SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 33-42125
CHUGACH ELECTRIC ASSOCIATION, INC.
Incorporated pursuant to the Laws of Alaska State
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Internal Revenue Service - Employer Identification No. 92-0014224
5601 Minnesota Drive, Anchorage, AK 99518
(907) 563-7494
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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 X No
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT NOVEMBER 1, 2002
NONE NONE
Page Number
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 2
Balance Sheets, September 30, 2002 and December 31, 2001 3
Statements of Revenues, Expenses and Patronage Capital,
Three and Nine Months Ended September 30, 2002 and 2001 5
Statements of Cash Flows, Nine Months Ended September 30, 2002
and 2001 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 1 0
Item 3. Quantitative and Qualitative Disclosures About Market Risk 1 6
Item 4. Controls and Procedures 1 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 1 8
Item 2. Changes in Securities and Use of Proceeds 1 8
Item 3. Defaults Upon Senior Securities 1 8
Item 4. Submission of Matters to a Vote of Security Holders 1 8
Item 5. Other Information 1 9
Item 6. Exhibits and reports on Form 8-K 1 9
Signatures 2 0
Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 2 1
Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 2 2
Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 2 3
Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 2 4
<page>
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Statements in this report that do not relate to historical facts, including
statements relating to future plans, events or performance, are
forward-looking statements that involve risks and uncertainties. Actual
results, events or performance may differ materially. Readers are cautioned
not to place undue reliance on these forward-looking statements, that speak
only as of the date of this report and the accuracy of which is subject to
inherent uncertainty. Chugach Electric Association, Inc. (Chugach or the
Association) undertakes no obligation to publicly release any revisions to
these forward-looking statements to reflect events or circumstances that
may occur after the date of this report or the 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 financial statements of
Chugach for the quarter ended September 30, 2002, follow:
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
<table>
<caption>
(Unaudited)
Assets September 30, 2002 December 31, 2001
------ ------------------ -----------------
Utility plant:
Electric plant in service $ 732,604,958 $ 714,317,863
Construction work in progress 22,150,983 28,887,008
---------- ----------
754,755,941 743,204,871
Less accumulated depreciation (275,048,177) (261,353,177)
------------- -------------
479,707,764 481,851,694
Other property and investments, at cost:
Nonutility property 3,550 3,550
Investments in associated organizations 10,544,946 10,485,186
---------- ----------
10,548,496 10,488,736
Current assets:
Cash and cash equivalents 3,641,752 3,814,767
Cash-restricted construction funds 587,243 517,871
Special deposits 222,163 222,163
Accounts receivable, net 16,027,570 22,302,400
Fuel cost recovery 401,272 3,591,963
Materials and supplies 23,986,827 22,822,003
Prepayments 3,085,380 627,544
Other current assets 346,299 335,753
------- -------
48,298,506 54,234,464
Deferred charges 28,762,645 28,706,293
---------- ----------
Total Assets $ 567,317,411 $ 575,281,187
============= =============
<FN>
See accompanying notes to financial statements.
</FN>
</table>
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Continued)
(Unaudited)
Liabilities and Equities September 30, 2002 December 31, 2001
------------------------ ------------------ -----------------
Equities and margins:
Memberships $ 1,095,448 $ 1,059,098
Patronage capital 128,958,991 125,184,374
Other 5,421,886 5,565,234
--------- ---------
135,476,325 131,808,706
Long-term obligations, excluding current installments:
First Mortgage (1991 Series A) Bond payable 0 149,310,000
2001 Series A Bond payable 150,000,000 150,000,000
2002 Series A Bond payable 120,000,000 0
2002 Series B Bond payable 60,000,000 0
National Bank for Cooperatives Bonds payable 64,134,179 65,000,000
---------- ----------
394,134,179 364,310,000
Current liabilities:
Short-term obligations 11,000,000 11,000,000
Current installments of long-term obligations 865,821 10,409,945
Accounts payable 4,738,018 11,012,905
Consumer deposits 1,763,540 1,603,691
Accrued interest 2,059,527 7,378,058
Salaries, wages and benefits 5,027,391 4,844,819
Fuel 7,096,506 11,565,117
Other current liabilities 1,487,602 1,900,155
--------- ---------
34,038,405 59,714,690
Deferred credits 3,668,502 19,447,791
--------- ----------
Total Liabilities and Equities $ 567,317,411 $ 575,281,187
============= =============
<FN>
See accompanying notes to financial statements.
