<PAGE> 1
THIS DOCUMENT IS A COPY OF THE U-3A-2
FILED ON FEBRUARY 26, 1999 PURSUANT TO A RULE 201
TEMPORARY HARDSHIP EXEMPTION
<PAGE> 2
File No._____________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM U-3A-2
STATEMENT BY HOLDING COMPANY CLAIMING EXEMPTION UNDER RULE
U-3A-2 FROM THE PROVISIONS OF THE PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935
FLATHEAD ELECTRIC COOPERATIVE, INC. hereby files with the Securities
Exchange Commission, pursuant to Rule 2, its statement claiming exemption as a
holding company from the provisions of the Public Utility Holding Company Act
of 1935, and submits the following information:
1. Name, State of organization, location and nature of business of
Claimant and every subsidiary thereof, other than any exempt wholesale
generator (EWG) or foreign utility company in which Claimant directly or
indirectly holds an interest.
<TABLE>
<S> <C>
Claimant: Flathead Electric Cooperative, Inc. ("FEC")
2510 Highway 2 East
Kalispell, Montana 59901
State of organization: Montana
Nature of business: FEC is a not for profit, cooperative
corporation which provides retail electric energy and
distribution services.
Subsidiary: Energy Northwest, Inc. ("ENI")
2510 Highway 2 East
Kalispell, Montana 59901
State of organization: Montana
Nature of business: ENI is a corporation which was formed to
provide retail electric energy and distribution services in the
incorporated cities of Kalispell, Whitefish, and Columbia Falls,
Montana. ENI first began operations in November, 1998.
Subsidiary: Evergreen Rail Industrial Center, Inc.
("ERIC")
2510 Highway 2 East
Kalispell, Montana 59901
State of organization: Montana
Nature of business: ERIC is a corporation which was formed by
FEC to manage an industrial-commercial real property development
located in Flathead County, Montana.
</TABLE>
1
<PAGE> 3
2. A brief description of the properties of Claimant and each of its
subsidiary public utility companies used for the generation, transmission, and
distribution of electric energy for sale, or for the production, transmission,
and distribution of natural or manufactured gas, indicating the location of
principal generating plants, transmission lines, producing fields, gas
manufacturing plants, and electric and gas distribution facilities, including
all such properties which are outside the Stat in which Claimant and its
subsidiaries are organized and all transmission or pipelines which deliver or
receive electric energy or gas at the boarders of such State.
Claimant:
FEC owns and operates an electric distribution system located in Flathead,
Lincoln, Lake, Carbon, and Big Horn Counties, Montana. The facilities are all
located within the State of Montana. FEC does not own or operate electric
generation, or natural gas production, transmission, or distribution facilities.
Subsidiary:
ENI owns and operates an electric distribution system located in the
cities of Kalispell, Whitefish, and Columbia Falls, Montana, which are located
in Flathead County, Montana. The facilities are all located within the State of
Montana. ENI does not own or operate electric generation, or natural gas
production, transmission, or distribution facilities.
3. The following information for the last calendar year with respect to
Claimant and each of its subsidiary public utility companies:
(a) Number of kwh, of electric energy sold (at retail or wholesale),
and Mcf. Of natural or manufactured gas distributed at retail.
Claimant: FEC sold at retail 4,415,769,000 kwh. In calendar year
1997.
Subsidiary: ENI is newly formed and has not operated for a calendar
year.
(b) Number of kwh, of electric energy and Mcf. Of natural or
manufactured gas distributed at retail outside the State in which each such
company is organized.
Not applicable.
(c) Number of kwh, of electric energy and Mcf. Of natural or
manufactured gas sold at wholesale outside the State in which each such company
is organized, or at the State line.
Not applicable.
(d) Number of kwh, of electric energy and mcf of natural or
manufactured gas purchased outside the State in which each such company is
organized or at the State line.
FEC purchased 1,415,769,000 kwh in calendar year 1997 from utilities
headquartered outside the State of
2
<PAGE> 4
Montana, and took delivery of all the power at delivery points within the State
of Montana. FEC can not say where the power was generated.
4. The following information for the reporting period with respect to
Claimant and each interest it holds directly or indirectly in an EWG or a
foreign utility company, stating monetary amounts in United States dollars:
Not applicable.
(a) Name, location, business address and description of the
facilities used by the EWG or foreign utility company for the generation,
transmission and distribution of electric energy for sale or for the
distribution at retail of natural or manufactured gas.
(b) Name of each system company that holds an interest in such EWG
or foreign utility company; and description of the interest held.
(c) Type and amount of capital invested, directly or indirectly, by
the holding company claiming exemption; any direct or indirect guarantee of the
security of the EWG or foreign utility company by the holding company claiming
exemption; and any debt or other financial obligation for which there is
recourse, directly or indirectly, to the h9olding company claiming exemption or
another system company, other than the EWG or foreign utility company.
(d) Capitalization and earnings of the EWG or foreign utility
company during the reporting period.
(e) Identify any service, sales or construction contract(s) between
the EWG or foreign utility company and a system company, and describe the
services to be rendered or good sold and fees or revenues under such
agreement(s).
The above-named Claimant has caused this statement to be duly executed on
its behalf by its authorized officer on this 25 day of Feb., 1999.
FLATHEAD ELECTRIC COOPERATIVE, INC.
By: /s/ [SIG]
------------------------------------
Title: President
---------------------------------
CORPORATE SEAL
Attest:
/s/ KARL SCHRADE
- -------------------------------------
Karl Schrade, Secretary
3
<PAGE> 5
Name, title, and address of officer to whom notices and correspondence
concerning this statement should be addressed:
Darrell S. Worm, Esq.
