2,617,719,967   $   2,174,494,384
                        See notes to financial statements.                                                                 27
Statements of Revenues, Expenses, and Changes In Net Assets
For the Years Ended December 31, 2008 and 2007




                                                                                          2008               2007

                         Operating revenues:
                           Gas operations                                      $ 495,877,222       $   369,322,637
                           Other                                                      7,130,602          6,443,075
                             Total operating revenues                              506,232,737         375,765,712
                         Operating expenses:
                           Gas operations                                          311,736,354         229,992,934
                           Depletion and delivery of gas                           108,528,905          85,635,813
                           General and administrative                                 8,181,617          7,773,627
                             Total operating expenses                              428,446,876         323,402,374
                         Operating income                                            76,560,948         52,363,338
                         Nonoperating revenues (expenses):
                           Interest expense                                         (90,297,814)       (60,730,922)
                           Interest and other income/expense, net                     6,815,875          7,337,761
                           Cost recoverable from future billings                      9,731,786          2,089,527
                           Loss on termination of gas purchase agreement (Note 5) (673,887,148)                  -
                           Net gain on derecognition of debt (Note 5)              673,887,148                   -
                             Total nonoperating expenses — net                      (73,750,153)       (51,303,634)
                         Change in net assets                                           810,795          1,059,704
                         Net assets:
                           Beginning of year                                         24,290,252         23,230,548
                           End of year                                         $     25,101,047    $    24,290,252

                         See notes to financial statements.




28                       Municipal Gas Authority Of Georgia
Statements of Cash Flows
For the Years Ended December 31, 2008 and 2007



                                                                                                  2008                  2007

                         Cash flows from operating activities:
                          Receipts from Members, Partners, and customers               $    565,682,374    $     493,274,703
                          Payments to suppliers                                            (314,791,267)        (247,942,691)
                          Payments to gas forward counterparties, net                       (39,013,201)         (99,434,268)
                          Payments to Members and customers                                 (14,328,815)         (11,424,969)
                          Payments to employees                                              (5,552,920)          (5,180,871)
                          Other receipts                                                         37,764               71,225
                                Net cash provided by operating activities                   192,033,935          129,363,129

                         Cash flows from noncapital financing activities:
                          Line of credit receipts                                          147,778,670                      -
                          Term note receipts                                               328,347,458                      -
                                Net cash provided by noncapital financing activities       476,126,128                      -

                         Cash flows from capital and related financing activities:
                          Acquisition of gas reserves                                       (18,000,000)                    -
                          Acquisition of prepaid gas supply                                (681,643,656)       (1,606,107,510)
                          Capital development of gas reserves                               (22,102,578)          (18,861,573)
                          Capital expenditures                                                  (76,359)             (434,822)
                          Member lease payments                                               3,784,875             3,763,845
                          Gas revenue bond payments                                        (110,600,000)          (84,540,000)
                          Limited obligation debt payments                                  (21,984,347)           (1,621,858)
                          Limited obligation debt proceeds                                  689,981,644         1,641,706,688
                          Interest payments and bond issuance costs                        (109,883,648)          (56,681,589)
                                Net cash used in capital
                                and related financing activities                           (270,524,069)        (122,776,819)
                         Cash flows from investing activities:
                          Investment securities purchases and sales, net                    (27,152,054)           5,578,970
                          Interest receipts                                                   2,865,265            3,613,113
                          Advance payments to Public Gas Partners                          (340,288,940)                   -
                          Operating partnerships distributions                                1,657,243              151,929
                                Net cash (used in) provided by investing activities        (362,918,486)           9,344,012
                         Net increase in cash and cash equivalents                           34,717,508           15,930,322
                         Cash and cash equivalents:
                          Beginning of year                                                 47,843,850            31,913,528
                          End of year                                                  $    82,561,358     $      47,843,850

                         Reconciliation of operating income to net cash
                         provided by operating activities:
                          Operating income                                          $       74,560,948     $      52,363,338
                          Adjustments to reconcile net cash provided by operations:
                           Depreciation, amortization, and accretion                           211,039               189,536
                           Depletion and delivery of gas                                   108,528,905            85,635,813
                           Changes in certain assets and liabilities:
                            Accounts receivable                                             (9,042,405)           19,251,498
                            Gas inventories                                                 (6,164,080)             (703,896)
                            Prepaid and other assets                                            37,764                74,113
                            Accounts payable and accrued expenses                           24,811,793           (29,095,744)
                            Due to Members                                                  (1,268,915)            1,780,514
                            Other assets and liabilities                                       358,886              (132,043)
                         Net cash provided by operating activities                  $      192,033,935     $     129,363,129

                         See notes to financial statements.
                                                                                                                            29
Notes To Financial Statements
as of and for the Years Ended December 31, 2008 and 2007




1
Summary of Significant Accounting Policies

Reporting Entity
The Municipal Gas Authority of Georgia (the “Gas Authority”) is a public corporation created in 1987 by an Act of the General
Assembly of the State of Georgia (the “Act”) to provide reliable and economic gas supplies to municipal gas distribution systems.
The Act provides that the Gas Authority will establish rates and charges so as to produce revenues sufficient to cover its costs,
including debt service, but it may not operate for profit, unless any such profit inures to the benefit of the public. Sixty-two
municipalities of the State of Georgia, eight municipalities of the State of Alabama, three municipalities of the State of Florida,
two municipalities of the State of Tennessee, and one municipality of the State of Pennsylvania (the “Members”) have contracted
with the Gas Authority for gas supplies for resale to their customers. The Gas Authority has also contracted to provide services to
eight other agencies and municipal utilities (“Partners”) on a limited basis for the benefit of the Members.

Pursuant to the provisions of the Act, the Gas Authority and all 76 Members have entered into long-term gas supply contracts
(the “Gas Supply Contracts”), which require Members to take their entire gas supply from the Gas Authority and require the
Gas Authority to provide that supply. Members can elect to participate in joint projects undertaken by the Gas Authority and
authorize issuance of project debt by entering into a supplemental contract (“Supplemental Contract”). These Supplemental
Contracts authorize the Gas Authority to issue gas revenue bonds and other debt obligations to acquire a portfolio of gas
supplies and gas-related assets to fulfill, in whole or in part, its obligation to supply gas to Members. Two such projects,
Portfolio II and Agency, expired during 2007, and final principal payments were made. The Portfolio III project was initiated
in November 2002 with the execution of amended gas supply contracts and Supplemental Contracts with all Members. Those
contracts were amended in 2008 to extend the full requirements gas supply services to Members through at least the date on
which all Portfolio III bonds are fully retired and authorize the issuance of up to $1,500,000,000 in debt to secure long-term
gas supplies. Through these contracts, the Gas Authority may issue additional debt, in series, through December 31, 2014, with
maturities not exceeding fifteen years from issuance.