</FN>
</table>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
(Unaudited)
Three months ended September 30 Nine months ended September 30
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues $41,523,323 $42,186,684 $ 132,929,592 $ 126,400,956
Operating expenses:
Fuel 11,320,700 12,537,245 36,016,679 39,441,150
Power production 3,389,458 2,373,466 10,113,399 8,146,782
Purchased power 4,165,054 5,176,508 14,172,137 9,147,759
Transmission 876,754 860,666 2,871,203 2,731,599
Distribution 2,522,722 2,484,640 7,746,900 7,260,234
Consumer accounts/Information expense 1,478,932 1,424,496 4,373,951 4,042,754
Sales expense 0 130,946 0 352,051
Administrative, general and other 5,496,010 4,229,961 15,470,650 13,951,269
Depreciation and amortization 6,299,242 6,373,276 18,862,947 18,678,752
--------- --------- ---------- ----------
Total operating expenses 35,548,872 35,591,204 109,627,866 103,752,350
Interest expense:
On long-term obligations 6,026,315 7,029,623 20,158,954 20,116,937
On short-term obligations 70,644 14,166 229,436 1,105,954
Charged to construction-credit (102,069) (363,665) (358,663) (814,285)
--------- --------- --------- ---------
Net interest expense 5,994,890 6,680,124 20,029,727 20,408,606
--------- --------- ---------- ----------
Net operating margins (20,439) (84,644) 3,271,999 2,240,000
Nonoperating margins:
Interest income 93,200 156,645 638,401 536,828
Other (1,827) 162,395 266,709 381,818
Property gain (loss) 3,273 (192,138) (188,751) (180,456)
----- --------- --------- ---------
Total nonoperating margins 94,646 126,902 716,359 738,190
------ ------- ------- -------
Assignable margins 74,207 42,258 3,988,358 2,978,190
====== ====== ========= =========
Patronage capital at beginning of period 128,955,925 125,743,981 125,184,374 122,925,253
Retirement of capital credits and estate
Payments (71,141) (115,645) (213,741) (232,849)
-------- --------- --------- ---------
Patronage capital at end of period $ 128,958,991 $ 125,670,594 $ 128,958,991 $ 125,670,594
============= ============= ============= =============
<FN>
See accompanying notes to financial statements.
</FN>
</table>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
(Unaudited)
Nine months ended September 30
2002 2001
---- ----
Cash flows from operating activities:
Assignable margins $3,988,358 $2,978,190
Adjustments to reconcile assignable margins to net cash provided (used) by
operating activities:
Depreciation and amortization 18,862,947 18,678,752
Capitalization of interest (401,431) (1,048,122)
Property gains, net (188,751) (190,456)
Other 2,116 (11,920)
Changes in assets and liabilities:
(Increase) decrease in assets:
Fuel cost recovery 3,190,691 1,308,950
Accounts receivable 6,274,830 (289,140)
Prepayments (2,457,835) (757,158)
Materials and supplies (1,164,824) 375,836
Deferred charges 1,655,610 (2,826,912)
Other (10,546) 607,881
Increase (decrease) in liabilities:
Accounts payable (5,641,761) (6,006,155)
Consumer deposits 159,849 224,087
Accrued interest (5,318,532) (4,458,649)
Deferred credits (15,743,826) (1,690,660)
Other (5,331,718) 1,223,545
----------- ---------
Net cash (used) provided by operating activities (2,124,823) 8,118,069
Cash flows from investing activities:
Extension and replacement of plant (17,840,797) (29,610,734)
Investments in associated organizations (61,876) (80,063)
-------- --------
Net cash used in investing activities (17,902,673) (29,690,797)
Cash flows from financing activities:
Short-term obligations 0 (35,000,000)
Proceeds from long-term obligations 180,000,000 150,000,000
Repayments of long-term obligations (159,719,945) (88,930,350)
Retirement of patronage capital (213,741) (232,849)
Other (211,833) (116,618)
--------- ---------
Net cash provided by financing activities 19,854,481 25,720,183
Net increase (decrease) in cash and cash equivalents (173,015) 4,147,455
Cash and cash equivalents at beginning of period $3,814,767 $1,695,162
- ------------------------------------------------ ---------- ----------
Cash and cash equivalents at end of period $3,641,752 $5,842,617
- ------------------------------------------ ========== ==========
Supplemental disclosure of cash flow information - interest expense paid, net of
amounts capitalized 25,348,258 24,867,255
========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</table>
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
(Unaudited)
1. Presentation of Financial Information
During interim periods, Chugach Electric Association, Inc. (Chugach or
Association) 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
Form 10-K when reviewing interim financial results. The accompanying
unaudited interim financial statements reflect all adjustments, which are,
in the opinion of management, necessary for a fair statement of the results
for the interim periods presented.
