CHUGACH ELECTRIC ASSOCIATION INC - 10-K Annual Report

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FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-31327, eff. 10-21-92)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(x)Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee Required)
For the fiscal year ended December 31, 1996

( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee Required)
For the transition period from ____________________ to _____________________

Commission file Number 33-42125

Chugach Electric Association, Inc.
(Exact name of registrant as specified in its charter)

Alaska 92-0014224
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

5601 Minnesota Drive, Anchorage, Alaska 99518
Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (907) 563-7494

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of
the Act:

(Title of class)

(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /x/ Yes / / No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. N/A

State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
(See definition of affiliate in Rule 405, 17 CFR 230.405). N/A

CHUGACH ELECTRIC ASSOCIATION, INC.

1996 Form 10-K Annual Report

Table of Contents

Page
PART I

Item 1 - Business 1

Item 2 - Properties 11

Item 3 - Legal Proceedings 15

Item 4 - Submission of Matters to a Vote of Security Holders 18

PART II

Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 18

Item 6 - Selected Financial Data 18

Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 19

Item 8 - Financial Statements and Supplementary Data 33

Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 53

PART III

Item 10 - Directors and Executive Officers of the Registrant 53

Item 11 - Executive Compensation 55

Item 12 - Security Ownership of Certain Beneficial Owners and
Management 58

Item 13 - Certain Relationships and Related Transactions 58

PART IV

Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K 58

SIGNATURES 71

PART I

Item 1 - Business

GENERAL

Chugach Electric Association, Inc. (Chugach or Association) is the largest
electric utility in Alaska. Chugach was organized as an Alaska not-for-profit
electric cooperative in 1948 and is engaged in the generation, transmission and
distribution of electricity to approximately 67,000 metered locations in the
Anchorage and upper Kenai Peninsula areas. Through an interconnected regional
electrical system, Chugach's power flows throughout Alaska's Railbelt, a
400-mile-long area stretching from the coastline of the southern Kenai Peninsula
to the interior of the state, including Alaska's largest cities, Anchorage and
Fairbanks. On a regular basis, through its direct service to retail customers
and indirectly through its wholesale and economy energy sales, Chugach provides
some or all of the electricity used by approximately two-thirds of Alaska's
electric customers. In addition, on a periodic basis, Chugach provides
electricity to the Anchorage-area customers of Municipal Light & Power (ML&P).

Chugach also supplies much of the power requirements of three wholesale
customers, Matanuska Electric Association (MEA), Homer Electric Association
(Homer) and the City of Seward (Seward). Substantially all of Chugach's
currently owned generating capacity is fueled by natural gas, which Chugach
purchases under long-term, relatively low-cost gas contracts. The remainder of
Chugach's generating resources are hydroelectric facilities. The Chugach system
includes 501.4 megawatts (MW) of installed generating capacity that is provided
by 15 generating units, 1,556 miles of distribution lines and 402 miles of
transmission lines. During 1996, Chugach sold 2.22 billion kilowatt hours (kWh)
of power.

In general, cooperatives are business organizations that are owned by their
members. Cooperatives are designed to give groups of individuals or entities the
opportunity to serve their own needs in a particular area of business activity
and to solve their own problems in that area more effectively than when acting
independently. In addition, as not-for-profit organizations, cooperatives are
intended to provide services to their members at the lowest possible cost, in
part by eliminating the need to produce profits or a return on equity. Today,
cooperatives operate throughout the United States in such diverse areas as
utilities, agriculture, irrigation, insurance and credit. All cooperatives are
based upon similar principles and legal foundations. Since members' equity is
not considered an investment, a cooperative's objectives and policies are
oriented to serving member interests, rather than maximizing return on
investment.

Chugach's members are the consumers of the electricity sold by Chugach. As of
December 31, 1996, Chugach had approximately 54,000 retail members receiving
service at approximately 67,000 metered locations. The business and affairs of
Chugach are managed by the General Manager and are overseen by its seven-member
Board of Directors. Directors are elected at large by the membership and serve
three-year staggered terms. Each member is entitled to one

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vote. In addition to voting for directors, members have voting rights with
respect to the sale, lease, or other disposition, except by mortgage or deed of
trust, of all or a substantial portion of Chugach's property.

Chugach customers are billed per a tariff rate, on a monthly basis for
electrical energy consumed during the preceding month. Billing rates are
approved by the Alaska Public Utilities Commission (APUC). Such rates have been
adjusted quarterly or semi-annually pursuant to a simplified rate filing
procedure (see Rate Regulation and Rates).

Rates (derived from the historic cost of service basis) may generate revenues in
excess of current period costs (net operating margins and nonoperating margins)
in any year and are designated on Chugach's Statements of Revenues, Expenses and
Patronage Capital as "assignable margins." Retained assignable margins are
designated on Chugach's balance sheet as "patronage capital," which is assigned
to each member on the basis of patronage.

In furtherance of Chugach's operations as a cooperative, Chugach credits to its
members, or patrons, all amounts received from the patrons for the furnishing of
electricity in excess of Chugach's operating costs, expenses and provision for
reasonable reserves. Such excess amounts (i.e., assignable margins) are
considered capital furnished by the patrons, and are credited to their accounts
and held by Chugach until such future time as they are retired and returned
without interest. Chugach's Bylaws provide that such capital credits are to be
retired (i) upon Chugach's dissolution or liquidation after payment of all of
Chugach's outstanding indebtedness or (ii) at any earlier time if the Board of
Directors determines that Chugach's financial condition will not be thereby
impaired. At December 31, 1996, Chugach has a policy of retiring patronage
capital on a general 20-year cycle for retail customers (i.e., patronage capital
provided by the retail customer in 1975 is retired in 1995). In recent years,
this rotation has been accelerated to a 13-year rotation cycle. In 1996, the
Board of Directors approved a retirement of retail capital credits, whereby,
one-half of the retail margins earned in 1983 were returned to retail customers.
Wholesale capital credits have been retired on a 10-year cycle pursuant to the
Equity Management Plan Settlement Agreement, despite its expiration in 1995. A
new Settlement Agreement (different than the aforementioned agreement) has been
negotiated with Alaska Electric Generation & Transmission Cooperative, Inc.
(AEG&T)/MEA/Homer and has been approved by the APUC. Under this agreement,
wholesale capital credits will continue to be rotated on a 10-year cycle until
1998. After 1998, wholesale capital credits are expected to be rotated using the
retail schedule in place at that time. Chugach is currently in the process of
updating its Equity Management Plan which will address future rotation schedules
for wholesale and retail customers. When complete, the plan will be submitted to
the Board of Directors for approval. Approval of actual capital credit
retirements is at the discretion of the Association's Board of Directors.

As an electric cooperative, Chugach is exempt from federal income taxation under
Section 501(c)(12) of the Internal Revenue Code (Code). Alaska electric
cooperatives must pay to the State of Alaska, in lieu of state and local ad
valorem, income and excise taxes, a tax at the rate of $0.0005 per kWh of
electricity sold in the retail market during the preceding year. In

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addition, Chugach collects a regulatory cost charge of $.000322 per kWh of
retail electricity sold. This charge is assessed to fund the operations of the
APUC. It is a pass-through and thus does not impact Chugach margins. Beginning
January 1, 1997, the regulatory cost charge was reduced to $.000297 per kWh of
retail electricity sold.

Chugach's workforce consists of approximately 356 full-time employees.
Approximately two-thirds of Chugach's employees are members of the International
Brotherhood of Electrical Workers (IBEW). Chugach has collective bargaining
agreements with the IBEW which are in effect through January 1998.

Characteristics of the Service Areas of Chugach and its Largest Customers

As indicated in the foregoing, the service areas of Chugach and its wholesale
and economy energy customers are often described collectively as the Railbelt
Region of Alaska because the three geographic regions, from Fairbanks in central
Alaska, through Anchorage, and south to the Kenai Peninsula, are linked by the
Alaska Railroad.

Anchorage is the trade, service and financial center for most of Alaska and
serves as a major center for many state governmental functions. Other
significant contributing factors to the Anchorage economy include a large
federal government and military presence, tourism, air and rail transportation
facilities, and headquarters support for the petroleum, mining and other basic
industries located elsewhere in the state.

The Matanuska-Susitna Borough is immediately northeast of Anchorage, centered
around the communities of Palmer and Wasilla. Although agriculture, tourism,
mining and forestry are factors in the economy of the Matanuska-Susitna Borough,
the economic well-being of the area is closely tied to that of Anchorage.

The Kenai Peninsula is south of Anchorage with an economy substantially
independent of the Anchorage area. The most significant basic industry on the
Kenai Peninsula is the production and processing of petroleum products from Cook
Inlet. Other important basic industries include tourism and fish harvesting and
processing. Principal communities on the Kenai Peninsula are Homer, Seward,
Kenai and Soldotna.

Fairbanks is the center of economic activity for the central part of the state.
Fairbanks (250 air miles north of Anchorage and about 400 air miles south of
Alaska's northern border) is Alaska's second largest city. Basic economic
activities in the Fairbanks region include federal and state government and
military operations, the University of Alaska, tourism and support of natural
resource development in the interior and northern parts of the state. Recently a
major gold mine has commenced operation near Fairbanks. The Trans-Alaska
Pipeline System passes near Fairbanks on its route from Prudhoe Bay to Valdez.

3

Rate Regulation and Rates

Chugach is subject to rate regulation by the APUC. In January 1987, the APUC
adopted a simplified rate filing (SRF) procedure for use solely by electric
cooperatives. Under the SRF procedure, electric cooperatives may submit proposed
base demand and energy rate changes to the APUC for approval (either on a
quarterly or semi-annual basis) without the necessity of undergoing a formal
hearing process. The proposed rates must be approved by the Board of Directors
of the electric cooperative before they will be accepted by the APUC for
consideration. Chugach has been a participant in this process since 1989.

In August 1996, the Chugach Board of Directors approved a petition to the APUC
to withdraw from the SRF process. The petition was submitted as part of Docket
U-96-37, which was opened to resolve rate disputes with Chugach's wholesale
customers. Interim-refundable rates for wholesale customers were ordered pending
resolution of the docket. In February 1997, the APUC approved a Settlement
Agreement between Chugach and AEG&T/MEA/Homer that resolved issues in the docket
and established permanent rates. As part of the Settlement Agreement, the
wholesale customers agreed not to oppose Chugach's withdrawal from SRF. The APUC
orders have not addressed Chugach's withdrawal from SRF but Chugach anticipates
approval of its petition. As part of the Order, the Association was required to
file Cost of Service and Revenue Requirement Studies. Chugach filed these
studies in March 1997.

If Chugach's petition to withdraw from the SRF process is approved, future
demand and energy rate changes will be sought through general rate case and
other normal APUC procedures. While the formal ratemaking process typically
takes nine months to one year, it is within the APUC's authority to authorize,
after a notice period, rate changes on an interim- refundable basis. In
addition, the APUC has been willing to open limited dockets to resolve specific
issues from which expeditious decisions can often be generated.

For 1997, Chugach management and its Board of Directors have committed that
retail and wholesale base rates will remain at current levels. As part of the
Settlement Agreement with AEG&T/MEA/Homer, Chugach has committed that their
demand and energy rate levels remain at current levels through 1999 and may be
reduced if existing rates provide returns higher than specified in the
Agreement. The Association will continue to recover changes in its fuel and
purchased power expense levels through routine fuel surcharge filings with the
APUC.

Chugach currently manages its business in an effort to meet or exceed an average
overall TIER of 1.25 from operations in accordance with its Equity Management
Plan. The Indenture of Trust, Series A, First Mortgage bonds (Indenture) dated
September 15, 1991 requires Chugach to set rates designed to yield margins for
interest (a TIER-like statistic) equal to at least 1.20 times total interest
expense. The authorized rate-setting TIER level of 1.35 has allowed Chugach to
achieve greater than the 1.20 margins for interest. In the Cost of Service and
Revenue Requirement Studies filed in March 1997, Chugach requested a
rate-setting TIER of 1.25. In 1996, Chugach's achieved TIER was 1.39.

4

Sales to Customers

The following table shows the energy sales to and electric revenues from
Chugach's retail, wholesale, and economy energy customers for the year ended
December 31, 1996:

Energy Loads and Revenues by Class of Customer

Percent of Total
MWh 1996 Revenues 1996 Revenues
--- ------------- --------------

Direct retail sales:
Residential 485,423 $ 47,109,647 35.3%
Commercial 527,006 39,218,216 29.4
--------- ----------- ------
Total 1,012,429 86,327,863 64.7
--------- ----------- ------

Wholesale sales:
MEA 491,541 22,881,086 17.2
Homer 414,284 16,062,969 12.0
Seward 51,476 2,075,293 1.6
--------- ----------- ------
Total 957,301 41,019,348 30.8
--------- ----------- ------

Economy Energy Sales:
GVEA 246,020 6,004,542 4.5
Other 92 3,693 0.0
--------- ----------- ------
246,112 6,008,235 4.5
--------- ----------- ------

Total sales to customers 2,215,842 $ 133,355,446 100.00%
--------- ----------- ------

Retail Customers

Certificated Service Territory. Chugach's retail service area covers the
populated areas of Anchorage as well as remote mountain areas and villages. The
service area ranges from the northern Kenai Peninsula on the South, to Tyonek on
the West, to Whittier on the East and to Fort Richardson on the North. Any
change in Chugach's certificated service area requires the approval of the APUC.

Customers. Chugach directly serves approximately 67,000 retail customers, as
measured by meters. There are approximately 54,000 members of Chugach; not all
customers are members due to the high density of multiple family dwellings in
the retail service area. In many ways, Chugach's retail customer base does not
conform to the traditional rural electric cooperative customer base in that
Chugach's customers are primarily urban and suburban rather than rural. The
urban nature of Chugach's customer base means that Chugach has a higher customer
density per line mile than is typical for rural electric cooperatives. Higher
customer density means that fixed costs can be spread over a greater number of
customers. As a result of lower average costs attributable to each customer,
Chugach may benefit from a greater level of stability in revenue, as compared to
a less dense distribution system in which each individual customer would have a
more significant impact on operating results. For the past five years no retail
customer accounted for more than 5% of Chugach's revenues.

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Wholesale Customers

Chugach is the principal supplier of power under wholesale power contracts with
MEA, Seward and Homer. Chugach's wholesale power contracts represented $41.0
million in revenues and 30.8% of Chugach's total sales to customers in 1996.

MEA and Homer. Chugach's contract with AEG&T (a generation and transmission
cooperative of which MEA and Homer are the only full-fledged members; ML&P is an
associate member) for the benefit of MEA obligates MEA to purchase all of its
electric power requirements from Chugach. Contractually, MEA has the right,
subject to APUC approval, to convert to a net requirements purchaser of power
from Chugach, under which MEA would be obligated to buy its needed power from
Chugach, net of its power needs satisfied from any of its own or AEG&T's
resources (including from the 39 MW Soldotna 1 gas-fired generating station
owned by AEG&T).

After conversion to net requirements under the contract, MEA cannot reduce the
amount of power it purchases from Chugach below a certain minimum amount. MEA
also has the right, on seven years advance notice and subject to APUC approval,
to convert to a take-or-pay purchaser of a fixed amount of power. If MEA
converts to net requirements service, MEA will be required to pay demand charges
based upon the highest post-1985 historical coincident peak of the MEA system.
Therefore, Chugach will continue to recover fixed costs if MEA converts to
net-requirements service. Also, Chugach's revenues from energy sales to MEA
would decline in proportion to the reduction in the energy sold, but this
decline would be largely offset by savings in the variable costs associated with
energy production. The MEA contract is in effect through December 31, 2014.
Chugach's contract with AEG&T for the benefit of Homer obligates Homer to
take-or-pay for 73 MW of capacity (demand), and not less than 350,000 MWh
(energy) per year. The Homer contract includes certain limitations on the costs
that may be included in the rates charged to Homer by Chugach. The Homer
contract expires on January 1, 2014. Homer's remaining resource requirements are
provided by AEG&T's Soldotna unit and AEG&T shares attributable to Homer from
the Bradley Lake hydroelectric project. Chugach and AEG&T have signed a dispatch
agreement whereby Chugach has access to all of the Soldotna unit output except
that which is required to supply Homer's load in excess of 73 MW. The term is
for 40,000 operating hours or 10 years, whichever is first, although the term
will be extended by three years if Chugach makes significant use of the unit
during the last three years of the original contract term. Chugach agreed to
generate at least 322 GWh and obtained an economical gas supply for the unit.
AEG&T receives payment for variable operating and maintenance costs plus a
margin for energy produced by the unit. Chugach obtained use of the unit output
while AEG&T retained ownership costs and responsibility. In 1996, Chugach used
47 GWh from the Soldotna unit.

Seward. Chugach currently provides all the firm power needs of Seward. Renewal
and extension of Chugach's contract with Seward is currently under negotiation.
In 1996, sales under this agreement amounted to 1.6% of Chugach's sales to
customers.

