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Table of Contents

 

 

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 EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

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.

(Exact name of registrant as specifies in its charter)

 

 

 

State of Alaska   92-0014224

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5601 Electron Drive, Anchorage, AK   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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. NONE

 

 

 


Table of Contents

CHUGACH ELECTRIC ASSOCIATION, INC.

TABLE OF CONTENTS

 

Caution Regarding Forward-Looking Statements

     2   

Part I. Financial Information

  

Item 1.

  

Financial Statements (unaudited)

     2   
  

Balance Sheets - as of September 30, 2012 and December 31, 2011

     3   
  

Statements of Operations - Three and nine months ended September 30, 2012 and September 30, 2011

     5   
  

Statements of Cash Flows - Nine months ended September 30, 2012 and September 30, 2011

     6   
  

Notes to Financial Statements

     7   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     19   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     36   

Item 4.

  

Controls and Procedures

     37   

Part II. Other Information

  

Item 1.

  

Legal Proceedings

     38   

Item 1A.

  

Risk Factors

     38   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     39   

Item 3.

  

Defaults Upon Senior Securities

     39   

Item 4.

  

Mine Safety Disclosures

     39   

Item 5.

  

Other Information

     39   

Item 6.

  

Exhibits

     40   
  

Signatures

     41   
  

Exhibits

     42   

 

1


Table of Contents

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. It is suggested these statements are read in conjunction with our audited financial statements for the year ended December 31, 2011, filed as part of our annual report on Form 10-K. 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 the financial statements of Chugach as of and for the three and nine months ended September 30, 2012, follow.

 

2


Table of Contents

Chugach Electric Association, Inc.

Balance Sheets

(Unaudited)

 

Assets

   September 30, 2012     December 31, 2011  

Utility plant:

    

Electric plant in service

   $ 885,289,091      $ 862,362,243   

Construction work in progress

     256,829,327        206,005,783   
  

 

 

   

 

 

 

Total utility plant

     1,142,118,418        1,068,368,026   

Less accumulated depreciation

     (493,683,745     (470,282,210
  

 

 

   

 

 

 

Net utility plant

     648,434,673        598,085,816   

Other property and investments, at cost:

    

Nonutility property

     84,735        84,735   

Investments in associated organizations

     10,471,000        11,134,496   

Special funds

     534,235        420,783   
  

 

 

   

 

 

 

Total other property and investments

     11,089,970        11,640,014   

Current assets:

    

Cash and cash equivalents

     35,054,775        17,118,118   

Special deposits

     152,200        149,701   

Restricted cash equivalents

     1,953,085        122,006,738   

Marketable securities

     10,050,601        0   

Fuel cost under-recovery

     158,198        1,213,484   

Accounts receivable, net

     37,768,954        42,373,995   

Materials and supplies

     31,231,395        32,994,454   

Fuel stock

     8,971,841        0   

Prepayments

     2,570,768        1,911,789   

Other current assets

     281,681        229,858   
  

 

 

   

 

 

 

Total current assets

     128,193,498        217,998,137   

Deferred charges, net

     29,857,847        25,205,690   
  

 

 

   

 

 

 

Total assets

   $ 817,575,988      $ 852,929,657   
  

 

 

   

 

 

 

 

3


Table of Contents

Chugach Electric Association, Inc.

Balance Sheets (continued)

(Unaudited)

 

Liabilities, Equities and Margins

   September 30, 2012      December 31, 2011  

Equities and margins:

     

Memberships

   $ 1,549,334       $ 1,517,488   

Patronage capital

     150,458,703         148,355,246   

Other

     11,372,355         11,358,692   
  

 

 

    

 

 

 

Total equities and margins

     163,380,392         161,231,426   

Long-term obligations, excluding current installments:

     

Bonds payable

     491,916,666         264,333,333   

National Bank for Cooperatives note payable

     29,680,420         31,756,775   
  

 

 

    

 

 

 

Total long-term obligations

     521,597,086         296,090,108   

Current liabilities:

     

Current installments of long-term obligations

     24,493,022         133,360,210   

Commercial paper

     7,500,000         175,000,000   

Accounts payable

     32,010,011         22,800,190   

Consumer deposits

     2,432,934         3,949,052   

Fuel cost over-recovery

     8,823,399         0   

Accrued interest

     1,056,370         6,843,473   

Salaries, wages and benefits

     8,731,808         7,597,691   

Fuel

     23,388,385         24,399,157   

Other current liabilities

     4,590,742         3,350,692   
  

 

 

    

 

 

 

Total current liabilities

     113,026,671         377,300,465   

Deferred compensation

     534,235         420,783   

Deferred liabilities

     2,929,110         1,703,277   

Patronage capital payable

     6,646,068         6,646,068   

Deferred proceeds on sale of asset

     9,462,426         9,537,530   
  

 

 

    

 

 

 

Total liabilities, equities and margins

   $ 817,575,988       $ 852,929,657   
  

 

 

    

 

 

 

See accompanying notes to financial statements.

 

4


Table of Contents

Chugach Electric Association, Inc.

Statements of Operations

(Unaudited)

 

    

Three months ended

September 30,

   

Nine months ended

September 30,

 
     2012     2011     2012     2011  

Operating revenues

   $ 62,675,511      $ 68,778,352      $ 192,488,013      $ 206,790,101   

Operating expenses:

        

Fuel

     30,536,763        35,351,057        89,976,114        101,385,372   

Production

     4,364,786        4,383,225        12,821,523        12,466,858   

Purchased power

     5,513,024        5,925,351        16,723,345        18,744,592   

Transmission

     1,481,332        1,588,996        4,294,173        5,163,878   

Distribution

     3,394,077        3,268,367        10,452,327        9,089,035   

Consumer accounts

     1,603,632        1,330,126        4,496,725        4,085,071   

Administrative, general and other

     5,188,262        5,494,955        16,784,922        16,785,365   

Depreciation and amortization

     8,118,653        8,167,673        24,395,611        24,478,626   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     60,200,529        65,509,750        179,944,740        192,198,797   

Interest expense:

        

Long-term debt and other

     6,016,325        4,059,234        17,879,791        14,058,833   

Charged to construction

     (2,520,460     (515,030     (6,968,904     (1,414,606
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense, net

     3,495,865        3,544,204        10,910,887        12,644,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating margins

     (1,020,883     (275,602     1,632,386        1,947,077   

Nonoperating margins:

        

Interest income

     77,448        74,377        231,085        223,305   

Allowance for funds used during construction

     66,031        54,632        195,611        101,907   

Capital credits, patronage dividends and other

     118,008        32,586        92,454        89,827   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total nonoperating margins

     261,487        161,595        519,150        415,039   
  

 

 

   

 

 

   

 

 

   

 

 

 

Assignable margins

   $ (759,396   $ (114,007   $ 2,151,536      $ 2,362,116   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to financial statements.

 

5


Table of Contents

Chugach Electric Association, Inc.

Statements of Cash Flows

(Unaudited)

 

     Nine months ended September 30  
     2012     2011  

Cash flows from operating activities:

    

Assignable margins

   $ 2,151,536      $ 2,362,116   
  

 

 

   

 

 

 

Adjustments to reconcile assignable margins to net cash provided by operating activities:

    

Depreciation

     24,395,611        24,478,626   

Amortization and depreciation cleared to operating expenses

     4,039,569        4,173,013   

Allowance for funds used during construction

     (195,611     (101,907

Loss on disposal of assets

     336,845        0   

Other

     (37,050     (13,885

(Increase) decrease in assets:

    

Accounts receivable, net

     4,605,041        (6,444,469

Fuel cost under-recovery

     1,055,286        (3,440,851

Materials and supplies

     1,512,390        2,108,877   

Fuel stock

     (8,971,841     0   

Prepayments

     (658,979     (1,174,976

Other assets

     (564     (1,954,745

Deferred charges

     (5,301,844     (4,670,710

Increase (decrease) in liabilities:

    

Accounts payable

     3,298,330        1,845,200   

Consumer deposits

     (1,516,118     (1,108,018

Fuel cost over-recovery

     8,823,399        0   

Accrued interest

     (5,787,103     (4,211,249

Salaries, wages and benefits

     1,134,117        968,069   

Fuel

     (1,010,772     1,346,727   

Other current liabilities

     2,125,966        1,979,633   

Deferred liabilities

     (69,380     (15,018
  

 

 

   

 

 

 

Net cash provided by operating activities

     29,928,828        16,126,433   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Investment in associated organizations

     663,697        1,153,470   

Investment in restricted cash equivalents

     0        (270,000,000

Investment in marketable securities

     (10,007,254     0   

Proceeds from restricted cash equivalents

     120,000,000        150,000,000   

Extension and replacement of plant

     (71,155,744     (81,942,547
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     39,500,699        (200,789,077
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Payments for debt issue costs

     (1,850,199     (1,882,693

Proceeds from short-term obligations

     20,500,000        62,500,000   

Proceeds from long-term obligations

     250,000,000        275,000,000   

Repayments of short-term obligations

     (188,000,000     0   

Repayments of long-term obligations

     (133,360,210     (152,565,812

Memberships and donations received

     45,509        162,215   

Retirement of patronage capital and estate payments

     (48,079     (255,111

Net receipts on consumer advances for construction

     1,220,109        335,198   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (51,492,870     183,293,797   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     17,936,657        (1,368,847

Cash and cash equivalents at beginning of period

   $ 17,118,118      $ 12,070,713   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 35,054,775      $ 10,701,866   
  

 

 

   

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

    

Retirement of plant

   $ 1,797,561      $ 4,141,911   

Extension and replacement of plant included in accounts payable

   $ 21,260,378      $ 25,031,907   

Supplemental disclosure of cash flow information - interest expense paid, net of amounts capitalized

   $ 15,568,633      $ 13,110,392   

See accompanying notes to financial statements.

 

6


Table of Contents

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

1. PRESENTATION OF FINANCIAL INFORMATION

The accompanying unaudited interim financial statements include the accounts of Chugach Electric Association, Inc. (Chugach) and have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States of America generally accepted accounting principles (U.S. GAAP) for complete financial statements. They should be read in conjunction with our audited financial statements for the year ended December 31, 2011, filed as part of our annual report on Form 10-K. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for an entire year or any other period.

