Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
- --------------------------------------------------------------------------------
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
- --------------------------------------------------------------------------------
Commission file number 33-42125
CHUGACH ELECTRIC ASSOCIATION, INC.
Incorporated pursuant to the Laws of Alaska State
- --------------------------------------------------------------------------------
Internal Revenue Service - Employer Identification No. 92-0014224
5601 Minnesota Drive, Anchorage, AK 99518
(907) 563-7494
- --------------------------------------------------------------------------------
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 the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 1, 2002
NONE NONE
Page Number
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 2
Balance Sheets, June 30, 2002 and December 31, 2001 3
Statements of Revenues, Expenses and Patronage Capital,
Three and Six Months Ended June 30, 2002 and 2001 5
Statements of Cash Flows, Six Months Ended June 30, 2002
and 2001 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 1 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings 1 7
Item 2. Changes in Securities and Use of Proceeds 1 7
Item 3. Defaults Upon Senior Securities 1 7
Item 4. Submission of Matters to a Vote of Security Holders 1 7
Item 5. Other Information 1 7
Item 6. Exhibits and reports on Form 8-K 1 8
Signatures 1 9
Exhibits 2 0
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Statements in this report that do not relate to historical facts, including
statements relating to future plans, events or performance, are
forward-looking statements that involve risks and uncertainties. Actual
results, events or performance may differ materially. Readers are cautioned
not to place undue reliance on these forward-looking statements, that speak
only as of the date of this report and the accuracy of which is subject to
inherent uncertainty. Chugach Electric Association, Inc. (Chugach or the
Association) 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 for the quarter ended June 30, 2002, follow:
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Unaudited)
Assets June 30, 2002 December 31, 2001
------ ------------- -----------------
Utility plant
Electric plant in service $725,992,916 $714,317,863
Construction work in progress 24,011,541 28,887,008
---------- ----------
750,004,457 743,204,871
Less accumulated depreciation (269,433,852) (261,353,177)
------------- -------------
Net utility plant 480,570,605 481,851,694
----------- -----------
Other property and investments, at cost:
Nonutility property 3,550 3,550
Investments in associated organizations 10,547,872 10,485,186
---------- ----------
10,551,422 10,488,736
---------- ----------
Current assets:
Cash and cash equivalents 3,779,829 3,814,767
Cash-restricted construction funds 561,698 517,871
Special deposits 242,163 222,163
Accounts receivable, net 16,844,729 22,302,400
Fuel cost recovery 1,405,553 3,591,963
Materials and supplies 23,872,758 22,822,003
Prepayments 2,451,288 627,544
Other current assets 197,430 335,753
------- -------
Total current assets 49,355,448 54,234,464
---------- ----------
Deferred charges 27,724,948 28,706,293
---------- ----------
$568,202,423 $575,281,187
============ ============
See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Continued)
(Unaudited)
Liabilities and Equities June 30, 2002 December 31, 2001
------------------------ ------------- -----------------
Equities and margins:
Memberships $1,080,243 $1,059,098
Patronage capital 128,955,925 125,184,374
Other 5,432,690 5,565,234
--------- ---------
135,468,858 131,808,706
----------- -----------
Long-term obligations, excluding current installments:
First Mortgage (1991 Series A) Bond payable 0 149,310,000
2001 Series A Bond payable 150,000,000 150,000,000
2002 Series A Bond payable 120,000,000 0
2002 Series B Bond payable 60,000,000 0
National Bank for Cooperatives Bonds payable 64,134,179 65,000,000
---------- ----------
394,134,179 364,310,000
----------- -----------
Current liabilities:
Short-term obligations 8,000,000 11,000,000
Current installments of long-term obligations 865,821 10,409,945
Accounts payable 4,513,758 11,012,905
Consumer deposits 1,702,949 1,603,691
Accrued interest 6,352,926 7,378,058
Salaries, wages and benefits 5,121,383 4,844,819
Fuel 6,840,359 11,565,117
Other current liabilities 1,618,348 1,900,155
--------- ---------
Total current liabilities 35,015,544 59,714,690
---------- ----------
Deferred credits 3,583,842 19,447,791
--------- ----------
$568,202,423 $575,281,187
============ ============
See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
(Unaudited)
