(15) Commitments and Contingencies

Contingencies

Chugach is a participant in various legal actions, rate disputes, personnel matters and claims both for and against Chugach’s interests. Management believes the outcome of any such matters will not materially impact Chugach’s financial condition, results of operations or liquidity.

(15) Commitments and Contingencies (continued)

Concentrations

Approximately 70 percent of our employees are members of the International Brotherhood of Electrical Workers (IBEW). Chugach has three Collective Bargaining Unit Agreements (CBA) with the IBEW. We also have an agreement with the Hotel Employees and Restaurant Employees (HERE). All three IBEW CBA’s were extended by the Board on February 24, 2010. The contract extensions expire on June 30, 2013. On April 28, 2010, the Board approved a three year extension of the HERE agreement. The contract extension also expires on June 30, 2013. Two of the bargaining units have ratified tentative agreements extending their labor agreements through June 30, 2017. Chugach is currently negotiating with the final IBEW bargaining unit.

Chugach is the principal supplier of power under long-term wholesale power contracts with MEA and HEA. These contracts represented $100.6 million or 39 percent of sales revenue in 2012, $104.0 million or 37 percent in 2011, and $89.1 million or 35 percent in 2010. The HEA contract expires January 1, 2014, and the MEA contract expires December 31, 2014. Non-renewal of these contracts could have a negative impact on the rates charged to other Chugach customers. Notification was made by MEA and HEA that neither organization intends to renew these contracts. MEA advised Chugach that it desired to open discussions regarding power sales possibilities beyond 2014. Chugach proposed a power supply offer to MEA on January 11, 2011, and again on January 31, 2012. Chugach received a response on February 29, 2012, indicating that MEA was following the path its membership most favored and is moving forward with plans to build its own generation plant. All rates are established by the RCA.

Fuel Supply Contracts

Chugach has fuel supply contracts from various producers at market terms. Previous contracts expired at the end of the currently committed volumes in 2010 and 2011. A gas supply contract between Chugach and ConocoPhillips Alaska, Inc. and ConocoPhillips, Inc. (collectively “COP”), was approved by the RCA effective August 21, 2009. The new contract provided gas beginning in 2010 and will terminate December 31, 2016. The total amount of gas under the contract is now estimated to be 60 BCF. The RCA approved a new natural gas supply contract with Marathon Alaska Production, LLC (MAP) effective May 17, 2010. The new MAP contract provided gas beginning April 1, 2011 and will terminate December 31, 2014, which includes two contract extensions that were exercised in 2011. The total amount of gas under contract is now estimated up to 40 billion cubic feet (BCF). These contracts fill 100 percent of Chugach’s needs through December 2014, approximately 70 percent of Chugach’s needs through December 2015 and approximately 40 percent in 2016. All of the production is expected to come from Cook Inlet, Alaska. In 2012, 89 percent of our power was generated from gas, compared to 92 percent and 89 percent in 2011 and 2010 respectively. Of that gas-fired power, 83 percent was generated at Chugach’s Beluga Power Plant in 2012 compared with 79 percent in 2011 and 78 percent in 2010.

(15) Commitments and Contingencies (continued)

The terms of the COP and MAP agreements require Chugach to handle the natural gas transportation over the connecting pipeline systems. Effective October 1, 2012, Chugach and Hilcorp Alaska, LLC (Hilcorp) entered into a gas exchange agreement to exchange gas between the east and west side of Cook Inlet. This agreement terminates on September 30, 2013. We have gas transportation agreements with ENSTAR Natural Gas Company (ENSTAR) and Marathon Oil Company. The following represents the cost of fuel purchased and or transported from these vendors as a percentage of total fuel costs for the years ended December 31:


	2012	2011	2010
Marathon Oil Company	72.0%	44.9%	24.1%
Chevron / Unocal / Hilcorp	1.3%	16.1%	26.4%
ML&P	0.0%	3.6%	14.2%
ConocoPhillips (COP)	24.2%	31.9%	35.1%
ENSTAR	2.2%	1.3%	0.2%
Miscellaneous	0.3%	2.2%	0.0%

Patronage Capital Payable

In 2007, Chugach entered into an agreement with HEA to return all of its patronage capital within five years after expiration of its power sales agreement, which was related to a settlement agreement associated with the 2005 Test Year General Rate Case (Docket U-06-134). The agreement was contingent on the RCA accepting the parties’ settlement agreement in Docket U-06-134, which occurred on August 9, 2007. HEA’s patronage capital should have been classified as a liability at that time. HEA’s patronage capital was $6.5 million at December 31, 2010. As the amount of the patronage capital was not material for any period, Chugach recorded an adjustment in the first quarter of 2011 to reclassify the amount of $6.5 million from patronage capital to patronage capital payable and is included in the retirement of capital credits on our Statements of Changes in Equities and Margins. HEA’s patronage capital was $6.9 million at December 31, 2012 and $6.6 million at December 31, 2011, and is classified as patronage capital payable on our Balance Sheet.

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 to fund the governing regulatory commission, which is currently the RCA. The tax is assessed on all retail consumers and is based on kilowatt-hour (kWh) consumption. The tax is collected monthly and remitted to the State of Alaska quarterly. The Regulatory Cost Charge has changed since its inception (November 1992) from an initial rate of $0.000626 per kWh to the current rate of $0.000568, effective July 1, 2012. The tax is reported on a net basis and the tax is not included in revenue or expense.

(15) Commitments and Contingencies (continued)

Sales Tax

Chugach collects sales tax on retail electricity sold to Kenai and Whittier consumers. The tax is

ollected monthly and remitted to the Kenai Peninsula Borough quarterly. Sales tax is reported

on a net basis and the tax is not included in revenue or expense.

Gross Receipts Tax

Chugach pays to the State of Alaska a gross receipts tax in lieu of state and local ad valorem, income and excise taxes on electricity sold in the retail market. The tax is accrued monthly and remitted annually. The tax is reported on a net basis and the tax is not included in revenue.

Production taxes

Production taxes on Chugach fuel purchases are paid directly to our gas producers and are recorded under “Fuel” in Chugach’s financial statements.

Underground Compliance Charge

In 2005 the Anchorage Municipal Assembly adopted an ordinance to require utilities to convert overhead distribution lines to underground. To comply with the ordinance, Chugach must invest 2 percent of gross retail revenue in the Municipality of Anchorage annually in moving existing distribution overhead lines underground. Consistent with State of Alaska undergrounding requirement, Chugach is permitted to amend its rates by adding a 2 percent charge to its retail members’ bills to recover the actual costs of the program. The rate amendments are not subject to RCA review or approval. Chugach’s liability was $3,786,031 and $2,611,110 for this charge at December 31, 2012 and 2011, respectively and will use the funds to offset the costs of the projects.

Environmental Matters

The Clean Air Act and Environmental Protection Agency (EPA) regulations under the Clean Air Act establish ambient air quality standards and limit the emission of many air pollutants.

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

(15) Commitments and Contingencies (continued)

Environmental Matters (continued)

SPP was required by its Air Quality Permit to collect ambient air background data. Data collection began on September 1, 2011 and continued through August 31, 2012. On December 19, 2012, the Alaska Department of Environmental Conservation (ADEC) determined that the ambient pollutant data at SPP meets the requirements of the Prevention of Significant Deterioration (PSD) program set forth by the EPA. This action completed the data collection requirement.

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

Generation Commitments

Chugach is in the process of developing a natural gas-fired generation plant on land owned by Chugach near its Anchorage headquarters. SPP was developed and owned by Chugach and ML&P as tenants in common. Chugach will own and take approximately 70 percent of the new plant’s output and ML&P will own and take the remaining output. Chugach will proportionately account for its ownership in SPP. Chugach executed a gas turbine purchase agreement for the purchase of three gas turbines and a spare engine for maintenance purposes with GE Packaged Power, Inc. (GEPP). Chugach has also executed an owner’s engineer services contract, a steam turbine generator (STG) purchase agreement, an engineering, procurement, and construction (EPC) contract, a once through steam generator (OTSG) equipment and transportation contracts for transportation of all purchased equipment. All equipment, including the spare engine, has been received. Chugach received an air quality permit from the Alaska Department of Environmental Conservation in 2010, allowing the project to begin construction in the spring of 2011 as planned. On March 15, 2011, the initial building permit was received from the Municipality of Anchorage. Chugach made payments of $85.7 million in 2012 and $130.5 million in 2011 pursuant to its contracts associated with SPP. Additional payments of $13.0 million have been paid or are expected to be paid in 2013. Commercialization of the project occurred on February 1, 2013.

(15) Commitments and Contingencies (continued)

Economy Energy Sales

On October 5, 2012, Chugach and GVEA finalized arrangements for Chugach to provide economy energy to GVEA until March of 2015. Sales will be made under the terms and conditions of Chugach’s economy energy sales tariff. The price to GVEA will include the cost of fuel, variable operations and maintenance expense and a margin. Chugach has also entered into gas supply arrangements for GVEA economy energy sales.

Cooper Lake Hydroelectric Project

The Cooper Lake Hydroelectric Project received a 50-year license from FERC in August of 2007. A condition of that license is a requirement to construct a Stetson Creek diversion structure, a pipeline to Cooper Lake, and a bypass structure to release warmer water from Cooper Lake into Cooper Creek. If the project is not feasible or if the cost estimate materially exceeds the terms of the license, Chugach has the option to request a license amendment. At the time the project was being relicensed the estimated cost to complete the project was $12.0 million. The current estimate to complete the project is now $21.9 million. As an alternative to requesting a license amendment from FERC, Chugach requested grants from the State of Alaska. Funding for this project includes $0.6 million in grants received, $5.8 million in grants authorized and $3.5 million in grants requested. The Chugach Board authorized expenditures for the project November 15, 2012. The diversion project will be constructed in 2013 and 2014, and will operate through the duration of the license.