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Home My WebLink About11-19-2002 BM MinutesALASKA ENERGY AUTHORITY Board Meeting November 19,2002 Minutes vy tegrehwne tee eae ot! oa ' ORLee eean 400, a lee et? aK to rere > e : a4, 3 " ._fanh,toeye " 3 ee ey Deore rE oereed ee tyetaa ate 7 . -Se gtRaleen ot as Preeaaey OO Bee esse Alaska Industrial Development and Export Authority AGENDA ALASKA ENERGY AUTHORITY Board of Directors November 19,2002 Anchorage,Alaska 1.CALL TO ORDER 2.BOARD OF DIRECTORS ROLL CALL 3.PUBLIC ROLL CALL 4.PUBLIC COMMENTS 5.PRIOR MINUTES _-October 10,2002 6.OLD BUSINESS 7.NEW BUSINESS A.Financial Statements/Audit Presentation (KPMG LLP) 8.DIRECTOR COMMENTS A.Director's Status Report of AEA Programs and Projects B.Next Meeting Date -Follows AIDEA Board meeting Dates 9.BOARD COMMENTS 10.ADJOURNMENT H:\ALL\bfuglestad\BOARD\Agenda AEA.doc 813 West Northern Lights Boulevard *Anchorage,Alaska 99503RADEASFNRAANAATANTANTATANNA Alaska Industrial Development and Export Authority Alaska Energy Authority ALASKA ENERGY AUTHORITY BOARD OF DIRECTORS November 19,2002 -1:37 p.m. Anchorage,Juneau,and Shungnak,Alaska 1.CALL TO ORDER Chairman Hughes called the meeting of the Alaska Energy Authority to order on November 19, 2002,at 1:37 p.m.A quorum was established. 2.BOARD OF DIRECTORS ROLL CALL Directors present in Anchorage:Mr.Wilson Hughes (Chairman/Public Member),Deputy Commissioner Larry Persily (Designee for Department of Revenue),and Commissioner Deborah Sedwick (Department of Community and Economic Development). Directors present in Shungnak:Ms.Helvi Sandvik (Public Member). Directors present in Juneau:Commissioner Joe Perkins (Department of Transportation and Public Facilities). 3.PUBLIC ROLL CALL Staff present in Anchorage:James A.McMillan (Acting Executive Director),Sue Weimer,(Acting Deputy Director-Credit),Valorie Walker (Deputy Director-Finance),Brenda J.Fuglestad (Administrative Manager),Lynn Kenney (Development Specialist),and Brenda J.Applegate (Accountant). Others attending in Anchorage:Tim Bradner (Alaska Journal of Commerce),Keith Laufer (Foster Pepper Rubini &Reeves),Brian Bjorkquist (Department of Law),Jim Yarmon (Polaris Fund), Kathy Porterfield and Charlie Kosak (KPMG LLP),and Ken Vassar (Wohlforth Vassar Johnson & Brecht). 4.PUBLIC COMMENTS There were no public comments. 5.PRIOR MINUTES -October 10,2002 The October 10,2002 minutes were approved as presented. 6.OLD BUSINESS There was no old business. 813 West Northern Lights Boulevard *Anchorage,Alaska 99503 OAT PACA VAAN 2aTAV ANT IATA WANA: AEA Board Meeting November 19,2002 Meeting Minutes Page 2 7.NEW BUSINESS 7A.Financial Statements/Audit Report (KPMG LLP) Ms.Kathy Porterfield,Managing Partner with KPMG LLP,summarized the audited financial statements,and letter to the Board. She said that the Authority adopted the provisions of GASB (Governmental Accounting Standards Board)Statement No.34,which is a new reporting model that governments need to adopt.The first three pages of the financial statements contain management discussion and analysis,which is new and required by GASB.It is designed to be a description of the changes in the financial statements between the most recent years. The audit covers only the most recent fiscal year as the Authority decided not to restate the 2001 financial statements to comply with the new reporting model.There are changes in the balance sheet as a result of the GASB standards.The GASB standards do not change how you account for things,but it affects how you display them in the financial statements. Ms.Porterfield said the purpose of the audit is for KPMG to gain reasonable assurance that the financial statements are free of material misstatement.KPMG conducted appropriate audit procedures and has concluded that the financial statements are fairly stated in all material respects in accordance with generally accepted accounting principles,resulting in an unqualified or a clean opinion.KPMG obtained reasonable assurance during the audit that the | financial statements are free of material misstatement. Ms.Porterfield said that the only significant item in the financial statements is on page seven, the Statement of Revenue,Expenses and Changes in Net Assets,where the loss on the sale of the Four Dam Pool is noted.She referred the Board to note five,stating that concurrent with the sale of the Four Dam Pool Project there was forgiveness of an approximately $180 million loan due the Alaska Energy Authority that could not be written off until it was forgiven,which was this current fiscal year. 8.DIRECTOR COMMENTS There were no Director comments. 9.BOARD COMMENTS There were no Board member comments. 10.ADJOURNMENT There being no objection and no further business of the Board,the meeting was adjourned at Ok.Qe James A.McMillan,Secretary Alaska Industrial Development and Export Authority ALASKA ENERGY AUTHORITY BOARD OF DIRECTORS October 10,2002 -2:31 p.m. Anchorage,Alaska 1.CALL TO ORDER Chairman Hughes called the meeting of the Alaska Energy Authority to order on October 10,2002, at 2:31 p.m.A quorum was established. 2.BOARD OF DIRECTORS ROLL CALL Directors present in Anchorage:Mr.Wilson Hughes (Chairman/Public Member),Deputy Commissioner Larry Persily (Designee for Department of Revenue),Ms.Helvi Sandvik (Public Member),Commissioner Deborah Sedwick (Department of Community and Economic Development),and Commissioner Joe Perkins (Department of Transportation and Public Facilities). 3.PUBLIC ROLL CALL Staff present in Anchorage:James A.McMillan (Acting Executive Director),Valorie F.Walker (Deputy Director-Finance),Sue Weimer,(Acting Deputy Director-Credit),Brenda J.Fuglestad (Administrative Manager),Lynn Kenney (Development Specialist),and Rebecca Garret (Program Manager). Rubini &Reeves),Ken Vassar (Wohlforth Vassar Johnson &Brecht),and Tim Bradner (Alaska Journal of Commerce). 4.PUBLIC COMMENTS There was no public comment. 5.PRIOR MINUTES -June 13,2002 The June 13,2002,minutes were approved as presented. 6.OLD BUSINESS There was no old business. 