Pursuant to Governmental Accounting Standards Board (GASB) Statement No. 14, The Financial Reporting Entity, the financial
statements of Main Street Natural Gas, Inc. (“Main Street”), a nonprofit corporation organized under Georgia law, are included
in these financial statements as a blended component unit. Main Street was formed to facilitate long-term supply transactions
on behalf of the Gas Authority as well as other municipal customers within and outside the State of Georgia. Main Street is
governed by a Board of Directors that consists of a subset of the Gas Authority’s Board of Directors.

The Gas Authority manages the day-to-day activities of Public Gas Partners (PGP), a Georgia nonprofit corporation that
acquires and manages separate pools of long-term natural gas supplies under Production Sharing Agreements with six municipal
entities, including the Gas Authority. PGP is not a component unit as it is an autonomous company with an independent
Board of Directors, and therefore its operations are not included in these financial statements.

Basis of Accounting
The Gas Authority follows proprietary fund accounting in accordance with GASB pronouncements. Proprietary fund
accounting is used to report business-type activities, as contrasted with tax-supported governmental activities. Pursuant to
GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use
Proprietary Fund Accounting, the Gas Authority follows all GASB pronouncements and has elected to adopt all FASB statements
issued after November 30, 1989 except for those that conflict with GASB pronouncements.

The Gas Authority also complies with policies and practices prescribed by its Board of Directors and to practices common in
the natural gas industry. As the Board of Directors has the authority to set rates, the Gas Authority follows FASB Statement
No. 71, Accounting for the Effects of Certain Types of Regulation, which provides for the reporting of assets and liabilities consistent
with the economic effect of the rate structure. Under FASB Statement No. 71, regulatory assets are recorded to reflect probable
future revenues associated with certain costs that are expected to be recovered from customers through the ratemaking process.

30                        Municipal Gas Authority Of Georgia
Regulatory liabilities are recorded to reflect probable future reductions in revenues associated with amounts that are expected
to be credited to customers through the ratemaking process. At December 31, 2008 and 2007, the Gas Authority’s significant
regulatory assets and liabilities are included in the accompanying balance sheets as costs recoverable (refundable) from future
billings and costs recoverable (refundable) from future billings — forward contracts.

The Main Street Board of Directors establishes a pricing mechanism outlining the methods for billing Customers for gas supply
services through long-term gas supply contracts. Main Street’s method includes the standard that debt service requirements, as
opposed to interest expense and amortization, are a cost for rate-making purposes.

Cash and Cash Equivalents
Cash and equivalents include cash on hand, bank demand accounts, cash deposited in local government investment pools,
overnight repurchase agreements, and short-term liquid investments purchased with an original maturity of 90 days or less.
Cash in excess of daily requirements is invested in a local government investment pool managed by the State of Georgia. Cash
deposited with bond trustees is invested in a U.S. Treasury securities fund. Restricted cash represents funds held by trustees
pursuant to various bond resolutions.

Prepaid Gas Supplies
At December 31, 2008 and 2007, prepaid gas supplies, which are recorded at amortized cost, represent three secured
prepayments of gas to be received by Main Street at specified volumes per day. Those prepayments expire at various dates in
2022 and 2028. The prepaid contracts are each secured by a guaranty provided by a large financial institution. See note 5.

Gas Inventories
Gas inventories consist of natural gas that is purchased and stored in interstate pipelines or other facilities in the summer and is
withdrawn in the winter. Gas inventories are stated at weighted-average cost.

Investment Securities
The Gas Authority is authorized by its Board to invest in direct obligations of the U.S. Government and U.S. Government
agencies, bankers acceptances, repurchase agreements collateralized by securities which the Gas Authority would otherwise be
permitted to purchase, obligations of any state government or any political subdivision of the State of Georgia, the State of
Georgia’s local government investment pools, and certain obligations of political subdivisions of any state, or their agencies
or instrumentalities, that meet certain minimum credit rating criteria. These investments are recorded at fair value based on
quoted market prices. Investment income, including changes in the fair value of investments, is recorded as interest income.
Investment securities also includes Main Street’s investments which consist of guaranteed investment contracts with financial
counterparties that meet minimum credit criteria. The balances in such accounts are restricted for use by Main Street’s bond
trustee, with earnings released annually to Main Street after debt service is paid. These investment contracts are recorded at
cost. Any other-than-temporary declines in value are recorded as impairments. No such impairments were recorded in 2008 or
2007. See note 2 for a schedule of investments as of December 31, 2008 and 2007.

Investments in Operating Partnerships
Investment in a joint venture, Pine Needle LNG Company, LLC, is accounted for using the cost method. Investment in
a natural gas pipeline company, Cherokee Basin Pipeline, LLC, is accounted for using the equity method. Investment in
Municipal Gas Marketing Services LLC is accounted for by using the equity method. Any other-than-temporary declines in
value are recorded as impairments. No such impairments were recorded in 2008 or 2007.

Investments in Direct Financing Leases
Certain direct financing leases executed on behalf of Members for gas distribution system improvements have been recorded
based on the lease payment schedule. Leases in which the Gas Authority has assigned its lease payment rights to a bank have not
been recorded in the financial statements.

Gas Properties
Gas properties represent operating and royalty interests in certain natural gas wells expected to produce through at least 2030.
Under the full-cost method, the Gas Authority capitalizes all acquisition, exploration, and development costs incurred for the
purpose of finding gas reserves. Costs associated with production are expensed in the period incurred. The Gas Authority also
                                                                                                                                   31
Notes To Financial Statements
as of and for the Years Ended December 31, 2008 and 2007

includes the present value of dismantlement, restoration, and abandonment costs within the capitalized oil and gas property
balance.

The Gas Authority computes the depreciation, depletion, and amortization (DD&A) of gas properties using the unit-of-
production method based upon production and estimates of proved reserve quantities. All capitalized costs, including acquisition
costs related to unproved properties, are included in the amortizable base.

Under the full-cost method, capitalized costs are limited to an amount not to exceed the value of the related gas reserves (referred
to as a ceiling on capitalized costs). In performing its annual ceiling test, the Gas Authority limits the capitalized costs of gas
properties, net of accumulated DD&A, to the estimated future net cash flows, including cash flows from hedging transactions,
from proved gas reserves discounted at 10%, plus the lower of cost or fair value of unproved properties included in the costs
being amortized. If capitalized costs exceed this limit, the excess is charged as additional DD&A expense. The Gas Authority
calculates future net cash flows by applying end-of-the-period prices, except in those instances where future natural gas prices are
covered by contracts.

Given the volatility of natural gas prices, it is reasonably possible that the Gas Authority’s estimate of discounted future net cash
flows from proved reserves could change in the near term. If natural gas prices decline significantly, even if only for a short period
of time, it is possible that write-downs of gas properties could occur.

Asset Retirement Obligation
Asset retirement obligation represents the present value of the estimated costs for well shut in and abandonment upon retirement
of the related gas properties. Such costs are recorded in gas properties and amortized to expense using the unit-of-production
method described above.

Capital Assets
Capital assets consist of land, buildings, furniture, and equipment and are recorded at cost. Depreciation on buildings, furniture,
and equipment is recorded using the straight-line method over estimated useful lives of three to forty years.

