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 March 31, 2004
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 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, 2004
NONE NONE
Page Number
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 2
Balance Sheets, March 31, 2004 and December 31, 2003 3
Statements of Revenues, Expenses and Patronage Capital, Three
Months Ended March 31, 2004 and 2003 5
Statements of Cash Flows, Three Months Ended March 31, 2004
and 2003 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 5
Item 4. Controls and Procedures 1 7
PART II OTHER INFORMATION
Item 1. Legal Proceedings 1 7
Item 2. Changes in Securities and Use of Proceeds 1 8
Item 3. Defaults Upon Senior Securities 1 8
Item 4. Submission of Matters to a Vote of Security Holders 1 8
Item 5. Other Information 1 8
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)
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, 2004, follow:
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
(Unaudited)
Assets March 31, 2004 December 31, 2003
------ -------------- -----------------
Utility plant:
Electric plant in service $ 746,270,821 $ 744,260,390
Construction work in progress 14,389,313 16,560,438
---------- ----------
760,660,134 760,820,828
Less accumulated depreciation (296,779,411) (293,371,966)
------------- -------------
463,880,723 467,448,862
Other property and investments, at cost:
Nonutility property 3,550 3,550
Investments in associated organizations 11,389,061 11,381,796
---------- ----------
11,392,611 11,385,346
Current assets:
Cash and cash equivalents 9,820,288 11,185,086
Cash-restricted construction funds 490,044 488,846
Special deposits 222,163 222,163
Accounts receivable, net 17,818,335 18,812,199
Fuel cost recovery 421,923 2,032,730
Materials and supplies 23,443,066 21,888,794
Prepayments 2,175,516 1,458,649
Other current assets 495,574 357,265
------- -------
54,886,909 56,445,732
Deferred charges 20,769,650 23,511,563
---------- ----------
Total Assets $ 550,929,893 $ 558,791,503
============= =============
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
(Continued)
(Unaudited)
Liabilities and Equities March 31, 2004 December 31, 2003
------------------------ -------------- -----------------
Equities and margins:
Memberships $ 1,165,593 $ 1,155,818
Patronage capital 130,637,377 126,341,413
Other 6,711,607 6,718,891
--------- ---------
138,514,577 134,216,122
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 46,200,000 51,100,000
National Bank for Cooperatives Bonds payable 62,696,402 63,189,179
---------- ----------
378,896,402 384,289,179
Current liabilities:
Current installments of long-term obligations 5,886,277 5,545,000
Accounts payable 3,612,555 7,676,906
Provision for rate refund 248,668 671,071
Consumer deposits 1,810,657 1,834,752
Accrued interest 1,858,086 6,165,790
Salaries, wages and benefits 5,197,909 4,886,600
Fuel 10,624,910 9,006,758
Other current liabilities 1,053,249 785,760
--------- -------
30,292,311 36,572,637
Deferred credits 3,226,603 3,713,565
--------- ---------
Total Liabilities and Equities $ 550,929,893 $ 558,791,503
============= =============
See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
(Unaudited)
Three months ended March
2004 2003
---- ----
Operating revenues $51,644,941 $50,239,007
Operating expenses:
Fuel 16,389,582 11,403,893
Power production 3,442,201 2,724,933
Purchased power 3,953,490 3,337,477
Transmission 1,740,561 1,194,608
Distribution 2,578,535 2,827,302
Consumer accounts/Information expense 1,427,359 1,401,666
Administrative, general and other 5,532,271 5,249,227
Depreciation and amortization 7,046,692 7,014,978
--------- ---------
Total operating expenses 42,110,691 35,154,084
Interest expense:
On long-term obligations 5,441,653 5,880,594
On short-term obligations 0 11,901
Charged to construction-credit (89,432) (107,879)
-------- ---------
Net interest expense 5,352,221 5,784,616
--------- ---------
Net operating margins 4,182,029 9,300,307
Nonoperating margins:
Interest income 89,034 86,563
Other 24,901 68,135
Property gain 0 71,219
- ------
Total nonoperating margins 113,935 225,917
------- -------
Assignable margins 4,295,964 9,526,224
--------- ---------
Patronage capital at beginning of period 126,341,413 120,148,502
Retirement of capital credits and estate
Payments (0) (60,208)
--- --------
Patronage capital at end of period $ 130,637,377 $ 129,614,518
============= =============
See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC.
Statement of Cash Flows
(Unaudited)
Three months ended
March 31
2004 2003
---- ----
Cash flows from operating activities:
Assignable margins $4,295,964 $9,526,224
Adjustments to reconcile assignable margins to net cash (used in) provided by
operating activities:
Provision for rate refund 0 (5,117,448)
Depreciation and amortization 7,944,026 8,377,586
Capitalization of interest (103,907) (122,881)
Property gains 0 (71,219)
Other 33 55
Changes in assets and liabilities:
(Increase) decrease in assets:
Fuel cost recovery 1,610,807 0
Accounts receivable 993,864 8,995,215
Prepayments (716,867) (1,389,708)
Materials and supplies (1,554,272) (12,942)
Deferred charges, net 1,844,579 (291,603)
Other (138,309) (140,514)
Increase (decrease) in liabilities:
Accounts payable (4,064,351) (3,479,935)
Provision for rate refund (422,403) 0
Fuel payable 0 1,113,073
Consumer deposits (24,095) (17,751)
Accrued interest (4,307,704) (4,385,524)
Deferred credits (960,163) (638,160)
Other 2,196,950 (705,670)
--------- ---------
Net cash provided by operating activities 6,594,152 11,638,798
Cash flows from investing activities:
Extension and replacement of plant (3,374,646) (3,708,553)
Investments in associated organizations (7,298) (35,413)
------- --------
Net cash used in investing activities (3,381,944) (3,743,966)
Cash flows from financing activities:
Short-term obligations 0 (6,081,250)
Proceeds from long-term obligations 0 0
Repayments of long-term obligations (5,051,500) (4,713,670)
Retirement of patronage capital 0 (60,208)
Other 474,494 292,340
------- -------
Net cash used in financing activities (4,577,006) (10,562,788)
Net increase (decrease) in cash and cash equivalents (1,364,798) (2,667,956)
Cash and cash equivalents at beginning of period $11,185,086 $7,284,292
- ------------------------------------------------ ----------- ----------
Cash and cash equivalents at end of period $9,820,288 $4,616,336
- ------------------------------------------ ========== ==========
Supplemental disclosure of cash flow information - interest expense paid, net of $5,489,717 $10,170,140
========== ===========
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 (SEC) unless otherwise noted. Users of interim financial
information are encouraged to refer to the footnotes contained in Chugach's
Form 10-K when reviewing interim financial results. The accompanying
unaudited interim financial statements reflect all adjustments, 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 2003 financial statements
to conform to the 2004 presentation.
2. Lines of credit
Chugach maintains a line of credit of $20 million with CoBank, ACB
(CoBank). The CoBank line of credit expires December 31, 2004, subject to
renewal at the discretion of the parties. At March 31, 2004, 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, 2004,
there was no outstanding balance on this line of credit. The NRUCFC line of
credit expires October 15, 2007.
3. 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 (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 Regulatory Commission of Alaska
(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 held April 15, 2003, before the Alaska Supreme
Court. Management is uncertain as to the outcome and expects a decision
very soon.
4. Critical Accounting Policies
Our accounting and reporting policies comply with accounting principles
generally accepted in the United States of America. 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.
Critical accounting policies are those policies that management believes
are the most important to the portrayal of Chugach's financial condition
and results of its operations, and require management's most difficult,
subjective, or complex judgments, often as a result of the need to make
estimates about matters that are inherently uncertain. Most accounting
policies are not considered by management to be critical accounting
policies. Several factors are considered in determining whether or not a
policy is critical in the preparation of financial statements. These
factors include, among other things, whether the estimates are material to
the financial statements, the nature of the estimates, the ability to
readily validate the estimates with other information including third
parties or available prices, and sensitivity of the estimates to changes in
economic conditions and whether alternative accounting methods may be
utilized under accounting principles general accepted in the United States
of America. For all of these policies management cautions that future
events rarely develop exactly as forecast, and the best estimates routinely
require adjustment. Management has discussed the development and the
selection of critical accounting policies with the Chugach Audit Committee.
The following policies are considered to be critical accounting policies
for the quarter ending March 31, 2004.
Electric Utility Regulation
Chugach is subject to regulation by the RCA. The RCA sets the rates Chugach
is permitted to charge customers based on allowable costs. As a result,
Chugach applies Financial Accounting Standards Board (FASB) Statement No.
71, Accounting for the Effects of Certain Types of Regulation. Through the
ratemaking process, the regulators may require the inclusion of costs or
revenues in periods different than when they would be recognized by a
non-regulated company. This treatment may result in the deferral of
expenses and the recording of related regulatory assets based on
anticipated future recovery through rates or the deferral of gains or
creation of liabilities and the recording of related regulatory
liabilities. The application of Statement No. 71 has a further effect on
Chugach's financial statements as a result of the estimates of allowable
costs used in the ratemaking process. These estimates may differ from those
actually incurred by the Company; therefore, the accounting estimates
inherent in specific costs such as depreciation and pension and
post-retirement benefits have less of a direct impact on Chugach's results
of operations than they would on a non-regulated company. Management
reviews the ultimate recoverability of these regulatory assets and
liabilities based on applicable regulatory guidelines. However, adverse
legislation and judicial or regulatory actions could materially impact the
amounts of such regulatory assets and liabilities and could adversely
impact Chugach's financial statements.
Financial Instruments and Hedging
Chugach used U.S. Treasury forward rate lock agreements to hedge expected
interest rates on debt. We accounted for the agreements under Statement of
Financial Accounting Standards (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, which was
authorized by the RCA in Order U-01-108(26).
Critical estimates also include provision for rate refunds and allowance
for doubtful accounts. Actual results could differ from those estimates.
5. New Accounting Standards
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This
Statement established standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. Many of those instruments were previously classified as equity.
Some of the provisions of this Statement are consistent with the current
definition of liabilities in FASB Concepts Statement No. 6, Elements of
Financial Statements. The remaining provisions of this Statement are
consistent with FASB's proposal to revise that definition to encompass
certain obligations that a reporting entity can or must settle by issuing
its own equity shares depending on the nature of the relationship
established between the holder and the issuer. While FASB still plans to
revise that definition through an amendment to Concepts Statement 6, FASB
decided to defer issuing that amendment until it has concluded its
deliberations on the next phase of this project. That next phase will deal
with certain compound financial instruments including puttable shares,
convertible bonds, and dual-indexed financial instruments. Chugach
implemented SFAS No. 150 effective January 1, 2004, and management does not
anticipate any material impacts to the 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.
Regulatory Matters
Docket U-01-108
Chugach filed a general rate case on July 10, 2001, based on the 2000 test
year expenses.
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.
Three intervenors participated in the rate case. A hearing was held in
November and December of 2002.
Between February 6, 2003, and January 27, 2004, the RCA issued Order Nos.
26 through 38 containing various rulings on Chugach's rate case.
As compared to prior-approved permanent rates, Chugach's final approved
rates on a system basis increased 0.07 percent, consisting of an increase
of 3.5 percent to retail customers and a decrease of 7.9 percent to
wholesale customers. These results were implemented on November 10, 2003.
Payment of Refunds
On November 10, 2003, Chugach issued refunds in the following amounts,
pursuant to Superior Court Order dated October 31, 2003, for demand and
energy usage between September 2001 and September 2003:
HEA $1,762,774
MEA $2,901,290
Seward $ 103,307
Chugach issued additional refund amounts totaling $70,894 to HEA and
$162,015 to MEA on December 29, 2003, for refund adjustments related to
Chugach's pre-refinancing activity that took place in February 2002.
On May 12, 2004, the RCA issued Order No. 39 establishing a term and
interest rate on refunds paid by Chugach to its wholesale customers
reflecting interest on the original refund amounts. Preliminary
calculations result in interest payments of less than $100 thousand.
Chugach issued refunds totaling $0.6 million to its Small General Service
class between March 19 and April 19, 2004, for customer bills rendered
between January 31, 2003, and November 10, 2003. A final report documenting
the Small General Service refund process was submitted to the RCA on April
26, 2004.
Appeal of RCA Orders
Chugach filed timely appeals of RCA Orders 26, 30 and 33. In its
Appellant's brief dated February 18, 2004, Chugach asserted that the RCA's
orders contained three errors:
o The split TIER decision unduly discriminates against retail customers;
o Interest expense was allocated on the basis of plant associated with
G&T and Distribution rather than on the basis of debt associated with
each function; and
o Chugach is entitled to include all of its interest expense in rates and
the RCA's offset for Interest During Construction was not justified
because nearly all of the plant that produced the IDC was in service by
the time the new rate went into effect.
Expected responses from MEA, HEA, and Seward to Chugach's Appellants brief
are due on May 20, 2004.
Chugach's wholesale customer, MEA, also appealed the RCA's orders. In its
Appellant's brief, MEA argued that the RCA's decision to normalize
Chugach's variable rate debt at 3.8 percent and to authorize the
corresponding interest expense constitutes error based on the historic
rates prevailing for Chugach's variable rate debt. Chugach will file an
Appellees brief in response on May 20, 2004.
