-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, In8Gyff1vMLGJ17qlCYZhf9FBJc6NPc5hLavvmlFpVf62Yhp0+MOwte+FdQVwOm+ Pk3xS+nJepotJ3Nd/9jA3Q== 0000878004-01-500026.txt : 20020410 0000878004-01-500026.hdr.sgml : 20020410 ACCESSION NUMBER: 0000878004-01-500026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHUGACH ELECTRIC ASSOCIATION INC CENTRAL INDEX KEY: 0000878004 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 920014224 STATE OF INCORPORATION: AK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-42125 FILM NUMBER: 1789438 BUSINESS ADDRESS: STREET 1: 5601 MINNESOTA DR STREET 2: PO BOX 196300 CITY: ANCHORAGE STATE: AK ZIP: 99518 BUSINESS PHONE: 9075637494 10-Q 1 third10q2001.txt FORM 10Q FOR QUARTER ENDED SEPTEMBER 30, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - -------------------------------------------------------------------------------- FORM 10-Q - -------------------------------------------------------------------------------- X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 - -------------------------------------------------------------------------------- Commission file number 33-42125 CHUGACH ELECTRIC ASSOCIATION, INC. Incorporated pursuant to the Laws of Alaska State - -------------------------------------------------------------------------------- Internal Revenue Service - Employer Identification No. 92-0014224 5601 Minnesota Drive, Anchorage, AK 99518 (907) 563-7494 - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date. CLASS OUTSTANDING AT NOVEMBER 1, 2001 NONE NONE Page Number CAUTION REGARDING FORWARD-LOOKING STATEMENTS 3 PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 3 Balance Sheets, September 30, 2001, and December 31, 2000 4 Statements of Revenues, Expenses and Patronage Capital, Three and Nine Months Ended September 30, 2001, and 2000 6 Statements of Cash Flows, Nine Months Ended September 30, 2001, and 2000 7 Notes to Financial Statements 8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 1 0 Item 3. Quantitative and Qualitative Disclosures About Market Risk 1 7 PART II OTHER INFORMATION Item 1. Legal Proceedings 1 8 Item 2. Changes in Securities and Use of Proceeds 1 9 Item 3. Defaults Upon Senior Securities 1 9 Item 4. Submission of Matters to a Vote of Security Holders 1 9 Item 5. Other Information 1 9 Item 6. Exhibits and reports on Form 8-K 1 9 Signatures 2 0 CAUTION REGARDING FORWARD-LOOKING STATEMENTS Statements in this report that do not relate to historical facts, including statements relating to future plans, events or performance, are forward-looking statements that involve risks and uncertainties. Actual results, events or performance may differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, that speak only as of the date of this report and the accuracy of which is subject to inherent uncertainty. Chugach Electric Association, Inc. (Chugach or the Association) 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 of Chugach for the quarter ended September 30, 2001, follow: CHUGACH ELECTRIC ASSOCIATION, INC. BALANCE SHEETS
(Unaudited) Assets September 30, 2001 December 31, 2000 ------ ------------------ ----------------- Utility plant Electric plant in service $ 703,708,999 $ 687,127,130 Construction work in progress 37,697,915 42,027,617 ---------- ---------- 741,406,914 729,154,747 Less accumulated depreciation (260,069,559) (259,999,872) ------------- ------------- Net utility plant 481,337,355 469,154,875 ----------- ----------- Other property and investments, at cost: Nonutility property 3,550 443,555 Investments in associated organizations 9,937,216 9,857,153 --------- --------- 9,940,766 10,300,708 --------- ---------- Current assets: Cash and cash equivalents, including repurchase agreements 5,842,617 1,695,162 Cash-restricted construction funds 180,293 378,848 Special deposits 222,163 212,163 Accounts receivable, less provisions for doubtful accounts 19,490,052 19,200,912 Fuel cost recovery 1,606,783 2,915,733 Materials and supplies 14,981,362 15,357,198 Prepayments 1,512,434 755,276 Other 352,925 332,246 ------- ------- Total current assets 44,188,629 40,847,538 ---------- ---------- Deferred charges 37,954,701 19,442,859 ---------- ---------- $ 573,421,451 $ 539,745,980 ============= ============= See accompanying notes to financial statements.
(Unaudited) Liabilities and Equities September 30, 2001 December 31, 2000 ------------------------ ------------------ ----------------- Equities and margins: Memberships $ 1,046,623 $ 1,009,663 Patronage capital 125,670,594 122,925,253 Other 4,726,846 4,880,424 --------- --------- 131,444,063 128,815,340 ----------- ----------- Long-term obligations, excluding current Installments: 2001 Series A bonds payable 150,000,000 0 First Mortgage bonds payable 154,310,000 169,542,000 National Bank for Cooperatives bonds payable 65,000,000 142,677,945 ---------- ----------- 369,310,000 312,219,945 ----------- ----------- Current liabilities: Short-term borrowings 5,000,000 40,000,000 Current installments of long-term obligations 10,409,945 6,430,350 Accounts payable 3,487,720 9,493,875 Consumer deposits 1,548,300 1,324,213 Accrued interest 1,402,741 5,861,390 Salaries, wages and benefits 4,709,359 4,586,407 Fuel 9,278,144 8,154,559 Estimated settlement of rate lock agreement 15,684,930 0 Other 1,411,570 1,434,562 --------- --------- Total current liabilities 52,932,709 77,285,356 ---------- ---------- Deferred credits 19,734,679 21,425,339 ---------- ---------- $ 573,421,451 $ 539,745,980 ============= ============= See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC. Statements of Revenues, Expenses and Patronage Capital (Unaudited)
Three-months ended Sept 30 Nine-months ended Sept 30 2001 2000 2001 2000 ---- ---- ---- ---- Operating revenues $ 42,186,684 $37,201,515 $ 126,400,956 $ 114,258,272 Operating expenses: Power production 14,910,711 12,890,904 47,587,932 36,257,283 Purchased power 5,176,508 2,456,575 9,147,759 7,072,014 Transmission 860,666 949,998 2,731,599 2,491,633 Distribution 2,484,640 2,574,665 7,260,234 7,521,075 Consumer accounts/Information expense 1,424,496 1,247,316 4,042,754 3,995,952 Sales expense 130,946 289,372 352,051 817,221 Administrative, general and other 4,229,961 5,035,824 13,951,269 14,743,566 Depreciation and amortization 6,373,276 5,747,653 18,678,752 17,180,273 --------- --------- ---------- ---------- Total operating expenses 35,591,202 31,192,307 103,752,350 90,079,017 ---------- ---------- ----------- ---------- Interest: On long-term obligations 7,029,623 6,245,878 20,116,937 18,856,861 On short-term obligations 14,166 549,767 1,105,954 1,083,306 Charged to construction-credit (363,665) (717,281) (814,285) (1,706,470) --------- --------- --------- ----------- Net interest expense 6,680,125 6,078,364 20,408,606 18,333,697 --------- --------- ---------- ---------- Net operating margins (84,643) (69,156) 2,240,000 5,845,558 -------- -------- --------- --------- Nonoperating margins: Interest income 156,645 123,217 536,828 513,235 Other (29,743) 97,044 201,362 323,536 -------- ------ ------- ------- Total nonoperating margins 126,903 220,261 738,190 836,771 ------- ------- ------- ------- Assignable margins 42,260 151,105 2,978,190 6,682,329 ====== ======= ========= ========= Patronage capital at beginning of period 125,743,981 123,726,878 122,925,253 117,335,481 ----------- ----------- ----------- ----------- Retirement of capital credits and estate payments (115,647) (147,717) (232,849) (287,544) --------- --------- --------- --------- Patronage capital at end of period $ 125,670,594 $ 123,730,266 $ 125,670,594 $ 123,730,266 ============= ============= ============= ============= See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC. Statement of Cash Flows (Unaudited)
Nine-months ended Sept 30 Cash flows from operating activities: 2001 2000 - ------------------------------------- ---- ---- Assignable margins $ 2,978,190 $ 6,682,329 ------------ ----------- Adjustments to reconcile assignable margins to net cash provided by operating activities: Depreciation and amortization 18,678,752 17,180,273 Changes in assets and liabilities: (Increase) decrease in assets: Fuel cost recovery 1,308,950 (844,996) Accounts receivable (289,140) 3,949,171 Prepayments (757,158) (451,193) Materials and supplies 375,836 (326,189) Deferred charges (2,826,912) 1,325,116 Other assets 607,881 47,219 Increase (decrease) in liabilities: Accounts payable (6,006,155) (4,840,628) Consumer deposits 224,087 109,726 Accrued interest (4,458,649) (4,380,345) Deferred credits (1,690,660) (3,273,999) Other liabilities 1,223,545 1,034,264 --------- --------- Net cash provided by operating activities 9,368,567 16,210,748 --------- ---------- Cash flows from investing activities: Extension and replacement of plant (30,861,232) (30,890,266) Investments in associated organizations (80,063) (44,056) -------- -------- Net cash used in investing activities (30,941,295) (30,934,322) ------------ ------------ Cash flows from financing activities: Short-term borrowings, net (35,000,000) 33,966,659 Proceeds from long-term obligations 150,000,000 0 Repayments of long-term obligations (88,930,350) (24,872,405) Retirement of patronage capital (232,849) (287,544) Other (116,618) 47,991 --------- ------ Net cash provided by financing activities 25,720,183 10,613,544 ---------- ---------- Net increase (decrease) in cash and cash equivalents 4,147,455 (4,110,030) Cash and cash equivalents at beginning of period $ 1,695,162 $ 4,110,030 - ------------------------------------------------ ----------- ----------- Cash and cash equivalents at end of period $ 5,842,617 $ 0 - ------------------------------------------ =========== =========== Supplemental disclosure of cash flow information - interest expense paid, net of $24,867,255 $22,714,043 =========== =========== amounts capitalized Non-Cash Transaction - Estimated settlement of rate lock agreement $15,684,930 $ 0 =========== =========== See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC. Notes to Financial Statements (Unaudited) 1. Presentation of Financial Information During interim periods, Chugach follows the accounting policies set forth in its audited financial statements included in Form 10-K filed with the Securities and Exchange Commission, unless otherwise noted. Users of interim financial information are encouraged to refer to the footnotes contained in Chugach's Form 10-K when reviewing interim financial results. The accompanying unaudited interim financial statements reflect all adjustments, which are, in the opinion of management necessary to a fair statement of the results for the interim periods presented. Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation. 2. Lines of Credit Chugach maintains a line of credit of $35 million with CoBank, ACB (CoBank). The CoBank line of credit expires August 1, 2002, but is subject to annual renewal. At September 30, 2001, there was $5 million outstanding on this line of credit at an interest rate of 6.0%. In addition, the Association has an annual line of credit of $50 million available at the National Rural Utilities Cooperative Finance Corporation (NRUCFC). At September 30, 2001, there was no outstanding balance on this line of credit. The NRUCFC line of credit expires October 14, 2002, but is subject to annual renewal. 3. Changes in Accounting Principles Chugach entered into a US Treasury Rate Lock Agreement consisting of notional amount of $196.0 million 10-year and $18.7 million 30-year U.S. Treasuries on March 17, 1999, with Lehman Brothers Financial Products, Inc. (Lehman) for the purpose of taking advantage of favorable interest rates in anticipation of the probable refinancing of our 1991 Series A Bonds due 2022 on their first call date of March 15, 2002. On May 11, 2001, Chugach terminated the $18.7 million U.S. Treasury portion of the U.S. Treasury Rate Lock Agreement in receipt of payment of $10,000 by Lehman. The Series A bonds are callable at a 9.14% premium. As of September 30, 2001, the aggregate principal amount of the Series A Bonds was $154,310,000. Under the US Treasury Rate Lock Agreement, we will receive a lump-sum payment on March 15, 2002, if the yield on 10-year Treasury bonds as of mid-February 2002 exceeds a specified target level (5.653%.) Conversely, on the same date, we will be required to make a payment if the yield on the 10-year Treasury bond falls below the target yields. Chugach adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, effective January 1, 2001. This new standard requires all derivative financial instruments to be reflected on the balance sheet. As of September 30, 2001, we have established a regulatory asset of $15,684,930 million and a liability for the same amount. The regulatory asset and liability will be adjusted for changes in the estimated value of the US Treasury Rate Lock Agreement entered into by us. Management believes it is probable the regulatory asset will be recovered through rates. 4. Environmental Matters Chugach discovered polychlorinated biphenyls (PCBs) in paint, caulk and grease at the Cooper Lake Hydroelectric Plant during initial phases of a turbine overhaul. A Federal Energy Regulatory Commission, (FERC) approved plan, prepared in consultation with the Environmental Protection Agency, (EPA) was implemented to remediate the PCBs in the plant. As a condition of its approval of the license amendment for the overhaul project, FERC required Chugach to also investigate the presence of PCBs in Kenai Lake. A sampling plan was developed by Chugach in consultation with various agencies and approved by FERC. In 2000, Chugach sampled sediments and fish collected from Kenai Lake and other waters. While extremely low levels of PCBs were found in some sediment samples taken near the plant, no pathway from sediment to fish was established. Additional sediment sampling and analysis in this area is being performed. While the presence of PCBs in fish did not reveal amounts above background levels, Chugach is conducting additional sampling and analysis of fish in Kenai Lake and other waters. A report will be provided to FERC on the results of the additional fish and sediment sampling by December 31, 2001. Management believes the costs of this work will be recoverable through rates and therefore will have no material impact on the financial condition or results of operations. 5. Legal Proceedings Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc. 3AN-99-8152 (Omnibus case) On July 7, 1999, Matanuska Electric Association, Inc., (MEA) filed a complaint against Chugach in Alaska Superior Court in Anchorage, asserting that Chugach violated state statutes, Chugach's bylaws and the power supply agreement between the parties in failing to provide MEA with information about several different matters that MEA asserts could affect the cost of the power MEA purchases from Chugach. MEA also asserted that Chugach violated the power supply agreement in its management of its long-term bond indebtedness. On February 8, 2000, MEA added a claim in this proceeding requesting an order requiring Chugach to present its general rate case filing under Section 9 (d) of the power sale agreement with MEA to the joint committee (a review panel comprised of two representatives of Chugach directors and one MEA director) prior to presenting it to the Regulatory Commission of Alaska (RCA). Chugach filed its answer to MEA's Second Amended Complaint on March 10, 2000, opposing the relief MEA requested. On July 10, 2001, in accordance with Section 9 (h) of the power sales agreement, Chugach filed its general rate case directly with the RCA requesting interim rate relief without review by the joint committee. On September 10, 2001, MEA filed a motion for partial summary judgement based on this filing. On September 28, 2001, Chugach filed a cross motion for summary judgement on this issue. Briefing is now complete on this issue and the parties are awaiting a decision. Discovery in this matter is underway. Trial is set for April 1, 2002. We are not able to estimate the costs of our participation. For additional information, refer to the discussion of this matter in Part I, Item 3 - Legal Proceedings, Matanuska Electric Association, Inc., v. Chugach Electric Association, Inc., 3AN 99-8152CI of the Form 10-K filed by Chugach with respect to the annual report period ended December 31, 2000. Chugach has certain additional litigation matters and pending claims that arise in the ordinary course of its business. In the opinion of management, no individual matter or the matters in the aggregate is likely to have a material adverse effect on our results of operations, financial condition or liquidity. Item 2. 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. For certain information concerning a U.S. Treasury Rate Lock transaction entered into by Chugach in March 1999, reference is made to information appearing in Part I, Item 3 "Quantitative and Qualitative Disclosures about Market Risk - Interest Rate Risk." of this report. Regulatory Matters Chugach submitted a general rate case based on the 2000 test year to the RCA on July 10, 2001. The filing requested an overall system base rate increases of 4.0 percent on an interim basis and 6.5 percent on a permanent basis. The Commission opened Docket U-01-108 to address the issues relating to the year 2000 test period rate filing. On September 5, 2001, the RCA issued Order No. 1 in Docket U-01-108 that authorized an interim base demand and energy rate increase of 1.6 percent for retail and wholesale billings effective September 14, 2001. Chugach retail customers under the Small General Service and Lighting tariffs were exempt from the increase. On September 25, 2001, Chugach submitted a Request for Reconsideration to the RCA regarding specific adjustments to Chugach's revenue requirement contained in the Commission order. On October 25, 2001, the Commission ruled on Chugach's Request for Reconsideration, which resulted in an interim base demand and energy increase of 3.97 percent, or about 2.4 percentage points higher than the initial authorized increase of 1.6 percent. Chugach submitted a compliance filing to this order on October 30, 2001, and the additional rate increase was implemented in November 2001. The 3.97 percent base demand and energy rate increase is anticipated to result in approximately $0.7 million in additional revenue in 2001 compared to previous permanent rates, or $4.1 million on an annualized basis. The interim rate increase is based on a normalized, or adjusted for recurring expenses, test year and a system ratemaking Times Interest Earned Ratio (TIER) of 1.35. Chugach requested a permanent system base rate increase of 6.5 percent, which Chugach anticipates becoming effective during 2002. In contrast to Chugach's traditional TIER-based approach to establishing rates, which was used to establish the 4.0 percent interim rate increase, Chugach's permanent base rate increase was established on the basis of a return on rate base method. The permanent rate increase for electric operations is based on a return of 7.0 percent, which is anticipated to result in margins of $10.8 million at the rate base submitted. The resultant system TIER is 1.38 based on the proposed capital structure contained in the filing. In contrast, the revenue requirement requested in Chugach's permanent rate proposal, given its existing capital structure under the traditional TIER based approach, is forecasted to result in margins of $11.9 million and an equivalent system TIER of 1.44. If approved, the 6.5 percent permanent base rate increase is anticipated to result in $7.5 million in annualized revenue, or approximately $3.4 million above the annualized interim increase. A pre-hearing conference to establish a procedural schedule for the rate case has been set for mid-November. Chugach submitted its 1998 test year revenue requirement filing to the RCA in February 2001. A hearing to resolve the outstanding issues associated with the filing was held during September 2001 and a Commission order is anticipated within the next several months. Management believes the resolution of the remaining issues will not have a material effect on Chugach's results of operations, financial position or liquidity. Results of Operations Current Year Quarter Versus Prior Year Quarter Assignable margins decreased slightly in this quarter over the same quarter last year, due to an increase in depreciation and amortization expense, net interest expense and a decrease in nonoperating margins. Operating revenues, which include sales of electrical energy to retail, wholesale and economy energy customers and other miscellaneous revenues, increased by $5.0 million, or 13.4%, for the quarter ended September 30, 2001, over the same quarter in 2000. Approximately $80,000, or two percent of this increase was due to a 1.6% interim base demand and energy rate increase that went into effect in September 2001. The remaining was due to increased fuel prices, resulting in increased revenue collected through the fuel surcharge mechanism. The increase was partially offset by lower economy energy sales due to a 55% decrease in kilowatt-hour sales to Golden Valley Electric Association (GVEA). Chugach's increased fuel prices have made it more economical for GVEA to produce their own power rather than purchase from Chugach. Retail demand and energy rates (excluding Small General Service and Lighting) were 1.6 percent higher in the third quarter of 2001 compared to the third quarter of 2000, reflecting the September 14, 2001 interim increase authorized by the Commission. The base rates charged to Small General Service and Lighting did not change during this period. Wholesale demand and energy rates charged to Homer Electric Association, Inc., (HEA) and Matanuska Electric Association, Inc., (MEA) also increased by 1.6 percent between third quarter 2000 and third quarter 2001, reflecting the September 14, 2001, interim increase. Wholesale demand and energy rates charged to Seward Electric System (SES) did not change this quarter compared to the same quarter last year. Power production expense increased by $2.0 million, or 15.7%, from the third quarter 2000 to the third quarter 2001 due to an increase in fuel prices. Purchased power expense increased by $2.7 million, or 110.7%, for the quarter ended September 30, 2001, compared to the same period in 2000 due to the Nikiski power plant being placed back into service under a new contract that requires the Nikiski unit to be run at full capacity. Transmission and Distribution expense did not vary materially in this period compared to the same period last year. Consumer Accounts and Information expense increased from the third quarter 2000 to the third quarter 2001 by $177,000, or 14.2%, due to a shift from sales functions to this category. Sales expense decreased by $158,000, or 54.8%, due in part to the same reason above, as well as to the sale of our internet service provider business in March 2001. Administrative, general and other expense decreased by $806,000, or 16.0%, from the third quarter 2000 to the third quarter 2001. This variance was primarily due to the sale of our internet service provider business in March 2001. Depreciation and amortization expense increased in this period compared to the same period last year by $626,000, or 10.9%, due to projects previously closed to electric plant in service, increasing the level of plant currently being depreciated. Interest on long-term obligations increased by $784,000 or 12.6%, due to the additional debt acquired in the public bond offering in April 2001. Interest charged to construction decreased $354,000, or 49.3% in the third quarter of 2001 compared to the same period in 2000 due to lower construction work in progress balances during the third quarter. Other interest expense decreased by $536,000 or 97.4%, due to lower outstanding balances on the lines of credit in the third quarter of 2001. Other nonoperating margins were lower for the quarter ended September 30, 2001, compared to the same period in 2000 due to the decrease in Allowance for Funds Used During Construction (AFUDC) during the third quarter. This reduction was primarily attributed to lower Construction Work in Progress (CWIP) balances in 2001, as well as the continued transactions associated with the sale of our internet service provider business. Current Year to Date Versus Prior Year to Date In general, net margins decreased as a result of a $2.1 million, or 11.3%, increase in net interest expense, a $1.5 million, or 8.7% increase in depreciation expense and the remainder due to a decrease of $892,000, or 52.3% in interest charged to construction. These variances are discussed in more detail below. Operating revenues increased by $12.1 million, or 10.6%, for nine months ended September 30, 2001 over the same period in 2000. The increase was primarily due to increased fuel prices, which resulted in increased revenue collected through the fuel surcharge mechanism and $80,000, or one half of one percent, was also attributable to the 1.6% interim rate increase that occurred in September of 2001. Economy energy sales were lower due to a 67% decrease in kilowatt-hour sales to GVEA. Power production expense increased by $11.3 million, or 31.3%, in the first nine months of 2001, compared to the same period in 2000 due to higher fuel costs. Purchased power expense increased by $2.1 million, or 29.4%, due to the unavailability of Beluga Unit 7, the limited availability of Bernice Lake Unit 3, and the Nikiski unit being placed back in service under a new contract that requires the Nikiski unit to be base loaded. Transmission expense increased by $240,000, or 9.6%, due to increased substation maintenance and unplanned maintenance on our submarine cable circuit. Sales expense decreased by $465,000, or 56.9%, due to the sale of our internet service provider business in March 2001. Administrative, general and other expense decreased in the first nine months of 2001 over 2000 by $792,000, or 5.4%, due primarily to the sale of our internet service provider business in March 2001. Depreciation and amortization expense increased by $1.5 million, or 8.7%, due to the substantial increase to plant in the fourth quarter of 2000. Net interest expense increased by $2.1 million, or 11.3%, due to transactions associated with the 2001 Series A Bonds issued in April 2001, as well as the decrease in Interest Charged to Construction due to lower Construction Work in Progress balances. Financial Condition Total assets increased by $33.7 million, or 6.2%, from December 31, 2000 to September 30, 2001. This increase was due to an $18.5 million, or 95.2%, increase in deferred charges, attributed in part to the recording of the estimated regulatory asset associated with the liability established for the rate lock agreement and the financing charges associated with the $150 million public bond offering in April 2001. There was a $12.2 million, or 2.6%, increase in net utility plant caused by the completion of several projects. There was also an increase in cash and cash equivalents, which was associated with funds borrowed on the line of credit for working capital. This was offset by a decrease in non-utility property due to the sale of our internet service provider business, as well as a decrease of $1.3 million, or 44.9%, in fuel cost recovery due to the additional recovery through fuel surcharge rates providing recovery of the under-collection of fuel costs. Notable changes to total liabilities include the $15.7 million recording of the estimated settlement value of the rate lock agreement, in compliance with FASB 133. There was an increase of $57.1 million, or 18.3%, in long-term debt, which was associated with the public bond offering in April 2001. That was offset by a $15.2 million, or 9.0%, decrease in first mortgage bonds payable, due to re-acquired bonds and the principal bond payment in March 2001. There was also an increase of $4.0 million, or 61.9%, in current installments of long-term obligations due to the first installment of CoBank 5 due in June of 2002. This was offset by the decrease of $35 million in short-term borrowings, which was also associated with the public bond offering in April 2001, producing the limited need for the lines of credit in the first nine months of the year. There was also a decrease of $6.0 million, or 63.3%, in accounts payable due to the payment of year-end accruals, as well as a $4.5 million, or 76.1%, decrease in accrued interest as a result of the September semi-annual bond interest payment. Liquidity and Capital Resources Chugach has satisfied its operational and capital cash requirements primarily through internally generated funds, an annual $50 million line of credit from NRUCFC and a $35 million line of credit with CoBank. At September 30, 2001, there was no outstanding balance with NRUCFC and a $5 million outstanding balance with CoBank. The CoBank line of credit bears interest at a variable rate, which was 6% as of September 30, 2001, and is currently reset monthly. Chugach has negotiated a supplemental indenture (Seventh Supplemental Indenture of Trust) that eliminated the maximum aggregate amounts of bonds the Association may issue under the Credit Agreement with CoBank. Prinicpal maturities and sinking fund payments of our outstanding indebtedness at September 30, 2001. Year Ending Sinking Fund Principal December 31 Requirements Maturities Total 2002 $0 $10,409,945 $10,409,945 2003 5,041,000 865,821 5,906,821 2004 5,502,000 945,000 6,447,000 2005 6,005,000 11,031,393 17,036,393 2006 6,554,000 1,125,687 7,679,687 Thereafter 281,208,000 51,032,099 332,240,099 Capital construction in 2001 is estimated at $34.3 million. At September 30, 2001, approximately $30.9 million had been expended. Capital improvement expenditures are expected to decrease in the upcoming fourth quarter as the construction season ends. Chugach is a party to a U.S. Treasury Rate Lock Agreement with respect to the probable refinancing of a portion of the 1991 Series A Bonds. The settlement date of this contract is March 15, 2002. At September 30, 2001, the U.S. Treasury Rate Lock Agreement had an estimated value of $(15,684,930). At November 6, 2001, the agreement had an estimated value of $(21,743,626) million. On May 11, 2001, Chugach terminated a portion of the agreement in receipt of payment of $10,000. See Item 3 "Quantitative and Qualitative Disclosures about Market Risk - Interest Rate Risk." Chugach management continues to expect that cash flows from operations and external funding sources will be sufficient to cover operational and capital funding requirements in 2001 and thereafter. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. The provisions of Statement 142 are required to be applied starting with fiscal years beginning after December 15, 2001. Chugach believes the adoption of Statement 141 and 142 will have no impact on Chugach's financial statements. In August 2001, the Financial Accounting Standards Board issued Statement No. 143, Accounting for Asset Retirement Obligations. Statement No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets. Statement No. 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset. Enterprises are required to adopt Statement No. 143 for fiscal years beginning after June 15, 2002, with early adoption encouraged. Chugach believes the adoption of Statement No. 143 will have no impact on Chugach's financial statements. In October 2001, the Financial Accounting Standards Board issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement, and broadens the presentation of discontinued operations to include more disposal transactions. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. Statement No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Early application is encouraged. Chugach believes the adoption of Statement No. 144 will have no impact on Chugach's financial statements. Outlook Due to the California electricity deregulation experience over the past year, the competitive marketplace in Alaska now seems quite distant and there is no movement in that direction. In the past few years, Chugach has been active at the Alaska Legislature in support of the customer's right to choose their electric power provider. Virtually all Alaska utilities opposed Chugach's efforts to develop competition. To ensure readiness for competition and to build organizational experience and expertise in competitive-type business, Chugach operates with three divisions: Finance and Energy Supply, Transmission and Distribution Network Services and Retail Services. Chugach also operates a key account program for larger customers and has developed several new services to enhance existing customer satisfaction. Environmental Matters Compliance with Environmental Standards Chugach's operations are subject to certain federal, state and local environmental laws that Chugach monitors to ensure compliance. The costs associated with environmental compliance are included as a component of both the operating and capital budget processes. Chugach accrues for costs associated with environmental remediation obligations when such costs are probable and reasonably estimable. Environmental Matters Chugach discovered polychlorinated biphenyls ("PCBs) in paint, caulk and grease at the Cooper Lake Hydroelectric Plant during initial phases of a turbine overhaul. A Federal Energy Regulatory Commission, (FERC) approved plan, prepared in consultation with the Environmental Protection Agency, (EPA) was implemented to remediate the PCBs in the plant. As a condition of its approval of the license amendment for the overhaul project, FERC required Chugach to also investigate the presence of PCBs in Kenai Lake.A sampling plan was developed by Chugach in consultation with various agencies and approved by FERC. In 2000 Chugach sampled sediments and fish collected from Kenai Lake and other waters. While extremely low levels of PCBs were found in some sediment samples taken near the plant, no pathway from sediment to fish was established. Additional sediment sampling and analysis in this area is being performed. While the presence of PCBs in fish did not reveal amounts above background levels, Chugach is conducting additional sampling and analysis of fish in Kenai Lake and other waters. A report will be provided to FERC on the results of the additional fish and sediment sampling by December 31, 2001. Management believes the costs of this work will be recoverable through rates and therefore will have no material impact on the financial condition or results of operations. 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, Chugach manages its exposure to these risks as described below. Chugach does not engage in trading market risk-sensitive instruments for speculative purposes. Interest Rate Risk As of September 30, 2001, all of our outstanding long-term borrowings were at fixed interest rates with varying maturity dates. The following table provides information regarding cash flows for principal payments for the remaining quarter and subsequent fiscal years on total debt by maturity date (dollars in thousands) as of September 30, 2001.
Fair Total Debt* 2001 2002 2003 2004 2005 Thereafter Total Value - ----------- ---- ---- ---- ---- ---- ---------- ----- ----- Fixed rate $0 $10,410 $5,907 $6,447 $17,036 $339,920 $379,720 $401,161 Average interest rate 6.90% 8.62% 8.62% 8.12% 7.50% 7.55% Variable rate $5,000 $0 $0 $0 $0 $0 $5,000 $5,000 Average interest rate 6.00% 6.00% * Includes current portion
On March 17, 1999, Chugach entered into a U.S. Treasury Rate Lock Agreement, consisting of a notional amount of $196 million 10-year and of $18.7 million 30-year U.S. Treasuries, with Lehman Brothers Financial Products, Inc., (Lehman) for the purpose of taking advantage of favorable market interest rates in anticipation of refinancing Chugach's Series A Bonds Due 2022 on their first call date (March 15, 2002). As of September 30, 2001, the aggregate principal amount of Series A Bonds due 2022 was $154.3 million. On May 11, 2001, Chugach terminated the $18.7 million 30-year U.S. Treasury portion of the Treasury Rate Lock Agreement in receipt of payment of $10,000 by Lehman Brothers. Under the Treasury rate lock contract, Chugach will receive a lump-sum payment from Lehman Brothers on March 15, 2002, if the yield on 10-year Treasury bonds as of mid-February, 2002, exceeds a specified target level (5.653%). Conversely, on the same date, Chugach will be required to make a payment to Lehman Brothers if the yield on the 10-year Treasury bonds falls below its stated target yield. The fair value of the treasury rate lock agreement on November 6, 2001, approximated $(21.7) million. A 10 basis-point change (up or down) in the prevailing yield on 10-year Treasury bonds would change the value of the rate lock agreement (up or down) by approximately $1.6 million. Commodity Price Risk Chugach's gas contracts provide for adjustments to gas prices based on fluctuations of certain commodity prices and indices. Because purchased power costs are passed directly to our wholesale and retail customers through a fuel surcharge, fluctuations in the price paid for gas pursuant to long-term gas supply contracts do not normally impact margins. The fuel surcharge mechanism mitigates the commodity price risk related to market fluctuations in the price of purchased power. PART II: OTHER INFORMATION Item 1. Legal Proceedings Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc. 3AN-99-8152 (Omnibus case) On July 7, 1999, MEA filed a complaint against Chugach in Alaska Superior Court in Anchorage asserting that Chugach violated state statutes, Chugach's bylaws and the power supply agreement between the parties, in failing to provide MEA with information about several different matters that MEA asserts could affect the cost of the power MEA purchases from Chugach. MEA also asserted that Chugach violated the power supply agreement in its management of its long-term bond indebtedness. On February 8, 2000, MEA added a claim in this proceeding requesting an order requiring Chugach to present its general rate case filing under Section 9 (d) of the power sale agreement with MEA to the joint committee (a review panel comprised of two representatives of Chugach directors and one MEA director) prior to presenting it to the RCA. Chugach filed its answer to MEA's Second Amended Complaint on March 10, 2000, opposing the relief MEA requested. On July 10, 2001, in accordance with Section 9 (h) of the power sales agreement, Chugach filed its general rate case directly with the RCA requesting interim rate relief without review by the joint committee. On September 10, 2001, MEA filed a motion for partial summary judgement based on this filing. On September 28, 2001, Chugach filed a cross motion for summary judgement on this issue. Briefing is now complete on this issue and the parties are awaiting a decision. Discovery in this matter is underway. Trial is set for April 1, 2002. We are not able to estimate the costs of our participation. For additional information, refer to the discussion of this matter in Part I, Item 3 - Legal Proceedings, Matanuska Electric Association, Inc., v. Chugach Electric Association, Inc., 3AN 99-8152CI of the Form 10-K filed by Chugach with respect to the annual report period ended December 31, 2000. Chugach has certain additional litigation matters and pending claims that arise in the ordinary course of its business. In the opinion of management, no individual matter or the matters in the aggregate is likely to have a material adverse effect on our results of operations, financial condition or liquidity. Item 2. Changes in Securities and Use of Proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: No exhibits are being filed with this report for the quarter ended September 30, 2001. (b) Reports on Form 8-K: No reports on Form 8-K were filed for the quarter ended September 30, 2001. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHUGACH ELECTRIC ASSOCIATION, INC. By: /s/Eugene N. Bjornstad Eugene N. Bjornstad General Manager Date: November 14, 2001 By: /s/Evan J. Griffith Evan J. Griffith Executive Manager, Finance & Energy Supply Date: November 14, 2001 -----END PRIVACY-ENHANCED MESSAGE-----