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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 March 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 33-42125
CHUGACH ELECTRIC ASSOCIATION, INC.
Incorporated pursuant to the Laws of Alaska State
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Internal Revenue Service - Employer Identification No. 92-0014224
5601 Minnesota Drive, Anchorage, AK 99518
(907) 563-7494
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act)
Yes No X
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 1, 2003
NONE NONE
Page Number
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 2
Balance Sheets, March 31, 2003 and December 31, 2002 3
Statements of Revenues, Expenses and Patronage Capital, Three
Months Ended March 31, 2003 and 2002 5
Statements of Cash Flows, Three Months Ended March 31, 2003 and 2002 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 1 0
Item 3. Quantitative and Qualitative Disclosures About Market Risk 1 8
Item 4. Controls and Procedures 1 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 1 9
Item 2. Changes in Securities and Use of Proceeds 1 9
Item 3. Defaults Upon Senior Securities 1 9
Item 4. Submission of Matters to a Vote of Security Holders 2 0
Item 5. Other Information 2 0
Item 6. Exhibits and reports on Form 8-K 2 0
Signatures 2 1
Exhibits 2 2
Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 2 3
Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 2 4
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Statements in this report that do not relate to historical facts, including
statements relating to future plans, events or performance, are
forward-looking statements that involve risks and uncertainties. Actual
results, events or performance may differ materially. Readers are cautioned
not to place undue reliance on these forward-looking statements, that speak
only as of the date of this report and the accuracy of which is subject to
inherent uncertainty. Chugach Electric Association, Inc. (Chugach)
undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances that may
occur after the date of this report or the effect of those events or
circumstances on any of the forward-looking statements contained in this
report, except as required by law.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited financial statements and notes to financial statements of
Chugach for the quarter ended March 31, 2003, follow:
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Unaudited)
Assets March 31, 2003 December 31, 2002
------ -------------- -----------------
Utility plant:
Electric plant in service $ 736,732,136 $ 730,439,297
Construction work in progress 17,068,171 20,224,302
---------- ----------
753,800,307 750,663,599
Less accumulated depreciation (286,207,945) (279,958,912)
------------- -------------
467,592,362 470,704,687
Other property and investments, at cost:
Nonutility property 3,550 3,550
Investments in associated organizations 10,999,073 10,963,715
---------- ----------
11,002,623 10,967,265
Current assets:
Cash and cash equivalents 4,616,336 7,284,292
Cash-restricted construction funds 580,542 598,864
Special deposits 222,163 222,163
Accounts receivable, net 17,415,049 26,410,264
Fuel cost recovery 0 0
Materials and supplies 23,760,532 23,747,590
Prepayments 3,343,058 1,953,350
Other current assets 477,312 336,798
------- -------
50,414,992 60,553,321
Deferred charges 26,918,597 27,989,601
---------- ----------
Total Assets $ 555,928,574 $ 570,214,874
============= =============
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Continued)
(Unaudited)
Liabilities and Equities March 31, 2003 December 31, 2002
------------------------ -------------- -----------------
Equities and margins:
Memberships $ 1,118,278 $ 1,108,243
Patronage capital 129,614,518 120,148,502
Other 6,177,878 6,221,150
--------- ---------
136,910,674 127,477,895
Long-term obligations, excluding current installments:
2001 Series A Bond payable 150,000,000 150,000,000
2002 Series A Bond payable 120,000,000 120,000,000
2002 Series B Bond payable 51,100,000 55,700,000
National Bank for Cooperatives Bonds payable 63,682,679 64,134,179
---------- ----------
384,782,679 389,834,179
Current liabilities:
Short-term obligations 0 6,081,250
Current installments of long-term obligations 5,503,651 5,165,821
Accounts payable 4,240,039 7,719,974
Provision for rate refund 1,932,552 7,050,000