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Economy Customers

Golden Valley Electric Association. Under the terms of Chugach's agreement with
Golden Valley Electric Association (GVEA), GVEA is obligated, under certain
circumstances, to purchase, if available from Chugach, its non-firm energy needs
until 2008. Sales under this agreement accounted for 4.5% of Chugach's 1996
sales revenues. Chugach and GVEA have entered into a tentative pooling agreement
whereby the resources of both utilities would be dispatched on a common basis to
reduce constraints on when non-firm energy would be available to GVEA.
Construction of a coal-fired generation facility at Healy (Healy II) is underway
with 50% of the construction costs funded from a United States Department of
Energy grant under the Clean Coal Technology III Demonstration Program. This
facility is projected to be operational in mid-1998 and is expected to produce
up to 50 MW of coal-fired power. When Healy II becomes operational, GVEA will
reduce its purchases of non-firm energy from Chugach by taking firm power from
Healy II. Chugach's management does not believe that such a reduction will have
a material adverse effect on Chugach. The Ft. Knox gold mine with an anticipated
load of 30-35 MW began operation during the last quarter of 1996.

FUEL SUPPLY

In 1996, 91% of Chugach's power was generated from gas, and 91% of that
gas-fired generation took place at Beluga.

Chugach's three sources of natural gas are (1) the Beluga River Field producers
[ARCO Alaska, Inc. (ARCO), Municipal Light & Power (ML&P) (old Shell) and
Chevron USA Inc. (Chevron)], (2) Marathon Oil Company (Marathon) and (3) ENSTAR
Natural Gas Company (ENSTAR). ARCO, ML&P and Chevron each own one-third of the
gas produced from the Beluga River Field and in 1996 provided approximately
equal shares of the Beluga gas. Chugach has approximately 471 billion cubic feet
(BCF) of gas committed to it from the Beluga River Field producers and Marathon.
Chugach currently uses about 20 BCF of natural gas per year for firm service.
Chugach believes that this usage will remain fairly constant and estimates that
its current contract gas will last 18 to 21 years. In 1996, Shell sold its
interests in the Beluga River Field to ML&P and ML&P assumed Shell's contractual
obligations to sell natural gas to Chugach. Chugach believes that this transfer
will have no material effect on the delivery of Beluga gas to Chugach.

Chugach's fuel supply is lower priced than that available to other generators in
the interconnected Railbelt. ML&P burns natural gas purchased from the Beluga
River Field producers and transported by ENSTAR. Chugach has a transportation
contract with ENSTAR to transport Chugach gas purchased from Marathon or the
Beluga River Producers to the Soldotna (AEG&T) and/or International Power plants
(International). The rate for firm transportation is $0.63 per MCF and the rate
for interruptible transportation is $0.30 per MCF. There is a minimum monthly
bill of $2,600. The primary reasons that Chugach's fuel supply is lower priced
than that available to other generators are (i) Chugach purchases its gas
directly

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from producers rather than from gas utilities and (ii) Chugach's power plants
are located in close proximity to gas fields so that there are insignificant
transportation costs included in the price of the fuel. ML&P currently depends
on ENSTAR to transport all of the gas it uses. The ENSTAR tariff rate is
$105,000 per month plus $0.28 per MCF.

GVEA uses both coal-fired and oil-fired generators. Because of the high cost of
fuel oil, GVEA is normally an importer of lower cost power from the south.

Beluga River Field Producers

Chugach has similar requirements contracts with each of ARCO, ML&P (old Shell)
and Chevron that were executed in April 1989, superseding contracts that had
been in place since 1973. Each of the contracts with the Beluga River Field
producers provides for delivery of gas on different terms in three different
periods. Period 1 related to the delivery of gas previously committed by the
respective producer under the 1973 contracts terminated in June 1996. The
maximum deliverability under the Beluga and Marathon contracts is in excess of
the peak winter demand requirements of the Beluga plant and allows for increased
deliverability should Chugach's combined-cycle plant be out of service.

During Period 2, which began in June 1996 and continues until the earlier of the
delivery of 180 BCF of natural gas or December 31, 2013, Chugach is entitled to
take delivery of up to 180 BCF of natural gas (60 BCF per Beluga River Field
producer). During this period, Chugach is required to take 60% of its total fuel
requirements at Beluga from the three Beluga River Field producers, exclusive of
gas purchased at Beluga under the Marathon contract for use in making sales to
GVEA or certain other wholesale purchasers. The price for gas during this period
under the ARCO and ML&P (old Shell) contracts is approximately 88% (or $1.28 per
MCF on December 31, 1996) of the price of gas under the Marathon contract
(described below), plus taxes. The price during this period under the Chevron
contract is approximately 110% (or $1.60 per MCF on December 31, 1996) of the
price of gas under the Marathon contract (described below), plus taxes.

During Period 3 under the Beluga River Field producers' contracts, which begins
at the earlier of December 31, 2013 or the end of Period 2, Chugach may become
entitled to take delivery of up to 120 BCF of natural gas (40 BCF per producer).
Whether any gas will be taken in Period 3, and the price and take requirements
with respect thereto, are to be determined in the future based upon then-current
market conditions.

Chugach also has supplemental, annually renewable contracts with the Beluga
River Field producers to supply supplemental gas (for peak periods of energy
usage) if they have it available in excess of the amounts guaranteed in the
basic contracts. The supplemental gas contracts raise the daily deliverability
of gas to an aggregate of 85,200 MCF per day from the Beluga River Field
producers. The base price of the gas under these contracts is the same as the
base price under the Marathon contract described below, plus taxes.

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Marathon

Chugach entered into a requirements contract with Marathon in September 1988 for
an initial commitment of 215 BCF. The contract expires December 31, 2015 or, if
earlier, the date on which Marathon has delivered to Chugach a volume of gas in
total which equals or exceeds the total volume of gas that Marathon is required
to sell and deliver to Chugach under the agreement. The base price for gas under
the Marathon contract is $1.35 per MCF, adjusted quarterly to reflect the
percentage change between the preceding twelve-month period and a base period in
the average prices of West Texas Intermediate Crude Oil (a benchmark of the
Light Sweet Crude Oil Futures Index), the Producer Price Index for natural gas,
and the Consumer Price Index for heating fuel oil. The price on December 31,
1996, exclusive of taxes was $1.45 per MCF.

Under the terms of the Marathon contract, Marathon generally provides the
primary supply of gas required for sales to GVEA, all of Chugach's requirements
at Bernice Lake and 40% of the requirements at Beluga. Marathon also has a right
of first refusal to provide additional gas under any sales agreements that
Chugach may enter into with electric utilities that Chugach does not currently
serve.

ENSTAR Natural Gas Company

Chugach and ENSTAR signed a transportation agreement in December 1992 that was
approved by the APUC in January 1993, whereby ENSTAR would transport Chugach's
gas purchased from the Beluga producers or Marathon on a firm basis to both
Chugach's International Power Plant and AEG&T's Soldotna Power Plant at a
transportation rate of $0.63 per MCF. In addition, ENSTAR agreed to transport
gas on an interruptible basis for off-system sales at a rate of $0.30 per MCF.
The agreement contains a minimum monthly bill of $2,600 for firm service.

Chugach holds a reservation to receive its gas requirements at International
Power Plant from ENSTAR under a tariff approved by the APUC in the event that
the transportation agreement is subsequently canceled. Under the currently
suspended tariff, ENSTAR is obligated to supply all of the gas Chugach desires
at a price approved by the APUC. There would be a monthly minimum bill of
$10,465, but no requirement to actually use any gas at International. The
current delivered price under the tariff is $2.53 per MCF.

COMPLIANCE WITH ENVIRONMENTAL STANDARDS

Regulatory initiatives arising out of recent amendments to State and Federal
environmental laws (including the Clean Air Act Amendments of 1990) may require
significant capital expenditures in the future. These initiatives have not
developed to the point where their financial impact on Chugach can be
determined. Other environmental compliance changes will require new substation
designs to incorporate spill containment features. The cost of incorporating
these features has been considered in future construction work plan projects.

9

REFINANCINGS

On September 19, 1991, Chugach issued $314,000,000 of First Mortgage Bonds, 1991
Series A, for purposes of repaying existing debt to the Federal Financing Bank
(FFB) and the Rural Electrification Administration (REA), (now Rural Utilities
Services (RUS)). Pursuant to Section 311 of the Rural Electrification Act,
Chugach was permitted to prepay the REA debt at a discounted rate of
approximately 9%, resulting in a discount of approximately $45,000,000. The gain
on prepayment of the REA debt has been deferred and Chugach has obtained
permission from the APUC to flow through the benefit to consumers through lower
rates in the future.

Of the total issuances, bonds in the amount of $52,000,000 are due in 2002 and
bear interest at 8.08% (Series A 2002 Bonds) and bonds in the original amount of
$262,000,000 are due in 2022 and bear interest at 9.14% (Series A 2022 Bonds).
Interest is payable semiannually on March 15 and September 15. The Series A 2002
Bonds are subject to annual sinking fund redemption at 100% of the principal
amount thereof that commenced March 15, 1993. The Series A 2022 Bonds are
subject to annual sinking fund redemption at 100% of the principal amount
thereof commencing March 15, 2003. The Series A 2002 Bonds are not subject to
optional redemption. The Series A 2022 Bonds are redeemable at the option of
Chugach on any interest payment date at an initial redemption price of 109.14%
of the principal amount thereof declining ratably to par on March 15, 2012. The
Indenture prohibits outstanding short-term indebtedness (other than trade
payables) in excess of 15% of Chugach's net utility plant and limits certain
cash investments to specific securities. Chugach has reacquired $39,295,000 of
the Series A 2022 bonds since December 1995 leaving a remaining balance of
$222,705,000 at December 31, 1996.

Chugach has negotiated a supplemental indenture (Third Supplemental Indenture of
Trust) with CoBank for up to $80 million in future bond financing. At December
31, 1996, Chugach had bonds in the amount of $56.6 million outstanding under
this financing arrangement. This balance is comprised of a $1.6 million bond
(CoBank 1) which carries an interest rate of 8.95% maturing in 2002, a $10
million bond (CoBank 2) with a 7.76% interest rate, due in 2005, a $21.5 million
bond (CoBank 3) currently priced at 6.45% (repriced monthly) and a $23.5 million
bond (CoBank 4) currently priced at 6.45% (also repriced monthly). Principal
payments on the CoBank 3 and 4 bonds commence in 2003 and continue through 2022.
In addition, Chugach has negotiated with NRUCFC for another $80 million
supplemental indenture (Fifth Supplemental Indenture of Trust). At December 31,
1996, no amounts were outstanding under this financing arrangement.

10

Item 2 - Properties

SYSTEM ASSETS

General

Chugach has 501.4 MW of installed capacity consisting of 15 generating units at
four power plants. These include 365.6 MW of operating capacity at Beluga on the
west side of Cook Inlet; 70.0 MW of power at Bernice Lake on the Kenai
Peninsula; 48.6 MW of power at International Station in Anchorage; and 17.2 MW
at Cooper Lake, which is also on the Kenai Peninsula. In addition to its own
generation, Chugach purchases power from the 30 MW Eklutna Hydroelectric Project
currently owned by the Alaska Power Administration of the U.S. Department of
Energy (APA) but under an agreement for sale to a consortium of local utilities
(including Chugach), and from the 90 MW Bradley Lake hydroelectric project owned
by the Alaska Energy Authority (AEA) (through Alaska Industrial Development and
Export Authority (AIDEA)) operated by Homer and dispatched by Chugach. The
Beluga, Bernice Lake and International facilities are all currently fueled by
natural gas. Chugach owns its offices and headquarters, located adjacent to its
International Station in Anchorage, in fee simple. Warehouse space for some
generation, transmission and distribution inventory (including a small amount of
office space) is leased from an independent party not directly affiliated with
Chugach.

Generation Assets

Chugach owns the land and improvements comprising its generating facilities at
Beluga and International. It also owns all improvements comprising its
generating plant at Bernice Lake, which is located on land originally leased
from Chevron Oil Company now owned by Homer, and its generating plant at Cooper
Lake, which is located on federal land pursuant to a major project license
(Federal License) granted to Chugach by the Federal Power Commission in 1957.
The Bernice Lake ground lease expires in 2011 and the Federal License for the
Cooper Lake facility expires in 2007. The management of Chugach has no reason to
believe at this time that it will not be able to renew the Federal License or
the Bernice Lake ground lease if desirable.

11

The following table lists specifics of the generating facilities of Chugach:
Commercial
Facility Type of Fuel Rated Capacity (1) Operation Date
-------- ------------ ------------------ -----------------

Beluga Power Plant:

Unit 1 Natural Gas 15.7 1968

Unit 2 Natural Gas 15.7 1968

Unit 3 Natural Gas 64.7 1972

Unit 5 Natural Gas 66.5 1975

Unit 6 Natural Gas 74.0 1975

Unit 7 Natural Gas 74.0 1978

Unit 8 Steam (2) 55.0 1981
-----

365.6

Bernice Lake Power
Plant:

Unit 2 Natural Gas 19.0 1968

Unit 3 Natural Gas 25.5 1978

Unit 4 Natural Gas 25.5 1981
-----

70.0

International
Generating Station:

Unit 1 Natural Gas 15.0 1964

Unit 2 Natural Gas 15.1 1965

Unit 3 Natural Gas 18.5 1969
-----

48.6

Cooper Lake
Hydroelectric Plant:

Unit 1 Hydroelectric 8.6 1960

Unit 2 Hydroelectric 8.6 1960
-----

17.2

Total units 15 501.4
-- -----

(1) Capacity rating in MW at 30 degrees Fahrenheit.
(2) Steam turbine-powered generator with heat provided by exhaust from
natural-gas fueled Units 6 and 7 (combined-cycle).
(3) Beluga Unit 4 and Bernice Lake Unit 1 were retired during 1994.

12

Transmission and Distribution Assets

As of December 31, 1996, Chugach's transmission and distribution assets included
40 substations and 402 miles of transmission lines, 933 miles of overhead
distribution lines and 623 miles of underground distribution line. Chugach owns
the land on which 21 of its substations are located and a portion of the
right-of-way connecting its Beluga plant to Anchorage.

Many substations and a substantial number of Chugach's transmission and
distribution rights-of-way are the subject of federal or state permits and
licenses. Under the Federal License and a permit from the United States Forest
Service, Chugach operates its Quartz Creek transmission substation, substations
at Hope, Summit Lake and Daves Creek, and transmission lines over all federal
lands between Cooper Lake on the Kenai Peninsula and Anchorage. Long-term
permits from the Alaska Division of Lands and the Alaska Railroad Corporation
govern much of the rest of Chugach's transmission system outside the Anchorage
area. Within the Anchorage area, Chugach operates its University Substation and
several major transmission lines pursuant to long-term rights-of-way grants from
the United States Bureau of Land Management, and transmission and distribution
lines have been constructed across privately-owned lands pursuant to easements
and across public rights-of-way and waterways pursuant to authority granted by
the appropriate governmental entity.

Title

Substantially all of the properties and assets of Chugach, including generation,
transmission and distribution properties, but excluding all excepted property,
are pledged to secure repayment of the Series A Bonds and all other bonds that
may be issued under the Indenture. The Indenture defines excepted property to
include, among other things, cash on hand, instruments and certain securities
(other than those required to be deposited with the Trustee under the terms of
the Indenture), patents and transportation equipment (including vehicles,
vessels and barges) in which a security interest cannot be perfected by filing,
leases for an original term of less than five years, certain non-assignable
permits, licenses and contractual rights, property located outside the State of
Alaska and not used in connection with Chugach's generation, transmission and
distribution system and other property in which a security interest cannot
legally be perfected. The lien of the Indenture is subject to certain permitted
encumbrances which the Indenture defines to include certain identified
restrictions, exceptions, reservations, conditions and limitations existing on
the date of the Indenture, reservations in U.S. patents, nondelinquent or
contested tax liens, local easements, leases and reservations and liens for
nondelinquent rent or wages. The lien of the Indenture is also subject to the
lien in favor of the Trustee to recover amounts owing to the Trustee under the
Indenture.

In addition to the Indenture, many of Chugach's properties are burdened by
easements, plat restrictions, mineral reservation, water rights and similar
title exceptions common to the area or customarily reserved in conveyances from
federal or state governmental entities, and to additional minor title
encumbrances and defects. In the opinion of Chugach's general counsel,

13

none of these title defects will materially impair the use of its properties in
the operation of its business.

In addition, a lawsuit was filed against the State of Alaska in which the
plaintiffs allege that the manner in which the State administered and disposed
of certain lands violates the Alaska Mental Health Enabling Act. One of
Chugach's substations and its right-of-way across State lands may be subject to
the plaintiffs' claims. Chugach's management believes that such claims will not
materially affect Chugach's financial position, results of operations or cash
flows.

Chugach operates its Bernice Lake facility on lands originally leased from
Chevron Oil Company (now owned by Homer) pursuant to a lease that is scheduled
to expire in 2011. Chugach also operates several terminal connection sites and a
substation under long-term or renewable leases from the State of Alaska and
private parties. In addition, as discussed above, a substantial number of
Chugach's transmission and distribution rights-of-way, and several distribution
substations, are the subject of federal or state permits and easements.

Under the Alaska Cooperative Act, Chugach is given the power of eminent domain
for the purpose and in the manner provided by the Alaska condemnation laws for
acquiring private property for public use.

