SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 33-46795
OLD DOMINION ELECTRIC COOPERATIVE
(Exact Name of Registrant as Specified in Its Charter)
VIRGINIA 23-7048405
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4201 Dominion Boulevard, Glen Allen, Virginia 23060
(Address of Principal Executive Offices) (Zip Code)
----------
(804) 747-0592
(Registrant's Telephone Number, Including Area Code)
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 __ No X
The Registrant is a membership corporation and has no authorized or outstanding
equity securities.
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1998 (Unaudited)
and December 31, 1997 3
Consolidated Statements of Revenues, Expenses and
Patronage Capital (Unaudited) - Three and Nine Months Ended
September 30, 1998 and 1997 5
Consolidated Statements of Comprehensive Income (Unaudited) -
Three and Nine Months Ended September 30, 1998 and 1997 6
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Exhibit Index 19
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(unaudited) (*)
<S> <C> <C>
ASSETS:
Electric Plant:
In service $ 885,446 $ 885,670
Less accumulated depreciation (134,338) (116,409)
------------- -------------
751,108 769,261
Nuclear fuel, at amortized cost 2,345 6,401
Plant acquisition adjustment, at amortized cost 5,680 22,721
Construction work in progress 19,702 12,701
------------- -------------
Net Utility Plant 778,835 811,084
------------- -------------
Decommissioning Fund 46,421 44,162
Other Investments and Funds 34,234 24,539
Restricted Investments and Funds 118,346 116,080
Current Assets:
Cash and cash equivalents 121,266 61,740
Receivables, net of allowance of $6.0 million
in 1998 and 1997 33,039 34,582
Fuel stock 4,935 4,254
Materials and supplies, at average cost 5,501 5,362
Prepayments 1,980 1,439
Deferred energy 2,531 -
------------- -------------
Total Current Assets 169,252 107,377
------------- -------------
Deferred Charges 13,484 14,058
Other Assets 12,231 12,612
------------- -------------
Total Assets $ 1,172,803 $ 1,129,912
============= =============
</TABLE>
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(unaudited) (*)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES:
Capitalization:
Patronage capital $ 202,314 $ 197,552
Accumulated other comprehensive income 1,228 -
Long-term debt 608,653 605,878
------------- -------------
Total Capitalization 812,195 803,430
------------- -------------
Current Liabilities:
Long-term debt due within one year 28,460 30,116
Accounts payable 38,059 31,732
Accounts payable - Member deposits 44,679 26,118
Deferred energy - 3,960
Accrued interest 16,155 4,111
Accrued taxes 2,178 263
Other 2,676 4,151
------------- -------------
Total Current Liabilities 132,207 100,451
------------- -------------
Decommissioning Reserve 46,421 44,162
Deferred Credits 59,715 61,782
Obligations under Long-Term Leases 121,517 119,343
Other Liabilities 748 744
Commitments and Contingencies
------------- -------------
Total Capitalization and Liabilities $ 1,172,803 $ 1,129,912
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(*) The Consolidated Balance Sheet at December 31, 1997, has been taken
from the audited financial statements at that date, but does not
include all disclosures required by generally accepted accounting
principles.
