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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
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 Electron 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, 2005
NONE NONE
Page Number
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 2
Balance Sheets, March 31, 2005 and December 31, 2004 3
Statements of Revenues, Expenses and Patronage Capital, Three
Months Ended March 31, 2005 and 2004 5
Statements of Cash Flows, Three Months Ended March 31, 2005 and 2004 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 1 1
Item 3. Quantitative and Qualitative Disclosures About Market Risk 1 5
Item 4. Controls and Procedures 1 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings 1 7
Item 2. Unregistered Sales of Equity 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 9
Item 6. Exhibits 1 9
Signatures 2 0
Exhibits 2 1
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Statements in this report that do not relate to historical facts, including
statements relating to future plans, events or performance, are
forward-looking statements that involve risks and uncertainties. Actual
results, events or performance may differ materially. Readers are cautioned
not to place undue reliance on these forward-looking statements, that speak
only as of the date of this report and the accuracy of which is subject to
inherent uncertainty. Chugach Electric Association, Inc. (Chugach)
undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances that may
occur after the date of this report or the effect of those events or
circumstances on any of the forward-looking statements contained in this
report, except as required by law.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited financial statements and notes to financial statements of
Chugach as of and for the quarter ended March 31, 2005, follow:
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Unaudited)
Assets March 31, 2005 December 31, 2004
------ -------------- -----------------
Utility plant:
Electric plant in service $ 751,141,360 $ 748,484,527
Construction work in progress 25,671,820 25,278,388
---------- ----------
Total utility plant 776,813,180 773,762,915
Less accumulated depreciation (312,896,779) (305,932,001)
------------- -------------
Net utility plant 463,916,401 467,830,914
Other property and investments, at cost:
Nonutility property 24,461 24,461
Investments in associated organizations 11,769,054 11,768,457
---------- ----------
Total other property and investments 11,793,515 11,792,918
Current assets:
Cash and cash equivalents 6,739,612 10,465,004
Special deposits 217,191 217,191
Accounts receivable, net 21,265,820 23,740,383
Materials and supplies 23,832,689 23,691,509
Prepayments 1,587,807 805,670
Other current assets 380,196 260,115
------- -------
Total current assets 54,023,315 59,179,872
Deferred charges, net 20,466,694 20,550,883
---------- ----------
Total Assets $ 550,199,925 $ 559,354,587
============= =============
CHUGACH ELECTRIC ASSOCIATION, INC.
BALANCE SHEETS
(Continued)
(Unaudited)
Liabilities and Equities March 31, 2005 December 31, 2004
------------------------ -------------- -----------------
Equities and margins:
Memberships $ 1,212,193 $ 1,202,538
Patronage capital 135,553,458 130,750,269
Other 7,090,184 7,045,992
--------- ---------
Total equities and margins 143,855,835 138,998,799
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 41,000,000 46,200,000
National Bank for Cooperatives promissory notes payable 46,619,958 47,157,786
---------- ----------
Total long-term obligations 357,619,958 363,357,786
Current liabilities:
Current installments of long-term obligations 16,276,444 15,931,393
Accounts payable 4,116,785 7,890,172
Consumer deposits 1,969,571 1,947,511
Fuel cost over-recovery 2,116,461 2,714,345
Accrued interest 1,917,747 6,201,769
Salaries, wages and benefits 5,807,177 5,530,740
Fuel 12,967,271 12,919,623
Other current liabilities 1,462,719 1,416,400
--------- ---------
Total current liabilities 46,634,175 54,551,953
Deferred credits 2,089,957 2,446,049
--------- ---------
Total Liabilities and Equities $ 550,199,925 $ 559,354,587
============= =============
See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
(Unaudited)
Three months ended March 31
2005 2004
---- ----
Operating revenues $57,212,034 $51,644,941
Operating expenses:
Fuel 20,492,023 16,389,582
Power production 3,442,780 3,442,201
Purchased power 5,275,922 3,953,490
Transmission 1,602,140 1,740,561
Distribution 2,819,605 2,578,535
Consumer accounts 1,355,391 1,427,359
Administrative, general and other 4,865,561 5,532,271
Depreciation 7,121,860 7,046,692
--------- ---------
Total operating expenses 46,975,282 42,110,691
