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 September 30, 1999
--------------------------------------
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 NOVEMBER 1, 1999
NONE NONE
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
INDEX
<TABLE>
Page Number
<S> <C>
CAUTION REGARDING FORWARD-LOOKING STATEMENTS 3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Balance Sheets, September 30, 1999 (Unaudited) and December 31, 1998 4
Statements of Revenues, Expenses and Patronage Capital, Nine Months Ended
September 30, 1999 and 1998 (Unaudited) 6
Statements of Cash Flows, Nine Months Ended September 30, 1999 and 1998
(Unaudited) 7
Notes to Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition (Unaudited) 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits 19
</TABLE>
2
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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 affect of those events or circumstances on any of the forward-looking
statements contained in this report.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited financial statements of Chugach as of the three and nine months
ending September 30, 1999 follow:
3
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
Assets
<TABLE>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Utility plant:
Electric plant in service $ 622,074,123 $ 620,216,818
Construction work in progress 50,710,035 30,405,736
------------ ------------
672,784,158 650,622,554
Less accumulated depreciation 241,128,337 233,981,397
------------ ------------
Net utility plant 431,655,821 416,641,157
------------ ------------
Other property and investments, at cost:
Nonutility property 184,033 3,550
Investments in associated organizations 8,351,861 8,356,364
------------ ------------
8,535,894 8,359,914
------------ ------------
Current assets:
Cash and cash equivalents 3,590,843 2,312,574
Cash - restricted construction funds 261,273 177,366
Special deposits 171,164 121,164
Accounts receivable, net 12,177,866 17,243,266
Materials and supplies, at average cost 17,247,923 15,963,434
Prepayments 1,566,885 917,381
Other current assets 366,997 349,030
------------- -------------
Total current assets 35,382,951 37,084,215
------------ ------------
Deferred charges 25,690,118 19,006,164
------------ ------------
$ 501,264,784 $ 481,091,450
------------ ------------
</TABLE>
See accompanying notes to unaudited financial statements.
4
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
Balance Sheets
Liabilities and Equities
<TABLE>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
Equities and margins:
Memberships $ 948,228 $ 911,253
Patronage capital 116,065,026 109,622,996
Other 3,753,585 3,489,047
------------- -------------
120,766,839 114,023,296
------------ ------------
Long-term obligations, excluding current installments:
First mortgage bonds payable 194,139,000 235,101,000
CoBank bonds payable 113,011,295 70,816,699
------------ ------------
307,150,295 305,917,699
------------ ------------
Current liabilities:
Note Payable 25,000,000 -
Current installments of long-term debt and
capital leases 6,372,405 6,088,802
Accounts payable 7,118,036 8,838,757
Consumer deposits 1,006,274 993,616
Accrued interest 1,442,454 6,722,325
Salaries, wages and benefits 3,860,960 3,755,837
Fuel 3,582,230 5,362,713
Other current liabilities 938,832 1,318,947
------------- -------------
Total current liabilities 49,321,191 33,080,997
------------ ------------
Deferred credits 24,026,459 28,069,458
------------ ------------
$ 501,264,784 $ 481,091,450
------------ ------------
</TABLE>
See accompanying notes to unaudited financial statements.
