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HomeMy WebLinkAboutBradley Lake PMC Meeting-Fri., Dec. 15, 2006 3 If you are unable to attend the meeting in person, please use the following phone instructions: TELECONFERENCE INSTRUCTIONS Friday, December 15, 2006 — 10:00 a.m. To join the meeting, please do the following: Dial 1-800-315-6338 Enter 1215# hy Alaska Industrial Development ~ Export Authority We yk he = ENERGY AUTHORITY BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE REGULAR MEETING AGENDA Friday, December 15, 2006 — 10:00 a.m. (via electronic media at CEA’s Board Room - 5601 Minnesota Drive) 1. CALL TO ORDER Stewart 2. ROLL CALL (for Committee members) 3; PUBLIC ROLL CALL (for all others present) 4. PUBLIC COMMENT 55 AGENDA COMMENTS 6. APPROVAL OF MEETING MINUTES July 26, 2006 7. NEW BUSINESS A. Bradley Lake Audit Status Report Stromberg B. Insurance Coverage Cunningham iC. Homer O&M Agreement Janorschke 8. COMMITTEE REPORTS / COMMENTS A. Operators Report » Update on Governor Modification Project Governor Committee B. Next Meeting Date Stewart 9: ADJOURNMENT 813 West Northern Lights Boulevard * Anchorage, Alaska 99503-2495 www.aidea.org * 907/269-3000 * FAX 907/269-3044 ® Toll Free (Alaska Only) 888/300-8534 * www.akenergyauthority.org Item 6 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE MEETING MINUTES 813 W. Northern Lights Boulevard Anchorage, Alaska Wednesday, July 26, 2006 — 10:00 a.m. 1. CALL TO ORDER Chair Haagenson called the meeting of the Bradley Lake Hydroelectric Project Management Committee to order at 10:00 a.m. on Wednesday, July 26, 2006, from the Alaska Industrial Development and Export Authority’s Board Room, Anchorage, Alaska, to conduct the business of the Committee per the agenda and public notice. 2. ROLL CALL Roll was called by Shauna Howell. The following members were present: Steve Haagenson Golden Valley Electric Association Bill Stewart Chugach Electric Association Bradley Janorschke Homer Electric Association Wayne Carmony Matanuska Electric Association Jim Posey Anchorage Municipal Light & Power Tim Barnum City of Seward Bryan Carey Alaska Energy Authority 3. PUBLIC ROLL CALL Rick Miller, Anchorage Municipal Light & Power Mike Cunningham, Chugach Electric Association Tuckerman Babcock, Matanuska Electric Association Don Zoerb, Matanuska Electric Association Lee Thibert, Chugach Electric Association John Cooley, Chugach Electric Association Robert Day, Anchorage Municipal Light & Power Charles O'Hare, Homer Electric Association Rick Eckert, Homer Electric Association Henri Dale, Golden Valley Electric Association Bob Price, Anchorage Municipal Light & Power Linda MacMillan, Alaska Energy Authority Rick Baldwin, Homer Electric Association Bradley Lake Project Management Committee Meeting July 26, 2006 Page 2 of 6 4. PUBLIC COMMENT There were no public comments. 5. AGENDA COMMENTS Mr. Carmony added under New Business — Section F — Legal Matters (2 motions). Chair Haagenson added under New Business — Section G — Letters from AEA. 6. APPROVAL OF MEETING MINUTES - March 28, 2006 Mr. Janorschke moved to approve the minutes of the March 28, 2006 meeting, seconded by Mr. Posey. The meeting minutes of March 28, 2006, were unanimously approved as presented. t NEW BUSINESS 7A. ELECTION OF OFFICERS Mr. Janorschke nominated Mr. Stewart for the position of Chairman, seconded by Mr. Carmony. Mr. Posey nominated Mr. Haagenson for the position of Chairman, seconded by Mr. Barnum. The group voted and Mr. Stewart was voted in as Chairman of the BPMC. Mr. Posey nominated Mr. Haagenson for the position of Vice Chairman, seconded by Mr. Barnum. Mr. Carmony nominated Mr. Janorschke for the position of Vice Chairman, seconded by Mr. Stewart. The group voted and Mr. Janorschke was voted in as Vice Chairman of the BPMC. The position of Secretary/Treasurer remains with AEA. 7B. FERC INSPECTION REPORT - CAREY Mr. Carey reported that during the week of July 10, 2006, the FERC inspection and Part 12 inspection, as well as the Potential Failure Modes Analysis (PFMA) discussions/meetings were held at HEA. Most of the discussions involved the PFMA and the history of Bradley and potential problems. Bradley came out as having more calcite than what the inspectors have seen in other dams. There is a small amount of corrosion down the diversion tunnel, which will be monitored. Seismic movement for Bradley, that was approved by FERC in a record decision, is a greater amount of movement than what FERC normally approves. The discussion came up of why Bradley could have greater seismic movement than other dams. It has been proposed that the tunnel drains which are accessed from the outside be cleaned out next year. Bradley Lake Project Management Committee Meeting July 26, 2006 Page 3 of 6 7C. INSURANCE RENEWAL — CUNNINGHAM Mr. Cunningham gave a summary of the insurance summary Renewal period July 1, 2006 — July 1, 2007 and Expiring period July 1, 2005 — July 1, 2006. Mr. Haagenson’s recommendation was to find a way to fund $20M. Mr. Posey added that the group should look at the cost of borrowing or a letter of credit for $20M from either AIDEA or someone else vs. the cost of insuring it. The group agreed to revisit this item at the next meeting with more information becoming available from the underwriter and Mr. Cunningham, also adding to that AIDEA’s look at how they would help fund the $20M. Mr. Carey clarified that it is Alaska Energy Authority that owns it and not AIDEA. 7D. RENEWAL & CONTINGENCY FUND REDEPOSIT PROCEDURE - MACMILLAN Ms. MacMillan gave a brief overview of the procedure, stating that this was a proposed housekeeping tool so that the movement of cash matches the budget plan. Motion #06-5: Mr. Janorschke moved to approve the Renewal and Contingency Fund redeposit procedure beginning with project fiscal year ended June 30, 2006 as follows: Renewal and Contingency Fund redeposit will be made in early August each year. The amount will equal the approved budget percentage of actual accrued expenditures as of June 30 of the fiscal year just ended. Seconded by Mr. Posey. A voice vote was taken and the motion passed by unanimous approval. 7E. HOMER O&M AGMT —- RECOMMENDATION FROM THE COMMITTEE - DALE Mr. Dale stated that the O&D Committee did meet and the recommendation was to not extend the contract, not.change the terms of language at this time. Mr. Carmony added that the document that Homer.presented be modified to say 5 years instead of 10 years and we vote in favor of extending this agreement for 5 years. Mr. Posey noted that if we are going to propose that, then to send it back to the O&D Committee and address at the next BPMC meeting. Motion #06-6: Recommend to not extend the contract, and not change the terms of language at this time. Seconded by Chair Stewart. Discussion ensued as to. moving this item to the next BPMC meeting allowing more time for the O&D Committee to make changes or a further review. Motion #06-7: Mr. Carey moved to table this item until the next meeting date. Seconded by Mr. Posey. A voice vote was taken and the motion to table passed by unanimous approval. The O&D Committee was tasked with reviewing this document and making necessary changes for presentation and review at the next BPMC meeting. Bradley Lake Project Management Committee Meeting July 26, 2006 Page 4 of 6 7F. LEGAL MATTERS — (2 motions) CARMONY First Legal Matter Motion #06-8: Mr. Carmony moves that the legal services provided to the BPMC by AterWynne be terminated and that an offer be extended to the firm of Davis Wright Tremaine to be retained as interim counsel to the BPMC. Seconded by Mr. Janorschke for discussion. Mr. Carmony’s concern is that there is commingling legal advice across the boundaries of various organizations. Mr. Haagenson stated that on the IOC everyone has their own attorneys, and the IPG is the same. Mr. Carmony added it may be time to terminate their services and obtain a firm that the group is all convinced can provide advice to the group. His research directed him to the firm of Davis Wright Tremaine as a recommendation for an interim counsel, hence the termination of the firm of AterWynne and extend an offer to Davis Wright Tremaine. Mr. Carey stated that the firm of Davis Wright Tremane could have a problem with in the sense that there would be conflict of interest, and asked if there were any other firms that could be used. Mr. Haagenson added that this group has a right to pick their own attorney. AterWynne is the present attorney by letter agreement. If the move is made to Davis Wright Tremaine, he recommended finding another attorney, adding that it may involve extending the search out of state. Mr. Carmony amended the motion to read: Move we terminate the services of AterWynne and have the Chairman begin immediately to identify and employ or retain an interim counsel until such time as something can be brought to the board for a more permanent arrangement. Seconded by Mr. Janorschke for further discussion. Mr. Haagenson stated that terminating before employing could be a big mistake and to use caution if the group proceeds this direction: It might be worth further amending Mr. Carmony’s motion to say we are looking at replacing AterWynne with someone else, and let this group do an evaluation to find a replacement and do the action at the correct time. Mr. Carmony stated that if that was a suggested amendment, he would second it. Mr. Carmony stated that we have made the decision to pursue new counsel and are going to authorize the Chair to do that investigation and bring a recommendation back to the group. Mr. Haagenson restated that he is not authorizing getting new counsel — rather, going out and find someone to replace them and once we have them and pick them, then we will replace them. Mr. Janorschke further amended the motion to include a timeline of the end of the year 2006. Chair Stewart agreed to making the assignment and a timeline. The Chair will bring back recommendations to the next BPMC meeting with a decision at the following meeting by the end of the year. A voice vote was taken and the motion was passed by unanimous approval. Bradley Lake Project Management Committee Meeting July 26, 2006 Page 5 of 6 Second Legal Matter Motion #06-9: Mr. Carmony moves that the Chairman promptly inform the utility members of the BPMC of all work assigned to the BPMC attorney. Further, that all work products, including drafts of the attorney be distributed to each utility at the same time it is turned over for review to the Chairman. Seconded by Mr. Janorschke for discussion. It was agreed that the wording “including drafts” will be removed from the above-stated motion. A roll call vote was taken and the results were as follows: City of Seward No Matanuska Electric Association: Yes Chugach Electric Association: No Homer Electric Association: Yes Golden Valley Electric Association: No Anchorage Municipal Light & Power: No Alaska Energy Authority: Yes 7G. LETTERS FROM AEA - HAAGENSON Mr. Haagenson presented three letters: Letter from Bryan Carey to Steve Haagenson dated June 13,2006 Letter from Steve Haagenson to Bryan Carey dated July 17, 2006 Letter from Ron Miller to Steve Haagenson dated July 25, 2006 He stated the two points the letters reference — request for bond counsel for work that they did and request for backup for the other part of the invoice. Mr. Bjorkquist noted that the concern that AEA has with the invoice that was given is the description didn’t describe what was done sufficiently to know that it was related to the operations of Bradley as opposed to something else. Reviewing bond documents — what was the purpose, what was intended, why was that being done. Multiple things are going on amongst the utilities with respect to Bradley and other issues — including possible divestiture. That is not related to operating Bradley, and if that is what this legal review is for, it’s inappropriate to be passed through the Bradley budget. That is fundamentally the question that AEA asks — what was being done with this, what’s the work, so that AEA knows. The second part about requesting the work product that came from that, in the past, you have shared work product with AEA, and that is a very efficient way to operate. If there is a common understanding of how things work, things work much better. What was intended was if this is something that you believe is appropriate to share with us, share it so that we don’t have to duplicate the work effort to come to our own conclusion on the very same issues. AEA asks for clarification that it's appropriate within Bradley operations as opposed to outside Bradley operations into something that would be inappropriate to pass through the Bradley budget. The role that we suggest AEA plays is a minimal role and the only question that we ask related to that is to obtain assurance that what you are invoicing through the Bradley budget, passed through to every ratepayer in the railbelt, is related to Bradley operations and not something else. You are exempt from regulation for Bradley, not from anything else. When the last fiscal Bradley Lake Project Management Committee Meeting July 26, 2006 Page 6 of 6 years budget was approved, there was a request to put in $150,000 for formation of a joint action agency, which is unrelated to operating Bradley — it has to do with the potential divestiture of Bradley. The Bradley budget is inappropriate for that and for AEA just to ask for clarification that the invoices relate to Bradley and Bradley operations is a minimal intrusion into the prerogatives of the BPMC. Chair Stewart asked that there be more use of phones and less use of letters to resolve these issues. 