 

2. DESCRIPTION OF BUSINESS

Chugach is the largest electric utility in Alaska. Chugach is engaged in the generation, transmission and distribution of electricity to directly serve retail customers in the Anchorage and upper Kenai Peninsula areas. Through an interconnected regional electrical system, Chugach’s power flows throughout Alaska’s Railbelt, a 400-mile-long area stretching from the coastline of the southern Kenai Peninsula to the interior of the state, including Alaska’s largest cities, Anchorage and Fairbanks.

Chugach supplies much of the power requirements for three wholesale customers, Matanuska Electric Association, Inc. (MEA), Homer Electric Association, Inc. (HEA), and the City of Seward (Seward). We sell available generation in excess of our own needs to produce electric energy for sale to Golden Valley Electric Association, Inc. (GVEA). In addition, on a periodic basis, we provide electricity to Anchorage Municipal Light & Power (ML&P). Chugach’s retail and wholesale members are the consumers of the electricity sold.

Chugach was organized as an Alaska electric cooperative in 1948 and operates on a not-for-profit basis and accordingly, seeks only to generate revenues sufficient to pay operating and maintenance costs, the cost of purchased power, capital expenditures, depreciation, and principal and interest on all indebtedness and to provide for reserves. Chugach is subject to the regulatory authority of the Regulatory Commission of Alaska (RCA).

 

3. SIGNIFICANT ACCOUNTING POLICIES

 

  a. Management Estimates

In preparing the financial statements, the management of Chugach is required to make estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the reporting period. Estimates include allowance for doubtful accounts, deferred charges, unbilled revenue and the estimated useful life of utility plant. Actual results could differ from those estimates.

 

7


Table of Contents

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

  b. Regulation

The accounting records of Chugach conform to the Uniform System of Accounts as prescribed by the Federal Energy Regulatory Commission (FERC). Chugach meets the criteria, and accordingly, follows the accounting and reporting requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 980, “Topic 980 – Regulated Operations.” FASB ASC 980 provides for the recognition of assets and liabilities as allowed by regulators for costs or credits that are reflected in current rates or are considered probable of being included in future rates. Our regulated rates are established to recover all of our specific costs of providing electric service. In each rate filing, rates are set at levels to recover all of our specific allowable costs and those rates are then collected from our retail and wholesale customers. The regulatory assets or liabilities are then reduced as the cost or credit is reflected in earnings and our rates.

 

  c. Income Taxes

Chugach is exempt from federal income taxes under the provisions of Section 501(c)(12) of the Internal Revenue Code and for the nine month periods ended September 30, 2012 and 2011 was in compliance with that provision. In addition, Chugach collects sales tax and is assessed gross receipts and excise taxes which are presented on a net basis in accordance with FASB ASC 605-45-50, “Topic 605 – Revenue Recognition – Subtopic 45 – Principal Agent Considerations – Section 50 – Disclosure.”

Chugach applies a more-likely-than-not recognition threshold for all tax uncertainties. FASB ASC 740, “Topic 740 – Income Taxes,” only allows the recognition of those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities. Chugach’s management reviewed Chugach’s tax positions and determined there were no outstanding or retroactive tax positions that were not highly certain of being sustained upon examination by the taxing authorities.

 

  d. Accounts Receivable

Included in accounts receivable are invoiced amounts to ML&P for fuel and their share of current Southcentral Power Project (SPP) costs, which amounted to $5.7 and $4.8 million at September 30, 2012 and December 31, 2011, respectively.

 

  e. Fuel Stock

Fuel Stock is the cost of fuel injected into the Cook Inlet Natural Gas Storage Alaska (CINGSA), which began service in the second quarter of 2012. Chugach’s injections amounted to $9.0 million at September 30, 2012. Limited withdrawals of gas began in the third quarter of 2012.

 

8


Table of Contents

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

  f. Marketable Securities

In September of 2012, Chugach implemented a bond and equity investment portfolio approved by the Board of Directors on August 29, 2012. Chugach’s initial investment was $10.0 million. The investments are classified as marketable securities, reported at fair value with gains and losses included in earnings. At September 30, 2012, the carrying amount and fair value was $10.1 million.

 

4. REGULATORY MATTERS

Modification to Certificate of Public Convenience and Necessity

On May 29, 2012, Chugach submitted a request to amend its service area contained within its certificate of public convenience and necessity to include Fire Island, the City of Whittier, and to adjust the service area boundary between Chugach and the City of Seward, d/b/a Seward Electric System in the Moose Pass area where both utilities are currently authorized to provide electric service. Chugach also requested that its service area be modified to include the areas of expansion in which electric service is currently being provided but are not described in Chugach’s certificate, and to include other service areas where potential future customer requests for electric service can be reasonably expected. Chugach is also proposing that several sections of its certificate be removed as these areas are well outside of any reasonable likelihood of service requests. On July 9, 2012, the City of Seward submitted comments in support of resolving the boundary area overlap between Chugach and Seward. Seward did not oppose the service area changes proposed by Chugach. A hearing was held on September 4, 2012, in which Chugach made a presentation on the proposed modifications to its service territory and responded to questions from the RCA, who is expected to issue a ruling on Chugach’s request by the end of November 2012.

Petition to Establish Depreciation Rates for the SPP

Chugach submitted proposed depreciation rates for the SPP on February 22, 2012, with a recommended 35 year life for the project. The filing also included depreciation rates for transmission plant specific to the project with a recommended life consistent with the depreciation rates of Chugach’s existing transmission assets. The RCA opened Docket U-12-009 on March 2, 2012, to adjudicate the case. Petitions to intervene were received from the Attorney General (AG), HEA and MEA. No responsive testimony was received from any of the parties. A hearing was held on July 2, 2012. On August 31, 2012, the RCA issued an order in the case, accepting depreciation rates for the SPP with an effective date equal to its in-service date, requested filing requirements and closed the docket.

 

9


Table of Contents

Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

Seward Power Sales Agreement

Effective March 1, 2012, the RCA approved Amendment No. 2 to the 2006 Agreement for the Sale and Purchase of Electric Power and Energy between Chugach and the City of Seward (2006 Agreement). Amendment No. 2 allows Seward to accept power from Small Power Projects on terms that are financially neutral to both Chugach and Seward for wholesale power service provided to Seward, without changing Seward’s status under the 2006 Agreement as a partially interruptible requirements customer of Chugach. In addition, Amendment No. 2 facilitates Seward offering net metering service from eligible on-site generation sources to its retail customers without attendant compensation to Chugach. Chugach and Seward have structured the net metering conditions to be consistent with the net metering regulations adopted by the RCA.

Fire Island Wind Project

On October 10, 2011, the RCA issued an order approving Chugach’s request for assurance of cost recovery associated with a new power purchase agreement (PPA) between Chugach and Fire Island Wind, LLC (FIW), a special purpose entity wholly-owned by Cook Inlet Region, Inc. The PPA is a 25-year agreement whereby Chugach purchases the output of the facility commencing January 1, 2013. The Fire Island Wind project is comprised of eleven 1.6- megawatt wind turbine generators with a total nameplate capacity of 17.6 megawatts which are expected to generate approximately 50,000 megawatt hours (MWh) per year. The generators will be located on the southern part of Fire Island, three miles west of Anchorage, Alaska. Chugach began receiving power from the project on August 17, 2012. An affiliate of FIW is responsible for the construction of the interconnection between the project and Chugach’s transmission system. Chugach is the recipient of a grant in the amount of approximately $25.0 million appropriated from the State of Alaska. The grant will be used to offset construction of the transmission line. Construction expenditures applied against the grant were $19.2 million in the first nine months of 2012 and $23.2 million for the total project to date. Chugach is not expected to incur any unreimbursed capital costs associated with this line and will acquire the line once construction is successfully completed.

Chugach submitted a specific rate recovery plan in compliance with U-11-100(5) on April 2, 2012, and project status reports on June 30, 2012 and October 31, 2012. The rate recovery plan addressed customer intergenerational impacts resulting from purchases made under the PPA’s fixed pricing structure. The RCA held a hearing on June 5, 2012, for Chugach to supplement its filing with an oral presentation explaining the rate impacts and equities to ratepayers. As a result of the hearing, Chugach submitted an updated rate recovery proposal on July 31, 2012, requesting that purchases made under the PPA be recovered on a direct cost basis for recovery through the fuel and purchased power surcharge process. Chugach withdrew its April 2, 2012, compliance filing.

On September 28, 2012, the RCA opened a new docket and issued an order granting Chugach interim approval of its cost disclosure and rate recovery proposals relating to the Fire Island wind project. Final approval of the rate recovery proposal, including the proposed billing method and cost disclosure language is expected by April 27, 2013.

 

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Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

Regulatory Assets

Storm Expenditures

On November 8, 2012, Chugach submitted a petition to the RCA requesting authorization to create a regulatory asset for deferred recovery of expenditures associated with extensive storm damage that occurred in September of 2012. Repeated windstorms were followed by considerable amounts of rain, resulting in outages and flooding, primarily caused by falling and uprooted trees. Chugach requested approval to recover the costs in future electric rates over a twelve month period. The deferral of storm related costs is expected to total $1.8 million.

Interest and Financing Costs

On January 11, 2012, Chugach issued $75.0 million of First Mortgage Bonds (2012 Series A, Tranche A) at an interest rate of 4.01 percent, $125.0 million of First Mortgage Bonds (2012 Series A, Tranche B) at an interest rate of 4.41 percent and $50.0 million of First Mortgage Bonds (2012 Series A, Tranche C) at an interest rate of 4.78 percent. The proceeds of the 2012 Series A Bonds were used to repay outstanding commercial paper and to finance the SPP construction.

On March 12, 2012, Chugach submitted a petition to the RCA requesting authorization to create a regulatory asset for deferred recovery of interim interest expense associated with the SPP financing and also requested approval to recover the financing transaction costs in future electric rates over the life of the 2012 Series A Bonds. Chugach’s request included the approval to defer the interest expense on the portion of the proceeds not immediately expended on the SPP and recover it in future electric rates over the life of the bonds, or between 20 and 30 years. Chugach estimates the remaining balance of proceeds will be completely expended on the project by November of 2012. The deferral of interest for the portion of the 2012 bonds not immediately expended totaled approximately $1.1 million.