Consumer deposits 1,808,514 1,826,265
Fuel cost payable 1,476,935 363,862
Accrued interest 1,995,582 6,381,106
Salaries, wages and benefits 5,119,435 4,977,594
Fuel 6,817,941 7,095,402
Other current liabilities 1,457,889 2,027,938
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30,352,538 48,689,212
Deferred credits 3,882,683 4,213,588
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Total Liabilities and Equities $ 555,928,574 $ 570,214,874
============= =============
See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
(Unaudited)
Three months ended March 31
2003 2002
---- ----
Operating revenues $50,239,007 $48,568,542
Operating expenses:
Fuel 11,403,893 12,959,289
Power production 2,724,933 3,218,313
Purchased power 3,337,477 5,194,540
Transmission 1,194,608 876,117
Distribution 2,827,302 2,628,113
Consumer accounts/Information expense 1,401,666 1,423,679
Administrative, general and other 5,249,227 4,949,319
Depreciation and amortization 7,014,978 6,240,618
--------- ---------
Total operating expenses 35,154,084 37,489,988
Interest expense:
On long-term obligations 5,880,594 8,042,244
On short-term obligations 11,901 103,248
Charged to construction-credit (107,879) (149,706)
--------- ---------
Net interest expense 5,784,616 7,995,786
--------- ---------
Net operating margins 9,300,307 3,082,768
Nonoperating margins:
Interest income 86,563 444,912
Other 68,135 247,367
Property gain (loss) 71,219 (193,189)
------ ---------
Total nonoperating margins 225,917 499,090
------- -------
Assignable margins 9,526,224 3,581,858
========= =========
Patronage capital at beginning of period 120,148,502 125,184,374
Retirement of capital credits and estate
Payments (60,208) (97,026)
-------- --------
Patronage capital at end of period $ 129,614,518 $ 128,669,206
============= =============
See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
(Unaudited)
Three months ended March 31
2003 2002
---- ----
Cash flows from operating activities:
Assignable margins $9,526,224 $3,581,858
Adjustments to reconcile assignable margins to net cash (used in) provided by
operating activities:
Provision for rate refund (5,117,448) 0
Depreciation and amortization 8,377,586 6,240,618
Capitalization of interest (122,881) (173,131)
Property gains (losses) 71,219 (193,189)
Other 55 970
Changes in assets and liabilities:
(Increase) decrease in assets:
Special deposits 0 0
Fuel cost recovery 0 (162,458)
Accounts receivable 8,995,215 3,833,288
Prepayments (1,389,708) (2,308,616)
Materials and supplies (12,942) 2,006,507
Deferred charges, net (291,603) (1,260,649)
Other (140,514) (133,078)
Increase (decrease) in liabilities:
Accounts payable (3,479,935) (4,211,665)
Fuel payable 1,113,073 0
Consumer deposits (17,751) 55,360
Accrued interest (4,385,524) (5,192,242)
Deferred credits (638,160) (15,666,447)
Other (705,670) (4,069,436)
----------- -----------
Net cash (used in) provided by operating activities 11,781,236 (17,652,310)
Cash flows from investing activities:
Extension and replacement of plant (3,850,991) (3,628,304)
Investments in associated organizations (35,413) (65,436)
----------- -----------
Net cash used in investing activities (3,886,404) (3,693,740)
Cash flows from financing activities:
Short-term obligations (6,081,250) 0
Proceeds from long-term obligations 0 180,000,000
Repayments of long-term obligations (4,713,670) (154,719,945)
Retirement of patronage capital (60,208) (97,026)
Other 292,340 11,539
----------- -----------
Net cash (used in) provided by financing activities (10,562,788) 25,194,568
Net increase (decrease) in cash and cash equivalents (2,667,956) 3,848,518
Cash and cash equivalents at beginning of period $7,284,292 $3,814,767
- ------------------------------------------------ ---------- ----------
Cash and cash equivalents at end of period $4,616,336 $7,663,285
- ------------------------------------------ ========== ==========
Supplemental disclosure of cash flow information - interest expense paid, net of 10,170,140 13,188,028
========== ==========
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 Electric Association, Inc. (Chugach)
follows the accounting policies set forth in its audited financial
statements included in Form 10-K filed with the Securities and Exchange
Commission 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 2002 financial statements
to conform to the 2003 presentation.
