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EX-32.2 - EX-32.2 - CHUGACH ELECTRIC ASSOCIATION INCc004-20170331xex32_2.htm
EX-32.1 - EX-32.1 - CHUGACH ELECTRIC ASSOCIATION INCc004-20170331xex32_1.htm
EX-31.2 - EX-31.2 - CHUGACH ELECTRIC ASSOCIATION INCc004-20170331xex31_2.htm
EX-31.1 - EX-31.1 - CHUGACH ELECTRIC ASSOCIATION INCc004-20170331xex31_1.htm
EX-10.61.3 - EX-10.61.3 - CHUGACH ELECTRIC ASSOCIATION INCc004-20170331xex10_613.htm
EX-10.60.4 - EX-10.60.4 - CHUGACH ELECTRIC ASSOCIATION INCc004-20170331xex10_604.htm
EX-10.59.3 - EX-10.59.3 - CHUGACH ELECTRIC ASSOCIATION INCc004-20170331xex10_593.htm
EX-4.33 - EX-4.33 - CHUGACH ELECTRIC ASSOCIATION INCc004-20170331xex4_33.htm
EX-4.32 - EX-4.32 - CHUGACH ELECTRIC ASSOCIATION INCc004-20170331xex4_32.htm
EX-4.31 - EX-4.31 - CHUGACH ELECTRIC ASSOCIATION INCc004-20170331xex4_31.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, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, and “emerging growth company” in Rule 12b-2 of the Exchange Act.



 

Large accelerated filer

Accelerated filer

Non-accelerated filer  (Do not check if a smaller reporting company)



Smaller reporting company



Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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)



 

Consolidated Balance Sheets - as of March 31, 2017, and December 31, 2016



 

Consolidated Statements of Operations - Three months ended March 31, 2017, and March 31, 2016



 

Consolidated Statements of Cash Flows - Three months ended March 31, 2017, and March 31, 2016



 

Notes to Financial Statements



Item 2.

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

21 



Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30 



Item 4.

Controls and Procedures

31 



 

 

 

Part II. Other Information

 



Item 1.

Legal Proceedings

31 



Item 1A.

Risk Factors

31 



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34 



Item 3.

Defaults Upon Senior Securities

34 



Item 4.

Mine Safety Disclosures

34 



Item 5.

Other Information

34 



Item 6.

Exhibits

35 



 

Signatures

36 



 

Exhibits

37 







 

 


 





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, 2016, 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, 2017, follow.





 

2


 

Table Of Contents

 

Chugach Electric Association, Inc.

Consolidated Balance Sheets

(Unaudited)





























 

 

 

 

 

 



 

 

 

 

 

 

Assets

 

March 31, 2017

 

December 31, 2016



 

 

 

 

 

 

Utility Plant:

 

 

 

 

 

 

Electric plant in service

 

$

1,204,760,014 

 

$

1,192,513,869 

Construction work in progress

 

 

11,023,857 

 

 

18,455,940 

Total utility plant

 

 

1,215,783,871 

 

 

1,210,969,809 

Less accumulated depreciation

 

 

(503,108,877)

 

 

(496,098,131)

Net utility plant

 

 

712,674,994 

 

 

714,871,678 



 

 

 

 

 

 

Other property and investments, at cost:

 

 

 

 

 

 

Nonutility property

 

 

76,889 

 

 

76,889 

Investments in associated organizations

 

 

8,980,127 

 

 

9,349,311 

Special funds

 

 

978,562 

 

 

907,836 

Restricted cash equivalents

 

 

872,232 

 

 

810,559 

Investments - other

 

 

3,060,568 

 

 

3,061,434 

Total other property and investments

 

 

13,968,378 

 

 

14,206,029 



 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

 

4,415,527 

 

 

4,672,935 

Special deposits

 

 

75,942 

 

 

75,942 

Restricted cash equivalents

 

 

838,449 

 

 

899,723 

Marketable securities

 

 

7,420,375 

 

 

7,375,381 

Accounts receivable, net

 

 

31,389,417 

 

 

33,000,919 

Materials and supplies

 

 

27,187,541 

 

 

27,889,167 

Fuel stock

 

 

4,880,941 

 

 

6,321,676 

Prepayments

 

 

3,233,765 

 

 

1,407,026 

Other current assets

 

 

427,188 

 

 

294,697 

Total current assets

 

 

79,869,145 

 

 

81,937,466 



 

 

 

 

 

 

Other non-current assets:

 

 

 

 

 

 

Deferred charges, net

 

 

24,914,883 

 

 

25,140,957 

Total other non-current assets

 

 

24,914,883 

 

 

25,140,957 



 

 

 

 

 

 

Total assets

 

$

831,427,400 

 

$

836,156,130 



















 

3


 

Table Of Contents

 

Chugach Electric Association, Inc.

Consolidated Balance Sheets (continued)

(Unaudited)





 

 

 

 

 

 



 

 

 

 

 

 



Liabilities, Equities and Margins

 

March 31, 2017

 

December 31, 2016



 

 

 

 

 

 

Equities and margins:

 

 

 

 

 

 

Memberships

 

$

1,697,209 

 

$

1,691,014 

Patronage capital

 

 

173,984,906 

 

 

169,996,436 

Other

 

 

13,923,557 

 

 

13,828,075 

Total equities and margins

 

 

189,605,672 

 

 

185,515,525 



 

 

 

 

 

 

Long-term obligations, excluding current installments:

 

 

 

 

 

 

Bonds payable

 

 

421,833,331 

 

 

405,249,998 

Notes payable

 

 

39,558,000 

 

 

40,356,000 

Less unamortized debt issuance costs

 

 

(2,805,096)

 

 

(2,715,745)

Total long-term obligations

 

 

458,586,235 

 

 

442,890,253 



 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current installments of long-term obligations

 

 

26,722,667 

 

 

24,836,667 

Commercial paper

 

 

47,200,000 

 

 

68,200,000 

Accounts payable

 

 

8,241,261 

 

 

9,618,630 

Consumer deposits

 

 

4,921,026 

 

 

5,207,585 

Fuel cost over-recovery

 

 

648,920 

 

 

3,824,722 

Accrued interest

 

 

1,105,521 

 

 

5,873,368 

Salaries, wages and benefits

 

 

7,424,928 

 

 

7,315,898 

Fuel

 

 

9,314,231 

 

 

6,284,338 

Other current liabilities

 

 

3,326,072 

 

 

3,234,586 

Total current liabilities

 

 

108,904,626 

 

 

134,395,794 



 

 

 

 

 

 

Other non-current liabilities:

 

 

 

 

 

 

Deferred compensation

 

 

978,562 

 

 

907,836 

Other liabilities, non-current

 

 

752,597 

 

 

655,277 

Deferred liabilities

 

 

1,174,806 

 

 

1,179,414 

Patronage capital payable

 

 

12,008,499 

 

 

12,008,499 

Cost of removal obligation / ARO

 

 

59,416,403 

 

 

58,603,532 

Total other non-current liabilities

 

 

74,330,867 

 

 

73,354,558 



 

 

 

 

 

 

Total liabilities, equities and margins

 

$

831,427,400 

 

$

836,156,130 



See accompanying notes to financial statements.



