UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549










FORM 10-Q








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





For the quarterly period ended September 30, 2010





OR





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








Commission file number 33-42125





CHUGACH ELECTRIC ASSOCIATION, INC.


(Exact name of registrant as specifies in its charter)







State of Alaska

92-0014224(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)5601 Electron Drive, Anchorage, AK

99518(Address of principal executive offices)

(Zip Code)(907) 563-7494(Registrant’s telephone number, including area code)None(Former name, former address, and former fiscal year if changed since last report)







Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


x Yes  o No




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


o Yes  o No




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




Large accelerated filer o

Accelerated filer oNon-accelerated filer x

Smaller reporting company o




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


o Yes  x No




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


NONE










CHUGACH ELECTRIC ASSOCIATION, INC.


TABLE OF CONTENTS





Caution Regarding Forward-Looking Statements

2Part I.  Financial InformationItem 1.

Financial Statements (unaudited)

2Balance Sheets - as of September 30, 2010 and December 31, 2009

3Statements of Operations - Three and Nine months Ended September 30, 2010 and September 30, 2009

5Statements of Cash Flows - Three and Nine months Ended September 30, 2010 and September 30, 2009

6Notes to Financial Statements

7Item 2.

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

19Item 3.

Quantitative and Qualitative Disclosures About Market Risk

34Item 4.

Controls and Procedures

35Part II. Other InformationItem 1.

Legal Proceedings

35Item 1A.

Risk Factors

35Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36Item 3.

Defaults Upon Senior Securities

36Item 4.

Reserved

36Item 5.

Other Information

36Item 6.

Exhibits

36Signatures

37Exhibits

38


1
 Table of Contents


Caution Regarding Forward-Looking Statements





Statements in this report that do not relate to historical facts, including statements relating to future plans, events or performance, are forward-looking statements that involve risks and uncertainties.  Actual results, events or performance may differ materially.  Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this report and the accuracy of which is subject to inherent uncertainty.  It is suggested these statements are read in conjunction with our audited financial statements for the year ended December 31, 2009, filed as part of our annual report on Form 10-K.  Chugach Electric Association, Inc. (Chugach) undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances that may occur after the date of this report or the effect of those events or circumstances on any of the forward-looking statements contained in this report, except as required by law.





PART I. FINANCIAL INFORMATION





ITEM 1. FINANCIAL STATEMENTS





The unaudited financial statements and notes to the financial statements of Chugach as of and for the quarter and year to date period ended September 30, 2010, follow.


2
 Table of Contents




Chugach Electric Association, Inc.


Balance Sheets


(Unaudited)




Assets

September 30, 2010


December 31, 2009Utility Plant:Electric Plant in service

$
845,146,696


$
834,467,734Construction work in progress


78,475,633



48,383,610Total utility plant


923,622,329



882,851,344Less accumulated depreciation


(440,203,173
)


(420,464,808
)Net utility plant


483,419,156



462,386,536Other property and investments, at cost:Nonutility property


24,461



24,461Special Funds


357,101



345,792Investments in associated organizations


12,026,811



12,333,936Total other property and investments


12,408,373



12,704,189Current assets:Cash and cash equivalents


10,633,526



3,503,765Special deposits


233,037



125,037Fuel cost under-recovery


181,150



278,164Accounts receivable, net


23,460,612



32,764,733Materials and supplies


31,319,735



29,990,618Prepayments


2,420,295



1,261,897Other current assets


280,739



246,380Total current assets


68,529,094



68,170,594Deferred charges, net


19,992,722



22,037,407Total assets

$
584,349,345


$
565,298,726


3
 Table of Contents




Chugach Electric Association, Inc.


Balance Sheets (continued)


(Unaudited)




Liabilities, Equities and Margins

September 30, 2010


December 31, 2009Equities and margins:Memberships

$
1,464,673


$
1,432,054Patronage capital


145,554,405



144,228,221Other


10,656,372



10,660,322Total equities and margins


157,675,450



156,320,597Long-term obligations, excluding current installments:Bonds payable


120,000,000



270,000,000National Bank for Cooperatives


34,736,007



37,301,819Total long-term obligations


154,736,007



307,301,819Current liabilities:Current installments of long-term obligations


152,828,951



4,118,028Commercial Paper


72,500,000



51,500,000Accounts payable


14,094,366



10,212,105Consumer deposits


2,179,750



2,447,140Fuel cost over-recovery


4,635,112



3,511,422Accrued interest


1,734,704



6,067,630Salaries, wages and benefits


7,173,036



5,956,320Fuel


14,007,466



14,658,058Other liabilities


949,247



1,234,371Total current liabilities


270,102,632



99,705,074Deferred compensation


357,101



345,792Deferred liabilities


1,478,155



1,625,444Total liabilities, equities and margins

$
584,349,345


$
565,298,726





See accompanying notes to financial statements.


4
 Table of Contents




Chugach Electric Association, Inc.


Statements of Operations


(Unaudited)




Three months ended

September 30,


Nine months ended

September 30,2010


2009


2010


2009Operating revenues

$
58,274,912


$
63,565,392


$
184,430,124


$
216,221,615Operating expenses:Fuel


24,082,544



27,751,711



78,596,428



101,214,779Production


5,557,226



4,700,270



13,532,362



12,739,101Purchased power


6,306,942



8,823,476



18,436,395



29,766,532Transmission


1,490,327



1,695,610



4,191,962



4,364,627Distribution


3,270,196



3,287,595



9,262,570



9,544,949Consumer accounts


1,347,065



1,277,619



4,089,150



3,863,125Administrative, general and other


5,206,186



4,500,094



15,766,176



14,587,035Depreciation and amortization


8,184,736



8,056,273



24,507,485



24,055,420Total operating expenses


55,445,222



60,092,648



168,382,528



200,135,568Interest expense:Long-term debt


2,573,807



5,010,659



9,773,021



15,135,824Other


2,664,974



250,984



5,929,072



854,251Charged to construction


(288,968
)


(139,233
)


(711,608
)


(397,147
)Interest expense, net


4,949,813



5,122,410



14,990,485



15,592,928Net operating margins


(2,120,123
)


(1,649,666
)


1,057,111



493,119Nonoperating margins:Interest income


76,215



81,200



231,267



174,197Capital credits, patronage dividends and other


34,635



59,668



72,696



139,880Total nonoperating margins


110,850



140,868



303,963



314,077Assignable margins

$
(2,009,273
)

$
(1,508,798
)

$
1,361,074


$
807,196





See accompanying notes to financial statements.


5
 Table of Contents


Chugach Electric Association, Inc.


Statements of Cash Flows


(Unaudited)




Nine months ended September 302010


2009Cash flows from operating activities:Assignable margins

$
1,361,074


$
807,196Adjustments to reconcile assignable margins to net cash provided by operating activities:Depreciation


24,507,485



24,055,420Amortization and depreciation cleared to operating expenses


4,038,147



3,552,562Allowance for other funds used during construction


(776,975
)


(494,377
)Write off of inventory and projects


14,315



293,346Other


(9,922
)


(4,768
)Changes in assets and liabilities:(Increase) decrease in assets:Accounts receivable


9,304,121



(859,117
)Fuel and purchased power cost under-recovery


97,014



11,788,078Materials and supplies


(1,329,117
)


(1,510,732
)Prepayments


(1,158,398
)


(207,428
)Other assets


223,235



(31,561
)Deferred charges, net


(1,073,793
)


(1,679,878
)Increase (decrease) in liabilities:Accounts payable


336,978



(888,713
)Consumer deposits


(267,390
)


(40,775
)Fuel and purchased power cost over-recovery


1,123,690



2,103,082Accrued interest


(4,332,926
)


(4,401,333
)Salaries, wages and benefits


1,216,716



(229,350
)Fuel


(650,592
)


(9,647,377
)Other liabilities


(224,350
)


(700,217
)Deferred liabilities


(26,080
)


33,991Net cash provided by operating activities


32,373,232



21,938,049Cash flows from investing activities:Extension and replacement of plant


(43,056,954
)


(21,389,832
)Net cash used for investing activities


(43,056,954
)


(21,389,832
)Cash flows from financing activities:Payments of notes payable


0



(2,860,000
)Repayments of long-term obligations


(3,854,889
)


(46,624,942
)Proceeds from short-term borrowing


21,000,000



66,998,000Repayments of short-term borrowing


0



(19,498,000
)Memberships and donations (received) refunded


28,669



(64,759
)Retirement of patronage capital and estate payments


(149,664
)


(134,432
)Net receipts on consumer advances for construction


789,367



477,793Net cash provided by (used for) financing activities


17,813,483



(1,706,340
)Net increase (decrease) in cash and cash equivalents


7,129,761



(1,158,123
)Cash and cash equivalents at beginning of period

$
3,503,765


$
7,491,302Cash and cash equivalents at end of period

$
10,633,526


$
6,333,179Supplemental disclosure of non-cash investing and financing activitiesRedeployment (retirement) of plant

$
(6,122,381
)

$
602,516Extension and replacement of plant included in accounts payable

$
9,257,687


$
3,599,026Supplemental disclosure of cash flow information - interest expense paid,excluding amounts capitalized

$
18,671,115


$
18,634,258





See accompanying notes to financial statements.


6
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





1.
PRESENTATION OF FINANCIAL INFORMATION





The accompanying unaudited interim financial statements include the accounts of Chugach Electric Association, Inc. (Chugach) and have been prepared in accordance with generally accepted accounting principles for interim financial information.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  They should be read in conjunction with our audited financial statements for the year ended December 31, 2009, filed as part of our annual report on Form 10-K.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  The results of operations for interim periods are not necessarily indicative of the results that may be expected for an entire year or any other period.