Accounting for the Impairment of Long-Lived Assets
The Gas Authority applies GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and
for Insurance Recoveries, which states that asset impairments are generally recognized only when the service utility of an asset is
reduced or physically impaired. GASB Statement No. 42 states that asset impairment is a significant, unexpected decline in the
service utility of a capital asset. The service utility of a capital asset is the usable capacity that at acquisition was expected to be
used to provide service, as distinguished from the level of utilization which is the portion of the usable capacity currently being
used. Decreases in utilization and existence of or increases in surplus capacity that are not associated with a decline in service
utility are not considered to be impairments. No impairments were recorded in 2008 or 2007.

Costs Recoverable (Refundable) From Future Billings
The Gas Supply Contracts establish a pricing mechanism outlining the methods for billing Members for various classes of gas
supply services. Expenses in excess of amounts currently billable to Members under the pricing mechanism will be recovered
from future billings to Members and are classified as a deferred debit. Current billings in excess of expenses will be returned in
future billings or rebates to Members. These amounts are principally related to long-term supply and storage arrangements and
include the change in fair value of forward contracts, interest, and other project costs that are realized at different times than they
are billed to Members. Additionally, this account includes amounts billable or refundable to Main Street Customers.

Rates for Main Street’s natural gas billings are designed to provide, over the life of each project, full recovery of all project costs
as defined in the respective bond resolutions and as prescribed the the Main Street Board of Directors. In accordance with SFAS
No. 71, the costs to be recovered consist primarily of the difference between amortization of prepaid gas supplies and debt
service requirements included in rates and the change in the fair value of forward contracts.

Other Assets
Other asset balances are primarily composed of costs of issuing debt that are deferred and amortized over the life of the related
debt using the effective interest method.

Revenues
Revenues are recognized in the period that gas supplies are delivered and other services are provided. Under the provisions of the
32                         Municipal Gas Authority Of Georgia
Act, the Gas Authority is required to set rates sufficient to recover all its costs. Thus, the Gas Authority’s revenue and expense
accounts are trued-up annually. Any excess revenues or expenses are either credited or billed to Members in accordance with
policies approved by the Board of Directors.
Forward Contracts
The Gas Authority uses natural gas futures, options and swaps to hedge its commodity price risk associated with physical
storage operations and anticipated gas supply transactions. The Gas Authority also uses interest rate swap agreements to reduce
the impact of changes in interest rates on its variable rate long-term debt. Main Street uses long-term prepaid gas purchase
agreements and natural gas swaps to procure gas and hedge related commodity price risk. Collectively, these instruments are
referred to as forward contracts. Realized gains and losses under gas contracts are recorded in gas operations revenue in the
period that the related gas supply is delivered. The differentials to be paid or received from the interest rate swap counterparty
are recorded as an adjustment to interest expense over the term of the related swap. The fair market values of these contracts at
the balance sheet date are recorded as an asset or liability and the unrealized gain or loss as a result of marking these contracts to
fair value is recorded as costs recoverable (refundable) from future billings – forward contracts. Cash receipts and payments for
forward contracts are classified as operating activities in the statements of cash flows.
Net Assets
Net assets invested in capital assets represent capital assets funded by net assets. Unrestricted net assets represent retained
operating margins or billings to Members in excess of costs to establish reserves and working capital to finance the Gas
Authority’s gas supply operations, and for the purchase of property and other assets. Such amounts are subject to disposition in
accordance with policies approved by the Board of Directors and the contracts with Members.
Income Taxes
The Gas Authority is a public corporation, and therefore, is exempt from federal and state income taxes. Accordingly, no
provision for such taxes is made in the accompanying financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect (1) the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and (2) the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Intercompany Eliminations
Transactions between the Gas Authority and Main Street have been eliminated in preparation of the financial statements.
Reclassifications
The 2007 investment securities balance, both restricted and unrestricted, of $28,210,559 was reclassified from non-current
assets to current assets to reflect a more appropriate classification on the balance sheet.
New Accounting Pronouncements
In June 2008, the GASB issued GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments
(GASB 53). GASB 53 is intended to improve how state and local governments report information about derivative instruments
in their financial statements. GASB 53 is effective for reporting periods beginning after June 15, 2009. The Gas Authority is
currently assessing its impact.




2
Cash and Equivalents, Investment Securities, and Related Risks

Cash and Cash Equivalents
At December 31, 2008, amounts invested in a local government investment pool totaled $47,257,541, and bank deposits
totaling $3,597,884 were either covered by federal depository insurance or collateralized with securities held by a third-party
bank’s trust department. Total restricted cash held by the trustee at December 31, 2008, was $30,014,873. Of this amount,
$28,141,147 related to Main Street’s limited obligation debt, $1,454,522 related to direct financing lease obligations, and
$419,204 related to Portfolio III debt service obligations.
                                                                                                                                     33
Notes To Financial Statements
as of and for the Years Ended December 31, 2008 and 2007

Investment Securities
Following is a summary of the Gas Authority’s investment balances:

December 31, 2008:
                                                                                                                    Percentage
Investment Type                                                        Balance                  Maturity              of Total

Main Street guaranteed investment contracts:
  Calyon - 2006A                                                  $ 22,072,152                   2022                   40%
  Calyon - 2006B                                                    22,087,846                   2022                   40%
  Aegon - 2007A                                                     11,206,616                   2028                   20%
Total                                                             $ 55,362,614


December 31, 2007:
                                                                                                                     Percentage
Investment Type                                                       Balance                  Maturity               of Total

Main Street guaranteed investment contracts:
 Calyon - 2006A                                                  $ 7,243,724                     2022                   26%
 Calyon - 2006B                                                    7,261,439                     2022                   26%
 Aegon - 2007A                                                    10,290,396                     2028                   36%
                                                                  24,795,559
Municipal bonds:
 Industry, CA Sales Tax Revenue                                       3,415,000                  2008                   12%

Total                                                            $ 28,210,559

While the guaranteed investment contracts have a maturity that is commensurate with the related gas purchase agreements, the
balances accumulate monthly and are subject to withdrawal when a semiannual debt service payment is due. Such balances are
classified as current restricted investments in the accompanying balance sheets.

Interest Rate Risk
The Gas Authority does not have a formal investment policy regarding interest rate risk.

Credit Risk
The Gas Authority’s investment policy allows investments in obligations of the federal or any state government, obligations
fully insured or guaranteed by the federal government or any of its agencies, obligations of any corporation of the federal
government, prime banker’s acceptances, the local government investment pool, certain repurchase agreements of the federal
government, or certain obligations of political subdivisions of any state, their agencies or instrumentalities that have been rated
the equivalent of AA- or better by at least one of the national rating agencies.

Concentration of Credit Risk
The Gas Authority does not have a policy that limits the amount that may be invested in any one issuer. Investments
representing greater than 5% of total investments are shown in the table above.

Custodial Credit Risk
Custodial credit risk is the risk that in the event of a bank failure, the Gas Authority’s deposits may not be returned to it. The
Gas Authority does not have a deposit policy for custodial credit risk. As of December 31, 2008, $24,019,788 was exposed
to custodial credit risk as it was uninsured and collateral held by the pledging bank’s trust department was not in the Gas
Authority’s name.


