ALASKA POWER & TELEPHONE
TRANSITIONS
2013 A NNUAL REPORT
MISSION
TO BE STRONG, GROWING AND INNOVATIVE IN THE ENERGY AND COMMUNICATIONS INDUSTRIES
CONTENTS
AP&T BOARD OF DIRECTORS
2-3
CHAIRMANS MESSAGE
4-5
PRESIDENTS MESSAGE
6-7
POWER OPERATIONS
8 - 11
DATA/TELECOM
12 - 15
APT SOLUTIONS
16 - 19
CUSTOMER SERVICE
20 - 21
AP&T COMMUNITIES
22 - 23
AP&T SERVICE AREAS
24 - 25
ANNUAL FINANCE REPORT
26 - 31
AUDITORS REPORT
32 - 57
STOCKHOLDERS NOTICE
59
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AP&T BOARD OF DIRECTORS (left to right)
Mark A. Foster P.E. Principal Mark A. Foster & Associates
Robert S. Grimm President CEO AP&T
William A. Squires JD Chairman of the Board, AP&T CEO Blackfoot Telephone Cooperative
Mike Barry Independent Director
Tom Ervin VP GM Telecom Operations and Engineering
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INDUSTRIES IN TRANSITION “It would be extremely convenient if all the differences between networks could be economically resolved by suitable interfacing at the network boundaries. For many of the differences, this objective can be achieved. However, both economic and technical considerations lead us to prefer that the interface be as simple and reliable as possible.”
Forty years later, this statement by the inventors of Internet Protocol technology applies not only to the technological and regulatory changes transforming the telecommunications industry, but ironically also touches on the challenges we face operating in an energy industry on the cusp of similar transition. AP&T’s power demand remained static in 2013. Nationwide, the power industry as a whole is facing similar market dynamics, with retail electricity sales decreasing in five of the last six years. To a large degree, the changing market is being driven by changing consumer demands, technology advancements and distributed generation. Greater efficiencies from home appliances, lighting and energy conscious construction should continue to result in net electricity consumption reduction, at least by residential consum-
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ers. Solar technology leads the move toward distributed generation, but it is yet to be seen if this technology is selfsustaining absent government incentives. Demand growth will likely remain below historic averages and our customers will expand their uses of energy saving technologies and alternative generation. As the energy market evolves, so too will AP&T, delivering a number of energy services. By actively exploring development and operation of distributed generation systems, such as liquefied natural gas, as well as smart grid technologies and services, AP&T will go beyond simply delivering electricity. Anticipating the transition of the telephone industry from one of monopoly power and heavy subsidization to competitive broadband services, AP&T continued in 2013 to expand and monetize the Southeast Alaska Microwave
Network (SAMN). This expansion will continue over the next several years, as consumer appetite for data transport continues to grow. Estimates project that IP data traffic in the United States will exceed 20 exabytes per month in 2014, growing to almost 40 exabytes by the end of 2017. This presents a tremendous opportunity for AP&T to capitalize on its investment in the SAMN. Non-regulated data and broadband services will continue to fuel growth and shareholder value. The Board of Directors and Management continued to take steps in 2013 to protect the company’s investment in HydroWest Holdings. Those efforts will advance in 2014 as we explore how best to restructure this investment to maximize any potential return. However, notwithstanding these efforts, the value of our investment in Central Amer-
AP&T CHAIRMANS MESSAGE
ica is clearly impaired. As a result, at the end of 2013 the company recorded a write down of approximately $2.3 million to that investment. While not impacting cash, this was recorded as an expense and therefore reduced our 2013 net income by a similar amount.
“Non-regulated data and broadband services will continue to fuel growth and shareholder value.�
Disruptive technology, market and regulatory transitions in any industry are difficult to navigate. Having those transitions occur in both of AP&T’s core industries, at essentially the same time, presents particular challenges and opportunities. We have the opportunity to continually seek efficiencies in our operations and invest in growth prospects that are accretive to earnings. The outstanding employees of AP&T embrace these opportunities and welcome the challenges of the future. Bill Squires Chairman Alaska Power & Telephone Company
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PRESIDENTS MESSAGE We are all familiar with the phrase, “The only thing that is constant is change.” Your Company attests to the truth of this statement. AP&T began in 1957, as a power and telephone utility delivering regulated electric service to the residents of Skagway. In 2013, AP&T finished its 56th year of operation profitably, by providing regulated energy and telephone service in 39 communities in rural Alaska. In addition, we have continued to provide unregulated data transport throughout SE Alaska since 2009. Several non-recurring expense items depressed our earnings in 2013. In the spring, your Company faced a petition from the International Brotherhood of Electrical Workers to unionize our personnel on Prince of Wales Island. This unsuccessful petition resulted in non-recurring expenses of $300,000. In the fall, a fuel tank failure resulted in a spill. Our crews responded quickly and recovered most of the spilled fuel, a $161,000 unexpected expense. Additionally, as noted in our Chairman’s Message, the impairment of our investment in Hydro West had a significant impact on earnings
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AP&T PRESIDENTS MESSAGE
as noted in the Management Discussion and Analysis segment of this report. Your Company has been selfinsuring its medical costs to save money for some time. In 2013, medical claims exceeded our expectations by $334,000, which reduced operating income. This non-recurring extraordinary expense, coupled with regulatory attrition and industry transition costs, reduced operating income dramatically. The impact was felt most by our electric distribution segment, which filed for a rate adjustment. Interim rate relief was granted in early 2014; further relief is expected in 2015. Rate adjustment proceedings are neither comfortable nor enjoyable, but are absolutely necessary to assure we have the opportunity to earn an adequate return for our shareholders and continue to maintain our electric distribution systems. We also must be diligent in our efforts to identify cost-reduction opportunities. Any investment in electric distribution must be prudent, as we expect this trend of declining volumes and increasing costs to continue for at least the near term. Our regulated electric business is experiencing disruptive market forces that may change this industry, much the way deregulation impacted the
telephone industry in 1996. The successful transformation of AP&T’s telecom market segment via construction of the Southeast Alaska Microwave Network is proof your company can rise to the occasion, overcome market forces and capture opportunity. AP&T managed this voice-to-data evolution effectively and advances, well-positioned for the future. Presently, revenues associated with the regulated electric distribution company are most at risk. The majority of electrical devices are becoming more efficient, lowering energy sales. Distributed generation by customers themselves is ever-increasing across the nation. AP&T is experiencing the effect of this trend in new generation sources, via the integration of private solar arrays to our interior division grid structure. Make no mistake, distributed generation will continue to grow; more and more of the power we distribute will not be generated as part of our regulated electric operations. Combined Heat and Power will allow our customers to compete with our central station generation. This market evolution requires us to begin offering more energy services, when profitable to do so. It also requires us to quickly modify our regulatory practices to ensure we are able to have the opportunity
to earn a return for our shareholders, during times of declining demand and increasing cost of operations. The regulatory lag associated with adjusting rates to correspond with costs will be challenging. Not only will it result in filing rate adjustments more often, but it will drive changes in the entire regulatory process. The present formula using $/Kwh as a cost recovery mechanism is already less workable than it was in the past. New methods of cost recovery will need to be adopted by the industry and regulators alike. Of benefit to AP&T is the ability to watch and learn, as these methods are tested in other jurisdictions where regulatory reforms have already occurred. AP&T is a diversified company and our history is a solid testament to the ability of our employee-owners to meet challenges and capture opportunities in a continuously evolving utility market, while adding value for our shareholders. I remain fully confident in our ability to continue to do so, both now and into the future. Robert S. Grimm President - CEO Alaska Power & Telephone Company
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POWER OPERATIONS During 2013, Alaska Power Company (APC) continued advancing initiatives focused on transitioning the remaining diesel generation to renewable energy based production at all of its locations. While there is plenty positive to say about 2013, it was a year with some challenging terrain.
Greg Mickelson AP&T VP-Power Operations 8
AP&T POWER OPERATIONS
The year began with the
may seem quite ordinary to
when Mother Nature let loose
specter of another damaging
some, they certainly do not di-
a cascade of debris above
ice break-up in Eagle, which
minish the extraordinary effort
APC’s Kasidaya Creek hydro
thankfully did less harm than
and noteworthy accomplish-
facility. Crews did yeoman’s
feared. It ended with fire, as
ments of our dedicated em-
duty, removing hundreds
a terrifying inferno destroyed
ployee-owners company-wide.
of yards of mud, rocks and
the Slana power generation
twisted timber from the facili-
module in October. No less a
In the Interior, APC continued
ty’s intake diversion. Efforts to
challenge, from a public re-
to evaluate the potential to
displace peaking diesel gen-
lations standpoint, was APC’s
utilize biomass, hydropower,
eration in the region shifted
rate filing with the Regulatory
solar, liquid natural gas, and
away from development of the
Commission of Alaska for an
an organic rankine cycle waste
Connelly Lake Hydroelectric
18% increase to remedy a
heat turbine at Tok. APC con-
Project in 2013. Preliminary
$1.95 million shortfall in return
tinues to work with the Alaska
scoping endured a lack of
on power investments’ made
Center for Energy and Power
local support; the project was
by the company since the pre-
(ACEP) on hydrokinetics- the
shelved, when load forecasts
vious rate adjustment in 2009.
use of a turbine submerged
deemed it financially infeasi-
All things factored, 2013 was
in a current, such as in a river-
ble at present. Subsequently,
a solid performance for our
by loaning the 25 kW turbine
the re-deployment of a C175
energy segment. We had a
used at Eagle, several years
state-of-the-art CAT generator,
0.6% increase in kWh sales
ago, to the ACEP for their
from our Tok to Haines, will
over 2012, to 65.9 GWH, and
studies.
firm-up local standby capacity
a net revenue increase of 0.5% to reach $14.7 million.
in the event of an extended The Upper Lynn Canal Region,
loss of hydro energy presently
(Haines/Skagway) started its
delivered via submarine cable
While 2013’s total power gen-
hydro-generation season with
from Skagway.
eration and revenue numbers
a literal avalanche of activity,
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On Prince of Wales Island,
primary source of power for
APC joint ventured with Haida
the most remote of our com-
Corp to form the Haida Energy
munities served .
Corporation. HEC’s mission is to develop the 5 MW Reynolds
As Alaska’s energy market
Creek Hydroelectric Project,
continues to evolve, we remain
east of Hydaburg, south is-
steadfast in our commitment
land. This project should
to the development of sus-
transition the communities
tainable energy projects that
on the island’s distribution
reduce our carbon footprint –
grid off of diesel generation,
one clean, renewable kilowatt
except during maintenance
at a time.
or emergencies. APC also helped the community of Coffman Cove receive a grant to expand grid distribution into an unserved area comprised of 91 lots. With clean, reliable, grid-based hydro power now available, existing homes transitioned off of fossil fuels and more property owners will be encouraged to build – strengthening the local economy. APC will aggressively continue its efforts to identify opportunities to displace fossil-fuel generation, as the 10
PHOTO: Skagway Line Foreman Lance Caldwell completes the installation of a new generation of energy effiecient LED Street Lights which now illuminate the gateway to the Klondike at a 35% savings over conventional bulbs.
AP&T POWER OPERATIONS
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DATA / TELECOM Transition... Change... Evolution... all words that can be used to describe the telecom industry over the last 10 years. Voice services used to be the staple of the wireline telecom company. Penetration of wireline service into customers’ homes was in the upper 90 percentile.
Today, it is a different world. The value proposition has shifted from hearing “a pin drop”... to mobility and messaging for the vast majority, who still use their phone or device to “talk.”
AP&T successfully forecasted these changes and adapted, improvised and overcame. Specifically, AP&T was able to build a network, create a business, and successfully enter the market of data transport. Years ago, AP&T determined the
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AP&T DATA/TELECOM
value of its wireline plant had a shortened life and changed its depreciation methods to accommodate the market. AP&T was also able to leverage, to
AP&T was able to
the greatest extent possible, its facilities to meet the critical
build a network,
broadband appetite in the areas it serves.
create a business As projected for 2013, AP&T
and successfully
was able to complete the first phase of its plan to increase
enter the market of
network transport capacity from 450MB to more than
data transport.
1GB. AP&T also neared completion of its plan to leverage the existing regulated plant to provide theoretical broadband speeds of 24MBPS. AP&T continues to repurpose vacated copper pairs to provide higher-capacity Ethernet services, in addition to ongoing deployment of fiber optic facilities, inclusive of Passive Optical Networks (PONs) in the local
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PHOTO: AP&T Wireless technicians performed radio and antenna upgrades at several SAMN mountaintop sites during 2013. Shown here is the antenna replacement while in progress at Dry Mountain.
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AP&T DATA/TELECOM
loop. Hand in hand with the
four years, AP&T’s non-reg-
aforementioned last- and
ulated telecom revenue has
middle-mile network changes,
grown to $2.4 million. That’s
AP&T brought additional value
a tremendous increase! This
to existing broadband tiers.
growth must be kept in per-
By increasing access speeds
spective, as regulated oper-
and providing an expanded
ating income has declined
menu of options, AP&T gives
considerably due to various
customers the ability to bet-
changes, including changes in
ter align their personal usage
regulation. Looking at the mix
profile with the company’s
of regulated and non-regu-
internet service offerings.
lated revenue, AP&T has been able to achieve some signifi-
Taken as a whole, the changes
cant growth overall. Combined
reflect the ongoing evolution
regulated and non-regulated
required for AP&T’s data and
operating income was only
telecom services to remain a
$1.7 million in 2009. In 2013,
competitive force in the Alas-
it was $3.9 million. This under-
kan market. As this business
scores AP&T’s ability to adapt,
segment changed, non-regu-
improvise, and overcome in an
lated telecom revenue had to
industry in transition.
become a larger contributing factor in AP&T’s operating
Michael Garrett
results—and it has. Non-reg-
COO - VP Telcom Operations
ulated operations showed a
Alaska Power & Telephone
loss in 2009 of approximately
Company
$500,000. Within a span of
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BUSINESS DEVELOPMENT Evolving to Establish Tomorrow’s Opportunities “Life is like a snowball. The important thing is finding wet snow and a really long hill.” ~Warren Buffet
PHOTO: AP&T Engineers Vern Neitzer and Larry Coupe engage in a preliminary site survey of the 77MW Soule River Hydro Project, which upon completion could establish a groundgreaking renewable energy export industry for Alaska.
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Alaska is not short on either ingredient. Just like Buffett’s proverbial snowball, AP&T has grown, expanding from its humble beginnings in Skagway in 1957, to $4.2 million in assets in 1984, and $120.5 million by yearend 2013. While valleys, peaks and periods of transition are the expected norm amidst Alaska’s “boom
or bust” economic cycles, AP&T shows no sign of losing forward momentum in an ever-changing climate. Always evolving, AP&T foresees bright horizons ahead, where we will pioneer new opportunities, as part of an aggressive business-development strategy to deliver growing shareholder value.
APT SOLUTIONS
Growing Core Operations AP&T is finalizing acquisition of the Gustavus Electric Company, including its Falls Creek hydropower plant. This will expand our core operations to include a new service area with long-term population and economic growth. AP&T com-
pleted a preliminary permit filing for a 25MW hydropower project at West Creek near Skagway. This project can be used to meet local energy needs, supply shoreside power to Skagway’s visiting cruise ships, and provide surplus energy for export to Canada’s Yukon Territory. The 2014 completion of the State of Alaska-funded Naukati intertie will allow more of our ratepayers to benefit from additional clean, affordable
energy; produced by the Reynolds Creek hydropower project by 2016/17. New fiscal year 2014 state grant investment in AP&T’s Mahoney Lake hydro project supports renewed efforts to enter the growing Ketchikan energy market, as an independent power producer. We continue to build upon the significant success and profitability of the Southeast Alaska Microwave Network, through ongoing expansion and system improvements, enhancing our ability to capitalize on growing data transport markets.
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AP&T’s widely recognized excellence in hydropower engineering and remote power systems promises increased service contracts with independent power producers, mining sector businesses, and rural communities—all seeking “AP&T Solutions” to their energy challenges. Through innovative efficiency measures and ongoing efforts to update our rate structure, your leadership strives to mitigate unavoidable economic pressures, such as rising healthcare costs, inflation, and unique risks and challenges found in rural Alaska. Our strong, ongoing relationships with local, state, federal and tribal governments allow your company to leverage grant funds and loan programs, and forge innovative public-private partnerships—strategic actions to hedge development risks and generate greater value for customers and shareholders alike.
Major Opportunities Ahead Recent mining exploration in AP&T’s Prince of Wales service region confirmed commercially viable precious metal deposits, as well as one of the largest domestic supplies of heavy rare earth elements— minerals critical to the U.S. military and other national strategic interests. While sev-
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eral years of mine permitting activities are expected, AP&T is positioned to eventually realize significantly increased sales associated with new mining operations, new ore processing facilities, and additional families relocating to the region to fill new jobs. AP&T is continuing to pioneer efforts to develop the 77.4 MW Soule hydropower project for Canadian markets. Soule— our largest and most ambitious hydro project to date— will be the first ever renewable energy project to export Alaska’s abundant renewable energy to British Columbia. Soule is a replicable model, which positions AP&T on the forefront of an even greater opportunity for commercial-scale export of Alaska’s vast, untapped renewable energy potential to ever-growing U.S. and Canadian markets. We look forward to a future where Alaska’s clean, renewable energy helps replace the many aging, coal-fired baseload power plants, scheduled for retirement, in the Lower 48.
Bright Horizons in Alaska and Beyond Very significantly, AP&T has been working to develop a new and growing portfolio of exploration-phase projects. These hold great promise to continue expanding our
business operations, profitability, and shareholder value long term. Projects currently in development include new hydropower projects in Alaska, as well as elsewhere within the U.S. We are actively and aggressively pursuing opportunities involving liquefied natural gas, biomass, wind, solar and renewable energy storage. As these efforts progress, we catch glimpses of our future— and the horizon looks very bright indeed. We are excited about new strategic partners, new market regions and emerging technology that will one day come to define AP&T. We look forward to sharing more details, as these promising opportunities approach commercial realization. Jason Custer Business Development APT Solutions
APT SOLUTIONS
Soule will be the first ever renewable energy project to export Alaska’s abundant renewable energy to British Columbia.
PHOTO: Since 2007, AP&T engineers and technicians have been in the field collecting data in the Soule River area. Larry Coupe prepares to retrieve flow measurment data as part of the ongoing preliminary site surveys.
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POWER
TELECOM
WIRELESS
SERVICE CENTER
DATE OF SERVICE
SKAGWAY 1957 • • TOK 1960 • • CRAIG 1962 • • PORT TOWNSEND (Corporate) 1964 • HYDABURG 1965 • TANACROSS 1973 DOT LAKE 1978 TETLIN 1986 HOLLIS 1990 BETTLES & EVANSVILLE 1991 • DRY CREEK 1991 CHISTOCHINA 1991 NAUKATI 1992 WHALE PASS 1992 MENTASTA LAKE 1992 MEYERS CHUCK 1992 COFFMAN COVE 1992 • EDNA BAY 1993 JIM RIVER CAMP 1993 EAGLE & EAGLE VILLAGE 1993 • HEALY LAKE 1994 NORTHWAY & NORTHWAY VILLAGE 1995 ALATNA & ALLAKAKET 1995 CHISANA 1996 HAINES (TEL 2000) 1997 • • KETCHIKAN 1997 • • METLAKATLA (TEL 2000) 1997 • • PETERSBURG (TEL 2000) 1997 • • WRANGELL (TEL 2000) 1997 • • THORNE BAY 1998 • KLAWOCK 1999 • • HYDER 2000 KLUKWAN 2000 ANCHORAGE 2000 • KASAAN 2001 • SLANA 2005 LUTAK 2007
• • • • • • • • • • • • •
• • • • • •
• • • • • • • • • • • • • • • • • • • • • • • • •
• •
• • • •
FAIRBANKS
EAGLE
DELTA JUNCTION DOT LAKE DRY CREEK
TOK
NORTHWAY
Fiber Interconnect with Copper Valley
Telephone
TETLIN BORDER
CITY
PALMER VALDEZ
AP&T SERVICE AREA MAP
POWER SERVICE SAMN NETWORK MICROWAVE TOWER FIBER OPTIC
SKAGWAY
FUTURE NETWORK
KLUKWAN
AP&T NON-EXCHANGES HAINES
AP&T EXCHANGES BROADBAND - UP TO 1 mb BROADBAND - UP TO 4 mb
Endicott Mtn
Auke Mtn
GUSTAVUS
BROADBAND - UP TO 8 mb
JUNEAU Taku FM Site
Taku Mtn
HOONAH PORTAGE TENAKEE
PELICAN
Dry Mtn
Catherine Island
SITKA Turn Mtn
KAKE
PETERSBURG
Lindenburg Peak
BETTLES & EVANSVILLE
Crystal Mtn
WRANGELL
ALATNA & ALLAKAKET WHALE PASS
HYDER
Burnette Peak
COFFMAN COVE MEYERS CHUCK
EDNA BAY
Kassan Mtn
KLAWOCK
KETCHIKAN
NAUKATI CRAIG
HOLLIS
High Mtn
HYDABURG
METLAKATLA KASAAN THORNE BAY
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CUSTOMER SERVICE Customer Service by its very nature is a moving target as products and services change along with people’s tastes and popular trends.
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AP&T CUSTOMER SERVICE
AP&T Customer Service Representatives enjoyed a colorful transition of seasons during the November 2013 Work Session in Port Townsend, Washington.
As JFK aptly stated: “Change
ness with us when and where
is the law of life. And those
they want, in addition to pres-
who look only to the past or
ent options such as Auto Pay
present are certain to miss the
and Email Billing.
L-R: Jamila Wells Louisa James Jackie Westcott Kelsey Richter, Sr. Dir. Customer Service-Mary Jo Quandt Kay Ackerman Heidi Williams Joni Faulkner CSR Lead-Rhoda Gilbert Roxanne Yancey and Terry Schmitt
Employee-Owners of AP&T
Underscoring our commit-
are keenly aware of the impor-
ment to quality customer care
tance the role of each cus-
is AP&T’s annual customer
tomer interaction plays in our
service work session. This is
continued success. Actively
an opportunity for CSR’s to
listening to what is impor-
network with peers, explore
tant to those whom we serve
creative solutions, receive in-
strengthens our relationships
novative training and sharpen
and provides insight into how
skills necessary to better serve
best to communicate and con-
an Industry in Transition.
future.” With this in view, The
duct our business with them.
While voice remains the primary communication channel used by customers, trends indicate it is quickly followed by self-service and digital options such as chat and email. Going forward AP&T continues developing new and better options that will allow our customers an enhanced ability to do busi-
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COMMUNITIES IN TRANSITION An ever-increasing outward migration of youth from rural Alaskan communities in search of greater opportunity pose a significant challenge to the social and economic health of villages and towns throughout the state. While there are no easy solutions to the complexities of this dilemma, there are, hard-working individuals who through sacrifice and the desire to see youth succeed, make it easy for us to see the value of supporting their efforts. We’d like to tell you about two such individuals AP&T came alongside in support of during 2013. A local elementary school educator in the small village of Slana, Alaska, Heidi Sutter is an individual whose passion for mushing is eclipsed only by her love of kids, and time invested mentoring students with autism and special needs in the region. As a top rookie musher in 2013, KMA Kennel (Heidi and husband Darrin), put together a competitive
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and resilient team finishing 1240 miles of racing this season that included the Yukon Quest 300, Copper Basin 300 and Kobuk 440 events. When not promoting the importance of reading skills in schools across the nation with lead dog Walter, veteran champion musher Hugh Neff might just as easily be spotted as the guy in the big red and white Dr. Seuss hat riding the runners at the start of any major mushing event. Known as “The Gypsy Musher”, and more recently as champion of the 2012 Yukon Quest, Hugh has captured the imagination of mushing fans and children alike, both on the trail and off. It is individuals like these who help our youth focus on the
myriad of “Possibilities” open to them, when life-circumstances may at times offer a differing view. The employee-owners of AP&T count it a privilege to have played a role in Hugh and Heidi’s efforts to educate, encourage and stoke the fires of these children’s creativity during their formative pre-teen years. Onward.. MUSH!
AP&T COMMUNITIES
It is individuals like these who help our youth focus on the myriad of “Possibilities” open to them, when lifecircumstances may at times offer a differing view.
PHOTO: AP&T sponsored mushers Heidi Sutter and 2012 Yukon Quest Champion Hugh Neff take time to pose with a young mushing fan at this year’s Kobuk 440 Sled Dog Race.
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ANNUAL FINANCE REPORT Alaska Power & Telephone Company was established in 1957 and through its’ subsidiaries, provides regulated electric and telephone service to a combined total of 39 communities.
Company Overview AP&T also has non-regulated operations which include the operation of a microwave communication network as well as offering internet, broadband, long distance and engineering services. During 2013 the Company faced several challenges including the overall economy in the rural communities it serves, ever increasing costs, regulatory reform mandated by the FCC and investments which struggle to achieve operational status. While regulated operations transition to face the environment presented, non-regulated operations continue its trend of healthy growth. Total revenues for the Company during 2013 were $43.1 million, an increase of 1.8%, while operating expense increased by 8.2% resulted in operating income of $7.1
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APT ANNUAL FINANCE REPORT 2013
million. An independent appraisal of the Company’s investments resulted in a valuation allowance of $2.3 million which resulted in Net income for the year of $1.4 million. Basic earnings per share for the year was $1.04 based on a weighted-average of 1.34 million common shares outstanding. The Company continued its dividend policy distributing $422,000 of its earnings to its shareholders. Total assets were $120.6 million, a reduction of 1.6%. Total debt at the end of the year was $59.1 million, a 5.4% or $3.4 million reduction. Shareholders’ equity increased by 6.9% or $2.3 million to a total of $36.2 million as the Company continues to strengthen its financial position.
caused by increased non-fuel expenses with the remaining 25% being the result of a regulatory charge. Operating income for the year was $3 million, a reduction of $1.8 million or 36.9% from the previous year. During 2013, the Company entered into a rate case requesting an 18% increase in rates in an attempt to mitigate the current situation. An interim and refundable rate increase of 6% was implemented the beginning of 2014 while the proceedings take place. The Company last adjusted power rates during 2009, since that time total KWh sales decreased by 2.2% while the Alaska Department of Labor indicates CPI in Alaska increased by 11.8% during the 5 year period.
Operations by Segment
Telecommunications Operations – Gross revenues for regulated telecommunications operations were $15.1 million for 2013, a 2.4% or $373,000 decrease from 2012 results. Operating expenses for the year increased by 8.4% or $766,000 to a total of $9.8 million. Operating income provided by regulated telecommunications was $1.47 million, a decrease of 28.7%. These decreases were expected to occur and budgeted for in 2013. The change in regulation by the Federal Communications Commission
Electric Operations – Total sales for electric operations during 2013 were 65.9 GWh, an increase of 0.6% over results for 2012. Gross revenue from power operations increased by 1.1% to a total of $20.3 million. Hydroelectric resources provided 72.4% of all generation, a decrease of 1.3% from the previous year. Total operating expenses for the year increased by $2 million, 12% was related to increased cost of power, 63%
in its 2011 Transformation Order plus a decline in access line account for the change in operating income between years. Non-regulated Operations – Consisting of AP&T Wireless, AP&T Long Distance, and engineering services, non-regulated operations continue to grow. Led by the wireless division, gross revenues increased by $928,000 or 13.6% during the past year to a total of $7.7 million. Combined operating expenses for the segment fell by 9% or $422,000 to $4.26 million, while operating income increased by 21.5% to $2.6 million. AP&T Wireless experienced a 12% or $750,000 increase in revenue, engineering services provided revenues of $477,000, an increase of $205,000, while Long Distance revenues fell by $26,000 to $258,000 for the year. AP&T Wireless growth has been primarily due to data transport sales to other carriers and broadband sales to high capacity users and residential and business customers.
Other Income and Expense The Company reviews its investments on a regular basis. When evidence indicates that the Company will not recover
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its full investment based on expected future cash flows, an impairment is recorded in the current year. As a result of this process, the Company has recorded an impairment on its investment in the preferred shares of Hydro West Holdings of $2.3 million. The Company received patronage dividends of $566,000 and $511,000 for the years ending 2013 and 2012 respectively. Patronage is based on 1% of the Company’s average outstanding loan balances with its primary lender CoBank. 65% of the patronage is returned to the Company in cash while the remainder increases the equity investment in CoBank.
Provision for Income Taxes Income before tax was $1.8 million and $5.6 million for the years 2013 and 2012 respectively. The effective tax rate was 22.5% or $404,000 for 2013 compared to 38.7% or $2.2 million in 2012. Net income for 2013 was $1.4 million or $1.04 per share compared to $3.4 million or $2.41 per share for 2012.
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Financial Condition The Company’s investment in gross plant in service increased by 3.8% or $7.1 million to $176.6 million, and once again depreciation expense exceeded capital expenditures resulting in a 0.8% decrease in net property, plant and equipment to a total of $77.2 million. Working capital was reduced to $4 million as the Company increased its accrued expenses for health insurance and interest expense. At year 2013, interest bearing liabilities were $59.1 million, a reduction of $3.4 million or 5.4%. The Company raised $827,000 of additional equity through retained earnings and an additional adjustment to “other comprehensive loss” of $1.5 million was recorded to reflect the improving fair market value of the interest rate swap that became effective August of 2013. In total, stockholders’ equity increased by 6.9% or $2.3 million during 2013. The Company’s equity as a percentage of total capital increase by 8.1% to 38% during 2013 from 35.1% at yearend 2012.
During 2013, the Company began the process of upgrading radios used in its SE Microwave network.
APT ANNUAL FINANCIAL REPORT 2013
Liquidity and Capital Resources Operating Activities – Cash flows provided by operating activities for 2013 were $11.5 million, a $1.5 million reduction from the previous year. This is primarily the result of transitioning from a large income tax receivable position to one were income taxes are due and paid quarterly. As bonus depreciation schemes are eliminated from the federal income tax code, the Company will lose its ability to defer its tax liabilities. Investing Activities – During 2013, the Company began the process of upgrading radios used in its SE Microwave network. As a result, cash used in acquiring property plant and equipment during 2013 increased by $2 million or 39% to $7.4 million compared to $5.3 million during 2012. Net cash used for investing activities totaled $8 million during 2013, compared to $5.8 million for the year ended 2012. Financing Activities – The Company used $3.8 million of cash for financing activities during the year ended 2013. $3.4 million was used to retire long-term debt while net transactions in the Company’s stock used $30,000 while
the payment of dividends used another $422,000. By comparison, during 2012 the Company used a net of $3.3 million to satisfy long-term debt, while transactions in the Company’s stock used another $3.3 million and an additional $456,000 was used to pay dividends for a total outflow of $7.1 million.
negative effects on projected results for the Company.
Issues, Risks and Challenges
• We face risks related to our operations through unexpected changes in compliance regulations, political, legal and economic instability, and seasonal factors that would affect hydrology, and unforeseen adverse tax consequences, all of which could have adverse effects on the Company’s longterm financial projections.
There will always be risks and challenges facing a business, which include the effects and uncertainties of future events, some of which have been identified and described below. • The continuing unstable economic environment in Alaska could have a negative impact and restrict growth opportunities there. • Our continued reliance on subsidies from government to our regulated electric and telecommunications customers, that help them to pay rates that reflect a fair return to the Company, could be affected by legislative or regulatory changes.
• If the company fails to uphold the financial covenants of its Master Loan Agreement with CoBank, events could cause a default in the terms of the agreements and would adversely affect the Company’s future.
Chad A. Haggar, CPA Chief Financial Officer, VP, Treasurer Robert S. Grimm CEO, President Michael Garrett, AP&T COO-VP Telecom
• Recently proposed regulatory changes in the telecommunications sector will have
29
FINANCIAL STATEMENTS - 5 YEAR SUMMARY $ Expressed in thousands except per share data
OPERATING RESULTS
2009
2010
2011
2012
2013
INCOME - ELECTRIC
$ 6,128
$ 5,975
$ 5,633
$ 4,909
$ 3,096
INCOME - TELECOM
$ 2,220
$ 2,763
$ 2,022
$ 2,059
$ 1,469
INCOME - NONREGULATED OPERATIONS
$ (843)
$ (445)
$ 1,450
$ 2,105
$ 2,558
TOTAL OPERATING INCOME
$ 7,505
$ 8,293
$ 9,105
$ 9,073
$ 7,123
19.7%
21.1%
21.9%
21.4%
16.5%
NET INCOME
$ 2,639
$ 2,846
$ 3,338
$ 3,425
$ 1,390
EBITDA1
$ 16,655
$ 16,830
$ 16,677
$ 16,611
$ 13,251
CASH FLOW FROM OPERATIONS
$ 6,573
$ 10,515
$ 12,826
$ 13,087
$ 11,450
1.79
1.91
2.22
2.41
1.04
OPERATING MARGIN
EARNINGS (LOSS) PER SHARE - BASIC
1
EBITDA is the acronym for: Earnings before Interest Taxes, Depreciation and Amortization, a common financial measure used to determine a company’s cash from operation activites.
FINANCIALS - 5 YEAR SUMMARY - OPERATING RESULTS 30
5 YEAR SUMMARY - KEY RATIOS
FINANCIAL STATEMENTS - 5 YEAR SUMMARY - KEY RATIOS $ Expressed in thousands except per share data
FINANCIAL POSITION
2009
2010
2011
2012
2013
TOTAL CAPITALIZATION
$108,711
$107,493
$102,817
$ 96,348
$ 95,310
WEIGHTED-AVERAGE SHARES OUTSTANDING
1,472,013
1,491,950
1,500,195
1,419,656
1,341,585
BOOK VALUE PER SHARE - BASIC
$ 22.42
$ 23.46
$ 23.49
$ 25.22
$ 26.98
SHARE PRICE (PER VALUATION)
$ 19.05
$ 18.58
$ 21.13
$ 28.10
$ TBD
CASH FROM OPERATIONS / REVENUE
17.2%
26.7%
30.8%
30.9%
26.6%
DEBT / CAPITALIZATION
69.46%
67.19%
65.79%
64.87%
62.04%
EQUITY / CAPITALIZATION
30.54%
32.81%
34.21%
35.13%
37.96%
RETURN ON ASSETS
2.06%
2.24%
2.62%
2.79%
1.15%
RETURN ON EQUITY
7.95%
8.07%
9.49%
10.12%
3.84%
KEY RATIOS
FINANCIALS - 5 YEAR SUMMARY - KEY RATIOS - FINANCIAL POSITION 31
Report of Independent Auditors and Financial Statements
Alaska Power& Telephone Company and Subsidiaries December 31, 2013 and 2012
CONTENTS REPORT OF INDEPENDENT AUDITORS
CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets
Consolidated statements of income
Consolidated statements of comprehensive income Consolidated statements of stockholders’ equity Consolidated statements of cash flows
Notes to consolidated financial statements
PAGE
1‐2
3‐4 5 6
7
8‐9
10‐23
REPORT OF INDEPENDENT AUDITORS
The Board of Directors Alaska Power & Telephone Company Report on the Financial Statements We have audited the accompanying consolidated financial statements of Alaska Power & Telephone Company (Company) and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated 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 audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate for the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 1
REPORT OF INDEPENDENT AUDITORS (continued)
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alaska Power & Telephone Company and its subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Spokane, Washington April 14, 2014
2
ALASKA POWER & TELEPHONE COMPANY CONSOLIDATED BALANCE SHEETS
ASSETS
PROPERTY, PLANT, AND EQUIPMENT Electric Telecommunications Nonutility
2013
December 31,
2012
$ 98,987,261 77,463,655 135,055
Less accumulated depreciation and amortization
176,585,971 99,367,860
$ 97,735,797 72,275,181 135,054
Utility plant under construction
77,218,111 4,364,097
77,809,088 3,673,476
OTHER ASSETS Investments Goodwill Rate stabilization asset Other assets
10,641,121 9,266,403 5,239,506 1,652,787
12,775,698 9,266,403 5,385,830 1,859,818
Total property, plant, and equipment
Total other assets
CURRENT ASSETS Cash and cash equivalents Receivables, less allowance for doubtful accounts of $35,119 in 2013 and $43,924 in 2012 Securities available for sale Inventory and other current assets Income tax refunds receivable
Total current assets
Total assets
3
81,582,208
170,146,032 92,336,944
81,482,564
26,799,817
29,287,749
2,790,891
3,138,015
6,052,732 212,798 3,083,335 69,868
12,209,624
$ 120,591,649
5,481,884 212,798 2,953,760 �
11,786,457
$ 122,556,770
ALASKA POWER & TELEPHONE COMPANY CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
2013
December 31,
2012
STOCKHOLDERS' EQUITY Common stock, $1 par value, 10,000,000 shares authorized 1,341,064 and 1,342,104 shares issued and outstanding in 2013 and 2012, respectively Additional paid‐in capital Retained earnings Accumulated other comprehensive loss
$ 1,341,064 5,159,738 33,443,955 (3,764,182)
LONG‐TERM DEBT, less current portion Goat Lake Hydro, Inc. note payable Other long‐term debt
36,180,575
33,847,350
11,050,000 43,851,092
11,916,666 47,352,357
Total stockholders’ equity
Total long‐term debt
INTEREST RATE SWAP
OTHER LIABILITIES AND DEFERRED CREDITS Deferred income taxes Other deferred credits
Total other liabilities and deferred credits
54,901,092
$ 1,342,104 5,187,913 32,616,615 (5,299,282)
59,269,023
6,232,087
8,773,644
14,227,209 869,192
13,389,310 837,001
CURRENT LIABILITIES Accounts payable and other accrued liabilities Income taxes payable Deferred income taxes Current portion of long‐term debt
15,096,401
14,226,311
3,841,897 ‐ 111,386 4,228,211
2,598,104 471,785 138,832 3,231,721
Total liabilities and stockholders’ equity
$ 120,591,649
Total current liabilities
See accompanying notes.
8,181,494
6,440,442
$ 122,556,770
4
ALASKA POWER & TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2013 2012
REVENUE Electric Telecommunications Other nonregulated
$ 20,256,346 15,105,588 7,748,360
EXPENSES Electric Telecommunications Other nonregulated
14,030,788 9,833,246 4,264,304
Operations and maintenance expense
Depreciation and amortization expense Income from operations
OTHER INCOME (EXPENSE) Loss from asset impairment Gain (loss) from disposal of assets Dividend income Miscellaneous Total other income Interest income Interest expense
Net interest expense
Income before income taxes Provision for income taxes
43,110,294
42,329,601
28,128,338
25,830,624
7,858,912
7,426,198
33,256,822
(2,334,160) 3,571 566,024 33,471
� (2,324) 510,815 (396,122)
3,296 (3,601,573)
32,877 (3,628,089)
7,123,044
(1,731,094) (3,598,277) 1,793,673
9,072,779
112,369
(3,595,212) 5,589,936
(403,861)
(2,165,036)
$ 1.04
$ 2.41
$ 1,389,812
Weighted�average basic and diluted shares outstanding
1,341,585
5
12,077,520 9,067,231 4,685,873
35,987,250
Net income
Basic and diluted earnings per share
$ 20,030,742 15,478,561 6,820,298
$ 3,424,900
1,419,656
See accompanying notes.
ALASKA POWER & TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2013 2012 Net income
Other comprehensive income (loss) before tax Gain (loss) from fair value adjustment to interest rate swap
Income tax expense (benefit) related to fair value adjustment to interest rate swap liability Comprehensive income
See accompanying notes.
$ 1,389,812
$ 3,424,900
2,541,557
(5,278,342)
(1,006,457)
2,090,223 $ 236,781
$ 2,924,912
6
ALASKA POWER & TELEPHONE COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Balance at December 31, 2011
Common Stock
31,509
584,585
‐
(186,612)
Other
Balance at December 31, 2012 Net income
Sale of common stock
Repurchase of common stock
‐
$ 29,647,424
Repurchase of common stock
Dividends paid to shareholders
3,424,900
$ 8,303,139
‐
Fair value adjustment to interest rate swap, net of tax
Retained Earnings
Accumulated Other Comprehensive Loss
$ 1,497,207
Net income
Sale of common stock
Additional Paid‐In Capital
‐
(3,756,502)
‐
Total
$ (4,274,112)
$ 35,173,658
‐
616,094
‐
3,424,900
(3,943,114)
‐
‐
‐
(1,025,170)
(1,025,170)
‐
56,691
‐
‐
56,691
‐ 1,342,104
‐ 21,634
(22,674)
‐ 5,187,913 ‐
586,271
(614,446)
(455,709) 32,616,615 1,389,812 ‐
‐
‐
(5,299,282) ‐ ‐
‐
(455,709) 33,847,350 1,389,812
607,905
(637,120)
Fair value adjustment to interest rate swap, net of tax
‐
‐
‐
1,535,100
1,535,100
Balance at December 31, 2013
$ 1,341,064
$ 5,159,738
$ 33,443,955
$ (3,764,182)
$ 36,180,575
Dividends paid to shareholders
7
‐
‐
(562,472)
‐
(562,472)
See accompanying notes.