813 West Northern Lights Boulevard *Anchorage,Alaska 99503 AEA Board Meeting October 10,2002 Meeting Minutes Page 2 7.NEW BUSINESS 7A.Resolution No.2002-02,Resolution of the Alaska Energy Authority Relating to the Appointment of an Acting Executive Director Mr.McMillan reviewed Resolution No.2002-02 stating it is a resolution that appoints James A. McMillan as Acting Executive Director effective August 30,2002. MOTION:Commissioner Sedwick moved to approve Resolution No.2002-02.Seconded by Deputy Commissioner Persily.There being no discussion,the question was called.A roll call vote was taken and the motion passed. 8.DIRECTORS COMMENTS Mr.McMillan said the Rural Energy Conference that was held in Fairbanks was well received and there have been good follow-up reports. 9.BOARD COMMENTS There were no Board comments. 10.ADJOURNMENT Hearing no objections Chairman Hughes adjourned the meeting at 2:35 p.m. _James A.McMillan,Secretary Alaska Industrial Development and Export Authority ||)é ="&:ay\rattan, Alaska Energy Authority MEMORANDUM TO:Board of Directors Alaska Energy Authority FROM:James A.McMilla Acting Executive Ditector DATE:November 19,2002 SUBJECT:Financial Reports Included with your packet are the June 30,2002,Financial Statements and Letter to the Board of Directors. Ms.Kathy Porterfield,Managing Partner of the Anchorage office of KPMG,LLP,will be - _in attendance at the meeting to discuss the reports and to answer any questions theBoardmembersmayhave. h:allbjfifinance\vfw\financial reports 813 West Northern Lights Boulevard »Anchorage,Alaska 99503 mane ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Financial Statements and Schedules June 30,2002 (With Independent Auditors'Report Thereon) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Table of Contents Management Discussion and Analysis Independent Auditors'Report Balance Sheet Statement of Revenues,Expenses and Changes in Net Assets Statement 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 21 22 23 ALASKA ENERGY AUTHORITY Management's Discussion and Analysis This discussion and analysis is intended to serve as an introduction to the June 30,2002 financial statements of the Alaska Energy Authority ("AEA”or "Authority”),a component unit of the State of Alaska.All amounts, unless otherwise indicated,are expressed in thousands of dollars. AEA's June 30,2002 financial statements are presented in a different format than historically,due to the implementation by AEA of Governmental Accounting Standards Board ("GASB”)34 during the year.The June 30,2001 financial statements are not presented in the accompanying financial statements.The condensed June 30,2001 financial information presented in this discussion and analysis has been restated to conform to the revised format. AEA's financial statements are comprised of four separate components: 1)Balance Sheet 2)Statement of Revenues,Expenses and Changes in Net Assets 3)Statement of Cash Flows 4)Notes to Financial Statements Financial Highlights AEA's assets exceeded its liabilities at June 30,2002 by $437,622.Of the total net assets,$159,780 was invested in capital assets,net of related debt,$51,955 was restricted and $225,887 was unrestricted. Financial Analysis Financial Position Total assets,total liabilities and total net assets at June 30,2002 and 2001 follow: Increase June 30,2002 June 30,2001 (Decrease) Current Assets $15,274 §$21,760 §$(6,486) Noncurrent and Restricted Assets 582,821 777,926 (195,105) Total Assets 598,095 799,686 (201,591) Current Liabilities 24,007 22,460 1,547 Noncurrent Liabilities 136,466 139,950 (3,484) Total Liabilities 160,473 162,410 (1,937) Total Net Assets 437,622 637,276 (199,654) Total Liabilities and Net Assets 598,095 799,686 (201,591) The decline in current assets substantially results from a decrease in operating revenue and loans receivable at June 30,2002 compared to June 30,2001.On January 31,2002,AEA sold the Four Dam Pool Project to the Four Dam Pool Power Agency.One of the conditions of sale was that revenues from operation of the Project for the period July 1 through December 31,2001 did not accrue to AEA.Therefore,the receivable at June 30,2002 was only for a one-month period,resulting in the large decline between the two year ends. 1 ALASKA ENERGY AUTHORITY Management's Discussion and Analysis Sale of the Four Dam Pool Project also affected the components of noncurrent assets.The legislation authorizing the sale of the Four Dam Poo!Project provided for forgiveness of a noncurrent loan totaling $184,762 to the Authority upon closing.Additionally,AEA received $68,000 from the sale of the Project,resulting in a corresponding decline in net property,plant and equipment.However,the sale proceeds and previously restricted funds made available as a result of the sale were deposited into the PCE Endowment Fund,which increased AEA's noncurrent restricted cash and investments.Other declines in noncurrent restricted cash and investments, depreciation on the Bradley Lake Hydroelectric Project and the write down of the Larsen Bay Hydroelectric Project ("Larsen Bay”)resulted in the net decline in total noncurrent assets of $195,105 from June 30,2001 compared to June 30,2002. The increase in total current liabilities from June 30,2001 to June 30,2002 was caused by a reduction in grants payable ($2,350),which was offset by an increase in the amount due to the State of Alaska ($3,571).The $3,484 decrease in total noncurrent liabilities was caused by the decrease in the long term portion of bonds payable during the year.All of the Larsen Bay bonds were called or defeased during the year ended June 30,2002 and no new Authority borrowings occurred during the year. The $199,654 decrease in net assets from June 30,2001 to June 30,2002 results from the $197,474 operating loss for the year ended June 30,2002 ($177,871 resulting from the loss on sale of the Four Dam Pool Project) coupled with a nonoperating investment loss. Operations Components of the Authority's operating revenues,operating expenses,and