The RCA opened Docket U-12-015 on March 21, 2012. On May 22, 2012, Chugach and the AG of the State of Alaska submitted a stipulation whereby the AG did not oppose the regulatory and accounting treatment requested by Chugach. On June 19, 2012, the RCA issued Order No. 2 accepting the stipulation and closing the docket.

2012 General Rate Case

In anticipation of filing the 2012 general rate case in the fourth quarter of 2012, on July 25, 2012, the Chugach Board of Directors approved the temporary suspension of Chugach’s participation in the Simplified Rate Filing (SRF) process pending the final resolution of the 2012 general rate case. Due to an updated SPP schedule, Chugach withdrew its filing for temporary suspension of its participation in the SRF process and filed its scheduled SRF for the test year ended June 30, 2012. Chugach is expected to file its 2012 general rate case near the expected commercial operation date of the SPP.

 

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Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

June 30, 2012 Test Year Simplified Rate Filing

On September 28, 2012, Chugach submitted a SRF to the RCA and requested a system demand and energy rate decrease of 1.7 percent, or approximately $1.9 million on an annual basis. The filing was based on the June 30, 2012 test year for proposed rate adjustments effective in November 2012. On a customer class basis, Chugach requested demand and energy rate decreases of 1.7 percent to Chugach retail customers and decreases of 2.1 and 1.9 percent to its wholesale customers HEA and MEA, respectively, and a 1.6 percent increase to Seward. The RCA is expected to issue an order by mid November 2012.

December 31, 2011 Test Year Simplified Rate Filing

On March 30, 2012, Chugach submitted a SRF to the RCA and requested a system demand and energy rate decrease of 0.1 percent, or approximately $0.8 million on an annual basis. The filing was based on the December 31, 2011 test year for proposed rate adjustments effective in May 2012. On a customer class basis, Chugach requested demand and energy rate increases of 1.3 percent to Chugach retail customers and decreases of 2.9 percent to its wholesale classes. The RCA issued a letter order on May 10, 2012, approving the filing. The updated rates were effective on and after May 14, 2012.

Economy Energy Sales and Transmission Wheeling Service

On April 23, 2012, Chugach submitted a filing to the RCA requesting approval to update its economy energy and transmission wheeling services tariffs to reflect current costs and operating conditions associated with transactions at the bulk power supply level. After public comments and meetings Chugach withdrew the filing and will file updated rates for transmission and related ancillary services in conjunction with its 2012 general rate case.

 

5. DEBT

Lines of Credit

Chugach maintains a $50 million line of credit with National Rural Utilities Cooperative Finance Corporation (NRUCFC). Chugach did not utilize this line of credit in the first nine months of 2012, and therefore had no outstanding balance at September 30, 2012. In addition, Chugach did not utilize this line of credit during 2011 and had no outstanding balance at December 31, 2011. The borrowing rate is calculated using the total rate per annum and may be fixed by NRUCFC. At September 30, 2012, and December 31, 2011, the borrowing rate was 3.20%.

The NRUCFC Revolving Line Of Credit Agreement requires that Chugach, for each 12-month period, for a period of at least five consecutive days, pay down the entire outstanding principal balance.

 

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Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

On September 26, 2012, the Board of Directors approved a resolution to renew this line of credit under substantially the same terms as the previous agreement. The NRUCFC line of credit now expires October 12, 2017.

This line of credit is immediately available for unconditional borrowing.

Commercial Paper

On November 17, 2010, Chugach entered into a $300.0 million Unsecured Credit Agreement intended to back the commercial paper program. The participating banks were NRUCFC, Bank of America, N.A., KeyBank National Association, JPMorgan Chase Bank, N.A., Bank of Montreal, CoBank, ACB, Goldman Sachs Bank USA, Bank of Taiwan, Los Angeles Branch and Chang Hwa Commercial Bank, Ltd., Los Angeles Branch. Effective May 4, 2012, Chugach reduced the commitment amount to $100.0 million and on June 29, 2012, amended and extended the Credit Agreement. Amendment No. 1 to the Credit Agreement updated the pricing and extended the term. The new pricing includes an all-in drawn spread of one month London Interbank Offered Rate (LIBOR) plus 107.5 basis points, along with a 17.5 basis points facility fee (based on an A-/A3 unsecured debt rating). The Amended and Extended Credit Agreement now expires on November 17, 2016. The participating banks include NRUCFC, KeyBank National Association, Bank of America, N.A., Bank of Montreal, CoBank, ACB and Chang Hwa Commercial Bank, Ltd., Los Angeles Branch. Chugach is expected to continue to issue commercial paper in 2012, as needed, however, the requirement for short-term borrowing has decreased. At September 30, 2012, Chugach had $7.5 million of commercial paper outstanding. At December 31, 2011, Chugach had $175.0 million of commercial paper outstanding. Our commercial paper can be repriced between one day and two hundred seventy days.

The following table provides information regarding average commercial paper balances outstanding for the quarter ended September 30 (dollars in millions), as well as corresponding weighted average interest rates:

 

2012   2011

Average Balance

   Weighted Average
Interest Rate
  Average Balance    Weighted Average
Interest Rate
$1.4    0.34%   $139.9    0.28%

Chugach has a term loan facility with CoBank. Loans made under that facility are evidenced by promissory notes governed by the Amended and Restated Master Loan Agreement dated January 19, 2011 and secured by the Second Amended and Restated Indenture. At September 30, 2012, Chugach had $31.8 million outstanding with CoBank.

 

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Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

6. RECENT ACCOUNTING PRONOUNCEMENTS

ASC Update 2012-04 “Technical Amendments and Improvements”

In October 2012, the FASB issued ASC Update 2012-04, “Technical Amendments and Improvements.” ASC Update 2012-04 amends a wide range of Topics in the FASB Codification, however the main provisions were to correct source literature guidance, provide clarity by updating and correcting wording and references, relocating guidance to a more appropriate location within the Codification, and conform terminology and clarify guidance to fully reflect the fair value measurement and disclosure requirements of Topic 820. This update is effective for the first interim or annual reporting period beginning after December 15, 2012. Chugach will begin application of ASC 2012-04 on January 1, 2013. Adoption is not expected to have any incremental effect on results of operations, financial position, and cash flows.

ASC Update 2012-03 “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)”

In August 2012, the FASB issued ASC Update 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs to SEC Staff Accounting Bulletin No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update).” ASC Update 2012-03 amends various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin (SAB) No. 114, which revised or removed portions of the interpretive guidance included in the FASB Codification of the SAB Series to ensure consistency of referencing throughout the SAB Series. This update is effective upon issuance. Chugach began application of ASC 2012-03 on its issuance date of August 27, 2012. Adoption did not have any incremental effect on results of operations, financial position, and cash flows.

ASC Update 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”

In May 2011, the FASB issued ASC Update 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” ASC Update 2011-04 amends current U.S. GAAP to create more commonality with IFRS by changing some of the wording used to describe requirements for measuring fair value and for disclosing information about fair value measurements. This update is effective for the first interim or annual reporting period beginning after December 15, 2011. Chugach began application of ASC 2011-04 on January 1, 2012. Adoption did not have any incremental effect on results of operations, financial position, and cash flows.

 

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Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

ASC Update 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”

In December 2011, the FASB issued ASC Update 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” ASC Update 2011-12 defers the effective date of the requirements to present separate line items on the income statement for reclassification adjustments of items out of accumulated other comprehensive income into net income for all periods presented. This update does not change the other requirements of ASC Update 2011-05. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Chugach began application of ASC 2011-12 in the period ended March 31, 2012. Chugach does not have any items included in other comprehensive income. Therefore, assignable margins and comprehensive income are the same amount and the adoption did not have any effect on results of operations, financial position, and cash flows.

 

7. FAIR VALUES OF ASSETS AND LIABILITIES

Fair Value Hierarchy

In accordance with ASC 820, “Topic 820 – Fair Value Measurement,” Chugach groups its financial assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 – Valuation is based upon quoted prices for identical instruments traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury and federal agency securities, which are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect Chugach’s estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

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Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

The table below presents the balance of Chugach’s overnight repurchase agreement, money market and restricted cash equivalent assets measured at fair value on a recurring basis at September 30, 2012, and December 31, 2011.

 

      Total      Level 1      Level 2      Level 3  

September 30, 2012

           

Repurchase agreement

   $ 100       $ 0       $ 100       $ 0   

Marketable securities

   $ 10,050,601       $ 10,050,601       $ 0       $ 0   

Money market

   $ 27,323,954       $ 27,323,954       $ 0       $ 0   

Restricted cash equivalents

   $ 1,953,085       $ 1,953,085       $ 0       $ 0   

December 31, 2011

           

Repurchase agreement

   $ 100       $ 0       $ 100       $ 0   

Money markets

   $ 10,000,000       $ 10,000,000       $ 0       $ 0   

Restricted cash equivalents

   $ 122,006,738       $ 122,006,738       $ 0       $ 0   

Chugach had no Level 3 assets or liabilities measured at fair value on a recurring basis. Fair value estimates are dependent upon subjective assumptions and involve significant uncertainties resulting in variability in estimates with changes in assumptions. The fair value of long-term debt has been determined using discounted future cash flows at borrowing rates currently available to Chugach. The fair value of cash, accounts receivable and payable, and other short-term monetary assets and liabilities approximate carrying value due to their short-term nature.

Fair Value of Financial Instruments

The estimated fair values (in thousands) of the long-term obligations included in the financial statements at September 30, 2012, are as follows:

 

     Carrying Value      Fair Value  

Long-term obligations (including current installments)

   $ 546,090       $ 579,726   

Level 1 measurement was used to determine the fair value of the 2011 and 2012 Series A Bonds. Level 2 measurements were used to determine all other long-term obligations.

 

8. ENVIRONMENTAL MATTERS

The Clean Air Act and Environmental Protection Agency (EPA) regulations under the Clean Air Act establish ambient air quality standards and limit the emission of many air pollutants. Some Clean Air Act programs that regulate electric utilities, notably the Title IV “acid rain” requirements, do not apply to facilities located in Alaska. In 2008, the EPA vacated regulations to limit mercury emissions from fossil-fired, steam-electric generating facilities.