ALASKA POWER & TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization Asset impairment (Gain) loss from disposal of assets Noncash patronage dividends Deferred income tax provision Other noncash activity Accretion of rate stabilization asset Changes in assets and liabilities Receivables Income taxes Other assets and liabilities Net cash from operating activities
CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property, plant, and equipment, net Reimbursable construction projects Investment in affiliate Proceeds from sale of available for sale securities Purchase of available for sale securities Net cash from investing activities
Years Ended December 31, 2013 2012 $ 1,389,812
$ 3,424,900
7,858,912 2,334,160 (3,571) (135,250) (340,577) ‐ 146,324
7,426,198 ‐ 2,324 (123,353) 607,428 329,337 (328,817)
11,450,299
13,086,943
(570,848) (541,653) 1,312,990
(7,424,443) (486,331) (64,333) ‐ ‐
(7,975,107)
341,451 1,559,447 (151,972)
(5,348,741) (212,249) (211,097) 157,249 (157,133) (5,771,971)
8
ALASKA POWER & TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2013 2012
CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long‐term debt Payments on long‐term debt Special funds ‐ restricted Proceeds from sale of common stock Repurchase of common stock Dividends paid Other changes in equity
$ ‐ (3,371,441) ‐ 607,905 (637,120) (421,660) ‐
$ 13,000,000 (16,267,358) (151,319) 616,094 (3,943,114) (455,709) 56,691
NET CHANGE IN CASH AND CASH EQUIVALENTS
(347,124)
170,257
CASH AND CASH EQUIVALENTS, end of the year
$ 2,790,891
$ 3,138,015
Net cash from financing activities
CASH AND CASH EQUIVALENTS, beginning of the year SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for Interest expense Income taxes
NONCASH INVESTING AND FINANCING ACTIVITIES Unrealized (gain) loss on interest rate swap, net of tax
Use of restricted funds to retire principal on long‐term debt Accrued dividends payable
9
(3,822,316) 3,138,015
(7,144,715) 2,967,758
$ 3,583,271
$ 3,699,042
$ (1,535,100)
$ 1,025,170
$ 140,812
$ ‐
$ 1,147,486
$ ‐
$ ‐
$ 2,205,000
See accompanying notes.
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – The Company and Summary of Significant Accounting Policies Description of entity – Alaska Power & Telephone Company and its subsidiaries (AP&T or Company) supply electric and telephone service to several communities in the state of Alaska. AP&T is subject to regulation by the Regulatory Commission of Alaska (RCA), the Federal Communications Commission (FCC), and the Federal Energy Regulatory Commission (Commissions) with respect to rates for service and maintenance of its accounting records. AP&T’s accounting policies conform to accounting principles generally accepted in the United States of America as applied to regulated public utilities and are in accordance with the accounting requirements and rate‐making practices of the Commissions. Consolidation – The accompanying consolidated financial statements include the accounts of AP&T and its wholly‐owned energy subsidiaries, Alaska Power Company, BBL Hydro, Inc., and Goat Lake Hydro, Inc.; its wholly‐owned telecommunications subsidiaries, Alaska Telephone Company, AP&T Long Distance, Inc., AP&T Wireless, Inc., Bettles Telephone, Inc., and North Country Telephone, Inc. All material intercompany balances and transactions have been eliminated in consolidation. Accounting estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include depreciation, interstate access revenue settlements, the fair value of goodwill, the fair value of the interest rate swap, unbilled revenue, and deferred income taxes. Actual results could differ from those estimates. Cash and cash equivalents – All highly liquid investments with original maturities of 90 days or less are carried at cost plus accrued interest, which approximates fair value, and are considered to be cash equivalents. All other investments not considered to be cash equivalents are separately categorized as investments or securities available for sale. Concentration of risks – At various times throughout the year, the cash balances deposited in local institutions exceed federally insured limits. A possible loss exists for those amounts in excess of the federally insured limits. AP&T minimizes this risk by utilizing numerous financial institutions for deposits of cash funds. In 2013, the Company received $2.9 million, or 7% of its revenue from the Federal Universal Service Fund. In 2012, the Company received $3.6 million, or 8.6% of its revenue from the Federal Universal Service Fund.
10
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – The Company and Summary of Significant Accounting Policies (continued) Comprehensive income – Accounting principles require that recognized revenues, expenses, gains, and losses be included in net income. In addition, certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and changes in the fair market value of interest rate swaps, are reported as a separate component of equity. These items, along with net income, are components of comprehensive income, which is reported in a separate consolidated statement of comprehensive income. Valuation of accounts receivable – Accounts receivable are stated at the amount management expects to collect on outstanding balances. AP&T reviews the collectability of accounts receivable annually based upon an analysis of outstanding receivables, historical collection information, and existing economic conditions. Receivables from power and telecommunications subscribers are due 30 days after issuance of the subscriber bill. Receivables from other customers are typically outstanding 30 to 60 days before payment is received. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Management believes it has established adequate reserves for any risk associated with these receivables. Securities available for sale – Securities not classified as held to maturity or trading are classified as available for sale. Available for sale securities are stated at fair value with any material unrealized gains and losses, net of deferred taxes, reported as a separate component of stockholders’ equity. Unrealized gains and losses were not material in 2013 or 2012. Quoted prices in active markets are available for all of the Company’s securities available for sale. Fuel, supplies, and other inventory – Fuel, supplies, and other inventory are valued at the lower of average cost or market. Cost is determined on a first‐in, first‐out basis. The supplies and other inventory are primarily held for use in construction projects including repairs and maintenance of AP&T’s delivery systems. Property, plant, equipment, and depreciation – Property, plant, and equipment are stated at cost. Regulated plant includes assets that are jointly used for regulated and nonregulated activities. The cost of additions to and replacements of property, plant, and equipment are capitalized. This cost includes direct material, labor, and similar items and charges for such indirect costs as engineering, supervision, payroll taxes, and pension benefits. AP&T capitalizes, as an additional cost of utility plant, an allowance for funds used during construction (AFUDC), which represents the allowed cost of capital used to finance a portion of construction work in progress for projects of more than one year in duration. AFUDC consists of debt and equity components that, when capitalized, are credited as noncash items to other income and interest charges. There was no AFUDC recorded in 2013 or 2012. 11
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – The Company and Summary of Significant Accounting Policies (continued) Property, plant, equipment, and depreciation (continued) – The cost of current repairs and maintenance is charged to expense, while the cost of betterment is capitalized. The original cost of property, plant, and equipment together with removal cost, less salvage, is charged to accumulated depreciation at such times as assets are retired and removed from service. For financial statement purposes, depreciation is computed on the straight‐line method using rates based on average service lives. For income tax purposes, AP&T computes depreciation using accelerated methods where permitted. Goodwill – In 1999, AP&T purchased certain telecommunications properties of GTE Alaska and in 1995 through 1997 purchased the power assets of three service areas in Alaska from existing power providers. The excess of the purchase price over the assets acquired has been recorded as goodwill in the amount of $8,550,741 for the telecommunications properties and $715,662 for the power properties. The goodwill is tested annually for impairment by management evaluating if current events and circumstances indicate that it is more likely than not the fair value of the reporting unit is less than its carrying value. If management’s analysis indicates that it is more likely than not the fair value is less than the carrying value, the fair value of the reporting unit is calculated and compared to the carrying value. Management has reviewed events and circumstances that may indicate decreases in fair value of goodwill and has concluded no impairment exists at December 31, 2013. Preliminary survey and investigation costs – AP&T defers costs incurred for the preliminary survey and investigation of proposed construction projects in accordance with the rules of the Commissions. These deferred costs are capitalized into utility plant when the preliminary survey and investigation projects are completed or are charged to expense in the period that a proposed project is abandoned. Income taxes – Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets relate primarily to asset impairment deductions on the books. Deferred tax liabilities relate primarily to the use of accelerated depreciation for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Company records uncertain tax positions if the likelihood the position will be sustained upon examination is less than 50%. As of December 31, 2013 and 2012, the Company had no accrued amounts related to uncertain tax positions. The Company is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for years before 2010.
12
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – The Company and Summary of Significant Accounting Policies (continued) Other deferred credits – Other deferred credits consist of customer advances for construction, grant funded projects, and other deferred revenue. Customer advances for construction of additions to the electric distribution systems are recorded as a liability and are amortized through discounted service billings to the customer over a 60‐month period. At the end of the amortization period, any remaining balance is recorded as a reduction of the respective utility plant accounts. Customer advances for construction were $539,521 and $440,468 at December 31, 2013 and 2012, respectively. Revenue recognition – Electric – AP&T utilizes cycle billing and records revenue billed to its customers when the meters are read each month. In addition, AP&T recognizes unbilled revenue from electric power delivered, but not yet billed. Revenue recognition – Telecommunications – AP&T’s local wireline rates and access revenues (revenues earned for originating and terminating long distance calls) are determined by rates approved by regulators. Other sources of revenues, such as Internet, equipment sales, wireless, and long distance resale are not rate regulated. Pending and future regulatory actions may have a significant impact on AP&T’s future operations and financial condition. Monthly service fees derived from local wireline, data services, and wireless are billed one month in advance, but recognized in the month that service is provided. Usage sensitive revenues such as long distance and other wireless services are generally billed as a per‐ minute charge. AP&T also receives significant universal service support revenue based on the higher costs of providing rural telecommunications service. These revenues are included in interstate access revenues and are based on AP&T’s relative level of operating expense and plant investment. The interstate program is governed by the FCC and administered by the Universal Service Administrative Company (USAC). Telecommunications operating revenues include settlements based on AP&T’s participation in the interstate revenue pools administered by the National Exchange Carrier Association (NECA) and regulated by the FCC. These revenues are determined by annually prepared separations and interstate access cost studies. Revenues for the current year are based on estimates prior to the submission of the cost study reporting actual results of operations. Additionally, the studies are subject to a 24‐month pool adjustment period and final review and acceptance by the pool administrators. There was an insignificant revenue impact for 2013 and 2012 for adjustments related to prior year differences between the recorded estimates and actual revenues. Management does not anticipate significant adjustments to recorded revenues for the years ended December 31, 2013 and 2012.
13
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – The Company and Summary of Significant Accounting Policies (continued) Revenue recognition – Telecommunications (continued) – Additionally, telecommunications operating revenues include revenues received from intrastate revenue pools administrated by the Alaska Exchange Carriers Association that are based on AP&T’s relative cost of providing intrastate access service. These revenues are based on projections submitted periodically and intrastate access cost studies that are submitted every two years. Management does not anticipate significant adjustments to recorded revenues for the years ended December 31, 2013 or 2012. In October 2011, the FCC issued an order reforming Intercarrier Compensation and Universal Service Funding (USF) mechanisms and issued a Further Notice of Proposed Rulemaking (FNPRM) on long‐term USF reform, transition timing, and implementation. The majority of the new rules took effect, subject to various transition provisions, on July 1, 2012. Major provisions of the order and FNPRM include: Limitations on the amount of support received per line Limitations on capital expenditures and operating expenses recoverable from the USF Benchmarks for minimum local rates charged to end users by recipients of support The establishment of the Access Recovery Charge billed to end users The elimination of local switching support The establishment of the Connect America Fund, a new funding mechanism for investment and expenses related to the switching function The structured reduction of carrier access rates charged by the Company to other carriers using its network to complete long distance calls Management is monitoring the impacts of the reform on an on‐going basis. Earnings per share – AP&T has calculated its basic earnings per share based on the weighted‐average number of shares of common stock outstanding. Diluted earnings per share reflect the impact of the dilution caused by outstanding stock options using the treasury stock method. There was no dilutive effect of any outstanding stock options in 2013 or 2012. Weighted‐average shares outstanding for purposes of calculating basic and diluted earnings per share were 1,341,585 in 2013 and 1,419,656 in 2012. Taxes imposed by governmental authorities – The Company’s customers are subject to taxes assessed by various governmental authorities on many different types of revenue transactions with the Company. These specific taxes are charged to and collected from the Company’s customers and subsequently remitted to the appropriate taxing authority. The taxes are accounted for on a net basis and excluded from revenues. 14
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – The Company and Summary of Significant Accounting Policies (continued) Advertising costs – AP&T expenses advertising costs as incurred. Advertising expenses during the years ended December 31, 2013 and 2012, were $126,632 and $126,310, respectively. Fair value measurements – Fair value represents the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The Company follows the following fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value: Level 1 Quoted prices in active markets for identical assets or liabilities. Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The fair value measurement guidance is applicable to the Company in the following areas: Goodwill impairment testing Securities available for sale Interest rate swaps The Company’s investment in securities available for sale and interest rate swaps are classified as Level 1 in the above hierarchy at December 31, 2013 and 2012. The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets: Cash and cash equivalents – The carrying amounts approximate fair value because of the short maturity of those instruments. Long‐term debt – The fair value of AP&T’s long‐term debt is estimated by discounting the future cash flows of the various instruments at rates currently available to AP&T for similar debt instruments of comparable maturities. The carrying amount of long‐term debt approximates the estimated fair value at December 31, 2013 and 2012, due to the low interest rate environment and the current rates for AP&T’s long‐term debt obligations. 15
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – The Company and Summary of Significant Accounting Policies (continued) Subsequent events – Subsequent events are events or transactions that occur after the balance sheet date but before the financial statements are available to be issued. The Company recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company’s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before the financial statements are available to be issued. The Company has evaluated subsequent events through April 14, 2014, which is the date the financial statements were available to be issued. Note 2 – Rate Stabilization Asset The Company defers certain costs that would otherwise be charged to expense, if it is probable future rates will permit the recovery of such costs. In September 2000, the Company received approval from the Commissions to defer the billing of a portion of the allowable annual costs as defined by the power sales agreement in place between Alaska Power Company and Goat Lake Hydro. Such amounts are deferred as a regulatory asset and will be billed in future years when the Company’s allowable annual costs decline below certain levels. Management projects the deferred amounts will be recovered through additional billings through 2020. Note 3 – Operating Lease Agreements AP&T leases a portion of its office space and a portion of its utility plant under noncancellable leases. Rent expense on the noncancellable leases was $243,578 and $253,287 for 2013 and 2012, respectively. Certain leases include renewal provisions at AP&T’s option. Minimum rental commitments under noncancellable operating leases are as follows: 2014 $ 185,662 2015 144,740 2016 122,540 2017 103,494 2018 91,972
Additional cancellable lease agreements have been secured for the use of the land for hydroelectric operations. The term of the agreements extend for the life of the hydroelectric license of 50 years. Total Company rent expense was $699,515 in 2013 and $707,085 in 2012. 16
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Property, Plant, and Equipment Property, plant, and equipment consist of the following assets at December 31:
Electric Hydroelectric Other generation Transmission and distribution Other Land Utility plant acquisition adjustment
2013
2012
Depreciation Rate
$ 26,573,965 19,103,246 38,265,704 13,877,105 821,068 346,173
$ 26,564,342 18,945,637 37,588,141 13,470,437 821,067 346,173
2% 4% to 8% 2.5% to 4% 2.5% to 20% ‐‐‐ 6%
Telecommunications General support assets Central office assets Cable and wire facilities Nonregulated investment Land
10,568,120 27,128,212 20,766,371 18,664,315 336,637
10,343,477 24,302,852 20,353,066 16,939,149 336,637
2.5% to 20% 8% to 14% 3 to 6% 10% to 20% ‐‐‐
101,923 33,132
101,924 33,130
4% ‐‐‐
$ 176,585,971
$ 170,146,032
Nonutility Buildings Land Total property, plant, and equipment
98,987,261
77,463,655
135,055
97,735,797
72,275,181
135,054
Utility plant under construction includes all direct and indirect costs incurred during the construction of projects that were not complete and in service at the balance sheet date. The balance also includes approximately $2.5 million in construction costs related to Soule River Hydro, LLC (SRH). SRH is a project company formed to construct a hydroelectric facility on the Soule River in Alaska that was not operational as of December 31, 2013.
17
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 – Investments AP&T’s investments consist of the following at December 31:
Investment in CoBank Investment in Ketchikan Electric Company, LLC Investment in Hydro West Holdings, Inc. Investment in Haida Energy, Inc. Other
2013
$ 4,025,785 600,000 5,346,000 609,336 60,000 $ 10,641,121
2012
$ 3,890,632 600,000 7,680,160 604,906 ‐ $ 12,775,698
CoBank – CoBank is organized similar to a cooperative and is owned by the customers it serves. As such, a portion of CoBank’s earnings is returned to its customers based on their patronage with the bank. This investment is recorded on the cost method. Dividend income was reported in the amounts of $541,002 and $510,815 for 2013 and 2012, respectively, related to these earnings. Ketchikan Electric Company LLC – AP&T owns a 50% share of Ketchikan Electric Company LLC (KEC) and accounts for the investment using the equity method. The principal purpose and business of KEC is to construct, own, operate, and manage a hydroelectric power system in the Ketchikan Gateway Borough. The investment represents capital contributions to KEC, as the Company is still in the development stage. There was no activity in 2013 or 2012. Hydro West Holdings, Inc. – Hydro West Holdings, Inc. (Holdings) is a domestic holding company that owns interest in hydroelectric projects in Central America. The Company’s investment consists of 7.6 million shares of nonvoting preferred stock in Holdings. The common and voting stock of Holdings is held by the individual stockholders of AP&T. The nonvoting preferred stock in Holdings entitles the Company to receive cumulative dividends at a rate of 8% per annum beginning in August 2013 and entitles the Company to distribution preference in the event of a liquidation. The Company’s investment in the preferred stock of Holdings is accounted for using the cost method. Management reviewed the carrying value of this investment by evaluating current events, future cash flows, and other circumstances and determined the carrying value exceeded the fair value. As a result, an impairment loss of $2,334,160 was recorded as other income in the accompanying statement of income to adjust the investment in Holdings to estimated fair value at December 31, 2013.
18
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 6 – Long‐Term Debt The Company’s long‐term debt consists of the following at December 31:
CoBank notes payable, secured by all assets of AP&T and its subsidiaries, due in quarterly installments and based on a 15‐year amortization with a fixed interest rate of 4.47%.
CoBank notes payable, secured by all assets of AP&T and its subsidiaries, due in quarterly installments and based on a 10‐year amortization with a variable interest rate of 2.89% at December 31, 2013. Interest rate swap agreement below reduces exposure to interest rate fluctuations.
Notes payable to state of Alaska, secured by certain electric assets, with interest rates ranging from 0.00% to 5.45%, maturing at various dates from 2014 through 2037. Other term debt
Less current portion
2013
2012
$ 11,916,667
$ 12,783,333
44,298,010
46,650,580
2,889,752
3,056,569
59,129,303 (4,228,211)
62,500,744 (3,231,721)
24,874
$ 54,901,092
10,262
$ 59,269,023
Annual maturities for the five years beginning January 1, 2014, are $4,228,211, $4,481,672, $4,758,373, $5,056,764, and $5,374,910, respectively, and $35,229,373 thereafter. The Company uses variable‐rate debt to finance its operations and these debt obligations expose the Company to variability in interest payments due to changes in interest rates. Management believes that it is prudent to limit the variability of a portion of its interest payments as well as the uncertainty associated with interest rates when its balloon payment with CoBank becomes due. To meet this objective, management periodically considers interest rate swap agreements to manage fluctuations in cash flows resulting from interest rate risk. These swaps change the variable‐rate cash flow exposure on the debt obligations to fixed cash flows. The Company does not enter into derivative instruments for speculative purposes. Under the terms of the interest rate swaps, the Company receives variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed‐rate debt. Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable‐rate debt obligations are reported in accumulated other comprehensive loss. 19
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 – Long‐Term Debt (continued) At December 31, 2009, the Company had entered into an interest rate swap agreement on all of its variable rate long‐term debt with CoBank. The interest rate swap becomes effective in August 2013 and amortizes over an additional ten‐year term at 7.62% per annum. The fair value of the interest rate swap liability was $6,232,087 and $8,773,644 at December 31, 2013 and 2012, respectively, and is classified within Level 2 of the valuation hierarchy. The note payable by Goat Lake Hydro to secure the Power Revenue Bonds Series 1997 was the result of the issuance on December 31, 1997, of a series of tax‐exempt bonds by the Alaska Industrial Development and Export Authority (AIDEA). The proceeds were restricted in use for the purpose of financing the acquisition, purchase, construction, improvement, and equipment of the project known as the Upper Lynn Canal Regional Power Supply System. Of these restricted funds, approximately $2 million was required to remain in reserve for the term of the bonds. During 2012, the Company refinanced its remaining outstanding obligations on the GLH note payable by securing a new note payable with CoBank for $13 million. The proceeds of the new note were used to repay the outstanding principal balance on the GLH note. This transaction removed the requirement for the Company to maintain restricted funds related to bond principal and interest. The loan agreements with CoBank contain provisions and restrictions pertaining to, among other things, limitations on additional debt, and defined amounts related to the Company’s total debt to EBITDA, equity to assets ratio, fixed charge coverage, and debt service coverage ratio. The Company has a $3 million line of credit established with CoBank. There were no outstanding balances on the line of credit as of December 31, 2013 or 2012. Note 7 – Income Taxes The components of the consolidated provision for income taxes are as follows for the years ended December 31: 2013 2012
Current Deferred
$ 744,438 (340,577) $ 403,861
$ 1,557,608 607,428 $ 2,165,036
20
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 7 – Income Taxes (continued) Total tax expense differs from that computed at the statutory federal income tax rate due to the following: 2013 2012
Income tax provision at federal rate of 34% State income taxes, net of federal benefit
Provision for income taxes
$ 256,684 147,177
$ 403,861
$ 1,831,723 333,313 $ 2,165,036
The components of the deferred tax (assets) and liabilities as of December 31 are as follows: 2013 2012
Current Deferred tax assets Deferred tax liabilities
$ (252,619) 364,005
$ (237,896) 376,728
Noncurrent Deferred tax assets Deferred tax liabilities
$ (4,497,967) 18,725,176
$ (4,537,124) 17,926,434 $ 13,389,310
Net current deferred tax liability
Net noncurrent deferred tax liability
$ 111,386
$ 14,227,209
$ 138,832
Note 8 – Employee Stock Ownership Plan and Other Benefits AP&T maintains an employee stock ownership plan (Plan). All employees expected to work at least 1,000 hours per year become eligible to participate in the Plan upon attaining the age of 18 and completing three months of service. Participants may elect to contribute from 1% to 80% of their wages to the Plan, subject to IRS maximums, which can be invested in the common stock of AP&T or into other investment accounts. The Company makes a defined matching contribution to each eligible participant’s account of 5% of the participant’s wages payable in Company stock. The Company also makes a profit sharing contribution where 7.5% of the prior year’s net income is paid out to the qualified Plan participants in cash. 21
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 – Employee Stock Ownership Plan and Other Benefits (continued) The Plan provides that participants’ interests in employer‐funded contributions become fully vested after the completion of three years of service. The Plan defines a year of service as the completion of not fewer than 1,000 hours of service within the calendar year. In 2013, employer matching contributions and profit sharing contributions were $460,723 and $256,868, respectively. In 2012, employer matching contributions and discretionary contributions were $449,166 and $250,328, respectively. Note 9 – Business Segment Information AP&T’s electric segment provides retail and wholesale electric service including both hydro electric and diesel generation facilities in rural portions of Alaska. AP&T’s telecommunications segment provides local telephone service also in rural areas of Alaska. AP&T’s reportable segments are strategic business units managed separately due to their different operating and regulatory environments. The “other nonregulated” category includes the parent company and segments below the quantitative threshold for separate disclosure. 2013 Regulated Regulated Other (all numbers in thousands) Electric Telecom Nonregulated Consolidated
Operating revenue Depreciation and amortization Operating income Interest expense Interest income Total fixed assets Capital expenditure 2012 (all numbers in thousands)
Operating revenue Depreciation and amortization Operating income Interest expense Interest income Total fixed assets Capital expenditure
$ 20,256 3,130 3,096 583 ‐ 98,987 2,034
$ 15,106 3,803 1,469 ‐ ‐ 58,799 1,465
$ 7,748 926 2,558 3,019 3 18,800 3,925
$ 43,110 7,859 7,123 3,602 3 176,586 7,424
Regulated Electric
Regulated Telecom
Other Nonregulated
Consolidated
$ 20,031 3,044 4,909 850 26 97,736 2,025
$ 15,479 3,246 2,059 ‐ ‐ 55,336 2,380
$ 6,820 1,136 2,105 2,778 6 17,074 1,156
$ 42,330 7,426 9,073 3,628 32 170,146 5,561
22
ALASKA POWER & TELEPHONE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10 – Other Assets Other assets consist of the following at December 31:
Deferred loan origination fees Miscellaneous regulatory assets ‐ power Other
2013
$ 692,256 505,060 455,471
$ 736,467 675,067 448,284
$ 1,859,818 The deferred loan origination fees are related to the note payable to CoBank and are being amortized on a straight‐line basis over the ten‐year life of the note.
23
$ 1,652,787
2012
58
NOTICE TO STOCKHOLDERS
Notice To Stockholders: The annual meeting will be held on Friday, May 23, 2014 at Fort Worden Commons, 200 Battery Way, Port Townsend, Washington at 10:00am; with the Board of Directors Meeting following.
This annual report was produced by: Mark McCready, Scott Stenehjem, Jessie Elizabeth, and Sandy Hershelman
Photo Credits: David Callos, Dave Pflaum, Mark McCready, Executive Photos: Rick Dahms
Disclaimer: The narrative descriptions of the Company’s activities within this annual report contain certain forward-looking statements that involve risks and uncertainties. When used in this annual report, the words “anticipates,” “believes,” “estimates,” “expects,” and similar expressions are intended to identify such forward-looking statements. The Company’s actual results, performance or achievements could differ materially from the results expressed in or implied by these forward-looking statements.
Regarding AP&T Stock: For information regarding the acquisition or sale of AP&T stock, please contact: Darrel A. Patrick Cutter & Company 6450 Poe Ave. Suite 510 Dayton, OH 45414 1-937-890-5093 Toll Free 888-586-9288 dpatrick@cutter-co.com www.cutter-co.com Member SIPC
ALASKA POWER & TELEPHONE
ALASKA POWER & TELEPHONE PO Box 3222 193 Otto Street Port Townsend, WA 98368-0922 1.800.982.0136 www.APTalaska.com
2013 ANN UA L R E P O RT