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HomeMy WebLinkAboutAEA Board Meeting Dec 1 2006EN /=ALASKA&} .xk *&Alaska Industrial DevelopmentandExportAuthority AGENDA Alaska Energy Authority Board of Directors December 1,2006 Anchorage and Juneau,Alaska Following AIDEA Board Meeting 1.CALL TO ORDER 2.BOARD OF DIRECTORS ROLL CALL 3.PUBLIC ROLL CALL 4.PUBLIC COMMENTS 5.PRIOR MINUTES --October 16,2006 6.OLD BUSINESS 7.NEW BUSINESS A.Financial Statements Presentation (Financial Statements available for review at the Executive Director's Office -after the meeting they will be posted on AEA's website) B.MEA Offer to Purchase Alaska Intertie 8.DIRECTOR COMMENTS A.Director's Status Report of AEA Programs and Projects B.Next meeting date 9.BOARD COMMENTS 10.ADJOURNMENT 813 West Northern Lights Boulevard *Anchorage,Alaska 99503-2495 www.aidea.org *907/269-3000 *FAX 907/269-3044 ®Toll Free (Alaska Only}888/300-8534 ©www.akenergyauthoritv.org Ww SAIDIEN ==ALASKA Alaska Industrial DevelopmentandExportAuthority ALASKA ENERGY AUTHORITY BOARD OF DIRECTORS December 1,2006 -2:55 p.m. Anchorage and Juneau,Alaska Teleconference 1.CALL TO ORDER Chairman Barry called the meeting of the Alaska Energy Authority to order on December 1,2006, at 2:55 p.m.A quorum was established. 2.BOARD OF DIRECTORS ROLL CALL Directors present in Anchorage:Mr.Mike Barry (Chairman/Public Member),Commissioner Bill Noll (Department of Commerce,Community &Economic Development),and Mr.John Winther (Public Member). Director present in Juneau:Deputy Commissioner Tom Boutin (Designee for Department of Revenue). 3.PUBLIC ROLL CALL Staff present in Anchorage:Ron Miller (Executive Director),Chris Anderson (Deputy Director- Credit &Business Development),Valorie Walker (Deputy Director-Finance),Sara Fisher-Goad (Deputy Director-Operations),Becky Gay (Project Manager),Linda MacMillan (Accountant), Brenda Applegate (Comptroller),Brenda J.M.Fuglestad (Admin Manager),and Jim Strandberg (Project Manager). Others attending:Brian Bjorkquist and Mike Mitchell (Department of Law),Doug Hall,Bob Price, and Lou Agi (ML&P),Jennie Trieu and Henry Dale (GVEA),Wayne Carmony,Jim Walker,and Don Zoerb (MEA),Kirk Wickersham and Sun Kim (Governor Palin's Transition Team),Theresa Obermeyer (Self),Isac Stein and Jeff Brown (Merrill Lynch),Ken Vassar (Birch Horton Bittner & Cherot),Charlie Kozak and Dave McCambridge (KPMG),Tim Bradner (Alaska Journal of Commerce),Jan Sieberts (Washington Capital Management),Don Edwards (Dorsey &Whitney), and Phil Steyer (Chugach Electric Association). 4.PUBLIC COMMENTS There were no public comments. 5.PRIOR MINUTES -October 16,2006 The October 16,2006 minutes were approved as presented. 813 West Northern Lights Boulevard *Anchorage,Alaska 99503-2495www.aidea.org *907/269-3000 *FAX 907/269-3044 ®Toll Free (Alaska Only)888/300-8534 *www.akenergyauthority.org AEA Board Meeting December 1,2006 Meeting Minutes Page 2 6.OLD BUSINESS There was no old business. 7.|NEWBUSINESS. 7A.Financial Statements Presentation Mr.McCambridge said KPMG LLP has an internal policy similar to what is required in public companies in that partners on engagements rotate off the engagements after they have served for a period of time so that there is a fresh look from the Partner level.This is the reason that he is here this year instead of Kathy Porterfield. Summarizing the letter to the Board,he said KPMG has issued an unqualified opinion on AEA's financial statements.There were no changes in accounting policies or significant transactions that needed to be reported separately.Included in the accounting estimates is $1.5 million in allowance for bad debt.Under significant audit adjustments,there was one past adjustment where a debt service account in the prior year classifications of net assets was shown and restricted that should have been reduced by the amount of outstanding accrued interest payable of $3.2 million.Those 2005 financial statements have not be restated to affect that as the adjustment had no impact on the statement of revenues expenses or changes in net assets. There were no disagreements with management over accounting questions or issues. In addition to the financial statements which contain KPMG's unqualified opinion,KPMG also conducted separate audits on AEA's federal financial assistance award grants as required under OMB Circular A133.KPMG conducted those audits and has issued unqualified opinions on the conduct of AEA's operation of the federal funds.There were no disagreements with management over accounting questions or issues concerning the A133 audit. 7B.Matanuska Electric Offer to Purchase Alaska Intertie A November 14,2006 letter from Lee Jordan,President,Matanuska Electric Association, requested a place on the Authority's December agenda to present a proposal to purchase the Alaska Intertie. Mr.Jim Walker,Senior Counsel for Matanuska Electric Association read into the record his December 1,2006 presentation (appended to this written record as Attachment A). Commissioner Noll asked that staff pursue the issue and bring back their thoughts and recommendations to the Board on how to move forward. Mr.Winther said before this takes place,we first need to decide if we want to sell,then we need to decide how we want to sell it.He had no objection to the proposal but there have not been a lot of discussions about the sale of the asset. Commissioner Boutin reiterated Mr.Winther's comments and also said that due diligence would require an analysis to see what is best for the Alaska Energy Authority and State of Alaska. Chairman Barry said that the Energy Task Force spent much time reviewing present practices and hoped for future practices within the railbelt utility system.A key of any potential sale of this asset would be how it fits into an overall railbelt energy grid and the management of that grid,as AEA Board Meeting December 1,2006 Meeting Minutes Page 3 there is no question that the Alaska Intertie is a vital link between the southern and northern part of the railbelt.The question is whether our duty under the statute that MEA presented is one of maximizing the value to the corporation or whether it is a much greater burden of doing our best to make the railbelt energy grid serve the people of Alaska as best it can. Chairman Barry indicated that the Board understood that MEA has proprietary reasons for keeping the details of their proposal confidential;however,it is important that the Alaska Energy Authority look at the actual details of how this would affect the grid.It was grievous that AEA had to go so far as to terminate the intertie agreement in order to focus attention on reparations on the intertie and forestall any potential disservice or lack of service to Alaskans.The Alaska Intertie is a public asset and therefore deserves public scrutiny as to how it is to be dealt with; repaired,maintained,or sold. Mr.Winther supported the Chairman's recommendation of continuing forward to see where the process leads.Trying to bring the whole thing together in four years has not worked;maybe this will be a way to get the issue taken care of. Commissioner Noll and Deputy Commissioner Boutin were also in agreement with the recommendation. Chairman Barry instructed staff to meet with MEA and obtain an understanding of their proposal.After this has been accomplished staff is to hold public hearings to allow the other railbelt utilities and the public to come forth with any thoughts or opinions. It was noted that staff would need to review whether MEA's proposal could be kept confidential once it has been presented to the Board for action.Mr.Jim Walker said MEA understands that at the time of action there will have to be public disclosure. Mr.Lou Agi,Municipal Light &Power,asked that the Board front end this process with their own deliberations without considering or discussing any of the matters that have been submitted in confidentiality by MEA.There is no need to get involved with handling confidential material in any respect,even if there is some sense that it would be later divulged,as once you have read the material those ideas will remain with you.He recommended not reviewing any confidential proposal from MEA at this time.Obviously,there are other utilities that are interested in the intertie. MEA is part of a joint action agency that it created either with Homer Electric through AEG&T or otherwise.This intertie,together with railbelt energy matters,has been in front of the legislature continually as well as in front of the Board of AEA.Under the joint action agency statute there is a process where the legislature will direct AEA to negotiate the sale,transfer,or acquisition with a JAA and then presumably name the agency or instruct that it be done on a competitive basis. This is a public asset and it cannot be better managed than through AEA's hands if it is to be managed at all. He suggested there may be a greater path of prudence in thinking these matters over.AEA has a specific statute which speaks to the sale of AEA assets -there are rival competitors in the railbelt scenario -maybe the process to sell or transfer the intertie asset should be led by the legislature and the Governor's office with input from AEA.Mr.Agi said that he is sensing that the Board of AEA is giving up entirely on managing the intertie.He indicated that in the course of the meetings that he attended,which led to the termination document,he recalled one time that the Chairman said that a principal source of the problem and failing to achieve unanimity 'was MEA's positions on a lot of the restructuring. AEA Board Meeting December 1,2006 Meeting Minutes Page 4 When the termination notice was issued,AEA indicated that they thought the problems could be solved fairly easily and,at a point,the Board directed AEA's engineer to work with the utilities. Nobody has ever said anything.In fact,you have had no negative comments in front of you by any of the utilities,at least none formally.You can infer that there was an effort to see where that would lead,but now the same agency,less than 30+days later,is saying insoluble,can't be handled,best thing is to get rid of it and bring $50 million into the treasury.He suggested that is not the path of wisdom or consistency and that there is also a sense of hubris to have heard senior council to MEA come forward,cite the event that precipitated the termination ,and say obviously it has to be managed bya utility and let us be your utility. Chairman Barry stated he did not hear the Board say they thought the Authority should accept the offer.The consensus of the Board is this is a genuine offer so they should have consideration.There is no predilection of accepting or rejecting the offer. We appreciate your comments about the confidentiality issue.This was not an offer that was solicited by the Authority and we are not going to try to push this quickly through the process. Our focus is on how we can make the intertie work better for all Alaskans.It is encouraging that there seems to be a willingness iterated to AEA from the utilities that they are willing to sit down and look at how the agreements can be adjusted to make them work better.No decisions are being made here today at this board meeting.We appreciate your comments and will make ample opportunity for everyone else to voice their opinions. Chairman Barry asked for clarification on Mr.Agi's comment that other utilities would be interested.He inquired as to whether ML&P would have an interest in either acquiring the intertie jointly with others or separately if the asset were made available.Mr.Agi stated this is part of the area group and one of its stated purposes in its agreement of establishing itself was that we would stand ready to accept and administer the intertie as best we could. Chairman Barry directed staff to learn more about MEA's offer and then hold public hearings to ascertain a process in which to move forward.He said staff should not abandon the path that we are currently on in working with the utilities to make changes to the existing agreements that would be amenable to everyone that would solve the intertie issues.Consider this another option that has presented itself. Mr.Winther asked if this meant that staff is going to work toward laying out the process to start negotiations with MEA or is this to decided if we want to sell it and,if so,then open up the process and ask for offers. Chairman Barry said the Board is not asking staff to commence negotiations with MEA.We are requesting that staff learn more about MEA's proposal and then hold public hearings to get input from anyone who is affected by this potentiality. We all understand that this has many nuances and probably needs to be addressed within the overall administration of the railbelt grid.That does not mean that we are going to brush aside a genuine offer that has come forward from one of the prominent utilities on the railbelt.We need to give it due consideration and we will.- Mr.Henri Dale,Golden Valley Electric Association,said AEA needs to evaluate what the best thing is for the State of Alaska.This intertie is very important for a large part of the economy of the state,it links the north and the south,the two biggest residential areas of the state and | would hope that you do your due diligence.Before you go into negotiations AEA needs to AEA Board Meeting December 1,2006 Meeting Minutes Page 5 decide what the best purpose is for everybody.You are going to need to evaluate the intertie in the terms of what your study sees as the future for the State of Alaska. 8A._Director's Status Report of AIDEA Programs and Projects Mr.Miller thanked the board for their work during the last four years. 8B.NEXT MEETING DATE The board will be polled for the next meeting date. 9.BOARD COMMENTS The Board thanked each other and staff for all of their hard work during their tenure. 10.ADJOURNMENT There being no objection and no further business of the Board,the meeting was adjourned at 3:35 p.m \ Ron Miller,SecretaryAlaskaEnergyAuthority [=ALASKA"os a GE)ENERGY AUTHORITY*Ww Alaska Industrial DevelopmenxportAuthor: { ALASKA ENERGY AUTHORITY BOARD OF DIRECTORS October 16,2006 @ 11:40 a.m. Anchorage and Juneau,Alaska Teleconference 1.CALL TO ORDER Chairman Barry called the meeting of the Alaska Energy Authority to order on October 16,2006,at 11:40 a.m.A quorum was established. 2.BOARD OF DIRECTORS ROLL CALL Directors present in Anchorage:Mr.Mike Barry (Chairman/Public Member),and Commissioner Bill Noll (Department of Commerce,Community &Economic Development). Director present in Juneau:Deputy Commissioner Tom Boutin (Designee for Department of Revenue),Commissioner Mike Barton (Department of Transportation and Public Facilities),and Mr.John Winther (Public Member). 3.PUBLIC ROLL CALL Staff present in Anchorage:Ronald W.Miller (Executive Director),Chris Anderson (Deputy Director-Credit &Business Development),Valorie Walker (Deputy Director-Finance),James Jensen (Assistant Project Manager),Martina Dabo (Project Manager),Peter Crimp (Project Manager),Sara Fisher-Goad (Financial Analyst),Mark Schimscheimer (Project Manager),Brenda J.M.Fuglestad (Admin Manager),and Jim Strandberg (Project Manager). Others attending:Brian Bjorkquist and Mike Mitchell (Department of Law),Lee Thibert (Chugach Electric),and Kim Floyd (Matanuska Electric Association). Others attending telephonically:Karl Reiche (AIDEA Project Development Manager). 4.PUBLIC COMMENTS | There were no public comments. 5.PRIOR MINUTES -August 18,2006 The August 18,2006 minutes were approved as presented. 6.OLD BUSINESS There was no old business. 7.NEW BUSINESS 813 West Northern Lights Boulevard *Anchorage,Alaska 99503-2495 www.aidea.org *907/269-3000 *FAX 907/269-3044 ®Toll Free (Alaska Only)888/300-8534 *www.akenergyauthority.org AEA Board Meeting October 16,2006 Meeting Minutes Page 2 7A.Resolution No.2006-05,A Resolution of the Alaska Energy Authority Relating to the Adoption of New Regulation Relating to Bulk Fuel Revolving Loan Fund. Mr.Miller stated Resolution No.2006-05 amends regulation 3 AAC 106.300 and 3 AAC 106.310. The regulations are amended to make them consistent with SLA 2006 Chapter 78 which relates to the maximum amount of loans from the Bulk Fuel Revolving Loan Fund that can be given to oneborrowerinafiscalyear. Staff has complied with statutory requirements by providing appropriate public notice of this proposed action.The public comment period ended at 4:30 p.m.on Thursday,September 21, 2006.No comments were received. Staff recommended approval of Resolution No.2006-05. Chairman Barry said the Board should advise staff on how this regulation change should be treated.He said there is an oil company owned by the Venezuelan Government that made available to native villages around the state of Alaska grants for fuel purchases.Some villages _ have not availed themselves of those grants because of the political nature of the dictator in Venezuela.He queried the Board as to their views of how someone who turned down the grant should be treated if they come in to borrow the money from AEA. Mr.Winther said he has been involved with the villages that declined the grants,which is also the area the APICDA CDQ group is in.When they turned it down,APICDA offered to pay half and my company and two others offered to pay the other half.He said if the Board is thinking of some participation by AIDEA in that form,he would be in favor of it. Mr.Bjorkquist said,under statutes he is not sure that whether a community participates or does not participate would be an appropriate basis for making a loan or a non-loan decision and suggested that part of this conversation be deferred to Assistant Attorney General Mike Mitchell who will look at the legal aspects as we follow up on this issue. Chairman Barry said his concern is that the revolving loan fund has only a finite amount of dollars and he does not believe this is a frivolous introduction.He does not know the correct answer so the Board would appreciate Mr.Mitchell investigating the legal part of the issue and staff researching how many,if any,are truly affected by this.He also asked the Board members to think about what,if any,policy decision is appropriate for us to make and what that policy should be.It is an issue that deserves our concern... Mr.Winther said options under the regulations we operate under should be laid out for the Board. Mr.Bjorkquist said he wanted to make clear that his expression is based on not knowing what the answer is as opposed to implying anything. Chairman Barry instructed staff come back to the Board with a list as to what the options are. MOTION:John Winther moved to approve Resolution No.2006-05.Seconded byCommissionerBarton.There being no discussion,the question was called.A roll call vote was taken and the motion passed with Messrs.Barry,Barton,Boutin,Noll,and Winther voting yea. AEA Board Meeting October 16,2006 Meeting Minutes Page 3 7B.Resolution No.2006-06,Resolution of the Alaska Energy Authority Relating to the Appointment of Various Officers of the Authority;and Related Matters Mr.Miller said Resolution No.2006-06 appoints Sara Fisher-Goad as Deputy Director-Operations and Assistant Secretary. Staff recommended approval of Resolution No.2006-06. MOTION:Deputy Commissioner Boutin moved to approve Resolution No.2006-06. Seconded by Commissioner Noll.There being no further discussion,the question was called.A roll call vote was taken and the motion passed with Messrs.Barry,Boutin,Barton, Noll,and Winther voting yea. 8A.Director'sStatusReport of AIDEA ProgramsandProjects Alaska Intertie Project Executive Session Mr.Bjorkquist stated that thereis proprietary information,status and strategy,and financial matters related to the Alaska Intertie Project.Under the open meetings act a body,such as the AIDEA Board,can go into executive session for matters the immediate knowledge of which would clearly have an adverse affect on the finances of AIDEA.The appropriate procedure for doing that is to have a Board member make a motion to go into executive session for that purpose and to vote on that motion. MOTION:Mr.Winther moved to go into executive session to discuss proprietary information,status and strategy,and financial matters related to the Alaska Intertie Project. Seconded by Commissioner Barton.There being no discussion,the question was called. A roll call vote was taken and the motion passed with Messrs.Barry,Boutin,Winther, Barton,and Noll voting yea. EXECUTIVE SESSION -11:48 a.m. The Board reconvened its regular meeting at 11:58 a.m. A quorum was established.Chairman Barry advised that the Board had not taken any formalactiononthemattersdiscussedwhileinExecutiveSession. 8B.NEXT MEETING DATE The board will be polled for the next meeting date. 9.BOARD COMMENTS There were no board member comments. 10.ADJOURNMENT AEA Board Meeting October 16,2006 Meeting Minutes Page 4 There being no objection and no further business of the Board,the meeting was adjourned at 11:59 a.m. Ron Miller,Secretary Alaska Energy Authority wwwk="AIDEN f=NASA*Ot Alaska Industrial DevelopmentWeAlasExportAuthority MEMORANDUM TO:Board of Directors Alaska Energy AuthorityFROM:Ron Miller |I Executive Director DATE:December 1,2006 SUBJECT:Financial Reports You have previously received the June 30,2006 Financial Statements and included with your packet is the Letter to the Board of Directors. Mr.David McCambridge,Partner with the Anchorage office of KPMG,LLP,will be in attendance at the meeting to discuss the reports and to answer any questions the Board members may have. 813 West Northern Lights Boulevard *Anchorage,Alaska 99503-2495 www.aidea.org ©907/269-3000 *FAX 907/269-3044 ®Toll Free (Alaska Only)888/300-8534 *www.akenergyauthority.org /=ALASKAqa)ENERGY AUTHORITYFRPearenttiDevelopment MEMORANDUM TO:Board of Directors Alaska Energy Authority FROM:Ron Miller Executive DATE:December 1,2006 SUBJECT:MEA Proposal Attached is a letter from the President of Matanuska Electric Association,Lee Jordan,requesting time on the Board's agenda to present a proposal to purchase the Alaska Intertie.The formal proposal will be given to the Board at the meeting on December 1,2006. 813 West Northern Lights Boulevard *Anchorage,Alaska 99503-2495 www.aidea.org *907/269-3000 *FAX 907/269-3044 ®Toll Free (Alaska Only)888/300-8534 *www.akenergyauthority.org hE A Matanuska ElectricSynergyWorks,Association,Inc. PO.Box 2929 Palmer,Alagka 99645-2929 Telephone:(907)745-3231 Fax;(907)761-9368 November 14,2006 Mr.Mike Barry,ChairmanAlaskaEnergyAuthority 813 West Northem Lights Boulevard Anchorage,Alaska 99503 Dear Mr.Barry:° Matanuska Electric Association,Inc.requests that we be placed on the agenda for the Alaska Energy Authority's Board of Directors meeting on December 1,2006 for the purpose of presenting a proposal to purchase the Alaska Intertie. Sincerely, cc:Ron Miller,Executive Director,Alaska Energy Authority December 1,2006 Presentation of Matanuska Electric Association to the Alaska Energy Authority Board of Directors Regarding Purchase of the Alaska Intertie by James L.Walker,Senior Counsel Directors,Mr.Miller,I want to thank you for scheduling MEA into your meeting agenda.For those of you who do not know me,I am Jim Walker,Senior Counsel for Matanuska Electric Association. Pursuant to Alaska Statute 44.83.080(7),and the Regulations at 3 AAC 105,this Authority has the power to sell any real or personal property that it owns or in which it otherwise has a legal interest.Any such sale must be found by this Board to further the corporate purposes of the Authority.Those purposes,are set out in Alaska Statute 44.83.070 as being to promote,develop, and advance the general prosperity and economic welfare of the people of this state by providing a means of financing and operating power projects.The Alaska Intertie is one of the power projects owned and operated by the Authority. The Alaska Intertie has been primarily utilized to make excess generation capacity in the southern Railbelt area available for consumers in the northern Railbelt area served by Golden Valley Electric Association.It has also facilitated contractual transfer of comparatively low cost energy from the Authority's Bradley Lake Hydroelectric Project to consumers in the GVEA service territory and provided comparatively high cost transmission service to MEA's Stevens Substation. The Alaska Intertie Agreement dated December 23,1985,was intended to be the vehicle facilitating achievement of the Authority's purposes with the Alaska Intertie.The Authority has recently given notice terminating the Alaska Intertie Agreement,effective October 16,2010. This notice was given after years of negotiations involving the participating utilities and Authority staff failed to produce a means for financing the long-term repair,rehabilitation,and improvements required for safe operation of the Alaska Intertie. The State owned portion of the Alaska Intertie mostly runs through MEA's service territory,and energy transfers over the Alaska Intertie are dependent upon use of more than 20 miles of MEA facilities.The Alaska Intertie needs the continuous attention to maintenance,repair, rehabilitation,and improvements that a regulated public utility can provide. MEA hereby offers to purchase the Alaska Intertie from the Authority pursuant to 3 AAC 105.400,for approximately $50 million,under terms and conditions mutually agreeable to the Authority and MEA that provide for Commission approved rates and the long-term viability of the Alaska Intertie for all connected entities providing electric utility services in Alaska.MEA has developed terms upon which negotiations leading to its purchase of the Alaska Intertie could be based.However,for competitive business reasons MEA desires to keep these terms confidential while negotiations are in progress. MEA is here today to specifically ask the Board to authorize its Executive Director to enter into confidential discussions regarding sale of the Alaska Intertie to MEA.The existing MEA proposal to AEA Board December 1,2006 Page |of 2 unsatisfactory contractual arrangement under which the Alaska Intertie is operated will expire in roughly 46 months.The sale of this asset to MEA would best fulfill the public policy requirements of the Authority with respect to the Alaska Intertie. If there are any general questions that you want to ask,we would be happy to answer them at this time.Thank you for your time and attention to this important issue. MEA proposal to AEA Board December 1,2006 Page 2 of 2 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Financial Statements and Schedules June 30,2006 and 2005 (With Independent Auditors'Report Thereon) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Table of Contents Management's Discussion and Analysis Independent Auditors”Report Balance Sheets Statements of Revenues,Expenses,and Changes in Net Assets Statements of Cash Flows Notes to Basic Financial Statements Schedules 1 Schedule of Bradley Lake Hydroelectric Project Trust Account Activities 2 Schedule of Projects -Balance Sheet 3 Schedule of Projects -Revenues,Expenses,and Changes in Net Assets Pages 33 34 35 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management's Discussion and Analysis June 30,2006 and 2005 Overview of the Financial Statements The Alaska Energy Authority's (AEA or Authority)operations are broken down into two major programs -the owned hydroelectric and intertie projects and the rural energy programs.Further information on AEA's programs can be found in note |to the fmancial statements. This financial report consists of three sections:management's discussion and analysis,basic financial statements, and supplementary schedules.AEA's operations are business type activities and are considered an enterprise fund.The Authority is a component unit of the State of Alaska (the State)and is discretely presented in the State's financial statements.The Authority's basic financial statements are the Balance Sheets;the Statements of Revenues,Expenses and Changes in Net Assets;the Statements of Cash Flows and the Notes to Basic Financial Statements. Basic Financial Statements The Balance Sheets report the Authority's assets,liabilities,and resulting net assets.The net assets are reported as invested in capital assets less debt,restricted and unrestricted.Restricted net assets are subject to external limits such as bond resolutions,legal agreements or statutes. The Statements of Revenues,Expenses,and Changes in Net Assets report the Authority's income,expenses,and resulting change in net assets during the periods reported. Both statements report on the accrual basis of accounting and economic resources measurement focus. The Statements of Cash Flows report the Authority's sources and uses of cash and change in cash balance resulting from the Authority's activities during the periods reported. The Notes to Basic Financial Statements provide additional information required to fully understand the amounts reported in the basic financial statements. Management's Discussion and Analysis This Section presents AEA management's analysis of the Authority's financial position and results of operations at and for the years ended June 30,2006 and 2005.This information is presented to help the reader focus on significant financial issues and provide additional information regarding the activities of the Authority.This information should be read in conjunction with the Independent Auditors'Report,the audited financial statements and accompanying notes. Financial Highlights AEA's assets exceeded its liabilities at June 30,2006 and 2005 by $415 million.Of the total net assets at June 30,2006,$138 million was invested in capital assets net of related debt,$44 million was restricted and $233 million was unrestricted.Of the total net assets at June 30,2005,$142 million was invested in capital assets net of related debt,$45 million was restricted and $227 million was unrestricted. 1 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management's Discussion and Analysis June 30,2006 and 2005 Financial Analysis Financial Position Total assets,total liabilities and total net assets at June 30,2006,2005,and 2004 follows (stated in thousands): 2006 2005 2004 Current assets $6,760 11,196 6,483 Capital assets 265,650 273,321 281,831 Other noncurrent and restricted assets 296,270 290,352 301,656 Total assets 568,680 574,869 589,970 Current liabilities 31,242 34,174 40,614 Noncurrent liabilities a 122,295 126,051 129,681 Total liabilities 153,537 160,225 170,295 Total net assets 415,143 414,644 419,675 Total liabilities and net assets $568,680 574,869 589,970 Current assets were $4.4 million lower at June 30,2006 compared to June 30,2005 and $4.7 million higher at June 30,2005 compared to June 30,2004.Components of the changes were (stated in millions): 2006 vs.2005 vs. 2005 2004 Department of Defense grant expended $- 1.7 Department of Energy construction grants final receipts in FY06 (0.9)- FEMA Grant received in FY05-no similar grant in FY06 (0.3)- Decrease in receivable from Denali Commission (2.4)- Increase in receivable from other grants -1.3 Decrease due to short term loan term change to long term (1.1)- Net increase due to loans originated, net of loan collections 0.3 1.7 $(4.4)4.7 Capital assets were $7.7 million lower at June 30,2006 compared to June 30,2005 and $8.5 million lower at June 30,2005 compared to June 30,2004 substantially due to depreciation of capital assets,partially offset by improvements on the Bradley Lake Project. 2 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management's Discussion and Analysis June 30,2006 and 2005 Other noncurrent and restricted assets were $5.9 million higher at June 30,2006 compared to June 30,2005 and $11.3 million lower at June 30,2005 compared to June 30,2004.Components of the changes were (stated in millions): 2006 vs.2005 vs. 2005 2004 Decrease in PCE Endowment Fund securities lending $(1.0)(3.5) Department of Defense grant expended -(1.7) Decrease in Bradley Fund due to increased project expenditure (2.0)- Increase in PCE program for year end supplemental appropriation 3.8 - Increase in PCE Endowment Fund fair value 3.4 1.8 Net increase in other program funds from investment income 0.6 Increase due to short term loan term changes to long term ll - Southeast Energy Fund grant expenditures -_-(7.9) $5.9 (11.3) Current liabilities were $2.9 million lower at June 30,2006 compared to June 30,2005 and $6.4 million lower at June 30,2005 compared to June 30,2004.Components of the changes were (stated in millions): 2006 vs.2005 vs. 2005 2004 Decrease in PCE Endowment Fund securities lending $(1.0)(3.5) Southeast Energy Fund grant payment expended -(5.4) Increase in short-term borrowings -0.2 Increased (decreased)budgeted revenues in excess of actual expenses on hydro and intertie projects (1.2)1.4 Increase (decrease)in other accrued expenditures (0.7)0.9 $(2.9)(6.4) The decreases in noncurrent liabilities between June 30,2006 and 2005 and between June 30,2005 and 2004 were caused by the decrease in the long-term portion of bonds payable at each year end;there have been no new borrowings. The decrease in net assets from June 30,2005 to June 30,2006 and between June 30,2004 to June 30,2005 resulted from the operating losses for those years offset by nonoperating investment income. 