FORM 10-K--ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(As last amended in Rel. No. 34-31327, eff. 10-21-92)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________________ to ______________________
Commission file Number 33-42125
Chugach Electric Association, Inc.
(Exact name of registrant as specified in its charter)
Alaska 92-0014224
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5601 Minnesota Drive, Anchorage, Alaska 99518
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (907) 563-7494
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. /x/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. N/A
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405, 17 CFR 230.405). N/A
CHUGACH ELECTRIC ASSOCIATION, INC.
1998 Form 10-K Annual Report
Table of Contents
Page
PART I
Item 1 - Business 1
Item 2 - Properties 14
Item 3 - Legal Proceedings 21
Item 4 - Submission of Matters to a Vote of Security Holders 23
PART II
Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters 23
Item 6 - Selected Financial Data 23
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Item 7A - Quantitative and Qualitative Disclosures About Market Risk 36
Item 8 - Financial Statements and Supplementary Data 37
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 61
PART III
Item 10 - Directors and Executive Officers of the Registrant 61
Item 11 - Executive Compensation 63
Item 12 - Security Ownership of Certain Beneficial Owners and
Management 67
Item 13 - Certain Relationships and Related Transactions 67
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports
on Form 8-K 67
SIGNATURES 81
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.
Chugach Electric Association, Inc. (Chugach or the Association) 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 affect of those events or circumstances on any of the forward-looking
statements contained in this report.
PART I
Item 1 - Business
GENERAL
Chugach is the largest electric utility in Alaska. Chugach was organized as an
Alaska not-for-profit electric cooperative in 1948 and is engaged in the
generation, transmission and distribution of electricity to approximately 69,000
metered locations in the Anchorage and upper Kenai Peninsula areas. Through an
interconnected regional electrical system, Chugach's power flows throughout
Alaska's Railbelt, a 600-mile-long area stretching from the coastline of the
southern Kenai Peninsula to the interior of the state, including Alaska's
largest cities, Anchorage and Fairbanks. On a regular basis, through its direct
service to retail customers and indirectly through its wholesale and economy
energy sales, Chugach provides some or all of the electricity used by
approximately two-thirds of Alaska's electric customers. In addition, on a
periodic basis, Chugach provides electricity to the city-core customers of
Anchorage Municipal Light & Power (AML&P).
Chugach also supplies much of the power requirements of three wholesale
customers, Matanuska Electric Association (MEA), Homer Electric Association
(Homer) and the City of Seward (Seward). Substantially all of Chugach's
currently-owned generating capacity is fueled by natural gas, which Chugach
purchases under long-term, relatively low-cost gas contracts. The remainder of
Chugach's generating resources are hydroelectric facilities. The Chugach system
includes 501.4 megawatts (MW) of installed generating capacity that is provided
by 15 solely-owned generating units, and another 11.7 MW of generating capacity
from two hydroelectric units that are owned jointly with MEA and AML&P. Chugach
operates 1,577 miles of distribution line and 402 miles of transmission line.
During 1998, Chugach sold 2.06 billion kilowatt hours (kWh) of power.
Cooperatives are business organizations that are owned by their members.
Cooperatives are designed to give groups of individuals or entities the
opportunity to serve their own needs in a particular area of business activity
and to solve their own problems in that area more
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effectively than when acting individually. In addition, as not-for-profit
organizations, cooperatives are intended to provide services to their members at
the lowest possible cost, in part by eliminating the need to produce profits or
a return on equity. Today, cooperatives operate throughout the United States in
such diverse areas as utilities, agriculture, irrigation, insurance and credit.
All cooperatives are based upon similar principles and legal foundations. Since
members' equity is not considered an investment, a cooperative's objectives and
policies are oriented to serving member interests, rather than maximizing return
on investment.
Chugach's members are the consumers of the electricity sold by Chugach. As of
December 31, 1998, Chugach had approximately 55,500 retail members receiving
service at approximately 69,000 metered locations. The business and affairs of
Chugach are managed by the General Manager and are overseen by its seven-member
Board of Directors (the Board). Directors are elected at large by the membership
and serve three-year staggered terms. Each member is entitled to one vote. In
addition to voting for directors, members have voting rights with respect to the
sale, lease, or other disposition, except by mortgage or deed of trust, of all
or a substantial portion of Chugach's property.
Chugach customers are billed per a tariff rate, on a monthly basis for
electrical energy consumed during the preceding month. Billing rates are
approved by the APUC (see Rate Regulation and Rates).
Rates (derived from the historic cost of service basis) may generate revenues in
excess of current period costs (net operating margins and nonoperating margins)
in any year and are designated on Chugach's Statements of Revenues, Expenses and
Patronage Capital as "assignable margins." Retained assignable margins are
designated on Chugach's balance sheet as "patronage capital" that is assigned to
each member on the basis of patronage.
In furtherance of Chugach's operations as a cooperative, Chugach credits to its
members, or patrons, all amounts received from the patrons for the furnishing of
electricity in excess of Chugach's operating costs, expenses and provision for
reasonable reserves. Such excess amounts (i.e., assignable margins) are
considered capital furnished by the patrons, and are credited to their accounts
and held by Chugach until such future time as they are retired and returned
without interest. Chugach's Bylaws provide that such capital credits are to be
retired (i) upon Chugach's dissolution or liquidation after payment of all of
Chugach's outstanding indebtedness or (ii) at any earlier time if the Board of
Directors determines that Chugach's financial condition will not be thereby
impaired. At December 31, 1998, Chugach has a practice of retiring patronage
capital on a first in-first out (FIFO) basis for retail customers. At the end of
1998, Chugach had authorized for retirement all retail capital credits through
1983 and approximately one-third of 1984 retail credits. Wholesale capital
credits have been retired on a 10-year cycle pursuant to the Equity Management
Plan Settlement Agreement despite its expiration in 1995. A Settlement Agreement
(different than the aforementioned agreement) has been negotiated with Alaska
Electric Generation & Transmission Cooperative, Inc., (AEG&T/MEA/Homer) and has
been approved by the APUC. Under this agreement, wholesale capital credits
continued to be rotated on a 10-year cycle through 1998. After 1998,
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wholesale capital credits are expected to be rotated using the retail schedule
in place at that time. In 1998, the Board authorized retirement of 1988
wholesale capital credits in the amount of $1,533,287. Approval of actual
capital credit retirements is at the discretion of the Association's Board.
As an electric cooperative, Chugach is exempt from federal income taxation under
Section 501(c)(12) of the Internal Revenue Code (Code). Alaska electric
cooperatives must pay to the State of Alaska, in lieu of state and local ad
valorem, income and excise taxes, a tax at the rate of $0.0005 per kWh of
electricity sold in the retail market during the preceding year. In addition,
Chugach collects a regulatory cost charge of $.000280 per kWh of retail
electricity sold. This charge is assessed to fund the operations of the APUC. It
is a pass-through and thus does not impact Chugach margins.
Chugach's workforce consists of approximately 348 full-time employees.
Approximately two-thirds of Chugach's employees are members of the International
Brotherhood of Electrical Workers (IBEW). Chugach has three collective
bargaining agreements with the IBEW that are currently open for negotiation.
Although each of the contracts expired January 31, 1998, the parties have agreed
that the contracts shall continue in effect until new contracts are put in
place. If the parties cannot agree on the terms of new agreements, all
outstanding issues will be decided through interest arbitration. The Union
cannot strike and Chugach cannot lockout under the continuing agreement.
Unsolicited Acquisition Proposal by Matanuska Electric Association, Inc.
In October 1998, MEA, Chugach's largest wholesale customer presented to the
Board of Chugach the unsolicited MEA proposal to acquire substantially all of
Chugach's assets in exchange for the assumption of Chugach's liabilities.
Although MEA has not provided many details of the MEA proposal, it has stated
that the generation and transmission assets of Chugach would be transferred to a
subsidiary of MEA, the assets comprising Chugach's distribution system would be
transferred to MEA itself, and Chugach's members could become members of MEA.
MEA has also stated that, at the time of the acquisition, it would borrow enough
money to defease (i.e. to purchase a pool of U.S. government-backed securities
that would generate sufficient cash flow to make scheduled debt service payments
during the remaining life of the defeased obligations) or refinance Chugach's
outstanding Series A Bonds and to refinance Chugach's outstanding CoBank bonds
plus an additional $42.5 million that would be distributed in cash to the
members of the post-acquisition MEA. On November 2, 1998, citing uncertainty
over whether MEA would be successful in its bid to acquire Chugach's assets,
Standard & Poor's Rating Service placed its single "A" rating on the Series A
Bonds on "Credit Watch with developing implications", meaning the rating may be
raised, lowered or affirmed.
After evaluating information provided by MEA and analyses of the MEA proposal
presented by Chugach's staff and independent financial advisors, the Board
rejected the MEA proposal on November 12, 1998. Thereafter, MEA withdrew the
provision of the MEA proposal which
3
contemplated that the Board of Directors of MEA, following the consummation of
the MEA proposal, would include minority representation from among the members
of the Board. MEA also stated that MEA's future communication on this matter
would be directed to Chugach's membership rather than the Board or Chugach's
staff and MEA began circulating a petition to gather a sufficient number of
signatures from Chugach's members to force a special meeting of Chugach's
members for the purpose of considering the MEA proposal. Under the Alaska
Electric & Telephone Cooperative Act, a special meeting of the members of
Chugach may be called by 10% of Chugach's members.
In February and March 1999, MEA issued public statements that it had received
sufficient petition signatures from Chugach members to compel the holding of a
special meeting but that it would seek an advisory vote of its own members
before submitting such signatures to Chugach. To date, MEA has not submitted any
petition signatures to Chugach and Chugach has therefore not had occasion to
initiate the formal tabulation that would be necessary to determine whether a
sufficient number of duly and validly signed petitions have been submitted and,
if so, the legal implication of such petitions with respect to the MEA proposal.
Alaska law prohibits Chugach from disposing of a substantial portion of its
assets unless the disposition is approved by a majority of the members of
Chugach and by at least two-thirds of those actually voting on the proposal,
except that the Board may authorize Chugach to sell its assets to another
cooperative if the transaction is approved by a majority of those voting in an
election in which a much smaller percentage of the membership votes and the
purchaser expressly agrees to assume Chugach's obligations under collective
bargaining agreements. MEA has taken the position that the Board would be
compelled to approve the sale of Chugach's assets to MEA if two-thirds of
Chugach's members voting at a special meeting of the members approved the
transaction and those voting in favor of the transaction constituted a majority
of all of the members. Chugach believes that, although member approval clearly
is a prerequisite to any sale to MEA, no such sale could legally occur unless
the Board also approves the sale in the exercise of its independent judgment.
It is unclear whether a special meeting of Chugach's members will be called to
consider the MEA proposal, whether Chugach's members would approve the MEA
proposal by a supermajority vote if it were submitted at a special meeting of
members, what legal effect (if any) approval by a supermajority of Chugach's
members would have in light of the rejection of the MEA proposal by the Board,
and whether any acquisition - even if approved by Chugach - would be approved by
the APUC. It is, therefore, not possible to determine at this time the outcome
of the MEA proposal. However, in view of numerous uncertainties associated with
the consummation of the MEA proposal, including those referred to above, Chugach
believes that there is not a material likelihood that the MEA proposal will be
consummated. Accordingly, while Chugach has publicly stated its belief that the
consummation of the MEA proposal (including the additional borrowing that would
be associated therewith) would adversely affect the financial condition, results
of operations, capital resources and liquidity of Chugach, Chugach does not
believe that there is a material likelihood that these consequences will occur.
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Characteristics of the Service Areas of Chugach and its Largest Customers
As indicated in the foregoing, the service areas of Chugach and its wholesale
and economy energy customers are often described collectively as the Railbelt
Region of Alaska because the three geographic areas (the Interior, Southcentral
and the Kenai Peninsula) are linked by the Alaska Railroad.
Anchorage is the trade, service and financial center for most of Alaska and
serves as a major center for many state governmental functions. Other
significant contributing factors to the Anchorage economy include a large
federal government and military presence, tourism, air and rail transportation
facilities and headquarters support for the petroleum, mining and other basic
industries located elsewhere in the state.
The Matanuska-Susitna (Mat-Su) Borough is immediately north of the Municipality
of Anchorage, centered around the communities of Palmer and Wasilla. Although
agriculture, tourism, mining and forestry are factors in the economy of the
Matanuska-Susitna Borough, the economic well-being of the area is closely tied
to that of Anchorage and many Mat-Su residents commute to jobs in Anchorage.
The Kenai Peninsula is south of Anchorage with an economy substantially
independent of the Anchorage area. The most significant basic industry on the
Kenai Peninsula is the production and processing of petroleum products from the
Cook Inlet region. Other important basic industries include tourism and fish
harvesting and processing. Principal communities on the Kenai Peninsula are
Homer, Seward, Kenai and Soldotna.
Fairbanks is the center of economic activity for the central part of the state
(known as the Interior). Fairbanks (250 air miles north of Anchorage and about
400 air miles south of Alaska's northern border) is Alaska's second largest
city. Basic economic activities in the Fairbanks region include federal and
state government and military operations, the University of Alaska, tourism and
support of natural resource development in the Interior and northern parts of
the state. Recently a major gold mine has commenced operation near Fairbanks.
The Trans-Alaska Pipeline System (crude oil) passes near Fairbanks on its route
from the North Slope oilfield.
Competition
Chugach has been active in the effort to promote customer choice in the retail
market in Anchorage. Chugach requested access over a neighboring utility's
distribution and transmission system and asked the APUC to enforce the request.
The APUC ruled that open retail competition did not yet exist in Alaska.
Chugach has also been actively supporting the customer's right to choose their
electric power supplier at the State Legislature. Virtually all Alaskan
utilities have opposed Chugach's efforts to develop competition and are striving
to maintain exclusive service territories. At this time
5
no bill relating to customer choice has moved out of legislative committee.
At least one electric power load aggregator is active in the Anchorage market.
The outcome of Chugach's efforts to open access over the neighboring utility's
system will impact the success and number of load aggregators operating on the
interconnected system. At this time, it is not possible to predict the impact
that load aggregators will have on Chugach's revenue.
To meet these competitive challenges, Chugach has formed a Marketing Department,
continues to operate its key account program for larger customers and is
developing new services to enhance existing customer's satisfaction.
Rate Regulation and Rates
Chugach is subject to rate regulation by the APUC. In January 1987, the APUC
adopted a simplified rate filing (SRF) procedure for use solely by electric
cooperatives. Under the SRF procedure, electric cooperatives may submit proposed
base demand and energy rate changes to the APUC for approval (either on a
quarterly or semi-annual basis) without the necessity of undergoing a formal
hearing process. The proposed rates must be approved by the Board of Directors
of the electric cooperative before they will be accepted by the APUC for
consideration.
In August 1996, the Chugach Board of Directors approved a petition to the APUC
to withdraw from the SRF process. The petition was submitted as part of Docket
U-96-37, that was opened to resolve rate disputes with Chugach's wholesale
customers. Interim-refundable rates for wholesale customers were ordered pending
resolution of the docket. In February 1997, the APUC approved a Settlement
Agreement between Chugach and AEG&T/MEA/Homer that resolved issues in the docket
and established permanent rates. As part of the Order, the Association was
required to file Cost of Service and Revenue Requirement Studies. Chugach filed
these studies in March 1997.
The APUC approved Chugach's petition to withdraw from the SRF process in July
1998. Future demand and energy rate changes will now be sought through general
rate case and other normal APUC procedures. While the formal ratemaking process
typically takes nine months to one year, it is within the APUC's authority to
authorize, after a notice period, rate changes on an interim-refundable basis.
In addition, the APUC has been willing to open limited dockets to resolve
specific issues from which expeditious decisions can often be generated.
In Order No. 18 of Docket U-96-37, at the urging of one of Chugach's wholesale
customers, the APUC ordered retroactive refunds in the approximately amount of
$1.2 million for fuel surcharge rates charged in 1995 - 1997. The Order is in
connection with Chugach's fuel and purchased power cost adjustment factors, that
are adjusted on a quarterly basis. It is Chugach's position that retroactive
refunds of quarterly surcharge revenues violate the rules against retroactive
ratemaking and constitutional due process protections. Chugach has appealed this
decision to the Superior Court for the State of Alaska. Chugach's request for
stay of the
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Commission refund order has been granted. It is not possible at this time to
determine the outcome of this appeal.
In addition, MEA filed a separate lawsuit to force Chugach to pay the same
refund ordered by the APUC and expanded the requested refund period to include
1990 - 1994. At Chugach's request, the Superior Court has dismissed this suit.
Order No. 18 in Docket U-96-37 also resolved methodological issues in the
calculation of base rates. With this Order, the provisions of the Settlement
Agreement can be implemented. As part of the Settlement Agreement with
AEG&T/MEA/Homer, Chugach has committed that the demand and energy rate levels
established on the 1995 test year in Docket U-96-37 will remain at no higher
than those levels through 1999 and may be reduced if existing rates provide
returns higher than specified in the agreement. Chugach may be required to grant
a refund to Homer and MEA retroactive to January 1, 1997 (based on the 1996 test
year filing). A provision for wholesale rate refunds of approximately $980,000
and $993,000 were recorded at December 31, 1997 and December 31, 1998,
respectively, to accommodate certain rate adjustment clauses contained in the
Settlement Agreement. Chugach anticipates the filing of the 1996 test year
revenue requirement in March 1999.
In February 1998, Chugach and the City of Seward signed a new 10-year power
sales agreement. The new power sales agreement, which is currently before the
APUC under Docket U-98-70, contains a provision that allows Chugach to interrupt
Seward at certain times during the year. A hearing has been scheduled for March
1999 and a final decision from the APUC is expected later in the year. The APUC
has already approved the contract on an interim- refundable basis. As a result
of this new power sales agreement, revenues derived from sales to the City of
Seward will decline about $350,000 annually, which represents a 15 percent
reduction. A provision for a rate refund of $198,180 has been made to reflect
the agreed upon effective date between Chugach and the City of Seward on an
interim-refundable basis of the new contract.
The Association will continue to recover changes in its fuel and purchased power
expense levels through routine fuel surcharge filings with the APUC. See the
Fuel Surcharge section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The Indenture of Trust, Series A, First Mortgage bonds (Indenture) dated
September 15, 1991 requires Chugach to set rates designed to yield margins for
interest (a TIER-like statistic) equal to at least 1.20 times total interest
expense. The authorized rate-setting TIER level of 1.35 has allowed Chugach to
achieve greater than the 1.20 margins for interest. In 1998, Chugach's achieved
TIER was 1.35.
Sales to Customers
The following table shows the energy sales to and electric revenues from
Chugach's retail, wholesale, and economy energy customers for the year ended
December 31, 1998:
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Energy Loads and Revenues by Class of Customer
Percent of Total
MWh 1998 Revenues 1998 Revenues
Direct retail sales:
Residential 487,622 $ 49,892,878 35.6%
Commercial 551,609 43,310,657 30.9%
Total 1,039,231 93,203,535 66.5%
Wholesale sales:
MEA 506,137 25,203,274 18.0%
Homer 403,398 18,225,576 13.0%
Seward 58,643 2,284,408 1.6%
Total 968,178 45,713,258 32.6%
Economy Energy Sales:
GVEA 46,322 1,288,077 0.9%
Other 2,232 50,648 0.0%
Total 48,554 1,338,725 0.9%
Total sales to customers 2,055,963 $140,255,518 100.0%
Note: 1998 Wholesale Revenues include a $1,201,636 provision for rate refund to
accommodate certain rate adjustment clauses contained in the Settlement
Agreement reached in Docket U-96-37.
Retail Customers
Service Territory. Chugach's retail service area covers the populated areas of
Anchorage as well as remote mountain areas and villages. The service area ranges
from the northern Kenai Peninsula on the South, to Tyonek on the West, to
Whittier on the East and to Fort Richardson on the North.
Customers. Chugach directly serves approximately 69,000 meters. There are
approximately 55,500 members of Chugach (some members are served by more than
one meter). Chugach's customers are primarily urban and suburban. The urban
nature of Chugach's customer base means that Chugach has a relatively high
customer density per line mile. Higher customer density means that fixed costs
can be spread over a greater number of customers. As a result of lower average
costs attributable to each customer, Chugach benefits from a greater stability
in revenue, as compared to a less dense distribution system in which each
individual customer would have a more significant impact on operating results.
For the past five years no retail customer accounted for more than 5% of
Chugach's revenues.
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Wholesale Customers
Chugach is the principal supplier of power under wholesale power contracts with
MEA, Seward and Homer. Chugach's wholesale power contracts represented $45.7
million in revenues and 47.1% of Chugach's total MWh sales to customers in 1998.
MEA and Homer. Chugach's contract with AEG&T (a generation and transmission
cooperative of which MEA and Homer are the only full members; AML&P is an
associate member) for the benefit of MEA obligates MEA to purchase all of its
electric power requirements from Chugach. Contractually, MEA has the right,
subject to APUC approval, to convert to a net requirements purchaser of power
from Chugach, under which MEA would be obligated to buy its needed power from
Chugach, net of its power needs satisfied from any of its own or AEG&T's
resources (including from the 39 MW Soldotna 1 gas-fired generating station
owned by AEG&T).
After conversion to net requirements under the contract, MEA cannot reduce the
amount of power it purchases from Chugach below a certain minimum amount. MEA
also has the right, on seven years advance notice and subject to APUC approval,
to convert to a take-or-pay purchaser of a fixed amount of power. If MEA
converts to net requirements service, MEA will be required to pay demand charges
based upon the highest post-1985 historical coincident peak on the MEA system.
Therefore, Chugach will continue to recover fixed costs if MEA converts to
net-requirements service. Also, Chugach's revenues from energy sales to MEA
would decline in proportion to the reduction in the energy sold, but this
decline would be largely offset by savings in the variable costs associated with
energy production. The MEA contract is in effect through December 31, 2014. This
contract does not protect against loss of load resulting from retail competition
in MEA's distribution service territory. It is not possible at this time to
estimate the potential impact on Chugach's revenues resulting from such
competition.
Chugach's contract with AEG&T for the benefit of Homer obligates Homer to take
or pay for 73 MW of capacity (demand), and not less than 350,000 MWh (energy)
per year. The Homer contract includes certain limitations on the costs that may
be included in the rates charged to Homer by Chugach. The Homer contract expires
on January 1, 2014. Homer's remaining resource requirements are provided by
AEG&T's Soldotna unit and AEG&T shares attributable to Homer from the Bradley
Lake hydroelectric project. Chugach and AEG&T have signed a dispatch agreement
whereby Chugach has access to all of the Soldotna unit output except that which
is required to supply Homer's load in excess of 73 MW. The term is for 40,000
operating hours or 10 years, whichever is first, although the term will be
extended by three years if Chugach makes significant use of the unit during the
last three years of the original contract term. AEG&T receives payment for
variable operating and maintenance costs plus a margin for energy produced by
the unit. Chugach obtained use of the unit output while AEG&T retained ownership
costs and responsibility. In 1998, Chugach used 41,222 MWh from the Soldotna
unit.
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In October 1998 the Chugach Board authorized the General Manager to enter into a
revised dispatch agreement with Homer and AEG&T. Under the agreement, Homer and
AEG&T anticipate relocating the Soldotna Unit to a Unocal fertilizer production
facility near Nikiski, Alaska within the Homer service area and installing
equipment to produce process steam using heat recovery from the turbine. The
dispatch agreement, subject to pending amendments to existing fuel supply
arrangements, allows Chugach to economically incorporate the unit into Chugach's
generation and transmission system and will ensure that Homer purchases all
energy available under the existing power supply contract. Gas will be provided
by Unocal to meet Homer loads in excess of 73 MW and may provide a portion of
the fuel for Homer loads in excess of the minimum energy takes. The new dispatch
agreement will replace the existing agreement when the unit is relocated and
will terminate coincident with the Homer power supply contract in 2024.
Seward. Chugach currently provides all the firm power needs of Seward. A new
contract with Seward, with an interruptible provision, is awaiting approval by
the APUC. In 1998, sales to Seward amounted to 2.9% of Chugach's MWh sales to
customers.
Economy Customers
Golden Valley Electric Association. Under the terms of Chugach's agreement with
Golden Valley Electric Association (GVEA), GVEA is obligated, under certain
circumstances, to purchase, if available from Chugach, its non-firm energy needs
until 2008. Sales under this agreement accounted for 2.25% of Chugach's 1998 MWh
sales. Chugach and GVEA have entered into a tentative pooling agreement whereby
the resources of both utilities would be dispatched on a common basis to reduce
constraints on when non-firm energy would be available to GVEA. Construction of
a coal-fired generation facility at Healy (Healy II), funded from a United
States Department of Energy grant under the Clean Coal Technology III
Demonstration Program, is complete. This facility began testing in early 1998
and has produced up to 50 MW of coal-fired power. GVEA reduced its purchases of
non-firm energy from Chugach by taking firm power from Healy II. Chugach's
management does not believe that such a reduction will have a material adverse
effect on Chugach. The Ft. Knox gold mine, near Fairbanks, with an anticipated
load of 30-35 MW began operation during the last quarter of 1996.
FUEL SUPPLY
In 1998, 84% of Chugach's power was generated from gas, and 91% of that
gas-fired generation took place at Beluga.
Chugach's three sources of natural gas are (1) the Beluga River Field producers
[ARCO Alaska, Inc. (ARCO), AML&P (old Shell) and Chevron USA Inc. (Chevron)],
(2) Marathon Oil Company (Marathon) and (3) ENSTAR Natural Gas Company (ENSTAR).
ARCO, AML&P and Chevron each own one-third of the gas produced from the Beluga
River Field and in 1998 provided approximately equal shares of the Beluga gas.
Chugach has
10
approximately 427 billion cubic feet (BCF) of gas committed to it from the
Beluga River Field producers and Marathon. Chugach currently uses about 20 BCF
of natural gas per year for firm service. Chugach believes that this usage will
remain fairly constant and estimates that its current contract gas will last 15
to 19 years. In 1996, Shell sold its interests in the Beluga River Field to
AML&P and AML&P assumed Shell's contractual obligations to sell natural gas to
Chugach. Chugach believes that this transfer will have no material effect on the
delivery of Beluga gas to Chugach.
The delivered price for Chugach's fuel supply is lower than that available to
other generators in the interconnected Railbelt. AML&P burns natural gas
purchased from the Beluga River Field producers and transported by ENSTAR.
Chugach has a transportation contract with ENSTAR to transport Chugach gas
purchased from Marathon or the Beluga River Producers to the Soldotna (AEG&T)
and/or International Power plants (International). The rate for firm
transportation is $0.63 per MCF and the rate for interruptible transportation is
$0.30 per MCF. There is a minimum monthly bill of $2,600. The primary reasons
that Chugach's fuel supply has a lower delivered price than that available to
other generators are (i) Chugach purchases its gas directly from producers
rather than from gas utilities and (ii) Chugach's power plants are located in
close proximity to gas fields so that there are insignificant transportation
costs included in the price of the fuel. AML&P currently depends on ENSTAR to
transport all of the gas it uses. The ENSTAR tariff rate for this service is
$105,000 per month plus $0.28 per MCF.
GVEA uses both coal-fired and oil-fired generators. Because of the high cost of
fuel oil, GVEA is normally an importer of lower cost power from the south.
Beluga River Field Producers
Chugach has similar requirements contracts with each of ARCO, ML&P (old Shell)
and Chevron that were executed in April 1989, superseding contracts that had
been in place since 1973. Each of the contracts with the Beluga River Field
producers provides for delivery of gas on different terms in three different
periods. Period 1 related to the delivery of gas previously committed by the
respective producer under the 1973 contracts terminated in June 1996. The
maximum deliverability under the Beluga and Marathon contracts is in excess of
the peak winter demand requirements of the Beluga plant and allows for increased
deliverability should Chugach's combined-cycle plant be out of service.
During Period 2, which began in June 1996 and continues until the earlier of the
delivery of 180 BCF of natural gas or December 31, 2013, Chugach is entitled to
take delivery of up to 180 BCF of natural gas (60 BCF per Beluga River Field
producer). During this period, Chugach is required to take 60% of its total fuel
requirements at Beluga from the three Beluga River Field producers, exclusive of
gas purchased at Beluga under the Marathon contract for use in making sales to
GVEA or certain other wholesale purchasers. The price for gas during this period
under the ARCO and AML&P (old Shell) contracts is approximately 88% (or $1.35
per MCF on December 31, 1998) of the price of gas under the Marathon contract
(described
11
below), plus taxes. The price during this period under the Chevron contract is
approximately 110% (or $1.68 per MCF on December 31, 1998) of the price of gas
under the Marathon contract (described below), plus taxes.
During Period 3 under the Beluga River Field producers' contracts, which begins
at the earlier of December 31, 2013 or the end of Period 2, Chugach may become
entitled to take delivery of up to 120 BCF of natural gas (40 BCF per producer).
Whether any gas will be taken in Period 3, and the price and take requirements
with respect thereto, are to be determined in the future based upon then-current
market conditions.
Chugach also has supplemental, annually renewable contracts with the Beluga
River Field producers to supply supplemental gas (for peak periods of energy
usage) if they have it available in excess of the amounts guaranteed in the
basic contracts. The supplemental gas contracts raise the daily deliverability
of gas to an aggregate of 85,200 MCF per day from the Beluga River Field
producers. The base price of the gas under these contracts is the same as the
base price under the Marathon contract described below, plus taxes.
