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 June 30, 2004
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 AUGUST 1, 2004
NONE NONE
Page Number
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 2
Balance Sheets, June 30, 2004 and December 31, 2003 3
Statements of Revenues, Expenses and Patronage Capital,
Three and Six Months Ended June 30, 2004 and 2003 5
Statements of Cash Flows, Six Months Ended June 30, 2004
and 2003 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 5
Item 4. Controls and Procedures 1 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 1 7
Item 2. Changes in Securities and Use of Proceeds 1 7
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 8
Item 6. Exhibits and reports on Form 8-K 1 8
Signatures 1 9
Exhibits 2 0
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 as of and for the quarter ended June 30, 2004, follow:
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Unaudited)
Assets June 30, 2004 December 31, 2003
------ ------------- -----------------
Utility plant:
Electric plant in service $ 738,257,811 $ 744,260,390
Construction work in progress 20,450,643 16,560,438
---------- ----------
758,708,454 760,820,828
Less accumulated depreciation (296,665,279) (293,371,966)
------------- -------------
462,043,175 467,448,862
Other property and investments, at cost:
Nonutility property 3,550 3,550
Investments in associated organizations 11,389,124 11,381,796
---------- ----------
11,392,674 11,385,346
Current assets:
Cash and cash equivalents 17,180,003 11,185,086
Cash-restricted construction funds 491,450 488,846
Special deposits 222,163 222,163
Accounts receivable, net 17,169,375 18,812,199
Fuel cost recovery 0 2,032,730
Materials and supplies 24,581,307 21,888,794
Prepayments 1,126,770 1,458,649
Other current assets 346,025 357,265
------- -------
61,117,093 56,445,732
Deferred charges 20,770,849 23,511,563
---------- ----------
Total Assets $ 555,323,791 $ 558,791,503
============= =============
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Continued)
(Unaudited)
Liabilities and Equities June 30, 2004 December 31, 2003
------------------------ ------------- -----------------
Equities and margins:
Memberships $ 1,176,963 $ 1,155,818
Patronage capital 130,453,423 126,341,413
Other 6,701,308 6,718,891
--------- ---------
138,331,694 134,216,122
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 46,200,000 51,100,000
National Bank for Cooperatives Bonds payable 62,157,786 63,189,179
---------- ----------
378,357,786 384,289,179
Current liabilities:
Current installments of long-term obligations 5,931,393 5,545,000
Accounts payable 4,332,980 7,676,906
Provision for rate refund 0 671,071
Consumer deposits 1,900,006 1,834,752
Fuel cost payable 874,034 0
Accrued interest 6,173,832 6,165,790
Salaries, wages and benefits 5,320,721 4,886,600
Fuel 10,056,317 9,006,758
Other current liabilities 837,802 785,760
------- -------
35,427,085 36,572,637
Deferred credits 3,207,226 3,713,565
--------- ---------
Total Liabilities and Equities $ 555,323,791 $ 558,791,503
============= =============
<FN>
See accompanying notes to financial statements.
</FN>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
(Unaudited)
Three months ended June 30 Six months ended June 30
2004 2003 2004 2003
---- ---- ---- ----
Operating revenues $46,388,411 $41,689,671 $98,033,352 $91,928,678
Operating expenses:
Fuel 14,560,068 10,449,494 30,949,650 21,853,386
Power production 3,378,311 3,398,259 6,820,512 6,123,192
Purchased power 5,538,343 4,694,759 9,491,833 8,032,237
Transmission 1,432,161 920,130 3,172,722 2,114,738
Distribution 2,852,655 2,450,195 5,431,190 5,277,497
Consumer accounts/Information expense 1,267,904 1,413,773 2,695,263 2,815,438
Administrative, general and other 5,325,992 8,036,378 10,858,262 13,285,605
Depreciation and amortization 7,085,627 6,957,600 14,132,319 13,972,578
--------- --------- ---------- ----------
Total operating expenses 41,441,061 38,320,588 83,551,751 73,474,671
Interest expense:
On long-term obligations 5,411,791 5,863,975 10,853,444 11,744,569
On short-term obligations (48,179) 0 (48,179) 11,901
Charged to construction-credit (109,520) 6,194 (198,952) (101,684)
--------- ----- --------- ---------
Net interest expense 5,254,092 5,870,169 10,606,313 11,654,786
--------- --------- ---------- ----------
Net operating margins (306,742) (2,501,086) 3,875,288 6,799,221
Nonoperating margins:
Interest income 104,993 95,520 194,026 182,083