3 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management's Discussion and Analysis June 30,2006 and 2005 Operations Components of the Authority's operating revenues,operating expenses,nonoperating investment income and operating loss for the years ended June 30,2006 through 2004 follows (stated in thousands): 2006 2005 2004 Operating revenues: Federal grants $28,544 42,442 34,592 Revenue from operating plants 15,669 16,680 14,161 State of Alaska appropriations 12,192 2,952 9,530 Other 1,603 1,780 1,834 Total operating revenues 58,008 63,854 60,117 Operating expenses: Grants and projects 30,170 46,926 45,861 Power cost equalization grants 21,669 15,575 15,461 Depreciation 9,992 10,006 10,312 Interest expense 8,274 8,553 8,782 Plant operating 4,213 4,044 4,306 General and administrative 1,638 1,539 1,583 Provision for loan loss and bad debt expense (326)170 (30) Total operating expense 75,630 86,813 86,275 Operating loss (17,622)(22,959)(26,158) Nonoperating -investment income,net 18,121 17,928 22,746 Increase (decrease)in net assets $499 (5,031)(3,412) Operating revenues decreased $5.8 million during the year ended June 30,2006 compared to the prior year and were $3.7 million higher during the year ended June 30,2005 compared to the prior year.Components of the changes were (stated in millions): FY 2006-2005 FY 2005-2004 Net change Net change Increased (decreased)grant revenue from Denali commission $(11.0)6.6 Decreased grant revenue from Department of Energy (1.5)- Increased (decreased)revenue from other grantors (1.4)Ll Fluctiuations in Bradley Lake approved budget expenditures (1.0)2.0 Increased (decreased)revenue from State of Alaska for Power Cost Equlization program 8.7 (5.0) Increased (decreased)revenue from State of Alaska general fund capital appropriations 0.4 (1.0) $(5.8)3.7 4 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management's Discussion and Analysis June 30,2006 and 2005 Operating expenses decreased $11.2 million during the year ended June 30,2006 compared to the prior year and were $0.5 million higher during the year ended June 30,2005 compared to the prior year.Components of the changes were (stated in millions): FY 2006-2005 FY 2005-2004 Net change Net change Increased (decreased)grant and project expenses in active rural energy construction projects $(17.0)6.1 Increased PCE grant expenditures 6.0 - Decreased grant expenditures for Southeast Alaska intertie project -(5.0) Increased (decreased)Bradley Lake plant expenses 0.2 (0.3) Decreased other expenses (0.4)(0.3) $(11.2)0.5 Nonoperating investment income increased during the year ended in 2006 due to $2.1 million increase in interest income and realized gains offset by $1.0 million decrease in fair value during the time period. Nonoperating investment income increased during the year end ended 2005 substantially due to fair value gains in the year ended in 2005 on the PCE Endowment Fund investments.The PCE Endowment Fund is a managed long term fund intended to generate the income to fund the PCE program.The fund value fluctuates with market changes. Outlook Annual operation of the owned hydroelectric and intertie projects are per annual budgets approved by the utilities that use the assets and pursuant to bond resolutions and other agreements.Annual operation of the rural energy programs are per State of Alaska legislation,annual appropriations and federal grant awards. KPMG LLP Suite 600 701 West Eighth Avenue Anchorage,AK 99501 Independent Auditors'Report The Board of Directors Alaska Energy Authority: We have audited the accompanying balance sheets of the Alaska Energy Authority (a Component Unit of the State of Alaska)(Authority)as of June 30,2006 and 2005,and the related statements of revenues, expenses,and changes in net assets,and cash flows for the years then ended.These financial statements are the responsibility of the Authority's management.Our responsibility is to express an opinion on these basic financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the Authority's internal control over financial reporting. Accordingly,we express no such opinion.An audit also includes examining,on a test basis,evidence supporting the arnounts and disclosures in the financial statements,assessing the accounting principles used and the significant estimates made by management,as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinions. In our opinion,the financial statements referred to above present fairly,in all material respects,the financial position of the Authority as of June 30,2006 and 2005,and the changes in its financial position and its cash flows for the years then ended in conformity with U.S.generally accepted accounting principles. In accordance with Government Auditing Standards,we have also issued our report dated October 6,2006, with subsequent event note dated October 16,2006,on our consideration of the Authority's internal control over financial reporting and on our tests of its compliance with certain provisions of laws,regulations, contracts,and grant agreements and other matters.The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing,and not to provide an opinion on the internal control over financial reporting or on compliance.That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The Management's Discussion and Analysis on pages |through 5 are not a required part of the basic financial statements but is supplementary information required by U.S.generally accepted accounting principles.We have applied certain limited procedures,which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information.However,we did not audit the information and express no opinion on it. 6 (Continued) KPMG LLP.a U-S.limited liability partnership,is the U.S. member firrn of KPMG International,a Swiss cooperative. Rana Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The supplementary information included in schedules 1 to 3 is presented for the purpose of additional analysis and is not a required part of the basic financial statements.Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and,in our opinion,is fairly stated in all material respects in relation to the basic financial statements taken as a whole. KPHcs LEP October 6,2006,except as noted in note 1(b)dated October 16,2006 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Balance Sheets June 30,2006 and 2005 (Stated in thousands) Assets Current assets: Grants receivable $ Loans receivable (note 7) Operating revenue receivable Accrued interest receivable Total current assets Noncurrent assets: Restricted cash and investments (note 3) Cash and investments designated for specific purposes (note 3) Loans receivable,net of allowance (note 7) Capital assets (note 5) Less accumulated depreciation Capital assets,net Total noncurrent assets Total assets $ Liabilities and Net Assets Current liabilities: Due to State of Alaska $ Accounts payable Bonds payable -current portion (note 6) Accrued interest Total current liabilities Noncurrent liabilities: Bonds payable -noncurrent portion,net (note 6) Arbitrage interest payable (note 6) Other liabilities Total noncurrent liabilities Total liabilities Net assets: Invested in capital assets,net of related debt Restricted for debt service Restricted by agreements with external parties Unrestricted net assets Total net assets Commitments and contingencies (notes 8 and 10) Total liabilities and net assets $ See accompanying notes to basic financial statements. 2006 2005 2,952 6,581 1,937 2,745 553 554 1,318 1,316 6,760 11,196 22,323 22,025 251,394 247,146 22,553 21,181 437,445 435,124 (171,795)(161,803) 265,650 273,321 561,920 563,673 568,680 574,869 942 1,014 21,262 24,191 5,800 5,665 3,238 3,304 31,242 34,174 121,482 125,485 710 463 103 103 122,295 126,051 153,537 160,225 138,368 142,171 19,085 22,025 25,168 23,392 232,522 227,056 415,143 414,644 568,680 574,869 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Statements of Revenues,Expenses,and Changes in Net Assets Years ended June 30,2006 and 2005 (Stated in thousands) Operating revenues: Federal grants $ Revenue from operating plants State of Alaska appropriations Revenue from state agencies Interest on loans Other revenue Total operating revenues Operating expenses: Grants and projects Power cost equalization grants Depreciation Interest expense Plant operating General and administrative Provision for loan loss and bad debt expense Total operating expenses Operating loss Nonoperating -investment income,net Increase (decrease)in net assets Net assets -beginning Net assets -ending $ 2006 2005 28,544 42,442 15,669 16,680 12,192 2,952 651 913 905 827 AT 40 58,008 63,854 30,170 46,926 21,669 15,575 9,992 10,006 8,274 8,553 4,213 4,044 1,638 1,539 (326)170 75,630 86,813 (17,622)(22,959) 18,121 17,928 499 (5,031) 414,644 419,675 415,143 414,644 See accompanying notes to basic financial statements. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Statements of Cash Flows Years ended June 30,2006 and 2005 (Stated in thousands) 2006 2005 Cash flows from operating activities: Receipts from federal grants $32,174 39,626 Receipts from customers and users 14,011 18,606 Receipts from State of Alaska appropriations 11,745 3,278 Principal collected on loans 7,935 5,763 Receipts from state agencies 897 913 Interest collected on loans 1,014 598 Other operating receipts 84 40 Loans originated (8,163)(7,294) Payments to suppliers (10,795)(14,286) Payments to grantees (47,117)(59,190) Net cash (used)provided by operating activities 1,785 (11,946) Cash flows from noncapital and related financing activities: Net unremitted interest earned (retumed)on federal grant advances (20)18 Net unremitted interest earned (returned)on state appropriation advances 128 (6) Net receipt from (payments on)operating loans from AIDEA (121)181 Net cash (used)provided by noncapital and related financing activities (13)193 Cash flows from capital and related financing activities: Principal paid on bonds (5,665)(5,370) Interest paid on bonds (6,564)(6,756) Purchase of capital assets (2,321)(1,496) Net cash used by capital and related financing activities (14,550)(13,622) Cash flows from investing activities: Purchase of investments (53,840)(36,824) Proceeds from sales and maturities of investments 66,508 33,746 Interest received from investments 8,904 7,732 Net cash provided by investing activities 21,572 4,654 Net increase (decrease)in cash and cash equivalents 8,794 (20,721) Cash and cash equivalents at beginning of year 14,723 35,444 Cash and cash equivalents at end of year (note 3)$23,517 14,723 Reconciliation of change in net assets to net cash (used)provided by operating activities: Operating loss $(17,622)(22,959) Adjustments to reconcile operating loss to net cash provided by operating activities: Depreciation 9,992 10,006 Provision for loan loss and bad debt expense (326)170 Bond interest expense 8,274 8,553 Changes in assets and liabilities: Increase (decrease)in due to State of Alaska (199)326 (Increase)decrease in grants receivable 3,630 (2,816) Increase in loans receivable (228)(1,531) (Increase)decrease in interest receivable 109 (229) (Increase)decrease in operating revenue receivable (9)133 Decrease in operating accounts payable (1,836)(3,599) Net cash (used)provided by operating activities $1,785 (11,946) See accompanying notes to basic financial statements. 10 (1) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 Organization and Operations The Alaska Energy Authority (Authority or AEA)was created by the Alaska State Legislature in 1976. AEA is a public corporation and a component unit of the State of Alaska (State).AEA's mission is to promote,develop,and advance the general prosperity and economic welfare of Alaskans by providing a means to operate and maintain existing power projects that tap Alaska's natural resources to achieve the lowest reasonable consumer power costs. Throughout the 1980's,AEA worked to develop the State's energy resources as a key element in diversifying Alaska's economy.A number of large-scale projects were constructed;four of those projects were sold in 2002.Today,AEA's two hydroelectric projects have an installed capacity in excess of 90 megawatts,and the Alaska Intertie's 170 miles of transmission line link Interior Alaska with the cheaper energy available in the Southcentral portion of the State. Pursuant to statute,on August 12,1993,the board of directors of the Alaska Industrial Development and Export Authority (AIDEA),a public corporation and a political subdivision of the State,became the board of directors of AEA.Concurrently,the Executive Director of AIDEA was also appointed as Executive Director of AEA:Among other things,AIDEA provides personnel services for AEA.AEA continues to exist as a separate legal entity.The corporate structure and operating assets of AEA were retained but the ability to construct and acquire energy projects was eliminated.The intent of the legislation was that ongoing operation of the operating assets be assumed by the electric utility companies that use or purchase power from the assets with oversight responsibility retained by AEA;this has occurred to the extent possible.