Certain reclassifications have been made to the 2001 financial statements
to conform to the 2002 presentation.
2. Lines of credit
Chugach maintains a line of credit of $35 million with CoBank, ACB
(CoBank). The CoBank line of credit expires February 1, 2003, but is
subject to annual renewal. At September 30, 2002, $11 million was
outstanding on this line of credit at an interest rate of 3.24%. In
addition, the Association has an annual line of credit of $50 million
available at the National Rural Utilities Cooperative Finance Corporation
(NRUCFC). The NRUCFC line of credit expired October 14, 2002, but is
pending finalization of a new revolving line of credit agreement, which
Chugach expects to occur in November 2002. At September 30, 2002, there was
no outstanding balance on this line of credit.
3. Environmental Matters
The Association 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 state and
federal agencies and approved by FERC. In 2000, Chugach sampled sediments
and fish collected from Kenai Lake and other waters. While low levels of
PCBs were found in some sediment samples taken near the plant, no pathway
from sediment to fish was established. While the levels of PCBs in fish
from Kenai Lake were similar to levels found in fish from other lakes
within the region, Chugach has conducted additional sampling and analysis
of fish in Kenai Lake and other waters and on April 1, 2002, filed its
final report to FERC, which analyzed the results of the sampling. Based on
these analyses, Chugach concluded that no further PCB sampling and analysis
in Kenai Lake was necessary. In a letter dated June 18, 2002, FERC informed
<Page>
Chugach that its review of the report supported Chugach's conclusions and
agreed that Chugach was not required to conduct further PCB sampling and
analysis in Kenai Lake. 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. The Regulatory Commission of
Alaska, (RCA) has issued an order to Chugach allowing Chugach to record its
remediation costs as a Financial Accounting Standards Board (FASB) 71
asset, subject to a determination, in the presently ongoing rate case, of
the level of prudently-incurred costs that may be recovered through rates.
4. Legal Proceeding
Matanuska Electric Association, Inc., v. Chugach Electric Association,
Inc., Superior Court Case No. 3AN-99-8152 Civil
This action is a claim for a breach of the Tripartite Agreement, which is
the contract governing the parties' relationship for a 25-year period from
1989 through 2014 and governing the Association's sale of power to
Matanuska Electric Association, Inc. (MEA) during that time. MEA asserted
the Association breached that contract by failing to provide a variety of
kinds of information, by failing to properly manage the Association's
long-term debt, and by failing to bring its base rate action to a Joint
Committee, a committee defined in the power sales contract consisting of
one MEA and two Chugach board members, before presenting it to the RCA. All
of MEA's claims have been dismissed. On April 29, 2002, MEA appealed the
Superior Court's decisions relating to Chugach's financial management and
its failure to bring its base rate action to the joint committee before
filing with the RCA to the Alaska Supreme Court. Management is uncertain as
to the outcome but will vigorously defend the appeal.
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.
5. Critical Accounting Policies
The preparation of financial statements in conformity with principles
generally accepted in the United States of America (GAAP) requires that
management apply accounting policies and make estimates and assumptions
that affect results of operations and reported amounts of assets and
liabilities in the financial statements. The following areas represent
those that management believes are particularly important to the financial
statements and that require the use of estimates and assumptions to
describe matters that are inherently uncertain.
FERC Accounting
Chugach prepares its financial statements in accordance with GAAP and in
conformity with the FERC's uniform system of accounts.
