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EX-31.2 - EX-31.2 - CHUGACH ELECTRIC ASSOCIATION INCc004-20160331xex31_2.htm
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EX-32.1 - EX-32.1 - CHUGACH ELECTRIC ASSOCIATION INCc004-20160331xex32_1.htm
EX-32.2 - EX-32.2 - CHUGACH ELECTRIC ASSOCIATION INCc004-20160331xex32_2.htm



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXHANGE ACT OF 1934



For the quarterly period ended March 31, 2016



OR



TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934





Commission file number 33-42125



CHUGACH ELECTRIC ASSOCIATION, INC.

(Exact name of registrant as specifies in its charter)





 

 

 

 

 

 

 

 

 



State of Alaska

(State or other jurisdiction of

incorporation or organization)

 

 

92-0014224

(I.R.S. Employer

Identification No.)

 

5601 Electron Drive, Anchorage, AK

(Address of principal executive offices)

 

99518

(Zip Code)

 

(907) 563-7494

(Registrant’s telephone number, including area code)

 

None

(Former name, former address, and former fiscal year if changed since last report)





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.

 Yes   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 Yes   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer

Non-accelerated filer Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes   No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

NONE



 

 


 



CHUGACH ELECTRIC ASSOCIATION, INC.

TABLE OF CONTENTS





 

 

 



Caution Regarding Forward-Looking Statements

Part I. Financial Information

 



 

 

 



Item 1.

Financial Statements (unaudited)



 

Balance Sheets - as of March 31, 2016 and December 31, 2015



 

Statements of Operations - Three months ended March 31, 2016 and March 31, 2015



 

Statements of Cash Flows - Three months ended March 31, 2016 and March 31, 2015



 

Notes to Financial Statements



Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22 



Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33 



Item 4.

Controls and Procedures

34 



 

 

 

Part II. Other Information

 



Item 1.

Legal Proceedings

34 



Item 1A.

Risk Factors

34 



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

35 



Item 3.

Defaults Upon Senior Securities

35 



Item 4.

Mine Safety Disclosures

35 



Item 5.

Other Information

35 



Item 6.

Exhibits

36 



 

Signatures

37 



 

Exhibits

38 







 

 


 





CAUTION REGARDING FORWARD-LOOKING STATEMENTS



Statements in this report that do not relate to historical facts, including statements relating to future plans, events or performance, are forward-looking statements that involve risks and uncertainties.  Actual results, events or performance may differ materially.  Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this report and the accuracy of which is subject to inherent uncertainty.  It is suggested that these statements be read in conjunction with the audited financial statements for Chugach Electric Association Inc. (Chugach) for the year ended December 31, 2015, filed as part of Chugach’s annual report on Form 10-K.  Chugach undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances that may occur after the date of this report or the effect of those events or circumstances on any of the forward-looking statements contained in this report, except as required by law.



PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



The unaudited financial statements and notes to the unaudited financial statements of Chugach as of and for the quarter ended March 31, 2016, follow.





 

2


 

Table Of Contents

 

Chugach Electric Association, Inc.

Balance Sheets

(Unaudited)



























 

 

 

 

 

 



 

 

 

 

 

 

Assets

 

March 31, 2016

 

December 31, 2015



 

 

 

 

 

 

Utility Plant:

 

 

 

 

 

 

Electric plant in service

 

$

1,131,827,669 

 

$

1,128,474,292 

Construction work in progress

 

 

16,377,052 

 

 

15,601,374 

Total utility plant

 

 

1,148,204,721 

 

 

1,144,075,666 

Less accumulated depreciation

 

 

(476,738,753)

 

 

(469,199,226)

Net utility plant

 

 

671,465,968 

 

 

674,876,440 



 

 

 

 

 

 

Other property and investments, at cost:

 

 

 

 

 

 

Nonutility property

 

 

76,889 

 

 

76,889 

Investments in associated organizations

 

 

9,317,355 

 

 

9,635,519 

Special funds

 

 

5,344,422 

 

 

763,913 

Restricted cash equivalents

 

 

1,855,094 

 

 

1,705,760 

Total other property and investments

 

 

16,593,760 

 

 

12,182,081 



 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

 

14,306,906 

 

 

15,626,919 

Special deposits

 

 

74,416 

 

 

74,416 

Restricted cash equivalents

 

 

994,177 

 

 

1,143,467 

Accounts receivable, net

 

 

25,658,982 

 

 

28,232,930 

Materials and supplies

 

 

28,143,142 

 

 

27,611,184 

Fuel stock

 

 

5,805,950 

 

 

7,063,541 

Prepayments

 

 

2,873,946 

 

 

1,466,301 

Other current assets

 

 

342,048 

 

 

225,079 

Total current assets

 

 

78,199,567 

 

 

81,443,837 



 

 

 

 

 

 

Deferred charges, net

 

 

16,420,316 

 

 

16,564,275 



 

 

 

 

 

 

Total assets

 

$

782,679,611 

 

$

785,066,633 



















 

3


 

Table Of Contents

 

Chugach Electric Association, Inc.

Balance Sheets (continued)

(Unaudited)





 

 

 

 

 

 



 

 

 

 

 

 



Liabilities, Equities and Margins

 

March 31, 2016

 

December 31, 2015



 

 

 

 

 

 

Equities and margins:

 

 

 

 

 

 

Memberships

 

$

1,667,979 

 

$

1,661,744 

Patronage capital

 

 

170,050,276 

 

 

167,447,781 

Other

 

 

12,535,665 

 

 

12,527,856 

Total equities and margins

 

 

184,253,920 

 

 

181,637,381 



 

 

 

 

 

 

Long-term obligations, excluding current installments:

 

 

 

 

 

 

Bonds payable

 

 

405,249,998 

 

 

426,666,665 

National Bank for Cooperatives bond payable

 

 

20,834,341 

 

 

22,241,852 

Less unamortized debt issuance costs

 

 

(2,846,190)

 

 

(2,928,378)

Total long-term obligations

 

 

423,238,149 

 

 

445,980,139 



 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current installments of long-term obligations

 

 

24,233,819 

 

 

24,115,980 

Commercial paper

 

 

43,000,000 

 

 

20,000,000 

Accounts payable

 

 

9,162,154 

 

 

9,701,088 

Consumer deposits

 

 

4,803,439 

 

 

5,000,684 

Fuel cost over-recovery

 

 

4,600,622 

 

 

5,135,745 

Accrued interest

 

 

855,792 

 

 

5,915,580 

Salaries, wages and benefits

 

 

7,391,923 

 

 

7,259,806 

Fuel

 

 

5,175,845 

 

 

4,942,310 

Other current liabilities

 

 

8,237,005 

 

 

8,076,903 

Total current liabilities

 

 

107,460,599 

 

 

90,148,096 



 

 

 

 

 

 

Other non-current liabilities:

 

 

 

 

 

 

Deferred compensation

 

 

784,422 

 

 

763,913 

Other liabilities, non-current

 

 

1,737,253 

 

 

1,555,329 

Deferred liabilities

 

 

1,376,125 

 

 

1,802,389 

Patronage capital payable

 

 

11,108,071 

 

 

11,108,071 

Cost of removal obligation

 

 

52,721,072 

 

 

52,071,315 

Total other non-current liabilities

 

 

67,726,943 

 

 

67,301,017 



 

 

 

 

 

 

Total liabilities, equities and margins

 

$

782,679,611 

 

$

785,066,633 



See accompanying notes to financial statements.



 

4


 

Table Of Contents

 

Chugach Electric Association, Inc.

Statements of Operations

(Unaudited)







 

 

 

 

 

 



 

Three months ended March 31,



 

2016

 

2015



 

 

 

 

 

 

Operating revenues

 

$

50,250,135 

 

$

74,973,117 



 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Fuel

 

 

13,888,937 

 

 

29,831,997 

Production

 

 

3,848,269 

 

 

4,567,682 

Purchased power

 

 

3,949,228 

 

 

6,606,602 

Transmission

 

 

1,376,867 

 

 

1,563,682 

Distribution

 

 

3,345,943 

 

 

3,250,564 

Consumer accounts

 

 

1,632,213 

 

 

1,541,591 

Administrative, general and other

 

 

5,829,967 

 

 

6,095,346 

Depreciation and amortization

 

 

8,487,648 

 

 

9,993,812 

Total operating expenses

 

$

42,359,072 

 

$

63,451,276 



 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

Long-term debt and other

 

 

5,483,764 

 

 

5,708,912 

Charged to construction

 

 

(98,553)

 

 

(119,539)

Interest expense, net

 

$

5,385,211 

 

$

5,589,373 

Net operating margins

 

$

2,505,852 

 

$

5,932,468 



 

 

 

 

 

 

Nonoperating margins:

 

 

 

 

 

 

Interest income

 

 

81,116 

 

 

68,097 

Allowance for funds used during construction

 

 

40,762 

 

 

44,965 

Capital credits, patronage dividends and other

 

 

1,200 

 

 

1,200 

Total nonoperating margins

 

$

123,078 

 

$

114,262 



 

 

 

 

 

 

Assignable margins

 

$

2,628,930 

 

$

6,046,730 



See accompanying notes to financial statements.

 



 

5


 

Table Of Contents

 

Chugach Electric Association, Inc.