Other Assets

Bradley Lake. Chugach is a participant in the Bradley Lake Hydroelectric Project
(Bradley Lake), which is a 90 MW hydroelectric facility near Homer on the
southern end of the Kenai Peninsula that was placed into service in September
1991. The project was financed and built by AEA through grants from the State of
Alaska and the issuance of $166 million principal amount of revenue bonds
supported by power sales agreements with six electric utilities that will share
the output from the facility (Chugach, ML&P, Homer and MEA (through AEG&T), GVEA
and Seward). Effective August 12, 1993, AEA became part of the Alaska Industrial
Development and Export Authority (AIDEA). Chugach and the other participating
utilities have entered into take-or-pay power sales agreements under which AEA
has sold percentage shares of the project capacity and the utilities have agreed
to pay a like percentage of annual costs of the project (including ownership,
operation and maintenance costs, debt-service costs and amounts required to
maintain established reserves). Under these take-or-pay power sales agreements,
the purchasing utilities have agreed to pay all project costs from the date of
commercial operation even if no energy is produced.

Chugach has a 27.4 MW or 30.4% share in Bradley Lake, and takes Seward's and
MEA's shares which it net bills to them, for a total of 45% of the project's
capacity.

The length of the agreement is "fifty years from the date of commercialization
or when the revenue bond principal is repaid, whichever is the longer." Chugach
believes that, under a worst-case scenario, it could be faced with annual
expenditures of approximately $4.6 million

14

as a result of its Bradley Lake take-or-pay obligations. Chugach believes that
this expense would be recoverable through the fuel surcharge ratemaking process.
The share of debt service for which the Association is responsible is
approximately $47,000,000 plus interest.

Chugach also provides transmission and related services as a wheeling agent (one
who dispatches and transmits power of third parties over its own system) for all
of the participants in the project. Upon the default of a participant, and
subject to certain other conditions, AEA is entitled to increase each
participant's share of costs pro rata, to the extent necessary to compensate for
the failure of another participant to pay its share, provided that no
participant's percentage share is increased by more than 25%.

Chugach and AEG&T have also negotiated a Bradley Lake Scheduling Agreement
whereby Chugach schedules AEG&T/Homer's share of the Bradley Lake project for
the benefit of the Chugach system. AEG&T continues to pay its Bradley Lake costs
and receives credit for the Bradley Lake energy generated for Homer. Chugach
pays a fixed annual fee of $112,000 to AEG&T for these scheduling rights. This
agreement allows Chugach to improve the efficiency of its generating resources
through better hydrothermal coordination.

Eklutna. Chugach contracts with the APA for 9 MW of firm power and 45,900 MWh of
energy from Eklutna. MEA also has a contract for 5 MW and 25,500 MWh of energy
from Eklutna, which is pooled with Chugach's purchases and sold back to MEA to
be used in meeting its overall requirements. Chugach's contract for the purchase
of power from Eklutna expires in 2014. Chugach, MEA and ML&P have entered into
an agreement to purchase Eklutna, which has been approved by the U.S. Congress.
Under the terms of the purchase agreement, Chugach is entitled to a 30% share of
the project. It is projected that joint utility ownership of the project would
slightly reduce the cost of project power otherwise available to Chugach.
Transfer of ownership will occur on or before November 1997 in accordance with
the Transition Plan. Chugach currently estimates that its 30% share of the
project would cost $1.8 million.

ML&P. ML&P is the second largest generating utility in Alaska. ML&P, like
Chugach, primarily generates power from units fueled by natural gas, which it
currently purchases from the producers at the Beluga River Field.

Item 3 - Legal Proceedings

LITIGATION

Standard Steel Salvage Yard Site

A cost recovery action was filed in Federal District Court on December 27, 1991
by the United States against Chugach and six other Potentially Responsible
Parties (PRPs) seeking reimbursement of removal and response action costs (Past
Response Costs) incurred by US EPA at the Standard Steel and Metals Salvage Yard
Superfund Site in Anchorage, Alaska

15

(Site). The six other PRPs named in the action are the Alaska Railroad,
Westinghouse Electric Corporation, Sears Roebuck and Co., Montgomery Ward & Co.,
J.C. Penney Company, Inc. and Bridgestone/Firestone, Inc.

On September 23, 1992, Chugach entered into an Administrative Order on Consent
(AOC) with the EPA to perform a remedial investigation and feasibility study
(RI/FS) for the Site. The RI/FS was completed in 1996 and, based on the results
of the RI/FS, EPA selected the remedy of soil stabilization and solidification
(S/S) for cleanup of the Site and documented its selection in a Record of
Decision issued in July, 1996.

In December 1996, a partial consent decree (Partial Consent Decree) settling the
cost recovery action was entered by the Federal District Court. Under the
Partial Consent Decree the PRPs and the United States settled the following
costs associated with the Site: Past Response Costs incurred by EPA through
December 1991; RI/FS costs; drum and scrap removal costs; past enforcement costs
incurred by the Department of Justice (DOJ) through December 11, 1996; and EPA
oversight costs related to the RI/FS.

The settlement under the Partial Consent Decree allocates 14.37% of the above
costs to Chugach. Chugach has paid its share of Past Response Costs and DOJ
enforcement costs under the Partial Consent Decree. The total estimated cost of
the settlement under the Partial Consent Decree is approximately $6,800,000 of
which Chugach's share will be approximately $977,000. These amounts are
estimates because RI/FS expenses and EPA oversight costs are not yet fully known
and, therefore, the total amount to be paid by Chugach under the Partial Consent
Decree is not known with certainty.

The Partial Consent Decree does not settle Chugach's liability for future costs
of designing and performing the S/S remedy (Future Costs). Although the Partial
Consent Decree does not settle Chugach's or the other private PRP's liability
for Future Costs, the Partial Consent Decree does bind the federal PRPs and the
Alaska Railroad to pay an aggregate share of 64% of Future Costs. Chugach and
the five other private PRPs have reached a separate settlement to divide the
remaining 36% of Future Costs among themselves. Under that settlement, Chugach's
percentage share of liability for Future Costs will equal 15.39%.

Chugach's agreement to perform remedial design and remedial action (RD/RA) at
the Site will be memorialized in a new Consent Decree (RD/RA Decree) that is
being negotiated between the private PRPs and the United States. The RD/RA
Decree is expected to contain the scope of work for the RD/RA as well as
settlement terms, including EPA's covenant not to sue Chugach and the other
private PRPs for Future Costs once the RD/RA is completed.

The estimate of Future Costs of RD/RA at the Site, as determined by Chugach's
consultants based on cost estimates contained in the FS report, ranges from
$5,231,200 to $6,619,800. The RD/RA Decree contains a cost estimate, as
determined by EPA and including a 50% cost overrun contingency, of $8,400,000.
Chugach's share of these estimated RD/RA expenses would range from approximately
$805,082 to $1,292,760. These amounts are only estimates,

16

however, the actual, full scope of the S/S cleanup at the Site will not be
known, and the projected costs associated with the remedy cannot be refined,
until EPA approves remedial design documents.

Under the RD/RA Decree, Chugach and the other PRPs will be required to reimburse
the United States for EPA oversight costs and DOJ enforcement costs relating to
the RD/RA. Those costs have not been estimated by the United States and are
unknown at this time. Therefore, the total amount paid by Chugach under the
RD/RA Decree cannot be predicted with certainty. In addition, the RD/RA Decree
contains reservation of rights allowing EPA to seek further response actions and
payments from the PRPs under certain circumstances, including costs associated
with alleged natural resource damages. At this time, no claims have been made
pertaining to alleged natural resource damages and no prediction can be made
whether EPA will request activities through its reservation of rights under
RD/RA Decree. Finally, it is uncertain whether Chugach and the other PRPs will
enter into the RD/RA Decree with EPA until negotiations are completed.

Four of Chugach's insurance carriers have agreed under a reservation of rights
to pay, and currently are paying, Chugach's costs of defense for the Site. The
carriers have reserved their rights regarding indemnification of Chugach for
response costs. Management believes that all past and future costs incurred for
response, removal, investigation and cleanup of the Site would be fully
recoverable in rates or covered by insurance and therefore would have no impact
on Chugach's financial condition or results of operations.

17

Item 4 - Submission of Matters to a Vote of Security Holders

Not Applicable

PART II

Item 5 - Market for Registrant's
Common Equity and Related Stockholder Matters

Not Applicable

Item 6 - Selected Financial Data

The following tables present selected historical information relating to
financial condition and results of operations over the past five years:

Balance Sheet Data ............. 1996 1995 1994 1993 1992
------------ ------------ ------------- ------------ ------------

Plant net:
In service .................. $400,052,837 $391,200,269 $ 390,969,561 $382,804,772 $383,934,140

Construction work in progress 19,826,957 27,068,964 22,795,657 27,698,289 23,713,420
------------ ------------ ------------- ------------ ------------

Electric plant, net ...... 419,879,794 418,269,233 413,765,218 410,503,061 407,647,560

Other assets ................ 63,415,182 66,521,090 65,559,620 65,816,373 62,885,825
------------ ------------ ------------- ------------ ------------

Total assets ............. $483,294,976 $484,790,323 $ 479,324,838 $476,319,434 $470,533,385
------------ ------------ ------------- ------------ ------------

Capitalization:
Long-term debt .............. 307,905,847 305,641,703 303,675,870 308,869,343 313,004,720

Capital leases .............. -- -- 131,582 261,991 314,838

Equities and margins ........ 104,477,942 99,230,550 94,579,059 84,089,720 78,803,200
------------ ------------ ------------- ------------ ------------

Total capitalization ..... $412,383,789 $404,872,253 $ 398,386,511 $393,221,054 $392,122,758
------------ ------------ ------------- ------------ ------------

Summary Operations Data

Operating revenues ............. 134,876,668 129,379,308 130,912,171 $122,159,761 117,575,113

Operating expenses ............. 100,913,804 95,920,361 90,151,993 90,346,001 87,200,819

Interest expense ............... 27,052,186 27,207,648 27,508,928 27,544,280 27,596,927

Amortization of gain on
refinancing .................. 1,703,136 2,150,476 1,926,212 1,948,394 1,963,198
------------ ------------ ------------- ------------ ------------

Net operating margins ..... 8,613,814 8,401,775 15,177,462 6,217,874 4,740,565

Nonoperating margins ........... 1,217,557 604,418 (249,028) 795,378 839,394
------------ ------------ ------------- ------------ ------------

Assignable margins ........ $ 9,831,371 $ 9,006,193 $ 14,928,434 $ 7,013,252 $ 5,579,959
------------ ------------ ------------- ------------ ------------

18

Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Chugach operates on a not-for-profit basis and, accordingly, seeks only to
generate revenues sufficient to pay operating and maintenance costs, the cost of
purchased power, capital expenditures, depreciation and principal and interest
on all indebtedness of Chugach and to provide for the establishment of
reasonable margins and reserves. Revenues in excess of current period costs (net
operating margins and nonoperating margins) in any year are designated on
Chugach's Statements of Revenues, Expenses and Patronage Capital as assignable
margins. Retained assignable margins are designated on Chugach's balance sheet
as patronage capital, which is assigned to each member on the basis of
patronage. This patronage capital constitutes the principal equity of Chugach.

Revenues

Operating revenues include sales of electric energy to retail, wholesale and
economy energy customers and other miscellaneous revenues. In 1996, operating
revenues were approximately 4.2% higher than 1995. This increase was largely
attributable to higher sales to all three customer classes. Demand and energy
rate increases (on an interim-refundable basis) to both of the wholesale
customer classes contributed to the rise in revenues. Retail demand and energy
rates did not change in 1996. Higher fuel costs also contributed to the increase
since fuel and purchased power costs are passed directly to customers through a
fuel and purchased power adjustment factor. Volume of power sold varies not only
with weather but also, in part, depends upon the volume of energy taken by
wholesale and economy energy customers (Homer, MEA, Seward and GVEA) from the
Bradley Lake hydroelectric project. In 1995 operating revenues were
approximately 1.2% lower than 1994 operating revenues due mostly to base rate
decreases for retail and both wholesale customer classes. These decreases more
than offset an increase in Megawatt hours (MWh) sold to retail and both
wholesale customer classes. Revenues and power sold were as follows for the
years ended December 31:

Year MWh sold Operating revenues

1996 2,215,842 $134,876,668

1995 2,136,599 129,379,308

1994 2,115,155 130,912,171

Chugach makes economy sales primarily to GVEA. These sales commenced in 1988 and
have contributed to Chugach's growth in operating revenues. Chugach does not
take such economy sales into consideration in its long-range resource planning
process because these sales are non-firm sales that depend on GVEA's need for
additional power and Chugach's available

19

generating capacity at the time. In 1996, economy sales to GVEA constituted
approximately 4.5% of Chugach's sales revenues.

The impact of inflation on Chugach's revenues falls into two rate categories as
follows:

Fuel Surcharge

Fuel and purchased power costs are passed directly to Chugach's wholesale
and retail customers through a fuel and purchased power adjustment factor.
Changes in these costs due to inflation or other market conditions are
passed directly to Chugach's retail and wholesale customers, which results
in either a direct increase or decrease to Chugach's system revenues. The
fuel adjustment factor is currently approved on a quarterly basis by the
APUC. There are no limitations on surcharge rate changes. Increases in
Chugach's fuel and purchased power costs result in increased revenues while
decreases in costs result in lower revenues. Revenue from the fuel
adjustment charge does not impact margins.

In 1988 Chugach began making economy energy sales at a price that
contemplated the future cost of the gas used to generate such energy. The
APUC authorized Chugach to establish a fund whereby 80% of the margins
earned from these sales would be used to mitigate the rate impact when
natural gas prices increased in accordance with the fuel contracts which
occurred in June 1996.

The margins in this fund, known as the rate stabilization fund, are being
returned to Chugach's ratepayers over a 12-month period in the form of a
credit to the fuel adjustment factor. The entire balance of the fund will
be returned to ratepayers by May 1997.

Chugach suspended accruals to the submarine cable reserve in 1995 pursuant
to an agreement with the wholesale customers. The balance of the reserve is
being returned to ratepayers via a credit to the fuel adjustment factor
over a period of 15 months, ending in March 1997.

Simplified Rate Filing

Since 1989 operating and maintenance costs and other nonfuel and purchased
power costs have been recouped through a Simplified Rate Filing (SRF)
process, that enabled Chugach to raise its electric prices up to 8% over a
cumulative twelve-month period or up to 20% over a cumulative thirty-six
month period, subject to APUC approval. Chugach's annual rate changes,
excluding fuel adjustments, for retail and wholesale classes for the years
1994 through 1996 were as follows:

20

1996 1995 1994
---- ---- ----

Retail 0.00% (4.92%) 0.86%

Wholesale:
MEA/Seward 2.46% (7.39%) (.07%)
Homer 5.32% (9.52%) 2.61%

Since Chugach's SRF rates are established on a revenue-requirement basis,
changes in operating and other nonfuel and purchased power costs result in
changes to system revenues. Each SRF requires a resolution from the Chugach
Board of Directors authorizing the rates requested. The filing must then be
approved by the APUC.

In August 1996, the Chugach Board of Directors approved a petition to the
APUC to withdraw from the SRF process. If approved, future demand and
energy rate changes will be requested through a general rate case and other
normal APUC procedures. The wholesale demand and energy rate changes for
1996 (shown above) were approved by the APUC on an interim-refundable
basis.

In February 1997, the APUC approved a Settlement Agreement between Chugach
and AEG&T/MEA/Homer which resolved outstanding issues surrounding the
APUC's approval of the aforementioned interim-refundable rates. Pursuant to
this Settlement Agreement, Chugach agreed to refund a portion of the
amounts collected under these interim-refundable rates. This refund amount
is not material to Chugach's financial condition or results of operations.

Expenses

Chugach's operating expenses for the years ended December 31, 1996, 1995 and
1994 were as follows:

Year Operating expenses

1996 $100,913,804

1995 95,920,361

1994 90,151,993

Operating expenses for 1996 were 5.2% higher than 1995. Operating expenses for
1995 were 6.4% higher than 1994. The reasons for the significant operating
expense variances follow:

Year ended December 31, 1996 versus year ended December 31, 1995

Chugach experienced a 17.5% increase in production costs in 1996 over 1995.
This rise

21

is due mostly to higher fuel prices and higher fuel consumption associated
with the increase in kWh sales. As previously reported, Chugach has now
completed the transition into Period 2 under the long-term fuel supply
contracts (see Fuel Supply in Item 1). Fuel costs now result from
market-based prices instead of the lower prices from Period 1 (old Beluga
gas) as outlined in the contracts. Thus, future fuel costs are expected to
be higher in comparison to prior periods.

Distribution expense decreased by 12.2% in 1996 from the same period in
1995. This decrease was caused mostly by lower levels of line maintenance
expense resulting from a decrease in distribution right-of-way clearing
activities. The focus of these clearing activities was on distribution
lines in 1995 and transmission lines in 1996.