2.
DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES





a.
Description of Business





Chugach is the largest electric utility in Alaska.  Chugach is engaged in the generation, transmission and distribution of electricity to directly serve 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 for three wholesale customers, Matanuska Electric Association, Inc. (MEA), Homer Electric Association, Inc. (HEA), and the City of Seward (Seward).  Chugach’s retail and wholesale members are the consumers of the electricity sold.





Chugach was organized as an Alaska electric cooperative in 1948 and operates on a not-for-profit basis and accordingly, seeks only to generate revenues sufficient to pay operating and maintenance costs, the cost of purchased power, capital expenditures, depreciation, and principal and interest on all indebtedness and to provide for reserves.  Chugach is subject to the regulatory authority of the Regulatory Commission of Alaska (RCA).





b.
Management Estimates





In preparing the financial statements, management of Chugach is required to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the reporting period.  Estimates include the allowance for doubtful accounts, deferred charges and credits, unbilled revenue and the estimated useful life of utility plant.  Actual results could differ from those estimates.


7
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





c.
Regulation





The accounting records of Chugach conform to the Uniform System of Accounts as prescribed by the Federal Energy Regulatory Commission (FERC).  Chugach meets the criteria, and accordingly, follows the accounting and reporting requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 980, “Topic 980 – Regulated Operations.”





FASB ASC 980 provides for the recognition of regulatory assets and liabilities as allowed by regulators for costs or credits that are reflected in current rates or are considered probable of being included in future rates.  The regulatory assets or liabilities are then reduced as the cost or credit is reflected in rates.





d.
Income Taxes





Chugach is exempt from federal income taxes under the provisions of Section 501(c)(12) of the Internal Revenue Code.  For the nine month periods ended September 30, 2010 and 2009, Chugach was in compliance with that code section.  In addition, Chugach collects sales tax and is assessed gross receipts and excise taxes which are presented on a net basis in accordance with FASB ASC 605-45-50, “Topic 605 – Revenue Recognition – Subtopic 45 – Principal Agent Considerations – Section 50 – Disclosure.”





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





3.
REGULATORY MATTERS





2008 Test Year General Rate Case (Docket U-09-080)





On June 23, 2009, Chugach filed a general rate case with the RCA to increase base rate revenue by $4.2 million, with increases of $2.7 million to Chugach retail customers and $1.5 million to wholesale customers.  Base rates charged to retail customers increased 3.3 percent and base rates charged to wholesale customers HEA, MEA and Seward increased 7.8 percent, 2.0 percent and 9.7 percent, respectively.





The RCA named the Attorney General and Chugach’s wholesale customers HEA, MEA and Seward parties to the docket.





On October 9, 2009, the RCA granted Chugach’s original request that the proposed rates go into effect on an interim and refundable basis.


8
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





On October 15, 2009, the RCA consolidated Docket U-09-080 (General Rate Case) and Docket U-09-097 (Depreciation Study Update, explained below).





Chugach reached a settlement with its wholesale customers, HEA, MEA and Seward, which resolved issues in both the general rate case and the depreciation study update.  The settlement, along with a request to vacate schedule, was filed with the RCA on May 21, 2010.  On June 2, 2010, the RCA granted the request to vacate schedule.  A final order in the consolidated case is explained below.





Revision to Current Depreciation Rates (Docket U-09-097)





In accordance with a stipulation with its wholesale customers, HEA and MEA, Chugach filed on August 31, 2009, an updated depreciation study based on plant balances as of December 31, 2008. The RCA opened Docket U-09-097 to consider Chugach’s updated depreciation study.  The RCA named Chugach’s wholesale customers HEA, MEA and Seward parties to the docket.





As indicated in the discussion under the 2008 Test Year General Rate Case above, the RCA consolidated the depreciation study update with the general rate case.  A hearing was held in June of 2010, which addressed unresolved depreciation issues between Chugach and the Attorney General, who acts as the public advocate on behalf of rate payers in RCA cases.





On September 16, 2010, the RCA issued a final order in the consolidated case (2008 Test Year General Rate Case and Revision to Current Depreciation Rates), accepting the settlements with its wholesale customers, HEA, MEA and Seward and resolving depreciation issues disputed by the Attorney General, which resulted in no change to the depreciation rates contained in the settlement agreements.





On September 28, 2010, Chugach filed revised tariffs in compliance with the settlement agreements, refund calculations, and a plan for refunding its customers the difference between the amounts paid under the interim and refundable rates and the amounts established by the settlement agreements.  As a result of the RCA accepting the settlement agreements and resolving depreciation issues, Chugach expects to refund its wholesale and retail customers approximately $0.7 million, including interest, in the fourth quarter of 2010.





On November 1, 2010, the RCA materially accepted Chugach’s compliance filing.  Base rate changes were approved effective November 1, 2010.





Request for Participation in the Simplified Rate Filing Process





On December 15, 2009, Chugach submitted a request to the RCA for approval to implement the Simplified Rate Filing (SRF) process for the adjustment of base energy and demand rates in accordance with Alaska Statute 42.05.381(e).  Chugach requested that base rate adjustments under SRF be completed on a semi-annual basis, utilizing the twelve months ended June and December as the test periods in each year.  Chugach requested that its initial SRF be submitted on the June 2010 test year for rate adjustments, if necessary, during fourth quarter, 2010.


9
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





Under SRF, base rate increases are limited to 8 percent over a 12-month period and 20 percent over a 36-month period.  Chugach is still permitted to submit general rate case filings while participating in the SRF process.  However, during these periods, rate adjustments under SRF would temporarily cease.  Utilization of SRF will allow Chugach to more efficiently adjust base rates in response to lower sales resulting from both energy conservation and technological improvements.  Chugach is also interested in SRF as a means to expedite the rate adjustment process with the goal of timely cost recovery and lower adjudicatory costs.





On April 21, 2010, the RCA opened docket U-10-20 to consider Chugach’s request to implement the simplified rate filing process.  A technical conference was held on June 1, 2010, to discuss guidelines that Chugach should follow in future simplified rate filings.  All parties agreed to modify the deadline for a final order to July 26, 2010.





A public hearing was held on July 19, 2010.  The parties to the docket entered into a stipulation on the outstanding issues in the case and the RCA issued a bench order at the hearing approving the stipulation.  A formal written order was issued on July 26, 2010.





On September 28, 2010, Chugach filed its initial filing under this process to decrease base rate revenue by $0.2 million, with increases of 0.2 percent to Chugach retail customers and 0.3 percent to Seward and decreases of 0.6 percent and 1.2 percent to HEA and MEA, respectively.  The RCA approved Chugach’s Simplified Rate Filing on November 4, 2010, for base rate changes effective November 15, 2010.





Natural Gas Contract Submittal





On April 2, 2010, Chugach submitted a new long-term natural gas supply contract with Marathon Alaska Production, LLC (“MAP”), to the RCA.  The new MAP contract will provide gas beginning April 1, 2011, terminating March 31, 2013.  MAP has two contract extension options that can be exercised during the first year of the initial contract.  MAP could extend the contract to December 31, 2013, by exercising the first contract extension option by March 31, 2011.  The second contract option could be exercised by December 31, 2011, and would extend the contract through December 31, 2014.  The total amount of gas under contract is estimated at 26 billion cubic feet (BCF) for the initial two year term of the contract with volumetric and delivery terms to be determined for each contract extension period that could provide up to an additional 16 BCF through December 31, 2014.  The RCA approved the gas supply contract effective May 17, 2010.





Net Metering Regulations





On June 16, 2010, regulations establishing net metering requirements for certain electric utilities became effective.  Net metering allows a customer to install and use certain types of renewable generation to offset their monthly usage and sell excess power to their serving utility at the utility’s avoided generation cost.  The net metering requirements adopted by the RCA apply to Chugach and nine other Alaska electric utilities.  The RCA’s order limits customer generation to units up to 25 kilowatts and installations must comply with approved interconnection standards.  Chugach has approved interconnection standards and non-firm buy-back rates in its tariff.  On June 17, 2010, Chugach filed with the RCA the final summary tariff necessary to implement net metering.  The RCA approved the tariff effective August 2, 2010.


10
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





Southcentral Power Project (SPP)





On June 30, 2010, Chugach filed a petition with the RCA for advance determination of decisional prudence and assurance of cost recovery for the Southcentral Power Project.  The petition requested regulatory assurance of future recovery in rates of the contract amounts Chugach has already executed.  Recovery would begin after an appropriate rate proceeding is completed such that recovery of SPP costs begin coincident with the date the SPP goes into service.  Chugach determined that substantial benefit will flow to our members if certain advance regulatory approvals are obtained to provide additional assurances to potential lenders. Public hearings were held in September of 2010.  On October 5, 2010, the RCA concluded that Chugach may include in future rates $197 million in costs attributable to three principal contracts to build the SPP when the plant becomes used and useful.  The RCA found that “it is in the public interest to provide cost recovery assurance” to Chugach regarding these costs.  Chugach’s share of the project cost is estimated to be $256 million, as budgeted.  Chugach will request approval of the additional costs associated with the project in a future general rate case that is expected to be filed in 2012.





