================================================================================
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, 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.
================================================================================
OGLETHORPE POWER CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 2002
(Unaudited) and December 31, 2001 3
Condensed Statements of Revenues and Expenses
(Unaudited) for the Three Months and Nine Months ended
September 30, 2002 and 2001 5
Condensed Statements of Patronage Capital and Membership
Fees and Accumulated Other Comprehensive Margin
(Unaudited) for the Nine Months ended
September 30, 2002 and 2001 6
Condensed Statements of Cash Flows (Unaudited)
for the Nine Months ended September 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES AND CERTIFICATIONS 20
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Oglethorpe Power Corporation
Condensed Balance Sheets
September 30, 2002 and December 31, 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
2002 2001
Assets (Unaudited)
--------------------------------------
Electric plant, at original cost:
In service $ 5,055,088 $ 5,029,192
Less: Accumulated provision for depreciation (1,981,031) (1,881,918)
----------- -----------
3,074,057 3,147,274
Nuclear fuel, at amortized cost 78,397 77,360
Construction work in progress 60,926 38,564
----------- -----------
3,213,380 3,263,198
----------- -----------
Investments and funds:
Decommissioning fund, at market 138,558 150,668
Deposit on Rocky Mountain transactions, at cost 71,512 68,032
Bond, reserve and construction funds, at market 26,521 28,691
Investment in associated organizations, at cost 22,280 22,187
Other, at cost 274 731
----------- -----------
259,145 270,309
----------- -----------
Current assets:
Cash and temporary cash investments, at cost 164,998 275,786
Other short-term investments, at market 93,279 88,589
Receivables 99,667 73,039
Notes receivable 316,000 340,396
Inventories, at average cost 90,972 81,768
Prepayments and other current assets 18,028 16,182
----------- -----------
782,944 875,760
----------- -----------
Deferred charges:
Premium and loss on reacquired debt, being amortized 154,260 162,690
Deferred amortization of capital leases 108,907 107,254
Discontinued projects, being amortized 4,188 6,463
Deferred debt expense, being amortized 15,602 16,475
Other 23,749 22,518
----------- -----------
306,706 315,400
----------- -----------
$ 4,562,175 $ 4,724,667
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements.
3
Oglethorpe Power Corporation
Condensed Balance Sheets
September 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 $ 380,103 $ 367,668
Long-term debt 2,830,534 2,929,316
Obligation under capital leases 363,182 373,837
Obligation under Rocky Mountain transactions 71,512 68,032
---------- ----------
3,645,331 3,738,853
---------- ----------
Current liabilities:
Long-term debt and capital leases due within one year 137,796 127,621
Accounts payable 64,494 79,859
Notes payable 303,243 353,680
Power marketer payable - 36,000
Accrued interest 20,001 7,793
Accrued and withheld taxes 19,510 678
Other current liabilities 5,097 15,783
---------- ----------
550,141 621,414
---------- ----------
Deferred credits and other liabilities:
Gain on sale of plant, being amortized 49,002 50,858
Net benefit of sale of income tax benefits, being amortized - 2,002
Net benefit of Rocky Mountain transactions, being amortized 77,244 79,633
Decommissioning reserve 162,324 174,506
Interest rate swap arrangements 58,399 36,859
Other 19,734 20,542
---------- ----------
366,703 364,400
---------- ----------
$4,562,175 $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 Nine Months Ended September 30, 2002 and 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
Three Months Nine Months
-------------------------------------------------------------
2002 2001 2002 2001
---------------------------- --------------------------
Operating revenues:
Sales to Members $ 315,446 $ 301,765 $ 866,197 $ 856,842
Sales to non-Members 10,260 17,815 26,914 49,256
--------- --------- --------- ---------
Total operating revenues 325,706 319,580 893,111 906,098
--------- --------- --------- ---------
Operating expenses:
Fuel 70,511 65,396 169,743 170,220
Production 55,743 52,566 167,587 158,638
Purchased power 109,795 122,934 287,357 316,207
Depreciation and amortization 32,588 33,368 97,596 100,018
--------- --------- --------- ---------
Total operating expenses 268,637 274,264 722,283 745,083
--------- --------- --------- ---------
Operating margin 57,069 45,316 170,828 161,015
--------- --------- --------- ---------
Other income (expense):
Investment income 3,488 9,730 20,453 28,038
Amortization of deferred gains 619 619 1,856 1,856
