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, 2005
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 Electron 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, 2005
NONE NONE
Page Number
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 2
Balance Sheets, September 30, 2005 and December 31, 2004 3
Statements of Revenues, Expenses and Patronage Capital, Three
and Nine Months Ended September 30, 2005 and 2004 5
Statements of Cash Flows, Nine Months Ended September 30, 2005
and 2004 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 1 3
Item 3. Quantitative and Qualitative Disclosures About Market Risk 2 2
Item 4. Controls and Procedures 2 3
PART II OTHER INFORMATION
Item 1. Legal Proceedings 2 4
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 2 5
Item 3. Defaults Upon Senior Securities 2 5
Item 4. Submission of Matters to a Vote of Security Holders 2 6
Item 5. Other Information 2 6
Item 6. Exhibits 2 6
Signatures 2 7
Exhibits 2 8
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, 2005, follow:
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
(Unaudited)
Assets September 30, 2005 December 31, 2004
------ ------------------ -----------------
Utility Plant:
Electric plant in service $763,067,771 $748,484,527
Construction work in progress 28,569,286 25,278,388
------------ ------------
Total utility plant 791,637,057 773,762,915
Less accumulated depreciation (325,994,605) (305,932,001)
------------- ------------
Net utility plant 465,642,452 467,830,914
Other property and investments, at cost:
Nonutility property 24,461 24,461
Investments in associated organizations 11,768,053 11,768,457
------------ ------------
Total other property and investments 11,792,514 11,792,918
Current assets:
Cash and cash equivalents 5,967,258 10,465,004
Special deposits 216,191 217,191
Fuel cost under-recovery 571,701 0
Accounts receivable, net 20,240,848 23,740,383
Materials and supplies 24,044,198 23,691,509
Prepayments 1,589,388 805,670
Other current assets 287,845 260,115
------------ ------------
Total current assets 52,917,429 59,179,872
Deferred charges, net 20,287,914 20,550,883
------------ ------------
Total assets $550,640,309 $559,354,587
============ ============
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
(Continued)
(Unaudited)
Liabilities and Equities September 30, 2005 December 31, 2004
------------------------ ------------------ -----------------
Equities and margins:
Memberships $1,238,663 $1,202,538
Patronage capital 134,742,201 130,750,269
Other 7,068,372 7,045,992
----------- -----------
Total equities and margins 143,049,236 138,998,799
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 41,000,000 46,200,000
National Bank for Cooperatives promissory notes payable 54,032,099 47,157,786
----------- -----------
Total long-term obligations 365,032,099 363,357,786
Current liabilities:
Current installments of long-term obligations 8,325,687 15,931,393
Accounts payable 5,041,954 7,890,172
Consumer deposits 1,989,398 1,947,511
Fuel cost over-recovery 0 2,714,345
Accrued interest 2,014,161 6,201,769
Salaries, wages and benefits 6,271,727 5,530,740
Fuel 13,927,998 12,919,623
Other current liabilities 2,367,567 1,416,400
----------- -----------
Total current liabilities 39,938,492 54,551,953
Deferred credits 2,620,482 2,446,049
----------- -----------
Total liabilities and equities $550,640,309 $559,354,587
============ ============
<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
2005 2004 2005 2004
Operating revenues $54,323,791 $47,991,700 $161,850,226 $146,025,052
Operating expenses:
Fuel 20,877,682 15,401,482 59,043,658 46,351,134
Power production 3,799,930 4,544,688 10,213,754 11,365,200
Purchased power 6,279,848 5,400,612 17,778,235 14,892,444
Transmission 1,433,318 1,611,613 4,362,254 4,784,335
Distribution 3,014,476 3,140,476 8,830,785 8,571,666
Consumer accounts 1,487,133 1,442,945 4,034,971 4,138,208
Administrative, general and other 5,249,736 5,478,919 14,879,950 16,337,182
Depreciation 7,624,509 6,757,489 21,907,024 20,889,807
---------------- ---------------- ---------------- ----------------
Total operating expenses 49,766,632 43,778,224 141,050,631 127,329,976
Interest expense:
On long-term obligations 5,903,604 5,503,915 17,391,282 16,357,359
On short-term obligations 44,412 0 46,649 (48,179)
Charged to construction-credit (199,534) (130,511) (605,708) (329,463)
---------------- ---------------- ---------------- ----------------
Net interest expense 5,748,482 5,373,404 16,832,223 15,979,717
---------------- ---------------- ---------------- ----------------
Net operating margins (1,191,323) (1,159,928) 3,967,372 2,715,359
Nonoperating margins:
Interest income 155,968 126,456 411,946 320,483
Capital credits, patronage dividends and other 40,395 19,242 108,494 61,938
---------------- ---------------- ---------------- ----------------
Total nonoperating margins 196,363 145,698 520,440 382,421
---------------- ---------------- ---------------- ----------------
Assignable margins (994,960) (1,014,230) 4,487,812 3,097,780
================ ================ ================ ================
Patronage capital at beginning of period 136,091,073 130,453,423 130,750,269 126,341,413
Retirement of capital credits and estate payments (353,912) 0 (495,880) 0
---------------- ---------------- ---------------- ----------------
Patronage capital at end of period $134,742,201 $129,439,193 $134,742,201 $129,439,193
================ ================ ================ ================
<FN>
See accompanying notes to financial statements.
