Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXHANGE ACT OF 1934
|
For
the quarterly period ended September 30, 2009
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.
(Exact
name of registrant as specifies in its charter)
State of Alaska
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92-0014224
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
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5601 Electron Drive, Anchorage,
AK
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99518
|
(Address
of principal executive offices)
|
(Zip
Code)
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(907)
563-7494
(Registrant’s
telephone number including area code)
None
(Former
name, former address, and former fiscal year, if changed since last
report)
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.
TYes
£
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
£Yes
£
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer £
|
Accelerated
filer £
|
|
Non-accelerated
filer T
|
Smaller
reporting company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
£Yes
T
No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
NONE
|
CHUGACH ELECTRIC ASSOCIATION, INC.
TABLE
OF CONTENTS
2
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Part I. Financial
Information
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Item
1.
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2
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3
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5
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6
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7
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Item
2.
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20
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Item
3.
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35
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Item
4.
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36
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Part II. Other Information
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Item
1.
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36
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Item
1A.
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36
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Item
2.
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37
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Item
3.
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38
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Item
4.
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38
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Item
5.
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38
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Item
6.
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38
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39
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40
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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. It is suggested these statements are read in conjunction
with our audited financial statements for the year ended December 31, 2008,
filed as part of our annual report on Form 10-K. Chugach Electric
Association, Inc. (Chugach) undertakes no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
that may occur after the date of this report or the effect of those events or
circumstances on any of the forward-looking statements contained in this report,
except as required by law.
PART
I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The
unaudited financial statements and notes to the financial statements of Chugach
as of and for the quarter ended September 30, 2009, follow.
2
Assets
|
September 30,
2009
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December 31,
2008
|
||||||
Utility
Plant:
|
||||||||
Electric
Plant in service
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$ | 833,206,375 | $ | 821,462,475 | ||||
Construction
work in progress
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34,863,744 | 25,151,072 | ||||||
Total
utility plant
|
868,070,119 | 846,613,547 | ||||||
Less
accumulated depreciation
|
(413,894,453 | ) | (389,002,139 | ) | ||||
Net
utility plant
|
454,175,666 | 457,611,408 | ||||||
Other
property and investments, at cost:
|
||||||||
Nonutility
property
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24,461 | 24,461 | ||||||
Investments
in associated organizations
|
12,182,216 | 12,177,769 | ||||||
Special
Funds
|
319,717 | 264,427 | ||||||
Total
other property and investments
|
12,526,394 | 12,466,657 | ||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
6,333,179 | 7,491,302 | ||||||
Special
deposits
|
124,140 | 114,930 | ||||||
Fuel
and purchased power cost under-recovery
|
0 | 11,788,078 | ||||||
Accounts
receivable, net
|
33,878,488 | 33,019,372 | ||||||
Materials
and supplies
|
30,094,956 | 28,806,641 | ||||||
Prepayments
|
1,751,453 | 1,544,025 | ||||||
Other
current assets
|
295,029 | 272,357 | ||||||
Total
current assets
|
72,477,245 | 83,036,705 | ||||||
Deferred
charges, net
|
22,473,264 | 23,577,199 | ||||||
Total
assets
|
$ | 561,652,569 | $ | 576,691,969 |
See
accompanying notes to financial statements.
3
Chugach
Electric Association, Inc.
Balance
Sheets (continued)
(Unaudited)
Liabilities,
Equities and Margins
|
September 30,
2009
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December 31,
2008
|
||||||
Equities
and margins:
|
||||||||
Memberships
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$ | 1,421,158 | $ | 1,390,413 | ||||
Patronage
capital
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142,788,158 | 142,009,998 | ||||||
Other
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10,271,085 | 10,366,588 | ||||||
Total
equities and margins
|
154,480,401 | 153,766,999 | ||||||
Long-term
obligations, excluding current installments:
|
||||||||
Bonds
payable
|
270,000,000 | 270,000,000 | ||||||
National
Bank for Cooperatives
|
37,564,958 | 41,419,847 | ||||||
National
Rural Utilities Cooperative Finance Corporation promissory notes
payable
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0 | 42,963,659 | ||||||
Total
long-term obligations
|
307,564,958 | 354,383,506 | ||||||
Current
liabilities:
|
||||||||
Current
installments of long-term obligations
|
4,597,259 | 4,403,653 | ||||||
Commercial
Paper
|
55,000,000 | 0 | ||||||
Promissory
notes payable
|
0 | 2,860,000 | ||||||
Short-term
obligations
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0 | 7,500,000 | ||||||
Accounts
payable
|
7,043,048 | 6,999,140 | ||||||
Consumer
deposits
|
2,370,205 | 2,410,980 | ||||||
Fuel
and purchased power cost over-recovery
|
2,103,082 | 0 | ||||||
Accrued
interest
|
1,757,594 | 6,158,927 | ||||||
Salaries,
wages and benefits
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5,252,271 | 5,481,621 | ||||||
Fuel
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18,846,834 | 28,494,211 | ||||||
Other
liabilities
|
860,907 | 1,666,521 | ||||||
Total
current liabilities
|
97,831,200 | 65,975,053 | ||||||
Deferred
compensation
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319,717 | 264,427 | ||||||
Deferred
liabilities
|
1,456,293 | 2,301,984 | ||||||
Total
liabilities, equities and margins
|
$ | 561,652,569 | $ | 576,691,969 |
See
accompanying notes to financial statements.
4
Three
months ended
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Nine
months ended
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|||||||||||||||
September 30
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September 30
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|||||||||||||||
2009
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2008
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2009
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2008
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|||||||||||||
Operating
revenues
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$ | 63,565,392 | $ | 70,297,168 | $ | 216,221,615 | $ | 204,651,479 | ||||||||
Operating
expenses:
|
||||||||||||||||
Fuel
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27,751,711 | 35,129,953 | 101,214,779 | 94,663,415 | ||||||||||||
Production
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4,700,270 | 4,076,478 | 12,739,101 | 12,523,044 | ||||||||||||
Purchased
power
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8,823,476 | 7,515,163 | 29,766,532 | 23,133,146 | ||||||||||||
Transmission
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1,695,610 | 1,683,165 | 4,364,627 | 4,601,905 | ||||||||||||
Distribution
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3,287,595 | 3,488,404 | 9,544,949 | 9,428,136 | ||||||||||||
Consumer
accounts
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1,277,619 | 1,326,579 | 3,863,125 | 4,017,769 | ||||||||||||
Administrative,
general and other
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4,500,094 | 4,995,323 | 14,587,035 | 14,998,039 | ||||||||||||
Depreciation
and amortization
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8,056,273 | 7,851,387 | 24,055,420 | 22,825,522 | ||||||||||||
Total
operating expenses
|
60,092,648 | 66,066,452 | 200,135,568 | 186,190,976 | ||||||||||||
Interest
on long-term debt
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5,010,659 | 5,193,829 | 15,135,824 | 16,074,579 | ||||||||||||
Other
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250,984 | 506,974 | 854,251 | 859,318 | ||||||||||||
Charged
to construction
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(139,233 | ) | (95,234 | ) | (397,147 | ) | (313,066 | ) | ||||||||
Net
interest expenses
|
5,122,410 | 5,605,569 | 15,592,928 | 16,620,831 | ||||||||||||
Net
operating margins
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(1,649,666 | ) | (1,374,853 | ) | 493,119 | 1,839,672 | ||||||||||
Nonoperating
margins:
|
||||||||||||||||
Interest
income
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81,200 | 96,687 | 174,197 | 309,002 | ||||||||||||
Capital
credits, patronage dividends and other
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59,668 | 55,440 | 139,880 | 116,408 | ||||||||||||
Total
nonoperating margins
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140,868 | 152,127 | 314,077 | 425,410 | ||||||||||||
Assignable
margins
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$ | (1,508,798 | ) | $ | (1,222,726 | ) | $ | 807,196 | $ | 2,265,082 |
See
accompanying notes to financial statements.
5
Nine
months ended September 30
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||||||||
2009
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2008
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|||||||
Cash flows from operating
activities:
|
||||||||
Assignable
margins
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$ | 807,196 | $ | 2,265,082 | ||||
Adjustments
to reconcile assignable margins to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
27,607,982 | 26,552,923 | ||||||
Capitalized
interest
|
(494,377 | ) | (402,134 | ) | ||||
Write
off of inventory and projects
|
293,346 | |||||||
Other
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(4,768 | ) | 162 | |||||
Changes
in assets and liabilities:
|
||||||||
(Increase)
decrease in assets:
|
||||||||
Accounts
receivable
|
(859,117 | ) | 6,395,677 | |||||
Fuel
and purchased power cost under-recovery
|
11,788,078 | (10,050,871 | ) | |||||
Materials
and supplies
|
(1,510,732 | ) | (207,416 | ) | ||||
Prepayments
|
(207,428 | ) | (59,376 | ) | ||||
Other
assets
|
(31,561 | ) | (36,739 | ) | ||||
Deferred
charges, net
|
(1,679,878 | ) | (5,569,348 | ) | ||||
Increase
(decrease) in liabilities:
|
||||||||
Accounts
payable
|
(888,713 | ) | 507,161 | |||||
Consumer
deposits
|
(40,775 | ) | (40,451 | ) | ||||
Fuel
and purchased power cost over-recovery
|
2,103,082 | (1,596,010 | ) | |||||
Accrued
interest
|
(4,401,333 | ) | (4,428,489 | ) | ||||
Salaries,
wages and benefits
|
(229,350 | ) | (61,957 | ) | ||||
Fuel
|
(9,647,377 | ) | 10,136,230 | |||||
Other
liabilities
|
(700,217 | ) | (403,665 | ) | ||||
Deferred
liabilities
|
33,991 | (13,517 | ) | |||||
Net
cash provided by operating activities
|
21,938,049 | 22,987,262 | ||||||
Cash flows from investing
activities:
|
||||||||
Extension
and replacement of plant
|
(21,389,832 | ) | (17,204,767 | ) | ||||
Net
cash used for investing activities
|
(21,389,832 | ) | (17,204,767 | ) | ||||
Cash flows from financing
activities:
|
||||||||
Payments
of notes payable
|
(2,860,000 | ) | 0 | |||||
Repayments
of long-term obligations
|
(46,624,942 | ) | (38,983,564 | ) | ||||
Proceeds
from short-term borrowing
|
66,998,000 | 37,213,659 | ||||||
Repayments
of short-term borrowing
|
(19,498,000 | ) | 0 | |||||
Memberships
and donations refunded
|
(64,759 | ) | (121,688 | ) | ||||
Retirement
of patronage capital and estate payments
|
(134,432 | ) | (1,438,743 | ) | ||||
Net
deposits of consumer advances for construction
|
477,793 | 748,806 | ||||||
Net
cash used for financing activities
|
(1,706,340 | ) | (2,581,530 | ) | ||||
Net
(decrease) increase in cash and cash equivalents
|
(1,158,123 | ) | 3,200,965 | |||||
Cash and cash equivalents at beginning of
period
|
$ | 7,491,302 | $ | 6,209,936 | ||||
Cash and cash equivalents at end of
period
|
$ | 6,333,179 | $ | 9,410,901 | ||||
Supplemental
disclosure of non-cash investing and financing activities
|
||||||||
Retirement
of plant
|
$ | 602,516 | $ | 5,436,875 | ||||
Extension
and replacement of plant included in accounts payable
|
$ | 3,599,026 | $ | 1,267,588 | ||||
Supplemental
disclosure of cash flow information - interest expense paid, excluding
amounts capitalized
|
$ | 18,634,258 | $ | 21,049,320 |
See accompanying notes to financial
statements.
