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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, 2002
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 No. 33-7591
________________________
Oglethorpe Power Corporation
(An Electric Membership Corporation)
(Exact name of registrant as specified in its charter)
Georgia 58-1211925
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
Post Office Box 1349
2100 East Exchange Place
Tucker, Georgia 30085-1349
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 270-7600
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 X No
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. The Registrant is a
membership corporation and has no authorized or outstanding equity securities.
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OGLETHORPE POWER CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2002
(Unaudited) and December 31, 2001 3
Condensed Statements of Revenues and Expenses
(Unaudited) for the Three Months and Six Months ended
June 30, 2002 and 2001 5
Condensed Statements of Patronage Capital and Membership
Fees and Accumulated Other Comprehensive Margin
(Unaudited) for the Three Months and Six Months ended
June 30, 2002 and 2001 6
Condensed Statements of Cash Flows (Unaudited)
for the Six Months ended June 30, 2002 and 2001 7
Notes to Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Oglethorpe Power Corporation
Condensed Balance Sheets
June 30, 2002 and December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
2002 2001
Assets (Unaudited)
-------------------------------------
Electric plant, at original cost:
In service $ 5,052,863 $ 5,029,192
Less: Accumulated provision for depreciation (1,947,495) (1,881,918)
----------- -----------
3,105,368 3,147,274
Nuclear fuel, at amortized cost 82,191 77,360
Construction work in progress 52,988 38,564
----------- -----------
3,240,547 3,263,198
----------- -----------
Investments and funds:
Decommissioning fund, at market 148,653 150,668
Deposit on Rocky Mountain transactions, at cost 70,326 68,032
Bond, reserve and construction funds, at market 26,824 28,691
Investment in associated organizations, at cost 22,184 22,187
Other, at cost 405 731
----------- -----------
268,392 270,309
----------- -----------
Current assets:
Cash and temporary cash investments, at cost 201,615 275,786
Other short-term investments, at market 91,337 88,589
Receivables 109,771 73,039
Notes receivable 319,710 340,396
Inventories, at average cost 93,658 81,768
Prepayments and other current assets 14,714 16,182
----------- -----------
830,805 875,760
----------- -----------
Deferred charges:
Premium and loss on reacquired debt, being amortized 157,340 162,690
Deferred amortization of capital leases 108,376 107,254
Discontinued projects, being amortized 4,946 6,463
Deferred debt expense, being amortized 15,845 16,475
Other 27,773 22,518
----------- -----------
314,280 315,400
----------- -----------
$ 4,654,024 $ 4,724,667
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
3
Oglethorpe Power Corporation
Condensed Balance Sheets
June 30, 2002 and December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
2002 2001
Equity and Liabilities (Unaudited)
---------------------------------
Capitalization:
Patronage capital and membership fees and accumulated
other comprehensive margin $ 384,319 $ 367,668
Long-term debt 2,762,828 2,929,316
Obligation under capital leases 366,755 373,837
Obligation under Rocky Mountain transactions 70,326 68,032
---------- ----------
3,584,228 3,738,853
---------- ----------
Current liabilities:
Long-term debt and capital leases due within one year 251,237 127,621
Accounts payable 76,972 79,859
Notes payable 300,713 353,680
Power marketer payable - 36,000
Accrued interest 58,047 7,793
Accrued and withheld taxes 13,920 678
Other current liabilities 7,073 15,783
---------- ----------
707,962 621,414
---------- ----------
Deferred credits and other liabilities:
Gain on sale of plant, being amortized 49,621 50,858
Net benefit of sale of income tax benefits, being amortized - 2,002
Net benefit of Rocky Mountain transactions, being amortized 78,041 79,633
Decommissioning reserve 172,359 174,506
Interest rate swap arrangements 42,789 36,859
Other 19,024 20,542
---------- ----------
361,834 364,400
---------- ----------
$4,654,024 $4,724,667
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
4
Oglethorpe Power Corporation
Condensed Statements of Revenues and Expenses (Unaudited)
For the Three and Six Months Ended June 30, 2002 and 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Three Months Six Months
----------------------------------------------------------
2002 2001 2002 2001
-------------------------- --------------------------
Operating revenues:
Sales to Members $ 269,879 $ 258,571 $ 550,751 $ 555,077
Sales to non-Members 9,648 21,340 16,654 31,441
--------- --------- --------- ---------
Total operating revenues 279,527 279,911 567,405 586,518
--------- --------- --------- ---------
Operating expenses:
Fuel 54,425 59,281 99,232 104,825
Production 51,515 51,487 111,844 106,071
Purchased power 82,810 86,908 177,562 193,272
Depreciation and amortization 32,624 33,300 65,008 66,650
--------- --------- --------- ---------
Total operating expenses 221,374 230,976 453,646 470,818
--------- --------- --------- ---------
Operating margin 58,153 48,935 113,759 115,700
--------- --------- --------- ---------
Other income (expense):
Investment income 8,154 8,059 16,965 18,308
Amortization of deferred gains 619 618 1,237 1,237
Amortization of net benefit of sale of income tax benefits 796 2,798 3,595 5,597
Allowance for equity funds used during construction 131 44 242 68
Other 485 1,129 1,265 1,811
--------- --------- --------- ---------
Total other income 10,185 12,648 23,304 27,021
--------- --------- --------- ---------
Interest charges:
Interest on long-term debt and capital leases 51,636 55,643 103,133 111,711
Other interest 4,686 2,302 9,888 7,045
Allowance for debt funds used during construction (917) (556) (1,748) (907)
Amortization of debt discount and expense 3,524 5,405 7,112 10,800
--------- --------- --------- ---------
Net interest charges 58,929 62,794 118,385 128,649
--------- --------- --------- ---------
Net margin $ 9,409 ($ 1,211) $ 18,678 $ 14,072
========= ========= ========= =========
The accompanying notes are an integral part of these condensed financial
statements.
5
Oglethorpe Power Corporation
Condensed Statements of Patronage Capital and Membership Fees
and Accumulated Other Comprehensive Margin (Unaudited)
For the Six Months Ended June 30, 2002 and 2001
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Patronage Accumulated
Capital and Other
Membership Comprehensive
Fees Margin (Loss) Total
----------------------------------------------
Balance at December 31, 2000 $391,611 $1,071 $392,682
Components of comprehensive margin:
Net margin 14,072 14,072
Unrealized loss on interest rate swap arrangements (31,188) (31,188)
Unrealized loss on financial gas hedges (4,611) (4,611)
Unrealized gain on available-for-sale securities 300 300
--------------
Total comprehensive margin (loss) (21,427)
--------------
- --------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 $405,683 ($34,428) $371,255
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $410,029 ($42,361) $367,668
Components of comprehensive margin:
Net margin 18,678 18,678
Unrealized loss on interest rate swap arrangements (5,931) (5,931)
Unrealized gain on financial gas hedges 4,402 4,402
Unrealized loss on available-for-sale securities (498) (498)
--------------
Total comprehensive margin 16,651
--------------
- --------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002 $428,707 ($44,388) $384,319
- --------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these condensed financial
statements.
6
Oglethorpe Power Corporation
Condensed Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, 2002 and 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
2002 2001
---------------------------
Cash flows from operating activities:
Net margin $ 18,678 $ 14,072
--------- ---------
Adjustments to reconcile net margin to net cash
provided by operating activities:
Depreciation and amortization 90,966 97,664
Allowance for equity funds used during construction (242) (68)
Amortization of deferred gains (1,237) (1,237)
Amortization of net benefit of sale of income tax benefits (3,595) (5,597)
Other 3,181 4,089
Change in operating assets and liabilities:
Receivables (36,732) 42,377
Notes receivable 56 (42)
Inventories (11,890) (1,154)
Prepayments and other current assets 1,468 (55)
Accounts payable (2,887) (34,055)
Accrued interest 50,254 (7,651)
Accrued and withheld taxes 13,242 12,512
Power marketer reserve (36,000) -
Other current liabilities (4,308) (20,382)
Deferred nuclear outage costs (17,706) (7,830)
--------- ---------
Total adjustments 44,570 78,571
--------- ---------
Net cash provided by operating activities 63,248 92,643
--------- ---------
Cash flows from investing activities:
Property additions (58,133) (28,398)
Net proceeds from bond, reserve and construction funds 1,599 397
Decrease (increase) in investment in associated organizations 3 (477)
Increase in other short-term investments (2,979) (3,221)
Increase in decommissioning fund (4,420) (3,299)
Other-generation equipment deposits - (13,064)
--------- ---------
Net cash used in investing activities (63,930) (48,062)
--------- ---------
Cash flows from financing activities:
Long-term debt proceeds, net 1,882 1,735
Long-term debt payments (43,034) (61,737)
(Decrease) increase in notes payable (52,967) 104,139
Decrease (increase) in notes receivable under interim financing agreement 20,630 (91,504)
--------- ---------
Net cash used in financing activities (73,489) (47,367)
--------- ---------
Net decrease in cash and temporary cash investments (74,171) (2,786)
Cash and temporary cash investments at beginning of period 275,786 330,622
--------- ---------
Cash and temporary cash investments at end of period $ 201,615 $ 327,836
========= =========
Cash paid for:
Interest (net of amounts capitalized) $ 56,260 $ 120,682
Income taxes - -
The accompanying notes are an integral part of these condensed financial
statements.
7
Oglethorpe Power Corporation
Notes to Condensed Financial Statements
June 30, 2002 and 2001
(A) The condensed financial statements included in this report have been
prepared by Oglethorpe Power Corporation (Oglethorpe), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC). In the opinion of management, the information furnished
in this report reflects all adjustments (which include only normal
recurring adjustments) and estimates necessary to present fairly, in all
material respects, the results for the periods ended June 30, 2002 and
2001. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC
rules and regulations, although Oglethorpe believes that the disclosures
are adequate to make the information presented not misleading. These
condensed financial statements should be read in conjunction with the
financial statements and the notes thereto included in Oglethorpe's
latest Annual Report on Form 10-K, as filed with the SEC. Certain amounts
for 2001 have been reclassified to conform with the current period
presentation. The results of operations for the three-month and six-month
periods ended June 30, 2002 are not necessarily indicative of results to
be expected for the full year.
(B) In June of 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting
for Asset Retirement Obligations." The statement provides accounting and
reporting standards for recognizing obligations related to costs
associated with the retirement of long-lived assets. SFAS No. 143
requires obligations associated with the retirement of long-lived assets
to be recognized at their fair value in the period in which they are
incurred if a reasonable estimate of fair value can be made. The fair
value of the asset retirement costs is capitalized as part of the
carrying amount of the long-lived asset and subsequently allocated to
expense using a systematic and rational method over the asset's useful
life. Any subsequent changes to the fair value of the liability due to
passage of time or changes in the amount or timing of estimated cash
flows is recognized as an accretion expense.
Adoption of SFAS No. 143 would require Oglethorpe to recognize the fair
value of its decommissioning liability. Under SFAS No. 71, Oglethorpe may
record an offsetting regulatory asset or liability to reflect the
difference in timing of recognition of the costs of decommissioning for
financial statement purposes and for ratemaking purposes. Oglethorpe will
be required to adopt this statement no later than January 1, 2003.
Oglethorpe's management is currently assessing the impact of this
statement on its results of operations and financial condition.
8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For the Three Months and Six Months Ended June 30, 2002 and 2001
- ----------------------------------------------------------------
Net Margin
Oglethorpe's net margin (loss) for the three months and six months ended June
30, 2002 was $9.4 million and $18.7 million compared to ($1.2) million and $14.1
million for the same periods of 2001. Net margin for the six months ended June
30, 2001 reflected a $17.3 million Board of Directors approved reduction to
revenue requirements as a result of lower than budgeted fixed production
expenses and lower interest costs in that period. This was recorded as a $17.3
million reduction in sales to Members resulting in a net loss for the second
quarter of 2001.
Operating Revenues
Oglethorpe's operating revenues fluctuate from period to period based on factors
including weather and other seasonal factors, growth in the service territories
of Oglethorpe's 39 retail electric distribution cooperative members (the
Members), operating costs, availability of electric generation resources, and
Oglethorpe's decisions of whether to dispatch its owned or purchased resources
or Member-owned resources over which it has dispatch rights. Oglethorpe's
operating revenues may also be affected by Members' decisions of whether to
purchase a portion of their growth requirements from Oglethorpe or from other
suppliers and whether to schedule separately their resources. A large number of
Members have now elected to schedule separately their percentage capacity
responsibilities (their pro-rata shares) in Oglethorpe resources to serve their
retail and wholesale customers, although approximately half of the elections
were not effective until June 1, 2002. (See "OGLETHORPE POWER
CORPORATION--Wholesale Power Contracts" in Item 1 of Oglethorpe's 2001 Annual
Report on Form 10-K.) As more and more Members have elected to become scheduling
Members, the scheduling choices of these Members are having a greater impact on
Oglethorpe's energy sales.
Revenues from sales to the Members for the three-month and six-month periods
ended June 30, 2002 were 4.4% higher and 0.8% lower than such revenues for the
same periods of 2001. Megawatt-hour (MWh) sales to Members increased 3.1% and
0.4% in the current periods compared to the same periods of 2001. The increase
in MWh sales to Members in the current quarter was primarily due to an increase
in sales to Members who participate in Oglethorpe's capacity and energy pool.
For the six-month period ended June 30, 2002, this increase was offset by lower
sales to scheduling Members. The average revenue per MWh from sales to Members
increased 1.2% for the second quarter and decreased 1.1% year-to-date compared
to the same periods of 2001.
9
The components of Member revenues for the three months and six months ended June
30, 2002 and 2001 were as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Capacity revenues $149,281 $142,898 $299,267 $301,376
Energy revenues 120,598 115,673 251,484 253,701
-------- -------- -------- --------
Total $269,879 $258,571 $550,751 $555,077
======== ======== ======== ========
Capacity revenues from Members for the three months and six months ended June
30, 2002 increased 4.5% and decreased 0.7% compared to the same periods of 2001.
The increase in capacity revenues for the second quarter was primarily due to
higher net margin for the current period compared to the same period of 2001,
which was due to the timing of the budget reduction in 2001. For the six-month
period ended June 30, 2002, this increase was offset by lower revenue
requirements due to lower interest costs. Energy revenues were 4.3% higher and
0.9% lower for the current periods of 2002 compared to the same periods of 2001.
The increase in energy revenues for the second quarter of 2002 was primarily due
to the increase in the volume of MWhs sold to Members. Oglethorpe's average
energy revenue per MWh from sales to Members were 1.1% higher in the current
quarter and 1.2% lower year-to-date compared to the same periods of 2001.
Sales to non-Members were from energy sales to power companies and from energy
sales to LG&E Energy Marketing Inc. (LEM) and Morgan Stanley Capital Group Inc.
(Morgan Stanley) under their power marketer arrangements with Oglethorpe. The
following table summarizes the sources of non-Member revenues for the three
months and six months ended June 30, 2002 and 2001:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Sales to power companies $9,337 $19,798 $16,316 $27,954
Sales to LEM and Morgan Stanley 311 1,542 338 3,487
------ ------- ------- -------
Total $9,648 $21,340 $16,654 $31,441
====== ======= ======= =======
Sales to power companies represent sales made directly by Oglethorpe. Oglethorpe
sells for its own account any energy available from the portion of its resources
dedicated to Morgan Stanley that is not scheduled by Morgan Stanley pursuant to
the power marketer arrangement. Scheduling Members are entitled to schedule
energy available from their percentage capacity responsibilities for both retail
sales and for resale in the wholesale market. More of the Members were
scheduling Members in the first six months of 2002 than in the first six months
of 2001, resulting in less energy being available to Oglethorpe to sell directly
to non-Members.
Sales to LEM and Morgan Stanley represent the net energy transmitted on behalf
of LEM and Morgan Stanley off-system on an hourly basis from Oglethorpe's total
10
resources under the LEM and Morgan Stanley power marketer arrangements.
Oglethorpe sold this energy to LEM at Oglethorpe's cost, subject to certain
limitations, and to Morgan Stanley at a contractually fixed price. The volume of
sales to LEM and Morgan Stanley depends primarily on the power marketers'
decisions for servicing their load requirements under the contracts.
Operating Expenses
Operating expenses for the three-month and six-month periods ended June 30, 2002
were 4.1% and 3.7% lower compared to the same periods of 2001. The decrease
during the second quarter of 2002 compared to the same period of 2001 was partly
due to lower purchased power costs and partly due to lower fuel costs. The
decrease in operating expenses year-to-date is primarily due to lower purchased
power costs offset somewhat by higher production costs.
For the current three-month period compared to the same period of 2001 total
fuel costs decreased 8.2% primarily as a result of a 6.1% decrease in total
generation. For the second quarter of 2002, nuclear generation was 3.1% lower
and fossil generation was 8.3% lower as compared to the same period of 2001. The
larger decrease in fossil generation, with its higher average fuel cost compared
to nuclear generation, yielded a 2.2% decrease in total average fuel cost.
Purchased power costs decreased 4.7% and 8.1% for the current periods of 2002
compared to the same periods of 2001. The decrease in total purchased power
costs resulted primarily from lower purchased MWhs in 2002 compared to 2001.
Purchased MWhs decreased 17.2% and 17.5% in the current three-month and
six-month periods of 2002 compared to the same periods of 2001. The average cost
per MWh of total purchased power increased 15.1% and 11.4% in the current
periods of 2002 compared to the same periods of 2001. Purchased power costs were
as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Capacity costs $19,801 $21,654 $40,099 $42,462
Energy costs 63,009 65,254 137,463 150,810
------- ------- ------- -------
Total $82,810 $86,908 $177,562 $193,272
======= ======= ======== ========
Purchased power energy costs for the three-month and six-month ended June 30,
2002 were 3.4% and 8.9% lower compared to the same periods of 2001. The
decreases resulted primarily from lower volume of purchased MWhs offset somewhat
by an increase in the average energy cost per MWh. Year-to-date June 30, 2002
the average cost of purchased power energy increased 10.5% compared to the same
period of 2001 partly due to an accrual in March 2002, of an additional expense
of $12.5 million in connection with the settlement of an arbitration proceeding
with LEM and partly due to higher net prices incurred for purchases made from
Morgan Stanley under the power marketer arrangement. See "Financial Condition"
herein and "Legal Proceedings--2001 LEM Arbitration" in Item 1 of Part II of
Oglethorpe's Quarterly Report on Form 10-Q for the period ended March 31, 2002
for further discussion of the 2001 LEM arbitration.
11
Production costs increased 5.5% for the six-month period ended June 30, 2002
compared to the same period of 2001. The higher production costs in 2002
resulted primarily from higher O&M costs. The higher O&M costs resulted partly
from a forced outage and diesel generator repairs at Plant Hatch during the
first quarter of 2002, partly from increased security costs at Plants Vogtle and
Hatch related to the events of September 11, 2001 and partly from several forced
outages at Plants Scherer and Wansley.
Other Income
For the three-month period ended June 30, 2002, the amortization of net benefit
of sale of income tax benefits decreased approximately $2 million due to the
amortization of the safe harbor lease ending in March 2001. Investment income
decreased 7.3% in the six-month period ended June 30, 2002 compared to the same
period of 2001 partly due to lower cash and temporary cash investment balances
and partly due to lower interest earnings on these investments.
Interest Charges
Interest on long-term debt and capital leases decreased 7.2% and 7.7% in the
current periods compared to the same periods of 2001 primarily as a result of
cost savings from lower variable interest rates on long-term debt. Other
interest expense increased $2.4 million or 103.5% and $2.8 million or 40.3% in
the current periods compared to the same periods of 2001 primarily as a result
of an increase in interest expense for decommissioning (which is recorded as an
offset to interest earnings on the decommissioning fund). Amortization of debt
discount and expense decreased 34.8% and 34.2% during the current periods
primarily due to accelerated amortization of $7 million and $24 million in
premiums paid to the Federal Financing Bank for refinancing $89 million and $424
million in 1999 and 1998, respectively. Such amortization ended in the third and
fourth quarters of 2001, respectively.
Financial Condition
Capital Requirements
- --------------------
Financing for Talbot EMC and Chattahoochee EMC
In 2000, Oglethorpe began arranging for the construction of two new generating
facilities to meet the load growth of certain of Oglethorpe's Members. In 2001,
30 of Oglethorpe's Members formed Talbot EMC to construct and own one of the
facilities, a six-unit, 618 MW gas-fired combustion turbine facility. Four units
were placed in-service in May and June 2002 and Oglethorpe is operating these
units on behalf of Talbot EMC. Two additional units are expected to be
in-service in summer 2003. Also in 2001, 28 of Oglethorpe's Members formed
Chattahoochee EMC to construct and own the other facility, a 468 MW gas-fired
combined cycle facility expected to be in-service by spring 2003.
Oglethorpe is currently providing loans to Talbot EMC and Chattahoochee EMC to
fund, on an interim basis, approximately 50 percent of the cost of constructing
these new generating facilities.
12
Oglethorpe is funding these loans under its commercial paper program, which is
backed 100% by committed lines of credit. The amount of commercial paper
outstanding for this purpose at June 30, 2002 was $301 million. Oglethorpe
expects to have approximately $300 million of commercial paper outstanding until
mid-2003 in conjunction with the interim financing of these facilities.
In connection with the construction of the facilities, Oglethorpe submitted loan
applications to the Rural Utilities Service (RUS) on behalf of any entity that
may ultimately own the facilities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Financial Condition--Capital
Requirements--Financing for Talbot EMC and Chattahoochee EMC" in Item 7 of
Oglethorpe's 2001 Annual Report of Form 10-K. During the process of evaluating
the terms proposed by RUS for providing loans to Talbot EMC and Chattahoochee
EMC, Oglethorpe, the Members, Talbot EMC and Chattahoochee EMC determined that
the terms of the financing would be more favorable if Oglethorpe owned the
facilities and obtained the RUS financing.
Accordingly, the parties have decided to pursue a course in which Oglethorpe
would acquire the two facilities from Chattahoochee EMC and Talbot EMC at such
time as funding is received from RUS and other proposed conditions are
satisfied. Oglethorpe is now working with RUS to process the applications so
that the loans would be made to Oglethorpe rather than to Talbot EMC and
Chattahoochee EMC. Oglethorpe expects that RUS will make a decision on whether
to approve the loans by September 30, 2002. If approved, funding under the loans
should be available by mid-2003.
Oglethorpe's proposed acquisition of the facilities would be conditioned upon
implementing new arrangements among Oglethorpe and the Members, including (1)
limited amendments to the Wholesale Power Contracts that do not involve any
change in the payment obligations of the Members and (2) other agreements among
Oglethorpe and the Members as to the future provisions of services by
Oglethorpe. Oglethorpe and the Members are working toward definitive agreements
regarding these proposed new arrangements, and Oglethorpe expects the new
arrangements will be in final form for Member approval in the fall and,
thereafter, for submission to RUS for approval.
If completed, Oglethorpe's acquisition of the facilities currently owned by
Chattahoochee EMC and Talbot EMC would increase the assets and liabilities
reported on Oglethorpe's balance sheet by approximately $600 million. In
addition, the funding of the loans by RUS would increase the level of debt
secured under the Mortgage Indenture. Since Oglethorpe's margin requirement is
based on a ratio applied to interest charges incurred for debt secured under the
Mortgage Indenture, the increase in debt would result in an increase in
Oglethorpe's margin requirement.
While it is Oglethorpe's current expectation that these two facilities will
ultimately be owned by Oglethorpe and financed by RUS, Oglethorpe cannot state
with certainty that RUS will approve these loans or that the Members will agree
to the proposed new arrangements. If either condition is not met, Oglethorpe
will assist Talbot EMC and Chattahoochee EMC in pursuing long-term permanent
financing.
Other Planned Financings
Oglethorpe has several debt financings planned in the near future. Oglethorpe
expects to finance up to $150 million in late 2002 and/or early 2003 to fund
13
past and future capital expenditures relating to compliance with environmental
regulations. This financing will include a combination of tax-exempt and taxable
debt. Oglethorpe also expects to issue approximately $122 million in tax-exempt
pollution control bonds ("PCB") in two separate refinancings in the fall of
2002. The first PCB transaction will be a $92 million issue to refinance loans
from CoBank and CFC totaling $92 million. These two loans were made in
conjunction with the defeasance of a tax-exempt bond issue in 1997. The second
transaction will be a $30 million issue to refinance PCB principal scheduled to
mature on January 1, 2003. These financing plans are subject to change in the
event of unanticipated changes in capital markets or business conditions.
Liquidity and Sources of Capital
- --------------------------------
To meet short-term cash needs and liquidity requirements, Oglethorpe had, as of
June 30, 2002, (i) approximately $202 million in cash and temporary cash
investments, (ii) $91 million in other short-term investments and (iii) up to
$104 million available under the following credit facilities:
=====================================================================================================
(dollars in thousands)
Committed Short-Term Credit Authorized Available Expiration
Facilities Amount Amount Date
=====================================================================================================
Commercial Paper $355,000 $54,000 September 27, 2002
Backup
Cooperative Finance 50,000 50,000 August 14, 2003
Corporation (CFC)
=====================================================================================================
Under its commercial paper program, Oglethorpe may issue commercial paper not to
exceed $355 million outstanding at any one time. The commercial paper is backed
100% by committed lines of credit provided by a group of eight banks that was
syndicated by Bank of America. In addition to providing commercial paper backup,
this facility can be used for general working capital purposes.
Oglethorpe recently converted its $50 million uncommitted line of credit with
CFC to a committed facility. This line of credit can be used for general working
capital purposes.
Liquidity Requirements
Oglethorpe has liquidity requirements in three financial agreements currently in
place. These agreements include the interest rate swap arrangements relating to
two PCB transactions and the Rocky Mountain lease transactions. The amount of
liquidity required under these agreements was $76 million as of June 30, 2002,
and Oglethorpe satisfied these requirements.
Credit Rating Triggers
Oglethorpe has credit agreements and other financial and commercial contracts
that contain provisions giving counterparties certain rights and options in the
event of a downgrade in Oglethorpe's credit ratings below specified levels. A
14
majority of these rating triggers require Oglethorpe to maintain at least two
out of three ratings at specified levels.
The table below sets forth Oglethorpe's current ratings and the most significant
rating triggers contained in Oglethorpe's agreements and contracts. To trigger
these provisions, Oglethorpe's ratings must fall below the levels specified in
the table. Given its current level of ratings, Oglethorpe's management does not
believe that the rating triggers contained in any of its existing agreements or
contracts will have a material adverse effect on its results of operations or
financial condition. However, Oglethorpe's ratings reflect the views of the
rating agencies and not of Oglethorpe, and therefore Oglethorpe cannot give any
assurance that its ratings will be maintained at current levels for any period
of time.
===========================================================================================================================
Standard & Poor's Moody's Fitch Ratings
===========================================================================================================================
Oglethorpe's Current Ratings
Senior Secured Debt A A3 A
Senior Unsecured Debt A Baa1(1) A
Short-term Debt A-1 P-2 F-1
Ratings Triggers
Commercial Paper Backup Line
of Credit
Senior Secured Debt BBB+ Baa2 BBB+
Short-term Debt A-2 P-2 F-2
Interest Rate Swap
Senior Secured Debt BBB- Baa3 Not Applicable
Rocky Mountain Lease
Senior Secured Debt BBB Baa2 BBB
Senior Unsecured Debt BBB- Baa3 BBB-
Morgan Stanley Power
Marketing Agreement
Senior Secured Debt BBB+ Baa1 BBB+
===========================================================================================================================
- ----------
<FN>
(1) Moody's also assigns an "Issuer Rating" of Baa1 to Oglethorpe.
</FN>
At Oglethorpe's request, the agent bank for the commercial paper backup line of
credit is proposing to the other lenders an elimination of both the long-term
and short-term rating triggers when the facility is renewed in September 2002.
Currently, a failure by Oglethorpe to maintain at least two of the three senior
secured and short-term debt ratings would constitute an event of default unless
waived by the banks.
Under the interest rate swap arrangements, if Oglethorpe's Standard & Poor's or
Moody's ratings fall below the specified levels, the swap counterparty has the
option to (1) make swap payments based on an index rather than the actual
variable rate on the bonds and/or (2) cause an early termination of the swaps.
In the event of a termination, either party could owe the other party a
termination payment depending on the then market value of the swap position.
Oglethorpe estimates that as of June 30, 2002, a termination of the swap would
require Oglethorpe to make a termination payment of approximately $43 million.
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Provisions in the Rocky Mountain lease transactions could require Oglethorpe to
put up additional surety bonds or letters of credit in the amount of $100
million if Oglethorpe fails to maintain at least two of the required ratings.
Oglethorpe could also be required to provide credit assurance up to $48 million
to Morgan Stanley Capital Group under its power marketing arrangements if
Oglethorpe fails to maintain at least two of the required ratings. The Morgan
Stanley contract expires on March 31, 2005.
Provisions in various other loan agreements and power purchase agreements of
Oglethorpe contain covenants based on credit ratings that could result in
increased interest rates or additional restrictions on issuing debt, or could
require Oglethorpe to give performance assurances, but would not result in
acceleration of Oglethorpe's obligations or termination of the agreements. The
ratings triggers in these agreements are at or below the minimum levels required
by the agreements described above.
General
- -------
Total assets and total equity plus liabilities as of June 30, 2002 were $4.7
billion, which was $71 million lower than the total at December 31, 2001. The
decrease was due primarily to depreciation of plant, decreases in cash and
temporary cash investments, and notes receivable, offset in part by additions to
plant in service and construction work in progress, and increases in receivables
and inventories.
Assets
Property additions for the six months ended June 30, 2002 totaled $58.1 million,
primarily for purchases of nuclear fuel and for additions, replacements, and
improvements to existing generation facilities.
The decrease in cash and temporary cash investments was a result of cash used in
financing and investing activities, including debt principal repayments,
exceeding cash provided from operations. The reduction in cash provided from
operations resulted from the $48.5 million payment to LEM for arbitration
settlement damages.
The increase in receivables was primarily due to the accrual of an additional
$12.5 million associated with the LEM arbitration settlement and an increase in
sales to Members as a result of seasonal variations. Receivables at June 30,
2002 include a total of $48.5 million associated with the settlement of the LEM
arbitration that have not yet been billed to the Members but have been recorded
as unbilled energy revenues.
Inventories increased primarily as a result of the seasonal buildup of coal
stockpiles at Plant Scherer and Plant Wansley for the summer peak period. Forced
outages, particularly at Plant Wansley, also contributed somewhat to the
increase.
Prepayments and other current assets decreased primarily as a result of the
amortization of prepaid insurance balances and prepaid association fees, and the
reversal of regulatory assets accrued at December 31, 2001 for sick and vacation
16
leave. This decrease was somewhat offset by an increase in prepayments made to
Georgia Power Company for estimated plant operating and construction costs.
The increase in other deferred charges was primarily due to the deferral of
nuclear outage costs associated with outages at Plant Vogtle Unit No. 1 and
Plant Hatch Unit No. 1. Both outages began during the first quarter of 2002.
Nuclear outage costs are amortized over an 18-month operating cycle for the
Plant Vogtle units and a 24-month operating cycle for the Plant Hatch units.
Equity and Liabilities
Patronage capital and membership fees and other comprehensive margin increased
by $16.6 million to $384.3 million at June 30, 2001. Patronage capital and
membership fees, excluding accumulated other comprehensive loss, increased by
$18.7 million from $410.0 million at December 31, 2001 to $428.7 million at June
30, 2002. Accumulated other comprehensive loss increased by $2.0 million, from
($42.4 million) to ($44.4 million).
Long-term debt and capital leases due within one year increased significantly as
a result of the reclassification of CoBank and CFC notes totaling $92.1 million
which are due March 31, 2003. Oglethorpe management intends to refinance these
obligations with long-term debt by issuing tax-exempt bonds later in 2002, but
Oglethorpe has not yet entered into a firm financing agreement to do so. The
remaining increase was primarily attributable to the timing of a payment made
for FFB debt at December 31, 2001 rather than January 2, 2002.
Notes payable represents Oglethorpe's outstanding commercial paper used to fund,
on an interim basis, a portion of the Talbot EMC and Chattahoochee EMC
construction projects. The decrease in notes payable was the result of a portion
of the bridge loan proceeds obtained by Talbot EMC and Chattahoochee EMC being
used to pay down a portion of Oglethorpe's outstanding commercial paper. (See
"Capital Requirements and Liquidity and Sources of Capital" above for a
discussion regarding financing of these projects.)
The decrease in the power marketer payable was the result of a $48.5 million
payment to LEM on May 24, 2002 in accordance with the arbitration settlement.
The increase in accrued interest was largely driven by interest expense accruals
associated with the long-term FFB mortgage notes, and to a lesser extent, the
lease of Plant Scherer Unit No. 2. At June 30, 2002 interest expense for three
months of FFB debt and six months of Scherer debt was accrued, whereas no
interest expense was accrued at December 31, 2001 as a result of early debt
payments.
Accrued and withheld taxes increased as a result of the normal monthly accruals
for property taxes, which are generally paid in the fourth quarter of the year.
The decrease in other current liabilities resulted primarily from payment of
certain year-end accruals and a performance based pay accrual, and a decrease in
the liability associated with natural gas cash flow hedges due to changing
market values and the settlement of certain contracts.
Oglethorpe has recorded an unrealized loss related to the interest rate swap
arrangements of $42.8 million, which represents the estimated payment Oglethorpe
17
would make if the swap arrangements were terminated.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The statement provides accounting and reporting standards for
recognizing obligations related to costs associated with the retirement of
long-lived assets. SFAS No. 143 requires obligations associated with the
retirement of long-lived assets to be recognized at their fair value in the
period in which they are incurred if a reasonable estimate of fair value can be
made. The fair value of the asset retirement costs is capitalized as part of the
carrying amount of the long-lived asset and subsequently allocated to expense
using a systematic and rational method over the assets' useful life. Any
subsequent changes to the fair value of the liability due to passage of time or
changes in the amount or timing of estimated cash flows is recognized as an
accretion expense.
Adoption of SFAS No. 143 would require Oglethorpe to recognize the fair value of
its decommissioning liability. Under SFAS No. 71, Oglethorpe may record an
offsetting regulatory asset or liability to reflect the difference in timing of
recognition of the costs of decommissioning for financial statement purposes and
for ratemaking purposes. Oglethorpe will be required to adopt this statement no
later than January 1, 2003. Oglethorpe's management is currently assessing the
impact of this statement on its results of operations and financial condition.
Forward-Looking Statements and Associated Risks
This Quarterly Report on Form 10-Q contains forward-looking statements,
including statements regarding, among other items, (i) anticipated transactions
by Oglethorpe and the Members and (ii) Oglethorpe's future capital requirements
and sources of capital. These forward-looking statements are based largely on
Oglethorpe's current expectations and are subject to a number of risks and
uncertainties, some of which are beyond Oglethorpe's control. For factors that
could cause actual results to differ materially from those anticipated by these
forward-looking statements, see "FACTORS AFFECTING THE ELECTRIC UTILITY
INDUSTRY" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Miscellaneous--Competition" in Items 1 and 7 of
Oglethorpe's 2001 Annual Report on Form 10-K. In light of these risks and
uncertainties, there can be no assurance that events anticipated by the
forward-looking statements contained in this Quarterly Report will in fact
transpire.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Oglethorpe's market risks have not changed materially from the market risks
reported in Oglethorpe's 2001 Annual Report on Form 10-K.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
PECO Proceeding
As previously reported, PECO Energy Company - Power Team, now Exelon Generation
Company ("Exelon"), in 1997 filed an application with the Federal Energy
Regulatory Commission ("FERC") requesting FERC to compel Oglethorpe and/or GTC
to provide PECO with specified transmission service. In addition, PECO sought
penalties from Oglethorpe and/or GTC under the Federal Power Act. On July 23,
2002, FERC denied the request for penalties. FERC also directed Exelon to submit
further information clarifying what transmission service it is now seeking.
1999 LEM Arbitration
As previously reported, in September 2001, the LG&E Parties filed motions in the
United States District Court for the Northern District of Georgia seeking to
vacate the court's confirmation of a 1999 arbitration award in Oglethorpe's
favor affirming the validity of the LEM Agreement, to vacate the underlying
award, and to take certain discovery, all based on alleged non-disclosure of
information that LEM claims would have been pertinent to the arbitration. On
June 17, the Court entered an order denying all relief to the LG&E Parties. The
time to appeal has expired and no appeal has been filed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
99.1 Certification Pursuant to 18 U.S.C. 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
by Thomas A. Smith (Principal Executive Officer)
99.2 Certification Pursuant to 18 U.S.C. 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
by J. Calvin Earwood (Principal Executive Officer)
99.3 Certification Pursuant to 18 U.S.C. 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
by W. Clayton Robbins (Principal Financial Officer)
99.4 Certification Pursuant to 18 U.S.C. 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
by Mac F. Oglesby (Principal Financial Officer)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Oglethorpe for the quarter ended
June 30, 2002.
19
SIGNATURES
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.
Oglethorpe Power Corporation
(An Electric Membership Corporation)
Date: August 14, 2002 By: /s/ Thomas A. Smith
-------------------
Thomas A. Smith
President and Chief Executive
Officer
Date: August 14, 2002 /s/ Mac F. Oglesby
-------------------
Mac F. Oglesby
Treasurer
(Principal Financial Officer)
Date: August 14, 2002 /s/ W. Clayton Robbins
----------------------
W. Clayton Robbins
Senior Vice President, Finance
and Administration
(Principal Financial Officer)
Date: August 14, 2002 /s/ Mark Chesla
---------------
Mark Chesla
Controller
(Chief Accounting Officer)
20