Three months ended June 30 Six months ended June 30
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues $42,837,727 $39,018,695 $91,406,269 $84,214,272
Operating expenses:
Fuel 11,736,690 12,204,482 24,695,979 25,903,905
Power production 3,505,628 2,928,305 6,723,941 6,773,316
Purchased power 4,812,543 2,153,516 10,007,083 3,971,251
Transmission 1,118,331 805,511 1,994,449 1,870,933
Distribution 2,596,065 2,435,425 5,224,178 4,775,595
Consumer accounts/Information expense 1,471,341 1,293,400 2,895,019 2,618,258
Sales expense 0 90,541 0 221,105
Administrative, general and other 5,025,321 4,636,545 9,974,640 9,721,309
Depreciation and amortization 6,323,088 6,240,878 12,563,706 12,305,476
--------- --------- ---------- ----------
Total operating expenses 36,589,007 32,788,603 74,078,995 68,161,148
---------- ---------- ---------- ----------
Interest:
On long-term obligations 6,090,395 6,924,727 14,132,639 13,087,314
On short-term obligations 55,544 186,557 158,792 1,091,787
Charged to construction-credit (106,888) (73,474) (256,594) (450,620)
--------- -------- --------- ---------
Net interest expense 6,039,051 7,037,810 14,034,837 13,728,481
--------- --------- ---------- ----------
Net operating margins 209,669 (807,718) 3,292,437 2,324,643
------- --------- --------- ---------
Nonoperating margins:
Interest income 100,289 226,608 545,201 380,182
Other 21,169 49,334 268,536 229,422
------ ------ ------- -------
Property gain (loss) 1,164 (53,323) (192,025) 1,683
----- -------- --------- -----
Total nonoperating margins 122,622 222,619 621,712 611,287
------- ------- ------- -------
Assignable margins 332,291 (585,099) 3,914,149 2,935,930
======= ========= ========= =========
Patronage capital at beginning of period 128,669,206 126,376,024 125,184,374 122,925,253
----------- ----------- ----------- -----------
Retirement of capital credits and estate
Payments (45,572) (46,944) (142,598) (117,202)
-------- -------- --------- ---------
Patronage capital at end of period $128,955,925 $125,743,981 $128,955,925 $125,743,981
============ ============ ============ ============
See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
(Unaudited)
Six-months ended June 30
2002 2001
---- ----
Cash flows from operating activities:
Assignable margins $3,914,149 $2,935,930
----------- ----------
Adjustments to reconcile assignable margins to net cash provided (used) by
operating activities:
Depreciation and amortization 12,563,706 12,305,476
Capitalization of interest (301,189) (565,068)
Property (gains) losses, net (192,025) 1,683
Other 970 0
Changes in assets and liabilities:
(Increase) decrease in assets:
Fuel cost recovery 2,186,410 (1,190,092)
Accounts receivable 5,457,671 1,833,481
Prepayments (1,823,744) (547,793)
Materials and supplies (1,050,755) (156,658)
Deferred charges 981,345 (3,207,358)
Other 118,323 496,981
Increase (decrease) in liabilities:
Accounts payable (6,499,147) (5,898,627)
Consumer deposits 99,258 126,472
Accrued interest (1,025,132) 742,406
Deferred credits (16,071,442) (1,237,019)
Other (4,730,002) (1,527,663)
----------- -----------
Net cash provided by (used in) operating activities (6,371,603) 4,112,151
----------- ---------
Cash flows from investing activities:
Extension and replacement of plant (10,789,404) (20,896,048)
Investments in associated organizations (63,656) (69,923)
-------- --------
Net cash used in investing activities (10,853,060) (20,965,971)
------------ ------------
Cash flows from financing activities:
Short-term obligations 8,000,000 (40,000,000)
Proceeds from long-term obligations 180,000,000 150,000,000
Repayments of long-term obligations (170,719,945) (88,760,028)
Retirement of patronage capital (142,598) (117,202)
Other 52,268 (62,388)
------ --------
Net cash provided by financing activities 17,189,725 21,060,382
---------- ----------
Net increase in cash and cash equivalents (34,938) 4,206,562
Cash and cash equivalents at beginning of period $3,814,767 $1,695,162
- ------------------------------------------------ ---------- ----------
Cash and cash equivalents at end of period $3,779,829 $5,901,724
- ------------------------------------------ ========== ==========
Supplemental disclosure of cash flow information - interest expense paid, net of 15,059,969 12,986,075
========== ==========
amounts capitalized
See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
(Unaudited)
1. Presentation of Financial Information
During interim periods, Chugach follows the accounting policies set forth
in its audited financial statements included in Form 10-K filed with the
Securities and Exchange Commission 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, 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 2001 financial statements
to conform to the 2002 presentation.
