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HomeMy WebLinkAboutAEA Board Meeting Dec 7 2007[===>ALASKA qa)ENERGY AUTHORITYWePeeaepatitereme AGENDA Alaska Energy Authority Board of Directors December 7,2007,Anchorage,Alaska Immediately following the AIDEA Board Meeting 1.CALL TO ORDER 2.BOARD OF DIRECTORS ROLL CALL 3.PUBLIC ROLL CALL 4.PUBLIC COMMENTS 5.PRIOR MINUTES -October 26,2007 6.OLD BUSINESS 7.NEW BUSINESS A.AEA Financial Statements 8.DIRECTOR COMMENTS A.Director's Status Report of AEA Programs and Projects B.Next meeting date:February 14,2008 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.akenergyauthority.org NN-CoNMHo-MNJANUARY S M T W T F 2 3 4 7 8 9 10 dT 14 15 1617 18 22 23 24 2528293031 FEBRUARY M T WTE I 4 5 6 8ui13(4)1s 19 20 21 22 25 26 27 28 29 MARCH M T W T F 4 5 6 710Il12.13 14 18 19 20 212425262728, APRIL M T W T F 1 23 4789flojii)1415 16 If 18 21 22 23 24 25282930 MAY M TW TF 1 2 5 6 7 8 9 2 13 14 15 16 20 21 22 2327282930 JUNE M V F 2 T W T 3.4 6910i@p1617181920 23 24 25 26 27 S 5 12 19 26 WOAonmnNO-7 14 21 28 2008 State Calendar State Holidays: January 1 New Year's Day 21 Martin Luther King,Jr.'s Day February 18 Presidents'Day March 31 Seward's Day May 26 Memorial Day July 4 Independence Day September 1 Labor Day October 17 Alaska Day November 11 Veterans'Day 27 Thanksgiving Day December 25 Christmas Day ©)Warrant Distribution C)Holiday State calendar maintained by DOA-IT, Division of Administrative Services, Department of Administration. www.state.ak.us/admin 2008 AIDEA and AEA BOARD MEETINGS Thu.Feb 14,2008 CO Thu.Apr 10,2008Thu.June 12,2008 Thu.Aug 14,2008 «AntO ANNO TL...M.A.11 ANNO SM TWTES 1 2 3()5789108112 14 15 16 17 18 19 20 21 22 23 24 25 2628293031 AUGUST S M T W T F S 1 2 4 5 6 8 911412}BG 161819202f2223252627%28 29 30 SEPTEMBER M T W T F §S 4)2 3 4 5 689101112;13 15 16 17 18 19 202223242526:27 29 30 OCTOBER M T W TF S 1 23 467s(9jioi131415160718 20 21 22 23 24 252728293031 NOVEMBER M TWTES I 3 4 567 810(it)12 13!14 15 17 18 19 20 21 22242526(27)28!29 DECEMBER M T W T FS 1 2 3 4 5 689or13151617181920 22 23 24 @5)26 27293031 *oe AIDE ALASKAAIGeX{=qa)ENERGY AUTHORITY*x Alaska Industrial DevelopmentindExportAuthority ALASKA ENERGY AUTHORITY BOARD OF DIRECTORS December 7,2007 Anchorage,Alaska MEETING MINUTES Chairman Notti called the meeting of the Alaska Energy Authority to order on December 7,2007,at 11:06 a.m.A quorum was established. Hearing no objection,Item 7A was taken up at this time. 7.NEW BUSINESS 7A.-AEA Financial Statements Mr.David McCambridge,KPMG,reported that the Alaska Energy Authority (AEA)Letter to the Board of Directors identifies KPMG's responsibilities.KPMG issued an unqualified opinion on AEA's Financial Statements.He pointed out that under "Significant Transactions,”AEA received a substantial appropriation from the State of Alaska of $182.7 million for the PCE Endowment Fund. Under "Accounting Estimates,”AEA has an allowance for bad debts which was $1.2 million at June 30,2007.Reviewing underlying assumptions,KPMG feels that it is reasonable in relationship to the financial statements.There were no disagreements with AEA management and no consultations with other auditors.In addition to the unqualified opinion on the Financial Statements,one of AEA's indentures requires a bond compliance report and KPMG issued an opinion that AEA was in compliance with certain provisions relating to the bonds,as required by the indenture. KPMG issued unqualified opinions on AEA's Federal Financial Assistance Audits.AEA expended approximately $22.5 million dollars in Federal awards last year for a variety of projects.KPMG conducted these audits on behalf of the government and issued unqualified opinions.A significant part of the audit process for AEA is the Federal Single Audit.The audits are available to board members for review.There were no compliance findings. Commissioner von Scheben asked about the $182.7 million appropriation from the State of Alaska for the Power Cost Equalization (PCE)Endowment Fund. Mr.Miller explained that AEA administers the PCE Endowment Fund in conjunction with the Regulatory Commission of Alaska.The fund is invested by the Department of Revenue and is now over $300 million.The PCE Endowment Fund is used to pay down the cost of electricity in communities of less than 2,000. 'Mr.Bjorkquist stated that a fixed percentage of earnings (7%)are used annually for the program. In response to questions from the Board,Ms.Fisher-Goad added that Alaska Statute allows for 7%_of the Fund to be appropriated annually to the program based on a three-year monthly 813 West Northern Lights Boulevard *Anchorage,Alaska 99503-2495www.aidea.org *907/771-3000 ®FAX 907/771-3044 ®Toll Free (Alaska Only)888/300-8534 ©www.akenergyauthority.org AEA Board Meeting December 7,2007 Meeting Minutes Page 2 average market value.The PCE Endowment Fund is not a dedicated fund and the legislature has never appropriated beyond the 7%of monthly average market value.The sale of the Four Dam Pool was the significant appropriation to the PCE Endowment Fund beyond the initial constitutional budget reserve appropriation of $100 million. Mr.Kelsey asked if the 7%included inflation.Ms.Fisher-Goad replied that the 7%is based on a three-year monthly average market value which is more aggressive than other endowment funds.The Department of Revenue invests the Fund in a mix of equities. Commissioner von Scheben expressed concern that both Letters to the Board were similar in nature.He noted for the record that the statements:"...there's been no transactions entered into by the Authority during the year that were both significant and unusual,”"...we propose no adjustments to the Authority's accounting records;”and "...there were no disagreements with management on financial accounting”jumped out as a canned phrase;both documents have similar phrases. Mr.McCambridge replied that the Letter is boiler plate,but contains important things the profession has determined the board members should understand about the audit process. Even though they are repetitive and boiler plate,the point is well taken and it is significant. The remainder of the agenda was taken up in order. 3.PUBLIC ROLL CALL Directors present in Anchorage:Commissioner Emil Notti (Chairman/Department of Commerce, Community &Economic Development);Deputy Commissioner Brian Andrews (Designee for Department of Revenue);Commissioner Leo von Scheben (Department of Transportation and Public Facilities);and Mr.John Kelsey (Public Member).Mr.John Winther (Vice-Chair/Public Member)absent. Staff present in Anchorage:Ron Miller (Executive Director);Chris Anderson (Deputy Director- Credit);Brenda Applegate (AIDEA Controller);Sara Fisher-Goad (Deputy Director-Operations); Brenda Fuglestad (Administrative Manager);Mike Harper (Deputy Director-Rural Energy);James Hemsath (Deputy Director-Development);Karl Reiche (Projects Development Manager);Karsten Rodvik (Project Manager-External Affairs);Mark Schimsheimer (Project Manager);Sherrie M. Siverson (Administrative Assistant);James Strandberg (Project Manager);and Valorie Walker (Deputy Director-Finance). Others present:Brian Bjorkquist and Mike Mitchell (Department of Law);Tim Leach (MEA Ratepayers Alliance);Christine Vecchio (MEA Ratepayers Alliance);Charles Kozak and David McCambridge (KPMG). 4.PUBLIC COMMENTS Verbatim Ms.Christine Vecchio (member of the MEA Ratepayers Alliance):Thank you for the opportunity to comment."Il attended the REGA Technical Conference on November 26-27,2007 and was impressed with the caliber,breadth,and scope of the conference.As a ratepayer,|learned a AEA Board Meeting December 7,2007 Meeting Minutes Page 3 tremendous amount of the complexity of all things that happen when you turn on a light switch.|was impressed by the commitment and interest from the governor,utilities,government agencies, financial institutions,environmental groups,consumer groups,tribal groups.This speaks very clearly to the importance and critical timing happening world-wide and in Alaska. One of the presentations explained a very critical 100-second window in generating electricity andinthefirst2-3 seconds you know you have to make the energy work.|likened the REGA Study tothatfirst100-seconds portion,because what comes out of the study will affect long-term energy needs and implementation for actions that need to be taken.|stress an important aspect of the study that is the big factor which is the on-going public process involving stakeholders input.The consultant Black &Veatch outlined the study process and each critical stage includes stakeholder input.This,|think,is what will make what comes out of the study one of the things that will make ownership possible from the public,not just the technical people,or engineers,or the utilities,but it becomes a public-ownership process,so |am very grateful for that.And,the last thing |would like to say is,|know we have been talking with people in our Valley with other groups that we are linked with in the various conservation communities,groups who are concerned with energy in Alaska,and we feel that we can make the study come out and implement what the findings are because we cannot do "business as usual”any more.People are going to have to step out of their comfort zones and really commit to finding some answers and solutions for not just the Railbelt. This study will be kind of like the back bone of what we decide as a state for our future energy needs.Thank you very much and congratulations to the staff,to everyone who worked on that technical conference and is continuing to work on the study.” End Verbatim Commissioner Notti stated energy is an important subject and a priority of his,and this study is an important part of it. 5.PRIOR MINUTES -October 26,2007 The October 26,2007 minutes were approved as presented. 