 

4


 

Table Of Contents

 

Chugach Electric Association, Inc.

Consolidated Statements of Operations

(Unaudited)







 

 

 

 

 

 



 

Three months ended March 31,



 

2017

 

2016



 

 

 

 

 

 

Operating revenues

 

$

60,793,482 

 

$

50,250,135 



 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Fuel

 

 

20,719,292 

 

 

13,888,937 

Production

 

 

3,956,971 

 

 

3,848,269 

Purchased power

 

 

4,496,723 

 

 

3,949,228 

Transmission

 

 

1,649,799 

 

 

1,376,867 

Distribution

 

 

3,040,935 

 

 

3,345,943 

Consumer accounts

 

 

1,524,201 

 

 

1,632,213 

Administrative, general and other

 

 

6,310,066 

 

 

5,829,967 

Depreciation and amortization

 

 

9,525,251 

 

 

8,487,648 

Total operating expenses

 

$

51,223,238 

 

$

42,359,072 



 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

Long-term debt and other

 

 

5,551,351 

 

 

5,483,764 

Charged to construction

 

 

(30,872)

 

 

(98,553)

Interest expense, net

 

$

5,520,479 

 

$

5,385,211 

Net operating margins

 

$

4,049,765 

 

$

2,505,852 



 

 

 

 

 

 

Nonoperating margins:

 

 

 

 

 

 

Interest income

 

 

150,722 

 

 

81,116 

Allowance for funds used during construction

 

 

13,053 

 

 

40,762 

Capital credits, patronage dividends and other

 

 

48,102 

 

 

1,200 

Total nonoperating margins

 

$

211,877 

 

$

123,078 



 

 

 

 

 

 

Assignable margins

 

$

4,261,642 

 

$

2,628,930 



See accompanying notes to financial statements.

 



 

5


 

Table Of Contents

 

Chugach Electric Association, Inc.

Consolidated Statements of Cash Flows

(Unaudited)









 

 

 

 

 



Three months ended March 31,



2017

 

2016

Cash flows from operating activities:

 

 

 

 

 

Assignable margins

$

4,261,642 

 

$

2,628,930 

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

 

 

 

 

 

Depreciation and amortization

 

9,525,251 

 

 

8,487,648 

Amortization and depreciation cleared to operating expenses

 

1,122,787 

 

 

1,130,842 

Allowance for funds used during construction

 

(13,053)

 

 

(40,762)

Write off of inventory, deferred charges and projects

 

79,538 

 

 

112,223 

Other

 

(49,333)

 

 

(Increase) decrease in assets:

 

 

 

 

 

Accounts receivable, net

 

1,731,178 

 

 

2,707,744 

Materials and supplies

 

622,119 

 

 

(594,700)

Fuel stock

 

1,440,735 

 

 

1,257,591 

Prepayments

 

(1,826,739)

 

 

(1,407,645)

Other assets

 

(132,491)

 

 

(116,969)

Deferred charges

 

(409,749)

 

 

(323,070)

Increase (decrease) in liabilities:

 

 

 

 

 

Accounts payable

 

(1,062,710)

 

 

638,452 

Consumer deposits

 

(286,559)

 

 

(197,245)

Fuel cost over-recovery

 

(3,175,802)

 

 

(535,123)

Accrued interest

 

(4,767,847)

 

 

(5,059,788)

Salaries, wages and benefits

 

109,030 

 

 

132,117 

Fuel

 

3,029,893 

 

 

233,535 

Other current liabilities

 

(250,588)

 

 

(201,989)

Deferred liabilities

 

 

 

(1,518)

Net cash provided by operating activities

 

9,947,302 

 

 

8,850,273 

Cash flows from investing activities:

 

 

 

 

 

Return of capital from investment in associated organizations

 

369,917 

 

 

318,164 

Investment in restricted cash equivalents

 

(399)

 

 

(44)

Investment in special funds

 

 

 

(4,560,000)

Proceeds from capital grants

 

 

 

114,775 

Extension and replacement of plant

 

(7,966,158)

 

 

(7,326,570)

Net cash used in investing activities

 

(7,596,640)

 

 

(11,453,675)

Cash flows from financing activities:

 

 

 

 

 

Payments for debt issue costs

 

(152,072)

 

 

Net increase (decrease) in short-term obligations

 

(21,000,000)

 

 

23,000,000 

Proceeds from long-term obligations

 

40,000,000 

 

 

Repayments of long-term obligations

 

(22,328,667)

 

 

(22,706,339)

Memberships and donations received

 

101,677 

 

 

14,044 

Retirement of patronage capital and estate payments

 

(273,172)

 

 

(26,435)

Net receipts on consumer advances for construction

 

1,044,164 

 

 

1,002,119 

Net cash provided by (used in) financing activities

 

(2,608,070)

 

 

1,283,389 

Net change in cash and cash equivalents

 

(257,408)

 

 

(1,320,013)

Cash and cash equivalents at beginning of period

$

4,672,935 

 

$

15,626,919 

Cash and cash equivalents at end of period

$

4,415,527 

 

$

14,306,906 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Cost of removal obligation

$

812,871 

 

$

649,757 

Extension and replacement of plant included in accounts payable

$

1,600,374 

 

$

1,205,855 

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

$

9,982,893 

 

$

10,150,305 



See accompanying notes to financial statements.

 

6


 

Table of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

1.

PRESENTATION OF FINANCIAL INFORMATION



The accompanying unaudited interim financial statements include the accounts of Chugach Electric Association, Inc. (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, 2016, 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 one of the largest electric utilities 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. Periodically, Chugach sells available generation, in excess of its own needs, to Matanuska Electric Association, Inc. (MEA),  Homer Electric Association, Inc. (HEA), Golden Valley Electric Association, Inc. (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, 2021. The three CBA’s provide for wage increases in all years and include health and welfare premium cost sharing provisions. The HERE contract was renewed through June 30, 2021,  and provides for wage, pension contribution, and health and welfare contribution increases in all years.

 



7


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

3.

SIGNIFICANT ACCOUNTING POLICIES



a. Management Estimates



In preparing the financial statements in conformity with U.S. 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 liabilities, unbilled revenue, estimated useful life of utility plant, cost of removal and asset retirement obligation (ARO), and remaining proved Beluga River Unit (BRU) reserves. 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) 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 our 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, 2017 and 2016 was in compliance with that provision.