2. Lines of credit
Chugach maintains a line of credit of $20 million with CoBank, ACB
(CoBank). The CoBank line of credit expires July 31, 2003, subject to
renewal at the discretion of the parties. At March 31, 2003, there was no
outstanding balance on this line of credit. In addition, Chugach has an
annual line of credit of $50 million available at the National Rural
Utilities Cooperative Finance Corporation (NRUCFC). At March 31, 2003,
there was no outstanding balance on this line of credit. The NRUCFC line of
credit expires October 15, 2007.
3. Environmental Matters
Chugach 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 us in consultation with state and federal
agencies and approved by FERC. In 2000, we sampled sediments and fish
collected from Kenai Lake and other waters. While low levels of PCBs were
found in some sediment samples taken near the plant, no pathway from
sediment to fish was established. While the levels of PCBs in fish from
Kenai Lake were similar to levels found in fish from other lakes within the
region, we conducted additional sampling and analysis of fish in Kenai Lake
and other waters and filed our final report dated April 1, 2002, with FERC,
which analyzed the results of the sampling. Based on these analyses, we
concluded that no further PCB sampling and analysis in Kenai Lake was
necessary. In a letter dated June 13, 2002, FERC informed us that its
review of the report supported our conclusions and agreed we were not
required to conduct further PCB sampling and analysis in Kenai Lake. In its
recent order in our general rate case, Order U-01-108(26), the Regulatory
Commission of Alaska (RCA), permitted the costs associated with the
overhaul and the PCB remediation to be recovered through rates.
Consequently, management believes the costs of the PCB remediation and
studies will have no material impact on our financial condition or results
of operations. We will be filing a request in 2003 with the RCA to allow us
to recover through rates the costs we incurred to investigate the presence
of PCBs in Kenai Lake.
4. Legal Proceeding
Matanuska Electric Association, Inc., v. Chugach Electric Association, Inc.,
Superior Court Case No. 3AN-99-8152 Civil
This action is a claim for a breach of the Tripartite Agreement, which is
the contract governing the parties' relationship for a 25-year period from
1989 through 2014 and governing our sale of power to Matanuska Electric
Association, Inc., (MEA) during that time. MEA asserted we breached that
contract by failing to provide information, by failing to properly manage
our long-term debt, and by failing to bring our base rate action to a Joint
Committee before presenting it to the RCA. The committee is defined in the
power sales contract and consists of one MEA and two Chugach board members.
All of MEA's claims have been dismissed. On April 29, 2002, MEA appealed the
Superior Court's decisions relating to our financial management and our
failure to bring our base rate action to the joint committee before filing
with the RCA to the Alaska Supreme Court. We cross-appealed the Superior
Court's decision not to dismiss the financial management claim on
jurisdictional and res judicata grounds. Oral argument was heard by the
Supreme Court on April 15, 2003. Management is uncertain as to the outcome
and expects a decision within six to twelve months.
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 principles
generally accepted in the United States of America 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 principles
generally accepted in the United States of America 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-based regulation reviewed and
approved by this regulatory commission. Under the authority of this
commission, Chugach has recorded certain regulatory assets in the amount of
$19.2 million as of March 31, 2003. If Chugach's rates were no longer based
upon cost or there was no longer the probability of future collection in
rates, these assets and liabilities would be written off against assignable
margins.
Financial Instruments and Hedging
Chugach has previously used U.S. Treasury based forward rate lock
agreements to hedge expected interest rates on debt. Chugach 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, these assets and liabilities would be written off
against assignable 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.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made to the information contained under the caption "CAUTION
REGARDING FORWARD-LOOKING STATEMENTS" at the beginning of this Report.