</FN>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statement of Cash Flows
(Unaudited)
Nine months ended September 30
2005 2004
---- ----
Cash flows from operating activities:
Assignable margins $4,487,812 $3,097,780
Adjustments to reconcile assignable margins to net cash provided by operating
activities:
Depreciation and amortization 24,083,566 23,586,909
Capitalized interest (713,201) (382,496)
Other 404 2,539
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 3,499,535 397,060
Fuel cost under-recovery (571,701) 2,032,730
Materials and supplies (352,689) (1,553,823)
Prepayments (783,718) (172,665)
Other assets (26,730) 70,494
Deferred charges (1,913,573) 171,250
Increase (decrease) in liabilities:
Accounts payable (2,848,218) (3,021,112)
Provision for rate refund 0 (671,071)
Consumer deposits 41,887 77,241
Fuel cost over-recovery (2,714,345) 739,488
Accrued interest (4,187,608) (4,262,769)
Salaries, wages and benefits 740,987 876,389
Fuel 1,008,375 1,935,563
Other liabilities 951,167 451,101
Deferred credits (52,866) (1,829,255)
---------- -----------
Net cash provided by operating activities $20,649,084 $21,545,353
Investing activities:
Extension and replacement of plant (19,005,361) (17,695,126)
Purchase of investments in associated organizations 0 (7,298)
----------- -----------
Net cash used in investing activities (19,005,361) (17,702,424)
Financing activities:
Net transfer of restricted construction funds 0 488,846
Repayments of long-term obligations (5,931,393) (5,545,000)
Memberships and donations received 58,505 15,342
Retirement of patronage capital (495,880) 0
Net receipts of consumer advances for construction 227,299 865,067
----------- -----------
Net cash used in financing activities (6,141,469) (4,175,745)
Net changes in cash and cash equivalents (4,497,746) (332,816)
Cash and cash equivalents at beginning of period $10,465,004 $11,185,086
Cash and cash equivalents at end of period $5,967,258 $10,852,270
=========== ===========
Supplemental disclosure of cash flow information - interest expense paid, excluding $21,019,831 $20,242,486
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 2004 financial statements
to conform to the 2005 presentation.
2. Lines of credit
Chugach had maintained a $20 million line of credit with CoBank, ACB
(CoBank). On October 31, 2005, Chugach reduced the line of credit to $7.5
million due to a decrease in short-term borrowing projections. The CoBank
line of credit expires October 31, 2006, subject to annual renewal at the
discretion of the parties. At September 30, 2005, there was no outstanding
balance on this line of credit and it was not utilized during the third
quarter of 2005. At September 30, 2005, the borrowing rate would have been
5.35% and at December 31, 2004, the borrowing rate would have been 3.80%.
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, 2005, there was no outstanding balance on this line of
credit and it was not utilized during the third quarter of 2005. At
September 30, 2005, the borrowing rate would have been 5.70% and at
December 31, 2004, the borrowing rate would have been 4.05%. The NRUCFC
line of credit expires October 15, 2007.
3. 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 Power Sales Agreement between
Chugach and Matanuska Electric Association, Inc. (MEA) for a 25-year period
from 1989 through 2014. MEA asserted Chugach breached that contract by
failing to provide information, by failing to properly manage Chugach's
long-term debt, and by failing to bring Chugach's base rate action to a
Joint Committee before presenting it to the Regulatory Commission of Alaska
(RCA). All of MEA's claims were dismissed by the Superior Court. On April
29, 2002, MEA appealed the Superior Court's decisions relating to Chugach's
financial management and Chugach's failure to bring Chugach's 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. The Alaska Supreme Court, on October 8, 2004, ruled 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 in its cross appeal. The Supreme Court also
overturned the Superior Court's decision that dismissed MEA's claim asking
for review of Chugach's use of rate locks instead of defeasing debt based
on the Prudent Utility Practice standard under our power sales agreement.
The Supreme Court remanded this issue to the Superior Court.
On January 24, 2005, Chugach filed a summary judgment motion based on
Chugach's claim that in the 2000 Test Year rate case the RCA had already
decided the underlying issues relating to the prudency of Chugach's use of
rate locks instead of defeasing debt. In its decision dated August 22,
2005, the Superior Court granted Chugach's summary judgment motion,
agreeing that the Commission reviewed the prudency of Chugach's financial
management and specifically Chugach's use of the rate lock as a hedge
against the risk of rising interest rates. The Court found that the
Commission had exercised its primary jurisdiction, reviewed MEA's claims
and held that Chugach's use of the rate lock mechanism to be reasonable and
a recoverable expense from ratepayers.
Once a final judgment has been entered, Chugach will seek recovery of its
allowed costs and fees from MEA. MEA has indicated it will appeal the
Superior Court's decision. The ultimate resolution of this matter is not
currently determinable.
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 margins 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. The case is in
the discovery phase but it is likely that the discovery deadlines as well
as the trial date, now scheduled for a five-day trial to begin February 27,
2006, will be rescheduled.
Management is vigorously defending against the claim. The ultimate
resolution of this matter is not currently determinable.