Statements of Cash Flows

(Unaudited)







 

 

 

 

 



 

 

 

 

 



Three months ended March 31,



2016

 

2015

Cash flows from operating activities:

 

 

 

 

 

Assignable margins

$

2,628,930 

 

$

6,046,730 

Adjustments to reconcile assignable margins to net cash provided by operating activities:

 

 

 

Depreciation and amortization

 

8,487,648 

 

 

9,993,812 

Amortization and depreciation cleared to operating expenses

 

1,130,842 

 

 

1,092,898 

Allowance for funds used during construction

 

(40,762)

 

 

(44,965)

Write off of inventory, deferred charges and projects

 

112,223 

 

 

65,228 

(Increase) decrease in assets:

 

 

 

 

 

Accounts receivable, net

 

2,707,744 

 

 

(3,415,064)

Materials and supplies

 

(594,700)

 

 

(657,211)

Fuel stock

 

1,257,591 

 

 

6,642,649 

Prepayments

 

(1,407,645)

 

 

(829,434)

Other assets

 

(116,969)

 

 

(73,820)

Deferred charges

 

(323,070)

 

 

(18,911)

Increase (decrease) in liabilities:

 

 

 

 

 

Accounts payable

 

638,452 

 

 

1,256,268 

Consumer deposits

 

(197,245)

 

 

(336,438)

Fuel cost over-recovery

 

(535,123)

 

 

5,265,285 

Accrued interest

 

(5,059,788)

 

 

(5,296,839)

Salaries, wages and benefits

 

132,117 

 

 

612,384 

Fuel

 

233,535 

 

 

(6,398,009)

Other current liabilities

 

(201,989)

 

 

(493,922)

Deferred liabilities

 

(1,518)

 

 

(105,066)

Net cash provided by operating activities

 

8,850,273 

 

 

13,305,575 

Cash flows from investing activities:

 

 

 

 

 

Return of capital from investment in associated organizations

 

318,164 

 

 

352,420 

Investment in restricted cash equivalents

 

(44)

 

 

Investment in special funds

 

(4,560,000)

 

 

Proceeds from capital grants

 

114,775 

 

 

845,950 

Extension and replacement of plant

 

(7,326,570)

 

 

(5,011,952)

Net cash used in investing activities

 

(11,453,675)

 

 

(3,813,582)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from short-term obligations

 

23,000,000 

 

 

9,000,000 

Repayments of long-term obligations

 

(22,706,339)

 

 

(22,598,264)

Memberships and donations received

 

14,044 

 

 

2,215 

Retirement of patronage capital and estate payments

 

(26,435)

 

 

Net receipts on consumer advances for construction

 

1,002,119 

 

 

970,909 

Net cash provided by (used in) financing activities

 

1,283,389 

 

 

(12,625,140)

Net change in cash and cash equivalents

 

(1,320,013)

 

 

(3,133,147)

Cash and cash equivalents at beginning of period

$

15,626,919 

 

$

16,364,962 

Cash and cash equivalents at end of period

$

14,306,906 

 

$

13,231,815 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Cost of removal obligation

$

649,757 

 

$

794,822 

Extension and replacement of plant included in accounts payable

$

1,205,855 

 

$

770,183 

Supplemental disclosure of cash flow information - interest expense paid, net of amounts capitalized

$

10,150,305 

 

$

10,575,885 



See accompanying notes to financial statements.



 

6


 

Table of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

1.

PRESENTATION OF FINANCIAL INFORMATION



The accompanying unaudited interim financial statements include the accounts of Chugach and have been prepared in accordance with generally accepted accounting principles for interim financial information.  Accordingly, they do not include all of the information and footnotes required by United States of America generally accepted accounting principles (U.S. GAAP) for complete financial statements.  They should be read in conjunction with Chugach’s audited financial statements for the year ended December 31, 2015, filed as part of Chugach’s annual report on Form 10-K.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  The results of operations for interim periods are not necessarily indicative of the results that may be expected for an entire year or any other period.



2.

DESCRIPTION OF BUSINESS



Chugach is the largest electric utility in Alaska. Chugach is engaged in the generation, transmission and distribution of electricity in the Anchorage and upper Kenai Peninsula areas. Chugach is on an interconnected regional electrical system referred to as the Alaska 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’s retail and wholesale members are the consumers of the electricity sold. Chugach supplies much of the power requirements of the City of Seward (Seward), as a wholesale customer. Chugach also served Matanuska Electric Association, Inc. (MEA), as a wholesale customer, through April 30, 2015, and Golden Valley Electric Association, Inc. (GVEA), as an economy, non-firm, energy customer, through March 31, 2015.  Periodically, Chugach sells available generation, in excess of its own needs, to MEA, GVEA and Anchorage Municipal Light & Power (ML&P).



Chugach was organized as an Alaska electric cooperative in 1948 and 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 reserves. Chugach is subject to the regulatory authority of the Regulatory Commission of Alaska (RCA).



Chugach has three Collective Bargaining Agreements (CBA’s) with the International Brotherhood of Electrical Workers (IBEW), representing approximately 70% of its workforce. Chugach also has an agreement with the Hotel Employees and Restaurant Employees (HERE). All three IBEW CBA’s have been renewed through June 30, 2017. The three CBA’s provide for wage increases in all years and include health and welfare premium cost sharing provisions. The HERE contract has been renewed through June 30, 2016. This contract provides for wage increases in all years.

 



7


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

3.

SIGNIFICANT ACCOUNTING POLICIES



a. Management Estimates



In preparing the financial statements in conformity with United States generally accepted accounting principles (GAAP), the management of Chugach 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. Estimates include allowance for doubtful accounts, workers’ compensation liability, deferred charges and credits, unbilled revenue, the estimated useful life of utility plant and the cost of removal obligation. Actual results could differ from those estimates.



b. Regulation



The accounting records of Chugach conform to the Uniform System of Accounts as prescribed by the Federal Energy Regulatory Commission (FERC). Chugach meets the criteria, and accordingly, follows the accounting and reporting requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 980, “Topic 980 - Regulated Operations.” FASB ASC 980 provides for the recognition of regulatory assets and liabilities as allowed by regulators for costs or credits that are reflected in current rates or are considered probable of being included in future rates. Chugach’s regulated rates are established to recover all of the specific costs of providing electric service. In each rate filing, rates are set at levels to recover all of the specific allowable costs and those rates are then collected from retail and wholesale customers. The regulatory assets or liabilities are then reduced as the cost or credit is reflected in earnings and rates.



c. Income Taxes



Chugach is exempt from federal income taxes under the provisions of Section 501(c)(12) of the Internal Revenue Code and for the three month periods ended March 31, 2016 and 2015 was in compliance with that provision. In addition, Chugach collects sales tax and is assessed gross revenue and excise taxes which are presented on a net basis in accordance with FASB ASC 605-45-50, “Topic 605 - Revenue Recognition – Subtopic 45 - Principal Agent Considerations – Section 50 - Disclosure.”



Chugach applies a more-likely-than-not recognition threshold for all tax uncertainties. FASB ASC 740, “Topic 740 – Income Taxes,” only allows the recognition of those tax benefits that have a greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. Chugach’s management reviewed Chugach’s tax positions and determined there were no outstanding or retroactive tax positions that were not highly certain of being sustained upon examination by the taxing authorities.

8


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

d.  Special Funds



Special funds include funds on deposit for deferred compensation plan assets, which amounted to $0.8 million at March 31, 2016, and December 31, 2015. In addition, special funds include funds on deposit for Chugach’s investment in the Beluga River Unit, which amounted to $4.6 million at March 31, 2016.



e. Restricted Cash Equivalents



Restricted cash equivalents include funds on deposit for future workers’ compensation claims, which amounted to $2.8 million at March 31, 2016, and December 31, 2015.



f. Accounts Receivable



Included in accounts receivable are invoiced amounts to ML&P for their proportionate share of current Southcentral Power Project (SPP) costs, which amounted to $1.2 million and $1.1 million at March 31, 2016, and December 31, 2015, respectively. In addition, accounts receivable includes invoiced amounts for grants to support the construction of facilities to divert water and safely transmit electricity, which amounted to $0.3 million and $0.2 million at March 31, 2016, and December 31, 2015, respectively.



g. Fuel Stock



Fuel Stock is the weighted average cost of fuel injected into the Cook Inlet Natural Gas Storage Alaska (CINGSA). Chugach’s fuel balance in storage amounted to $5.8 million and $7.1 million at March 31, 2016, and December 31, 2015, respectively.



h. Corrections



For the period ended March 31, 2016, Chugach recorded the following correction for the period ended March 31, 2015:



A correction representing the cash received from customers for the undergrounding ordinance, included in net receipts on consumer advances for construction, previously reported as other current liabilities. The impact of this correction was a decrease in cash provided by operating activities and cash used in financing activities of $0.9 million for the three months ended March 31, 2015.

 

9


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

4.

REGULATORY MATTERS



Amended Eklutna Generation Station 2015 Dispatch Services Agreement



On February 13, 2015, Chugach submitted the Amended Eklutna Generation Station 2015 Dispatch Services Agreement (Dispatch Services Agreement) to the RCA for dispatch services to be provided by Chugach to MEA for a one-year period. Under the Dispatch Services Agreement, Chugach provides electric and natural gas dispatch services for MEA’s Eklutna Generation Station (EGS), electric dispatch services for the Bradley Lake Hydroelectric Project (Bradley Lake), and electric dispatch coordination services for the Eklutna Hydroelectric Project (Eklutna Hydro) beginning with EGS’ full commercial operation.