2. Lines of credit
Chugach maintains a line of credit of $35 million with CoBank. The CoBank
line of credit expires November 1, 2002, but is subject to annual renewal.
At June 30, 2002, $8 million was outstanding on this line of credit at an
interest rate of 3.75%. In addition, the Association has an annual line of
credit of $50 million available at the National Rural Utilities Cooperative
Finance Corporation (NRUCFC). At June 30, 2002, there was no outstanding
balance on this line of credit. The NRUCFC line of credit expires October
14, 2002, but is subject to annual renewal.
3. Environmental Matters
The Association discovered polychlorinated biphenyls (PCBs) in paint, caulk
and grease at the Cooper Lake Hydroelectric plant during initial phases of
a turbine overhaul. A Federal Energy Regulatory Commission (FERC) approved
plan, prepared in consultation with the Environmental Protection Agency
(EPA), was implemented to remediate the PCBs in the plant. As a condition
of its approval of the license amendment for the overhaul project, FERC
required Chugach to also investigate the presence of PCBs in Kenai Lake. A
sampling plan was developed by Chugach in consultation with various
agencies and approved by FERC. In 2000, Chugach sampled sediments and fish
collected from Kenai Lake and other waters. While extremely low levels of
PCBs were found in some sediment samples taken near the plant, no pathway
from sediment to fish was established. Additional sediment sampling and
analysis in this area has been completed. While the presence of PCBs in
fish did not reveal amounts above background levels, Chugach has conducted
additional sampling and analysis of fish in Kenai Lake and other waters and
on April 1, 2002, filed its final report to FERC, which analyzed the
results of the sampling. Based on these analyses, Chugach concluded that no
further PCB sampling and analysis in Kenai Lake was necessary. In a letter
dated June 18, 2002, the FERC informed Chugach that its review of the
report supported Chugach's conclusions and agreed that Chugach was not
required to conduct further PCB sampling and analysis in Kenai Lake.
Management believes the costs of this work will be recoverable through
rates and therefore will have no material impact on our financial condition
or results of operations.
The Regulatory Commission of Alaska, (RCA) has issued an order to Chugach
generally allowing prudently incurred remediation costs at Cooper Lake to
be recovered through rates, however, the RCA has not approved the final
recovery amount in this matter and will review these costs as part of the
2000 test year rate case.
4. Legal Proceeding
Matanuska Electric Association, Inc., v. Chugach Electric Association,
Inc., Superior Court Case No. 3AN-99-8152 Civil
This action was a claim for a breach of the Tripartite Agreement, which is
the contract governing the parties' relationship for a 25-year period from
1989 through 2014 and governing the Association's sale of power to
Matanuska Electric Association, Inc., (MEA) during that time. MEA asserted
the Association breached that contract by failing to provide a variety of
kinds of information, by failing to properly manage the Association's
long-term debt, and by failing to bring its base rate action to the Joint
Committee before presentation to the RCA. All of MEA's claims have been
dismissed. On April 29, 2002, MEA appealed the Superior Court decisions
relating to Chugach's financial management and Section 9(d) of the Power
Sales Agreement relating to review of rate filings by a joint committee of
MEA and Chugach board members before filing with the RCA to the Alaska
Supreme Court. Management is uncertain as to the outcome but will
vigorously defend the appeal.
Chugach has certain additional litigation matters and pending claims that
arise in the ordinary course of its business. In the opinion of management,
no individual matter or the matters in the aggregate is likely to have a
material adverse effect on our results of operations, financial condition
or liquidity.