Marathon
Chugach entered into a requirements contract with Marathon in September 1988 for
an initial commitment of 215 BCF. The contract expires December 31, 2015 or, if
earlier, the date on which Marathon has delivered to Chugach a volume of gas in
total which equals or exceeds the total volume of gas that Marathon is required
to sell and deliver to Chugach under the agreement. The base price for gas under
the Marathon contract is $1.35 per MCF, adjusted quarterly to reflect the
percentage change between the preceding twelve-month period and a base period in
the average prices of West Texas Intermediate Crude Oil (a benchmark of the
Light Sweet Crude Oil Futures Index), the Producer Price Index for natural gas,
and the Consumer Price Index for heating fuel oil. The price on December 31,
1998, exclusive of taxes was $1.53 per MCF.
Under the terms of the Marathon contract, Marathon generally provides the
primary supply of gas required for sales to GVEA, all of Chugach's requirements
at Bernice Lake and 40% of the requirements at Beluga. Marathon also has a right
of first refusal to provide additional gas under any sales agreements that
Chugach may enter into with electric utilities that Chugach does not currently
serve.
ENSTAR Natural Gas Company
Chugach and ENSTAR signed a transportation agreement in December 1992 that was
approved by the APUC in January 1993, whereby ENSTAR would transport Chugach's
gas purchased from the Beluga producers or Marathon on a firm basis to both
Chugach's International Power Plant and AEG&T's Soldotna Power Plant at a
transportation rate of $0.63 per MCF. In addition, ENSTAR agreed to transport
gas on an interruptible basis for off-system sales at a rate of $0.30 per MCF.
The agreement contains a minimum monthly bill of $2,600 for firm
12
service.
Chugach holds a reservation to receive its gas requirements at International
Power Plant from ENSTAR under a tariff approved by the APUC in the event that
the transportation agreement is subsequently canceled. Under the currently
suspended tariff, ENSTAR is obligated to supply all of the gas Chugach desires
at a price approved by the APUC. There would be a monthly minimum bill of
$10,465, but no requirement to actually use any gas at International. The
current delivered price under the tariff is $2.53 per MCF.
COMPLIANCE WITH ENVIRONMENTAL STANDARDS
Chugach's operations are subject to certain Federal, State and local
environmental laws which Chugach monitors to ensure compliance. The costs
associated with environmental compliance are included as a component of both the
operating and capital budget processes. Chugach accrues for costs associated
with environmental remediation obligations when such costs are probable and
reasonably estimable.
REFINANCINGS
On September 19, 1991, Chugach issued $314,000,000 of First Mortgage Bonds, 1991
Series A, for purposes of repaying existing debt to the Federal Financing Bank
(FFB) and the Rural Electrification Administration (REA), (now Rural Utilities
Services (RUS)). Pursuant to Section 311 of the Rural Electrification Act,
Chugach was permitted to prepay the REA debt at a discounted rate of
approximately 9%, resulting in a discount of approximately $45,000,000. The gain
on prepayment of the REA debt has been deferred and Chugach has obtained
permission from the APUC to flow through the benefit to consumers through lower
rates in the future.
The original issuance consisted of bonds in the amount of $52,000,000 due in
2002 bearing interest at 8.08% (Series A 2002 Bonds) and bonds in the amount of
$262,000,000 due in 2022 and bearing interest at 9.14% (Series A 2022 Bonds).
Interest is payable semiannually on March 15 and September 15. The Series A 2002
Bonds are subject to annual sinking fund redemption at 100% of the principal
amount thereof that commenced March 15, 1993. The Series A 2022 Bonds are
subject to annual sinking fund redemption at 100% of the principal amount
thereof commencing March 15, 2003. The Series A 2002 Bonds are not subject to
optional redemption. The Series A 2022 Bonds are redeemable at the option of
Chugach on any interest payment date at an initial redemption price of 109.14%
of the principal amount thereof declining ratably to par on March 15, 2012. The
Indenture prohibits outstanding short-term indebtedness (other than trade
payables) in excess of 15% of Chugach's net utility plant and limits certain
cash investments to specific securities. Chugach has reacquired $44,295,000 of
the Series A 2022 bonds since December 1995 leaving a remaining balance of
13
$217,705,000 at December 31, 1998. In February 1999, Chugach reacquired an
additional $34,895,000 of the Series A 2022 bonds leaving a remaining
outstanding balance of $182,810,000.
Chugach has negotiated a supplemental indenture (Third Supplemental Indenture of
Trust) with CoBank which previously allowed up to $80 million in future bond
financing. In 1998 Chugach finalized an amendment to the Third Supplemental
Indenture of Trust (Seventh Supplemental Indenture of Trust) that eliminates the
maximum aggregate amount of bonds the company may issue under the agreement. At
December 31, 1998, Chugach had bonds in the amount of $71.1 million outstanding
under this financing arrangement. The balance is comprised of a $1.4 million
bond (CoBank 1) that carries an interest rate of 8.95% maturing in 2002, a $10
million bond (CoBank 2) priced at 7.76% due in 2005, a $21.5 million bond
(CoBank 3), priced at 5.60%, a $23.5 million bond (CoBank 4) priced at 5.60%,
and a $15 million bond (CoBank 5) priced at 5.60% in 2002, 2007 and 2012.
Principal payments on the CoBank 3 and 4 bonds commence in 2003 and continue
through 2022. Additionally, Chugach has negotiated a similar supplemental
indenture (Fifth Supplemental Indenture of Trust) with National Rural Utilities
Cooperative Finance Corporation (NRUCFC) for $80 million. At December 31, 1998
there were no amounts outstanding under this financing arrangement.
On March 17, 1999, Chugach entered into a Treasury Rate Lock Transaction with
Lehman Brothers on $183 million of its Series A (2022) bonds at an all-in-rate
of 5.679%. This "hedge" will insure the savings that could be achieved by
refinancing these bonds in today's relatively low interest rate market at the
call date in 2002. This transaction requires no payments until the settlement
date of mid-February 2002 when a comparison of then-current rates with the hedge
rate will define the payment scenario. Settlement payments are calculated on the
basis of the Dollar Value of a Basis Point (DVBP) determined from Bloomberg's
Financial Market Government Yield Analysis times 10,000. At settlement (in
2002), if the market interest rates are above the 5.679% transaction rate,
Lehman Brother pays Chugach the difference between the current rate and 5.679%
times DVBP. If the current rates are lower, Chugach pays Lehman Brothers under
the same mathematics.
Item 2 - Properties
SYSTEM ASSETS
General
Chugach has 513.1 MW of installed capacity consisting of 17 generating units at
five power plants. These include 365.6 MW of operating capacity at Beluga on the
west side of Cook Inlet; 70.0 MW of power at Bernice Lake on the Kenai
Peninsula; 48.6 MW of power at International Station in Anchorage; and 17.2 MW
at Cooper Lake, which is also on the Kenai Peninsula. Chugach also has 11.7 MW
of capacity from the two Eklutna hydroelectric plant generating units owned
jointly with MEA and AML&P. In addition to its own generation,
14
Chugach purchases power from the 90 MW Bradley Lake hydroelectric project owned
by the Alaska Energy Authority (AEA) through Alaska Industrial Development and
Export Authority (AIDEA). Bradley Lake is operated by Homer and dispatched by
Chugach. The Beluga, Bernice Lake and International facilities are all fueled by
natural gas. Chugach owns its offices and headquarters, located adjacent to its
International Station in Anchorage, in fee simple. Warehouse space for some
generation, transmission and distribution inventory (including a small amount of
office space) is leased from an independent party not directly affiliated with
Chugach.
15
Generation Assets
Chugach owns the land and improvements comprising its generating facilities at
Beluga and International. It also owns all improvements comprising its
generating plant at Bernice Lake, that is located on land originally leased from
Chevron Oil Company now owned by Homer, and its generating plant at Cooper Lake,
that is located on federal land pursuant to a major project license (Federal
License) granted to Chugach by the Federal Power Commission in 1957. The Bernice
Lake ground lease expires in 2011 and the Federal License for the Cooper Lake
facility expires in 2007. The management of Chugach has no reason to believe
that it will not be able to renew the Federal License or the Bernice Lake ground
lease if desirable.
In 1997, Chugach acquired a partial interest in the Eklutna Hydroelectric
Project. The plant is located on federal land pursuant to a United States Bureau
of Land Management (BLM) right-of-way grant issued in October 1997.
16
The following table lists specifics of the generating facilities of Chugach:
Commercial
Facility Type of Fuel Rated Capacity (1) Operation Date
Beluga Power Plant:
Unit 1 Natural Gas 15.7 1968
Unit 2 Natural Gas 15.7 1968
Unit 3 Natural Gas 64.7 1972
Unit 5 Natural Gas 66.5 1975
Unit 6 Natural Gas 74.0 1975
Unit 7 Natural Gas 74.0 1978
Unit 8 Steam (2) 55.0 1981
365.6
Bernice Lake Power
Plant:
Unit 2 Natural Gas 19.0 1971
Unit 3 Natural Gas 25.5 1978
Unit 4 Natural Gas 25.5 1981
70.0
International
Generating Station:
Unit 1 Natural Gas 15.0 1964
Unit 2 Natural Gas 15.1 1965
Unit 3 Natural Gas 18.5 1969
48.6
Cooper Lake
Hydroelectric Plant:
Unit 1 Hydroelectric 8.6 1960
Unit 2 Hydroelectric 8.6 1960
Eklutna Hydroelectric 17.2
Plant (4):
Unit 1 Hydroelectric 5.8 1955
Unit 2 Hydroelectric 5.9 1955
11.7
Total units 17 513.1
(1) Capacity rating in MW at 30 degrees Fahrenheit.
(2) Steam turbine-powered generator with heat provided by exhaust from
natural-gas fueled Units 6 and 7 (combined-cycle).
(3) Beluga Unit 4 and Bernice Lake Unit 1 were retired during 1994.
(4) The Eklutna Hydroelectric Plant is jointly owned by Chugach, MEA and AML&P.
The capacity shown is Chugach's 30% share of the plant's maximum output.
17
Transmission and Distribution Assets
As of December 31, 1998, Chugach's transmission and distribution assets included
39 substations and 402 miles of transmission lines, 931 miles of overhead
distribution lines and 647 miles of underground distribution line. Chugach owns
the land on which 21 of its substations are located and a portion of the
right-of-way connecting its Beluga plant to Anchorage. In the 1997 Eklutna
acquisition, Chugach also acquired a partial interest in two substations and
additional transmission facilities.
Many substations and a substantial number of Chugach's transmission and
distribution rights-of-way are the subject of federal or state permits and
licenses. Under the Federal License and a permit from the United States Forest
Service, Chugach operates its Quartz Creek transmission substation, substations
at Hope, Summit Lake and Daves Creek, and transmission lines over all federal
lands between Cooper Lake on the Kenai Peninsula and Anchorage. Long-term
permits from the Alaska Division of Lands and the Alaska Railroad Corporation
govern much of the rest of Chugach's transmission system outside the Anchorage
area. Within the Anchorage area, Chugach operates its University Substation and
several major transmission lines pursuant to long-term rights-of-way grants from
the BLM, and transmission and distribution lines have been constructed across
privately-owned lands pursuant to easements across public rights-of-way and
waterways pursuant to authority granted by the appropriate governmental entity.
Title
Substantially all of the properties and assets of Chugach, including generation,
transmission and distribution properties, but excluding all excepted property,
are pledged to secure repayment of the Series A Bonds and all other bonds that
may be issued under the Indenture. The Indenture defines excepted property to
include, among other things, cash on hand, instruments and certain securities
(other than those required to be deposited with the Trustee under the terms of
the Indenture), patents and transportation equipment (including vehicles,
vessels and barges), leases for an original term of less than five years,
certain non-assignable permits, licenses and contractual rights, property
located outside the State of Alaska and not used in connection with Chugach's
generation, transmission and distribution system and other property in which a
security interest cannot legally be perfected. The lien of the Indenture is
subject to certain permitted encumbrances that the Indenture defines to include
certain identified restrictions, exceptions, reservations, conditions and
limitations existing on the date of the Indenture, reservations in U.S. patents,
nondelinquent or contested tax liens, local easements, leases and reservations
and liens for nondelinquent rent or wages. The lien of the Indenture is also
subject to the lien in favor of the Trustee to recover amounts owing to the
Trustee under the Indenture.
In addition to the Indenture, many of Chugach's properties are burdened by
easements, plat restrictions, mineral reservation, water rights and similar
title exceptions common to the area or customarily reserved in conveyances from
federal or state governmental entities, and to
18
additional minor title encumbrances and defects. In the opinion of Chugach's
General Counsel, none of these title defects will materially impair the use of
its properties in the operation of its business.
In addition, a lawsuit was filed against the State of Alaska in which the
plaintiffs allege that the manner in which the State administered and disposed
of certain lands violates the Alaska Mental Health Enabling Act. One of
Chugach's substations and its right-of-way across State lands may be subject to
the plaintiffs' claims. Chugach's management believes that such claims will not
materially affect Chugach's financial position, results of operations or cash
flows.
Chugach operates its Bernice Lake facility on lands originally leased from
Chevron Oil Company (fee interest now owned by Homer) pursuant to a lease that
is scheduled to expire in 2011. Chugach also operates several terminal
connection sites and a substation under long-term or renewable leases from the
State of Alaska and private parties. In addition, as discussed above, a
substantial number of Chugach's transmission and distribution rights-of-way, and
several distribution substations, are the subject of federal or state permits
and easements.
Under the Alaska Cooperative Act, Chugach is given the power of eminent domain
for the purpose and in the manner provided by Alaska condemnation laws for
acquiring private property for public use.
Other Assets
Bradley Lake. Chugach is a participant in the Bradley Lake Hydroelectric Project
(Bradley Lake), which is a 90 MW hydroelectric facility near Homer on the
southern end of the Kenai Peninsula that was placed into service in September
1991. The project was financed and built by AEA through grants from the State of
Alaska and the issuance of $166 million principal amount of revenue bonds
supported by power sales agreements with six electric utilities that will share
the output from the facility (Chugach, AML&P, Homer and MEA (through AEG&T),
GVEA and Seward). Effective August 12, 1993, AEA became part of the Alaska
Industrial Development and Export Authority (AIDEA). Chugach and the other
participating utilities have entered into take-or-pay power sales agreements
under which AEA has sold percentage shares of the project capacity and the
utilities have agreed to pay a like percentage of annual costs of the project
(including ownership, operation and maintenance costs, debt- service costs and
amounts required to maintain established reserves). Under these take-or-pay
power sales agreements, the purchasing utilities have agreed to pay all project
costs from the date of commercial operation even if no energy is produced.
Chugach has a 27.4 MW or 30.4% share in Bradley Lake, and takes Seward's and
MEA's shares which it net bills to them, for a total of 45% of the project's
capacity.
19
The length of the agreement is fifty years from the date of commercialization or
when the revenue bond principal is repaid, whichever is the longer. Chugach
believes that, under a worst-case scenario, it could be faced with annual
expenditures of approximately $4.1 million as a result of its Bradley Lake
take-or-pay obligations. Chugach believes that this expense would be recoverable
through the fuel surcharge ratemaking process. The share of debt service for
which the Association is responsible is approximately $46,000,000 plus interest.
In December 1997, $59,485,000 of the Power Revenue Bonds, Third Series and
$47,710,000 of the Power Revenue Bonds, Fourth Series were refinanced under a
forward refunding arrangement. The true interest cost of the new bonds decreased
to 5.611% for the Third Series bonds and 6.06% for the Fourth Series bonds from
7.295% and 7.235%, respectively. This refunding produced a net present value
saving to the participating utilities of approximately $8,500,000. The
Association's share of these savings will be approximately $1,600,000.
In January 1999, $28,910,000 of the Power Revenue Bonds, Fifth Series, were
refinanced under a forward refunding arrangement. The true interest cost of the
new bonds decreased to 5.25%. This produced a Net Present Value savings to the
participating utilities of approximately $2,875,000. The Association's share of
these savings will be approximately $546,000.
Chugach also provides transmission and related services as a wheeling agent (one
who dispatches and transmits power of third parties over its own system) for all
of the participants in the project. Upon the default of a participant, and
subject to certain other conditions, AEA is entitled to increase each
participant's share of costs pro rata, to the extent necessary to compensate for
the failure of another participant to pay its share, provided that no
participant's percentage share is increased by more than 25%.
Chugach and AEG&T have also negotiated a Bradley Lake Scheduling Agreement
whereby Chugach schedules AEG&T/Homer's share of the Bradley Lake project for
the benefit of the Chugach system. AEG&T continues to pay its Bradley Lake costs
and receives credit for the Bradley Lake energy generated for Homer. Chugach
pays a fixed annual fee of $112,000 to AEG&T for these scheduling rights. This
agreement allows Chugach to improve the efficiency of its generating resources
through better hydrothermal coordination.
Eklutna. Chugach purchased a 30% undivided interest in the Eklutna Hydroelectric
Project from the federal government. MEA purchased a 17% undivided interest in
the Eklutna Project. The power MEA purchases from Eklutna is pooled with
Chugach's purchases and sold back to MEA to be used in meeting MEA's overall
power requirements. AML&P purchased the remaining 53% undivided interest in the
Eklutna Project. Transfer of ownership occurred on October 2, 1997 in accordance
with a transition plan. Chugach believes that the cost of power from the Eklutna
Project will be less than it would have been under continued federal ownership.
20
Item 3 - Legal Proceedings
LITIGATION
Standard Steel Salvage Yard Site
The full investigation and cleanup (remedial action) of the Site was
substantially completed as of September 30, 1998. A relatively minor amount of
additional Site work and additional reporting will be performed in 1999 to
complete the remedial action. Although the costs of the 1999 work as well as the
total oversight costs of EPA and other federal agencies are not yet known,
Chugach has pre-funded these costs and, based on estimates for 1999, it is not
anticipated that Chugach will be required to make any further payments relating
to the remedial action at the Site.
Four of Chugach's insurance carriers have been paying, under a reservation of
rights, Chugach's costs of defense for the Site. By agreement dated May 15,
1998, these four insurance carriers agreed to pay the majority of Chugach's
costs relating to the Site, including investigation and remedial action costs,
EPA oversight costs and attorneys' fees. This settlement preserves Chugach's
potential claim for natural resource damages and is anticipated to result in
Chugach paying no more than $500,000 for all Site costs. Management believes
that the latter amount would be fully recoverable in rates and therefore would
have no impact on Chugach's financial condition or results of operations.
Matanuska Electric Association, Inc. v. Chugach Electric Association U-98-180
Reference is made to Item 1 with respect to the MEA proposal and certain
contractual relationships between Chugach and MEA. On December 2, 1998, MEA
filed a complaint with the APUC. In the Matter of the Formal Complaint filed by
MATANUSKA ELECTRIC ASSOCIATION, INC. Against CHUGACH ELECTRIC ASSOCIATION, Inc.,
U-98-180. MEA's complaint alleges that Chugach has engaged in "unreasonable
management practices" in the management of the Series A Bonds. The complaint
asks the APUC to issue an order instituting an investigation into the
reasonableness and propriety of the continuing decision of Chugach not to
defease such Bonds, which order would include convening a public hearing to take
evidence as to whether Chugach's decision not to defease said Bonds constitutes
an unreasonable management decision, and awarding MEA such additional relief as
the APUC may find just and equitable. Chugach has filed an answer denying the
material allegations of MEA's complaint, asserting that its management of the
Series A Bonds has been reasonable and sound, and contending that defeasance of
such Bonds would not be a prudent course of action. The answer also asserts that
the APUC should not open an investigation on the ground that MEA's allegations
do not implicate the kinds of management decisions into which it is appropriate
for the APUC to inquire. MEA has filed a reply to Chugach's answer, which
Chugach has moved to strike on the basis that such reply asserts new claims
going beyond the core allegations in the complaint relating to Chugach's
decision not to defease the Series A Bonds and relies on new factual allegations
not contained in the complaint. Each party has
21
filed additional motions regarding the pleadings of the other party.
To date, the APUC has not rendered any decision on any aspect of the case. If
the APUC authorizes an investigation, Chugach will vigorously defend its
financial management. Because of the preliminary nature of the case, Chugach has
not been able to estimate the cost of its participation in the case, should the
case proceed.
22
Item 4 - Submission of Matters to a Vote of Security Holders
Not Applicable
PART II
Item 5 - Market for Registrant's
Common Equity and Related Stockholder Matters
Not Applicable
Item 6 - Selected Financial Data
The following tables present selected historical information relating to
financial condition and results of operations over the past five years:
<TABLE>
<S> <C> <C> <C> <C> <C>
Balance Sheet Data 1998 1997 1996 1995 1994
Plant net:
In service .................. $386,235,421 $393,228,853 $400,052,837 $391,200,269 $ 390,969,561
Construction work in
progress .................. 30,405,736 24,664,395 19,826,957 27,068,964 22,795,657
Electric plant, net ...... 416,641,157 417,893,248 419,879,794 418,269,233 413,765,218
Other assets ................ 64,450,293 67,674,051 62,608,636 66,521,090 65,559,620
Total assets ............. $481,091,450 $485,567,299 $482,488,430 $484,790,323 $ 479,324,838
Capitalization:
Long-term debt .............. 305,917,699 312,006,501 307,905,847 305,641,703 303,675,870
Capital leases .............. -- -- -- -- 131,582
Equities and margins ........ 114,023,296 109,119,697 104,477,942 99,230,550 94,579,059
Total capitalization ....$ 419,940,995 $421,126,198 $412,383,789 $404,872,253 $ 398,386,511
Summary Operations Data
Operating revenues ............. 141,825,373 143,947,730 134,876,668 129,379,308 130,912,171
Operating expenses ............. 110,737,441 113,070,990 100,913,804 95,920,361 90,151,993
Interest expense ............... 26,011,392 26,661,510 27,052,186 27,207,648 27,508,928
Amortization of gain on
refinancing .................. 1,542,723 1,577,149 1,703,136 2,150,476 1,926,212
Net operating margins ..... 6,619,263 5,792,379 8,613,814 8,401,775 15,177,462
Nonoperating margins ........... 2,111,141 1,762,018 1,217,557 604,418 (249,028)
Assignable margins ........ $ 8,730,404 $ 7,554,397 $ 9,831,371 $ 9,006,193 $ 14,928,434
</TABLE>
23
Item 7 - 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. Reference
is also made to the information contained in Item 1 with respect to the MEA
proposal.
RESULTS OF OPERATIONS
Chugach operates on a not-for-profit basis and, accordingly, seeks only to
generate revenues sufficient to pay operating and maintenance costs, the cost of
purchased power, capital expenditures, depreciation and principal and interest
on all indebtedness of Chugach and to provide for the establishment of
reasonable margins and reserves. Revenues in excess of current period costs (net
operating margins and nonoperating margins) in any year are designated on
Chugach's Statements of Revenues, Expenses and Patronage Capital as assignable
margins. Retained assignable margins are designated on Chugach's balance sheet
as patronage capital, which is assigned to each member on the basis of
patronage. This patronage capital constitutes the principal equity of Chugach.
Revenues
Operating revenues include sales of electric energy to retail, wholesale and
economy energy customers and other miscellaneous revenues. In 1998, operating
revenues were approximately 1.5% lower than 1997. This decrease was largely
attributable to lower sales to Homer due to economy energy purchases from AML&P.
Also, economy energy sales to GVEA decreased due to the Healy Clean Coal Plant
testing activity in 1998. A total of $2,181,024 has been recorded in the
provision for rate refund account since 1997. This provision was recorded in
response to Docket U-96-37 which was opened by the APUC to resolve certain rate
disputes with the wholesale customers. At December 31, 1998, Docket U-96-37 had
not been closed. In addition, under the terms of a renegotiated power sales
agreement with Seward they may be entitled to a refund. A provision for that
rate refund was also included in the 1998 total provision. Retail demand and
energy rates did not change in 1998 while demand and energy rates charged to MEA
decreased slightly. Demand and energy rates to Homer remain unchanged. Seward's
demand and energy rates dropped 15%. In 1997 operating revenues were
approximately 6.7% higher than 1996. This increase was largely attributable to
higher sales to retail and two wholesale customer classes. Higher fuel costs
also contributed to the increase since fuel and purchased power costs are passed
directly to customers through a fuel and purchased power adjustment factor.
Retail demand and energy rates did not change in 1997 while demand and energy
rates charged to MEA decreased slightly. Demand and energy rates to Homer and
Seward did not change in 1997. Revenues and power sold were as follows for the
years ended December 31:
24
Year MWh sold Operating revenues
1998 2,055,963 $ 141,825,373
1997 2,269,453 143,947,730
1996 2,215,842 134,876,668
Chugach makes economy sales primarily to GVEA. These sales commenced in 1988 and
have contributed to a portion of Chugach's growth in operating revenues. Chugach
does not take such economy sales into consideration in its long-range resource
planning process because these sales are non-firm sales that depend on GVEA's
need for additional power and Chugach's available generating capacity at the
time. In 1998, economy sales to GVEA constituted approximately .92% of Chugach's
sales revenues. This decrease from previous year's Economy Energy sales is due
primarily to the Healy Clean Coal Project (HCCP) entering testing in mid-1998,
decreasing the need for GVEA to make economy power purchases.
The impact of inflation on Chugach's revenues falls into two rate categories as
follows:
Fuel Surcharge
Fuel and purchased power costs are passed directly to Chugach's wholesale and
retail customers through a fuel and purchased power adjustment factor (fuel
surcharge). Changes in these costs due to inflation or other market conditions
are passed directly to Chugach's retail and wholesale customers, which results
in either a direct increase or decrease to Chugach's system revenues. The fuel
adjustment factor is currently approved on a quarterly basis by the APUC. There
are no limitations on surcharge rate changes. Increases in Chugach's fuel and
purchased power costs result in increased revenues while decreases in costs
result in lower revenues. Revenue from the fuel adjustment charge normally does
not impact margins.
In 1997, Chugach experienced higher than anticipated fuel and purchased power
costs that were considered unusual and transitory in nature. In an effort to
maintain overall price stability, Chugach requested and was granted a waiver by
the APUC to leave fuel surcharge rates at the computed second quarter 1997 level
through the fourth quarter 1997. Routine quarterly adjustments resumed January
1, 1998 and undercollected fuel and purchased power costs over this period were
recovered throughout 1998.
At the urging of one of Chugach's wholesale customers, in Order No. 18 of Docket
U-96- 37, the APUC ordered retroactive refunds in the approximate amount of $1.2
million for fuel surcharge rates charged in 1995 - 1997. The order is in
connection with Chugach's fuel and purchased power cost adjustment factors, that
are adjusted on a quarterly basis. It is Chugach's position that retroactive
refunds of quarterly surcharge revenues violate the rules against retroactive
ratemaking and constitutional due process protections. Chugach
25
has appealed this decision to the Superior Court for the State of Alaska.
Chugach's request for stay of the Commission refund order has been granted. It
is not possible at this time to determine the outcome of this appeal.
Simplified Rate Filing
Since 1989 operating and maintenance costs and other nonfuel and purchased power
costs have been recouped through a Simplified Rate Filing (SRF) process that
enabled Chugach to raise its electric prices up to 8% over a cumulative
twelve-month period or up to 20% over a cumulative thirty-six month period,
subject to APUC approval.
In August 1996, the Board of Directors approved a petition to the APUC to
withdraw from the SRF process. This petition was submitted to the APUC as part
of Docket U-96-37, that was opened to resolve rate disputes with Chugach's
wholesale customers. Interim- refundable rates for wholesale customers were
ordered pending resolution of the docket. In February 1997, the APUC approved a
Settlement Agreement between Chugach and AEG&T/MEA/Homer that resolved issues in
the docket and established permanent rates. As part of the APUC Order, the
Association was required to file Cost of Service and Revenue Requirement
Studies. These studies were filed in March 1997.
The APUC approved Chugach's petition to withdraw from the SRF process in July
1998. Future demand and energy rate changes will now be sought through general
rate case and other normal APUC procedures. While the formal ratemaking process
typically takes nine months to one year, it is within the APUC's authority to
authorize, after a notice period, rate changes on an interim-refundable basis.
In addition, the APUC has been willing to open limited dockets to resolve
specific issues from which expeditious decisions can often be generated.
Chugach's annual base rate changes (excluding fuel adjustments) for retail and
wholesale classes for the years 1996 through 1998 were as follows:
1998 1997 1996
Retail 0.00% 0.00% 0.00%
Wholesale:
Homer 0.00% 0.00% 5.32%
MEA (0.20%) (0.80%) 2.46%
Seward (15.00%) 0.00% 2.46%
26
Expenses
Chugach's operating expenses for the years ended December 31, 1998, 1997 and
1996 were as follows:
Year Operating expenses
1998 $110,737,441
1997 $113,070,990
1996 100,913,804
Operating expenses for 1998 were 2.1% lower than 1997. Operating expenses for
1997 were 12.0% higher than 1996. The reasons for the significant operating
expense variances follow:
Year ended December 31, 1998 compared to the year ended December 31, 1997
Production expense decreased in 1998 from 1997. There was a substantial decrease
in the consumption of fuel at Beluga due to a 13.0% reduction in output from
1997 to 1998. This was a result of significantly reduced economy energy sales.
This decrease was offset slightly by increased fuel costs for Bernice Lake due
to decreased power purchases from Soldotna Unit #1. In 1998, it proved to be
more economical to run our own units at Bernice Lake to increase reliability on
the Kenai Peninsula, rather than purchase power from Soldotna Unit #1, as was
done in 1997.