34                        Municipal Gas Authority Of Georgia
3
Cash Reserves

The Board of Directors created Portfolio and Agency Reserves funded from the Portfolio and Agency gas supply projects in
1996. The Portfolio Reserve reached its initial targeted level of $15,000,000 in 2006, and investment income on such reserve
is distributed annually to Members (see note 4). No additional contributions are expected to be made to the Portfolio Reserve
other than by Members that have contracted with the Gas Authority since the inception of the reserve. In 2008, the Board
approved the full distribution of the remaining balance in the Agency Reserve. In 2005, the Board of Directors created a
Working Capital Reserve funded from retained margins from long-term supplies, including the Portfolio III Project. On
March 25, 2009, the Board of Directors approved a contribution of $1,000,000, which has been reflected in the December 31,
2008 financial statements, resulting in a Working Capital Reserve balance of $5,200,000 at December 31, 2008.



4
Member Distributions

On March 25, 2009, the Board of Directors approved cash distributions to Members of $10,957,597 from long-term supply
projects, $395,262 of interest income on the Portfolio Reserve, and $1,544,581 from general operations as a result of Member
billings, which are based on current monthly market prices, exceeding the estimated average cost of supplies. These Member
distributions have been included in Due to Members on the balance sheet as of December 31, 2008.



5
Main Street Natural Gas

Main Street is authorized to issue tax-exempt bonds on behalf of the Gas Authority under IRS regulations. Main Street is
governed by a board of directors consisting of five directors of the Gas Authority. Main Street’s daily activities are managed by
the Gas Authority under services agreements with durations consistent with the related gas supply agreements. Audited financial
statements of Main Street are available from the Gas Authority.

Main Street has acquired gas through long-term prepaid Gas Purchase Agreements (GPAs) and delivers gas to Customers
through long-term gas supply contracts for specified volumes of gas (“NAESBs”). In some cases, the obligation of each
Customer to pay Main Street the contract price for its contract quantity of gas is insured pursuant to a separate financial
guaranty insurance policy. Gas is priced to Customers at a discount to spot market pricing. Additional discounts may be
distributed annually to each project’s Customers at the discretion of the Main Street board. On March 26, 2009, the Main
Street board approved an annual distribution of $3,757,668 to Customers for 2008 deliveries. Of this amount, $3,224,913 is
due to MGAG, and the remainder is included in accounts payable as of December 31, 2008. Following is a summary of Main
Street’s prepayments. See further discussion of the related debt in note 10.

Series 2006A
In January 2007, Main Street issued revenue bonds totaling $528,255,000 to fund a fifteen-year natural gas prepayment
transaction for 108,600,131 Mcf supplied by J.P. Morgan Ventures Energy Corporation (“J.P. Ventures”), a wholly-owned
subsidiary of JP Morgan Chase & Co. Delivery of gas began February 1, 2007 and is contracted to continue through January
31, 2022. J.P. Ventures is required to make certain payments to Main Street for failure to deliver, or the inability of Main
Street to take, the specific daily quantities of gas required to be delivered under the Gas Purchase Agreement, or upon early
termination of the agreement. These payments are guaranteed by JP Morgan Chase & Co. Five municipalities signed


                                                                                                                                35
Notes To Financial Statements
as of and for the Years Ended December 31, 2008 and 2007

NAESBs with an original term of fifteen years. The Gas Authority anticipates taking approximately 76% of the gas acquired
in this transaction.

Series 2006B
In January 2007, Main Street issued revenue bonds totaling $527,630,000 to fund a fifteen-year natural gas prepayment
transaction for 108,600,131 Mcf supplied by Merrill Lynch Commodities, Inc. (“Merrill Commodities”), a wholly-owned
subsidiary of Merrill Lynch & Co., Inc. In January 2009, Merrill Lynch & Co., Inc. was acquired by Bank of America
Corporation. Delivery of gas began February 1, 2007 and is contracted to continue through January 31, 2022. Merrill
Commodities is required to make certain payments to Main Street for failure to deliver, or the inability of Main Street to take,
the specific daily quantities of gas required to be delivered under the Gas Purchase Agreement, or upon early termination of the
agreement. These payments are guaranteed by Merrill Lynch & Co., Inc. Five municipalities signed NAESBs with an original
term of fifteen years. The Gas Authority anticipates taking approximately 76% of the gas acquired in this transaction.

Series 2007A
In September 2007, Main Street issued revenue bonds totaling $496,710,000 to fund a twenty-year and eight month natural
gas prepayment transaction for 118,783,750 Mcf supplied by Merrill Commodities. Delivery of gas began December 1, 2007
and is contracted to continue through July 31, 2028. Merrill Commodities is required to make certain payments to Main Street
for failure to deliver, or the inability of Main Street to take, the specific daily quantities of gas required to be delivered under the
Gas Purchase Agreement, or upon early termination of the agreement. These payments are guaranteed by Merrill Lynch & Co.,
Inc. The gas supply purchased by Main Street is sold to the sole Customer, the Gas Authority, pursuant to a NAESB with an
original term of twenty years and eight months.

Series 2008A
In April 2008, Main Street issued revenue bonds totaling $709,060,000 to fund a thirty-year natural gas prepayment
transaction for 160,040,000 Mcf supplied by Lehman Brothers Commodities Services Inc. (LBCI). Delivery of gas began
June 1, 2008. In September 2008, Main Street exercised its option to terminate the LBCI GPA after LBCI failed to deliver
gas for five consecutive days. Termination of the LBCI GPA triggered mandatory redemption of the outstanding bonds
under the 2008A Trust Indenture as well as the termination of all other related transaction agreements including the supply
agreements with Customers, the commodity swap agreement, and the guaranteed investment contract. Under the LBCI
GPA, LBCI is obligated to make a termination payment to the bond trustee on behalf of Main Street sufficient to redeem the
bonds, and Lehman Brothers Holdings Inc. (LBHI) as guarantor is obligated to make such payment in the event of LBCI’s
failure. In September 2008, LBHI filed for bankruptcy. On September 30, 2008, LBCI and LBHI failed to make the required
termination payment, resulting in the default of the 2008A bonds. In October 2008, LBCI filed for bankruptcy. The full
amount of the bonds remains outstanding at December 31, 2008.

Main Street’s obligation to pay principal and interest under the 2008 Trust Indenture is limited to assets in the Trust Estate for
the Series 2008A bonds. Trust assets primarily include $20,445,038 in restricted cash consisting of (1) amounts received by the
trustee for the period during which gas was actually delivered by LBCI to Main Street and (2) the liquidation of the $1,509,351
operating reserve established at the inception of the transaction, as well as (3) the right of the trustee to receive any settlement
payment in respect of the defaulted termination payment from the LBHI bankruptcy proceedings. All Trust assets are under the
exclusive control of the trustee for the benefit of bondholders.