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
CONSOLIDATED STATEMENTS OF REVENUES,
EXPENSES AND PATRONAGE CAPITAL (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Operating Revenues:
Sales to members $ 100,612 $ 93,620 $ 268,386 $ 262,311
Sales to non-members 472 80 925 382
------------- -------------- ------------- -------------
101,084 93,700 269,311 262,693
------------- -------------- ------------- -------------
Operating Expenses:
Operation-
Fuel 12,687 10,956 33,849 29,321
Purchased power 48,457 47,791 116,790 127,094
Other 6,413 5,650 18,368 16,662
------------- -------------- ------------- -------------
67,557 64,397 169,007 173,077
Maintenance 1,841 1,534 5,585 5,821
Administrative and general 3,535 3,987 11,312 12,113
Depreciation and amortization 12,163 6,763 36,355 20,319
Amortization of lease gains (689) (689) (2,067) (2,067)
Decommissioning cost 171 171 511 511
Taxes other than income taxes 1,952 1,829 5,669 5,424
------------- -------------- ------------- -------------
Total Operating Expenses 86,530 77,992 226,372 215,198
------------- -------------- ------------- -------------
Operating Margin 14,554 15,708 42,939 47,495
------------- -------------- ------------- -------------
Other (Expense)/Income, net 42 (109) 624 (143)
------------- -------------- ------------- -------------
Investment Income:
Interest 1,101 661 3,199 2,308
Other 40 6 194 102
------------- -------------- ------------- -------------
Total Investment Income 1,141 667 3,393 2,410
------------- -------------- ------------- -------------
Interest Charges:
Interest on long-term debt, net 13,072 13,559 39,064 41,542
Other 129 82 329 167
Allowance for borrowed funds
used during construction (106) (103) (315) (289)
------------- -------------- ------------- -------------
Net Interest Charges 13,095 13,538 39,078 41,420
------------- -------------- ------------- -------------
Net Margin 2,642 2,728 7,878 8,342
Patronage Capital-beginning of
period 199,672 190,367 197,552 184,753
Payment of Capital Credits - - (3,116) -
------------- -------------- ------------- -------------
Patronage Capital-end of period $ 202,314 $ 193,095 $ 202,314 $ 193,095
============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
OLD DOMINION ELECTRIC COOPERATIVE
STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------
1998 1997 1998 1997
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Margin $ 2,642 $ 2,728 $ 7,878 $ 8,342
Other comprehensive income:
Unrealized gains on
investments 751 - 1,228 -
------------- -------------- ------------- -------------
Comprehensive income $ 3,393 $ 2,728 $ 9,106 $ 8,342
============= ============== ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Cash Provided By Operating Activities:
Net margin $ 7,878 $ 8,342
Adjustments to reconcile net margin to net cash
provided by operating activities:
Depreciation 18,946 18,696
Amortization 23,873 8,531
Decommissioning cost 511 511
Amortization of lease obligations 6,264 6,163
Gain from lease transactions (2,067) (2,067)
Change in Current Assets and Liabilities:
Change in current assets (2,349) 8,423
Change in current liabilities 33,412 41,345
Increase in deferred charges (363) (3,186)
Decrease in other assets 241 3,653
Increase (decrease) in other liabilities 4 (5)
------------- -------------
Net Cash Provided By Operating Activities 86,350 90,406
------------- -------------
Cash Used For Financing Activities:
Obligations under long-term lease (4,090) -
Payment of long-term debt, net (581) (31,713)
Payment of capital credits (3,116) -
------------- -------------
Net Cash Used For Financing Activities (7,787) (31,713)
------------- -------------
Cash (Used For) Provided By Investing Activities:
Additions to electric plant (7,686) (21,506)
Decommissioning fund deposits (511) (511)
(Additions to) reduction of other investments and funds, net (8,467) 29,974
Additions to restricted investments and funds, net (2,266) (6,136)
Retirement work in progress (107) 23
------------- -------------
Net Cash (Used For) Provided By Investing Activities (19,037) 1,844
------------- -------------
Net Change in Cash and Cash Equivalents 59,526 60,537
Beginning of Period Cash and Cash Equivalents 61,740 46,217
------------- -------------
End of Period Cash and Cash Equivalents $ 121,266 $ 106,754
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of the management of Old Dominion Electric Cooperative ("Old
Dominion"), the accompanying unaudited consolidated financial statements
contain all adjustments, which include only normal recurring adjustments,
necessary for a fair statement of Old Dominion's consolidated financial
position as of September 30, 1998, its consolidated results of operations
and its comprehensive income for the three and nine months ended September
30, 1998 and 1997, and its consolidated cash flows for the nine months
ended September 30, 1998 and 1997. The consolidated results of operations
for the nine months ended September 30, 1998, are not necessarily
indicative of the results to be expected for the entire year. These
financial statements should be read in conjunction with the financial
statements and notes thereto included in Old Dominion's 1997 Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
2. In October 1998, Virginia State Senator Jackson E. Reasor accepted an offer
to become president and chief executive officer of Old Dominion. Mr. Reasor
will resign his Senate seat and will begin his new duties by November 30,
1998. He replaces Charles R. Rice, Jr., current vice-chairman of Old
Dominion's board, who has served as acting president and chief executive
officer since April 1998, when Ronald W. Watkins and Old Dominion's Board
of Directors decided not to renew Mr. Watkins' employment contract, which
expired April 1, 1998. Mr. Watkins had been president and chief executive
officer of Old Dominion since April 1, 1995.
