SEC Company Response from CHUGACH ELECTRIC ASSOCIATION INC (CIK 0000878004) — Jul 21, 2005
CHUGACH ELECTRIC ASSOCIATION INC (CIK 0000878004)
Date: July 21, 2005 · CIK: 0000878004 · Accession: 0000878004-05-000019
AI Filing Summary & Sentiment
Referenced dates: July 7, 2005
Letter
Mr. John Cannarella Staff Accountant Securities and Exchange Commission Washington, D.C. 20549 United States of America July 21, 2005
RE: Form 10-K for the year ended December 31, 2004 YOUR RE: File No. 3-42125
Dear Mr. Cannarella,
We refer to your comment letter dated July 7, 2005, requesting further information in relation to the above Form 10-K, filed on March 31, 2005.
Attached please find our response to your comment letter, containing the supplemental information to the aforesaid Form 10-K, in response to your request.
We acknowledge that Chugach Electric Association, Inc. is responsible for the adequacy and accuracy of the disclosure in the filing; staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and Chugach Electric Association, Inc. may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
We look forward to receiving your confirmation that our response meets your requirements.
Sincerely,
/s/ Evan J. Griffith
Evan J. Griffith
Chief Executive Officer
Chugach Electric Association, Inc.
5601 Electron Dr.
Anchorage, AK 99518
Show Raw Text
<DOCUMENT>
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<TEXT>
Mr. John Cannarella
Staff Accountant
Securities and Exchange Commission
Washington, D.C. 20549
United States of America
July 21, 2005
Dear Mr. Cannarella,
RE: Form 10-K for the year ended December 31, 2004
YOUR RE: File No. 3-42125
We refer to your comment letter dated July 7, 2005, requesting further
information in relation to the above Form 10-K, filed on March 31, 2005.
Attached please find our response to your comment letter, containing the
supplemental information to the aforesaid Form 10-K, in response to your
request.
We acknowledge that Chugach Electric Association, Inc. is responsible for the
adequacy and accuracy of the disclosure in the filing; staff comments or changes
to disclosure in response to staff comments do not foreclose the Commission from
taking any action with respect to the filing; and Chugach Electric Association,
Inc. may not assert staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the United
States.
We look forward to receiving your confirmation that our response meets your
requirements.
Sincerely,
/s/ Evan J. Griffith
Evan J. Griffith
Chief Executive Officer
Chugach Electric Association, Inc.
5601 Electron Dr.
Anchorage, AK 99518
<PAGE>
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2004
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
1. You indicate that the $17.2 million increase in revenues from
fiscal year 2004 compared to fiscal year 2003 was due to increased
sales and higher fuel costs. Please discuss the business
reason(s) for the increase in sales and quantify changes resulting
from increase sales and higher fuel surcharge pass through. To
the extent you have different tariffs by class of customer, you
could provide a discussion of changes in revenue by class of
customer and include your residential and commercial customers
that comprise your retail sales. Similarly, it would be
informative to the user to see the extent to which the margin from
Wholesale and Economy Sales contribute to covering your fixed
costs. Please provide some type of table that contrasts revenues
from such bulk sales with the related direct variable costs.
Please refer to Item 303(a)(3) of Regulation S-K, Financial
Reporting Codification 501.04, and SEC Release No. 33-8350.
The Company experienced increased demand in 2004. With regard to
retail revenues, the Municipality of Anchorage, our primary
service area, continued to experience job growth during 2004.
Additionally, increased state and federal spending generated
additional general economic activity. These factors contributed to
increased retail revenues. With regard to wholesale revenues, base
rate revenue decreased in 2004 due to a decrease in the base rates
charged to the Company's wholesale customers, however, actual
sales to the Company's wholesale customers increased due to the
same economic activity described above.
<PAGE>
The following table shows the base rate energy sales revenue and
fuel surcharge revenue by customer class that is included in
revenue at December 31, 2004, and 2003. Future filings with the
Commission will contain the expanded disclosure to promote reader
understanding.
