UNITED STATES
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, 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 NOVEMBER 1, 2004
NONE NONE
Page Number
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 2
Balance Sheets, September 30, 2004 and December 31, 2003 3
Statements of Revenues, Expenses and Patronage Capital,
Three and Nine Months Ended September 30, 2004 and 2003 5
Statements of Cash Flows, Nine Months Ended September
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 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk 1 7
Item 4. Controls and Procedures 1 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 1 8
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 2 0
Item 3. Defaults Upon Senior Securities 2 0
Item 4. Submission of Matters to a Vote of Security Holders 2 0
Item 5. Other Information 2 0
Item 6. Exhibits 2 0
Signatures 2 1
Exhibits 2 2
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 September 30, 2004, follow:
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Unaudited)
Assets September 30, 2004 December 31, 2003
------ ------------------ -----------------
Utility plant:
Electric plant in service $ 746,890,350 $ 744,260,390
Construction work in progress 18,793,652 16,560,438
---------- ----------
765,684,002 760,820,828
Less accumulated depreciation (301,048,910) (293,371,966)
------------- -------------
464,635,092 467,448,862
Other property and investments, at cost:
Nonutility property 3,550 3,550
Investments in associated organizations 11,388,139 11,381,796
---------- ----------
11,391,689 11,385,346
Current assets:
Cash and cash equivalents 10,852,270 11,185,086
Cash-restricted construction funds 0 488,846
Special deposits 222,163 222,163
Accounts receivable, net 18,415,139 18,812,199
Fuel cost recovery 0 2,032,730
Materials and supplies 23,442,617 21,888,794
Prepayments 1,631,314 1,458,649
Other current assets 286,771 357,265
------- -------
54,850,274 56,445,732
Deferred charges 20,643,211 23,511,563
---------- ----------
Total Assets $ 551,520,266 $ 558,791,503
============= =============
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Continued)
(Unaudited)
Liabilities and Equities September 30, 2004 December 31, 2003
------------------------ ------------------ -----------------
Equities and margins:
Memberships $ 1,190,948 $ 1,155,818
Patronage capital 129,439,193 126,341,413
Other 6,699,102 6,718,891
--------- ---------
137,329,243 134,216,122
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 52,157,786 63,189,179
---------- ----------
368,357,786 384,289,179
Current liabilities:
Current installments of long-term obligations 15,931,393 5,545,000
Accounts payable 4,655,794 7,676,906
Provision for rate refund 0 671,071
Consumer deposits 1,911,993 1,834,752
Fuel cost payable 739,488 0
Accrued interest 1,903,021 6,165,790
Salaries, wages and benefits 5,762,989 4,886,600
Fuel 10,942,321 9,006,758
Other current liabilities 1,236,861 785,760
--------- -------
43,083,860 36,572,637
Deferred credits 2,749,377 3,713,565
--------- ---------
Total Liabilities and Equities $ 551,520,266 $ 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 September 30 Nine months ended September 30
2004 2003 2004 2003
---- ---- ---- ----
Operating revenues $47,991,700 $41,163,160 $146,025,052 $133,091,838
Operating expenses:
Fuel 15,401,482 12,267,067 46,351,134 34,120,453
Power production 4,544,688 3,363,789 11,365,200 9,486,981
Purchased power 5,400,612 4,681,807 14,892,444 12,714,043
Transmission 1,611,613 1,045,137 4,784,335 3,159,875
Distribution 3,140,476 2,869,990 8,571,666 8,147,487
Consumer accounts/Information expense 1,442,945 1,307,796 4,138,208 4,123,234
Administrative, general and other 5,478,919 5,976,266 16,337,182 19,261,872
Depreciation and amortization 6,757,489 6,839,754 20,889,807 20,812,332
--------- --------- ---------- ----------
Total operating expenses 43,778,224 38,351,606 127,329,976 111,826,277
Interest expense:
On long-term obligations 5,503,915 5,845,448 16,357,359 17,590,018
On short-term obligations 0 0 (48,179) 11,900
Charged to construction-credit (130,511) (110,826) (329,463) (212,510)
--------- --------- --------- ---------
Net interest expense 5,373,404 5,734,622 15,979,717 17,389,408
--------- --------- ---------- ----------
Net operating margins (1,159,928) (2,923,068) 2,715,359 3,876,153
Nonoperating margins:
Interest income 126,456 99,950 320,483 282,033
Other 20,826 22,890 63,522 86,605
Property gains (losses) (1,584) 30,396 (1,584) 101,615
------- ------ ------- -------
Total nonoperating margins 145,698 153,236 382,421 470,253
------- ------- ------- -------
Assignable margins (1,014,230) (2,769,832) 3,097,780 4,346,406
=========== =========== ========= =========
Patronage capital at beginning of period 130,453,423 127,204,532 126,341,413 120,148,502
Retirement of capital credits and estate
payments (0) (0) (0) (60,208)
--- --- --- --------
Patronage capital at end of period $ 129,439,193 $ 124,434,700 $ 129,439,193 $124,434,700
============= ============= ============= ============
<FN>
See accompanying notes to financial statements.
