Filed Pursuant to Rule 424(b)(4)
Registration No. 333-75840
PROSPECTUS
$120,000,000 6.20% 2002 Series A Bonds Due 2012
$60,000,000 2002 Series B Bonds Due 2012
[CHUGACH LOGO]
The 2002 Series A Bonds will mature on February 1, 2012 and will bear
interest at 6.20% per annum. We will pay interest on the 2002 Series A Bonds
semi-annually of each year commencing with August 1, 2002. We may not redeem the
2002 Series A Bonds prior to maturity.
The 2002 Series B Bonds (the "Auction Rate Bonds") will mature on
February 1, 2012. The Auction Rate Bonds will bear interest from the date of
original delivery to and through February 27, 2002 at a rate established by the
underwriter prior to their date of delivery and afterwards, will initially bear
interest at the rate set for 28-day auction periods. The initial auction date
will be February 27, 2002. The applicable interest rate for any 28-day auction
period will be the term rate established by the auction agent based on the terms
of the auction as described herein. The Auction Rate Bonds may be converted, in
our discretion, to a daily, seven-day, 35-day, three-month or a semi-annual
period or a flexible auction period. The Auction Rate Bonds are subject to
optional and mandatory redemption and to mandatory tender for purchase prior to
maturity in the manner and at the times described herein. Bankers Trust Company
will act as the auction agent and J.P. Morgan Securities Inc. will act as the
initial broker-dealer for the Auction Rate Bonds. See "Description of Bonds" for
specific terms of the Auction Rate Bonds, including their auction procedures,
and interest rate, payment, optional and mandatory redemption, and remarketing
features.
Payment of the 2002 Series A Bonds and the Auction Rate Bonds
(collectively the "Bonds") initially will be secured by a first lien on
substantially all of our tangible and some intangible properties. The first lien
will be automatically released when all bonds issued by us prior to April 1,
2001 cease to be outstanding or their holders consent to the release of the
lien. After that time, the Bonds will be unsecured obligations, ranking equally
with our other unsecured and unsubordinated obligations. In addition, we will be
limited in our ability to secure obligations for borrowed money or the deferred
purchase price of property after that time unless we equally and ratably secure
our outstanding indebtedness subject to the Indenture governing the Bonds. See
"Description of the Bonds."
The scheduled payment of the principal and interest on the Bonds, when due,
will be insured by an insurance policy by MBIA Insurance Corporation to be
issued concurrently with the delivery of the Bonds. See "Bond Insurance."
[INSURER LOGO]
<Table>
<Caption>
Price to Underwriting Discounts Proceeds to
Public(1) and Commissions to Chugach (2)
-------------- ---------------------- --------------
Per Series A Bond...... 99.926% 0.823% 99.103%
Total................ $119,911,200 $987,600 $118,923,600
Per Auction Rate Bond.. 100% 0.671% 99.329%
Total................ $60,000,000 $402,600 $59,597,400
Combined Total......... $179,911,200 $1,390,200 $178,521,000
- ---------------------------
</Table>
(1) Plus accrued interest from February 1, 2002, if any. (2) Before
deducting expenses payable by us estimated to be $1,650,000.
The Bonds are offered by the underwriter subject to certain conditions
and subject to prior sale and when, as and if, issued and accepted by the
underwriter. We have agreed to indemnify the underwriter for some obligations
relating to the offering of these bonds. We expect that the Bonds will be
available for delivery in New York, New York in book-entry form on or about
February 1, 2002, through the facilities of The Depository Trust Company against
payment therefor in immediately available funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful and complete. Any representation to the contrary is a
criminal offense.
JPMorgan
January 29, 2002
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell, and seeking offers
to buy, the Bonds only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of any
sale of our Bonds. In this prospectus, the words "we," "us," and "our" refer to
Chugach Electric Association, Inc. unless the context indicates otherwise.
--------------------------
TABLE OF CONTENTS
<Table>
<Caption>
Page
PROSPECTUS........................................................................................................1
SUMMARY...........................................................................................................3
USE OF PROCEEDS...................................................................................................9
SELECTED FINANCIAL DATA..........................................................................................10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................11
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................................21
BUSINESS.........................................................................................................22
MANAGEMENT.......................................................................................................35
BOND INSURANCE...................................................................................................39
DESCRIPTION OF THE BONDS.........................................................................................42
CERTAIN FEDERAL INCOME TAX MATTERS...............................................................................56
UNDERWRITING.....................................................................................................56
LEGAL OPINIONS...................................................................................................57
EXPERTS..........................................................................................................57
WHERE TO FIND ADDITIONAL INFORMATION ABOUT CHUGACH...............................................................57
INDEX TO FINANCIAL STATEMENT PAGES..............................................................................F-1
APPENDIX A - SPECIMEN INSURANCE POLICY..........................................................................A-1
APPENDIX B - AUCTION PROCEDURES.................................................................................B-1
</Table>
--------------------------
The Chugach logo is a trademark of Chugach Electric Association, Inc.
All other trademarks or trade names referred to in this prospectus are the
property of their respective owners.
Information contained on our web site does not constitute part of this
prospectus.
Until March 10, 2002 all dealers that effect transactions in the Bonds,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
SUMMARY
The following summary contains information about our company, the
offering and the terms of the 2002 Series A Bonds and the 2002 Series B Bonds
that we believe is important. You should read the entire prospectus, including
the financial statements and the notes to those financial statements, for a
complete understanding of our business and the offering. This prospectus
contains forward-looking statements based on our current expectations,
assumptions, estimates and projections about us and our industry. These
forward-looking statements involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, some of which are more fully
described elsewhere in this prospectus. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future, except as required by
law.
Explanation of Accounting Terms
We are organized as a cooperative. A cooperative is a business
organization owned by its members who are also its customers. As such, we use
different accounting terminology than stockholder-owned corporations. In this
prospectus, when we refer to assignable margins for a period, we mean revenues
in excess of costs for the period. When we refer to patronage capital, we mean
assignable margins we have not distributed to our members. Patronage capital
constitutes our principal equity and is assigned to each member on the basis of
the volume of purchases from us.
Terms of the Bonds
2002 SERIES A BONDS
Bonds Offered
$120,000,000 principal amount of 2002 Series A Bonds due February 1,
2012. The 2002 Series A Bonds will be issued in multiples of $1,000
denominations.
Interest
The 2002 Series A Bonds bear interest at 6.20% per annum. We will pay
interest on the bonds on February 1 and August 1, beginning August 1, 2002.
Redemption
The 2002 Series A Bonds are not redeemable by us prior to maturity.
AUCTION RATE BONDS
Bonds Offered
$60,000,000 principal amount of 2002 Series B Bonds due February 1,
2012 (the "Auction Rate Bonds"). The Auction Rate Bonds will be issued in
denominations of $50,000 and multiples of $50,000 thereof.
Defined Terms
See Appendix B--Auction Procedures (the "Auction Procedures") and
"Description of the Bonds--Auction Rate Bonds--Glossary of Terms" for
definitions of capitalized terms not defined in the below summary discussion.
Interest
The Auction Rate Bonds will bear interest from the date of original
delivery to and through February 27, 2002 at a rate established by J.P. Morgan
Securities Inc. The interest rate for the first Interest Period has been set at
1.97% per annum. Afterwards, the Auction Rate Bonds will bear interest at the
28-day rate as determined by the Auction Procedures. The Auction Rate Bonds can
be converted to a daily, seven-day, 28-day, 35-day, three-month or a semiannual
period or a Flexible Auction Period and will bear interest at the rate
established for such period through the Auction Procedures. In no event will the
Auction Rate Bonds have an interest rate exceeding 15% per annum unless approved
by us and the insurer of the Bonds.
3
Auction Procedures
The auction agent will establish an interest rate for each auction
period sufficient to result in the sale of all of the Auction Rate Bonds most
favorable to us consistent with the submission of Sufficient Clearing Bids for
all the Auction Rate Bonds. The first auction will take place on February 27,
2002. Thereafter on the business day next preceding each Interest Payment
Date, an auction will be held to determine the interest rate for the Auction
Rate Bonds for the next succeeding 28-day auction period.
Prior to the submission deadline on the date of an auction, owners and
potential owners of the Auction Rate Bonds will either themselves or through
their broker, need to have submitted an irrevocable hold, bid or sell
order setting forth the principal amount of the bonds and the rate at which they
are willing to hold, buy or sell. If an order for all the Auction Rate Bonds
held by an existing owner is not submitted to the auction agent prior to the
submission deadline, the existing owner will be deemed to have submitted a hold
order covering the principal amount of Auction Rate Bonds held by such existing
owner and not subject to orders submitted. On each auction date, the auction
agent will assemble all orders submitted or deemed submitted to it and will
determine (i) the bonds available for sale, (ii) whether there are Sufficient
Clearing Bids, and (iii) the Auction Rate. The procedures for submitting orders
and bids and the processes in which orders and bids will be allocated in an
auction are described in Appendix B--Auction Procedures. See "Description of the
Bonds--Auction Rate Bonds--Auction Procedures" for a summary description of the
auction procedures.
Conversion of Auction Rate Bonds to Another Interest Mode
At our option, with the consent of the Bond Insurer, all of the Auction
Rate Bonds may be converted to bear interest at a Daily Rate, a Weekly Rate, a
Flexible Rate, a Term Rate or a Fixed Rate. On the Mode Adjustment Date
applicable to the Auction Rate Bonds to be converted, the Auction Rate Bonds to
be converted shall be subject to mandatory tender at a purchase price equal to
100% of the principal amount thereof, plus accrued interest. The purchase price
of the Auction Rate Bonds so tendered is payable solely from the proceeds of the
remarketing of such Auction Rate Bonds. In the event that the conditions of a
conversion are not satisfied, including the failure to remarket all applicable
Auction Rate Bonds, the Auction Rate Bonds will not be subject to mandatory
tender, will be returned to their owners, will automatically convert to a
seven-day auction period and will bear interest at the Maximum Auction Rate.
Interest on the Auction Rate Bonds in a daily, seven-day, 28-day,
35-day, a three-month or a Flexible Auction Period of 180 days or less will be
computed on the basis of a 360-day year for the actual number of days elapsed.
Interest on the Auction Rate Bonds in a semiannual auction period or Flexible
Auction Period of more than 180 days will be computed on the basis of a 360-day
year of twelve 30-day months.
Auction Agent
Bankers Trust Company has agreed to act as the initial auction agent,
but may resign or be replaced. The auctions will be conducted without
charge to the holders of the Auction Rate Bonds.
Optional Redemption
During the Auction Mode, the Auction Rate Bonds may be redeemed at our
option on any Interest Payment Date immediately following the end of an Auction
Period, at par, plus any accrued interest. If we redeem less than all of the
Auction Rate Bonds, the notes will be redeemed pro rata or any other method the
trustee considers fair and appropriate.
4
Sinking Fund Redemption
The Auction Rate Bonds will be subject to annual pro-rata sinking fund
redemption at a redemption price equal to 100% of the principal amount and will
be redeemed commencing on the Interest Payment Date on or immediately preceding
February 1, 2003, and on the Interest Payment Date on or immediately preceding
February 1 in each year thereafter until maturity. See "Description of the
Bonds--Sinking Fund Redemption Provisions."
2002 SERIES A BONDS AND AUCTION RATE BONDS
Security for the Bonds
The 2002 Series A Bonds and the Auction Rate Bonds (the "Bonds")
initially will be secured by a first lien on substantially all of our tangible
and some of our intangible properties and assets, including generation,
transmission and distribution properties, with certain exceptions set forth in
the Indenture of Trust, dated September 15, 1991, as amended, between us and
U.S. Bank National Association as trustee (the "Existing Indenture"), and
subject to certain permitted encumbrances set forth in the Existing Indenture.
The first lien will be automatically released on the date on which all bonds
issued under the Existing Indenture prior to April 1, 2001 cease to be
outstanding or their holders consent to release of the lien (the "Release
Date"). We anticipate that the other series of bonds issued prior to April 1,
2001 will be retired or defeased or their holders will consent to the release of
the lien prior to March 15, 2002.
On the Release Date, the Amended and Restated Indenture dated April 1,
2001, between us and U.S. Bank National Association, as trustee (the "Amended
Indenture"), will become effective and replace the Existing Indenture. On the
Release Date, the Bonds will become general unsecured obligations and will rank
equally and ratably with all our other unsecured and unsubordinated obligations.
See "Description of the Bonds--Security for Payment of the Obligations Prior to
Release Date; Conversion to Unsecured Obligations on Release Date." When we
refer to the "Indenture", we mean the Existing Indenture prior to the Release
Date and the Amended Indenture on and after the Release Date.
Under the Amended Indenture, we are prohibited from creating or
permitting to exist any mortgage, lien, pledge, security interest or encumbrance
on our properties and assets (other than those arising by operation of law) to
secure the repayment of borrowed money or the obligation to pay the deferred
purchase price of property unless we equally and ratably secure all bonds
subject to the Amended Indenture, except that we may incur secured indebtedness
in an amount not to exceed $5,000,000 or enter into sale and leaseback or
similar agreements.
Bond Insurance
MBIA Insurance Corporation ("MBIA" or the "Bond Insurer") has issued a
commitment to provide an insurance policy providing for the payment of principal
and interest on the Bonds when due. As an insurer of the Bonds, MBIA (and not
the holders of the Bonds) will be considered the holder of the Bonds for the
purpose of approving supplemental indentures or other amendments to the
Indenture, giving any other approval consent or notice to effect any waiver,
exercising any remedies, and taking any other action that could be taken by the
holders of Bonds in the absence of such bond insurance. See "Bond Insurance" and
"Description of the Bonds--Rights of Insurer."
5
Additional Bonds
Prior to the Release Date, subject to meeting certain interest coverage
tests, we may issue additional bonds from time-to-time against the cost of
certain property acquisitions, the principal amount of retired or defeased bonds
and deposits of cash with the trustee. After the Release Date, we may issue
additional obligations under the Amended Indenture subject only to meeting
certain interest coverage tests. No limitations will exist on our ability to
issue indebtedness other than under the Amended Indenture. See "Description of
the Bonds--Additional Obligations."
Rate Covenant
The Existing Indenture requires us, subject to any necessary regulatory
approval, to establish and collect rates reasonably expected to yield margins
for interest equal to at least 1.20 times total interest expense. Margins for
interest generally consist of our assignable margins plus total interest expense
and income tax accruals.
The Amended Indenture will require us, subject to any necessary
regulatory approval, to establish and collect rates reasonably expected to yield
margins for interest equal to at least 1.10 times total interest expense.
Margins for interest are defined in the Amended Indenture as our assignable
margins plus total interest expense on obligations to repay borrowed money or
the deferred purchase price of property or services (other than from
subordinated debt), income tax accruals and non-recurring charges. See
"Description of the Bonds--Rate Covenant."
Rate Regulation
The Regulatory Commission of Alaska ("RCA") must approve the rates at
which we sell electricity. We design rates to produce reasonable reserves and
margins. We also recover increases in our fuel and purchased power costs through
a quarterly adjustment to our rates. These adjustments are approved by the RCA
and are not subject to any rate increase limits. Under Alaska law, our financial
covenants in the Indenture are valid and enforceable, and rates set by the RCA
must be adequate to meet those covenants.
Limitations on Distributions to Members
The Existing Indenture prohibits us from making any distribution of
patronage capital to our customers if an event of default under the Existing
Indenture then exists. Otherwise we are permitted to make distributions to our
members after December 31, 1990 in the aggregate amount of $7 million plus 35
percent of the aggregate assignable margins earned after December 31, 1990. This
restriction does not apply if, after the distribution, our aggregate equities
and margins as of the end of the immediately preceding fiscal quarter would be
equal to at least 45% of our total liabilities and equities and margins. Based
on the unaudited financial statements at September 30, 2001, we could have
distributed $4.1 million to our members under this formula. In December 2001, we
distributed $3 million of patronage capital to our members.
The Amended Indenture will prohibit us from making any distribution of
patronage capital to our customers if an event of default under the Amended
Indenture then exists. Otherwise, we may make distributions to our members in
each year equal to the lesser of 5% of our patronage capital or 50% of
assignable margins for the prior fiscal year. This restriction will not apply
if, after the distribution, our aggregate equities and margins as of the end of
the immediately preceding fiscal quarter would be equal to at least 30% of our
total liabilities and equities and margins. See "Description of the
Bonds--Limitation on Distributions to Members."
6
Reporting Obligations
We do not intend to register the Bonds under Section 12(b) of the
Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"). We
will, however, initially be subject to the reporting requirements of Section
15(d) of the Securities Exchange Act. The Indenture requires us to continue
reporting under the Securities Exchange Act for so long as any of the Bonds are
outstanding.
Form and Denomination
The Bonds will be evidenced by two or more global certificates in fully
registered form without coupons, deposited with a custodian for and registered
in the name of a nominee of The Depositary Trust Company. Except as described in
this prospectus, beneficial interests in the global certificates will be shown
on, and transfers of these beneficial interests will be effected only through,
records maintained by The Depository Trust Company and its direct and indirect
participants. See "Description Of The Bonds--Book-Entry System;
Exchangeability."
Market for Bonds
We do not intend to list either series of Bonds on any securities
exchange or have them quoted on the National Association of Securities Dealers
Automated Quotation System. As a result, there may not be a secondary market for
the Bonds. The underwriter intends, but is not obligated, to make a market in
the Bonds. See "Underwriting."
Our Company and Business
We are the largest electric utility in Alaska. We provide electricity,
either directly or through our wholesale and economy-energy sales, to
approximately two-thirds of all electric customers in Alaska. We have
approximately 57,900 directly served retail customers and also regularly supply
capacity and energy to three wholesale customers and economy energy to one
additional customer. We also provide electricity periodically to Anchorage
Municipal Light & Power. For the nine months ended September 30, 2001,
approximately 63% of our revenues were from sales to our directly served retail
customers, approximately 33% were from sales of firm power to our three
wholesale customers and approximately 3% were from economy sales.
We currently are the only electric utility with the right to provide
retail electric service in the certificated service area assigned to us by the
Regulatory Commission of Alaska ("RCA"). Our certificated service area extends
from Anchorage (except certain downtown and residential areas of Anchorage) to
the upper Kenai Peninsula and from Whittier on Prince William Sound to Tyonek on
the west side of Cook Inlet. We provide power to Alaskans from Homer to
Fairbanks through sales to our wholesale customers. We do not expect the Alaska
legislature to pass a law establishing retail competition in the foreseeable
future.
We have approximately 527 megawatts of installed generating capacity
provided by 17 generating units at our four wholly owned power plants: Beluga
Power Plant, Bernice Lake Power Plant, International Power Plant and Cooper Lake
Hydroelectric Plant, and our 30% interest in the Eklutna Hydroelectric Project.
In addition, we have purchase rights to 30.4% (27.4 megawatts) of the output of
Bradley Lake Hydroelectric Project and we buy most of the output of the Nikiski
cogeneration facility on the Kenai Peninsula, a nominally rated 40 megawatt
generation unit. Approximately 96% of our energy was generated from natural gas
in the first nine months of 2001, and of that amount, 89% was from our Beluga
Power Plant units.
We were organized as an Alaska electric generation, transmission and
distribution cooperative in 1948. As with electric cooperatives generally, we
operate on a not-for-profit basis. As a cooperative, we design our rates on a
cost-of-service basis that historically allows us to recover our operating and
maintenance costs and expenses; debt service; costs of repairs, replacements,
and renewals; and costs for that portion of capital additions not funded by
borrowings. We design rates to produce reasonable reserves and margins but not a
return on equity for profit. We are exempt from federal income taxation under
Section 501(a) of the Internal Revenue Code of 1986, as amended, as an
organization described in 501(c)(12) of the Code.
7
The RCA must approve the rates at which we sell electricity. We also
recover increases in our fuel and purchased power costs through an automatic
quarterly adjustment to our rates. These adjustments are subject to prior
approval by the RCA and are not subject to any rate increase limits. Under
Alaska law, our financial covenants in the Bonds and the Indenture are valid and
enforceable, and rates set by the RCA must be adequate to meet those covenants.
Our principal office is located at 5601 Minnesota Drive, Anchorage,
Alaska 99519-6300, and our telephone number is (907) 563-7494.
8
USE OF PROCEEDS
We will apply the net proceeds of this offering, estimated to be $176.9
million after payment of underwriting discounts and offering expenses, to redeem
$149.3 million in principal amount of the 1991 Series A Bonds due 2022, to pay
the redemption premium on the 1991 Series A Bonds due 2022 in the estimated
amount of $13.6 million, and for general working capital. The 1991 Series A
Bonds due 2022 have an aggregate outstanding principal balance of $149.3 million
and bear interest at 9.14% per annum.
9
SELECTED FINANCIAL DATA
We derived the selected financial data presented in the table below for
and as of the end of each year in the five year period ended December 31, 2000
from our audited financial statements. Our balance sheet as of September 30,
2001, and the related statements of revenues, expenses and patronage capital and
cash flows for the nine-month period ended September 30, 2001 and each of the
years in the three-year period ended December 31, 2000 and the report of KPMG
LLP thereon are included elsewhere in this prospectus. We derived the statement
of operations data for the nine months ended September 30, 2001 and 2000 and the
balance sheet data as of September 30, 2001 from our unaudited financial
statements included in this prospectus. In management's opinion, this unaudited
information includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. The historical results do not
necessarily indicate the results you should expect in any future period and the
results in interim periods are not necessarily indicative of the results that
may be expected for the full fiscal year. The information contained in this
table is qualified entirely by reference to "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and related notes included in this prospectus.
<Table>
<Caption>
Nine months ended
September 30, Years ended December 31,
--------------------- ------------------------------------------------------
Statements of Operations Data: 2001 2000 2000 1999 1998 1997 1996
(in thousands, except ratios)
Operating revenues.................. $ 126,401 $ 114,258 $ 158,541 $ 142,644 $ 141,825 $ 143,948 $ 134,877
Operating expenses.................. (103,752) (90,079) (126,430) (110,457) (110,737) (113,071) (100,914)
Interest expense.................... (20,409) (18,334) (24,718) (24,135) (24,469) (25,085) (25,349)
-------- -------- -------- -------- -------- -------- --------
Net operating margins........... 2,240 5,845 7,393 8,052 6,619 5,792 8,614
Nonoperating Margins(1)............. 738 837 2,287 1,615 2,111 1,762 1,217
-------- -------- -------- -------- -------- -------- --------
Assignable margins.............. $ 2,978 $ 6,682 $ 9,680 $ 9,667 $ 8,730 $ 7,554 $ 9,831
========= ========== ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges(1,2)........................ 1.140 1.335 1.360 1.385 1.345 1.294 1.379
</Table>
<Table>
<Caption>
September 30, December 31,
------------ -----------------------------------------------------
Balance Sheet Data: 2001 2000 1999 1998 1997 1996
------------ --------- --------- --------- --------- ---------
(in thousands)
Assets:
Plant net:
In service................... $ 443,639 $ 427,127 $ 398,545 $ 386,235 $ 393,229 $ 400,053
Construction work in progress 37,698 42,028 47,257 30,406 24,664 19,827
---------- --------- --------- --------- --------- ---------
Electric plant, net........ 481,337 469,155 445,802 416,641 417,893 419,880
Other assets.................... 92,084 70,591 72,554 64,450 67,674 62,608
---------- --------- --------- --------- --------- ---------
Total assets................. $ 573,421 $ 539,746 $ 518,356 $ 481,091 $ 485,567 $ 482,488
========== ========= ========= ========= ========= =========
Liabilities:
Current liabilities............. $ 52,933 $ 77,286 $ 33,970 $ 33,081 $ 34,461 $ 36,686
Deferred credits................ 19,734 21,425 24,711 28,069 29,979 33,418
Long-term debt (excluding
current portion).............. 369,310 312,220 337,150 305,918 312,007 307,906
Equities and margins............ 131,444 128,815 122,525 114,023 109,120 104,478
---------- --------- --------- --------- --------- ---------
Total liabilities............ $ 573,421 $ 539,746 $ 518,356 $ 481,091 $ 485,567 $ 482,488
========== ========= ========= ========= ========= =========
</Table>
________________
1 The decrease in net operating margins and assignable margins is primarily
attributable to an increase in depreciation due to a substantial increase
in plant in the fourth quarter of 2000 related to the Beluga unit 6
re-powering, increased interest expense due to the issuance of $150 million
of long-term debt in the second quarter of 2001, and a decrease in
capitalized interest charged to construction. Another factor in the margin
decrease was that our requested interim base rate increase did not become
effective until September 14, 2001. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Nine months
ended September 30, 2001 compared to nine months ended September 30, 2000."
2 For purposes of this ratio, earnings consist of earnings plus fixed
charges. Fixed charges consist of interest expense and the estimated
interest portion of rent expense. Income taxes have been excluded because
we are a tax-exempt organization.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Caution Regarding Forward Looking Statements
Statements in this prospectus 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 should not place undue
reliance on these forward-looking statements. They speak only as of the date of
this prospectus and their accuracy is subject to many uncertainties. We
undertake no obligation to publicly release any revisions to these
forward-looking statements to reflect actual events or circumstances that may
occur after the date of this prospectus or the effect of those events or
circumstances on any of the forward-looking statements contained in this
prospectus, except as required by law.
Results of Operations
Overview
Margins. We operate on a not-for-profit basis and, accordingly, seek
only to generate revenues sufficient to pay operating and maintenance costs, the
cost of purchased power, capital expenditures, depreciation and principal and
interest on our indebtedness and to provide for the establishment of reasonable
margins and reserves. These amounts are referred to as "margins." Patronage
capital, the retained margins of our members, constitutes our principal equity.
Times Interest Earned Ratio (TIER). Alaska electric cooperatives
generally set their rates on the basis of TIER. TIER is determined by dividing
the sum of assignable margins plus long-term interest expense (excluding
capitalized interest) by long-term interest expense (excluding capitalized
interest). We manage our business with a view toward achieving a TIER of 1.25 or
greater. We achieved TIERs for the past five years and estimate the TIER for
2001 to be as follows:
Year TIER
---- ----
2001 (estimate) 1.21
2000 1.39
1999 1.40
1998 1.35
1997 1.30
1996 1.39
Our TIER for the nine months ended September 30, 2001 was 1.15. We estimate TIER
for 2001 to be 1.21 due to the 1.6% interim base rate increase that became
effective September 14, 2001, as well as the 3.97% interim base rate increase
that was implemented on November 1, 2001. We have proposed to the RCA that we
set our rates in the future based on a rate-based rate of return methodology
rather than a TIER methodology. See "Business--Rate Regulation and Rates" for
additional information.
Rates. Our rates are made up of two components: "base rates" and "fuel
surcharge rates. "Base rates" are composed of fixed and variable charges in
connection with the generation and transmission of electricity. Although a base
fuel and purchased power component is included in base rates, they consist
primarily of costs other than fuel and purchased power costs. "Fuel surcharge"
rates take into account the rise and fall of fuel and purchased power costs and
ensure collection of fuel and purchased power costs above the base component
included in the base energy rate. The RCA approves the amounts paid by our
wholesale and retail customers under base rates and approves the quarterly fuel
surcharge filing authorizing rate changes in the fuel surcharge calculations.
Base Rates. We recover operating and maintenance and other non-fuel and
purchased power costs through our base rates established through an order of the
RCA following a general rate case, where we propose a rate increase or decrease
for each class of customer based on our costs to service those classes during a
recent year referred to as a test year. While this process typically takes nine
months to one year, the RCA may authorize, after a
11
notice period, rate changes on an interim and refundable basis. In addition, the
RCA has been willing to open limited reviews of rate cases to resolve specific
issues from which expeditious decisions can often be generated.
We filed a general rate case in July 2001, requesting a permanent base
rate increase of 6.5%, and an interim base rate increase of 4%. On September 5,
2001, the RCA granted a 1.6% interim increase effective September 14, 2001. We
filed a petition for reconsideration and on October 25, 2001, the RCA approved
an interim base rate increase of 3.97%. The additional rate increase was
implemented on November 1, 2001. The 3.97% interim base rate increase is
anticipated to result in approximately $0.7 million in additional revenue in
2001 compared to previous permanent base rates, or $4.1 million on an annualized
basis. The interim base rate increase is based on a normalized, or adjusted for
recurring expenses, test year and a system ratemaking TIER of 1.35.
The requested permanent base rate increase of 6.5%, if approved by the
RCA, is anticipated to result in $7.5 million in additional revenue each year,
or approximately $3.4 million more than the interim base rate increase approved
by the RCA which became effective on November 1, 2001, and margins of $10.8
million for 2002 at the base rate submitted. The requested permanent base rate
increase is scheduled for a hearing before the RCA in August 2002.
Prior to 2001, our base rates to our retail customers had not increased
since 1994. As part of a settlement of disputes over rate adjustments with our
wholesale customers (the "Settlement Agreement"), we agreed that our base rate
for wholesale customers would not exceed 1995 levels at least through 1999 and
could be reduced if those rates provide returns significantly higher than those
specified in the settlement. As discussed below, we have granted refunds for
rates based on our 1996 costs. The RCA issued an order on February 27, 2001,
that no rate reduction or refunds were required based on our 1997 test year
costs. The 1998 test year hearing has been completed but an order from the RCA
has not yet been issued but is anticipated within the next several months.
Our base rate changes, excluding fuel surcharges, for retail and
wholesale customer classes, for the nine months ended September 30, 2001 and the
years 1998 through 2000 were as follows:
<Table>
<Caption>
Nine months ended
September 30, 2001 2000 1999 1998
------------------ ---- ---- ----
Retail* 1.6% 0.0% 0.0% 0.0%
Wholesale:
Homer 1.6% (0.7%) (0.3%) 0.0%
MEA 1.6% (0.8%) (3.8%) (0.2%)
Seward 0.0% 0.0% 0.0% (15.0%)
</Table>
- ----------------
*The 2001 base rate increase was not applied to small general service or
lighting customer classes.
The rate reductions shown in the table for Matanuska Electric
Association ("MEA") and Homer Electric Association ("Homer") in 1999 and 2000
relate to our filing under the Settlement Agreement of our cost of service for
1996. Our calculations indicated that a rate reduction was required and that a
refund was owed for the previous periods. We recorded provisions for wholesale
rate refunds that totaled $2.7 million at December 31, 1999. Early in 2000, we
issued additional refunds of $86,132 to Homer and $1.8 million to MEA that
represented uncontested amounts owed to them under the Settlement Agreement. In
June 2000, the RCA issued a final order approving our 1996 test year cost of
service. As a result of that order, we issued additional refunds to MEA and
Homer in the amounts of $332,157 and $503,272, respectively, on July 25, 2000.
Consistent with the Settlement Agreement, these refunds were based on demand and
energy purchases retroactive to January 1, 1997.
The RCA issued an order for the 1997 test year that did not reduce
wholesale rates or require refunds under the Settlement Agreement. The 1998 test
year hearing has been completed but an order from the RCA has not yet been
issued. No additional test years remain to be reviewed under the Settlement
Agreement.
The rate reduction to the City of Seward ("Seward") in 1998 was the
result of a contract re-negotiation through which Seward moved from being a firm
customer to an interruptible customer. The rate reduction reflects a negotiated
reduction of rates for Seward since the Seward load can be interrupted.
12
Fuel Surcharge. We pass fuel and purchased power costs above base
amounts included in the base rate directly to our wholesale and retail customers
through the fuel surcharge. Changes in fuel and purchased power costs are
primarily due to fuel price adjustment mechanisms in our gas supply contracts
based on natural gas, crude oil and fuel oil indexed price changes. We pass
these costs directly to our retail and wholesale customers. The fuel surcharge
is approved on a quarterly basis by the RCA. There are no limitations on the
number or amount of fuel surcharge rate changes. Increases in our fuel and
purchased power costs result in increased revenues while decreases in these
costs result in lower revenues. Therefore, revenue from the fuel surcharge
normally does not impact margins.
The RCA ordered refunds of approximately $1.2 million because of
alleged over-collection of fuel surcharges in 1995, 1996 and 1997. We appealed
that finding to the Superior Court, which overturned it. MEA appealed that
decision to the Alaska Supreme Court and the RCA filed an amicus brief generally
supporting the MEA position. A hearing before the court was held October 17,
2001 and a decision is pending.
Nine months ended September 30, 2001 compared to nine months ended
September 30, 2000
Margins
Our margins for the nine months ended September 30, 2001 and 2000 were
as follows:
Nine months ended
September 30,
--------------------------------
2000 2001
------------- ------------
Net operating margins.............. $5,845,558 $2,240,000
Nonoperating margins............... 836,771 738,190
------------- ------------
Assignable margins................. $6,682,329 $2,978,190
============= ============
The decrease in net operating margins and assignable margins is
primarily attributable to an increase in depreciation due to a substantial
increase in plant in the fourth quarter of 2000 related to the Beluga unit 6
re-powering, increased interest expense due to the issuance of $150 million of
long-term debt in the second quarter of 2001, and a decrease in capitalized
interest charged to construction. Another factor in the margin decrease was that
our requested interim base rate increase did not become effective until
September 14, 2001.
Nonoperating margins include interest income, allowance for funds used
during construction, capital credits and patronage capital allocations.
Nonoperating margins decreased by $99,000, or 12%, in the first nine months of
2001 compared to the same period in 2000 due to a decrease in Allowance for
Funds Used During Construction ("AFUDC") due to lower Construction Work in
Progress ("CWIP") balances in 2001.
Revenues
Operating revenues include sales of electrical energy to retail,
wholesale and economy energy customers and other miscellaneous revenues.