Regulatory Matters
Docket U-01-108
Chugach filed a general rate case, Docket U-01-108, on July 10, 2001, based
on the 2000 test year, requesting a permanent base rate increase of 6.5%,
and an interim base rate increase of 4.0%. On September 5, 2001, the RCA
granted a 1.6% interim demand and energy rate increase effective September
14, 2001. Chugach filed a petition for reconsideration and on October 25,
2001, the RCA revised its Interim Approval to permit Chugach to collect an
interim base rate increase of 3.97%. The additional rate increase was
implemented on November 1, 2001. 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 in
the revenue requirement 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-powering project and a
reduction in annualized interest expense of $2.4 million due to Chugach's
recent refinancings. In this revised filing, Chugach continued to request
$11.9 million in margins. As a result of reduced interest costs, Chugach's
supplemental filing would have yielded an equivalent system Times Interest
Earned Ratio (TIER) of 1.47.
Docket U-01-108, Order No. 26
The RCA issued Order No. 26 in Docket U-01-108 on February 6, 2003.
Order 26 resolved several issues in Chugach's favor:
o The RCA rejected intervenor mismanagement allegations regarding
re-powering of Beluga Units 6, 7 and Cooper Lake Power Plant (CLPP)
overhaul and PCB remediation.
o The RCA accepted Chugach's rate lock cost amortization and did not
question other refinancing activities.
o The RCA approved the 1999 depreciation study, in part, and allowed
implementation of remaining life depreciation methodology.
o The RCA approved recovery of rate lock and CLPP PCB remediation
expenses.
Order 26 contained several adjustments not in Chugach's favor:
o The RCA required Chugach to continue using TIER in calculating return
levels instead of converting to a return on rate-base methodology.
o The RCA adjusted Chugach's system overall TIER downwards from 1.35 to
1.30, a difference of approximately $1.3 million in margins based on
the 2000 test year and would have similar impacts in subsequent years.
As Chugach had requested that its permanent rates in this case be
established with an effective TIER of 1.47, this was a difference of
approximately $4 million in margins based on the 2000 test year between
the now-authorized TIER of 1.30.
o The RCA required Chugach to treat Allowance for Funds Used During
Construction/Interest During Construction (AFUDC / IDC) as a reduction
to long-term interest expense, which reduces the revenue requirement by
approximately $1.2 million, excluding TIER. With the required AFUDC/IDC
adjustment alone, Chugach's effective TIER would be below a 1.30.
o The RCA required a 1.8 percentage point interest rate reduction (from
3.8% to 2%) on Chugach's $60.0 million of variable debt, which equates
to a revenue requirement reduction of approximately $1.1 million,
excluding TIER.
o Chugach's overall Depreciation Study was approved, although the RCA did
require approximately $0.7 million in downward adjustments, primarily
related to Bernice Lake Units 2 - 4 and Chugach's North Submarine Cable
field. This reduction in the revenue requirement will match Chugach's
reduction in depreciation expense, resulting in a net effect of zero to
margins in subsequent years.
The impact of Order 26 required the following:
o Based on the final rates ordered, a refund of revenues collected in
2001 of approximately $1.1 million and in revenues collected in 2002 of
approximately $6.0 million, which resulted in a net operating loss of
$2 million in 2002. Under the Order, Chugach's financial performance
for 2002 fell below the 1.10 level contained in the Rate Covenants in
its currently effective indenture, the Amended and Restated Indenture,
the CoBank Master Loan Agreement and the MBIA Reimbursement and
Indemnity Agreement.
o A reduction in estimated 2003 revenues of approximately $6.0 million.
Based on the budgeted revenues and expenditures, under Order 26,
Chugach may have insufficient margins over interest in 2003 to comply
with the requirements of the Rate Covenants in the agreements described
above.
In accordance with the Rate Covenant in the Amended and Restated Indenture,
on February 13, 2003, Chugach filed a Motion with the RCA asking the RCA to
stay the effect of Order 26 until after the RCA considered Chugach's
Petition for Reconsideration. On February 18, 2003, the RCA granted, in
part, our motion for stay. Chugach filed the Petition for Reconsideration
with the RCA on February 28, 2003.