Interest expense:
On long-term obligations 5,675,686 5,441,653
On short-term obligations 2,237 0
Charged to construction-credit (191,718) (89,432)
--------- --------
Net interest expense 5,486,205 5,352,221
--------- ---------
Net operating margins 4,750,547 4,182,029
Nonoperating margins:
Interest income 121,694 89,034
Capital credits, patronage dividends and other 35,441 24,901
Total nonoperating margins 157,135 113,935
------- -------
Assignable margins 4,907,682 4,295,964
========= =========
Patronage capital at beginning of period 130,750,269 126,341,413
Retirement of capital credits and estate payments (104,493) 0
Patronage capital at end of period $ 135,553,458 $ 130,637,377
============= =============
See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
(Unaudited)
Three months ended March 31
2005 2004
---- ----
Operating activities:
Assignable margins $4,907,682 $4,295,964
Adjustments to reconcile assignable margins to net cash provided by operating
activities:
Depreciation and amortization 7,841,322 7,944,026
Capitalization of interest (226,563) (103,907)
Other (597) 33
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable 2,474,563 993,864
Fuel cost recovery 0 1,610,807
Materials and supplies (141,180) (1,554,272)
Prepayments (782,137) (716,867)
Other assets (120,081) (138,309)
Deferred charges (635,272) 1,844,579
Increase (decrease) in liabilities:
Accounts payable (3,773,387) (4,064,351)
Provision for rate refund 0 (422,403)
Consumer deposits 22,060 (24,095)
Fuel cost payable (597,884) 0
Accrued interest (4,284,022) (4,307,704)
Salaries, wages and benefits 276,437 311,309
Fuel 47,648 1,618,152
Other liabilities 46,319 267,489
Deferred credits (38,458) (960,163)
-------- ---------
Net cash provided by operating activities 5,016,450 6,594,152
Investing activities:
Extension and replacement of plant (2,980,785) (3,374,646)
Purchase of Investments in associated organizations 0 (7,298)
- -------
Net cash used in investing activities (2,980,785) (3,381,944)
Financing activities:
Net transfer of restricted construction funds 0 (1,198)
Repayments of long-term obligations (5,392,777) (5,051,500)
Memberships and donations received 53,847 2,491
Retirement of patronage capital (104,493) 0
Net receipts (refunds) of consumer advances for construction (317,634) 473,201
--------- -------
Net cash used in financing activities (5,761,057) (4,577,006)
Net change in cash and cash equivalents (3,725,392) (1,364,798)
Cash and cash equivalents at beginning of period $10,465,004 $11,185,086
- ------------------------------------------------ ----------- -----------
Cash and cash equivalents at end of period $6,739,612 $9,820,288
- ------------------------------------------ ========== ==========
Supplemental disclosure of cash flow information - interest expense paid, including $9,770,227 $9,659,925
========== ==========
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 of normal
and recurring nature, 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 2004 financial statements
to conform to the 2005 presentation.
2. Lines of credit
Chugach maintains a line of credit of $20 million with CoBank, ACB
(CoBank). The CoBank line of credit expires June 30, 2005, subject to
annual renewal at the discretion of the parties. At March 31, 2005, there
was no outstanding balance on this line of credit, however, on March 17,
2005, we borrowed $1.5 million as well as an additional $1.0 million on
March 18, 2005. That balance was subsequently paid back on March 25, 2005.
At March 31, 2005, the borrowing rate would have been 4.36% and at December
31, 2004, the borrowing rate would have been 3.80%. 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, 2005,
there was no outstanding balance on this line of credit and it was not
utilized during the first quarter of 2005. At March 31, 2005, the borrowing
rate would have been 4.50% and at December 31, 2004, the borrowing rate
would have been 4.05%. The NRUCFC line of credit expires October 15, 2007.
3. 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 Power Sales Agreement between
Chugach and Matanuska Electric Association, Inc. (MEA) for a 25-year period
from 1989 through 2014. MEA asserted Chugach breached that contract by
failing to provide information, by failing to properly manage Chugach's
long-term debt, and by failing to bring Chugach's base rate action to a
Joint Committee before presenting it to the Regulatory Commission of Alaska
(RCA). All of MEA's claims were dismissed by the Superior Court. On April
29, 2002, MEA appealed the Superior Court's decisions relating to Chugach's
financial management and Chugach's failure to bring Chugach's 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.
