- --------------------------------------------------------------------------------
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, 1999
or
---- c 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.
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<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1999 (Unaudited)
and December 31, 1998 3
Consolidated Statements of Revenues, Expenses and
Patronage Capital (Unaudited) - Nine Months Ended
September 30, 1999 and 1998 5
Consolidated Statements of Comprehensive Income (Unaudited) -
Nine Months Ended September 30, 1999 and 1998 6
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended September 30, 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
</TABLE>
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- ----------
(in thousands)
(unaudited) (*)
<S> <C>
ASSETS:
Electric Plant:
In service $ 885,638 $ 885,551
Less accumulated depreciation (194,057) (140,574)
----------- -----------
691,581 744,977
Nuclear fuel, at amortized cost 3,973 8,398
Construction work in progress 19,101 13,591
----------- -----------
Net Electric Plant 714,655 766,966
----------- -----------
Investments and Funds:
Nuclear decommissioning trust fund 53,654 51,964
Restricted investments 123,707 120,391
Other investments 83,117 38,689
----------- -----------
Total Investments and Funds 260,478 211,044
----------- -----------
Current Assets:
Cash and cash equivalents 50,933 82,382
Receivables 33,472 37,367
Fuel stock 2,265 3,460
Materials and supplies, at average cost 6,003 5,831
Prepayments 2,711 2,533
Deferred energy 6,033 -
----------- -----------
Total Current Assets 101,417 131,573
----------- -----------
Deferred Charges:
Regulatory assets 3,171 4,643
Other assets 15,074 12,318
----------- -----------
Total Deferred Charges 18,245 16,961
----------- -----------
Total Assets $ 1,094,795 $ 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>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------- -----------
(in thousands)
(unaudited) (*)
<S> <C>
CAPITALIZATION AND LIABILITIES:
Capitalization:
Patronage capital $ 214,336 $ 206,530
Accumulated other comprehensive income (2,031) 697
Long-term debt 544,076 584,630
----------- -----------
Total Capitalization 756,381 791,857
----------- -----------
Current Liabilities:
Long-term debt due within one year 29,590 29,590
Accounts payable 20,176 19,007
Accounts payable - Member deposits 31,349 42,204
Deferred energy - 2,366
Accrued interest 14,774 3,839
Accrued taxes 2,224 212
Other 2,466 2,463
----------- -----------
Total Current Liabilities 100,579 99,681
----------- -----------
Deferred Credits and Other Liabilities:
Decommissioning reserve 53,654 51,964
Deferred credits 56,617 58,684
Obligations under long-term leases 126,821 123,614
Other liabilities 743 744
----------- -----------
Total Deferred Credits and Other Liabilities: 237,835 235,006
----------- -----------
Commitments and Contingencies - -
----------- -----------
Total Capitalization and Liabilities $ 1,094,795 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
1999 1998 1999 1998
--------- --------- --------- -----------
(in thousands)
<S> <C>
Operating Revenues:
Sales to members $ 108,551 $ 100,612 $ 299,607 $ 268,386
Sales to non-member 90 472 853 925
--------- --------- --------- ---------
Total Operating Revenues 108,641 101,084 300,460 269,311
--------- --------- --------- ---------
Operating Expenses:
Operation:
Fuel 11,683 12,687 34,629 33,849
Purchased power 51,098 48,457 127,681 116,790
Other 6,451 6,413 19,214 18,368
--------- --------- --------- ---------
69,232 67,557 181,524 169,007
Maintenance 1,558 1,841 5,451 5,585
Administrative and general 4,347 3,535 13,156 11,312
Depreciation and amortization 18,438 12,163 53,862 36,355
Amortization of lease gains (689) (689) (2,067) (2,067)
Decommissioning cost 171 171 511 511
Taxes other than income taxes 1,895 1,952 5,775 5,669
--------- --------- --------- ---------
Total Operating Expenses 94,952 86,530 258,212 226,372
--------- --------- --------- ---------
Operating Margin 13,689 14,554 42,248 42,939
--------- --------- --------- ---------
Other (Expense)/Income, net (33) 42 (13) 624
--------- --------- --------- ---------
Investment Income:
Interest 1,212 1,101 3,877 3,199
Other 86 40 510 194
--------- --------- --------- ---------
Total Investment Income 1,298 1,141 4,387 3,393
--------- --------- --------- ---------
Interest Charges:
Interest on long-term debt, net 11,860 13,072 38,318 39,064
Other 666 129 723 329
Allowance for borrowed funds
used during construction (82) (106) (227) (315)
--------- --------- --------- ---------
Net Interest Charges 12,444 13,095 38,814 39,078