Docket U-01-108, Order No. 30
On April 15, 2003, the RCA issued Order No. 30 in Docket U-01-108, revising
its earlier ruling by:
o Reversing its AFUDC/IDC offset decision and agreeing with Chugach that
the offset of AFUDC and IDC against long-term interest expense in the
test year is not appropriate. Language in Order 30 may limit its ruling
to projects commenced and concluded within the test year.
o Allowing most of the legal expenses cut or amortized from the revenue
requirement to be added back.
o Establishing a normalized interest rate of 3.8% on our $60 million in
variable rate debt.
o Clarifying that it intended to set a floating TIER of 1.64 for
Distribution.
o Clarifying, as requested by Chugach, that the refund cannot go below
the "floor" of the rates that were in place prior to Chugach's interim
increase.
o Clarifying that interest expense should be allocated based on net
plant.
o Authorizing Chugach to use the higher interest rate existing in January
and February of 2002 (before the March refinancing reduced interest
expense) in calculating any refunds.
In Order 30 the RCA also:
o Declined to change its ruling continuing the split TIER.
o Declined to change its ruling reducing overall TIER to 1.30 and
reducing Generation and Transmission (G&T) TIER to 1.10.
o Declined to change its ruling that rate case costs cannot be amortized
and recovered in rates.
The net impact of Order 30, as it modified Order 26, requires the
following:
o A refund of approximately $435 thousand in revenues collected in 2001.
o A refund of approximately $1.1 million in revenues collected in 2002.
The resulting provision for rate refund adjustment adjusts revenue
positively by $5.45 million in 2003.
o A refund of approximately $377 thousand in revenues collected in 2003.
o Chugach calculates, that based on the budgeted revenues and
expenditures, under Order 30, Chugach will have sufficient margins over
interest in 2003 to comply with the requirements of the Rate Covenants
in the Amended and Restated Indenture, the CoBank Master Loan Agreement
and the MBIA Reimbursement Agreement.
Docket U-01-108, Order No. 30 Appeal
On April 29, 2003, Chugach filed an appeal in Alaska Superior Court on two
issues. In Order No. 30 of this docket, the RCA reconsidered and reversed
its earlier decision and agreed with Chugach that requiring AFUDC/IDC as an
offset to long-term interest expense would cause under-recovery and should,
therefore, not be required. However, the specific language of the RCA's
order on reconsideration may limit its ruling to projects commenced and
concluded within the test year. This could cause under-recovery of project
costs over the life of the asset resulting in a confiscatory rate. Chugach
has filed an appeal as to this portion of the RCA's decision on
reconsideration in Order No. 30. In its compliance filing with the RCA,
Chugach revised the calculations used to develop rates and calculating
refunds in compliance with the RCA's orders. Chugach proposed rate and
refund calculations consistent with the rationale approved by the
Commission in Order 30, which if allowed by the RCA, would alleviate this
defect and moot the issue on appeal. If the RCA accepts Chugach's
compliance filing, Chugach will withdraw the appeal on this issue.
Chugach has also appealed the RCA's decision from Order No. 26, which the
RCA declined to reconsider, to modify Chugach's TIER of 1.10, from the
previously effective 1.15, for generation and transmission service and a
TIER of approximately 1.6 for distribution service. Chugach asserts that
such a disparity in TIER violates the requirements of AS 42.05.141(a)(3)
and AS 42.05.391 (a) in that the resulting rates are not just, fair and
reasonable and yield an unreasonable difference as to rates between
Chugach's retail and wholesale customers. Chugach further asserts that the
resulting rates grant an unreasonable preference or advantage to Chugach's
wholesale customers by creating an unreasonable prejudice or disadvantage
to its retail customers.
Results Of Operations
Current Year Quarter Versus Prior Year Quarter
Assignable margins increased by $5.9 million, or 166%, for the quarter
ended March 30, 2003, over the same quarter in 2002 primarily due to the
provision for rate refund adjustment that was made in March of 2003. That
increase to revenue was offset by a decrease to revenue due to lower retail
and wholesale kWh sales in the first quarter of 2003 due to an unusually
warmer winter. It was also offset by a decrease in fuel expense, purchased
power and interest expense, which is described below.
