Attached files

file filename
EX-10.67 - EX-10.67 - CHUGACH ELECTRIC ASSOCIATION INCc004-20150930ex106705f02.htm
EX-32.2 - EX-32.2 - CHUGACH ELECTRIC ASSOCIATION INCc004-20150930xex322.htm
EX-31.2 - EX-31.2 - CHUGACH ELECTRIC ASSOCIATION INCc004-20150930xex312.htm
EX-10.75.3 - EX-10.75.3 - CHUGACH ELECTRIC ASSOCIATION INCc004-20150930ex10753df28.htm
EX-31.1 - EX-31.1 - CHUGACH ELECTRIC ASSOCIATION INCc004-20150930xex311.htm
EX-32.1 - EX-32.1 - CHUGACH ELECTRIC ASSOCIATION INCc004-20150930xex321.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

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

(State or other jurisdiction of

incorporation or organization)

 

 

92-0014224

(I.R.S. Employer

Identification No.)

 

5601 Electron Drive, Anchorage, AK

(Address of principal executive offices)

 

99518

(Zip Code)

 

(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.

 Yes   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 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   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

 

 

 

 

 

 

Caution Regarding Forward-Looking Statements 

Part I. Financial Information 

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

Balance Sheets - as of September 30, 2015 and December 31, 2014

 

 

Statements of Operations - Three and nine months ended September 30, 2015 and September 30, 2014

 

 

Statements of Cash Flows - Nine months ended September 30, 2015 and September 30, 2014

 

 

Notes to Financial Statements

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32 

 

Item 4.

Controls and Procedures

33 

 

 

 

 

Part II. Other Information 

 

 

Item 1.

Legal Proceedings

33 

 

Item 1A.

Risk Factors

33 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34 

 

Item 3.

Defaults Upon Senior Securities

34 

 

Item 4.

Mine Safety Disclosures

34 

 

Item 5.

Other Information

34 

 

Item 6.

Exhibits

35 

 

 

Signatures

36 

 

 

Exhibits

37 

 

 

 

 


 

 

 

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 that these statements be read in conjunction with the audited financial statements for Chugach Electric Association Inc. (Chugach) for the year ended December 31, 2014, filed as part of Chugach’s annual report on Form 10-K.  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 unaudited financial statements of Chugach as of and for the quarter ended September 30, 2015, follow.

 

 

 

2


 

Table Of Contents

 

Chugach Electric Association, Inc.

Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Utility Plant:

 

 

 

 

 

 

Electric plant in service

 

$

1,120,197,908 

 

$

1,155,500,963 

Construction work in progress

 

 

23,397,867 

 

 

21,567,341 

Total utility plant

 

 

1,143,595,775 

 

 

1,177,068,304 

Less accumulated depreciation

 

 

(468,510,793)

 

 

(497,601,371)

Net utility plant

 

 

675,084,982 

 

 

679,466,933 

 

 

 

 

 

 

 

Other property and investments, at cost:

 

 

 

 

 

 

Nonutility property

 

 

76,889 

 

 

76,889 

Investments in associated organizations

 

 

9,571,132 

 

 

9,923,552 

Special funds

 

 

719,719 

 

 

666,967 

Restricted cash equivalents

 

 

1,591,811 

 

 

1,705,086 

Total other property and investments

 

 

11,959,551 

 

 

12,372,494 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

 

15,833,336 

 

 

16,364,962 

Special deposits

 

 

74,390 

 

 

79,390 

Restricted cash equivalents

 

 

1,256,275 

 

 

1,143,000 

Accounts receivable, net

 

 

24,043,503 

 

 

36,060,256 

Materials and supplies

 

 

28,548,392 

 

 

26,774,512 

Fuel stock

 

 

7,961,846 

 

 

9,652,073 

Prepayments

 

 

3,026,826 

 

 

2,178,723 

Other current assets

 

 

269,571 

 

 

242,682 

Total current assets

 

 

81,014,139 

 

 

92,495,598 

 

 

 

 

 

 

 

Deferred charges, net

 

 

19,842,028 

 

 

21,376,596 

 

 

 

 

 

 

 

Total assets

 

$

787,900,700 

 

$

805,711,621 

 

 

 

 

 

 

 

 

3


 

Table Of Contents

 

Chugach Electric Association, Inc.

Balance Sheets (continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities, Equities and Margins

 

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

 

Equities and margins:

 

 

 

 

 

 

Memberships

 

$

1,654,079 

 

$

1,631,569 

Patronage capital

 

 

167,101,697 

 

 

164,135,053 

Other

 

 

11,118,375 

 

 

11,158,677 

Total equities and margins

 

 

179,874,151 

 

 

176,925,299 

 

 

 

 

 

 

 

Long-term obligations, excluding current installments:

 

 

 

 

 

 

Bonds payable

 

 

426,666,665 

 

 

448,083,332 

National Bank for Cooperatives bond payable

 

 

22,241,852 

 

 

24,941,165 

Total long-term obligations

 

 

448,908,517 

 

 

473,024,497 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current installments of long-term obligations

 

 

24,115,980 

 

 

23,889,777 

Commercial paper

 

 

24,000,000 

 

 

21,000,000 

Accounts payable

 

 

11,615,949 

 

 

9,746,175 

Consumer deposits

 

 

5,321,301 

 

 

4,914,260 

Fuel cost over-recovery

 

 

5,233,310 

 

 

1,462,057 

Accrued interest

 

 

889,733 

 

 

6,191,608 

Salaries, wages and benefits

 

 

8,039,380 

 

 

7,547,316 

Fuel

 

 

7,816,804 

 

 

11,137,609 

Other current liabilities

 

 

6,302,396 

 

 

4,594,865 

Total current liabilities

 

 

93,334,853 

 

 

90,483,667 

 

 

 

 

 

 

 

Other non-current liabilities:

 

 

 

 

 

 

Deferred compensation

 

 

719,719 

 

 

666,967 

Other liabilities, non-current

 

 

1,582,377 

 

 

1,842,000 

Deferred liabilities

 

 

1,860,816 

 

 

1,858,455 

Patronage capital payable

 

 

10,205,739 

 

 

10,205,739 

Cost of removal obligation

 

 

51,414,528 

 

 

50,704,997 

Total other non-current liabilities

 

 

65,783,179 

 

 

65,278,158 

 

 

 

 

 

 

 

Total liabilities, equities and margins

 

$

787,900,700 

 

$

805,711,621 

 

See accompanying notes to financial statements.

 

 

4


 

Table Of Contents

 

Chugach Electric Association, Inc.