--------- --------- --------- ---------
Net Margin 2,510 2,642 7,808 7,878
Patronage Capital-Beginning of Period 211,826 199,672 206,528 197,552
Capital Credits Payments - - - (3,116)
--------- --------- --------- ---------
Patronage Capital-End of Period $ 214,336 $ 202,314 $ 214,336 $ 202,314
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ----------------------
1999 1998 1999 1998
------- ------ -------- --------
(in thousands)
<S> <C>
Net Margin $ 2,510 $ 2,642 $ 7,808 $ 7,878
Other comprehensive income:
Unrealized (losses)/gains on investments (968) 751 (2,728) 1,228
------- ------- ------- -------
Comprehensive income $ 1,542 $ 3,393 $ 5,080 $ 9,106
======= ======= ======= =======
</TABLE>
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>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
-------- ---------
(in thousands)
<S> <C>
Operating Activities:
Net margin $ 7,808 $ 7,878
Adjustments to reconcile net margin to net cash
provided by operating activities:
Depreciation and amortizaiton 53,862 36,355
Other non-cash charges 8,169 6,464
Decommissioning cost 511 511
Amortization of lease obligations 6,536 6,264
Gain from lease transactions (2,067) (2,067)
Change in current assets and liabilities:
Change in current assets (1,293) (2,349)
Change in current liabilities 898 33,412
Increase in deferred charges (328) (363)
Decrease in other assets and liabilities (2,914) 245
--------- ---------
Net Cash Provided By Operating Activities 71,182 86,350
--------- ---------
Financing Activities:
Obligations under long-term lease (262) (248)
Payment of long-term debt, net (42,342) (581)
Payment of capital credits - (3,116)
--------- ---------
Net Cash Used For Financing Activities (42,604) (3,945)
--------- ---------
Investing Activities:
Additions to electric plant (5,966) (7,686)
Decommissioning fund deposits (511) (511)
Restricted investments (6,383) (8,467)
Other investments (47,156) (6,108)
Retirement work in progress (11) (107)
--------- ---------
Net Cash Used For Investing Activities (60,027) (22,879)
--------- ---------
Net Change in Cash and Cash Equivalents (31,449) 59,526
Cash and Cash Equivalents - Beginning of Period 82,382 61,740
--------- ---------
Cash and Cash Equivalents - End of Period $ 50,933 $ 121,266
========= =========
</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, 1999, its consolidated results of
operations and its comprehensive income for the three and nine months
ended September 30, 1999 and 1998, and its consolidated cash flows for the
nine months ended September 30, 1999 and 1998. The consolidated results of
operations for the three and nine months ended September 30, 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. Because of severe summer drought conditions in Virginia, on August 7,
1999, the Clover Power Station ("Clover") was forced to operate at minimum
load (150MW) to conserve water. The units were operated at capacity during
the day to meet peak loads. However, at night, load was reduced to 150 MW
on each unit to conserve water. The station requested and received a
Consent Special Order variance on August 26, 1999, which allowed the
station to resume withdrawing water to support full load operations, and
on August 27, 1999, the units were released for full operations. Both
units experienced significant reductions in generation during the
intervening period. As a result, Old Dominion was required to purchase
more expensive replacement power.
3. 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 "Plan ").
Subsequently, an independent assessment of the impact on Old Dominion of a
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 Plan. The
Plan currently calls for the accumulation of approximately $330.0 million
in cash and cash equivalents from 1998 through 2003 with the funds to be
used for the prepayment of a portion of outstanding debt. The Plan will be
updated periodically based on any revised projections, projected targets,
legislation, 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 Plan, Old Dominion has accelerated the recovery in
rates of certain assets (including accelerated depreciation on generating
assets discussed below) aggregating $76.3 million through September 30,
1999, and purchased $42.7 million of outstanding debt.
In conjunction with the Plan, on May 10, 1999, Old Dominion's Board of
Directors unanimously approved a resolution to record accelerated
depreciation on generation assets during the period January 1, 1999,
through December 31, 2003, and to 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. As of September 30, 1999, Old
Dominion had recorded $34.3 million of additional depreciation expense.
Due to the seasonal nature of Old Dominion's business, $14.6 million was
recorded in the first quarter, $7.8 million in the second quarter, and
$11.9 million in the third quarter. Rates previously approved by the Board
of Directors for 1999 were designed to include approximately $45.4 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.
<PAGE>
Beginning in 2004, annual depreciation expense will be reduced, based on
the remaining net book values of the generation assets at December 31,
2003. Depreciation expense will be calculated based on the straight-line
method over the remaining useful lives of the assets.
4. On May 24, 1996, a default judgment of approximately $27.0 million was
rendered against Seacoast, Inc. ("Seacoast") a corporation in which CSC
Services, Inc. ("CSC"), an affiliate of Old Dominion, had an indirect
ownership interest prior to August 1998. The judgment was 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 in August 1998 of its interest in Seacoast, 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, seasonal
weather fluctuations, and, in the future, retail competition.
Sales to a non-member represent sales of excess energy from the Clover
Power Station ("Clover") to Virginia Electric and Power Company ("Virginia
Power"), pursuant to the requirements of the Clover Operating Agreement. In
light of deregulation initiatives in Virginia, Old Dominion and Virginia Power
have agreed that the Clover Operating Agreement will have to be restructured
prior to January 1, 2002, to permit Old Dominion to sell its excess energy from
Clover to others or to Virginia Power on changed terms.
The following table summarizes the increases (decreases) in operating
revenues by component:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 vs 1998 1999 vs 1998
------------ ------------
(in thousands)
<S> <C>
Sales to Members:
Power sales volume $ 4,416 $ 21,571
Blended rates (5,350) (8,984)
Fuel adjustment revenues 2,779 10,341
Margin stabilization plan adjustment 2,758 4,957
Margin stabilization returned to Members 3,336 3,336
-------- --------
7,939 31,221
Sales to a non-member (382) (72)
-------- --------
$ 7,557 $ 31,149
======== ========
</TABLE>
The increase in operating revenues in the third quarter of 1999 as compared
to the corresponding period in 1998 was the result of a 3.4% increase in energy
revenues caused by the hot weather combined with an increase in fuel adjustment
revenues. Old Dominion's demand sales for the three months ended September 30,
1999 and 1998, were 4,594 MW and 4,404 MW, respectively. Energy sales for the
three months ended September 30, 1999 and 1998, were 2,364,827 MWh and 2,287,399
MWh, respectively.
The increase in operating revenues in the first nine months of the year is
mainly due to the cold weather in the first quarter and the hot weather in the
third quarter. Demand and energy revenues increased 2.7% and 7.0%, respectively.
Demand sales for the nine months ended September 30, 1999 and 1998, were 12,462
MW and 11,631 MW, respectively. Energy sales for the nine months ended September
30, 1999 and 1998, were 6,398,868 MWh and 5,948,737 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, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
September 30, September 30,
------------------------------- -----------------------------
1999 1998 Normal 1999 1998 Normal
-------- -------- ------ -------- -------- ------
<S> <C>
Cooling degree days 1,056 1,108 1,085 1,425 1,570 1,561
Percentage change compared
to prior year (4.7)% 16.3% (9.2)% 24.0%
Heating degree days 15 6 20 2,251 2,034 2,276
Percentage change compared
to prior year 150.0% (83.3)% 10.7% (13.3)%
</TABLE>
OPERATING EXPENSES
OPERATIONS
Old Dominion has an 11.6% undivided ownership interest in the North Anna
Nuclear Power Station ("North Anna") and a 50.0% undivided ownership 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 energy rates to the Members,
are significantly affected by the operations of North Anna and Clover.
North Anna and Clover capacity factors for the three and nine month periods
ended September 30, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
North Anna Clover
------------------------------------ -----------------------------------
Three Nine Three Nine
Months Ended Months Ended Months Ended Months Ended
September 30, September 30, September 30, September 30,
-------------- ------------- -------------- -------------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C>
Unit 1 103.8% 76.9% 103.5% 92.2% 83.5% 87.6% 80.3% 85.8%
Unit 2 77.6 97.9 93.2 86.9 85.6 87.8 86.0 67.3
Combined 90.7 87.4 98.4 89.6 84.6 87.7 83.2 76.6
</TABLE>
<PAGE>
There were no significant, unplanned outages at North Anna during the first
nine months of 1999. As of September 30, 1999, Unit 1 had been on-line for 358
consecutive days. Unit 2 was removed from service in mid-September for a
scheduled refueling. During the first nine months of 1998, both Units 1 and 2
were off-line for scheduled maintenance and refueling. Unplanned outages were
minor.
Clover Unit 1 operated for 166 days before it was removed from service in
March 1999 for a 16-day scheduled maintenance outage. As of September 30, 1999,
Clover Unit 2 had been in operation for 236 consecutive days. On August 7, 1999,
Clover experienced very low water flow due to continued drought conditions in
the state. As a result, the units operated to meet peak loads during the day;
however, at night, load was reduced on each unit to 150 MW to conserve water. On
August 27, 1999, the units were released for full operations.
During the nine months ended September 30, 1998, Clover Unit 1 did not
experience any significant outages. Clover Unit 2 was removed from service in
February 1998 for a scheduled chimney liner replacement that lasted 60 days.
In addition to power generated at Clover and North Anna, Old Dominion
purchases power from Virginia Power, Public Service Electric & Gas Company
("PSE&G"), Delmarva Power & Light Company ("Delmarva"), and others. Old
Dominion's energy supply for the three and nine month periods ended September
30, 1999 and 1998, was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------- ------------------------------------
1999 1998 1999 1998
------------------ ---------------- ---------------- ----------------
<S> <C>
(MWh) (MWh) (MWh) (MWh)
Clover 823,172 33.2% 853,962 35.9% 2,377,102 35.6% 2,189,679 35.5%
North Anna 415,564 16.8 400,686 16.8 1,337,934 20.0 1,218,011 19.8
Purchased Power:
Virginia Power 639,355 25.8 581,595 24.4 1,377,819 20.6 1,339,665 21.7
PSE&G Contract 329,657 13.3 186,896 7.8 1,044,460 15.7 723,669 11.7
Delmarva Power 198,126 8.0 279,945 11.8 330,058 4.9 516,705 8.4
Conectiv/PPL 16,104 0.6 23,767 1.0 53,738 0.8 23,767 0.4
Other 56,800 2.3 54,157 2.3 157,494 2.4 151,407 2.5
--------- ------ --------- ----- --------- ----- --------- -----
Total Available Energy 2,478,778 100.0% 2,381,008 100.0% 6,678,605 100.0% 6,162,903 100.0%
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
Extreme temperatures in the first and third quarters of 1999 coupled with
increased production at North Anna and Clover in 1999 as compared to 1998 were
the primary factors affecting operating expenses in the first nine months of
1999. The result was an increase in both production and purchased power
expenses. In August 1999, severe drought conditions forced Clover to operate at
minimum load for approximately three weeks resulting in a decrease in fuel
expenses and an increase in purchased power costs for the three months ended
September 30, 1999.
OTHER OPERATING EXPENSES
Administrative and general expenses increased in the third quarter and
first nine months of 1999 primarily because of legal and engineering consulting
fees relating to the potential siting of combustion turbines combined with
expenses incurred in forming Old Dominion's alliance with Reliant Energy, Inc.
("Reliant"). See "Other Matters."
Depreciation expense increased because of accelerated depreciation recorded
on North Anna and Clover plant assets in accordance with Old Dominion's
strategic plan. As of September 30, 1999, Old Dominion had recorded $34.3
million of additional depreciation expense, of which $11.9 million was recorded
in the third quarter.
<PAGE>
NON-OPERATING INCOME AND EXPENSES
Investment income increased during the third quarter and first nine months
of 1999 as compared to the same periods in 1998 due to higher investment
balances.
Interest on long-term debt decreased due to scheduled debt service payments
and the purchase of $42.7 million of outstanding debt. The purchases resulted in
net losses of approximately $3.6 million including the write-off of original
issuance costs. The net losses, which have been deferred, are included in other
assets on the balance sheet and are being amortized over the life of the
remaining bonds. During the nine months ended September 30, 1999, the
accelerated amortization and recovery in rates of a debt prepayment premium of
$1.7 million offset the decrease in expense from the debt purchases.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES provided $71.2 million in the first nine months of
1999 and $86.4 million during the corresponding period of 1998. The increase in
operating revenues is primarily due to accelerated depreciation recorded on the
generating assets in accordance with Old Dominion's strategic plan.
FINANCING ACTIVITIES for the nine months ended September 30, 1999, resulted
in a cash outflow of $42.6 million as Old Dominion used its cash from operations
for the purchase of $42.7 million of outstanding debt. Old Dominion's patronage
capital as a percentage of total capitalization increased from 26.1% at December
31, 1998 to 28.3% at September 30, 1999.
INVESTING ACTIVITIES for the nine months ended September 30, 1999, mainly
additions to other investments to establish Old Dominion's strategic plan fund,
resulted in a net cash outflow of $60.0 million. Other investments consisting
primarily of highly liquid managed bond and mutual funds are classified as
available-for-sale, and accordingly, are carried at fair value. Unrealized gains
and losses on other investments, if material, are reflected as a component of
capitalization.
PURCHASE POWER COMMITMENTS
Old Dominion has entered into a Memorandum of Understanding ("MOU") with
Delmarva Power. The subject and purpose of the MOU is to define the terms and
conditions under which Old Dominion and Delmarva Power will terminate their
Settlement Agreement and Old Dominion will purchase capacity from Delmarva
Power. Under such terms and conditions, the Settlement Agreement will be
terminated in its entirety as of December 1, 1999. Additionally, Old Dominion
will purchase capacity from Delmarva Power from December 1, 1999 through August
31, 2001. Delmarva will extend the period through May 31, 2002, provided Old
Dominion submits written notice on or before December 1, 2000. Old Dominion will
not be obligated to purchase any energy from Delmarva Power.
OTHER MATTERS
Because of severe summer drought conditions in Virginia, on August 7, 1999,
Clover was forced to operate at minimum load (150 MW) to conserve water. The
units were operated at capacity to meet peak loads during the day. However, at
night, load was reduced on each unit to 150 MW to conserve water. The station
requested and received a Consent Special Order variance on August 26, 1999,
which allowed the station to resume withdrawing water to support full load
operations, and on August 27, 1999, the units were released for full operations.
Both units experienced significant reductions in generation during the
intervening period.
<PAGE>
In May 1999, Old Dominion signed an alliance agreement with Reliant to
better position Old Dominion for the deregulation of the electric utility
industry. Old Dominion and Reliant will work together to evaluate future
business relationships in order to improve and expand service options and lower
energy costs to Old Dominion's Members.
On September 1, 1999, Old Dominion issued a Request for Proposals for up to
1,500 MW of capacity. Old Dominion is currently evaluating the responses
received along with self-build options.
Old Dominion's members have made filings in Maryland, Delaware and West
Virginia to recover all charges in connection with Old Dominion's strategic
plan. A procedural schedule has not yet been set in Maryland. In Delaware, a
hearing is scheduled for December 1999, with a final order from the Delaware
Public Service Commission on February 28, 2000. A hearing has been held in West
Virginia; however, a decision will not be made for approximately 12 to 18
months.
On May 24, 1996, a default judgment of approximately $27.0 million was
rendered against Seacoast, Inc. ("Seacoast") a corporation in which CSC
Services, Inc. ("CSC"), an affiliate of Old Dominion, had an indirect ownership
interest prior to August 1998. The judgement was 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 in August 1998 of its interest in
Seacoast, 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.
STRATEGIC PLAN
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 "Plan"). Subsequently, an
independent assessment of the impact on Old Dominion of a 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 Plan. The Plan currently calls for the accumulation of
approximately $330.0 million in cash and cash equivalents from 1998 through 2003
with the funds to be used for the prepayment of a portion of outstanding debt.
The Plan will be updated periodically based on any revised projections,
projected targets, legislation, 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 Plan, Old Dominion has accelerated the recovery in rates of
certain assets (including accelerated depreciation on generating assets
discussed below) aggregating $76.3 million through September 30, 1999, and
purchased $42.7 million of outstanding debt.
In conjunction with the Plan, on May 10, 1999, Old Dominion's Board of
Directors unanimously approved a resolution to record accelerated depreciation
on generating assets during the period January 1, 1999, through December 31,
2003, and to 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. As of September
30, 1999, Old Dominion had recorded $34.3 million of additional depreciation
expense. Due to the seasonal nature of Old Dominion's business, $14.6 million
was recorded in the first quarter, $7.8 million in the second quarter, and $11.9
million in the third quarter. Rates previously approved by the Board of
Directors for 1999 were designed to include approximately $45.4 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.
<PAGE>
Beginning in 2004, annual depreciation expense will be reduced, based on the
remaining net book values of the generation assets at December 31, 2003.
Depreciation expense will be calculated based on the straight-line method over
the remaining useful lives of the assets.
COMPETITION AND CHANGING REGULATIONS
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 of 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 member-consumers.
The deregulation plan calls for capping rates, excluding the recovery of
fuel costs, from January 1, 2001 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. For the cooperatives, retail choice will begin no later
than July 1, 2003. The legislation also calls for a 3.0% to 7.5% rate reduction
for residential customers, excluding cooperative 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.
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
Member cooperative in Delaware. 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 may no longer be able to recover all
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.
Old Dominion is currently working with the Members through its strategic plan 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.
<PAGE>
YEAR 2000 COMPLIANCE
Old Dominion believes that its mission-critical systems used to produce and
deliver electricity are ready for date changes associated with the year 2000.
Old Dominion has completed a comprehensive inventory to identify digital
components and applications that could be affected by the rollover to 2000.
Items within the inventory have been evaluated for susceptibility to year 2000
date change issues. Old Dominion has worked diligently towards replacing,
repairing, or otherwise addressing deficient items in our critical systems.
Thus, Old Dominion believes that the organization's primary functions related to
production and delivery of electricity will operate reliably through year
2000 dates. Recognizing, however, that no organization can make absolute
guarantees about something as complex as year 2000 readiness, Old Dominion also
has in place contingency plans to address potential problems caused by year
2000. Total expenditures for year 2000 costs are estimated to be $0.9 million,
including Old Dominion's portion of the cost to prepare North Anna and Clover
for the rollover to 2000. Old Dominion estimates that approximately $0.8 million
has been spent as of September 30, 1999.
As part of the year 2000 compliance process, Old Dominion must determine and
evaluate most reasonably likely worst case scenarios. Old Dominion has
identified its most reasonably likely worst case scenarios as the 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 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 or year 2000 compliance efforts. Non-year 2000
compliance by these third parties could have a material adverse impact on Old
Dominion and its Members.
Virginia Power, as operator of the North Anna and Clover power stations, is
responsible for ensuring that the plants are ready for the century date change
by January 1, 2000. Virginia Power has represented that systems essential to
providing electricity are year 2000 ready. Contingency planning efforts to
ensure continuity of operations into and beyond the year 2000 are essentially
complete with only minor updates remaining. Virginia Power already has extensive
contingency plans in place in case of an extraordinary event, which may cause
interruptions in service. Its year 2000 contingency plans are an extension of
those existing plans.
On April 9, 1999, Virginia Power successfully participated in the first
nationwide drill coordinated by the North American Electric Reliability Council
to examine how utilities would cope with a loss of voice and data communications
and to demonstrate the ability of utilities to use backup systems to communicate
operating information. Actual communications systems were not shut down during
the exercise.
Old Dominion and Virginia Power participated in a second drill on September
9, 1999. The exercise simulated the implementation of administration, operating,
communications, and contingency response plans for transition to the year 2000.
The drill was successfully completed with no service interruptions reported at
or after the midnight rollover time. The Southeastern Electric Reliability
Council reported that there were no year 2000-related problems in the nation or
regionally.
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 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, 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: November 12, 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 21
<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-31-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 714,655
<OTHER-PROPERTY-AND-INVEST> 260,478
<TOTAL-CURRENT-ASSETS> 101,417
<TOTAL-DEFERRED-CHARGES> 3,171
<OTHER-ASSETS> 15,074
<TOTAL-ASSETS> 1,094,765
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 214,336<F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 0
0
0
<LONG-TERM-DEBT-NET> 544,076
<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> 306,793
<TOT-CAPITALIZATION-AND-LIAB> 1,094,795
<GROSS-OPERATING-REVENUE> 300,460
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 258,212
<TOTAL-OPERATING-EXPENSES> 258,212
<OPERATING-INCOME-LOSS> 42,248
<OTHER-INCOME-NET> 4,374
<INCOME-BEFORE-INTEREST-EXPEN> 46,622
<TOTAL-INTEREST-EXPENSE> 38,814
<NET-INCOME> 7,808
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 71,182
<EPS-BASIC> 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 bylaws.
</FN>
</TABLE>