5. Critical Accounting Policies
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles (GAAP) requires that management apply
accounting policies and make estimates and assumptions that affect results
of operations and reported amounts of assets and liabilities in the
financial statements. The following areas represent those that management
believes are particularly important to the financial statements and that
require the use of estimates and assumptions to describe matters that are
inherently uncertain.
FERC Accounting
Chugach prepares its financial statements in accordance with GAAP and in
conformity with the FERC's uniform system of accounts.
Cost Basis Regulation
Chugach is subject to regulation by the RCA. The rates that are charged by
Chugach to its customers are based upon cost basis regulation reviewed and
approved by this regulatory commission. Under the authority of this
commission, Chugach has recorded certain regulatory assets in the amount of
$16.6 million as of June 30, 2002. If Chugach's rates were no longer based
upon cost basis or the probability of future collection in rates,
regulation, the assets and liabilities would be written off to margins.
Financial Instruments and Hedging
Chugach has used U.S. Treasury forward rate lock agreements to hedge
expected interest rates on debt. The Association accounted for the
agreements under SFAS 80 and 71 through December 31, 2000, and SFAS 133,
138 and 71 subsequent to that date. Gains or losses are treated as
regulatory assets or liabilities upon settlement. If Chugach's rates were
no longer based upon cost or there was no longer the probability of future
collection in rates, the assets and liabilities would be written off to
margins. Based on historical regulatory treatment on previous refinancing,
management believes the establishment and recovery of Chugach's regulatory
assets and liabilities is appropriate. Accounting for derivatives continues
to evolve through guidance issued by the Derivatives Implementation Group
(DIG) of the Financial Accounting Standards Board, (FASB). To the extent
that changes by the DIG modify current guidance, the accounting treatment
for derivatives may change.
6. Recent Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Statement No. 145 eliminates the treatment of
extinguishment of debt as extraordinary and clarifies the accounting for
certain sale-leaseback transactions. The provisions of Statement No. 145
are required to be applied starting with fiscal years beginning after May
15, 2002, with early adoption encouraged. The Association believes the
adoption of Statement No. 145 will have no impact on its financial
statements, as the costs associated with the extinguishment of debt are
accounted for under the provisions of Statement No. 71, Accounting for the
Effects of Certain Types of Regulation and the Association does not engage
in sale-leaseback transactions.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. The provisions of Statement No. 146 are required to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Association believes the adoption of Statement No.
146 will have no impact on its financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to the information contained under the caption "CAUTION
REGARDING FORWARD-LOOKING STATEMENTS" at the beginning of this Report.
Recent Accounting Pronouncements
In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Statement No. 145 eliminates the treatment of
extinguishment of debt as extraordinary and clarifies the accounting for
certain sale-leaseback transactions. The provisions of Statement No. 145
are required to be applied starting with fiscal years beginning after May
15, 2002, with early adoption encouraged. The Association believes the
adoption of Statement No. 145 will have no impact on its financial
statements, as the costs associated with the extinguishment of debt are
accounted for under the provisions of Statement No. 71, Accounting for the
Effects of Certain Types of Regulation and the Association does not engage
in sale-leaseback transactions.
In July 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. Statement No. 146 requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. The provisions of Statement No. 146 are required to be
applied prospectively to exit or disposal activities initiated after
December 31, 2002. The Association believes the adoption of Statement No.
146 will have no impact on its financial statements.
Regulatory Matters
Docket U-96-37
Chugach submitted its 1998 test year revenue requirement filing to the RCA
in February 2001. According to an order issued by the RCA on March 15,
2002, no rate reduction or refunds were required based on our 1998 test
year costs. On July 23, 2002, the RCA closed Docket U-96-37, accepting
Chugach's March 22, 2002 compliance filing on the 1998 test year.
This docket was originally opened in 1996 to resolve outstanding issues
between Chugach and Alaska Electric Generation & Transmission (AEG&T)
/Homer Electric Association, (HEA) and MEA associated with Chugach's 1995
test year revenue requirement. The docket was further extended for the
adjudication of the 1996 through 1998 test period revenue requirement
filings that were completed as a result of a Settlement Agreement between
Chugach, AEG&T / HEA and MEA.