General Counsel
Flathead Electric Cooperative, Inc.
17 Second Street East, Suite 211
Kalispell, Montana 59901
4
<PAGE> 6
EXHIBIT "A"
A consolidating statement of income and surplus of the Claimant and its
subsidiary companies for the last calendar year, together with a consolidating
balance sheet of Claimant and its subsidiary companies as of the close of such
calendar year.
Attached are consolidated financial statements and balance sheets for
FEC and ERIC for 1997.
FEC does not yet have consolidated financial statements for 1998. FEC
will file an updated form when they are available.
<PAGE> 7
EXHIBIT "B"
If, at the time a report on this form is filed, the registrant is
required to submit this report and any amendments thereto electronically via
EDGAR, and registrant shall furnish a Financial Data Schedule. The Schedule
shall set forth the financial and other data specified below that are
applicable to the registrant on a consolidated basis.
<TABLE>
<CAPTION>
ITEM NO. CAPTION HEADING
<S> <C>
1 Total Assets
2 Total Operating Revenues
3 Net Income
</TABLE>
Not applicable.
<PAGE> 8
EXHIBIT "C"
An organization chart showing the relationship of each EWG or foreign
utility company to associate companies in the holding-company system.
Not applicable.
<PAGE> 9
FLATHEAD ELECTRIC
COOPERATIVE, INC.
KALISPELL, MONTANA
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
WITH INDEPENDENT AUDITOR'S REPORT
Prepared by:
JUNKERMIER, CLARK, CAMPANELLA, STEVENS, P.C.
Certified Public Accountants
Kalispell, Montana
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT ............................................ 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets ........................................ 2
Consolidated Statements of Revenue
and Patronage Capital ......................................... 3
Consolidated Statements of Cash Flows .............................. 4
Notes to Consolidated Financial Statements ......................... 5-19
</TABLE>
<PAGE> 11
[JCCS LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Trustees
Flathead Electric Cooperative, Inc.
Kalispell, Montana
We have audited the accompanying comparative consolidated balance sheets of
Flathead Electric Cooperative, Inc. (a Montana corporation) and subsidiary, as
of December 31, 1997 and 1996, and the related consolidated statements of
revenue and patronage capital, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Cooperative's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Flathead Electric
Cooperative, Inc. and subsidiary as of December 31, 1997 and 1996, and the
results of its operations and cash flows for the years then ended in conformity
with generally accepted accounting principles.
JUNKERMIER, CLARK, CAMPANELLA, STEVENS, P.C.
Certified Public Accountants
February 19, 1998
-1-
<PAGE> 12
FLATHEAD ELECTRIC COOPERATIVE, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ELECTRIC PLANT
In service $ 33,469,752 $ 31,075,586
Construction work in progress 1,286,496 1,786,097
------------ ------------
34,756,248 32,861,683
Less accumulated depreciation (11,516,701) (10,881,417)
------------ ------------
23,239,547 21,980,266
------------ ------------
OTHER ASSETS AND INVESTMENTS
Land -- held for sale/lease/investment 434,253 441,130
Investments in associated organizations 1,030,705 979,010
ETCA special funds 150,370 199,022
Temporary investments 679,812 826,354
Regulatory assets 390,487 341,705
------------ ------------
2,685,627 2,787,221
------------ ------------
CURRENT ASSETS
Operating cash (33,220) 552,057
Accounts receivable 3,395,920 3,672,643
Materials and supplies 473,195 465,990
Other current assets 10,522 14,000
------------ ------------
3,846,417 4,704,690
------------ ------------
DEFERRED CHARGES 146,151 149,469
------------ ------------
$ 29,917,742 $ 29,621,646
============ ============
EQUITY AND LIABILITIES
EQUITY
Memberships $ 285,900 $ 277,375
Patronage capital 8,086,400 7,955,492
Other equities 281,925 229,647
------------ ------------
8,654,225 8,462,514
------------ ------------
OTHER LIABILITIES
ETCA special funds 150,370 199,022
------------ ------------
LONG-TERM DEBT 15,212,594 15,711,230
------------ ------------
CURRENT LIABILITIES
Current maturities of long-term debt 755,149 326,816
Accounts payable -- purchase power 2,977,720 2,926,974
Accounts payable -- other 413,992 223,194
Consumer secondary service fees 98,514 86,291
Accrued property taxes 127,740 137,785
Other current liabilities 707,802 680,516
------------ ------------
5,080,917 4,381,576
------------ ------------
DEFERRED CREDITS 819,636 867,304
------------ ------------
$ 29,917,742 $ 29,621,646
============ ============
</TABLE>
The accompanying notes to the financial statements are an
integral part of this statement
-2-
<PAGE> 13
FLATHEAD ELECTRIC COOPERATIVE, INC.