</FN>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
(Unaudited)
Nine months ended September 30
2004 2003
---- ----
Cash flows from operating activities:
Assignable margins $3,097,780 $4,346,406
Adjustments to reconcile assignable margins to net cash (used in) provided by
operating activities:
Provision for rate refund adjustment 0 (1,842,497)
Depreciation and amortization 23,586,909 24,813,600
Capitalization of interest (382,496) (245,983)
Property (gains) losses 1,584 (101,615)
Impairment of long-lived asset 0 1,846,816
Other 955 1,145
Changes in assets and liabilities:
(Increase) decrease in assets:
Fuel cost recovery 2,032,730 (100,714)
Accounts receivable 397,060 12,885,977
Prepayments (172,665) (1,422,453)
Materials and supplies (1,553,823) 1,556,613
Deferred charges, net 171,250 (792,956)
Other 70,494 (14,389)
Increase (decrease) in liabilities:
Accounts payable (3,021,112) (4,097,725)
Provision for rate refund (671,071) 0
Fuel payable 739,488 (363,862)
Consumer deposits 77,241 (16,109)
Accrued interest (4,262,769) (4,388,496)
Deferred credits (1,829,255) (978,206)
Other 3,263,053 1,444,009
--------- ---------
Net cash provided by operating activities 21,545,353 32,529,561
Cash flows from investing activities:
Extension and replacement of plant (17,695,126) (18,419,642)
Investments in associated organizations (7,298) (34,226)
------- --------
Net cash used in investing activities (17,702,424) (18,453,868)
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 1,369,255 529,251
--------- -------
Net cash used in financing activities (4,175,745) (10,778,028)
Net increase (decrease) in cash and cash equivalents (332,816) 3,297,665
Cash and cash equivalents at beginning of period $11,185,086 $7,284,292
- ------------------------------------------------ ----------- ----------
Cash and cash equivalents at end of period $10,852,270 $10,581,957
- ------------------------------------------ =========== ===========
Supplemental disclosure of cash flow information - interest expense paid, net of $20,242,486 $17,456,325
=========== ===========
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
annual renewal at the discretion of the parties. At September 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 Sept
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, Supreme Court No.
S-10598/10618
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.
MEA appealed the Superior Court's decisions relating to our debt 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 debt management claim on
jurisdictional and res judicata grounds.
The Alaska Supreme Court issued a decision on October 8, 2004. The Supreme
Court approved of the Superior Court's dismissal of this claim by ruling in
Chugach's favor supporting its right under the power sales agreement to
file for interim rate relief without first going to the Joint Committee.
The Supreme Court ruled against Chugach by overturning the Superior Court's
decision that dismissed MEA's fifth cause of action. This claim asked the
court to review Chugach's use of rate locks instead of defeasing debt based
on the Prudent Utility Practice standard under our power sales agreement.
The Superior Court had dismissed the claim finding that the Prudent Utility
Practice standard found in the power sales agreement between the parties
did not apply. The Supreme Court reversed that decision, finding that the
Prudent Utility Practice standard does apply to Chugach's debt management.
The Supreme Court also ruled against Chugach on arguments that the Superior
Court should have dismissed the debt management claim on jurisdictional and
res judicata grounds.
The case will be remanded to the Superior Court to consider the one
remaining issue. Management is uncertain of the outcome of the proceeding
before the Superior Court.
Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc.