Statements of Operations

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

43,109,512 

 

$

65,677,900 

 

$

165,780,449 

 

$

212,046,091 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Fuel

 

 

10,042,130 

 

 

29,575,954 

 

 

53,059,968 

 

 

97,116,559 

Production

 

 

3,960,888 

 

 

5,735,365 

 

 

12,618,185 

 

 

16,153,611 

Purchased power

 

 

4,306,447 

 

 

3,719,885 

 

 

15,642,645 

 

 

11,891,311 

Transmission

 

 

1,554,417 

 

 

1,582,025 

 

 

4,608,043 

 

 

4,635,919 

Distribution

 

 

3,846,034 

 

 

3,568,897 

 

 

10,687,875 

 

 

10,549,766 

Consumer accounts

 

 

1,541,648 

 

 

1,448,550 

 

 

4,669,254 

 

 

4,671,669 

Administrative, general and other

 

 

5,845,187 

 

 

5,921,952 

 

 

17,989,910 

 

 

18,422,710 

Depreciation and amortization

 

 

8,570,795 

 

 

10,160,306 

 

 

27,333,500 

 

 

30,735,923 

Total operating expenses

 

$

39,667,546 

 

$

61,712,934 

 

$

146,609,380 

 

$

194,177,468 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt and other

 

 

5,475,837 

 

 

5,749,622 

 

 

16,688,389 

 

 

17,454,552 

Charged to construction

 

 

(47,063)

 

 

(126,730)

 

 

(289,075)

 

 

(327,786)

Interest expense, net

 

$

5,428,774 

 

$

5,622,892 

 

$

16,399,314 

 

$

17,126,766 

Net operating margins

 

$

(1,986,808)

 

$

(1,657,926)

 

$

2,771,755 

 

$

741,857 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating margins:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

74,440 

 

 

144,425 

 

 

221,277 

 

 

477,049 

Allowance for funds used during construction

 

 

17,702 

 

 

44,548 

 

 

108,737 

 

 

115,504 

Capital credits, patronage dividends and other

 

 

(13,114)

 

 

(92,792)

 

 

(10,714)

 

 

(33,526)

Total nonoperating margins

 

$

79,028 

 

$

96,181 

 

$

319,300 

 

$

559,027 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assignable margins

 

$

(1,907,780)

 

$

(1,561,745)

 

$

3,091,055 

 

$

1,300,884 

 

See accompanying notes to financial statements.

 

 

 

5

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30,

 

2015

 

2014

Cash flows from operating activities:

 

 

 

 

 

Assignable margins

$

3,091,055 

 

$

1,300,884 

Adjustments to reconcile assignable margins to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

27,333,500 

 

 

30,735,923 

Amortization and depreciation cleared to operating expenses

 

3,357,136 

 

 

4,339,571 

Allowance for funds used during construction

 

(108,737)

 

 

(115,504)

Write off of inventory, deferred charges and projects

 

301,943 

 

 

857,350 

Other

 

2,278 

 

 

52,730 

(Increase) decrease in assets:

 

 

 

 

 

Accounts receivable, net

 

11,337,119 

 

 

3,096,257 

Fuel cost under-recovery

 

 

 

(1,410,565)

Materials and supplies

 

(1,975,444)

 

 

(727,250)

Fuel stock

 

1,690,227 

 

 

1,086,893 

Prepayments

 

(848,103)

 

 

(1,448,944)

Other assets

 

(21,889)

 

 

570,034 

Deferred charges

 

(71,870)

 

 

(191,605)

Increase (decrease) in liabilities:

 

 

 

 

 

Accounts payable

 

(1,105,284)

 

 

(1,945,120)

Consumer deposits

 

407,041 

 

 

(38,939)

Fuel cost over-recovery

 

3,771,253 

 

 

(1,635,677)

Accrued interest

 

(5,301,875)

 

 

(5,579,689)

Salaries, wages and benefits

 

492,064 

 

 

202,729 

Fuel

 

(3,320,805)

 

 

(1,643,363)

Other current liabilities

 

2,133,713 

 

 

2,195,886 

Deferred liabilities

 

(109,763)

 

 

131,530 

Net cash provided by operating activities

 

41,053,559 

 

 

29,833,131 

Cash flows from investing activities:

 

 

 

 

 

Return of capital from investment in associated organizations

 

352,420 

 

 

351,162 

Investment in restricted cash equivalents

 

 

 

(116)

Investment in marketable securities

 

 

 

(217,817)

Proceeds from the sale of marketable securities

 

 

 

10,522,620 

Proceeds from capital grants

 

1,664,614 

 

 

3,945,976 

Extension and replacement of plant

 

(23,215,538)

 

 

(21,288,751)

Net cash used in investing activities

 

(21,198,504)

 

 

(6,686,926)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from short-term obligations

 

23,000,000 

 

 

22,000,000 

Repayments of short-term obligations

 

(20,000,000)

 

 

(11,000,000)

Repayments of long-term obligations

 

(23,889,777)

 

 

(24,682,812)

Memberships and donations received

 

(17,792)

 

 

46,979 

Retirement of patronage capital and estate payments

 

(124,411)

 

 

(46,348)

Net receipts on consumer advances for construction

 

645,299 

 

 

664,760 

Net cash used in financing activities

 

(20,386,681)

 

 

(13,017,421)

Net change in cash and cash equivalents

 

(531,626)

 

 

10,128,784 

Cash and cash equivalents at beginning of period

$

16,364,962 

 

$

4,347,163 

Cash and cash equivalents at end of period

$

15,833,336 

 

$

14,475,947 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Cost of removal obligation

$

709,531 

 

$

2,781,684 

Extension and replacement of plant included in accounts payable

$

5,332,676 

 

$

2,746,962 

Patronage capital retired and included in other current liabilities

$

 

$

5,022,000 

Supplemental disclosure of cash flow information - interest expense paid, net of amounts capitalized

$

20,803,312 

 

$

21,781,066 

 

See accompanying notes to financial statements.

 

 

6

 


 

Table of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

1.

PRESENTATION OF FINANCIAL INFORMATION

 

The accompanying unaudited interim financial statements include the accounts of 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 United States of America generally accepted accounting principles (U.S. GAAP) for complete financial statements.  They should be read in conjunction with Chugach’s audited financial statements for the year ended December 31, 2014, filed as part of Chugach’s 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

 

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.

 

Additionally, Chugach supplies much of the power requirements of the City of Seward, as a wholesale customer. Chugach also served Matanuska Electric Association, Inc. (MEA), as a wholesale customer through April 30, 2015.  Periodically, Chugach sells available generation, in excess of its own needs, to Golden Valley Electric Association, Inc. (GVEA) and Anchorage Municipal Light & Power (ML&P). Chugach’s retail and wholesale members are the consumers of the electricity sold.

 

Chugach was organized as an Alaska electric cooperative in 1948 and 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).

 

Chugach has three Collective Bargaining Agreements (CBA’s) with the International Brotherhood of Electrical Workers (IBEW), representing approximately 70 percent of its workforce. Chugach also has an agreement with the Hotel Employees and Restaurant Employees (HERE). All three IBEW CBA’s have been renewed through June 30, 2017. The three CBA’s provide for wage increases in all years and include health and welfare premium cost sharing provisions. The HERE contract has been renewed through June 30, 2016. This contract provides for wage increases in all years.

 

 

7


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

3.

