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HomeMy WebLinkAboutAEA Annual Financial Statement 2018-A The report accompanying these financial statements was issued by BDO USA, LLP, a Delaware limited liability partnership and the U.S. member of BDO International Limited, a UK company limited by guarantee. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Basic Financial Statements and Schedules June 30, 2018 (With Independent Auditors’ Report Thereon) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Basic Financial Statements and Schedules June 30, 2018 (With Independent Auditors’ Report Thereon) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Table of Contents Page(s) Independent Auditor’s Report 1-2 Management’s Discussion and Analysis (Unaudited) 3-15 Basic Financial Statements Government-Wide Financial Statements: Statement of Net Position 16 Statement of Activities 17 Fund Financial Statements: Governmental Fund: Balance Sheet/Statement of Net Position - Governmental Activities 18 Statement of Revenues, Expenditures, and Changes in Fund Balance/Statement of Activities – Governmental Activities 19 Enterprise Fund: Statement of Net Position 20 Statement of Revenues, Expenses, and Changes in Net Position 21 Statement of Cash Flows 22 Notes to Basic Financial Statements 23-47 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Table of Contents Page(s) Supplementary Information Schedules 1 Bradley Lake Hydroelectric Project Trust Account Activities 48 2 Special Revenue Fund – Projects and Programs – Balance Sheet 49 3 Special Revenue Fund – Projects and Programs – Revenues, Expenses, and Changes in Fund Balance 50 4 Business-Type Activities – Enterprise Fund – Projects and Programs – Statement of Net Position 51 5 Business-Type Activities – Enterprise Fund – Projects and Programs – Revenues, Expenses, and Changes in Net Position 52 Supplementary Information (Unaudited) 6 Schedule of Capital Assets Presented under Federal Energy Regulatory Commission Requirements 53 7 Bradley Lake Historical Annual Project Cost 54 8 PCE Endowment Fund Historical Analysis 55 9 Supplementary Organization and Project Information 56-58 BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 1 3601 C Street, Suite 600 Anchorage, AK 99503 Tel: 907-278-8878 Fax: 907-278-5779 www.bdo.com Independent Auditor’s Report The Board of Directors Alaska Energy Authority Report on the Financial Statements We have audited the accompanying financial statements of the governmental activities, the business-type activities and each major fund of Alaska Energy Authority (a Component Unit of the State of Alaska) (Authority), as of and for the year ended June 30, 2018 and the related notes to the financial statements, which collectively comprise the Authority’s basic financial statements as listed in the table of contents. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express opinions on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Opinions In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the business-type activities, and each major fund of the Authority as of June 30, 2018, and the respective changes in its financial position and, where applicable, cash flows thereof for the year then ended in accordance with accounting principles generally accepted in the United States of America. 2 Other Matters Required Supplementary Information Accounting principles generally accepted in the United States of America require that the management’s discussion and analysis on pages 3-15 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Supplementary Information Our audit was conducted for the purpose of forming an opinion on the financial statements that collectively comprise the Authority’s basic financial statements. The supplementary information in schedules 1 through 9 is presented for purposes of additional analysis and is not a required part of the basic financial statements. The supplementary information in schedules 1, 2, 3, 4 and 5 is the responsibility of management and was derived from and relate directly to the underlying accounting and other records used to prepare the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the basic financial statements or to the basic financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the supplementary information is fairly stated in all material respects in relation to the basic financial statements as a whole. The supplementary information in schedules 6, 7, 8 and 9 has not been subjected to the auditing procedures applied in the audit of the basic financial statements, and accordingly, we do not express an opinion or provide any assurance on it. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued our report dated October 29, 2018 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 solely 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 effectiveness of the Authority’s internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Authority’s internal control over financial reporting and compliance. Anchorage, Alaska October 29, 2018 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 3 Overview of the Financial Statements The Alaska Energy Authority (AEA or Authority) is a public corporation of the State of Alaska (State) within the Department of Commerce, Community, and Economic Development (DCCED), but with a separate and independent legal existence and a separate and self-balancing set of independently audited financial statements. AEA’s operations consist of governmental fund activities reported as special revenue funds and business-type activities reported as enterprise funds. The financial information in this report is later reported as a component unit of the State and is discretely presented in the State’s financial statements. AEA manages the following projects and programs: owned hydroelectric and intertie projects; rural energy programs; and energy development programs. AEA’s programs are funded primarily by the State, federal grants, investment income, and utility companies—for use of AEA owned assets. Further information on AEA’s programs can be found in note 1 to the financial statements. Management’s Discussion and Analysis This section presents management’s discussion and analysis of the financial position and results of operations for the year ended June 30, 2018. This information is presented to help the reader focus on significant financial matters 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. Government-Wide Financial Statements The government-wide financial statements report information about the overall finances of the Authority similar to a business enterprise. These statements combine and consolidate short-term, spendable resources with capital assets and long-term obligations. The government-wide financial statements are divided into the following categories:  Governmental activities – These are functions of the Authority that are financed primarily by intergovernmental revenues. AEA’s governmental activities include Power Cost Equalization Fund (PCE), Renewable Energy Fund, Emerging Energy Technology Fund, Trans-Alaska Pipeline Liability Fund, and Rural Energy Projects.  Business-type activities – These are functions of the Authority in which customer user fees and charges are used to help cover all or most of the cost of services they provide. AEA’s business-type activities include the Bradley Lake Hydroelectric Project, the Alaska Intertie, the Susitna-Watana Hydroelectric Project, the Power Project Fund, the Rural Electrification Revolving Loan Fund, and the Power Development and Railbelt Projects. The Statement of Net Position presents information on all of AEA’s assets and deferred outflows of resources less liabilities and deferred inflows of resources, which results in net position. This statement is designed to display the financial position of AEA. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 4 The Statement of Activities provides information, which shows how the Authority’s net position changed as a result of the year’s activities. The statement uses the full accrual basis of accounting and the economic resources measurement focus, which is similar to the accounting used by private- sector businesses. Revenues are recognized when earned and expenses are recognized when a liability is incurred. Fund Financial Statements A fund is a grouping of related accounts used to maintain control over resources that have been segregated for specific activities or objectives. The funds of the Authority are divided into two categories: governmental fund and proprietary fund, both of which are further described below, and which provides more detail than the government-wide statements. AEA uses fund accounting to ensure and demonstrate compliance with finance related legal requirements. Governmental Funds – Special Revenue Funds Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on the short-term view of AEA’s operations. Because the focus of governmental funds is narrower than that of the government-wide, it is useful to compare the information presented for the governmental funds with similar information presented for governmental activities in the government-wide financial statements. These funds are combined on the Governmental Fund Balance Sheet/Statement of Net Position – Governmental Activities and Governmental Fund Statement of Revenues, Expenditures, and Changes in Fund Balance/Statement of Activities – Governmental Activities. Proprietary Funds – Enterprise Fund The Authority reports one enterprise fund. The enterprise fund is used to account for activities for which a fee is charged to external users for goods and services. The Statement of Net Position reports the Authority’s assets, deferred outflows of resources, liabilities, deferred inflows of resources, and resulting net position. The net position is reported as net investment in capital assets, restricted, and unrestricted. Restricted net position is subject to external limits such as bond resolutions, legal agreements, or statutes. The Statement of Revenues, Expenses, and Changes in Net Position reports the Authority’s revenues, expenses, and resulting change in net position during the periods reported. Both statements report on the full accrual basis of accounting and economic resources measurement focus. The Statement of Cash Flows reports the Authority’s sources and uses of cash and change in cash balance resulting from the Authority’s activities during the periods reported. Notes to Basic Financial Statements The notes provide additional information that is essential to fully understand the amounts reported in the government-wide and fund financial statements. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 5 Other Information In addition to the basic financial statements and accompanying notes, this report also presents certain supplementary information, which provides additional information about AEA’s projects and programs. Required Components of the Financial Report    Basic Financial  Statements  (audited)    Required and  Optional*  Supplementary  Information          Government‐wide  Financial Statements  (audited)    Fund Financial  Statements  (audited)    Notes to the  Financial  Statements  (audited)    Management's  Discussion and  Analysis  (unaudited)       Summary   Detail  *Optional Supplementary Information:  Schedule 1: Schedule of Bradley Lake Hydroelectric Project Trust Account Activities (audited);  Schedule 2: Special Revenue Fund Schedule of Projects and Programs – Balance Sheet (audited);  Schedule 3: Special Revenue Fund Schedule of Projects and Programs – Revenues, Expenses and Changes in Fund Balance (audited);  Schedule 4: Business-Type Activities – Enterprise Fund – Schedule of Projects and Programs – Statement of Net Position (audited); ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 6  Schedule 5: Business-Type Activities – Enterprise Fund – Schedule of Projects and Programs – Revenues, Expenses, and Changes in Net Position (audited);  Schedules 6: Schedule of Capital Assets Presented under Federal Energy Regulatory Commission (FERC) Requirements (unaudited);  Schedule 7: Bradley Lake Historical Annual Project Cost (unaudited)  Schedule 8: PCE Endowment Fund Historical Analysis (unaudited); and  Schedule 9: Supplementary Organization and Project Information (unaudited). Government-Wide Financial Analysis As noted earlier, net position may serve over time as a useful indicator of a government’s financial position. In the case with AEA as a whole, assets and deferred outflows exceeded its liabilities and deferred inflows by $1,488.9 million at June 30, 2018 and $1,461.2 million at June 30, 2017. Of the total net position at June 30, 2018, $318.2 million was invested in capital assets, net of related debt, and $1,170.7 million was restricted. Of the total net position at June 30, 2017, $321.5 million was invested in capital assets, net of related debt and $1,139.7 million was restricted. REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 7 Financial Analysis The following tables are provided to show AEA’s total assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position at June 30, 2018 and 2017: Table 1 (in thousands of dollars) Governmental Activities Business-Type Activities 2018 2017 Variance 2018 2017 Variance Assets: Current and other noncurrent assets $ 1,118,780 1,088,666 30,114 117,158 87,444 29,714 Capital assets - - - 369,188 374,937 (5,749) Total assets 1,118,780 1,088,666 30,114 486,346 462,381 23,965 Deferred outflows of resources - - - 10 20 (10) Total assets and deferred outflows $ 1,118,780 1,088,666 30,114 486,356 462,401 23,955 Liabilities: Current liabilities 17,726 20,672 (2,946) 22,143 23,877 (1,734) Noncurrent liabilities 2 - 2 76,338 45,308 31,030 Total liabilities 17,728 20,672 (2,944) 98,481 69,185 29,296 Net Position: Net investment in capital assets - - - 318,239 321,462 (3,223) Restricted 1,101,052 1,067,994 33,058 69,636 71,754 (2,118) Total net position 1,101,052 1,067,994 33,058 387,875 393,216 (5,341) Total liabilities and net position $ 1,118,780 1,088,666 30,114 486,356 462,401 23,955 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 8 Governmental Activities: Current and other noncurrent assets are $30.1 million higher in the current fiscal year. The Power Cost Equalization Endowment Fund had a net increase in restricted investments of $49.8 million. Decreases in restricted cash and cash equivalents and other assets in the