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.



d. Restricted Cash Equivalents



Restricted cash equivalents include funds on deposit for future workers’ compensation claims, which amounted to $0.9 and $0.8 million at March 31, 2017 and December 31, 2016, respectively.



8


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

e. Marketable Securities



Chugach’s marketable securities consist of bond mutual funds classified as trading securities, reported at fair value with gains and losses in earnings. Net gains on marketable securities are summarized as follows:





 

 



 

 



Three months ended

March 31, 2017

Net gains and losses recognized during the period on trading securities

$

44,128 

Less: Net gains and losses recognized during the period on trading securities sold during the period

 

Unrealized gains and losses recognized during the reporting period on trading securities still held at the reporting date

$

44,128 



f. Investments – Other



Investments – other consists of certificates of deposit with an original maturity of 18 months.



g. Accounts Receivable



Included in accounts receivable are amounts invoiced to ML&P for their proportionate share of current Southcentral Power Project (SPP) costs, which amounted to $1.2 million and $1.4 million at March 31, 2017, and December 31, 2016, respectively. In addition, accounts receivable includes amounts for grants to support investigating means of mitigating the impact of renewable generation variability on the grid, which amounted to $0.1 million and $0.0 million at March 31, 2017, and December 31, 2016, respectively. At March 31, 2017, accounts receivable also included $0.6 million from BRU operations primarily associated with gas sales to ENSTAR Natural Gas Company (ENSTAR).



h. 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 $4.9 million and $6.3 million at March 31, 2017, and December 31, 2016, respectively.





9


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

4.

REGULATORY MATTERS



Simplified Rate Filing



Chugach is a participant in the Simplified Rate Filing (SRF) process for adjustments to base demand and energy rates for Chugach retail customers and wholesale customer, Seward Electric System. SRF is an expedited base rate adjustment process available to electric cooperatives in the State of Alaska, with filings made either on a quarterly or semi-annual basis. Chugach is a participant on a quarterly filing schedule basis. Chugach submitted its December 2016 test year SRF with the RCA on March 1, 2017, as an informational filing with no changes to the demand and energy rates of Chugach retail customers or Seward.



Depreciation Study Update



In compliance with a previous order from the RCA (U-12-009(8)), Chugach submitted a 2015 Depreciation Study Update to the RCA, requesting approval of the depreciation rates resulting from the study for use in Chugach’s financial record keeping and for establishing electric rates. The filing was submitted to the RCA on September 30, 2016. Chugach proposed changes to depreciation rates that would result in a $5.9 million reduction in annual depreciation expense. On a demand and energy rate basis, the impact is a 4.7% reduction to retail customers and a 4.6% reduction to Seward. The reductions on a total customer bill basis, which includes fuel and purchased power costs, are 3.2% and 1.9%, respectively. Chugach requested that the updated depreciation rates be implemented on July 1, 2017, for both accounting and ratemaking purposes.



On October 11, 2016, the RCA issued Order U-16-081(1) to address the depreciation study update.



On March 23, 2017, the RCA issued Order U-16-081(2) approving Chugach’s proposed changes to its depreciation rates. The depreciation rates were approved as filed. The RCA required Chugach to file a new depreciation study by July 1, 2022, based on plant activity as of December 31, 2021.  The RCA closed the docket.



Furie Agreement



On March 16, 2017, Chugach submitted a request to the RCA for approval of the agreement entitled, “Firm and Interruptible Gas Sale and Purchase Agreement between Furie Operating Alaska, LLC and Chugach Electric Association, Inc.” (Furie Agreement) dated March 3, 2017. As part of the filing, Chugach also requested RCA approval to recover both firm and interruptible purchases under the agreement and all attendant transportation and storage costs through its quarterly fuel and purchased power cost adjustment process. 



On May 1, 2017, the RCA approved the Furie Agreement.  The GSA provides Chugach with both firm and non-firm gas supplies over a 16-year period, with firm purchases beginning on April 1, 2023, and ending March 31, 2033, and interruptible gas purchases available to Chugach immediately and ending on March 31, 2033.  With respect to firm purchases beginning on April 1, 2023, and ending on March 31, 2033, the GSA provides an Annual Gas Commitment by Furie

10


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

to sell and Chugach to purchase approximately 1.8 Bcf of gas each year, which represents approximately 20% to 25% of Chugach’s projected gas requirements during this period.  The GSA also provides Chugach with additional purchase options, on a firm and interruptible basis.  The initial price for firm gas is $7.16 per Mcf beginning April 1, 2023 and escalates annually rising to $7.98 per Mcf on April 1, 2032, the last year of the contract.    



The RCA also approved recovery of costs associated with the Furie GSA through its Cost of Power Adjustment (COPA) mechanism.



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, 2017. In addition, Chugach did not utilize this line of credit during 2016 and had no outstanding balance at December 31, 2016. The borrowing rate is calculated using the total rate per annum and may be fixed by NRUCFC. The borrowing rate was  2.50% at March 31, 2017, and December 31, 2016. 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.



Commercial Paper



On June 13, 2016, Chugach entered into a $150.0 million senior unsecured credit facility, the 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 90.0 basis points, along with a 10.0 basis points facility fee (based on an A/A2/A unsecured debt rating). The new Credit Agreement will expire on June 13, 2021. The participating banks include NRUCFC, KeyBank National Association, Bank of America, N.A., and CoBank, ACB. The commercial paper can be repriced between one day and 270 days.



Chugach expects to continue issuing commercial paper in 2017, as needed. Chugach had $47.2 million and $68.2 million of commercial paper outstanding at March 31, 2017, and December 31, 2016, respectively.



The following table provides information regarding average commercial paper balances outstanding for the quarters ended March 31, 2017, and 2016 (dollars in millions), as well as corresponding weighted average interest rates:



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

2017

 

2016

Average Balance

 

Weighted Average Interest Rate

 

Average Balance

 

Weighted Average Interest Rate

$

62.3

 

0.97 

%

 

$

21.3

 

0.60 

%

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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

Term Loans



Chugach has a term loan facility with CoBank. Loans made under this facility are evidenced by the 2016 CoBank Note, which is governed by the Amended and Restated Master Loan Agreement dated June 30, 2016, and secured by the Second Amended and Restated Indenture of Trust (Indenture). At March 31, 2017, Chugach had $42.9 million outstanding with CoBank.



Financing



On March 17, 2017, Chugach issued $40,000,000 of First Mortgage Bonds, 2017 Series A, due March 15, 2037. The bonds were issued for general corporate purposes. The 2017 Series A Bonds will mature on March 15, 2037, and bear interest at 3.43%. Interest will be paid each March 15 and September 15, commencing on September 15, 2017. The 2017 Series A Bonds require principal payments in equal installments on an annual basis beginning March 15, 2018, resulting in an average life of approximately 10.0 years. The bonds are secured, ranking equally with all other long-term obligations, by a first lien on substantially all of Chugach’s assets, pursuant to the Sixth Supplemental Indenture to the Second Amended and Restated Indenture of Trust, which initially became effective on January 20, 2011, as previously amended and supplemented. 



