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, 2007
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.
(Exact name of registrant as specifies in its charter)
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State of Alaska 92-0014224
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5601 Electron Drive, Anchorage, AK 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)
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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. |X| Yes |_| No
Indicate by check mark whether the registrant is large accelerated filer, and
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company, as defined in
Rule 12b-2 of the Act. |_| Yes |X| No
CHUGACH ELECTRIC ASSOICATION, INC.
TABLE OF CONTENTS
Caution Regarding Forward-Looking Statements 2
Part I. Financial Information
Item 1. Financial Statements (unaudited) 2
Balance Sheets - as of September 30, 2007 and December 31, 2006 3
Statements of Operations - Three and nine months ended September 30, 2007 5
and September 30, 2006
Statements of Changes in Equities and Margins - Nine months 6
Ended September 30, 2007 and September 30, 2006
Statements of Cash Flows - Nine Months Ended September 30, 2007 7
and September 30, 2006
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 26
Part II. Other Information
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits 29
Signatures 30
Exhibits 31
1
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 the financial statements of
Chugach as of and for the quarter ended September 30, 2007, follow.
2
Chugach Electric Association, Inc.
Balance Sheets (continued)
(Unaudited)
Assets September 30, 2007 December 31, 2006
- ---------------------------------------------- ------------------ -----------------
Utility Plant:
Electric Plant in service $ 800,524,964 $ 787,005,028
Construction work in progress 22,357,378 20,254,298
------------- -------------
Total utility plant 822,882,342 807,259,326
Less accumulated depreciation (365,357,280) (347,736,514)
------------- -------------
Net utility plant 457,525,062 459,522,812
Other property and investments, at cost:
Nonutility property 24,461 24,461
Investments in associated organizations 11,888,490 11,888,530
Special Funds 645,582 0
------------- -------------
Total other property and investments 12,558,533 11,912,991
Current assets:
Cash and cash equivalents 3,363,263 9,844,914
Special deposits 126,312 206,191
Accounts receivable, net 28,800,260 32,899,571
Materials and supplies 28,278,556 25,424,493
Prepayments 1,360,767 1,487,966
Other current assets 346,807 280,562
------------- -------------
Total current assets 62,275,965 70,143,697
Deferred charges, net 22,581,697 21,460,648
------------- -------------
Total assets $ 554,941,257 $ 563,040,148
============= =============
See accompanying notes to financial statements.
3
Chugach Electric Association, Inc.
Balance Sheets (continued)
(Unaudited)
Liabilities, Equities and Margins September 30, 2007 December 31, 2006
- --------------------------------------------------------- ------------------ -----------------
Equities and margins:
Memberships $ 1,332,933 $ 1,297,633
Patronage capital 141,571,979 141,117,620
Other 8,293,970 8,300,847
-------------- --------------
Total equities and margins 151,198,882 150,716,100
Long-term obligations, excluding current installments:
Bonds payable 299,600,000 305,500,000
National Bank for Cooperatives 46,546,740 45,303,530
-------------- --------------
Total long-term obligations 346,146,740 350,803,530
Current liabilities:
Current installments of long-term obligations 10,089,184 13,728,569
Accounts payable 10,881,240 10,308,668
Consumer deposits 2,324,045 2,217,613
Fuel cost over-recovery 3,539,731 300,567
Accrued interest 2,201,265 6,364,100
Salaries, wages and benefits 5,336,463 6,021,473
Fuel 18,383,650 16,158,783
Other liabilities 2,150,985 4,112,020
-------------- --------------
Total current liabilities 54,906,563 59,211,793
Deferred liabilities 2,043,490 2,308,725
Other liabilities 645,582 0
-------------- --------------
Total liabilities, equities and margins $ 554,941,257 $ 563,040,148
============== ==============
See accompanying notes to financial statements.
4
Chugach Electric Association, Inc.
Statements of Operations
(Unaudited)
Three months ended September 30 Nine months ended September 30
2007 2006 2007 2006
------------ ------------ ------------- -------------
Operating revenues $ 57,053,772 $ 63,243,634 $ 187,634,471 $ 190,377,774
Operating expenses:
Fuel 22,930,887 27,721,572 75,571,087 82,870,065
Production 4,395,166 4,331,051 11,854,064 11,002,135
Purchased power 7,333,164 8,164,009 25,976,348 21,620,093
Transmission 1,568,826 2,019,552 5,187,398 4,553,234
Distribution 3,306,766 2,372,131 10,064,752 8,096,796
Consumer accounts 1,322,706 1,187,437 3,782,755 3,722,437
Administrative, general and other 5,201,484 4,498,643 15,376,179 13,993,330
Depreciation and amortization 7,221,745 7,070,812 21,746,281 21,280,580
------------ ------------ ------------- -------------
Total operating expenses 53,280,744 57,365,207 169,558,864 167,138,670
Interest on long-term debt 6,153,277 6,218,457 18,309,050 18,348,879
Other 0 0 89,029 0
Charged to construction (192,972) (145,112) (456,185) (344,096)
------------ ------------ ------------- -------------
Net interest expenses 5,960,305 6,073,345 17,941,894 18,004,783
------------ ------------ ------------- -------------
Net operating margins (2,187,277) (194,918) 133,713 5,234,321
Nonoperating margins:
Interest income 169,752 261,131 546,878 673,365
Other 81,128 51,844 207,559 113,471
------------ ------------ ------------- -------------
Total nonoperating margins 250,880 312,975 754,437 786,836
------------ ------------ ------------- -------------
Assignable margins $ (1,936,397) $ 118,057 $ 888,150 $ 6,021,157
============ ============ ============= =============
See accompanying notes to financial statements.
5
Chugach Electric Association, Inc.
