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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO _____________
COMMISSION FILE NO. 33-7591
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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, 1999
PAGE NO.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 1999 (Unaudited)
and December 31, 1998 3
Condensed Statements of Revenues and Expenses and
Comprehensive Margin (Unaudited) for the Three Months
and Six Months ended June 30, 1999 and 1998 5
Condensed Statements of Cash Flows (Unaudited)
for the Six Months Ended June 30, 1999 and 1998 6
Notes to the Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
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
JUNE 30, 1999 AND DECEMBER 31, 1998
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(dollars in thousands)
1999 1998
ASSETS (Unaudited)
-------------------------------------
ELECTRIC PLANT, AT ORIGINAL COST:
In service $4,861,487 $4,856,174
Less: Accumulated provision for depreciation (1,571,082) (1,510,888)
-------------- --------------
3,290,405 3,345,286
Nuclear fuel, at amortized cost 88,933 84,418
Construction work in progress 22,983 20,948
-------------- --------------
3,402,321 3,450,652
-------------- --------------
INVESTMENTS AND FUNDS:
Decommissioning fund, at market 131,252 122,094
Deposit on Rocky Mountain transactions, at cost 57,635 55,755
Bond, reserve and construction funds, at market 32,160 32,909
Investment in associated organizations, at cost 16,093 16,231
Other, at cost 3,302 3,326
-------------- --------------
240,442 230,315
-------------- --------------
CURRENT ASSETS:
Cash and temporary cash investments, at cost 86,706 106,235
Other short-term investments, at market 74,177 73,356
Customer receivables 125,833 110,919
Notes and interim financing receivable 115,171 45,151
Inventories, at average cost 92,419 76,783
Prepayments and other current assets 18,982 21,395
-------------- --------------
513,288 433,839
-------------- --------------
DEFERRED CHARGES:
Premium and loss on reacquired debt, being amortized 203,794 206,729
Deferred amortization of Scherer leasehold 100,318 99,297
Discontinued projects, being amortized 32,111 36,203
Deferred debt expense, being amortized 15,333 15,825
Other 39,615 33,405
-------------- --------------
391,171 391,459
-------------- --------------
$4,547,222 $4,506,265
-------------- --------------
-------------- --------------
The accompanying notes are an integral part of these condensed financial
statements.
3
OGLETHORPE POWER CORPORATION
CONDENSED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
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(dollars in thousands)
1999 1998
EQUITY AND LIABILITIES (Unaudited)
-----------------------------------
CAPITALIZATION:
Patronage capital and membership fees (including unrealized
loss of $663 at June 30, 1999 and $1,006 at
December 31, 1998 on available-for-sale securities) $363,614 $352,701
Long-term debt 3,118,375 3,177,883
Obligation under capital leases 278,761 282,299
Obligation under Rocky Mountain transactions 57,635 55,755
-------------- --------------
3,818,385 3,868,638
-------------- --------------
CURRENT LIABILITIES:
Long-term debt and capital leases due within one year 104,463 97,475
Accounts payable 61,376 46,676
Notes payable 109,342 50,986
Accrued interest 15,609 10,074
Accrued and withheld taxes 12,954 214
Other current liabilities 8,271 17,901
-------------- --------------
312,015 223,326
-------------- --------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Gain on sale of plant, being amortized 57,044 58,282
Net benefit of sale of income tax benefits, being amortized 22,026 26,030
Net benefit of Rocky Mountain transactions, being amortized 87,597 89,189
Accumulated deferred income taxes 63,203 63,203
Decommissioning reserve 164,522 156,021
Other 22,430 21,576
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416,822 414,301
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$4,547,222 $4,506,265
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-------------- --------------
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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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(dollars in thousands)
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------------------- -------------------------
OPERATING REVENUES:
Sales to Members $262,540 $297,014 $507,583 $528,957
Sales to non-Members 11,377 19,713 17,099 23,037
----------- ----------- ----------- -----------
TOTAL OPERATING REVENUES 273,917 316,727 524,682 551,994
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Fuel 46,606 48,978 88,141 88,845
Production 52,559 48,486 102,847 95,417
Purchased power 82,729 130,141 145,735 184,705
Depreciation and amortization 33,681 31,077 67,300 62,199
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 215,575 258,682 404,023 431,166
----------- ----------- ----------- -----------
OPERATING MARGIN 58,342 58,045 120,659 120,828
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Investment income 10,610 8,273 18,064 16,113
Amortization of net benefit of sale of income tax benefits 2,799 2,799 5,597 5,596
Allowance for equity funds used during construction 19 9 46 31
Other 1,017 788 1,804 913
----------- ----------- ----------- -----------
TOTAL OTHER INCOME 14,445 11,869 25,511 22,653
----------- ----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt and other obligations 68,242 68,397 133,987 134,541
Allowance for debt funds used during construction 62 (73) (398) (278)
----------- ----------- ----------- -----------
NET INTEREST CHARGES 68,304 68,324 133,589 134,263
----------- ----------- ----------- -----------
NET MARGIN 4,483 1,590 12,581 9,218
Net change in unrealized (loss) gain on available-for-sale securities (894) 367 (1,668) 596
----------- ----------- ----------- -----------
COMPREHENSIVE MARGIN $3,589 $1,957 $10,913 $9,814
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these condensed financial
statements.