Other
Chugach received a demand letter from a third party offering a license to a
patent and implying that the patent may be infringed by certain services
provided by Chugach. The patent purportedly relates to intellectual
property rights over a system for automated electronic bill presentment and
payment. As of this date, no legal proceedings have been instituted against
Chugach, but if the third party's patents are valid, enforceable and apply
to our business, Chugach could be required to seek a license, discontinue
certain activities or be subject to a claim for past infringement. Chugach
is currently considering this matter, but lack sufficient information to
assess the potential outcome at this time. The ultimate resolution of this
matter is not currently determinable.
Chugach has certain additional litigation matters and pending claims that
arise in the ordinary course of our business. In the opinion of management,
no individual matter or the matters in the aggregate are likely to have a
material adverse effect on our results of operations, financial condition
or liquidity.
4. Regulatory Matters
Depreciation Rates Review Proceeding (Docket No. U-04-102)
In 2004, Chugach implemented new depreciation rates based on an update of
the Depreciation Study utilizing Electric Plant in Service balances as of
December 31, 2002. The Depreciation Study resulted in a net impact on the
2004 financial statements of approximately $255 thousand, which, in
aggregate, was not material to the financial statements. The depreciation
study was submitted to the RCA for approval on November 19, 2004 resulting
in the RCA opening a docket to review the proposed new rates, however, the
new rates were implemented and in effect for all of 2004. Chugach did not
request a change in electric rates charged to customers based on the
proposed revisions to depreciation rates.
On March 9, 2005, the RCA ruled in Order No. 2 that depreciation rates may
not be implemented without prior approval of the RCA. On August 8, 2005,
Chugach filed a motion proposing an alternate implementation plan. On
September 21, 2005, the RCA issued Order No. 8 denying our motion and
granting a Motion filed by a wholesale customer of Chugach to Enforce Order
No. 2. Order No. 8 required that Chugach adjust its underlying 2004
financial records to reflect the results as if Chugach had not implemented
unapproved rates but the order did not require us to restate our 2004
annual report. Chugach revised its accounting records for 2005 by
approximately $427 thousand to reflect the previously approved depreciation
rates. Order No. 8 further indicated that the RCA would rule on the
effective date for implementing the new depreciation rates currently under
review in its final ruling in this docket. The RCA's final ruling may
change the depreciation rates to be applied for all or portions of 2005.
The RCA is expected to issue a final order in this docket in the fourth
quarter of 2005. Chugach expects to make a final adjustment to 2005
depreciation rates based upon a final order from the RCA on this matter.
Management is uncertain of the outcome of the RCA depreciation study review
process.
5. Critical Accounting Policies
Chugach's accounting and reporting policies comply with accounting
principles generally accepted in the United States of America (GAAP). The
preparation of financial statements in conformity with 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 GAAP. 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 three and nine months ended September 30, 2005.
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 the February 2002 debt re-financings. Chugach accounted
for the agreements under Statement of Financial Accounting Standards (SFAS)
133. For rate-making purposes, Chugach did not adjust rates for gains and
losses prior to settlement, and the loss on settlement has been and will
continue to be an adjustment to rates over the lives of the associated
debt. This rate-making treatment was approved by the RCA in Order
U-01-108(26). Accordingly, the unrealized net loss was not recorded and was
treated as a regulatory asset upon settlement.
Other
Critical estimates also include provision for rate refunds and allowance
for doubtful accounts. Actual results could differ from those estimates.
6. New Accounting Standards
FASB Interpretation No. 47 (FIN 47) "Accounting for Conditional Asset
Retirement Obligations"
In March, 2005, the FASB issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47). FIN 47, effective for
fiscal years ending after December 15, 2005, is an interpretation of FASB
Statement No. 143, Accounting for Asset Retirement Obligations (Statement
143). FIN 47 Interpretation clarifies that conditional obligations meet the
definition of an asset-retirement obligation in Statement 143 and therefore
should be recognized if their fair value is reasonably estimable. It also
provides additional guidance to evaluate whether fair value is reasonably
estimable. Chugach will evaluated the provisions of FIN 47 and implement
the Interpretation effective December 31, 2005.
SFAS 154 "Accounting Changes and Error Corrections"
This statement replaces Accounting Principles Board (APB) Opinion No. 20,
"Accounting Changes" and FASB Statement No. 3, "Reporting Changes in
Interim Financial Statements," and establishes, unless impracticable,
retrospective application as the required method for reporting a change in
accounting principle in the absence of explicit transition requirements
specific to the newly adopted accounting principle. It applies to all
voluntary changes in accounting principle, and to changes required by an
accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. When a pronouncement
includes specific transition provisions, those provisions should be
followed. This Statement is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005. Chugach will implement the Statement effective January 1, 2006.
SFAS 153 "Exchanges of Nonmonetary Assets"
This Statement addresses the measurement of exchanges of nonmonetary
assets. It eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions," and replaces it with an
exception for exchanges that do not have commercial substance. This
Statement specifies that a nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as
a result of the exchange. The provisions of this Statement are effective
for nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. Chugach implemented the statement effective July 1, 2005.
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
Depreciation Rates Review Proceeding (Docket No. U-04-102)
In 2004, Chugach implemented new depreciation rates based on an update of
the Depreciation Study utilizing Electric Plant in Service balances as of
December 31, 2002. The Depreciation Study resulted in a net impact on the
2004 financial statements of approximately $255 thousand, which, in
aggregate, was not material to the financial statements. The depreciation
study was submitted to the RCA for approval on November 19, 2004 resulting
in the RCA opening a docket to review the proposed new rates, however, the
new rates were implemented and in effect for all of 2004. Chugach did not
request a change in electric rates charged to customers based on the
proposed revisions to depreciation rates.