4.
LINES OF CREDIT





Chugach maintained a $7.5 million line of credit with CoBank, ACB (CoBank).  This line of credit expired on October 31, 2009, and was subject to annual renewal at the discretion of the parties.  Chugach did not renew this line of credit upon its expiration date due to unused carrying costs, its lack of use and the existence of the National Rural Utilities Cooperative Finance Corporation (NRUCFC) line of credit and commercial paper borrowing capacity.  Chugach had activity on this line of credit in the first half of 2009, however, this line of credit wasn’t utilized in the third quarter of 2009 and there was no outstanding balance at September 30, 2009.





In addition, Chugach had a $75 million line of credit available with NRUCFC until January 30, 2009, when it was permanently reduced to $50 million pursuant to the terms of the Amendment To Revolving Line of Credit Agreement.  Chugach has not utilized this line of credit in the first nine months of 2010 and has no outstanding balance at September 30, 2010.  Chugach utilized this line of credit in the first quarter of 2009 but issued commercial paper to repay the balance.  Therefore, there was no outstanding balance at December 31, 2009.  The borrowing rate is calculated using the total rate per annum as may be fixed by NRUCFC and will not exceed the Prevailing Prime Rate, plus one percent per annum.  At September 30, 2010, and December 31, 2009, the borrowing rate was 4.95%.


11
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





The NRUCFC Revolving Line Of Credit Agreement requires that Chugach, for each 12-month period, for a period of at least five consecutive days, pay down the entire outstanding principal balance.  The NRUCFC line of credit expires October 14, 2012.





The NRUCFC line of credit is immediately available for unconditional borrowing, as was the CoBank line of credit prior to its expiration.





5.
FINANCING / COMMERCIAL PAPER





Over the next several years Chugach anticipates financing increased capital expenditures due to the construction of a gas-fired generation project and on-going capital needs.  In addition, we plan to refinance $150 million of 2001 Series A Bonds due March 15, 2011, and $120 million of 2002 Series A Bonds due February 1, 2012.  Commercial paper is being issued and will act as a bridge until Chugach converts commercial paper balances to long-term debt and to refinance the 2001 and 2002 Series A bonds.  The Commercial Paper Program is backed by a $300 million Unsecured Credit Agreement between NRUCFC, KeyBank, CoBank and US Bank.  The Credit Agreement was priced with an all-in drawn spread of London Interbank Offered Rate (LIBOR) plus 60 basis points, along with a 17.5 basis points facility fee.   The credit agreement expires on October 10, 2011.  At this time, management intends to renew this agreement although the terms may be different.





Chugach began issuing commercial paper in January 2009.  Chugach had $72.5 million and $51.5 million of commercial paper outstanding at September 30, 2010, and December 31, 2009, respectively.  Our commercial paper can be repriced between one and two hundred and seventy days.





The following table provides information regarding average commercial paper balances outstanding for the quarter ended September 30 (dollars in millions), as well as corresponding weighted average interest rates:





2010

2009Average Balance

Weighted Average Interest Rate

Average Balance

Weighted Average Interest Rate$62.3

0.33%

$47.7

0.38%


12
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





6.
LEGAL PROCEEDINGS





Chugach has certain litigation matters and pending claims that arise in the ordinary course of Chugach’s business.  In the opinion of management, no individual matter or the matters in the aggregate is likely to have a material adverse effect on Chugach’s results of operations, financial condition or liquidity.





7.
RECENT ACCOUNTING PRONOUNCEMENTS





ASC Update 2010-06“Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”


In January 2010, the FASB issued ASC Update 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.”  ASC Update 2010-06 applies to all entities that are required to make disclosures about recurring or nonrecurring fair value measurements and expands the disclosures required based on the measurement Level.  This update is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for certain Level 3 transactions.  Those transaction disclosure requirements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  Chugach began application of ASC Update 2010-06 during the quarter ended March 31, 2010.  Application did not have a material effect on our results of operations, financial position, and cash flows.





SFAS 167“Amendments to FASB Interpretation No. 46(R)”





In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB Interpretation No. 46(R).”  SFAS No. 167 applies to all entities except for those identified in FIN 46(R), “Consolidation of Variable Interest Entities,” as well as entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated by SFAS No. 166, “Accounting for Transfers of Financial Assets.”  SFAS No. 167 amends FIN 46(R) to require additional disclosures regarding an entity’s involvement in variable interest entities.  SFAS No. 167 is effective for interim and annual reporting periods beginning after November 15, 2009.  Chugach began application of SFAS No. 167 on January 1, 2010, which did not have a material effect on our results of operations, financial position, and cash flows.





In December 2009, the FASB issued ASC Update 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” an adaptation of SFAS No. 167 into the FASB Accounting Standards Codification (the Codification).  To view the adapted content, see FASB ASC 810-10-30, for the Initial Measurement Section of Subtopic 10, and FASB ASC 810-10-65, for the Transition and Open Effective Date Information of Section of Subtopic 810-10.


13
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





SFAS 166“Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140”





In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140.”  SFAS No. 166 applies to all entities and amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.”  SFAS No. 140 was amended to enhance the disclosure requirements as well as to define some of the terms and measurements to be used, by removing the concept of a qualifying special-purpose entity and the exception from applying FIN 46, “Consolidation of Variable Interest Entities,” to qualifying special-purpose entities.  SFAS No. 166 is effective for interim and annual reporting periods beginning after November 15, 2009.  Chugach began application of SFAS No. 166 on January 1, 2010, which did not have a material effect on our results of operations, financial position, and cash flows.





In December 2009, the FASB issued ASC Update 2009-16, “Accounting for Transfers of Financial Assets,” an adaptation of SFAS No. 166 into the Codification.  To view the adapted content, see FASB ASC 860-10-40, for the Derecognition Section of Subtopic 10, and FASB ASC 860-10-65, for the Transition and Open Effective Date Information of Subtopic 860-10.





SFAS 164“Not-for-Profit Entities: Mergers and Acquisitions – Including an amendment of FASB Statement No. 142”





In April 2009, the FASB issued SFAS No. 164, “Not-for-Profit Entities: Mergers and Acquisitions – Including an amendment of FASB Statement No. 142.”  SFAS No. 164 applies to the combination of not-for-profit entities meeting the definition of a merger or acquisition, with specific exceptions.  SFAS No. 164 provides guidance on the accounting and disclosure of these combinations.  SFAS No. 164 is effective for annual reporting periods beginning after December 15, 2009.  Chugach began application of SFAS No. 164 on January 1, 2010, which did not have a material effect on our results of operations, financial position, and cash flows.





In January 2010, the FASB issued ASC Update 2010-07, “Not-for-Profit Entities (Topic 958): Not-for-Profit Entities: Mergers and Acquisitions,” an adaptation of SFAS No. 164 into the Codification.  To view the adapted content, see FASB ASC 954-805 for the Business Combinations Subtopic of Topic 954, FASB ASC 958-805 for the Business Combinations Subtopic of 958, FASB ASC 805-10-15 for the Scope and Scope Exceptions Section of Subtopic 805-10, FASB ASC 805-50-15 for the Scope and Scope Exceptions Section of Subtopic 805-50, and FASB ASC 350-10-65 for the Transition and Open Effective Date Information Section of Subtopic 350-10.


14
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





8.
FAIR VALUES OF ASSETS AND LIABILITIES





Fair Value Hierarchy





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





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





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





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





The table below presents the balance of Chugach’s non-qualified deferred compensation plan and Overnight Repurchase Agreement assets measured at fair value on a recurring basis at September 30, 2010, and December 31, 2009.





Total


Level 1


Level 2


Level 3September 30, 2010Deferred compensation

$
357,101


$
357,101


$
0


$
0Repurchase agreement

$
5,123,517


$
5,123,517


$
0


$
0December 31, 2009Deferred compensation

$
345,792


$
345,792


$
0


$
0Repurchase agreement

$
3,026,893


$
3,026,893


$
0


$
0





Chugach had no Level 2 or Level 3 assets or liabilities measured at fair value on a recurring basis.


15
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





Fair Value of Financial Instruments





The estimated fair values (in thousands) of the long-term obligations included in the financial statements at September 30, 2010, are as follows:




Carrying Value


Fair ValueLong-term obligations  (including current installments)

$
380,065


$
391,777





Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions.  The fair value of long-term debt has been determined using discounted future cash flows at borrowing rates currently available to Chugach, which are considered to be level 2 inputs.  The fair value of cash and cash equivalents, accounts receivable and payable, and other short-term monetary assets and liabilities approximate carrying value due to their short-term nature.





9.
ENVIRONMENTAL MATTERS





The Clean Air Act and Environmental Protection Agency (EPA) regulations under the act (the “Clean Air Act”) establish ambient air quality standards and limit the emission of many air pollutants.  Some Clean Air Act programs that regulate electric utilities, notably the Title IV “acid rain” requirements, do not apply to facilities located in Alaska.





New Clean Air Act regulations impacting electric utilities may result from future events or may result from new regulatory programs.  On October 30, 2009, the EPA published new federal regulations requiring the mandatory reporting of greenhouse gases from all sectors of the economy.  Chugach is subject to this new regulation, which is not expected to have a material effect on our results of operations, financial position, and cash flows.  While we cannot predict whether any additional new regulation would occur or its limitation, it is possible that new laws or regulations could increase our capital and operating costs.  We have obtained or applied for all Clean Air Act permits currently required for the operation of our generating facilities.





Chugach is subject to numerous other environmental statutes including the Clean Water Act, the Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Endangered Species Act, and the Comprehensive Environmental Response, Compensation and Liability Act and to the regulations implementing these statutes.  We do not believe that compliance with these statutes and regulations to date has had a material impact on our financial condition or results of operation.  However, new laws or regulations, implementation of final regulations or changes in or new interpretations of these laws or regulations could result in significant additional capital or operating expenses.