SIGNIFICANT ACCOUNTING POLICIES

 

a. Management Estimates

 

In preparing the financial statements in conformity with United States generally accepted accounting principles (GAAP), the 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, workers’ compensation liability, deferred charges and credits, unbilled revenue, the estimated useful life of utility plant and the cost of removal obligation. Actual results could differ from those estimates.

 

b. 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. Chugach’s regulated rates are established to recover all of the specific costs of providing electric service. In each rate filing, rates are set at levels to recover all of the specific allowable costs and those rates are then collected from retail and wholesale customers. The regulatory assets or liabilities are then reduced as the cost or credit is reflected in earnings and rates.

 

c. 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, 2015 and 2014 was in compliance with that provision. In addition, Chugach collects sales tax and is assessed gross revenue 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.”

 

Chugach applies a more-likely-than-not recognition threshold for all tax uncertainties. FASB ASC 740, “Topic 740 – Income Taxes,” only allows the recognition of those tax benefits that have a greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. Chugach’s management reviewed Chugach’s tax positions and determined there were no outstanding or retroactive tax positions that were not highly certain of being sustained upon examination by the taxing authorities.

8

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

d. Accounts Receivable

 

Included in accounts receivable are invoiced amounts to ML&P for their proportionate share of current Southcentral Power Project (SPP) costs, which amounted to $1.2 million and $0.9 million at September 30, 2015 and December 31, 2014, respectively. In addition, accounts receivable includes invoiced amounts for grants to support the construction of facilities to divert water and safely transmit electricity, which amounted to $0.4 million and $1.1 million at September 30, 2015, and December 31, 2014, respectively.

 

e. Fuel Stock

 

Fuel Stock is the weighted average cost of fuel injected into the Cook Inlet Natural Gas Storage Alaska (CINGSA). Chugach’s fuel balance in storage amounted to $8.0 million and $9.7 million at September 30, 2015, and December 31, 2014, respectively.

 

f. Restricted Cash Equivalents

 

Restricted cash equivalents include funds on deposit for future workers’ compensation claims, which amounted to $2.8 million at September 30, 2015 and December 31, 2014.

 

g. Reclassifications

 

At September 30, 2015, Chugach recorded the following reclassification for the year ended December 31, 2014:

 

A reclassification representing the long-term versus current presentation of long-term obligations associated with bonds payable, previously reported as current installments of long-term obligations and now reported as long-term obligations, excluding current installments. The impact of this reclassification was an increase to long-term obligations, excluding current installments, and a decrease to current installments of long-term obligations of $1.0 million as of December 31, 2014.

 

4.

REGULATORY MATTERS

 

MEA Interim Power Sales Agreement

 

On August 12, 2014, MEA notified Chugach that their newly constructed power plant, the Eklutna Generation Station (EGS), would not be completed by January 1, 2015. On September 30, 2014, Chugach entered into an Interim Power Sales Agreement (Agreement) to provide MEA with all demand and energy requirements on a firm basis based on existing tariff rates for a minimum one quarter period beginning January 1, 2015, and ending on March 31, 2015. The RCA approved the Agreement December 22, 2014. The term of the Agreement was subsequently extended to and expired on April 30, 2015.  

 

9

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

June 2014 Test Year General Rate Case

 

Chugach’s June 2014 Test Year General Rate Case was finalized and submitted to the RCA on February 13, 2015. Chugach requested a system base rate increase of approximately $21.3 million, or 20 percent, on total base rate revenues for rates effective in April 2015. The primary driver of the rate changes is the reduction and shift in fixed-cost responsibility resulting from the expiration of the Interim Power Sales Agreement between Chugach and MEA on April 30, 2015.

 

The RCA issued Order U-15-081(1) on April 30, 2015, suspending the filing and granting Chugach’s request for interim and refundable rate increases effective May 1, 2015. A scheduling conference was held on May 27, 2015. On June 4, 2015, the RCA issued Order U-15-081(2), granting approval for intervention by Homer Electric Association (HEA), MEA and GVEA. The RCA has indicated that a final order in the case will be issued by May 8, 2016. Intervenor responsive testimony is due in late October of 2015. Chugach’s reply testimony is due in mid-December of 2015. An evidentiary hearing is scheduled for January 25 through February 5, 2016.

 

Chugach submitted proposed adjustments to its fuel and purchased power rates under a separate tariff advice letter to become effective at the same time which allows interim base rate increases to be synchronized with reductions in fuel costs resulting from system heat rate improvements and a greater share of hydroelectric generation used to meet the load requirements of the remaining customers on the system. In combination with Chugach’s fuel and purchased power rate adjustment filing for rates effective in April 2015, the effective increase to retail customer bills was between 2 and 5 percent.

 

Third Amendment to the Gas Sale and Purchase Agreement between Hilcorp Alaska, LLC and Chugach Electric Association, Inc.

 

On July 23, 2015, Chugach filed the Third Amendment to the Gas Sale and Purchase Agreement (Third Amendment) between Hilcorp Alaska, LLC and Chugach with the RCA. The Third Amendment extends the term of the existing Gas Sale and Purchase Agreement (GSPA) between Chugach and Hilcorp to provide for firm gas sales from March 31, 2019 to March 31, 2023, and adjusts the volumes and gas price for purchases in 2019. The Third Amendment does not change the underlying terms and conditions of the GSPA as amended, or the pricing and gas quantities in 2015 through March 31, 2018. The Third Amendment reduces the gas price by 8.5 percent on April 1, 2018.

 

10

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

A key provision of the Third Amendment is the option for additional gas volumes during the period of April 1, 2019 through March 31, 2023, on both an annual contract quantity and average daily contract quantity basis. These options provide Chugach with added flexibility in the overall management of its gas supply requirements. Chugach is permitted to increase the annual contract volumes of up to 1.1 billion cubic feet (Bcf) of gas beginning April 1, 2019, and up to 2.6 Bcf annually on April 1 thereafter, provided advance notice is given to Hilcorp. This option allows Chugach to continue to obtain firm gas supplies from Hilcorp or alternatively from other gas suppliers if market conditions allow.

 

The Third Amendment also provides Chugach with shorter-term options to purchase up to 2.0 million cubic feet (MMcf) per day of additional firm gas without impacting established annual contract quantities. This option allows Chugach to purchase additional volumes in response to short-term sales increases due to weather, bulk power maintenance activities, or other events on the Chugach system.

 

On September 8, 2015, the RCA issued a letter order approving the Third Amendment. In the same order, the RCA approved Chugach’s request to recover gas purchases made under the Third Amendment through its fuel and purchased power rate adjustment process.

 

Operation and Regulation of the Alaska Railbelt Transmission System

 

The 2014 Alaska Legislature directed the RCA to provide a recommendation on whether creating an independent system operator or similar structure in the Railbelt area is the best option for effective and efficient electrical transmission. On February 11, 2015, the RCA voted in favor of opening a docket to investigate and receive input on alternative transmission structures for the Railbelt. The RCA held public meetings and workshops throughout the second quarter of 2015. On June 30, 2015, the RCA issued its report which recommended an independent transmission company, certificated and regulated as a public utility, be created to operate the transmission system reliably and transparently and to plan and execute major maintenance, transmission system upgrades, and new transmission projects necessary for the reliable delivery of electric power to Railbelt customers. The RCA also wants to be granted authority for siting new generation and transmission and to regulate integrated resource planning of the Railbelt electrical system. Quarterly progress reports on this effort are required for the remainder of 2015. The development of common Railbelt operating and reliability standards and system-wide merit order economic dispatch of the Railbelt’s electrical generation units to bring the maximum benefit to ratepayers was also recommended. The RCA expects to analyze and review present efforts in order to assess the organizational and governance structure needed for an independent consolidated system operator. Initial progress reports to develop an independent Railbelt electric transmission company were filed with the RCA on September 30, 2015. A second report on grid unification will be filed with the RCA by December 31, 2015. Progress reports associated with system-wide economic dispatch are required beginning in 2016.

 

11

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

2013 General Rate Case

 

Chugach submitted a 2013 Test Year General Rate Case to the RCA on November 19, 2013. On April 18, 2014, Chugach submitted an update to reflect the final results contained in Chugach’s compliance filing in the 2012 Test Year General Rate Case that was submitted to the RCA on April 14, 2014. The update reflects final rate design changes contained in the 2012 Test Year General Rate Case.

 

Chugach and the parties to the docket entered into a stipulation resolving revenue requirement and cost of service matters contained in the case, which was accepted by the RCA on November 13, 2014. On February 12, 2015, the RCA issued Order No. 9 of U-14-001 accepting a separate stipulation on reactive supply and voltage control from generation sources and resolving the remaining issues in the docket. On April 30, 2015, the RCA issued Order U-14-001(11), approving final tariff sheets for the January 2014 through April 30, 2015, interim period as well as Chugach’s refund plan. The stipulation contained a provision that Chugach be permitted to create a regulatory asset for approximately $0.9 million of storm-related costs and be permitted to recover $0.2 million per year over the next five years. Chugach also stipulated to rate adjustments associated with transmission wheeling and ancillary services. Revenues associated with reactive supply and voltage control from generation sources do not impact Chugach’s margin levels. Chugach completed the issuance of refunds in July of 2015.

 

On March 16, 2015, MEA filed an appeal to Order U-14-001(9) in Superior Court asserting that the RCA erred by ordering a fully allocated cost-based transmission rate for use of the Teeland Substation, and that the RCA ignored evidence that a fully allocated cost-based transmission rate results in unjust and unreasonable rates and ignored long-established precedent of cost causer/cost payer relationships for wheeling across the Teeland Substation, among other items. MEA filed its brief with the Superior Court on June 26, 2015. Chugach’s response to MEA’s brief was filed on August 28, 2015, and MEA’s reply was filed on October 16, 2015. While Chugach cannot predict the outcome of this case, it will vigorously defend the RCA’s order.

 

CINGSA

 

On January 30, 2015, Cook Inlet Natural Gas Storage Alaska (CINGSA) submitted a filing to the RCA providing notice that it had found 14.5 Bcf of gas as a result of directional drilling in the storage facility and now proposes to establish guidelines for commercial sales of at least 2 Bcf of this gas. Chugach submitted comments to the RCA regarding CINGSA’s proposed treatment of found gas. Chugach does not believe CINGSA’s proposal to retain revenues for the sale of found gas should be permitted in recognition of the risk-sharing agreements made by CINGSA and its storage customers that resulted in the development of the CINGSA storage facility.

 

12

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

The RCA issued an order in March of 2015 suspending the filing for further investigation. CINGSA filed direct testimony in the case on April 13, 2015. Chugach and other intervenors in the case submitted responsive testimony on June 5, 2015. CINGSA submitted its reply testimony on June 29, 2015. The evidentiary hearing was held in September of 2015 and a final order in the case is now expected by December 4, 2015.

 

5.

DEBT

 

Lines of Credit

 

Chugach maintains a $50.0 million line of credit with National Rural Utilities Cooperative Finance Corporation (NRUCFC). Chugach did not utilize this line of credit in the nine months ended September 30, 2015. In addition, Chugach did not utilize this line of credit during 2014 and had no outstanding balance at December 31, 2014. The borrowing rate is calculated using the total rate per annum and may be fixed by NRUCFC. The borrowing rate was 2.90 percent at September 30, 2015, and December 31, 2014. 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 12, 2017. This line of credit is immediately available for unconditional borrowing.

 

Commercial Paper

 

Chugach maintains a $100.0 million Amended Unsecured Credit Agreement, which is used to back Chugach’s Commercial Paper Program. The pricing includes an all-in drawn spread of one month London Interbank Offered Rate (LIBOR) plus 107.5 basis points, along with a 17.5 basis points facility fee (based on an A- unsecured debt rating). The Amended Unsecured Credit Agreement expires on November 17, 2016. The participating banks include NRUCFC, KeyBank National Association, Bank of America, N.A., Bank of Montreal, CoBank and Chang Hwa Commercial Bank, Ltd., Los Angeles Branch. The commercial paper can be repriced between one day and 270 days. Chugach is expected to continue to issue commercial paper in 2015, as needed. Chugach had $24.0 million and $21.0 million of commercial paper outstanding at September 30, 2015, and December 31, 2014, respectively.

 

The following table provides information regarding average commercial paper balances outstanding for the quarters ended September 30, 2015, and 2014 (dollars in millions), as well as corresponding weighted average interest rates:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2015

 

2014

Average Balance

 

Weighted Average Interest Rate

 

Average Balance

 

Weighted Average Interest Rate

$

13.8

 

0.25 

%

 

$

30.6

 

0.19 

%

 

13

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

Term Loan

 

Chugach has a term loan facility with CoBank. Loans made under this facility are evidenced by the 2011 CoBank Bond, which is governed by the Amended and Restated Master Loan Agreement dated January 19, 2011, and secured by the Second Amended and Restated Indenture (Indenture). Chugach had  $24.9 million and $27.4 million outstanding with CoBank at September 30, 2015, and December 31, 2014, respectively. 

 

6.

RECENT ACCOUNTING PRONOUNCEMENTS

 

ASC Update 2014-09 “Revenue from Contracts with Customers (Topic 606) and ASC 2014-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date

 

In May of 2014, the FASB issued ASC Update 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASC Update 2014-09 provides guidance for the recognition, measurement and disclosure of revenue related to the transfer of promised goods or services to customers. This update was effective for fiscal years beginning after December 15, 2016, for which early application was prohibited. However, in  August of 2015, the FASB issued ASC Update 2014-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” deferring the effective date of ASC Update 2014-09 to fiscal years beginning after December 15, 2017, and permitting early adoption of this update, but only for annual reporting periods beginning after December 15, 2016, and interim reporting periods within that reporting period. Chugach has not yet selected a transition method and is evaluating the effect on its results of operations, financial position, and cash flows.

 

ASC Update 2015-03 “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

 

In April of 2015, the FASB issued ASC Update 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” ASC Update 2015-03 revises the presentation guidance for debt issuance costs related to a recognized debt liability. The effect of this update is to present the debt issuance costs as a direct deduction to the liability on the balance sheet and retrospective application is required. This update does not change the recognition and measurement guidance for debt issuance costs. This update is effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016, with early adoption permitted. Chugach will begin application of ASC 2015-03 on January 1, 2016. Adoption is not expected to have a material effect on its results of operations, financial position, and cash flows.

 

14

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

ASC Update 2015-15 “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements

 

In September of 2015, the FASB issued ASC Update 2015-15, “Interest – Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” ASC Update 2015-15 amends guidance related to the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements for SEC reporting. This update is effective for fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016, with early adoption permitted. Chugach will begin application of ASC 2015-15 on January 1, 2016. Adoption is not expected to have a material effect on its results of operations, financial position, and cash flows.

 

7.

FAIR VALUES OF ASSETS AND LIABILITIES

 

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 United States 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.

 

Chugach had no Level 1,  Level 2 or Level 3 assets or liabilities measured at fair value on a recurring basis. 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 cash and cash equivalents, accounts receivable and payable, and other short-term monetary assets and liabilities approximate carrying value due to their short-term nature.

 

15

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

Fair Value of Financial Instruments

 

The estimated fair values (in thousands) of long-term obligations included in the financial statements at September 30, 2015, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Value

 

Fair Value

Long-term obligations (including current installments)

$

473,024 

 

$

482,002 

 

Level 1 measurement was used to determine the fair value of the 2011 and 2012 Series A Bonds. Level 2 measurements were used to determine all other long-term obligations.

 

8.

ENVIRONMENTAL MATTERS

 

The Clean Air Act and Environmental Protection Agency (EPA) regulations under the Clean Air Act establish ambient air quality standards and limit the emission of many air pollutants. New Clean Air Act regulations impacting electric utilities may result from future events or new regulatory programs. On August 3, 2015, the EPA released the final 111(d) regulation language aimed at reducing emissions of carbon dioxide (CO2) from existing power plants that provide electricity for utility customers. In the final rule, the EPA took the approach of making individual states responsible for the development and implementation of plans to reduce the rate of CO2 emissions from the power sector. The EPA has initially applied the final rule to 47 of the contiguous states.  At this time, Alaska, Hawaii, Vermont, Washington D.C. and two U.S. territories are not bound by the regulation. Alaska may be required to comply at some future date. The EPA 111(d) regulation, in its current form, is not expected to have a material effect on Chugach’s financial condition, results of operations, or cash flows. While Chugach cannot predict the implementation of any additional new law or regulation, or the limitations thereof, it is possible that new laws or regulations could increase capital and operating costs. Chugach has obtained or applied for all Clean Air Act permits currently required for the operation of generating facilities.

 

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. Chugach does not believe that compliance with these statutes and regulations to date has had a material impact on its financial condition, results of operation or cash flows. However, the implementation of any new law or regulation, or the limitations thereof, or changes in or new interpretations of laws or regulations could result in significant additional capital or operating expenses. Chugach monitors proposed new regulations and existing regulation changes through industry associations and professional organizations.

 

16

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

9.

COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

Chugach is a participant in various legal actions, rate disputes, personnel matters and claims both for and against Chugach’s interests. Management believes the outcome of any such matters will not materially impact Chugach’s financial condition, results of operations or liquidity. Chugach establishes reserves when a particular contingency is probable and calculable.  Chugach has not accrued for any contingency at September 30, 2015, as it does not consider any contingency to be probable nor calculable. Chugach faces contingencies that are reasonably possible to occur; however, they cannot currently be estimated.

 

Concentrations

 

Approximately 70 percent of Chugach’s employees are members of the IBEW. Chugach has three CBA’s with the IBEW. Chugach also has an agreement with the HERE. All three IBEW CBA’s have been renewed through June 30, 2017. The HERE contract has been renewed through June 30, 2016.

 

Chugach was the principal supplier of power under an Interim Power Sales Agreement with MEA. Including the fuel component, this contract represented $26.1 million of sales revenue through April 30, 2015, and $70.7 million, or 26 percent, of sales revenue in 2014. This agreement expired April 30, 2015.

 

Commitments

 

Fuel Supply Contracts 

 

Chugach has fuel supply contracts from various producers at market terms. A gas supply contract between Chugach and ConocoPhillips Alaska, Inc. and ConocoPhillips, Inc. (collectively “ConocoPhillips”), was approved by the RCA effective August 21, 2009. The contract provided gas beginning in 2010 and will terminate December 31, 2016. The total amount of gas under the contract is estimated to be 60 Bcf. Chugach entered into a gas contract with Hilcorp effective January 1, 2015, to provide gas through March 31, 2018. The total amount of gas under the contract is estimated to be 17.7 Bcf. On September 15, 2014, the RCA approved an amendment to the Hilcorp gas purchase agreement extending gas delivery and subsequently filling 100 percent of Chugach’s needs through March 31, 2019. On September 8, 2015, the RCA approved another amendment to the Hilcorp gas purchase agreement extending the term of the agreement, thus filling up to 100 percent of Chugach’s needs through March 31, 2023. All of the production is expected to come from Cook Inlet, Alaska. The terms of the ConocoPhillips and Hilcorp agreements require Chugach to manage the natural gas transportation over the connecting pipeline systems. Chugach has gas transportation agreements with ENSTAR Natural Gas Company (ENSTAR) and Hilcorp.

 

17

 


 

Table Of Contents

 

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2015 and 2014

 

Patronage Capital

 

In 2007, Chugach entered into an agreement with HEA to return all of its patronage capital within five years after expiration of its power sales agreement, which was December 31, 2013. This patronage capital retirement was related to a settlement agreement associated with the 2005 Test Year General Rate Case (Docket U-06-134) and accepted by the RCA on August 7, 2007. HEA’s patronage capital was $7.9 million at September 30, 2015, and December 31, 2014, and is classified as patronage capital payable on Chugach’s Balance Sheet.

 

In an agreement reached in May of 2014 with MEA, capital credits retired to MEA are classified as patronage capital payable on Chugach’s Balance Sheet. MEA’s patronage capital payable was $2.3 million at September 30, 2015, and December 31, 2014.

 

Economy Energy Sales

 

On October 5, 2012, Chugach and GVEA finalized arrangements for Chugach to provide economy energy to GVEA through March of 2015. Sales were made under the terms and conditions of Chugach’s economy energy sales tariff. The price to GVEA included the cost of fuel, variable operations and maintenance expense, wheeling charges and a margin. Chugach had also entered into specific gas supply arrangements to make economy energy sales to GVEA. Sales revenue to GVEA amounted to $8.0 million in 2015 through the expiration of their contract, and $32.0 million in the nine months ended September 30, 2014.