Debt Issuance Costs



The following table outlines debt issuance costs associated with long-term obligations, excluding current installments, at March 31, 2017.



 

 

 

 

 



 

 

 

 

 



Long-term Obligations

 

Unamortized
Debt Issuance Costs

2011 Series A Bonds

$

200,333,331 

 

$

1,314,681 

2012 Series A Bonds

 

183,500,000 

 

 

1,083,799 

2017 Series A Bonds

 

38,000,000 

 

 

254,544 

2016 CoBank Note

 

39,558,000 

 

 

152,073 



$

461,391,331 

 

$

2,805,096 



The following table outlines debt issuance costs associated with long-term obligations, excluding current installments, at December 31, 2016.





 

 

 

 

 



 

 

 

 

 



Long-term Obligations

 

Unamortized
Debt Issuance Costs

2011 Series A Bonds

$

210,999,998 

 

$

1,347,350 

2012 Series A Bonds

 

194,250,000 

 

 

1,106,275 

2016 CoBank Note

 

40,356,000 

 

 

262,120 



$

445,605,998 

 

$

2,715,745 





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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

6.

RECENT ACCOUNTING PRONOUNCEMENTS



Issued, not yet adopted:



ASC Update 2014-09 “Revenue from Contracts with Customers (Topic 606)” and Related Updates

In May of 2014, the FASB issued Accounting Standards Codification (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. Chugach will begin application of the standard on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. While Chugach has not yet selected a transition method, we currently expect to use the cumulative effect method. Our transition method, and the expected materiality of the impact of adopting this standard on our operations, financial position, and cash flows, will be determined after we further evaluate the impact of this update.

We have evaluated our energy sales contracts, including retail, wholesale, and economy energy, and do not believe there will be a material impact to our recognition of revenue from energy sales. Energy sales are billed monthly per regulator approved tariffs based on the energy consumed by the customer. Total revenue derived from energy sales during 2016 was approximately 99% of our total operating revenue.

The American Institute of Certified Public Accountants (AICPA) Power and Utilities Revenue Recognition Task Force is currently assessing the impact of this update on contributions in aid of construction (CIAC). CIAC represents the funds collected from customers and third parties and recorded as a reduction to the total cost of property, plant and equipment, per industry standard practice. If it is determined that CIAC is within the scope of this update, it could have a material impact on the amount of revenue we recognize.



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

In January of 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, 2017, and interim periods within those years, with early adoption not permitted with certain exceptions. Chugach will begin application of ASC 2016-01 on January 1, 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 Consolidated Financial Statements

March 31, 2017 and 2016

 

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 of 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 expects this update to increase the recorded amounts of assets and liabilities and we are evaluating the significance of the increase. We are also evaluating the impact of this update to our results of operations, financial position, and cash flows.

ASC Update 2016-11 “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Update 2014-09 and 2014-06 Pursuant to Staff Announcements at the March 3, 2016, EITF Meeting (SEC Update)



In May 2016, the FASB issued ASC Update 2016-11, “Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Update 2014-09 and 2014-06 Pursuant to Staff Announcements at the March 3, 2016, EITF Meeting (SEC Update).” ASC 2016-11 rescinds and supersedes SEC guidance previously governing revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs, consideration given by a vendor to a customer, and gas-balancing arrangements. This update affects the guidance in ASC Update 2014-09 and 2014-06 and follows the same effective date and transition requirements. While Chugach has not yet selected a transition method, we currently expect to use the cumulative effect method. Our transition method, and the expected materiality of the impact of adopting this standard on our operations, financial position, and cash flows, will be determined after we further evaluate the impact of this update.



ASC Update 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments



In June 2016, the FASB issued ASC Update 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASC Update 2016-13 revised the criteria for the measurement, recognition, and reporting of credit losses on financial instruments to be recognized when expected. This update is effective for fiscal years beginning after December 15, 2019, including the interim periods within those years, with early adoption permitted for fiscal years beginning after December 15, 2018, including interim periods within those years. Chugach will begin application of ASC 2016-13 on January 1, 2020. 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 Consolidated Financial Statements

March 31, 2017 and 2016

 

ASC Update 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)”



In August 2016, the FASB issued ASC Update 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). ASC Update 2016-15 clarifies how certain cash payments and cash proceeds should be classified on the statement of cash flows to limit the diversity in practice. This update is effective fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted. Chugach will begin application of ASC 2016-15 on January 1, 2018. Adoption is not expected to have a material effect on its results of operations, financial position, and cash flows.



ASC Update 2016-18  “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)



In November 2016, the FASB issued ASC Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force). ASC Update 2016-18 clarifies how to classify and present changes in restricted cash or cash equivalents that occur when there are transfers between cash, cash equivalents, and restricted cash or restricted cash equivalents and when there are direct cash receipts into or payments made from restricted cash or restricted cash equivalents on the statement of cash flows to limit the diversity in practice. This update is effective fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted. Chugach will begin application of ASC 2016-18 on January 1, 2018. Adoption is not expected to have a material effect on its results of operations, financial position, and cash flows.



ASC Update 2017-01  “Business Combinations (Topic 805): Clarifying the Definition of a Business



In January 2017, the FASB issued ASC Update 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business. ASC Update 2017-01 clarifies the definition of a business by providing a screen to determine when a set of assets and activities acquired or disposed of constitute a business, as well as a framework for evaluating whether all elements of a business are present in the set. This update is effective fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted only when the transaction has not been reported in financial statements. Chugach will begin application of ASC 2017-01 on January 1, 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 Consolidated Financial Statements

March 31, 2017 and 2016

 

ASC Update 2017-07  “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost



In March 2017, the FASB issued ASC Update 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASC Update 2017-07 amends current guidance on the presentation and disclosure of other compensation costs in the income statement. This update is effective fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted only for financial statements that have not been issued. Chugach will begin application of ASC 2017-07 on January 1, 2018. Adoption is not expected to have a material 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.



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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

The table below presents the balance of Chugach’s marketable securities measured at fair value on a recurring basis at March 31, 2017, and December 31, 2016. Chugach’s bond mutual funds are measured using quoted prices in active markets.  Market prices for Chugach’s certificates of deposit are measured using pricing models based upon market-observable interest rates. Chugach had no other assets or liabilities measured at fair value on a recurring basis at March 31, 2017, or at  December 31, 2016.  