 

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Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

New Clean Air Act regulations impacting electric utilities may result from future events or new regulatory programs. On October 30, 2009, the EPA published new federal regulations requiring the mandatory reporting of greenhouse gases from all sectors of the economy. Chugach is subject to this new regulation, which is not expected to have a material effect on our results of operations, financial position, and cash flows. While we cannot predict whether any additional new regulation would occur or its limitation, it is possible that new laws or regulations could increase our capital and operating costs. We have obtained or applied for all Clean Air Act permits currently required for the operation of our generating facilities.

The SPP is required by its Air Quality Permit to collect ambient air background data. Data collection began on September 1, 2011 and continued through August 31, 2012. Alaska Department of Environmental Conservation (ADEC) is currently validating the collected data in accordance with provisions of the Air Quality Permit for the SPP.

Chugach is subject to numerous other environmental statutes including the Clean Water Act, the Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Endangered Species Act, and the Comprehensive Environmental Response, Compensation and Liability Act and to the regulations implementing these statutes. We do not believe that compliance with these statutes and regulations to date has had a material impact on our financial condition or results of operation. However, new laws or regulations, implementation of final regulations or changes in or new interpretations of these laws or regulations could result in significant additional capital or operating expenses.

 

9. COMMITMENTS AND CONTINGENCIES

Generation Commitments

Chugach is in the process of developing a natural gas-fired generation plant on land owned by Chugach near its Anchorage headquarters. The SPP will be developed and owned by Chugach and ML&P as tenants in common. Chugach will own and take approximately 70 percent of the new plant’s output and ML&P will own and take the remaining output. Chugach will proportionately account for its ownership in the SPP.

 

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Chugach Electric Association, Inc.

Notes to Financial Statements

September 30, 2012 and 2011

 

Chugach executed a gas turbine purchase agreement for the purchase of three gas turbines and a spare engine for maintenance purposes with GE Packaged Power, Inc. (GEPP). Chugach has also executed an owner’s engineer services contract, a services contract for the shipment of the combustion turbine generators and related accessories, a steam turbine generator (STG) purchase agreement, an engineering, procurement, and construction (EPC) contract, a once through steam generator (OTSG) equipment and transportation contract and amended the contract for transportation of combustion turbine generators to include transportation of the steam turbine generator. All equipment, including the spare engine, has been received. Chugach received an air quality permit from the Alaska Department of Environmental Conservation in 2010, allowing the project to begin construction in the spring of 2011 as planned. On March 15, 2011, the initial building permit was received from the Municipality of Anchorage. Chugach made payments of $52.1 million in the first nine months of 2012, with additional payments of $50.3 million expected in 2012 pursuant to its contracts associated with the SPP.

Fuel Supply Contracts

Chugach has fuel supply contracts with producers at market terms. The gas supply contract between Chugach and ConocoPhillips Alaska, Inc. and ConocoPhillips, Inc. (collectively “COP”), provided gas beginning in 2010 and will terminate December 31, 2016. The total amount of gas under the contract is currently estimated to be 60 billion cubic feet (BCF). The gas supply contract with Marathon Alaska Production, LLC (MAP) provided gas beginning April 1, 2011, and will terminate December 31, 2014. Both contract extension options have been exercised. The total amount of gas under contract with MAP is currently estimated at 40 BCF. These contracts fill 100 percent of Chugach’s needs through December 2014, approximately 70 percent of Chugach’s needs through 2015 and approximately 40 percent in 2016.

Legal Proceedings

Chugach has certain litigation matters and pending claims that arise in the ordinary course of Chugach’s business. In the opinion of management, no individual matter or matters in the aggregate is or are likely to have a material adverse effect on Chugach’s results of operations, financial condition or liquidity.

Economy Energy Sales

On October 5, 2012, Chugach and GVEA finalized arrangements for Chugach to provide economy energy to GVEA between November 2012 and March 2015. Sales will be made under the terms and conditions of Chugach’s economy energy sales tariff. The price to GVEA will include the cost of fuel, variable operations and maintenance expense and a margin. Chugach has also entered into gas supply arrangements for GVEA economy energy sales.

 

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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.

RESULTS OF OPERATIONS

Current Year Quarter versus Prior Year Quarter

Assignable margins decreased $0.6 million, or 566.1%, during the third quarter of 2012 compared to the same quarter in 2011, due primarily to a decrease in revenue caused by lower economy energy sales during the third quarter of 2012 compared to the same quarter in 2011.

Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, decreased $6.1 million, or 8.9%, in the third quarter of 2012 compared to the same quarter in 2011. This decrease was due primarily to lower fuel expense recovered through the fuel and purchased power adjustment process and lower economy energy kilowatt hour (kWh) sales.

Overall, retail and wholesale revenue decreased in the third quarter of 2012 compared to the same quarter in 2011. Retail and wholesale base revenue did not materially change in the third quarter of 2012 compared to the same period in 2011. A decrease in fuel expense caused primarily by less thousand cubic feet (MCF) used and a lower average effective price, which is recovered in revenue through the fuel and purchased power adjustment process, was the primary cause of the overall decrease in retail and wholesale revenue in the third quarter of 2012 compared to the same quarter in 2011.

Economy energy revenue decreased in the third quarter of 2012 compared to the same period in 2011 due to less gas available under Chugach’s interruptible gas contract to make economy sales.

Based on the results of fixed and variable cost recovery established in Chugach’s last rate case, wholesale sales to HEA, MEA and Seward contributed approximately $6.5 million to Chugach’s fixed costs for the quarter ended September 30, 2012, and $6.3 million for the quarter ended September 30, 2011.

 

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The following table shows the base rate sales revenue and fuel and purchased power revenue by customer class that is included in revenue for the quarters ended September 30, 2012 and 2011:

 

     Base Rate Sales Revenue     Fuel and Purchased Power Revenue     Total Revenue  
     2012      2011      % Variance     2012      2011      % Variance     2012      2011      % Variance  
Retail                         

Residential

   $ 9.9       $ 9.9         0.0   $ 7.0       $ 7.6         (7.9 %)    $ 16.9       $ 17.5         (3.4 %) 

Small Commercial

   $ 1.8       $ 1.7         5.9   $ 1.6       $ 1.7         (5.9 %)    $ 3.4       $ 3.4         0.0

Large Commercial

   $ 6.9       $ 6.9         0.0   $ 7.6       $ 8.2         (7.3 %)    $ 14.5       $ 15.1         (4.0 %) 

Lighting

   $ 0.2       $ 0.3         (33.3 %)    $ 0.1       $ 0.1         0.0   $ 0.3       $ 0.4         (25.0 %) 

Total Retail

   $ 18.8       $ 18.8         0.0   $ 16.3       $ 17.6         (7.4 %)    $ 35.1       $ 36.4         (3.6 %) 
Wholesale                         

HEA

   $ 3.1       $ 3.1         0.0   $ 6.9       $ 6.9         (0.0 %)    $ 10.0       $ 10.0         0.0

MEA

   $ 4.9       $ 4.7         4.3   $ 9.8       $ 10.3         (4.9 %)    $ 14.7       $ 15.0         (2.0 %) 

SES

   $ 0.3       $ 0.4         (25.0 %)    $ 0.9       $ 1.0         (10.0 %)    $ 1.2       $ 1.4         (14.3 %) 

Total Wholesale

   $ 8.3       $ 8.2         1.2   $ 17.6       $ 18.2         (3.3 %)    $ 25.9       $ 26.4         (1.9 %) 

Economy Sales

   $ 0.1       $ 0.4         (75.0 %)    $ 0.8       $ 5.0         (84.0 %)    $ 0.9       $ 5.4         (83.3 %) 

Miscellaneous

   $ 0.5       $ 0.5         0.0   $ 0.3       $ 0.1         200.0   $ 0.8       $ 0.6         33.3

Total Revenue

   $ 27.7       $ 27.9         (0.7 %)    $ 35.0       $ 40.9         (14.4 %)    $ 62.7       $ 68.8         (8.9 %) 

The following table summarizes kWh sales for the quarters ended September 30:

 

Customer

   2012
kWh
     2011
kWh
 

Retail

     265,598,972         265,025,549   

Wholesale

     310,216,577         297,510,320   

Economy Energy

     7,602,000         61,375,000   
  

 

 

    

 

 

 

Total

     583,417,549         623,910,869   
  

 

 

    

 

 

 

Base rates charged to retail and wholesale customers in the third quarter of 2012 include demand and energy base rate changes effective November 14, 2011, as a result of the SRF utilizing the twelve months ended June 30, 2011 and demand and energy base rate changes effective May 14, 2012, as a result of the SRF utilizing the twelve months ended December 31, 2011. Effectively, demand and energy base rates charged to retail customers decreased 0.9% and increased 0.3% to wholesale customer HEA, and decreased 2.3% and 5.6% to wholesale customers MEA and Seward, respectively, in the third quarter of 2012 compared to the same period in 2011.

Total operating expenses decreased $5.3 million, or 8.1%, in the third quarter of 2012 over the same quarter in 2011.

 

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Fuel expense decreased $4.8 million, or 13.6%, in the third quarter of 2012 compared to the same quarter in 2011. The decrease was due primarily to a decrease in fuel price and MCF used, which was primarily associated with the decrease in economy sales. In the third quarter of 2012, Chugach used 6,583,658 MCF of fuel at an average effective price of $4.98 per MCF, which included 914,789 MCF of fuel that was recorded as purchased power expense. In the third quarter of 2011, Chugach used 6,960,832 MCF of fuel at an average effective price of $5.69 per MCF, which included 765,743 MCF of fuel that was recorded as purchased power.

Production expense did not materially change in the third quarter of 2012 compared to the same quarter in 2011.

Purchased power expense, which included the cost of 914,789 MCF of fuel associated with purchases from the Nikiski Cogeneration plant (Nikiski), decreased $0.4 million, or 7.0%, in the third quarter of 2012 compared to the same quarter in 2011, due primarily to a lower average effective price, largely associated with the price of fuel. In the third quarter of 2012, Chugach purchased 121,297 MWh of energy at an average effective price of 4.18 cents per kWh. In the third quarter of 2011, Chugach purchased 96,603 MWh of energy at an average effective price of 5.71 cents per kWh.

Transmission expense did not materially change in the third quarter of 2012 compared to the same quarter in 2011.

Distribution expense did not materially change in the third quarter of 2012 compared to the same quarter in 2011.

Consumer accounts increased $0.3 million, or 20.6%, due primarily to higher labor and allocated costs associated with a new customer information and billing system in the third quarter of 2012 compared to the same quarter in 2011.

