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HomeMy WebLinkAbout11-13-2001 BM MinutesALASKA ENERGY AUTHORITY Board MeetingNovember13,2001 Minutes . * -fe 5Pa¥ a v3 BAUrryTayeBeraaLeytreat*eatenSefsetenahworEee1eres ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY =ALASKAqm=ENERGY AUTHORITY eS ; 813 WEST NORTHERN LIGHTS BLVD.®ANCHORAGE,ALASKA 99503 ©907/269-3000 ©FAX 907/269-3044 TOLL FREE (ALASKA ONLY)888 /300-8534 AGENDA ALASKA ENERGY AUTHORITY Board of Directors November 13,2001 1.CALL TO ORDER 2.BOARD OF DIRECTORS ROLL CALL 3.PUBLIC ROLL CALL 4.PUBLIC COMMENTS 5.PRIOR MINUTES _ -October 11,2001 6.OLD BUSINESS 7.NEW BUSINESS A.Financial Statements/Audit Report (KPMG) B.GASB #34 Presentation (KPMG) 8.DIRECTOR COMMENTS A.Director's Status Report of AEA Programs and Projects B.Next Meeting Dates: 9.BOARD COMMENTS 10.ADJOURNMENT H:\ALL\bfuglestad\BOARD\Agenda AEA.DOC ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY /=>ALASKAME=ENERGY AUTHORITY 813 WEST NORTHERN LIGHTS BLVD.¢ANCHORAGE,ALASKA 99503 ¢907/269-3000 ¢°FAX 907/269-3044 TOLL FREE (ALASKA ONLY)888 /300-8534 ALASKA ENERGY AUTHORITY BOARD OF DIRECTORS November 13,2001 -2:06 p.m. Anchorage,and Juneau,Alaska 1.CALL TO ORDER Chairman Hughes called the meeting of the Alaska Energy Authority to order on November 13, 2001,at 2:06 p.m.A quorum was established. 2.BOARD OF DIRECTORS ROLL CALL Directors present in Anchorage:Mr.Wilson Hughes (Chairman/Public Member),Commissioner Sedwick (Department of Community and Economic Development),Ms.Helvi Sandvik (Public Member),and Deputy Commissioner Larry Persily (Designee for Department of Revenue). Directors present in Juneau:Commissioner Joe Perkins (Department of Transportation and Public Facilities). 3.PUBLIC ROLL CALL Staff present in Anchorage:Robert Poe,Jr.(Executive Director),Valorie Walker (Deputy Director- Finance),James A.McMillan (Deputy Director-Credit),Brenda J.Fuglestad (Administrative Assistant),Lynn Kenney (Development Specialist),Brenda Applegate (Accountant),Christel Petty (Accountant),Amy McCollum (Accountant),Sara Fisher-Goad (Accountant),Linda MacMillan (Accountant),Karl Reiche (Projects Development Manager),Bruce Tiedeman (Rural Energy Manager). Others attending in Anchorage:Brian Bjorkquist (Department of Law),Jan Sieberts and Jerry Weaver (Wells Fargo),Jon Rubini and Keith Laufer (Foster Pepper Rubini &Reeves LLC),Ken Vassar (Wohlforth Vasser Johnson &Brecht),Tim Bradner (Alaska Economic Report). 4.PUBLIC COMMENTS There were no public comments. 5.PRIOR MINUTES -October 11,2001 The October 11,2001,minutes were approved as presented. AEA Board Meeting November 13,2001 Meeting Minutes Page 2 6.OLD BUSINESS There was no old business. 7.NEW BUSINESS 7A.Financial Statements/Audit Report (KPMG) Ms.Kathy Porterfield,Managing Partner with KPMG,LLP,summarized the audited financial statements,and letter to the Board. 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 there were no significant writedowns or unusual transactions. In reviewing the management letter,Ms.Porterfield said that last year there were several significant administrative and contro!issues that were brought to the attention of the Authority and the Board with regard to internal control.The only issue that the Authority is still working on is with respect to subrecipient monitoring.The Authority receives funds from the federal government that they pass through to other entities.There are specific subrecipient monitoring requirements that the federal government has that the Authority is still implementing internal processes to get that monitoring in place.The other recommendations from last year have all been taken care of.In KPMG's opinion,there has been substantial progress made. Mr.Poe said Valorie Walker heads up the finance department and has been a tremendous manager in guiding this team in solving a huge number of accounting problems.Mr.Poe introduced Brenda Applegate,Amy McCollum,Sara Fisher-Goad,and Linda MacMillan, recognizing them for their hard work and the effort they have put into solving these issues and bringing them under control. The Board acknowledged the challenges involved and complimented staff on their aggressiveness toward dealing with and resolving the issues. Ms.Walker extended her thanks to the Department of Community and Economic Development's staff for their help and efforts in resolving some of the issues. 7B.GASB #34 Presentation (KPMG) Ms.Porterfield said that there are a few issues that AEA needs to deal with but they are ready to implement this new accounting standard.AEA will be given a complete list of tasks that they have to perform over the next couple of months so that théy can implement the standard fully and be ready before the next audit. AEA Board Meeting November 13,2001 Meeting Minutes Page 3 8.DIRECTOR COMMENTS e Four Dam Pool Project Update Mr.Bjorkquist updated the Board with regard to the Four Dam Pool Project Purchase and Sale Agreement stating there has been much progress made on the agreement and it is basically in its final form.The Memorandum of Understanding sets the basic parameters for the sale and the purchasing agreement sets the details. Mr.Laufer stated that AIDEA would be financing the sale.The people involved have been meeting regularly over the last month on the financing package.The guidance from the Memorandum of Understanding was that the financing be structured in a way as would be typical for a financing done with publicly issued bonds.The only asset that the Joint Action Agency holds is the Power Sales Agreement and the projects themselves.As was always the case,it was understood that the current Power Sales Agreement could not be altered.AIDEA, however,is in a better position than AEA has been in that if there is ever a default,AIDEA has the ability to terminate the Power Sales Agreement and enter into a new Power Sales Agreement with the existing communities or others to sell this power.In that perspective, AIDEA would not be in a situation where if the loan were in default they would then be subject to taking over these projects in the same status as AEA had with the existing Power Sales Agreement. We are requiring the Joint Action Agency to take the revenues they receive monthly and keep them within the Agency consistent with the Power Sales Agreement.The debt service component was the payment that was previously going to AEA and ultimately going to Power Cost Equalization.A mechanism has been set up whereby they must deposit the monies into a dedicated account.They would then deposit monthly the amounts in that account to the Trustee.The Trustee would apply it,as would be the case in a traditional bond financing,to the payment of AIDEA's debt service and also to fund adequate reserves.Effectively,the debt service component is tied up with the Trustee where only the excess amounts over and above what is necessary for debt service and reserve and replacement requirements can be used by the Joint Action Agency for other purposes.This mechanism ensures that the funds are first used to pay AIDEA and to fund the reserve and replacement requirements for long term maintenance of the project.The basic parameters of how that is going to be structured have become clear and are generally accepted by the Joint Action Agency and their counsel. e Rural Energy Group Update Mr.Poe informed the Board that AEA has nine powerhouse operators graduating from AVTEC next week. He also said the Canadian Broadcasting crew has been in Alaska and are interested in taking a look at a number of AEA's projects with regard to the alternative energy programs. Under the Biomass program,Unisea has been doing test burns in Dutch Harbor on a 50/50 basis with fish oil and diesel.The diesel generator works great with the 50/50 burn and it reduces the emissions by 30%,and the estimated savings by burning this 50/50 mix will be approximately $465,000 per year. AEA Board Meeting November 13,2001 Meeting Minutes Page 4 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 2:25 p.m. 4 4RobertPoe,Jr.,Setretary ALASKA INDUSTRIAL DEVELOPMENT*AND EXPORT AUTHORITY «=>ALASKA @@E™=ENERGY AUTHORITY 813 WEST NORTHERN LIGHTS BLVD.©ANCHORAGE,ALASKA 99503 ©907/269-3000 ©FAX 907/269-3044 TOLL FREE (ALASKA ONLY)888 /300-8534 ALASKA ENERGY AUTHORITY BOARD OF DIRECTORS October 11,2001 -1:20 p.m. Anchorage,Alaska 1.CALL TO ORDER Chairman Hughes called the meeting of the Alaska Energy Authority to order on October 11, 2001,at 1:20 p.m.A quorum was established. 2.BOARD OF DIRECTORS ROLL CALL Directors present in Anchorage:Mr.Wilson Hughes (Chairman/Public Member),Commissioner Sedwick (Department of Community and Economic Development),and Ms.Helvi Sandvik (Public Member). 3.PUBLIC ROLL CALL Staff present in Anchorage:Robert Poe,Jr.(Executive Director),Valorie F.Walker (Deputy Director-Finance),Michael Harper (Deputy Director-Energy),James A.McMillan (Deputy Director- Credit),Mark Schimscheimer (Technical Engineer),David Lockard (Technical Engineer),Karl Reiche (Projects Development Manager),Lynn Kenney (Development Specialist),and Brenda Fuglestad (Administrative Assistant). Others Present in Anchorage:Jim St.George (STG,Inc.),Robert LeResche (LeResche & Company),Mike Mitchell (Department of Law),and Keith Laufer (Foster Pepper Rubini &Reeves LLC). 4.PUBLIC COMMENTS There were no public comments. 5.PRIOR MINUTES -June 14,2001 The June 14,2001,minutes were approved as presented. 6.OLD BUSINESS There was no old business. AEA Board Meeting October 11,2001 Meeting Minutes Page 2 7.NEW BUSINESS There was no new business. 8.DIRECTOR COMMENTS e Four Dam Pool Project Update Mr.LeResche said that essentially the conclusion of the divestiture would result in the Four Dam Pool Projects at Terror Lake,Solomon Gulch,Tyee,and Swan Lake,being owned by a group of utilities from those communities joined together in a Joint Action Agency,which is a quasi-governmental corporation.The main benefits to AEA are the release from liabilities both present and future.The original Four Dam Pool Power Sales Agreement,as written,was not favorable to AEA.The Power Sales Agreement does not require any specific minimum payment every year;the utilities pay debt service based on per kilowatt-hours used.AEA was responsible for any shortfall in renewal and replacement funds.The revenues from the Four Dam Pool have always gone to where the legislature directs for budgetary expenditure,so they were not retained in the project in any way.This is not a good thing and has already caused AEA financial trouble over the years and is bound to cause more.One of the key factors is that the utilities under this Joint Action Agency will assume all of these risks in the future. Under the MOU the utilities will pay $73 million for the Four Dam Pool Project.As structured, this is actually a fair representation of the market value.The utilities,in order to complete this purchase,will keep rates at what they have been.In terms of earning value,at least for the short term,this is a fair price. Of that $73 million,$5 million will initially be reserved for a future loan for the Swan-Tyee Lake Intertie.If they do want to take that loan then they will have to pay back the $5 million.AIDEA will lend them that in the future. In addition,the state will receive $32 million from a combination of the insurance fund and payments for power over the last two years.Approximately $90 million goes into the PCE Endowment Fund,which is expected to pay out 7%every year toward PCE.The legislature also added $100 million from the constitutional budget reserve to that Fund. Any business deal of this magnitude is not simple,but this one is particularly heinous given that there are four projects and five entities.To summarize,this sale will happen by December 31. There is an incentive in the MOU that this sale not happen much before that,because as soon as it happens the utilities have to start paying for the power.They are forgiven any payments for usage from July 1 through December 31,2001.To make this sale happen,the Purchase and Sales Agreement further defines the elements of the MOU which states the terms of the sale.There have been numerous discussions involving indemnification and whether the state delivers as is where is or whether the state warrants any title to anything.This agreement also has attached schedules that would list as much as possible of the $470 million worth of assets that comprises these projects. The Department of Natural Resources will convey several thousand acres to the Joint Action Agency by way of rights-of-way.These took title searches and land records review,but approximately two months ago DNR published draft findings as to why these long-term leases were in the public's interest.The comment period is closed and the Commissioner will sign his AEA Board Meeting October 11,2001 Meeting Minutes Page 3 findings next Thursday.In addition,these leases have to meet FERC requirements.FERC requires that any license holder have a certain amount of control over the underlying land in order to keep the license