Revenues for the nine months ended September 30, 2001, were $126.4 million, an
increase of 11% over the same nine month period in 2000, due to increased fuel
prices resulting in increased revenue collected through the fuel surcharge. The
increase was also due to the 1.6% interim base rate increase in September 2001.
The increase is offset by lower economy energy sales to Golden Valley Electric
Association ("GVEA"). We sold 76.8 million kWh of power to GVEA during the nine
months ended September 30, 2001,
13
compared to 233.7 million kWh during the comparable period of 2000. The major
components of our operating revenue for the nine months ended September 30, 2001
and 2000, were as follows:
Nine months ended
September 30,
--------------------------------
2001 2000
-------------- -------------
Retail............................. $ 79,617,388 $ 70,896,302
Wholesale:
Homer.......................... 16,823,628 13,650,135
MEA............................ 22,901,064 18,828,755
Seward......................... 2,072,412 1,764,815
Economy energy..................... 3,117,712 6,621,754
Other.............................. 1,868,752 2,496,510
------------- -------------
Total revenue.................. $126,400,956 $114,258,272
============= =============
Expenses
The major components of our operating expenses for the nine months
ended September 30, 2001 and 2000, were as follows:
Nine months ended
September 30,
---------------------------------
2001 2000
-------------- -----------
Power production................... $ 47,587,932 $36,257,283
Purchased power.................... 9,147,759 7,072,014
Transmission....................... 2,731,599 2,491,633
Distribution....................... 7,260,234 7,521,075
Consumer accounts.................. 4,042,754 3,995,952
Sales expense...................... 352,051 817,221
Administrative, general and other.. 13,951,269 14,743,566
Depreciation....................... 18,678,752 17,180,273
------------- ------------
Total operating expenses....... $103,752,350 $90,079,017
============= ============
Power Production. Power production expense increased in the first nine
months of 2001 by $11.3 million, or 31%, over the same period in 2000 due to an
increase in fuel expense.
Purchased Power. Purchased power costs increased in the first nine
months of 2001, over the same period in 2000, by $2.1 million, or 29%, due to
the unavailability of Beluga unit 7, the limited availability of Bernice Lake
unit 3, and the Nikiski unit being placed back in service under a new contract
with Alaska Electric Generation & Transmission Cooperative, Inc. ("AEG&T"). This
new contract requires the Nikiski unit to run at full capacity except during
required maintenance.
Transmission. Transmission expense increased $240,000, or 9%, in the
first nine months of 2001, over the same period in 2000, due to increased
substation maintenance and unplanned maintenance on our submarine cable circuit.
Sales Expense. Sales expense decreased by $465,000, or 57%, in the
first nine months of 2001 over the same period in 2000 due to the sale of our
internet service provider business in March 2001. See "Sale of a Segment" below.
Administrative, General and Other. Administrative, general and other
expense decreased in the first nine months of 2001 over 2000 by $792,000, or 5%,
due primarily to the sale of the internet service provider business in March
2001.
14
Depreciation. Depreciation expense increased in the first nine months
of 2001 over the same period in 2000 by $1.5 million, or 9%, due to a
substantial increase in plant in the fourth quarter of 2000 related to the
Beluga unit 6 re-powering.
Interest Expense (Net). Interest on long-term debt increased by $1.3
million, or 7%, to $20.1 million, in the first nine months of 2001 over the same
period in 2000 due to the issuance of $150 million of 2001 Series A Bonds in the
second quarter of 2001. Our weighted average cost of total borrowings for the
first nine months of 2001 was 7.83% compared to 8.01% for the comparable period
in 2000. This was due to increased borrowing under our short-term line of credit
at September 30, 2000, which carried a higher variable interest rate than the
remaining total borrowings. Net interest expense includes interest on long-term
debt and short-term debt, reduced by interest charged to construction. The
amortization of the gain on refinancing debt offset by the amortization of
losses on refinancing debt and transaction costs resulted in a net interest
expense reduction of $847,000 for the first nine months of 2001, and by $897,000
for the comparable period in 2000.
Year ended December 31, 2000 compared to the years ended December 31,
1999 and 1998
Margins
Our margins for the years ended December 31, 2000, 1999 and 1998, were
as follows:
2000 1999 1998
----------- ----------- -----------
Net Operating Margins............ $7,392,551 $8,052,060 $6,619,263
Nonoperating Margins............. 2,287,227 1,615,374 2,111,141
Assignable Margins............... 9,679,778 9,667,434 8,730,404
The decrease in net operating margins in 2000 over 1999 by $660,000, or
8%, was primarily attributable to an increase in interest on debt due to
increased funds needed to fund the Beluga unit 6 repowering project and the
Cooper Lake overhaul project. The increase in net operating margins in 1999 over
1998 by $1.4 million, or 22%, was primarily attributable to increased revenue
associated with increased sales to GVEA due to operating problems with the Healy
Clean Coal Plant (the "Healy Plant"), as well as increased kWh sales due to
colder weather.
Nonoperating margins increased in 2000 over 1999 by $672,000 or 42%.
This was due to an allowance for funds used during construction based on higher
construction work in progress balances during the year, increased allocations of
patronage capital from CoBank, ACB ("CoBank"), and higher interest earnings in
2000 as a result of increased short-term investment balances. Nonoperating
margins decreased in 1999 over 1998, by $496,000, or 23%. The primary
contributor to the decrease from 1998 was the gain on the sale of a surplus
compressor rotor to GVEA in 1998. The variance was also due in part to
higher-than-anticipated patronage capital from CoBank but was offset by a
decrease in interest earnings in 1999 as a result of decreased short-term
investment balances.
15
Revenues
For the year ended December 31, 2000, operating revenues were $15.9
million, or 11%, higher than in 1999 primarily due to increased sales of economy
energy to GVEA following the shutdown of the Healy Plant in February 2000,
higher recoverable fuel and purchased power costs and increased revenue
generated by our non-traditional business ventures. In 1999, operating revenues
were $819,000, or 0.57%, higher than in 1998. Retail base rates did not change
in 1999 while base rates charged to MEA and Homer decreased slightly. Revenues
and power sold were as follows for the years ended December 31:
<Table>
<Caption>
2000 1999 1998
------------- ------------- -------------
Retail............................. $ 98,536,690 $ 94,057,713 $ 93,203,537
Wholesale:
Homer.......................... 19,060,244 17,357,727 18,225,575
MEA............................ 27,252,051 25,063,734 25,203,272
Seward......................... 2,369,550 2,168,982 2,284,409
Economy energy..................... 7,820,998 1,864,873 1,338,725
Other.............................. 3,501,581 2,131,298 1,569,855
------------- ------------- -------------
Total revenue.................. $ 158,541,114 $ 142,644,327 $ 141,825,373
============= ============= =============
MWh sold........................... 2,409,088 2,190,253 2,055,963
</Table>
We make economy sales to GVEA. These sales commenced in 1988 and have
contributed to our growth in operating revenues. We do not take economy sales
into consideration in our long-range resource planning process because these
sales are non-firm sales that depend on GVEA's need for additional energy and
our available generating capacity at the time. In 2000, 1999, and 1998, economy
sales to GVEA constituted approximately 5.03%, 0.79%, and 0.92%, respectively,
of our sales revenues. The increase in economy sales in 2000 from 1999 is due
primarily to the shutdown of the Healy Plant, increasing the need for GVEA to
make economy purchases. The Healy Plant is a 50 megawatt demonstration project
in Healy, Alaska on the Alaska Intertie between Fairbanks and Anchorage.
Following the test period in 1998, GVEA asserted that the demonstration was not
successful. Litigation ensued and the Healy Plant has been shut down since that
time pending further analysis of alternatives for our operation. As a result,
GVEA began buying economy energy from us at the time of the Healy Plant
shutdown.
Expenses
The major components of our operating expenses for the years ended
December 31, 2000, 1999 and 1998 were as follows:
<Table>
<Caption>
2000 1999 1998
-------------- -------------- --------------
Power production......................... $ 52,726,374 $ 40,301,607 $ 45,261,450
Purchased power.......................... 9,152,248 8,581,979 8,462,835
Transmission............................. 3,828,630 3,813,438 2,771,652
Distribution............................. 9,774,860 9,400,618 8,876,890
Consumer accounts........................ 5,275,455 4,387,421 4,177,980
Sales expense............................ 1,112,804 1,227,908 1,125,410
Administrative, general and other........ 21,343,393 22,892,479 17,592,829
Depreciation............................. 23,216,509 19,851,436 22,468,395
-------------- -------------- --------------
Total operating expenses............... $ 126,430,273 $ 110,456,886 $ 110,737,441
============== ============== ==============
</Table>
Power Production. Power production expense increased in 2000 from 1999
by $12.4 million, or 31%, due primarily to an increase in fuel expense from
$29.6 million in 1999 to $42.5 million in 2000, which resulted from an average
40% increase in fuel prices from 1999 to 2000. Power production expense
decreased by $4.9 million, or 11%, in 1999 from 1998 due primarily to a decrease
in fuel expense.
Purchased Power. Purchased power costs increased from 1999 to 2000 by
$570,000, or 7%. We purchased more power from the Soldotna 1 unit and Anchorage
Municipal Light and Power ("AML&P") than
16
anticipated due to avalanche damage to our transmission lines early in the year,
the unavailability of Beluga 3 and Beluga 6 units during the summer months and
an increase in economy energy purchases for GVEA. Purchased power costs did not
vary materially from 1998 to 1999.
Transmission. Transmission expense did not vary materially from 1999 to
2000. Transmission expense increased in 1999 from 1998 by $1 million, or 38%,
due to unanticipated transmission line repairs, Y2K preparation and testing and
overhead line maintenance activity as a result of outages early in 1999.
Distribution. Distribution expense increased in 2000 from 1999 by
$374,000, or 4%, due primarily to an update in allocations of cost related to
the information services and garage clearing. This update shifted those costs
from the general and administrative category to the appropriate functional areas
of the company. Distribution expense increased in 1999 from 1998 by $525,000, or
6%, due primarily to the increased outage activity that occurred early in 1999,
which resulted in increased labor costs.
Consumer Accounts. Consumer accounts expense increased in 2000 from
1999 by $888,000 or 20%. This was due to less charges to costs for doubtful
accounts in 1999 as compared to 2000. In addition, the update to allocations of
cost related to information services caused an increase to this category in
2000. The increase in consumer accounts in 1999 from 1998 was not material but
resulted from additional allocated marketing costs offset by less charges to
costs for doubtful accounts in 1999.
Sales Expense. Sales expense did not vary materially in 2000, 1999 or
1998. The slight variances are due to changes in the number of employees in the
marketing department in these years.
Administrative, General and Other. Administrative, general and other
expense decreased by $1.55 million, or 6.8%, from 1999 to 2000. This decrease
was a result of costs incurred in 1999 for outside counsel, consulting,
advertising and internal labor costs associated with an unsolicited MEA takeover
attempt and resultant special meeting in 1999 and an update in allocations of
cost related to information services in 2000. General and administrative expense
increased by $5.3 million, or 30%, from 1998 to 1999, primarily due to the costs
associated with the MEA takeover attempt, an increase in software amortization
expense, increased maintenance costs of Year 2000 compliant software
implementation completed in 1998, additional expenses associated with our
ancillary businesses and multiple insurance settlements paid in 1999. In
addition, general plant maintenance expenses were higher due to multiple
projects completed in 1999.
Depreciation. We use the composite method of depreciation. The increase
in depreciation expense from 1999 to 2000 was $3.4 million, or 17%, and was the
result of more transmission assets being placed in service in 2000. Depreciation
expense decreased in 1999 from 1998 by $2.6 million, or 12%, due to a change in
the useful lives of portions of general plant.
Interest Expense (Net). Interest on long-term debt increased for the
year ended December 31, 2000 over 1999, by $849,000, or 4%, to $25 million due
to higher amounts of outstanding debt. Our outstanding indebtedness increased
due to the issuance of $30 million in bonds to CoBank and to increased borrowing
under the lines of credit with CoBank and the National Rural Utilities
Cooperative Finance Corporation ("CFC") to fund the Beluga unit 6 re-powering
project. Interest on short-term debt increased from 1999 to 2000 by $912,000, or
91%, because of higher balances maintained and higher interest rates. Our
weighted average cost of total borrowings for 2000 was 8.06% compared to 8.14%
for 1999. Interest on long-term debt was lower by $1 million, or 4%, in 1999
than 1998 due primarily to the refinancing of $34.9 million of Series A Bonds
due 2022 in the first quarter of 1999. Our weighted average cost of total
borrowings for 1998 was 8.43%. Net interest expense includes interest on
long-term debt and short-term debt, reduced by interest charged to construction.
The amortization of the gain on refinancing debt offset by the amortization of
losses on refinancing debt and transaction costs resulted in a net interest
expense reduction of $1.54 million, $1.09 million and $1.44 million in 1998,
1999 and 2000, respectively.
Patronage Capital (Equity)
Our patronage capital and total equity have shown steady growth. The
following table summarizes our patronage capital and total equity position for
the nine months ended September 30, 2001 and for the years ended December 31,
2000, 1999 and 1998.
17
<Table>
<Caption>
Nine months eded
September 30, Years ended December 31,
----------------- ---------------------------------------------------------
2001 2000 1999 1998
----------------- ------------- --------------- ----------------
Patronage capital beginning of
year................... $122,925,253 $117,735,481 $109,622,996 $104,800,092
Retirement of capital credits and
estate payments........ (232,849) (4,090,006) (1,954,949) (3,907,500)
Assignable margins........... 2,978,190 9,679,778 9,667,434 8,730,404
------------ ----------- ----------- ------------
Patronage capital at end of year 125,670,594 122,925,253 117,335,481 109,622,996
Other equity................. 5,773,469 5,890,087 5,189,164 4,400,300
------------ ------------ ------------ ------------
Total equity at end of year $131,444,063 $128,815,340 $122,524,645 $114,023,296
============ ============ ============ ============
</Table>
In furtherance of our operations as a cooperative, we credit to our
members all amounts received from them for the furnishing of electricity in
excess of our operating costs, expenses and provision for reasonable reserves.
These excess amounts (i.e., assignable margins) are considered capital furnished
by the members, and are credited to their accounts and held by us until such
future time as they are retired and returned without interest. Approval of
distributions of these amounts to members, also known as capital credits, is at
the discretion of our Board of Directors. We currently have a practice of
retiring capital credits on a first-in, first-out basis for retail customers. At
December 31, 2000, we had retired all retail capital credits attributable to
margins earned in periods prior to 1984 and approximately 19% of 1985 retail
capital credits. Prior to 2000, wholesale capital credits had been retired on a
10-year cycle pursuant to an Equity Management Plan Settlement Agreement despite
its expiration in 1995. However, in 2000, there was no wholesale retirement as
we implemented a plan to return the capital credits of wholesale and retail
customers on a 15-year rotation.
The Existing Indenture includes a covenant restricting the distribution
of patronage capital to members. We cannot distribute capital credits to members
if 1) an event of default exists or 2) the aggregate amount of patronage capital
distributions after September 15, 1991, exceeds the sum of $7 million plus 35%
of the aggregate assignable margins earned after December 31, 1990. At September
30, 2001, we were permitted to distribute $4.1 million to our members under the
Existing Indenture under this formula. In December 2001, we distributed $3
million of patronage capital to our members. The Amended Indenture prohibits us
from making any distributions, payment or retirement of patronage capital to our
customers if an event of default under the Amended Indenture exists. Otherwise,
we may make distributions to our members in each year equal to the lesser of 5%
of our patronage capital or 50% of assignable margins for the prior fiscal year.
This restriction does not apply if, after the distribution, our aggregate
equities and margins as of the end of the immediately preceding fiscal quarter
is equal to at least 30% of our total liabilities and equities and margins.
We also retire our patronage credits through annual payments to our
members. The table below sets forth a five-year summary of actual and
anticipated capital credit retirements:
Year Ending Wholesale Retail Total
----------- ----------- ------------ -------------
2001 $ 0 $ 3,000,000 $ 3,000,000
2002 0 3,500,000 3,500,000
2003 0 3,500,000 3,500,000
2004 1,359,000 3,500,000 4,859,000
2005 1,109,000 3,500,000 4,609,000
Sale of a Segment
As of March 20, 2001, we sold the bulk of our internet service provider
assets related to dial-up services (excluding DSL services) to GCI Communication
Corporation. The aggregate purchase price was $759,049 at closing, plus an
additional amount of $70,075, which was based on the number of subscriber
accounts retained during the ninety-day transition period following closing.
18
Changes in Financial Condition
Total assets increased by $33.7 million, or 6.2%, from December 31,
2000 to September 30, 2001. This increase was due to a $18.5 million, or 95.2%,
increase in deferred charges, attributed in large part to the recording of the
estimated regulatory asset associated with the liability established for the
treasury rate-lock agreement and the transaction costs associated with the
issuance of the 2001 Series A Bonds in April 2001. There was a $12.2 million, or
2.6%, increase in net utility plant caused by the completion of several
projects, including the Supervisory Control and Data Acquisition upgrade, the
International Power Plant auxiliaries improvement and miscellaneous distribution
projects. There was also an increase in cash and cash equivalents, which was
associated with funds borrowed on a line of credit for working capital. This was
offset by a decrease in non-utility property due to the sale of our internet
service provider business, as well as a decrease of $1.3 million, or 44.9%, in
fuel cost recovery due to the additional recovery through fuel surcharge rates
providing recovery of the under-collection of fuel costs.
Notable changes to total liabilities include the $15.7 million
recording of the estimated settlement value of the treasury rate-lock agreement,
in compliance with FASB 133. There was an increase of $57.1 million, or 18.3%,
in long-term debt, which was associated with issuance of the 2001 Series A Bonds
in April 2001. That was offset by a $15.2 million, or 9.0%, decrease in First
Mortgage bonds payable, due to outstanding bonds purchased and a principal bond
payment in March 2001. There was also an increase of $4.0 million, or 61.9%, in
current installments of long-term debt due to the first installment of CoBank 5
Bond due in June of 2002. This was offset by the decrease of $35 million in
short-term borrowings, which were repaid with the proceeds of our public bond
offering in April 2001. There was also a decrease of $6.0 million, or 63.3%, in
accounts payable due to the payment of year-end accruals, as well as a $4.5
million, or 76.1%, decrease in accrued interest as a result of the September
semi-annual bond interest payment.
Liquidity And Capital Resources
We satisfy our operational and capital cash requirements primarily
through internally-generated funds, a $50 million line of credit from CFC and a
$35 million line of credit with CoBank. At September 30, 2001, there was no
outstanding balance with CFC and a $5 million outstanding balance with CoBank.
The CoBank line of credit bears interest at a variable rate, which was 6% as of
September 30, 2001 and is currently reset monthly.
Principal maturities and sinking fund payments of our outstanding
indebtedness at September 30, 2001 on a pro forma basis to give effect to the
receipt and application of the net proceeds of this offering are set forth
below:
Pro Forma Pro Forma
Year Ending Sinking Fund Principal
December 31 Requirements Maturities Pro Forma Total
- ----------- ------------ ---------- ---------------
2002 $ 0 $ 5,000,000 $ 5,000,000
2003 $ 4,300,000 $ 865,821 $ 5,165,821
2004 $ 4,600,000 $ 945,000 $ 5,545,000
2005 $ 4,900,000 $ 11,031,393 $ 15,931,393
2006 $ 5,200,000 $ 1,125,687 $ 6,325,687
Thereafter $161,000,000 $201,032,099 $362,032,099
19
For the nine months ended September 30, 2001, we have spent
approximately $30.9 million on capital construction projects, which includes
interest capitalized during construction. We develop five-year work plans that
are updated every year. Our capital improvement requirements are based on
long-range plans and other supporting studies and are executed through a
five-year construction work plan. Our estimate of capital expenditures for the
years 2002 through 2006 is:
Year Capital Expenditures (estimate)
---- -------------------------------
2002 $30.1 million
2003 $23.6 million
2004 $43.8 million
2005 $32.5 million
2006 $24.0 million
The anticipated large increase in capital expenditures in 2004 represents the
construction of a transmission line from the International Power Plant to
University Station via new South Anchorage Bulk, and the Wind Turbine capital
project and an overhaul of Beluga unit 6.
We expect cash flows from operations and external funding sources will
be sufficient to cover operational expenses, debt service and capital
expenditures through the term of our current five year business plan.
Changes in Accounting Principles
We were required to adopt SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS No. 138, effective
January 1, 2001. This new standard requires all derivative financial instruments
to be reflected on the balance sheet. As of September 30, 2001, we have
established a regulatory asset for $15.7 million and a liability for the same
amount. The regulatory asset and liability will be adjusted for changes in the
fair value of a treasury rate-lock agreement entered into by us. See
"Quantitative and Qualitative Disclosures about Market Risk - Interest Rate
Risk." Management believes it is probable the regulatory asset will be recovered
through rates.
In July 2001, the Financial Accounting Standards Board issued Statement
No. 141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets. Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated or completed after June 30,
2001. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually. The provisions of Statement 142 are required to be
applied starting with fiscal years beginning after December 15, 2001. We believe
the adoption of Statement 141 and 142 will have no impact on our financial
statements.
In August 2001, the Financial Accounting Standards Board issued
Statement No. 143, Accounting for Asset Retirement Obligations. Statement No.
143 requires an enterprise to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets. Statement No. 143
also requires the enterprise to record the contra to the initial obligation as
an increase to the carrying amount of the related long-lived asset. Enterprises
are required to adopt Statement No. 143 for fiscal years beginning after June
15, 2002. We believe the adoption of Statement No. 143 will have no impact on
our financial statements.
In October 2001, the Financial Accounting Standards Board issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Statement No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. While Statement No. 144 supersedes
FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement, and broadens the presentation of discontinued
operations to include more disposal transactions. Statement No. 144 also
supersedes the accounting and reporting provisions of APB Opinion No. 30,
Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions, for the disposal of a segment of a business. However,
it retains the requirement in Opinion 30 to report separately discontinued
operations and
20
extends that reporting to a component of an entity that either has been disposed
of or is classified as held for sale. Statement No. 144 is effective for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. We believe the adoption of Statement No. 144 will have no impact on our
financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are 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
As of September 30, 2001, all of our outstanding long-term borrowings
were at fixed interest rates with varying maturity dates. We used the proceeds
from our sale of fixed-rate debt in April 2001 to repay substantially all our
variable-rate debt. The $150 million of fixed-rate bonds sold in April 2001
mature in 2011. The following table provides information regarding cash flows
for principal payments on total debt by maturity date as of September 30, 2001.
<Table>
<Caption>
Total Debt* 2001 2002 2003 2004 2005 Thereafter Total Fair Value
- ----------------------- -------- ------- -------- -------- ------- ---------- --------- ------------
(dollars in thousands)
Fixed-rate.......... $ 0 $10,410 $5,907 $6,447 $17,036 $339,920 $379,720 $401,161
Average interest rate 6.90% 8.62% 8.62% 8.12% 7.50% 7.55%
Variable-rate....... $5,000 $ 0 $ 0 $ 0 $ 0 $ 0 $ 5,000 $ 5,000
Average interest rate 6.00% - - - - - 6.00%
</Table>
- ----------------------
* Includes current portion
As of September 30, 2001, the aggregate principal amount of outstanding
1991 Series A Bonds due 2022 was $154.3 million. On December 10, 2001, we
reacquired $5 million of our Series A 2022 Bonds for $5.7 million, which
included accrued interest and premium. The 1991 Series A Bonds due 2022 are not
subject to redemption until March 15, 2002. We intend to use a substantial
portion of the proceeds of the Bonds to defease the 1991 Series A Bonds prior to
that date and to redeem those bonds on that date.
To manage interest rate exposure for refinancing of these bonds on
their first available call date, March 15, 2002, we entered into a treasury
rate-lock agreement with Lehman Brothers Financial Products Inc. ("Lehman
Brothers") in March 1999. The treasury rate-lock agreement has a settlement date
of February 15, 2002. On December 7, 2001, we terminated 50%, $98.0 million, of
the 10-year U.S. Treasury portion of the treasury rate-lock agreement for a
settlement payment of $4 million to Lehman Brothers. We settled the remaining
50% of the treasury rate-lock agreement for $3 million on December 19, 2001. The
settlement payments will be accounted for as a regulatory asset. We believe the
regulatory asset will be recovered through rates.
Commodity Price Risk
Our gas supply 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
the fuel surcharge, fluctuations in the price paid for gas pursuant to long-term
gas supply contracts does not normally impact margins.
21
BUSINESS
General
We are the largest electric utility in Alaska. We are engaged in the
generation, transmission and distribution of electricity to approximately 69,900
meters in our service area. Through an interconnected regional electrical
system, our energy is distributed throughout Alaska's Railbelt, a 600-mile-long
area stretching from the coastline of the southern Kenai Peninsula to the
interior of the state, including Alaska's largest cities, Anchorage and
Fairbanks. Neither we nor any other electric utility in Alaska has any
connection to the electric grid of the mainland United States or Canada.
Through direct service to retail customers and indirectly through
wholesale and economy energy sales, we provide some or all of the electricity
used by approximately two-thirds of Alaska's electric customers. We also supply
much of the power requirements of three wholesale customers, MEA, Homer and
Seward. In addition, on an occasional basis, we provide electricity to AML&P.
AML&P has about 30,000 meters.
We have approximately 527 megawatts of installed generating capacity
provided by 17 generating units at our five owned power plants: Beluga Power
Plant, Bernice Lake Power Plant, International Power Plant, Cooper Lake
Hydroelectric Plant and Eklutna Hydroelectric Project, in which we own a 30%
interest. In the first nine months of 2001, approximately 96% (by rated
capacity) of our generating capacity was fueled by natural gas, which we
purchased under long-term gas contracts. The remainder of our generating
resources are hydroelectric facilities. In the first nine months of 2001,
approximately 89% of our energy was generated at our Beluga facility. In
addition, we purchase up to 27.4 megawatts from the Bradley Lake Hydroelectric
Project and up to 40 megawatts from the Nikiski power plant on the Kenai
Peninsula. We operate 1,610 miles of distribution lines and 402 miles of
transmission lines. For the year ended December 31, 2000, we sold 2.4 billion
kilowatt-hours ("kWh") of energy. For the nine months ended September 30, 2001,
we have sold 1.6 billion kWh of power.
We were organized as an Alaska electric cooperative in 1948.
Cooperatives are business organizations owned by their members. As
not-for-profit organizations, cooperatives are intended to provide services to
their members at low cost, in part by eliminating the need to produce profits or
a return on equity other than reasonable reserves and margins. Today,
cooperatives operate throughout the United States in such diverse areas as
utilities, agriculture, irrigation, banking, insurance and credit. All
cooperatives are based upon similar principles and legal foundations. Because
members' equity is not considered an investment, a cooperative's objectives and
policies are oriented to serving member interests, rather than maximizing return
on investment.
Our members are the consumers of the electricity sold by us. As of
September 30, 2001, we had approximately 56,686 retail members receiving service
at approximately 69,900 meters and three major wholesale customers. No
individual retail customer receives more than 5% of our energy. Our customers
are billed through a tariff rate on a monthly basis for electrical power
consumed during the preceding month. Billing rates are approved by the RCA. See
"Rate Regulation and Rates" below. Rates (derived from the historic cost of
service basis) may generate revenues in excess of current period costs (net
operating margins and nonoperating margins) in any year and such excess is
designated on our Statements of Revenues, Expenses and Patronage Capital as
"assignable margins." Retained assignable margins are designated on our balance
sheet as "patronage capital" that is assigned to each member on the basis of
patronage.
We are a rural electric cooperative that is exempt from federal income
taxation as an organization described in Section 501(c)(12) of the Internal
Revenue Code ("Code"). Alaska electric cooperatives must pay to the State of
Alaska, in lieu of state and local ad valorem, income and excise taxes, a tax at
the rate of $0.0005 per kWh of electricity sold in the retail market during the
preceding year. In addition, we collect a regulatory charge of $.000360 per kWh
of retail electricity sold. This charge is assessed to fund the operations of
the RCA. We pass-through this cost to our customers and thus it does not impact
our margins.
Our workforce consists of approximately 351 full time employees.
Approximately two-thirds of our employees are members of the International
Brotherhood of Electric Workers (the "IBEW"). We have three collective
bargaining agreements with the IBEW that are in effect through June 30, 2003. We
also have an
22
agreement with Hotel Employees, Restaurant Employees, Local 878 in effect
through June 30, 2003. We believe our relationship with our employees is good.
Our Service Areas
Our service areas and those of our wholesale and economy energy
customers are often described collectively as the Railbelt region of Alaska
because the three geographic areas (the Southcentral, the Kenai Peninsula and
the Interior) are linked by the Alaska Railroad.
Anchorage is located in the south central portion of Alaska and is the
trade, service and financial center for most of Alaska and serves as a major
center for many state governmental functions. Other significant contributing
factors to the Anchorage economy include a large federal government and military
presence, tourism, air and rail transportation facilities and headquarters
support for the petroleum, mining and other basic industries located elsewhere
in the state.
The Matanuska-Susitna Borough is immediately north of Anchorage,
centered around the communities of Palmer and Wasilla. Although agriculture,
tourism, mining and forestry are factors in the economy of the Matanuska-Susitna
Borough, the economic well-being of the area is closely tied to that of
Anchorage and many Matanuska-Susitna residents commute to jobs in Anchorage.
The Kenai Peninsula is south of Anchorage and has an economy
substantially independent of the Anchorage area. The most significant industry
on the Kenai Peninsula is the production and processing of petroleum products
from the Cook Inlet region. Other important industries include tourism and fish
harvesting and processing. Principal communities on the Kenai Peninsula are
Homer, Seward, Kenai and Soldotna.
Fairbanks is the center of economic activity for the central part of
the state (known as the Interior). Fairbanks (250 air miles north of Anchorage
and about 400 air miles south of Alaska's northern border) is Alaska's second
largest city. Economic activities in the Fairbanks region include federal and
state government and military operations, the University of Alaska, tourism and
support of natural resource development in the Interior and northern parts of
the state. A major gold mine operates near Fairbanks; another is being
developed. The Trans-Alaska Pipeline System (which transports crude oil) passes
near Fairbanks on its route from the North Slope oilfield to Valdez. Alyeska
Pipeline Company which operates the Trans-Alaska oil pipeline from Prudhoe Bay
to Valdez has its main operations base in Fairbanks.
Competition
We have taken several steps to be effectively positioned to meet the
challenge of a competitive market for electricity. We have been active at the
Alaska Legislature in support of the customer's right to choose their electric
power supplier. For example, we have requested the RCA permit us access over a
neighboring utility's distribution and transmission system. The RCA ruled that
retail competition is permitted in Alaska only after prior review and approval
by the RCA. We are appealing this ruling in the courts. Nearly all other Alaskan
utilities have opposed our efforts to develop retail competition and are
treating their service territories as exclusive. At this time no bill relating
to customer choice has moved out of committee in the Alaskan legislature. We do
not expect the legislature to pass a law granting retail competition for
electric service for the foreseeable future.
We have made organizational changes in preparation for retail
competition. Recognizing that the new marketplace will probably be "unbundled"
along the functional lines of generation, transmission and distribution, and
retail services, our organizational structure reflects these functions.
Operating with three divisions: Finance and Energy Supply, Transmission and
Distribution Network Services and Retail Services, we have positioned ourselves
to meet retail competition in the electric industry should it develop.
It is our objective to continually improve the efficiency and cost
effectiveness of our operations. We participate in customer satisfaction
surveys, benchmark the performance of system operations against an international
peer group and perform studies on how to implement business process best
practices. These ongoing programs focus on distribution and transmission lines,
substations, power plants, fleet operations and administrative services.
23
Rate Regulation and Rates
The RCA regulates our rates. We can seek increases in our base rates
and fuel surcharge by filing general rate cases with the RCA. While the formal
ratemaking process typically takes nine months to one year, it is within the
RCA's authority to authorize, after a notice period, rate changes on an interim,
refundable basis. In addition, the RCA has been willing to open limited reviews
of matters to resolve specific issues from which expeditious decisions can often
be rendered.
The RCA has exclusive regulatory control of our rates, subject to
appeal to the Alaska courts. Under Alaska law, financial covenants of an Alaska
electric cooperative contained in a debt instrument are valid and enforceable,
and rates set by the RCA must be adequate to meet those covenants. Under Alaska
law, a cooperative utility that is negotiating to enter into a mortgage or other
debt instrument that provides for a TIER greater than the ratio the RCA most
recently approved for that cooperative must submit the mortgage or debt
instrument to the RCA before the instrument takes effect. However, the rate
covenant contained in the Amended Indenture will impose no greater TIER
requirement than does the rate covenant contained in the Existing Indenture. We
do not expect the requirements of either the Existing Indenture or the Amended
Indenture to exceed the TIER most recently approved for us by the RCA.
We expect to continue to recover changes in our fuel and purchased
power expenses through routine fuel surcharge filings with the RCA. See
"Management's Discussion and Analysis of Results of Operations - Overview."
The Existing Indenture governing all of our outstanding bonds requires
us to set rates designed to yield margins for interest equal to at least 1.20
times total interest expense. On the Release Date, the Amended Indenture will
supersede the Existing Indenture and require us to set rates designed to yield
margins for interest equal to at least 1.10 times total interest expense. See
"Description of Bonds - Rate Covenant." Under RCA orders establishing our
current base rates, we are permitted to achieve a TIER of 1.35. For the year
ended December 31, 2000, our achieved TIER was 1.39. For the nine months ended
September 30, 2001, our achieved TIER was 1.15 due to the delay between the
increase in our costs and the RCA's approval of an increase in our interim base
rate. Another factor in the margin decrease was the increase in our long-term
interest expense due to the issuance of $150 million of long-term debt in the
second quarter of 2001.
In our general rate case filed July 10, 2001 based on the 2000 test
year, we proposed that margins be calculated using a rate base/rate of return
methodology rather than the TIER methodology previously used by us. Under this
methodology, we can assign different rates of return to our various business
functions, such as generation, transmission and distribution, in order to
recover appropriate risk premiums for each individual function. In addition, the
change in methodology allows us to more efficiently allocate our cost of funds.
The resultant system TIER would be 1.38 based on the proposed capital structure
contained in that filing. We do not believe that our request to change from the
TIER-based methodology to the return-on-rate-base methodology will have any
material adverse effect on future ratemaking or on our ability to service our
outstanding indebtedness.
24
Sales to Customers
The following table shows the energy sales to and electric revenues
from our retail, wholesale, and economy energy customers for the nine months
ended September 30, 2001:
<Table>
<Caption>
For nine months ended September 30, 2001
-----------------------------------------------------
Percent of
MWh Revenues total revenues
----------- ------------- --------------
Direct retail sales:
Residential.................... 377,641 $ 41,269,624 33%
Commercial..................... 428,573 38,347,765 30%
----------- ------------- --------------
Total.......................... 806,214 79,617,389 63%
Wholesale sales:
MEA............................ 398,941 22,901,064 18%
Homer.......................... 313,744 16,823,628 13%
Seward......................... 44,943 2,072,412 2%
----------- ------------- --------------
Total.......................... 757,628 41,797,104 33%
Economy energy sales ............... 76,825 3,117,712 3%
----------- -------------
Total sales to customers............ 1,640,667 44,914,816 99%
==========
Miscellaneous energy revenue(1) .... 1,868,751 1%
------------- --------------
Total energy revenues............... $126,400,956 100%
============= ==============
</Table>
- ---------------------
(1) Miscellaneous energy revenue consists of wheeling, rental, late
fees, damage claims, microwave business venture and other miscellaneous revenue.
Retail Customers
Service Territory. Our retail service area covers the populated areas
of Anchorage (other than downtown Anchorage) as well as remote mountain areas
and villages. The service area ranges from the northern Kenai Peninsula on the
south, to Tyonek on the west, to Whittier on the east and to Fort Richardson on
the north.
Customers. As of September 30, 2001, we had approximately 56,700
members being served by approximately 69,900 meters (some members are served by
more than one meter). Our customers are primarily urban and suburban. The urban
nature of our customer base means that we have a relatively high customer
density per line mile. Higher customer density means that fixed costs can be
spread over a greater number of customers. As a result of lower average costs
attributable to each customer, we benefit from a greater stability in revenue,
as compared to a less dense distribution system in which each individual
customer would have a more significant impact on operating results. For the past
five years no retail customer accounted for more than 5% of our revenues.
Wholesale Customers
We are the principal supplier of power to MEA, Seward and Homer under
separate wholesale power contracts. In the first nine months of 2001, our
wholesale power contracts produced $41.8 million in revenues, representing 33%
of our total revenues and 46% of our total kWh sales to customers.
MEA and Homer. We have two power sales contracts with AEG&T: one for
sales to MEA and one for sales to Homer. AEG&T is a generation and transmission
cooperative that was formed by MEA and Homer. Under each of these contracts, we
sell power to AEG&T, which resells the power to MEA and Homer. MEA and Homer
have recently indicated that they may be disbanding or substantially changing
their relationship with AEG&T but no changes to our contracts have been made at
this time. Under our contracts, each of MEA and Homer is obligated to pay us for
the power sold to AEG&T even if AEG&T does not pay.
Under the contract, MEA is obligated to purchase all of its electric
power and energy requirements from us. Contractually, MEA has the right, on
advance notice and subject to RCA approval, to convert to a net requirements
purchaser of power, and as such MEA would be obligated to buy its needed power
from us net of its power needs
25
satisfied from any of its own or AEG&T's resources. The notice period required
for such conversion may be up to five years, depending on which non-Chugach
resources MEA proposes to use to satisfy its power needs. MEA has not invoked
this right, at this time.
If MEA converts to a net requirements purchaser under the contract, MEA
cannot reduce its payment for power that it purchases from us below a certain
minimum amount. MEA will be required to pay demand charges based upon the
highest post-1985 historical coincident peak on the MEA system. Therefore, if
MEA converts to net-requirements service, we will continue to recover all or
substantially all of the fixed costs assigned to it. Also, our revenues from
energy sales to MEA would partially decline in proportion to the reduction in
the energy sold, but this decline would be offset to an extent by savings in the
variable costs associated with energy production.
MEA also has the right, on seven years advance notice and subject to
RCA approval, to convert to a take-or-pay purchase of a fixed amount of power,
also subject to minimum payment requirements associated with prior purchases.
The MEA contract is in effect through December 31, 2014. This contract does not
protect us against loss of load resulting from retail competition in MEA's
distribution service territory if retail competition is ever permitted in
Alaska. We do not expect that the Alaska legislature will pass a law granting
retail competition in the foreseeable future and it is not possible at this time
to estimate the potential impact on our revenues that could result from such
competition. See "Competition" above.
During the past several years, we have had numerous disputes and
engaged in substantial litigation with MEA regarding many aspects of our
contractual relationship. For a discussion of material pending litigation
between MEA and us, see "Legal Proceedings."
Our contract for the benefit of Homer obligates Homer (through AEG&T)
to take or pay for 73 megawatts of capacity, and not less than 350,000 MWh per
year. The Homer contract includes limitations on the costs that may be included
in our rates charged to it. The Homer contract expires on January 1, 2014.
Homer's remaining resource requirements are provided by AEG&T's Nikiski
cogeneration facility and AEG&T's entitlement for power from the Bradley Lake
hydroelectric project for the benefit of Homer. In February 1999, we entered
into a dispatch agreement with AEG&T to operate the Nikiski unit as a Chugach
system resource. The agreement provides that, in addition to the energy that we
already sell to AEG&T and Homer, we will sell energy to AEG&T equal to Homer's
residual energy requirements less its allocated share of the Bradley Lake
project, up to a maximum of 320,000 MWh per year. A portion of the Nikiski unit
output may be dispatched for Homer's needs in excess of the sum of our contract
demand plus Homer's share of energy from the Bradley Lake project. The dispatch
agreement will terminate in 2014 when our power supply contract for the benefit
of Homer terminates.
On August 24, 2001, Alaska Electric and Energy Cooperative, Inc.
("AEEC") and AEG&T filed an Application to Transfer Certificate of Public
Convenience and Necessity No. 345 to serve as the wholesale power supplier of
Homer, instead of AEG&T. Homer is the sole member of AEEC. The RCA was requested
to act on the transfer prior to the end of 2001, however, the application
includes the expectation that our power sales agreement will be assigned to AEEC
and the Nikiski dispatch agreement will be assigned to Homer. Homer has been
requested to meet with us in that regard.
Seward. We currently provide nearly all the power needs of the City of
Seward. In February 1998, we entered into a new power sales agreement with
Seward that allows us to interrupt service to Seward up to 12 times per year and
thereby reduces the demand charge by 1/3 (approximately $350,000 annually). This
agreement was originally set to expire on September 1, 2001, but we negotiated
an amendment to the agreement that extended its term to January 31, 2006. The
amendment was fully executed on December 12, 2000 and subsequently filed for
approval with the RCA on February 5, 2001. The RCA conditionally approved the
extension on April 19, 2001, with an effective date of September 11, 2001. The
RCA required an amendment to the contract to include an option to re-negotiate
the terms of the contract if rates are adjusted by the general rate case we
filed in July 2001. Seward has three choices within sixty days of the final
order of the RCA in that general rate case. The choices are to continue the
contract using the rate methodology adopted in the case, negotiate a new
contract or give notice of termination effective twelve months from the
effective date of the final order of the RCA.
26
Economy Customers
Since 1988, we have sold economy (nonfirm) energy to GVEA under an
agreement that expires in 2008. Under the agreement, we use available generating
capacity in excess of our own needs to produce electric energy for sale to GVEA,
which uses that energy to serve its own loads in place of more expensive energy
that it would otherwise generate itself or purchase from other sources. We
purchased gas from Marathon Oil Company ("Marathon") to produce energy for sale
to GVEA, and we charge GVEA a rate sufficient to recover the gas cost, the costs
of incremental operations and maintenance expense resulting from increased use
of our generators for GVEA, and an agreed-upon markup or margin for each kWh
sold.
In 2000, the RCA approved an amendment to our agreement with GVEA and a
settlement of an inter-utility dispute. As a result, the market for economy
energy sold to GVEA has now been divided into two parts. The larger part
continues to be governed by our agreement with GVEA, in which we are assured of
selling 300 million kWh of GVEA's load and an additional 80% of the excess over
450 million kWh of energy that GVEA purchases each year if we are capable of
producing that energy. The remaining energy purchases by GVEA are made through
the "Economy Energy Spot Market." Neither we nor any other seller enjoys a
contractual priority in making such sales. GVEA makes purchases from the seller
offering the lowest competitive price. One of those sellers, AML&P, is expected
to dominate sales in the Economy Energy Spot Market for the immediate future,
partly because AML&P prices its gas at a rate less than the rate on which we
rely in making such sales (based on Marathon gas).
Load Forecasts
The following table sets forth our projected load forecasts for five
years:
<Table>
<Caption>
Load (MWh) 2002 2003 2004 2005 2006
- ----------------- ---------- ---------- ---------- ---------- ---------
Retail............ 1,131,666 1,157,509 1,179,497 1,197,027 1,206,932
Wholesale......... 1,128,347 1,163,645 1,196,738 1,225,912 1,248,269
Economy........... 160,000 160,000 160,000 160,000 160,000
Losses............ 126,104 129,329 132,184 134,562 136,118
---------- ---------- ---------- ---------- ---------
Total........ 2,546,117 2,610,483 2,668,419 2,717,501 2,751,319
</Table>
Sales are expected to increase over the next five years principally due
to economic growth in the service sector. Based on a study by the University of
Alaska, our total energy requirements are expected to grow at an average
compounded annual rate of 2.6% from 2001 to 2005, retail sales at a rate of 2.1%
and wholesale sales at a rate of 3.2%.
Properties
General
We have 527.1 megawatts of installed capacity consisting of 17
generating units at five power plants. These include 379.7 megawatts of
operating capacity at the Beluga facility on the west side of Cook Inlet; 67.5
megawatts of power at the Bernice Lake facility on the Kenai Peninsula; 46.7
megawatts of power at the International Power Plant in Anchorage; and 20.6
megawatts at the Cooper Lake facility, which is also on the Kenai Peninsula. We
also have 12.6 megawatts of capacity from the two Eklutna Hydroelectric Project
generating units that we jointly own with MEA and AML&P. In addition to our own
generation, we purchase power from the 126 megawatt Bradley Lake hydroelectric
project owned by the Alaska Energy Authority ("AEA") through the Alaska
Industrial Development and Export Authority. The Bradley Lake facility is
operated by Homer and dispatched by us. The Beluga, Bernice Lake and
International facilities are all fueled by natural gas. We own our offices and
headquarters, located adjacent to our International Power Plant in Anchorage. We
also lease warehouse space for some generation, transmission and distribution
inventory (including a small amount of office space).
27
Generation Assets
We own the land and improvements comprising our generating facilities
at Beluga and International facilities. We also own all improvements comprising
our generating plant at Bernice Lake, located on land leased from Homer. The
Bernice Lake ground lease expires in 2011. The Cooper Lake facility is located
on federal land pursuant to a major project license granted to us by the Federal
Power Commission in 1957 and which expires in 2007. We have no reason to believe
that we will not be able to renew the federal license or the Bernice Lake
facility ground lease if desirable.
In 1997, we acquired a 30% interest in the Eklutna Hydroelectric
Project. The plant is located on federal land pursuant to a United States Bureau
of Land Management right-of-way grant issued in October 1997.
Our principal generation units are Beluga units 3, 5, 6, 7 and 8. These
units have a combined capacity of 340.5 MWh and meet most of our load. All other
units are used principally as reserve. While the Beluga turbine-generators have
been in service for many years, they have been maintained in good working order
with periodic upgrades. Beluga unit 3 had a major overhaul in 1996. Beluga unit
5 received a major overhaul in 1997. Beluga unit 6 was "repowered" in 2000
adding in excess of 25 years to its life. Beluga unit 7 is currently being
repowered. Beluga unit 8, a steam turbine, was overhauled in 1994 and is slated
for another major overhaul in 2002.
28
The following table depicts nomenclature, run hours as of September 30,
2001 and percentages of contribution and other historical information for all of
our generation units.
<Table>
<Caption>
Percent of Percent of
Commercial Rating Run Hours Total Time
Facility Operation Date Nomenclature (MW)(1) (2000) Generation Available
---------------- -------------- ------------ ------- -------- ---------- ---------
Beluga Power
Plant (3)
Unit 1 1968 GE Frame 5 19.6 548.7 0.37% 73.4%
Unit 2 1968 GE Frame 5 19.6 368.2 0.25 74.8
Unit 3 1972 GE Frame 7 64.8 5,195.6 17.42 69.3
Unit 5 1975 GE Frame 7 68.7 4,762.1 16.35 66.4
Unit 6 1975 BB 11D-4NM 81.0 5,889.3 28.11 67.7
Unit 7 1978 BB 11D-4NM 71.0 2,881.1 13.44 40.4
Unit 8 1981 BB DK-21150(2) 55.0 6,046.8 13.26 69.0
Bernice Lake
Power Plant(3)
Unit 2 1971 GE Frame 5 19.0 0.0 0.00 100.0
Unit 3 1978 GE Frame 5 26.0 3,888.8 4.62 95.0
Unit 4 1981 GE Frame 5 22.5 2,049.1 2.26 91.9
Cooper Lake
Hydroelectric
Plant
Unit 1 1960 BB MV 230/10 10.3 4,103.6 2.29 49.7
Unit 2 1960 BB MV 230/10 10.3 2,768.3 1.49 32.4
International
Power Plant
Unit 1 1964 GE Frame 5 14.1 98.5 0.05 100.0
Unit 2 1965 GE Frame 5 14.1 114.0 0.04 100.0
Unit 3 1969 Westinghouse 191G 18.5 100.5 0.05 88.6
Eklutna
Hydroelectric
Plant (4)
Unit 1 1955 Newport News 6.3 N/A5 N/A5 N/A5
Unit 2 1955 Newport News 6.3 N/A5 N/A5 N/A5
-------- ------
System Total 38,814.6 100%
</Table>
- -------------------
(1) Capacity rating in MW at 30 degrees Fahrenheit.
(2) Steam-turbine powered generator with heat provided by exhaust from
natural-gas fueled Units 6 and 7 (combined-cycle).
(3) Beluga Unit 4 and Bernice Lake Unit 1 were retired during 1994.
(4) The Eklutna Hydroelectric Plant is jointly owned by MEA, AML&P and
us. The capacity shown is our 30% share of the plant's maximum output.
(5) Because Eklutna Hydroelectric Plant is operated by MEA and managed
by a committee of the three owners, we do not record run hours or in-commission
rates.
29
Transmission and Distribution Assets
As of September 30, 2001, our transmission and distribution assets
included 39 substations and 402 miles of transmission lines, 930 miles of
overhead distribution lines and 680 miles of underground distribution lines. We
own the land on which 20 of our substations are located and a portion of the
right-of-way connecting our Beluga facility to Anchorage. As part of our 1997
acquisition of 30% of the Eklutna facility, we also acquired a partial interest
in two substations and additional transmission facilities.
Many substations and a substantial number of our transmission and
distribution rights-of-way are the subject of federal or state permits and
licenses. Under a federal license and a permit from the United States Forest
Service, we operate the Quartz Creek transmission substation, substations at
Hope, Summit Lake and Daves Creek, and transmission lines over all federal lands
between Cooper Lake on the Kenai Peninsula and Anchorage. Long-term permits from
the Alaska Division of Lands and the Alaska Railroad Corporation govern much of
the rest of our transmission system outside the Anchorage area. Within the
Anchorage area, we operate our University substation and several major
transmission lines pursuant to long-term rights-of-way grants from the U.S.
Department of the Interior, Bureau of Land Management, and transmission and
distribution lines have been constructed across privately owned lands pursuant
to easements across public rights-of-way and waterways pursuant to authority
granted by the appropriate governmental entity.
Title
Until the Release Date, substantially all of our tangible and some of
our intangible properties and assets, including generation, transmission and
distribution properties, but excluding all excepted property identified in the
Existing Indenture, are pledged to secure repayment of the bonds issued under
the Existing Indenture. See "Description of the Bonds - Security for Payment of
the Obligations Prior to Release Date; Conversion to Unsecured Obligations on
Release Date."
In addition to the lien of the Existing Indenture, many of our
properties are burdened by easements, plat restrictions, mineral reservation,
water rights and similar title exceptions common to the area or customarily
reserved in conveyances from federal or state governmental entities, and to
additional minor tide encumbrances and defects. We do not believe that any of
these title defects will materially impair the use of our properties in the
operation of our business.
Under the Alaska Electric and Telephone Cooperative Act, we possess the
power of eminent domain for the purpose and in the manner provided by Alaska
condemnation laws for acquiring private property for public use.
Other Assets
Bradley Lake. We are a participant in the Bradley Lake hydroelectric
project, which is a 126 megawatt rated capacity hydroelectric facility near
Homer on the southern end of the Kenai Peninsula that was placed into service in
September 1991. The project is nominally scheduled at 90 megawatts to minimize
losses and insure system stability. We have a 27.4 megawatt or 30.4% share in
the Bradley Lake project's output, and take Seward's and MEA's shares which we
net bill to them, for a total of 45% of the project's capacity.
The project was financed and built by AEA through grants from the State
of Alaska and the issuance of $166 million principal amount of revenue bonds
supported by power sales agreements with six electric utilities that share the
output from the facility (AML&P, Homer and MEA (through AEG&T), GVEA, Seward and
us). The participating utilities have entered into take-or-pay power sales
agreements under which AEA has sold percentage shares of the project capacity
and the utilities have agreed to pay a like percentage of the annual costs of
the project (including ownership, operation and maintenance costs, debt-service
costs and amounts required to maintain established reserves). We also provide
transmission and related services as a wheeling agent (one who dispatches and
transmits power of third parties over its own system) for all of the
participants in the Bradley Lake project.
The length of our Bradley Lake power sales agreement is fifty years
from the date of commercial operation of the facility (September 1991) or when
the revenue bond principal is repaid, whichever is longer. We believe that our
maximum annual liability for our take-or-pay obligations is approximately $4.1
million. We believe that so long
30
as this project produces power taken by us for our use that this expense will be
recoverable through a fuel surcharge. The share of Bradley Lake indebtedness for
which we are responsible is approximately $44 million. Upon the default of a
participant, and subject to certain other conditions, AEA is entitled to
increase each other participant's share of costs and output pro rata, to the
extent necessary to compensate for the failure the defaulting participant to pay
its share, provided that no participant's percentage share may be increased by
more than 25%.
We negotiated with AEG&T a scheduling agreement whereby we schedule
Homer's share of the Bradley Lake project through AEG&T for the benefit of the
Railbelt electric system. AEG&T continues to pay its Bradley Lake project costs
and receives credit for the Bradley Lake energy generated for Homer. We pay a
fixed annual fee of $112,000 to AEG&T for these scheduling rights. This
agreement allows us to improve the efficiency of our generating resources
through better hydrothermal coordination.
Eklutna. We purchased a 30% undivided interest in the Eklutna
Hydroelectric Project from the federal government in 1997. MEA also owns 17% of
the Eklutna Hydroelectric Project. The power MEA purchases from the Eklutna
Hydroelectric Project is pooled with our purchases and sold back to MEA to be
used in meeting MEA's overall power requirements. AML&P owns the remaining 53%
undivided interest in the Eklutna Hydroelectric Project.
Fuel Supply and Transportation
For the nine months ending September 30, 2001, 96% of our power was
generated from gas, and 89% of that gas-fired generation took place at Beluga.
Our primary sources of natural gas are the Beluga River Field producers
(Phillips Alaska, Inc. ("Phillips"), AML&P and Chevron USA Inc. ("Chevron")) and
Marathon. Phillips, AML&P and Chevron each own one-third of the gas produced
from the Beluga River Field and in the first nine months of 2001 provided
approximately equal shares of the Beluga gas. We have approximately 362 billion
cubic feet ("BCF") of remaining gas committed to us from the Beluga River Field
producers and Marathon. We currently use approximately 23 BCF of natural gas per
year for firm service. We believe that this usage will increase approximately
0.5 BCF per year and estimate that our contract gas will last 10 to 15 years.
The deliverability requirements under the Beluga River Field producers and
Marathon contracts are in excess of the peak winter demand requirements of the
Beluga plant.
Beluga River Field Producers
We have similar requirements contracts with each of Phillips, AML&P and
Chevron that were executed in April 1989, superseding contracts that had been in
place since 1973. Each of the contracts with the Beluga River Field producers
provides for delivery of gas on different terms in three different periods.
Period 1 related to the delivery of gas previously committed by the respective
producer under the 1973 contracts and ended in June 1996.
During Period 2, which began in June 1996 and continues until the
earlier of the delivery of 180 BCF of natural gas or December 31, 2013, we are
entitled to take delivery of up to 180 BCF of natural gas (60 BCF per Beluga
River Field producer). During this period, we are required to take 60% of our
total fuel requirements at Beluga from the three Beluga River Field producers,
exclusive of gas purchased at Beluga under the Marathon contract for use in
making sales to GVEA or certain other wholesale purchasers. The price for gas
during this period under the Phillips and AML&P contracts is approximately 88%
of the price of gas under the Marathon contract (described below) ($2.4324 per
million cubic feet ("MCF") on October 1, 2001), plus taxes. The price during
this period under the Chevron contract is approximately 110% of the price of gas
under the Marathon contract ($3.0405 per MCF on October 1, 2001), plus taxes.
During Period 3 under the Beluga River Field producers' contracts,
which begins on the earlier of December 31, 2013 or the end of Period 2, we may
become entitled to take delivery of up to 120 BCF of natural gas (40 BCF per
producer). Whether any gas will be taken in Period 3, and the price and take
requirements with respect thereto, are to be determined in the future based upon
then-current market conditions.
We have supplemental, annually renewable contracts with the Beluga
River Field producers to supply supplemental gas (for peak periods of energy
usage) if they have it available in excess of the amounts guaranteed in
31
the long-term contracts. The supplemental gas contracts raise the daily
deliverability of gas from the Beluga River Field producers to an aggregate of
85,200 MCF per day. The base price of the gas under these contracts is the same
as the base price under the Marathon contract, plus taxes.
Marathon
We entered into a requirements contract with Marathon in September 1988
for an initial commitment of 215 BCF. The contract expires on the earlier of
December 31, 2015 or the date on which Marathon has delivered to us a volume of
gas in total which equals or exceeds 215 BCF, which we currently expect to occur
by mid-2009. The base price for gas under the Marathon contract is $1.35 per
MCF, adjusted quarterly to reflect the percentage change between the preceding
twelve-month period and a base period in the average prices of West Texas
Intermediate Crude Oil (a benchmark of the Light Sweet Crude Oil Futures Index),
the Producer Price Index for natural gas, and the Consumer Price Index for
heating fuel oil. The price on October 1, 2001, exclusive of taxes, was $2.7641
per MCF.
Under the terms of the Marathon contract, Marathon generally provides
the primary supply of gas required for sales to GVEA, all of our requirements at
Bernice Lake, International and Nikiski and 40% of the requirements at Beluga.
Marathon also has a right of first refusal to provide additional gas under any
sales agreements that we may enter into with electric utilities we do not
currently serve. The terms of the Marathon contract also gave Marathon a right
to provide additional volumes in the period following depletion of the initial
commitment of 215 BCF. On June 13, 2001, we were notified that Marathon will not
commit to supply any additional volumes.
ENSTAR
We entered into a transportation agreement with ENSTAR Natural Gas
Company ("ENSTAR") in December 1992, whereby ENSTAR would transport our gas
purchased from the Beluga River Field producers or Marathon on a firm basis to
our International Power Plant at a transportation rate of $0.63 per MCF. In
addition, ENSTAR agreed to transport gas on an interruptible basis for
off-system sales at a rate of $0.30 per MCF. The agreement contains a minimum
monthly bill of $2,600 for firm service. Under a tariff approved by the RCA in
the event that the transportation agreement is subsequently canceled. ENSTAR is
obligated to supply all of the gas we require at a price approved by the RCA.
There would be a monthly minimum bill of $10,465, but no requirement to actually
use any gas at the International Power Plant.
Environmental Matters
General
Our operations are subject to certain federal, state and local
environmental laws and regulations which seek to limit to 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 "Clear 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. The EPA's
anticipated regulations to limit mercury emissions from fossil-fired
steam-electric generating facilities, are not expected to materially impact
Chugach because our thermal power plants burn exclusively natural gas.
32
New Clean Air Act regulations impacting electric utilities may result
from future events or may result from new regulatory programs that may be
established to address problems such as global warming. While we cannot predict
whether any 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, and we are not aware of any future
requirements that will materially impact our financial condition.
We are 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.
Cooper Lake
We discovered polychlorinated biphenyls ("PCBs") in paint, caulk and
grease at the Cooper Lake Hydroelectric Plant during initial phases of a turbine
overhaul. A Federal Energy Regulatory Commission ("FERC), approved plan,
prepared in consultation with the EPA, was implemented to remediate the PCBs in
the plant. As a condition of its approval of the license amendment for the
overhaul project, FERC required us also to investigate the presence of PCBs in
Kenai Lake. A sampling plan was developed by us in consultation with various
agencies and approved by FERC. In 2000, we sampled sediments and fish collected
from Kenai Lake and other waters. While extremely low levels of PCBs were found
in some sediment samples taken near the plant, no pathway from sediment to fish
was established. Additional sediment sampling and analysis in this area is being
performed. While the presence of PCBs in fish did not reveal amounts above
background levels, we are conducting additional sampling and analysis of fish in
Kenai Lake and other waters. We have asked FERC for an extension in which to
file a report on the results of the additional fish and sediment sampling.
Management believes the costs of this work will be recoverable through rates and
therefore will have no material impact on our financial condition or results of
operations.
Legal Proceedings
Matanuska Electric Association, Inc. v. Chugach Electric Association,
Inc.
On July 7, 1999, MEA filed a complaint against us in Alaska Superior
Court in Anchorage, asserting that we violated state statutes, our bylaws and
its power supply agreement with us in failing to provide MEA with information
about several different matters that MEA asserts could affect the cost of the
power MEA purchases from us. MEA also asserted that we violated the power supply
agreement in our management of our long-term bond indebtedness.
On February 8, 2000, MEA added a claim requesting an order requiring us
to present our general rate case filing to the Joint Committee (a review panel
comprised of two representatives of our Board of Directors and one MEA director)
prior to presenting it to the RCA. On July 10, 2001, in accordance with the
power sales agreement, we filed our general rate case directly with the RCA
requesting interim base rate relief without review by the Joint Committee. On
September 10, 2001, MEA filed a motion for partial summary judgment based on
this filing. On September 28, 2001, we filed a cross motion for summary judgment
on this issue. Briefing is now complete on this issue and the parties are
awaiting a decision from the court.
In a decision dated November 16, 2001, the Superior Court granted our
motion for partial summary judgment dismissing the fifth cause of action
challenging our management of our long-term bond indebtedness. As a result of
that decision, all of MEA's claims, except their request for an order requiring
us to present our general rate case filing to the Joint Committee, have been
dismissed either by a decision of the court or by stipulation of the parties.
Should trial on the remaining issue be necessary, it is set for April 2002. MEA
has indicated its intention to appeal the court's November 16, 2001, ruling.
33
Other
We have certain additional litigation matters and pending claims that
arise in the ordinary course of our business. In the opinion of management, no
individual matter or the matters in the aggregate is likely to have a material
adverse effect on our results of operations or financial condition.
34
MANAGEMENT
Executive Officers and Directors
We operate under the direction of a Board of Directors that is elected
at large by our membership. Day-to-day business and affairs are administered by
the General Manager. Our seven-member Board of Directors sets policy and
provides direction to our General Manager. The following table sets forth
certain information with respect to our executive officers and directors as of
January 1, 2002.
<Table>
<Caption>
Name Age Position
- -------------------------------------------- ----- ---------------------------------------------
Eugene N. Bjornstad......................... 63 General Manager
Lee D. Thibert.............................. 46 Executive Manager, Transmission and
Distribution Network Services
Evan J. Griffith............................ 60 Executive Manager, Finance and Energy Supply
William R. Stewart.......................... 54 Executive Manager, Retail Services
Bruce Davison............................... 53 President and Director
H. A. ("Red") Boucher....................... 80 Vice President and Director
Christopher Birch........................... 51 Secretary and Director
Jeffrey W. Lipscomb......................... 50 Treasurer and Director
Elizabeth ("Pat") Kennedy................... 63 Director
Pat Jasper.................................. 72 Director
Dave Cottrell............................... 54 Director
</Table>
Eugene N. Bjornstad was appointed our General Manager on June 22, 1994.
Prior to that he served as Acting General Manager from March 28, 1994, until his
permanent appointment. He joined us in 1983 and served as Executive Manager,
Operating Divisions from 1988 to 1994.
Lee D. Thibert was appointed our Executive Manager, Transmission &
Distribution Network Services in a reorganization on June 1, 1997. Prior to that
he was Executive Manager, Operating Divisions from June of 1994. Before moving
up to the Executive Manager position, he served as Director of Operations from
May 1987.
Evan J. Griffith has been our Executive Manager, Finance and Energy
Supply since our internal reorganization on June 1, 1997. Prior to that, he was
Executive Manager, Finance & Planning from August 1989 to June 1997. Prior to
coming to us, he was Budget/Program Analyst for the Anchorage Municipal Assembly
from August 1984 to August 1989.
William R. Stewart has been our Executive Manager, Retail Services
since the June 1, 1997 reorganization. Prior to that, he was our Executive
Manager, Administration from July 1987 to June 1, 1997. He was our Division
Director of Administration from January 1984 to July 1987 and our Staff
Assistant to the General Manager from November 1982 to January 1984. He has been
employed by us since 1969.
Bruce Davison serves as President of the Board. He had served as the
Secretary of the Board since April 1998. Mr. Davison was first appointed to the
Board in June 1997. Prior to his appointment, he served two years on our Bylaws
Committee. He is a partner in the law firm of Davison & Davison, Inc.
Red Boucher became Vice President of the Board in April 2001. He was
elected to the Board in April 1999. In addition to being a director, Mr. Boucher
owns a consulting firm, serves as president of a telecommunication firm and
hosts a weekly statewide TV show. He has held many elected offices in Alaska
including Lieutenant Governor.
Chris Birch has been serving as Secretary of the Board since April
2001. He was appointed to fill a Board vacancy in October 1996. Mr. Birch was
then elected to that seat in April 1997. He has previously served as
35
Secretary and President. He is a professional engineer for the Alaska Department
of Transportation and Public Facilities.
Jeff Lipscomb was elected director in April 2000 and currently serves
as Treasurer. Mr. Lipscomb is the principal of JWL Engineering which he founded
in 1995. He is a professional mechanical engineer with over 20 years of
experience in Alaskan oil and gas production facility design.
Pat Kennedy has served on the Board since 1993 and has served as both
Secretary and President. She is an attorney who has been licensed to practice
law since 1976.
Pat Jasper most recently served as the President of the Board from
April 2000 to April 2001. Ms. Jasper was originally elected to the Board in
April 1995. Since 1995, she has held several offices including Secretary, Vice
President and President. She is a small business owner and has been a computer
programmer and systems analyst.
Dave Cottrell was elected to the Board in April 2001. Mr. Cottrell has
been the president and managing partner at Mikunda Cottrell & Co., an accounting
firm he owns in Anchorage, since 1977. Mr. Cottrell is a certified public
accountant.
Executive Compensation
Cash Compensation
The following table sets forth all remuneration paid by us for the last
three years to each of our four executive officers, each of whose total cash and
cash equivalent compensation exceeded $100,000 for 2000, and for all the
executive officers as a group:
<Table>
<Caption>
Name Principal Position Year Salary Bonus Total
- --------------------- --------------------- ------ ---------- --------- ---------
Eugene N. Bjornstad General Manager 2000 $230,074 - $230,074
1999 168,057 $36,891 204,948
1998 166,427 33,996 200,423
Lee D. Thibert Executive Manager,
Transmission & 2000 131,710 - 131,710
Distribution 1999 123,390 12,757 136,147
Network Services 1998 125,880 - 125,880
Evan J. Griffith Executive Manager, 2000 131,657 - 131,657
Finance & 1999 135,140 12,757 147,897
Energy Supply 1998 131,634 3,300 134,934
William R. Stewart Executive Manager, 2000 134,398 - 134,398
Retail Services 1999 137,376 12,757 150,133
1998 140,193 3,300 143,493
</Table>
Our directors are compensated for their services in the amount of $100
per board meeting attended (including committee meetings) up to a maximum of
seventy meetings per year for a director and eighty-five meetings per year for
the President. Upon termination, Mr. Bjornstad's employment agreement provides
that he may receive an amount equal to his salary for the greater of six months
or remaining term of his employment agreement (which number shall not be less
than six months) plus any accrued annual leave or other compensation then due as
of the effective date of the notice of termination.
36
Compensation Pursuant to Benefit Plans
We have elected to participate in the National Rural Electric
Cooperative Association ("NRECA") Retirement and Security Program (the "Plan"),
a multiple employer defined benefit master pension plan maintained and
administered by the NRECA for the benefit of its members and their employees.
The Plan is intended to be a qualified pension plan under Section 401(a) of the
Code. All our employees not covered by a union agreement become participants in
the Plan on the first day of the month following completion of one year of
eligibility service. An employee is credited with one year of eligibility
service if he completes 1,000 hours of service either in his first twelve
consecutive months of employment or in any calendar year for us or certain other
employers in rural electrification (related employers). Pension benefits vest at
the rate of 10% for each of the first four years of vesting service and become
fully vested and nonforfeitable on the earlier of the date a participant has
five years of vesting service or the date the participant attains age fifty-five
while employed by us or a related employer. A participant is credited with one
year of vesting service for each calendar year in which he performs at least one
hour of service for us or a related employer. Pension benefits are generally
paid upon the participant's retirement or death. A participant may also elect to
receive pension benefits while still employed by us if he has reached his normal
retirement date by completing thirty years of benefit service (defined below)
or, if earlier, by attaining age sixty-two. A participant may elect to receive
actuarially reduced early retirement pension benefits before his normal
retirement date provided he has attained age fifty-five.
Pension benefits paid in normal form are paid monthly for the remaining
lifetime of the participant. Unless an actuarially equivalent optional form of
benefit payment to the participant is elected, upon the death of a participant
the participant's surviving spouse will receive pension benefits for life equal
to 50% of the participant's benefit. The annual amount of a participant's
pension benefit and the resulting monthly payments the participant receives
under the normal form of payment are based on the number of his years of
participation in the Plan (benefit service) and the highest five-year average of
the annual rate of his base salary during the last ten years of his
participation in the Plan (final average salary). Annual compensation in excess
of $200,000, as adjusted by the Internal Revenue Service for cost of living
increases, is disregarded after January 1, 1989. The participant's annual
pension benefit at his normal retirement date is equal to the product of his
years of benefit service (up to thirty) times final average salary times 2%. In
1998, NRECA notified us that there were employees whose pension benefits from
the Plan would be reduced because of limitations on retirement benefits payable
under Section 401(a)(17) or 415 of the Code. NRECA made available a Pension
Restoration Severance Pay Plan and a Pension Restoration Deferred Compensation
Plan for cooperatives to adopt in order to make employees whole for their lost
benefits. In May 1998, we adopted both of these plans to protect the benefits of
current and future employees whose pension benefits would be reduced because of
these limitations.
The following table sets forth the estimated annual pension benefit
payable at normal retirement date for participants in the specified final
average salary and years of benefit service categories:
<Table>
<Caption>
Years of Benefit Service
Final Average ------------------------------------------------------------------
Salary 15 20 25 30+
------------- -------- --------- -------- --------
$125,000 $37,500 $50,000 $62,500 $75,000
150,000 45,000 60,000 75,000 90,000
</Table>
The annual pension benefits indicated above are the joint and surviving
spouse life annuity amounts payable by the Plan, and they are not subject to any
deduction for Social Security or other offset amounts.
37
Benefit service as of December 31, 2000 taken into account under the
Plan for the executive officers is shown below. Base salary for 2000 taken into
account under the Plan for purposes of determining final average salary is also
included.
<Table>
<Caption>
Covered
Name Principal Position Benefit Service Compensation
- ------------------------------ -------------------------------- --------------- ---------------
Eugene N. Bjornstad........... General Manager 16.7 $165,027
Lee D. Thibert................ Executive Manager, Transmission 12.7 130,790
& Distribution Network Services
Evan J. Griffith.............. Executive Manager, Finance & 10.4 130,166
Energy Supply
William R. Stewart............ Executive Manager, Retail 30.0 130,187
Services
</Table>
Employment Arrangements
In August 2001, we entered into an employment agreement with Eugene
Bjornstad, our General Manager. He is paid an annual base salary of $175,000.
Mr. Bjornstad also is eligible to receive additional compensation, bonus and
benefits for meeting performance goals established annually by the Board of
Directors. In the event that Mr. Bjornstad is terminated without cause, he will
be entitled to severance in an amount equal to six months of his annual salary,
plus any accrued annual leave and any bonuses or other compensation then due.
38
BOND INSURANCE
The following information has been furnished by MBIA Insurance
Corporation ("MBIA") for use in this prospectus. Reference is made to Appendix A
for a specimen of MBIA's policy.
MBIA's policy unconditionally and irrevocably guarantees the full and
complete payment required to be made by us or on our behalf to the Paying Agent
or its successor of an amount equal to (i) the principal of (either at the
stated maturity or by an advancement of maturity pursuant to a mandatory sinking
fund payment) and interest on, the Bonds as such payments shall become due but
shall not be so paid (except that in the event of any acceleration of the due
date of such principal by reason of mandatory or optional redemption or
acceleration resulting from default or otherwise, other than any advancement of
maturity pursuant to a mandatory sinking fund payment, the payments guaranteed
by MBIA's policy shall be made in such amounts and at such times as such
payments of principal would have been due had there not been any such
acceleration); and (ii) the reimbursement of any such payment which is
subsequently recovered from any owner of the Bonds pursuant to a final judgment
by a court of competent jurisdiction that such payment constitutes an avoidable
preference to such owner within the meaning of any applicable bankruptcy law (a
"Preference").
MBIA's policy does not insure against loss of any prepayment premium
which may at any time be payable with respect to any Bonds. MBIA's policy does
not, under any circumstance, insure against loss relating to: (i) optional or
mandatory redemptions (other than mandatory sinking fund redemptions); (ii) any
payments to be made on an accelerated basis; (iii) payments of the purchase
price of Bonds upon tender by an owner thereof; or (iv) any Preference relating
to (i) through (iii) above. MBIA's policy also does not insure against
nonpayment of principal of or interest on the Bonds resulting from the
insolvency, negligence or any other act or omission of the Paying Agent or any
other paying agent for the Bonds.
Upon receipt of telephonic or telegraphic notice, such notice
subsequently confirmed in writing by registered or certified mail, or upon
receipt of written notice by registered or certified mail, by MBIA from the
Paying Agent or any owner of a Bond the payment of an insured amount for which
is then due, that such required payment has not been made, MBIA on the due date
of such payment or within one business day after receipt of notice of such
nonpayment, whichever is later, will make a deposit of funds, in an account with
State Street Bank and Trust Company, N.A., in New York, New York, or its
successor, sufficient for the payment of any such insured amounts which are then
due. Upon presentment and surrender of such Bonds or presentment of such other
proof of ownership of the Bonds, together with any appropriate instruments of
assignment to evidence the assignment of the insured amounts due on the Bonds as
are paid by MBIA, and appropriate instruments to effect the appointment of MBIA
as agent for such owners of the Bonds in any legal proceeding related to payment
of insured amounts on the Bonds, such instruments being in a form satisfactory
to State Street Bank and Trust Company, N.A., State Street Bank and Trust
Company, N.A. shall disburse to such owners or the Paying Agent payment of the
insured amounts due on such Bonds, less any amount held by the Paying Agent for
the payment of such insured amounts and legally available therefor.
MBIA
MBIA Insurance Corporation ("MBIA") is the principal operating
subsidiary of MBIA Inc., a New York Stock Exchange listed company (the
"Company"). The Company is not obligated to pay the debts of or claims against
MBIA. MBIA is domiciled in the State of New York and licensed to do business in
and subject to regulation under the laws of all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. MBIA has three branches, one in the Republic of France, one in the
Republic of Singapore and one in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by MBIA, changes in control and transactions
among affiliates. Additionally, MBIA is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
MBIA does not accept any responsibility for the accuracy or
completeness of this prospectus or any information or disclosure contained
herein, or omitted herefrom, other than with respect to the accuracy of the
39
<Page>
information regarding the policy and MBIA set forth under the heading "Bond
Insurance." Additionally, MBIA makes no representation regarding the Bonds or
the advisability of investing in the Bonds.
The Financial Guarantee Insurance Policies are not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
MBIA Information
The following documents filed by MBIA with the Securities and Exchange
Commission (the "SEC") are incorporated herein by reference:
(1) Annual Report on Form 10-K for the year ended December 31, 2000;
(2) Quarterly Report on Form 10-Q for the quarter ended September 30,
2001; and
(3) The report on Form 8-K filed by MBIA on January 30, 2001.
Any documents filed by MBIA pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act of 1934, as amended, after the date of this prospectus
and prior to the termination of the offering of the Bonds offered hereby shall
be deemed to be incorporated by reference in this prospectus and to be a part
hereof. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein, or contained in this prospectus, shall be
deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
MBIA files annual, quarterly and special reports, information
statements and other information with the SEC under File No. 1-9583. Copies of
the SEC filings (including (1) MBIA's Annual Report on Form 10-K for the year
ended December 31, 2000, (2) MBIA's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001, and (3) the report on Form 8-K filed by MBIA
on January 30, 2001) are available (i) over the Internet at the SEC's web site
at http://www.sec.gov; (ii) at the SEC's public reference room in Washington
D.C.; (iii) over the Internet at MBIA's web site at http://www.mbia.com; and
(iv) at no cost, upon request to MBIA Insurance Corporation, 113 King Street,
Armonk, New York 10504. The telephone number of MBIA is (914) 273-4545.
As of December 31, 2000, MBIA had admitted assets of $7.6 billion
(audited), total liabilities of $5.2 billion (audited), and total capital and
surplus of $2.4 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of September 30, 2001, MBIA had admitted assets of $8.4 billion
(unaudited), total liabilities of $6.0 billion (unaudited), and total capital
and surplus of $2.4 billion (unaudited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities.
Financial Strength Ratings of MBIA
Moody's Investors Service, Inc. rates the financial strength of MBIA
"Aaa."
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. rates
the financial strength of MBIA "AAA."
Fitch, Inc. rates the financial strength of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of MBIA and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above ratings
may be obtained only from the applicable rating agency.
40
<Page>
The above ratings are not recommendations to buy, sell or hold the
Bonds, and such ratings may be subject to revision or withdrawal at any time by
the rating agencies. Any downward revision or withdrawal of any of the above
ratings may have an adverse effect on the market price of the Bonds. MBIA does
not guaranty the market price of the Bonds nor does it guaranty that the ratings
on the Bonds will not be revised or withdrawn.
41
DESCRIPTION OF THE BONDS
General
The Bonds will be issued under and secured initially by the Existing
Indenture. U.S. Bank National Association currently acts as trustee under
the Existing Indenture (the "Trustee"). On the earliest date when all bonds
issued under the Existing Indenture prior to April 2001 cease to be outstanding
or their holders have consented to release of the lien (the "Release Date"), the
Existing Indenture will be superseded in its entirety by the Amended Indenture.
Our currently outstanding 1991 Series A Bonds Due 2002 are not redeemable, and
our 1991 Series A Bonds Due 2022 are not redeemable until March 15, 2002, so the
earliest date on which we expect that the Amended Indenture could take effect is
March 15, 2002. For purposes hereof, reference to the "Indenture" refers to the
Existing Indenture at all times prior to the Release Date, and to the Amended
Indenture at all times on and after the Release Date. Obligations of all series
that have been or may be issued under the Indenture, including the Bonds, may be
referred to in this prospectus as "Obligations."
The following summaries of provisions of the Bonds do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Indenture, including the definitions therein of
certain terms. Wherever particular sections of the Indenture or capitalized
terms are referred to in this prospectus, such sections and the definitions of
such capitalized terms contained in the Indenture are incorporated by reference
in their entirety. The Indenture is included as an exhibit to the registration
statement of which this prospectus is a part. A copy of the Indenture may also
be obtained from the Trustee or from us.
In connection with the issuance of the Auction Rate Bonds, the Trustee
will enter into an Auction Agreement with the Auction Agent which, among other
things, sets forth the duties and responsibilities of the Auction Agent.
Reference is made to Appendix B--Auction Procedures to this prospectus, which is
a part of the Indenture and the Auction Agreement (the "Auction Procedures").
Unless otherwise defined in this prospectus, capitalized terms referred to in
"Description of the Bonds--Auction Rate Bonds" are defined either in the
Indenture, the Auction Procedures or under "Description of the Bonds--Auction
Rate Bonds--Glossary of Terms." Terms contained in the Indenture are
incorporated by reference in their entirety.
2002 Series A Bonds
The 2002 Series A Bonds will mature on February 1, 2012 and will bear
interest at the annual rate of 6.20% (on the basis of a 360-day year) from their
date of issuance or from the most recent Interest Payment Date to which interest
has been paid or provided for, payable semi-annually on February 1 and August 1
of each year, commencing August 1, 2002, to the person in whose name the 2002
Series A Bonds are registered at the close of business on the Regular Record
Date for such interest, which shall be the 15th day (whether or not a business
day) of the calendar month next preceding such Interest Payment Date. If
interest on the 2002 Series A Bonds is not punctually paid or duly provided for,
we will pay such amount instead to each registered holder of the bonds on a
special record date not more than 15 nor less than 10 days prior to the date of
the proposed payment. Principal of, and premium (if any) and interest on, the
2002 Series A Bonds will be payable, and the transfer of interests in the bonds
will be effected, through the facilities of The Depository Trust Company, a New
York corporation ("DTC"), as described under "Book-Entry System;
Exchangeability." The 2002 Series A Bonds will be issued in multiples of $1,000
denominations.
Auction Rate Bonds
The Auction Rate Bonds will mature on February 1, 2012 and will bear
interest from the date of original delivery to and through February 27, 2002 at
a rate established by the underwriter. The interest rate for the first Interest
Period has been set at 1.97% per annum. Afterwards, the Auction Rate Bonds will
bear interest at the applicable rate set for 28-day Auction Periods. The initial
Auction Date will be February 27, 2002. After this date, the applicable interest
rate will be the interest rate established by the Auction Agent based on the
terms of the Auction Procedures. Unless approved by us and consented to by the
Bond Insurer, the interest rate will not exceed the Maximum Rate. The Auction
Rate Bonds will be issued in denominations of (i) for the Auction Rate Bonds
bearing interest at a Daily Rate, a Weekly Rate or a Flexible Rate, $100,000 or
any integral multiple of $5,000 in
42
excess thereof; (ii) for the 2002 Series B Bonds bearing interest at an Auction
Mode Rate, $50,000 and multiples of $50,000 thereof; and (iii) for the 2002
Series B Bonds bearing interest at a Term Rate or a Fixed Rate, $5,000 or any
integral multiple thereof (collectively the "Authorized Denominations").
The Auction Rate Bonds can at our direction on any conversion date be
converted to a daily, seven-day, 28-day, 35-day, three-month or a semiannual
period or a Flexible Auction Period and will bear interest at the rate
established for such period through the Auction Procedures. The consent of the
Bond Insurer is required prior to the conversion to an Auction Period of greater
than 35 days. Upon conversion to a daily, seven-day, 28-day, 35-day, three-month
or a semiannual period or a Flexible Auction Period, the Auction Rate Bonds will
be subject to mandatory tender on the conversion date at a price equal to 100%
of the principal amount thereof plus accrued interest, if any, to such date.
Interest on the Auction Rate Bonds in a daily, seven-day, 28-day, 35-day, a
three-month or a Flexible Auction Period of 180 days or less will be computed on
the basis of a 360-day year for the actual number of days elapsed. Interest on
the Auction Rate Bonds in a semiannual Auction Period or Flexible Auction Period
of more than 180 days will be computed on the basis of a 360-day year of twelve
30-day months.
Auction Agent
The Trustee will enter into the Auction Agreement initially with
Bankers Trust Company, pursuant to which Bankers Trust Company, as agent for the
Trustee, shall perform the duties of Auction Agent. The Auction Agreement
provides, among other things, that the Auction Agent will determine the Auction
Rate for each Auction in accordance with the Auction Procedures.
Auction Date
An Auction to determine the interest rate with respect to the Auction
Rate Bonds for the next succeeding Auction Period will be held on the business
day next preceding each Interest Payment Date except when the Auction Rate Bonds
are in a daily Auction Period when an Auction will be held every business day.
The first Auction will take place on February 27, 2002.
Orders
The procedure for submitting Orders prior to the Submission Deadline on
each Auction Date is described in the Auction Procedures.
Submission of Orders; Auction Procedures
Prior to the Submission Deadline on an Auction Date, existing and
potential owners of the Auction Rate Bonds will, either themselves or through
their broker, need to have submitted an irrevocable Hold Order, Bid or Sell
Order to the Auction Agent setting forth the principal amount of Auction Rate
Bonds and the interest rate at which they are willing to hold, buy or sell. If
an Order for all the Auctions Rate Bonds held by an existing owner is not
submitted to the Auction Agent prior to the Submission Deadline, the existing
owner will be deemed to have submitted a Hold Order covering all the principal
amount of Auction Rate Bonds held by such existing owner and not subject to
orders submitted.
Promptly after the Submission Deadline on each Auction Date, the
Auction Agent will assemble all Orders submitted or deemed submitted to it by
the broker-dealers (each such Order as submitted or deemed submitted by a
broker-dealer being hereinafter referred to as a "Submitted Hold Order," a
"Submitted Bid" or a "Submitted Sell Order," as the case may be, and
collectively as a "Submitted Order") and will determine (i) the Available Bonds,
(ii) whether there are Sufficient Clearing Bids, and (iii) the Auction Rate. In
the event the Auction Agent fails to calculate, or for any reason fails to
timely provide, the Auction Rate for any Auction Period, the Auction Rate for
such Auction Period will be the No Auction Rate.
43
In the event of Sufficient Clearing Bids, Submitted Orders are accepted
or rejected in the following order of priority:
(i) the Submitted Hold Order of each existing owner will be accepted,
thus requiring each the existing owner to continue to hold the Bonds
that are the subject of the Submitted Hold Order;
(ii) the Submitted Sell Order of each existing owner will be accepted
and the Submitted Bid of each existing owner specifying any rate that
is higher than the Winning Bid Rate will be rejected, thus requiring
each such existing owner to sell the Bonds that are the subject of the
Submitted Sell Order or Submitted Bid;
(iii) the Submitted Bid of each existing owner specifying any rate that
is lower than the Winning Bid Rate will be accepted, thus requiring
each such existing owner to continue to hold the Bonds that are the
subject of the Submitted Bid;
(iv) the Submitted Bid of each potential owner specifying any rate that
is lower than the Winning Bid Rate will be accepted, thus requiring
each such existing owner to purchase the Bonds that are the subject of
the Submitted Bid;
(v) the Submitted Bid of each existing owner specifying a rate that is
equal to the Winning Bid Rate will be accepted, thus requiring each
such existing owner to continue to hold the Bonds that are the subject
of the Submitted Bid, but only up to and including the principal amount
of Bonds obtained by multiplying (A) the aggregate principal amount of
Outstanding Bonds which are not the subject of Submitted Hold Orders
described in paragraph (i) above or of Submitted Bids described in
paragraphs (iii) or (iv) above by (B) a fraction the numerator of which
will be the principal amount of Outstanding Bonds held by such existing
owner subject to the Submitted Bid and the denominator of which will be
the aggregate principal amount of Outstanding Bonds subject to the
Submitted Bids made by all the existing owners that specified a rate
equal to the Winning Bid Rate, and the remainder, if any, of the
Submitted Bid will be rejected, thus requiring each such existing owner
to sell any excess amount of Bonds;
(vi) the Submitted Bid of each potential owner specifying a rate that
is equal to the Winning Bid Rate will be accepted, thus requiring each
such potential owner to purchase the Bonds that are the subject of the
Submitted Bid, but only in an amount equal to the principal amount of
Bonds obtained by multiplying (A) the aggregate principal amount of
Outstanding Bonds which are not the subject of Submitted Hold Orders
described in paragraph (i) above or of Submitted Bids described in
paragraphs (iii), (iv) or (v) above by (B) a fraction the numerator of
which will be the principal amount of Outstanding Bonds subject to the
Submitted Bid and the denominator of which will be the sum of the
aggregate principal amount of Outstanding Bonds subject to the
Submitted Bids made by all the potential owners that specified a rate
equal to the Winning Bid Rate, and the remainder of the Submitted Bid
will be rejected; and
(vii) the Submitted Bid of each potential owner specifying any rate
that is higher than the Winning Bid Rate will be rejected.
In the event there are not Sufficient Clearing Bids, Submitted Orders
will be accepted or rejected as follows in the following order of priority:
(i) the Submitted Hold Order of each existing owner will be accepted,
thus requiring each such existing owner to continue to hold the Bonds
that are the subject of the Submitted Hold Order;
(ii) the Submitted Bid of each existing owner specifying any rate that
is not higher than the Maximum Auction Rate will be accepted, thus
requiring each such existing owner to continue to hold the Bonds that
are the subject of the Submitted Bid;
44
(iii) the Submitted Bid of each potential owner specifying any rate
that is not higher than the Maximum Auction Rate will be accepted, thus
requiring each such potential owner to purchase the Bonds that are the
subject of the Submitted Bid;
(iv) the Submitted Sell Orders of each existing owner will be accepted
as Submitted Sell Orders and the Submitted Bids of each existing owner
specifying any rate that is higher than the Maximum Rate will be deemed
to be and will be accepted as Submitted Sell Orders, in both cases only
up to and including the principal amount of Bonds obtained by
multiplying (A) the aggregate principal amount of Bonds subject to
Submitted Bids described in paragraph (iii) of this subsection (b) by
(B) a fraction the numerator of which will be the principal amount of
Outstanding Bonds held by such existing owner subject to the Submitted
Sell Order or the Submitted Bid deemed to be a Submitted Sell Order and
the denominator of which will be the principal amount of outstanding
Auction Rate Bonds subject to all the Submitted Sell Orders and the
Submitted Bids deemed to be Submitted Sell Orders, and the remainder of
each the Submitted Sell Order or Submitted Bid will be deemed to be and
will be accepted as a Hold Order and each such existing owner will be
required to continue to hold such excess amount of Auction Rate Bonds;
and
(v) the Submitted Bid of each potential owner specifying any rate that
is higher than the Maximum Auction Rate will be rejected.
Amendment of Auction Procedures
The Auction Procedures may be amended by obtaining the consent of all
the owners of all Auction Rate Bonds. All owners of the Auction Rate Bonds will
be deemed to have consented if on the first Auction Date occurring at least 20
days after the Auction Agent mailed notice to such owners the Auction Rate
determined for such date is the Winning Bid Rate. Changes to the Auction Periods
and Auction Dates do not require the amendment of the Auction Procedures or any
consents, except the Bond Insurer's consent for Auction Periods greater than 35
days.
Conversion from One Auction Period to Another
At our option, and with the Bond Insurer's consent for Auction Periods
greater than 35 days, the Auction Rate Bonds can on any conversion date be
converted to a daily, seven-day, 28-day, 35-day, three-month or a semiannual
period or a Flexible Auction Period. On the conversion date from one Auction
Period to another, the Auction Rate Bonds which are not the subject of a
specific Hold Order or Bid will be deemed to be subject to a Sell Order. In the
event of a failed conversion to another Auction Period due to the lack of
Sufficient Clearing Bids, the Auction Rate Bonds will automatically convert to a
seven-day Auction Period and will bear interest at the Maximum Auction Rate. In
connection with a conversion from one Auction Period to another, written notice
of such conversion will be given in accordance with the Auction Procedures;
however, the Auction Rate Bonds will not be subject to mandatory tender on such
conversion date.
Conversion of Auction Rate Bonds to Another Interest Mode
At our option, with the consent of the Bond Insurer, all of the Auction
Rate Bonds may be converted to bear interest at a Daily Rate, a Weekly Rate, a
Flexible Rate, a Term Rate or a Fixed Rate. On the Mode Adjustment Date
applicable to the Auction Rate Bonds to be converted, the Auction Rate Bonds to
be converted shall be subject to mandatory tender at a purchase price equal to
100% of the principal amount thereof, plus accrued interest. The purchase price
of the Auction Rate Bonds so tendered is payable solely from the proceeds of the
remarketing of such Auction Rate Bonds. In the event that the conditions of a
conversion are not satisfied, including the failure to remarket all applicable
Auction Rate Bonds on a mandatory tender date, the Auction Rate Bonds will not
be subject to mandatory tender, will be returned to their owners, will
automatically convert to a seven-day Auction Period and will bear interest at
the Maximum Auction Rate.
Should the Auction Rate Bonds be converted to bear interest at a Daily
Rate, a Weekly Rate, a Flexible Rate, a Term Rate or a Fixed Rate, such Auction
Rate Bonds may need to be registered on a registration statement covering such
securities. We will agree to take such reasonable additional actions, if any,
necessary in order to
45
register the Auction Rate Bonds under, and to otherwise comply with, each of the
Securities Act and the Securities Exchange Act upon remarketing of the Auction
Rate Bonds.
Broker-Dealer
Broker-dealers may submit orders in any Auction for their own account.
If a broker-dealer submits an order for its own account in any Auction, it might
have an advantage over other bidders in that it would have knowledge of orders
placed through it in that Auction; such broker-dealer, however, would not have
knowledge of orders submitted by other broker-dealers (if any) in that Auction.
Special Considerations
The Auction Agent may resign from its duties as Auction Agent by giving
at least 90 days' notice or 30 days' notice, if it has not been paid, to us and
the Trustee and such resignation does not require, as a condition to its
effectiveness, that a replacement Auction Agent be in place if its fee has not
been paid. The Broker-Dealer Agreement provides that the broker-dealer
thereunder may resign upon five business days' notice or immediately, in certain
circumstances, and does not require, as a condition to the effectiveness of such
resignation, that a replacement broker-dealer be in place. For any Auction
Period during which there is no duly appointed Auction Agent, or during which
there is no duly appointed broker-dealer, it will not be possible to hold
Auctions, with the result that the interest rate on the Auction Rate Bonds will
be the No Auction Rate.
Optional Redemption for the Auction Rate Bonds
During the Auction Mode, the Auction Rate Bonds may be redeemed at our
option in whole or in part on any Interest Payment Date immediately following
the end of an Auction Period, at the principal amount of the bonds to be
redeemed without premium together with the accrued interest; provided, however,
in the event of a partial redemption of the Auction Rate Bonds bearing interest
at the Auction Mode Rate, the aggregate principal amount not so redeemed shall
be an integral multiple of $50,000.
Sinking Fund Installments and Mandatory Redemption for the Auction Rate
Bonds
The Auction Rate Bonds are subject to mandatory redemption prior to
maturity from sinking fund installments, on the Interest Payment Date on or
immediately preceding February 1 in the years and in the principal amounts set
forth below at a redemption price equal to 100% of the principal amount being
redeemed, plus accrued interest to the redemption date:
Principal Amount to be
Year Redeemed
2003 $4,300,000
2004 $4,600,000
2005 $4,900,000
2006 $5,200,000
2007 $5,500,000
2008 $5,900,000
2009 $6,300,000
2010 $6,700,000
2011 $7,100,000
2012 $9,500,000
Selection of Auction Rate Bonds to be Redeemed
If we redeem less than all of the Auction Rate Bonds, the Auction Rate
Bonds to be redeemed will be selected at random by the Trustee in such manner as
the Trustee considers fair and appropriate and the portion of the Auction Rate
Bonds not so redeemed will be in an Authorized Denomination.
46
Notice of Redemption
The Trustee, on our behalf, shall give notices of redemption by mail,
postage prepaid not less than 15 days prior to the redemption date, to each
holder of Auction Rate Bonds which are to be redeemed, at its last address, if
any, appearing upon the registry books. Notice having been given in the manner
provided in the Indenture, as the
case may be, on the redemption date so designated, if there is sufficient moneys
available therefor, then the Auction Rate Bonds so called for redemption will
become due and payable on such redemption date at the redemption price, plus
interest accrued and unpaid to the redemption date.
Glossary of Terms
The following glossary of terms contains key terms used in the above
summary of the Auction Rate Bonds. Capitalized terms found in the above summary
but not defined in this glossary or in Appendix B--Auction Procedures have the
meaning assigned them in the Indenture.
"Daily Mode" means the Interest Mode during which the Auction Rate
Bonds of a particular series bear interest at Daily Rates.
"Daily Rate" means the interest rate applicable to the Auction Rate
Bonds during the Daily Mode, determined as provided in the Indenture.
"Favorable Opinion of Bond Counsel" shall mean, with respect to any
action to be taken hereunder with respect to the Auction Rate Bonds, an opinion
of nationally recognized bond counsel to the effect that such action is
permitted by the terms of the Indenture.
"Fixed Mode" means the Interest Mode during which the Auction Rate
Bonds bear interest at the Fixed Rate.
"Fixed Rate" means the interest rate applicable to the Auction Rate
Bonds during the Fixed Mode, determined as provided in the Indenture.
"Flexible Mode" means the Interest Mode during which the Auction Rate
Bonds bear interest at Flexible Rates.
"Flexible Rate" means the interest rate applicable to the Auction Rate
Bonds during the Flexible Mode, determined as provided in the Indenture.
"Interest Accrual Period" means the period from and including each
Interest Payment Date to, but excluding, the next Interest Payment Date. The
initial Interest Accrual Period for the Auction Rate Bonds shall begin on (and
include) the Delivery Date. The final Interest Accrual Period for any Offered
Security shall end on the day next preceding the maturity or redemption date of
such Offered Security, as the case may be.
"Interest Mode" means a period of time relating to the frequency with
which the interest rate on the Auction Rate Bonds is determined pursuant to the
Indenture. An Interest Mode may be the Auction Mode, the Daily Mode, the Weekly
Mode, the Flexible Mode, the Term Mode or the Fixed Mode.
"Interest Period" means the period from and including a Rate Adjustment
Date to but excluding the next succeeding Rate Adjustment Date; provided,
however, that (a) the first Interest Period for the Auction Rate Bonds shall be
the period from and including the Delivery Date to but excluding the first Rate
Adjustment Date and (b) the final Interest Period for the Auction Rate Bonds
shall be the period from and including the last Rate Adjustment Date preceding
the maturity or redemption date of such Offered Security to but excluding such
maturity or redemption date.
"Maximum Rate" shall mean fifteen percent (15%) per annum, or such
higher rate as shall be approved by us if (1) a Favorable Opinion of Bond
Counsel shall have been delivered to parties entitled to notice and (2) such
higher rate shall have been consented to in writing by the Bond Insurer.
47
"Mode Adjustment Date" means any date on which the Interest Mode or
Interest Period to which the Auction Rate Bonds are subject is to be changed to
another Interest Mode or Interest Period, as the case may be, determined as
provided in the Indenture.
"No Auction Rate" means, as of any Auction Date, the rate determined by
multiplying the Percentage of Index set forth below, based on the Prevailing
Rating of the Auction Rate Bonds in effect at the close of business on the
business day immediately preceding such Auction Date, by the Index:
Percentage
Prevailing Rating of Index
------------------- ----------
AAA/Aaa/AAA 100%
AA/Aa/AA 110
A/A/A 125
BBB/Baa/BBB 150
Below BBB/Baa/BBB 200
provided, however, that in no event will the No Auction Rate exceed the Maximum
Auction Rate.
"Rate Adjustment Date" means the day on which each Auction Mode Rate,
Daily Rate, Weekly Rate, Flexible Rate, Term Rate or Fixed Rate shall become
effective.
"Rate Determination Date" means the time and date as of which an
interest rate for the Auction Rate Bonds shall be determined as provided in the
Indenture.
"Record Date" means the close of business on the Business Day
immediately preceding such Interest Payment Date.
"Sufficient Clearing Bids" means an Auction for which (a) the aggregate
principal amount of Auction Rate Bonds that are the subject of Submitted Bids by
potential owners specifying one or more rates not higher than the Maximum
Auction Rate is not less than (b) the aggregate principal amount of Auction Rate
Bonds that are the subject of Submitted Sell Orders and of Submitted Bids by
existing owners specifying rates higher than the Maximum Auction Rate.
"Term Mode" means the Interest Mode during which the Auction Rate Bonds
bear interest at Term Rates.
"Term Rate" means the interest rate applicable to the Auction Rate
Bonds during the Term Mode, determined as provided in the Indenture.
"Weekly Mode" means the Interest Mode during which the Auction Rate
Bonds bear interest at Weekly Rates.
"Weekly Rate" means the interest rate applicable to the Auction Rate
Bonds during the Weekly Mode, determined as provided in the Indenture.
Security for Payment of the Obligations Prior to Release Date; Conversion to
Unsecured Obligations on Release Date
Until the Release Date, the Bonds will be secured equally and ratably
with all other Obligations issued (whether previously or subsequent to issuance
of the Bonds) under the Existing Indenture, by a first lien on substantially all
of our tangible properties and certain of our other assets, including
generation, transmission and distribution properties, excluding Excepted
Property. The Existing Indenture defines Excepted Property to include, among
other things, cash on hand, instruments and certain securities, patents and
trademarks, transportation equipment (including vehicles, vessels and barges) in
which a security interest cannot be perfected by filing a financing statement
under the Uniform Commercial Code, leases for an original term of less than five
years, certain
48
nonassignable permits, licenses and contractual rights, property located outside
the State of Alaska and not used in connection with our generation, transmission
and distribution system, and other personal property in which a security
interest cannot legally be perfected. The lien of the Existing Indenture is
subject to certain permitted encumbrances (the "Permitted Encumbrances"), which
the Indenture defines to include, among other things, certain identified
restrictions, exceptions, reservations, conditions and limitations existing on
September 15, 1991, reservations in U.S. patents, non-delinquent or contested
tax liens, local improvement district assessments, contractors' liens and
similar liens arising in the ordinary course of business, certain easements,
leases and reservations and liens for non-delinquent rent or wages. The lien of
the Existing Indenture is also subject to a lien in favor of the Trustee to
recover amounts owing to the Trustee under the Indenture. In addition, our title
to the mortgaged property and the lien of the Existing Indenture are subject to
certain other prior rights and encumbrances which we do not believe adversely
affects in any material respect our right to use such property to secure the
Bonds.
Immediately following this offering and the application of the proceeds
hereof to the repayment of the 1991 Series A Bonds due 2002 and the redemption
of the 1991 Series A Bonds due 2022, there will be approximately $400 million of
Obligations, including the Bonds, outstanding under the Existing Indenture.
From and after the Release Date, the Bonds, all other Obligations then
still outstanding and any other Obligations thereafter issued under the
Indenture will be unsecured general obligations and will rank equally with all
of our other unsecured and unsubordinated obligations. On the Release Date, any
lien or security interest arising under the Indenture will automatically
terminate and the Trustee is required to take any actions we deem reasonably
necessary to confirm or give notice of the termination and release of any lien
or security interest arising under the Indenture and to evidence the
reconveyance, re-assignment and transfer to us of all right, title and interest
of the Trustee in the collateral.
Rights of Insurer
The Indenture provides that if any person provides an insurance policy,
letter of credit, surety bond or other undertaking that unconditionally
obligates that person to pay any Obligations when they become due, to the extent
not paid by us, then as long as that credit enhancer is not in default in
performing that undertaking, that credit enhancer (and not the holders of the
Obligations to which the credit enhancement relates) will be considered the
holder of those Obligations for purposes of giving any approval or consent to
any supplemental indenture or other amendment to the Indenture (other than
modifications that cannot be effecting without unanimous approval of the holders
of those Obligations), the giving any other approval, consent or notice,
effecting any waiver or authorization, exercising any remedies or the taking of
any other action under the Indenture. Because MBIA will issue an insurance
policy insuring the payment of principal and interest on the Bonds, MBIA will
have the exclusive authority to exercise such powers and take such actions under
the Indenture in lieu of the actual holders of the Bonds. In addition we have
agreed with MBIA that if an Event of Default under the Indenture related to
nonpayment of interest and principal shall occur and be continuing, that, as
long as MBIA is not in default in performing its duties as the Bond Insurer,
MBIA may direct us to convert from one Auction Period to another or from the
current Interest Mode to a Fixed Rate mode, subject to the satisfaction of the
other conditions to the conversion set forth in the Indenture. See "Bond
Insurance."
Release and Substitution of Property Prior to Release Date; Negative Pledge
After Release Date
Until the Release Date, property subject to the lien of the Existing
Indenture may be released to facilitate the day-to-day operation of our
business. In addition, property may be released upon deposit of cash, retirement
of Obligations or acquisition of additional property.
The lien of the Indenture terminates on the Release Date when the
Existing Indenture is replaced by the Amended Indenture. However, the Amended
Indenture will thereafter prohibit us from creating or permitting to exist any
mortgage, lien, pledge, charge, security interest or other encumbrance of any
kind (other than those arising by operation of law) for the purpose of securing
repayment of borrowed money or any obligation to pay the deferred purchase price
for goods or services, except for security interests securing other debt not
exceeding $5,000,000.
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Rate Covenant
Until the Release Date, subject to any necessary approval or
determination of any regulatory authority with jurisdiction over rates, rents,
charges, fees and other compensation (collectively, "Rates"), the Indenture
requires us to establish and collect Rates for the use or the sale of the
output, capacity or service of our electric generation, transmission and
distribution system which are reasonably expected to yield margins for interest
for the 12-month period commencing with the effective date of such Rates equal
to at least 1.20 times total interest expense during such 12-month period.
Margins for interest generally consist of our assignable margins plus total
interest expense and income tax accruals. Promptly upon any material change in
the circumstances which were contemplated at the time such Rates were most
recently reviewed, but not less frequently than once every 12 months, we will
review the Rates and, subject to any necessary regulatory approval, promptly
establish or revise the Rates as necessary to obtain the required margins for
interest and produce moneys sufficient to enable us to comply with our other
covenants under the Indenture. After the Release Date, the Amended Indenture
will require us to establish and collect Rates reasonably expected to yield
margins for interest for each fiscal year equal to 1.10 times total interest
expense for the fiscal year. Margins for interest are defined in the Amended
Indenture as our assignable margins plus total interest expense on obligations
to repay borrowed money or the deferred purchase price of property or services
(other than from subordinated debt), income tax accruals and non-recurring
charges. We must also review Rates at least annually and promptly revise them to
comply with the margins for interest covenant subject to any necessary
regulatory approvals.
Depreciation Deposits Prior to Release Date
Until the Release Date, the Indenture requires us to deposit with the
Trustee, on or before July 1 of each year, cash (a "Depreciation Deposit") in an
amount equal to the excess (if any) obtained by subtracting the aggregate amount
of property acquired by us since July 1, 1991 that is subject to the lien of the
Indenture to the date of such Depreciation Deposit from our aggregate
depreciation expense incurred from January 1, 1992 through the end of the
calendar year immediately preceding the date of deposit. Depreciation Deposits
and other amounts deposited with the Trustee may be withdrawn on the basis of
Bondable Additions of property or retirement or defeasance of Obligations. To
date, we have not been required to make, and have not made, any Depreciation
Deposits.
The Indenture will not require us to make any Depreciation Deposits
after the Release Date.
Limitations on Issuance of Short-Term Debt Prior to Release Date
Until the Release Date, the Indenture prohibits us or any of our
subsidiaries from incurring or permitting to be outstanding any indebtedness
(other than trade payables) with an original maturity of less than one year or
which is redeemable at the option of the holder within one year from the date of
original issuance, if, after giving effect thereto, the outstanding principal
amount of such indebtedness (other than trade payables) would exceed 15% of our
net utility plant determined on a consolidated basis as of the end of the
immediately preceding fiscal quarter. Fifteen percent of our net utility plant
as of September 30, 2001 was approximately $72.2 million. This specific
restriction on our ability to issue short-term debt will end on the Release
Date.
Limitation on Certain Cash Investments Prior to Release Date
Until the Release Date, the Indenture prohibits us from investing or
directing the Trustee to invest more than 25% of the aggregate of (i) cash on
hand, (ii) moneys received by the Trustee following a release of property,
proceeds from a taking or insurance, or disposition of a portion of the trust
estate or other money the Indenture does not require to be applied in any other
manner, and (iii) cash deposited with the Trustee as a basis for Additional
Obligations, other than in (a) obligations unconditionally guaranteed by the
United States of America or certificates or other evidences of interests in
those obligations, (b) securities issued by any agency or instrumentality of the
United States of America or any corporation created pursuant to any act of
Congress, (c) commercial paper rated in either of the two highest rating
categories by a national credit rating agency, (d) demand or time deposits,
certificates of deposit and bankers' acceptances issued or accepted by any bank
or trust company having capital surplus and undivided profits aggregating at
least $50,000,000, (e) any non-convertible debt securities rated in any of the
three highest rating categories by a national credit rating agency, (f)
repurchase agreements that are secured by a perfected security interest in
securities listed in clauses (a) or (b) above entered into with a government
bond
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dealer recognized as a primary dealer by the Federal Reserve Bank of New York or
any bank described in clause (d) above, or (g) any short-term institutional
investment fund or account which invests solely in any of the foregoing
obligations. These restrictions on our cash investments will end on the Release
Date.
Book-Entry System; Exchangeability
Each series of the Bonds will be represented by one or more global
bonds that we will deposit with DTC or its agent. The Bonds will be registered
in the name of DTC's nominee, Cede & Co. The deposit of the Bonds with DTC and
their registration in the name of Cede & Co. will effect no change in beneficial
ownership. Upon the issuance of each global bond, DTC will credit the accounts
of persons held with it with the respective principal amounts of the Bonds
represented by such global bond designated by the Underwriters with respect to
the Bonds.
The Bonds will settle in DTC's Same-Day Funds Settlement System and
trade in that system in book-entry form until maturity. Therefore, secondary
market trading activity for the Bonds will settle in immediately available
funds. We will pay principal and interest to DTC in immediately available funds.
There can be no assurance as to the effect, if any, that settlement in
immediately available funds will have on trading activity in the Bonds.
DTC has advised as follows: It is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Banking Law, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act. DTC was created to hold securities for its
participating organizations and to facilitate the clearance and settlement of
securities transactions between participants in such securities through
electronic book-entry changes in accounts of its participants. Direct
participants include securities brokers and dealers (including the
underwriters), banks and trust companies, clearing corporations and certain
other organizations. Access to DTC's system is also available to indirect
participants such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a direct participants either
directly or indirectly. Persons who are not participants may beneficially own
securities held by DTC only through participants.
Under the terms of the Indenture, we and the trustee will treat the
persons in whose names the Bonds are registered as the owners of the Bonds for
the purpose of receiving payment of principal and interest on the Bonds and for
all other purposes. Except as set forth below, owners of beneficial interests in
a global bond representing the Bonds will not be entitled to have the Bonds
represented by such global bond registered in their names, will not receive or
be entitled to receive physical delivery of Bonds in definitive form and will
not be considered the owners or holders thereof under the Indenture including,
without limitation, for purposes of consenting to any amendment thereof or
supplement thereto.
DTC has no knowledge of the actual owners of beneficial interests in
the global bonds representing the Bonds. DTC's records reflect only the identity
of the direct participants to whose accounts the Bonds are credited, which may
or may not be the beneficial owners. Ownership of beneficial interests in global
bonds representing the Bonds will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC's
participants or persons that hold through DTC's participants. DTC's participants
will remain responsible for keeping account of their holdings on behalf of their
customers. The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a global bond.
Payment of principal of (and premium, if any) and interest, if any, on
Bonds registered in the name of or held by DTC or its nominee will be made to
DTC or its nominee, as the case may be, as the registered owner or the holder of
the global bonds representing the Bonds. We expect that DTC or its nominee, upon
receipt of any payment of principal of (and premium, if any) or interest on
global bonds, will credit participants' accounts on the date such payment is
payable in accordance with their respective beneficial interests in the
principal amount of such global bonds as shown on the records of DTC or its
nominee. We also expect that payments by participants to owners of beneficial
interests in such global bond held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name", and will be the responsibility of such participants. None of
Chugach, the Trustee, any Paying Agent or the Security Registrar for the Bonds
will have any responsibility or liability for any
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aspect of the records relating to or payments made on account of beneficial
ownership interests in a global bond for the Bonds or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
Unless and until exchanged in whole for Bonds in definitive form, a
global bond representing Bonds may not be transferred except as a whole by DTC
to DTC's nominee by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any such nominee to a successor of DTC or a nominee of such successor.
We have obtained the information in this section concerning DTC and
DTC's book-entry system from sources that we believe to be reliable. We take no
responsibility for the accuracy of such information.
If DTC is at any time unwilling or unable to continue as depositary for
the global bonds representing the Bonds and a successor depositary is not
appointed by us within 90 days, we will issue Bonds in definitive registered
form in exchange for the global bond or securities representing the Bonds. In
addition, we may at any time and in our sole discretion, determine not to have
any Bonds in registered form represented by one or more global bonds and, in
such event, will issue Bonds in definitive registered form in exchange for the
global bond or securities representing the Bonds. In any such instance, an owner
of a beneficial interest in a global bond will be entitled to physical delivery
in definitive form of Bonds represented by such global bond equal in principal
amount to such beneficial interest and to have the Bonds registered in the name
of the owner of such beneficial interest.
Additional Obligations
The aggregate principal amount of Obligations that may be issued under
the Indenture is not limited.
Issuance of Additional Bonds Prior to Release Date
Until the Release Date, additional obligations, ranking equally and
ratably with the Bonds, may be issued from time-to-time in the aggregate amount
of (i) 10/11 (90.909%) of the amount of Bondable Additions, (ii) the aggregate
principal amount of retired or defeased Obligations, and (iii) deposits of cash
with the Trustee.
We have approximately $130 million of Bondable Additions currently
available to support our issuance of additional debt. Taking into account the
issuance of the Bonds in this offering, the retirement of $5 million of
outstanding 1991 Series A Bonds maturing on March 15, 2002, and the redemption
on March 15, 2002, of $149 million of outstanding 1991 Series Bonds due 2022, we
will continue to have the capacity to issue approximately $108 million of
additional bonds under the Indenture as in effect prior to the Release Date,
plus the bondable value of all Property Additions after November 30, 2001,
minus the bondable value of all property subject to the lien of the Indenture
that is retired or disposed of after November 30, 2001 ("Retirements"). For the
purpose of calculating the amount of Property Additions and Retirements, the
bondable value of property is the lesser of its cost or fair value to us. Until
the Release Date, we cannot issue additional Obligations on the basis of
Bondable Additions or (where the new Obligations will accrue interest at a rate
greater than that accruing on the retired or deferred Obligations) retirement or
defeasance of Obligations unless we certify that (i) our margins for interest
(assignable margins plus interest expense, income tax accruals and non-recurring
charges) during a 12-month period within the 18-month period immediately
preceding its request for additional Obligations was at least 1.20 times total
interest expense during such 12-month period and (ii) the sum of our margins for
interest for such 12-month period plus the maximum annual interest (making
certain assumptions with respect to variable rate debt) that will accrue on the
additional Obligations to be issued (net of annual interest savings on any
Obligations and other obligations secured by liens prior to or equal in priority
with the lien of the Existing Indenture that are retired with the proceeds of
such additional Obligations) would equal at least 1.20 times the sum of the
total interest expense during such 12-month period plus such maximum annual
interest that will accrue on the additional Obligations to be issued (net of
interest on retired Bonds and other obligations secured by liens prior to or
equal in priority to the lien of the Existing Indenture).
If after the commencement of the period for which margins for interest
is being calculated, we acquire any property, or we will acquire with the
proceeds of the Obligations being issued any property which was, during the
6-month period prior to its acquisition, used in a business similar to ours,
then, in computing our margins for interest there shall be included, to the
extent not otherwise included, the net operating earnings or net operating
losses of such property for the entire 12-month period. The calculation of
margins for interest shall also be adjusted if an
52
independent engineer of favorable national repute determines that efficiencies,
inefficiencies or other effects likely to result from the acquisition are
significant enough to render the historical performance of the separate
properties an inaccurate indicator of the future performance of the combined
properties. The additional adjustment shall take into account the efficiencies,
inefficiencies or other effects to the extent determined by the independent
engineer.
Issuance of Additional Obligations After Release Date
Beginning on the Release Date, we may issue additional indebtedness
under the Amended Indenture, ranking equally and ratably with the Bonds, from
time-to-time as authorized by our Board of Directors. Before issuing any
additional indebtedness on or after the Release Date, we must certify that our
margins for interest during a 12 consecutive month period within the 18-month
period immediately preceding our request to the Trustee for authentication of
additional indebtedness under the Amended Indenture was at least 1.10 times
total interest expense during such 12-month period. The additional indebtedness
that we may issue may contain provisions for, among other things, optional
redemption, prepayment, amortization of principal, and covenants and events of
default that differ from the terms of the Bonds.
The aggregate principal amount of Additional Obligations which may be
authenticated and delivered and Outstanding under the Indenture is not otherwise
limited, except as provided in the provisions of any supplemental indenture
creating any series of Obligations and except as may be limited by law.
Limitation on Distributions to Members
The Indenture prohibits us from making any distribution of patronage
capital (each a "Distribution") to our members prior to the Release Date if,
giving effect to such Distribution, (i) an Event of Default then exists or (ii)
the aggregate amount expended for Distributions after September 15, 1991 would
exceed the sum of $7 million plus 35% of our aggregate assignable margins earned
after December 31, 1990. This restriction does not apply if, giving effect to a
Distribution, our aggregate equities and margins would equal at least 45% of our
total liabilities and equities as of the end of the immediately preceding fiscal
quarter. At September 30, 2001, we could have distributed $4.1 million to our
members. In December 2001, we distributed $3 million of patronage capital to our
members.
Beginning on the Release Date, the Indenture will prohibit us from
making any Distribution if, giving effect to a Distribution, (i) an Event of
Default exists, or (ii) our aggregate equities and margins as of the end of our
most recent fiscal quarter would be less than 30% of our total long-term debt
and equities at such time. Notwithstanding these restrictions, we would be
permitted, in any fiscal year, to make a Distribution of up to the lesser of (A)
5% of our aggregate equities and margins as of the end of the immediately
preceding fiscal year or (B) 50% of the prior fiscal year's margins. For this
purpose, aggregate equities and margins and total long-term debt and equities
shall not include any earnings retained in any of our subsidiaries or affiliates
or the debt of any subsidiary or affiliate.
Events of Default and Remedies
Events of Default under the Indenture are:
o failure to pay principal of or premium, if any, on any Obligation when
due (subject to any applicable grace period);
o failure to pay any interest on any Obligation when due, continued
beyond any applicable grace period (the duration of which, unless
specified otherwise is such Obligation, is 30 days);
o any other breach by us of any of our warranties or covenants contained
in the Indenture, continued for 30 days after written notice as
provided in the Indenture;
o failure to pay when due any portion of the principal of any of
indebtedness for money borrowed (other than pursuant to the
Indenture), which failure resulted in the indebtedness becoming due or
being declared due and payable prior to the date on which it would
otherwise have become due and payable, in an aggregate amount in
excess of $1 million ($10 million after the Release Date) unless such
53
indebtedness is discharged or such acceleration rescinded within 10
days after such acceleration (and, for nonpayment or acceleration
prior to the Release Date, continuance of such default for a period of
30 days after notice thereof from the Trustee or the Holders of at
least 10% in principal amount of the Obligations); or
o certain other proceedings in bankruptcy, receivership, insolvency,
liquidation or reorganization.
In addition, it is an Event of Default after the Release Date if a judgment
against us in an amount exceeding $10 million is not discharged or stayed within
the period ending on the later of (i) 30 days after the judgment date or
expiration of any such stay and (ii) 10 days after written notice of default
from the Trustee or holders of at least 10% of the principal amount of the
Outstanding Obligations.
Subject to the provisions of the Indenture relating to the duties of
the Trustee in case an Event of Default shall occur and be continuing, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the Holders, unless
such Holders shall have offered to the Trustee indemnity reasonably satisfactory
to the Trustee. Subject to such provisions for the indemnification of the
Trustee, the Holders of a majority in aggregate principal amount of the
Outstanding Obligations will have the right to require the Trustee to proceed to
enforce the Indenture and to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee to the extent the discretion is not in conflict
with law and the Trustee has determined that the action is not unjustly
prejudicial to non-directing holders.
If an Event of Default shall occur and be continuing, either the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Outstanding Obligations may accelerate the maturity of all Obligations. However,
after such acceleration, but before a judgment or decree based on acceleration,
the Holders of a majority in aggregate principal amount of Outstanding
Obligations may, under certain circumstances, rescind such acceleration if,
among other things, all Events of Default, other than the non-payment of
accelerated principal, have been cured or waived as provided in the Indenture.
No Holder of any Obligation will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
(i) such Holder shall have previously given to the Trustee written notice of a
continuing Event of Default, (ii) the Holders of at least 25% in aggregate
principal amount of the Outstanding Obligations shall have made written request
and offered indemnity reasonably satisfactory to the Trustee to institute such
proceeding as trustee, (iii) the Trustee for 60 days after its receipt of such
notice, request and indemnity shall have failed to institute any such
proceeding, and (iv) the Trustee shall not have received from the Holders of a
majority in aggregate principal amount of the Outstanding Obligations a
direction inconsistent with such request during such 60-day period. However,
such limitations on the Holders' rights to institute proceedings do not apply to
a suit instituted by a Holder of an Obligation for the enforcement of payment of
the principal of and premium, if any, or interest on such Obligation on or after
the respective due date stated therein. If an Event of Default affects the
Holders of the Bonds only, any action previously described that requires the
approval of Holders of Obligations can be taken by the Holders of the Bonds
alone in the same percentage.
The Indenture provides that the Trustee, within 90 days after the
occurrence of an Event of Default, shall give to the Holders of Obligations
notice of all uncured defaults known to it, except that in the case of a default
in the payment of principal of, premium (if any), sinking fund payment or
interest on any Obligations, the Trustee shall be protected in withholding such
notice if it in good faith determines that the withholding of such notice is in
the interest of the Holders of the Obligations.
The Indenture provides that in case an Event of Default shall occur and
be continuing, the Trustee shall exercise such of its rights and powers under
the Indenture, and use the same degree of care and skill in their exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his own affairs.
If an Event of Default occurs and is continuing prior to the Release
Date, the Trustee may sell the Trust Estate, in either judicial or nonjudicial
proceedings. The proceeds from disposition of the Trust Estate prior to the
Release Date, and any other moneys collected by the Trustee in the exercise of
any remedies available to it on behalf of the Holders, shall, after payment of
amounts owing to the Trustee, be applied as follows: (i) if all Obligations
54
shall have become due and payable, to the payment of Outstanding Obligations
without preference or priority between interest or principal or among
Obligations, (ii) if any principal shall not have become due and payable, then
(A) first to interest installments in the order of their maturity and (B) second
to principal or redemption price.
Following the Release Date, money collected by the Trustee following an
Event of Default shall be applied as follows: (i) to the payment of all amounts
due the Trustee; (ii) if all Obligations shall have become due and payable, to
the payment of Outstanding Obligations without preference or priority between
interest or principal (and premium, if any) or among Obligations; (iii) if any
principal shall not have become due and payable, then (A) first to interest
installments in the order of their maturity and (B) second to principal or
premium.
Prior to the date the Trustee obtains a judgment for the payment of
money due, the Holders of at a majority in principal amount of the Outstanding
Obligations, by written notice to the Trustee, may waive any past defaults,
except a default in payment of the principal or interest on any Obligation, or
in respect of any covenant or provision that by its terms cannot be modified or
amended without the consent of the Holder of each Obligation affected. Upon any
such waiver, the default shall cease to exist and any Event of Default arising
therefrom shall be deemed cured.
Because MBIA is a credit enhancer with respect to the Bonds, MBIA--and
not the actual Holders of the Bonds--will have the right to exercise any
remedies that would otherwise be exercisable by the Holders of the Bonds under
the Indenture. See "Rights of Insurer." The Indenture requires us to deliver to
the Trustee, within 120 days after the end of each fiscal year, a written
statement as to our compliance (determined without regard to any grace period or
notice requirement) with all conditions and covenants under the Indenture. In
addition, we required to deliver to the Trustee, promptly after any of our
officers may be reasonably deemed to have knowledge of a default under the
Indenture, a written notice specifying the nature and duration of the default
and the action we are taking and propose to take with respect thereto.
Amendments and Supplemental Indentures
Without the Consent of Holders
Without the consent of the Holders of any Obligations, we and the
Trustee may from time-to-time enter into one or more supplemental indentures to
add to the conditions, limitations and restrictions on the authorized amount,
terms or purposes of the issue, authentication and delivery of Obligations or of
any series of Obligations under the Indenture; to create any new series of
Obligations; to evidence the succession of another corporation and the
assumption by any such successor of our covenants; to add to our covenants or to
surrender any of our rights or powers; to cure any ambiguity, to correct or
supplement any provision in the Indenture which may be inconsistent with any
other provision or to make any other provisions, with respect to matters or
questions arising under the Indenture, which shall not be inconsistent with the
provisions of the Indenture, provided such action shall not adversely affect the
interests of the Holders of the Obligations in any material respect; to modify,
eliminate or add to the provisions of the Indenture to the extent necessary to
effect the qualification of the Indenture under the Trust Indenture Act of 1939,
as amended (the "1939 Act"), or under any similar federal statute hereafter
enacted; or to make any other change in the Indenture that, in the reasonable
judgment of the Trustee, will not materially and adversely affect the rights of
Holders of Obligations. Prior to the Release Date, we and the Trustee may also
enter into one or more supplemental indentures, without the consent of Holders
of Obligations, to correct or amplify the description of any property at any
time subject to the lien of the Indenture, to confirm property subject or
required to be subjected to the lien of the Indenture, or to subject additional
property to the lien of the Indenture.
Effective from and after the Release Date, without the consent of the
Holders of any Obligations, we and the Trustee may also from time-to-time,
without the consent of Holders of Obligations, enter into one or more
supplemental indentures to evidence the appointment of any successor trustee or
separate trustee and to define the rights, powers, duties and obligations
conferred upon any such separate trustee or trustees or to add or change the
Indenture to such extent as necessary to permit or facilitate the issuance of
Obligations in bearer form, registrable or not registrable as to principal and
with or without interest coupons or in book-entry form.
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With the Consent of the Holders
With the consent of the Holders of not less than a majority in
principal amount of the Obligations of all series then Outstanding affected by
such supplemental indenture, we and the Trustee may enter into one or more
supplemental indentures to add, change or eliminate any of the provisions of the
Indenture or modify the rights of the Holders of Obligations, but no such
supplemental indenture shall, without the consent of the Holder of each
Outstanding Obligation affected thereby, change the Stated Maturity of or reduce
the principal of, or any installment of interest on, any Obligation, or any
premium payable upon the redemption thereof, or change any Place of Payment
where any Obligation, or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof (or, in the case of redemption, on or after the Redemption
Date); reduce the percentage in principal amount of the Outstanding Obligations
the consent of the Holders of which is required for various purposes; modify
what constitutes an Outstanding Obligation, modify the Indenture in such a
manner as to affect the rights of the Holders to the benefits of the sinking
fund; modify the Indenture as to the application of moneys received by the
Trustee; or permit (prior to the Release Date) the creation of any lien ranking
prior to or on a parity with the lien of the Indenture with respect to any of
the Trust Estate.
Defeasance
The Indenture provides that Obligations of any series will be deemed to
have been paid, and (subject to receipt of certain rulings or opinions relating
to tax matters) all obligations of the Company to the holders of such
Obligations will be discharged, if we deposit with the Trustee Defeasance
Securities the principal and interest on which when due, together with cash
deposited by us with the Trustee, will provide moneys sufficient to pay when due
the principal or (if applicable) Redemption Price and interest due and to become
due on such Obligations. Defeasance Securities are defined to include bonds or
other obligations the principal and interest on which constitute direct
obligations of, or are unconditionally guaranteed by, the U.S. Government,
certain AAA-rated, pre-refunded municipal bonds, and certificates of interest or
participation in any such obligations, or in specified portions thereof. If
sufficient Defeasance Securities are deposited with respect to Obligations of
any series at any time at which the Indenture imposes a lien on any of our
property or assets, any such lien of the Indenture shall be deemed to have been
extinguished with respect to the Obligations of such series.
Trustee, Paying Agent
The Trustee and Paying Agent under the Indenture is U.S. Bank National
Association.
CERTAIN FEDERAL INCOME TAX MATTERS
Qualification as a Tax-Exempt Entity
We currently qualify for exemption from federal income tax under
Section 501(c)(12) of the Code. In order to maintain our qualification as a
tax-exempt entity as an organization described in Section 501(c)(12) of the
Code, we must operate on a cooperative basis and at least 85% of our income must
consist of amounts collected from members for the sole purpose of meeting losses
and expenses.
Unrelated Business Taxable Income
Entities like us that are exempt from federal income tax under Section
501(a) of the Code are nonetheless subject to tax on the amount of their
"unrelated business taxable income." Unrelated business taxable income is income
derived from an "unrelated trade or business" regularly carried on by a
tax-exempt entity. The Code defines an unrelated trade or business, in general,
as a trade or business the conduct of which is not substantially related to the
exercise or performance by the tax-exempt entity of the purpose or function
constituting the basis for its tax exemption.
UNDERWRITING
Subject to the terms and conditions in the Underwriting Agreement (the
"Underwriting Agreement"), between us and J.P. Morgan Securities Inc. (the
"Underwriter"), we have agreed to sell the entire amount of the
56
bonds to the Underwriter. The Underwriting Agreement provides that the
obligations of the Underwriter to pay for and accept delivery of the bonds is
subject to approval of certain legal matters by its counsel and other
conditions. The Underwriter is committed to purchase all of the bonds if any are
purchased.
The Underwriter has advised us that it proposes to offer all or part of
the bonds directly to the public initially at the offering price set forth on
the cover page of this Prospectus. After the initial offering, the public
offering prices and concessions may be changed.
We have agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriter may be required to make in connection with the sale of
the bonds.
The Bonds have no established trading market and no assurance can be
given as to the liquidity of, or the existence of a trading market for, the
Bonds. The Underwriter has advised us that it intends to make a market in the
Bonds but is not obligated to do so and may discontinue making a market at any
time without notice. In order to facilitate the offering of the Bonds, the
Underwriter may engage in transactions that stabilize, maintain or otherwise
affect the price of the Bonds. Specifically, the Underwriter may overallot in
connection with the offering, creating a short position in the Bonds for its own
account. In addition, to cover over allotments or to stabilize the price of the
Bonds, the Underwriter may bid for, and purchase the Bonds in the open market.
Any of these activities may stabilize or maintain the market price of the Bonds
above independent market levels. The Underwriter is not required to engage in
these activities and may end any of the activities at any time.
The Underwriter may engage in transactions with and perform services
for us from time-to-time in the ordinary course of business.
LEGAL OPINIONS
Heller Ehrman White & McAuliffe LLP, Seattle, Washington, will pass
upon the legality of the Bonds for us. Orrick, Herrington & Sutcliffe LLP, New
York, New York, will pass upon certain legal matters in connection with the
Bonds for the Underwriter.
EXPERTS
The financial statements and schedule of Chugach Electric Association,
Inc. as of December 31, 2000 and 1999, and for each of the years in the
three-year period ended December 31, 2000, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
accountants, appearing elsewhere herein, and upon said authority of the firm as
experts in accounting and auditing.
WHERE TO FIND ADDITIONAL INFORMATION ABOUT CHUGACH
We have filed with the SEC a registration statement on a Form S-1. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information included in the registration statement. You may
review a copy of the registration statement, including exhibits, at the SEC's
public reference room at Judiciary Plaza, 450 Fifth Street, N.W., Washington
D.C. 20549. You can also obtain copies of these documents, upon payment of a
duplicating fee, by writing to the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330
for further information about the public reference room. Our SEC filings are
also available to the public from the SEC's web site at http://www.sec.gov.
The Indenture requires us to file reports under the Securities Exchange
Act. Quarterly and annual reports will be made available upon request of holders
of the Bonds, which annual reports will contain financial information that has
been examined and reported upon by, with an opinion expressed by, an independent
public or certified public accountant.
57
FINANCIAL STATEMENTS AND SCHEDULE INDEX
<Table>
<Caption>
Financial Statements Pages
Independent Auditors' Report................................................................F-2
Balance Sheets, September 30, 2001 (Unaudited),
December 31, 2000 and 1999..............................................................F-3
Statements of Revenues, Expenses and Patronage Capital, Nine-Months Ended
September 30, 2001 and 2000 (Unaudited), Years ended December 31, 2000,
1999 and 1998...........................................................................F-4
Statements of Cash Flows, Nine-Months Ended September 30, 2001 and 2000
(Unaudited), Years ended December 31, 2000, 1999 and 1998...............................F-5
Notes to Financial Statements...............................................................F-6 to F-20
Financial Statement Schedule
Schedule - Valuation and Qualifying Accounts, Nine-Months Ended
September 30, 2001 (Unaudited), Years ended December 31,
2000, 1999 and 1998.....................................................................F-21
</Table>
F-1
Independent Auditors' Report
The Board of Directors
Chugach Electric Association, Inc.
We have audited the financial statements of Chugach Electric
Association, Inc. as listed in the accompanying index. In connection with our
audits of the financial statements, we have also audited the financial statement
schedule as listed in the accompanying index. These financial statements and
financial statement schedule are the responsibility of the Association's
management. Our responsibility is to express an opinion on these financial
statements and financial statements schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Chugach Electric
Association, Inc. as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Anchorage, Alaska
February 23, 2001, except as to note 17, which is as of March 6, 2001
F-2
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
September 30, 2001, December 31, 2000 and 1999
<Table>
<Caption>
Assets September 30, 2001 December 31, 2000 December 31, 1999
------------------ ----------------- -----------------
(unaudited)
Utility plant (notes 2, 6, 13 and14):
Electric plant in service $ 703,708,999 $ 687,127,130 $ 641,627,328
Construction work in progress 37,697,915 42,027,617 47,257,296
------------------ ----------------- -----------------
741,406,914 729,154,747 688,884,624
Less accumulated depreciation (260,069,559) (259,999,872) (243,082,832)
------------------ ----------------- -----------------
Net utility plant 481,337,355 469,154,875 445,801,792
------------------ ----------------- -----------------
Other property and investments, at cost:
Nonutility property 3,550 443,555 413,515
Investments in associated
organizations (note 3) 9,937,216 9,857,153 8,946,861
------------------ ----------------- -----------------
9,940,766 10,300,708 9,360,376
------------------ ----------------- -----------------
Current assets:
Cash and cash equivalents, including
repurchase agreements of $7,162,211
at September 30, 2001, $3,905,283
in 2000 and $6,574,457 in 1999 5,842,617 1,695,162 4,110,030
Cash-restricted construction funds 180,293 378,848 538,404
Special deposits 222,163 212,163 182,164
Accounts receivable, less provisions
for doubtful accounts of $576,702
at September 30, 2001, $441,933
in 2000 and $389,223 in 1999 19,490,052 19,200,912 17,730,994
Fuel cost recovery 1,606,783 2,915,733 180,755
Materials and supplies 14,981,362 15,357,198 17,180,136
Prepayments 1,512,434 755,276 861,947
Other current assets 352,925 332,246 341,702
------------------ ----------------- -----------------
Total current assets 44,188,629 40,847,538 41,126,132
------------------ ----------------- -----------------
Deferred charges (notes 6, 9 and 15) 37,954,701 19,442,859 22,067,237
------------------ ----------------- -----------------
$ 573,421,451 $ 539,745,980 $ 518,355,537
================== ================= =================
</Table>
<Table>
<Caption>
Liabilities and Equities September 30, 2001 December 31, 2000 December 31, 1999
------------------ ----------------- -----------------
(unaudited)
Equities and margins (note 11):
Memberships $ 1,046,623 $ 1,009,663 $ 960,808
Patronage capital (note 4) 125,670,594 122,925,253 117,335,481
Other (note 5) 4,726,846 4,880,424 4,228,356
------------------ ----------------- -----------------
131,444,063 128,815,340 122,524,645
------------------ ----------------- -----------------
Long-term obligations, excluding current
installments (notes 6, 7 and 11):
2001 Series A bonds payable 150,000,000 0 0
First Mortgage bonds payable 154,310,000 169,542,000 194,139,000
National Bank for Cooperatives
bonds payable 65,000,000 142,677,945 143,011,295
------------------ ----------------- -----------------
369,310,000 312,219,945 337,150,295
------------------ ----------------- -----------------
Current liabilities:
Current installments of long-term
obligations (notes 6, 7 and 11) 10,409,945 6,430,350 6,372,405
Short-term borrowings (note 6) 5,000,000 40,000,000 0
Accounts payable 3,487,720 9,493,875 9,508,851
Consumer deposits 1,548,300 1,324,213 1,059,677
Accrued interest 1,402,741 5,861,390 6,066,114
Salaries, wages and benefits 4,709,359 4,586,407 4,053,228
Fuel 9,278,144 8,154,559 4,381,304
Estimated settlement of rate lock
agreement 15,684,930 0 0
Other current liabilities 1,411,570 1,434,562 2,527,798
------------------ ----------------- -----------------
Total current liabilities 52,932,709 77,285,356 33,969,377
------------------ ----------------- -----------------
Deferred credits (note 12) 19,734,679 21,425,339 24,711,220
------------------ ----------------- -----------------
$ 573,421,451 $ 539,745,980 $ 518,355,537
================== ================= =================
</Table>
See accompanying notes to financial statements.
F-3
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
Nine-Months ended September 30, 2001 and 2000,
Years ended December 31, 2000, 1999 and 1998
<Table>
<Caption>
Nine-Months ended
September 30, Year ended December 31,
---------------------------- ----------------------------------------------
2001 2000 2000 1999 1998
------------- ------------- ------------- ------------- --------------
(unaudited)
Operating revenues $ 126,400,956 $ 114,258,272 $ 158,541,114 $ 142,644,327 $ 141,825,373
Operating expenses:
Power Production 47,587,932 36,257,283 52,726,374 40,301,607 45,261,450
Purchased power 9,147,759 7,072,014 9,152,248 8,581,979 8,462,835
Transmission 2,731,599 2,491,633 3,828,630 3,813,438 2,771,652
Distribution 7,260,234 7,521,075 9,774,860 9,400,618 8,876,890
Consumer accounts /
Information expense 4,042,754 3,995,952 5,275,455 4,387,421 4,177,980
Sales expense 352,051 817,221 1,112,804 1,227,908 1,125,410
Administrative, general and
other 13,951,269 14,743,566 21,343,393 22,892,479 17,592,829
Depreciation and amortization 18,678,752 17,180,273 23,216,509 19,851,436 22,468,395
------------- ------------- ------------- ------------- --------------
Total operating expenses 103,752,350 90,079,017 126,430,273 110,456,886 110,737,441
------------- ------------- ------------- ------------- --------------
Interest Expense:
On long-term obligations 20,116,937 18,856,861 24,987,033 24,137,593 25,159,660
Charged to construction-credit (814,285) (1,706,470) (2,178,425) (1,000,246) (821,137)
------------- ------------- ------------- ------------- --------------
On short-term obligations 1,105,954 1,083,306 1,909,682 998,034 130,146
Net interest expense 20,408,606 18,333,697 24,718,290 24,135,381 24,468,669
------------- ------------- ------------- ------------- --------------
Net operating margins 2,240,000 5,845,558 7,392,551 8,052,060 6,619,263
------------- ------------- ------------- ------------- --------------
Nonoperating margins:
Interest income 536,828 513,235 703,807 592,208 711,155
Other 381,818 338,706 1,615,161 1,003,029 1,050,899
------------- ------------- ------------- ------------- --------------
Property gain (loss) (180,456) (15,170) (31,741) 20,137 349,087
------------- ------------- ------------- ------------- --------------
Assignable margins 2,978,190 6,682,329 9,679,778 9,667,434 8,730,404
Patronage capital at beginning of
period 122,925,253 117,335,481 117,335,481 109,622,996 104,800,092
------------- ------------- ------------- ------------- --------------
Retirement of capital credits and
estate payments (note 4) (232,849) (287,544) (4,090,006) (1,954,949) (3,907,500)
------------- ------------- ------------- ------------- --------------
Patronage capital at end of period $ 125,670,594 $ 123,730,266 $ 122,925,253 $ 117,335,481 $ 109,622,996
============= ============= ============ ============= =============
</Table>
See accompanying notes to financial statements.
F-4
CHUGACH ELECTRIC ASSOCIATION, INC.
Statement of Cash Flows
Nine-Months ended September 30, 2001 and 2000,
Years ended December 31, 2000, 1999 and 1998
<Table>
<Caption>
Nine-Months ended
September 30, Year ended December 31,
----------------------------- ----------------------------------------------
Cash flows from operating activities: 2001 2000 2000 1999 1998
- ------------------------------------- ------------- ------------- -------------- ------------ --------------
(unaudited)
Assignable margins ............................... $ 2,978,190 $ 6,682,329 $ 9,679,778 $ 9,667,434 $ 8,730,404
- -------------------------------------------------- ------------- ------------- ------------- ------------- -------------
Adjustments to reconcile assignable margins to
net cash provided by operating activities:
Depreciation and amortization ............... 22,379,953 20,417,900 27,575,408 23,563,805 24,605,760
Capitalization of equity allowance .......... (233,837) (304,883) (340,838) (151,474) (260,258)
Property (gains) losses and obsolete
inventory write off ......................... (190,456) 8,854 (25,425) 242 (349,087)
Other ....................................... (115) (1,489) (1,155) (221) 60,734
Changes in assets and liabilities:
(Increase) decrease in assets:
Special Deposits ........................ (10,000) 0 (29,999) (61,000) 30,540
Accounts receivable ..................... (289,140) 4,794,167 (1,469,918) (1,049,512) 2,549,024
Fuel cost recovery ...................... 1,308,950 (844,996) (2,734,978) 381,029 4,206,848
Prepayments ............................. (757,158) (451,193) 106,671 55,434 (359,010)
Materials and supplies .................. 375,836 (326,189) 1,822,938 (1,216,702) (344,349)
Deferred charges ........................ (6,385,230) (2,383,437) (1,231,531) (14,179,418) (7,898,240)
Other assets ............................ (20,680) (21,738) 9,456 7,328 (43,615)
Increase (decrease) in liabilities:
Accounts payable ........................ (6,006,155) (4,840,628) (14,976) 670,093 1,800,524
Accrued interest ........................ (4,458,649) (4,380,345) (204,724) (656,211) (182,010)
Deferred credits ........................ (1,504,988) (3,498,625) (3,638,491) (2,973,944) (1,829,112)
Consumer deposits ....................... 224,087 109,726 264,536 66,061 (44,625)
Other liabilities ....................... 1,223,545 1,034,264 3,213,198 524,833 (3,129,329)
------------- ------------- ------------- ------------- -------------
Net cash provided by operating activities 8,634,153 15,993,717 32,979,950 14,647,777 27,544,199
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Extension and replacement of plant ............... (30,139,816) (31,035,710) (46,736,359) (41,864,828) (20,269,038)
Increase investments in associated organizations . (79,948) (42,567) (909,137) (590,276) (552,827)
------------- ------------- ------------- ------------- -------------
Net cash (used) in investing activities . (30,219,764) (31,078,277) (47,645,496) (42,455,104) (20,821,865)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Net change in bank overdraft ..................... -- 1,758,843 -- 0 0
Short-term borrowings, net ....................... (35,000,000) 33,966,659 40,000,000 0 0
Proceeds from long-term obligations .............. 150,000,000 -- -- 72,500,000 0
Repayments of long-term obligations ......... (88,930,350) (24,872,405) (24,872,405) (40,983,801) (5,913,512)
Retirement of patronage capital .................. (232,849) (287,544) (4,090,006) (1,954,949) (3,907,500)
Other ....................................... (103,735) 408,977 1,213,089 43,533 186,723
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities .................... 25,733,066 10,974,530 12,250,678 29,604,783 (9,634,289)
------------- ------------- ------------- ------------- -------------
Net change in cash and cash equivalents . 4,147,455 (4,110,030) (2,414,868) 1,797,456 (2,911,955)
Cash and cash equivalents at beginning of period . $ 1,695,162 $ 4,110,030 $ 4,110,030 $ 2,312,574 $ 5,224,529
- -------------------------------------------------- ------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of period ....... $ 5,842,617 $ 0 $ 1,695,162 $ 4,110,030 $ 2,312,574
- -------------------------------------------------- ============= ============= ============= ============= =============
Supplemental disclosure of cash flow
information - interest expense paid, net of
amounts capitalized .............................. $ 24,867,255 $ 22,714,043 $ 24,917,014 $ 24,791,592 $ 24,650,680
- -------------------------------------------------- ============= ============= ============= ============= =============
Non-Cash Transaction - Estimated settlement of
rate lock agreement .............................. $ 15,684,930 $ 0 $ 0 $ 0 $ 0
============= ============= ============= ============= =============
</Table>
See accompanying notes to financial statements.
F-5
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
December 31, 2000, 1999 and 1998
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Chugach Electric Association, Inc. (Association or Chugach) is the
largest electric utility in Alaska. The Association is engaged in the
generation, transmission and distribution of electricity to directly served
retail customers in the Anchorage and upper Kenai Peninsula areas. Through an
interconnected regional electrical system, Chugach's power flows throughout
Alaska's Railbelt, a 400-mile-long area stretching from the coastline of the
southern Kenai Peninsula to the interior of the state, including Alaska's
largest cities, Anchorage and Fairbanks.
Chugach also supplies much of the power requirements of three wholesale
customers, Matanuska Electric Association (MEA), Homer Electric Association
(Homer) and the City of Seward (Seward).
The Association operates on a not-for-profit basis and, accordingly,
seeks only to generate revenues sufficient to pay operating and maintenance
costs, the cost of purchased power, capital expenditures, depreciation, and
principal and interest on all indebtedness and to provide for reasonable margins
and reserves. The Association is subject to the regulatory authority of the
Regulatory Commission of Alaska (RCA), (formerly the Alaska Public Utilities
Commission (APUC)).
Management Estimates
In preparing the financial statements, management of the Association is
required to make estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities as of
the date of the balance sheet and revenues and expenses for the reporting
period. Actual results could differ from those estimates.
Regulation
The accounting records of the Association conform to the Uniform System of
Accounts as prescribed by the Federal Energy Regulatory Commission. The
Association meets the criteria, and accordingly, follows the accounting and
reporting requirements of Statement of Financial Accounting Standards No. 71,
Accounting for the Effects of Certain Types of Regulation (SFAS 71). Revenues
in excess of current period costs (net operating margins and nonoperating
margins) in any year are designated on the Association's statement of revenues
and expenses as assignable margins. Retained assignable margins are designated
on the Association's balance sheet as patronage capital, which is assigned to
each member on the basis of patronage. This patronage capital constitutes the
principal equity of the Association.
Reclassifications
Certain reclassifications have been made to the 1998 and 1999 financial
statements to conform to the 2000 presentation.
Plant Additions and Retirements
Additions to electric plant in service are recorded at original cost of
contracted services, direct labor and materials, and indirect overhead charges.
For property replaced or retired, the average unit cost of the property unit,
plus removal cost, less salvage, is charged to accumulated provision for
depreciation. The cost of replacement is added to electric plant.
Operating Revenues
Operating revenues are based on billing rates authorized by the RCA, which are
applied to customers' usage of electricity. Included in operating revenue are
billings rendered to customers adjusted for differences in meter read dates from
year to year. The Association's tariffs include provisions for the flow through
of gas costs pursuant to existing gas supply contracts.
F-6
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
Chugach entered into a settlement agreement with MEA and Homer in 1996. The
settlement agreement was designed to resolved a number of ratemaking disputes
and assure MEA and Homer that their base rates would be no higher than those
based on 1995 costs and would be reduced (and refunds given) if our 1996, 1997
or 1998 test year costs to serve their needs were significantly reduced. The RCA
has required Chugach to make filings of Chugach's cost of service to facilitate
determination of any refunds owed under the settlement agreement.
Calculations based on 1996 costs indicated that a rate reduction was required
and that a refund was owed for the previous periods. Chugach recorded provisions
for wholesale rate refunds that totaled $2,651,361 as of December 31, 1999.
Early in 2000, refunds of $86,132 were issued to Homer and $1,809,801 to MEA
that represented uncontested amounts owed consistent with the 1996 test year
filing.
In June 2000, the RCA issued its final order approving the 1996 test year cost
of service. As a result of this order, additional refunds were issued to MEA and
Homer in the amounts of $332,157 and $503,272, respectively, on July 25, 2000.
Consistent with the Settlement Agreement, these refunds were based on demand and
energy purchases retroactive to January 1, 1997.
The process for RCA, MEA and Homer review of 1997 test year costs is nearly
complete. An order from the RCA was received February 27, 2001, and no rate
reduction or refunds were required. Both MEA and Chugach have filed petitions
for reconsideration of this order.
The 1998 test year cost calculation is currently being reviewed by the RCA.
Management believes that no rate reduction or refund will be required based on
the 1998 test year.
The RCA has required that Chugach file a general rate case based on the 2000
test year by June 30, 2001. This filing may request a modest increase in base
rates.
In 1998 a power sales agreement was negotiated between Chugach and Seward. The
contract was approved by the RCA on June 14, 1999 for a three-year term, which
expires on September 1, 2001. The parties have recently negotiated and executed
an Amendment, extending the term of the contract to January 31, 2006, subject to
approval by the RCA.
In October 1998 Marathon Oil Company, one of Chugach's natural gas suppliers,
notified Chugach that it had reached a settlement with the State of Alaska
regarding additional excise and royalty taxes for the period 1989 through 1998.
In accordance with the purchase contract, Chugach would be responsible for these
additional taxes. The RCA approved Chugach's plan to recover this over 12 months
through the Fuel Surcharge mechanism except for the retail portion in the amount
of $436,778 that was written-off at December 31, 1998. Recovery of this expense
in rates continued from April 1, 1999 through April 1, 2000. Despite RCA
approval and subsequent re-confirmation by the RCA, MEA has refused to pay the
portion of its monthly bill it considers to be recovery of the Marathon tax.
Effective December 20, 2000, by the Superior Court for the State of Alaska, MEA
was ordered to pay $298,004, representing the unpaid tax liability and
associated litigation costs. MEA has appealed this order to the Alaska Supreme
Court.
Investments in Associated Organizations
Investments in associated organizations represent capital requirements as part
of financing arrangements. These investments are non-marketable and accounted
for at cost.
Deferred Charges and Credits
Deferred charges, representing regulatory assets, are amortized to operating
expense over the period allowed for rate-making purposes, generally five years.
Nonrefundable contributions in aid of construction are credited to the
associated cost of construction of property units. Refundable contributions in
aid of construction are held in deferred credits pending their return or other
disposition.
F-7
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
Depreciation and Amortization
Depreciation and amortization rates have been applied on a straight-line basis
and at December 31, 2000 are as follows:
Rate (%)
Steam production plant 2.70 - 2.96
Hydraulic production plant 1.33 - 2.88
Other production plant 3.34 - 6.50
Transmission plant 1.85 - 5.37
Distribution plant 2.10 - 4.55
General plant 2.22 - 20.00
Other 1.88 - 2.75
In 1997 an update of the Depreciation Study was completed utilizing Electric
Plant in Service balances as of December 31, 1995. Depreciation rates developed
in that study were implemented in January, 1998. In 2000 another update of the
study was completed. Depreciation rates determined in that study will be
implemented upon approval by the RCA.
Capitalized Interest
Allowance for funds used during construction and interest charged to
construction - credit are the estimated costs during the period of construction
of equity and borrowed funds used for construction purposes. The Association
capitalized such funds at the average rate (adjusted monthly) of 7.9% during
2000, 7.4% during 1999 and 8.3% during 1998.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Association considers all
highly liquid debt instruments with a maturity of three months or less upon
acquisition by the Association (excluding restricted cash and investments) to be
cash equivalents.
Materials and Supplies
Materials and supplies are stated at the lower of cost or market and valued at
average cost.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards 107, Disclosures About the Fair
Value of Financial Instruments, requires disclosure of the fair value of certain
on and off balance sheet financial instruments for which it is practicable to
estimate that value. The following methods are used to estimate the fair value
of financial instruments:
Cash and cash equivalents and restricted cash - the carrying amount approximates
fair value because of the short maturity of those instruments.
Investments in associated organizations - the carrying amount approximates fair
value because of limited marketability and the nature of the investments.
Consumer deposits - the carrying amount approximates fair value because of the
short refunding term.
Long-term obligations - the fair value is estimated based on the quoted market
price for same or similar issues (note 7).
Forward rate lock agreements - the fair value is estimated based on discounted
cash flow using current rates.
F-8
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
Financial Instruments and Hedging
The Association uses U.S. Treasury forward rate lock agreements to hedge
expected interest rates on probable debt refinancings. Under the guidance of
SFAS No. 80, Accounting for Futures Contracts, the Association has accounted for
the treasury rate lock agreement as a hedge. Accordingly, the unrealized gain or
loss has not been recorded and will be treated as a regulatory asset or
liability upon settlement (note 6).
Income Taxes
The Association is exempt from federal income taxes under the provisions of
Section 501(c)(12) of the Internal Revenue Code, except for unrelated business
income. For the years ended December 31, 2000, 1999 and 1998 the Association
received no unrelated business income.
Environmental Remediation Costs
The Association accrues for losses associated with environmental
remediation obligations when such losses are probable and can be reasonably
estimated. Such accruals are adjusted as further information develops or
circumstances change. Estimates of future costs for environmental remediation
obligations are not discounted to their present value.
2. Utility Plant Summary
Major classes of electric plant as of December 31 are as follows:
<Table>
<Caption>
2000 1999
------------ -----------
Electric plant in service:
Steam production plant $ 60,392,869 $ 60,392,869
Hydraulic production plant 8,798,695 8,798,695
Other production plant 106,017,802 104,925,446
Transmission plant 211,860,829 211,881,174
Distribution plant 170,378,081 162,365,836
General plant 45,835,618 47,704,821
Unclassified electric plant in service 77,054,390 38,834,298
Equipment under capital lease 56,323 56,323
Other 6,732,523 6,667,866
------------ -----------
Total electric plant in service 687,127,130 641,627,328
Construction work in progress 42,027,617 47,257,296
------------ -----------
Total electric plant in service
and construction work in progress $729,154,747 $688,884,624
============ ============
</Table>
Depreciation of unclassified electric plant in service has been included in
functional plant depreciation accounts in accordance with the anticipated
eventual classification of the plant investment.
3. Investments in Associated Organizations
Investments in associated organizations include the following at December 31:
<Table>
<Caption>
2000 1999
---------- ----------
National Rural Utilities Cooperative Finance
Corporation (NRUCFC) $6,095,980 $6,095,980
National Bank for Cooperatives (CoBank) 3,600,133 2,708,200
NRUCFC capital term certificates 33,733 32,300
Other 127,307 110,381
---------- ----------
$9,857,153 $8,946,861
========== ==========
</Table>
F-9
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
The Farm Credit Administration, CoBank's federal regulators, requires minimum
capital adequacy standards for all Farm Credit System institutions. CoBank's
loan agreements require, as a condition of the extension of credit, that an
equity ownership position be established by all borrowers. The Association's
investment in NRUCFC similarly was required by its financing arrangements with
NRUCFC.
4. Patronage Capital
The Association has an approved Equity Management Plan, which establishes in
general, a ten-year (for wholesale customers) and twenty-year (for retail
customers) capital credit retirement of patronage capital, based on the members'
proportionate contribution to Association assignable margins. On January 19,
2000, the Board of Directors passed a resolution putting all members on a
15-year rotation. At December 31, 2000, out of the total of $122,925,253
patronage capital, the Association had assigned $89,432,752 of such patronage
capital (net of capital credit retirements). Approval of actual capital credit
retirements is at the discretion of the Association's Board of Directors.
In December 1998, the Board of Directors authorized the retirement of $2,208,997
of retail capital credits representing the balance of 1984 retail distribution
patronage. The Board also authorized the retirement of $1,533,287 of wholesale
patronage for 1988.
In November 1999, the Board of Directors authorized the retirement of $1,766,000
of retail patronage for 1984.
In November 2000, the Board of Directors authorized the retirement of $3,750,000
of retail patronage for 1984 and 1985.
Following is a five-year summary of anticipated capital credit retirements:
<Table>
<Caption>
Year ending Wholesale Retail Total
----------- --------------- -------------- ------------
2001 $ - $3,500,000 $3,500,000
2002 - 3,500,000 3,500,000
2003 - 3,500,000 3,500,000
2004 1,359,000 3,500,000 4,859,000
2005 1,109,000 3,500,000 4,609,000
</Table>
5. Other Equities
A summary of other equities at December 31 follows:
<Table>
<Caption>
2000 1999
---------- ----------
Nonoperating margins, prior to 1967 $ 23,625 $ 23,625
Donated capital 183,907 183,907
Unredeemed capital credit retirement 4,672,892 4,020,824
--------- ---------
$4,880,424 $4,228,356
========== ==========
</Table>
F-10
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
6. Debt
Long-term obligations at December 31 are as follows:
<Table>
<Caption>
2000 1999
---------------- ----------------
First mortgage bonds of 8.08% maturing in 2002
and 9.14% maturing in 2022 with interest payable
semiannually March 15 and September 15:
8.08% $ 11,329,000 $ 17,396,000
9.14% 164,310,000 182,810,000
CoBank 8.95% bond maturing in 2002,
with interest payable monthly and
Principal due semi-annually 511,295 816,700
CoBank 7.76% bond maturing in 2005,
with interest payable monthly 10,000,000 10,000,000
CoBank 5.60% bonds maturing in 2022,
with interest payable monthly 45,000,000 45,000,000
CoBank 5.60% bonds maturing in 2002,
2007 and 2012 with interest payable monthly
15,000,000 15,000,000
CoBank, variable interest, with a rate of 8.20% at
December 31, 2000, bonds maturing in 2002, with
interest payable monthly 42,500,000 42,500,000
CoBank, variable interest, with a rate of 8.20% at
December 31, 2000, bonds maturing in 2002, with interest
payable monthly 30,000,000 30,000,000
---------------- ----------------
Total long-term obligations 318,650,295 343,522,700
Less current installments 6,430,350 6,372,405
---------------- ----------------
Long-term obligations, excluding current
installments $ 312,219,945 $ 337,150,295
================ ================
</Table>
Substantially all assets are pledged as collateral for the long-term
obligations.
F-11
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
Maturities of Long-term Obligations
Long-term obligations at December 31, 2000 mature as follows:
<Table>
<Caption>
Sinking Fund
Requirements Principal maturities
------------ --------------------
Year ending First mortgage CoBank
December 31 bonds mortgage bonds Total
----------- ------------- -------------- ------------
2001 $6,097,000 $333,350 $6,430,350
2002 5,232,000 77,677,944 82,909,944
2003 5,041,000 865,821 5,906,821
2004 5,502,000 945,000 6,447,000
2005 6,005,000 11,031,000 17,036,000
Thereafter 147,762,000 52,158,180 199,920,180
------------- -------------- ------------
$175,639,000 $143,011,295 $318,650,295
============= ============== ============
</Table>
Lines of Credit
The Association had an annual line of credit of $35,000,000 at December 31, 2000
and 1999 available with CoBank. The CoBank line of credit expires August 1, 2001
but carries an annual automatic renewal clause. At December 31, 2000 there was
$35 million outstanding on the line of credit, which carried an interest rate of
8.2%. At December 31, 1999 there was no outstanding balance. In addition, the
Association had an annual line of credit of $50,000,000 available at December
31, 2000 and 1999 with NRUCFC. At December 31, 2000 there was $5 million
outstanding on this line of credit, which carried an interest rate of 8.55%. At
December 31, 1999, there was no outstanding balance. The NRUCFC line of credit
expires October 14, 2002.
Refinancing
1991 Series A Bonds
On September 19, 1991, Chugach issued $314,000,000 of First Mortgage Bonds, 1991
Series A (Bonds), for purposes of repaying existing debt to the Federal
Financing Bank and the Rural Electrification Administration (now Rural Utilities
Services). Pursuant to Section 311 of the Rural Electrification Act, Chugach was
permitted to prepay the REA debt at a discounted rate of approximately 9%,
resulting in a discount of approximately $45,000,000 (note 12).
The bonds maturing in 2002 (Series A 2002 Bonds) are subject to annual sinking
fund redemption at 100% of the principal amount thereof which commenced March
15, 1993. The bonds maturing in 2022 (Series A 2022 Bonds) are subject to annual
sinking fund redemption at 100% of the principal amount thereof commencing March
15, 2003. The Series A 2002 Bonds are not subject to optional redemption. The
Series A 2022 Bonds are redeemable at the option of Chugach on any interest
payment date at an initial redemption price commencing in 2002 of 109.140 of the
principal amount thereof declining ratably to par on March 15, 2012. The Bonds
are secured by a first lien on substantially all of Chugach's assets. The
Indenture prohibits outstanding short-term indebtedness (other than trade
payables) in excess of 15% of Chugach's net utility plant and limits certain
cash investments to specific securities.
In April 1997, Chugach reacquired $5,000,000 of the Series A 2022 Bonds at a
premium of 109.7500. Total transaction cost, including accrued interest and
premium, was $5,510,350.
In February 1999, Chugach reacquired $11,000,000 of the Series A 2022 Bonds at a
premium of 117.05. Total transaction cost, including accrued interest and
premium, was $13,322,344.
In February 1999, Chugach reacquired $14,000,000 of the Series A 2022 Bonds at a
premium of 116.25. Total transaction cost, including accrued interest and
premium, was $16,868,592.
In February 1999, Chugach reacquired $9,895,000 of the Series A 2022 Bonds at a
premium of 116.75. Total transaction cost, including accrued interest and
premium, was $11,974,467.
F-12
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
In March 2000, Chugach reacquired $8,500,000 of the Series A 2022 Bonds at a
premium of 104.00. Total transaction cost, including accrued interest and
premium, was $9,215,502.
In April 2000, Chugach reacquired $10,000,000 of the Series A 2022 Bonds at a
premium of 108.875. Total transaction costs, including accrued interest and
premium, was $10,953,511.
On March 17, 1999, Chugach entered into a Treasury rate-lock transaction with
Lehman Brothers Financial Products Inc. (Lehman Brothers) for the purpose of
taking advantage of favorable market interest rates in anticipation of
refinancing Chugach's Series A Bonds due 2022 on their call date (March 15,
2002). As of December 31, 2000, the aggregate principal amount of Series A Bonds
due 2022 was $164,310,000. Under the treasury rate-lock contract, Chugach will
receive a lump-sum payment from Lehman Brothers on March 15, 2002, if the yield
on 10-year Treasury bonds as of mid-February 2002, exceeds a specified target
level (5.653%). Conversely, Chugach will on the same date be required to make a
payment to Lehman Brothers if the yield on the 10-year Treasury bonds falls
below its stated target yield. The treasury rate lock agreement fair value on
December 31, 2000 was $(8,600,000) and on December 31, 1999 was $13,000,000.
Chugach adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, on January 1, 2001. This new standard
requires all derivative financial instruments to be reflected on the balance
sheet. As of January 1, 2001, Chugach established a regulatory asset for $8.6
million and a liability for the same amount. The regulatory asset and liability
will be adjusted for changes in the fair value of the treasury rate lock
agreement. Management believes it is probable the regulatory asset will be
recovered through rates.
7. Fair Value of Long-Term Obligations
The estimated fair values (in thousands) of the long-term obligations included
in the financial statements at December 31 are as follows:
<Table>
<Caption>
2000 1999
---------------------- -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
Long-term obligations
(including current installments) $318,650 $335,155 $343,523 $354,534
</Table>
Fair value estimates are dependent upon subjective assumptions and involve
significant uncertainties resulting in variability in estimates with changes in
assumptions.
8. Employee Benefits
Employee benefits for substantially all employees are provided through the
Alaska Electrical Trust and Alaska Hotel, Restaurant and Camp Employees Health
and Welfare Trust Funds (union employees) and the National Rural Electric
Cooperative Association (NRECA) Retirement and Security Program (nonunion
employees). The Association makes annual contributions to the plans equal to the
amounts accrued for pension expense. For the union plans, the Association pays a
contractual hourly amount per union employee which is based on total plan costs
for all employees of all employers participating in the plan. In these master,
multiple-employer plans, the accumulated benefits and plan assets are not
determined or allocated separately to the individual employer. Costs for union
plans were approximately $2,017,000 in 2000, $1,832,000 in 1999 and $1,805,000
in 1998. In 2000, 1999 and 1998, the Association contributed $1,057,000,
$868,000 and $813,000, respectively, to the NRECA plan.
F-13
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
9. Deferred Charges
Deferred charges consisted of the following at December 31:
2000 1999
------------ -----------
Debt issuance and reacquisition costs $ 5,399,282 $ 6,196,555
Refurbishment of transmission equipment 253,087 262,346
Computer software and conversion 10,672,135 12,186,272
Studies 1,724,936 1,880,734
Business venture studies 562,435 273,660
Fuel supply negotiations 346,894 369,609
Major overhaul of steam generating unit 222,198 427,305
Environmental matters and other 261,892 470,756
------------ -----------
$19,442,859 $22,067,237
============ ===========
10. Employee Representation
Approximately 72% of the Association's employees are represented by the
International Brotherhood of Electrical Workers (IBEW). The various IBEW
contracts expire on June 30, 2003.
11. Return of Capital
Under provisions of its long-term debt agreements, the Association is not
directly or indirectly permitted to declare or pay any dividend or make any
payments, distributions or retirements of patronage capital to members if an
event of default exists with respect to its bonds (event of default), if payment
of such distribution would result in an event of default, or if the aggregate
amount expended for all distributions on and after September 26, 1991 exceeds
the sum of $7,000,000 plus 35% of the aggregate assignable margins (whether or
not such assignable margins have since been allocated to members) of the
Association earned after December 31, 1990 (or, in the case such aggregate shall
be a deficit, minus 100% of such deficit). The Association may declare and make
distributions at any time if, after giving effect thereto, the Association's
aggregate margins and equities as of the end of the most recent fiscal quarter
would be not less than 45% of the Association's total liabilities and equities
as of the date of the distribution. The Association does not anticipate that
this provision will limit the anticipated capital credit retirements described
in note 4.
12. Deferred Credits
Deferred credits at December 31 consisted of the following:
<Table>
<Caption>
2000 1999
----------- ------------
Regulatory liability - unamortized gain on
reacquired debt $18,066,673 $21,271,412
Refundable consumer advances for construction 1,771,302 2,123,913
Estimated initial installation costs for transformers and
meters 323,821 272,554
Post retirement benefit obligation 286,200 286,200
New business venture 20,254 46,185
Other 957,089 710,956
----------- ------------
$21,425,339 $24,711,220
=========== ============
</Table>
In conjunction with the refinancing described in note 6, the Association had
recognized a gain of approximately $45,000,000. The APUC required the
Association to flow through the gain to consumers in the form of reduced rates
over a period equal to the life of the bonds using the effective interest
method; consequently, the gain has been deferred for financial reporting
purposes as required by SFAS 71. Approximately $1,553,000 of the deferred gain
was amortized in 2000. Approximately $1,215,000 of the deferred gain was
amortized in 1999. Approximately $1,700,000 of the deferred gain was amortized
in 1998.
F-14
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
13. Bradley Lake Hydroelectric Project
The Association is a participant in the Bradley Lake Hydroelectric Project
(Bradley Lake). Bradley Lake was built and financed by the Alaska Energy
Authority (AEA) through State of Alaska grants and $166,000,000 of revenue
bonds. The Association and other participating utilities have entered into
take-or-pay power sales agreements under which shares of the project capacity
have been purchased and the participants have agreed to pay a like percentage of
annual costs of the project (including ownership, operation and maintenance
costs, debt service costs and amounts required to maintain established
reserves). Under these take-or-pay power sales agreements, the participants have
agreed to pay all project costs from the date of commercial operation even if no
energy is produced. The Association has a 30.4% share of the project's capacity.
The share of debt service exclusive of interest, for which the Association has
guaranteed, is approximately $44,000,000. Under a worst case scenario, the
Association could be faced with annual expenditures of approximately $4.1
million as a result of its Bradley Lake take-or-pay obligations. Management
believes that such expenditures, if any, would be recoverable through the fuel
surcharge ratemaking process.
Upon the default of a Bradley Lake participant, and subject to certain other
conditions, AEA, through Alaska Industrial Development and Export Authority, is
entitled to increase each participant's share of costs pro rata, to the extent
necessary to compensate for the failure of another participant to pay its share,
provided that no participant's percentage share is increased by more than 25%.
On April 6, 1999, AEA issued $59,485,000 of Power Revenue Refunding Bonds, Third
Series, for the purpose of refunding $59,110,000 of the First Series Bonds. The
refunded First Series Bonds were called on July 1, 1999. The refunding resulted
in aggregate debt service payments over the next nineteen years in a total
amount approximately $9,500,000 less than the debt service payments, which would
be due on the refunded bonds. There was an economic gain of approximately
$5,900,000. 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.
On April 13, 1999, AEA issued $30,640,000 of Power Revenue Refunding Bonds,
Fifth Series, for the purpose of refunding $28,910,000 of the First Series
Bonds. The refunded First Series Bonds were called on July 1, 1999. The
refunding resulted in aggregate debt service payments over the next twenty-three
years in a total amount approximately $4,400,000 less than the debt service
payments, which would be due on the refunded bonds. There was an economic gain
of approximately $2,900,000.
On April 4, 2000, AEA issued $47,710,000 of Power Revenue Refunding Bonds,
Fourth Series, for the purpose of refunding $46,235,000 of the Second Series
Bonds. The refunded Second Series Bonds were called on July 1, 2000. The
refunding resulted in aggregate debt service payments over the next twenty-two
years in a total amount approximately $6,400,000 less than the debt service
payment, which would be due on the refunded bonds. There was an economic gain of
approximately $3,500,000.
The following represents information with respect to Bradley Lake at June 30,
2000 (the most recent date for which information is available). The
Association's share of expenses were $3,696,829 in 2000, $3,902,737 in 1999 and
$4,112,292 in 1998 and are included in purchased power in the accompanying
financial statements.
Total Proportionate Share
------ -------------------
(in thousands)
Plant in service $ 306,872 $ 93,289
Accumulated depreciation (60,567) (18,170)
Interest expense 9,938 2,981
Other electric plant in service represents the Association's share of a Bradley
Lake transmission line financed internally and the Association's share of the
Eklutna Hydroelectric Project, purchased in 1997 (note 14).
F-15
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
14. Eklutna Hydroelectric Project
During October 1997, the ownership of the Eklutna Hydroelectric Project formally
transferred from the Alaska Power Administration to the participating utilities.
This group consists of the Association along with Matanuska Electric Association
(MEA) and Municipal Light and Power (AML&P).
Other electric plant in service includes $1,956,954 representing the
Association's share of the Eklutna Hydroelectric Plant. This balance will be
amortized over the estimated life of the facility. During the transition phase
and after the transfer of ownership, Chugach, MEA and AML&P have jointly
operated the facility. Each participant contributes their proportionate share
for operations and maintenance costs. Under net billing arrangements, Chugach
then reimburses MEA for their share of the costs.
15. Commitments and Contingencies
Contingencies
The Association is a participant in various legal actions, rate disputes,
personnel matters and claims both for and against its interests. Management
believes that the outcome of any such matters will not materially impact the
Association's financial condition, results of operations or liquidity.
Long-Term Fuel Supply Contracts
The Association has entered into long-term fuel supply contracts from various
producers at market terms. The current contracts will expire in 15 to 20 years.
Significant Customers
The Association is the principal supplier of power under long-term wholesale
power contracts with MEA and HEA. These contracts represented $45.2 million or
28.5% of operating revenues in 2000, and will expire in 2014.
Cooper Lake Hydroelectric Plant
Chugach discovered polychlorinated biphenyls (PCBs) in paint, caulk and grease
at the Cooper Lake Hydroelectric Plant during initial phases of a turbine
overhaul. A Federal Energy Regulatory Commission, (FERC) approved plan, prepared
in consultation with the Environmental Protection Agency, (EPA) was implemented
to remediate the PCBs in the plant. As a condition of its approval of the
license amendment for the overhaul project, FERC required Chugach to also
investigate the presence of PCBs in Kenai Lake. A sampling plan was developed by
Chugach in consultation with various agencies and approved by FERC. In 2000,
Chugach sampled sediments and fish collected from Kenai Lake and other waters.
While extremely low levels of PCBs were found in some sediment samples taken
near the plant, no pathway from sediment to fish was established. Additional
sediment sampling and analysis in this area is being performed. While the
presence of PCBs in fish did not reveal amounts above background levels, Chugach
is conducting additional sampling and analysis of fish in Kenai Lake and other
waters. A report will be provided to FERC on the results of the additional fish
and sediment sampling by December 31, 2001. Management believes the costs of
this work will be recoverable through rates and therefore will have no material
impact on the financial condition or results of operations.
Regulatory Cost Charge
In 1992 the State of Alaska Legislature passed legislation authorizing the
Department of Revenue to collect a regulatory cost charge from utilities in
order to fund the APUC. The tax is assessed on all retail consumers and is based
on kilowatt hour (kWh) consumption. The Regulatory Cost Charge has decreased
since its inception (November 1992) from an initial rate of $.000626 per kWh to
the current rate of $.000318, effective October 1, 2000.
F-16
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
16. Segment Reporting
The Association had divided its operations into two reportable segments: Energy
and Internet service. The energy segment derives its revenues from sales of
electricity to residential, commercial and wholesale customers, while the
Internet segment derives its revenues from provision of residential and
commercial internet services and products. The reporting segments follow the
same accounting policies used for the Association's financial statements and
described in the summary of significant accounting policies. Management
evaluates a segment's performance based upon profit or loss from operations.
Jointly used assets are allocated by percentage of reportable segment usage and
centrally incurred costs are allocated using factors developed by the
Association, which are patterned upon usage. The Internet segment began
operations during 1998, the results of which are immaterial to the financial
statements. The following is a tabulation of business segment information for
the years ended December 31:
<Table>
<Caption>
Operating Revenues 2000 1999
------------------ ------------- -------------
Internet ................... $ 1,170,448 $ 374,296
Energy ..................... 157,370,666 142,270,031
------------- -------------
Total operating revenues . 158,541,114 142,644,327
============= =============
Assignable Margins
Internet ................... (1,505,518) (1,293,388)
Energy ..................... 11,185,296 10,960,822
------------- -------------
Total assignable margins . 9,679,778 9,667,434
============= =============
Assets
Internet ................... 550,275 564,477
Energy ..................... 539,195,705 517,791,060
------------- -------------
Total assets ............. 539,745,980 518,355,537
============= =============
Capital Expenditures
Internet ................... 163,565 508,082
Energy ..................... 46,572,794 41,356,746
------------- -------------
Total capital expenditures $ 46,736,359 $ 41,864,828
============= =============
</Table>
17. Sale of Segment
On March 6, 2001, the Association entered into an agreement to sell
substantially all the assets and customers of the Internet business segment to
an unrelated third party. The transaction is expected to result in a nominal
gain.
18. Quarterly Results of Operations (unaudited)
<Table>
<Caption>
2001 Quarter Ended
---------------------------------------------------
Sept. 30 June 30 March 31
----------- ----------- -----------
Operating Revenue $42,186,684 $39,018,695 $45,195,577
Operating Expense 35,591,202 32,788,603 35,372,545
Net Interest 6,680,125 7,037,810 6,690,671
----------- ----------- -----------
Net Operating Margins (84,643) (807,718) 3,132,361
Non-Operating Margins 126,903 222,619 388,668
----------- ----------- -----------
Assignable Margins $ 42,260 $ (585,099) $ 3,521,029
=========== =========== ===========
</Table>
<Table>
<Caption>
2000 Quarter Ended
--------------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
----------- ------------ ----------- ------------
Operating Revenue $44,282,842 $37,201,515 $36,185,683 $40,871,074
Operating Expense 36,351,256 31,192,307 29,183,255 29,703,456
Net Interest 6,384,593 6,078,364 6,114,471 6,140,861
----------- ------------ ----------- ------------
Net Operating Margins 1,546,993 (69,156) 887,957 5,026,757
Non-Operating Margins 1,450,456 220,261 267,174 349,336
----------- ------------ ----------- ------------
Assignable Margins $ 2,997,449 $ 151,105 $ 1,155,131 $ 5,376,093
=========== ============ =========== ============
</Table>
F-17
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
<Table>
<Caption>
1999 Quarter Ended
--------------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 March 31
----------- ------------ ----------- ------------
Operating Revenue $38,837,034 $32,075,076 $32,307,980 $39,424,237
Operating Expense 30,637,296 26,163,772 27,033,946 26,621,873
Net Interest 6,148,973 5,905,993 5,949,006 6,131,408
----------- ------------ ----------- ------------
Net Operating Margins 2,050,765 5,311 (674,972) 6,670,956
Non-Operating Margins 1,090,556 199,106 170,377 155,335
----------- ------------ ----------- ------------
Assignable Margins $ 3,141,321 $ 204,417 $ (504,595) $ 6,826,291
=========== ============ =========== ============
</Table>
19. Presentation of Financial Information
During interim periods, Chugach follows the accounting policies set forth in its
audited financial statements included in Form 10-K filed with the Securities and
Exchange Commission, unless otherwise noted. Users of interim financial
information are encouraged to refer to the footnotes contained in Chugach's
audited financial statements when reviewing interim financial results. The
accompanying unaudited interim financial statements reflect all adjustments,
which are, in the opinion of management necessary to a fair statement of the
results for the interim periods presented.
20. Subsequent Events (unaudited)
Patronage Capital
In November 2001, the Board of Directors authorized the retirement of $3,000,000
of retail patronage for 1985, which will be distributed by the end of 2001.
Lines of Credit
The annual line of credit of $35,000,000 with CoBank was renewed by the
Association and is schedule to expire August 1, 2002. At September 30, 2001
there was $5 million outstanding on this line of credit with an interest rate of
6.0%.
Refinancing
2001 Series A Bonds
On April 17, 2001, Chugach issued $150,000,000 of 2001 Series A Bonds, for the
purpose of retiring indebtedness outstanding under existing lines of credit and
outstanding bonds, for capital expenditures and for general working capital. The
lines of credit had an aggregate outstanding principal balance of $55,000,000,
as of April 17, 2001, are renewable annually and bore interest at variable rates
ranging from 7.55% to 7.80% at April 17, 2001. The variable-rate bonds retired
had an aggregate outstanding principal balance of $72,500,000, as of April 17,
2001, would have matured in 2002 and bore interest at a variable rate that was
7.55% on April 17, 2001.
The 2001 Series A Bonds will mature on March 15, 2011, and bear interest at
6.55% per annum. Interest will be paid semi-annually on March 15 and September
15 of each year commencing with September 15, 2001. The 2001 Series A Bonds are
secured by a first lien on substantially all of Chugach's assets. The first lien
will be automatically released when all bonds issued by Chugach prior to April
1, 2001, cease to be outstanding or their holders consent to conversion to
unsecured status. Thereafter, the 2001 Series A Bonds will be unsecured
obligations, ranking equally with Chugach's other unsecured and unsubordinated
obligations.
In May 2001, Chugach reacquired $10,000,000 of its Series A 2022 Bonds at a
price of 111%. Total transaction costs, including accrued interest and premium,
was $11,242,178. The premium paid will be reflected as a regulatory asset and
amortized over the life of the 2001 Series A Bonds.
On December 10, 2001, Chugach reacquired $5,000,000 of its Series A 2022 Bonds
at a price of 111%. Total transaction costs, including accrued interest and
premium, was $5,661,711.
F-18
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
On May 11, 2001, Chugach terminated the $18.7 million U. S. Treasury portion of
the U. S. Treasury Rate Lock Agreement in receipt of payment of $10,000 by
Lehman. The Series A bonds are callable at a 9.14% premium. As of September 30,
2001, the aggregate principal amount of Series A Bonds due 2022 was
$154,310,000. The U.S. Treasury Rate Lock Agreement fair value on September 30,
2001 was $(15,684,930). As of September 30, 2001, Chugach established a
regulatory asset of $15,684,930 and a liability for the same amount.
On December 7, 2001, Chugach terminated 50% or $98.0 million of the 10-year U.S.
Treasury portion of the U.S. Treasury Rate Lock Agreement for a settlement
payment of $3,975,000 to Lehman. As of December 7, 2001, the fair value of the
remaining $98.0 million was $(3,975,000). The settlement payment of $3,975,000
will be accounted for as a regulatory asset. Management believes it is probable
the regulatory asset will be recovered through rates.
On December 17, 2001, Chugach terminated the remaining 50% or $98.0 million of
the 10-year U.S. Treasury portion of the U.S. Treasury Rate Lock Agreement for a
settlement payment of $2,975,000 to Lehman. The settlement payment of $2,975,000
will be accounted for as a regulatory asset. Management believes it is probable
the regulatory asset will be recovered through rates.
MATANUSKA ELECTRIC ASSOCIATION, INC. V. CHUGACH ELECTRIC ASSOCIATION, INC.
3AN-99-8152 (OMNIBUS CASE)
On July 7, 1999, MEA filed a complaint against us in Alaska Superior Court in
Anchorage, asserting that we violated state statutes, our bylaws and its power
supply agreement with us in failing to provide MEA with information about
several different matters that MEA asserts could affect the cost of the power
MEA purchases from us. MEA also asserted that we violated the power supply
agreement in our management of our long-term bond indebtedness.
On February 8, 2000, MEA added a claim requesting an order requiring us to
present our general rate case filing to the Joint Committee (a review panel
comprised of two representatives of our Board of Directors and one MEA director)
prior to presenting it to the Regulatory Commission of Alaska (RCA). On July 10,
2001, in accordance with the power sales agreement, we filed our general rate
case directly with the RCA requesting interim base rate relief without review by
the joint committee. On September 10, 2001, MEA filed a motion for partial
summary judgment based on this filing. On September 28, 2001, we filed a cross
motion for summary judgment on this issue. Briefing is now complete on this
issue and the parties are awaiting a decision from the court.
In a decision dated November 16, 2001, the superior court granted our motion for
partial summary judgment dismissing the fifth cause of action challenging our
management of our long-term bond indebtedness. As a result of that decision, all
of MEA's claims, except their request for an order requiring us to present our
general rate case filing to the joint committee, have been dismissed either by a
decision of the court or by stipulation of the parties. Should trial on the
remaining issue be necessary, it is set for April 2002. MEA has indicated its
intention to appeal the court's November 16, 2001, ruling.
For additional information, refer to the discussion of this matter in Part I,
Item 3 - Legal Proceedings, Matanuska Electric Association, Inc., v. Chugach
Electric Association, Inc., 3AN 99-8152CI of the Form 10-K filed by Chugach with
respect to the annual report period ended December 31, 2000.
Chugach has certain additional litigation matters and pending claims that arise
in the ordinary course of its business. In the opinion of management, no
individual matter or the matters in the aggregate is likely to have a material
adverse effect on our results of operations, financial condition or liquidity.
Regulatory Cost Charge
The Regulatory Cost Charge has decreased since its inception (November 1992)
from an initial rate of $.000626 per kWh to the current rate of $.000360,
effective October 1, 2001.
F-19
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements (cont.)
Sale of Segment
As of March 20, 2001, we sold the bulk of our internet service provider assets
related to dial-up services (excluding DSL services) to GCI Communication
Corporation. The aggregate purchase price was $759,049 at closing, plus an
additional amount of $70,075, which was based on the number of subscriber
accounts retained during the ninety-day transition period following closing.
F-20
CHUGACH ELECTRIC ASSOCIATION, INC.
Valuation and Qualifying Accounts
Nine-Months ended September 30, 2001
Years ended December 31, 2000, 1999 and 1998
<Table>
<Caption>
Balance at Charged Balance
beginning to costs at end
of year and expenses Deductions of period
------------- ---------------- ---------------- ------------
Allowance for doubtful accounts:
Activity for period ended:
September 30, 2001 (unaudited) (441,933) (175,418) 40,649 (576,702)
December 31, 2000 (389,223) (373,666) (320,956) (441,933)
December 31, 1999 (447,908) (331,895) (390,580) (389,223)
December 31, 1998 (368,029) (407,825) (327,946) (447,908)
</Table>
F-21
APPENDIX A
FINANCIAL GUARANTY INSURANCE POLICY
MBIA Insurance Corporation
Armonk, New York 10504 Policy No.
MBIA Insurance Corporation (the "Insurer") has issued a policy
containing the following provisions, such policy being on file at U.S. Bank
National Association, Seattle, Washington.
The Insurer, in consideration of the payment of the premium and subject to the
terms of this policy, hereby unconditionally and irrevocably guarantees to any
owner, as hereinafter defined, of the following described obligations, the full
and complete payment required to be made by or on behalf of Chugach Electric
Association, In c. ("Chugach") to U.S. Bank National Association or its
successor (the "Paying Agent") of an amount equal to (i) the principal of
(either at the stated maturity or by any advancement of maturity pursuant to a
mandatory sinking fund payment) and interest on, the Obligations (as that term
is defined below) as such payments shall become due but shall not be so paid
(except that in the event of any acceleration of the due date of such principal
by reason of mandatory or optional redemption or acceleration resulting from
default or otherwise, other than any advancement of maturity pursuant to a
mandatory sinking fund payment, the payments guaranteed hereby shall be made in
such amounts and at such times as such payments of principal would have been due
had there not been any such acceleration); and (ii) the reimbursement of any
such payment which is subsequently recovered from any owner pursuant to a final
judgment by a court of competent jurisdiction that such payment constitutes an
avoidable preference to such owner within the meaning of any applicable
bankruptcy law. The amounts referred to in clauses (i) and (ii) of the preceding
sentence shall be referred to herein collectively as the "Insured Amounts."
"Obligations" shall mean:
$120,000,000 New Bonds, 2002 Series A
$60,000,000 New Bonds, 2002 Series B
CHUGACH ELECTRIC ASSOCIATION, INC.
Upon receipt of telephonic or telegraphic notice, such notice
subsequently confirmed in writing by registered or certified mail, or upon
receipt of written notice by registered or certified mail, by the Insurer from
the Paying Agent or any owner of an Obligation the payment of an Insured Amount
for which is then due, that such required payment has not been made, the Insurer
on the due date of such payment or within one business day after receipt of
notice of such nonpayment, whichever is later, will make a deposit of funds, in
an account with State Street Bank and Trust Company, N.A., in New York, New
York, or its successor, sufficient for the payment of any such Insured Amounts
which are then due. Upon presentment and surrender of such Obligations or
presentment of such other proof of ownership of the Obligations, together with
any appropriate instruments of assignment to evidence the assignment of the
Insured Amounts due on the Obligations as are paid by the Insurer, and
appropriate instruments to effect the appointment of the Insurer as agent for
such owners of the Obligations in any legal proceeding related to payment of
Insured Amounts on the Obligations, such instruments being in a form
satisfactory to State Street Bank and Trust Company, N.A., State Street Bank and
Trust Company, N.A. shall disburse to such owners or the Paying Agent payment of
the Insured Amounts due on such Obligations, less any amount held by the Paying
Agent for the payment of such Insured Amounts and legally available therefor.
This policy does not insure against loss of any prepayment premium which may at
any time be payable with respect to any Obligation.
As used herein, the term "owner" shall mean the registered owner of any
Obligation as indicated in the books maintained by the Paying Agent, Chugach, or
any designee of Chugach for such purpose. The term owner shall not include
Chugach or any party whose agreement with Chugach constitutes the underlying
security for the Obligations.
Any service of process on the Insurer may be made to the Insurer at its
offices located at 113 King Street, Armonk, New York 10504 and such service of
process shall be valid and binding.
A-1
This policy is non-cancellable for any reason. The premium on this
policy is not refundable for any reason including the payment prior to maturity
of the Obligations.
IN WITNESS WHEREOF, the Insurer has caused this policy to be executed
in facsimile on its behalf by its duly authorized officers, this [DAY] day of
[MONTH, YEAR].
MBIA INSURANCE CORPORATION
A-2
APPENDIX B
AUCTION PROCEDURES
1. DEFINITIONS
"Agent Member" means a member of, or participant in, the Securities
Depository who will act on behalf of a Bidder.
"Auction" means each periodic implementation of the Auction Procedures.
"Auction Agent" means the auctioneer appointed in accordance with the
provisions of the Supplemental Indenture and will initially be Bankers Trust.
"Auction Agreement" means an agreement between the Auction Agent and
the Trustee pursuant to which the Auction Agent agrees to follow the procedures
specified in the provisions of the Supplemental Indenture with respect to the
2002 Series B Bonds while bearing interest at Auction Mode Rates, as such
agreement may from time to time be amended or supplemented with the consent
of the Bond Insurer.
"Auction Date" means with respect to any 2002 Series B Bonds during any
period in which the Auction Procedures are not suspended in accordance with the
provisions of the Supplemental Indenture, (i) if the 2002 Series B Bonds are in
a daily Auction Period, each Business Day, (ii) if the 2002 Series B Bonds are
in a Flexible Auction Period, the last Business Day of the Flexible Auction
Period, and (iii) if the 2002 Series B Bonds are in any other Auction Period,
the Business Day next preceding each Interest Payment Date for such 2002 Series
B Bonds (whether or not an Auction will be conducted on such date); provided,
however, that the last Auction Date with respect to the 2002 Series B Bonds in
an Auction Period other than a daily Auction Period or Flexible Auction Period
will be the earlier of (a) the Business Day next preceding the Interest Payment
Date next preceding any Mode Adjustment Date and (b) the Business Day next
preceding the Interest Payment Date next preceding the final maturity date of
the 2002 Series B Bonds; and provided, further, that if the 2002 Series B Bonds
are in a daily Auction Period, the last Auction Date will be the earlier of (x)
the Business Day next preceding a Mode Adjustment Date and (y) the Business Day
next preceding the final maturity date of the 2002 Series B Bonds. The last
Business Day of a Flexible Auction Period will be the Auction Date for the
Auction Period which begins on the next succeeding Business Day, if any. On the
Business Day preceding the conversion from a daily Auction Period to another
Auction Period, there will be two Auctions, one for the last daily Auction
Period and one for the first Auction Period following the conversion. The first
Auction Date for the 2002 Series B Bonds is February 27, 2002.
"Auction Mode Multiple" means, as of any Auction Date, the Percentage
of the Index (in effect on such Auction Date) determined as set forth below,
based on the Prevailing Rating of the 2002 Series B Bonds in effect at the close
of business on the Business Day immediately preceding such Auction Date:
Percentage
Prevailing Rate of Index
--------------- --------
AAA/Aaa/AAA 150%
AA/Aa/AA 200
A/A/A 250
BBB/Baa/BBB 275
Below BBB/Baa/BBB 300
"Auction Mode Rate" means the rate of interest to be borne by the 2002
Series B Bonds during each Auction Period determined in accordance with the
Supplemental Indenture, as summarized under "Determination of Auction Mode Rate"
of this Auction Procedures Description; provided, however, in no event may the
Auction Mode Rate exceed the Maximum Rate.
"Auction Period" means with respect to 2002 Series B Bonds (i) in a
Flexible Auction Period, the Flexible Auction Period, (ii) in a daily Auction
Period, a period beginning on each Business Day and extending to but not
including the next succeeding Business Day, (iii) in a seven-day Auction Period,
a period of generally seven days beginning on a Thursday (or the day following
the last day of the prior Auction Period if the prior Auction Period does not
end on a Wednesday) and ending on the Wednesday thereafter (unless such
Wednesday is not followed by a Business Day, in which case on the next
succeeding day which is followed by
B-1
a Business Day), (iv) in a 28-day Auction Period, a period of generally 28 days
beginning on a Thursday (or the day following the last day of the prior Auction
Period if the prior Auction Period does not end on a Wednesday) and ending on
the fourth Wednesday thereafter (unless such Wednesday is not followed by a
Business Day, in which case on the next succeeding day which is followed by a
Business Day), (v) in a 35-day Auction Period, a period of generally 35 days
beginning on a Thursday (or the day following the last day of the prior Auction
Period if the prior Auction Period does not end on a Wednesday) and ending on
the fifth Wednesday thereafter (unless such Wednesday is not followed by a
Business Day, in which case on the next succeeding day which is followed by a
Business Day), (vi) in a three-month Auction Period, a period of generally three
months (or shorter period upon a conversion from another Auction Period)
beginning on the day following the last day of the prior Auction Period and
ending on the first day of the month that is the third calendar month following
the beginning date of such Auction Period, and (vii) in a semiannual Auction
Period, a period of generally six months (or shorter period upon a conversion
from another Auction Period) beginning on the day following the last day of the
prior Auction Period and ending on the next succeeding June 30 or December 31;
provided, however, that if there is a conversion of 2002 Series B Bonds from a
daily Auction Period to a seven-day Auction Period, the next Auction Period will
begin on the date of the conversion (i.e., the Interest Payment Date for the
prior Auction Period) and will end on the next succeeding Wednesday (unless such
Wednesday is not followed by a Business Day, in which case on the next
succeeding day which is followed by a Business Day), if there is a conversion
from a daily Auction Period to a 28-day Auction Period, the next Auction Period
will begin on the date of the conversion (i.e., the Interest Payment Date for
the prior Auction Period) and will end on the Wednesday (unless such Wednesday
is not followed by a Business Day, in which case on the next succeeding day
which is followed by a Business Day) which is more than 21 days but not more
than 28 days from such date of conversion, and, if there is a conversion from a
daily Auction Period to a 35-day Auction Period, the next Auction Period will
begin on the date of the conversion (i.e., the Interest Payment Date for the
prior Auction Period) and will end on the Wednesday (unless such Wednesday is
not followed by a Business Day, in which case on the next succeeding day which
is followed by a Business Day) which is more than 28 days but not more than 35
days from such date of conversion.
"Auction Procedures" means the procedures for conducting Auctions for
2002 Series B Bonds during an Auction Rate Period set forth in the Supplemental
Indenture to the Indenture and summarized in this Auction Procedures
Description.
"Auction Procedures Description" means this Appendix B, as amended from
time to time.
"Auction Rate" means for 2002 Series B Bonds for each Auction Period,
(i) if Sufficient Clearing Bids exist, the Winning Bid Rate, provided, however,
if all 2002 Series B Bonds are the subject of Submitted Hold Orders, the Minimum
Auction Rate and (ii) if Sufficient Clearing Bids do not exist, the Maximum
Auction Rate.
"Auction Rate Period" means after the Initial Period any period of time
commencing on the day following the Initial Period and ending on a Mode
Adjustment Date.
"Available Bonds" means for 2002 Series B Bonds on each Auction Date,
the aggregate principal amount of 2002 Series B Bonds that are not the subject
of Submitted Hold Orders.
"Bid" has the meaning specified in subsection (a) under the heading
"Orders by Existing Owners and Potential Owners" of this Auction Procedures
Description.
"Bidder" means each Existing Owner and Potential Owner who places an
Order.
"Broker-Dealer" means any entity that is permitted by law to perform
the function required of a Broker-Dealer described in the Eleventh Supplemental
Indenture, that is a member of, or a direct participant in, the Securities
Depository, that has been selected by the Company and that is a party to a
Broker-Dealer Agreement with the Company and the Auction Agent.
"Broker-Dealer Agreement" means an agreement among the Auction Agent,
the Company and a Broker-Dealer pursuant to which such Broker-Dealer agrees to
follow the procedures described in the Supplemental Indenture, as such agreement
may from to time be amended or supplemented with the consent of the Bond
Insurer.
B-2
"Default Rate" means, in respect of any Auction Period other than a
daily Auction Period, a per annum rate equal to three hundred percent (300%) of
the Index determined on the Auction Date next preceding the first day of such
Auction Period or in the case of 2002 Series B Bonds in a daily Auction Period,
three hundred percent (300%) of the Index determined on the Auction Date which
was the first day of such Auction Period, provided, however, the Default Rate
will not exceed the Maximum Rate.
"Existing Owner" means a Person who is listed as the beneficial owner
of 2002 Series B Bonds in the records of the Auction Agent.
"Flexible Auction Period" means any period of not less than seven nor
more than 364 days which begins on an Interest Payment Date and ends on a
Wednesday unless such Wednesday is not followed by a Business Day, in which case
on the next succeeding day which is followed by a Business Day.
"Hold Order" has the meaning specified in subsection (a) of "Orders by
Existing Owners and Potential Owners" of this Auction Procedures Description.
"Index" will have the meaning specified in "Index" of this Auction
Procedures Description.
"Initial Period" means the period from the Delivery Date to but not
including February 28, 2002.
"Interest Payment Date" means, with respect to 2002 Series B Bonds in
the Auction Mode, February 28, 2002, and thereafter (a) when used with respect
to any Auction Period other than a daily Auction Period or a Flexible Auction
Period, the Business Day immediately following such Auction Period, (b) when
used with respect to a daily Auction Period, the first Business Day of the month
immediately succeeding such Auction Period, (c) when used with respect to a
Flexible Auction Period of (i) seven or more but fewer than 92 days, the
Business Day immediately following such Flexible Auction Period, or (ii) 92 or
more days, each thirteenth Wednesday after the first day of such Flexible
Auction Period or the next Business Day if such Wednesday is not a Business Day
and on the Business Day immediately following such Flexible Auction Period, (d)
any Mode Adjustment Date and (e) the maturity or redemption date thereof.
"LIBOR," on any date of determination for any Auction Period, means (i)
for any Auction Period of fewer than 40 days, the offered rate for deposits in
U.S. dollars for a one-month period which appears on the Telerate Page 3750 at
approximately 11:00 A.M., London time, on such date, or if such date is not a
date on which dealings in U.S. dollars are transacted in the London interbank
market, then on the next preceding day on which such dealings were transacted in
such market and (ii) for any Auction Period of 40 or more but fewer than 95
days, such rates for deposits in U.S. dollars for a three-month period.
"Maximum Auction Rate" means, as of any Auction Date, the product of
the Index multiplied by the Auction Mode Multiple, provided, however, the
Maximum Auction Rate will not exceed the Maximum Rate.
"Minimum Auction Rate" means, as of any Auction Date, ninety percent
(90%) of the Index in effect on such Auction Date.
"No Auction Rate" means, as of any Auction Date, the rate determined by
multiplying the Percentage of Index set forth below, based on the Prevailing
Rating of the 2002 Series B Bonds in effect at the close of business on the
Business Day immediately preceding such Auction Date, by the Index:
Percentage
Prevailing Rate of Index
--------------- --------
AAA/Aaa/AAA 100%
AA/Aa/AA 110
A/A/A 125
BBB/Baa/BBB 150
Below BBB/Baa/BBB 300
Below BBB/Baa/BBB 200
B-3
provided, however that in no event will the No Auction Rate exceed the Maximum
Auction Rate.
"Order" means a Hold Order, Bid or Sell Order.
"Potential Owner" means any Person, including any Existing Owner, who
may be interested in acquiring a beneficial interest in the 2002 Series B Bonds
in addition to the 2002 Series B Bonds currently owned by such Person, if any.
"Prevailing Rating" means (a) AAA/Aaa/AAA, if the 2002 Series B Bonds
will have a rating of AAA or better by S&P, a rating of Aaa or better by Moody's
and a rating of AAA or better by Fitch, (b) if not AAA/Aaa/AAA, AA/Aa/AA if the
2002 Series B Bonds will have a rating of AA- or better by S&P, a rating of Aa3
or better by Moody's and a rating of AA- or better by Fitch, (c) if not
AAA/Aaa/AAA or AA/Aa/AA, A/A/A if the 2002 Series B Bonds will have a rating of
A- or better by S&P, a rating of A3 or better by Moody's and a rating of A- or
better by Fitch, (d) if not AAA/Aaa/AAA, AA/Aa/AA or A/A/A, BBB/Baa/BBB if the
2002 Series B Bonds will have a rating of BBB- or better by S&P, a rating of
Baa3 or better by Moody's and a rating of BBB- or better by Fitch, and (e) if
not AAA/Aaa/AAA, AA/Aa/AA, A/A/A or BBB/Baa/BBB, then below BBB/Baa/BBB whether
or not the 2002 Series B Bonds are rated by any securities rating agency. For
purposes of this definition, S&P's rating categories of "AAA," "AA," and "A-,"
Moody's rating categories of "Aaa," "Aa3" and "A3" and Fitch's rating categories
of "AAA," "AA," and "A-," will be deemed to refer to and include the respective
rating categories correlative thereto in the event that any such Rating Agencies
will have changed or modified their generic rating categories or if any
successor thereto appointed in accordance with the definitions thereof will use
different rating categories. If the 2002 Series B Bonds are not rated by a
Rating Agency, the requirement of a rating by such Rating Agency will be
disregarded. If the ratings for the 2002 Series B Bonds are split between two or
more of the foregoing categories, the lower rating will determine the Prevailing
Rating. If there is no rating, then the Auction Mode Rate will be the Maximum
Auction Rate.
"Principal Office" means, with respect to the Auction Agent, the office
thereof designated in writing to the Company, the Trustee and each
Broker-Dealer.
"Sell Order" has the meaning specified in subsection (a) under the
heading "Orders by Existing Owners and Potential Owners" of this Auction
Procedures Description.
"Submission Deadline" means 1:00 p.m., New York City time, on each
Auction Date for 2002 Series B Bonds not in a daily Auction Period and 11:00
a.m., New York City time, on each Auction Date for 2002 Series B Bonds in a
daily Auction Period, or such other time on such date as will be specified from
time to time by the Auction Agent pursuant to the Auction Agreement as the time
by which Broker-Dealers are required to submit Orders to the Auction Agent.
"Submitted Bid" has the meaning specified in subsection (b) under the
heading "Determination of Auction Mode Rate" of this Auction Procedures
Description.
"Submitted Hold Order" has the meaning specified in subsection (b)
under the heading "Determination of Auction Mode Rate" of this Auction
Procedures Description.
"Submitted Order" has the meaning specified in subsection (b) under the
heading "Determination of Auction Mode Rate" of this Auction Procedures
Description.
"Submitted Sell Order" has the meaning specified in subsection (b)
under the heading "Determination of Auction Mode Rate" of this Auction
Procedures Description.
"Sufficient Clearing Bids" means with respect to 2002 Series B Bonds,
an Auction for which (a) the aggregate principal amount of 2002 Series B Bonds
that are the subject of Submitted Bids by Potential Owners specifying one or
more rates not higher than the Maximum Auction Rate is not less than (b) the
aggregate principal amount of 2002 Series B Bonds that are the subject of
Submitted Sell Orders and of Submitted Bids by Existing Owners specifying rates
higher than the Maximum Auction Rate.
B-4
"Supplemental Indenture" means the Eleventh Supplemental Indenture
dated February 1, 2002 (which is amendatory and supplemental to the Indenture),
as the same may be amended and supplemented from time to time.
"Winning Bid Rate" means with respect to 2002 Series B Bonds, the
lowest rate specified in any Submitted Bid which if selected by the Auction
Agent as the Auction Mode Rate would cause the aggregate principal amount of
2002 Series B Bonds that are the subject of Submitted Bids specifying a rate not
greater than such rate to be not less than the aggregate principal amount of
Available Bonds.
2. AUCTION PROCEDURES
2.01. Orders by Existing Owners and Potential Owners.
(a) Prior to the Submission Deadline on each Auction Date:
(i) each Existing Owner may submit to a Broker-Dealer, in writing or by
such other method as will be reasonably acceptable to such Broker-Dealer,
information as to:
(A) the principal amount of 2002 Series B Bonds, if any, held by such
Existing Owner which such Existing Owner irrevocably commits to continue to hold
for the next succeeding Auction Period without regard to the rate determined by
the Auction Procedures for such Auction Period,
(B) the principal amount of 2002 Series B Bonds, if any, held by such
Existing Owner which such Existing Owner irrevocably commits to continue to hold
for the next succeeding Auction Period if the rate determined by the Auction
Procedures for such Auction Period will not be less than the rate per annum then
specified by such Existing Owner (and which such Existing Owner irrevocably
offers to sell on the next succeeding Interest Payment Date (or the same day in
the case of a daily Auction Period) if the rate determined by the Auction
Procedures for the next succeeding Auction Period will be less than the rate per
annum then specified by such Existing Owner), and/or
(C) the principal amount of 2002 Series B Bonds, if any, held by such
Existing Owner which such Existing Owner irrevocably offers to sell on the next
succeeding Interest Payment Date (or on the same day in the case of a daily
Auction Period) without regard to the rate determined by the Auction Procedures
for the next succeeding Auction Period; and
(ii) for the purpose of implementing the Auctions and thereby to
achieve the lowest possible interest rate on the 2002 Series B Bonds, the
Broker-Dealers will contact Potential Owners, including Persons that are
Existing Owners, to determine the principal amount of 2002 Series B Bonds, if
any, which each such Potential Owner irrevocably offers to purchase if the rate
determined by the Auction Procedures for the next succeeding Auction Period is
not less than the rate per annum then specified by such Potential Owner.
For the purposes hereof, an Order containing the information referred
to in clause (i)(A) above is herein referred to as a "Hold Order", an Order
containing the information referred to in clause (i)(B) or (ii) above is herein
referred to as a "Bid", and an Order containing the information referred to in
clause (i)(C) above is herein referred to as a "Sell Order."
(b) A Bid by an Existing Owner will constitute an irrevocable offer to
sell:
(i) (A) the principal amount of 2002 Series B Bonds specified in such
Bid if the rate determined by the Auction Procedures on such Auction Date will
be less than the rate specified therein; or
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(B) such principal amount or a lesser principal amount of 2002 Series B
Bonds to be determined as described in subsection (a)(v) of the section below
entitled "Allocation of 2002 Series B Bonds" if the rate determined by the
Auction Procedures on such Auction Date will be equal to such specified rate; or
(C) a lesser principal amount of 2002 Series B Bonds to be determined
as described in subsection (b)(iv) of the section below entitled "Allocation of
2002 Series B Bonds" if such specified rate will be higher than the Maximum
Auction Rate and Sufficient Clearing Bids do not exist.
(ii) A Sell Order by an Existing Owner will constitute an irrevocable
offer to sell:
(A) the principal amount of 2002 Series B Bonds specified in such Sell
Order; or
(B) such principal amount or a lesser principal amount of 2002 Series B
Bonds as described in subsection (b)(iv) of the section below entitled
"Allocation of 2002 Series B Bonds" if Sufficient Clearing Bids do not exist.
(iii) A Bid by a Potential Owner will constitute an irrevocable offer
to purchase:
(A) the principal amount of 2002 Series B Bonds specified in such Bid
if the rate determined by the Auction Procedures on such Auction Date will be
higher than the rate specified therein; or
(B) such principal amount or a lesser principal amount of 2002 Series B
Bonds as described in subsection (a)(vi) of the section below entitled
"Allocation of 2002 Series B Bonds" if the rate determined by the Auction
Procedures on such Auction Date will be equal to such specified rate.
(c) Anything herein to the contrary notwithstanding:
(i) for purposes of any Auction, any Order which specifies 2002 Series
B Bonds to be held, purchased or sold in a principal amount which is not $50,000
or an integral multiple thereof will be rounded down to the nearest $50,000, and
the Auction Agent will conduct the Auction Procedures as if such Order had been
submitted in such lower amount;
(ii) for purposes of any Auction other than during a daily Auction
Period, any portion of an Order of an Existing Owner which relates to a 2002
Series B Bond which has been called for redemption on or prior to the Interest
Payment Date next succeeding such Auction will be invalid with respect to such
portion and the Auction Agent will conduct the Auction Procedures as if such
portion of such Order had not been submitted;
(iii) for purposes of any Auction other than during a daily Auction
Period, no portion of a 2002 Series B Bond which has been called for redemption
on or prior to the Interest Payment Date next succeeding such Auction will be
included in the calculation of Available Bonds for such Auction; and
(iv) the Auction Procedures will be suspended during the period
commencing on the date of the Auction Agent's receipt of notice from the Trustee
or the Company of the occurrence of an Event of Default resulting from a failure
to pay principal, premium or interest on any 2002 Series B Bond when due
(provided, however, that for purposes of this provision only payment by the Bond
Insurer will be deemed to cure such Event of Default and no suspension of the
Auction Procedures will occur) but will resume two Business Days after the date
on which the Auction Agent receives notice from the Trustee that such Event of
Default has been waived or cured, with the next Auction to occur on the next
regularly scheduled Auction Date occurring thereafter.
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2.02. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer will submit to the Auction Agent in writing or
by such other method as will be reasonably acceptable to the Auction Agent,
including such electronic communication acceptable to the parties, prior to the
Submission Deadline on each Auction Date, all Orders obtained by such
Broker-Dealer and specifying, if requested, with respect to each Order:
(i) the name of the Bidder placing such Order;
(ii) the aggregate principal amount of 2002 Series B Bonds, if any,
that are the subject of such Order;
(iii) to the extent that such Bidder is an Existing Owner:
(A) the principal amount of 2002 Series B Bonds, if any, subject to any
Hold Order placed by such Existing Owner;
(B) the principal amount of 2002 Series B Bonds, if any, subject to any
Bid placed by such Existing Owner and the rate specified in such Bid; and
(C) the principal amount of 2002 Series B Bonds, if any, subject to any
Sell Order placed by such Existing Owner; and
(iv) to the extent such Bidder is a Potential Owner, the rate specified
in such Bid.
(b) If any rate specified in any Bid contains more than three figures
to the right of the decimal point, the Auction Agent will round such rate up to
the next highest one thousandth of one percent (0.001%).
(c) If an Order or Orders covering all of the 2002 Series B Bonds held
by an Existing Owner is not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent will deem a Hold Order to have been
submitted on behalf of such Existing Owner covering the principal amount of 2002
Series B Bonds held by such Existing Owner and not subject to Orders submitted
to the Auction Agent; provided, however, that if there is a conversion from one
Auction Period to another Auction Period and Orders have not been submitted to
the Auction Agent prior to the Submission Deadline covering the aggregate
principal amount of 2002 Series B Bonds held by such Existing Owner, the Auction
Agent will deem a Sell Order to have been submitted on behalf of such Existing
Owner covering the principal amount of 2002 Series B Bonds held by such Existing
Owner not subject to Orders submitted to the Auction Agent.
(d) If one or more Orders covering in the aggregate more than the
principal amount of Outstanding 2002 Series B Bonds held by any Existing Owner
are submitted to the Auction Agent, such Orders will be considered valid as
follows:
(i) all Hold Orders will be considered Hold Orders, but only up to and
including in the aggregate the principal amount of 2002 Series B Bonds held by
such Existing Owner;
(ii) (A) any Bid of an Existing Owner will be considered valid as a Bid
of an Existing Owner up to and including the excess of the principal amount of
2002 Series B Bonds held by such Existing Owner over the principal amount of the
2002 Series B Bonds subject to Hold Orders referred to in paragraph (i) above;
(B) subject to clause (A) above, all Bids of an Existing Owner with the
same rate will be aggregated and considered a single Bid of an Existing Owner up
to and including the excess of the principal amount of 2002 Series B Bonds held
by such Existing Owner over the principal amount of 2002 Series B Bonds held by
such Existing Owner subject to Hold Orders referred to in paragraph (i) above;
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(C) subject to clause (A) above, if more than one Bid with different
rates is submitted on behalf of such Existing Owner, such Bids will be
considered Bids of an Existing Owner in the ascending order of their respective
rates up to the amount of the excess of the principal amount of 2002 Series B
Bonds held by such Existing Owner over the principal amount of 2002 Series B
Bonds held by such Existing Owner subject to Hold Orders referred to in
paragraph (i) above; and
(D) the principal amount, if any, of such 2002 Series B Bonds subject
to Bids not considered to be Bids of an Existing Owner under this paragraph (ii)
will be treated as the subject of a Bid by a Potential Owner;
(iii) all Sell Orders will be considered Sell Orders, but only up to
and including a principal amount of 2002 Series B Bonds equal to the excess of
the principal amount of 2002 Series B Bonds held by such Existing Owner over the
sum of the principal amount of the 2002 Series B Bonds considered to be subject
to Hold Orders pursuant to paragraph (i) above and the principal amount of 2002
Series B Bonds considered to be subject to Bids of such Existing Owner pursuant
to paragraph (ii) above.
(e) If more than one Bid is submitted on behalf of any Potential Owner,
each Bid submitted with the same rate will be aggregated and considered a single
Bid and each Bid submitted with a different rate will be considered a separate
Bid with the rate and the principal amount of 2002 Series B Bonds specified
therein.
(f) Any Bid submitted by an Existing Owner or a Potential Owner
specifying a rate lower than the Minimum Auction Rate will be treated as a Bid
specifying the Minimum Auction Rate. (g) Neither the Company, the Trustee nor
the Auction Agent will be responsible for the failure of any Broker-Dealer to
submit an Order to the Auction Agent on behalf of any Existing Owner or
Potential Owner.
2.03. Determination of Auction Mode Rate.
(a) Not later than 9:30 a.m., New York City time, on each Auction Date
for 2002 Series B Bonds, the Auction Agent will advise the Broker-Dealers and
the Trustee by telephone or other electronic communication acceptable to the
parties of the Minimum Auction Rate, the Maximum Auction Rate and the Index.
(b) Promptly after the Submission Deadline on each Auction Date for
2002 Series B Bonds, the Auction Agent will assemble all Orders submitted or
deemed submitted to it by the Broker-Dealers (each such Order as submitted or
deemed submitted by a Broker-Dealer being hereinafter referred to as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, and collectively as a "Submitted Order") and will determine (i) the
Available Bonds, (ii) whether there are Sufficient Clearing Bids, and (iii) the
Auction Rate.
(c) Promptly after the Auction Agent has made the determinations
pursuant to subsection (b) above, the Auction Agent will advise the Trustee by
telephone (promptly confirmed in writing), telex or facsimile transmission or
other electronic communication acceptable to the parties of the Auction Rate for
the next succeeding Auction Period and the Trustee will promptly notify DTC of
such Auction Rate.
(d) In the event the Auction Agent fails to calculate, or for any
reason fails to timely provide, the Auction Rate for any Auction Period, the
Auction Mode Rate for such Auction Period will be the No Auction Rate; provided,
however, that if the Auction Procedures are suspended due to the failure to pay
principal of, premium or interest on any 2002 Series B Bond, the Auction Mode
Rate for the next succeeding Auction Period will be the Default Rate.
(e) In the event of a failed conversion to an Interest Mode other than
the Auction Mode or in the event of a failure to change the length of the
current Auction Period due to the lack of Sufficient Clearing Bids at the
Auction on the Auction Date for the first new Auction Period, the Auction Mode
Rate for the next Auction Period will be the Maximum Auction Rate and the
Auction Period will be a seven-day Auction Period.
(f) If the 2002 Series B Bonds are not rated or are not registered in
the name of the Securities Depository, then the Auction Mode Rate will be the
Maximum Auction Rate.
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2.04. Allocation of 2002 Series B Bonds.
(a) In the event of Sufficient Clearing Bids for 2002 Series B Bonds,
subject to the further provisions of subsections (c) and (d) below, Submitted
Orders will be accepted or rejected as follows in the following order of
priority:
(i) the Submitted Hold Order of each Existing Owner will be accepted,
thus requiring each such Existing Owner to continue to hold the 2002 Series B
Bonds that are the subject of such Submitted Hold Order;
(ii) the Submitted Sell Order of each Existing Owner will be accepted
and the Submitted Bid of each Existing Owner specifying any rate that is higher
than the Winning Bid Rate will be rejected, thus requiring each such Existing
Owner to sell the 2002 Series B Bonds that are the subject of such Submitted
Sell Order or Submitted Bid;
(iii) the Submitted Bid of each Existing Owner specifying any rate that
is lower than the Winning Bid Rate will be accepted, thus requiring each such
Existing Owner to continue to hold the 2002 Series B Bonds that are the subject
of such Submitted Bid;
(iv) the Submitted Bid of each Potential Owner specifying any rate that
is lower than the Winning Bid Rate will be accepted, thus requiring each such
Potential Owner to purchase the 2002 Series B Bonds that are the subject of such
Submitted Bid;
(v) the Submitted Bid of each Existing Owner specifying a rate that is
equal to the Winning Bid Rate will be accepted, thus requiring each such
Existing Owner to continue to hold the 2002 Series B Bonds that are the subject
of such Submitted Bid, but only up to and including the principal amount of 2002
Series B Bonds obtained by multiplying (A) the aggregate principal amount of
Outstanding 2002 Series B Bonds which are not the subject of Submitted Hold
Orders described in paragraph (i) above or of Submitted Bids described in
paragraphs (iii) or (iv) above by (B) a fraction the numerator of which will be
the principal amount of Outstanding 2002 Series B Bonds held by such Existing
Owner subject to such Submitted Bid and the denominator of which will be the
aggregate principal amount of Outstanding 2002 Series B Bonds subject to such
Submitted Bids made by all such Existing Owners that specified a rate equal to
the Winning Bid Rate, and the remainder, if any, of such Submitted Bid will be
rejected, thus requiring each such Existing Owner to sell any excess amount of
2002 Series B Bonds;
(vi) the Submitted Bid of each Potential Owner specifying a rate that
is equal to the Winning Bid Rate will be accepted, thus requiring each such
Potential Owner to purchase the 2002 Series B Bonds that are the subject of such
Submitted Bid, but only in an amount equal to the principal amount of 2002
Series B Bonds obtained by multiplying (A) the aggregate principal amount of
Outstanding 2002 Series B Bonds which are not the subject of Submitted Hold
Orders described in paragraph (i) above or of Submitted Bids described in
paragraphs (iii), (iv) or (v) above by (B) a fraction the numerator of which
will be the principal amount of Outstanding 2002 Series B Bonds subject to such
Submitted Bid and the denominator of which will be the sum of the aggregate
principal amount of Outstanding 2002 Series B Bonds subject to such Submitted
Bids made by all such Potential Owners that specified a rate equal to the
Winning Bid Rate, and the remainder of such Submitted Bid will be rejected; and
(vii) the Submitted Bid of each Potential Owner specifying any rate
that is higher than the Winning Bid Rate will be rejected.
(b) In the event there are not Sufficient Clearing Bids for 2002 Series
B Bonds, subject to the further provisions of subsections (c) and (d) below,
Submitted Orders for 2002 Series B Bonds will be accepted or rejected as follows
in the following order of priority:
(i) the Submitted Hold Order of each Existing Owner will be accepted,
thus requiring each such Existing Owner to continue to hold the 2002 Series B
Bonds that are the subject of such Submitted Hold Order;
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(ii) the Submitted Bid of each Existing Owner specifying any rate that
is not higher than the Maximum Auction Rate will be accepted, thus requiring
each such Existing Owner to continue to hold the 2002 Series B Bonds that are
the subject of such Submitted Bid;
(iii) the Submitted Bid of each Potential Owner specifying any rate
that is not higher than the Maximum Auction Rate will be accepted, thus
requiring each such Potential Owner to purchase the 2002 Series B Bonds that are
the subject of such Submitted Bid;
(iv) the Submitted Sell Orders of each Existing Owner will be accepted
as Submitted Sell Orders and the Submitted Bids of each Existing Owner
specifying any rate that is higher than the Maximum Auction Rate will be deemed
to be and will be accepted as Submitted Sell Orders, in both cases only up to
and including the principal amount of 2002 Series B Bonds obtained by
multiplying (A) the aggregate principal amount of 2002 Series B Bonds subject to
Submitted Bids described in paragraph (iii) of this subsection (b) by (B) a
fraction the numerator of which will be the principal amount of Outstanding 2002
Series B Bonds held by such Existing Owner subject to such Submitted Sell Order
or such Submitted Bid deemed to be a Submitted Sell Order and the denominator of
which will be the principal amount of Outstanding 2002 Series B Bonds subject to
all such Submitted Sell Orders and such Submitted Bids deemed to be Submitted
Sell Orders, and the remainder of each such Submitted Sell Order or Submitted
Bid will be deemed to be and will be accepted as a Hold Order and each such
Existing Owner will be required to continue to hold such excess amount of 2002
Series B Bonds; and
(v) the Submitted Bid of each Potential Owner specifying any rate that
is higher than the Maximum Auction Rate will be rejected.
(c) If, as a result of the procedures described in subsection (a) or
(b) above, any Existing Owner or Potential Owner would be required to purchase
or sell an aggregate principal amount of 2002 Series B Bonds which is not an
integral multiple of $50,000 on any Auction Date, the Auction Agent will by lot,
in such manner as it will determine in its sole discretion, round up or down the
principal amount of 2002 Series B Bonds to be purchased or sold by any Existing
Owner or Potential Owner on such Auction Date so that the aggregate principal
amount of 2002 Series B Bonds purchased or sold by each Existing Owner or
Potential Owner on such Auction Date will be an integral multiple of $50,000,
even if such allocation results in one or more of such Existing Owners or
Potential Owners not purchasing or selling any 2002 Series B Bonds on such
Auction Date.
(d) If, as a result of the procedures described in subsection (a)
above, any Potential Owner would be required to purchase less than $50,000 in
principal amount of 2002 Series B Bonds on any Auction Date, the Auction Agent
will by lot, in such manner as it will determine in its sole discretion,
allocate 2002 Series B Bonds for purchase among Potential Owners so that the
principal amount of 2002 Series B Bonds purchased on such Auction Date by any
Potential Owner will be an integral multiple of $50,000, even if such allocation
results in one or more of such Potential Owners not purchasing 2002 Series B
Bonds on such Auction Date.
2.05 Notice of Auction Mode Rate.
(a) On each Auction Date, the Auction Agent will notify by telephone or
other telecommunication device or other electronic communication acceptable to
the parties or in writing each Broker-Dealer that participated in the Auction
held on such Auction Date of the following with respect to 2002 Series B Bonds
for which an Auction was held on such Auction Date:
(i) the Auction Mode Rate determined on such Auction Date for the
succeeding Auction Period;
(ii) whether Sufficient Clearing Bids existed for the determination of
the Winning Bid Rate;
(iii) if such Broker-Dealer submitted a Bid or a Sell Order on behalf
of an Existing Owner, whether such Bid or Sell Order was accepted or rejected
and the principal amount of 2002 Series B Bonds, if any, to be sold by such
Existing Owner;
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(iv) if such Broker-Dealer submitted a Bid on behalf of a Potential
Owner, whether such Bid was accepted or rejected and the principal amount of
2002 Series B Bonds, if any, to be purchased by such Potential Owner;
(v) if the aggregate principal amount of the 2002 Series B Bonds to be
sold by all Existing Owners on whose behalf such Broker-Dealer submitted Bids or
Sell Orders is different from the aggregate principal amount of 2002 Series B
Bonds to be purchased by all Potential Owners on whose behalf such Broker-Dealer
submitted a Bid, the name or names of one or more Broker-Dealers (and the Agent
Member, if any, of each such other Broker-Dealer) and the principal amount of
2002 Series B Bonds to be (A) purchased from one or more Existing Owners on
whose behalf such other Broker-Dealers submitted Bids or Sell Orders or (B) sold
to one or more Potential Owners on whose behalf such Broker-Dealer submitted
Bids; and
(vi) the immediately succeeding Auction Date.
(b) On each Auction Date, with respect to 2002 Series B Bonds for which
an Auction was held on such Auction Date, each Broker-Dealer that submitted an
Order on behalf of any Existing Owner or Potential Owner will: (i) advise each
Existing Owner and Potential Owner on whose behalf such Broker-Dealer submitted
an Order as to (A) the Auction Mode Rate determined on such Auction Date, (B)
whether any Bid or Sell Order submitted on behalf of each such Owner was
accepted or rejected and (C) the immediately succeeding Auction Date; (ii)
instruct each Potential Owner on whose behalf such Broker-Dealer submitted a Bid
that was accepted, in whole or in part, to instruct such Existing Owner's Agent
Member to pay to such Broker-Dealer (or its Agent Member) through the Securities
Depository the amount necessary to purchase the principal amount of 2002 Series
B Bonds to be purchased pursuant to such Bid (including, with respect to the
2002 Series B Bonds in a daily Auction Period, accrued interest if the purchase
date is not an Interest Payment Date for such Bond) against receipt of such 2002
Series B Bonds; and (iii) instruct each Existing Owner on whose behalf such
Broker-Dealer submitted a Sell Order that was accepted or a Bid that was
rejected in whole or in part, to instruct such Existing Owner's Agent Member to
deliver to such Broker-Dealer (or its Agent Member) through the Securities
Depository the principal amount of 2002 Series B Bonds to be sold pursuant to
such Bid or Sell Order against payment therefor.
2.06 Index.
(a) The Index on any Auction Date with respect to 2002 Series B Bonds
in any Auction Period of less than 95 days will be LIBOR on such date. The Index
with respect to 2002 Series B Bonds in any Auction Period of 95 days or more
will be the rate on United States Treasury securities having a maturity which
most closely approximates the length of the Auction Period as last published in
The Wall Street Journal. If either rate is unavailable, the Index will be an
index or rate agreed to by all Broker-Dealers and consented to by the Company.
(b) If for any reason on any Auction Date the Index will not be
determined as hereinabove provided in this Section, the Index will be the Index
for the Auction Period ending on such Auction Date.
(c) The determination of the Index as provided herein will be
conclusive and binding upon the Company, the Trustee, the Broker-Dealers, the
Auction Agent and the Holders of the 2002 Series B Bonds.
2.07. Miscellaneous Provisions Regarding Auctions.
(a) In this Auction Procedures Description, each reference to the
purchase, sale or holding of 2002 Series B Bonds will refer to beneficial
interests in 2002 Series B Bonds, unless the context clearly requires otherwise.
(b) During an Auction Rate Period, the provisions of the Supplemental
Indenture and the definitions contained therein and described in this Auction
Procedures Description, including without limitation the definitions of Default
Rate, Maximum Auction Rate, Minimum Auction Rate, No Auction Rate, Index,
Auction Mode Multiple and Auction Rate, may be amended pursuant to the Indenture
by obtaining the consent of the owners of all Outstanding 2002 Series B Bonds
bearing interest at the Auction Mode Rate as follows. If on the first Auction
Date occurring at least 20 days after the date on which the Trustee mailed
notice of such proposed amendment to the registered owners of the Outstanding
2002 Series B Bonds as required by the Indenture, (i) the Auction Mode Rate
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which is determined on such date is the Winning Bid Rate and (ii) there is
delivered to the Company, Trustee and Bond Insurer an Opinion of Counsel to the
effect that such amendment will not adversely affect the validity of the 2002
Series B Bonds, the proposed amendment will be deemed to have been consented to
by the Holders of all affected Outstanding 2002 Series B Bonds.
(c) If the Securities Depository notifies the Company that it is
unwilling or unable to continue as owner of the 2002 Series B Bonds or if at any
time the Securities Depository will no longer be registered or in good standing
under the Securities Exchange Act of 1934, as amended, or other applicable
statute or regulation and a successor to the Securities Depository is not
appointed by the Company within 90 days after the Company receives notice or
becomes aware of such condition, as the case may be, the Company will execute
and the Trustee will authenticate and deliver certificates representing the 2002
Series B Bonds. Such 2002 Series B Bonds will be registered in such names and
authorized denominations as the Securities Depository, pursuant to instructions
from the Agent Members or otherwise, will instruct the Company and the Trustee.
During an Auction Rate Period, so long as the ownership of the 2002
Series B Bonds is maintained in book-entry form by the Securities Depository, an
Existing Owner or a beneficial owner may sell, transfer or otherwise dispose of
a 2002 Series B Bond only pursuant to a Bid or Sell Order in accordance with the
Auction Procedures or to or through a Broker-Dealer, provided, however, that (i)
in the case of all transfers other than pursuant to Auctions, such Existing
Owner or its Broker-Dealer or its Agent Member advises the Auction Agent of such
transfer and (ii) a sale, transfer or other disposition of 2002 Series B Bonds
from a customer of a Broker-Dealer who is listed on the records of that
Broker-Dealer as the holder of such 2002 Series B Bonds to that Broker-Dealer or
another customer of that Broker-Dealer will not be deemed to be a sale, transfer
or other disposition for purposes of this paragraph if such Broker-Dealer
remains the Existing Owner of the 2002 Series B Bonds so sold, transferred or
disposed of immediately after such sale, transfer or disposition.
2.08 Changes in Auction Period or Auction Date.
(a) Changes in Auction Period.
(i) During any Auction Rate Period, the Company may, from time
to time on any Interest Payment Date, change the length of the Auction Period
with respect to all of the 2002 Series B Bonds among daily, seven-days, 28-days,
35-days, three months, six months and a Flexible Auction Period in order to
accommodate economic and financial factors that may affect or be relevant to the
length of the Auction Period and the interest rate borne by the 2002 Series B
Bonds; provided, however, that the prior consent of the Bond Insurer shall be
required prior to a change to an Auction Period in excess of 35 days. The
Company will initiate the change in the length of the Auction Period by giving
written notice to the Trustee, the Bond Insurer, the Auction Agent, the
Broker-Dealers and the Securities Depository that the Auction Period will change
if the conditions described herein are satisfied and the proposed effective date
of the change, which will be at least 10 Business Days prior to the Auction Date
for such Auction Period.
(ii) Any such changed Auction Period will be for a period of one day,
seven-days, 28-days, 35-days, three months, six months or a Flexible Auction
Period and will apply to all of the 2002 Series B Bonds.
(iii) The change in the length of the Auction Period will not be
allowed unless Sufficient Clearing Bids existed at both the Auction before the
date on which the notice of the proposed change was given as provided in this
subsection (a) and the Auction immediately preceding the proposed change. If the
condition referred to in the preceding sentence is not met, the Auction Rate for
the next Auction Period will be the Maximum Auction Rate, and the Auction Period
will be a seven-day Auction Period.
(iv) On the conversion date for 2002 Series B Bonds selected for
conversion from one Auction Period to another, any 2002 Series B Bonds which are
not the subject of a specific Hold Order or Bid will be deemed to be subject to
a Sell Order.
(b) Changes in Auction Date.During any Auction Rate Period, the Auction
Agent, with the written consent of the Company, may specify an earlier Auction
Date (but in no event more than five Business Days earlier) than the Auction
Date that would otherwise be determined in accordance with the definition of
"Auction Date" in order to conform with then current market practice with
respect to similar securities or to accommodate economic
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and financial factors that may affect or be relevant to the day of the week
constituting an Auction Date and the interest rate borne on the 2002 Series B
Bonds. The Auction Agent will provide notice of its determination to specify an
earlier Auction Date for an Auction Period by means of a written notice
delivered at least 45 days prior to the proposed changed Auction Date to the
Trustee, the Company, the Broker-Dealers and the Securities Depository.
2.09. Conversions from an Auction Mode Rate.
At the option of the Company, all or any portion of the 2002 Series B
Bonds may be converted from an Auction Mode Rate to a Daily Rate, a Weekly
Rate, a Flexible Rate or a Term Rate, as follows:
(i) If the 2002 Series B Bonds are in an Auction Period other than a
daily Auction Period, the Mode Adjustment Date will be the second regularly
scheduled Interest Payment Date following the final Auction Date. If the 2002
Series B Bonds are in a daily Auction Period, the Mode Adjustment Date will be
the next regularly scheduled Interest Payment Date.
(ii) The Company will give written notice by an Officer's Certificate
of any such conversion to the Bond Insurer, the Trustee, the Auction Agent and
the Broker-Dealer not less than seven (7) Business Days prior to the date on
which the Trustee is required to notify the Bondholders of the conversion
pursuant to subparagraph (iii) below. Such Officer's Certificate will specify
the proposed Mode Adjustment Date and the Interest Mode to which the conversion
will be made (and the length of any Term Rate Period). Together with such
Officer's Certificate, the Company will file with the Bond Insurer, and the
Trustee, a Favorable Opinion of Bond Counsel to the effect that the proposed
conversion of 2002 Series B Bonds to a Daily Rate, a Weekly Rate, a Flexible
Rate or a Term Rate, including the assignment of maturity dates and sinking fund
payment dates, will not adversely affect the validity of the 2002 Series B
Bonds. No change to a Daily Rate, a Weekly Rate, a Flexible Rate or a Term Rate
will become effective unless the Company will also file with the Bond Insurer
and the Trustee, such an opinion dated the Mode Adjustment Date.
(iii) Not less than twenty (20) days prior to the Mode Adjustment Date,
the Trustee will mail a written notice of the conversion to the holders of all
2002 Series B Bonds to be converted, specifying the Mode Adjustment Date and
setting forth the matters required to be stated pursuant to the Supplemental
Indenture with respect to purchases of 2002 Series B Bonds.
(iv) If on a Mode Adjustment Date any condition precedent to such
conversion required under the Supplemental Indenture is not satisfied, the
Trustee will give written notice by first class mail postage prepaid as soon as
practicable and in any event not later than the next succeeding Business Day to
the Bondholders, the Company and the Bond Insurer that such conversion has not
occurred, that the 2002 Series B Bonds will not be purchased on the failed Mode
Adjustment Date, that the Auction Agent will continue to implement the Auction
Procedures on the Auction Dates with respect to the 2002 Series B Bonds which
otherwise would have been converted excluding however, the Auction Date falling
on the Business Day next preceding the failed Mode Adjustment Date, and that
the interest rate will continue to be the Auction Mode Rate; provided, however,
that the interest rate borne by the 2002 Series B Bonds during the Auction
Period commencing on such failed Mode Adjustment Date will be the Maximum
Auction Rate, and the Auction Period will be the seven-day Auction Period.
(v) A Liquidity Facility meeting the requirements of the Supplemental
Indenture.
In addition, all or a portion of the 2002 Series B Bonds may be
converted to a Fixed Rate pursuant to the terms of the Supplemental Indenture.
3. AUCTION AGENT
3.01. Auction Agent.
The Auction Agent will be appointed by the Trustee at the written
direction of the Company, to perform the functions specified herein and will be
approved by the Bond Insurer. The Auction Agent will designate its Principal
Office and signify its acceptance of the duties and obligations imposed upon it
hereunder by a written instrument delivered to the Trustee, the Company and each
Broker-Dealer which will set forth such procedural and other
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matters relating to the implementation of the Auction Procedures as will be
satisfactory to the Company, Trustee and Bond Insurer.
3.02 Qualifications of Auction Agent; Resignation; Removal.
The Auction Agent will be (a) a bank or trust company organized under
the laws of the United States or any state or territory thereof having a
combined capital stock, surplus and undivided profits of at least $30,000,000,
or (b) a member of the National Association of Securities Dealers, Inc. having a
capitalization of at least $30,000,000 and, in either case, authorized by law to
perform all the duties imposed upon it by the Supplemental Indenture and a
member of or a participant in, the Securities Depository. The Auction Agent may
at any time resign and be discharged of the duties and obligations created by
the Supplemental Indenture by giving at least ninety (90) days' notice to the
Company, the Bond Insurer and the Trustee. The Auction Agent may be removed at
any time by the Company by written notice, delivered to the Auction Agent, the
Company, the Bond Insurer and the Trustee. Upon any such resignation or removal,
the Trustee, upon written direction of the Company, will appoint a successor
Auction Agent meeting the requirements of this section. In the event of the
resignation or removal of the Auction Agent, the Auction Agent will pay over,
assign and deliver any moneys and 2002 Series B Bonds held by it in such
capacity to its successor. The Auction Agent will continue to perform its duties
until its successor has been appointed by the Trustee. In the event that the
Auction Agent has not been compensated for its services, the Auction Agent may
resign by giving thirty (30) days notice to the Company and the Trustee even if
a successor Auction Agent has not been appointed.
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CHUGACH ELECTRIC
ASSOCIATION, INC.
$120,000,000 6.20% 2002 Series A Bonds Due 2012
$60,000,000 2002 Series B Bonds Due 2012
[CHUGACH LOGO]
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PROSPECTUS
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JPMorgan