5
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Revenues, Expenses and Patronage Capital
<TABLE>
Three-months Nine-months
ended September 30 ended September 30
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating revenues ................................. $ 32,075,076 $ 31,831,077 $ 103,807,293 $ 104,436,580
------------- ------------- ------------- -------------
Operating expenses:
Production .................................... 9,384,454 10,243,578 29,383,994 32,923,370
Purchased power ............................... 2,205,731 2,368,196 5,962,379 6,629,062
Transmission .................................. 754,449 785,280 2,416,893 2,061,900
Distribution .................................. 2,343,063 2,145,969 6,575,734 6,637,862
Consumer accounts ............................. 1,178,644 1,299,098 3,385,068 3,497,845
Sales ......................................... 228,185 -- 947,180 --
Administrative, general and other ............. 5,460,297 3,889,817 15,793,370 11,836,249
Depreciation and amortization ................. 4,608,949 5,774,401 15,354,973 17,247,681
------------- ------------- ------------- -------------
Total operating expenses .............. 26,163,772 26,506,339 79,819,591 80,833,969
------------- ------------- ------------- -------------
Interest:
On long-term debt ............................... 6,081,895 6,304,386 17,985,345 18,985,155
Other ........................................... 231,958 14,778 589,453 85,042
Charged to construction - credit ................ (407,860) (206,054) (588,390) (560,963)
------------- ------------- ------------- -------------
Net interest expense .................. 5,905,993 6,113,110 17,986,408 18,509,234
------------- ------------- ------------- -------------
Net operating margins ................. 5,311 (788,372) 6,001,295 5,093,377
------------- ------------- ------------- -------------
Nonoperating margins:
Interest income ............................... 139,152 194,594 438,905 561,399
Other ......................................... 59,954 373,238 85,913 724,866
------------- ------------- ------------- -------------
Total non-operating margins ........... 199,106 567,832 524,818 1,286,265
------------- ------------- ------------- -------------
Assignable margins .................... 204,417 (220,540) 6,526,113 6,379,642
Patronage capital at beginning of period ........... 115,870,695 111,325,582 109,622,996 104,800,092
Retirement of capital credits and
estate payments ................................. (10,086) (35,936) (84,083) (110,628)
------------- ------------- ------------- -------------
Patronage capital at end of period ................. $ 116,065,026 $ 111,069,106 $ 116,065,026 $ 111,069,106
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to unaudited financial statements.
6
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
Statements of Cash Flows
<TABLE>
Nine-months ended September 30
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Assignable margins ...................................................................... $ 6,526,113 $ 6,379,642
------------ ------------
Adjustments to reconcile assignable margins to net cash provided by operating
activities:
Depreciation and amortization ....................................................... 15,354,973 17,247,681
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable, net .......................................................... 5,065,400 9,603,135
Materials and supplies ............................................................ (1,284,489) (1,090,693)
Deferred charges .................................................................. (6,683,954) (4,272,766)
Prepayments ....................................................................... (649,504) (954,085)
Other ............................................................................. (332,357) 149,263
Increase (decrease) in liabilities:
Accounts payable .................................................................. (1,720,721) (1,525,210)
Accrued interest .................................................................. (5,279,871) (5,576,540)
Deferred credits .................................................................. (4,042,999) (1,298,088)
Consumer deposits, net ............................................................ 12,658 (91,349)
Other ............................................................................. (2,055,475) (4,566,841)
------------ ------------
Total adjustments ...................................................... (1,616,339) 7,624,507
------------ ------------
Net cash provided by operating activities .............................. 4,909,774 14,004,149
------------ ------------
Cash flows from investing activities:
Extension and replacement of plant ...................................................... (30,369,637) (12,156,256)
Investments in associated organizations ................................................. 4,503 (140,000)
------------ ------------
Net cash used in investing activities .................................. (30,365,134) (12,296,256)
------------ ------------
Cash flows from financing activities:
Net proceeds and repayments of long-term debt ........................................... 1,516,199 (5,913,512)
Retirement of patronage capital ......................................................... (84,083) (110,628)
Short-term borrowings, net .............................................................. 25,000,000 5,000,000
Other ................................................................................... 301,513 (35,963)
------------ ------------
Net cash provided by (used) in financing activities .................... 26,733,629 (1,060,103)
------------ ------------
Net increase in cash and cash equivalents .............................. 1,278,269 647,790
Cash and cash equivalents at beginning of period ........................................... 2,312,574 5,224,529
------------ ------------
Cash and cash equivalents at end of period ................................................. $ 3,590,843 $ 5,872,319
------------ ------------
</TABLE>
See accompanying notes to unaudited financial statements.
7
<PAGE>
CHUGACH ELECTRIC ASSOCIATION, INC.
Notes to Financial Statements
September 30, 1999
(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 million with CoBank, ACB
(formerly known as National Bank for Cooperatives or CoBank). The CoBank,
ACB line of credit expires August 1, 2000, and carries an annual automatic
renewal clause. At September 30, 1999, $25 million was outstanding on this
line. In addition, the Association has an annual line of credit of $50
million available at the National Rural Utilities Cooperative Finance
Corporation (NRUCFC). At September 30, 1999, there were no amounts
outstanding. The NRUCFC line of credit expires October 14, 2002.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
GENERAL
Reference is made to the information contained under the caption "CAUTION
REGARDING FORWARD-LOOKING STATEMENTS" at the beginning of this Report. Reference
is also made to the information contained, and referenced, in Item 5 of Part II
with respect to the Matanuska Electric Association, Inc. (MEA) proposal.