Other 17,795 (4,420) 42,695 63,715
Property gain 0 0 0 71,219
------- ------ ------- ------
Total nonoperating margins 122,788 91,100 236,721 317,017
------- ------ ------- -------
Assignable margins (183,954) (2,409,986) 4,112,010 7,116,238
========= =========== ========= =========
Patronage capital at beginning of period 130,637,377 129,614,518 126,341,413 120,148,502
Retirement of capital credits and estate
Payments (0) (0) (0) (60,208)
--- --- --- --------
Patronage capital at end of period $ 130,453,423 $ 127,204,532 $130,453,423 $127,204,532
============= ============= ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
(Unaudited)
Six months ended June 30
2004 2003
---- ----
Cash flows from operating activities:
Assignable margins $4,112,010 $7,116,238
Adjustments to reconcile assignable margins to net cash (used in) provided by
operating activities:
Provision for rate refund 0 (4,790,712)
Depreciation and amortization 15,929,027 16,700,183
Capitalization of interest (231,159) (112,266)
Property gains 0 (71,219)
Impairment of long-lived asset 0 1,846,816
Other (30) 54
Changes in assets and liabilities:
(Increase) decrease in assets:
Fuel cost recovery 2,032,730 0
Accounts receivable 1,642,824 13,501,548
Prepayments 331,879 (928,731)
Materials and supplies (2,692,513) (1,682,533)
Deferred charges, net (1,873,975) (429,586)
Other 11,239 109,607
Increase (decrease) in liabilities:
Accounts payable (3,343,926) (2,980,332)
Provision for rate refund (671,071) 0
Fuel payable 874,034 682,089
Consumer deposits 65,254 1,434
Accrued interest 8,042 (70,424)
Deferred credits (920,669) (1,221,591)
Other 1,535,722 582,511
--------- -------
Net cash provided by operating activities 16,809,418 28,253,086
Cash flows from investing activities:
Extension and replacement of plant (5,677,492) (9,926,020)
Investments in associated organizations (7,298) (34,226)
------- --------
Net cash used in investing activities (5,684,790) (9,960,246)
Cash flows from financing activities:
Short-term obligations 0 (6,081,250)
Repayments of long-term obligations (5,545,000) (5,165,821)
Retirement of patronage capital 0 (60,208)
Other 415,289 641,551
------- -------
Net cash used in financing activities (5,129,711) (10,665,728)
Net increase in cash and cash equivalents 5,994,917 7,627,112
Cash and cash equivalents at beginning of period $11,185,086 $7,284,292
- ------------------------------------------------ ----------- ----------
Cash and cash equivalents at end of period $17,180,003 $14,911,404
- ------------------------------------------ =========== ===========
Supplemental disclosure of cash flow information - interest expense paid, net of 10,598,271 11,725,209
========== ==========
amounts capitalized
<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 (SEC) 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 of normal
and recurring nature, 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 2003 financial statements
to conform to the 2004 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, 2004, subject to
renewal at the discretion of the parties. At June 30, 2004, 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 June 30, 2004, there
was no outstanding balance on this line of credit. The NRUCFC line of
credit expires October 15, 2007.
3. 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 25-year all requirements
contract for power sales to Matanuska Electric Association, Inc. (MEA)
through 2014. MEA asserted Chugach 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 Regulatory Commission of Alaska (RCA). The joint
committee is defined in the power sales contract and consists of one MEA
and two Chugach board members. All of MEA's claims were dismissed in
Superior Court.
On April 29, 2002, MEA appealed the Superior Court's decisions relating to
our financial management and our failure to bring our base rate action to
the joint committee before filing with the RCA to the Alaska Supreme Court.
Chugach cross-appealed the Superior Court's decision not to dismiss the
financial management claim on jurisdictional and res judicata grounds. Oral
argument was held April 15, 2003, before the Alaska Supreme Court.
Management is uncertain as to the outcome and expects a decision very soon.
4. Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles
generally accepted in the United States of America. The preparation of
financial statements in conformity with Generally Accepted Accounting
Principles (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.