3. In 1995, Old Dominion and 10 of its 12 member distribution systems
established an affiliate, CSC Services, Inc. ("CSC"), to explore
alternative business opportunities on behalf of the cooperatives. During
1996, CSC invested in an approximate one-half interest in Seacoast Power
LLC, whose wholly owned subsidiary, Seacoast, Inc. ("Seacoast"), executed a
six-month power sales contract with INECEL, the state-owned electric
utility in Ecuador. Because of contract disputes, INECEL did not pay
invoices rendered by Seacoast for energy made available under the terms of
the power sales contract. Accordingly, in July 1996, Seacoast filed a $26.0
million lawsuit in Ecuador against INECEL seeking to recover approximately
$16.3 million in amounts owed under the power sales contract, plus damages
and fees. A trial date has not been set. In 1997, CSC and the other
participants in Seacoast Power LLC sold their interests in the venture. In
August 1998, CSC signed an agreement in principle to sell its interest in
the lawsuit against INECEL to the other participants in Seacoast Power LLC.
4. On May 24, 1996, a default judgment of approximately $27.0 million was
rendered against Seacoast pursuant to a claim filed in the District Court
of Travis County, Texas, by an entity seeking damages for breach of an oral
contract by the former owners of Seacoast. On January 29, 1998, the Texas
Court of Appeals issued an order affirming the default judgment against
Seacoast but reversing and remanding the award of damages as factually
unsupported. On March 18, 1998, Seacoast filed an appeal challenging the
refusal by the Texas Court of Appeals to set aside the default judgment.
That appeal is pending. In a separate proceeding, on May 5, 1997, Seacoast
filed a bill of review in the District Court of Travis County, Texas,
collaterally attacking the default judgment. That action is also pending.
5. On February 27, 1997, Southside Electric Cooperative ("Southside"), one of
two member distribution systems that did not participate in forming CSC,
raised a question as to whether the loss, with respect to Old Dominion's
interest in Seacoast, should be borne totally by Old Dominion, thus
resulting in a greater financial burden on Southside. Southside asserts
that its share of the loss should be limited to a pro rata share of Old
Dominion's 30% common equity participation in CSC, which may be less than
their proportionate share as an Old Dominion Member. On October 16, 1997,
the Board of Directors of Southside passed a resolution outlining various
issues of concern with Old Dominion. Management believes these issues will
be resolved over time and without a material impact on Old Dominion's
financial position.
<PAGE>
6. On October 14, 1997, Old Dominion's Board of Directors approved a
resolution adopting certain strategic objectives designed to mitigate the
effects of the transition to a competitive electric market (the "Strategic
Plan Initiative"). Management is currently evaluating various alternatives
as Old Dominion prepares for transition to competition. The Strategic Plan
Initiative could result in an alternate treatment of Old Dominion's excess
margins, which are currently returned to Members through the Margin
Stabilization Plan. Northern Virginia Electric Cooperative ("NOVEC"),
Rappahannock Electric Cooperative ("REC"), and Southside have voiced
concerns about the level and timing of cost recovery as contemplated by the
Strategic Plan Initiative. Further, NOVEC and REC have expressed concerns
about the Strategic Plan Initiative regarding: (1) the all-requirements
nature of the Wholesale Power Contracts that they have with Old Dominion,
and (2) whether Old Dominion has the right under the Wholesale Power
Contracts to "over-collect" monies from its Members for future debt
retirement or for payment of future costs. To address these concerns, Old
Dominion is working on several initiatives to resolve several Members
concerns, including those raised by REC and NOVEC, regarding the transition
to a competitive environment.
7. In accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," Old Dominion has included a Statement of
Comprehensive Income in its consolidated financial statements for the
quarter ended September 30, 1998.
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, as defined by the Private
Securities Litigation Act of 1995, with respect to matters that could have an
impact on future operations of Old Dominion. These statements are based on
expectations and estimates of management and are not guarantees of future
performance. Actual results may differ materially from those expressed in the
forward-looking statements.