Superior Court Case No. 3AN-04-11776 Civil
On October 12, 2004, MEA filed suit in Superior Court alleging a breach of
the power sales agreement between the parties and violation of Chugach's
bylaws in connection with allocation of margins (capital credits) to MEA
for the years 1998 through 2003. Allocation of capital credits assigns a
share of the margins earned in a particular year to each customer. Capital
credits are repatriated to customers at the discretion of the board of
directors typically many years after the margins are earned.
The suit seeks a declaration by the Court that Chugach is in breach of its
bylaws and the power sales agreement based on its allocation of capital
credits to MEA as well as injunctive relief requiring Chugach to calculate
MEA's capital credit allocations based on MEA's patronage and in accordance
with generally accepted accounting practices for nonprofit cooperatives and
cooperative principles. The suit also seeks damages in an unspecified
amount to compensate MEA for the alleged breach of contract.
Management intends to vigorously defend against the claim. Management is
uncertain of the outcome of the suit.
4. Critical Accounting Policies
Chugach's 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 September 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 no
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 a 2000 Test
Year.
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%. 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 a timely appeal of RCA Orders Nos. 26, 30 and 33 to the
Alaska Superior Court. 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 $1.8 million for the quarter ended
September 30, 2004, over the same quarter in 2003 due to a decrease in
administrative, general and other expense, a decrease in net interest
expense and increased kWh sales. The decreases were offset by an increase
in production, 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 $6.8 million, or 16.6%, for the quarter ended September 30,
2004, over the same quarter in 2003. The increase in revenues was due to an
increase in revenue recovered through the fuel surcharge mechanism due to
higher fuel prices, as well as increased kWh sales to both residential and
wholesale customers.
The following table represents kWh sales for the quarter ended September
30:
2004 2003
---- ----
Customer kWh kWh
Retail 281,952,973 270,956,140
Wholesale 287,864,611 269,168,585
Economy Energy 49,464,608 48,747,730
---------- ----------
Total 619,282,192 588,872,455
============= ============
Retail demand and energy rates and wholesale demand and energy rates
charged to HEA, MEA and SES did not change in the third quarter of 2004
compared to the third quarter of 2003.
Fuel expense increased by $3.1 million, or 25.6%, for the quarter ended
September 30, 2004, compared to the same period in 2003 primarily due to
higher fuel prices. Purchased power also increased $718.8 thousand, or
15.4%, due to higher fuel prices. Fuel and purchased power is recovered
through the fuel surcharge mechanism. Power production expense increased
$1.2 million, or 35.1%, due to annual maintenance projects starting later
in the year in 2004 than in 2003. Transmission expense increased by $566.5
thousand, or 54.2%, due to a change in directly assigning SCADA,
communications and relay maintenance to the substation maintenance
category. In 2003, these costs were recorded to the administrative, general
and other financial statement category. Distribution expense increased by
$270.5 thousand, or 9.4%, due to increased scheduled maintenance. Consumer
Accounts/Information expense increased $135.1 thousand, or 10.3%, due to
increased customer record and collection expenses. Administrative, general
and other expense decreased by $497.3 thousand, or 8.3%, due to lower
information services and garage allocated costs. The decrease was also
caused by a write off in 2003 associated with a wind power project that was
higher than a write off in 2004 of inventory associated with the fuel cell.
Depreciation and amortization expense did not materially change for the
three-month period ended September 30, 2004.
Interest on long-term debt decreased by $341.5 thousand, or 5.8%, due to
lower long-term debt balances and lower interest rates on the CoBank bonds.
Interest charged to construction did not materially change in the third
quarter of 2004 compared to the same period in 2003.
Other nonoperating margins decreased $7.5 thousand, or 4.9%, for the
three-month period ended September 30, 2004, compared to the same period in
2003 due to the sale of a crane in August of 2003, which caused 2003's
nonoperating margins to be higher than usual.
Current Year to Date Versus Prior Year to Date
Assignable margins decreased by $1.2 million, or 28.7%, in the first nine
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 $12.9 million, or 9.7%, due to an increase in
revenue recovered through the fuel surcharge mechanism due to higher fuel
prices and increased kWh sales. The increase was offset by decreased
economy energy sales to GVEA.
