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EX-32.2 - EX-32.2 - CHUGACH ELECTRIC ASSOCIATION INCc004-20180331xex32_2.htm
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EX-31.2 - EX-31.2 - CHUGACH ELECTRIC ASSOCIATION INCc004-20180331xex31_2.htm
EX-31.1 - EX-31.1 - CHUGACH ELECTRIC ASSOCIATION INCc004-20180331xex31_1.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, 2018

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

(Note:  The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.  Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.)

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

 

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, 2018, and December 31, 2017



 

Consolidated Statements of Operations - Three months ended March 31, 2018, and March 31, 2017



 

Consolidated Statements of Cash Flows - Three months ended March 31, 2018, and March 31, 2017



 

Notes to Financial Statements



Item 2.

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

24 



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

35 



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 







 

 


 





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, 2017, 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, 2018, follow.





 

2


 

Table Of Contents

 

Chugach Electric Association, Inc.

Consolidated Balance Sheets

(Unaudited)





























 

 

 

 

 

 



 

 

 

 

 

 

Assets

 

March 31, 2018

 

December 31, 2017



 

 

 

 

 

 

Utility plant:

 

 

 

 

 

 

Electric plant in service

 

$

1,208,267,411 

 

$

1,205,092,224 

Construction work in progress

 

 

13,314,406 

 

 

17,952,573 

Total utility plant

 

 

1,221,581,817 

 

 

1,223,044,797 

Less accumulated depreciation

 

 

(516,994,008)

 

 

(515,496,312)

Net utility plant

 

 

704,587,809 

 

 

707,548,485 



 

 

 

 

 

 

Other property and investments, at cost:

 

 

 

 

 

 

Nonutility property

 

 

76,889 

 

 

76,889 

Investments in associated organizations

 

 

8,566,510 

 

 

8,980,410 

Special funds

 

 

1,467,069 

 

 

1,466,010 

Restricted cash equivalents

 

 

756,076 

 

 

1,028,758 

Total other property and investments

 

 

10,866,544 

 

 

11,552,067 



 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

 

2,457,282 

 

 

5,485,631 

Special deposits

 

 

54,300 

 

 

54,300 

Restricted cash equivalents

 

 

549,639 

 

 

687,370 

Marketable securities

 

 

11,090,931 

 

 

11,420,900 

Fuel cost under-recovery

 

 

4,709,977 

 

 

4,921,794 

Accounts receivable, net

 

 

28,436,792 

 

 

35,680,680 

Materials and supplies

 

 

16,133,683 

 

 

15,291,095 

Fuel stock

 

 

6,648,349 

 

 

6,901,994 

Prepayments

 

 

4,970,460 

 

 

4,953,170 

Other current assets

 

 

364,160 

 

 

257,193 

Total current assets

 

 

75,415,573 

 

 

85,654,127 



 

 

 

 

 

 

Other non-current assets:

 

 

 

 

 

 

Deferred charges, net

 

 

32,668,462 

 

 

32,764,065 

Total other non-current assets

 

 

32,668,462 

 

 

32,764,065 



 

 

 

 

 

 

Total assets

 

$

823,538,388 

 

$

837,518,744 





















 

3


 

Table Of Contents

 

Chugach Electric Association, Inc.

Consolidated Balance Sheets (continued)

(Unaudited)





 

 

 

 

 

 



 

 

 

 

 

 



Liabilities, Equities and Margins

 

March 31, 2018

 

December 31, 2017



 

 

 

 

 

 

Equities and margins:

 

 

 

 

 

 

Memberships

 

$

1,724,759 

 

$

1,719,154 

Patronage capital

 

 

176,056,635 

 

 

172,928,887 

Other

 

 

14,650,759 

 

 

14,653,253 

Total equities and margins

 

 

192,432,153 

 

 

189,301,294 



 

 

 

 

 

 

Long-term obligations, excluding current installments:

 

 

 

 

 

 

Bonds payable

 

 

398,416,664 

 

 

421,833,331 

Notes payable

 

 

36,366,000 

 

 

37,164,000 

Less unamortized debt issuance costs

 

 

(2,607,091)

 

 

(2,669,485)

Total long-term obligations

 

 

432,175,573 

 

 

456,327,846 



 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current installments of long-term obligations

 

 

26,608,667 

 

 

26,608,667 

Commercial paper

 

 

62,000,000 

 

 

50,000,000 

Accounts payable

 

 

6,069,221 

 

 

7,420,279 

Consumer deposits

 

 

5,279,088 

 

 

5,335,896 

Accrued interest

 

 

1,040,747 

 

 

5,991,619 

Salaries, wages and benefits

 

 

7,356,171 

 

 

7,017,131 

Fuel

 

 

9,677,585 

 

 

9,913,781 

Other current liabilities

 

 

7,657,115 

 

 

7,079,821 

Total current liabilities

 

 

125,688,594 

 

 

119,367,194 



 

 

 

 

 

 

Other non-current liabilities:

 

 

 

 

 

 

Deferred compensation

 

 

1,230,508 

 

 

1,229,294 

Other liabilities, non-current

 

 

702,663 

 

 

531,630 

Deferred liabilities

 

 

1,219,047 

 

 

1,249,390 

Patronage capital payable

 

 

8,798,077 

 

 

8,798,077 

Cost of removal obligation / asset retirement obligation

 

 

61,291,773 

 

 

60,714,019 

Total other non-current liabilities

 

 

73,242,068 

 

 

72,522,410 



 

 

 

 

 

 

Total liabilities, equities and margins

 

$

823,538,388 

 

$

837,518,744 



See accompanying notes to financial statements.



 

4


 

Table Of Contents

 

Chugach Electric Association, Inc.

Consolidated Statements of Operations

(Unaudited)







 

 

 

 

 

 



 

Three months ended March 31,



 

2018

 

2017



 

 

 

 

 

 

Operating revenues

 

$

56,057,278 

 

$

60,793,482 



 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Fuel

 

 

18,487,590 

 

 

20,719,292 

Production

 

 

4,423,919 

 

 

3,956,971 

Purchased power

 

 

4,082,888 

 

 

4,496,723 

Transmission

 

 

1,988,004 

 

 

1,649,799 

Distribution

 

 

3,735,960 

 

 

3,040,935 

Consumer accounts

 

 

1,865,709 

 

 

1,524,201 

Administrative, general and other

 

 

5,544,969 

 

 

6,310,066 

Depreciation and amortization

 

 

7,343,077 

 

 

9,525,251 

Total operating expenses

 

$

47,472,116 

 

$

51,223,238 



 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

Long-term debt and other

 

 

5,614,735 

 

 

5,551,351 

Charged to construction

 

 

(57,363)

 

 

(30,872)

Interest expense, net

 

$

5,557,372 

 

$

5,520,479 

Net operating margins

 

$

3,027,790 

 

$

4,049,765 



 

 

 

 

 

 

Nonoperating margins:

 

 

 

 

 

 

Interest income

 

 

159,583 

 

 

150,722 

Allowance for funds used during construction

 

 

23,873 

 

 

13,053 

Capital credits, patronage dividends and other

 

 

(83,286)

 

 

48,102 

Total nonoperating margins

 

$

100,170 

 

$

211,877 



 

 

 

 

 

 

Assignable margins

 

$

3,127,960 

 

$

4,261,642 



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,



2018

 

2017

Cash flows from operating activities:

 

 

 

 

 

Assignable margins

$

3,127,960 

 

$

4,261,642 

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

 

 

 

 

 

Depreciation and amortization

 

7,343,077 

 

 

9,525,251 

Amortization and depreciation cleared to operating expenses

 

1,262,244 

 

 

1,122,787 

Allowance for funds used during construction

 

(23,873)

 

 

(13,053)

Write off of inventory, deferred charges and projects

 

26,443 

 

 

79,538 

Other

 

82,710 

 

 

(49,333)

(Increase) decrease in assets:

 

 

 

 

 

Accounts receivable, net

 

6,416,498 

 

 

1,731,178 

Fuel cost under-recovery

 

211,817 

 

 

Materials and supplies

 

(862,658)

 

 

622,119 

Fuel stock

 

253,645 

 

 

1,440,735 

Prepayments

 

(17,290)

 

 

(1,826,739)

Other assets

 

(106,967)

 

 

(132,491)

Deferred charges

 

(771,655)

 

 

(409,749)

Increase (decrease) in liabilities:

 

 

 

 

 

Accounts payable

 

(766,388)

 

 

(1,062,710)

Consumer deposits

 

(56,808)

 

 

(286,559)

Fuel cost over-recovery

 

 

 

(3,175,802)

Accrued interest

 

(4,950,872)

 

 

(4,767,847)

Salaries, wages and benefits

 

339,040 

 

 

109,030 

Fuel

 

(236,196)

 

 

3,029,893 

Other current liabilities

 

(272,951)

 

 

(250,588)

Deferred liabilities

 

(815)

 

 

Net cash provided by operating activities

 

10,996,961 

 

 

9,947,302 

Cash flows from investing activities:

 

 

 

 

 

Return of capital from investment in associated organizations

 

413,897 

 

 

369,917 

Investment in special funds

 

(3,139)

 

 

Proceeds from the sale of marketable securities

 

250,556 

 

 

Extension and replacement of plant

 

(3,963,731)

 

 

(7,966,158)

Net cash used in investing activities

 

(3,302,417)

 

 

(7,596,241)

Cash flows from financing activities:

 

 

 

 

 

Payments for debt issue costs

 

 

 

(152,072)

Net increase (decrease) in short-term obligations

 

12,000,000 

 

 

(21,000,000)

Proceeds from long-term obligations

 

 

 

40,000,000 

Repayments of long-term obligations

 

(24,214,667)

 

 

(22,328,667)

Memberships and donations received

 

3,111 

 

 

101,677 

Retirement of patronage capital and estate payments

 

(212)

 

 

(273,172)

Net receipts on consumer advances for construction

 

1,078,462 

 

 

1,044,164 

Net cash used in financing activities

 

(11,133,306)

 

 

(2,608,070)

Net change in cash, cash equivalents, and restricted cash equivalents

 

(3,438,762)

 

 

(257,009)

Cash, cash equivalents, and restricted cash equivalents at beginning of period

 

7,201,759 

 

 

6,383,217 

Cash, cash equivalents, and restricted cash equivalents at end of period

$

3,762,997 

 

$

6,126,208 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Cost of removal obligation

$

577,754 

 

$

812,871 

Extension and replacement of plant included in accounts payable

$

581,314 

 

$

1,600,374 

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

$

10,380,240 

 

$

9,982,893 



See accompanying notes to financial statements.

 

6


 

Table of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

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, 2017, 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 are effective 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 is effective 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, 2018 and 2017

 

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) 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 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, 2018 and 2017 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. Cash, Cash Equivalents, and Restricted Cash Equivalents



The following table provides a reconciliation of cash, cash equivalents, and restricted cash equivalents reported within the Consolidated Balance Sheet that sum to the total of the same such amounts shown in the Consolidated Statements of Cash Flows.





 

 

8


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 



 

 



March 31, 2018

Cash and cash equivalents

$

2,457,282 

Restricted cash equivalents

 

549,639 

Restricted cash equivalents included in other property and investments

 

756,076 

Total cash, cash equivalents and restricted cash equivalents shown in the consolidated statements of cash flows

$

3,762,997 



Restricted cash equivalents include funds on deposit for future workers’ compensation claims.



e. Marketable Securities



Chugach’s marketable securities consist of bond mutual funds, corporate bonds, and certificates of deposit with a maturity less than 12 months, classified as trading securities, reported at fair value with gains and losses in earnings. Net gains on marketable securities are included in nonoperating margins – capital credits, patronage dividends and other, and are summarized as follows:





 

 



 

 



Three months ended

March 31, 2018

Net gains and losses recognized during the period on trading securities

$

79,413 

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

 

(495)

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

$

78,918 



f. 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 $1.5 million and $1.3 million at March 31, 2018, and December 31, 2017, respectively. Accounts receivable also included $1.1 million from BRU operations primarily associated with gas sales to ENSTAR Natural Gas Company (ENSTAR) at December 31, 2017, at which time this contract expired.



g. Fuel Stock



Fuel Stock is the weighted average cost of fuel injected into the Cook Inlet Natural Gas Storage (CINGSA). Chugach’s fuel balance in storage amounted to $6.6 million and $6.9 million at March 31, 2018, and December 31, 2017, respectively.



h. Investments in Associated Organizations



Chugach’s investments in associated organizations are considered equity securities without readily determinable fair values, and as such are measured at cost minus impairment, if any. There were no impairments of these investments recognized during the three months ended March 31, 2018 or 2017.



9


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

4.      REVENUE FROM CONTRACTS WITH CUSTOMERS



a. Nature of goods and services



The following is a description of the contracts and customer classes from which Chugach generates revenue.



i. Energy Sales



Energy sales revenues are Chugach’s primary source of revenue, representing approximately 95.5% of total operating revenue during the three months ended March 31, 2018, and are recognized upon delivery of electricity, based on billing rates authorized by the RCA, which are applied to customers’ usage of electricity. Chugach’s rates are established, in part, on test period sales levels that reflect actual operating results. Chugach's tariffs include provisions for the recovery of gas costs according to gas supply contracts and costs associated with the BRU operations, as well as purchased power costs.



Expenses associated with electric services include fuel purchased from others and produced from Chugach’s interest in the BRU, both of which are used to generate electricity, as well as power purchased from others. Chugach is authorized by the RCA to recover fuel and purchased power costs through the fuel and purchased power adjustment process, which is adjusted quarterly to reflect increases and decreases of such costs. The amount of fuel and purchased power revenue recognized is equal to actual fuel and purchased power costs. We recognize differences between projected recoverable fuel and purchased power costs and amounts actually recovered through rates.  The fuel cost under/over recovery on our Balance Sheet represents the net accumulation of any under- or over-collection of fuel and purchased power costs. Fuel cost under-recovery will appear as an asset on our Balance Sheet and will be collected from our members in subsequent periods. Conversely, fuel cost over-recovery will appear as a liability on our Balance Sheet and will be refunded to our members in subsequent periods.

10


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 





 

Customer Class

Nature, timing of satisfaction of performance obligations, and significant payment terms

Retail

Retail energy customers can have up to four components of monthly billing included in revenue – energy, fuel and purchased power, demand and customer charge. The energy rate and fuel and purchased power surcharge are applied by kilowatt hour (kWh) usage. The demand charge is applied by kilowatt (kW). The customer charge is a monthly amount applied by meter.

Wholesale

Classified as firm energy sales. Four components of monthly billing are included in revenue – energy, fuel and purchased power, demand and customer charge. The energy rate and fuel and purchased power surcharge are applied by kWh usage. The customer charge is a monthly amount applied by meter. The demand charge is applied by kW.

Economy

Classified as non-firm (interruptible) energy sales. Four components of monthly billing are included in revenue – operations and maintenance, margin, and fuel. The operations and maintenance and margin rates are applied by megawatt hour (MWh) usage. The actual fuel costs are billed per thousand cubic feet (Mcf) used.



Payment on energy sales invoices to all customer classes above are due within one month or 30 days.



Chugach calculates unbilled revenue, for residential and commercial customers, at the end of each month to ensure the recognition of a full months’s revenue. Chugach accrued $9,176,639 and $9,505,446 of unbilled retail revenue at March 31, 2018 and 2017,  respectively, which is included in accounts receivable on the Balance Sheet. Revenue derived from wholesale and economy customers is recorded from metered locations on a calendar month basis, so no estimation is required.



The collectability of our energy sales is very high with typically 0.10% written off as bad debt expense, adjusted annually.



There were no costs associated with obtaining any of these contracts, therefore no asset was recognized or recorded associated with obtaining any contract.



ii. Wheeling



Wheeling represented 3.6% of our revenue during the three months ended March 31, 2018, and was recorded through the wheeling of energy across Chugach’s transmission lines at rates set by utility tariff and approved by the RCA.  The rates are applied to MWh of energy wheeled. The collectability of wheeling is very high, with no adjustment required.



11


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

iii.  Gas Sales



There were no gas sales during the three months ended March 31, 2018. Gas sales represented 2.6% of our revenue in during the three months ended March 31, 2017, and were recorded through the transfer of natural gas and billed monthly, using Mcf as the unit of measure, and the RCA approved gas transfer price, revised annually. The collectability of gas sales was very high, with no adjustment required.



iv. Other Miscellaneous Services



Other miscellaneous services consist of various agreements including dispatch service and gas transfer agreements, pole rentals and microwave bandwidth. Revenue from these agreements is billed monthly and represented 0.9% of our total operating revenue during the three months ended March 31, 2018. The revenue recognized from these agreements is recorded as the service is provided over a period of time. The collectability of these agreements is very high, with no adjustment required.



b. Disaggregation of Revenue



The table below details the revenue recognized by customer class and disaggregates base revenue from fuel and purchased power revenue recognized in the Consolidated Statement of Operations for the three months ended March 31, 2018, and 2017 (in millions).







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Base Rate Sales Revenue

Fuel and Purchased Power Revenue

Total Revenue



 

2018

 

2017

 

% Variance

 

2018

 

2017

 

% Variance

 

2018

 

2017

 

% Variance

Retail

 

$

32.3 

 

$

33.9 

 

(4.7 

%)

 

$

19.9 

 

$

19.5 

 

2.1 

%

 

$

52.2 

 

$

53.4 

 

(2.2 

%)

Wholesale

 

$

0.5 

 

$

0.6 

 

(16.7 

%)

 

$

0.8 

 

$

0.8 

 

0.0 

%

 

$

1.3 

 

$

1.4 

 

(7.1 

%)

Economy

 

$

0.0 

 

$

0.1 

 

(100.0 

%)

 

$

0.0 

 

$

1.8 

 

(100.0 

%)

 

$

0.0 

 

$

1.9 

 

(100.0 

%)

Total Energy Sales

 

$

32.8 

 

$

34.6 

 

(5.2 

%)

 

$

20.7 

 

$

22.1 

 

(6.3 

%)

 

$

53.5 

 

$

56.7 

 

(5.6 

%)

Wheeling

 

$

0.0 

 

$

0.0 

 

0.0 

%

 

$

2.0 

 

$

1.9 

 

5.3 

%

 

$

2.0 

 

$

1.9 

 

5.3 

%

Gas Sales

 

$

0.0 

 

$

0.0 

 

0.0 

%

 

$

0.0 

 

$

1.6 

 

(100.0 

%)

 

 

0.0 

 

 

1.6 

 

(100.0 

%)

Other

 

$

0.5 

 

$

0.6 

 

(16.7 

%)

 

$

0.0 

 

$

0.0 

 

0.0 

%

 

$

0.5 

 

$

0.6 

 

(16.7 

%)

Total Miscellaneous

 

$

0.5 

 

$

0.6 

 

(16.7 

%)

 

$

2.0 

 

$

3.5 

 

(42.9 

%)

 

$

2.5 

 

$

4.1 

 

(39.0 

%)

Total Revenue

 

$

33.3 

 

$

35.2 

 

(5.4 

%)

 

$

22.7 

 

$

25.6 

 

(11.3 

%)

 

$

56.0 

 

$

60.8 

 

(7.9 

%)



c. Contract Balances



The table below provides information about receivables, contract assets and contract liabilities.





 

 

 

 

 



 

 

 

 

 



March 31, 2018

 

December 31, 2017

Receivables, included in accounts receivable

$

26,694,354 

 

$

31,215,494 

Consumer deposits

 

3,813,809 

 

 

3,754,416 

Contract asset

 

4,709,977 

 

 

4,921,794 

Contract liabilities

 

1,465,279 

 

 

1,581,481 



12


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

Accounts receivable represent amounts receivable from retail, wholesale, economy, wheeling, and BRU customers. Consumer deposits represent the deposits required of certain customers to receive electric service and are refundable payments not recognized in revenue. When the customer either terminates service or has established a positive payment history, the deposit is either returned to the customer in cash or applied to the customer’s account.



The contract asset consists of the fuel cost under-recovery and represents the under-collection of fuel and purchased power costs through the fuel and purchased power adjustment process, which will be collected from customers in the following quarter.



Contract liabilities consist of credit balances and fuel cost over-recovery. Credit balances represent the prepaid accounts of retail customers and are recognized in revenue as the customer uses electric service. Fuel cost over-recovery represents the over-collection of fuel and purchased power costs through the fuel and purchased power adjustment process, which will be refunded to customers through lower rates in the following quarter.



Significant changes in the contract assets and liabilities balances during the first quarter of 2018 are as follows:





 

 

 

 

 



 

 

 

 

 



Contract assets
Increase (decrease)

 

Contract liabilities
(Increase) decrease

Revenue recognized that was included in the contract liability balance at the beginning of the period

$

 

$

1,098,245 

Transferred to revenue from contract asset recognized at the beginning of the period

 

(4,921,794)

 

 

Cash received, excluding amounts recognized as revenue during the period

 

4,709,977 

 

 

(982,043)

Net change

$

(211,817)

 

$

116,202 



d. Transaction Price Allocated to Remaining Performance Obligations



The table below includes estimated revenue to be recognized during the remainder of 2018 and in 2019 related to performance obligations that are unsatisfied (or partially unsatisfied) at March 31, 2018.





 

 



 

 



2018

Credit balances

$

1,465,279 



Credit balances are primarily associated with Chugach’s LevelPay program. The program calculates the monthly amount to be collected from customers annually. It is anticipated the balance will be recognized in revenue within the following year as customers consume electricity.



Chugach’s fuel cost over- and under- recovery are adjusted quarterly, therefore, assumes amounts over or under collected will be collected or refunded in the following quarter.

13


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

5.      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. 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 demand and energy rates.  Chugach submitted quarterly SRF filings which resulted in a 3.0% decrease to system demand and energy rates effective July 1, 2017, an increase of 1.9% for rates effective November 1, 2017, and an increase of 0.4 % for rates effective February 1, 2018. Chugach submitted its December 31, 2017 test year SRF with the RCA on March 30, 2018. The RCA approved a system demand and energy rate increase of 0.3%, effective May 1, 2018.



Fuel and Purchased Power Rates



Chugach recovers fuel and purchased power costs directly from retail and wholesale customers through the fuel and purchased power rate adjustment process. Changes in fuel and purchased power costs are primarily due to fixed price or fuel price adjustment processes in gas-supply contracts. Other factors, including generation unit availability also impact fuel and purchased power recovery rate levels. The fuel and purchased power adjustment is approved on a quarterly basis by the RCA. There are no limitations on the number or amount of fuel and purchased power recovery rate changes. Increases in fuel and purchased power costs result in increased revenues while decreases in these costs result in lower revenues. Therefore, revenue from the fuel and purchased power adjustment process does not impact margins. Chugach recognizes differences between projected recoverable fuel and purchased power costs and amounts actually recovered through rates. The fuel cost under/over recovery on the balance sheet represents the net accumulation of any under- or over-collection of fuel and purchased power costs. A fuel cost under-recovery will appear as an asset on our balance sheet and will be collected from our members in subsequent periods. Conversely, a fuel cost over-recovery will appear as a liability on the balance sheet and will be refunded to members in subsequent periods.



The Fuel and Purchased Power rate is comprised of three rate elements: Fuel, Purchased Power and the Fire Island Adjustment Factor (FIW Adj.). The total Fuel and Purchased Power rates at March 2017 and March 2018 were $0.05508 and $0.06798, respectively.



14


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

6.      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, 2018. In addition, Chugach did not utilize this line of credit during 2017 and had no outstanding balance at December 31, 2017.  The borrowing rate is calculated using the total rate per annum and may be fixed by NRUCFC. The borrowing rate was 3.00% at March 31, 2018, and December 31, 2017. 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 was renewed September 29, 2017, and expires September 29, 2022. 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 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 2018, as needed. Chugach had $62.0 million and $50.0 million of commercial paper outstanding at March 31, 2018, and December 31, 2017, respectively.



The following table provides information regarding average commercial paper balances outstanding for the quarters ended March 31, 2018, and 2017 (dollars in millions), as well as corresponding weighted average interest rates:



 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

2018

 

2017

Average Balance

 

Weighted Average Interest Rate

 

Average Balance

 

Weighted Average Interest Rate

$

45.1

 

1.93 

%

 

$

62.3

 

0.97 

%



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, 2018, Chugach had $39.6 million outstanding with CoBank.



15


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

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, 2018.



 

 

 

 

 



 

 

 

 

 



Long-term Obligations

 

Unamortized
Debt Issuance Costs

2011 Series A Bonds

$

189,666,664 

 

$

1,187,683 

2012 Series A Bonds

 

172,750,000 

 

 

998,391 

2017 Series A Bonds

 

36,000,000 

 

 

196,776 

2016 CoBank Note

 

36,366,000 

 

 

224,241 



$

434,782,664 

 

$

2,607,091 



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





 

 

 

 

 



 

 

 

 

 



Long-term Obligations

 

Unamortized
Debt Issuance Costs

2011 Series A Bonds

$

200,333,331 

 

$

1,218,687 

2012 Series A Bonds

 

183,500,000 

 

 

1,019,582 

2017 Series A Bonds

 

38,000,000 

 

 

199,399 

2016 CoBank Note

 

37,164,000 

 

 

231,817 



$

458,997,331 

 

$

2,669,485 









16


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

7.      RECENT ACCOUNTING PRONOUNCEMENTS



Issued, and adopted at March 31, 2018:



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

In May of 2014, the FASB issued ASC Update (ASU) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 provides guidance for the recognition, measurement and disclosure of revenue related to the transfer of promised goods or services to customers. Chugach adopted the standard on January 1, 2018, using the modified retrospective transition method with no cumulative effect adjustment as of adoption.

We evaluated our contracts associated with energy sales, wheeling, gas sales, and other miscellaneous revenue and did not identify any change to the timing or pattern of revenue recognition.  The adoption of Topic 606 also included additional disclosure requirements. See “Note 4 – REVENUE FROM CONTRACTS WITH CUSTOMERS.”



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 ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 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 began application of ASU 2016-01 on January 1, 2018. Adoption did not have a material effect on its results of operations, financial position, and cash flows.



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 ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). ASU 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 for fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted. Chugach began application of ASU 2016-15 on January 1, 2018. Adoption did not have a material effect on its results of operations,  financial position., and cash flows.



17


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

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 ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” ASU 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 for fiscal years beginning after December 15, 2017, including interim periods within those years, with early adoption permitted. Chugach began application of ASU 2016-18 on January 1, 2018. Adoption did not have a material effect on its results of operations, financial position, and cash flows.



While there was not a material impact to the net change in cash flows, the beginning and ending cash balances for the three months ended March 31, 2017, increased $1,710,282 and $1,710,681, respectively, to reflect the restricted cash equivalents balances.



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



In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 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 for 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 began application of ASU 2017-01 on January 1, 2018. Adoption did not have a material effect on its results of operations, financial position, and cash flows.



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 ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 amends current guidance on the presentation and disclosure of other compensation costs in the income statement. This update is effective for 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 began application of ASU 2017-07 on January 1, 2018. Adoption did not have a material effect on its results of operations, financial position, and cash flows.



18


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

Issued, not yet adopted:



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 and Related Updates



In February of 2016, the FASB issued ASU 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.” ASU 2016-02 amends guidance related to the recognition, measurement, presentation and disclosure of leases for lessors and lessees. While accounting for lessors remains substantially the same, lessee accounting requires significant changes from current U.S. GAAP. Pursuant to the new standard, lessees will be required to identify all leases, including those embedded in contracts, classify leases as finance or operating, recognize all leases on the balance sheet and record corresponding right-of-use assets and lease liabilities. The update requires the recognition of lease assets and liabilities for those leases currently classified as operating leases while also refining the definition of a lease. Operating leases will reflect lease expense on a straight-line basis, while finance leases will result in the separate presentation of interest expense on the lease liability and amortization expense of the right-of-use asset.



In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842.” ASU 2018-01 amends ASU 2016-02 to provide an optional transition practical expedient allowing entities to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for as leases under the current lease guidance in Topic 840.



Chugach is evaluating the impact of these updates as well as existing land easements to determine if we will elect to use the practical expedient for transition. We will continue to monitor utility industry implementation issues that may change existing and future lease classification.



These updates are 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 ASU 2016-02 and ASU 2018-01 on January 1, 2019. Chugach expects these updates 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 these updates to our results of operations, financial position, and cash flows.



19


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

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



In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 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 ASU 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.



8.      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.



20


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

The table below presents the balance of Chugach’s marketable securities measured at fair value on a recurring basis at March 31, 2018, and December 31, 2017.  Chugach’s bond mutual funds, corporate bonds, and marketable certificates of deposit are measured using quoted prices in active markets. Chugach had no other assets or liabilities measured at fair value on a recurring basis at March 31, 2018, or at  December 31, 2017.  







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

Total

 

Level 1

 

Level 2

 

Level 3

Bond mutual funds

 

$

8,025,838 

 

$

8,025,838 

 

$

 

$

Certificates of deposit

 

$

3,065,093 

 

$

3,065,093 

 

$

 

$



 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Total

 

Level 1

 

Level 2

 

Level 3

Bond mutual funds

 

$

8,109,242 

 

$

8,109,242 

 

$

 

$

Corporate bonds

 

$

248,335 

 

$

248,335 

 

$

 

$

Certificates of deposit

 

$

3,063,323 

 

$

3,063,323 

 

$

 

$



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, 2018, are as follows:









 

 

 

 

 

 



 

 

 

 

 

 



 

Carrying Value

 

Fair Value Level 2

Long-term obligations (including current installments)

 

$

461,391 

 

$

473,565 





9.      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.

21


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

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. On October 10, 2017, the EPA initiated a Proposed Repeal of the Clean Power Plan. 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.



10.    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, 2018, 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% of our employees are members of the IBEW. Chugach has three CBA’s with the IBEW. We also have a CBA with the HERE. All three IBEW CBA’s and the HERE CBA have been renewed through June 30, 2021.  



22


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Consolidated Financial Statements

March 31, 2018 and 2017

 

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.



BRU Operations



Chugach and other owners, ML&P and Hilcorp, are operating under an existing Joint Operating Agreement. Hilcorp is the operator for BRU. The owners are considering updating the existing Joint Operating Agreement to better match the new owners’ interests.



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. At March 31, 2018, and December 31, 2017, patronage capital payable to MEA and HEA was $4.9 million and $5.9 million, respectively.



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.



 

23


 

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.



Potential ML&P Acquisition

In December 2017, the Mayor of Anchorage, Alaska, announced plans to place a proposition on the April 3, 2018 municipal ballot allowing the voters to authorize the sale of ML&P to Chugach. The proposition was approved by Anchorage voters 65.08% to 34.92% per the certified election results. Terms are being negotiated and if agreement between Chugach and ML&P can be reached, the terms will require approval by the Chugach Board of Directors, the Anchorage Assembly and the RCA, prior to the sale being finalized.



Railbelt Grid Unification



Chugach remains 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 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

24


 

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 began evaluating possible transmission business model opportunities and associated economic dispatch models that Chugach believes may lead to more optimal system wide operations.



In June 2016, the RCA opened a docket to “evaluate the reliability and security standards and practices of Alaska Electric Utilities.” In 2017, Chugach and several other Alaska Railbelt utilities entered into a contract with GDS Associates, Inc. (GDS). GDS’s scope is to facilitate discussion among all six Alaska Railbelt utilities and various stakeholders with an end goal of submitting to the RCA a proposal for a Railbelt Reliability Council (RRC), including a governance structure, that will be responsible for adoption and enforcement of uniform reliability standards and integrated transmission resource planning. GDS presented to the RCA during technical conferences in January and March 2018. Chugach and the other utilities plan to provide GDS’s final recommendation of the RRC to the RCA in May 2018.  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 encourages new development and continued investment in Cook Inlet. The 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 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’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 BRU interest 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 facilities, and 4% are met from wind.



25


 

The BRU is expected to provide gas to meet Chugach’s on-going generation requirements over an approximate 18-year period. Gas associated with the BRU 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 a firm gas supply contract with Hilcorp, see “ITEM 1 – FINANCIAL STATEMENTS – Note 10 – 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), and with Cook Inlet Energy LLC through March 31, 2023. Collectively, these agreements provide added diversification and optionality for Chugach to minimize costs within its gas supply portfolio.



RESULTS OF OPERATIONS



Current Year Quarter versus Prior Year Quarter



Assignable margins decreased $1.1 million, or 26.6%, during the first quarter of 2018 compared to the first quarter of 2017, primarily due to decreased sales revenue.



Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, decreased $4.8 million, or 7.9%, in the first quarter of 2018 compared to the first quarter of 2017. This decrease was primarily due to lower energy sales caused by warmer weather, as well as lower economy energy sales to GVEA and HEA and the expiration of the gas sales contract with ENSTAR.



Retail revenue decreased $1.2 million, or 2.2%, in the first quarter of 2018 compared to the first quarter of 2017 due to lower energy sales, as discussed above, which was somewhat offset by higher fuel and purchased power costs recovered through the fuel and purchased power adjustment process.



Wholesale revenue decreased $0.1 million, or 7.1%, in the first quarter of 2018 compared to the first quarter of 2017, due to lower energy sales, as discussed above.



Economy revenue decreased $1.9 million, or 100.0%, in the first quarter of 2018 compared to the first quarter of 2017, due to lower sales to GVEA and HEA.



Miscellaneous revenue decreased $1.6 million, or 39.0%, in the first quarter of 2018 compared to the first quarter of 2017, due to the expiration of the ENSTAR gas sales contract.



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 and $0.4 million to Chugach’s fixed costs for the quarters ended March 31, 2018 and 2017, respectively.



See ITEM 1 – FINANCIAL STATEMENTS – Note 4 – REVENUE FROM CONTRACTS WITH CUSTOMERS,” for a table showing 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, 2018 and 2017.







26


 

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





 

 

 

 

Customer

 

2018

kWh

 

2017

kWh



 

 

 

 

Retail

 

293,232,377 

 

306,599,162 

Wholesale

 

14,351,206 

 

15,227,089 

Economy Energy

 

207 

 

16,303,000 

Total

 

307,583,790 

 

338,129,251 



From the first quarter of 2017 to the first quarter of 2018, base demand and energy rates decreased 0.6% to retail and 6.7% to Seward, respectively. The decreases are the result of the net impact associated with final rates from Chugach’s SRF process.



Total operating expenses decreased $3.7 million, or 7.3%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to lower fuel and depreciation and amortization expense.



Fuel expense decreased $2.2 million, or 10.8%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to less fuel purchased for generation as a result of lower energy sales. In the first quarter of 2018, Chugach used 2,194,538 Mcf of fuel at an average effective delivered price of $7.86 per Mcf. 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.



Production expense increased $0.5 million, or 11.8%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to amortization associated with Beluga Power Plant production equipment parts.



Purchased power expense decreased $0.4 million, or 9.2%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to a lower average effective price, which was somewhat offset by more energy purchased. In the first quarter of 2018, Chugach purchased 53,270 MWh of energy at an average effective price of 6.24 cents per kWh. In the first quarter of 2017, Chugach purchased 51,636 MWh of energy at an average effective price of 7.31 cents per kWh.



Transmission expense increased $0.3 million, or 20.5%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to less capital substation labor.



Distribution expense increased $0.7 million, or 22.9%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to higher expense labor and costs associated with vegetation control.



Consumer accounts expense increased $0.3 million, or 22.4%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to advertising costs associated with the ML&P acquisition.



27


 

Administrative, general and other expense decreased $0.8 million, or 12.1%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to the deferred classification of costs associated with the ML&P acquisition.



Depreciation and amortization decreased $2.2 million, or 22.9%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to the implementation of lower depreciation rates effective July 1, 2017.



Interest on long-term and other debt and interest charged to construction did not materially change in the first quarter of 2018 compared to the first quarter of 2017.



Non-operating margins decreased $0.1 million, or 52.7%, in the first quarter of 2018 compared to the first quarter of 2017, primarily due to the change in market value of marketable securities.



Financial Condition



Assets



Total assets did not materially change from December 31, 2017, to March 31, 2018. Decreases in net utility plant, cash and cash equivalents, and accounts receivable, were somewhat offset by an increase in materials and supplies over the same period. Net utility plant decreased $3.0 million, or 0.4%, due to retirements and depreciation expense in excess of extension and replacement of plant. Cash and cash equivalents decreased $3.0 million, or 55.2%, primarily due to principal payments on long-term obligations and lower operating revenue. Accounts receivable decreased $7.2 million, or 20.3%, primarily due to a decrease in energy sales from winter to spring and the expiration of the gas sales contract with ENSTAR. Materials and supplies increased $0.8 million, or 5.5%, due to the purchase of inventory to be used in the approaching construction season.  



Liabilities and Equity



Total liabilities, equities and margins did not materially change from December 31, 2017, to March 31, 2018. Decreases in long-term obligations and accrued interest were somewhat offset by an increase in commercial paper. Long-term obligations decreased $24.1 million, or 5.3%, accrued interest decreased $4.9 million, or 82.6%, and commercial paper increased $12.0 million, or 24.0%, due to payment of principal and accrued interest on long-term obligations in March 2018.



28


 

LIQUIDITY AND CAPITAL RESOURCES



Summary



Chugach ended the first quarter of 2018 with $3.8 million of cash, cash equivalents, and restricted cash equivalents down from $6.1 million at December 31, 2017. At March 31, 2018, Chugach also had $11.1 million in marketable securities. Chugach did not utilize its $50.0 million line of credit maintained with NRUCFC in the first quarter, therefore, this line of credit had no outstanding balance and the available borrowing capacity under this line was $50.0 million at March 31, 2018. Chugach issued additional commercial paper and ended the first quarter with $62.0 million of commercial paper outstanding, thus the available borrowing capacity under the commercial paper program at March 31, 2018, was $88.0 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).



Cash Flows



The following table summarizes Chugach’s cash flows from operating, investing and financing activities for the three months ended March 31, 2018 and 2017.