The Alaska Supreme Court, on October 8, 2004, ruled in Chugach's favor
supporting its right under the power sales agreement to file for interim
rate relief without first going to the Joint Committee. The Supreme Court
ruled against Chugach in its cross appeal. The Supreme Court also
overturned the Superior Court's decision that dismissed MEA's claim asking
for review of Chugach's use of rate locks instead of defeasing debt based
on the Prudent Utility Practice standard under our power sales agreement.
The Supreme Court remanded this issue to the Superior Court.
On January 24, 2005, Chugach filed a summary judgment motion based on
Chugach's claim that in the 2000 Test Year rate case the RCA has already
decided the underlying issues relating to the prudency of Chugach's use of
rate locks instead of defeasing debt. This motion is pending. Management is
uncertain of the outcome of the proceeding before the Superior Court. No
reserves have been established for this matter.
Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc.
Superior Court Case No. 3AN-04-11776 Civil
On October 12, 2004, MEA filed suit in Superior Court alleging a breach of
the power sales agreement between the parties and violation of Chugach's
bylaws in connection with allocation of margins (capital credits) to MEA
for the years 1998 through 2003. Allocation of capital credits assigns a
share of the margins earned in a particular year to each customer. Capital
credits are repatriated to customers at the discretion of the board of
directors typically many years after the margins are earned.
The suit seeks a declaration by the Court that Chugach is in breach of its
bylaws and the power sales agreement based on its allocation of capital
credits to MEA as well as injunctive relief requiring Chugach to calculate
MEA's capital credit allocations based on MEA's patronage and in accordance
with generally accepted accounting practices for nonprofit cooperatives and
cooperative principles. The suit also seeks damages in an unspecified
amount to compensate MEA for the alleged breach of contract.
Management is vigorously defending against the claim. Management is
uncertain of the outcome of the suit. No reserves have been established for
this matter.
Other
Chugach received a demand letter from a third party offering a license to a
patent and implying that the patent may be infringed by certain services
provided by Chugach. The patent purportedly relates to intellectual
property rights over a system for automated electronic bill presentment and
payment. As of this date, no legal proceedings have been instituted against
us, but if the third party's patents are valid, enforceable and apply to
our business, we could be required to seek a license, discontinue certain
activities or be subject to a claim for past infringement. We are currently
considering this matter, but lack sufficient information to assess the
potential outcome at this time. No reserves have been established for this
matter.
Chugach has certain additional litigation matters and pending claims that
arise in the ordinary course of our business. In the opinion of management,
no individual matter or the matters in the aggregate are likely to have a
material adverse effect on our results of operations, financial condition
or liquidity.
4. Critical Accounting Policies
Chugach's 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 generally 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, 2005.
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 the February 2002 debt re-financings. We accounted for
the agreements under Statement of Financial Accounting Standards (SFAS)
133. For rate-making purposes, Chugach did not adjust rates for gains and
losses prior to settlement, and the loss on settlement will be an
adjustment to rates over the lives of the associated debt. This rate-making
treatment was approved by the RCA in Order U-01-108(26). Accordingly, the
unrealized gain or loss was not recorded and was treated as a regulatory
asset upon settlement.
Critical estimates also include provision for rate refunds and allowance
for doubtful accounts. Actual results could differ from those estimates.
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
Depreciation Rates Review Proceeding
In 2004, we implemented new depreciation rates based on an update of the
Depreciation Study utilizing Electric Plant in Service balances as of
December 31, 2002. The depreciation study resulted in a net impact on the
2004 financial statements of approximately $200,000, which, in aggregate,
was not material to the financial statements. The depreciation study was
submitted to the RCA for approval on November 19, 2004, however, the new
rates were implemented and in effect for all of 2004. We did not request a
change in electric rates charged to our customers based on the proposed
revisions to depreciation rates.
On March 9, 2005, the RCA ruled that depreciation rates may not be
implemented without prior approval of the RCA. The RCA is expected to issue
a final order in the fourth quarter of 2005. We expect to make any required
adjustments on a forward-going basis.
Management is uncertain of the outcome of the RCA depreciation study review
process.
Results Of Operations
Current Year Quarter Versus Prior Year Quarter
Assignable margins increased by $611.7 thousand for the quarter ended March
31, 2005, over the same quarter in 2004 due to a decrease in
administrative, general and other expense and a decrease in transmission
and consumer accounts expense. The decreases were offset by an increase in
distribution expense and interest on long-term debt.