valid. Part of this deal is that the Alaska Industrial Development and Export Authority will be the lender to the Joint Action Agency of up to $110 million to cover the $73 million purchase price. This transaction involves trustees,reserve funds,and certain security so AIDEA will be able to sell this loan.This financial negotiation has to move ahead quite quickly because one of the members of the Joint Action Agency is Ketchikan,which is a municipal utility that requires two readings a month apart plus a 30 day waiting period before they can vote on it.Ketchikan has to have a near final finance document in their hand within 10 days from now. Mr.Laufer updated the Board with regard to litigation involving Ketchikan Electric Company. He reported that the FERC issue was resolved in the utilities'favor,it was subsequently appealed to the District Court in D.C.and that too was resolved in the utilities'favor.There is a potential for further appeals but it is unlikely that it will change the result.The other litigation was a similar piece that was filed in the Ketchikan Superior Court.That too was resolved at the Superior Court level in favor of the utilities and the Joint Action Agency.At this point,it appears that the PURPA issues are resolved and are not going to impede the sale of the projects. With AIDEA providing the financing there is potential to help the process along.Because the financing was complicated,by adding a third party after going through an approval process with the legis!ature,would complicate it to an extent that we were not confident that we would be able to get the deal closed.There was an obvious concern on the part of AIDEA staff,AIDEA Board of Directors,and the Administration that we not turn AIDEA into an AEA and reduce the typical AIDEA requirements and financial discipline that is involved in an AIDEA transaction.As such,when we negotiated the MOU we created safeguards as it relates to the AIDEA financing. The first safeguard is that there is a requirement that the utilities subordinate their rights under the Power Sales Agreement.It would be structured as would be typical to finance a project like this with publicly issued debt.The AIDEA Board ultimately has approval of the transaction before it can be consummated.The Power Sales Agreement was a very onerous agreement because it placed a great deal of liability on the state.The obvious concern was that if there was default,with AIDEA as the lender,we wanted to assure that AIDEA would not have to take these projects encumbered by that Power Sales Agreement.As part of the original MOU,the utilities and AIDEA agreed that AIDEA financing requires subordination.That is part of the deal and has never been in doubt.The deal as it is written now,and is being negotiated,allows AIDEA or the trustee,depending on who owns the debt at the time,to elect in a default situation to either enforce the Power Sales Agreement or foreclose. The second safeguard was that it be financed as a typical public debt.The rationale was two fold:apply that discipline,but also have a debt structured in a way that when AIDEA itself went out to issue its bonds it would be a valuable asset to the rating agencies and the people that AIDEA sells bonds to.Some of these things are causing a great deal of discomfort with the utilities.But,at this point,we are intent on holding firm and not present to the Board something that we do not believe would be a typical public debt.The entity that is going to hold this is a stand-alone entity.The Joint Action Agency is a limited liability company.The only assets that the Joint Action Agency will hold are the projects themselves and the Power Sales Agreement: the right to receive revenues under the existing Power Sales Agreement.The utilities,to some extent,are arguing that it should be treated more like a utility financing.A typical utility AEA Board Meeting October 11,2001 Meeting Minutes Page 4 generally has the ability to increase the rate as necessary,with regulatory approval,in order to pay its debt.This entity will have no such right because all it has is the same rights that AEA had before,which was the right on their Power Sales Agreement to receive payments when power is delivered. e Rural Energy Group Update Mr.Poe said that Senator Stevens has had much success in bringing money into Alaska to deal with leaking storage tanks,the capacity of storage tank farms in Rural Alaska,and the cost of electricity in Rural Alaska.All of our programs are designed to assist. The Rural Energy Programs further cement the linkage between Urban and Rural Alaska and between the economic development that AIDEA does and the economic development that rural energy organizations do in Rural Alaska.The Dimond Hotel is a good example as the targeted customers for the hotel are Rural Alaskan's coming to visit Anchorage on shopping trips. One of the things we set about doing is to.find ways that we could build projects for Rural Alaska at a much higher volume,more effectively,and without adding state employees to the payroll to do that job.We also had to change the Denali Commission's view of Rural Energy. We did that by delivering on what we said we were going to do. We used construction managers as a way to use private sector companies to leverage our ability to build more projects.The construction manager is a critical part in the success we have had.We also challenged the construction managers to work with the communities to hire local people and be responsible for training them.This would leave more than just the completed project when they left a particular village.For a project in Kotlik,Mr.St.George,our construction manager,recruited the welding instructor from the King Career Center,took him to Kotlik and trained approximately six finish welders.This means these welders have the opportunity to work on jobs around the state,which opens upa lot of opportunities. Messrs.David Germer and Karl Reiche built the rural energy team and Mike Harper has done a great job of leading them.Valorie Walker also overcame some tremendous accounting problems with the Rural Energy Group. We will have completed nine bulk fuel projects this year and two rural power system upgrades. We expect to complete eleven bulk fuel projects next year,four rural power system upgrades, and put 21 more projects into planning this fall.This represents approximately a three-fold increase in the number of projects that this place has been able to produce. Mr.Harper updated the Board on the rural energy program projects.He walked the Board through a series of slides. He stated that staff has requested and received $2.7 million from the Denali Commission for 21 bulk fuel projects which are scheduled for the fall of 2001 with anticipated construction in 2002. The projects are for work in the following communities:Aleknagik,Larsen Bay,Akiachak, Egigik,Lime Village,Sand Point,Chauthbaluk,Takotna,Akutan,Iqiugig,Nelson Lagoon, Chalkyitsik,Venetie,Chenega Bay,Kokhanok,Newhalen,Beaver,Akhiok,Deering,Koyukuk, and Port Heiden. AEA Board Meeting October 11,2001 Meeting Minutes Page 5 Staff has also requested and received $300,000 for six rural power system upgrade projects scheduled for the fall of 2001 with anticipated construction in 2002.The projects are:Golvin Powerhouse,Kwigillingok Powerhouse,Newtok Powerhouse,Kongiginak Powerhouse & Distribution System,Atmautluak Distribution System,and the Manokotak Powerhouse.There has also been a request for an additional $253,000 for a rural power system upgrade for Stevens Village. Mr.Harper referred the Board members to the powerpoint presentation as to the details with regard to the completed,under construction,active,and planned construction projects through 2003. Mr.Harper said that the Authority produced a prioritization report that listed deficiencies using a numbering system.Those communities that were the worst went to the top of the list for improvements.After some discussion with the Denali Commission,it was agreed that we do not want to build a $2 million project only to have the community fold up a few years later.The notion of sustainability or the ability of the utility in the village to continue the operation is critical. We have come up with a template to quickly write a business plan for the projects. Mr.Schimscheimer briefed the Board on the first construction manager project,which is approximately two weeks away from final completion.The project has been very successful.Not only is the facility now state of the art and code compliant,but in the process this project has put a lot of money into the local village and produced six certified welders from the village.The project is on schedule and under budget. Discussions ensued as to the first project using a construction manager on site and the success of the project. In response to Board questions,Mr.Poe said the Denali Commission is the main source of funding through grants.He said the grant goes to the community and then the community has an agreement with AEA.The community ends up owning the facility.In the business plan,we have to find a backup operator so that should the community fail,the backup operator takes over operation and responsibility for the asset. Mr.Poe said that in terms of cost overruns,AEA has no financial liability.AEA would look to the Denali Commission for additional monies. Discussions ensued as to quality control on the projects. In response to Board questions,Mr.Poe said the community's assets are at risk if there is a failure in the tank in their community,not AEA's assets.It is the community's insurance policy that will be looked to in case of a failure of the tank.The community has no recourse back to AEA. Mr.Poe said that AEA contacts the communities in terms of needs because if staff were to wait for the community to come to AEA then only the communities with the wherewithal would be the ones to obtain the grants.As such,some of the communities with the biggest problems may get left behind.AEA brings the request to the Denali Commission,however,there must be a community agreement,a community business plan,and a grant agreement between AEA and the community before it can move forward. AEA Board Meeting October 11,2001 Meeting Minutes Page 6 Mr.Poe said AVEC has 51 villages that they serve and the Denali Commission chose AVEC as a vehicle for addressing the needs in those communities.The villages that AVEC serves are also on AEA's prioritization index. Mr.Poe said initially,when the Division of Energy was still in existence,the projects were not getting done in a timely manner so the Denali Commission felt pressure to get the money placed and went to a second partner,AVEC,to complete the task.This allowed more projects to happen in a shorter period of time. Discussions ensued as to training programs and the need to coordinate with other agencies that provide these services. Commissioner Sedwick suggested that Mr.Poe mention the training issues at the next Governor's Cabinet meeting to entice discussion. Mr.Schimscheimer said that the business plan would leave communities not just with mechanics but with an ability to run a business.There will be very specific training requirements in the business plan for each community in order to receive the tank farm.Specifically,people will be trained to operate a tank farm.They will be trained as accountants,bookkeepers,etc.Staff is currently not aware of all of the programs there are in which to accomplish the training goal,but as part of the agreement with the Denali Commission,the community would have to send a certain number of people to training for computer literacy,accounting software,business procedures,etc. Ms.Sandvik said that Alaska is filled with great-intended infrastructure financed by the state,but after the facilities were built the state left without training people as to how to operate them. NANA ended up owning and operating three bulk fuel storage facilities and lost a lot of money on them.Ultimately,NANA gave them back to the community because we could not afford,as a profit organization,to continue to subsidize the community.The community needs to take responsibility to manage their own bulk fuel storage.It is a critical component to leave the tools in the community to manage the infrastructure that they need to be self-sustaining. 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 2:30 p.m. Robert Poe,Jr.Secretary ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY {=ALASKA@aE™ENERGY AUTHORITY aoe wetscan<a 813 WEST NORTHERN LIGHTS BLVD.