Critical accounting policies are those policies that management believes
are the most important to the portrayal of Chugach's financial condition
and results of its operations, and require management's most difficult,
subjective, or complex judgments, often as a result of the need to make
estimates about matters that are inherently uncertain. Most accounting
policies are not considered by management to be critical accounting
policies. Several factors are considered in determining whether or not a
policy is critical in the preparation of financial statements. These
factors include, among other things, whether the estimates are material to
the financial statements, the nature of the estimates, the ability to
readily validate the estimates with other information including third
parties or available prices, and sensitivity of the estimates to changes in
economic conditions and whether alternative accounting methods may be
utilized under accounting principles generally accepted in the United
States of America. For all of these policies management cautions that
future events rarely develop exactly as forecast, and the best estimates
routinely require adjustment. Management has discussed the development and
the selection of critical accounting policies with the Chugach Audit
Committee.
The following policies are considered to be critical accounting policies
for the quarter ending June 30, 2004.
Electric Utility Regulation
Chugach is subject to regulation by the RCA. The RCA sets the rates Chugach
is permitted to charge customers based on allowable costs. As a result,
Chugach applies Financial Accounting Standards Board (FASB) Statement No.
71, Accounting for the Effects of Certain Types of Regulation. Through the
ratemaking process, the regulators may require the inclusion of costs or
revenues in periods different than when they would be recognized by a
non-regulated company. This treatment may result in the deferral of
expenses and the recording of related regulatory assets based on
anticipated future recovery through rates or the deferral of gains or
creation of liabilities and the recording of related regulatory
liabilities. The application of Statement No. 71 has a further effect on
Chugach's financial statements as a result of the estimates of allowable
costs used in the ratemaking process. These estimates may differ from those
actually incurred by the Company; therefore, the accounting estimates
inherent in specific costs such as depreciation and pension and
post-retirement benefits have less of a direct impact on Chugach's results
of operations than they would on a non-regulated company. Management
reviews the ultimate recoverability of these regulatory assets and
liabilities based on applicable regulatory guidelines. However, adverse
legislation and judicial or regulatory actions could materially impact the
amounts of such regulatory assets and liabilities and could adversely
impact Chugach's financial statements.
Financial Instruments and Hedging
Chugach used U.S. Treasury forward rate lock agreements to hedge expected
interest rates on debt. We accounted for the agreements under Statement of
Financial Accounting Standards (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, based on
authorization by the RCA in Order U-01-108(26) to recover these gains and
losses.
Critical estimates also include provision for rate refunds and allowance
for doubtful accounts. Actual results could differ from those estimates.
5. New Accounting Standards
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement established 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
implemented SFAS No. 150 effective January 1, 2004, and there was not any
material impact to the 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.
Docket U-01-108
Chugach filed a general rate case on July 10, 2001, based on the 2000 test
year expenses. 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. Three wholesale customers and
the Public Advocacy Staff of the RCA participated in the rate case. A
hearing was held in November and December of 2002.
Between February 6, 2003, and May 12, 2004, the RCA issued Order Nos. 26
through 39 containing various rulings on Chugach's rate case.
As compared to prior-approved permanent rates, Chugach's final approved
rates on a system basis increased 0.07 percent, consisting of an increase
of 3.5 percent to retail customers and a decrease of 7.9 percent to
wholesale customers. These results were implemented on November 10, 2003.
On June 30, 2004, the RCA issued Order No. 40, acknowledging receipt of
compliance filings and closed the docket.
Appeal of RCA Orders
Chugach filed timely appeals of RCA Orders 26, 30 and 33. In its
Appellant's brief dated February 18, 2004, Chugach asserted that the RCA's
orders contained three errors:
o The split TIER decision unduly discriminates against retail customers;
o Interest expense was allocated on the basis of plant associated with
G&T and Distribution rather than on the basis of debt associated with
each function; and
o Chugach is entitled to include all of its interest expense in rates and
the RCA's offset for Interest During Construction (IDC) was not
justified because nearly all of the plant that produced the IDC was in
service by the time the new rate went into effect.
The resolution of the first two issues will not change the total amount
Chugach can recover through rates. If Chugach prevails on the last issue,
it will be authorized to recover approximately $1,000,000 more each year in
rates.
One of Chugach's wholesale customers, MEA, also appealed the RCA's orders.
In its Appellant's brief, MEA argued that the RCA's decision to normalize
Chugach's variable rate debt at 3.8 percent and to authorize the
corresponding interest expense constitutes error based on the historic
rates prevailing for Chugach's variable rate debt. If MEA prevails on its
argument, Chugach's authorized rates would be reduced by approximately
$1,000,000 each year.
The Alaska Superior Court heard oral argument on July 13, 2004. The Court
took the matter under advisement. Management is uncertain as to the outcome
but expects a decision in 2004.