Purchased power expense decreased 40% in 1998 from 1997 due primarily to the
previously mentioned decreased purchases from Soldotna Unit #1. In addition,
there were unusual purchases made from AML&P in 1997 while maintenance was being
performed on the transmission lines between Beluga and Anchorage. This was done
to promote the system stability and avoid possible outages.
Transmission expense decreased in 1998 from 1997 due to the unanticipated cost
of clearing the right-of-way from Quartz Creek substation to the Soldotna and
Bernice Lake substations in 1997.
In preparation for competition and with the addition of new business ventures at
Chugach, Sales Expense as a financial category was added in 1998. At December
31, 1998, $1,125,410 had been charged to Sales Expense for advertising and
marketing of Chugach services.
Administrative and General expense increased from 1997 to 1998. This was caused
by an update in the amount of common information services costs allocated to
this category.
27
Year ended December 31, 1997 compared to the year ended December 31, 1996
Production expense increased in 1997 over 1996. Higher fuel prices and higher
fuel consumption (due to the increase in kWh sales) were the major causes of
this increase. As previously reported, Chugach has completed the transition to
Period 2 under the long-term fuel supply contracts and fuel costs now result
from market-based prices (See Fuel Supply in Item 1).
Purchased power expense increased in 1997 over 1996. This was substantially due
to the system operating scenario throughout 1997 wherein Chugach purchased power
from AEG&T's Soldotna 1 plant to ensure system reliability on the Kenai
Peninsula.
Consumer accounts expense decreased in 1997 from 1996. The majority of this
decrease was due to a lower level of common information services costs being
allocated to this function.
Other interest expense decreased in 1997 from 1996. This was caused by a lower
average outstanding balance on the short-term lines of credit throughout the
year.
Margins
Chugach's assignable margins for the years ended December 31, 1998, 1997 and
1996 were as follows:
Period Net operating margins Nonoperating margins Assignable margins
1998 $ 6,619,263 $ 2,111,141 $ 8,730,404
1997 $ 5,792,379 $ 1,762,018 $ 7,554,397
1996 $ 8,613,814 $ 1,217,557 $ 9,831,371
Nonoperating margins increased in 1998 over 1997. This increase was caused
mostly by an increase in patronage capital allocation from CoBank in 1998 versus
1997.
Nonoperating margins increased in 1997 over 1996. This increase was caused by a
gain recorded on the sale of a generator hot gas case that had been held in
inventory.
28
Patronage Capital (Equity)
Chugach's patronage capital and total equity have shown steady growth, both in
dollars and as a percentage of capitalization. The following table summarizes
Chugach's patronage capital and total equity position since 1996:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
Patronage capital at beginning of year . $ 104,800,092 $ 100,685,517 $ 95,421,358
Retirement of capital credits and estate
payments ............................ (3,907,500) (3,439,822) (4,567,212)
Assignable margins ..................... 8,730,404 7,554,397 9,831,371
Patronage capital at end of year ....... 109,622,996 104,800,092 100,685,517
Other equity ........................... 4,400,300 4,319,605 3,792,425
Total equity ........... $ 114,023,296 $ 109,119,697 $ 104,477,942
</TABLE>
The Indenture includes a covenant restricting the distribution of patronage
capital to members. Chugach cannot distribute patronage capital to members if 1)
an event of default exists or 2) the aggregate amount of patronage capital
distribution exceeds the sum of $7,000,000 plus 35 percent of the aggregate
assignable margins earned after December 31, 1990.
Times Interest Earned Ratio (TIER)
Alaska electric cooperatives generally set rates on the basis of TIER. TIER is
determined by dividing the sum of assignable margins plus long-term interest
expense (excluding capitalized interest) by long-term interest expense.
Beginning in 1989, Chugach's Board of Directors approved an Equity Management
Plan that established a schedule for building Chugach's equity. Since then
Chugach has managed its business with a view toward achieving a TIER of 1.25 or
greater. Chugach's achieved TIERs for the past five years were as follows:
Period TIER
1998 1.35
1997 1.30
1996 1.39
1995 1.34
1994 1.58
The Indenture requires Chugach to establish rates reasonably expected to yield
margins for interest (MFI) equal to at least 1.20 times total interest expense
(I), where margins for interest are defined as net margins plus interest charges
and accruals for federal income and other taxes imposed on income after
deduction of interest charges for such period, provided that the amount of
nonoperating margins included in assignable margins shall not exceed 50% of
29
assignable margins. Chugach's achieved MFI/I for the past five years are not
materially different from the TIER calculations shown above.
The Indenture requires that Chugach achieve such a 1.20 ratio for any 12
consecutive month period of the last 18 months before issuing additional Bonds
(other than additional Bonds issued based on deposited cash and, under certain
circumstances, retirement of Bonds).
MATERIAL CHANGES IN FINANCIAL CONDITION
Chugach maintained a stable asset base from 1997 to 1998. Notable changes among
the components include: a decrease in cash (and cash equivalents) due to the
paydown of the outstanding balance on the CoBank line of credit; an increase in
Construction Work in Progress (CWP) due to increased construction activity and a
decrease in accounts receivable due to the substantial decrease in economy
energy sales to GVEA, as explained previously; and the decrease in the
uncollected reimbursements from the Standard Steel matter.
Notable changes to other liabilities include: a lower balance in other
liabilities due to decreased fuel and purchased power payables caused by
decreased economy energy sales to GVEA; and the decrease in deferred credits
resulting from the annual amortization of the original refinancing gain.
LIQUIDITY AND CAPITAL RESOURCES
Chugach satisfies its operational and capital cash requirements through
internally generated funds, a $50 million line of credit with the NRUCFC and a
$35 million line of credit with CoBank.
At December 31, 1998, no balance was outstanding on the NRUCFC line. The NRUCFC
line of credit expires October 14, 2002. At December 31, 1998, no amount was
outstanding on the CoBank line. The CoBank line of credit expires August 1,
1999, but carries an annual automatic renewal clause.
Chugach's capital improvement requirements are based on long-range plans and
other supporting studies and are executed through a five-year construction work
plan.
Five-year work plans are fully developed and updated every year. Shown below is
an estimate of capital expenditures for the years 1999 through 2002:
1999 $33.9 million
2000 34.1 million
2001 23.7 million
2002 28.2 million
2003 33.7 million
30
Following is a five-year summary of anticipated capital credit retirements:
Year ending Wholesale Retail Total
1999 0 1,766,000 1,766,000
2000 0 1,380,000 1,380,000
2001 0 1,293,000 1,293,000
2002 0 1,307,000 1,307,000
2003 0 1,241,000 1,241,000
Chugach's outstanding long-term obligations at December 31, 1998 are as follows:
First mortgage bonds of 8.08% maturing in
2002 and 9.14% maturing in 2022, with
interest payable semiannually March 15
and September 15:
8.08% $ 23,205,000
9.14% 217,705,000
CoBank 8.95% bond maturing in 2002,
with interest payable monthly and
principal due semi-annually 1,096,501
CoBank 7.76% bond maturing in 2005,
with interest payable monthly 10,000,000
CoBank 5.60% bonds maturing 2022, with
interest payable monthly 45,000,000
CoBank 5.60% bonds maturing in 2002,
2007 and 2012 with interest payable
monthly 15,000,000
Total long-term obligations 312,006,501
Less current installments 6,088,802
Long-term obligations, excluding
current installments $ 305,917,699
31
Maturities of Long-term Obligations
Long-term obligations at December 31, 1998 mature as follows:
Sinking Fund Principal
Year ending Requirements maturities
December 31
Total
First mortgage CoBank
bonds mortgage bonds
1999 5,809,000 279,802 6,088,802
2000 6,067,000 305,405 6,372,405
2001 6,097,000 333,350 6,430,350
2002 5,232,000 5,177,944 10,409,944
2003 5,041,000 865,821 5,906,821
Thereafter 212,664,000 64,134,179 276,798,179
$ 240,910,000 $ 71,096,501 $ 312,006,501
On September 19, 1991, Chugach issued $314 million of First Mortgage Bonds, 1991
Series A, for purposes of repaying existing debt to the FFB and the REA.
Pursuant to Section 311 of the Rural Electrification Act, Chugach was permitted
to prepay the REA debt at a discounted rate of approximately 9%, resulting in a
discount of approximately $45 million. The gain on prepayment was deferred at
December 31, 1991 because Chugach expected to pass the benefit of the gain
through to ratepayers prospectively in the form of lower rates. In April 1992,
Chugach received formal approval from the APUC to defer the gain and amortize it
into income over the life of the bonds. Annual amortization for 1998 and 1997
was $1.7 million and for 1996 was $1.85 million.
Chugach has negotiated a supplemental indenture (Third Supplemental Indenture of
Trust) with CoBank that previously allowed up to $80 million in future bond
financing. In 1997 Chugach finalized an amendment to the Third Supplemental
Indenture of Trust (Seventh Supplemental Indenture of Trust) that eliminates the
maximum aggregate amount of bonds the company may issue under the agreement. At
December 31, 1998, Chugach had bonds in the amount of $71.1 million outstanding
under this financing arrangement. The balance is comprised of a $1.4 million
bond (CoBank 1) that carries an interest rate of 8.95% maturing in 2002, a $10
million bond (CoBank 2) priced at 7.76% due in 2005, a $21.5 million bond
(CoBank 3), priced at 5.60%, a $23.5 million bond (CoBank 4) priced at 5.60% and
a $15 million bond (CoBank 5) priced at 5.60% due in 2002, 2007 and 2012.
Principal payments on the CoBank 3 and 4 bonds commence in 2003 and continue
through 2022. Additionally, Chugach has negotiated a similar supplemental
indenture (Fifth Supplemental Indenture of Trust) with NRUCFC for $80 million.
At December 31, 1998 there were no amounts outstanding under this financing
32
arrangement.
Chugach management expects that cash flows from operations and external funding
sources will be sufficient to cover operational and capital funding requirements
in 1999 and thereafter.
YEAR 2000
Readiness Information
Chugach has recognized the need to investigate, test and remediate if necessary
the critical systems and equipment under its control which could cause power and
business disruptions in conjunction with what are collectively called "Year
2000" (Y2K) dates. Chugach has an active program underway that should be
completed by the summer of 1999.
Chugach expects to fund its Y2K project internally and estimates it will incur
between $9 and $11 million of incremental costs through March 1, 2000,
associated with making the necessary modifications identified to date to
applications and embedded devices. This projection includes contingencies and
replacement systems that may be required. Chugach has incurred costs of
approximately $7.7 million for Y2K projects through December 31, 1998, all of
which has been capitalized.
Chugach's Y2K Project is divided into three primary phases. The first phase is
"inventory and assessment" during which applications (both internally developed
and vendor supplied) and devices (in the generation plants, substations,
telecommunications and facilities) are identified and criticality to the
business is determined. The second phase, "testing and remediation" occurs
during the replacement or remediation of the systems and/or devices. The final
phase is "contingency planning" during which specific backup plans will be
developed for all "mission critical" applications, devices and systems. Chugach
is also participating in the Y2K activities of several organizations including
the North American Electric Reliability Council (NERC), Electric Power Research
Institute (EPRI) and the National Rural Electric Cooperative Association (NRECA)
who are developing a network to verify the risks and costs nationally, in the
State and at Chugach.
Chugach's Y2K readiness program is divided along functional lines (real time and
business systems) and each area is at a different point of completion. System
testing at Chugach's four power plants is underway and will be complete by June
1999. In the transmission and distribution area, inventory and assessment
activities are underway for the Supervisory and Control and Data Acquisition
(SCADA) system, telecommunication, relaying and system protection assets.
Testing and remediation are scheduled to be completed in June, 1999.
Chugach business systems Y2K readiness activities were complete by year-end
1998. General Ledger, Accounts Payable, Payroll, Materials Management Project
Costing and Human Resources subsystems to the Financial Information System were
converted by the end of 1998. Additionally, the Customer Billing System was
updated to be Year 2000 compliant. The total
33
cost of these conversions was $7.7 million. Remaining, non-critical financial
subsystems needing to be converted in 1999 are the Budget Preparation subsystem
and Fixed Assets system. We are also updating our Work Management subsystems.
Finally, all the hardware connected to Chugach's business systems wide area
network have been tested and found to be problem free.
The business systems team is currently developing contingency plans in the event
of any failure. These plans will be ready by August 1999.
The Purchasing Department asked every vendor for a statement regarding their
preparedness. All responses are due by the end of April 1999. If, after review
of the individual vendor's response, it is determined that the vendor will not
be Y2K compliant by year-end, Chugach will determine if it is worthwhile to
continue the relationship with that vendor.
It is Chugach's goal that all Y2K readiness projects be complete by the summer
of 1999 and no Chugach customers lose power for an extended time due to a Y2K
problem. Based on the progress to date, Chugach believes the goals will be
achieved.
Since contingency planning is in progress, the reasonably worst case scenario
has not been determined at this time. Although contingency planning is by its
nature speculative, the Y2K contingency plan will reduce the risk of material
impacts on Chugach's operations due to Y2K problems.
ENVIRONMENTAL MATTERS
Compliance with Environmental Standards
Chugach's operations are subject to certain Federal, State and local
environmental laws which Chugach monitors to ensure compliance. The costs
associated with environmental compliance are included as a component of both the
operating and capital budget processes. Chugach accrues for costs associated
with environmental remediation obligations when such costs are probable and
reasonably estimable.
Standard Steel Salvage Yard Site
The full investigation and cleanup (remedial action) of the Site was
substantially completed as of September 30, 1998. A relatively minor amount of
additional Site work and additional reporting will be performed in 1999 to
complete the remedial action. Although the costs of the 1999 work as well as the
total oversight costs of EPA and other federal agencies are not yet known,
Chugach has pre-funded these costs and, based on estimates for 1999, it is not
anticipated that Chugach will be required to make any further payments relating
to the remedial action at the Site.
Four of Chugach's insurance carriers have been paying, under a reservation of
rights,
34
Chugach's costs of defense for the Site. By agreement dated May 15, 1998, these
four insurance carriers agreed to pay the majority of Chugach's costs relating
to the Site, including investigation and remedial action costs, EPA oversight
costs and attorneys' fees. This settlement preserves Chugach's potential claim
for natural resource damages and is anticipated to result in Chugach paying no
more than $500,000 for all Site costs. Management believes that the latter
amount would be fully recoverable in rates and therefore would have no impact on
Chugach's financial condition or results of operations.
OUTLOOK
Nationwide, the electric utility industry is entering a period of unprecedented
competition. Electric utilities in Alaska will not be immune from these
competitive forces. Chugach has taken several steps to be more effectively
positioned to meet the challenge of a competitive market for electricity.
Chugach participates in national benchmarking projects to improve system
operations. The most recent studies have focused on mailroom operations,
remittance processing, new service connections, system reliability and power
production. As a result of these studies, Chugach has been able to make these
processes more efficient which has led to lower costs. The Association is
committed to continue reviewing all areas of its operations and to serve its
customers in a way that maintains high reliability while containing the cost of
electricity.
In addition to participation in benchmarking studies, Chugach has also
implemented strategic alliances in the purchasing and warehousing areas. These
alliances are designed to improve efficiency and thus, contribute to lower
operating costs. In 1997, Chugach was able to lower inventory unit costs,
increase inventory turns and decrease project cost by furnishing materials to
contractors as a direct result of these strategic alliances. Chugach will
continue to explore other areas for strategic alliance opportunities.
During 1998, Chugach updated its new strategic plan. In this plan, priority
issues are identified that are critical to the company's success. Updated key
result area targets were developed that track the most important measures of
Chugach's performance.
Chugach has been active at the State Legislature in support of the customer's
right to choose their electric power supplier. Virtually all Alaskan utilities
have opposed Chugach's efforts to develop competition and are attempting to
create exclusive service territories. At this time no bill relating to customer
choice has moved out of legislative committee. Thus, it is not possible to
predict the outcome of this legislative process.
In 1997 Chugach made organizational changes in preparation for competition.
Recognizing that the new marketplace will probably be "unbundled" along the
functional lines of generation, transmission and distribution, and retail
services, Chugach's organizational structure reflects these functions. Operating
with three divisions: Finance and Energy Supply, Transmission and Distribution
Network Services and Retail Services, Chugach has positioned itself to meet
35
competition in the electric industry. Chugach's Marketing Department continues
to operate a key account program for larger customers and is developing new
services to enhance existing customer's satisfaction.
Chugach commenced operation as an internet service provider (ISP) in February
1999. Also in 1999, Chugach began selling spare microwave bandwidth to
industrial customers.
Chugach has three collective bargaining agreements with the IBEW that are
currently open for negotiation. Although each of the contracts had an expiration
date of January 31, 1998, the parties have agreed that the contracts shall
continue in effect until new contracts are put in place. If the parties cannot
agree on the terms of new agreements, all outstanding issues will be decided
through interest arbitration. The Union cannot strike and Chugach cannot lockout
under the continuing agreement.
Item 7A - Quantitative and Qualitative Disclosures
About Market Risk
Chugach is exposed to a variety of risks, including changes in interest rates
and changes in commodity prices due to repricing mechanisms inherent in gas
supply contracts as described on page 12 under the heading "Marathon". In the
normal course of its business, Chugach manages its exposure to these risks as
described below. Chugach does not engage in trading market risk sensitive
instruments for speculative purposes, nor are any derivative instruments
outstanding at December 31, 1998.
Interest rate risk - As of December 31, 1998, Chugach's outstanding borrowings
were at fixed interest rates. The following table provides information regarding
cash flows and related weighted average interest rates by expected maturity
dates for Chugach's debt obligations (dollars in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
Long-term debt,
including current portion $6,089 $6,372 $6,430 $10,410 $5,907 $276,798 $312,006 $349,353
</TABLE>
Commodity price risk - As described on page 12 under the heading "Marathon",
Chugach's gas contracts provide for adjustments to gas prices based on
fluctuations of certain commodity prices and indices. As described on page 24
under the heading "Fuel Surcharge", purchased power costs are passed directly to
Chugach's wholesale and retail customers through a fuel surcharge, therefore,
fluctuations in the price paid for gas pursuant to long-term gas supply
contracts does not normally impact margins. The fuel surcharge mechanism
mitigates the commodity price risk related to market fluctuations in the price
of purchased power.
36
Item 8 - Financial Statements and Supplementary Data
December 31, 1998 and 1997
Independent Auditors' Report
The Board of Directors
Chugach Electric Association, Inc.:
We have audited the accompanying balance sheets of Chugach Electric Association,
Inc. as of December 31, 1998 and 1997, and the related statements of revenues,
expenses and patronage capital and cash flows for each of the years in the
three-year period ended December 31, 1998. These financial statements are the
responsibility of the Association's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chugach Electric Association,
Inc. as of December 31, 1998 and 1997, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1998, in conformity with generally accepted accounting principles.
Anchorage, Alaska /s/ KPMG LLP
February 26, 1999
37
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<S> <C> <C>
Assets 1998 1997
------------ ------------
Utility plant (notes 2, 13 and 14):
Electric plant in service ............... $620,216,818 $625,365,803
Construction work in progress ........... 30,405,736 24,664,395
------------ ------------
650,622,554 650,030,198
Less accumulated depreciation ........... 233,981,397 232,136,950
------------ -----------
Net utility plant ..... 416,641,157 417,893,248
------------ -----------
Other property and investments, at cost:
Nonutility property ..................... 3,550 3,550
Investments in associated organizations
(note 3) ............................. 8,356,364 7,864,271
------------ -----------
8,359,914 7,867,821
------------ -----------
Current assets:
Cash and cash equivalents, including
repurchase agreements of $4,153,475 in
1998 and $6,351,291 in 1997 .......... 2,312,574 5,224,529
Cash - restricted construction funds .... 177,366 364,778
Special deposits ........................ 121,164 151,703
Accounts receivable, less provision for
doubtful accounts of $447,908 in 1998
and $368,029 in 1997 ................. 17,243,266 23,999,138
Materials and supplies .................. 15,963,434 15,619,085
Prepayments ............................. 917,381 558,371
Other current assets .................... 349,030 305,415
------------ ------------
Total current assets .... 37,084,215 46,223,019
------------ ------------
Deferred charges (notes 9 and 15) ............ 19,006,164 13,583,211
------------ ------------
$481,091,450 $485,567,299
------------ ------------
</TABLE>
See accompanying notes to financial statements.
38
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets, Continued
December 31, 1998 and 1997
<TABLE>
<S> <C> <C>
Liabilities 1998 1997
------------ -------------
Equities and margins (note 11):
Memberships .............................. $ 911,253 $ 861,543
Patronage capital (note 4) ............... 109,622,996 104,800,092
Other (note 5) ........................... 3,489,047 3,458,062
------------ -------------
114,023,296 109,119,697
------------ -------------
Long-term obligations, excluding current
installments (notes 6, 7 and 11):
First mortgage bonds payable ............. 235,101,000 240,910,000
National Bank for Cooperatives bonds
payable ................................. 70,816,699 71,096,501
------------ ------------
305,917,699 312,006,501
------------ ------------
Current liabilities:
Current installments of long-term debt and
capital leases (notes 6, 7 and 11) .... 6,088,802 5,913,512
Accounts payable ......................... 8,838,757 7,038,234
Consumer deposits ........................ 993,616 1,038,241
Accrued interest ......................... 6,722,325 6,904,335
Salaries, wages and benefits ............. 3,755,837 3,655,101
Fuel ..................................... 5,362,713 6,611,415
Other (note 15) .......................... 1,318,947 3,300,310
------------- ------------
Total current liabilities . 33,080,997 34,461,148
------------- ------------
Deferred credits (note 12) .................... 28,069,458 29,979,953
------------- ------------
$481,091,450 $485,567,299
------------- ------------
</TABLE>
See accompanying notes to financial statements.
39
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
Operating revenues ................... $ 141,825,373 $ 143,947,730 $ 134,876,668
------------- ------------- -------------
Operating expenses:
Production ...................... 45,261,450 45,879,337 37,066,444
Purchased power ................. 8,462,835 14,033,282 10,024,483
Transmission .................... 2,771,652 3,378,540 3,667,039
Distribution .................... 8,876,890 8,640,443 8,789,683
Consumer accounts ............... 4,177,980 4,955,838 6,978,856
Sales expense ................... 1,125,410 -- --
Administrative, general and other 17,592,829 15,071,966 13,713,690
Depreciation .................... 22,468,395 21,111,584 20,673,609
------------- ------------- -------------
Total operating expenses 110,737,441 113,070,990 100,913,804
------------- ------------- -------------
Interest:
On long-term debt ............... 25,159,660 24,942,281 25,029,257
Charged to construction - credit (821,137) (629,764) (616,090)
On short-term debt .............. 130,146 771,844 935,883
------------- ------------- -------------
Net interest ............ 24,468,669 25,084,361 25,349,050
------------- ------------- -------------
Net operating margins ... 6,619,263 5,792,379 8,613,814
Nonoperating margins:
Interest income ................. 711,155 632,191 695,699
Other ........................... 1,050,899 520,414 566,908
Property gain (loss) ............ 349,087 609,413 (45,050)
------------- ------------- -------------
Assignable margins ....... 8,730,404 7,554,397 9,831,371
Patronage capital at beginning of year 104,800,092 100,685,517 95,421,358
Retirement of capital credits and
estate payments (note 4) .......... (3,907,500) (3,439,822) (4,567,212)
------------- -------------- -------------
Patronage capital at end of year ..... $ 109,622,996 $ 104,800,092 $ 100,685,517
------------- -------------- -------------
</TABLE>
See accompanying notes to financial statements.
40
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Assignable margins ..................................... $ 8,730,404 $ 7,554,397 $ 9,831,371
------------ ------------ ------------
Adjustments to reconcile assignable margins to
net cash provided by operating activities:
Depreciation and amortization .......................... 24,605,760 23,532,263 23,221,162
Capitalized interest ................................... (1,081,394) (799,999) (809,302)
Property (gains) losses and obsolete inventory write-off (349,087) (609,413) 45,050
Other .................................................. 60,734 (241,317) (265,643)
Changes in assets and liabilities:
(Increase) decrease in assets:
Special deposits .................................. 30,540 (62,471) 8,557
Accounts receivable ............................... 6,755,872 (8,629,254) 1,738,940
Prepayments ....................................... (359,010) 135,886 (19,140)
Materials and supplies, net ....................... (344,349) 568,507 2,311,191
Deferred charges .................................. (7,898,240) (2,299,547) (4,581,795)
Other ............................................. (43,615) (11,035) 117,829
Increase (decrease) in liabilities:
Accounts payable .................................. 1,800,524 1,860,074 (1,481,316)
Accrued interest .................................. (182,010) (172,052) (976,398)
Deferred credits .................................. (1,829,112) (755,366) (8,023,874)
Consumer deposits, net ............................ (44,625) (28,665) (52,150)
Other ............................................. (3,129,329) (1,076,365) 5,956,463
------------- ------------- ------------
Total adjustments ............................ 17,992,659 11,411,246 17,189,574
------------- ------------- ------------
Net cash provided by operating
activities ................................. 26,723,063 18,965,643 27,020,945
------------- ------------- ------------
Cash flows from investing activities:
Extension and replacement of plant ..................... (19,447,902) (17,487,859) (20,605,093)
(Increase) decrease in investments in associated
organizations .......................................... (552,827) 24,235 132,261
------------- ------------- ------------
Net cash (used) in investing activities ...... (20,000,729) (17,463,624) (20,472,832)
------------- ------------- ------------
Cash flows from financing activities:
Transfer of restricted construction funds .............. 187,412 1,006,608 (1,371,386)
Net decrease in notes payable .......................... -- (2,750,000) (5,250,000)
Proceeds from long-term debt ........................... -- 15,000,000 45,000,000
Repayments of long-term debt ........................... (5,913,512) (10,957,586) (42,429,853)
Memberships and donations received (refunded) .......... 80,695 527,179 (16,768)
Retirement of patronage capital ........................ (3,907,500) (3,439,822) (4,567,212)
Increase in (refunds) and transfers of consumer advances
for construction ..................................... (81,384) (1,083,688) 1,627,442
-------------- ------------- --------------
Net cash used by financing
activities ................................ (9,634,289) (1,697,309) (7,007,777)
-------------- ------------- --------------
Net decrease in cash and cash
equivalents ............................... (2,911,955) (195,290) (459,664)
Cash and cash equivalents at beginning of year .............. 5,224,529 5,419,819 5,879,483
-------------- ------------- --------------
Cash and cash equivalents at end of year .................... $ 2,312,574 $ 5,224,529 $ 5,419,819
-------------- ------------- --------------
Supplemental disclosure of cash flow information - $ 24,650,680 $ 25,256,413 $ 26,325,449
interest expense paid, net of amounts capitalized -------------- ------------- --------------
</TABLE>
See accompanying notes to financial statements.
41
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
December 31, 1998 and 1997
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
Chugach Electric Association, Inc. (Association or Chugach) is the largest
electric utility in Alaska. The Association is engaged in the generation,
transmission and distribution of electricity to directly served retail customers
in the Anchorage and upper Kenai Peninsula areas. Through an interconnected
regional electrical system, Chugach's power flows throughout Alaska's Railbelt,
a 400-mile-long area stretching from the coastline of the southern Kenai
Peninsula to the interior of the state, including Alaska's largest cities,
Anchorage and Fairbanks.
Chugach also supplies much of the power requirements of three wholesale
customers, Matanuska Electric Association (MEA), Homer Electric Association
(Homer) and the City of Seward (Seward).
The Association operates on a not-for-profit basis and, accordingly, seeks only
to generate revenues sufficient to pay operating and maintenance costs, the cost
of purchased power, capital expenditures, depreciation, and principal and
interest on all indebtedness and to provide for reasonable margins and reserves.
The Association is subject to the regulatory authority of the Alaska Public
Utilities Commission (APUC).
Management Estimates
In preparing the financial statements, management of the Association is required
to make estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities as of the
date of the balance sheet and revenues and expenses for the reporting period.
Actual results could differ from those estimates.
Regulation
The accounting records of the Association conform to the Uniform System of
Accounts as prescribed by the Federal Energy Regulatory Commission. The
Association meets the criteria, and accordingly, follows the accounting and
reporting requirements of Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS 71). Revenues in
excess of current period costs (net operating margins and nonoperating margins)
in any year are designated on the Association's statement of revenues and
expenses as assignable margins. Retained assignable margins are designated on
the Association's balance sheet as patronage capital, which is assigned to each
member on the basis of patronage. This patronage capital constitutes the
principal equity of the Association.
42
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
In July 1997, the Financial Accounting Standards Board (FASB) Emerging Issues
Task Force (EITF) reached a consensus on EITF 97-4 "Deregulation of the Pricing
of Electricity - Issues Related to the Application of FASB Statements No. 71 and
No. 101." This issue discusses when an enterprise should stop applying SFAS 71
to the separable portion of its business whose product or service pricing is
being deregulated and how a company should account for its stranded costs after
it has discontinued the application of SFAS 71. It also provides guidance with
respect to the evaluation of regulatory assets and liabilities and concluded
that these items should be determined on the basis of where in the business the
regulated cash flows to realize and settle them will be derived. The
Association's current method of accounting is consistent with the EITF.
The Association performs an annual evaluation of the requirements of SFAS 71 and
related exposures.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997 financial
statements to conform to the 1998 presentation.