remaining funds partially offset this increase. Cash and cash equivalents held by AEA are advances from state appropriations and are drawn based on project need; therefore, these balance will fluctuate annually. Total liabilities decreased in the current fiscal year by $2.9 million. The Authority’s liabilities include amounts due to the State and accounts payable and will fluctuate annually. Net position, during the current fiscal year increased by $33.0 million. This increase is a result of FY18 operations. Net position increased $95.0 million from revenues earned in FY18 and decreased $60.0 million from expenses incurred in FY18. Net position was further reduced by $2.0 million reflecting a transfer of net assets within the Rural Energy Projects. The net asset transfer decreased governmental activities and increased business-type activities. Business-Type Activities: Current and other noncurrent assets increased by $29.7 million in the current fiscal year. The increase in current and noncurrent assets is primarily due to an increase in restricted cash and cash equivalents. These balances comprise the total cash on hand for the Enterprise Fund projects and fluctuates relative to the operational needs of the projects. In FY18 the cash increase was substantially due to the issuance of $41.2 million in bonds to finance the construction of the West Fork Upper Battle Creek Diversion Project. Capital assets, net of accumulated depreciation decreased by $5.7 million due to an increase in depreciation expense and decreased spending on the Susitna-Watana Hydroelectric project. Depreciation expense increased from prior year due to an adjustment to the useful life of two static VAR compensators; the adjustment was made to more accurately reflect the actual useful life of the assets, this caused an additional amount of depreciation to be recognized in FY18. In the current year, Susitna-Watana Hydroelectric project spent $7.6 million less on the FERC license capital asset compared to the prior fiscal year. Deferred outflows of resources decreased in the current fiscal year by $10 thousand, due to amortized costs relating to long-term debt. Total liabilities increased in the current fiscal year by $29.3 million. $31.7 million of the total increase was due to the net effect of the issuance of $41.2 million in debt for the construction of the West Fork Upper Battle Creek Diversion projects and debt service payments on the Bradley Lake Hydroelectric Project bonds of $9.5 million. The issuance of new debt increased total liabilities while payments on debt decreased this balance. Advances to AEA from the State of Alaska decreased by $1.2 million in the current fiscal year. Advances from the State are drawn based on project need; therefore, these amounts will fluctuate annually. Net position decreased in the current fiscal year by $5.3 million. The decrease in net position was due to the net effect of $25.8 million of revenues, $25.9 million of expenses, $2.8 million capital contributions and $10.1 million in reappropriations of funds returned to the State of Alaska in FY18. Net position was further increased by $2.0 million reflecting a transfer of net assets within the Power Development and Railbelt Energy Projects. The net asset transfer increased business-type activities and decreased governmental activities. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 9 The following tables are provided to show AEA’s revenues, expenses, and changes in net position at June 30, 2018 and 2017: Financial Analysis, continued Table 2 (in thousands of dollars) Governmental Activities Business-Type Activities 2018 2017 Variance 2018 2017 Variance Revenues: Program revenues: Fees, Fines, and Charges for services $ - - - 21,848 19,179 2,669 Operating grants and contributions 17,986 22,096 (4,110) 995 - 995 Capital grants and contributions - - - 661 9,148 (8,487) General revenues: Investment Income 77,046 112,618 (35,572) 2,299 1,825 474 Total revenues 95,032 134,714 (39,682) 25,803 30,152 (4,349) Expenses: Grants and projects 30,496 36,776 (6,280) - - - Power cost equalization grants 26,196 25,853 343 - - - General and administrative 3,288 3,452 (164) 1,166 1,252 (86) Interest expense - - - 2,371 2,652 (281) Plant operations - - - 6,772 4,330 2,442 Depreciation - - - 15,594 10,808 4,786 Loss on disposal of asset - - - 15 - 15 Provision for loan loss - - - (51) 154 (205) Total expenses 59,980 66,081 (6,101) 25,867 19,196 6,671 State of Alaska reappropriation of funds - (13,556) 13,556 (10,067) - (10,067) Capital contributions - - - 2,796 - 2,796 Transfers in (out) (1,994) - (1,994) 1,994 - 1,994 Change in net position 33,058 55,077 (22,019) (5,341) 10,956 (16,297) Net position, beginning 1,067,994 1,012,917 55,077 393,216 382,260 10,956 Net position, ending $ 1,101,052 1,067,994 33,058 387,875 393,216 (5,341) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 10 Governmental Activities: Revenues for governmental activities decreased by $39.7 million, based on the following:  Operating grants and contributions decreased by $4.1 million in the current fiscal year as a result of reduced state and federal contributions for Rural Power System Upgrade (RPSU) and Bulk Fuel Upgrade (BFU) projects; and  Investment income was $35.6 million lower in the current fiscal year, due to appropriations taken out of the PCE Endowment Fund and market fluctuations substantially contributed to decreased earnings in FY18 compared to FY17. Expenses for governmental activities decreased overall by $6.1 million from the prior fiscal year, based on the following:  Grants and project expenses decreased by $6.3 million. The reduction is from reduced state and federal funding for projects and will fluctuate annually;  PCE grants increased by $343 thousand;  General and administrative expenses decreased by $164 thousand in the current fiscal year, primarily due to decreases in administrative costs shared between AIDEA and AEA for administrative support; and  State of Alaska reappropriation and transfers for governmental activities decreased by approximately $13.6 million in FY18 compared to FY17. In FY17 $13.6 million was reappropriated from the PCE fund and there was no reappropriation in FY18. Business-Type Activities: Revenues for business-type activities decreased, overall, by $4.3 million in the current fiscal year, due to the following:  Charges for services were increased by $2.7 million. Charges for services include the amounts received from the utilities for services performed by AEA on behalf of the utilities. These services are agreed to and the amounts are based on project expenditures, operating cash requirements, and will fluctuate annually. The current year increase is a reflection of additional services required to be performed related to the construction of the West Fork Upper Battle Creek Diversion Project and maintenance projects performed on the Intertie;  Operating grants and contributions increased by $995 thousand due to maintenance projects performed on the Alaska Intertie Project funded by the State of Alaska appropriations; ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 11  Capital grants and contributions from the State were less in the current fiscal year by $8.5 million. The decrease is primarily due to the reduction of state funding for capital projects, such as the Susitna-Watana Hydroelectric project. In the current fiscal year, AEA completed its efforts to get the project to the point where the State’s investment, to date, is preserved and the project has been left in abeyance; and  Investment income increased by $474 thousand due to higher cash and cash equivalent balances throughout the year ended June 30, 2018, when compared to prior year. These balances will fluctuate annually, based on operating cash needs of the projects. In FY18 cash balances increased substantially due to the receipt of $41.2 million in debt proceeds for the construction of the Battle Creek Diversion Project. Changes in portfolio management of the Power Project Fund also contributed to higher investment income. Expenses for business-type activities increased by $6.7 million in the current fiscal year, based on the following:  General and administrative expenses decreased by $86 thousand. General and administrative expenses will fluctuate annually. The current year decrease is minimal and a normal fluctuation;  Interest expense represents the cost of interest on AEA’s Power Revenue Bonds for the Bradley Lake Hydroelectric Project. Interest expense decreased in the current fiscal year by $281 thousand. Outstanding bond balances of the Bradley Lake bonds relating to the original project and not subject to federal interest subsidy decreased; therefore, interest accrued on those balances also decreased. The FY18 issuance of debt for the construction of the Battle Creek Diversion project offset this decrease slightly. Interest expense on the Battle Creek Diversion bonds is offset by federal subsidies causing interest expense to be minimal. The Battle Creek Diversion bonds qualified for two federal interest subsidy programs;  Plant operations for the Bradley Lake Hydroelectric project and the Alaska Intertie project increased in the current fiscal year by $2.4 million. Plant operations consist of various activities required to maintain operations of each project. These activities are provided as needed; therefore, these amounts will fluctuate annually. In the current year the Alaska Intertie project had multiple large maintenance projects performed;  Depreciation expense increased in the current fiscal year by $4.8 million, as a result of an adjustment to the useful life used to depreciate two static VAR compensators; the adjustment was made to more accurately reflect the actual useful life of the assets, this caused an additional amount of depreciation to be recognized in FY18;  Loss on disposal of asset in FY18 is related to a Michigan loader that was sold for $15 thousand less than its book value for the Bradley Lake Hydroelectric project; and  Provision for loan recovery decreased by $205 thousand from the prior fiscal year. The decrease is due to a reevaluation by management of the loss exposure relating to the Power Project Fund loan portfolio. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 12 Fund Balances Governmental Funds: The focus of AEA’s governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing AEA’s financing requirements. At the end of the current fiscal year, AEA’s governmental funds reported combined ending fund balances of $1,101.1 million, which is an increase of $33.1 million in comparison with the prior fiscal year. The combined ending fund balance is categorized as restricted to indicate that there is an externally enforceable limitation to its use. Specifically, the fund balance is entirely restricted by agreements with external parties or by legislation. At the end of the current fiscal year, total fund balances for AEA’s governmental funds were as follows: Table 3 Governmental Fund – Fund Balances (in thousands of dollars) Power Cost Equalization Fund $ 1,071,193 Renewable Energy Grant Fund 27,541 Trans-Alaska Pipeline Liability Fund 1,174 Emerging Energy Technology Fund 1,143 Rural Energy Projects 1 Total Fund Balance $ 1,101,052 REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 13 Proprietary Funds: AEA’s proprietary fund financial statements consist of enterprise funds, which provide detailed information of the same type found in the business-type activities section of the government-wide financial statements. At the end of the current fiscal year, total net position for AEA’s proprietary funds were as follows: Table 4 Proprietary Funds – Net Position (in thousands of dollars) Bradley Lake Hydroelectric Project $ 137,572 Alaska Intertie Project 25,335 Susitna-Watana Hydroelectric Project 183,682 Power Project Fund 39,165 Rural Electrification Revolving Loan Fund 127 Power Development and Railbelt Energy Projects 1,994 Total Net Position $ 387,875 At the end of the current fiscal year, AEA’s proprietary funds reported combined ending net position of $387.9 million, which is a decrease of $5.3 million in comparison with the prior fiscal year. The combined ending net position is categorized as the following:  invested in capital assets, net of related debt ($318.2 million);  restricted for capital projects ($164 thousand);  restricted for debt service ($25.6 million);  restricted by agreements with external parties ($2.6 million); and  restricted by legislation ($41.3 million). Capital Assets and Debt Administration Capital Assets: AEA’s investment in capital assets for its business-type activities as of June 30, 2018 amounts to $369.2 million (net of accumulated depreciation), which is a decrease of $5.7 million from the prior fiscal year. The investment in capital assets only occurs in the enterprise funds and includes land and rights of way, infrastructure, equipment, and construction in progress. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 14 Table 5 Capital Assets (net of depreciation, in thousands of dollars) Business-Type Activities 2018 2017 Variance Land and Rights of Way $ 11,212 11,212 - Infrastructure 160,530 167,600 (7,070) Equipment 998 152 846 Construction in Progress 196,448 195,973 475 Total $ 369,188 374,937 (5,749) Major additions to capital assets during the current fiscal year include improvements to the Bradley Lake Hydroelectric Project consisting primarily of the static VAR compensator replacement for Soldotna/Daves Creek and continued work on the West Fork Upper Battle Creek project. The Susitna-Watana Hydroelectric project continued its efforts to complete studies and get the project to the point where the State’s investment, to date, is preserved and the project can be left in abeyance. Table 6 Capital Asset Additions (in thousands of dollars) Bradley Battle Creek Diversion $ 6,923 SVC Replacement-Soldotna/Daves Creek 1,341 Bradley Fish Water Valve Actuators 361 Bradley Lake power plant equipment (Mobile Crane and 950M Loader) 352 Bradley Lake transportation equipment (five vehicles) 168 Bradley Lake Equipment Storage Shed 68 Susitna-Watana Hydroelectric 661 Total Capital Asset Additions $ 9,874 Major deletions to capital assets during the current fiscal year includes the original static VAR compensators that were replaced at Soldotna/Daves Creek, transportation equipment that was replaced and power plant equipment that was replaced. REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management’s Discussion and Analysis June 30, 2018 15 Table 7 Capital Asset Deletions (in thousands of dollars) SVC at Soldotna/Daves Creek $ 15,271 Bradley Lake power plant equipment (Loader) 136 Bradley Lake transportation equipment (two vehicles) 50 Total Capital Asset Additions $ 15,457 Long-Term Debt: At the end of the current fiscal year, AEA had total long-term debt outstanding of $85.2 million. AEA’s total long-term debt increased by $31.7 million during the current fiscal year as a result of scheduled debt service payments of $9.5 million and the issuance of debt for the construction of the West Fork Upper Battle Creek Diversion Project in the amount of $41.2 million. Table 8 Outstanding Debt (in thousands of dollars) Business-Type Activities 2018 2017 Variance Bradley Lake Power Revenue and refunding Bonds $ 85,179 53,495 31,684 Total $ 85,179 53,495 31,684 Outlook Operations and maintenance of our hydroelectric and interties projects will continue as approved by the utilities. The construction on the West Fork Upper Battle Creek Diversion Project is anticipated to continue through FY21. Various RPSU and BFU projects are anticipated to continue through FY19 with the continued federal and state funding. The Renewable Energy Grant Fund is expected to start projects for Round IX in FY19. AEA and the Denali Commission are leveraging the use of available funding by shifting project focus to more maintenance and improvement projects. AEA will continue Bulk Fuel and Power Plant Operator training, Circuit Rider, Technical Assistance, and Electrical Emergency efforts across Alaska. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Statement of Net Position June 30, 2018 (stated in thousands) Governmental Business-Type Assets and Deferred Outflows of Resources Activities Activities Total Current assets: Restricted cash and cash equivalents (note 3) $ 27,070 70,109 97,179 Operating receivable 1,090 346 1,436 Prepaid expense — 731 731 Grants receivable 1,530 — 1,530 Loans receivable (note 7) — 567 567 Due from State of Alaska 831 30 861 Accrued interest receivable — 1,198 1,198 Due (to) from other funds/internal balances 640 (640) — Total Current Assets 31,161 72,341 103,502 Noncurrent assets: Restricted investments (note 3) 1,087,619 27,416 1,115,035 Loans receivable, net of allowance (note 7) — 17,401 17,401 Capital assets, net of accumulated depreciation (note 4) — 369,188 369,188 Total Noncurrent Assets 1,087,619 414,005 1,501,624 Deferred outflows of resources: Deferred charge on bond refundings — 10 10 Total Assets and Deferred Outflows of Resources $ 1,118,780 486,356 1,605,136 Liabilities and Net Position Current liabilities: Advances from the State of Alaska $ 5,869 2,212 8,081 Accounts payable 11,849 7,255 19,104 Bonds payable – current portion (note 6) — 10,470 10,470 Other bond liabilities – current portion (note 6) — 156 156 Accrued interest payable — 2,050 2,050 Other liabilities 8 — 8 Total Current Liabilities 17,726 22,143 39,869 Noncurrent liabilities: Bonds payable – noncurrent portion, net (note 6) — 74,709 74,709 Other bond liabilities – noncurrent portion (note 6) — 1,100 1,100 Other liabilities 2 529 531 Total Noncurrent Liabilities 2 76,338 76,340 Total Liabilities 17,728 98,481 116,209 Net Position: Net investment in capital assets — 318,239 318,239 Restricted for capital projects — 164 164 Restricted for debt service — 25,595 25,595 Restricted by agreements with external parties 1,174 2,591 3,765 Restricted by legislation 1,099,878 41,286 1,141,164 Total Net Position 1,101,052 387,875 1,488,927 Total Liabilities and Net Position $ 1,118,780 486,356 1,605,136 Commitments and contingencies (note 11) See accompanying notes to basic financial statements. 16 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Statement of Activities Year ended June 30, 2018 (stated in thousands) Fees, Fines, Operating Capital and Grants Grants Charges and and Govern- Business- for Contri- Contri- mental Type Activities Expenses Services butions butions Activities Activities Total Governmental: Power Cost Equalization Endowment Fund $ 26,605 — — — $(26,605) — (26,605) Renewable Energy Grant Fund 11,360 — — — (11,360) — (11,360) Emerging Energy Technology Fund 163 — 76 — (87) — (87) Trans Alaska Pipeline Liability Fund 3,252 — — — (3,252) — (3,252) Rural Energy Projects 18,600 — 17,910 — (690) — (690) Total Governmental Activities 59,980 — 17,986 — (41,994) — (41,994) Business-type: Bradley Lake Hydroelectric Project 18,606 19,207 — — — 601 601 Alaska Intertie Project 6,969 2,277 995 — — (3,697) (3,697) Susitna-Watana Hydroelectric Project — — — 661 — 661 661 Power Project Fund 534 361 — — — (173) (173) Rural Electrification Revolving Loan Fund (242) 3 — — — 245 245 Total Business-Type Activities 25,867 21,848 995 661 — (2,363) (2,363) Total Activities 85,847 21,848 18,981 661 (41,994) (2,363) (44,357) General Revenues Interest and investment income 77,046 2,299 79,345 State of Alaska reappropriations and transfers — (10,067) (10,067) Capital contributions — 2,796 2,796 Transfers in (out) (1,994) 1,994 — Total General Revenues, Contributions, and Transfers 75,052 (2,978) 72,074 Change in Net Position 33,058 (5,341) 27,717 Net Position - Beginning 1,067,994 393,216 1,461,210 Net Position - Ending $ 1,101,052 387,875 1,488,927 See accompanying notes to basic financial statements. Net (Expense) Revenue and Program Revenues Changes in Net Position 17 Major Special Statement of Revenue Net Position Fund Total Current assets: Restricted cash and cash equivalents (note 3) $ 27,070 $ 27,070 Operating receivable 1,090 1,090 Grants receivable 1,530 1,530 Due from State of Alaska 831 831 Due (to) from other funds/internal balances 640 640 Total current assets 31,161 31,161 Noncurrent assets: Restricted investments (note 3) 1,087,619 1,087,619 Total assets $ 1,118,780 $ 1,118,780 Current liabilities: Advances from the State of Alaska $ 5,869 $ 5,869 Accounts payable 11,849 11,849 Other current liabilities 8 8 Total current liabilities 17,726 17,726 Noncurrent liabilities: Other noncurrent liabilities 2 2 Total noncurrent liabilities 2 2 Total liabilities 17,728 17,728 Fund balance: Restricted by agreements with external parties 1,174 Restricted by legislation 1,099,878 Total fund balance 1,101,052 Total liabilities and fund balance $ 1,118,780 Net Position: Restricted by agreements with external parties 1,174 Restricted by legislation 1,099,878 Total net position 1,101,052 Total liabilities and net position $ 1,118,780 Commitments and contingencies (note 11) See accompanying notes to basic financial statements. Liabilities and Fund Balance Assets (stated in thousands) (A Component Unit of the State of Alaska) ALASKA ENERGY AUTHORITY Governmental Fund Balance Sheet/Statement of Net Position - Governmental Activities June 30, 2018 18 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Governmental Fund Statement of Revenues, Expenditures, and Changes in Fund Balance/Statement of Activities - Governmental Activities Year ended June 30, 2018 (stated in thousands) Major Special Revenue Statement of Fund Activities Revenues: State of Alaska appropriations $ 14,407 $ 14,407 Federal grants 3,505 3,505 Other revenues 74 74 Total revenues 17,986 17,986 Expenditures/Expenses: Grants and projects 30,496 30,496 Power cost equalization grants 26,196 26,196 General and administrative 3,288 3,288 Total expenditures/expenses 59,980 59,980 Nonoperating activities: Investment income, net 77,046 77,046 Transfers out (1,994) (1,994) Total nonoperating activities and transfers out 75,052 75,052 Net change in fund balance 33,058 Change in net position 33,058 Fund balance/Net position – beginning 1,067,994 1,067,994 Fund balance/Net position – ending $ 1,101,052 $ 1,101,052 See accompanying notes to basic financial statements. 19 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Enterprise Fund - Major Fund Statement of Net Position June 30, 2018 (stated in thousands) Assets and Deferred Outflows of Resources Current assets: Restricted cash and cash equivalents (note 3) $ 70,109 Operating receivable 346 Prepaid expense 731 Loans receivable (note 7)567 Accrued interest receivable 1,198 Due from the State of Alaska 30 Due (to) from other funds/internal balances (640) Total Current Assets 72,341 Noncurrent assets: Restricted investments (note 3) 27,416 Loans receivable, net of allowance (note 7) 17,401 Capital assets, net of accumulated depreciation (note 4) 369,188 Total Noncurrent Assets 414,005 Deferred outflows of resources: Deferred charge on bond refundings 10 Total Assets and Deferred Outflows of Resources $ 486,356 Liabilities and Net Position Current liabilities: Advances from the State of Alaska $ 2,212 Accounts payable 7,255 Bonds payable – current portion (note 6) 10,470 Other bond liabilities – current portion (note 6) 156 Accrued interest payable 2,050 Total Current Liabilities 22,143 Noncurrent liabilities: Bonds payable – noncurrent portion, net (note 6) 74,709 Other bond liabilities – noncurrent portion (note 6) 1,100 Other liabilities 529 Total Noncurrent Liabilities 76,338 Total Liabilities 98,481 Net position: Net investment in capital assets 318,239 Restricted for capital projects 164 Restricted for debt service 25,595 Restricted by agreements with external parties 2,591 Restricted by legislation 41,286 Total Net Position 387,875 Total Liabilities and Net Position $ 486,356 Commitments and contingencies (note 11) See accompanying notes to basic financial statements. 20 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Enterprise Fund - Major Fund Statement of Revenues, Expenses, and Changes in Net Position Year ended June 30, 2018 (stated in thousands) Operating revenues: State of Alaska appropriations $ 995 Revenue from operating plants 21,482 Interest on loans 296 Other revenues 70 Total Operating Revenues 22,843 Operating expenses: Depreciation 15,594 General and administrative 1,166 Interest expense 2,371 Plant operations 6,772 Loss on disposal of asset 15 Provision for loan recovery (note 7) (51) Total Operating Expenses 25,867 Operating Loss (3,024) Nonoperating activities: Investment income, net 2,299 State of Alaska reappropriations and transfers (10,067) Capital contribution 2,796 State of Alaska appropriations 661 Transfers in 1,994 Total Nonoperating Activities and Reappropriations, Capital Contributions, and Transfers (2,317) Increase (Decrease) in Net Position (5,341) Net Position – Beginning 393,216 Net Position – Ending $ 387,875 See accompanying notes to basic financial statements. 21 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Enterprise Fund - Major Fund Statement of Cash Flows Year ended June 30, 2018 (stated in thousands) Cash flows from operating activities: Receipts from customers and users $ 21,699 Payments from State of Alaska 995 Payments to suppliers (10,542) Net cash provided by operating activities 12,152 Cash flows from noncapital and related financing activities: Net unremitted interest returned on State appropriation advances (145) Net decrease in short-term borrowings from AIDEA for working capital (457) Net cash used for noncapital and related financing activities (602) Cash flows from capital and related financing activities: Principal paid on bonds (9,555) Proceeds from issuance of bonds 41,239 Interest paid on bonds (2,018) State of Alaska reappropriations and transfers (10,067) Investment in capital assets (8,663) Capital contributions 2,796 Transfers in 1,994 Net cash provided by capital and related financing activities 15,726 Cash flows from investing activities: Purchase of investments (17,813) Proceeds from sales and maturities of investments 10,990 Interest received from investments 2,299 Principal collected on loans 348 Loans originated (6,981) Net cash used for investing activities (11,157) Net increase in cash and cash equivalents 16,119 Cash and cash equivalents at beginning of year 53,990 Cash and cash equivalents at end of year $ 70,109 Reconciliation of operating loss to net cash provided by operating activities: Operating loss $ (3,024) Adjustments to reconcile operating loss to net cash provided by operating activities: Depreciation 15,594 Loss on disposal of assets 15 Amortization of bond deferred charges 10 Provision for loan recovery (51) Bond interest expense 2,371 Changes in assets and liabilities that provided (used) cash: Increase in operating receivables (30) Increase in due to from other funds (72) Increase in accrued interest receivable (119) Decrease in prepaid assets 164 Decrease in advances from State of Alaska (1,274) Decrease in operating accounts payable (1,432) Net cash provided by operating activities $ 12,152 Noncash capital and related financing and investing activities: Ending balance of capital assets accounts payable $ (928) Net increase in contingent liability on sold loans 36 See accompanying notes to basic financial statements. 22 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 23 (1) Organization and Operations The Alaska Energy Authority (AEA or Authority) was created by the Alaska State Legislature in 1976. AEA is a public corporation of the State of Alaska (State) within the Department of Commerce, Community, and Economic Development with separate and independent legal existence. AEA has its own self-balancing set of financial statements independently audited separate from the State. For financial reporting, AEA is a component unit of the State. AEA finances various energy infrastructure projects and energy programs to reduce the cost of energy throughout the State. AEA receives funding from the State, federal grants, and utility companies for use of AEA owned assets. Pursuant to legislation enacted in 1993, the Members of the Board of the Alaska Industrial Development and Export Authority (AIDEA) also serve as the Board of Directors of AEA. AIDEA provides personnel services for AEA (per statute, AEA has no employees) and has a Board approved borrowing agreement to provide short-term working capital funds to AEA. AIDEA and AEA have separate executive directors, both are employees of AIDEA. 