RESULTS OF OPERATIONS
Current Year Quarter Versus Prior Year Quarter
Operating revenues, including sales of electric energy to retail, wholesale and
economy energy customers and other miscellaneous revenues, increased for the
quarter ended September 30, 1999, over the same quarter in 1998. The increase in
revenues is attributable to higher kilowatt hour sales during the third quarter
1999 versus the same period last year.
Retail demand and energy rates remained constant for the third quarter 1999
compared to the same period in 1998. The third quarter 1998 demand and energy
rates charged to Homer Electric Association, Inc. (HEA) and MEA were 0.3 percent
and 4.1 percent higher, respectively, than third quarter 1999 levels. Over the
past 12 months, HEA's base demand and energy rates have been reduced once while
the base demand and energy rates charged to MEA have been reduced twice.
Pursuant to a Settlement Agreement with Alaska Electric Generation and
Transmission Cooperative, Inc. (AEG&T/MEA/HEA), Chugach may be required to grant
a refund to AEG&T/MEA/HEA retroactive to January 1, 1997, (based on the 1996
test year filing). A provision for wholesale rate refunds of approximately
$980,000 and $993,000 was recorded at December 31, 1997, and December 31, 1998,
to accommodate certain rate adjustment clauses contained in the Settlement
Agreement. Year-to-date September 1999 refund provisions total approximately
$510,000, bringing the total provision for wholesale rate refunds to
approximately $2,483,000. Determination of the final refund amounts await final
Regulatory Commission of Alaska (RCA), formerly the Alaska Public Utilities
Commission (APUC), approval of the 1996 test year filing.
In June 1999 the RCA approved Chugach's 1996 test year revenue requirement
filing on an interim and refundable basis, pending the resolution of docket
U-96-37.
Power production expense was lower for the quarter ended September 30, 1999,
compared to the same period in 1998. This variance is largely due to a decrease
in fuel prices. Distribution expense increased for the quarter ending September
30, 1999, versus the same period last year. This increase is due to increased
line clearing activity in this quarter compared to the same
9
<PAGE>
period in 1998. Consumer accounts and sales expense increased in third quarter
1999 versus third quarter 1998 due to the addition of new business ventures in
1999. In addition, administrative, general and other expenses increased for the
three-month period ending September 30, 1999. This increase was substantially
due to the amortization of capital costs related to the Year 2000 (Y2K)
compliant financial software that was implemented in 1998.
Depreciation expense was lower for the quarter ending September 30, 1999,
compared to the same period last year due to an adjustment made in 1999 for an
over-amortization which occurred in 1998.
Interest expense on long-term borrowing continued to decrease during the quarter
due to the refinancing of $34.9 million of 9.14% Series A First Mortgage Bonds
that occurred in the first quarter of 1999. Other interest expense increased
during the quarter due to increased activity on the line of credit.
Current Year-to-Date Versus Prior Year-to-Date
Operating revenues for the nine-month period ending September 30, 1999,
decreased relative to the same period in 1998. These lower revenues were
essentially due to lower fuel costs recovered during this period.
Power production expenses decreased while distribution, transmission, consumer
accounts, sales and administrative, general and other expenses increased for the
nine-month period ending September 30, 1999, for essentially the same reasons
outlined in the quarter-to-date comparison section. Purchased power expense is
lower for the nine-month period ending September 30, 1999, compared to the same
period last year. This variance is due to the system operating scenario that has
existed in 1999. Due to the decrease in the fuel prices this year, it was proven
more economical to generate power at the Bernice Lake plant to ensure
reliability on the Kenai Peninsula, rather than purchase power from AEG&T's
Soldotna 1 plant. In addition, purchased power expenses are lower due to the
refinancing of the long-term bonds associated with the Bradley Lake
Hydroelectric Project. Chugach is one of six electric utilities participating in
this project. Transmission expense was higher during third quarter 1999 versus
1998 due to increased line clearing activity and a change in the focus of
substation maintenance activities from distribution in 1998 to transmission in
1999.