®©ANCHORAGE,ALASKA 99503 ©907/269-3000 ©FAX 907/269-3044 TOLL FREE (ALASKA ONLY)888 /300-8534 MEMORANDUM TO:Board of Directors Alaska Energy Authority FROM:Robert Poe,Jr,RU” Executive Director DATE:November 13,2001 SUBJECT:Financial Reports Included with your packet are the June 30,2001,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 the Board members may have. h:allbjf\finance\vfwifinancial reports ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Financial Statements and Schedules June 30,2001 and 2000 (With Independent Auditors'Report Thereon) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Table of Contents Independent Auditors'Report Balance Sheet Statement of Revenues and Expenses Statements of Changes in Fund Equity Statements of Cash Flows Notes to Financial Statements Schedules 1 Schedule of Bradley Lake Hydroelectric Project Trust Account Activities 2 Schedule of Projects --Balance Sheet 3 Schedule of Projects -Revenues and Expenses 6-19 ia)me |mw = [KEPAMKE 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 sheets of the Alaska Energy Authority (a Component Unit of the State of Alaska)as of June 30,2001 and 2000,and the related statements of revenues and expenses, changes in fund equity,and cash flows for the years then ended.These financial statements are the responsibility of Alaska Energy Authority's management.Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audits 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 audits provide a reasonable basis for our opinion. In our opinion,the financial statements referred to above present fairly,in all material respects,the financial position of Alaska Energy Authority (a Component Unit of the State of Alaska)as of June 30, 2001 and 2000,and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. 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 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 audits 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. KPIc LEP October 5,2001 g|KPMG LLP KPMG LLP.a US.limited liability partnership,isamemberofKPMGInternational,a Swiss association. ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Balance Sheets June 30,2001 and 2000 (Stated in Thousands) Assets Property,plant and equipment (notes 4 and 5) Less accumulated depreciation Net property,plant and equipment Other assets -cash and investments -restricted (note 3) Current assets: Due from State of Alaska Operating revenue receivable Accrued interest receivable Total current assets Loans receivable,net of allowance (note 7) Grants receivable Fund Equity and Liabilities Fund equity: Contributed capital Accumulated deficit Total fund equity Long-term debt,net of current portion (note 6): Bonds payable Arbitrage interest payable Total long-term debt Current liabilities: Accounts payable Grants payable Current portion of bonds payable (note 6) Accrued interest Other liabilities Total current liabilities See accompanying notes to financial statements. $ 2001 2000 890,209 890,209 331,447 310,214 558,762 579,995 198,299 146,177 1,632 46,432 10,506 13,774 1,191 1,244 13,329 61,450 23,832 24,035 5,465 10,004 799,687 821,661 963,518 963,518 (326,241)(316,713) 637,277 646,805 139,525 142,387 226 149 139,751 142,536 10,871 9,450 2,350 11,540 4,635 4,180 3,850 3,246 953 3,904 22,659 32,320 799,687 821,661 ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Statements of Revenues and Expenses Years ended June 30,2001 and 2000 (Stated in Thousands) 2001 2000 Revenues: Revenue from operating plants $25,257 25,259 Operating transfer from State of Alaska 20,254 9,163 Federal grants 7,920 22,284 State of Alaska appropriations 3,079 7,020 Receipts from (refunds to)other agencies (77)1,239 Investment income (loss)(309)5,667 Other revenue 83 69 Total revenues”-56,207 70,701 Expenses: Depreciation 21,233 22,974 Power cost equalization grants 16,955 14,583 Grants and projects 9,707 26,849 Interest 9,538 10,017 Plant operating 5,440 6,567 General and administrative 1,971 1,911 Operating transfer to State of Alaska 425 - Bad debt expense 332 -_- Provision for loan losses (note 7)134 1,093 Impairment loss (note 5)-41,358 Total expenses 65,735 125,352 Deficiency of revenues over expenses $(9,528)(54,651) See accompanying notes to financial statements. ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Statements of Changes in Fund Equity Years ended June 30,2001 and 2000 (Stated in Thousands) Contributed Accumulated Total Capital Deficit Fund Equity Balance at June 30,1999 $619,801 (262,062)357,739 Residual equity transfers in (note 1)399,320 -399,320 Residual equity transfers out (note 1)(55,603)-(55,603) Deficiency of revenues over expenses -_-(54,651)(54,651) Balance at June 30,2000 963,518 (316,713)646,805 Deficiency of revenues over expenses -(9,528)(9,528) Balance at June 30,2001 $963,518 (326,241)637,277 See accompanying notes to financial statements. ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Statements of Cash Flows Years ended June 30,2001 and 2000 (Stated in Thousands) 2001 2000 Reconciliation of deficiency of revenues over expenses to net cash provided by operating activities: Deficiency of revenues over expenses $(9,528)(54,651) Adjustments to reconcile deficiency of revenues over expenses to net cash provided by operating activities: Depreciation 21,233 22,974 Provision for loan losses (note 7)134 1,093 Impairment loss (note 5)-41,358 Bad debt expense 332 - Bond interest expense 9,538 10,017 Investment (income)loss 309 (5,667) Changes in assets and liabilities: (Increase)decrease in due from State and other agencies 44,800 (1,244) (Increase)decrease in grants receivable 4,539 (7,773) (Increase)decrease in loans receivable 69 (2,428) (Increase)decrease in operating revenue receivable 2,936 (3,882) Increase (decrease)in grants payable (9,190)11,341 Increase (decrease)in accounts payable 1,421 (413) Decrease in other liabilities (2,951)(3,336) Net cash provided by operating activities 63,642 7,389 Cash flows from noncapital financing activities - Residual equity transfer -_86,908 Cash flows from capital and related financing activities: Repayment of bonds (4,180)(4,874) Interest paid on borrowings (7,161)(7,310) Construction of capital projects -(56) Net cash used in capital and related financing activities (11,341)(12,240) Cash flows from investing activities: Net increase in restricted cash and investments (62,230)(87,479) Interest received from investments 9,929 5,422 Net cash provided by investing activities (52,301)(82,057) Cash and investments at beginning of year -_-- Cash and investments at end of year $-- See accompanying notes to financial statements. (1) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 Organization and Operations The Alaska Energy Authority (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.Today,AEA's six hydroelectric projects have an installed capacity of 164 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 of AEA was retained but the ability to construct and acquire energy projects was eliminated.AEA retained its operating assets including the Four Dam Pool (Solomon Gulch,Swan Lake,Terror Lake and Lake Tyee Hydroelectric Projects),the Bradley Lake Hydroelectric Project,the Alaska Intertie and the Larsen Bay Hydroelectric Project.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 1999 reorganization resulted in a residual equity transfer in of $399,320,000.During 2000,the Authority transferred $55,603,000 to the Railbelt Energy Fund and to the State General Fund;the transfers were recorded as residual equity transfers out. The following is a description of AEA's existing projects: (a)Bradley Lake Hydroelectric Project The project has installed capability 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 6 (Continued) (2) (b) (c) (d) (e) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 Association under contract with AEA.Bradley Lake serves Alaska's Railbelt from Homer to Fairbanks as well as the Delta Junction area. Four Dam Pool Project The Solomon Gulch,Swan Lake,Terror Lake and Lake Tyee Hydroelectric projects,collectively known as the Four Dam Pool,came on line in the 1980's and serve,respectively,the communities of Valdez and Glennallen,Ketchikan,Kodiak,and Petersburg and Wrangell. The project gained its name from the fact that all costs are pooled,with the same kwh rate charged for electricity drawn from any one of the four projects.The local utilities are responsible for day-to- day operation of the projects.(See note 5) 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 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. 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.(See note 6) Rural Energy Programs The rural energy programs of the Authority include Bulk Fuel Storage Upgrades,Rural Power System Upgrades,Power Cost Equalization,Alternative Energy,Utility Training and Technical Assistance,two active loan programs funded from the Bulk Fuel Revolving Loan Fund and the Power Project Fund and one inactive loan program. Summary of Significant Accounting Policies (a)Basis of Accounting -Enterprise Fund Accounting The accounts of AEA are organized as an Enterprise Fund.Accordingly,the financial activities of AEA are recorded using 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. Statement No.20 of the Government Accounting Standards Board (GASB),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).AEA has elected to apply all applicable GASB 7 (Continued) (b) (c) (d) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 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. Property,Plant and Equipment Property,plant and equipment 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 For hydroelectric plants financed through tax-exempt borrowings,interest costs on the borrowings, less any interest earned on the related investments acquired with proceeds of the borrowings are capitalized from the date of the borrowing until the assets are placed in service.Ordinary repairs and maintenance are expensed as incurred. The Authority follows Statement of Financial Accounting Standards No.121 (SFAS No.121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement requires recognition of 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 and are not considered to be cash equivalents for purposes of preparing the statement of cash flows. 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. 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. 8 (Continued) (3) (e) (g) (h) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 Contributed Capital Funds received from Federal,State or other sources for purposes of acquisition of property,plant and equipment are accounted for as contributed capital. 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. Grant Revenue Recognition The Authority recognizes grant revenue under the provisions of Governmental Accounting Standards Board Statement No.33,Accounting and Financial Reporting for Nonexchange Transactions, whereby revenue is recognized when all applicable eligibility requirements,including time requirements,are met. Reclassifications Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation. Cash and Investments Pursuant to various agreements relating to its operation,AEA has established funds to account for assets restricted to construction,operation and financing activities. 9 (Continued) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 The restricted cash and investments are held in trust accounts for the following activities as of June 30 (stated in thousands): Bradley Lake Hydroelectric Project funds Power Cost Equalization Endowment fund Rural Energy Operations Four Dam Pool Project funds (note 5) Rural Energy Loan funds Southeast Energy fund Power Cost Equalization and Rural Electric Capitalization fund Power Development fund Four Dam Pool sale fund Electric Service Extension fund Alaska Intertie operations fund Larsen Bay Hydroelectric Project funds Total cash and investments $ 2001 2000 29,416 28,859 95,677 - 23,537 3,265 17,310 21,868 14,158 69,002 12,028 12,079 3,952 9,217 1,633 1,169 480 -_- 84 84 24 597 -37 198,299 146,177 AEA's cash and investments are categorized below to give an indication of risk assumed by AEA at June 30,2001.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. U.S.Treasury and Agency Securities Repurchase agreements Cash with State Treasury Other investments $ (Stated in Thousands) Fair value at Category 1 Category 2 Category 3 June 30,2001 16,943 -_-_16,943 --39,356 39,356 --_-114,092 114,092 -27,371 537 27,908 16,943 27,371 153,985 198,299 10 (Continued) (4) (5) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 Property,Plant and Equipment A summary of property,plant and equipment and related accumulated depreciation is as follows at June 30, 2001 and 2000 (stated in thousands): 2001 2000 Intangible $2,989 2,989 Production 581,685 581,685 Transmission 339,177 339,177 General 7,716 7,716 931,567 931,567 Less:Four Dam Pool impairment loss (note 5)(41,358)(41,358) Less:Accumulated depreciation (331,447)(310,214) Net property,plant and equipment $558,762 579,995 Four Dam Pool Sale Pursuant to ch.60 SLA 2000 (the Legislation),AEA has been authorized to sell the Four Dam Pool Projects to an entity formed by the City of Ketchikan,the City of Wrangell,the City of Petersburg,Copper Valley Electric Association,Inc.and Kodiak Electric Association,Inc.Pursuant to the Legislation,AEA may sell 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 the MOU there are various conditions that must be satisfied prior to consummation of the sale.Assuming all conditions can be satisfied,the parties anticipate the sale of the Projects to be consummated on December 31,2001.Pursuant to ch.75 SLA 2000,the proceeds of the sale along with certain other project funds have been appropriated to the Power Cost Equalization Endowment Fund established under the Legislation.In accordance with Statement of Financial Accounting Standard No.121,the Authority wrote down its investment in the Four Dam Pool Project by $41,358,000 during the year ended June 30,2000. li (Continued) (6) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 Long-term Debt Following is a summary of long-term debt at June 30 (stated in thousands): 2001 2000 Bradley Lake Power: Revenue Bonds,First Series (a)$9,910 9,910 Revenue Bonds,Second Series (a)11,520 13,055 Revenue Refunding Bonds,Third Series (a)56,880 59,485 Revenue Refunding Bonds,Fourth Series (a)47,710 47,710 Revenue Refunding Bonds,Fifth Series (a)30,640 30,640 Larsen Bay Fixed Rate Revenue Bonds (b)585 625 Total scheduled maturities of long-term debt 157,245 161,425 Arbitrage interest payable (c)226 149 Less bond discount and deferred interest (13,085)(14,858) 144,386 146,716 Less -current portion of bonds payable (4,635)(4,180) Total long-term debt $139,751 142,536 (a)AEA issued the Power Revenue Bonds,First and Second Series (Bradley Lake Bonds),in September 1989 and August 1990,respectively,for the long term financing of the construction costs of the Bradley Lake Hydroelectric Project and refunded AEA's Variable Rate Demand Bonds which were issued in November 1985 to provide interim financing of the project.AEA issued the Power Revenue Refunding Bonds,Third and Fifth Series in April 1999 to refund a portion of the First Series Bonds and to provide costs of issuance.AEA issued the Power Revenue Refunding Bonds,Fourth Series in April 2000 to refund a portion of the Second Series Bonds and to provide costs of issuance.All of the revenues derived by AEA from the operation of the project and all moneys,securities and funds (except the excess earnings fund),including a capital reserve fund,held or set aside are pledged and assigned to secure the payment of principal,redemption premium,if any,and interest on the bonds. No other revenues of AEA are pledged as security for the payment of the bonds.AEA has covenanted to notify the State Legislature of any failure to maintain the capital reserve fund at its required level.The bonds are further secured by bond insurance.AEA collects from each power purchaser a percentage share of annual project costs.The outstanding Bradley Lake Bonds mature annually each July 1 through the year 2021 with interest rates ranging from 5%to 6.25%. On April 4,2000,AEA issued $47,710,000 of Power Revenue Refunding Bonds,Fourth Series,for the purpose of refunding $46,235,000 of the Second Series Bonds.The refunded Second Series Bonds were called on July 1,2000.The refunding resulted in aggregate debt service payments over the next twenty-two years in a total amount approximately $6,400,000 less than the debt service payment which would be due on the refunded bonds.There was an economic gain of approximately $3,500,000. 12 (Continued) (b) (c) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 Larsen Bay Fixed Rate Revenue Bonds were issued May 1991 for the long term financing of a portion of the construction costs of the Larsen Bay Hydroelectric Project.All of the revenues derived by AEA from the operation of the project are pledged and assigned to secure payment of the bonds. No other revenues of AEA are pledged as security for the payment of the bonds.The bonds are further secured by a letter of credit.The bonds mature annually each April 1 through the year 2011 with interest rates ranging from 7.4%to 7.75%. An event of default exists under the terms of certain agreements entered into in conjunction with the issuance of the Larsen Bay Bonds.The City of Larsen Bay has failed to pay certain costs relating to the Larsen Bay Hydroelectric Project.As the bonds are supported by a letter of credit,no bondholder loss of principal or interest is anticipated.The Alaska Legislature in ch 61,SLA 2001,appropriated $400,000 to AIDEA to be deposited with the Larsen Bay Hydroelectric Project's bond indenture trustee for the purpose of retiring bonds.AEA is working with the City of Larsen Bay and the issuer of the letter of credit in an effort to resolve the default. 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 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. 13 (Continued) Scheduled maturities of long-term debt as of June 30,2001 are as follows (stated in thousands): ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 Bradley Lake Power Revenue Bonds Power Revenue Refunding Bonds Total Larsen Bay First Second Third Fourth Fifth Bradley Revenue Maturity date Series Series Series Series Series Lake Bonds Total 2002 $--2,740 1,855 -4,595 40 4,635 2003 -_2,875 1,950 -_4,825 45 4,870 2004 -_-_3,030 2,055 _-5,085 45 5,130 2005 -_-3,200 2,170 -5,370 50 5,420 2006 3,270 -_-105 2,290 _-5,665 55 5,720 2007-2011 6,540 11,520 11,020 635 -_29,715 350 30,065 2012-2016 -_22,775 13,835 560 37,170 -_37,170 2017-2021 75 -13,135 18,525 22,320 52,055 _-$2,055 Thereafter 25 -_-4,395 7,760 12,180 -12,180 $9,910 11,520 56,880 47,710 30,640 156,660 585 157,245 Interest expense on borrowings,totaled $9,537,811 and $10,016,987 for the years ended June 30,2001 and 2000,respectively. 14 ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 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 30,2001,the unpaid principal balance of the notes was $27,710,601 and the trust assets had a fair value of $27,257,679. 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 30,2001,the outstanding balance was $49,905,000. 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. 15 (Continued) (7) (8) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 Loans The Authority administers the Power Project Loan Program,the Rural Electrification Revolving Loan Fund and the Bulk Fuel Revolving Loan Fund.Loans outstanding at June 30 are classified as follows (stated in thousands): 2000 Number Amount Number Amount Power Project Loan Program 40 22,279 33 $21,712 Rural Electrification Revolving Loan Fund ll 2,132 11 2,466 Bulk Fuel Revolving Loan Fund 38 868 43 1,170 89 25,279 87 25,348 Less:Allowance for loan losses (1,447)(1,313) 23,832 $24,035 Loans which are more than 90 days past due on which the accrual of interest has been discontinued amounted to $1,582,386 and $1,543,524 at June 30,2001 and 2000,respectively. An analysis of changes in the allowance for loan losses for the year ended June 30,2001 and 2000 follows (stated in thousands): 2001 2000 Balance at beginning of year $1,313 - Residual equity transfer -220 Provision for loan losses 134 1,093 $1,447 1,313 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. 16 (Continued) (9) (b) (c) (d) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 Property 1.Four Dam Pool Facilities: The Four Dam Pool (FDP)property risks are covered by commercial insurance purchased through the State Division of Risk Management for losses in excess of $10,000,000 up to $60,000,000.The risk of losses for the first $10,000,000 is retained.However,AEA maintains an insurance fund to cover the self retained risks and other noninsurable risks,as well as a $10,000,000 line of credit secured by the insurance fund for this purpose.(See note 10) AEA's self-insurance for the FDP is currently funded through:(a)an annual insurance premium payment from the FDP project management committee,(b)investment revenue from investment of the insurance fund and (c)certain interruptible power sales revenues. 2.Alaska Intertie: The utilities participating in the Alaska Intertie operating agreement retain the property risk associated with the Alaska Intertie. 3.Bradley Lake and Larsen Bay Hydroelectric Projects: The risks are covered by commercial insurance purchased through the State Division of Risk Management,and the self-insured retentions are the responsibility of the respective projects from operating funds. Boiler and Machinery These risks are covered by commercial insurance purchased through the State Division of Risk Management and a private carrier. Additionally,utilities benefiting from the use of the facilities owned by AEA participate in the responsibility for deductibles and self insured retentions under the terms of the respective agreements. Workers Compensation Insurance AEA participates in the State Risk Management Pool.The risks are transferred to the pool and the premium is charged to AEA based on payroll expenditures. 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. 17 (Continued) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 (b)Four Dam Pool Project Management Committee (c) (d) Effective October 28,1985,AEA entered into a long-term power sales agreement with entities purchasing electric power from the FDP 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 to the PMC,net of each purchaser's operating costs associated with the respective FDP facility,for the power purchaser's share of total estimated annual costs,including a "debt service component,”at a set price for kilowatt hours purchased each month,with an annual settlement to adjust the payments to actual cost.The PMC makes monthly payments to AEA for a fixed annual administrative fee and to reimburse operating and maintenance costs incurred by AEA.The PMC makes annual payments to AEA for the debt service component of the wholesale power rate and for insurance. 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 to be 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. 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 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. (10)Commitments and Contingencies (a)Litigation 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 are not presently expected to have a material adverse effect on AEA's financial statements. 18 (Continued) (b) (c) ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Notes to Financial Statements June 30,2001 and 2000 Four Dam Pool Project Repairs and Improvements Prior to July 1998,AEA received $19,353,419 from the FDP power purchasers to be expended for repairs and improvements to the FDP projects,in lieu of "debt service component”payments under the long term power sales agreement.These funds were deposited into the Four Dam Pool Self-Help Fund.AEA received an additional $1,600,000 in August 1999 from the FDP power purchasers to be held in trust for repairs and improvements to the FDP projects,in lieu of "debt service component” payments.AEA's commitments for future repairs to the FDP facilities,which is expected to be paid from funds currently held by AEA,approximates $4,800,000. Unused Line of Credit At June 30,2001 AEA had an unused $10 million line of credit relating to the FDP self-insurance fund.(See note 8) 19 Schedule 1 ALASKA ENERGY AUTHORITY (a component Unit of the State of Alaska) Schedule of Bradley Lake Hydroelectric Project Trust Account Activities Year ended June 30,2001 (Stated in Thousands) Debt Capital Renewal and Construction Excess OperatingServiceReserveContingencyUnallocatedEarningsRevenueOperatingReserve Cost of Fund Fund Fund Fund Fund Fund Fund Fund Issuance Total Balance at June 30,2000 $7,007 12,834 5,000 2,069 129 158 998 535 129 28,859 Interest received -786 276 83 8 698 -_-|1,852 Bond principal paid (4,140)_--._--_--(4,140) Bond interest paid (7,073)___-_____(7,073) Construction expenditures -__(107)-___---(107) Operating revenue received -__-__12,488 ___-12,488 Operating expenses paid -_-_(73)_(2,390)__(2,463) Transfers between funds 12,640 (786)(276)_19 (13,186)1,719 =(130)_ Balance at June 30,2001 $8,434 12,834 5,000 2,045 83 158 327 535 _29,416 Assets Property,plant and equipment Less accumulated depreciation Net property,plant and equipment Other assets -cash and investments restricted Current assets: Due from State of Alaska and other agencies Operating revenue receivable Accrued interest receivable Total current assets Loans receivable,net of allowance Four Dam Pool receivable Grants receivable Fund Equity and Liabilities Fund equity: Contributed capital Accumulated Deficit Total fund equity Long-term debt,net of current portion Bonds payable Four Dam Pool payable Arbitrage interest payable Total long-term debt Current liabilities: Accounts payable Grants payable Current portion of bonds payable Four Dam Pool interest payable Other accrued interest Retainage payable Deferred Revenue Other liabilities Total current liabilities See accompanying independent auditors'report. ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Schedule of Projects -Balance Sheets June 30,2001 and 2000 Schedule 2 (Stated in Thousands) Administration Bradley Lake Alaska Larsen Bay aud Power 2001 2000 Hydroelectric Four Dam Intertie Hydroelectric Development Rural Energy Combined Combined Project Pool Project Project Project Project Project Subtotal Eliminati Batance Balance $306,872 457,489 124,246 1,602 -_-890,209 -890,209 890,209 67,534 210,744 52,791 378 _=331,447 =331,447 310,214 239,338 246,745 71,455 1,224 __-558,762 _-558,762 579,995 29,416 17,310 24 =2,113 149,436 198,299 _198,299 146,177 -----1,632 1.632 _-1.632 46,432 _10,254 49 203 --10,506 -10,506 13,77496694==2 9,662 10,724 (9,533)191 £244 966 10,348 49 203 2 13,294 22,862 (9,533)13,329 61,450 -_-_-_23,832 23,832 -23,832 24,035 al ----184,572 184,572 (184,572)__ ====5,465 5,465 -5,465 10,004 $269,720 274,403 71,528 1,427 2115 374,599 993,792 (194,105)799,687 821,661 $162,975 316,316 124,250 923 15,337 343,717 963,518 _-963,518 963,518 (41,571)(237,014)(52,779)(334)(12,908)_18,365 (326,241)_=(326,241)(316,713) 121,404 79,302 TAT 589 2,429 362,082 637,277 _637,277 646,805 138,999 184,572 -526 --324,097 (184,572)139,525 142,387 226 =--__226 =226 149 139,225 184,572 =526 ==324,323 (184,572)139,751 142,536 514 971 56 6 10 9,314 10,871 -10,871 9,450 -----2,350 2,350 -2,350 11,540 4,595 _40 --4,635 -4,635 4,180 _-9,533 _---9,533 (9,533)-- 3,839 --"--3,850 _3,850 3,246 103 -----_103 -103 103 -___-99 99 --99 444 40 25 !255 (324)|754 751 =751 3,357 9,091 10,529 57 312 (G14)12,517 32,192 (9,533)22,659 32,320 $269,720 274,403 71,528 1,427 2,115 374,599 993,792 (194,105)799,687 821,661 21 Schedule 3 ALASKA ENERGY AUTHORITY {a Component Unit of the State of Alaska) Schedute of Projects -Revenues and Expenses Years ended June 30,2001 and 2000 (Stated in Thousands) Adninistration Bradley Lake Alaska Larsen Bay and Power 2001 2000 Hydroelectric Four Dam Intertle Hydroelectric Development Rural Energy Combined Combined Project Pool Project Project Project Project Project Subtotal Eliminations Balance Balance Revenues: Revenue from operating plants $12,488 11,539 1,061 169 --25,257 _25,257 25,259OperatingtransferfromStateofAlaska_-_---20,254 20,254 _20,254 9,163Federalgrants_----_7,920 7,920 --7,920 22,284 State of Alaska appropriations _--__3,079 3,079 _3,079 7,020OperatingwansferfromFourDamPoo!Transfer Fund __--_9,533 9,533 (9,533)-_ Receipts from other agencies _=_-_-(77)an -7)1,239 lnvestinent income 1,757 1,142 25 1 15 (3,249)(309)_(309)5,667 Other revenue 2 62 _3 16 83 _83 69 Total revenues 14,247 12,743 1,086 170 18 37,476 65,740 (9,533)56,207 70,701 Expenses: Depreciation 6,967 10,827 3,401 38 _-21,233 -21,233 22,974 Power Cost Equalization grants _-_-_-__-16,955 16,955 _16,955 14,583 Grants and projects -_--_-9,707 9,707 -_9,707 26,849Interest9,467 9,546 _58 _-_19,071 (9,533)9,538 10,017 Plant operating 1,854 2,516 1,053 17 ---5,440 _5,440 6,567 General and adininistrative 224 446 33 il --1,257 1,971 _1,971 1911 Operating transfer to State of Alaska --___-425 425 --425 _- Provision for doubtful accounts - _-332 --332 -332 _ Provision for loan losses _-___134 134 _-134 1,093 Impairinent loss (note 5)=-_--_====41,358 Total expenses 18,512 23,335 4,487 456 =_-28,478 75,268 (9,533)65,735 125,352 Deficiency of revenues over expenses $(4,265)(10,592)(3,401)(286)18 8,998 (9,528)_-(9,528)(54,651) See accompanying independent auditors'report. 22 ALASKA ENERGY AUTHORITY (a Component Unit of the State of Alaska) Letter to the Board of Directors October 5,2001 KPMG. 701 West Eighth Avenue Suite 600 Anchorage,AK 99501 October 5,2001 The Board of Directors Alaska Energy Authority (a Component Unit of the State of Alaska) Dear Members: We have audited the financial statements of the Alaska Energy Authority (a Component Unit of the State of Alaska)(AEA)for the year ended June 30,2001,and have issued our report thereon dated October 5, 2001.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 30,2001 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.No new accounting policies were adopted in fiscal year 2001. 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. 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. ia KPMG LLP.KPMG LLP.a US.limited liability partnership,is a member of KPMG International,a Swiss association. maa The Board of Directors Alaska Energy Authority (a Component Unit of the State of Alaska) October 5,2001 Page 2 Management's estimates of potential loss are charged to operating expense through provisions for loan losses. AEA's property,plant and equipment are carried at cost,adjusted for permanent impairments of value. AEA follows Statement of Financial Accounting Standards No.121 (SFAS No.121),Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.This statement requires recognition of 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. 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. 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 2001 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 ofAccounting 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. Internal Controls and Other Matters During fiscal 2000,AEA assumed responsibility for administration of rural energy programs from the Department of Community and Regional Affairs,Division of Energy.In a letter dated October 5,2000, KPMG brought a number of issues to AEA's attention regarding administration of these programs.The following is the status of the issues set forth in our previous letter. The Board of Directors Alaska Energy Authority (a Component Unit of the State of Alaska) October 5,2001 Page 3 Fiscal Management of Rural Energy Programs During 2000,AEA utilized a bookkeeping firm to provide accounting services for projects managed on behalf of communities.A project general ledger was established for each project related bank account.At times the total number of project general ledgers and corresponding bank accounts exceeded 100.During 2001,AEA transferred much of the project accounting directly to its own general ledger system.The number of project general ledgers and related bank accounts maintained by the bookkeeping firm was greatly reduced as a result.AEA can now more efficiently reconcile project financial activities maintained by the bookkeeping firm to AEA's general ledger and obtain accurate information with regards to over all project costs. Recovery of Costs AEA had been recovering costs from federal grants using a methodology that was inconsistent with certain federal laws and regulations.During 2001,AEA developed suitable procedures to recover costs from federal grants. Subrecipient Monitoring AFA receives federal funding that is then passed on to other entities,known as subrecipients.Federal regulations require that AEA comply with specific subrecipient monitoring procedures to ensure that the subrecipient spends the federal funds in accordance with terms of the grant agreements.In particular,AEA is responsible for ensuring that the subrecipients obtain the necessary federal single audits required by federal regulation.We recommend that AEA develop internal processes to monitor subrecipients to ensure that they comply with appropriate federal regulations. Funding Sources During 2000,AEA initially transferred funds among projects in order to limit the use of unrestricted funds.This made it difficult to monitor the status of project expenditures versus available funding at any point in time.AEA discontinued this practice during 2001. Analysis of Projects During 2001,AEA implemented a process to analyze projects to ensure that all state appropriations and grants had been properly spent on the projects contemplated by the original funding source. Financial Reporting Process Rural energy program data was maintained on 3 different accounting systems.AEA has moved to consolidate the accounting function during 2001. Project Management Agreements (PMA) The original PMAs required that AEA be responsible for engaging an auditor to perform single audits on behalf of subrecipients;this did not occur.During 2001,subsequent PMAs were amended to require the subrecipients to obtain the required single audits. *kK ROK ana The Board of Directors Alaska Energy Authority (a Component Unit of the State of Alaska) October 5,2001 Page 4 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 ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY =ALASKAGm=ENERGY AUTHORITY 813 WEST NORTHERN LIGHTS BLVD.©ANCHORAGE,ALASKA 99503 ©907/269-3000 ©FAX 907/269-3044 TOLL FREE (ALASKA ONLY)888 /300-8534 MEMORANDUM TO:Board of Directors Alaska Energy Authority FROM:Robert Poe,Jr.ROP Executive Director DATE:November 13,2001 SUBJECT:GASB No.34 Presentation AEA is required to adopt Governmental Accounting Standards Board Statement No.34,Basic Financial Statements and Management's Discussion and Analysis-for State and Local Governments (GASB 34).GASB 34 is a revolutionary new reporting model that will completely change the presentation of AEA's financial statements.The objective of the new reporting model is to enhance the clarity and usefulness of governmental financial statements to the citizenry,oversight bodies,investors and creditors.Some changes that will impact AEA include new financial statement captions,modifications to the methodology for recording contributed capital,and the addition of management's discussion and analysis to the financial statements. For other governments,the changes are much more severe. We have engaged KPMG to help us determine our readiness to implement GASB 34,and to develop a plan for identifying all affected areas and accounts.Kathy Porterfield with KPMG will attend the board meeting to discuss the requirements of GASB 34 in general,the status of the project they are conducting for us,and the general changes we expect to see in the presentation of AEA's financial statements.Included with your packet is a draft Phase |- Readiness Assessment Report. DRAFT 11/06/2001 CONFIDENTIAL Alaska Energy Authority GASB Statement No.34 Government Reporting Implementation Process Phase I -Readiness Assessment DRAFT 11/06/2001 CONFIDENTIAL TABLE OF CONTENTS I.EXECUTIVE SUMMARY BOO Ooo OOO TEDL O DE TOTO O SES EE ESE OES IOO DOSE DOO DOES DE SOOO HOES SOLO TOOT ES DESO DEO TDD O ODED OSE EOSDEGES SOE DED EEE DOD EDEL DSS H.IMPLEMENTATION CATEGORIES TRAINING Perereeeeereeee ere CeCe rer eee errr rrreceree ees ee re erer rere sere er ter er eer eres cere eee ere cere rere er re rere rere rere rece rer re sere re rere rer er rersy OTHER ACCOUNT &TRANSACTION ANALYSIS EXPENSE ANALYSIS FINANCIAL REPORTING POLICIES AND PROCEDURES CAPITAL ASSETS SOOO Re meee OHH OOOO OREO EEE OE OTE EO OREO SESE EEE EEE ESE D HOUR EE EE OE SE DE EE SED DDOEER DEO HOTEO HESS OES EHO HED SSE EEO EEE D ESE eEe LIABILITY ANALYSIS MANAGEMENT'S DISCUSSION AND ANALYSIS HI.OVERALL RESULTS READINESS/CRITICALITY REPORT eee PPE Ce SECO Cerere rere ree re reser eraser rere cere rere rec eee res reer ec eerie reeset eee reser eeee reer erie) HIGH LEVEL IMPLEMENTATION PLAN SUMMARY ere EPEC ee ee ere ere sere ce eee eee Serer errr er rece ee reer ert reer e terre es eee rere ee PROJECTS NOT APPLICABLE TO AEA .........cccecsecccesevseccussscccccesseseeavssessecseseeceuecceteuseseesussseeeeuessceeensecs DRAFT 11/06/2001 CONFIDENTIAL Rane I.EXECUTIVE SUMMARY Background Governmental Accounting Standards Board (GASB)Statement 34,Basic Financial Statements-and Management's Discussion and Analysis-for State and Local Governments was issued in June 1999 to establish new financial reporting requirements for state and local governments.Subsequently,in November 1999,GASB Statement 35 was issued (as an amendment to GASB Statement 34)to establish accounting and financial reporting standards for public colleges and universities within the financial reporting requirements of GASB Statement 34.Implementation of GASB Statement 34 will create accounting,financial reporting,policy and compliance issues for Alaska Energy Authority (AEA).As a result of these new requirements,the management of AEA has requested assistance in determining their readiness to comply with the new accounting and reporting standards. AEA has engaged KPMG to provide assistance with its GASB 34 Readiness Assessment, Implementation Plan and Program Management projects which are divided into three phases. Assessment (Phase I)and the Implementation Plan (Phase II)are AEA's desired workplan with KPMG at this point.The two deliverables which would be presented to AEA during Phase I and II are the readiness/criticality matrix and the development of the Government Reporting Implementation Process (GRIP)Master Plan.AEA has decided to request KPMG's assistance on an as-needed-basis for Phase III of Program Management. Objective The objective of this report is to present the first deliverable of Phase I of the Project,the Preliminary Readiness/Criticality Matrix (the "Report”).For the preparation of this deliverable,we conducted a readiness assessment of AEA's ability to prepare financial statements in accordance with GASB Statement 34 utilizing interviews with staff and management of AEA.The primary objective of the interviews was to assess AEA's ability to account for and prepare its financial statements in accordance with GASB Statement 34 and identify areas where modifications will be necessary.Through the readiness assessment process,high level projects were identified and prioritized by relative contribution to preparing financial statements in accordance with GASB Statement 34.The information obtained during this segment of the Project will be critical in laying the groundwork for the deliverables of the GRIP Master Plan in Phase II. DRAFT 11/06/2001 CONFIDENTIAL Rane Readiness Criticality Report -Approach and Results In order to accomplish the readiness assessment objectives of the GASB 34 Readiness Assessment and Implementation Project,KPMG LLP ("KPMG”)utilized their GRIP Readiness Assessment Questionnaire (Questionnaire),a KPMG proprietary assessment tool.This Questionnaire includes a series of strategic questions in a computerized format designed to ascertain AEA's ability to implement GASB Statement 34.The questions were used to gather basic information about AEA's accounting and financial reporting system as well as gain an understanding of AEA's operations in order to identify the policies,practices and systems that will need to be established and/or revised in order to implement the new standard. In utilizing the Questionnaire,KPMG interviewed the following individuals based on their areas of responsibility and/or their role in AEA's financial reporting process: e Valorie Walker Deputy Director e¢Amy McCollum Accountant V e Brenda Applegate Accountant IV e Sarah Fisher-Goad Accountant The information obtained during the interviews was used to identify and summarize the steps needed to prepare GASB Statement 34 financial statements.This process highlighted various necessary implementation projects which were reviewed with AEA's management for validation. Based on this information,the Report was developed. The Report identifies each project that will be required to be undertaken by AEA.The projects included in the Report are based on the significance of each project for AEA to be able to prepare financial statements in accordance with GASB Statement 34 (the horizontal or "criticality”axis) and AEA's current status in addressing the requirement (the vertical or "readiness”axis).At the date of this report,24 implementation projects were identified,which are classified into 8 implementation categories as identified in the following section.Additional projects may be added throughout Phase II.KPMG has also identified 46 additional projects that were found not applicable to AEA during Phase I. The Report has been discussed with and validated by AEA's management as it relates to the prioritization of projects (deferrable,moderate or immediate)to be undertaken and the current readiness of AEA's ability to implement these projects (high,moderate or low). Acknowledgments The successful readiness assessment segment of Phase I would not have been possible without the effort of many individuals.We would like to extend a special thanks to the management and staff at AEA who assisted us in this portion of Phase I.Each interviewee participated willingly in our process and provided KPMG with candid information,which made it possible to prepare the assessment included in this Report.We sincerely appreciate the support of AEA's leadership and employees in the delivery of this project and look forward to working with AEA in the remaining portions of the GASB 34 Implementation Project. DRAFT 11/06/2001 CONFIDENTIAL ane HI.IMPLEMENTATION CATEGORIES As discussed in Section I,KPMG assisted AEA in identifying the projects and steps necessary to improve AEA's readiness to prepare financial statements in accordance with the requirements of GASB Statement 34.The 24 projects identified and discussed in the previous section have been grouped into the following categories: e Training e Capital Assets e Other Account &Transaction Analysis e Liability Analysis e Expense Analysis e Management's Discussion and e Financial Reporting Analysis e Policies and Procedures A discussion of each of the implementation categories follows. Training The content and scope of changes in GASB Statement 34 will require the creation of new information and will restructure information that AEA has historically presented in its financial statements.The objective of GASB Statement 34 is to provide the readers and users of governmental financial statements with financial statements that are more comprehensive,easier to understand and use.By providing meaningful information about transactions,events and conditions,the new financial statements will also provide readers and users with useful insight into AEA's financial condition.To fully understand the purpose and impact of the changes in the financial statements,various users,including the Board of Directors,key agency personnel and other special interest groups will require training and education on the meaning and use of the new financial statements.An "Awareness Campaign”or similar effort will still need to be conducted in order to promote awareness of GASB 34 issues throughout AEA as well as generate momentum and encourage individuals within AEA to take action as early as possible to determine the modifications they will have to make.It should also include a training effort by AEA for personnel who are responsible for preparing the financial statements.This training will be necessary to ensure reliable and timely responses before and during the implementation efforts. Other Account &Transaction Analysis Due to new requirements under GASB Statement 34 AEA will be required to evaluate specific accounting transactions to determine if the procedures and systems properly account for and report all transactions.Net Assets will need to be analyzed to determine proper classification and restriction in the financial statement. DRAFT 11/06/2001 CONFIDENTIAL Rane Expense Analysis Detail expense reporting by function and by activity is required under GASB 34.Also,expenses will be accounted for based on the full accrual method of accounting,which AEA already does. AEA will have to develop new policies and procedures to capture new information not required under the previous model,such as significant or unusual expenses. Financial Reporting Financial reporting is the process of preparing the basic financial statements in accordance with generally accepted accounting principles.Under current accounting standards AEA's financial statements must,at a minimum,contain the financial statements,related notes to those financial statements,and other required supplementary information.GASB Statement 34 has expanded and enhanced the components of AEA's financial statements. Under GASB Statement 34,AEA's financial statements will need to include the following: e Management's Discussion and Analysis (MD&A)-The MD&A will introduce the basic financial statements and provide a detailed analytical overview of AEA's financial activities.(See further discussion under Management's Discussion and Analysis). e Special Purpose Government Financial Statements -The special purpose government financial statements consist of: -Statement of net assets or balance sheet.Either a balance sheet or net asset format may be used. -Statement of revenues,expenses and changes in fund net assets or fund equity. Either fund net assets or fund equity may be used for the difference between proprietary fund assets and liabilities. -Statement of cash flows.Only the direct method is allowed. e Notes to the Financial Statements -The notes to the financial statements will provide information that is essential to a user's understanding of the basic financial statements. In order to prepare the required components of the financial statements for the fiscal year beginning July 1,2001,AEA must have policies,procedures and processes in place and functioning effectively to properly accumulate and report the necessary financial data and report that data in the basic financial statements.This will require technical modifications to AEA's financial reporting system and other tools used for financial reporting of AEA and may require extensive change. Policies and Procedures GASB Statement 34 will result in the need for AEA to develop,implement and update many of its current accounting policies and procedures.The documentation of policies and procedures helps to ensure consistent application of accounting policies,procedures and internal controls.The lack of up-to-date accounting and business policies and procedures can result in miscommunications among staff,duplication of tasks,unclear lines of reporting responsibility,and conflicting or inconsistent interpretations of accounting and business policies. DRAFT 11/06/2001 CONFIDENTIAL Rane Capital Assets When most government officials think about the changes required under GASB Statement 34,the changes in the accounting for and recording of capital assets,infrastructure assets and depreciation expense immediately come to mind.GASB Statement 34 will require AEA to completely account for all capital assets as part of the government,which it already does.Capital assets include land,land improvements,easements,buildings,building improvements,vehicles,machinery,equipment,and all other tangible or intangible assets that are used in AEA's operations and that have initial useful lives extending beyond a single fiscal year. Recording depreciation expense on governmental fund type capital assets,excluding infrastructure, is also a new requirement under GASB Statement 34.Although AEA already records depreciation expense this requirement increases the importance of having a complete inventory listing of all capital assets,including the breakout within improvements.Without a complete record,AEA will not be able to produce proper depreciation expense amounts,which in turn will result improper fund and net asset balances. GASB Statement 34 also adds requirements for reporting infrastructure assets e.g.,roads,bridges, and other public works acquired since 1980.For AEA,counting,valuing and recording its investment in infrastructure assets will not be a significant undertaking,as it already records infrastructure.GASB Statement 34 does allow AEA a four-year window to report the infrastructure assets acquired between 1980 and 2001. AEA will also have a choice under the new requirements to depreciate its infrastructure assets or follow the modified approach method.Under the modified approach,no depreciation is required if it can be demonstrated that infrastructure assets are maintained at or above a condition level that is established.This will require AEA to evaluate the costs and benefits of using one method over another.Factors to be considered in this evaluation include:the ability to maintain at or above a condition level,additional information and resources required to accumulate and report under each method,and the impact on the financial statements,including the scope of the audit.At this time, AEA has indicated it will not use the modified approach for its infrastructure. Liability Analysis GASB Statement 34 will require AEA to develop or modify its existing systems to segregate short- term liabilities from long-term liabilities data in order that amounts be separately disclosed in the financial statements.GASB Statement 34 will also require identification and accumulation of information needed to prepare new required liabilities footnote disclosure. DRAFT 11/06/2001 CONFIDENTIAL Fane Management's Discussion and Analysis Under GASB Statement 34,the new Management's Discussion and Analysis (MD&A)will also precede the financial statements of AEA.MD&A is intended to provide the users of the financial statements with an objective,easily readable,and detailed analysis of AEA's financial activities based on known facts,decisions and conditions.AEA will be required to have procedures in place and operating effectively to capture the information necessary to complete the required sections of the MD&A.Also,AEA should be able to prepare an accurate,detailed,and timely analysis of its financial results and activities. DRAFT 11/06/2001 CONFIDENTIAL Fane HI.OVERALL RESULTS Readiness/Criticality Report The Readiness Assessment process is designed to accumulate information regarding AEA's ability to produce financial statements in accordance with GASB Statement 34.The first deliverable for AEA's GASB 34 Implementation Project is the Readiness/Criticality Report.This assessment is based on AEA's current ability to accumulate the new required information and does not reflect AEA's ability to prepare financial statements under current generally accepted accounting principles. The attached Readiness/Criticality Report identifies and plots specific implementation plans (projects)and tasks,prioritized according to their expected contribution relative to preparing financial statements in accordance with GASB Statement 34 and AEA's overall progress towards addressing this area. In assessing Readiness,if AEA has made progress towards addressing an area,the project was plotted as High,whereas,if AEA has made no progress or very little progress towards addressing an area,the project was plotted as Low.A project area for which AEA has already made progress would require fewer,if any,resources than