Amortization of net benefit of sale of income tax benefits 796 2,799 4,391 8,396
Allowance for equity funds used during construction 94 31 336 99
Other 705 1,419 1,970 3,230
--------- --------- --------- ---------
Total other income 5,702 14,598 29,006 41,619
--------- --------- --------- ---------
Interest charges:
Interest on long-term debt and capital leases 51,567 55,057 154,700 166,767
Other interest 981 4,701 10,869 11,746
Allowance for debt funds used during construction (592) (362) (2,340) (1,269)
Amortization of debt discount and expense 3,444 4,549 10,556 15,349
--------- --------- --------- ---------
Net interest charges 55,400 63,945 173,785 192,593
--------- --------- --------- ---------
Net margin $ 7,371 ($ 4,031) $ 26,049 $ 10,041
========= ========= ========= =========
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 Nine Months Ended September 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 10,041 10,041
Cumulative effect of accounting change to record unrealized
loss on interest rate swap arrangements as of January 1, 2001 (33,515) (33,515)
Unrealized loss on interest rate swap arrangements (12,533) (12,533)
Unrealized loss on financial gas hedges (7,053) (7,053)
Unrealized gain on available-for-sale securities 2,172 2,172
----------
Total comprehensive margin (loss) (40,888)
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 $ 401,652 ($ 49,858) $ 351,794
====================================================================================================================================
Balance at December 31, 2001 $ 410,029 ($ 42,361) $ 367,668
Components of comprehensive margin:
Net margin 26,049 26,049
Unrealized loss on interest rate swap arrangements (21,540) (21,540)
Unrealized gain on financial gas hedges 7,448 7,448
Unrealized gain on available-for-sale securities 478 478
----------
Total comprehensive margin 12,435
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $ 436,078 ($ 55,975) $ 380,103
====================================================================================================================================
The accompanying notes are an integral part of these condensed financial
statements.
6
Oglethorpe Power Corporation
Condensed Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2002 and 2001
- ------------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
2002 2001
---------------------------
Cash flows from operating activities:
Net margin $ 26,049 $ 10,041
--------- ---------
Adjustments to reconcile net margin to net cash
provided by operating activities:
Depreciation and amortization, including nuclear fuel 137,730 145,808
Allowance for equity funds used during construction (336) (99)
Amortization of deferred gains (1,856) (1,856)
Amortization of net benefit of sale of income tax benefits (4,391) (8,396)
Gain on sale of generation equipment - (223)
Other 2,043 6,678
Change in operating assets and liabilities:
Receivables (26,628) 39,561
Notes receivable 139 (68)
Inventories (9,204) 2,775
Prepayments and other current assets (1,846) (7,393)
Accounts payable (15,365) (6,793)
Accrued interest 12,208 (12,291)
Accrued and withheld taxes 18,832 19,085
Power marketer reserve (36,000) -
Other current liabilities (3,235) (20,782)
Deferred nuclear outage costs (19,846) (12,569)
--------- ---------
Total adjustments 52,245 143,437
--------- ---------
Net cash provided by operating activities 78,294 153,478
--------- ---------
Cash flows from investing activities:
Property additions (72,849) (43,636)
Net proceeds from bond, reserve and construction funds 1,819 1,092
Increase in investment in associated organizations (93) (1,097)
Increase in other short-term investments (3,862) (5,034)
Increase in decommissioning fund (2,341) (5,279)
Other-generation equipment deposits - (16,781)
Proceeds from sale of generation equipment - 26,204
--------- ---------
Net cash used in investing activities (77,326) (44,531)
--------- ---------
Cash flows from financing activities:
Long-term debt proceeds, net 3,277 2,869
Long-term debt payments (88,853) (83,202)
(Decrease) increase in notes payable (50,437) 179,746
Decrease (increase) in notes receivable under interim financing agreement 24,257 (212,984)
Retirement of patronage capital - -
--------- ---------
Net cash used in financing activities (111,756) (113,571)
--------- ---------
Net decrease in cash and temporary cash investments (110,788) (4,624)
Cash and temporary cash investments at beginning of period 275,786 330,622
--------- ---------
Cash and temporary cash investments at end of period $ 164,998 $ 325,998
========= =========
Cash paid for:
Interest (net of amounts capitalized) $ 148,041 $ 178,391
Income taxes - -
The accompanying notes are an integral part of these condensed financial
statements.