Docket U-01-108
Chugach submitted a general rate case based on the 2000 test year to the
RCA on July 10, 2001. The filing requested an overall system base rate
increase of 4.0 percent on an interim basis and 6.5 percent on a permanent
basis. The Commission opened Docket U-01-108 to address the issues relating
to the 2000 test year period rate filing.
On September 5, 2001, the RCA issued Order No. 1 in Docket U-01-108 that
authorized an interim base demand and energy rate increase of 1.6 percent
for retail and wholesale billings effective September 14, 2001. Chugach
retail customers under the Small General Service and Lighting tariffs were
exempt from the increase.
On September 25, 2001, Chugach submitted a Request for Reconsideration to
the RCA regarding specific adjustments to Chugach's revenue requirement
contained in the Commission order. On October 25, 2001, the Commission
ruled on Chugach's Request for Reconsideration, and granted an interim base
demand and energy increase of 3.97 percent, or about 2.4 percentage points
higher than the initial authorized increase of 1.6 percent. Chugach
submitted a compliance filing implementing the Commission's Order on
October 30, 2001, and the additional rate increase was effective in
November 2001.
The interim rate increase was based on a normalized (adjusted for recurring
expenses) test year and a system ratemaking Times Interest Earned Ratio
(TIER) of 1.35.
As anticipated in Chugach's July 2001 original filing, on April 15, 2002,
Chugach submitted a filing with the RCA to update certain known and
measurable costs and savings that had occurred outside the 2000 Test Year.
In the updated filing, Chugach reduced its base rate increase request from
6.5% to 5.7%, or approximately $0.9 million on a system basis. The revised
filing also reflected an increase in depreciation expense of approximately
$1.5 million due to the completion of the Beluga Unit 7 re-power project
and a reduction in annualized interest expense due to Chugach's recent
refinancing efforts of $2.4 million. In this revised filing, Chugach
continues to request $11.9 million in margins, however, due to reduced
interest costs, the equivalent system TIER calculation results in a TIER of
1.47.
Three Intervenors filed pre-filed testimony with the Commission in July
2002 opposing various aspects of Chugach's proposal. Chugach will file its
reply testimony with the Commission in October. A hearing has been
scheduled for November 2002 to resolve the outstanding issues associated
with the 2000 test year rate case. A final Commission order is expected in
2003.
Results Of Operations
Current Year Quarter Versus Prior Year Quarter
In general, net margins increased due to a $998.8 thousand, or 14%,
decrease in net interest expense and the interim rate increase.
Operating revenues, which include sales of electric energy to retail,
wholesale and economy energy customers and other miscellaneous revenues,
increased by $3.8 million, or 10%, for the quarter ended June 30, 2002,
over the same quarter in 2001. The increase in revenues was due to an
interim rate increase of 3.97%, which was approved and implemented during
the fourth quarter of 2001, as well as an increase in purchased power,
which resulted in increased revenue collected through the fuel and
purchased power surcharge mechanism.
The following table represents kWh sales for the quarter ended June 30:
2002 2001
---- ----
Customer kWh KWh
Retail 259,178,470 256,048,943
Wholesale 263,894,173 212,930,291
Economy Energy 42,402,010 21,559,500
---------- ----------
Total 565,474,653 490,538,734
=========== ===========
Retail demand and energy rates for all rate classes except small commercial
and public street and highway lighting increased 3.97% in the second
quarter of 2002 compared to the second quarter of 2001. Over this same
period, the wholesale demand and energy rates charged to HEA and MEA also
increased by 3.97%. These increases reflected the interim rate increase
authorized by the RCA in 2001. Wholesale demand and energy rates charged to
Seward Electric System (SES) did not change in this quarter compared to the
same quarter last year.
Fuel expense decreased by $467.8 thousand, or 4%, for the quarter ended
June 30, 2002, compared to the same period in 2001 due to lower fuel
prices. Power production expense increased by $577.3 thousand, or 20%, due
to a higher level of scheduled maintenance activity in 2002, including a
hot gas path inspection and a major overhaul of a Bernice Lake unit.