Operating revenues, which include sales of electric energy to retail,
wholesale and economy energy customers and other miscellaneous revenues,
increased by $5.6 million, or 10.8%, for the quarter ended March 31, 2005,
over the same quarter in 2004. The increase in revenues was due to an
increase in revenue recovered through the fuel surcharge mechanism due to
higher fuel prices, as well as increased wholesale and economy energy kWh
sales.
The following table represents kWh sales for the quarter ended March 31:
2005 2004
---- ----
Customer kWh kWh
Retail 329,374,667 332,954,124
Wholesale 327,634,824 310,766,791
Economy Energy 95,825,850 59,846,760
---------- ----------
Total 752,835,341 703,567,675
=========== ===========
Retail demand and energy rates and wholesale demand and energy rates
charged to Homer Electric Association (HEA), MEA and Seward Electric System
(SES) did not change in the first quarter of 2005 compared to the first
quarter of 2004.
Fuel expense increased by $4.1 million, or 25.0%, for the quarter ended
March 31, 2005, compared to the same period in 2004 primarily due to higher
fuel prices and increased economy energy sales. Purchased power also
increased $1.3 million, or 33.4%, due in part to higher fuel prices, as
well as a refund for our share of Bradley Lake operating expenses we
received for fiscal year 2003 in the first quarter of 2004. Fiscal year
2004 did not generate a refund for our share of Bradley Lake operating
expenses in the first quarter of 2005. Fuel and purchased power is
recovered through the fuel surcharge mechanism. Production expense did not
materially change for the three-month period ended March 31, 2005, compared
to the same period in 2004. Transmission expense decreased by $138.4
thousand, or 8.0%, and distribution expense increased by $241.1 thousand,
or 9.3%, due primarily to the timing of distribution maintenance, due to
weather conditions, being performed in the first quarter of 2005 while
transmission maintenance will be performed later in the year. Consumer
Accounts/Information expense did not materially change for the three-month
period ended March 31, 2005. Administrative, general and other expense
decreased by $666.7 thousand, or 12.1%. The majority of the decrease was
attributed to a $111.4 thousand decrease in software amortization, a $149.6
thousand decrease in professional services, a $153.0 thousand decrease in
allocated costs and a $184.4 thousand decrease in labor due to the timing
of pay periods. Depreciation and amortization expense did not materially
change for the three-month period ended March 31, 2005.
Interest on long-term debt increased by $234.0 thousand, or 4.3%, due to
higher interest rates on the variable CoBank bonds. Interest charged to
construction increased by $102.3 thousand, or 114.4%, due to higher rates
and a higher average balance in construction work in progress associated
with the continued construction of the South Anchorage substation.
Other nonoperating margins increased $43.2 thousand, or 37.9%, for the
three-month period ended March 31, 2005, compared to the same period in
2004 due to an increase in interest income associated with higher interest
rates on our investment accounts and an increase in allowance for funds
used during construction (AFUDC), also due to higher rates and the
continued construction of the South Anchorage substation.
Financial Condition
Total assets decreased $9.2 million, or 1.6%, from December 31, 2004, to
March 31, 2005. The decrease was due in part to a $3.9 million, or 0.8%,
decrease in net plant, primarily due to depreciation expense in excess of
extension and replacement of plant. The decrease in total assets was also
due to a $3.7 million, or 35.6%, decrease in cash and cash equivalents
caused by the semi-annual interest payment on the 2001 and 2002 Series A
Bonds and the principle payment on the 2002 Series B Bonds in the first
quarter, as well as a $2.5 million, or 10.4%, decrease in accounts
receivable caused by the collection on receivables that were accrued but
not paid at December 31, 2004.
These decreases were offset by a $782.1 thousand, or 97.1%, increase in
prepayments caused by the annual renewal of insurance policies for 2005, as
well as a $120.1 thousand, or 46.2% increase in other current assets caused
by interest accrued on our NRUCFC term certificates and an increase in the
receivable associated with pole rentals.
Notable changes to total liabilities and equities include installment
payments of $5.4 million on the 2002 Series B bond and the CoBank 3 bonds.
Accounts payable also decreased $3.8 million, or 47.8%, as a result of the
payment of invoices that were accrued but not paid at December 31, 2004.
