AP&T understands that opportunities do not float like clouds. They are firmly attached to individuals.

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2 AP&T CREATING OPPORTUNITIES CONTENTS AP&T understands that opportunities do not float like clouds. They are firmly attached to individuals. The opportunities that surround us every day reside and resonate within social, economic and geographical circles of people. Robert S. Grimm, President - CEO AP&T To create opportunity requires an alignment of resources with the strategies most suited to goals and strengths. Those with good ideas and information tend to congregate, thereby achieving greater success. This is what we endeavor to do every day with each other, within our industry and externally with our peers. AP&T BOARD OF DIRECTORS 2-3 CHAIRMANS MESSAGE 4-5 PRESIDENTS MESSAGE 6-9 ENERGY OPERATIONS TELECOM OPERATIONS SAMN NETWORK 20 BROADBAND OPERATIONS 21 AP&T SERVICE AREAS As employee-owners we are proud of what we have accomplished in 2012, and foster a grounded confidence in our ability to create opportunities for continued success in the years ahead. ANNUAL FINANCE REPORT FIVE YEAR SUMMARY AUDITORS REPORT STOCKHOLDERS NOTICE Inside Back Cover 1

3 AP&T BOARD OF DIRECTORS AP&T BOARD OF DIRECTORS To Create Opportunity one must first identify need, apply a fresh coat of vision, and then aggregate the resources necessary to achieve success. Robert S. Grimm, President - CEO AP&T Of late, many businesses have found themselves struggling to find ways to sustain themselves while mired in a sluggish regional and national economy. The notion of growth is often relegated to the back burner as the challenge of making payroll or deciding how to operate leaner takes center stage. It can fuel a loss of vision and direction as the emphasis shifts from thrive, to survive. Robert S. Grimm President CEO AP&T Mark A. Foster P.E. Principal Mark A. Foster & Associates A broader view of the present economic and political landscapes hint that these challenges may persist as the new business norm. Thus, a businesses ability to Create Opportunity, William A. Squires JD Chairman of the Board, AP&T CEO Blackfoot Telephone Cooperative becomes a key component in the equation for continued success. Mike Barry Independent Director Tom Ervin VP GM AP&T Telecom Operations and Engineering 2 3

4 WILLIAM A SQUIRES - AP&T CHAIRMAN OF THE BOARD AP&T CHAIRMAN S MESSAGE A pessimist sees the difficulty in every opportunity; an optimist sees an opportunity in every difficulty. -Winston Churchill As our energy generation and sales remained flat in 2012 and the entire regulatory paradigm of the telecom industry was turned upside down AP&T remained, and remains today, optimistic about the future. In these difficulties, we see opportunity. Significant efficiency gains in line loss and operations contributed to maintaining shareholder value in our power operations, despite a lagging market. The Company continues to explore and promote new opportunities in energy development. Management is actively pursuing liquefied natural gas and compressed natural gas opportunities, coal production, and new hydro projects. A very important facet to new development is the creation of new market opportunities. The Company plays an active role in promoting new opportunities in the State of Alaska, through participation in strong organizations, such as the SE Conference, Alaska Independent Power Producers Association, and the Alaska Marine Trades Association, to name a few. Biomass, of course, remains an active pursuit. It allows the ability to create jobs in the forest products industry, while providing good stewardship of our natural resources. Opportunities for economic development, and the resulting growth of energy demand, are abundant. If certain opportunities are not readily apparent, AP&T is working hard to bring them to life. The telecommunications industry is in a state of rebirth and AP&T is well ahead of the curve. Having seen both the looming pressures on traditional revenue streams and the insatiable appetite for broadband, AP&T seized the opportunity to build the Southeast Alaska Microwave Network (SAMN). This investment continues to thrive and bear fruit for our shareholders. In 2012, additional radio upgrades were completed to accommodate growth. Additional network paths and facilities were engineered and readied for the upcoming construction season. AP&T continues to see opportunities to leverage SAMN to create additional value for our customers and our shareholders. During 2012, the AP&T Board of Directors challenged the Company s management to dive deep into our operations in an effort to not only mine efficiencies, but to create opportunities for growth. I am proud of the job our management team and employees did in this regard. They have endeavored to imagine and develop new opportunities for our future that will continue to create shareholder value for years to come. We began to see the positive impacts of those labors in 2012, and into Creating its own opportunities puts AP&T in control of its own destiny. That is a favorable position to be in. As Milton Berle said, If opportunity doesn t knock, build a door. AP&T is very busy building doors. AP&T continues to see opportunities to leverage SAMN to create additional value for our customers and our shareholders. Bill Squires Chairman of the Board AP&T 4 5

5 ROBERT S GRIMM - AP&T PRESIDENT - CEO AP&T PRESIDENT S MESSAGE Creating Opportunity It s been said, Opportunity is missed by most people because it is dressed in overalls and looks like work...through Results In a year of financial uncertainty, the solid performance of AP&T during fiscal 2012 was a testament to the resolve of our employee-owners, who donned the overalls of opportunity to implement operational efficiencies and reduce problematic line loss, thereby minimizing the impacts of an economy still struggling to hit its stride. While gross revenues and operating income remained stable at $41.7 million and $9.1 million, respectively, earnings per share rose 8.4% to $2.41; net income improved 2.6% to $3.4 million....through Perseverance Although total sales of our energy business segment decreased 1.8%, in 2012, to 65.5Gwh, our renewable hydroelectric generation provided 74% of kilowatts sold an increase of 3.5% over the previous year and a 3.7% increase over the five-year average. The upside to this equation is increased hydro production comes with a reduced cost of power. When coupled with a 1.7% reduction in operating expenses, the downside impact is diminished, resulting in operating income of $4.9 million for Significant progress has been made toward the goal of relegating high-cost diesel generation to a back-up role. However, seasonal weather fluctuations and capacity peaking still result in the use of supplemental diesel generation company-wide. Our Interior Division continues to be solely reliant on diesel generation, which creates further hardship and a barrier to economic growth for the rural Alaskan communities feeling the brunt of the extended economic downturn. The challenge is to identify a viable, affordable and sustainable solution. To that end, several years of studies have moved us closer to our goal, but have yet to yield a winning combination from both a technical and financial standpoint. Generation sources under review include, but are not limited to, hydropower, wind, liquefied natural gas, biomass and solar. We remain cautiously optimistic that the maturation of promising renewable technologies may provide an opportunity to increase our regulated investment in that area, while preserving our existing generation plant as standby and backup. However, hydropower remains the foundation of our renewable-energy portfolio....through Innovation With technology permeating every corner of business and society, AP&T has been quick to position, promote and capitalize on the capabilities of its Southeast Alaska Microwave Network (SAMN). It has taken less than five years for the network to secure its role as a vital and strategic industry asset. Recently, an earthquake near Wrangell, Alaska, triggered an undersea slide and severed a competitor s fiber transport cable. AP&T was able to re-route the crippled carrier s traffic within 12 hours of the event. 6 7

6 AP&T CEO - PRESIDENT S MESSAGE AP&T CEO - PRESIDENT S MESSAGE This was an incredible feat, under the best of circumstances and testament to the resiliency of the network and resolve of our employee-owner technicians. Building on this cornerstone of opportunity, 2013 upgrades planned for our SAMN s existing 600Mb capacity will allow for greater flexibility in market-driven strategies and pricing. An outgrowth of this investment has been the ability to penetrate the small-business market with customized business data solutions. Our broadband team scored big wins by capitalizing on the prevalence of maritime traffic in SE Alaska, as well as the desire of leisure travellers and working merchant marine tradesmen to stay connected, while sailing the Inside Passage. Similar upgrades were a key component in AP&T s ability to offer customized data solutions for the education sector, as well. New challenges present us with the ability to create new opportunities: as 2013 progresses, these opportunities will shape AP&T s future. what is possible for the future of Alaska s vast untapped energy resources. We see an Alaska full of opportunities yet to be created for those willing to expand their vision beyond the border marked status quo. I am proud to be heading up such a talented team at AP&T. We believe we have outstanding future growth prospects. We re intensely focused on delivering long-term value for our shareholders via strategic assets, such as our SAMN infrastructure, and continued development of sustainable energy technologies designed to provide affordable, clean and reliable power for our customers. By creating and seizing the opportunities best suited to our strengths, AP&T will continue to deliver strong results for years to come. We thank you for your continued support of AP&T....through Collaboration and Leadership A relative bright spot on the horizon of opportunity in our service areas is an uptick in strategic mineral resource exploration. Primarily driven by the needs of the tech and military sectors, this increase in resource-based activity may lead to additional growth opportunities for Alaska s renewable energy resources. By working closely with regional business organizations, industry partners and research organizations (such as the Alaska Center for Energy and Power), AP&T shares a larger vision of Robert S. Grimm President - CEO Alaska Power & Telephone Company 8 9

7 AP&T OPERATIONS GREG MICKELSON, AP&T -VP POWER OPERATIONS CREATING OPPORTUNITY The year 2012 represented Alaska Power & Telephone Company s 55th year of progressive service, innovation and leadership in the Alaskan utility industry. It is a benchmark born of vision, fostered by innovation, and nurtured by creativity and perseverance. At 55 years young, we enjoy the benefit of hindsight, while realizing who we are is what we do now and how we do it. The theme of this year s annual report, Creating Opportunity, follows a desire to convey AP&T s approach, not simply viewed from a single year in time, but from an extended vantage, as well. An annual report is basically the interpretation of the immediate past to project how it will affect the future. With that in mind, 2012 set the table for 2013 and beyond: steady progress toward operational and financial goals will help ensure our long-term stability and prosper- ENERGY OPERATIONS Powering Opportunities For the Alaska Power Company, 2012 was a year of perseverance and incremental progress. It was a challenging journey marked by a decline in revenues and an increase in our customers conservation efforts. Factors driving the 3% downturn in sales underscore the need for continued development of affordable, sustainable, clean energy in rural Alaskan communities. A bitterly cold winter and high heating oil costs combined to push customers, in the Tok Area and Upper Lynn Canal, toward an increased use of electricity for heating. Sadly, in many cases, it was also a hardlearned lesson in the need for adequate home and business weatherization. It did, however, create the opportunity to deepen the ongoing dialogue and support of customers and local business leaders, regarding APC s efforts to expand our renewable energy capabilities, most notably in our interior division. ity. Photo: Big Salt inlet, at the mouth of Black Bear Creek, Prince of Wales Island, Alaska. Photo: Greg Mickelson, AP&T - VP Power Operations. Doug Bennett displays new energy efficient LED street lighting

8 AP&T ENERGY OPERATIONS AP&T ENERGY OPERATIONS Interior Division A 4.4% decrease in 2012 sales can be attributed to the high cost of energy in Tok, along with the elimination of APC s Tok Alcan Border Station generation. This has prompted some customers to install supplemental generation, such as solar arrays, in an attempt to help offset costs. A pilot program at the Tok School, using a wood-fired boiler to generate heat and electricity via steam-turbine, has had limited success so far. Despite the complex nature of developing a viable and affordable broad-based alternative to fossil-fuel generation in the Tok Area, APC has demonstrated a willingness to turn over every stone in search of a long-term solution that is right for both our customers and our company. The extent of our detailed feasibility studies involving hydro, wind, biomass, liquefied natural gas, solar and combinations of the aforementioned with solar emphasize our resolve for implementing a quality energy solution for the area s needs. We d like to acknowledge the extraordinary efforts of our line crews, from all locations, in responding to a freakish micro-burst of 70mph winds off the slopes of the Alaska Range. On Monday, September 17,. several homes, in the communities of Tanacross and Dot Lake, as well as the Tanacross School, suffered roof damage. Images of the aftermath showed a mile-wide swath, where trees had been uprooted, broken, or had simply been laid-over, combed like hair. Despite the extent of the damage, crews had the majority of the system restored by Wednesday evening; traveling crews returned home by the weekend. The manner in which our personnel pulled together to respond exemplifies the dedication of our employee-owners and the Alaskan Spirit. Upper Lynn Canal Generation and sales in the Haines and Skagway region continued to trend downward in 2012, ending the year -2% and -3%, respectively. Conservation, along with a cooler summer, reduced the need for power associated with seasonal cooling in commercial businesses. Record regional snowfalls (more than 360 inches) kept crews busy. A cold spring meant delays in the turn-up of the Kasidaya Creek hydro facility. The dangerous work of penstock refurbishment on one of Alaska s longest running hydro plants was completed on the Dewey Lakes site. Kudos to Jim Shunn and his crew for completing this job with no injuries. Efforts to move the Connelly Lake project forward continue to be met with resistance at the local level, producing concern that it may take a catastrophic event, similar to the undersea cable break this year in Wrangell, to shift public sentiment in favor of the project. In the meantime, efforts are underway to determine the best options for additional back-up generation in the Haines location. The possibility for increased loads, as a result of an expansion of infrastructure at the Skagway ore terminal, is a bright spot in the region. APC is positioning itself to play an integral part, as mineral exploration and recovery take center stage as one of Southeast Alaska s most promising economic engines for our communities. Photo: Generation technician Aaron Tawney, Tok, Alaska. Photo: Vern Neitzer, Winter at Kasidaya Falls. Lance Caldwell installs new LED roadway lighting in downtown Skagway, Alaska 12 13

9 AP&T ENERGY OPERATIONS AP&T ENERGY OPERATIONS Prince of Wales Island Region A good summer of rainfall may be a bit of an oxymoron in most people s vocabularies, but it was the very thing that helped our POW division finish the year with generation totals equaling those produced in Our South Fork hydro facility generated a monthly total of more than one million kilowatt-hours for the first time ever in the month of June. The resulting 8% combined increase in power generation, at the Black Bear Lake and South Fork hydro facilities, yielded a 43.9% reduction in diesel fuel purchases for the year. Supplementing that good news was an increased customer count, plus word the community of Coffman Cove had been awarded a grant to extend our power system to an additional 120 lots east of town. The ongoing three-year road project, connecting the north island communities of Naukati and Coffman Cove with the existing primary island road system, is creating an opportunity for APC. The goal is to not simply displace existing diesel generation in these communities (via extension of our Renewable Energy Grid), but also reduce energy rates, providing fuel for economic growth. At the southern end of the island, progress continues in our work with the Haida Corporation on the 5 MW Reynolds Creek hydroelectric project. We remain cautiously optimistic the project can be completed by With focused resolve from all parties, this project will become yet another reliable keystone of long-term renewable energy and economic stability for Prince of Wales Island. Other encouraging economic news was the detection of highly sought after, rare-earth minerals on POW Island. Limited availability and increasing need, driven by the technology and military sectors, may push ground operations along on a fast track. Mining is a very energy intensive business, so we are keeping a very close eye on these developments. In a similar vein, we continued to mine the day-to-day opportunities that created mutually beneficial outcomes. A prime example: negotiations with Alaska Marine Lines, which netted a contract to power 100-plus shipping containers full of frozen fish, as they awaited weekly transport during the season. This added approx 500kw peak load to the system, equaling about 75,000kwhs by season s end. AML got cold fish and clean affordable power, while avoiding the headache and costs associated with the operation and maintenance of onsite generation. And it s no fish story that similar negotiations are also underway, with another fish processor, to convert 1200kw of onsite diesel driven compressors, powering blast freezers, to APC s clean energy island power grid in Another priority moving forward is to achieve constructive outcomes in our various rate case proceedings. Although no one likes to pay more for anything, APC needs to adequately and fairly recover the capital investment costs of our operations and attempt to minimize our exposure to downside risk. I d say 55 years is a pretty good run, but we ve plenty of ground yet to cover. You can be sure, in the years ahead, APC will focus our perspective toward every chance to create opportunity and drive economic growth, as we continue doing business in a way that s good for people, the planet and our shareholders. Photo: A Coffman Cove welcome. City Administrator Misty Fitzpatrick with AP&T s line supervisor Barry Heatley, Wade Adamson, Doug Bennett and Matt Steffen. Photo: AP&T s South Fork hydroelectric project on Prince of Wales Island

10 MICHAEL GARRETT - AP&T COO-VP TELECOM OPERATIONS AP&T TELECOM OPERATIONS Creating Opportunity Connects Us To Our Future For AP&T s regulated non-regulated business segments and the industry as a whole, 2012 was a year of continued momentum. Such a dynamic environment creates great opportunity, yet requires an intense commitment to innovation, evaluation and a focus on continuous improvement. How can we improve the lives of our customers? How can our resources help local businesses become more efficient? The resources and infrastructure of AP&T s networks provide a platform for answering these questions, while creating growth opportunities for our company and those whom we serve. Regulated Telecom Tok Area The geography and climate in which we operate make AP&T unique among the nation s telecommunications providers. Extended stretches of sub-zero weather in our Tok location makes planning critical and timing even more so. With a narrower window of outdoor project construction time than other locations, Tok telecom crews fought both the 2012 calendar and manpower issues to accomplish the best laid of plans. Despite these challenges, telecom personnel completed the majority of a 7000-foot right-of-way cable project, requiring extensive brushing and multiple pole re-alignments. Several powering, timing and switching issues were resolved both in the Tok Central Office and in outlying service areas, such as Jim River and Allakaket. Travelling to Eagle, technicians completed the installation of a new satellite dish, providing greater, more cost-effective internet transport than was previously available. Haines / Skagway In preparation for the seasonal flood of visitors and requests for service, Skagway personnel dispatched the old Mitel Central Office switch, while reconfiguring and upgrading both hard and soft components around the new Occam switching equipment. Several T1 transport links were provided to cell providers, cabling between 8th and 13th streets was upgraded. Placement of fiber, between the Dyea SAMN tower and Skagway tower, will provide greater economy of scale and cleaner delivery of transport services to ACS, GCI and AT&T at this site. Beginning the year with record snowfall led to some unexpected maintenance problems for Haines technicians when City and State road crews were unable to see markers and inadvertently sheared off ground-based cable terminations. Taller markers in the 2013 budget check. Crews completed splicing fiber to 26 mile and piggybacked Hatteras equipment (equipment used to bond pairs of copper to increase data capacity) to the balance of copper cable out to 39 mile. This provides AP&T the ability to offer Metro Ethernet service, as a transport solution, up the valley to the Canadian border. Kudos to Haines technician Dan Hanson for the 2012 in-house training and on-site support he provided several of our exchanges. Well done, Dan! Photo: AP&T COO - VP Telecom, Michael Garrett. SAMN Network tower overlooking Kasaan Bay on Prince of Wales Island. Photo: AP&T s Tom Cochran, Skagway. Central Office Technician, Dan Hanson, Haines