Depreciation expense was lower for the nine-month period ending September 30,
1999, compared to the same period last year due to the same reason outlined in
the quarter-to-date comparison section as well as an adjustment in the first
quarter 1999 as a result of the unitization of a capital project that was
completed in 1997.
Financial Condition
Total assets increased by 4.2% from December 31, 1998 to September 30, 1999. The
increase is due primarily to an increase in cash from short-term borrowings,
prepayments and deferred charges. The increase in deferred charges is largely
due to costs associated with the long-term bond purchase and a fuel cell
project. A decline in accounts receivable was caused by the payment of wholesale
power bills that were accrued but not paid at December 31, 1998.
10
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Notable changes to total liabilities include an increase in notes payable due to
short-term borrowings from CoBank, ACB and an increase in CoBank, ACB bonds
resulting from the issuance of CoBank 6 in the amount of $42.5 million on March
30, 1999. Offsetting the increase in CoBank, ACB bonds was a decrease in first
mortgage bonds resulting from the March bond payment and Chugach's purchase of
first mortgage bonds. Additionally, the account payable in respect to fuel
decreased due to declining fuel prices and accrued interest decreased as a
result of the September semi-annual bond payment.
Liquidity and Capital Resources
Chugach has satisfied its operational and capital cash requirements primarily
through internally generated funds, an annual $50 million line of credit from
NRUCFC and a $35 million line of credit with CoBank, ACB. At September 30, 1999,
Chugach had $25 million outstanding on the CoBank, ACB line of credit which
carried an interest rate of 6.45%. There was no balance outstanding with NRUCFC
at September 30, 1999.
Capital construction in 1999 is estimated at $43.7 million. At September 30,
1999, approximately $31.1 million has been expended. Capital improvement
expenditures are expected to decline in the upcoming fourth quarter as the
construction season subsides.
In 1998 Chugach negotiated a supplemental indenture (Seventh Supplemental
Indenture of Trust) with CoBank, ACB that previously allowed up to $80 million
in future bond financing. Chugach finalized an amendment to the Third
Supplemental Indenture of Trust (Seventh Supplemental Indenture of Trust) that
eliminated the maximum aggregate amount of bonds the Company may issue under the
agreement. At September 30, 1999, Chugach had bonds in the amount of $113.3
million outstanding under this financing arrangement. The balance is comprised
of a $817 thousand bond (CoBank 1) which carries an interest rate of 8.95%
maturing in 2002, a $10 million bond (CoBank 2) priced at 7.76% due in 2005, a
$21.5 million bond (CoBank 3), currently priced at 5.60% (repriced
periodically), a $23.5 million bond (CoBank 4) currently priced at 5.60% (also
repriced periodically), a $15 million bond (CoBank 5) currently priced at 5.60%
(also repriced periodically) due in 2002, 2007 and 2012 and a $42.5 million bond
(CoBank 6) carrying a variable interest rate currently priced at 6.45% (as of
October 1999). CoBank 6 matures March 15, 2002. Principal payments on the CoBank
3 and 4 bonds commence in 2003 and continue through 2022. Additionally, Chugach
has negotiated a similar supplemental indenture (Fifth Supplemental Indenture of
Trust) with NRUCFC for $80 million. At September 30, 1999, there were no amounts
outstanding under this financing arrangement.
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 1999 and thereafter.
YEAR 2000
Readiness Information
Chugach has recognized the need to investigate, test and remediate, if necessary
, the critical
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business and real time systems and equipment under its control which could cause
power and business disruptions in conjunction with what are collectively called
Y2K dates. Business systems were essentially Y2K ready at year-end 1998. As of
September 30, 1999, Chugach mission critical systems were determined to be Y2K
ready.
Chugach has funded its Y2K program internally and estimates it will incur
approximately $11 million of incremental costs through March 1, 2000, associated
with making necessary modifications identified to date to applications and
embedded devices. Chugach has incurred costs of $10.4 million through September
30, 1999. Of this total, $10 million was expended on the now completed business
system Y2K conversions, all of which was capitalized. An additional $360,000 has
been expended on real time system inventory and assessment activities, all of
which has been expensed.
Chugach's Purchasing Department has completed the assessment of vendor responses
to their Y2K readiness. Selected vendors, particularly those supplying "mission
critical" devices or transportation services have been contacted regarding their
readiness during the Y2K key date by telephone on sent follow-up letters. To
date, no vendors have been identified for which special Chugach contingency
plans need to be developed. These vendor readiness interviews were completed in
October 1999.
