FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
----------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-42125
Chugach Electric Association, Inc.
(Exact name of registrant as specified in its charter)
Alaska 92-0014224
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 Minnesota Drive Anchorage, Alaska 99518
(Address of principal executive offices) (Zip Code)
(907) 563-7494
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year,if changed since
last report)
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 .
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 1, 1997
NONE NONE
CHUGACH ELECTRIC ASSOCIATION, INC.
INDEX
Part I. Financial Information Page Number
Balance Sheets, March 31, 1997 (Unaudited) and December 31, 1996 3
Statements of Revenues, Expenses and Patronage Capital, Three Months Ended
March 31, 1997 and 1996 (Unaudited) 5
Statements of Cash Flows, Three Months Ended March 31, 1997 and 1996
(Unaudited) 6
Notes to Financial Statements (Unaudited) 7
Management's Discussion and Analysis of Results of Operations and
Financial Condition (Unaudited) 8
Part II. Other Information 11
Signatures 13
Exhibits 14
2
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
Assets
March 31, 1997 December 31, 1996
-------------- -----------------
(Unaudited)
Utility plant:
Electric plant in service ................. $616,168,278 $615,464,060
Construction work in progress ............. 21,738,320 19,826,957
------------ ------------
637,906,598 635,291,017
Less accumulated depreciation ............. 220,344,657 215,411,223
------------ ------------
Net utility plant ........ 417,561,941 419,879,794
------------ ------------
Other property and investments, at cost:
Nonutility property ....................... 3,550 3,550
Investments in associated organizations ... 7,626,275 7,647,189
Restricted cash - margins from economy
energy sales, all repurchase
agreements ............................. 811,465 1,599,239
------------ ------------
8,441,290 9,249,978
------------ ------------
Current assets:
Cash and cash equivalents ................. 9,882,395 5,419,819
Cash - restricted construction funds ...... 1,338,137 1,371,386
Special deposits .......................... 89,232 89,232
Accounts receivable, net .................. 16,395,733 15,369,883
Materials and supplies, at average cost ... 16,108,331 16,187,592
Prepayments ............................... 1,443,519 694,257
Other current assets ...................... 409,718 294,380
------------ ------------
Total current assets ....... 45,667,065 39,426,549
------------ ------------
Deferred charges ............................... 14,169,785 13,932,109
------------ ------------
$485,840,081 $482,488,430
------------ ------------
See accompanying notes to unaudited financial statements.
3
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
Liabilities and Equities
March 31, 1997 December 31, 1996
-------------- -----------------
(Unaudited)
Equities and margins:
Memberships ..................................... $ 822,608 $ 812,748
Patronage capital ............................... 106,786,331 100,685,517
Other ........................................... 2,905,214 2,979,677
------------ ------------
110,514,153 104,477,942
------------ ------------
Long-term obligations, excluding current installments:
First mortgage bonds payable .................... 245,910,000 251,553,000
National Bank for Cooperatives bonds
payable ....................................... 56,227,479 56,352,847
------------ ------------
302,137,479 307,905,847
------------ ------------
Current liabilities:
Notes payable ................................... 17,279,600 2,750,000
Current installments of long-term debt and
capital leases ................................ 5,914,880 5,971,752
Accounts payable ................................ 3,494,545 5,178,161
Consumer deposits ............................... 1,059,940 1,066,906
Accrued interest ................................ 1,336,013 7,076,388
Salaries, wages and benefits .................... 3,537,180 3,583,422
Fuel ............................................ 4,315,969 6,047,574
Other ........................................... 3,510,740 5,012,191
------------ ------------
Total current liabilities ......... 40,448,867 36,686,394
------------ ------------
Deferred credits ..................................... 32,739,582 33,418,247
------------ ------------
$485,840,081 $482,488,430
------------ ------------
See accompanying notes to unaudited financial statements.