Main Street wrote off the unamortized amount of the prepaid gas supply asset, resulting in a loss of $673,887,148. Main Street
is not obligated to pay the excess of the Series 2008A bonds’ redemption price over amounts held by the Trustee. Therefore,
Main Street derecognized the obligation for the Series 2008A bonds upon the termination of the LBCI GPA. The net gain
on the derecognition of the bonds of $673,887,148 consists of the reversal of the carrying amount of the bonds and related
accrued interest, net of the write-off of the related unamortized debt issue costs and the related costs recoverable from future
billings. Main Street recorded a termination payment receivable from LBHI with a corresponding obligation to the trustee
to remit the termination payment receivable from LBHI. The termination payment due from LBHI equals $748,159,797
based on the terms of the LBCI GPA and represents the redemption price of the bonds plus the present value of the aggregate
savings yet to be realized by Main Street from delivery of gas under the LBCI GPA, less amounts on deposit with the trustee
of $20,445,038 to be utilized by the trustee to fund redemption of the bonds. Any amounts collected from LBCI for the
termination payment would first be applied to amounts due to the trustee to fund redemption of the bonds. The termination
payment receivable was reduced by an estimated allowance for uncollectable amounts of $557,781,673, for a net termination
payment receivable of $190,378,124 recorded at December 31, 2008. The net receivable amount was estimated based on
recent trading prices of the Main Street Series 2008A bonds. The termination payment receivable from LBHI, as well as
36                         Municipal Gas Authority Of Georgia
the restricted cash held by the trustee, and the offsetting obligation to remit these amounts to the trustee has been classified
in non-current assets and non-current liabilities, respectively, in the accompanying balance sheet, as such amounts are not
reasonably expected to be collected and remitted within 2009, given LBHI’s and LBCI’s bankruptcy proceedings.



6
Public Gas Partners
Public Gas Partners, Inc. (PGP) is a Georgia nonprofit corporation that acquires and manages separate pools of long-term
natural gas supplies on behalf of its municipal members. The Gas Authority has entered into two Natural Gas Production
Sharing Agreements (PSAs) with PGP. Each PSA obligates the Gas Authority to pay as a component of gas operations expense
its share of all costs incurred by the related PGP Pool until all related debt has been paid and the last volumes have been
delivered. The PSAs include a step-up provision that could obligate the Gas Authority to increase its participation share in the
pool by up to 25% in the event of default of another member. There were no such defaults in 2008 or 2007.
The acquisition periods for the two PGP Pools ended in 2008. The Gas Authority has committed to take 46.4% of PGP’s
production from Pool 1 and 53.6% of PGP’s production from Pool 2. The production may be taken physically by the Gas
Authority or it may be sold in its local market on behalf of the Gas Authority.
In December 2008, in conjunction with the expiration of PGP’s lines of credit, the Gas Authority loaned PGP $340,288,940
under an Advance Payment Agreement. PGP is obligated to repay this amount by December 2009 along with interest at a rate
of approximately 1.7%.
In 2008, in anticipation of the formation of PGP Pool 3, the Gas Authority acquired gas reserves and acreage for development
in Louisiana and Oklahoma for $18,000,000. It is anticipated that Pool 3 will be formed by PGP in 2009, at which time these
projects will be transferred to PGP.
The Gas Authority manages the day-to-day activities of PGP under a long-term services agreement and received fees of
$820,779 and $847,284 from PGP in 2008 and 2007, respectively.



7
Gas Properties
The Gas Authority owns working and royalty interests in natural gas reserves in Kansas, Alabama, Louisiana, and Oklahoma.
Depletion expense for 2008 and 2007 was $11,703,412 and $10,532,882, respectively. Accumulated depletion of gas
properties as of December 31, 2008 and 2007 was $45,208,874 and $33,505,462, respectively.
Estimated proved reserves of the Gas Authority’s gas properties, based on independent petroleum engineers’ studies and
subsequent deliveries to the Gas Authority, are as follows, in thousands of cubic feet (“Mcf ”):
                                                                                                             Estimated Proved
                                                                                                              Reserves (Mcf )
                                                                                                               (Unaudited)

Balance - December 31, 2007                                                                                     97,414,690

 Capital development                                                                                              7,716,066
 Change in estimates                                                                                            (1,395,597)
 Production                                                                                                     (8,424,380)

Balance - December 31, 2008                                                                                     95,310,779


                                                                                                                                   37
Notes To Financial Statements
as of and for the Years Ended December 31, 2008 and 2007




8
Investments In Operating Partnerships

The Gas Authority owns a 3% interest in Pine Needle LNG Company, LLC, which owns and operates a liquefied natural
gas peak demand facility in North Carolina on the Transco Pipeline. The investment is carried at its cost of $1,605,000.
During 2008 and 2007, the Gas Authority received $138,243 and $151,929, respectively, of distributed income.

In January 2006, in conjunction with the acquisition of a working interest in reserves in Kansas, the Gas Authority purchased
a 49% noncontrolling interest in Cherokee Basin Pipeline, LLC (CBPL), a gas gathering system, for $12,500,000. The
system transports gas from gas wells in the Cherokee Basin field to the interstate pipeline. The Gas Authority pays a monthly
transportation fee to CBPL, which totaled $7,292,651 and $5,566,160 in 2008 and 2007, respectively.

The Gas Authority and The Southeast Alabama Gas District (SEAGD) jointly (50/50) own Municipal Gas Marketing Services
LLC (MGMS). MGMS is a nonprofit Georgia corporation that provides purchase, transportation and resale of available gas
production from gas reserves in which each entity owns an equal undivided interest. MGMS assumed a life-of-production
purchase contract from a prior buyer of a substantial portion of the net prodution from the Gas Authority’s Alabama reserves
effective April 1, 2004. MGMS pays the operator of the reserves market prices for the production under the contract and sells
these volumes to the Gas Authority and SEAGD at delivered cost.



9
Term Notes and Long-Term Debt

Four series of Portfolio III bonds are outstanding related to the financing of gas reserve acquisitions, advance payments to PGP,
storage operations and other gas supply activities. The Portfolio III Series A bonds are variable rate demand bonds that are
supported by and payable from a long-term irrevocable letter of credit issued by a commercial bank. The Gas Authority has
entered into an agreement to provide for the remarketing of these bonds if repurchase is required. The other three series, Series
C, D, and E, are one-year term notes that were issued at a premium in December 2008 at rates ranging from 2.5% to 3.0%,
with effective yields of 1.35% to 1.99%. The premium is accounted for under the effective interest method. The Series C and
D proceeds were used to fund an advance payment to PGP and the Series E proceeds of $75,000,000 were deposited with the
trustee in December 2008 to refund a portion of the existing Portfolio III debt in February 2009. As a result, $20,000,000 of
the Portfolio III Series A bonds and $55,000,000 of the Portfolio III Series B bonds are considered to be defeased at December
31, 2008 and the liability for those bonds has been removed from the balance sheet. Additionally, the Gas Authority entered
into two 364-day lines of credit in December 2008. Those lines have a total capacity of $210,000,000. At December 31,
2008, $62,221,330 was available to be drawn.