Results Of Operations
Current Year Quarter Versus Prior Year Quarter
Assignable margins decreased by $5.2 million, or 55.0%, for the quarter
ending March 30, 2004, over the same quarter in 2003 primarily due to a
$5.2 million reversal recorded in March of 2003 of a $7.1 million provision
for rate refund recorded in 2002. There was also an increase in power
production and transmission expense although these expenses were offset by
a decrease in distribution and net interest expense described as follows:
Operating revenues, which include sales of electric energy to retail,
wholesale and economy energy customers and other miscellaneous revenues,
increased by $1.4 million, or 2.8%, for the quarter ending March 31, 2004,
over the same quarter in 2003, which included the $5.2 million provision
for rate refund reversal discussed above. The increase in revenues would
have been $6.6 million, or 14.7%, if the provision for rate refund recorded
in 2003 was excluded. The increase in revenues, adjusted for the $5.2
million provision reversal, was due to increased kWh sales and an increase
in fuel prices, resulting in a 40% increase in revenue collected through
the fuel surcharge cost recovery mechanism for the three-month period ended
March 31, 2004, over the same period in 2003.
The following table represents kWh sales for the quarter ending March 31:
%
2004 2003 Change
---- ---- ------
Customer kWh kWh
Retail 332,954,124 310,612,397 7%
Wholesale 310,766,791 291,100,159 7%
Economy Energy 59,846,760 59,193,690 1%
---------- ----------
Total 703,567,675 660,906,246
Retail demand and energy rates increased 0.24% in the first quarter of 2004
compared to the first quarter of 2003 due to RCA Order No. 33 in Docket
U-01-108. Wholesale demand and energy rates charged to HEA decreased by
10.9%, while MEA's rates decreased 12.4% due to the same order. Demand and
energy rates charged to Seward Electric System (SES) also decreased 9.9%
due to Order 33.
Fuel expense increased by $5.0 million, or 43.7%, for the quarter ending
March 31, 2004, compared to the same period in 2003 due to higher fuel
prices. Power production expense also increased $717.3 thousand, or 26.3%,
for the three months ending March 31, 2004, compared to the same period in
2003 due to an expense adjustment to a previously capitalized maintenance
project and to increased maintenance expense at Beluga in the first quarter
of 2004. Purchased power expense also increased $616.0 thousand, or 18.5%,
due to a six-week outage of the Nikiski power plant during 2003, returning
to a normal purchase schedule in 2004. Transmission expense increased by
$546.0 thousand, or 45.7%, and distribution expense decreased $248.8
thousand, or 8.8%, due primarily to the timing of transmission maintenance
being performed in the first quarter of 2004 while distribution maintenance
will be performed later in the year. Consumer accounts/information and
administrative, general and other expenses did not materially change for
the three-month period ending March 31, 2004.
Interest on long-term debt decreased by $438.9 thousand, or 7.5%, due to
lower interest rates. Interest charged to construction decreased by $18.4
thousand, or 17.1%, in the first quarter of 2004 compared to the same
period in 2003 due to lower interest rates and less construction work in
progress. Other interest expense decreased by $11.9 thousand, or 100.0%,
from the first quarter of 2003 due to decreased borrowing on the CoBank
line of credit in the first quarter of 2004.
Other non-operating margins decreased by $112.0 thousand, or 49.6%, for the
quarter ending March 31, 2004, compared to the same period in 2003, due
primarily to the decrease in property gain from several gain on disposals
of property in 2003 and due to lower interest rates on allowance for funds
used during construction (AFUDC) in the first quarter of 2004.
Financial Condition
Total assets decreased $7.9 million, or 1.4%, from December 31, 2003, to
March 31, 2004. The decrease was due in part to a $3.6 million, or 0.7%,
decrease in net plant, caused by the $3.4 million, or 1%, increase in
accumulated depreciation due to a quarter of depreciation, which was offset
by the retirement and replacement of transmission and distribution
substation equipment. The decrease in total assets was also due to a $1.4
million, or 12.2%, decrease in cash and cash equivalents and a $993.9
thousand, or 5.3%, decrease in accounts receivable caused by the collection
on receivables that were accrued but not paid at December 31, 2003. The
decrease was also due to a $1.6 million, or 79.2%, decrease in fuel cost
recovery caused by the collection of the previous quarters fuel cost
through the fuel surcharge mechanism. The decrease was also due to a $2.7
million, or 11.7%, decrease in deferred charges caused by the first
quarter's amortization of deferred projects and the transfer of software
implementation costs from deferred charges to general plant.
These decreases were offset by a $1.6 million, or 7.1%, increase in
materials and supplies caused by the purchase of generation inventory items
in preparation of scheduled maintenance projects and a $716.9 thousand, or
49.2%, increase in prepayments caused by the annual renewal of insurance
policies for 2004.
Notable changes to total liabilities and equities include a $5.4 million,
or 1.4%, decrease in long-term obligations caused by the installment
payments of the 2002 Series B Bond and the CoBank 3 Bond. Accounts payable
also decreased $4.1 million, or 52.9%, caused by the payment of invoices
that were accrued at December 31, 2003. There was also a $4.3 million, or
69.9%, decrease in accrued interest caused by the semi-annual interest
payment on the 2001 and 2002 Series A Bonds in the first quarter.
These decreases were offset by a $4.3 million, or 3.2%, increase in
patronage capital due to the margins generated in the first quarter of
2004, as well as a $1.6 million, or 18.0%, increase in fuel due to higher
fuel prices.
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, 2004, 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, 2004,
Chugach had the following promissory notes outstanding under this facility:
Interest rate at March Principal Payment
Promissory Note Principal balance 31, 2004 Maturity Date Dates
--------------- ----------------- -------- ------------- -----
CoBank 2 $10,000,000 7.76% 2005 2005
CoBank 3 $20,634,830 2.50% 2022 2003 - 2022
CoBank 4 $23,047,849 2.50% 2022 2003 - 2022
CoBank 5 $10,000,000 2.50% 2012 2002 - 2012
Total $63,682,679
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 2004 is estimated at $32.7 million. At March 31,
2004, approximately $3.4 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 2004 and thereafter.
Outlook
Chugach is currently investigating future resource needs. An Integrated
Resource Plan (IRP) is being developed to study a variety of scenarios that
includes the possibility of operating without one or more of our current
wholesale customers.
On March 17, 2004, the Chugach Board of Directors authorized the Chief
Executive Officer (CEO) or his designee to enter into a Joint Action Agency
Agreement (JAA). The JAA will provide a structure that will allow railbelt
utilities to work together in developing the capability to own and operate
power projects jointly, as well as to receive and operate state-owned
facilities.
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.
Cooper Lake
Chugach discovered polychlorinated biphenyls (PCBs) in paint, caulk and
grease at the Cooper Lake Hydroelectric plant during initial phases of a
turbine overhaul. A FERC- approved plan, prepared in consultation with the
Environmental Protection Agency (EPA), was implemented to remediate the
PCBs in the plant. In an order in Chugach's general rate case, Order
U-01-108(26), the RCA permitted the costs associated with the overhaul and
the PCB remediation to be recovered through rates.
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
The following table provides information regarding auction dates and rates
in 2004.
Auction Date Interest Rate
January 28, 2004 1.12%
February 25, 2004 1.09%
March 24, 2004 1.10%
April 21, 2004 1.11%
The following table provides information regarding cash flows for principal
payments on total debt by maturity date (dollars in thousands) as of March
31, 2004.
Fair
Total Debt* 2004 2005 2006 2007 Thereafter Total Value
- ----------- ---- ---- ---- ---- ---------- ----- -----
Fixed rate $0 $10,000 $0 $0 $270,000 $280,000 $319,240
Average
interest rate 0.00% 7.76% 0.00% 0.00% 6.39% 6.44%
Variable rate $494 $5,931 $6,326 $11,729 $80,304 $104,783 $104,783
Average
interest rate 2.50% 1.36% 1.36% 1.85% 1.89% 1.82%
* 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
As of the end of the period covered by this report, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures. Our principal executive (CEO) and principal financial officer
(CFO) supervised and participated in this evaluation. Based on this
evaluation, our CEO and CFO each concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
required to be included in our periodic reports to the Securities and
Exchange Commission. The design of any system of controls is based in part
upon various assumptions about the likelihood of future events, and there
can be no assurance that any of our plans, products, services or procedures
will succeed in achieving their intended goals under future conditions. In
addition, there have been no significant changes in our internal controls
or in other factors known to management that could significantly affect our
internal controls subsequent to our most recent evaluation. We have found
no facts that would require us to take any corrective actions with regard
to significant deficiencies or material weaknesses.
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 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 held April 15, 2003, before the Alaska Supreme Court.
Management is uncertain as to the outcome and expects a decision very soon.
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 29, 2004, the
following amendment to the Bylaws was passed:
Term limits: The term limit that restricted a director to serving three
consecutive three-year terms was eliminated.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Bylaws of the Registrant (as amended April 29, 2004).
Employment Agreement between the Registrant and Evan J.
Griffith dated effective April 21, 2004.
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.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended March
31, 2004.
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, 2004
By: /s/ Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer
Date: May 14, 2004
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 29, 2004)
10.52 Employment Agreement between the Registrant and Evan J. Griffith
dated effective April 21, 2004.
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