Administrative, general and other expense decreased $0.3 million, or 5.6%, due primarily to lower legal expense in the third quarter of 2012 compared to the same quarter in 2011.

Depreciation and amortization expense did not materially change in the third quarter of 2012 compared to the same quarter in 2011.

Interest on long-term and other debt increased $2.0 million, or 48.2%, in the third quarter of 2012 compared to the same quarter in 2011. The increase was due to the interest associated with the 2012 bonds issued in January of 2012, which replaced less expensive commercial paper. The increase was somewhat offset by the rate difference between the 2002 Series A Bonds that matured on February 1, 2012, and the 2011 Series A Bonds. A lower debt balance as a result of principal payments on our CoBank debt also contributed to offsetting the increase.

 

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Interest charged to construction increased $2.0 million, or 389.4%, in the third quarter of 2012 compared to the same quarter in 2011 due primarily to an increase in the average Construction Work in Progress (CWIP) balance that is debt financed, due primarily to expenditures associated with the SPP and an increase in the rate as the funding for the SPP transitioned from commercial paper to fixed rate debt in January of 2012.

Non-operating margins did not materially change in the third quarter of 2012 compared to the same quarter in 2011.

Current Year to Date versus Prior Year to Date

Assignable margins did not materially change in the first nine months of 2012 compared to the same period in 2011.

Operating revenues, which include sales of electric energy to retail, wholesale and economy energy customers and other miscellaneous revenues, decreased $14.3 million, or 6.9%, in the first nine months of 2012 compared to the same period in 2011. This decrease was due primarily to lower fuel and purchased power expense recovered through the fuel and purchased power adjustment process and lower economy energy sales, which was somewhat offset by higher firm kWh sales.

Overall, retail revenue decreased in the first nine months of 2012 compared to the same period in 2011. An increase in retail base revenue due to higher retail kWh sales was somewhat offset by a decrease in rates charged to retail customers. A decrease in fuel expense associated with retail sales and a decrease in purchased power expense, both of which are recovered through the fuel and purchased power adjustment process contributed to the overall decrease in retail revenue in the first nine months of 2012 compared to the same period in 2011.

Wholesale revenue decreased in the first nine months of 2012 compared to the same period in 2011. An increase in wholesale base revenue due to higher kWh sales was more than offset by a decrease in fuel and purchased power expense, both of which are recovered through the fuel and purchased power adjustment process. Economy energy revenue decreased during the first nine months of 2012 compared to the same period in 2011 due to less gas available under Chugach’s interruptible gas contract to make economy sales.

Based on the results of fixed and variable cost recovery established in Chugach’s last rate case, wholesale sales to HEA, MEA and Seward contributed approximately $20.2 million to Chugach’s fixed costs for the nine months ended September 30, 2012, and approximately $20.0 million for the nine months ended September 30, 2011, respectively.

 

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The following table shows the base rate sales revenue and fuel and purchased power revenue by customer class that is included in revenue for the nine months ended September 30, 2012 and 2011:

 

     Base Rate Sales Revenue     Fuel and Purchased Power Revenue     Total Revenue  
     2012      2011      % Variance     2012      2011      % Variance     2012      2011      % Variance  
Retail                         

Residential

   $ 32.6       $ 32.6         0.0   $ 22.7       $ 22.8         (0.4 %)    $ 55.3       $ 55.4         (0.2 %) 

Small Commercial

   $ 5.6       $ 5.5         1.8   $ 5.0       $ 5.0         0.0   $ 10.6       $ 10.5         1.0

Large Commercial

   $ 20.5       $ 20.4         0.5   $ 21.6       $ 22.2         (2.7 %)    $ 42.1       $ 42.6         (1.2 %) 

Lighting

   $ 0.9       $ 1.0         (10.0 %)    $ 0.2       $ 0.2         0.0   $ 1.1       $ 1.2         (8.3 %) 

Total Retail

   $ 59.6       $ 59.5         0.2   $ 49.5       $ 50.2         (1.4 %)    $ 109.1       $ 109.7         (0.5 %) 
Wholesale                         

HEA

   $ 9.4       $ 9.1         3.3   $ 19.4       $ 19.5         (0.5 %)    $ 28.8       $ 28.6         0.7

MEA

   $ 15.7       $ 15.6         0.6   $ 30.5       $ 30.4         0.3   $ 46.2       $ 46.0         0.4

SES

   $ 1.0       $ 1.0         0.0   $ 2.7       $ 2.7         0.0   $ 3.7       $ 3.7         0.0

Total Wholesale

   $ 26.1       $ 25.7         1.6   $ 52.6       $ 52.6         0.0   $ 78.7       $ 78.3         0.5

Economy Sales

   $ 0.2       $ 1.3         (84.6 %)    $ 2.2       $ 15.5         (85.8 %)    $ 2.4       $ 16.8         (85.7 %) 

Miscellaneous

   $ 1.3       $ 1.5         (13.3 %)    $ 1.0       $ 0.5         100.0   $ 2.3       $ 2.0         15.0

Total Revenue

   $ 87.2       $ 88.0         (0.9 %)    $ 105.3       $ 118.8         (11.4 %)    $ 192.5       $ 206.8         (6.9 %) 

The following table summarizes kWh sales for the nine months ended September 30:

 

Customer

   2012
kWh
     2011
kWh
 

Retail

     854,675,881         846,958,217   

Wholesale

     961,685,660         943,363,908   

Economy Energy

     26,250,000         194,743,000   
  

 

 

    

 

 

 

Total

     1,842,611,541         1,985,065,125   
  

 

 

    

 

 

 

Base rates charged to retail and wholesale customers in the first nine months of 2012 include demand and energy base rate changes effective November 14, 2011, as a result of the SRF utilizing the twelve months ended June 30, 2011, and demand and energy base rate changes effective May 14, 2012, as a result of the SRF utilizing the twelve months ended December 31, 2011. Effectively, demand and energy base rates charged to retail customers decreased 0.8 percent, increased 3.2 percent to wholesale customer HEA and decreased 0.6 and 3.1 percent to wholesale customers MEA and Seward, respectively, in the first nine months of 2012 compared to the same period in 2011.

Total operating expenses decreased $12.3 million, or 6.4%, in the first nine months of 2012 over the same period in 2011.

 

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Fuel expense decreased $11.4 million, or 11.3%, in the first nine months of 2012 compared to the same period in 2011. The decrease was due primarily to a decrease in fuel price and MCF used, which was primarily associated with the decrease in economy sales. In the first nine months of 2012, Chugach used 19,961,118 MCF of fuel at an average effective price of $5.03 per MCF, which included 2,683,168 MCF of fuel that was recorded as purchased power expense. In the first nine months of 2011, Chugach used 21,643,405 MCF of fuel at an average effective price of $5.31 per MCF, which included 2,584,630 MCF of fuel that was recorded as purchased power.

Production expense did not materially change in the first nine months of 2012 compared to the same period in 2011.

Purchased power expense, which included the cost of 2,683,168 MCF of fuel associated with purchases from Nikiski, decreased $2.0 million, or 10.8%, in the first nine months of 2012 compared to the same period in 2011. The decrease was due primarily to a decrease in the average effective price, largely associated with the price of fuel. In the first nine months of 2012, Chugach purchased 375,049 MWh of energy at an average effective price of 4.12 cents per kWh. In the first nine months of 2011, Chugach purchased 322,513 MWh of energy at an average effective price of 5.43 cents per kWh.

Transmission expense decreased $0.9 million, or 16.8%, in the first nine months of 2012 compared to the same period in 2011. The decrease was due to the timing of transmission line clearing cycles and less substation maintenance in the first nine months of 2012 compared to the same period in 2011.

Distribution expense increased $1.4 million, or 15.0%, in the first nine months of 2012 compared to the same period in 2011. The increase was due primarily to higher costs associated with storm related line maintenance and right-of-way line clearing in the first nine months of 2012 compared to the same period in 2011.

Consumer accounts did not materially change in the first nine months of 2012 compared to the same period in 2011.

Administrative, general and other expense did not materially change in the first nine months of 2012 compared to the same period in 2011.

Depreciation and amortization expense did not materially change in the first nine months of 2012 compared to the same period in 2011.

Interest on long-term debt and other increased $3.8 million, or 27.2%, in the first nine months of 2012 compared to the same period in 2011. The increase was due to the interest associated with the 2012 bonds issued in January of 2012, which replaced less expensive commercial paper. The increase was somewhat offset by the rate difference between the 2001 and 2002 Series A Bonds that matured on March 15, 2011 and February 1, 2012, and the 2011 Series A Bonds. A lower debt balance as a result of principal payments on our CoBank debt also contributed to offsetting the increase.

 

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Interest charged to construction increased $5.6 million, or 392.6%, in the first nine months of 2012 compared to the same period in 2011 due primarily to an increase in the average CWIP balance that is debt financed, due primarily to expenditures associated with the SPP and an increase in the rate as the funding for the SPP transitioned from commercial paper to fixed rate debt in January of 2012.

Non-operating margins did not materially change in the first nine months of 2012 compared to the same period in 2011.

Financial Condition

Assets

Total assets decreased $35.4 million, or 4.1%, from December 31, 2011 to September 30, 2012. Restricted cash equivalents decreased $120.1 million, or 98.4%, caused by the release of funds held for the retirement of the 2002 Series A Bonds on February 1, 2012. Investments in associated organizations decreased $0.7 million, or 6.0%, caused by a CoBank equity retirement in March of 2012 and fuel cost under-recovery decreased $1.1 million, or 87.0%, due to the collection of the prior quarter’s fuel and purchased power costs. Accounts receivable decreased $4.6 million, or 10.9%, caused primarily by a decrease in the energy and fuel component of consumer’s invoices. Materials and supplies decreased $1.8 million, or 5.3%, caused primarily by the use of materials for scheduled projects.