6
1.
|
PRESENTATION
OF FINANCIAL INFORMATION
|
The
accompanying unaudited interim financial statements include the accounts of
Chugach Electric Association, Inc. (Chugach) and have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. They should be
read in conjunction with our audited financial statements for the year ended
December 31, 2008, filed as part of our annual report on Form
10-K. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for interim periods are not
necessarily indicative of the results that may be expected for an entire year or
any other period.
2.
|
DESCRIPTION
OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
|
|
a.
|
Description of
Business
|
Chugach
is the largest electric utility in Alaska. Chugach is engaged in the
generation, transmission and distribution of electricity to directly serve
retail customers in the Anchorage and upper Kenai Peninsula
areas. Through an interconnected regional electrical system,
Chugach’s power flows throughout Alaska’s Railbelt, a 400-mile-long area
stretching from the coastline of the southern Kenai Peninsula to the interior of
the state, including Alaska’s largest cities, Anchorage and
Fairbanks.
Chugach
also supplies much of the power requirements for three of its wholesale
customers, Matanuska Electric Association, Inc. (MEA), Homer Electric
Association, Inc. (HEA), and the City of Seward (Seward). Retail
members of Chugach and wholesale customers are the consumers of the electricity
sold. Notification was made by MEA in 2004 and by HEA in 2007 that neither
organization intends to be on the Chugach system under the current contractual
arrangements post 2014. This would result in a loss of approximately
50% of Chugach’s power sales load and approximately 40% of the utility’s annual
sales revenue. At the August 26, 2009, Chugach Board of Directors’
meeting and in a letter dated September 3, 2009, MEA’s Interim General Manager
advised Chugach that MEA desires to open discussions regarding power sales
possibilities.
Since
1989, we have sold economy (non-firm) energy to Golden Valley Electric
Association, Inc. (GVEA) under an agreement that expired on March 31,
2009. Under that agreement, we used available generation in excess of
our own needs to produce electric energy for sale to GVEA, which used that
energy to serve its own loads in place of more expensive energy that it would
have otherwise generated itself or purchased from other sources. We
purchased gas from Marathon Oil Company (Marathon) to produce energy for sale to
GVEA.
Chugach
negotiated a three-month gas sales agreement, spanning September through
November of 2009, with Marathon, to provide between 5,000 and 7,000 million
cubic feet (MCF)
per day to facilitate a 20 megawatt (MW) economy energy sale to
GVEA. The short-term agreement has an extension provision which will
be evaluated on November 17, 2009. This sale is being made under the
terms and conditions of Chugach’s economy energy sales tariff.
7
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
Chugach
operates on a not-for-profit basis and accordingly, seeks only to generate
revenues sufficient to pay operating and maintenance costs, the cost of
purchased power, capital expenditures, depreciation, and principal and interest
on all indebtedness and to provide for reserves. Chugach is subject
to the regulatory authority of the Regulatory Commission of Alaska
(RCA).
|
b.
|
Management
Estimates
|
In
preparing the financial statements, management of Chugach is required to make
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of the
balance sheet and revenues and expenses for the reporting
period. Estimates include allowance for doubtful accounts, deferred
charges and credits, unbilled revenue and the estimated useful life of utility
plant. Actual results could differ from those estimates.
|
c.
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Regulation
|
The
accounting records of Chugach conform to the Uniform System of Accounts as
prescribed by the Federal Energy Regulatory Commission
(FERC). Chugach meets the criteria, and accordingly, follows the
accounting and reporting requirements of Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC) 980, “Topic 980 - Regulated
Operations.”
FASB ASC
980 provides for the recognition of regulatory assets and liabilities as allowed
by regulators for costs or credits that are reflected in current rates or are
considered probable of being included in future rates. The regulatory
assets or liabilities are then reduced as the cost or credit is reflected in
rates.
|
d.
|
Income
Taxes
|
Chugach
is exempt from federal income taxes under the provisions of Section 501(c)(12)
of the Internal Revenue Code and for the nine month periods ended September 30,
2009 and 2008 was in compliance with that provision. In addition,
Chugach collects sales tax and is assessed gross receipts and excise taxes which
are presented on a net basis in accordance with FASB ASC 605-45-50, “Topic 605 - Revenue Recognition – Subtopic 45 -
Principal Agent Considerations – Section 50 - Disclosure.”
e.
|
Subsequent
Events
|
Chugach’s
management evaluated all events from the date of our financial statements,
September 30, 2009, through the date our financial statements were issued,
November 13, 2009.
8
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
f.
|
Presentation of
Financial Information
|
During
the nine months ended September 30, 2009, the company recorded an immaterial
adjustment to correctly present cash used in investing activities and cash used
in financing activities for the nine months ended September 30,
2008. The adjustment represents the amount of non-refundable consumer
advances previously included as a reduction of cash used in investing activities
and now included as a reduction of cash used in financing
activities. The impact of the adjustment was to increase cash used in
investing activities by $762,805 and reduce cash used in financing
activities by the same amount.
3.
|
REGULATORY
MATTERS
|
Natural Gas Contract
Submittal
On May
12, 2009, Chugach submitted a new long-term natural gas supply contract with
ConocoPhillips Alaska, Inc. and ConocoPhillips, Inc. (collectively “COP”), to
the RCA. The new contract will provide gas beginning in 2010 and will
terminate December 31, 2016. The total amount of gas under the
contract is estimated to be 66 billion cubic feet (BCF). The
new contract is designed to fill 100% of Chugach’s unmet needs until April 2011,
approximately 50% of Chugach’s unmet needs from May 2011 through December 2015
and approximately 25% in 2016. The RCA approved the gas supply
contract between Chugach and COP effective August 21, 2009. The RCA
also approved inclusion of all fuel (gas) and transportation costs related to
the contract in the calculation of Chugach’s fuel and purchased power surcharge
process. The gas supply contract was filed with an 8-K dated August
21, 2009 and filed August 27, 2009.
The gas
supplied by COP under the contract is separated into two volume tranches for
pricing purposes. “Firm Fixed Quantity” gas will meet a portion of
Chugach’s base load requirements, while “Firm Variable Quantity” gas will meet
peaking needs. Chugach expects that ninety percent of the gas
purchased under the contract will be firm fixed and ten percent will be firm
variable. The dividing line between firm fixed and firm variable
volumes will be calculated based on a methodology that involves using a
multiplier and the simple average of Chugach’s average daily volumes for the
thirty lowest volume days during the last calendar year.
Pricing
for firm fixed gas will be based on the average of five Lower 48 natural gas
production areas. The contract price will be calculated on a
quarterly basis as the trailing average of the simple daily average of the
Platts Gas Daily midpoint prices for each “flow day” in these market areas
during the last quarter. There will be a price collar, floor of $5.75
per MCF and cap of $6.25 per MCF, on the firm fixed gas between January 1, 2010
and June 30, 2010.
Pricing
for firm variable gas purchased between January 1, 2010, and March 31, 2011,
will be the one quarter trailing average of ninety-five percent of the average
monthly price of Kenai liquefied natural gas delivered to Japan, as officially
reported to the U.S. Department of Energy. Pricing for firm variable
gas purchased from April 1, 2011, to December 31, 2013, will be 120 percent of
the one calendar quarter trailing average of “Platts National Average Price” as
published in Platts Gas Daily for each “flow day.” The price for firm
variable gas is capped at two-hundred percent of the firm fixed
price. Firm variable gas is not provided by the contract after
December 31, 2013.
9
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
Chugach
also has the option to receive a fixed price quote from COP and lock that price
of any quantity as long as the quantity does not exceed the “Firm Fixed
Quantity” and for any term up to December 31, 2016, for which price is to be
locked.
General Rate
Case: Docket U-09-080
On June
23, 2009, Chugach filed a general rate case with the RCA to increase base rate
revenue by $4.2 million, with increases of $2.7 million to Chugach retail
customers and $1.5 million to wholesale customers. The estimated
increase to Chugach’s retail end-users was approximately 1.7%, while the
increase to retail end-users of Chugach’s wholesale customers was approximately
0.9%. Chugach requested that the proposed rates become effective on
an interim and refundable basis beginning August 7, 2009.
On August
7, 2009, the RCA suspended Chugach’s filing into Docket U-09-080 and issued
Order No. 1. The RCA indicated that it would issue a final order in
this case no later than September 16, 2010. The RCA did not issue a
decision on Chugach’s interim rate request. The RCA
named the Attorney General and Chugach’s wholesale customers HEA, MEA and SES
parties to the docket.
On
October 9, 2009, the RCA issued Order No. 2 granting Chugach’s original request
that the proposed rates go into effect on an interim and refundable
basis.
On
October 15, 2009, the RCA consolidated Docket U-09-080 (General Rate Case) and
Docket U-09-97 (Depreciation Study Update, explained below) and will hold
combined hearings in June 2010.
Request for Amortization of
Cooper Lake Unit 2 Overhaul Costs: Docket U-09-93
On August
10, 2009, Chugach filed a request with the RCA to amortize approximately $1.07
million of expenditures associated with its 2008-2009 overhaul of Cooper Lake
generating Unit 2 over a ten year period. The unit’s planned overhaul
was accelerated due to extensive wear that caused a forced outage in August of
2008. With this request Chugach seeks to amortize the overhaul costs
and record the unamortized balance as a “regulatory asset”.
On
September 2, 2009, the RCA opened Docket U-09-093 to consider Chugach’s request
and issued Order No. 1. The RCA stated that it would issue a final order on this
matter no later than February 5, 2010. On October 1, 2009, the RCA
issued Order No. 2, naming Chugach’s wholesale customers, HEA and MEA, parties
to the docket and scheduled a pre-hearing scheduling
conference.
10
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
Depreciation Study
Update: Docket U-09-097
In
accordance with a stipulation with its wholesale customers, HEA and MEA, Chugach
filed on August 31, 2009, an updated depreciation study based on plant balances
as of December 31, 2008. The RCA opened Docket U-09-097 to consider Chugach’s
updated depreciation study and issued Order No. 1 on September 14, 2009. The RCA
named Chugach’s wholesale customers, HEA, MEA, and SES, parties to the docket
and scheduled a prehearing scheduling conference. As indicated in the
discussion under the General Rate Case above, the RCA has consolidated the
depreciation study update with the general rate case.
4.
|
LINES
OF CREDIT
|
Chugach
maintained a $7.5 million line of credit with CoBank, ACB
(CoBank). On October 22, 2008, the Board of Directors approved a
resolution to renew this line of credit. The line of credit was also
renewed by CoBank, extending the expiration date to October 31, 2009, and is
subject to annual renewal at the discretion of the parties. Chugach
did not renew this line of credit upon its expiration date due to unused
carrying costs, its lack of use and the existence of the NRUCFC line of credit
and Commercial Paper borrowing capacity. Chugach had activity on this
line of credit in the first half of 2009, however, this line of credit wasn’t
utilized in the third quarter of 2009 and there was no outstanding balance at
September 30, 2009. At December 31, 2008, the outstanding balance on
this line of credit was $7.5 million.
The
CoBank Master Loan Agreement requires Chugach to establish and collect electric
rates reasonably expected to yield margins for interest equal to at least 1.10
times interest expense, to achieve a funded debt to operating cash flow ratio
not greater than 8 to 1 and achieve an equity to total capitalization ratio
greater than 22%. The borrowing rate is calculated using the CoBank
Base Rate on the first business day of the week and can not exceed the CoBank
Base Rate on that day plus 3%. The borrowing rate at September 30, 2009 and
December 31, 2008 was 2.25% and 2.27%, respectively.