The business systems team has developed contingency plans in the event of any
failure. These plans are being reviewed by third-party software vendors. A
staffing plan is in place to perform testing and any necessary remediation on
the business systems New Year's weekend.
Real time systems contingency planning has been completed. A task force,
consisting of key managers and technical supervisors, has prepared a detailed
action plan to ensure the necessary personnel, equipment and support are
available for the December 31, 1999, rollover. The results of the action plan
have been incorporated into Chugach's "Emergency Resource Plan".
In the business system's Y2K Contingency Plan it was determined that the
worst-case scenario would be to operate without the Billing, Accounts Payable or
Payroll systems. An alternative billing system site is available with Daffron,
the vendor that supports this system. In regards to the Accounts Payable and
Payroll systems, manual checks would be generated to accommodate vendors and
employees. In addition, the worst-case scenario for the real time systems is the
contingency loss of natural gas fuel supply to some or all of the turbine
generator units at the Beluga, Bernice Lake and International power plants.
Natural gas is the primary fuel supply for these units and there is no
alternative fuel available. Y2K contingency plans consider some combination,
based on the severity of curtailment of fuel supply, of purchase of emergency
energy, maximization of the use of hydro generation resources and rotating load
shed. Chugach has coordinated contingency planning with the fuel suppliers and,
based on this dialogue, believes the probability of this contingency is
extremely small.
It is Chugach's goal that no Chugach customers lose power for an extended time
due to a Y2K problem. Based on the progress to date, Chugach believes this goal
will be achieved.
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OUTLOOK
Nationwide, the electric utility industry is entering a period of unprecedented
competition. Electric utilities in Alaska will not be immune from these
competitive forces. Chugach has taken several steps to be more effectively
positioned to meet the challenge of a competitive market for electricity.
Chugach participates in national benchmarking projects to improve system
operations. These projects have focused on mailroom operations, remittance
processing, new service connections, system reliability and power production. As
a result of these studies, Chugach has been able to make these processes more
efficient which has led to lower costs. The Association is committed to continue
reviewing all areas of its operations and to serve its customers in a way that
maintains high reliability while containing the cost of electricity.
In addition to participation in benchmarking studies, Chugach has also
implemented strategic alliances in the purchasing and warehousing areas. These
alliances improve efficiency and contribute to lower operating costs.
Chugach has been active at the State Legislature in support of the customer's
right to choose their electric power supplier. Virtually all Alaskan utilities
oppose Chugach's efforts to develop competition. At this time no bill relating
to customer choice has moved out of legislative committee. Thus, it is not
possible to predict the outcome of this legislative process.
Chugach now operates with three divisions: Finance and Energy Supply,
Transmission and Distribution Network Services, and Retail Services to position
itself to meet competition in the electric industry. Chugach's marketing efforts
conduct a key account program for larger customers and are developing new
services to enhance existing customers' satisfaction.
Chugach commenced operation as an internet service provider (ISP) in February
1999. Also in 1999 Chugach began selling spare microwave bandwidth to industrial
customers.
Chugach has three collective bargaining agreements with the International
Brotherhood of Electrical Workers (IBEW) that are currently in negotiation.
Although each of the contracts had an expiration date of January 31, 1998, the
parties have agreed that the contracts shall continue in effect until new
contracts are put in place. All outstanding issues will be decided through
binding interest arbitration. The IBEW cannot strike and Chugach cannot lockout
under the continuing agreement. Fact finding before a third party arbitrator
commenced in October 1999 and continues in November 1999 on the remaining open
issues. If the parties remain unable to agree, an arbitration hearing is
scheduled for February 2000.
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
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accrues for costs associated with environmental remediation obligations when
such costs are probable and reasonably estimable.
Environmental Matters
Reference is made to Part II, Item 1 for discussion of the status of the
Standard Steel Salvage Yard Site litigation.
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 its business, Chugach manages its
exposure to these risks as described below. Chugach does not hold or issue
derivative financial instruments for trading purposes and does not engage in
trading market risk sensitive instruments for speculative purposes, nor are any
derivative instruments outstanding at September 30, 1999 other than the Treasury
rate lock described below.