Operating revenues, which include sales of electric energy to retail,
wholesale and economy energy customers and other miscellaneous revenues,
increased by $1.7 million, or 3.4%, for the quarter ended March 31, 2003,
over the same quarter in 2002. The increase in revenues was due primarily
to a provision for rate refund adjustment that was made in March of 2003,
as well as increased economy energy sales to Golden Valley Electric
Association (GVEA). GVEA purchased more from Chugach in the first quarter
of 2003 as compared to the same quarter last year when they purchased more
from another provider. That increase was offset by lower kWh sales and a
decrease in fuel prices, resulting in decreased revenue collected through
the fuel surcharge cost recovery mechanism.
The following table represents kWh sales for the quarter ended March 31:
2003 2002
---- ----
Customer kWh KWh
Retail 310,612,397 313,327,560
Wholesale 291,100,159 298,440,519
Economy Energy 59,193,690 3,304,890
---------- ---------
Total 660,906,246 615,072,969
=========== ===========
Retail demand and energy rates and wholesale demand and energy rates
charged to HEA and MEA did not change in the first quarter of 2003 compared
to the first quarter of 2002. The interim rate increase authorized by the
RCA for all rate classes except small commercial and public street and
highway lighting in November 2001 was still in affect, awaiting the RCA's
approval of our Compliance Filing for the 2000 Test Year rate case.
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 $1.6 million, or 12.0%, for the quarter ended
March 31, 2003, compared to the same period in 2002 due to lower fuel
prices. Purchased power expense decreased by $1.9 million, or 35.8%, due to
a six-week outage of the Nikiski power plant, which received a controls
upgrade. Transmission expense increased by $318.5 thousand, or 36.4%, due
primarily to additional maintenance. Distribution, consumer
accounts/information and administrative, general and other expenses did not
materially change for the three-month period ended March 31, 2003.
Interest on long-term debt decreased by $2.2 million, or 26.9%, due to
lower interest rates. Interest charged to construction decreased by $41.8
thousand, or 27.9%, in the first quarter of 2003 compared to the same
period in 2002 due to less construction activity and lower interest rates.
Other interest expense decreased by $91.3 thousand, or 88.5%, from the
first quarter of 2002 due to decreased borrowing on the CoBank line of
credit in the first quarter of 2003.
Other nonoperating margins decreased by $273.2 thousand, or 54.7%, for the
quarter ended March 31, 2003, compared to the same period in 2002, due
primarily to the decrease in interest income due to funds received and
invested for a month as a result of the refinancing in the first quarter of
2002.
Financial Condition
Total assets decreased $14.3 million, or 2.5%, from December 31, 2002, to
March 31, 2003. The decrease was due in part to a $3.1 million, or 0.7%
decrease in net plant, caused primarily by the increase in accumulated
depreciation due to plant construction completed in 2002. The decrease was
also due to a $9.0 million, or 34.1% decrease in accounts receivable caused
by the payment of wholesale power invoices and the state of Alaska
relocation invoices that were accrued but not paid at December 31, 2002.
The decrease in total assets was also due to a $2.7 million, or 36.6%
decrease in cash and cash equivalents and a $1.1 million, or 3.8% decrease
in deferred charges caused by the first quarter's amortization of deferred
projects.
The decrease in total assets was offset by a $1.4 million, or 71.1%
increase in prepayments caused by increased insurance renewals.
Notable changes to total liabilities and equities include a $9.5 million,
or 7.9% increase in patronage capital due to the margin impact of the
provision for rate refund adjustment to revenue. There was also an increase
of $1.1 million, or 3.1% in fuel cost payable caused by the over-collection
of the prior quarter's fuel cost adjustment.