Statements of Changes in Equities and Margins
(Unaudited)
Other Equities Patronage
Memberships and Margins Capital Total
----------- ----------- ------- -----
Balance, January 1, 2007 $ 1,297,633 $ 8,300,847 $ 141,117,620 $ 150,716,100
Assignable margins 0 0 888,150 888,150
Retirement of capital credits 0 0 (433,791) (433,791)
Unclaimed capital credit retirements 0 208,894 0 208,894
Memberships and donations received 35,300 (215,771) 0 (180,471)
------------------------------------------------------------------------
Balance, September 30, 2007 $ 1,332,933 $ 8,293,970 $ 141,571,979 $ 151,198,882
========================================================================
Balance, January 1, 2006 $ 1,250,398 $ 7,603,376 $ 136,185,378 $ 145,039,152
Assignable margins 0 0 6,021,157 6,021,157
Retirement of capital credits 0 0 (765,544) (765,544)
Unclaimed capital credit retirements 0 323,551 0 323,551
Memberships and donations received 36,360 (469,298) 0 (432,938)
------------------------------------------------------------------------
Balance, September 30, 2006 $ 1,286,758 $ 7,457,629 $ 141,440,991 $ 150,185,378
========================================================================
See accompanying notes to financial statements.
6
Chugach Electric Association, Inc.
Statements of Cash Flows
(Unaudited)
Nine months ended September 30
2007 2006
-------------- --------------
Cash flows from operating activities:
Assignable margins $ 888,150 $ 6,021,157
-------------- --------------
Adjustments to reconcile assignable margins to net cash provided activities:
Depreciation and amortization 23,552,609 23,503,261
Capitalized interest (689,462) (470,081)
Write off of deferred charges 0 345,899
Other 40 (10,013)
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 4,099,311 (320,159)
Fuel cost under-recovery 0 (85,275)
Materials and supplies (2,854,063) (3,209,504)
Prepayments 127,199 (9,343)
Other assets 13,634 (23,417)
Deferred charges (2,927,377) (4,549,202)
Increase (decrease) in liabilities:
Accounts payable 2,087,456 (725,693)
Consumer deposits 106,432 102,788
Fuel cost over-recovery 3,239,164 0
Accrued interest (4,162,835) (4,143,766)
Salaries, wages and benefits (685,010) (249,180)
Fuel 2,224,867 994,398
Other liabilities (1,961,035) 974,292
Deferred liabilities 93,495 148,920
-------------- --------------
Net cash provided by operating activities 23,152,575 18,295,082
-------------- --------------
Investing activities:
Extension and replacement of plant (20,573,953) (14,842,602)
-------------- --------------
Net cash used for investing activities (20,573,953) (14,842,602)
-------------- --------------
Cash flows from financing activities:
Repayments of long-term obiligations (8,296,175) (7,825,687)
Memberships and donations received (refunded) 28,423 (109,387)
Retirement of patronage capital and estate payments (433,791) (765,544)
Net refunds on consumer advances for construction (358,730) (201,283)
-------------- --------------
Net cash used for financing activities (9,060,273) (8,901,901)
-------------- --------------
Net decrease in cash and cash equivalents (6,481,651) (5,449,421)
Cash and cash equivalents at beginning of period $ 9,844,914 $ 10,650,594
-------------- --------------
Cash and cash equivalents at end of period $ 3,363,263 $ 5,201,173
============== ==============
Supplemental disclosure of non-cash investing and financing activities
Retirement of plant $ 3,869,816 $ 5,566,466
Extension and replacement of plant $ 2,565,783 $ 1,199,510
Supplemental disclosure of cash flow information - interest expense paid,
excluding amounts capitalized $ 17,869,213 $ 22,148,549
============== ==============
See accompanying notes to financial statements.
7
Chugach Electric Association, Inc.
Notes to Financial Statements
(Unaudited)
1. PRESENTATION OF FINANCIAL INFORMATION
The accompanying unaudited interim financial statements include the
accounts of Chugach Electric Association, Inc. (Chugach) and have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements. They should be read in conjunction with our audited financial
statements for the year ended December 31, 2006, filed as part of our
annual report on Form 10-K. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations for interim
periods are not necessarily indicative of the results that may be expected
for an entire year or any other period.
2. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
a. Description of Business
Chugach is the largest electric utility in Alaska. Chugach is engaged in
the generation, transmission and distribution of electricity to directly
serve retail customers in the Anchorage and upper Kenai Peninsula areas.
Through an interconnected regional electrical system, Chugach's power
flows throughout Alaska's Railbelt, a 400-mile-long area stretching from
the coastline of the southern Kenai Peninsula to the interior of the
state, including Alaska's largest cities, Anchorage and Fairbanks.
Chugach also supplies much of the power requirements for three of its
wholesale customers, Matanuska Electric Association, Inc. (MEA), Homer
Electric Association, Inc. (HEA), and the City of Seward (Seward).
Chugach operates on a not-for-profit basis, and accordingly, seeks only to
generate revenues sufficient to pay operating and maintenance costs, the
cost of purchased power, capital expenditures, depreciation, and principal
and interest on all indebtedness and to provide for reserves. Chugach is
subject to the regulatory authority of the Regulatory Commission of Alaska
(RCA).
In June 2007, Chugach and the Municipality of Anchorage issued a mutual
press release announcing plans to explore a possible merger or joint
operations between Chugach and Municipal Light & Power (ML&P). On July 6,
2007, a seven-member oversight panel was announced. The panel is comprised
of Anchorage government and business leaders that will oversee the
analysis of whether a merger or other joint operations between Chugach and
ML&P is feasible.
8
Chugach Electric Association, Inc.
Notes to Financial Statements
(Unaudited)
b. Management Estimates
In preparing the financial statements, management of Chugach is required
to make estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities as of
the date of the balance sheet and revenues and expenses for the reporting
period. Critical estimates include allowance for doubtful accounts and the
estimated useful life of utility plant. Actual results could differ from
those estimates.
c. Regulation
The accounting records of Chugach conform to the Uniform System of
Accounts as prescribed by the Federal Energy Regulatory Commission (FERC).
Chugach meets the criteria, and accordingly, follows the accounting and
reporting requirements of Statement of Financial Accounting Standards
(SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation
(SFAS 71).