Depreciation expense again increased in 1996 over 1995. This was the
combined result of a higher plant in service balance as well as the
completion of a depreciation rate phase-in plan approved by the APUC.
Transmission plant depreciation rates for submarine cables were implemented
in 1994, while revised depreciation rates for the remainder of
transmission, distribution and general plant were implemented in 1995.
Implementation of the revised generation plant depreciation rates took
place in January 1996. These rates were obtained from the original
Depreciation Study that included plant asset account activity through
December 31, 1990. The APUC required that Chugach file an update to the
original study. This update, for plant asset account balances as of
December 31, 1994 was submitted to the APUC although Chugach did not
request a change in depreciation rates. The study has again been updated
for plant asset account balances at December 31, 1995. Chugach plans to
submit the new depreciation rates from the latest update to the study to
the APUC for implementation effective January 1, 1998.

Other interest expense was higher during 1996 than in 1995. This was due to
a higher average outstanding balance on the short-term lines of credit. The
line of credit was used to fund the reacquisitions of Chugach's Series A,
2022 bonds during 1996. Several draws were subsequently converted to
long-term bonds under the Third Supplemental Indenture (CoBank 3 and 4).

Interest charged to construction decreased in 1996 due mostly to a lower
construction work in progress balance during the period.

Year ended December 31, 1995 versus year ended December 31, 1994

Chugach is engaged in a periodic maintenance program whereby generation
units are subject to major overhauls based on their anticipated run times.
Overhaul costs are variable as the level of maintenance required is
uncertain pending completion of inspections prior to the overhaul work
taking place. Additionally, in 1995 Chugach implemented Smaller Retirement
Unit (SRU) accounting for its production maintenance projects. SRU
accounting allows for the capitalization of production major component
costs that would have been expensed as maintenance under the previous
capitalization methodology.

22

Production costs increased by 17.0% from 1994 to 1995. This increase is
largely due to higher fuel consumption associated with the increase in kWh
sales. Additionally, fuel prices increased in 1995 over 1994. Higher
production maintenance expense also contributed to the overall increase in
Production expense. During 1995, Beluga units 3 and 7 were overhauled with
the non-SRU portions of the projects being charged to maintenance expense.
This compares to 1994 when the only major overhaul undertaken was the
Beluga unit 8 and steam plant project. This project cost was deferred and
is being amortized to expense over the useful life of the overhaul project.

Transmission expense in 1995 increased 11.2% over the 1994 level. This
increase was largely due to costs associated with restoration of real
property leased by Chugach as a result of evicting a sublessee preparatory
to returning the leasehold to Chugach's lessor and terminating the lease,
as well as settlement of a claim with regard to adjacent property
previously leased by Chugach. The property had been primarily used by
Chugach to store submarine cable and associated equipment and as a staging
area for submarine cable repair projects.

The 10.2% increase in Customer accounts expense in 1995 was caused, in
large part, by a higher level of costs associated with the corporate image
advertising campaign and publication of a commercial customer newsletter.
There were no retail capital credits retired during 1995; capital credit
payments are offset against the corresponding previously uncollectible
accounts prior to distribution. This contributed to an increase in the
uncollectible accounts expense. Additionally, amortization of the Data
Processing 5-Year Conversion Plan charged to Customer accounts expense
increased in 1995 over 1994.

Depreciation expense increased in 1995 over 1994. This was caused by the
combination of a higher plant in service balance as well as new
depreciation rates put into effect during 1995. The rates were changed as
part of the aforementioned phase-in plan approved by the APUC.

Short-term interest expense increased in 1995 relative to 1994 due to
greater usage of the short-term lines of credit and generally higher rates
in effect during the period. Interest charged to construction increased in
1995 over 1994 due mostly to higher rates which offset a slightly lower
average construction work in progress balance during the period.

23

Margins

Chugach's assignable margins for the years ended December 31, 1996, 1995 and
1994 were as follows:

Period Net operating margins Nonoperating margins Assignable margins

1996 $ 8,613,814 $ 1,217,557 $ 9,831,371

1995 $ 8,401,775 $ 604,418 $ 9,006,193

1994 $ 15,177,462 $ (249,028) $14,928,434

Nonoperating margins increased in 1996 over 1995 primarily because of the
write-off of a failed submarine cable and other property in 1995. No similar
events took place in 1996. Additionally, more capital credits were received in
1996 than 1995. This increase was due mostly to the higher level of borrowing
from CoBank (capital credits received are based on patronage).

Nonoperating margins increased in 1995 over 1994 substantially due to a lower
amount of losses on property dispositions. Additionally, interest income was
higher due to generally higher interest rates in effect during the period and a
higher average cash balance available for investment. Also, allowance for funds
used during construction (AFUDC) increased for essentially the same reason noted
above for interest charged to construction.

Patronage Capital (Equity)

Consistent with the directives of the Equity Management Plan approved by the
Board of Directors, Chugach's customers and the APUC, Chugach's patronage
capital and total equity have shown steady growth, both in dollars and as a
percentage of capitalization. The following table summarizes Chugach's patronage
capital and total equity position since 1994:

1996 1995 1994
------------ ----------- -----------

Patronage capital at beginning of year . $ 95,421,358 $91,079,686 $80,802,620

Retirement of capital credits and estate
payments ............................ 4,567,212 4,664,521 4,651,368

Assignable margins ..................... 9,831,371 9,006,193 14,928,434
------------ ----------- -----------

Patronage capital at end of year ....... 100,685,517 95,421,358 91,079,686

Other equity ........................... 3,792,425 3,809,192 3,499,373
------------ ----------- -----------

Total equity ......... $104,477,942 $99,230,550 $94,579,059
------------ ----------- -----------

24

Chugach is in the process of updating its Equity Management Plan which will
address future rotation schedules for its retail and wholesale customers. When
complete, the plan will be submitted to the Board of Directors for approval.

The Indenture includes a covenant restricting the distribution of patronage
capital to members. Chugach cannot distribute patronage capital to members if 1)
an event of default exists or 2) the aggregate amount of patronage capital
distribution exceeds the sum of $7,000,000 plus 35 percent of the aggregate
assignable margins earned after December 31, 1990.

Times Interest Earned Ratio (TIER)

Alaska electric cooperatives generally set rates on the basis of TIER. TIER is
determined by dividing the sum of assignable margins plus long-term interest
expense (excluding capitalized interest) by long-term interest expense.
Beginning in 1989, Chugach's Board of Directors implemented an Equity Management
Plan which established a schedule for building Chugach's equity. The plan
requires that Chugach manage its business with a view to achieving a TIER of
1.25 or greater. Chugach's achieved TIERs for the past five years were as
follows:

Period TIER

1996 1.39
1995 1.34
1994 1.58
1993 1.27
1992 1.21

The Indenture requires Chugach to establish rates reasonably expected to yield
margins for interest (MFI) equal to at least 1.20 times total interest expense,
where margins for interest are defined as net margins plus interest charges and
accruals for federal income and other taxes imposed on income after deduction of
interest charges for such period, provided that the amount of nonoperating
margins included in assignable margins shall not exceed 50% of assignable
margins. Chugach's achieved MFIs for the past five years are not materially
different from the TIER calculations shown above.

The Indenture requires that Chugach achieve such a 1.20 ratio for any 12
consecutive month period of the last 18 months before issuing additional Bonds
(other than additional Bonds issued based on deposited cash and, under certain
circumstances, retirement of Bonds).

MATERIAL CHANGES IN FINANCIAL CONDITION

Chugach maintained a stable asset base from 1995 to 1996. Notable changes among
the components include: a decrease in restricted cash (margins from economy
energy sales or rate stabilization fund) caused by the return of these funds to
the ratepayers (through the fuel surcharge mechanism); an increase in restricted
construction funds due to the receipt of the

25

grant funds for the Southern Intertie Siting Study (from AIDEA); a decrease in
accounts receivable caused in large part by the timing of receipts in 1995 from
a large customer (i.e. two months billings were included in the December 31,
1995 balance); and a lower material and supplies inventory balance, which was
due to the majority of the components included in the balance at December 31,
1995 being capitalized to plant during 1996.

Reacquisitions of the Series A 2022 bonds that took place in 1996 represent the
major change in long-term obligations. As described in Item 1 (Refinancings),
Chugach replaced some of its Series A 2022 bonds with bonds under the CoBank
Supplemental Indenture. This also caused the decrease in accrued interest
payable as the new bonds were priced lower than the bonds they replaced.

Other notable changes include: a higher fuel payable balance caused by both the
timing of payments to the suppliers and the increase in fuel prices; the
increase in other liabilities due to the current portions of both the rate
stabilization fund and the submarine cable reserve fund being reclassified from
deferred credits and an additional accrual related to the Standard Steel
litigation (see Item 3); and the lower balance in the deferred credits caused by
the aforementioned reclassification and a reduction in the balance of the
original refinancing gain due to the bond reacquisitions (the bond
reacquisitions resulted in a higher pro rata recognition of the original
refinancing gain and refinancing costs deferred credits; these amounts were
combined with the transaction costs (premiums) and are included in a regulatory
asset which is being amortized over the life of the replacement debt).

LIQUIDITY AND CAPITAL RESOURCES

Chugach satisfies its operational and capital cash requirements through
internally generated funds, a $50 million line of credit with the National Rural
Utilities Cooperative Finance Corporation (NRUCFC) and a $35 million line of
credit with CoBank.

At December 31, 1996, $2.75 million was outstanding on the NRUCFC line which
carried an interest rate of 6.35%. The NRUCFC line of credit expires February
19, 1998. At December 31, 1996, no amount was outstanding on the CoBank line.
The CoBank line of credit expires August 1, 1997, but is expected to be renewed.

Chugach's capital improvement requirements are based on long-range plans and
other supporting studies and are executed through a five-year construction work
plan.

26

Five-year work plans are fully developed and updated every year. Shown below is
an estimate of capital expenditures for the years 1997 through 2001:

1997 $21.0 million

1998 $35.2 million

1999 $19.7 million

2000 $18.9 million

2001 $40.2 million

The following table summarizes Chugach's historical capital additions for the
years 1992 through 1996:

Historical Capital Improvement Additions
(000's omitted)

1996 1995 1994 1993 1992
------- ------- ------- ------- -------

Generation ...... $ 7,622 $ 4,978 $ 950 $ 2,754 $ 9,132

Transmission .... 9,661 4,497 6,038 4,528 611

Distribution .... 10,625 11,488 18,501 7,265 7,477

General and other 2,137 3,421 1,925 1,988 3,084
------- ------- ------- ------- -------

Total ... $30,045 $24,384 $27,414 $16,535 $20,304
------- ------- ------- ------- -------

In 1997 the Association will update the Equity Management Plan. Following
is a five-year summary of those anticipated capital credit retirements:

Year ending Wholesale Retail Total

1997 $1,206,000 $1,431,000 $2,637,000

1998 1,533,000 2,146,000 3,679,000

1999 0 1,766,000 1,766,000

2000 0 1,783,000 1,783,000

2001 0 1,823,000 1,823,000

27

Chugach's outstanding long-term obligations and maturity dates at December 31,
1996 are as follows:

1996

First mortgage bonds of 8.08% maturing in 2002 and 9.14% maturing in 2022,
with interest payable semiannually March 15 and September 15:
8.08% $ 34,554,000

9.14% 222,705,000

CoBank 8.95% bond maturing in 2002,
with interest payable monthly .......................................... 1,587,703

CoBank 7.76% bond maturing in 2005,
with interest payable monthly .......................................... 10,000,000

CoBank 6.35% (variable rate, repriced
monthly, currently 6.45%) bonds maturing
2022, with interest payable monthly ...................................... 45,000,000

Capital lease for computer equipment at
an interest rate of 9.10% with monthly
payments of approximately
$1,700 through July 1998 ............................................... 30,896
------------

Total long-term obligations ........................................ 313,877,599

Less current installments ................................................ 5,971,752

Long-term obligations, excluding
current installments ............................................. $307,905,847
------------

Sinking Fund Principal maturities
requirements
Year ending First mortgage
December 31 bonds Total

CoBank
mortgage bonds Capital leases

1997 $ 5,706,000 $ 234,856 $ 30,896 $ 5,971,752

1998 5,643,000 256,346 - 5,899,346

1999 5,809,000 279,802 - 6,088,802

2000 6,067,000 305,405 - 6,372,405

2001 6,097,000 333,350 - 6,430,350

Thereafter 227,937,000 55,177,944 - 283,114,944
------------ ---------- --------- -----------

$ 257,259,000 $ 56,587,703 $ 30,896 $ 313,877,599
------------ ---------- ------- -----------

28

On September 19, 1991, Chugach issued $314 million of First Mortgage Bonds, 1991
Series A Bonds, for purposes of repaying existing debt to the FFB and the REA.
Pursuant to Section 311 of the Rural Electrification Act, Chugach was permitted
to prepay the REA debt at a discounted rate of approximately 9%, resulting in a
discount of approximately $45 million. The gain on prepayment was deferred at
December 31, 1991 because Chugach expected to pass the benefit of the gain
through to ratepayers prospectively in the form of lower rates. In April 1992,
Chugach received formal approval from the APUC to defer the gain and amortize it
into income over the life of the bonds. Annual amortization for 1996, 1995 and
1994 was approximately $2 million.

Chugach has negotiated a supplemental indenture (Third Supplemental Indenture of
Trust) with CoBank for up to $80 million in future bond financing. At December
31, 1996, Chugach had bonds in the amount of $56.6 million outstanding under
this financing arrangement. This balance is comprised of a $1.6 million bond
which carries an interest rate of 8.95% maturing in 2002, a $10 million bond
with a 7.76% interest rate, due in 2005, a $21.5 million bond (CoBank 3),
currently priced at 6.45% (repriced monthly) and a $23.5 million bond (CoBank 4)
currently priced at 6.45% (also repriced monthly). Principal payments on the
CoBank 3 and 4 bonds commence in 2003 and continue through 2022. In addition,
Chugach has negotiated a similar supplemental indenture with NRUCFC, also for
$80 million (Fifth Supplemental Indenture of Trust). At December 31, 1996, no
amounts were outstanding under this financing vehicle.

Since December 1995, Chugach has reacquired $39.295 million of its Series A 2022
bonds. This strategy has been in response to the favorable long-term interest
rate environment. Chugach will continue to explore reacquisition of its Series A
2022 bonds if market conditions warrant such action. Besides these reacquisition
transactions (and any similar future refinancings) Chugach does not anticipate
issuance of long-term debt in the next 12 months.

Chugach management expects that cash flows from operations and external funding
sources will be sufficient to cover operational and capital funding requirements
in 1997 and thereafter.

Impact of Recent Accounting Pronouncements

In 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 121 "Accounting for Impairment of Long Lived Assets and
Long Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No. 121 addresses
accounting for the impairment of long-lived assets, identifiable intangibles and
goodwill related to those assets. It also provides guidance for recognition and
measurement of impairment losses. SFAS No. 121 is effective for fiscal years
beginning after December 15, 1995, thus, Chugach implemented the new standard in
1996. The statement did not have a material impact on Chugach's financial
condition or results of operations. On an ongoing basis, Chugach assesses its
regulatory assets to ensure that impairment has not occurred.

29

ENVIRONMENTAL MATTERS

Standard Steel Salvage Yard Site

A cost recovery action was filed in Federal District Court on December 27, 1991
by the United States against Chugach and six other Potentially Responsible
Parties (PRPs) seeking reimbursement of removal and response action costs (Past
Response Costs) incurred by US EPA at the Standard Steel and Metals Salvage Yard
Superfund Site in Anchorage, Alaska (Site). The six other PRPs named in the
action are the Alaska Railroad, Westinghouse Electric Corporation, Sears Roebuck
and Co., Montgomery Ward & Co., J.C. Penney Company, Inc.
and Bridgestone/Firestone, Inc.

On September 23, 1992, Chugach entered into an Administrative Order on Consent
(AOC) with the EPA to perform a remedial investigation and feasibility study
(RI/FS) for the Site. The RI/FS was completed in 1996 and, based on the results
of the RI/FS, EPA selected the remedy of soil stabilization and solidification
(S/S) for cleanup of the Site and documented its selection in a Record of
Decision issued in July, 1996.

In December 1996, a partial consent decree (Partial Consent Decree) settling the
cost recovery action was entered by the Federal District Court. Under the
Partial Consent Decree the PRPs and the United States settled the following
costs associated with the Site: Past Response Costs incurred by EPA through
December 1991; RI/FS costs; drum and scrap removal costs; past enforcement costs
incurred by the Department of Justice (DOJ) through December 11, 1996; and EPA
oversight costs related to the RI/FS.

The settlement under the Partial Consent Decree allocates 14.37% of the above
costs to Chugach. Chugach has paid its share of Past Response Costs and DOJ
enforcement costs under the Partial Consent Decree. The total estimated cost of
the settlement under the Partial Consent Decree is approximately $6,800,000 of
which Chugach's share will be approximately $977,000. These amounts are
estimates because RI/FS expenses and EPA oversight costs are not yet fully known
and, therefore, the total amount to be paid by Chugach under the Partial Consent
Decree is not known with certainty.

The Partial Consent Decree does not settle Chugach's liability for future costs
of designing and performing the S/S remedy (Future Costs). Although the Partial
Consent Decree does not settle Chugach's or the other private PRP's liability
for Future Costs, the Partial Consent Decree does bind the federal PRPs and the
Alaska Railroad to pay an aggregate share of 64% of Future Costs. Chugach and
the five other private PRPs have reached a separate settlement to divide the
remaining 36% of Future Costs among themselves. Under that settlement, Chugach's
percentage share of liability for Future Costs will equal 15.39%.

