- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OGLETHORPE POWER CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets as of September 30, 1998 (Unaudited) and December 31, 1997 3 Condensed Statements of Revenues and Expenses and Comprehensive Margin (Unaudited) for the Three Months and Nine Months Ended September 30, 1998 and 1997 5 Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 1998 and 1997 6 Notes to the Condensed Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Oglethorpe Power Corporation Condensed Balance Sheets September 30, 1998 and December 31, 1997 - ------------------------------------------------------------------------------------------ (dollars in thousands) 1998 1997 Assets (Unaudited) ------------------------- Electric plant, at original cost: In service $4,900,356 $4,910,067 Less: Accumulated provision for depreciation (1,496,228) (1,412,287) ---------- ---------- 3,404,128 3,497,780 Nuclear fuel, at amortized cost 83,310 90,423 Construction work in progress 17,410 13,578 ---------- ---------- 3,504,848 3,601,781 ---------- ---------- Investments and funds: Decommissioning fund, at market 107,699 105,817 Deposit on Rocky Mountain transactions, at cost 54,845 52,176 Bond, reserve and construction funds, at market 32,934 33,160 Investment in associated organizations, at cost 15,597 15,940 Other, at cost 4,940 4,641 ---------- ---------- 216,015 211,734 ---------- ---------- Current assets: Cash and temporary cash investments, at cost 71,905 63,215 Other short-term investments, at market 103,586 97,022 Receivables 127,242 105,993 Inventories, at average cost 74,916 65,528 Prepayments and other current assets 20,501 12,530 ---------- ---------- 398,150 344,288 ---------- ---------- Deferred charges: Premium and loss on reacquired debt, being amortized 211,136 196,583 Deferred amortization of Scherer leasehold 98,657 96,303 Deferred debt expense, being amortized 16,842 15,345 Other 39,462 43,823 ---------- ---------- 366,097 352,054 ---------- ---------- $4,485,110 $4,509,857 ---------- ---------- ---------- ---------- The accompanying notes are an integral part of these condensed financial statements. 3 Oglethorpe Power Corporation Condensed Balance Sheets September 30, 1998 and December 31, 1997 - ------------------------------------------------------------------------------------------- (dollars in thousands) 1998 1997 Equity and Liabilities (Unaudited) ------------------------- Capitalization: Patronage capital and membership fees (including unrealized gain (loss) of $2,854 at September 30, 1998 and ($107) at December 31, 1997 on available-for-sale securities) $342,775 $ 330,509 Long-term debt 3,183,280 3,258,046 Obligation under capital leases 283,958 288,638 Obligation under Rocky Mountain transactions 54,845 52,176 --------- --------- 3,864,858 3,929,369 --------- --------- Current liabilities: Long-term debt and capital leases due within one year 96,483 89,556 Notes payable 3,982 -- Accounts payable 69,785 51,103 Accrued interest 14,415 12,961 Accrued and withheld taxes 17,154 517 Other current liabilities 4,742 8,428 --------- --------- 206,561 162,565 --------- --------- Deferred credits and other liabilities: Gain on sale of plant, being amortized 58,900 60,756 Net benefit of Rocky Mountain transactions, being amortized 89,986 92,375 Net benefit of sale of income tax benefits, being amortized 28,032 34,039 Accumulated deferred income taxes 63,117 63,117 Decommissioning reserve 146,122 142,354 Other 27,534 25,282 --------- --------- 413,691 417,923 --------- --------- $4,485,110 $4,509,857 --------- --------- --------- --------- The accompanying notes are an integral part of these condensed financial statements. 4 Oglethorpe Power Corporation Condensed Statements of Revenues and Expenses and Comprehensive Margin (Unaudited) For the Three and Nine Months Ended September 30, 1998 and 1997 - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) Three Months Ended September 30, Nine Months Ended September 30, 1998 1997 1998 1997 -------------------------------- ------------------------------- Operating revenues: Sales to Members $ 331,361 $ 280,503 $ 860,317 $ 767,714 Sales to non-Members 14,414 6,076 37,451 33,226 --------- --------- --------- --------- Total operating revenues 345,775 286,579 897,768 800,940 --------- --------- --------- --------- Operating expenses: Fuel 55,680 61,206 144,525 152,799 Production 49,996 43,418 145,413 134,490 Purchased power 153,202 95,038 337,907 215,350 Depreciation and amortization 31,074 30,154 93,273 96,534 Other operating expenses -- 10 -- 5,775 --------- --------- --------- --------- Total operating expenses 289,952 229,826 721,118 604,948 --------- --------- --------- --------- Operating margin 55,823 56,753 176,650 195,992 --------- --------- --------- --------- Other income (expense): Interest income 5,742 7,247 21,856 21,002 Amortization of net benefit of sale of income tax benefits 2,799 2,799 8,396 8,396 Allowance for equity funds used during construction 19 32 49 81 Other 786 457 1,699 4,025 --------- --------- --------- --------- Total other income 9,346 10,535 32,000 33,504 --------- --------- --------- --------- Interest charges: Interest on long-term-debt and other obligations 65,256 68,488 199,797 216,294 Allowance for debt funds used during construction (173) (328) (452) (873) --------- --------- --------- --------- Net interest charges 65,083 68,160 199,345 215,421 --------- --------- --------- --------- Net margin (loss) 86 (872) 9,305 14,075 Net change in unrealized gain on available-for sale securities 2,366 787 2,961 329 --------- --------- --------- --------- Comprehensive margin $ 2,452 ($ 85) $ 12,266 $ 14,404 --------- --------- --------- --------- --------- --------- --------- --------- The accompanying notes are an integral part of these condensed financial statements. 5 Oglethorpe Power Corporation Condensed Statements of Cash Flows (Unaudited) For the Nine Months Ended September 30, 1998 and 1997 - --------------------------------------------------------------------------------------------------------- (dollars in thousands) 1998 1997 --------- --------- Cash flows from operating activities: Net margin $ 9,305 $ 14,075 --------- --------- Adjustments to reconcile net margin to net cash provided by operating activities: Depreciation and amortization 136,151 139,190 Net benefit of Rocky Mountain transactions -- 22,470 Deferred gain from Corporate Restructuring -- 4,670 Allowance for equity funds used during construction (49) (81) Amortization of deferred gains (1,856) (1,823) Amortization of net benefit of sale of income tax benefits (8,396) (8,396) Other 9,991 3,268 Change in net current assets, excluding long-term debt and capital leases due within one year and notes payable: Receivables (21,249) (4,290) Inventories (9,388) 9,972 Prepayments and other current assets (7,971) (8,176) Accounts payable 18,682 11,403 Accrued interest 1,454 (2,251) Accrued and withheld taxes 16,637 14,860 Other current liabilities (3,686) 1,683 --------- --------- Total adjustments 130,320 182,499 --------- --------- Net cash provided by operating activities 139,625 196,574 --------- --------- Cash flows from investing activities: Property additions (25,779) (49,942) Net proceeds from bond, reserve and construction funds 1,143 21,616 Decrease (increase) in investment in associated organizations 343 (28) Increase in other short-term investments (4,520) (4,306) Increase in decommissioning fund (8,988) (7,709) Net cash received in Corporate Restructuring -- 23,495 --------- --------- Net cash used in investing activities (37,801) (16,874) --------- --------- Cash flows from financing activities: Long-term debt proceeds, net (5,556) 100,404 Long-term debt payments (68,931) (302,617) Premium paid on refinancing of debt (24,041) -- Increase in notes payable 3,982 -- Retirement of patronage capital -- (48,863) Other 1,412 (1,426) --------- --------- Net cash used in financing activities (93,134) (252,502) --------- --------- Net increase (decrease) in cash and temporary cash investments 8,690 (72,802) Cash and temporary cash investments at beginning of period 63,215 132,783 --------- --------- Cash and temporary cash investments at end of period $ 71,905 $ 59,981 --------- --------- --------- --------- Cash paid for: Interest (net of amounts capitalized) $ 177,396 $ 202,400 Income taxes -- 830 The accompanying notes are an integral part of these condensed financial statements. 6 Oglethorpe Power Corporation Notes to Condensed Financial Statements September 30, 1998 and 1997 (A) The condensed financial statements included herein 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 herein 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 September 30, 1998 and 1997. 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 such SEC rules and regulations, although Oglethorpe believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements 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 1997 have been reclassified to conform with the current period presentation. (B) In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." The standard requires that all derivative instruments be recognized as assets or liabilities and be measured at fair value. Oglethorpe is required to adopt SFAS No. 133 by January 1, 2000. Oglethorpe is currently assessing the impact that adoption of SFAS No. 133 will have on results of operations and financial condition and is undecided as to the date the standard will be adopted. (C) As discussed in Notes 1 and 2 of Notes to Financial Statements included in Oglethorpe's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, Oglethorpe entered into long-term lease transactions for its 74.6% undivided ownership interest in the Rocky Mountain Pumped Storage Hydroelectric Project (Rocky Mountain). Under the terms of these transactions, Oglethorpe leased the facility to three institutional investors for the useful life of the facility, who in turn leased it back to Oglethorpe for a term of 30 years, through a wholly owned subsidiary of Oglethorpe, Rocky Mountain Leasing Corporation. The assets of Rocky Mountain Leasing Corporation are not available to pay creditors of Oglethorpe or its affiliates. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General LEM Power Marketer Arrangements As previously reported, Oglethorpe entered into long-term power marketer arrangements effective January 1, 1997 for approximately 50% of the load requirements of its 39 retail electric distribution cooperative members (the Members) with LG&E Energy Marketing Inc. (LEM), an indirect, wholly owned subsidiary of LG&E Power Inc., a Delaware corporation (LPI), and of LG&E Energy Corp. (LG&E), which is a diversified energy services company headquartered in Louisville, Kentucky. In July 1998, LG&E announced that it was discontinuing its merchant energy trading and sales business and associated gas gathering and processing business and, as a result, recorded an after-tax loss on discontinued operations of $225 million in the second quarter of 1998. LG&E stated that the loss on discontinued operations results primarily from several fixed-price energy marketing agreements, including the agreements between LEM and Oglethorpe. Oglethorpe has two agreements with LEM. One involves the load requirements of 37 of the 39 Members and has a term extending through 2011, with Oglethorpe and LEM having the right to terminate the agreement beginning in 2002 and 2005, respectively. The other agreement involves the load requirements of the other two Members and has a term extending through 1999. Under the agreements, LEM is obligated to deliver, and Oglethorpe is obligated to take, approximately 50% of the load requirements of the participating Members. LEM has access to 50% of the output of Oglethorpe's existing generating facilities and power purchase arrangements for its use. At the request of LEM, the parties have discussed the future of these arrangements. LEM also has initiated the contractually defined binding arbitration process as to certain load projections provided by Oglethorpe to LEM in connection with the execution of the larger of the two agreements. Oglethorpe continues to receive power under the LEM agreements and believes the agreements are enforceable against LEM and LG&E (with respect to the agreement relating to the 37 Members) and LPI (with respect to the agreement relating to the other two Members). Even so, given LG&E's announced intention to discontinue its merchant energy trading and sales business, instead of performing itself, LEM could, with consent of Oglethorpe and the Rural Utilities Service, make alternative arrangements, including assigning performance to an acceptable third party, or otherwise make Oglethorpe whole from any damages incurred as a result of termination. Oglethorpe believes that LEM, LG&E and LPI have the ability, financial and otherwise, to perform their obligations under these agreements. The current uncertainty relating to the LEM arrangements does not adversely affect Oglethorpe's ability to meet its Members' load requirements but could, in the future, affect the sources and prices for such power. If LEM, LG&E and LPI were to cease to perform their obligations under the LEM agreements or the LEM agreements were to be terminated, Oglethorpe expects to be able to serve its Members' needs through its existing owned and purchased capacity, supplemented by additional capacity either purchased in the wholesale market, constructed or otherwise acquired. Termination of 8 the LEM agreements would however eliminate a source of power at contractually fixed prices and thus would introduce additional uncertainty regarding future power costs and Member rates. Oglethorpe's management does not expect the ultimate resolution of the LEM arrangements will have a material adverse effect on its financial condition or results of operations. Peaking Power Resources As previously reported, Oglethorpe has forecasted the need for additional capacity to meet the peaking requirements of its Members. Recently, Oglethorpe has signed options to buy additional peaking power and has also arranged for the construction of a 220-megawatt, natural gas-fired combustion turbine (Smarr CT) to be located in Smarr, Georgia. The Smarr CT is being constructed by Siemens Power Corporation and is expected to be operational for the summer of 1999. The Smarr CT will be owned by a new entity, Smarr EMC, which will be owned by 36 of the 39 Members of Oglethorpe. Oglethorpe expects to sign additional contracts for peaking power and may also contract for or otherwise acquire additional capacity. Sale of EnerVision, Inc. As discussed in Oglethorpe's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, in connection with the Corporate Restructuring, Oglethorpe created a wholly owned subsidiary, EnerVision, Inc., Tailored Energy Solutions (EnerVision), to which it transferred its marketing services business. On October 15, 1998, the senior associates of EnerVision purchased the company from Oglethorpe. EnerVision plans to continue to serve the Georgia electric cooperatives and also plans to expand its services to clients nationwide. The sale of EnerVision did not have a material effect on Oglethorpe's financial condition or results of operations. Results of Operations For the Three Months and Nine Months Ended September 30, 1998 and 1997 As reported in its 1997 Annual Report on Form 10-K, Oglethorpe and the Members completed a corporate restructuring (the Corporate Restructuring) on March 11, 1997, in which Oglethorpe was divided into three specialized operating companies. Oglethorpe now operates the power supply business, Georgia Transmission Corporation (GTC) operates the transmission business and Georgia System Operations Corporation (GSOC) operates the system operations business. The Condensed Statement of Revenues and Expenses and Comprehensive Margin for the three months and nine months ended September 30, 1998 reflects Oglethorpe's operations solely as a power supply company, whereas the Condensed Statement of Revenues and Expenses and Comprehensive Margin for the nine months ended September 30, 1997 reflects Oglethorpe's operations as a combined power supply, transmission and system operations company through March 31, 1997, and operations solely as a power supply company thereafter. Although the Corporate Restructuring was completed on March 11, 1997, pursuant to the restructuring agreement among Oglethorpe, GTC and GSOC, all transmission-related and systems operations-related revenues were assigned to Oglethorpe, and all transmission-related and systems operations-related costs were paid or reimbursed by Oglethorpe during the period March 11, 1997 through March 31, 1997. Decreases 9 in depreciation and amortization, other operating expenses, operating margin, net interest charges and net margin from 1997 to 1998 are primarily attributable to the Corporate Restructuring. See Oglethorpe's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 for a pro forma presentation of the Statement of Revenues and Expenses for the year ended December 31, 1997, reflecting the exclusion of the transmission and system operations businesses, as though the Corporate Restructuring had occurred at the beginning of 1997 (Note 11 of Notes to Financial Statements). Operating Revenues Revenues from sales to Members for the three months and nine months ended September 30, 1998 were 18.1% and 12.1% higher compared to the same periods of 1997. While capacity revenues from Members for the nine months ended September 30, 1998 compared to the same period of 1997 were reduced due to the removal of capacity revenues relating to the transmission business, this effect was more than offset by a significant increase in energy revenues from sales to Members. Such energy revenues were 38.2% higher for the three months ended September 30, 1998 compared to the same period of 1997 and 44.3% higher for the nine-month period compared to 1997. Megawatt-hour (MWh) sales to the Members were 13.9% and 16.3% higher in the current three-month and nine-month periods compared to the same periods of 1997 due to prolonged hot weather during the summer months of 1998. Oglethorpe's average energy revenue per MWh from sales to Members for the three-month and nine-month periods were 21.4% and 24.1% higher in 1998 compared to 1997. This increase resulted primarily from higher purchased power costs as discussed below under "Operating Expenses". Sales to non-Members were primarily from energy sales to other utilities and power marketers, and, in 1997, pursuant to contractual arrangements with Georgia Power Company (GPC). The following table summarizes the amounts of non-Member revenues from these sources for the three months and nine months ended September 30, 1998 and 1997: Three Months Nine Months Ended September 30, Ended September 30, ------------------ ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- (dollars in thousands) Sales to other utilities $ 9,212 $ 5,021 $22,626 $14,691 Sales to power marketers 5,202 772 14,825 3,508 GPC-Power supply arrangements 0 283 0 12,847 ITS transmission agreements 0 0 0 2,180 ------- ------- ------- ------- Total $14,414 $ 6,076 $37,451 $33,226 ------- ------- ------- ------- ------- ------- ------- ------- Sales to other utilities represent sales made directly by Oglethorpe. Oglethorpe sells for its own account any energy in excess of the portion of its resources dedicated to Morgan Stanley Capital Group Inc. (Morgan Stanley) that is not scheduled by Morgan Stanley pursuant to its power marketer arrangement. Sales to other utilities were higher for the three-month and nine-month periods of 1998 10 compared to 1997 partly due to capacity revenues received under an agreement entered into with Alabama Electric Cooperative to sell 100 MW of capacity for the period June 1998 through December 2005 and partly due to higher energy prices experienced in the wholesale electricity markets during the summer months of 1998. Under the LEM and Morgan Stanley power marketer arrangements, sales to the power marketers represented the net energy transmitted on behalf of LEM and Morgan Stanley off-system on a daily basis from Oglethorpe's total resources. Such energy was sold to LEM and Morgan Stanley at Oglethorpe's cost, with certain limited adjustments set forth in the arrangements. The volume of sales to power marketers depends primarily on the power marketers' decisions for servicing their load requirements. The revenues from power supply arrangements with GPC were derived in 1997 from energy sales arising from dispatch situations whereby GPC caused Plant Wansley to be operated when Oglethorpe's system did not require all of its contractual entitlement to the generation. These revenues compensated Oglethorpe for its costs because, under the operating agreement (before it was amended), Oglethorpe was responsible for its share of fuel costs any time a unit operated. With the commencement of the separate dispatch of Plant Wansley as of May 1, 1997, this type of sale to GPC ended. Another source of non-Member revenues in 1997 was payments received from GPC for use of the Integrated Transmission System (ITS) and related transmission interfaces. GPC compensated Oglethorpe to the extent that Oglethorpe's percentage of investment in the ITS exceeded its percentage use of the system. In such case, Oglethorpe was entitled to income as compensation for the use of its investment by the other ITS participants. As a result of the Corporate Restructuring, all of the revenues in this category have been GTC's revenues since April 1, 1997. Operating Expenses Operating expenses were 26.2% and 19.2% higher in the three months and nine months ended September 30, 1998 compared to the same periods of 1997. For the nine months ended September 30, 1998 depreciation and amortization and other operating expenses were lower due to the elimination of these expenses relating to the transmission business assumed by GTC in connection with the Corporate Restructuring. However, the changes in fuel, production and purchased power expenses did not result from the Corporate Restructuring. Production expenses were 15.2% higher for the third quarter 1998 compared to the same period of 1997. This increase primarily resulted from higher operations and maintenance costs at the various generation facilities. Purchased power costs for the three months and nine months ended September 30, 1998 were 61.2% and 56.9% higher compared to the same periods of 1997. Purchased power capacity costs for the three months and nine months ended September 30, 1998 were 12.3% and 12.5% lower than the same periods of 1997. These savings were primarily as a result of the elimination, effective September 1, 1997, of a 250-megawatt component block under the Block Power Sale Agreement between Oglethorpe and GPC. Effective September 1, 1998, Oglethorpe eliminated another 250-megawatt 11 component block. Purchased power energy costs for the three-month and nine-month periods of 1998 were 103.4% and 121.4% higher compared to the same periods of 1997 primarily as a result of significant price increases experienced in the wholesale electricity markets combined with higher volume of purchased MWhs. A total of 27.2% and 44.1% more MWhs were purchased in three-month and nine-month periods of 1998 compared to the same periods of 1997 due to prolonged hot weather during the summer months of 1998. The average cost of purchased power energy per MWh for the three-month and nine-month periods were 59.9% and 53.7% higher in 1998 compared to 1997. The higher volumes of purchased MWhs utilized to serve Member load that was not contractually provided by the power marketers resulted in a significant increase in the average MWh cost of energy to the Members. Other operating expenses for 1997 reflect expenses for the power delivery portion of the business which was subsequently transferred to GTC in connection with the Corporate Restructuring. Other Income Total other income for the nine months ended September 30, 1998 varied slightly compared to the same periods of 1997. For the nine months ended September 30, 1997, the caption "Other" reflected a margin of approximately $1.3 million related to Oglethorpe's marketing services business which was subsequently transferred to EnerVision. As discussed in "General--Sale of EnerVision, Inc." above, EnerVision was purchased from Oglethorpe by its senior associates on October 15, 1998. For the nine months ended September 30, 1998, the caption "Other" includes no net margin or loss from the results of operations and sale of EnerVision. Interest Charges Net interest charges for the nine months ended September 30, 1998 decreased compared to the same period of 1997 primarily due to the debt assumed by GTC in connection with the Corporate Restructuring. Net Margin and Comprehensive Margin Oglethorpe's net margin (loss) for the three months and nine months ended September 30, 1998 was $86,000 and $9.3 million, respectively, compared to $(872,000) and $14.1 million for the same periods of 1997. Since Oglethorpe's margin requirement is based on a ratio applied to interest charges, the reduction in interest charges resulting from the Corporate Restructuring also reduced Oglethorpe's margin requirement effective April 1, 1997. Such margin earned by Oglethorpe from the transmission and system operations functions during the first three months of 1997 was $2.3 million. The net loss for the third quarter of 1997 was the result of a capacity charge adjustment in August 1997 to return $4 million of year-to-date margins in excess of the Indenture requirements. The net margin achieved for the nine months ended September 30, 1998 is consistent with the 1998 margin requirement. The margin requirement for 1998 is approximately $1 million lower than budgeted due to lower interest charges resulting from the refinancing of $430 million of Federal Financing Bank (FFB) debt. Comprehensive margin is now reported on the Condensed Statement of Revenues and Expenses, consistent with Statement No. 130, "Reporting Comprehensive Income", issued by the Financial 12 Accounting Standards Board. This Statement requires the reporting of all components of changes in equity on the Statement of Revenues and Expenses. For Oglethorpe, the only additional item being reported is the net change in unrealized gains on investments in available-for-sale securities. Financial Condition Total assets and total equity plus liabilities as of September 30, 1998 were $4.5 billion which was $25 million less than the total at December 31, 1997 due primarily to depreciation of electric plant. Assets Property additions for the nine months ended September 30, 1998 totaled $25.8 million primarily for purchases of nuclear fuel and for additions, replacements and improvements to existing generation facilities. The increase in cash is a result of cash provided from operations exceeding financing and investing uses, including property additions noted above and debt service activities of which $23.1 million in premiums were paid to the FFB in conjunction with the refinancing of $430 million of debt. The increase in receivables resulted from significantly higher energy costs billed to Members at September 30, 1998 compared to the receivable balance from the Members at December 31, 1997. Inventories increased primarily as a result of the coal inventories for Plants Scherer and Wansley returning to more normal levels at September 30, 1998 compared to lower 1997 year-end levels caused by problems associated with rail transportation. Prepayments and other current assets increased primarily due to a $5.8 million increase in estimated payments to GPC for Plant Hatch operations and maintenance costs for October 1998 compared to the estimate paid for January 1998. The increase related to a planned refueling outage and costs to increase the actual and licensed thermal output of Hatch Units No. 1 and No. 2. The increase in premium and loss on reacquired debt resulted from the above-mentioned refinancing premiums paid to FFB. Equity and Liabilities Notes payable represent commercial paper issued by Oglethorpe as interim financing for costs incurred in construction of the Smarr CT. Although Oglethorpe is providing interim financing, the facility will be owned by Smarr EMC. Oglethorpe will be reimbursed by Smarr EMC for all construction costs incurred prior to transfer of ownership, and, accordingly, has recorded all expenditures as a receivable from Smarr EMC. For further discussion of this generation facility see "General--Peaking Power Resources" above. Accounts payable increased due to the volume of purchased power activity in September 1998 compared to December 1997. 13 Accrued and withheld taxes increased as a result of the normal monthly accruals of property taxes, which are generally paid in the fourth quarter of the year. The decrease in other current liabilities primarily resulted from $2.3 million improvement in negative book cash balances at September 30, 1998 compared to 1997 year-end. Miscellaneous Year 2000 Issue Background The Year 2000 issue, which is common to most corporations, concerns the ability of certain software and databases to properly recognize date sensitive information related to the Year 2000 and thereafter. Oglethorpe is heavily dependent upon complex computer systems for all phases of power supply operations. Oglethorpe's operations include both information technology (IT) systems, such as billing systems, financial accounting systems, and human resource/payroll systems, as well as non-IT systems, such as those relating to operations of the Rocky Mountain Pumped Storage Hydroelectric Facility (Rocky Mountain), generation substations and Oglethorpe's headquarters facilities that may have embedded microprocessors. Management recognizes the seriousness of the Year 2000 issue and believes it has dedicated adequate resources to address the issue. As part of its business alliance with Oglethorpe, Intellisource Services Solutions is providing administration of Oglethorpe's Year 2000 program. Oglethorpe's Board of Directors and its audit committee are monitoring this issue through periodic updates from project management. Project Phases Oglethorpe has developed and is implementing a detailed strategy to prevent any material disruption to operations. Phase I began in April 1997 and included an inventory and assessment of potential Year 2000 issues. Substantially all IT and non-IT systems were assessed during this phase which concluded in the fall of 1997. Phase II began in the fall of 1997 and includes remediation and testing of all inventoried IT and non-IT systems. Remediation and testing efforts for all inventoried internally developed systems applications are expected to be completed by December 31, 1998. Externally purchased systems, including financial accounting systems, procurement and materials management systems and human resource/payroll systems are currently being evaluated for possible upgrade or replacement in 1999. Remediation and testing efforts for systems at Rocky Mountain are expected to be completed by March 31, 1999. Phase III began recently and includes contingency planning and an assessment of Year 2000 readiness of material third parties, including Oglethorpe's Members, GTC, GSOC, GPC, power marketers and vendors. This phase will be on-going throughout 1998 and 1999. 14 Relationships with Third Parties GTC and GSOC have also implemented a detailed strategy to ensure Year 2000 compliance of the systems utilized in their transmission and systems control operations. The Year 2000 compliance plans for Oglethorpe, GTC and GSOC were jointly developed and are being implemented on the same schedule, as described above. Oglethorpe is in the process of gathering information from the Members regarding their Year 2000 readiness. Based on this information, Oglethorpe will implement a follow-up program to monitor the Members' Year 2000 compliance and will further assess any impact on Oglethorpe's risks and contingency planning. During 1998, Georgia Electric Membership Corporation (the Members' trade association) and Intellisource Services Solutions have conducted workshops for the Members and have assisted some Members in their Year 2000 planning by providing information for their use in this process. All of Oglethorpe's co-owned generating plants, except Rocky Mountain, are operated by GPC on behalf of itself as a co-owner and as agent for the other co-owners. The Southern Company (Southern) is performing Year 2000 remediation and testing on all generation plants which are operated by Southern's subsidiary, GPC. Southern estimates that total costs related to its project on behalf of the GPC-operated plants will be approximately $38 million, of which approximately $4.5 million is expected to be billed to Oglethorpe based on its ownership share of these generation plants. To date, Oglethorpe has paid approximately $1.5 million for this project. Remaining costs will be expensed primarily in 1998 and 1999. Southern reports that its Year 2000 program for the Georgia-based generating plants is scheduled to be completed by June 1999. Southern is subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, files reports and other information with the Securities and Exchange Commission. During Phase III of its program, Oglethorpe plans to assess the Year 2000 readiness of other significant third parties, including power marketers, other utilities and vendors of materials and services. This information will allow Oglethorpe to perform contingency planning, including assessing the need to identify alternative vendors. Project Costs In addition to the $4.5 million expected to be paid to GPC, Oglethorpe currently estimates costs of approximately $665,000 to upgrade its internal systems, including those relating to Rocky Mountain. To date, Oglethorpe has spent approximately $350,000 of the estimated $665,000 on this effort. In addition, Oglethorpe will likely replace its current procurement and financial systems during 1999 to improve functionality and to avoid Year 2000 remediation efforts on those existing systems. The estimated cost of replacing these two systems is approximately $3.2 million. Oglethorpe's policy is to expense as incurred the maintenance and modification costs of existing software, including those associated with the Year 2000 project, and to capitalize and amortize over its useful life the cost of new software. 15 Risk Assessment Oglethorpe has implemented a detailed process to minimize the possibility of power supply interruptions related to Year 2000 challenges and expects its IT and non-IT systems to be in compliance by December 31, 1999. The most reasonably likely worst case scenario could involve service interruptions to Oglethorpe's Members and the Members' retail consumers. These scenarios include the loss of a generating unit or a source of purchased power, or a disruption in transmission and distribution services by GTC or the Members. Because Oglethorpe is taking prudent steps to prepare for the Year 2000 challenges, it expects any interruptions in power supply to be isolated and short in duration. However, because of material relationships with third parties, it is too early to fully assess the possibility of service interruptions to the ultimate retail consumers. There is also risk to the Members of billing and other business system failures and of some reduction in net margin caused by interruptions in service and reduced electrical demand by consumers because of their Year 2000 issues. Oglethorpe has not fully assessed the impact of these risks on its financial condition or results of operations. Contingency Planning Oglethorpe recently began developing contingency plans for its IT and non-IT systems. This contingency planning process will also focus on non-compliance by material third parties with the goal of keeping any service interruptions to a minimum and of short duration. Forward-Looking Statements and Associated Risks This Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding, among other things, (i) anticipated trends in Oglethorpe's business, (ii) Oglethorpe's future power supply resources and arrangements and (iii) other management issues such as the Year 2000 issue. These forward-looking statements are based largely on Oglethorpe's current expectations and are subject to a number of risks and uncertainties, certain of which are beyond Oglethorpe's control. For certain factors that could cause actual results to differ materially from those anticipated by these forward-looking statements, see Oglethorpe's 1997 Annual Report on Form 10-K in "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY" in Item 1 and "Competition" in Item 7. 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. 16 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Number Description ------ ----------- 27.1 Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K No reports on Form 8-K were filed by Oglethorpe for the quarter ended September 30, 1998. 17 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: November 13, 1998 By: /s/ Jack L. King ------------------------------------- Jack L. King President and Chief Executive Officer (Principal Executive Officer) Date: November 13, 1998 /s/ Mac F. Oglesby ------------------------------------- Mac F. Oglesby Treasurer and Director (Principal Financial Officer) Date: November 13, 1998 /s/ Thomas A. Smith -------------------------------------- Thomas A. Smith Senior Vice President and Chief Financial Officer (Chief Financial Officer) Date: November 13, 1998 /s/ Robert D. Steele -------------------------------------- Robert D. Steele Controller (Chief Accounting Officer) 18