16
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





10.
COMMITMENTS / CONCENTRATIONS





Generation Commitments





Chugach is in the process of developing a natural gas-fired generation plant on land owned by Chugach near its Anchorage headquarters.  The Southcentral Power Project (SPP) will be developed and owned as tenants in common with Anchorage Municipal Light & Power (AML&P).  Chugach will own and take approximately 70 percent of the new plant’s output and AML&P will own and take the remaining output.  Chugach will proportionately account for its ownership in the SPP.





On November 17, 2008, Chugach executed a gas turbine purchase agreement for the purchase of three gas turbines with General Electric Packaged Power (GEPP).  During 2009 Chugach executed several amendments associated with its purchase agreement with GEPP, which included the purchase of a spare engine for maintenance purposes.  In December 2008, Chugach purchased land adjacent to its Anchorage headquarters for SPP use during construction.  Chugach executed an Owner’s Engineer Services Contract on May 12, 2009.  This contract expired on December 31, 2009, but was later renewed effective January 1, 2010.  On January 5, 2010, Chugach executed a Services Contract for the shipment of the combustion turbine generators and related accessories.  On February 25, 2010, Chugach purchased additional land adjacent to its Anchorage headquarters for the laydown of equipment displaced by the new power plant.  On April 13, 2010, Chugach executed a steam turbine generator (STG) purchase agreement.  On June 18, 2010, Chugach executed an Engineering, Procurement, and Construction (EPC) contract with SNC-Lavalin Constructors, Inc. (SLCI). On August 27, 2010, Chugach executed a Once Through Steam Generator (OTSG) equipment contract with Innovative Steam Technologies (IST).  Chugach made payments of $25.0 million in 2009 and $35.2 million in the first nine months of 2010, with additional payments of $24.5 million expected in 2010 pursuant to all these contracts.  Chugach amended the contract for transportation of combustion turbine generators on September 28, 2010, to include transportation of the steam turbine generator.





Labor Agreements





Approximately 70 percent of Chugach’s employees are represented by the International Brotherhood of Electrical Workers (IBEW).  We have three Collective Bargaining Unit Agreements (CBA) with the IBEW.  We also have an agreement with the Hotel Employees and Restaurant Employees (HERE).  All current agreements were due to expire on June 30, 2010.  On February 24, 2010, the Board of Directors approved three year extensions of all three IBEW CBA’s.  The three extensions provide no wage increase in the first year and wage increases tied to changes in the Consumer Price Index (CPI) in the second and third years, with a floor on the minimum increase and a cap on the maximum increase.  The wage increases also have an indirect connection to Chugach’s financial performance.  The contract extensions expire on June 30, 2013.  On April 28, 2010, the Board of Directors approved a three year extension of the HERE agreement.  The extension contains an increase in the employer health and welfare contribution in each year of the extension but does not provide for a wage or pension increase.  The contract extension expires on June 30, 2013.


17
 Table of Contents


Chugach Electric Association, Inc.


Notes to Financial Statements


September 30, 2010 and 2009





11.
ECONOMY ENERGY SALES





Since 1989, we have sold economy (non-firm) energy to Golden Valley Electric Association, Inc. (GVEA) under an agreement that expired on March 31, 2009.  On April 6, 2010, Chugach and GVEA finalized an agreement for Chugach to provide a minimum of 20 MW of economy energy to GVEA on a non-firm basis based on an interruptible gas supply arrangement.  The agreement commenced on May 1, 2010, and will continue through March 31, 2013, pending annual commitments from gas suppliers.  The price to GVEA will include the cost of fuel (based on a system average heat rate), plus variable operations and maintenance expense, plus a margin.  Sales will be made under the terms and conditions of Chugach’s economy energy sales tariff.





12.
BRADLEY LAKE HYDROELECTRIC PROJECT





Chugach 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.  Chugach 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.  Chugach has a 30.4 percent share of the project’s capacity.  The share of debt service, exclusive of interest, for which Chugach has guaranteed, is approximately $34 million.  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 percent.  Upon default, Chugach could be faced with annual expenditures of approximately $5.4 million as a result of Chugach’s Bradley Lake take-or-pay obligations.





On July 1, 2010, AEA issued $28,800,000 of Power Revenue Refunding Bonds, Sixth Series, for purposes of refunding $30,640,000 of the Fifth Series Bonds.  The refunded Fifth Series Bonds were called on August 2, 2010.  The refunding resulted in aggregate debt service payments over the next eleven years in a total amount approximately $3.3 million less than the debt service payments which would have been due on the refunded bonds.  Refunding the Fifth Series Bonds resulted in an economic gain of approximately $2.4 million.  Economic gain is calculated as the net difference between the present value of the old debt service requirements and the present value of the new debt service requirements, discounted at the effective interest rate and adjusted for additional cash paid.  Chugach’s share of these savings will be approximately $714.3 thousand.


18
 Table of Contents


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION 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.





RESULTS OF OPERATIONS





Current Year Quarter versus Prior Year Quarter





Assignable margins decreased $500.5 thousand, or 33.2%, during the third quarter of 2010 compared to the same quarter in 2009.





Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, decreased $5.3 million, or 8.3%, in the third quarter of 2010 compared to the same quarter in 2009. This decrease was due to lower fuel and purchased power expense which is recovered through the fuel and purchased power surcharge process.





Retail revenue decreased in the third quarter of 2010 compared to the same quarter in 2009. Fuel and purchased power expense, which is recovered through the fuel and purchased power surcharge process, decreased due primarily to lower fuel prices in the third quarter of 2010 compared to the same period in 2009, which was slightly offset by an increase in base revenue due to higher retail kWh sales and an increase in rates charged to retail customers as a result of Chugach’s 2008 Test Year Rate Case.




Wholesale revenue decreased in the third quarter of 2010 compared to the same quarter in 2009.  Fuel and purchased power expense, which is recovered through the fuel and purchased power surcharge process, decreased due primarily to lower fuel prices in the third quarter of 2010 compared to the same period in 2009.  Base revenue did not materially change in the third quarter of 2010 compared to the same quarter in 2009. A decrease in kWh sales and demand charges was offset by a full quarter increase in rates as a result of Chugach’s 2008 Test Year Rate Case.  Economy energy revenue increased during the third quarter of 2010 compared to the same quarter in 2009 due to increased sales to Golden Valley Electric Association, Inc. (GVEA) as it was more economic for GVEA to purchase power from Chugach than to generate power.





Based on the results of fixed and variable cost recovery established in Chugach’s last rate case, wholesale sales to HEA, MEA and Seward contributed approximately $6.3 million to Chugach’s fixed costs for the quarter ended September 30, 2010, and $6.5 million for the quarter ended September 30, 2009, respectively.


19
 Table of Contents


The following table shows the base rate sales revenue and fuel and purchased power revenue by customer class that is included in revenue for the quarters ended September 30, 2010 and 2009:





Base Rate Sales Revenue


Fuel and Purchased Power Revenue


Total Revenue2010


2009


% Variance


2010


2009


% Variance


2010


2009


% VarianceRetailResidential

$
10.1


$
9.8



3.1
%

$
5.4


$
7.3



(26.0
%)

$
15.5


$
17.1



(9.4
%)Small Commercial

$
1.7


$
1.8



(5.6
%)

$
1.2


$
1.5



(20.0
%)

$
2.9


$
3.3



(12.1
%)Large Commercial

$
7.0


$
6.9



1.4
%

$
5.8


$
7.8



(25.6
%)

$
12.8


$
14.7



(12.9
%)Lighting

$
0.3


$
0.3



0.0
%

$
0.0


$
0.1



(100.0
%)

$
0.3


$
0.4



(25.0
%)Total Retail

$
19.1


$
18.8



1.6
%

$
12.4


$
16.7



(25.7
%)

$
31.5


$
35.5



(11.3
%)WholesaleHEA

$
3.0


$
3.0



0.0
%

$
4.9


$
7.2



(31.9
%)

$
7.9


$
10.2



(22.5
%)MEA

$
4.8


$
4.7



2.1
%

$
7.2


$
9.8



(26.5
%)

$
12.0


$
14.5



(17.2
%)SES

$
0.4


$
0.4



0.0
%

$
0.7


$
1.0



(30.0
%)

$
1.1


$
1.4



(21.4
%)Total Wholesale

$
8.2


$
8.1



1.2
%

$
12.8


$
18.0



(28.9
%)

$
21.0


$
26.1



(19.5
%)Economy Sales

$
0.9


$
0.2



350.0
%

$
4.1


$
1.1



272.7
%

$
5.0


$
1.3



284.6
%Miscellaneous

$
0.8


$
0.7



14.3
%

$
0.0


$
0.0



0.0
%

$
0.8


$
0.7



14.3
%Total Revenue

$
29.0


$
27.8



4.3
%

$
29.3


$
35.8



(18.2
%)

$
58.3


$
63.6



(8.3
%)





The following table summarizes kWh sales for the quarter ended September 30:





Customer

2010 kWh


2009 kWhRetail


268,355,928



268,170,880Wholesale


289,418,847



296,784,184Economy Energy


59,678,000



12,192,000Total


617,452,775



577,147,064





Base rates charged to retail customers in the third quarter of 2010 included base rate changes effective October 9, 2009.  Base rates charged to retail customers increased 3.3 percent and were effective on an interim and refundable basis as a result of Chugach’s 2008 Test Year Rate Case filed with the RCA on June 23, 2009.     Base rates charged to wholesale customers did not change in the third quarter of 2010 compared to the same quarter in 2009, as the base rates changes due to Chugach’s 2008 Test Year Rate Case were in effect for one month in the third quarter of 2009.





Total operating expenses decreased $4.6 million, or 7.7%, in the third quarter of 2010 over the same quarter in 2009.





Fuel expense decreased $3.7 million, or 13.2%, in the third quarter of 2010 compared to the same quarter in 2009. The decrease was due primarily to a decrease in fuel price, which was partially offset by an increase in fuel used.  The increase in fuel used was caused primarily by an increase in economy energy sales.  In the third quarter of 2010, Chugach used 6,396,515 thousand cubic feet (MCF) of fuel at an average effective price of $4.32 per MCF, which includes 825,600 MCF of fuel that is recorded as purchased power expense.  In the third quarter of 2009, Chugach used 5,457,259 MCF of fuel at an average effective price of $6.19 per MCF, which includes 972,624 MCF of fuel that is recorded as purchased power.


20
 Table of Contents


Production expense increased $857.0 thousand, or 18.2%, in the third quarter of 2010 compared to the same quarter in 2009. The increase was due to maintenance on Bernice Lake Unit 3 and Beluga Unit 6 in the third quarter of 2010, which was in excess of the maintenance on Beluga Unit 5 and Unit 8 in the third quarter of 2009.





Purchased power expense, which includes the cost of 825,600 MCF of fuel associated with purchases from the Nikiski Cogeneration plant, decreased $2.5 million, or 28.5%, in the third quarter of 2010 compared to the same quarter in 2009 due to a decrease in the effective price, primarily associated with the price of fuel, which was slightly offset by an increase in MWh purchased.  In the third quarter of 2010, Chugach purchased 148,868 MWh of energy at an average effective price of 4.01 cents per kWh.  In the third quarter of 2009, Chugach purchased 141,821 MWh of energy at an average effective price of 5.96 cents per kWh.





Transmission expense decreased $205.3 thousand, or 12.1%, in the third quarter of 2010 compared to the same quarter in 2009. The decrease was due to less overhead line clearing in the third quarter of 2010 compared to the same quarter in 2009.




Distribution expense did not materially change in the third quarter of 2010 compared to the same quarter in 2009.




Consumer accounts did not materially change in the third quarter of 2010 compared to the same quarter in 2009.





Administrative, general and other expenses increased $706.1 thousand, or 15.7%, in the third quarter of 2010 compared to the same quarter in 2009. The increase was due primarily to legal expenses, the amortization of fuel contract negotiations, current costs associated with prior workers compensation claims and higher general and administrative labor in the third quarter of 2010 compared to the same quarter in 2009.





Depreciation and amortization expense did not materially change in the third quarter of 2010 compared to the same quarter in 2009.





Interest on long-term debt decreased $2.4 million, or 48.6%, in the third quarter of 2010 compared to the same quarter in 2009.  The decrease was due primarily to the reclassification of the interest expense associated with the 2001 Series A Bonds, due March 15, 2011, from long-term to short-term. That decrease was somewhat offset by an increase in interest rates in the third quarter of 2010 compared to the same quarter in 2009.





Other interest expense increased $2.4 million in the third quarter of 2010 compared to the same quarter in 2009.  The increase was due primarily to the reclassification of the interest expense associated with the 2001 Series A Bonds, due March 15, 2011, from long-term to short-term and the difference between the balance and associated interest rate of our commercial paper in the third quarter of 2010 compared to the same quarter in 2009.





Interest charged to construction increased $149.7 thousand, or 107.5%, in the third quarter of 2010 compared to the same quarter in 2009 due primarily to an increase in the average Construction Work in Progress (CWIP) balance that is debt financed.  That was due primarily to expenditures associated with the SPP project.


21
 Table of Contents


Non-operating margins decreased $30.0 thousand, or 21.3%, in the third quarter of 2010 compared to the same quarter in 2009. The decrease was due primarily to a decrease in Allowance for Funds Used During Construction (AFUDC) caused by a lower average CWIP balance that is equity financed.





Current Year to Date versus Prior Year to Date





Assignable margins increased $0.6 million, or 68.6%, during the first nine months of 2010 compared to the same period in 2009.





Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, decreased $31.8 million, or 14.7%, in the first nine months of 2010 compared to the same period in 2009. This decrease was due primarily to lower fuel and purchased power expense recovered through the fuel and purchased power surcharge process.





Retail revenue decreased in the first nine months of 2010 compared to the same period in 2009.  Base revenue increased due to an increase in rates charged to retail customers as a result of Chugach’s 2008 Test Year Rate Case, which was partially offset by lower retail kWh sales caused by a change in consumer consumption patterns.  Fuel and purchased power expense recovered through the fuel and purchased power surcharge process decreased due primarily to lower fuel prices in the first nine months of 2010 compared to the same period in 2009.





Wholesale revenue decreased in the first nine months of 2010 compared to the same period in 2009.  Base revenue did not change in the first nine months of 2010 compared to the same period in 2009.  Lower wholesale kWh sales as a result of changes in consumer consumption patterns was offset by an increase in rates charged to wholesale customers as a result of Chugach’s 2008 Test Year Rate Case.  Fuel and purchased power expense recovered through the fuel and purchased power surcharge process decreased due primarily to lower fuel prices in the first nine months of 2010 compared to the same period in 2009.  Economy energy revenue increased during the first nine months of 2010 compared to the same period in 2009 due to increased sales to Golden Valley Electric Association, Inc. (GVEA).  Chugach’s sales agreement with GVEA expired in March of 2009 and another sales agreement wasn’t completed until September of 2009.





Based on the results of fixed and variable cost recovery established in Chugach’s last rate case, wholesale sales to HEA, MEA and Seward contributed approximately $19.9 million to Chugach’s fixed costs for the nine months ended September 30, 2010, and $21.1 million for the nine months ended September 30, 2009, respectively.


22
 Table of Contents


The following table shows the base rate sales revenue and fuel and purchased power revenue by customer class that is included in revenue for the nine months ended September 30, 2010 and 2009:





Base Rate Sales Revenue


Fuel and Purchased Power Revenue


Total Revenue2010


2009


% Variance


2010


2009


% Variance


2010


2009


% VarianceRetailResidential

$
32.7


$
32.3



1.2
%

$
18.1


$
28.6



(36.7
%)

$
50.8


$
60.9



(16.6
%)Small Commercial

$
5.4


$
5.9



(8.5
%)

$
3.9


$
6.1



(36.1
%)

$
9.3


$
12.0



(22.5
%)Large Commercial

$
21.0


$
20.3



3.4
%

$
17.3


$
27.0



(35.9
%)

$
38.3


$
47.3



(19.0
%)Lighting

$
1.0


$
1.0



0.0
%

$
0.1


$
0.2



(50.0
%)

$
1.1


$
1.2



(8.3
%)Total Retail

$
60.1


$
59.5



1.0
%

$
39.4


$
61.9



(36.3
%)

$
99.5


$
121.4



(18.0
%)WholesaleHEA

$
8.9


$
8.7



2.3
%

$
14.7


$
24.7



(40.5
%)

$
23.6


$
33.4



(29.3
%)MEA

$
15.4


$
15.6



(1.3
%)

$
23.3


$
37.1



(37.2
%)

$
38.7


$
52.7



(26.6
%)SES

$
1.0


$
1.0



0.0
%

$
2.0


$
3.3



(39.4
%)

$
3.0


$
4.3



(30.2
%)Total Wholesale

$
25.3


$
25.3



0.0
%

$
40.0


$
65.1



(38.6
%)

$
65.3


$
90.4



(27.8
%)Economy Sales

$
3.2


$
0.4



700.0
%

$
14.4


$
2.1



585.7
%

$
17.6


$
2.5



604.0
%Miscellaneous

$
2.0


$
1.9



5.3
%

$
0.0


$
0.0



0.0
%

$
2.0


$
1.9



5.3
%Total Revenue

$
90.6


$
87.1



4.0
%

$
93.8


$
129.1



(27.3
%)

$
184.4


$
216.2



(14.7
%)





The following table summarizes kWh sales for the nine months ended September 30:





Customer

2010 kWh


2009 kWhRetail


845,639,029



859,881,745Wholesale


907,479,099



932,095,629Economy Energy


219,142,000



26,056,300Total


1,972,260,128



1,818,033,674





Base rates charged to retail and wholesale customers in the first nine months of 2010 include base rate changes effective October 9, 2009.  The base rate changes were effective on an interim and refundable basis and were the result of proposed rates included in Chugach’s 2008 Test Year Rate Case filed with the RCA on June 23, 2009.   Base rates charged to retail customers increased 3.3 percent and base rates charged to wholesale customers HEA, MEA and Seward increased 7.8 percent, 2.0 percent and 9.7 percent, respectively, in the first nine months of 2010 compared to the same period in 2009.





Total operating expenses decreased $31.8 million, or 15.9%, in the first nine of 2010 over the same period in 2009.





Fuel expense decreased $22.6 million, or 22.3%, in the first nine months of 2010 compared to the same period in 2009. The decrease was due primarily to a decrease in fuel price, which was partially offset by an increase in fuel used.  The increase in fuel used was caused primarily by an increase in economy energy sales.  In the first nine months of 2010, Chugach used 21,041,385 MCF of fuel at an average effective price of $4.20 per MCF, which includes 2,343,898 MCF of fuel that is recorded as purchased power expense. In the first nine months of 2009, Chugach used 18,441,637 MCF of fuel at an average effective price of $6.58 per MCF, which includes 3,070,111 MCF of fuel that is recorded as purchased power.


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Production expense increased $793.3 thousand, or 6.2%, in the first nine months of 2010 compared to the same period in 2009. The increase was due to maintenance on Bernice Lake Unit 3 and Beluga Unit 6 in the first nine months of 2010, which was in excess of the maintenance on Beluga Unit 8 and expenditures associated with the water treatment system at the Bernice Lake Power Plant in 2009.





Purchased power expense, which included the cost of 2,343,898 MCF of fuel associated with purchases from the Nikiski Cogeneration plant, decreased $11.3 million, or 38.1%, in the first nine months of 2010 compared to the same period in 2009.  The decrease was due to a decrease in the effective price, primarily associated with the price of fuel and the unavailability of purchases from the Nikiski plant in the first quarter due to maintenance.  In the first nine months of 2010, Chugach purchased 374,351 MWh of energy at an average effective price of 4.65 cents per kWh.  In the first nine months of 2009, Chugach purchased 391,138 MWh of energy at an average effective price of 7.33 cents per kWh.





Transmission expense did not materially change in the first nine months of 2010 compared to the same period in 2009.




Distribution expense did not materially change in the first nine months of 2010 compared to the same period in 2009.




Consumer accounts increased $226.0 thousand, or 5.9%, in the first nine months of 2010 compared to the same period in 2009 due primarily to an increase in customer assistance programs, to include smart power education and process improvements.





Administrative, general and other expenses increased $1.2 million, or 8.1%, in the first nine months of 2010 compared to the same period in 2009. The increase was due primarily to current costs associated with prior workers compensation claims and higher general and administrative labor in the first nine months of 2010 compared to the same period in 2009.





Depreciation and amortization expense did not materially change in the first nine months of 2010 compared to the same period in 2009.





Interest on long-term debt decreased $5.4 million, or 35.4%, in the first nine months of 2010 compared to the same period in 2009.  The decrease was due primarily to the reclassification of the interest expense associated with the 2001 Series A Bonds, due March 15, 2011, from long-term to short-term and a lower debt balance in 2010 as a result of principal payments on our CoBank debt.  That decrease was somewhat offset by an increase in interest rates in the first nine months of 2010 compared to the same period in 2009.


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Other interest expense increased $5.1 million in the first nine months of 2010 compared to the same period in 2009.  The increase was due primarily to the reclassification of the interest expense associated with the 2001 Series A Bonds, due March 15, 2011, from long-term to short-term and the difference between the balance and associated interest rate of our commercial paper in the first nine months of 2010 compared to the same period in 2009.





Interest charged to construction increased $314.5 thousand, or 79.2%, in the first nine months of 2010 compared to the same period in 2009 due primarily to an increase in the average Construction Work in Progress (CWIP) balance that is debt financed.  That was due primarily to expenditures associated with the SPP project.





Non-operating margins decreased $10.1 thousand, or 3.2%, in the first nine months of 2010 compared to the same period in 2009.  The increase was due primarily to an increase in interest income caused by a higher cash balance in the first nine months of 2010 compared to the same period in 2009, which was somewhat offset by a decrease in Allowance for Funds Used During Construction (AFUDC) caused by a lower average CWIP balance that is equity financed.





Financial Condition





Assets





Total assets increased $19.1 million, or 3.4%, from December 31, 2009 to September 30, 2010.  Net utility plant increased $21.0 million, or 4.5%, due primarily to extension and replacement of plant in excess of depreciation expense, primarily associated with SPP. Cash and cash equivalents increased $7.1 million caused primarily by the timing of additional commercial paper issuances and the payment of expenditures. Materials and supplies increased $1.3 million, or 4.4%, due primarily to the purchase of materials for planned generation projects. Prepayments increased $1.2 million caused by the annual renewal of property insurance and the balance of the prepayment of health and welfare premiums for 2010.





These increases were offset by decreases in other property and investments, accounts receivable and deferred charges.  Other property and investments decreased $295.8 thousand, or 2.3%, due to an equity retirement from CoBank.  Accounts receivable decreased $9.3 million, or 28.4%, due primarily to a decrease in the energy and fuel component of consumer’s invoices.  Deferred charges decreased $2.0 million, or 9.3%, due to the amortization of existing deferred charges which exceeded the costs associated with current deferred projects.


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Liabilities and Equity





Total liabilities, equities and margins increased $19.1 million, or 3.4%, from December 31, 2009 to September 30, 2010.  The increase included a $1.4 million, or 0.9%, increase in total equities and margins due to the margins generated in the first nine months of 2010.  Current installments of long-term obligations increased $148.7 million due to the reclassification of the 2001 Series A Bonds due March 15, 2011, from long-term obligations.  Commercial paper increased $21.0 million, or 40.8%, due to an increase in SPP financing requirements.  Accounts payable increased $3.9 million, or 38.0%, due primarily to the timing of construction payments.  Fuel and purchased power cost over-recovery increased $1.1 million, or 32.0%, due to the over-collection of the prior quarter’s fuel and purchased power costs recovered through the fuel surcharge process.  Salaries, wages and benefits increased $1.2 million, or 20.4%, due to an increase in pension benefits and the timing of the payment of accrued labor.





These increases were offset by a $152.6 million, or 49.6%, decrease in total long-term obligations, caused by the reclassification of the 2001 Series A Bonds due March 15, 2011 to current portion and to the principal payments on CoBank 2, 3, 4 and 5 in the first nine months of 2010.  Consumer deposits decreased $267.4 thousand, or 10.9%, and accrued interest decreased $4.3 million, or 71.4%, caused by the semi-annual interest payments on our bonds.  Fuel payable decreased $650.6 thousand, or 4.4%, caused by the timing of our fuel payments.  Other liabilities decreased $285.1 thousand, or 23.1%, caused by the payment of Chugach’s annual gross receipts tax and the payment of the remaining 2009 retirement of patronage capital in the first quarter of 2010.  Deferred liabilities decreased $147.3 thousand, or 9.1%, caused by a decrease in customer advances for construction.




LIQUIDITY AND CAPITAL RESOURCES





Summary





We ended the first nine months of 2010 with $10.6 million of cash and cash equivalents, up from $3.5 million at December 31, 2009.  We did not utilize the $50.0 million line of credit that we maintain with NRUCFC in the first nine months of 2010, therefore, this line of credit had no outstanding balance and our available borrowing capacity under this line was $50.0 million at September 30, 2010.  We issued commercial paper in the first nine months of 2010 and had $72.5 million of commercial paper outstanding at September 30, 2010, thus our available borrowing capacity under our Commercial Paper Program at September 30, 2010, was $227.5 million.





Cash equivalents consist of all highly liquid debt instruments with a maturity of three months or less when purchased and an Overnight Repurchase Agreement with First National Bank Alaska (FNBA).


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Cash Flows





The following table summarizes our cash flows from operating, investing and financing activities for the periods ended September 30.





2010


2009Total cash provided by (used in):Operating activities

$
32,373,232


$
21,938,049Investing activities


(43,056,954
)


(21,389,832
)Financing activities


17,813,483



(1,706,340
)Increase (decrease) in cash and cash equivalents

$
7,129,761


$
(1,158,123
)





Operating Activities





Cash provided by operating activities was $32.4 million for the period ended September 30, 2010, compared with $21.9 million for the period ended September 30, 2009. Assignable margins increased to $1.4 million in the first nine months of 2010, compared with $0.8 million in the first nine months of 2009.  The change in cash provided by operating activities was due primarily to changes in depreciation and amortization, accounts receivable, fuel cost under-recovery, prepayments, fuel cost over-recovery, salaries, wages and benefits and fuel.  The change in depreciation and amortization was due primarily to depreciation on additional extension and replacement of plant and the accounts receivable change was due primarily to a decrease in the energy and fuel component of consumer’s invoices.  The change in fuel cost under-recovery was due to the collection of fuel and purchased power costs recovered through the fuel surcharge process.  The change in prepayments was due primarily to the prepayment of health and welfare premiums for 2010.  The change in fuel cost over-recovery was due to the over-collection of fuel and purchased power costs recovered through the fuel surcharge process.  The change in salaries, wages and benefits was due primarily to an increase in pension benefits while the change in fuel payable was due primarily to the change in fuel prices and the difference in the level of economy energy sales.





Investing Activities





Cash used in investing activities was $43.1 million for the period ended September 30, 2010, compared with $21.4 million for the period ended September 30, 2009.  The increase in cash used in investing activities for the period ended September 30, 2010, compared with the period ended September 30, 2009, was due to the level of construction activity, primarily related to SPP.  Capital construction for 2010 is estimated at $111.9 million.  Capital improvement expenditures, excluding expenditures related to SPP, are expected to decrease during the fourth quarter as the construction season ends.


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Financing Activities





Cash provided by financing activities was $17.8 million for the period ended September 30, 2010, compared to cash used for financing activities of $1.7 million for the period ended September 30, 2009.  The change in cash provided by or used in financing activities for the period ended September 30, 2010, compared with the period ended September 30, 2009, was due primarily to the use of commercial paper to pay long-term debt, as well as the payment of short term borrowings and notes payable in 2009 compared to the issuance of additional commercial paper and the payment of debt in the first nine months of 2010.  The change was also due to an increase in customer advances for construction.