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. Neither AIDEA’s accounts nor activities are included in the accompanying financial statements. The following is a description of AEA’s existing owned projects and programs: (a) Bradley Lake Hydroelectric Project The project has 120 megawatts of installed capacity 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 Bradley Lake Project Management Committee oversees the activities of the Bradley Lake Hydroelectric Project. The project is now operated by Homer Electric Association under contract with AEA. Bradley Lake serves Alaska’s Railbelt (the power-sharing area between Interior Alaska and South Central Alaska, connected by roads, generating facilities, and transmission lines) from the Kenai Peninsula to Fairbanks, as well as the Delta Junction area. In September 2016 the Authority received an amendment to the Federal Energy Regulatory Commission (FERC) license for a diversion of West Fork Upper Battle Creek into Bradley Lake. The diversion will increase the Bradley Lake projects annual energy by approximately 37,000 megawatt hours (MWh). Construction began in 2018 and is anticipated to be complete in the fall of 2020. REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 24 (b) Alaska Intertie Project The Alaska Intertie is a 170–mile transmission line designed for 345 kilovolts and operating at 138 kilovolts. It runs between Willow and Healy and interconnects the power systems in the Southcentral and Fairbanks areas. The Alaska Intertie Agreement appointed the Intertie Management Committee (IMC) and AEA to oversee the activities of the Alaska Intertie project. AEA contracts with the following Participating Utilities for operations and maintenance: Golden Valley Electric Association (GVEA) in Fairbanks, and Southcentral Alaska utilities, Chugach Electric Association (CEA), Matanuska Electric Association (MEA), and the Municipality of Anchorage, d/b/a Municipal Light and Power (ML&P). The Intertie reduces the number of black/brownouts throughout the system by enabling power to move either north or south when major system disturbances occur. The Intertie enables GVEA to obtain lower cost power from Southcentral utilities and allows Southcentral Alaska utilities to purchase power from Fairbanks during power shortages. It also enables GVEA to receive power generated by the Bradley Lake Project, which is some of the lowest priced power in the Railbelt region. (c) Susitna-Watana Hydroelectric Project The Alaska Legislature appropriated $192 million in funding to AEA towards the development of a large hydroelectric project to be built in the Railbelt Region. The proposed project would be located approximately half-way between Anchorage and Fairbanks on the upper Susitna River and would include a single dam that would produce 2,800,000 MWh annually, equivalent to approximately 50% of the Railbelt’s annual electrical use. AEA pursued a FERC license. Pursuant to Administrative Order 271, AEA advanced the licensing process through FERC’s issuance of an updated Study Plan Determination on the environmental studies completed between 2013 and 2015. The engineering feasibility study and economic analysis have been completed; FERC’s updated Determination on the environmental work completed thus far was favorable to the State. The licensing effort is currently in abeyance. (d) Rural Energy Programs The rural energy programs include Bulk Fuel Storage Upgrades, Rural Power System Upgrades, the Power Cost Equalization (PCE) Grant Program, Utility Training, Technical Assistance, one active loan program (the Power Project Fund), and one inactive loan program (Rural Electrification Revolving Loan Fund). The PCE Endowment Fund provides the PCE program a long-term stable financing source in order to reduce electricity costs for residential and community facility customers in otherwise high-cost service areas. (e) Energy Development Programs The energy development programs include the Renewable Energy Grant Fund and Recommendation Program, Alternative Energy and Energy Efficiency (AEEE) programs, and the Emerging Energy Technology Fund (EETF) grant program. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 25 The purpose of the Renewable Energy Grant Fund and Recommendation program is to finance renewable energy projects in Alaska. The AEEE programs support the development of alternative energy resources specific to Alaska. The purpose of the EETF grant program is to promote and provide financial assistance to applicants to test, conserve, and improve emerging energy technologies. (2) Summary of Significant Accounting Policies (a) Basis of Accounting As a component unit of the State, and for the purpose of preparing financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP), the Authority, as a public corporation of the State with separate and independent legal existence, is subject to the accounting requirements as set forth by the Governmental Accounting Standards Board (GASB). The funds of the Authority are organized as Governmental Fund and Proprietary Fund. The financial activities of the Authority are recorded in various funds as necessitated by sound fiscal management. The funds are combined for financial statement purposes. (b) Government-Wide and Fund Financial Statements The government-wide financial statements (i.e., the statement of net position and the statement of activities) report information on all of the activities of the Authority. In general, the effect of inter- fund activity has been removed from these statements to minimize the double-counting of internal activities. Governmental activities, which normally are supported by intergovernmental revenues, are reported separately from business-type activities, which rely primarily on fees and charges to external parties. The statement of activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include 1) fees, fines and charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Other items not properly included among program revenues are reported instead as general revenues. Investment earnings are general revenues. Separate financial statements are provided for the special revenue fund and enterprise fund. (c) Measurement Focus, Basis of Accounting, and Financial Statement Presentation The government-wide and proprietary fund financial statements are reported using the economic resources measurement focus and the full accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 26 Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measurable and available. Revenues are considered to be available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the Authority considers all revenues, except reimbursement grants, to be available if they are collected within 60 days after year end. Reimbursement grants are considered available if they are collected within one year of the end of the current fiscal period. Expenditures generally are recorded when a liability is incurred, as under full accrual accounting. However, debt service expenditures are recorded only to the extent they have matured. (d) The Authority reports the following major funds: Major governmental funds: AEA uses a special revenue fund to account for its governmental activities. This fund does not have a legally adopted budget, and hence the budget to actual is not presented in the financial statements. Major proprietary funds: The enterprise fund accounts for all financial activities primarily related to fees and charges to external parties. (e) Revenue Recognition AEA does not have a General Fund since all funds are legally restricted with specific purposes by external agreements, legislation or statute. As a general rule, the effect of inter-fund activity has been eliminated from the government-wide financial statements. Amounts reported as program revenues include 1) fees, fines, and charges to customers or applicants for goods, services, or privileges provided, 2) operating grants and contributions, and 3) capital grants and contributions. Internally dedicated resources are reported as general revenues rather than as program revenues. For purposes of proprietary fund presentation, the Authority considers its revenues and expenses, except investment income, the sale of program loans, fund transfers with the State, and conveyance of capital assets, 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 position. (f) Fair Value Measurement and Application Securities or other assets are reported and measured at fair value if (a) we hold it primarily for the purpose of income or profit and (b) it has a present service capacity based solely on its ability to generate cash or be sold to generate cash. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 27 (g) Cash and Cash Equivalents All of AEA’s cash and cash equivalents are restricted or designated as to use. AEA has trust accounts defined by bond resolutions, agreements with external parties, and state legislation restricting the use of cash and investments. For the purposes of the statement of cash flows, cash and cash equivalents consist of cash, short-term commercial paper, and money market funds. (h) Investments Marketable securities are reported at fair value in the financial statements. Unrealized gains and losses are reported as components of the change in net position. Fair values are obtained from independent sources. Investments are segregated between current and noncurrent based on stated maturity and intended use. Investments maturing within a year are classified as current if they are considered to be potentially needed for current operations. This classification recognizes that a portion of our investment portfolio may be needed for current operations. A noncurrent investment may be sold for operational cash flow needs, if needed, and is beneficial under current market conditions. (i) 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 position. For purposes of the statement of cash flows, the loan program activities are treated as investing activities. (j) Allowance for Loan Losses The allowance for loan losses represents management’s judgment as to the amount required to absorb probable losses in the loan portfolio. The factors used by management to determine the allowance required include payment history, individual loan size, collateral values, and other factors. Management’s opinion is that the allowance is currently adequate to absorb known losses and inherent risks in the portfolio. REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 28 (k) 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 AEA recognizes intangible assets per the guidance of GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets. Intangible assets are assets which are nonfinancial in nature, lack physical substance, are identifiable and have a useful life extending beyond a single reporting period. Costs associated with the generation of internally generated intangible assets are capitalized when incurred after the following milestones have been met:  Determination of the specific objective of the project and the nature of the service capacity that is expected to be provided by the intangible asset upon the completion of the project  Demonstration of the technical or technological feasibility for completing the project so that the intangible asset will provide its expected service capacity  Demonstration of the current intention, ability, and presence of effort to complete or, in the case of a multiyear project, continue development of the intangible asset The Authority recognizes impairment losses for long-lived assets whenever there is a significant unexpected decline in service utility. Interest on short-term and long-term borrowing for construction projects are capitalized during the construction phase of the projects. (l) Fund Balance In the fund financial statements, the Special Revenue Fund reports aggregate amounts for five classifications of fund balances based on the constraints imposed on the use of these resources. The nonspendable fund balance classification includes amounts that cannot be spent because they are either (a) not in spendable form—prepaid items or inventories; or (b) legally or contractually required to be maintained intact. The spendable portion of the fund balance comprises the remaining four classifications: restricted, committed, assigned, and unassigned. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 29 Restricted fund balance – this classification reflects the constraints imposed on resources either (a) externally by creditors, grantors, contributors, laws, or regulations of other governments; or (b) imposed by law through constitutional provisions or enabling legislation. All of the Authority’s fund balance is restricted. (m) Net Position Net position is displayed in three components, as follows: Net investment in capital assets – This consists of capital assets, net of accumulated depreciation, less the outstanding balances of any bonds, mortgages, notes, and accounts payable or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. Restricted – this consists of net assets that are legally restricted by outside parties. Those restrictions come in the form of legislation or State statute that cannot be modified by AEA’s board of directors. Unrestricted – This consists of net assets that do not meet the definition of “restricted” or “net investment in capital assets.” The Authority’s spending policy is to evaluate, on a case by case basis, whether restricted or unrestricted net position should be spent. This evaluation is performed by management as part of the overall spending plan. (n) Environmental Issues The Authority’s policy relating to environmental issues, including pollution and contamination remediation obligations to address the current or potential detrimental effects of existing pollution by participating in pollution remediation activities such as site assessments and cleanups, is to record a liability when the likelihood of Authority responsibility for clean-up is probable and the costs are reasonably estimable. In July 2017, the Authority identified soil surface stains at the Authority’s warehouse property. In FY18, the Authority retained the services of an independent contractor and worked with the State of Alaska Department of Environmental Conservation (DEC) to conduct a survey and soil tests of the area. Soil remediation efforts proceeded and a letter from DEC on March 28, 2018 deemed that no further action was required at the site. At June 30, 2018, there were no other outstanding 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. (o) 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 public corporation of the State performing an essential governmental function and is therefore exempt from State and federal income taxes. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 30 (p) Appropriations and Grants The Authority recognizes appropriations and grant revenue when all applicable eligibility requirements, including time requirements, are met. (q) 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 Statements of Net Position. These estimates impact revenue and expenses for the period. Actual results could differ from those estimates. (r) Deferred Outflows of Resources In addition to assets, the statements of net position reports a separate section for deferred outflows of resources. This separate financial statement element, deferred outflows of resources, represents a consumption of net position that applies to a future period(s) and so will not be recognized as an outflow of resources (expense) until then. AEA only has one item that qualifies for reporting in this category. It is the deferred charge on debt refunding reported in the Statement of Net Position. A deferred charge on debt refunding results from the difference in the carrying value of refunded debt and its reacquisition price. This amount is deferred and amortized over the shorter of the life of the refunded or refunding debt. (s) Recently Issued Accounting Pronouncements GASB Statement No. 83 – Certain Asset Retirement Obligations (Statement 83) was issued by the GASB in November 2016. Statement 83 addresses accounting and financial reporting for certain assets retirement obligations. Statement 83 generally requires a government that has legal obligations to perform future assets retirement activities related to its tangible capital assets to recognize a liability based on the guidance in this Statement. Asset retirement obligation is defined as a legally enforceable liability associated with the retirement of a tangible capital asset. The Statement establishes criteria for determining the time and pattern of recognition of a liability and a corresponding deferred outflow of resources for asset retirement obligations. The Statement requires that recognition occurs when the liability is both incurred and reasonably estimable. Statement 83 is required to be implemented for financial reporting periods beginning after June 15, 2018. The Authority has not implemented Statement 83 and will evaluate the impact on future financial statements. GASB Statement No. 84, Fiduciary activities (Statement 84) was issued by the GASB in January 2017. The objective of Statement 84 is to improve guidance regarding the identification of fiduciary activities for accounting and financial reporting purposes and how those activities should be recorded. This Statement establishes criteria for identifying fiduciary activities of all state and local governments. The focus of the criteria generally is on (1) whether a government is controlling the assets of the fiduciary activity and (2) the beneficiaries with whom a fiduciary relationship exists. Separate criteria are included to identify fiduciary component units and postemployment benefit arrangements that are fiduciary activities. The provisions of this Statement are required to be implemented for the reporting ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 31 periods beginning after December 15, 2018. The Authority has not implemented Statement 84 and will evaluate the impact on future financial statements. GASB Statement No. 85, Omnibus 2017 (Statement 85) was issued by the GASB in March 2017. The objective of Statement 85 is to address practice issues that have been identified during implementation and application of certain GASB Statements. This Statement addresses a variety of topics including issues related to blending component units, goodwill, fair value measurement and application, and postemployment benefits (pensions and other postemployment benefits [OPEB]). Specifically, this Statement addresses the following topics:  Blending a component unit in circumstances in which the primary government is a business-type activity that reports in a single column for financial statement presentation  Reporting amounts previously reported as goodwill and “negative” goodwill  Classifying real estate held by insurance entities  Measuring certain money market investments and participating interest-earning investment contracts at amortized cost  Timing of the measurement of pension or OPEB liabilities and expenditures recognized in financial statements prepared using the current financial resources measurement focus  Recognizing on-behalf payments for pensions or OPEB in employer financial statements  Presenting payroll-related measures in required supplementary information for purposes of reporting by OPEB plans and employers that provide OPEB  Classifying employer-paid member contributions for OPEB  Simplifying certain aspects of the alternative measurement method for OPEB  Accounting and financial reporting for OPEB provided through certain multiple-employer defined benefit OPEB plans. The provisions of this Statement are required to be implemented for the periods beginning after June 15, 2017. The Authority has determined that there is no financial statement impact from implementing GASB Statement No. 85. GASB Statement No. 86, Certain Debt Extinguishing Issues (Statement 86) was issued by the GASB in May 2017. The objective of Statement 86 is to improve consistency in accounting and financial reporting for in-substance defeasance of debt by providing guidance for transactions in which cash and other monetary assets acquired with only existing resources—resources other than the proceeds of refunding debt—are placed in an irrevocable trust for the sole purpose of extinguishing debt. This Statement also improves accounting and financial reporting for prepaid insurance on debt that is extinguished and notes to financial statements for debt that is defeased in substance. The provisions of ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 32 this Statement are required to be implemented for the reporting periods beginning after June 15, 2017. The Authority has determined that there is no financial statement impact from implementing GASB Statement No. 86. GASB Statement No. 87, Leases (Statement 87) was issued by the GASB in June 2017. The objective of Statement 87 is to better meet the information needs of financial statement users by improving accounting and financial reporting for leases by governments. This Statement increases the usefulness of governments’ financial statements by requiring recognition of certain lease assets and liabilities for leases that previously were classified as operating leases and recognized as inflows of resources or outflows of resources based on the payment provisions of the contract. It establishes a single model for lease accounting based on the foundational principle that leases are financings of the right to use an underlying asset. Under this Statement, a lessee is required to recognize a lease liability and an intangible right-to-use lease asset, and a lessor is required to recognize a lease receivable and a deferred inflow of resources, thereby enhancing the relevance and consistency of information about governments’ leasing activities. The provisions of this Statement are required to be implemented for the reporting periods beginning after December 15, 2019. The Authority has not implemented Statement 87 and will evaluate the impact on future financial statements. GASB Statement No. 88, Certain Disclosure Related to Debt, including Direct Barrowings and Direct Placements (Statement 88) was released in March of 2018. The primary objective of this Statement is to improve the information that is disclosed in notes to government financial statements related to debt, including direct borrowings and direct placements. It also clarifies which liabilities governments should include when disclosing information related to debt. This Statement defines debt for purposes of disclosure in notes to financial statements as a liability that arises from a contractual obligation to pay cash (or other assets that may be used in lieu of cash) in one or more payments to settle an amount that is fixed at the date the contractual obligation is established. This Statement requires that additional essential information related to debt be disclosed in notes to financial statements, including unused lines of credit; assets pledged as collateral for the debt; and terms specified in debt agreements related to significant events of default with finance-related consequences, significant termination events with finance-related consequences, and significant subjective acceleration clauses. For notes to financial statements related to debt, this Statement also requires that existing and additional information be provided for direct borrowings and direct placements of debt separately from other debt. The requirements of this Statement are effective for reporting periods beginning after June 15, 2018. The Authority has not implemented Statement 88 and will evaluate the impact on future financial statements. GASB Statement No. 89, Accounting for Interest Cost Incurred before the End of a Construction Period (Statement 89) was released in June of 2018. The objectives of this Statement are (1) to enhance the relevance and comparability of information about capital assets and the cost of borrowing for a reporting period and (2) to simplify accounting for interest cost incurred before the end of a construction period. This Statement establishes accounting requirements for interest cost incurred before the end of a construction period. Such interest cost includes all interest that previously was accounted for in accordance with the requirements of paragraphs 5-22 of Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements which are superseded by this Statement. This Statement requires ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 33 that interest cost incurred before the end of a construction period be recognized as an expense in the period in which the cost is incurred for financial statements prepared using the economic resources measurement focus. As a result, interest cost incurred before the end of a construction period will not be included in the historical cost of a capital asset reported in a business-type activity or enterprise fund. This Statement also reiterates in the financial statements prepared using the current financial resources measurement focus that interest cost incurred before the end of a construction period should be recognized as an expenditure on a basis consistent with governmental fund accounting principles. The requirements of this Statement are effective for reporting periods beginning after December 15, 2019. The Authority has not implemented Statement 89 and will evaluate the impact on future financial statements. GASB Statement No. 90, Majority Equity Interests (Statement 90) was issued August 2018. The primary objectives of this Statement are to improve the consistency and comparability of reporting a government’s majority equity interest in a legally separate organization and to improve the relevance of financial statement information for certain component units. It defines a majority equity interest and specifies that a majority equity interest in a legally separate organization should be reported as an investment if a government’s holding of the equity interest meets the definition of an investment. A majority equity interest that meets the definition of an investment should be measured using the equity method, unless it is held by a special-purpose government engaged only in fiduciary activities, a fiduciary fund, or an endowment (including permanent and term endowments) or permanent fund. Those governments and funds should measure the majority equity interest at fair value. For all other holdings of a majority equity interest in a legally separate organization, a government should report the legally separate organization as a component unit, and the government or fund that holds the equity interest should report an asset related to the majority equity interest using the equity method. This Statement establishes that ownership of a majority equity interest in a legally separate organization results in the government being financially accountable for the legally separate organization and, therefore, the government should report that organization as a component unit. This Statement also requires that a component unit in which a government has a 100 percent equity interest account for its assets, deferred outflows of resources, liabilities, and deferred inflows of resources at acquisition value at the date the government acquired a 100 percent equity interest in the component unit. Transactions presented in statements of the component unit in that circumstance should include only transactions that occurred subsequent to the acquisition. The requirements of this Statement are effective for reporting periods beginning after December 15, 2018. The requirements should be applied retroactively, except for the provisions related to (1) reporting a majority equity interest in a component unit and (2) reporting a component unit if the government acquires a 100 percent equity interest. Those provisions should be applied on a prospective basis. The Authority has not implemented Statement 90 and will evaluate the impact on future financial statements. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 34 (3) 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 throughout this note, “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 GAAP. At June 30, 2018, the Authority’s carrying amount of cash and cash equivalents (all of which were restricted or designated for specific purposes) was $97,179,000. The total of all bank balances on the same dates amounted to $97,179,000. REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 35 The restricted cash and cash equivalents and investments were held in trust and restricted accounts for the following activities as of June 30, 2018: Restricted Cash and Cash Equivalents (in thousands of dollars) Governmental Business- Type Activities Activities Totals Bradley Lake Hydroelectric Project $ - 54,052 54,052 Alaska Intertie Project - 360 360 Rural Energy Loan Funds - 12,282 12,282 Power Development Fund - 1,931 1,931 Funds Advanced from State and Federal Agencies 6,169 1,484 7,653 Power Cost Equalization Endowment Fund 3,910 - 3,910 Renewable Energy Grant Fund 14,342 - 14,342 Emerging Energy Technology Fund 1,152 - 1,152 Trans-Alaska Pipeline Liability Fund 1,285 - 1,285 Rural Energy and Energy Development Programs 212 - 212 Total restricted cash and cash equivalents $ 27,070 70,109 97,179 Restricted Investments (in thousands of dollars) Governmental Business- Type Activities Activities Totals Bradley Lake Hydroelectric Project $ - 17,429 17,429 Rural Energy Loan Funds - 9,987 9,987 Power Cost Equalization Endowment Fund 1,073,333 - 1,073,333 Renewable Energy Grant Fund 14,286 - 14,286 Total restricted investments $ 1,087,619 27,416 1,115,035 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 36 Investment Holdings The Power Cost Equalization Endowment Fund (PCE Fund), created under Alaska Statute (AS) 42.45.070, the Renewable Energy Grant Fund (RE Fund), created under AS 42.45.045, and the Emerging Energy Technology Fund (EET Fund), created under AS 42.45.375, are under the fiduciary authority of the State Department of Revenue, Treasury Division (Treasury). Other AEA Cash and Investments – a portion of Bradley Lake Hydroelectric Project investments are invested pursuant to investment agreements with JP Morgan Chase Bank that guarantees annual interest earnings of 7.38% or 7.41% per annum that end the earlier of July 1, 2021 or the date of repayment of the Bradley Lake Power Revenue Bonds, First Series. These investments are in nonparticipating contracts and are measured at cost in accordance with GASB 31. Additional funds are held by a trustee bank and invested in accordance with the requirements of the trust agreement. 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. Bradley Lake investments, associated with the Power Revenue Bonds and Refunding Bonds, are subject to rebate computation. Internal staff manage AEA’s internally managed portfolio for liquidity and safety. There is no AEA Board approved investment policy; however, staff follows AIDEA’s Board approved investment policy for internally managed investments. 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);  Money market funds collateralized by U.S. Treasury, agency securities, and repurchase agreements;  Units in the investment pool or any series of investment pool of the Alaska Municipal League Investment Pool, Inc., or any successor to that entity, or any other investment pool for public entities of the State of Alaska that is established under the Alaska Investment Pool Act (AS 37.23.010-37.23.900); and  Other investments specifically approved by the board. Fair Value Measurement AEA categorizes fair value measurements within the fair value hierarchy established by generally accepted accounting principles. The hierarchy is based on the valuation inputs used to measure the fair value of an asset. Level 1 inputs are quoted prices in active markets for identical assets; Level 2 inputs are significant other observable inputs; and Level 3 inputs are significant unobservable inputs. Following is a summary of the AEA’s cash and investments at the recurring fair value measurement at June 30, 2018 (in thousands): ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 37 Fair Value of Cash and Investments (in thousands of dollars) Governmental Business-Type Activities Activities Totals Deposits $ 2 - 2 Money market funds 27,068 70,109 97,177 Investment agreements - 17,429 17,429 Investments managed by Treasury 1,087,619 - 1,087,619 U.S. Government agency Discount notes - 9,987 9,987 Total invested assets $ 1,114,689 97,525 1,212,214 Cash and cash equivalents, including investment agreements, are reported at amortized cost, investments managed by Treasury are invested in a pooled environment and the remaining investments have a fair value level of 2. Interest Rate Risk Interest rate risk is the risk that changes in interest rates will negatively affect the fair value of an investment. The Resolution addresses interest rate risk. Duration is an indicator of a portfolio’s market sensitivity to changes in interest rates. In general, major factors affecting duration are (in order of importance): 1) Maturity 2) Prepayment frequency 3) Level of market interest rates 4) Size of coupon 5) Coupon payments Rising interest rates generally translate into the fair market value of fixed income investments declining, while falling interest rates are generally associated with increasing market values. Effective duration attempts to account for the price sensitivity of a bond to changes in prevailing interest rates, including the effect of embedded options. For example, for a bond portfolio with a duration of 5.0, a one percentage point parallel decline in interest rates would result in an approximate price increase on that bond portfolio of 5.0%. AEA Internally Managed Investments – AEA has no written policy for interest rate risk for internally managed investments; however, staff follows and believes to be in compliance with AIDEA’s written policy for interest rate risk. The duration for investments is 2 years or less. The maximum maturity of any issue is 3 years from the date of purchase. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 38 Credit Risk AEA has no written policy with regard to credit risk; however, staff follows and believe to be in compliance with AIDEA’s written policy for credit risk. 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 contain a portion that are invested in guaranteed investment contracts collateralized by federal obligations, which minimize credit risk. 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, 2018, AEA’s deposits managed by Treasury were uncollateralized and uninsured. With respect to AEA managed investments, amounts totaling approximately $97,177,000 at June 30, 2018 are held in money market funds with the custodian, the trust department of a commercial bank; therefore, no custodial risk exists for these securities. Investment agreements in the amount of $17,429,000 are held with the custodian institution and are collateralized. Renewable Energy Grant Fund The State Department of Revenue – Treasury Division has created a pooled environment by which it manages the investments for which its Commissioner has fiduciary responsibility. Actual investing is performed by investment officers within Treasury or by contracted external investment managers. The Fund invests in the State’s internally managed General Fund and Other Non-Segregated Investments Pool (GeFONSI). The GeFONSI consists of investments in the State’s internally managed Short-term Fixed Income Pool, Short-term Liquidity Fixed Income Pool and the Intermediate-term Fixed Income Pool. The complete financial activity of the Fund is shown in the Comprehensive Annual Financial Report (CAFR) available from the Department of Administration, Division of Finance. Assets in the pools are reported at fair value. Investment purchases and sales are recorded on a trade-date basis. Securities are valued each business day using prices obtained from a pricing service. The full accrual basis of accounting is used for the investment income and GeFONSI investment income is distributed to pool participants monthly if prescribed by statute or if appropriated by the State legislature. Income in the Short-term, Short-term Liquidity, and Intermediate-term Fixed Income Pools is allocated to the pool participants daily on a pro-rata basis. At June 30, 2018, the GeFONSI total for the Renewable Energy Grant Fund was $14,286,000. For additional information on interest rate risk, credit risk, foreign exchange, derivatives, fair value, and counterparty credit risk see the separately issued report on the Invested Assets of the Commissioner of Revenue at: http://treasury.dor.alaska.gov/Investments/Annual-Investment-Reports.aspx. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 39 Power Cost Equalization Endowment Fund Investment Holdings Treasury has created a pooled environment by which it manages the investments the Commissioner has fiduciary responsibility for. Actual investing is performed by investment officers in Treasury or by contracted external investment managers. The Fund invests in the State’s internally managed Short-term Fixed Income Pool, the Broad Market Fixed Income Pool, as well as the State’s internally managed Domestic Equity and International Equity Pools. The complete financial activity of the Fund is shown in the Comprehensive Annual Financial Report (CAFR) available from the State - Department of Administration, Division of Finance. Assets in the pools are reported at fair value. Investment purchases and sales are recorded on a trade-date basis. Fixed income and equity securities are valued each business day. Securities expressed in terms of foreign currencies are translated into U.S dollars at the prevailing exchange rates. The full accrual basis of accounting is used for investment income. Income in the Short-term and Broad Market Fixed Income Pools is allocated to pool participants daily on a pro-rata basis. At June 30, 2018, the Fund’s share of pool investments was as follows: Power Cost Equalization Endowment Fund Investment Pools (in thousands of dollars) FY18 Cash and cash equivalents Short-term fixed income pool $ 45 Domestic fixed income Broad market pool 300,857 High yield pool 44,739 Equity Domestic equity pool 420,801 International equity pools 248,729 Real estate investment trust pool 58,207 Net Invested Assets $ 1,073,378 For additional information on interest rate risk, credit risk, foreign exchange, derivatives, fair value, and counterparty credit risk see the separately issued report on the Invested Assets of the Commissioner of Revenue at: http://treasury.dor.alaska.gov/Investments/Annual-Investment-Reports.aspx. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 40 (4) Capital Assets Capital asset activity for the year ended June 30, 2018 was as follows (stated in thousands): Balance at Balance at Business-Type Activities July 1, 2017 Additions Deletions June 30, 2018 Capital assets not being depreciated: Land and Rights of Way $ 11,212 - - 11,212 Construction in progress: Intangibles 188,490 661 - 189,151 Other 7,483 8,332 (8,518) 7,297 Total capital assets not being depreciated 207,185 8,993 (8,518) 207,660 Depreciable capital assets: Infrastructure 448,367 8,518 (15,407) 441,478 Equipment 5,576 881 (50) 6,407 Total depreciable capital assets 453,943 9,399 (15,457) 447,885 Less accumulated depreciation: Infrastructure (280,767) (15,559) 15,378 (280,948) Equipment (5,424) (35) 50 (5,409) Total accumulated depreciation (286,191) (15,594) 15,428 (286,357) Capital assets, net $ 374,937 2,798 (8,547) 369,188 For the year ended June 30, 2018 total interest costs on long term borrows for construction projects was $895,824, of that amount $32,004 was capitalized as a part of construction in progress-other. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 41 Depreciation expense was charged to the functions as follows for the year ended June 30, 2018 (stated in thousands): Business-Type Activities Bradley Lake Hydroelectric Project $11,903 Alaska Intertie Project 3,691 Total depreciation expense – business type activities $ 15,594 In FY18, AEA made a change to the estimated useful service life of two of its infrastructure assets. The change is a change in accounting estimate and is reported in the current year. AEA adjusted the estimated useful life of the original SVCs for the Bradley Lake Hydroelectric project at Daves Creek and Soldotna Substations from a 36.36 year useful life to a useful life of 20 years. The impact of the change on the FY18 financial statements is an increase in depreciation expense of $4,772,000 that would have been recognized in previous years had the asset been depreciated over is actual useful life. (5) Interfund Receivables, Payables, and Transfers Interfund balances typically result from short-term operating or capital advances. Transfers typically result from operating activities. A schedule of interfund balances as of and for the year ended June 30, 2018 follows (stated in thousands): Due from other funds Due to Special Revenue Fund from Enterprise Fund $ 640 REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 42 (6) Long-Term Debt Long-term debt activity for the year ended June 30, 2018 was as follows (stated in thousands): REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK Balance at Balance at Due Business-Type Activities July 1, 2017 Additions Deletions June 30, 2018 within one year Power Revenue Bonds Bradley Lake: First Series (a) $ 100 - - 100 25 Refunding, Third Series (a) 5,730 - (5,730) - - Refunding, Fourth Series (a) 19,635 - (3,485) 16,150 3,695 Refunding, Sixth Series (a)(b) 28,030 - (340) 27,690 6,750 Bradley Lake – Battle Creek Seventh Series(a)(c) - 40,000 - 40,000 - Eighth Series (a)(c) - 1,239 - 1,239 - Total bonds payable 53,495 41,239 (9,555) 85,179 10,470 Arbitrage interest payable (c) 979 466 (504) 941 - Bond original issue premium 554 - (239) 315 156 Total other bond liabilities 1,533 466 (743) 1,256 156 Total long-term debt $ 55,028 41,705 (10,298) 86,435 10,626 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 43 (a) AEA issued the Power Revenue Bonds, First and Second Series (Bradley Lake Hydroelectric Project 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. The First Series refunded bonds were called on July 1, 1999. 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. The Second Series refunded bonds were called on July 1, 2000. All of the revenues derived by AEA from the operation of the project and all moneys, securities and funds (except the excess investment 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 Fourth Series Bondshare 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 4.0% to 6.25%. (b) In July 2010, the Authority issued $28,800,000 of Power Revenue Refunding Bonds, Sixth Series, to refund and defease $30,640,000 aggregate outstanding principal amount of the Authority’s Power Revenue Refunding Bonds, Fifth Series, and to pay costs of issuing the bonds. The refunded bonds were called on August 2, 2010. (c) In December 2017, the Authority issued, as a private placement, $47,000,000 of Power Revenue Bonds for the long-term financing of the construction costs of the Battle Creek Diversion Project, an improvement to the Bradley Lake Hydroelectric Project. The Power Revenue Bonds consist of $40,000,000 Seventh Series New Clean Renewable Energy Bonds; $1,239,000 Eighth Series Qualified Energy Conservation Bonds; and $5,761,000 Ninth Series Taxable Draw-Down Bonds. Only the Seventh and Eighth Series have amounts outstanding as of June 30, 2018. During the period of construction, interest only payments are due on the outstanding bonds at a fixed interest rate of 4.24%. The outstanding bonds mature annually each July 1 starting in 2021 through the year 2050. The draw period for the Ninth Series ends in December 2020. There were no draws made as of June 30, 2018. The Seventh and Eighth Series Bonds qualify for federal tax credits under the New Clean Renewable Energy Bond and Qualified Energy Conservation Bond Programs, respectively. These programs provide for a partial federal subsidy of interest due on the bonds, subject to federal funding availability. (d) The arbitrage interest payable is due to the U.S. Treasury for the excess of investment income on the proceeds of each series of AEA’s tax exempt and tax advantaged Bradley Lake bonds over the related interest expense computed in accordance with Section 148 of the Internal Revenue Code of 1986, as amended. 