The following table represents kWh sales for the nine months ended
September 30:
2004 2003
---- ----
Customer kWh kWh
Retail 889,250,801 845,910,228
Wholesale 875,228,226 819,762,696
Economy Energy 148,728,850 166,840,860
----------- -----------
Total 1,913,207,877 1,832,513,784
============= =============
Fuel expense increased by $12.2 million, or 35.8%, for the first nine
months of 2004, compared to the same period in 2003 due to higher fuel
prices. Fuel expense is recovered through the fuel surcharge mechanism.
Power production expense increased by $1.9 million, or 19.8%, due to a
shift from capital projects in 2003 to expense projects in 2004. Purchased
power expense increased by $2.2 million, or 17.1%, also due to higher fuel
prices and is also recovered through the fuel surcharge mechanism.
Transmission expense increased $1.6 million, or 51.4%, due to a change in
directly assigning SCADA, communications and relay maintenance to the
substation maintenance category. In 2003, these costs were recorded to the
administrative, general and other financial statement category. This
expense category was also lower in 2003 due to the accrual of a Federal
Emergency Management Agency (FEMA) reimbursement of $250,000 for windstorm
damage recorded in the second quarter of 2003. Administrative, general and
other expense decreased by $2.9 million, or 15.2%, 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. The decrease was
also attributed to lower information services costs allocated to this
expense category this year compared to last year when the information
services department spent more time on non-administrative projects.
Distribution, consumer accounts/information and depreciation and
amortization expense did not materially change for the nine-month period
ended September 30, 2004, compared to the same period in 2003.
Interest on long-term debt decreased by $1.2 million, or 7.0%, due to lower
debt balances and lower interest rates. Interest charged to construction
increased by $117.0 thousand, or 55.0%, in the first nine 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 $87.8 thousand, or 18.7%, for the
nine-month period ended September 30, 2004, compared to the same period in
2003, caused by the gain associated with the disposal of a crane in 2003.
Financial Condition
Total assets decreased $7.3 million, or 1.3%, from December 31, 2003, to
September 30, 2004. The decrease was due in part to a $2.8 million, or
0.60%, 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 $488.8 thousand, or 100.0%, decrease in restricted
construction funds, as well as 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 $2.9
million, or 12.2%, in deferred charges caused by the amortization of
deferred projects, as well as the reclassification of software applications
to utility plant in service. These decreases were offset by an additional
$1.4 million of costs associated with the Cooper Lake Relicensing project.
These decreases were offset by a $1.6 million, or 7.1%, increase in
materials and supplies caused by the purchase of generation and
transmission inventory items in preparation for scheduled generation
maintenance projects and capital transmission projects.
Notable changes to total liabilities and equities include installment
payments of $5.5 million on the 2002 Series B bond and the CoBank 3 and 4
bonds. Accounts payable also decreased $3.0 million, or 39.4%, caused by a
decrease in construction activity in the third quarter of 2004 and the
payment of invoices that were accrued but not paid at December 31, 2003.
Accrued interest also decreased $4.3 million, or 69.1%, caused by the
semi-annual interest payment on the 2001 Series A Bonds in the third
quarter. 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 $964.2 thousand, or 26.0%, due to the
return of the Southern Intertie funds discussed above and to reduced
refundable deposits.
These decreases were offset by a $3.1 million, or 2.5%, increase in
patronage capital due to the margins generated in the first three quarters
of 2004 and an $739.5 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
$10.4 million, or 187.3%, in current installments of long-term debt caused
by the reclassification of CoBank 2, which is due in August of 2005.
Salaries, wages and benefits also increased $876.4 thousand, or 17.9%, due
to higher accruals caused by the timing of pay dates. Fuel cost also
increased $1.9 million, or 21.5%, 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
September 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 September 30,
2004, Chugach had the following promissory notes outstanding under this
facility:
Interest rate at Principal Payment
Promissory Note Principal balance September 30, 2004 Maturity Date Dates
--------------- ----------------- ------------------ ------------- -----
CoBank 2 $10,000,000 7.76% 2005 2005
CoBank 3 $20,634,830 3.12% 2022 2003 - 2022
CoBank 4 $22,554,349 3.12% 2022 2003 - 2022
CoBank 5 $10,000,000 3.12% 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 $30.0 million. At September 30, 2004,
approximately $17.7 million had been expended. Capital improvement
expenditures are expected to decrease in the fourth quarter of 2004 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 2004 and thereafter.