Chugach
had maintained an annual line of credit of $50 million with National Rural
Utilities Cooperative Finance Corporation (NRUCFC) until October 9, 2008, when
Chugach reduced this line of credit to $45 million. On December 22,
2008, this line of credit was increased to $75 million, however, pursuant to the
terms of the Amendment To Revolving Line of Credit Agreement with NRUCFC, this
line of credit shall be permanently reduced to $50 million upon the earlier of
January 1, 2010 or the date Chugach pays down this line of credit to an
outstanding balance of not more than $50 million. In January of 2009,
Chugach had additional line of credit activity and had a balance of $38 million
on January 30, 2009, when we repaid $30 million on this line of credit by
issuing commercial paper under our Commercial Paper
program. Consequently, effective January 30, 2009, Chugach’s
borrowing limit on its NRUCFC line of credit was permanently reduced to $50
million. In February of 2009, Chugach repaid the remaining balance on
this line of credit by issuing commercial paper. There was no
outstanding balance at September 30, 2009. At December 31, 2008, the
outstanding balance on this line of credit was $43 million. The
borrowing rate is calculated using the total rate per annum as may be fixed by
NRUCFC and will not exceed the Prevailing Prime Rate, plus one percent per
annum. At September 30, 2009 and December 31, 2008, the borrowing
rate was 4.95% and 5.25%, respectively.
11
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
The
NRUCFC Revolving Line Of Credit Agreement requires that Chugach, for each
12-month period, for a period of at least five consecutive days, pay down the
entire outstanding principal balance. The NRUCFC line of credit
expires October 14, 2012.
The
NRUCFC line of credit is immediately available for unconditional
borrowing.
5.
|
NOTES
PAYABLE
|
In
December of 2008, Chugach acquired property near its Anchorage headquarters for,
among other purposes, construction of an additional electrical generation
facility. The total purchase price of the property was $4,860,000
which included a $75,000 non refundable earnest money payment, a $1,925,000 down
payment and a $2,860,000 promissory note bearing interest at six percent per
annum payable in two installments. A payment of $1,000,000 was made
in March of 2009 and the final payment of $1,860,000 plus accrued interest was
made on June 12, 2009. Chugach had the right to prepay any amount of
the note in full at any time without penalty. The promissory note was
secured by a deed of trust on the property.
6.
|
FINANCING
|
Over the
next five years, Chugach anticipates financing increased capital expenditures
due to the construction of a natural gas fired generation unit and on-going
capital needs and plans to refinance $150 million of 2001 Series A Bonds due
March 15, 2011, and $120 million of 2002 Series A Bonds due February 1,
2012. In October 2008, Chugach entered into a $300 million Unsecured
Credit Agreement between NRUCFC, KeyBank, CoBank and US Bank intended to back
the commercial paper program. The Credit Agreement was priced with an
all-in drawn spread of London Interbank Offered Rate (LIBOR) plus 60 basis
points, along with a 17.5 basis points facility fee. The credit
agreement was executed on October 10, 2008, and expires on October 10,
2011. Commercial paper will be issued under this facility and will
act as a bridge until Chugach converts Commercial Paper balances to long term
debt and to refinance the 2011 and 2012 Series A bonds. At this time,
management intends to renew this agreement although the terms may be
different. On January 30, 2009, Chugach issued $36.0 million of
commercial paper to repay its NRUCFC line of credit. On February 5,
2009, Chugach issued $10.0 million of commercial paper to repay the balance of
its NRUCFC line of credit. Chugach had additional commercial paper
activity in the first, second and third quarters of 2009. At
September 30, 2009, Chugach had $55.0 million of commercial paper
outstanding. Our commercial paper can be repriced between one day and
two hundred and seventy days.
12
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
The
following table provides information on average commercial paper balances
outstanding (dollars in millions) and corresponding weighted average interest
rates:
Average
|
Weighted
Average
|
||||||
Month
|
Balance
|
Interest Rate
|
|||||
January
2009
|
36.0 | 1.17 | |||||
February
2009
|
44.6 | 1.48 | |||||
March
2009
|
46.6 | 1.19 | |||||
April
2009
|
47.0 | 0.60 | |||||
May
2009
|
43.0 | 0.53 | |||||
June
2009
|
41.7 | 0.49 | |||||
July
2009
|
41.5 | 0.44 | |||||
August
2009
|
48.6 | 0.36 | |||||
September
2009
|
53.1 | 0.32 |
7.
|
LEGAL
PROCEEDINGS
|
Chugach
has certain litigation matters and pending claims that arise in the ordinary
course of business. In the opinion of management, no individual
matter or matters in the aggregate are likely to have a material adverse effect
on Chugach’s results of operations, financial condition or
liquidity.
8.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
ASC Update 2009-01
“Topic
105 – Generally Accepted Accounting Principles – amendments based on – Statement
No. 168 – The FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles”
In June
2009, the FASB issued ASC Update 2009-01, “Topic 105 – Generally Accepted
Accounting Principles – amendments based on Statement No. 168 – The FASB Accounting Standards
CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles.” This
update applies to all financial statements of nongovernmental entities that are
presented in conformity with U.S. Generally Accepted Accounting Principles
(GAAP). ASC Update 2009-01 does not change GAAP, it establishes the
FASB Accounting Standards
CodificationTM
(Codification) as the source of authoritative GAAP to be applied by
nongovernmental entities, while also acknowledging the rules and interpretive
releases of the SEC under authority of federal securities laws as sources of
authoritative GAAP for SEC registrants. Additionally, the
Codification creates a new format for tracking, identifying, and citing GAAP, by
numbered topics, subtopics, sections and paragraphs. As of the effective date of
this update, all then-existing non-SEC standards will be superseded by the
Codification and any non-SEC accounting literature not grandfathered will become
non-authoritative. ASC Update 2009-01 is effective for financial
statements issued for periods ending after September 15,
2009. Chugach began application of ASC Update 2009-01 to the
financial statements for the period ended September 30, 2009, which did not have
a material effect on our results of operations, financial position, and cash
flows.
13
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
ASC Update 2009-05
“Fair
Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair
Value”
In August
2009, the FASB issued ASC Update 2009-05, “Fair Value Measurements and
Disclosures (Topic 820) – Measuring Liabilities at Fair Value.” ASC
Update 2009-05 applies to all entities that measure liabilities at fair value
within the scope of Topic 820 and clarifies the measurement techniques to be
used. This update is effective for the first reporting period
(including interim periods) beginning after issuance. Chugach will
begin application of ASC Update 2009-05 to the financial statements for the
period ended December 31, 2009, which we do not expect to have a material effect
on our results of operations, financial position, and cash flows.
SFAS 167 “Amendments
to FASB Interpretation No. 46(R)”
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R).” SFAS No. 167 applies to all entities except for those
identified in FIN 46(R), “Consolidation of Variable Interest Entities,” as well
as entities previously considered qualifying special-purpose entities, as the
concept of these entities was eliminated by SFAS No. 166, “Accounting for
Transfers of Financial Assets.” SFAS No. 167 amends FIN 46(R) to
require additional disclosures regarding an entity’s involvement in variable
interest entities. SFAS No. 167 is effective for interim and annual
reporting periods beginning after November 15, 2009. Chugach will
begin application of SFAS No. 167 on January 1, 2010, which is not expected to
have a material effect on our results of operations, financial position, and
cash flows.
Though
SFAS No. 167 was not adapted into the Codification, the purpose of this
pronouncement remains authoritative per FASB ASC 105-10-70-2, paragraph 2 of
Section 105-10-70.
SFAS 166 “Accounting
for Transfers of Financial Assets – an amendment of FASB Statement No.
140”
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets – an amendment of FASB Statement No. 140.” SFAS No. 166
applies to all entities and amends SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 140
was amended to enhance the disclosure requirements as well as to define some of
the terms and measurements to be used, by removing the concept of a qualifying
special-purpose entity and the exception from applying FIN 46, “Consolidation of
Variable Interest Entities,” to qualifying special-purpose
entities. SFAS No. 166 is effective for interim and annual reporting
periods beginning after November 15, 2009. Chugach will begin
application of SFAS No. 166 on January 1, 2010, which is not expected to have a
material effect on our results of operations, financial position, and cash
flows.
14
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
Though
SFAS No. 166 was not adapted into the Codification, the purpose of this
pronouncement remains authoritative per FASB ASC 105-10-70-2, paragraph 2 of
Section 105-10-70.
FAS 165 “Subsequent
Events”
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165
applies to the accounting for and disclosure of subsequent events, in both
interim and annual financial statements. However, it does not apply
to those subsequent events or transactions within the scope of other GAAP that
provides different guidance of subsequent events and
transactions. SFAS No. 165 is effective for interim and annual
reporting periods ending after June 15, 2009. Chugach began
application of SFAS No. 165 with the financial statements ending June 30, 2009,
which did not have a material effect on our results of operations, financial
position, and cash flows.
Effective
July 2009, the FASB adapted SFAS No. 165 into the Codification. To
view the adapted content, see FASB ASC 855-10 for the Overall Subtopic of Topic
855.
FAS 164 “Not-for-Profit
Entities: Mergers and Acquisitions – Including an amendment of FASB Statement
No. 142”
In April
2009, the FASB issued SFAS No. 164, “Not-for-Profit Entities: Mergers and
Acquisitions – Including an amendment of FASB Statement No.
142.” SFAS No. 164 applies to the combination of not-for-profit
entities meeting the definition of a merger or acquisition, with specific
exceptions. SFAS No. 164 provides guidance on the accounting and
disclosure of these combinations. SFAS No. 164 is effective for
annual reporting periods beginning after December 15, 2009. Chugach
will begin application of SFAS No. 164 on January 1, 2010, which is not expected
to have a material effect on our results of operations, financial position, and
cash flows.
Though
SFAS No. 164 was not adapted into the Codification, the purpose of this
pronouncement remains authoritative per FASB ASC 105-10-70-2, paragraph 2 of
Section 105-10-70.
FSP FAS 107-1 and APB 25-1
“Interim
Disclosures about Fair Value of Financial Instruments”
In April
2009, the FASB issued FASB Staff Position (FSP) FAS 107-1 and APB 25-1, “Interim Disclosures about Fair
Value of Financial Instruments.” This FSP applies to all
financial instruments within the scope of SFAS No. 107, “Disclosures about Fair
Value of Financial Instruments,” held by publicly traded companies, as defined
by APB Opinion No. 28, “Interim Financial Reporting.” This FSP
expands the reporting of fair value disclosures required by SFAS No. 107 to
include interim reporting. This FSP also amends APB Opinion No. 28 to
require those disclosures in summarized financial information of interim
reports. FSP FAS 107-1 and APB 25-1 is effective for interim periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. Chugach began application of FSP FAS 107-1 and
APB 25-1 to fair value disclosures on January 1, 2009, which did not have a
material effect on our results of operations, financial position, and cash
flows.
15
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
Effective
July 2009, the FASB adapted FSP FAS 107-1 and APB 25-1 into the
Codification. To view the adapted content, see FASB ASC 825-10-65-1
for paragraph 1 of Section 825-10-65.