11 AP&T TELECOM OPERATIONS AP&T TELECOM OPERATIONS Petersburg / Wrangell Prince of Wales Island / Metlakatla A Central Office reconfiguration/migration were the centerpiece of the 2012 work accomplished by the Petersburg crew. New Adtran equipment to facilitate delivery of our converged voice services was installed. Customers continue to be migrated from line equipment, behind the GENBAND switch, to the Occam Broadband Loop Carrier, enhancing delivery of next generation IP-based services. Also in the queue of work accomplished was the incremental, ongoing, multi-year installation of a fiber network for the city of Petersburg. Riding the city s upgraded fiber loop is a new E911 emergency public safety answering point. Its installation kept our techs at the top of their game, both technically and tactfully, as coordination with the manufacturer and public safety personnel became a textbook exercise in Public Relations 101. Similarly, Wrangell personnel spent much of the year involved in an extensive downtown revitalization project that involved a nearly complete re-cabling of the core business district. This proved to be a good deal of work for crew their size. Brent Akers took on the responsibility of leading both Petersburg and Wrangell in 2012 which will be quite a challenge but necessary as we do what we can to be more efficient with resources. An optimist will tell you the glass is half full; a pessimist, the glass is half empty. The fiber tech will tell you the glass just needs to be spliced. On Prince of Wales Island, 2012 was indeed the year of fiber. First quarter included a re-work of the fiber to Hollis and Hydaburg, as well as placing them into a ring configuration. Second quarter saw additional AP&T personnel on island to assist in the extremely large undertaking of consolidating and terminating five outside plant fiber cables into the fiber frame at the Klawock SAMN hut. Looking ahead: once all Synchronous Optical Network Equipment (SONET) is in place, a redundant high-speed path for voice and data traffic, on and off the island, will reduce the present choke-points now limiting service. At the outset of 2012, our Metlakatla crew s focus wasn t on fiber, but on copper; soaring metal prices made our cable an enticing target for thieves. Beyond the rocky start, it was a productive year on Annette Island. Techs completed Central Office upgrade work and shifted focus back to fiber, with the installation of a Passive Optical Network (PON) to a new housing subdivision. Several commercial entrance cabling and terminal projects were accomplished, along with the placement of underground conduit to the island s new ferry terminal. Photo: Brent Akers, Manager Petersburg Exchange. AP&T Customer Service Team Rhoda Gilbert, Jackie Westcott and Theresa Vick, Petersburg. Photo: John Moots, Prince of Wales Island, marked his 30th year with AP&T in SAMN Network infrastructure. 18 Creating Opportunities to better connect in Wrangell are telecom technicians Paul Loftus and Lucas Shilts. 19

12 AP&T TELECOM OPERATIONS AP&T TELECOM OPERATIONS Non-Regulated Activities Southeast Alaska Microwave Network The 2012 customer is not the same person, who looked to AP&T to provide telecom and Internet services in 2006, when we began construction on the SAMN project. Today s customers want to be able to access mobile content on any screen TV, personal computer, tablet or cell phone wherever and whenever it s convenient for them. As the demand for mobile data grows, so does the need for transport. AP&T s SAMN is uniquely positioned in the Alaska market to capitalize on the explosive growth in the demand for transport of mobile data services, now and well into the future. Plans to increase 2013 network capacity to 1050Mb and extend its reach are well underway. (See Service Area Map) As a carrier s carrier, the network s strategic capabilities were put on full display, when an earthquake near Craig, Alaska, caused GCI to lose all connectivity to Wrangell, Alaska. Crews worked feverishly to provide a redundant path and restore GCI s connectivity, within 12 hours of the initial contact. The strategic regional value the network brings to wireless carriers has not been overlooked either. SAMN provides a far-reaching footprint, from which new and existing carriers may expand their reach into established and emerging markets. In order to support the burgeoning and complex logistics associated with the maintenance and expansion of the SAMN network, in 2012, our Ketchikan crew moved into new facilities. The expanded warehouse and office space also accommodates room for carrier transport co-location and will allow for more efficient and productive pre-site assembly of SAMN components. High Capacity Internet One of the most productive conduits for creating opportunity and driving revenue is the sale of High Capacity Internet. It is a touchpoint, where business, government and education intersect with our empowering technology, to share new ideas, stimulate commerce, solve problems, and enhance our lives in exciting new ways. One catalyst driving the impressive 2012 growth in non regulated revenue was the aggressive addition of E-rate accounts to educational facilities within our exchanges. Bryant Smith s ability to procure multi-year contracts, in both the educational and private business sectors, is to be commended. Creating opportunity in yet another market segment: AP&T gained a foothold with maritime travelers to the Inside Passage, as a deal was struck with MTN Satellite Communications to offer Internet services to cruise passengers, during the May to September sailing season. Broadband A snapshot of 2012 Broadband activity shows a total of 3,136 subscribers, with 17.5% opting to utilize the higher-speed 4Mb and 8Mb service tiers. This represents a 39% increase in top-tier subscribers over As noted throughout this report, creating opportunity requires investment. At its core, the strength of AP&T s network has centered on investing capital, aligned with the growth of our industry, trends driving the region and our strategic planning. We are leveraging our investment in the SAMN to maximize opportunities as the center of gravity in the data market shift toward mobility. We anticipate upgrades and expansion of our SAMN investment will facilitate additional competitive initiatives to our broadband products in Leading the list of key structural accomplishments, underpinning AP&T s extremely successful year, were several local loop upgrades to fiber-fed Occam Broadband Carrier equipment throughout the company. Additionally the deployment of technology, enabling synchronous Ethernet over existing copper plant, provided improved high-speed services to local businesses, bolstering our market position. Our 2012 results reflect our fundamental financial strategies, our commitment to growing shareholder value and our success in creating and seizing opportunities in key strategic areas of growth. Photo: Creating Opportunities to grow our Network and build their community, Alaska Telephone Wireless employee-owners dedicated their new Ketchikan office and SAMN Network 20 logistics facility in Dave Pflaum, ATW Technician, Ketchikan. Photo: Bryant Smith, ATW s Director of Internet Services. Tim Montgomery, Local Area Network Technician, Ketchikan, AK 21

13 AP&T SERVICE AREA MAP DATE OF SERVICE SERVICE CENTER WIRELESS TELECOM POWER 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 PALMER FAIRBANKS DELTA JUNCTION VALDEZ DRY CREEK HEALY LAKE TANACROSS MENTASTA SLANA DOT LAKE Fiber Interconnect with Copper Val- CHISTOCHINA TOK TETLIN EAGLE NORTHWAY BETTLES & EVANSVILLE AP&T SERVICE AREA MAP MICROWAVE MICROWAVE TOWER ALATNA & ALLAKAKET KLUKWAN SKAGWAY HAINES Endicott Mtn GUSTAVUS HOONAH PELICAN SITKA Moore Mtn Auke Mtn PORTAGE TENAKEE COSMOS Catherine Island COFFMAN COVE JUNEAU Taku FM Site Taku Mtn KAKE Dry Mtn Turn Mtn EDNA BAY NAUKATI Lindenburg Peak WHALE PASS KLAWOCK CRAIG HOLLIS PETERSBURG Crystal Mtn Burnette Peak HYDABURG WRANGELL Kassan Mtn HYDER FIBER OPTIC FUTURE NETWORK AP&T NON SERVICE LOCATIONS AP&T SERVICE LOCATIONS MEYERS CHUCK High Mtn KASAAN THORNE BAY BROADBAND - Up to 1Mb BROADBAND - Up to 4Mb BROADBAND - Up to 8Mb KETCHIKAN METLAKATLA

14 CHAD HAGGAR - AP&T VP-CFO TREASURER AP&T ANNUAL FINANCE REPORT Company Overview Alaska Power & Telephone Company was established in 1957 and through its subsidiaries, provides regulated electric and telephone service to a combined total of 34 communities. 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. Measurable progress was achieved in 2012, as AP&T continued to show how the private sector creates opportunities both in growing market segments, and those which pose more substantial challenges. With the ongoing support and cooperation of employee-owners, financiers and industry partners, AP&T will continue to create shareholder value and opportunities for a healthier local and regional Alaskan economy. During 2012, not only did the Company continue its trend of achieving solid growth and ever improving financial performance, it implemented a quarterly dividend policy of $0.105 per share. The Company also successfully called and refinanced all outstanding bonds associated with Goat Lake Hydro which represents 20% of its outstanding debt, substantially lowering the related cost of funds. The Company experienced total revenues for the year of $41.7 million and resulted in operating income of $9 million. Net income was $3.4 million, an increase of 2.6%. The Company achieved basic earnings per share of $2.41 for the year, an 8.4% increase, on a weighted-average of 1.42 million common shares outstanding. Total assets were reduced by 3.6% to $122.5 million while total longterm debt fell by $5.1 million to a total of $62.5 million, a reduction of 7.6%. Operations by Segment Electric Operations Total sales for electric operations during 2012 decreased by 1.8% to 65.5 GWh from a total of 66.7 GWh for However, hydroelectric resources provided 74% of all generation, an increase of 3.5% over the previous year and 3.7% over the 5 year average. Diesel generation operations provided 18.9 GWh, 13.8% less than the 5 year average. While gross revenue from power operations declined by $1 million to a total of $20 million, the increase in hydroelectric generation provided for a reduction in the cost of power resulting in net revenue being $318,000 less than the previous year. Operating expenses for the year were reduced by 1.7%, or $200,000, to a total of $12 million. Operating income for the year was $4.9 million, a reduction of $690,000 or 12.3% from the previous year. Telecommunications Operations Gross revenues for regulated telecommunications operations during 2012 were $15.5 million, representing a 3.1% or $464,000 increase over 2011 results. Operating expenses for 2012 increased by 2% or $164,000 over the previous year to a total of $8.5 million. This was the combined effect of including SE Network plant used to provide regulated services into regulated cost recovery mechanisms. Operating income provided by regulated telecommunications was $2.1 million, an increase of 1.8%. Non-regulated Operations This segment consists of engineering and construction services, AP&T Long Distance, Inc. and AP&T Wireless, Inc. Gross revenues from nonregulated operations increased by $590,000 or 10.4% over 2011 results to $6.3 million. Engineering and construction services provided $273,000 of revenue for the year while long-distance services provided $284,000. AP&T Wireless experienced a revenue increase of 24.4% to $6.2 million. Operating expenses for the non-regulated business segment increased 3.7% or $166,000, to a total of $4.7 million. Operating income for non-regulated operations was to $2.1 million, a 45% increase from result for 2011 of $1.45 million. Investment and Other Income Dividend income of $511,000 for 2012 and $501,000 for 2011 represents patronage from CoBank, the Company s primary lender, and is based on 1% of the Company average outstanding loan balances. For both years, 65% of this patronage was returned to the Company in cash with the remainder increasing the equity investment in CoBank. During the year, the Company successfully called and refinanced all bonds associated with the Goat Lake Hydro project, reducing the effective interest rate from 5.87% to 4.47% before patronage. As a part of the refinancing, the Company incurred a one-time charge of $329,000 related to unamortized bond issuance costs. Interest income is primarily derived from restricted cash balances held in conjunction with the Goat Lake Hydro Bonds (see note 6 of the audited financial statements). This cash is invested in high quality government securities with varying maturity dates. As these securities mature, they are replaced at current market rates. As the bond markets have remained soft and balances invested have been reduced to nominal amounts, interest income has fallen from $59,000 in 2011 to $33,000 for Interest expense for the year was $3.6 million, an 8.9% decrease from 2011, the result of the Company s continued commitment to reduce outstanding loan balances

15 AP&T ANNUAL FINANCE REPORT AP&T ANNUAL FINANCE REPORT Provision for Income Taxes Income before tax was $5.6 million and $5.2 million for the years 2012 and 2011 respectively. The effective tax rate was 38.7% or $2.2 million for 2012 compared to 36.8% or $1.9 million in Net income for 2012 was $3.4 million or $2.41 per share compared to $3.3 million or $2.22 per share for Financial Condition The Company increased its gross plant in service 2.7% to $170 million, although depreciation expense exceeded capital expenditures resulting in a 2.2% decrease in net property, plant and equipment. During the year restricted funds related to the Goat Lake Hydro bonds were reduced by $2 million, the proceeds being used to retire a portion of the related debt. Working capital was reduced to $5.3 million, primarily the result of the Company fully utilizing its prepaid income tax balances of $1 million. Interest bearing liabilities were reduced by 7.6%, or $5.1 million, to a total of $62.5 million for the year ending The Company raised $616,000 of additional equity through the sale of common stock, while the repurchase of shares required the use of $3.9 million resulting in a reduction of $3.3 million in invested capital. The Company s equity as a percentage of total capital improved slightly from -34.2% at the end of 2011, to 35.1% at yearend An other comprehensive loss adjustment of $1 million was recorded to reflect the fair market value of the interest rate swap that the Company entered into in Liquidity and Capital Resources Operating Activities Cash flows from operating activities decreased Cash flows from operating activities increased by 2% to $13 million, during 2012 from $12.8 million during The collection of outstanding receivables and an increase in deferred income taxes net of the non-cash effects of the interest rate swap provision were the primary sources. Investing Activities The Company used $5.5 million of its cash in acquiring property plant and equipment during 2012 compared to $6.3 million the prior year. Net cash used for other assets and investments was $210,000, down from $740,000 in Net cash used in investing activities decreased by 17.8% to $5.8 million for the year ended 2012 compared to $7 million during Financing Activities The Company obtained financing of $13 million which it used to call all outstanding bond issued by its subsidiary, Goat Lake Hydro. Net cash used for long-term debt payments was $3.3 million during 2012, compared to a total of $4.6 million during Proceeds from the sale of common stock were $616,000 for 2012 and $615,000 for Cash used for the repurchase of common stock was $3.9 million and $724,000 for 2012 and 2011 respectively. During 2012, the Company also applied $455,000 of its cash toward dividends. Net cash used for financing activities for 2012 increased by 49.3% or $2.3 million to $7.1 million from $4.8 million for Issues, Risks and Challenges While the economy has fluctuated widely over the past two years, the Company s risk profile did not change significantly in However, management recognizes that 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. Recently proposed regulatory changes in the telecommunications sector will have negative effects on projected results for the Company. 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. 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 long-term financial projections. Robert S. Grimm President - CEO Michael Garrett, Executive Vice President Chad A. Haggar, CPA VP, Chief Financial Officer, Treasurer 26 27

16 AP&T FINANCE STATEMENTS - 5 YEAR SUMMARY AP&T FINANCE STATEMENTS - 5 YEAR SUMMARY - KEY RATIOS $ Expressed in thousands except per share data $ Expressed in thousands except per share data OPERATING RESULTS FINANCIAL POSITION OPERATING INCOME BY SEGMENT TOTAL CAPITALIZATION $112,649 $108,711 $107,493 $102,817 $ 96,348 INCOME - ELECTRIC $ 5,936 $ 6,128 $ 5,975 $ 5,633 $ 4,909 WEIGHTED-AVERAGE SHARES OUTSTANDING 1,473,155 1,472,013 1,491,950 1,500,195 1,419,654 INCOME - TELECOM $ 2,227 $ 2,220 $ 2,763 $ 2,022 $ 2,059 BOOK VALUE PER SHARE - BASIC $ $ $ $ $ INCOME - NONREGULATED OPERATIONS $ (1,575) $ (843) $ (445) $ 1,450 $ 2,105 SHARE PRICE (PER VALUATION) $ $ $ $ $ TBD TOTAL OPERATING INCOME $ 6,588 $ 7,505 $ 8,293 $ 9,105 $ 9,073 OPERATING MARGIN 16.4% 19.7% 21.1% 21.9% 21.7% KEY RATIOS NET INCOME $ 2,636 $ 2,639 $ 2,846 $ 3,338 $ 3,425 CASH FROM OPERATIONS / REVENUE 23.5% 17.2% 26.7% 30.8% 31.4% EBITDA 1 $ 15,627 $ 16,655 $ 16,830 $ 16,677 $ 16,611 DEBT / CAPITALIZATION 72.79% 69.46% 67.19% 65.79% 64.87% CASH FLOW FROM OPERATIONS $ 9,446 $ 6,573 $ 10,515 $ 12,826 $ 13,087 EQUITY / CAPITALIZATION 27.21% 30.54% 32.81% 34.21% 35.13% EARNINGS (LOSS) PER SHARE - BASIC RETURN ON ASSETS 2.06% 2.06% 2.24% 2.62% 2.79% RETURN ON EQUITY 8.60% 7.95% 8.07% 9.49% 10.12% 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

17 MOSS ADAMS - AUDITORS REPORT MOSS ADAMS - AUDITORS REPORT CONTENTS PAGE REPORT OF INDEPENDENT AUDITORS Report of Independent Auditors and Consolidated Financial Statements for Alaska Power & Telephone Company and Subsidiaries December 31, 2012 and 2011 CONSOLIDATED FINANCIAL STATEMENTS Consolidated balance sheets Consolidated statements of income 36 Consolidated statements of comprehensive income 37 Consolidated statements of stockholders equity 38 Consolidated statements of cash flows Notes to consolidated financial statements

18 2 REPORT OF INDEPENDENT AUDITORS (continued) The Board of Directors Alaska Power & Telephone Company REPORT OF INDEPENDENT AUDITORS 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, 2012 and 2011, and the related consolidated statements of 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. 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, 2012 and 2011, 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 9, 2013 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

19 ALASKA POWER & TELEPHONE COMPANY - CONSOLIDATED BALANCE SHEETS ALASKA POWER & TELEPHONE COMPANY - CONSOLIDATED BALANCE SHEETS See accompanying notes

20 ALASKA POWER & TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF INCOME ALASKA POWER & TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME See accompanying notes. See accompanying notes

21 ALASKA POWER & TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY ALASKA POWER & TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS See accompanying notes

22 ALASKA POWER & TELEPHONE COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS 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. During 2011, the Company completed a spin-off of Hydro West International, which is discussed in Note 5. The operations of Hydro West International prior to the spin-off date are included in the accompanying consolidated financial statements. 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 2012, the Company received $3.6 million, or 8.6% of its revenue from the Federal Universal Service Fund. In 2011, the Company received $3.7 million, or 8.7% of its revenue from the Federal Universal Service Fund. See accompanying notes