Cost Basis Regulation
Chugach is subject to regulation by the RCA. The rates that are charged by
Chugach to its customers are based upon cost basis regulation reviewed and
approved by this regulatory commission. Under the authority of this
commission, Chugach has recorded certain regulatory assets in the amount of
$16.2 million as of September 30, 2002. If Chugach's rates were no longer
based upon cost or there was no longer the probability of future collection
in rates, these assets and liabilities would be written off against
assignable margins.
Financial Instruments and Hedging
Chugach has previously used U.S. Treasury forward rate lock agreements to
hedge expected interest rates on debt. The Association accounted for the
agreements under SFAS 80 and 71 through December 31, 2000, and SFAS 133,
138 and 71 subsequent to that date. Gains or losses are treated as
regulatory assets or liabilities upon settlement. If Chugach's rates were
no longer based upon cost or there was no longer the probability of future
collection in rates, these assets and liabilities would be written off
against assignable margins. Based on historical regulatory treatment on
previous refinancing, management believes the establishment and recovery of
Chugach's regulatory assets and liabilities is appropriate. Accounting for
derivatives continues to evolve through guidance issued by the Derivatives
Implementation Group (DIG) of the FASB. To the extent that changes by the
DIG modify current guidance, the accounting treatment for derivatives may
change.
6. Recent Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Statement No. 145 eliminates the treatment of
extinguishment of debt as extraordinary and clarifies the accounting for
certain sale-leaseback transactions. The provisions of Statement No. 145
are required to be applied starting with fiscal years beginning after May
15, 2002, with early adoption encouraged. The Association believes the
adoption of Statement No. 145 will have no impact on its financial
statements, as the costs associated with the extinguishment of debt are
accounted for under the provisions of Statement No. 71, Accounting for the
Effects of Certain Types of Regulation and the Association does not engage
in sale-leaseback transactions.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. The provisions of Statement No. 146 are required to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Association believes the adoption of Statement No.
146 will have no impact on its financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to the information contained under the caption "CAUTION
REGARDING FORWARD-LOOKING STATEMENTS" at the beginning of this Report.
Recent Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Statement No. 145 eliminates the treatment of
extinguishment of debt as extraordinary and clarifies the accounting for
certain sale-leaseback transactions. The provisions of Statement No. 145
are required to be applied starting with fiscal years beginning after May
15, 2002, with early adoption encouraged. The Association believes the
adoption of Statement No. 145 will have no impact on its financial
statements, as the costs associated with the extinguishment of debt are
accounted for under the provisions of Statement No. 71, Accounting for the
Effects of Certain Types of Regulation and the Association does not engage
in sale-leaseback transactions.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. The provisions of Statement No. 146 are required to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Association believes the adoption of Statement No.
146 will have no impact on its financial statements.
Regulatory Matters
Docket U-01-108
Chugach submitted a general rate case based on the 2000 test year to the
RCA on July 10, 2001. The filing requested an overall system base rate
increase of 4.0 percent on an interim basis and 6.5 percent on a permanent
basis. The Commission opened Docket U-01-108 to address the issues relating
to the 2000 test year period rate filing.
On September 5, 2001, the RCA issued Order No. 1 in Docket U-01-108 that
authorized an interim base demand and energy rate increase of 1.6 percent
for retail and wholesale billings effective September 14, 2001. Chugach
retail customers under the small general service and lighting tariffs were
exempt from the increase.
On September 25, 2001, Chugach submitted a request for reconsideration to
the RCA regarding specific adjustments to Chugach's revenue requirement
contained in the Commission order. On October 25, 2001, the Commission
ruled on Chugach's request for reconsideration, and granted an interim base
demand and energy rate increase of 3.97 percent, or about 2.4 percentage
points higher than the initial authorized increase of 1.6 percent. Chugach
<Page>
submitted a compliance filing implementing the Commission's Order on
October 30, 2001, and the additional rate increase was effective in
November 2001.
The interim rate increase was based on a normalized (adjusted for recurring
expenses) test year and a system ratemaking Times Interest Earned Ratio
(TIER) of 1.35.
As anticipated in Chugach's July 2001 original filing, on April 15, 2002,
Chugach submitted a filing with the RCA to update certain known and
measurable costs and savings that had occurred outside the 2000 Test Year.