8. COMMITTEE REPORTS 8A. OPERATORS REPORT — UPDATE ON GOVERNOR MODIF. PROJECT — O’HARE Mr. O'Hare gave a brief overview on the project update handout dated July 26, 2006. The overview included items accomplished, major problems encountered and expenditures to date. He stated that construction was completed on Unit 1 as of May 13, 2006 and have started testing, which was put on hold on May 18, 2006 due to a divider issue. The modifications for that divider issue were completed on July 6, 2006, and testing for Unit 1 was completed on July 10, 2006. The testing proved the new design has improved the operation of the Unit. Unit #2 construction started on July 12, 2006. Expect construction to be complete on August 8, 2006, followed by testing of both units on August 16, 2006. Some of the major problems encountered include a deficiency in the design of the hydraulic system that precluded the dividers to operate.at the required speed of 1.1 seconds. That mandated that VA TECH go back and do some redesign and hydraulic upgrades, which caused a delay and a change order to the initial contract. During construction of Unit #1 some problems with the linkage were found, including pitting and galling. VA TECH has corrected these problems with Unit #1 and just found that Unit #2 has the same problems. It has resulted in change orders to the contract and a bit of a delay. During testing of Unit #1, it was discovered that the new hydraulic system was not strong enough to pull the dividers out of the stream during four and six needle operations, resulting in VA TECH going back and redesigning the profiles of the dividers so that the force factor angle was changed to allow the present hydraulics to be able to pull the dividers out of the stream. 8B. NEXT MEETING DATE The next meeting date will be at the call of the Chair. 9. ADJOURNMENT The meeting was adjourned at 11:45 a.m. By: Bill Stewart, Chairman ATTEST: Alaska Energy Authority, Secretary Item 7A Agenda Item: TA MOTION: Move the Bradley Lake Project Management Committee accept the results of the Bradley Lake Project Management Committee Operating and Revenue Funds as of June 30, 2006, as presented by Parasena, Stromberg & Company, APC. Move: Second: Agenda Item: TA MOTION: Move the Bradley Lake Project Management Committee instruct the utilities to pay their proportionate share of the FY06 short fall to the bond trustee, U.S. Bank, on or before February 1, 2007. Move: Second: FY06 shortfall to be paid on or beforeFebruary 1, 2007 UTILITIES TO POWER PURCHASER % SHARE PAY CHUGACH ELECTRIC 30.4% 21,477.12 MUNICIPALITY OF ANCHORAGE 25.9% 18,297.94 AEG&T-HEA 12.0% 8,477.80 AEG&T-MEA 13.8% 9,749.48 GOLDEN VALLEY ELECTRIC 16.9% 11,939.58 CITY OF SEWARD 1.0% 706.48 100.0% 70,648.40 H:\all\lmacmillan\BradleyLake\F YO6BRADLEY\PaymentSch-FY06Shortfall.xisPAYMENT SCH Item 7B Bradley Lake Insurance Program 2006 - 2007 Expiration Date: July 1, 2007 ARECA Insurance Exchange $50,000,000 Limit per accident Subject to the following deductibles: $2.50 per kW for Hydro Turbine Generators $100,000 for Transformers 100 MVA and larger $50,000 for all other objects $127,937 Commerical Property Boiler and Machinery This is intended as reference only and does not illustrate a complete list of each policy's terms and conditions. BRADLEY LAKE HYDROELECTRIC PROJECT INSURANCE SUMMARY | RENEWAL 07/01/06 - 07/01/07 Type of Insurance Limits of Liability Deductible Premium Primary $5,000,000 per occurrence $2,000,000 per occurrence for buildings $ 105,535 Excluding Terrorism equipment and contents $7,500,000 per occurrence for Earthquake First Excess t— Primary First Excess Boiler & Machinery Second Excess $5,000,000 per occurrence Excluding Terrorism $15,000,000 excess of $5,000,000 per occurrence Excluding Terrorism $2,000,000 per occurrence for buildings equipment and contents $7,500,000 per occurrence for Earthquake and flood $2,000,000 per occurrence for buildings equipment and contents $50,000,000 direct damage $2,000,000 expediting expense Excluding Terrorism $40,000,000 excess underlying $20,000,000 excess primary & first excess $2.50 per kW for Hydro Turbine Generators $100,000 Transformers 100 MOA and larger $50,000 All other objects Total Annual Premiums and flood $15,000,000 excess of $ 195,992 $5,000,000 per occurrence Excluding Terrorism Boiler & Machinery }$50,000,000 per accident $2.50 per kW for Hydro Turbine Generators | $ 127,937 Excluding Terrorism $100,000 Transformers 100 MVA and larger $50,000 All other objects Second Excess Limit of $20,000,000 excess underlying $ 131,350 $20,000,000 excess primary & first a Total Annual Premiums $560,814 EXPIRING 07/01/05 - 07/01/06 Type of Insurance Limits of Liability | Deductible Premium $ 91,769 $ 170,428 $ 116,306 $ 150,000 $ 528,503 3 | 2 AGREEMENT AMENDING AND EXTENDING THE TERM OF THE OPERATION AND MAINTENANCE AGREEMENT FOR BRADLEY LAKE PROJECT AMENDMENT NO. 3 THIS AGREEMENT entered into this day of , 2006, between the Homer Electric Association, Inc. (the “Operator”) and the Alaska Energy Authority (the “Authority”). Recital Effective February 11, 1994, the parties entered into an agreement titled Operation and Maintenance Agreement for Bradley Lake Project (the “Agreement”). The term of the Agreement was for an initial period of five years, automatically renewable annually thereafter. The parties extended the Agreement through an Amendment dated June 22, 1999. The Amendment extended the Agreement until June 30, 2004, and provided that the term shall continue from year to year thereafter. The parties have determined that instead of the annua! renewal, the Agreement shall be renewed for an additional period of ten years and automatically renewed annually thereafter; and that the Agreement be further amended as hereafter set forth. Amendments NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: le Section 2 of the Agreement as amended by the June 22, 1999 Amendment is hereby amended as follows: Effective July 1, 2006, the term of the Agreement shall be ten years and the term shall automatically be renewed for successive one-year periods, until terminated as provided in the Agreement. 2. Paragraph 13(a)(1) of the Agreement is amended to read as follows: Each Party shall be liable for the negligent, willful and grossly negligent acts of its officers, employees, agents and contractors with respect to the ownership, construction operation, maintenance or repair of the Project. It is recognized that the project insurance does not cover the willful and grossly negligent acts of a party. Each Party shall be solely liable for the willful and grossly negligent acts of its officers, employees, agents and contractors to the extent not covered by insurance. A party's maximum cumulative liability relative to all other claims and liabilities, including that with respect to direct damages and obligations under any indemnity, will not exceed the limits of any insurance policies insuring against such claims or liabilities. In no event will a Party be liable for incidental, indirect or consequential damages of any kind. Agreement Amending and Extending the Term of the Operation and Maintenance Agreement for Bradley Lake Project (AEA 2006-01) (f) Date Date Paragraph 13(a)(8) of the Agreement is amended to read as follows: (8) A copy of the insurance policies required of the Operator by this Section will be furnished to the Authority prior to beginning work under this Agreement. Prior to February 1 of each year thereafter, evidence of insurance shall be provided by the Operator. Paragraph 13(a)(9) of the Agreement is amended to read as follows: (9) The Operator's obligation to obtain and maintain insurance coverage pursuant to this Section shall be subject to the general availability of such coverage under reasonable terms and conditions. If one or more of the required insurance coverages is not available to the Operator under reasonable terms and conditions, the Operator shall, under the guidance and direction of the BPMC and Division of Risk Management, use its best efforts to obtain substantively equivalent insurance coverage acceptable to the BPMC, the Authority, and the Division of Risk Management. A new subsection 13(f) is added to the Agreement to read as follows: The Authority shall maintain a policy or policies of property damage insurance fully insuring the Project against lost resulting from fire, explosion, accident, or equipment breakdown for the full insurable value of the Project. The policy shall contain a waiver of subrogation with respect to the Operator and the BPMC and list the Operator as an additional named insured. IN WITNESS WHEREOF, the parties have caused this agreement to be executed as of the date first written above. HOMER ELECTRIC ASSOCIATION, INC. By General Manager ALASKA ENERGY AUTHORITY By Executive Director Agreement Amending and Extending the Term of the Operation and Maintenance Agreement for Bradley Lake Project (AEA 2006-01) If you are unable to attend the meeting in person, please use the following phone instructions: TELECONFERENCE INSTRUCTIONS Friday, December 15, 2006 — 10:00 a.m. To join the meeting, please do the following: Dial 1-800-315-6338 Enter 1215# Alaska Industrial Development and Export Authority Kok “YIDEN. /= ALASKA BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE REGULAR MEETING AGENDA Friday, December 15, 2006 — 10:00 a.m. (via electronic media at CEA’s Board Room - 5601 Minnesota Drive) is CALL TO ORDER Stewart 2, ROLL CALL (for Committee members) 3. PUBLIC ROLL CALL (for all others present) 4. PUBLIC COMMENT 5. AGENDA COMMENTS 6. APPROVAL OF MEETING MINUTES July 26, 2006 le NEW BUSINESS A. Bradley Lake Audit Status Report Stromberg B. Insurance Coverage Cunningham C. Homer O&M Agreement Janorschke 8. COMMITTEE REPORTS / COMMENTS A. Operators Report » Update on Governor Modification Project Governor Committee B. Next Meeting Date Stewart 9. ADJOURNMENT 813 West Northern Lights Boulevard * Anchorage, Alaska 99503-2495 www.aidea.org © 907/269-3000 * FAX 907/269-3044 ® Toll Free (Alaska Only) 888/300-8534 ¢ www.akenergvauthoritv.org Item 6 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE MEETING MINUTES 813 W. Northern Lights Boulevard Anchorage, Alaska Wednesday, July 26, 2006 — 10:00 a.m. 1. CALL TO ORDER Chair Haagenson called the meeting of the Bradley Lake Hydroelectric Project Management Committee to order at 10:00 a.m. on Wednesday, July 26, 2006, from the Alaska Industrial Development and Export Authority's Board Room, Anchorage, Alaska, to conduct the business of the Committee per the agenda and public notice. 2. ROLL CALL Roll was called by Shauna Howell. The following members were present: Steve Haagenson Golden Valley Electric Association Bill Stewart Chugach Electric Association Bradley Janorschke Homer Electric Association Wayne Carmony Matanuska Electric Association Jim Posey Anchorage Municipal Light & Power Tim Barnum City of Seward Bryan Carey Alaska Energy Authority 3. PUBLIC ROLL CALL Rick Miller, Anchorage Municipal Light & Power Mike Cunningham, Chugach Electric Association Tuckerman Babcock, Matanuska Electric Association Don Zoerb, Matanuska Electric Association Lee Thibert, Chugach Electric Association John Cooley, Chugach Electric Association Robert Day, Anchorage Municipal Light & Power Charles O’Hare, Homer Electric Association Rick Eckert, Homer Electric Association Henri Dale, Golden Valley Electric Association Bob Price, Anchorage Municipal Light & Power Linda MacMillan, Alaska Energy Authority Rick Baldwin, Homer Electric Association Bradley Lake Project Management Committee Meeting July 26, 2006 Page 2 of 6 4. PUBLIC COMMENT There were no public comments. 5. AGENDA COMMENTS Mr. Carmony added under New Business — Section F — Legal Matters (2 motions). Chair Haagenson added under New Business — Section G — Letters from AEA. 6. APPROVAL OF MEETING MINUTES - March 28, 2006 Mr. Janorschke moved to approve the minutes of the March 28, 2006 meeting, seconded by Mr. Posey. The meeting minutes of March 28, 2006, were unanimously approved as presented. ta NEW BUSINESS 7A. ELECTION OF OFFICERS Mr. Janorschke nominated Mr. Stewart for the position of Chairman, seconded by Mr. Carmony. Mr. Posey nominated Mr. Haagenson for the position of Chairman, seconded by Mr. Barnum. The group voted and Mr. Stewart was voted in as Chairman of the BPMC. Mr. Posey nominated Mr. Haagenson for the position of Vice Chairman, seconded by Mr. Barnum. Mr. Carmony nominated Mr. Janorschke for the position of Vice Chairman, seconded by Mr. Stewart. The group voted and Mr. Janorschke was voted in as Vice Chairman of the BPMC. The position of Secretary/Treasurer remains with AEA. 7B. FERC INSPECTION REPORT - CAREY Mr. Carey reported that during the week of July 10, 2006, the FERC inspection and Part 12 inspection, as well as the Potential Failure Modes Analysis (PFMA) discussions/meetings were held at HEA. Most of the discussions involved the PFMA and the history of Bradley and potential problems. Bradley came out as having more calcite than what the inspectors have seen in other dams. There is a small amount of corrosion down the diversion tunnel, which will be monitored. Seismic movement for Bradley, that was approved by FERC in a record decision, is a greater amount of movement than what FERC normally approves. The discussion came up of why Bradley could have greater seismic movement than other dams. It has been proposed that the tunnel drains which are accessed from the outside be cleaned out next year. Bradley Lake Project Management Committee Meeting July 26, 2006 Page 3 of 6 7C. INSURANCE RENEWAL — CUNNINGHAM Mr. Cunningham gave a summary of the insurance summary Renewal period July 1, 2006 — July 1, 2007 and Expiring period July 1, 2005 — July 1, 2006. Mr. Haagenson’s recommendation was to find a way to fund $20M. Mr. Posey added that the group should look at the cost of borrowing or a letter of credit for $20M from either AIDEA or someone else vs. the cost of insuring it. The group agreed to revisit this item at the next meeting with more information becoming available from the underwriter and Mr. Cunningham, also adding to that AIDEA's look at how they would help fund the $20M. Mr. Carey clarified that it is Alaska Energy Authority that owns it and not AIDEA. 7D. RENEWAL & CONTINGENCY FUND REDEPOSIT PROCEDURE - MACMILLAN Ms. MacMillan gave a brief overview of the procedure, stating that this was a proposed housekeeping tool so that the movement of cash matches the budget plan. Motion #06-5: Mr. Janorschke moved to approve the Renewal and Contingency Fund redeposit procedure beginning with project fiscal year ended June 30, 2006 as follows: Renewal and Contingency Fund redeposit will be made in early August each year. The amount will equal the approved budget percentage of actual accrued expenditures as of June 30 of the fiscal year just ended. Seconded by Mr. Posey. A voice vote was taken and the motion passed by unanimous approval. 