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. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 44 The minimum payments related to all bonds, for the years subsequent to June 30, 2018, are as follows: Business-Type Activities (in thousands of dollars) Principal Interest Total Fiscal Year Ending June 30: 2019 $ 10,470 3,808 14,278 2020 11,025 3,227 14,252 2021 11,575 2,647 14,222 2022 12,245 2,011 14,256 2023 1,375 1,661 3,036 2024-2028 6,873 7,431 14,304 2029-2033 6,873 5,974 12,847 2034-2038 6,873 4,517 11,390 2039-2043 6,873 3,060 9,933 2044-2048 6,873 1,603 8,476 2049-2051 4,124 262 4,386 Total $ 85,179 36,201 121,380 REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 45 (7) Loans Receivable The Authority administers the Power Project Fund Loan Program and the Rural Electrification Revolving Loan Program. Loans outstanding at June 30, 2018 are classified as follows (stated in thousands): Business-Type Activities (in thousands of dollars) No. of Loans Amount Power Project Fund Loan Programs 15 $ 18,137 Rural Electrification Revolving Loan Program 2 128 17 Less: Allowance for Loan Loss (297) Balance, at end of year $ 17,968 Loans more than 90 days past due are not included in the accrual of interest. At June 30, 2018, there were no loans more than 90 days past due. An analysis of changes in the allowance for loan losses for the years ended June 30, 2018 follows (stated in thousands): Balance at beginning of year $ 348 Provision for loan recovery (51) Balance at end of year $ 297 On September 30, 2010, the Authority sold a portion of its Power Project Fund loan portfolio to AIDEA. Under the agreement, upon AIDEA’s request, AEA is required to repurchase any loan upon a payment default. On June 30, 2018, the outstanding principal balance of the loans sold was $14,184,283 for which AEA has recognized an estimated liability for potential repurchase of $425,528. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 46 (8) Fund Balance Fund balances reported in the aggregate on the governmental fund balance sheet are subject to the following constraints (stated in thousands): Restricted by External Parties Restricted by Legislation Power Cost Equalization Fund $ - 1,071,193 Renewable Energy Fund - 27,541 Emerging Energy Technology Fund - 1,143 Trans-Alaska Pipeline Liability Fund 1,174 - Rural Energy Projects - 1 Total fund balance $ 1,174 1,099,878 (9) Risk Management AEA is exposed to various risks of loss related to torts, theft of, damage to and destruction of assets; errors and omissions; and natural disasters. AEA covers that risk through the purchase of commercial insurance and participation in the State’s Risk Management Pool. The Risk Management Pool administers a self- insurance program for each State agency, which covers all sudden and accidental property and casualty claims. Annual assessments allocated by Risk Management are the maximum each agency is called upon to pay, forestalling the need for supplemental appropriation or disruption of vital state services after a major property loss, adverse civil jury award, or significant workers compensation claim. (10) Related Parties (a) Alaska Industrial Development and Export Authority Pursuant to understandings and agreements between AIDEA and AEA, AIDEA provides administrative, personnel, data processing, communications, and other services to AEA. AEA has a Board approved borrowing agreement with AIDEA to provide short-term working capital funds up to a maximum of $7.5 million. At June 30, 2018, AEA recognized expenses for services from AIDEA in the amount of $5.05 million. AEA also paid AIDEA $200,000 for administration of the Bradley Lake Hydroelectric Project and $22,000 for administration of the Battle Creek Project. In addition, AEA had $4.28 million payable to AIDEA for services and borrowings, which are included in accounts payable. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30, 2018 47 As a result of implementing GASB Statement No. 68 Accounting and Financial Reporting for Pensions, AIDEA recorded a net pension liability. Additionally, as a result of implementing GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefit Plans Other than Pensions, AIDEA recorded a net liability for other Postemployment Benefits. AEA’s annual payments to AIDEA for personnel services supporting AEA activities includes a Public Employees Retirement System contribution component. Payments to AIDEA for personnel services supporting AEA activities comprise over half of AIDEA’s personnel costs. (b) Alaska Intertie Management Committee AEA is party to agreement with utilities (GVEA, MEA, CEA, and ML&P) using the Alaska Intertie for wheeling of electrical power. Pursuant to the Intertie Agreement, the IMC was established to manage the system. The IMC 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 received $99,383 during fiscal year 2018 for administrative services. (c) Bradley Lake Project Management Committee On December 7, 1987, AEA entered into a Power Sales Agreement (PSA) with utilities (GVEA, MEA, CEA, ML&P, HEA, and City of Seward) purchasing electric power produced by the Bradley Lake Hydroelectric Project. In 1988, legislation was passed which made the PSA effective. Pursuant to the PSA, a Project Management Committee (PMC) was formed to manage the project. The PMC is comprised of a representative from AEA and each of the utilities. The participating utilities make monthly payments directly to the bond trustee based on their respective percentage share of the estimated annual project costs. AEA has an agreement with the PMC to provide administrative services to the Bradley Lake Project and received $222,000 for these services. (11) Commitments and Contingencies 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, 2018, AEA had Power Project Fund loan commitments of $9,787,000. At June 30, 2018, AEA had cumulative prior year commitments from grant awards that are funded by State appropriations and federal awards; the amounts committed were $30,017,000. In management’s opinion, the final outcome of any present legal proceedings or other contingent liabilities and commitments will not materially affect our financial position. Schedule 1ALASKA ENERGY AUTHORITY(A Component Unit of the State of Alaska)Schedule of Bradley Lake Hydroelectric Project Trust Account ActivitiesYear ended June 30, 2018(stated in thousands)ExcessCapital Renewal and InvestmentOperatingConstruction Debt Service Reserve Contingency Earnings Revenue Operating ReserveFund Fund Fund Reserve Fund Fund Fund Fund Account TotalBalance at July 1, 2017 $ — 10,990 12,779 3,220 682 1,339 2,431 1,031 32,472 Interest received 164 239 963 227 45 451 125 72 2,286 Bond principal paid — (9,555) — — — — — — (9,555) Bond interest paid — (2,590) — — — — — — (2,590) Arbitrage paid — — — — (504) — — — (504) Construction proceeds received41,239 — — — — — — — 41,239 IRS interest subsidy received— — — — — 572 — — 572 Capital reserve contribution — — 2,796 — — — — — 2,796 Operating budget surplus paid — — — (1,148) — — (1,223) — (2,371) Capital expenditures (3,856) — — (4,079) — (450) — — (8,385) Operating revenue received — — — — — 20,463 — — 20,463 Operating expenses paid — — — — — — (4,987) — (4,987) Transfers between funds — 13,436 (963) 2,793 268 (19,870) 4,512 (176) — Balance at June 30, 2018 $ 37,547 12,520 15,575 1,013 491 2,505 858 927 71,436 See accompanying independent auditors’ report.48 Schedule 2ALASKA ENERGY AUTHORITY(A Component Unit of the State of Alaska)Schedule of Projects and Programs – Balance SheetJune 30, 2018(stated in thousands)Power Cost Renewable Emerging Trans AlaskaEqualization Energy Energy Pipeline RuralEndowmentGrant Technology Liability EnergyFund Fund Fund Fund Projects Eliminations TotalsCurrent assets:Restricted cash and cash equivalents $ 3,910 14,342 1,152 1,285 6,381 — 27,070 Operating receivable — 994 — — 96 — 1,090 Grants receivable — — 13 — 1,517 — 1,530 Due from State of Alaska— — — — 831 — 831 Due (to) from other funds/internal balances — — — — 3,022 (2,382) 640 Total Current Assets3,910 15,336 1,165 1,285 11,847 (2,382) 31,161 Noncurrent assets:Restricted investments 1,073,333 14,286 — — — — 1,087,619 Total Assets$ 1,077,243 29,622 1,165 1,285 11,847 (2,382) 1,118,780 Liabilities and Fund BalanceCurrent liabilities:Advances from the State of Alaska$ 37 — — — 5,832 — 5,869 Accounts payable 5,300 1,329 22 — 5,198 — 11,849 Other current liabilities — — — — 8 — 8 Due to (from) other funds/internal balances 713 752 — 111 806 (2,382) — Total Current Liabilities6,050 2,081 22 111 11,844 (2,382) 17,726 Other liabilities-noncurrent— — — — 2 — 2 Total Noncurrent Liabilities— — — — 2 — 2 Total Liabilities6,050 2,081 22 111 11,846 (2,382) 17,728 Fund Balance:Restricted by agreements with external parties— — — 1,174 — — 1,174 Restricted by legislation1,071,193 27,541 1,143 — 1 — 1,099,878 Total Fund Balance1,071,193 27,541 1,143 1,174 1 — 1,101,052 Total Liabilities and Fund Balance$ 1,077,243 29,622 1,165 1,285 11,847 (2,382) 1,118,780 See accompanying independent auditors’ report.Special Revenue FundAssets49 Schedule 3ALASKA ENERGY AUTHORITY(A Component Unit of the State of Alaska)Special Revenue FundSchedule of Projects and Programs – Revenues, Expenses, and Changes in Fund BalanceYear ended June 30, 2018(stated in thousands)Power Cost Renewable Emerging Trans AlaskaEqualization Energy Energy Pipeline RuralEndowment Grant Technology Liability EnergyFund Fund Fund Fund Projects TotalsOperating revenues:State of Alaska appropriations $ — — — — 14,407 14,407 Federal grants — — 76 — 3,429 3,505 Other revenues — — — — 74 74 Total Operating Revenues— — 76 — 17,910 17,986 Operating expenditures:Grants and projects — 10,474 163 3,160 16,699 30,496 Power cost equalization grants 26,196 — — — — 26,196 General and administrative 409 886 — 92 1,901 3,288 Total Operating Expenditures26,605 11,360 163 3,252 18,600 59,980 Nonoperating activities:Investment income, net 76,663 355 — 28 — 77,046 Total Nonoperating Income76,663 355 — 28 — 77,046 Capital grants and contributions (465) (224) — — 689 — Transfers out — — — — (1,994) (1,994) Total Capital Contributions and Transfers(465) (224) — — (1,305) (1,994) Increase (Decrease) in Fund Balance49,593 (11,229) (87) (3,224) (1,995) 33,058 Fund Balance – Beginning1,021,600 38,770 1,230 4,398 1,996 1,067,994 Fund Balance – Ending$ 1,071,193 27,541 1,143 1,174 1 1,101,052 See accompanying independent auditors’ report.50 Schedule 4ALASKA ENERGY AUTHORITY(A Component Unit of the State of Alaska)Schedule of Projects and Programs – Statement of Net PositionJune 30, 2018(stated in thousands)Susitna- Rural Power Develop-Bradley Lake Alaska Watana Power Electrification ment andHydroelectric Intertie Hydroelectric Project Revolving Railbelt EnergyAssets and Deferred Outflows of Resources Project Project Project Fund Loan Fund Projects Eliminations TotalsCurrent assets:Restricted cash and cash equivalents $ 54,052 360 — 12,215 67 3,415 — 70,109 Operating receivable 15 297 — 32 — 2 — 346 Prepaid expense 51 680 — — — — — 731 Loans receivable — — — 504 63 — — 567 Accrued interest receivable 1,178 — — 19 1 — — 1,198 Due from State of Alaska — 25 — — — 5 — 30 Due (to) from other funds/internal balances — — — — — 85 (725) (640) Total Current Assets55,296 1,362 — 12,770 131 3,507 (725) 72,341 Noncurrent assets:Restricted investments17,429 — — 9,987 — — — 27,416 Loans receivable, net of allowance — — — 17,338 63 — — 17,401 Capital assets, net of accumulated depreciation 160,188 25,318 183,682 — — — — 369,188 Total Noncurrent Assets177,617 25,318 183,682 27,325 63 — — 414,005 Deferred outflows of resources:Deferred charge on bond refundings10 — — — — — — 10 Total Assets and Deferred Outflows of Resources$ 232,923 26,680 183,682 40,095 194 3,507 (725) 486,356 Current liabilities:Advances from (to) the State of Alaska $ 8 680 (56) — 67 1,513 — 2,212 Accounts payable 6,645 609 1 — — — — 7,255 Bonds payable – current portion 10,470 — — — — — — 10,470 Other bond liabilities – current portion 156 — — — — — — 156 Accrued interest payable 2,050 — — — — — — 2,050 Due to (from) other funds/internal balances 110 56 55 504 — — (725) — Total Current Liabilities19,439 1,345 — 504 67 1,513 (725) 22,143 Noncurrent liabilities:Bonds payable – noncurrent portion, net74,709 — — — — — — 74,709 Other bond liabilities – noncurrent portion 1,100 — — — — — — 1,100 Other liabilities 103 — — 426 — — — 529 Total Noncurrent Liabilities75,912 — — 426 — — — 76,338 Total Liabilities95,351 1,345 — 930 67 1,513 (725) 98,481 Net position:Net investment in capital assets 109,239 25,318 183,682 — — — — 318,239 Restricted for capital projects 164 — — — — — — 164 Restricted for debt service 25,595 — — — — — — 25,595 Restricted by agreements with external parties 2,574 17 — — — — — 2,591 Restricted by legislation — — — 39,165 127 1,994 — 41,286 Total Net Position137,572 25,335 183,682 39,165 127 1,994 — 387,875 Total Liabilities and Net Position$ 232,923 26,680 183,682 40,095 194 3,507 (725) 486,356 See accompanying independent auditors’ report.Business-Type Activities - Enterprise FundLiabilities and Net Position51 Schedule 5ALASKA ENERGY AUTHORITY(A Component Unit of the State of Alaska)Business-Type Activities - Enterprise FundSchedule of Projects and Programs – Revenues, Expenses, and Changes in Net PositionYear ended June 30, 2018(stated in thousands)Rural Power Develop-Bradley Lake AlaskaSusitna-Watana Power Electrification ment andHydroelectric Intertie Hydroelectric Project RevolvingRailbelt EnergyProject Project Project Fund Loan Fund Projects TotalsOperating revenues:State of Alaska appropriations $ — 995 — — — — 995 Revenue from operating plants 19,205 2,277 — — — — 21,482 Interest on loans — — — 293 3 — 296 Other revenues 2 — — 68 — — 70 Total Operating Revenues19,207 3,272 — 361 3 — 22,843 Operating expenses:Depreciation 11,903 3,691 — — — — 15,594 General and administrative 667 156 — 582 (239) — 1,166 Interest expense 2,371 — — — — — 2,371 Plant operating 3,650 3,122 — — — — 6,772 Loss on disposal of asset 15 — — — — — 15 Provision for loan recovery — — — (48) (3) — (51) Total Operating Expenses18,606 6,969 — 534 (242) — 25,867 Operating Income (Loss)601 (3,697) — (173) 245 — (3,024) Nonoperating activities:Investment income, net 1,960 6 — 332 1 — 2,299 Total nonoperating income1,960 6 — 332 1 — 2,299 State of Alaska reappropriations and transfers — — — (10,000) (67) — (10,067) Capital contribution 2,796 — — — — — 2,796 State of Alaska appropriations — 661 — — — 661 Transfers in — — — — — 1,994 1,994 2,796 — 661 (10,000) (67) 1,994 (4,616) Increase (Decrease) in Net Position5,357 (3,691) 661 (9,841) 179 1,994 (5,341) Net Position – Beginning132,215 29,026 183,021 49,006 (52) — 393,216 Net Position – Ending$ 137,572 25,335 183,682 39,165 127 1,994 387,875 See accompanying independent auditors’ report.Total reappropriations, capitalcontributions, and transfers52 Schedule 6 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Schedule of Capital Assets Presented under Federal Energy Regulatory Commission Requirements June 30, 2018 (stated in thousands) Balance at Balance at July 1, 2017 Additions Deletions June 30, 2018 Capital assets: Intangible $ 183,035 661 — 183,696 Production 266,837 7,796 (136) 274,497 Transmission 205,459 1,417 (15,271) 191,605 General 5,797 — (50) 5,747 Total capital assets 661,128 9,874 (15,457) 655,545 Less accumulated depreciation: Intangible (6) — — (6) Production (133,056) (5,505) 107 (138,454) Transmission (147,712) (10,068) 15,271 (142,509) General (5,417) (21) 50 (5,388) Total accumulated depreciation (286,191) (15,594) 15,428 (286,357) Capital assets, net $ 374,937 (5,720) (29) 369,188 Unaudited - See accompanying independent auditors’ report. 53 Schedule 7 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Bradley Lake Historical Annual Project Cost Year ended June 30, 2018 (stated in thousands) Operating Data 2018 Project costs: Operations and maintenance $ 2,748 Repairs 361 General and administrative 798 Insurance 625 Capital purchases 1,721 Contributions to capital reserve fund 2,796 Contributions to renewal and contingency fund and operating reserve account 2,917 Subtotal 11,966 Debt service 13,675 Less Federal interest subsidy (572) Less investment income (1,810) Total cost of power $ 23,259 Energy delivered (MWh) 417,522 Total unit cost of power (cents per kWh) 5.57 Unaudited - See accompanying independent auditors’ report. This schedule is provided as part of the municipal secondary market disclosure requirements relating to the Bradley Lake Hydroelectric Power Revenue and Refunding Bonds. 54 Schedule 8ALASKA ENERGY AUTHORITY(A Component Unit of the State of Alaska)PCE Endowment Fund Historical AnalysisJune 30, 2018(stated in thousands) FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018Beginning investment fund balance $ 303,354 320,714 364,529 751,780 840,215 977,867 969,389 946,939 1,023,566 Inflows:Annual investment earnings 38,387 67,651 10,948 111,488 171,112 33,192 8,912 112,331 76,602 Capital fund transfers in — — 400,000 — — — — — — Total inflows 38,387 67,651 410,948 111,488 171,112 33,192 8,912 112,331 76,602 Outflows:Transfers to AEA for PCE payments (1) (20,725) (23,458) (23,154) (22,527) (32,773) (41,002) (30,622) (34,956) (25,595) Program administration - AEA (160) (174) (211) (198) (241) (248) (255) (243) (624) Administrative fee - Regulatory Commission — (78) (129) (90) (110) (107) (100) (112) (113) Management fee - Department of Revenue (142) (126) (203) (238) (336) (313) (385) (393) (458) Total outflows (21,027) (23,836) (23,697) (23,053) (33,460) (41,670) (31,362) (35,704) (26,790) Ending investment fund balance $ 320,714 364,529 751,780 840,215 977,867 969,389 946,939 1,023,566 1,073,378 (1) Final PCE program expenditures reported may vary depending on outstanding PCE payables at June 30, not included in this presentation. Unaudited - See accompanying independent auditors’ report.55 Schedule 9 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Supplementary Organization and Project Information June 30, 2018 Unaudited - See accompanying independent auditors’ report. 56 Organization and Operations Throughout the 1980’s, Alaska Energy Authority (AEA or Authority) 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 and one was transferred to the City of Larsen Bay in the fall of 2010. The Bradley Lake Hydroelectric project provides some of the least expensive electric energy to the Railbelt. The Alaska Intertie provides for connection and movement of power north or south to increase reliability and allow Interior Alaska to obtain less expensive electric energy available from the Southcentral portion of the state. Pursuant to statute, on August 12, 1993, the Board 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 to AEA. The AEA executive director is an employee of AIDEA, but is separate and independent and is not subject to supervision by AIDEA’s executive director. 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 Legislature, in 1993, required AEA, to the maximum extent feasible, to enter into contracts with public utilities and other entities to carry out AEA duties with respect to the ongoing operation and maintenance of the AEA owned operating assets; this has occurred with oversight responsibility retained by AEA. 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. These rural energy programs were originally part of AEA prior to the 1993 reorganization. During fiscal year 2009, legislation added energy development programs to AEA. The Alaska Legislature empowered AEA to acquire a Susitna River power project under AS 44.83.080 (18), effective July 1, 1999. Effective July 14, 2011, the legislature empowered AEA to acquire, construct, own, and operate a hydroelectric project located on the Susitna River. Under this legislative authorization, AEA worked on planning, designing, and Federal Energy Regulatory Commission (FERC) licensing of the Susitna-Watana Hydroelectric Project. Bradley Lake Hydroelectric Project The project has 120 Megawatts (MW) of installed capacity 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. Homer Electric Association now operates the project under contract with AEA. Bradley Lake serves Alaska’s Railbelt from the Kenai Peninsula to Fairbanks, as well as the Delta Junction area. In September 2016, the Authority received an amendment to the FERC license for a diversion of West Fork Upper Battle Creek into Bradley Lake. The diversion will increase the Bradley Lake Hydroelectric Project annual energy output by approximately 37,000 Megawatt hours (MWh). The Battle Creek project addition includes construction of three miles of road, a concrete diversion dam, and a pipe and canal to convey the water to Bradley Lake. The estimated cost of construction is approximately $47.2 million. Construction began in 2018 and is anticipated to be complete in the fall of 2020. Schedule 9 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Supplementary Organization and Project Information June 30, 2018 Unaudited - See accompanying independent auditors’ report. 57 Alaska Intertie Project The Alaska Intertie is a 170–mile transmission line designed for 345 kilovolts and operating at 138 kilovolts. It runs between Willow and Healy and interconnects the power systems in the Southcentral and Fairbanks areas. The Intertie reduces the number of black/brownouts throughout the system by enabling power to move either north or south when major system disturbances occur. The Alaska Intertie allows Railbelt utilities to implement informal power to lower the costs to rate paying consumers. It also allows Southcentral Alaska utilities to purchase power from Fairbanks during power shortages. AEA contracts with the following Participating Utilities for operations and maintenance: Golden Valley Electric Association (GVEA) in Fairbanks, and Southcentral Alaska utilities, Chugach Electric Association (CEA), Matanuska Electric Association (MEA), and the Municipality of Anchorage, d/b/a Municipal Light and Power (ML&P). The Alaska Intertie also enables GVEA to receive power generated by the Bradley Lake Project, which is some of the lowest priced power in the Railbelt region. It also allows Southcentral Alaska utilities to purchase power from Fairbanks during power shortages. The Alaska Intertie Agreement appointed the Intertie Management Committee (IMC) and AEA to oversee the activities of the Alaska Intertie project. AEA contracts with certain Participating Utilities for operations and maintenance. The IMC and AEA oversee the Alaska Intertie under the second amended and restated Intertie Agreement (Agreement) executed on March 11, 2014. The Agreement improves the reliability of the interconnected electrical systems, outlines how the transfer over the Intertie of electrical capacity and energy among the participants will occur, and establishes the IMC. The IMC’s primary responsibility is to provide governance, control, operation, maintenance, repair, and improvement to the Intertie, subject to AEA’s oversight. The IMC is comprised of a representative from AEA and each of the Participating Utilities. Summarized below are the State’s appropriations to upgrade and extend a portion of the Alaska Intertie (in thousands): Appropriation Description Year Amount Upgrade and extension of the Intertie (net of FY08 and FY12 reappropriations) FY02 $ 9,300 Repair of Static VAR compensators (SVC) and a tower foundation repair FY08 10,000 Substation upgrades and tower repairs FY12 5,000 Railbelt transmission plan FY12 1,000 ML&P was contracted to perform the repairs and upgrades. The tower repairs are now complete. Design and construction of the new static VAR compensators (SVC’s) is complete. AEA will continue to work with the Railbelt utilities to extend the intertie to Lake Lorraine. Susitna-Watana Hydroelectric Project Starting in 2010, AEA conducted preliminary planning and conceptual design for a large hydroelectric project to be built in the Railbelt Region. A number of hydroelectric generation alternatives were studied and AEA issued a Schedule 9 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Supplementary Organization and Project Information June 30, 2018 Unaudited - See accompanying independent auditors’ report. 58 Preliminary Decision Document selecting what is now known as the Susitna-Watana Hydroelectric Project as the primary large hydroelectric project for the State to pursue. The proposed Susitna-Watana Hydroelectric Project would be located approximately half-way between Anchorage and Fairbanks on the upper Susitna River. The Susitna-Watana dam would be located within a steep-sided valley of the Susitna River below Watana Creek at River Mile 184, above the mouth approximately 22 miles upstream of the Devil's Canyon rapids. The project would include a single roller compacted concrete dam with a height providing nominal crest elevation at 2,050 feet mean sea level with a 23,546 acre, 42.5-mile long reservoir with an average width of one to two miles. The height of the dam was determined to be 705 feet tall during the engineering feasibility studies. The powerhouse, dam, and related facilities would be linked by transmission lines connecting the project to the Alaska Intertie. The project would produce about 50% of the Railbelt's electrical demand or an annual average of 2,800,000 MWh. AEA filed a Notice of Intent and Pre-Application Document with the FERC to begin the licensing process for the project in December 2011. The FERC approved 58 environmental study plans in early 2013. In implementing the study plans, AEA worked closely with the Alaska Department of Fish and Game in conducting the fishery and wildlife studies. On June 3, 2014, AEA filed the Initial Study Report (ISR) for the project. The approximately 7,000 page ISR presents information collected from the first year of field studies. The Alaska Legislature has appropriated a total of $192,072,930 for AEA to plan, design, and obtain a FERC permit for the project. On December 26, 2014, the Governor of Alaska (Governor) issued Administrative Order 271 suspending discretionary spending on the project. On January 8, 2015, the FERC granted AEA’s request to hold the licensing process in abeyance. On July 6, 2015, the Governor’s office authorized AEA to proceed with the Integrated Licensing Process (ILP) using previously appropriated funds. AEA, in August 2015, requested the FERC’s permission to resume the licensing efforts. On August 4, 2016, the Governor issued a letter to FERC requesting to proceed with the ILP to the point of issuing an updated Study Plan Determination (SPD) to preserve the State of Alaska’s investment in the project. On August 26, 2016, FERC responded to the Governor’s letter stating that FERC will proceed with the ILP to complete the SPD. After issuing the SPD, the project will be put into abeyance as requested by the Governor. On June 22, 2017, FERC issued its Determination on the ISR for Susitna. Overall, it was very favorable to the State. However, since it was issued more than 100 days beyond the ILP schedule of March 10, 2017, there was insufficient time within FY17 to complete previously authorized scopes of work to complete a comprehensive analysis of the Determination and revise study reports as needed. AEA requested that a portion of the Susitna appropriation be extended for 90 days to complete this work and preserve the value of the State’s investment to the maximum extent possible. On July 18, 2017, the OMB issued a memo to AEA authorizing the continued spending on the project 90 days from June 30, 2017. AEA was granted concurrence and authorization to spend necessary funds in order to proceed to the point where the State’s investment, to date, is preserved and the project was put in abeyance. The work was completed and all remaining contracts were terminated September 30, 2017. The remaining funds, approximately $1,893,000, were returned to the State in FY19.