SFAS No. 71 provides for the recognition of regulatory assets and
liabilities as allowed by regulators for costs or credits that are
reflected in current rates or are considered probable of being included in
future rates. The regulatory assets or liabilities are then relieved as
the cost or credit is reflected in rates.
d. Income Taxes
Chugach is exempt from federal income taxes under the provisions of
Section 501(c)(12) of the Internal Revenue Code, except for unrelated
business income. For the nine months ended September 30, 2007, Chugach
received no unrelated business income.
e. Reclassifications and Immaterial Error Corrections
Reclassifications have been made to the 2006 financial statements to make
them comparable with the 2007 presentation. We corrected immaterial errors
from the timing of the cash settlement of additions to extension and
replacement of plant as follows:
Three Six Nine Twelve Three Six
Months Months Months Months Months Months
ended ended ended ended ended ended
03/31/06 06/30/06 09/30/06 12/31/06 03/31/07 06/30/07
-------- -------- -------- -------- -------- --------
Increase (decrease) in net cash flows
provided by operating activities 969,887 1,760,443 1,665,813 (432,873) 2,541,889 2,867,057
(Increase) decrease in net cash flows
used for investing activities (969,887) (1,760,443) (1,665,813) 432,873 (2,541,889) (2,867,057)
Supplemental disclosure of non-cash
investing activities, Extension and
replacement of plant 884,240 649,420 1,199,510 3,503,009 944,351 665,694
9
Chugach Electric Association, Inc.
Notes to Financial Statements
(Unaudited)
3. LINES OF CREDIT
Chugach maintains a $7.5 million line of credit with CoBank, ACB (CoBank). On
October 17, 2007, the Board of Directors approved a resolution to renew this
line of credit. The CoBank line of credit will expire on October 31, 2008,
subject to annual renewal at the discretion of the parties. Chugach borrowed
$1.0 million on this line of credit on September 19, 2007 and repaid the balance
on September 28, 2007. Interest on the borrowings is calculated using the CoBank
Base Rate on the first business day of the week plus 3%. The borrowing rate at
September 30, 2007 was 6.35% and at December 31, 2006 the borrowing rate was
6.66%. In addition to the CoBank line of credit, Chugach has an annual line of
credit of $50 million available with the National Rural Utilities Cooperative
Finance Corporation (NRUCFC). Chugach did not utilize this line of credit during
the third quarter of 2007 and had no balance outstanding at September 30, 2007.
The borrowing rate is calculated using the total rate per annum as may be fixed
by CFC and will not exceed the Prevailing Prime Rate, plus one percent per
annum. The borrowing rate at September 30, 2007 was 6.65% and at December 31,
2006 the borrowing rate was 7.15%. On October 17, 2007, the Board of Directors
approved a resolution to renew NRUCFC line of credit. NRUCFC line of credit
expires October 31, 2012.
4. LEGAL PROCEEDINGS
Matanuska Electric Association, Inc. (MEA) v. State of Alaska, Regulatory
Commission of Alaska, Superior Court Case No. 3AN-06-8243 Civil
On May 17, 2006, MEA appealed and on May 30, 2006, Homer Electric Association,
Inc., (HEA) cross appealed the RCA's decision in Commission Docket No. U-04-102,
see "Footnote 5, Regulatory Matters - Revision to Current Depreciation Rates
(Docket No. U-04-102)." On appeal, MEA claims the Commission's decision dated
January 10, 2006 to authorize Chugach to implement new depreciation rates as of
January 1, 2005 constituted illegal retroactive ratemaking. MEA also contends
that the Commission's reliance on avoidance of regulatory lag as a basis for its
decision was improper. MEA also challenged the discovery rulings of the
Commission. Chugach will join the State of Alaska in defending the Commission's
rulings. On April 25, 2007 the Court issued a briefing schedule. MEA has filed
its appellant's brief and Chugach's responsive brief is due November 14, 2007.
The ultimate resolution of this matter is not currently determinable. In the
opinion of management, an adverse outcome is not likely to have a material
adverse effect on Chugach's results of operations, financial condition or
liquidity. No reserves have been established for this matter.
10
Chugach Electric Association, Inc.
Notes to Financial Statements
(Unaudited)
5. REGULATORY MATTERS
Revision to Current Depreciation Rates (Docket No. U-04-102)
In 2004, Chugach implemented new depreciation rates based on an update of the
1999 Depreciation Study utilizing Electric Plant in Service balances as of
December 31, 2002. The 2002 Depreciation Study resulted in an increase to 2004
depreciation expense, which was not material to the financial statements. The
2002 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.
Chugach, however, implemented the new rates effective January 1, 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 September 21, 2005, the RCA issued Order No. 8 requiring Chugach to adjust
its underlying 2004 financial records to reflect the results as if Chugach had
not implemented unapproved rates. In November of 2005, Chugach reversed the 2004
depreciation expense and depreciation reserves that were previously recorded
using the 2002 Depreciation Study rates and calculated 2004 depreciation expense
for all categories of plant using the 1999 Depreciation Study rates as approved
by the RCA in Docket U-01-108. The adjustment was not material to Chugach's
financial statements.
In Order No. 9 dated January 10, 2006, the RCA ruled substantially in Chugach's
favor approving the 2002 Depreciation Study with certain changes to the proposed
depreciation rates. The main effect of this decision is to allow Chugach to
revise its depreciation rates effective as of January 1, 2005.
Because Chugach did not request changes to the electric rates charged to its
customers based on the proposed new depreciation rates, there was no immediate
electric rate impact.
Wholesale customers MEA and HEA were active in the proceeding. Subsequently, MEA
filed an appeal of the RCA's decision in Superior Court, see "Footnote 4, Legal
Proceedings - Matanuska Electric Association, Inc. v. State of Alaska,
Regulatory Commission of Alaska, Superior Court Case No. 3AN-06-8243 Civil." HEA
has withdrawn from the appeal. MEA has filed its initial appellate brief.
Chugach anticipates filing an appellee's brief on November 14, 2007.
11
Chugach Electric Association, Inc.
Notes to Financial Statements
(Unaudited)
2005 Test Year General Rate Case (Docket No. U-06-134)
On September 27, 2006, the Chugach Board of Directors authorized and instructed
management to file a general rate case with the RCA. On September 29, 2006,
Chugach filed a general rate case based on a 2005 test year and requested a
revenue increase of $10.6 million for the Generation and Transmission (G&T)
function and a revenue decrease of $7.8 million for the Distribution function.
Overall revenues were proposed to increase $2.8 million in the initial filing.