Results of Operations
Operating Revenues. Old Dominion's operating revenues are derived from power
sales to its Members and to non-members. Revenues from sales to Members are a
function of the requirement for power by the Members' consumers and Old
Dominion's cost of service in meeting that requirement. The major factors
affecting Members' consumers' demand for power are the growth in the number of
consumers and seasonal weather fluctuations.
The following table illustrates increases (decreases) in operating revenues
by component:
Three Months Nine Months
Ended Ended
September 30, September 30,
1998 vs 1997 1998 vs 1997
------------ ------------
(in thousands)
Sales to Members:
Power sales volume $ 7,701 $ 8,308
Blended rates (3,236) (5,534)
Fuel adjustment revenues 535 (2,088)
Margin stabilization plan
adjustment 1,992 5,389
Sales to Non-members 392 543
------- -------
$ 7,384 $ 6,618
======= ========
Warmer weather during the third quarter of 1998 resulted in an increase in
demand sales, which was offset by a 4% reduction in the demand rate effective
April 1, 1998. The net result for the quarter was a marginal increase in demand
revenues as compared to the same period in 1997. Energy revenues increased 11.9%
because of the warm weather. Demand sales for the three months ended September
30, 1998 and 1997, were 4,404 MW and 4,204 MW, respectively. Energy sales for
the three months ended September 30, 1998 and 1997, were 2,287,399 MWh and
2,043,371 MWh, respectively.
A warm winter in the first quarter combined with a 4% reduction in the demand
rate resulted in a decrease in demand revenues in 1998. However, the decrease
was offset by an increase in demand revenues due to the warmer weather during
the second and third quarters of 1998. The net result was a 1.3% decrease in
demand revenues. Energy revenues increased 5.2% as compared to 1997. Demand
sales for the nine-month periods ended September 30, 1998 and 1997, were 11,631
MW and 11,421 MW, respectively. Energy sales for the nine-month periods ended
September 30, 1998 and 1997, were 5,948,737 MWh and 5,680,258 MWh, respectively.
Weather affects customer demand for electricity. Hot summers and cold winters
increase demand while mild weather reduces demand. The weather's effect is
measured using degree days. A degree day is the difference between the average
daily temperature and a baseline temperature of 65 degrees. Cooling degree days
result when the average daily temperature is above 65 degrees; heating degree
days result when the average daily temperature is below 65 degrees.
Heating and cooling degree days for the three and nine month periods ended
September 30, 1998 and 1997, were as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1998 1997 Normal 1998 1997 Normal
-------- ------ -------- ------- --------- ------
Cooling degree days 1,108 953 1,081 1,570 1,266 1,549
Percentage change compared
to prior year 16.3% (4.8)% 24.3% (13.0)%
Heating degree days 6 11 22 2,034 2,347 2,345
Percentage change compared
to prior year (45.5)% (31.3)% (13.3)% (6.7)%
Operating Expenses. Old Dominion has an 11.6% ownership interest in the North
Anna Nuclear Power Station ("North Anna") and a 50% undivided ownership interest
in the Clover Power Station ("Clover"). While nuclear power plants, such as
North Anna, generally have relatively high fixed costs, such facilities operate
with relatively low variable costs due to lower fuel costs and technological
efficiencies. Owners of nuclear power plants, including Old Dominion, incur the
embedded fixed costs of these facilities whether or not the units operate.
When one or more units of either North Anna or Clover are off-line, Old
Dominion must purchase replacement power that can be more costly. Any change in
the amount of Old Dominion's energy output from North Anna or Clover displaces
or is replaced by higher cost supplemental energy purchases from Virginia
Electric and Power Company ("Virginia Power"). As a result, Old Dominion's
operating expenses, and therefore its rates to the Members, are significantly
impacted by the operations of North Anna and Clover.
North Anna and Clover capacity factors for the three and nine month periods
ended September 30, 1998 and 1997, were as follows:
North Anna Clover
Three Nine Three Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30
------------- ------------- ------------- ------------
1998 1997 1998 1997 1998 1997 1998 1997
------ ------ ------ ------ --------------- -------------
Unit 1 76.9% 100.0% 92.2% 88.3% 87.6% 55.4% 85.8% 67.2%
Unit 2 97.9 99.6 86.9 100.2 87.8 81.7 67.3 55.8
Combined 87.4 99.8 89.6 94.3 87.7 68.6 76.6 61.5
North Anna Unit 1 was off-line 18 days during the first nine months of 1998
and 30 days during the first nine months of 1997 for scheduled maintenance and
refueling. Unit 2 was off-line 30 days for scheduled refueling during the nine
months ended September 30, 1998. Unit 2 was not off-line during the first nine
months of 1997.