4
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
Three months ended March 31
1997 1996
---- ----
(Unaudited)
Operating revenues ..................... $ 38,510,339 $ 35,097,712
------------- ------------
Operating expenses:
Production ........................ 9,843,528 8,382,590
Purchased power ................... 3,957,693 2,329,442
Transmission ...................... 929,679 883,206
Distribution ...................... 1,963,501 2,443,880
Consumer accounts ................. 1,270,375 1,791,397
Administrative, general and other . 3,097,740 3,425,465
Depreciation and amortization ..... 5,271,803 5,035,068
------------- ------------
Total operating expenses .. 26,334,319 24,291,048
------------- ------------
Interest:
On long-term debt ................. 6,336,161 7,304,244
Other ............................. 60,988 185,933
Charged to construction - credit .. (172,039) (122,271)
------------- ------------
Net interest expense ...... 6,225,110 7,367,906
------------- ------------
Net operating margins ..... 5,950,910 3,438,758
------------- ------------
Nonoperating margins:
Interest income ................... 148,628 171,162
Other ............................. 78,599 16,546
------------- ------------
Total nonoperating margins 227,227 187,708
------------- ------------
Assignable margins ........ 6,178,137 3,626,466
Patronage capital at beginning of period 100,685,517 95,421,358
Retirement of capital credits and
estate payments ..................... (77,323) (34,677)
------------- ------------
Patronage capital at end of period ..... $ 106,786,331 $ 99,013,147
------------- ------------
See accompanying notes to unaudited financial statements.
5
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
Three months ended March 31
1997 1996
---- ----
(Unaudited)
Cash flows from operating activities:
Assignable margins .............................. $ 6,178,137 $ 3,626,466
------------ ------------
Adjustments to reconcile assignable
margins to net cash used in operating
activities:
Depreciation and amortization ............... 5,271,803 5,035,068
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ....................... (1,025,850) 1,677,068
Prepayments ............................... (749,262) (684,168)
Materials and supplies .................... 79,261 (478,961)
Deferred charges .......................... (237,676) (43,310)
Other ..................................... 705,687 (533,539)
Increase (decrease) in liabilities:
Accounts payable .......................... (1,683,615) (4,048,575)
Consumer deposits ......................... (6,966) (47,746)
Accrued interest .......................... (5,740,375) (6,776,920)
Deferred credits .......................... (678,665) (4,511,866)
Other ..................................... (3,279,301) 3,484,157
------------ ------------
Total adjustments ................... (7,344,959) (6,928,792)
------------ ------------
Net cash used in
operating activities .............. (1,166,822) (3,302,326)
Cash flows from investing activities:
Extension and replacement of plant .............. (2,953,950) (1,237,770)
Investments in associated organizations ......... 20,913 55,231
------------ ------------
Net cash used in investing activities (2,933,037) (1,182,539)
------------ ------------
Cash flows from financing activities:
Short-term borrowings, net ...................... 14,529,600 25,500,000
Repayments of long-term debt .................... (5,825,239) (21,053,614)
Retirement of patronage capital ................. (77,323) (34,677)
Other ........................................... (64,603) (52,388)
------------ ------------
Net cash provided by
financing activities .............. 8,562,435 4,359,321
------------ ------------
Net increase (decrease) in cash and
cash equivalents .................. 4,462,576 (125,544)
Cash and cash equivalents at beginning of period ... 5,419,819 5,879,483
------------ ------------
Cash and cash equivalents at end of period ......... $ 9,882,395 $ 5,753,939
------------ ------------
See accompanying notes to unaudited financial statements.
6
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
March 31, 1997
(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. Users of interim financial information are encouraged to refer
to footnotes contained in Form 10-K when reviewing interim financial
results. Management believes that the accompanying interim financial
statements reflect all adjustments which are necessary for a fair statement
of the results of the interim period presented. All adjustments made in the
accompanying interim financial statements are of a normal recurring nature.
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 presentation.