Sources of Liquidity





Chugach has satisfied its operational and capital cash requirements through internally generated funds, a $50 million line of credit from NRUCFC and a $300 million Commercial Paper Program.  At September 30, 2010, there was no outstanding balance on our NRUCFC line of credit and $72.5 million of outstanding commercial paper.  Thus, at September 30, 2010, our available borrowing capacity under our line of credit was $50 million and our available commercial paper capacity was $227.5 million.





Chugach also has a term loan facility with CoBank.  Loans made under this facility are evidenced by promissory notes governed by the Master Loan Agreement, which became effective on January 22, 2003.





At September 30, 2010, Chugach had the following promissory notes outstanding with this facility:





Promissory Note

Principal Balance


Interest Rate at September 30, 2010


Maturity Date


Principal Payment DatesCoBank 3


16,914,427


2.60%


2022


2003 – 2022CoBank 4


18,487,863


2.60%


2022


2003 – 2022CoBank 5


2,162,668


2.60%


2012


2007 – 2012Total

$
37,564,958





Over the next several years Chugach anticipates incurring increased amounts of capital expenditures due to the construction of a gas-fired generation project and on going capital needs.  In addition, we expect to refinance certain existing debt.  Commercial paper is being issued and will act as a bridge until Chugach converts commercial paper balances to long term debt and to refinance the 2001 and 2002 Series A bonds due 2011 and 2012, respectively.  Chugach’s Commercial Paper Program is backed by a $300 million Unsecured Credit Agreement, executed on October 10, 2008, however, at this time, management intends to renew this agreement although the terms may be different.  Chugach began issuing commercial paper in 2009 and had a balance of $72.5 million outstanding at September 30, 2010.  Our commercial paper can be repriced between one and two hundred and seventy days.


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Chugach management continues to expect that cash flows from operations and external funding sources, including additional commercial paper borrowings, will be sufficient to cover operational, financing and capital funding requirements in 2010 and thereafter.





CRITICAL ACCOUNTING POLICIES





Chugach’s accounting and reporting policies comply with U.S. generally accepted accounting principles (GAAP).  The preparation of financial statements in conformity with GAAP requires that management apply accounting policies and make estimates and assumptions that effect results of operations and reported amounts of assets and liabilities in the financial statements.  Critical accounting policies are those policies that management believes are the most important to the portrayal of Chugach's financial condition and results of its operations, and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain. Most accounting policies are not considered by management to be critical accounting policies.  Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements.  These factors include, among other things, whether the estimates are significant to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under GAAP.  For all of these policies management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment.  Management has discussed the development and the selection of critical accounting policies with Chugach's Audit Committee. The following policies are considered to be critical accounting policies for the quarter ended September 30, 2010.





Electric Utility Regulation





Chugach is subject to regulation by the Regulatory Commission of Alaska (RCA). The RCA sets the rates Chugach is permitted to charge customers based on allowable costs.  As a result, Chugach applies FASB ASC 980, “Topic 980 – Regulated Operations.”Through the ratemaking process, the regulators may require the inclusion of costs or revenues in periods different than when they would be recognized by a non-regulated company.  This treatment may result in the deferral of expenses and the recording of related regulatory assets based on anticipated future recovery through rates or the deferral of gains or creation of liabilities and the recording of related regulatory liabilities.  The application of FASB ASC 980 has a further effect on Chugach's financial statements as a result of the estimates of allowable costs used in the ratemaking process.  These estimates may differ from those actually incurred by the Company; therefore, the accounting estimates inherent in specific costs such as depreciation and pension and post-retirement benefits have less of a direct impact on Chugach's results of operations than they would on a non-regulated company.  Significant regulatory assets and liabilities have been recorded.  Management reviews the ultimate recoverability of these regulatory assets and liabilities based on applicable regulatory guidelines.  However, adverse legislation and judicial or regulatory actions could materially impact the amounts of such regulatory assets and liabilities and could adversely impact Chugach’s financial statements.


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Unbilled revenue





Chugach calculates unbilled retail revenue at the end of each month to ensure the recognition of a calendar month’s revenue.  Chugach estimates calendar-month unbilled sales based on billing cycle sales, billing cycle read dates, weather and hours of darkness to produce an estimate of calendar sales.  This estimate of calendar sales is calibrated to deliveries measured at Chugach distribution substations, net of losses.  Chugach then uses the calibrated estimate of unbilled billing class determinants to produce an estimate of calendar month revenue.  Chugach accrued $6,371,177 and $7,924,356 of unbilled retail revenue at September 30, 2010 and 2009, respectively.





RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





Information required by this Item is contained in Note 7 to the “Notes to Financial Statements” within Part I of this Form 10-Q.





OUTLOOK





Procuring a new power generation facility, low-cost financing and replacement revenue sources for some significant wholesale customer loads that will potentially be leaving in 2014, all while controlling operating expenses to minimize impacts on customer rates,  are some of the challenges Chugach has faced and will continue to face in the near and intermediate term.





These issues, along with emerging energy issues and state political factors, will shape how Chugach proceeds into the future.





Chugach has entered an agreement with AML&P to construct and own as tenants in common a new 183 MW natural gas-fired power plant.  Chugach will own and take approximately 70 percent of the new plant’s output and AML&P will own and take the remaining output.  Currently, major components have been ordered and engineering is moving forward.  Chugach executed an Engineering, Procurement and Construction (EPC) contract in June and a Once Through Steam Generator (OTSG) equipment contract in August and finalized the transportation of the steam turbine generator in September of this year.





On October 5, 2010, the RCA, acting on a petition filed by Chugach, concluded that Chugach may include in future rates $197 million in expenditures attributable to three principal contracts to build SPP when the plant becomes used and useful.  The RCA found that “it is in the public interest to provide cost recovery assurance” to Chugach regarding these costs.  This action is unprecedented in Alaska regulatory history and is a noteworthy endorsement of Chugach’s decision to build this new facility.


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Chugach’s interim financing for the plant will come from a commercial paper borrowing program that was established via a $300 million unsecured credit agreement in 2008.





On April 2, 2010, Chugach submitted a new long-term natural gas supply contract with Marathon Alaska Production, LLC (“MAP”), to the RCA.  The new MAP contract will provide gas beginning April 1, 2011, terminating March 31, 2013.  MAP has two contract extension options that can be exercised during the first year of the initial contract.  MAP could extend the contract to December 31, 2013, by exercising the first contract extension option by March 31, 2011.  The second contract option could be exercised by December 31, 2011, and would extend the contract through December 31, 2014.  The total amount of gas under contract is estimated at 26 BCF for the initial two year term of the contract with volumetric and delivery terms to be determined for each contract extension period that could provide up to an additional 16 BCF through December 31, 2014.  The RCA approved the gas supply contract effective May 17, 2010.





The State of Alaska Department of Natural Resources (DNR) completed a preliminary engineering and geological evaluation of the remaining Cook Inlet gas reserves in December of 2009.  The study identified 863 BCF of proved, developed, producing reserves, additional probable reserves of 279 BCF and an additional increment of 353 BCF in high-confidence pay intervals.  Combined, these 1.5 trillion cubic feet of gas reserves are similar to the 1.4 trillion cubic feet of gas reserves identified in a 2004 study undertaken by the Department of Energy in 2004.  Given current demand and deliverability, DNR estimates at minimum a 10-year supply of gas exists in currently producing leases.  DNR does note that economic considerations will play a major role in whether producers continue drilling and development activities to meet demand.  Chugach has been working closely with the state and Cook Inlet producers to develop a comprehensive Cook Inlet resource management plan that will meet this goal.  Chugach continues to explore its options for future fuel supply needs by working with developers on commercial terms for natural gas storage and the State of Alaska on energy policies to promote gas development in Cook Inlet and other in-state gas options such as the North Slope Spur Line or Bullet line to Southcentral Alaska.  Chugach is also evaluating natural gas storage and import options as transition gas until in-state gas options are developed.




Notification was made by MEA in 2004 and by HEA in 2007 that neither organization intends to be on the Chugach system under the current contractual arrangements post 2014.  This would result in a loss of approximately 50 percent of Chugach’s power sales load and approximately 40 percent of the utility’s annual sales revenue.  This would also result in a decrease in certain fixed and variable costs, however, the remaining customers will have to shoulder the burden imposed by the remaining costs and will likely face higher rates.  Chugach can sustain operations and meet financial covenants in the event these two wholesale customers leave the system because cost recovery would transfer to the remaining customers on Chugach’s system.





On April 13, 2010, HEA issued a press release stating that HEA’s solely-owned power generation and transmission entity, Alaska Electric and Energy Cooperative, Inc. (AEEC), approved a design engineer to complete design for the Nikiski generation conversion project. AEEC currently owns a 40 MW natural gas fired generation plant that is dispatched as part of Chugach’s overall system.  The conversion project entails adding a steam turbine and increasing the output of the plant to 77 MW.  HEA intends to purchase all of the output from this unit upon expiration of the Chugach contract in 2013.  Chugach is currently negotiating with HEA for generation and transmission reserves necessary to meet the balance of HEA’s power requirements.


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MEA does not have significant resources in place at this time that would indicate a complete reduction in service from Chugach is probable or even possible.  At the August 26, 2009, Chugach Board of Directors’ meeting and in a letter dated September 3, 2009, MEA’s then Interim General Manager advised Chugach that MEA desires to open discussions regarding power sales possibilities beyond 2014.  Discussions have been ongoing throughout 2010.





Chugach is continuing to pursue replacement sources of revenue through potential new firm power sales agreements and transmission wheeling and ancillary services tariff additions.  We believe that successful implementation of new power sales agreements and revised tariffs will mitigate anticipated rate increases in the 2014 and 2015 timeframe.  However, we cannot assure that we will be able to completely replace sources of revenue or that any replacement of revenue sources or new tariffs will fully mitigate any anticipated rate increases in this timeframe.





A State of Alaska Energy Plan set a goal that renewable energy and alternative fuel sources account for one-half of the state’s energy sales by 2025.  This is in concert with Chugach’s conceptual goal to move from a “90 – 10” (90 percent fossil fuel – 10 percent renewable alternative) generation mix to a “10 – 90” generation mix.  Chugach’s challenge in the coming years will be to find low-cost, highly efficient generation projects that lead toward this goal.





In 2009 and 2010, the Alaska Legislature considered, but did not adopt, legislation to create the Greater Railbelt Energy and Transmission Corporation (GRETC).  The purpose of the corporation was to “plan for the financing, acquisition, construction, ownership, and operation of necessary electric power generation and transmission assets and services that would be necessary to provide the Railbelt with adequate, reliable, safe, and stable electric power and transmission services at the lowest feasible long-term cost.”  The six Railbelt utility governing bodies worked cooperatively on this legislation.  The Railbelt utilities will continue to support establishment of an organization to do at least some of the mission foreseen for GRETC.  Chugach is an active participant in this process and, with other utilities, is considering establishing a Railbelt Generation and Transmission Cooperative as an alternative to GRETC.





Chugach is coordinating with other parties, including the State of Alaska, private developers and other utilities in the planning and potential development of renewable energy resources.  The Alaska legislature approved $10 million in the state capital budget for the AEA to coordinate Railbelt large scale hydro planning, design and permitting.  Chugach will work with AEA and other parties on this effort.




Potential renewable resources that Chugach is actively exploring with developers include the Fire Island wind project being proposed by Fire Island Wind, LLC, Mt. Spurr Geothermal being proposed by Ormat Technologies, Inc., landfill gas and a potential waste-to-energy project in Anchorage.  Other potential projects include wind power developments in the HEA and GVEA service areas.  Chugach, in coordination with other Railbelt utilities and the National Renewable Energy Laboratory (NREL), is currently involved in wind integration studies to determine if wind resources can be cost effectively added to Chugach’s and the Railbelt’s islanded grid system.


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Approximately 70 percent of Chugach’s employees are represented by the IBEW.  We have three agreements with the IBEW.  We also have an agreement with the HERE.  All current agreements were due to expire on June 30, 2010.  On February 24, 2010, the Board of Directors approved three year extensions of the three IBEW CBA’s.  The three extensions provide no wage increase in the first year and wage increases tied to changes in the CPI in the second and third years, with a floor on the minimum increase and a cap on the maximum increase.  The wage increases also have an indirect connection to Chugach’s financial performance.  The contract extensions expire on June 30, 2013.  On April 28, 2010, the Board of Directors approved a three year extension of the HERE agreement.  The extension contains an increase in the employer health and welfare contribution in each year of the extension but does not provide for a wage or pension increase.  The contract extension expires on June 30, 2013.





ENVIRONMENTAL MATTERS





Compliance with Environmental Standards





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





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





The Clean Air Act and Environmental Protection Agency (EPA) regulations under the act (the “Clean Air Act”) establish ambient air quality standards and limit the emission of many air pollutants.  Some Clean Air Act programs that regulate electric utilities, notably the Title IV “acid rain” requirements, do not apply to facilities located in Alaska.





New Clean Air Act regulations impacting electric utilities may result from future events or may result from new regulatory programs.  On October 30, 2009, EPA published new federal regulations requiring the mandatory reporting of greenhouse gases from all sectors of the economy. Chugach is subject to this new regulation, which is not expected to have a material effect on our results of operations, financial position, and cash flows.  While we cannot predict whether any additional new regulation would occur or its limitation, it is possible that new laws or regulations could increase our capital and operating costs. We have obtained or applied for all Clean Air Act permits currently required for the operation of our generating facilities.


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Chugach is subject to numerous other environmental statutes including the Clean Water Act, the Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Endangered Species Act, and the Comprehensive Environmental Response, Compensation and Liability Act and to the regulations implementing these statutes.  We do not believe that compliance with these statutes and regulations to date has had a material impact on our financial condition or results of operation.  However, new laws or regulations, implementation of final regulations or changes in or new interpretations of these laws or regulations could result in significant additional capital or operating expenses.





ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.  In the normal course of our business, we manage our exposure to these risks as described below.  We do not engage in trading market risk-sensitive instruments for speculative purposes.





Interest Rate Risk




At September 30, 2010, our short- and long- term debt was comprised of our 2001 and 2002 Series A Bonds, promissory notes owed to CoBank and outstanding commercial paper.





The interest rates of our 2001 and 2002 Series A Bonds are fixed at 6.55 and 6.20 percent, respectively, per annum.  At September 30, 2010, we had $270.0 million of 2001 and 2002 Series A Bonds outstanding.  The fair value at September 30, 2010, was $281.7 million.





Chugach is exposed to market risk from changes in interest rates associated with our other credit facilities.  Our credit facilities’ interest rates may be reset due to fluctuations in a market-based index, such as the London Interbank Offered Rate (LIBOR) or the base rate or prime rate of our lenders.  A 100 basis-point rise in interest rates would increase our interest expense by approximately $1.1 million, and a 100 basis point decline in interest rates would decrease our interest expenses by approximately $614.9 thousand, based on $110.1 million of variable rate debt outstanding at September 30, 2010.


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Commodity Price Risk





Chugach’s gas contracts provide for adjustments to gas prices based on fluctuations of certain commodity prices and indices.  Because fuel and purchased power costs are passed directly to our wholesale and retail customers through a fuel surcharge mechanism, fluctuations in the price paid for gas pursuant to long-term gas supply contracts does not normally impact margins.





ITEM 4.
CONTROLS AND PROCEDURES





Evaluation of Controls and Procedures





As of the end of the period covered by this report, Chugach evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Chugach’s CEO and Chief Financial Officer (CFO) supervised and participated in this evaluation.  Based on this evaluation, Chugach’s CEO and CFO each concluded that as of the end of the period covered by this report, Chugach’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in its periodic reports to the SEC.  In addition, there have been no changes in Chugach’s internal controls over financial reporting or in other factors known to management during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect its internal controls over financial reporting.





PART II.  OTHER INFORMATION





ITEM 1.
LEGAL PROCEEDINGS





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





ITEM 1A.
RISK FACTORS





Fuel Supply





In 2009, 90 percent of our power was generated from gas, which included power generated at Nikiski.  Our primary suppliers of natural gas are the Beluga River Field Producers and Marathon.  Chugach currently has a contract in place to fill 100 percent of Chugach’s unmet needs until April 2011, approximately 50 percent of Chugach’s unmet needs from May 2011 through December 2014, approximately 60 percent in 2015 and approximately 29 percent in 2016.





On April 2, 2010, Chugach submitted a new long-term natural gas supply contract with Marathon Alaska Production, LLC (“MAP”), to the RCA.  The new MAP contract will provide gas on April 1, 2011, terminating March 31, 2013.  MAP has two contract extension options that can be exercised during the first year of the initial contract.  MAP could extend the contract to December 31, 2013, by exercising the first contract extension option by March 31, 2011.  The second contract option could be exercised by December 31, 2011, and would extend the contract through December 31, 2014.  The total amount of gas under contract is estimated at 26 BCF for the initial two year term of the contract with volumetric and delivery terms to be determined for each contract extension period that could provide up to an additional 16 BCF through December 31, 2014.  The RCA approved the gas supply contract effective May 17, 2010.


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With the approval of the MAP contract, Chugach has ensured 100 percent of its natural gas needs will be met at least through March 31, 2013.





The RCA approved inclusion of all fuel (gas) and transportation costs related to our current contracts in the calculation of Chugach’s fuel surcharge process which will ensure, in advance, that costs incurred under the contracts can be recovered from Chugach’s customers.  The fuel surcharge process allows Chugach to recover its current fuel and purchased power costs with minimal regulatory lag.  To the extent the regulated fuel recovery process does not provide for the timely recovery of fuel expenses, Chugach could experience a material negative impact on its cash flows.  Chugach has line of credit and commercial paper borrowing capacity to mitigate this risk.





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





Not applicable.





ITEM 3.
DEFAULTS UPON SENIOR SECURITIES





Not applicable.





ITEM 4.
RESERVED





None.





ITEM 5.
OTHER INFORMATION





None.





ITEM 6.
EXHIBITS





Transportation Agreement between the Registrant and Beluga Pipeline Company dated effective October 1, 2010.





Transportation Agreement For Interruptible Transportation Of Natural Gas between the Registrant and Kenai Nikiski Pipeline dated effective October 1, 2010.





Gas Exchange Contract between the Registrant and Union Oil Company of California dated effective October 1, 2010.


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





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





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





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








SIGNATURES





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






CHUGACH ELECTRIC ASSOCIATION, INC.








By:
/s/ Bradley W. EvansBradley W. EvansChief Executive OfficerBy:
/s/ Michael R. CunninghamMichael R. CunninghamChief Financial OfficerDate:
November 11, 2010


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EXHIBITS





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





Exhibit Number

Description10.68

Transportation Agreement between the Registrant and Beluga Pipeline Company dated effective October 1, 201010.69

Transportation Agreement For Interruptible Transportation Of Natural Gas between the Registrant and Kenai Nikiski Pipeline dated effective October 1, 201010.70

Gas Exchange Contract between the Registrant and Union Oil Company of California dated effective October 1, 201031.1

Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

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






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