7
Oglethorpe Power Corporation
Notes to Condensed Financial Statements
September 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 September 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 nine-month periods ended
September 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other things, this statement rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt" (SFAS No. 4),
which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of
the related income tax effect. As a result, the criteria in Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations -
8
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
which requires gains and losses on extinguishments of debt to be classified
as income or loss from continuing operations, will now be applied. SFAS No.
71 permits Oglethorpe to record gains and losses from early extinguishment
of debt as regulatory assets and regulatory liabilities. Oglethorpe
anticipates that any future gains and losses from early extinguishment of
debt will be recorded as regulatory assets and regulatory liabilities. The
provisions of SFAS No. 145 are effective for fiscal years beginning after
May 15, 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities"(SFAS No.146), which addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring" (EITF 94-3). The principal difference between SFAS No. 146
and EITF 94-3 relates to SFAS No. 146's requirements for recognition of a
liability for a cost associated with an exit or disposal activity. SFAS No.
146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF
93-4, a liability for an exit cost as generally defined in EITF 94-3 was
recognized at the date of an entity's commitment to an exit plan.
Oglethorpe is required to adopt SFAS No. 146 effective January 1, 2003.
9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For the Three Months and Nine Months Ended September 30, 2002 and 2001
- ----------------------------------------------------------------------
Net Margin
Oglethorpe's net margin (loss) for the three months and nine months ended
September 30, 2002 was $7.4 million and $26.0 million compared to ($4.0) million
and $10.0 million for the same periods of 2001. As a result of lower than
budgeted fixed production expenses and lower interest costs during the first
nine months of 2001, Oglethorpe's Board of Directors approved reductions to
budgeted expenses resulting in reduced Member capacity revenues, including a
reduction that was recorded in the third quarter of 2001 as an $18.3 million
reduction in Sales to Members.
Net margin for the first nine months of 2002 is greater than the expected annual
margin requirement under Oglethorpe's Indenture, dated as of March 1, 1997, from
Oglethorpe to SunTrust Bank, as trustee (the "Mortgage Indenture"). The rate
schedule to Oglethorpe's Wholesale Power Contracts provides for budget
adjustments from time to time throughout the year. Oglethorpe's management is
currently evaluating several possible budget adjustments that would reduce
budgeted expenses and/or accelerate write-offs for certain assets or deferred
charges, which would be designed with a view to Oglethorpe achieving a Margins
for Interest Ratio of at least 1.10 for 2002.
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 are 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. Oglethorpe and the Members are evaluating proposed new arrangements
between Oglethorpe and the Members that could affect the amount of energy
Oglethorpe supplies to its Members in the future. (See "Proposed New
Arrangements Among Oglethorpe and its Members" in Item 5 of Oglethorpe's Current
Report on Form 8-K dated October 16, 2002.)
Revenues from sales to the Members for the three-month and nine-month periods
ended September 30, 2002 were 4.5% and 1.1% higher than such revenues for the
same periods of 2001. Megawatt-hour (MWh) sales to Members increased 3.4% and
10
1.5% 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 scheduling Members. For the nine-month period ended September 30,
2002, the increase resulted from higher sales to both scheduling Members and
from higher sales to Members who participate in Oglethorpe's capacity and energy
pool. The average revenue per MWh from sales to Members increased 1.1% for the
third quarter and decreased 0.4% year-to-date compared to the same periods of
2001.
The components of Member revenues for the three months and nine months ended
September 30, 2002 and 2001 were as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Capacity revenues $149,800 $145,371 $449,067 $446,747
Energy revenues 165,646 156,394 417,130 410,095
-------- -------- -------- --------
Total $315,446 $301,765 $866,197 $856,842
======== ======== ======== ========
Capacity revenues from Members for the three months and nine months ended
September 30, 2002 increased 3.1% and 0.5% compared to the same periods of 2001.
The increase in capacity revenues for the third quarter was primarily due to
higher net margin for the current periods compared to the same periods of 2001,
which was due to the timing of the budget reduction in 2001. Energy revenues
were 5.9% and 1.7% higher for the three-month and nine-month periods of 2002
compared to the same periods of 2001. The increase in energy revenues for the
third 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 was 2.4% higher in the current quarter and 0.2% higher 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 nine months ended September 30, 2002 and 2001:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Sales to power companies $ 9,661 $17,803 $25,977 $45,757
Sales to LEM and Morgan Stanley 599 12 937 3,499
------- ------- ------- -------
Total $10,260 $17,815 $26,914 $49,256
======= ======= ======= =======
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
11
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 nine months of 2002 than in the first nine
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
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 nine-month periods ended September
30, 2002 were 2.1% and 3.1% lower compared to the same periods of 2001. The
decrease during the third quarter of 2002 compared to the same period of 2001
was primarily due to lower purchased power costs, offset somewhat by higher 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 increased 7.8% primarily as a result of a 6.1% increase in total
generation. Nuclear generation was 5.4% higher, fossil generation was 5.0%
higher and gas-fired combustion turbine generation was 67.4% higher in the
current period as compared to the same period of 2001. Gas-fired generation
accounted for 3.0% of total generation during the third quarter of 2002. The
increase in gas-fired generation, with its higher average fuel cost compared to
nuclear and fossil generation, yielded a 1.6% increase in total average fuel
cost.