5
OGLETHORPE POWER CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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(dollars in thousands)
1999 1998
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net margin $ 12,581 $ 9,218
-------------- --------------
ADJUSTMENTS TO RECONCILE NET MARGIN TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 84,167 85,413
Allowance for equity funds used during construction (46) (31)
Amortization of deferred gains (1,237) (1,237)
Amortization of net benefit of sale of income tax benefits (5,597) (5,596)
Other 8,624 8,501
CHANGE IN NET CURRENT ASSETS, EXCLUDING LONG-TERM DEBT
AND CAPITAL LEASES DUE WITHIN ONE YEAR AND NOTES PAYABLE:
Customer receivables (14,914) (76,872)
Notes receivable 415 (293)
Inventories (15,636) (9,009)
Prepayments and other current assets 2,413 (2,195)
Accounts payable 14,700 73,780
Accrued interest 5,535 (3,176)
Accrued and withheld taxes 12,740 10,682
Other current liabilities (9,630) (4,493)
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TOTAL ADJUSTMENTS 81,534 75,474
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NET CASH PROVIDED BY OPERATING ACTIVITIES 94,115 84,692
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (32,454) (15,786)
Net proceeds from bond, reserve and construction funds 92 572
Decrease in investment in associated organizations 138 272
Increase in other short-term investments (1,832) (3,015)
Increase in decommissioning fund (10,868) (7,631)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (44,924) (25,588)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt proceeds, net (4,667) (24,133)
Long-term debt payments (52,938) (51,224)
Increase in notes payable 58,356 -
Increase in notes receivable under interim financing agreement (70,435) -
Other 964 1,236
-------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (68,720) (74,121)
-------------- --------------
NET DECREASE IN CASH AND TEMPORARY CASH INVESTMENTS (19,529) (15,017)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 106,235 63,215
-------------- --------------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $ 86,706 $ 48,198
-------------- --------------
-------------- --------------
CASH PAID FOR:
Interest (net of amounts capitalized) $ 108,936 $ 123,020
Income taxes - -
The accompanying notes are an integral part of these condensed financial
statements.
6
OGLETHORPE POWER CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(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 June 30, 1999 and 1998.
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 1998 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, 2001. Oglethorpe is currently assessing the impact
that adoption of SFAS No. 133 will have on results of operations and
financial condition.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
POWER PURCHASES FROM GPC
Oglethorpe entered into an agreement with Georgia Power Company (GPC) effective
April 1, 1999 to purchase capacity and associated energy on a take-or-pay basis.
In connection with this agreement, the Block Power Sale Agreement (BPSA)
between Oglethorpe and GPC was terminated. Under the new agreement,
Oglethorpe will purchase capacity and associated energy as follows: 750
megawatt (MW) through May 31, 2000, 500 MW from June 1, 2000 to August 31,
2000, 375 MW from September 1, 2000 to August 31, 2001, and 250 MW from
September 1, 2001 to March 31, 2006.
DOYLE POWER PURCHASE
Oglethorpe has entered into an agreement with Doyle I, LLC, a limited liability
company to be owned by an affiliate of Enron Capital & Trade Resources Corp. and
one member of Oglethorpe, to purchase approximately 325 MW of peaking capacity
over a 15-year term. Delivery is anticipated to commence by June 1, 2000,
subject to the generating units underlying the purchase being ready for
commercial operation.
MEMBER POWER RESOURCES
Under the Wholesale Power Contracts, Oglethorpe's 39 retail electric
distribution cooperative members (the Members) may choose to supply all or a
portion of their future requirements with purchases from suppliers other than
Oglethorpe. A new entity, Smarr EMC, was formed in 1998 by 36 of the Members to
own a two-unit, 217 MW combustion turbine (CT) facility, Smarr Energy Facility
(Smarr CT). Smarr CT was declared in commercial operation in June 1999.
Oglethorpe is providing operation management services for this facility.
Smarr EMC, or similar entities, may also own future generation facilities on
behalf of Members who may decide to participate in such projects. Sewell Creek
Energy Facility (Sewell Creek CT) is one such project currently under
construction in which 31 Members are participating. Sewell Creek CT is a
four-unit, 492 MW CT facility scheduled for commercial operation by the summer
of 2000. Oglethorpe is providing construction management services and interim
financing for this facility and anticipates that it will provide operation
management services as well.
In addition, two Members formed an entity that constructed 90 MW of CT capacity,
which began commercial operation in the summer of 1999.
All of these CTs are currently anticipated to be dispatched in the Oglethorpe
pool of generation resources, except for 50 MW of the 90 MW owned by two
Members.
8
RESULTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
OPERATING REVENUES
Revenues from sales to Members for the three months and six months ended June
30, 1999 were 11.6% and 4.0% lower than the same periods of 1998. Megawatt-hour
(MWh) sales to Members were 1.5% and 6.2% higher in the current three-month and
six-month periods compared to the same periods of 1998. The average revenue per
MWh from sales to Members was 12.9% and 9.6% less for the current periods
compared to the same periods of 1998. The components of Member revenues for the
three months and six months ended June 30, 1999 and 1998 were as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(dollars in thousands)
Capacity revenues $155,210 $155,862 $310,424 $311,683
Energy revenues 107,330 141,152 197,159 217,274
-------- -------- -------- --------
Total $262,540 $297,014 $507,583 $528,957
-------- -------- -------- --------
-------- -------- -------- --------
While capacity revenues from Members for the three months and six months ended
June 30, 1999 compared to 1998 were virtually unchanged, energy revenues were
24.0% and 9.3% lower for the current periods compared to the same periods of
1998. The decrease in energy revenues in 1999 was due to the pass-through in
1998 of significant price increases for purchased power in the wholesale
electricity markets (see "OPERATING EXPENSES" below). Oglethorpe's average
energy revenue per MWh from sales to Members for the three-month and six-month
periods were 25.1% and 14.5% lower in 1999 compared to 1998. As noted above, MWh
sales to Members increased during the current quarter compared to 1998 due to
continued sales growth in the Members' service territories. In addition,
Oglethorpe provided the Members with additional energy to offset lower delivery
of hydroelectric power from Southeastern Power Administration due to lower
than normal rainfall.
Sales to non-Members were primarily from energy sales to other utilities and
power marketers. The following table summarizes the amounts of non-Member
revenues from these sources for the three months and six months ended June 30,
1999 and 1998:
9
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(dollars in thousands)
Sales to other utilities $ 8,878 $11,189 $12,705 $13,414
Sales to power marketers 2,499 8,524 4,394 9,623
-------- -------- -------- --------
Total $11,377 $19,713 $17,099 $23,037
-------- -------- -------- --------
-------- -------- -------- --------
Sales to other utilities 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 Capital Group Inc. (Morgan Stanley) that is not
scheduled by Morgan Stanley pursuant to its power marketer arrangement.
Under the LG&E Energy Marketing Inc. (LEM) and Morgan Stanley power marketer
arrangements, sales to the power marketers represent 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 at Oglethorpe's cost,
subject to certain limitations, and to Morgan Stanley at a contractually fixed
price. The volume of sales to power marketers depends primarily on the power
marketers' decisions for servicing their load requirements.
OPERATING EXPENSES
Operating expenses for the three months and six months ended June 30, 1999 were
16.7% and 6.3% lower compared to the same periods of 1998. This decrease was
primarily due to the 36.4% and 21.1% decline in total purchased power costs for
the current three-month and six-month periods compared to the same periods of
1998. Oglethorpe purchased 28.1% and 11.1% less MWhs in the three months and six
months ended June 30, 1999 than in the same periods of 1998. The average cost
per MWh of total purchased power was 11.6% and 11.2% less in 1999 compared to
the comparable periods of 1998. The lower volume of purchased MWhs was due to
milder weather in the current quarter compared to the same period of 1998. The
milder weather also resulted in lower sales to other utilities and power
marketers. Purchased power costs were as follows:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(dollars in thousands)
Capacity costs $26,941 $32,055 $52,349 $62,229
Energy cost 55,788 98,086 93,386 122,476
-------- -------- -------- --------
Total $82,729 $130,141 $145,735 $184,705
-------- -------- -------- --------
-------- -------- -------- --------
Purchased power capacity cost for the three months and six months ended June 30,
1999 was approximately 16.0% and 15.9% lower than the comparable periods of
1998. These savings were primarily a result of the elimination, effective
September 1, 1998, of a 250 MW component block
10
under the BPSA between Oglethorpe and GPC. Purchased power energy costs for
the three-month and six-month periods of 1999 were 43.1% and 23.8% lower
compared to the same periods of 1998 as a result of higher volumes of
purchased MWhs and higher prices experienced in the wholesale electricity
markets during the second quarter of 1998 compared to the current quarter.
These factors resulted in a 20.9% and 14.2% decrease in the average cost of
purchased power energy per MWh for the three-month and six-month periods of
1999 compared to 1998. This decrease in the average cost of purchased power
energy was primarily responsible for the decrease in the average MWh cost of
energy to the Members.
OTHER INCOME
Investment income was higher in the current quarter compared to the same period
of 1998 partly due to higher earnings from the decommissioning fund and partly
due to interest earnings on the notes and interim financing receivable for Smarr
CT and Sewell Creek CT. See "General--MEMBER POWER RESOURCES" for a further
discussion of these projects.
NET MARGIN AND COMPREHENSIVE MARGIN
Oglethorpe's net margin for the three months and six months ended June 30, 1999
was $4.5 million and $12.6 million, respectively, compared to $1.6 million and
$9.2 million for the same periods of 1998. The higher net margin resulted
primarily from lower than budgeted fixed operations and maintenance (O&M)
expenses and from lower than budgeted interest rates on the variable portion of
long-term debt. Comprehensive margin for Oglethorpe is net margin adjusted for
the net change in unrealized gains and losses on investments in
available-for-sale securities.
FINANCIAL CONDITION
Total assets and total equity plus liabilities as of June 30, 1999 were $4.5
billion, which was $41.0 million more than the total at December 31, 1998 due
primarily to an increase in the notes and interim financing receivable for
construction of Smarr CT and Sewell Creek CT, offset by depreciation of plant.
These projects are being financed on an interim basis by Oglethorpe through the
issuance of commercial paper. On July 8, 1999, Oglethorpe was reimbursed $56.3
million for Smarr CT project costs funded by Oglethorpe through May 31, 1999.
Oglethorpe used these funds to retire $53.2 million in outstanding commercial
paper that was issued to fund the construction of Smarr CT. See "General--MEMBER
POWER RESOURCES" for a further discussion of these projects.
ASSETS
Property additions for the six months ended June 30, 1999 totaled $32.5 million
primarily for purchases of nuclear fuel and for additions, replacements and
improvements to existing generation facilities.
The decrease in cash is a result of cash used in financing and investing
activities, including property additions noted above and debt principal
repayments, exceeding cash provided from operations.
The increase in receivables resulted from significantly higher energy costs
billed to Members at June 30, 1999 compared to the receivable balance from the
Members at December 31, 1998.
11
The increase in notes and interim financing receivable resulted primarily
from use of funds in the interim financing activities related to the
construction of Smarr CT and Sewell Creek CT. Included in notes and interim
financing receivable as of June 30, 1999 is $57.2 million relating to the
construction of Smarr CT and $57.5 million relating to the construction of
Sewell Creek CT. As noted above, the note related to Smarr CT was repaid in
July 1999.
Inventories of fossil fuel were greater at June 30, 1999 than at December 31,
1998 as a result of normal seasonal increases in anticipation of higher
demand for electricity during the summer season. In addition, inventories
were greater because Oglethorpe's fossil fuel plants have been utilized less
than projected due to decisions made by LEM and Morgan Stanley under the
power marketer arrangements.
Prepayments and other current assets decreased primarily due to the estimated
payments to GPC for Plant Hatch O&M costs for July 1999 compared to the
estimate for January 1999.
The increase in other deferred charges is related to 1999 refueling outages
for Vogtle Unit No.1 and Hatch Unit No.1. Such costs will be amortized to
expense over the 18-month operating cycle of each unit.
EQUITY AND LIABILITIES
Notes payable represent commercial paper issued by Oglethorpe as interim
financing for costs incurred in the construction of Smarr CT and Sewell Creek
CT. In July 1999, Oglethorpe was reimbursed $56.3 million for Smarr CT
project costs funded by Oglethorpe through May 31, 1999. Oglethorpe used
these funds to retire $53.2 million in outstanding commercial paper which was
issued to fund the construction of Smarr CT. Oglethorpe expects to be
reimbursed for costs relating to the construction of Sewell Creek CT shortly
after it is placed into commercial operation, which Oglethorpe anticipates
will be by the summer of 2000.
Accounts payable increased due to the volume of purchased power activity in
June 1999 compared to December 1998.
Accrued interest increased as a result of the accrual for the July 1 interest
payment due for the Scherer Unit No. 2 lease obligation.
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 primarily resulted from $8.2
million improvement in negative book cash balances at June 30, 1999 compared
to 1998 year-end.
12
MISCELLANEOUS
COMPETITION
For information about competition in the electric utility industry and the
actions and potential actions Oglethorpe and the Members have taken and are
considering and evaluating to reduce costs and enhance their competitiveness
in anticipation of future increased competition, see Oglethorpe's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1999.
YEAR 2000
BACKGROUND. The Year 2000 issue, which is common to most corporations,
concerns the ability of certain hardware, software, databases and other
devices that use microprocessors 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 that may have embedded
microprocessors, such as those relating to operations of the Rocky Mountain
Pumped Storage Hydroelectric Facility (Rocky Mountain), generation
substations and Oglethorpe's headquarters facilities.
Management recognizes the seriousness of the Year 2000 issue and believes it
has dedicated adequate resources to address the issue. Oglethorpe's Senior
Vice President and Chief Financial Officer is in charge of its Year 2000
program, and he reports directly to Oglethorpe's President and Chief
Executive Officer. As part of its business alliance with Oglethorpe,
Intellisource is assisting in the 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 problems in its systems. Substantially all IT and
non-IT systems were inventoried and assessed.
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 complete.
Financial accounting systems, procurement and materials management systems
and human resource/payroll systems are externally developed and supported.
Currently, only the financial accounting systems are not Year 2000 ready.
Oglethorpe is replacing most of its financial accounting system modules and
is retaining and upgrading one module. Oglethorpe expects its financial
accounting systems to be Year 2000 ready by the fourth quarter of 1999. The
financial accounting systems project is approximately 60% complete. Critical
computer systems required to operate the Rocky Mountain control room have
been upgraded. The computer system required to manage maintenance activities
and purchase materials for Rocky Mountain will be upgraded by the third
quarter of 1999.
Phase III began in the spring of 1999 with a verification of the completeness
of the original systems
13
inventory. Phase III also includes contingency planning, an assessment of
Year 2000 readiness of material third parties and verification that all
material systems are being properly remediated and tested. This phase will be
on-going throughout 1999.
RELATIONSHIPS WITH THIRD PARTIES. Georgia Transmission Corporation (GTC) and
Georgia System Operations Corporation (GSOC) have implemented detailed
strategies to ensure Year 2000 readiness of the systems utilized in their
transmission and systems control operations. The Year 2000 readiness plans for
Oglethorpe, GTC and GSOC were jointly developed and are being implemented on the
same schedule, as described above.
Oglethorpe has gathered information from the Members regarding their Year
2000 readiness. Based on this information, Oglethorpe is conducting a
follow-up program to monitor the Members' Year 2000 readiness and will
further assess any impact on Oglethorpe's risks and contingency planning.
Oglethorpe expects to complete the information gathering process from the
Members by September 30, 1999.
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. Year 2000 remediation and testing on all generation plants which are
operated by GPC are being performed by GPC's parent company, The Southern
Company (Southern). Oglethorpe estimates that approximately $4.3 million will be
billed by Southern based on its ownership share of the co-owned generation
plants, of which approximately $4.0 million has been paid. Remaining costs will
be expensed primarily in 1999. Southern reports that its Year 2000 program for
the Georgia-based generating plants was completed on schedule in June 1999.
Southern also reports that its Year 2000 program will continue to monitor the
affected computer systems, devices and applications into the Year 2000. 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 SEC.
During Phase III of its program, Oglethorpe is in the process of assessing the
Year 2000 readiness of other third parties, including power marketers (such as
LEM and Morgan Stanley), other utilities and vendors of materials and services.
Oglethorpe has identified over 1,200 such third parties, of which approximately
60 are deemed to be material. Oglethorpe has requested information from these
third parties and expects to complete this process by September 30, 1999. This
information will allow Oglethorpe to perform contingency planning, including
assessing the need to identify alternative vendors. Oglethorpe may not be able
to identify all third parties' Year 2000 problems, and may not be able to
develop adequate contingency plans if third parties do not correct their Year
2000 problems.
PROJECT COSTS. In addition to the $4.3 million expected to be paid to Southern,
Oglethorpe currently estimates project costs of approximately $5.1 million.
These costs are being incurred to upgrade its internal systems, including those
relating to Rocky Mountain, and to upgrade or replace its externally developed
financial accounting, procurement and materials management systems. These costs
are also being incurred to perform a management evaluation of the Phase I and
Phase II activities, and to perform the contingency planning and the
preparedness evaluation of key business relationships. 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
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its useful life the cost of new software. To date, Oglethorpe has spent
approximately $1.8 million of the $5.1 million on these efforts. These costs
are estimates, and actual costs could be higher.
Oglethorpe plans to pay for Year 2000 costs with general corporate funds.
Year 2000 costs are being recovered from the Members through Oglethorpe's
rates.
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 Year 2000 ready by December 31, 1999.
The most reasonably likely worst case scenario would be service interruptions to
Oglethorpe's Members or the Members' retail consumers. These scenarios include
the loss of a generating unit or a source of purchased power, or a disruption in
transmission or 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, Oglethorpe may not be able
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.
Actual results, costs, risks, or worst case scenarios related to Year 2000
issues may materially differ from those that Oglethorpe expects or estimates.
Factors that might cause material differences include, but are not limited to,
Oglethorpe's ability to locate and correct all microprocessors that are not Year
2000 ready, the readiness of third parties, and Oglethorpe's ability to develop
adequate contingency plans to respond to foreseen or unforeseen Year 2000
problems.
CONTINGENCY PLANNING. Oglethorpe has developed contingency plans for its IT and
non-IT systems with the assistance of the consulting firm KPMG. The contingency
plans were completed as of July 31, 1999 and will continue to be evaluated,
tested and implemented throughout 1999. The contingency plans also focus on
non-compliance by material third parties and assess the need to identify
alternative vendors and the need to increase inventory of materials and
supplies. The goal of the contingency planning process is to keep any service
interruptions to a minimum and of short duration and to avoid disruptions in its
billing or other management processes. Oglethorpe may incur additional costs as
a result of implementing its contingency plans.
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 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 "YEAR 2000" herein, "Miscellaneous--COMPETITION"
in Item 2 of Oglethorpe's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1999 and
15
"CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY" in Item 1 of
Oglethorpe's 1998 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 1998 Annual Report on Form 10-K.
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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 June 30,
1999.
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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 13, 1999 By:/s/ JACK L. KING
-------------------------------------------------
Jack L. King
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1999 /s/ MAC F. OGLESBY
-------------------------------------------------
Mac F. Oglesby
Treasurer
(Principal Financial Officer)
Date: August 13, 1999 /s/ THOMAS A. SMITH
-------------------------------------------------
Thomas A. Smith
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 1999 /s/ WILLIE B. COLLINS
-------------------------------------------------
Willie B. Collins
Controller
(Chief Accounting Officer)
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