Chugach Electric Association 10-Q 2017 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2017

OR

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

Commission file number 33-42125

CHUGACH ELECTRIC ASSOCIATION, INC.

(Exact name of registrant as specifies in its charter)

State of Alaska (State or other jurisdiction of incorporation or organization)	92-0014224 (I.R.S. Employer Identification No.)
5601 Electron Drive, Anchorage, AK (Address of principal executive offices)	99518 (Zip Code)
(907) 563-7494 (Registrant’s telephone number, including area code) None (Former name, former address, and former fiscal year if changed since last report)

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

☐ Yes  ☒ No

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

☒ Yes  ☐ No

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒ (Do not check if a smaller reporting company)	Smaller reporting company ☐
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

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

☐ Yes  ☒ No

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

NONE

CHUGACH ELECTRIC ASSOCIATION, INC.

TABLE OF CONTENTS

Caution Regarding Forward-Looking Statements			2
Part I. Financial Information
	Item 1.	Financial Statements (unaudited)	2
		Consolidated Balance Sheets - as of September 30, 2017, and December 31, 2016	3
		Consolidated Statements of Operations - Three and nine months ended September 30, 2017, and September 30, 2016	5
		Consolidated Statements of Cash Flows - Nine months ended September 30, 2017, and September 30, 2016	6
		Notes to Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
	Item 4.	Controls and Procedures	34
Part II. Other Information
	Item 1.	Legal Proceedings	35
	Item 1A.	Risk Factors	35
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
	Item 3.	Defaults Upon Senior Securities	37
	Item 4.	Mine Safety Disclosures	37
	Item 5.	Other Information	37
	Item 6.	Exhibits	38
		Signatures	39
		Exhibits	40

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Statements in this report that do not relate to historical facts, including statements relating to future plans, events or performance, are forward-looking statements that involve risks and uncertainties.  Actual results, events or performance may differ materially.  Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date of this report and the accuracy of which is subject to inherent uncertainty.  It is suggested that these statements be read in conjunction with the audited financial statements for Chugach Electric Association Inc. (Chugach) for the year ended December 31, 2016, filed as part of Chugach’s annual report on Form 10-K.  Chugach undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances that may occur after the date of this report or the effect of those events or circumstances on any of the forward-looking statements contained in this report, except as required by law.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The unaudited financial statements and notes to the unaudited financial statements of Chugach as of and for the quarter ended September 30, 2017, follow.

Assets	September 30, 2017		December 31, 2016
Utility Plant:
Electric plant in service	$	1,206,712,928	$	1,192,513,869
Construction work in progress		15,817,120		18,455,940
Total utility plant		1,222,530,048		1,210,969,809
Less accumulated depreciation		(513,861,377)		(496,098,131)
Net utility plant		708,668,671		714,871,678
Other property and investments, at cost:
Nonutility property		76,889		76,889
Investments in associated organizations		8,980,409		9,349,311
Special funds		1,137,189		907,836
Restricted cash equivalents		975,732		810,559
Investments - other		1,419,574		3,061,434
Total other property and investments		12,589,793		14,206,029
Current assets:
Cash and cash equivalents		3,966,322		4,672,935
Special deposits		54,300		75,942
Restricted cash equivalents		737,517		899,723
Investments - other		1,891,407		0
Marketable securities		8,384,626		7,375,381
Fuel cost under-recovery		1,443,967		0
Accounts receivable, net		29,662,805		33,000,919
Materials and supplies		14,063,331		27,889,167
Fuel stock		10,773,773		6,321,676
Prepayments		4,921,490		1,407,026
Other current assets		316,335		294,697
Total current assets		76,215,873		81,937,466
Other non-current assets:
Deferred charges, net		33,819,717		25,140,957
Total other non-current assets		33,819,717		25,140,957
Total assets	$	831,294,054	$	836,156,130

Liabilities, Equities and Margins	September 30, 2017		December 31, 2016
Equities and margins:
Memberships	$	1,712,704	$	1,691,014
Patronage capital		168,190,154		169,996,436
Other		14,016,284		13,828,075
Total equities and margins		183,919,142		185,515,525
Long-term obligations, excluding current installments:
Bonds payable		421,833,331		405,249,998
Notes payable		37,962,000		40,356,000
Less unamortized debt issuance costs		(2,734,709)		(2,715,745)
Total long-term obligations		457,060,622		442,890,253
Current liabilities:
Current installments of long-term obligations		26,608,667		24,836,667
Commercial paper		51,000,000		68,200,000
Accounts payable		7,712,302		9,618,630
Consumer deposits		5,219,743		5,207,585
Fuel cost over-recovery		0		3,824,722
Accrued interest		1,095,652		5,873,368
Salaries, wages and benefits		7,310,097		7,315,898
Fuel		9,501,633		6,284,338
Other current liabilities		8,146,356		3,234,586
Total current liabilities		116,594,450		134,395,794
Other non-current liabilities:
Deferred compensation		1,137,189		907,836
Other liabilities, non-current		863,220		655,277
Deferred liabilities		1,574,566		1,179,414
Patronage capital payable		10,798,077		12,008,499
Cost of removal obligation / ARO		59,346,788		58,603,532
Total other non-current liabilities		73,719,840		73,354,558
Total liabilities, equities and margins	$	831,294,054	$	836,156,130

See accompanying notes to financial statements.

	Three months ended September 30,				Nine months ended September 30,
	2017		2016		2017		2016
Operating revenues	$	49,405,607	$	45,132,973	$	161,753,739	$	140,005,625
Operating expenses:
Fuel		17,291,134		11,825,993		55,487,263		37,661,493
Production		4,711,160		4,218,378		12,951,877		12,111,405
Purchased power		3,089,568		3,067,950		11,739,475		11,258,778
Transmission		1,548,215		1,653,494		4,598,273		4,369,240
Distribution		4,080,959		3,769,984		10,368,772		10,530,563
Consumer accounts		1,483,127		1,509,664		4,580,216		4,704,764
Administrative, general and other		4,666,137		5,010,460		17,776,742		17,068,780
Depreciation and amortization		7,980,294		9,252,379		26,936,964		26,435,059
Total operating expenses	$	44,850,594	$	40,308,302	$	144,439,582	$	124,140,082
Interest expense:
Long-term debt and other		5,616,675		5,507,173		16,733,184		16,343,393
Charged to construction		(46,714)		(79,734)		(107,712)		(283,338)
Interest expense, net	$	5,569,961	$	5,427,439	$	16,625,472	$	16,060,055
Net operating margins	$	(1,014,948)	$	(602,768)	$	688,685	$	(194,512)
Nonoperating margins:
Interest income		164,207		89,118		471,038		253,455
Allowance for funds used during construction		19,555		32,978		45,219		117,189
Capital credits, patronage dividends and other		23,751		3,236		105,049		5,636
Total nonoperating margins	$	207,513	$	125,332	$	621,306	$	376,280
Assignable margins	$	(807,435)	$	(477,436)	$	1,309,991	$	181,768

See accompanying notes to financial statements.

	Nine months ended September 30,
	2017		2016
Cash flows from operating activities:
Assignable margins	$	1,309,991	$	181,768
Adjustments to reconcile assignable margins to net cash provided by operating activities:
Depreciation and amortization		26,936,964		26,435,059
Amortization and depreciation cleared to operating expenses		3,548,294		3,799,494
Allowance for funds used during construction		(45,219)		(117,189)
Write off of inventory, deferred charges and projects		393,341		774,190
Other		(52,782)		42,267
(Increase) decrease in assets:
Accounts receivable, net		1,955,518		1,242,132
Fuel cost under-recovery		(1,443,967)		0
Materials and supplies		2,183,548		792,607
Fuel stock		(4,452,097)		(1,436,315)
Prepayments		(3,514,464)		(1,588,834)
Other assets		4		(56,821)
Deferred charges		(432,465)		(3,186,363)
Increase (decrease) in liabilities:
Accounts payable		(1,282,462)		(828,693)
Consumer deposits		12,158		115,384
Fuel cost over-recovery		(3,824,722)		76,906
Accrued interest		(4,777,716)		(4,822,053)
Salaries, wages and benefits		(5,801)		(8,242)
Fuel		3,217,295		393,451
Other current liabilities		131,182		(586,163)
Deferred liabilities		0		6,131
Net cash provided by operating activities		19,856,600		21,228,716
Cash flows from investing activities:
Return of capital from investment in associated organizations		370,010		319,233
Investment in restricted cash equivalents		(2,967)		(199)
Investment in marketable securities and investments-other		(1,158,521)		(8,895,871)
Investment in Beluga River Unit		0		(44,421,161)
Proceeds from capital grants		115,452		387,692
Extension and replacement of plant		(21,844,914)		(26,494,465)
Net cash used in investing activities		(22,520,940)		(79,104,771)
Cash flows from financing activities:
Payments for debt issue costs		(208,498)		(274,373)
Net increase (decrease) in short-term obligations		(17,200,000)		45,200,000
Proceeds from long-term obligations		40,000,000		45,600,000
Repayments of long-term obligations		(24,038,667)		(47,269,832)
Memberships and donations received		209,899		102,806
Retirement of patronage capital and estate payments		(484,345)		(209,043)
Net receipts on consumer advances for construction		3,679,338		2,817,862
Net cash provided by financing activities		1,957,727		45,967,420
Net change in cash and cash equivalents		(706,613)		(11,908,635)
Cash and cash equivalents at beginning of period	$	4,672,935	$	15,626,919
Cash and cash equivalents at end of period	$	3,966,322	$	3,718,284
Supplemental disclosure of non-cash investing and financing activities:
Cost of removal obligation	$	743,256	$	5,776,366
Extension and replacement of plant included in accounts payable	$	1,291,167	$	2,195,012
Supplemental disclosure of cash flow information - interest expense paid, net of amounts capitalized	$	20,518,560	$	19,980,489

See accompanying notes to financial statements.

1. PRESENTATION OF FINANCIAL INFORMATION

The accompanying unaudited interim financial statements include the accounts of Chugach Electric Association, Inc. (Chugach) and have been prepared in accordance with generally accepted accounting principles for interim financial information.  Accordingly, they do not include all of the information and footnotes required by United States of America generally accepted accounting principles (U.S. GAAP) for complete financial statements.  They should be read in conjunction with Chugach’s audited financial statements for the year ended December 31, 2016, filed as part of Chugach’s annual report on Form 10-K.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  The results of operations for interim periods are not necessarily indicative of the results that may be expected for an entire year or any other period.

2. DESCRIPTION OF BUSINESS

Chugach is one of the largest electric utilities in Alaska. Chugach is engaged in the generation, transmission and distribution of electricity in the Anchorage and upper Kenai Peninsula areas. Chugach is on an interconnected regional electrical system in an area referred to as the Alaska 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’s retail and wholesale members are the consumers of the electricity sold. Chugach supplies much of the power requirements of the City of Seward (Seward), as a wholesale customer. Periodically, Chugach sells available generation, in excess of its own needs, to Matanuska Electric Association, Inc. (MEA),  Homer Electric Association, Inc. (HEA), Golden Valley Electric Association, Inc. (GVEA) and Anchorage Municipal Light & Power (ML&P).

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

Chugach has three Collective Bargaining Agreements (CBA’s) with the International Brotherhood of Electrical Workers (IBEW), representing approximately 70% of its workforce. Chugach also has a CBA with the Hotel Employees and Restaurant Employees (HERE). All three IBEW CBA’s have been renewed through June 30, 2021. The three CBA’s provide for wage increases in all years and include health and welfare premium cost sharing provisions. The HERE CBA was renewed through June 30, 2021,  and provides for wage, pension contribution, and health and welfare contribution increases in all years.