In the updated filing, Chugach reduced its base rate increase request from
6.5% to 5.7%, or approximately $0.9 million in the revenue requirement on a
system basis. The revised filing also reflected an increase in depreciation
expense of approximately $1.5 million due to the completion of the Beluga
Unit 7 re-powering project and a reduction in annualized interest expense,
due to Chugach's recent refinancing efforts, of $2.4 million. In this
revised filing, Chugach continues to request $11.9 million in margins. As a
result of reduced interest costs, this would yield an equivalent system
TIER of 1.47.
Three intervenors filed pre-filed testimony with the Commission in July
2002 opposing various aspects of Chugach's proposal. Chugach filed its
reply testimony with the Commission during October 2002. A hearing has been
scheduled for November and December 2002 to resolve the outstanding issues
associated with the 2000 test year rate case. A final Commission order is
expected in 2003.
Results Of Operations
Current Year Quarter Versus Prior Year Quarter
In general, assignable margins did not materially change from the quarter
ended September 30, 2002, over the same quarter in 2001.
Operating revenues, which include sales of electric energy to retail,
wholesale and economy energy customers and other miscellaneous revenues,
decreased by $663.4 thousand, or 1.6%, for the quarter ended September 30,
2002, over the same quarter in 2001. The decrease in revenues was due to
decreased fuel prices, resulting in decreased revenue collected through the
fuel surcharge cost recovery mechanism.
The following table represents kWh sales for the quarter ended September
30:
2002 2001
---- ----
Customer kWh kWh
Retail 258,530,607 248,302,947
Wholesale 265,987,798 265,847,324
Economy Energy 34,830,310 32,693,020
---------- ----------
Total 559,348,715 546,843,291
============= ============
<Page>
Retail demand and energy rates for all rate classes except small commercial
and public street and highway lighting increased 3.97% in the third quarter
of 2002 compared to the third quarter of 2001. Over this same period, the
wholesale demand and energy rates charged to HEA and MEA also increased by
3.97%. These increases reflected the interim rate increase authorized by
the RCA in 2001. Wholesale demand and energy rates charged to Seward
Electric System (SES) did not change in this quarter compared to the same
quarter last year.
Fuel expense decreased by $1.2 million, or 9.7%, for the quarter ended
September 30, 2002, compared to the same period in 2001 due to lower fuel
prices. Power production expense increased by $1.0 million, or 42.8%, due
to continued maintenance on Beluga unit 8 and the repair of Cooper Lake
unit 2. Purchased power expense decreased by $1.0 million, or 19.5%, due to
a Nikiski maintenance outage in September of 2002. Transmission,
distribution and consumer accounts/information expense did not materially
change for the three-month period ended September 30, 2002. Administrative,
general and other expenses increased by $1.3 million, or 29.9%, for the
three-month period ended September 30, 2002, due to increased insurance
costs, increased Information Services, (IS) /garage clearing and increased
regulatory costs associated with the current rate case.
Interest on long-term debt decreased by $1.0 million, or 14.3%, due to
lower interest rates. Interest charged to construction decreased by $261.6
thousand, or 71.9%, in the third quarter of 2002 compared to the same
period in 2001 due to less construction activity. Other interest expense
increased by $56.5 thousand, or 398.7%, from the third quarter of 2001 due
to a consistent outstanding balance on the CoBank line of credit in the
third quarter of 2002.
Other nonoperating margins were $32.3 thousand, or 25.4%, lower for the
quarter ended September 30, 2002, compared to the same period in 2001 due
to the abandonment and write off of a web-enabling project.
Current Year to Date Versus Prior Year to Date
In general, assignable margins increased due to the increase in revenue
caused by the interim rate increase implemented during the fourth quarter
of 2001 and a decrease in other interest expense. These were offset by an
increase in production and administrative, general and other expense.
Operating revenues increased by $6.5 million, or 5.2%, in the first nine
months of 2002, over the same period in 2001. The increase in revenues was
due to the interim rate increase of 3.97%, which was approved and
implemented during the fourth quarter of 2001. It was also due to a net
increase in purchased power and fuel costs, which resulted in increased
revenue collected through the fuel and purchased power surcharge mechanism,
as well as increased kWh sales.