FSP FAS 115-2 and FAS 124-2
“Recognition
and Presentation of Other-Than-Temporary Impairments”
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments.” FSP FAS 115-2 and FAS 124-2
applies to debt securities classified as available-for-sale and held-to-maturity
that are subject to other-than-temporary impairment guidance within specific
parameters. This FSP amends current GAAP guidance on
other-than-temporary impairment of debt securities to make the guidance more
operational and to improve the presentation and disclosure of those impairments
in the financial statements. FSP FAS 115-2 and FAS 124-2 are
effective for interim and annual reporting periods ending after June 15,
2009. Chugach began application of FSP FAS 115-2 and FAS 124-2 on
April 1, 2009, which did not have a material effect on our results of
operations, financial position, and cash flows.
Effective
July 2009, the FASB adapted FSP FAS 115-2 and FAS 124-2 into the
Codification. To view the adapted content, see FASB ASC 320-10-65-1
for paragraph 1 of Section 320-10-65.
FSP FAS 157-4 “Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly”
In April
2009, the FASB issued FSP FAS 157-4, ”Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions.” FSP FAS 157-4 applies to all assets and
liabilities within the scope of accounting pronouncements that require or permit
fair value measurement. FSP FAS 157-4 is effective for interim and
annual reporting periods ending after June 15, 2009. Chugach began
application of FSP FAS 157-4 on April 1, 2009, which did not have a material
effect on our results of operations, financial position, and cash
flows.
Effective
July 2009, the FASB adapted FSP FAS 157-4 into the Codification. To
view the adapted content, see FASB ASC 820-10-65-4 for paragraph 4 of Section
820-10-65.
9.
|
FAIR
VALUES OF ASSETS AND LIABILITIES
|
On
January 1, 2008, Chugach adopted the provisions of FASB ASC 820, “Topic 820 – Fair Value Measurements
and Disclosures.” FASB ASC 820 defines fair value, establishes
a consistent framework for measuring fair value and expands disclosure
requirements for fair value measurements. On January 1, 2009, Chugach
adopted certain provisions of FASB ASC 820 relating to nonfinancial assets and
liabilities that are not recognized or disclosed at fair value in the financial
statements on a recurring basis, at least annually. The adoption of
these specific provisions of FASB ASC 820 relating to nonfinancial assets and
liabilities did not have a material impact on our results of operations,
financial position, and cash flows.
16
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
Fair Value
Hierarchy
In
accordance with FASB ASC 820, Chugach groups its financial assets and
liabilities measured at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value. These levels
are:
Level 1 –
Valuation is based upon quoted prices for identical instruments traded in active
exchange markets, such as the New York Stock Exchange. Level 1 also
includes U.S. Treasury and federal agency securities, which are traded by
dealers or brokers in active markets. Valuations are obtained from
readily available pricing sources for market transactions involving identical
assets or liabilities.
Level 2 –
Valuation is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant
assumptions are observable in the market.
Level 3 –
Valuation is generated from model-based techniques that use significant
assumptions not observable in the market. These unobservable
assumptions reflect Chugach’s estimates of assumptions that market participants
would use in pricing the asset or liability. Valuation techniques
include use of option pricing models, discounted cash flow models and similar
techniques.
The table
below presents the balance of Chugach’s non-qualified deferred compensation plan
assets measured at fair value on a recurring basis.
Total
|
Level 1
|
Level 2
|
Level 3
|
$319,717
|
$319,717
|
$0
|
$0
|
Chugach
had no Level 2 or Level 3 assets or liabilities measured at fair value on a
recurring basis.
Fair Value of Long-Term
Obligations
The
estimated fair values (in thousands) of the long-term obligations included in
the financial statements at September 30, 2009, are as follows:
Carrying Value
|
Fair Value
|
|
Long-term
obligations (including current installments)
|
$312,162
|
$332,888
|
17
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
Fair
value estimates are dependent upon subjective assumptions and involve
significant uncertainties resulting in variability in estimates with changes in
assumptions. The fair value of long-term debt has been determined
using discounted future cash flows at borrowing rates currently available to
Chugach.
The fair
values of cash and cash equivalents, accounts receivable and payable, and other
short-term monetary assets and liabilities approximate carrying values due to
their short-term nature.
10.
|
ENVIRONMENTAL
MATTERS
|
The Clean
Air Act and Environmental Protection Agency (EPA) regulations under the act (the
“Clean Air Act”) establish ambient air quality standards and limit the emission
of many air pollutants. Some Clean Air Act programs that regulate
electric utilities, notably the Title IV “acid
rain” requirements, do not apply to facilities located in Alaska. In
2008, the EPA vacated regulations to limit mercury emissions from fossil-fired
steam-electric generating facilities.
New Clean
Air Act regulations impacting electric utilities may result from future events
or may result from new regulatory programs that may be established to address
problems such as global warming. While we cannot predict whether any
new regulation would occur or its limitation, it is possible that new laws or
regulations could increase our capital and operating costs. We have obtained or
applied for all Clean Air Act permits currently required for the operation of
our generating facilities.
On
October 30, 2009, EPA published new federal regulations requiring the mandatory
reporting of greenhouse gases from all sectors of the
economy. Chugach is subject to this new regulation and is currently
analyzing the effect it will have on its operations. Complying with
the new rule is not expected to have a material effect on our results of
operations, financial position, and cash flows.
In March
2007, Chugach conducted emissions testing at the Bernice Lake Power Plant which
indicated that two of the gas turbines at the facility were exceeding the New
Source Performance Standards (NSPS) emission limit for nitrogen oxides
(NOx). Chugach voluntarily limited the power output of these turbines
to ensure interim compliance with the NSPS regulations until a water injection
system to control NOx emissions from the turbines was installed and
operational. With the water injection system, Chugach is able to
fully utilize the power output from these turbines while complying with the NSPS
regulations.
The
Alaska Department of Environmental Conservation (ADEC) issued a Notice of
Violation (NOV) on March 26, 2008, regarding the NSPS NOx emission limit
exceedances. Chugach entered into a settlement with ADEC regarding
the NOV for the past NSPS non-compliance. Chugach and the ADEC signed
the settlement agreement on February 18, 2009. As part of the
settlement, Chugach paid a civil penalty of $112,161 to ADEC on April 3, 2009,
bringing the issue to a close.
Chugach
is subject to numerous other environmental statutes including the Clean Water
Act, the Resource Conservation and Recovery Act, the Toxic Substances Control
Act, the Endangered Species Act, and the Comprehensive Environmental Response,
Compensation and Liability Act and to the regulations implementing these
statutes. We do not believe that compliance with these statutes and
regulations to date has had a material impact on our financial condition or
results of operation. However, new laws or
regulations, implementation of final regulations or changes in or new
interpretations of these laws or regulations could result in significant
additional capital or operating expenses.
18
Chugach
Electric Association, Inc.
Notes
to Financial Statements
September
30, 2009 and 2008
11.
|
GENERATION
COMMITMENTS
|
Chugach
is in the process of constructing a natural gas fired generation plant on land
currently owned by Chugach near its Anchorage headquarters. The
Southcentral Power Project (SPP) will be developed and owned jointly with
Anchorage Municipal Light & Power (AML&P). Chugach will own
and take 70% of the new plant’s output and AML&P will own and take the
remaining 30%. Chugach will account for its ownership in the SPP
proportionately. Chugach and AML&P signed Participation,
Operation and Maintenance (O&M) and Lease Agreements (Agreements) for this
project on August 28, 2008. On November 17, 2008, Chugach executed a
gas turbine purchase agreement for the purchase of three gas turbines with an
option for a fourth turbine with General Electric Packaged Power
(GEPP). The option to purchase a fourth turbine expired on January
31, 2009. Chugach made a payment of $5.1 million in 2008 and is
expected to make progress and milestone payments of $23.5 million and $22.8
million in 2009 and 2010, respectively, pursuant to its purchase agreement with
GEPP. In December of 2008, Chugach purchased land adjacent to its
Anchorage headquarters. This land will be used as a project laydown
area and to relocate materials and equipment previously located on the site of
the new power plant. Chugach is currently preparing purchase
documentation for engineering, procurement and construction services to be
awarded in early 2010. On April 22, 2009, Chugach’s Board of
Directors authorized the Chief Executive Officer to enter into an Owner’s
Engineer Services Contract for the SPP. Chugach executed an Owner’s
Engineer Services Contract on May 12, 2009.
19
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Reference
is made to the information contained under the caption “CAUTION REGARDING
FORWARD-LOOKING STATEMENTS” at the beginning of this report.
RESULTS
OF OPERATIONS
Current
Year Quarter versus Prior Year Quarter
Assignable
margins decreased by $286.1 thousand, or 23.4%, during the third quarter of 2009
compared to the same quarter in 2008. Negative margin performance
during the second and third quarters is representative of the seasonal nature of
our business. Our customers’ requirements for capacity and energy
generally are seasonal and increase in the fall and winter as home heating needs
increase and then decline in the spring and summer as the weather becomes
milder.
Operating
revenues, which include sales of electric energy to retail, wholesale and
economy energy customers and other miscellaneous revenues, decreased $6.7
million, or 9.6%, in the third quarter of 2009 compared to the same quarter in
2008. This decrease was due primarily to lower fuel and purchased
power costs recovered through the fuel and purchased power surcharge process and
a decrease in sales.
Total
retail revenue decreased in the third quarter of 2009 compared to the same
quarter in 2008. Base rate revenue decreased due to lower retail kWh
sales caused by a change in consumer consumption patterns. A decrease in
the fuel and purchased power expense recovered through the fuel and purchased
power surcharge process caused primarily by lower kwh sales also contributed to
the decrease in retail revenue in the third quarter of 2009 compared to the same
period in 2008.
Total
wholesale revenue decreased in the third quarter of 2009 compared to the same
quarter in 2008. Base rate revenue increased in part due to the base
rate increase effective October 9, 2009, as a result of interim rates included
in Chugach’s 2008 Test Year Rate Case filed on June 23, 2009. That
increase was somewhat offset by a decrease in wholesale kWh sales primarily
caused by lower sales by HEA to its commercial customers. Fuel and
purchased power expense recovered through the fuel and purchased power surcharge
process also decreased due primarily to lower kwh sales in the third quarter of
2009 compared to the same period in 2008. Economy energy revenue
decreased during the third quarter of 2009 compared to the same quarter in 2008
due to decreased sales to GVEA. The decrease was caused by the March
31, 2009, expiration of the current sales agreement. Chugach
negotiated a three-month sales agreement, spanning September through November of
2009, to provide a 20 MW economy energy sale to GVEA.
20
Based on
the results of fixed and variable cost recovery established in Chugach’s last
rate case, wholesale sales to HEA, MEA and Seward contributed approximately $6.5
million to Chugach’s fixed costs for the quarter ended September 30, 2009 and
$6.5 million for the quarter ended September 30, 2008.
