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, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)
Yes No X
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, 2003
NONE NONE
Page Number
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 2
Balance Sheets, September 30, 2003 and December 31, 2002 3
Statements of Revenues, Expenses and Patronage Capital,
Three and Nine Months Ended September 30, 2003 and 2002 5
Statements of Cash Flows, Nine Months Ended September 30,
2003 and 2002 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 1 1
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 2 1
Item 4. Controls and Procedures 2 2
PART II OTHER INFORMATION
Item 1. Legal Proceedings 2 2
Item 2. Changes in Securities and Use of Proceeds 2 3
Item 3. Defaults Upon Senior Securities 2 3
Item 4. Submission of Matters to a Vote of Security Holders 2 3
Item 5. Other Information 2 3
Item 6. Exhibits and reports on Form 8-K 2 4
Signatures 2 5
Exhibits 2 6
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)
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, 2003, follow:
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Unaudited)
Assets September 30, 2003 December 31, 2002
------ ------------------ -----------------
Utility plant:
Electric plant in service $732,735,303 $730,439,297
Construction work in progress 24,377,886 20,224,302
----------------------------------------------
757,113,189 750,663,599
Less accumulated depreciation (290,300,411) (279,958,912)
----------------------------------------------
466,812,778 470,704,687
Other property and investments, at cost:
Nonutility property 3,550 3,550
Investments in associated organizations 10,996,796 10,963,715
----------------------------------------------
11,000,346 10,967,265
Current assets:
Cash and cash equivalents 10,581,957 7,284,292
Cash-restricted construction funds 507,924 598,864
Special deposits 222,163 222,163
Fuel cost receivable 100,714 0
Accounts receivable, net 13,524,287 26,410,264
Materials and supplies 22,190,977 23,747,590
Prepayments 3,375,803 1,953,350
Other current assets 351,187 336,798
----------------------------------------------
50,855,012 60,553,321
Deferred charges 24,781,290 27,989,601
----------------------------------------------
Total Assets $553,449,426 $570,214,874
==============================================
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Continued)
(Unaudited)
Liabilities and Equities September 30, 2003 December 31, 2002
------------------------ ------------------ -----------------
Equities and margins:
Memberships $1,143,643 $1,108,243
Patronage capital 124,434,700 120,148,502
Other 6,161,732 6,221,150
--------------------------------------------------
131,740,075 127,477,895
Long-term obligations, excluding current
installments
2001 Series A Bond payable 150,000,000 150,000,000
2002 Series A Bond payable 120,000,000 120,000,000
2002 Series B Bond payable 51,100,000 55,700,000
CoBank, ACB Bonds payable 63,189,179 64,134,179
--------------------------------------------------
384,289,179 389,834,179
Current liabilities:
Short-term obligations 0 6,081,250
Current installments of long-term obligations 5,545,000 5,165,821
Accounts payable 3,622,249 7,719,974
Provision for rate refund 5,207,503 7,050,000
Consumer deposits 1,810,156 1,826,265
Fuel cost payable 0 363,862
Accrued interest 1,992,610 6,381,106
Salaries, wages and benefits 5,221,340 4,977,594
Fuel 8,659,340 7,095,402
Other current liabilities 1,664,264 2,027,938
--------------------------------------------------
33,722,462 48,689,212
Deferred credits 3,697,710 4,213,588
--------------------------------------------------
Total Liabilities and Equities $553,449,426 $570,214,874
<FN>
==================================================
See accompanying notes to financial statements
</FN>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statement of Revenues, Expenses and Patronage Capital
(Unaudited)
Three months ended September 30 Nine months ended September 30
2003 2002 2003 2002
---- ---- ---- ----
Operating revenues: $41,163,160 $41,523,323 $133,091,838 $132,929,592
Operating expenses:
Fuel 12,267,067 11,320,700 34,120,453 36,016,679
Power production 3,363,789 3,389,458 9,486,981 10,113,399
Purchased power 4,681,807 4,165,054 12,714,043 14,172,137
Transmission 1,045,137 876,754 3,159,875 2,871,203
Distribution 2,869,990 2,522,722 8,147,487 7,746,900
Consumer accounts/Information expense 1,307,796 1,478,932 4,123,234 4,373,951
Administrative, general and other 5,976,266 5,496,010 19,261,872 15,470,650
Depreciation and amortization 6,839,754 6,299,242 20,812,332 18,862,947
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Total operating expenses 38,351,606 35,548,872 111,826,277 109,627,866
Interest expense:
On long-term obligations 5,845,448 6,026,315 17,590,018 20,158,954
On short-term obligations 0 70,644 11,900 229,436
Charged to construction-credit (110,826) (102,069) (212,510) (358,663)
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Net interest expense 5,734,622 5,994,890 17,389,408 20,029,727
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Net operating margins (2,923,068) (20,439) 3,876,153 3,271,999
Non-operating margins:
Interest income 99,950 93,200 282,033 638,401
Other 22,890 (1,827) 86,605 266,709
Property gain (loss) 30,396 3,273 101,615 (188,751)
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Total non-operating margins 153,236 94,646 470,253 716,359
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Assignable margins (2,769,832) 74,207 4,346,406 3,988,358
==================================================================
Patronage capital at beginning of period 127,204,532 128,955,925 120,148,502 125,184,374
Retirement of capital credits and estate
payments 0 (71,141) (60,208) (213,741)
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Patronage capital at end of period $124,434,700 $128,958,991 $124,434,700 $128,958,991
==================================================================
<FN>
See accompanying notes to financial statements
</FN>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statement of Cash Flows
(Unaudited)
Nine months ended
September 30
2003 2002
---- ----
Cash flows from operating activities:
Assignable margins $4,346,406 $3,988,358
Adjustments to reconcile assignable margins to net cash (used in) provided by
operating activities:
Provision for rate refund (1,842,497) 0
Depreciation and amortization (net of deferred asset amortization) 24,813,600 18,862,947
Capitalization of interest (245,983) (401,431)
Property (gains) losses (101,615) 188,751
Impairment of long-lived asset 1,846,816 0
Other 1,145 2,116
Changes in assets and liabilities:
(Increase) decrease in assets:
Fuel cost recovery (100,714) 3,190,691
Accounts receivable 12,885,977 6,274,830
Prepayments (1,422,453) (2,457,835)
Materials and supplies 1,556,613 (1,164,824)
Deferred charges, net (792,956) 1,655,610
Other (14,389) (10,546)
Increase (decrease) in liabilities:
Accounts payable (4,097,725) (5,641,761)
Fuel payable (363,862) 0
Consumer deposits (16,109) 159,849
Accrued interest (4,388,496) (5,318,532)
Deferred credits (978,206) (15,743,826)
Other 1,444,009 (5,331,718)
----------------------------
Net cash (used in) provided by operating activities 32,529,561 (1,747,321)
Cash flows from investing activities:
Extension and replacement of plant (18,419,642) (18,218,299)
Investments in associated organizations (34,226) (61,876)
----------------------------
Net cash used in investing activities (18,453,868) (18,280,175)
Cash flows from financing activities:
Short-term obligations (6,081,250) 0
Proceeds from long-term obligations 0 180,000,000
Prepayments of long-term obligations (5,165,821)(159,719,945)
Retirement of patronage capital (60,208) (213,741)
Other 529,251 (211,833)
----------------------------
Net cash (used in) provided by financing activities (10,778,028) 19,854,481
Net increase (decrease) in cash and cash equivalents 3,297,665 (173,015)
Cash and cash equivalents at beginning of period 7,284,292 3,814,767
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----------------------------
Cash and cash equivalents at end of period $10,581,957 $3,641,752
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============================
Supplemental disclosure of cash flow information - interest expense paid, net of amounts
capitalized $17,456,325 $25,348,258
============================
<FN>
See accompanying notes to financial statements
</FN>
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
(Unaudited)
1. Presentation of Financial Information
During interim periods, Chugach Electric Association, Inc. (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 Form 10-K
when reviewing interim financial results. The accompanying unaudited
interim financial statements reflect normal recurring 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 2002 financial statements
to conform to the 2003 presentation.
2. Lines of credit
Chugach maintains a line of credit of $20 million with CoBank, ACB
(CoBank). The CoBank line of credit expires December 31, 2003, subject to
renewal at the discretion of the parties. At September 30, 2003, there was
no outstanding balance on this line of credit. In addition, Chugach has an
annual line of credit of $50 million available at the National Rural
Utilities Cooperative Finance Corporation (NRUCFC). At September 30, 2003,
there was no outstanding balance on this line of credit. The NRUCFC line of
credit expires October 15, 2007.