During the nine months ended September 30, 1998, Clover Unit 1 was off-line
five days for one scheduled outage and three unscheduled outages. Clover Unit 2
was off-line from February 28 through April 29, 1998, for the scheduled chimney
liner replacement and one day for unscheduled maintenance. During the nine month
period ended September 30, 1997, Clover Unit 1 was off-line 47 days for repairs
to the chimney's liner, three days for other unscheduled maintenance and five
days for scheduled maintenance. Also during the nine months ended September 30,
1997, Clover Unit 2 was off-line 11 days for a scheduled warranty inspection, 11
days for unscheduled maintenance and 75 days for repairs resulting from the
damage incurred on April 17, 1997, when the unit tripped off-line.
<PAGE>
Old Dominion's energy supply for the three and nine month periods ended
September 30, 1998 and 1997, was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------------
1998 1997 1998 1997
----------------------------------- ----------------------------------------
(MWh) (MWh) (MWh) (MWh)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North Anna 400,686 16.8% 457,738 21.5% 1,218,011 19.8% 1,282,063 21.8%
Clover 853,962 35.9 667,508 31.3 2,189,679 35.5 1,756,830 29.9
Purchased Power:
Virginia Power 581,595 24.4 525,681 24.6 1,339,665 21.7 1,493,879 25.4
Delmarva Power 279,945 11.8 157,443 7.4 516,705 8.4 403,227 6.8
PSE&G Contract 186,896 7.8 276,585 13.0 723,669 11.7 804,755 13.7
PPL/Conectiv 23,767 1.0 -- -- 23,767 0.4 -- --
Other 54,157 2.3 47,156 2.2 151,407 2.5 142,565 2.4
--------- ----- --------- ----- --------- ----- --------- -----
Total Available
Energy 2,381,008 100.0% 2,132,111 100.0% 6,162,903 100.0% 5,883,319 100.0%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
Increased production at Clover and warm weather were the primary factors
affecting operating expenses in the third quarter and first nine months of 1998.
Third quarter purchased power costs were virtually unchanged from the third
quarter of 1997 despite warmer temperatures due to an increase in generation at
Clover. Purchased power costs for the nine months ended September 30, 1998,
increased as compared to the same period in 1997 even though MWh purchases
decreased because there was an increase in the price of energy in the summer of
1998. Fuel and other operating costs increased in the third quarter and first
nine months of 1998, because of the increased production at Clover.
Depreciation and amortization expense increased because of accelerated
amortization of the North Anna plant acquisition adjustment.
Other income/(expense), net, increased because of a refund in 1998 of
administrative and general expenses related to 1996 and 1997 that resulted from
implementation of the new Interconnection and Operating Agreement with Virginia
Power.
Investment income increased during the third quarter and first nine months
of 1998 as compared to 1997 due to higher investment balances.
Interest on long-term debt decreased in 1998 as compared to the same period
in 1997 due to scheduled debt service and the purchase of $32.0 million of
outstanding debt in 1997.
Liquidity and Capital Resources
Operating Activities. Operating activities are a primary source of cash for
Old Dominion. Net cash provided by operating activities decreased in 1998 as
compared to 1997, primarily because of changes between periods in non-cash
working capital accounts.
Financing Activities. Financing activities resulted in a cash outflow of
$7.8 million as Old Dominion used its cash from operations for debt service and
the retirement of a portion of capital credits.
Investing Activities. Investing activities, primarily additions to plant
and other investments and funds, resulted in a net cash outflow of $19.0
million.
<PAGE>
Other Matters
In October 1998, Virginia State Senator Jackson E. Reasor accepted an offer
to become president and chief executive officer of Old Dominion. Mr. Reasor will
resign his Senate seat and will begin his new duties by November 30, 1998. He
replaces Charles R. Rice, Jr., current vice-chairman of Old Dominion's board,
who has served as acting president and chief executive officer since April 1998,
when Ronald W. Watkins and Old Dominion's Board of Directors decided not to
renew Mr. Watkins' employment contract, which expired April 1, 1998. Mr. Watkins
had been president and chief executive officer of Old Dominion since April 1,
1995.