Fuel cost payable also decreased $597.9 thousand, or 22.0%, due to the
collection of the previous quarter's fuel and purchased power cost through
the fuel surcharge mechanism. Accrued interest also decreased $4.3 million,
or 69.1%, as a result of the semi-annual interest payment on the 2001 and
2002 Series A Bonds in the first quarter.
These decreases were offset by a $4.9 million, or 3.5%, increase in
patronage capital due to the margins generated in the first quarter of
2005.
Liquidity and Capital Resources
Chugach has satisfied its operational and capital cash requirements
primarily through internally-generated funds, an annual $20 million line of
credit with CoBank and a $50 million line of credit from NRUCFC. At March
31, 2005, there was no outstanding balance with NRUCFC or CoBank, however,
on March 17, 2005, we borrowed $1.5 million on the CoBank line of credit,
as well as an additional $1.0 million on March 18, 2005. That balance was
subsequently paid back on March 25, 2005.
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, 2005,
Chugach had the following promissory notes outstanding under this facility:
Interest rate at March Principal Payment
Promissory Note Principal balance 31, 2005 Maturity Date Dates
--------------- ----------------- -------- ------------- -----
CoBank 2 $10,000,000 7.76% 2005 2005
CoBank 3 $20,142,053 4.51% 2022 2003 - 2022
CoBank 4 $22,554,349 4.51% 2022 2003 - 2022
CoBank 5 $5,000,000 4.51% 2007 2007
Total $57,696,402
On January 22, 2003, Chugach and CoBank finalized a new Master Loan
Agreement pursuant to which the CoBank term loan facility was converted
from secured to unsecured debt and the obligations represented by the
outstanding bonds then held by CoBank were converted into promissory notes
governed by the new Master Loan Agreement. Chugach's mortgage indenture was
replaced in its entirety by an Amended and Restated Indenture dated April
1, 2001. All liens and security interests imposed under the indenture were
terminated and all outstanding Chugach bonds (including new bonds of 2001
Series A, 2002 Series A and 2002 Series B) became unsecured obligations
governed by the terms of the Amended and Restated Indenture.
Capital construction in 2005 is estimated at $29.7 million. At March 31,
2005, approximately $3.0 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 2005 and thereafter.
Outlook
Effective January 31, 2005, Chugach reorganized its operations into more
distinct business units - Office of the Chief Executive Officer (CEO),
Generation and Transmission (G&T) Division, Distribution Division and
Corporate Services. This reorganization was accomplished to more fully
recognize the diversity of Chugach operations and clearly determine the
financial and operational performance of each unit.
The Office of the Chief Executive Officer is responsible for all corporate
level activities including board of director functions, human resources,
risk management, legal matters, labor relations and employee relations,
legislative affairs and all financing activities Chugach may undertake. The
CEO's direct staff is the Chief Financial Officer, Vice President, Human
Resources, General Counsel and Government and External Affairs Manager. The
General Managers of the G&T Division, Distribution Division and Corporate
Services Division also report to the CEO.
G&T operations include all power supply functions, transmission functions,
system control and administrative requirements associated with generation
and transmission. The G&T sector is led by Bradley Evans, General Manager.
Distribution functions include consumer services, public relations,
distribution engineering, line operation and maintenance and consumer
information and services areas. The Distribution area is led by Lee
Thibert, General Manager.
Corporate Services is comprised of Administrative Services (Environmental
Engineering and Hazardous Materials, Fleet Services, Contracting, Safety,
Security, and Purchasing), Information Services, Regulatory Affairs and
Accounting. It is responsible for providing services to all divisions of
Chugach. Corporate Services is led by William Stewart, General Manager,
Corporate Services Division.
Environmental Matters
Compliance with Environmental Standards
Chugach's operations are subject to certain federal, state and local
environmental laws. The costs associated with environmental compliance are
included as a component of both the operating and capital budget processes.
Chugach accrues for costs associated with environmental remediation
obligations when such costs are probable and reasonably estimable.
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 2005 on the 2002 Series B bonds.
Auction Date Interest Rate
January 26, 2005 2.50%
February 23, 2005 2.62%
March 23, 2005 3.00%
April 20, 2005 3.05%
The following table provides information regarding cash flows for principal
payments on total debt by maturity date (dollars in thousands) as of March
31, 2005.