3. Environmental Matters
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 us in consultation with state and federal
agencies and approved by FERC. In 2000, we 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, we conducted additional sampling and analysis of fish in Kenai Lake
and other waters and filed our final report dated April 1, 2002, with FERC,
which analyzed the results of the sampling. Based on these analyses, we
concluded that no further PCB sampling and analysis in Kenai Lake was
necessary. In a letter dated June 13, 2002, FERC informed us that its
review of the report supported our conclusions and agreed we were not
required to conduct further PCB sampling and analysis in Kenai Lake. In its
recent order in our general rate case, Order U-01-108(26), the Regulatory
Commission of Alaska (RCA) permitted the costs associated with the overhaul
and the PCB remediation to be recovered through rates. Consequently,
management believes the costs of the PCB remediation and studies will have
no material impact on our financial condition or results of operations.
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 our sale of power to Matanuska Electric
Association, Inc., (MEA) during that time. MEA asserted we breached that
contract by failing to provide information, by failing to properly manage
our long-term debt, and by failing to bring our base rate action to a joint
committee before presenting it to the RCA. The committee is defined in the
power sales contract and consists of one MEA and two Chugach board members.
All of MEA's claims have been dismissed. On April 29, 2002, MEA appealed to
the Alaska Supreme Court the Superior Court's decisions relating to our
financial management, our decision not to bring our base rate action to the
joint committee before filing with the RCA, as well as the Superior's
Court's award to us of attorney's fees. We cross-appealed the Superior
Court's decision not to dismiss the financial management claim on
jurisdictional and res judicata grounds. Oral argument was heard by the
Supreme Court on April 15, 2003. Management is uncertain as to the outcome
and expects a decision within six to twelve months.
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 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 principles
generally accepted in the United States of America 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-based regulation reviewed and
approved by this regulatory commission. Under the authority of this
commission, Chugach has recorded certain regulatory assets in the amount of
$23.4 million as of September 30, 2003. 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-based forward rate-lock
agreements to hedge expected interest rates on debt. Chugach accounted for
the agreements under SFAS 80 and 71 through December 31, 2000, and SFAS
133, 138, 149 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 Financial Accounting Standards Board
(FASB). To the extent that changes by the DIG modify current guidance, the
accounting treatment for derivatives may change.
6. Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144),
Chugach performed an analysis of certain generation assets in the second
quarter of 2003 and determined an impairment of an asset existed. As a
result of this analysis, an asset was written down by $1,846,816 to its
estimated salvage value. This amount is included in the nine months ended
September 30, 2003 column in the Statement of Revenues, Expenses and
Patronage Capital, "Administrative, general and other," category.
7. Recent Accounting Prounouncements
In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. Many of those instruments were previously
classified as equity. Some of the provisions of this Statement are
consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, Elements of Financial Statements. The remaining provisions
of this Statement are consistent with FASB's proposal to revise that
definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own equity shares depending on the nature of the
relationship established between the holder and the issuer. While FASB
still plans to revise that definition through an amendment to Concepts
Statement 6, FASB decided to defer issuing that amendment until it has
concluded its deliberations on the next phase of this project. That next
phase will deal with certain compound financial instruments including
puttable shares, convertible bonds, and dual-indexed financial instruments.
Chugach plans to implement SFAS 150 effective January 1, 2004. Chugach has
not completed evaluating the potential impact of this Statement 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.
Regulatory Matters
Docket U-01-108
Chugach filed a general rate case, Docket U-01-108, on July 10, 2001, based
on the 2000 test year, requesting a permanent base rate increase of 6.5%,
and an interim base rate increase of 4.0%. On September 5, 2001, the RCA
granted a 1.6% interim demand and energy rate increase effective September
14, 2001. Chugach filed a petition for reconsideration and on October 25,
2001, the RCA revised its Interim Approval to permit Chugach to collect an
interim base rate increase of 3.97%. The additional rate increase was
implemented on November 1, 2001.
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
of $2.4 million due to Chugach's recent refinancings. In this revised
filing, Chugach continued to request $11.9 million in margins. As a result
of reduced interest costs, Chugach's supplemental filing would have yielded
an equivalent system Times Interest Earned Ratio (TIER) of 1.47.
Docket U-01-108, Order No. 26
The RCA issued Order No. 26 in Docket U-01-108 on February 6, 2003.
