-----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, Def59b0ygeKGIVvVgHJFqQ/pUJ7occvPUMouknaGrUsmKxCtgewTVXjD24DyXAzu rbVISKWGwJrgZHJbEsD6oQ== 0000878004-05-000008.txt : 20050516 0000878004-05-000008.hdr.sgml : 20050516 20050513185615 ACCESSION NUMBER: 0000878004-05-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050516 DATE AS OF CHANGE: 20050513 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: 05831053 BUSINESS ADDRESS: STREET 1: 5601 MINNESOTA DR STREET 2: PO BOX 196300 CITY: ANCHORAGE STATE: AK ZIP: 99518 BUSINESS PHONE: 9075637494 10-Q 1 sec20051st10q.txt 2005 1ST QUARTER 10Q UNITED STATES 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 March 31, 2005 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 Electron 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes No X Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date. CLASS OUTSTANDING AT MAY 1, 2005 NONE NONE Page Number CAUTION REGARDING FORWARD-LOOKING STATEMENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 2 Balance Sheets, March 31, 2005 and December 31, 2004 3 Statements of Revenues, Expenses and Patronage Capital, Three Months Ended March 31, 2005 and 2004 5 Statements of Cash Flows, Three Months Ended March 31, 2005 and 2004 6 Notes to Financial Statements 7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 1 1 Item 3. Quantitative and Qualitative Disclosures About Market Risk 1 5 Item 4. Controls and Procedures 1 6 PART II OTHER INFORMATION Item 1. Legal Proceedings 1 7 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 1 8 Item 3. Defaults Upon Senior Securities 1 8 Item 4. Submission of Matters to a Vote of Security Holders 1 8 Item 5. Other Information 1 9 Item 6. Exhibits 1 9 Signatures 2 0 Exhibits 2 1
CAUTION REGARDING FORWARD-LOOKING STATEMENTS Statements in this report that do not relate to historical facts, including statements relating to future plans, events or performance, are forward-looking statements that involve risks and uncertainties. Actual results, events or performance may differ materially. Readers are cautioned not to place undue reliance on these forward-looking statements, that speak only as of the date of this report and the accuracy of which is subject to inherent uncertainty. Chugach Electric Association, Inc. (Chugach) undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances that may occur after the date of this report or the effect of those events or circumstances on any of the forward-looking statements contained in this report, except as required by law. PART I FINANCIAL INFORMATION Item 1. Financial Statements The unaudited financial statements and notes to financial statements of Chugach as of and for the quarter ended March 31, 2005, follow: CHUGACH ELECTRIC ASSOCIATION, INC. BALANCE SHEETS (Unaudited)
Assets March 31, 2005 December 31, 2004 ------ -------------- ----------------- Utility plant: Electric plant in service $ 751,141,360 $ 748,484,527 Construction work in progress 25,671,820 25,278,388 ---------- ---------- Total utility plant 776,813,180 773,762,915 Less accumulated depreciation (312,896,779) (305,932,001) ------------- ------------- Net utility plant 463,916,401 467,830,914 Other property and investments, at cost: Nonutility property 24,461 24,461 Investments in associated organizations 11,769,054 11,768,457 ---------- ---------- Total other property and investments 11,793,515 11,792,918 Current assets: Cash and cash equivalents 6,739,612 10,465,004 Special deposits 217,191 217,191 Accounts receivable, net 21,265,820 23,740,383 Materials and supplies 23,832,689 23,691,509 Prepayments 1,587,807 805,670 Other current assets 380,196 260,115 ------- ------- Total current assets 54,023,315 59,179,872 Deferred charges, net 20,466,694 20,550,883 ---------- ---------- Total Assets $ 550,199,925 $ 559,354,587 ============= =============
CHUGACH ELECTRIC ASSOCIATION, INC. BALANCE SHEETS (Continued) (Unaudited)
Liabilities and Equities March 31, 2005 December 31, 2004 ------------------------ -------------- ----------------- Equities and margins: Memberships $ 1,212,193 $ 1,202,538 Patronage capital 135,553,458 130,750,269 Other 7,090,184 7,045,992 --------- --------- Total equities and margins 143,855,835 138,998,799 Long-term obligations, excluding current installments: 2001 Series A Bond payable 150,000,000 150,000,000 2002 Series A Bond payable 120,000,000 120,000,000 2002 Series B Bond payable 41,000,000 46,200,000 National Bank for Cooperatives promissory notes payable 46,619,958 47,157,786 ---------- ---------- Total long-term obligations 357,619,958 363,357,786 Current liabilities: Current installments of long-term obligations 16,276,444 15,931,393 Accounts payable 4,116,785 7,890,172 Consumer deposits 1,969,571 1,947,511 Fuel cost over-recovery 2,116,461 2,714,345 Accrued interest 1,917,747 6,201,769 Salaries, wages and benefits 5,807,177 5,530,740 Fuel 12,967,271 12,919,623 Other current liabilities 1,462,719 1,416,400 --------- --------- Total current liabilities 46,634,175 54,551,953 Deferred credits 2,089,957 2,446,049 --------- --------- Total Liabilities and Equities $ 550,199,925 $ 559,354,587 ============= ============= See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC. Statements of Revenues, Expenses and Patronage Capital (Unaudited)
Three months ended March 31 2005 2004 ---- ---- Operating revenues $57,212,034 $51,644,941 Operating expenses: Fuel 20,492,023 16,389,582 Power production 3,442,780 3,442,201 Purchased power 5,275,922 3,953,490 Transmission 1,602,140 1,740,561 Distribution 2,819,605 2,578,535 Consumer accounts 1,355,391 1,427,359 Administrative, general and other 4,865,561 5,532,271 Depreciation 7,121,860 7,046,692 --------- --------- Total operating expenses 46,975,282 42,110,691 Interest expense: On long-term obligations 5,675,686 5,441,653 On short-term obligations 2,237 0 Charged to construction-credit (191,718) (89,432) --------- -------- Net interest expense 5,486,205 5,352,221 --------- --------- Net operating margins 4,750,547 4,182,029 Nonoperating margins: Interest income 121,694 89,034 Capital credits, patronage dividends and other 35,441 24,901 Total nonoperating margins 157,135 113,935 ------- ------- Assignable margins 4,907,682 4,295,964 ========= ========= Patronage capital at beginning of period 130,750,269 126,341,413 Retirement of capital credits and estate payments (104,493) 0 Patronage capital at end of period $ 135,553,458 $ 130,637,377 ============= ============= See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC. Statements of Cash Flows (Unaudited)
Three months ended March 31 2005 2004 ---- ---- Operating activities: Assignable margins $4,907,682 $4,295,964 Adjustments to reconcile assignable margins to net cash provided by operating activities: Depreciation and amortization 7,841,322 7,944,026 Capitalization of interest (226,563) (103,907) Other (597) 33 Changes in assets and liabilities: (Increase) decrease in assets: Accounts receivable 2,474,563 993,864 Fuel cost recovery 0 1,610,807 Materials and supplies (141,180) (1,554,272) Prepayments (782,137) (716,867) Other assets (120,081) (138,309) Deferred charges (635,272) 1,844,579 Increase (decrease) in liabilities: Accounts payable (3,773,387) (4,064,351) Provision for rate refund 0 (422,403) Consumer deposits 22,060 (24,095) Fuel cost payable (597,884) 0 Accrued interest (4,284,022) (4,307,704) Salaries, wages and benefits 276,437 311,309 Fuel 47,648 1,618,152 Other liabilities 46,319 267,489 Deferred credits (38,458) (960,163) -------- --------- Net cash provided by operating activities 5,016,450 6,594,152 Investing activities: Extension and replacement of plant (2,980,785) (3,374,646) Purchase of Investments in associated organizations 0 (7,298) - ------- Net cash used in investing activities (2,980,785) (3,381,944) Financing activities: Net transfer of restricted construction funds 0 (1,198) Repayments of long-term obligations (5,392,777) (5,051,500) Memberships and donations received 53,847 2,491 Retirement of patronage capital (104,493) 0 Net receipts (refunds) of consumer advances for construction (317,634) 473,201 --------- ------- Net cash used in financing activities (5,761,057) (4,577,006) Net change in cash and cash equivalents (3,725,392) (1,364,798) Cash and cash equivalents at beginning of period $10,465,004 $11,185,086 - ------------------------------------------------ ----------- ----------- Cash and cash equivalents at end of period $6,739,612 $9,820,288 - ------------------------------------------ ========== ========== Supplemental disclosure of cash flow information - interest expense paid, including $9,770,227 $9,659,925 ========== ========== amounts capitalized See accompanying notes to financial statements.
CHUGACH ELECTRIC ASSOCIATION, INC. Notes to Financial Statements (Unaudited) 1. Presentation of Financial Information During interim periods, Chugach Electric Association, Inc. (Chugach) follows the accounting policies set forth in its audited financial statements included in Form 10-K filed with the Securities and Exchange Commission (SEC) unless otherwise noted. Users of interim financial information are encouraged to refer to the footnotes contained in Chugach's Form 10-K when reviewing interim financial results. The accompanying unaudited interim financial statements reflect all adjustments of normal and recurring nature, which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 presentation. 2. Lines of credit Chugach maintains a line of credit of $20 million with CoBank, ACB (CoBank). The CoBank line of credit expires June 30, 2005, subject to annual renewal at the discretion of the parties. At March 31, 2005, there was no outstanding balance on this line of credit, however, on March 17, 2005, we borrowed $1.5 million as well as an additional $1.0 million on March 18, 2005. That balance was subsequently paid back on March 25, 2005. At March 31, 2005, the borrowing rate would have been 4.36% and at December 31, 2004, the borrowing rate would have been 3.80%. In addition, Chugach has an annual line of credit of $50 million available at the National Rural Utilities Cooperative Finance Corporation (NRUCFC). At March 31, 2005, there was no outstanding balance on this line of credit and it was not utilized during the first quarter of 2005. At March 31, 2005, the borrowing rate would have been 4.50% and at December 31, 2004, the borrowing rate would have been 4.05%. The NRUCFC line of credit expires October 15, 2007. 3. Legal Proceedings Matanuska Electric Association, Inc., v. Chugach Electric Association, Inc., Superior Court Case No. 3AN-99-8152 Civil This action is a claim for a breach of the Power Sales Agreement between Chugach and Matanuska Electric Association, Inc. (MEA) for a 25-year period from 1989 through 2014. MEA asserted Chugach breached that contract by failing to provide information, by failing to properly manage Chugach's long-term debt, and by failing to bring Chugach's base rate action to a Joint Committee before presenting it to the Regulatory Commission of Alaska (RCA). All of MEA's claims were dismissed by the Superior Court. On April 29, 2002, MEA appealed the Superior Court's decisions relating to Chugach's financial management and Chugach's failure to bring Chugach's base rate action to the joint committee before filing with the RCA to the Alaska Supreme Court. We cross-appealed the Superior Court's decision not to dismiss the financial management claim on jurisdictional and res judicata grounds. The Alaska Supreme Court, on October 8, 2004, ruled in Chugach's favor supporting its right under the power sales agreement to file for interim rate relief without first going to the Joint Committee. The Supreme Court ruled against Chugach in its cross appeal. The Supreme Court also overturned the Superior Court's decision that dismissed MEA's claim asking for review of Chugach's use of rate locks instead of defeasing debt based on the Prudent Utility Practice standard under our power sales agreement. The Supreme Court remanded this issue to the Superior Court. On January 24, 2005, Chugach filed a summary judgment motion based on Chugach's claim that in the 2000 Test Year rate case the RCA has already decided the underlying issues relating to the prudency of Chugach's use of rate locks instead of defeasing debt. This motion is pending. Management is uncertain of the outcome of the proceeding before the Superior Court. No reserves have been established for this matter. Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc. Superior Court Case No. 3AN-04-11776 Civil On October 12, 2004, MEA filed suit in Superior Court alleging a breach of the power sales agreement between the parties and violation of Chugach's bylaws in connection with allocation of margins (capital credits) to MEA for the years 1998 through 2003. Allocation of capital credits assigns a share of the margins earned in a particular year to each customer. Capital credits are repatriated to customers at the discretion of the board of directors typically many years after the margins are earned. The suit seeks a declaration by the Court that Chugach is in breach of its bylaws and the power sales agreement based on its allocation of capital credits to MEA as well as injunctive relief requiring Chugach to calculate MEA's capital credit allocations based on MEA's patronage and in accordance with generally accepted accounting practices for nonprofit cooperatives and cooperative principles. The suit also seeks damages in an unspecified amount to compensate MEA for the alleged breach of contract. Management is vigorously defending against the claim. Management is uncertain of the outcome of the suit. No reserves have been established for this matter. Other Chugach received a demand letter from a third party offering a license to a patent and implying that the patent may be infringed by certain services provided by Chugach. The patent purportedly relates to intellectual property rights over a system for automated electronic bill presentment and payment. As of this date, no legal proceedings have been instituted against us, but if the third party's patents are valid, enforceable and apply to our business, we could be required to seek a license, discontinue certain activities or be subject to a claim for past infringement. We are currently considering this matter, but lack sufficient information to assess the potential outcome at this time. No reserves have been established for this matter. Chugach has certain additional litigation matters and pending claims that arise in the ordinary course of our business. In the opinion of management, no individual matter or the matters in the aggregate are likely to have a material adverse effect on our results of operations, financial condition or liquidity. 4. Critical Accounting Policies Chugach's accounting and reporting policies comply with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires that management apply accounting policies and make estimates and assumptions that affect results of operations and reported amounts of assets and liabilities in the financial statements. Critical accounting policies are those policies that management believes are the most important to the portrayal of Chugach's financial condition and results of its operations, and require management's most difficult, subjective, or complex judgments, often as a result of the need to make estimates about matters that are inherently uncertain. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of financial statements. These factors include, among other things, whether the estimates are material to the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including third parties or available prices, and sensitivity of the estimates to changes in economic conditions and whether alternative accounting methods may be utilized under accounting principles generally accepted in the United States of America. For all of these policies management cautions that future events rarely develop exactly as forecast, and the best estimates routinely require adjustment. Management has discussed the development and the selection of critical accounting policies with the Chugach Audit Committee. The following policies are considered to be critical accounting policies for the quarter ending March 31, 2005. Electric Utility Regulation Chugach is subject to regulation by the RCA. The RCA sets the rates Chugach is permitted to charge customers based on allowable costs. As a result, Chugach applies Financial Accounting Standards Board (FASB) Statement No. 71, Accounting for the Effects of Certain Types of Regulation. Through the ratemaking process, the regulators may require the inclusion of costs or revenues in periods different than when they would be recognized by a non-regulated company. This treatment may result in the deferral of expenses and the recording of related regulatory assets based on anticipated future recovery through rates or the deferral of gains or creation of liabilities and the recording of related regulatory liabilities. The application of Statement No. 71 has a further effect on Chugach's financial statements as a result of the estimates of allowable costs used in the ratemaking process. These estimates may differ from those actually incurred by the Company; therefore, the accounting estimates inherent in specific costs such as depreciation and pension and post-retirement benefits have less of a direct impact on Chugach's results of operations than they would on a non-regulated company. Management reviews the ultimate recoverability of these regulatory assets and liabilities based on applicable regulatory guidelines. However, adverse legislation and judicial or regulatory actions could materially impact the amounts of such regulatory assets and liabilities and could adversely impact Chugach's financial statements. Financial Instruments and Hedging Chugach used U.S. Treasury forward rate lock agreements to hedge expected interest rates on the February 2002 debt re-financings. We accounted for the agreements under Statement of Financial Accounting Standards (SFAS) 133. For rate-making purposes, Chugach did not adjust rates for gains and losses prior to settlement, and the loss on settlement will be an adjustment to rates over the lives of the associated debt. This rate-making treatment was approved by the RCA in Order U-01-108(26). Accordingly, the unrealized gain or loss was not recorded and was treated as a regulatory asset upon settlement. Critical estimates also include provision for rate refunds and allowance for doubtful accounts. Actual results could differ from those estimates. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Reference is made to the information contained under the caption "CAUTION REGARDING FORWARD-LOOKING STATEMENTS" at the beginning of this Report. Regulatory Matters Depreciation Rates Review Proceeding In 2004, we implemented new depreciation rates based on an update of the Depreciation Study utilizing Electric Plant in Service balances as of December 31, 2002. The depreciation study resulted in a net impact on the 2004 financial statements of approximately $200,000, which, in aggregate, was not material to the financial statements. The depreciation study was submitted to the RCA for approval on November 19, 2004, however, the new rates were implemented and in effect for all of 2004. We did not request a change in electric rates charged to our customers based on the proposed revisions to depreciation rates. On March 9, 2005, the RCA ruled that depreciation rates may not be implemented without prior approval of the RCA. The RCA is expected to issue a final order in the fourth quarter of 2005. We expect to make any required adjustments on a forward-going basis. Management is uncertain of the outcome of the RCA depreciation study review process. Results Of Operations Current Year Quarter Versus Prior Year Quarter Assignable margins increased by $611.7 thousand for the quarter ended March 31, 2005, over the same quarter in 2004 due to a decrease in administrative, general and other expense and a decrease in transmission and consumer accounts expense. The decreases were offset by an increase in distribution expense and interest on long-term debt. Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, increased by $5.6 million, or 10.8%, for the quarter ended March 31, 2005, over the same quarter in 2004. The increase in revenues was due to an increase in revenue recovered through the fuel surcharge mechanism due to higher fuel prices, as well as increased wholesale and economy energy kWh sales. The following table represents kWh sales for the quarter ended March 31: 2005 2004 ---- ---- Customer kWh kWh Retail 329,374,667 332,954,124 Wholesale 327,634,824 310,766,791 Economy Energy 95,825,850 59,846,760 ---------- ---------- Total 752,835,341 703,567,675 =========== =========== Retail demand and energy rates and wholesale demand and energy rates charged to Homer Electric Association (HEA), MEA and Seward Electric System (SES) did not change in the first quarter of 2005 compared to the first quarter of 2004. Fuel expense increased by $4.1 million, or 25.0%, for the quarter ended March 31, 2005, compared to the same period in 2004 primarily due to higher fuel prices and increased economy energy sales. Purchased power also increased $1.3 million, or 33.4%, due in part to higher fuel prices, as well as a refund for our share of Bradley Lake operating expenses we received for fiscal year 2003 in the first quarter of 2004. Fiscal year 2004 did not generate a refund for our share of Bradley Lake operating expenses in the first quarter of 2005. Fuel and purchased power is recovered through the fuel surcharge mechanism. Production expense did not materially change for the three-month period ended March 31, 2005, compared to the same period in 2004. Transmission expense decreased by $138.4 thousand, or 8.0%, and distribution expense increased by $241.1 thousand, or 9.3%, due primarily to the timing of distribution maintenance, due to weather conditions, being performed in the first quarter of 2005 while transmission maintenance will be performed later in the year. Consumer Accounts/Information expense did not materially change for the three-month period ended March 31, 2005. Administrative, general and other expense decreased by $666.7 thousand, or 12.1%. The majority of the decrease was attributed to a $111.4 thousand decrease in software amortization, a $149.6 thousand decrease in professional services, a $153.0 thousand decrease in allocated costs and a $184.4 thousand decrease in labor due to the timing of pay periods. Depreciation and amortization expense did not materially change for the three-month period ended March 31, 2005. Interest on long-term debt increased by $234.0 thousand, or 4.3%, due to higher interest rates on the variable CoBank bonds. Interest charged to construction increased by $102.3 thousand, or 114.4%, due to higher rates and a higher average balance in construction work in progress associated with the continued construction of the South Anchorage substation. Other nonoperating margins increased $43.2 thousand, or 37.9%, for the three-month period ended March 31, 2005, compared to the same period in 2004 due to an increase in interest income associated with higher interest rates on our investment accounts and an increase in allowance for funds used during construction (AFUDC), also due to higher rates and the continued construction of the South Anchorage substation. Financial Condition Total assets decreased $9.2 million, or 1.6%, from December 31, 2004, to March 31, 2005. The decrease was due in part to a $3.9 million, or 0.8%, decrease in net plant, primarily due to depreciation expense in excess of extension and replacement of plant. The decrease in total assets was also due to a $3.7 million, or 35.6%, decrease in cash and cash equivalents caused by the semi-annual interest payment on the 2001 and 2002 Series A Bonds and the principle payment on the 2002 Series B Bonds in the first quarter, as well as a $2.5 million, or 10.4%, decrease in accounts receivable caused by the collection on receivables that were accrued but not paid at December 31, 2004. These decreases were offset by a $782.1 thousand, or 97.1%, increase in prepayments caused by the annual renewal of insurance policies for 2005, as well as a $120.1 thousand, or 46.2% increase in other current assets caused by interest accrued on our NRUCFC term certificates and an increase in the receivable associated with pole rentals. Notable changes to total liabilities and equities include installment payments of $5.4 million on the 2002 Series B bond and the CoBank 3 bonds. Accounts payable also decreased $3.8 million, or 47.8%, as a result of the payment of invoices that were accrued but not paid at December 31, 2004. Fuel cost payable also decreased $597.9 thousand, or 22.0%, due to the collection of the previous quarter's fuel and purchased power cost through the fuel surcharge mechanism. Accrued interest also decreased $4.3 million, or 69.1%, as a result of the semi-annual interest payment on the 2001 and 2002 Series A Bonds in the first quarter. These decreases were offset by a $4.9 million, or 3.5%, increase in patronage capital due to the margins generated in the first quarter of 2005. Liquidity and Capital Resources Chugach has satisfied its operational and capital cash requirements primarily through internally-generated funds, an annual $20 million line of credit with CoBank and a $50 million line of credit from NRUCFC. At March 31, 2005, there was no outstanding balance with NRUCFC or CoBank, however, on March 17, 2005, we borrowed $1.5 million on the CoBank line of credit, as well as an additional $1.0 million on March 18, 2005. That balance was subsequently paid back on March 25, 2005. Chugach also has a term loan facility with CoBank. Loans made under this facility are evidenced by promissory notes governed by the Master Loan Agreement, which became effective on January 22, 2003. At March 31, 2005, Chugach had the following promissory notes outstanding under this facility:
Interest rate at March Principal Payment Promissory Note Principal balance 31, 2005 Maturity Date Dates --------------- ----------------- -------- ------------- ----- CoBank 2 $10,000,000 7.76% 2005 2005 CoBank 3 $20,142,053 4.51% 2022 2003 - 2022 CoBank 4 $22,554,349 4.51% 2022 2003 - 2022 CoBank 5 $5,000,000 4.51% 2007 2007 Total $57,696,402
On January 22, 2003, Chugach and CoBank finalized a new Master Loan Agreement pursuant to which the CoBank term loan facility was converted from secured to unsecured debt and the obligations represented by the outstanding bonds then held by CoBank were converted into promissory notes governed by the new Master Loan Agreement. Chugach's mortgage indenture was replaced in its entirety by an Amended and Restated Indenture dated April 1, 2001. All liens and security interests imposed under the indenture were terminated and all outstanding Chugach bonds (including new bonds of 2001 Series A, 2002 Series A and 2002 Series B) became unsecured obligations governed by the terms of the Amended and Restated Indenture. Capital construction in 2005 is estimated at $29.7 million. At March 31, 2005, approximately $3.0 million had been expended. Capital improvement expenditures are expected to increase in the upcoming second quarter as the construction season begins. Chugach management continues to expect that cash flows from operations and external funding sources will be sufficient to cover operational and capital funding requirements in 2005 and thereafter. Outlook Effective January 31, 2005, Chugach reorganized its operations into more distinct business units - Office of the Chief Executive Officer (CEO), Generation and Transmission (G&T) Division, Distribution Division and Corporate Services. This reorganization was accomplished to more fully recognize the diversity of Chugach operations and clearly determine the financial and operational performance of each unit. The Office of the Chief Executive Officer is responsible for all corporate level activities including board of director functions, human resources, risk management, legal matters, labor relations and employee relations, legislative affairs and all financing activities Chugach may undertake. The CEO's direct staff is the Chief Financial Officer, Vice President, Human Resources, General Counsel and Government and External Affairs Manager. The General Managers of the G&T Division, Distribution Division and Corporate Services Division also report to the CEO. G&T operations include all power supply functions, transmission functions, system control and administrative requirements associated with generation and transmission. The G&T sector is led by Bradley Evans, General Manager. Distribution functions include consumer services, public relations, distribution engineering, line operation and maintenance and consumer information and services areas. The Distribution area is led by Lee Thibert, General Manager. Corporate Services is comprised of Administrative Services (Environmental Engineering and Hazardous Materials, Fleet Services, Contracting, Safety, Security, and Purchasing), Information Services, Regulatory Affairs and Accounting. It is responsible for providing services to all divisions of Chugach. Corporate Services is led by William Stewart, General Manager, Corporate Services Division. Environmental Matters Compliance with Environmental Standards Chugach's operations are subject to certain federal, state and local environmental laws. The costs associated with environmental compliance are included as a component of both the operating and capital budget processes. Chugach accrues for costs associated with environmental remediation obligations when such costs are probable and reasonably estimable. Item 3. Quantitative and Qualitative Disclosures About Market Risk Chugach is exposed to a variety of risks, including changes in interest rates and changes in commodity prices due to repricing mechanisms inherent in gas supply contracts. In the normal course of our business, we manage our exposure to these risks as described below. Chugach does not engage in trading market risk-sensitive instruments for speculative purposes. Interest Rate Risk The following table provides information regarding auction dates and rates in 2005 on the 2002 Series B bonds. Auction Date Interest Rate January 26, 2005 2.50% February 23, 2005 2.62% March 23, 2005 3.00% April 20, 2005 3.05% The following table provides information regarding cash flows for principal payments on total debt by maturity date (dollars in thousands) as of March 31, 2005.
Fair Total Debt* 2005 2006 2007 2008 Thereafter Total Value - ----------- ---- ---- ---- ---- ---------- ----- ----- Fixed rate debt $10,000 $0 $0 $0 $270,000 $280,000 $302,671 Average interest rate 7.76% - - - 6.39% 6.44% Variable rate debt $539 $6,326 $11,729 $7,241 $68,063 $93,896 $93,896 Average interest rate 4.51% 3.32% 3.83% 3.32% 3.88% 3.79% * Includes current portion
Commodity Price Risk Chugach's gas contracts provide for adjustments to gas costs based on fluctuations of certain commodity prices and indices. Because fuel and purchased power costs are passed directly to our wholesale and retail customers through a fuel surcharge rate, fluctuations in the price paid for gas pursuant to long-term gas supply contracts do not normally impact margins. The fuel surcharge mechanism mitigates the commodity price risk of market fluctuations in the price of fuel and purchased power. Item 4. Controls and Procedures As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Our principal executive officer (CEO) and principal financial officer (CFO) supervised and participated in this evaluation. Based on this evaluation, our CEO and CFO each concluded that our disclosure controls and procedures are effective and timely in alerting them to material information required to be included in our periodic reports to the Securities and Exchange Commission. The design of any system of controls is based in part upon various assumptions about the likelihood of future events and there can be no assurance that any of our plans, products, services or procedures will succeed in achieving their intended goals under future conditions. In addition, there have been no significant changes in our internal controls or in other factors known to management that could significantly affect our internal controls subsequent to our most recent evaluation. PART II OTHER INFORMATION Item 1. Legal Proceedings Matanuska Electric Association, Inc., v. Chugach Electric Association, Inc., Superior Court Case No. 3AN-99-8152 Civil This action is a claim for a breach of the Power Sales Agreement between Chugach and MEA for a 25-year period from 1989 through 2014. MEA asserted Chugach breached that contract by failing to provide information, by failing to properly manage Chugach's long-term debt, and by failing to bring Chugach's base rate action to a Joint Committee before presenting it to the Regulatory Commission of Alaska (RCA). All of MEA's claims were dismissed by the Superior Court. On April 29, 2002, MEA appealed the Superior Court's decisions relating to Chugach's financial management and Chugach's failure to bring Chugach's base rate action to the joint committee before filing with the RCA to the Alaska Supreme Court. We cross-appealed the Superior Court's decision not to dismiss the financial management claim on jurisdictional and res judicata grounds. The Alaska Supreme Court, on October 8, 2004, ruled in Chugach's favor supporting its right under the power sales agreement to file for interim rate relief without first going to the Joint Committee. The Supreme Court ruled against Chugach in its cross appeal. The Supreme Court also overturned the Superior Court's decision that dismissed MEA's claim asking for review of Chugach's use of rate locks instead of defeasing debt based on the Prudent Utility Practice standard under our power sales agreement. The Supreme Court remanded this issue to the Superior Court. On January 24, 2005, Chugach filed a summary judgment motion based on Chugach's claim that in the 2000 Test Year rate case the RCA has already decided the underlying issues relating to the prudency of Chugach's use of rate locks instead of defeasing debt. This motion is pending. Management is uncertain of the outcome of the proceeding before the Superior Court. No reserves have been established for this matter. Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc. Superior Court Case No. 3AN-04-11776 Civil On October 12, 2004, MEA filed suit in Superior Court alleging a breach of the power sales agreement between the parties and violation of Chugach's bylaws in connection with allocation of margins (capital credits) to MEA for the years 1998 through 2003. Allocation of capital credits assigns a share of the margins earned in a particular year to each customer. Capital credits are repatriated to customers at the discretion of the board of directors typically many years after the margins are earned. The suit seeks a declaration by the Court that Chugach is in breach of its bylaws and the power sales agreement based on its allocation of capital credits to MEA as well as injunctive relief requiring Chugach to calculate MEA's capital credit allocations based on MEA's patronage and in accordance with generally accepted accounting practices for nonprofit cooperatives and cooperative principles. The suit also seeks damages in an unspecified amount to compensate MEA for the alleged breach of contract. Management intends to vigorously defend against the claim. Management is uncertain of the outcome of the suit. No reserves have been established for this matter. Other Chugach received a demand letter from a third party offering a license to a patent and implying that the patent may be infringed by certain services provided by Chugach. The patent purportedly relates to intellectual property rights over a system for automated electronic bill presentment and payment. As of this date, no legal proceedings have been instituted against us, but if the third party's patents are valid, enforceable and apply to our business, we could be required to seek a license, discontinue certain activities or be subject to a claim for past infringement. We are currently considering this matter, but lack sufficient information to assess the potential outcome at this time. No reserves have been established for this matter. Chugach has certain additional litigation matters and pending claims that arise in the ordinary course of its business. In the opinion of management, no individual matter or the matters in the aggregate is likely to have a material adverse effect on our results of operations, financial condition or liquidity. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Not applicable Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information At the Chugach annual membership meeting held on April 28, 2005, three new board members were elected and the following proposed amendments to the Bylaws failed: o The elimination of the requirement to make and save electronic recordings of board meetings and to prepare verbatim transcripts. o The elimination of prohibition on compensating standing and ad hoc committee members. o The elimination of the requirement for a member advisory council. Item 6. Exhibits Exhibits: Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHUGACH ELECTRIC ASSOCIATION, INC. By: /s/ Evan J. Griffith Evan J. Griffith Chief Executive Officer Date: May 13, 2005 By: /s/ Michael R. Cunningham Michael R. Cunningham Chief Financial Officer Date: May 13, 2005 By: /s/ William R. Stewart William R. Stewart General Manager, Corporate Services Division Date: May 13, 2005 EXHIBITS Listed below are the exhibits, which are filed as part of this Report:
Exhibit Number Description 31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-31 2 sec20051st10qex312.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael R. Cunningham, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chugach Electric Association, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2005 /s/ Michael R. Cunningham Michael R. Cunningham Chief Financial Officer EX-32 3 sec20051st10qex321.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this quarterly report of Chugach Electric Association, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2005, I, Evan J. Griffith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (a) This quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) The information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 13, 2005 /s/ Evan J. Griffith Evan J. Griffith Chief Executive Officer EX-32 4 sec20051st10qex322.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this quarterly report of Chugach Electric Association, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2005, I, Michael R. Cunningham, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (a) This quarterly report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) The information contained in this quarterly report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 13, 2005 /s/ Michael R. Cunningham Michael R. Cunningham Chief Financial Officer EX-31 5 sec20051st10qex311.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Evan J. Griffith, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Chugach Electric Association, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 13, 2005 /s/ Evan J. Griffith Evan J. Griffith Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----