38                        Municipal Gas Authority Of Georgia
Following is a summary of term note and long-term debt activity in 2008:

                                               December 31,                                                December 31,
                                                  2007              Issuances           Payments              2008
Term notes payable:
Portfolio III Series C                     $             -      $ 200,000,000       $              -   $ 200,000,000
Portfolio III Series D                                   -         50,000,000                      -      50,000,000
Portfolio III Series E                                   -         75,000,000                      -      75,000,000

Total term notes payable                   $             -      $ 325,000,000       $              -   $ 325,000,000

Long-term debt:
Portfolio II Series C                      $ 35,600,000        $                -   $ (35,600,000)     $             -
Portfolio III Series A                       55,510,000                         -     (20,000,000)          35,510,000
Portfolio III Series B                       55,000,000                         -     (55,000,000)                   -

Total debt                                     146,110,000     $                -   $ (110,600,000)         35,510,000

Less amounts due within one year                35,600,000                                                           -

Total long-term debt                       $ 110,510,000                                               $ 35,510,000


Following is a summary of long-term debt activity in 2007:

                                               December 31,                                                December 31,
                                                  2006              Issuances           Payments              2007

Agency B & C                               $ 32,900,000         $               -   $ (32,900,000)     $             -
Portfolio II Series B and C                  85,400,000                         -     (49,800,000)          35,600,000
Portfolio III Series A                       57,350,000                         -     (20,000,000)          55,510,000
Portfolio III Series B                       55,000,000                         -                -          55,000,000

Total debt                                     230,650,000      $               -   $ (84,540,000)         146,110,000

Less amounts due within one year                84,540,000                                                  35,600,000

Total long-term debt                       $ 146,110,000                                               $ 110,510,000




                                                                                                                          39
Notes To Financial Statements
as of and for the Years Ended December 31, 2008 and 2007

The summary of annual debt service, including redemptions of gas revenue bonds required under agreements with the banks
or resolutions, along with expected interest payments, for the years ending December 31, as follows:

                                                                 Total Debt
Years                 Principal            Interest (a)            Service
2009              $          -            $ 443,875              $ 443,875
2010                         -                443,875               443,875
2011                         -                443,875               443,875
2012                35,510,000                443,875            35,953,875
Total debt        $ 35,510,000           $ 1,775,500           $ 37,285,500

(a) Variable interest amounts assume future interest rates remain constant at the rates in effect on December 31, 2008.

The interest rate on Portfolio III Series A variable rate gas revenue bonds outstanding at December 31, 2008, was 1.25%.
The variable rates reset weekly and approximate the London Interbank Offering Rate (LIBOR) 30-day index. As Portfolio III
Series A variable rates reset weekly, the amount recorded on the balance sheet at December 31, 2008 is deemed to represent fair
value. The fair value of Series C, D and E was $329,020,025 at December 31, 2008.

The Gas Authority is party to an interest rate swap agreement with a commercial bank executed to reduce the impact of changes
in interest rates on its variable rate long-term Portfolio III debt. The Gas Authority pays a fixed interest rate of 3.313% to the
bank and receives a variable index-based rate. The interest rate swap agreement is designed to approximate a fixed interest rate
without refinancing the underlying debt obligations. The agreement had a notional principal of $55,000,000 at December 31,
2008. The Gas Authority is exposed to credit loss in the event of nonperformance by the bank; however, the Gas Authority
does not anticipate nonperformance. The fair value of this agreement was $(2,562,401) at December 31, 2008. This amount
is recorded as a liability (fair value of forward contracts) and a deferred credit (costs recoverable from future billings — forward
contracts) on the balance sheet.



10
Limited Obligation Debt

Main Street Debt
As discussed in note 5, Main Street has issued three series of revenue bonds to acquire prepaid long-term supplies of gas from
various gas suppliers. These bonds were issued at a premium, which is accounted for under the effective interest method. Under
the prepaid gas purchase agreements, each supplier has agreed to deliver a specified quantity of gas each day during the 15-20
year terms. These gas supplies are resold by Main Street to the Gas Authority and other municipal Customers at market-based
pricing less a contractual discount. Additional discounts may be distributed annually by Main Street at the discretion of its
Board. Under the related supply contracts, Customers are only obligated to pay for gas if, and when, delivered by Main Street.
Main Street’s debt is not an obligation of the Gas Authority or any other Customers of Main Street. As Main Street delivers gas
to the Gas Authority and other Customers, it uses a portion of the proceeds to pay principal and interest on the bonds.

In 2008, Main Street issued 2008A series bonds which were subsequently called for redemption. See note 5.

Direct Financing Leases
The Gas Authority and various Members have entered into Supplemental Contracts for the issuance of Limited Obligation
Gas Revenue Bonds. The bond proceeds are used to make improvements to the respective Members’ gas distribution systems.
Project improvements are leased to those Members until the debt is retired. The bonds are limited obligations of the Gas
Authority payable solely from the trust estates created by the various Gas Revenue Bond Resolutions. The respective Members are




40                        Municipal Gas Authority Of Georgia
required to make lease payments to the Gas Authority for deposit with the trustees that correspond in amount to the principal,
premium, and interest on each series of bonds in advance of their payment dates. Limited obligation issues outstanding at
December 31, 2008, are as follows:

City of Buford Project, Series 1994 Bonds, serial bonds with principal payment or $175,000 due November 1, 2009 bearing
interest of 6.80%.

City of Warner Robins Project, Series 1995-A & B Bonds, serial and term bonds due in annual installments of $130,000 to
$1,700,000 from January 1, 2009 through January 1, 2026, bearing interest from 6.00% to 6.70%.

City of Warner Robins Project, Series 1996 A & B Bonds, serial and term bonds due in payments of $1,245,000 and
$1,205,000 on January 1, 2015 and January 1, 2020, respectively, bearing interest at 5.80% to 5.85%, respectively.

City of Buford Project, Series 1998 Bonds, serial bonds due in annual installments of $225,000 to $775,000 through
November 1, 2013, bearing interest from 4.75% to 5.00%.

City of Toccoa Project, Series 1999 Bonds, serial and term bonds in annual installments of $890,000 to $7,740,000 through
June 1, 2024, bearing interest from 4.25% to 5.00%.

City of Toccoa Project, Series 2000 Bonds, serial and term bonds due in annual installments of $100,000 to $1,585,000 through
June 1, 2024, bearing interest from 4.50% to 5.38%.

City of Buford Project, Series 2000 Bonds, serial bonds due in annual installments of $410,000 to $535,000 through
November 1, 2014, bearing interest from 5.35% to 5.70%.

The trustees held $1,454,522 of funds restricted under the various bond resolutions at December 31, 2008. The leases of these
properties to the respective Members have been recorded as investments in direct financing leases. The components of net
investment in the direct financing leases are as follows:

Total debt requirement                                                                                      $ 53,395,938
Less advanced payments deposited with trustee                                                                  1,352,868
   Total minimum lease payments to be received                                                                52,043,070
Less unearned income                                                                                          17,348,771
Net investment in direct financing leases                                                                   $ 34,694,299

Lease payments to be received over the remaining life of the leases are as follows:

2009                                                                                                         $  3,646,253
2010                                                                                                            3,475,486
2011                                                                                                            3,074,286
2012                                                                                                            3,056,483
2013                                                                                                            3,817,643
Thereafter                                                                                                     36,325,788
Total                                                                                                        $ 53,395,938

See note 14 regarding certain off-balance sheet direct financing leases.




                                                                                                                                 41
Notes To Financial Statements
as of and for the Years Ended December 31, 2008 and 2007

Following is a summary of limited obligation debt activity in 2008:

                                     December 31,                              Payments/               2008A           December 31,
                                        2007                   Issuances      Amortization           Termination          2008

Main Street bonds            $ 1,552,595,000             $ 709,060,000     $ (20,290,000) $ (709,060,000) $ 1,532,305,000
Bond premium                       82,198,153                        -        (7,639,699)               -      74,558,454
Direct financing leases            37,479,998                        -        (1,694,347)               -      35,785,651
 Total debt                     1,672,273,151            $ 709,060,000     $ (29,624,046) $ (709,060,000)   1,642,649,105
Less amounts due within one year 22,265,000                                                                    57,290,000
Less current portion of
 bond premium                       7,639,699                                                                            7,513,332
Total long-term limited
 obligation debt             $ 1,642,368,452                                                                       $ 1,577,845,773


Following is a summary of limited obligation debt activity in 2007 :

                                                           December 31,                                                December 31,
                                                               2006          Issuances                Payments           2007
Main Street bonds                                        $            - $ 1,552,595,000          $        -        $ 1,552,595,000
Bond premium                                                          -      82,198,153                   -             82,198,153
Direct financing leases                                     39,101,857                 -        (1,621,859)             37,479,998
 Total debt                                                 39,101,857 $ 1,634,793,153        $ (1,621,859)          1,672,273,151
Less amounts due within one year                              1,885,000                                                 22,265,000
Less current portion of bond premium                                  -                                                  7,639,699
Total long-term limited obligation debt                  $ 37,216,857                                              $ 1,642,368,452

The combined annual requirement to amortize all limited obligation bond issues outstanding at December 31, 2008, is
as follows:

                                                           Principal
                                 Main Street
                                    Series                   Direct
                                2006A, 2006B               Financing                                                   Total Debt
Years                             & 2007A                    Leases          Total                   Interest           Service

2009                       $      55,215,000         $    2,075,000 $       57,290,000       $    80,273,527       $   137,563,527
2010                              58,470,000              2,010,000         60,480,000            77,407,011           137,887,011
2011                              60,885,000              1,705,000         62,590,000            74,387,311           136,977,311
2012                              68,040,000              1,785,000         69,825,000            71,245,258           141,070,258
2013                              73,705,000              2,650,000         76,355,000            67,739,418           144,094,418
2014-2018                        422,840,000              9,307,641        432,147,641           280,826,753           712,974,394
2019-2023                        471,510,000             10,452,300        481,962,300           162,491,715           644,454,015
2024-2028                        321,640,000              5,800,710        327,440,710            54,671,731           382,112,441

Total                      $   1,532,305,000         $   35,785,651 $ 1,568,090,651          $ 869,042,724         $ 2,437,133,375

Main Street bonds have fixed coupon interest rates ranging from 5.00% to 5.50% at December 31, 2008 with an effective
rate, including bond premium, of 4.42%. Direct financing lease bonds have a fixed rate that ranged from 4.20% to 6.70%
at December 31, 2008. The average effective rate for all limited-obligation bonds was 4.43% at December 31, 2008. The
estimated fair value of limited-obligation debt as of December 31, 2008, computed using a discounted cash flow method based
on current interest rates, was $1,283,467,084.




42                        Municipal Gas Authority Of Georgia
11
Forward Contracts

As discussed in note 1, the Gas Authority uses forward contracts to hedge its commodity price risk associated with physical
storage operations and anticipated gas supply transactions and to hedge interest rate risk associated with variable rate long-
term debt.

Hedging Activities Related to Storage Gas
The Gas Authority uses a variety of gas forward contracts to reduce risk related to price changes between the injection of storage
gas in the summer months and its withdrawal during the winter months. At December 31, 2008, hedging positions included
gas forward contracts maturing through March 2013, covering 8,560,000 dekatherms (“DT”) of natural gas.

Hedging Activities Related to Portfolio III Gas Supplies
The Gas Authority has established rates with its Members and Partners based on spot market pricing. Therefore, it has entered
into various long-term gas forward contracts to swap the fixed amounts paid for gas reserves owned by the Portfolio III project
to market prices. These agreements require monthly amounts to be paid or received based on the difference between the spot
market price and the contract strike price. The Gas Authority has entered into forward contracts for approximately 75% of
expected volumes to be produced through 2014 from gas reserves owned by the Portfolio III project. As of December 31, 2008,
these agreements cover a total remaining volume, declining annually through 2014, of 23,113,900 DT.

Hedging Activities Related to Gas Supply Operations
Members and Partners may elect to stabilize gas prices and/or basis differentials for a portion of their anticipated future
purchases by entering into alternate pricing agreements with the Gas Authority. The Gas Authority uses a variety of gas forward
contracts to minimize its risk associated with these alternate pricing agreements. At December 31, 2008, the Gas Authority had
entered into gas forward contracts for future delivered supplies to Members and Partners covering a total volume of 40,863,000
DT through October 2014.

Hedging Activities Related to Main Street
Main Street enters into long-term prepaid gas purchase agreements and uses long-term forward contracts with terms that match
the related prepaid gas purchase agreements to convert fixed prepayments for future deliveries to spot market pricing. As of
December 31, 2008 these swap agreements total 308,951,382 DT through July 2028. Main Street records the fair value of the
forward contracts (commodity swaps) on the balance sheet. Changes in the fair value of forward contracts do not impact rates
to Main Street’s Customers, and accordingly, are deferred and recorded as costs recoverable (refundable) from future billings –
forward contracts in the accompanying balance sheets. On a stand-alone basis, the prepaid gas contracts have a fair value that
differs from their carrying value by an amount which approximates and offsets the fair value of the related commodity swaps.
For each of its prepay gas transactions, the Gas Authority has separated the embedded derivative within the Gas Purchase
Agreement, a forward contract to purchase gas over the life of the agreement, and recorded this forward contract at fair value.
Changes in the fair value of these forward contracts are also deferred and recorded as costs recoverable (refundable) from future
billings – forward contracts in the accompanying balance sheets.

The Gas Authority and Main Street intend to hold all gas forward contracts to maturity. The Gas Authority is exposed to
market gas price risk in the event of nonperformance by the counterparties; however, the Gas Authority does not anticipate
nonperformance. The counterparties to these forward contracts are major financial institutions with either high investment
grade credit ratings or agreements to collateralize their positions. Main Street gas forward contracts (commodity swaps) contain
tear-up provisions such that they may be terminated under certain limited circumstances, including specific credit events, with
no settlement payment due or payable by either party.