Outlook
Chugach is currently planning for future resource needs. An Integrated
Resource Plan (IRP) is in development. 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.
On September 15, 2004, the Chugach Board of Directors authorized the CEO to
undertake all necessary steps to craft a plan to create a single-member
Generation and Transmission (G&T) cooperative that would hold all Chugach
G&T assets, contractual arrangements, and associated debt. Chugach is
considering this option as a way to more effectively track the finances of
the G&T functions and to help address issues in future rate cases involving
the relative margin earning burdens among customer classes.
These two organizational structures are not mutually exclusive.
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%
September 8, 2004 1.75%
October 6, 2004 1.90%
November 3, 2004 2.05%
The following table provides information regarding cash flows for principal
payments on total debt by maturity date (dollars in thousands) as of
September 30, 2004.
Fair
Total Debt* 2005 2006 2007 2008 Thereafter Total Value
- ----------- ---- ---- ---- ---- ---------- ----- -----
Fixed rate $10,000 $0 $0 $0 $270,000 $280,000 $311,611
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 2.25% 2.25% 2.68% 2.25% 2.76% 2.66%
<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 rate, 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.
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, Supreme Court No.
S-10598/10618
This action is a claim for a breach of the 25-year all requirements
contract for power sales to 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.
MEA appealed the Superior Court's decisions relating to our debt 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 debt management claim on
jurisdictional and res judicata grounds.
The Alaska Supreme Court issued a decision on October 8, 2004. The Supreme
Court approved of the Superior Court's dismissal of this claim by ruling in
Chugach's favor supporting its right under the power sales agreement to
file for interim rate relief without first going to the Joint Committee.
The Supreme Court ruled against Chugach by overturning the Superior Court's
decision that dismissed MEA's fifth cause of action. This claim asked the
court to review Chugach's use of rate locks instead of defeasing debt based
on the Prudent Utility Practice standard under our power sales agreement.
The Superior Court had dismissed the claim finding that the Prudent Utility
Practice standard found in the power sales agreement between the parties
did not apply. The Supreme Court reversed that decision, finding that the
Prudent Utility Practice standard does apply to Chugach's debt management.
The Supreme Court also ruled against Chugach on arguments that the Superior
Court should have dismissed the debt management claim on jurisdictional and
res judicata grounds.
The case will be remanded to the Superior Court to consider the one
remaining issue. Management is uncertain of the outcome of the proceeding
before the Superior Court.
Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc.
Superior Court Case No. 3AN-04-11776 Civil
On October 12, 2004, MEA filed suit in Superior Court alleging a breach of
the power sales agreement between the parties and violation of Chugach's
bylaws in connection with allocation of margins (capital credits) to MEA
for the years 1998 through 2003. Allocation of capital credits assigns a
share of the margins earned in a particular year to each customer. Capital
credits are repatriated to customers at the discretion of the board of
directors typically many years after the margins are earned.
The suit seeks a declaration by the Court that Chugach is in breach of its
bylaws and the power sales agreement based on its allocation of capital
credits to MEA as well as injunctive relief requiring Chugach to calculate
MEA's capital credit allocations based on MEA's patronage and in accordance
with generally accepted accounting practices for nonprofit cooperatives and
cooperative principles. The suit also seeks damages in an unspecified
amount to compensate MEA for the alleged breach of contract.
Management intends to vigorously defend against the claim. Management is
uncertain of the outcome of the suit.
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. Unregistered Sales of Equity 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
Chugach and MEA met on October 27, 2004, pursuant to Section 12(c) of the
MEA/Chugach Power Sales Agreement. This provision requires the parties to
meet no later than ten years prior to the termination date of the
Agreement, to discuss a possible renewal, extension, or modification of the
Agreement, as well as the desires and potential circumstances of all
parties following the termination date. At that meeting and shortly
thereafter by letter dated November 2, 2004, MEA communicated to Chugach
that MEA does not desire to renew, extend or modify the Agreement. Further,
MEA stated that it does not envision any type of firm power purchase
arrangement with Chugach following expiration of the Agreement on December
31, 2014. MEA assured Chugach that it intends to continue to purchase power
from Chugach in accordance with the Agreement through December 31, 2014.
Item 6. Exhibits
Exhibits:
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.
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 12, 2004
By: /s/ Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer
Date: November 12, 2004
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