In 1995, Old Dominion and 10 of its 12 member distribution systems
established an affiliate, CSC Services, Inc. ("CSC"), to explore alternative
business opportunities on behalf of the cooperatives. During 1996, CSC invested
in an approximate one-half interest in Seacoast Power LLC, whose wholly owned
subsidiary, Seacoast, Inc. ("Seacoast"), executed a six-month power sales
contract with INECEL, the state-owned electric utility in Ecuador. Because of
contract disputes, INECEL did not pay invoices rendered by Seacoast for energy
made available under the terms of the power sales contract. Accordingly, in July
1996, Seacoast filed a $26.0 million lawsuit in Ecuador against INECEL seeking
to recover approximately $16.3 million in amounts owed under the power sales
contract, plus damages and fees. A trial date has not been set. In 1997, CSC and
the other participants in Seacoast Power LLC sold their interests in the
venture. In August 1998, CSC signed an agreement in principle to sell its
interest in the lawsuit against INECEL to the other participants in Seacoast
Power LLC.
On May 24, 1996, a default judgment of approximately $27.0 million was
rendered against Seacoast pursuant to a claim filed in the District Court of
Travis County, Texas, by an entity seeking damages for breach of an oral
contract by the former owners of Seacoast. On January 29, 1998, the Texas Court
of Appeals issued an order affirming the default judgment against Seacoast but
reversing and remanding the award of damages as factually unsupported. On March
18, 1998, Seacoast filed an appeal challenging the refusal by the Texas Court of
Appeals to set aside the default judgment. That appeal is pending. In a separate
proceeding, on May 5, 1997, Seacoast filed a bill of review in the District
Court of Travis County, Texas, collaterally attacking the default judgment. That
action is also pending.
On February 27, 1997, Southside Electric Cooperative ("Southside"), one of
two Member distribution systems that did not participate in forming CSC, raised
a question as to whether the loss, with respect to Old Dominion's interest in
Seacoast, should be borne totally by Old Dominion, thus resulting in a greater
financial burden on Southside. Southside asserts that its share of the loss
should be limited to a pro rata share of Old Dominion's 30% common equity
participation in CSC, which may be less than their proportionate share as an Old
Dominion Member. On October 16, 1997, the Board of Directors of Southside passed
a resolution outlining various issues of concern with Old Dominion. Management
believes these issues will be resolved over time and without a material impact
on Old Dominion's financial position.
On October 14, 1997, Old Dominion's Board of Directors approved a resolution
adopting certain strategic objectives designed to mitigate the effects of the
transition to a competitive electric market (the "Strategic Plan Initiative").
Management is currently evaluating various alternatives as Old Dominion prepares
for transition to competition. The Strategic Plan Initiative could result in an
alternate treatment of Old Dominion's excess margins, which are currently
returned to Members through the Margin Stabilization Plan. Northern Virginia
Electric Cooperative ("NOVEC"), Rappahannock Electric Cooperative ("REC"), and
Southside have voiced concerns about the level and timing of cost recovery as
contemplated by the Strategic Plan Initiative. Further, NOVEC and REC have
expressed concerns about the Strategic Plan Initiative regarding: (1) the
all-requirements nature of the Wholesale Power Contracts that they have with Old
Dominion, and (2) whether Old Dominion has the right under the Wholesale Power
Contracts to "over-collect" monies from its Members for future debt retirement
or for payment of future costs. To address these concerns, Old Dominion is
working on several initiatives to resolve Members concerns, including those
raised by REC and NOVEC, regarding the transition to a competitive environment.
<PAGE>
Future Issues
Competition
The electric utility industry is becoming increasingly competitive as a
result of deregulation, competing energy suppliers, new technology, and other
factors. The Energy Policy Act of 1992 amended the Federal Power Act and the
Public Utilities Holding Company Act to allow for increased competition among
wholesale electricity suppliers and increased access to transmission services by
such suppliers. A number of other significant factors have affected the
operations of electric utilities, including the availability and cost of fuel
for the generation of electric energy; the use of alternative fuel sources for
space and water heating and household appliances; fluctuating rates of load
growth; compliance with environmental and other governmental regulations;
licensing and other delays affecting the construction, operation, and cost of
new and existing facilities; and the effects of conservation, energy management,
and other governmental regulations on the use of electric energy. All these
factors present an increasing challenge to companies in the electric utility
industry, including Old Dominion and its Members, to reduce costs, increase
efficiency and innovation, and improve management of resources.
