| Other | 5.
Wildcat Point Generation Facility We are currently constructing, and will be the sole owner of, an approximate 1,000 MW natural gas-fueled combined cycle generation facility, named Wildcat Point, in Cecil County, Maryland. Wildcat Point's major equipment will consist of two Mitsubishi combustion turbines, two Alstom heat recovery steam generators, and one Alstom steam turbine generator. While the facility was scheduled to become operational in mid-2017, based upon the most recent information available, we believe that Wildcat Point will achieve substantial completion in the fourth quarter of 2017. WOPC, the EPC contractor, claims that the delay is associated with the incurrence of additional work and other matters, including alleged misrepresentation under the EPC contract, for which it will seek recovery, in whole or in part, from its subcontractors and us. On May 24, 2017, WOPC filed a complaint against Alstom and us, in the United States District Court for the District of Maryland. An amended complaint was filed on July 21, 2017. On August 21, 2017, motions were filed by Alstom and us to transfer venue from the United States District Court for the District of Maryland to the United States District Court for the Eastern District of Virginia, and on November 7, 2017, these motions were granted. We believe that this complaint is without merit, plan to vigorously defend against WOPC's claims against us, and do not believe any liability is estimable at this time. Further, we disagree that we have additional liability under the contract and therefore have not revised our estimated project cost of $834.3 million, before consideration of any liquidated damages as a result of the project delay. We do not believe that any such delay in the substantial completion of the Wildcat Point facility, or any additional amounts associated with the delay, including PJM capacity delay charges, for which we may be ultimately responsible, are reasonably likely to have a material adverse effect on our results of operations or financial condition due to our ability to collect such amounts through rates charged to our member distribution cooperatives. Even if we are ultimately responsible for additional costs, any such amounts may be offset in part by liquidated damages under the contract associated with WOPC’s delay in achieving substantial completion. Additionally, on September 29, 2017, we filed a complaint in the United States District Court for the Eastern District of Virginia against WOPC, a joint venture, and its constituent members, PCL Industrial Construction Company and Sargent & Lundy, L.L.C., alleging that the companies have breached the contract they entered into with ODEC to engineer, procure, and construct Wildcat Point. See “Item 1 – Legal Proceedings.” Through September 30, 2017, we capitalized construction costs related to Wildcat Point totaling $780.1 million, including $68.6 million of capitalized interest, offset by $39.0 million of liquidated damages. FERC Proceeding Related to Formula Rate On September 30, 2013, we filed with FERC to revise our cost-based formula rate in order to more closely align our cost recovery from our member distribution cooperatives with the methodologies used by PJM to allocate costs to us. On November 8, 2013, Bear Island, a customer of REC, filed a motion to intervene, protest, and request for hearing. On December 2, 2013, FERC issued its order accepting the proposed revisions for filing to become effective January 1, 2014, subject to refund, and establishing hearing and settlement procedures. On April 13, 2015, we received an initial decision from the hearing judge. On January 19, 2017, FERC issued its order on the hearing judge's initial decision. On February 21, 2017, we submitted our compliance filing, revising the formula rate as directed in the order. Additionally, on February 21, 2017, Bear Island filed a request for rehearing. On March 22, 2017, FERC issued an order granting rehearing of its initial order for the limited purpose of FERC's further consideration of the matter. Our formula rate remains in effect subject to refund pending a final order from FERC. If a refund is ultimately determined, we believe it will result in a reallocation of costs among our member distribution cooperatives. Recovery of Costs from PJM On June 23, 2014, we filed a petition at FERC seeking recovery from PJM of approximately $14.9 million of unreimbursed costs, which were incurred during the first quarter of 2014 related to the dispatch of our combustion turbine generating facilities. On June 9, 2015, FERC denied our petition, on July 9, 2015, we filed a request for rehearing, and on August 10, 2015, FERC issued an order granting rehearing for the limited purpose of FERC's further consideration of the matter. On March 1, 2016, FERC denied our request for rehearing, on April 11, 2016, we filed a Petition for Review in the U.S. Court of Appeals for the District of Columbia Circuit, and on October 24, 2017, the court heard oral arguments. Also related to this matter, on January 5, 2017, we filed a complaint and request for relief in the Circuit Court for the County of Henrico in the Commonwealth of Virginia. We have not recorded a receivable related to this matter. Long-term Debt On July 6, 2017, we issued $250.0 million of long-term debt in a private placement transaction. The issuance consists of $250.0 million of 3.33% First Mortgage Bonds, 2017 Series A due December 1, 2037. Revolving Credit Facility We maintain a $500.0 million revolving credit facility to cover our short-term and medium-term funding needs that are not met by cash from operations or other available funds. The syndicated credit agreement associated with the facility was amended and restated on March 3, 2017, and commitments under this agreement extend until March 3, 2022. As of September 30, 2017, we had outstanding under this facility no borrowings and $12.2 million in letters of credit. As of December 31, 2016, we had outstanding under this facility $152.0 million in borrowings and $5.2 million in letters of credit. Limited Exception under Wholesale Power Contracts We have a wholesale power contract with each of our member distribution cooperatives. Each contract obligates us to sell and deliver to the member distribution cooperative, and obligates the member distribution cooperative to purchase and receive from us, all power that it requires for the operation of its system, with limited exceptions. One of the limited exceptions permits each of our member distribution cooperatives, with 180 days prior written notice, to receive up to the greater of 5% of its demand and associated energy or 5 MW and associated energy from owned generation or other suppliers. If all of our member distribution cooperatives elected to utilize the 5% or 5 MW exception, we estimate the current impact would be a reduction of approximately 175 MW of demand and associated energy. The following table summarizes the cumulative removal of load requirements under this exception since January 1, 2016.
Date
MW
January 1, 2016
9
May 1, 2016
60
June 1, 2017
65
May 1, 2018
106
We do not anticipate that the utilization of this exception by our member distribution cooperatives will have a material impact on our financial condition, results of operations, or cash flows. Retail Choice in Virginia In Virginia, retail choice in the selection of a power supplier is available to customers that consume at least 5 MW of power individually or in the aggregate (with aggregation subject to the approval of the VSCC) and that do not account for more than 1% of the incumbent utility's peak load during the past year. Currently, no customer of our member distribution cooperatives has elected to choose an alternate supplier under this provision. Retail choice is also available to any customer whose noncoincident peak demand exceeds 90 MW. Beginning June 1, 2016, Bear Island, an industrial customer of REC and the only customer of any of our member distribution cooperatives that has noncoincident peak demand that exceeds 90 MW, elected to purchase its power requirements from an alternate supplier. We do not anticipate that this will have a material impact on our financial condition, results of operations, or cash flows. North Anna Unit 3 In 2011, we decided not to participate in North Anna Unit 3, finalized our withdrawal as a participant in the project and transferred our interest to Virginia Power. In 2011, we established a regulatory asset of $22.7 million for our early stage development costs incurred for North Anna Unit 3. In 2015, we recovered 70% of these costs from Virginia Power and, with our board of directors’ approval, amortized the remaining balance in 2015. On June 1, 2017, Virginia Power agreed to return the remaining balance of North Anna Unit 3 development costs that we incurred as part of the resolution of other regulatory matters with Virginia Power. The remaining balance of North Anna Unit 3 development costs, including interest through May 2018, totals $11.6 million. In the second quarter of 2017, we recorded $6.9 million as amortization of regulatory asset/liability, net, and $4.4 million as interest income on North Anna Unit 3 cost recovery on our Condensed Consolidated Statements of Revenues, Expenses, and Patronage Capital. During the second quarter of 2017, we received a payment of $6.8 million and established a receivable for the remaining balance, which will continue to accrue interest. Virginia Power agreed to pay the remaining balance in the second quarter of 2018. New Accounting Pronouncements In May 2014, the FASB issued Accounting Standards Update 2014-09 Revenue from Contracts with Customers. This update requires entities to recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We supply power requirements (energy and demand) to our eleven member distribution cooperatives subject to substantially identical wholesale power contracts with each of them. The revenues from these wholesale power contracts constituted at least 95% of our total revenues for the past three years. We are in the process of evaluating our wholesale power and other contracts. We have not identified any material impact to our recognition of revenue from the sale of power to our member distribution cooperatives, but are still completing our review of the wholesale power contracts as well as other contracts. We plan to adopt this standard for the fiscal year beginning January 1, 2018. In February 2016, the FASB issued Accounting Standards Update 2016-02 Leases (Subtopic 835-30). This update revised accounting guidance for the recognition, measurement, presentation and disclosure of leasing arrangements. The update requires the recognition of lease assets and liabilities for those leases currently classified as operating leases while also refining the definition of a lease. In addition, lessees will be required to disclose key information about the amount, timing, and uncertainty of cash flows arising from leasing arrangements. We are currently evaluating the impact of this pronouncement. We plan to adopt this standard for the fiscal year beginning January 1, 2019. Subsequent Event On November 7, 2017, our board of directors approved an additional equity contribution of $14.1 million and declared a patronage capital retirement of $14.1 million, to be paid on April 2, 2018. Also, on November 7, 2017, our board of directors approved the establishment of a $15.0 million regulatory liability, to be amortized over a 24-month period, beginning January 1, 2018, which will reduce revenue requirements in 2018 and 2019. |