On March 9, 2005, the RCA ruled in Order No. 2 that depreciation rates may
not be implemented without prior approval of the RCA. On August 8, 2005,
Chugach filed a motion proposing an alternate implementation plan. On
September 21, 2005, the RCA issued Order No. 8 denying our motion and
granting a Motion filed by a wholesale customer of Chugach to Enforce Order
No. 2. Order No. 8 required that Chugach adjust its underlying 2004
financial records to reflect the results as if Chugach had not implemented
unapproved rates but the order did not require us to restate our 2004
annual report. Chugach revised its accounting records for 2005 by
approximately $427 thousand to reflect the previously approved depreciation
rates. Order No. 8 further indicated that the RCA would rule on the
effective date for implementing the new depreciation rates currently under
review in its final ruling in this docket. The RCA's final ruling may
change the depreciation rates to be applied for all or portions of 2005.
The RCA is expected to issue a final order in this docket in the fourth
quarter of 2005. Chugach expects to make a final adjustment to 2005
depreciation rates based upon a final order from the RCA on this matter.
Management is uncertain of the outcome of the RCA depreciation study review
process.
Results Of Operations
Current Year Quarter Versus Prior Year Quarter
Assignable margins increased by $19.3 thousand for the quarter ended
September 30, 2005, over the same quarter in 2004.
Operating revenues, which include sales of electric energy to retail,
wholesale and economy energy customers and other miscellaneous revenues,
increased by $6.3 million, or 13.2%, for the quarter ended September 30,
2005, over the same quarter in 2004. The increase in revenues was primarily
due to an increase in revenue collected through the fuel surcharge
mechanism due to higher fuel prices, as well as increased kWh sales to
wholesale customers and an increase in economy energy sales to Golden
Valley Electric Association (GVEA). With regard to retail sales, the
Municipality of Anchorage, our primary service area, experienced average
economic growth in the third quarter of 2005, compared to the same period
in 2004, however, that was offset by a 1.5% increase in distribution line
losses in 2005. With regard to wholesale revenues, actual sales increased
due to increased job growth and continued state and federal spending, which
generated additional economic activity. Based on the results of fixed and
variable cost recovery established in Chugach's last rate case, wholesale
sales to Matanuska Electric Association, Inc. (MEA), Homer Electric
Association, Inc. (HEA) and Seward Electric System (SES) contributed
approximately $5.6 and $5.5 million to Chugach's fixed costs for the
quarter ended September 30, 2005 and 2004, respectively. The following
table shows the base rate sales revenue and fuel and purchased power
revenue by customer class that is included in revenue for the quarters
ending September 30, 2005, and 2004.
Base Rate Sales Fuel and Purchased Power Total Revenue
Revenue Revenue
2005 2004 % Variance 2005 2004 % Variance 2005 2004 % Variance
Retail
Residential $10.3 $10.5 (1.9%) $5.0 $3.9 28.2% $15.3 $14.4 6.3%
Small Commercial $1.9 $1.9 0.0% $1.0 $0.8 25.0% $2.9 $2.7 7.4%
Large Commercial $7.5 $7.5 0.0% $5.7 $4.3 32.6% $13.2 $11.8 11.9%
Lighting $0.3 $0.3 0.0% $0.0 $0.0 0.0% $0.3 $0.3 0.0%
Total Retail* $20.0 $20.2 (1.0%) $11.7 $9.0 30.0% $31.7 $29.2 8.6%
Wholesale
HEA $2.6 $2.6 0.0% $5.2 $4.0 30.0% $7.8 $6.6 18.2%
MEA $3.9 $3.8 2.6% $6.0 $4.7 27.7% $9.9 $8.5 16.5%
SES $0.3 $0.3 0.0% $0.7 $0.5 40.0% $1.0 $0.8 25.0%
Total Wholesale $6.8 $6.7 1.5% $11.9 $9.2 29.3% $18.7 $15.9 17.6%
Economy Sales $0.9 $0.7 28.6% $2.1 $1.4 n/a $3.0 $2.1 42.9%
Miscellaneous $0.9 $0.8 12.5% $0.0 $0.0 n/a $0.9 $0.8 12.5%
Total Revenue $28.6 $28.4 0.7% $25.7 $19.6 31.1% $54.3 $48.0 13.1%
The following table summarizes kWh sales for the quarter ended September
30:
2005 2004
---- ----
Customer kWh kWh
Retail 281,179,408 281,952,976
Wholesale 297,906,849 287,864,611
Economy Energy 61,124,910 49,464,608
---------- ----------
Total 640,211,167 619,282,192
============= ============
Demand and energy rates charged to retail and HEA, MEA and SES did not
change in the third quarter of 2005 compared to the third quarter of 2004.