6.OLD BUSINESS Mr.Miller provided an update for the board on the Railbelt Electrical Grid Authority Technical Conference held on November 26-27,2007 at the Sheraton.The two-day conference was well attended with over 160 participants.Governor Palin gave the opening address and a comprehensive agenda and panel of speakers was followed by an extensive roundup session. The roundup session was open to public discussion on topics discussed during the conference. A consultant from Black &Veatch attended and will return to Anchorage for follow up meetings. Representatives from the railbelt utilities attended and as a result there will be a meeting of the General Managers next week in Anchorage.One of their discussion topics will be whether the utilities should create some type of unified system operation,generation transmission co-op,or maybe a joint action agency.The REGA conference was a great success due to staff's hardworkinbringingittogether. 7.NEW BUSINESS AEA Board Meeting December 7,2007 Meeting Minutes Page 4 Mr.Miller distributed copies of Resolution No.2007-02 appointing James Hemsath,Deputy Director-Development as an Assistant Secretary of the Authority. MOTION:Mr.Kelsey moved to approve Resolution No.2007-02.Seconded by Deputy Commissioner Andrews. Discussions ensued regarding time constraints for this resolution.No time constrains were noted for Resolution No.2007-02. MOTION:Mr.Kelsey moved to table Resolution No.2007-02.Seconded by Deputy Commissioner Andrews.There being no discussion,the question was called.A roll call vote was taken and the motion passed unanimously. 8.DIRECTOR COMMENTS 8A.Director's Status Report of AEA Programs and Projects There were no Director's comments. 8B.NEXT MEETING DATE The next meeting is scheduled for Thursday,February 14,2007. 9.BOARD COMMENTS At the request of Deputy Commissioner Andrews,Mr.Strandberg gave a brief update on the AK-BC Intertie Advisory Work Group Meeting that was held in Kake on October 29 and 30, 2007. He said there is an active advisory work group and the purpose of that work group is to provide input to the project manager so that AEA can administer the project in a fashion that best reflects the needs of the region.As a part of that process,the work group has met four times. The public meetings were designed so the group could meet with the people from each region. At the Craig meeting,the AK-BC Intertie Feasibility Study was discussed and the advisory group passed a resolution in support of the report.The consensus was that public meetings should be held in southern Southeast Alaska to include the people of Kake inasmuch as they are a unique community in need of an intertie project. Public comment was taken at the end of each agenda item.30-35 people from the Kake region attended and many offered comments.Representatives from a private power group interested in developing the Thomas Bay projects spoke and supported the concept of a Petersburg-to- Kake Intertie. As a result of the Kake public meeting,the advisory work group passed a resolution supporting a balanced approach in developing in-state interties;specifically the Petersburg-to-Kake Intertie in conjunction with development of an export intertie into Canada. Deputy Commissioner Andrews asked if the recent closure of mines in British Columbia was going to affect the Four Dam Pool. me Ay AEA Board Meeting December 7,2007 Meeting Minutes Page 5 Mr.Strandberg reported that he received a call from Mr.Rohan Soulsby,British Columbia Transmission Corporation (BCTC),indicating they were cognizant of developments with the Galore Creek Mine.BCTC plans to discuss the impact of the closure on their transmission project with the Ministry.AEA is waiting to hear about the approach they are going to take.The closure may reduce the potential for large-load support,but there are other reasons for the government to continue with development. Deputy Commissioner Andrews queried Valorie Walker about refinancing opportunities for Bradley Lake Bonds given today's low-interest rate environment. Ms.Walker reported that the majority of the bonds are not callable.She has spoken with a representative from Goldman Sachs and any refinancing would be initiated by the utilities making the payments on the bonds.Bonds were refunded in three separate bond issues in1999-2000.The bonds for the 3°and 4"series are not refundable.The 5"series, approximately $30,000,000,is refundable July 1,2009.Further discussions will ensue as the call date approaches and if it makes economic sense,they will be encouraged to refinance.Ms. Walker said she would follow up by contacting Goldman Sachs next week. Executive Session MOTION:Mr.Kelsey made a motion to go into Executive Session to discuss proposed draft legislation.Seconded by Commissioner von Scheben.There being no discussion, the question was called.Aroll call vote was taken and the motion passed unanimously. EXECUTIVE SESSION:11:53 am The Board reconvened its regular meeting at 12:32pm Roll call was taken and a quorum was established.Chair Notti advised that the Board had not taken any formal action on the matters discussed while in Executive Session. 10.ADJOURNMENT There being no objection and no further business of the Board,the meeting was adjourned at 12:35pm. SLho LadSécretary Alaska Energy Authority ALASKA ENERGY AUTHORITY BOARD OF DIRECTORS October 26,2007 10:30am Anchorage,Alaska MEETING MINUTES 1.CALL TO ORDER Chairman Notti called the meeting of the Alaska Energy Authority to order on October 26,2007, at 10:40 a.m.A quorum was established. 2.BOARD OF DIRECTORS ROLL CALL Directors present in Anchorage:Commissioner Emil Notti,Chairman (Department of Commerce, Community &Economic Development);Deputy Commissioner Brian Andrews (Designee for Department of Revenue);Commissioner Leo von Scheben (Department of Transportation &Public Facilities);and Mr.John Winther,Vice Chair (Public Member).Mr.John Kelsey (Public Member) was not present. 3.PUBLIC ROLL CALL Staff present in Anchorage:Ron Miller (Executive Director);Chris Anderson (Deputy Director- Credit &Business Development);Bruce Chertkow (Loan Officer);Sara Fisher-Goad (Deputy Director-Operations);Mike Harper (Deputy Director-Rural Energy);Sherrie M.Siverson (Admin Asst);Jim Strandberg (Project Manager);and Valorie Walker (Deputy Director-Finance). Others present:Brian Bjorkquist and Mike Mitchell (Department of Law);Chris Brechbuhler (Alaska Permanent Capital Management);Joe Everhart (Wells Fargo);MaryElla Kercher (Kron Associates Recorder);Patrick Lavin (Attorney,National Wildlife Federation);Jeff Pantages (Alaska Permanent Capital Management);Andy Petro (Wells Fargo);Jan Sieberts (Washington Capital); Christine Vecchio (MEA Ratepayers Alliance);and Bert Wagnon (Alaska Permanent Capital Management). Teleconference:Mike O'Leary (Callan and Associates,Inc.). Joined the meeting in progress:Leona Hakala (Loan Officer II);Danita Martin (Loan Servicing Supervisor);Mark Schimscheimer (Project Manager);and Charlie Cole (Attorney). 4.PUBLIC COMMENTS VERBATIM CHRISTINE VECCHIO:Good morning,my name is Christine Vecchio.|live in Palmer and!ama member of the MEA Ratepayers Alliance and |thank you very very much for having the opportunity to come and attend and make some comments.MEA Ratepayers Alliance is a newly founded AEA Board Meeting October 26,2007 Meeting Minutes Page 2 organization that we started in the Matanuska-Susitna Valley because we are faced with certain energy issues with the Matanuska Electrical Co-op. Our goal and our main intent is to focus on ways in providing information and education,advocacy for clean,affordable and responsible energy generation and transmission.|come to you today in support wholeheartedly of your study,your railbelt study.|first learned about the study through a newspaper article and then also participated in the hearing and public meeting over at the Regulatory Commission of Alaska,at which point |met Mr.Strandberg and got more information about the Alaska Energy Authority.Our group sees this very very critical need for statewide and regional planning and so we feel and I personally feel also,that this is a very very important study. We would like to do what we can.We are encouraging our co-op to participate in the study because we feel that Alaska as well as the United States and the World,we are all facing some very critical issues that have to deal with our environment,our health and what we are to do in the future and for future generations.So whatever we can do to support the study to provide you input from consumers,what we have learned on our own doing our own research,we would really wholeheartedly like to do.We are also writing to the governor and legislatures and people who | think need to know that this study is very important to us as consumers.So we hope that we can work in partnership with you and continue hearing about the project and doing what we can to support it.So again,thank you very much,please continue the study,bring in what you need to do to get it done and for us to work together in partnership,really,because |think this is an issue that goes across the board,no pun intended,for all of us here in Alaska.So thank you very much. CHAIRMAN NOTTI:Thank you for your comments.Any questions? COMMISSIONER von SCHEBEN:|have a question Mr.Chairman.You say clean,affordable energy.What is your groups'perception of that?What does that mean to you? CHRISTINE VECCHIO:For us,what it means is (1)that |think the issue that brought it out for us would be that we are dealing with the possibility of having a coal plant being built in our valley and all the research that we have done,we feel that for us clean and affordable would be to work for renewable energy.Affordable,|think what we would need to factor in,you know,a lot of times what I'm hearing from people is "what is this going to cost per kilowatt”bottom line things.And for us,|think,to factor in bottom line issues would also be,include "what would be the impact on health?”We know that there are certain things like mercury,CO2 emissions,heavy metals and then also you have things that would contribute to asthma,probably also with ecosystem impacts, those kinds of things we would like to be addressed in deciding what kind of energy generation happens for us minimally here in