The following table represents kWh sales for the nine months ended
September 30:
2002 2001
---- ----
Customer kWh kWh
Retail 831,036,637 806,213,531
Wholesale 828,322,490 757,667,529
Economy Energy 80,537,210 76,785,790
---------- ----------
Total 1,739,896,337 1,640,666,850
============= =============
Fuel expense decreased by $3.4 million, or 8.7%, for nine months ended
September 30, 2002, compared to the same period in 2001 due to lower fuel
prices. Power production expense increased by $2.0 million, or 24.1%, due
to increased maintenance on Beluga unit 3 and unit 8, Bernice Lake unit 4
and Cooper Lake unit 2. Purchased power expense increased by $5.0 million,
or 54.9%, due to the new contract with Nikiski, a co-generation power plant
owned by Alaska Electric Generation & Transmission (AEG&T) (HEA).
Distribution expense increased $486.7 thousand, or 6.7%, due to a
modification in our right-of-way clearing schedule, which does not
substantially change the annual expense expected by year-end. In addition,
we have experienced a higher level of underground cable failures resulting
in higher distribution maintenance expense. Administrative, general and
other increased by $1.5 million, or 10.9%, due to increased labor,
information services clearing and insurance costs.
Interest on long-term debt did not materially change from September 30,
2001, to September 30, 2002. Interest charged to construction decreased by
$455.6 thousand, or 56.0%, in the nine months ended September 30, 2002,
compared to the same period in 2001 due to lower construction work in
progress balances as well as lower overall cost of debt. Other interest
expense decreased by $876.5 thousand, or 79.3%, due to lower outstanding
balances on the lines of credit.
Other nonoperating margins did not materially change in the first nine
months of 2002 compared to the same period in 2001.
Financial Condition
Total assets decreased $8.0 million, or 1.4%, from December 31, 2001, to
September 30, 2002. The decrease was due in part to a $2.1 million, or
0.4%, decrease in net plant. The decrease was also due to a $6.3 million,
or 39.2%, decrease in accounts receivable caused by the payment of
wholesale power invoices that were accrued but not paid at December 31,
2001; however, that amount was offset by an increase in billings to the
state of Alaska for facility relocation construction work performed during
the summer. The decrease in total assets was also due to a $3.2 million, or
88.8%, decrease in fuel cost recovery from the collection of the prior
quarter's fuel cost adjustment.
The decrease in total assets was offset by a $2.5 million, or 391.7%,
increase in prepayments caused by the prepayment of generation parts and a
$1.2 million, or 5.1%, increase in materials and supplies.
<Page>
Notable changes to total liabilities and equities include a $3.7 million,
or 2.8%, increase in patronage capital and a $29.8 million, or 8.2%,
increase in long-term obligations associated with the 2002 refinancing.
These increases were offset by a $9.5 million, or 91.7%, decrease in
current installments of long-term obligations due to the final payment of
the 1991 Series A Bond due 2002 and the $5 million payment of the first
installment of CoBank 5.
There was a $6.3 million, or 57.0%, decrease in accounts payable caused by
the payment of invoices that were accrued at December 31, 2001. There was
also a $5.3 million, or 72.1%, decrease in accrued interest due to lower
interest rates on our debt after the 2002 refinancing, in addition to a
semi-annual interest payment of approximately $4.9 million on the 2001
Series A Bonds in the third quarter. There was also a $4.5 million, or
38.6%, decrease in fuel payable caused by lower fuel prices in the first
nine months of 2002.
Deferred credits decreased $15.8 million, or 81.1%, due to the premium that
offset the gain associated with the 1991 Series A Bond due 2022 that was
refinanced in the first quarter of 2002.
Liquidity and Capital Resources
Chugach has satisfied its operational and capital cash requirements
primarily through internally generated funds, an annual $50 million line of
credit from NRUCFC and a $35 million line of credit with CoBank. At
September 30, 2002, there was no outstanding balance with NRUCFC. At
September 30, 2002, there was $11 million outstanding under the CoBank line
of credit, which carried an interest rate of 3.24%.