Purchased power expense increased by $2.7 million, or 123%, due to the new
contract with Nikiski, a co-generation power plant owned by AEG&T/HEA.
Transmission, Distribution, Consumer accounts/Information and Sales expense
did not materially change for the three-month period ended June 30, 2002.
Administrative, general and other expenses increased by $388.8 thousand, or
8%, for the three-month period ended June 30, 2002, due to the combination
of increased labor, information services and insurance costs.
Interest on long-term debt decreased by $834.3 thousand, or 12%, due to
lower interest rates. Interest charged to construction increased by $33.4
thousand, or 45%, in the second quarter of 2002 compared to the same period
in 2001 due to more construction activity. Other interest expense decreased
by $131.0 thousand, or 70%, from the second quarter of 2001 to the second
quarter of 2002 due to lower outstanding balances on the lines of credit in
the second quarter of 2002.
Other nonoperating margins were $100.0 thousand, or 45%, lower for the
quarter ended June 30, 2002, compared to the same period in 2001 due to
funds received and invested for a month as a result of the refinancing in
2001.
Current Year to Date Versus Prior Year to Date
In general, net margins increased due to the increase in revenue caused by
the interim rate increase implemented during the fourth quarter of 2001.
Operating revenues increased by $7.2 million, or 9%, in the first six
months of 2002, over the same period in 2001. The increase in revenues was
due to the interim rate increase of 3.97%, which was approved and
implemented during the fourth quarter of 2001. It was also due to an
increase in purchased power, which resulted in increased revenue collected
through the fuel and purchased power surcharge mechanism.
The following table represents kWh sales for the six months ended June 30:
2002 2001
---- ----
Customer kWh KWh
Retail 572,506,030 557,910,584
Wholesale 562,334,692 491,780,205
Economy Energy 45,706,900 44,132,770
---------- ----------
Total 1,180,547,622 1,093,823,559
============= =============
Fuel expense decreased by $1.2 million, or 5%, for six months ended June
30, 2002, compared to the same period in 2001 due to less fuel used and
lower fuel prices. Power production expense did not materially change for
the six-month period ended June 30, 2002. Purchased power expense increased
by $6.0 million, or 152%, due to the new contract with Nikiski, a
co-generation power plant owned by Alaska Electric Generation &
Transmission (AEG&T) (HEA). Distribution expense increased $448.6 thousand,
or 9%, due to additional right-of-way clearing associated with a major
project in Beluga/Tyonek, which caused a more than normal quantity of miles
cleared. Transmission, Consumer accounts/Information, Sales expense and
Administrative, general and other did not materially change for the
six-month period ended June 30, 2002.
Interest on long-term debt increased by $1.0 million, or 8%, due to
additional debt associated with the 2002 refinancing. Interest charged to
construction decreased by $194.0 thousand, or 43%, in the six months ended
June 30, 2002 compared to the same period in 2001 due to less construction
activity. Other interest expense decreased by $933.0 thousand, or 85%, due
to lower outstanding balances on the lines of credit.
Other nonoperating margins did not materially change in the first six
months of 2002 compared to the same period in 2001.
Financial Condition
Total assets decreased $7.1 million, or 1%, from December 31, 2001 to June
30, 2002. The decrease was due to a $5.5 million, or 24%, decrease in
accounts receivable caused by the payment of wholesale power invoices that
were accrued but not paid at December 31, 2001. It was also due to a $2.2
million, or 61%, decrease in fuel cost recovery from the collection of the
prior quarter's fuel cost adjustment. Deferred charges decreased by $981
thousand, or 3%, largely due to normal monthly amortization of deferred
charges. The decreases were offset by a $1.8 million, or 291%, increase in
prepayments caused by the prepayment of rotors for Beluga units 6 and 7
that are due to be installed in 2003 and 2004. Notable changes to total
liabilities include a $30.7 million, or 8%, increase in long-term
obligations associated with the 2002 refinancing. This increase was offset
by a $3 million, or 27%, decrease in short-term obligations, as well as a
$10.4 million, or 100%, decrease in current installments of long-term
obligations due to the final payment of the 1991 Series A Bond due 2002 and
the $5 million payment of the first installment of CoBank 5. There was also
a $6.5 million, or 59%, decrease in accounts payable caused by the payment
of invoices that were accrued at December 31, 2001. There was also a $1.0
million, or 14%, decrease in accrued interest due to lower interest rates
on our debt after the 2002 refinancing, as well as a $4.7 million, or 41%,
decrease in fuel payable caused by lower fuel prices in the first and
second quarter of 2002. Deferred credits decreased $15.9 million, or 82%,
due to the reclassification of the gain associated with the 1991 Series A
Bond due 2022 that was refinanced in the first quarter of 2002.
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 NRUCFC and a $35 million line of credit with CoBank. At June
30, 2002, there was no outstanding balance with NRUCFC. At June 30, 2002,
there was $8 million outstanding under the CoBank line of credit, which
carried an interest rate of 3.75%.
Chugach has negotiated a supplemental indenture (Seventh Supplemental
Indenture of Trust) that eliminated the maximum aggregate amounts of bonds
the Association may issue under the CoBank agreement. At June 30, 2002,
Chugach had the following bonds outstanding under this financing
arrangement.
Interest rate at June Principal Payment
Bond Principal balance 30, 2002 Maturity Date Dates
CoBank 2 $10,000,000 7.76% 2005 2005
CoBank 3 $21,500,000 5.60% 2022 2003 - 2022
CoBank 4 $23,500,000 5.60% 2022 2003 - 2022
CoBank 5 $10,000,000 5.60% 2012 2002 - 2012
Total $65,000,000
Capital construction in 2002 is estimated at $32.8 million. At June 30,
2002, approximately $10.8 million had been expended. Capital improvement
expenditures are expected to increase in the upcoming third quarter as the
construction season began in April and extends into October.
Chugach management continues to expect that cash flows from operations and
external funding sources will be sufficient to cover operational and
capital funding requirements in 2002 and thereafter.
Outlook
In the recent past Chugach has been active at the Alaska Legislature in
support of the customer's right to choose their electric power provider.
Virtually all Alaska utilities opposed Chugach's efforts to develop
competition and no movement in that direction currently exists.
Chugach intends to maintain a readiness for competition and to build
organizational experience and expertise in competitive-type business to the
degree possible. Chugach reorganized in June 2002 when the longstanding
Chief Financial Officer, (CFO) accepted the General Manager position. The
Association now has four senior vice-president level organizational
entities: CFO (Finance and Accounting), Energy Supply, Power Delivery and
Administration. A Chief of Staff position was also created and staffed by
in-house senior management. We believe this structure will better
facilitate the organization's ability to effectively manage future
challenges including competition.
Environmental Matters
Compliance with Environmental Standards
Chugach's operations are subject to certain federal, state and local
environmental laws that Chugach monitors to ensure compliance. 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.
Environmental Matters
The Association discovered polychlorinated biphenyls (PCBs) in paint, caulk
and grease at the Cooper Lake Hydroelectric plant during initial phases of
a turbine overhaul. A Federal Energy Regulatory Commission (FERC) approved
plan, prepared in consultation with the Environmental Protection Agency
(EPA), was implemented to remediate the PCBs in the plant. As a condition
of its approval of the license amendment for the overhaul project, FERC
required Chugach to also investigate the presence of PCBs in Kenai Lake. A
sampling plan was developed by Chugach in consultation with various
agencies and approved by FERC. In 2000, Chugach sampled sediments and fish
collected from Kenai Lake and other waters. While extremely low levels of
PCBs were found in some sediment samples taken near the plant, no pathway
from sediment to fish was established. Additional sediment sampling and
analysis in this area has been completed. While the presence of PCBs in
fish did not reveal amounts above background levels, Chugach has conducted
additional sampling and analysis of fish in Kenai Lake and other waters and
on April 1, 2002, filed its final report to FERC, which analyzed the
results of the sampling. Based on these analyses, Chugach concluded that no
further PCB sampling and analysis in Kenai Lake was necessary. In a letter
dated June 18, 2002, the FERC informed Chugach that its review of the
report supported Chugach's conclusions and agreed that Chugach was not
required to conduct further PCB sampling and analysis in Kenai Lake.
Management believes the costs of this work will be recoverable through
rates and therefore will have no material impact on our financial condition
or results of operations. The RCA has issued an order to Chugach generally
allowing prudently incurred remediation costs at Cooper Lake to be
recovered through rates, however, the RCA has not approved the final
recovery amount in this matter and will review these costs as part of the
2000 test year rate case.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Chugach is exposed to a variety of risks, including changes in interest
rates and changes in commodity prices due to repricing mechanisms inherent
in gas supply contracts. In the normal course of our business, we manage
our exposure to these risks as described below. Chugach does not engage in
trading market risk-sensitive instruments for speculative purposes.
Interest Rate Risk
As of June 30, 2002, except for the 2002 Series B Bond, which carries a
variable interest rate and is re-priced every 28 days, all of our
outstanding long-term obligations were at fixed interest rates with varying
maturity dates. The Auction Rate Bond bore interest at 1.97% from the date
of original delivery to and through February 27, 2002. The following table
provides information regarding subsequent auction dates and rates.
Auction Date Interest Rate
February 27, 2002 2.00%
March 27, 2002 2.00%
April 27, 2002 1.97%
May 22, 2002 1.97%
June 19, 2002 1.95%
July 17, 2002 1.90%
The following table provides information regarding cash flows for principal
payments on total debt by maturity date (dollars in thousands) as of June
30, 2002.
Fair
Total Debt* 2002 2003 2004 2005 2006 Thereafter Total Value
- ----------- ---- ---- ---- ---- ---- ---------- ----- -----
Fixed rate $0 $866 $945 $11,031 $1,126 $321,032 $335,000 $349,106
Average
interest rate -- 5.60% 5.60% 7.56% 5.60% 6.27% 6.30%
Variable rate $8,000 $0 $0 $0 $0 $60,000 $68,000 $68,000
Average
interest rate 3.75% -- -- -- -- 1.95% 2.16%
* 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, 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 related to market
fluctuations in the price of purchased power.
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 was a claim for a breach of the Tripartite Agreement, which is
the contract governing the parties' relationship for a 25-year period from
1989 through 2014 and governing the Company's sale of power to MEA during
that time. MEA asserted the Company breached that contract by failing to
provide a variety of kinds of information, by failing to properly manage
the Company's long-term debt, and by failing to bring its base rate action
to the Joint Committee before presentation to the RCA. All of MEA's claims
have been dismissed. On April 29, 2002, MEA appealed the Superior Court
decisions relating to Chugach's financial management and Section 9(d) of
the Power Sales Agreement relating to review of rate filings by a joint
committee of MEA and Chugach board members before filing with the RCA to
the Alaska Supreme Court. Management is uncertain as to the outcome but
will vigorously defend the appeal.
Chugach has certain additional litigation matters and pending claims that
arise in the ordinary course of its business. In the opinion of management,
no individual matter or the matters in the aggregate is likely to have a
material adverse effect on our results of operations, financial condition
or liquidity.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
On August 12, 2002, MEA filed a request with the RCA asking that Chugach's
Certificate of Public Convenience and Necessity (CPCN) be amended to
eliminate retail service and requesting that the retail services portion of
the CPCN be included in MEA's CPCN. The RCA has not determined whether it
will hear the request. Management is of the opinion that the request has no
merit and it is very unlikely that the requested change in the certificate
will be approved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Employment Agreement between the Registrant and Evan J.
Griffith dated effective May 1, 2002.
Certification of Principal Executive Officer
Certification of Principal Financial Officer
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended June
30, 2002.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHUGACH ELECTRIC ASSOCIATION, INC.
By: /s/Evan J. Griffith
Evan J. Griffith
General Manager
Date: August 13, 2002
By: /s/Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer
Date: August 13, 2002
Exhibits
Listed below are the exhibits, which are filed as part of this Report:
Exhibit Number Description Page
10.52 Employment Agreement between the Registrant and
Evan J. Griffith dated effective May 1, 2002 21
99.1 Certification of Principal Executive Officer 32
99.2 Certification of Principal Financial Officer 33