the region.We would like to see those considerations come in statewide.There is now research and some figures that have come up where they have factored in health costs,environmental impact costs into the cost of energy generation,so that for us is bottom line,that we factor in all those things and then see and compare what would be the actual, not only dollar and cents cost,but also impacting industry,impacting wildlife,health concerns, because one of the things that we are concerned about in the Valley is in the winter time we've got that inversion layer.So one concern we had was if we do have a coal-generating plant that keeps the emissions that are coming out staying put and so that for us is a major concern. COMMISSIONER von SCHEBEN:Well,renewable energy,what would that be? AEA Board Meeting October 26,2007 Meeting Minutes Page 3 CHRISTINE VECCHIO:We were thinking of -there's hydro as a possibility,there are several projects that are going on around the area,and then also wind,you've got tidal,geothermal,so right now,as far as we're concerned,we would like to see,|don't know if this falls within the purview of the study,|know the study is dealing with looking at generation and transmission and a possible utility operator,but for us,|think it,we really do need to look at what it would cost overall with all the different types of scenarios.So that's why |think for us the study is important because my understanding is that you will be looking at different types of scenarios,you know,and really just go and look and talk to different utilities and get public input. COMMISSIONER von SCHEBEN:Okay.I'm very interested in this aspect of energy as a big deal.When people come to us and they start limiting what we can use,then |kind of wonder what they are thinking about.And your points are well taken,tidal,wind,hydro,but a lot of times we get people that come to us and just pretty much limit us to nothing,there are no solutions,so at least you have an open mind as to the various areas. CHRISTINE VECCHIO:Well,|think because we are in such a critical time,because |think we've got a window of opportunity here,which is why |think the timing of the study is so important because whatever decisions are made about the kind of energy generation we do,it's going to affect us 30-40 years down the line.So thank you very much. COMMISSIONER von SCHEBEN:Thank you. RON MILLER:Mr.Chairman,for the Board's information,this Railbelt Electrical Grid Authority Study,we have identified a consultant and we will be working on a contract and issuing a notice of intent to award in the next few days.We do have a conference scheduled for here in Anchorage on November 26 &27,2007 and we'll be looking at all potential fuel sources for the railbelt.Mr. Pat Lavin with the National Wildlife Federation has put together what is titled "A Balanced Energy, Plan for Alaska's Railbelt”and there is an abstract of that that the Board has and copies out for the public as well. PAT LAVIN:Thanks Ron.Thanks for the opportunity to comment.I'm Pat Lavin.I'm at the National Wildlife Federation office here in Anchorage. Briefly,just a little bit about us and what brings me before you on a topic of energy matters that National Wildlife Federation on the national scale has identified global warming as a top priority and so efforts on that take a lot of forms and in some of the field offices including ours there's work on clean energy and on transition to bringing on renewable energy,energy efficiency to the extent practicable and that was really the premise behind the balanced energy plan that Ron just mentioned.I'll just say that it is still in draft form,but Ron's been kind enough to suggest that | come give you a heads up about that and provide a little bit of information about it for your packetandatasubsequentmeeting,maybe the next one,or the one after that,be able to get you a public discussion draft that we'll be sharing with a lot of audiences and get into it with a little more detail, but two things for today.|wanted to provide a heads up about that and the second was to talk a little bit about the Railbelt Energy Grid Authority project as well.On the latter,the notion of some kind of regional authority on the railbelt has been around a long time and also emerges from the preliminary drafts that |have of our own balanced energy plan that that's a worthy topic to pursue. There is a lot of interest,|think,on the railbelt changing the status quo.Ms.Vecchio was just indicating that out in the Valley is a concept that resonates there and |guess my pitch,there is a AEA Board Meeting October 26,2007 Meeting Minutes Page 4 two-day conference happening in about a month to sort of kick that off at least formally and at this point,to the best of my knowledge,there is no formal or clear mechanism for stakeholder participation or input into that process and |think that is at least part of the thinking about it.You know the conference is two days,it represents a substantial time commitment for someone of thepublicinordertoattendso|think if there is a clear mechanism in place that that sort of stakeholder participation will be a formal part or at least a clearer part of the proceeding and folks wouldn't just be coming and listening for two days or not getting to a point where their input really is considered, then participation is likely to be less.|would make a pitch for that and (double you up)definitelyparticipateinthat.|feel like |may have skipped some talking points on the balanced energy plan but you've got a little bit of information about it,so maybe |can stop there and just take any questions about either. RON MILLER:Mr.Chairman,if |could add,in the scope of work that we have set for the consultant there will be public meetings to take input,there will be an advisory group formed in the railbelt of stakeholders and at the conference we will have two days.The final session will be a round table discussion of experts and with the public having the opportunity to provide comments and engage those experts and pose questions to those experts about the railbelt electrical grid. How it should be managed,regulated,what fuel sources and we'll have opportunity again for people to comment.We do have a session scheduled for future fuel sources so people can be given overviews of all the plans in the railbelt for future generation and the types of fuels that will be used. To follow,AEA has in the past done regular updates on our alternative energy and energy efficiency programs and we just completed the most recent update.This will be posted on the AEA website,but |do have printed copies for the Board.It takes a look at all the alternative energy and energy efficiency programs in which we are involved.It has the various project managers and program managers giving their overview of what we are doing and where we are with various "projects:wind,hydro,geothermal,ocean and river energy,end-use efficiency and biomass and also diesel efficiency and heat recovery.In addition to this we are putting together finishing touches on a geothermal plan.We have been working throughout the summer and early fall on that and we'll get it to the Board first and then out to the public.We have identified 14 priority projects that we should be looking at in conjunction with federal entities and private and other state entities. COMMISSIONER NOTTI:Thank you.In order to comply with the opens meetings,|have to report that |had scheduled two separate board members and we ended up at the same table having coffee this morning and we talked about background information on something for Executive Session and then about the Ketchikan Dock loan,but no discussion on trying to arrive at any decisions,just for background information. BRIAN BJORKQUIST:Mr.Chairman,that is for the other board meeting,the AIDEA board meeting,as opposed to this board meeting,the Alaska Energy Authority.|believe you mentioned that there was no conversation about matters on the Alaska Energy Authority. COMMISSIONER NOTTI:That's right. BRIAN BJORKQUIST:So you will have to make that disclosure again at the AIDEA board meeting.!'ll speak about the Open Meetings Act at that point. AEA Board Meeting October 26,2007 Meeting Minutes Page 5 COMMISSIONER NOTTI:Yeah,|tend to forget that they are two separate entities.Okay,prior minutes? 5.PRIOR MINUTES -August 23,2007 The August 23,2007 minutes were approved as presented. 6.OLD BUSINESS Mr.Miller updated the Board with regard to the Railbelt Electric Grid Authority Study.He said staff will notify the Board as soon as we have concluded an agreement with the consultant identified.We do have to issue a Notice of Intent to Award then allow an appeal period under State Procurement Law. Staff has also met with representatives from the Railbelt Utilities to discuss the Alaska Intertie Agreement.We had sent notice last year that it was our intent to terminate that Agreement within 48 months because the way the agreement is written now,there are problems with addressing operation and maintenance,there is no R&R fund,and there are problems with the budgetary process.It is an agreement that tries to do too much in one document and so we had a very good meeting with the representatives of the Railbelt Utilities.We do have a work plan to go forward.We have a meeting scheduled for January 24,2008 and so we will be pursuing a lot of work on the railbelt in a parallel path in addition to the REGA Study.We also have the Build-Around Project going on where we have contracted with Municipal Light &Power (ML&P) to be essentially the general contractor for that project.They are working through their initial steps of that agreement now.We were assured by ML&P representatives yesterday that they are going forward with that project. Mr.Bjorkquist clarified that the date of the meeting has been moved from January 24,2008 to February 1,2008. Commissioner von Scheben requested staff send him information for the Governor.He said she is very interested in a statewide energy plan for this Railbelt.He requested staff send a couple of paragraphs as to what the plan is and the status and goals are.|!would like this information to come through me to the Governor so |can let her know what is going on,at least with the Railbelt.Mr.Miller said staff would comply with this request. ) Deputy Commissioner Andrews requested that staff give some background information to the Board as to what is needed from a financing standpoint for the Railbelt. Mr.Miller said we are focusing on financing infrastructure in the railbelt at the conference and the consultant will be looking at that as well.We've heard numbers from the utilities saying that a billion dollars will be needed over the next 10-20 years for generation and transmission and new infrastructure and improvements.|don't know if they have sat down and assigned values to particular projects,but we will dig that out. AEA Board Meeting October 26,2007 Meeting Minutes Page 6 We've provided financing scenarios for the railbelt utilities in conjunction with the improvements needed for the Alaska Intertie.That's a much smaller amount and we'll dig around and see what we can find. Commissioner von Scheben said this is a huge elephant and I'm trying to take a bite out at a time and |think the railbelt is a good one,but |don't know if the Governor knows the plan that AEA is putting together.|don't know if that's something we might want to outline.Has she ever been presented an energy plan that we're looking at or working on? Mr.Miller said we have given briefing documents to Special Assistants and to the Chief of Staff on energy issues.We've recapped for the Administration what the Legislature's Energy Policy Task Force came out with,and provided copies of AEA's Rural Energy Plan that we put together in 2004.|think on several occasions we've provided that information but have not had a direct meeting with the Governor.Commissioner von Scheben stated that he will talk with Mr. Miller after the meeting. Commissioner von Scheben said he has seen the statistics and we all have seen them "out of gas in 2012.”So everybody's starting to wonder about what's that mean,are we going to be importing gas that's from other countries?It's a big deal and the price of oil and everybody's hearing it and we talk about an energy plan for Alaska.Alaska's got so many sources of energy,|mean,geothermal,and tidal and wind,etc.but to get them kicked off within a reasonable time frame it's concerning.Commissioner Notti stated that this is a worthy discussion as this agency is expected to take the lead. Commissioner von Scheben said the heat is on and |listened to Mayor Begich talk about the same thing.Anchorage is putting together an energy plan,right,have you heard that?And I'm wondering,various agencies are starting to put their plans together and it should be a statewide, like you're alluding to and talking about.-So,everybody's talking about it now and it seems like people are starting to go out in various directions and it seems a focal point would be statewide, which is us and |think that is very important., 7.NEW BUSINESS Mr.Miller informed the Board that staff has a session scheduled for next week in Kake that is in relation to the Alaska-BC Intertie Study.The Legislature a couple of years ago made $3.2 million dollars available to study the possibility of connecting Southeast Alaska to the British Columbia grid for the potential of exporting hydro power from Southeast Alaska.That study has been completed,and there is money left over and there is interest in re-appropriating that money to devote it to the Petersburg to Kake Intertie.That is one of the purposes of the meeting next week in Kake is for AEA representatives,members of the AK-BC Intertie Advisory Group and Stakeholders in Southeast to discuss this issue._ Mr.Winther asked if any part of this meeting include any discussion on that proposed Thomas Bay hydro-project that Kake is thinking about getting involved in? Mr.Miller deferred to Jim Strandberg as the Project Manager for the Study to give details on whether that will be a topic. AEA Board Meeting October 26,2007 Meeting Minutes Page 7 Mr.Strandberg said there is an agenda and on the agenda is the export portion of the project as well as the Kake-Petersburg Intertie.Basically the project can be thought of as an export intertie portion and then an in-state build-out portion.My expectations from the conversations lve been having are that there will be representatives from various interests that want to privately develop the Thomas Bay projects at the meeting.So |would suspect that that would be a fairly active discussion. Mr.Winther said it appears there have been two proposals:Cascade LLC and Whatcom County.Mr.Chairman,|would like to attend that meeting because it is a very hot button issue up in Petersburg.If |am able to make it,|would like to go.Commissioner Notti indicated that would be fine. Mr.Strandberg stated the study on the BC hookup to the Southeast has been completed.It is favorable,but with caveats.The difficulty is in determining exactly what the future energy markets will do.The best advice |can give you is,you may or may not come up with this conclusion when you view the study,there is a significant upside,but it's pretty hard to go much beyond where we've gone as far as providing any more surety and feasibility. Mr.Miller indicated that the study has been posted on the AEA website. Mr.Strandberg said the meeting is structured to be an open public meeting.Of course AEA is funding the travel and the per diem for the work group members.They are a,I'll call it an eclectic group of stakeholders and we have a definite format and a definite agenda.The work group members will deliberate and basically the output of the meeting is going to be recommendations to AEA on how to proceed with the project.At the end of each agenda item we've provided for public input and while we're not transcribing the meeting,we will have someone taking notes and this has been the structure of the project.If you look on the web page we've had |think three other meetings with that exact same format and it's been pretty successful. We have evolving actions in Canada where the Canadians have just decided to construct a $300 million dollar backbone transmission line that will bring network access to within 60 miles of the Alaska border.The Business Development Manager for BCTC,the Canadian Transmission Company,will be there to brief us on that very new development and at that time | expect we'll be talking schedule. Dave Carlson is on the Advisory Group.In addition,|might mention for Commissioner von Scheben,Mr.Hawes from your Southeast Group is going to be there with your DOT road alignments and one of the things we are going to do is get the elbow grease out and take a look at the forest service road alignments that are coming over to DOT and seeing if we can align the Kake to Petersburg Transmission Line to achieve cost efficiencies.So it will be a definite work meeting. We have $2.6 million left out of $3.2.We spent $511,000 to date on the study.|thought it was a decent study. AEA Board Meeting October 26,2007 Meeting Minutes Page 8 8.DIRECTOR COMMENTS 8A.Director's Status Report of AEA Programs and Projects There were no directors comments. 8B.Next meeting date. The next meeting is scheduled for Thursday,December 13,2007.If anyone has any changes they can give those to Sherrie and or Brenda.Brenda will be back by mid-November. 9.BOARD COMMENTS Deputy Commissioner Andrews requested that on December 13,the Board receive a full report on the AK-BC Intertie story.It may require an extra hour at the meeting,but |would like to hear the full story. 10.ADJOURNMENT There being no objection and no further business of the Board,the meeting was adjourned at 11:15am. Ron Miller,Secretary Alaska Energy Authority /=ALASKA=)ENERGY AUTHORITY*Alaska industrial rtp opmentandExportAuthori MEMORANDUM TO:Board of Directors Alaska Energy,Authority FROM:Ron Miller Executive Difector DATE:December 7,2007 SUBJECT:Financial Reports Included with your packet are the June 30,2007 Financial Statements and 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 may have. 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 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Financial Statements and Schedules June 30,2007 and 2006 (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 33 34 35 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management's Discussion and Analysis June 30,2007 and 2006 Overview of the Financial Statements The Alaska Energy Authority's (AEA or Authority)operations fall within two major programs -the AEA owned hydroelectric and intertie projects and the rural energy programs.Further information on AEA's programs can be found in note 1 to the financial statements. This financial report consists of three sections:management's discussion and analysis,basic financial statements, and supplementary schedules.AEA's operations are business type activities and are considered an enterprise fund.The Authority is a component unit of the State of Alaska (State)and is discretely presented in the State's financial statements.The Authority's basic financial statements are the Balance Sheets;the Statements of Revenues,Expenses and Changes in Net Assets;the Statements of Cash Flows and the Notes to Basic Financial Statements. Basic Financial Statements The Balance Sheets report the Authority's assets,liabilities,and resulting net assets.The net assets are reported as invested in capital assets less debt,restricted and unrestricted.Restricted net assets are subject to external limits such as bond resolutions,legal agreements or statutes. The Statements of Revenues,Expenses,and Changes in Net Assets report the Authority's income,expenses,and resulting change in net assets during the periods reported. Both statements report on the accrual basis of accounting and economic resources measurement focus. The Statements of Cash Flows report the Authority's sources and uses of cash and change in cash balance resulting from the Authority's activities during the periods reported. The Notes to Basic Financial Statements provide additional information required to fully understand the amounts reported in the basic financial statements. Management's Discussion and Analysis This section presents AEA management's analysis of the Authority's financial position and results of operations at and for the years ended June 30,2007 and 2006.This information is presented to help the reader focus on significant financial issues and provide additional information regarding the activities of the Authority.This information should be read in conjunction with the Independent Auditors'Report,the audited financial statements and the accompanying notes. Financial Highlights AEA's assets exceeded its liabilities by $630 million at June 30,2007 and by $415 million at June 30,2006.Of the total net assets at June 30,2007,$137 million was invested in capital assets net of related debt,$42 million was restricted and $450 million was unrestricted.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. 1 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management's Discussion and Analysis June 30,2007 and 2006 Financial Analysis Financial Position Total assets,total liabilities,and total net assets at June 30,2007,2006,and 2005 follows (stated in thousands): 2007 2006 2005 Current assets $7,386 6,760 11,196 Capital assets 259,816 265,650 273,321 Other noncurrent and restricted assets 524,425 296,270 290,352 Total assets 791,627 568,680 574,869 Current liabilities 44,137 31,242 34,174 Noncurrent liabilities 118,234 122,295 126,051 Total liabilities 162,371 153,537 160,225 Total net assets 629,256 415,143 414,644 Total liabilities and net assets $791,627 $68,680 574,869 Current assets were $0.6 million higher at June 30,2007 compared to June 30,2006 and $4.4 million lower at June 30,2006 compared to June 30,2005.Components of the changes were (stated in millions): Increase in investment interest receivable $ Department of Energy construction grants final receipts in FY06 Decrease in operating receivable from operating plants FEMA Grant received in FY05-no similar grant in FY06 or FY07 Decrease in receivable from Denali Commission Increase in receivable from other grants Decrease due to short term loan term change to long term Net increase in short-term loans originated, net of loan collections 2007 vs.2006 vs. 2006 2005 0.1 - -(0.9) (0.1)- -(0.3) (0.3)(2.4) 0.4 - -(1.1) 0.5 0.3 0.6 (4.4) Capital assets were $5.8 million lower at June 30,2007 compared to June 30,2006 and $7.7 million lower at June 30,2006 compared to June 30,2005 substantially due to depreciation of capital assets,offset by improvements to the Bradley Lake Project. (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management's Discussion and Analysis June 30,2007 and 2006 Other noncurrent and restricted assets were $228.2 million higher at June 30,2007 compared to June 30,2006 and $5.9 million higher at June 30,2006 compared to June 30,2005.Components of the changes were (stated in millions): 2007 vs.2006 vs. 2006 2005 Increase (decrease)in PCE Endowment Fund securities lending $5.4 (1.0) Contribution to PCE Endowment Fund 182.7 - Increase in PCE Endowment Fund realized investment income 7A - Decrease due to increased capital expenditure (0.9)(2.0) Increase in restricted cash for bond arbitrage liability 0.3 -_- Increase in PCE program due to FY06 supplemental appropriation -3.8 Increase in PCE Endowment Fund fair value 22.9 3.4 Net increase in other funds from investment income and fair value 0.8 0.6 Increase in long-term loan fundings 1.0 1.1 Net increase in State advances on appropriations 8.6 -_ ) $228.2 5.9 Current liabilities were $12.8 million higher at June 30,2007 compared to June 30,2006 and $2.9 million lower at June 30,2006 compared to June 30,2005.Components of the changes were (stated in millions): 2007 vs.2006 vs. 2006 2005 Increase (decrease)in PCE Endowment Fund securities lending $5.4 (1.0) Net increase in State advances on appropriations 8.6 - Decrease in short-term borrowings (0.2)- Increased (decreased)budgeted revenues in excess of actual expenses on hydroelectric and intertie projects 0.5 (1.2) Decrease in other accrued expenditures (1.5)(0.7) $12.8 (2.9) The decreases in noncurrent liabilities between June 30,2007 and 2006 and between June 30,2006 and 2005 were caused by the decrease in the long-term portion of bonds payable at each year end;there were no new borrowings. The increase in net assets from June 30,2006 to June 30,2007 resulted from the $182.7 million contribution to the PCE Endowment Fund and resulting increased investment income offset by operating losses.The decrease in net assets from June 30,2005 to June 30,2006 resulted from the operating loss offset by nonoperating investment income. 3 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management's Discussion and Analysis June 30,2007 and 2006 Operations Components of the Authority's operating revenues,operating expenses,nonoperating investment income and operating loss for the years ended June 30,2007 through 2005 follows (stated in thousands): 2007 2006 2005 Operating revenues: Federal grants $21,881 28,544 42,442 Revenue from operating plants 16,962 15,669 16,680 State appropriations 14,539 12,192 2,952Other1,718 1,603 1,780 Total operating revenues 55,100 58,008 63,854 Operating expenses: Grants and projects 24,239 30,170 46,926 PCE grants 25,145 21,669 15,575 Depreciation 10,034 9,992 10,006 Interest expense 7,938 8,274 8,553 Plant operating 4,242 4,213 4,044 General and administrative 1,673 1,638 1,539 Provision for loan loss and bad debt expense (349)(326)170 Total operating expense 72,922 75,630 86,813 Operating loss (17,822)(17,622)(22,959) Nonoperating: PCE Endowment Fund contribution 182,700 -- Investment income,net 49,235 18,121 17,928 Increase (decrease)in net assets $214,113 499 (5,031) Operating revenues decreased $2.9 million during the year ended June 30,2007 compared to the prior year and $5.8 million during the year ended June 30,2006 compared to the same period in 2005.Components of the changes were (stated in millions): FY 2007-2006 FY 2006-2005 Net change Net change Decreased grant revenue from Denali Commission $(8.2)(11.0) Increase (decreased)grant revenue from Department of Energy 0.6 (1.5) Increased (decreased)revenue from other grantors 1.0 (1.4) Fluctuations in Bradley Lake approved budget expenditures 1.3 (1.0) Increased revenue from State for PCE grants 2.1 8.7 Increased revenue from State general fund capital appropriations 0.3 0.4 $(2.9)(5.8) 4 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Management's Discussion and Analysis June 30,2007 and 2006 Operating expenses decreased $2.7 million during the year ended June 30,2007 compared to the prior year and were $11.2 million lower during the year ended June 30,2006 compared to the same period in 2005. Components of the changes were (stated in millions): FY 2007-2006 FY 2006-2005 Net change Net change Decreased grant and project expenses in active rural energy construction projects $(5.9)(17.0) Increased PCE grant expenditures 3.5 6.0 Decreased bond interest expense (0.3)- Increased Bradley Lake plant expenses -0.2 Decreased other expenses =(0.4) $(2.7)(11.2) During the year ended June 30,2007,the PCE Endowment received a contribution of $182.7 million from the State general fund.This contribution created increased interest income and realized gains by $7.4 million and increased fair value of investments by $22.9 million during the year ended in 2007. Nonoperating investment income increased during the year ended in 2006 compared to 2005 due to a $2.1 million increase in interest income and realized gains,offset by a $1.0 million decrease in fair value during the time period. 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 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 30,2007 and 2006,and the related statements of revenues, expenses,and changes in net assets,and cash flows for the years then ended.These financial statements are the responsibility of the Authority's management.Our responsibility is to express an opinion on these basic financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of the Authority's internal control over financial reporting. Accordingly,we express no such opinion.An audit also includes examining,on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and the significant estimates made by management,as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinions. In our opinion,the financial statements referred to above present fairly,in all material respects,the financial position of the Authority as of June 30,2007 and 2006,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 25, 2007,on our consideration of the Authority's internal control over financial reporting and on our tests of its compliance with certain provisions of laws,regulations,contracts,and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing,and not to provide an opinion on the internal control over financial reporting or on compliance.That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The Management's Discussion and Analysis on pages 1 through 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 KPMG LLP,a U.S.limites liability partnership.is the U.S. member firm of KPMG international,a Swiss cooperative. 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,1s fairly stated in all material respects in relation to the basic financial statements taken as a whole. KPa LEP October 25,2007 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Balance Sheets June 30,2007 and 2006 (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. 2007 2006 3,072 2,952 2,471 1,937 409 553 1,434 1,318 7,386 6,760 22,585 22,323 478,390 251,394 23,450 22,553 441,645 437,445(181,829)(171,795) 259,816 265,650 784,241 561,920 791,627 568,680 8,286 942 26,809 21,262 5,810 5,800 3,232 3,238 44,137 31,242 117,147 121,482 984 710 103 103 118,234 122,295 162,371 153,537 136,859 138,368 19,353 19,085 22,892 25,168 450,152 232,522 629,256 415,143 791,627 $68,680 ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Statements of Revenues,Expenses,and Changes in Net Assets Years ended June 30,2007 and 2006 (Stated in thousands) 2007 2006 Operating revenues: Federal grants $21,881 28,544 Revenue from operating plants -16,962 15,669 State of Alaska appropriations 14,539 12,192 Revenue from state agencies 690 651 Interest on loans 980 905 Other revenue 48 47 Total operating revenues 55,100 58,008 Operating expenses: Grants and projects 24,239 30,170 Power Cost Equalization grants 25,145 21,669 Depreciation 10,034 9,992 Interest expense 7,938 8,274 Plant operating -4,242 4,213 General and administrative 1,673 1,638 Provision for loan loss and bad debt expense (note 7)(349)(326) Total operating expenses 72,922 75,630 Operating loss (17,822)(17,622) Nonoperating: State of Alaska PCE Endowment contribution (note 3)182,700 - Investment income,net 49,235 18,121 Total nonoperating 231,935 18,121 Increase in net assets 214,113 499 Net assets -beginning 415,143 414,644 Net assets -ending $629,256 415,143 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 30,2007 and 2006 (Stated in thousands) 2007 2006 Cash flows from operating activities: Receipts from federal grants $21,760 32,174 Receipts from customers and users 16,967 14,011 Receipts from State of Alaska appropriations 22,011 11,745 Principal collected on loans 8,702 7,935 Receipts from state agencies 690 897 Interest collected on loans 937 1,014 Other operating receipts 47 84 Loans originated (9,784)(8,163) Payments to suppliers (12,687)(10,795) Payments to grantees (44,407)(47,117) Net cash provided by operating activities 4,236 1,785 Cash flows from noncapital and related financing activities: Net unremitted interest returned on federal grant advances (1)(20) Net unremitted interest earned (returned)on State appropriation advances (127)128 Endowment fund contribution from State appropriation 182,700 -_- State appropriation advance held in trust for others 971 -_ Net receipt from (payments on)operating loans from AIDEA 125 (121) Net cash provided (used)by noncapital and related financing activities 183,668 (13) Cash flows from capital and related financing activities: Principal paid on bonds (5,800)(5,665) Interest paid on bonds (6,470)(6,564) Purchase of capital assets (3,201)(2,321) Net cash used by capital and related financing activities (15,471)(14,550) Cash flows from investing activities: Purchase of investments (207,885)(53,840) Proceeds from sales and maturities of investments 29,527 66,508 Interest received from investments 15,573 8,904 Net cash (used)provided by investing activities (162,785)21,572 Net increase in cash and cash equivalents 9,648 8,794 Cash and cash equivalents at beginning of year 23,517 14,723 Cash and cash equivalents at end of year (note 3)$33,165 23,517 Reconciliation of generating loss to net cash provided by operating activities: Operating loss $(17,822)(17,622) Adjustments to reconcile operating loss to net cash provided by operating activities: Depreciation 10,034 9,992 Provision for loan loss and bad debt expense (349)(326) Bond interest expense 7,938 8,274 Changes in assets and liabilities: Increase (decrease)in due to State of Alaska 7,472 (199) (Increase)decrease in grants receivable (121)3,630 Increase in loans receivable (1,082)(228) (Increase)decrease in interest receivable (43)109 Decrease (increase)in operating revenue receivable 144 (9) Decrease in operating accounts payable (1,935)(1,836) Net cash provided by operating activities $4,236 1,785 Noncash capital activities: Amount included in accounts payable for fixed asset additions $999 _ 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 30,2007 and 2006 Organization and Operations The Alaska Energy Authority (Authority or AEA)was created by the Alaska State Legislature in 1976. AEA is a public corporation and a component unit of the State of Alaska (State).AEA's mission is to reduce the cost of energy in Alaska. Throughout the 1980's,AEA worked to develop the State's energy resources as a key element in diversifying Alaska's economy.A number of large-scale projects were constructed;four of those projects were sold in 2002.Today,AEA's two hydroelectric projects have an installed capacity in excess of 90 megawatts,and the Alaska Intertie's 170 miles of transmission line link Interior Alaska with the cheaper energy available in the Southcentral portion of the State. Pursuant to statute,on August 12,1993,the board of directors of the Alaska Industrial Development and Export Authority (AIDEA),a public corporation and a political subdivision of the State,became the board of directors of AEA.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) (b) (c) (d) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 Alaska Intertie Project The 170-mile,345-kilovolt transmission line runs between Willow and Healy,and interconnects the power distribution systems of Anchorage and Fairbanks.The Alaska Intertie allows Golden Valley 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.Through June 30,2004,AEA incurred $152,000 in costs for preliminary design work.No further costs were incurred as of June 30,2007.In August,2007,AEA issued a contract to the Municipality of Anchorage dba Municipal Light and Power for $19,500,000 for the upgrade and authorized project commencement in September,2007.The project is estimated to be completed by late 2013. 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 produces electricity and provides water for the City of Larsen Bay (City), an isolated Kodiak Island community.It went into commercial operation in 1991 and replaced the City's old water supply system and provided a better source of water with reduced maintenance and improved water quality.The City operates the project. The Authority and the City have agreed that the Authority will convey the project to the City and the City will accept all responsibility for it when the Authority completes repair work currently being performed under a project management agreement with the City. Rural Energy Programs The rural energy programs of the Authority include Bulk Fuel Storage Upgrades,Rural Power System Upgrades,Power Cost Equalization (PCE),Alternative Energy,Utility Training,and Technical Assistance,two active loan programs funded from the Bulk Fuel Revolving Loan Fund and the Power Project Fund and one inactive loan program. 12 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 (2)Summary of Significant Accounting Policies (a) (b) (¢) Basis ofAccounting -Enterprise Fund Accounting The accounts of the Authority are organized as an Enterprise Fund.Accordingly,the financial activities of the Authority are reported using the economic resources measurement focus and the accrual basis of accounting,whereby revenues are recorded when earned and expenses are recorded when goods or services are received or the related liability is incurred. GASB Statement No.20,Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting,provides two options for reporting proprietary fund activities (including component units using proprietary fund accounting).The Authority has elected to apply all applicable GASB pronouncements and all FASB Statements and Interpretations,Accounting Principles Board Opinions and Accounting Research Bulletins issued on or before November 30,1989,unless they conflict with or contradict GASB pronouncements. Operating Revenue and Expense The Authority considers all its revenues and expenses,except investment income and fund transfers with the State,to be part of its principal ongoing operations and therefore classifies these revenues and expenses as operating in the statement of revenues,expenses,and changes in net assets. Capital Assets Capital assets are stated at cost and depreciation is charged to operations by use of the straight-line method over their estimated useful lives.The estimated economic lives of the assets are as follows: Utility plant Life in years Intangible 30-50 Production 30-50 Transmission 20-40 General 5-30 The Authority recognizes impairment losses for long-lived assets whenever events or changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future cash flows associated with such assets. Cash and Investments All of AEA's cash and investments are restricted.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. 13 (Continued) (d) (e) (g) (h) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 Loans and Related Interest Income Loans are generally carried at amounts advanced less principal payments collected.Interest income is accrued as earned.Accrual of interest is discontinued whenever the payment of interest or principal is more than ninety days past due or when the loan terms are restructured.The Authority considers lending activities to be part of its principal operations and classifies it as operating in the statement of revenues,expenses,and changes in net assets.For purposes of the statement of cash flows,loans are treated as program loans. Allowance for Loan Losses The allowance for loan losses represents management's judgment as to the amount required to absorb potential losses in the loan portfolio.The factors used by management to determine the allowance required include historical loss experience,individual loan delinquencies,collateral values,economic conditions and other factors.Management's opinion is that the allowance is currently adequate to absorb known losses and inherent risks in the portfolio. Environmental Issues The Authority's policy relating to environmental issues is to record a liability when the likelihood of Authority responsibility for clean-up is probable and the costs are reasonably estimable.At June 30, 2007 and 2006,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. 14 (Continued) (3) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 @)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. 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 30,2007 and 2006 the Authority's carrying amount of deposits (all of which were restricted)was $33,165,000 and $23,517,000,respectively.The total of all bank balances was $34,785,000 and $24,027,000,respectively. The restricted and designated cash and investments were held in trust accounts for the following activities as of June 30,2007 (stated in thousands): Cash and cash equivalents Investments Total Power Cost Equalization Endowment Fund $2 415,935 415,937 Bradley Lake Hydroelectric Project 9,042 18,317 27,359 Rural Energy Loan Funds 8,643 11,810 20,453 Rural Energy Operations 1,745 18,260 20,005 Funds advanced from State and federal agencies 9,419 -9,419 Power Development Fund 1,974 -1,974 Power Cost Equalization and Rural Electric Capitalization Fund 1,751 3,488 5,239 Alaska Intertie Project 589 -589 Total cash and investments $33,165 467,810 500,975 15 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 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 At June 30,2007 and 2006,amounts restricted for debt service totaled $22,585,000 and $22,323,000, 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.During 2007,the Authority received an appropriation of $182,700,000 from the State of Alaska for the PCE Fund. 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 30,2007 and 2006 At June 30,2007,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 $121 ---_- Short-term investment fund 787 ---_-- Commercial paper 1,743 118 -__-118 U.S.Treasury Notes -_-11,048 -_15,687 26,735 U.S.Treasury Bonds -6,549 -_--_-6,549 U.S.Government Agency -10,678 -_10,678 Mortgage-backed 1,347 73,077 --73,077 Other asset-backed 9,676 6,908 __-6,908 Corporate bonds 5,017 25,383 --_-25,383 Yankee: Government -542 --$42 Corporate 1,058 2,936 --2,936 Domestic equity -_-_-191,881 _191,881 International equity =-77,927 -77,927 Total invested assets 19,749 137,239 269,808 15,687 422,734 Pool related net liabilities (90)(25,550)(906)-(26,456) Other pool ownership (19,657)19,657 --19,657 Net invested assets $2 131,346 268,902 15,687 415,935 17 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 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 -_--__ USS.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 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 and minimal risk.There is no AEA board approved investment policy,but AIDEA staff follows AIDEA's board approved investment policy.The AEA managed portfolio consists of the following eligible securities: °Debt instruments issued or guaranteed by the U.S.government,its agencies and instrumentalities, and Government Sponsored Enterprises (GSEs);and °Money market funds and repurchase agreements collateralized by U.S.Treasury and agency securities. 18 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 At June 30,2007 and 2006,AEA had the following cash and investments in its other funds (stated in thousands): 2007 2006 Fair value Fair value Short-term Short-term Investment type fixed income fixed income Deposits $17 49 Money market 33,146 24,957 Mortgage-backed 33,557 25,762 Investment agreements 18,317 28,192 Total invested assets $85,037 78,960 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 both June 30,2007 and 2006, the expected average life of individual fixed rate securities ranged from three days to seven months.At June 30,2007 and 2006 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 30,2007 and 2006,was 4.7 years and 4.8 years, respectively. 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. 19 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 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 30,2007 and 2006,the effective duration by investment type (not including the investment agreements)was as follows: 2007 2006 Treasury AEA Treasury AEA managed managed managed managed Money market -0.18 -0.25 U.S.Treasury Notes 3.92 -_3.13 - US.Treasury Bonds 11.26 -9.74 - U.S.Government agency 5.79 -_-4.25 - U.S.Government agency and GSE discount notes -0.29 -- Mortgage-backed 4.22 0.72 3.75 0.69 Other asset-backed 5.53 -0.87 - Corporate bonds 5.26 -4.99 - Yankees: Government 10.87 -8.83 - Corporate 5.84 -6.34 - Portfolio effective duration 4.06 0.38 3.96 0.38 Credit Risk -Credit risk is the financial risk that an issuer or other counterparty to an investment will not fulfill its obligations anda 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. 20 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 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. The Bradley Lake Hydroelectric Project investments are substantially invested in collateralized investment agreements,which minimizes credit risk. 21 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 At June 30,2007,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 -%-%-%39% Overnight sweep account Not Rated 1 ---_- Short-term investment account Not Rated 4 --- Commercial paper AA 2 -_--_-- Commercial paper A 3 --"= Commercial paper Not Rated 4 --- U.S.Government agency -_ discount notes AAA _-7 -- U.S.Government agency and GSE _- discount notes Not Rated -_---_-12 U.S.Government agency and GSE AAA _-2 -27 U.S.Government agency Not Rated _1 __ Mortgage-backed AAA 7 55 _-_- Mortgage-backed Not Rated -_--_--_- Mortgage-backed (Agency)Not Rated -_11 _--_ Other asset-backed AAA 41 5 -_- Other asset-backed AA 1 --- Other asset-backed A 6 --_-- Other asset-backed BBB _-1 --_ Other asset-backed Not Rated 1 --_--_- Corporate bonds AAA 2 2 __- Corporate bonds AA 15 4 _-_ Corporate bonds A 8 7 -- Corporate bonds BBB _8 -- Corporate bonds Not Rated -1 --_- Yankees -corporate AAA -___- Yankees -corporate AA 3 --- Yankees -corporate A 2 2 -_- Yankees -corporate BBB -_-1 -- No credit exposure -_(7)100 - Investment agreements _-_22 100%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 30,2007 and 2006 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 -%-%-%30% Overnight sweep account Not Rated ---- Short-term investment account Not Rated 4 -_-2 _- Commercial paper A-1 9 -_- U.S.Government agency and GSE discount notes AAA _2 -1 U.S.Government agency AAA = 12 _-_ Mortgage-backed AAA -44 _-- Mortgage-backed Not Rated 7 9 --_- Mortgage-backed (Agency and GSE)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 ll -_--_ 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. The Domestic Equity Pool managed by Treasury is an indexed account that is not rated. At June 30,2007 and 2006,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 30,2007,AEA's deposits managed by Treasury were uncollateralized and uninsured. With respect to AEA managed investments,amounts totaling approximately $24,104,000 at June 30,2007 and $23,463,000 at June 30,2006,are held in money market funds not registered in AEA's name.The investment contracts are collateralized.All other investment securities are registered in AEA's name and are held by its custodian,the trust department of a commercial bank;therefore no custodial risk exists for these securities. 23 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 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 2007 and 2006,and invested assets included the following holdings at June 30,2007 and 2006,for the PCE fund's investment in the International Equity Pool: Policy Actual FY07 18%t5%19.24% FY06 17%+5%19.08% At June 30,2007 and 2006,AEA's PCE Fund had exposure to foreign currency risk as follows (stated in thousands): FY07 Fair FY06 Fair Currency value value Deposits: Euro Currency $3 1 Japanese Yen 27 34 Swiss Frank =1 30 36 Investment -international equity: Australian Dollar -228 Euro Currency 30,235 14,227 Japanese Yen 11,434 6,432 New Zealand Dollar 718 - Norwegian Krone -484 Pound Sterling 21,329 5,648 Singapore Dollar 1,361 - Swedish Krona 1,130 297 Swiss Franc 6,514 3,185 72,721 30,501 Total $72,751 30,537 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 30,2007 and 2006 At June 30,2007,AEA's investments included the following concentrations greater than 5%(dollar amounts stated in thousands): Issuer Amount Percent Federal National Mortgage Association $55,044 11% 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 Securities Lending A portion of the funds managed by Treasury are in the State Department of Revenue's securities lending program.Alaska Statute 37.10.071 authorizes the Commissioner of Revenue to lend assets,under an agreement and for a fee,against deposited collateral of equivalent fair value.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 30,2007 and 2006,the fair value of securities on loan allocable to the PCE Fund totaled $15,687,000 and $10,165,000,respectively.Associated expense for securities lending,$870,000 for fiscal year 2007 and $1,546,000 for fiscal year 2006,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 102%of their fair value.Fixed income security loans are collateralized at not less than 102%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 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. 25 (Continued) (5) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 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 30,2007 and 2006,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 30,2007 and 2006 was as follows (stated in thousands): Balance at June 30,2006 Additions Balance at Deletions June 30,2007 Capital assets:Intangible $14 --14 Production 246,797 4,140 -250,937 Transmission 185,600 60 -185,660 General 5,034 --5,034 Total capital assets 437,445 4,200 -441,645 Less accumulated depreciation for:Intangible (3)(1)-(4) Production (74,103)(5,095)-(79,198) Transmission (92,661)(4,936)-(97,597) General (5,028)(2)-(5,030) Total accumulated depreciation (171,795)(10,034)-(181,829) Capital assets,net $265,650 (5,834)-259,816 26 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 Balance at Balance at June 30,2005 Additions Deletions June 30,2006 Capital assets:Intangible $14 --14 Production 244,476 2,321 -246,797 Transmission 185,600 --185,600 General 5,034 --5,034 Total capital assets 435,124 2,321 -437,445 Less accumulated depreciation for: Intangible (3)--(3) Production (69,071)(5,032)-(74,103)Transmission (87,707)(4,954)-(92,661)General (5,022)(6)-(5,028) Total accumulated depreciation (161,803)(9,992)- (171,795) Capital assets,net $273,321 (7,671)-265,650 (6)Long-Term Debt Long-term debt activity for the years ended June 30,2007 and 2006 was as follows (stated in thousands): Balance Balance at June 30,at June 30,Due within 2006 Additions Deletions 2007 one year Bradley Lake Power Revenue Bonds: First Series (a)$6,640 -(3,270)3,370 3,270 Second Series (a)11,520 -_(2,305)9,215 2,305 Refunding,Third Series (a)44,930 -(110)44,820 115 Refunding,Fourth Series (a)37,390 -(115)37,275 120 Refunding,Fifth Series (a)30,640 --30,640 - Total bonds payable 131,120 -_-(5,800)125,320 5,810 Arbitrage interest payable (b)710 -_-274 984 - Less bond discount and deferred interest (3,838)-_-1,475 (2,363)- $127,992 -_(4,051)123,941 5,810 27 (Continued) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 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 The minimum payments related to all bonds for the years subsequent to June 30,2007 are as follows (stated in thousands): Principal Interest Total Year ending June 30: 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 6,495 5,583 12,078 2013-2017 39,955 21,336 61,291 2018-2022 54,955 7,708 62,663 $125,320 59,452 184,772 (a)AEA issued the Power Revenue Bonds,First and Second Series (Bradley Lake Bonds),in September 1989 and August 1990,respectively,for the long term financing of the construction costs of the Bradley Lake Hydroelectric Project and refunded AEA's Variable Rate Demand Bonds which were issued in November 1985 to provide interim financing of the project.AEA issued the Power Revenue Refunding Bonds,Third and Fifth Series in April 1999 to refund a portion of the First Series Bonds and to provide costs of issuance.AEA issued the Power Revenue Refunding Bonds, Fourth Series in April 2000 to refund a portion of the Second Series Bonds and to provide costs of issuance.All of the revenues derived by AEA from the operation of the project and all moneys, securities and funds (except the excess earnings fund),including a capital reserve fund,held or set aside are pledged and assigned to secure the payment of principal,redemption premium,if any,and interest on the bonds.No other revenues of AEA are pledged as security for the payment of the bonds.AEA has covenanted to notify the State Legislature of any failure to maintain the capital reserve fund at its required level.The bonds are further secured by bond insurance.AEA collects 28 (Continued) (b) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 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 United States Treasury for the excess of investment income on the proceeds of each series of AEA's tax exempt Bradley Lake bonds over the related interest expense computed in accordance with Section 148 of the Internal Revenue Code of 1986. The accumulated arbitrage interest payable amount is computed each year,and the amount for each series is first due after the end of the fifth bond year and every five years thereafter.AEA maintains a separate account for each series with the trustee and each year sets aside a sufficient amount to satisfy the liability. In addition,the Authority has participated in the following debt agreements: Other Debt -In 1982,AEA assumed $44,859,000 of 5%mortgage notes payable which 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 30,2007,the unpaid principal balance of the notes was $17,524,000 and the trust assets had a fair value of $17,770,000. 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 30,2007,the outstanding balance was $41,325,000. 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 30,2007 and 2006 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 30,2007 and 2006 are classified as follows (dollar amounts stated in thousands): 2007 2006 No.of loans Amount No.of loans Amount Power Project Loan Program 41 §$24,403 39 §$23,743 Rural Electrification Revolving Loan Program 3 763 4 835 Bulk Fuel Revolving LoanProgram 31 1,932 34 1,441 75 27,098 77 26,019 Less allowance for loan losses (1,177)(1,529) $25,921 $24,490 Loans that are more than 90 days past due on which the accrual of interest has been discontinued amounted to $1,117,000 and $1,075,000 at June 30,2007 and 2006,respectively. An analysis of changes in the allowance for loan losses for the years ended June 30,2007 and 2006 follows (stated in thousands): 2007 2006 Balance at beginning of year $1,529 1,836 Recoveries -28 Write-offs (3)_ Provision for loan loss (349)(335) Balance at end ofyear $1,177 1,529 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) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 (b)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. (c)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)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 2007 and 2006,AEA expensed $2,972,000 and $2,770,000,respectively,for such services.AEA has a borrowing arrangement with AIDEA to provide working capital funds.At June 30,2007 and 2006,AEA had $718,000 and $942,000 payable to AIDEA for services and borrowings. (b)Alaska Intertie Operating Committee Effective May 1,1986,AEA entered into an agreement with utilities using the Alaska Intertie for wheeling of electrical power.Pursuant to the agreement,the Intertie Operating Committee (IOC)was established to manage the system.The IOC is comprised of a representative from AEA and each of the utilities.AEA is reimbursed for operation and maintenance costs on a monthly basis with an annual settlement to adjust the payments to actual costs.AEA management on October 16,2006, issued contractually required notice that the agreement will terminate in 48 months as a mechanism to implement cures to identified defects in the agreement (note 1(b)). 31 (Continued) (10) ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2007 and 2006 (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 30,2007 and 2006,AEA had open loan commitments of $3,769,000 and $3,451,000,respectively.At June 30,2007 and 2006,AEA held approximately $5,364,000 and $5,174,000,respectively,of investments in escrow under an agreement. 32 Balance at June 30,2006 $ Interest received Bond principal paid Bond interest paid Construction expenditures Operating revenue received Operating expenses paid Transfers between funds Balance at June 30,2007 $ ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Schedule of Bradley Lake Hydroelectric Project Trust Account Activities Year ended June 30,2007 (Stated in thousands) Schedule 1 Debt Capital Renewal and Excess Operating service reserve contingency earnings Revenue Operating reserve account account account account account account account Total 9,038 12,834 4,216 451 458 534 661 28,192 321 805 327 _327 34 60 1,874 (5,800)_____-_-(5,800) (6,470)-__-__-(6,470) --(3,221)----(3,221) ---_-_15,925 __15,925 -___-(3,141)-(3,141) 11,953 (805)412 258 (15,178)3,395 (35)-_- 9,042 12,834 1,734 709 1,532 822 686 27,359 See accompanying independent auditors'report. 33 Assets Current assets: Grants receivable Loans receivable Operating revenue receivable Accrued interest receivable Total current assets Noncurrent assets: Restricted cash and investments Designated for specific purposes Loans receivable,net of allowance Capital assets 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 liabilities Total noncurrent liabilities Total liabilities Net assets: Investment in capital assets net of related debt Restricted for debt service Restricted by agreements with external parties Unrestricted net assets Total net assets Commitments and contingencies Total liabilities and net assets See accompanying independent auditors'report. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Schedule of Projects -Balance Sheet June 30,2007 (Stated in thousands) Administration Schedule 2 Bradley Lake Alaska Rural and Power Hydroelectric Intertie Energy Development Rural Energy Combined Project Project Projects Fund Programs balance _60 15 2,997 3,072 _-_-2,471 2,471 -_306 -_103 409 959 ==_475 1,434 959 306 60 15 6,046 7,386 22,585 ____22,585 4,774 589 _11,393 461,634 478,390 -_-__-23,450 23,450 316,923 124,246 476 -_441,645 (108,276)___(73,137)_(416)==(181,829) 208,647 51,109 60 --259,816 236,006 51,698 60 11,393 485,084 784,241 236,965 52,004 120 11,408 491,130 791,627 __-8,475 (189)8,286 1,882 879 277 761 23,010 26,809 5,810 ____5,810 3,232 ===_3,232 10,924 879 277 9,236 22,821 44,137 117,147 ___-117,147 984 ____984 103 ===_-103 118,234 ====118,234 129,158 879 277 9,236 22,821 162,371 85,690 51,109 60 __-136,859 19,353 ____19,353 2,764 16 __20,112 22,892 ==(217)2,172 448,197 450,152 107,807 $1,125 (157)2,172 468,309 629,256 236,965 52,004 120 11,408 491,130 791,627 34 Operating revenues: Federal grants Revenue from operating plants State of Alaska appropriations Revenue from state agencies Interest on loans Other revenue Total operating revenues Operating expenses: Grants and projects Power cost equalization grants Depreciation Interest expense Plant operating General and administrative Provision for loan loss and bad debt expense Total operating expenses Operating income (loss) Nonoperating: State of Alaska PCE Endowment contribution Investment income,net Increase (decrease)in net assets Net assets -beginning Net assets -ending See accompanying independent auditors'report. ALASKA ENERGY AUTHORITY (A Component Unit of the State of Alaska) Schedule of Projects -Revenues,Expenses,and Changes in Net Assets Year ended June 30,2007 (Stated in thousands) Schedule 3 Administration Bradley Lake Alaska Rural and Power Hydroelectric Intertie Energy Development Rural Energy Combined Project Project Projects Fund Programs balance $--60 -21,821 21,881 15,567 1,388 7 --16,962 -a --14,539 14,539 ----690 690 ----980 980 6 _-_--42 48 15,573 1,388 67 -38,072 55,100 ---_-24,239 24,239 --_-_--25,145 25,145 6,674 3,360 ---10,034 7,938 -_--_---7,938 2,871 1,349 22 --4,242 245 75 1 -1,352 1,673 ----_(349)(349) 17,728 4,784 23 -50,387 72,922 (2,155)(3,396)44 -(12,315)(17,822) ---_-182,700 182,700 1,545 36 -_-47,654 49,235 (610)(3,360)44 -_-218,039 214,113 108,417 54,485 (201)2,172 250,270 415,143 $107,807 $1,125 (157)2,172 468,309 629,256