Chugach also has a term loan facility with CoBank. Loans made under this
facility are evidenced by bonds secured by Chugach's existing mortgage
indenture. At September 30, 2002, Chugach had the following bonds
outstanding under this term loan facility:
Interest rate at Principal Payment
Bond Principal balance September 30, 2002 Maturity Date Dates
CoBank 2 $10,000,000 7.76% 2005 2005
CoBank 3 $21,500,000 5.60% 2022 2003 - 2022
CoBank 4 $23,500,000 5.60% 2022 2003 - 2022
CoBank 5 $10,000,000 5.60% 2012 2002 - 2012
Total $65,000,000
The $5 million principal payment made in June of 2002 on CoBank 5 is
currently being carried on our CoBank line of credit and included in short
term debt. Upon completion of the CoBank Master Loan Agreement, that amount
will become long-term debt with an expiration date of 2007.
Chugach and CoBank have tentatively agreed on the terms of a new Master
Loan Agreement pursuant to which the existing term loan facility will be
converted from secured to unsecured debt and the obligations represented by
the outstanding bonds held by CoBank will be converted into promissory
notes governed by the new Master Loan Agreement. Upon the substitution of
promissory notes for the CoBank bonds, Chugach's existing mortgage
indenture will be replaced in its entirety by an Amended and Restated
Indenture dated April 1, 2001, all liens and security interests imposed
under the indenture will be terminated and all outstanding Chugach bonds
(including New Bonds of 2001 Series A, 2002 Series A and 2002 Series B)
will become unsecured obligations governed by the terms of the Amended and
Restated Indenture.
Capital construction in 2002 is estimated at $29.4 million. At September
30, 2002, approximately $17.8 million had been expended. Capital
improvement expenditures are expected to decrease in the upcoming fourth
quarter as the construction season ends.
Chugach management continues to expect that cash flows from operations and
external funding sources will be sufficient to cover operational and
capital funding requirements in 2002 and thereafter.
Outlook
Chugach reorganized in June 2002 when the longstanding Chief Financial
Officer, (CFO) accepted the General Manager position. The Association now
has four senior vice-president level organizational entities: CFO (Finance
and Accounting), Energy Supply, Power Delivery and Administration. A Chief
of Staff position was also created and staffed by in-house senior
management. We believe this structure will better facilitate the
organization's ability to effectively manage future challenges including
competition.
Environmental Matters
Compliance with Environmental Standards
Chugach's operations are subject to certain federal, state and local
environmental laws that Chugach monitors to ensure compliance. The costs
associated with environmental compliance are included as a component of
both the operating and capital budget processes. Chugach accrues for costs
associated with environmental remediation obligations when such costs are
probable and reasonably estimable.
Environmental Matters
The Association 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 state and
federal agencies and approved by FERC. In 2000, Chugach sampled sediments
and fish collected from Kenai Lake and other waters. While low levels of
PCBs were found in some sediment samples taken near the plant, no pathway
from sediment to fish was established. While the levels of PCBs in fish
from Kenai Lake were similar to levels found in fish from other lakes
within the region, Chugach has conducted additional sampling and analysis
of fish in Kenai Lake and other waters and on April 1, 2002, filed its
final report to FERC, which analyzed the results of the sampling. Based on
these analyses, Chugach concluded that no further PCB sampling and analysis
in Kenai Lake was necessary. In a letter dated June 18, 2002, FERC informed
Chugach that its review of the report supported Chugach's conclusions and
agreed that Chugach was not required to conduct further PCB sampling and
analysis in Kenai Lake. 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. The Regulatory Commission of
Alaska, (RCA) has issued an order to Chugach allowing Chugach to record its
remediation costs as a FASB 71 asset, subject to a determination, in the
presently ongoing rate case, of the level of prudently-incurred costs that
may be recovered through rates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Chugach is exposed to a variety of risks, including changes in interest
rates and changes in commodity prices due to repricing mechanisms inherent
in gas supply contracts. In the normal course of our business, we manage
our exposure to these risks as described below. Chugach does not engage in
trading market risk-sensitive instruments for speculative purposes.
Interest Rate Risk
As of September 30, 2002, except for the 2002 Series B Bond, which carries
a variable interest rate and is re-priced every 28 days, all of our
outstanding long-term obligations were at fixed interest rates with varying
maturity dates. The Auction Rate Bond bore interest at 1.97% from the date
of original delivery to and through February 27, 2002. The following table
provides information regarding subsequent auction dates and rates.
Auction Date Interest Rate
February 27, 2002 2.00%
March 27, 2002 2.00%
April 27, 2002 1.97%
May 22, 2002 1.97%
June 19, 2002 1.95%
July 17, 2002 1.90%
August 14, 2002 1.84%
September 11, 2002 1.95%
October 9, 2002 1.92%
November 6, 2002 1.75%
The following table provides information regarding cash flows for principal
payments on total debt by maturity date (dollars in thousands) as of
September 30, 2002.
Fair
Total Debt* 2002 2003 2004 2005 2006 Thereafter Total Value
- ----------- ---- ---- ---- ---- ---- ---------- ----- -----
Fixed rate $0 $866 $945 $11,031 $1,126 $321,032 $335,000 $367,556
Average
interest rate -- 5.60% 5.60% 7.56% 5.60% 6.27% 6.30%
Variable rate $11,000 $0 $0 $0 $0 $60,000 $71,000 $71,000
Average
interest rate 3.24% -- -- -- -- 1.75% 1.98%
<FN>
* Includes current portion
</FN>
</table>
Commodity Price Risk
Chugach's gas contracts provide for adjustments to gas prices based on
fluctuations of certain commodity prices and indices. Because purchased
power costs are passed directly to our wholesale and retail customers
through a fuel surcharge, fluctuations in the price paid for gas pursuant
to long-term gas supply contracts do not normally impact margins. The fuel
surcharge mechanism mitigates the commodity price risk related to market
fluctuations in the price of purchased power.
<Page>
Item 4. Controls and Procedures
The Association's management, including the Principal Executive Officer and
the Chief Financial Officer, evaluated the Company's disclosure controls
and procedures (as defined in Rule 13a-14(c) under the Securities Exchange
Act of 1934) within 90 days prior to the filing date of this quarterly
report. Based on this evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the
Association's internal controls that could significantly affect its
disclosure controls and procedures since the date of the evaluation.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Matanuska Electric Association, Inc., v. Chugach Electric Association,
Inc., Superior Court Case No. 3AN-99-8152 Civil
This action is a claim for a breach of the Tripartite Agreement, which is
the contract governing the parties' relationship for a 25-year period from
1989 through 2014 and governing the Association's sale of power to
Matanuska Electric Association, Inc. (MEA) during that time. MEA asserted
the Association breached that contract by failing to provide a variety of
kinds of information, by failing to properly manage the Association's
long-term debt, and by failing to bring its base rate action to a Joint
Committee, a committee defined in the power sales contract consisting of
one MEA and two Chugach board members, before presenting it to the RCA. All
of MEA's claims have been dismissed. On April 29, 2002, MEA appealed the
Superior Court's decisions relating to Chugach's financial management and
its failure to bring its base rate action to the joint committee before
filing with the RCA to the Alaska Supreme Court. Management is uncertain as
to the outcome but will vigorously defend the appeal.
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.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
<Page>
Item 5. Other Information
On August 12, 2002 MEA filed a request with the Regulatory Commission of
Alaska asking that Chugach's Certificate of Public Convenience and
Necessity (CPCN) be amended to eliminate retail service and requesting that
the retail services portion of the CPCN be included in MEA's CPCN. In an
order issued August 29, 2002, the Regulatory Commission of Alaska summarily
rejected the request.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
No exhibits are being filed with this report for the quarter
ended September 30, 2002.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended
September 30, 2002.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHUGACH ELECTRIC ASSOCIATION, INC.
By: /s/ Evan J. Griffith
Evan J. Griffith
General Manager
Date: November 14, 2002
By: /s/ Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer
Date: November 14, 2002
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Evan J. Griffith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chugach Electric
Association, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Evan J. Griffith
Evan J. Griffith
General Manager and Principal Executive Officer
<Page>
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael R. Cunningham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chugach Electric
Association, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer
<Page>
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report of Chugach Electric Association, Inc.
(the "Company") on Form 10-Q for the period ending September 30, 2002, I, Evan
J. Griffith, General Manager and Principal Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(a) This quarterly report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(b) The information contained in this quarterly report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: November 14, 2002 /s/ Evan J. Griffith
Evan J. Griffith
General Manager and Principal Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with this quarterly report of Chugach Electric Association, Inc.
(the "Company") on Form 10-Q for the period ending September 30, 2002, I,
Michael R. Cunningham, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
(a) This quarterly report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(b) The information contained in this quarterly report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: November 14, 2002 /s/ Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer