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

For the fiscal year ended December 31, 1997

( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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.

1997 Form 10-K Annual Report

Table of Contents

Page
PART I

Item 1 - Business 1

Item 2 - Properties 12

Item 3 - Legal Proceedings 16

Item 4 - Submission of Matters to a Vote of Security Holders 19

PART II

Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 19

Item 6 - Selected Financial Data 19

Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 20

Item 8 - Financial Statements and Supplementary Data 34

Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 57

PART III

Item 10 - Directors and Executive Officers of the Registrant 57

Item 11 - Executive Compensation 59

Item 12 - Security Ownership of Certain Beneficial Owners and
Management 62

Item 13 - Certain Relationships and Related Transactions 62

PART IV

Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K 62

SIGNATURES 72

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 68,000 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, 11.7 MW of generating capacity from two hydroelectric
units that are owned jointly with MEA and ML&P, 1,571 miles of distribution
lines and 402 miles of transmission lines. During 1997, Chugach sold 2.27
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, 1997, Chugach had approximately 55,000 retail members receiving
service at approximately 68,000 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

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large by the membership and serve three-year staggered terms. Each member is
entitled to one 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" that 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, 1997, 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 14-year rotation cycle. In 1997, the
Board of Directors approved a retirement of retail capital credits whereby the
remaining 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. In 1997, The Board of Directors
authorized retirement of 1987 wholesale capital credits in the amount of
$1,205,510. A special wholesale capital credit retirement of $88,818 (wholesale
margins from 1985) was also authorized in 1997. 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

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of $0.0005 per kWh of electricity sold in the retail market during the preceding
year. In addition, Chugach collects a regulatory cost charge of $.000297 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, 1998, the regulatory cost charge was reduced to $.000280
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 three collective
bargaining agreements with the IBEW that are currently open for negotiation.
Although each of the contracts has an expiration date of January 31, 1998, the
parties have agreed that the contracts shall continue in effect until new
contracts are put in place. If the parties cannot agree on the terms of new
agreements, all outstanding issues will be decided through interest arbitration.
The Union cannot strike and Chugach cannot lockout under the continuing
agreement.

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 (Seward), 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 the
Cook Inlet region. 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

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major gold mine has commenced operation near Fairbanks. The Trans-Alaska
Pipeline System (crude oil) passes near Fairbanks on its route from Prudhoe Bay
to Valdez.

Competition

Consistent with developments in other states, Alaska is contemplating the
effects of retail competition in the sale of electric power. Chugach considers
that the primary market in which competition will develop is the interconnected
electrical system which stretches from the Kenai Peninsula to Fairbanks.
Participants in this market consist of rural electric cooperatives and
municipally-owned utilities as well as cogeneration providers and load
aggregators. Chugach anticipates that principal methods of competition will
emphasize price, service and range of service offerings.

Chugach has been very active in the effort to promote customer choice in the
retail market in Anchorage because it believes it will benefit customers and
will put Chugach in a better competitive position as customer choice develops.
After several retail customers in a neighboring utility's service area formally
asked Chugach to provide their electric power, Chugach requested access over the
other utility's distribution and transmission system and asked the APUC to
enforce the request. At this time, the APUC has not ruled on this request and it
is not possible to predict their decision.

Chugach has also been active at the State legislative level in support of the
customer's right to choose their electric power supplier. Virtually all Alaskan
utilities have opposed Chugach's efforts to develop competition and are active
in attempting to create exclusive service territories. At this time, however, no
bill relating to customer choice has moved out of committee. Thus, it is not
possible to predict the outcome of this legislative process.

Several Chugach customers are investigating self-generation or cogeneration
using various technologies, including fuel cells, and may choose to generate
their own power. It is not possible to predict the impact this type of project
will have on Chugach's revenues.

At least one electric power load aggregator is active in the Anchorage market.
The outcome of Chugach's efforts to open access over the neighboring utility's
system will impact the success and number of load aggregators operating on the
interconnected system. At this time, it is not possible to predict the impact
that load aggregators will have on Chugach's revenue.

To meet these competitive challenges, Chugach has formed a Marketing Department,
continues to operate its Key Account program for larger customers and continues
to develop new services to enhance existing customer's satisfaction.

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

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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, that 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 committed that retail
and wholesale base rates would remain unchanged. As part of the Settlement
Agreement with AEG&T/MEA/Homer, Chugach has committed that demand and energy
rate levels to be established on a 1995 test year in Docket U-96-37 will remain
at no higher than those 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. See the Fuel Surcharge
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations.

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 1997, Chugach's achieved
TIER was 1.30.

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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, 1997:

Energy Loads and Revenues by Class of Customer

Percent of Total
MWh 1997 Revenues 1997 Revenues
--- ------------- --------------

Direct retail sales:
Residential 484,679 $ 48,718,433 34.0%
Commercial 540,572 42,020,343 29.2
--------- ----------- ------
Total 1,025,250 90,738,776 63.2
--------- ----------- ------

Wholesale sales:
MEA 490,670 24,793,315 17.3
Homer 416,980 17,851,001 12.4
Seward 53,593 2,362,915 1.6
--------- ----------- ------
Total 961,243 45,007,231 31.3
--------- ----------- ------

Economy Energy Sales:
GVEA 282,805 7,930,126 5.5
Other 155 4,650 0.0
--------- ----------- ------
282,960 7,934,776 5.5
--------- ----------- ------

Total sales to customers 2,269,453 $ 143,680,783 100.00%
--------- ----------- ------

Retail Customers

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.

Customers. Chugach directly serves approximately 68,000 meters. There are
approximately 55,000 members of Chugach. Some members are served by more than
one meter, like, for example, service to high density multiple family dwellings.
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 $45.0
million in revenues and 42.4% of Chugach's total MWh sales to customers in 1997.

MEA and Homer. Chugach's contract with AEG&T (a generation and transmission
cooperative of which MEA and Homer are the only full 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 on 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. This
contract does not protect against loss of load resulting from retail competition
in MEA's distribution service territory. It is not possible at this time to
estimate the potential impact on Chugach's revenues resulting from such
competition.

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. 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 1997, Chugach used 163,000 MWh
from the Soldotna unit.

Seward. Chugach currently provides all the firm power needs of Seward. A new
contract with Seward, with an interruptible provision, is awaiting approval by
the APUC. In 1997, sales to Seward amounted to 2.4% of Chugach's MWh 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 12.5% of Chugach's 1997 MWh
sales. 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, near Fairbanks, with an
anticipated load of 30-35 MW began operation during the last quarter of 1996.

FUEL SUPPLY

In 1997, 90% of Chugach's power was generated from gas, and 89% 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 1997 provided approximately
equal shares of the Beluga gas. Chugach has approximately 447 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 16 to 20 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.

The delivered price for Chugach's fuel supply is lower 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 has a lower delivered price than that available to
other generators are (i) Chugach purchases

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its gas directly 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 $1.51 per
MCF on December 31, 1997) 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 $1.88 per MCF on December 31, 1997) 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,
1997, exclusive of taxes was $1.71 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

Chugach's operations are subject to certain Federal, State and local
environmental laws which Chugach monitors to ensure compliance. The costs
associated with environmental compliance are included as a component of both the
operating and capital budget processes. Chugach accrues for costs associated
with environmental remediation obligations when such costs are probable and
reasonably estimable.

10

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.

The original issuance consisted of bonds in the amount of $52,000,000 due in
2002 bearing interest at 8.08% (Series A 2002 Bonds) and bonds in the amount of
$262,000,000 due in 2022 and bearing 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 $44,295,000 of
the Series A 2022 bonds since December 1995 leaving a remaining balance of
$217,705,000 at December 31, 1997.

Chugach has negotiated a supplemental indenture (Third Supplemental Indenture of
Trust) with CoBank which previously allowed up to $80 million in future bond
financing. Recently Chugach finalized an amendment to the Third Supplemental
Indenture of Trust (Seventh Supplemental Indenture of Trust) that eliminates the
maximum aggregate amount of bonds the company may issue under the agreement. At
December 31, 1997, Chugach had bonds in the amount of $71.4 million outstanding
under this financing arrangement. The balance is comprised of a $1.4 million
bond (CoBank 1) that carries an interest rate of 8.95% maturing in 2002, a $10
million bond (CoBank 2) priced at 7.76% due in 2005, a $21.5 million bond
(CoBank 3), currently priced at 6.65% (repriced periodically), a $23.5 million
bond (CoBank 4) currently priced at 6.65% (also repriced periodically), and a
$15 million bond (CoBank 5) currently priced at 6.65% (also repriced
periodically) due in 2002, 2007 and 2012. Principal payments on the CoBank 3 and
4 bonds commence in 2003 and continue through 2022. Additionally, Chugach has
negotiated a similar supplemental indenture (Fifth Supplemental Indenture of
Trust) with National Rural Utilities Cooperative Finance Corporation (NRUCFC)
for $80 million. At December 31, 1997 there were no amounts outstanding under
this financing arrangement.

11

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. Chugach also has 11.7 MW
of capacity from the two Eklutna hydroelectric plant generating units owned
jointly with MEA and ML&P. In addition to its own generation, Chugach purchases
power from the 90 MW Bradley Lake hydroelectric project owned by the Alaska
Energy Authority (AEA) through Alaska Industrial Development and Export
Authority (AIDEA). Bradley Lake is operated by Homer and dispatched by Chugach.
The Beluga, Bernice Lake and International facilities are all 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, that is located on land originally leased from
Chevron Oil Company now owned by Homer, and its generating plant at Cooper Lake,
that 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
that it will not be able to renew the Federal License or the Bernice Lake ground
lease if desirable.

In 1997, Chugach acquired a partial interest in the Eklutna Hydroelectric
Project. The plant is located on federal land pursuant to a United States Bureau
of Land Management (BLM) right-of-way grant issued October in 1997.

12

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
-----

Eklutna Hydroelectric 17.2
Plant (4):

Unit 1 Hydroelectric 5.8 1955

Unit 2 Hydroelectric 5.9 1955
----

11.7

Total units 17 513.1
-- -----

(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.
(4) The Eklutna Hydroelectric Plant is jointly owned by Chugach, MEA and ML&P.
The capacity shown is Chugach's 30% share of the plant's maximum output.

13

Transmission and Distribution Assets

As of December 31, 1997, Chugach's transmission and distribution assets included
40 substations and 402 miles of transmission lines, 931 miles of overhead
distribution lines and 640 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. In the 1997 Eklutna
acquisition, Chugach also acquired a partial interest in two substations and
additional transmission facilities.

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 BLM, and transmission and distribution lines have been constructed across
privately-owned lands pursuant to easements 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), 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 that 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

14

additional minor title encumbrances and defects. In the opinion of Chugach's
general counsel, 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 (fee interest 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 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.

15

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 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.

In December 1997, $59,485,000 of the Power Revenue Bonds, Third Series and
$47,710,000 of the Power Revenue Bonds, Fourth Series were refinanced under a
forward refunding arrangement. The true interest cost of the new bonds decreased
to 5.611% for the Third Series bonds and 6.06% for the Fourth Series bonds from
7.295% and 7.235%, respectively. This refunding produced a net present value
saving to the participating utilities of approximately $8,500,000. The
Association's share of these savings will be approximately $1,600,000.

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 purchased a 30% undivided interest in the Eklutna Hydroelectric
Project from the United States. MEA purchased a 17% undivided interest in the
Eklutna Project. The power MEA purchases from Eklutna is pooled with Chugach's
purchases and sold back to MEA to be used in meeting MEA's overall power
requirements. ML&P purchased the remaining 53% undivided interest in the Eklutna
Project. Transfer of ownership occurred on October 2, 1997 in accordance with
the Transition Plan. Chugach believes that the cost of power from the Eklutna
Project will be less than it would have been under continued Federal ownership.

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

16

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.
In December, 1996, Chugach, the other named PRPs and certain federal agency PRPs
(Federal PRPs) entered into a Partial Consent Decree. Under the Partial Consent
Decree, Chugach and the other parties settled claims for Past Response Costs as
well as investigation and other costs incurred with respect to the Site through
December 1996. The Partial Consent Decree, however, did not settle Chugach's
liability for future costs of designing and performing the cleanup at the Site
(Future Costs).

Although the Partial Consent Decree did not settle Chugach's or the other
private PRPs' liability for Future Costs, the Partial Consent Decree binds 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 14.89%. The private PRPs' agreement to perform remedial design and
remedial action (RD/RA) at the Site is memorialized in a new Consent Decree
(RD/RA Decree) that was entered by the Federal District Court in January 1998.
The RD/RA Decree contains 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
$778,926 to $1,250,760. Based on recent bid documents for the remedial action,
it seems unlikely that the RD/RA will cost as much as EPA's high-end estimate.
These amounts are only estimates, however, and cannot be definitively known
until the RD/RA work at the Site is completed in late 1998 or 1999.

Under the RD/RA Decree, Chugach and the other PRPs are required to reimburse the
United States for EPA oversight costs and DOJ enforcement costs relating to the
RD/RA. Those costs have been estimated by the United States to equal
approximately $676,000. Chugach's share of these estimated oversight and
enforcement costs would equal $100,656. In addition, one of the private PRPs,
Montgomery Ward, recently filed for bankruptcy protection and did not execute
the RD/RA Consent Decree. As a result, Chugach will be paying an additional sum
equal to Chugach's percentage share of Montgomery Ward's share of Future Costs.
This additional sum is estimated to be approximately $12,600 given current
estimates of Future Costs, EPA oversight costs and DOJ enforcement costs.

Based on the above estimates, the total amount that may be owed by Chugach under
the RD/RA Decree ranges from approximately $892,182 to $1,364,016. These
amounts, particularly the projected EPA oversight costs, are only estimates and
are subject to change,

17

although, in light of recent bid documents, Chugach does not anticipate that the
costs will reach the high-end estimate. 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 for costs associated with
alleged natural resource damages and no prediction can be made whether EPA will
request activities through its reservation of rights under the RD/RA Decree.

Four of Chugach's insurance carriers have been paying, under a reservation of
rights, Chugach's costs of defense for the Site. The carriers reserved their
rights regarding indemnification of Chugach for response costs. In February
1998, Chugach reached an agreement in principle with these four insurance
carriers pursuant to which the carriers will pay the majority of Chugach's costs
relating to the Site, including all Past Costs and Future Costs. This settlement
preserves Chugach's potential claim for natural resource damages and is
anticipated to result in Chugach paying no more that $500,000 for all Site
costs. Management believes that the latter amount would be fully recoverable in
rates and therefore would have no impact on Chugach's financial condition or
results of operations.

18

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 ....... 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------- ------------

Plant net:
In service ............ $393,228,853 $400,052,837 $391,200,269 $ 390,969,561 $382,804,772

Construction work in
progress ............ 24,664,395 19,826,957 27,068,964 22,795,657 27,698,289
------------ ------------ ------------ ------------- ------------

Electric plant, net 417,893,248 419,879,794 418,269,233 413,765,218 410,503,061

Other assets .......... 67,674,051 62,608,636 66,521,090 65,559,620 65,816,373
------------ ------------ ------------ ------------- ------------

Total assets ....... $485,567,299 $482,488,430 $484,790,323 $ 479,324,838 $476,319,434
------------ ------------ ------------ ------------- ------------

Capitalization:
Long-term debt ........ 312,006,501 307,905,847 305,641,703 303,675,870 308,869,343

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

Equities and margins .. 109,119,697 104,477,942 99,230,550 94,579,059 84,089,720
------------ ------------ ------------ ------------- ------------

Total capitalization $421,126,198 $412,383,789 $404,872,253 $ 398,386,511 $393,221,054
------------ ------------ ------------ ------------- ------------

Summary Operations Data

Operating revenues ....... 143,947,730 134,876,668 129,379,308 130,912,171 122,159,761

Operating expenses ....... 113,070,990 100,913,804 95,920,361 90,151,993 90,346,001

Interest expense ......... 26,661,510 27,052,186 27,207,648 27,508,928 27,544,280

Amortization of gain on
refinancing ............ 1,577,149 1,703,136 2,150,476 1,926,212 1,948,394
------------ ------------ ------------ ------------- ------------

Net operating margins 5,792,379 8,613,814 8,401,775 15,177,462 6,217,874

Nonoperating margins ..... 1,762,018 1,217,557 604,418 (249,028) 795,378
------------ ------------ ------------ ------------- ------------

Assignable margins .. $ 7,554,397 $ 9,831,371 $ 9,006,193 $ 14,928,434 $ 7,013,252
------------ ------------ ------------ ------------- ------------

19

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

The statements in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that relate to future plans, events or performance,
including statements relating to collection of fuel surcharges, natural gas
prices and development of the competitive marketplace, are forward-looking
statements which involve risk and uncertainties including, but not limited to,
actions of the APUC, competitive pressures, factors that affect natural gas
prices and other risks identified in the Chugach Securities and Exchange
Commission filings. Actual results, events or performance may differ materially.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Association undertakes
no obligation to publicly release any revisions to these forward-looking
statements that may be needed to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

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 1997, operating
revenues were approximately 6.7% higher than 1996. This increase was largely
attributable to higher sales to retail and two of the wholesale customer
classes. 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. See further discussion under Fuel Surcharge.
Retail demand and energy rates did not change in 1997 while demand and energy
rates charged to MEA decreased slightly. Demand and energy rates to Homer and
Seward did not change. 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. Revenues and power sold were as follows
for the years ended December 31:

20

Year MWh sold Operating revenues

1997 2,269,453 $143,947,730

1996 2,215,842 134,876,668

1995 2,136,599 129,379,308

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 generating capacity at the time. In
1997, economy sales to GVEA constituted approximately 5.5% 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
(fuel surcharge). 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 normally does not impact margins.

In 1997, Chugach experienced higher than anticipated fuel and purchased
power costs that were considered unusual and transitory in nature. In an
effort to maintain overall price stability, Chugach requested and was
granted a waiver by the APUC to leave fuel surcharge rates at the computed
second quarter 1997 level through the fourth quarter 1997. Further, Chugach
elected to forego collection of approximately $3,500,000 of fuel and
purchased power costs (representing the cumulative uncollected fuel
surcharge through May 1997).

Routine quarterly adjustments have resumed and fuel surcharge rates
increased effective January 1998. Undercollected fuel and purchased power
costs for June through December 1997 will be recovered throughout 1998
under a plan approved by the APUC.

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.

21

The margins in this fund, known as the rate stabilization fund, were
returned to Chugach's ratepayers over a 12-month period in the form of a
credit to the fuel adjustment factor. The process was completed in 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
has been 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
1995 through 1997 were as follows:

1997 1996 1995
---- ---- ----

Retail 0.00% 0.00% (4.92%)

Wholesale:
Homer 0.00% 5.32% (9.52%)
MEA (0.80%) 2.46% (7.39%)
Seward 0.00% 2.46% (7.37%)

In August 1996, the Board of Directors approved a petition to the Alaska
Public Utilities (APUC) to withdraw from the 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 was required to file Cost of Service and Revenue Requirement
Studies. These studies were filed 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. At December 31, 1997, Docket U-96-37 had not been
closed. A provision for a wholesale rate refund of $980,389 was recorded at
December 31, 1997 to accommodate certain rate adjustment clauses contained
in the Settlement Agreement.

22

Expenses

Chugach's operating expenses for the years ended December 31, 1997, 1996 and
1995 were as follows:

Year Operating expenses

1997 $113,070,990

1996 100,913,804

1995 95,920,361

Operating expenses for 1997 were 12.0% higher than 1996. Operating expenses for
1996 were 5.2% higher than 1995. The reasons for the significant operating
expense variances follow:

Year ended December 31, 1997 compared to the year ended December 31, 1996

Production expense increased in 1997 over 1996. Higher fuel prices and
higher fuel consumption (due to the increase in kWh sales) were the major
causes of this increase. As previously reported, Chugach has completed the
transition to Period 2 under the long-term fuel supply contracts and fuel
costs now result from market-based prices (See Fuel Supply in Item 1).

Purchased power expense increased in 1997 over 1996. This was substantially
due to the system operating scenario throughout 1997 wherein Chugach
purchased power from AEG&T's Soldotna 1 plant to ensure system reliability
on the Kenai Peninsula.

Consumer accounts expense decreased in 1997 from 1996. The majority of this
decrease was due to a lower level of common information services costs
being allocated to this function.

Other interest expense decreased in 1997 from 1996. This was caused by a
lower average outstanding balance on the short-term lines of credit
throughout the year.

Year ended December 31, 1996 compared to the year ended December 31, 1995

Chugach experienced a 17.5% increase in production costs in 1996 over 1995.
This rise is due mostly to higher fuel prices and higher fuel consumption
associated with the increase in kWh sales. As previously reported, Chugach
had completed the transition into Period 2 under the long-term fuel supply
contracts (see Fuel Supply in Item 1). Fuel costs result from market-based
prices instead of the lower prices from Period 1 (old Beluga gas) as
outlined in the contracts.

Distribution expense decreased by 12.2% in 1996 from the same period in
1995. This
23

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 an original
depreciation study that included plant asset account activity through
December 31, 1990. The APUC required that Chugach file an update to the
1990 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 submitted 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 some 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.

Margins

Chugach's assignable margins for the years ended December 31, 1997, 1996 and
1995 were as follows:

Period Net operating margins Nonoperating margins Assignable margins

1997 $ 5,792,379 $ 1,762,018 $ 7,554,397

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

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

Nonoperating margins increased in 1997 over 1996. This increase was caused
mostly by a gain recorded on the sale of a generator hot gas case that had been
held in inventory.

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

24

mostly to the higher level of borrowing from CoBank (capital credits received
are based on patronage).

Patronage Capital (Equity)

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 1995:

1997 1996 1995
------------ ------------ -----------

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

Retirement of capital credits and estate
payments ............................ 3,439,822 4,567,212 4,664,521

Assignable margins ..................... 7,554,397 9,831,371 9,006,193
------------ ------------ -----------

Patronage capital at end of year ....... 104,800,092 100,685,517 95,421,358

Other equity ........................... 4,319,605 3,792,425 3,809,192
------------ ------------ -----------

Total equity ........... $109,119,697 $104,477,942 $99,230,550
------------ ------------ -----------

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 approved an Equity Management
Plan that established a schedule for building Chugach's equity. Since then
Chugach has managed its business with a view toward achieving a TIER of 1.25 or
greater. Chugach's achieved TIERs for the past five years were as follows:

Period TIER

1997 1.30
1996 1.39
1995 1.34
1994 1.58
1993 1.27

25

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
(I), 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 MFI/I 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 1996 to 1997. 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); a decrease in restricted
construction funds due to the reimbursement of general fund cash for
construction expenditures incurred; and an increase in accounts receivable
caused in large part by the remaining uncollected fuel surcharge balance as well
as additional uncollected reimbursements from the Standard Steel matter.

Chugach reacquired an additional $5 million of its Series A 2022 bonds during
1997. Also, a $15 million bond (CoBank 5) was issued under the CoBank
Supplemental Indenture. These activities represent the major change in long-term
obligations during 1997.

Notable changes to other liabilities include: a lower balance outstanding on the
short-term lines of credit due to an adequate liquidity position at year-end; an
increase in accounts payable largely due to the timing of payments to
contractors; a lower balance in other liabilities caused by the return of both
the rate stabilization and submarine cable reserve funds during 1997; and the
decrease in deferred credits resulting from the annual amortization of the
original refinancing gain.

LIQUIDITY AND CAPITAL RESOURCES

Chugach satisfies its operational and capital cash requirements through
internally generated funds, a $50 million line of credit with the NRUCFC and a
$35 million line of credit with CoBank.

At December 31, 1997, no balance was outstanding on the NRUCFC line. The NRUCFC
line of credit expires October 14, 2002. At December 31, 1997, no amount was
outstanding on the CoBank line. The CoBank line of credit expires August 1,
1998, but carries an annual automatic renewal clause.

26

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.

Five-year work plans are fully developed and updated every year. Shown below is
an estimate of capital expenditures for the years 1998 through 2002:

1998 $28.0 million

1999 $40.0 million

2000 $48.2 million

2001 $30.1 million

2002 $22.5 million

Following is a five-year summary of anticipated capital credit retirements:

Year ending Wholesale Retail Total

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

1999 0 1,975,000 1,975,000

2000 0 1,308,000 1,308,000

2001 0 1,497,000 1,497,000

2002 0 1,672,000 1,672,000

27

Chugach's outstanding long-term obligations and maturity at December 31,
1997 are as follows:

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% $ 28,848,000

9.14% 217,705,000

CoBank 8.95% bond maturing in 2002,
with interest payable monthly .......................................... 1,352,847

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

CoBank 6.65% (variable rate, repriced
monthly) bonds maturing 2022, with
interest payable monthly ................................................. 45,000,000

CoBank 6.65% (variable rate repriced
monthly) bonds maturing in 2002, 2007
and 2012 with interest payable monthly ................................... 15,000,000

Capital lease for computer equipment at
an interest rate of 9.10% with monthly
payments of approximately
$1,700 through July 1998 ............................................... 14,166
------------

Total long-term obligations ........................................ 317,920,013

Less current installments ................................................ 5,913,512

Long-term obligations, excluding
current installments ............................................. $312,006,501
------------

28

Sinking Fund Principal maturities
requirements

Year ending First CoBank
December 31 mortgage bonds mortgage bonds Capital leases Total

1998 $ 5,643,000 $ 256,346 $14,166 $ 5,913,512

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

2002 5,232,000 5,177,944 - 10,409,944

Thereafter 217,705,000 65,000,000 - 282,705,000
------------ ---------- --------- -----------

$ 246,553,000 $ 71,352,847 $ 14,166 $ 317,920,013
------------ ---------- ------- -----------

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 1997 was $1.6
million. Annual amortization for 1996 was $1.7 million and for 1995 was $2.2
million.

Chugach has negotiated a supplemental indenture (Third Supplemental Indenture of
Trust) with CoBank which previously allowed up to $80 million in future bond
financing. Recently Chugach finalized an amendment to the Third Supplemental
Indenture of Trust (Seventh Supplemental Indenture of Trust) that eliminates the
maximum aggregate amount of bonds the company may issue under the agreement. At
December 31, 1997, Chugach had bonds in the amount of $71.4 million outstanding
under this financing arrangement. The balance is comprised of a $1.4 million
bond (CoBank 1) that carries an interest rate of 8.95% maturing in 2002, a $10
million bond (CoBank 2) priced at 7.76% due in 2005, a $21.5 million bond
(CoBank 3), currently priced at 6.65% (repriced periodically), a $23.5 million
bond (CoBank 4) currently priced at 6.65% (also repriced periodically), and a
$15 million bond (CoBank 5) currently priced at 6.65% (also repriced
periodically) due in 2002, 2007 and 2012. Principal payments on the CoBank 3 and
4 bonds commence in 2003 and continue through 2022. Additionally, Chugach has
negotiated a similar supplemental indenture (Fifth Supplemental Indenture of
Trust) with NRUCFC for $80 million. At December 31, 1997 there were no amounts
outstanding under this financing arrangement.

Chugach management expects that cash flows from operations and external funding
sources will be sufficient to cover operational and capital funding requirements
in 1998 and thereafter.

29

YEAR 2000

Chugach has considered the impact of Year 2000 issues on its computer systems
and applications and developed a remediation plan. Chugach's consideration
included not only financial information systems, but applications in operational
areas and the impact of interaction with suppliers, customers and vendors where
appropriate. Conversion activities are in process and the Association expects
conversion and testing to be completed by April 1999. Expenditures in 1997 for
the Year 2000 project amounted to approximately $1.7 million and the Association
expects that completion of the project will result in additional expenditures of
approximately $2.9 million.

ENVIRONMENTAL MATTERS

Compliance with Environmental Standards

Chugach's operations are subject to certain Federal, State and local
environmental laws which Chugach monitors to ensure compliance. The costs
associated with environmental compliance are included as a component of both the
operating and capital budget processes. Chugach accrues for costs associated
with environmental remediation obligations when such costs are probable and
reasonably estimable.

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. In December, 1996, Chugach, the other named PRPs and
certain federal agency PRPs (Federal PRPs) entered into a Partial Consent
Decree. Under the Partial Consent Decree, Chugach and the other parties settled
claims for Past Response Costs as well as investigation and other costs incurred
with respect to the Site through December 1996. The Partial Consent Decree,
however, did not settle Chugach's liability for future costs of designing and
performing the cleanup at the Site (Future Costs).

Although the Partial Consent Decree did not settle Chugach's or the other
private PRPs' liability for Future Costs, the Partial Consent Decree binds 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 14.89%. The private PRPs' agreement to perform remedial design and
remedial action (RD/RA) at the Site is memorialized in a new Consent Decree
(RD/RA Decree) that was entered by the Federal District Court in January 1998.
The RD/RA Decree contains 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
30

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 $778,926 to
$1,250,760. Based on recent bid documents for the remedial action, it seems
unlikely that the RD/RA will cost as much as EPA's high-end estimate. These
amounts are only estimates, however, and cannot be definitively known until the
RD/RA work at the Site is completed in late 1998 or 1999.

Under the RD/RA Decree, Chugach and the other PRPs are required to reimburse the
United States for EPA oversight costs and DOJ enforcement costs relating to the
RD/RA. Those costs have been estimated by the United States to equal
approximately $676,000. Chugach's share of these estimated oversight and
enforcement costs would equal $100,656. In addition, one of the private PRPs,
Montgomery Ward, recently filed for bankruptcy protection and did not execute
the RD/RA Consent Decree. As a result, Chugach will be paying an additional sum
equal to Chugach's percentage share of Montgomery Ward's share of Future Costs.
This additional sum is estimated to be approximately $12,600 given current
estimates of Future Costs, EPA oversight costs and DOJ enforcement costs.

Based on the above estimates, the total amount that may be owed by Chugach under
the RD/RA Decree ranges from approximately $892,182 to $1,364,016. These
amounts, particularly the projected EPA oversight costs, are only estimates and
are subject to change, although, in light of recent bid documents, Chugach does
not anticipate that the costs will reach the high-end estimate. 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 for costs associated with alleged natural resource damages and no
prediction can be made whether EPA will request activities through its
reservation of rights under the RD/RA Decree.

Four of Chugach's insurance carriers have been paying, under a reservation of
rights, Chugach's costs of defense for the Site. The carriers reserved their
rights regarding indemnification of Chugach for response costs. In February
1998, Chugach reached an agreement in principle with these four insurance
carriers pursuant to which the carriers will pay the majority of Chugach's costs
relating to the Site, including all Past Costs and Future Costs. This settlement
preserves Chugach's potential claim for natural resource damages and is
anticipated to result in Chugach paying no more that $500,000 for all Site
costs. Management believes that the latter amount would be fully recoverable in
rates 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
31

studies have focused on mailroom operations, remittance processing, new service
connections, system reliability and power production. 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 high
reliability while containing the cost of electricity.

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. In 1997, Chugach was able to lower inventory unit costs,
increase inventory turns and decrease project cost by furnishing materials to
contractors as a direct result of these strategic alliances. Chugach will
continue to explore other areas for strategic alliance opportunities.

During 1997, Chugach adopted a new strategic plan. In this plan, priority issues
were identified that are critical to the company's success. In addition, key
result area targets were developed that will track the most important measures
of Chugach's performance. As the operating environment changes, the strategic
plan will continue to be adapted and further developed to reflect the new market
conditions.

Chugach has been extensively involved in the effort to introduce customer choice
for electric service in Anchorage. After several customers in a neighboring
utility's service area formally asked Chugach to provide their electric power,
Chugach requested access over the other utility's distribution and transmission
system and asked the APUC to enforce the request. At this time, the APUC has not
ruled on this request and it is not possible to predict their decision.

Chugach has been active at the State legislative level in support of the
customer's right to choose their electric power supplier. Virtually all Alaskan
utilities have opposed Chugach's efforts to develop competition and are active
in attempting to create exclusive service territories. At this time, however, no
bill relating to customer choice has moved out of committee. Thus, it is not
possible to predict the outcome of this legislative process.

Chugach has also made organizational changes in preparation for competition.
Recognizing that the new marketplace will probably be "unbundled" along the
functional lines of generation, transmission and distribution, and retail
services, Chugach's new organizational structure reflects these functions.
Chugach now operates with three divisions: Finance and Energy Supply,
Transmission and Distribution Network Services and Retail Services. This
structure will better allow Chugach to compete in the rapidly changing electric
utility industry. In addition, Chugach has formed a Marketing Department,
continues to operate its Key Account program for larger customers and continues
to develop new services to enhance existing customer's satisfaction.

Chugach has three collective bargaining agreements with the IBEW that are
currently open for negotiation. Although each of the contracts has an expiration
date of January 31, 1998, the parties have agreed that the contracts shall
continue in effect until new contracts are put in place. If the parties cannot
agree on the terms of new agreements, all outstanding issues will

32

be decided through interest arbitration. The Union cannot strike and Chugach
cannot lockout under the continuing agreement.

33

Item 8 - Financial Statements and Supplementary Data

December 31, 1997 and 1996

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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.

Anchorage, Alaska /s/ KPMG Peat Marwick LLP
February 20, 1998

34

CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
December 31, 1997 and 1996

Assets 1997 1996
------------ ------------

Utility plant (notes 2, 13 and 14):

Electric plant in service ................ $625,365,803 $615,464,060

Construction work in progress ............ 24,664,395 19,826,957
------------ ------------

650,030,198 635,291,017

Less accumulated depreciation ............ 232,136,950 215,411,223
------------ ------------

Net utility plant ...... 417,893,248 419,879,794
------------ ------------

Other property and investments, at cost:

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

Investments in associated organizations
(note 3) .............................. 7,864,271 7,647,189

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

7,867,821 9,249,978
------------ ------------

Current assets:

Cash and cash equivalents, including
repurchase agreements of $6,351,291 in
1997 and $6,216,073 in 1996 ........... 5,224,529 5,419,819

Cash - restricted construction funds ..... 364,778 1,371,386

Special deposits ......................... 151,703 89,232

Accounts receivable, less provision for
doubtful accounts of $368,029 in 1997
and $367,085 in 1996 .................. 23,999,138 15,369,883

Materials and supplies, at average cost .. 15,619,085 16,187,592

Prepayments .............................. 558,371 694,257

Other current assets ..................... 305,415 294,380
------------ ------------

Total current assets ..... 46,223,019 39,426,549
------------ ------------

Deferred charges (notes 9 and 15) ............. 13,583,211 13,932,109
------------ ------------

$485,567,299 $482,488,430
------------ ------------

See accompanying notes to financial statements.

35

CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets, Continued
December 31, 1997 and 1996

Liabilities 1997 1996
------------ ------------

Equities and margins (note 11):

Memberships .................................$ 861,543 $ 812,748

Patronage capital (note 4) .................. 104,800,092 100,685,517

Other (note 5) .............................. 3,458,062 2,979,677
------------ ------------

109,119,697 104,477,942
------------ ------------

Long-term obligations,
excluding current installments (notes 6, 7 and 11)

First mortgage bonds payable ................ 240,910,000 251,553,000

National Bank for Cooperatives bonds
payable .................................... 71,096,501 56,352,847
------------ ------------

312,006,501 307,905,847
------------ ------------

Current liabilities:

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

Current installments of long-term debt and
capital leases (notes 6, 7 and 11) ....... 5,913,512 5,971,752

Accounts payable ............................ 7,038,234 5,178,161

Consumer deposits ........................... 1,038,241 1,066,906

Accrued interest ............................ 6,904,335 7,076,388

Salaries, wages and benefits ................ 3,655,101 3,583,422

Fuel ........................................ 6,611,415 6,047,574

Other (note 15) ............................. 3,300,310 5,012,191
------------ ------------

Total current liabilities .... 34,461,148 36,686,394
------------ ------------

Deferred credits (note 12) ....................... 29,979,953 33,418,247
------------ ------------

$485,567,299 $482,488,430
------------ ------------

See accompanying notes to financial statements.

36

CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage
Capital Years ended December 31, 1997, 1996
and 1995

1997 1996 1995
------------- ------------- -------------

Operating revenues ................... $ 143,947,730 $ 134,876,668 $ 129,379,308
------------- ------------- -------------

Operating expenses:

Production ...................... 45,879,337 37,066,444 31,533,567

Purchased power ................. 14,033,282 10,024,483 10,136,623

Transmission .................... 3,378,540 3,667,039 3,460,823

Distribution .................... 8,640,443 8,789,683 10,008,020

Consumer accounts ............... 4,955,838 6,978,856 7,089,847

Administrative, general and other 15,071,966 13,713,690 14,395,125

Depreciation .................... 21,111,584 20,673,609 19,296,356
------------- ------------- -------------

Total operating expenses 113,070,990 100,913,804 95,920,361
------------- ------------- -------------

Interest:

On long-term debt ............... 24,942,281 25,029,257 25,559,725

Charged to construction - credit (629,764) (616,090) (1,114,928)

On short-term debt .............. 771,844 935,883 612,375
------------- ------------- -------------

Net interest ............ 25,084,361 25,349,050 25,057,172
------------- ------------- -------------

Net operating margins ... 5,792,379 8,613,814 8,401,775

Nonoperating margins:

Interest income ................. 632,191 695,699 730,041

Other ........................... 520,414 566,908 351,586

Property gain (loss) ............ 609,413 (45,050) (477,209)
------------- ------------- -------------

Assignable margins ....... 7,554,397 9,831,371 9,006,193

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

Retirement of capital credits and
estate payments (note 4) .......... (3,439,822) (4,567,212) (4,664,521)
------------- ------------- -------------

Patronage capital at end of year ..... $ 104,800,092 $ 100,685,517 $ 95,421,358
------------- ------------- -------------

See accompanying notes to financial statements.

37

CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995

1997 1996 1995
------------ ------------ ------------

Cash flows from operating activities:
Assignable margins ........................................................ $ 7,554,397 $ 9,831,371 $ 9,006,193
------------ ------------ ------------

Adjustments to reconcile assignable margins to net cash provided by operating
activities:
Depreciation and amortization ............................................. 23,532,263 23,221,162 21,846,611

Capitalized interest ...................................................... (799,999) (809,302) (1,354,273)

Property (gains) losses and obsolete inventory write-off .................. (609,413) 45,050 477,434

Other ..................................................................... (241,317) (265,643) 343,806

Changes in assets and liabilities:
(Increase) decrease in assets:
Special deposits ..................................................... (62,471) 8,557 (44,332)

Accounts receivable .................................................. (8,629,254) 1,738,940 (3,492,435)

Notes receivable ..................................................... -- -- 2,533

Prepayments .......................................................... 135,886 (19,140) 194,790

Materials and supplies, net .......................................... 568,507 2,311,191 1,527,094

Deferred charges ..................................................... (2,299,547) (4,581,795) (2,222,963)

Other ................................................................ (11,035) 117,829 (14,740)

Increase (decrease) in liabilities:
Accounts payable ..................................................... 1,860,074 (1,481,316) 3,125,594

Accrued interest ..................................................... (172,052) (976,398) (136,434)

Deferred credits ..................................................... (755,366) (8,023,874) (3,274,768)

Consumer deposits, net ............................................... (28,665) (52,150) (73,789)

Other ................................................................ (1,076,365) 5,956,463 389,099
------------ ------------ ------------

Total adjustments ............................................... 11,411,246 17,189,574 17,293,227
------------ ------------ ------------

Net cash provided by operating
activities .................................................... 18,965,643 27,020,945 26,299,420
------------ ------------ ------------

Cash flows from investing activities:
Extension and replacement of plant ........................................ (17,487,859) (20,605,093) (22,058,887)

Decrease in investments in associated organizations ....................... 24,235 132,261 267,393
------------ ------------ ------------

Net cash (used) in investing activities ......................... (17,463,624) (20,472,832) (21,791,494)
------------ ------------ ------------

Cash flows from financing activities:

Transfer of restricted construction funds ................................. 1,006,608 (1,371,386) --

Net increase (decrease) in notes payable .................................. (2,750,000) (5,250,000) 500,000

Proceeds from long-term debt .............................................. 15,000,000 45,000,000 10,000,000

Repayments of long-term debt .............................................. (10,957,586) (42,429,853) (8,312,527)

Memberships and donations received (refunded) ............................. 527,179 (16,768) 309,821

Retirement of patronage capital ........................................... (3,439,822) (4,567,212) (4,664,521)

Increase in (refunds) and transfers of consumer advances
for construction ........................................................ (1,083,688) 1,627,442 (1,309,828)
------------ ------------ ------------

Net cash used by financing
activities ................................................... (1,697,309) (7,007,777) (3,477,055)
------------ ------------ ------------

Net increase (decrease) in cash and cash
equivalents .................................................. (195,290) (459,664) 1,030,871

Cash and cash equivalents at beginning of year ................................. 5,419,819 5,879,483 4,848,612
------------ ------------ ------------

Cash and cash equivalents at end of year ....................................... $ 5,224,529 $ 5,419,819 $ 5,879,483
------------ ------------ ------------

Supplemental disclosure of cash flow information - ............................. $ 25,256,413 $ 26,325,449 $ 25,193,606
------------ ------------ ------------
interest expense paid, net of amounts capitalized

See accompanying notes to financial statements.

38

CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements

December 31, 1997 and 1996

(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 relating to the reporting of
assets and liabilities and the disclosure of contingent assets and
liabilities as of the date of the balance sheet and revenues and expenses
for the reporting period. Actual results could differ from those
estimates.

Summary of Significant Accounting Policies

Regulation

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

39

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

to each member on the basis of patronage. This patronage capital
constitutes the principal equity of the Association.

In July 1997, the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) reached a consensus on EITF 97-4 "Deregulation
of the Pricing of Electricity - Issues Related to the Application of FASB
Statements No. 71 and No 101." This issue discusses when an enterprise
should stop applying FAS No. 71 to the separable portion of its business
whose product or service pricing is being deregulated and how a company
should account for its stranded costs after it has discontinued the
application of FAS No. 71. It also provides guidance with respect to the
evaluation of regulatory assets and liabilities and concluded that these
items should be determined on the basis of where in the business the
regulated cash flows to realize and settle them will be derived. The
Association's current method of accounting is consistent with the EITF.

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

Reclassifications

Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 presentation.

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.

40

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

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 were returned, over a twelve month
period, in the form of a credit to the Fuel Cost Recovery Adjustment
(FCRA) factor.

In 1997, Chugach experienced higher than anticipated fuel and purchased
power costs that were considered unusual and transitory in nature. In an
effort to maintain overall price stability, Chugach requested and was
granted a waiver by the APUC to leave fuel surcharge rates at the
computed second quarter 1997 level through the fourth quarter 1997.
Further, Chugach elected to forego collection of approximately $3,500,000
of fuel and purchased power costs (representing cumulative uncollected
fuel surcharge through May 1997).

Routine quarterly adjustments have resumed and fuel surcharge rates
increased effective January 1998. June through December 1997
undercollected fuel and purchased power costs will be recovered
throughout 1998 under a plan approved by the APUC.

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 was required to file
Cost of Service and Revenue Requirement Studies. These studies were filed
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. At
December 31, 1997,

41

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

Docket U-96-37 had not been closed. A provision for a wholesale rate
refund of $980,389 was recorded at December 31, 1997 to accommodate
certain rate adjustment clauses contained in the Settlement Agreement.

Investments in Associated Organizations

Investments in associated organizations represent capital requirements as
part of financing arrangements.

The Association has the intent and ability to hold these investments to
maturity, and accordingly has elected to account for them at cost under
SFAS 115.

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, 1997 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 1.88 - 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

42

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

General plant rates were implemented. In 1996, new Generation plant
depreciation rates were implemented.

In 1997 an update of the Depreciation Study was completed utilizing
Electric Plant in Service balances as of December 31, 1995. Depreciation
rates developed in that Study will be implemented in January, 1998. No
phase-in of rates is required by the APUC.

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 8.3% during 1997, 8.6% during 1996 and 8.2% during 1995.

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).

43

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

Environmental Remediation Costs

The Association accrues for losses associated with environmental
remediation obligations when such losses are probable and reasonably
estimable. Such accruals are adjusted as further information develops or
circumstances change. Estimates of future costs for environmental
remediation obligations are not discounted to their present value.

2) Utility Plant Summary

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

1997 1996
------------ ------------

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

Hydraulic production plant ............ 8,798,695 8,798,695

Other production plant ................ 108,067,665 107,278,076

Transmission plant .................... 191,960,788 189,961,660

Distribution plant .................... 151,076,058 144,939,571

General plant ......................... 62,575,576 61,174,312

Unclassified electric plant in service 35,941,017 37,533,642

Equipment under capital lease ......... 56,323 674,323

Other ................................. 6,496,812 4,710,912
------------ ------------

Total electric plant in service ... 625,365,803 615,464,060

Construction work in progress ............ 24,664,395 19,826,957
------------ ------------

Total electric plant in service and
construction work in progress ... $650,030,198 $635,291,017
------------ ------------

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.

44

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

(3) Investments in Associated Organizations

Investments in associated organizations include the following at December
31:

1997 1996
---- ----

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

National Bank for Cooperatives (CoBank) 1,565,097 1,352,010

NRUCFC capital term certificates 32,300 29,120

Other 170,894 170,079
--------- ---------

$ 7,864,271 $ 7,647,189
--------- ---------

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, 1997, out of the total of $104,800,092 patronage
capital, the Association had assigned $97,245,695 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 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 December 1997, the Board of Directors authorized
the retirement of $1,859,730 of retail capital credits representing the
remaining 1983 patronage capital. The Board of Directors also authorized
the retirement of 1987 wholesale capital credits in the amount of
$1,205,510 in December 1997. A special

45

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

wholesale capital credit retirement of $88,818, representing wholesale
margins from 1985, was authorized in December 1997.

Following is a five-year summary of anticipated capital credit
retirements:

Year ending Wholesale Retail Total

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

1999 0 1,975,000 1,975,000

2000 0 1,308,000 1,308,000

2001 0 1,497,000 1,497,000

2002 0 1,672,000 1,672,000

(5) Other Equities

A summary of other equities at December 31 follows:

1997 1996
---- ----

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

Donated capital 186,199 183,580

Unredeemed capital credit retirement 3,248,238 2,772,472
---------- ----------

$ 3,458,062 $ 2,979,677
---------- ----------

46

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

(6) Long-term Obligations

Long-term obligations at December 31 are as follows:

1997 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% $ 28,848,000 $ 34,554,000

9.14% 217,705,000 222,705,000

CoBank 8.95% bond maturing in 2002,
with interest payable monthly .......................................... 1,352,847 1,587,703

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

CoBank 6.65% (variable rate, repriced
monthly) bonds maturing 2022, with
interest payable monthly ................................................. 45,000,000 45,000,000

CoBank 6.65% (variable rate repriced
monthly) bonds maturing in 2002, 2007
and 2012 with interest payable monthly ................................... 15,000,000 --

Capital lease for computer equipment at
an interest rate of 9.10% with monthly
payments of approximately
$1,700 through July 1998 ............................................... 14,166 30,896
------------ ------------

Total long-term obligations ........................................ 317,920,013 313,877,599

Less current installments ................................................ 5,913,512 5,971,752
------------ ------------

Long-term obligations, excluding
current installments ............................................. $312,006,501 $307,905,847
------------ ------------

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

Under provisions of its financing arrangements with CoBank (Third
Supplemental Indenture of Trust, as amended by the Seventh Supplemental
Indenture of Trust), there is no limit on the maximum aggregate amount of
bonds which may be issued. Chugach has also negotiated a supplemental
indenture with NRUCFC (Fifth Supplemental Indenture of Trust) for $80
million, with no amounts outstanding at December 31, 1997.

47

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

Maturities of Long-term Obligations

Long-term obligations at December 31, 1997 mature as follows:

Sinking Fund Principal maturities
requirements

Year ending First CoBank
December 31 mortgage bonds mortgage bonds Capital leases Total

1998 $ 5,643,000 $ 256,346 $14,166 $ 5,913,512

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

2002 5,232,000 5,177,944 - 10,409,944

Thereafter 217,705,000 65,000,000 - 282,705,000
------------ ---------- --------- -----------

$ 246,553,000 $ 71,352,847 $ 14,166 $ 317,920,013
------------ ---------- ------- -----------

Lines of Credit

The Association had an annual line of credit of $35,000,000 in 1997 and
1996 available with CoBank. The CoBank line of credit expires August 1,
1998 but carries an annual automatic renewal clause. At December 31, 1997
and 1996, there was no outstanding balance on this line of credit. In
addition, the Association had an annual line of credit of $50,000,000
available at December 31, 1997 and 1996 with NRUCFC. At December 31, 1997
there was no outstanding balance on this line of credit. At December 31,
1996, $2,750,000 was outstanding at an interest rate of 6.35%. The NRUCFC
line of credit expires October 14, 2002.

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 12).

48

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

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 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 109.3750. 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 108.5280. Total transaction cost, including accrued
interest and premium, was $1,356,567.

In April 1997, Chugach reacquired $5,000,000 of the Series A 2022 Bonds
at a premium of 109.7500. Total transaction cost, including accrued
interest and premium, was $5,510,350.

49

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

(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:

1997 1996
---- ----

Carrying Fair Carrying Fair
Value Value Value Value

Long-term obligations
(including current installments) $317,920 $352,755 $313,878 $348,273

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

(8) 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 $1,810,000 in 1997, $1,889,000 in 1996 and
$1,860,000 in 1995. For several years, NRECA did not require
contributions to the plan; consequently, no pension cost was incurred. 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. In 1997 approximately $601,000 was contributed to the
NRECA plan as the moratorium was not in effect.

50

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

(9) Deferred Charges

Deferred charges consisted of the following at December 31:

1997 1996
---- ----

Debt issuance and reacquisition costs $ 4,006,295 $ 4,220,403

Refurbishment of transmission equipment 280,864 290,123

Computer software and conversion 5,596,222 4,702,932

Studies 1,162,416 1,021,820

Fuel supply negotiations 415,042 437,758

Major overhaul of steam generating unit 837,517 1,042,624

Other (note 15) 1,284,855 2,216,449
---------- ----------

$ 13,583,211 $ 13,932,109
---------- ----------

(10) Income Taxes

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

(11) 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.

51

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

(12) Deferred Credits

Deferred credits at December 31 consisted of the following:

1997 1996
---- ----

Regulatory liability - unamortized gain on
reacquired debt $ 27,477,114 $ 29,726,201

Refundable consumer advances for
construction 1,821,002 2,904,690

Estimated initial installation costs for
transformers and meters 364,941 470,460

Post retirement benefit obligation 255,700 255,700

Other 61,196 61,196
----------- -----------

$ 29,979,953 $ 33,418,247
----------- -----------

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 $1,700,000 was recorded in 1997. Approximately,
$2,000,000 of the deferred gain was amortized annually in 1996 and 1995.

(13) 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

52

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

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%.

In December 1997, $59,485,000 of the Power Revenue Bonds, Third Series
and $47,710,000 of the Power Revenue Bonds, Fourth Series were refinanced
under a forward refunding arrangement. The true interest cost of the new
bonds decreased to 5.611% for the Third Series bonds and 6.06% for the
Fourth Series bonds from 7.295% and 7.235%, respectively. This refunding
produced a Net Present Value saving to the participating utilities of
approximately $8,500,000. The Association's share of these savings will
be approximately $1,600,000.

The following represents information with respect to Bradley Lake at June
30, 1997 (the most recent date for which information is available). The
Association's share of expenses were $3,981,624 in 1997, $3,957,930 in
1996 and $4,100,154 in 1995 and are included in purchased power in the
accompanying financial statements.

Other electric plant in service of $6,496,812 represents the
Association's share of a Bradley Lake transmission line financed
internally and the Association's share of the Eklutna Hydroelectric
Project, purchased in 1997.

Proportionate
Total share

Plant in service $ 306,792,274 $ 93,264,851

Accumulated depreciation (39,645,544) (12,052,245)

Interest expense 11,107,824 3,337,779

(14) Eklutna Hydroelectric Project

During October 1997, the ownership of the Eklutna Hydroelectric Project
formally transferred from the Alaska Power Administration to the
participating utilities. This group consists of the Association along
with Matanuska Electric Association (MEA) and Municipal Light and Power
(ML&P).

Other electric plant in service includes $1,785,900 representing the
Association's share of the Eklutna Hydroelectric Plant. This balance will
be amortized over the estimated life

53

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

of the facility. During the transition phase and after the transfer of
ownership, Chugach, MEA and ML&P have jointly operated the facility. Each
participant contributes their proportionate share for operations and
maintenance costs. Under net billing arrangements, Chugach then
reimburses MEA for their share of the costs. Prior to the transfer of
ownership, these costs were recorded as purchased power expenses; after
the transfer these costs were recorded as power production expenses.

(15) Commitments and Contingencies
Construction

The Association is engaged in a continuous construction program.
Management estimates that approximately $28,000,000 will be spent on the
construction program in 1998, including approximately $4,100,000 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. In
December, 1996, Chugach, the other named PRPs and certain federal agency
PRPs (Federal PRPs) entered into a Partial Consent Decree. Under the
Partial Consent Decree, Chugach and the other parties settled claims for
Past Response Costs as well as investigation and other costs incurred
with respect to the Site through December 1996. The Partial Consent
Decree, however, did not settle Chugach's liability for future costs of
designing and performing the cleanup at the Site (Future Costs).

Although the Partial Consent Decree did not settle Chugach's or the other
private PRPs' liability for Future Costs, the Partial Consent Decree
binds 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

54

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

liability for Future Costs will equal 14.89%. The private PRPs' agreement
to perform remedial design and remedial action (RD/RA) at the Site is
memorialized in a new Consent Decree (RD/RA Decree) that was entered by
the Federal District Court in January 1998. The RD/RA Decree contains 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 $778,926 to $1,250,760. Based on
recent bid documents for the remedial action, it seems unlikely that the
RD/RA will cost as much as EPA's high-end estimate. These amounts are
only estimates, however, and cannot be definitively known until the RD/RA
work at the Site is completed in late 1998 or 1999.

Under the RD/RA Decree, Chugach and the other PRPs are required to
reimburse the United States for EPA oversight costs and DOJ enforcement
costs relating to the RD/RA. Those costs have been estimated by the
United States to equal approximately $676,000. Chugach's share of these
estimated oversight and enforcement costs would equal $100,656. In
addition, one of the private PRPs, Montgomery Ward, recently filed for
bankruptcy protection and did not execute the RD/RA Consent Decree. As a
result, Chugach will be paying an additional sum equal to Chugach's
percentage share of Montgomery Ward's share of Future Costs. This
additional sum is estimated to be approximately $12,600 given current
estimates of Future Costs, EPA oversight costs and DOJ enforcement costs.

Based on the above estimates, the total amount that may be owed by
Chugach under the RD/RA Decree ranges from approximately $892,182 to
$1,364,016. These amounts, particularly the projected EPA oversight
costs, are only estimates and are subject to change, although, in light
of recent bid documents, Chugach does not anticipate that the costs will
reach the high-end estimate. 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 for costs
associated with alleged natural resource damages and no prediction can be
made whether EPA will request activities through its reservation of
rights under the RD/RA Decree.

Four of Chugach's insurance carriers have been paying, under a
reservation of rights, Chugach's costs of defense for the Site. The
carriers reserved their rights regarding indemnification of Chugach for
response costs. In February 1998, Chugach reached an agreement in
principle with these four insurance carriers pursuant to which the
carriers

55

CHUGACH ELECTRIC ASSOCIATION, INC.

Notes to Financial Statements

will pay the majority of Chugach's costs relating to the Site, including
all Past Costs and Future Costs. This settlement preserves Chugach's
potential claim for natural resource damages and is anticipated to result
in Chugach paying no more that $500,000 for all Site costs. Management
believes that the latter amount would be fully recoverable in rates 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 $.000280,
effective January 1, 1998.

56

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 the General Manager. The following table sets forth
certain information with respect to the executive management of Chugach:

Name Age Position held

Eugene N. Bjornstad 60 General Manager

Lee D. Thibert 42 Executive Manager, Transmission &
Distribution Network Services

Evan J. Griffith, Jr. 56 Executive Manager, Finance &
Energy Supply

William R. Stewart 51 Executive Manager, Retail Services

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, in a reorganization on June 1, 1997, was appointed Executive
Manager, Transmission and Distribution Network Services. Prior to that he was
Executive Manager, Operating Divisions from June of 1994. Before moving up to
the Executive Manager position, he served as Director of Operations from June
1987.

Evan J. Griffith, Jr. was Executive Manager, Finance and Planning of Chugach
from August 1989 to June 1997. In the June 1, 1997 reorganization he assumed the
position of Executive Manager, Finance and Energy Supply. Prior to coming to
Chugach, he was Budget/Program Analyst for the Anchorage Municipal Assembly from
August 1984 to August 1989.

57

William R. Stewart was Executive Manager, Administration of Chugach from July
1987 to June 1, 1997 when he assumed the duty as Executive Manager, Retail
Services in a reorganization of functions. He 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.

Board of Directors

Pat Jasper - President. Pat Jasper, 68, 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 served as Vice President until April 1997
when she became President.

Ed Granger - Vice President. Ed Granger, 63, 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. He became Vice President in April 1997.

Christopher Birch - Secretary. Chris Birch, 47, is a professional engineer
employed by the Alaska Department of Transportation and Public Facilities. He
was appointed to the Board to fill a vacated seat in October 1996 and was
elected to that seat in April 1997.

Mary Minder - Treasurer. Mary Minder, 58, was elected to the Board in April 1995
and served as Treasurer until April 1996 when she became Secretary. In April
1997, she was again elected Treasurer. Ms. Minder is a realtor and associate
real estate broker.

Elizabeth Page "Pat" Kennedy - Director. Pat Kennedy, 59, 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.

Raymond A. "Ray" Kreig - President. Ray Kreig, 51, 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 was President from April 1995 to April 1997.

Bruce Davison - Director. Bruce Davison, 49, was appointed to the Association's
Board of Directors in June of 1997. Prior to his appointment, Mr. Davison served
two years on the Chugach Electric Association Bylaws Committee. Mr. Davison is a
25-year Alaska resident and a partner in the law firm of Davison & Davison, Inc.

Kathleen A. Weeks - Treasurer. Kathleen Weeks, 51, is an attorney in private
practice. Her specialty is divorce, real estate and probate law. She was elected
to the Board in April 1995,

58

served as Vice President from that time to April 1996 when she became Treasurer.
Ms. Weeks was removed from the Board in June 1997 after the adoption of a bylaw
requiring board members to physically reside - not just receive service in -
Chugach's traditional service area.

Item 11 - Executive Compensation

CASH COMPENSATION

The following table sets forth all remuneration paid by Chugach for the calendar
years ended December 31, 1997, 1996 and 1995 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 1997 $ 164,482

1996 167,296

1995 164,924

Lee D. Thibert Executive Manager, 1997 125,626
Transmission & Distribution
Network Services 1996 118,562

1995 119,312

Evan J. Griffith, Jr. Executive Manager, Finance & 1997 126,866
Energy Supply
1996 137,434

1995 126,378

William R. Stewart Executive Manager, Retail 1997 142,213
Services
1996 134,393

1995 129,738

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

59

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 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

60

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, 1997 taken into account under the Plan for
the executive officers is shown below. Base salary for 1997 taken into account
under the Plan for purposes of determining final average salary is also
included.

Benefit Covered
Name Principal Position Service Compensation

Eugene N. Bjornstad General Manager 13.7 $ 156,021

Lee D. Thibert Executive Manager, T&D 9.7 122,242
Network Services

Evan J. Griffith, Jr. Executive Manager, 7.4 123,968
Finance & Energy Supply

William R. Stewart Executive Manager, Retail 27.9 123,968
Services

61

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 34
Balance Sheets, December 31, 1997 and 1996 35
Statements of Revenues, Expenses and Patronage Capital,
Years ended December 31, 1997, 1996 and 1995 37
Statements of Cash Flows,
Years ended December 31, 1997, 1996 and 1995 38
Notes to Financial Statements 39-56

Financial Statement Schedules

Included in Part IV of this Report:
Independent Auditors' Report 63
Schedule II - Valuation and Qualifying Accounts,
Years ended December 31, 1997, 1996 and 1995 64

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.

62

Independent Auditors' Report

The Board of Directors
Chugach Electric Association, Inc.:

Under the date of February 20, 1998, we reported on the balance sheets of
Chugach Electric Association, Inc. as of December 31, 1997 and 1996 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, 1997 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 1997 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
February 20, 1998

63

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, 1997 $(367,085) $(618,379) $617,435 $(368,029)

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

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

64

EXHIBITS

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

Exhibit Description Page
Number

*3.1 Articles of Incorporation of the Registrant

**3.2 Bylaws of the Registrant (as amended April 30, 1997)

*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 Supplemental
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

4.4.5 Closing documents dated November 26, 1997 First
Mortgage Bond, CoBank Series (CoBank-5), Due
June 15, 2012 pursuant to the Third Supplemental
Indenture of Trust 77

Exhibit
number Description Page

*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

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

***4.8 Seventh Supplemental Indenture of Trust by and
among Chugach Electric Association, Inc. and
Seattle-First National Bank dated June 1, 1997

*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

65

Exhibit
number Description Page

*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

*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.

*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.

66

Exhibit
number Description Page

*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

*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.

67

Exhibit
number Description Page

*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

*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.

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

Exhibit
number Description Page

*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

*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

68

Exhibit
number Description Page

*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.

*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

*10.52 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

69

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

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

***10.63 National Bank for Cooperatives (CoBank) Credit
Agreement dated June 22, 1994

***10.63.1 Amendment No. 1 to National Bank for Cooperatives
(CoBank) Credit Agreement dated June 1, 1997

10.64 Eklutna Hydroelectric Project Closing Documents
dated October 2, 1997 96

10.65 Fifty Million Dollar Line of Credit Agreement between
Chugach and the National Rural Utilities Cooperative
Finance Corporation executed October 22, 1997 215

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, 1996.

** Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q dated June 30, 1997.

*** Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q dated September 30, 1997.

REPORTS ON FORM 8-K

The Company was not required to file any report on Form 8-K for the year ended
December 31, 1997.

70

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 30, 1998.

CHUGACH ELECTRIC ASSOCIATION, INC.

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

Date: March 30, 1998

71

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 30, 1998:

/s/ Eugene N. Bjornstad
- -----------------------------------
Eugene N. Bjornstad General Manager
/s/ Lee D. Thibert
- -----------------------------------
Lee D. Thibert Executive Manager, T&D Network Services
/s/ Evan J. Griffith, Jr.
- -----------------------------------
Evan J. Griffith, Jr. Executive Manager, Finance & Energy Supply
/s/ William R. Stewart (principal financial officer)
- -----------------------------------
William R. Stewart Executive Manager, Retail Services
/s/ Michael R. Cunningham
- -----------------------------------
Michael R. Cunningham Controller
/s/ Patricia Jasper (principal accounting officer)
- -----------------------------------
Patricia Jasper President and Director
/s/ Ed Granger (principal executive officer)
- -----------------------------------
Ed Granger Vice President and Director
/s/ Christopher Birch
- -----------------------------------
Christopher Birch Secretary and Director
/s/ Mary Minder
- -----------------------------------
Mary Minder Treasurer and Director
/s/ Raymond A. Kreig
- -----------------------------------
Raymond A. Kreig Director
/s/ Bruce Davison
- -----------------------------------
Bruce Davison Director
/s/ Elizabeth P. Kennedy
- -----------------------------------
Elizabeth P. Kennedy Director

72

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 1997 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.

73