Plant Additions and Retirements
Additions to electric plant in service are recorded at original cost of
contracted services, direct labor and materials, and indirect overhead charges.
For property replaced or retired, the average unit cost of the property unit,
plus removal cost, less salvage, is charged to accumulated provision for
depreciation. The cost of replacement is added to electric plant.
Operating Revenues
Operating revenues are based on billing rates authorized by the APUC which are
applied to customers' usage of electricity. Included in operating revenue are
billings rendered to customers adjusted for differences in meter read dates from
year to year. The Association's tariffs include provisions for the flow through
of gas cost increases pursuant to existing gas supply contracts.
In 1997, Chugach experienced higher than anticipated fuel and purchased power
costs that were considered unusual and transitory in nature. In an effort to
maintain overall price stability, Chugach requested and was granted a waiver by
the APUC to leave fuel surcharge rates at the computed second quarter 1997 level
through the fourth quarter 1997. Further, Chugach elected to forego collection
of approximately $3,500,000 of fuel
43
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
and purchased power costs (representing cumulative uncollected fuel surcharge
through May 1997). Routine quarterly adjustments were resumed and fuel surcharge
rates increased effective January 1998. Undercollected fuel and purchased power
costs were recovered throughout 1998 under a plan approved by the APUC.
In August 1996, the Board of Directors approved a petition to the APUC to
withdraw from the Simplified Rate Filing (SRF) process. This petition was
submitted to the APUC as part of Docket U-96-37, which was opened to resolve
rate disputes with two of Chugach's wholesale customers (AEG&T/MEA/Homer).
Interim-refundable rates for AEG&T/MEA/Homer were ordered pending resolution of
the docket. In February 1997, the APUC approved a Settlement Agreement between
Chugach and AEG&T/MEA/Homer resolving issues in the docket and establishing
permanent rates. As part of the APUC order, the Association was required to file
Cost of Service and Revenue Requirement Studies. These studies were filed in
March 1997. The APUC approved Chugach's withdrawal from SRF in July 1998. Rate
changes will be applied for through general rate case and other normal APUC
procedures. At December 31, 1998, Docket U-96-37 had not been closed. A
provision for a wholesale rate refund of $1,983,845 to AEG&T/MEA/Homer was
recorded at December 31, 1998 to accommodate certain rate adjustment clauses
contained in the Settlement Agreement.
In 1998 a new power sales agreement was negotiated between Chugach and Seward.
The new contract was filed with the APUC and approved on an interim-refundable
basis by an order dated October 12, 1998. The APUC specifically postponed a
decision on whether to allow the reduced rates under the contract to be
effective as of March 1, 1998 as the parties had agreed in the contract. At
December 31, 1998 a provision for the potential rate refund of $198,180 to
Seward was recorded to allow for this possible refund obligation.
In October 1998 Marathon Oil Company, one of Chugach's natural gas suppliers,
notified Chugach that it had reached a settlement with the State of Alaska
regarding additional excise and royalty taxes for the period 1989 through 1998.
In accordance with the purchase contract, Chugach would be responsible for these
additional taxes. At December 31, 1998, $834,058 was recorded to accommodate
this reimbursement. Chugach intends to recover this over 12 months through the
Fuel Surcharge mechanism in 1999 except for the retail portion in the amount of
$436,778 that was written-off at December 31, 1998.
Investments in Associated Organizations
Investments in associated organizations represent capital requirements as part
of financing arrangements.
44
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
The Association has the intent and ability to hold these investments to
maturity, and accordingly has elected to account for them at cost under SFAS
115.
Deferred Charges and Credits
Deferred charges, representing regulatory assets, are amortized to operating
expense over the period allowed for rate-making purposes, generally five years.
Nonrefundable contributions in aid of construction are credited to the
associated cost of construction of property units. Refundable contributions in
aid of construction are held in deferred credits pending their return or other
disposition.
Depreciation and Amortization
Depreciation and amortization rates have been applied on a straight-line basis
and at December 31, 1998 are as follows:
Rate (%)
Steam production plant 2.70 - 2.96
Hydraulic production plant 1.33 - 2.88
Other production plant 3.34 - 6.50
Transmission plant 1.85 - 5.37
Distribution plant 2.10 - 4.55
General plant 2.22 - 20.00
Other 1.88 - 2.75
In 1997 an update of the Depreciation Study was completed utilizing Electric
Plant in Service balances as of December 31, 1995. Depreciation rates developed
in that Study were implemented in January, 1998. As part of the implementation
of this Study, Chugach converted from depreciating to amortizing general plant,
excluding buildings and vehicles. Under this methodology, general plant is
capitalized in the same manner, however, retirements are recorded when a vintage
is fully amortized rather than as the units are removed from service. No
phase-in of rates is required by the APUC.
45
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
Implementation of the new depreciation rates and amortization of general plant
in 1998 caused depreciation expense to be $1,154,084 less as calculated on the
1998 plant balances than it would have been if the new rates had not been
implemented.
Capitalized Interest
Allowance for funds used during construction and interest charged to
construction - credit are the estimated costs during the period of construction
of equity and borrowed funds used for construction purposes. The Association
capitalized such funds at the average rate (adjusted monthly) of 8.3% during
1998 and 1997 and 8.6% during 1996.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Association considers all
highly liquid debt instruments with a maturity of three months or less upon
acquisition by the Association (excluding restricted cash and investments) to be
cash equivalents.
Materials and Supplies
Materials and supplies are stated at the lower of cost or market and valued at
average cost.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards 107, Disclosures About the Fair
Value of Financial Instruments, requires disclosure of the fair value of certain
on and off balance sheet financial instruments for which it is practicable to
estimate that value. The following methods are used to estimate the fair value
of financial instruments:
Cash and cash equivalents and restricted cash - the carrying amount approximates
fair value because of the short maturity of those instruments.
Investments in associated organizations - the carrying amount approximates fair
value because of limited marketability and current market interest rates which
approximate interest rates on the investments.
Consumer deposits - the carrying amount approximates fair value because of the
short refunding term.
Long-term obligations - the fair value is estimated based on the quoted market
price for same or similar issues (note 7).
46
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
Environmental Remediation Costs
The Association accrues for losses associated with environmental remediation
obligations when such losses are probable and reasonably estimable. Such
accruals are adjusted as further information develops or circumstances change.
Estimates of future costs for environmental remediation obligations are not
discounted to their present value.
2) Utility Plant Summary
Major classes of electric plant as of December 31 are as follows:
<TABLE>
<S> <C> <C>
1998 1997
------------ ------------
Electric plant in service:
Steam production plant ................ $ 60,392,869 $ 60,392,869
Hydraulic production plant ............ 8,798,695 8,798,695
Other production plant ................ 109,153,064 108,067,665
Transmission plant .................... 191,960,788 191,960,788
Distribution plant .................... 156,976,983 151,076,058
General plant ......................... 44,782,572 62,575,576
Unclassified electric plant in service 41,598,712 35,941,017
Equipment under capital lease ......... 56,323 56,323
Other ................................. 6,496,812 6,496,812
------------ ------------
Total electric plant in service ... 620,216,818 625,365,803
Construction work in progress ............ 30,405,736 24,664,395
------------ ------------
Total electric plant in service and
construction work in progress ... $650,622,554 $650,030,198
------------ ------------
</TABLE>
Depreciation of unclassified electric plant in service has been included in
functional plant depreciation accounts in accordance with the anticipated
eventual classification of the plant investment.
47
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
(3) Investments in Associated Organizations
Investments in associated organizations include the following at December 31:
1998 1997
----------- -----------
National Rural Utilities Cooperative Finance
Corporation (NRUCFC) $ 6,095,980 $ 6,095,980
National Bank for Cooperatives (CoBank) 2,117,924 1,565,097
NRUCFC capital term certificates 32,300 32,300
Other 110,160 170,894
----------- -----------
$ 8,356,364 $ 7,864,271
----------- -----------
The Farm Credit Administration, CoBank's federal regulators, requires minimum
capital adequacy standards for all Farm Credit System institutions. CoBank's
loan agreements require, as a condition of the extension of credit, that an
equity ownership position be established by all borrowers. The Association's
investment in NRUCFC similarly was required by its financing arrangements with
NRUCFC. The investments in NRUCFC and CoBank mature at various dates through
2020 and bear interest at rates ranging from 3% to 5%.
(4) Patronage Capital
The Association has approved an Equity Management Plan which established in
general, a ten-year (for wholesale customers) and twenty-year (for retail
customers) capital credit retirement of patronage capital, based on the members'
proportionate contribution to Association assignable margins. At December 31,
1998, out of the total of $109,622,996 patronage capital, the Association had
assigned $100,892,591 of such patronage capital (net of capital credit
retirements). Approval of actual capital credit retirements is at the discretion
of the Association's Board of Directors. In November 1996, the Board of
Directors approved the retirement of $1,868,785 of retail capital credits
representing 50 percent of the 1983 retail patronage. In December 1996, the
Board of Directors authorized the retirement of $2,135,078 of wholesale capital
credits from 1986 resulting in an authorized 1996 distribution of $4,003,863. A
special return of wholesale capital credits in the amount of $392,136 was
authorized by the Board of Directors under the terms of APUC Docket U-92-10. In
December 1997, the Board of Directors authorized the retirement of $1,859,730 of
retail capital credits representing the remaining 1983 patronage capital. The
Board of Directors also authorized the retirement of 1987
48
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
wholesale capital credits in the amount of $1,205,510 in December 1997. A
special wholesale capital credit retirement of $88,818, representing wholesale
margins from 1985, was authorized in December 1997.
In December 1998 the Board of Directors authorized the retirement of $2,208,997
of retail capital credits representing the balance of 1984 retail distribution
patronage. The Board also authorized the retirement of $1,533,287 of wholesale
patronage for 1988.
Following is a five-year summary of anticipated capital credit retirements:
Year ending Wholesale Retail Total
1999 - 1,766,000 1,766,000
2000 - 1,380,000 1,380,000
2001 - 1,293,000 1,293,000
2002 - 1,307,000 1,307,000
2003 - 1,241,000 1,241,000
(5) Other Equities
A summary of other equities at December 31 follows:
1998 1997
------------ -------------
Nonoperating margins, prior to 1967 $ 23,625 $ 23,625
Donated capital 184,581 186,199
Unredeemed capital credit retirement 3,280,841 3,248,238
------------ -------------
$ 3,489,047 $ 3,458,062
------------ -------------
49
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
(6) Long-term Obligations
Long-term obligations at December 31 are as follows:
<TABLE>
<S> <C> <C>
1998 1997
------------ ------------
First mortgage bonds of 8.08% maturing in
2002 and 9.14% maturing in 2022 with
interest payable semiannually March 15
and September 15:
8.08% $ 23,205,000 $ 28,848,000
9.14% 217,705,000 217,705,000
CoBank 8.95% bond maturing in 2002,
with interest payable monthly and
principal due semi-annually ........... 1,096,501 1,352,847
CoBank 7.76% bond maturing in 2005,
with interest payable monthly ......... 10,000,000 10,000,000
CoBank 5.60% bonds maturing 2022, with
interest payable monthly .............. 45,000,000 45,000,000
CoBank 5.60% bonds maturing in 2002,
2007 and 2012 with interest payable
monthly ............................... 15,000,000 15,000,000
Capital lease for computer equipment at
an interest rate of 9.10% with monthly
payments of approximately
$1,700 through July 1998 .............. -- 14,166
------------ ------------
Total long-term obligations ....... 312,006,501 317,920,013
Less current installments ............... 6,088,802 5,913,512
------------ ------------
Long-term obligations, excluding
current installments ............ $305,917,699 $312,006,501
------------ ------------
</TABLE>
Substantially all assets are pledged as collateral for the long-term
obligations.
50
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
Maturities of Long-term Obligations
Long-term obligations at December 31, 1998 mature as follows:
Sinking Fund Principal
Year ending Requirements maturities
December 31
Total
First mortgage CoBank
bonds mortgage bonds
1999 5,809,000 279,802 6,088,802
2000 6,067,000 305,405 6,372,405
2001 6,097,000 333,350 6,430,350
2002 5,232,000 5,177,944 10,409,944
2003 5,041,000 865,821 5,906,821
Thereafter 212,664,000 64,134,179 276,798,179
------------- ------------ -------------
$ 240,910,000 $ 71,096,501 $ 312,006,501
------------- ------------ -------------
Lines of Credit
The Association had an annual line of credit of $35,000,000 in 1998 and 1997
available with CoBank. The CoBank line of credit expires August 1, 1999 but
carries an annual automatic renewal clause. At December 31, 1998 and 1997, there
was no outstanding balance on this line of credit. In addition, the Association
had an annual line of credit of $50,000,000 available at December 31, 1998 and
1997 with NRUCFC. At December 31, 1998 and 1997 there was no outstanding balance
on this line of credit. The NRUCFC line of credit expires October 14, 2002.
Refinancing
On September 19, 1991, Chugach issued $314,000,000 of First Mortgage Bonds, 1991
Series A (Bonds), for purposes of repaying existing debt to the Federal
Financing Bank and the Rural Electrification Administration (now Rural Utilities
Services). Pursuant to Section 311 of the Rural Electrification Act, Chugach was
permitted to prepay the REA debt at a discounted rate of approximately 9%,
resulting in a discount of approximately $45,000,000 (note 12).
51
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
The bonds maturing in 2002 (Series A 2002 Bonds) are subject to annual sinking
fund redemption at 100% of the principal amount thereof which commenced March
15, 1993. The bonds maturing in 2022 (Series A 2022 Bonds) are subject to annual
sinking fund redemption at 100% of the principal amount thereof commencing March
15, 2003. The Series A 2002 Bonds are not subject to optional redemption. The
Series A 2022 Bonds are redeemable at the option of Chugach on any interest
payment date at an initial redemption price commencing in 2002 of 109.140% of
the principal amount thereof declining ratably to par on March 15, 2012. The
Bonds are secured by a first lien on substantially all of Chugach's assets. The
Indenture prohibits outstanding short-term indebtedness (other than trade
payables) in excess of 15% of Chugach's net utility plant and limits certain
cash investments to specific securities.
In February 1996, Chugach reacquired $2,445,000 of the Series A 2022 Bonds at a
premium of 117.5000. Total transaction cost, including accrued interest and
premium, was $2,970,334.
In March 1996, Chugach reacquired $13,150,000 of the Series A 2022 Bonds at a
premium of 115.3750. Total transaction cost, including accrued interest and
premium, was $15,762,752.
In June 1996, Chugach reacquired $20,000,000 of the Series A 2022 Bonds at a
premium of 109.3750. Total transaction cost, including accrued interest and
premium was $22,347,233.
In September 1996, Chugach reacquired $1,200,000 of the Series A 2022 Bonds at a
premium of 108.5280. Total transaction cost, including accrued interest and
premium, was $1,356,567.
In April 1997, Chugach reacquired $5,000,000 of the Series A 2022 Bonds at a
premium of 109.7500. Total transaction cost, including accrued interest and
premium, was $5,510,350.
In February 1999, Chugach reacquired $11,000,000 of the Series A 2022 Bonds at a
premium of 117.05. Total transaction cost, including accrued interest and
premium, was $13,322,344.
In February 1999, Chugach reacquired $14,000,000 of the Series A 2022 Bonds at a
premium of 116.25. Total transaction cost, including accrued interest and
premium, was $16,868,592.
52
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
In February 1999, Chugach reacquired $9,895,000 of the Series A 2022 Bonds at a
premium of 116.75. Total transaction cost, including accrued interest and
premium, was $11,974,467.
(7) Fair Value of Financial Instruments
The estimated fair values (in thousands) of the long-term obligations included
in the financial statements at December 31 are as follows:
1998 1997
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
Long-term obligations
(including current installments) $312,007 $349,353 $317,920 $352,755
Fair value estimates are dependent upon subjective assumptions and involve
significant uncertainties resulting in variability in estimates with changes in
assumptions.
(8) Employee Benefits
Pension benefits for substantially all employees are provided through the Alaska
Electrical Trust and Alaska Hotel, Restaurant and Camp Employees Health and
Welfare Trust Funds (union employees) and the National Rural Electric
Cooperative Association (NRECA) Retirement and Security Program (nonunion
employees). The Association makes annual contributions to the plans equal to the
amounts accrued for pension expense. For the union plans, the Association pays a
contractual hourly amount per union employee which is based on total plan costs
for all employees of all employers participating in the plan. In these master,
multiple-employer plans, the accumulated benefits and plan assets are not
determined or allocated separately to the individual employer. Pension costs for
union plans were approximately $1,805,000 in 1998, $1,810,000 in 1997 and
$1,889,000 in 1996. For several years, NRECA did not require contributions to
the plan; consequently, no pension cost was incurred. In 1996 a moratorium was
in effect from January through September. From October through December 1996,
$266,000 was contributed to the NRECA plan. In 1997 approximately $601,000 was
contributed to the NRECA plan as the moratorium was not in effect. In 1998
approximately $813,000 was contributed to the NRECA plan for the full year.
53
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
(9) Deferred Charges
Deferred charges consisted of the following at December 31:
1998 1997
------------ ------------
Debt issuance and reacquisition costs $ 3,838,237 $ 4,006,295
Refurbishment of transmission equipment 271,605 280,864
Computer software and conversion 11,104,406 5,596,222
Studies 2,253,165 1,162,416
Business venture studies 72,961 -
Fuel supply negotiations 392,325 415,042
Major overhaul of steam generating unit 632,411 837,517
Other (note 15) 441,054 1,284,855
------------ ------------
$ 19,006,164 $ 13,583,211
------------ ------------
(10) Income Taxes
The Association is exempt from federal income taxes under the provisions of
Section 501(c)(12) of the Internal Revenue Code, except for unrelated business
income. For the years ending December 31, 1998, 1997 and 1996 the Association
received no unrelated business income.
(11) Return of Capital
Under provisions of its long-term debt agreements, the Association is not
directly or indirectly permitted to declare or pay any dividend or make any
payments, distributions or retirements of patronage capital to members if an
event of default exists with respect to its bonds (event of default), if payment
of such distribution would result in an event of default, or if the aggregate
amount expended for all distributions on and after September 26, 1991 exceeds
the sum of $7,000,000 plus 35% of the aggregate assignable margins (whether or
not such assignable margins have since been allocated to members) of the
Association earned after December 31, 1990 (or, in the case such aggregate shall
be a deficit, minus 100% of such deficit). The Association may declare and make
distributions at any time if, after giving effect thereto, the Association's
aggregate margins and equities as of the end of the most recent fiscal quarter
would be not less than 45% of the Association's total liabilities and equities
as of the date of the distribution. The Association does not anticipate that
this provision will limit the anticipated capital credit retirements described
in note 4.
54
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
(12) Deferred Credits
Deferred credits at December 31 consisted of the following:
1998 1997
------------ ------------
Regulatory liability - unamortized gain on
reacquired debt $ 25,796,171 $ 27,477,114
Refundable consumer advances for
construction 1,739,618 1,821,002
Estimated initial installation costs for
transformers and meters 277,969 364,941
Post retirement benefit obligation 255,700 255,700
Other - 61,196
------------- -------------
$ 28,069,458 $ 29,979,953
------------- -------------
In conjunction with the refinancing described in note 6, the Association
recognized a gain of approximately $45,000,000. The APUC permitted the
Association to flow through the gain to consumers in the form of reduced rates
over a period equal to the life of the bonds using the effective interest
method; consequently, the gain has been deferred for financial reporting
purposes as required by SFAS 71. Approximately $1,700,000 of the deferred gain
was amortized annually in 1998 and 1997. Approximately $1,850,000 of the
deferred gain was amortized in 1996.
(13) Bradley Lake Hydroelectric Project
The Association is a participant in the Bradley Lake Hydroelectric Project
(Bradley Lake). Bradley Lake was built and financed by the Alaska Energy
Authority (AEA) through State of Alaska grants and $166,000,000 of revenue
bonds. The Association and other participating utilities have entered into
take-or-pay power sales agreements under which shares of the project capacity
have been purchased and the participants have agreed to pay a like percentage of
annual costs of the project (including ownership, operation and maintenance
costs, debt service costs and amounts required to maintain established
reserves). Under these take-or-pay power sales agreements, the participants have
agreed to pay all project costs from the date of commercial operation even if no
energy is produced. The Association has a 30.4% share of the project's capacity.
The share of debt service exclusive of interest, for which the Association is
responsible is approximately $46,000,000. Under a worst case scenario, the
Association could be faced with annual expenditures of approximately $4.1
million as a result of its Bradley Lake
55
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
take-or-pay obligations. Management believes that such expenditures, if any,
would be recoverable through the fuel surcharge ratemaking process. Upon the
default of a Bradley Lake participant, and subject to certain other conditions,
AEA, through Alaska Industrial Development and Export Authority, is entitled to
increase each participant's share of costs pro rata, to the extent necessary to
compensate for the failure of another participant to pay its share, provided
that no participant's percentage share is increased by more than 25%.
In December 1997, $59,485,000 of the Power Revenue Bonds, Third Series and
$47,710,000 of the Power Revenue Bonds, Fourth Series were refinanced under a
forward refunding arrangement. The true interest cost of the new bonds decreased
to 5.611% for the Third Series bonds and 6.06% for the Fourth Series bonds from
7.295% and 7.235%, respectively. This refunding produced a Net Present Value
saving to the participating utilities of approximately $8,500,000. The
Association's share of these savings will be approximately $1,600,000.
In January 1999, $28,910,000 of the Power Revenue bonds, Fifth Series were
refinanced under a forward refunding arrangement. The true interest cost of the
new bonds decreased to 5.25%. This produced a Net Present Value savings to the
participating utilities of approximately $2,875,000. The Association's share of
these savings will be approximately $546,000.
The following represents information with respect to Bradley Lake at June 30,
1998 (the most recent date for which information is available). The
Association's share of expenses were $4,112,292 in 1998, $3,981,624 in 1997 and
$3,957,930 in 1996 and are included in purchased power in the accompanying
financial statements.
Other electric plant in service of $6,496,812 represents the Association's share
of a Bradley Lake transmission line financed internally and the Association's
share of the Eklutna Hydroelectric Project, purchased in 1997.
Proportionate
Total share
Plant in service $ 306,841,084 $ 93,279,690
Accumulated depreciation (46,617,088) (14,171,595)
Interest expense 11,169,754 3,395,605
56
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
(14) Eklutna Hydroelectric Project
During October 1997, the ownership of the Eklutna Hydroelectric Project formally
transferred from the Alaska Power Administration to the participating utilities.
This group consists of the Association along with Matanuska Electric Association
(MEA) and Municipal Light and Power (AML&P).
Other electric plant in service includes $1,785,900 representing the
Association's share of the Eklutna Hydroelectric Plant. This balance will be
amortized over the estimated life of the facility. During the transition phase
and after the transfer of ownership, Chugach, MEA and AML&P have jointly
operated the facility. Each participant contributes their proportionate share
for operations and maintenance costs. Under net billing arrangements, Chugach
then reimburses MEA for their share of the costs. Prior to the transfer of
ownership, these costs were recorded as purchased power expenses; after the
transfer these costs were recorded as power production expenses. In 1998, the
Association charged $253,207 to various expense categories representing
Chugach's share of Eklutna operations.
(15) Commitments and Contingencies
Construction
The Association is engaged in a continuous construction program. Management
estimates that approximately $34,000,000 will be spent on the construction
program in 1999.
Contingencies
The Association is a participant in various legal actions, claims and unasserted
claims, both for and against its interests. Management believes that the outcome
of any such matters will not materially impact the Association's financial
condition, results of operations or liquidity.
Standard Steel Salvage Yard Site
A cost recovery action was filed in Federal District Court on December 27, 1991
by the United States against the Association and six other Potentially
Responsible Parties seeking reimbursement of removal and response action costs
incurred by the United States Environmental Protection Agency ("EPA") at the
Standard Steel and Metals Salvage Yard Superfund Site in Anchorage, Alaska.
57
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
Four of Chugach's insurance carriers have been paying, under a reservation of
rights, the defense costs for the Site. By agreement dated May 15, 1998, these
four insurance carriers agreed to pay the majority of the Company's cost
relating to the Site, including investigation and remedial action costs and
attorneys' fees. This settlement preserves Chugach's potential claim for natural
resource damages and is anticipated to result in Chugach paying no more than
$500,000 for all Site costs. Management believes that the latter amount would be
fully recoverable in rates and therefore would have no impact on the Company's
financial condition.
Unsolicited Acquisition Proposal by Matanuska Electric Association, Inc.
In October 1998, MEA, Chugach's largest wholesale customer presented to the
Board of Directors of Chugach (the Board) an unsolicited proposal (the MEA
Proposal) to acquire substantially all of Chugach's assets in exchange for the
assumption of Chugach's liabilities. Although MEA has not provided many details
of the MEA Proposal, it has stated that the generation and transmission assets
of Chugach would be transferred to a subsidiary of MEA, the assets comprising
Chugach's distribution system would be transferred to MEA itself, and Chugach's
members would become members of MEA. MEA has also stated that, at the time of
the acquisition, it would borrow enough money to defease (i.e. to purchase a
pool of U.S. government of U.S. government-backed securities that would generate
sufficient cash flow to make scheduled debt service payments during the
remaining life of the defeased obligations) or refinance Chugach's outstanding
Series A Bonds and to repay Chugach's outstanding CoBank bonds plus an
additional $42.5 million that would be distributed in cash to the members of the
post- acquisition MEA. On November 2, 1998, citing uncertainty over whether MEA
would be successful in its bid to acquire Chugach's assets, Standard & Poor's
Rating Service placed its single "A" rating on the Series A Bonds on "Credit
Watch with developing implications", meaning the rating may be raised, lowered
or affirmed.
After evaluating information provided by MEA and analyses of the MEA Proposal
presented by Chugach's staff and independent financial advisors, on November 12,
1998, the Board rejected the MEA Proposal. Thereafter, MEA withdrew the
provision of the MEA Proposal which contemplated that the Board of Directors of
MEA, following the consummation of the MEA Proposal, would include minority
representation from among the members of the Board. MEA also stated that MEA's
future communication on this matter would be directed to Chugach's membership
rather than the Board or Chugach's staff and MEA began circulating a petition to
gather a sufficient number of signatures from Chugach's members to force a
special meeting of Chugach's members for the purpose of considering the MEA
Proposal. Under the Alaska Electric & Telephone Cooperative Act, a special
meeting of the members of Chugach may be called by 10% of Chugach's members.
58
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
In February 1999, MEA issued public statements that it had received sufficient
petition signatures from Chugach members to compel the holding of a special
meeting but that it would seek an advisory vote of its own members before
submitting such signatures.
To date, MEA has not submitted any purported petition signatures to Chugach and
Chugach has therefore not had occasion to initiate the formal tabulation that
would be necessary to determine whether a sufficient number of duly and validly
signed petitions have been submitted and, if so, the legal implication of such
petitions with respect to the MEA Proposal.
Alaska law prohibits Chugach from disposing of a substantial portion of its
assets unless the disposition is approved by a majority of the members of
Chugach and by at least two- thirds of those actually voting on the proposal,
except that the Board may authorize Chugach to sell its assets to another
cooperative if the transaction is approved by a majority of those voting in an
election in which a much smaller percentage of the membership votes and the
purchaser expressly agrees to assume Chugach's obligations under collective
bargaining agreements. MEA has taken the position that the Board would be
compelled to approve the sale of Chugach's assets to MEA if two-thirds of
Chugach's members voting at a special meeting of the members approved the
transaction and those voting in favor of the transaction constituted a majority
of all of the members. Chugach believes that, although member approval clearly
is a prerequisite to any sale to MEA, no such sale could legally occur unless
the Board also approves the sale in the exercise of its independent judgment.
It is unclear whether a special meeting of Chugach's members will be called to
consider the MEA Proposal, whether Chugach's members would approve the MEA
Proposal by a supermajority vote if it were submitted at a special meeting of
members, what legal effect (if any) approval by a supermajority of Chugach's
members would have in light of the rejection of the MEA Proposal by the Board,
and whether any acquisition - even if approved by Chugach - would be approved by
the APUC. It is, therefore, not possible to determine at this time the outcome
of the MEA proposal. However, in view of numerous uncertainties associated with
the consummation of the MEA Proposal, including those referred to above, Chugach
believes that there is not a material likelihood that the MEA Proposal will be
consummated. Accordingly, while Chugach has publicly stated its belief that the
consummation of the MEA Proposal (including the additional borrowing that would
be associated therewith) would adversely affect the financial condition, results
of operations, capital resources and liquidity of Chugach, Chugach does not
believe that there is a material likelihood that these consequences will occur.
59
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
Year 2000 Conversion
Chugach has recognized the need to investigate, test and remediate if necessary
the critical systems and equipment under its control which could cause power and
business disruptions in conjunction with what are collectively called "Year
2000" dates. Chugach has an active program underway to do just that. It is
expected that Chugach's Y2K efforts will be completed by the summer of 1999.
Regulatory Cost Charge
In 1992 the State of Alaska Legislature passed legislation authorizing the
Department of Revenue to collect a regulatory cost charge from utilities in
order to fund the APUC. The tax is assessed on all retail consumers and is based
on kilowatt hour (kWh) consumption. The Regulatory Cost Charge has decreased
since its inception (November 1992) from an initial rate of $.000626 per kWh to
the current rate of $.000280, effective January 1, 1998.