Interest rate risk - As of September 30, 1999, except for CoBank 6 which carries
a variable interest rate that is periodically repriced, Chugach's outstanding
borrowings were at fixed interest rates with varying maturity dates. At
maturity, these bonds can be repriced and a new maturity date established. The
following table provides information regarding cash flows by expected maturity
dates for Chugach's debt obligations (dollars in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Long-term debt,
including current portion $6,372 $6,430 $52,910 $5,907 $6,447 $235,457 $313,523 $330,632
</TABLE>
On March 17, 1999, Chugach entered into a Treasury rate-lock transaction with
Lehman Brothers Financial Products Inc. (Lehman Brothers) for the purpose of
taking advantage of favorable market interest rates in anticipation of
refinancing Chugach's Series A Bonds Due 2022 on their first call date (March
15, 2002). As of September 30, 1999, the aggregate principal amount of Series A
Bonds due 2022 was $182,810,000. Under the Treasury rate-lock contract, Chugach
will receive a lump-sum payment from Lehman Brothers on March 15, 2002, if the
yield on 10- or 30-year Treasury bonds as of mid-February 2002, exceeds a
specified target level (5.653% and 5.838%, respectively). Conversely, Chugach
will on the same date be required to make a payment to Lehman Brothers if the
yield on the 10- or 30- year Treasury bonds falls below its stated target yield.
The amount of the payment will increase as the difference between the actual
yield and the target yield increases. For each basis point (0.01% per annum) by
which the yield on 10-year or 30-year Treasury bonds deviates from the stated
target level, Chugach will receive (if the Treasury yield exceeds the target
yield) or make (if the Treasury yield falls short of the target yield) a payment
equal to the product obtained by multiplying (i) the amount of deviation
(expressed in basis points) by (ii) the changes in the prices of $196 million
(in the case of 10-year Treasury bonds) and $18.7 million (in the case of the
30-year Treasury bonds) of Treasury bonds, given a one-basis-point change in
their respective yields (determined with reference to the Bloomberg Financial
Market's Government Yield Analysis Page). In this way, Chugach intends that
higher interest
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costs resulting from increases in market interest rates prior to refinancing of
Chugach's long-term debt would be mitigated by a lump-sum, up-front payment to
Chugach at the time of the refinancing.
Commodity price risk - Chugach's gas contracts provide for adjustments to gas
prices based on fluctuations of certain commodity prices and indices. Purchased
power costs are passed directly to Chugach's wholesale and retail customers
through a fuel surcharge, therefore, fluctuations in the price paid for gas
pursuant to long-term gas supply contracts does 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
Standard Steel Salvage Yard Site (the site)
Reference is made to Item 1, Part II of the Form 10-Q filed by Chugach with
respect to the quarterly period ended June 30, 1999 with respect to the Standard
Steel Salvage Yard Site (the site). The site work and reporting required to
complete the remedial action has been done. Although the total oversight costs
of EPA and other federal agencies is not yet known, Chugach has pre-funded these
costs and believes that sufficient funds remain in the account to pay these
costs and the on-going future site monitoring costs. Chugach's total costs for
the site not reimbursed by its insurers will not exceed $500,000. Management
believes that this amount is fully recoverable in rates and therefore would have
no impact on Chugach's financial condition or results of operations.
Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc.
U-98-180
Reference is made to the discussion of this matter in Item 1 of Part II of the
Form 10-Q filed by Chugach with respect to quarterly period ended June 30, 1999.
Since June 30, 1999, neither party has filed any papers in this action, and the
RCA has issued no orders and taken no other action. If the RCA authorizes an
investigation, Chugach still intends to vigorously defend its financial
management.
Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc.
3AN-99-8152 CI
Reference is made to the discussion of this matter in Item 1 of Part II of the
Form 10-Q filed by Chugach with respect to the quarterly period ended June 30,
1999. On September 9, 1999, Chugach filed a motion requesting the dismissal of
the portion of MEA's claim seeking to recover damages for Chugach's alleged
financial mismanagement. In its motion to dismiss, Chugach asserted that MEA's
claim regarding Chugach's alleged financial mismanagement is essentially the
same as MEA's financial mismanagement claim in U-98-180, referenced above. MEA
opposed Chugach's motion to dismiss asserting that its financial mismanagement
claim in this action is different from its claim before the RCA, because in this
case it seeks monetary
15
<PAGE>
damages for past losses, while in its action before the RCA it seeks to force
Chugach to change its future financial management practices. Chugach has
answered MEA's complaint and replied to MEA's opposition to Chugach's motion to
dismiss. Oral argument on Chugach's motion to dismiss is scheduled for November
17, 1999.
