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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 June 30, 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.
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<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
INDEX
Page
Number
------
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999
(Unaudited) and December 31, 1998 3
Consolidated Statements of Revenues, Expenses
and Patronage Capital (Unaudited) - Three
and Six Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Comprehensive
Income (Unaudited) - Three and Six Months
Ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows
(Unaudited) - Six Months Ended June
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 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 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- -----------------
<S> <C>
(in thousands)
ASSETS: (unaudited) (*)
Electric Plant:
In service $ 885,536 $ 885,551
Less accumulated depreciation (175,619) (140,574)
----------------- -----------------
709,917 744,977
Nuclear fuel, at amortized cost 5,254 8,398
Construction work in progress 14,322 13,591
----------------- -----------------
Net Electric Plant 729,493 766,966
----------------- -----------------
Investments and Funds:
Nuclear decommissioning trust fund 55,556 51,964
Restricted investments 121,723 120,391
Other investments 85,005 38,689
----------------- -----------------
Total Investments and Funds 262,284 211,044
----------------- -----------------
Current Assets:
Cash and cash equivalents 60,386 82,382
Receivables 38,826 37,367
Fuel stock 2,908 3,460
Materials and supplies, at average cost 5,744 5,831
Prepayments 2,577 2,533
----------------- -----------------
Total Current Assets 110,441 131,573
----------------- -----------------
Deferred Charges:
Regulatory assets 3,164 4,643
Other assets 13,320 12,318
----------------- -----------------
Total Deferred Charges 16,484 16,961
----------------- -----------------
Total Assets $ 1,118,702 $ 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.
3
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------------- -----------------
<S> <C>
(in thousands)
CAPITALIZATION AND LIABILITIES: (unaudited) (*)
Capitalization:
Patronage capital $ 211,826 $ 206,530
Accumulated other comprehensive income (1,063) 697
Long-term debt 560,037 584,630
----------------- -----------------
Total Capitalization 770,800 791,857
----------------- -----------------
Current Liabilities:
Long-term debt due within one year 29,590 29,590
Notes payable 2,400 -
Accounts payable 16,383 19,007
Accounts payable - member deposits 43,245 42,204
Deferred energy 8,854 2,366
Accrued interest 3,985 3,839
Accrued taxes 1,577 212
Other 3,390 2,463
----------------- -----------------
Total Current Liabilities 109,424 99,681
----------------- -----------------
Deferred Credits and Other Liabilities:
Decommissioning reserve 55,556 51,964
Deferred credits 57,306 58,684
Obligations under long-term leases 124,873 123,614
Other liabilities 743 744
----------------- -----------------
Total Deferred Credits and Other Liabilities 238,478 235,006
----------------- -----------------
Commitments and Contingencies - -
----------------- -----------------
Total Capitalization and Liabilities $ 1,118,702 $ 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.
4
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
CONSOLIDATED STATEMENTS OF REVENUES,
EXPENSES AND PATRONAGE CAPITAL (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------- ---------------------------------------
<S> <C>
1999 1998 1999 1998
------------------ ------------------ ----------------- -----------------
(in thousands)
Operating Revenues:
Sales to members $ 84,793 $ 82,099 $ 191,056 $ 167,774
Sales to non-member 708 281 763 453
------------------ ------------------ ----------------- -----------------
Total Operating Revenues 85,501 82,380 191,819 168,227
------------------ ------------------ ----------------- -----------------
Operating Expenses:
Operation:
Fuel 11,993 10,183 22,946 21,162
Purchased power 31,469 32,217 76,583 68,333
Other 6,548 6,206 12,763 11,955
------------------ ------------------ ----------------- -----------------
50,010 48,606 112,292 101,450
Maintenance 1,602 1,906 3,893 3,744
Administrative and general 4,848 3,986 8,809 7,777
Depreciation and amortization 14,460 12,092 35,424 24,192
Amortization of lease gains (689) (689) (1,378) (1,378)
Decommissioning cost 170 170 340 340
Taxes other than income taxes 1,999 1,860 3,880 3,717
------------------ ------------------ ----------------- -----------------
Total Operating Expenses 72,400 67,931 163,260 139,842
------------------ ------------------ ----------------- -----------------
Operating Margin 13,101 14,449 28,559 28,385
------------------ ------------------ ----------------- -----------------
Other (Expense)/Income, net (30) 8 20 582
------------------ ------------------ ----------------- -----------------
Investment Income:
Interest 1,467 1,138 2,665 2,098
Other 344 60 424 154
------------------ ------------------ ----------------- -----------------
Total Investment Income 1,811 1,198 3,089 2,252
------------------ ------------------ ----------------- -----------------
Interest Charges:
Interest on long-term debt, net 12,445 12,997 26,458 25,992
Other 24 137 57 200
Allowance for borrowed funds
used during construction (75) (105) (145) (209)
------------------ ------------------ ----------------- -----------------
Net Interest Charges 12,394 13,029 26,370 25,983
------------------ ------------------ ----------------- -----------------
Net Margin 2,488 2,626 5,298 5,236
Patronage Capital-beginning of period 209,338 197,046 206,528 197,552
Capital Credits Payments - - - (3,116)
------------------ ------------------ ----------------- -----------------
Patronage Capital-end of period $ 211,826 $ 199,672 $ 211,826 $ 199,672
================== ================== ================= =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------- ---------------------------------------
1999 1998 1999 1998
------------------ ----------------- ----------------- ------------------
<S> <C>
(in thousands)
Net Margin $ 2,488 $ 2,626 $ 5,298 $ 5,236
Other comprehensive income:
Unrealized loss on investments (1,219) (334) (1,760) -
------------------ ----------------- ----------------- ------------------
Comprehensive income $ 1,269 $ 2,292 $ 3,538 $ 5,236
================== ================= ================= ==================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
OLD DOMINION ELECTRIC COOPERATIVE
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
1999 1998
----------------- -----------------
<S> <C>
(in thousands)
Cash From Operating Activities:
Net margin $ 5,298 $ 5,236
Adjustments to reconcile net margin to net cash
provided by operating activities:
Depreciation and amortization 35,424 24,189
Other non-cash charges 6,241 4,343
Decommissioning cost 340 340
Amortization of lease obligation 4,348 4,167
Gain from lease transactions (1,378) (1,378)
Changes in Current Assets and Current Liabilities:
Change in current assets (864) 1,022
Change in current liabilities 9,743 5,032
Deferred charges (325) (801)
Other assets and liabilities (1,107) 737
----------------- -----------------
Net Cash Provided by Operating Activities 57,720 42,887
----------------- -----------------
Cash From Financing Activities:
Reduction in obligations under long-term leases (175) (3,850)
Payment of long-term debt (25,784) (581)
Payment of capital credits - (3,116)
----------------- -----------------
Net Cash Used for Financing Activities (25,959) (7,547)
----------------- -----------------
Cash From Investing Activities:
Electric plant additions (1,085) (3,794)
Decommissioning fund deposits (340) (340)
Restricted investments (4,246) (374)
Other investments (48,076) (7,415)
Retirement work in progress (10) (65)
----------------- -----------------
Net Cash Used for Investing Activities (53,757) (11,988)
----------------- -----------------
Net Change in Cash and Cash Equivalents (21,996) 23,352
Cash and Cash Equivalents - Beginning of Period 82,382 61,740
----------------- -----------------
Cash and Cash Equivalents - End of Period $ 60,386 $ 85,092
================= =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<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 June 30, 1999, its consolidated
results of operations and its comprehensive income for the three and six
months ended June 30, 1999 and 1998, and its consolidated cash flows for
the six months ended June 30, 1999 and 1998. The consolidated results
of operations for the six months ended June 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. Due to the drought conditions in Virginia, Clover operations have been
curtailed. As of August 11, 1999, the plant had water available for 14
days of generation at full load. If the drought continues, Old Dominion
will be required to purchase more expensive replacement power.
Virginia Power is meeting with the Department of Environmental
Quality to discuss possible steps to prolong Clover operations.
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 annually 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 aggregating $64.4 million through
June 30, 1999, and purchased $26.0 million of outstanding debt.
In accordance with Old Dominion's strategic 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 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 June 30, 1999,
Old Dominion had recorded $22.0 million of additional depreciation
expense. Because of the seasonal nature of Old Dominion's business, $7.8
million of additional depreciation expense was recorded in the second
quarter and $14.2 million was recorded in the first 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.
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.
8
<PAGE>
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 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.
5. Certain reclassifications have been made to the accompanying prior year's
consolidated financial statements to conform to the current year's
presentation.
9
<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"), pursuant to the requirements of the Clover Operating Agreement. These
sales are at a price that does not cover all costs associated with producing
such power. Old Dominion and Virginia Power have agreed that the Clover
Operating Agreement will have to be renegotiated before deregulation begins.
The following table summarizes the increases (decreases) in operating
revenues by component:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
1999 vs 1998 1999 vs 1998
------------ ------------
<S> <C>
(in thousands)
Sales to Members:
Power sales volume $ 1,421 $17,223
Blended rates (634) (3,702)
Fuel adjustment revenues 3,901 7,562
Margin stabilization plan adjustment (1,994) 2,199
--------- --------
2,694 23,282
Sales to a non-member 427 310
--------- --------
$ 3,121 $23,592
========= ========
</TABLE>
The marginal increase in operating revenues for the second quarter of 1999
as compared to the corresponding period in 1998, was the result of an increase
in fuel adjustment revenues combined with a 3.9% increase in energy revenues.
Old Dominion's demand sales for the three months ended June 30, 1999 and 1998,
were 3,535 MW and 3,558 MW, respectively. Energy sales for the three months
ended June 30, 1999 and 1998, were 1,835,460 MWh and 1,737,205 MWh,
respectively.
10
<PAGE>
The increase in operating revenues in the first half of the year is mainly
due to the cold weather in the first quarter. Demand sales for the six-month
periods ended June 30, 1999 and 1998, were 7,868 MW and 7,227 MW, respectively.
Energy sales for the six-month periods ended June 30, 1999 and 1998, were
4,034,041 MWh and 3,661,337 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 six month periods
ended June 30, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ -----------------------------
June 30, June 30,
------------------------------ -----------------------------
1999 1998 Normal 1999 1998 Normal
---- ---- ------- ---- ---- ------
<S> <C>
Cooling degree days 369 431 463 369 462 476
Percentage change compared
to prior year (14.4)% 40.0% (19.9)% 47.6%
Heating degree days 292 294 313 2,236 2,028 2,256
Percentage change compared
to prior year (0.7)% (37.7)% 10.2% (13.2)%
</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% 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 six month periods
ended June 30, 1999 and 1998, were as follows:
<TABLE>
<CAPTION>
North Anna Clover
-------------------------------------- --------------------------------------
Three Six Three Six
Months Ended Months Ended Months Ended Months Ended
June 30, June 30, June 30, June 30,
-------------------------------------- ---------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
------------------ ---------------- ------------------ -----------------
<S> <C>
Unit 1 103.7% 100.3% 103.4% 100.1% 79.3% 80.4% 78.2% 84.4%
Unit 2 101.7 65.7 100.1 81.3 92.1 53.9 85.7 56.5
Combined 102.7 83.0 101.8 90.7 85.7 67.1 82.0 70.5
</TABLE>
11
<PAGE>
North Anna Unit 1 was not off-line during the first six months of 1999 or
1998. Unit 2 was not off-line during the first six months of 1999; however the
unit was off-line 30 days for scheduled refueling during the six months ended
June 30, 1998. As of June 30, 1999, Unit 1 had been on-line for 266 consecutive
days and Unit 2 had been on-line for 286 consecutive days.
Clover Unit 1 operated for 166 days before it was removed from service in
March 1999 for a 16-day scheduled maintenance outage. Additionally, Unit 1
experienced a short scheduled outage (approximately one day) and a short
unscheduled outage (approximately five days) during the first half of the year.
During the six months ended June 30, 1998, Clover Unit 1 experienced one minor
scheduled outage and two minor unscheduled outages (approximately 5 days).
As of June 30, 1999, Clover Unit 2 had been on-line for 144 consecutive
days. In February 1998, Clover Unit 2 was taken off-line 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 Company
("PSE&G"), Delmarva Power & Light Company ("Delmarva"), and others. Old
Dominion's energy supply for the three and six month periods ended June 30, 1999
and 1998, was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- -------------------------------------
1999 1998 1999 1998
--------------------------------------- -------------------------------------
<S> <C>
(MWh) (MWh) (MWh) (MWh)
Clover 824,711 42.7% 646,674 35.4% 1,553,930 37.0% 1,335,717 35.3%
North Anna 465,543 24.1 376,212 20.6 922,370 22.0 817,325 21.6
Purchased Power:
Virginia Power 220,628 11.4 360,930 19.8 738,464 17.6 758,070 20.0
PSE&G Contract 296,236 15.3 251,697 13.8 709,028 16.9 536,773 14.2
Delmarva Power 69,468 3.6 148,920 8.1 131,932 3.1 236,760 6.3
Conectiv/PPL 12,843 0.6 - - 43,409 1.0 - -
Other 44,016 2.3 42,378 2.3 100,694 2.4 97,250 2.6
--------- ------ --------- ------ ---------- ------ --------- ------
Total Available Energy 1,933,445 100.0% 1,826,811 100.0% 4,199,827 100.0% 3,781,895 100.0%
========= ====== ========= ====== ========== ====== ========= ======
</TABLE>
Increased production at North Anna and Clover and cooler weather in the
first quarter of 1999 as compared to 1998 were the primary factors affecting
operating expenses in the second quarter and first half of 1999. Purchased power
costs were lower and fuel and other operating costs were higher as a result of
the increased production. Increased production at Clover and warm weather were
the primary factors affecting operating expenses in the second quarter and first
half of 1998.
Other Operating Expenses
Administrative and general expenses increased in the second quarter and
first half of 1999 because of a $0.4 million true-up of Clover's 1998
administrative and general expenses 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 June 30, 1999, Old Dominion had recorded $22.0 million of
additional depreciation expense. Because of the seasonal nature of Old
Dominion's business, $7.8 million of additional depreciation expense was
recorded in the second quarter and $14.2 million in the first quarter. In 1998,
depreciation expense increased because of accelerated amortization of the North
Anna plant acquisition adjustment.
12
<PAGE>
Non-Operating Income and Expenses
Investment income increased during the second quarter and the first half of
1999 as compared to the same periods in 1998 due to higher investment balances.
Interest on long-term debt increased in the first half of 1999 as compared
to the same period in 1998 because of the accelerated amortization and recovery
in rates of a debt prepayment premium of $1.7 million. However, during the
second quarter, interest expense decreased due to scheduled debt service and the
purchase of $26.0 million of Old Dominion's 1993 Series A bonds in May 1999. The
purchase resulted in a net loss of approximately $1.3 million including the
write-off of original issuance costs. The net loss has been deferred and is
being amortized over the life of the remaining bonds.
Liquidity and Capital Resources
Operating activities provided $57.7 million in the first half of 1999 and
$42.9 million in the first half of 1998. The increase is primarily due to
accelerated depreciation recorded on the generating assets in accordance with
Old Dominion's strategic plan.
Financing activities for the six months ended June 30, 1999, resulted in a
cash outflow of $26.0 million as Old Dominion used its cash from operations for
the purchase of $26.0 million of outstanding debt in May.
Investing activities for the six months ended June 30, 1999, mainly
additions to other investments to set up Old Dominion's strategic plan fund,
resulted in a net cash outflow of $53.8 million. Other investments 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.
Other Matters
Due to drought conditions in Virginia, Clover operations have been
curtailed. As of August 11, 1999, the plant had water available for 14 days of
generation at full load. If the drought continues, Old Dominion will be required
to purchase more expensive replacement power. Virginia Power is meeting with the
Department of Environmental Quality to discuss possible steps to prolong Clover
operations.
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 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 a 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.
13
<PAGE>
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 annually 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 aggregating $64.4 million
through June 30, 1999, and purchased $26.0 million of outstanding debt.
In accordance with Old Dominion's strategic 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 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
June 30, 1999, Old Dominion recorded had $22.0 million of additional
depreciation expense. Because of the seasonal nature of Old Dominion's business,
$7.8 million of additional depreciation expense was recorded in the second
quarter and $14.2 million in the first 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.
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 members' 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.
14
<PAGE>
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 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 cooperatives 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 recover 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 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.
Year 2000 Compliance
At July 31, 1999, Old Dominion's efforts to remediate year 2000 computer
problems were approximately 99% complete. Final preparations during the
remainder of 1999 will focus on finalizing contingency plans. Old Dominion
expects to be 100% complete by October 1, 1999. Total expenditures for year 2000
costs are estimated to be $0.7 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 $0.6 million has been spent as of June 30, 1999.
Remaining expenditures are primarily for finalizing contingency plans to address
Old Dominion's response to any year 2000 problems should they occur.
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.
15
<PAGE>
Virginia Power, as operator of the North Anna and Clover power stations, is
responsible for ensuring that the plants are year 2000 ready 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 will participate in a second drill on
September 9, 1999. The exercise will simulate the implementation of
administration, operating, communications, and contingency response plans for
the year 2000 transition.
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.
16
<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
June 30, 1999.
17
<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: August 12, 1999 /s/ Daniel M. Walker
----------------------------------------
Daniel M. Walker
Vice President of Accounting and Finance
(Chief Financial Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- -------
27. Financial Data Schedule 20
19
<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> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 729,493
<OTHER-PROPERTY-AND-INVEST> 262,284
<TOTAL-CURRENT-ASSETS> 110,441
<TOTAL-DEFERRED-CHARGES> 3,164
<OTHER-ASSETS> 13,320
<TOTAL-ASSETS> 1,118,702
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 211,826<F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 0
0
0
<LONG-TERM-DEBT-NET> 560,037
<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> 317,249
<TOT-CAPITALIZATION-AND-LIAB> 1,118,702
<GROSS-OPERATING-REVENUE> 191,819
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 163,260
<TOTAL-OPERATING-EXPENSES> 163,260
<OPERATING-INCOME-LOSS> 28,559
<OTHER-INCOME-NET> 3,109
<INCOME-BEFORE-INTEREST-EXPEN> 31,668
<TOTAL-INTEREST-EXPENSE> 26,370
<NET-INCOME> 5,298
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 26,458
<CASH-FLOW-OPERATIONS> 57,720
<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>