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. Pursuant to legislation effective July 1,1999,rural energy programs previously administered by the former Department of Community and Regional Affairs,Division of Energy,were transferred to AEA for administration,as part of a larger reorganization of state agencies.Five general energy programs comprising more than twenty smaller programs were moved to AEA.Rural energy programs were originally part of AEA prior to the reorganization that occurred in 1993. The following is a description of AEA's existing projects and programs: (a)Bradley Lake Hydroelectric Project The project has installed capability,under optimal conditions,of 126 megawatts and transmits its power to the State's main power grid via two parallel 20-mile transmission lines.The project,which cost in excess of $300 million,went into commercial operation in 1991.The project is now operated by Homer Electric Association under contract with AEA.Bradley Lake serves Alaska's Railbelt from Homer to Fairbanks as well as the Delta Junction area. 11 (Continued) (2) (b) (c) (d) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 Alaska Intertie Project The 170-mile,345-kilovolt transmission line interconnects the power distribution systems of Anchorage and Fairbanks.The Alaska Intertie allows Golden Valley Electric Association in Fairbanks to purchase electricity produced with lower cost energy,such as natural gas and hydroelectric,from the Anchorage and Kenai Peninsula utilities.The Alaska Intertie reduces the number of black/brownouts throughout the system.Operations and maintenance duties are overseen by the Intertie Operating Committee under the Alaska Intertie Agreement (Agreement). Under legislation effective July 1,2002,the State appropriated $20,300,000 to AEA to upgrade and extend a portion of the Alaska Intertie.During the year ended June 30,2004,AEA incurred $64,000 in costs for preliminary design work.No costs were incurred in 2006 or 2005. AEA management and utility members of the Intertie Operating Committee identified defects in the Agreement that AEA management believes threaten the long-term operational reliability and economic viability of the Alaska Intertie.The attempts to cure the identified defects were unsuccessful because amending the Agreement requires unanimous consent of each member of the Intertie Operating Committee,and at least one utility member objected to each proposed cure.As a first step to cure defects in the Agreement,AEA management on October 16,2006,issued contractually required notice that the Agreement will terminate in 48 months,on October 17,2010. AEA management anticipates that the necessary amendments to the Agreement can be implemented no later than the effective date of the termination of the existing Agreement,or earlier if Intertie Operating Committee members reach unanimous consent. Larsen Bay Hydroelectric Project The 475-kilowatt project went into commercial operation in 1991.In addition to producing electricity for this isolated Kodiak Island community,the project replaced the City of Larsen Bay's old water supply system and provides a better source of water with reduced maintenance and improved water quality.The City of Larsen Bay operates the project. Rural Energy Programs The rural energy programs of the Authority include Bulk Fuel Storage Upgrades,Rural Power System Upgrades,Power Cost Equalization,Alternative Energy,Utility Training,and Technical Assistance,two active loan programs funded from the Bulk Fuel Revolving Loan Fund and the Power Project Fund and one inactive loan program. Summary of Significant Accounting Policies (a)Basis of Accounting -Enterprise Fund Accounting The accounts of the Authority are organized as an Enterprise Fund.Accordingly,the financial activities of the Authority are reported using the economic resources measurement focus and the accrual basis of accounting,whereby revenues are recorded when earned and expenses are recorded when goods or services are received or the related liability is incurred. 12 (Continued) (b) (c) (d) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 GASB Statement No.20,Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting,provides two options for reporting proprietary fund activities (including component units using proprietary fund accounting).The Authority has elected to apply all applicable GASB pronouncements and all FASB Statements and Interpretations,Accounting Principles Board Opinions and Accounting Research Bulletins issued on or before November 30,1989,unless they conflict with or contradict GASB pronouncements. Operating Revenue and Expense The Authority considers all its revenues and expenses,except for investment income,to be part of its principal ongoing operations and therefore classifies these revenues and expenses as operating in the statement of revenues,expenses,and changes in net assets. Capital Assets Capital assets are stated at cost and depreciation is charged to operations by use of the straight-line method over their estimated useful lives.The estimated economic lives of the assets are as follows: Utility plant Life in years Intangible 30-50 Production 30-50 Transmission 20-40 General 5-30 The Authority recognizes impairment losses for long-lived assets whenever events or changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future cash flows associated with such assets. Cash and Investments All of AEA's cash and investments are restricted.For the purposes of the statement of cash flows, cash and cash equivalents consist of cash,short term commercial paper and money market funds. AEA's marketable securities are reported at fair value in the financial statements.Unrealized gains and losses are reported as components of the deficiency of revenues over expenses.Fair values are obtained from independent sources. Loans and Related Interest Income Loans are generally carried at amounts advanced less principal payments collected.Interest income is accrued as earned.Accrual of interest is discontinued whenever the payment of interest or principal is more than ninety days past due or when the loan terms are restructured.The Authority considers lending activities to be part of its principal operations and classifies it as operating in the statement of revenues,expenses,and changes in net assets.For purposes of the statement of cash flows,loans are treated as program loans. 13 (Continued) (e) (g) (h) (i) @) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 Allowance for Loan Losses The allowance for loan losses represents management's judgment as to the amount required to absorb potential losses in the loan portfolio.The factors used by management to determine the allowance required include historical loss experience,individual loan delinquencies,collateral values,economic conditions and other factors.Management's opinion is that the allowance is currently adequate to absorb known losses and inherent risks in the portfolio. Environmental Issues The Authority's policy relating to environmental issues is to record a liability when the likelihood of Authority responsibility for clean-up is probable and the costs are reasonably estimable.At June 30, 2006 and 2005,there were no environmental issues which met both of these criteria and, accordingly,no provision has been made in the accompanying financial statements for any potential liability which may result. Income Taxes The Internal Revenue Code provides that gross income for tax purposes does not include income accruing to a state or territory or any political subdivision thereof which is derived from the exercise of any essential governmental function or from any public utility.AEA is a political subdivision of the State performing an essential governmental function and is therefore exempt from State and federal income taxes. Appropriations and Grants The Authority recognizes grant revenue under the provisions of GASB Statement No.33, Accounting and Financial Reporting for Nonexchange Transactions,whereby revenue is recognized when all applicable eligibility requirements,including time requirements,are met. Segment Information The financial statements disclose all financial information required by the Authority's Bradley Lake bond indenture. Estimates In preparing the financial statements,management of the Authority is required to make estimates and assumptions that affect the reported amounts of assets and liabilities,and disclosures of contingent assets and liabilities as of the date of the balance sheet.These estimates impact revenue and expenses for the period.Actual results could differ from those estimates. 14 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 (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 herein,Fund means a separate account established by the State legislature and does not refer to a separate group of self balancing accounts as contemplated by accounting principles generally accepted in the United States of America). At June 30,2006 and 2005 the Authority's carrying amount of deposits (all of which were restricted)was $23,517,000 and $14,723,000,respectively.The total of all bank balances was $24,027,000 and $15,813,000,respectively. The restricted and designated cash and investments were held in trust accounts for the following activities as of June 30,2006 (stated in thousands): Cash and cash equivalents Investments Total Power Cost Equalization Endowment Fund =$5 194,752 194,757 Bradley Lake Hydroelectric Project -28,192 28,192 Rural Energy Loan Funds 13,390 7,451 20,841 Rural Energy Operations 1,404 18,311 19,715 Southeast Energy Fund 128 -128 Funds advanced from State and federal agencies 842 -_-842 Power Development Fund 1,988 -1,988 Power Cost Equalization and Rural Electric Capitalization Fund 4,730 1,494 6,224 Alaska Intertie Project 1,030 -1,030 Total cash and investments $23,517 250,200 273,717 15 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 The restricted and designated cash and investments were held in trust accounts for the following activities as of June 30,2005 (stated in thousands): Cash and cash equivalents Investments Total Power Cost Equalization Endowment Fund $7 192,337 192,344 Bradley Lake Hydroelectric Project 679 29,509 30,188 Rural Energy Loan Funds 5,528 14,341 19,869 Rural Energy Operations 1,145 18,261 19,406 Southeast Energy Fund 123 -123 Funds advanced from State and federal agencies 1,247 -1,247 Power Development Fund 2,052 -2,052 Power Cost Equalization and Rural Electric Capitalization Fund 2,434 -2,434 Alaska Intertie Project 1,508 -1,508 Total cash and investments $14,723 254,448 269,171 At June 30,2006 and 2005,amounts restricted for debt service totaled $22,323,000 and $22,025,000, respectively,for the Bradley Lake Hydroelectric Project. Investment Holdings Power Cost Equalization Fund --The Power Cost Equalization Endowment Fund (PCE Fund),created under Alaska Statute 42.45.070,is under the fiduciary authority of the State Department of Revenue, Treasury (Treasury).The purpose of the fund is to provide for a long term stable financing source for power cost equalization in order to provide affordable levels of electric utility costs in otherwise high-cost service areas in the state. State investments are managed in pools.PCE Fund assets are held in the State's Short-term and Broad Market Fixed Income Pools,managed by Treasury's investment officers,and the State's Domestic Equity account and International Equity Pool,managed by contracted external investment managers.A complete description of the investment policy for each pool is included in the State's CAFR (see Department of Revenue,Treasury Division,Policies and Procedures). Fixed income and international equity securities are valued each business day using prices obtained from a pricing service.The Domestic Equity account is valued each business day by the Trustee Committee in good faith and pursuant to procedures established by the Trustee.Securities expressed in terms of foreign currencies are translated into U.S.dollars at the prevailing exchange rates.Income in the fixed income pools and the International Equity Pool is allocated to pool participants daily on a pro rata basis.Domestic equity income is distributed quarterly. 16 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 At June 30,2006,AEA had the following cash and investments in the PCE Fund (stated in thousands): Cash Investments at fair value Short-term Broad market Securities fixed fixed lending Total Investment type income pool income pool Equity collateral investments Overnight sweep account $13 -_-_-_- Money market 318 -_-_-10,300 10,300 Commercial paper 637 ---- U.S.Treasury Bills -_3,420 -_--_-3,420 U.S.Treasury Notes -3,790 _-_-3,790 U.S.Government Agency Discount Notes -_1,016 -_-_-1,016 U.S.Government Agency _-7,043 _-_-7,043 Mortgage-backed 549 30,004 -_--_30,004 Other asset-backed 3,815 1,165 -_-1,165 Corporate bonds 1,974 14,672 --14,672 Yankee: Government _-357 --_357 Corporate 80 961 -_-_961 Domestic equity -_-85,143 _-85,143 International equity =__-35,158 -35,158 Total invested assets 7,386 62,428 120,301 10,300 193,029 Pool related net liabilities (5)(5,603)(50)-(5,653) Other pool ownership (7,376)7,376 --7,376 Net invested assets $5 64,201 120,251 10,300 194,752 17 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 At June 30,2005,AEA had the following cash and investments in the PCE Fund (stated in thousands): Cash Investments at fair value Short-term Broad market Securities fixed fixed lending Total Investment type income pool income pool Equity collateral investments Deposits $_-22 -22 Overnight sweep account 3 _-_-_- Money market _-_863 11,231 12,094 Commercial paper 194 _-_-_--_ U.S.Treasury Bills 142 -_-_--_-- U.S.Treasury Notes 123 4,099 _-4,099 U.S.Treasury Bonds -_4,485 --4,485 U.S.Treasury Strips _-915 _-_915 U.S.Government Agency Discount Notes 31 154 _--_154 U.S.Government Agency -_3,262 --3,262 Mortgage-backed 358 31,445 _--_31,445 Other asset-backed 1,005 2,208 --2,208 Corporate bonds 455 14,763 -_-14,763 Yankee: Government _-263 _-_263 Corporate 17 318 --318 Domestic equity --83,270 -83,270 International equity -_--33,490 -_-33,490 Total invested assets 2,328 61,912 117,645 11,231 190,788 Pool related net assets (liabilities)22 (976)182 _-(794) Other pool ownership (2,343)2,343 _-_-2,343 Net invested assets $7 63,279 117,827 11,231 192,337 Other AEA Cash and Investments -Bradley Lake Hydroelectric Project investments are substantially invested pursuant to investment agreements with JP Morgan Chase Bank that end the earlier of July 1, 2021 or the date of repayment of the Bradley Lake Power Revenue Bonds First and Second Series.All other AEA assets are managed by AIDEA staff for liquidity.There is no written investment policy; AIDEA staff manages AEA investments following AIDEA's internally managed investment policy for liquidity and minimal risk.The AEA managed portfolio consists of the following eligible securities: e Debt instruments issued or guaranteed by the U.S.government,its agencies and instrumentalities, and Government Sponsored Enterprises (GSEs);and °Money market funds and repurchase agreements collateralized by U.S.Treasury and agency securities. 18 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 At June 30,2006,AEA had the following cash and investments in its other funds (stated in thousands): Fair value Short-term Investment type fixed income Deposits $49 Money market 24,957 Mortgage-backed 25,762 Investment agreements 28,192 Total invested assets $78,960 At June 30,2005,AEA had the following cash and investments in its other funds (stated in thousands): Fair value Short-term Investment type fixed income Deposits $59 Money market 14,656 U.S.Government agency discount notes 19,721 Mortgage-backed 12,882 Investment agreements 29,509 Total invested assets $76,827 Interest Rate Risk -Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. Short-Term Fixed Income Pool -As a means of limiting its exposure to fair value losses arising from increasing interest rates,Treasury's investment policy limits individual fixed rate securities to fourteen months in maturity or fourteen months expected average life.Floating rate securities are limited to three years in maturity or three years expected average life.Treasury utilizes the actual maturity date for commercial paper and twelve month prepay speeds for other securities.At June 30,2006,the expected average life of individual fixed rate securities ranged from three days to seven months.At June 30,2005, the expected average life of individual fixed rate securities ranged from one day to ten months.At June 30, 2006 and 2005 the expected average life of floating rate securities ranged from less than one year to three years. Broad Market Fixed Income Pool -Through its investment policy,Treasury manages its exposure to fair value losses arising from increasing interest rates by limiting the effective duration of its Broad Market Fixed Income Pool to +20%of the Lehman Brothers Aggregate Bond Index.The effective duration for the Lehman Brothers Aggregate Bond Index at June 30,2006 and 2005,was 4.80 years and 4.16 years, respectively. 19 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 Investment Agreements -Bradley Lake Hydroelectric Project investments are invested pursuant to agreements with JP Morgan Chase Bank that guarantees annual interest earnings of 7.38%or 7.41%per annum until the earlier of July 1,2021 or the date of repayment of the Bradley Lake Power Revenue Bonds,First and Second Series.The investment contracts are collateralized. Under the Internal Revenue Code of 1986,certain earnings in excess of arbitrage yield on the Bradley Lake bonds must be rebated to the U.S.Treasury.The bulk of the Bradley Lake investments are subject to rebate. AEA Internally Managed Investments -There is no written policy for interest rate risk for AEA's internally managed investments,but AIDEA's policy is followed.The duration for the investments is 2 years or less. The maximum maturity of any issue shall be 3 years from the date of purchase. Duration -Duration is a measure of interest rate risk.It measures a security's sensitivity to a 100-basis point change in interest rates.Duration is a weighted average term-to-maturity of an investment's cash flows. Treasury uses industry-standard analytical software developed by The Yield Book Inc.to calculate effective duration.The software takes into account various possible future interest rates,historical and estimated prepayment rates,call options and other variable cash flows for purposes of the effective duration calculation.Duration for the AEA managed investments are as reported on Bloomberg. Treasury has no policy with regard to interest rate risk for the money market balance held in the International Equity Pool. At June 30,2006,the effective duration by investment type (not including the investment agreements)was as follows: Effective duration (in years) Treasury managed AEA managed Money market -0.25 USS.Treasury Notes 3.13 - U.S.Treasury Bonds 9.74 - U.S.Government agency 4.25 - Mortgage-backed 3.75 0.69 Other asset-backed 0.87 - Corporate bonds 4.99 - Yankees: Government 8.83 - Corporate 6.34 -_- Portfolio effective duration 3.96 0.46 20 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 At June 30,2005,the effective duration by investment type (not including the investment agreements)was as follows: Effective duration (in years) Treasury managed AEA managed Money market -0.25 U.S.Treasury Notes 3.91 - U.S.Treasury Bonds 10.39 - U.S.Treasury Strips 15.97 - U.S.Government agency 7.00 0.39 Mortgage-backed 2.41 1.76 Other asset-backed 1.31 - Corporate bonds 5.39 - Yankees: Government 6.50 - Corporate 9.86 - Portfolio effective duration 4.10 0.57 Credit Risk -Credit risk is the financial risk that an issuer or other counterparty to an investment will not fulfill its obligations and a loss will result. Treasury's investment policy has the following limitations with regard to credit risk:With the exception of the sweep account,Short-term Fixed Income Pool investments are limited to instruments with a long-term credit rating of at least A3 or equivalent and instruments with a short-term credit rating of at least Al or equivalent.For securities with long-term credit ratings,they may be purchased if the median rating of Standard &Poor's Corporation,Moody's and Fitch is A3 or equivalent.Asset-backed and nonagency mortgage securities may be purchased if only rated by one of the rating agencies mentioned above if they are rated AAA.Unexpected daily cash surpluses that arise in this pool are invested overnight in the custodian's repurchase agreement sweep account.Treasury does not have a policy to limit credit risk associated with the sweep account. Broad Market Fixed Income Pool investments are limited to securities with a long-term credit rating of at least BBB3 or equivalent and securities with a short-term credit rating of at least Al or equivalent.For securities with long-term credit ratings,they may be purchased if the median rating of Standard &Poor's Corporation,Moody's and Fitch is BBB3 or equivalent.Asset--backed and nonagency mortgage securities may be purchased if only rated by one of the rating agencies mentioned above if they are rated AAA. Treasury has no policy with regard to credit risk for the money market balance held in the International Equity Pool. There is no written policy with regard to credit risk for investments managed by AEA.Since AEA only invests in highly rated money markets and U.S.government and agency securities,and GSEs credit risk is minimal. 21 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 The Bradley Lake Hydroelectric Project investments are substantially invested in collateralized investment agreements,which minimizes credit risk. At June 30,2006,the Pools managed by Treasury and the investments managed by AEA consisted of investments with credit quality ratings issued by nationally recognized statistical rating organizations as follows (using Standard &Poor's Corporation rating scale). Short-term Broad market fixed income fixed income International AEA Investment type Rating'pool pool equity pool managed Money market AAA -%-%h -%30% Overnight sweep account Not Rated ---- Short-term investment account Not Rated 4 _-2 - Commercial paper A-l 9 ---_ U.S.Government agency discount notes AAA -2 -1 U.S.Government agency AAA _12 -- Mortgage-backed AAA -44 -- Mortgage-backed Not Rated 7 9 -- Mortgage-backed (Agency)AAA _-_-33 Other asset-backed AAA 48 2 -_- Other asset-backed A 3 -_-- Corporate bonds AAA 2 2 -_- Corporate bonds AA 15 4 -_- Corporate bonds A 9 11 -- Corporate bonds BBB _9 -- Yankees -corporate AAA 1 _--- Yankees -corporate AA 1 _---_ Yankees -corporate A -_1 --_ Yankees -corporate BBB -_1 -- No credit exposure 1 3 98 - Investment agreements _-_-36 100%100%100%100% 'Rating modifiers are not disclosed. 22 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 At June 30,2005,the Pools managed by Treasury and the investments managed by AEA consisted of investments with credit quality ratings issued by nationally recognized statistical rating organizations as follows (using Standard &Poor's Corporation rating scale): Short-term Broad marketfixedincomefixedincome International AEA Investment type Rating'pool pool equity pool managed Money market AAA -%-%3%19% Commercial paper A 8 -_-_-- U.S.Government agency discount notes Not Rated 1 --_ U.S.Government agency Not Rated _-6 -_- U.S.Government agency A -_--26 Mortgage-backed AAA 15 11 -_-_ Mortgage-backed (Agency)Not Rated _41 --_- Mortgage-backed (Agency)AAA __-_-17 Other asset-backed AAA 39 3 -_-_ Other asset-backed A 3 _--- Corporate bonds AAA 2 -_-- Corporate bonds AA 11 2 --_- Corporate bonds A 7 -- Corporate bonds BBB _-12 _-_- Yankees -corporate A 1 -_-_- No credit exposure 12 16 97 _ Investment agreements _-_-_-38 100%100%100%100% 'Rating modifiers are not disclosed. The Domestic Equity Pool managed by Treasury is an indexed account that is not rated. At June 30,2006 and 2005,the securities lending collateral was invested in a registered 2(a)-7 money market fund that was not rated (note 4). 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 30,2006,AEA's deposits managed by Treasury were uncollateralized and uninsured. With respect to AEA managed investments,amounts totaling approximately $23,463,000 at June 30,2006 and $14,600,000 at June 30,2005,are held in money market funds.The investment contracts are collateralized.All other investment securities are registered in AEA's name and are held by its custodian, the trust department of a commercial bank;therefore no custodial risk exists for these securities. 23 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 Foreign Currency Risk -The Commissioner of Revenue formally adopts asset allocation policies for AEA's PCE Fund at the beginning of each fiscal year which places policy limitations on the amount of international securities the PCE Fund is allowed to hold.The following policy was in place during fiscal years 2006 and 2005,and invested assets included the following holdings at June 30,2006 and 2005,for the PCE fund's investment in the International Equity Pool: Policy FY06 Actual FY05 Actual Power Cost Equlization Endowment Fund 17%4+5%19.03%19.08% At June 30,2006 and 2005,AEA's PCE Fund had exposure to foreign currency risk as follows (stated in thousands): FY06 Fair FY05 Fair Currency value value Deposits: Euro Currency $I - Japanese Yen 34 22 Swiss Frank 1 _ 36 22 Investment -international equity: Australian Dollar 228 - Euro Currency 14,227 14,044 Japanese Yen 6,432 7,391 Norwegian Krone 484 396 Pound Sterling 5,648 7,820 Singapore Dollar -384 Swedish Krona 297 _- Swiss Franc 3,185 3,455 30,501 33,490 Total $30,537 33,512 Concentration of Credit Risk -Treasury's policy with regard to concentration of credit risk is to prohibit the purchase of more than five percent of a pool's holdings in corporate bonds of any one company or affiliated group.Federal National Mortgage Association and Federal Home Loan Mortgage Corporation securities are not classified as corporate bonds.AEA has no written policy with respect to concentration of credit risk for its other investments. 24 (Continued) (4) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 At June 30,2006,AEA's investments included the following concentrations greater than 5% (dollar amounts stated in thousands): Issuer Amount Percent Federal National Mortgage Association $26,793 10% Federal Home Loan Mortgage Corporation 31,915 11 JP Morgan Chase Bank collateralized investment agreements 28,409 10 At June 30,2005,AEA's investments included the following concentrations greater than 5% (dollar amounts stated in thousands): Issuer Amount Percent Federal National Mortgage Association $26,793 10% JP Morgan Chase Bank collateralized investment agreements 29,509 11 Securities Lending A portion of the funds managed by Treasury are in the Department of Revenue's securities lending program.Alaska Statute 37.10.071 authorizes the Commissioner of Revenue to lend assets,under an agreement and for a fee,against deposited collateral of equivalent fair value.The Commissioner entered into an agreement with State Street Corporation (the Bank)to lend fixed income and equity securities.The Bank,acting as the Commissioner's agent under the agreement,transfers securities to broker agents or other entities for collateral in the form of cash or securities and simultaneously agrees to return the collateral for the same securities in the future., At June 30,2006 and 2005,the fair value of securities on loan allocable to the PCE Fund totaled $10,165,875 and $10,897,000,respectively.Associated expense for securities lending,$1,546,000 for fiscal year 2006 and $462,000 for fiscal year 2005,is included in net investment income. There is no limit to the amount that can be loaned and the Commissioner is able to sell securities on loan. International equity security loans are collateralized at not less than 105 percent of their fair value.Fixed income security loans are collateralized at not less than 102 percent of their fair value.Loaned securities and collateral is marked to market daily and collateral is received or delivered the following day to maintain collateral levels. Cash collateral is invested in a registered 2(a)-7 money market fund.Maturities of investments in the money market fund generally do not match the maturities of the loaned securities because the lending agreements are terminable at will.Collateral securities may be pledged or sold upon borrower default. Since the Commissioner does not have the ability to pledge or sell the collateral securities unless the borrower defaults,they are not recorded in the financial statements.Securities under loan,cash collateral and cash collateral payable are recorded in the financial statements at fair value.The Bank,PCE Fund and 25 (Continued) (5) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 the borrower receive a fee from earnings on invested collateral.The Bank and PCE Fund share a fee paid by the borrower for loans not collateralized with cash. There is limited credit risk associated with the lending transactions since the Commissioner is indemnified by the Bank against any loss resulting from counterparty failure or default on a loaned security or its related income distributions.The Bank further indemnifies against loss due to borrower rebates in excess of earnings on cash collateral.Indemnifications are subject to limitation relating to war,civil unrest or revolution,or beyond the reasonable control of the Bank. For the years ended June 30,2006 and 2005,there were no losses incurred as a result of securities lending transactions and there were no significant violations of legal or contractual provisions or failures by any borrowers to return loaned securities. Capital Assets Capital asset activity for the years ended June 30,2006 and 2005 was as follows (stated in thousands): Capital assets: Intangible Production Transmission General Total capital assets Less accumulated depreciation for: Intangible Production Transmission General Total accumulated depreciation Capital assets,net Balance at Balance at June 30,2005 Additions Deletions June 30,2006 14 --14 244,476 2,321 -246,797 185,600 --185,600 5,034 --5,034 435,124 2,321 -437,445 (3)--(3) (69,071)(5,032)-(74,103) (87,707)(4,954)-(92,661) (5,022)(6)-(5,028) (161,803)(9,992)-(171,795) 273,321 (7,671)-265,650 26 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 Balance at Balance at June 30,2004 Additions Deletions June 30,2005 Capital assets: Intangible $14 --14 Production 242,980 1,496 -244,476 Transmission 185,600 --185,600 General 5,034 --5,034 Total capital assets 433,628 1,496 -435,124 Less accumulated depreciation for: Intangible (3)--(3) Production (64,057)(5,014)-(69,071) Transmission (82,731)(4,976)-(87,707) General (5,006)(16)-(5,022) Total accumulated depreciation (151,797)(10,006)-_-(161,803) Capital assets,net $281,831 (8,510)-273,321 (6)Long-Term Debt Long-term debt activity for the years ended June 30,2006 and 2005 was as follows (stated in thousands): Balance Balance at June 30,at June 30,Due within 2005 Additions Deletions 2006 one year Bradley Lake Power Revenue Bonds: First Series (a)$9,910 -(3,270)6,640 3,270 Second Series (a)11,520 --_11,520 2,305 Refunding,Third Series (a)45,035 -(105)44,930 110 Refunding,Fourth Series (a)39,680 _(2,290)37,390 115 Refunding,Fifth Series (a)30,640 --_30,640 -_ Total bonds payable 136,785 -(5,665)131,120 5,800 Arbitrage interest payable (b)463 -247 710 - Less bond discount and deferred interest (5,635)-1,797 (3,838)-_ $131,613 -_(3,621)127,992 5,800 27 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 Balance Balance at June 30,at June 30,Due within 2004 Additions Deletions 2005 one year Bradley Lake Power Revenue Bonds: First Series (a)$9,910 --9,910 3,270 Second Series (a)11,520 --11,520 _ Refunding,Third Series (a)48,235 -_-(3,200)45,035 105 Refunding,Fourth Series (a)41,850 -(2,170)39,680 2,290 Refunding,Fifth Series (a)30,640 _--30,640 -_- Total bonds payable 142,155 -_(5,370)136,785 5,665 Arbitrage interest payable (b)373 241 (151)463 -_- Less bond discount and deferred interest (7,580)-_-1,945 (5,635)- $134,948 241 (3,576)131,613 5,665 The minimum payments related to all bonds for the years subsequent to June 30,2006 are as follows (stated in thousands): Principal Interest Total Year ending June 30: 2007 $5,800 6,470 12,270 2008 5,810 6,457 12,267 2009 5,820 6,344 12,164 2010 6,030 6,127 12,157 2011 6,255 5,897 12,152 2012-2016 37,170 23,641 60,811 2017-2021 52,055 10,659 62,714 2022 12,180 327 12,507 $131,120 65,922 197,042 (a)AEA issued the Power Revenue Bonds,First and Second Series (Bradley Lake Bonds),in September 1989 and August 1990,respectively,for the long term financing of the construction costs of the Bradley Lake Hydroelectric Project and refunded AEA's Variable Rate Demand Bonds which were issued in November 1985 to provide interim financing of the project.AEA issued the Power Revenue Refunding Bonds,Third and Fifth Series in April 1999 to refund a portion of the First Series Bonds and to provide costs of issuance.AEA issued the Power Revenue Refunding Bonds, Fourth Series in April 2000 to refund a portion of the Second Series Bonds and to provide costs of issuance.All of the revenues derived by AEA from the operation of the project and all moneys, securities and funds (except the excess earnings fund),including a capital reserve fund,held or set aside are pledged and assigned to secure the payment of principal,redemption premium,if any,and interest on the bonds.No other revenues of AEA are pledged as security for the payment of the bonds.AEA has covenanted to notify the State Legislature of any failure to maintain the capital 28 (Continued) (b) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 reserve fund at its required level.The bonds are further secured by bond insurance.AEA collects from each power purchaser a percentage share of annual project costs.The outstanding Bradley Lake Bonds mature annually each July 1 through the year 2021 with interest rates ranging from 5%to 6.25%. The arbitrage interest payable is due to the Internal Revenue Service for the excess of investment income on the proceeds of each series of AEA's tax exempt Bradley Lake bonds over the related interest expense in accordance with Section 148 of the Internal Revenue Code of 1986.The accumulated arbitrage interest payable amount is computed each year,and the amount for each series is first due after the end of the fifth bond year and every five years thereafter.AEA maintains a separate account for each series with the trustee and each year sets aside a sufficient amount to satisfy the liability. In addition,the Authority has participated in the following debt agreements: Other Debt -In 1982,AEA assumed $44,859,000 of 5%mortgage notes payable which require quarterly principal and interest payments to the Rural Utilities Service (RUS)in connection with the Solomon Gulch Hydroelectric Project.Concurrent with the assumption,AEA deposited with a trustee Treasury notes sufficient to satisfy and provide for timely repayment of all principal and interest due on the assumed RUS loans.Accordingly,the loans and related trust assets are not included in the financial statements of AEA.At June 30,2006,the unpaid principal balance of the notes was $21,262,000 and the trust assets had a fair value of $28,086,000. Conduit Financing -City and Borough of Sitka -Utility Revenue Refunding Bonds,Series 1997 and Utility Revenue Bonds,Series 1992 -In May 1992,AEA issued $56,890,000 of tax-exempt bonds that allowed the City and Borough of Sitka (Sitka)to refinance its 1979 municipal bonds,resulting in significant debt service savings to Sitka.In November 1997,AEA issued $22,080,000 of tax- exempt bonds to advance refund and defease $20,145,000 of the Series 1992 bonds (collectively with the Series 1992 bonds,the Sitka Bonds).The Sitka Bonds are not included in these financial statements.As of June 30,2006,the outstanding balance was $43,000,000. The Sitka Bonds are special obligations of AEA secured under a trust indenture by and between AEA and U.S.Bank National Association,as trustee.The Sitka Bonds are payable solely from the sources provided under the trust indenture.They are equally and ratably secured by a pledge and assignment of the municipal revenue bonds of Sitka held by AEA under the trust indenture,the obligation of Sitka to make payments under its loan agreement with AEA and the money and securities held under the trust indenture,including a capital reserve fund.AEA has covenanted to notify the State Legislature of any failure to maintain the capital reserve fund at its required level. The bonds are further secured by bond insurance. The Sitka Bonds do not constitute an indebtedness or other liability of the State,including AEA,and do not directly,indirectly or contingently obligate the State,including AEA,or any political subdivision thereof to levy any form of taxation for the payment of the bonds.Neither the full faith and credit nor the taxing power of the State,including AEA,or Sitka is pledged for the payment of the Sitka Bonds. 29 (Continued) (7) (8) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 Loans The Authority administers the Power Project Loan Program,the Rural Electrification Revolving Loan Program and the Bulk Fuel Revolving Loan Program.Loans outstanding at June 30,2006 and 2005 are classified as follows (dollar amounts stated in thousands): 2006 2005 No.of loans Amount No.of loans Amount Power Project Loan Program 39 §$23,743 47 $23,621 Rural Electrification Revolving Loan Program 4 835 4 909 Bulk Fuel Revolving Loan Program 34 1,441 39 1,232 77 26,019 90 25,762 Less allowance for loan losses (1,529)(1,836) $24,490 $23,926 Loans that are more than 90 days past due on which the accrual of interest has been discontinued amounted to $1,075,000 and $1,000,000 at June 30,2006 and 2005,respectively. An analysis of changes in the allowance for loan losses for the years ended June 30,2006 and 2005 follows (stated in thousands): 2006 2005 Balance at beginning of year $1,836 1,491 Recoveries 28 175 Provision for loan loss (335)170 Balance at end of year $1,529 1,836 Risk Management AEA is exposed to various risks of loss.AEA obtains coverage for its risks through the purchase of commercial insurance,participation in the State Risk Management Pool and the establishment of self- insurance plans. (a)General Liability -Watercraft and Aviation All risks are covered by the State insurance plan through an annual charge assessed by the State Division of Risk Management and payroll markup. 30 (Continued) (9) (b) (c) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 Property Alaska Intertie The utilities participating in the Alaska Intertie operating agreement retain the property risk associated with the Alaska Intertie. Bradley Lake and Larsen Bay Hydroelectric Projects The risks are covered by commercial insurance purchased through the State Division of Risk Management,and the self-insured retentions are the responsibility of the respective projects from operating funds. Boiler and Machinery These risks are covered by commercial insurance purchased through the State Division of Risk Management and a private carrier. Additionally,utilities benefiting from the use of the facilities owned by AEA participate in the responsibility for deductibles and self insured retentions under the terms of the respective agreements. Related Parties (a) (b) Alaska Industrial Development and Export Authority Pursuant to understandings and agreements between AIDEA and AEA,AIDEA provides administrative,treasury,personnel,legal,data processing,communications,and other services to AEA.During 2006 and 2005,AEA expensed $2,770,000 and $2,560,000,respectively,for such services.In addition,AEA has a borrowing arrangement with AIDEA to provide working capital funds.At June 30,2006 and 2005,AEA had $942,000 and $1,014,000 payable to AIDEA for services and borrowings. Alaska Intertie Operating Committee Effective May 1,1986,AEA entered into an agreement with utilities using the Alaska Intertie for wheeling of electrical power.Pursuant to the agreement,the Intertie Operating Committee (IOC)was established to manage the system.The IOC is comprised of a representative from AEA and each of the utilities.AEA is reimbursed for operation and maintenance costs on a monthly basis with an annual settlement to adjust the payments to actual costs.AEA management on October 16,2006, issued contractually required notice that the agreement will terminate in 48 months as a mechanism to implement cures to identified defects in the agreement (note 1(b)). 31 (Continued) (10) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2006 and 2005 (c)Bradley Lake Project Management Committee Effective December 7,1987,AEA entered into a power sales agreement with entities purchasing electric power produced by the Bradley Lake Hydroelectric Project.Pursuant to the agreement,a Project Management Committee (PMC)was formed.The PMC is comprised of a representative from AEA and each of the power purchasers.The participating power purchasers make monthly payments directly to the bond trustee based on their respective percentage share of the estimated annual project costs,including debt service and annual administrative fee to AEA. Commitments and Contingencies AEA,in the normal course of business,is involved in various claims and pending litigation.The State Department of Law manages all pending litigation of AEA,and any liability arising from the settlement of pending claims is a liability for which the Department of Law or AEA requests an appropriation from the Legislature to satisfy judgment in the event that the judgment exceeds available funds or the proceeds from applicable insurance policies.In the opinion of management,the disposition of current claims and pending litigation is not presently expected to have a material adverse effect on AEA's financial position. In the normal course of business,AEA also has various commitments,such as commitments for the extension of credit.At June 30,2006 and 2005,AEA had open loan commitments of $3,451,000 and $3,991,000,respectively.At June 30,2006,AEA held approximately $5,174,000 of investments in escrow under an agreement. 32 Balance at June 30,2005 Interest received Bond principal paid Bond interest paid Arbitrage interest paid Construction expenditures Operating revenue received Operating expenses paid Transfers between funds Balance at June 30,2006 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Schedule of Bradley Lake Hydroelectric Project Trust Account Activities Year ended June 30,2006 (Stated in thousands) Schedule 1 Debt Capital Renewal and Construction Excess Operating service reserve contingency unallocated earnings Revenue Operating reserve account account account account account account account account Total $8,968 12,834 5,996 331 222 525 651 661 30,188 546 614 370 11 -273 49 46 1,909 (5,665)_-__-___-_(5,665) (6,542)--_-_----(6,542) ___-_(13)-__(13) _-(1,983)(342)-_--_-_-_-(2,325) ----__-13,853 (528)_13,325 -__-_--_-_-_(2,685)_(2,685) 11,731 (614)(167)-242 (14,193)3,047 (46)_ $9,038 12,834 4,216 _-451 458 534 661 28,192 See accompanying independent auditors'report. 33 Current assets: Grants receivable Loans receivable Operating revenue receivable Accrued interest receivable Total current assets Noncurrent assets: Restricted cash and investments Designated for specific purposes Loans receivable,net of allowance Capital assets Less accumulated depreciation Capital assets,net Total noncurrent assets Total assets Liabilities and Net Assets Current liabilities: Due to State of Alaska Accounts payable Bonds payable -current portion Accrued interest Total current liabilities Noncurrent liabilities: Long-term debt,net of current portion: Bonds payable -noncurrent portion,net Arbitrage interest payable Other liabitities Total noncurrent liabilities Total liabilities Net assets: Investment in capital assets net of related debt Restricted for debt service Restricted by agreements with external parties Unrestricted net assets Total net assets Commitments and contingencies Total liabilities and net assets See accompanying independent auditors'report. Assets ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Schedule of Projects -Balance Sheet June 30,2006 (Stated in thousands) Schedule 2 Administration Bradley Lake Alaska Larsen Bay and Power Hydroelectric Intertie Hydroelectric Development Rural Energy Combined Project Project Project Fund Programs balance $--_(56)3,008 2,952 _-_-1,937 1,937 71 376 __106 553 1,014 ___304 1,318 1,085 376 _-(56)5,355 6,760 22,323 ____22,323 5,869 1,030 _2,830 241,665 251,394 _-___22,553 22,553 211,182 54,468 ___265,650 211,182 54,468 ___265,650 239,374 55,498 -_-2,830 264,218 561,920 $240,459 55,874 _2,774 269,573 568,680 $_-816 126 942 709 1,389 201 (214)19,177 21,262 5,800 _-_-5,800 3,238 ____3,238 9,747 1,389 201 602 19,303 31,242 121,482 ____121,482 710 -___710 103 _-_--103 122,295 -___-_122,295 132,042 1,389 201 602 19,303 153,537 83,900 54,468 _--138,368 19,085 __--_-19,085 5,432 17 __19,719 25,168 __QOL)2,172 230,551 232,522 108,417 54,485 (201)2,172 250,270 415,143 $240,459 55,874 _-2,774 269,573 568,680 34 Schedule 3 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Schedule of Projects -Revenues,Expenses,and Changes in Net Assets Year ended June 30,2006 (Stated in thousands) Administration Bradley Lake Alaska Larsen Bay and Power Hydroelectric Intertie Hydroelectric Development Rural Energy Combined Project Project Project Fund Programs balance Operating revenues: Federal grants $-_---28,544 28,544 Revenue from operating plants 14,448 1,220 1 _-_15,669 State of Alaska appropriations __-_-_12,192 12,192 Revenue from state agencies __-_-651 651 Interest on loans -_--__-_-905 905 Other revenue -_-_--_47 47 Total operating revenues 14,448 1,220 1 -42,339 $8,008 Operating expenses: Grants and projects -_-_-_-30,170 30,170 Power cost equalization grants ----21,669 21,669 Depreciation 6,612 3,380 ---9,992 Interest expense 8,274 ---_-8,274 Plant operating 3,010 1,157 46 --_-4,213 General and administrative 239 103 12 -1,284 1,638 Provision for loan loss and bad debt expense -_-9 -(335)(326) Total operating expenses 18,135 4,640 67 -_-$2,788 75,630 Operating loss (3,687)(3,420)(66)-(10,449)(17,622) Nonoperating: Investment income,net 1,704 40 -_-16,377 18,121 Decrease in net assets (1,983)(3,380)(66)_-5,928 499 Net assets -beginning 110,400 57,865 (135)2,172 244,342 414,644 Net assets -ending $108,417 54,485 (201)2,172 250,270 415,143 See accompanying independent auditors'report. 35