Fuel expense increased by $5.5 million, or 35.6%, for the quarter ended
September 30, 2005, compared to the same period in 2004 due to an increase
in kWh sales and to higher fuel prices. For the quarter ended September 30,
2005, Chugach used 5,806,994 MCF of fuel at an average effective price of
$3.60 per MCF, compared to 5,469,989 MCF of fuel used for the same period
in 2004, at an average effective price of $2.82 per MCF. Fuel expense is
collected through the fuel surcharge mechanism. Power production expense
decreased $744.8 thousand, or 16.4%, for the same period due to less major
maintenance performed in 2005 than in 2004. Purchased power also increased
$879.2 thousand, or 16.3%, due to higher fuel prices and higher Bradley
Lake purchased power payments, which the majority is also collected through
the fuel surcharge mechanism. In the third quarter of 2005, Chugach
purchased 157,289 MWH of energy at an average effective price of $.038 per
kWh. For the same period in 2004, Chugach purchased 156,931 MWH of energy
at an average effective price of $.033 per kWh. Transmission expense
decreased by $178.3 thousand, or 11.1%, due primarily to a decrease in
substation maintenance in the third quarter of 2005, compared to the third
quarter of 2004. Administrative, general and other expense decreased by
$229.2 thousand, or 4.2%, due to a decrease in labor caused by several
vacant positions throughout the organization. Depreciation and amortization
expense increased $867.0 thousand, or 12.8%, due to project close-outs, and
the implementation of RCA Order No. 8, which adjusted depreciation rates to
the approved 1999 study rates, resulting in an increase of approximately
$427 thousand. Consumer accounts and distribution expense did not
materially change for the three-month period ended September 30, 2005.
Interest on long-term debt increased by $399.7 thousand, or 7.3%, due to
higher interest rates on our 2002 Series B bonds and our CoBank promissory
notes. The 2002 Series B bonds and three of our CoBank promissory notes are
currently variable rate notes. The interest rate on our 2002 Series B bonds
at September 30, 2005, was 3.65% compared to 1.75% at September 30, 2004.
The CoBank promissory notes carried an interest rate of 5.35% at September
30, 2005, compared to 3.12% at September 30, 2004. Interest charged to
construction increased by $69.0 thousand in the third quarter of 2005
compared to the same period in 2004 due to the continued construction of
the South Anchorage Substation and the 138 kV International Generating
Terminal (IGT) to South Anchorage Substation projects. Other interest
expense increased by $44.4 thousand, or 100%, from the third quarter of
2004 due to an adjustment in the third quarter of 2005 to interest
associated with the provision for rate refunds.
Other nonoperating margins increased $50.7 thousand, or 34.8%, for the
three-month period ended September 30, 2005, compared to the same period in
2004 due to an increase in interest income caused by higher interest rates
and higher Allowance for Funds Used During Construction (AFUDC) due to the
continued construction of the aforementioned projects.
Current Year to Date Versus Prior Year to Date
Assignable margins increased by $1.4 million in the first nine months of
2005, over the same period in 2004.
Operating revenues increased $15.8 million, or 10.8%, due to an increase in
revenue collected through the fuel surcharge mechanism primarily due to
higher fuel prices and an increase in sales to wholesale customers and an
increase in economy energy sales to GVEA. With regard to retail sales, in
the first nine months of 2005, Chugach experienced a decrease in kWh sales
due to a mild winter, compared to the same period in 2004, as well as the
impact of a 1.5% increase in distribution line losses in 2005. With regard
to wholesale revenues, actual sales increased in the first nine months of
2005 over the same period in 2004 due to the same economic activity in the
aforementioned current year quarter versus prior year quarter discussion.
Based on the results of fixed and variable cost recovery established in
Chugach's last rate case, wholesale sales contributed approximately $17.8
and $17.4 million to Chugach's fixed costs for the year ended September 30,
2005 and 2004, respectively.
The following table shows the base rate sales revenue and fuel and
purchased power revenue by customer class that is included in revenue at
September 30, 2005, and 2004.
Base Rate Sales Fuel and Purchased Power Total Revenue
Revenue Revenue
2005 2004 % Variance 2005 2004 % Variance 2005 2004 % Variance
Retail
Residential $34.0 $34.7 (2.0%) $15.0 $12.6 19.0% $49.0 $47.3 3.6%
Small Commercial $6.0 $6.0 0.2% $3.1 $2.6 19.2% $9.1 $8.6 5.9%
Large Commercial $21.5 $21.4 0.5% $14.8 $12.0 23.3% $36.3 $33.4 8.7%
Lighting $1.0 $1.0 0.0% $0.1 $0.1 0.0% $1.1 $1.1 0.0%
Total Retail $62.5 $63.1 (0.9%) $33.0 $27.3 20.9% $95.5 $90.4 5.7%
Wholesale
HEA $7.8 $7.6 2.6% $13.4 $10.9 22.9% $21.2 $18.5 14.6%
MEA $12.9 $12.4 4.0% $17.2 $14.1 22.0% $30.1 $26.5 13.6%
SES $0.8 $0.7 14.3% $1.7 $1.4 21.4% $2.5 $2.1 19.0%
Total Wholesale $21.5 $20.7 3.9% $32.3 $26.4 22.3% $53.8 $47.1 14.2%
Economy Sales $3.3 $2.2 50.0% $7.1 $4.3 n/a $10.4 $6.5 60.0%
Miscellaneous $2.2 $2.0 10.0% $0.0 $0.0 n/a $2.2 $2.0 10.0%
Total Revenue $89.5 $88.0 1.7% $72.4 $58.0 24.8% $161.9 $146.0 10.9%
The following table summarizes kWh sales for the nine months ended
September 30:
2005 2004
---- ----
Customer kWh kWh
Retail 882,411,034 889,250,801
Wholesale 909,893,201 875,228,226
Economy Energy 226,125,700 148,728,850
----------- -----------
Total 2,018,429,935 1,913,207,877
============= =============
Fuel expense increased by $12.7 million, or 27.4%, for the first nine
months of 2005, compared to the same period in 2004 due to an increase in
consumption and to higher fuel prices. In the first nine months of 2005,
Chugach used 17,569,823 MCF of fuel at an average effective price of $3.36
per MCF, compared to 16,340,521 MCF of fuel used for the same period in
2004, at an average effective price of $2.84 per MCF. Fuel expense is
collected through the fuel surcharge mechanism. Power production expense
decreased by $1.2 million, or 10.1%, due to several projects starting later
in the year than in 2004. In addition, the scope of several of the projects
changed and resulted in cost savings. Purchased power expense increased by
$2.9 million, or 19.4%, due to higher fuel prices and higher Bradley Lake
purchased power payments, which is also collected through the fuel
surcharge mechanism. In the first nine months of 2005, Chugach purchased
434,533 MWH of energy at an average effective price of $.039 per kWh. For
the same period in 2004, Chugach purchased 436,716 MWH of energy at an
average effective price of $.032 per kWh. Transmission expense decreased
$422.1 thousand, or 8.8%, due to maintenance projects that were unexpected
in 2004, that did not occur in 2005. Distribution expense increased $259.1
thousand, or 3.0%, due primarily to an increase in labor and professional
services related to outages due to windstorms in 2005 compared to 2004.