Chugach's agreement to perform remedial design and remedial action (RD/RA) at
the Site will be memorialized in a new Consent Decree (RD/RA Decree) that is
being negotiated between the private PRPs and the United States. The RD/RA
Decree is expected to contain the scope

30

of work for the RD/RA as well as settlement terms, including EPA's covenant not
to sue Chugach and the other private PRPs for Future Costs once the RD/RA is
completed.

The estimate of Future Costs of RD/RA at the Site, as determined by
Chugach's consultants based on cost estimates contained in the FS report, ranges
from $5,231,200 to $6,619,800. The RD/RA Decree contains a cost estimate, as
determined by EPA and including a 50% cost overrun contingency, of $8,400,000.
Chugach's share of these estimated RD/RA expenses would range from approximately
$805,082 to $1,292,760. These amounts are only estimates, however, the actual,
full scope of the S/S cleanup at the Site will not be known, and the projected
costs associated with the remedy cannot be refined, until EPA approves remedial
design documents.

Under the RD/RA Decree, Chugach and the other PRPs will be required to reimburse
the United States for EPA oversight costs and DOJ enforcement costs relating to
the RD/RA. Those costs have not been estimated by the United States and are
unknown at this time. Therefore, the total amount paid by Chugach under the
RD/RA Decree cannot be predicted with certainty. In addition, the RD/RA Decree
contains reservation of rights allowing EPA to seek further response actions and
payments from the PRPs under certain circumstances, including costs associated
with alleged natural resource damages. At this time, no claims have been made
pertaining to alleged natural resource damages and no prediction can be made
whether EPA will request activities through its reservation of rights under
RD/RA Decree. Finally, it is uncertain whether Chugach and the other PRPs will
enter into the RD/RA Decree with EPA until negotiations are completed.

Four of Chugach's insurance carriers have agreed under a reservation of rights
to pay, and currently are paying, Chugach's costs of defense for the Site. The
carriers have reserved their rights regarding indemnification of Chugach for
response costs. Management believes that all past and future costs incurred for
response, removal, investigation and cleanup of the Site would be fully
recoverable in rates or covered by insurance and therefore would have no impact
on Chugach's financial condition or results of operations.

OUTLOOK

Nationwide, the electric utility industry is entering a period of unprecedented
competition. Electric utilities in Alaska will not be immune from these
competitive forces. Chugach has taken several steps to be more effectively
positioned to meet the challenge of a competitive market for electricity.

Chugach participates in national benchmarking projects to improve system
operations. Recent studies have focused on line extensions, field services, new
service costs, meter reading and purchasing. As a result of these studies,
Chugach has been able to make these processes more efficient which has led to
lower costs. The Association is committed to continue reviewing all areas of its
operations and to serve its customers in a way that maintains higher reliability
while containing the cost of electricity.

31

In addition to participation in benchmarking studies, Chugach has also
implemented strategic alliances in the purchasing and warehousing areas. These
alliances are designed to improve efficiency and thus, contribute to lower
operating costs. Chugach will continue to explore other areas for strategic
alliance opportunities.

The company is also creating a new strategic planning process to address how the
cooperative can prepare for competition. In 1995, the Strategic Planning Group
(a team of employees from different operational areas) was created. This group
has evolved into four separate teams comprised of Strategic Planning Group
employees, executive managers and members of the board. The teams include Retail
Strategy, Wholesale Strategy, Corporate Direction and Organization. The Retail
Strategy, Wholesale Strategy and Corporate Direction teams are working on
development of the key strategies in their respective focus area. Once
developed, the Organization team will combine these strategies and develop a
detailed action plan for preparing Chugach for the future and competition.

32

Item 8 - Financial Statements and Supplementary Data

December 31, 1996 and 1995

Independent Auditors' Report

The Board of Directors
Chugach Electric Association, Inc.:

We have audited the accompanying balance sheets of Chugach Electric Association,
Inc. as of December 31, 1996 and 1995, and the related statements of revenues,
expenses and patronage capital and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Association's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chugach Electric Association,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.

Anchorage, Alaska /s/ KPMG Peat Marwick LLP
March 5, 1997

33

CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
December 31, 1996 and 1995

Assets 1996 1995
------------ ------------

Utility plant (notes 2 and 14):

Electric plant in service ................ $615,464,060 $587,877,992

Construction work in progress ............ 19,826,957 27,068,964
------------ ------------

635,291,017 614,946,956

Less accumulated depreciation ............ 215,411,223 196,677,723
------------ ------------

Net utility plant ...... 419,879,794 418,269,233
------------ ------------

Other property and investments, at cost:

Nonutility property ...................... 3,550 3,550

Investments in associated organizations
(note 3) .............................. 7,647,189 7,513,807

Restricted cash - margins from Economy
Energy Sales, all repurchase agreements 1,599,239 3,026,634
------------ ------------

9,249,978 10,543,991
------------ ------------

Current assets:

Cash and cash equivalents, including
repurchase agreements of $6,216,073 in
1996 and $6,360,452 in 1995 ........... 6,226,365 6,371,687

Cash - restricted construction funds ..... 1,371,386 --

Special deposits ......................... 89,232 97,789

Accounts receivable, less provision for
doubtful accounts of $367,085 in 1996
and $436,083 in 1995 .................. 15,369,883 17,108,823

Materials and supplies, at average cost .. 16,187,592 18,498,783

Prepayments .............................. 694,257 675,117

Other current assets ..................... 294,380 412,209
------------ ------------

Total current assets ..... 40,233,095 43,164,408
------------ ------------

Deferred charges (notes 10 and 16) ............ 13,932,109 12,812,691
------------ ------------

$483,294,976 $484,790,323
------------ ------------

See accompanying notes to financial statements.

34

CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets, Continued
December 31, 1996 and 1995

Liabilities 1996 1995
------------ ------------

Equities and margins (note 12):

Memberships ............................... $ 812,748 $ 765,123

Patronage capital (note 4) ................ 100,685,517 95,421,358

Other (note 5) ............................ 2,979,677 3,044,069
------------ ------------

104,477,942 99,230,550
------------ ------------

Long-term obligations, excluding current
installments (notes 6 and 7):
First mortgage bonds payable .............. 251,553,000 294,054,000

National Bank for Cooperatives bonds
payable .................................. 56,352,847 11,587,703
------------ ------------

307,905,847 305,641,703
------------ ------------

Current liabilities:

Bank overdraft ............................ 806,546 492,204

Notes payable (note 6) .................... 2,750,000 8,000,000

Current installments of long-term debt and
capital leases (notes 6 and 7) ......... 5,971,752 5,665,749

Accounts payable .......................... 5,178,161 6,659,477

Consumer deposits ......................... 1,066,906 1,119,056

Accrued interest .......................... 7,076,388 8,052,786

Salaries, wages and benefits .............. 3,583,422 3,772,608

Fuel ...................................... 6,047,574 2,289,776

Other (note 16) ........................... 5,012,191 2,624,341
------------ ------------

Total current liabilities .. 37,492,940 38,675,997
------------ ------------

Deferred credits (note 13) ..................... 33,418,247 41,242,073
------------ ------------

$483,294,976 $484,790,323
------------ ------------

See accompanying notes to financial statements.

35

CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage
Capital Years ended December 31, 1996, 1995
and 1994

1996 1995 1994
------------- ------------- -------------

Operating revenues ................... $ 134,876,668 $ 129,379,308 $ 130,912,171
------------- ------------- -------------

Operating expenses:

Production ...................... 37,066,444 31,533,567 26,947,797

Purchased power ................. 10,024,483 10,136,623 10,311,046

Transmission .................... 3,667,039 3,460,823 3,112,527

Distribution .................... 8,789,683 10,008,020 10,036,600

Consumer accounts ............... 6,978,856 7,089,847 6,431,363

Administrative, general and other 13,713,690 14,395,125 15,431,254

Depreciation .................... 20,673,609 19,296,356 17,881,406
------------- ------------- -------------

Total operating expenses 100,913,804 95,920,361 90,151,993
------------- ------------- -------------

Interest:

On long-term debt ............... 25,029,257 25,559,725 25,876,104

Charged to construction - credit (616,090) (1,114,928) (704,813)

On short-term debt .............. 935,883 612,375 411,425
------------- ------------- -------------

Net interest ............ 25,349,050 25,057,172 25,582,716
------------- ------------- -------------

Net operating margins ... 8,613,814 8,401,775 15,177,462

Nonoperating margins:

Interest income ................. 695,699 730,041 589,537

Other ........................... 566,908 351,586 91,552

Property loss ................... (45,050) (477,209) (930,117)
------------- ------------- -------------

Assignable margins ....... 9,831,371 9,006,193 14,928,434

Patronage capital at beginning of year 95,421,358 91,079,686 80,802,620

Retirement of capital credits and
estate payments ................... (4,567,212) (4,664,521) (4,651,368)
------------- ------------- -------------

Patronage capital at end of year ..... $ 100,685,517 $ 95,421,358 $ 91,079,686
------------- ------------- -------------

See accompanying notes to financial statements.

36

CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994

1996 1995 1994

------------ ------------ ------------

Cash flows from operating activities:
Assignable margins ........................................................ $ 9,831,371 $ 9,006,193 $ 14,928,434
------------ ------------ ------------

Adjustments to reconcile assignable margins to net cash provided by operating
activities:
Depreciation and amortization ............................................. 23,221,162 21,846,611 19,963,165

Capitalized interest (AFUDC/IDC) .......................................... (809,302) (1,354,273) (825,500)

Property losses and obsolete inventory write-off .......................... 45,050 477,434 2,110,125

Other ..................................................................... (265,643) 343,806 369,791

Changes in assets and liabilities:
(Increase) decrease in assets:
Special deposits ..................................................... 8,557 (44,332) 51,702

Accounts receivable .................................................. 1,738,940 (3,492,435) 814,163

Notes receivable ..................................................... -- 2,533 28,434

Prepayments .......................................................... (19,140) 194,790 (272,084)

Materials and supplies, net .......................................... 2,311,191 1,527,094 (1,522,925)

Deferred charges ..................................................... (4,581,795) (2,222,963) (3,577,693)

Other ................................................................ 117,829 (14,740) 3,640

Increase (decrease) in liabilities:
Accounts payable ..................................................... (1,481,316) 3,125,594 (163,379)

Accrued interest ..................................................... (976,398) (136,434) (13,428)

Deferred credits ..................................................... (8,023,874) (3,274,768) (1,837,226)

Consumer deposits, net ............................................... (52,150) (73,789) (18,281)

Other ................................................................ 5,956,463 389,099 1,789,648
------------ ------------ ------------

Total adjustments ............................................... 17,189,574 17,293,227 16,900,152
------------ ------------ ------------

Net cash provided by operating
activities .................................................... 27,020,945 26,299,420 31,828,586
------------ ------------ ------------

Cash flows from investing activities:
Extension and replacement of plant ........................................ (20,605,093) (22,058,887) (21,733,836)

Decrease in investments in associated organizations ....................... 132,261 267,393 229,897
------------ ------------ ------------

Net cash (used) in investing activities ......................... (20,472,832) (21,791,494) (21,503,939)
------------ ------------ ------------

Cash flows from financing activities:
Net increase (decrease) in bank overdraft ................................. 314,342 (635,111) (1,534,005)

Transfer to restricted construction funds ................................. (1,371,386) -- --

Net increase (decrease) in notes payable .................................. (5,250,000) 500,000 (2,500,000)

Proceeds from long-term debt .............................................. 45,000,000 10,000,000 --

Repayments of long-term debt .............................................. (42,429,853) (8,312,527) (4,185,104)

Memberships and donations received (refunded) ............................. (16,768) 309,821 212,272

Retirement of patronage capital ........................................... (4,567,212) (4,664,521) (4,651,368)

Increase in (refunds) and transfers of consumer advances
for construction ........................................................ 1,627,442 (1,309,828) 465,382
------------ ------------ ------------

Net cash used by financing
activities ................................................... (6,693,435) (4,112,166) (12,192,823)
------------ ------------ ------------

Net increase (decrease) in cash and cash
equivalents .................................................. (145,322) 395,760 (1,868,176)

Cash and cash equivalents at beginning of year ................................. 6,371,687 5,975,927 7,844,103
------------ ------------ ------------

Cash and cash equivalents at end of year ....................................... $ 6,226,365 $ 6,371,687 $ 5,975,927
------------ ------------ ------------

Supplemental disclosure of cash flow information - ............................. $ 26,325,449 $ 25,193,606 $ 25,596,144
------------ ------------ ------------
interest expense paid, net of amounts capitalized

See accompanying notes to financial statements.

37

CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements

December 31, 1996 and 1995

(1) Description of Business and Summary of Significant Accounting Policies
Description of Business

Chugach Electric Association, Inc. (Association or Chugach) is the
largest electric utility in Alaska. The Association is engaged in the
generation, transmission and distribution of electricity to directly
served retail customers in the Anchorage and upper Kenai Peninsula areas.
Through an interconnected regional electrical system, Chugach's power
flows throughout Alaska's Railbelt, a 400-mile-long area stretching from
the coastline of the southern Kenai Peninsula to the interior of the
state, including Alaska's largest cities, Anchorage and Fairbanks.

Chugach also supplies much of the power requirements of three wholesale
customers, Matanuska Electric Association (MEA), Homer Electric
Association (Homer) and the City of Seward (Seward).

The Association operates on a not-for-profit basis and, accordingly,
seeks only to generate revenues sufficient to pay operating and
maintenance costs, the cost of purchased power, capital expenditures,
depreciation, and principal and interest on all indebtedness and to
provide for the establishment of reasonable margins and reserves. The
Association is subject to the regulatory authority of the Alaska Public
Utilities Commission (APUC).

Management Estimates

In preparing the financial statements, management of the Association is
required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the balance sheet and
revenues and expenses for the period. Actual results could differ from
those estimates.

Summary of Significant Accounting Policies

The accounting records of the Association conform to the Uniform System
of Accounts as prescribed by the Federal Energy Regulatory Commission.
The Association meets the criteria, and accordingly, follows the
accounting and reporting requirements of Statement of Financial
Accounting Standards No. 71, Accounting for the Effects of Certain Types
of Regulation (SFAS 71). Revenues in excess of current period costs (net
operating margins and nonoperating margins) in any year are designated on
the Association's statement of revenues and expenses as assignable
margins. Retained assignable margins are designated on the Association's
balance sheet as patronage capital, which is assigned to each member on
the basis of patronage. This patronage capital constitutes the principal
equity of the Association.

The Association performs an annual evaluation of the requirements of SFAS
71 and related exposures.

Reclassifications

Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to the 1996 presentation.

38
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

Plant Additions and Retirements

Additions to electric plant in service are recorded at original cost of
contracted services, direct labor and materials, and indirect overhead
charges. For property replaced or retired, the average unit cost of the
property unit, plus removal cost, less salvage, is charged to accumulated
provision for depreciation. The cost of replacement is added to electric
plant.

The Association implemented Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long Lived Assets and Long
Lived Assets to be Disposed Of in 1996. There was no material impact on
the financial statements.

In 1994 the Association completed a feasibility study concerning the
desirability of implementing Smaller Retirement Unit accounting. The
Association implemented Smaller Retirement Unit accounting in 1995.

Smaller Retirement Unit accounting allows for the capitalization of
generation major component costs which would have been expensed as
maintenance under the previous capitalization methodology.

Operating Revenues

Operating revenues are based on billing rates authorized by the APUC
which are applied to customers' usage of electricity. Included in
operating revenue are billings rendered to customers adjusted for
differences in meter read dates from year to year. The Association's
tariffs include provisions for the flow through of gas cost increases
pursuant to existing gas supply contracts.

During 1988 the Association commenced some sales of energy at a price
which contemplates the future replacement cost of the gas used to
generate such energy, referred to as Economy Energy Sales. Pursuant to an
order by the APUC, 80% of the margins from Economy Energy Sales is
deferred to mitigate future gas price increases.

Return of these deferred margins, plus accrued interest earnings, to
ratepayers began in June 1996, when the transition from lower priced
natural gas to higher priced natural gas occurred. These margins will be
returned, over a twelve month period, in the form of a credit to the Fuel
Cost Recovery Adjustment (FCRA) factor.

In August 1996, the Board of Directors approved a petition to the Alaska
Public Utilities Commission (APUC) to withdraw from the Simplified Rate
Filing (SRF) process. This petition was submitted to the APUC as part of
Docket U-96-37, which was opened to resolve rate disputes with Chugach's
wholesale customers. Interim-refundable rates for wholesale customers
were ordered pending resolution of the docket. In February 1997, the APUC
approved a Settlement Agreement between Chugach and its wholesale
customers resolving issues in the docket and establishing permanent
rates. As part of the APUC order, the Association is required to file
Cost of Service and Revenue Requirement Studies. Chugach will file these
studies in March 1997. As part of the Settlement Agreement, the wholesale
customers agreed not to oppose Chugach's withdrawal from SRF. The APUC
orders have not addressed Chugach's withdrawal from SRF but Chugach
anticipates approval of its petition. Future rate changes will be applied
for through general rate case and other normal APUC procedures.