The
following table shows the base rate sales revenue and fuel and purchased power
revenue by customer class that is included in revenue for the quarters ended
September 30, 2009 and 2008:
Base
Rate Sales Revenue
|
Fuel
and Purchased Power Revenue
|
Total
Revenue
|
||||||||||||||||||||||||||||||||||
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||
Retail
|
|
|||||||||||||||||||||||||||||||||||
Residential
|
$ | 9.8 | $ | 10.2 | (3.9 | %) | $ | 7.3 | $ | 8.0 | (8.8 | %) | $ | 17.1 | $ | 18.2 | (6.0 | %) | ||||||||||||||||||
Small
Commercial
|
$ | 1.8 | $ | 1.9 | (5.3 | %) | $ | 1.5 | $ | 1.8 | (16.7 | %) | $ | 3.3 | $ | 3.7 | (10.8 | %) | ||||||||||||||||||
Large
Commercial
|
$ | 6.9 | $ | 7.1 | (2.8 | %) | $ | 7.8 | $ | 8.5 | (8.2 | %) | $ | 14.7 | $ | 15.6 | (5.8 | %) | ||||||||||||||||||
Lighting
|
$ | 0.3 | $ | 0.3 | 0.0 | % | $ | 0.1 | $ | 0.1 | 0.0 | % | $ | 0.4 | $ | 0.4 | 0.0 | % | ||||||||||||||||||
Total
Retail
|
$ | 18.8 | $ | 19.5 | (3.6 | %) | $ | 16.7 | $ | 18.4 | (9.2 | %) | $ | 35.5 | $ | 37.9 | (6.3 | %) | ||||||||||||||||||
Wholesale
|
||||||||||||||||||||||||||||||||||||
HEA
|
$ | 3.0 | $ | 2.9 | 3.4 | % | $ | 7.2 | $ | 8.1 | (11.1 | %) | $ | 10.2 | $ | 11.0 | (7.3 | %) | ||||||||||||||||||
MEA
|
$ | 4.7 | $ | 4.6 | 2.2 | % | $ | 9.8 | $ | 10.4 | (5.8 | %) | $ | 14.5 | $ | 15.0 | (3.3 | %) | ||||||||||||||||||
SES
|
$ | 0.4 | $ | 0.3 | 33.3 | % | $ | 1.0 | $ | 1.1 | (9.1 | %) | $ | 1.4 | $ | 1.4 | (0.0 | %) | ||||||||||||||||||
Total
Wholesale
|
$ | 8.1 | $ | 7.8 | 3.8 | % | $ | 18.0 | $ | 19.6 | (8.2 | %) | $ | 26.1 | $ | 27.4 | (4.7 | %) | ||||||||||||||||||
Economy
Sales
|
$ | 0.2 | $ | 1.1 | (81.8 | %) | $ | 1.1 | $ | 3.1 | (64.5 | %) | $ | 1.3 | $ | 4.2 | (69.0 | %) | ||||||||||||||||||
Miscellaneous
|
$ | 0.7 | $ | 0.8 | (12.5 | %) | $ | 0.0 | $ | 0.0 | 0.0 | % | $ | 0.7 | $ | 0.8 | (12.5 | %) | ||||||||||||||||||
Total
Revenue
|
$ | 27.8 | $ | 29.2 | (4.8 | %) | $ | 35.8 | $ | 41.1 | (12.9 | %) | $ | 63.6 | $ | 70.3 | (9.5 | %) |
The
following table summarizes kWh sales for the quarter ended September
30:
2009
|
2008
|
|||||||
Customer
|
kWh
|
kWh
|
||||||
Retail
|
268,170,880 | 271,392,009 | ||||||
Wholesale
|
296,784,184 | 309,796,748 | ||||||
Economy
Energy
|
12,192,000 | 56,803,260 | ||||||
Total
|
577,147,064 | 637,992,017 |
Base
rates charged to retail customers did not change in the third quarter of 2009
compared to the same quarter in 2008. Base rates charged to wholesale
customers in the third quarter of 2009 included a one month interim base rate
change which averaged 4.2%, effective October 9, 2009, as a result of proposed
rates included in Chugach's 2008 Test Year Rate Case filed on June 23,
2009.
Total
operating expenses decreased $6.0 million, or 9.0%, in the third quarter of 2009
over the same quarter in 2008, due largely to a decrease in fuel costs, which
was offset primarily by an increase in purchased power costs.
Fuel
expense decreased $7.4 million, or 21.0%, in the third quarter of 2009 compared
to the same quarter in 2008. The decrease was due primarily to a
decrease in MCF used caused by lower kwh and economy energy sales. In the
third quarter of 2009, Chugach used 5,457,259 MCF of fuel at an average
effective price of $6.19 per MCF, which includes 972,624 MCF of fuel that is
recorded as purchased power expense. In the third quarter of 2008, Chugach
used 7,449,345 MCF of fuel at an average effective price of $5.11 per MCF, which
includes 879,188 MCF of fuel that is recorded as purchased power expense.
21
Production
expense increased $623.8 thousand, or 15.3%, in the third quarter of 2009
compared to the same quarter in 2008 due primarily to expenses associated
with Beluga Unit 8 maintenance in the third quarter of 2009.
Purchased
power expense, which includes the cost of 972,624 MCF of fuel associated with
purchases from the Nikiski Cogeneration plant, increased $1.3 million, or 17.4%,
in the third quarter of 2009 compared to the same quarter in 2008 due primarily
to an increase in MWh purchased, which was somewhat offset by a decrease in
the effective price, primarily associated with the price of fuel. In
the third quarter of 2009, Chugach purchased 141,821 MWh of energy at an average
effective price of 5.96 cents per kWh. In the third quarter of 2008,
Chugach purchased 98,434 MWh of energy at an average effective price of 7.29
cents per MWh.
Transmission
expense did not materially change in the third quarter of 2009 compared to the
same quarter in 2008.
Distribution
expense decreased $200.8 thousand, or 5.8%, in the third quarter of 2009
compared to the same quarter in 2008 due primarily to a decrease in substation
and overhead line maintenance and clearing.
Consumer
accounts expense did not materially change in the third quarter of 2009 compared
to the same quarter in 2008.
Administrative,
general and other expenses decreased $495.2 thousand, or 9.9%, in the third
quarter of 2009 compared to the same quarter in 2008 due primarily to a decrease
in legal expenses.
Depreciation
and amortization expense did not materially change in the third quarter of 2009
compared to the same quarter in 2008.
Interest
on long-term debt did not materially change in the third quarter of 2009
compared to the same quarter in 2008.
Other
interest expense decreased $256.0 thousand, or 50.5%, in the third quarter of
2009 compared to the same quarter in 2008. The decrease was due primarily
to the difference between the balance of the NRUCFC line of credit used in 2008
to redeem the 2002 Series B Bonds and the balance of commercial paper
outstanding, which was used to pay the balance of the NRUCFC line of credit in
2009, as well as lower interest rates on commercial paper compared to our NRUCFC
line of credit.
22
Interest
charged to construction increased $44.0 thousand, or 46.2%, in the third quarter
of 2009 compared to the same quarter in 2008. The increase was largely due
to a higher construction work in progress balance in the third quarter of 2009
compared to the same period in 2008.
Non-operating
margins decreased $11.3 thousand, or 7.4%, in the third quarter of 2009 compared
to the same quarter in 2008. The decrease was due to lower interest
income due to a lower average cash balance and lower interest rates and lower
Allowance for Funds Used During Construction (AFUDC) due to a lower average
rate, offset by a higher construction work in progress balance. Those
decreases were somewhat offset by a gain associated with a relinquished easement
interest on permitted property in 2009.
Current
Year to Date versus Prior Year to Date
Assignable
margins decreased by $1.5 million, or 64.4%, during the first nine months of
2009 compared to the same period in 2008.
Operating
revenues, which include sales of electric energy to retail, wholesale and
economy energy customers and other miscellaneous revenues, increased $11.6
million, or 5.7%, in the first nine months of 2009 compared to the same period
in 2008. This increase was due primarily to higher fuel and purchased power
expense recovered through the fuel and purchased power surcharge
process.
Total
retail revenue increased in the first nine months of 2009 compared to the same
period in 2008. Base rate revenue decreased due to lower retail kWh
sales caused by a change in consumer consumption patterns and a retail base rate
decrease effective in June of 2008 as a result of Chugach’s 2005 Test Year Rate
Case. The decrease in base rate revenue was more than offset by
higher fuel and purchased power expenses recovered through the fuel and
purchased power surcharge process. Higher fuel and purchased power
costs were due in part to higher fuel prices, which was somewhat offset by a
decrease in MCF used due primarily to lower economy energy sales in the first
nine months of 2009 compared to the same period in 2008.
Wholesale
revenue increased in the first nine months of 2009 compared to the same period
in 2008. Base rate revenue increased due in part to the base rate
increase charged to wholesale customers in June of 2008 as a result of Chugach’s
2005 Test Year Rate Case, as well as a one month interim base rate increase
which averaged 4.2%, effective October 9, 2009, as a result of proposed rates
included in Chugach’s 2008 Test Year Rate Case filed on June 23,
2009. This increase was somewhat offset by a decrease in wholesale
kWh sales primarily due to lower sales by HEA to its commercial
customers. Fuel and purchased power expense recovered through the
fuel and purchased power surcharge process increased due to higher fuel prices
which was somewhat offset by a decrease in MCF used due primarily to lower
economy energy sales. Economy energy revenue decreased during the first
nine of 2009 compared to the same period in 2008 due to decreased sales to
GVEA. The decrease was caused by the March 31, 2009, expiration of
the current sales agreement. Chugach negotiated a three-month sales
agreement, spanning September through November of 2009, to provide a 20 MW
economy energy sale to GVEA.
23
Based on
the results of fixed and variable cost recovery established in Chugach’s last
rate case, wholesale sales to HEA, MEA and Seward contributed approximately
$21.1 million to Chugach’s fixed costs for the nine months ended September 30,
2009 and $19.9 million for the nine months ended September 30,
2008.
The
following table shows the base rate sales revenue and fuel and purchased power
revenue by customer class that is included in revenue for the nine months ended
September 30, 2009 and 2008:
Base
Rate Sales Revenue
|
Fuel
and Purchased Power Revenue
|
Total
Revenue
|
||||||||||||||||||||||||||||||||||
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
2009
|
2008
|
%
Variance
|
||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||
Retail
|
|
|
||||||||||||||||||||||||||||||||||
Residential
|
$ | 32.3 | $ | 33.7 | (4.2 | %) | $ | 28.6 | $ | 23.1 | 23.8 | % | $ | 60.9 | $ | 56.8 | 7.2 | % | ||||||||||||||||||
Small
Commercial
|
$ | 5.9 | $ | 6.1 | (3.3 | %) | $ | 6.1 | $ | 4.9 | 24.5 | % | $ | 12.0 | $ | 11.0 | 9.1 | % | ||||||||||||||||||
Large
Commercial
|
$ | 20.3 | $ | 21.3 | (4.7 | %) | $ | 27.0 | $ | 22.5 | 20.0 | % | $ | 47.3 | $ | 43.8 | 8.0 | % | ||||||||||||||||||
Lighting
|
$ | 1.0 | $ | 1.0 | 0.0 | % | $ | 0.2 | $ | 0.1 | 0.0 | % | $ | 1.2 | $ | 1.1 | 9.1 | % | ||||||||||||||||||
Total
Retail
|
$ | 59.5 | $ | 62.1 | (4.2 | %) | $ | 61.9 | $ | 50.6 | 22.3 | % | $ | 121.4 | $ | 112.7 | 7.7 | % | ||||||||||||||||||
Wholesale
|
||||||||||||||||||||||||||||||||||||
HEA
|
$ | 8.7 | $ | 8.4 | 3.6 | % | $ | 24.7 | $ | 21.0 | 17.6 | % | $ | 33.4 | $ | 29.4 | 13.6 | % | ||||||||||||||||||
MEA
|
$ | 15.6 | $ | 14.6 | 6.8 | % | $ | 37.1 | $ | 28.9 | 28.4 | % | $ | 52.7 | $ | 43.5 | 21.1 | % | ||||||||||||||||||
SES
|
$ | 1.0 | $ | 0.8 | 25.0 | % | $ | 3.3 | $ | 2.7 | 22.2 | % | $ | 4.3 | $ | 3.5 | 22.9 | % | ||||||||||||||||||
Total
Wholesale
|
$ | 25.3 | $ | 23.8 | 6.3 | % | $ | 65.1 | $ | 52.6 | 23.8 | % | $ | 90.4 | $ | 76.4 | 18.3 | % | ||||||||||||||||||
Economy
Sales
|
$ | 0.4 | $ | 3.6 | (88.9 | %) | $ | 2.1 | $ | 9.8 | (78.6 | %) | $ | 2.5 | $ | 13.4 | (81.3 | %) | ||||||||||||||||||
Miscellaneous
|
$ | 1.9 | $ | 2.2 | (13.6 | %) | $ | 0.0 | $ | 0.0 | 0.0 | % | $ | 1.9 | $ | 2.2 | (13.6 | %) | ||||||||||||||||||
Total
Revenue
|
$ | 87.1 | $ | 91.7 | (5.0 | %) | $ | 129.1 | $ | 113.0 | 14.2 | % | $ | 216.2 | $ | 204.7 | 5.6 | % |
The
following table summarizes kWh sales for the nine months ended September
30:
2009
|
2008
|
|||||||
Customer
|
kWh
|
kWh
|
||||||
Retail
|
859,881,745 | 875,024,498 | ||||||
Wholesale
|
932,095,629 | 960,541,423 | ||||||
Economy
Energy
|
26,056,300 | 191,662,340 | ||||||
Total
|
1,818,033,674 | 2,027,228,261 |
Base
rates charged to retail customers in the first nine months of 2009 included a
4.8 percent base rate decrease, which was effective June 1, 2008, as a result of
Chugach’s 2005 Test Year Rate Case. Base rates charged to wholesale
customers in the first nine months of 2009 included a base rate increase, which
was effective June 1, 2008, as a result of Chugach’s 2005 Test Year Rate
Case. Base rates charged to wholesale customers also included a one
month interim base rate increase of 4.2 percent, which was effective October 9,
2009, as a result of proposed rates included in Chugach’s 2008 Test Year Rate
Case filed on June 23, 2009.