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2017

 

Total

 

Level 1

 

Level 2

 

Level 3

Bond mutual funds

 

$

7,420,375 

 

$

7,420,375 

 

$

 

$

Certificates of deposit

 

$

3,060,568 

 

$

 

$

3,060,568 

 

$



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

Total

 

Level 1

 

Level 2

 

Level 3

Bond mutual funds

 

$

7,375,381 

 

$

7,375,381 

 

$

 

$

Certificates of deposit

 

$

3,061,434 

 

$

 

$

3,061,434 

 

$



Fair Value of Financial Instruments



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.



The estimated fair values (in thousands) of long-term obligations included in the financial statements at March 31, 2017, are as follows:









 

 

 

 

 

 



 

 

 

 

 

 



 

Carrying Value

 

Fair Value Level 2

Long-term obligations (including current installments)

 

$

488,114 

 

$

494,410 





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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

8.ENVIRONMENTAL MATTERS



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 District of Columbia (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 D.C. Circuit decides the case, or until the disposition of a petition to the Supreme Court on the issue. On September 27, 2016, the U.S. Court of Appeals for the D.C. Circuit heard oral arguments challenging the legality of the Clean Power Plan. While awaiting the court decision, an Executive Order promoting energy independence and economic growth was issued March 28, 2017, by the President instructing the EPA to review the Clean Power Plan. The EPA is directed to review the Clean Power Plan rule and either revise or withdraw the proposed rule. 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 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.





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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

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, 2017, 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, 2021. The HERE contract was renewed through June 30, 2021.  



Commitments



Fuel Supply Contracts 



Chugach has fuel supply contracts with various producers at market terms. 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 Hilcorp agreement require Chugach to manage the natural gas transportation over the connecting pipeline systems. Chugach has gas transportation agreements with ENSTAR and Hilcorp.



The RCA approved a natural gas supply contract with Marathon Alaska Production, LLC (MAP) effective May 17, 2010. This contract includes two contract extensions that were exercised in 2011. Effective February 1, 2013, this gas purchase agreement was assigned to Hilcorp, who purchased MAP’s assets in Cook Inlet. This contract began providing gas April 1, 2011, and will expire March 31, 2023. The total amount of gas under contract is currently estimated up to 49 Bcf. These contracts fill 100% of Chugach’s needs through March 31, 2023.  All of the production is expected to come from Cook Inlet, Alaska.



On May 1, 2017, the RCA approved the Firm and Interruptible Gas Sale and Purchase Agreement (GSA) between Furie Operating Alaska, LLC (Furie) and Chugach Electric Association, Inc.   The

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Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2017 and 2016

 

GSA provides Chugach with both firm and non-firm gas supplies over a 16-year period, with firm purchases beginning on April 1, 2023, and ending March 31, 2033, and interruptible gas purchases available to Chugach immediately and ending on March 31, 2033.  With respect to firm purchases beginning on April 1, 2023, and ending on March 31, 2033, the GSA provides an Annual Gas Commitment by Furie to sell and Chugach to purchase approximately 1.8 Bcf of gas each year, which represents approximately 20% to 25% of Chugach’s projected gas requirements during this period.  The GSA also provides Chugach with additional purchase options, on a firm and interruptible basis.  The initial price for firm gas is $7.16 per Mcf beginning April 1, 2023 and escalates annually rising to $7.98 per Mcf on April 1, 2032, the last year of the contract.



BRU Operations



Following the acquisition, Hilcorp temporarily assumed operations under an agreement similar to that previously held by ConocoPhillips Alaska, Inc. (CPAI). A final operator agreement is expected during the second quarter of 2017.



Patronage Capital



Pursuant to agreements reached with HEA and MEA, patronage capital allocated or retired to HEA or MEA is classified as patronage capital payable on Chugach’s balance sheet. HEA’s patronage capital was $7.9 million at March 31, 2017, and December 31, 2016. MEA’s patronage capital payable was $4.1 million at March 31, 2017, and December 31, 2016.



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.



 

20


 

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 one of the largest electric utilities 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 upper Kenai Peninsula areas and supplies much of the power requirements of the City of Seward, as a wholesale customer. Periodically, Chugach sells available generation in excess of its own needs to MEA, HEA, GVEA and to ML&P.



Chugach is an Alaska electric cooperative operating on a not-for-profit basis and is subject to the regulatory authority of the 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 additional revenue sources. These challenges, along with energy issues and plans at the state level, will shape how Chugach proceeds into the future.



Railbelt Grid Unification



Chugach is focused on efforts in Alaska’s Railbelt to explore the benefits of grid unification. Currently, each of the six electric utilities in the Alaska’s 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 were required. With the support of the RCA, Chugach and several other Alaska’s Railbelt utilities are evaluating possible transmission business model opportunities and associated economic dispatch models that Chugach believes may lead to more optimal Alaska’s Railbelt-wide system operations. Chugach intends to finalize this review and evaluation during 2017. 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.

21


 

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 and approximately 20% to 25% of Chugach’s projected gas requirements from April 2023 through March 2033. Chugach continues its efforts to secure long-term reliable gas supply solutions and encourages 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 million cubic feet (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.



Chugach also has an interest in the BRU, which provides an additional long-term supply of natural gas to meet on-going generation requirements. Gas associated with the BRU is expected to provide approximately 15% of Chugach’s gas requirements through 2033, although actual gas quantities produced are expected to vary on a year-by-year basis. During 2016, 77% of Chugach’s generation requirements were met from natural gas, 19% were met from hydroelectric facilities, and 4% were met from wind.



Chugach has a firm gas supply contract with Hilcorp, see “Item 1 – FINANCIAL STATEMENTS – Note 9 – Commitments and Contingencies – Commitments – Fuel Supply Contracts”. In addition to this firm contract, Chugach has gas supply agreements with AIX Energy LLC through March 31, 2024 (with an option to extend the term an additional 5-year period through March 31, 2029), with Cook Inlet Energy LLC through March 31, 2023 (Chugach has exercised its option to extend the term an additional 5-year period through March 31, 2023), with Furie beginning April 1, 2023 through March 31, 2033, and had an agreement with ML&P which expired March 31, 2017. 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, 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. This is an aspirational goal and not a mandate.