Chugach expects full adjudication to be completed from January 1, 2008 to March
31, 2008, assuming no appeals or other delay in the regulatory process. The
Commission permitted intervention from Chugach's wholesale customers and the
Regulatory Affairs and Public Advocacy (RAPA) section within the Attorney
General's office of the State of Alaska. It also permitted intervention of a
single Chugach retail member.
A scheduling order was issued on January 23, 2007, establishing a hearing
schedule to adjudicate the case. Discovery from the intervenors in the case on
Chugach's filing and pre-filed initial testimony has been completed. Intervenor
testimony has been submitted. Chugach completed reviewing and discovery on this
testimony. Chugach's reply testimony was submitted May 29, 2007. Chugach has
been responding to discovery from intervenors. The last day to submit discovery
on Chugach's reply testimony was July 16, 2007. A settlement agreement between
several of the intervenors and Chugach, reached in August 2007, has been
accepted by the RCA. The settlement agreement results in an estimated 3% overall
decrease for retail members and an estimated 2 to 3 percent overall increase for
HEA and Seward. The hearing scheduled to occur in August 2007 with the remaining
intervenors was canceled. The remaining active intervener, MEA, and Chugach
entered into a stipulation to resolve outstanding procedural issues on October
16, 2007. This stipulation agrees to a procedure whereby the Commission will
decide the matter based on the written record with provisions for Commission
written questions and optional oral questioning by the Commission of selected
witnesses. Chugach has submitted permanent rates to implement the settlement
agreement and interim rates for the party that did not settle, which are
expected to be approved during the fourth quarter. If the RCA approves these
rates as filed, Chugach's total annual revenues would be reduced by $1.2 million
from current rate levels. Chugach expects a decision from the RCA on the
outstanding issues with MEA by March 31, 2008, which could have an impact on the
change in annual revenues noted above.
6. ENVIRONMENTAL MATTERS
During first quarter 2007, the Alaska Department of Environmental Conservation
notified Chugach that two of the Beluga River turbines may be subject to a
federal Clean Air Act requirement to install Best Available Retrofit Technology
(BART) to reduce visibility impairment in national parks and wilderness areas.
12
Chugach Electric Association, Inc.
Notes to Financial Statements
(Unaudited)
On May 7, 2007, Chugach was notified by the State of Alaska, Department of
Environmental Conservation that the Beluga Power Plant turbines are not subject
to the BART requirements, and Chugach will not need to participate in the BART
process, which includes new emission limits.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In February, 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115." SFAS No. 159 allows for certain financial assets and
liabilities to be measured at fair value on an instrument-by-instrument basis
subject to certain restrictions. SFAS No. 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007. Chugach
will begin application of SFAS No. 159 on January 1, 2008, and does not expect
it to have a material affect on our results of operations, financial position,
and cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 provides guidance for using fair value to measure assets and
liabilities. In addition, this statement defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. This statement applies when other accounting pronouncements
require fair value measurement; it does not require new fair value measurements.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. Chugach will begin application of SFAS No. 157 on January 1, 2008, and
does not expect it to have a material affect on our results of operations,
financial position, and cash flows.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets -- an amendment of FASB Statement No. 140." SFAS No. 156
requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into a
servicing contract in specific situations. Additionally, the servicing asset or
servicing liability is initially measured at fair value; however, an entity may
elect the "amortization method" or "fair value method" for subsequent balance
sheet reporting periods. Application of SFAS No. 156 on January 1, 2007, did not
have a material affect on our results of operations, financial position, and
cash flows.
In February 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standard "(SFAS") No. 155, "Accounting for Certain Hybrid
Instruments", which is an amendment of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", and SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities -- a
replacement of FASB Statement No. 125." SFAS No. 155 allows financial
instruments that have embedded derivatives to
13
Chugach Electric Association, Inc.
Notes to Financial Statements
(Unaudited)
be accounted for as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the whole instrument on a
fair value basis. The Statement also establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation and clarifies that concentrations
of credit risk in the form of subordination are not embedded derivatives.
Application of SFAS No. 155 on January 1, 2007, did not have a material affect
on our results of operations, financial position, and cash flows.
In September 2006, the FASB issued FASB Staff Position ("FSP") AUG AIR-1,
"Accounting for Planned Major Maintenance Activities." FSP AUG AIR-1 prohibits
the use of the accrue-in-advance method of accounting for planned major
maintenance activities in annual and interim financial reporting periods.
Chugach implemented this Staff Position effective January 1, 2007. Because
Chugach does not accrue in advance for planned major maintenance activities, the
implementation of FSP AUG AIR-1 did not have an impact on our results of
operations or financial condition.
14
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.
RESULTS OF OPERATIONS
Current Year Quarter versus Prior Year Quarter
Assignable margins decreased $2.1 million, or 1,740.2%, during the third quarter
of 2007 compared to the same quarter of 2006. Third quarter 2007 margins are
down due to decreased sales, lower fuel surcharge revenue, and increased
operating expenses.
Operating revenues which include sales of electric energy to retail, wholesale
and economy energy customers and other miscellaneous revenues, decreased 9.8%
from $63.2 million in the third quarter of 2006 compared to $57.1 million in the
third quarter of 2007. This decrease was primarily due to lower economy energy
kWh sales during the third quarter of 2007 as well as lower fuel surcharge
revenue. The reduction in the fuel surcharge revenue is the result of reduced
Cook Inlet production taxes and receipt of credits during the third quarter of
2007 for previously paid production taxes. Chugach is authorized by the RCA to
recover fuel and related costs through the fuel surcharge mechanism, which is
adjusted quarterly to reflect increases and decreases of such costs. In
addition, retail sales decreased in the third quarter of 2007 compared to the
same quarter of 2006 due primarily to a change in gas fields operations of one
of Chugach's large commercial customers and a change in consumer consumption
patterns in response to significant increases in the price of natural gas as
reflected in both natural gas and electric utility bills. Wholesale kWh sales
were higher during the third quarter of 2007 compared to the same quarter of
2006 due primarily to increased kWh sales to Homer Electric. Economy energy
sales were lower during the third quarter of 2007 compared to the same quarter
of 2006 primarily due to maintenance activities that limited generation and the
ability to sell kWh to Golden Valley Electric Association (GVEA) during the
third quarter of 2007.