The 1998 session of the Virginia General Assembly passed two measures
affecting the course of electric industry restructuring in Virginia. The first,
H.B. 1172, indicates that the deregulation of generation and the transition to
retail competition will begin in 2002 and be completed by 2004. However, these
time lines are not self-enacting and future action by the General Assembly is
needed. Consequently, Senate Joint Resolution 91 ("SJR 91") was passed to
continue the study of electric industry restructuring in Virginia. The
subcommittee created pursuant to SJR 91 has established four task forces:
Stranded Costs and Related Issues, Consumer and Environmental Education,
Structure and Transition, and Taxes. These task forces will continue to meet to
determine what legislative changes, if any, are needed to facilitate
restructuring in the state.
The Maryland General Assembly adjourned in April 1998 without taking action
on any electric industry restructuring proposal. Consequently, the order adopted
by the Maryland Public Service Commission ("Maryland Commission") in 1997
outlining both a time frame for restructuring and a process by which it will
occur is in effect. Requests for rehearing of the order have been filed and are
currently pending before the Maryland Commission. Six roundtable groups have
been meeting over the last several months addressing issues of competitive
metering and billing, continuation of demand-side management, universal service,
customer projections, consumer education, and supplier authorization. An interim
report to the Maryland Commission is due in November 1998 reporting on the
progress of each roundtable.
The Maryland Senate Budget and Taxation Committee and the Maryland House
Committee on Ways and Means have begun meeting to discuss tax reform in Maryland
in preparation for retail competition. The first meeting was held on July 28,
1998, and there are several meetings scheduled throughout the remainder of the
year.
A measure to provide customer choice was introduced in the Delaware General
Assembly during the most recent session, which recessed on June 30, 1998. While
the measure passed the House unanimously, the Senate did not consider it. The
primary opponent of this legislation was the Governor who expressed concern
about the impact of restructuring on residential customers. It is anticipated
that legislation will be introduced in Delaware in 1999.
Year 2000 Issue
Certain computer hardware, computer software, and embedded technology used by
Old Dominion were not designed to recognize calendar years after 1999. Because
Old Dominion's operations rely upon computer technology and upon the systems of
others with whom it does business, the failure of Old Dominion, or those with
whom it does business, to become year 2000 compliant on a timely basis could
have a material adverse effect on Old Dominion's operations and its financial
condition.
<PAGE>
Old Dominion's primary concerns are its ability to generate or obtain power
for its members; the ability of members to deliver power to their customers; the
ability of Old Dominion to bill its members for power received, and the ability
of Old Dominion to monitor loads. To address these and other concerns, Old
Dominion formalized an initiative, which included the appointment of a project
manager having overall responsibility for coordinating efforts in addressing its
year 2000 issues and implementing a three-phase approach for each of its
critical systems.
Planning and assessment: This phase consists of identifying affected
systems and software and developing a remediation or replacement plan.
Implementation and Remediation: This phase consists of system
upgrade, replacement or other corrective action.
Testing and documentation: This phase includes validation of corrective
actions taken.
In addition to its own internal assessment, Old Dominion contracted with a
technology services company to perform an assessment and analysis of its
information technology and non-information technology systems. The analysis
involved inventorying all systems and addressed computer hardware, computer
software, and embedded technology issues. In October 1998, the technology
services company completed its assessment and issued its initial report, which
contained its findings and recommendations. Additionally, Old Dominion completed
its assessment of its systems and will utilize the results of these assessments
to develop a detailed action plan for addressing the noted findings. The plan is
expected to be complete by the end of 1998.
Old Dominion has identified its financial and engineering systems as those
which are critical to its operations and business. Old Dominion has determined
that its financial and engineering systems are year 2000 ready, except for the
billing system. Modification of the billing system is expected to be complete by
March 1999, with testing complete by September 1999.