2. Lines of Credit
Chugach maintains a line of credit of $35,000,000 with National Bank for
Cooperatives (CoBank). The CoBank line of credit expires August 1, 1997 but
is expected to be renewed. At March 31, 1997, $17,279,600 was outstanding
at an interest rate of 6.40%. In addition, the Association has an annual
line of credit of $50,000,000 available at the National Rural Utilities
Cooperative Finance Corporation (NRUCFC). At March 31, 1997, there was no
outstanding balance on this line of credit. The NRUCFC line of credit
expires February 19, 1998.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
RESULTS OF OPERATIONS
Current Year Quarter Versus Prior Year Quarter
Operating revenues, which include sales of electric energy to retail, wholesale
and economy energy customers and other miscellaneous revenues, increased by 9.7%
for the quarter ended March 31, 1997 over the same quarter in 1996. The higher
revenues are mostly attributable to higher fuel and purchased power costs which
are passed directly to Chugach's customers through a fuel and purchased power
adjustment factor. Demand and energy rate increases (on an interim-refundable
basis) to the wholesale customers and higher kWh sales to one of the wholesale
customer classes also contributed to the increase in revenues. Additionally,
higher economy energy sales were a factor as well. These factors more than
offset lower kWh sales to retail customers and the other wholesale customer
class.
As previously reported, demand and energy rates charged to the two wholesale
customer classes were increased on an interim-refundable basis. These increases
were slightly offset by refunds granted pursuant to a Settlement Agreement
between Chugach and AEG&T/MEA/Homer. This agreement was approved by the APUC in
February 1997. The refunds of amounts collected under the interim-refundable
rates were not material to Chugach's financial position or results of
operations. Retail demand and energy rates did not change from the first quarter
of 1996 to the same period in 1997.
Higher fuel prices were the major cause for the increase in production expense
for the three months ended March 31, 1997 compared to the same period in 1996.
As previously reported, Chugach has completed the transition into Period 2 under
the long-term fuel supply contracts. Fuel costs now result from market-based
prices instead of the lower prices from Period 1 under the contracts. Thus,
future fuel costs are expected to be higher in comparison to prior periods. Due
to the system operating scenario during the first quarter of 1997, Chugach
purchased power from AEG&T's Soldotna 1 plant. These purchases were made to
insure system reliability on the Kenai Peninsula. Bradley Lake hydroelectric
plant hydro allocations were significantly lower than the forecasted levels due
to lake inflows. In addition, Chugach purchased power from Anchorage Municipal
Light & Power when one of its transmission lines from its Beluga power plant was
down for maintenance. These factors explain the increase in purchased power
expense in 1997 over 1996. Distribution expense was lower for the quarter ended
March 31, 1997 compared to the same period in 1996. This variance was
substantially due to station equipment maintenance activities being focused on
distribution substations in 1996 as opposed to transmission substations in 1997.
Lower overhead line maintenance expenses were caused in part by staff reductions
and also by a slight increase in capital construction activities. Meter expenses
were lower due to a portion of the connect/disconnect activities being
transferred to another department. The lower overhead line maintenance and meter
expenses also contributed to the decrease in distribution expense. Consumer
accounts
8
expense decreased for the period ended March 31, 1997. The majority of this
decrease was due to a lower level of common Information Service Department costs
being allocated to this function.
Interest on long-term debt was lower for the quarter ended March 31, 1997 than
the same period in 1996. This was caused by the reacquisition of $15.595 million
of Chugach's Series A, 2022 bonds during the first quarter of 1996. The net
transaction cost of the reacquisition was originally charged to expense.
Subsequently, Chugach determined that these costs were recoverable through rates
and set up a regulatory asset which is being amortized to expense over the life
of the replacement debt. Additionally, the interest rates on the replacement
debt were lower than the reacquired bonds which also contributed to the decline
in interest expense for the quarter. Other interest expense decreased in the
current period due to a lower average outstanding balance on the short-term line
of credit.
Financial Condition
Total assets increased slightly from December 31, 1996 to March 31, 1997. The
majority of this increase was due to a higher cash balance that resulted mainly
from logistics considerations surrounding the March semi-annual bond payment.
The payment was made entirely with funds drawn on the CoBank line of credit (as
opposed to being combined with internally generated funds) in order to
accommodate a wire transfer deadline to insure the debt service payment could be
disbursed by the Trustee. Chugach expects to pay down a substantial portion of
this balance during the upcoming second and third quarters in anticipation of
making an additional draw to fund the September 1997 debt service payment.