39
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

Investments in Associated Organizations

Investments in associated organizations are carried at cost.

In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which becomes effective for
fiscal years beginning after December 15, 1993. Initial adoption is
required to be reflected prospectively. The statement requires entities
to classify debt and equity securities as held-to-maturity securities,
trading securities or available-for-sale securities. Held-to-maturity
securities are to be reported at amortized cost. Trading securities are
to be reported at fair value, with unrealized gains and losses included
in earnings. Available-for-sale securities are to be reported at fair
value, with unrealized gains and losses excluded from earnings and
reported in a separate component of patronage capital. Chugach adopted
the statement in 1994 but its impact was not significant as all
investments were classified as held-to-maturity. The Association has the
intent and ability to hold these investments to maturity.

Deferred Charges and Credits

Deferred charges, representing regulatory assets, are amortized to
operating expense over the period allowed for rate-making purposes,
generally five years.

Nonrefundable contributions in aid of construction are credited to the
associated cost of construction of property units. Refundable
contributions in aid of construction are held in deferred credits pending
their return or other disposition.

Depreciation and Amortization

Depreciation and amortization rates have been applied on a straight-line
basis and at December 31, 1996 are as follows:

Rate (%)

Steam production plant 2.68 - 2.95

Hydraulic production plant 1.33 - 2.24

Other production plant 3.46 - 7.07

Transmission plant 1.85 - 5.00

Distribution plant 2.10 - 6.67

General plant 2.22 - 25.00

Other 2.75

In 1994, the first phase of a three part phase-in of new depreciation
rates occurred as APUC approved rates for submarine cables (Transmission
plant) were implemented. The impact of utilization of these new
depreciation rates on the financial statements was not material. In 1995,
the balance of Transmission plant, all of Distribution plant and General
plant rates were implemented. In 1996, new Generation plant depreciation
rates were implemented.

40
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

Capitalized Interest

Allowance for funds used during construction and interest charged to
construction - credit are the estimated costs during the period of
construction of equity and borrowed funds used for construction purposes.
The Association capitalized such funds at the average rate (adjusted
monthly) of 8.6% during 1996, 8.2% during 1995 and 7.6% during 1994.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Association considers
all highly liquid debt instruments with a maturity of three months or
less upon acquisition by the Association (excluding restricted cash and
investments) to be cash equivalents.

Fair Value of Financial Instruments

Statement of Financial Accounting Standards 107, Disclosures About the
Fair Value of Financial Instruments, requires disclosure of the fair
value of certain on and off balance sheet financial instruments for which
it is practicable to estimate that value. The following methods are used
to estimate the fair value of financial instruments:

Cash and cash equivalents and restricted cash - the carrying amount
approximates fair value because of the short maturity of those
instruments.

Investments in associated organizations - the carrying amount
approximates fair value because of limited marketability and
current market interest rates which approximate interest rates on
the investments.

Consumer deposits - the carrying amount approximates fair value
because of the short refunding term.

Notes payable - the carrying amount approximates fair value because
of the short maturity of the notes.

Long-term obligations - the fair value is estimated based on the
quoted market price for same or similar issues (note 7).

41
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

2) Utility Plant Summary

Major classes of electric plant as of December 31 are as follows:

1996 1995
---- ----

Electric plant in service:
Steam production plant $ 60,392,869 $ 60,392,869

Hydraulic production plant 8,798,695 8,766,762

Other production plant 107,278,076 107,222,121

Transmission plant 189,961,660 189,792,544

Distribution plant 144,939,571 137,233,348

General plant 61,174,312 59,326,923

Unclassified electric plant in service 37,533,642 19,814,513

Equipment under capital leases 674,323 618,000

Other 4,710,912 4,710,912
------------ ------------

Total electric plant in service 615,464,060 587,877,992

Construction work in progress 19,826,957 27,068,964
----------- -----------

Total electric plant in service and
construction work in progress $ 635,291,017 $ 614,946,956
----------- -----------

Depreciation of unclassified electric plant in service has been included
in functional plant depreciation accounts in accordance with the
anticipated eventual classification of the plant investment.

(3) Investments in Associated Organizations

Investments in associated organizations include the following at December
31:

1996 1995
---- ----

National Rural Utilities Cooperative Finance
Corporation (NRUCFC) $ 6,095,980 $ 6,095,980

National Bank for Cooperatives (CoBank) 1,352,010 1,253,223

NRUCFC capital term certificates 29,120 16,317

Other 170,079 148,287
--------- ---------

$ 7,647,189 $ 7,513,807
--------- ---------

42
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

The Farm Credit Administration, CoBank's federal regulators, requires
minimum capital adequacy standards for all Farm Credit System
institutions. CoBank's loan agreements require, as a condition of the
extension of credit, that an equity ownership position be established by
all borrowers. The Association's investment in NRUCFC similarly was
required by its financing arrangements with NRUCFC. The investments in
NRUCFC and CoBank mature at various dates through 2020 and bear interest
at rates ranging from 3% to 5%.

(4) Patronage Capital

The Association has approved an Equity Management Plan which established
in general, a ten-year (for wholesale customers) and twenty-year (for
retail customers) capital credit retirement of patronage capital, based
on the members' proportionate contribution to Association assignable
margins. At December 31, 1996, out of the total of $100,685,517 patronage
capital, the Association had assigned $90,854,146 of such patronage
capital (net of capital credit retirements). Approval of actual capital
credit retirements is at the discretion of the Association's Board of
Directors. In November 1995, the Board of Directors approved retirement
of wholesale capital credits for 1985 resulting in an authorized
distribution of $4,535,362. The Board of Directors elected to not
authorize a retail capital credit retirement for 1995. In November 1996,
the Board of Directors approved the retirement of $1,868,785 of retail
capital credits representing 50 percent of the 1983 retail patronage. In
December 1996, the Board of Directors authorized the retirement of
$2,135,078 of wholesale capital credits from 1986 resulting in an
authorized 1996 distribution of $4,003,863. A special return of wholesale
capital credits in the amount of $392,136 was authorized by the Board of
Directors under the terms of APUC Docket U-92-10.

In 1997 the Association will update the Equity Management Plan. Following
is a five-year summary of those anticipated capital credit retirements:

Year ending Wholesale Retail Total

1997 $1,206,000 $1,431,000 $2,637,000

1998 1,533,000 2,146,000 3,679,000

1999 0 1,766,000 1,766,000

2000 0 1,783,000 1,783,000

2001 0 1,823,000 1,823,000

43
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

(5) Other Equities

A summary of other equities at December 31 follows:

1996 1995
---- ----

Nonoperating margins, prior to 1967 $ 23,625 $ 23,625

Donated capital 183,580 203,478

Unredeemed capital credit retirement 2,772,472 2,816,966
---------- ----------

$ 2,979,677 $ 3,044,069
---------- ----------

(6) Long-term Obligations

Long-term obligations at December 31 are as follows:

1996 1995
------------ ------------

First mortgage bonds of 8.08% maturing in 2002 and 9.14% maturing in 2022,
with interest payable semiannually March 15 and September 15:
8.08% $ 34,554,000 $ 39,873,000

9.14% 222,705,000 259,500,000

CoBank 8.95% bond maturing in 2002,
with interest payable monthly .......................................... 1,587,703 1,802,871

CoBank 7.76% bond maturing in 2005,
with interest payable monthly .......................................... 10,000,000 10,000,000

CoBank 6.35% (variable rate, repriced
monthly) bonds maturing 2022, with
interest payable monthly ................................................. 45,000,000 --

Capital lease for computer equipment at
an interest rate of 9.10% with monthly
payments of approximately
$1,700 through July 1998 ............................................... 30,896 131,581
------------ ------------

Total long-term obligations ........................................ 313,877,599 311,307,452

Less current installments ................................................ 5,971,752 5,665,749
------------ ------------

Long-term obligations, excluding
current installments ............................................. $307,905,847 $305,641,703
------------ ------------

Substantially all assets are pledged as collateral for the long-term
obligations.

44
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

Maturities of Long-term Obligations

Long-term obligations at December 31, 1996 mature as follows:

Sinking Fund Principal maturities
requirements
Year ending First mortgage
December 31 bonds Total

CoBank
mortgage bonds Capital leases

1997 $ 5,706,000 $ 234,856 $ 30,896 $ 5,971,752

1998 5,643,000 256,346 - 5,899,346

1999 5,809,000 279,802 - 6,088,802

2000 6,067,000 305,405 - 6,372,405

2001 6,097,000 333,350 - 6,430,350

Thereafter 227,937,000 55,177,944 - 283,114,944
------------ ---------- --------- -----------

$ 257,259,000 $ 56,587,703 $ 30,896 $ 313,877,599
------------ ---------- ------- -----------

Lines of Credit

The Association had an annual line of credit of $35,000,000 in 1996 and
1995 available with CoBank. The CoBank line of credit expires August 1,
1997 but is expected to be renewed. At December 31, 1996, there was no
outstanding balance on this line of credit. At December 31, 1995,
$3,000,000 was outstanding at an interest rate of 6.35%. In addition, the
Association had an annual line of credit of $50,000,000 available at
December 31, 1996 and 1995 with NRUCFC. At December 31, 1996, $2,750,000
was outstanding at an interest rate of 6.35%. At December 31, 1995,
$5,000,000 was outstanding at an interest rate of 6.35%. The NRUCFC line
of credit expires February 19, 1998.

Refinancing

On September 19, 1991, Chugach issued $314,000,000 of First Mortgage
Bonds, 1991 Series A (Bonds), for purposes of repaying existing debt to
the Federal Financing Bank and the Rural Electrification Administration
(now Rural Utilities Services). Pursuant to Section 311 of the Rural
Electrification Act, Chugach was permitted to prepay the REA debt at a
discounted rate of approximately 9%, resulting in a discount of
approximately $45,000,000 (note 13).

The bonds maturing in 2002 (Series A 2002 Bonds) are subject to annual
sinking fund redemption at 100% of the principal amount thereof which
commenced March 15, 1993. The bonds maturing in 2022 (Series A 2022
Bonds) are subject to annual sinking fund redemption at 100% of the
principal amount thereof commencing March 15, 2003. The Series A 2002
Bonds are not subject to optional redemption. The Series A 2022 Bonds

45
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

are redeemable at the option of Chugach on any interest payment date at
an initial redemption price commencing in 2002 of 109.140% of the
principal amount thereof declining ratably to par on March 15, 2012. The
Bonds are secured by a first lien on substantially all of Chugach's
assets. The Indenture prohibits outstanding short-term indebtedness
(other than trade payables) in excess of 15% of Chugach's net utility
plant and limits certain cash investments to specific securities.

In December 1995, Chugach reacquired $2,500,000 of the Series A 2022
Bonds at a premium of 116.8795. Total transaction cost, including accrued
interest and premium, was $2,982,286.

In February 1996, Chugach reacquired $2,445,000 of the Series A 2022
Bonds at a premium of 117.5000. Total transaction cost, including accrued
interest and premium, was $2,970,334.

In March 1996, Chugach reacquired $13,150,000 of the Series A 2022 Bonds
at a premium of 115.3750. Total transaction cost, including accrued
interest and premium, was $15,762,752.

In June 1996, Chugach reacquired $20,000,000 of the Series A 2022 Bonds
at a premium of 109.375. Total transaction costs, including accrued
interest and premium was $22,347,233.

In September 1996, Chugach reacquired $1,200,000 of the Series A 2022
Bonds at a premium of 108.528. Total transaction cost, including accrued
interest and premium, was $1,356,567.

(7) Fair Value of Financial Instruments

The estimated fair values (in thousands) of the long-term obligations
included in the financial statements at December 31 are as follows:

1996 1995
---- ----

Carrying Fair Carrying Fair
Value Value Value Value

Long-term obligations
(including current installments) $313,878 $348,273 $311,307 $365,663

Fair value estimates are dependent upon subjective assumptions and
involve significant uncertainties resulting in variability in estimates
with changes in assumptions.

46
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

(8) Minimum Take Provision

The Association previously contracted to purchase a minimum amount of
natural gas each year through May 1996. The daily purchase requirement is
45,000 MCF at a price of $0.40 per MCF (adjusted pursuant to contract
provisions). Subsequent to May 1996, all gas contracts are requirements
contracts with no specified minimum purchase requirement. These contracts
extend to approximately the year 2015 or 2025 under certain conditions.
Management believes all gas purchase expenses will be fully recovered in
rates. A liability under the minimum take provisions of the purchase
contracts was not required at December 31, 1996.

(9) Employee Benefits

Pension benefits for substantially all employees are provided through the
Alaska Electrical Trust and Alaska Hotel, Restaurant and Camp Employees
Health and Welfare Trust Funds (union employees) and the National Rural
Electric Cooperative Association (NRECA) Retirement and Security Program
(nonunion employees). The Association makes annual contributions to the
plans equal to the amounts accrued for pension expense. For the union
plans, the Association pays a contractual hourly amount per union
employee which is based on total plan costs for all employees of all
employers participating in the plan. In these master, multiple-employer
plans, the accumulated benefits and plan assets are not determined or
allocated separately to the individual employer. Pension costs for union
plans were approximately $1,889,000 in 1996, $1,860,000 in 1995 and
$1,805,000 in 1994. For the years ended December 31, 1993 and 1992, NRECA
did not require contributions to the plan; consequently, no pension cost
was incurred. The moratorium was lifted in 1994 and $178,000 was
contributed to the NRECA pension plan. In 1995 the moratorium was in
effect from May through December. From January through April 1995, a
total of $484,000 was contributed to the NRECA plan. In 1996 the
moratorium was in effect from January through September. From October
through December 1996, $266,000 was contributed to the NRECA plan.

(10) Deferred Charges

Deferred charges consisted of the following at December 31:

1996 1995
---- ----

Debt issuance and reacquisition costs $ 4,220,403 $ 4,110,684

Refurbishment of transmission equipment 290,123 299,383

Computer software and conversion 4,702,932 5,633,811

Studies 1,021,820 901,710

Fuel supply negotiations 437,758 460,474

Major overhaul of steam generating unit 1,042,624 1,247,730

Other (note 16) 2,216,449 158,899
---------- ----------

$ 13,932,109 $ 12,812,691
---------- ----------

(11) Income Taxes

The Association is exempt from federal income taxes under the provisions
of Section 501(c)(12) of the Internal Revenue Code.

47
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

(12) Return of Capital

Under provisions of its long-term debt agreements, the Association is not
directly or indirectly permitted to declare or pay any dividend or make
any payments, distributions or retirements of patronage capital to
members if an event of default exists with respect to its bonds (event of
default), if payment of such distribution would result in an event of
default, or if the aggregate amount expended for all distributions on and
after September 26, 1991 exceeds the sum of $7,000,000 plus 35% of the
aggregate assignable margins (whether or not such assignable margins have
since been allocated to members) of the Association earned after December
31, 1990 (or, in the case such aggregate shall be a deficit, minus 100%
of such deficit). The Association may declare and make distributions at
any time if, after giving effect thereto, the Association's aggregate
margins and equities as of the end of the most recent fiscal quarter
would be not less than 45% of the Association's total liabilities and
equities as of the date of the distribution. The Association does not
anticipate that this provision will limit the anticipated capital credit
retirements described in note 4.

(13) Deferred Credits

Deferred credits at December 31 consisted of the following:

1996 1995
---- ----

Regulatory liability - unamortized gain on
reacquired debt $ 29,726,201 $ 35,720,461

Refundable consumer advances for
construction 2,904,690 1,277,248

Deferred economy energy margins,
including accrued interest - 2,774,954

Estimated initial installation costs for
transformers and meters 470,460 416,532

Submarine cable reserve - 729,600

Post retirement benefit obligation 255,700 283,200

Other 61,196 40,078
----------- -----------

$ 33,418,247 $ 41,242,073
---------- ----------

In conjunction with the refinancing described in note 6, the Association
recognized a gain of approximately $45,000,000. The APUC permitted the
Association to flow through the gain to consumers in the form of reduced
rates over a period equal to the life of the bonds using the effective
interest method; consequently, the gain has been deferred for financial
reporting purposes as required by SFAS 71. Amortization of the deferred
gain of approximately $2,000,000 was recorded annually in 1996, 1995 and
1994.

48
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

Accruals for the Submarine Cable Reserve (begun in 1992 at $400,000 per
year plus a 2% per year inflation factor) were suspended in 1995 by
agreement with Chugach's wholesale customers. The balance of the reserve
is being returned to ratepayers via a credit to the Fuel Cost Recovery
Adjustment Factor over 15 months which began in July 1996.

(14) Bradley Lake Hydroelectric Project

The Association is a participant in the Bradley Lake Hydroelectric
Project (Bradley Lake). Bradley Lake was built and financed by the Alaska
Energy Authority (AEA) through State of Alaska grants and $166,000,000 of
revenue bonds. The Association and other participating utilities have
entered into take-or-pay power sales agreements under which shares of the
project capacity have been purchased and the participants have agreed to
pay a like percentage of annual costs of the project (including
ownership, operation and maintenance costs, debt service costs and
amounts required to maintain established reserves). Under these
take-or-pay power sales agreements, the participants have agreed to pay
all project costs from the date of commercial operation even if no energy
is produced. The Association has a 30.4% share of the project's capacity.
The share of debt service exclusive of interest, for which the
Association is responsible is approximately $47,000,000. Under a worst
case scenario, the Association could be faced with annual expenditures of
approximately $4.6 million as a result of its Bradley Lake take-or-pay
obligations. Management believes that such expenditures, if any, would be
recoverable through the fuel surcharge ratemaking process. Upon the
default of a Bradley Lake participant, and subject to certain other
conditions, AEA, through Alaska Industrial Development and Export
Authority, is entitled to increase each participant's share of costs pro
rata, to the extent necessary to compensate for the failure of another
participant to pay its share, provided that no participant's percentage
share is increased by more than 25%.