Purchased power costs decreased 10.7% and 9.1% for the three-month and
nine-month periods of 2002 compared to the same periods of 2001. Purchased MWhs
decreased 2.3% and 5.3% in the current three-month and nine-month periods of
2002 compared to the same periods of 2001. The average cost per MWh of total
purchased power decreased 8.6% and 4.0% in the current periods of 2002 compared
to the same periods of 2001. Purchased power costs were as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(dollars in thousands)
Capacity costs $ 17,226 $ 26,009 $ 57,324 $ 68,472
Energy costs 92,569 96,925 230,033 247,735
-------- -------- -------- --------
Total $109,795 $122,934 $287,357 $316,207
======== ======== ======== ========
Purchased power capacity costs decreased 33.8% and 16.3% for the current periods
as compared to the same periods of 2001. The decreases in purchased power
capacity costs resulted from the termination of capacity payments under two
power purchase agreements that ended in August 2001 and May 2002, respectively.
Purchased power energy costs for the three-month and nine-month periods ended
September 30, 2002 were 4.5% and 7.2% lower compared to the same periods of
2001. The decreases resulted partly from lower volume of purchased MWhs and
12
partly from lower average energy cost per MWh. The average cost of purchased
power energy for the three months and nine months ended September 30, 2002 was
2.2% and 1.9% lower compared to the same periods of 2001 due to lower prices in
the wholesale electricity markets.
Production costs increased 5.6% for the nine-month period ended September 30,
2002 compared to the same period of 2001. The higher production costs in 2002
resulted primarily from higher operation and maintenance (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,
partly from one-time costs incurred due to the Southern Nuclear Operating
Company engineering reorganization efforts and partly from forced outages at
Plants Scherer and Wansley.
Other Income
For the three-month and nine-month periods ended September 30, 2002, the
amortization of net benefit of sale of income tax benefits decreased due to the
amortization of the safe harbor lease ending in March 2002. Investment income
decreased 64.2% and 27.1% in the current periods compared to the same periods 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 6.3% and 7.2% 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 decreased $3.7 million or 79.1% in the current quarter compared
to the same period of 2001 primarily as a result of a decrease 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 24.3% and 31.2% 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.
13
Financial Condition
Capital Requirements and Liquidity and Sources of Capital
- ---------------------------------------------------------
Financing for Talbot EMC and Chattahoochee EMC
Oglethorpe submitted loan applications to the Rural Utilities Service ("RUS") to
provide permanent financing for a six-unit, 618 MW gas-fired combustion turbine
project (currently owned by Talbot EMC) and a 468 MW gas-fired combined cycle
project (currently owned by Chattahoochee EMC). The loan applications initially
were submitted on behalf of either Oglethorpe or related entities that might
ultimately own the facilities. During the process of evaluating the terms
proposed by RUS for providing these loans to Talbot EMC and Chattahoochee EMC,
it was determined that the terms of the financing would be more favorable if
Oglethorpe owned the facilities and obtained the RUS financing. On September 19,
2002, RUS issued two RUS-guaranteed loan commitments totaling approximately $589
million to Oglethorpe for these generating facilities. Concurrently with the
funding of these loans, which is currently expected to occur by June 30, 2003,
it is proposed that Oglethorpe would acquire the two generating facilities from
Talbot EMC and Chattahoochee EMC provided certain conditions are met. (See
"Proposed New Arrangements Among Oglethorpe and its Members" in Item 5 of
Oglethorpe's Current Report on Form 8-K dated October 16, 2002.)