Matanuska Electric Association, Inc. v. Chugach Electric Association, Inc.
3AN-99-10830 CI
On October 13, 1999, Chugach filed a complaint against MEA in Alaska Superior
Court in Anchorage. In it, Chugach asked the court to enforce the APUC and RCA
orders obligating MEA to pay Chugach for MEA's pro rata share of Chugach's Fuel
and Purchased Power Cost Adjustment (FPPCA) attributable to an $839,000 tax
liability Chugach incurred in connection with its supply contract with Marathon
Oil Company. On October 22, 1999, Chugach filed a motion for a preliminary
injunction in the same case asking the court to enjoin MEA's attempt to have the
question of its liability for Chugach's FPPCA attributable to the Marathon tax
liability submitted to an arbitrator. MEA has not yet responded to either
Chugach's complaint or motion.
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
Unsolicited Acquisition Proposal by Matanuska Electric Association, Inc.
Reference is made to Item 5 of Part II of the Form 10-Q filed by Chugach with
respect to the quarterly period ended June 30, 1999, with respect to the
unsolicited acquisition proposal by Matanuska Electric Association, Inc.
Pursuant to its bylaws, on August 24, 1999, Chugach conducted a public hearing
on MEA's proposal. The meeting of Chugach members to consider and vote on MEA's
proposal is scheduled on November 18, 1999. Chugach continues to believe that
there is not a material likelihood that the MEA proposal will be consummated.
Accordingly, while Chugach has publicly stated its belief that the consummation
of the MEA proposal (including the additional borrowing that would be associated
therewith) would adversely affect the financial condition, results of
operations, capital resources and liquidity of Chugach, Chugach does not believe
that there is a material likelihood that these consequences will occur.
16
<PAGE>
Petitions for Removal of Directors
On November 8, 1999, Chugach received what were represented to be petitions
calling for the removal of five of its seven directors. The directors who are
the subject of the purported petitions are Chris Birch (Board President), Bruce
Davison, Ray Kreig, Pat Jasper and Mary Minder. The purported petitions do not
seek the removal of the two other members of the Chugach Board, Pay Kennedy and
H.A. ("Red") Boucher. The Petition alleges that the five directors should be
removed "for violating open meetings laws and financial mismanagement."
Chugach intends to handle this matter in accordance with its bylaws, the Alaska
Electric and Telephone Cooperative Act and other applicable laws. Chugach will
review the paperwork that was submitted on November 8, 1999, to determine
whether further action is appropriate. This review may take some time. In an
announcement regarding this matter, Chugach's general manager stated, "Our only
comment at this time is that our directors are very well aware of their
responsibilities; they take their responsibilities very seriously; we're proud
of our board's record; and our directors respect and value one another's
contributions."
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 September 30,
1998.
17
<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: November 12, 1999
By: /s/ Evan J. Griffith, Jr.
Evan J. Griffith, Jr.
Executive Manager, Finance & Energy Supply
Date: November 12, 1999
18
<PAGE>
EXHIBITS
Listed below are the exhibits which are filed as part of this Report:
Exhibit
number Description Page
27 Financial Data Schedule. **
** Filed Electronically
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,852,115
<SECURITIES> 0
<RECEIVABLES> 13,140,460
<ALLOWANCES> 756,445
<INVENTORY> 17,247,923
<CURRENT-ASSETS> 35,382,950
<PP&E> 672,184,158
<DEPRECIATION> (241,128,337)
<TOTAL-ASSETS> 501,264,784
<CURRENT-LIABILITIES> 49,321,191
<BONDS> 307,150,295
0
0
<COMMON> 0
<OTHER-SE> 120,766,839
<TOTAL-LIABILITY-AND-EQUITY> 501,264,784
<SALES> 103,807,293
<TOTAL-REVENUES> 103,807,293
<CGS> 0
<TOTAL-COSTS> 79,819,591
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,986,407
<INCOME-PRETAX> 6,526,113
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,526,113
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,526,113
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