The above decreases were offset to some degree by an increase in net utility plant, cash and cash equivalents, marketable securities, fuel stock, prepayments and deferred charges. Net utility plant increased $50.3 million, or 8.4%, due to extension and replacement of plant in excess of depreciation expense, primarily associated with SPP related expenditures. Cash and cash equivalents increased $17.9 million, or 104.8%, due to the net of excess funds received from the 2012 financing after retiring the balance of commercial paper outstanding and funding additional SPP related expenditures. Marketable securities increased $10.1 million, or 100%, caused by a bond and equity investment portfolio executed in September of 2012. Fuel stock increased $9.0 million, or 100% caused by injections into the CINGSA storage facility and prepayments increased $0.7 million, or 34.5%, caused primarily by the prepayment of health and welfare premiums for 2012. Deferred charges also increased $4.7 million, or 18.5%, due primarily to expenditures associated with financing activities, Beluga Unit 8 maintenance, expenditures associated with storm damage and a bi-directional fuel project which exceeded the amortization of other deferred charges.

 

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Liabilities and Equity

Total liabilities, equities and margins decreased $35.4 million, or 4.1%, from December 31, 2011 to September 30, 2012. Commercial paper decreased $167.5 million, or 95.7%, due to the proceeds from the 2012 financing which were used to pay the outstanding balance of commercial paper in January of 2012. Consumer deposits decreased $1.5 million, or 38.4%, due primarily to a decrease in prepaid customer accounts. Fuel payable decreased $1.0 million, or 4.1%, due primarily to the timing of fuel payments. Accrued interest decreased $5.8 million, or 84.6%, caused by the semi-annual interest payments on the 2011 and 2012 Series A Bonds.

The above decreases were offset to some extent by increases in total equities and margins, the net of total long-term obligations and current installments of long-term obligations, accounts payable, fuel cost over-recovery, salaries, wages and benefits and other and deferred liabilities. Total equities and margins increased $2.1 million, or 1.3%, due to the margins generated in the first nine months of 2012. The net of total long-term obligations and current installments of long-term obligations increased $116.6 million due to the issuance of the 2012 bonds in January of 2012, which was offset by the retirement of the 2002 Series A Bonds on February 1, 2012 and the principal payments on the 2011 bonds and CoBank debt. Accounts payable increased $9.2 million, or 40.4%, due primarily to the timing of cash payments, which were primarily impacted by SPP related expenditures. Fuel cost over-recovery increased $8.8 million, or 100%, caused by the over-recovery of the prior quarter’s fuel and purchased power costs. Salaries, wages and benefits increased $1.1 million, or 14.9%, caused by contract labor adjustments and an increase in benefits and other liabilities increased $1.2 million, or 37.0%, caused primarily by an increase in the municipal underground ordinance payable. Deferred liabilities increased $1.2 million, or 72.0%, due to an increase in customer advances for construction.

LIQUIDITY AND CAPITAL RESOURCES

Summary

We ended the first nine months of 2012 with $35.1 million of cash and cash equivalents, up from $17.1 million at December 31, 2011. The excess proceeds from the 2012 financing not immediately used to pay off the outstanding balance of commercial paper is being utilized specifically for funding the remaining expenditures associated with the SPP. We did not utilize the $50.0 million line of credit that we maintain with NRUCFC in the first nine months of 2012, therefore, this line of credit had no outstanding balance and our available borrowing capacity under this line was $50.0 million at September 30, 2012.

On September 26, 2012, Chugach renewed its $50 million line of credit with NRUCFC. The NRUCFC line of credit now expires October 12, 2017.

 

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Effective May 4, 2012, Chugach reduced its commercial paper commitment amount to $100.0 million and on June 29, 2012, amended and extended the Credit Agreement. The Amended and Extended Credit Agreement now expires on November 17, 2016. The participating banks include NRUCFC, KeyBank National Association, Bank of America, N.A., Bank of Montreal, CoBank, ACB and Chang Hwa Commercial Bank, Ltd., Los Angeles Branch. We issued commercial paper in the first nine months of 2012 and had $7.5 million outstanding at September 30, 2012, thus our available borrowing capacity under our Commercial Paper Program at September 30, 2012, was $92.5 million.

Cash equivalents consist of all highly liquid instruments with a maturity of three months or less upon acquisition and an overnight repurchase agreement with First National Bank Alaska (FNBA).

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the nine months ended September 30, 2012 and 2011.

 

     2012     2011  

Total cash provided by (used in):

    

Operating activities

   $ 29,928,828      $ 16,126,433   

Investing activities

     39,500,699        (200,789,077

Financing activities

     (51,492,870     183,293,797   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

   $ 17,936,657      $ (1,368,847
  

 

 

   

 

 

 

Operating Activities

Cash provided by operating activities was $29.9 million for the nine-month period ended September 30, 2012, compared with $16.1 million for the nine-month period ended September 30, 2011. Assignable margins did not materially change in the first nine months of 2012, compared to the first nine months of 2011. The accounts receivable change was due primarily to a change in the energy and fuel and purchased power component of consumer’s invoices and a change in invoiced amounts for economy sales, fuel and current SPP costs. The change in fuel cost under and over-recovery was due to the over-collection of fuel and purchased power costs recovered through the fuel and purchased power adjustment process, while the change in materials and supplies was due primarily to the change in inventory needed and used during the construction season. The change in fuel stock was due to the fuel injected into the CINGSA storage facility and the change in deferred charges was due primarily to the difference between the deferred interest associated with the 2011 and 2012 financing, Beluga Unit 8 maintenance, expenditures associated with storm damage and a bi-directional fuel project in 2012. The change in accounts payable was due primarily to the timing of cash payments for goods and services and the change in other assets was due primarily to a deposit associated with insurance. The change in fuel was due primarily to the timing of payments and the difference in price and quantity of fuel used in the first nine months of 2012 compared to the first nine months of 2011.

 

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Investing Activities

Cash provided by investing activities was $39.5 million for the nine-month period ended September 30, 2012, compared with $200.8 million used in the nine-month period ended September 30, 2011. The change in cash provided by investing activities was due primarily to the release of restricted funds associated with the 2011 financing to repay the 2002 Series A Bonds on February 1, 2012, the amount of construction expenditures, primarily associated with SPP related expenditures and the investment in marketable securities in September of 2012. Capital construction through September 30, 2012, was $71.1 million and is estimated at $103.6 million for the full year. Capital improvement expenditures, excluding the SPP, are expected to decrease during the fourth quarter as the construction season ends.

Financing Activities

Cash used in financing activities was $51.5 million for the nine-month period ended September 30, 2012, compared to $183.3 million provided for the nine-month period ended September 30, 2011. The change in cash provided by financing activities was due primarily to the difference in short-term needs, the repayment of short-term obligations with the proceeds from the 2012 financing, the use of restricted cash to repay the Series A Bonds in 2011 and 2012 and the difference in consumer advances for construction.

Sources of Liquidity

Chugach can satisfy its operational and capital cash requirements through internally generated funds, a $50.0 million line of credit from NRUCFC and a $100.0 million Commercial Paper Program. At September 30, 2012, there was no outstanding balance on our NRUCFC line of credit and $7.5 million of commercial paper outstanding. Thus, at September 30, 2012, our available borrowing capacity under our line of credit was $50.0 million and our available commercial paper capacity was $92.5 million.

Until May 4, 2012, Chugach’s Commercial Paper Program was backed by a $300.0 million Unsecured Credit Agreement, executed on November 17, 2010, between NRUCFC, Bank of America, N.A., KeyBank National Association, JPMorgan Chase Bank, N.A., Bank of Montreal, CoBank, ACB, Goldman Sachs Bank USA, Bank of Taiwan, Los Angeles Branch and Chang Hwa Commercial Bank, Ltd., Los Angeles Branch. Effective May 4, 2012, Chugach reduced the commitment amount to $100.0 million and on June 29, 2012, amended and extended the 2010 Credit Agreement. The current participating banks include NRUCFC, KeyBank National Association, Bank of America, N.A., Bank of Montreal, CoBank, ACB and Chang Hwa Commercial Bank, Ltd., Los Angeles Branch. Chugach is expected to continue to issue commercial paper in 2012, as needed; however, the requirement for short-term borrowing has decreased. The Amended and Extended Credit Agreement expires on November 17, 2016.

 

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Our commercial paper can be repriced between one day and two hundred seventy days. The average commercial paper balance for the quarter ended September 30, 2012, was $1.4 million with a corresponding weighted average interest rate of 0.34%. The maximum amount outstanding for the quarter ended September 30, 2012, was $7.5 million. The following table provides information regarding monthly average commercial paper balances outstanding (dollars in millions), as well as corresponding weighted average interest rates:

 

Month

   Average Balance    Weighted Average Interest Rate

January 2012

   $62.7    0.27%

February 2012

   $  0.0    0.00%

March 2012

   $  8.0    0.38%

April 2012

   $  6.3    0.36%

May 2012

   $  0.8    0.35%

June 2012

   $  0.0    0.00%

July 2012

   $  0.0    0.00%

August 2012

   $  0.0    0.00%

September 2012

   $  4.2    0.34%

On September 26, 2012, Chugach renewed its $50 million line of credit with NRUCFC. The NRUCFC line of credit now expires October 12, 2017.

Chugach has a term loan facility with CoBank. Loans made under that facility are evidenced by promissory notes governed by the Amended and Restated Master Loan Agreement dated January 19, 2011 and secured by the Second Amended and Restated Indenture.

At September 30, 2012, Chugach had the following note outstanding with this facility:

 

     Principal
Balance
     Interest Rate at
September 30, 2012
    Maturity
Dates
   Principal
Payment Dates

2011 CoBank Note

   $ 31,756,775         2.56   2013–2022    2013–2022

Under the Second Amended and Restated Indenture of Trust, additional obligations may be sold by Chugach upon the basis of bondable additions and the retirement or defeasance of or principal payments on previously outstanding obligations. Chugach’s ability to sell additional debt obligations will be dependent on the market’s perception of Chugach’s financial condition and Chugach’s continuing compliance with financial covenants contained in its debt agreements.

Chugach management continues to expect that cash flows from operations and external funding sources, including additional commercial paper borrowings, will be sufficient to cover operational, financing and capital funding requirements in 2012 and thereafter.

 

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CRITICAL ACCOUNTING POLICIES

Chugach’s accounting and reporting policies comply with U.S. generally accepted accounting principles (GAAP). The preparation of financial statements in conformity with GAAP requires that management apply accounting policies and make estimates and assumptions that effect 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 significant 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 GAAP. 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 Chugach’s Audit Committee. The following policies are considered to be critical accounting policies for the quarter ended September 30, 2012.

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 FASB ASC 980, “Topic 980 – Regulated Operations.” 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 future recovery through rates or the deferral of gains or creation of liabilities and the recording of related regulatory liabilities. The application of FASB ASC 980 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 Chugach; 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. Significant regulatory assets and liabilities have been recorded. Management reviews the ultimate recoverability or return of these regulatory assets and liabilities, respectively, 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.

 

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Unbilled revenue

Chugach calculates unbilled retail revenue at the end of each month to ensure the recognition of a calendar month’s revenue. Chugach estimates calendar-month unbilled sales based on billing cycle sales and read dates, weather and hours of darkness to produce an estimate of calendar sales. This estimate of calendar sales is calibrated to deliveries measured at Chugach distribution substations, net of losses. The calendar sales estimate is multiplied by respective billing class determinants to produce an estimate of calendar month revenue. Chugach accrued $6.6 and $7.0 million of unbilled retail revenue at September 30, 2012 and 2011, respectively.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Information required by this Item is contained in Note 6 to the “Notes to Financial Statements” within Part I of this Form 10-Q.

OUTLOOK

Completing the construction of a new, highly efficient power generation facility, managing natural gas contracts and securing replacement revenue sources for wholesale customer loads that will be leaving in 2014, all while controlling operating expenses to minimize future adverse customer rate impacts, are some of the major challenges Chugach has faced and will continue to face in the near and intermediate term. These issues, along with energy issues and plans at the state level, will shape how Chugach proceeds into the future.

Chugach has partnered with ML&P to construct and jointly own a new 183-megawatt (MW) natural gas fired power plant. Chugach will own and take approximately 70 percent of the new plant’s output and ML&P will own and take the remaining 30 percent. The plant is scheduled to be placed into service in the first quarter of 2013. Chugach’s financing for the project was primarily completed in January of 2012 with the issuance of the 2012 Series A Bonds. In 2010, the RCA concluded that Chugach may include in future rates $197 million in costs attributable to three principal contracts to build the SPP when the plant becomes used and useful. A request to establish and approve SPP depreciation rates was approved by the RCA in August of 2012. Chugach will request approval of the additional costs associated with the project in a general rate case which is expected to be filed near the expected commercial operation date of the SPP.

We maintain issuer ratings from Standard & Poor’s Rating Services (S&P) and Fitch Ratings (Fitch). Moody’s Investors Service (Moody’s) withdrew its rating when Chugach repaid the 2002 Series A Bonds on February 1, 2012. For strictly economic reasons, we chose not to seek a new rating from Moody’s on any of our current long-term secured debt. S&P and Moody’s continue to rate our commercial paper.

 

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We continue to actively manage our fuel supply needs. We currently have contracts in place to fill 100 percent of our needs through December 2014, approximately 70 percent of our needs through 2015 and approximately 40 percent in 2016. The State of Alaska Department of Natural Resources (DNR) completed a preliminary engineering and geological evaluation of the remaining Cook Inlet gas reserves in December of 2009. The study identified 863 BCF of proven, developed, producing reserves, additional probable reserves of 279 BCF and an additional increment of 353 BCF in high-confidence pay intervals. Combined, these 1.5 trillion cubic feet of gas reserves are similar to the 1.4 trillion cubic feet of gas reserves identified in a 2004 study undertaken by the Department of Energy. Given current demand and deliverability, DNR estimates a minimum 10-year supply of gas exists in currently producing leases. DNR does note that economic considerations will play a major role in whether producers continue undertaking additional drilling and development activities to meet demand. An updated June 2011 DNR report titled “Cook Inlet Natural Gas Production Cost Study” further quantified the economic considerations and came to two key conclusions:

 

  1) Based on currently available information, the assumptions made in this study, and absent any exploration success, the Cook Inlet basin is capable given sufficient continued investments of supplying the regional natural gas needs until 2018-2020 at a price below that of currently contemplated alternatives. However, failure to make appropriate investments in lockstep with demand requirements will necessitate alternative sources of natural gas to be made available sooner. Therefore, transition to alternative sources of natural gas may begin to occur before the 2018-2020 time-frame as part of a comprehensive supply and risk management plan.

 

  2) Natural gas storage will play an increasingly important role in optimizing and managing deliverability and economics of the natural gas supply for south-central Alaska. Just-in-time production reduces the amount of time between investment and return, and improves the economics of supplying natural gas. If gas purchases can be made in summer in advance of peak winter needs, storage allows these dynamics to be managed effectively by allowing production in summer to exceed the demand and storing the excess production until it is needed in winter.

Chugach has been working closely with the State of Alaska and producers to develop a comprehensive Cook Inlet management plan that will meet this goal. Chugach continues to explore its options for future fuel supply needs by working with developers on commercial terms for future gas supply and the state of Alaska on energy policies to promote gas development in Cook Inlet and other in-state gas options such as a Spur Line off a larger line from the North Slope or a Bullet Line to Southcentral Alaska.

 

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The 2010 Alaska Legislature passed legislation that provides incentives to natural gas producers to enhance Cook Inlet oil and gas production. There are currently two independent producers mobilizing or using jack-up drill rigs in Cook Inlet to take advantage of those incentives. Other producers have recently drilled conventional wells. Although it is too early to tell if the incentives will pay off, independent producers do seem to be taking steps to enter the market. 2011 Cook Inlet petroleum lease sales were up and several gas producers new to Cook Inlet have plans to drill in 2012 and 2013. The State of Alaska recently took in approximately $6.9 million in bids at its area-wide Cook Inlet oil and gas lease sale, the second-highest dollar volume for a Cook Inlet sale since area-wide sales began in 1999. The three major bidders were all large current leaseholders and much of the bidding appeared to be filling in around existing leasehold positions. Hilcorp purchased Chevron’s subsidiary Union Oil Company of California January 1, 2012, and announced April 9, 2012, the purchase of Marathon Alaska Production assets with an effective date of January 1, 2012, which is currently pending regulatory approval. According to a filing with the RCA, Hilcorp “is poised to begin making substantial investments in its newly acquired Cook Inlet assets over the next several years.”

Chugach, ML&P and ENSTAR, a Southcentral natural gas distribution company, retained a consulting firm to forecast Cook Inlet gas production. A report from the study was issued in October of 2012 that estimated if the current pace of drilling activity were to continue, along with no additional discoveries brought to production, a shortfall in Cook Inlet gas supply in 2015 could result.

Although Railbelt utilities have the ability to utilize existing oil-fired generation to meet a significant portion of the Railbelt load, Chugach is also evaluating the implementation of dual fuel at the SPP, gas importation and enhanced storage capabilities. Chugach believes these measures, along with existing incentives to natural gas producers, improves fuel security and supply in Southcentral Alaska.

In addition to following exploration and production activity in the Cook Inlet area, Chugach is also closely monitoring potential pipeline options from the North Slope.

ConocoPhillips Alaska purchased Marathon Oil’s 30% share of the Kenai Liquefied Natural Gas (LNG) plant effective September 26, 2011. ConocoPhillips and Marathon Oil had previously announced they would be ceasing exports from the LNG facility at Nikiski and putting it in “preservation mode,” leaving future options open. Operations were extended into November of 2011 and exports resumed in the summer of 2012, however, the plant’s future remains unclear.

CINGSA began service April 1, 2012. The facility will have an initial storage capacity of 11 BCF so that local utilities, including Chugach, will have gas available to meet deliverability requirements during peak periods. Chugach’s share of the initial capacity is 2.4 BCF in 2012, reducing to 2.3 BCF in 2013. Injections into the facility began in 2012 with limited withdrawals in the third quarter of 2012. Chugach is entitled to withdraw gas at a rate of up to 35 million cubic feet (MMcf) per day in 2012-2013. The RCA approved inception rates and a tariff for the CINGSA facility on January 31, 2011 and a Firm Storage Service (FSS) Agreement between the seller and Chugach in July of 2011.

 

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Notification was made by MEA in 2004 and by HEA in 2007 that neither organization intends to be on the Chugach system under the current contractual arrangements post 2014. This would result in a loss of approximately 50 percent of Chugach’s power sales load and approximately 40 percent of the utility’s annual sales revenue.

On April 13, 2010, HEA issued a press release stating that HEA’s solely owned power generation and transmission entity, Alaska Electric and Energy Cooperative, Inc. (AEEC), approved a design engineer to complete design for the Nikiski generation conversion project. AEEC currently owns a 40 MW natural gas-fired generation plant that is dispatched as part of Chugach’s overall system. The conversion project entails adding a steam turbine and increasing the output of the plant to 77 MW. HEA intends to purchase all of the output from this unit upon expiration of the Chugach contract in 2013. Effective December 31, 2011, Chugach sold the Bernice Lake Power Plant and associated transmission substation facilities to AEEC and HEA. Associated with the sale, Chugach also entered into a purchased power agreement that allows Chugach to purchase the capacity and related energy from the Bernice Lake Power Plant from the closing date of the sale of the facility through December 31, 2013. The agreement allowed Chugach to sell the Bernice Lake Power Plant and simultaneously ensures system retail and wholesale deliverability requirements continue to be met through December 31, 2013. All capacity purchased power costs will be recovered through our fuel and purchased power process.

Chugach proposed a power supply offer to MEA on January 11, 2011, and again on January 31, 2012. Chugach received a response on February 29, 2012, indicating that MEA was following the path its membership most favored and is moving forward with plans to build its own generation plant. On March 12, 2012, MEA issued a press release announcing an award for power house engineering and engine/generating equipment for their new power plant at Eklutna, Alaska, which is expected to provide 171 MW of base load generation for MEA beginning in 2015.

Chugach has been preparing for the loss of two of its wholesale customers for some time and has taken steps to reduce costs in order to mitigate the rate impact to our remaining customers. Our 10-year financial forecast results indicate Chugach can sustain operations and meet financial covenants when these two customers leave the system.

Chugach is also pursuing replacement sources of revenue through potential new power sales agreements and transmission wheeling and ancillary services tariff revisions. We believe that cost reduction and containment, successful implementation of new power sales agreements and revised tariffs will mitigate anticipated rate increases in the 2014 and 2015 timeframe. However, we cannot assure that we will be able to replace sources of revenue or that any replacement of revenue sources, revised tariffs or our cost reduction and containment measures will fully counteract any anticipated rate increases in this timeframe.