Total
operating expenses increased $13.9 million, or 7.5%, in the first nine months of
2009 over the same period in 2008, due largely to fuel and purchased power
costs.
24
Fuel
expense increased $6.6 million, or 6.9%, in the first nine months of 2009
compared to the same period in 2008, due to an increase in the effective fuel
price, which was somewhat offset by a decrease in MCF used due primarily to
lower kwh and economy energy sales. In the first nine months of 2009,
Chugach used 18,441,637 MCF of fuel at an average effective price of $6.58 per
MCF, which includes 3,070,111 MCF of fuel that is recorded as purchased power
expense. In the first nine months of 2008, Chugach used 22,128,154
MCF of fuel at an average effective price of $4.85 per MCF, which includes
2,915,950 MCF of fuel that is recorded as purchased power expense.
Production
expense did not materially change in the first nine months of 2009 compared to
the same period in 2008.
Purchased
power expense, which includes the cost of 3,070,111 MCF of fuel associated with
purchases from the Nikiski Cogeneration plant, increased $6.6 million, or 28.7%,
in the first nine months of 2009 compared to the same period in 2008 due
primarily to an increase in the price, primarily associated with the price of
fuel. In the first nine months of 2009, Chugach purchased 391,138 MWh
of energy at an average effective price of 7.33 cents per kWh. In the
first nine months of 2008, Chugach purchased 373,844 MWh of energy at an average
effective price of 5.91 cents per kWh.
Transmission
expense decreased $237.3 thousand, or 5.2%, in the first nine months of 2009
compared to the same period in 2008 due primarily to a decrease in substation
maintenance.
Distribution
expense did not materially change in the first nine months of 2009 compared to
the same period in 2008.
Consumer
accounts expense did not materially change in the first nine months of 2009
compared to the same period in 2008.
Administrative,
general and other expenses did not materially change in the first nine months of
2009 compared to the same period in 2008.
Depreciation
and amortization expense increased $1.2 million, or 5.4%, in the first nine
months of 2009 compared to the same period in 2008. The increase was
due in large part to a change in depreciation rates, effective in June of 2008
as a result of Chugach’s 2005 Test Year Rate Case and the continued closeout of
construction projects.
Interest
on long-term debt decreased $938.8 thousand, or 5.8%, in the first nine months
of 2009 compared to the same period in 2008. The decrease was related
to the use of our NRUCFC line of credit to redeem the outstanding principal
amount of the 2002 Series B Bonds in March of 2008, resulting in a shift from
long-term to short-term interest expense, lower interest rates in the first nine
months of 2009 compared to the same period in 2008 and continued principal
payments on our CoBank debt.
25
Other
interest expense did not materially change in the first nine months of 2009
compared to the same period in 2008, however, other interest expense increased
due in part to the use of the NRUCFC line of credit described above and for
general working capital which wasn’t repaid until February 19,
2009. This increase is offset by the difference between the balance
of the NRUCFC line of credit used in 2008 to redeem the 2002 Series B Bonds and
the balance of commercial paper outstanding which was used to pay the balance of
the NRUCFC line of credit in 2009. The increase is also offset by the
effect of the difference in interest rates between the NRUCFC line of credit in
2008 and the commercial paper interest rates in 2009.
Interest
charged to construction increased $84.1 thousand, or 26.9%, in the first nine
months of 2009 compared to the same period in 2008. The increase was
due primarily to a higher construction work in progress balance in the first
nine months of 2009 compared to the same period in 2008.
Non-operating
margins decreased $111.3 thousand, or 26.2%, in the first nine months of 2009
compared to the same period in 2008. The decrease is due to lower
interest income due to a lower average cash balance as well as lower interest
rates. The decrease was somewhat offset by a gain associated with a
relinquished easement interest on permitted property in 2009 and higher AFUDC
caused by a higher construction work in progress balance in the first nine
months of 2009 compared to the same period in 2008, slightly offset by a lower
average rate.
Financial
Condition
Assets
Total
assets decreased $15.0 million, or 2.6%, from December 31, 2008 to September 30,
2009. Net utility plant decreased $3.4 million, or 0.8%, primarily
due to depreciation expense in excess of extension and replacement of
plant. Fuel and purchased power cost recovery decreased $11.8 million, or
100%, due to the collection of the prior quarter’s fuel and purchased power
costs recovered through the fuel surcharge process. Deferred charges
decreased $1.1 million, or 4.7%, due primarily to nine months of amortization of
deferred charges, offset by an increase in deferred charges associated with gas
negotiations and the overhauls of units at the Cooper Lake Power
Plant.
These
decreases were offset by a $1.3 million, or 4.5% increase in materials and
supplies due primarily to the purchase of materials for planned generation and
distribution projects.
Liabilities
Total
liabilities, equities and margins decreased $15.0 million, or 2.6%, from
December 31, 2008 to September 30, 2009. The decrease includes a $2.9
million, or 100%, decrease in promissory notes payable caused by the payment of
the note associated with the property Chugach acquired for construction of an
additional electrical generation facility. The decrease also includes
a $7.5 million, or 100% decrease in short-term obligations due to the payment of
the outstanding balance on the CoBank line of credit. Accrued
interest decreased $4.4 million, or 71.5%, caused by the timing of semi-annual
interest payments and fuel payable decreased $9.6 million, or 33.9%, caused by a
decrease in fuel prices and kWh sales. Other liabilities decreased
$805.6 thousand, or 48.3%, due primarily to a decrease in the municipal
underground ordinance payable, a decrease in gross receipts payable due to the
payment of Chugach’s annual gross receipts tax and a decrease in patronage
capital payable due to the payment of the 2008 retirement of patronage capital
in 2009. Deferred liabilities also decreased $845.7 thousand, or
36.7%, caused primarily by the transfer of customer advances to construction
projects.
26
These
decreases were offset by a $713.4 thousand, or 0.5%, increase in total equities
and margins due primarily to the margins generated in the first nine months of
2009. The net of total long-term obligations and current installments
of long-term debt increased $8.4 million, or 2.3%, caused by an increase in
commercial paper borrowing, which was somewhat offset by the principal payments
made on CoBank 2, 3, 4 and 5 in the first nine months of 2009. The
decreases were also offset by a $2.1 million, or 100% increase in fuel and
purchased power cost over-recovery due to the over-collection of the prior
quarter’s fuel and purchased power costs recovered through the fuel surcharge
process, which created a payable instead of a receivable at September 30,
2009.
LIQUIDITY
AND CAPITAL RESOURCES
Summary
We ended
the first nine months of 2009 with $6.3 million of cash and cash equivalents,
down from $7.5 million at December 31, 2008. We utilized the $57.5 million
in lines of credit that we maintained with CoBank and NRUCFC in the first half
of 2009, however, we did not utilize these lines of credit in the third quarter
of 2009 and there was no outstanding balance on these lines of credit at
September 30, 2009. Our available borrowing capacity under these lines at
September 30, 2009, was $57.5 million. Our line of credit with CoBank
expired on October 31, 2009. We did not renew this line of credit
upon its expiration date, thus reducing our available borrowing capacity under
our existing line of credit to $50 million. We issued commercial
paper in the first nine months of 2009 and had $55.0 million of commercial paper
outstanding at September 30, 2009, thus our available borrowing capacity under
our commercial paper program at September 30, 2009, was $245.0
million.
Cash
equivalents consist of all highly liquid debt instruments with a maturity of
three months or less when purchased and an Overnight Repurchase Agreement with
First National Bank Alaska (FNBA).
27
Cash
Flows
The
following table summarizes our cash flows from operating, investing and
financing activities for the nine months ended September 30, 2009 and
2008.
2009
|
2008
|
|||||||
Total
cash provided by (used in):
|
||||||||
Operating
activities
|
21,938,049 | 22,987,262 | ||||||
Investing
activities
|
(21,389,832 | ) | (17,204,767 | ) | ||||
Financing
activities
|
(1,706,340 | ) | (2,581,530 | ) | ||||
(Decrease)
increase in cash and cash equivalents
|
(1,158,123 | ) | 3,200,965 |
Operating
Activities
Cash
provided by operating activities was $21.9 million for the nine months ended
September 30, 2009, compared with $23.0 million for the nine months ended
September 30, 2008. An increase in depreciation expense was offset by
a decrease in assignable margins and changes in operating assets and
liabilities. Assignable margins decreased to $0.8 million in the first nine
months of 2009, compared with $2.3 million in the first nine months of
2008. The changes in operating assets and liabilities were due primarily to
changes in accounts receivable, fuel and purchased power cost under-recovery,
materials and supplies, deferred charges, accounts payable, fuel and purchased
power cost over-recovery and fuel payable. The accounts receivable change
was due primarily to a decrease in the fuel component of consumer’s invoices due
to lower fuel prices while the change in fuel and purchased power cost
under-recovery was due to the collection of fuel and purchased power costs
recovered through the fuel surcharge process in the first quarter of
2009. The change in materials and supplies was due primarily to the
change in inventory needed for projects while the change in deferred charges was
due to the difference between the costs associated with the Beluga Unit 8
overhaul and new generation development in 2008 compared with the costs
associated with the Cooper Lake Unit 2 overhaul and interim financing in
2009. The change in accounts payable was due primarily to the timing
of cash payments on invoices for goods and services. The change in
fuel and purchased power cost over-recovery was due to the over-collection of
fuel and purchased power costs recovered through the fuel surcharge process in
2009. The fuel payable change was due primarily to a decrease in the
cost of fuel since December 31, 2008.
Investing
Activities
Cash used
in investing activities was $21.4 million for the nine months ended September
30, 2009, compared with $17.2 million for the nine months ended September 30,
2008. The change in cash used in investing activities for the nine
months ended September 30, 2009, compared with the nine months ended September
30, 2008, was due primarily to the level of construction activity in the first
nine months of 2009 compared to the same period in 2008, which includes taking
into account the adjustment described in the Notes to Financial Statements, see
“Item 1 – Financial Statements
– Note 2f – Presentation of Financial Information.” Capital
construction for 2009 was originally estimated at $72.1
million. Capital improvement expenditures are expected to decrease
during the fourth quarter as the construction season ends. It is
expected that capital improvement expenditures in 2009 will be significantly
below the amount originally anticipated.
28
Financing
Activities
Cash used
in financing activities was $1.7 million for the nine months ended September 30,
2009, compared to $2.6 million for the nine months ended September 30,
2008. The change in cash used in financing activities for the nine
months ended September 30, 2009, compared with the nine months ended September
30, 2008, was due primarily to the use of short-term borrowings to pay long-term
debt in 2008 compared to the reclassification of long-term debt to current
portion in the first quarter of 2009, as well as the net of commercial paper
borrowings and subsequent payments in the first nine months of
2009. The change was also due to the payment of the 2008 retirement
of patronage capital in 2009, which was less than the payment of the 2007
retirement of patronage capital in 2008. The change was also due to
the payment of a promissory note associated with a land purchase.
Sources
of Liquidity
Chugach
had satisfied its operational and capital cash requirements primarily through
internally generated funds, an annual $7.5 million line of credit with CoBank, a
$50 million line of credit from NRUCFC and a $300 million commercial paper
program. We issued $45.5 million of our available
commercial paper in order to pay the outstanding balance of our NRUCFC line of
credit which was used to redeem our 2002 Series B Bonds in March of 2008 and for
general working capital. In the first half of 2009, Chugach had
activity on our CoBank line of credit, however, Chugach paid the outstanding
balance on this line of credit. At September 30, 2009, there was no
outstanding balance on our CoBank or NRUCFC lines of credit and $55.0 million of
commercial paper outstanding. Thus, at September 30, 2009, our
available borrowing capacity under these lines of credit was $57.5 million and
our available commercial paper capacity was $245.0 million. Our line of credit
with CoBank expired on October 31, 2009. Due to unused carrying
costs, its lack of use and the existence of the NRUCFC line of credit and
Commercial Paper borrowing capacity, we did not renew this line of credit upon
its expiration date, reducing our available borrowing capacity under our
existing line of credit to $50 million.
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.
29
At
September 30, 2009, Chugach had the following promissory notes outstanding with
this facility:
Promissory
Note
|
Principal
Balance
|
Interest
Rate at September 30,
2009
|
Maturity
Date
|
Principal
Payment Dates
|
|||||||||
CoBank
2
|
$ | 2,000,000 | 5.50% | 2010 | 2005 – 2010 | ||||||||
CoBank
3
|
17,677,513 | 2.25% | 2022 | 2003 – 2022 | |||||||||
CoBank
4
|
19,321,934 | 2.25% | 2022 | 2003 – 2022 | |||||||||
CoBank
5
|
3,162,770 | 2.25% | 2012 | 2007 – 2012 | |||||||||
Total
|
$ | 42,162,217 |
Over the
next five years, Chugach anticipates incurring increased capital expenditures
due to the construction of a natural gas fired generation plant, on-going
capital needs and refinancing of certain existing debt. In October
2008, Chugach entered into a $300 million Unsecured Credit Agreement between
NRUCFC, KeyBank, CoBank and US Bank intended to back the commercial paper
program. The Credit Agreement was priced with an all-in drawn spread
of LIBOR plus 60 basis points, along with a 17.5 basis points facility
fee. The credit agreement was executed on October 10, 2008, and
expires on October 10, 2011. Commercial paper will be issued under
this facility and will act as a bridge until Chugach converts Commercial Paper
balances to long term debt and to refinance the 2011 and 2012 Series A
Bonds. At this time, management intends to renew this agreement
although the terms may be different. Chugach began issuing short-term
Commercial Paper in the first quarter of 2009.
Chugach
management continues to expect that cash flows from operations and external
funding sources, including additional commercial paper borrowings, will be
sufficient to cover operational, financing and capital funding requirements for
the remainder of 2009 and thereafter.
CRITICAL
ACCOUNTING POLICIES
Chugach’s
accounting and reporting policies comply with U.S. generally accepted accounting
principles (GAAP). The preparation of financial statements in
conformity with GAAP requires that management apply accounting policies and make
estimates and assumptions that affect results of operations and reported amounts
of assets and liabilities in the financial statements. Critical
accounting policies are those policies that management believes are the most
important to the portrayal of Chugach's financial condition and results of its
operations, and require management's most difficult, subjective, or complex
judgments, often as a result of the need to make estimates about matters that
are inherently uncertain. Most accounting policies are not considered by
management to be critical accounting policies. Several factors are
considered in determining whether or not a policy is critical in the preparation
of financial statements. These factors include, among other things,
whether the estimates are significant to the financial statements, the nature of
the estimates, the ability to readily validate the estimates with other
information including third parties or available prices, and sensitivity of the
estimates to changes in economic conditions and whether alternative accounting
methods may be utilized under GAAP. For all of these policies
management cautions that future events rarely develop exactly as forecast,
and the best estimates routinely require adjustment. Management has
discussed the development and the selection of critical accounting policies with
Chugach's Audit Committee. The following policies are considered to be critical
accounting policies for the nine months ended September 30,
2009.
30
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 FASB
ASC 980, “Topic 980 –
Regulated Operations.” 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 FASB ASC 980 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. Significant regulatory assets and liabilities have
been recorded. Management reviews the ultimate recoverability of these
regulatory assets and liabilities based on applicable regulatory guidelines.
However, adverse legislation and judicial or regulatory actions could materially
impact the amounts of such regulatory assets and liabilities and could adversely
impact Chugach’s financial statements.
Unbilled
revenue
Chugach
calculates unbilled retail revenue at the end of each month to ensure the
recognition of a full month’s revenue. Chugach estimates
calendar-month unbilled sales based on billing cycle sales, billing cycle read
dates, weather and hours of darkness to produce an estimate of calendar
sales. This estimate of calendar sales is then calibrated to
deliveries measured at Chugach distribution substations, net of
losses. Until September of 2008, calendar unbilled revenue was
determined by multiplying kWh sales by an average rate. Beginning in
September of 2008, Chugach fully implemented an unbilled estimate based on
respective billing class determinants to produce an estimate of calendar month
revenue. Chugach accrued $7,924,356 and $7,785,667 of unbilled retail
revenue at September 30, 2009 and 2008, respectively.
Allowance
for Doubtful Accounts
Chugach
maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. We base our estimates
on the aging of our accounts receivable balances, historical bad debt reserves,
historical percent of retail revenue that has been deemed uncollectible, our
collections process and regulatory requirements. If the financial
condition of our customers were to deteriorate resulting in an impairment of
their ability to make payments, additional allowances may be
required. If their financial condition improves, allowances may be
reduced. Such allowance changes could have a material effect on our
consolidated financial condition and results of operations.
31
RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
Information
required by this Item is contained in Note 8 to the “Notes to Financial
Statements” within Part I of this Form 10-Q.
OUTLOOK
Procuring
a new, highly efficient power generation facility, natural gas contracts, low
cost financing and replacement revenue sources for wholesale customer loads that
will be leaving in 2014, all while controlling operating expenses to minimize
adverse customer rate impacts, are some of the challenges Chugach has faced and
will continue to face in the near and intermediate term.
These
issues, along with emerging energy issues and plans at the state level, will
shape how Chugach proceeds into the future.
Chugach
has partnered with AML&P to construct and jointly own a new 183 megawatt
natural gas fired power plant. Chugach will own and take 70% of the
new plant’s output and AML&P will own and take the remaining
30%. The plant is scheduled to be placed into service in
2013. Currently, major components have been ordered and engineering
is moving forward. Chugach’s interim financing for the plant will
come from its’ established line of credit and a commercial paper borrowing
program that was established via a commercial paper $300 million unsecured
credit agreement in 2008. Given the recent volatility in the bond and
commercial paper market, close attention will be given to the timing and type of
permanent financing Chugach obtains for the new plant and other capital
additions.
Chugach
will explore all potential sources of long term financing to include federal,
state, private placement and the public markets to obtain the lowest cost
financing available for the 2011 and 2012 maturing long-term debt refinancing
and requirements for new, long-term financing for our capital additions that are
expected to begin in 2010.
On May
12, 2009, Chugach submitted a new long-term natural gas supply contract with
ConocoPhillips Alaska, Inc. and ConocoPhillips, Inc. (collectively “COP”), to
the RCA. The new contract will provide gas beginning in 2010 and
terminating December 31, 2016. The total amount of gas under the
contract is estimated to be 66 BCF. The new contract is designed to
fill 100% of Chugach’s unmet needs until April 2011, approximately 50% of
Chugach’s unmet needs from May 2011 through December 2015 and approximately 25%
in 2016. The RCA approved the gas supply contract between Chugach and
COP effective August 21, 2009. The RCA also approved inclusion of all
fuel (gas) and transportation costs related to the contract in the calculation
of Chugach’s fuel and purchased power surcharge process.
32
Notification
was made by MEA in 2004 and by HEA in 2007 that neither organization intends to
be on the Chugach system under the current contractual arrangements post
2014. This would result in a loss of approximately 50% of Chugach’s
power sales load and approximately 40% of the utility’s annual sales
revenue. While financial management plan scenarios indicate Chugach
can sustain operations and meet financial covenants in the event these two
customers leave the system, the remaining customers will have to shoulder the
burden imposed by the remaining costs and will likely face higher
rates. Neither MEA nor HEA have significant resources in place at
this time that would indicate a complete reduction in service from Chugach is
possible. Due to the lack of this necessary physical evidence,
Chugach is preparing for a continuation of some business with HEA and
MEA. At the August 26, 2009, Chugach Board of Directors’ meeting and
in a letter dated September 3, 2009, MEA’s Interim General Manager advised
Chugach that MEA desires to open discussions regarding power sales
possibilities. Chugach, however, is continuing to pursue replacement
sources of revenue through potential new firm power sales agreements and revised
transmission wheeling and ancillary services tariff revisions. We
believe that successful implementation of new power sales agreements and revised
tariffs will mitigate anticipated rate increases in the 2014 and 2015
timeframe. However, we cannot assure that we will be able to replace
sources of revenue or that any replacement of revenue sources or revised tariffs
will fully mitigate any anticipated rate increases in this
timeframe.
A
recently released State of Alaska Energy Plan released by Alaska’s governor
called for a migration to alternative fuel sources for one half of the state by
2025. This is in concert with Chugach’s conceptual goal to move from
a “90 – 10” (90 % natural gas fuel source – 10% alternative fuel source)
generation mix to a “10 – 90” generation mix. Chugach’s challenge in
the coming years will be to find low cost, highly efficient generation projects
that fulfill this goal.
On March
5, 2009, the governor of Alaska transmitted a bill to the Alaska State
Legislature that creates the Greater Railbelt Energy and Transmission
Corporation. In the Governor’s transmittal letter, she identified the
purpose of the corporation was to “plan for the financing, acquisition,
construction, ownership, and operation of necessary electric power generation
and transmission assets and services that would be necessary to provide the
Railbelt with adequate, reliable, safe, and stable electric power and
transmission services at the lowest feasible long-term cost.” The
legislation (HB 182 and SB 143) was introduced in both the House and Senate
special committees on energy and is being held in committee until the 2010
legislative session. In the interim, the six Railbelt utility
governing bodies have agreed to form a special task force to further discuss the
legislation and make recommendations to the state administration and the
legislative committees.
33
ENVIRONMENTAL
MATTERS
Compliance
with Environmental Standards
The Clean
Air Act and Environmental Protection Agency (EPA) regulations under the act (the
“Clean Air Act”) establish ambient air quality standards and limit the emission
of many air pollutants. Some Clean Air Act programs that regulate
electric utilities, notably the Title IV “acid rain” requirements, do not apply
to facilities located in Alaska. In 2008 the EPA vacated regulations
to limit mercury emissions from fossil-fired steam-electric generating
facilities.
New Clean
Air Act regulations impacting electric utilities may result from future events
or may result from new regulatory programs that may be established to address
problems such as global warming. While we cannot predict whether any
new regulation would occur or its limitation, it is possible that new laws or
regulations could increase our capital and operating costs. We have obtained or
applied for all Clean Air Act permits currently required for the operation of
our generating facilities.
On
October 30, 2009, EPA published new federal regulations requiring the mandatory
reporting of greenhouse gases from all sectors of the
economy. Chugach is subject to this new regulation and is currently
analyzing the effect it will have on its operations. Complying with
the new rule is not expected to have a material effect on our results of
operations, financial position, and cash flows.
In March
2007, Chugach conducted emissions testing at the Bernice Lake Power Plant which
indicated that two of the gas turbines at the facility were exceeding the New
Source Performance Standards (NSPS) emission limit for nitrogen oxides
(NOx). Chugach voluntarily limited the power output of these turbines
to ensure interim compliance with the NSPS regulations until a water injection
system to control NOx emissions from the turbines was installed and
operational. With the water injection system, Chugach is able to
fully utilize the power output from these turbines while complying with the NSPS
regulations.
The
Alaska Department of Environmental Conservation (ADEC) issued a Notice of
Violation (NOV) on March 26, 2008, regarding the NSPS NOx emission limit
exceedances. Chugach entered into a settlement with ADEC regarding
the NOV for the past NSPS non-compliance. Chugach and the ADEC signed
the settlement agreement on February 18, 2009. As part of the
settlement, Chugach paid a civil penalty of $112,161 to ADEC on April 3, 2009,
bringing the issue to a close.
Chugach
is subject to numerous other environmental statutes including the Clean Water
Act, the Resource Conservation and Recovery Act, the Toxic Substances Control
Act, the Endangered Species Act, and the Comprehensive Environmental Response,
Compensation and Liability Act and to the regulations implementing these
statutes. We do not believe that compliance with these statutes and
regulations to date has had a material impact on our financial condition or
results of operation. However, new laws or regulations,
implementation of final regulations or changes in or new interpretations of
these laws or regulations could result in significant additional capital or
operating expenses.
34
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Chugach
is exposed to a variety of risks, including changes in interest rates and
changes in commodity prices due to repricing mechanisms inherent in gas supply
contracts. In the normal course of our business, we manage our
exposure to these risks as described below. We do not engage in
trading market risk-sensitive instruments for speculative purposes.
Interest
Rate Risk
The
following table provides information regarding cash flows for principal payments
on total debt by maturity date (dollars in thousands) as of September 30,
2009.
Total Debt1
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
FairValue
|
||||||||||||||||||||||||
Fixed
rate debt
|
$ | 500 | $ | 1,500 | $ | 150,000 | $ | 120,000 | $ | 0 | $ | 0 | $ | 272,000 | $ | 292,726 | ||||||||||||||||
Average
interest rate
|
5.50 | % | 5.50 | % | 6.55 | % | 6.20 | % | 0.00 | % | 0.00 | % | 6.39 | % | ||||||||||||||||||
Annual
interest expense
|
$ | 4,341 | $ | 17,297 | $ | 9,487 | $ | 620 | $ | 0 | $ | 0 | ||||||||||||||||||||
Variable
rate debt
|
$ | 55,242 | $ | 2,618 | $ | 2,852 | $ | 2,694 | $ | 2,076 | $ | 29,680 | $ | 95,162 | $ | 95,162 | ||||||||||||||||
Average
interest rate
|
0.33 | % | 2.24 | % | 2.24 | % | 2.24 | % | 2.24 | % | 2.24 | % | 1.13 | % |
1
Includes current portion
Chugach
is exposed to market risk from changes in interest rates. A 100
basis-point change (up or down) would increase or decrease our interest expense
by approximately $951,622 based on $95,162,217 of variable rate debt outstanding
at September 30, 2009.
Commodity
Price Risk
Chugach’s
gas contracts provide for adjustments to gas prices 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 process, fluctuations in the price paid for gas pursuant to
long-term gas supply contracts does not normally impact
margins.
35
ITEM 4. CONTROLS
AND PROCEDURES
Evaluation
of Controls and Procedures
As of the
end of the period covered by this report, Chugach evaluated the effectiveness of
the design and operation of its disclosure controls and procedures. Chugach’s
CEO and Chief Financial Officer (CFO) supervised and participated in this
evaluation. Based on this evaluation, Chugach’s CEO and CFO each
concluded that as of the end of the period covered by this report, Chugach’s
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in its periodic reports to the
SEC. In addition, there have been no changes in Chugach’s internal
controls over financial reporting or in other factors known to management during
the most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect its internal controls over financial
reporting.
PART
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information
required by this Item is contained in Note 7 to the “Notes to Financial
Statements” within Part I of this Form 10-Q.
ITEM 1A. RISK FACTORS
Fuel
Supply
In 2008,
91% of our power was generated from gas, which included power generated at
Nikiski. Our primary suppliers of natural gas are the Beluga River
Field Producers and Marathon, of which we collectively have approximately 83 BCF
of gas remaining. In 2008, Chugach used approximately 31 BCF of
natural gas. Chugach’s supply contract with Marathon will expire in
2010. We estimate that our contract gas with the Beluga River
Producers will expire in 2011.
On May
12, 2009, Chugach submitted a new long-term natural gas supply contract with
ConocoPhillips Alaska, Inc. and ConocoPhillips, Inc. (collectively “COP”), to
the RCA. The new contract will provide gas beginning in 2010 and
terminating December 31, 2016. The total amount of gas under the
contract is estimated to be 66 BCF. The new contract is designed to
fill 100% of Chugach’s unmet needs until April 2011, approximately 50% of
Chugach’s unmet needs from May 2011 through December 2015 and approximately 25%
in 2016. The RCA approved the gas supply contract between Chugach and
COP effective August 21, 2009. The RCA also approved inclusion of all
fuel (gas) and transportation costs related to the contract in the calculation
of Chugach’s fuel and purchased power surcharge process.
Chugach
negotiated a three-month gas sales agreement, spanning September through
November of 2009, with Marathon, to provide between 5,000 and 7,000 MCF per day
to facilitate a 20 MW economy energy sale to GVEA. The short-term
agreement has an extension provision which will be evaluated on November 17,
2009.
There is
no assurance that Chugach will be able to secure additional natural gas
contracts in a timely manner, however, we are currently in contract negotiations
with other fuel producers. The RCA approved inclusion of all fuel
(gas) and transportation costs related to the contract with COP in the
calculation of Chugach’s fuel and purchased power surcharge
process. The fuel and purchased power surcharge process allows
Chugach to recover its current fuel and purchased power costs with minimal
regulatory lag. To the extent the regulated fuel recovery process
does not provide for the timely recovery of fuel expenses, Chugach could
experience a material negative impact on its cash flows.
36
Wholesale
contracts
Chugach
is the principal supplier of power under long-term wholesale power contracts
with MEA and HEA. These contracts, including the fuel component,
represented $104.6 million or 37% of sales revenue in 2008 and $93.4 million or
37% in 2007. The HEA contract expires January 1, 2014, and the MEA
contract expires December 31, 2014. All rates are approved by the
RCA.
Pursuant
to provisions of their contracts, notification was made by MEA in 2004 and by
HEA in 2007 that neither organization intends to be on the Chugach system under
the current contractual arrangements post 2014. This would result in
a loss of approximately 50% of Chugach’s power sales load and approximately 40%
of the utility’s annual sales revenue. At the August 26, 2009,
Chugach Board of Directors’ meeting and in a letter dated September 3, 2009,
MEA’s Interim General Manager advised Chugach that MEA desires to open
discussions regarding power sales possibilities.
Chugach’s
planning process, however, reflects the termination of the MEA and HEA wholesale
contracts post 2014. Consequently, to mitigate this risk, Chugach
will be pursuing replacement sources of revenue through potential new power
sales agreements and revised transmission wheeling and ancillary services tariff
revisions. The loss of these wholesale customers may require Chugach
to file a general rate case to recover total costs and/or restructure
rates. To the extent that the general rate case could take up to
fifteen months to be completed, Chugach may request an interim and refundable
rate increase in which the RCA is required to take action within 45
days. To the extent a general rate case or an interim and refundable
rate increase does not provide for the timely recovery of expenses, Chugach
could experience a material negative impact on its cash flows. Under
Alaska law, financial covenants of an Alaskan electric cooperative contained in
a debt instrument will be valid and enforceable, and rates set by the RCA must
be adequate to meet those covenants.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
Not
applicable.
37
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
Not
applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
ITEM 5. OTHER INFORMATION
On
November 9, 2009, the RCA approved Amendment No. 3 to the Nikiski Cogeneration
Plant System Use and Dispatch Agreement between Chugach and HEA effective
November 6, 2009. The contract modification recognizes HEA’s
Sustainable Natural Alternative Power (SNAP) program and allows HEA to purchase
energy from members that generate power from alternative power sources,
including wind, solar and hydro resources.
ITEM 6. EXHIBITS
Agreement
for the Sale and Purchase of Natural Gas between the Registrant and
ConocoPhillips Alaska, Inc. and ConocoPhillips, Inc. (collectively,
ConocoPhillips) effective August 21, 2009. Incorporated by reference
from Exhibit 10.65 to the Registrant’s Form 8-K filed August 27,
2009.
Third
Amendment to the Nikiski Cogeneration Plant System Use and Dispatch Agreement
between the Registrant and Homer Electric Association, Inc. dated effective
November 6, 2009.
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.
38
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this quarterly report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHUGACH
ELECTRIC ASSOCIATION, INC.
By:
|
/s/ Bradley W. Evans
|
|
Bradley
W. Evans
|
||
Chief
Executive Officer
|
||
By:
|
/s/ Michael R.
Cunningham
|
|
Michael
R. Cunningham
|
||
Chief
Financial Officer
|
||
Date:
|
November 13,
2009
|
39
EXHIBITS
Listed
below are the exhibits, which are filed as part of this Report:
Exhibit Number
|
Description
|
10.65
|
Agreement
for the Sale and Purchase of Natural Gas between the Registrant and
ConocoPhillips Alaska, Inc. and ConocoPhillips, Inc. (collectively,
ConocoPhillips) effective August 21, 2009. Incorporated by
reference from Exhibit 10.65 to the Registrant’s Form 8-K filed August 27,
2009
|
Third
Amendment to the Nikiski Cogeneration Plant System Use and Dispatch
Agreement between the Registrant and Homer Electric Association, Inc.
dated effective November 6, 2009
|
|
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
|
40