Oglethorpe is currently providing interim loans to Talbot EMC and Chattahoochee
EMC to fund approximately fifty percent of the cost of these generating
facilities. Oglethorpe is funding these loans through the issuance of commercial
paper. As of November 1, 2002, approximately $296 million in commercial paper
was outstanding, all of which was for this purpose. Oglethorpe expects to have
up to approximately $300 million of commercial paper outstanding for this
purpose until the funding of the RUS loans. The remaining fifty percent of the
cost of these generating facilities is being funded under two bridge loans from
third parties. For a discussion of the bridge loans and Oglethorpe's guarantee
of the bridge loan to Chattahoochee EMC and other contingent liabilities in
connection with the Talbot and Chattahoochee generating facilities, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Financial Condition - Capital Requirements" in Item 7 of
Oglethorpe's Annual Report on Form 10-K for the year ended December 31, 2001.
The proceeds from the RUS loans will first be used to repay the bridge loans and
then to retire Oglethorpe's outstanding commercial paper.
Liquidity
On September 25, 2002, Oglethorpe renewed its existing committed lines of credit
available for working capital and as support for Oglethorpe's commercial paper
program at a level of $320 million, with an expiration date of September 24,
2003. This credit facility is structured such that the commitment amount is
reduced to $290 million upon the earlier to occur of (i) June 30, 2003 or (ii)
receipt by Oglethorpe of funds totaling $350 million under the RUS loans for the
Talbot and Chattahoochee generating facilities. If the committed amount is
reduced before funding of the RUS loans, Oglethorpe would use its cash or
another line of credit to fund the difference between the amount of the
outstanding loans to Talbot EMC and Chattahoochee EMC and the reduced
availability of commercial paper. Currently, all of the commercial paper
outstanding relates to the funding of these generating facilities.
14
Oglethorpe has a $50 million committed line of credit with the National Rural
Utilities Cooperative Finance Corporation ("CFC") that can be used for general
working capital purposes. No amounts are currently outstanding under this
facility. CFC also is a $40 million participant in Oglethorpe's $320 million
working capital credit facility that serves as backup for its commercial paper
program. In conjunction with CFC's participation in the commercial paper backup
facility, Oglethorpe entered into a pledge agreement with CFC under which
Oglethorpe invested $50 million of its general funds in CFC commercial paper and
pledged that investment as collateral for the working capital line of credit
with CFC. By its terms, the pledge agreement terminated on October 23, 2002 when
Oglethorpe repaid a $46,065,000 medium-term loan with CFC as discussed below.
Other Financings
On October 23, 2002, Oglethorpe issued $71,990,000 of Series 2002A and
$20,000,000 of Series 2002B tax-exempt pollution control revenue bonds (PCBs)
through the Development Authority of Burke County. The bonds bear interest at
rates that are re-set every 35 days in an auction process. Oglethorpe's
obligations relating to the bonds are secured under the Mortgage Indenture. The
bond proceeds were used to prepay a $46,065,000 medium-term loan with CoBank and
another $46,065,000 medium-term loan with CFC. The two medium-term loans were
set to mature on March 31, 2003.
Oglethorpe has two debt financings planned in the near future. In December 2002,
Oglethorpe expects to issue, through Georgia development authorities,
approximately $40 million of tax-exempt PCBs. The $40 million would include
$30,075,000 to refinance a like amount of tax-exempt bonds that mature on
January 1, 2003, and approximately $10 million to fund capital expenditures
previously made or to be made in complying with environmental regulations at
Plant Hatch. In addition, Oglethorpe expects to issue up to $125 million in
taxable debt in early 2003 to fund capital expenditures previously made or to be
made in complying with environmental regulations at several of its generating
plants. The debt issued in both of these financings would be secured under the
Mortgage Indenture.
General
- -------
Total assets and total equity plus liabilities as of September 30, 2002 were
$4.6 billion, which was $162 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 nine months ended September 30, 2002 totaled $72.8
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.
15
The increase in receivables was due in part to the accrual of an additional
$12.5 million associated with the LEM arbitration settlement. In addition,
receivables at December 31, 2001 included a credit for Board approved budget
reductions that reduced 2001 Member revenues due. Receivables at September 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 buildup of coal stockpiles at
Plant Scherer and Plant Wansley which were at the lower end of the targeted days
of supply at December 31, 2001.
Prepayments and other current assets increased primarily as a result of
prepayments made to Georgia Power Company for estimated plant operating and
construction costs. This increase was somewhat offset by the amortization of
prepaid insurance balances and prepaid association fees.
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 $12.4 million to $380.1 million at September 30, 2002. Patronage capital and
membership fees, excluding accumulated other comprehensive loss, increased by
$26.1 million from $410.0 million at December 31, 2001 to $436.1 million at
September 30, 2002. Accumulated other comprehensive loss increased by $13.6
million, from ($42.4 million) to ($56.0 million).
The decrease in accounts payable was primarily attributable to payment by
Oglethorpe of amounts that were due to Georgia Transmission Corporation (GTC) as
of December 31, 2001 for amounts billed to the Members on GTC's behalf and
collected by Oglethorpe, and amounts accrued at year-end for progress payments
associated with the construction of the Talbot EMC facility. Since January 2002,
the Members have remitted amounts billed on GTC's behalf directly to GTC.
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 the interest expense
accrual associated with the lease of Plant Scherer Unit No. 2, which is paid
semi-annually. At September 30, 2002 interest expense for three months of
Scherer debt was accrued, whereas no interest expense was accrued at December
31, 2001 as a result of the payment made (as due) on that date.
16
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 the settlement
of certain contracts and changing market values. Somewhat offsetting this
decrease was an increase in accrued operating and maintenance expenses for Plant
Doyle.
Oglethorpe has recorded an unrealized loss related to the interest rate swap
arrangements of $58.4 million, which represents the estimated payment Oglethorpe
would make if the swap arrangements were terminated.
New Accounting Pronouncements
For a discussion of New Accounting Pronouncements see Note B of Notes to
Condensed Financial Statements.
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.
17
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.
Item 4. Controls and Procedures
Within 90 days prior to the filing date of this report, Oglethorpe carried out
an evaluation, under the supervision and with the participation of its
management, including its President and Chief Executive Officer and Vice
President, Finance, of the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended). Based on this
evaluation, the President and Chief Executive Officer and the Vice President,
Finance concluded that Oglethorpe's disclosure controls and procedures are
effective to ensure that information required to be disclosed by Oglethorpe in
the reports that Oglethorpe files or submits under the Securities Exchange Act
is recorded, processed, summarized and reported within the time periods required
by the Securities Exchange Act and the rules thereunder.
No significant changes occurred in Oglethorpe's internal controls or in other
factors that could significantly affect its internal controls since the date of
its evaluation. Oglethorpe has not found any significant deficiencies or
material weaknesses in these controls which require any corrective actions since
the date of Oglethorpe's evaluation.
18
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. Exelon subsequently withdrew its
application with FERC.
Environmental Claims
As is typical for electric utilities, Oglethorpe is subject to various federal,
state and local air and water quality requirements which, among other things,
regulate emissions of pollutants, such as particulate matter, sulfur dioxide and
nitrogen oxides into the air and discharges of other pollutants, including heat,
into waters of the United States. See "FACTORS AFFECTING THE ELECTRIC UTILITY
INDUSTRY--Environmental and Other Regulation" in Item 1 of Oglethorpe's 2001
Annual Report on Form 10-K. Oglethorpe, or generating facilities in which
Oglethorpe has an interest, are also subject, from time to time, to claims
relating to emissions of pollutants, including actions by citizens to enforce
environmental regulations and claims for personal injury due to emissions from
the facilities. Oglethorpe cannot predict the outcome of current or future
actions, the responsibility of Oglethorpe for a share of any damages awarded or
any impact on facility operations. Oglethorpe, however, does not believe that
the current actions will have a material adverse effect on the financial
position or results of operations of Oglethorpe.
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 Anne F. Appleby (Principal Financial Officer)
(b) Reports on Form 8-K
Oglethorpe filed a Current Report on Form 8-K on October 16, 2002,
containing disclosure under Item 5, Other Events and Regulation FD
Disclosure and Item 7, Financial Statements and Exhibits, regarding
recent developments relating to Oglethorpe and financial and
statistical information about the Members, in connection with
Oglethorpe's offering of the Burke Series 2002A and 2002B PCBs.
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: November 14, 2002 By: /s/ Thomas A. Smith
---------------------------
Thomas A. Smith
President and Chief Executive Officer
Date: November 14, 2002 /s/ Mark Chesla
---------------------------
Mark Chesla
Controller
(Chief Accounting Officer)
20
CERTIFICATIONS
I, Thomas A. Smith, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Oglethorpe Power
Corporation (An Electric Membership Corporation);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Thomas A. Smith
- -------------------
Thomas A. Smith
President and Chief Executive Officer
21
I, Anne F. Appleby, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Oglethorpe Power
Corporation (An Electric Membership Corporation);
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Anne F. Appleby
- -------------------
Anne F. Appleby
Vice President, Finance
(Principal Financial Officer)
22