 

Cooper Lake Hydroelectric Project

 

The Cooper Lake Hydroelectric Project received a new 50-year license from FERC in August of 2007. A condition of that license is a requirement to construct a Stetson Creek diversion structure, a pipeline to Cooper Lake, and a bypass structure to release warmer water from Cooper Lake into Cooper Creek. If the project was not feasible or if the cost estimate materially exceeded the terms of the license, Chugach had the option to request a license amendment. At the time the project was being relicensed the estimated cost to complete the project was $12.0 million. Due to a change in FERC requirements, the completed project cost $22.9 million. As an alternative to requesting a license amendment from FERC, Chugach requested grants from the State of Alaska. Funding for this project included $9.9 million in grants awarded. The Chugach Board authorized expenditures for the project November 15, 2012. The diversion project began construction in 2013 and was put into service on July 25, 2015. It will operate through the duration of the license.

 

Legal Proceedings

 

Chugach has certain litigation matters and pending claims that arise in the ordinary course of Chugach’s business. In the opinion of management, none of these matters, individually or in the aggregate, is or are likely to have a material adverse effect on Chugach’s results of operations, financial condition or cash flows.

 

 

18

 


 

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.

 

OVERVIEW

 

Chugach is the largest electric utility in Alaska, engaged in the generation, transmission and distribution of electricity. Chugach’s power flows through an interconnected regional electrical system throughout Alaska’s Railbelt, a 400-mile-long area stretching from the coastline of the southern Kenai Peninsula to the interior of the state which includes Alaska’s largest cities, Anchorage and Fairbanks.

 

Chugach directly serves retail customers in the Anchorage and Kenai Peninsula areas and supplies much of the power requirements of the City of Seward, as a wholesale customer. Chugach also supplied power to Matanuska Electric Association, Inc. (MEA) through April 30, 2015, as a wholesale customer. Periodically, Chugach sells available generation in excess of its own needs to Golden Valley Electric Association, Inc. (GVEA) and to Anchorage Municipal Light & Power (ML&P).

 

Chugach is an Alaska electric cooperative operating on a not-for-profit basis and is subject to the regulatory authority of the Regulatory Commission of Alaska (RCA).

 

Chugach’s customers’ requirements for capacity and energy generally increase in fall and winter as home heating and lighting needs increase and decline in spring and summer as the weather becomes milder and daylight hours increase.

 

Chugach Operations

 

In the near term, Chugach continues to face the challenges of operating in a flat load growth environment and securing replacement revenue sources. These challenges, along with energy issues and plans at the state level, will shape how Chugach proceeds into the future.

 

Prior to the expiration of MEA’s wholesale power contract with Chugach at the end of 2014, Chugach entered into an Interim Power Sales Agreement with MEA to provide all demand and energy requirements on a firm basis on existing tariffs for a minimum one quarter period beginning January 1, 2015, and ending on March 31, 2015, while MEA completed construction of its new power plant, the Eklutna Generation Station (EGS). On March 31, 2015, Chugach entered into a Memorandum of Understanding (MOU) with MEA to extend the Interim Power Sales Agreement for one month while MEA continued to prepare its EGS and supervisory control and data acquisition (SCADA) system for commercial operation. This MOU also delayed the implementation of the Dispatch Services Agreement with MEA to provide electric and natural gas dispatch services to EGS, electric dispatch services for MEA’s share of the Bradley Lake Hydroelectric Project and electric dispatch coordination services for Eklutna Hydroelectric Project to May 1, 2015. On April 30, 2015, the Interim Power Sales Agreement with MEA expired.

19

 


 

Chugach has been preparing for the expiration of its second wholesale power contract for some time and has taken steps to reduce costs in order to mitigate the rate impacts to its remaining customers. Despite the loss of these two wholesale power contracts which accounted for approximately 50% of energy sales and 40% of sales revenue, the net system rate increase for Chugach’s remaining customers was approximately 20%. Chugach’s 10-year financial forecast results indicate it can sustain operations and meet financial covenants without these wholesale contracts. In addition, because Chugach’s rates are established by the RCA, Chugach expects to maintain its ability to recover Chugach’s specific costs of providing service despite the loss of these customers.

 

Chugach is also pursuing replacement sources of revenue through potential new power sales and dispatch agreements, as well as transmission wheeling and ancillary services tariff revisions. Chugach has updated and expanded its operating tariff to include both firm and non-firm transmission wheeling services and attendant ancillary services in support of third-party transactions on the Chugach system. Chugach believes that cost reduction and containment, successful implementation of new power sales and dispatch agreements and revised tariffs will mitigate additional rate increases. However, Chugach cannot assure that it will be able to replace sources of revenue or that any replacement of revenue sources, revised tariffs or cost reduction and containment measures will fully offset any rate increases in this timeframe.

 

Railbelt Grid Unification

 

Chugach is focused on efforts in the Railbelt to explore the benefits of grid unification. Currently, each of the six electric utilities in the Railbelt own a portion of the transmission grid, as does the Alaska Energy Authority (AEA). Chugach is a proponent of following other successful business models to effectively unify the grid. Discussions on the issue led the Alaska State Legislature in 2014 to appropriate $250,000 to the RCA to explore the issue and report back to legislators. The RCA expects to analyze and review present efforts in order to assess the organizational and governance structure needed for an independent consolidated system operator, see “Item 1 - FINANCIAL STATEMENTS - Note 4 – Regulatory Matters - Operation and Regulation of the Alaska Railbelt Transmission System.” Progress reports associated with system-wide economic dispatch are required beginning in 2016. With the support of the RCA, Chugach and several other Railbelt utilities are evaluating possible transmission business model opportunities and associated economic dispatch models that Chugach believes may lead to more optimal Railbelt-wide system operations. Chugach intends to finalize this review and evaluation in the first or second quarter of 2016. While Chugach cannot determine the materiality of any effect on its results of operations, financial condition, and cash flows until a business model and plan are adopted, it anticipates a positive outcome.

 

Fuel Supply

 

Chugach actively manages its fuel supply needs and currently has contracts in place to meet up to 100 percent of its anticipated needs through March of 2023. Chugach continues its efforts to secure long-term reliable gas supply solutions and encourage new development and continued investment in Cook Inlet. The State of Alaska’s Department of Natural Resources (DNR) published a study in September of 2015, “Updated Engineering Evaluation of Remaining Cook

20

 


 

Inlet Gas Reserves,” to provide an estimate of Cook Inlet’s gas supply. The study estimated there are 1,183 Bcf of proved and probable reserves remaining in Cook Inlet’s legacy fields. This is higher than the 2009 DNR study estimate of 1,142 Bcf. Effectively, Cook Inlet gas supply has slightly increased from 2009. The 2015 DNR estimate does not include reserves from a large gas field under development by Furie Operating Alaska, LLC (Furie) and another considered for development by BlueCrest Energy, Inc. Furie is constructing an offshore gas production platform and has procured undersea gas pipe, which was installed during the summer of 2015. Furie expects to produce 15 to 20 MMcf per day by late 2015. The platform and other production facilities are designed for up to 200 MMcf per day. Other gas producers are actively developing gas supplies in the Cook Inlet. Chugach is encouraged with these developments but continues to explore other alternatives to diversify its portfolio.

 

Renewable Energy Goals

 

A State of Alaska Energy Policy approved by the legislature in 2010 included legislative intent that the state achieve a 15 percent increase in energy efficiency on a per capita basis between 2010 and 2020, receive 50 percent of its electric generation from renewable and alternative energy sources by 2025, work to ensure reliable in-state gas supply for residents of the state, and that the state power project fund serve as the main source of state assistance for energy projects, remain a leader in petroleum and natural gas production and become a leader in renewable and alternative energy development.

 

The main project moving Alaska toward its renewable energy goals is the Susitna-Watana Hydroelectric Project, located on the Susitna River, approximately halfway between Anchorage and Fairbanks. The State of Alaska began appropriating funds to the AEA for this project in the state’s 2012 fiscal year budget, totaling approximately $180.7 million through the spring of 2014. However, on December 26, 2014, the Governor of the State of Alaska (Governor) issued an Administrative Order to suspend discretionary spending on a number of capital projects, including this project, due to the large state budget deficit. Accordingly, AEA submitted two consecutive requests to the FERC to suspend the schedule for 60 days. The FERC granted AEA’s requests and in May of 2015 advised AEA it will hold the process in abeyance until further notice. In addition, AEA provided notice that the Initial Study Report meetings previously scheduled for January of 2015 were postponed until further notice. In July of 2015, the Governor approved using $6.6 million in uncommitted funds from a prior Susitna-Watana appropriation to continue moving the project forward. In October of 2015, the state’s Office of Management and Budget lifted the spending freeze on the Susitna-Watana Hydroelectric Project providing AEA with access to funds representing approximately three percent of the total allocation to the current project proposal to date. AEA estimates the project’s cost at over $5.5 billion and plans to act based on the funding the state’s fiscal reality allows. AEA will now continue the pre-licensing study process with the FERC and plans to establish a new schedule. Chugach has been working with and will continue to work with AEA and other parties on this effort.

 

21

 


 

Appropriations

 

The 2015 fiscal year State of Alaska capital budget contained $3.5 million in appropriations for Chugach’s Stetson Creek Diversion project. The 2014 fiscal year State of Alaska capital budget contained $287.5 thousand in appropriations for Chugach. Funding for these projects will flow through either the AEA or the Municipality of Anchorage.

 

RESULTS OF OPERATIONS

 

Current Year Quarter versus Prior Year Quarter

 

Assignable margins decreased $0.3 million, or 22.2%, during the third quarter of 2015 compared to the third quarter of 2014, due primarily to higher distribution expense, which was somewhat offset by decreases in production and other expenses.

 

Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, decreased $22.6 million, or 34.4%, in the third quarter of 2015 compared to the third quarter of 2014. This decrease was due primarily to the expiration of MEA’s interim wholesale contract and GVEA’s economy sales contract.

 

Retail revenue increased $2.9 million, or 7.8%, in the third quarter of 2015 compared to the third quarter of 2014. Base revenue increased due to an increase in rates charged to retail customers as a result of Chugach’s June 2014 Test Year General Rate Case, which was somewhat offset by lower fuel expense recovered through the fuel and purchased power surcharge process.

 

Wholesale revenue decreased $15.4 million, or 92.2%, in the third quarter of 2015 compared to the third quarter of 2014, due primarily to the loss of MEA’s wholesale sales upon the expiration of the MEA interim contract on April 30, 2015.

 

Economy energy revenue decreased $9.9 million, or 98.0%, in the third quarter of 2015 compared to the third quarter of 2014 due to the expiration of GVEA’s economy sales contract, which was somewhat offset by economy sales to ML&P during the third quarter of 2015.

 

Based on the results of fixed and variable cost recovery established in Chugach’s last rate case, wholesale sales to Seward contributed approximately $0.4 million to Chugach’s fixed costs for the quarter ended September 30, 2015. Wholesale sales to MEA and Seward contributed approximately $5.6 million and $0.3 million, respectively, to Chugach’s fixed costs for the quarter ended September 30, 2014.

 

22

 


 

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, 2015, and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base Rate Sales Revenue

Fuel and Purchased Power Revenue

Total Revenue

 

 

2015

 

2014

 

% Variance

 

2015

 

2014

 

% Variance

 

2015

 

2014

 

% Variance

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

14.1 

 

$

12.0 

 

17.5 

%

 

$

5.0 

 

$

5.7 

 

(12.3 

%)

 

$

19.1 

 

$

17.7 

 

7.9 

%

Small Commercial

 

$

2.6 

 

$

2.2 

 

18.2 

%

 

$

1.2 

 

$

1.3 

 

(7.7 

%)

 

$

3.8 

 

$

3.5 

 

8.6 

%

Large Commercial

 

$

11.2 

 

$

9.1 

 

23.1 

%

 

$

5.7 

 

$

6.5 

 

(12.3 

%)

 

$

16.9 

 

$

15.6 

 

8.3 

%

Lighting

 

$

0.4 

 

$

0.4 

 

0.0 

%

 

$

0.0 

 

$

0.1 

 

(100.0 

%)

 

$

0.4 

 

$

0.5 

 

(20.0 

%)

Total Retail

 

$

28.3 

 

$

23.7 

 

19.4 

%

 

$

11.9 

 

$

13.6 

 

(12.5 

%)

 

$

40.2 

 

$

37.3 

 

7.8 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MEA

 

$

0.0 

 

$

7.5 

 

(100.0 

%)

 

$

0.0 

 

$

7.8 

 

(100.0 

%)

 

$

0.0 

 

$

15.3 

 

(100.0 

%)

SES

 

$

0.6 

 

$

0.6 

 

0.0 

%

 

$

0.7 

 

$

0.8 

 

(12.5 

%)

 

$

1.3 

 

$

1.4 

 

(7.1 

%)

Total Wholesale

 

$

0.6 

 

$

8.1 

 

(92.6 

%)

 

$

0.7 

 

$

8.6 

 

(91.9 

%)

 

$

1.3 

 

$

16.7 

 

(92.2 

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economy

 

$

0.2 

 

$

0.7 

 

(71.4 

%)

 

$

0.0 

 

$

9.4 

 

(100.0 

%)

 

$

0.2 

 

$

10.1 

 

(98.0 

%)

Miscellaneous

 

$

0.6 

 

$

0.4 

 

50.0 

%

 

$

0.8 

 

$

1.2 

 

(33.3 

%)

 

$

1.4 

 

$

1.6 

 

(12.5 

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenue

 

$

29.7 

 

$

32.9 

 

(9.7 

%)

 

$

13.4 

 

$

32.8 

 

(59.1 

%)

 

$

43.1 

 

$

65.7 

 

(34.4 

%)

 

The following table summarizes kWh sales for the quarters ended September 30:

 

 

 

 

 

 

Customer

 

2015
kWh

 

2014
kWh

 

 

 

 

 

Retail

 

261,969,391 

 

261,368,484 

Wholesale

 

16,252,751 

 

187,208,239 

Economy Energy

 

9,556,000 

 

93,523,000 

Total

 

287,778,142 

 

542,099,723 

 

Base rates charged to retail and wholesale customers in the third quarter of 2015 include base rate changes effective May 1, 2015, as a result of Chugach’s June 2014 Test Year General Rate Case. Effectively, base rates increased 21.8% to retail customers and 16.9% to Seward in the third quarter of 2015 compared to the third quarter of 2014.

 

Total operating expenses decreased $22.0 million, or 35.7%, in the third quarter of 2015 compared to the third quarter of 2014.

 

Fuel expense decreased $19.5 million, or 66.0%, in the third quarter of 2015 compared to the third quarter of 2014, due primarily to a decrease in the volume of natural gas used as a result of the expiration of contracts with MEA and GVEA, as well as a lower average effective price delivered. In the third quarter of 2015, Chugach used 2,203,693 MCF of fuel at an average effective delivered price of $3.95 per MCF. In the third quarter of 2014, Chugach used 4,654,017 MCF of fuel at an average effective delivered price of $6.05 per MCF.

 

23

 


 

Production expense decreased $1.8 million, or 30.9%, in the third quarter of 2015 compared to the third quarter of 2014, due primarily to a decrease in operating and maintenance costs at Beluga, as a result of the retirement of Beluga Unit 8 during the first quarter of 2015.

 

Purchased power expense increased $0.6 million, or 15.8%, in the third quarter of 2015 compared to the third quarter of 2014, due primarily to purchases associated with MEA’s EGS and a higher average effective price. In the third quarter of 2015, Chugach purchased 46,039 megawatt hours (MWh) of energy at an average effective price of 7.80 cents per kWh. In the third quarter of 2014, Chugach purchased 73,310 MWh of energy at an average effective price of 4.24 cents per kWh.

 

Transmission expense did not materially change in the third quarter of 2015 compared to the third quarter of 2014.

 

Distribution expense increased $0.3 million, or 7.8%, in the third quarter of 2015 compared to the third quarter of 2014, due primarily to higher substation and overhead line maintenance.

 

Consumer accounts and administrative, general and other expense did not materially change in the third quarter of 2015 compared to the third quarter of 2014.

 

Depreciation and amortization expense decreased $1.6 million, or 15.6%, in the third quarter of 2015 compared to the third quarter of 2014, due primarily to the retirement of Beluga Unit 8, as well as a change in depreciation rates associated with the use of Beluga's remaining units from base load to peaking units, coinciding with the expiration of MEA's interim wholesale contract.

 

Interest on long-term and other debt and interest charged to construction did not materially change in the third quarter of 2015 compared to the third quarter of 2014.

 

Non-operating margins did not materially change in the third quarter of 2015 compared to the third quarter of 2014.

 

Current Year to Date versus Prior Year to Date

 

Assignable margins increased $1.8 million, or 137.6%, in the nine months ended September 30, 2015, compared to the same period in 2014, due primarily to lower production and depreciation expense, which was somewhat offset by decreased operating revenues due to lower sales.

 

Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, decreased $46.3 million, or 21.8%, in the nine months ended September 30, 2015, compared to the same period in 2014.

 

Overall, retail revenue did not materially change in the nine months ended September 30, 2015, compared to the same period in 2014. Base revenue increased due to an increase in rates charged to retail customers as a result of Chugach’s June 2014 Test Year General Rate Case, which was offset by lower fuel expense recovered through the fuel and purchased power surcharge process.

 

24

 


 

Wholesale revenue decreased $25.3 million, or 46.0%, in the nine months ended September 30, 2015, compared to the same period in 2014, due primarily to the expiration of MEA’s interim wholesale contract.

 

Economy energy revenue decreased $23.8 million, or 74.4%, in the nine months ended September 30, 2015, compared to the same period in 2014 due to the expiration of GVEA’s contract at the end of the first quarter of 2015, which was somewhat offset by economy energy sales to ML&P during the third quarter of 2015.

 

Based on the results of fixed and variable cost recovery established in Chugach’s last rate case, wholesale sales to MEA and Seward contributed approximately $9.5 million and $1.0 million, respectively, to Chugach’s fixed costs for the nine months ended September 30, 2015. Wholesale sales to MEA and Seward contributed approximately $19.1 million and $1.0 million, respectively, to Chugach’s fixed costs for the nine months ended September 30, 2014.

 

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, 2015, and 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Base Rate Sales Revenue

Fuel and Purchased Power Revenue

Total Revenue

 

 

2015

 

2014

 

% Variance

 

2015

 

2014

 

% Variance

 

2015

 

2014

 

% Variance

Retail

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

$

42.9 

 

$

39.7 

 

8.1 

%

 

$

17.8 

 

$

20.1 

 

(11.4 

%)

 

$

60.7 

 

$

59.8 

 

1.5 

%

Small Commercial

 

$

7.7 

 

$

7.0 

 

10.0 

%

 

$

4.3 

 

$

4.7 

 

(8.5 

%)

 

$

12.0 

 

$

11.7 

 

2.6 

%

Large Commercial

 

$

30.5 

 

$

27.2 

 

12.1 

%

 

$

17.9 

 

$

20.1 

 

(10.9 

%)

 

$

48.4 

 

$

47.3 

 

2.3 

%

Lighting

 

$

1.2 

 

$

1.2 

 

0.0 

%

 

$

0.1 

 

$

0.2 

 

(50.0 

%)

 

$

1.3 

 

$

1.4 

 

(7.1 

%)

Total Retail

 

$

82.3 

 

$

75.1 

 

9.6 

%

 

$

40.1 

 

$

45.1 

 

(11.1 

%)

 

$

122.4 

 

$

120.2 

 

1.8 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Wholesale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MEA

 

$

12.8 

 

$

24.8 

 

(48.4 

%)

 

$

13.3 

 

$

26.4 

 

(49.6 

%)

 

$

26.1 

 

$

51.2 

 

(49.0 

%)

SES

 

$

1.5 

 

$

1.5 

 

0.0 

%

 

$

2.1 

 

$

2.3 

 

(8.7 

%)

 

$

3.6 

 

$

3.8 

 

(5.3 

%)

Total Wholesale

 

$

14.3 

 

$

26.3 

 

(45.6 

%)

 

$

15.4 

 

$

28.7 

 

(46.3 

%)

 

$

29.7 

 

$

55.0 

 

(46.0 

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Economy

 

$

0.9 

 

$

2.3 

 

(60.9 

%)

 

$

7.3 

 

$

29.7 

 

(75.4 

%)

 

$

8.2 

 

$

32.0 

 

(74.4 

%)

Miscellaneous

 

$

1.7 

 

$

1.2 

 

41.7 

%

 

$

3.8 

 

$

3.7 

 

2.7 

%

 

$

5.5