Based on the results of fixed and variable cost recovery established in
Chugach's last rate case, wholesale sales to HEA, MEA and Seward contributed
approximately $5.8 million to Chugach's fixed costs for the quarter ended
September 30, 2007 and $5.8 million for the quarter ended September 30, 2006.
15
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
ended September 30, 2007 and 2006:
(in millions)
- --------------------------------------------------------------------------------------------------------------------------
Base Rate Sales Revenue Fuel and Purchased Power Revenue Total Revenue
- --------------------------------------------------------------------------------------------------------------------------
2007 2006 % Variance 2007 2006 % Variance 2007 2006 % Variance
- --------------------------------------------------------------------------------------------------------------------------
Retail
Residential $10.2 $10.3 (1.0%) $5.9 $6.9 (14.5%) $16.1 $17.2 (6.4%)
Small Commercial $1.9 $1.9 0.0% $1.3 $1.5 (13.3%) $3.2 $3.4 (5.9%)
Large Commercial $7.3 $7.5 (2.7%) $6.4 $7.7 (16.9%) $13.7 $15.2 (9.9%)
Lighting $0.3 $0.3 0.0% $0.0 $0.0 0.0% $0.3 $0.3 0.0%
Total Retail $19.7 $20.0 (1.5%) $13.6 $16.1 (15.5%) $33.3 $36.1 (7.8%)
Wholesale
HEA $2.6 $2.6 0.0% $6.7 $6.7 0.0% $9.3 $9.3 0.0%
MEA $4.1 $4.1 0.0% $7.6 $8.8 (13.6%) $11.7 $12.9 (9.3%)
SES $0.3 $0.3 0.0% $0.8 $0.9 (11.1%) $1.1 $1.2 (8.3%)
Total Wholesale $7.0 $7.0 0.0% $15.1 $16.4 (7.9%) $22.1 $23.4 (5.6%)
Economy Sales $0.3 $0.7 (57.1%) $0.7 $2.2 n/a $1.0 $2.9 (65.5%)
Miscellaneous $0.7 $0.8 (12.5%) $0.0 $0.0 n/a $0.7 $0.8 (12.5%)
Total Revenue $27.7 $28.5 (2.8%) $29.4 $34.7 (15.3%) $57.1 $63.2 (9.7%)
- --------------------------------------------------------------------------------------------------------------------------
The following table summarizes kWh sales for the quarter ended September 30:
2007 2006
Customer kWh kWh
-------- --- ---
Retail 273,827,417 279,445,748
Wholesale 317,625,932 295,729,561
Economy Energy 18,248,140 41,836,320
----------- -----------
Total 609,701,489 617,011,629
=========== ===========
There were no changes to demand rates and energy rates charged to retail and
wholesale customers during the third quarter of 2007 compared to the third
quarter of 2006.
Total operating expenses decreased $4.1 million, or 7.1%, in the third quarter
of 2007 over the same period of 2006. Fuel expense decreased $4.8 million, or
17.3%, due to lower economy energy sales, lower base contract prices for fuel
and a reduction in related production taxes recorded during the third quarter of
2007.
Purchased power decreased $830.8 thousand, or 10.2%, in the third quarter of
2007 compared to the second quarter of 2006. The decrease is a result of prior
quarter scheduling and contract restrictions, limiting the ability to purchase
power during third quarter of 2007. Chugach purchased more power in the first
and second quarter of 2007 while maintenance work was being done. In the third
quarter of 2007, Chugach purchased 115,106 MWh of energy compared to 140,151 MWh
for the same quarter of 2006.
Transmission expense decreased $450.7 thousand, or 22.3%, in the third quarter
of 2007 compared to the same quarter of 2006. During the third quarter of 2006,
significant riverbank erosion occurred due to flooding resulting in emergency
transmission tower repairs. In 2007, major transmission repairs were not
necessary.
16
Distribution expense increased $934.6 thousand, or 39.4%, for the quarter ended
September 30, 2007 compared to the same period of 2006. The increase is due
primarily to increased expenditures related to utility locates and underground
maintenance during the third quarter of 2007.
Consumer accounts increased $135.3 thousand, or 11.4%, in the third quarter of
2007 compared to the same time period of 2006. The increase in the third quarter
of 2007 is related to filling personnel positions that were vacant during the
third quarter of 2006 as well as an increase in expenses related to consumer
information and advertising.
Administrative, general and other expenses increased $702.8 thousand, or 15.6%,
for the third quarter of 2007 compared to the same quarter of 2006. The increase
is primarily due to increased professional services costs related to the 2005
test year rate case, Sarbanes Oxley compliance, and other Board related studies
during the third quarter of 2007. Professional services expenses for Sarbanes
Oxley compliance during third quarter 2007 totaled $360.2 thousand.
Interest on long-term debt did not materially change in the third quarter of
2007 compared to the same quarter of 2006. Interest charged to construction
increased $47.9 thousand, or 33.0%, due to a higher average balance in
construction work-in-progress (CWIP) as well as the impact of higher overall
interest rates during the third quarter of 2007 compared to the same quarter in
2006.
Non-operating margins decreased $62.1 thousand, or 19.8%, in the third quarter
of 2007 compared to the same quarter of 2006. The decrease is primarily due to a
lower average cash balance during the third quarter of 2007 compared to 2006
resulting in lower interest income.
Current Year to Date versus Prior Year to Date
Assignable margins decreased $5.1 million, or 85.3%, during the first nine
months of 2007 compared to the same nine months of 2006. 2007 margins are down
due to decreased sales, lower fuel surcharge revenue, and increased operating
expenses.
Operating revenues, which include sales of electric energy to retail, wholesale
and economy energy customers and other miscellaneous revenues, decreased 1.4%
from $190.4 million in the first nine months of 2006 compared to $187.6 million
in the first nine months of 2007. This decrease was primarily due to lower
economy energy kWh sales as reduced fuel surcharge revenue. The reduction in the
fuel surcharge revenue is the result of reduced Cook Inlet production taxes and
receipt of credits for previously paid production taxes during the first nine
months of 2007 compared to the same nine months of 2006.
Total energy sales decreased in the first nine months of 2007 compared to the
same time period of 2006. Retail and economy energy sales decreased in the first
nine months of 2007 while wholesale energy sales increased. Retail energy sales
decreased primarily
17
due to a change in gas fields operations of one of Chugach's large commercial
customers as well as a change in consumer consumption patterns in response to
significant increases in the price of natural gas as reflected in both natural
gas and electric utility bills.