Results Of Operations
Current Year Quarter Versus Prior Year Quarter
Assignable margins increased by $2.2 million for the quarter ended June 30,
2004, over the same quarter in 2003 due to a decrease in administrative,
general and other expense and a decrease in net interest expense. These
decreases were slightly offset by an increase in transmission and
distribution expenses.
Operating revenues, which include sales of electric energy to retail,
wholesale and economy energy customers and other miscellaneous revenues,
increased by $4.7 million, or 11.3%, for the quarter ended June 30, 2004,
over the same quarter in 2003. The increase in revenues was due to an
increase in revenue collected through the fuel surcharge mechanism due to
higher fuel prices, as well as increased kWh sales to both residential and
wholesale customers. These increases were offset by decreased economy
energy sales to Golden Valley Electric Association (GVEA). GVEA purchased
less from Chugach in the second quarter of 2004 as compared to the same
quarter last year.
The following table represents kWh sales for the quarter ended June 30:
2004 2003
---- ----
Customer kWh kWh
Retail 274,343,704 264,341,691
Wholesale 276,596,824 259,493,952
Economy Energy 39,417,482 58,899,440
---------- ----------
Total 590,358,010 582,735,083
================== =================
Retail demand and energy rates and wholesale demand and energy rates
charged to HEA, MEA and SES did not change in the second quarter of 2004
compared to the second quarter of 2003. The RCA issued a final order May
12, 2004, on remaining interest rate issues affecting refunds. By order
issued June 30, 2004, the RCA acknowledged receipt of filings from Chugach
demonstrating compliance with its earlier orders and closed the docket. All
rates currently in effect are final.
Fuel expense increased by $4.1 million, or 39.3%, for the quarter ended
June 30, 2004, compared to the same period in 2003 primarily due to higher
fuel prices. Purchased power also increased $843.6 thousand, or 18.0%, due
to higher fuel prices. Fuel and purchased power is collected through the
fuel surcharge mechanism. Transmission expense increased by $512.0
thousand, or 55.6%, due to increased substation maintenance. Distribution
expense increased by $402.5 thousand, or 16.4%, due to lower distribution
expense in 2003. This was caused by increased professional services related
to the timing of facility locate invoices and the accrual of a Federal
Emergency Management Agency (FEMA) reimbursement of $250,000 for wind storm
damage in the second quarter of 2003. Consumer Accounts/Information expense
decreased $145.9 thousand, or 10.3%, due to lower information services and
garage allocated costs. Administrative, general and other expense decreased
by $2.7 million, or 33.7%, due to write offs in 2003 that Chugach did not
have in 2004. The write offs included several study projects, obsolete
inventory and the write down of an impaired asset of $1.8 million in 2003.
Power production and depreciation and amortization expense did not
materially change for the three-month period ended June 30, 2004.
Interest on long-term debt decreased by $452.2 thousand, or 7.7%, due to
lower long-term debt balances and lower interest rates on the CoBank bonds.
Interest charged to construction increased by $115.7 thousand in the second
quarter of 2004 compared to the same period in 2003 due to an adjustment
that was made to a completed project in 2003. Other interest expense
decreased by $48.2 thousand, or 100%, from the second quarter of 2003 due
to an adjustment to interest associated with the provision for rate refunds
that was made earlier in the year.
Other nonoperating margins increased $31.7 thousand, or 34.8%, for the
three-month period ended June 30, 2004, compared to the same period in 2003
due to an increase in interest income caused by higher cash balances and
higher Allowance for Funds Used During Construction (AFUDC) due to the same
adjustment made to a completed project in 2003 discussed above.
Current Year to Date Versus Prior Year to Date
Assignable margins decreased by $3.0 million, or 42.2%, in the first six
months of 2004, over the same period in 2003, primarily due to a $5.2
million reversal recorded to revenue in March of 2003 of a $7.1 million
provision for rate refund recorded in 2002. This variance was offset by a
decrease in interest expense and a decrease in administrative, general and
other expense.
Operating revenues increased $6.1 million, or 6.6%, due to an increase in
revenue collected through the fuel surcharge mechanism due to higher fuel
prices and due to the provision for rate refund reversal discussed above.
The increase was offset by decreased economy energy sales to GVEA.
The following table represents kWh sales for the six months ended June 30:
2004 2003
---- ----
Customer kWh kWh
Retail 607,297,828 574,954,088
Wholesale 587,363,615 550,594,111
Economy Energy 31,262,141 118,093,130
---------- -----------
Total 225,923,584 1,243,641,329
=================== ==================
Fuel expense increased by $9.1 million, or 41.6%, for the first six months
of 2004, compared to the same period in 2003 due to higher fuel prices.
Fuel expense is collected through the fuel surcharge mechanism. Power
production expense increased by $697.3 thousand, or 11.4%, due to the
timing of generation projects. In 2003, the annual maintenance projects
started later in the year than in 2004. Purchased power expense increased
by $1.5 million, or 18.7%, also due to higher fuel prices and is also
collected through the fuel surcharge mechanism. Transmission expense
increased $1.1 million, or 50%, due to increased substation maintenance.
Administrative, general and other expense decreased by $2.4 million, or
18.3%, due primarily to a $1.8 million write down of an impaired asset in
2003, as well as higher write offs of study projects and obsolete inventory
in 2003. Distribution, consumer accounts/information and depreciation and
amortization expense did not materially change for the six-month period
ended June 30, 2004, compared to the same period in 2003.
Interest on long-term debt decreased by $891.1 thousand, or 7.6%, due to
lower debt balances and lower interest rates. Interest charged to
construction increased by $97.3 thousand, or 95.7%, in the first six months
of 2004 compared to the same period in 2003, due to an adjustment that was
made to a completed project in 2003. Other interest expense decreased by
$60.1 thousand, or 504.8%, during the same period in 2004 compared to the
same period in 2003 due to an adjustment to interest associated with our
provision for rate refunds that were made earlier in the year.
Other non-operating margins decreased by $80.3 thousand, or 25.2%, for the
six-month period ended June 30, 2004, compared to the same period in 2003,
due to a decrease in the gain associated with the disposal of property
caused by the sale of a crane in 2003.
Financial Condition
Total assets decreased $3.5 million, or 0.62%, from December 31, 2003, to
June 30, 2004. The decrease was due in part to a $5.4 million, or 1.2%,
decrease in net plant, primarily due to depreciation expense in excess of
extension and replacement of plant. The decrease in total assets was also
due to a $1.6 million, or 8.7%, decrease in accounts receivable caused by
the collection of receivables that were accrued but not received at
December 31, 2003. The decrease in total assets was also due to a $2.0
million, or 100.0%, decrease in fuel cost recovery caused by the collection
of the previous quarter fuel cost through the fuel surcharge mechanism.
There was also a decrease of $2.7 million, or 11.7%, in deferred charges
caused by the amortization of deferred projects.
These decreases were offset by a $6.0 million, or 53.6%, increase in cash
and cash equivalents due to less than anticipated construction spending and
a $2.7 million, or 12.3%, increase in materials and supplies caused by the
purchase of generation inventory items in preparation for scheduled
maintenance projects.
Notable changes to total liabilities and equities include a $5.9 million,
or 1.5%, decrease in long-term obligations caused by the installment
payments of the 2002 Series B bond and the CoBank 3 and 4 bonds. Accounts
payable also decreased $3.3 million, or 43.6%, caused by the payment of
invoices that were accrued but not paid at December 31, 2003. There was
also a $671.1 thousand, or 100.0%, decrease in provision for rate refund
due to the payment of rate refunds since December 31, 2003. Deferred
credits also decreased $506.3 thousand, or 13.6%, due to reduced refundable
deposits.
These decreases were offset by a $4.1 million, or 3.3%, increase in
patronage capital due to the margins generated in the first two quarters of
2004 and an $874.0 thousand, or 100.0%, increase in fuel cost payable due
to the over-collection of the previous quarter fuel cost through the fuel
surcharge mechanism. The decreases were also offset by an increase of
$386.4 thousand, or 7.0%, in current installments of long-term debt.
Salaries, wages and benefits also increased $434.1 thousand, or 8.9%, due
to higher accruals caused by the timing of pay dates. Fuel cost also
increased $1.0 million, or 11.7%, due to higher fuel prices.
Liquidity and Capital Resources
Chugach has satisfied its operational and capital cash requirements
primarily through internally-generated funds, an annual $20 million line of
credit with CoBank and a $50 million line of credit from NRUCFC. At June
30, 2004, there was no outstanding balance with NRUCFC or CoBank.
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 June 30, 2004,
Chugach had the following promissory notes outstanding under this facility:
Interest rate at June Principal Payment
Promissory Note Principal balance 30, 2004 Maturity Date Dates
--------------- ----------------- -------- ------------- -----
CoBank 2 $10,000,000 7.76% 2005 2005
CoBank 3 $20,634,830 2.71% 2022 2003 - 2022
CoBank 4 $22,554,349 2.71% 2022 2003 - 2022
CoBank 5 $10,000,000 2.71% 2012 2002 - 2012
Total $63,189,179
On January 22, 2003, Chugach and CoBank finalized a new Master Loan
Agreement pursuant to which the CoBank term loan facility was converted
from secured to unsecured debt and the obligations represented by the
outstanding bonds then held by CoBank were converted into promissory notes
governed by the new Master Loan Agreement. Chugach's 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 2004 is estimated at $28.2 million. At June 30,
2004, approximately $5.7 million had been expended. Capital improvement
expenditures are expected to increase in the third quarter of 2004 as the
construction season begins in April and extends into October.
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 2004 and thereafter.
Outlook
Chugach is currently planning for future resource needs. An Integrated
Resource Plan (IRP) is in progress. This effort studies several possible
future scenarios for power sales.
On March 17, 2004, the Chugach Board of Directors authorized the Chief
Executive Officer (CEO) or his designee to enter into an agreement to form
a Joint Action Agency (JAA) that, if implemented, could provide a structure
with which Chugach and other eligible Alaska utilities might jointly
acquire, own and operate certain generation and transmission facilities.
Environmental Matters
Compliance with Environmental Standards
Chugach's operations are subject to certain federal, state and local
environmental laws. 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.
Cooper Lake
Chugach discovered polychlorinated biphenyls (PCBs) in paint, caulk and
grease at the Cooper Lake Hydroelectric plant during initial phases of a
turbine overhaul. A FERC- approved plan, prepared in consultation with the
Environmental Protection Agency (EPA), was implemented to remediate the
PCBs in the plant. In an order in Chugach's 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.
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
The following table provides information regarding auction dates and rates
in 2004 on the 2002 Series B bonds.
Auction Date Interest Rate
January 28, 2004 1.12%
February 25, 2004 1.09%
March 24, 2004 1.10%
April 21, 2004 1.11%
May 19, 2004 1.20%
June 16, 2004 1.40%
July 14, 2004 1.55%
August 11, 2004 1.65%
The following table provides information regarding cash flows for principal
payments on total debt by maturity date (dollars in thousands) as of June
30, 2004.
Fair
Total Debt* 2005 2006 2007 2008 Thereafter Total Value
- ----------- ---- ---- ---- ---- ---------- ----- -----
Fixed rate $10,000 $0 $0 $0 $270,000 $280,000 $304,765
Average
interest rate 7.76% - - - 6.39% 6.44%
Variable rate $5,931 $6,326 $11,729 $7,241 $73,063 $104,289 $104,289
Average
interest rate 1.83% 1.83% 2.20% 1.83% 2.28% 2.19%
<FN>
* Includes current portion
</FN>
Commodity Price Risk
Chugach's gas contracts provide for adjustments to gas costs 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 of market
fluctuations in the price of purchased power.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures. Our principal executive officer (CEO) and principal financial
officer (CFO) supervised and participated in this evaluation. Based on this
evaluation, our CEO and CFO each concluded that our disclosure controls and
procedures are effective and timely in alerting them to material
information required to be included in our periodic reports to the
Securities and Exchange Commission. The design of any system of controls is
based in part upon various assumptions about the likelihood of future
events and there can be no assurance that any of our plans, products,
services or procedures will succeed in achieving their intended goals under
future conditions. In addition, there have been no significant changes in
our internal controls or in other factors known to management that could
significantly affect our internal controls subsequent to our most recent
evaluation. We have found no facts that would require us to take any
corrective actions with regard to significant deficiencies or material
weaknesses.
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 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 were dismissed in
Superior Court.
On April 29, 2002, MEA appealed the Superior Court's decisions relating to
our financial management and our failure to bring our base rate action to
the joint committee before filing with the RCA to the Alaska Supreme Court.
We cross-appealed the Superior Court's decision not to dismiss the
financial management claim on jurisdictional and res judicata grounds. Oral
argument was held April 15, 2003, before the Alaska Supreme Court.
Management is uncertain as to the outcome and expects a decision very soon.
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
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Code of Ethics for Senior Financial Officers of the Registrant
dated effective June 16, 2004.
Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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 June
30, 2004.
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: August 13, 2004
By: /s/ Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer
Date: August 13, 2004
EXHIBITS
Listed below are the exhibits, which are filed as part of this Report:
Exhibit Number Description
14 Code of Ethics for Senior Financial Officers of the Registrant
dated effective June 16, 2004
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