22


 

The main project moving Alaska toward its renewable energy goals was to be the Susitna-Watana Hydroelectric Project on the Susitna River, approximately halfway between Anchorage and Fairbanks. The Alaska Legislature has appropriated a total of $192.1 million for AEA to plan, design, and obtain permit of the project. On December 26, 2014, the Governor of Alaska issued Administrative Order 271 suspending discretionary spending on the project. On January 8, 2015, the FERC granted AEA’s request to hold the licensing process in abeyance. On July 6, 2015, the Governor’s office authorized AEA to proceed with the Integrated Licensing Process using previously appropriated funds. In August 2015, AEA requested the FERC’s permission to resume the licensing efforts. As per the Governor’s direction on June 29, 2016, AEA has continued to work towards shutting down the project while preserving the State’s investment to date. On August 4, 2016, the Governor issued a letter to FERC requesting FERC to proceed with the Integrated Licensing Process (ILP) to the point of issuing its updated Study Plan Determination (SPD) to preserve the State’s investment in the project. On August 26, 2016, FERC responded to the Governor’s letter. FERC will proceed with the ILP to complete the SPD. After issuing the SPD, the project will be put into abeyance as requested by the Governor. Chugach intends to continue to work with AEA and other parties on this effort.



RESULTS OF OPERATIONS



Current Year Quarter versus Prior Year Quarter



Assignable margins increased $1.6 million, or 62.1%, during the first quarter of 2017 compared to the first quarter of 2016, primarily due to increased sales revenue.



Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, increased $10.6 million, or 21.1%, in the first quarter of 2017 compared to the first quarter of 2016. This increase was primarily due to increased energy sales caused by colder weather, as well as higher economy energy sales to GVEA and HEA.



Retail revenue increased $5.9 million, or 12.4%, due to increased energy sales, as discussed above, and higher fuel and purchased power costs recovered through the fuel and purchased power adjustment process.



Wholesale revenue increased $0.2 million, or 16.7%, in the first quarter of 2017 compared to the first quarter of 2016, due to increased energy sales and higher fuel and purchased power costs recovered through the fuel and purchased power adjustment process.



Economy revenue increased $1.9 million, or 100.0%, in the first quarter of 2017 compared to the first quarter of 2016, due to economy energy sales to GVEA and HEA.



Miscellaneous revenue increased $2.6 million, or 173.3%, in the first quarter of 2017 compared to the first quarter of 2016, due to an increase in wheeling and BRU revenue.



Based on the results of fixed and variable cost recovery established in Chugach’s last rate case, wholesale sales to Seward contributed approximately $0.4 million and $0.3 million to Chugach’s fixed costs for the quarters ended March 31, 2017 and 2016, respectively.



23


 

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, 2017 and 2016:









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Base Rate Sales Revenue

Fuel and Purchased Power Revenue

Total Revenue



 

2017

 

2016

 

% Variance

 

2017

 

2016

 

% Variance

 

2017

 

2016

 

% Variance

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

19.3 

 

$

17.5 

 

10.3 

%

 

$

9.4 

 

$

7.3 

 

28.8 

%

 

$

28.7 

 

$

24.8 

 

15.7 

%

Small Commercial

 

$

3.3 

 

$

3.1 

 

6.5 

%

 

$

2.2 

 

$

1.7 

 

29.4 

%

 

$

5.5 

 

$

4.8 

 

14.6 

%

Large Commercial

 

$

10.9 

 

$

11.0 

 

(0.9 

%)

 

$

7.8 

 

$

6.4 

 

21.9 

%

 

$

18.7 

 

$

17.4 

 

7.5 

%

Lighting

 

$

0.4 

 

$

0.4 

 

0.0 

%

 

$

0.1 

 

$

0.1 

 

0.0 

%

 

$

0.5 

 

$

0.5 

 

0.0 

%

Total Retail

 

$

33.9 

 

$

32.0 

 

5.9 

%

 

$

19.5 

 

$

15.5 

 

25.8 

%

 

$

53.4 

 

$

47.5 

 

12.4 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SES

 

$

0.6 

 

$

0.5 

 

20.0 

%

 

$

0.8 

 

$

0.7 

 

14.3 

%

 

$

1.4 

 

$

1.2 

 

16.7 

%

Total Wholesale

 

$

0.6 

 

$

0.5 

 

20.0 

%

 

$

0.8 

 

$

0.7 

 

14.3 

%

 

$

1.4 

 

$

1.2 

 

16.7 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economy

 

$

0.1 

 

$

0.0 

 

100 

%

 

$

1.8 

 

$

0.0 

 

100 

%

 

$

1.9 

 

$

0.0 

 

100 

%

Miscellaneous

 

$

0.6 

 

$

0.6 

 

0.0 

%

 

$

3.5 

 

$

0.9 

 

288.9 

%

 

$

4.1 

 

$

1.5 

 

173.3 

%



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

35.2 

 

$

33.1 

 

6.3 

%

 

$

25.6 

 

$

17.1 

 

49.7 

%

 

$

60.8 

 

$

50.2 

 

21.1 

%



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





 

 

 

 

Customer

 

2017
kWh

 

2016
kWh



 

 

 

 

Retail

 

306,599,162 

 

297,176,263 

Wholesale

 

15,227,089 

 

15,218,221 

Economy Energy

 

16,303,000 

 

Total

 

338,129,251 

 

312,394,484 



Base rates charged to retail customers increased 3.2% and 5.2% to Seward in the first quarter of 2017 from the first quarter of 2016. The increases are the result of the net impact associated with final rates from Chugach’s June 2014 test year general rate case and Chugach’s re-entry into the SRF process.



Total operating expenses increased $8.9 million, or 20.9%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to higher fuel expense and depreciation and amortization.



Fuel expense increased $6.8 million, or 49.2%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to more fuel purchased for generation as a result of increased energy sales, and at a higher average effective delivered price. In the first quarter of 2017, Chugach used 2,424,861 Mcf of fuel at an average effective delivered price of $7.87 per Mcf. 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.



Production expense did not materially change in the first quarter of 2017 compared to the first quarter of 2016.



24


 

Purchased power expense increased $0.5 million, or 13.9%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to a higher average effective price. In the first quarter of 2017, Chugach purchased 51,636 megawatt hours (MWh) of energy at an average effective price of 7.31 cents per kWh. In the first quarter of 2016, Chugach purchased 49,271 MWh of energy at an average effective price of 6.88 cents per kWh.



Transmission expense increased $0.3 million, or 19.8%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to higher costs associated with vegetation control.



Distribution expense decreased $0.3 million, or 9.1%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to less administrative and general support activity.



Consumer accounts expense did not materially change in the first quarter of 2017 compared to the first quarter of 2016.



Administrative, general and other expense increased $0.5 million, or 8.2%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to an increase in labor expense, professional services, and software costs.



Depreciation and amortization increased $1.0 million, or 12.2%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to the acquisition of the Beluga River Unit.



Interest on long-term and other debt and interest charged to construction did not materially change in the first quarter of 2017 compared to the first quarter of 2016.



Non-operating margins increased $0.1 million, or 72.1%, in the first quarter of 2017 compared to the first quarter of 2016, primarily due to the dividends, interest income, and change in market value of marketable securities.



Financial Condition



Assets



Total assets did not materially change from December 31, 2016, to March 31, 2017. Decreases in net utility plant, accounts receivable, and fuel stock were offset by an increase in prepayments over the same period. Net utility plant decreased $2.2 million, or 0.3%, due to the depreciation expense in excess of extension and replacement of plant. Accounts receivable decreased $1.6 million, or 4.9%, primarily due to a decrease in energy sales from winter to spring and fuel stock decreased $1.4 million, or 22.8%, due to the use of fuel from the fuel storage facility. Prepayments increased $1.8 million, or 129.8%, due to the prepayment of insurance, memberships, consulting, and technical support for 2017.



25


 

Liabilities and Equity



Total liabilities, equities and margins did not materially change from December 31, 2016, to March 31, 2017. Decreases in commercial paper, accounts payable, fuel cost over-recovery, and accrued interest were offset by increases in total equities and margins, long-term obligations, and fuel payable over the same period. Commercial paper decreased $21.0 million, or 30.8%, due primarily to repayments upon the issuance of the 2017 Series A First Mortgage Bonds. Accounts payable decreased $1.4 million, or 14.3%, due to the timing of cash payments and fuel cost over-recovery decreased $3.2 million, or 83.0%, due to refunding of the prior quarter’s over-collection of fuel and purchased power costs. Accrued interest decreased $4.8 million, or 81.2%, primarily due to the semi-annual interest payment on the 2011 and 2012 Series A Bonds. Total equities and margins increased $4.1 million, or 2.2%, primarily due to the margins generated in the three months ended March 31, 2017. Long-term obligations increased $16.6 million, or 4.1%, due to the issuance of the 2017 Series A First Mortgage Bonds on March 17, 2017, which was somewhat offset by the principal payments on Chugach’s existing debt. Fuel payable increased $3.0 million, or 48.2%, primarily due to an increase in gas purchased for generation in March 2017 compared to December 2016.



LIQUIDITY AND CAPITAL RESOURCES



Summary



Chugach ended the first quarter of 2017 with $4.4 million of cash and cash equivalents, down from $4.7 million at December 31, 2016. At March 31, 2017, Chugach also had $10.5 million in marketable securities and investments - other, which was transferred from cash and cash equivalents in September 2016. Chugach did not utilize its $50.0 million line of credit maintained with NRUCFC in the three months ended March 31, 2017, therefore, this line of credit had no outstanding balance and the available borrowing capacity under this line was $50.0 million at March 31, 2017. Chugach paid down commercial paper in the three months ended March 31, 2017 and had $47.2 million of commercial paper outstanding at March 31, 2017, thus the available borrowing capacity under the commercial paper program at March 31, 2017, was $102.8 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).



Cash Flows



The following table summarizes Chugach’s cash flows from operating, investing and financing activities for the three months ended March 31, 2017 and 2016.





 

 

 

 

 



 

 

 

 

 



2017

 

2016

Total cash provided by (used in):

 

 

 

 

 

Operating activities

$

9,947,302 

 

$

8,850,273 

Investing activities

 

(7,596,640)

 

 

(11,453,675)

Financing activities

 

(2,608,070)

 

 

1,283,389 

Decrease in cash and cash equivalents

$

(257,408)

 

$

(1,320,013)



26


 

Operating Activities



Cash provided by operating activities was $9.9 million for the three months ended March 31, 2017, compared with $8.9 million for the three months ended March 31, 2016. The increase in cash provided by operating activities in the first three months of 2017 from the same period in 2016 was primarily due to an increase in margins as a result of higher energy sales.



Investing Activities



Cash used in investing activities was $7.6 million for the three months ended March 31, 2017, compared with $11.5 million for the three months ended March 31, 2016. The change in cash used in investing activities was primarily due to Chugach’s investment in the BRU in 2016.



Capital construction through March 31, 2017, was $7.8 million and is estimated to be $44.3 million for the full year. Once funding from other sources is collected, the total cash requirement is estimated to be $29.5 million for 2017. Capital improvement expenditures are expected to increase during the second quarter as the construction season begins.



Financing Activities



Cash used in financing activities was $2.6 million for the three months ended March 31, 2017, compared to cash provided of $1.3 million for the three months ended March 31, 2016. The change in cash used in or provided by financing activities was primarily due to the higher balance of commercial paper in 2016, which was used to finance a portion of Chugach’s investment in the BRU.



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 $150.0 million commercial paper program. At March 31, 2017, there was no outstanding balance on the NRUCFC line of credit and $47.2 million of outstanding commercial paper. Therefore, at March 31, 2017, the available borrowing capacity under Chugach’s line of credit with NRUCFC was $50.0 million and the available commercial paper capacity was $102.8 million.



Commercial paper can be repriced between one day and 270 days. The average commercial paper balance for the three months ended March 31, 2017, was $62.3 million with a corresponding weighted average interest rate of 0.97%. The maximum amount of outstanding commercial paper for the three months ended March 31, 2017, was $91.2 million.



27


 

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 2017

 

$

65.0

 

0.94

February 2017

 

$

63.0

 

0.92

March 2017

 

$

60.9

 

1.04



At March 31, 2017, Chugach had a term loan facility with CoBank. Loans made under these facilities are evidenced by the 2016 CoBank Note, which is governed by the Second and Amended and Restated Master Loan Agreement dated June 30, 2016 and secured by the Indenture.



At March 31, 2017, Chugach had the following outstanding with this facility:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Principal Balance

 

Interest Rate at
March 31, 2017

 

Maturity Date

 

Principal Payment Dates



 

 

 

 

 

 

 

 

 

2016 CoBank Note

 

$

42,864,000 

 

2.58%

 

2031

 

2017-2031



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 2017 and thereafter.



CRITICAL ACCOUNTING POLICIES



As of March 31, 2017, there have been no significant changes in Chugach’s critical accounting policies as disclosed in Chugach’s 2016 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, Item 1 of this Form 10-Q.



28


 

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 we monitor these laws and regulations to ensure compliance, they frequently change and often become more restrictive. When this occurs, the costs of our compliance generally increase.

We include costs associated with environmental compliance in both our operating and capital budgets. We accrue for costs associated with environmental remediation obligations when those costs are probable and reasonably estimable. We do not anticipate that environmental related expenditures will have a material effect on our results of operations or financial condition. We cannot, however, predict the nature, extent or cost of new laws or regulations relating to environmental matters.

The Clean Air Act and 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 CO2 from existing power plants that provide electricity for utility customers. In the final rule, the EPA took the approach of making the 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 District of Columbia (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 D.C. Circuit decides the case, or until the disposition of a petition to the Supreme Court on the issue. On September 27, 2016, the U.S. Court of Appeals for the D.C. Circuit heard oral arguments challenging the legality of the Clean Power Plan. While awaiting the court decision, an Executive Order promoting energy independence and economic growth was issued March 28, 2017, by the President instructing the EPA to review the Clean Power Plan. The EPA is directed to review the Clean Power Plan rule and either revise or withdraw the proposed rule. 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.

29


 

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.



ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Chugach is exposed to a variety of risks. 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, 2017, short- and long- term debt was comprised of the 2011, 2012, and 2017 Series A Bonds, the 2016 CoBank Note and outstanding commercial paper.



The interest rates of the 2011, 2012, and 2017 Series A Bonds, and 2016 CoBank Note are fixed and set forth in the table below with the carrying value and fair value (dollars in thousands) at March 31, 2017.





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Maturing

 

Interest
Rate

 

Carrying
Value

 

Fair
Value

2011 Series A, Tranche A

 

2031

 

4.20 

%

 

$

63,000 

 

$

63,113 

2011 Series A, Tranche B

 

2041

 

4.75 

%

 

 

148,000 

 

 

155,224 

2012 Series A, Tranche A

 

2032

 

4.01 

%

 

 

56,250 

 

 

55,668 

2012 Series A, Tranche B

 

2042

 

4.41 

%

 

 

88,000 

 

 

89,679 

2012 Series A, Tranche C

 

2042

 

4.78 

%

 

 

50,000 

 

 

52,998 

2017 Series A, Tranche A

 

2037

 

3.43 

%

 

 

40,000 

 

 

37,641 

2016 CoBank Note

 

2031

 

2.58 

%

 

 

42,864 

 

 

40,087 

Total

 

 

 

 

 

 

$

488,114 

 

$

494,410 



Chugach is exposed to market risk from changes in interest rates associated with its credit facility. Chugach’s credit facilities’ interest rates may be reset due to fluctuations in a market-based index, such as the LIBOR. At March 31, 2017, Chugach had $47.2 million of commercial paper outstanding. A 100 basis-point rise or decline in interest rates would increase or decrease interest expense by approximately $0.5 million, based on $47.2 million of variable rate debt outstanding at March 31, 2017.



30


 

Commodity Price Risk



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.



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 2017 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, Item 1 of this Form 10-Q.



ITEM 1A.  RISK FACTORS



Regulatory



Chugach’s billing rates are approved by the RCA. Chugach submitted its December 2016 test year SRF with the RCA on March 1, 2017, as an informational filing with no changes to the demand and energy rates of Chugach retail or Seward. See “Item 1 FINANCIAL STATEMENTS – Note 4 – Regulatory Matters – Simplified Rate Filing.”

31


 

Financing



On March 17, 2017, Chugach issued $40,000,000 of First Mortgage Bonds, 2017 Series A, due March 15, 2037. The bonds were issued for general corporate purposes. The 2017 Series A Bonds will mature on March 15, 2037, and bear interest at 3.43%. Interest will be paid each March 15 and September 15, commencing on September 15, 2017. The 2017 Series A Bonds require principal payments in equal installments on an annual basis beginning March 15, 2018, resulting in an average life of approximately 10.0 years. The bonds are secured, ranking equally with all other long-term obligations, by a first lien on substantially all of Chugach’s assets, pursuant to the Sixth Supplemental Indenture to the Second Amended and Restated Indenture of Trust, which initially became effective on January 20, 2011, as previously amended and supplemented.



Fuel Supply

In 2016, 77% of our power was generated from natural gas. Our primary sources of natural gas in 2016 were Hilcorp, ConocoPhillips, ML&P, and Chugach’s 10% share of the Beluga River Unit. Chugach currently has gas contracts in place to fill up to 100% of Chugach’s needs through March 31, 2023.



On May 1, 2017, the RCA approved the Firm and Interruptible Gas Sale and Purchase Agreement (GSA) between Furie Operating Alaska, LLC (Furie) and Chugach Electric Association, Inc.   The GSA provides Chugach with both firm and non-firm gas supplies over a 16-year period, with firm purchases beginning on April 1, 2023, and ending March 31, 2033, and interruptible gas purchases available to Chugach immediately and ending on March 31, 2033.  With respect to firm purchases beginning on April 1, 2023, and ending on March 31, 2033, the GSA provides an Annual Gas Commitment by Furie to sell and Chugach to purchase approximately 1.8 Bcf of gas each year, which represents approximately 20% to 25% of Chugach’s projected gas requirements during this period.  The GSA also provides Chugach with additional purchase options, on a firm and interruptible basis.  The initial price for firm gas is $7.16 per Mcf beginning April 1, 2023 and escalates annually rising to $7.98 per Mcf on April 1, 2032, the last year of the contract.



Chugach also has agreements with Cook Inlet Energy (CIE) and AIX Energy, LLC, which provide a structure to purchase supplemental gas, adding diversity in Chugach’s sources of natural gas to meet system load requirements.



Green House Gas Regulations, Carbon Emission and Climate Change



Uncertainty remains regarding the impacts of potential regulations regarding greenhouse gases (GHG), carbon emissions, and climate change on Chugach’s operations. The EPA is moving forward with regulations that seek to limit carbon emissions in the United States. Power plants are the single largest source of carbon emissions in the United States. On August 3, 2015, the EPA released the final 111(d) regulation aimed at reducing emissions of carbon dioxide (CO2) from existing power plants. Alaska is not bound by the 111(d) regulation, however 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. On September 27, 2016, the US

32


 

Court of Appeals for the District of Columbia Circuit heard oral arguments challenging the legality of the Clean Power Plan. While awaiting the court decision, an Executive Order promoting energy independence and economic growth was issued on March 28, 2017, by the President instructing the EPA to review the Clean Power Plan. The EPA is directed to review the Clean Power Plan rule and either revise or withdraw the proposed rule. 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.



Additional costs related to a GHG tax or cap and trade program, if enacted by Congress, or other regulatory action, could affect the relative cost of the energy Chugach produces. 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.



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, 2016. Except as noted above, these risk factors have not materially changed as of March 31, 2017.



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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



Sixth Supplemental Indenture to the Second Amended and Restated Indenture of Trust between the Registrant and U.S. Bank National Association dated March 17, 2017



Bond Purchase Agreement between the Registrant and the 2017 Series A Bond Purchasers dated March 17, 2017



Form of 2017 Series A Bond (Tranche A) due March 15, 2037



Letter of Agreement By and Between the Registrant and the International Brotherhood of Electrical Workers Local 1547 Representing Office and Engineering Bargaining Unit dated effective July 1, 2017



Letter of Agreement By and Between the Registrant and the International Brotherhood of Electrical Workers Local 1547 Representing Generation Bargaining Unit dated effective July 1, 2017



Letter of Agreement By and Between the Registrant and the International Brotherhood of Electrical Workers Local 1547 Representing Outside Plant Bargaining Unit dated effective July 1, 2017



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/ Lee D. Thibert