Wholesale energy sales increased primarily due to large commercial growth in
HEA's territory. Economy energy sales were lower in the first nine months of
2007 compared to the same period in 2006. This was due to Dynamite Slough
transmission line work as well as other maintenance activities, limiting the
ability to make economy energy sales.
Based on the results of fixed and variable cost recovery established in
Chugach's last rate case, wholesale sales to HEA, MEA and Seward contributed
approximately $18.9 million and $18.5 million to Chugach's fixed costs for the
nine months ended September 30, 2007 and 2006, 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 nine months
ended September 30, 2007 and 2006:
(in millions)
- ---------------------------------------------------------------------------------------------------------------------------------
Base Rate Sales Revenue Fuel and Purchased Power Revenue Total Revenue
- ---------------------------------------------------------------------------------------------------------------------------------
2007 2006 % Variance 2007 2006 % Variance 2007 2006 % Variance
- ---------------------------------------------------------------------------------------------------------------------------------
Retail
Residential $33.9 $34.2 (0.9%) $21.4 $21.1 1.4% $55.3 $55.3 (0.0%)
Small Commercial $6.2 $6.1 1.6% $4.6 $4.4 4.5% $10.8 $10.5 2.9%
Large Commercial $22.0 $21.7 1.4% $20.6 $20.9 (1.4%) $42.6 $42.6 0.0%
Lighting $0.9 $1.0 (10.0%) $0.0 $0.1 0.0% $0.9 $ 1.1 (18.2%)
Total Retail $63.0 $63.0 (0.0%) $46.6 $46.5 0.2% $109.6 $109.5 0.1%
Wholesale
HEA $7.9 $7.6 3.9% $20.0 $17.9 11.7% $27.9 $25.5 9.4%
MEA $13.6 $13.6 0.0% $26.8 $25.6 4.7% $40.4 $39.2 3.1%
SES $0.9 $0.8 12.5% $2.5 $2.1 19.0% $3.4 $ 2.9 17.2%
Total Wholesale $22.4 $22.0 1.8% $49.3 $45.6 8.1% $71.7 $67.6 6.1%
Economy Sales $1.1 $2.9 (62.1%) $2.9 $8.2 n/a $4.0 $11.1 (64.0%)
Miscellaneous $2.3 $2.2 4.5% $0.0 $0.0 n/a $2.3 $ 2.2 4.5%
Total Revenue $88.8 $90.1 (1.4%) $98.8 $100.3 (1.5%) $187.6 $190.4 (1.5%)
- ---------------------------------------------------------------------------------------------------------------------------------
The following table summarizes kWh sales for the nine months ended September 30:
2007 2006
Customer kWh kWh
-------- --- ---
Retail 881,411,698 888,399,387
Wholesale 965,764,816 914,797,999
Economy Energy 67,514,050 187,746,390
------------- -------------
Total 1,914,690,564 1,990,943,776
============= =============
Total operating expenses increased $2.4 million, or 1.5%, in the first nine
months of 2007 over the same period of 2006. Fuel expense decreased $7.3
million, or 8.8%, due to lower economy energy sales, lower base contract prices
for fuel and a reduction in related production taxes during the first nine
months of 2007.
18
Production expense increased $851.9 thousand, or 7.7%, in the nine months of
2007 compared to the same period in 2006 due to expenses associated with the
Beluga Unit 3 inspection in 2007, which was greater in scope than the Beluga
Unit 5 inspection in 2006. The increase was also due expenses related to the
Beluga Unit 1 and 2 controls upgrade and the Beluga Unit 8 inspection in 2007.
Also, the Cooper Lake annual inspection was done during the first nine months of
2007 compared to the same inspection that occurred in the fourth quarter of
2006.
Purchased power increased $4.4 million, or 20.2%, during the first nine months
of 2007 compared to the same period of 2006. The increase is due to transmission
line work at Dynamite Slough and other maintenance activities, limiting
generation, which resulted in the need for Chugach to purchase more power from
providers.
Transmission expense increased $634.2 thousand, or 13.9%, during the first nine
months of 2007 compared to the same period of 2006. The increase is primarily
due to increased labor and professional services related to transmission line
clearing as well as contract services for maintenance at the Point MacKenzie and
University substations.
Distribution expense increased $2.0 million, or 24.3%, during the first nine
months of 2007 compared to the same period of 2006. The increase is primarily
due to labor and professional services related to an outage that occurred in
December 2006 and extended into the first quarter of 2007. The increase is also
due to increased expenditures related to utility locates and right-of-way
clearing as well as increased labor due to contract increases in 2007 compared
to 2006.
Administrative, general and other expenses increased $1.4 million, or 9.9%, for
the first nine months of 2007 compared to the same period of 2006. The increase
is primarily due to increased professional service costs related to the 2005
test year rate case, Sarbanes Oxley compliance and other Board related studies
in 2007. As of September 30, 2007, $584.1 thousand had been expensed for
professional services related to Sarbanes Oxley compliance.
Interest on long-term debt did not materially change in the first nine months of
2007 compared to the same period of time in 2006. Other interest expense
increased $89.0 thousand, or 100.0%, primarily due to interest paid on an
adjustment to an electric account. Interest charged to construction increased
$112.1 thousand, or 32.3%, due to a higher average balance in CWIP as well as a
higher average interest rate during the first nine months of 2007 compared to
the same nine months of 2006.
Non-operating margins increased $32.4 thousand, or 4.1%, in the first nine
months of 2007 compared to the same period of time in 2006. The increase was due
to an increase in AFUDC during the first nine months of 2007 compared to the
first nine months of 2006 due to a higher average balance in CWIP as well a
higher rate being charged to the average CWIP balance.
19
Financial Condition
Assets
Total assets decreased $8.1 million, or 1.4%, from December 31, 2006, to
September 30, 2007. Net utility plant decreased $2.0 million, or 0.4% primarily
due to depreciation expense in excess of extension and replacement of plant.
Cash and cash equivalents decreased $6.5 million, or 65.8%, due in part to the
semi-annual interest payments on the 2001 and 2002 Series A bonds in the third
quarter of 2007 as well as increased professional services related to Sarbanes
Oxley compliance, rate case expenditures and gas contract negotiations. Special
deposits decreased $80.0 thousand, or 38.7%, due to the redemption of
certificates of deposits that were being held as performance guarantees with the
State of Alaska. Accounts receivable decreased $4.1 million, or 12.5%, due to
lower demand and energy usage as of September 30, 2007 compared to December 31,
2006. Prepayments decreased $127.2 thousand, or 8.5%, due to the timing of
payment of annual insurance premiums.
These decreases were offset by increases in special funds, materials and
supplies, other current assets and deferred charges. Special funds increased
$645.5 thousand, or 100.0%, due to the value of employee contributions to a
deferred compensation plan being recorded in 2007. Materials and supplies
increased $2.9 million, or 11.2%, due mainly to the cost of wire and purchase of
materials committed to planned distribution projects, and additional spare and
refurbished turbine parts for generation inventory. Other current assets
increased $66.2 thousand, or 23.6%, due primarily to the timing of receipt of a
semi-annual interest payment from NRUCFC. Deferred charges increased $1.2
million, or 5.2%, due primarily to additional charges for the Beluga River gas
compression project.
Liabilities
Total liabilities decreased $8.1 million, or 1.4%, from December 31, 2006 to
September 30, 2007. The decrease includes an $8.3 million, or 2.3%, decrease in
total long-term obligations, which includes current installments, due to
principal payments made on CoBank 2, 3, 4 and 4 and the 2002 Series B Bonds.
Accrued interest decreased $4.2 million, or 65.4%, due to the timing of
semi-annual interest payments. Salaries, wages and benefits decreased $685.0
thousand, or 11.4%, due to the ratification of labor contracts and payment of
related labor and benefits that were accrued at December 31, 2006. Other
liabilities decreased $2.0 million, or 47.7%, as a result of completing and
funding state and municipal undergrounding compliance projects. Deferred
liabilities decreased $265.2 thousand, or 11.5%, due to a reduction in
refundable advances for construction.
Other notable changes in liabilities include increases in fuel cost
over-recovery and fuel payable. The fuel surcharge mechanism allows Chugach to
recover fuel and related costs on a quarterly basis. Due to the timing of
receiving credits from fuel suppliers for previously paid Cook Inlet production
taxes, fuel cost over-recovery increased $3.5
20
million, or 1,077.7%. Fuel payable increased $2.2 million, or 13.8%, due to the
timing of fuel payments at September 30, 2007.
LIQUIDITY AND CAPITAL RESOURCES
Chugach has satisfied its operational and capital cash requirements primarily
through internally generated funds, an annual $7.5 million line of credit with
CoBank and a $50 million line of credit from NRUCFC. At September 30, 2007 there
was no outstanding balance on either line of credit.
Chugach also has a term loan facility with CoBank. Loans made under this
facility are evidenced by promissory notes governed by the Master Loan
Agreement, which became effective on January 22, 2003.
At September 30, 2007, Chugach had the following promissory notes outstanding
with this facility:
Promissory Principal Interest Rate at Maturity Principal
Note Balance Sept. 30, 2007 Date Payment Dates
---- ------- -------------- ---- -------------
CoBank 2 $ 6,000,000 5.50% 2010 2005 - 2010
CoBank 3 19,017,242 6.35% 2022 2003 - 2022
CoBank 4 20,786,288 6.35% 2022 2003 - 2022
CoBank 5 4,932,394 6.35% 2012 2007 - 2012
-------------
Total $ 50,735,924
On June 5, 2007, Chugach refinanced its $5 million promissory note with CoBank.
The new $5 million, variable rate promissory note will mature July 20, 2012 and
contains monthly principal payments commencing September 20, 2007.
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.
21
Chugach had the following bonds outstanding at September 30, 2007:
Principal Interest Rate at Maturity Principal
Bond Balance September 30, 2007 Date Payment Dates
---- ------- ------------------ ---- -------------
2001 Series A $150,000,000 6.55% 2011 2011
2002 Series A $120,000,000 6.20% 2012 2012
2002 Series B $ 35,500,000 5.25% 2012 2008 - 2012
------------
Total $305,500,000
Capital construction for 2007 is estimated at $29.0 million. At September 30,
2007, approximately $18.9 million had been expended. Capital improvement
expenditures are expected to decrease during the fourth quarter as the
construction season ends.
Chugach management continues to expect that cash flows from operations and
external funding sources will be sufficient to cover operational and capital
funding requirements in 2007 and thereafter.
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies comply with U.S. generally accepted
accounting principles (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. Significant accounting
policies are described in Note 1 of Item 8 "Financial Statements and
Supplementary Data" of our Form 10-K for the fiscal year ended December 31,
2006. 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 significant 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 Chugach's Audit Committee. The following
policies are considered to be critical accounting policies for the nine months
ended September 30, 2007.
22
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 Statement of Financial Accounting Standards (SFAS) No. 71, Accounting
for the Effects of Certain Types of Regulation (SFAS 71). 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. As reflected in Note 1 of Item 8 "Financial
Statements and Supplementary Data" under "Deferred Charges and Credits" of our
Form 10-K for the fiscal year ended December 31, 2006, significant regulatory
assets and liabilities have been recorded. 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.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. We base our
estimates on the aging of our accounts receivable balances, historical bad debt
reserves, historical percent of retail revenue that has been deemed
uncollectible, changes in our collections process and regulatory requirements.
If the financial condition of our customers were to deteriorate resulting in an
impairment of their ability to make payments, additional allowances may be
required. If their financial condition improves, allowances may be reduced. Such
allowance changes could have a material effect on our consolidated financial
condition and results of operations.
Estimated Useful Life of Utility Plant
We determine the estimated useful life of utility plant based on a depreciation
study that is updated every three years and approved by the RCA. The annual
depreciation rates were calculated by the straight-line average service life
method using the remaining life basis. The calculated accrual rates were based
on attained ages of plant in service and the estimated service life and net
salvage characteristics of each depreciable group. The service life and net
salvage estimates were based on statistical analyses of historical data
assembled from utility records, management's current plans and operating
policies, a field
23
survey of the property in service, consideration of current developments in the
electric industry, and a general knowledge of the life and salvage
characteristics of other electric properties. For major facilities, such as
generating units, probable retirement years were estimated and the life span
procedure of calculating depreciation was used to provide for the simultaneous
retirement of all associated property, surviving from various years of
installation, at the time of the retirement of the major investment. Certain
general plant accounts are amortized as a cost effective means of recording the
cost of such assets to the cost of operations. The last update was the 2002
depreciation study update and those rates were approved and implemented
effective January 1, 2005.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Information required by this Item is contained in Note 7 to the "Notes to
Financial Statements" within Part I of this Form 10-Q.
OUTLOOK
On August 24, 2007, FERC issued Chugach a new 50-year license for the Cooper
Lake Hydroelectric Project. The license allows Chugach to continue operations
and maintenance of the Cooper Lake power plant.
Effective October 8, 2007, Chugach reorganized its operations to add two new
divisions, Division of Administration and Corporate Planning and Regulatory
Affairs.
The Division of Administration is comprised of Administrative Services
(Contracting, Security and Purchasing), Information Services and Member
Services. This division reports to the Vice President Administration, David
Smith.
Corporate Planning and Regulatory Affairs division includes Corporate Planning
Analysis, Regulatory Affairs and Energy Asset. Suzanne Gibson, Vice President
Corporate Planning and Regulatory Affairs leads this division.
On October 24, 2007, Brian Hickey was promoted to Vice President, Power
Delivery. This division is comprised of Technical Services and Operations.
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.
24
During first quarter 2007, the Alaska Department of Environmental Conservation
notified Chugach that two of the Beluga River turbines may be subject to a
federal Clean Air Act requirement to install Best Available Retrofit Technology
(BART) to reduce visibility impairment in national parks and wilderness areas.
On May 7, 2007, Chugach was notified by the State of Alaska, Department of
Environmental Conservation that the Beluga Power Plant turbines are not subject
to the Best Available Retrofit Technology (BART) requirements, and Chugach will
not need to participate in the BART process, which includes new emission limits.
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. We do 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
2007 on the 2002 Series B Bonds. The maximum rate on the 2002 Series B bond is
15%.
Auction Date Interest Rate
------------ -------------
January 24 5.29%
February 21 5.29%
March 22 5.30%
April 18 5.25%
May 16 5.32%
June 13 5.30%
July 11 5.29%
August 8 5.33%
September 5 6.15%
October 3 5.25%
October 31 5.00%
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 $802,359 based on $80,235,923 of variable rate debt outstanding
at September 30, 2007.
25
The following table provides information regarding cash flows for principal
payments on total debt by maturity date (dollars in thousands) as of September
30, 2007.
Fair
Total Debt(1) 2007 2008 2009 2010 2011 Thereafter Total Value
------------- ---- ---- ---- ---- ---- ---------- ----- -----
Fixed rate debt $ 500 $ 2,000 $ 2,000 $ 1,500 $150,000 $120,000 $276,000 $281,573
Average interest rate 5.50% 5.50% 5.50% 5.50% 6.55% 6.20% 6.37%
Annual interest
Expense $17,628 $17,518 $17,405 $17,297 $ 9,487 $ 620 $ 79,955
Variable rate debt $ 206 $ 8,107 $ 8,704 $ 9,318 $ 9,951 $ 43,950 $ 80,236 $ 80,236
Average interest rate 6.64% 5.51% 5.51% 5.51% 5.51% 6.33%
(1) Includes current portion
Commodity Price Risk
Chugach's gas contracts provide for adjustments to gas prices based on
fluctuations of certain commodity prices and indices. Because purchased power
costs are passed directly to our wholesale and retail customers through a fuel
surcharge mechanism, fluctuations in the price paid for gas pursuant to
long-term gas supply contracts does not normally impact margins.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
As of the end of the period covered by this report, Chugach evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures. Chugach's chief executive officer (CEO) and chief financial officer
(CFO) supervised and participated in this evaluation. Based on this evaluation,
Chugach's CEO and CFO each concluded that Chugach's disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in its periodic reports to the SEC. 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 Chugach's
plans, products, services or procedures will succeed in achieving their intended
goals under future conditions. In addition, there have been no significant
changes in Chugach's internal controls or in other factors known to management
that could significantly affect its internal controls subsequent to our most
recent evaluation.
Internal Control Over Financial Reporting
Chugach is in the process of implementing the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, which requires its management to assess the
effectiveness of its internal controls over financial reporting and include an
assertion in its annual
26
report as to the effectiveness of our controls. In addition, Chugach's
independent registered public accounting firm, KPMG LLP, will be required to
attest to whether Chugach's 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, 2008. 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.
27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information required by this Item is contained in Note 4 to the "Notes to
Financial Statements" within Part I of this Form 10-Q.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors disclosed under "Risk
Factors" in Item 1.A. of our Form 10-K for the fiscal year ended December 31,
2006.
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, 2007, Director Alan Christopherson tendered his resignation from
the Board of Directors effective immediately. On October 17, 2007, the Board of
Directors voted to fill the vacancy with Rebecca Logan.
28
ITEM 6. 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
Ameneded and Restated Promissory Note and Multiple Advance Term Loan
Supplement between the Registrant and CoBank, ACB dated June 5, 2007
Amended and Restated Promissory Note and Committed Revolving Credit
Supplement between the Registrant and CoBank, ACB dated October 10, 2007
Line of Credit Agreement between the Registrant and the National Rural
Utilities Cooperative Finance Corporation dated October 17, 2007
29
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this quarterly 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
Chief Executive Officer
By: /s/ Michael R. Cunningham
----------------------------------------
Michael R. Cunningham
Chief Financial Officer
Date: November 19, 2007
-----------------
30
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
10.45.6 Ameneded and Restated Promissory Note and Multiple
Advance Term Loan Supplement between the Registrant and
CoBank, ACB dated June 5, 2007
10.45.7 Amended and Restated Promissory Note and Committed
Revolving Credit Supplement between the Registrant and
CoBank, ACB dated October 10, 2007
10.47.1 Line of Credit Agreement between the Registrant and the
National Rural Utilities Cooperative Finance Corporation
dated October 17, 2007
31