On March 23, 2015, the RCA approved the Dispatch Agreement, conditioned on the requirements that 1) MEA and Chugach notify the RCA at least one month prior to forming separate Load Balancing Authorities and include in any such notification details on the tie points and any written agreements contemplated by the utilities; and, 2) Chugach file an update to its tariff to reflect any extension of the Dispatch Services Agreement one week from the receipt of such a request from MEA. The Dispatch Services Agreement was in effect through March 31, 2016.



In December 2015, MEA notified Chugach that it would not be extending the Dispatch Services Agreement for the dispatch of electric service. Subsequently, Chugach and MEA entered into an agreement entitled, “Gas Dispatch Agreement” in which Chugach provides gas scheduling and dispatch services to MEA. The term of the agreement is April 1, 2016, through March 31, 2017, with a provision to extend the agreement through March 31, 2018 upon mutual consent prior to August 1, 2016. The agreement is subject to the approval of the RCA.



June 2014 Test Year General Rate Case



Chugach’s June 2014 Test Year General Rate Case was submitted to the RCA on February 13, 2015. Chugach requested a system base rate increase of approximately $21.3 million, or 20%, on total base rate revenues for rates effective in April 2015. The filing also included updates to firm and non-firm transmission wheeling rates and attendant ancillary services in support of third-party transactions on the Chugach transmission system. The primary driver of the rate changes is the reduction and shift in fixed-cost responsibility resulting from the expiration of the Interim Power Sales Agreement between Chugach and MEA on April 30, 2015.



Chugach submitted proposed adjustments to its fuel and purchased power rates under a separate tariff advice letter to become effective at the same time which allows interim base rate increases to be synchronized with reductions in fuel costs resulting from system heat rate improvements and a greater share of hydroelectric generation used to meet the load requirements of the remaining customers on the system. In combination with Chugach’s fuel and purchased power rate adjustment filing for rates effective in April 2015, the effective increase to retail customer bills was approximately between two and five percent.

10


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

The RCA issued Order U-15-081(1) on April 30, 2015, suspending the filing and granting Chugach’s request for interim and refundable rate increases effective May 1, 2015. A scheduling conference was held on May 27, 2015. On June 4, 2015, the RCA issued Order U-15-081(2), granting approval for intervention by Homer Electric Association (HEA), MEA and GVEA. The RCA has indicated that a final order in the case will be issued by May 8, 2016. Intervenor responsive testimony was filed by the Attorney General (AG) and MEA on October 28, 2015. The AG’s testimony focused on revenue requirement matters and MEA’s testimony focused on transmission cost allocation issues. Chugach’s responsive testimony was filed on December 15, 2015.



In January 2016, Chugach and the Attorney General (AG) for the State of Alaska entered into settlement discussions to resolve revenue requirement matters in the case, which resulted in settlement of all outstanding matters related to the determination of Chugach’s system revenue requirement for both the interim and permanent rate periods. As a result, Chugach agreed to reduce its revenue requirement by 0.5% (approximately $0.6 million). In addition, the stipulation provides for a permanent increase in Chugach’s system Times Interest Earned Ratio (TIER) from 1.30 to 1.35, which represents an approximate margin increase of $1.0 million per year. The stipulation was filed with the RCA on January 21, 2016. The RCA has not issued a ruling on the settlement. If the settlement is accepted, Chugach will reduce its revenue requirement by $0.6 million and expects to issue refunds on demand and energy rates for bills issued during the interim rate period.



The adjudicatory hearing was held from January 25 through January 28, 2016, to address transmission-related matters identified by MEA. Because of the settlement, no revenue requirement matters were addressed during the hearing.



On May 2, 2016, the RCA issued Order U-15-081(8) accepting the stipulation between Chugach and the AG. The order required Chugach to submit by June 1, 2016, updated revenue requirement and cost of service results reflecting the adjustments contained in the stipulation, as well as updated tariff sheets and a refund plan. The stipulation does not resolve issues related to the pricing of transmission and ancillary services, which will be addressed in a future order in the docket.



On May 4, 2016, the RCA issued an order extending the statutory timeline for issuance of a final order in the case from May 8 to August 8, 2016. All parties in the case consented to the extension.



Chugach expects to resume its participation in the Simplified Rate Filing (SRF) process at the conclusion of this case. SRF is an expedited process available to electric cooperatives in Alaska for routine updates to demand and energy rates.



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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

Cook Inlet Natural Gas Storage Alaska (CINGSA): Found Gas



On January 30, 2015, CINGSA submitted a filing to the RCA providing notice that it had found 14.5 Bcf of gas as a result of directional drilling in the storage facility and now proposes to establish guidelines for commercial sales of at least 2 Bcf of this gas. Chugach submitted comments to the RCA regarding CINGSA’s proposed treatment of found gas. Chugach does not believe CINGSA’s proposal to retain revenues for the sale of found gas should be permitted in recognition of the risk-sharing agreements made by CINGSA and its storage customers that resulted in the development of the CINGSA storage facility.



The RCA issued an order in March 2015 suspending the filing for further investigation. CINGSA filed direct testimony in the case on April 13, 2015. Chugach and other intervenors in the case submitted responsive testimony on June 5, 2015. CINGSA submitted its reply testimony on June 29, 2015. The evidentiary hearing was held in September 2015.



The RCA issued a final order in the case on December 4, 2015, ruling significantly in favor of the intervenors in the case. The RCA granted approval for CINGSA to sell 2 Bcf with 87% of the proceeds allocated to CINGSA’s Firm Storage Service (FSS) customers and 13% to CINGSA. The RCA also required CINGSA to file a reservoir engineering study by June 30, 2016, and required CINGSA to file notice of all gas sales within 30 days of any sales, including the transaction price, purchaser, quantities, and the terms and conditions of the sale. The RCA also required that all proceeds to the FSS customers be treated as a reduction in fuel costs that are paid by CINGSA’s customers.



On January 4, 2016, CINGSA filed an appeal in Superior Court to Order U-15-016(14), stating the RCA violated CINGSA’s right to due process of law, errored, and/or acted unreasonably, unfairly, arbitrarily, capriciously, or contrary to applicable law. CINGSA believes additional proceeds resulting from the sale of found native gas should remain with CINGSA. Chugach filed an entry of appearance in the case on January 14, 2016.



On April 12, 2016, CINGSA filed a motion for a 6-week extension of time to file its brief in the appeal. A decision on the motion has not yet been issued.



Beluga River Unit



In July 2015, ConocoPhillips Alaska, Inc. (COP) announced the marketing for sale of its North Cook Inlet Unit; its interest in the Beluga River Unit (BRU); and its interest in 5,700 acres of exploration prospects in the Cook Inlet region. In October 2015, Chugach submitted a joint bid with the Municipality of Anchorage d/b/a Municipal Light & Power (ML&P) for acquisition of COP’s working interest in the BRU.



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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

As discussed in “Note 9Commitments and Contingencies – Beluga River Unit,” Chugach entered into an agreement entitled, “Purchase and Sale Agreement between ConocoPhillips Alaska, Inc. and Municipality of Anchorage d/b/a Municipal Light & Power and Chugach Electric Association, Inc.” (Purchase and Sale Agreement) on February 4, 2016. The Purchase and Sale Agreement transfers COP’s interest in the BRU to Chugach and ML&P. The acquisition and attendant recovery of costs in electric rates is subject to RCA approval.



On March 11, 2016, Chugach and ML&P submitted a joint request to the RCA for approval of the acquisition of ConocoPhillips Alaska, Inc.’s interest in the BRU and the attendant recovery of the acquisition costs in electric rates.  Chugach and ML&P requested expedited consideration, asking the RCA to issue a bench ruling by April 21, 2016. The request for expedited consideration was made to provide additional certainty regarding Chugach’s eligibility for a State of Alaska production tax credit.



The RCA opened docket U-15-081 and established an expedited procedural schedule for the case. The RCA held a hearing from April 18 through April 20, 2016, and issued a bench ruling on April 20, 2016, approving the joint request for approval of the Purchase and Sale Agreement. A written order affirming the bench ruling was issued on April 21, 2016.



Separate filings detailing the specific rate recovery process are expected to be filed in the second quarter of 2016. Under the recovery structure that will be proposed by Chugach, costs associated with the BRU, including acquisition and on-going operations, maintenance and capital investment, will be recovered on a dollar-for-dollar basis through Chugach’s quarterly fuel adjustment process. Chugach recovers its fuel and purchased power costs as a direct pass-through from its retail and wholesale customers with minimal lag between cost incurrence and recovery.



5.

DEBT



Lines of Credit



Chugach maintains a $50.0 million line of credit with National Rural Utilities Cooperative Finance Corporation (NRUCFC). Chugach did not utilize this line of credit in the three months ended March 31, 2016. In addition, Chugach did not utilize this line of credit during 2015 and had no outstanding balance at December 31, 2015. The borrowing rate is calculated using the total rate per annum and may be fixed by NRUCFC. The borrowing rate was 2.90 percent at March 31, 2016, and December 31, 2015. The NRUCFC Revolving Line Of Credit Agreement requires that Chugach, for each 12-month period, for a period of at least five consecutive days, pay down the entire outstanding principal balance. The NRUCFC line of credit expires October 12, 2017. This line of credit is immediately available for unconditional borrowing.



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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

Commercial Paper



Chugach maintains a $100.0 million Amended Unsecured Credit Agreement, which is used to back Chugach’s Commercial Paper Program. The pricing includes an all-in drawn spread of one month London Interbank Offered Rate (LIBOR) plus 107.5 basis points, along with a 17.5 basis points facility fee (based on an A- unsecured debt rating). The Amended Unsecured Credit Agreement expires on November 17, 2016. The participating banks include NRUCFC, KeyBank National Association, Bank of America, N.A., Bank of Montreal, CoBank and Chang Hwa Commercial Bank, Ltd., Los Angeles Branch. The commercial paper can be repriced between one day and 270 days. Chugach is expected to continue to issue commercial paper in 2016, as needed. Chugach had $43.0 million and $20.0 million of commercial paper outstanding at March 31, 2016, and December 31, 2015, respectively.