7E. HOMER O&M AGMT —-RECOMMENDATION FROM THE COMMITTEE - DALE Mr. Dale stated that the O&D Committee did meet and the recommendation was to not extend the contract; not.change the terms of language at this time. Mr. Carmony added that the document that Homer.presented be modified to say 5 years instead of 10 years and we vote in favor of extending this agreement for 5 years. Mr. Posey noted that if we are going to propose that; then to send it back to the O&D Committee and address at the next BPMC meeting. Motion #06-6: Recommend to not extend the contract, and not change the terms of language at this time. Seconded by Chair Stewart. Discussion ensued as to,moving this item to the next BPMC meeting allowing more time for the O&D Committee to make changes or a further review. Motion #06-7: Mr. Carey moved to table this item until the next meeting date. Seconded by Mr. Posey. A voice vote was taken and the motion to table passed by unanimous approval. The O&D Committee was tasked with reviewing this document and making necessary changes for presentation and review at the next BPMC meeting. Bradley Lake Project Management Committee Meeting July 26, 2006 Page 4 of 6 TE: LEGAL MATTERS — (2 motions) CARMONY First Legal Matter Motion #06-8: Mr. Carmony moves that the legal services provided to the BPMC by AterWynne be terminated and that an offer be extended to the firm of Davis Wright Tremaine to be retained as interim counsel to the BPMC. Seconded by Mr. Janorschke for discussion. Mr. Carmony’s concern is that there is commingling legal advice across the boundaries of various organizations. Mr. Haagenson stated that on the IOC everyone has their own attorneys, and the IPG is the same. Mr. Carmony added it may be time to terminate their services and obtain a firm that the group is all convinced can provide advice to the group. His research directed him to the firm of Davis Wright Tremaine as a recommendation for an interim counsel, hence the termination of the firm of AterWynne and extend an offer to Davis Wright Tremaine. Mr. Carey stated that the firm of Davis Wright Tremane could have a problem with in the sense that there would be conflict of interest, and asked if there were any other firms that could be used. Mr. Haagenson added that this group has a right to pick their own attorney. AterWynne is the present attorney by letter agreement. If the move is made to Davis Wright Tremaine, he recommended finding another attorney, adding that it may involve extending the search out of state. Mr. Carmony amended the motion to read: Move we terminate the services of AterWynne and have the Chairman begin immediately to identify and employ or retain an interim counsel until such time as something can be brought to the board for a more permanent arrangement. Seconded by Mr. Janorschke for further discussion. Mr. Haagenson stated that terminating before employing could be a big mistake and to use caution if the group proceeds this direction. It might be worth further amending Mr. Carmony’s motion to say we are looking at replacing AterWynne with someone else, and let this group do an evaluation to find a replacement and do the action at the correct time. Mr. Carmony stated that if that was a suggested amendment, he would second it. Mr. Carmony stated that we have made the decision to pursue new counsel and are going to authorize the Chair to do that investigation and bring a recommendation back to the group. Mr. Haagenson restated that he is not authorizing getting new counsel — rather, going out and find someone to replace them and once we have them and pick them, then we will replace them. Mr. Janorschke further amended the motion to include a timeline of the end of the year 2006. Chair Stewart agreed to making the assignment and a timeline. The Chair will bring back recommendations to the next BPMC meeting with a decision at the following meeting by the end of the year. A voice vote was taken and the motion was passed by unanimous approval. Bradley Lake Project Management Committee Meeting July 26, 2006 Page 5 of 6 Second Legal Matter Motion #06-9: Mr. Carmony moves that the Chairman promptly inform the utility members of the BPMC of all work assigned to the BPMC attorney. Further, that all work products, including drafts of the attorney be distributed to each utility at the same time it is turned over for review to the Chairman. Seconded by Mr. Janorschke for discussion. It was agreed that the wording “including drafts” will be removed from the above-stated motion. A roll call vote was taken and the results were as follows: City of Seward No Matanuska Electric Association: Yes Chugach Electric Association: No Homer Electric Association: Yes Golden Valley Electric Association: No Anchorage Municipal Light & Power: No Alaska Energy Authority: Yes 7G. LETTERS FROM AEA - HAAGENSON Mr. Haagenson presented three letters: Letter from Bryan Carey to Steve Haagenson dated June 13, 2006 Letter from Steve Haagenson to Bryan Carey dated July 17, 2006 Letter from Ron Miller to Steve Haagenson dated July 25, 2006 He stated the two points the letters reference — request for bond counsel for work that they did and request for backup for the other part of the invoice. Mr. Bjorkquist noted that the concern that AEA has with the invoice that was given is the description didn’t describe what was done sufficiently to know that it was related to the operations of Bradley as opposed to something else. Reviewing bond documents — what was the purpose, what was intended, why was that being done. Multiple things are going on amongst the utilities with respect to Bradley and other issues — including possible divestiture. That is not related to operating Bradley, and if that is what this legal review is for, it’s inappropriate to be passed through the Bradley budget. That is fundamentally the question that AEA asks — what was being done with this, what's the work, so that AEA knows. The second part about requesting the work product that came from that, in the past, you have shared work product with AEA, and that is a very efficient way to operate. If there is a common understanding of how things work, things work much better. What was intended was if this is something that you believe is appropriate to share with us, share it so that we don’t have to duplicate the work effort to come to our own conclusion on the very same issues. AEA asks for clarification that it’s appropriate within Bradley operations as opposed to outside Bradley operations into something that would be inappropriate to pass through the Bradley budget. The role that we suggest AEA plays is a minimal role and the only question that we ask related to that is to obtain assurance that what you are invoicing through the Bradley budget, passed through to every ratepayer in the railbelt, is related to Bradley operations and not something else. You are exempt from regulation for Bradley, not from anything else. When the last fiscal Bradley Lake Project Management Committee Meeting July 26, 2006 Page 6 of 6 years budget was approved, there was a request to put in $150,000 for formation of a joint action agency, which is unrelated to operating Bradley — it has to do with the potential divestiture of Bradley. The Bradley budget is inappropriate for that and for AEA just to ask for clarification that the invoices relate to Bradley and Bradley operations is a minimal intrusion into the prerogatives of the BPMC. Chair Stewart asked that there be more use of phones and less use of letters to resolve these issues. 8. COMMITTEE REPORTS 8A. OPERATORS REPORT - UPDATE ON GOVERNOR MODIF. PROJECT — O’HARE Mr. O’Hare gave a brief overview on the project update handout dated July 26, 2006. The overview included items accomplished, major problems encountered and expenditures to date. He stated that construction was completed on Unit 1 as of May 13, 2006 and have started testing, which was put on hold on May 18, 2006 due to a divider issue. The modifications for that divider issue were completed on July 6, 2006, and testing for Unit 1 was completed on July 10, 2006. The testing proved the new design has improved the operation of the Unit. Unit #2 construction started on July 12, 2006. Expect construction to be complete on August 8, 2006, followed by testing of both units on August 16, 2006. Some of the major problems encountered include a deficiency in the design of the hydraulic system that precluded the dividers to operate at the required speed of 1.1 seconds. That mandated that VA TECH go back and do some redesign and hydraulic upgrades, which caused a delay and a change order to the initial contract. During construction of Unit #1 some problems with the linkage were found, including pitting and galling. VA TECH has corrected these problems with Unit #1 and just found that Unit #2 has the same problems. It has resulted in change orders to the contract and a bit of a delay. During testing of Unit #1, it was discovered that the new hydraulic system was not strong enough to pull the dividers out of the stream during four and six needle operations, resulting in VA TECH going back and redesigning the profiles of the dividers so that the force factor angle was changed to allow the present hydraulics, to be able to pull the dividers out of the stream. 8B. NEXT MEETING DATE The next meeting date will be at the call of the Chair. 9. ADJOURNMENT The meeting was adjourned at 11:45 a.m. BY: Bill Stewart, Chairman ATTEST: Alaska Energy Authority, Secretary Item 7A Agenda Item: TA MOTION: Move the Bradley Lake Project Management Committee accept the results of the Bradley Lake Project Management Committee Operating and Revenue Funds as of June 30, 2006, as presented by Parasena, Stromberg & Company, APC. Move: Second: Agenda Item: TA MOTION: Move the Bradley Lake Project Management Committee instruct the utilities to pay their proportionate share of the FY06 short fall to the bond trustee, U.S. Bank, on or before February 1, 2007. Move: Second: FY06 shortfall to be paid on or beforeFebruary 1, 2007 UTILITIES TO POWER PURCHASER % SHARE PAY CHUGACH ELECTRIC 30.4% 21,477.12 MUNICIPALITY OF ANCHORAGE 25.9% 18,297.94 AEG&T-HEA 12.0% 8,477.80 AEG&T-MEA 13.8% 9,749.48 GOLDEN VALLEY ELECTRIC 16.9% 11,939.58 CITY OF SEWARD 1.0% 706.48 100.0% 70,648.40 H:\all\lmacmillan\BradleyLake\F YO6BRADLEY\PaymentSch-F Y06Shortfall.xisPAYMENT SCH Item 7B Bradley Lake Insurance Program 2006 - 2007 Expiration Date: July 1, 2007 ARECA Insurance Exchange $50,000,000 Limit per accident Subject to the following deductibles: | $2.50 per kW for Hydro Turbine Generators $100,000 for Transformers 100 MVA and larger $50,000 for all other objects $127,937 Commerical Property Boiler and Machinery This is intended as reference only and does not illustrate a complete list of each policy's terms and conditions. BRADLEY LAKE HYDROELECTRIC PROJECT INSURANCE SUMMARY RENEWAL 07/01/06 - 07/01/07 Type of Insurance Limits of Liability Deductible Premium Primary $5,000,000 per occurrence $2,000,000 per occurrence for buildings $ 105,535 Excluding Terrorism equipment and contents $7,500,000 per occurrence for Earthquake and flood First Excess $15,000,000 excess of $ 195,992 $5,000,000 per occurrence Excluding Terrorism Boiler & Machinery |$50,000,000 per accident Excluding Terrorism $2.50 per kW for Hydro Turbine Generators | $ 127,937 $100,000 Transformers 100 MVA and larger $50,000 All other objects | Second Excess Limit of $20,000,000 excess underlying $ 131,350 $20,000,000 excess primary & first excess Total Annual Premiums $_ 560,814 EXPIRING 07/01/05 - 07/01/06 Limits of Liability Deductible $5,000,000 per occurrence Excluding Terrorism Premium $ 91,769 Type of Insurance $2,000,000 per occurrence for buildings equipment and contents $7,500,000 per occurrence for Earthquake and flood First Excess $15,000,000 excess of $2,000,000 per occurrence for buildings $5,000,000 per occurrence equipment and contents Excluding Terrorism $50,000,000 direct damage $2,000,000 expediting expense Excluding Terrorism $40,000,000 excess underlying $20,000,000 excess primary & first excess | Total Annual Premiums $ 528,503 $ 170,428 $2.50 per kW for Hydro Turbine Generators $100,000 Transformers 100 MOA and larger $50,000 All other objects Boiler & Machinery $ 116,306 Second Excess $ 150,000 | oo Item 7C AGREEMENT AMENDING AND EXTENDING THE TERM OF THE OPERATION AND MAINTENANCE AGREEMENT FOR BRADLEY LAKE PROJECT AMENDMENT NO. 3 THIS AGREEMENT entered into this day of , 2006, between the Homer Electric Association, Inc. (the “Operator”) and the Alaska Energy Authority (the “Authority’). Recital Effective February 11, 1994, the parties entered into an agreement titled Operation and Maintenance Agreement for Bradley Lake Project (the “Agreement”. The term of the Agreement was for an initial period of five years, automatically renewable annually thereafter. The parties extended the Agreement through an Amendment dated June 22, 1999. The Amendment extended the Agreement until June 30, 2004, and provided that the term shall continue from year to year thereafter. The parties have determined that instead of the annua! renewal, the Agreement shall be renewed for an additional period of ten years and automatically renewed annually thereafter; and that the Agreement be further amended as hereafter set forth. Amendments NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS: 15 Section 2 of the Agreement as amended by the June 22, 1999 Amendment is hereby amended as follows: Effective July 1, 2006, the term of the Agreement shall be ten years and the term shall automatically be renewed for successive one-year periods, until terminated as provided in the Agreement. De Paragraph 13(a)(1) of the Agreement is amended to read as follows: Each Party shall be liable for the negligent, willful and grossly negligent acts of its officers, employees, agents and contractors with respect to the ownership, construction operation, maintenance or repair of the Project. It is recognized that the project insurance does not cover the willful and grossly negligent acts of a party. Each Party shall be solely liable for the willful and grossly negligent acts of its officers, employees, agents and contractors to the extent not covered by insurance. A party’s maximum cumulative liability relative to all other claims and liabilities, including that with respect to direct damages and obligations under any indemnity, will not exceed the limits of any insurance policies insuring against such claims or liabilities. In no event will a Party be liable for incidental, indirect or consequential damages of any kind. Agreement Amending and Extending the Term of the Operation and Maintenance Agreement for Bradley Lake Project (AEA 2006-01) (f) Paragraph 13(a)(8) of the Agreement is amended to read as follows: (8) A copy of the insurance policies required of the Operator by this Section will be furnished to the Authority prior to beginning work under this Agreement. Prior to February 1 of each year thereafter, evidence of insurance shall be provided by the Operator. Paragraph 13(a)(9) of the Agreement is amended to read as follows: (9) The Operator’s obligation to obtain and maintain insurance coverage pursuant to this Section shall be subject to the general availability of such coverage under reasonable terms and conditions. If one or more of the required insurance coverages is not available to the Operator under reasonable terms and conditions, the Operator shall, under the guidance and direction of the BPMC and Division of Risk Management, use its best efforts to obtain substantively equivalent insurance coverage acceptable to the BPMC, the Authority, and the Division of Risk Management. A new subsection 13(f) is added to the Agreement to read as follows: The Authority shall maintain a policy or policies of property damage insurance fully insuring the Project against lost resulting from fire, explosion, accident, or equipment breakdown for the full insurable value of the Project. The policy shall contain a waiver of subrogation with respect to the Operator and the BPMC and list the Operator as an additional named insured. IN WITNESS WHEREOF, the parties have caused this agreement to be executed as of the date first written above. Date Date HOMER ELECTRIC ASSOCIATION, INC. By General Manager ALASKA ENERGY AUTHORITY By Executive Director Agreement Amending and Extending the Term of the Operation and Maintenance Agreement for Bradley Lake Project (AEA 2006-01) AUDITED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS JUNE 30, 2006 AND 2005 Parisena, Stromberg & Company A Professional Corporation Audited Financial Statements and Other Financial Information BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS Independent Auditor's Report Balance Sheets Statements of Revenues, Expenses and Changes in Surplus Statements of Cash Flows Notes to Financial Statements Independent Auditor's Report on Additional Information Statements of Expenses 10 11 Independent Auditor's Report Bradley Lake Project Management Committee Anchorage, Alaska We have audited the accompanying special-purpose balance sheets of the Bradley Lake Project Management Committee Operating and Revenue Funds (a project management committee) as of June 30, 2006 and 2005, and the related special-purpose statements of revenues and expenses, and of cash flows for the years then ended. These financial statements are the responsibility of the Bradley Lake Project Management Committee. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 audits provide a reasonable basis for our opinion. The accompanying special-purpose financial statements were prepared for the purpose of complying with, and in conformity with the accounting requirements specified in Note A, and are not intended to be a presentation in conformity with generally accepted accounting principles. In our opinion, the special-purpose financial statements referred to above present fairly, in all material respects, the assets, liabilities and surplus of the Bradley Lake Project Management Committee Operating and Revenue Funds as of June 30, 2006 and 2005, and its revenue, expenses and changes in surplus and its cash flows for the years then ended, on the basis of accounting described in Note A. This report is intended solely for the information and use of the Bradley Lake Project Management Committee and is not intended to be and should not be used by anyone other than this specified party. Parisena, Stromberg & Company, APC Anchorage, Alaska October 31, 2006 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS BALANCE SHEETS June 30, 2006 and 2005 2006 005 ASSETS Current assets: Investments (Note B) $ 992,086 OS) LS S167 Accounts receivable - 293,170 Utility contributions receivable (Note E) 70,648 - Prepaid expense 20525) - Total assets 1,083.25 46 7 LIABILITIES AND SURPLUS Current liabilities: Due to other funds (Note D) $ 4,714 $ 8,761 Accounts payable 666,126 407,340 Utility contributions paid in advance - 348,035 Payable to utilities (Note E) - 704,801 R & C repayment 412.419 - Total liabilities $1,083,259 $1,468,937 See accompanying notes to the financial statements. 2 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF REVENUES AND EXPENSES Years ended June 30, 2006 and 2005 2006 Variance Favorable 2005 Budget Actual (Unfavorable) Actual Revenues: Utility contributions, net of surplus refund $ 14,378,183 $14,448,825 $ 70,642 $15,325,245 Interest receipts 1,785,699 1,896,353 110,654 1,770,987 Other miscellaneous : - - 293,170 Total revenue 16,163,882 16,345,178 181,296 17,389,402 Expenses, fixed asset replacements, refunds and debt service: Operations and maintenance 3,645,843 3,827,139 (181,296) 4,873,570 Debt service 12,276,325 12,276,325 - 12,273,050 Arbitrage transfer 241,714 241,714 - 227,782 Fixed asset replacements - Interfund transfer : - - 15,000 Total expenses, fixed asset replacements and debt service 16,163,882 16,345,178 (181,296) 17,389,402 Excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service $ - See accompanying notes to the financial statements. 3 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF CASH FLOWS Years ended June 30, 2006 and 2005 Cash flows from operating activities: Excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service Adjustments to reconcile excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service to net cash provided by (used in) operating activities: Decrease (increase) in accounts receivable Decrease (increase) in utility contributions receivable (Increase) in prepaid expense Increase in accounts payable Increase (decrease) in amounts due to other funds Increase (decrease) in utility contributions paid in advance Increase (decrease) in payable to utilities Increase in R & C repayment Net cash provided by (used in) operating activities Available cash and cash equivalents, beginning of year Available cash and cash equivalents, end of year Supplemental disclosure of cash flows information: Interest paid See accompanying notes to the financial statements. 4 293,170 (70,648) (20,525) 258,786 (4,047) (348,035) (704,801) 412.419 (183,681) 1,175,767 $__992,086 $_6,476,325 (293,170) 73,492 38,947 8,664 348,035 704,801 880,769 294,998 $_1,175,767 $6,608,050 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS June 30, 2006 and 2005 NOTE A: SIGNIFICANT ACCOUNTING POLICIES Description of Business: The Bradley Lake Project Management Committee (the Committee) was established pursuant to Section 13 of the Agreement for the Sale and Purchase of Electric Power (Power Sales Agreement) dated December 8, 1987. The purpose of the Committee is to arrange for the operation and maintenance of the Bradley Lake Hydroelectric Project (the Project), which became operational in September 1991, and the scheduling, production and dispatch of power. The members of the Committee include the Alaska Energy Authority (AEA) and the five purchasers under the Power Sales Agreement - Chugach Electric Association, Inc.; Golden Valley Electric Association, Inc.; the Municipality of Anchorage (Municipal Light & Power); the City of Seward (Seward Electric System); and the Alaska Electric Generation & Transmission Cooperative, Inc. (AEG&T). The Homer Electric Association, Inc. (HEA) and the Matanuska Electric Association, Inc. (MEA) are additional parties to the Power Sales Agreement but are included as power purchasers for purposes of representation while AEG&T has no direct vote as a consequence of the individual representation of HEA and MEA. Section 13 of the Power Sales Agreement delineates other Committee responsibilities, including: establishing procedures for each party's water allocation, budgeting for annual Project costs and calculating each party's required contribution to fund annual Project costs. Committee approval of operations and maintenance arrangements for the Project, sufficiency of the annual budgets and wholesale power rates and the undertaking of optional Project work requires a majority affirmative vote and the affirmative vote of AEA. The Power Sales Agreement extends until the later of: 1) 50 years after commencement of commercial operation or 2) the complete retirement of bonds outstanding under the AEA Power Revenue Bond Resolution along with the satisfaction of all other payment obligations under the Power Sales Agreement. Renewal options for additional terms exist. Establishment of Trust Funds: Article V, Section 502 of the Alaska Energy Authority's Power Revenue Bond Resolution established a Revenue Fund and an Operating Fund, including an Operating Reserve account, to be held by AEA. In actuality these funds, along with the Debt Service, Excess Investment Earnings (arbitrage), and various construction funds related to the Bradley Lake Hydroelectric Project are all held by the Corporate Trust Department of US Bank in Seattle, Washington. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE A: SIGNIFICANT ACCOUNTING POLICIES (Continued) All deposits, including utility contributions and interest transferred from other funds, are made into the Revenue Fund, which transfers amounts approximately equal to one-twelfth of the annual operating and maintenance budget into the Operating Fund on a monthly basis. Additional transfers are made from the Revenue Fund to the Debt Service Fund in order to satisfy semiannual interest payments and annual principal payments on the Project's outstanding bonds payable. Interest earnings available for operations and maintenance are derived from the following funds: Debt Service Fund; Operating Reserve Fund; Operating Fund; Revenue Fund; Capital Reserve Fund; and the Renewal & Contingency Fund when the fund balance is $5,000,000 or greater. Revenue and Expense Recognition: Utility contributions are recognized as revenue when due to be received under the terms of the Power Sales Agreement. Transfers from other funds are recognized when the transfer is made and interest earnings are recognized when received. Operating and maintenance expenses are recognized when incurred, while interest and principal transfers to Debt Service Fund are recognized when the transfer is made. Purchases of fixed asset replacements are expensed when purchased. Transfer to the Renewal and Contingency Reserve Fund (R & C) for repayments of capital costs is recognized at fiscal year end based on capital costs incurred as of fiscal year end. Estimates: The preparation of the special-purpose financial statements of the Operating and Revenue Funds requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes: The Bradley Lake Project Management Committee is exempt from income taxation under Section 501 (a) of the Internal Revenue Code. NOTE B: INVESTMENTS Substantially all of the balances in the following funds are invested in collateralized investment agreements through the trust department of US Bank. The specified interest rate for monies from the Operating and Revenue Funds invested in the agreements is 7.38% per annum. Balances at June 30, 2006 and 2005 are as follows: BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE B: INVESTMENTS (Continued) 2006 2005 Operating Fund $ 534,188 $ 650,865 Revenue Fund 457,898 524,902 Total investments $992,086 $1,175,767 Investments are sold as needed to cover operating requisitions submitted to the trustee and are therefore considered to be short-term and available for sale. Investments are presented at aggregate cost, which approximates market value. For purposes of the cash flow statements, management considers the full amount of the investment balance to be cash available for operations. NOTE C: MAJOR CONTRACTS AND AGREEMENTS During May 1994, the Alaska Energy Authority entered into the Master Maintenance and Operating agreement with the Committee. The purpose of the agreement is to establish contract administration and budgeting procedures for maintenance and operation contracts of the Bradley Lake Hydroelectric Project and to provide for the lease or other use of facilities and equipment in a manner consistent with the requirements of the Power Sales Agreement. The term of the Master Agreement is indefinite, remaining in effect until termination of the Power Sales Agreement or until AEA no longer legally exists. This agreement authorizes AEA to enter into any contracts necessary to perform operating or maintenance-type services to the Project, subject to the approval of the Committee. On behalf of the Committee, the AEA entered into an agreement with Chugach Electric Association, Inc. (CEA) in August, 1996, for the provision of all services necessary to dispatch the Bradley Project's electric power output. The dispatch agreement runs concurrently with the wheeling and related services contract entered into by and among the parties to the Power Sales Agreement in December 1987 and remains in effect for the term of the wheeling agreement unless CEA ceases to be the output dispatcher. In August 1996, the Alaska Energy Authority entered into an agreement with CEA on behalf of the Committee for the provision of maintenance services for the Daves Creek and Soldotna SVC Substations. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE C: MAJOR CONTRACTS AND AGREEMENTS (Continued) An operation and maintenance agreement dated February 11, 1994, was executed between Homer Electric Association, Inc. and the Alaska Energy Authority. This agreement provides for the operation and maintenance of the Bradley Lake Hydroelectric Project by Homer Electric Association, Inc. The agreement is through June 30, 2004 and continues from year to year thereafter, except upon written notice to terminate by either party. Notice of termination must be given one year in advance of the termination date. HEA is to be reimbursed for costs associated with the operation, maintenance and repair of the Project as determined in advance through the submission of an annual budget based upon prudent estimates and anticipated operation and maintenance costs. In August, 1996, the agreement was amended to separate the maintenance of the transmission facilities from the hydroelectric project. The transmission agreement continues from year to year, except upon written notice to terminate by either party. Notice of termination must be given six months in advance of termination dates. In June, 1999 the agreement was again amended to require HEA to provide communication services in addition to the other services. NOTE D: RELATED PARTY TRANSACTIONS During the years ended June 30, 2006 and 2005, costs incurred under the various contracts with related parties described in Note C were as follows: 2006 2005 Homer Electric Association, Inc. — operation, maintenance and communications $ 1,640,208 $ 1,574,296 Chugach Electric Association, Inc. — substation service maintenance $ 89,641 $ 162,448 Alaska Energy Authority — administrative fees $ 200,000 $ 200,000 For the years ended June 30, 2006 and 2005, Chugach Electric Association, Inc. provided dispatch services to the Committee at the agreed upon amount which is zero. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE D: RELATED PARTY TRANSACTIONS (Continued) Amounts payable to related parties at June 30, 2006 and 2005 were as follows: 200 2005 Included in accounts payable: Homer Electric Association, Inc. $ 275,876 $ 286,086 Chugach Electric Association, Inc. $ 3,665 $ 25,497 Due to other funds: Alaska Energy Authority — short-term borrowings for vendor payments $ 4,714 $ 8,761 NOTE E: SURPLUS REFUND AND UTILITY CONTRIBUTIONS RECEIVABLE The $704,801 surplus at June 30, 2005 was refunded to member utilities in fiscal year 2006 pursuant to the Power Sales Agreement (PSA) and direction of the Bradley Lake Project Management Committee (BPMC). The $70,648 utility contribution receivable at June 30, 2006 was the cash deficit for fiscal year 2006 which will be repaid by the utilities in fiscal year 2007 pursuant to the PSA and direction of the BPMC. Independent Auditor’s Report on Additional Information Bradley Lake Project Management Committee Anchorage, Alaska Our report on our audits of the special-purpose financial statements of the Bradley Lake Project Management Committee Operating and Revenue Funds for the years ended June 30, 2006 and 2005 appears on the page preceding the balance sheets. Those audits were conducted for the purpose of forming an opinion on the special-purpose financial statements taken as a whole. The supplemental special-purpose Statements of Expenses are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the special-purpose financial statements and, in our opinion, is fairly stated in all material respects in relation to the special- purpose financial statements taken as a whole. Parisena, Stromberg & Company, APC Anchorage, Alaska October 31, 2006 10 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF EXPENSES Years ended June 30, 2006 and 2005 2006 Variance Favorable 2005 Budget Actual (Unfavorable) Actual Expenses: Generation expense: Operation supervision and engineering $ 185,214 §$ 176,529 $ 8,685 $ 147,460 Hydraulic operation 58,300 4,416 53,884 3,950 Electric plant operation 94,200 222,062 (127,862) 206,246 Hydraulic power generation operation 381,840 318,064 63,776 283,773 FERC land use fees 74,000 64,587 9,413 66,115 Structure maintenance 53,500 116,324 (62,824) 50,231 Reservoir, dam, and waterway maintenance 15,400 - 15,400 11,145 Electric plant maintenance 295,000 503,363 (208,363) 540,304 Hydraulic plant maintenance 274,000 171,116 102,884 173,971 System control and load dispatching 248,472 282,400 (33,928) 238,786 Substation operation and maintenance 105,200 89,640 15,560 - 165,417 Overhead line maintenance 36,000 30,423 5,577 95,569 Unallocated contingency funding 94,919 : 94,919 - Total generation expense 1,916,045 1,978,924 (62,879) 1,982,967 Administrative, general and regulatory expense: Insurance 588,503 599,449 (10,946) 654,490 AEA administrative fee 200,000 200,000 - 200,000 PMC costs 74,500 40,994 33,506 64,431 Regulatory commission: FERC administrative fees 126,000 269,272 (143,272) 15,233 FERC licensing 115,500 85,145 30,355 52,362 FERC study 75,000 38.419 36,581 7,546 Total administrative, general and regulatory expense 1,179,503 1,233,279 (53,776) 994.062 Total operations and maintenance expenses, before capital project reimbursement 3,095,548 3,212,203 (116,655) 2,977,029 R & C repayment 550,295 614,936 (64,641) 1,896,541 Total operations and maintenance expenses $3,645,843 $ 3,827,139 $ (181,296) $ 4,873,570 11 AUDITED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS JUNE 30, 2006 AND 2005 Parisena, Stromberg & Company A Professional Corporation Audited Financial Statements and Other Financial Information BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS Independent Auditor's Report Balance Sheets Statements of Revenues, Expenses and Changes in Surplus Statements of Cash Flows Notes to Financial Statements Independent Auditor's Report on Additional Information Statements of Expenses 10 11 Independent Auditor's Report Bradley Lake Project Management Committee Anchorage, Alaska We have audited the accompanying special-purpose balance sheets of the Bradley Lake Project Management Committee Operating and Revenue Funds (a project management committee) as of June 30, 2006 and 2005, and the related special-purpose statements of revenues and expenses, and of cash flows for the years then ended. These financial statements are the responsibility of the Bradley Lake Project Management Committee. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 audits provide a reasonable basis for our opinion. The accompanying special-purpose financial statements were prepared for the purpose of complying with, and in conformity with the accounting requirements specified in Note A, and are not intended to be a presentation in conformity with generally accepted accounting principles. In our opinion, the special-purpose financial statements referred to above present fairly, in all material respects, the assets, liabilities and surplus of the Bradley Lake Project Management Committee Operating and Revenue Funds as of June 30, 2006 and 2005, and its revenue, expenses and changes in surplus and its cash flows for the years then ended, on the basis of accounting described in Note A. This report is intended solely for the information and use of the Bradley Lake Project Management Committee and is not intended to be and should not be used by anyone other than this specified party. Parisena, Stromberg & Company, APC Anchorage, Alaska October 31, 2006 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS BALANCE SHEETS June 30, 2006 and 2005 2006 2005 ASSETS Current assets: Investments (Note B) $ 992,086 S 51753767 Accounts receivable 293,170 Utility contributions receivable (Note E) 70,648 - Prepaid expense 20,525 : Total assets $1,083,259 1,468,937 LIABILITIES AND SURPLUS Current liabilities: Due to other funds (Note D) $ 4,714 $ 8,761 Accounts payable 666,126 407,340 Utility contributions paid in advance 348,035 Payable to utilities (Note E) - 704,801 R & C repayment 412.419 : Total liabilities $_ 1,083,259 $1,468,937 See accompanying notes to the financial statements. 2 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF REVENUES AND EXPENSES Years ended June 30, 2006 and 2005 2006 Variance Favorable 2005 Budget Actual (Unfavorable) Actual Revenues: Utility contributions, net of surplus refund $ 14,378,183 $14,448,825 $ 70,642 $15,325,245 Interest receipts 1,785,699 1,896,353 110,654 1,770,987 Other miscellaneous - - - 293,170 Total revenue 16,163,882 16,345,178 181,296 17,389,402 Expenses, fixed asset replacements, refunds and debt service: Operations and maintenance 3,645,843 3,827,139 (181,296) 4,873,570 Debt service 12,276,325 12,276,325 - 12,273,050 Arbitrage transfer 241,714 241,714 - 227,782 Fixed asset replacements - Interfund transfer - - - 15,000 Total expenses, fixed asset replacements and debt service 16,163,882 16,345,178 (181,296) 17,389,402 Excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service $ - See accompanying notes to the financial statements. 3 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF CASH FLOWS Years ended June 30, 2006 and 2005 Cash flows from operating activities: Excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service Adjustments to reconcile excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service to net cash provided by (used in) operating activities: Decrease (increase) in accounts receivable Decrease (increase) in utility contributions receivable (Increase) in prepaid expense Increase in accounts payable Increase (decrease) in amounts due to other funds Increase (decrease) in utility contributions paid in advance Increase (decrease) in payable to utilities Increase in R & C repayment Net cash provided by (used in) operating activities Available cash and cash equivalents, beginning of year Available cash and cash equivalents, end of year Supplemental disclosure of cash flows information: Interest paid See accompanying notes to the financial statements. 4 2006 293,170 (70,648) (20,525) 258,786 (4,047) (348,035) (704,801) 412.419 (183,681) 1,175,767 $__992,086 $6,476,325 (293,170) 73,492 38,947 8,664 348,035 704,801 880,769 294,998 $_1,175,767 $6,608,050 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS June 30, 2006 and 2005 NOTE A: SIGNIFICANT ACCOUNTING POLICIES Description of Business: The Bradley Lake Project Management Committee (the Committee) was established pursuant to Section 13 of the Agreement for the Sale and Purchase of Electric Power (Power Sales Agreement) dated December 8, 1987. The purpose of the Committee is to arrange for the operation and maintenance of the Bradley Lake Hydroelectric Project (the Project), which became operational in September 1991, and the scheduling, production and dispatch of power. The members of the Committee include the Alaska Energy Authority (AEA) and the five purchasers under the Power Sales Agreement - Chugach Electric Association, Inc.; Golden Valley Electric Association, Inc.; the Municipality of Anchorage (Municipal Light & Power); the City of Seward (Seward Electric System); and the Alaska Electric Generation & Transmission Cooperative, Inc. (AEG&T). The Homer Electric Association, Inc. (HEA) and the Matanuska Electric Association, Inc. (MEA) are additional parties to the Power Sales Agreement but are included as power purchasers for purposes of representation while AEG&T has no direct vote as a consequence of the individual representation of HEA and MEA. Section 13 of the Power Sales Agreement delineates other Committee responsibilities, including: establishing procedures for each party's water allocation, budgeting for annual Project costs and calculating each party's required contribution to fund annual Project costs. Committee approval of operations and maintenance arrangements for the Project, sufficiency of the annual budgets and wholesale power rates and the undertaking of optional Project work requires a majority affirmative vote and the affirmative vote of AEA. The Power Sales Agreement extends until the later of: 1) 50 years after commencement of commercial operation or 2) the complete retirement of bonds outstanding under the AEA Power Revenue Bond Resolution along with the satisfaction of all other payment obligations under the Power Sales Agreement. Renewal options for additional terms exist. Establishment of Trust Funds: Article V, Section 502 of the Alaska Energy Authority's Power Revenue Bond Resolution established a Revenue Fund and an Operating Fund, including an Operating Reserve account, to be held by AEA. In actuality these funds, along with the Debt Service, Excess Investment Earnings (arbitrage), and various construction funds related to the Bradley Lake Hydroelectric Project are all held by the Corporate Trust Department of US Bank in Seattle, Washington. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE A: SIGNIFICANT ACCOUNTING POLICIES (Continued) All deposits, including utility contributions and interest transferred from other funds, are made into the Revenue Fund, which transfers amounts approximately equal to one-twelfth of the annual operating and maintenance budget into the Operating Fund on a monthly basis. Additional transfers are made from the Revenue Fund to the Debt Service Fund in order to satisfy semiannual interest payments and annual principal payments on the Project's outstanding bonds payable. Interest earnings available for operations and maintenance are derived from the following funds: Debt Service Fund; Operating Reserve Fund; Operating Fund; Revenue Fund; Capital Reserve Fund; and the Renewal & Contingency Fund when the fund balance is $5,000,000 or greater. Revenue and Expense Recognition: Utility contributions are recognized as revenue when due to be received under the terms of the Power Sales Agreement. Transfers from other funds are recognized when the transfer is made and interest earnings are recognized when received. Operating and maintenance expenses are recognized when incurred, while interest and principal transfers to Debt Service Fund are recognized when the transfer is made. Purchases of fixed asset replacements are expensed when purchased. Transfer to the Renewal and Contingency Reserve Fund (R & C) for repayments of capital costs is recognized at fiscal year end based on capital costs incurred as of fiscal year end. Estimates: The preparation of the special-purpose financial statements of the Operating and Revenue Funds requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes: The Bradley Lake Project Management Committee is exempt from income taxation under Section 501 (a) of the Internal Revenue Code. NOTE B: INVESTMENTS Substantially all of the balances in the following funds are invested in collateralized investment agreements through the trust department of US Bank. The specified interest rate for monies from the Operating and Revenue Funds invested in the agreements is 7.38% per annum. Balances at June 30, 2006 and 2005 are as follows: BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE B: INVESTMENTS (Continued) 2006 2005 Operating Fund $ 534,188 $ 650,865 Revenue Fund 457,898 524,902 Total investments $992,086 $1,175,767 Investments are sold as needed to cover operating requisitions submitted to the trustee and are therefore considered to be short-term and available for sale. Investments are presented at aggregate cost, which approximates market value. For purposes of the cash flow statements, management considers the full amount of the investment balance to be cash available for operations. NOTE C: MAJOR CONTRACTS AND AGREEMENTS During May 1994, the Alaska Energy Authority entered into the Master Maintenance and Operating agreement with the Committee. The purpose of the agreement is to establish contract administration and budgeting procedures for maintenance and operation contracts of the Bradley Lake Hydroelectric Project and to provide for the lease or other use of facilities and equipment in a manner consistent with the requirements of the Power Sales Agreement. The term of the Master Agreement is indefinite, remaining in effect until termination of the Power Sales Agreement or until AEA no longer legally exists. This agreement authorizes AEA to enter into any contracts necessary to perform operating or maintenance-type services to the Project, subject to the approval of the Committee. On behalf of the Committee, the AEA entered into an agreement with Chugach Electric Association, Inc. (CEA) in August, 1996, for the provision of all services necessary to dispatch the Bradley Project's electric power output. The dispatch agreement runs concurrently with the wheeling and related services contract entered into by and among the parties to the Power Sales Agreement in December 1987 and remains in effect for the term of the wheeling agreement unless CEA ceases to be the output dispatcher. In August 1996, the Alaska Energy Authority entered into an agreement with CEA on behalf of the Committee for the provision of maintenance services for the Daves Creek and Soldotna SVC Substations. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE C: MAJOR CONTRACTS AND AGREEMENTS (Continued) An operation and maintenance agreement dated February 11, 1994, was executed between Homer Electric Association, Inc. and the Alaska Energy Authority. This agreement provides for the operation and maintenance of the Bradley Lake Hydroelectric Project by Homer Electric Association, Inc. The agreement is through June 30, 2004 and continues from year to year thereafter, except upon written notice to terminate by either party. Notice of termination must be given one year in advance of the termination date. HEA is to be reimbursed for costs associated with the operation, maintenance and repair of the Project as determined in advance through the submission of an annual budget based upon prudent estimates and anticipated operation and maintenance costs. In August, 1996, the agreement was amended to separate the maintenance of the transmission facilities from the hydroelectric project. The transmission agreement continues from year to year, except upon written notice to terminate by either party. Notice of termination must be given six months in advance of termination dates. In June, 1999 the agreement was again amended to require HEA to provide communication services in addition to the other services. NOTE D: RELATED PARTY TRANSACTIONS During the years ended June 30, 2006 and 2005, costs incurred under the various contracts with related parties described in Note C were as follows: 2006 200 Homer Electric Association, Inc. — operation, maintenance and communications $ 1,640,208 $ 1,574,296 Chugach Electric Association, Inc. — substation service maintenance $ 89,641 $ 162,448 Alaska Energy Authority — administrative fees $ 200,000 $ 200,000 For the years ended June 30, 2006 and 2005, Chugach Electric Association, Inc. provided dispatch services to the Committee at the agreed upon amount which is zero. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE D: RELATED PARTY TRANSACTIONS (Continued) Amounts payable to related parties at June 30, 2006 and 2005 were as follows: 2006 2005 Included in accounts payable: Homer Electric Association, Inc. $ 275,876 $ 286,086 Chugach Electric Association, Inc. $ 3,665 $ 25,497 Due to other funds: Alaska Energy Authority — short-term borrowings for vendor payments $ 4,714 $ 8,761 NOTE E: SURPLUS REFUND AND UTILITY CONTRIBUTIONS RECEIVABLE The $704,801 surplus at June 30, 2005 was refunded to member utilities in fiscal year 2006 pursuant to the Power Sales Agreement (PSA) and direction of the Bradley Lake Project Management Committee (BPMC). The $70,648 utility contribution receivable at June 30, 2006 was the cash deficit for fiscal year 2006 which will be repaid by the utilities in fiscal year 2007 pursuant to the PSA and direction of the BPMC. Independent Auditor’s Report on Additional Information Bradley Lake Project Management Committee Anchorage, Alaska Our report on our audits of the special-purpose financial statements of the Bradley Lake Project Management Committee Operating and Revenue Funds for the years ended June 30, 2006 and 2005 appears on the page preceding the balance sheets. Those audits were conducted for the purpose of forming an opinion on the special-purpose financial statements taken as a whole. The supplemental special-purpose Statements of Expenses are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the special-purpose financial statements and, in our opinion, is fairly stated in all material respects in relation to the special- purpose financial statements taken as a whole. Parisena, Stromberg & Company, APC Anchorage, Alaska October 31, 2006 10 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF EXPENSES Years ended June 30, 2006 and 2005 2006 Variance Favorable 2005 Budget Actual (Unfavorable) Actual Expenses: Generation expense: Operation supervision and engineering $ 185,214 $ 176,529 $ 8,685 $ 147,460 Hydraulic operation 58,300 4,416 53,884 3,950 Electric plant operation 94,200 222,062 (127,862) 206,246 Hydraulic power generation operation 381,840 318,064 63,776 283,773 FERC land use fees 74,000 64,587 9,413 66,115 Structure maintenance 53,500 116,324 (62,824) 50,231 Reservoir, dam, and waterway maintenance 15,400 - 15,400 11,145 Electric plant maintenance 295,000 503,363 (208,363) 540,304 Hydraulic plant maintenance 274,000 171,116 102,884 173,971 System control and load dispatching 248,472 282,400 (33,928) 238,786 Substation operation and maintenance 105,200 89,640 15,560" 165,417 Overhead line maintenance 36,000 30,423 5,577 95,569 Unallocated contingency funding 94,919 : 94,919 - Total generation expense 1,916,045 1,978,924 (62,879) 1,982,967 Administrative, general and regulatory expense: Insurance 588,503 599,449 (10,946) 654,490 AEA administrative fee 200,000 200,000 - 200,000 PMC costs 74,500 40,994 33,506 64,431 Regulatory commission: FERC administrative fees 126,000 269,272 (143,272) 15,233 FERC licensing 115,500 85,145 30,355 52,362 FERC study 75,000 38.419 36,581 7,546 Total administrative, general and regulatory expense 1,179,503 1,233,279 (53,776) 994,062 Total operations and maintenance expenses, before capital project reimbursement 3,095,548 3,212,203 (116,655) 2,977,029 R & C repayment 550,295 614,936 (64,641) 1,896,541 Total operations and maintenance expenses $3,645,843 $§ 3,827,139 $ (181,296) $ 4,873,570 11 AUDITED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS JUNE 30, 2006 AND 2005 Parisena, Stromberg & Company A Professional Corporation Audited Financial Statements and Other Financial Information BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS Independent Auditor's Report Balance Sheets Statements of Revenues, Expenses and Changes in Surplus Statements of Cash Flows Notes to Financial Statements Independent Auditor's Report on Additional Information Statements of Expenses 10 11 Independent Auditor's Report Bradley Lake Project Management Committee Anchorage, Alaska We have audited the accompanying special-purpose balance sheets of the Bradley Lake Project Management Committee Operating and Revenue Funds (a project management committee) as of June 30, 2006 and 2005, and the related special-purpose statements of revenues and expenses, and of cash flows for the years then ended. These financial statements are the responsibility of the Bradley Lake Project Management Committee. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 audits provide a reasonable basis for our opinion. The accompanying special-purpose financial statements were prepared for the purpose of complying with, and in conformity with the accounting requirements specified in Note A, and are not intended to be a presentation in conformity with generally accepted accounting principles. In our opinion, the special-purpose financial statements referred to above present fairly, in all material respects, the assets, liabilities and surplus of the Bradley Lake Project Management Committee Operating and Revenue Funds as of June 30, 2006 and 2005, and its revenue, expenses and changes in surplus and its cash flows for the years then ended, on the basis of accounting described in Note A. This report is intended solely for the information and use of the Bradley Lake Project Management Committee and is not intended to be and should not be used by anyone other than this specified party. Parisena, Stromberg & Company, APC Anchorage, Alaska October 31, 2006 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS BALANCE SHEETS June 30, 2006 and 2005 2006 2005 ASSETS Current assets: Investments (Note B) $ 992,086 $ 1,175,767 Accounts receivable - 293,170 Utility contributions receivable (Note E) 70,648 - Prepaid expense 20,525 - Total assets $_ 1,083,259 $1,468,937 LIABILITIES AND SURPLUS Current liabilities: Due to other funds (Note D) $ 4,714 $ 8,761 Accounts payable 666,126 407,340 Utility contributions paid in advance - 348,035 Payable to utilities (Note E) - 704,801 R & C repayment 412.419 - Total liabilities $_ 1,083,259 $_ 1,468,937 See accompanying notes to the financial statements. 2 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF REVENUES AND EXPENSES Years ended June 30, 2006 and 2005 2006 Variance Favorable 2005 Budget Actual (Unfavorable) Actual Revenues: Utility contributions, net of surplus refund $ 14,378,183 $14,448,825 $ 70,642 $15,325,245 Interest receipts 1,785,699 1,896,353 110,654 1,770,987 Other miscellaneous - < - 293,170 Total revenue 16,163,882 16,345,178 181,296 17,389,402 Expenses, fixed asset replacements, refunds and debt service: Operations and maintenance 3,645,843 3,827,139 (181,296) 4,873,570 Debt service 12,276,325 12,276,325 - 12,273,050 Arbitrage transfer 241,714 241,714 - 227,782 Fixed asset replacements - Interfund transfer - - - 15,000 Total expenses, fixed asset replacements and debt service 16,163,882 16,345,178 (181,296) 17,389,402 Excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service $ - §$ - § _- §$ = See accompanying notes to the financial statements. 3 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF CASH FLOWS Years ended June 30, 2006 and 2005 Cash flows from operating activities: Excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service Adjustments to reconcile excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service to net cash provided by (used in) operating activities: Decrease (increase) in accounts receivable Decrease (increase) in utility contributions receivable (Increase) in prepaid expense Increase in accounts payable Increase (decrease) in amounts due to other funds Increase (decrease) in utility contributions paid in advance Increase (decrease) in payable to utilities Increase in R & C repayment Net cash provided by (used in) operating activities Available cash and cash equivalents, beginning of year Available cash and cash equivalents, end of year Supplemental disclosure of cash flows information: Interest paid See accompanying notes to the financial statements. 