60
Item 9 - Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
MANAGEMENT
Executives
Chugach operates under the direction of a Board of Directors that is elected at
large by its membership. Day-to-day business and affairs are administered by the
General Manager. Chugach's seven-member Board of Directors sets policy and
provides direction to the General Manager. The following table sets forth
certain information with respect to the executive management of Chugach:
Name Age Position held
Eugene N. Bjornstad 61 General Manager
Lee D. Thibert 43 Executive Manager, Transmission &
Distribution Network Services
Evan J. Griffith, Jr. 57 Executive Manager, Finance &
Energy Supply
William R. Stewart 52 Executive Manager, Retail Services
Eugene N. Bjornstad was appointed General Manager of Chugach June 22, 1994.
Prior to that he served as Acting General Manager from March 28, 1994 until his
permanent appointment. He joined Chugach in 1983 and served as Executive
Manager, Operating Divisions from 1988 to 1994.
Lee D. Thibert, in a reorganization on June 1, 1997, was appointed Executive
Manager, Transmission & Distribution Network Services. Prior to that he was
Executive Manager, Operating Divisions from June of 1994. Before moving up to
the Executive Manager position, he served as Director of Operations from June
1987.
Evan J. Griffith, Jr. was Executive Manager, Finance and Planning of Chugach
from August 1989 to June1997. In the June 1, 1997 reorganization he assumed
the position of Executive Manager, Finance and Energy Supply. Prior to
coming to Chugach, he was Budget/Program Analyst for the Anchorage Municipal
Assembly from August 1984 to August 1989.
61
William R. Stewart was Executive Manager, Administration of Chugach from July
1987 to June 1, 1997 when he assumed the duty as Executive Manager, Retail
Services in a reorganization of functions. He was Division Director of
Administration of Chugach from January 1984 to July 1987 and Staff Assistant to
the General Manager of Chugach from November 1982 to January 1984. He has been
employed at Chugach since 1969.
Board of Directors
Pat Jasper - President. Pat Jasper, 69, is a small business owner and has been a
computer programmer and systems analyst. She was originally elected to the Board
in April 1995 to fill a one-year term, and served as Secretary to April 1996.
She was re-elected in April 1996 and served as Vice President until April 1997
when she became President.
Christopher Birch - Vice President. Chris Birch, 48, is a professional engineer
employed by the Alaska Department of Transportation and Public Facilities. He
was appointed to the Board to fill a vacated seat in October 1996 and was
elected to that seat in April 1997. He served as Secretary from April 1997 to
April 1998.
Bruce Davison - Secretary. Bruce Davison, 50, was appointed to the Association's
Board of Directors in June of 1997. Prior to his appointment, Mr. Davison served
two years on the Chugach Electric Association Bylaws Committee. Mr. Davison is a
25-year Alaska resident and a partner in the law firm of Davison & Davison, Inc.
He became Secretary in April 1998.
Mary Minder - Treasurer. Mary Minder, 59, was elected to the Board in April 1995
and served as Treasurer until April 1996 when she became Secretary. In April
1997, she was again elected Treasurer and serves in that same capacity today.
Ms. Minder is a realtor and associate real estate broker.
Elizabeth Page "Pat" Kennedy - Director. Pat Kennedy, 60, was President of
Chugach from April 1994 to April 1995. Ms. Kennedy has served on the board since
1993 and was Secretary from April 1993 to April 1994. She is an attorney who has
been licensed to practice law since 1976 and has been in private practice since
1990.
Raymond A. "Ray" Kreig - Director. Ray Kreig, 52, is president of R.A. Kreig &
Associates, a consulting firm specializing in land and site assessment. He is a
professional civil engineer and geologist. Mr. Kreig was elected to the board in
April 1994 and was President from April 1995 to April 1997.
Ed Granger - Director. Ed Granger, 64, is a retired professional engineer
working in real estate. He was elected to the board in 1991. He resigned in
March 1994, one month before his first term expired. He was reappointed to the
Board to fill the remaining term of another resigned director in June 1995 and
was re-elected in April 1996. He served as Vice President from April 1997 to
April 1998. Mr. Granger again resigned his board seat in December 1998 due to
the press of personal business. His seat was not filled.
62
Item 11 - Executive Compensation
CASH COMPENSATION
The following table sets forth all remuneration paid by Chugach for the calendar
years ended December 31, 1998, 1997 and 1996 with respect to each of the four
executive officers of Chugach, all of whose total cash and cash equivalent
compensation exceeded $100,000, and for all such executive officers as a group:
Name Principal Position Year Salary
Eugene N. Bjornstad General Manager 1998 $200,423
1997 164,482
1996 167,296
Lee D. Thibert Executive Manager, 1998 125,880
Transmission & Distribution
Network Services 1997 125,626
1996 118,562
Evan J. Griffith, Jr. Executive Manager, Finance & 1998 134,934
Energy Supply
1997 126,866
1996 137,434
William R. Stewart Executive Manager, Retail 1998 143,943
Services
1997 142,213
1996 134,393
Directors of Chugach are compensated for their services in the amount of $100
per board meeting attended (including committee meetings) up to a maximum of
seventy meetings per year for a director and eighty-five meetings per year for
the President. Upon termination, Mr. Bjornstad's employment agreement provides
that he may receive an amount equal to his salary for the remaining term of his
employment agreement (which number shall not be less than six months) plus any
accrued annual leave or other compensation then due as of the effective date of
the notice of termination.
COMPENSATION PURSUANT TO PLANS
Chugach has elected to participate in the National Rural Electric Cooperative
Association (NRECA) Retirement and Security Program (Plan), a multiple employer
defined benefit master pension plan maintained and administered by the NRECA for
the benefit of its members and their employees. The Plan is intended to be a
qualified pension plan under Section 401(a) of the Code. All employees of
Chugach not covered by a union agreement become participants
63
in the Plan on the first day of the month following completion of one year of
eligibility service. An employee is credited with one year of eligibility
service if he completes 1,000 hours of service either in his first twelve
consecutive months of employment or in any calendar year for Chugach or certain
other employers in rural electrification (related employers). Pension benefits
vest at the rate of 10% for each of the first four years of vesting service and
become fully vested and nonforfeitable on the earlier of the date a participant
has five years of vesting service or the date the participant attains age
fifty-five while employed by Chugach or a related employer. A participant is
credited with one year of vesting service for each calendar year in which he
performs at least one hour of service for Chugach or a related employer. Pension
benefits are generally paid upon the participant's retirement or death. A
participant may also elect to receive pension benefits while still employed by
Chugach if he has reached his normal retirement date by completing thirty years
of benefit service (as hereinafter defined) or, if earlier, by attaining age
sixty-two. A participant may elect to receive actuarially reduced early
retirement pension benefits before his normal retirement date provided he has
attained age fifty-five.
Pension benefits paid in normal form are paid monthly for the remaining lifetime
of the participant. Unless an actuarially equivalent optional form of benefit
payment to the participant is elected, upon the death of a participant the
participant's surviving spouse will receive pension benefits for life equal to
50% of the participant's benefit. The annual amount of a participant's pension
benefit and the resulting monthly payments the participant receives under the
normal form of payment are based on the number of his years of participation in
the Plan (benefit service) and the highest five-year average of the annual rate
of his base salary during the last ten years of his participation in the Plan
(final average salary). Annual compensation in excess of $200,000, as adjusted
by the Internal Revenue Service for cost of living increases, is disregarded
after January 1, 1989. The participant's annual pension benefit at his normal
retirement date is equal to the product of his years of benefit service (up to
thirty) times final average salary times 2%.
In 1998, NRECA notified the Association that there were employees whose pension
benefits from NRECA's Retirement & Security Program would be reduced because of
limitations on retirement benefits payable under Section 401(a)(17) or 415 of
the Internal Revenue Code of 1986, as amended. NRECA made available a Pension
Restoration Severance Pay Plan and a Pension Restoration Deferred Compensation
Plan for cooperatives to adopt in order to make employees whole for their lost
benefits. Adopting these plans would allow Chugach to protect the benefits of
current and future employees whose pension benefits would be reduced because of
these limitations. On May 6, 1998, the Association adopted the NRECA Pension
Restoration Severance Pay Plan and the Pension Restoration Deferred Compensation
Plan and amended its NRECA Retirement & Security Program accordingly.
64
The following table sets forth the estimated annual pension benefit payable at
normal retirement date for participants in the specified final average salary
and years of benefit service categories:
Final Years of benefit service
Average
Salary
15 20 25 30 35
$ 125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000 $ 75,000
150,000 45,000 60,000 75,000 90,000 90,000
The annual pension benefits indicated above are the joint and surviving spouse
life annuity amounts payable by the Plan, and they are not subject to any
deduction for Social Security or other offset amounts.
Benefit service as of December 31, 1998 taken into account under the Plan for
the executive officers is shown below. Base salary for 1998 taken into account
under the Plan for purposes of determining final average salary is also
included.
Benefit Covered
Name Principal Position Service Compensation
Eugene N. Bjornstad General Manager 14.7 $ 156,021
Lee D. Thibert Executive Manager, T&D 10.7 122,242
Network Services
Evan J. Griffith, Jr. Executive Manager, 8.4 123,968
Finance & Energy Supply
William R. Stewart Executive Manager, Retail 28.9 123,968
Services
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The NRECA's COMPensate Wage and Salary Plan was developed in 1986 by NRECA to
provide its members with a systematic and standardized method of evaluating jobs
in each cooperative by grading them and comparing wages and salaries within
similar rural electric systems, as well as the external market-place, and then
creating and applying statistically determined equitable pay scales. In 1988 the
Chugach Board approved implementation of NRECA's COMPensate Wage and Salary Plan
for all non-bargaining unit employees of the Association. The Plan was adopted
by the Board in 1989 and is administered in accordance with the COMPensate
guidelines. This Plan was last updated and approved by the Board in 1996 and
further updated by the General Manager in 1997 to adjust the Alaskan
differential for all management salaries from 20% to 15%. The Chugach Board has
directed that this Plan
65
will be updated annually although the update does not guarantee an adjustment to
the salary ranges. The General Manager annually conducts a performance appraisal
for each of the Executive Managers.
Since 1994, the General Manager has had an Employment Agreement with the Chugach
Board of Directors. The Operations committee of the Board of Directors appraises
annually the performance of the General Manager and makes a written report to
the Board prior to April 24 of each year. The General Manager's performance for
1998 will be determined based on the criteria outlined in the Employment
Agreement between Chugach and Eugene N. Bjornstad dated July 6, 1994 and amended
February 25, 1998 (filed as Exhibit 10.60.1 in the March 31, 1998 Form 10-Q).
66
Item 12 - Security Ownership of
Certain Beneficial Owners and Management
Not Applicable
Item 13 - Certain Relationships and Related Transactions
Not Applicable
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
Page
Financial Statements
Included in Part IV of this Report:
Independent Auditors' Report 37
Balance Sheets, December 31, 1998 and 1997 38
Statements of Revenues, Expenses and Patronage Capital,
Years ended December 31, 1998, 1997 and 1996 40
Statements of Cash Flows,
Years ended December 31, 1998, 1997 and 1996 41
Notes to Financial Statements 42-60
Financial Statement Schedules
Included in Part IV of this Report:
Independent Auditors' Report 68
Schedule II - Valuation and Qualifying Accounts,
Years ended December 31, 1998, 1997 and 1996 69
Other schedules are omitted as they are not required or are not applicable, or
the required information is shown in the applicable financial statements or
notes thereto.
67
Independent Auditors' Report
The Board of Directors
Chugach Electric Association, Inc.:
Under the date of February 26, 1999, we reported on the balance sheets of
Chugach Electric Association, Inc. as of December 31, 1998 and 1997 and the
related statements of revenues, expenses and patronage capital and cash flows
for each of the years in the three-year period ended December 31, 1998 which are
included in Part II of the Company's Annual Report on Form 10-K. In connection
with our audits of the aforementioned financial statements, we also audited the
related financial statement schedule listed in the index to Item 14 of the
Company's 1998 Annual Report on Form 10-K. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits.
In our opinion such schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Anchorage, Alaska
February 26, 1999
68
Schedule II
CHUGACH ELECTRIC ASSOCIATION, INC.
Valuation and Qualifying Accounts
Balance at Charged Balance
beginning to costs at end
of year and expenses Deductions of year
Allowance for doubtful accounts:
Activity for year ended:
December 31, 1998 $(368,029) $(697,181) $617,302 $(447,908)
December 31, 1997 (367,085) (618,379) 617,435 (368,029)
December 31, 1996 (436,083) (566,844) 635,842 (367,085)
69
EXHIBITS
Listed below are the exhibits which are filed as part of this Report:
Exhibit Description Page
Number
******3.1 Articles of Incorporation of the Registrant (as amended
April 30, 1998)
******3.2 Bylaws of the Registrant (as amended April 30, 1998)
*4.1 Trust Indenture, dated as of September 15, 1991,
between the Registrant and Security Pacific
Bank Washington, N.A., Trustee (Including forms
of bonds)
*4.2 First Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-
First National Bank dated March 17, 1993
*4.3 Second Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-
First National Bank dated May 19, 1994
*4.4 Third Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-
First National Bank
*4.4.1 Closing Documents dated November 30, 1994, First
Mortgage Bond, CoBank Series (CoBank-1), Due
March 15, 2002 pursuant to the Third Supple-
mental Indenture of Trust dated June 29, 1994
*4.4.2 Closing documents dated August 31, 1995 First
Mortgage Bond, CoBank Series (CoBank-2), due
August 31, 2005 pursuant to the Third
Supplemental Indenture of Trust
*4.4.3 Closing documents dated April 30, 1996 First
Mortgage Bond, CoBank Series (CoBank-3), due
March 15, 2022 pursuant to the Third
Supplemental Indenture of Trust
*4.4.4 Closing documents dated September 30, 1996 First
Mortgage Bond, CoBank Series (CoBank-4), Due
June 15, 2022 pursuant to the Third Supplemental
Indenture of Trust
****4.4.5 Closing documents dated November 26, 1997 First
Mortgage Bond, CoBank Series (CoBank-5), Due
June 15, 2012 pursuant to the Third Supplemental
Indenture of Trust
Exhibit
number Description Page
*4.5 Fourth Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-First
National Bank dated March 1, 1995
*4.6 Fifth Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-First
National Bank dated September 6, 1995
*4.7 Sixth Supplemental Indenture of Trust by and among
Chugach Electric Association, Inc. and Seattle-First
National Bank dated April 3, 1996
***4.8 Seventh Supplemental Indenture of Trust by and
among Chugach Electric Association, Inc. and
Seattle-First National Bank dated June 1, 1997
*****4.9 Eighth Supplemental Indenture of Trust dated as of
February 4, 1998, by and between Chugach
Electric Association, Inc. and Security Pacific Bank
Washington, N.A.
*10.1 Joint Use Agreement between the City of Seward and
the Registrant
*10.2 Wholesale Power Agreement between the City of
Seward and the Registrant
*10.3 Agreement for Sale of Electric Power and Energy
between Homer Electric Association, Inc., Alaska
Electric Generation and Transmission Association,
Inc. and the Registrant
*10.4 Modified Agreement for the Sale and Purchase of
Electric Power and Energy between Matanuska
Electric Association, Inc., Alaska Electric
Generation and Transmission Association, Inc.
and the Registrant
*10.4.1 First Amendment to Modified Agreement for the Sale
and Purchase of Electric Power and Energy dated
April 5, 1989 by and among Chugach Electric
Association, Inc., Matanuska Electric Association,
Inc. and Alaska Electric Generation & Trans-
mission Cooperative, Inc.
*10.5 Agreement for the Sale and Purchase of Natural Gas
between the Registrant and ARCO Alaska, Inc.
Exhibit
number Description Page
*10.6 Amendment No. 1 to Agreement for the Sale and
Purchase of Natural Gas between the Registrant
and ARCO Alaska, Inc.
*10.7 Agreement for the Sale and Purchase of Natural Gas
between the Registrant and Marathon Oil Company
*10.8 Amendatory Agreement No. 1 to Agreement for the
Sale and Purchase of Natural Gas between the
Registrant and Marathon Oil Company
*10.9 Amendatory Agreement No. 2 to Agreement for the
Sale and Purchase of Natural Gas between the
Registrant and Marathon Oil Company
*10.10 Amendatory Agreement No. 3 to Agreement for the
Sale and Purchase of Natural Gas between the
Registrant and Marathon Oil Company
*10.11 Letter of Understanding between the Registrant and
Marathon Oil Company
*10.12 Agreement for the Sale and Purchase of Natural Gas
between the Registrant and Shell Western E&P Inc.
*10.13 Amendatory Agreement No. 1 to the Agreement for the
Sale of Natural Gas between the Registrant and
Shell Western E&P Inc.
*10.14 Amendment No. 2 to the Agreement for the Sale of
Natural Gas between the Registrant and Shell
Western E&P Inc.
*10.14.1 Amendment No. 3 to the Agreement for the Sale of
Natural Gas between the Registrant and Shell
Western E&P Inc.
*10.15 Agreement for the Sale and Purchase of Natural Gas
between the Registrant and Chevron USA Inc.
*10.16 Letter of Understanding to the Agreement for the Sale
and Purchase of Natural Gas between the
Registrant and Chevron USA Inc.
*10.17 Amendment No. 2 to Agreement for the Sale and
Purchase of Natural Gas between the Registrant
and Chevron USA Inc.
*10.18 Nonfirm Energy Agreement between the Registrant and
Golden Valley Electric Association, Inc.
Exhibit
number Description Page
*10.19 Alaska Intertie Agreement between Alaska Power
Authority, Municipality of Anchorage, the
Registrant, City of Fairbanks, Alaska Municipal
Utilities System, Golden Valley Electric
Association, Inc. and Alaska Electric Generation
and Transmission Cooperative, Inc.
*10.20 Memorandum of Understanding Regarding Intertie
Upgrades among Alaska Energy Authority, the
Registrant, Golden Valley Electric Association,
Inc., Homer Electric Association, Inc., Matanuska
Electric Association, Inc., Municipality of
Anchorage dba Municipal Light and Power, and
the City of Seward d/b/a Seward Electric System
*10.21 Addendum No. 1 to the Alaska Intertie Agreement--
Reserve Capacity and Operating Reserve
Responsibility
*10.22 Bradley Lake Agreement for the Sale and Purchase of
Electric Power between the Alaska Power
Authority, Golden Valley Electric Association, Inc.,
the Municipality of Anchorage, the City of Seward,
the Alaska Electric Generation & Transmission
Cooperative, Inc., Homer Electric Association, Inc.,
Matanuska Electric Association Inc. and the
Registrant
*10.23 Agreement for the Wheeling of Electric Power and for
Related Services by and among the Registrant,
Homer Electric Association, Inc., Golden Valley
Electric Association, Inc., Matanuska Electric
Association, Inc., the Municipality of Anchorage,
Inc. dba Municipal Light & Power, the City of
Seward dba Seward Electric System and Alaska
Electric Generation and Transmission Cooperative,
Inc.
*10.24 Transmission Sharing Agreement by and among Homer
Electric Association, Inc., the Registrant, Golden
Valley Electric Association, Inc., and the
Municipality of Anchorage d/b/a Municipal Light
and Power
70
Exhibit
number Description Page
*10.25 Amendment to Agreement for Sale of Transmission
Capability among Homer Electric Association, Inc.,
Alaska Electric Generation and Transmission
Cooperative, Inc., the Registrant, Golden Valley
Electric Association, Inc. and the Municipality of
Anchorage d/b/a Municipal Light and Power
*10.26 Net Billing Agreement among the Registrant,
Matanuska Electric Association, Inc. and Alaska
Electric Generation and Transmission Cooperative,
Inc.
*10.27 Interconnection Agreement between the Registrant and
Municipality of Anchorage Municipal Light and
Power
*10.28 Interconnection Agreement between the Registrant and
Municipality of Anchorage Municipal Light and
Power Addendum No. 1
*10.29 Amendment No. 1 to Interconnection Agreement
between the Registrant and Municipality of
Anchorage Municipal Light and Power
*10.30 Agreement between the Registrant and Chevron USA,
Inc. for the Sale and Purchase of Supplemental
Natural Gas
*10.31 Agreement between the Registrant and Shell Western
E&P Inc. for the Sale and Purchase of
Supplemental Natural Gas
*10.32 Agreement between the Registrant and ARCO Alaska,
Inc. for the Sale and Purchase of Supplemental
Natural Gas
*10.33 Eklutna Purchase Agreement among the Registrant,
Matanuska Electric Association, Inc., Municipality
of Anchorage d/b/a Municipal Light and Power and
Alaska Power Administration
*10.33.1 Amendment No. 1 to Eklutna Purchase Agreement
among the Registrant, Matanuska Electric
Association, Inc., Municipality of Anchorage d/b/a
Municipal Light and Power and Alaska Power
Administration
*10.33.2 Eklutna Purchase Agreement Amendment No. 2
effective June 14, 1993 between Chugach, MEA,
AML&P and the Alaska Power Administration
71
Exhibit
number Description Page
*10.33.3 Eklutna Hydroelectric Project Transition Plan, by and
among the Registrant; The United States of
America d/b/a Alaska Power Administration, a unit
of the Department of Energy; the Municipality of
Anchorage d/b/a Municipal Light & Power; and
Matanuska Electric Association, Inc.
*10.34 University Substation 1991 Improvements Contract
between the Registrant and Alcan Electrical and
Engineering, Inc.
*10.35 Camp Facilities Replacement Contract between the
Registrant and Baugh Construction and
Engineering Company
*10.36 Lease Amendment between Standard Oil Company of
California and the Registrant
*10.37 Lease Amendment between Chevron USA, Inc. and the
Registrant
*10.38 Settlement Agreement among the Registrant, Homer
Electric Association, Inc., Matanuska Electric
Association, Inc., the City of Seward and Alaska
Electric Generation and Transmission Cooperative,
Inc. resolving G&T TIER Level, Equity Level,
Capital Credits, Equity Management Plan, and
Loan Covenant Disputes
*10.38.1 First Amendment to "Settlement Agreement Resolving
G&T TIER Level, Equity Level, Capital Credits,
Equity Management Plan and Loan Covenant
Disputes" in APUC Docket U-92-10 between
Chugach and MEA, Homer and AEG&T dated
March 1993
*10.39 Loan Agreement between the National Bank for
Cooperatives (formerly Spokane Bank for
Cooperatives) and the Registrant, as amended
*10.40 Amendment dated September 13, 1991 to Loan
Agreement between the National Bank for
Cooperatives and the Registrant
*10.41 Form of Commitment Letter to be entered into between
the National Bank for Cooperatives and Registrant
72
Exhibit
number Description Page
*10.42 Agreement between the Municipality of Anchorage
d/b/a Anchorage Municipal Light and Power,
Chugach Electric Association, Inc., Matanuska
Electric Association, Inc., U.S. Fish and Wildlife
Service, National Marine Fisheries Service, Alaska
Energy Authority, and the State of Alaska Relative
to the Eklutna and Snettisham Hydroelectric
Projects
*10.43 Bradley Lake Hydroelectric Agreement for the
Dispatch of Electric Power and for Related
Services by and among Chugach Electric
Association, Inc. and the Alaska Energy Authority
*10.44 Net Billing Agreement among Chugach Electric
Association, Inc. and the City of Seward
*10.45 Soldotna One System Use and Dispatch Agreement by
and among Alaska Electric Generation and
Transmission Cooperative, Inc. and Chugach
Electric Association, Inc.
*10.46 Agreement for Bradley Lake Resource Scheduling
between Chugach, Homer Electric Association, Inc.
and the Alaska Electric Generation and
Transmission Cooperative, Inc. dated September
29, 1992
*10.47 Gas Transportation Agreement between Chugach,
Alaska Pipeline Company and ENSTAR Natural
Gas Company dated December 7, 1992
*10.48 Daves Creek Substation Agreement between Chugach
and the Alaska Energy Authority dated March 13,
1992
*10.49 Memorandum of Agreement between Chugach and
AEG&T dated April 27, 1993 regarding Interest
Expense Allocator
*10.50 Settlement Agreement between Chugach and Intervenor
Wholesale Customers in APUC Docket U-93-15
dated September 1993 regarding depreciation of
submarine cables
*10.52 Twenty Five Million Dollar Line of Credit Agreement
and Promissory Note between Chugach and
National Bank for Cooperatives
73
Exhibit
number Description Page
*10.52.1 Amendment to Line of Credit Agreement between
Chugach and National Bank for Cooperatives dated
March 11, 1994
*10.52.2 Amendment to Line of Credit Agreement between
Chugach and National Bank for Cooperatives and
amended and restated Promissory Note (thirty-five
million dollars) dated April 18, 1994
*10.52.3 Amendment to Line of Credit Agreement between
Chugach and National Bank for Cooperatives
(thirty-five million dollars) dated May 1, 1995
*10.52.4 Amendment to Line of Credit Agreement between
Chugach and National Bank for Cooperatives
(thirty-five million dollars) dated May 15, 1995
*10.53 Bill of Sale between Chugach and Cook Inlet Tug &
Barge Co. for the barge SUSITNA dated March 1,
1993
*10.54 Intertie Grant Agreement between Chugach and
GVEA, FMUS, AML&P, AEG&T, MEA, Homer,
Seward, the State of Alaska, Department of
Administration, and AIDEA dated October 26,
1993
*10.55 Grant Transfer and Delegation Agreement between
Chugach and GVEA, FMUS, AML&P, AEG&T,
MEA, Homer, Seward, the State of Alaska,
Department of Administration, and AIDEA dated
November 5, 1993
*10.56 Letter of Understanding between Chugach and IBEW
dated January 6, 1993 regarding the Outside Plant
Personnel Agreement
*10.57 Letter of Understanding between Chugach and IBEW
dated January 6, 1993 regarding the Office and
Engineering Agreement
*10.58 Letter of Understanding between Chugach and IBEW
dated January 6, 1993 regarding the Generation
Plant Personnel Agreement
*10.59 Eklutna Power Sales Contract No. 85-79AP10004
between Chugach and Alaska Power
Administration dated October 13, 1979
Exhibit
number Description Page
*10.59.1 Contract Modification No. 1 to Contract No.
85-79AP10004 between Chugach and the Alaska
Power Administration dated October 19, 1988
extending the Eklutna Power Sales Agreement
*10.59.2 Amendment to Exhibit E of Modification No. 1 to
Contract No. 85-79AP10004 between Chugach
and Alaska Power Administration dated October
29, 1993 regarding the Eklutna Power Sales
Agreement
*10.59.3 Contract Modification No. 2 to Contract No.
85-79AP10004 between Chugach and the Alaska
Power Administration dated November 9, 1993
extending the Eklutna Power Sales Agreement
*10.60 Employment Agreement by and among Chugach
Electric Association, Inc. and Eugene N.
Bjornstad dated July 6, 1994
*****10.60.1 Amendment to Employment Agreement by and
among Chugach Electric Association, Inc. and
Eugene N. Bjornstad dated February 25, 1998
*10.61 United States Department of Energy, Alaska Power
Administration, Eklutna Project, Contract No.
DE-SC85-95AP10042 for Electric Service to
Chugach Electric Association, Inc., Matanuska
Electric Association, Inc. and Municipality of
Anchorage dba Municipal Light & Power dated
December 29, 1994
*10.62 Hotel Employees & Restaurant Employees Union
agreement covering terms and conditions of
employment - Beluga Power Plant Culinary
Employees dated the 2nd day of March, 1995
***10.63 National Bank for Cooperatives (CoBank) Credit
Agreement dated June 22, 1994
***10.63.1 Amendment No. 1 to National Bank for
Cooperatives (CoBank) Credit Agreement dated
June 1, 1997
****10.64 Eklutna Hydroelectric Project Closing Documents
dated October 2, 1997
****10.65 Fifty Million Dollar Line of Credit Agreement
between Chugach and the National Rural Utilities
Cooperative Finance Corporation executed
October 22, 1997
74
Exhibit
number Page
10.66 Contract of Sale PC25TM Model C Fuel Cell Power
Plants between ONSI Corporation ("Seller") and
Chugach Electric Association, Inc. ("Buyer")
dated April 24, 1998 83
10.67 International Swap Dealers Association, Inc. (ISDA)
Master Agreement dated as of March 17, 1999
between Lehman Brothers Financial Products
Inc. and Chugach Electric Association, Inc. 97
12.1 N/A
*19.0 Administrative Order on Consent for Remedial
Investigation/Feasibility Study between Chugach
and the United States Environmental Protection
Agency dated September 23, 1992
*19.1 Proposed Partial Consent Decree in Standard Steel
Superfund Site matter
*19.2 Partial Consent Decree in Standard Steel Superfund
Site matter
*****19.3 Memorandum of Agreement by and among Chugach
Electric Association, Inc. and Admiral Insurance
Company Alaska, Alaska National Insurance
Company, Nationwide Mutual Insurance
Company and Providence Washington Insurance
Company relating to Chugach's PRP obligations
at the Standard Steel Superfund Site dated
February 3, 1998
*****19.4 CERCLA Remedial Design and Remedial Action
Consent Decree in the Standard Steel Superfund
Site matter dated January 24, 1998
******19.5 Settlement Agreement dated the 15th day of May
1998 by and between Nationwide Mutual
Insurance Company, Alaska National Insurance
Company, Providence Washington Insurance
Company and Admiral Insurance Company and
Chugach Electric Association, Inc.
27 Financial Data Schedule (filed electronically)
* Previously referred to in the Registrant's Annual Report on Form 10-K dated
December 31, 1996.
** Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q dated June 30, 1997.
75
*** Previously filed as an exhibit to the Registrant's Quarterly Report on Form
10-Q dated September 30, 1997.
**** Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K dated December 31, 1997
***** Previously filed as an exhibit to the Registrant's Quarterly Report on
Form 10-Q dated March 31, 1998
****** Previously filed as an exhibit to the Registrants Quarterly Report on
Form 10-Q dated June 30, 1998
******* Previously filed as an exhibit to the Registrants Quarterly Report on
Form 10-Q dated September 30, 1998
REPORTS ON FORM 8-K
The Company was not required to file any report on Form 8-K for the year ended
December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 30, 1999.
CHUGACH ELECTRIC ASSOCIATION, INC.
By: /s/ Eugene N. Bjornstad
Eugene N. Bjornstad, General Manager
Date: March 30, 1999
76
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated March 30, 1999:
/s/ Eugene N. Bjornstad
Eugene N. Bjornstad General Manager
/s/ Lee D. Thibert
Lee D. Thibert Executive Manager, T&D Network Services
/s/ Evan J. Griffith, Jr.
Evan J. Griffith, Jr. Executive Manager, Finance & Energy
Supply (principal financial officer)
/s/ William R. Stewart
William R. Stewart Executive Manager, Retail Services
/s/ Michael R. Cunningham
Michael R. Cunningham Controller
(principal accounting officer)
/s/ Patricia B. Jasper
Patricia B. Jasper President and Director
(principal executive officer)
/s/ Christopher Birch
Christopher Birch Vice President and Director
/s/ Bruce E. Davison
Bruce E. Davison Secretary and Director
/s/ Mary Minder
Mary Minder Treasurer and Director
/s/ Raymond A. Kreig
Raymond A. Kreig Director
/s/ Elizabeth P. Kennedy
Elizabeth P. Kennedy Director
77
Supplemental information to be furnished with reports filed pursuant to Section
15(d) of the Act by registrants which have not registered securities pursuant to
Section 12, of the Act:
Chugach has not made an Annual Report to securities holders for 1998 and will
not make such a report after the filing of this Form 10-K. As a consequence, no
copies of any such report will be furnished to the Securities and Exchange
Commission.
78
CONTRACT OF SALE
PC25TM MODEL C FUEL CELL POWER PLANTS
ONSI Corporation("SELLER") and Chugach Electric Association, Inc. ("BUYER")
agree as follows:
1. PRODUCTS AND SERVICES
SELLER shall manufacture and deliver to BUYER six (6) PC25 Fuel Cell
Power Plants as described in Attachment A ("Power Plants") and as set
forth below in Section 2.
SELLER will provide the service options as set forth in Section 2
below.
SELLER shall furnish installation and service manuals prior to or upon
delivery of the first Power Plant.
2. DELIVERIES
Power Plants
The Power Plants shall be delivered on or before the below listed
delivery dates:
Quantity Part Number Unit Price Total Delivery Date
6 TBD $627,500 $3,765,000 December 1998
(Power Plant with
Grid Independent
Parallel; High Grade
Heat)
Services Price
1. ONSI will provide the site installation design $0.00 based on
our standard installation drawings.
This effort will include the initial site visit (up to two
days) followed by one on-site design review.
<PAGE>
3. PRICE AND PAYMENT
The total price of this Contract (subject to increase due to the
exercise of the option in Article 5) is $3,765,000. BUYER shall pay to
SELLER in installments within thirty (30) days of presentation of
SELLER's invoices in accordance with the following schedule:
Upon execution of this Contract. 20% of the unit price of
each Power Plant
Two months prior to delivery 50% of the unit price of
each Power Plant
Upon delivery or ten (10) days after 20% of the unit price of
notice from SELLER that the Power each Power Plant
Plant is ready for delivery, whichever
occurs first.
Upon initial operation or one hundred 10% of the unit price of
twenty (120) days after the earlier of each Power Plant
delivery or notice of readiness for
delivery, whichever occurs first.
All payments shall be made in U.S. dollar funds by wire transfer of the
required remittance without discount to a U.S. bank designated by
SELLER for credit to SELLER's account.
4. GENERAL PROVISIONS
This Contract is subject to and incorporates the terms of the following
Attachments:
A. Attachment A, PC25(TM) Fuel Cell Power Plant Description
B. Attachment B, ONSI Corporation General Contract Provisions
5. SPECIAL PROVISIONS
The following special provisions are applicable to this Contract:
A. BUYER grants SELLER an option to purchase up to four (4)
additional Power Plants at the price and delivery dates set
forth below subject to the terms of this Contract. This option
may be exercised by the BUYER providing SELLER written
notification no later than August 30, 1998.
Power Plants
<PAGE>
Quantity Part Number Unit Price Total Delivery Date
Up to 4 FC13300-01 $600,000 $2,400,000 December 1999
B. i. BUYER acknowledges that the funding to provide the development
of the load share Site Management System may be provided by a
third party. In the event SELLER has not entered a legally
binding agreement for this development effort with a third party
by May 15, 1998, then SELLER and BUYER agree to seek a mutually
agreeable alternative approch, but if agreement is not reached,
then SELLER may terminate this Contract by providing BUYER
written notice of such termination no later than June 30, 1998.
ii. SELLER agrees that if notwithstanding BUYER's best efforts,
funding is not obtained in order to complete the purchase of the
Power Plants hereunder, then BUYER may cancel its order for such
Power Plants upon written notice to SELLER on or before June 30,
1998. BUYER shall forfeit a portion of payments made by BUYER in
respect of such Power Plants to the extent of the costs and
non-cancelable commitments not otherwise recoverable that are
incurred by SELLER to the date of cancellation, but in no event
more than $200,000. Such costs shall be substantiated by
suporting documentataon. Within thirty (30) days of SELLER's
receipt of BUYER's cancellation notice, Seller shall return the
payments made by Buyer less the amount forfeited under this
Section 5B(ii). If, Seller recovers all or a portion of the cost
and non-cancelable commitments incurred under this Contrat by
contating to sell at least four (4) Power Poants withthe grid
independent paralleling option by December 31, 1999, Seller will
return the amount forgeited hereunder by BUYER less SELLER's
unrecovered costs as porvicded above; and if six (6) or more
Power Plants with the grid independent paralleling option are
sold by December 31, 1999, the entire amount forfeited under this
Secion 5 B (ii) will be returned to Buyer up to a maximum amount
of $200,000.
6. NOTICES
Address all notices, which shall be made in writing in the English
language, by certified mail, return receipt requested, or by facsimile
to:
ONSI Corporation Chugach Electric Association, Inc.
P.O. Box 1148 P. O. Box 196300
195 Governor's Highway 5601 Minnesota Drive
South Windsor, CT 06074 U.S.A. Anchorage, AK 99519
Attn: Counsel Attn: Evan J. Griffith, Jr.
Facsimile: (860) 727-2319 Facsimile: 907-762-4514
<PAGE>
This Contract has been executed on behalf of SELLER and BUYER by their duly
authorized representatives as set forth below:
ONSI CORPORATION CHUGACH ELECTRIC ASSOCIATION,
INC.
By /s/ R L Suttmeiller By /s/ Eugene N. Bjornstad
Name Robert L. Suttmeiller Name Eugene N. Bjornstad
Title President Title General Manager
Date May 4, 1998 Date April 24, 1998
<PAGE>
ATTACHMENT A
PC25(TM) FUEL CELL POWER PLANT DESCRIPTION
(Standard Model C Configuration)
The PC25 is a packaged, self-contained fuel cell Power Plant which operates
unattended and automatically using pipeline natural gas fuel. The standard
configuration PC25 Model C can provide on-site electricity and heat in
connection with the utility grid. The Power Plant's capabilities can be extended
with optional configurations.
Rating
The maximum continuous net electrical power output capability is 200 kW/235 kVA.
The Power Plant will operate continuously at temperatures from -20 to
110(degree)F at 500 feet above sea level.
The maximum heat available from the Power Plant is 750,000 Btu/hr at an ambient
temperature of 60(degree)F.
Fuel
The PC25 operates on pipeline natural gas delivered at pressures between 4 and
14 inches water column with gas composition limits in accordance with Table 1.
Table 1. Fuel Composition Limits - Pipeline Natural Gas
Maximum Allowable
Percent Volume
Methane 100
Ethanes 10
Propane 5
Butanes 1.25
Pentanes, Hexanes, C6+ 0.5
CO2 3
O2 0.2
N2 (continuous) 4
Total Sulfur 30 ppmv maximum (6 ppmv average)
Ammonia 1 ppmv
Chlorine 0.05 ppm (weight basis)
At rated power, the PC25 consumes less than 2000 standard cubic feet per hour of
natural gas with a higher heating value of 1000 Btu/ft3.
PC25 Standard Equipment
<PAGE>
The PC25 equipment consists of two modules: a Power Module, designed for outdoor
or indoor operation, and a Cooling Module intended for outdoor operation.
Dimensions of these modules are indicated in Figure 1. These modules include all
equipment necessary to (1) convert natural gas to utility quality ac power, (2)
provide useful heat to the customer and (3) reject excess heat to air. All
controls and instrumentation required for starting and operating the PC25 are
included.
Figure 1. Approximate Module Sizes
[GRAPHIC OMITTED, DEPICTS APPROXIMATE MODULE SIZES]
PC25 Grid-Independent/Paralleling Power Plant Option
When multiple power plants are operated in the grid-independent mode and
connected in parallel to a load, an internal load sharing control is
incorporated into each of the power plants to enable all power plants to operate
in phase, at the same voltage, and share the current properly.
PC25 High-Grade Heat Recovery Option
The standard PC25 power plant provides heat in a single medium-grade stream.
However, the power plant can be configured to provide more than 300,000 Btu/hr
of heat at rated power to heat a customer's pressurized hot water system to
250(degree) F. The remaining 40,000
<PAGE>
Btu/hr or more of heat is provided at 140(degree) F. The high grade heat
decreases to zero at approximately half rated power. Similar to the basic PC25
power plant, the estimated high-grade heat availability is dependent upon supply
and return water temperatures.
Customer Furnished Materials and Equipment
The customer must supply a foundation for the equipment, electrical connections
to the building and/or electrical power grid, gas supply plumbing, plumbing
connections to the building and electrical and plumbing connections between the
Cooling Module and Power Module.
In addition, for the Grid-Independent/Paralleling power plant option the
customer must incorporate a Site Management System into the site installation to
coordinate the operation of the multiple fuel cell power plants during
transitions between operating modes and provide the interface communication
capabilities for control of the multi-unit installation. This Site Management
System is site specific and is external to the power plant.
The power plant also requires up to 82 kW of electrical power during start.
The information contained in this document is intended to be representative of
the PC25 configuration. However, the materials and characteristics are subject
to change. All fuel cell power plants are subject to deterioration in
performance over time and with repeated thermal cycles associated with shutdowns
and startups. Deterioration can be minimized by maintaining continuous operation
to the fullest extent possible.
<PAGE>
ATTACHMENT B
ONSI CORPORATION
GENERAL CONTRACT PROVISIONS
PROVISION 1 -- TAXES
BUYER shall pay SELLER, in addition to the Price, any and all taxes (not
including income taxes) which may be imposed by any taxing authority arising
from the sale, delivery, or subsequent use of the goods sold, and for which
SELLER may be held responsible for collection or payment, either on its own
behalf or that of BUYER, upon receipt by BUYER from SELLER of its bill therefor.
PROVISION 2 -- DELIVERY, TITLE, SHIPPING AND INSURANCE
Deliveries pursuant to this Contract are FOB SELLER's place of manufacture.
Title and risk of loss for each Power Plant shall pass to BUYER at SELLER's
place of manufacture upon delivery or ten (10) days after notice from SELLER
that the Power Plant is ready for delivery, whichever occurs first. BUYER shall
arrange transportation and insurance from the place of manufacture. SELLER shall
notify BUYER of the actual shipping date at least ten (10) days prior to the
actual shipping date.
PROVISION 3 -- WARRANTY
A. Warranty
1. Power Plant Warranty
SELLER warrants that, at the time of delivery, each Power
Plant furnished hereunder shall be free of defects in
materials and manufacturing workmanship.
SELLER's obligations under this warranty with respect to each
Power Plant shall expire twelve (12) months after initial
operation or use, but in no event later than eighteen (18)
months after the date of its delivery or, if BUYER shall
refuse to accept delivery of the Power Plant when it is
offered for delivery on or after the scheduled delivery date,
the date of such offer for delivery.
SELLER warrants that at the time of initial operation, and for
a period of twelve (12) months thereafter, but in no event
later than eighteen (18) months after the date of its
delivery, each Power Plant furnished under this Contract shall
be capable of functioning as described in Attachment A,
providing BUYER has installed, operated, and maintained each
Power Plant and the Site Managmenetn System according to the
SELLER's specifications and recommendations.
2. Warranty of Services
SELLER warrants to BUYER that all services provided under
the Contract will be
<PAGE>
performed in a diligent manner in accordance with the usual
industrial standards. SELLER's liability and BUYER's remedy
under this warranty are limited to SELLER's correction of such
services as are shown to SELLER reasonable satisfaction to
have been defective, provided that written notice of such
defective services shall have been given by BUYER to SELLER
within ninety (90) days after the performance of such services
by SELLER.
B. Remedy and Conditions of Power Plant Warranty
1. SELLER's liability and BUYER's remedy under the
foregoing warranty are limited to the repair or
replacement, at SELLER's option, of defective equipment
or materials or parts thereof, which BUYER will afford
SELLER a reasonable opportunity to inspect, provided
that written notice of the defect shall have been given
by BUYER to SELLER within a reasonable time after
discovery of the claimed defect, but in no event later
than the expiration of the applicable warranty period.
SELLER shall not be responsible for remedying the
effects of ordinary wear and tear.
2. In the event it is necessary to remove any equipment or
materials, or parts thereof, from the Power Plant in
order for BUYER or SELLER to repair or replace the
same, BUYER, at SELLER's election, shall provide the
personnel and equipment necessary for such removal and
reinstallation at SELLER's expense, however, BUYER
shall provide SELLER with its cost estimate of the
removal and reinstallation for any unscheduled work
exceeding one (1) man-day of effort and shall not
proceed with the effort until SELLER's written approval
is received.
3. Any cost of shipment of repaired or replacement
equipment or materials, or parts thereof, to or from
SELLER's plant or any other off-site facility shall be
borne by SELLER, and SELLER shall bear the risk of loss
of such equipment or materials or parts thereof while
they are located away from the location of the Power
Plant.
4. In the event any equipment or materials, or parts
thereof, originally furnished by SELLER are replaced,
SELLER, at its option, shall be entitled to possession
of and title to all of the equipment so replaced. In
the event SELLER, or BUYER acting at SELLER's request,
removes any replaced equipment from the Power Plant
location, title to and risk of loss of such replaced
equipment or materials or parts thereof shall pass to
SELLER at the time it is removed from the Power Plant
location.
5. Where repaired or replacement equipment or materials,
or parts thereof, are furnished pursuant to this
Provision 3, they will be subject to the same
warranties, the same conditions and the same remedies
provided for the original equipment and materials, or
parts thereof, provided that the warranty period for
repaired or replacement equipment and materials or
parts thereof shall be the balance of the applicable
warranty period under Provision 3-A above or the
waranty period porvided by the suppl9ier of hte
reapired or replaced equipment o rmatereials or parts.
In the eveent it is necessary to remove any repoaried
or replaced equipment or materials, or perts thereof,
from thePower Polant inorder for BUYER or SELLER to
reair or replace the same, after the original waranty
period of the
<PAGE>
PowerPlant has expired, BUYER shall provide the
personnel and equipment necessary for such removal and
reinstallation at BUYER's expense.
6. BUYER agrees to provide and maintain telephone service
at its own expense so that SELLER can monitor the Power
Plant and its operation remotely throughout the
applicable warranty period under Provision 3-A above.
7. SELLER shall have no obligation to provide the remedy
specified in this Provision 3 for equipment or
materials which have been subjected to accident,
alteration, abuse or misuse or have not been maintained
and operated in accordance with the procedures
prescribed by SELLER, including the providing of
natural gas at the site in accordance with SELLER's gas
specification set forth in Attachment A, and otherwise
in accordance with reasonable and prudent maintenance
and operational standards.
C. Limitation of Warranty and Remedies
THE WARRANTIES AND REMEDIES STATED IN THIS PROVISION 3 ARE EXCLUSIVE
AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED (INCLUDING
WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR A
PARTICULAR PURPOSE). IN NO EVENT SHALL SELLER BE LIABLE FOR SPECIAL,
INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY NATURE.
PROVISION 4 - LICENSES AND PERMITS
In order to accomplish the objectives set forth in this Contract, certain
permits, approvals, licenses and/or other authorizations (collectively called
"authorizations") may have to be obtained from governmental authorities. BUYER
shall be responsible for obtaining any authorizations that are necessary for its
acquisition, financing, ownership, shipping, export, installation, operation and
maintenance of the Power Plant. SELLER shall be responsible for obtaining any
authorizations required for performance of its obligations under this Contract.
The parties agree to cooperate and provide support to each other in obtaining
the authorizations required hereunder. All such authorizations shall be obtained
in a timely manner.
SELLER shall be notified of and afforded an opportunity to attend at its expense
all presentations to governmental authorities and insurers relating to or
otherwise affecting the safety or other aspects of the equipment or related
services furnished by SELLER. All materials to be presented to any governmental
authority or to any insurer describing SELLER or the safety or other aspects of
the equipment or related services furnished by SELLER shall be subject to the
approval of SELLER, which approval shall not be unreasonably withheld.
SELLER shall not be obligated to disclose to BUYER information which SELLER
considers confidential or proprietary (hereinafter collectively called
"Proprietary Information"). However, SELLER may, at its discretion, provide
Proprietary Information which is necessary in connection with licensing of the
Power Plant, or in connection with other regulatory matters, or where it is
necessary to repair, operate or maintain the Power Plants. If SELLER furnishes
any Proprietary Information to BUYER, it shall be designated as such. BUYER
shall receive and hold such Proprietary Information in confidence, shall use it
exclusively in connection with the Power Plant
<PAGE>
for the purposes specified above (including necessary disclosures on a
proprietary basis to others in that connection, but in any event excluding
disclosures to other suppliers of electric generating equipment) and shall not
publish or otherwise disclose it to others. This obligation of BUYER shall not
apply to information which is in or hereafter comes into the public domain
through no breach of this Contract, which BUYER can show to have been in its
possession before any disclosure hereunder or which BUYER receives from a third
party having a right to make such a disclosure. All Proprietary Information of
SELLER furnished to BUYER shall remain the property of SELLER.
PROVISION 5 - DELAYS
SELLER shall not be liable for delays, interruptions or failures in performing
its obligations arising from any act, delay or failure to act on the part of any
governmental authority, including delay or failure to act in the issuance of
permits, approvals or licenses; acts of God; accidents or disruptions such as
fire, explosion, or major equipment breakdown; failure or delay in securing
necessary materials, equipment, services or facilities; labor difficulties such
as strikes, slowdowns or shortages; delays in transportation; or any cause of a
similar or dissimilar nature beyond SELLER's reasonable control. The time for
performance of this Contract shall be extended for a period equal to any time
lost by reason of the delay. SELLER shall not be obligated to incur any
additional expenses in connection with such a delay unless so directed by BUYER,
in which event the cost of any measures taken to recover any lost time shall be
for BUYER's account.
PROVISION 6 - ASSIGNMENT
Until the payment obligations set forth in Provision 3 of the Contract of Sale
(and any increases due to the exercise of the option in Provision 5 of the
Contract of Sale) are satisfied, neither BUYER nor SELLER may assign any of its
rights or obligations under this Contract, except with the written consent of
the other, and any assignment made without such consent shall be null and void;
provided, however, that SELLER may, upon written notice to BUYER, assign its
rights and obligations without such consent, to an entity which acquires all or
substantially all of SELLER's assets or which controls, is controlled by or is
under common control with SELLER. Such written consent shall not be unreasonably
withheld.
PROVISION 7 - PATENTS
A. SELLER shall conduct, at its own expense, the entire defense of any claim,
suit or action alleging that, without further combination which is the
basis therefor, the use or resale by BUYER of the goods delivered
hereunder, directly infringes any patent of the United States but only on
the condition that (a) SELLER receives prompt (sufficient so as not to
prejudice any of SELLER's interests) written notice of such claim, suit or
action and full opportunity and authority to assume the sole defense
thereof, including settlement and appeals, and all information available to
BUYER for such defense; (b) such claim, suit or action is not based on the
use of the goods in a manner not reasonably contemplated by SELLER and
BUYER; (c) the claim, suit or action is brought against BUYER or one to
whom BUYER is or may become legally obligated for the infringement; and (d)
BUYER has paid all amounts then due and payable hereunder. Provided all of
the foregoing conditions have been met, SELLER shall, at its own expense,
subject to Provision 8 entitled "Liability Limitation", either settle said
infringement claim, suit, or action or pay all
<PAGE>
damages and costs awarded by the court therein and, if the use or resale of
such goods is finally enjoined,SELLER shall,at SELLER's option and expense,
(i) procure for BUYER the right to use or resell the goods, (ii) replace
them with equivalent noninfringing goods, (iii) modify them so they become
noninfringing but substantially equivalent, or (iv) remove them and refund
the purchase price (less a reasonable allowance for use, damage and
obsolescence).
B. If a claim, suit or action is based on the use by BUYER of such goods in a
manner not reasonably contemplated by BUYER and SELLER, or on the use or
sale by BUYER of such goods in combination with other goods not delivered
to BUYER hereunder by SELLER, or on the manufacture of such goods to a
design specified by BUYER, then BUYER shall indemnify and hold SELLER
harmless against all liability, costs, expenses and damages arising out of
such claim, suit or action.
PROVISION 8 - LIABILITY LIMITATION
The Price allocable in this Contract to any Power Plant (including all options)
and/or services alleged to be the cause of any loss or damage to BUYER shall be
the ceiling limit on SELLER's liability, whether founded in contract or tort
(including negligence), arising out of, or resulting from, (i) this Contract or
the performance or breach thereof, (ii) the design, manufacture, delivery, sale,
repair, replacement, or (iii) the use of any such Power Plant. Under no
circumstances shall SELLER be liable for any special, incidental, indirect or
consequential damages of any nature whatsoever, including without limitation,
lost profits, revenues or sales, or increased costs of production, whether such
claims are based in contract or tort including negligence, or any other legal
theory or principle.
PROVISION 9 - TERRITORIES
BUYER shall not install or operate a Power Plant delivered hereunder in any
territory in the United States in which (a) SELLER has provided another person
with an exclusive license to install and operate Power Plants and (b) SELLER has
notified BUYER of such territory, unless BUYER shall have received the prior
permission of the person having an exclusive license for such territory. SELLER
hereby notifies BUYER that it has provided other persons with an exclusive
license to install and operate Power Plants in the exclusive natural gas service
or franchise area of Pacific Gas and Electric and Southern California Gas
Company. BUYER shall include this clause with SELLER identified as ONSI
Corporation in any contract under which a Power Plant is resold or that provides
another person with the right to install and operate a Power Plant and shall
notify the Purchaser under any such contract of such territories on behalf of
SELLER. Notwithstanding any other provisions of this Contract to the contrary,
BUYER agrees that the person holding the exclusive license in a territory is a
third party beneficiary of this provision and such person may enforce this
provision.
PROVISION 10 - MISCELLANEOUS
A. Third Party Beneficiaries
The provisions of this Contract are solely for the benefit of the
parties hereto and not for any other person, except as specifically
provided herein.
<PAGE>
B. Waivers
Waiver by any party of any default by the other shall not be deemed a
waiver by such party of any other default. No waiver shall be binding
unless in writing and signed by a duly authorized representative of the
party granting the waiver. No alteration or modification of any of the
provisions hereof shall be binding unless in writing and signed by a
duly authorized representative of the party to be bound thereby.
C. Notices
Notices and other communications between the parties shall be addressed
as specified on the signature page of this Contract, provided that
either party may change its respective address by notice to the other.
All notices and communications shall be given in writing, in the
English language, by certified mail, return receipt requested, or
facsimile.
D. Section Headings
The section headings used in this Contract are merely for the
convenience of the parties and do not have substantive meaning. It is
not intended that said headings will be considered in the construction
of this Contract.
E. Compliance with Laws
SELLER and BUYER will each comply with all federal, state and local
laws applicable to the performance of their respective obligations
hereunder.
F. Law Controlling
The rights of all parties under this Contract and the construction and
effect of every provision hereof shall be subject to and construed
according to the laws of the State of Alaska, including the Uniform
Commercial Code, and of the United States of America, excluding the
United Nations Convention on the International Sale of Goods.
G. Entire Agreement
This Contract contains the entire agreement between the parties
regarding the Power Plant(s) and any equipment, materials, services and
information provided in connection therewith. Any previous and
collateral agreements, representations, warranties, promises and
conditions relating to the subject matter of this Contract are
superseded by this Contract. Any representation, warranty, promise or
condition not incorporated in this Contract shall not be binding on
either party. No modification nor any claimed waiver of any of the
provisions hereof shall be binding unless in writing and signed by the
party against whom such modification or waiver is sought to be
enforced.
<PAGE>
March 17, 1999
Lehman Brothers Financial Products Inc.
3 World Financial Center
New York, NY 10285
Re: Chugach Electric Association, Inc.
Ladies and Gentlemen:
This letter constitutes the opinion of General Counsel for Chugach Electric
Association, Inc., an Alaska electric cooperative ("Chugach"), in connection
with the ISDA Master Agreement, including the Schedule thereto and related
Confirmation (together the "Swap Agreement"), dated as of March 17, 1999,
between Chugach and Lehman Brothers Financial Products Inc., a Delaware
corporation ("Counterparty"). This opinion is rendered to you pursuant to
Section 4(a) of the Swap Agreement and Part 2 of the Schedule to the Swap
Agreement. Capitalized terms used without definition in this opinion have the
meanings given to them in the Swap Agreement.
I.
I have assumed the authenticity of all records, documents and instruments
submitted to us as originals, the genuineness of all signatures, the legal
capacity of natural persons and the conformity to the originals of all records,
documents and instruments submitted to us as copies. I have based my opinion
upon my review of the following records, documents, instruments and certificates
and such additional certificates relating to factual matters as I have deemed
necessary or appropriate for my opinion:
(a) The Swap Agreement;
(b) The Articles of Incorporation of Chugach certified by the Alaska
Commissioner of Commerce and Economic Development as of January 20, 1999;
(c) The Bylaws of Chugach as in effect on the date of this opinion;
(d) All records of the proceedings and actions of the board of directors of
Chugach relating to the transactions contemplated by the Swap Agreement;
and
(e) A Certificate of Compliance relating to Chugach issued by the Alaska
Commissioner of Commerce and Economic Development, dated January 20, 1999.
This opinion is limited to the federal laws of the United States of America and
the laws of the State of Alaska, and I disclaim any opinion as to the laws of
any other jurisdiction. I further disclaim any opinion as to any statute, rule,
regulation, ordinance, order or other promulgation of any regional or local
governmental body or as to any related judicial or administrative opinion.
II.
Based upon the foregoing and our examination of such questions of law as we have
deemed necessary or appropriate for the purpose of our opinion, and subject to
the limitations and qualifications expressed below, it is my opinion that:
1. The Swap Agreement has been duly authorized by all necessary corporate
action on the part of Chugach.
2. Neither the execution and delivery of the Swap Agreement on behalf of
Chugach nor the consummation by Chugach of the swap transaction as provided
in the Swap Agreement conflicts with any provision of the Articles of
Incorporation or Bylaws of the Company.
3. I do not have knowledge of any action, suit or proceeding against Chugach
that is either pending or has been threatened in writing that is likely to
affect the legality, validity or enforceability of the Swap Agreement.
III.
This opinion is rendered to you in connection with the Swap Agreement and is
solely for your benefit. This opinion may not be relied upon by any other
person, firm, corporation or other entity without my (acting as general counsel
of Chugach) prior written consent. I disclaim any obligation to advise you of
any change of law that occurs, or any facts of which we become aware, after the
date of this opinion.
Sincerely,
/s/ Donald W. Edwards
Donald W. Edwards
General Counsel
<PAGE>
OFFICER'S CERTIFICATE
The undersigned, Donald W. Edwards, certifies as follows to Heller
Ehrman White & McAuliffe for purposes of the opinion it will render to Lehman
Brothers Financial Products Inc. regarding the ISDA Master Agreement, including
the Schedule thereto, dated as of March 17, 1999, as supplemented by that Swap
Confirmation dated as of March 17, 1999 (as so supplemented, the "Agreement"),
between Chugach Electric Association, Inc. and Lehman Brothers Financial
Products Inc.
1. I am the general counsel of Chugach Electric Association, Inc. (the
"Company"). In that capacity, I am familiar with the matters to which this
certificate relates.
2. The copy of the Articles of Incorporation of the Company as amended April
1998, previously provided to you by the Company, is a true, correct and
complete copy of the Articles of Incorporation of the Company in full force
and effect as of the date of this certificate.
3. The copy of the Bylaws of the Company, as amended April 30, 1998,
previously provided to you by the Company, is a true, correct and complete
copy of the Bylaws of the Company in full force and effect as of the date
of this certificate.
4. I have recently telefaxed to you a resolution of the board of directors of
the Company, adopted at a meeting held on February 22, 1999, approving the
transactions contemplated by the Agreement and authorizing the execution
and delivery of the Agreement. That resolution is in full force and effect
as of the date of this certificate and has not been amended or rescinded.