Fair
Total Debt* 2005 2006 2007 2008 Thereafter Total Value
- ----------- ---- ---- ---- ---- ---------- ----- -----
Fixed rate debt $10,000 $0 $0 $0 $270,000 $280,000 $302,671
Average
interest rate 7.76% - - - 6.39% 6.44%
Variable rate debt $539 $6,326 $11,729 $7,241 $68,063 $93,896 $93,896
Average
interest rate 4.51% 3.32% 3.83% 3.32% 3.88% 3.79%
* Includes current portion
Commodity Price Risk
Chugach's gas contracts provide for adjustments to gas costs based on
fluctuations of certain commodity prices and indices. Because fuel and
purchased power costs are passed directly to our wholesale and retail
customers through a fuel surcharge rate, 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 of
market fluctuations in the price of fuel and 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 officer (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 and timely in 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.
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 Power Sales Agreement between
Chugach and MEA for a 25-year period from 1989 through 2014. MEA asserted
Chugach breached that contract by failing to provide information, by
failing to properly manage Chugach's long-term debt, and by failing to
bring Chugach's base rate action to a Joint Committee before presenting it
to the Regulatory Commission of Alaska (RCA). All of MEA's claims were
dismissed by the Superior Court. On April 29, 2002, MEA appealed the
Superior Court's decisions relating to Chugach's financial management and
Chugach's failure to bring Chugach's 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.
The Alaska Supreme Court, on October 8, 2004, ruled in Chugach's favor
supporting its right under the power sales agreement to file for interim
rate relief without first going to the Joint Committee. The Supreme Court
ruled against Chugach in its cross appeal. The Supreme Court also
overturned the Superior Court's decision that dismissed MEA's claim asking
for review of Chugach's use of rate locks instead of defeasing debt based
on the Prudent Utility Practice standard under our power sales agreement.
The Supreme Court remanded this issue to the Superior Court.
On January 24, 2005, Chugach filed a summary judgment motion based on
Chugach's claim that in the 2000 Test Year rate case the RCA has already
decided the underlying issues relating to the prudency of Chugach's use of
rate locks instead of defeasing debt. This motion is pending. Management is
uncertain of the outcome of the proceeding before the Superior Court. No
reserves have been established for this matter.
Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc.
Superior Court Case No. 3AN-04-11776 Civil
On October 12, 2004, MEA filed suit in Superior Court alleging a breach of
the power sales agreement between the parties and violation of Chugach's
bylaws in connection with allocation of margins (capital credits) to MEA
for the years 1998 through 2003. Allocation of capital credits assigns a
share of the margins earned in a particular year to each customer. Capital
credits are repatriated to customers at the discretion of the board of
directors typically many years after the margins are earned.
The suit seeks a declaration by the Court that Chugach is in breach of its
bylaws and the power sales agreement based on its allocation of capital
credits to MEA as well as injunctive relief requiring Chugach to calculate
MEA's capital credit allocations based on MEA's patronage and in accordance
with generally accepted accounting practices for nonprofit cooperatives and
cooperative principles. The suit also seeks damages in an unspecified
amount to compensate MEA for the alleged breach of contract.
Management intends to vigorously defend against the claim. Management is
uncertain of the outcome of the suit. No reserves have been established for
this matter.
Other
Chugach received a demand letter from a third party offering a license to a
patent and implying that the patent may be infringed by certain services
provided by Chugach. The patent purportedly relates to intellectual
property rights over a system for automated electronic bill presentment and
payment. As of this date, no legal proceedings have been instituted against
us, but if the third party's patents are valid, enforceable and apply to
our business, we could be required to seek a license, discontinue certain
activities or be subject to a claim for past infringement. We are currently
considering this matter, but lack sufficient information to assess the
potential outcome at this time. No reserves have been established for this
matter.
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. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
At the Chugach annual membership meeting held on April 28, 2005, three new
board members were elected and the following proposed amendments to the
Bylaws failed:
o The elimination of the requirement to make and save electronic
recordings of board meetings and to prepare verbatim transcripts.
o The elimination of prohibition on compensating standing and ad
hoc committee members.
o The elimination of the requirement for a member advisory council.
Item 6. Exhibits
Exhibits:
Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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 13, 2005
By: /s/ Michael R. Cunningham
Michael R. Cunningham
Chief Financial Officer
Date: May 13, 2005
By: /s/ William R. Stewart
William R. Stewart
General Manager, Corporate Services Division
Date: May 13, 2005
EXHIBITS
Listed below are the exhibits, which are filed as part of this Report:
Exhibit Number Description
31.1 Certification of Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002