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AEA Basic Financial Statements and Schedules June 30, 2009 and 2008
ALASKA ENERGY AUTHORITY (A. Component Unit of the State of Alaska) Basic Financial Statements and Schedules June 30, 2909 ang 2008 (With Incependent Auditors’ Resort Thereon) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Table of Contents Management’s Discussion and Analysis Independent Auditors’ Report Balance Sheets Statements of Revenues, Expenses, and Changes in Net Assets Statements of Cash Flows Notes to Basic Financial Statements Schedules 1 Schedule of Bradley Lake Hydroelectric Project Trust Account Activities 2 Schedule of Projects — Balance Sheet 3 Schedule of Projects —- Revenues, Expenses and Changes in Net Assets Page 1-7 10 11 12 13 -34 35 36 i ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2009 and 2008 Overview of the Financial Statements The Alaska Energy Authority’s (AEA or Authority) is composed of the following programs — AEA owned hydroelectric and intertie projects, rural energy programs, and energy development programs. Further information on AEA’s programs can be found in note 1 to the financial statements. This financial report consists of three sections: management’s discussion and analysis, basic financial statements, and supplementary schedules. AEA’s operations are business type activities and are considered an enterprise fund. The Authority is a component unit of the State of Alaska (State) and is discretely presented in the State’s financial statements. The Authority’s basic financial statements are the Balance Sheets; the Statements of Revenues, Expenses and Changes in Net Assets; the Statements of Cash Flows and the Notes to Basic Financial Statements. Basic Financial Statements The Balance Sheets report the Authority’s assets, liabilities, and resulting net assets. The net assets are reported as invested in capital assets less debt, restricted and unrestricted. Restricted net assets are subject to external limits such as bond resolutions, legal agreements or statutes. The Statements of Revenues, Expenses, and Changes in Net Assets report the Authority’s income, expenses, and resulting change in net assets during the periods reported. Both statements report on the accrual basis of accounting and economic resources measurement focus. The Statements of Cash Flows report the Authority’s sources and uses of cash and change in cash balance resulting from the Authority’s activities during the periods reported. The Notes to Basic Financial Statements provide additional information required to fully understand the amounts reported in the basic financial statements. Management’s Discussion and Analysis This section presents AEA management’s analysis of the Authority’s financial position and results of operations at and for the years ended June 30, 2009 and 2008. This information is presented to help the reader focus on significant financial issues and provide additional information regarding the activities of the Authority. This information should be read in conjunction with the Independent Auditors’ Report, the audited financial statements and the accompanying notes. Financial Highlights AEA’s assets exceeded its liabilities by $627 million at June 30, 2009 and by $597 million at June 30, 2008. Of the total net assets at June 30, 2009, $132 million was invested in capital assets net of related debt, $42 million was restricted and $453 million was unrestricted. Of the total net assets at June 30, 2008, $134 million was invested in capital assets net of related debt, $43 million was restricted and $420 million was unrestricted. 1 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2009 and 2008 Financial Analysis Financial Position Total assets, total liabilities, and total net assets at June 30, 2009, 2008, and 2007 follows (stated in thousands): 2009 2008 2007 Current assets $ 125133 16,825 7,386 Capital assets 245,054 251,834 259,816 Other noncurrent and restricted assets 515,785 478,603 524,425 Total assets 772,972 747,262 791,627 Current liabilities 38,672 CHAS 44,137 Noncurrent liabilities 107,578 112,838 118,234 Total liabilities 146,250 150,595 162,371 Total net assets 626,722 596,667 629,256 Total liabilities and net assets $ 172,972 747,262 791,627 Current assets were $4.7 million lower at June 30, 2009 compared to June 30, 2008 and $9.4 million higher at June 30, 2008 compared to June 30, 2007. Components of the changes were (stated in millions): 2009 vs. 2008 vs. 2008 2007 Decrease in investment interest receivable $ (0.1) (0.1) (Decrease) increase in receivable from Department of Energy (0.5) 0.4 (Decrease) increase in operating receivable from operating plants (0.2) 0.1 Increase (decrease) in receivable from Denali Commission 13 (0.7) (Decrease) increase in receivable for advanced grant funds to grantee (4.3) 9.3 Net (decrease) increase in short-term loans originated, net of loan collections (0.9) 0.4 $ (4.7) 9.4 2 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2009 and 2008 Capital assets were $6.8 million lower at June 30, 2009 compared to June 30, 2008 and $7.9 million lower at June 30, 2008 compared to June 30, 2007 substantially due to depreciation of capital assets, offset by improvements. Improvements to the below projects (stated in millions) were: 2009 vs. 2008 vs. 2008 2007 Bradley Lake Hydroelectric Project $ 0.5 1.4 Alaska Intertie Project 0.2 0.5 Napakiak Intertie Project 2.7 0.3 $ 3.4 2.2 Other noncurrent and restricted assets were $37.2 million higher at June 30, 2009 compared to June 30, 2008 and $45.8 million lower at June 30, 2008 compared to June 30, 2007. Components of the changes were (stated in millions): 2009 vs. 2008 vs. 2008 2007 Decrease in PCE Endowment Fund securities lending $ — (15.7) (Decrease) increase in PCE Endowment Fund realized investment income (7.0) 3.9 Decrease in PCE Endowment Fund fair value (42.1) (31.6) Contribution to Renewable Energy Fund 100.0 — Contribution to Bulk Fuel Revolving Loan Fund 5 — Net increase in other funds from investment income and fair value 4.3 — Decrease due to increased grant expenditures (30.0) (1.5) Decrease due to increased capital expenditures (1.2) od Increase in long-term loan fundings 1.4 0.6 Net increase (decrease) in State advances on appropriations 6.3 (1.5) $ 37.2 (45.8) 3 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2009 and 2008 Current liabilities were $0.9 million higher at June 30, 2009 compared to June 30, 2008 and $6.4 million lower at June 30, 2008 compared to June 30, 2007. Components of the changes were (stated in millions): 2009 vs. 2008 vs. 2008 2007 Increase in PCE Endowment Fund securities lending $ — (15.7) Net (decrease) increase in State advances on appropriations (1222) 6.0 Increase (decrease) in short-term borrowings 0.2 (0.4) (Decrease) increase in current portion of arbitrage interest payable (0.7) 1.0 Increased budgeted revenues in excess of actual expenses on hydroelectric and intertie projects 0.1 3.0 Increase (decrease) in other accrued expenditures 13:5 (0.3) $ 0.9 (6.4) The decreases in noncurrent liabilities between June 30, 2009 and 2008 and between June 30, 2008 and 2007 were caused by the decrease in the long-term portion of bonds payable at each year end and the decrease in the noncurrent portion of arbitrage interest payable. There were no new borrowings. The increase in net assets from June 30, 2008 to June 30, 2009 resulted primarily from the $100 million Renewable Energy contribution from the State of Alaska offset by the investment losses in the PCE Endowment Fund. The decrease in net assets from June 30, 2007 to June 30, 2008 resulted primarily from the $39.9 million unrealized loss in the PCE Endowment Fund offset by increased realized investment gains. 4 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2009 and 2008 Operations Components of the Authority’s operating revenues, operating expenses, nonoperating investment income and operating loss for the years ended June 30, 2009 through 2007 follows (stated in thousands): Operating revenues: Federal grants Revenue from operating plants State appropriations Other Total operating revenues Operating expenses: Grants and projects PCE grants Depreciation Interest expense Plant operating General and administrative Provision for loan loss and bad debt expense Total operating expenses Operating loss Nonoperating: State of Alaska Bulk Fuel Revolving Loan Fund contribution State of Alaska Renewable Energy Fund contribution Investment (loss) income, net Increase (decrease) in net assets $ 2009 2008 2007 20,545 19,817 21,881 17,890 17,185 16,962 61,394 22,612 14,539 1,763 2,312 1,718 101,592 61,926 55,100 72,010 27,594 24,239 37,074 28,235 25,145 10,233 10,160 10,034 7,116 7,577 7,938 5,077 4,489 4,242 1,940 1,894 1,673 (40) (106) (349) 133,410 79,843 72,922 (31,818) (17,917) (17,822) 5,500 — 182,700 100,001 = — (43,628) (14,672) 49,235 30,055 (32,589) 214,113 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2009 and 2008 Operating revenues increased $39.6 million during the year ended June 30, 2009 compared to the prior year and increased $6.8 million during the year ended June 30, 2008 compared to the same period in 2007. Components of the changes were (stated in millions): FY 2009-2008 FY 2008-2007 Net change Net change Decreased grant revenue from Denali Commission $ (1.8) (1.9) (Decreased) increased grant revenue from Department of Energy (0.7) 0.2 Increased revenue from other grantors 35) _ Fluctuations in Bradley Lake approved budget expenditures 0.7 — (Decreased) increased revenue from other State agencies (0.6) 0.5 Increased revenue from State for PCE grants 2.8 25) Increased revenue from State general fund operating and capital appropriations 36.0 55) $ 39.6 6.8 Operating expenses increased $53.6 million during the year ended June 30, 2009 compared to the prior year and were $6.9 million higher during the year ended June 30, 2008 compared to the same period in 2007. Components of the changes were (stated in millions): FY 2009-2008 FY 2008-2007 Net change Net change Increased (decreased) federal funded grant and project expenses in active rural energy construction projects $ 0.7 (2.0) Increased State funded grant and project expenses 44.4 5.0 Decreased (increased) State agency funded expenses for interagency contracts (0.6) 0.6 Increased PCE grant expenditures 8.8 Sal Decreased bond interest expense (0.4) (0.4) Increased operating plants expense 0.6 0.2 Increased administrative costs due to increased state funding = 03 Increased other expenses 0.1 0.1 $ 53.6 6.9 During the year ended June 30, 2009, the PCE Endowment had unrealized losses of $42 million and realized losses of $13.4 million that offset $6.2 million in net interest income and realized gains from other funds. During the year ended June 30, 2008, the PCE Endowment had unrealized losses of $39.6 million that offset $24.7 million in net interest income and realized gains from other funds. 6 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2009 and 2008 Outlook Annual operation of the owned hydroelectric and intertie projects are per annual budgets approved by the utilities that use the assets and pursuant to bond resolutions and other agreements. Annual operation of the rural energy programs and energy development programs are per State legislation, annual appropriations and federal grant awards. KPMG LLP Suite 600 701 West Eighth Avenue Anchorage, AK 99501 Independent Auditors’ Report The Board of Directors Alaska Energy Authority: We have audited the accompanying balance sheets of the Alaska Energy Authority (a Component Unit of the State of Alaska) (Authority) as of June 30, 2009 and 2008, and the related statements of revenues, expenses, and changes in net assets, and cash flows for the years then ended. These financial statements are the responsibility of the Authority’s management. Our responsibility is to express an opinion on these basic financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Authority’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and the 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 opinions. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Authority as of June 30, 2009 and 2008, and the changes in its financial position and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. In accordance with Government Auditing Standards, we have also issued our report dated October 23, 2009, on our consideration of the Authority’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The Management’s Discussion and Analysis on pages 1 through 7 is not a required part of the basic financial statements but is supplementary information required by U.S. generally accepted accounting principles. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. KPMG LLP, a U.S. limited liability partnership, is the U.S. member firm of KPMG International, a Swiss cooperative. mana Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The supplementary information included in schedules | to 3 is presented for the purpose of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. KPMG LEP October 23, 2009 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Balance Sheets June 30, 2009 and 2008 (Stated in thousands) Assets 2009 2008 Current assets: Grants receivable $ 3,566 2,810 Loans receivable (note 7) 1,970 2,857 Operating revenue receivable 5,355) 9,843 Accrued interest receivable 1,242 13315 Total current assets 12,133 16,825 Noncurrent assets: Restricted cash and investments (note 3) 23,015 22,863 Cash and investments designated for specific purposes (note 3) 467,464 431,876 Loans receivable, net of allowance (note 7) 25,306 23,864 Capital assets (note 5) 447,276 443,823 Less accumulated depreciation (202,222) (191,989) Capital assets, net 245,054 251,834 Total noncurrent assets 760,839 730,437 Total assets $ 772,972 747,262 Liabilities and Net Assets Current liabilities: Due to State of Alaska $ 2,143 14,081 Accounts payable 27,022 13,624 Bonds payable — current portion (note 6) 6,030 5,820 Arbitrage interest payable — current portion (note 6) 357 1,007 Accrued interest 3,120 3,225 Total current liabilities 38,672 37,757 Noncurrent liabilities: Bonds payable — noncurrent portion, net (note 6) 107,301 112,454 Arbitrage interest payable noncurrent portion (note 6) 174 281 Other liabilities 103 103 Total noncurrent liabilities 107,578 112,838 Total liabilities 146,250 150,595 Net assets: Invested in capital assets, net of related debt 1315723) 133,560 Restricted for debt service 19,896 19,638 Restricted by agreements with external parties 21,883 23,088 Unrestricted net assets 453,220 420,381 Total net assets 626,722 596,667 Commitments and contingencies (notes 8 and 10) Total liabilities and net assets $ 772,972 747,262 See accompanying notes to basic financial statements. 10 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Statements of Revenues, Expenses, and Changes in Net Assets Years ended June 30, 2009 and 2008 (Stated in thousands) Operating revenues: Federal grants Revenue from operating plants State of Alaska appropriations Revenue from state agencies Interest on loans Other revenue Total operating revenues Operating expenses: Grants and projects Power cost equalization grants Depreciation Interest expense Plant operating General and administrative Provision for loan loss and bad debt expense (note 7) Total operating expenses Operating loss Nonoperating: State of Alaska Bulk Fuel Revolving Loan Fund contribution State of Alaska Renewable Energy Fund contribution Investment loss, net Total nonoperating Increase (decrease) in net assets Net assets — beginning Net assets — ending See accompanying notes to basic financial statements. 11 2009 20,545 17,890 61,394 551 1,099 113 101,592 72,010 37,074 10,233 7,116 5,077 1,940 (40) 133,410 (31,818) 5,500 100,001 (43,628) 61,873 30,055 596,667 626,722 2008 19,817 17,185 22,612 1,221 1,020 71 61,926 27,594 28,235 10,160 7,577 4,489 1,894 (106) 79,843 (17,917) (14,672) (14,672) (32,589) 629,256 596,667 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Statements of Cash Flows Years ended June 30, 2009 and 2008 (Stated in thousands) Cash flows from operating activities: Receipts from federal grants Receipts from customers and users Receipts from State of Alaska appropriations Principal collected on loans Receipts from state agencies Interest collected on loans Other operating receipts Loans originated Payments to suppliers Payments to grantees Net cash used by operating activities Cash flows from noncapital and related financing activities: Net unremitted interest returned on State appropriation advances Renewable Energy Fund contribution from State appropriation Bulk Fuel Revolving Loan Fund contribution from State appropriations Decrease in State appropriation advance held in trust for others Net receipt from operating loans from AIDEA Net cash provided (used) by noncapital and related financing activities Cash flows from capital and related financing activities: Principal paid on bonds Interest paid on bonds Purchase of capital assets Net cash used by capital and related financing activities Cash flows from investing activities: Purchase of investments Proceeds from sales and maturities of investments Interest received from investments Net cash (used) provided by investing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (note 3) Reconciliation of operating loss to net cash used by operating activities: Operating loss Adjustments to reconcile operating loss to net cash used by operating activities: Depreciation Provision for loan loss and bad debt expense Bond interest expense Changes in assets and liabilities: (Decrease) increase in due to State of Alaska (Increase) decrease in grants receivable Increase in loans receivable Increase in interest receivable Decrease (increase) in operating revenue receivable Decrease in operating accounts payable Net cash used by operating activities Noncash capital activities: Amount included in accounts payable for fixed asset additions Net decrease in fair value of investments See accompanying notes to basic financial statements. 12 2009 s 19,789 17,473 49,190 11,716 787 1,101 62 (12,232) (13,073) (84,240) (9,427) (21) 100,001 5,500 (432) 27 105,075 (5,820) (6,344) (3,421) (15,585) (354,684) 289,767 11,353 (53,564) 26,499 30,741 $ 57,240 $ (31,818) 10,233 (40) 7,116 (11,917) (756) (516) 1 4,488 13,782 $ (9,427) s 248 (42,092) 2008 20,080 17,388 28,660 9,431 1,051 1,029 7 (10,125) (13,733) (54,432) (580) (88) (567) 174 (481) (5,810) (6,457) 2,961) (15,228) (113,845) 110,661 17,049 13,865 (2,424) 33,165 30,741 (17,917) 10,160 (106) 7,577 5,882 263 (694) 9 (9,434) 3,680 (580) 216 (39,367) (1) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 Organization and Operations The Alaska Energy Authority (Authority or AEA) was created by the Alaska State Legislature in 1976. AEA is a public corporation and a component unit of the State of Alaska (State). AEA’s mission is to reduce the cost of energy in Alaska. Throughout the 1980’s, AEA worked to develop the State’s energy resources as a key element in diversifying Alaska’s economy. A number of large-scale projects were constructed; four of those projects were sold in 2002. Today, AEA’s two hydroelectric projects have an installed capacity in excess of 90 megawatts, and the Alaska Intertie’s 170 miles of transmission line link Interior Alaska with the cheaper energy available in the Southcentral portion of the State. Pursuant to statute, on August 12, 1993, the board of directors of the Alaska Industrial Development and Export Authority (AIDEA), a public corporation and a political subdivision of the State, became the board of directors of AEA. AEA continues to exist as a separate legal entity. The corporate structure and operating assets of AEA were retained but the ability to have employees, and construct or acquire energy projects was eliminated. Among other things, AIDEA provides personnel services for AEA. The board appointed, on April 10, 2008, a separate AEA executive director who is an employee of AIDEA. Previously, the AEA and AIDEA executive directors were the same. There is no commingling of funds, assets or liabilities between AIDEA and AEA and there is no responsibility of one for the debts or the obligations of the other. Consequently, the accounts of AIDEA are not included in the accompanying financial statements. The 1993 legislation required AEA, to the maximum extent feasible, to enter contracts with public utilities and other entities to carry out AEA duties respecting the ongoing operation and maintenance of the AEA owned operating assets; this has occurred with oversight responsibility retained by AEA. Pursuant to legislation effective July 1, 1999, rural energy programs previously administered by the former Department of Community and Regional Affairs, Division of Energy, were transferred to AEA for administration, as part of a larger reorganization of state agencies. Five general energy programs comprising more than twenty smaller programs were moved to AEA. Rural energy programs were originally part of AEA prior to the reorganization that occurred in 1993. During fiscal year 2008, legislation added energy development programs to AEA. The following is a description of AEA’s existing projects and programs: (a) Bradley Lake Hydroelectric Project The project has installed capability, under optimal conditions, of 126 megawatts and transmits its power to the State’s main power grid via two parallel 20—mile transmission lines. The project, which cost in excess of $300 million, went into commercial operation in 1991. The project is now operated by Homer Electric Association under contract with AEA. Bradley Lake serves Alaska’s Railbelt from Homer to Fairbanks as well as the Delta Junction area. (b) Alaska Intertie Project The 170-mile, 345-kilovolt transmission line runs between Willow and Healy, and interconnects the power distribution systems of Anchorage and Fairbanks. The Alaska Intertie allows Golden Valley 13 (Continued) (d) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 Electric Association in Fairbanks to purchase electricity produced with lower cost energy, such as natural gas and hydroelectric, from the Anchorage and Kenai Peninsula utilities and allows utilities from the Mat-Su Valley, Anchorage and the Kenai Peninsula to purchase power from Fairbanks during power shortages. The Alaska Intertie reduces the number of black/brownouts throughout the system. Operations and maintenance duties are overseen by the Intertie Operating Committee under the Alaska Intertie Agreement (Agreement). Effective July 1, 2002, the State appropriated $20,300,000 to AEA to upgrade and extend a portion of the Alaska Intertie. Through June 30, 2008, AEA incurred $489,000 in costs for preliminary design work. In August 2007, AEA issued a contract to the Municipality of Anchorage dba Municipal Light and Power (ML&P) for $19,500,000 for the upgrade and the work began in September 2007. Effective July 1, 2008, the State re-appropriated up to $10,000,000 of the original funds for certain specific capital repairs on the Intertie. As a result, AEA is renegotiating the existing contract with ML&P to reduce scope of work to upgrade and extend a portion of the Intertie, and is negotiating with ML&P to repair static VAR compensators and a tower foundation. Due to reduction of funds in original project and related scope change, the major upgrades and repairs funded by the appropriations are estimated to be completed by late 2014. However this estimate of date is dependent on the final scope of work and availability of funds. AEA management and participating utilities identified defects in the Agreement that AEA management believes should be corrected. Attempts to cure the identified defects were unsuccessful because amending the Agreement requires unanimous consent of each member of the Intertie Operating Committee, and at least one utility member objected to each proposed cure. AEA management, on October 16, 2006, issued contractually required notice that the Agreement will terminate in 48 months, on October 17, 2010. AEA management anticipates that the necessary amendments to the Agreement can be implemented on or before the effective date of the termination of the existing Agreement. Larsen Bay Hydroelectric Project The 475-kilowatt project produces electricity and provides water for the City of Larsen Bay (City), an isolated Kodiak Island community. It went into commercial operation in 1991 and replaced the City’s old water supply system and provided a better source of water with reduced maintenance and improved water quality. The City operates the project. The Authority and the City have agreed that the Authority will convey the project to the City and the City will accept all responsibility for it when the Authority completes repair work currently being performed under a project management agreement with the City. Rural Energy Programs The rural energy programs include Bulk Fuel Storage Upgrades, Rural Power System Upgrades, Power Cost Equalization (PCE), Alternative Energy, Utility Training, and Technical Assistance, two active loan programs funded from the Bulk Fuel Revolving Loan Fund and the Power Project Fund and one inactive loan program. 14 (Continued) (2) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 Energy Development Programs The energy development programs include the energy sustainability plan and renewable energy grants program pursuant to legislation passed in 2008. (2) Summary of Significant Accounting Policies (a) (b) (c) Basis of Accounting — Enterprise Fund Accounting The accounts of the Authority are organized as an Enterprise Fund. Accordingly, the financial activities of the Authority are reported using the economic resources measurement focus and the accrual basis of accounting, whereby revenues are recorded when earned and expenses are recorded when goods or services are received or the related liability is incurred. GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, provides two options for reporting proprietary fund activities (including component units using proprietary fund accounting). The Authority has elected to apply all applicable GASB pronouncements and all FASB Statements and Interpretations, Accounting Principles Board Opinions and Accounting Research Bulletins issued on or before November 30, 1989, unless they conflict with or contradict GASB pronouncements. Operating Revenue and Expense The Authority considers all its revenues and expenses, except investment income and fund transfers with the State, to be part of its principal ongoing operations and therefore classifies these revenues and expenses as operating in the statement of revenues, expenses, and changes in net assets. Capital Assets Capital assets are stated at cost and depreciation is charged to operations by use of the straight-line method over their estimated useful lives. The estimated economic lives of the assets are as follows: Utility plant Life in years Intangible 30-50 Production 30-50 Transmission 20-40 General 5-30 The Authority recognizes impairment losses for long-lived assets whenever events or changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future cash flows associated with such assets. Cash and Investments All of AEA’s cash and investments are restricted as to use by AEA. For the purposes of the, statement of cash flows, cash and cash equivalents consist of cash, short term commercial paper and money market funds. nS) (Continued) (d) (7) (9) (h) ) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 AEA’s marketable securities are reported at fair value in the financial statements. Unrealized gains and losses are reported as components of the change in net assets. Fair values are obtained from independent sources. Loans and Related Interest Income Loans are generally carried at amounts advanced less principal payments collected. Interest income is accrued as earned. Accrual of interest is discontinued whenever the payment of interest or principal is more than ninety days past due or when the loan terms are restructured. The Authority considers lending activities to be part of its principal operations and classifies it as operating in the statement of revenues, expenses, and changes in net assets. For purposes of the statement of cash flows, loans are treated as program loans. Allowance for Loan Losses The allowance for loan losses represents management’s judgment as to the amount required to absorb potential losses in the loan portfolio. The factors used by management to determine the allowance required include historical loss experience, individual loan delinquencies, collateral values, economic conditions and other factors. Management’s opinion is that the allowance is currently adequate to absorb known losses and inherent risks in the portfolio. Environmental Issues The Authority’s policy relating to environmental issues is to record a liability when the likelihood of Authority responsibility for clean-up is probable and the costs are reasonably estimable. At June 30, 2009 and 2008, there were no environmental issues which met both of these criteria and, accordingly, no provision has been made in the accompanying financial statements for any potential liability which may result. Income Taxes The Internal Revenue Code provides that gross income for tax purposes does not include income accruing to a state or territory or any political subdivision thereof which is derived from the exercise of any essential governmental function or from any public utility. AEA is a political subdivision of the State performing an essential governmental function and is therefore exempt from State and federal income taxes. Appropriations and Grants The Authority recognizes grant revenue under the provisions of GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, whereby revenue is recognized when all applicable eligibility requirements, including time requirements, are met. Segment Information The financial statements disclose all financial information required by the Authority’s Bradley Lake bond indenture. 16 (Continued) (3) @ () ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 Estimates In preparing the financial statements, management of the Authority is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities as of the date of the balance sheet. These estimates impact revenue and expenses for the period. Actual results could differ from those estimates. Recent Accounting Pronouncement In November 2006, GASB issued Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations, which is effective for periods beginning after December 15, 2007. This statement addresses accounting and financial reporting standards for pollution (including contamination) remediation obligations, which are obligations to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities such as site assessments and cleanups. No liability existed under this standard at June 30, 2009. Cash and Investments Pursuant to various agreements, appropriations and statutory requirements relating to its operations, AEA has established accounts for assets restricted to construction, operation, and financing activities (as used herein, Fund means a separate account established by the State legislature and does not refer to a separate group of self balancing accounts as contemplated by accounting principles generally accepted in the United States of America). At June 30, 2009 and 2008 the Authority’s carrying amount of deposits (all of which were restricted) was $57,240,000 and $30,741,000, respectively. The total of all bank balances was $58,536,000 and $31,507,000, respectively. The restricted and designated cash and investments were held in trust accounts for the following activities as of June 30, 2009 (stated in thousands): Cash and cash equivalents Investments Total Power Cost Equalization Endowment Fund = $ 13 303,341 303,354 Renewable Energy Grant Fund a 87,143 87,143 Bradley Lake Hydroelectric Project 9,149 18,626 Dist Rural Energy Loan Funds 17,405 8,587 25,992 Rural Energy and Energy Development Programs 3,067 15,542 18,609 Funds advanced from State and federal agencies 13,879 — 13,879 Renewable Energy Grant Program 11,021 _— 11,021 Power Development Fund 1,867 — 1,867 Alaska Intertie Project 839 = 839 Total cash and investments $ 57,240 433,239 490,479 17 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 The restricted and designated cash and investments were held in trust accounts for the following activities as of June 30, 2008 (stated in thousands): Cash and cash equivalents Investments Total Power Cost Equalization Endowment Fund $ 2 368,704 368,706 Bradley Lake Hydroelectric Project 9,045 17,933 26,978 Rural Energy Loan Funds 9,180 11,539 20,719 Rural Energy and Energy Development Programs 1,387 18,831 20,218 Funds advanced from State and federal agencies 7,925 —_— 7,925 Power Development Fund 1,940 — 1,940 Power Cost Equalization and Rural Electric Capitalization Fund 746 6,991 slot Alaska Intertie Project 516 _— 516 Total cash and investments $ 30,741 423,998 454,739 At June 30, 2009 and 2008, amounts restricted for debt service totaled $23,015,000 and $22,863,000, respectively, for the Bradley Lake Hydroelectric Project. Investment Holdings Power Cost Equalization Endowment Fund and Renewable Energy Grant Fund — The Power Cost Equalization Endowment Fund (PCE Fund), created under Alaska Statute 42.45.070, and the Renewable Energy Grant Fund (RE Fund), created under Alaska Statute 42.45.045, are under the fiduciary authority of the State Department of Revenue, Treasury Division (Treasury). The purpose of the PCE fund is to provide for a long-term stable financing source for power cost equalization in order to provide affordable levels of electric utility costs in otherwise high-cost service areas in the state. The purpose of the RE Fund is to finance renewable energy projects in Alaska. State investments are managed in pools. PCE Fund assets are held in the State’s internally managed Short— term Fixed Income Pool and the Conservative Broad Market Pool (which consists solely of investments in the Broad Market and U.S. Treasury Fixed Income Pools), as well as the State’s externally managed Domestic Equity account and International Equity Pool. RE Fund assets are held in the State’s internally managed General Fund and Other Non-Segregated Investments Pool (GeFonsi). The GeFONSI consists of investments in the State’s Short-term and Intermediate-term Fixed Income Pools. A complete description of the investment policy for each pool is included in the Department of Revenue, Treasury Division, Policies and Procedures. Fixed income and international equity securities are valued each business day using prices obtained from a pricing service. The Domestic Equity account is valued each business day by the Trustee Committee in good faith and pursuant to procedures established by the Trustee. Securities expressed in terms of foreign currencies are translated into U.S. dollars at the prevailing exchange rates. 18 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 The accrual basis of accounting is used for investment income. Income in the other fixed income pools and the International Equity Pool is allocated to pool participants daily on a pro rata basis. Domestic equity income is distributed quarterly. At June 30, 2009, AEA had the following cash and investments in the PCE and RE Funds (stated in thousands): Cash Investments at fair value PCE Fund RE Fund PCE FUND Broad market Short and and U.S. Short-term intermediate- Treasuries fixed terms fixed fixed Investment type income pool income pool income pools Equity Total Deposit $ 19 105 _— — _ Short-term Investment Fund _ _ _ 1,069 1,069 Commercial paper 382 2,111 _ _— — U.S. Treasury bonds _— — 3,146 — 3,146 U.S. Treasury bills 2,156 11,907 — — — U.S. Treasury notes _ 23,650 24,215 — 24,215 U.S. govemment agency 167 16,335 4,260 — 4,260 Mortgage-backed 241 6,213 48,802 — 48,802 Other asset-backed 761 4,526 1,220 — 1,220 Corporate bonds 2,059 17,057 20,420 — 20,420 Yankee: Govemment _ 406 273 _ 273 Corporate 442 4,688 3,936 — 3,936 Domestic equity — _ — 141,032 141,032 International equity — _— — 50,286 50,286 Total invested assets 6,227 86,998 106,272 192,387 298,659 Pool related net liabilities (14) 145 (1,744) 226 (1,518) Other pool ownership (6,200) = 6,200 _ 6,200 Net invested assets $ 13 87,143 110,728 192,613 303,341 19 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 At June 30, 2008, AEA had the following cash and investments in the PCE Fund (stated in thousands): Cash Investments at fair value Short-term Broad market fixed fixed Total Investment type income pool income pool Equity investments Overnight sweep account $ 27 — _ _ Commercial paper 877 _ — - Municipal bonds —_— 18 _— 18 U.S. Treasury notes — 12,170 — 12,170 U.S. Treasury bonds — 4,929 —_— 4,929 U.S. government agency 5,854 2,541 —_ 2,541 Mortgage-backed 470 90,741 _— 90,741 Other asset-backed eal. 8,265 _ 8,265 Corporate bonds 2,581 34,438 _— 34,438 Yankee: Government — 382 — 382 Corporate 774 4,264 — 4,264 Domestic equity —_ _ 137,785 137,785 International equity _— — 69,192 69,192 Total invested assets 13,310 157,748 206,977 364,725 Pool related net liabilities (7) (10,225) 903 (9,322) Other pool ownership (13,301) 13,301 — 13,301 Net invested assets $ 2; 160,824 207,880 368,704 Other AEA Cash and Investments — Bradley Lake Hydroelectric Project investments are substantially invested pursuant to investment agreements with JP Morgan Chase Bank that end the earlier of July 1, 2021 or the date of repayment of the Bradley Lake Power Revenue Bonds, First and Second Series. All other AEA assets are managed by internal staff for liquidity and minimal risk. There is no AEA board approved investment policy, but staff follows AIDEA’s board approved investment policy. The AEA managed portfolio consists of the following eligible securities: . Debt instruments issued or guaranteed by the U.S. government, its agencies and instrumentalities, and Government Sponsored Enterprises (GSEs); and ° Money market funds and repurchase agreements collateralized by U.S. Treasury and agency securities. 20 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 At June 30, 2009 and 2008, AEA had the following cash and investments in its other funds (stated in thousands): 2009 2008 Fair value Fair value short-term short-term Investment type fixed income fixed income Deposits $ yA) 17 Money market 57,198 30,721 GSE-Mortgage-backed 5,031 25,897 U.S. Treasury notes 19,098 11,464 Investment agreements 18,626 17,934 Total invested assets $ 99,982 86,033 Interest Rate Risk — Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. Short-Term Fixed Income Pool — As a means of limiting its exposure to fair value losses arising from increasing interest rates, Treasury’s investment policy limits individual fixed rate securities to fourteen months in maturity or fourteen months expected average life. Floating rate securities are limited to three years in maturity or three years expected average life. Treasury utilizes the actual maturity date for commercial paper and twelve month prepay speeds for other securities. At June 30, 2009, the expected average life of individual fixed rate securities ranged from one day to six and one-half years and the expected average life of floating rate securities ranged from one day to eight years. At June 30, 2008 the expected average life of fixed rate securities ranged from eight days to less than three months. Intermediate-Term Fixed Income Pool — Treasury manages its exposure to fair value losses arising from increasing interest rates by limiting effective duration of the Intermediate-term Fixed Income Pool to + 20% of the Merrill Lynch 1-5 year Government Bond Index. The effective duration for this index at June 30, 2009 was 2.54 years. AEA held no investments in this pool in 2008. Broad Market and U.S. Treasury Fixed Income Pools — Through its investment policy, Treasury manages its exposure to fair value losses arising from increasing interest rates by limiting the effective duration of its other fixed income pools to the following: For 2009, Treasury limited Broad Market Fixed Income Pool to + 20% of the Barclay’s Capital U.S. Aggregate Bond Index. The effective duration of the Index at June 30, 2009 was 4.3 years. For 2008, Treasury limited the pool to + 20% of the Lehman Brothers Aggregate Bond Index. The effective duration for the Lehman Brothers Aggregate Bond Index at June 30, 2008, was 4.7 years. For 2009, Treasury limited U.S. Treasury Fixed Income Pool to + 20% of the Barclay’s Capital U.S. Aggregate Treasury Index. The effective duration of the Index at June 30, 2009 was 5.13 years. AEA held no investments in this pool in 2008. 21 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 Investment Agreements — Bradley Lake Hydroelectric Project investments are invested pursuant to agreements with JP Morgan Chase Bank that guarantees annual interest earnings of 7.38% or 7.41% per annum until the earlier of July 1, 2021 or the date of repayment of the Bradley Lake Power Revenue Bonds, First and Second Series. The investment contracts are collateralized. Under the Internal Revenue Code of 1986, as amended, certain earnings in excess of arbitrage yield on the Bradley Lake bonds must be rebated to the U.S. Treasury. The bulk of the Bradley Lake investments are subject to rebate. AEA Internally Managed Investments — There is no written policy for interest rate risk for AEA’s internally managed investments, but AIDEA’s policy is followed. The duration for the investments is 2 years or less. The maximum maturity of any issue is 3 years from the date of purchase. Duration — Duration is a measure of interest rate risk. It measures a security’s sensitivity to a 100-basis point change in interest rates. Duration is a weighted average term—to—maturity of an investment’s cash flows. Treasury uses industry-standard analytical software developed by The Yield Book Inc. to calculate effective duration. The software takes into account various possible future interest rates, historical and estimated prepayment rates, call options and other variable cash flows for purposes of the effective duration calculation. Duration for the AEA managed investments are as reported on Bloomberg. Treasury has no policy with regard to interest rate risk for the money market balance held in the International Equity Pool. Additionally, the Conservative Broad Market Fixed Income pool does not have its own investment policy because it invests only in existing pools, which do have established policies. 22 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 At June 30, 2009 and 2008, the effective duration by investment type (not including the investment agreements) was as follows: US. Treasury fixed income pool 4.70 9.58 8.95 2.57 5.12 Managed by AEA Intermediate- Broad term market fixed income fixed income Managed by Treasury pool ool 2009 U.S. Treasury notes = 6.01 U.S. Treasury bonds 3.07 12.81 U.S. government agency 2.02 6.92 Mortgage-backed 2.42 _ Other asset-backed 0.71 — Corporate bonds 2.10 — Yankees: Government 2713 11-37 Corporate 2.81 4.80 Portfolio effective duration 2.52 4.19 2008 U.S. Treasury notes _ 7.24 U.S. Treasury bonds _— 13.48 U.S. government agency _ 4.85 Municipal bonds _ 10.96 Mortgage-backed _ 4.37 Other asset-backed _— 2.58 Corporate bonds _ 4.91 Yankees: Government _ 1193 Corporate _ 5.48 Portfolio effective duration _ 4.57 2009 Money market 0.16 U.S. Treasury notes 0.33 U.S. government agency and GSE discount notes 0.03 Portfolio effective duration 0.37 23 2008 0.18 0.95 0.25 0.34 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 Credit Risk — Credit risk is the financial risk that an issuer or other counterparty to an investment will not fulfill its obligations and a loss will result. Treasury’s investment policy has the following limitations with regard to credit risk. Short-Term Fixed Income Pool — Short-term Fixed Income Pool investments are limited to instruments with a long-term credit rating of at least A3 or equivalent and instruments with a short-term credit rating of at least P-1 or equivalent. Asset-backed and nonagency mortgage securities must be rated A3 or equivalent. The A3 rating is defined as the median rating of the following three rating agencies: Standard & Poor’s Corporation, Moody’s and Fitch. Asset-backed and nonagency mortgage securities may be purchased if only rated by one of these agencies if they are rated AAA. Intermediate-Fixed Income Pool — Intermediate-term Fixed Income Pool investments are limited to securities with a long-term credit rating of at least Baa3 or equivalent and securities with a short-term credit rating of at least P-1 or equivalent. Asset-backed and nonagency mortgage securities must be rated investment grade. The investment grade rating is defined as the median rating of the following three rating agencies: Standard & Poor’s Corporation, Moody’s and Fitch. Asset-backed and nonagency mortgage securities may be purchased if only rated by one of these agencies if they are rated AAA. Broad Market Fixed Income Pool — The Broad Market Fixed Income Pool investments are limited to securities with a long-term credit rating of at least Baa3 or equivalent and securities with a short-term credit rating of at least P-1 or equivalent. Asset-backed and nonagency mortgage securities must be rated investment grade. The investment grade rating is defined as the median rating of the following three rating agencies: Standard & Poor’s Corporation, Moody’s and Fitch. Asset-backed and nonagency mortgage securities may be purchased if only rated by one of these agencies if they are rated AAA. U.S. Treasury Fixed Income Pool — Commercial paper in the U.S. Treasury Fixed Income Pool must be rated at least P-1 by Moody’s and A-1 by Standard and Poor’s Corporation. In addition, corporate, asset-backed and nonagency mortgage securities must be rated investment grade. The investment grade rating is defined as the median rating of the following three rating agencies: Standard & Poor’s Corporation, Moody’s and Fitch. In addition, asset-backed and nonagency mortgage securities may be purchased if only rated by one of these agencies if they are rated AAA. Corporate bonds may be purchased if rated by two of these agencies. Treasury has no policy with regard to credit risk for the money market balance held in the International Equity Pool. The Conservative Broad Market Fixed Income pool does not have its own investment policy because it invests only in existing pools, which have established policies. There is no written policy with regard to credit risk for investments managed by AEA. Since AEA only invests in highly rated money markets and U.S. government and agency securities and GSEs, credit risk is minimal. The Bradley Lake Hydroelectric Project investments are substantially invested in collateralized investment agreements, which minimizes credit risk. 24 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 At June 30, 2009, the Pools managed by Treasury and the investments managed by AEA consisted of investments with credit quality ratings issued by nationally recognized statistical rating organizations as follows (using Standard & Poor’s Corporation rating scale). Short-term Intermediate- Broad market US. fixed term fixed fixed Treasury AEA Investment type Rating’ income pool income pool income pool _income pool managed Money market AAA —* —* — —% 57% Commercial paper A-l 1 — _— _ — Commercial paper Not Rated 5 - _— _ _ U.S. Treasury notes AAA — _— 16 69 19 U.S. Treasury bills AAA 35 44 — — =— U.S. Treasury bonds AAA _ _— 2 11 _ U.S. government agency — and GSE discount notes AAA 3 28 2 _ s) U.S. government agency and GSE Not Rated _ 1 1 6 — Mortgage-backed AAA 5) i 46 _ _ Mortgage-backed Not Rated _ Zz 4 — _ Other asset-backed AAA 11 — 1 _ _— Other asset-backed AA 1 _— _— = — Corporate bonds AAA 19 5 2 8 _ Corporate bonds AA 6 1 3 = — Corporate bonds A 8 a 9 _ _ Corporate bonds BBB _— 2 6 _ — Yankees — government AA _ 1 — _— _ Yankees — corporate AAA 2 3 1 _ _— Yankees — corporate AA 4 1 — _— _— Yankees — corporate A — _ 2 _ — Yankees — corporate BBB 2 _ 1 _ — No credit exposure _ 2 4 6 _— Investment agreements Not Rated _— _ _— a= 19 100% 100% 100% 100% 100% ‘Rating modifiers are not disclosed. The International Equity Pool was 100% no credit exposure. 25 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 At June 30, 2008, the Pools managed by Treasury and the investments managed by AEA consisted of investments with credit quality ratings issued by nationally recognized statistical rating organizations as follows (using Standard & Poor’s Corporation rating scale): Short-term Broad market fixed income fixed income International AEA Investment type Rating! pool pool equity pool managed Money market AAA —% —r —* 36% Commercial paper Not Rated 7 _ _ — U.S. Treasury notes AAA — 8 — 13 U.S. Treasury bonds AAA — 3 — -- U.S. government agency and GSE discount notes AAA 44 1 — 20 U.S. government agency and GSE AAA _ _ a 10 Mortgage-backed AAA 3 46 _ —_ Mortgage-backed (agency) Not Rated _ 11 _ _— Other asset-backed AAA 16 3 — _ Other asset-backed AA il _ _ _ Other asset-backed A 3 1 _ _ Other asset-backed BB 1 — —_ — Corporate bonds AAA 2 2 _ _— Corporate bonds AA 12 5 _ _ Corporate bonds A 4 9 _ _ Corporate bonds BBB — 5 _ _ Corporate bonds Not Rated 1 1 — _ Yankees — corporate AA 4 1 — _— Yankees — corporate A 1 1 — _— Yankees — corporate BBB — 1 — _ Yankees — corporate Not Rated 1 _ — — No credit exposure — Z 100 _ Investment agreements Not Rated _ ee = 21 100% 100% 100% 100% ‘Rating modifiers are not disclosed. Custodial Credit Risk — Custodial credit risk is the risk that deposits may not be returned in the event of a bank failure. Treasury’s policy with regard to custodial credit risk is to collateralize State deposits to the extent possible. At June 30, 2009, AEA’s deposits managed by Treasury were uncollateralized and uninsured. With respect to AEA managed investments, amounts totaling approximately $48,048,000 at June 30, 2009 and $21,676,000 at June 30, 2008, are held in money market funds not registered in AEA’s name. The investment contracts are collateralized. All other investment securities are registered in AEA’s name and are held by its custodian, the trust department of a commercial bank; therefore no custodial risk exists for these securities. 26 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 Foreign Currency Risk — The Commissioner of Revenue formally adopts asset allocation policies for AEA’s PCE Fund at the beginning of each fiscal year which places policy limitations on the amount of international securities the PCE Fund is allowed to hold. The following policy was in place during fiscal years 2009 and 2008, and invested assets included the following holdings at June 30, 2009 and 2008, for the PCE Fund’s investment in the International Equity Pool: Policy Actual FY09 18%+5% 17.00% FY08 17%+5% 19.01% At June 30, 2009 and 2008, AEA’s PCE Fund had exposure to foreign currency risk as follows (stated in thousands): FY09 Fair FY08 Fair Currency value value Deposits: Euro Currency $ — 28 Japanese Yen a — Pound Sterling (7) 72 _— 100 Investment — international equity: Canadian Dollar 565 1,295 Danish Krone 421 _— Euro Currency 14,396 19,167 Hong Kong Dollar 345 —_ Japanese Yen 7,347 8,304 Norwegian Krone _— 560 Pound Sterling 9,578 12,373 Singapore Dollar 843 1,703 Swedish Krona 531 488 Swiss Franc 4,109 6,978 38,135 50,868 Total $ 38,135 50,968 Concentration of Credit Risk — Treasury’s policy with regard to concentration of credit risk is to prohibit the purchase of more than five percent of a pool’s holdings in corporate bonds of any one company or affiliated group. Federal National Mortgage Association and Federal Home Loan Mortgage Corporation securities are not classified as corporate bonds. AEA has no written policy with respect to concentration of credit risk for its other investments. 27 (Continued) (4) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 At June 30, 2009, AEA’s investments (excluding U.S. Treasury securities) included the following concentrations greater than 5% (dollar amounts stated in thousands): Issuer Amount Percent Federal National Mortgage Association $ 57,375 12% At June 30, 2008, AEA’s investments included the following concentrations greater than 5% (dollar amounts stated in thousands): Issuer Amount Percent Federal National Mortgage Association $ 61,664 14% Federal Home Loan Bank 22,793 5 Securities Lending Prior to 2008, a portion of the funds managed by Treasury were in the State Department of Revenue’s securities lending program. Alaska Statute 37.10.071 authorizes the Commissioner of Revenue to lend assets, under an agreement and for a fee, against deposited collateral of equivalent fair value. During 2008, the Commissioner suspended the securities lending agreement with State Street Corporation (the Bank), which lent equity and domestic fixed income securities. Prior to suspension, the Bank, acting as the Commissioner’s agent under the agreement, transferred securities to broker agents or other entities for collateral in the form of cash or securities and simultaneously agreed to return the collateral for the same securities in the future. At June 30, 2009 and 2008 there were no securities on loan. 28 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements (5) Capital Assets June 30, 2009 and 2008 Capital asset activity for the years ended June 30, 2009 and 2008 was as follows (stated in thousands): Capital assets: Intangible 5) Production Transmission General Total capital assets Less accumulated depreciation for: Intangible Production Transmission General Total accumulated depreciation Capital assets, net $ Capital assets: Intangible $ Production Transmission General Total capital assets Less accumulated depreciation for: Intangible Production Transmission General Total accumulated depreciation Capital assets, net $ Balance at Balance at June 30, 2008 Additions Deletions June 30, 2009 14 — — 14 252,199 342 _— 252,541 186,459 2,267 — 188,726 5,151 844 — 33995 443,823 3,453 = 447,276 (4) — — (4) (84,411) (5,267) —_ (89,678) (102,531) (4,934) — (107,465) (5,043) (32) — (5,075) (191,989) (10,233) — (202,222) 251,834 (6,780) _— 245,054 Balance at Balance at June 30, 2007 Additions Deletions June 30, 2008 14 _— — 14 250,937 1,262 — 252,199 185,660 799 _— 186,459 5,034 ne _ 5,151 441,645 2,178 a 443,823 (4) a aa (4) (79,198) (65213) — (84,411) (97,597) (4,934) — (102,531) (5,030) (13) — (5,043) (181,829) (10,160) — (191,989) 259,816 (7,982) — 251,834 29 (Continued) (6) Long-Term Debt ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 Long-term debt activity for the years ended June 30, 2009 and 2008 was as follows (stated in thousands): Bradley Lake Power Revenue Bonds: First Series (a) Second Series (a) Refunding, Third Series (a) Refunding, Fourth Series (a) Refunding, Fifth Series (a) Total bonds payable Arbitrage interest payable (b) Less bond discount and deferred interest $ Bradley Lake Power Revenue Bonds: First Series (a) $ Second Series (a) Refunding, Third Series (a) Refunding, Fourth Series (a) Refunding, Fifth Series (a) Total bonds payable Arbitrage interest payable (b) Less bond discount and deferred interest Balance Balance at June 30, at June 30, Due within 2008 Additions Deletions 2009 one year 100 100 _ 6,910 (2,305) 4,605 2,300 44,705 (3,390) 41,315 B95 Sialo> (125) 37,030 135 30,640 30,640 _— 119,510 — (5,820) 113,690 6,030 1,288 250 (1,007) So Bo (1,236) 877 (359) = Balance Balance at June 30, at June 30, Due within 2007 Additions Deletions 2008 one year 3,370 _ (3,270) 100 _ 9,215 _ (2,305) 6,910 2,305 44,820 _ (115) 44,705 3,390 37,275 _ (120) 37,155 125 30,640 — _— 30,640 _ 125,320 _ (5,810) 119,510 5,820 984 304 _ 1,288 1,007 (2,363) _ 1,127 (1,236) _ (4,683) 119,562 6,827 123,941 304 30 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 The minimum payments related to all bonds for the years subsequent to June 30, 2009 are as follows (stated in thousands): Year ending June 30: Principal Interest Total 2010 $ 6,030 6,127 12,157 2011 6,255 5,897 25152 2012 6,495 5,583 12,078 2013 6,880 5,182 12,062 2014 7,300 4,757 12,057 2015 — 2019 46,020 16,248 62,268 2020 — 2022 34,710 2,857 37,567 $ 113,690 46,651 160,341 (a) AEA issued the Power Revenue Bonds, First and Second Series (Bradley Lake Bonds), in September 1989 and August 1990, respectively, for the long term financing of the construction costs of the Bradley Lake Hydroelectric Project and refunded AEA’s Variable Rate Demand Bonds which were issued in November 1985 to provide interim financing of the project. AEA issued the Power Revenue Refunding Bonds, Third and Fifth Series in April 1999 to refund a portion of the First Series Bonds and to provide costs of issuance. AEA issued the Power Revenue Refunding Bonds, Fourth Series in April 2000 to refund a portion of the Second Series Bonds and to provide costs of issuance. All of the revenues derived by AEA from the operation of the project and all moneys, securities and funds (except the excess earnings fund), including a capital reserve fund, held or set aside are pledged and assigned to secure the payment of principal, redemption premium, if any, and interest on the bonds. No other revenues of AEA are pledged as security for the payment of the bonds. AEA has covenanted to notify the State Legislature of any failure to maintain the capital reserve fund at its required level. The bonds are further secured by bond insurance. AEA collects from each power purchaser a percentage share of annual project costs. The outstanding Bradley Lake Bonds mature annually each July 1 through the year 2021 with interest rates ranging from 5% to 6.25%. (b) The arbitrage interest payable is due to the United States Treasury for the excess of investment income on the proceeds of each series of AEA’s tax exempt Bradley Lake bonds over the related interest expense computed in accordance with Section 148 of the Internal Revenue Code of 1986. The accumulated arbitrage interest payable amount is computed each year, and the amount for each series is first due after the end of the fifth bond year and every five years thereafter. AEA maintains a separate account for each series with the trustee and each year sets aside a sufficient amount to satisfy the liability. In addition, the Authority has participated in the following debt agreements: . Other Debt — In 1982, AEA assumed $44,859,000 of 5% mortgage notes payable which requires quarterly principal and interest payments to the Rural Utilities Service (RUS) in connection with the Solomon Gulch Hydroelectric Project. Concurrent with the assumption, AEA deposited with a trustee Treasury notes sufficient to satisfy and provide for timely repayment of all principal and 31 (Continued) ) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 interest due on the assumed RUS loans. Accordingly, the loans and related trust assets are not included in the financial statements of AEA. At June 30, 2009, the unpaid principal balance of the notes was $13,396,000 and the trust assets had a fair value of $14,627,000. . Conduit Financing — City and Borough of Sitka — Utility Revenue Refunding Bonds, Series 1997 and Utility Revenue Bonds, Series 1992 — In May 1992, AEA issued $56,890,000 of tax-exempt bonds that allowed the City and Borough of Sitka (Sitka) to refinance its 1979 municipal bonds, resulting in significant debt service savings to Sitka. In November 1997, AEA issued $22,080,000 of tax— exempt bonds to advance refund and defease $20,145,000 of the Series 1992 bonds (collectively with the Series 1992 bonds, the Sitka Bonds). The Sitka Bonds are not included in these financial statements. As of June 30, 2009, the outstanding balance was $37,455,000. The Sitka Bonds are special obligations of AEA secured under a trust indenture by and between AEA and U.S. Bank National Association, as trustee. The Sitka Bonds are payable solely from the sources provided under the trust indenture. They are equally and ratably secured by a pledge and assignment of the municipal revenue bonds of Sitka held by AEA under the trust indenture, the obligation of Sitka to make payments under its loan agreement with AEA and the money and securities held under the trust indenture, including a capital reserve fund. AEA has covenanted to notify the State Legislature of any failure to maintain the capital reserve fund at its required level. The bonds are further secured by bond insurance. The Sitka Bonds do not constitute an indebtedness or other liability of the State, including AEA, and do not directly, indirectly or contingently obligate the State, including AEA, or any political subdivision thereof to levy any form of taxation for the payment of the bonds. Neither the full faith and credit nor the taxing power of the State, including AEA, or Sitka is pledged for the payment of the Sitka Bonds. Loans The Authority administers the Power Project Loan Program, the Rural Electrification Revolving Loan Program and the Bulk Fuel Revolving Loan Program. Loans outstanding at June 30, 2009 and 2008 are classified as follows (dollar amounts stated in thousands): 2009 2008 No. of loans Amount No. of loans Amount Power Project Loan Program 47 $ 26,330 42 $ 24,944 Rural Electrification Revolving Loan Program 2 646 2 698 Bulk Fuel Revolving Loan Program 23 1,352 25 Dad 72 28,328 69 27,813 Less allowance for loan losses (1,052) (1,092) $ 27,276 $ 26,721 32 (Continued) (8) (9) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 Loans that are more than 90 days past due on which the accrual of interest has been discontinued amounted to $368,520 and $266,000 at June 30, 2009 and 2008, respectively. An analysis of changes in the allowance for loan losses for the years ended June 30, 2009 and 2008 follows (stated in thousands): 2009 2008 Balance at beginning of year $ 1,092 1,177 Recoveries — 21 Write-offs a — Provision for loan loss (40) (106) Balance at end of year $ 1,052 1,092 Risk Management AEA is exposed to various risks of loss and obtains coverage for its risks through the purchase of commercial insurance and participation in the State Risk Management Pool. Related Parties (a) Alaska Industrial Development and Export Authority Pursuant to understandings and agreements between AIDEA and AEA, AIDEA provides administrative, treasury, personnel, data processing, communications, and other services to AEA. During 2009 and 2008, AEA expensed $4,344,000 and $3,430,000, respectively, for such services. During 2009 and 2008, AEA capitalized $31,000 and $64,000, respectively, for such services. AEA has a borrowing arrangement with AIDEA to provide working capital funds. At June 30, 2009 and 2008, AEA had $1,852,000 and $1,440,000, respectively, payable to AIDEA for services and borrowings. (b) Alaska Intertie Operating Committee Effective May 1, 1986, AEA entered into an agreement with utilities using the Alaska Intertie for wheeling of electrical power. Pursuant to the agreement, the Intertie Operating Committee (IOC) was established to manage the system. The IOC is comprised of a representative from AEA and each of the utilities. AEA is reimbursed for operation and maintenance costs on a monthly basis with an annual settlement to adjust the payments to actual costs. AEA management on October 16, 2006, issued contractually required notice that the agreement will terminate in 48 months as a mechanism to implement cures to identified defects in the agreement (note 1(b)). 33 (Continued) (10) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2009 and 2008 (c) Bradley Lake Project Management Committee Effective December 7, 1987, AEA entered into a power sales agreement with entities purchasing electric power produced by the Bradley Lake Hydroelectric Project. Pursuant to the agreement, a Project Management Committee (PMC) was formed. The PMC is comprised of a representative from AEA and each of the power purchasers. The participating power purchasers make monthly payments directly to the bond trustee based on their respective percentage share of the estimated annual project costs, including debt service and annual administrative fee to AEA. Commitments and Contingencies AEA, in the normal course of business, is involved in various claims and pending litigation. The State Department of Law manages all pending litigation of AEA, and any liability arising from the settlement of pending claims is a liability for which the Department of Law or AEA requests an appropriation from the Legislature to satisfy judgment in the event that the judgment exceeds available funds or the proceeds from applicable insurance policies. In the opinion of management, the disposition of current claims and pending litigation is not presently expected to have a material adverse effect on AEA’s financial position. In the normal course of business, AEA also has various commitments, such as commitments for the extension of credit and award of grants. At June 30, 2009 and 2008, AEA had open loan commitments of $12,253,000 and $4,596,000, respectively. At June 30, 2009 and 2008, AEA had committed to grant awards to be funded by State appropriations and federal awards; the amounts committed were $146,201,000 and $60,770,000, respectively. At June 30, 2009 and 2008, AEA held approximately $5,795,000 and $5,750,000 at fair value, respectively, of investments in escrow under an agreement. 34 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Schedule of Bradley Lake Hydroelectric Project Trust Account Activities Year ended June 30, 2009 (Stated in thousands) Schedule 1 Capital Renewal and Excess Operating Debt service reserve contingency earnings Revenue Operating reserve account account account account account account account Total Balance at June 30, 2008 $ 9,045 12,834 1,082 984 1,852 446 735 26,978 Interest received 318 809 124 (979) 392 43 49 716 Bond principal paid (5,820) _— _ _ — a —_ (5,820) Bond interest paid (6,344) -= —_ _ —_ — _— (6,344) Construction expenditures _ _ (197) _ _ _ _ (197) Operating revenue received — _— — — 16,142 — = 16,142 Operating expenses paid _— _ _ _ _ (3,700) — (3,700) Transfers between funds 11,951 (809) 1,322 304 (16,380) 3,656 (44) _— Balance at June 30, 2009 $ 9,150 12,834 _ 2,331 309 1,966 445 740 27,775 See accompanying independent auditors’ report. a2 Assets Current assets: Grants receivable Loans receivable Operating revenue receivable Accrued interest receivable Total current assets Noncurrent assets: Restricted cash and investments Designated for specific purposes Loans receivable, net of allowance Capital assets net of accumulated depreciation Total noncurrent assets Total assets Liabilities and Net Assets Current liabilities: Due to State of Alaska Accounts payable Bonds payable — current portion Accrued interest Arbitrage interest payable — current portion Total current liabilities Noncurrent liabilities: Bonds payable — noncurrent portion, net Arbitrage interest payable — noncurrent portion Other liabilities Total noncurrent liabilities Total liabilities Net assets: Investment in capital assets net of related debt Restricted for debt service Restricted by agreements with external parties Unrestricted net assets Total net assets Commitments and contingencies Total liabilities and net assets See accompanying independent auditors’ report. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Schedule of Projects — Balance Sheet June 30, 2009 (Stated in thousands) Schedule 2 Administration Rural Energy Bradley Lake Alaska Rural and Power and Energy Hydroelectric Intertie Energy Development Development Combined Project Project Projects Fund Programs balance $ - _ 106 (284) 3,744 3,566 _ _ — _ 1,970 1,970 68 216 — _ 5,071 pigo5 924 = = = 318 1,242 992 216 106 (284) 11,103 12,133 23,015 _— _— — — 23,015 4,760 839 _ 15,746 446,119 467,464 _ — _ _ 25,306 25,306 196,824 45,129 3,101 = = 245,054 224,599 45,968 3,101 15,746 471,425 760,839 $ 225,591 46,184 3,207 15,462 482,528 772,972 s — (64) — 22,890 (20,683) 2,143 1,225 1,102 341 (9,600) 33,954 27,022 6,030 _ _— _ _- 6,030 3,120 _— _- _ _ 3,120 357 _ _— = =— 357 10,732 1,038 341 13,290 13,271 38,672 107,301 - _- _ _— 107,301 174 — i - _— 174 103 = 6 = © 103 107,578 = 6 = (6) 107,578 118,310 1,038 347 13,290 13,265 146,250 83,493 45,129 3,102 - ad 131,724 19,896 = - _ 19,896 3,892 17 _ _- 17,974 21,883 —_ — (242) 2,172 451,289 453,219 107,281 45,146 2,860 2,172 469,263 626,722 $ 225,591 46,184 3,207 15,462 482,528 772,972 36 Operating revenues: Federal grants Revenue from operating plants State of Alaska appropriations Revenue from state agencies Interest on loans Other revenue Total operating revenues Operating expenses: Grants and projects Power cost equalization grants Depreciation Interest expense Plant operating General and administrative Provision for loan loss and bad debt expense Total operating expenses Operating income (loss) Nonoperating: State of Alaska fund transfers Investment income, net Increase (decrease) in net assets Net assets — beginning Net assets — ending See accompanying independent auditors’ report. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Schedule of Projects — Revenues, Expenses, and Changes in Net Assets Year ended June 30, 2009 (Stated in thousands) Schedule 3 Administration Rural Energy Bradley Lake Alaska Rural and Power and Energy Hydroelectric Intertie Energy Development Development Combined Project Project Projects Fund Programs balance $ _— _— 2,722 _ 17,823 20,545 16,597 1,281 12 _ _ 17,890 _ 291 8 _ 61,095 61,394 _ _ _ _— 551 551 _ _ _ _ 1,099 1,099 1 _ _ _ 112 113 16,598 1,572 2,742 _ 80,680 101,592 = 40 = aie 71,970 72,010 _— _ _ _ 37,074 37,074 6,874 3,360 _ _ _ 10,234 7,116 _ _ — _— 7,116 3,796 1,256 24 — _ 5,076 261 29 1 — 1,649 1,940 (40) (40) 18,047 4,685 25 _ 110,653 133,410 (1,449) (3,113) 2,717 _— (29,973) (31,818) aa — — _ 105,501 105,501 1,490 4 _ _ (45,122) (43,628) 41 (3,109) 2,717 — 30,406 30,055 107,240 48,255 143 QT. 438,857 596,667 $ 107,281 45,146 2,860 2,172 469,263 626,722 —— 37