 

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In 2011, Chugach entered into a power purchase agreement with FIW, a special purpose entity wholly owned by Cook Inlet Region, Inc. The project is comprised of eleven 1.6-megawatt wind turbine generators with a total nameplate capacity of 17.6 megawatts. The generators are located on the southern part of Fire Island in Anchorage, Alaska. The transmission line will be paid for by a grant in the amount of approximately $25 million awarded by the State Legislature. Chugach began receiving power from the project on August 17, 2012. Purchased power costs will be recovered through our fuel and purchased power recovery process.

A State of Alaska Energy Policy approved by the legislature in 2010 included legislative intent that the state achieve a 15 percent increase in energy efficiency on a per capita basis between 2010 and 2020, receive 50 percent of its electric generation from renewable and alternative energy sources by 2025, work to ensure a reliable in-state gas supply for residents of the state, and that the state power project fund serve as the main source of state assistance for energy projects, remain a leader in petroleum and natural gas production and become a leader in renewable and alternative energy development. The main project moving Alaska toward its renewable energy goals is the Susitna-Watana Hydroelectric Project. The project is to be located on the Susitna River, approximately halfway between Anchorage and Fairbanks. The project capacity is expected to be 600 megawatts and would provide about half the electric energy needed in the Railbelt. The 2012 fiscal year State of Alaska capital budget contained $65.7 million for the Alaska Energy Authority (AEA) to conduct planning, design and permitting for this project and on December 29, 2011, AEA filed an application with FERC to begin the licensing process. On July 16, 2012, AEA submitted the proposed studies required to meet federal licensing requirements as part of the review process to meet environmental and safety standards. AEA held public meetings and comments will be accepted by FERC through November 14, 2012. An updated study plan will be submitted in December and FERC will decide on the plan in February. Chugach will work with AEA and other parties on this effort.

The 2013 fiscal year State of Alaska capital budget contained appropriations for Chugach projects that will help contain the cost of power for ratepayers while improving reliability and increasing the amount of renewable energy on the system. Funding for these projects will flow through either the AEA or the Municipality of Anchorage.

ENVIRONMENTAL MATTERS

Compliance with Environmental Standards

Chugach’s operations are subject to certain federal, state and local environmental laws and regulations, which seek to limit air, water and other pollution and regulate hazardous or toxic waste disposal. While we monitor these laws and regulations to ensure compliance, they frequently change and often become more restrictive. When this occurs, our costs of compliance generally increase. We include costs associated with environmental compliance in both our operating and capital budgets. We accrue for costs associated with environmental remediation obligations when those costs are probable and

 

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reasonably estimable. We do not anticipate that environmental related expenditures will have a material effect on our results of operations or financial condition. We cannot, however, predict the nature, extent or cost of new laws or regulations relating to environmental matters.

The Clean Air Act and EPA regulations under the Clean Air Act establish ambient air quality standards and limit the emission of many air pollutants. Some Clean Air Act programs that regulate electric utilities, notably the Title IV “acid rain” requirements, do not apply to facilities located in Alaska. In 2008, the EPA vacated regulations to limit mercury emissions from fossil-fired, steam-electric generating facilities.

New Clean Air Act regulations impacting electric utilities may result from future events or new regulatory programs. On October 30, 2009, the EPA published new federal regulations requiring the mandatory reporting of greenhouse gases from all sectors of the economy. Chugach is subject to this new regulation, which is not expected to have a material effect on our results of operations, financial position, and cash flows. While we cannot predict whether any additional new regulation would occur or its limitation, it is possible that new laws or regulations could increase our capital and operating costs. We have obtained or applied for all Clean Air Act permits currently required for the operation of our generating facilities.

The SPP is required by its Air Quality Permit to collect ambient air background data. Data collection began on September 1, 2011 and continued through August 31, 2012. ADEC is currently validating the collected data in accordance with the provisions of the Air Quality Permit for the SPP.

Chugach is subject to numerous other environmental statutes including the Clean Water Act, the Resource Conservation and Recovery Act, the Toxic Substances Control Act, the Endangered Species Act, and the Comprehensive Environmental Response, Compensation and Liability Act and to the regulations implementing these statutes. We do not believe that compliance with these statutes and regulations to date has had a material impact on our financial condition or results of operation. However, new laws or regulations, implementation of final regulations or changes in or new interpretations of these laws or regulations could result in significant additional capital or operating expenses.

 

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. We do not engage in trading market risk-sensitive instruments for speculative purposes.

 

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Interest Rate Risk

At September 30, 2012, our short and long-term debt was comprised of our 2011 and 2012 Series A Bonds, our 2011 note owed to CoBank and outstanding commercial paper.

The interest rates of our 2011 Series A Bonds are fixed at 4.20 and 4.75 percent per annum, for Tranche A and Tranche B, respectively. The interest rates of our 2012 Series A Bonds are fixed at 4.01, 4.41 and 4.78 percent per annum, for Tranche A, Tranche B and Tranche C, respectively. At September 30, 2012, we had $514.3 million of 2011 and 2012 Series A Bonds outstanding. The fair value of the 2011 and 2012 Series A Bonds at September 30, 2012, was $548.0 million.

Chugach is exposed to market risk from changes in interest rates associated with our other credit facilities. Our credit facilities’ interest rates may be reset due to fluctuations in a market-based index, such as the LIBOR or the base rate or prime rate of our lenders. A 100 basis-point rise in interest rates would increase our interest expense by approximately $0.4 million, and a 100 basis point decline in interest rates would decrease our interest expenses by approximately $0.3 million, based on $39.3 million of variable rate debt outstanding at September 30, 2012.

Commodity Price Risk

Chugach’s gas contracts provide for adjustments to gas prices 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 and purchased power surcharge mechanism, fluctuations in the price paid for gas pursuant to long-term gas supply contracts does not normally impact margins.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Controls and Procedures

As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(e). Based on this evaluation, our CEO and CFO each concluded that as of the end of the period covered by this report, our disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed in our periodic reports to the Securities and Exchange Commission (SEC), ensures that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure.

 

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In addition, there have been no changes in our internal controls over financial reporting identified in connection with the evaluation that occurred during the third quarter of 2012 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Information required by this Item is contained in Note 9 to the “Notes to Financial Statements” within Part I of this Form 10-Q.

 

ITEM 1A. RISK FACTORS

Fuel Supply

In 2011, 92 percent of our power was generated from natural gas, which included power generated at Nikiski. Our primary suppliers of natural gas are ConocoPhillips and Marathon. Chugach currently has contracts in place to fill 100 percent of Chugach’s needs through December 2014, approximately 70 percent of Chugach’s needs through 2015 and approximately 40 percent in 2016.

The 2010 Alaska Legislature passed legislation that provides incentives to natural gas producers to enhance Cook Inlet oil and gas production. There are currently two independent producers mobilizing or using jack-up drill rigs in Cook Inlet to take advantage of those incentives. Other producers have recently drilled conventional wells. Although it is too early to tell if the incentives will pay off, independent producers do seem to be taking steps to enter the market. 2011 Cook Inlet petroleum lease sales were up and several gas producers new to Cook Inlet have plans to drill in 2012 and 2013. The State of Alaska recently took in approximately $6.9 million in bids at its area-wide Cook Inlet oil and gas lease sale, the second-highest dollar volume for a Cook Inlet sale since area-wide sales began in 1999. The three major bidders were all large current leaseholders and much of the bidding appeared to be filling in around existing leasehold positions. Hilcorp purchased Chevron’s subsidiary Union Oil Company of California January 1, 2012, and announced April 9, 2012, the purchase of Marathon Alaska Production assets with an effective date of January 1, 2012, which is currently pending regulatory approval. According to a filing with the RCA, Hilcorp “is poised to begin making substantial investments in its newly acquired Cook Inlet assets over the next several years.”

 

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Chugach, ML&P and ENSTAR, a Southcentral natural gas distribution company, retained a consulting firm to forecast Cook Inlet gas production. A report from the study was issued in October of 2012 that estimated if the current pace of drilling activity were to continue, along with no additional discoveries brought to production, a shortfall in Cook Inlet gas supply in 2015 could result.

Although Railbelt utilities have the ability to utilize existing oil-fired generation to meet a significant portion of the Railbelt load, Chugach is also evaluating the implementation of dual fuel at the SPP, gas importation and enhanced storage capabilities. Chugach believes these measures, along with existing incentives to natural gas producers, improves fuel security and supply in Southcentral Alaska.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

None.

 

ITEM 5. OTHER INFORMATION

Chugach Electric Association’s annual membership meeting was held on May 17, 2012. One new board member was elected, while one current board member was re-elected. Total number of members of record was 66,824. Out of 9,954 ballots cast, new board member Sisi Cooper received 6,383 votes, while current board member James Nordlund received 6,421 votes. Their terms expire in May of 2015. Directors Janet Reiser, Susan Reeves, P. J. Hill and Jim Henderson were elected by the sitting board as Chair, Vice Chair, Treasurer and Secretary, respectively.

There were also four proposed bylaw amendments before the membership. The first proposal changed the member advisory council from a standing committee to an ad hoc committee. The second proposal expanded joint memberships. The third proposal included housekeeping amendments. The final proposal permitted the Board of Directors to set meeting fees for member committees. All proposals passed.

 

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ITEM 6. EXHIBITS

Line of Credit Agreement between the Registrant and the National Rural Utilities Cooperative Finance Corporation dated effective October 12, 2012.

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

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Label Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned thereunto duly authorized.

 

CHUGACH ELECTRIC ASSOCIATION, INC.
  By:  

/s/ Bradley W. Evans

    Bradley W. Evans
    Chief Executive Officer
  By:  

/s/ Michael R. Cunningham

    Michael R. Cunningham
    Chief Financial Officer
  Date:   November 9, 2012

 

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EXHIBITS

Listed below are the exhibits, which are filed as part of this Report:

 

Exhibit
Number

  

Description

  10.47.3    Line of Credit Agreement between the Registrant and the National Rural Utilities Cooperative Finance Corporation dated October 12, 2012.
  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
101.INS*    XBRL Instance Document
101.SCH*    XBRL Taxonomy Extension Schema Document
101.CAL*    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*    XBRL Taxonomy Extension Label Linkbase Document
101.PRE*    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*    XBRL Taxonomy Extension Definition Linkbase Document

 

* XBRL (“Extensible Business Reporting Language”) information is furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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