Each member of the board of directors of the Company was duly elected by
the shareholders or through the filling of vacancies in accordance with
applicable law. The meeting at which the transaction was approved was duly
noticed (or notice was waived) and quorum was present.
5. No proceedings for the dissolution, merger, consolidation or liquidation of
the Company, or for the sale of all or substantially all of its assets is
pending, or to the best of my knowledge, threatened or contemplated by the
Company.
DATED as of March 17, 1999
/s/ Donald W. Edwards
Donald W. Edwards, General Counsel
<PAGE>
(Local Currency-Single Jurisdiction)
ISDA
International Swap Dealers Association, Inc.
MASTER AGREEMENT
dated as of March 17, 1999
Lehman Brothers Financial Products Inc. and Chugach Electric Association, Inc.
have entered and/or anticipate entering into one or more transactions (each a
"Transaction") that are or will be governed by this Master Agreement, which
includes the schedule (the "Schedule"), and the documents and other confirming
evidence (each a "Confirmation") exchanged between the parties confirming those
Transactions.
Accordingly, the parties agree as follows:--
1. Interpretation
(a) Definitions. The terms defined in Section 12 and in the Schedule will
have the meanings therein specified for the purpose of this Master
Agreement.
(b) Inconsistency. In the event of any inconsistency between the provisions
of the Schedule and the other provisions of this Master Agreement, the
Schedule will prevail. In the event of any inconsistency between the
provisions of any Confirmation and this Master Agreement (including the
Schedule), such Confirmation will prevail for the purpose of the
relevant Transaction.
(c) Single Agreement. All Transactions are entered into in reliance on the
fact that this Master Agreement and all Confirmations form a single
agreement between the parties (collectively referred to as this
"Agreement"), and the parties would not otherwise enter into any
Transactions.
2. Obligations
(a) General Conditions.
(i) Each party will make each payment or delivery specified in each
Confirmation to be made by it, subject to the other provisions of this
Agreement.
(ii) Payments under this Agreement will be made on the due date for
value on that date in the place of the account specified in the
relevant Confirmation or otherwise pursuant to this Agreement, in
freely transferable funds and in the manner customary for payments in
the required currency. Where settlement is by delivery (that is, other
than by payment), such delivery will be made for receipt on the due
date in the manner customary for the relevant obligation unless
otherwise specified in the relevant Confirmation or elsewhere in this
Agreement.
(iii) Each obligation of each party under Section 2(a)(i) is subject
to (1) the condition precedent that no Event of Default or Potential
Event of Default with respect to the other party has occurred and is
continuing,(2) the condition precedent that no Early Termination Date
in respect of the relevant Transaction has occurred or been
effectively designated and (3) each other applicable condition
precedent specified in this Agreement.
(b) Change of Account. Either party may change its account for receiving a
payment or delivery by giving notice to the other party at least five
Local Business Days prior to the scheduled date for the payment or
delivery to which such change applies unless such other party gives
timely notice of a reasonable objection to such change.
(c) Netting. If on any date amounts would otherwise be payable:--
(i) in the same currency; and
(ii) in respect of the same Transaction,
by each party to the other, then, on such date, each party's obligation to make
payment of any such amount will be automatically satisfied and discharged and,
if the aggregate amount that would otherwise have been payable by one party
exceeds the aggregate amount that would otherwise have been payable by the other
party, replaced by an obligation upon the party by whom the larger aggregate
amount would have been payable to pay to the other party the excess of the
larger aggregate amount over the smaller aggregate amount.
The parties may elect in respect of two or more Transactions that a net amount
will be determined in respect of all amounts payable on the same date in the
same currency in respect of such Transactions, regardless of whether such
amounts are payable in respect of the same Transaction. The election may be made
in the Schedule or a Confirmation by specifying that subparagraph (ii) above
will not apply to the Transactions identified as being subject to the election,
together with the starting date (in which case subparagraph (ii) above will not,
or will cease to, apply to such Transactions from such date). This election may
be made separately for different groups of Transactions and will apply
separately to each pairing of branches or offices through which the parties make
and receive payments or deliveries.
(d) Default Interest; Other Amounts. Prior to the occurrence or effective
designation of an Early Termination Date in respect of the relevant Transaction,
a party that defaults in the performance of any payment obligation will, to the
extent permitted by law and subject to Section 6(c), be required to pay interest
(before as well as after judgment) on the overdue amount to the other party on
demand in the same currency as such overdue amount, for the period from (and
including) the original due date for payment to (but excluding) the date of
actual payment, at the Default Rate. Such interest will be calculated on the
basis of daily compounding and the actual number of days elapsed. If, prior to
the occurrence or effective designation of an Early Termination Date in respect
of the relevant Transaction, a party defaults in the performance of any
obligation required to be settled by delivery, it will compensate the other
party on demand if and to the extent provided for in the relevant Confirmation
or elsewhere in this Agreement.
3. Representations
Each party represents to the other party (which representations will be deemed
to be repeated by each party on each date on which a Transaction is entered
into) that:
(a) Basic Representations.
(i) Status. It is duly organised and validly existing under the
laws of the jurisdiction of its organisation or incorporation and, if
relevant under such laws, in good standing;
(ii) Powers. It has the power to execute this Agreement and any
other documentation relating to this Agreement to which it is a party,
to deliver this Agreement and any other documentation relating to this
Agreement that it is required by this Agreement to deliver and to
perform its obligations under this Agreement and any obligations it
has under any Credit Support Document to which it is a party and has
taken all necessary action to authorise such execution, delivery and
performance;
(iii)No Violation or Conflict. Such execution, delivery and
performance do not violate or conflict with any law applicable to it,
any provision of its constitutional documents, any order or judgment
of any court or other agency of government applicable to it or any of
its assets or any contractual restriction binding on or affecting it
or any of its assets;
(iv) Consents. All governmental and other consents that are
required to have been obtained by it with respect to this Agreement or
any Credit Support Document to which it is a party have been obtained
and are in full force and effect and all conditions of any such
consents have been complied with; and
(v) Obligations Binding. Its obligations under this Agreement and any
Credit Support Document to which it is a party constitute its legal,
valid and binding obligations, enforceable in accordance with their
respective terms (subject to applicable bankruptcy, reorganisation,
insolvency, moratorium or similar laws affecting creditors' rights
generally and subject, as to enforceability, to equitable principles of
general application (regardless of whether enforcement is sought in a
proceeding in equity or at law)).
(b) Absence of Certain Events. No Event of Default or Potential Event of
Default or, to its knowledge, Termination Event with respect to it has occurred
and is continuing and no such event or circumstance would occur as a result of
its entering into or performing its obligations under this Agreement or any
Credit Support Document to which it is a party.
(c) Absence of Litigation. There is not pending or, to its knowledge,
threatened against it or any of its Affiliates any action, suit or proceeding at
law or in equity or before any court, tribunal, governmental body, agency or
official or any arbitrator that is likely to affect the legality, validity or
enforceability against it of this Agreement or any Credit Support Document to
which it is a party or its ability to perform its obligations under this
Agreement or such Credit Support Document.
(d) Accuracy of Specified Information. All applicable information that is
furnished in writing by or on behalf of it to the other party and is identified
for the purpose of this Section 3(d) in the Schedule is, as of the date of the
information, true, accurate and complete in every material respect.
4. Agreements
Each party agrees with the other that, so long as either party has or may have
any obligation under this Agreement or under any Credit Support Document to
which it is a party:
(a) Furnish Specified Information. It will deliver to the other party any
forms, documents or certificates specified in the Schedule or any Confirmation
by the date specified in the Schedule or such Confirmation or, if none is
specified, as soon as reasonably practicable.
(b) Maintain Authorisations. It will use all reasonable efforts to maintain
in full force and effect all consents of any governmental or other authority
that are required to be obtained by it with respect to this Agreement or any
Credit Support Document to which it is a party and will use all reasonable
efforts to obtain any that may become necessary in the future.
(c) Comply with Laws. It will comply in all material respects with all
applicable laws and orders to which it may be subject if failure so to comply
would materially impair its ability to perform its obligations under this
Agreement or any Credit Support Document to which it is a party.
5. Events of Default and Termination Events
(a) Events of Default. The occurrence at any time with respect to a party
or, if applicable, any Credit Support Provider of such party or any Specified
Entity of such party of any of the following events constitutes in event of
default (an "Event of Default") with respect to such party:--
(i) Failure to Pay or Deliver. Failure by the party to make, when due,
any payment under this Agreement or delivery under Section 2(a)(i) or 2(d)
required to be made by it if such failure is not remedied on or before the
third Local Business Day after notice of such failure is given to the
party;
(ii) Breach of Agreement. Failure by the party to comply with or
perform any agreement or obligation (other than an obligation to make any
payment under this Agreement or delivery under Section 2(a)(i) or 2(d) or
to give notice of a Termination Event or any agreement or obligation under
Section 4(a)) to be complied with or performed by the party in accordance
with this Agreement if such failure is not remedied on or before the
thirtieth day after notice of such failure is given to the party;
(iii) Credit Support Default.
(1) Failure by the party or any Credit Support Provider of such party
to comply with or perform any agreement or obligation to be complied with
or performed by it in accordance with any Credit Support Document if such
failure is continuing after any applicable grace period has elapsed;
(2) the expiration or termination of such Credit Support Document or
the failing or ceasing of such Credit Support Document to be in full force
and effect for the purpose of this Agreement (in either case other than in
accordance with its terms) prior to the satisfaction of all obligations of
such party under each Transaction to which such Credit Support Document
relates without the written consent of the other party; or
(3) the party or such Credit Support Provider disaffirms, disclaims,
repudiates or rejects, in whole or in part, or challenges the validity of,
such Credit Support Document;
(iv) Misrepresentation. A representation made or repeated or deemed to
have been made or repeated by the party or any Credit Support Provider of
such party in this Agreement or any Credit Support Document proves to have
been incorrect or misleading in any material respect when made or repeated
or deemed to have been made or repeated;
(v) Default under Specified Transaction. The party, any Credit Support
Provider of such party or any applicable Specified Entity of such party (1)
defaults under a Specified Transaction and, after giving effect to any
applicable notice requirement or grace period, there occurs a liquidation
of, an acceleration of obligations under, or an early termination of, that
Specified Transaction, (2) defaults, after giving effect to any applicable
notice requirement or grace period, in making any payment or delivery due
on the last payment, delivery or exchange date of, or any payment on early
termination of, a Specified Transaction (or such default continues for at
least three Local Business Days if there is no applicable notice
requirement or grace period) or (3) disaffirms, disclaims, repudiates or
rejects, in whole or in part, a Specified Transaction (or such action is
taken by any person or entity appointed or empowered to operate it or act
on its behalf);
(vi) Cross Default. If "Cross Default" is specified in the Schedule as
applying to the party, the occurrence or existence of (1) a default, event
of default or other similar condition or event (however described) in
respect of such party, any Credit Support Provider of such party or any
applicable Specified Entity of such party under one or more agreements or
instruments relating to Specified Indebtedness of any of them (individually
or collectively) in an aggregate amount of not less than the applicable
Threshold Amount (as specified in the Schedule) which has resulted in such
Specified Indebtedness becoming, or becoming capable at such time of being
declared, due and payable under such agreements or instruments, before it
would otherwise have been due and payable or (2) a default by such party,
such Credit Support Provider or such Specified Entity (individually or
collectively) in making one or more payments on the due date thereof in an
aggregate amount of not less than the applicable Threshold Amount under
such agreements or instruments (after giving effect to any applicable
notice requirement or grace period);
(vii) Bankruptcy. The party, any Credit Support Provider of such party
or any applicable Specified Entity of such party:--
(1) is dissolved (other than pursuant to a consolidation,
amalgamation or merger); (2) becomes insolvent or is unable to pay
its debts or fails or admits in writing its inability generally to
pay its debts as they become due; (3) makes a general assignment,
arrangement or composition with or for the benefit of its
creditors; (4) institutes or has instituted against it a
proceeding seeking a judgment of insolvency or bankruptcy or any
other relief under any bankruptcy or insolvency law or other
similar law affecting creditors' rights, or a petition is
presented for its winding-up or liquidation, and, in the case of
any such proceeding or petition instituted or presented against
it, such proceeding or petition (A) results in a judgment of
insolvency or bankruptcy or the entry of an order for relief or
the making of an order for its winding-up or liquidation or (B) is
not dismissed, discharged, stayed or restrained in each case
within 30 days of the institution or presentation thereof; (5) has
a resolution passed for its winding-up, official management or
liquidation (other than pursuant to a consolidation, amalgamation
or merger); (6) seeks or becomes subject to the appointment of an
administrator, provisional liquidator, conservator, receiver,
trustee, custodian or other similar official for it or for all or
substantially all its assets; (7) has a secured party take
possession of all or substantially all its assets or has a
distress, execution, attachment, sequestration or other legal
process levied, enforced or sued on or against all or
substantially all its assets and such secured party maintains
possession, or any such process is not dismissed, discharged,
stayed or restrained, in each case within 30 days thereafter; (8)
causes or is subject to any event with respect to it which, under
the applicable laws of any jurisdiction, has an analogous effect
to any of the events specified in clauses (1) to (7) (inclusive);
or (9) takes any action in furtherance of, or indicating its
consent to, approval of, or acquiescence in, any of the foregoing
acts; or
(viii) Merger Without Assumption. The party or any Credit Support
Provider of such party consolidates or amalgamates with, or merges with or
into, or transfers all or substantially all its assets to, another entity
and, at the time of such consolidation, amalgamation, merger or transfer:
(1) the resulting, surviving or transferee entity fails to assume
all the obligations of such party or such Credit Support Provider under this
Agreement or any Credit Support Document to which it or its predecessor was a
party by operation of law or pursuant to an agreement reasonably satisfactory to
the other party to this Agreement; or
(2) the benefits of any Credit Support Document fail to extend
(without the consent of the other party) to the performance by such resulting,
surviving or transferee entity of its obligations under this Agreement.
(b) Termination Events. The occurrence at any time with respect to a party
or, if applicable, any Credit Support Provider of such party or any Specified
Entity of such party of any event specified below constitutes an Illegality if
the event is specified in (i) below, and, if specified to be applicable, a
Credit Event Upon Merger if the event is specified pursuant to (ii) below or an
Additional Termination Event if the event is specified pursuant to (iii) below:
(i) Illegality. Due to the adoption of, or any change in, any applicable
law after the date on which a Transaction is entered into, or due to the
promulgation of, or any change in, the interpretation by any court, tribunal or
regulatory authority with competent jurisdiction of any applicable law after
such date, it becomes unlawful (other than as a result of a breach by the party
of Section 4(b)) for such party (which will be the Affected Party):
(1) to perform any absolute or contingent obligation to make a
payment or delivery or to receive a payment or delivery in respect of such
Transaction or to comply with any other material provision of this Agreement
relating to such Transaction; or
(2) to perform, or-for any Credit Support Provider of such party
to perform, any contingent or other obligation which the party (or such Credit
Support Provider) has under any Credit Support Document relating to such
Transaction;
(ii) Credit Event Upon Merger. If "Credit Event Upon Merger" is specified
in the Schedule as applying to the party, such party ("X"), any Credit Support
Provider of X or any applicable Specified Entity of X consolidates or
amalgamates with, or merges with or into, or transfers all or substantially all
its assets to, another entity and such action does not constitute an event
described in Section 5(a)(viii) but the creditworthiness of the resulting,
surviving or transferee entity is materially weaker than that of X, such Credit
Support Provider or such Specified Entity, as the case may be, immediately prior
to such action (and, in such event, X or its successor or transferee, as
appropriate, will be the Affected Party); or
(iii) Additional Termination Event. If any "Additional Termination
Event" is specified in the Schedule or any Confirmation as applying, the
occurrence of such event (and, in such event, the Affected Party or Affected
Parties shall be as specified for such Additional Termination Event in the
Schedule or such Confirmation).
(c) Event of Default and Illegality. If an event or circumstance which
would otherwise constitute or give rise to an Event of Default also constitutes
an Illegality, it will be treated as an Illegality and will not constitute an
Event of Default.
6. Early Termination
(a) Right to Terminate Following Event of Default. If at any time an Event of
Default with respect to a party (the "Defaulting Party") has occurred and is
then continuing, the other party (the "Non-defaulting Party") may, by not more
than 20 days notice to the Defaulting Party specifying the relevant Event of
Default, designate a day not earlier than the day such notice is effective as an
Early Termination Date in respect of all outstanding Transactions. If, however,
"Automatic Early Termination" is specified in the Schedule as applying to a
party, then an Early Termination Date in respect of all outstanding Transactions
will occur immediately upon the occurrence with respect to such party of an
Event of Default specified in Section 5(a)(vii)(1), (3), (5), (6) or, to the
extent analogous thereto, (8), and as of the time immediately preceding the
institution of the relevant proceeding or the presentation of the relevant
petition upon the occurrence with respect to such party of an Event of Default
specified in Section 5(a)(vii)(4) or, to the extent analogous thereto, (8).
(b) Right to Terminate Following Termination Event.
(i) Notice. If a Termination Event occurs, an Affected Party will, promptly
upon becoming aware of it, notify the other party, specifying the nature of that
Termination Event and each Affected Transaction and will also give such other
information about that Termination Event as the other party may reasonably
require.
(ii) Two Affected Parties. If an Illegality under Section 5(b)(1) occurs
and there are two Affected Parties, each party will use all reasonable efforts
to reach agreement within 30 days after notice thereof is given under Section
6(b)(i) on action to avoid that Termination Event.
(iii) Right to Terminate. If:--
(1) an agreement under Section 6(b)(ii) has not been effected
with respect to all Affected Transactions within 30 days after an Affected Party
gives notice under Section 6(b)(i); or
(2) an Illegality other than that referred to in Section
6(b)(ii), a Credit Event Upon Merger or an Additional Termination Event occurs,
either party in the case of an Illegality, any Affected Party in the
case of an Additional Termination Event if there is more than one
Affected Party, or the party which is not the Affected Party in the
case of a Credit Event Upon Merger or an Additional Termination Event
if there is only one Affected Party may, by not more than 20 days
notice to the other party and provided that the relevant Termination
Event is then continuing, designate a day not earlier than the day such
notice is effective as an Early Termination Date in respect of all
Affected Transactions.
(c) Effect of Designation
(i) If notice designating an Early Termination Date is given under
Section 6(a) or (b), the Early Termination Date will occur on the date so
designated, whether or not the relevant Event of Default or Termination Event is
then continuing.
(ii) Upon the occurrence or effective designation of an Early
Termination Date, no further payments or deliveries under Section 2(a)(i) or
2(d) in respect of the Terminated Transactions will be required to be made, but
without prejudice to the other provisions of this Agreement. The amount, if any,
payable in respect of an Early Termination Date shall be determined pursuant to
Section 6(e).
(d) Calculations.
(i) Statement. On or as soon as reasonably practicable following the
occurrence of an Early Termination Date, each party will make the
calculations on its part, if any, contemplated by Section 6(e) and will
provide to the other party a statement (1) showing, in reasonable
detail, such calculations (including all relevant quotations and
specifying any amount payable under Section 6(e)) and (2) giving
details of the relevant account to which any amount payable to it is to
be paid. In the absence of written confirmation from the source of a
quotation obtained in determining a Market Quotation, the records of
the party obtaining such quotation will be conclusive evidence of the
existence and accuracy of such quotation.
(ii) Payment Date. An amount calculated as being due in respect of any
Early Termination Date under Section 6(e) will be payable on the day
that notice of the amount payable is effective (in the case of an Early
Termination Date which is designated or occurs as a result of an Event
of Default) and on the day which is two Local Business Days after the
day on which notice of the amount payable is effective (.in the case of
an Early Termination Date which is designated as a result of a
Termination Event). Such amount will be paid together with (to the
extent permitted under applicable law) interest thereon (before as well
as after judgment), from (and including) the relevant Early Termination
Date to (but excluding) the date such amount is paid, at the Applicable
Rate. Such interest will be calculated on the basis of daily
compounding and the actual number of days elapsed.
(e) Payments on Early Termination. If an Early Termination Date occurs, the
following provisions shall apply based on the parties' election in the Schedule
of a payment measure, either "Market Quotation" or "Loss", and a payment method,
either the "First Method" or the "Second Method". If the parties fail to
designate a payment measure or payment method in the Schedule, it will be deemed
that "Market Quotation" or the "Second Method", as the case may be, shall apply.
The amount, if any, payable in respect of an Early Termination Date and
determined pursuant to this Section will be subject to any Set-off.
(i) Events of Default. If the Early Termination Date results from an Event
of Default:
(1) First Method and Market Quotation. If the First Method and
Market Quotation apply, the Defaulting Party will pay to the Non-defaulting
Party the excess, if a positive number, of (A) the sum of the Settlement Amount
(determined by the Non-defaulting Party) in respect of the Terminated
Transactions and the Unpaid Amounts owing to the Non-defaulting Party over (B)
the Unpaid Amounts owing to the Defaulting Party.
(2) First Method and Loss. If the First Method and Loss apply, the
Defaulting Party will pay to the Non-defaulting Party, if a positive number, the
Non-defaulting Party's Loss in respect of this Agreement.
(3) Second Method and Market Quotation. If the Second Method and Market
Quotation apply, an amount will be payable equal to (A) the sum of the
Settlement Amount (determined by the Non-defaulting Party) in respect of the
Terminated Transactions and the Unpaid Amounts owing to the Non-defaulting Party
less (B) the Unpaid Amounts owing to the Defaulting Party. If that amount is a
positive number, the Defaulting Party will pay it to the Non-defaulting Party;
if it is a negative number, the Nondefaulting Party will pay the absolute value
of that amount to the Defaulting Party.
(4) Second Method and Loss. If the Second Method and Loss apply,
an amount will be payable equal to the Non-defaulting Party's Loss in respect of
this Agreement. If that amount is a positive number, the Defaulting Party will
pay it to the Non-defaulting Party; if it is a negative number, the
Non-defaulting Party will pay the absolute value of that amount to the
Defaulting Party.
(ii) Termination Events. If the Early Termination Date results from a
Termination Event:
(1) One Affected Party. If there is one Affected Party, the amount
payable will be determined in accordance with Section 6(e)(i)(3),
if Market Quotation applies, or Section 6(e)(i)(4), if Loss
applies, except that, in either case, references to the Defaulting
Party and to the Non-defaulting Party will be deemed to be
references to the Affected Party and the party which is not the
Affected Party, respectively, and, if Loss applies and fewer than
all the Transactions are being terminated Loss shall be calculated
in respect of all Terminated Transactions.
(2) Two Affected Parties. If there are two Affected Parties:--
(A) if Market Quotation applies, each party will determine a
Settlement Amount in respect of the Terminated Transactions, and an amount will
be payable equal to (I) the sum of (a) one-half of the difference between the
Settlement Amount of the party with the higher Settlement Amount ("X") and the
Settlement Amount of the party with the lower Settlement Amount ("Y") and (b)
the Unpaid Amounts owing to X less (11) the Unpaid Amounts owing to Y; and
(B.) if Loss applies, each party will determine its Loss in
respect of this Agreement (or, if fewer than all the Transactions are being
terminated, in respect of all Terminated Transactions) and an amount will be
payable equal to one-half of the difference between the Loss of the party with
the higher Loss ("X") and the Loss of the party with the lower Loss ("Y").
If the amount payable is a positive number, Y will pay it to X;
if it is a negative number, X will pay the absolute value of that amount to Y.
(iii) Adjustment for Bankruptcy. In circumstances where an Early
Termination Date occurs because "Automatic Early Termination" applies in respect
of a party, the amount determined under this Section 6(e) will be subject to
such adjustments as are appropriate and permitted by law to reflect any payments
or deliveries made by one party to the other under this Agreement (and retained
by such other party) during the period from the relevant Early Termination Date
to the date for payment determined under
Section 6(d)(ii).
(iv) Pre-Estimate. The parties agree that if Market Quotation applies an
amount recoverable under this Section 6(e) is a reasonable pre-estimate of loss
and not a penalty. Such amount is payable for the loss of bargain and the loss
of protection against future risks and except as otherwise provided in this
Agreement neither party will be entitled to recover any additional damages as a
consequence of such losses.
7. Transfer
Neither this Agreement nor any interest or obligation in or under-this Agreement
may be transferred (whether by way of security or otherwise) by either party
without the prior written consent of the other party, except that:--
(a) a party may make such a transfer of this Agreement pursuant to a
consolidation or amalgamation with, or merger with or into, & transfer of all or
substantially all its assets to, another entity (but without prejudice to any
other right or remedy under this Agreement); and
(b) a party may make such a transfer of all or any part of its interest in
any amount payable to it from a Defaulting Party under Section 6(e).
Any purported transfer that is not in compliance with this Section will be void.
8. Miscellaneous
(a) Entire Agreement. This Agreement constitutes the entire agreement and
understanding of the parties with respect to its subject matter and supersedes
all oral communication and prior writings with respect thereto.
(b) Amendments. No amendment, modification or waiver in respect of this
Agreement will be effective unless in writing (including a writing evidenced by
a facsimile transmission) and executed by each of the parties or confirmed by an
exchange of telexes or electronic messages on an electronic messaging system.
(c) Survival of Obligations. Without prejudice to Sections 2(a)(iii) and
6(c)(ii), the obligations of the parties under this Agreement will survive the
termination of any Transaction.
(d) Remedies Cumulative. Except as provided in this Agreement, the rights,
powers, remedies and privileges provided in this Agreement are cumulative and
not exclusive of any rights, powers, remedies and privileges provided by law.
(e) Counterparts and Confirmations.
(i) This Agreement (and each amendment, modification and waiver in
respect of it) may be executed and delivered in counterparts (including by
facsimile transmission), each of which will be deemed an original.
(ii) The parties intend that they are legally bound by the terms of
each Transaction from the moment they agree to those terms (whether
orally or otherwise). A Confirmation shall be entered into as soon as
practicable and may be executed and delivered in counterparts
(including by facsimile transmission) or be created by an exchange of
telexes or by an exchange of electronic messages on an electronic
messaging system, which in each case will be sufficient for all
purposes to evidence a binding supplement to this Agreement. The
parties will specify therein or through another effective means that
any such counterpart, telex or electronic message constitutes a
Confirmation.
(f) No Waiver of Rights. A failure or delay in exercising any right, power
or privilege in respect of this Agreement will not be presumed to operate as a
waiver, and a single or partial exercise of any right, power or privilege will
not be presumed to preclude any subsequent or further exercise, of that right,
power or privilege or the exercise of any other right, power or privilege.
(g) Headings. The headings used in this Agreement are for convenience of
reference only and are not to affect the construction of or to be taken into
consideration in interpreting this Agreement.
9. Expenses
A Defaulting Party will, on demand, indemnify and hold harmless the other party
for and against all reasonable out-of-pocket expenses, including legal fees,
incurred by such other party by reason of the enforcement and protection of its
rights under this Agreement or any Credit Support Document to which the
Defaulting Party is a party or by reason of the early termination of any
Transaction, including, but not limited to, costs of collection.
10. Notices
(a) Effectiveness. Any notice or other communication in respect of this
Agreement may be given in any manner set forth below (except # that a notice or
other communication under Section 5 or 6 may not be given by facsimile
transmission or electronic messaging system) to the address or number or in
accordance with the electronic messaging system details provided (see the
Schedule) and will be deemed effective as indicated:--
(i) if in writing and delivered in person or by courier, on the date it is
delivered;
(ii) if sent by telex, on the date the recipient's answerback is received;
(iii) if sent by facsimile transmission, on the date that transmission is
received by a responsible employee of the recipient in legible form (it being
agreed that the burden of proving receipt will be on the sender and will not be
met by a transmission report generated by the sender's facsimile machine);
(iv) if sent by certified or registered mail (airmail, if overseas) or the
equivalent (return receipt requested), on the date that mail is delivered or its
delivery is attempted; or
(v) if sent by electronic messaging system, on the date that electronic
message is received,
unless the date of that delivery (or attempted delivery) or that receipt, as
applicable, is not a Local Business Day or that communication is delivered (or
attempted) or received, as applicable, after the close of business on a Local
Business Day, in which case that communication shall be deemed given and
effective on the first following day that is a Local Business Day.
(b) Change of Addresses. Either party may by notice to the other change the
address, telex or facsimile number or electronic messaging system details at
which notices or other communications are to be given to it.
11. Governing Law and Jurisdiction
(a) Governing Law. This Agreement will be governed by and construed in
accordance with the law specified in the Schedule.
(b) Jurisdiction. With respect to any suit, action or proceedings relating
to this Agreement ("Proceedings"), each party irrevocably:--
(i) submits to the jurisdiction of the English courts, if this
Agreement is expressed to be governed by English law, or to the non-exclusive
jurisdiction of the courts of the State of New York and the United States
District Court located in the Borough of Manhattan in New York City, if this
Agreement is expressed to be governed by the laws of the State of New York; and
(ii) waives any objection which it may have at any time to the laying
of venue of any Proceedings brought in any such court, waives any claim that
such Proceedings have been brought in an inconvenient forum and further waives
the right to object, with respect to such Proceedings, that such court does not
have any jurisdiction over such party.
Nothing in this Agreement precludes either party from bringing Proceedings in
any other jurisdiction (outside, if this Agreement is expressed to be governed
by English law, the Contracting States, as defined in Section 1(3) of the Civil
Jurisdiction and Judgments Act 1982 or any modification, extension or
re-enactment thereof for the time being in force) nor will the bringing of
Proceedings in any one or more jurisdictions preclude the bringing of
Proceedings in any other jurisdiction.