a project for which AEA's readiness is assessed as low. In assessing Criticality,if the project needs to be started immediately and the significance of the project is such that it is critical to preparing financial statements in accordance with GASB 34,the project was plotted as Immediate,whereas,if the project is not required to be completed in order to produce financial statements in accordance with GASB Statement 34, it was plotted as Deferrable.However,good sound accounting practices necessitate that even deferrable projects would ultimately be completed. The implementation projects in the Report have been color-coded into the major implementation categories as discussed in the previous section.The legend of the color-coding is presented at the lower left-hand corner of the Report.Each project has been assigned a project number and in some cases,projects are broken down further into sub-projects,i.e.Tl,T1.1,T1.2,etc.Projects have then been grouped together into the major implementation categories.Skips in project numbers represent projects which are not applicable to AEA,however,for tracking purposes,the projects have not been renumbered.The results of the Readiness/Criticality Report are based on input provided by AEA management and staff and our analysis of GASB Statement 34.KPMG validated and obtained initial approval of the Readiness/Criticality Report results with management of AEA. This document is intended to serve as a starting point for determining the various projects needed to be addressed by AEA in order to prepare GASB Statement 34 financial statements.Due to the complexities of GASB Statement 34,and changes/coordination of efforts required to pull together information for the reporting,additional projects may be identified over the course of AEA's implementation efforts for which information may not have been previously identified.In addition, systems may need significant modification to allow AEA to comply overall with GASB Statement 34.Projects identified subsequent to this deliverable should be included in AEA's implementation efforts as more information is obtained. DRAFT 11/06/2001 CONFIDENTIAL Readiness/Criticality Report Low Li wih ld Readiness Moderate v-¥4 T15 High T18 Fi4:114,714.1,T17, T17.2 Deferrable Moderate Immediate Criticality Policies and Procedures| Capital Assets DRAFT 11/06/2001 CONFIDENTIAL Rane High Level Implementation Plan Summary This section includes a high level summary of the identified implementation projects that have been preliminarily approved by AEA management.These projects must be completed in order to assist AEA in preparing financial statements in accordance with GASB Statement 34.This summary is presented by project and consists of a description of each project along with the project's matrix assessment.More detailed high level implementation plans for these projects will be presented in the Phase II GRIP Master Plan. Education (Beard of Directors,key agency personnel) Education (constituents) T1.4 Education-GASB No.33 Tl4 TI4.1 TIS Capital Assets Capital assets system (management information) Capital Assets System (infrastructure information) Search For Missing Capital Asset Titles This project will provide education for the Board of Directors of AEA,key agency personnel,as well as other interested parties.This training should explain the new reporting model and its potential impact on fund balance and other accumulated surpluses.The training should also explain the implementation efforts that will be required by AEA. This project provides education to constituents, i.e.,grantors,creditors and citizens groups,etc., to explain the changes in accounting and financial reporting and/or eliminate potential negative reactions. This project explains the concepts and requirements of GASB 33,Accounting and Financial Reporting for Non-exchange Transactions,to AEA personnel and Board of Directors. This project entails identifying the capital assets that wiil need to be reported in accordance with the new model,establishing the system for maintaining the information needed to report the capital assets,and establishing a reliable baseline for going forward. This project entails identifying the infrastructure assets that will need to be reported in accordance with the new model,establishing the system for maintaining the information needed to report the infrastructure assets,and establishing a reliable baseline for going forward. This project entails ensuring that all capital and infrastructure assets recorded in AEA's capital assets/infrastructure information system are the rightful property of AEA Low/ Immediate Low/ Deferrable High/ Immediate High/ Immediate High/ Immediate Moderate/ Moderate DRAFT 11/06/2001 CONFIDENTIAL pian (Projeetht Capital Assets,continued T16 Capital Assets System (capitalizable interest) TI7 Depreciation Accounting T17.2.Determination of accumulated depreciation This project helps AEA determine,record,and report prospectively the capitalizable interest applicable to capital assets as required by SFAS Statement 34,Capitalization of Interest Costs,as amended by SFAS 62. This project entails establishing the policies, account structure,and systems to obtain and record the necessary depreciation information. This project entails helping AEA determine the amount of depreciation that should be accumulated for capital assets and other similar assets for which depreciation has not previously been recorded. High/ Moderate High/ Immediate High/ Immediate T24 Systems Modification (liabilities) T25 Liability Disclosures T18 Analysis of Receivables T21 Restricted Assets Identification T27 Analysis of Net Assets This project helps AEA ensure that long-term This project entails development of new or modification of existing systems to segregate short-term liabilities data from long-term liabilities data in order that the amounts can be separately disclosed. This project entails the identification and accumulation of information needed to prepare the liabilities footnote disclosures required by GASB Statement 34. ip 3 Perna receivables are properly valued in accordance with the accrual basis of accounting required by GASB Statement 34. This project entails identifying assets for use in the calculation of net assets which restrictions,as defined by GASB Statement 34 on use,change the nature or normal understanding of the availability of the asset. This project will enable AEA to display its net assets in the three required components:(1) invested in capital assets,net of related debt;(2) restricted (either externally or by law);and (3) unrestricted.The project entails reconciliations of information obtained from other projects and sources and the quantification of amounts to be reported in the equity section of AEA's statement of net assets. High/ Moderate High/ Moderate High/ Deferrable Low/ Moderate Low/ Immediate DRAFT 11/06/2001 CONFIDENTIAL tags ReadinessgECriticaliryy a This project establishes the generalT29SpecialandExtraordinary ledger High/ Items accounts and a procedure to capture the special Moderate and extraordinary items,a review process to identify the items,and a mechanism to accumulate the information that will be needed for disclosure in the financial statements. L PORVITETINS ibid decd T35 Significant or Unusual This project entails developing a review process Low/ Expenses to identify any material expenses that while Moderate infrequent or unusual do not meet the definition of special items,but which for political purposes the government would want to separately identify in the statement of activities as program expenses.(This process should be distinguished from the process that identifies special or extraordinary items.However,the procedures are similar and can be accomplished at the same time.) inenctal Reporting! T6.2 Financial Reporting This project entails planning and coordinating the =Low/ Assistance (direct statement development of the statement of cash flows Immediate of cash flows)required to be prepared on the direct method for all proprietary funds. 16.3 Reporting Segment This project helps AEA obtain and disclose the |Moderate/ Information for Multiple required segment information for those Immediate Enterprise Fund Activities identifiable activities within an enterprise fund or other stand-alone entity for which one or more revenue bonds or other revenue-backed debt instruments are outstanding. 139 Financial Reporting This project entails an evaluation of the Low/ Assistance (systems)capabilities of AEA's accounting and financial Immediate reporting systems to generate the information necessary to prepare the financial statements in accordance with new reporting model,and the ease with which the systems could be modified. T40 Financial Reporting This project guides AEA in planning and Low/ Assistance (organization and _coordinating the preparation of the basic financial Immediate people)statements.It assumes AEA has the systems in place to develop and provide the data needed to be compiled into the statements. DRAET 11/06/2001 CONFIDENTIAL T41 Management's Discussion This project helps AEA develop a structure and Moderate/ and Analysis (process)plan for preparing management's discussion and Moderate analysis (MD&A). T42 Management's Discussion This project helps AEA compile the information Moderate/ and Analysis (information)required for Management's Discussion and Moderate Analysis (MD&A)including the following: ¢Brief discussion of the basic financial statements including key relationships and significant differences *Analysis of overall financial position and results of operations e Analysis of material balances and transactions of individual funds e Description of significant capital asset and long-term debt activity during the year e Description of currently known facts, decisions or conditions that are expected to have a significant impact on financial position or operations |Policies and Procedures 13.4 Policies (fixed assets)This project helps AEA determine a cost-effective |Low/ capitalization threshold for recording,tracking,Immediate and reporting its capitalized fixed and infrastructure assets in a fund rather than an account group,as previously reported by GAAP. DRAFT 11/06/2001 CONFIDENTIAL ow aa B Description ts oe Trgining T1.3 TL5 T2 T2.1 Education (modified approach alternative to depreciation accounting) Education (budget department) Education (taxes) Component Unit (identification) Component Unit (guidance) This project will provide education for AEA's personnel (e.g.,elected officials,management, finance department personnel,budget department personnel)on the various aspects of the modified approach alternative to depreciation accountings, thus enabling management to make cost beneficial decisions regarding using the alternative or straight-line depreciation. This project entails developing and conducting an educational awareness seminar for representatives of the budget department that address,among other matters,the manner in which the new reporting model will impact the presentation of budgetary data in the financial statements, including possible changes in how the budgetary data are to be gathered. This project provide education to finance and budget office personnel,possibly to elected officials,and others interested in AEA's dedicated tax streams regarding how taxes are considered general revenues,not revenues for a specific purpose.Therefore,taxes are not presented as part of program revenues in the new statement of activities and the relationship between taxes and the related programs will not be disclosed. This project enables AEA to identify new component units or confirm the status of component units already identified for financial reporting.This task is necessary in order to determine which component units,if any,qualify as major component units and are thus required to be reported separately in the fund statements or in separate financial statements,e.g.a statement of fiduciary responsibilities. This project entails confirming that AEA's component unit is aware and knowledgeable of the reporting requirements and implementation deadlines required by GASB Statement 34.It also entails ensuring that if the component unit is not aware of the new requirements it will have time to implement the requirements and thus enable AEA to prepare its financial statements in accordance with generally accepted accounting principles. N/A N/A N/A N/A N/A DRAFT 11/06/2001 CONFIDENTIAL T14.2 T17.1 T17.3 T4 T4.1 T6 T6.1 T6.4 Capital Assets Fixed Assets System (works of art,historical treasures and similar assets) Depreciation Expense Distribution Infrastructure Accounting (modified approach) Fund Analysis. Major Funds (initial analysis) Major Funds (optimum presentation) Enterprise Fund Reporting (identifying enterprise funds) Enterprise Fund Accounting (establishing enterprise funds) Enterprise Fund Accounting (switching from enterprise funds) This project entails helping governments establish a record of any works of art,historical treasures, and