The following represents information with respect to Bradley Lake at June
30, 1996 (the most recent date for which information is available). The
Association's share of expenses were $3,957,930 in 1996, $4,100,154 in
1995 and $4,231,644 in 1994 and are included in purchased power in the
accompanying financial statements:

Proportionate
Total share

Plant in service $ 306,601,978 $ 93,207,000

Accumulated depreciation (32,679,560) (9,935,000)

Interest expense 11,181,937 3,399,000

Other electric plant in service of $4,710,912 represents the
Association's share of a Bradley Lake transmission line financed
internally.

49
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

(15) Eklutna Hydroelectric Project

In 1996, the Association along with Matanuska Electric Association (MEA)
and Municipal Light and Power (ML&P) entered the transition phase of the
Eklutna Hydroelectric Project acquisition. Formal transfer of ownership
from the Alaska Power Administration to the participating utilities is
expected to take place by November 1997. During the transition phase, MEA
will operate and maintain the facility. Chugach and ML&P will reimburse
MEA for their proportionate shares of the operations and maintenance
costs.

Chugach's eventual ownership share of the plant is 9/30's of the plant's
available output. Under net billing arrangements, Chugach will purchase
14/30's of the plant's available output. Chugach's share of the total
purchase price of the facility will be approximately $1,800,000 in 1997.

(16) Commitments and Contingencies
Construction

The Association is engaged in a continuous construction program.
Management estimates that approximately $21,000,000 will be spent on the
construction program in 1997, including approximately $2,400,000 due to
use of Smaller Retirement Unit accounting methodology for generation unit
major overhauls.

Contingencies

The Association is a participant in various legal actions, claims and
unasserted claims, both for and against its interests. Management
believes that the outcome of any such matters will not materially impact
the Association.

Standard Steel Salvage Yard Site

A cost recovery action was filed in Federal District Court on December
27, 1991 by the United States against Chugach and six other Potentially
Responsible Parties (PRPs) seeking reimbursement of removal and response
action costs (Past Response Costs) incurred by US EPA at the Standard
Steel and Metals Salvage Yard Superfund Site in Anchorage, Alaska (Site).
The six other PRPs named in the action are the Alaska Railroad,
Westinghouse Electric Corporation, Sears Roebuck and Co., Montgomery Ward
& Co., J.C. Penney Company, Inc. and Bridgestone/Firestone, Inc.

On September 23, 1992, Chugach entered into an Administrative Order on
Consent (AOC) with the EPA to perform a remedial investigation and
feasibility study (RI/FS) for the Site. The RI/FS was completed in 1996
and, based on the results of the RI/FS, EPA selected the remedy of soil
stabilization and solidification (S/S) for cleanup of the Site and
documented its selection in a Record of Decision issued in July, 1996.

50
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

In December 1996, a partial consent decree (Partial Consent Decree)
settling the cost recovery action was entered by the Federal District
Court. Under the Partial Consent Decree the PRPs and the United States
settled the following costs associated with the Site: Past Response Costs
incurred by EPA through December 1991; RI/FS costs; drum and scrap
removal costs; past enforcement costs incurred by the Department of
Justice (DOJ) through December 11, 1996; and EPA oversight costs related
to the RI/FS.

The settlement under the Partial Consent Decree allocates 14.37% of the
above costs to Chugach. Chugach has paid its share of Past Response Costs
and DOJ enforcement costs under the Partial Consent Decree. The total
estimated cost of the settlement under the Partial Consent Decree is
approximately $6,800,000 of which Chugach's share will be approximately
$977,000. These amounts are estimates because RI/FS expenses and EPA
oversight costs are not yet fully known and, therefore, the total amount
to be paid by Chugach under the Partial Consent Decree is not known with
certainty.

The Partial Consent Decree does not settle Chugach's liability for future
costs of designing and performing the S/S remedy (Future Costs). Although
the Partial Consent Decree does not settle Chugach's or the other private
PRP's liability for Future Costs, the Partial Consent Decree does bind
the federal PRPs and the Alaska Railroad to pay an aggregate share of 64%
of Future Costs. Chugach and the five other private PRPs have reached a
separate settlement to divide the remaining 36% of Future Costs among
themselves. Under that settlement, Chugach's percentage share of
liability for Future Costs will equal 15.39%.

Chugach's agreement to perform remedial design and remedial action
(RD/RA) at the Site will be memorialized in a new Consent Decree (RD/RA
Decree) that is being negotiated between the private PRPs and the United
States. The RD/RA Decree is expected to contain the scope of work for the
RD/RA as well as settlement terms, including EPA's covenant not to sue
Chugach and the other private PRPs for Future Costs once the RD/RA is
completed.

The estimate of Future Costs of RD/RA at the Site, as determined by
Chugach's consultants based on cost estimates contained in the FS report,
ranges from $5,231,200 to $6,619,800. The RD/RA Decree contains a cost
estimate, as determined by EPA and including a 50% cost overrun
contingency, of $8,400,000. Chugach's share of these estimated RD/RA
expenses would range from approximately $805,082 to $1,292,760. These
amounts are only estimates, however, the actual, full scope of the S/S
cleanup at the Site will not be known, and the projected costs associated
with the remedy cannot be refined, until EPA approves remedial design
documents.

Under the RD/RA Decree, Chugach and the other PRPs will be required to
reimburse the United States for EPA oversight costs and DOJ enforcement
costs relating to the RD/RA. Those costs have not been estimated by the
United States and are unknown at this time. Therefore, the total amount
paid by Chugach under the RD/RA Decree cannot be

51
(Continued)

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

predicted with certainty. In addition, the RD/RA Decree contains
reservation of rights allowing EPA to seek further response actions and
payments from the PRPs under certain circumstances, including costs
associated with alleged natural resource damages. At this time, no claims
have been made pertaining to alleged natural resource damages and no
prediction can be made whether EPA will request activities through its
reservation of rights under RD/RA Decree. Finally, it is uncertain
whether Chugach and the other PRPs will enter into the RD/RA Decree with
EPA until negotiations are completed.

Four of Chugach's insurance carriers have agreed under a reservation of
rights to pay, and currently are paying, Chugach's costs of defense for
the Site. The carriers have reserved their rights regarding
indemnification of Chugach for response costs. Management believes that
all past and future costs incurred for response, removal, investigation
and cleanup of the Site would be fully recoverable in rates or covered by
insurance and therefore would have no impact on Chugach's financial
condition or results of operations.

Regulatory Cost Charge

In 1992 the State of Alaska Legislature passed legislation authorizing
the Department of Revenue to collect a regulatory cost charge from
utilities in order to fund the APUC. The tax is assessed on all retail
consumers and is based on kilowatt hour (kWh) consumption. The Regulatory
Cost Charge has decreased since its inception (November 1992) from an
initial rate of $.000626 per kWh to the current rate of $.000297,
effective January 1, 1997.

52

Item 9 - Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure

None

PART III

Item 10 - Directors and Executive Officers of the Registrant

MANAGEMENT

Executives

Chugach operates under the direction of a Board of Directors that is elected at
large by its membership. Day-to-day business and affairs are administered by the
General Manager. Chugach's seven-member Board of Directors sets policy and
provides direction to Chugach's General Manager. The following table sets forth
certain information with respect to the executive management of Chugach:

Name Age Positions held

Eugene N. Bjornstad 59 General Manager
Lee D. Thibert 41 Executive Manager, Operating Divisions
Evan J. Griffith, Jr. 55 Executive Manager, Finance and Planning
William R. Stewart 50 Executive Manager, Administration

Eugene N. Bjornstad was appointed General Manager of Chugach June 22, 1994.
Prior to that he served as Acting General Manager from March 28, 1994 until his
permanent appointment. He joined Chugach in 1983 and served as Executive
Manager, Operating Divisions from 1988 to 1994.

Lee D. Thibert was appointed Acting Executive Manager, Operating Divisions in
June of 1994 and received permanent appointment to this position on December 1,
1994. Prior to moving up to the Executive Manager position, he served as
Director of Operations from June 1987.

Evan J. Griffith, Jr. has been Executive Manager, Finance and Planning of
Chugach since August 1989 and was Budget/Program Analyst for the Anchorage
Municipal Assembly from August 1984 to August 1989.

William R. Stewart has been Executive Manager, Administration of Chugach since
July 1987, was Division Director of Administration of Chugach from January 1984
to July 1987 and Staff Assistant to the General Manager of Chugach from November
1982 to January 1984. He has been employed at Chugach since 1969.

53

Board of Directors

Raymond A. "Ray" Kreig - President. Ray Kreig, 50, is president of R.A.
Kreig & Associates, a consulting firm specializing in land and site assessment.
He is a professional civil engineer and geologist. Mr. Kreig was elected to the
board in April 1994 and became President in April 1995.

Pat Jasper - Vice President. Pat Jasper, 67, is a small business owner and has
been a computer programmer and systems analyst. She was originally elected to
the Board in April 1995 to fill a one-year term, and served as Secretary to
April 1996. She was re-elected in April 1996 and has been Vice President since
then.

Mary Minder - Secretary. Mary Minder, 57, was elected to the Board in April
1995 and served as Treasurer until April 1996 when she became Secretary. Ms.
Minder is a realtor and associate real estate broker.

Kathleen A. Weeks - Treasurer. Kathleen Weeks, 50, is an attorney in private
practice. Her specialty is divorce, real estate and probate law. She was elected
to the Board in April 1995, served as Vice President from that time to April
1996 when she became Treasurer.

Christopher Birch, 46, is a professional engineer employed by the Alaska
Department of Transportation and Public Facilities. He was appointed to the
Board to fill the seat vacated by Marty Bushue in October 1996.

Ed Granger - Director. Ed Granger, 62, is a retired professional engineer
working in real estate. He was elected to the board in 1991. He resigned in
March 1994, one month before his first term expired. He was reappointed to the
Board to fill the remaining term of another resigned director in June 1995 and
was re-elected in April 1996.

Elizabeth Page "Pat" Kennedy - Director. Pat Kennedy, 58, was President of
Chugach from April 1994 to April 1995. Ms. Kennedy has served on the board since
1993 and was Secretary from April 1993 to April 1994. She is an attorney who has
been licensed to practice law since 1976 and has been in private practice since
1990.

Martin J. "Marty" Bushue - Director. Marty Bushue, 51, is a professional
electrical engineer and a principal of MJB Engineering. He has 21 years of
engineering and project management experience in Alaska. He was elected to the
board in April 1994. Mr. Bushue resigned from the board for personal reasons in
October 1996.

54

Item 11 - Executive Compensation

CASH COMPENSATION

The following table sets forth all remuneration paid by Chugach for the calendar
years ended December 31, 1996, 1995 and 1994 with respect to each of the four
executive officers of Chugach, all of whose total cash and cash equivalent
compensation exceeded $100,000, and for all such executive officers as a group:

Name Principal position Year Salary

Eugene N. Bjornstad General Manager 1996 $ 167,296

1995 164,924

1994 146,044

Lee D. Thibert Executive Manager, Operating 1996 118,562
Divisions
1995 119,312

1994 111,732

Evan J. Griffith, Jr. Executive Manager, Finance & 1996 137,434
Planning
1995 126,378

1994 120,483

William R. Stewart Executive Manager, 1996 134,393
Administration
1995 129,738

1994 127,027

Directors of Chugach are compensated for their services in the amount of $100
per board meeting attended (including committee meetings) up to a maximum of
seventy meetings per year for a director and eighty-five meetings per year for
the President. Upon termination, Mr. Bjornstad's employment agreement provides
that he may receive an amount equal to his salary for the remaining term of his
employment agreement (which number shall not be less than six months) plus any
accrued annual leave or other compensation then due as of the effective date of
the notice of termination.

COMPENSATION PURSUANT TO PLANS

Chugach has elected to participate in the National Rural Electric Cooperative
Association Retirement and Security Program (Plan), a multiple employer defined
benefit master pension plan maintained and administered by the National Rural
Electric Cooperative Association for the benefit of its members and their
employees. The Plan is intended to be a qualified pension plan under Section
401(a) of the Code. All employees of Chugach not covered by a union agreement
become participants in the Plan on the first day of the month following
completion of one year of eligibility service. An employee is credited with one
year of eligibility service if he completes 1,000 hours of service either in his
first twelve consecutive months of employment or in any calendar year for
Chugach or certain other employers in rural electrification (related employers).
Pension benefits vest at the rate of 10% for each of the first four years of
vesting service and become fully vested and nonforfeitable on the earlier of the
date a participant has five years of vesting service or the date the participant
attains age

55

fifty-five while employed by Chugach or a related employer. A participant is
credited with one year of vesting service for each calendar year in which he
performs at least one hour of service for Chugach or a related employer. Pension
benefits are generally paid upon the participant's retirement or death. A
participant may also elect to receive pension benefits while still employed by
Chugach if he has reached his normal retirement date by completing thirty years
of benefit service (as hereinafter defined) or, if earlier, by attaining age
sixty-two. A participant may elect to receive actuarially reduced early
retirement pension benefits before his normal retirement date provided he has
attained age fifty-five.

Pension benefits paid in normal form are paid monthly for the remaining lifetime
of the participant. Unless an actuarially equivalent optional form of benefit
payment to the participant is elected, upon the death of a participant the
participant's surviving spouse will receive pension benefits for life equal to
50% of the participant's benefit. The annual amount of a participant's pension
benefit and the resulting monthly payments the participant receives under the
normal form of payment are based on the number of his years of participation in
the Plan (benefit service) and the highest five-year average of the annual rate
of his base salary during the last ten years of his participation in the Plan
(final average salary). Annual compensation in excess of $200,000, as adjusted
by the Internal Revenue Service for cost of living increases, is disregarded
after January 1, 1989. The participant's annual pension benefit at his normal
retirement date is equal to the product of his years of benefit service (up to
thirty) times final average salary times 2%.

The following table sets forth the estimated annual pension benefit payable at
normal retirement date for participants in the specified final average salary
and years of benefit service categories:

Final Years of benefit service
Average
Salary

15 20 25 30 35
-- -- -- -- --

$ 125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 75,000

150,000 45,000 60,000 75,000 90,000 90,000

The annual pension benefits indicated above are the joint and surviving spouse
life annuity amounts payable by the Plan, and they are not subject to any
deduction for Social Security or other offset amounts.

Benefit service as of December 31, 1996 taken into account under the Plan for
the executive officers is shown below. Base salary for 1996 taken into account
under the Plan for purposes of determining final average salary is also
included.

56

Covered
Name Principal Position Benefit Service Compensation

Eugene N. Bjornstad General Manager 12.7 $ 156,021

Lee D. Thibert Executive Manager, 8.6 118,664
Operating Divisions

Evan J. Griffith, Jr. Executive Manager, 6.3 123,968
Finance & Planning

William R. Stewart Executive Manager, 26.7 123,968
Administration

57

Item 12 - Security Ownership of
Certain Beneficial Owners and Management

Not Applicable

Item 13 - Certain Relationships and Related Transactions

Not Applicable

PART IV

Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K

Page

Financial Statements

Included in Part IV of this Report:
Independent Auditors' Report 33
Balance Sheets, December 31, 1996 and 1995 34
Statements of Revenues, Expenses and Patronage Capital,
Years ended December 31, 1996, 1995 and 1994 36
Statements of Cash Flows,
Years ended December 31, 1996, 1995 and 1994 37
Notes to Financial Statements 38-52

Financial Statement Schedules

Included in Part IV of this Report:
Independent Auditors' Report 59
Schedule II - Valuation and Qualifying Accounts,
Years ended December 31, 1996, 1995 and 1994 60

Other schedules are omitted as they are not required or are not applicable, or
the required information is shown in the applicable financial statements or
notes thereto.

58

Independent Auditors' Report

The Board of Directors
Chugach Electric Association, Inc.:

Under the date of March 5, 1997, we reported on the balance sheets of Chugach
Electric Association, Inc. as of December 31, 1996 and 1995 and the related
statements of revenues, expenses and patronage capital and cash flows for each
of the years in the three-year period ended December 31, 1996 which are included
in Part II of the Company's Annual Report on Form 10-K. In connection with our
audits of the aforementioned financial statements, we also audited the related
financial statement schedule listed in the index to Item 14 of the Company's
1996 Annual Report on Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.

In our opinion such schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

Anchorage, Alaska /s/ KPMG Peat Marwick LLP
March 5, 1997

59

Schedule II

CHUGACH ELECTRIC ASSOCIATION, INC.