These increases were offset by a $5.1 million, or 1.3% decrease in
long-term obligations due to an installment payment of the 2002 Series B
Bond and an installment payment of CoBank 3. There was a $6.1 million, or
100.0% decrease in short-term obligations caused by the collection of
outstanding accounts receivable that was collected and used to pay off the
line of credit. There was also a $3.5 million, or 45.1% decrease of
accounts payable caused by the payment of invoices that were accrued at
December 31, 2002. There was also a $5.1 million, or 72.6% decrease in the
provision for rate refund caused by the adjustment calculated by RCA Order
30. There was also a $4.4 million, or 68.7% decrease in accrued interest
due to the semi-annual interest payment on the 2001 Series A Bonds and the
2002 Series A Bonds in the first quarter. Other current liabilities
decreased $570.0 thousand, or 28.1% due to the payment of the annual gross
receipts tax and the quarterly RCA tax.
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 $20 million line of credit with CoBank. At March
31, 2003, there was no outstanding balance with NRUCFC or CoBank.
Chugach also has a term loan facility with CoBank. Loans made under this
facility are evidenced by promissory notes governed by the Master Loan
Agreement, which became effective on January 22, 2003. At March 31, 2003,
Chugach had the following promissory notes outstanding under this facility:
Interest rate at March Principal Payment
Promissory Note Principal balance 31, 2003 Maturity Date Dates
CoBank 2 $10,000,000 7.76% 2005 2005
CoBank 3 $21,086,330 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 $64,586,330
On January 22, 2003, Chugach and CoBank finalized a new Master Loan
Agreement pursuant to the existing term loan facility that was converted
from secured to unsecured debt and the obligations represented by the
outstanding bonds held by CoBank were converted into promissory notes
governed by the new Master Loan Agreement. Chugach's existing mortgage
indenture was replaced in its entirety by an Amended and Restated Indenture
dated April 1, 2001. All liens and security interests imposed under the
indenture were terminated and all outstanding Chugach bonds (including New
Bonds of 2001 Series A, 2002 Series A and 2002 Series B) became unsecured
obligations governed by the terms of the Amended and Restated Indenture.
Capital construction in 2003 is estimated at $31.1 million. At March 31,
2003, approximately $3.9 million had been expended. Capital improvement
expenditures are expected to increase in the upcoming second quarter as the
construction season begins.
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 2003 and thereafter.
Outlook
Chugach reorganized its management and structure in June 2002 when the
longstanding Chief Financial Officer (CFO), Evan J. Griffith, 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.
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
Chugach 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 us in consultation with state and federal
agencies and approved by FERC. In 2000, we sampled sediments and fish
collected from Kenai Lake and other waters. While low levels of PCBs were
found in some sediment samples taken near the plant, no pathway from
sediment to fish was established. While the levels of PCBs in fish from
Kenai Lake were similar to levels found in fish from other lakes within the
region, we conducted additional sampling and analysis of fish in Kenai Lake
and other waters and filed our final report dated April 1, 2002, with FERC,
which analyzed the results of the sampling. Based on these analyses, we
concluded that no further PCB sampling and analysis in Kenai Lake was
necessary. In a letter dated June 13, 2002, FERC informed us that its
review of the report supported our conclusions and agreed we were not
required to conduct further PCB sampling and analysis in Kenai Lake. In its
recent order in our general rate case, Order U-01-108(26), the Regulatory
Commission of Alaska (RCA), permitted the costs associated with the
overhaul and the PCB remediation to be recovered through rates.
Consequently, management believes the costs of the PCB remediation and
studies will have no material impact on our financial condition or results
of operations. We will be filing a request in 2003 with the RCA to allow us
to recover through rates the costs we incurred to investigate the presence
of PCBs in Kenai Lake.
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 March 31, 2003, 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 following table provides information regarding auction
dates and rates in 2003.
Auction Date Interest Rate
January 29, 2003 1.40%
February 26, 2003 1.35%
March 26, 2003 1.32%
April 23, 2003 1.33%
The following table provides information regarding cash flows for principal
payments on total debt by maturity date (dollars in thousands) as of March
31, 2003.