The following table provides information regarding average commercial paper balances outstanding for the quarters ended March 31, 2016, and 2015 (dollars in millions), as well as corresponding weighted average interest rates:



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

2016

 

2015

Average Balance

 

Weighted Average Interest Rate

 

Average Balance

 

Weighted Average Interest Rate

$

21.3

 

0.60 

%

 

$

15.3

 

0.27 

%



Term Loan



Chugach has a term loan facility with CoBank. Loans made under this facility are evidenced by the 2011 CoBank Bond, which is governed by the Amended and Restated Master Loan Agreement dated January 19, 2011, and secured by the Second Amended and Restated Indenture (Indenture). Chugach had $23.7 million and $24.9 million outstanding with CoBank at March 31, 2016, and December 31, 2015, respectively.



Debt Issuance Costs



The following table outlines the debt issuance costs at March 31, 2016.



 

 

 

 

 



 

 

 

 

 



Principal

 

Unamortized
Debt Issuance Costs

2011 Series A Bonds

$

210,999,998 

 

$

1,448,456 

2012 Series A Bonds

 

194,250,000 

 

 

1,174,345 

CoBank Bonds

 

20,834,341 

 

 

179,035 

Amended and Unsecured Credit Agreement

 

 

 

44,354 



$

426,084,339 

 

$

2,846,190 



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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

The following table outlines the debt issuance costs at December 31, 2015.





 

 

 

 

 



 

 

 

 

 



Principal

 

Unamortized
Debt Issuance Costs

2011 Series A Bonds

$

221,666,665 

 

$

1,482,791 

2012 Series A Bonds

 

205,000,000 

 

 

1,198,105 

CoBank Bonds

 

22,241,852 

 

 

186,495 

Amended and Unsecured Credit Agreement

 

 

 

60,987 



$

448,908,517 

 

$

2,928,378 





6.

RECENT ACCOUNTING PRONOUNCEMENTS



Issued and adopted:



ASC Update 2015-03 “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs



In April 2015, the FASB issued ASC Update 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASC Update 2015-03 revises the presentation guidance for debt issuance costs related to a recognized debt liability. The effect of this update is to present the debt issuance costs as a direct deduction to the liability on the balance sheet and retrospective application is required. This update does not change the recognition and measurement guidance for debt issuance costs. This update is effective for fiscal years beginning after December 15, 2015, and interim periods within those years, with early adoption permitted. Chugach began application of ASC 2015-03 with the fiscal year beginning January 1, 2016. Adoption did not have a material effect on its results of operations, financial position, and cash flows.



ASC Update 2015-15 “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements



In September 2015, the FASB issued ASC Update 2015-15, “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” ASC Update 2015-15 amends guidance related to the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements for SEC reporting. This update is effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016, with early adoption permitted. Chugach began application of ASC 2015-15 with the fiscal year beginning January 1, 2016. Adoption did not have a material effect on its results of operations, financial position, and cash flows.



Adoption of the above guidance was applied retrospectively and reduced deferred charges and long-term debt by the unamortized debt issuance costs of $2.8 million and $2.9 million at March 31, 2016, and December 31, 2015, respectively.



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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

Issued, not yet adopted:



ASC Update 2014-09 “Revenue from Contracts with Customers (Topic 606) and ASC 2014-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date



In May 2014, the FASB issued ASC Update 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASC Update 2014-09 provides guidance for the recognition, measurement and disclosure of revenue related to the transfer of promised goods or services to customers. This update was effective for fiscal years beginning after December 15, 2016, for which early application was prohibited. However, in  August 2015, the FASB issued ASC Update 2014-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” deferring the effective date of ASC Update 2014-09 to fiscal years beginning after December 15, 2017, and permitting early adoption of this update, but only for annual reporting periods beginning after December 15, 2016, and interim reporting periods within that reporting period. The standard permits the use of either the retrospective or cumulative effect transition method. Chugach has not yet selected a transition method and is evaluating the effect on its results of operations, financial position, and cash flows.



ASC Update 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net”



In March 2016, the FASB issued ASC Update 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net.” ASC Update 2016-08 clarifies the implementation guidance in Topic 606 on principal versus agent considerations. This update affects the guidance in ASC Update 2014-09 and follows the same effective date and transition requirements. Chugach has not yet selected a transition method and is evaluating the effect on its results of operations, financial position, and cash flows. 



ASC Update 2016-01 “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities



In January 2016, the FASB issued ASC Update 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASC Update 2016-01 amends guidance related to certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. This update is effective for fiscal years beginning after December 15, 2018, and interim periods beginning after December 15, 2019, with early adoption not permitted with certain exceptions. Chugach will begin application of ASC 2016-01 with the annual report for the year ended December 31, 2018. Adoption is not expected to have a material effect on its results of operations, financial position, and cash flows.



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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

ASC Update 2016-02 “Leases (Topic 842): Section A – Leases: Amendments to the FASB Accounting Standards Codification; Section B – Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification; Section C – Background Information and Basis for Conclusions



In February 2016, the FASB issued ASC Update 2016-02, “Leases (Topic 842): Section A – Leases: Amendments to the FASB Accounting Standards Codification; Section B – Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification; Section C – Background Information and Basis for Conclusions.” ASC Update 2016-02 amends guidance related to the recognition, measurement, presentation and disclosure of leases for lessors and lessees. This update is effective for fiscal years beginning after December 15, 2018, including the interim periods within those years, with early adoption permitted. Chugach will begin application of ASC 2016-02 on January 1, 2019. Chugach is evaluating the effect on its results of operations, financial position, and cash flows.



7.

FAIR VALUES OF ASSETS AND LIABILITIES



Fair Value Hierarchy



In accordance with FASB ASC 820, Chugach groups its financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:



Level 1 – Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes United States Treasury and federal agency securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.



Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.



Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect Chugach’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.



Chugach had no Level 1,  Level 2 or Level 3 assets or liabilities measured at fair value on a recurring basis. Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions. The fair value of cash and cash equivalents, accounts receivable and payable, and other short-term monetary assets and liabilities approximate carrying value due to their short-term nature.

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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

Fair Value of Financial Instruments



The estimated fair values (in thousands) of long-term obligations included in the financial statements at March 31, 2016, are as follows:





 

 

 

 

 

 

 



 

 

 

 

 

 

 



Measurement

 

Carrying Value

 

Fair Value

2011 CoBank Bonds

Level 2

 

$

23,651 

 

$

23,651 

2011 Series A Bonds

Level 2

 

 

221,667 

 

 

233,565 

2012 Series A Bonds

Level 2

 

 

205,000 

 

 

213,481 

Long-term obligations (including current installments)

 

$

450,318 

 

$

470,697 





8.

ENVIRONMENTAL MATTERS



Since January 1, 2007, transformer manufacturers have been required to meet the US Department of Energy (DOE) efficiency levels as defined by the Energy Act of 2005 (Energy Act) for all “Distribution Transformers.” As of January 1, 2016, the specific efficiency levels are increasing from the original “TP1” levels to the new “DOE-2016” levels. The Energy Act mandates specific types of low voltage dry-type transformers manufactured and sold in the USA to have efficiencies as defined by the 10 CFR Part 431 standard when loaded to 35% of maximum capacity. Chugach is in the process of evaluating our transformer specifications and will make modifications as necessary with our alliance transformer manufacturers to ensure DOE-2016 is met. At this time a small increase in capital costs is anticipated along with a reduction in energy losses.



The Clean Air Act and Environmental Protection Agency (EPA) regulations under the Clean Air Act establish ambient air quality standards and limit the emission of many air pollutants. New Clean Air Act regulations impacting electric utilities may result from future events or new regulatory programs. On August 3, 2015, the EPA released the final 111(d) regulation language aimed at reducing emissions of carbon dioxide (CO2) from existing power plants that provide electricity for utility customers. In the final rule, the EPA took the approach of making individual states responsible for the development and implementation of plans to reduce the rate of CO2 emissions from the power sector. The EPA initially applied the final rule to 47 of the contiguous states. At this time, Alaska, Hawaii, Vermont, Washington D.C. and two U.S. territories are not bound by the regulation. Alaska may be required to comply at some future date. On February 9, 2016 the U.S. Supreme Court issued a stay on the proposed EPA 111(d) regulations until the DC Circuit decides the case, or until the disposition of a petition to the Supreme Court on the issue. The EPA 111(d) regulation, in its current form, is not expected to have a material effect on Chugach’s financial condition, results of operations, or cash flows. While Chugach cannot predict the implementation of any additional new law or regulation, or the limitations thereof, it is possible that new laws or regulations could increase capital and operating costs. Chugach has obtained or applied for all Clean Air Act permits currently required for the operation of generating facilities.

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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

Chugach is subject to numerous other environmental statutes including the Clean Water Act, the Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Endangered Species Act, and the Comprehensive Environmental Response, Compensation and Liability Act and to the regulations implementing these statutes. Chugach does not believe that compliance with these statutes and regulations to date has had a material impact on its financial condition, results of operation or cash flows. However, the implementation of any additional new law or regulation, or the limitations thereof, or changes in or new interpretations of laws or regulations could result in significant additional capital or operating expenses. Chugach monitors proposed new regulations and existing regulation changes through industry associations and professional organizations.



9.

COMMITMENTS AND CONTINGENCIES



Contingencies



Chugach is a participant in various legal actions, rate disputes, personnel matters and claims both for and against Chugach’s interests. Management believes the outcome of any such matters will not materially impact Chugach’s financial condition, results of operations or liquidity. Chugach establishes reserves when a particular contingency is probable and calculable.  Chugach has not accrued for any contingency at March 31, 2016, as it does not consider any contingency to be probable nor calculable. Chugach faces contingencies that are reasonably possible to occur; however, they cannot currently be estimated.



Concentrations



Approximately 70 percent of Chugach’s employees are members of the IBEW. Chugach has three CBA’s with the IBEW. Chugach also has an agreement with the HERE. All three IBEW CBA’s have been renewed through June 30, 2017. The HERE contract has been renewed through June 30, 2016.



Chugach was the principal supplier of power under an Interim Power Sales Agreement with MEA. Including the fuel component, this contract represented $26.2 million of sales revenue through its expiration on April 30, 2015.



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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

Commitments



Fuel Supply Contracts 



Chugach has fuel supply contracts from various producers at market terms. A gas supply contract between Chugach and ConocoPhillips Alaska, Inc. and ConocoPhillips, Inc. (collectively “ConocoPhillips”), was approved by the RCA effective August 21, 2009. This contract began providing gas in 2010 and will terminate December 31, 2016. The total amount of gas under this contract is estimated to be 62 Bcf. Chugach entered into a gas contract with Hilcorp effective January 1, 2015, to provide gas through March 31, 2018. On September 15, 2014, the RCA approved an amendment to the Hilcorp gas purchase agreement extending gas delivery and subsequently filling 100 percent of Chugach’s needs through March 31, 2019. On September 8, 2015, the RCA approved another amendment to the Hilcorp gas purchase agreement extending the term of the agreement, thus filling up to 100 percent of Chugach’s needs through March 31, 2023.  The total amount of gas under this contract is estimated to be  60 Bcf. All of the production is expected to come from Cook Inlet, Alaska. The terms of the ConocoPhillips and Hilcorp agreements require Chugach to manage the natural gas transportation over the connecting pipeline systems. Chugach has gas transportation agreements with ENSTAR Natural Gas Company (ENSTAR) and Hilcorp.



Beluga River Unit



On February 4, 2016, Chugach entered into an agreement entitled, “Purchase and Sale Agreement between ConocoPhillips Alaska, Inc. and Municipality of Anchorage d/b/a Municipal Light & Power and Chugach Electric Association, Inc.” The Purchase and Sale Agreement transfers COP’s working interest in the BRU to Chugach and ML&P. The total purchase price is $152 million, with Chugach’s portion totaling $45.6 million.



Under the joint bid arrangement, Chugach’s ownership of COP’s working interest is 30% and ML&P’s ownership is 70%. The ownership shares include the attendant rights and privileges of all gas and oil resources, including 15,500 lease acres (8,200 in Unit / Participating Area and 7,300 held by Unit), Sterling and Beluga producing zones, and COP’s 67% working interest in deep oil resources. On April 21, 2016, the acquisition was approved by the RCA (see “Note 5 – Regulatory Matters – Beluga River Unit”) and the agreement closed on April 22, 2016.



Chugach has a firm gas supply contract with COP, as previously discussed under “Fuel Supply Contracts”. In addition to Chugach, COP had contractual gas sales obligations to ENSTAR through 2017. These contracts are assumed by ML&P and Chugach on the basis of ownership share.



The BRU is located on the western side of Cook Inlet, approximately 35 miles from Anchorage, and is an established natural gas field that was originally discovered in 1962. Currently, the BRU is jointly owned (one-third) by COP, Hilcorp, and ML&P. If the transaction is approved, ML&P’s ownership of the BRU would increase to approximately 56.7%, Hilcorp’s ownership would remain unchanged at 33.3%, and Chugach’s ownership would be 10.0%.

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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

March 31, 2016 and 2015

 

Patronage Capital



In 2007, Chugach entered into an agreement with HEA to return all of its patronage capital within five years after expiration of its power sales agreement, which was December 31, 2013. This patronage capital retirement was related to a settlement agreement associated with the 2005 Test Year General Rate Case (Docket U-06-134) and accepted by the RCA on August 7, 2007. HEA’s patronage capital was $7.9 million at March 31, 2016, and December 31, 2015, and is classified as patronage capital payable on Chugach’s Balance Sheet.



In an agreement reached in May 2014 with MEA, capital credits retired to MEA are classified as patronage capital payable on Chugach’s Balance Sheet. MEA’s patronage capital payable was $3.2 million at March 31, 2016, and December 31, 2015.



Legal Proceedings



Chugach has certain litigation matters and pending claims that arise in the ordinary course of Chugach’s business. In the opinion of management, none of these matters, individually or in the aggregate, is or are likely to have a material adverse effect on Chugach’s results of operations, financial condition or cash flows.



 

21


 

ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Reference is made to the information contained under the caption “CAUTION REGARDING FORWARD-LOOKING STATEMENTS” at the beginning of this report.



OVERVIEW



Chugach is the largest electric utility in Alaska, engaged in the generation, transmission and distribution of electricity. Chugach is on an interconnected regional electrical system referred to as Alaska’s Railbelt, a 400-mile-long area stretching from the coastline of the southern Kenai Peninsula to the interior of the state which includes Alaska’s largest cities, Anchorage and Fairbanks.



Chugach directly serves retail customers in the Anchorage and Kenai Peninsula areas and supplies much of the power requirements of the City of Seward, as a wholesale customer. Chugach also supplied power to Matanuska Electric Association, Inc. (MEA) through April 30, 2015, as a wholesale customer. Periodically, Chugach sells available generation in excess of its own needs to MEA, Golden Valley Electric Association, Inc. (GVEA) and to Anchorage Municipal Light & Power (ML&P).



Chugach is an Alaska electric cooperative operating on a not-for-profit basis and is subject to the regulatory authority of the Regulatory Commission of Alaska (RCA).



Chugach’s customers’ requirements for capacity and energy generally increase in fall and winter as home heating and lighting needs increase and decline in spring and summer as the weather becomes milder and daylight hours increase.



Chugach Operations



In the near term, Chugach continues to face the challenges of operating in a flat load growth environment and securing replacement revenue sources. These challenges, along with energy issues and plans at the state level, will shape how Chugach proceeds into the future.



Chugach has been preparing for the expiration of its second wholesale power contract for some time and has taken steps to reduce costs in order to mitigate the rate impacts to its remaining customers. Despite the loss of these two wholesale power contracts which accounted for approximately 50% of energy sales and 40% of sales revenue, the net system rate increase for Chugach’s remaining customers was approximately 20%. Chugach’s 10-year financial forecast indicates it can sustain operations and meet financial covenants without these wholesale contracts. In addition, because Chugach’s rates are established by the RCA, Chugach expects to maintain its ability to recover Chugach’s specific costs of providing service despite the loss of these customers.



22


 

Chugach is also pursuing replacement sources of revenue through potential new power sales and dispatch agreements, as well as transmission wheeling and ancillary services tariff revisions. Chugach has updated and expanded its operating tariff to include both firm and non-firm transmission wheeling services and attendant ancillary services in support of third-party transactions on the Chugach system. Chugach believes that cost reduction and containment, successful implementation of new power sales and dispatch agreements and revised tariffs will mitigate additional rate increases. However, Chugach cannot assure that it will be able to replace sources of revenue or that any replacement of revenue sources, revised tariffs or cost reduction and containment measures will fully offset any rate increases in this timeframe.



Railbelt Grid Unification



Chugach is focused on efforts in the Railbelt to explore the benefits of grid unification. Currently, each of the six electric utilities in the Railbelt own a portion of the transmission grid, as does the Alaska Energy Authority (AEA). Chugach is a proponent of following other successful business models to effectively unify the grid. Discussions on the issue led the Alaska State Legislature in 2014 to appropriate $250,000 to the RCA to explore the issue and report back to legislators. The RCA expects to analyze and review present efforts in order to assess the organizational and governance structure needed for an independent consolidated system operator Beginning in 2016, progress reports associated with system-wide economic dispatch are required.  With the support of the RCA, Chugach and several other Railbelt utilities are evaluating possible transmission business model opportunities and associated economic dispatch models that Chugach believes may lead to more optimal Railbelt-wide system operations. Chugach intends to finalize this review and evaluation in the third quarter of 2016. While Chugach cannot determine the materiality of any effect on its results of operations, financial condition, and cash flows until a business model and plan are adopted, it anticipates a positive outcome.



Fuel Supply



Chugach actively manages its fuel supply needs and currently has contracts in place to meet up to 100% of its anticipated needs through March of 2023. Chugach continues its efforts to secure long-term reliable gas supply solutions and encourage new development and continued investment in Cook Inlet. The State of Alaska’s Department of Natural Resources (DNR) published a study in September 2015, “Updated Engineering Evaluation of Remaining Cook Inlet Gas Reserves,” to provide an estimate of Cook Inlet’s gas supply. The study estimated there are 1,183 Bcf of proved and probable reserves remaining in Cook Inlet’s legacy fields. This is higher than the 2009 DNR study estimate of 1,142 Bcf. Effectively, Cook Inlet gas supply has slightly increased from 2009. The 2015 DNR estimate does not include reserves from a large gas field under development by Furie Operating Alaska, LLC (Furie) and another considered for development by BlueCrest Energy, Inc. Furie has constructed an offshore gas production platform and has begun production. The platform and other production facilities are designed for up to 200 MMcf per day. Other gas producers are actively developing gas supplies in the Cook Inlet. Chugach is encouraged with these developments but continues to explore other alternatives to diversify its portfolio.

23


 

On April 21, 2016, the RCA approved the acquisition of the Beluga River Unit effective January 1, 2016, as discussed in “Item 1 – FINANCIAL STATEMENTS – Note 4 – Regulatory Matters – Beluga River Unit and Note 9 – Commitments and Contingencies – Commitments – Beluga River Unit.” Chugach’s interest in the BRU is to reduce the cost of electric service to its retail and wholesale members by securing an additional long-term supply of natural gas to meet on-going generation requirements. The acquisition complements existing gas supplies and is expected to provide greater fuel diversity at an effective annual cost that is $2 million to $3 million less than alternative sources of gas in the Cook Inlet region. Approximately 80% of Chugach’s current generation requirements are met from natural gas, 16% are met from hydroelectric, and 4% are met from wind.



The acquisition is expected to provide gas to meet Chugach’s on-going generation requirements over an approximate 18-year period, or from 2016 to 2033. Gas associated with the acquisition is expected to provide about 15% of Chugach’s gas requirements through 2033, although actual gas quantities produced are expected to vary on a year-by-year basis.



Chugach has firm gas supply contracts with COP and Hilcorp, see “Item 1 – FINANCIAL STATEMENTS – Note 9 – Commitments and Contingencies - Fuel Supply Contracts”. In addition to Chugach, COP had contractual gas sales obligations to ENSTAR through 2017. These contracts are assumed by ML&P and Chugach on the basis of ownership share. In addition to these firm contracts, Chugach has gas supply agreements with Aurora Gas LLC through September 30, 2016, AIX Energy LLC through March 31, 2024 (with an option to extend the term an additional 5-year period through March 31, 2029), and with Cook Inlet Energy LLC through March 31, 2018 (with an option to extend the term an additional 5-year period through March 31, 2023). Collectively, these agreements provide added diversification and optionality for Chugach to minimize costs within its gas supply portfolio.



Renewable Energy Goals



A State of Alaska Energy Policy approved by the legislature in 2010 included legislative intent that the state achieve a 15% increase in energy efficiency on a per capita basis between 2010 and 2020, receive 50% of its electric generation from renewable and alternative energy sources by 2025, work to ensure reliable in-state gas supply for residents of the state, and that the state power project fund serve as the main source of state assistance for energy projects, remain a leader in petroleum and natural gas production and become a leader in renewable and alternative energy development.



The main project moving Alaska toward its renewable energy goals is the Susitna-Watana Hydroelectric Project which is currently planned to be located on the Susitna River, approximately halfway between Anchorage and Fairbanks. The State of Alaska began appropriating funds to the AEA for this project in the state’s 2012 fiscal year budget, totaling approximately $180.7 million through the spring of 2014. However, on December 26, 2014, the Governor of the State of Alaska (Governor) issued an Administrative Order suspending discretionary spending on a number of capital projects, including this project, due to the large state budget deficit. In July 2015, the Governor approved using $6.6 million in uncommitted funds from a prior Susitna-Watana appropriation to continue moving the project forward. In October 2015, the state’s Office of Management and Budget lifted the spending freeze on the Susitna-Watana Hydroelectric Project providing AEA with access to funds representing

24


 

approximately three percent of the total allocation to the current project proposal to date. AEA estimates the project’s cost at over $5.5 billion and plans to act based on the funding the state’s fiscal reality allows. AEA continued the pre-licensing study process with the FERC and filed Part D of the Initial Study Report on November 6, 2015. On December 2, 2015, the FERC published an updated licensing schedule, including stakeholder meetings that began in March 2016. Chugach has been working with and will continue to work with AEA and other parties on this effort.



RESULTS OF OPERATIONS



Current Year Quarter versus Prior Year Quarter



Assignable margins decreased $3.4 million, or 56.5%, during the first quarter of 2016 compared to the first quarter of 2015, primarily due to lower energy sales, which was somewhat offset by decreases in production, administrative, general and other expenses, and depreciation.



Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, decreased $24.8 million, or 33.1%, in the first quarter of 2016 compared to the first quarter of 2015. This decrease was primarily due to the expiration of MEA’s interim wholesale contract and GVEA’s economy sales contract.



Retail revenue increased $3.9 million, or 8.9%, in the first quarter of 2016 compared to the first quarter of 2015. Base revenue increased due to an increase in rates charged to retail customers as a result of Chugach’s June 2014 Test Year General Rate Case, which was somewhat offset by lower energy sales and lower fuel expense recovered through the fuel and purchased power surcharge process.



Wholesale revenue decreased $20.5 million, or 94.5%, in the first quarter of 2016 compared to the first quarter of 2015, primarily due to the expiration of MEA’s interim wholesale contract on April 30, 2015.



Economy energy revenue decreased $8.0 million, or 100.0%, in the first quarter of 2016 compared to the first quarter of 2015 due to the expiration of GVEA’s economy sales contract at the end of the first quarter of 2015.



Based on the results of fixed and variable cost recovery established in Chugach’s last rate case, wholesale sales to Seward contributed approximately $0.3 million to Chugach’s fixed costs for the quarters ended March 31, 2016 and 2015. Wholesale sales to MEA contributed approximately $7.6 million to Chugach’s fixed costs for the quarter ended March 31, 2015.



25


 

The following table shows the base rate sales revenue and fuel and purchased power revenue by customer class that is included in revenue for the quarters ended March 31, 2016 and 2015:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Base Rate Sales Revenue

Fuel and Purchased Power Revenue

Total Revenue



 

2016

 

2015

 

% Variance

 

2016

 

2015

 

% Variance

 

2016

 

2015

 

% Variance

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

17.5 

 

$

15.2 

 

15.1 

%

 

$

7.3 

 

$

7.7 

 

(5.2 

%)

 

$

24.8 

 

$

22.9 

 

8.3 

%

Small Commercial

 

$

3.1 

 

$

2.7 

 

14.8 

%

 

$

1.7 

 

$

1.8 

 

(5.6 

%)

 

$

4.8 

 

$

4.5 

 

6.7 

%

Large Commercial

 

$

11.0 

 

$

9.1 

 

20.9 

%

 

$

6.4 

 

$

6.7 

 

(4.5 

%)

 

$

17.4 

 

$

15.8 

 

10.1 

%

Lighting

 

$

0.4 

 

$

0.3 

 

33.3 

%

 

$

0.1 

 

$

0.1 

 

0.0 

%

 

$

0.5 

 

$

0.4 

 

25.0 

%

Total Retail

 

$

32.0 

 

$

27.3 

 

17.2 

%

 

$

15.5 

 

$

16.3 

 

(4.9 

%)

 

$

47.5 

 

$

43.6 

 

8.9 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MEA

 

$

0.0 

 

$

10.1 

 

(100.0 

%)

 

$

0.0 

 

$

10.4 

 

(100.0 

%)

 

$

0.0 

 

$

20.5 

 

(100.0 

%)

SES

 

$

0.5 

 

$

0.5 

 

0.0 

%

 

$

0.7 

 

$

0.7 

 

0.0 

%

 

$

1.2 

 

$

1.2 

 

0.0 

%

Total Wholesale

 

$

0.5 

 

$

10.6 

 

(95.3 

%)

 

$

0.7 

 

$

11.1 

 

(93.7 

%)

 

$

1.2 

 

$

21.7 

 

(94.5 

%)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economy

 

$

0.0 

 

$

0.7 

 

(100.0 

%)

 

$

0.0 

 

$

7.3 

 

(100.0 

%)

 

$

0.0 

 

$

8.0 

 

(100.0 

%)

Miscellaneous

 

$

0.6 

 

$

0.6 

 

0.0 

%

 

$

0.9 

 

$

1.1 

 

(18.2 

%)

 

$

1.5 

 

$

1.7 

 

(11.8 

%)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

33.1 

 

$

39.2 

 

(15.6 

%)

 

$

17.1 

 

$

35.8 

 

(52.2 

%)

 

$

50.2 

 

$

75.0 

 

(33.1 

%)



The following table summarizes kWh sales for the quarters ended March 31:





 

 

 

 

Customer

 

2016

kWh

 

2015

kWh



 

 

 

 

Retail

 

297,176,263 

 

307,159,468 

Wholesale

 

15,218,221 

 

229,039,644 

Economy Energy

 

 

96,165,000 

Total

 

312,394,484 

 

632,364,112 



Base rates charged to retail and wholesale customers in the first quarter of 2016 include base rate changes effective May 1, 2015, as a result of Chugach’s June 2014 Test Year General Rate Case. Effectively, base rates increased 21.8% to retail customers and 16.9% to Seward in the first quarter of 2016 compared to the first quarter of 2015.



Total operating expenses decreased $21.1 million, or 33.2%, in the first quarter of 2016 compared to the first quarter of 2015.



Fuel expense decreased $15.9 million, or 53.4%, in the first quarter of 2016 compared to the first quarter of 2015,  primarily due to a decrease in the volume of natural gas used as a result of the expiration of contracts with MEA and GVEA, which was somewhat offset by a higher average effective delivered price. In the first quarter of 2016, Chugach used 2,195,688 MCF of fuel at an average effective delivered price of $5.82 per MCF. In the first quarter of 2015, Chugach used 5,419,260 MCF of fuel at an average effective delivered price of $5.29 per MCF.



26


 

Production expense decreased $0.7 million, or 15.8%, in the first quarter of 2016 compared to the first quarter of 2015, primarily due to a decrease in operating and maintenance costs at Beluga, as a result of the retirement of Beluga Unit 8 during the first quarter of 2015.



Purchased power expense decreased $2.7 million, or 40.2%, in the first quarter of 2016 compared to the first quarter of 2015,  primarily due to purchases required as a result of the expiration of MEA’s interim wholesale contract, which was somewhat offset by a higher average effective price. In the first quarter of 2016, Chugach purchased 49,271 megawatt hours (MWh) of energy at an average effective price of 6.88 cents per kWh. In the first quarter of 2015, Chugach purchased 124,856 MWh of energy at an average effective price of 4.75 cents per kWh.



Transmission expense decreased $0.2 million, or 11.9%, in the first quarter of 2016 compared to the first quarter of 2015, primarily due to a shift in labor from transmission to distribution maintenance.



While distribution expense did not materially change overall in the first quarter of 2016 compared to the first quarter of 2015, a shift in labor from transmission to distribution maintenance was offset by lower costs associated with overhead line clearing.



Consumer accounts and administrative, general and other expense did not materially change in the first quarter of 2016 compared to the first quarter of 2015.



Depreciation and amortization expense decreased $1.5 million, or 15.1%, in the first quarter of 2016 compared to the first quarter of 2015, primarily due to the retirement of IGT Unit 3 and Beluga Unit 8, as well as a change in depreciation rates associated with the use of Beluga's remaining units from base load to peaking units, coinciding with the expiration of MEA's interim wholesale contract.



Interest on long-term and other debt and interest charged to construction did not materially change in the first quarter of 2016 compared to the first quarter of 2015.



Non-operating margins did not materially change in the first quarter of 2016 compared to the first quarter of 2015.



27


 

Financial Condition



Assets



Total assets did not materially change from December 31, 2015 to March 31, 2016. Decreases at March 31, 2016, from December 31, 2015, in net utility plant, cash and cash equivalents, accounts receivable, and fuel stock, were somewhat offset by increases in special funds and prepayments over the same period. Net utility plant decreased $3.4 million, or 0.5%, primarily due to depreciation expense in excess of extension and replacement of plant. Cash and cash equivalents decreased $1.3 million, or 8.4%, and accounts receivable decreased $2.6 million, or 9.1%, primarily due to a decrease in energy sales from winter to spring. Fuel stock decreased $1.3 million, or 17.8%, due to the use of fuel from the fuel storage facility. Special funds increased $4.4 million, primarily due to the funds held in escrow for Chugach’s investment in the Beluga River Field, and prepayments increased $1.4 million, or 96.0%, due primarily to the prepayment of insurance.



Liabilities and Equity



Total liabilities, equities and margins did not materially change from December 31, 2015 to March 31, 2016. Decreases at March 31, 2016, from December 31, 2015, in long-term obligations, accrued interest, and fuel cost over-recovery were somewhat offset by increases in commercial paper and total equities and margins over the same period. Long-term obligations decreased $22.7 million, or 5.1%, primarily due to the principal payments on Chugach’s existing debt. Accrued interest decreased $5.1 million, or 85.5%, due to the semi-annual interest payment on the 2011 and 2012 Series A Bonds. Fuel cost over-recovery decreased $0.5 million, or 10.4%, due to the refund of the prior quarter’s over-recovery of fuel and purchased power costs. Commercial paper increased $23.0 million, or 115.0%, primarily due to the funds needed for principal payments associated with the 2011 and 2012 bonds and a portion of Chugach’s investment in the Beluga River Field. Total equities and margins increased $2.6 million, or 1.4%, primarily due to the margins generated in the three months ended March 31, 2016.



LIQUIDITY AND CAPITAL RESOURCES



Summary



Chugach ended the first quarter of 2016 with $14.3 million of cash and cash equivalents, down from $15.6 million at December 31, 2015. Chugach did not utilize its $50.0 million line of credit maintained with NRUCFC in the three months ended March 31, 2016, therefore, this line of credit had no outstanding balance and the available borrowing capacity under this line was $50.0 million at March 31, 2016. Chugach issued commercial paper in the three months ended March 31, 2016 and had $43.0 million of commercial paper outstanding at March 31, 2016, thus the available borrowing capacity under the Commercial Paper Program at March 31, 2016, was $57.0 million.



Cash equivalents consist of all highly liquid debt instruments, with a maturity of three months or less when purchased, and a concentration account with First National Bank Alaska (FNBA).



28


 

Cash Flows



The following table summarizes Chugach’s cash flows from operating, investing and financing activities for the three months ended March 31, 2016 and 2015.





 

 

 

 

 



 

 

 

 

 



2016

 

2015

Total cash provided by (used in):

 

 

 

 

 



 

 

 

 

 

Operating activities

$

8,850,273 

 

$

13,305,575 

Investing activities

 

(11,453,675)

 

 

(3,813,582)

Financing activities

 

1,283,389 

 

 

(12,625,140)



 

 

 

 

 

Decrease in cash and cash equivalents

$

(1,320,013)

 

$

(3,133,147)



Operating Activities



Cash provided by operating activities was $8.9 million for the three months ended March 31, 2016, compared with $13.3 million for the three months ended March 31, 2015.



The decrease in cash provided by operating activities in the first quarter of 2016 from the first quarter of 2015 was primarily due to the expiration of the MEA and GVEA contracts in 2015. These resulted in a decrease in assignable margins and accounts receivable, as well as decreases associated with natural gas primarily for operations and from the fuel storage facility, which was somewhat offset by the refund associated with the over-collection of fuel through the fuel and purchased power adjustment process.



Investing Activities



Cash used in investing activities was $11.5 million for the three months ended March 31, 2016, compared with $3.8 million for the three months ended March 31, 2015. The change in cash used in investing activities was primarily due to an increase in special funds caused by a portion of Chugach’s investment in the Beluga River Field held in escrow. An increase in cash used for the extension and replacement of plant also contributed to the increase primarily due to distribution substation projects.



Capital construction through March 31, 2016, was $7.3 million and is estimated to be $30.2 million for the full year. Once funding from other sources is collected, the total cash requirement is estimated to be $23.7 million for 2016. Capital improvement expenditures are expected to increase during the second quarter as the construction season begins.



29


 

Financing Activities



Cash provided by financing activities was $1.3 million for the three months ended March  31,  2016, compared to cash used of $12.6 million for the three months ended March 31, 2015. The change in cash used in financing activities was primarily due to the increase in proceeds from commercial paper, as a result of cash required to make the annual principal payments on Chugach’s 2011 and 2012 bonds and a portion of Chugach’s investment in the Beluga River Field.



Sources of Liquidity



Chugach satisfies its operational and capital cash requirements through internally generated funds, a $50.0 million line of credit from NRUCFC and a $100.0 million Commercial Paper Program. At March 31, 2016, there was no outstanding balance on the NRUCFC line of credit and $43.0 million of outstanding commercial paper. At March 31, 2016, the available borrowing capacity under Chugach’s line of credit with NRUCFC was $50.0 million and the available commercial paper capacity was $57.0 million.



Commercial paper can be repriced between one day and 270 days. The average commercial paper balance for the three months ended March 31, 2016, was $21.3 million with a corresponding weighted average interest rate of 0.60%. The maximum amount of outstanding commercial paper for the three months ended March 31, 2016, was $43.0 million.



The following table provides information regarding monthly average commercial paper balances outstanding (dollars in millions), as well as corresponding monthly weighted average interest rates:



 

 

 

 

 



 

 

 

 

 

Month

 

Average Balance

 

Weighted Average
Interest Rate

January 2016

 

$

16.1

 

0.61

February 2016

 

$

16.9

 

0.60

March 2016

 

$

30.5

 

0.60



Chugach has a term loan facility with CoBank. Loans made under this facility are evidenced by the 2011 CoBank Bond, which is governed by the Amended and Restated Master Loan Agreement dated January 19, 2011 and secured by the Indenture. At March 31, 2016, Chugach had the following bond outstanding with this facility:







 

 

 

 

 

 

 

 

 



 

Principal Balance

 

Interest Rate at

March 31, 2016

 

Maturity Date

 

Principal Payment Dates



 

 

 

 

 

 

 

 

 

2011 CoBank Bond

 

$

23,651,493 

 

2.78%

 

2022

 

2016-2022



30


 

Under the Indenture, additional obligations may be sold by Chugach upon the basis of bondable additions and the retirement or defeasance of or principal payments on previously outstanding obligations. Chugach’s ability to sell additional debt obligations will be dependent on the market’s perception of Chugach’s financial condition and Chugach’s continuing compliance with financial covenants contained in its debt agreements.



Chugach management continues to expect that cash flows from operations and external funding sources, including additional commercial paper borrowings, will be sufficient to cover operational, financing and capital funding requirements in 2016 and thereafter.



CRITICAL ACCOUNTING POLICIES



As of March 31, 2016, there have been no significant changes in Chugach’s critical accounting policies as disclosed in Chugach’s 2015 Annual Report on Form 10-K. These policies include electric utility regulation and unbilled revenue.



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



Information required by this Item is contained in Note 6 to the “Notes to Financial Statements” within Part I of this Form 10-Q.



ENVIRONMENTAL MATTERS



Compliance with Environmental Standards



Chugach’s operations are subject to certain federal, state and local environmental laws and regulations, which seek to limit air, water and other pollution and regulate hazardous or toxic waste disposal. While Chugach monitors these laws and regulations to ensure compliance, they frequently change and often become more restrictive. When this occurs, costs of compliance generally increase.



Costs associated with environmental compliance are included in both the operating and capital budgets. Costs associated with environmental remediation obligations are accrued when probable and reasonably able to be estimated. It is not anticipated that expenditures associated with environmental matters will have a material effect on Chugach’s financial condition, results of operations or cash flows. Chugach cannot, however, predict the nature, extent or cost of new laws or regulations relating to environmental matters.



Since January 1, 2007, transformer manufacturers have been required to meet the DOE efficiency levels as defined by the Energy Act for all “Distribution Transformers.” As of January 1, 2016, the specific efficiency levels are increasing from the original “TP1” levels to the new “DOE-2016” levels. The Energy Act mandates specific types of low voltage dry-type transformers manufactured and sold in the USA to have efficiencies as defined by the 10 CFR Part 431 standard when loaded to 35% of maximum capacity. Chugach is in the process of evaluating our transformer specifications and will make modifications as necessary with our alliance transformer manufacturers to ensure DOE-2016 is met. At this time a small increase in capital costs is anticipated along with a reduction in energy losses.



31


 

The Clean Air Act and Environmental Protection Agency (EPA) regulations under the Clean Air Act establish ambient air quality standards and limit the emission of many air pollutants. New Clean Air Act regulations impacting electric utilities may result from future events or new regulatory programs. On August 3, 2015, the EPA released the final 111(d) regulation language aimed at reducing emissions of carbon dioxide (CO2) from existing power plants that provide electricity for utility customers. In the final rule, the EPA took the approach of making individual states responsible for the development and implementation of plans to reduce the rate of CO2 emissions from the power sector. The EPA has initially applied the final rule to 47 of the contiguous states. At this time, Alaska, Hawaii, Vermont, Washington D.C. and two U.S. territories are not bound by the regulation. Alaska may be required to comply at some future date. On February 9, 2016 the U.S. Supreme Court issued a stay on the proposed EPA 111(d) regulations until the DC Circuit decides the case, or until the disposition of a petition to the Supreme Court on the issue. The EPA 111(d) regulation, in its current form, is not expected to have a material effect on Chugach’s financial condition, results of operations, or cash flows. While Chugach cannot predict the implementation of any additional new law or regulation, or the limitations thereof, it is possible that new laws or regulations could increase capital and operating costs. Chugach has obtained or applied for all Clean Air Act permits currently required for the operation of generating facilities.



Chugach is subject to numerous other environmental statutes including the Clean Water Act, the Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Endangered Species Act, and the Comprehensive Environmental Response, Compensation and Liability Act and to the regulations implementing these statutes. Chugach does not believe that compliance with these statutes and regulations to date has had a material impact on its financial condition, results of operation or cash flows. However, the implementation of any new law or regulation, or the limitations thereof, or changes in or new interpretations of laws or regulations could result in significant additional capital or operating expenses. Chugach monitors proposed new regulations and existing regulation changes through industry associations and professional organizations.



32


 

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Chugach is exposed to a variety of risks, including changes in interest rates and changes in commodity prices due to repricing mechanisms in a  gas supply contract. In the normal course of its business, Chugach manages exposure to these risks as described below. Chugach does not engage in trading market risk-sensitive instruments for speculative purposes.



Interest Rate Risk



At March 31, 2016, short- and long- term debt was comprised of the 2011 and 2012 Series A Bonds, the CoBank Bond and outstanding commercial paper.



The interest rates of the 2011 Series A Bonds and the 2012 Series A Bonds are fixed and set forth in the table below with the carrying value and fair value (dollars in millions) at March 31, 2016.





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Maturing

 

Interest
Rate

 

Carrying
Value

 

Fair
Value

2011 Series A, Tranche A

 

2031

 

4.20 

%

 

$

67,500 

 

$

68,603 

2011 Series A, Tranche B

 

2041

 

4.75 

%

 

 

154,167 

 

 

164,961 

2012 Series A, Tranche A

 

2032

 

4.01 

%

 

 

60,000 

 

 

60,251 

2012 Series A, Tranche B

 

2042

 

4.41 

%

 

 

95,000 

 

 

98,853 

2012 Series A, Tranche C

 

2042

 

4.78 

%

 

 

50,000 

 

 

54,377 

Total

 

 

 

 

 

 

$

426,667 

 

$

447,045 



Chugach is exposed to market risk from changes in interest rates associated with other credit facilities. Chugach’s credit facilities’ interest rates may be reset due to fluctuations in a market-based index, such as the London Interbank Offered Rate (LIBOR) or the base rate or prime rate of lenders. At March 31, 2016, Chugach had $43.0 million of commercial paper outstanding and $23.7 million outstanding on its CoBank Bond. A 100 basis-point rise in interest rates would increase interest expense by approximately $0.7 million, and up to a 100 basis-point decline in interest rates would decrease interest expense by approximately $0.5 million, based on $66.7 million of variable rate debt outstanding at March 31, 2016.



Commodity Price Risk



A portion of Chugach’s gas supply is subject to fluctuations in gas prices because the gas price is indexed to certain commodity prices. Because fuel and purchased power costs are passed directly to wholesale and retail customers through a fuel and purchased power recovery process, fluctuations in the price paid for gas pursuant to gas supply contracts does not normally impact margins.





33


 

ITEM 4.  CONTROLS AND PROCEDURES



Evaluation of Controls and Procedures



As of the end of the period covered by this report, under the supervision and with the participation of Chugach management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), Chugach conducted an evaluation of the effectiveness of the design and operation of disclosure controls and procedures, as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(e). Based on this evaluation, the CEO and CFO each concluded that as of the end of the period covered by this report, disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed in Chugach’s periodic reports to the Securities and Exchange Commission (SEC), ensures that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosure.



Changes in Internal Control Over Financial Reporting



There have been no changes in Chugach’s internal controls over financial reporting identified in connection with the evaluation that occurred during the first quarter of 2016 that has materially affected, or is reasonably likely to materially affect, internal controls over financial reporting.





PART II.  OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS



Information required by this Item is contained in Note 9 to the “Notes to Financial Statements” within Part I of this Form 10-Q.



ITEM 1A.  RISK FACTORS



Regulatory



Chugach’s billing rates are approved by the RCA. Chugach filed its June 2014 General Rate Case on February 13, 2015, to reflect revenue and cost changes resulting from the April 30, 2015, expiration of the 2015 Interim Power Sales Agreement between MEA and Chugach. Chugach requested a system base rate increase of approximately $21.3 million on total base rate revenues. The RCA issued Order U-15-081(1) on April 30, 2015, suspending the filing and granting Chugach’s request for interim and refundable rate increases effective May 1, 2015. On May 2, 2016, the RCA issued Order U-15-081(8) accepting the stipulation between Chugach and the AG. The order required Chugach to submit by June 1, 2016 updated revenue requirement and cost of service results reflecting the adjustments contained in the stipulation, as well as updated tariff sheets and a refund plan. See “Item 1 FINANCIAL STATEMENTS – Note 4 – Regulatory Matters – June 2014 Test Year General Rate Case.”

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Fuel Supply



On April 21, 2016, the RCA approved the acquisition of the Beluga River Unit effective January 1, 2016, as discussed in “Item 1 – FINANCIAL STATEMENTS – Note 4 – Regulatory Matters – Beluga River Unit and Note 9 – Commitments and Contingencies – Commitments – Beluga River Unit.” The acquisition complements existing gas supplies and is expected to provide greater fuel diversity at an effective annual cost that is $2 million to $3 million less than alternative sources of gas in the Cook Inlet region. Approximately 80% of Chugach’s current generation requirements are met from natural gas, 16% are met from hydroelectric, and 4% are met from wind.



The acquisition is expected to provide gas to meet Chugach’s on-going generation requirements over an approximate 18-year period, or from 2016 to 2033. Gas associated with the acquisition is expected to provide about 15% of Chugach’s gas requirements through 2033, although actual gas quantities produced are expected to vary on a year-by-year basis.



For information regarding additional risk factors, refer to Item 1A of Chugach’s Annual Report on Form 10-K for the year ended December 31, 2015. Except as noted above, these risk factors have not materially changed as of March 31, 2016.





ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



Not applicable.





ITEM 3.  DEFAULTS UPON SENIOR SECURITIES



Not applicable.





ITEM 4.  MINE SAFETY DISCLOSURES



None.





ITEM 5.  OTHER INFORMATION



None.





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ITEM 6.  EXHIBITS



Employment Agreement between the Registrant and Lee D. Thibert dated effective May 1, 2016



Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



XBRL Instance Document



XBRL Taxonomy Extension Schema Document



XBRL Taxonomy Extension Calculation Linkbase Document



XBRL Taxonomy Extension Label Linkbase Document



XBRL Taxonomy Extension Presentation Linkbase Document



XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES



Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned thereunto duly authorized.







 

 



 

CHUGACH ELECTRIC ASSOCIATION, INC.



 

 



 

 



 

 



By:

/s/ Bradley W. Evans



 

Bradley W. Evans



 

Chief Executive Officer



 

 



By:

/s/ Sherri L. Highers



 

Sherri L. Highers



 

Chief Financial Officer



 

 



 

 



Date:

May 13, 2016



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EXHIBITS



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





 

Exhibit Number

Description

10.78

Employment Agreement between the Registrant and Lee D. Thibert dated effective May 1, 2016

31.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document









38