Administrative, general and other expense decreased by $1.5 million, or
8.9%, caused by a $358.1 thousand decrease due to fully amortized software
and lower information services support on administrative and general
projects, a $206.6 thousand decrease in corporate planning, corporate
services and power production professional services and a $347.7 thousand
decrease in labor due to several vacant positions. The decrease was also
due to a $236.3 thousand decrease in the allocation of property insurance
and a $101.7 thousand decrease in headquarters operations expense due to a
decrease in copier maintenance expense. Depreciation and amortization
expense increased $1.0 million, or 4.9%, due to several project close-outs,
as well as the implementation of RCA Order No. 8, which adjusted
depreciation expense by approximately $427 thousand to reflect the approved
1999 study rates. Consumer accounts expense did not materially change for
the nine-month period ended September 30, 2005, compared to the same period
in 2004.
Interest on long-term debt increased by $1.0 million, or 6.3%, due to
higher interest rates on our 2002 Series B bonds and our CoBank promissory
notes. The 2002 Series B bonds and three of our CoBank promissory notes are
currently variable rate notes. The interest rate on our 2002 Series B bonds
at September 30, 2005, was 3.65% compared to 1.75% at September 30, 2004.
The CoBank promissory notes carried an interest rate of 5.35% at September
30, 2005, compared to 3.12% at September 30, 2004. Interest charged to
construction increased by $276.2 thousand, or 83.8%, in the first nine
months of 2005 compared to the same period in 2004, due to the continued
construction of the South Anchorage Substation and the 138 kV International
Generating Terminal (IGT) to South Anchorage Substation projects. Other
interest expense increased by $94.8 thousand, or 196.8%, during the same
period in 2005 compared to the same period in 2004, due to adjustments in
2004 and 2005 to interest associated with provision for rate refunds.
Other non-operating margins increased by $138.0 thousand, or 36.1%, for the
nine-month period ended September 30, 2005, compared to the same period in
2004, due to an increase in interest income caused by higher interest rates
and higher AFUDC due to the continued construction of the aforementioned
transmission projects.
Financial Condition
Total assets decreased $8.7 million, or 1.6%, from December 31, 2004, to
September 30, 2005. The decrease was due to a $2.2 million, or 0.5%,
decrease in net plant. This was due to depreciation expense, which was
offset by an increase in electric plant in service caused by the closeout
of several projects such as the Beluga Unit 5 hot gas path inspection, the
138 kV International Generating Terminal (IGT) to South Anchorage
Substation, the Glacier Creek 115kV project and the Thomson Industrial
subdivision project. Construction work in progress also increased caused by
the continued construction of the South Anchorage Substation. Cash and cash
equivalents decreased $4.5 million, or 43.0%, caused by the semi-annual
interest payments on the 2001 and 2002 Series A Bonds in the third quarter
of 2005. Accounts receivable decreased $3.5 million due to a decrease in
state billings at September 30, 2005, compared to December 31, 2004, and
due to less energy sold at September 30, 2005, compared to December 31,
2004. Deferred charges decreased $263.0 thousand, or 1.3%, due to the
amortization of deferred projects in excess of additions to the Cooper Lake
Relicensing project.
The decrease was offset by a $783.7 thousand, or 97.3%, increase in
prepayments caused by the annual renewal of Chugach's property insurance in
September of 2005 and a $571.7 thousand, or 100%, increase in fuel cost
recovery caused by the under-collection of the previous quarters fuel cost
through the fuel surcharge mechanism. The decrease was also offset by a
$352.7 thousand, or 1.5%, increase in materials and supplies.
Notable changes to total liabilities and equities include a $7.6 million,
or 47.7%, decrease in current installments of long-term debt due to the
reclassification to long-term debt of the CoBank 2 promissory note, which
was refinanced on August 31, 2005. Fuel cost over-recovery decreased $2.7
million, or 100.0%, due to the collection of the previous quarter's fuel
and purchased power cost through the fuel surcharge mechanism. Accounts
payable decreased $2.8 million, or 36.1%, due to the timing and scope of
work several project as well as cost cutting measures in place in 2005 and
a one-time expense accrued at December 31, 2004. Accrued interest decreased
$4.2 million, or 67.5%, due to the semi-annual interest payment on the 2001
and 2002 Series A Bonds in the third quarter of 2005.
The decrease was offset by a $1.7 million, or 0.5%, increase in long-term
obligations caused by the reclassification of the CoBank 2 promissory note,
which was refinanced on August 31, 2005. The decrease was also offset by a
$4.1 million, or 2.9%, increase in patronage capital due to the margins
generated in the first three quarters of 2005, as well as a $741.0
thousand, or 13.4%, increase in salaries, wages and benefits caused
primarily by an increase in benefit expense. Fuel payable increased $1.0
million, or 7.8%, caused by higher fuel prices and other current
liabilities increased $951.2 thousand, or 67.2% caused by a state and
municipal underground compliance charge on retail revenue that was
implemented June 1, 2005.
Liquidity and Capital Resources
Chugach has satisfied its operational and capital cash requirements
primarily through internally-generated funds, an annual line of credit with
CoBank which expires October 31, 2006, subject to annual renewal at the
discretion of the parties and a $50 million line of credit from NRUCFC
which expires October 15, 2007. On October 31, 2005, Chugach reduced the
line of credit with CoBank from $20 million to $7.5 million due to a
decrease in short-term borrowing projections. At September 30, 2005, there
was no outstanding balance with NRUCFC or CoBank and neither line of credit
was utilized during the third quarter of 2005.
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,
2005, Chugach had the following promissory notes outstanding under this
facility:
Interest rate at Principal Payment
Promissory Note Principal balance September 30, 2005 Maturity Date Dates
--------------- ----------------- ------------------ ------------- -----
CoBank 2 $10,000,000 5.50% 2010 2005 - 2010
CoBank 3 $20,142,053 5.35% 2022 2003 - 2022
CoBank 4 $22,015,733 5.35% 2022 2003 - 2022
CoBank 5 $5,000,000 5.35% 2007 2007
Total $57,157,786
On August 31, 2005, Chugach refinanced its $10 million promissory note with
CoBank. The new $10 million, 5.50% fixed rate promissory note will mature
September 20, 2010 and contains consecutive monthly installment payments
commencing October 20, 2005.
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 2005 is estimated at $29.7 million. At September
30, 2005, approximately $19.0 million had been expended. Capital
improvement expenditures are expected to continue in the fourth quarter of
2005 as some construction projects are still in progress.
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 2005 and thereafter.
Outlook
Effective January 31, 2005, Chugach reorganized its operations into more
distinct business units - Office of the Chief Executive Officer (CEO),
Generation and Transmission (G&T) Division, Distribution Division and
Corporate Services Division. This reorganization was accomplished to more
fully recognize the diversity of Chugach operations and clearly determine
the financial and operational performance of each unit.
The Office of the Chief Executive Officer is responsible for all corporate
level activities including board of director functions, human resources,
risk management, legal matters, labor relations and employee relations,
legislative affairs and all financing activities Chugach may undertake. The
CEO's direct staff is the Chief Financial Officer, Vice President, Human
Resources, General Counsel and Government and External Affairs Manager. The
General Managers of the G&T Division, Distribution Division and Corporate
Services Division also report to the CEO.
G&T operations include all power supply functions, transmission functions,
system control and administrative requirements associated with generation
and transmission. The G&T sector is led by Bradley Evans, General Manager.
Distribution functions include consumer services, public relations,
distribution engineering, line operation and maintenance and consumer
information and services areas. The Distribution area is led by Lee
Thibert, General Manager.
Corporate Services is comprised of Administrative Services (Environmental
Engineering and Hazardous Materials, Fleet Services, Contracting, Safety,
Security, and Purchasing), Information Services, Regulatory Affairs and
Accounting. It is responsible for providing services to all divisions of
Chugach. Corporate Services is led by William Stewart, General Manager,
Corporate Services Division.
On September 2, 2005, Joe Griffith resigned from his position of CEO.
Effective September 3, 2005, William R. Stewart, General Manager, Corporate
Services Division was appointed interim CEO. Mr. Stewart has over 36 years
of electric utility experience at Chugach.
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.
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 business, Chugach manages
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 2005 on the 2002 Series B bonds. The maximum rate on the 2002 Series B
bonds is 15%.
Auction Date Interest Rate
January 26, 2005 2.50%
February 23, 2005 2.62%
March 23, 2005 3.00%
April 20, 2005 3.05%
May 18, 2005 3.09%
June 15, 2005 3.22%
July 13, 2005 3.38%
August 10, 2005 3.56%
September 7, 2005 3.65%
October 5, 2005 3.74%
November 2, 2005 4.04%
Chugach is exposed to market risk from changes in interest rates. A 100
basis-point change (up or down) would increase or decrease our interest
expense by approximately $933,578 based on $93,357,786 of variable rate
debt outstanding at September 30, 2005.
The following table provides information regarding principal payments on
total debt by maturity date (dollars in thousands) as of September 30,
2005.
Fair
Total Debt* 2005 2006 2007 2008 2009 Thereafter Total Value
- ----------- ---- ---- ---- ---- ---- ---------- ----- -----
Fixed rate debt $500 $2,000 $2,000 $2,000 $2,000 $271,500 $280,000 $300,802
Average
interest rate 5.50% 5.50% 5.50% 5.50% 5.50% 6.36% 6.18%
Variable rate debt $0 $6,326 $11,729 $7,241 $7,763 $60,299 $93,358 $93,358
Average
interest rate - 4.32% 4.85% 4.32% 4.32% 4.98% 4.81%
* Includes current portion
Commodity Price Risk
Chugach's gas contracts provide for adjustments to gas costs based on
fluctuations of certain commodity prices and indices. Because fuel and
purchased power costs are passed directly to 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 fuel and purchased power.
Item 4. Controls and Procedures
As of the end of the period covered by this report, Chugach 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 were no changes in our internal
controls during the last fiscal quarter that materially affected, or are
reasonable likely to materially affect, our internal controls over
financial reporting.
Chugach is in the process of implementing the requirements of Section 404
of the Sarbanes-Oxley Act of 2002, which requires our management to assess
the effectiveness of our internal controls over financial reporting and
include an assertion in our annual report as to the effectiveness of our
controls. Subsequently, our independent registered public accounting firm,
KPMG LLP, will be required to attest to whether our assessment of the
effectiveness of our internal controls over financial reporting is fairly
stated in all material respects and separately report on whether it
believes Chugach maintained, in all material respects, effective internal
controls over financial reporting as of December 31, 2007, as Chugach is
considered a non-accelerated filer under Section 404 of the Sarbanes-Oxley
Act of 2002. Chugach is in the process of performing the system and process
documentation, evaluation and testing required for management to make this
assessment and for KPMG LLP to provide its attestation report. This process
will continue to require significant amounts of management time and
resources. In the course of evaluation and testing, management may identify
deficiencies that will need to be addressed and remediated.
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 Power Sales Agreement between
Chugach and Matanuska Electric Association, Inc. (MEA) for a 25-year period
from 1989 through 2014. MEA asserted Chugach breached that contract by
failing to provide information, by failing to properly manage Chugach's
long-term debt, and by failing to bring Chugach's base rate action to a
Joint Committee before presenting it to the Regulatory Commission of Alaska
(RCA). All of MEA's claims were dismissed by the Superior Court. On April
29, 2002, MEA appealed the Superior Court's decisions relating to Chugach's
financial management and Chugach's failure to bring Chugach's 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. The Alaska Supreme Court, on October 8, 2004, ruled 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 in its cross appeal. The Supreme Court also
overturned the Superior Court's decision that dismissed MEA's claim asking
for review of Chugach's use of rate locks instead of defeasing debt based
on the Prudent Utility Practice standard under our power sales agreement.
The Supreme Court remanded this issue to the Superior Court.
On January 24, 2005, Chugach filed a summary judgment motion based on
Chugach's claim that in the 2000 Test Year rate case the RCA had already
decided the underlying issues relating to the prudency of Chugach's use of
rate locks instead of defeasing debt. In its decision dated August 22,
2005, the Superior Court granted Chugach's summary judgment motion,
agreeing that the Commission reviewed the prudency of Chugach's financial
management and specifically Chugach's use of the rate lock as a hedge
against the risk of rising interest rates. The Court found that the
Commission had exercised its primary jurisdiction, reviewed MEA's claims
and held that Chugach's use of the rate lock mechanism to be reasonable and
a recoverable expense from ratepayers.
Once a final judgment has been entered, Chugach will seek recovery of its
allowed costs and fees from MEA. MEA has indicated it will appeal the
Superior Court's decision. The ultimate resolution of this matter is not
currently determinable.
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 margins 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. The case is in
the discovery phase but it is likely that the discovery deadlines as well
as the trial date, now scheduled for a five-day trial to begin February 27,
2006, will be rescheduled.
Management is vigorously defending against the claim. The ultimate
resolution of this matter is not currently determinable.
Other
Chugach received a demand letter from a third party offering a license to a
patent and implying that the patent may be infringed by certain services
provided by Chugach. The patent purportedly relates to intellectual
property rights over a system for automated electronic bill presentment and
payment. As of this date, no legal proceedings have been instituted against
Chugach, but if the third party's patents are valid, enforceable and apply
to our business, Chugach could be required to seek a license, discontinue
certain activities or be subject to a claim for past infringement. Chugach
is currently considering this matter, but lack sufficient information to
assess the potential outcome at this time. The ultimate resolution of this
matter is not currently determinable.
Chugach has certain additional litigation matters and pending claims that
arise in the ordinary course of our business. In the opinion of management,
no individual matter or the matters in the aggregate are 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
On September 7, 2005, the Board of Directors voted to appoint Alan
Christopherson as Chairman of the Board.
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
Promissory Note and Supplement between the Registrant and
CoBank, ACB dated August 24, 2005
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/ William R. Stewart
William R. Stewart
Interim Chief Executive Officer
Date: November 14, 2005
By: /s/ Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer
Date: November 14, 2005
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
10.45.4 Promissory Note and Supplement between the Registrant and CoBank,
ACB dated August 24, 2005