similar assets it owns in order that they may be reported and if considered exahaustible or depreciated. This project entails the development of policies,a methodology,and systems to distribute depreciation expenses to the various programs and activities. This project enables AEA to use the modified approach alternative to depreciation accounting by helping it 1)develop a system that provides complete and accurate estimates of the annual amounts required to maintain and preserve the infrastructure assets at the condition level established and disclosed by management;and 2) provide,if achieved,reasonable assurance,based on the three most recent condition assessments, that the eligible infrastructure assets are being preserved approximately at or above the established,disclosed condition level. This project helps AEA make an_initial identification of its major funds. This project helps AEA with analysis of various scenarios of combining or splitting funds to determine the optimum mix of major funds to report. This project entails determining the activities that are required to be reported as enterprise funds and activities for which enterprise fund is optional. This project helps AEA establish enterprise fund accounting for activities for which such accounting is required by GASB Statement 34, and/or for which AEA believes that measurement and reporting in a manner similar to an enterprise fund would be desirable. This project helps AEA assess the accounting and reporting Impact of switching activities from enterprise fund accounting and reporting to governmental fund accounting and reporting,and then making the adjustments necessary for such a change. N/A N/A N/A N/A N/A N/A N/A DRAFT 11/06/2001 CONFIDENTIAL T7.1 T8 T9 T10 TIl T12 T13 Fund Analysis,continued Internal Service Funds Internal Service Funds (reconciliation of transactions) Pension Reporting Pension Reporting Reporting Other Fiduciary Activities Trust Fund Analysis (combining expendable trust funds into existing special revenue funds) Trust Fund Accounting Unemployment Compensation Fund Accounting This project entails determining those activities that should be recorded as internal service funds and then making it possible to properly report such funds.It is necessitated by the requirement in the new reporting model that internal service funds be used to report any activity that provides goods and services to other funds,departments,or agencies of the primary government and_its component units,or other governments,on a cost- reimbursement basis (assuming that the sponsor government is the predominant participant in the activity). This project entails identifying internal service activities,reconciling the financial transactions recorded by the funds providing the activities with the financial transactions recorded by the funds receiving the benefits of the activities,and ensuring the elimination of inappropriate duplicative reporting in the financial statements. This project helps AEA develop a plan to acquire the information necessary for pension reporting and report the retirement plan as a pension trust plan This project helps AEA document the rationale for concluding that it has no fiduciary obligation regarding its pension plan and discontinuing reporting the plan as a pension plan. This project entails determining the fund type to be used to report fiduciary activities other than pension plans and external investment pools. This project helps AEA analyze the desirability of combining expendable trust funds into existing special revenue funds or,alternatively,creating a new special revenue fund for each expendable trust fund. This project helps AEA establish permanent funds,previously called non-expendable trust funds,to account for the assets subject to agreements requiring the maintenance of funds in perpetuity This project helps AEA capture the required unemployment compensation information,while moving the accounting for such activities to an enterprise fund. N/A N/A N/A N/A N/A N/A N/A T22 722.1 T19 T20 126 DRAFT 11/06/2001 CONFIDENTIAL Liabilities (data Improvement) ther Account andseries5cecorathennerransactionAnaly: Inventories Other Long Term Asset Identification Interfund Transactions and Balances This project entails the identification and compilation of liabilities previously excluded from the governmental fund financial statements and now required to be included on the government-wide statement of net assets (e.g., environmental clean-up,vacation/sick leave,etc). This project entails evaluating and,if necessary, making improvements to the quality of estimated data previously reported as liabilities im the General Long Term Debt Account Group (GLTDAG),and quantifying the costs that must now be included in the statement of activities. (The project is necessitated by the fact that under the old reporting model,many of the long term liabilities other than bonded debt reported in the GLTDAG,e.g.,accrued vacation,litigation, other self insured liabilities,seemed relatively insignificant in relation to the bonded debt and did not affect fund balance.) This project entails helping AEA ensure that each of its types of inventory systems,regardless of type or location,that were previously recorded in accordance with the modified accrual basis of accounting,will be valued,recorded,and reported in accordance with one of the acceptable full accrual accounting bases (e.g.,LIFO,FIFO) required by GASB Statement 34. This project entails identifying other long term assets not reported in the governmental fund balance sheets that would need to be reported in the government-wide statement of net assets.Such long-term assets include long term receivables on contracts,grants and other arrangements, prepayments,interfund receivables,receivables and other assets allocated to lease or sales back transactions,off-balance sheet financing and loans sold with recourse. This project entails helping AEA eliminate interfund balances included within the same column in the government-wide statement of net assets. N/A N/A N/A N/A 10 137 T38 DRAFT 11/06/2001 CONFIDENTIAL eMecty::1g {Ntda Non-Reciprocal Transactions (policies and system) Non-Reciprocal Transactions (eliminations) This project entails helping AEA_establish policies and procedures for standardizing the recording of allocations of overhead expenses from one function to another or within the same function,i.e.transactions,similar in nature to those generally reported in internal service funds, and thereby ensure the elimination of "grossed up”amounts in the government-wide statement of activities. This project helps AEA eliminate transactions involving allocations or redistributions among functions of expenses similar in nature to those generally reported in internal service funds,i.e., non-reciprocal transactions,and thus avoid "grossing up”amounts in the government-wide statement of activities. N/A Revenue Analysis T23 T23.1 128 Actuarial Study Alternative Means Study Program Revenue Determination This project entails an evaluation by a qualified property/casualty actuary of the proper level of reserves necessary for self-insured liabilities, such as workers'compensation,health care, automobile liability,and other general liability exposures.A byproduct of the evaluation can be recommendations for the claims management process and information regarding the expected timing for expected cash flows. This project,which would be undertaken when it is not practical or timely to have qualified property/casualty actuary perform the evaluation of the reserves needed for self insured liabilities, e.g.workers'compensation,health care, automobile liability,general liabilities,is a determination of the proper level of reserves using some of the techniques employed by actuaries.A byproduct of the evaluation can be recommendation for the claims management process and information regarding the expected timing for cash flows. This project entails 1)analyzing the revenue streams to determine which streams are directly related to AEA's programs and therefore should be considered program revenues and 2) developing a mechanism to capture that information. N/A N/A N fi A 11 128.1 T28.2 DRAFT 11/06/2001 CONFIDENTIAL «{lysis,conatin ued Permanent Fund Revenue Determination Grant Revenue Determination This project entails providing AEA with an analysis of permanent fund revenue streams and a procedure for assigning the revenues to those functions they are required to support,if applicable.Permanent funds are newly created funds used to account for assets subject to restrictions where the corpus cannot be used. This project provides AEA with an analysis of grant revenue streams and a procedure for allocating grant revenues intended to support more than a single function to the applicable functions,including ensuring the allocations are based on measures of actual activities rather than arbitrary,budgetary,or political reasons. N/A bbhdS Ties AI GLVSLS. T3l T33.1 T32 T33 Functional Categories (selection) Cost Allocation Plan (development of a simplified plan) Functional Categories (reporting) Cost Allocation Plan (development of an OMB Circular A-87 plan) This project entails selecting the functional categories,e.g.,general government,public safety,culture and recreation,etc.,to be used to report expenses in the statement of activities.It permits the entity to expand or change the categories,for instance to the program level, provided that the categories presented in the government-wide statements are at least as detailed as the categories in the fund perspective financial statements. This project entails the development of a cost allocation plan,using a simplified methodology, that will result in the full allocation of costs, including general government,administrative, and other supporting costs.It is included for governments who want to allocate costs for more limited purposes,i.e.,solely to prepare the statement of activities,and thus do not need the more complex approach entailed in the OMB Circular A-87 methodology. This project entails developing a mechanism for capturing expenditure information at the functional level,consistent with the level of detail desired for reporting expenses. This project entails the development of a cost allocation plan,based on the OMB Circular A-87 indirect cost methodology,that will result in the full allocation of costs,including administrative and other supporting costs,to programs N/A N/A N/A N/A 12 DRAFT 11/06/2001 CONFIDENTIAL T33.2 Cost Allocation Plan (review) T34 Interest Expense Analysis [a ES SeEESena T36 Budget Presentation This project entails reviewmg an_internally developed cost allocation plan,including the allocation of expenses related to multi-purpose general government activities,in order to ascertain the integrity and soundness of the plan. This project determines the interest expense on an accrual basis that should be attributable to functional categories and programs because the borrowing is essential to the creation or continuing existence of the program and excluding the interest from the programs'direct expenses would render the expense totals meaningless. This project develops a process with which budgetary data can be compiled and presented in accordance with the functional classifications used for the financial statements. N/A TS Legal Analysis T30 Accrual Adjustments This project entails the development of a plan to eliminate the conflict between legal/regulatory requirements and generally accepted accounting principles This project entails the preparation of a comprehensive list of expenditures that will needs to be converted from modified accrual to full accrual (expenses),and thereby enable AEA to issue government-wide financial statements on a full accrual basis.It also entails revising the policies and procedures for capturing the necessary information based on the nature of the necessary adjustments. N/A N/A |Policies and Procedures T3 Policies (establishment of fund) T3.1 Policies (modification of existing statement) T3.2 Policies (depreciation alternatives) This project assists with the development of a policy defining the circumstances under which AEA will 1)establish a new fund and 2) designate a find as a major fund. This project assists AEA to modify its policies regarding the establishment of new funds,in order that the policy can be a useful document. This project assists management in establishing a policy that addresses that manner in which the government will recognize and report the use of infrastructure and other fixed assets,ie., depreciation or the modified approach. N/A N/A N/A 13 DRAFT 11/06/2001 CONFIDENTIAL PIGGA EAIEa Policies and Procedures, continued 13.3 T3.5 Policies (fiduciary funds) Policies (valuation of interfund balances) This policy assists with the adoption or revision of a policy regarding the reporting of fiduciary funds. This project guides AEA in establishing a policy regarding the recording and repayment of interfund loans and the proper valuation of such loans. N/A N/A 14