Fair
Total Debt* 2003 2004 2005 2006 2007 Thereafter Total Value
- ----------- ---- ---- ---- ---- ---- ---------- ----- -----
Fixed rate $452 $945 $11,031 $1,126 $1,229 $319,803 $334,586 $366,488
Average
interest rate 5.60% 5.60% 7.56% 5.60% 5.60% 6.27% 6.31%
Variable rate $0 $4,600 $4,900 $5,200 $5,500 $35,500 $55,700 $55,700
Average
interest rate -- 1.33% 1.33% 1.33% 1.33% 1.33% 1.33%
* 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.
Item 4. Controls and Procedures
The Association's management, including the Chief Executive Officer and the
Chief Financial Officer, evaluated the Company's disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act
of 1934) within 90 days prior to the filing date of this quarterly report.
Based on this evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the
Association's internal controls that could significantly affect its
disclosure controls and procedures since the date of the evaluation.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Matanuska Electric Association, Inc., v. Chugach Electric Association,
Inc., Superior Court Case No. 3AN-99-8152 Civil
This action is 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 our sale of power to Matanuska Electric
Association, Inc. (MEA) during that time. MEA asserted we breached that
contract by failing to provide information, by failing to properly manage
our long-term debt, and by failing to bring our base rate action to a Joint
Committee before presenting it to the RCA. The committee is defined in the
power sales contract and consists of one MEA and two Chugach board members.
All of MEA's claims have been dismissed. On April 29, 2002, MEA appealed
the Superior Court's decisions relating to our financial management and our
failure to bring our base rate action to the joint committee before filing
with the RCA to the Alaska Supreme Court. We cross-appealed the Superior
Court's decision not to dismiss the financial management claim on
jurisdictional and res judicata grounds. Oral argument was heard by the
Supreme Court on April 15, 2003. Management is uncertain as to the outcome
and expects a decision within six to twelve months.
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
At the Chugach annual membership meeting held on April 24, 2003, the
following amendments to the Bylaws were passed:
Title: The titles of Board officers and the General Manager were changed to
reflect the actual functional duties and responsibilities of those
individuals.
Bonds of Officers: Chugach can cover the Board Treasurer as well as any
other officer or agent of Chugach responsible for the custody of its funds
or property by insurance, as well as, or in lieu of, a bond.
Compensation: Directors shall receive a fee and expenses, to include travel
expenses, for each day of attendance at any meeting representing Chugach in
an official capacity. The Board of Directors will have the authority to set
the fee amount.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Bylaws of the Registrant (as amended April 24, 2003).
Amendment to Line of Credit Agreement between the Registrant
and CoBank, ACB dated December 27, 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.
(b) Reports on Form 8-K:
Reference is made to the January 22, 2003, 8K, which discussed
a Master Loan Agreement that Chugach and CoBank entered into
dated December 27, 2002.
Reference is made to the January 31, 2003, 8K, which discussed
Order No. 26 that Chugach received from the RCA on February 6,
2003, concerning Chugach's 2000 Test Year rate case.
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
CHUGACH ELECTRIC ASSOCIATION, INC.
By: /s/ Evan J. Griffith
Evan J. Griffith
Chief Executive Officer
Date: May 14, 2003
By: /s/ Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer
Date: May 14, 2003
EXHIBITS
Listed below are the exhibits, which are filed as part of this Report:
Exhibit Number Description
3.2 Bylaws of the Registrant (as amended April 24, 2003)
10.44.8 Amendment to Line of Credit Agreement
between the Registrant and CoBank, ACB
dated December 27, 2002
99.1 Certification of Principal Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Principal Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Evan J. Griffith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chugach Electric
Association, Inc.; 2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report; 3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this quarterly
report; 4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date; 5. The registrant's other certifying
officer and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and 6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
/s/ Evan J. Griffith
Evan J. Griffith
Chief Executive Officer
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael R. Cunningham, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chugach Electric
Association, Inc.; 2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by
this quarterly report; 3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this quarterly
report; 4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date; 5. The registrant's other certifying
officer and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and 6. The registrant's other certifying officer and I have
indicated in this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 14, 2003
/s/ Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer