FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
----------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-42125
Chugach Electric Association, Inc.
(Exact name of registrant as specified in its charter)
Alaska 92-0014224
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5601 Minnesota Drive Anchorage, Alaska 99518
(Address of principal executive offices) (Zip Code)
(907) 563-7494
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) . No ( ).
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 1, 1996
NONE NONE
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
INDEX
Part I. Financial Information Page Number
Balance Sheets, March 31, 1996 (Unaudited) and
December 31, 1995 3
Statements of Revenues, Expenses and Patronage Capital, Three Months Ended
March 31, 1996 and 1995 (Unaudited) 5
Statements of Cash Flows, Three Months Ended March 31, 1996 and 1995
(Unaudited) 6
Notes to Financial Statements (Unaudited) 7
Management's Discussion and Analysis of Results of Operations and
Financial Condition (Unaudited) 8
Part II. Other Information 11
Signatures 13
Exhibits 14
2
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
Assets
<TABLE>
March 31, 1996 December 31, 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Utility plant:
Electric plant in service .......................... $600,991,000 $587,877,992
Construction work in progress ...................... 14,809,004 27,068,964
------------ ------------
615,800,004 614,946,956
Less accumulated depreciation ...................... 201,328,069 196,677,723
------------ ------------
Net utility plant ................. 414,471,935 418,269,233
------------ ------------
Other property and investments, at cost:
Nonutility property ................................ 3,550 3,550
Investments in associated organizations ............ 7,458,576 7,513,807
Restricted cash - margins from economy
energy sales, all repurchase
agreements ...................................... 3,066,189 3,026,634
------------ ------------
10,528,315 10,543,991
------------ ------------
Current assets:
Cash and cash equivalents .......................... 7,585,875 6,371,687
Cash - restricted construction funds ............... 698,960 --
Special deposits ................................... 97,872 97,789
Accounts receivable, net ........................... 15,431,755 17,108,823
Materials and supplies, at average cost ............ 18,977,744 18,498,783
Prepayments ........................................ 1,359,285 675,117
Other current assets ............................... 207,150 412,209
------------ ------------
Total current assets ................ 44,358,641 43,164,408
------------ ------------
Deferred charges ........................................ 12,856,001 12,812,691
------------ ------------
$482,214,892 $484,790,323
------------ ------------
See accompanying notes to unaudited financial statements.
</TABLE>
3
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
Liabilities and Equities
<TABLE>
March 31, 1996 December 31, 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Equities and margins:
Memberships .............................................. $ 774,663 $ 765,123
Patronage capital ........................................ 99,013,147 95,421,358
Other .................................................... 2,982,141 3,044,069
------------ ------------
102,769,951 99,230,550
------------ ------------
Long-term obligations, excluding current installments:
First mortgage bonds payable ............................. 272,753,000 294,054,000
National Bank for Cooperatives bonds
payable (note 2) ........................................ 32,972,845 11,587,703
------------ ------------
305,725,845 305,641,703
------------ ------------
Current liabilities:
Bank overdraft ........................................... 1,831,936 492,204
Notes payable ............................................ 12,000,000 8,000,000
Current installments of long-term debt and
capital leases ........................................ 6,027,993 5,665,749
Accounts payable ......................................... 2,610,902 6,659,477
Consumer deposits ........................................ 1,071,310 1,119,056
Accrued interest ......................................... 1,275,866 8,052,786
Salaries, wages and benefits ............................. 3,931,723 3,772,608
Fuel ..................................................... 2,363,736 2,289,776
Other .................................................... 5,875,423 2,624,341
------------ ------------
Total current liabilities .................. 36,988,889 38,675,997
------------ ------------
Deferred credits .............................................. 36,730,207 41,242,073
------------ ------------
$482,214,892 $484,790,323
------------ ------------
See accompanying notes to unaudited financial statements.
</TABLE>
4
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
<TABLE>
Three months ended March 31
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Operating revenues ................................... $ 35,097,712 $ 36,088,726
------------ ------------
Operating expenses:
Production ...................................... 8,382,590 8,129,228
Purchased power ................................. 2,329,442 2,067,867
Transmission .................................... 883,206 710,477
Distribution .................................... 2,443,880 2,611,358
Consumer accounts ............................... 1,791,397 1,733,216
Administrative, general and other ............... 3,425,465 3,578,474
Depreciation and amortization ................... 5,035,068 4,712,778
------------ ------------
Total operating expenses ................ 24,291,048 23,543,398
------------ ------------
Interest:
On long-term debt ............................... 7,304,244 6,462,517
Other ........................................... 185,933 124,113
Charged to construction - credit ................ (122,271) (294,562)
------------ ------------
Net interest expense .................... 7,367,906 6,292,068
------------ ------------
Net operating margins ................... 3,438,758 6,253,260
------------ ------------
Nonoperating margins:
Interest income ................................. 171,162 163,361
Other ........................................... 16,546 75,582
------------ ------------
Total nonoperating margins .............. 187,708 238,943
------------ ------------
Assignable margins ...................... 3,626,466 6,492,203
Patronage capital at beginning of period ............. 95,421,358 91,079,686
Retirement of capital credits and
estate payments ................................... (34,677) (39,684)
------------ ------------
Patronage capital at end of period ................... $ 99,013,147 $ 97,532,205
------------ ------------
See accompanying notes to unaudited financial statements.
</TABLE>
5
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statement of Cash Flows
<TABLE>
Three months ended March 31
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Assignable margins ............................... $ 10,594,780 $ 6,492,203
------------ ------------
Adjustments to reconcile assignable
margins to net cash used in operating
activities:
Depreciation and amortization ................ 5,035,068 4,712,778
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable ........................ 1,677,068 248,112
Prepayments ................................ (684,168) (749,052)
Materials and supplies ..................... (478,961) (762,720)
Deferred charges ........................... (43,310) (1,944,760)
Other ...................................... (533,539) (75,440)
Increase (decrease) in liabilities:
Accounts payable ........................... (4,048,575) (958,408)
Consumer deposits .......................... (47,746) (11,857)
Accrued interest ........................... (6,776,920) (6,981,799)
Deferred credits ........................... (4,511,866) (357,490)
Other ...................................... 3,484,157 (976,646)
------------ ------------
Total adjustments .................... (6,928,792) (7,857,282)
------------ ------------
Net cash provided (used) in
operating activities ............... (3,302,326) (1,365,079)
Cash flows from investing activities:
Extension and replacement of plant ............... (1,237,770) (3,402,894)
Investments in associated organizations .......... 55,231 69,158
------------ ------------
Net cash used in investing activities (1,182,539) (3,333,736)
------------ ------------
Cash flows from financing activities:
Net change in bank overdraft ..................... 1,339,732 42,390
Short-term borrowings, net ....................... 25,500,000 11,300,000
Repayments of long-term debt ..................... (21,053,614) (5,190,874)
Retirement of patronage capital .................. (34,677) (39,684)
Other ............................................ (52,388) (11,244)
------------ ------------
Net cash (used) provided by
financing activities ............... 5,699,053 6,100,588
------------ ------------
Net increase (decrease) in cash and
cash equivalents ................... 1,214,188 1,401,773
Cash and cash equivalents at beginning of period .... 6,371,687 5,975,927
------------ ------------
Cash and cash equivalents at end of period .......... $ 7,585,875 $ 7,377,700
------------ ------------
See accompanying notes to unaudited financial statements.
</TABLE>
6
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
March 31, 1996
(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. Users of interim financial information are encouraged to refer
to footnotes contained in Form 10-K when reviewing interim financial
results. Management believes that the accompanying interim financial
statements reflect all adjustments which are necessary for a fair statement
of the results of the interim period presented. All adjustments made in the
accompanying interim financial statements are of a normal recurring nature.
2. Lines of Credit
Chugach maintains a line of credit of $35,000,000 with National Bank for
Cooperatives (CoBank). The CoBank line of credit expires August 1, 1996 but
is expected to be renewed. At March 31, 1996, $21,500,000 was outstanding
at an interest rate of 6.15%. This balance was converted to a long-term
bond on April 30, 1996. Thus, it is classified in long-term obligations at
March 31, 1996. In addition, the Association has an annual line of credit
of $50,000,000 available at the National Rural Utilities Cooperative
Finance Corporation (NRUCFC). At March 31, 1996, $12,000,000 was
outstanding at an interest rate of 6.30%. The NRUCFC line of credit expires
February 19, 1998.
3. Restricted Cash
Beginning in the first quarter of 1996, Chugach began receiving grant funds
from the Alaska Industrial Development and Export Authority (AIDEA) to
finance the siting study for the Southern Intertie. Under the terms of the
grant agreement, Chugach agreed to deposit these funds in a separate
interest bearing bank account at its main banking institution. Chugach
reimburses itself from this account monthly for expenditures related to the
siting study.
The initial amount approved for the study was $900,000. At March 31, 1996
this account contained a balance of $698,960.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
RESULTS OF OPERATIONS
Current Year Quarter Versus Prior Year Quarter
Operating revenues, which include sales of electric energy to retail, wholesale
and economy energy customers and other miscellaneous revenues, decreased by 2.7%
for the quarter ended March 31, 1996 from the same quarter in 1995. The lower
revenues are attributable to retail and wholesale rate decreases which more than
offset higher kWh sales to all three customer classes. Specifically, retail
demand and energy rates decreased by 4.9% while demand and energy rates charged
to the two wholesale customer classes decreased by 9.5% and 7.4%.
Several times during the reporting period, it was more economical for Chugach to
purchase power from Anchorage Municipal Light & Power than to start one of its
own Frame 5 generation units to meet its load requirements. This caused the
increase in purchased power expense in 1996 versus 1995. Transmission expense
was 24.3% higher for the quarter ended March 31, 1996 compared to the same
period in 1995. This variance was substantially due to higher overhead line
maintenance expense.
Interest on long-term debt was higher for the quarter ended March 31, 1996 than
for the same period in 1995. This was caused by the repurchase of $15.595
million Series 1 2022 bonds. Chugach incurred redemption losses (premiums) as a
result of the transaction. These losses were largely offset by a greater amount
of amortization of the original refinancing gain being recognized during the
period. Since the refinancing in 1991, this amortization has been recorded as an
offset to interest expense and is being recognized over the life of the new
long-term debt (the 2002 and 2022 Series bonds). Accordingly, when $15.595
million of the bonds were extinguished through the repurchase in 1996, a higher
pro rata share of the refinancing gain was recognized. The net impact of the
repurchase transaction was approximately $882,000. This amount is not considered
material to the financial statements taken as a whole, and thus was not treated
as an extraordinary item. Other interest expense increased in the current period
due to a higher average outstanding balance on the short-term lines of credit
which more than offset lower interest rates in effect. Interest charged to
construction decreased for the quarter ended March 31, 1996 versus the same
period in 1995 due to the combination of lower rates and lower construction work
in process balances.
Nonoperating margins decreased for the first quarter of 1996 due mostly to a
lower level of allowance for funds used during construction (AFUDC). This
decrease was caused by the same factors that explain the above-mentioned
decrease in interest charged to construction.
8
<PAGE>
Financial Condition
Total assets declined by 0.5% from December 31, 1995 to March 31, 1996. The
decrease is due primarily to the lower balance in net utility plant. This lower
balance was caused mostly by the higher accumulated depreciation reserve
resulting from the implementation of higher depreciation rates. Notable changes
to total liabilities include the decrease in First Mortgage bonds payable and
corresponding increase in CoBank long-term debt resulting from the repurchase of
the Series 1 2022 bonds. Additionally, accrued interest payable decreased due to
the semi-annual bond interest payment made in March. Other liabilities increased
due to the reclassification of the current portion of both the rate
stabilization fund and submarine cable reserve which will be returned to
customers in 1996 and early 1997.
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 March 31, 1996, Chugach
had $21.5 million outstanding with CoBank which carried an interest rate of
6.15%. This amount is classified as long-term debt at March 31, 1996 (see
discussion of CoBank 3 below). There was $12.0 million outstanding on the NRUCFC
line at March 31, 1996, priced at 6.30%.
Capital construction in 1996 is estimated at $26 million. At March 31, 1996
approximately $1.2 million has been expended. Capital improvement expenditures
are expected to increase in the second and third quarters as the construction
season begins in April and extends into October.
Chugach has negotiated a supplemental indenture (Third Supplemental Indenture of
Trust) with CoBank for up to $80 million in future bond financing. At March 31,
1996, Chugach had bonds in the amount of $11.7 million outstanding under this
financing arrangement. The balance is comprised of a $1.7 million bond which
carries an interest rate of 8.95% maturing in 2002 and a $10 million bond priced
at 7.76% due in 2005. Additionally, Chugach has negotiated a similar
supplemental indenture (Fifth Supplemental Indenture of Trust) with NRUCFC also
for $80 million. At March 31, 1996 there were no amounts outstanding under this
financing arrangement.
As previously reported, Chugach has repurchased a total of $18.095 million of
its 2022 bonds. This strategy has been in response to the favorable long-term
interest rate environment. On April 30, 1996 Chugach combined these repurchases
(along with the associated transaction costs incurred) into a new bond under the
Third Supplemental Indenture in the amount of $21.5 million. The new bond,
CoBank 3, carries an interest rate of 6.30% and is repriced monthly. Principal
payments are scheduled to begin in 2003. Chugach will continue to explore
similar repurchase transactions if market conditions warrant such action. Except
for any further repurchases of its bonds, (and any similar future refinancings),
Chugach does not anticipate issuance of additional long-term debt in 1996.
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 1996.
9
<PAGE>
Chugach's current ratios (current assets divided by current liabilities) at
December 31, 1995 and March 31, 1996 were as follows:
Current ratio
December 31, 1995 1.12
March 31, 1996 1.20
Environmental Matters
Regulatory initiatives arising out of recent amendments to state and federal
environmental laws (including the Clean Air Act Amendments of 1990) may require
significant capital expenditures in the future. These initiatives have not
developed to the point where their financial impact on Chugach can be
determined. Chugach is commenting on proposed revisions to the Alaska air
quality protection rules. The Association has focused its efforts on minimizing
the financial impact on Chugach of the new regulations, while meeting the
requirements of State and Federal law. Other environmental compliance changes
will require new substation designs to incorporate spill-containment features.
The cost of incorporating these features has been considered in future
construction work plan projects.
Refer to Part II, Item 1 for an update on the status of the Standard Steel
Salvage Yard Site litigation.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported in the Form 10-K for the period ended December 31, 1995,
a cost recovery action was filed in Federal District Court on December 27, 1991
by the United States against Chugach and six other Potentially Responsible
Parties (PRPs) seeking reimbursement of removal and response action costs (Past
Response Costs) incurred by U.S. EPA at the Standard Steel and Metals Salvage
Yard Superfund Site in Anchorage, Alaska (Site). The six other PRPs named in the
action are the Alaska Railroad, Westinghouse Electric Corporation, Sears,
Roebuck and Co., Montgomery Ward & Co., J.C. Penney Company, Inc. and
Bridgestone/Firestone, Inc.
On September 23, 1992, Chugach entered into an Administrative Order on Consent
(AOC) with the EPA to perform a remedial investigation and feasibility study
(RI/FS) for the Site. Under a separate agreement, several federal agency PRPs
are reimbursing Chugach for 75% of the costs of performing the RI/FS. Chugach's
contractors have now completed the RI/FS for the Site and, based on the results
of the RI/FS, EPA has selected a remedy for cleanup of the Site which will be
documented in a Record of Decision (ROD). The preferred remedy for cleanup of
the Site selected by EPA is soil treatment by means of stabilization and
solidification (S/S).
As reported in the Form 10-K, all of the PRPs and the United States government,
including EPA and the Department of Justice (DOJ), are negotiating a new Consent
Decree to settle both the cost recovery action and the PRPs' (including the
federal PRPs') alleged liability for costs associated with the Site, including
investigation and enforcement costs, through the date of the ROD. The parties
anticipate that the Consent Decree will be entered by the Federal District Court
in the Spring of 1996, at approximately the same time that EPA issues the ROD.
The Consent Decree, which is still being negotiated by the parties and must be
approved by the Court, will allocate to Chugach 14.37% of Past Response Costs,
RI/FS Costs (including scrap removal costs), EPA oversight costs and DOJ
enforcement costs incurred in connection with the Site up through the date of
issuance of the ROD and entry of the Consent Decree, respectively. Because
Chugach is currently funding the RI/FS, the Consent Decree requires the other
PRPs to reimburse Chugach and, in the event any PRP fails to make such
reimbursement, the Consent Decree provides a credit to Chugach for the
unreimbursed amounts. If applicable, this credit will be applied to reduce
Chugach's obligation to pay EPA oversight costs so that the total amount paid by
Chugach will not exceed 14.37% of the costs being settled under the Consent
Decree.
The total estimated cost of the settlement under the Consent Decree is
approximately $6,200,000 for Past Response Costs, RI/FS costs (including scrap
removal costs), DOJ enforcement costs and EPA oversight costs. This total cost
is an estimate because additional oversight costs will be incurred by EPA in
connection with issuing the ROD and interest will continue to accrue on Past
Response Costs until paid by the PRPs. Applying Chugach's percentage share under
the Consent Decree (14.37%), the total Chugach will have to pay to
11
<PAGE>
settle all costs associated with the Site up through the date of the ROD is
approximately $890,940. The Consent Decree does not settle Chugach's liability
for future costs of designing and performing a remedy to cleanup the Site.
Although the Consent Decree does not settle Chugach's or the other private PRPs'
liability for costs of future remedial action at the Site, the Consent Decree
does bind the federal PRPs and the Alaska Railroad to pay an aggregate share of
64% of future costs. Chugach and the five other private PRPs will divide the
remaining 36% of future costs among themselves in accordance with an allocation
of shares to be negotiated. The current low and high estimates of total future
costs of remedial design and remedial action at the Site are approximately
$5,717,000 to $6,679,000. These cost estimates are based on the predicted scope
of the S/S remedy as contemplated in the FS report. Although EPA has selected
S/S as the cleanup remedy, the actual scope of the S/S cleanup at the Site will
not be known, and the projected costs associated with the remedy cannot be
refined, until EPA issues the ROD. Based on currently available information,
however, Chugach's share of future costs for remedial work at the Site will not
exceed some percentage of 36% (as divided among the six private PRPs) of
$6,679,000, or $2,404,440.
Four of Chugach's insurance carriers have agreed under a reservation of rights
to pay, and currently are paying, Chugach's costs of defense for the Site. The
carriers have reserved their rights regarding indemnification of Chugach for
response costs. Management believes that all past and future costs incurred for
response, removal, investigation and cleanup of the Site would be fully
recoverable in rates or covered by insurance and therefore would have no impact
on Chugach's financial condition.
Items 2, 3, 4 and 5
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the quarter ended March 31, 1996.
12
<PAGE>
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: May 13, 1996
By: /s/ Evan J. Griffith, Jr.
Evan J. Griffith, Jr.
Executive Manager, Finance & Planning
Date: May 13, 1996
13
<PAGE>
EXHIBITS
Listed below are the exhibits which are filed as part of this Report:
Exhibit
number Description Page
27 Financial Data Schedule N/A
14
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> MAR-31-1996
<CASH> 8,284,835
<SECURITIES> 0
<RECEIVABLES> 15,982,124
<ALLOWANCES> (550,369)
<INVENTORY> 18,977,744
<CURRENT-ASSETS> 44,358,641
<PP&E> 615,800,004
<DEPRECIATION> (201,328,069)
<TOTAL-ASSETS> 482,214,892
<CURRENT-LIABILITIES> 36,988,889
<BONDS> 305,725,845
0
0
<COMMON> 0
<OTHER-SE> 102,769,951
<TOTAL-LIABILITY-AND-EQUITY> 482,214,892
<SALES> $35,097,712
<TOTAL-REVENUES> $35,097,712
<CGS> 0
<TOTAL-COSTS> 24,291,048
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,367,906
<INCOME-PRETAX> 3,626,466
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,626,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,626,466
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