nonoperating investment loss for the year ended June 30,2002 compared to the same period ended June 30,2001 follows.Certain reclassifications have been made to the June 30,2001 financial information in order to conform to the 2002 presentation. Increase June 30,2002 June 30,2001 (Decrease) Operating Revenues: Federal grants $22,792 §7,920 $14,872 Revenue from operating plants 17,388 25,257 (7,869) State of Alaska 13,151 22,461 (9,310) Other 1,539 1,195 344 Total Operating Revenues 54,870 56,833 (1.963) ALASKA ENERGY AUTHORITY Management's Discussion and Analysis Increase June 30,2002 June 30,2001 (Decrease) Operating Expenses: Loss on sale of Four Dam Pool Project 177,871 -177,871 Grants and projects 24,802 9,707 15,095 Power cost equalization grants 15,652 16,955 (1.303) Depreciation 15,782 21,233 (5,451) Interest expense 9,275 9,538 (263) Plant operating 5,347 5,440 (93) General and administrative 2,239 1,971 268 Impairment loss 1,186 -1,186 Bad debt expense 190 466 (276) Total Operating Expenses 252,344 65,310 187,034 Operating Loss (197,474)(8,477)(188,997) Nonoperating -investment loss (2,180)(1,051)(1,129) Decrease in Net Assets (199,654)(9,528)(190,126) Operating revenues declined $1,963 during the year ended June 30,2002 compared to 2001.An increase in federal grants,resulting from increased project funding from the Denali Commission,was offset by a decrease in revenue from operating plants and State of Alaska receipts.As indicated earlier,the Four Dam Pool Project was sold on January 31,2002 and income from the Project did not accrue to AEA from July 1 to December 31,2001, which accounts for the decline in operating income.The decline in revenues from the State of Alaska results from net changes in several State funding sources between the two years. Operating expenses increased $187,034 during the year ended June 30,3002 compared to the same period in 2001.The primary reason for the increase was the loss on sale of the Four Dam Pool Project.Grant and project expenses increased $15,095 due to the increase in the number of active rural energy projects under construction. The increase in grant and project expenses corresponded with the increase in federal grant revenues.Other changes in operating expenses between the two years included a decrease in Power Cost Equalization grants and the impairment loss recognized on Larsen Bay. The nonoperating investment loss increased during the year ended June 30,2002 compared to the same period in 2001 substantially due to market value losses on the PCE Endowment Fund. wen |cay |yoo | 701 West Eighth Avenue Suite 600 Anchorage,AK 99501 Independent Auditors'Report The Board of Directors Alaska Energy Authority (a Component Unit of the State of Alaska): We have audited the accompanying balance sheet of the Alaska Energy Authonty (a Component Unit of the State of Alaska)(Authority)as of June 30,2002,and the related statement of revenues,expenses and changes in net assets,and cash flows for the year then ended.These basic 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 audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes examining,on a test basis,evidence supporting the amounts and disclosures in the financial statements.An audit also includes assessing the accounting principles used and significant estimates made by management,as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion. In our opinion,the basic financial statements referred to above present fairly,in all material respects,the financial position of the Authority as of June 30,2002,and the changes in its financial position and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in note 2,the Authority adopted Governmental Accounting Standards Board Statement No.34,Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments,GASB Statement No.37,Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments:Omnibus;and GASB Statement No.38,Certain Financial Statement Disclosures,effective July 1,2001. The management discussion and analysis on pages 1 through 3 is not a required part of the basic financial statements but is supplementary information required by accounting principles generally accepted in the United States of America.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. |A ci KPMG LLP KPMG LLP a US.limited hability partnership,1samemberofKPMGIniernational,a Swiss association, ana The Board of Directors Alaska Energy Authority (a Component Unit of the State of Alaska) Our audit was made for the purpose of forming an opinion on the financial statements taken as a whole. The supplementary information included in schedules 1 to 3 is presented for the purpose of additional analysis and is not a required part of the basic financial statements.Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and,in our opinion,is fairly stated in all material respects in relation to the basic financial statements taken as a whole. KPI LEP September 27,2002 ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Balance Sheet June 30,2002 (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) Designated for specific purposes (note 3) Loans receivable,net of allowance (note 7) Capital assets (note 4) 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 (note 2): 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. 10,184 2,026 1,713 1,351 15,274 21,620 238,701 21,934 431,678 (131,112) 300,566 582,821 598,095 8,072 7,386 4,825 3,724 24,007 135,961 402 103 136,466 160,473 159,780 21,620 30,335 225,887 437,622 598,095 ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Statement of Revenues,Expenses,and Changes in Net Assets Year ended June 30,2002 (Stated in Thousands) Operating revenues: Federal grants $22,792 Revenue from operating plants 17,388 State of Alaska 13,151 Interest on loans 751 Revenue from other state agencies 573 Other revenue 215 Total operating revenues 54,870 Operating expenses: Loss on sale of Four Dam Pool Project (note 5)177,871 Grants and projects 24,802 Power cost equalization grants 15,652 Depreciation 15,782 Interest expense 9,275 Plant operating 5,347 General and administrative 2,239 Impairment loss (note 1)1,186 Bad debt expense 190 Total operating expenses 252,344 Operating loss (197,474) Nonoperating -investment loss (2,180) Decrease in net assets (199,654) Net assets -beginning 637,276 Net assets -ending $437,622 See accompanying notes to basic financial statements. ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Statement of Cash Flows Year ended June 30,2002 (Stated in Thousands) Cash flows from operating activities: Receipts from customers and users $27,458 Receipts from federal grants 15,723 Receipts from State of Alaska appropriations 14,021 Principal collected on loans 2,967 Interest collected on loans 734 Receipts from other state agencies 440 Other operating receipts 127 Loans originated (3,095) Payments to suppliers (13,297) Payments to grantees (36,532) Net cash provided by operating activities 8,546 Cash flows from noncapital and related financing activities:° Net operating loans from State of Alaska 4,118 Net operating loans from AIDEA 928 Net cash provided by noncapital and related financing activities 5,046 Cash flows from capital and related financing activities: Principal paid on bonds (5,180) Interest paid on borrowings (7,616) Purchase of capital assets (144) Sale of capital assets,net 63,500 Net cash provided by capital and related financing activities 50,560 Cash flows from investing activities: Purchase of investments (112,948) Proceeds from sales and maturities of investments 26,090 Interest received from investments 8,521 Net cash used by investing activities (78,337) Net decrease in cash and cash equivalents (14,185) Cash and investments at beginning of year 48,275 Cash and investments at end of year (note 3)$34,090 Reconciliation of change in net assets to net cash provided by operating activities: Operating loss $(197,474) Adjustments to reconcile deficiency of revenues over expenses to net cash provided by operating activities: Loss on sale of Four Dam Pool Project (note 5)177,871 Depreciation 15,782 Impairment loss (note 1)1,186 Bad debt expense 190 Bond interest expense 9,275 Changes in assets and liabilities: Decrease in due to State of Alaska 245 Increase in grants receivable (7,069) Increase in loans receivable (128) Increase in interest receivable (17) Decrease in operating revenue receivable 9,424 Decrease in accounts payable (662) Decrease in other liabilities (77) Net cash provided by operating activities $8,546 See accompanying notes to basic financial statements. (1) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 Organization and Operations The Alaska Energy Authority (Authority or AEA)was created by the Alaska State Legislature in 1976. AEA is a public corporation and a component unit of the State of Alaska (State).AEA's mission is to promote,develop,and advance the general prosperity and economic welfare of Alaskans by providing a means to operate and maintain existing power projects that tap Alaska's natural resources to achieve the lowest reasonable consumer power costs. Throughout the 1980's,AEA worked to develop the State's energy resources as a key element in diversifying Alaska's economy.A number of large-scale projects were constructed;four of those projects were sold in 2002.Today,AEA's two hydroelectric projects have an installed capacity of 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.The staff of AIDEA serves as the staff of AEA.AIDEA and AEA continue to exist as separate legal entities.There is no commingling of funds,assets or liabilities between AIDEA and AEA and there is no responsibility of one for the debts or the obligations of the other.Consequently,the accounts of AIDEA are not included in the accompanying financial statements.The 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. 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. (b)Alaska Intertie The 170-mile,345-kilovolt transmission line interconnects the power distribution systems of Anchorage and Fairbanks.The Alaska Intertie allows Golden Valley Electric Association in Fairbanks to purchase electricity produced with lower cost energy,such as natural gas and 9 (Continued) (2) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 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. (c)Larsen Bay Hydroelectric Project The 475-kilowatt project went into commercial operation in mid-1991.In addition to producing electricity for this isolated Kodiak Island community,the project replaced the City of Larsen Bay's old water supply system and provides a better source of water with reduced maintenance and improved water quality.The City of Larsen Bay operates the project. During 2002,the Authority recognized an impairment charge of $1,186,000 to reduce the asset to its net realizable value.In addition,during 2002,all remaining outstanding bonds that financed this project were defeased (see note 6). (d)Rural Energy Programs The rural energy programs of the Authority include Bulk Fuel Storage Upgrades,Rural Power System Upgrades,Power Cost Equalization,Alternative Energy,Utility Training,and Technical Assistance,two active loan programs funded from the Bulk Fuel Revolving Loan Fund and the Power Project Fund and one inactive loan program. Summary of Significant Accounting Policies On July 2001,the Authority adopted three new accounting statements issued by the Governmental Accounting Standards Board (GASB): °Statement No.34 Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments; e Statement No.37,Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments:Omnibus;and e Statement No.38,Certain Financial Statement Disclosures. GASB Statement No.34 (as amended by GASB Statement No.37)resulted in modifications in the financial reporting model used by the Authority.Modifications include presentation of management's discussion and analysis (as required supplementary information),cash flow statement using the direct method and reclassification of net assets according to certain criteria.The adoption of GASB Statement No.34 had no cumulative effect on net assets. GASB Statement No.38 requires certain disclosures to be made in the notes to the basic financial statements concurrent with the implementation of GASB Statement No.34.While this Statement does not affect amounts recorded in the financial statements of the Authority,certain note disclosures have been added and or amended. 10 (Continued) (a) (b) (c) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 Basis of Accounting -Enterprise Fund Accounting The accounts of the Authority are organized as an Enterprise Fund.Accordingly,the financial activities of the Authority are reported using the economic resources measurement focus and the accrual basis of accounting,whereby revenues are recorded when earned and expenses are recorded when goods or services are received or the related liability is incurred. GASB Statement No.20,Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting,provides two options for reporting proprietary fund activities (including component units using proprietary fund accounting).The Authority has elected to apply all applicable GASB pronouncements and all FASB Statements and Interpretations,Accounting Principles Board Opinions and Accounting Research Bulletins issued on or before November 30,1989,unless they conflict with or contradict GASB pronouncements. Operating Revenue and Expense The Authority considers all its revenues and expenses,except for investment income,to be part of its principal ongoing operations and therefore classifies these revenues and expenses as operating in the statement of revenues,expenses,and changes in net assets. Capital Assets Capital assets are stated at cost and depreciation is charged to operations by use of the straight-line method over their estimated useful lives.The estimated economic lives of the assets are as follows: Utility plant Life in years Intangible 30-50 Production 30-50 Transmission 20-40 General 5-30 The Authority recognizes impairment losses for long-lived assets whenever events or changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future cash flows associated with such assets. Cash and Investments All of AEA's cash and investments are restricted.For the purposes of the statement of cash flows, cash and cash equivalents consist of cash,short term commercial paper and repurchase agreements, whether unrestricted or restricted as to their use.This is a change in policy from reporting in the prior year. 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. 11 (Continued) (d) (e) (g) (h) (i) @) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 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 the 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, 2002,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 information required by the Authority's bond indentures. 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 disclosure of contingent assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ from those estimates. 12 (Continued) (3) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 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 legislature and does not refer to a separate group of self balancing accounts as contemplated by GAAP). At June 30,2002 the Authority's carrying amount of deposits was $34,090,000 (all of which were restricted)and the total of all the bank balances were $33,802,000. The restricted and designated cash and investments are held in trust accounts for the following activities as of June 30,2002 (stated in thousands): Cash and cash equivalents Investments Total Power Cost Equalization Endowment Fund =$55 172,374 172,429 Bradley Lake Hydroelectric Project 1,917 28.515 30,432 Rural Energy Operations 5,719 16,174 21,893 Rural Energy Loan Funds 9,719 9,168 18.887 Southeast Energy Fund 11,921 -11,921 Power Cost Equalization and Rural Electric Capitalization Fund 2,810 -2,810 Power Development Fund 1,865 -1,865 Electric Service Extension Fund 84 -_-84 Total cash and investments $34,090 226,231 260,321 At June 30,2002,amounts restricted for debt service totaled $21,620,000 for the Bradley Lake Hydroelectric Project. 13 (Continued) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 AEA's cash,cash equivalents and investments are categorized below to give an indication of risk assumed by AEA at June 30,2002.Category 1 includes investments that are insured,registered or collateralized with securities held by AEA or its agents in AEA's name.Category 2 includes uninsured and unregistered investments or collateralized investments,with securities held by the pledging financial institution's trust department in AEA's name.Category 3 includes uninsured and unregistered investments for which the securities are held by the counter party,or by its trust department or agent but not in AEA's name. (Stated in thousands) Fair value at Category 1 Category 2 Category 3 June 30,2002 U.S.Treasury and Agency Securities $25,341 --25,341 Repurchase agreements --17,210 17,210 Cash and investments with State Treasury _--_187,245 187,245 Other investments -28.506 2.019 30.525 $25,341 28,506 206.474 260.321 (4)Capital Assets Capital asset activity for the year ended June 30,2002 was as follows (stated in thousands): Beginning Ending balance Increases Decreases balance Capital assets,being depreciated: Intangible $2,742 -(2,728)14 Production 553,496 144 (312,570)241,070 Transmission 326.481 -(140.881)185,600 General 7,490 -(2.496)4.994 Total capital assets, being depreciated 890,209 144 (458.675)431,678 Less accumulated depreciation for: Intangible (1,199)(1)1,228 (2) Production (164,184)(8,016)118,133 (54,067) Transmission (159.501)(7,300)94.020 (72,781) General (6.564)(435)2,737 (4.262) Total accumulated depreciation (331,448)(15,782)216,118 (131,112) Total capital assets, being depreciated,net $558,761 (15.638)(242,557)300,566 14 (Continued) (5) (6) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 Four Dam Pool Sale On January 31,2002,pursuant to ch.60 SLA 2000 (the Legislation),AEA sold the Four Dam Pool Projects to the Four Dam Pool Power Agency,an entity formed by the City of Ketchikan dba Ketchikan Public Utilities,the City of Wrangell dba Wrangell Municipal Light and Power,the City of Petersburg dba Petersburg Municipal Light and Power,Copper Valley Electric Association,Inc.and Kodiak Electric Association,Inc.(Purchasing Utilities).Pursuant to the Legislation,AEA sold the Projects pursuant to the terms of a Memorandum of Understanding (MOU)between AEA and the Purchasing Utilities dated April 11,2000,as amended in accordance with the Legislation.Pursuant to ch.75 SLA 2000,the proceeds of the sale,$68,000,000,along with certain other project funds,were transferred to the Power Cost Equalization Endowment Fund established under the Legislation.The Legislation provided for forgiveness of a noncurrent loan to the Authority upon closing.The loan forgiveness,net of other items,resulted in a $177,871,000 loss on sale of the Projects. Long-Term Debt The composition of bonds outstanding at June 30,2002 follows (stated in thousands): Balance Balance at June 30,at June 30,Due within 2001 Additions Deletions 2002 one year Revenue bonds payable: Bradley Lake Power First Series (a)$9,910 ---9,910 - Second Series (a)11,520 _--11,520 - Refunding,Third Series (a)56,880 -(2,740)54,140 2,875 Refunding,Fourth Series (a)47,710 -(1,855)45,855 1,950 Refunding,Fifth Series (a)30,640 --30,640 - Larsen Bay Fixed Rate (b)585 -(585)-- Total bonds payable 157,245 -(5,180)152,065 4,825 Arbitrage interest payable 226 176 -402 - Less bond discount and deferred interest (13.085)-1,806 (11,279)- $144,386 176 (3,374)141,188 4,825 15 (Continued) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 The minimum payments related to all bonds for the years subsequent to June 30,2002 are as follows (stated in thousands): (a) (b) (c) Principal Interest Total 2003 $4,825 7,316 12,141 2004 5,085 7,043 12,128 2005 5,370 6,756 12,126 2006 5,665 6,542 12,207 2007 5,800 6,470 12,270 2008-2012 30,410 30,408 60,818 2013-2017 39,955 21,336 61,291 2018-2022 54,955 7,708 62,663 $152,065 93,579 245,644 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 Vanable Rate Demand Bonds which were issued in November 1985 to provide interim financing of the project.AEA issued the Power Revenue Refunding Bonds,Third and Fifth Series in April 1999 to refund a portion of the First Series Bonds and to provide costs of issuance.AEA issued the Power Revenue Refunding Bonds, Fourth Series in April 2000 to refund a portion of the Second Series Bonds and to provide costs of issuance.All of the revenues derived by AEA from the operation of the project and all moneys, securities and funds (except the excess earnings fund),including a capital reserve fund,held or set aside are pledged and assigned to secure the payment of principal,redemption premium,if any,and interest on the bonds.No other revenues of AEA are pledged as security for the payment of the bonds.AEA has covenanted to notify the State Legislature of any failure to maintain the capital reserve fund at its required level.The bonds are further secured by bond insurance.AEA collects from each power purchaser a percentage share of annual project costs.The outstanding Bradley Lake Bonds mature annually each July |through the year 2021 with interest rates ranging from 5%to 6.25%. Larsen Bay Fixed Rate Revenue Bonds,issued May 1991 for the long term financing of a portion of the construction costs of the Larsen Bay Hydroelectric Project,were legally defeased as of June 30, 2002,with a call date of October 1,2002. The Alaska Legislature,in ch 61,SLA 2001,appropriated $400,000 to AIDEA,which in turn deposited the funds with the Larsen Bay Hydroelectric Project's bond trustee,as required by the legislation.The funds were used to pay current debt service and call bonds on April 1,2002.In June 2002,the AEA board authorized the expenditure of funds to retire all remaining outstanding bonds. The June 2002 transfer to the bond trustee resulted in the legal defeasance of all outstanding bonds. The arbitrage interest payable is due to the Internal Revenue Service for the excess of investment income on the proceeds of AEA's tax exempt bonds over the related interest expense in accordance with Section 148 of the Internal Revenue Code of 1986.The accumulated arbitrage interest payable 16 (Continued) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 amount is computed each year,and the amount is first due after the end of the fifth bond year and every five years thereafter.AEA maintains a separate account 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 $44,858,858 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 30,2002,the unpaid principal balance of the notes was $26,216,383 and the trust assets had a fair value of $26,848,688. 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 30,2002,the outstanding balance was $48,690,000. The Sitka Bonds are special obligations of AEA secured under a trust indenture by and between AEA and U.S.Bank Trust 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 and do not directly, indirectly or contingently obligate the State 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 or Sitka is pledged for the payment of the Sitka Bonds. 17 (Continued) (7) (8) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 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 30,2002 are classified as follows (dollar amounts stated in thousands): No.of Loans Amount Power Project Loan Program 43 $22,232 Rural Electrification Revolving Loan Program 10 1,812 Bulk Fuel Revolving Loan Program 46 1,114 99 25,158 Less allowance for loan losses (1,198) $23.960 Loans that are more than 90 days past due on which the accrual of interest has been discontinued amounted to $1,749,000 at June 30,2002. An analysis of changes in the allowance for loan losses for the year ended June 30,2002 follows (stated in thousands): Balance at beginning of year $1,447 Loans charged off during year (249) Balance at end of year . $1,198 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. (b)Property 1.Alaska Intertie The utilities participating in the Alaska Intertie operating agreement retain the property risk associated with the Alaska Intertie. 18 (Continued) (9) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 2.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 anda 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. (b)Alaska Intertie Operating Committee Effective May I,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.The agreement may be terminated by mutual agreement of the participants. (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,for each fiscal year with an annual settlement to adjust the payments to actual costs,which includes a fixed annual administrative fee to AEA. 19 (Continued) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Basic Financial Statements June 30,2002 (10)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 statements. 20 Balance at June 30,2001 Interest received Bond principal paid Bond interest paid Construction expenditures Operating revenue received Operating expenses paid Transfers between funds Balance at June 30,2002 ALASKA ENERGY AUTIIORITY (a Component Unit of the State of Alaska) Schedule of Bradley Lake Hydroelectric Project Trust Account Activities Year ended June 30,2002 (Stated in Thousands) Schedule 1 Debt Capital Renewal and Construction Excess Operating Service Reserve Contingency Unallocated Earnings Revenue Operating Reserve Account Account Account Account Account Account Account Account Total 8,434 12,834 5,000 2,045 83 158 327 535 29,416 289 786 433 82 12 263 =-_1,865 (4,595)_-_____(4,595) (7,563)______-_-(7,563) __(47)(210)____(257) _-_-=-_-13,766 _-13,766 _---=-_-(2,200)=-(2,200) 11,984 (786)(386)-142 (13,526)2,572 __- 8,549 12,834 5,000 1,917 237 661 699 535 30,432 See accompanying independent auditors'report. 21 Assets Current assets: Grants receivable Loans receivable Operating revenue receivable Accrued interest receivable Tota!current assets Noncurrent assets: Restricted cash and investments 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 Arbitrage interest payable Other liabilities Tota!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 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 30,2002 (Stated in Thousands) Schedule 2 Administration Bradley Lake Alaska Larsen Bay and Power Hydroelectric Four Dam Intertie Hydroelectric Development Rural Energy Combined Project Pool Project Project Project Project Projects Balance --___10,184 10,184 __-__--2,026 2.026 __234 12 909 558 1,713 951 _==_400 1,351 951 _234 12 909 13,168 15,274 30,432 -__1,865 228,024 260,321 -_---_21,934 21,934 307,016 _124,246 416 _-_431,678 (74,503)_(56,193)(416)=ied (131,112) 232,513 -68,053 ___300,566 262,945 _68,053 =1,865 249,958 582,821 263,896 _68,287 12 2,774 263,126 598,095 --_-8.072 8,072 718 -217 39 643 5,769 7,386 4,825 -_--__4,825 3,724 _====3,724 9,267 -217 39 643 13,841 24,007 135,961 ___-_-135,961 402 _-___402 103 ===_==103 136,466 -===_-136,466 145,733 -217 39 643 13,841 160,473 91,727 _68,053 -_-_159,780 21,620 _-___21,620 4,816 17 25,502 30,335 -__(27)2,131 223,783 225,887 $18,163 _-68,070 (27)2,131 249,285 437,622 263,896 _-68,287 12 2,774 263,126 598.095 22 Operating revenues: Federal grants $ Revenue from operating plants State of Alaska Interest on loans Revenue from other state agencies Other revenue Total operating revenues Operating expenses: Loss on sale of Four Dam Pool Project Grants and projects Power cost equalization grants Depreciation Interest expense Plant operating General and administrative Impairment loss Bad debt expense Total operating expenses Operating loss Nonoperating Investment loss Transfers Change 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 30,2002 Schedule 3 (Stated in Thousands) Administration Bradley Lake Alaska Larsen Bay and Power Hydroelectric Four Dam Intertie Hydroelectric Development Rural Energy Combined Project Pool Project Project Project Project Project Balance __-_-__22,792 22,792 13,766 2,487 1,135 __-_17,388 =439 -400 -12,312 13,151 __-_-__751 751 -_---_-_-573 573 ---__--215 215 13,766 2,926 1,135 400 _36,643 54,870 _178,061 -__--178,061 _-=--24,802 24,802 _--_-_-_--15,652 15,652 6,969 5,374 3,401 38 _-_-15,782 9,235 -_-40 -_--9,275 2,232 2,019 1,063 33 _-5,347 246 666 74 49 16 1,188 2,239 _-_-1,186 _-1,186 _190 -_-=__-190 18,682 186,310 4,538 1,346 16 41,642 252,344 (4,916)(183,384)(3,403)(946)(16)(4,999)(197,474) 1,675 338 2 !_(4,196)(2,180) -103,364 -520 (283)(103,601)- (3,241)(79,682)(3,401)(425)(299)(112,796)(199,654) 121,404 79,302 71,471 588 2,430 362,081 637,276 118,163 (380)68,070 163 2,131 249,285 437,622 23 ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Letter to the Board of Directors September 27,2002 aed KA PKE 701 West Eighth Avenue Suite 600 Anchorage,AK 99501 September 27,2002 The Board of Directors Alaska Energy Authority (a Component Unit of the State of Alaska) Dear Members: We have audited the basic financial statements of the Alaska Energy Authority (a Component Unit of the State of Alaska)(AEA or Authority)for the year ended June 30,2002,and have issued our report thereon dated September 27,2002.Under auditing standards generally accepted in the United States of America, we are providing you with the following information related to the conduct of our audit. Our Responsibility Under Auditing Standards Generally Accepted in the United States of America Our audit of your financial statements as of and for the year ended June 30,2002 was planned and performed to obtain reasonable assurance about whether the financial statements are free of material misstatements,whether caused by error or fraud.In planning and performing our audit,we considered internal control in order to determine our auditing procedures for the purpose of expressing our opinion on the financial statements.An audit does not include examining the effectiveness of internal control and does not provide assurance on internal control. Significant Accounting Policies The significant accounting policies used by AEA are described in note 2 to the financial statements.On July 2001,the Authority adopted three new accounting statements issued by the Governmental Accounting Standards Board (GASB): °Statement No.34,Basic Financial Statements-and Management Discussion and Analysis- for State and Local Governments; °Statement No.37,Basic Financial Statements-and Management Discussion and Analysis- for State and Local Governments:Omnibus,and e Statement No.38,Certain Financial Statement Disclosures. GASB Statement No.34 (as amended by GASB Statement No.37)resulted in modifications in the financial reporting model used by the Authority.Modifications include presentation of management's discussion and analysis (as required supplementary information),cash flow statement using the direct method and reclassification of net assets according to certain criteria.The adoption of GASB Statement No.34 had no cumulative effect on net assets. GASB Statement No.38 requires certain disclosures to be made in the notes to the financial statements concurrent with the implementation of GASB Statement No.34.While this statement does not affect amounts reported in the financial statements of the Authority,certain note disclosures have been added and or amended. f]|KPMG LLP KPMG LLP a US.limited liability partnership,isamemberofKPMGInternational,a Swiss association. mana The Board of Directors Alaska Energy Authority (a Component Unit of the State of Alaska) September 27,2002 Page 2 Significant Transactions We noted no transactions entered into by AEA during the year that were both significant and unusual,and of which,under professional standards,we are required to inform you,or transactions for which there is a lack of authoritative guidance or consensus. Management Judgments and Accounting Estimates Accounting estimates are an integral part of the financial statements prepared by management and are based upon management's current judgments.Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ markedly from management's current judgments.We evaluated the key factors and assumptions used to develop management's judgments and estimates in determining that amounts recorded were reasonable in relation to the financial statements of AEA taken as a whole. On January 31,2002,pursuant to legislation,AEA sold the Four Dam Pool Projects to the Four Dam Pool Power Agency,an entity formed by the City of Ketchikan dba Ketchikan Public Utilities,the City of Wrangell dba Wrangell Municipal Light and Power,the City of Petersburg dba Petersburg Municipal Light and Power,Copper Valley Electric Association,Inc.and Kodiak Electric Association Inc. (Purchasing Utilities).AEA sold the Projects pursuant to the terms of a Memorandum of Understanding (MOU)between AEA and the Purchasing Utilities dated April 11,2000,as amended in accordance with legislation.The proceeds of the sale $68,000,000 along with certain other project funds,were transferred to the Power Cost Equalization Endowment Fund.The Legislation provided for forgiveness of a noncurrent loan to the Authority upon closing.The loan forgiveness,net of other items,resulted in a $177,871,000 loss on sale of the Projects. The allowances for loan losses represent management's judgment as to the amount required to absorb potential losses in the loan portfolio.The factors used by management to determine the allowances include historical loss experience,individual delinquencies,existing economic conditions and other factors. Management's estimates of potential loss are charged to operating expense through provisions for loan losses.The allowance totaled approximately $1,198,000 at June 30,2002,and we agreed with management that the allowance is reasonable in relation to the financial statements taken as a whole. Significant Audit Adjustments We did not propose corrections of the financial statements that could,in our judgment,either individually or in the aggregate,have a significant effect on AEA's financial reporting process. Other Information in Documents Containing Audited Financial Statements Our responsibility for other information in documents containing AEA's financial statements and our report thereon does not extend beyond the financial information identified in our report,and we have no obligation to perform any procedures to corroborate other information contained in these documents.We will,however,read the other information included in AEA's annual report and offering documents,and will communicate to management and,if necessary,the Board of Directors any items that caused us to believe that such information,or its manner of presentation,is materially inconsistent with information,or manner of its presentation,appearing in the financial statements. mana The Board of Directors Alaska Energy Authority (a Component Unit of the State of Alaska) September 27,2002 Page 3 Disagreements with Management There were no disagreements with management on financial accounting and reporting matters that,if not satisfactorily resolved,would have caused a modification of our report on AEA's 2002 financial reporting. Consultation with Other Accountants To the best of our knowledge management has not consulted with or obtained opinions,written or oral, from other independent accountants during the past year that were subject to the requirements of Statement on Auditing Standards No.50,Reports on the Application of Accounting Principles. Major Issues Discussed with Management Prior to Retention We generally discuss a variety of matters,including the application of accounting principles and auditing standards,with management prior to retention each year as AEA's auditors.However,these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Difficulties Encountered in Performing the Audit We encountered no difficulties in dealing with management in performing our audit. ek Rk This information is intended solely for the information and use of the Board of Directors and is not intended to be used and should not be used by anyone other than these specified parties. Very truly yours, KPMG LEP