As operator of both the North Anna and Clover power stations, Virginia Power
is responsible for ensuring that the plants are year 2000 ready. North Anna is
expected to be year 2000 ready by October 31, 1999. Unit 2 is scheduled for a
regular maintenance and refueling outage in September 1999, and final
remediation work will be done during that outage. Virginia Power will have
extensive experience performing remediation at three nuclear units, including
North Anna Unit 1, prior to that time and, thus, feels confident that the work
on Unit 2 will be achieved quickly. Clover is expected to be year 2000 ready by
July 1999. Virginia Power does not have specific contingency plans for North
Anna and Clover and has not established a worst case scenario for either plant.
As part of the year 2000 compliance process, Old Dominion must determine and
evaluate most reasonably likely worst case scenarios. Based on preliminary
evaluations, Old Dominion has identified the following as the most reasonably
likely worst case scenarios: temporary loss of a portion of generation capacity,
and third party power suppliers' failure to be year 2000 compliant. Based on
information supplied by Virginia Power, Old Dominion does not believe that a
temporary loss of generation capacity will have a material adverse impact on Old
Dominion's results of operations.
Regarding third party power suppliers, Old Dominion receives more than half
of its power from other parties and is interconnected with other utilities at
more than 200 transmission and distribution points. Although Old Dominion has a
program to keep up with their efforts for year 2000 compliance, Old Dominion
does not control their activities and outcome. Non-year 2000 compliance by these
third parties could have a detrimental impact on Old Dominion and its members.
In addition to Virginia Power and third party power suppliers, Old Dominion
is evaluating the year 2000 readiness of other key suppliers and vendors. In all
cases, Old Dominion is developing a contingency plan and anticipates having such
plan in place by March 1999 to deal with any problems should they occur.
<PAGE>
Old Dominion's estimate of its year 2000 costs is approximately $0.6 million,
of which approximately $0.2 million has been expended to date.
The above description of Old Dominion's year 2000 efforts and completion
dates are based on assumptions and management's best estimates regarding future
events. However, estimates and assumptions could change as Old Dominion, its
members, key suppliers and Virginia Power move through this process and as more
information becomes available. Additionally, there are no assurances that
estimates of completion will be achieved and actual results could differ
materially from those stated above.
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Other than certain legal proceedings arising out of the ordinary
course of business, which management believes will not have a material
adverse impact on the results of operations or financial condition of
Old Dominion, there is no other litigation pending or threatened against
Old Dominion. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Other Matters" for a discussion of
certain disputes relating to Old Dominion's interest in Seacoast, Inc.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27.Financial Data Schedule
(b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K during the quarter ended
September 30, 1998.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OLD DOMINION ELECTRIC COOPERATIVE
Registrant
Date: November 16, 1998 /s/Daniel M. Walker
-----------------------------------
Daniel M. Walker
Vice President of Accounting and
Finance (Chief Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Description of Exhibit Number
27. Financial Data Schedule 20
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF OLD DOMINION ELECTRIC COOPERATIVE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 778,835
<OTHER-PROPERTY-AND-INVEST> 199,001
<TOTAL-CURRENT-ASSETS> 169,252
<TOTAL-DEFERRED-CHARGES> 13,484
<OTHER-ASSETS> 12,231
<TOTAL-ASSETS> 1,172,803
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 202,314<F1>
<OTHER COMPREHENSIVE INCOME> 1,228
<TOTAL-COMMON-STOCKHOLDERS-EQ> 0
0
0
<LONG-TERM-DEBT-NET> 608,653
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 28,460
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 332,148
<TOT-CAPITALIZATION-AND-LIAB> 1,172,803
<GROSS-OPERATING-REVENUE> 269,311
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 226,372
<TOTAL-OPERATING-EXPENSES> 226,372
<OPERATING-INCOME-LOSS> 42,939
<OTHER-INCOME-NET> 4,017
<INCOME-BEFORE-INTEREST-EXPEN> 46,956
<TOTAL-INTEREST-EXPENSE> 39,078
<NET-INCOME> 7,878
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 86,350
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Old Dominion is organized and operated as a cooperative. Patronage
capital is the retained net margins of Old Dominion which have been
allocated to its members based on their respective power purchases
in accordance with Old Dominion's bylaws.
</FN>
</TABLE>