The impact of Order 26 required the following:
o Based on the final rates ordered, a refund of revenues collected in
2001 of approximately $1.1 million and in revenues collected in 2002 of
approximately $6.0 million, which resulted in a net operating loss of
$2 million in 2002. Under the Order, Chugach's financial performance
for 2002 fell below the 1.10 level contained in the Rate Covenants in
its currently effective indenture, the Amended and Restated Indenture,
the CoBank Master Loan Agreement and the MBIA Insurance Corporation's
(MBIA) Reimbursement and Indemnity Agreement.
In accordance with the Rate Covenant in the Amended and Restated Indenture,
on February 13, 2003, Chugach filed a Motion with the RCA asking the RCA to
stay the effect of Order 26 until after the RCA considered Chugach's
Petition for Reconsideration. On February 18, 2003, the RCA granted, in
part, our motion for stay. Chugach filed the Petition for Reconsideration
with the RCA on February 28, 2003.
Docket U-01-108, Order No. 30
On April 15, 2003, the RCA issued Order No. 30 in Docket U-01-108, revising
its earlier ruling by:
o Reversing its AFUDC/IDC offset decision and agreeing with Chugach that
the offset of AFUDC and IDC against long-term interest expense in the
test year is not appropriate. Language in Order 30 may limit its ruling
to projects commenced and concluded within the test year.
o Allowing most of the legal expenses reduced or amortized from the
revenue requirement to be added back.
o Establishing a normalized interest rate of 3.8% on our $60 million in
variable rate debt.
o Clarifying that it intended to set a floating TIER of 1.64 for
Distribution.
o Clarifying, as requested by Chugach, that the refund cannot go below
the "floor" of the rates that were in place prior to Chugach's interim
increase.
o Clarifying that interest expense should be allocated based on net
plant.
o Authorizing Chugach to use the higher interest rate existing in January
and February of 2002 (before the March refinancing reduced interest
expense) in calculating any refunds.
In Order No. 30, the RCA also:
o Declined to change its ruling continuing the split TIER.
o Declined to change its ruling reducing overall TIER to 1.30 and
reducing Generation and Transmission (G&T) TIER to 1.10.
o Declined to change its ruling that rate case costs cannot be amortized
and recovered in rates.
Chugach calculates, that based on actual results through September 30 and
for the remainder of the year, the budgeted revenues and expenditures,
under Order 30, Chugach will have sufficient margins over interest in 2003
to comply with the requirements of the Rate Covenants in the Amended and
Restated Indenture, the CoBank Master Loan Agreement and the MBIA
Reimbursement Agreement.
Docket U-01-108, Order No. 33
On August 26, 2003, the RCA issued Order No. 33 in Docket U-01-108, which
reversed again its decision and required Chugach to offset long-term
interest expense with a normalized level of AFUDC/IDC established to be
$1.2 million. On August 15, 2003, the RCA issued Order No. 32 and clarified
that January 31, 2003 is the date from which any refunds below the level of
the previously approved rates must be computed.
On August 26, 2003, the RCA issued Order No. 33 and re-reversed its
decision on the ratemaking treatment of AFUDC / IDC. In this order, the RCA
required Chugach to treat AFUDC / IDC as a reduction to long-term interest
expense, which reduces the revenue requirement by approximately $1.2
million, excluding TIER. This treatment effectively reverts to the
treatment accorded by the RCA's original decision made in Order 26 of this
docket.
On September 8, 2003 Chugach filed its recalculated revenue requirement in
compliance with Order No. 33. The results of the calculation show a
permanent system revenue requirement increase of less than $0.1 million. On
November 5, 2003, the RCA issued an electronic order partially approving
Chugach's compliance filing and requiring Chugach to file revised Cost of
Power Adjustment (COPA) Tariffs by November 6, 2003, and indicating that
upon receipt and approval of the required COPA, all tariffs would be
approved with a simultaneous effective date.
On September 25, 2003, Chugach filed an appeal in Superior Court of RCA
Order 33 on the grounds that the RCA's treatment of AFUDC/IDC disallowed
interest expense actually incurred and thus sets rates that are not just,
fair and reasonable and which are constitutionally confiscatory,
constituted an abuse of discretion, results in insufficient margins on the
wholesale side of Chugach's business and resulted in discriminatory rates.
The Superior Court has consolidated the appeals of Orders 26 and 30 with
the appeal of Order 33.
Docket U-01-108, Appeals
Chugach has appealed the RCA's decisions in Order No. 26 to modify
Chugach's generation and transmission TIER of 1.10, from the previously
authorized level of 1.15 and a distribution TIER of approximately 1.6.
Chugach asserts that such a disparity in TIER violates the requirements of
AS 42.05.141(a)(3) and AS 42.05.391 (a) in that the resulting rates are not
just, fair and reasonable and yield an unreasonable difference as to rates
between Chugach's retail and wholesale customers. Chugach further asserts
that the resulting rates grant an unreasonable preference or advantage to
Chugach's wholesale customers by creating an unreasonable prejudice or
disadvantage to its retail customers.
On April 29, 2003, Chugach filed an appeal in Alaska Superior Court on two
issues. In Order No. 30 of this docket, the RCA reconsidered and reversed
its earlier decision and agreed with Chugach that requiring AFUDC/IDC as an
offset to long-term interest expense would cause under-recovery and should,
therefore, not be required. However, the specific language of the RCA's
order on reconsideration limited its ruling to projects commenced and
concluded within the test year. This could cause under-recovery of project
costs over the life of the asset resulting in a confiscatory rate. Chugach
has filed an appeal as to this portion of the RCA's decision on
reconsideration in Order No. 30.
On May, 13, 2003, MEA filed a cross appeal challenging the following RCA's
decisions:
o Allowing 3.8 percent interest rate for use in calculating the weighted
cost of debt associated with its 2002 Series B (auction rate) Bonds.
o Approving Chugach's treatment of AFUDC/IDC for ratemaking purposes.
o Determining that the RCA did not have the jurisdiction to consider the
claims of MEA regarding Chugach's alleged breach of its power sales
agreement with MEA.
o Concluding that the "rate locks" executed by Chugach were both a
prudent financial management decision and a prudent expenditure such
that Chugach could recover the cost of the rate locks through the rates
paid by MEA.
On July 21, 2003, the Superior Court of Alaska granted Chugach's motion for
stay on condition that the excess interim rate refund be placed into an
interest bearing escrow account and the revenues received from future
rates, which may be subject to refund, be held in the same account.
On October 3, 2003 Chugach filed for a motion to dissolve the stay that was
granted by the Superior Court on July 21. Based on the results of RCA
orders, subsequent to Chugach's request for stay in Superior Court, Chugach
determined that removal of the stay on implementation of rates pursuant to
Order 33 would increase Chugach revenues by approximately $0.7 million on
an annual basis. Chugach will continue to pursue all issues raised in its
appeals in Alaska Superior Court.
On October 31, the superior court issued an order granting Chugach's motion
to remove stay, releasing the escrow funds and ordering Chugach to pay
refunds within 10 days of the order based upon the RCA's orders.
On November 7, 2003, the Commission issued an electronic ruling approving
Chugach's Order No. 33 compliance filing. As a result of the order, Chugach
implemented revised retail and wholesale rates. The final order resulted in
a system rate increase of 0.07 percent, or an increase of 3.5 percent to
Chugach retail and a decrease of 7.9 percent to wholesale rates.
In addition to implementing the revised rates, Chugach issued refunds on
November 10, 2003, in the amount of $4.8 million to its wholesale customer
classes. Chugach has requested an extension of time during which to issue
refunds to its retail customers to allow it 90 days from the date of final
approval by the RCA of Chugach's retail refund plan. This request was not
opposed by the parties to the appeal, with MEA indicating it takes no
position with respect to the request. Chugach expects to refund
approximately $0.5 million to its small commercial customers, the only
customer class entitled to a refund under the decision by the RCA.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144),
Chugach performed an analysis of generation assets, in the second quarter
of 2003, and determined an impairment of a certain asset existed. As a
result of this analysis, an asset was written down by $1,846,816 to its
estimated salvage value. This amount is included in the nine months ended
September 30, 2003 column in the Statement of Revenues, Expenses and
Patronage Capital, "Administrative, general and other," category.
Results Of Operations
Current Year Quarter Versus Prior Year Quarter
Assignable margins decreased by $2.8 million for the quarter ended
September 30, 2003, over the same quarter in 2002 primarily due to
additional provision for rate refunds recorded in the third quarter of 2003
pending a final decision from the RCA.
Operating revenues, which include sales of electric energy to retail,
wholesale and economy energy customers and other miscellaneous revenues,
decreased by $360.2 thousand, or 0.9%, for the quarter ended September 30,
2003, over the same quarter in 2002. The decrease in revenues was due to
provision for rate refunds recorded in the third quarter of 2003, which was
offset by a $759.7 thousand, or 60.0%, increase in economy energy sales to
Golden Valley Electric Association (GVEA). GVEA purchased more from Chugach
in the third quarter of 2003 as compared to the same quarter last year when
they purchased more from another provider.
The following table represents kWh sales for the quarter ended September
30:
2003 2002
---- ----
Customer kWh kWh
Retail 270,956,140 258,530,607
Wholesale 269,168,585 265,987,798
Economy Energy 48,747,730 34,830,310
---------- ----------
Total 588,872,455 559,348,715
================== =================
Retail demand and energy rates and wholesale demand and energy rates
charged to HEA and MEA did not change in the third quarter of 2003 compared
to the third quarter of 2002. The interim rate increase authorized by the
RCA for all rate classes except small commercial and public street and
highway lighting in November 2001 was still in affect awaiting a final
order from the RCA for the 2000 Test Year rate case. 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 increased by $946.4 thousand, or 8.4%, for the quarter ended
September 30, 2003, compared to the same period in 2002 due to higher fuel
prices. Purchased power expense increased $516.8 thousand, or 12.4% due to
higher fuel prices and additional purchases from Anchorage Municipal Light
& Power (AML&P) while the Beluga units were out for maintenance.
Distribution expense increased by $347.3 thousand, or 13.8%, due to a
decrease in meter and transformer installation credits and additional labor
associated with the transfer of a crew who's efforts concentrated on
distribution projects. Administrative, general and other expense increased
by $480.3 thousand, or 8.7%, due to increased insurance, labor and health
and welfare costs. Depreciation and amortization expense increased by
$540.5 thousand, or 8.6%, due to the implementation of new depreciation
rates in accordance with the depreciation study approved by the RCA. Power
production, transmission and consumer accounts/information expenses did not
materially change for the three-month period ended September 30, 2003.
Interest on long-term debt decreased by $180.9 thousand, or 3.0%, due to
lower interest rates.
Current Year to Date Versus Prior Year to Date
Assignable margins increased $358.0 thousand, or 9.0% in the first nine
months of 2003 compared to the same period in 2002 due to the various
reasons described below.
Operating revenues did not materially change for the nine-month period
ended September 30, 2003. Operating revenues increased due to increased kWh
sales and higher fuel prices, resulting in increased revenue collected
through the fuel surcharge cost-recovery mechanism; however, that was
offset by $2.9 million of additional provision for rate refunds recorded in
the third quarter of 2003.
The following table represents kWh sales for the nine months ended
September 30:
2003 2002
---- ----
Customer kWh kWh
Retail 845,910,228 831,036,637
Wholesale 819,762,696 828,322,490
Economy Ener 166,840,860 80,537,210
----------- ----------
Total 1,832,513,784 1,739,896,337
=================== ==================
Fuel expense decreased by $1.9 million, or 5.3%, for the first nine months
of 2003, compared to the same period in 2002 due to lower fuel prices.
Power production expense decreased $626.4 thousand, or 6.2%, due to
unplanned vacancies. Purchased power expense decreased by $1.5 million, or
10.3%, due to an outage of the Nikiski power plant as a result of a
controls upgrade in the first quarter of 2003. Distribution expense
increased by $400.6 thousand, or 5.2%, due to a decrease in meter and
transformer installation credits and additional labor associated with an
added crew. Administrative, general and other expense increased by $3.8
million, or 24.5%, for the first nine months of 2003, compared to the same
period in 2002. This was due to a $1.8 million write down of an impaired
asset, a $341 thousand increase in labor, a $430 thousand increase in
insurance costs, a $500 thousand reclassification of the Kenai Lake PCBs
study from a deferred debit to other deductions, a $627 thousand increase
in allocated information services costs and the $207 thousand donation of
an obsolete inventory item. Depreciation and amortization expense increased
by $1.9 million, or 10.3%, due to the implementation of new depreciation
rates in accordance with the depreciation study approved by the RCA.
Transmission and consumer accounts/information expense did not materially
change for the nine-month period ended September 30, 2003, compared to the
same period in 2002.
Interest on long-term debt decreased by $2.6 million, or 12.7%, due to
lower interest rates. Interest charged to construction decreased by $146.2
thousand, or 40.7%, in the first nine months of 2003 compared to the same
period in 2002 due to less construction activity and lower interest rates.
Other interest expense decreased by $217.5 thousand, or 94.8%, during the
same period in 2003 compared to the same period in 2002 due to decreased
borrowing on the lines of credit in 2003.
Other non-operating margins decreased by $246.1 thousand, or 34.4%, for the
nine-month period ended September 30, 2003, compared to the same period in
2002, due primarily to a decrease in interest income. During the 2002
refinancing, Chugach received and invested funds that increased interest
income in the prior year.
Financial Condition
Total assets decreased $16.8 million, or 2.9%, from December 31, 2002, to
September 30, 2003. The decrease was due in part to a $3.9 million, or
0.8%, decrease in net plant, caused primarily by the increase in
accumulated depreciation under new depreciation rates and plant
construction completed in 2002. The decrease was also due to a $12.9
million, or 48.8%, decrease in accounts receivable caused by the payment of
wholesale power invoices and the state of Alaska relocation invoices that
were accrued but not paid at December 31, 2002. It was also due to a $1.6
million, or 6.6%, decrease in materials and supplies caused by the use of
generation inventory items for scheduled maintenance projects. The decrease
was also due to a $3.2 million, or 11.5%, decrease in deferred charges
caused by the amortization of deferred projects, as well as the
reclassification of the Kenai Lake PCBs study from a deferred debit to
other deductions.
The decrease in total assets was offset by a $3.3 million, or 45.3%,
increase in cash and cash equivalents caused by the collection of
relocation invoices from the State of Alaska. It was also offset by a $1.4
million, or 72.9%, increase in prepayments caused by the September 2003
property insurance renewal.
Notable changes to total liabilities and equities include a $4.3 million,
or 3.6%, increase in patronage capital due to the margin impact of the
provision for rate refund adjustment to revenue. Fuel payable also
increased by $1.6 million, or 22.0%, due to increased fuel prices and the
timing of fuel invoice payments.
The increases to total liabilities and equities were offset by a $363.9
thousand, or 100.0% decrease in fuel cost payable caused by the
under-collection of the prior quarter's fuel cost adjustment, as well as a
$5.5 million, or 1.4%, decrease in long-term obligations due to an
installment payment of the 2002 Series B Bond and installment payments of
CoBank 3 and CoBank 4 bonds. There was a $6.1 million, or 100.0%, decrease
in short-term obligations caused by the collection of outstanding accounts
receivable that was collected and used to pay off the line of credit. There
was also a $4.4 million, or 68.8% decrease in accrued interest caused by
lower interest rates and the semi-annual interest payment on the 2001
Series A Bonds in the third quarter. There was also a $4.1 million, or
53.1%, decrease in accounts payable due to the payment of invoices that
were accrued at December 31, 2002. There was also a $1.8 million, or
26.1%, decrease in the provision for rate refund caused by an initial
adjustment calculated by RCA Order 30 and by additional refund amounts that
are recorded monthly.
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 $20 million line of credit with CoBank. At
September 30, 2003, there was no outstanding balance under the NRUCFC or
CoBank line of credit.
Chugach also has a term loan facility with CoBank. Loans made under this
facility are evidenced by promissory notes governed by the Master Loan
Agreement, which became effective on January 22, 2003. At September 30,
2003, Chugach had the following promissory notes outstanding under this
facility:
Interest rate at Principal Payment
Promissory Note Principal balance September 30, 2003 Maturity Date Dates
CoBank 2 $10,000,000 7.76% 2005 2005
CoBank 3 $21,086,330 2.70% 2022 2003 - 2022
CoBank 4 $23,047,849 2.70% 2022 2003 - 2022
CoBank 5 $10,000,000 2.70% 2012 2002 - 2012
Total $64,134,179
On January 22, 2003, Chugach and CoBank finalized a new Master Loan
Agreement pursuant to the existing term loan facility that was converted
from secured to unsecured debt and the obligations represented by the
outstanding bonds held by CoBank were converted into promissory notes
governed by the new Master Loan Agreement. Chugach's existing mortgage
indenture was replaced in its entirety by an Amended and Restated Indenture
dated April 1, 2001. All liens and security interests imposed under the
indenture were terminated and all outstanding Chugach bonds (including New
Bonds of 2001 Series A, 2002 Series A and 2002 Series B) became unsecured
obligations governed by the terms of the Amended and Restated Indenture.
Capital construction in 2003 is estimated at $31.1 million. At September
30, 2003, approximately $18.4 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 2003 and thereafter.
Outlook
Chugach reorganized its management and structure in June 2002 when the
longstanding Chief Financial Officer (CFO), Evan J. Griffith, accepted the
Chief Executive Officer (CEO) position. Chugach 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.
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
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 us in consultation with state and federal
agencies and approved by FERC. In 2000, we 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, we conducted additional sampling and analysis of fish in Kenai Lake
and other waters and filed our final report dated April 1, 2002, with FERC,
which analyzed the results of the sampling. Based on these analyses, we
concluded that no further PCB sampling and analysis in Kenai Lake was
necessary. In a letter dated June 13, 2002, FERC informed us that its
review of the report supported our conclusions and agreed we were not
required to conduct further PCB sampling and analysis in Kenai Lake. In its
recent order in our general rate case, Order U-01-108(26), the RCA
permitted the costs associated with the overhaul and the PCB remediation to
be recovered through rates. Consequently, management believes the costs of
the PCB remediation and studies will have no material impact on our
financial condition or results of operations.
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, 2003, the 2002 Series B Bond carried a variable
interest rate and will re-price every 28 days. CoBank 3, 4, and 5 were
re-priced from 5.6% to 2.7%, on October 16, 2003, to a variable interest
rate instrument that is re-priced every 30 days. All of our other
outstanding long-term obligations were at fixed interest rates with varying
maturity dates. The following table provides information regarding auction
dates and rates in 2003 for the 2002 Series B Bonds.
Auction Date Interest Rate
January 29, 2003 1.40%
February 26, 2003 1.35%
March 26, 2003 1.32%
April 23, 2003 1.33%
May 21, 2003 1.30%
June 18, 2003 1.18%
July 16, 2003 1.10%
August 13, 2003 1.10%
September 10, 2003 1.12%
October 8, 2003 1.12%
November 5, 2003 1.12%
The following table provides information regarding cash flows for principal
payments on total debt by maturity date (dollars in thousands) as of
September 30, 2003.
Fair
Total Debt* 2003 2004 2005 2006 2007 Thereafter Total Value
- ----------- ---- ---- ---- ---- ---- ---------- ----- -----
Fixed rate $0 $0 $10,000 $0 $0 $270,000 $280,000 $313,414
Average
interest rate 7.56% 6.39% 6.44%
Variable rate $0 $5,545 $5,931 $6,326 $6,729 $85,303 $109,834 $109,834
Average
interest rate -- 1.39% 1.39% 1.40% 1.41% 2.04% 1.90%
<FN>
* Includes current portion
</FN>
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.
Item 4. Controls and Procedures
Chugach's management, including the Chief 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) as of September 30, 2003. 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 Chugach'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 our sale of power to Matanuska Electric
Association, Inc., (MEA) during that time. MEA asserted we breached that
contract by failing to provide information, by failing to properly manage
our long-term debt, and by failing to bring our base rate action to a joint
committee before presenting it to the RCA. The committee is defined in the
power sales contract and consists of one MEA and two Chugach board members.
All of MEA's claims have been dismissed. On April 29, 2002, MEA appealed to
the Alaska Supreme Court the Superior Court's decisions relating to our
financial management, our decision not to bring our base rate action to the
joint committee before filing with the RCA, as well as the Superior's
Court's award to us of attorney's fees. We cross-appealed the Superior
Court's decision not to dismiss the financial management claim on
jurisdictional and res judicata grounds. Oral argument was heard by the
Supreme Court on April 15, 2003. Management is uncertain as to the outcome
and expects a decision within six to twelve months.
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
Item 5. Other Information
On August 8, 2003, Standard & Poor's rating service downgraded the
underlying ratings on Chugach's 2001 Series A, 2002 Series A and 2002
Series B Bonds from "A Stable" rating to "A-minus Negative" rating.
On October 31, 2003, Fitch Ratings downgraded the underlying ratings
Chugach's 2001 Series A, 2002 Series A and 2002 Series B Bonds from "A+" to
"A" rating and placed the debt on Rating Watch Negative.
The rating with Moody's Investors Service has not been affected. The 2001
Series A and 2002 Series A and B Bonds are still insured by MBIA Insurance
Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended
September 30, 2003.
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
Chief Executive Officer
Date: November 14, 2003
By: /s/Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer
Date: November 14, 2003
EXHIBITS
Listed below are the exhibits, which are filed as part of this Report:
Exhibit Number Description
31.1 Certification of Principal Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification of Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002