 

 

 

 

 



 

 

 

 

 



2018

 

2017

Total cash provided by (used in):

 

 

 

 

 

Operating activities

$

10,996,961 

 

$

9,947,302 

Investing activities

 

(3,302,417)

 

 

(7,596,241)

Financing activities

 

(11,133,306)

 

 

(2,608,070)

Increase (decrease) in cash and cash equivalents

$

(3,438,762)

 

$

(257,009)



Operating Activities



Cash provided by operating activities was $11.0 million for the three months ended March 31, 2018, compared with $9.9 million for the three months ended March 31, 2017. The increase in cash provided by operating activities in the first three months of 2018 from the same period in 2017 was primarily due to the collection of receivables. Additionally, more cash used for fuel stock and fuel was somewhat offset by more cash provided by fuel and purchased power recovery, as a result of the under-collection of the prior quarter’s fuel and purchased power costs during the first quarter of 2018 compared with the refunding of the prior quarter’s fuel and purchased power costs during the first quarter of 2017.



Investing Activities



Cash used in investing activities was $3.3 million for the three months ended March 31, 2018, compared with $7.6 million for the three months ended March 31, 2017. The change in cash used in investing activities was primarily due to less cash used for extension and replacement of plant.



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Capital construction through March 31, 2018, was $4.0 million and is estimated to be $49.8 million for the full year. Once funding from other sources is collected, the total cash requirement is estimated to be $41.9 million for 2018. Capital improvement expenditures are expected to increase during the second quarter as the construction season begins.



Financing Activities



Cash used in financing activities was $11.1 million for the three months ended March 31, 2018, compared with $2.6 million for the three months ended March 31, 2017. The change in cash used in financing activities was primarily due to issuance of the 2017 Bonds and payment of commercial paper in the first quarter of 2017.



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, 2018, there was no outstanding balance on the NRUCFC line of credit and $62.0 million of outstanding commercial paper. Therefore, at March 31, 2018, the available borrowing capacity under Chugach’s line of credit with NRUCFC was $50.0 million and the available commercial paper capacity was $88.0 million.



Commercial paper can be repriced between one day and 270 days. The average commercial paper balance for the three months ended March 31, 2018, was $45.1 million with a corresponding weighted average interest rate of 1.93%. The maximum amount of outstanding commercial paper for the three months ended March 31, 2018, was $64.0 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 2018

 

$

44.7

 

1.80 

%

February 2018

 

$

38.1

 

1.78 

%

March 2018

 

$

51.8

 

2.12 

%



At March 31, 2018, 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, 2018, Chugach had the following outstanding with this facility:





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 



 

Principal Balance

 

Interest Rate at

March 31, 2018

 

Maturity Date

 

Principal Payment Dates



 

 

 

 

 

 

 

 

 

2016 CoBank Note

 

$

39,558,000 

 

2.58%

 

2031

 

2018-2031



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. The principal payment capacity as of March 15, 2018, was $100.9 million, compared to the previously reported $63.6 million. This amount has been revised to include the principal paid on the 2011 CoBank Note. 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 2018 and thereafter.



CRITICAL ACCOUNTING POLICIES



As of March 31, 2018, there have been no significant changes in Chugach’s critical accounting policies as disclosed in Chugach’s 2017  Annual Report on Form 10-K. This includes policies regarding electric utility regulation.



RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



Information required by this Item is contained in Note 7 to the “Notes to Financial Statements” within Part I, Item 1 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 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.

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 increased from the original “TP1” levels to the new “DOE-2016” levels. All new transformers are DOE-2016 compliant. A small increase in capital costs is anticipated along with a reduction in energy losses.

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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. On October 10, 2017, the EPA initiated a Proposed Repeal of the Clean Power Plan. 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.



32


 

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, 2018, 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, 2018.





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

Maturing

 

Interest
Rate

 

Carrying
Value

 

Fair
Value

2011 Series A, Tranche A

 

2031

 

4.20 

%

 

$

58,500 

 

$

59,023 

2011 Series A, Tranche B

 

2041

 

4.75 

%

 

 

141,833 

 

 

150,946 

2012 Series A, Tranche A

 

2032

 

4.01 

%

 

 

52,500 

 

 

52,385 

2012 Series A, Tranche B

 

2042

 

4.41 

%

 

 

81,000 

 

 

84,040 

2012 Series A, Tranche C

 

2042

 

4.78 

%

 

 

50,000 

 

 

53,846 

2017 Series A, Tranche A

 

2037

 

3.43 

%

 

 

38,000 

 

 

36,192 

2016 CoBank Note

 

2031

 

2.58 

%

 

 

39,558 

 

 

37,133 

Total

 

 

 

 

 

 

$

461,391 

 

$

473,565 



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, 2018, Chugach had $62.0 million of commercial paper outstanding. A 100 basis-point rise or decline in interest rates would increase or decrease interest expense by approximately $0.6 million, based on $62.0 million of variable rate debt outstanding at March 31, 2018.



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.



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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



Effective January 1, 2018, we adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (Topic 606). Although adoption of Topic 606 had an immaterial impact on our financial statements, we implemented certain changes to our related revenue recognition control activities, including the development of new policies and periodic reviews of revenue transactions, based on the five-step model provided in the new revenue standard.



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 2018 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 10 to the “Notes to Financial Statements” within Part I, Item 1 of this Form 10-Q.



34


 

ITEM 1A.  RISK FACTORS

Regulatory



Chugach’s billing rates are approved by the RCA. Chugach submitted its December 31, 2017 test year SRF with the RCA on March 30, 2018.  The RCA approved a demand and energy rate increase of 0.3 percent to retail and a demand and energy rate decrease of 0.2 percent to Seward, effective May 1, 2018. See “ITEM 1 FINANCIAL STATEMENTS – Note 5 – REGULATORY MATTERS – Simplified Rate Filing.”



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, 2017. Except as noted above, these risk factors have not materially changed as of March 31, 2018.





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.



35


 

ITEM 6.  EXHIBITS



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