<TABLE>
<CAPTION>
Base Rate Sales Revenue Fuel and Purchased Power Revenue Total
% % 2004 2003
2004 2003 Variance 2004 2003 Variance Total Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Retail
Residential $47,934,042 $47,487,204 0.9% $17,717,363 $14,225,754 24.5% $65,651,405 $61,712,958
Small Commercial 8,286,112 7,387,058 12.2% 3,593,442 2,588,196 38.8% 11,879,554 9,975,254
Large Commercial 29,318,402 29,135,473 0.6% 16,472,154 13,585,003 21.3% 45,790,556 42,720,476
Lighting 1,315,794 1,260,915 4.4% 99,456 47,885 107.7% 1,415,250 1,308,800
Total Retail $86,854,350 $85,270,650 1.9% $37,882,415 $30,446,838 24.4% $124,736,765 $115,717,488
Wholesale
HEA $10,205,288 $10,990,710 (7.1)% $14,585,056 $10,742,534 35.8% 24,790,344 $21,733,244
MEA 17,356,227 18,934,031 (8.3)% 19,808,667 15,271,229 29.7% 37,164,894 34,205,260
SES 985,641 955,873 3.1% 1,864,360 1,505,327 23.9% 2,850,001 2,461,200
Total Wholesale $28,547,156 $30,880,614 (7.6)% $36,258,083 $27,519,090 31.8% 64,805,239 $58,399,704
Economy Sales $8,867,625 $7,112,276 24.7% $0 $0 8,867,625 $7,112,276
Miscellaneous $2,836,986 $2,802,945
Total Revenue $124,269,131 $123,263,540 0.8% $74,140,497 $57,965,928 27.9% $201,246,615 $184,032,413
</TABLE>
Margins realized from wholesale (firm) sales are treated
differently than the margins earned from economy (non-firm) energy
sales.
There are no fixed-cost contributions associated with economy
energy sales. Margins realized from economy energy sales
transactions do not impact the margin levels that are used to
determine the financial results of the Company. Rather, margins
earned from these sales are returned to retail and wholesale
customers as an offset against fuel and purchased power expenses
included for recovery in the fuel surcharge process. In this
manner, the rate levels of retail and wholesale customers are
precisely offset by the margins earned through economy energy
sales transactions.
In contrast, wholesale rates are established to provide fixed and
variable cost recovery. The majority of the variable costs are
fuel and purchased power related, which are recovered through the
fuel surcharge process. Fixed costs, including margins, are
recovered through base rates. The Company's authorized Times
Interest Earned Ratio (TIER) on long-term generation and
transmission interest expense is 1.10. Wholesale base rates were
last adjusted in the Company's 2000 test period rate case.
<PAGE>
Based on the results of fixed and variable cost recovery
established in the Company's last rate case, wholesale sales
contributed approximately $24 and $26 million to the Company's
fixed costs for the years ended December 31, 2004 and 2003,
respectively. Future filings with the Commission will contain
expanded disclosure of this information to promote reader
understanding.
2. Please tell us how you recognize fuel expense in your Statement of
Revenues and Expenses. If you do not recognize actual fuel expense
but instead recognize the approved amount with the difference from
actual reflected as a fuel over/under recovery in the balance
sheet, please expand your fuel discussion to indicate fluctuation
fuel prices affect fuel expense. Further, you should quantify the
price versus volume variances you mention in your fuel expense
discussion.
The Company recognizes actual fuel expense used in its Statement
of Revenues and Expenses. In 2004, Chugach used 25,024,954 MCF of
fuel at an average effective price of $2.56 per MCF. In 2003,
Chugach used 23,402,981 MCF of fuel at an average effective price
of $2.08 per MCF. The Company will quantify the price versus
volume variances in the fuel expense discussions in future filings
with the Commission.
3. You indicate that the increase in power production expense in 2004
was due, in part, to the update of the method in which you record
maintenance costs. Please tell us why you believe it is
appropriate to reclassify only the current period and not the
prior periods to conform to current period presentation. In this
regard, you should explain to us how you changed your method by
which maintenance costs are recorded. To the extent you were
previously capitalizing maintenance costs, please explain your
basis in GAAP.