(c) Waiver of Immunities. Each party irrevocably waives, to the fullest extent
permitted by applicable law, with respect to itself and its revenues and assets
(irrespective of their use or intended use), all immunity on the grounds of
sovereignty or other similar grounds from (i) suit, (ii) jurisdiction of any
court, (iii) relief by way of injunction, order for specific performance or for
recovery of property, (iv) attachment of its assets (whether before or after
judgment) and (v) execution or enforcement of any judgment to which it or its
revenues or assets might otherwise be entitled in any Proceedings in the courts
of any jurisdiction and irrevocably agrees, to the extent permitted by
applicable law, that it will not claim any such immunity in any Proceedings.
12. Definitions
As used in this Agreement:--
"Additional Termination Event" has the meaning specified in Section 5(b).
"Affected Party" has the meaning specified in Section 5(b).
"Affected Transactions" means (a) with respect to any Termination Event
consisting of an Illegality, all Transactions affected by the occurrence of such
Termination Event and (b) with respect to any other Termination Event, all
Transactions.
"Affiliate" means, subject to the Schedule, in relation to any person, any
entity controlled, directly or indirectly, by the person, any entity that
controls, directly or indirectly, the person or any entity directly or
indirectly under common control with the person. For this purpose, "control" of
any entity or person means ownership of a majority of the voting power of the
entity or person.
"Applicable Rate" means:--
(a) in respect of obligations payable or deliverable (or which would have been
but for Section 2(a)(iii)) by a Defaulting Party, the Default Rate;
(b) in respect of an obligation to pay an amount under Section 6(e) of
either party from and after the date (determined in accordance with Section
6(d)(ii)) on which that amount is payable, the Default Rate;
(c) in respect of all other obligations payable or deliverable (or which
would have been but for Section 2(a)(iii)) by a Non-defaulting Party, the
Non-default Rate; and
(d) in all other cases, the Termination Rate.
"consent" includes a consent, approval, action, authorisation, exemption,
notice, filing, registration or exchange control consent.
"Credit Event Upon Merger" has the meaning specified in Section 5(b).
"Credit Support Document" means any agreement or instrument that is specified as
such in this Agreement.
"Credit Support Provider" has the meaning specified in the Schedule.
"Default Rate" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the relevant payee (as certified by it) if it
were to fund or of funding the relevant amount plus I % per annum.
"Defaulting Party" has the meaning specified in Section 6(a).
"Early Termination Date" means the date determined in accordance with Section
6(a) or 6(b)(iii).
"Event of Default" has the meaning specified in Section 5(a) and, if
applicable, in the Schedule.
"Illegality" has the meaning specified in Section 5(b).
"law" includes any treaty, law, rule or regulation and "lawful" and "unlawful"
will be construed accordingly.
"Local Business Day" means, subject to the Schedule, a day on which commercial
banks are open for business (including dealings in foreign exchange and foreign
currency deposits) (a) in relation to any obligation under Section 2(a)(i), in
the place(s) specified in the relevant Confirmation or, if not so specified, as
otherwise agreed by the parties in writing or determined pursuant to provisions
contained, or incorporated by reference, in this Agreement, (b) in relation to
any other payment, in the place where the relevant account is located, (c) in
relation to any notice or other communication, including notice contemplated
under Section 5(a)(i), in the city specified in the address for notice provided
by the recipient and, in the case of a notice contemplated by Section' 2(b), in
the place where the relevant new account is to be located and (d) in relation to
Section 5(a)(v)(2), #in the relevant locations for performance with respect to
such Specified Transaction.
"Loss" means, with respect to this Agreement or one or more Terminated
Transactions, as the case may be, and a party, an amount that party reasonably
determines in good faith to be its total losses and costs (or gain, in which
case expressed as a negative number) in connection with this Agreement or that
Terminated Transaction or group of Terminated Transactions, as the case may be,
including any loss of bargain, cost of funding or, at the election of such party
but without duplication, loss or cost incurred as a result of its terminating,
liquidating, obtaining or reestablishing any hedge or related trading position
(or any gain resulting from any of them). Loss includes losses and costs (or
gains) in respect of any payment or delivery required to have been made
(assuming satisfaction of each applicable condition precedent) on or before the
relevant Early Termination Date and not made, except, so as to avoid
duplication, if Section 6(e)(i)(1) or (3) or 6(e)(ii)(2)(A) applies. Loss does
not include a party's legal fees and out-of-pocket expenses referred to under
Section 9. A party will determine its Loss as of the relevant Early Termination
Date, or, if that is not reasonably practicable, as of the earliest date
thereafter as is reasonably practicable. A party may (but need not) determine
its Loss by reference to quotations of relevant rates or prices from one or more
leading dealers in the relevant markets.
"Market Quotation" means, with respect to one or more Terminated Transactions
and a party making the determination, an amount determined on the basis of
quotations from Reference Market-makers. Each quotation will be for an amount,
if any, that would be paid to such party (expressed as a negative number) or by
such party (expressed as a positive number) in consideration of an agreement
between such party (taking into account any existing Credit Support Document
with respect to the obligations of such party) and the quoting Reference
Market-maker to enter into a transaction (the "Replacement Transaction") that
would have the effect of preserving for such party the economic equivalent of
any payment or delivery (whether the underlying obligation was absolute or
contingent and assuming the satisfaction of each applicable condition precedent)
by the parties under Section 2(a)(i) in respect of such Terminated Transaction
or group of Terminated Transactions that would, but for the occurrence of the
relevant Early Termination Date, have been required after that date. For this
purpose, Unpaid Amounts in respect of the Terminated Transaction or group of
Terminated transactions are to be excluded but, without limitation, any payment
or delivery that would, but for the relevant Early Termination Date, have been
required (assuming satisfaction of each applicable condition precedent) after
that Early Termination Date is to be included. The Replacement Transaction would
be subject to such documentation as such party and the Reference Market-maker
may, in good faith, agree. The party making the determination (or its agent)
will request each Reference Market-maker to provide its quotation to the extent
reasonably practicable as of the same day and time (without regard to different
time zones) on or as soon as reasonably practicable after the relevant Early
Termination Date. The day and time as of which those quotations are to be
obtained will be selected in good faith by the party obliged to make a
determination under Section 6(e), and, if each party is so obliged, after
consultation with the other. If more than three quotations are provided, the
Market Quotation will be the arithmetic mean of the quotations, without regard
to the quotations having the highest and lowest values. If exactly three such
quotations are provided, the Market Quotation will be the quotation remaining
after disregarding the highest and lowest quotations. For this purpose, if more
than one quotation has the same highest value or lowest value, then one of such
quotations shall be disregarded. If fewer than three quotations are provided, it
will be deemed that the Market Quotation in respect of such Terminated
Transaction or group of Terminated Transactions cannot be determined.
"Non-default Rate" means a rate per annum equal to the cost (without proof or
evidence of any actual cost) to the Non-defaulting Party (as certified by it) if
it were to fund the relevant amount.
"Non -defaulting Party" has the meaning specified in Section 6(a).
"Potential Event of Default" means any event which, with the giving of notice or
the lapse of time or both, would constitute an Event of Default.
"Reference Market-makers" means four leading dealers in the relevant market
selected by the party determining a Market Quotation in good faith (a) from
among dealers of the highest credit standing which satisfy all the criteria that
such party applies generally at the time in deciding whether to offer or to make
an extension of credit and (b) to the extent practicable, from among such
dealers having an office in the same city.
"Scheduled Payment Date" means a date on which a payment or delivery is to be
made under Section 2(a)(i) with respect to a Transaction.
"Set-off" means set-off, offset, combination of accounts, right of retention or
withholding or similar right or requirement to which the payer of an amount
under Section 6 is entitled or subject (whether arising under this Agreement,
another contract, applicable law or otherwise) that is exercised by, or imposed
on, such payer.
"Settlement Amount" means, with respect to a party and any Early
Termination Date, the sum of:
(a) the Market Quotations (whether positive or negative) for each Terminated
Transaction or group of Terminated Transactions for which a Market Quotation is
determined; and
(b) such party's Loss (whether positive or negative and without reference
to any Unpaid Amounts) for each Terminated Transaction or group of Terminated
Transactions for which a Market Quotation cannot be determined or would not (in
the reasonable belief of the party making the determination) produce a
commercially reasonable result.
"Specified Entity" has the meaning specified in the Schedule.
"Specified Indebtedness" means, subject to the Schedule, any obligation (whether
present or future, contingent or otherwise, as principal or surety or otherwise)
in respect of borrowed money.
"Specified Transaction" means, subject to the Schedule, (a) any transaction
(including an agreement with respect thereto) now existing or hereafter entered
into between one party to this Agreement (or any Credit Support Provider of such
party or any applicable Specified Entity of such party) and the other party to
this Agreement (or any Credit Support Provider of such other party or any
applicable Specified Entity of such other party) which is a rate swap
transaction, basis swap, forward rate transaction, commodity swap, commodity
option, equity or equity index swap, equity or equity index option, bond option,
interest rate option, foreign exchange transaction, cap transaction, floor
transaction, collar transaction, currency swap transaction, cross-currency rate
swap transaction, currency option or any other similar transaction (including
any option with respect to any of these transactions), (b) any combination of
these transactions and (c) any other transaction identified as a Specified
Transaction in this Agreement or the relevant confirmation.
"Terminated Transactions" means with respect to any Early Termination Date (a)
if resulting from a Termination Event, all Affected Transactions and (b) if
resulting from an Event of Default, all Transactions (in either case) in effect
immediately before the effectiveness of the notice designating that Early
Termination Date (or, if "Automatic Early Termination" applies, immediately
before that Early Termination Date).
"Termination Event" means an Illegality or, if specified to be applicable, a
Credit Event Upon Merger or an Additional Termination Event.
"Termination Rate" means a rate per annum equal to the arithmetic mean of the
cost (without proof or evidence of any actual cost) to each party (as certified
by such party) if it were to fund or of funding such amounts.
"Unpaid Amounts" owing to any party means, with respect to an Early Termination
Date, the aggregate of (a) in respect of all Terminated Transactions, the
amounts that became payable (or that would have become payable but for Section
2(a)(iii)) to such party under Section 2(a)(i) on or prior to such Early
Termination Date and which remain unpaid as at such Early Termination Date and
(b) in respect of each Terminated Transaction, for each obligation under Section
2(a)(i) which was (or would have been but for Section 2(a)(iii)) required to be
settled by delivery to such party on or prior to such Early Termination Date and
which has not been so settled as at such Early Termination Date, an amount equal
to the fair market value of that which was (or would have been) required to be
delivered as of the originally scheduled date for delivery, in each case
together with (to the extent permitted under applicable law) interest, in the
currency of such amounts, from (and including) the date such amounts or
obligations were or would have been required to have been paid or performed to
(but excluding) such Early Termination Date, at the Applicable Rate. Such
amounts of interest will be calculated on the basis of daily compounding and the
actual number of days elapsed. The fair market value of any obligation referred
to in clause (b) above shall be reasonably determined by the party obliged to
make the determination under Section 6(e) or, if each party is so obliged, it
shall be the average of the fair market values reasonably determined by both
parties.
IN WITNESS WHEREOF the parties have executed this document on the respective
dates specified below with effect from the date specified on the first page of
this document.
LEHMAN BROTHERS FINANCIAL PRODUCTS CHUGACH ELECTRIC ASSOCIATION,
INC., a Delaware corporation INC., an Alaska not-for-profit incorporated
electric cooperative
By: /s/ Sherri Venakor By: /s/ Eugene N. Bjornstad
Name: Sherri Venakor Name: Eugene N. Bjornstad
Title: Vice President Title: General Manager
Date: March 17, 1999 Date: March 17, 1999
1
<PAGE>
(Local Currency--Single Jurisdiction)
ISDA (R)
International Swap Dealers Association, Inc.
SCHEDULE
to the
Master Agreement
dated as of March 17, 1999
between LEHMAN BROTHERS FINANCIAL PRODUCTS INC. ("Party A")
and CHUGACH ELECTRIC ASSOCIATION, INC. ("Party B")
PART 1: Termination Provisions
(a) "Specified Entity" means in relation to Party A for the purpose of:-
Section 5(a)(v) (Default under Specified Transaction), none;
Section 5(a)(vi) (Cross Default), none;
Section 5(a)(vii) (Bankruptcy), none; and
Section 5(b)(ii) (Credit Event Upon Merger), none;
in relation to Party B for the purpose of:-
Section 5(a)(v) (Default under Specified Transaction) none;
Section 5(a)(vi) (Cross Default), none;
Section 5(a)(vii) (Bankruptcy), none; and
Section 5(b)(ii) (Credit Event Upon Merger), none.
(b) "Specified Transaction" will have the meaning specified in Section 12.
(c) The "Cross-Default" provisions of Section 5(a)(vi) will not apply to Party
A and will not apply to Party B.
(d) The "Credit Event Upon Merger" provisions of Section 5(b)(ii) will apply to
Party A will apply to Party B.
(e) The "Automatic Early Termination" provision of Section 6(a) will not apply
to Party A will not apply to Party B.
(f) Payments on Early Termination. For the purpose of Section 6(e):
(i) See part 4 (d)
(g) "Termination Currency" means United States Dollars.
(h) "Additional Termination Event." Additional Termination Event will not
apply.
PART 2: Agreement to Deliver Documents
For the purpose of Section 4(a) of this Agreement, each party agrees to deliver
the following documents:
Tax forms, documents or certificates to be delivered are: none.
Other documents to be delivered are:-
<TABLE>
<S> <C> <C> <C>
Party required to Form/Document/Certificate Date by Covered by Section 3(d)
deliver document which to be delivered Representation
- --------------------- -------------------------------------------- -------------------------- -----------------------
Party B AnnualReport of Party B thereof containing As soon as available and in Yes
audited, consolidated financial statements any event within 120 days after
certified by independent certified public the end of each fiscal year
accountants and prepared in accordance with of Party B.
generally accepted accounting principles in
the country in which such party is organized
Party B Quarterly Financial Statements of Party B As soon as available and in Yes
containing unaudited, consolidated financial any event within 90 days
statements of such party's fiscal quarter pre- after the end of each of the
pared in accordance with generally accepted first three fiscal quarters
accounting principles in the country in which of each fiscal year of
such party and such Credit Support Provider is Party B
organized
Party B Opinion of counsel substantially in the form Upon execution and delivery No
of Exhibit I hereto of this Agreement
Party A and Certified copies of all corporate authorizations Upon execution and delivery Yes
Party B and any other documents with respect to the of this Agreement
execution, delivery and performance of this
Agreement and any Credit Support Document
Party A and Certificate of authority and specimen signatures Upon execution and delivery Yes
Party B of individuals executing this Agreement any of this Agreement and there-
Credit Support Document and Confirmations after upon request of the
other party
</TABLE>
PART 3: Miscellaneous
(a) Address for Notices. For the purpose of Section 10(a)of this Agreement:-
Address for notice or communications to Party A:
Lehman Brothers Financial Products Inc.
3 World Financial Center
New York, NY 10285
Attention: Documentation Group
Telephone No.: (212) 526-1877
Facsimile No.: (212) 526-7097
Address for notice or communications to Party B:
Chugach Electric Association, Inc.
5601 Minnesota Drive
Anchorage, AK 99519-6300
Attention: Evan J. Griffith, Jr.
Telephone No.: (907) 762-4760
Facsimile No.: (907) 762-4514
(b) Calculation Agent. The Calculation Agent is Party A.
(c) Credit Support Document. Details of any Credit Support Document:- Not
applicable.
(d) Credit Support Provider. Credit Support Provider means in relation to Party
A: Not applicable. Credit Support Provider means in relation to Party B:
Not applicable.
(e) Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York (without reference to its
conflict of laws doctrine).
(f) Netting of Payments. All amounts payable on the same date, in the same
currency and in respect of the same Transaction shall be netted in
accordance with Section 2(c) of this Agreement. The election contained in
the last paragraph of Section 2(c) of this Agreement shall not apply for
the purposes of this Agreement.
(g) "Affiliate" will have the meaning specified in Section 12 of this Agreement.
PART 4: Other Provisions
(a) Set-off. Any amount (the "Early Termination Amount") payable to one party
(the Payee) by the other party (the Payer) under Section 6(e), in
circumstances where there is a Defaulting Party or one Affected Party in
the case where a Termination Event under Section 5(b)(ii) or (iii) has
occurred, will, at the option of the party ("X") other than the Defaulting
Party or the Affected Party (and without prior notice to the Defaulting
Party or the Affected Party), be reduced by its set-off against any
amount(s) (the "Other Agreement Amount") payable (whether at such time or
in the future or upon the occurrence of a contingency) by the Payee to the
Payer (irrespective of the currency, place of payment or booking office of
the obligation) under any other agreement(s) between the Payee and the
Payer or instrument(s) or undertaking(s) issued or executed by one party
to, or in favor of, the other party (and the Other Agreement Amount will be
discharged promptly and in all respects to the extent it is so set-off). X
will give notice to the other party of any set-off effected under this Part
4(a). For this purpose, either the Early Termination Amount or the Other
Agreement Amount (or the relevant portion of such amounts) may be converted
by X into the currency in which the other is denominated at the rate of
exchange at which such party would be able, acting in a reasonable manner
and in good faith, to purchase the relevant amount of such currency. If an
obligation is unascertained, X may in good faith estimate that obligation
and set-off in respect of the estimate, subject to the relevant party
accounting to the other when the obligation is ascertained. Nothing in this
Part 4(a) shall be effective to create a charge or other security interest.
This Part 4(a) shall be without prejudice and in addition to any right of
set-off, combination of accounts, lien or other right to which any party is
at any time otherwise entitled (whether by operation of law, contract or
otherwise).
(b) Delivery of Confirmations. For each Transaction entered into hereunder,
Party A shall promptly send to Party B a Confirmation via facsimile
transmission. Party B agrees to respond to such Confirmation within two (2)
Business Days, either confirming agreement thereto or requesting a
correction of any error(s) contained therein. Failure by Party A to send a
Confirmation or of Party B to respond within such period shall not affect
the validity or enforceability of such Transaction. Absent manifest error,
there shall be a presumption that the terms contained in such Confirmation
are the terms of the Transaction.
(c) Bankruptcy. Section 5(a)(vii)(3) of this Agreement is hereby amended by the
substitution of the following therefor:
"(3) sends a notice convening a meeting to propose a
voluntary arrangement of creditors, or any class thereof, or
makes a general assignment, arrangement or composition with or
for the benefit of its creditors, or any class thereof;"
(d) Early Termination: (i) Calculation of Payment. If an Early Termination Date
occurs with respect to the Treasury Rate-Lock Transaction (as defined in
the Confirmation (the "Confirmation") of even date herewith), or if the
Treasury Rate-Lock Transaction is otherwise terminated on any date before
February 13, 2002, then, irrespective of the reason for such occurrence,
the amount, if any, payable by either party to the other party (which shall
then constitute the "Adjustment Amount" for purposes of the Rate-Lock
Transaction) shall be determined in accordance with the following (and, to
the extent relevant, the Early Termination Date shall constitute the
"Determination Date" referred to in the Confirmation):
By mutual agreement
of the parties, in which case the agreed-upon Adjustment Amount will be
paid on the Payment Date and, except for the obligation to pay the
Adjustment Amount, the Treasury Rate-Lock Transaction will terminate on the
Determination Date, with no further rights or obligations of either party;
or
At the election of either party and if, after the relevant determination
is complete, the amount so determined is acceptable to Party B, in its sole
discretion: using the "Second Method" and "Market Quotation", determined by
Party A (as if Party A were the "Non-defaulting Party") as of the
Determination Date, in which case the "Adjustment Amount" for purposes
hereof shall be equal to the "Settlement Amount" that results from
application of the Second Method and Market Quotation, and as so
determined, will be paid on the Payment Date and, except for the obligation
to pay the Adjustment Amount, the Treasury Rate-Lock Transaction will
terminate on the Determination Date, with no further rights or obligations
of either party; or
At Party B's election (to be made in its sole
discretion but subject to the prior written consent of Party A, not to be
unreasonably withheld, as to the identity of the assignee), Party B may, in
lieu of terminating (or permitting the termination of) the Treasury
Rate-Lock Transaction, assign its interest in the Treasury Rate-Lock
Transaction to any other Person willing to accept such assignment and to
assume all obligations of Party B in respect thereof, on the terms and
conditions of this Agreement (including this Schedule) and the related
Confirmation, notwithstanding any other documentation between Party A and
such assignee, all pursuant to documentation reasonably acceptable in form
and substance to the assignee, to Party B and to Party A, in which case the
Treasury Rate-Lock Transaction will not terminate, but will continue as a
contract between Party A and Party B's assignee, and no Adjustment Amount
shall be payable in connection with such assignment.
(ii) Payment Subject to Set-Off. Such amount, if any, as is payable by one party
to the other in respect of an Early Termination Date shall be payable in
accordance with the Section 6 (d) (ii), and shall be subject to any
Set-off.
---------------------------
(iii)Adjustment for Bankruptcy. In circumstances where an Early Termination
Event occurs because "Automatic Early Termination" applies in respect of a
party, the amount, if any, determined to be payable by either party to the
other party under this Part 4(d) will be subject to such adjustments as are
appropriate and permitted by law to reflect any payments or deliveries made
by one party to the other party under this Agreement (and retained by such
other party) during the period from the relevant Early Termination Date to
the date for payment provided under Section 6(d) (ii).
(iv) Pre-Estimate. The parties agree that the Adjustment Amount provided to be
determined and paid pursuant to this Part 4(d) is a reasonable pre-estimate
of loss and not a penalty. Such amount is payable for the loss of bargain
and the loss of protection against future risks and except as otherwise
provided in this Agreement neither party will be entitled to recover any
additional damages as a consequence of such losses.
------------
(e) Recording of Conversations. Each party to this Agreement acknowledges and
agrees to the tape recording of conversations between the parties to this
Agreement whether by one or other or both of the parties or their agents,
and that any such tape recordings may be submitted in evidence in any
Proceedings relating to the Agreement.
(f) Credit Assignment Event.
(i) If at any time during the term of the Treasury Rate-Lock
Transaction Party B fails to maintain, with at least one of the ratings
agencies set forth below, at least the Assignment Threshold Rating (as
defined below), the rights and obligations of Party A under the
Treasury Rate-Lock Transaction shall automatically, and without further
action by any party, be deemed to have been assigned and delegated to,
and assumed by, Lehman Brothers Special Financing Inc., a Delaware
corporation ("LBSF"), effective on the third Business Day following
notification by Party A to Party B of such assignment and assumption,
and Party B expressly and irrevocably consents to such assignment and
assumption, except that no such assignment and assumption shall occur
at any time after the occurrence of any event of default under any
master agreement between Party A and LBSF. As of and from the effective
date of such assignment and assumption, LBSF shall succeed to all
rights and obligations of Party A under the Treasury Rate-Lock
Transaction.
"Assignment Threshold Rating" means: with respect to Moody's Investors Service
Inc.: (1) long-term senior unsecured debt rating, counterparty rating or
long-term deposit-paying rating of Baa1, (2) financial strength rating of
Baa2, or (3) if neither clause (1) nor clause (2) applies, commercial paper
or short-term rating of P-3. with respect to Standard & Poor's Rating
Group: (1) long-term senior unsecured debt rating, financial programs
rating or certificate of deposit rating of BBB+, (2) claims-paying ability
rating of BBB, or (3) if neither clause (1) nor clause (2) applies,
commercial paper or short-term rating of A-2.
(ii) Party A represents that it has provided separate consideration to LBSF for
the right to assign the Treasury Rate-Lock Transaction to LBSF pursuant to
clause (i) above, and Party B shall not owe to Party A any termination or
other payment upon any such assignment.
(iii)Notwithstanding clause (i) above, no assignment of the Treasury Rate-Lock
Transaction to LBSF shall occur if, before the effective date of the
assignment and assumption described in clause (i), Party B notifies Party A
that Party B agrees to (A) terminate the Treasury Rate-Lock Transaction as
if a Termination Event has occurred and Party B is the Affected Party, or
(B) assign the Treasury Rate-Lock Transaction to a third party on terms
acceptable to Party A and Party B.
(iv) Notwithstanding clauses (i) through (iii) above, no transfer or assignment
payment shall be due to or owing from either Party A or Party B.
(g) Section 3(a) of this Agreement is amended by (i) deleting the word "and" at
the end of clause (iv); (ii) deleting the period at the end of clause (v)
and inserting therein "; and " ; and (iii) by inserting the following
additional representation:
"(vi)Eligible Swap Participant. It is an 'eligible swap participant' as
defined under the regulations of the Commodity Futures Trading
Commission, currently at 17 CFR Section 35.1(b)(2)."
(h) Section 3 is revised so as to add the following Section (e) at the end
thereof:
"(e) Relationship Between Parties. Each party represents to the other party
and will be deemed to represent to the other party on the date on
which it enters into a Transaction that (absent a written agreement
between the parties that expressly imposes affirmative obligations to
the contrary for that Transaction):-
(i) Non-Reliance. It is acting for its own account, and it has made
its own independent decisions to enter into that Transaction and
as to whether that Transaction is appropriate or proper for it
based upon its own judgment and upon advice from such advisors as
it has deemed necessary. It is not relying on any communication
(written or oral) of the other party as investment advice or as a
recommendation to enter into that Transaction; it being
understood that information and explanations related to the terms
and conditions of a Transaction shall not be considered
investment advice or a recommendation to enter into that
Transaction. Further, such party has not received from the other
party any assurance or guarantee as to the expected results of
that Transaction.
(ii) Evaluation and Understanding. It is capable of evaluating and
understanding (on its own behalf or through independent
professional advice), and understands and accepts, the terms,
conditions and risks of that Transaction. It is also capable of
assuming, and assumes, the financial and other risks of that
Transaction.
(iii)Status of Parties. The other party is not acting as an agent,
fiduciary or advisor for it in respect of that Transaction."
(i) Waiver of Right to Trial by Jury. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
AND ALL RIGHTS TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.
(j) Conditions to Payment. Section 2 (a)(iii) shall not apply to the payment of
the Adjustment Amount, as defined in the relevant Confirmation, or as
determined pursuant hereto.
Accepted and agreed:
LEHMAN BROTHERS FINANCIAL PRODUCTS INC. CHUGACH ELECTRIC ASSOCIATION, INC.
By: /s/ Sherri Venakor By: /s/ Eugene N. Bjornstad
Name: Sherri Venakor Name: Eugene N. Bjornstad
Title: Vice President Title: General Manager
<PAGE>
EXHIBIT I
[PLEASE SEE THE ATTACHED TWO FORMS OF OPINIONS]
<PAGE>
SECRETARY'S CERTIFICATE
I, Bruce Davison, [Assistant] Secretary of Chugach Electric
Association, Inc., an Alaska not-for-profit incorporated electric cooperative
(the "Company"), hereby certify pursuant to Part 2(b) of the Schedule, dated as
of March 17, 1999, to the Master Agreement dated as of March 17, 1999, between
the Company and Lehman Brothers Financial Products Inc., a Delaware corportation
("LBFP") (collectively, the "Agreement") (capitalized terms used herein and not
otherwise defined shall have the same meanings assigned to them in the
Agreement):
The following person(s) authorized to execute and deliver the
Agreement and the related Confirmation on behalf of the Company, were, at the
respective times of signing and delivery of the Agreement and such Confirmation,
and are, on and as of the date hereof, the duly appointed officers of the
Company holding the respective offices or titles set forth opposite their names
below, and the signatures set forth opposite their names below are their true
and genuine signatures:
Name Title of Office Signature
Eugene N. Bjornstad General Manager /s/ Eugene N. Bjornstad
Evan J. Griffith, Jr. Executive Manager, /s/ Evan J. Griffith, Jr.
Finance and Energy Supply
IN WITNESS WHEREOF, I have executed this Certificate as
[Assistant] Secretary of the Company this 22nd day of March, 1999.
Name: /s/ Bruce Davison
Bruce Davison
Secretary
I, Dianne Hillemeyer, do hereby certify that Bruce Davison is, on and as of
the date hereof, the duly appointed Secretary of the Company, and the signature
set forth opposite his name below is his true and genuine signature:
Name Title of Office Signature
Bruce Davison Secretary /s/ Bruce Davison
IN WITNESS WHEREOF, I have executed this Certificate as
Exec. Asst. of the Company this 22nd day of March, 1999.
Name: /s/ Dianne Hillemeyer
Name: Dianne Hillemeyer
Title: Executive Assistant
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,489,940
<SECURITIES> 0
<RECEIVABLES> 17,691,174
<ALLOWANCES> (447,908)
<INVENTORY> 15,963,434
<CURRENT-ASSETS> 37,084,215
<PP&E> 650,622,554
<DEPRECIATION> (233,981,397)
<TOTAL-ASSETS> 481,091,450
<CURRENT-LIABILITIES> 33,080,997
<BONDS> 305,917,699
0
0
<COMMON> 0
<OTHER-SE> 114,023,296
<TOTAL-LIABILITY-AND-EQUITY> 481,091,450
<SALES> $141,825,373
<TOTAL-REVENUES> $141,825,373
<CGS> 0
<TOTAL-COSTS> 110,737,441
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,468,669
<INCOME-PRETAX> 8,730,404
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,730,404
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,730,404
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
