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 March 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to __________
Commission file number 33-46795
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 - March 31, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Revenues, Expenses and
Patronage Capital (Unaudited) - Three Months Ended
March 31, 1999 and 1998 5
Consolidated Statements of Comprehensive Income (Unaudited) -
Three Months Ended March 31, 1999 and 1998 6
Consolidated Statements of Cash Flows (Unaudited) - Three
Months Ended March 31, 1999 and 1998 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 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Exhibit Index 20
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------- -----------------
(In Thousands)
<S> <C> <C>
ASSETS: (unaudited) (*)
Electric Plant:
In service $ 885,615 $ 885,551
Less accumulated depreciation (161,368) (140,574)
---------------- -----------------
724,247 744,977
Nuclear fuel, at amortized cost 6,888 8,398
Construction work in progress 13,816 13,591
---------------- -----------------
Net Electric Plant 744,951 766,966
---------------- -----------------
Investments and Funds:
Nuclear decommissioning trust fund 52,685 51,964
Restricted investments 119,598 120,391
Other investments 38,139 38,689
---------------- -----------------
Total Investments and Funds 210,422 211,044
---------------- -----------------
Current Assets:
Cash and cash equivalents 127,668 82,382
Receivables 33,374 37,367
Fuel stock 3,701 3,460
Materials and supplies, at average cost 5,957 5,831
Prepayments 2,564 2,533
---------------- -----------------
Total Current Assets 173,264 131,573
---------------- -----------------
Deferred Charges:
Regulatory assets 3,164 4,643
Other 11,980 12,318
---------------- -----------------
Total Deferred Charges 15,144 16,961
---------------- -----------------
Total Assets $ 1,143,781 $ 1,126,544
================ =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(*) The Consolidated Balance Sheet at December 31, 1998, 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 BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------------- -----------------
(In Thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES: (Unaudited) (*)
Capitalization:
Patronage capital $ 209,338 $ 206,530
Accumulated other comprehensive income 156 697
Long-term debt 585,224 584,630
---------------- -----------------
Total Capitalization 794,718 791,857
---------------- -----------------
Current Liabilities:
Long-term debt due within one year 29,590 29,590
Accounts payable 18,890 19,007
Accounts payable - Member deposits 41,851 42,204
Deferred energy 5,374 2,366
Accrued interest 15,373 3,839
Accrued taxes 939 212
Other 2,924 2,463
---------------- -----------------
Total Current Liabilities 114,941 99,681
---------------- -----------------
Deferred Credits and Other Liabilities:
Decommissioning reserve 52,685 51,964
Deferred credits 57,995 58,684
Obligations under long-term leases 122,698 123,614
Other 744 744
---------------- -----------------
Total Deferred Charges and Other Liabilities 234,122 235,006
---------------- -----------------
Committments and Contingencies - -
---------------- -----------------
Total Capitalization and Liabilities $ 1,143,781 $ 1,126,544
================ =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(*) The Consolidated Balance Sheet at December 31, 1998, 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)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
1999 1998
---------------- -----------------
(In Thousands)
<S> <C> <C>
Operating Revenues:
Sales to members $ 106,263 $ 85,675
Sales to non-member 55 172
---------------- -----------------
106,318 85,847
---------------- -----------------
Operating Expenses:
Operation:
Fuel 10,953 10,979
Purchased power 45,114 36,116
Other 6,215 5,749
---------------- -----------------
62,282 52,844
Maintenance 2,291 1,838
Administrative and general 3,961 3,791
Depreciation and amortization 20,964 12,100
Amortization of lease gains (689) (689)
Decommissioning cost 170 170
Taxes other than income taxes 1,881 1,857
---------------- -----------------
Total Operating Expenses 90,860 71,911
---------------- -----------------
Operating Margin 15,458 13,936
---------------- -----------------
Other Income, net 50 574
---------------- -----------------
Investment Income:
Interest 1,198 960
Other 80 94
---------------- -----------------
Total Investment Income 1,278 1,054
---------------- -----------------
Interest Charges:
Interest on long-term debt, net 14,013 12,995
Other 33 63
Allowance for borrowed funds used during construction (70) (104)
---------------- -----------------
Net Interest Charges 13,976 12,954
---------------- -----------------
Net Margin 2,810 2,610
Patronage Capital-beginning of period 206,528 197,552
Capital Credit Payments - (3,116)
---------------- -----------------
Patronage Capital-end of period $ 209,338 $ 197,046
================ =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
------------------------------
1999 1998
---------------- -------------
(In Thousands)
Net Margin $ 2,810 $ 2,610
Other comprehensive income:
Unrealized gains on investments 156 334
-------------- ---------------
Comprehensive income $ 2,966 $ 2,944
============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------
1999 1998
---------------- -----------------
(In Thousands)
<S> <C> <C>
Cash From Operating Activities:
Net margin $ 2,810 $ 2,610
Adjustments to reconcile net margin to net cash provided
by operating activities:
Depreciation and amortization 20,964 12,100
Other non-cash charges 3,953 2,078
Decommissioning cost 170 170
Amortization of lease obligations 2,172 2,082
Gain from lease transactions (689) (689)
Changes in Current Assets and Current Liabilities:
Change in current assets 3,595 2,987
Change in current liabilities 15,260 22,943
Deferred charges (319) (100)
Other assets 287 87
---------------- -----------------
Net Cash Provided by Operating Activities 48,203 44,268
---------------- -----------------
Cash From Financing Activities:
Reduction in obligations under long-term leases (175) (161)
Payment of long-term debt - (581)
Payment of capital credits - (3,116)
---------------- -----------------
Net Cash Used in Financing Activities (175) (3,858)
---------------- -----------------
Cash From Investing Activities:
Electric plant additions (455) (3,453)
Decommissioning fund deposits (170) (170)
Restricted investments (2,121) (2,030)
Other investments 9 (2,942)
Retirement work in progress (5) (23)
---------------- -----------------
Net Cash Provided by (Used in) Investing Activities (2,742) (8,618)
---------------- -----------------
Net Increase in Cash and Cash Equivalents 45,286 31,792
Cash and Cash Equivalents - Beginning of Period 82,382 61,740
---------------- -----------------
Cash and Cash Equivalents - End of Period $ 127,668 $ 93,532
================ =================
</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 March 31, 1999, and its consolidated results of operations,
comprehensive income and cash flows for the three months ended March 31,
1999 and 1998. The consolidated results of operations for the three months
ended March 31, 1999, 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 1998 Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
2. 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 ("Strategic Plan
Initiative"). Subsequently, an independent assessment of the impact on Old
Dominion of transition to a competitive market was performed and the
resulting recommendations to mitigate the transition effects were approved
by the Board of Directors on July 28, 1998, and incorporated into the
Strategic Plan Initiative. The Strategic Plan Initiative currently calls
for the accumulation of approximately $330.0 million in cash and cash
equivalents from 1998 to 2003 with the funds to be used for the prepayment
of a portion of outstanding debt. The Plan will be updated annually based
on any revised projections, projected targets and the status of the Plan's
objective. The Board of Directors will approve all revisions or
modifications to the Plan. In conjunction with the Strategic Plan
Initiative, Old Dominion has accelerated the recovery in rates of certain
assets aggregating $40.3 million through December 31, 1998. During the
first quarter of 1999, Old Dominion accelerated the amortization and
recovery in rates of a debt prepayment premium in the amount of $1.7
million.
In accordance with Old Dominion's Strategic Plan Initiative, on May 10,
1999, Old Dominion's Board of Directors unanimously approved a resolution
to record accelerated depreciation on the North Anna and Clover Power
Stations during the period January 1, 1999 through December 31, 2003, and
recover the additional expense through rates pursuant to the comprehensive
rate formula filed with and approved by the Federal Energy Regulatory
Commission. The additional depreciation expense to be recorded annually
will be equal to margins in excess of Old Dominion's costs and times
interest earned ratio ("TIER") requirement of 1.20, but will not exceed
budgeted annual margins in excess of costs and TIER. Old Dominion
anticipates recording additional depreciation of approximately $43.7
million in 1999. Old Dominion recorded $14.2 million of additional
depreciation expense in the first quarter of 1999. Rates previously
approved by the Board of Directors for 1999 were designed to include
approximately $45.0 million of margins in excess of costs and TIER.
Consequently, the action undertaken by the Board of Directors on May 10,
1999 will not result in a change in rates from those previously planned and
approved.
Based on the Strategic Plan Initiative, annual depreciation expense will be
reduced, beginning in 2004, based on the remaining net book values of North
Anna and Clover at December 31, 2003. Depreciation expense will be
calculated based on the straight-line method over the remaining useful
lives of the plants.
3. Old Dominion holds an approximate 30% equity interest in CSC Services, Inc.
("CSC"), formed in 1995 by Old Dominion and 10 of its 12 member
distribution systems 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
<PAGE>
1996, Seacoast filed a $26.0 million lawsuit in Ecuador against INECEL
seeking to recover amounts owed under the power sales contract, plus
damages and fees. A trial date has not been set. In August 1998, CSC sold
its interest in Seacoast Power LLC to the other participants in Seacoast
Power LLC for $100,000.
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 any 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 judgment. That
appeal was denied. As a condition of the sale of its interest in Seacoast
Power LLC, CSC agreed to fund approximately one-half of any further costs
that may be necessary to defend Seacoast against this action if the damage
claim is pursued. Management of CSC believes there is no basis for the
lawsuit and no additional amount has been recorded as a liability by Old
Dominion.
5. Certain reclassifications have been made to the accompanying prior year's
consolidated financial statements to conform to the current year's
presentation.
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, based on
expectations and estimates of management, are not guarantees of future
performance and are subject to risks, uncertainties, and other factors that
could cause actual results to differ materially from those expressed in the
forward-looking statements. These risks, uncertainties, and other factors
include, but are not limited to: general business conditions, competition,
federal and state regulations, environmental issues, tax status, industry
restructuring, year 2000 readiness of Old Dominion, its Members, and those with
which they interface and weather. Given these uncertainties, undue reliance
should not be placed on such forward-looking statements.
RESULTS OF OPERATIONS
OPERATING REVENUES
Old Dominion's operating revenues are derived from power sales to its
Members and to a non-member. 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.
Sales to a non-member represent sales of excess energy from the Clover
Power Station ("Clover") to Virginia Electric and Power Company ("Virginia
Power"). Old Dominion is required to sell its excess energy from Clover to
Virginia Power, a non-member.
The following table summarizes the increases (decreases) in operating
revenues by component:
Three Months
Ended
March 31,
1999 vs 1998
--------------
(in thousands)
Sales to Members:
Power sales volume $16,021
Blended rates (3,286)
Fuel adjustment revenue 3,661
Margin stabilization plan adjustment 4,192
-------
20,588
Sales to non-member (117)
-------
$20,471
=======
The colder weather in the first quarter of 1999 as compared to the same
period in 1998 resulted in a 12.7% increase in demand sales and a 14.3% increase
in energy sales. Old Dominion's demand and energy sales for the three months
ended March 31, 1999, were 4,333,343 MW and 2,198,581 MWh, respectively. Old
Dominion's demand and energy sales for the three months ended March 31, 1998,
were 3,668,716 MW and 1,924,132 MWh, respectively.
<PAGE>
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 first quarter of 1999 and 1998
were as follows:
Three Months Ended
-----------------------------
March 31,
-----------------------------
1999 1998 Normal
--------- ------- -------
Cooling degree days................. - 31 13
Percentage change compared to
prior year........................ (100.00)% 518.96%
Heating degree days................. 1,944 1,734 1,943
Percentage change compared to
prior year........................ 12.09% (6.97)%
OPERATING EXPENSES
OPERATIONS
Old Dominion has an 11.6% undivided ownership interest in the North Anna
Nuclear Power Station ("North Anna") and a 50% undivided interest in Clover.
Power plants, particularly nuclear power plants such as North Anna, generally
have relatively high fixed costs; however, 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 either North Anna or Clover is off-line, Old Dominion must purchase
replacement power that is 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 Power. As a result, Old
Dominion's operating expenses, and therefore its rates to its Members, are
significantly affected by the operation of North Anna and Clover.
Actual North Anna and Clover capacity factors for the first quarter 1999
and 1998 as compared to the net capacity ratings were as follows:
North Anna Clover
------------------- ------------------
Three Months Ended Three Months Ended
March 31, March 31,
------------------- -------------------
1999 1998 1999 1998
-------- -------- ------- -------
Unit 1 103.1% 99.8% 76.4% 87.6%
Unit 2 100.6 97.0 78.6 58.6
Combined 101.9 98.4 77.5 73.1%
North Anna Units 1 and 2 were not off-line during the first quarter of 1999
or 1998. As of March 31, 1999, Unit 1 had been on-line for 175 consecutive days
and Unit 2 had been on-line for 195 consecutive days.
<PAGE>
Clover Unit 1 operated for 166 consecutive days before it was removed from
service on March 19, 1999, to begin a 20-day scheduled maintenance outage. Unit
2 has been on-line for 53 consecutive days as of March 31, 1999. As of March 31,
1998, Clover Unit 1 had been on-line 138 consecutive days. Clover Unit 2 was
taken off-line February 28, 1998, for a scheduled chimney liner replacement
which lasted 60 days.
In addition to power generated at Clover and North Anna, Old Dominion
purchases power from Virginia Power, Public Service Electric & Gas ("PSE&G"),
Delmarva Power & Light ("Delmarva Power"), and others. Old Dominion's energy
supply for 1999 and 1998 was as follows:
Three Months Ended
March 31,
----------------------------------------
1999 1998
------------------ ------------------
(MWh) (MWh)
Clover 729,219 32.2 689,043 35.2
--------- ---- ---------- ----
North Anna 456,827 20.2% 441,113 22.6%
--------- ---- ---------- ----
Purchased Power:
Virginia Power 517,836 22.8 397,140 20.3
PSE&G 412,792 18.2 285,076 14.6
Delmarva Power 62,464 2.8 87,840 4.5
Conectiv/PPL 30,566 1.3 - -
Other 56,678 2.5 54,872 2.8
--------- ------- --------- ------
Total Purchased Power 1,080,336 47.6 824,928 42.2
--------- ------ --------- ------
Total Available Energy 2,266,382 100.0% 1,955,084 100.0%
========= ===== ========= =====
An increase in demand and energy sales combined with increased production
at Clover and North Anna resulted in an increase in operating expenses in the
first quarter of 1999. Additionally, purchased power costs increased $0.9
million in the first quarter of 1999 as compared to the same period in 1998 due
to an increase in the volume purchased and deferred energy costs. Increased
production at Clover and mild weather were the primary factors affecting
operating expenses in the first quarter of 1998.
OTHER OPERATING EXPENSES
Other operating expenses in the first quarter of 1999 remained
approximately the same as in the first quarter of 1998 except for depreciation
expense, which increased primarily because of $14.2 million of accelerated
depreciation recorded on North Anna and Clover in accordance with Old Dominion's
Strategic Plan Initiative. See Note 2 to the consolidated financial statements.
In the first quarter of 1998, depreciation and amortization expense included
$5.2 million of accelerated amortization and recovery in rates relating to the
North Anna plant acquisition adjustment. At December 31, 1998, the plant
acquisition adjustment was fully amortized.
NON-OPERATING INCOME AND EXPENSES
Other income, net, decreased because of a 1998 refund of prior year
expenses paid by Old Dominion in the amount of $0.5 million relating to the
implementation of a new Interconnection and Operating Agreement with Virginia
Power.
Interest on long-term debt increased in the first quarter of 1999 as
compared to the same period in 1998 because of the accelerated amortization and
recovery in rates of the debt prepayment premium of $1.7 million. Interest on
long-term debt decreased in the first quarter of 1998 as compared to the same
period in 1997 because of the purchase of $32.0 million of outstanding debt in
1997.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES provided $48.2 million in the first quarter of 1999
and $44.3 million in the first quarter of 1998. The increase of $3.9 million is
primarily due to the accelerated depreciation recorded on North Anna and Clover
in 1999 offset by the change between periods in non-cash working capital
accounts, mainly accounts payable and accrued expenses.
FINANCING ACTIVITIES were minimal in 1999. However, in 1998 Old Dominion
used its cash from operations for the retirement of a portion of capital
credits.
INVESTING ACTIVITIES resulted in a net cash outflow during the first
quarter of 1999 because of plant additions, decommissioning fund deposits, and
additions to restricted investments. In 1998, the net cash outflow resulted from
plant additions, additions to restricted and other investments, and
decommissioning fund deposits.
OTHER MATTERS
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 ("Strategic Plan
Initiative"). Subsequently, an independent assessment of the impact on Old
Dominion of transition to a competitive market was performed and the resulting
recommendations to mitigate the transition effects were approved by the Board of
Directors on July 28, 1998, and incorporated into the Strategic Plan Initiative.
The Strategic Plan Initiative currently calls for the accumulation of
approximately $330.0 million in cash and cash equivalents from 1998 to 2003 with
the funds to be used for the prepayment of a portion of outstanding debt. The
Plan will be updated annually based on any revised projections, projected
targets and the status of the Plan's objective. The Board of Directors will
approve all revisions or modifications to the Plan. In conjunction with the
Strategic Plan Initiative, Old Dominion has accelerated the recovery in rates of
certain assets aggregating $42.0 million through March 31, 1999.
In accordance with Old Dominion's Strategic Plan Initiative, on May 10,
1999, Old Dominion's Board of Directors unanimously approved a resolution to
record accelerated depreciation on the North Anna and Clover Power Stations
during the period January 1, 1999, through December 31, 2003, and recover the
additional expense through rates pursuant to the comprehensive rate formula
filed with and approved by the Federal Energy Regulatory Commission. The
additional depreciation expense to be recorded annually will be equal to margins
in excess of Old Dominion's costs and times interest earned ratio ("TIER")
requirement of 1.20, but will not exceed budgeted annual margins in excess of
costs and TIER. Old Dominion anticipates recording additional depreciation of
approximately $43.7 million in 1999. Old Dominion recorded $14.2 million of
additional depreciation expense in the first quarter of 1999. Rates previously
approved by the Board of Directors for 1999 were designed to include
approximately $45.0 million of margins in excess of costs and TIER.
Consequently, the action undertaken by the Board of Directors on May 10, 1999
will not result in a change in rates from those previously planned and approved.
Based on the Strategic Plan Initiative, annual depreciation expense will
be reduced, beginning in 2004, based on the remaining net book values of North
Anna and Clover at December 31, 2003. Depreciation expense will be calculated
based on the straight-line method over the remaining useful lives of the plants.
Old Dominion holds an approximate 30% equity interest in CSC Services, Inc.
("CSC"), formed in 1995 by Old Dominion and 10 of its 12 member distribution
systems 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
<PAGE>
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 amounts owed under the
power sales contract, plus damages and fees. A trial date has not been set. In
August 1998, CSC sold its interest in Seacoast Power LLC to the other
participants in Seacoast Power LLC for $100,000.
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 any 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 judgment. That appeal was denied. As a
condition of the sale of its interest in Seacoast Power LLC, CSC agreed to fund
approximately one-half of any further costs that may be necessary to defend
Seacoast against this action if the damage claim is pursued. Management of CSC
believes there is no basis for the lawsuit and no additional amount has been
recorded as a liability by Old Dominion.
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.
VIRGINIA. On March 25, 1999, the governor of Virginia signed into law
comprehensive electric utility restructuring legislation. The legislation
provides for retail choice to begin on January 1, 2002, and be completed by
January 1, 2004. Previously regulated electric utilities must unbundle the
component parts of generation, transmission, and distribution. Power
transmission and distribution will remain under government regulation; however,
power generation will be deregulated and utilities will be able to compete for
customers in the open market. Cooperatives will continue to be the default
supplier for their members consumers.
The deregulation plan calls for capping rates, excluding the recovery of
fuel costs, from January 1, 2002 to July 1, 2007, during which time competition
for power generation will be introduced into the state's electric utility
industry. The rates will be capped at the levels in effect on July 1, 1999;
however, a utility can petition the Virginia State Corporation Commission for an
increase in rates prior to January 1, 2001. Utilities may use revenues collected
during the transition period to recover the costs of nuclear power plants and
other assets that could lose their values in a competitive market. Old
Dominion's Member cooperatives in Virginia will be required to comply with these
regulations.
MARYLAND. On April 8, 1999, the governor of Maryland signed into law
restructuring legislation requiring a three-year phase-in of retail competition
beginning July 1, 2000. The legislation also calls for a 3.0% to 7.5% rate
reduction for residential customers upon commencement of competition, followed
by a four-year rate freeze for all customers. Similar to legislation adopted in
Virginia, power generation will be deregulated and utilities will compete for
customers in the open market. Old Dominion's Member cooperative in Maryland will
be required to comply with the legislation as it was passed.
<PAGE>
DELAWARE. On March 31, 1999, the governor of Delaware signed into law
legislation requiring a phase-in of retail competition beginning October 1,
1999, for customers of the state's investor-owned electric utility and beginning
April 1, 2000, for cooperative customers, including customers of Old Dominion's
Members. Rates for residential customers of the state's investor-owned electric
utility are to be reduced 7.5% effective October 1, 1999, after which the rates
will be frozen for four years. Rates for all other customer classes are to be
frozen for three years. Cooperative customers' rates are to be frozen at current
levels for five years. As in Virginia and Maryland, this legislation provides
that power generation be deregulated and utilities compete for customers in the
open market.
With the electric utility industry moving toward a competitive environment,
it has become necessary for Old Dominion and its Members to develop innovative
approaches to serving traditional markets. In a competitive environment,
generating utilities such as Old Dominion are no longer guaranteed the recovery
of prudently incurred costs. Generating utilities with costs that exceed market
prices could suffer significant losses. Additionally, the loss of customers
could also have a significant impact on a utility's results of operations. In
the case of Old Dominion and its Members, the loss of a significant portion of
load could cause a reduction in revenues and cash flows. The resulting decrease
in Member revenues could also cause Old Dominion to lose its tax-exempt status.
Management is currently working with the Members through the Strategic Plan
Initiative to improve Old Dominion's and the Members' competitive position. Old
Dominion cannot predict the ultimate effect competition will have on results of
operations and future cash flows.
YEAR 2000 COMPLIANCE
Certain computer hardware, computer software, and embedded technology used
by Old Dominion was not designed to recognize calendar years after 1999. Since
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.
Old Dominion's goal is to ensure that key systems, applications and
third-party relationships have been evaluated and will continue operating into
the year 2000 and thereafter. Given the magnitude and complexity of the year
2000 issue, Old Dominion cannot guarantee that every problem will be found and
corrected prior to January 1, 2000. Therefore, Old Dominion is focusing on
critical operating and business systems and anticipates having a contingency
plan in place by June 1999 to deal with any problems should they occur.
Old Dominion's primary concerns are its ability to obtain power for its
Members through purchase or generation; the ability of its 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
solutions. In addition, Old Dominion contracted with a technology services
company to perform an assessment and analysis of its information technology and
non-information technology systems. Their analysis involved inventorying all
systems and addressed computer hardware, computer software, and embedded
technology issues. In October 1998, the technology services company issued its
report, which contained detailed findings and recommendations. From this report,
Old Dominion formalized a year 2000 action plan which was approved by Old
Dominion's Board of Directors on February 8, 1999.
<PAGE>
Currently, Old Dominion anticipates upgrading or replacing older systems and
equipment with new, year 2000 compliant systems and equipment and implementing a
four-phase approach for each system.
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.
Contingency planning: This phase consists of departmental planning for
internal and external risks.
Old Dominion has completed the assessment of its systems and identified
appropriate resources and courses of action to ensure that the key operating and
business systems are year 2000 ready. In addition, Old Dominion is meeting with
key suppliers and assessing their year 2000 readiness.
Old Dominion has determined that its financial and engineering systems are
year 2000 ready. The billing system has been modified and documentation of the
testing results is currently underway. Also user/information systems
documentation is being updated.
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 has represented that it
will have extensive experience performing remediation at three nuclear units,
including North Anna Unit 1, prior to that time and, thus, is confident that the
work on Unit 2 will be achieved quickly. Clover is expected to be year 2000
ready by July 1999. Virginia Power's contingency planning efforts to ensure
continuity of operations into and beyond the year 2000 are essentially complete.
Minor updates and final reviews will be completed during the second quarter of
1999. Virginia Power has existing contingency plans in place in case of an
extraordinary event, which may cause interruptions in service. Year 2000
contingency planning is an extension of these existing plans.
Additionally, Virginia Power participated in the first nationwide drill
coordinated by the North American Electric Reliability Council on April 9, 1999,
to examine how utilities would cope with a loss of voice and date
communications. Virginia Power will participate in a second nationwide drill on
September 8 - 9, 1999.
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.
Old Dominion has made inquiries of and sent questionnaires to its Members in
order to determine their year 2000 readiness. However, Old Dominion does not
control their year 2000 activities and non-compliance by a Member could have an
adverse impact on Old Dominion's results of operations.
Regarding third party power suppliers, Old Dominion receives a significant
portion 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 stay abreast of 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.
<PAGE>
Old Dominion's estimate of its year 2000 costs is approximately $0.8
million, of which approximately $0.6 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 moves
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
March 31, 1999.
<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: May 14, 1999 /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
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 744,951
<OTHER-PROPERTY-AND-INVEST> 210,422
<TOTAL-CURRENT-ASSETS> 173,264
<TOTAL-DEFERRED-CHARGES> 3,164
<OTHER-ASSETS> 11,980
<TOTAL-ASSETS> 1,143,781
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 209,338<F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 0
0
0
<LONG-TERM-DEBT-NET> 585,224
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 29,590
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 319,629
<TOT-CAPITALIZATION-AND-LIAB> 1,143,781
<GROSS-OPERATING-REVENUE> 106,318
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 90,860
<TOTAL-OPERATING-EXPENSES> 90,860
<OPERATING-INCOME-LOSS> 15,458
<OTHER-INCOME-NET> 1,328
<INCOME-BEFORE-INTEREST-EXPEN> 0
<TOTAL-INTEREST-EXPENSE> 13,976
<NET-INCOME> 2,810
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 48,203
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
<FN>
<F1>Old Dominion is organized and operated as a cooperative. Patronage capital is
the ratained 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>