Accounts receivable also increased, due to an increase in the fuel and purchased
power adjustment factor balancing account (i.e. Chugach was undercollected at
March 31, 1997). The seasonal increase in the prepayments category also
contributed to the higher total assets balance. These factors more than offset
the lower balance in net utility plant. This lower balance was caused by the
higher accumulated depreciation reserve resulting from the implementation of
higher depreciation rates (the phase-in of updated depreciation rates was
completed in 1996). The notable change to total liabilities is the increase in
the balance on the short-term lines of credit. The semi-annual bond payment in
March resulted in a corresponding decrease in accrued interest payable.
Liquidity and Capital Resources
Chugach has satisfied its operational and capital cash requirements primarily
through internally generated funds, an annual $50 million line of credit from
National Rural Utilities Cooperative Finance Corporation (NRUCFC) and a $35
million line of credit with CoBank. At March 31, 1997, Chugach had $17.3 million
outstanding with CoBank which carried an interest rate of 6.40%. There were no
amounts outstanding on the NRUCFC line at March 31, 1997.
Capital construction in 1997 is estimated at $19.8 million. At March 31, 1997
approximately $3.0 million has been expended. Capital improvement expenditures
are expected to increase in the upcoming second and third quarters as the
construction season begins in April and extends into October.
Chugach has negotiated a supplemental indenture (Third Supplemental Indenture
of Trust) with
9
CoBank for up to $80 million in future bond financing. At March 31, 1997,
Chugach had bonds in the amount of $56.5 million outstanding under this
financing arrangement. The balance is comprised of a $1.5 million bond that
carries an interest rate of 8.95% maturing in 2002, a $10 million bond priced at
7.76% due in 2005, a $21.5 million bond (CoBank 3), currently priced at 6.65%
(repriced monthly), and a $23.5 million bond (CoBank 4) currently priced at
6.65% (also repriced monthly). Additionally, Chugach has negotiated a similar
supplemental indenture (Fifth Supplemental Indenture of Trust) with NRUCFC also
for $80 million. At March 31, 1997 there were no amounts outstanding under this
financing arrangement.
As previously reported, Chugach has reacquired $39.3 million of its Series A
2022 bonds. This strategy has been in response to the favorable long-term
interest rate environment. Chugach will continue to explore similar
reacquisition transactions if market conditions warrant such action. Besides
these reacquisition transactions (and any similar future refinancings), Chugach
does not anticipate issuance of additional long-term debt in 1997.
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 1997 and thereafter.
Chugach's current ratios (total current assets divided by current liabilities)
at December 31, 1996 and March 31, 1997 were as follows:
Current Ratio
December 31, 1996 1.07
March 31, 1997 1.13
Environmental Matters
Refer to Part II, Item 1 for an update on the status of the Standard Steel
Salvage Yard Site litigation.
10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported in the 10-K for year ending December 31, 1996, a cost
recovery action was filed in Federal District Court on December 27, 1991 by the
United States against Chugach and six other Potentially Responsible Parties
(PRPs) seeking reimbursement of removal and response action costs (Past Response
Costs) incurred by US EPA at the Standard Steel and Metals Salvage Yard
Superfund Site in Anchorage, Alaska (Site). The six other PRPs named in the
action are the Alaska Railroad, Westinghouse Electric Corporation, Sears Roebuck
and Co., Montgomery Ward & Co., J.C. Penney Company, Inc. and
Bridgestone/Firestone, Inc.
On September 23, 1992, Chugach entered into an Administrative Order on Consent
(AOC) with the EPA to perform a remedial investigation and feasibility study
(RI/FS) for the Site. The RI/FS was completed in 1996 and, based on the results
of the RI/FS, EPA selected the remedy of soil stabilization and solidification
(S/S) for cleanup of the Site and documented its selection in a Record of
Decision issued in July, 1996.