4 2006 293,170 (70,648) (20,525) 258,786 (4,047) (348,035) (704,801) I) _———eete (183,681) 1,175,767 ee ee $__992,086 $_ 6,476,325 2005 (293,170) 73,492 38,947 8,664 348,035 704,801 880,769 294,998 $ 1,175,767 $6,608,050 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS June 30, 2006 and 2005 NOTE A: SIGNIFICANT ACCOUNTING POLICIES Description of Business: The Bradley Lake Project Management Committee (the Committee) was established pursuant to Section 13 of the Agreement for the Sale and Purchase of Electric Power (Power Sales Agreement) dated December 8, 1987. The purpose of the Committee is to arrange for the operation and maintenance of the Bradley Lake Hydroelectric Project (the Project), which became operational in September 1991, and the scheduling, production and dispatch of power. The members of the Committee include the Alaska Energy Authority (AEA) and the five purchasers under the Power Sales Agreement - Chugach Electric Association, Inc.; Golden Valley Electric Association, Inc.; the Municipality of Anchorage (Municipal Light & Power); the City of Seward (Seward Electric System); and the Alaska Electric Generation & Transmission Cooperative, Inc. (AEG&T). The Homer Electric Association, Inc. (HEA) and the Matanuska Electric Association, Inc. (MEA) are additional parties to the Power Sales Agreement but are included as power purchasers for purposes of representation while AEG&T has no direct vote as a consequence of the individual representation of HEA and MEA. Section 13 of the Power Sales Agreement delineates other Committee responsibilities, including: establishing procedures for each party's water allocation, budgeting for annual Project costs and calculating each party's required contribution to fund annual Project costs. Committee approval of operations and maintenance arrangements for the Project, sufficiency of the annual budgets and wholesale power rates and the undertaking of optional Project work requires a majority affirmative vote and the affirmative vote of AEA. The Power Sales Agreement extends until the later of: 1) 50 years after commencement of commercial operation or 2) the complete retirement of bonds outstanding under the AEA Power Revenue Bond Resolution along with the satisfaction of all other payment obligations under the Power Sales Agreement. Renewal options for additional terms exist. Establishment of Trust Funds: Article V, Section 502 of the Alaska Energy Authority's Power Revenue Bond Resolution established a Revenue Fund and an Operating Fund, including an Operating Reserve account, to be held by AEA. In actuality these funds, along with the Debt Service, Excess Investment Earnings (arbitrage), and various construction funds related to the Bradley Lake Hydroelectric Project are all held by the Corporate Trust Department of US Bank in Seattle, Washington. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE A: SIGNIFICANT ACCOUNTING POLICIES (Continued) All deposits, including utility contributions and interest transferred from other funds, are made into the Revenue Fund, which transfers amounts approximately equal to one-twelfth of the annual operating and maintenance budget into the Operating Fund on a monthly basis. Additional transfers are made from the Revenue Fund to the Debt Service Fund in order to satisfy semiannual interest payments and annual principal payments on the Project's outstanding bonds payable. Interest earnings available for operations and maintenance are derived from the following funds: Debt Service Fund; Operating Reserve Fund; Operating Fund; Revenue Fund; Capital Reserve Fund; and the Renewal & Contingency Fund when the fund balance is $5,000,000 or greater. Revenue and Expense Recognition: Utility contributions are recognized as revenue when due to be received under the terms of the Power Sales Agreement. Transfers from other funds are recognized when the transfer is made and interest earnings are recognized when received. Operating and maintenance expenses are recognized when incurred, while interest and principal transfers to Debt Service Fund are recognized when the transfer is made. Purchases of fixed asset replacements are expensed when purchased. Transfer to the Renewal and Contingency Reserve Fund (R & C) for repayments of capital costs is recognized at fiscal year end based on capital costs incurred as of fiscal year end. Estimates: The preparation of the special-purpose financial statements of the Operating and Revenue Funds requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes: The Bradley Lake Project Management Committee is exempt from income taxation under Section 501 (a) of the Internal Revenue Code. NOTE B: INVESTMENTS Substantially all of the balances in the following funds are invested in collateralized investment agreements through the trust department of US Bank. The specified interest rate for monies from the Operating and Revenue Funds invested in the agreements is 7.38% per annum. Balances at June 30, 2006 and 2005 are as follows: BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE B: INVESTMENTS (Continued) 2006 2005 Operating Fund $ 534,188 $ 650,865 Revenue Fund 457,898 524,902 Total investments $992,086 $1,175,767 Investments are sold as needed to cover operating requisitions submitted to the trustee and are therefore considered to be short-term and available for sale. Investments are presented at aggregate cost, which approximates market value. For purposes of the cash flow statements, management considers the full amount of the investment balance to be cash available for operations. NOTE C: MAJOR CONTRACTS AND AGREEMENTS During May 1994, the Alaska Energy Authority entered into the Master Maintenance and Operating agreement with the Committee. The purpose of the agreement is to establish contract administration and budgeting procedures for maintenance and operation contracts of the Bradley Lake Hydroelectric Project and to provide for the lease or other use of facilities and equipment in a manner consistent with the requirements of the Power Sales Agreement. The term of the Master Agreement is indefinite, remaining in effect until termination of the Power Sales Agreement or until AEA no longer legally exists. This agreement authorizes AEA to enter into any contracts necessary to perform operating or maintenance-type services to the Project, subject to the approval of the Committee. On behalf of the Committee, the AEA entered into an agreement with Chugach Electric Association, Inc. (CEA) in August, 1996, for the provision of all services necessary to dispatch the Bradley Project's electric power output. The dispatch agreement runs concurrently with the wheeling and related services contract entered into by and among the parties to the Power Sales Agreement in December 1987 and remains in effect for the term of the wheeling agreement unless CEA ceases to be the output dispatcher. In August 1996, the Alaska Energy Authority entered into an agreement with CEA on behalf of the Committee for the provision of maintenance services for the Daves Creek and Soldotna SVC Substations. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE C: MAJOR CONTRACTS AND AGREEMENTS (Continued) An operation and maintenance agreement dated February 11, 1994, was executed between Homer Electric Association, Inc. and the Alaska Energy Authority. This agreement provides for the operation and maintenance of the Bradley Lake Hydroelectric Project by Homer Electric Association, Inc. The agreement is through June 30, 2004 and continues from year to year thereafter, except upon written notice to terminate by either party. Notice of termination must be given one year in advance of the termination date. HEA is to be reimbursed for costs associated with the operation, maintenance and repair of the Project as determined in advance through the submission of an annual budget based upon prudent estimates and anticipated operation and maintenance costs. In August, 1 996, the agreement was amended to separate the maintenance of the transmission facilities from the hydroelectric project. The transmission agreement continues from year to year, except upon written notice to terminate by either party. Notice of termination must be given six months in advance of termination dates. In June, 1999 the agreement was again amended to require HEA to provide communication services in addition to the other services. NOTE D: RELATED PARTY TRANSACTIONS During the years ended June 30, 2006 and 2005, costs incurred under the various contracts with related parties described in Note C were as follows: 2006 2005 Homer Electric Association, Inc. — operation, maintenance and communications $ 1,640,208 $ 1,574,296 Chugach Electric Association, Inc. — substation service maintenance $ 89,641 $ 162,448 Alaska Energy Authority — administrative fees $ 200,000 $ 200,000 For the years ended June 30, 2006 and 2005, Chugach Electric Association, Inc. provided dispatch services to the Committee at the agreed upon amount which is zero. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE D: RELATED PARTY TRANSACTIONS (Continued) Amounts payable to related parties at June 30, 2006 and 2005 were as follows: 2006 2005 Included in accounts payable: Homer Electric Association, Inc. $ 275,876 $ 286,086 Chugach Electric Association, Inc. $ 3,665 $ 25,497 Due to other funds: Alaska Energy Authority — short-term borrowings for vendor payments $ 4,714 $ 8,761 NOTE E: SURPLUS REFUND AND UTILITY CONTRIBUTIONS RECEIVABLE The $704,801 surplus at June 30, 2005 was refunded to member utilities in fiscal year 2006 pursuant to the Power Sales Agreement (PSA) and direction of the Bradley Lake Project Management Committee (BPMC). The $70,648 utility contribution receivable at June 30, 2006 was the cash deficit for fiscal year 2006 which will be repaid by the utilities in fiscal year 2007 pursuant to the PSA and direction of the BPMC. Independent Auditor’s Report on Additional Information Bradley Lake Project Management Committee Anchorage, Alaska Our report on our audits of the special-purpose financial statements of the Bradley Lake Project Management Committee Operating and Revenue Funds for the years ended June 30, 2006 and 2005 appears on the page preceding the balance sheets. Those audits were conducted for the purpose of forming an opinion on the special-purpose financial statements taken as a whole. The supplemental special-purpose Statements of Expenses are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the special-purpose financial statements and, in our opinion, is fairly stated in all material respects in relation to the special- purpose financial statements taken as a whole. Parisena, Stromberg & Company, APC Anchorage, Alaska October 31, 2006 10 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF EXPENSES Years ended June 30, 2006 and 2005 2006 Variance Favorable 2005 Budget Actual (Unfavorable) Actual Expenses: Generation expense: Operation supervision and engineering $ 185,214 § 176,529 §$ 8,685 $ 147,460 Hydraulic operation 58,300 4,416 53,884 3,950 Electric plant operation 94,200 222,062 (127,862) 206,246 Hydraulic power generation operation 381,840 318,064 63,776 283,773 FERC land use fees . 74,000 64,587 9,413 66,115 Structure maintenance 53,500 116,324 (62,824) 50;23] Reservoir, dam, and waterway maintenance 15,400 - 15,400 11,145 Electric plant maintenance 295,000 503,363 (208,363) 540,304 Hydraulic plant maintenance 274,000 171,116 102,884 173,971 System control and load dispatching 248,472 282,400 (33,928) 238,786 Substation operation and maintenance 105,200 89,640 15,560 ° 165,417 Overhead line maintenance 36,000 30,423 5,577 95,569 Unallocated contingency funding 94,919 : 94,919 - Total generation expense 1,916,045 1,978,924 (62,879) 1,982,967 Administrative, general and regulatory expense: Insurance 588,503 599,449 (10,946) 654,490 AEA administrative fee 200,000 200,000 - 200,000 PMC costs 74,500 40,994 33,506 64,431 Regulatory commission: FERC administrative fees 126,000 269,272 (143,272) 15,233 FERC licensing 115,500 85,145 30,355 52,362 FERC study 75,000 38.419 36,581 7,546 Total administrative, general and regulatory expense 1,179,503 1,233,279 (53,776) 994,062 Total operations and maintenance expenses, before capital project reimbursement 3,095,548 3,212,203 (116,655) 2,977,029 R & C repayment 550,295 614,936 (64,641) 1,896,541 Total operations and maintenance expenses $3,645,843 $ 3,827,139 $ (181,296) $ 4,873,570 11 AUDITED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS JUNE 30, 2006 AND 2005 Parisena, Stromberg & Company A Professional Corporation Audited Financial Statements and Other Financial Information BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS Independent Auditor's Report Balance Sheets Statements of Revenues, Expenses and Changes in Surplus Statements of Cash Flows Notes to Financial Statements Independent Auditor's Report on Additional Information Statements of Expenses 10 11 Independent Auditor's Report Bradley Lake Project Management Committee Anchorage, Alaska We have audited the accompanying special-purpose balance sheets of the Bradley Lake Project Management Committee Operating and Revenue Funds (a project management committee) as of June 30, 2006 and 2005, and the related special-purpose statements of revenues and expenses, and of cash flows for the years then ended. These financial statements are the responsibility of the Bradley Lake Project Management Committee. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 audits provide a reasonable basis for our opinion. The accompanying special-purpose financial statements were prepared for the purpose of complying with, and in conformity with the accounting requirements specified in Note A, and are not intended to be a presentation in conformity with generally accepted accounting principles. In our opinion, the special-purpose financial statements referred to above present fairly, in all material respects, the assets, liabilities and surplus of the Bradley Lake Project Management Committee Operating and Revenue Funds as of June 30, 2006 and 2005, and its revenue, expenses and changes in surplus and its cash flows for the years then ended, on the basis of accounting described in Note A. This report is intended solely for the information and use of the Bradley Lake Project Management Committee and is not intended to be and should not be used by anyone other than this specified party. Parisena, Stromberg & Company, APC Anchorage, Alaska October 31, 2006 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS BALANCE SHEETS June 30, 2006 and 2005 2006 2005 ASSETS Current assets: Investments (Note B) $ 992,086 $ 1,175,767 Accounts receivable 293,170 Utility contributions receivable (Note E) 70,648 - Prepaid expense 20,525 - Total assets $_ 1,083,259 14 a LIABILITIES AND SURPLUS Current liabilities: Due to other funds (Note D) $ 4,714 $ 8,761 Accounts payable 666,126 407,340 Utility contributions paid in advance 348,035 Payable to utilities (Note E) 704,801 R & C repayment 412,419 - Total liabilities $_ 1,083,259 $1,468,937 See accompanying notes to the financial statements. 2 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF REVENUES AND EXPENSES Years ended June 30, 2006 and 2005 2006 Variance Favorable 2005 Budget Actual (Unfavorable) Actual Revenues: Utility contributions, net of surplus refund $ 14,378,183 $14,448,825 $ 70,642 $15,325,245 Interest receipts 1,785,699 1,896,353 110,654 1,770,987 Other miscellaneous : : : 293,170 Total revenue 16,163,882 16,345,178 181,296 17,389,402 Expenses, fixed asset replacements, refunds and debt service: Operations and maintenance 3,645,843 3,827,139 (181,296) 4,873,570 Debt service 12,276,325 12,276,325 - 12,273,050 Arbitrage transfer 241,714 241,714 - 227,782 Fixed asset replacements - Interfund transfer - - - 15,000 Total expenses, fixed asset replacements and debt service 16,163,882 16,345,178 (181,296) 17,389,402 Excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service $ - § - § - § : See accompanying notes to the financial statements. 3 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF CASH FLOWS Years ended June 30, 2006 and 2005 Cash flows from operating activities: Excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service Adjustments to reconcile excess (deficiency) of revenues over expenses, fixed asset replacements, refunds and debt service to net cash provided by (used in) operating activities: Decrease (increase) in accounts receivable Decrease (increase) in utility contributions receivable (Increase) in prepaid expense Increase in accounts payable Increase (decrease) in amounts due to other funds Increase (decrease) in utility contributions paid in advance Increase (decrease) in payable to utilities Increase in R & C repayment Net cash provided by (used in) operating activities Available cash and cash equivalents, beginning of year Available cash and cash equivalents, end of year Supplemental disclosure of cash flows information: Interest paid See accompanying notes to the financial statements. 4 2006 293,170 (70,648) (20,525) 258,786 (4,047) (348,035) (704,801) 412.419 (183,681) DEUS S167. $_992,086 47 2 2005 (293,170) 73,492 38,947 8,664 348,035 704,801 880,769 294,998 $_1,175,767 6,608,05 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS June 30, 2006 and 2005 NOTE A: SIGNIFICANT ACCOUNTING POLICIES Description of Business: The Bradley Lake Project Management Committee (the Committee) was established pursuant to Section 13 of the Agreement for the Sale and Purchase of Electric Power (Power Sales Agreement) dated December 8, 1987. The purpose of the Committee is to arrange for the operation and maintenance of the Bradley Lake Hydroelectric Project (the Project), which became operational in September 1991, and the scheduling, production and dispatch of power. The members of the Committee include the Alaska Energy Authority (AEA) and the five purchasers under the Power Sales Agreement - Chugach Electric Association, Inc.; Golden Valley Electric Association, Inc.; the Municipality of Anchorage (Municipal Light & Power); the City of Seward (Seward Electric System); and the Alaska Electric Generation & Transmission Cooperative, Inc. (AEG&T). The Homer Electric Association, Inc. (HEA) and the Matanuska Electric Association, Inc. (MEA) are additional parties to the Power Sales Agreement but are included as power purchasers for purposes of representation while AEG&T has no direct vote as a consequence of the individual representation of HEA and MEA. Section 13 of the Power Sales Agreement delineates other Committee responsibilities, including: establishing procedures for each party's water allocation, budgeting for annual Project costs and calculating each party's required contribution to fund annual Project costs. Committee approval of operations and maintenance arrangements for the Project, sufficiency of the annual budgets and wholesale power rates and the undertaking of optional Project work requires a majority affirmative vote and the affirmative vote of AEA. The Power Sales Agreement extends until the later of: 1) 50 years after commencement of commercial operation or 2) the complete retirement of bonds outstanding under the AEA Power Revenue Bond Resolution along with the satisfaction of all other payment obligations under the Power Sales Agreement. Renewal options for additional terms exist. Establishment of Trust Funds: Article V, Section 502 of the Alaska Energy Authority's Power Revenue Bond Resolution established a Revenue Fund and an Operating Fund, including an Operating Reserve account, to be held by AEA. In actuality these funds, along with the Debt Service, Excess Investment Earnings (arbitrage), and various construction funds related to the Bradley Lake Hydroelectric Project are all held by the Corporate Trust Department of US Bank in Seattle, Washington. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE A: SIGNIFICANT ACCOUNTING POLICIES (Continued) All deposits, including utility contributions and interest transferred from other funds, are made into the Revenue Fund, which transfers amounts approximately equal to one-twelfth of the annual operating and maintenance budget into the Operating Fund on a monthly basis. Additional transfers are made from the Revenue Fund to the Debt Service Fund in order to satisfy semiannual interest payments and annual principal payments on the Project's outstanding bonds payable. Interest earnings available for operations and maintenance are derived from the following funds: Debt Service Fund; Operating Reserve Fund; Operating Fund; Revenue Fund; Capital Reserve Fund; and the Renewal & Contingency Fund when the fund balance is $5,000,000 or greater. Revenue and Expense Recognition: Utility contributions are recognized as revenue when due to be received under the terms of the Power Sales Agreement. Transfers from other funds are recognized when the transfer is made and interest earnings are recognized when received. Operating and maintenance expenses are recognized when incurred, while interest and principal transfers to Debt Service Fund are recognized when the transfer is made. Purchases of fixed asset replacements are expensed when purchased. Transfer to the Renewal and Contingency Reserve Fund (R & C) for repayments of capital costs is recognized at fiscal year end based on capital costs incurred as of fiscal year end. Estimates: The preparation of the special-purpose financial statements of the Operating and Revenue Funds requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes: The Bradley Lake Project Management Committee is exempt from income taxation under Section 501 (a) of the Internal Revenue Code. NOTE B: INVESTMENTS Substantially all of the balances in the following funds are invested in collateralized investment agreements through the trust department of US Bank. The specified interest rate for monies from the Operating and Revenue Funds invested in the agreements is 7.38% per annum. Balances at June 30, 2006 and 2005 are as follows: BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE B: INVESTMENTS (Continued) 2006 2005 Operating Fund $ 534,188 $ 650,865 Revenue Fund 457,898 524,902 Total investments $992,086 $1,175,767 Investments are sold as needed to cover operating requisitions submitted to the trustee and are therefore considered to be short-term and available for sale. Investments are presented at aggregate cost, which approximates market value. For purposes of the cash flow statements, management considers the full amount of the investment balance to be cash available for operations. NOTE C: MAJOR CONTRACTS AND AGREEMENTS During May 1994, the Alaska Energy Authority entered into the Master Maintenance and Operating agreement with the Committee. The purpose of the agreement is to establish contract administration and budgeting procedures for maintenance and operation contracts of the Bradley Lake Hydroelectric Project and to provide for the lease or other use of facilities and equipment in a manner consistent with the requirements of the Power Sales Agreement. The term of the Master Agreement is indefinite, remaining in effect until termination of the Power Sales Agreement or until AEA no longer legally exists. This agreement authorizes AEA to enter into any contracts necessary to perform operating or maintenance-type services to the Project, subject to the approval of the Committee. : On behalf of the Committee, the AEA entered into an agreement with Chugach Electric Association, Inc. (CEA) in August, 1996, for the provision of all services necessary to dispatch the Bradley Project's electric power output. The dispatch agreement runs concurrently with the wheeling and related services contract entered into by and among the parties to the Power Sales Agreement in December 1987 and remains in effect for the term of the wheeling agreement unless CEA ceases to be the output dispatcher. In August 1996, the Alaska Energy Authority entered into an agreement with CEA on behalf of the Committee for the provision of maintenance services for the Daves Creek and Soldotna SVC Substations. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE C: MAJOR CONTRACTS AND AGREEMENTS (Continued) An operation and maintenance agreement dated February 11, 1994, was executed between Homer Electric Association, Inc. and the Alaska Energy Authority. This agreement provides for the operation and maintenance of the Bradley Lake Hydroelectric Project by Homer Electric Association, Inc. The agreement is through June 30, 2004 and continues from year to year thereafter, except upon written notice to terminate by either party. Notice of termination must be given one year in advance of the termination date. HEA is to be reimbursed for costs associated with the operation, maintenance and repair of the Project as determined in advance through the submission of an annual budget based upon prudent estimates and anticipated operation and maintenance costs. In August, 1996, the agreement was amended to separate the maintenance of the transmission facilities from the hydroelectric project. The transmission agreement continues from year to year, except upon written notice to terminate by either party. Notice of termination must be given six months in advance of termination dates. In June, 1999 the agreement was again amended to require HEA to provide communication services in addition to the other services. NOTE D: RELATED PARTY TRANSACTIONS During the years ended June 30, 2006 and 2005, costs incurred under the various contracts with related parties described in Note C were as follows: 2006 2005 Homer Electric Association, Inc. — operation, maintenance and communications $ 1,640,208 $ 1,574,296 Chugach Electric Association, Inc. — substation service maintenance $ 89,641 $ 162,448 Alaska Energy Authority — administrative fees $ 200,000 $ 200,000 For the years ended June 30, 2006 and 2005, Chugach Electric Association, Inc. provided dispatch services to the Committee at the agreed upon amount which is zero. BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS NOTES TO FINANCIAL STATEMENTS (Continued) June 30, 2006 and 2005 NOTE D: RELATED PARTY TRANSACTIONS (Continued) Amounts payable to related parties at June 30, 2006 and 2005 were as follows: 2006 2005 Included in accounts payable: Homer Electric Association, Inc. $ 275,876 $ 286,086 Chugach Electric Association, Inc. $ 3,665 $ 25,497 Due to other funds: Alaska Energy Authority — short-term borrowings for vendor payments $ 4,714 $ 8,761 NOTE E: SURPLUS REFUND AND UTILITY CONTRIBUTIONS RECEIVABLE The $704,801 surplus at June 30, 2005 was refunded to member utilities in fiscal year 2006 pursuant to the Power Sales Agreement (PSA) and direction of the Bradley Lake Project Management Committee (BPMC). The $70,648 utility contribution receivable at June 30, 2006 was the cash deficit for fiscal year 2006 which will be repaid by the utilities in fiscal year 2007 pursuant to the PSA and direction of the BPMC. Independent Auditor’s Report on Additional Information Bradley Lake Project Management Committee Anchorage, Alaska Our report on our audits of the special-purpose financial statements of the Bradley Lake Project Management Committee Operating and Revenue Funds for the years ended June 30, 2006 and 2005 appears on the page preceding the balance sheets. Those audits were conducted for the purpose of forming an opinion on the special-purpose financial statements taken as a whole. The supplemental special-purpose Statements of Expenses are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the special-purpose financial statements and, in our opinion, is fairly stated in all material respects in relation to the special- purpose financial statements taken as a whole. Parisena, Stromberg & Company, APC Anchorage, Alaska October 31, 2006 10 BRADLEY LAKE PROJECT MANAGEMENT COMMITTEE OPERATING AND REVENUE FUNDS STATEMENTS OF EXPENSES Years ended June 30, 2006 and 2005 2006 Variance Favorable 2005 Budget Actual (Unfavorable) Actual Expenses: = = Generation expense: Operation supervision and engineering $ 185,214 $ 176,529 §$ 8,685 $ 147,460 Hydraulic operation 58,300 4,416 53,884 3,950 Electric plant operation 94,200 222,062 (127,862) 206,246 Hydraulic power generation operation 381,840 318,064 63,776 283,773 FERC land use fees é 74,000 64,587 9,413 66,115 Structure maintenance 53,500 116,324 (62,824) 50,231 Reservoir, dam, and waterway maintenance 15,400 - 15,400 11,145 Electric plant maintenance 295,000 503,363 (208,363) 540,304 Hydraulic plant maintenance 274,000 171,116 102,884 173,971 System control and load dispatching 248,472 282,400 (33,928) 238,786 Substation operation ! and maintenance 105,200 89,640 15,560 ° 165,417 Overhead line maintenance 36,000 30,423 5,577 95,569 Unallocated contingency funding 94,919 : 94,919 - Total generation expense 1,916,045 1,978,924 (62.879) 1,982,967 Administrative, general and regulatory expense: Insurance 588,503 599,449 (10,946) 654,490 AEA administrative fee 200,000 200,000 - 200,000 PMC costs 74,500 40,994 33,506 64,431 Regulatory commission: FERC administrative fees 126,000 269,272 (143,272) 15,233 FERC licensing 115,500 85,145 30,355 52,362 FERC study 75,000 38,419 36,581 7,546 Total administrative, general and regulatory expense 1,179,503 1,233,279 (53,776) 994,062 Total operations and maintenance expenses, before capital project reimbursement 3,095,548 3,212,203 (116,655) 2,977,029 R & C repayment 550,295 614,936 (64,641) 1,896,541 Total operations and maintenance expenses $ 3,645,843 $ 3,827,139 $ (181,296) $ 4,873,570 ll