10-Q 1 sec06300210q.txt FORM 10Q FOR PERIOD ENDED JUNE 30, 2002 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 June 30, 2002 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 AUGUST 1, 2002 NONE NONE Page Number CAUTION REGARDING FORWARD-LOOKING STATEMENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 2 Balance Sheets, June 30, 2002 and December 31, 2001 3 Statements of Revenues, Expenses and Patronage Capital, Three and Six Months Ended June 30, 2002 and 2001 5 Statements of Cash Flows, Six Months Ended June 30, 2002 and 2001 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 1 6 PART II OTHER INFORMATION Item 1. Legal Proceedings 1 7 Item 2. Changes in Securities and Use of Proceeds 1 7 Item 3. Defaults Upon Senior Securities 1 7 Item 4. Submission of Matters to a Vote of Security Holders 1 7 Item 5. Other Information 1 7 Item 6. Exhibits and reports on Form 8-K 1 8 Signatures 1 9 Exhibits 2 0 CAUTION REGARDING FORWARD-LOOKING STATEMENTS Statements in this report that do not relate to historical facts, including statements relating to future plans, events or performance, are forward-looking statements that involve risks and uncertainties. Actual results, events or performance may differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, that speak only as of the date of this report and the accuracy of which is subject to inherent uncertainty. Chugach Electric Association, Inc. (Chugach 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 and notes to financial statements of Chugach for the quarter ended June 30, 2002, follow: CHUGACH ELECTRIC ASSOCIATION, INC. BALANCE SHEETS
(Unaudited) Assets June 30, 2002 December 31, 2001 ------ ------------- ----------------- Utility plant Electric plant in service $725,992,916 $714,317,863 Construction work in progress 24,011,541 28,887,008 ---------- ---------- 750,004,457 743,204,871 Less accumulated depreciation (269,433,852) (261,353,177) ------------- ------------- Net utility plant 480,570,605 481,851,694 ----------- ----------- Other property and investments, at cost: Nonutility property 3,550 3,550 Investments in associated organizations 10,547,872 10,485,186 ---------- ---------- 10,551,422 10,488,736 ---------- ---------- Current assets: Cash and cash equivalents 3,779,829 3,814,767 Cash-restricted construction funds 561,698 517,871 Special deposits 242,163 222,163 Accounts receivable, net 16,844,729 22,302,400 Fuel cost recovery 1,405,553 3,591,963 Materials and supplies 23,872,758 22,822,003 Prepayments 2,451,288 627,544 Other current assets 197,430 335,753 ------- ------- Total current assets 49,355,448 54,234,464 ---------- ---------- Deferred charges 27,724,948 28,706,293 ---------- ---------- $568,202,423 $575,281,187 ============ ============ See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC. BALANCE SHEETS (Continued)
(Unaudited) Liabilities and Equities June 30, 2002 December 31, 2001 ------------------------ ------------- ----------------- Equities and margins: Memberships $1,080,243 $1,059,098 Patronage capital 128,955,925 125,184,374 Other 5,432,690 5,565,234 --------- --------- 135,468,858 131,808,706 ----------- ----------- Long-term obligations, excluding current installments: First Mortgage (1991 Series A) Bond payable 0 149,310,000 2001 Series A Bond payable 150,000,000 150,000,000 2002 Series A Bond payable 120,000,000 0 2002 Series B Bond payable 60,000,000 0 National Bank for Cooperatives Bonds payable 64,134,179 65,000,000 ---------- ---------- 394,134,179 364,310,000 ----------- ----------- Current liabilities: Short-term obligations 8,000,000 11,000,000 Current installments of long-term obligations 865,821 10,409,945 Accounts payable 4,513,758 11,012,905 Consumer deposits 1,702,949 1,603,691 Accrued interest 6,352,926 7,378,058 Salaries, wages and benefits 5,121,383 4,844,819 Fuel 6,840,359 11,565,117 Other current liabilities 1,618,348 1,900,155 --------- --------- Total current liabilities 35,015,544 59,714,690 ---------- ---------- Deferred credits 3,583,842 19,447,791 --------- ---------- $568,202,423 $575,281,187 ============ ============ See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC. Statements of Revenues, Expenses and Patronage Capital (Unaudited)
Three months ended June 30 Six months ended June 30 2002 2001 2002 2001 ---- ---- ---- ---- Operating revenues $42,837,727 $39,018,695 $91,406,269 $84,214,272 Operating expenses: Fuel 11,736,690 12,204,482 24,695,979 25,903,905 Power production 3,505,628 2,928,305 6,723,941 6,773,316 Purchased power 4,812,543 2,153,516 10,007,083 3,971,251 Transmission 1,118,331 805,511 1,994,449 1,870,933 Distribution 2,596,065 2,435,425 5,224,178 4,775,595 Consumer accounts/Information expense 1,471,341 1,293,400 2,895,019 2,618,258 Sales expense 0 90,541 0 221,105 Administrative, general and other 5,025,321 4,636,545 9,974,640 9,721,309 Depreciation and amortization 6,323,088 6,240,878 12,563,706 12,305,476 --------- --------- ---------- ---------- Total operating expenses 36,589,007 32,788,603 74,078,995 68,161,148 ---------- ---------- ---------- ---------- Interest: On long-term obligations 6,090,395 6,924,727 14,132,639 13,087,314 On short-term obligations 55,544 186,557 158,792 1,091,787 Charged to construction-credit (106,888) (73,474) (256,594) (450,620) --------- -------- --------- --------- Net interest expense 6,039,051 7,037,810 14,034,837 13,728,481 --------- --------- ---------- ---------- Net operating margins 209,669 (807,718) 3,292,437 2,324,643 ------- --------- --------- --------- Nonoperating margins: Interest income 100,289 226,608 545,201 380,182 Other 21,169 49,334 268,536 229,422 ------ ------ ------- ------- Property gain (loss) 1,164 (53,323) (192,025) 1,683 ----- -------- --------- ----- Total nonoperating margins 122,622 222,619 621,712 611,287 ------- ------- ------- ------- Assignable margins 332,291 (585,099) 3,914,149 2,935,930 ======= ========= ========= ========= Patronage capital at beginning of period 128,669,206 126,376,024 125,184,374 122,925,253 ----------- ----------- ----------- ----------- Retirement of capital credits and estate Payments (45,572) (46,944) (142,598) (117,202) -------- -------- --------- --------- Patronage capital at end of period $128,955,925 $125,743,981 $128,955,925 $125,743,981 ============ ============ ============ ============ See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC. Statements of Cash Flows (Unaudited)
Six-months ended June 30 2002 2001 ---- ---- Cash flows from operating activities: Assignable margins $3,914,149 $2,935,930 ----------- ---------- Adjustments to reconcile assignable margins to net cash provided (used) by operating activities: Depreciation and amortization 12,563,706 12,305,476 Capitalization of interest (301,189) (565,068) Property (gains) losses, net (192,025) 1,683 Other 970 0 Changes in assets and liabilities: (Increase) decrease in assets: Fuel cost recovery 2,186,410 (1,190,092) Accounts receivable 5,457,671 1,833,481 Prepayments (1,823,744) (547,793) Materials and supplies (1,050,755) (156,658) Deferred charges 981,345 (3,207,358) Other 118,323 496,981 Increase (decrease) in liabilities: Accounts payable (6,499,147) (5,898,627) Consumer deposits 99,258 126,472 Accrued interest (1,025,132) 742,406 Deferred credits (16,071,442) (1,237,019) Other (4,730,002) (1,527,663) ----------- ----------- Net cash provided by (used in) operating activities (6,371,603) 4,112,151 ----------- --------- Cash flows from investing activities: Extension and replacement of plant (10,789,404) (20,896,048) Investments in associated organizations (63,656) (69,923) -------- -------- Net cash used in investing activities (10,853,060) (20,965,971) ------------ ------------ Cash flows from financing activities: Short-term obligations 8,000,000 (40,000,000) Proceeds from long-term obligations 180,000,000 150,000,000 Repayments of long-term obligations (170,719,945) (88,760,028) Retirement of patronage capital (142,598) (117,202) Other 52,268 (62,388) ------ -------- Net cash provided by financing activities 17,189,725 21,060,382 ---------- ---------- Net increase in cash and cash equivalents (34,938) 4,206,562 Cash and cash equivalents at beginning of period $3,814,767 $1,695,162 ------------------------------------------------ ---------- ---------- Cash and cash equivalents at end of period $3,779,829 $5,901,724 ------------------------------------------ ========== ========== Supplemental disclosure of cash flow information - interest expense paid, net of 15,059,969 12,986,075 ========== ========== amounts capitalized See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC. Notes to Financial Statements (Unaudited) 1. Presentation of Financial Information During interim periods, Chugach 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 for a fair statement of the results for the interim periods presented. Certain reclassifications have been made to the 2001 financial statements to conform to the 2002 presentation. 2. Lines of credit Chugach maintains a line of credit of $35 million with CoBank. The CoBank line of credit expires November 1, 2002, but is subject to annual renewal. At June 30, 2002, $8 million was outstanding on this line of credit at an interest rate of 3.75%. In addition, the Association has an annual line of credit of $50 million available at the National Rural Utilities Cooperative Finance Corporation (NRUCFC). At June 30, 2002, 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. Environmental Matters The Association 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 has been completed. While the presence of PCBs in fish did not reveal amounts above background levels, Chugach has conducted additional sampling and analysis of fish in Kenai Lake and other waters and on April 1, 2002, filed its final report to FERC, which analyzed the results of the sampling. Based on these analyses, Chugach concluded that no further PCB sampling and analysis in Kenai Lake was necessary. In a letter dated June 18, 2002, the FERC informed Chugach that its review of the report supported Chugach's conclusions and agreed that Chugach was not required to conduct further PCB sampling and analysis in Kenai Lake. Management believes the costs of this work will be recoverable through rates and therefore will have no material impact on our financial condition or results of operations. The Regulatory Commission of Alaska, (RCA) has issued an order to Chugach generally allowing prudently incurred remediation costs at Cooper Lake to be recovered through rates, however, the RCA has not approved the final recovery amount in this matter and will review these costs as part of the 2000 test year rate case. 4. Legal Proceeding Matanuska Electric Association, Inc., v. Chugach Electric Association, Inc., Superior Court Case No. 3AN-99-8152 Civil This action was a claim for a breach of the Tripartite Agreement, which is the contract governing the parties' relationship for a 25-year period from 1989 through 2014 and governing the Association's sale of power to Matanuska Electric Association, Inc., (MEA) during that time. MEA asserted the Association breached that contract by failing to provide a variety of kinds of information, by failing to properly manage the Association's long-term debt, and by failing to bring its base rate action to the Joint Committee before presentation to the RCA. All of MEA's claims have been dismissed. On April 29, 2002, MEA appealed the Superior Court decisions relating to Chugach's financial management and Section 9(d) of the Power Sales Agreement relating to review of rate filings by a joint committee of MEA and Chugach board members before filing with the RCA to the Alaska Supreme Court. Management is uncertain as to the outcome but will vigorously defend the appeal. 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. 5. Critical Accounting Policies The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires that management apply accounting policies and make estimates and assumptions that affect results of operations and reported amounts of assets and liabilities in the financial statements. The following areas represent those that management believes are particularly important to the financial statements and that require the use of estimates and assumptions to describe matters that are inherently uncertain. FERC Accounting Chugach prepares its financial statements in accordance with GAAP and in conformity with the FERC's uniform system of accounts. Cost Basis Regulation Chugach is subject to regulation by the RCA. The rates that are charged by Chugach to its customers are based upon cost basis regulation reviewed and approved by this regulatory commission. Under the authority of this commission, Chugach has recorded certain regulatory assets in the amount of $16.6 million as of June 30, 2002. If Chugach's rates were no longer based upon cost basis or the probability of future collection in rates, regulation, the assets and liabilities would be written off to margins. Financial Instruments and Hedging Chugach has used U.S. Treasury forward rate lock agreements to hedge expected interest rates on debt. The Association accounted for the agreements under SFAS 80 and 71 through December 31, 2000, and SFAS 133, 138 and 71 subsequent to that date. Gains or losses are treated as regulatory assets or liabilities upon settlement. If Chugach's rates were no longer based upon cost or there was no longer the probability of future collection in rates, the assets and liabilities would be written off to margins. Based on historical regulatory treatment on previous refinancing, management believes the establishment and recovery of Chugach's regulatory assets and liabilities is appropriate. Accounting for derivatives continues to evolve through guidance issued by the Derivatives Implementation Group (DIG) of the Financial Accounting Standards Board, (FASB). To the extent that changes by the DIG modify current guidance, the accounting treatment for derivatives may change. 6. Recent Accounting Pronouncements In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Statement No. 145 eliminates the treatment of extinguishment of debt as extraordinary and clarifies the accounting for certain sale-leaseback transactions. The provisions of Statement No. 145 are required to be applied starting with fiscal years beginning after May 15, 2002, with early adoption encouraged. The Association believes the adoption of Statement No. 145 will have no impact on its financial statements, as the costs associated with the extinguishment of debt are accounted for under the provisions of Statement No. 71, Accounting for the Effects of Certain Types of Regulation and the Association does not engage in sale-leaseback transactions. In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of Statement No. 146 are required to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Association believes the adoption of Statement No. 146 will have no impact on its financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Reference is made to the information contained under the caption "CAUTION REGARDING FORWARD-LOOKING STATEMENTS" at the beginning of this Report. Recent Accounting Pronouncements In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Statement No. 145 eliminates the treatment of extinguishment of debt as extraordinary and clarifies the accounting for certain sale-leaseback transactions. The provisions of Statement No. 145 are required to be applied starting with fiscal years beginning after May 15, 2002, with early adoption encouraged. The Association believes the adoption of Statement No. 145 will have no impact on its financial statements, as the costs associated with the extinguishment of debt are accounted for under the provisions of Statement No. 71, Accounting for the Effects of Certain Types of Regulation and the Association does not engage in sale-leaseback transactions. In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of Statement No. 146 are required to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Association believes the adoption of Statement No. 146 will have no impact on its financial statements. Regulatory Matters Docket U-96-37 Chugach submitted its 1998 test year revenue requirement filing to the RCA in February 2001. According to an order issued by the RCA on March 15, 2002, no rate reduction or refunds were required based on our 1998 test year costs. On July 23, 2002, the RCA closed Docket U-96-37, accepting Chugach's March 22, 2002 compliance filing on the 1998 test year. This docket was originally opened in 1996 to resolve outstanding issues between Chugach and Alaska Electric Generation & Transmission (AEG&T) /Homer Electric Association, (HEA) and MEA associated with Chugach's 1995 test year revenue requirement. The docket was further extended for the adjudication of the 1996 through 1998 test period revenue requirement filings that were completed as a result of a Settlement Agreement between Chugach, AEG&T / HEA and MEA. Docket U-01-108 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 increase 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 2000 test year 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, and granted 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 implementing the Commission's Order on October 30, 2001, and the additional rate increase was effective in November 2001. The interim rate increase was based on a normalized (adjusted for recurring expenses) test year and a system ratemaking Times Interest Earned Ratio (TIER) of 1.35. As anticipated in Chugach's July 2001 original filing, on April 15, 2002, Chugach submitted a filing with the RCA to update certain known and measurable costs and savings that had occurred outside the 2000 Test Year. In the updated filing, Chugach reduced its base rate increase request from 6.5% to 5.7%, or approximately $0.9 million on a system basis. The revised filing also reflected an increase in depreciation expense of approximately $1.5 million due to the completion of the Beluga Unit 7 re-power project and a reduction in annualized interest expense due to Chugach's recent refinancing efforts of $2.4 million. In this revised filing, Chugach continues to request $11.9 million in margins, however, due to reduced interest costs, the equivalent system TIER calculation results in a TIER of 1.47. Three Intervenors filed pre-filed testimony with the Commission in July 2002 opposing various aspects of Chugach's proposal. Chugach will file its reply testimony with the Commission in October. A hearing has been scheduled for November 2002 to resolve the outstanding issues associated with the 2000 test year rate case. A final Commission order is expected in 2003. Results Of Operations Current Year Quarter Versus Prior Year Quarter In general, net margins increased due to a $998.8 thousand, or 14%, decrease in net interest expense and the interim rate increase. Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, increased by $3.8 million, or 10%, for the quarter ended June 30, 2002, over the same quarter in 2001. The increase in revenues was due to an interim rate increase of 3.97%, which was approved and implemented during the fourth quarter of 2001, as well as an increase in purchased power, which resulted in increased revenue collected through the fuel and purchased power surcharge mechanism. The following table represents kWh sales for the quarter ended June 30:
2002 2001 ---- ---- Customer kWh KWh Retail 259,178,470 256,048,943 Wholesale 263,894,173 212,930,291 Economy Energy 42,402,010 21,559,500 ---------- ---------- Total 565,474,653 490,538,734 =========== ===========
Retail demand and energy rates for all rate classes except small commercial and public street and highway lighting increased 3.97% in the second quarter of 2002 compared to the second quarter of 2001. Over this same period, the wholesale demand and energy rates charged to HEA and MEA also increased by 3.97%. These increases reflected the interim rate increase authorized by the RCA in 2001. Wholesale demand and energy rates charged to Seward Electric System (SES) did not change in this quarter compared to the same quarter last year. Fuel expense decreased by $467.8 thousand, or 4%, for the quarter ended June 30, 2002, compared to the same period in 2001 due to lower fuel prices. Power production expense increased by $577.3 thousand, or 20%, due to a higher level of scheduled maintenance activity in 2002, including a hot gas path inspection and a major overhaul of a Bernice Lake unit. Purchased power expense increased by $2.7 million, or 123%, due to the new contract with Nikiski, a co-generation power plant owned by AEG&T/HEA. Transmission, Distribution, Consumer accounts/Information and Sales expense did not materially change for the three-month period ended June 30, 2002. Administrative, general and other expenses increased by $388.8 thousand, or 8%, for the three-month period ended June 30, 2002, due to the combination of increased labor, information services and insurance costs. Interest on long-term debt decreased by $834.3 thousand, or 12%, due to lower interest rates. Interest charged to construction increased by $33.4 thousand, or 45%, in the second quarter of 2002 compared to the same period in 2001 due to more construction activity. Other interest expense decreased by $131.0 thousand, or 70%, from the second quarter of 2001 to the second quarter of 2002 due to lower outstanding balances on the lines of credit in the second quarter of 2002. Other nonoperating margins were $100.0 thousand, or 45%, lower for the quarter ended June 30, 2002, compared to the same period in 2001 due to funds received and invested for a month as a result of the refinancing in 2001. Current Year to Date Versus Prior Year to Date In general, net margins increased due to the increase in revenue caused by the interim rate increase implemented during the fourth quarter of 2001. Operating revenues increased by $7.2 million, or 9%, in the first six months of 2002, over the same period in 2001. The increase in revenues was due to the interim rate increase of 3.97%, which was approved and implemented during the fourth quarter of 2001. It was also due to an increase in purchased power, which resulted in increased revenue collected through the fuel and purchased power surcharge mechanism. The following table represents kWh sales for the six months ended June 30:
2002 2001 ---- ---- Customer kWh KWh Retail 572,506,030 557,910,584 Wholesale 562,334,692 491,780,205 Economy Energy 45,706,900 44,132,770 ---------- ---------- Total 1,180,547,622 1,093,823,559 ============= =============
Fuel expense decreased by $1.2 million, or 5%, for six months ended June 30, 2002, compared to the same period in 2001 due to less fuel used and lower fuel prices. Power production expense did not materially change for the six-month period ended June 30, 2002. Purchased power expense increased by $6.0 million, or 152%, due to the new contract with Nikiski, a co-generation power plant owned by Alaska Electric Generation & Transmission (AEG&T) (HEA). Distribution expense increased $448.6 thousand, or 9%, due to additional right-of-way clearing associated with a major project in Beluga/Tyonek, which caused a more than normal quantity of miles cleared. Transmission, Consumer accounts/Information, Sales expense and Administrative, general and other did not materially change for the six-month period ended June 30, 2002. Interest on long-term debt increased by $1.0 million, or 8%, due to additional debt associated with the 2002 refinancing. Interest charged to construction decreased by $194.0 thousand, or 43%, in the six months ended June 30, 2002 compared to the same period in 2001 due to less construction activity. Other interest expense decreased by $933.0 thousand, or 85%, due to lower outstanding balances on the lines of credit. Other nonoperating margins did not materially change in the first six months of 2002 compared to the same period in 2001. Financial Condition Total assets decreased $7.1 million, or 1%, from December 31, 2001 to June 30, 2002. The decrease was due to a $5.5 million, or 24%, decrease in accounts receivable caused by the payment of wholesale power invoices that were accrued but not paid at December 31, 2001. It was also due to a $2.2 million, or 61%, decrease in fuel cost recovery from the collection of the prior quarter's fuel cost adjustment. Deferred charges decreased by $981 thousand, or 3%, largely due to normal monthly amortization of deferred charges. The decreases were offset by a $1.8 million, or 291%, increase in prepayments caused by the prepayment of rotors for Beluga units 6 and 7 that are due to be installed in 2003 and 2004. Notable changes to total liabilities include a $30.7 million, or 8%, increase in long-term obligations associated with the 2002 refinancing. This increase was offset by a $3 million, or 27%, decrease in short-term obligations, as well as a $10.4 million, or 100%, decrease in current installments of long-term obligations due to the final payment of the 1991 Series A Bond due 2002 and the $5 million payment of the first installment of CoBank 5. There was also a $6.5 million, or 59%, decrease in accounts payable caused by the payment of invoices that were accrued at December 31, 2001. There was also a $1.0 million, or 14%, decrease in accrued interest due to lower interest rates on our debt after the 2002 refinancing, as well as a $4.7 million, or 41%, decrease in fuel payable caused by lower fuel prices in the first and second quarter of 2002. Deferred credits decreased $15.9 million, or 82%, due to the reclassification of the gain associated with the 1991 Series A Bond due 2022 that was refinanced in the first quarter of 2002. 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 June 30, 2002, there was no outstanding balance with NRUCFC. At June 30, 2002, there was $8 million outstanding under the CoBank line of credit, which carried an interest rate of 3.75%. 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 CoBank agreement. At June 30, 2002, Chugach had the following bonds outstanding under this financing arrangement.
Interest rate at June Principal Payment Bond Principal balance 30, 2002 Maturity Date Dates CoBank 2 $10,000,000 7.76% 2005 2005 CoBank 3 $21,500,000 5.60% 2022 2003 - 2022 CoBank 4 $23,500,000 5.60% 2022 2003 - 2022 CoBank 5 $10,000,000 5.60% 2012 2002 - 2012 Total $65,000,000
Capital construction in 2002 is estimated at $32.8 million. At June 30, 2002, approximately $10.8 million had been expended. Capital improvement expenditures are expected to increase in the upcoming third quarter as the construction season began in April and extends into October. 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 2002 and thereafter. Outlook In the recent past 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 and no movement in that direction currently exists. Chugach intends to maintain a readiness for competition and to build organizational experience and expertise in competitive-type business to the degree possible. Chugach reorganized in June 2002 when the longstanding Chief Financial Officer, (CFO) accepted the General Manager position. The Association now has four senior vice-president level organizational entities: CFO (Finance and Accounting), Energy Supply, Power Delivery and Administration. A Chief of Staff position was also created and staffed by in-house senior management. We believe this structure will better facilitate the organization's ability to effectively manage future challenges including competition. 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 The Association 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 has been completed. While the presence of PCBs in fish did not reveal amounts above background levels, Chugach has conducted additional sampling and analysis of fish in Kenai Lake and other waters and on April 1, 2002, filed its final report to FERC, which analyzed the results of the sampling. Based on these analyses, Chugach concluded that no further PCB sampling and analysis in Kenai Lake was necessary. In a letter dated June 18, 2002, the FERC informed Chugach that its review of the report supported Chugach's conclusions and agreed that Chugach was not required to conduct further PCB sampling and analysis in Kenai Lake. Management believes the costs of this work will be recoverable through rates and therefore will have no material impact on our financial condition or results of operations. The RCA has issued an order to Chugach generally allowing prudently incurred remediation costs at Cooper Lake to be recovered through rates, however, the RCA has not approved the final recovery amount in this matter and will review these costs as part of the 2000 test year rate case. Item 3. Quantitative and Qualitative Disclosures About Market Risk Chugach is exposed to a variety of risks, including changes in interest rates and changes in commodity prices due to repricing mechanisms inherent in gas supply contracts. In the normal course of our business, we manage our exposure to these risks as described below. Chugach does not engage in trading market risk-sensitive instruments for speculative purposes. Interest Rate Risk As of June 30, 2002, except for the 2002 Series B Bond, which carries a variable interest rate and is re-priced every 28 days, all of our outstanding long-term obligations were at fixed interest rates with varying maturity dates. The Auction Rate Bond bore interest at 1.97% from the date of original delivery to and through February 27, 2002. The following table provides information regarding subsequent auction dates and rates. Auction Date Interest Rate February 27, 2002 2.00% March 27, 2002 2.00% April 27, 2002 1.97% May 22, 2002 1.97% June 19, 2002 1.95% July 17, 2002 1.90% The following table provides information regarding cash flows for principal payments on total debt by maturity date (dollars in thousands) as of June 30, 2002.
Fair Total Debt* 2002 2003 2004 2005 2006 Thereafter Total Value ----------- ---- ---- ---- ---- ---- ---------- ----- ----- Fixed rate $0 $866 $945 $11,031 $1,126 $321,032 $335,000 $349,106 Average interest rate -- 5.60% 5.60% 7.56% 5.60% 6.27% 6.30% Variable rate $8,000 $0 $0 $0 $0 $60,000 $68,000 $68,000 Average interest rate 3.75% -- -- -- -- 1.95% 2.16% * Includes current portion
Commodity Price Risk Chugach's gas contracts provide for adjustments to gas prices based on fluctuations of certain commodity prices and indices. Because purchased power costs are passed directly to our wholesale and retail customers through a fuel surcharge, fluctuations in the price paid for gas pursuant to long-term gas supply contracts do not normally impact margins. The fuel surcharge mechanism mitigates the commodity price risk related to market fluctuations in the price of purchased power. PART II OTHER INFORMATION Item 1. Legal Proceedings Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc. Superior Court Case No. 3AN-99-8152 Civil This action was a claim for a breach of the Tripartite Agreement, which is the contract governing the parties' relationship for a 25-year period from 1989 through 2014 and governing the Company's sale of power to MEA during that time. MEA asserted the Company breached that contract by failing to provide a variety of kinds of information, by failing to properly manage the Company's long-term debt, and by failing to bring its base rate action to the Joint Committee before presentation to the RCA. All of MEA's claims have been dismissed. On April 29, 2002, MEA appealed the Superior Court decisions relating to Chugach's financial management and Section 9(d) of the Power Sales Agreement relating to review of rate filings by a joint committee of MEA and Chugach board members before filing with the RCA to the Alaska Supreme Court. Management is uncertain as to the outcome but will vigorously defend the appeal. 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 On August 12, 2002, MEA filed a request with the RCA asking that Chugach's Certificate of Public Convenience and Necessity (CPCN) be amended to eliminate retail service and requesting that the retail services portion of the CPCN be included in MEA's CPCN. The RCA has not determined whether it will hear the request. Management is of the opinion that the request has no merit and it is very unlikely that the requested change in the certificate will be approved. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Employment Agreement between the Registrant and Evan J. Griffith dated effective May 1, 2002. Certification of Principal Executive Officer Certification of Principal Financial Officer (b) Reports on Form 8-K: No reports on Form 8-K were filed for the quarter ended June 30, 2002. Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHUGACH ELECTRIC ASSOCIATION, INC. By: /s/Evan J. Griffith Evan J. Griffith General Manager Date: August 13, 2002 By: /s/Michael R. Cunningham Michael R. Cunningham Chief Financial Officer Date: August 13, 2002 Exhibits Listed below are the exhibits, which are filed as part of this Report:
Exhibit Number Description Page 10.52 Employment Agreement between the Registrant and Evan J. Griffith dated effective May 1, 2002 21 99.1 Certification of Principal Executive Officer 32 99.2 Certification of Principal Financial Officer 33