In December 1996, a partial consent decree (Partial Consent Decree) settling the
cost recovery action was entered by the Federal District Court. Under the
Partial Consent Decree the PRPs and the United States settled the following
costs associated with the Site: Past Response Costs incurred by EPA through
December 1991; RI/FS costs; drum and scrap removal costs; past enforcement costs
incurred by the Department of Justice (DOJ) through December 11, 1996; and EPA
oversight costs related to the RI/FS.
The settlement under the Partial Consent Decree allocates 14.37% of the above
costs to Chugach. Chugach has paid its share of Past Response Costs and DOJ
enforcement costs under the Partial Consent Decree. The total estimated cost of
the settlement under the Partial Consent Decree, including amounts already paid
by Chugach, is approximately $6,800,000 of which Chugach's share will be
approximately $977,000. These amounts are estimates because EPA oversight costs
are not yet fully known and, therefore, the total amount to be paid by Chugach
under the Partial Consent Decree is not known with certainty.
The Partial Consent Decree does not settle Chugach's liability for future costs
of designing and performing the S/S remedy (Future Costs). Although the Partial
Consent Decree does not settle Chugach's or the other private PRPs' liability
for Future Costs, the Partial Consent Decree does bind the federal PRPs and the
Alaska Railroad to pay an aggregate share of 64% of Future Costs. Chugach and
the five other private PRPs have reached a separate settlement to divide the
remaining 36% of Future Costs among themselves. Under that settlement, Chugach's
percentage share of liability for Future Costs will equal 15.39%.
Chugach's agreement to perform remedial design and remedial action (RD/RA) at
the Site will be memorialized in a new Consent Decree (RD/RA Decree) that is
being negotiated between the private PRPs and the United States. The RD/RA
Decree is expected to contain the scope of work for the RD/RA as well as
settlement terms, including EPA's covenant not to sue Chugach and the other
private PRPs for Future Costs once the RD/RA is completed.
11
The estimate of Future Costs of RD/RA at the Site, as determined by Chugach's
consultants based on cost estimates contained in the FS report, ranges from
$5,231,200 to $6,619,800. The RD/RA Decree contains a cost estimate, as
determined by EPA and including a 50% cost overrun contingency, of $8,400,000.
Chugach's share of these estimated RD/RA expenses would range from approximately
$805,082 to $1,292,760. These amounts are only estimates, however. The actual,
full scope of the S/S cleanup at the Site will not be known, and the projected
costs associated with the remedy cannot be refined, until EPA approves remedial
design documents.
Under the RD/RA Decree, Chugach and the other PRPs will be required to reimburse
the United States for EPA oversight costs and DOJ enforcement costs relating to
the RD/RA. Those costs have not been estimated by the United States and are
unknown at this time. Therefore, the total amount to be paid by Chugach under
the RD/RA Decree cannot be predicted with certainty. In addition, the RD/RA
Decree contains reservation of rights allowing EPA to seek payments from the
PRPs under certain circumstances, including costs associated with alleged
natural resource damages. At this time, no claims have been made pertaining to
alleged natural resource damages and no prediction can be made whether EPA will
bring future claims through its reservation of rights under RD/RA Decree.
Finally, it is uncertain whether Chugach and the other PRPs will enter into the
RD/RA Decree with EPA until negotiations are completed.
Four of Chugach's insurance carriers have agreed under a reservation of rights
to pay, and currently are paying, Chugach's costs of defense for the Site. The
carriers have reserved their rights regarding indemnification of Chugach for
response costs. Management believes that all past and future costs incurred for
response, removal, investigation and cleanup of the Site would be fully
recoverable in rates or covered by insurance and therefore would have no impact
on Chugach's financial condition or results of operations.
Items 2, 3, 4 and 5
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended March
31, 1997.
12
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/ Eugene N. Bjornstad
Eugene N. Bjornstad
General Manager
Date: May 13, 1997
By: /s/ Evan J. Griffith, Jr.
Evan J. Griffith, Jr.
Executive Manager, Finance & Planning
Date: May 13, 1997
13
EXHIBITS
Listed below are the exhibits which are filed as part of this Report:
Exhibit
number Description Page
27 Financial Data Schedule N/A
14