CONSOLIDATED STATEMENTS OR REVENUE AND PATRONAGE CAPITAL
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
OPERATING REVENUES $38,776,891 $38,298,552
----------- -----------
OPERATING EXPENSES
Cost of power 33,105,909 33,088,405
Distribution - operating 656,136 585,167
Distribution - maintenance 708,949 684,302
Consumer accounts 302,523 271,594
Sales and consumer expenses 260,000 247,301
Administrative and general 1,399,160 1,272,518
Depreciation 965,999 906,420
Property taxes 268,080 269,791
----------- -----------
37,666,756 37,325,498
----------- -----------
1,110,135 973,054
----------- -----------
FIXED CHARGES
Interest on long-term debt 1,060,907 941,798
Allowance for funds used for
construction (213,154) (104,067)
RUS buy out - gain amortized (73,122) (65,834)
----------- -----------
774,631 771,897
----------- -----------
NON-OPERATING MARGINS
Sale of land 34,377 --
Interest and patronage dividends 238,725 95,578
Realized gains and losses 1,318 18,913
Extraordinary expenses -
write off deferred charges (129,277) --
----------- -----------
NET MARGINS 480,647 315,648
PATRONAGE CAPITAL - BEGINNING OF YEAR 7,955,492 8,072,693
Retirement of capital credits (349,739) (432,849)
----------- -----------
PATRONAGE CAPITAL - END OF YEAR $ 8,086,400 $ 7,955,492
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an
integral part of this statement
- 3 -
<PAGE> 14
FLATHEAD ELECTRIC COOPERATIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net margins $ 480,647 $ 315,648
Adjustments to reconcile net
margin to net cash provided
by operating activities:
Amortization interest costs (213,154) --
Amortization deferred charges (129,277) --
Depreciation 965,999 906,420
Amortization of trading securities (60,110) 18,913
Patronage dividends 52,692 23,089
(Increase) decrease in assets:
Accounts receivable 276,723 (1,763,008)
Other current assets 3,478 4,949
Deferred charges 3,311 (2,828)
Increase (decrease) in liabilities:
Accounts payable 241,542 1,798,989
Consumer deposits 12,222 (4,149)
Accrued taxes (10,045) 9,669
Other current liabilities 27,286 126,995
Deferred credits (110,086) 259,076
----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 1,541,228 1,693,763
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of land 35,000 --
Electric plant additions and
replacement - net (1,894,565) (1,819,749)
Change in materials (7,205) 116,151
Change in land held for sale 6,877 (441,130)
Increase investments in associated
organization (51,692) (37,747)
Decrease in temporary investments 146,542 45,650
Change in regulatory assets (59,486) 7,729
----------- -----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (1,824,529) (2,129,096)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan fund advances CFC -- 2,789,650
Loan fund advances Co-Bank - net 300,000 1,850,000
Principal payments on long-term debt (357,803) (243,952)
Patronage capital retirements (349,739) (432,849)
Pay-off RUS loan -- (3,168,056)
Principal payments on Economic
Development loan (12,500) (12,500)
Increase in memberships 8,525 9,895
Increase in other equities 109,541 74,253
----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (301,976) 866,441
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (585,277) 431,108
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 552,057 120,949
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ (33,220) $ 552,057
=========== ===========
</TABLE>
The accompanying notes to the financial statements are an
integral part of this statement
-4-
<PAGE> 15
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Flathead Electric Cooperative, Inc. (FEC) is an Electric Cooperative
organized under the Rural Electrification Act of 1936 and incorporated
under the laws of the State of Montana in 1939. FEC is a tax exempt Rural
Electrical Utility Cooperative under Internal Revenue Service Code Section
501(c)(12). FEC's primary activity is the construction and maintenance of a
distribution system fore electrical power which it sells to approximately
12,000 commercial and residential customers located in its service area
surrounding Kalispell, Montana. FEC follows the Federal Energy Regulatory
Commission's Uniform System of Accounts. Rates charged to customers are
established by the Board of Trustees.
In March of 1996, FEC served as the incorporator for Evergreen Rail
Industrial Center, Inc. (ERIC), a taxable subsidiary of FEC. ERIC was
formed to manage the commercial-industrial development site adjacent to
FEC's headquarters. The goal for the subsidiary is to provide cash flow to
FEC to supplement revenue from electric sales, thereby stabilizing retail
prices.
Principles of Consolidation
The consolidated financial statements include the accounts of Evergreen
Rail Industrial Center, Inc., a wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Accounting Records
The Cooperative maintains its accounting records and prepares its financial
statements in accordance with the requirements of the Federal Energy
Regulatory Commissions Uniform System of Accounts.
ERIC maintains its accounting records and prepares its financial statements
in accordance with generally accepted accounting principles.
Electric Plant
The electric plant is stated at cost, less related contributions-in-aid of
construction. The cost of additions to electric plant includes contract
work, direct labor and materials and allocable overheads. Generally, the
utility plant is capitalized when the work order becomes part of an
operating unit and is energized. However, certain items of plant, referred
to as special equipment items (meters and transformers), are capitalized at
the time of purchase along with the related standard labor costs of
installation. When units of property are retired, sold, or otherwise
disposed of in the ordinary course of business, their average costs
(specific unit cost for substantially all of the general plant) is removed
from utility plant and the cost, less net salvage, is removed from
accumulated depreciation. The Cooperative charges to maintenance or
operations the cost of labor, materials and other expenses incurred in
maintaining the operating efficiency of its plant. Betterments are added to
property accounts at cost.
-5-
<PAGE> 16
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Depreciation
Depreciation is recorded on the composite basis and is charged to capital
and operating accounts at rates adopted by the Board of Directors in
conformity with guidelines provided by the Federal Energy Regulatory
Commission.
Depreciation expense is provided by the straight-line method over the
composite rate or a specific unit basis.
<TABLE>
<CAPTION>
Classification
--------------
<S> <C>
Transmission 2.75%
Distribution 2.00% to 6.60%
General plant
Structures and improvements 2.50%
Office furniture and equipment 6.50%
Computers 13.00%
Transportation equipment 14% to 18.00%
Power operated equipment 13.50%
Communication equipment 6.50%
Other general plant 4.80%
</TABLE>
Investments
In accordance with FASB pronouncement #115, "Held to Maturity Securities"
are reported at amortized cost.
Cash & Cash Equivalents
For the purpose of reporting cash flows, the Cooperative considers all
commercial paper and money funds with an original maturity of three months
or less, to be cash equivalents.
Material & Supplies
Materials and supplies of the Cooperative consist primarily of items for
construction and maintenance of its distribution system and are stated at
average unit cost.
Patronage Capital & Margins
In conformity with its bylaws, the Cooperative conducts its operations on a
cooperative, nonprofit basis. Annual revenues in excess of the cost of
providing service, commonly referred to as net margins, are allocated in
the form of "capital credits" to the customers' capital accounts on the
basis of patronage. Capital credits due patrons who pass away are paid to
the estates of the patrons in accordance with the bylaws.
-6-
<PAGE> 17
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Operating Revenues
Operating revenues which include patronage capital are billed monthly to
consumers. Approximately one half the consumers are billed on the 15th of
the month and one half at the end of the month. Electricity used by one
half the members from the 15th to the 30th has not been recorded. This
un-billed revenue was approximately $240,000. This amount is consistent
with prior years.
Cost of Power
Cost of power is expensed as consumed.
Pension Costs
The policy is to fund pension costs accrued.
Business and Credit Risk
The Cooperative sells electrical energy on account primarily to portions
of Flathead County in Northwest Montana. The Company extends credit to its
customers who are also members of the Cooperative.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles, and FERC requirements, requires management
to make estimates and assumptions that affect certain reported amounts and
disclosures. Actual results could differ from those estimates.
Income Taxes
The Corporation operates under the Internal Revenue Code, Section
501(C)(12), as a tax-exempt cooperative. Accordingly, no provision for
income taxes has been made in the consolidated financial statements.
ERIC, the subsidiary of the Cooperative, is a taxable entity. As of
December 31, 1997, the Company had a net operating loss carry forward, for
tax purposes, in the amount of approximately $111,407, which is due to
expire in the years 2011 and 2012.
NOTE 2 -- DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Electric Plant
Intangible plant $ 666 $ 666
Distribution plant 26,917,447 25,344,532
Transmission plant 1,530,831 1,071,931
General plant in service 5,020,808 4,658,457
----------- -----------
33,469,752 31,075,586
Construction work in progress 1,286,496 1,786,097
----------- -----------
$34,756,248 $32,861,683
=========== ===========
</TABLE>
-7-
<PAGE> 18
FLATHEAD ELECTRIC COOPERATIVE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Accounts Receivable
Rent receivable $ 2,509 $ -
Heat pump 300,265 369,820
Consumers 2,986,976 3,233,785
Other -- interest 6,600 7,300
Employees 1,851 191
Economic development loan 84,375 96,875
Other 54,287 23,475
------------ ------------
3,436,863 3,731,446
Allowance for doubtful accounts (40,943) (58,803)
------------ ------------
$ 3,395,920 $ 3,672,643
============ ============
Investments in Associated Organizations
Patronage capital of associated
co-ops $ 177,138 $ 166,517
Capital term certificates of NRUCFC 758,861 725,895
Others 94,706 86,598
------------ ------------
$ 1,030,705 $ 979,010
============ ============
Patronage Capital
Assignable $ 480,647 $ 315,648
Assigned 10,611,988 10,296,340
------------ ------------
11,092,635 10,611,988
Retired (3,006,235) (2,656,496)
------------ ------------
$ 8,086,400 $ 7,955,492
============ ============
Other Equities
Discount on capital credits $ 80,301 $ 58,383
Unclaimed capital credits 76,902 57,131
Donated capital 103,302 92,713
Consumers' collection for
debt service 21,420 21,420
------------ ------------
$ 281,925 $ 229,647
============ ============
Deferred Charges
Engineering work plan $ 86,108 $ 8,725
Clearing account 34,540 47,758
Deferred compensation 25,503 25,866
Deferred Co-generation plant - 67,120
------------ ------------
$ 146,151 $ 149,469
============ ============
Regulatory Assets
Unfunded, pension costs $ 145,556 $ 62,181
Deferred personal leave 244,931 279,524
------------ ------------
$ 390,487 $ 341,705
============ ============
</TABLE>
-8-
<PAGE> 19
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred Credits
Round up for safety $ 11,105 $ -
Deferred work comp income 17,880 -
Advance billing 96 153
Deferred loan - 10,765
Deferred gain (RUS loan buy out) 790,555 856,386
-------- --------
$819,636 $867,304
======== ========
</TABLE>
The deferred credit arose in late December 1995, and February 1996, when
the Cooperative paid off certain RUS notes early. The Cooperative received
a certain "discount" and will amortize the potential gain over the period
of the notes that were obtained to pay off RUS. The recording of this
transaction is in accordance with FASB 75.
NOTE 3 - CAPITAL CREDITS
In November, 1992 the State of Montana ruled that all capital credit checks
unclaimed after five years are to be escheated to the State of Montana or
allowed to be used for educational programs. The Cooperative has elected to
donate these funds for educational programs after the statutory five year
period.
NOTE 4 - PENSION COSTS
All full-time employees of the Cooperative participate in the National
Rural Electric Cooperative Association (NRECA) Retirement and Security
Program, a defined benefit pension plan qualified under Section 401 and tax
exempt under Section 501(a) of the Internal Revenue Code. In this
multiple-employer plan, the accumulated benefits and plan assets are not
determined or allocated separately by individual employer. The total cost
to the Cooperative of this plan for the years ended December 31, 1997 and
1996, approximated $136,549 and $33,658, respectively which was charged to
expense and other accounts on the basis of payroll distribution.
The Cooperative has unfunded prior service costs which will be amortized
over the future service period of those active employees who are expected
to benefit under the plan. During 1996, such prior service costs were
recorded as an asset and related liability in accordance with Statement of
Financial Accounting Standards Board (SFAS) Statement No. 87, Employers'
Accounting for Pensions. The total cost to the Cooperative for prior period
service costs was $11,599 in 1997 and $11,707 in 1996.
-9-
<PAGE> 20
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 -- CONTINGENT LIABILITY
On November 25, 1981, the Cooperative entered into an agreement with the
United States Government to guarantee a portion of certain loans made to
North Central Data Cooperative (NCDC) by the U.S. Government.
If NCDC were to default on loans from the government, the Cooperative has
agreed to pay a percentage of such loans, not to exceed $107,610 plus
interest.
In consideration of this commitment, the Cooperative receives a preferred
rate on their data processing fees.
NOTE 6 -- COMMITMENTS
The Cooperative is a participant in the Montana Electric and Telephone
Systems Pool (METSPOOL), an organization which provides workers'
compensation insurance coverage to Montana electric and telephone
cooperatives. METSPOOL is a self-insurance trust formed pursuant to the
provisions of the Montana Electric and Telephone Systems self-insured
workers' compensation pool resolution. Member cooperatives make
contributions to the trust which provides mutual workers' `compensation
insurance protection for all members of the trust based on a actuarial
study. In addition, Flathead Electric Cooperative, Inc. has taken an
excess indemnity policy for workers' compensation insurance to provide for
any unexpected loss experience in the METSPOOL trust.
Under its wholesale power agreement, the Cooperative is committed to
purchase the majority of its electric power and energy requirements from
Bonneville Power Administration until June 30, 2001. The rates paid for
such purchases are subject to renewal.
The Cooperative entered into a power purchase and sales agreement with
Columbia Falls Aluminum Company and Hinson Power Company. The agreement to
purchase power from Hinson is for the period July 20, 1995 to July 20,
2005.
As of December 31, 1997, the Cooperative has the following purchase
commitments:
<TABLE>
<S> <C>
Turtles - Hunt Company $ 39,000
Wires - MES 56,000
Poles - B.J. Carney 12,000
</TABLE>
-10-
<PAGE> 21
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- DETAILS OF LONG-TERM DEBT
<TABLE>
<S> <C> <C>
National Rural Utilities Cooperative
Finance Corporation:
7% Note due 7-18-2007 $ 18,062
7% Note due 7-18-2008 48,485
7% Note due 7-10-2009 126,062
6.65% Note due 4-15-2010 100,072
6.2% Note due 1-26-2014 538,646
6.2% Note due 6-17-2015 776,143
6.625% Note due 7-21-2017 695,668
6.2% Note due 2-18-2023 1,635,304
6.15% Note due 10-20-1998 250,421
6.15% Note due 10-20-1999 265,786
6.15% Note due 10-20-2000 282,819
6.2% Note due 10-20-2001 364,414
6.35% Note due 10-20-2002 372,807
6.2% Note due 10-20-2003 386,855
6.6% Note due 10-20-2004 288,397
6.35% Note due 10-20-2005 153,328
6.35% Note due 10-20-2005 198,078
6.7% Note due 10-20-2006 428,634
6.5% Note due 10-20-2007 443,106
6.8% Note due 10-20-2008 455,458
6.6% Note due 10-20-2009 462,754
6.9% Note due 10-20-2010 431,171
6.7% Note due 10-20-2011 472,641
6.9% Note due 10-20-2012 464,593
6.75% Note due 10-20-2013 476,020
7.3% Note due 10-20-2014 424,979
6.8% Note due 10-20-2015 386,545
7.3% Note due 10-20-2016 301,695
6.85% Note due 10-20-2017 249,090
7.3% Note due 10-20-2018 183,888
7.3% Note due 10-20-2019 192,361
7.3% Note due 10-20-2020 201,187
7.35% Note due 10-20-2021 210,624
7.35% Note due 10-20-2022 220,464
7.35% Note due 10-20-2023 101,514
-----------
12,608,071
------------
Co-Bank:
6.6% Note due 01-14-98 300,000
7.65% Note due 12-21-2026 1,492,336
6.45% Note due 01-20-2032 1,492,336
-----------
3,284,672
-----------
RUS:
0% Economic Development 75,000
-----------
$15,967,743
===========
</TABLE>
-11-
<PAGE> 22
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 -- DETAILS OF LONG-TERM DEBT (CONTINUED)
Substantially all assets are pledged as security for long-term debt to
CFC, and Co-Bank.
As of December 31, 1997, annual maturities of long-term debt outstanding,
for the next five years are as follows:
<TABLE>
<S> <C>
1998 $755,149
1999 470,514
2000 487,547
2001 569,142
2002 577,535
</TABLE>
NOTE 8 -- LEASES
The Cooperative has an operating lease for a copier machine. The contract,
for 60 months, was signed in July of 1995. The lease expense charge was
$5,244 for the years 1997 and 1996. At December 31, 1997, the obligation
for the remaining life of the lease was, $5,244 for 1998; $5,244 for 1999;
and $3,059 for 2000.
NOTE 9 -- TERMINATION OF EXCHANGE TRANSMISSION CONTRACT
During 1988, the Cooperative received $642,318 from the Bonneville Power
Administration on the termination of their exchange contract. These funds
will be used as an ETCA credit on consumer bills and have been invested in
zero coupon bonds which are scheduled to mature as needed.
The assets in the fund are carried at cost (FASB-115). The fund consists of
the following assets at December 31, 1997; these are "held to maturity
securities":
<TABLE>
<CAPTION>
Amortized Unrealized Estimated Face Value Approx.
Cost Gain Fair Value At Maturity Date Due
--------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Zero $ 33,862 $ 45,597 $ 79,459 $ 80,000 2-15-98
Zero 33,654 47,356 81,010 85,000 11-15-98
Zero 30,065 45,281 75,346 85,000 2-15-00
Zero 27,442 43,845 71,287 85,000 2-15-01
Zero 25,252 42,192 67,444 84,000 11-15-01
Cash 95 -- 95 95 1-01-98
--------- ---------- ---------- -----------
$150,370 $224,271 $374,641 $419,095
========= ========== ========== ===========
</TABLE>
All of the above assets are intended to provide security for the consumers
because the Cooperative is party to an agreement with BPA that stipulates all
funds, including interest, must be distributed to certain consumers or applied
to their bills.
-12-
<PAGE> 23
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 -- TERMINATION OF EXCHANGE TRANSMISSION CONTRACT (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Beginning balance ETCA funds (assets) $199,022
Add: Interest income 31,348
Deduct: Transfer to operating account (80,000)
--------
Ending balance ETCA funds assets $150,370
========
Beginning balance ETCA liability $199,022
Add: Interest income 31,348
Deduct: Amount applied to
consumers' bills (80,000)
--------
Ending balance ETCA liability $150,370
========
</TABLE>
NOTE 10 -- TEMPORARY INVESTMENTS
The following is a schedule of long and midterm, non-current
investments showing approximate cost, carrying value, and approximate
market value.
<TABLE>
<CAPTION>
Approximate
Approximate Carrying Fair Market
Cost Value Value
----------- -------- -----------
<S> <C> <C> <C>
Temporary Investments
"Held to Maturity":
CMO FHLMC G40112 $ 97,871 $ 97,871 $ 99,672
CMO FHLMC G186454 149,156 155,743 149,156
FNMA POOL 50419 77,400 77,877 77,400
Certificate of deposits 298,000 304,842 304,842
Interest bearing account 38,977 38,977 38,977
Accrued income 4,502 4,502 4,502
-------- -------- --------
$665,906 $679,812 $674,549
======== ======== ========
</TABLE>
The Cooperative has adopted Financial Accounting Standard Board
pronouncement #115. Accordingly, "Held to Maturity Securities" are
reported at amortized cost.
NOTE 11 -- CONCENTRATION OF CREDIT RISK
At certain times, the Cooperative has bank account balances in excess
of FDIC or FSLIC insurance protection.
- 13 -
<PAGE> 24
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 -- ENVIRONMENTAL ISSUES
The Cooperative is subject to laws and regulations relating to the
protection of the environment. The Cooperative's policy is to accrue
environmental and cleanup related costs of a non-capital nature when it is
both probable that a liability has been incurred and when the amount can
be reasonably estimated. Although it is not possible to quantify with any
degree of certainty the potential financial impact of the Cooperative's
continuing compliance efforts, management believes any furture remediation
or other compliance related cost will not have a material adverse effect
on the financial condition or reported results of operations of the
Cooperative.
NOTE 13 -- UTILITY INDUSTRY
The electric utility industry is undergoing dynamic change. A bill was
passed in the 1997 Montana Legislature that addresses restructuring of the
electric utility business, allows for pilot programs in customer choice,
sets 2002 as the time for choice by all electric customers, and provides
for recovery of various prior period costs. The law also addresses the
need for energy efficiency and the concerns of low income customers. There
is no way to predict the financial impact on the future financial
statements of the Cooperative. The Cooperative has made changes to its
organizational structure and is moving toward activity based accounting to
better position itself for the future.
NOTE 14 -- MANAGEMENT AGREEMENT
Flathead Electric Cooperative, Inc. has entered into a management
agreement with the Evergreen Rail Industrial Center, its subsidiary.
The agreement provides for the Corporation to reimburse Flathead Electric
Cooperative for the actual cost to the Cooperative of services provided
the Corporation, "such as staff time, office supplies and the like."
NOTE 15 -- EXTRAORDINARY CHARGE
The Cooperative wrote off, during 1997, deferred costs of investigating
and performing feasibility studies for co-generation plants with Plum
Creek Timber Company $67,120 and Lincoln Electric $62,157.
-14-
<PAGE> 25
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 -- ASSET IMPAIRMENT
Effective January 1, 1996, the Cooperative adopted SFAS 121, "Accounting
for Impairment of Long-lived Assets and for Long-Lived Assets to be
Disposed of". This statement requires that long-lived assets to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstance indicate that the carrying amount of an asset may not be
recoverable. The Cooperative evaluated all its assets based upon SFAS 121
and does not expect adoption of this standard to have a material effect on
its consolidated financial statements.
NOTE 17 -- INTEREST CAPITALIZED
Interest during construction must be capitalized. Interest costs of
$104,067 in 1996, and $213,154 in 1997, were capitalized into various plant
accounts.
NOTE 18 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, receivables, payables,
accrued liabilities, and short-term borrowings approximate the fair value
because of the short-term maturity of those instruments. The fair value of
long-term debt has been estimated as the same as the carrying value because
the Cooperative has recently re-financed all loans at current market rates
and terms.
NOTE 19 -- LOAN AGREEMENT PROVISIONS
The Cooperative made a board approved patronage capital refund that could
be determined to violate a covenant of the long-term debt agreement. If the
Cooperative pays patronage dividends in excess of 25% of the prior year's
net margin, the Cooperative must maintain equity of 30% or more. The equity
at year end was 28%.
The long-term lenders were contacted. Co-Bank waived the loan covenant
requiring Flathead Electric Cooperative to have an equity level of at
least 30% after the distribution of patronage capital for the year ended
December 31, 1997 and 1996. However, this waiver shall only be valid for
the year ended December 31, 1997 and 1996, and does not apply to future
years. CFC has indicated that no approval is required as the equity
position following the refund will be greater than 20%.
NOTE 20 -- LITIGATION
The Cooperative is a defendant in a lawsuit arising from normal business
activities. Management has reviewed the pending litigation with legal
counsel and believes that action is without merit, or the ultimate
liability, if any, resulting from it will not materially affect the
Cooperative's financial position.
-15-
<PAGE> 26
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 -- DETAIL OF CONSOLIDATED ACCOUNTS
Consolidated Balance Sheet Detail -- December 31, 1997
<TABLE>
<CAPTION>
Flathead Evergreen Rail
Electric Industrial Consolidated Consolidated
Cooperative Center Entries Balances
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
ELECTRIC PLANT
In service $ 33,469,752 $ -- $ -- $ 33,469,752
Construction in progress 1,286,496 -- -- 1,286,496
------------ ----------- ----------- ------------
34,756,248 -- -- 34,756,248
Less accum. depreciation (11,516,701) -- -- (11,516,701)
------------ ----------- ----------- ------------
23,239,547 -- -- 23,239,547
------------ ----------- ----------- ------------
OTHER ASSETS AND INVESTMENTS
Land -- held for sale/lease/inv -- $ 1,472,179 (1,037,926) 434,253
Investments in associated org. 1,305,409 1,000 (275,704) 1,030,705
ETCA special funds 150,370 -- -- 150,370
Temporary investments 679,812 -- -- 679,812
Regulatory assets 390,487 -- -- 390,487
------------ ----------- ----------- ------------
2,526,078 1,473,179 (1,313,630) 2,685,627
============ =========== =========== ============
CURRENT ASSETS
Operating cash (50,721) 17,501 -- (33,220)
Accounts receivable 4,722,329 2,509 (1,328,918) 3,395,920
Materials and supplies 473,195 -- -- 473,195
Other current assets 10,522 -- -0 10,522
------------ ----------- ----------- ------------
5,155,325 20,010 (1,328,918) 3,846,417
------------ ----------- ----------- ------------
DEFERRED CHARGES 146,151 -- -- 146,151
------------ ----------- ----------- ------------
$ 31,067,101 $ 1,493,189 $(2,642,548) $ 29,917,742
============ =========== =========== ============
EQUITY
Memberships $ 285,900 $ -- $ -- $ 285,900
Patronage capital 8,197,807 164,297 (275,704) 8,086,400
Other 281,925 -- -- 281,925
------------ ----------- ----------- ------------
8,765,632 164,297 (275,704) 8,654,225
------------ ----------- ----------- ------------
OTHER LIABILITIES
ETCA special funds 150,370 -- -- 150,370
------------ ----------- ----------- ------------
LONG-TERM DEBT 15,212,594 1,328,918 (1,328,918) 15,212,594
------------ ----------- ----------- ------------
CURRENT LIABILITIES
Current long-term debt 755,149 -- -- 755,149
Consumer accounts
payable -- power 2,977,720 -- -- 2,977,720
Consumer accounts
payable -- other 413,992 -- -- 413,992
Secondary service fees 98,540 (26) -- 98,514
Accrued property tax 127,740 -- -- 127,740
Other current liabilities 707,802 -- -- 707,802
------------ ----------- ----------- ------------
5,080,943 (26) -- 5,080,917
------------ ----------- ----------- ------------
DEFERRED CREDITS 1,857,562 -- (1,037,926) 819,636
------------ ----------- ----------- ------------
$ 31,067,101 $ 1,493,189 $(2,642,548) $ 29,917,742
============ =========== =========== ============
</TABLE>
-16-
<PAGE> 27
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 - DETAIL OF CONSOLIDATED ACCOUNTS (CONTINUED)
Consolidated Revenue & Patronage Capital Detail - December 31, 1997
<TABLE>
<CAPTION>
Flathead Evergreen Rail
Electric Industrial Consolidated Consolidated
Cooperative Center Entries Balances
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES $38,753,929 $ 22,962 $ - $ 38,776,891
----------- ----------- ------------ ------------
OPERATING EXPENSES
Cost of power 33,105,909 - - 33,105,909
Distribution - operating 656,136 - - 656,136
Distribution - maintenance 708,949 - - 708,949
Consumer accounts 302,523 - - 302,523
Sales and consumer expenses 260,000 - - 260,000
Administration and general 1,360,860 38,300 - 1,399,160
Depreciation 957,346 8,653 - 965,999
Property tax 255,998 12,082 - 268,080
----------- ----------- ------------- ------------
37,607,721 59,035 - 37,666,756
----------- ----------- ------------- ------------
1,146,208 (36,073) - 1,110,135
FIXED CHARGES
Interest (774,631) (21,824) 21,824 (774,631)
----------- ----------- ------------- ------------
371,577 (57,897) 21,824 335,504
NON OPERATING MARGINS
Interest and dividend income 256,796 3,753 (21,824) 238,725
Unrealized gains and losses 1,318 - - 1,318
Gain on land sale 34,377 - - 34,377
Extraordinary expense
Write off deferred items (129,277) - - (129,277)
----------- ----------- ------------- ------------
NET MARGINS 534,791 (54,144) - 480,647
PATRONAGE CAPITAL -
BEGINNING OF YEAR 7,955,492 154,817 (154,817) 7,955,492
Investment proceeds - 63,624 (63,624) -
Retirement of
capital credits (349,739) - - (349,739)
Eliminate last period loss 57,263 - (57,263) -
----------- ----------- ------------- ------------
PATRONAGE CAPITAL -
END OF YEAR $ 8,197,807 $ 164,297 $ (275,704) $ 8,086,400
=========== =========== ============= ============
</TABLE>
-17-
<PAGE> 28
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 -- DETAIL OF CONSOLIDATED ACCOUNTS (CONTINUED)
Consolidated Balance Sheet Detail -- December 31, 1996
<TABLE>
<CAPTION>
Flathead Evergreen Rail
Electric Industrial Consolidated Consolidated
Cooperative Center Entries Balances
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
ELECTRIC PLANT
In service $ 31,075,586 $ - $ - $ 31,075,586
Construction in progress 1,786,097 - - 1,786,097
------------ ---------- ----------- ------------
32,861,683 - - 32,861,683
Less Accum. depreciation (10,881,417) - - (10,881,417)
------------ ---------- ----------- ------------
21,980,266 - - 21,980,266
------------ ---------- ----------- ------------
OTHER ASSETS AND INVESTMENTS
Land - held for sale/lease/inv - 1,479,056 (1,037,926) 441,130
Investments in associated org. 1,190,093 1,000 (212,083) 979,010
ETCA special funds 199,022 - - 199,022
Temporary investments 826,354 - - 826,354
Regulatory assets 341,705 - - 341,705
------------ ---------- ----------- ------------
2,557,174 1,480,056 (1,250,009) 2,787,221
------------ ---------- ----------- ------------
CURRENT ASSETS
Operating cash 537,513 14,544 - 552,057
Accounts receivable 5,001,561 - (1,328,918) 3,672,643
Materials and supplies 465,990 - - 465,990
Other current assets 14,000 - - 14,000
------------ ---------- ----------- ------------
6,019,064 14,544 (1,328,918) 4,704,690
------------ ---------- ----------- ------------
DEFERRED CHARGES 138,704 10,765 - 149,469
------------ ---------- ----------- ------------
$ 30,695,208 $1,505,365 $(2,578,927) $ 29,621,646
============ ========== =========== ============
EQUITY
Memberships $ 277,375 $ - $ - $ 277,375
Patronage capital 9 ,050,684 154,817 (1,250,009) 7,955,492
Other 229,647 - - 229,647
------------ ---------- ----------- ------------
9,557,706 154,817 (1,250,009) 8,462,514
------------ ---------- ----------- ------------
OTHER LIABILITIES
ETCA special funds 199,022 - - 199,022
------------ ---------- ----------- ------------
LONG-TERM DEBT 15,711,230 1,328,918 (1,328,918) 15,711,230
------------ ---------- ----------- ------------
CURRENT LIABILITIES
Current long-term debt 326,816 - - 326,816
Consumer accounts payable -
power 2,926,974 - - 2,926,974
Consumer accounts payable -
other 223,194 - - 223,194
Secondary service fees 86,291 - - 86,291
Accrued property tax 137,785 - - 137,785
Other current liabilities 669,652 10,864 - 680,516
------------ ---------- ----------- ------------
4,370,712 10,864 - 4,381,576
------------ ---------- ----------- ------------
DEFERRED CREDITS 856,538 10,766 867,304
------------ ---------- ----------- ------------
$ 30,695,208 $1,505,365 $(2,578,927) $ 29,621,646
============ ========== =========== ============
</TABLE>
-18-
<PAGE> 29
FLATHEAD ELECTRIC COOPERATIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 -- DETAIL OF CONSOLIDATED ACCOUNTS (CONTINUED)
Consolidated Revenue & Patronage Capital Detail -- December 31, 1996
<TABLE>
<CAPTION>
Flathead Evergreen Rail
Electric Industrial Consolidated Consolidated
Cooperative Center Entries Balances
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES $38,295,224 $ (3,328) $ -- $38,298,552
----------- -------- ----------- -----------
OPERATING EXPENSES
Cost of power 33,088,405 -- -- 33,088,405
Distribution -- operating 585,167 -- -- 585,167
Distribution -- maintenance 684,302 -- -- 684,302
Consumer accounts 271,594 -- -- 271,594
Sales and consumer expenses 247,301 -- -- 247,301
Administration and general 1,220,897 51,621 -- 1,272,518
Depreciation 899,210 7,210 -- 906,420
Property tax 269,791 -- -- 269,791
----------- -------- ----------- -----------
37,266,667 58,831 -- 37,325,498
----------- -------- ----------- -----------
1,028,557 (55,503) -- 973,054
FIXED CHARGES
Interest (771,897) (2,350) 2,350 (771,897)
----------- -------- ----------- -----------
256,660 (57,853) 2,350 201,157
NON OPERATING MARGINS
Interest and dividend income 97,338 590 (2,350) 95,578
Unrealized gains and losses 18,913 -- -- 18,913
Gain on land sale 1,037,926 -- (1,037,926) --
----------- -------- ----------- -----------
NET MARGINS 1,410,837 (57,263) (1,037,926) 315,648
PATRONAGE CAPITAL --
BEGINNING OF YEAR 8,072,693 -- -- 8,072,693
Retirement of capital credits (432,849) -- -- (432,849)
----------- -------- ----------- -----------
PATRONAGE CAPITAL --
END OF YEAR $ 9,050,681 $(57,263) $(1,037,926) $ 7,955,492
=========== ======== =========== ===========
</TABLE>
-19-