Valuation and Qualifying Accounts

Balance at Charged Balance
beginning to costs at end
of year and expenses Deductions of year

Allowance for doubtful accounts:

Activity for year ended:

December 31, 1996 $(436,083) $(566,844) $ 635,842 $ (367,085)

December 31, 1995 (569,769) (534,646) 668,332 (436,083)

December 31, 1994 (891,563) (736,847) 1,058,641 (569,769)

60

EXHIBITS

Listed below are the exhibits which are filed as part of this Report:

Exhibit
number Description Page

*3.1 Articles of Incorporation of the Registrant

**3.2 Bylaws of the Registrant (as amended April 25, 1996)

*4.1 Trust Indenture, dated as of September 15, 1991,
between the Registrant and Security Pacific Bank
Washington, N.A., Trustee (Including forms of
bonds)

*4.2 First Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-
First National Bank dated March 17, 1993

*4.3 Second Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-
First National Bank dated May 19, 1994

*4.4 Third Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-
First National Bank

*4.4.1 Closing Documents dated November 30, 1994, First
Mortgage Bond, CoBank Series (CoBank-1), Due March
15, 2002 pursuant to the Third Supple-
mental Indenture of Trust dated June 29, 1994

*4.4.2 Closing documents dated August 31, 1995 First
Mortgage Bond, CoBank Series (CoBank-2), due
August 31, 2005 pursuant to the Third
Supplemental Indenture of Trust

**4.4.3 Closing documents dated April 30, 1996 First
Mortgage Bond, CoBank Series (CoBank-3), due
March 15, 2022 pursuant to the Third
Supplemental Indenture of Trust

***4.4.4 Closing documents dated September 30, 1996 First
Mortgage Bond, CoBank Series (CoBank-4), Due
June 15, 2022 pursuant to the Third Supplemental
Indenture of Trust

*4.5 Fourth Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-First
National Bank dated March 1, 1995

*4.6 Fifth Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-First
National Bank dated September 6, 1995

61

Exhibit
number Description Page

**4.7 Sixth Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-First
National Bank dated April 3, 1996

*10.1 Joint Use Agreement between the City of Seward and
the Registrant

*10.2 Wholesale Power Agreement between the City of
Seward and the Registrant

*10.3 Agreement for Sale of Electric Power and Energy
between Homer Electric Association, Inc., Alaska
Electric Generation and Transmission Association,
Inc. and the Registrant

*10.4 Modified Agreement for the Sale and Purchase of
Electric Power and Energy between Matanuska
Electric Association, Inc., Alaska Electric
Generation and Transmission Association, Inc.
and the Registrant

*10.4.1 First Amendment to Modified Agreement for the Sale
and Purchase of Electric Power and Energy dated
April 5, 1989 by and among Chugach Electric
Association, Inc., Matanuska Electric Association,
Inc. and Alaska Electric Generation & Trans-
mission Cooperative, Inc.

*10.5 Agreement for the Sale and Purchase of Natural Gas
between the Registrant and ARCO Alaska, Inc.

*10.6 Amendment No. 1 to Agreement for the Sale and
Purchase of Natural Gas between the Registrant
and ARCO Alaska, Inc.

*10.7 Agreement for the Sale and Purchase of Natural Gas
between the Registrant and Marathon Oil Company

*10.8 Amendatory Agreement No. 1 to Agreement for the
Sale and Purchase of Natural Gas between the
Registrant and Marathon Oil Company

*10.9 Amendatory Agreement No. 2 to Agreement for the
Sale and Purchase of Natural Gas between the
Registrant and Marathon Oil Company

*10.10 Amendatory Agreement No. 3 to Agreement for the
Sale and Purchase of Natural Gas between the
Registrant and Marathon Oil Company

62

Exhibit
number Description Page

*10.11 Letter of Understanding between the Registrant and
Marathon Oil Company

*10.12 Agreement for the Sale and Purchase of Natural Gas
between the Registrant and Shell Western E&P Inc.

*10.13 Amendatory Agreement No. 1 to the Agreement for the
Sale of Natural Gas between the Registrant and
Shell Western E&P Inc.

*10.14 Amendment No. 2 to the Agreement for the Sale of
Natural Gas between the Registrant and Shell
Western E&P Inc.

10.14.1 Amendment No. 3 to the Agreement for the Sale of
Natural Gas between the Registrant and Shell
Western E&P Inc. 73

*10.15 Agreement for the Sale and Purchase of Natural Gas
between the Registrant and Chevron USA Inc.

*10.16 Letter of Understanding to the Agreement for the
Sale and Purchase of Natural Gas between the
Registrant and Chevron USA Inc.

*10.17 Amendment No. 2 to Agreement for the Sale and
Purchase of Natural Gas between the Registrant
and Chevron USA Inc.

*10.18 Nonfirm Energy Agreement between the Registrant and
Golden Valley Electric Association, Inc.

*10.19 Alaska Intertie Agreement between Alaska Power
Authority, Municipality of Anchorage, the
Registrant, City of Fairbanks, Alaska Municipal
Utilities System, Golden Valley Electric
Association, Inc. and Alaska Electric Generation
and Transmission Cooperative, Inc.

*10.20 Memorandum of Understanding Regarding Intertie
Upgrades among Alaska Energy Authority, the
Registrant, Golden Valley Electric Association,
Inc., Homer Electric Association, Inc., Matanuska
Electric Association, Inc., Municipality of
Anchorage dba Municipal Light and Power, and
the City of Seward d/b/a Seward Electric System

*10.21 Addendum No. 1 to the Alaska Intertie Agreement--
Reserve Capacity and Operating Reserve
Responsibility

63

Exhibit
number Description Page

*10.22 Bradley Lake Agreement for the Sale and Purchase of
Electric Power between the Alaska Power
Authority, Golden Valley Electric Association, Inc.,
the Municipality of Anchorage, the City of Seward,
the Alaska Electric Generation & Transmission
Cooperative, Inc., Homer Electric Association, Inc.,
Matanuska Electric Association Inc. and the
Registrant

*10.23 Agreement for the Wheeling of Electric Power and for
Related Services by and among the Registrant,
Homer Electric Association, Inc., Golden Valley
Electric Association, Inc., Matanuska Electric
Association, Inc., the Municipality of Anchorage,
Inc. dba Municipal Light & Power, the City of
Seward dba Seward Electric System and Alaska
Electric Generation and Transmission Cooperative,
Inc.

*10.24 Transmission Sharing Agreement by and among Homer
Electric Association, Inc., the Registrant, Golden
Valley Electric Association, Inc., and the
Municipality of Anchorage d/b/a Municipal Light
and Power

*10.25 Amendment to Agreement for Sale of Transmission
Capability among Homer Electric Association, Inc.,
Alaska Electric Generation and Transmission
Cooperative, Inc., the Registrant, Golden Valley
Electric Association, Inc. and the Municipality of
Anchorage d/b/a Municipal Light and Power

*10.26 Net Billing Agreement among the Registrant,
Matanuska Electric Association, Inc. and Alaska
Electric Generation and Transmission Cooperative,
Inc.

*10.27 Interconnection Agreement between the Registrant and
Municipality of Anchorage Municipal Light and
Power

*10.28 Interconnection Agreement between the Registrant and
Municipality of Anchorage Municipal Light and
Power Addendum No. 1

*10.29 Amendment No. 1 to Interconnection Agreement
between the Registrant and Municipality of
Anchorage Municipal Light and Power

64

Exhibit
number Description Page

*10.30 Agreement between the Registrant and Chevron USA,
Inc. for the Sale and Purchase of Supplemental
Natural Gas

*10.31 Agreement between the Registrant and Shell Western
E&P Inc. for the Sale and Purchase of
Supplemental Natural Gas

*10.32 Agreement between the Registrant and ARCO Alaska,
Inc. for the Sale and Purchase of Supplemental
Natural Gas

*10.33 Eklutna Purchase Agreement among the Registrant,
Matanuska Electric Association, Inc., Municipality
of Anchorage d/b/a Municipal Light and Power and
Alaska Power Administration

*10.33.1 Amendment No. 1 to Eklutna Purchase Agreement
among the Registrant, Matanuska Electric
Association, Inc., Municipality of Anchorage d/b/a
Municipal Light and Power and Alaska Power
Administration

*10.33.2 Eklutna Purchase Agreement Amendment No. 2
effective June 14, 1993 between Chugach, MEA,
ML&P and the Alaska Power Administration

10.33.3 Eklutna Hydroelectric Project Transition Plan, by and
among the Registrant; The United States of
America d/b/a Alaska Power Administration, a unit
of the Department of Energy; the Municipality of
Anchorage d/b/a Municipal Light & Power; and
Matanuska Electric Association, Inc. 79

*10.34 University Substation 1991 Improvements Contract
between the Registrant and Alcan Electrical and
Engineering, Inc.

*10.35 Camp Facilities Replacement Contract between the
Registrant and Baugh Construction and
Engineering Company

*10.36 Lease Amendment between Standard Oil Company of
California and the Registrant

*10.37 Lease Amendment between Chevron USA, Inc. and the
Registrant

65

Exhibit
number Description Page

*10.38 Settlement Agreement among the Registrant, Homer
Electric Association, Inc., Matanuska Electric
Association, Inc., the City of Seward and Alaska
Electric Generation and Transmission Cooperative,
Inc. resolving G&T TIER Level, Equity Level,
Capital Credits, Equity Management Plan, and
Loan Covenant Disputes

*10.38.1 First Amendment to "Settlement Agreement Resolving
G&T TIER Level, Equity Level, Capital Credits,
Equity Management Plan and Loan Covenant Disputes"
in APUC Docket U-92-10 between Chugach and MEA,
Homer and AEG&T dated March 1993

*10.39 Loan Agreement between the National Bank for
Cooperatives (formerly Spokane Bank for
Cooperatives) and the Registrant, as amended

*10.40 Amendment dated September 13, 1991 to Loan
Agreement between the National Bank for
Cooperatives and the Registrant

*10.41 Form of Commitment Letter to be entered into between
the National Bank for Cooperatives and Registrant

*10.42 Agreement between the Municipality of Anchorage
d/b/a Anchorage Municipal Light and Power,
Chugach Electric Association, Inc., Matanuska
Electric Association, Inc., U.S. Fish and Wildlife
Service, National Marine Fisheries Service, Alaska
Energy Authority, and the State of Alaska Relative
to the Eklutna and Snettisham Hydroelectric
Projects

*10.43 Bradley Lake Hydroelectric Agreement for the
Dispatch of Electric Power and for Related
Services by and among Chugach Electric
Association, Inc. and the Alaska Energy Authority

*10.44 Net Billing Agreement among Chugach Electric
Association, Inc. and the City of Seward

*10.45 Soldotna One System Use and Dispatch Agreement by
and among Alaska Electric Generation and
Transmission Cooperative, Inc. and Chugach
Electric Association, Inc.

66

Exhibit
number Description Page

*10.46 Agreement for Bradley Lake Resource Scheduling
between Chugach, Homer Electric Association, Inc.
and the Alaska Electric Generation and
Transmission Cooperative, Inc. dated September
29, 1992

*10.47 Gas Transportation Agreement between Chugach,
Alaska Pipeline Company and ENSTAR Natural
Gas Company dated December 7, 1992

*10.48 Daves Creek Substation Agreement between Chugach
and the Alaska Energy Authority dated March 13,
1992

*10.49 Memorandum of Agreement between Chugach and
AEG&T dated April 27, 1993 regarding Interest
Expense Allocator

*10.50 Settlement Agreement between Chugach and
Intervenor Wholesale Customers in APUC Docket
U-93-15 dated September 1993 regarding
depreciation of submarine cables

*10.51 Fifty Million Dollar Line of Credit Agreement between
Chugach and the National Rural Utilities
Cooperative Finance Corporation executed
February 19, 1993

*10.52 Twenty Five Million Dollar Line of Credit Agreement
and Promissory Note between Chugach and
National Bank for Cooperatives

*10.52.1 Amendment to Line of Credit Agreement between
Chugach and National Bank for Cooperatives dated
March 11, 1994

*10.52.2 Amendment to Line of Credit Agreement between
Chugach and National Bank for Cooperatives and
amended and restated Promissory Note (thirty-five
million dollars) dated April 18, 1994

*10.52.3 Amendment to Line of Credit Agreement between
Chugach and National Bank for Cooperatives
(thirty-five million dollars) dated May 1, 1995

*10.52.4 Amendment to Line of Credit Agreement between
Chugach and National Bank for Cooperatives
(thirty-five million dollars) dated May 15, 1995

67

Exhibit
number Description Page

*10.53 Bill of Sale between Chugach and Cook Inlet Tug &
Barge Co. for the barge SUSITNA dated March 1,
1993

*10.54 Intertie Grant Agreement between Chugach and GVEA,
FMUS, ML&P, AEG&T, MEA, Homer, Seward, the State
of Alaska, Department of Administration, and AIDEA
dated October 26,
1993

*10.55 Grant Transfer and Delegation Agreement between
Chugach and GVEA, FMUS, ML&P, AEG&T, MEA, Homer,
Seward, the State of Alaska, Department of
Administration, and AIDEA dated November 5, 1993

*10.56 Letter of Understanding between Chugach and IBEW
dated January 6, 1993 regarding the Outside Plant
Personnel Agreement

*10.57 Letter of Understanding between Chugach and IBEW
dated January 6, 1993 regarding the Office and
Engineering Agreement

*10.58 Letter of Understanding between Chugach and IBEW
dated January 6, 1993 regarding the Generation
Plant Personnel Agreement

*10.59 Eklutna Power Sales Contract No. 85-79AP10004
between Chugach and Alaska Power
Administration dated October 13, 1979

*10.59.1 Contract Modification No. 1 to Contract No
85-79AP10004 between Chugach and the Alaska
Power Administration dated October 19, 1988
extending the Eklutna Power Sales Agreement

*10.59.2 Amendment to Exhibit E of Modification No. 1 to
Contract No. 85-79AP10004 between Chugach and
Alaska Power Administration dated October 29,
1993 regarding the Eklutna Power Sales Agreement

*10.59.3 Contract Modification No. 2 to Contract No.
85-79AP10004 between Chugach and the Alaska
Power Administration dated November 9, 1993
extending the Eklutna Power Sales Agreement

*10.60 Employment Agreement by and among Chugach
Electric Association, Inc. and Eugene N. Bjornstad
dated July 6, 1994

68

Exhibit
number Description Page

*10.61 United States Department of Energy, Alaska Power
Administration, Eklutna Project, Contract No.
DE-SC85-95AP10042 for Electric Service to
Chugach Electric Association, Inc., Matanuska
Electric Association, Inc. and Municipality of
Anchorage dba Municipal Light & Power dated
December 29, 1994

**10.62 Hotel Employees & Restaurant Employees Union
agreement covering terms and conditions of
employment - Beluga Power Plant Culinary Employees
dated the 2nd day of March, 1995

12.1 N/A

*19.0 Administrative Order on Consent for Remedial
Investigation/Feasibility Study between Chugach
and the United States Environmental Protection
Agency dated September 23, 1992

*19.1 Proposed Partial Consent Decree in Standard Steel
Superfund Site matter

***19.2 Partial Consent Decree in Standard Steel Superfund
Site matter

27 Financial Data Schedule (filed electronically)

* Previously referred to in the Registrant's Annual Report on Form 10-K dated
December 31, 1995.

** Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q dated June 30, 1996.

*** Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q dated September 30, 1996.

REPORTS ON FORM 8-K

The Company was not required to file any report on Form 8-K for the quarter
ended December 31, 1996.

69

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 26, 1997.

CHUGACH ELECTRIC ASSOCIATION, INC.

By: /s/ Eugene N. Bjornstad
Eugene N. Bjornstad, General Manager

Date: March 26, 1997

70

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated March 26, 1997:

/s/ Eugene N. Bjornstad
- --------------------------------------
Eugene N. Bjornstad General Manager
/s/ Lee D. Thibert
- --------------------------------------
Lee D. Thibert Executive Manager, Operating Divisions
/s/ Evan J. Griffith, Jr.
- --------------------------------------
Evan J. Griffith, Jr. Executive Manager, Finance and Planning
/s/ William R. Stewart (principal financial officer)
- --------------------------------------
William R. Stewart Executive Manager, Administration
/s/ Michael R. Cunningham
- --------------------------------------
Michael R. Cunningham Controller
/s/ Raymond A. Kreig (principal accounting officer)
- --------------------------------------
Raymond A. Kreig President and Director
/s/ Patricia Jasper (principal executive officer)
- --------------------------------------
Patricia Jasper Vice President and Director
/s/ Mary Minder
- --------------------------------------
Mary Minder Secretary and Director
/s/ Kathleen A. Weeks
- --------------------------------------
Kathleen A. Weeks Treasurer and Director
/s/ Christopher Birch
- --------------------------------------
Christopher Birch Director
/s/ Ed Granger
- --------------------------------------
Ed Granger Director
/s/ Elizabeth P. Kennedy
- --------------------------------------
Elizabeth P. Kennedy Director

71

Supplemental information to be furnished with reports filed pursuant to Section
15(d) of the Act by registrants which have not registered securities pursuant to
Section 12, of the Act:

Chugach has not made an Annual Report to securities holders for 1996 and will
not make such a report after the filing of this Form 10-K. As a consequence, no
copies of any such report will be furnished to the Securities and Exchange
Commission.

72