                                                                                                                                 43
Notes To Financial Statements
as of and for the Years Ended December 31, 2008 and 2007

The estimated fair values of forward contracts outstanding consist of the following assets (liabilities):

December 31, 2008:

                          Main Street         Main Street                   Other                Interest Rate
                    Gas Purchase Agreements Commodity Swaps            Forward Contracts            Swaps            Total

Current assets           $             -             $ 25,677,589         $    8,541,631         $            -   $ 34,219,220
Long-term assets              32,575,252               32,241,299             17,086,658              2,693,689     84,596,898
 Total assets                 32,575,252               57,918,888             25,628,289              2,693,689   118,816,118

Current liabilities           25,677,589                           -          28,492,323                      -    54,169,912
Long-term liabilities         32,241,299                  32,575,252          18,557,533              5,256,090    88,630,074
 Total liabilities            57,918,888                  32,575,252          47,049,856              5,256,090   142,800,086

Total                    $ (25,343,636)              $ 25,343,636        $ (21,421,567)          $(2,562,401)     $(23,983,968)

December 31, 2007:

                          Main Street         Main Street                   Other                Interest Rate
                    Gas Purchase Agreements Commodity Swaps            Forward Contracts            Swaps            Total

Current assets           $     7,540,311             $             -     $     4,949,153          $          -    $ 12,489,464
Long-term assets             210,230,976                           -             874,161               742,973    211,848,110
 Total assets                217,771,287                           -           5,823,314               742,973    224,337,574

Current liabilities                        -               7,540,311          15,898,160                      -    23,438,471
Long-term liabilities                      -             210,230,976          14,646,781              1,209,903   226,087,660
 Total liabilities                         -             217,771,287          30,544,941              1,209,903   249,526,131

Total                    $ 217,771,287               $ (217,771,287)     $ (24,721,627)           $ (466,930)     $(25,188,557)

The fair value estimates presented above for gas purchase agreements, commodity swaps, and other forward contracts represent
the present value of the differences of the monthly fixed prices in the related instruments less the NYMEX forward price curve,
adjusted for basis differential and multiplied by the corresponding monthly gas volume using the LIBOR forward interest rate
curve as a discount rate. The fair values above are based on pertinent information available to management at each balance sheet
date. Such amounts may be significantly impacted by changes in underlying natural gas commodity prices or the general interest
rate environment. The values presented have not been comprehensively revalued for purposes of these financial statements since
December 31, 2008, and current estimates of fair value may differ significantly from the amounts presented herein.



12
Employee Benefit Plans

The Gas Authority has a noncontributory, defined contribution retirement plan that requires the Gas Authority to contribute
a defined percentage of each participant’s basic compensation. Additionally, contributions may be made as determined solely by
the action of the Board of Directors.

The Gas Authority has a deferred compensation plan pursuant to Section 457 of the Internal Revenue Code, which allows
plan participants to defer and contribute to the plan, through the Gas Authority, a specified portion of each participant’s
compensation. The Gas Authority matches a portion of the participants’ contributions up to amounts specified in the plan.

The Gas Authority’s contributions to the above plans resulted in expense of $657,617 and $610,501 in 2008 and 2007,
respectively.
44                           Municipal Gas Authority Of Georgia
13
Capital Assets

Capital asset activity for the year ended December 31, 2008, was as follows:

                                               Balance at                                                            Balance at
                                              December 31,                                                          December 31,
                                                 2007                     Additions                 Deletions          2008

Land                                         $      1,033,614        $           -              $         -     $     1,033,614
Building and equipment                              3,103,835               76,359                  (50,920)          3,129,274

Total                                               4,137,449               76,359                  (50,920)          4,162,888

Less accumulated depreciation                      (1,188,248)            (211,039)                  50,920          (1,348,367)

Capital assets - net                         $      2,949,201        $    (134,680)             $          -    $     2,814,521


Capital asset activity for the year ended December 31, 2007, was as follows:

                                                  Balance at                                                         Balance at
                                                 December 31,                                                       December 31,
                                                    2006                  Additions                 Deletions          2007

Land                                         $      1,033,614         $          -          $              -    $     1,033,614
Building and equipment                              2,835,762              434,543                  (166,470)         3,103,835

Total                                               3,869,376              434,543                  (166,470)         4,137,449

Less accumulated depreciation                      (1,107,212)            (189,258)                 108,222          (1,188,248)

Capital assets - net                         $      2,762,164         $    245,285          $        (58,248)   $     2,949,201



14
Off-Balance Sheet Direct Financing Leases

The Gas Authority has entered into lease agreements with certain Member cities in which the Gas Authority leases for fixed
rental payments gas distribution system improvements (the “Projects”) to be constructed by such Members. The Gas Authority
has assigned its rights to receive such rental payments to the banks that funded construction of the Projects. The Gas Authority
has not executed a promissory note or loaned money in connection with the lease transactions. The obligations of the cities
(which total $53,595,938 at December 31, 2008) to make the rental payments under the leases constitute general obligations
of the cities to which the full faith and credit of the cities are pledged. Therefore, no leased assets or related obligations have
been recorded in the Gas Authority’s financial statements.




                                                                                                                                   45
Notes To Financial Statements
as of and for the Years Ended December 31, 2008 and 2007




15
Fair Value of Financial Instruments

The estimated fair values of financial instruments have been determined by the Gas Authority using market information
and appropriate valuation methodologies. The estimates presented are not necessarily indicative of the amounts that the
Gas Authority could realize in a current market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair market value.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued interest payable
are estimated to approximate fair value because of their short-term nature. The carrying amounts of variable-rate debt also
approximate fair value because of their variable interest rates.

See notes 9 and 10 for information regarding the fair value of long-term debt and see note 11 regarding the fair value of
derivative instruments.



16
Commitments

The Gas Authority has contracted to purchase the following volumes of gas, including commitments with Main Street and
PGP, through 2028 at a discount to spot market pricing on a pay-as-you-go basis:

                                                 Gas Volumes
          Years                                   (MMBtu)

        2009                                       24,178,410
        2010                                       19,089,500
        2011                                       19,089,500
        2012                                       19,868,100
        2013                                       19,778,200
        Thereafter                                222,957,950

        Total                                     324,961,660

In 2008, the Gas Authority purchased 21,013,615 MMBtu of gas under these agreements.




46                        Municipal Gas Authority Of Georgia
    This Annual Report was
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Bond Holders/Investment Community
The Gas Authority welcomes comments and inquiries,
104 TownPark Drive, Kennessaw, Georgia 30144.
Telephone (770)590-1000.

Corporate Website: www.gasauthority.com
Designed By: Graphix, Inc.
General Corporate Information

Corporate Offices
104 TownPark Drive
Kennesaw, Georgia 30144
(770) 590-1000

Independent Auditors
Ernst & Young LLP
Atlanta, Georgia

General Counsel
Della Wager-Wells
Alston & Bird
Atlanta, Georgia

Trustee
The Bank of New York
New York, New York

Paying Agent, Tender Agent and Registrar
The Bank of New York
New York, New York




  104 TownPark Drive
  Kennesaw, Georgia 30144
  www.gasauthority.com

				
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