Prior to 2004, all maintenance costs associated with substation,
relay, microwave, communications and SCADA were recorded under
caption "Administrative, general and other" in the Company's
financial statements. In an effort to better reflect the
functional areas of the organization that incurred maintenance
costs, effective January 1, 2004, the Company began directly
assigning these maintenance costs to Statement of Revenues,
Expenses and Patronage Capital expense accounts "Power
production," "Transmission," and "Distribution" according to the
functional area of the organization where the maintenance
occurred.
We did not reclassify the prior years to conform to current period
presentation because the maintenance was not material for 2003 or
2002.
None of these maintenance costs in question were previously
capitalized.
4. When you discuss the increase in purchased power costs, you should
provide a price volume analysis to illustrate the effect of higher
fuel costs and increased demand.
The Company purchases power from several producers. The purchased
power price includes a fuel cost component that is directly
related to the price that the producer pays for fuel. The Company
purchased approximately the same quantity from some producers but
paid more. Fuel cost is a major component of the price paid for
purchased power, therefore, the Company disclosed that the cost
increased due to higher fuel costs. In 2004, the Company purchased
581,103 MWH of energy at an average effective price of $3.36 cents
per kWh. In 2003, the Company purchased 554,706 MWH of energy at
an average effective price of $3.01 cents per kWh. The Company
reported that purchased power costs increased in 2004 from 2003
due to higher fuel costs and increased sales. Increased sales
referred to increased purchase power sales.
It is difficult to perform a traditional price/volume variance
analysis because the volume of power purchased is not necessarily
a function of customer demand. The following factors influence the
Company's decision as to whether or not to purchase power:
o The Company has entered into contracts to purchase all of
the output of hydroelectric units that are based on
reservoir in-flows that are weather dependent.
o The Company has entered into a contract for all of the
output of the Nikiski power plant, which fluctuates due to
planned and forced outages at the plant.
o A take or pay contract for purchased power of the Bradley
Lake hydroelectric project. The cost for purchased power
remains the same, however, the quantity changes due to
weather conditions.
Future filings with the Commission will contain expanded
disclosure of variances to purchased power expense to promote
reader understanding.
5. It appears that you record the retirement of capital credits and
estate payments in your balance sheets based on the amounts paid
rather than the amounts authorized. Please tell us why you believe
that such treatment is appropriate or revise your accounting
treatment accordingly in future filings.
All retirements of capital credits, which include amounts retired
under a new discounted capital credits retirement plan, and estate
payments are recorded based on the amounts authorized by the
Company's board of directors, not the amounts paid. Future filings
with the Commission will contain expanded disclosure of this
information to promote reader understanding.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
6. We note that your sensitivity analysis with respect to market risk
from changes in interest rates is limited to the variable rate
debt of $5.9 million which matures in 2005. Please revise your
sensitivity analysis for changes in interest rates to include all
of your variable rate debt or tell us why you believe your current
disclosure is appropriate.
The Company will revise our sensitivity analysis for changes in
interest rates to include all of our variable rate debt
outstanding in the 2nd quarter 2005 10Q filing and in future
filings with the Commission.
Notes to Financial Statements
Note 1. Description of Business and Significant Accounting Policies
7. You indicate you performed an impairment analysis of certain
generation assets and determined that impairment existed. You
wrote the asset down to its estimated salvage value. We are unable
to determine whether the impairment was based on held and used or
based on disposing such assets. Your write-down to net realizable
value suggests the latter. If so, please provide the disclosure
required by paragraph 47.a of SFAS 144. If otherwise, please
provide the disclosure required by paragraph 26.a of SFAS 144.
During the second quarter of 2003, we entered into a plan to take
a generation asset out of service. The asset was physically
abandoned in September of 2003. In accordance with SFAS No. 144,
paragraph 28, we adjusted the remaining depreciable life of the
asset. The Company determined the depreciation that would have
been recorded in the third quarter of 2003 was immaterial,
therefore we considered that the asset should be fully depreciated
in the second quarter of 2003 when we committed to a plan to
abandon th