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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) | ||
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | ||
OR | ||
o | 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. 333-192954
(An Electric Membership Corporation)
(Exact name of registrant as specified in its charter)
Georgia (State or other jurisdiction of incorporation or organization) | 58-1211925 (I.R.S. employer identification no.) | |
2100 East Exchange Place Tucker, Georgia (Address of principal executive offices) | 30084-5336 (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 o No ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filero o Accelerated Filer o Non-Accelerated Filer ý (Do not check if a smaller reporting company) Smaller Reporting Company o Emerging Growth Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
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.
(This page has been left blank intentionally)
OGLETHORPE POWER CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBERJUNE 30, 20172018
| | Page No. | ||
---|---|---|---|---|
PART I—FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements | 1 | ||
Unaudited Consolidated Balance Sheets as of | 1 | |||
Unaudited Consolidated Statements of Revenues and Expenses For the Three and | 3 | |||
Unaudited Consolidated Statements of Comprehensive Margin For the Three and | 4 | |||
Unaudited Consolidated Statements of Patronage Capital and Membership Fees and Accumulated Other Comprehensive | 5 | |||
Unaudited Consolidated Statements of Cash Flows For the | 6 | |||
Notes to Unaudited Consolidated Financial Statements | 7 | |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |||
Item 4. | Controls and Procedures | |||
PART II—OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | |||
Item 1A. | Risk Factors | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 40 | ||
Item 3. | Defaults Upon Senior Securities | 40 | ||
Item 4. | Mine Safety Disclosures | 40 | ||
Item 5. | Other Information | 40 | ||
Item 6. | Exhibits | 41 | ||
SIGNATURES | 42 |
i
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains "forward-looking statements." All statements, other than statements of historical facts, that address activities, events or developments that we expect or anticipate to occur in the future, including matters such as the timing of various regulatory and other actions, future capital expenditures, business strategy, regulatory actions, and development, construction or operation of facilities (often, but not always, identified through the use of words or phrases such as "will likely result," "are expected to," "will continue," "is anticipated," "estimated," "projection," "target" and "outlook") are forward-looking statements.
Although we believe that in making these forward-looking statements our expectations are based on reasonable assumptions, any forward-looking statement involves uncertainties and there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Some of the risks, uncertainties and assumptions that may cause actual results to differ from these forward-looking statements are described under "Item 1A—RISK FACTORS" and in other sections of our annual report on Form 10-K for the fiscal year ended December 31, 20162017 and under "Risk Factors" in our Form 10-Q for the quarterly period ended June 30, 2017 and in this quarterly report on Form 10-Q. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this quarterly report may not occur.
Any forward-looking statement speaks only as of the date of this quarterly report, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of them; nor can we assess the impact of each factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Factors that could cause actual results to differ materially from those indicated in any forward-looking statement include, but are not limited to:
ii
ii
iii
Oglethorpe Power Corporation |
(dollars in thousands) | (dollars in thousands) | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||
Assets | ||||||||||||||
Electric plant: | ||||||||||||||
In service | $ | 8,857,293 | $ | 8,786,839 | $ | 8,976,019 | $ | 8,886,407 | ||||||
Less: Accumulated provision for depreciation | (4,260,047 | ) | (4,115,339 | ) | (4,391,583 | ) | (4,302,332 | ) | ||||||
| | | | | | | | | | | | | | |
4,597,246 | 4,671,500 | 4,584,436 | 4,584,075 | |||||||||||
Nuclear fuel, at amortized cost | 360,529 | 377,653 | 350,425 | 358,562 | ||||||||||
Construction work in progress | 3,824,068 | 3,228,214 | 3,369,651 | 2,935,868 | ||||||||||
| | | | | | | | | | | | | | |
Total electric plant | 8,781,843 | 8,277,367 | 8,304,512 | 7,878,505 | ||||||||||
| | | | | | | | | | | | | | |
Investments and funds: | ||||||||||||||
Nuclear decommissioning trust fund | 427,786 | 386,029 | 446,985 | 445,055 | ||||||||||
Investment in associated companies | 74,187 | 72,783 | 75,246 | 74,981 | ||||||||||
Long-term investments | 125,518 | 99,874 | 151,399 | 140,622 | ||||||||||
Restricted investments | 265,180 | 221,122 | 585,111 | 653,585 | ||||||||||
Other | 21,689 | 20,730 | 23,238 | 22,562 | ||||||||||
| | | | | | | | | | | | | | |
Total investments and funds | 914,360 | 800,538 | 1,281,979 | 1,336,805 | ||||||||||
| | | | | | | | | | | | | | |
Current assets: | ||||||||||||||
Cash and cash equivalents | 342,064 | 366,290 | 524,874 | 397,695 | ||||||||||
Restricted short-term investments | 246,432 | 247,006 | 219,989 | 229,324 | ||||||||||
Receivables | 180,250 | 155,042 | 164,784 | 156,781 | ||||||||||
Inventories, at average cost | 263,226 | 259,831 | 263,759 | 266,219 | ||||||||||
Prepayments and other current assets | 20,438 | 32,919 | 20,217 | 18,884 | ||||||||||
| | | | | | | | | | | | | | |
Total current assets | 1,052,410 | 1,061,088 | 1,193,623 | 1,068,903 | ||||||||||
| | | | | | | | | | | | | | |
Deferred charges: | ||||||||||||||
Regulatory assets | 572,237 | 545,387 | 597,611 | 585,084 | ||||||||||
Prepayments to Georgia Power | 33,532 | 45,575 | ||||||||||||
Other | 28,639 | 16,733 | 13,474 | 13,267 | ||||||||||
| | | | | | | | | | | | | | |
Total deferred charges | 600,876 | 562,120 | 644,617 | 643,926 | ||||||||||
| | | | | | | | | | | | | | |
Total assets | $ | 11,349,489 | $ | 10,701,113 | $ | 11,424,731 | $ | 10,928,139 | ||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Oglethorpe Power Corporation |
(dollars in thousands) | (dollars in thousands) | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||
Equity and Liabilities | ||||||||||||||
Capitalization: | ||||||||||||||
Patronage capital and membership fees | $ | 923,495 | $ | 859,810 | $ | 955,771 | $ | 911,087 | ||||||
Accumulated other comprehensive margin | (352 | ) | (370 | ) | ||||||||||
| | | | | | | ||||||||
923,143 | 859,440 | |||||||||||||
Long-term debt | 7,991,307 | 7,892,836 | 7,779,704 | 7,927,562 | ||||||||||
Obligation under capital lease | 89,710 | 92,096 | 84,534 | 87,192 | ||||||||||
Other | 19,725 | 18,765 | 20,728 | 20,051 | ||||||||||
| | | | | | | | | | | | | | |
Total capitalization | 9,023,885 | 8,863,137 | 8,840,737 | 8,945,892 | ||||||||||
| | | | | | | | | | | | | | |
Current liabilities: | ||||||||||||||
Long-term debt and capital lease due within one year | 154,817 | 316,861 | 554,340 | 216,694 | ||||||||||
Short-term borrowings | 631,949 | 102,168 | 438,021 | 190,626 | ||||||||||
Accounts payable | 161,168 | 73,801 | 192,590 | 212,868 | ||||||||||
Accrued interest | 84,287 | 93,634 | 85,671 | 79,510 | ||||||||||
Member power bill prepayments, current | 43,836 | 176,988 | 113,025 | 6,171 | ||||||||||
Other current liabilities | 54,621 | 59,979 | 51,238 | 55,136 | ||||||||||
| | | | | | | | | | | | | | |
Total current liabilities | 1,130,678 | 823,431 | 1,434,885 | 761,005 | ||||||||||
| | | | | | | | | | | | | | |
Deferred credits and other liabilities: | ||||||||||||||
Asset retirement obligations | 726,074 | 698,051 | 749,659 | 734,997 | ||||||||||
Member power bill prepayments, non-current | 202,202 | 48,115 | 109,000 | 203,615 | ||||||||||
Contract retainage | 0 | 40,008 | ||||||||||||
Regulatory liabilities | 236,445 | 197,748 | 253,683 | 251,649 | ||||||||||
Other | 30,205 | 30,623 | 36,767 | 30,981 | ||||||||||
| | | | | | | | | | | | | | |
Total deferred credits and other liabilities | 1,194,926 | 1,014,545 | 1,149,109 | 1,221,242 | ||||||||||
| | | | | | | | | | | | | | |
Total equity and liabilities | $ | 11,349,489 | $ | 10,701,113 | $ | 11,424,731 | $ | 10,928,139 | ||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Oglethorpe Power Corporation |
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||
Three Months | Nine Months | Three Months | Six Months | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Operating revenues: | ||||||||||||||||||||||||||
Sales to Members | $ | 385,758 | $ | 430,883 | $ | 1,106,975 | $ | 1,158,134 | $ | 365,811 | $ | 361,323 | $ | 739,212 | $ | 715,467 | ||||||||||
Sales to non-Members | 148 | 130 | 220 | 383 | 110 | 46 | 355 | 72 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total operating revenues | 385,906 | 431,013 | 1,107,195 | 1,158,517 | 365,921 | 361,369 | 739,567 | 715,539 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating expenses: | ||||||||||||||||||||||||||
Fuel | 143,767 | 178,516 | 366,405 | 404,056 | 122,144 | 118,723 | 242,591 | 222,638 | ||||||||||||||||||
Production | 93,657 | 105,681 | 293,930 | 312,332 | 101,891 | 99,185 | 203,163 | 200,273 | ||||||||||||||||||
Depreciation and amortization | 56,143 | 54,719 | 167,983 | 162,606 | 56,841 | 55,977 | 113,629 | 111,840 | ||||||||||||||||||
Purchased power | 14,345 | 13,109 | 44,222 | 39,254 | 14,761 | 14,901 | 30,649 | 29,877 | ||||||||||||||||||
Accretion | 9,224 | 8,059 | 27,333 | 24,099 | 9,435 | 9,111 | 18,756 | 18,109 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses | 317,136 | 360,084 | 899,873 | 942,347 | 305,072 | 297,897 | 608,788 | 582,737 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating margin | 68,770 | 70,929 | 207,322 | 216,170 | 60,849 | 63,472 | 130,779 | 132,802 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income: | ||||||||||||||||||||||||||
Investment income | 14,850 | 12,578 | 44,509 | 37,628 | 14,719 | 14,840 | 28,683 | 29,659 | ||||||||||||||||||
Other | 627 | 1,531 | 1,908 | 6,259 | 1,643 | 641 | 3,617 | 1,281 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total other income | 15,477 | 14,109 | 46,417 | 43,887 | 16,362 | 15,481 | 32,300 | 30,940 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest charges: | ||||||||||||||||||||||||||
Interest expense | 93,809 | 93,544 | 280,621 | 273,066 | 91,825 | 93,527 | 181,495 | 186,812 | ||||||||||||||||||
Allowance for debt funds used during construction | (33,517 | ) | (30,135 | ) | (99,953 | ) | (84,460 | ) | (34,950 | ) | (33,349 | ) | (69,149 | ) | (66,436 | ) | ||||||||||
Amortization of debt discount and expense | 3,150 | 2,999 | 9,386 | 8,946 | 3,051 | 3,099 | 6,049 | 6,236 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest charges | 63,442 | 66,408 | 190,054 | 197,552 | 59,926 | 63,277 | 118,395 | 126,612 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net margin | $ | 20,805 | $ | 18,630 | $ | 63,685 | $ | 62,505 | $ | 17,285 | $ | 15,676 | $ | 44,684 | $ | 37,130 | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Oglethorpe Power Corporation |
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||
Three Months | Nine Months | Three Months | Six Months | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Net margin | $ | 20,805 | $ | 18,630 | $ | 63,685 | $ | 62,505 | $ | 17,285 | $ | 15,676 | $ | 44,684 | $ | 37,130 | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive margin: | ||||||||||||||||||||||||||
Unrealized gain (loss) on available-for-sale securities | 56 | (19 | ) | 18 | 358 | — | 1 | — | (38 | ) | ||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive margin | $ | 20,861 | $ | 18,611 | $ | 63,703 | $ | 62,863 | $ | 17,285 | $ | 15,677 | $ | 44,684 | $ | 37,092 | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||
Patronage Capital and Membership Fees | Accumulated Other Comprehensive (Deficit) Margin | Total | Patronage Capital and Membership Fees | Accumulated Other Comprehensive Deficit | Total | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Balance at December 31, 2015 | $ | 809,465 | $ | 58 | $ | 809,523 | ||||||||||||||
| | | | | | | | | | |||||||||||
Components of comprehensive margin: | ||||||||||||||||||||
Net margin | 62,505 | — | 62,505 | |||||||||||||||||
Unrealized gain on available-for-sale securities | — | 358 | 358 | |||||||||||||||||
| | | | | | | | | | |||||||||||
Balance at September 30, 2016 | $ | 871,970 | $ | 416 | $ | 872,386 | ||||||||||||||
| | | | | | | | | | |||||||||||
| | | | | | | ||||||||||||||
| | | | | | | | | | |||||||||||
Balance at December 31, 2016 | $ | 859,810 | $ | (370 | ) | $ | 859,440 | $ | 859,810 | $ | (370 | ) | $ | 859,440 | ||||||
| | | | | | | | | | | | | | | | | | | ||
Components of comprehensive margin: | ||||||||||||||||||||
Net margin | 63,685 | — | 63,685 | 37,130 | — | 37,130 | ||||||||||||||
Unrealized gain on available-for-sale securities | — | 18 | 18 | |||||||||||||||||
Unrealized loss on available-for-sale securities | — | (38 | ) | (38 | ) | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2017 | $ | 923,495 | $ | (352 | ) | $ | 923,143 | |||||||||||||
Balance at June 30, 2017 | $ | 896,940 | $ | (408 | ) | $ | 896,532 | |||||||||||||
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | ||
Balance at December 31, 2017 | $ | 911,087 | $ | — | $ | 911,087 | ||||||||||||||
| | | | | | | | | | |||||||||||
Components of comprehensive margin: | ||||||||||||||||||||
Net margin | 44,684 | — | 44,684 | |||||||||||||||||
| | | | | | | | | | | ||||||||||
Balance at June 30, 2018 | $ | 955,771 | $ | — | $ | 955,771 | ||||||||||||||
| | | | | | | | | | | ||||||||||
| | | | | | | | |||||||||||||
| | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
Oglethorpe Power Corporation |
(dollars in thousands) | (dollars in thousands) | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||
Cash flows from operating activities: | ||||||||||||||
Net margin | $ | 63,685 | $ | 62,505 | $ | 44,684 | $ | 37,130 | ||||||
| | | | | | | | | | | | | | |
Adjustments to reconcile net margin to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization, including nuclear fuel | 279,898 | 268,674 | 184,323 | 185,640 | ||||||||||
Accretion cost | 27,333 | 24,099 | 18,756 | 18,109 | ||||||||||
Amortization of deferred gains | (1,341 | ) | (1,341 | ) | (894 | ) | (894 | ) | ||||||
Allowance for equity funds used during construction | (567 | ) | (567 | ) | (450 | ) | (387 | ) | ||||||
Deferred outage costs | (32,777 | ) | (29,464 | ) | (12,411 | ) | (22,194 | ) | ||||||
Gain on sale of investments | (16,478 | ) | (653 | ) | ||||||||||
Loss (gain) on sale of investments | 3,152 | (16,352 | ) | |||||||||||
Regulatory deferral of costs associated with nuclear decommissioning | 631 | (14,522 | ) | (13,966 | ) | 5,707 | ||||||||
Other | (6,610 | ) | (4,424 | ) | (2,637 | ) | (4,934 | ) | ||||||
Change in operating assets and liabilities: | ||||||||||||||
Receivables | (24,650 | ) | (41,015 | ) | (7,254 | ) | 4,556 | |||||||
Inventories | (3,395 | ) | 30,251 | 2,460 | (6,897 | ) | ||||||||
Prepayments and other current assets | 1,949 | (1,305 | ) | (518 | ) | 361 | ||||||||
Accounts payable | 68,585 | (87,056 | ) | (25,517 | ) | 27,736 | ||||||||
Accrued interest | (9,347 | ) | (966 | ) | 6,161 | (31,944 | ) | |||||||
Accrued taxes | 7,249 | 5,348 | 1,269 | (2,641 | ) | |||||||||
Other current liabilities | (13,354 | ) | (20,604 | ) | (7,600 | ) | (4,852 | ) | ||||||
Member power bill prepayments | 20,935 | 32,809 | 12,239 | (48,831 | ) | |||||||||
Other | 6,188 | — | ||||||||||||
| | | | | | | | | | | | | | |
Total adjustments | 298,061 | 159,264 | 163,301 | 102,183 | ||||||||||
| | | | | | | | | | | | | | |
Net cash provided by operating activities | 361,746 | 221,769 | 207,985 | 139,313 | ||||||||||
| | | | | | | | | | | | | | |
Cash flows from investing activities: | ||||||||||||||
Property additions | (737,146 | ) | (421,384 | ) | (561,033 | ) | (474,683 | ) | ||||||
Activity in nuclear decommissioning trust fund—Purchases | (329,248 | ) | (307,222 | ) | (262,959 | ) | (235,754 | ) | ||||||
—Proceeds | 323,840 | 302,308 | 259,092 | 232,376 | ||||||||||
Increase in restricted investments | (44,058 | ) | (66,821 | ) | ||||||||||
Decrease in restricted investments | 68,474 | 12,147 | ||||||||||||
Decrease in restricted short-term investments | 574 | 3,519 | 9,335 | 61,889 | ||||||||||
Activity in other long-term investments—Purchases | (45,246 | ) | (44,457 | ) | (102,715 | ) | (39,042 | ) | ||||||
—Proceeds | 27,196 | 35,278 | 90,329 | 25,390 | ||||||||||
Other | (12,780 | ) | 2,401 | 10,473 | (2,225 | ) | ||||||||
| | | | | | | | | | | | | | |
Net cash used in investing activities | (816,868 | ) | (496,378 | ) | (489,004 | ) | (419,902 | ) | ||||||
| | | | | | | | | | | | | | |
Cash flows from financing activities: | ||||||||||||||
Long-term debt proceeds | 4,517 | 634,279 | 236,200 | 4,517 | ||||||||||
Long-term debt payments | (240,417 | ) | (113,328 | ) | (77,234 | ) | (240,182 | ) | ||||||
Increase (decrease) in short-term borrowings, net | 652,401 | (105,225 | ) | |||||||||||
Increase in short-term borrowings, net | 247,395 | 425,929 | ||||||||||||
Other | 14,395 | 8,553 | 1,837 | 10,141 | ||||||||||
| | | | | | | | | | | | | | |
Net cash provided by financing activities | 430,896 | 424,279 | 408,198 | 200,405 | ||||||||||
| | | | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | (24,226 | ) | 149,670 | |||||||||||
Net increase (decrease) in cash and cash equivalents | 127,179 | (80,184 | ) | |||||||||||
Cash and cash equivalents at beginning of period | 366,290 | 213,038 | 397,695 | 366,290 | ||||||||||
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | $ | 342,064 | $ | 362,708 | $ | 524,874 | $ | 286,106 | ||||||
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Supplemental cash flow information: | ||||||||||||||
Cash paid for— | ||||||||||||||
Interest (net of amounts capitalized) | $ | 187,798 | $ | 185,484 | $ | 104,670 | $ | 150,849 | ||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||||
Change in asset retirement obligations | $ | 2,189 | $ | 72,097 | $ | 2,404 | $ | 0 | ||||||
Change in accrued property additions | $ | (21,904 | ) | $ | (24,451 | ) | ||||||||
Accrued property additions at end of period | $ | 141,338 | $ | 104,799 | ||||||||||
Interest paid-in-kind | $ | 42,555 | $ | 34,587 | $ | 29,072 | $ | 28,092 |
The accompanying notes are an integral part of these consolidated financial statements.
Oglethorpe Power Corporation
Notes to Unaudited Consolidated Financial Statements
Pursuant to our adoption of Revenue from Contracts with Customers (Topic 606), we adjusted sales to members for the three and six month periods ended June 30, 2017 in our Consolidated Statements of Revenues and Expenses to reflect a $5.8 million refund liability. The refund liability represents the adjustment to our revenue that we assessed as of June 30, 2017, that would have been required to meet our 2017 annual revenue requirement.
These consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, as filed with the SEC. The results of operations for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20172018 are not necessarily indicative of results to be expected for the full year. As noted in our 20162017 Form 10-K, our revenues consist primarily of sales to our 38 electric distribution cooperative members and, thus, the receivables on the consolidated balance sheets are principally from our members. See "Notes to Consolidated Financial Statements" in our 20162017 Form 10-K.
The guidance establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value as follows:
As required by the guidance, assets and liabilities measured at fair value are based on one or more of the following three valuation techniques:
1. Market approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business) and deriving fair value based on these inputs.
2. Income approach. The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts.
3. Cost approach. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (often referred to as current replacement cost). This approach assumes that the fair value would not exceed what it would cost a market participant to acquire or construct a substitute asset or comparable utility, adjusted for obsolescence.
The tables below detail assets and liabilities measured at fair value on a recurring basis at SeptemberJune 30, 20172018 and December 31, 2016.2017.
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Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||||
September 30, | Quoted Prices in | Significant Other | June 30, 2018 | Quoted Prices in | Significant Other | Significant | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||||||||
Nuclear decommissioning trust funds: | |||||||||||||||||||||||
Domestic equity | $ | 138,008 | $ | 138,008 | $ | — | $ | 146,480 | $ | 146,480 | $ | — | $ | — | |||||||||
International equity trust | 81,260 | — | 81,260 | 86,840 | — | 86,840 | — | ||||||||||||||||
Corporate bonds | 68,909 | — | 68,909 | ||||||||||||||||||||
US Treasury and government agency securities | 51,144 | 51,144 | — | ||||||||||||||||||||
Agency mortgage and asset backed securities | 35,153 | — | 35,153 | ||||||||||||||||||||
Mutual funds | 47,604 | 47,604 | — | ||||||||||||||||||||
Corporate bonds and debt | 51,481 | — | 48,172 | 3,309 | |||||||||||||||||||
US Treasury securities | 42,148 | 42,148 | — | — | |||||||||||||||||||
Mortgage backed securities | 56,752 | — | 56,752 | — | |||||||||||||||||||
Domestic mutual funds | 50,776 | 50,776 | — | — | |||||||||||||||||||
Municipal bonds | 301 | — | 301 | 288 | — | 288 | — | ||||||||||||||||
Federal agency securities | 5,164 | — | 5,164 | — | |||||||||||||||||||
Non-US Gov't bonds & private placements | 1,466 | — | 1,466 | — | |||||||||||||||||||
Other | 5,407 | 5,407 | — | 5,590 | 5,590 | — | — | ||||||||||||||||
Long-term investments: | |||||||||||||||||||||||
International equity trust | 20,712 | — | 20,712 | 19,632 | — | 19,632 | — | ||||||||||||||||
Corporate bonds | 15,173 | — | 15,173 | ||||||||||||||||||||
US Treasury and government agency securities | 11,608 | 11,608 | — | ||||||||||||||||||||
Agency mortgage and asset backed securities | 1,348 | — | 1,348 | ||||||||||||||||||||
Mutual funds | 75,479 | 75,479 | — | ||||||||||||||||||||
Corporate bonds and debt | 13,200 | — | 11,512 | 1,688 | |||||||||||||||||||
US Treasury securities | 7,643 | 7,643 | — | — | |||||||||||||||||||
Mortgage backed securities | 11,062 | — | 11,062 | — | |||||||||||||||||||
Domestic mutual funds | 91,714 | 91,714 | — | — | |||||||||||||||||||
Federal agency securities | 452 | — | 452 | — | |||||||||||||||||||
Treasury STRIPS | 4,641 | — | 4,641 | — | |||||||||||||||||||
Other | 1,198 | 1,199 | — | 3,055 | 3,055 | — | — | ||||||||||||||||
Natural gas swaps | 807 | — | 807 | 11,382 | — | 11,382 | — | ||||||||||||||||
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Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | |||||||||||||||||||
December 31, | Quoted Prices in | Significant Other | December 31, | Quoted Prices in | Significant Other | |||||||||||||||
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||
Nuclear decommissioning trust funds: | ||||||||||||||||||||
Domestic equity | $ | 170,408 | $ | 170,408 | $ | — | $ | 142,419 | $ | 142,419 | $ | — | ||||||||
International equity trust | 66,861 | — | 66,861 | 88,820 | — | 88,820 | ||||||||||||||
Corporate bonds | 60,019 | — | 60,019 | |||||||||||||||||
US Treasury and government agency securities | 65,725 | 65,725 | — | |||||||||||||||||
Agency mortgage and asset backed securities | 17,410 | — | 17,410 | |||||||||||||||||
Corporate bonds and debt | 66,317 | — | 66,317 | |||||||||||||||||
US Treasury securities | 38,791 | 38,791 | — | |||||||||||||||||
Mortgage backed securities | 49,379 | — | 49,379 | |||||||||||||||||
Domestic mutual funds | 47,833 | 47,833 | — | |||||||||||||||||
Municipal bonds | 943 | — | 943 | 92 | — | 92 | ||||||||||||||
Federal agency securities | 3,725 | — | 3,725 | |||||||||||||||||
Other | 4,663 | 4,663 | — | 7,679 | 7,679 | — | ||||||||||||||
Long-term investments: | ||||||||||||||||||||
Corporate bonds | 11,853 | — | 11,853 | |||||||||||||||||
US Treasury and government agency securities | 12,187 | 12,187 | — | |||||||||||||||||
Agency mortgage and asset backed securities | 1,651 | — | 1,651 | |||||||||||||||||
International equity trust | 15,946 | — | 15,946 | 20,071 | — | 20,071 | ||||||||||||||
Mutual funds | 57,932 | 57,932 | — | |||||||||||||||||
Corporate bonds and debt | 16,215 | — | 16,215 | |||||||||||||||||
US Treasury securities | 6,670 | 6,670 | — | |||||||||||||||||
Mortgage backed securities | 7,267 | — | 7,267 | |||||||||||||||||
Domestic mutual funds | 87,011 | 87,011 | — | |||||||||||||||||
Federal agency securities | 259 | — | 259 | |||||||||||||||||
Other | 305 | 305 | — | 3,129 | 3,129 | — | ||||||||||||||
Natural gas swaps | (15,090 | ) | — | (15,090 | ) | 6,328 | — | 6,328 | ||||||||||||
| | | | | | | | | | | | | | | | | | |
The Level 2 investments above in corporate bonds and debt, federal agency mortgage backed securities, and mortgage backed securities may not be exchange traded. The fair value measurements for these investments are based on a market approach, including the use of observable inputs. Common inputs include reported trades and broker/dealer bid/ask prices. The fair value of the Level 2 investments above in international equity trust are calculated based on the net asset value per share of the fund. There are no unfunded commitments for the international equity trust and redemption may occur daily with a 3-day redemption notice period.
The Level 3 investments above in corporate bonds and debt consist of investments in bank loans which are not exchange traded. Although these securities may be liquid and priced daily, their inputs are not observable.
The following table presents the changes in Level 3 assets measured at fair value on a recurring basis during the three and six months ended June 30, 2018.
| | | | |
Three Months Ended | ||||
Corporate bonds and debt | ||||
| | | | |
(dollars in thousands) | ||||
Balance at March 31, 2018 | $ | 3,807 | ||
Transfers to Level 3 | 1,190 | |||
Total gains or losses (realized/unrealized): | ||||
Changes in net assets | — | |||
| | | | |
Balance at June 30, 2018 | $ | 4,997 | ||
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| | | | |
Six Months Ended | ||||
Corporate bonds and debt | ||||
| | | | |
(dollars in thousands) | ||||
Balance at December 31, 2017 | $ | — | ||
Transfers to Level 3 | 4,997 | |||
Total gains or losses (realized/unrealized): | ||||
Changes in net assets | — | |||
| | | | |
Balance at June 30, 2018 | $ | 4,997 | ||
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None of our assets or liabilities measured at fair value on a recurring basis were categorized as Level 3 at September 30, 2017 or December 31, 2016.2017.
The estimated fair values of our long-term debt, including current maturities at SeptemberJune 30, 20172018 and December 31, 20162017 were as follows (in thousands):
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2017 | 2016 | 2018 | 2017 | |||||||||||||||||||||||
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Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||
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Long-term debt | $ | 8,237,972 | $ | 9,119,700 | $ | 8,304,523 | $ | 9,043,029 | $ | 8,423,001 | $ | 8,947,616 | $ | 8,232,703 | $ | 9,155,942 | ||||||||||
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The estimated fair value of long-term debt is classified as Level 2 and is estimated based on observed or quoted market prices for the same or similar issues or on current rates offered to us for debt of similar maturities. The primary sources of our long-term debt consist of first mortgage bonds, pollution control revenue bonds and long-term debt issued by the Federal Financing Bank that is guaranteed by the Rural Utilities Service or the U.S. Department of Energy. We also have small amounts of long-term debt provided by National Rural Utilities Cooperative Finance Corporation (CFC) and by CoBank, ACB.. The valuations for the first mortgage bonds and the pollution control revenue bonds were obtained from a third party data reporting service, and are based on secondary market trading of our debt. Valuations for debt issued by the Federal Financing Bank are based on U.S. Treasury rates as of SeptemberJune 30, 20172018 plus an applicable spread, which reflects our borrowing rate for
new loans of this type from the Federal Financing Bank. The rates on the CFC debt are fixed and the valuation is based on rate quotes provided by CFC. We use an interest rate quote sheet provided by CoBank for valuation of the CoBank debt, which reflects current rates for similar loans.
For cash, and cash equivalents, and receivables, the carrying amount approximates fair value because of the short-term maturity of those instruments. Restricted investments consist of funds on deposit with the Rural Utilities Service in the Cushion of Credit Account and the carrying amount of these investments approximates fair value.value because of the liquid nature of the deposits with the U.S. Treasury.
We are exposed to credit risk as a result of entering into these hedging arrangements. Credit risk is the potential loss resulting from a counterparty's nonperformance under an agreement. We have established policies and procedures to manage credit risk through counterparty analysis, exposure calculation and monitoring, exposure limits, collateralization and certain other contractual provisions.
It is possible that volatility in commodity prices could cause us to have credit risk exposures with one or more counterparties. If such counterparties fail to perform their obligations, we could suffer a financial loss. However, as of SeptemberJune 30, 20172018, all of the counterparties with transaction amounts outstanding under our hedging programs are rated investment grade by the major rating agencies or have provided a guaranty from one of their affiliates that is rated investment grade.
We have entered into International Swaps and Derivatives Association agreements with our natural gas hedge counterparties that mitigate credit exposure by creating contractual rights relating to creditworthiness, collateral, termination and netting (which, in certain cases, allows us to use the net value of affected transactions with the same counterparty in the event of default by the counterparty or early termination of the agreement).
Additionally, we have implemented procedures to monitor the creditworthiness of our counterparties and to evaluate nonperformance in valuing counterparty positions. We have contracted with a third party to assist in monitoring certain of our counterparties' credit standing and condition. Net liability positions are generally not adjusted as we use derivative transactions as hedges and have the ability and intent to perform under each of our contracts. In the instance of net asset positions, we consider general market conditions and the observable financial health and outlook of specific counterparties, forward looking data such as credit default swaps, when available, and historical default probabilities from credit rating agencies in evaluating the potential impact of nonperformance risk to derivative positions.
The contractual agreements contain provisions that could require us or the counterparty to post collateral or credit support. The amount of collateral or credit support that could be required is calculated as the difference between the aggregate fair value of the hedges and pre-established credit thresholds. The credit thresholds are contingent upon each party's credit ratings from the major credit rating agencies. The collateral and credit support requirements vary by contract and by counterparty.
Gas hedges. Under the natural gas swap arrangements, we pay the counterparty a fixed price for specified natural gas quantities and receive a payment for such quantities based on a market price index. These payment obligations are netted, such that if the market price index is lower than the
fixed price, we will make a net payment, and if the market price index is higher than the fixed price, we will receive a net payment.
At SeptemberJune 30, 20172018 and December 31, 2016,2017, the estimated fair value of our natural gas contracts was a net liability of approximately $807,000$11,382,000 and a net asset of $15,090,000,$6,328,000, respectively.
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, neither we nor any counterparties were required to post credit support or collateral under the natural gas swap agreements. If the credit-risk-related contingent features underlying these agreements were triggered on SeptemberJune 30, 20172018 due to our credit rating being downgraded below investment grade, we would have been required to post collateral or letters of credit of $2,788,000$11,382,000 with our counterparties.
The following table reflects the notional volume activity of our natural gas derivatives as of SeptemberJune 30, 20172018 that is expected to settle or mature each year:
| | | | | | | | |
Year | Natural Gas Swaps | Natural Gas Swaps | ||||||
| | | | | | | | |
2017 | 3.8 | |||||||
2018 | 24.6 | 15.4 | ||||||
2019 | 18.7 | 21.6 | ||||||
2020 | 15.9 | 18.4 | ||||||
2021 | 12.9 | 16.8 | ||||||
2022 | 5.8 | 10.7 | ||||||
2023 | 0.2 | |||||||
| | | | | | | | |
Total | 81.7 | 83.1 | ||||||
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Interest rate options. In fourth quarter of 2011, we purchased seventeen LIBOR swaptions at a cost of $100,000,000 with a total notional amount of approximately $2,200,000,000 to hedge the interest rates on a portion of the debt that we are incurring to finance the two additional nuclear units at Plant Vogtle. The last of these options, having a notional value of $80,169,000, expired without value at March 31, 2017.
We are deferring the premiums paid to purchase these LIBOR swaptions, related carrying and other incidental costs in accordance with our rate-making treatment. The deferral will continue and costs will be amortized and collected in rates over the life of the associated debt that we hedged with the swaptions.
The table below reflects the fair value of derivative instruments and their effect on our consolidated balance sheets at SeptemberJune 30, 20172018 and December 31, 2016.2017.
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Balance Sheet | Fair Value | Balance Sheet | Fair Value | |||||||||||||||
| | | | | | | | | | | | | | | | | | |
2017 | 2016 | 2018 | 2017 | |||||||||||||||
| (dollars in thousands) |
| (dollars in thousands) | |||||||||||||||
Not designated as hedges: | ||||||||||||||||||
Assets: | ||||||||||||||||||
Natural gas swaps | Other current assets | $ | 3,302 | $ | 13,833 | |||||||||||||
Natural gas swaps | Other deferred charges | $ | — | $ | 3,289 | Other current assets | $ | 1,228 | $ | 412 | ||||||||
Liabilities: |
|
| ||||||||||||||||
Natural gas swaps | Other current liabilities | $ | — | $ | 54 | Other current liabilities | $ | 747 | $ | 1,575 | ||||||||
Natural gas swaps | Other deferred credits | $ | 4,109 | $ | 1,977 | Other deferred credits | $ | 11,863 | $ | 5,165 | ||||||||
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The following table presents the gross realized gains and (losses) on derivative instruments recognized in margin for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016.2017.
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Statement of Revenues and Expenses Location | Three months ended September 30, | Nine months ended September 30, | Statement of | Three months | Six months | |||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||
Not Designated as hedges: | ||||||||||||||||||||||||||||||
Natural Gas Swaps | Fuel | $ | 778 | $ | 2,039 | $ | 3,514 | $ | 2,057 | Fuel | $ | 359 | $ | 1,897 | $ | 1,751 | $ | 2,736 | ||||||||||||
Natural Gas Swaps | Fuel | (678 | ) | (5,923 | ) | (1,495 | ) | (18,262 | ) | Fuel | (111 | ) | (73 | ) | (859 | ) | (817 | ) | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
$ | 100 | $ | (3,884 | ) | $ | 2,019 | $ | (16,205 | ) | |||||||||||||||||||||
Total | $ | 248 | $ | 1,824 | $ | 892 | $ | 1,919 | ||||||||||||||||||||||
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The following table presents the unrealized gains and (losses)losses on derivative instruments deferred on the balance sheet at SeptemberJune 30, 20172018 and December 31, 2016.2017.
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Balance Sheet | 2017 | 2016 | Balance Sheet | 2018 | 2017 | |||||||||||||
| | | | | | | | | | | | | | | | | | |
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||
Not designated as hedges: | ||||||||||||||||||
Natural gas swaps | Regulatory asset | $ | (2,788 | ) | $ | (62 | ) | Regulatory asset | $ | (11,382 | ) | $ | (6,328 | ) | ||||
Natural gas swaps | Regulatory liability | 1,981 | 15,152 | |||||||||||||||
Interest rate options | Regulatory asset | — | (5,788 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | | |
Total not designated as hedges | $ | (807 | ) | $ | 9,302 | |||||||||||||
Total | $ | (11,382 | ) | $ | (6,328 | ) | ||||||||||||
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The following tables summarize available-for-saledebt and equity securities as of SeptemberJune 30, 20172018 and December 31, 2016.2017.
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Gross Unrealized | Gross Unrealized | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||
September 30, 2017 | Cost | Gains | Losses | Fair Value | ||||||||||||||||||||||
June 30, 2018 | Cost | Gains | Losses | Fair Value | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity | $ | 251,021 | $ | 75,181 | $ | (4,386 | ) | $ | 321,816 | $ | 248,817 | $ | 96,340 | $ | (4,885 | ) | $ | 340,272 | ||||||||
Debt | 224,458 | 2,194 | (1,769 | ) | 224,883 | 253,860 | 694 | (5,087 | ) | 249,467 | ||||||||||||||||
Other | 6,604 | 1 | — | 6,605 | 8,645 | — | — | 8,645 | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | $ | 482,083 | $ | 77,376 | $ | (6,155 | ) | $ | 553,304 | $ | 511,322 | $ | 97,034 | $ | (9,972 | ) | $ | 598,384 | ||||||||
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Gross Unrealized | Gross Unrealized | |||||||||||||||||||||||||
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(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||
December 31, 2016 | Cost | Gains | Losses | Fair Value | ||||||||||||||||||||||
December 31, 2017 | Cost | Gains | Losses | Fair Value | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||
Equity | $ | 237,317 | $ | 51,054 | $ | (5,041 | ) | $ | 283,330 | $ | 246,549 | $ | 91,954 | $ | (4,064 | ) | $ | 334,439 | ||||||||
Debt | 201,492 | 1,167 | (3,423 | ) | 199,236 | 240,878 | 1,814 | (2,262 | ) | 240,430 | ||||||||||||||||
Other | 3,339 | — | (2 | ) | 3,337 | 10,807 | 1 | — | 10,808 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||
Total | $ | 442,148 | $ | 52,221 | $ | (8,466 | ) | $ | 485,903 | $ | 498,234 | $ | 93,769 | $ | (6,326 | ) | $ | 585,677 | ||||||||
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We adopted the new revenue standard effective January 1, 2018, using the full retrospective approach reflecting the application of the standard inmethod, which required us to restate each prior reporting period with the option to elect certain practical expedients, or (ii) a modified retrospective approach with the cumulative effect of initially adopting the standard recognized at the date ofpresented. The adoption (which includes additional footnote disclosures). Early adoption was not permitted.
In August 2015, the FASB issued an update to Topic 606 deferring the effective date by one year. The standard is effective for annual reporting periods beginning after December 15, 2017 and interim periods therein. The standard also permits early adoption of the standard, but not before the original effective date of December 15, 2016.
While we expect that the majority of our revenues will be included in the scope of Topic 606, we have not fully completed our evaluation of the new revenue standard. Our evaluation process includes, but isstandard did not limited to, identifying contractschange the nature, amounts or timing of revenues we recognize within the scope of Topic 606, reviewing and documenting our accounting for these contracts and assessing the applicability of the variable consideration guidance. A large majority of our revenues is derived from substantially identical wholesale power contracts that we have with each of our 38 members. We expect the pattern of revenue recognition pursuant to our wholesale power contracts will remain unchanged on an annual basis under the new revenue standard. However, we continue to evaluate the effects, if any, of Topic 606 on our interim period revenues as it relates to budget adjustments, which have historically been made during the fourth quarter but may also be made during the year that affect our annual revenue requirement and therefore amounts billed to our members. We also continue to evaluate other revenue streams and the related contracts, as well as monitor issues specific to the power and utilities industry. While we have not fully completed our evaluation of thereporting period. The most significant impact of the new revenue standard to us relates to the potential recognition guidance,of refund liabilities related to capacity revenues in interim reporting periods. Refund liabilities, if any, are included in accounts payable on our consolidated balance sheets. For the six months ended June 30, 2018 and 2017, we currently anticipate utilizing a full retrospective transition uponrecognized refund liabilities totaling $5,650,000 and $5,750,000, respectively. Adoption of the adoption of Topic 606 as of January 1, 2018.new revenue standard had no impact to cash from or used in operating, financing, or investing on our consolidated cash flows statements.
In January 2016, the FASB issued "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new standard is effective for us for annual reporting periods beginning after December 15, 2017, and interim periods therein. Certain provisions within this update can be adopted early. Certain provisions within this update should be applied by means of a cumulative effect adjustment to the balance sheet of the fiscal year of adoption and certain provisions should be applied prospectively. We do not expectOne of the provisions in this standard requires our equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of our subsidiary, to be measured at fair value with changes in fair value recognized in net income. None of the other provisions in this standard will have any impact to our consolidated financial statements. Effective December 31, 2017, we adopted regulatory accounting treatment with respect to unrealized gains and/or losses on our equity investments. Upon applying regulatory accounting treatment, unrealized gains on our equity investments will be recorded as a regulatory liability and, conversely, unrealized losses on our equity investments will be recorded as a regulatory asset, at the end of each reporting period. As of December 31, 2017, we recorded $618,000 of unrealized losses on our equity investments as a regulatory asset. On January 1, 2018, we adopted the amendments within this standard. The adoption of this standard todid not have a materialany impact onto our consolidated financial statements.statements due to our regulatory accounting treatment for unrealized gains and/or losses on our equity investments.
In February 2016, the FASB issued "Leases (Topic 842)." The new leases standard requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a
right-of-use (ROU) asset and a corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the ROU asset and for operating leases the lessee would recognize a straight-line total lease expense. Quantitative and qualitative disclosures will also be required surrounding significant judgments made by management. The new lease standard does not substantially change lessor accounting. The new leases standard is effective for us on a modified retrospective approach for annual reporting periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted.
In January 2018, the FASB issued "Land Easement Practical Expedient for Transition to Topic 842" that allows an entity to not evaluate existing and expired land easements that were not previously accounted for as leases upon adoption of Topic 842. Any land easements entered into prospectively or modified after adoption should be evaluated to assess whether they meet the definition of a lease.
In July 2018, the FASB issued "Codification Improvements to Topic 842, Leases" to clarify certain narrow aspects of the guidance in Topic 842. The effective date and transition requirements in this standard are the same as the requirements in Topic 842. We are currently evaluatingassessing the future impactpotential impacts of the amendments in this standard in context of the overall adoption of the new accounting guidance for leases. In addition, we continue to monitor both the FASB's ongoing standard-setting activities that may result in the issuance of additional targeted improvements, as well as potential industry implementation issues.
In July 2018, the FASB issued "Leases (Topic 842): Targeted Improvements" to add a new transition method to the new leases standard that allows entities to not apply the new guidance in the comparative periods entities present in their financial statements in the year of adoption. The FASB also provided a practical expedient that gives lessors an option to combine non-lease and associated lease components when certain criteria are met and requires a lessor to account for the combined component in accordance with the new revenue standard if the associated non-lease components are the predominant component.
While we have not fully completed our evaluation of the new leases standard, we expect that the adoption of such standard will not have a material impact on our consolidated financial statements. Our lease portfolio consists of our 60% undivided interest in Scherer Unit No. 2, railcars leases for the transportation of coal and various nominal leases.
We account for the Scherer Unit No. 2 leases as capital leases and the railcars leases as operating leases under the current lease accounting model. At this time, we believe that the key changes in adopting the new leases standard will be how we account for our operating leases that are currently off-balance sheet. Our evaluation process includes, but is not limited to, reviewing all forms of leases, performing a completeness assessment over the lease population and analyzing the practical expedients available to us.
We will adopt the new leases standard on January 1, 2019.
In June 2016, the FASB issued "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this update replace the current incurred loss impairment methodology with a methodology that reflects expected credit losses. The new standard is effective for us prospectively for annual reporting periods beginning after December 15, 2019, and interim periods therein. The amendments in this update can be adopted earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the future impact of this standard on our consolidated financial statements.
In August 2016,March 2018, the FASB issued "Statement of Cash Flows"Income Taxes (Topic 230)740): Classification of Certain Cash Receipts and Cash Payments.Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118." The amendments in this standard provide specific guidance on eight cash flow classification issues relating to how certain cash receipts and cash payments are presented and classified in the statement of cash flows, thereby reducing the current and potential future diversity in practice. The new standard is effective for us for annual reporting periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In November 2016, the FASB issued "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)." The amendments in this standard require the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the statement of cash flows. The new standard is effective for us on a retrospective basis for annual reporting periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted, including adoption in an interim period. Our restricted cash balances are nominal and accordingly we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
Form 10-K. Amounts reclassifiedrecognized the provisional tax impacts related to net marginthe re-measurement of our deferred income tax assets and liabilities as of the year ended December 31, 2017. As of June 30, 2018, we have not made any additional measurement-period adjustments related to these items. Such adjustments may be necessary in future periods due to, among other things, the significant complexity of the Tax Cuts and Job Act signed into law in December 2017, and anticipated additional regulatory guidance that may be issued by the Internal Revenue Service, changes in analysis, interpretations and assumptions we made and actions we may take as a result of the Act. We are continuing to gather information to assess the application of the Act and expect to complete our analysis with the filing of our 2017 income tax returns during the fourth quarter of 2018.
Pursuant to our contracts, we primarily provide two services, capacity and energy. Capacity and energy revenues are recognized by us upon transfer of control of promised services to our members and non-members in an amount that reflects the consideration we expect to receive in exchange for those services. Capacity and energy are distinct and we account for them as separate performance obligations. The obligations to provide capacity and energy are satisfied over time as the customer simultaneously receives and consumes the benefit of these services. Both performance obligations are provided directly by us and not through a third party.
Each of our members is obligated to pay us for capacity and energy we furnish under its wholesale power contract in accordance with rates we establish. We review our rates periodically but are required to do so at least once every year. Revenues from our members are derived through a cost-plus rate structure which is set forth as a formula in the table belowrate schedule to the wholesale power contracts between us and each of our members. The formulary rate provides for the pass-through of our (i) fixed costs (net of any income from other sources) plus a targeted margin as capacity revenues and (ii) variable costs as energy revenues from our members. Power purchase and sale agreements between us and non-members obligates each non-member to pay us for capacity, if any, and energy furnished in accordance with the prices agreed to by us in the applicable agreement. Margins produced from non-member sales are reflectedincluded in "Other income"the rate schedule formula and reduce revenue requirements from our members.
The standard selling price at which we provide capacity services to our members is determined by our formulary rate on an annual basis. As a result, the consideration we receive for providing capacity services is determined annually. Over the course of a year, our unaudited Consolidated Statementsmember capacity revenues are relatively stable. Capacity revenues may fluctuate year to year largely due to the recovery of Revenuesfixed operation and Expenses.
Our effective taxmaintenance costs. The components of the formulary rate associated with capacity costs include the annual budget of fixed costs, a targeted margin and income from other sources. Capacity revenues, therefore, vary to the extent these components vary. Fixed costs include items such as depreciation, interest, fixed operation and maintenance expenses, administrative and general expenses. Fixed costs also include certain costs, such as major maintenance costs, which will be recognized as expense in future periods. Recognition of revenues associated with these future expenses is zero; therefore, all amounts belowdeferred pursuant to Accounting Standards Codification (ASC) 980, Regulated Operations. The regulatory liabilities are presented net of tax.amortized to revenue in
| | | | |
Accumulated Other Comprehensive (Deficit) Margin | ||||
Three Months Ended | ||||
| | | | |
(dollars in thousands) | ||||
Available-for-sale | ||||
| | | | |
Balance at June 30, 2016 | $ | 435 | ||
Unrealized gain | 50 | |||
(Gain) reclassified to net margin | (69 | ) | ||
| | | | |
Balance at September 30, 2016 | $ | 416 | ||
| | | | |
Three Months Ended September 30, 2017 | ||||
| | | | |
(dollars in thousands) | ||||
Available-for-sale | ||||
| | | | |
Balance at June 30, 2017 | $ | (408 | ) | |
Unrealized gain | 33 | |||
Loss reclassified to net margin | 23 | |||
| | | | |
Balance at September 30, 2017 | $ | (352 | ) | |
| | | | |
| | | | |
accordance with the associated revenue deferral plan. For information regarding regulatory accounting, see Note I.
Capacity revenues are recognized by us for standing ready to deliver electricity to our customers. Our capacity revenues are based on the associated costs we expect to recover in a given year and are recognized and billed to our members in equal monthly installments over the course of the year regardless of whether our generation and purchased power resources are dispatched to produce electricity. Non-member capacity revenues, if any, are typically billed and recognized in equal monthly installments over the term of the contract.
We have a power bill prepayment program pursuant to which our members may prepay future capacity costs and receive a discount. As this program provides us with significant financing, we adjust our capacity revenues by the amount of the discount, which is based on our avoided cost of borrowing. The discounts are credited against the participating members' power bills on a monthly basis. The prepayments are credited against the participating members' power bills in the month(s) agreed upon in advance. Application of the prepayments extends through January 2023, with the majority of the balance scheduled to be applied by the end of 2019.
We satisfy our performance obligations to deliver energy as energy is delivered to the applicable meter points. We determine the standard selling price for energy we deliver to our members based upon the variable costs incurred to generate or purchase that energy. Fuel expense is the primary variable cost. Energy revenue recognized equals the actual variable expenses incurred in any given accounting period. Our member energy revenues fluctuate from period to period based on several factors, including fuel costs, weather and other seasonal factors, load requirements in our members' service territories, variable operating costs, the availability of electric generation resources, our decisions of whether to dispatch our owned or purchased resources or member-owned resources over which we have dispatch rights, and by members' decisions of whether to purchase a portion of their hourly energy requirements from our resources or from other suppliers. We do not provide all of our members' energy requirements. The standard selling price for our energy revenues from non-members is the price mutually agreed upon.
We are required under our first mortgage indenture to produce a margins for interest ratio of at least 1.10 for each fiscal year. For 2018, our board has approved a targeted margins for interest ratio of 1.14 and for 2017, we achieved a margins for interest ratio of 1.14. Historically, our board of directors has approved adjustments to revenue requirements by year end such that revenue in excess of that required to meet the targeted margins for interest ratio is refunded to the members. Given that our capacity revenues are based upon budgeted expenditures and generally recognized and billed to our members in equal monthly installments over the course of the year, we may recognize capacity revenues that exceed our actual fixed costs and targeted margins in any given interim reporting period. At each interim reporting period we assess our projected revenue requirements through year end to determine if a refund to our members of excess consideration is likely. If required, we reduce our capacity revenues and recognize a refund liability to our members. Refund liabilities, if any, are included in accounts payable on our consolidated balance sheets. As of June 30, 2018 and 2017, we recognized refund liabilities totaling $5,650,000 and $5,750,000, respectively. Based on our current agreements with non-members, we do not refund any consideration received from non-members.
Sales to members were as follows:
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Nine Months Ended September 30, 2016 | |||||||||||||||||
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Available-for-sale | (dollars in thousands) | (dollars in thousands) | |||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2015 | $ | 58 | |||||||||||||||
Unrealized gain | 486 | ||||||||||||||||
(Gain) reclassified to net margin | (128 | ) | |||||||||||||||
Capacity revenues | $ | 231,571 | $ | 229,946 | $ | 472,052 | $ | 467,377 | |||||||||
Energy revenues | 134,240 | 131,377 | 267,160 | 248,090 | |||||||||||||
| | | | | | | | | | | | | | | | | |
Balance at September 30, 2016 | $ | 416 | |||||||||||||||
Total | $ | 365,811 | $ | 361,323 | $ | 739,212 | $ | 715,467 | |||||||||
| | | | | | | | | | | | | | | | | |
Sales to non-members during the three and six months ended June 30, 2018 and June 30, 2017 were insignificant.
We bill our members for capacity and energy on a monthly basis. Based on the payment terms of the wholesale power contracts and power purchase and sale agreements, we receive payment during the following month in which capacity and energy revenues are billed. Estimated energy charges are billed to members based on the amount of energy supplied during the month and are adjusted when actual costs are available, generally the following month. As payment is due to us within one month of billing, we do not provide significant financing to our customers.
The opening and closing balances of receivables from contracts with our customers are as follows:
Nine Months Ended September 30, 2017 | |||||||||||||||||
| | | | | | | | | | | | | | | | | |
(dollars in thousands) | (dollars in thousands) | ||||||||||||||||
Available-for-sale | |||||||||||||||||
| | | | ||||||||||||||
Balance at December 31, 2016 | $ | (370 | ) | ||||||||||||||
Unrealized loss | (57 | ) | |||||||||||||||
Loss reclassified to net margin | 75 | ||||||||||||||||
| | | | ||||||||||||||
Balance at September 30, 2017 | $ | (352 | ) | ||||||||||||||
| | | | | | | | | | | | | | | | | |
June 30, 2018 | June 30, 2017 | December 31, 2017 | December 31, 2016 | ||||||||||||||
| | | | | | | | | | | | | | | | | |
Receivables from members | $ | 144,865 | $ | 132,703 | $ | 126,211 | $ | 136,552 | |||||||||
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Electric capacity and energy revenues are recognized by us without any obligation for returns, warranties or taxes collected. As our members are jointly and severally obligated to pay all expenses associated with owning and operating our power supply business and we perform an on-going assessment of the credit worthiness of non-members, we have not recorded an allowance for doubtful accounts associated with our receivables from members or non-members.
For the three and six months ended June 30, 2018 and June 30, 2017, no impairment losses were recognized on any receivables that arose from contracts with our customers.
We do not anticipate that the liabilities, if any, for any current proceedings against us will have a material effect on our financial condition or results of operations. However, at this time, the ultimate outcome of any pending or potential litigation cannot be determined.
a. Patronage Capital Litigation
On June 9, 2017, the Georgia Court of Appeals upheld the Superior Court of DeKalb County's decision to dismiss on all counts both of the cases described under Note 12—Patronage Capital Litigation in our 2016 Form 10-K. The plaintiffs did not further appeal these dismissals to the Georgia Supreme Court and the appeal period has since expired, ending this litigation.
b. Environmental Matters
As is typical for electric utilities, we are subject to various federal, state and local environmental laws which represent significant future risks and uncertainties. Air emissions, water discharges and water usage are extensively controlled, closely monitored and periodically reported. Handling and disposal requirements govern the manner of transportation, storage and disposal of various types of waste. We aremay also become subject to climate change regulations that impose restrictions on emissions of greenhouse gases, including carbon dioxide, for certain new and modified facilities.dioxide.
In general, these and other types of environmental requirements have become increasingly stringent. Such requirements may substantially increase the cost of electric service, by requiring modifications in the design or operation of existing facilities or the purchase of emission allowances. Failure to comply with these requirements could result in civil and criminal penalties and could include the complete shutdown of individual generating units not in compliance. Certain of our debt instruments require us to comply in all material respects with laws, rules, regulations
and orders imposed by applicable governmental authorities, which include current and future
environmental laws or regulations. Should we fail to be in compliance with these requirements, it would constitute a default under those debt instruments. We believe that we are in compliance with those environmental regulations currently applicable to our business and operations. Although it is our intent to comply with current and future regulations, we cannot provide assurance that we will always be in compliance.
At this time, the ultimate impact of any potential new and more stringent environmental regulations described above is uncertain and could have an effect on our financial condition, results of operations and cash flows as a result of future additional capital expenditures and increased operations and maintenance costs.
Additionally, litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as air quality and water standards, has increased generally throughout the United States. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief, personal injury and property damage allegedly caused by coal combustion residue, greenhouse gas and other emissions have become more frequent.
The following regulatory assets and liabilities are reflected on the unaudited consolidated balance sheets as of SeptemberJune 30, 20172018 and December 31, 2016.2017.
| | | | | | | | | | | | | | |
2017 | 2016 | 2018 | 2017 | |||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||
| | | | | | | | | | | | | | |
Regulatory Assets: | ||||||||||||||
Premium and loss on reacquired debt(a) | $ | 51,546 | $ | 55,084 | $ | 49,647 | $ | 52,989 | ||||||
Amortization on capital leases(b) | 33,454 | 32,274 | 34,382 | 33,846 | ||||||||||
Outage costs(c) | 42,060 | 39,986 | 34,715 | 40,525 | ||||||||||
Interest rate swap termination fees(d) | 2,231 | 3,570 | ||||||||||||
Asset retirement obligations—Ashpond and other(l) | 59,540 | 33,747 | ||||||||||||
Depreciation expense(e) | 43,023 | 44,091 | ||||||||||||
Deferred charges related to Vogtle Units No. 3 and No. 4 training costs(f) | 47,322 | 43,444 | ||||||||||||
Interest rate options cost(g) | 110,915 | 107,394 | ||||||||||||
Deferral of effects on net margin—Smith Energy Facility(h) | 167,941 | 172,399 | ||||||||||||
Other regulatory assets(m) | 14,205 | 13,398 | ||||||||||||
Asset retirement obligations—Ashpond and other(k) | 85,449 | 68,289 | ||||||||||||
Depreciation expense(d) | 41,955 | 42,667 | ||||||||||||
Deferred charges related to Vogtle Units No. 3 and No. 4 training costs(e) | 50,188 | 48,702 | ||||||||||||
Interest rate options cost(f) | 114,515 | 112,102 | ||||||||||||
Deferral of effects on net margin—Smith Energy Facility(g) | 163,482 | 166,454 | ||||||||||||
Other regulatory assets(l) | 23,278 | 19,510 | ||||||||||||
| | | | | | | | | | | | | | |
Total Regulatory Assets | $ | 572,237 | $ | 545,387 | $ | 597,611 | $ | 585,084 | ||||||
Regulatory Liabilities: | ||||||||||||||
Accumulated retirement costs for other obligations(i) | $ | 14,235 | $ | 9,829 | ||||||||||
Deferral of effects on net margin—Hawk Road Energy Facility(h) | 19,705 | 20,163 | ||||||||||||
Major maintenance reserve(j) | 43,269 | 28,379 | ||||||||||||
Accumulated retirement costs for other obligations(h) | $ | 16,112 | $ | 12,813 | ||||||||||
Deferral of effects on net margin—Hawk Road Energy Facility(g) | 19,247 | 19,553 | ||||||||||||
Major maintenance reserve(i) | 50,084 | 47,087 | ||||||||||||
Amortization on capital leases(b) | 20,780 | 23,084 | 18,605 | 20,055 | ||||||||||
Deferred debt service adder(k) | 93,296 | 86,082 | ||||||||||||
Asset retirement obligations(l) | 40,199 | 11,766 | ||||||||||||
Other regulatory liabilities(m) | 4,961 | 18,445 | ||||||||||||
Deferred debt service adder(j) | 100,447 | 95,695 | ||||||||||||
Asset retirement obligations—Nuclear(k) | 40,334 | 53,571 | ||||||||||||
Other regulatory liabilities(l) | 8,854 | 2,875 | ||||||||||||
| | | | | | | | | | | | | | |
Total Regulatory Liabilities | $ | 236,445 | $ | 197,748 | $ | 253,683 | $ | 251,649 | ||||||
| | | | | | | | | | | | | | |
Net Regulatory Assets | $ | 335,792 | $ | 347,639 | $ | 343,928 | $ | 333,435 | ||||||
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Pursuant to the loan guarantee program established under Title XVII of the Energy Policy Act of 2005 (the Title XVII Loan Guarantee Program), we and the U.S. Department of Energy, acting by and through the Secretary of Energy, entered into a Loan Guarantee Agreement on February 20, 2014 (as amended, the Loan Guarantee Agreement) pursuant to which the Department of Energy agreed to guarantee our obligations under the Note Purchase Agreement dated as of February 20, 2014 (the Note Purchase Agreement), among us, the Federal Financing Bank and the Department of Energy and two future advance promissory notes, each dated February 20, 2014, made by us to the Federal Financing Bank (the FFB Notes and together with the Note Purchase Agreement, the FFB Credit Facility Documents). The FFB Credit Facility Documents provide for a multi-advance term loan facility (the Facility), under which we may make long-term loan borrowings through the Federal Financing Bank.
Proceeds of advances madereceived under the Facility will beare used to reimburse us for a portion of certain costs of construction relating to Vogtle Units No. 3 and No. 4 that are eligible for financing under the Title XVII Loan Guarantee Program. Aggregate borrowings under the Facility may not exceed the lesser of (i) 70% of eligible project costs or (ii) $3,057,069,461, of which $335,471,604 is designated for capitalized interest.
Under the Loan Guarantee Agreement, we are obligated to reimburse the Department of Energy in the event the Department of Energy is required to make any payments to the Federal Financing Bank under the guarantee. Our payment obligations to the Federal Financing Bank under the FFB Notes and reimbursement obligations to the Department of Energy under its guarantee, but not our covenants to the Department of Energy under the Loan Guarantee Agreement, are secured equally and ratably with all of our other notes and obligations issued under our first mortgage indenture. The final maturity date for each advance is February 20, 2044. Interest is payable quarterly in arrears and principal payments will begin on February 20, 2020. Under both FFB Notes, the interest rates during the applicable interest rate periods will equal the current average yield on U.S. Treasuries of comparable maturity at the beginning of the interest rate period, plus a spread equal to 0.375%.
At SeptemberJune 30, 2017,2018, aggregate Department of Energy-guaranteed borrowings totaled $1,720,997,000,$1,764,658,000, including capitalized interest.
On July 27, 2017, we and the Department of Energy entered into Amendment No. 3Pursuant to the Loan Guarantee Agreement. Under the amended terms of the Loan Guarantee Agreement, no further advances under the Facility will beare permitted unless and until such time as Georgia Power, on behalfpending satisfaction of the Co-owners (as defined in Note L), has (i) completed comprehensive schedule, cost-to-complete, and cancellation cost assessments (the Cost Assessments) and made a determination to continue construction of Vogtle Units No. 3 and No. 4; (ii) delivered to the Department of Energycertain conditions, including an updated project schedule, construction budget, and other information; (iii) entered into one or more agreements with a construction contractor or contractors that will be primarily responsible for construction of Vogtle Units No. 3 and No. 4 and such agreements have been approved by the Department of Energy (together with the Services Agreement (as defined in Note L) and certain
related intellectual property licenses (the IP Licenses), the Replacement EPC Arrangements); and (iv) entered into a further amendment to the Loan Guarantee Agreement with the Department of Energyand a Co-owner vote to reflect the Replacement EPC Arrangements.
continue construction (discussed in Note L). When thethese conditions in the preceding paragraph are satisfied, advances may be requested under the Facility on a quarterly basis through December 31, 2020. The timing of satisfaction of these conditions is currently uncertain but likely to be satisfied in 2018.
In addition to the conditions described above, future advances are subject to satisfaction of customary conditions, including certification of compliance with the requirements of the Title XVII Loan Guarantee Program, accuracy of project-related representations and warranties, delivery of updated project-related information, our continued ownership of our interest in Vogtle Units No. 3 and No. 4 free and clear of any liens except those permitted under the Loan Guarantee
Agreement, evidence of compliance with the prevailing wage requirements of the Davis-Bacon Act, as amended, and certification from the Department of Energy's consulting engineer that proceeds of the advance are used to reimburse eligible project costs.
Under the Loan Guarantee Agreement, we are subject to customary borrower affirmative and negative covenants and events of default. In addition, we are subject to project-related reporting requirements and other project-specific covenants and events of default.
Under the Loan Guarantee Agreement, upon the occurrence of an "Alternate Amortization Event," the Department of Energy may require us to prepay the outstanding principal amount of all guaranteed borrowings over a period of five years, with level principal amortization. These events include (i) cessation of the construction of Vogtle Units No. 3 and No. 4 for twelve consecutive months, (ii) termination of the Services Agreement as defined in Note L or rejection of the Services Agreement in bankruptcy if Georgia Power does not maintain access to certain related intellectual property rights, under the IP Licenses, (iii) a decision by us not to continue construction of Vogtle Units No. 3 and No. 4, (iv) Georgia Power, on behalf of the Co-owners, fails to complete the Cost Assessments or enter into the Replacement EPC Arrangements by December 31, 2017, (v) loss of or failure to receive necessary regulatory approvals under certain circumstances, (vi)(v) loss of access to intellectual property rights necessary to construct or operate Vogtle Units No. 3 and No. 4 under certain circumstances, (vii)(vi) our failure to fund our share of operation and maintenance expenses for Vogtle Units No. 3 and No. 4 for twelve consecutive months, (viii)(vii) change of control of Oglethorpe and (ix)(viii) certain events of loss or condemnation.
Under certain circumstances we may be required to make prepayments in connection with our receipt of payments under the settlement agreement with Toshiba regarding the Toshiba Guarantee or from the EPC Contractor under the EPC Agreement (as defined in Note L). In addition, ifIf we receive proceeds from an event of condemnation relating to Vogtle Units No. 3 and No. 4, such proceeds must be applied to immediately prepay outstanding borrowings under the Facility.
We may also voluntarily prepay outstanding borrowings under the Facility. Under the FFB Credit Facility Documents, any prepayment will be subject to a make-whole premium or discount, as applicable.
On September 28, 2017, the Department of Energy issued a conditional commitment to us for up to approximately $1,620,000,000 in$1,619,679,706 of additional guaranteed loansfunding under the Loan Guarantee Agreement. This conditional commitment expires on September 30, 2018, subject to any extension approved by the Department of Energy. We do not anticipate closing on the new loan before September 30, 2018 and anticipate seeking an extension from the Department of Energy. Final approval and issuance of thesethis additional loan guaranteesguarantee by the Department of Energy cannot be assured and areis subject to negotiation of definitive agreements, completion of due diligence by the Department of Energy, receipt of any necessary regulatory approvals and satisfaction of other conditions.conditions, including a vote of the Co-owners to continue construction.
For the nine-monthsix-month period ended SeptemberJune 30, 20172018, we received advances on Rural Utilities Service-guaranteed Federal Financing Bank loans totaling $4,517,000$236,200,000 for long-term financing of general and
environmental improvements at existing plants.These advances are secured under our first mortgage indenture.plants.
On October 30, 2017,In July 2018, we received an additional $17,582,000$33,021,000 in advances on Rural Utilities Service-guaranteed Federal Financing Bank loans for long-term financing of general and environmental improvements at existing plants.
These advances are secured under our first mortgage indenture.
On October 12,December 28, 2017, the Development Authority of Burke County (Georgia), the Development Authority of Heard County (Georgia) and the Development Authority of Monroe County (Georgia) issued, on our behalf, $122,620,000$399,785,000 (Series 2017C, D, E, F Burke) in aggregate principal amount of tax-exempt pollution control revenue bonds for the purpose of refinancingto refinance costs associated with certain of our air or water pollution control and sewage or solid waste disposal facilities. The bonds were directly purchased by a banktwo banks and the proceeds were used to repay outstanding commercial paper issued to redeem certain auction ratedefeased our
obligations under $399,785,000 of pollution control revenue bonds issued in 2008 that were callable on or after January 2017.1, 2018. Those 2008 bonds were fully redeemed on their call date. Each series of the 2017 bonds bearbore interest at an indexed variable rate until October 3, 2022,February 1, 2018 when we converted the initialbonds into fixed interest rate modes. We converted the (i) $200,000,000 Series 2017C and Series 2017D bonds to a fixed rate of 4.125% per annum to maturity with an optional call at par on February 1, 2028, (ii) $100,000,000 Series 2017E bonds to a fixed term rate of 3.25% per annum to the mandatory tender date.date of February 3, 2025 and (iii) $99,785,000 Series 2017F bonds to a fixed term rate of 3.00% per annum to the mandatory tender date of February 1, 2023. The pollution control revenueSeries 2017C, D, E, F bonds are scheduled to mature in 20402041 through 2045. Our payment obligations related to these bonds are secured under our first mortgage indenture.
In 2008, Georgia Power, acting for itself and as agent for the Co-owners, entered into an Engineering, Procurement and Construction Agreement (the EPC Agreement) with Westinghouse Electric Company LLC and Stone & Webster, Inc. (collectively, the EPC Contractor). Stone & Webster, which was subsequently acquired by Westinghouse and changed its name to WECTEC Global Project Services Inc. (WECTEC)(collectively, Westinghouse). Pursuant to the EPC Agreement, the EPC ContractorWestinghouse agreed to design, engineer, procure, construct and test two 1,100 megawatt nuclear units using the Westinghouse AP1000 technology and related facilities at Plant Vogtle.
Under the EPC Agreement, the Co-owners agreed to pay a purchase price subject to certain price escalationsUntil March 2017, construction on Units No. 3 and adjustments. The EPC Agreement also provided for liquidated damages upon the EPC Contractor's failure to fulfill the schedule and certain performance guarantees, each subject to an aggregate cap of 10% of the contract price, or approximately $920 million.
Toshiba Corporation guaranteed certain payment obligations of the EPC ContractorNo. 4 continued under the EPC Agreement (the Toshiba Guarantee), including any liability of the EPC Contractor for abandonment of work. In January 2016, Westinghouse delivered to the Co-owners $920��million of letters of credit from financial institutions (Westinghouse Letters of Credit) to secure a portion of the EPC Contractor's potential obligations under thesubstantially fixed price EPC Agreement. TheIn March 2017, Westinghouse Letters of Credit are subject to annual renewals through June 30, 2020, and require 60 days' written notice to Georgia Power, as agent of the Co-owners, in the event the Westinghouse Letters of Credit will not be renewed.
Under the terms of the EPC Agreement, the EPC Contractor did not have the right to terminate the EPC Agreement for convenience. In the event of an abandonment of work by the EPC
Contractor, the maximum liability of the EPC Contractor under the EPC Agreement was 40% of the contract price, or $3.68 billion, of which our proportionate share is approximately $1.1 billion.
On March 29, 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. To provide for a continuation of work at Vogtle Units No. 3 and No. 4,In connection with the bankruptcy filing, Georgia Power, acting for itself and as agent for the other Co-owners, entered into an Interim Assessment Agreement with the EPC ContractorWestinghouse and WECTEC Staffing Services LLC which the bankruptcy court approved on March 30, 2017. The Interim Assessment Agreement provided, among other items, that during the termto provide for a continuation of the Interim Assessment Agreement Georgia Power was obligated to pay, on behalf of the Co-owners, all costs accrued by the EPC Contractor for subcontractors and vendors for services performed or goods provided. The Interim Assessment Agreement, as amended, expired on July 27, 2017.
Subsequent to the EPC Contractor's bankruptcy filing, a number of subcontractors to the EPC Contractor, including Fluor Enterprises, Inc., a subsidiary of Fluor Corporation, alleged non-payment by the EPC Contractor for amounts owed for work performed onat Vogtle Units No. 3 and No. 4. Georgia Power, acting for itself and as agent forThe Interim Assessment Agreement expired in July 2017 upon the Co-owners, has taken, and continues to take, actions to remove liens filed by these subcontractors through the posting of surety bonds. Georgia Power estimates the aggregate liability, through September 30, 2017,effective date of the Co-owners for the removal of subcontractor liens and payment of other EPC Contractor pre-petition accounts payable to total approximately $386 million, of which our proportionate share totals approximately $115 million. As of September 30, 2017, $340 million of this aggregate liability had been paid or accrued by Georgia Power, on behalf of the Co-owners.Services Agreement.
On June 9, 2017, Georgia Power and the other Co-owners and Toshiba entered into a settlement agreement regarding the Toshiba Guarantee (the Guarantee Settlement Agreement). Pursuant to the Guarantee Settlement Agreement, Toshiba acknowledged the amount of its obligation under the Toshiba Guarantee is $3.68 billion (the Guarantee Obligations), of which our proportionate share is approximately $1.1 billion, and that the Guarantee Obligations exist regardless of whether Vogtle Units No. 3 and No. 4 are completed. The Guarantee Settlement Agreement also provides for a schedule of payments for the Guarantee Obligations that beganEffective in October 2017 and continues through January 2021. In the event Toshiba receives certain payments, including sale proceeds, from or related to Westinghouse (or its subsidiaries) or Toshiba Nuclear Energy Holdings (UK) Limited (or its subsidiaries), it will hold a portion of such payments in trust for the Co-owners and promptly pay them as offsets against any remaining Guarantee Obligations. Under the Guarantee Settlement Agreement, the Co-owners will forbear from exercising certain remedies, including drawing on the Westinghouse Letters of Credit, until June 30, 2020, unless certain events of nonpayment, insolvency, or other material breach of the Guarantee Settlement Agreement by Toshiba occur. If such an event occurs, the balance of the Guarantee Obligations will become immediately due and payable, and the Co-owners may exercise any and all rights and remedies, including drawing on the Westinghouse Letters of Credit without restriction. In addition, the Guarantee Settlement Agreement does not restrict the Co-owners from fully drawing on the Westinghouse Letters of Credit in the event they are not renewed or replaced prior to the expiration date. In October and November 2017, Georgia Power, on behalf of the Co-owners, received the first two installments of the Guarantee Obligations totaling $377.5 million from Toshiba, of which our proportionate share was $113.3 million. We are considering potential options with respect to our right to payments under the Guarantee Settlement Agreement and our claims against the EPC Contractor in the EPC Contractor's bankruptcy proceeding, including a potential sale of those payment rights and bankruptcy claims. Execution of any such transaction cannot be assured and would require certain consents from and cooperation by the Department of Energy.
On November 9, 2017, Toshiba released its financial results for the second quarter of fiscal year 2017, which reflected a negative shareholders' equity balance of approximately $5.5 billion as of
September 30, 2017. Toshiba also reiterated the existence of material events and conditions that raise substantial doubt about Toshiba's ability to continue as a going concern. As a result, substantial risk regarding the Co-owners' ability to fully collect the Guarantee Obligations continues to exist. An inability or other failure by Toshiba to perform its obligations under the Guarantee Settlement Agreement could have a further material impact on the net cost to the Co-owners of Vogtle Units No. 3 and No. 4, and, therefore, on our financial condition and results of operations as well.
Additionally, on June 9,July 2017, Georgia Power, acting for itself and as agent for the other Co-owners, and the EPC ContractorWestinghouse entered into a services agreement which was amended and restated on July 20, 2017 (the Services Agreement), for the EPC Contractorpursuant to transition construction management of Vogtle Units No. 3which Westinghouse is providing facility design and No. 4 to Southern Nuclearengineering services, procurement and to provide ongoing design, engineering,technical support and procurement services to Southern Nuclear. On July 20, 2017, the bankruptcy court approved the EPC Contractor's motion seeking authorization to (i) enter into the Services Agreement, (ii) assumestaff augmentation on a time and assign to the Co-owners certain project-related contracts, (iii) join the Co-owners as counterparties to certain assumed project-related contracts, and (iv) reject the EPC Agreement.materials cost basis. The Services Agreement became effective upon approval by the Department of Energy on July 27, 2017 and will continue until the start-up and testing of Vogtle Units No. 3 and No. 4 is complete and electricity is generated and sold from both units. The Services Agreement is terminable by the Co-owners upon 30 days' written notice.
On August 31, 2017, Georgia Power filed its 17th Vogtle Construction Monitoring report (VCM 17 Report) with the Georgia Public Service Commission. In the VCM 17 Report, Georgia Power recommended that construction on Vogtle Units No. 3 and No. 4 be continued with Southern Nuclear serving as project manager. The recommendation to continue construction is supported by all the Co-owners and is based on the results of a comprehensive schedule, cost-to-complete and cancellation assessment. The Georgia Public Service Commission will render a decision on these matters by February 6, 2018.
The revised project schedule Georgia Power submitted to the Georgia Public Service Commission for approval included commercial operation dates of November 2021 for Unit No. 3 and November 2022 for Unit No. 4. Based on comprehensive cost-to complete assessments and the revised commercial operation dates, our revised project budget is $7.0 billion, which includes capital costs, allowance for funds used during construction and a contingency amount. This budget assumes 100% recovery of our $1.1 billion share of the Guarantee Obligations from Toshiba. As of September 30, 2017, our total investment in the additional Vogtle units was approximately $3.9 billion without taking into account any amounts recoverable from Toshiba. Amounts recovered in connection with the Guarantee Settlement Agreement will be recorded as a reduction to the construction work in progress balance as payments are received.
Effective October 23, 2017, Georgia Power, acting for itself and as agent for the other Co-owners, entered into a construction completion agreement (the Bechtel Agreement) with Bechtel Power Corporation, wherebypursuant to which Bechtel will serveserves as the primary contractor for the remaining construction activities for Vogtle Units No. 3 and No. 4. Facility design and engineering remains the responsibility of Westinghouse under the Services Agreement.4 (the Bechtel Agreement). The Bechtel Agreement is a cost reimbursable plus fee arrangement, whereby Bechtel will beis reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets.
Each Co-owner is severally, (not jointly)and not jointly, liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement.
The Co-owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Co-owners will be required to pay amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain
circumstances, including, certain Co-owner suspensions of work, certain breaches of the Bechtel Agreement by the Co-owners, Co-owner insolvency and certain other events. Pursuant to the loan guarantee agreement between us and the Department of Energy, we are required to obtain the Department of Energy's approval of the Bechtel Agreement prior to obtaining any further advances under the loan guarantee agreement.
OnIn November 2, 2017, the Co-owners entered into an amendment to their joint ownership agreements for Vogtle Units No. 3 and No. 4 (as amended, the Joint Ownership Agreements) to provide for, among other conditions, additional Co-owner approval requirements. Pursuant to the Joint Ownership Agreements, the holders of at least 90% of the ownership interests in Vogtle Units No. 3 and No. 4 must vote to continue construction, or can vote to suspend construction, if certain adverse events occur, including: (i) the bankruptcy of Toshiba or, except in the case in which each of the Co-owners has assigned its rights under the Guarantee Settlement Agreement to a third party, a material breach by Toshiba of the Guarantee Settlement Agreement;Corporation; (ii) termination or rejection in bankruptcy of certain agreements, including the Services Agreement or the Bechtel Agreement; (iii) the Georgia Public Service Commission or Georgia Power determines that any of Georgia Power's costs relating to the construction of Vogtle Units No. 3 and No. 4 will not be recovered in retail rates because such costs are deemed unreasonable or imprudent;rates; or (iv) an increase in the construction budget contained in theGeorgia Power's seventeenth VCMVogtle construction monitoring (VCM) report of more than $1 billion$1,000,000,000 or extension of the project schedule contained in the seventeenth VCM report of more than one year. In addition, pursuant to the Joint Ownership Agreements, the required approval of holders of ownership interests in Vogtle Units No. 3 and No. 4 is at least (i) 90% for a change of the primary construction contractor and (ii) 67% for material amendments to the Services Agreement or agreements with Southern Nuclear or the primary construction contractor, including the Bechtel Agreement.
The effectivenessOn December 21, 2017, the Georgia Public Service Commission took a series of the amendments to the Joint Ownership Agreementsactions related to the Plant Alvin W.construction of Vogtle Additional Units Ownership Participation Agreement, datedNo. 3 and No. 4 and issued its related order on January 11, 2018. Among other actions, the Public Service Commission (i) accepted Georgia Power's recommendation to continue construction of Vogtle Units No. 3 and No. 4, with Southern Nuclear Operating Company, Inc. serving as construction manager and Bechtel as primary contractor and (ii) approved the revised schedule placing Unit No. 3 in service in November 2021 and Unit No. 4 in service in November 2022. In its January 11, 2018 order, the Public Service Commission stated if certain conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Public Service Commission reserved the right to reconsider the decision to continue construction. Parties have filed two petitions with the Fulton County Superior Court appealing the Georgia Public Service Commission's January 11, 2018 order. Georgia Power has stated that it believes these appeals have no merit; however, an adverse outcome in either appeal could have a material impact on our financial condition and results of April 21, 2006, as amended, is subjectoperations.
Georgia Power has advised us that it recently became aware that the estimated future Vogtle project costs were projected to exceed the corresponding budgeted amounts. Upon discovery of these variances, the Co-owners requested Southern Nuclear perform a full cost analysis and reforecast of the cost to complete the project and engaged a third party to independently assess this analysis, forecast, and existing project controls for identifying budget variances. The capital costs estimated to complete construction are expected to increase by approximately $1.5 billion (our 30% share estimated at approximately $450 million). The increases are primarily due to
changed assumptions related to the conditionfinalization of contract scopes and management responsibilities for Bechtel and over 60 subcontractors, craft labor incentives, as well as the related levels of project management, oversight and support, including field supervision and engineering support, required to complete the project. We, and the other Co-owners, are evaluating these increased capital costs along with a project-level contingency in a preliminary amount of approximately $800 million (our 30% share estimated at $240 million). We are also evaluating whether an additional Oglethorpe contingency is warranted as is consistent with our conservative budgeting practices. Further, improvements to the project control environment have been implemented and additional improvements will continue to be evaluated.
We are currently in the process of evaluating the estimated increases to the project budget. The impact of these additional project costs on our budget will be substantially mitigated by approximately $500 million of contingency included in our existing budget. We are in the process of preparing a revised budget that we obtain the approvalwould include capital costs, allowance for funds used during construction, our allocation of the Rural Utilities Serviceproject-level contingency as required underwell as a potential, separate Oglethorpe contingency. If construction on the project continues, we anticipate that our loan contract withproject budget may increase from $7.0 billion to a range of $7.25 billion to $7.5 billion. A revised project budget will affect the Rural Utilities Service.
Intiming and amount of the eventprojected capital expenditures related to the Vogtle project is cancelled, ourpreviously disclosed, although the timing of such expenditures remains uncertain.
Georgia Power has stated that it does not intend to seek rate recovery for its proportionate share of the Co-owners' cancellationadditional capital costs are estimatedin its nineteenth VCM report to be approximately $230 million.filed with the Georgia Public Service Commission. As a result of Georgia Power's decision not to seek rate recovery of its allocation of these costs and the increased construction budget, the holders of at least 90% of the ownership interests in Vogtle Units No. 3 and No. 4 must vote to continue construction. The Co-owners are expected to conduct these votes in the third quarter of 2018, and each of Georgia Power, Oglethorpe and MEAG will have to affirmatively vote to continue construction. If the Co-owners vote to move forward, they will also approve a revised project is cancelled,budget.
As of June 30, 2018, our total investment in the additional Vogtle units was approximately $3,396,731,000. In the event that fewer than 90% of the Co-owners determine to continue construction, we and the other Co-owners will assess options for the Vogtle project. If the investment were to be written off, we would seek regulatory accounting treatment to amortize ourthe investment in the Vogtle project over a long-term period, which would requirerequires the approval of our board of directors, and we would submit the regulatory accounting treatment requestdetails to the Rural Utilities Service for its approval.
The scheduled in-service dates of November 2021 and November 2022 for Vogtle Units No. 3 and No. 4, respectively, are not expected to change in connection with these budget revisions. However, any extension of the project schedule is currently estimated to result in additional base capital costs of approximately $30 million per month based on our ownership interests and allowance for funds used during construction of approximately $12.5 million per month per unit.
Subsequent to Westinghouse's bankruptcy filing, a number of subcontractors to Westinghouse alleged non-payment by Westinghouse for amounts owed for work performed on Vogtle Units No. 3 and No. 4. Georgia Power, acting for itself and as agent for the Co-owners, has taken actions to remove liens on the site filed by these subcontractors through the posting of surety bonds. Related to such liens, certain subcontractors have filed, and additional subcontractors may file, actions against Westinghouse and the Co-owners to preserve their payment rights with respect to such claims. All amounts associated with the removal of subcontractor liens and payment of other Westinghouse pre-petition accounts payable have been paid or accrued as of June 30, 2018.
We have a $3,057,069,461 federal loan guarantee from the Department of Energy, under which we have borrowed $1,764,658,000 as of June 30, 2018. Pursuant to the terms of the loan guarantee
agreement, no further advances are permitted pending satisfaction of certain conditions. On September 28, 2017, the Department of Energy issued a conditional commitment to us for up to $1,619,679,706 of additional guaranteed funding under the loan guarantee agreement. This conditional commitment expires on September 30, 2018, subject to any extension approved by the Department of Energy. We do not anticipate closing on the new loan before September 30, 2018 and anticipate seeking an extension from the Department of Energy. Final approval and issuance of the additional loan guarantee by the Department of Energy cannot be assured and is subject to an amendment and restatement of the loan guarantee agreement and satisfaction of other conditions, including the Co-owners vote to continue construction. For additional information regarding conditions for future advances, potential repayment over a five-year period, covenants and events of default under the loan guarantee agreement with the Department of Energy, see Note K.
We have also financed an additional $1,387,000,000 of the capital costs of the Vogtle units through capital market debt issuances. We anticipate financing any project costs not financed with Department of Energy in the capital markets. The timing and availability of funds under the Department of Energy loan guarantee will guide our decisions as to the timing of any capital markets offerings.
As construction continues, risks remain that construction-related challenges, including management of contractors, subcontractors, and vendors, labor productivity, availability, and/or cost escalation; procurement, fabrication, delivery, assembly and/or installation, including any required engineering changes, of plant systems, structures and components, or other issues could further impact the projected schedule and cost. Monthly construction production targets required to maintain the current project schedule increase significantly later in 2018 through 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be deployed. Aspects of the Westinghouse AP1000 design are based on new technologies that are just beginning initial operation in the global nuclear industry at this scale.
There have been technical and procedural challenges to the construction and licensing of Vogtle Units No. 3 and No. 4 at the federal and state level and additional challenges may arise as construction proceeds.arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the Nuclear Regulatory Commission that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the Nuclear Regulatory Commission. Various design and other licensing-based compliance matters, including the timely resolution of Inspections, Tests, Analyses,inspections, tests, analyses, and Acceptance Criteriaacceptance criteria and the related approvals by the Nuclear Regulatory Commission, may arise, if construction proceeds, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be further delays in the project schedule that could result in increased costs.
As construction continues,costs to the risk remains that challenges with management of contractors, subcontractors and vendors, labor productivity, fabrication, delivery, assembly, and installation of plant systems, structures, and components, or other issues could arise and may further impact project schedule and cost.Co-owners.
The ultimate outcome of these matters cannot be determined at this time.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
We are a Georgia electric membership corporation (an EMC) incorporated in 1974 and headquartered in metropolitan Atlanta. We are owned by our 38 retail electric distribution cooperative members. Our members are consumer-owned distribution cooperatives providing retail electric service in Georgia on a not-for-profit basis. Our principal business is providing wholesale electric power to our members, which we provide primarily from our generation assets and, to a lesser extent, from power purchased from other suppliers. As with cooperatives generally, we operate on a not-for-profit basis.
Results of Operations
For the |
Net Margin
Our net margins for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20172018 were $20.8$17.3 million and $63.7$44.7 million compared to $18.6$15.7 million and $62.5$37.1 million for the same periods of 2016.2017. Through SeptemberJune 30, 2017,2018, we collectedrecognized approximately 123%86% of our targeted net margin of $51.7$51.6 million for the year ending December 31, 2017.2018. These collections are typical as our capacity revenues are generally recorded evenly throughout the year and our management budgets conservatively. In September 2017, our board of directors approved a budget adjustment that reduced revenue requirements by $5.0 million in order to provide our members with a measure of relief for costs they incurred as a result of significant system damage from Hurricane Irma.year. We anticipate our board of directors will approve an additionala budget adjustment by theyear end of the year so that margins will achieve, but not exceed, our 2017the 2018 targeted margins for interest ratio of 1.14. Pursuant to our adoption of Revenue from Contracts with Customers (Topic 606), we assessed the annual revenue requirement needed to meet the targeted margins for interest ratio and recorded a refund liability of $5.7 million during the second quarter of 2018. In addition, the 2017 revenues for the three-month and six-month periods have been adjusted to reflect a $5.8 million refund liability as of June 30, 2017. For additional information regarding our net margin requirements and policy, see "Item 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Summary of Cooperative Operations—Margins" in our 20162017 Form 10-K.
Operating Revenues
Our operating revenues fluctuate from period to period based on several factors, including fuel costs, weather and other seasonal factors, load requirements in our members' service territories, operating costs, availability of electric generation resources, our decisions of whether to dispatch our owned, purchased or member-owned resources over which we have dispatch rights, and our members' decisions of whether to purchase a portion of their hourly energy requirements from our resources or from other suppliers.
Sales to Members. We generate revenues principally from the sale of electric capacity and energy to our members. Capacity revenues are the revenues we receive for electric service whether or not our generation and purchased power resources are dispatched to produce electricity, andelectricity. These revenues are designed to recover the fixed costs associated with our business, including fixed production expenses, depreciation and amortization expenses and interest charges, plus a targeted margin. Energy revenues are earned by sellingthe sales of electricity to our members, which involves generatinggenerated or purchasing electricitypurchased for our members. Energy revenues recover the variable costs of our business, including fuel, purchased energy and variable operation and maintenance expense.
The components of member revenues for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20172018 and 20162017 were as follows:
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Three Months Ended September 30, | 2017 vs. 2016 % Change | Nine Months Ended September 30, | 2017 vs. 2016 % Change | Three Months Ended June 30, | 2018 vs. 2017 % Change | Six Months Ended June 30, | 2018 vs. 2017 % Change | |||||||||||||||||||||||||||||||
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2017 | 2016 |
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Capacity revenues | $ | 217,918 | $ | 228,011 | (4.4%) | $ | 666,226 | $ | 681,384 | (2.2%) | $ | 231,571 | $ | 229,946 | 0.7% | $ | 472,052 | $ | 467,377 | 1.0% | ||||||||||||||||||
Energy revenues | 167,840 | 202,872 | (17.3%) | 440,749 | 476,750 | (7.6%) | 134,240 | 131,377 | 2.2% | 267,160 | 248,090 | 7.7% | ||||||||||||||||||||||||||
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Total | $ | 385,758 | $ | 430,883 | (10.5%) | $ | 1,106,975 | $ | 1,158,134 | (4.4%) | $ | 365,811 | $ | 361,323 | 1.2% | $ | 739,212 | $ | 715,467 | 3.3% | ||||||||||||||||||
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MWh Sales to members | 6,962,978 | 7,956,412 | (12.5%) | 18,213,379 | 19,886,944 | (8.4%) | 5,926,738 | 5,925,578 | 0.0% | 11,027,064 | 11,250,401 | (2.0%) | ||||||||||||||||||||||||||
Cents/kWh | 5.54 | 5.42 | 2.3% | 6.08 | 5.82 | 4.4% | 6.17 | 6.10 | 1.2% | 6.70 | 6.36 | 5.4% | ||||||||||||||||||||||||||
Member energy requirements supplied | 62 | % | 64 | % | (3.9%) | 63 | % | 64 | % | (1.3%) | 62 | % | 64 | % | (3.1%) | 58 | % | 64 | % | (9.1%) | ||||||||||||||||||
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Capacity revenues for the three-month and nine-month periods ended September 30, 2017 reflect a $5.0 million reduction in revenue requirements for the September 2017 budget adjustment approved by the board of directors discussed above.
Energy revenues from members decreasedincreased for the three-monththree and nine-month periodssix-month period ended SeptemberJune 30, 20172018 compared to the same periods in 2016June 30, 2017 primarily due to a decrease inthe recovery of fuel costs which was largely a result of a decrease in generation for member sales in 2017.costs. For a discussion of fuel costs, which are the primary components of energy revenues, see "—Operating Expenses."
Operating Expenses
The following table summarizes our fuel costs and megawatt-hour generation by generating source.
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Cost | Generation | Cents per kWh | Cost | Generation | Cents per kWh | |||||||||||||||||||||||||||||||||||||||||||||||||||
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Three Months Ended | 2017 vs. | Three Months Ended | 2017 vs. | Three Months Ended | 2017 vs. | Three Months Ended | 2018 vs. | Three Months Ended | 2018 vs. | Three Months Ended | 2018 vs. | |||||||||||||||||||||||||||||||||||||||||||||
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Fuel Source | 2017 | 2016 | 2016 % Change | 2017 | 2016 | 2016 % Change | 2017 | 2016 | 2016 % Change | 2018 | 2017 | 2017 % Change | 2018 | 2017 | 2017 % Change | 2018 | 2017 | 2017 % Change | ||||||||||||||||||||||||||||||||||||||
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Coal | $ | 30,924 | $ | 49,478 | (37.5%) | 1,157,960 | 1,704,203 | (32.1%) | 2.67 | 2.90 | (8.0%) | $ | 31,361 | $ | 31,313 | 0.2% | 1,048,979 | 1,094,066 | (4.1%) | 2.99 | 2.86 | 4.5% | ||||||||||||||||||||||||||||||||||
Nuclear | 23,249 | 21,950 | 5.9% | 2,585,668 | 2,691,129 | (3.9%) | 0.90 | 0.82 | 10.2% | 21,660 | 22,747 | (4.8%) | 2,597,891 | 2,536,188 | 2.4% | 0.83 | 0.90 | (7.0%) | ||||||||||||||||||||||||||||||||||||||
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Combined Cycle | 67,058 | 73,223 | (8.4%) | 2,888,612 | 2,976,562 | (3.0%) | 2.32 | 2.46 | (5.6%) | 57,012 | 52,433 | 8.7% | 2,168,551 | 2,177,166 | (0.4%) | 2.63 | 2.41 | 9.2% | ||||||||||||||||||||||||||||||||||||||
Combustion Turbine | 22,536 | 33,865 | (33.5%) | 544,294 | 846,699 | (35.7%) | 4.14 | 4.00 | 3.5% | 12,111 | 12,231 | (1.0%) | 298,698 | 294,414 | 1.5% | 4.05 | 4.15 | (2.4%) | ||||||||||||||||||||||||||||||||||||||
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$ | 143,767 | $ | 178,516 | (19.5%) | 7,176,534 | 8,218,593 | (12.7%) | 2.00 | 2.17 | (7.8%) | $ | 122,144 | $ | 118,724 | 2.9% | 6,114,119 | 6,101,834 | 0.2% | 2.00 | 1.95 | 2.7% | |||||||||||||||||||||||||||||||||||
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Nine Months Ended | 2017 vs. | Nine Months Ended | 2017 vs. | Nine Months Ended | 2017 vs. | Six Months Ended | 2018 vs. | Six Months Ended | 2018 vs. | Six Months Ended | 2018 vs. | |||||||||||||||||||||||||||||||||||||||||||||
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Fuel Source | 2017 | 2016 | 2016 % Change | 2017 | 2016 | 2016 % Change | 2017 | 2016 | 2016 % Change | 2018 | 2017 | 2017 % Change | 2018 | 2017 | 2017 % Change | 2018 | 2017 | 2017 % Change | ||||||||||||||||||||||||||||||||||||||
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Coal | $ | 81,867 | $ | 114,961 | (28.8%) | 2,913,161 | 3,945,663 | (26.2%) | 2.81 | 2.91 | (3.5%) | $ | 49,561 | $ | 50,943 | (2.7%) | 1,639,031 | 1,755,201 | (6.6%) | 3.02 | 2.90 | 4.2% | ||||||||||||||||||||||||||||||||||
Nuclear | 66,538 | 61,786 | 7.7% | 7,399,354 | 7,605,266 | (2.7%) | 0.90 | 0.81 | 10.7% | 42,483 | 43,289 | (1.9%) | 5,082,334 | 4,813,686 | 5.6% | 0.84 | 0.90 | (7.0%) | ||||||||||||||||||||||||||||||||||||||
Gas: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Combined Cycle | 181,254 | 165,272 | 9.7% | 7,546,775 | 7,338,407 | 2.8% | 2.40 | 2.25 | 6.6% | 129,331 | 114,160 | 13.3% | 4,289,697 | 4,658,163 | (7.9%) | 3.01 | 2.45 | 23.0% | ||||||||||||||||||||||||||||||||||||||
Combustion Turbine | 36,746 | 62,037 | (40.8%) | 881,514 | 1,644,184 | (46.4%) | 4.17 | 3.77 | 10.5% | 21,216 | 14,246 | 48.9% | 354,484 | 337,220 | 5.1% | 5.99 | 4.22 | 41.7% | ||||||||||||||||||||||||||||||||||||||
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$ | 366,405 | $ | 404,056 | (9.3%) | 18,740,804 | 20,533,520 | (8.7%) | 1.96 | 1.97 | (0.6%) | $ | 242,591 | $ | 222,638 | 9.0% | 11,365,546 | 11,564,270 | (1.7%) | 2.13 | 1.93 | 10.9% | |||||||||||||||||||||||||||||||||||
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Total fuel costs decreasedincreased for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20172018 compared to the same periods of 20162017 primarily due to a decrease in generation as a result of moderate temperatures. In addition, generation for the nine-month period ended September 30, 2017 compared to the same period of 2016 was somewhat affected by increased natural gas transportation costs associated with a new pipeline, which was placed into service in August 2017. The six-month period increase was also impacted by higher natural gas prices, particularly during January 2018 when extreme cold weather affected the supply and planned maintenance outages during 2017.transportation of natural gas. In addition to the natural gas consumed being more expensive, the higher cost contributed to a shift in generation to oil and coal-fired units. An unplanned outage at one of our coal-fired units also contributed to the shift in generation to relatively more expensive units at the beginning of 2018.
Financial Condition
Balance Sheet Analysis as of |
Assets
Cash used for property additions for the nine-monthsix-month period ended SeptemberJune 30, 20172018 totaled $737.1$561.0 million. Of this amount, approximately $518.5$451.6 million was associated with construction expenditures for Vogtle Units No. 3 and No. 4, $47.7$48.7 million related to environmental control projects at our coal-fired plants and $33.7 million was for nuclear fuel purchases andpurchases. The remainder was for expenditures forrelated to normal additions and replacements to our existing generation facilities.
Restricted investments consist of funds on deposit with the Rural Utilities Service in the Cushion of Credit Account. The funds, including interest earned thereon, can only be applied to debt service on our Rural Utilities Service-guaranteed Federal Financing Bank notes. Decisions regarding when to apply the funds are guided by the interest rate environment and our anticipated liquidity needs.
Equity and Liabilities
Long-term debt increased $98.5decreased $147.9 million during the nine-monthsix-month period ended SeptemberJune 30, 20172018 primarily due toas a result of the classification of $122.6amounts with maturities due within one year to current, offset by $236.2 million of commercial paper as long-term debt. In October 2017, $122.6 million of tax-exempt bonds was issued to refund the commercial paperadvances on a long-term basis. For information regarding the refunding of commercial paper and the issuance of tax-exempt bonds, see Note K.existing Rural Utilities Service loans.
Long-term debt and capital leases due within one year decreased $162.0increased $337.6 million during the nine-month period ended September 30, 2017. The decrease was primarily due to the redemption of $122.6$350 million of variable rate pollution control revenuefirst mortgage bonds throughmaturing in March 2019 that were classified as current debt during the issuance of commercial paper in January 2017. In addition, the decrease was due to certain quarterly Federal Financing Bank note payments we made, when due, in early January 2017.period.
Short-term borrowings, which primarily provide interim financing for Vogtle Units No. 3 and No. 4 construction costs, increased $529.8$247.4 million during the nine-monthsix-month period ended SeptemberJune 30, 2017.
Accounts payable increased $87.4 million for the nine-month period ended September 30, 2017 primarily as a result of a $104.7 million increase in the payable to Georgia Power Company for operation and maintenance costs for our co-owned plants and capital costs associated with Vogtle Units No. 3 and No. 4. Offsetting the increase was $17.2 million in credits applied to our members' bills in the first quarter of 2017, for a board approved reduction in 2016 revenue requirements as a result of margins in excess of our 2016 target.
The current portion of member power bill prepayments decreased $133.2 million for the nine-month period ended September 30, 2017 due to the application of credits against the power bills of members that participate in the power bill prepayment program. The long-term portion of member power bill prepayments increased $154.1 million for the nine-month period ended September 30, 2017 due to member contributions to the program made during the third quarter of 2017. For additional information on the member power bill prepayment program, see Note J of Notes to Unaudited Consolidated Financial Statements.2018.
Capital Requirements and Liquidity and Sources of Capital |
Vogtle Units No. 3 and No. 4
We, Georgia Power, the Municipal Electric Authority of Georgia, and the City of Dalton, Georgia, acting by and through its Board of Water, Light and Sinking Fund Commissioners, doing business as Dalton Utilities (collectively, the Co-owners) are parties to an Ownership Participation Agreement that, along with other agreements, governs our participation in two additional nuclear units at Plant Vogtle, Units No. 3 and No. 4. The Co-owners appointed Georgia Power to act as agent under this agreement. Our binding ownership interest and proportionate share of the cost to construct these units is 30%. Pursuant to this agreement, Georgia Power has designated Southern Nuclear Operating Company, Inc. as its agent for licensing, engineering, procurement, contract management, construction and pre-operation services.
In 2008, Georgia Power, acting for itself and as agent for the Co-owners, entered into an Engineering, Procurement and Construction Agreement (the EPC Agreement) with Westinghouse Electric Company LLC and Stone & Webster, Inc. (collectively, the EPC Contractor). Stone & Webster, which was subsequently acquired by Westinghouse and changed its name to WECTEC Global Project Services Inc. (WECTEC)(collectively, Westinghouse). Pursuant to the EPC Agreement, the EPC ContractorWestinghouse agreed to design, engineer, procure, construct and test two 1,100 megawatt nuclear units using the Westinghouse AP1000 technology and related facilities at Plant Vogtle.
Under the EPC Agreement, the Co-owners agreed to pay a purchase price subject to certain price escalationsUntil March 2017, construction on Units No. 3 and adjustments. The EPC Agreement also provided for liquidated damages upon the EPC Contractor's failure to fulfill the schedule and certain performance guarantees, each subject to an aggregate cap of 10% of the contract price, or approximately $920 million.
Toshiba Corporation guaranteed certain payment obligations of the EPC ContractorNo. 4 continued under the EPC Agreement (the Toshiba Guarantee), including any liability of the EPC Contractor for abandonment of work. In January 2016, Westinghouse delivered to the Co-owners $920 million of letters of credit from financial institutions (Westinghouse Letters of Credit) to secure a portion of the EPC Contractor's potential obligations under thesubstantially fixed price EPC Agreement. TheIn March 2017, Westinghouse Letters of Credit are subject to annual renewals through June 30, 2020, and require 60 days' written notice to Georgia Power, as agent of the Co-owners, in the event the Westinghouse Letters of Credit will not be renewed.
Under the terms of the EPC Agreement, the EPC Contractor did not have the right to terminate the EPC Agreement for convenience. In the event of an abandonment of work by the EPC Contractor, the maximum liability of the EPC Contractor under the EPC Agreement was 40% of the contract price, or $3.68 billion, of which our proportionate share is approximately $1.1 billion.
On March 29, 2017, the EPC Contractor filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. To provide for a continuation of work at Vogtle Units No. 3 and No. 4,In connection with the bankruptcy filing, Georgia Power, acting for itself and as agent for the other Co-owners, entered into an Interim Assessment Agreement with the EPC ContractorWestinghouse and WECTEC Staffing Services LLC which the bankruptcy court approved on March 30, 2017. The Interim Assessment Agreement provided, among other items, that during the termto provide for a continuation of the Interim Assessment Agreement Georgia Power was obligated to pay, on behalf of the Co-owners, all costs accrued by the EPC Contractor for subcontractors and vendors for services performed or goods provided. The Interim Assessment Agreement, as amended, expired on July 27, 2017.
Subsequent to the EPC Contractor's bankruptcy filing, a number of subcontractors to the EPC Contractor, including Fluor Enterprises, Inc., a subsidiary of Fluor Corporation, alleged non-payment by the EPC Contractor for amounts owed for work performed onat Vogtle Units No. 3 and No. 4. Georgia Power, acting for itself and as agent forThe Interim Assessment Agreement expired in July 2017 upon the Co-owners, has taken, and continues to take, actions to remove liens filed by these subcontractors through the posting of surety bonds. Georgia Power estimates the aggregate liability, through September 30, 2017,effective date of the Co-owners for the removal of subcontractor liens and payment of other EPC Contractor pre-petition accounts payable to total approximately $386 million, of which our proportionate share totals approximately $115 million. As of September 30, 2017, $340 million of this aggregate liability had been paid or accrued by Georgia Power, on behalf of the Co-owners.Services Agreement.
On June 9, 2017, Georgia Power and the other Co-owners and Toshiba entered into a settlement agreement regarding the Toshiba Guarantee (the Guarantee Settlement Agreement). Pursuant to the Guarantee Settlement Agreement, Toshiba acknowledged the amount of its obligation under the Toshiba Guarantee is $3.68 billion (the Guarantee Obligations), of which our proportionate share is approximately $1.1 billion, and that the Guarantee Obligations exist regardless of whether Vogtle Units No. 3 and No. 4 are completed. The Guarantee Settlement Agreement also provides for a schedule of payments for the Guarantee Obligations that beganEffective in October 2017 and continues through January 2021. In the event Toshiba receives certain payments, including sale proceeds, from or related to Westinghouse (or its subsidiaries) or Toshiba Nuclear Energy Holdings (UK) Limited (or its subsidiaries), it will hold a portion of such payments in trust for the Co-owners and promptly pay them as offsets against any remaining Guarantee Obligations. Under the Guarantee Settlement Agreement, the Co-owners will forbear from exercising certain remedies, including drawing on the Westinghouse Letters of Credit, until June 30, 2020, unless certain events of nonpayment, insolvency, or other material breach of the Guarantee Settlement Agreement by Toshiba occur. If such an event occurs, the
balance of the Guarantee Obligations will become immediately due and payable, and the Co-owners may exercise any and all rights and remedies, including drawing on the Westinghouse Letters of Credit without restriction. In addition, the Guarantee Settlement Agreement does not restrict the Co-owners from fully drawing on the Westinghouse Letters of Credit in the event they are not renewed or replaced prior to the expiration date. In October and November 2017, Georgia Power, on behalf of the Co-owners, received the first two installments of the Guarantee Obligations totaling $377.5 million from Toshiba, of which our proportionate share was $113.3 million. We are considering potential options with respect to our right to payments under the Guarantee Settlement Agreement and our claims against the EPC Contractor in the EPC Contractor's bankruptcy proceeding, including a potential sale of those payment rights and bankruptcy claims. Execution of any such transaction cannot be assured and would require certain consents from and cooperation by the Department of Energy.
On November 9, 2017, Toshiba released its financial results for the second quarter of the fiscal year 2017, which reflected a negative shareholders' equity balance of approximately $5.5 billion as of September 30, 2017. Toshiba also reiterated the existence of material events and conditions that raise substantial doubt about Toshiba's ability to continue as a going concern. As a result, substantial risk regarding the Co-owners' ability to fully collect the Guarantee Obligations continues to exist. An inability or other failure by Toshiba to perform its obligations under the Guarantee Settlement Agreement could have a further material impact on the net cost to the Co-owners of Vogtle Units No. 3 and No. 4, and, therefore, on our financial condition and results of operations as well.
Additionally, on June 9,July 2017, Georgia Power, acting for itself and as agent for the other Co-owners, and the EPC ContractorWestinghouse entered into a services agreement which was amended and restated on July 20, 2017 (the Services Agreement), for the EPC Contractorpursuant to transition construction management of Vogtle Units No. 3which Westinghouse is providing facility design and No. 4 to Southern Nuclearengineering services, procurement and to provide ongoing design, engineering,technical support and procurement services to Southern Nuclear. On July 20, 2017, the bankruptcy court approved the EPC Contractor's motion seeking authorization to (i) enter into the Services Agreement, (ii) assumestaff augmentation on a time and assign to the Co-owners certain project-related contracts, (iii) join the Co-owners as counterparties to certain assumed project-related contracts, and (iv) reject the EPC Agreement.materials cost basis. The Services Agreement became effective upon approval by the Department of Energy on July 27, 2017 and will continue until the start-up and testing of Vogtle Units No. 3 and No. 4 is complete and electricity is generated and sold from both units. The Services Agreement is terminable by the Co-owners upon 30 days' written notice.
On August 31, 2017, Georgia Power filed its 17th Vogtle Construction Monitoring report (VCM 17 Report) with the Georgia Public Service Commission. In the VCM 17 Report, Georgia Power recommended that construction on Vogtle Units No. 3 and No. 4 be continued with Southern Nuclear serving as project manager. The recommendation to continue construction is supported by all the Co-owners and is based on the results of a comprehensive schedule, cost-to-complete and cancellation assessment. The Georgia Public Service Commission is expected to render a decision on these matters by February 6, 2018.
The revised project schedule Georgia Power submitted to the Georgia Public Service Commission for approval included commercial operation dates of November 2021 for Unit No. 3 and November 2022 for Unit No. 4. Based on comprehensive cost-to complete assessments and the revised commercial operation dates, our revised project budget is $7.0 billion, which includes capital costs, allowance for funds used during construction and a contingency amount. This budget assumes 100% recovery of our $1.1 billion share of the Guarantee Obligations from Toshiba. As of September 30, 2017, our total investment in the additional Vogtle units was approximately $3.9 billion without taking into account any amounts recoverable from Toshiba. Amounts recovered in connection with the Guarantee Settlement Agreement will be recorded as a reduction to the construction work in progress balance as payments are received.
Based on the revised project schedule and budget, the following table provides an updated estimate of our forecasted capital expenditures related to Vogtle Units No. 3 and No. 4 for 2017 through 2019 (dollars in millions).
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Future Generation | $ | 645 | $ | 677 | $ | 504 | $ | 1,826 | |||||
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In addition to the amounts reflected in the table above, we have budgeted approximately $1.9 billion to complete construction of Vogtle Units No. 3 and No. 4 beyond the years shown in the table. These projected capital expenditures assume that Toshiba fully performs its obligations under the Guarantee Settlement Agreement and the failure of Toshiba to perform those obligations could have a material impact on our costs for Vogtle Units No. 3 and No. 4. For additional information regarding our capital expenditures, see "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Capital Requirements—Capital Expenditures" in our 2016 Form 10-K.
Effective October 23, 2017, Georgia Power, acting for itself and as agent for the other Co-owners, entered into a construction completion agreement (the Bechtel Agreement) with Bechtel Power Corporation, wherebypursuant to which Bechtel will serveserves as the primary contractor for the remaining construction activities for Vogtle Units No. 3 and No. 4. Facility design and engineering remains the responsibility of Westinghouse under the Services Agreement.4 (the Bechtel Agreement). The Bechtel Agreement is a cost reimbursable plus fee arrangement, whereby Bechtel will beis reimbursed for actual costs plus a base fee and an at-risk fee, which is subject to adjustment based on Bechtel's performance against cost and schedule targets. Each Co-owner is severally, (not jointly)and not jointly, liable for its proportionate share, based on its ownership interest, of all amounts owed to Bechtel under the Bechtel Agreement. The Co-owners may terminate the Bechtel Agreement at any time for their convenience, provided that the Co-owners will be required to pay amounts related to work performed prior to the termination (including the applicable portion of the base fee), certain termination-related costs and, at certain stages of the work, the applicable portion of the at-risk fee. Bechtel may terminate the Bechtel Agreement under certain circumstances, including, certain Co-owner suspensions of work, certain breaches of the Bechtel Agreement by the Co-owners, Co-owner insolvency and certain other events. Pursuant to the loan guarantee agreement between us and the Department of Energy, we are required to obtain the Department of Energy's approval of the Bechtel Agreement prior to obtaining any further advances under the loan guarantee agreement.
OnIn November 2, 2017, the Co-owners entered into an amendment to their joint ownership agreements for Vogtle Units No. 3 and No. 4 (as amended, the Joint Ownership Agreements) to provide for, among other conditions, additional Co-owner approval requirements. Pursuant to the Joint Ownership Agreements, the holders of at least 90% of the ownership interests in Vogtle Units No. 3 and No. 4 must vote to continue construction, or can vote to suspend construction, if certain adverse events occur, including: (i) the bankruptcy of Toshiba or, except in the case in which each of the Co-owners has assigned its rights under the Guarantee Settlement Agreement to a third party, a material breach by Toshiba of the Guarantee Settlement Agreement;Corporation; (ii) termination or rejection in bankruptcy of certain agreements, including the Services Agreement or the Bechtel Agreement; (iii) the Georgia Public Service Commission or Georgia Power determines that any of Georgia Power's costs relating to the construction of Vogtle Units No. 3 and No. 4 will not be recovered in retail rates because such costs are deemed unreasonable or imprudent;rates; or (iv) an increase in the construction budget contained in theGeorgia Power's seventeenth VCMVogtle construction monitoring (VCM) report of more than $1 billion or extension of the project schedule contained in the seventeenth VCM report of more than one year. In addition, pursuant to the Joint Ownership Agreements, the required approval of holders of ownership interests in Vogtle Units No. 3 and No. 4 is at least (i) 90% for a change of the primary construction contractor and (ii) 67% for material amendments to the Services Agreement or agreements with Southern Nuclear or the primary construction contractor, including the Bechtel Agreement.
On December 21, 2017, the Georgia Public Service Commission took a series of actions related to the construction of Vogtle Units No. 3 and No. 4 and issued its related order on January 11, 2018. Among other actions, the Public Service Commission (i) accepted Georgia Power's recommendation to continue construction of Vogtle Units No. 3 and No. 4, with Southern Nuclear Operating Company, Inc. serving as construction manager and Bechtel as primary contractor and (ii) approved the revised schedule placing Unit No. 3 in service in November 2021 and Unit No. 4 in service in November 2022. In its January 11, 2018 order, the Public Service Commission stated if certain conditions change and assumptions upon which Georgia Power's seventeenth VCM report are based do not materialize, the Public Service Commission reserved the right to reconsider the decision to continue construction. Parties have filed two petitions with the Fulton County Superior Court appealing the Georgia Public Service Commission's January 11, 2018 order. Georgia Power has stated that it believes these appeals have no merit; however, an adverse outcome in either appeal could have a material impact on our financial condition and results of operations.
Georgia Power has advised us that it recently became aware that the estimated future Vogtle project costs were projected to exceed the corresponding budgeted amounts. Upon discovery of these variances, the Co-owners requested Southern Nuclear perform a full cost analysis and reforecast of the cost to complete the project and engaged a third party to independently assess this analysis, forecast,
and existing project controls for identifying budget variances. The effectiveness of the amendmentscapital costs estimated to the Joint Ownership Agreementscomplete construction are expected to increase by approximately $1.5 billion (our 30% share estimated at approximately $450 million). The increases are primarily due to changed assumptions related to the Plant Alvin W. Vogtle Additional Units Ownership Participation Agreement, datedfinalization of contract scopes and management responsibilities for Bechtel and over 60 subcontractors, craft labor incentives, as well as the related levels of April 21, 2006,project management, oversight and support, including field supervision and engineering support, required to complete the project. We, and the other Co-owners, are evaluating these increased capital costs along with a project-level contingency in a preliminary amount of approximately $800 million (our 30% share estimated at $240 million). We are also evaluating whether an additional Oglethorpe contingency is warranted as amended, is subjectconsistent with our conservative budgeting practices. Further, improvements to the conditionproject control environment have been implemented and additional improvements will continue to be evaluated.
We are currently in the process of evaluating the estimated increases to the project budget. The impact of these additional project costs on our budget will be substantially mitigated by approximately $500 million of contingency included in our existing budget. We are in the process of preparing a revised budget that we obtain the approvalwould include capital costs, allowance for funds used during construction, our allocation of the Rural Utilities Serviceproject-level contingency as required underwell as a potential, separate Oglethorpe contingency. If construction on the project continues, we anticipate that our loan contract withproject budget may increase from $7.0 billion to a range of $7.25 to $7.5 billion. A revised project budget will affect the Rural Utilities Service.
Intiming and amount of the eventprojected capital expenditures related to the Vogtle project is cancelled,disclosed in our Form 10-K, although the timing of such expenditures remains uncertain.
Georgia Power has stated that it does not intend to seek rate recovery for its proportionate share of the Co-owners' cancellationadditional capital costs are estimatedin its nineteenth VCM report to be approximately $230 million.filed with the Georgia Public Service Commission. As a result of Georgia Power's decision not to seek rate recovery of its allocation of these costs and the increased construction budget, the holders of at least 90% of the ownership interests in Vogtle Units No. 3 and No. 4 must vote to continue construction. The Co-owners are expected to conduct these votes in the third quarter of 2018, and each of Georgia Power, Oglethorpe and MEAG will have to affirmatively vote to continue construction. If the Co-owners vote to move forward, they will also approve a revised project is cancelled,budget.
As of June 30, 2018, our total investment in the additional Vogtle units was approximately $3.4 billion. In the event that fewer than 90% of the Co-owners determine to continue construction, we and the other Co-owners will assess options for the Vogtle project. If the investment were to be written off, we would seek regulatory accounting treatment to amortize ourthe investment in the Vogtle project over a long-term period, which would requirerequires the approval of our board of directors, and we would submit the regulatory accounting treatment requestdetails to the Rural Utilities Service for its approval.
The scheduled in-service dates of November 2021 and November 2022 for Vogtle Units No. 3 and No. 4, respectively, are not expected to change in connection with these budget revisions. However, any extension of the project schedule is currently estimated to result in additional base capital costs of approximately $30 million per month based on our ownership interests and allowance for funds used during construction of approximately $12.5 million per month per unit.
Subsequent to Westinghouse's bankruptcy filing, a number of subcontractors to Westinghouse alleged non-payment by Westinghouse for amounts owed for work performed on Vogtle Units No. 3 and No. 4. Georgia Power, acting for itself and as agent for the Co-owners, has taken actions to remove liens on the site filed by these subcontractors through the posting of surety bonds. Related to such liens, certain subcontractors have filed, and additional subcontractors may file, actions against Westinghouse and the Co-owners to preserve their payment rights with respect to such claims. All amounts associated with the removal of subcontractor liens and payment of other Westinghouse pre-petition accounts payable have been paid or accrued as of June 30, 2018.
We have a $3.06$3.1 billion federal loan guarantee from the Department of Energy, under which we have advanced $1.72borrowed $1.8 billion as of SeptemberJune 30, 2017.2018. Pursuant to the terms of the Loan Guarantee Agreement,loan guarantee agreement, no further advances are permitted pending satisfaction of certain conditions, including approval of the Bechtel Agreement and an amendment to the Loan Guarantee Agreement. The timing of satisfaction of these conditions is currently uncertain but likely to be satisfied in 2018.conditions. On September 28, 2017, the Department of Energy issued a conditional commitment to us for up to approximately $1.62$1.6 billion inof additional guaranteed loansfunding under the Loan Guarantee Agreement.loan guarantee agreement. This conditional commitment expires on September 30, 2018, subject to any extension approved by the Department of Energy. We do not anticipate closing on the new loan before September 30, 2018 and anticipate seeking an extension from the Department of Energy. Final approval and issuance of thesethe additional loan guaranteesguarantee by the Department of Energy cannot be assured and areis subject to negotiationan amendment and restatement of definitive agreements, completion of due diligence by the Department of Energy, receipt of any necessary regulatory approvalsloan guarantee agreement and satisfaction of other conditions.conditions, including the Co-owners vote to continue construction. For additional information regarding conditions for future advances, potential repayment over a five-year period, covenants and events of default under the Loan Guarantee Agreementloan guarantee agreement with the Department of Energy, see Note K of Notes to Unaudited Consolidated Financial Statements and for additional information regarding the financing of Vogtle Units No. 3 and No. 4, see "Statements.
Financing Activities—Department of Energy-Guaranteed Loan." We have also financed an additional $1.4 billion of the capital costs of the Vogtle units through capital market debt issuances. We anticipate financing any project costs not financed with Department of Energy in the capital markets. The timing and availability of funds under the Department of Energy loan guarantee will guide our decisions as to the timing of any capital markets offerings. For additional information regarding the financing of Vogtle Units No. 3 and No. 4, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Capital Requirements and Liquidity and Sources of Capital—Financing Activities—Department of Energy-Guaranteed Loan."
Under the Bipartisan Budget Act of 2018, we qualify for nuclear production tax credits related to Vogtle Units No. 3 and No. 4. We expect to receive these tax credits in accordance with our 30% ownership interest in the Vogtle Units and are analyzing various options to monetize these credits with a third party. We estimate that the nominal value of our allocation of production tax credits will be approximately $660 million and will be earned for eight years post commercial operation.
As construction continues, risks remain that construction-related challenges, including management of contractors, subcontractors, and vendors, labor productivity, availability, and/or cost escalation; procurement, fabrication, delivery, assembly and/or installation, including any required engineering changes, of plant systems, structures and components, or other issues could further impact the projected schedule and cost. Monthly construction production targets required to maintain the current project schedule increase significantly later in 2018 through 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be deployed. Aspects of the Westinghouse AP1000 design are based on new technologies that are just beginning initial operation in the global nuclear industry at this scale.
There have been technical and procedural challenges to the construction and licensing of Vogtle Units No. 3 and No. 4 at the federal and state level and additional challenges may arise as construction proceeds.arise. Processes are in place that are designed to assure compliance with the requirements specified in the Westinghouse Design Control Document and the combined construction and operating licenses, including inspections by Southern Nuclear and the Nuclear Regulatory Commission that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the Nuclear Regulatory Commission. Various design and other licensing-based compliance matters, including the timely resolution of Inspections, Tests, Analyses,inspections, tests, analyses, and Acceptance Criteriaacceptance criteria and the related approvals by the Nuclear Regulatory Commission, may arise, if construction proceeds, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be further delays in the project schedule that could result in increased costs.
As construction continues,costs to the risk remains that challenges with management of contractors, subcontractors and vendors, labor productivity, fabrication, delivery, assembly, and installation of plant systems, structures, and components, or other issues could arise and may further impact project schedule and cost.Co-owners.
The ultimate outcome of these matters cannot be determined at this time.
See "Risk Factors" in this Form 10-Q for risks related to Vogtle Units No. 3 and No. 4 and the Guarantee Settlement Agreement and "Item 1A—RISK FACTORS" in our 2016 Form 10-K for a discussion of certain risks associated with the licensing, construction, financing and operation of nuclear generating units.
Environmental Regulations
Federal and state laws and regulations regarding environmental matters affect operations at our facilities. Followingfacilities and are some substantial developments relatingsubject to environmental regulations and litigation that have occurred since we filed our Form 10-Q for the quarterly period ended June 30, 2017.change over time.
On October 10, 2017,July 30, 2018, the U.S. Environmental Protection Agency (EPA) proposed a rule to repealpublished the Clean Power Plan in its entirety on the basis that the Clean Power Plan exceeds the EPA's authority under the Clean Air Act. Even though some portionsfirst of the rule may be in accord with the Clean Air Act, EPA proposes to find that those portions are not severable from the objectionable portions and that the entire Clean Power Plan be repealed. EPA will decide what action, if any, to taketwo final rules in the future with regardFederal Register that revised a portion of its 2015 coal combustion residual rule. The revisions provide relief from several mandatory closure requirements and provide significant flexibility for facility owners to any replacement Clean Power Planimplement the coal combustion residuals disposal and has stated that it intends to issue an advanced notice of proposed rulemaking in the near future to solicit information on alternate systems to reduce greenhouse gas emissions consistent with its authority under the Clean Air Act. We cannot predict the outcome of this current proposal or any litigation that might be brought challenging any resulting final rule, nor can we predict the outcome of the litigation currently pending on the existing Clean Power Plan.
In September 2017, EPA postponed certain compliance dates for its November 2015 rule for the effluent limitations guidelines and standards for the steam electric power generating (ELG Rule) for two years. Plants Scherer and Wansley are regulated under this rule. EPA has stated that it intends to conduct a rulemaking to potentially revise the more stringent best available technology economically achievable effluent limitations and pretreatment standards for existing sources for flue gas desulfurization wastewater and bottom ash transport water established in the ELG Rule; however, it does not intend to revise the ELG Rule for fly ash transport, flue gas mercury control wastewater or othermanagement requirements. We cannot predict the outcome of any actions EPA may take to revise the ELG Rule, or any litigation that might be brought challenging any final rule.
We continue to evaluate all EPA actions regarding reviews and reconsiderations of final rules and processing of proposed rules and cannot predict the outcome of these rulemakings, any related state rulemakings or any related litigation, including litigation that might be brought to challenge the issuance of replacement or new final rules. It is unknown what impact potential rule changes will have on our and our members' operations. Continued uncertainty related to the status of current and future environmental regulations may make long-term planning decisions more difficult.
For furthera discussion regarding potential effects on our business from environmental regulations, including potential capital requirements, see "Item 1—BUSINESS—REGULATION—Environmental," "Item 1A—RISK FACTORS" and "Item 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Financial Condition—Capital Requirements—Capital Expenditures" in our 20162017 Form 10-K and "Item 2—Management's Discussion And Analysis Of Financial Condition And Results Of Operations—Financial Condition—Capital Requirements and Liquidity and Sources of Capital—Environmental Regulations" in our quarterly reports on Form 10-Q for the quarterly periods ended March 31, 2017 and June 30, 2017.10-K.
Liquidity
At SeptemberJune 30, 2017,2018, we had $1.07$1.44 billion of unrestricted available liquidity to meet our short-term cash needs and liquidity requirements. This amount included $342$525 million in cash and cash equivalents and $726$920 million of unused and available committed credit arrangements.
At SeptemberJune 30, 2017,2018, we had $1.61 billion of committed credit arrangements in place, the details of which are reflected in the table below:
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Committed Credit Facilities | Committed Credit Facilities | Committed Credit Facilities | ||||||||||||||
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Authorized | Available | Expiration Date | Authorized | Available | Expiration | |||||||||||
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Unsecured Facilities: | ||||||||||||||||
Syndicated Line of Credit led by CFC | $ | 1,210 | $ | 442 | (1) | March 2020 | $ | 1,210 | $ | 636 | (1) | March 2020 | ||||
CFC Line of Credit(2) | 110 | 110 | December 2018 | 110 | 110 | December 2018 | ||||||||||
JPMorgan Chase Line of Credit | 150 | 34 | (3) | October 2018 | 150 | 34 | (3) | October 2018 | ||||||||
Secured Facilities: |
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CFC Term Loan(2) | 250 | 140 | (2) | December 2018 | 140 | 140 | December 2018 | |||||||||
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Total | $ | 1,610 | $ | 726 | $ | 1,610 | $ | 920 | ||||||||
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Currently, we are primarily using our commercial paper program to provide interim funding for payments related to the construction of Vogtle Units No. 3 and No. 4 prior to receiving advances of long-term funding under the Department of Energy-guaranteed Federal Financing Bank loan.loan or issuing debt in the capital markets. At June 30, 2018, $429 million of our commercial paper outstanding was related to the Vogtle construction. See Note K of Notes to Unaudited Consolidated Financial Statements and "—Department of Energy-Guaranteed Loan" below for a discussion of recent amendments that were madeour ability to the Loan Guarantee Agreement with
request further loan advances from the Department of Energy which restricts our ability to request further loan advances pending a determination to continue construction of the additional Vogtle units and satisfaction of relatedcertain conditions including an amendmentrelating to the Loan Guarantee Agreement. Our last advance under this loan was received in December 2016 and timing regarding our ability to make further advances under this loan is uncertain but likely in 2018. The inability to advance funds under our Department of Energy loan has reduced our available liquidity in 2017. We expect this constraint to be mitigated in the coming months through one or more of several potential options including resumption of advances under the Department of Energy loan, monetization of the Toshiba Guarantee Settlement Agreement, or issuance of taxable bonds.Vogtle project.
Under our commercial paper program, we are authorized to issue commercial paper in amounts that do not exceed the amount of our committed backup lines of credit, thereby providing 100% dedicated support for any commercial paper outstanding. Our commercial paper program is currently sized at $1.0 billion.
We expect to renew our $150 million line of credit with JPMorgan Chase Bank prior to its expiration in October 2018 for a term of three years.
Under our unsecured committed lines of credit, we have the ability to issue letters of credit totaling $760 million in the aggregate, of which $509 million remained available at SeptemberJune 30, 2017.2018. However, amounts related to issued letters of credit reduce the amount that would otherwise be available to draw for working capital needs. Also, due to the requirement to have 100% dedicated backup for any commercial paper outstanding, any amounts drawn under our committed credit facilities for working capital or related to issued letters of credit will reduce the amount of commercial paper that we can issue. The majority of our outstanding letters of credit are for the purpose of providing credit enhancement on variable rate demand bonds.
Two of our credit facilities contain a financial covenant that requires us to maintain minimum levels of patronage capital. At SeptemberJune 30, 2017,2018, the required minimum level was $675 million and our actual patronage capital was $923$956 million. These agreements contain an additional covenant that limits our secured indebtedness and unsecured indebtedness, both as defined in the credit agreements, to $12.0 billion and $4.0 billion, respectively. At SeptemberJune 30, 2017,2018, we had $8.1$8.5 billion of secured indebtedness and $756$438 million of unsecured indebtedness outstanding.
At SeptemberJune 30, 2017,2018, we had $512$805 million on deposit in the Rural Utilities Service Cushion of Credit Account, all of which is classified as a restricted investment. See "—Balance Sheet Analysis as of SeptemberJune 30, 2017—2018—Assets" for more information regarding this account.
Financing Activities
First Mortgage Indenture. At SeptemberJune 30, 2017,2018, we had $8.1$8.4 billion of long-term debt outstanding under our first mortgage indenture secured equally and ratably by a lien on substantially all of our owned tangible and certain of our intangible property, including property we acquire in the future. See "Item 1—BUSINESS—OGLETHORPE POWER CORPORATION—First Mortgage Indenture" in our 20162017 Form 10-K for further discussion of our first mortgage indenture.
Rural Utilities Service-Guaranteed Loans. At SeptemberJune 30, 2017,2018, we had two approved Rural Utilities Service-guaranteed loans being funded through the Federal Financing Bank that are in various stages of being drawn down. These two loans totaled $678 million with $501$215 million remaining to be advanced. When advanced, the debt will be secured under our first mortgage indenture. As of SeptemberJune 30, 2017,2018, we had $2.5$2.6 billion of debt outstanding under various Rural Utilities Service-guaranteed loans.
Department of Energy-Guaranteed Loan. In 2014, we closed onentered into a loan guarantee agreement with the Department of Energy that willto fund up to the lesser$3.1 billion of $3.06 billion or 70% of eligible project costs related to the cost to construct our 30% undivided share of Vogtle Units No. 3 and No. 4. ThisThe loan is being funded by the Federal Financing Bank and is backed by a federal loan guarantee provided by the Department of Energy.
As of September At June 30, 2017,2018, we had advanced $1.72borrowed $1.8 billion, including capitalized interest, under this loan and we had $1.34the capacity to fund an additional $1.1 billion remaining to be advanced. Allunder the facility based on the amount of the debt under this loan will be secured ratably with all other debt under our first mortgage indenture. Access to the committed funds under this loan requires us to meet certain conditions related to our business and the Vogtleeligible project and also requires certain third-parties related to the Vogtle project to comply with certain laws. See Note K of Notes to Unaudited Consolidated Financial Statements for a discussion of recent amendments that were made to the Loan Guarantee Agreement with the Department of Energy which restrict our ability to request further loan advances pending a determination to continue construction of the additional Vogtle units and satisfaction of related conditions, including an amendment to the Loan Guaranty Agreement. costs already incurred.
Our last advance under this loan was received in December 2016 and timing regarding our ability2016. Following the bankruptcy of Westinghouse in March 2017, the loan guarantee agreement was amended to makerestrict further advances under this facility is uncertain. Underpending satisfaction of certain circumstances,conditions, including a decision notfurther amendment to continue construction of the Vogtle units, the Department of Energy has discretion to require that we repay all amounts outstanding under the loan over a five-year period.guarantee agreement to
Onincorporate provisions related to the Bechtel Agreement and other replacement agreements. In September 28, 2017, the Department of Energy issued a conditional commitment to us for up to $1.62$1.6 billion inof additional guaranteed funding under the Loan Guarantee Agreement. Final approval and issuance of theseloan guarantee agreement. This additional loan guarantees by the Department of Energy cannot be assured and arefunding is subject to negotiationan amendment and restatement of definitive agreements,the loan guarantee agreement, completion of due diligence by the Department of Energy, receipt of any necessary regulatory approvals and satisfaction of certain other conditions. Due to the new estimate-to-complete forecast provided by Georgia Power and Southern Nuclear, a resumption of funding under the original loan and approval of the additional loan guarantee are now also subject to the Co-owners vote to continue the Vogtle construction.
The conditional commitment expires on September 30, 2018, subject to any extension approved by the Department of Energy. We do not anticipate closing on the new loan before September 30, 2018, and anticipate seeking an extension from the Department of Energy. If closed, our aggregate Department of Energy loan financing for the Vogtle expansion project will increase to nearly $4.7 billion. Final approval and issuance of the additional loan guarantee cannot be assured.
All of the debt advanced under the loan guarantee agreement is secured ratably with all other debt under our first mortgage indenture. For additional information regarding this loan, see Note K of Notes to Unaudited Consolidated Financial Statements.
At June 30, 2018, we had funded in the aggregate approximately $3.2 billion of our Vogtle project cost. In addition to the Department of Energy loan funding, we have issued $1.4 billion of first mortgage bonds to finance a substantial portion of the Vogtle expansion that will not be funded by the
Department of Energy. As of September 30, 2017, we had $3.1 billion of long-term funding in place for the $3.9 billion invested in theexpansion. We expect to finance any Vogtle project to-date. We anticipate utilizing capital markets financing for any Vogtle related costs that we are not able to advance undercovered by the Department of Energy-guaranteed loans.
Bond Financings
On October 12, 2017, we closed on a $122.6 million direct bank purchase of tax-exempt bonds and used the proceeds to retire commercial paper that was issued in January 2017 in connectionloans with the redemption of our remaining auction rate securities. See Note K of Notes to Unaudited Consolidated Financial Statements for more information regarding this refinancing.
additional capital market financings. In late 2017 or early 2018, we plan to issue approximately $400 million of tax-exempt pollution control revenue bonds, the proceeds of which will be used to refinance $400 million of existing pollution control bonds that are callable on January 1, 2018 and that have higher interest rates than our other tax-exempt debt. When issued, out payment obligations related to these bonds will be secured ratably with all other debt under our first mortgage indenture.
As of September 30, 2017, we had $980.8 million of outstanding obligations related to tax-exempt private activity bonds related to certain of our pollution control facilities. The Tax Cut and Jobs Act, as proposed by memberslight of the Housecontinued delay in obtaining funds from the Department of Representatives on November 2, 2017, could take away our ability to utilize tax-exempt private activity bonds to finance or refinance qualifying pollution control facilities if issued on or after January 1, 2018 and impact the interest rates on our private activity bonds outstanding prior to January 1,Energy, we may undertake a capital markets financing later in 2018.
For more detailed information regarding our financing plans, see "Item 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Financial Condition—Financing Activities" in our 20162017 Form 10-K.
Credit Rating Risk
The table below sets forth our current ratings from S&P Global Ratings, Moody's Investors Service and Fitch Ratings.
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We have financial and other contractual agreements in place containing provisions which, upon a credit rating downgrade below specified levels, may require the posting of collateral in the form of letters of credit or other acceptable collateral. Our primary exposure to potential collateral postings is at rating levels of BBB–/Baa3 or below. As of September 30, 2017, our maximum potential collateral requirements were as follows:
At senior secured rating levels:
At senior unsecured or issuer rating levels:
The Rural Utilities Service Loan Contract contains covenants that, upon a credit rating downgrade below investment grade by two rating agencies, could result in restrictions on issuing debt. Certain of our pollution control bond agreements contain provisions based on the ratings assigned to the bonds (which could be related to either our rating or a bond insurer's rating if the bonds are insured) that, upon a credit rating downgrade below specified levels, could result in increased interest rates. Also, borrowing rates and commitment fees in two of our line of credit agreements are based on credit ratings and could increase if our ratings are lowered. None of these covenants and provisions, however, would result in acceleration of any debt due to credit rating downgrades.
Given our current level of ratings, our management does not have any reason to expect a downgrade that would result in any material impacts to our business. However, our ratings reflect only the views of the rating agencies and we cannot give any assurance that our ratings will be maintained at current levels for any period of time.
Newly Adopted or Issued Accounting Standards
For a discussion of recently issued or adopted accounting pronouncements, see Note E of Notes to Unaudited Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have not been any material changes to market risks from those reported in "Item 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK" of our 20162017 Form 10-K.
Item 4. Controls and Procedures
As of SeptemberJune 30, 2017,2018, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.
There have been no changes in internal control over financial reporting or other factors that occurred during the quarter ended SeptemberJune 30, 20172018 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
Except as disclosed under "Item 1—Legal Proceedings" in our quarterly report on Form 10-Q for the quarterly period ended June 30, 2017, thereThere have been no material changes fromto the legal proceedings disclosed in "Item 3—LEGAL PROCEEDINGS" in our 20162017 Form 10-K.
Except as discusseddescribed below, there have been no material changes from thechange to these risk factors from those previously disclosed in "Item 1A—RISK FACTORS" in our 2016the Form 10-K.
Our participation in the development and construction of Vogtle Units No. 3 and No. 4 could have a material impact on our financial condition and results of operations.
We are contractually committed to participating in the construction of two additional nuclear units at Plant Vogtle and have committed significant capital expenditures to this endeavor. The construction of large, complex generating plants involves significant financial risk. Further, no nuclear plants have been constructed in the United States using advanced designs, such as the Westinghouse AP1000 design, and therefore estimating the total cost of construction and the related schedule is inherently uncertain. We also rely on Georgia Power and Southern Nuclear as our agents for the oversight of the construction of the additional units at Plant Vogtle and do not exercise direct control over the construction process.
Our current project budget for the Vogtle Units, which includes capital costs, allowance for funds used during construction and a contingency amount is $7.0 billion and the scheduled commercial operation dates are November 2021 for Unit No. 3 and November 2022 for Unit No. 4. Certain eventsGeorgia Power has advised us that it recently became aware that the estimated future Vogtle project costs were projected to exceed the corresponding budgeted amounts. Upon discovery of these variances, the Co-owners requested Southern Nuclear perform a full cost analysis and reforecast of the cost to complete the project and engaged a third party to independently assess this analysis, forecast, and existing project controls for identifying budget variances. The capital costs estimated to complete construction are expected to increase by approximately $1.5 billion (our 30% share estimated at approximately $450 million). The increases are primarily due to changed assumptions related to the finalization of contract scopes and management responsibilities for Bechtel and over 60 subcontractors, craft labor incentives, as well as the related levels of project management, oversight and support, including field supervision and engineering support, required to complete the project. We, and the other Co-owners, are evaluating these increased capital costs along with a project-level contingency in a preliminary amount of approximately $800 million (our 30% share estimated at $240 million). We are also evaluating whether an additional Oglethorpe contingency is warranted as is consistent with our conservative budgeting practices. Further, improvements to the project control environment have materially delayedbeen implemented and additional improvements will continue to be evaluated.
We are currently in the original commercial operation dates and increasedprocess of evaluating the originalestimated increases to the project budget. The most significantimpact of these relateadditional project costs on our budget will be substantially mitigated by approximately $500 million of contingency included in our existing budget. We are in the process of preparing a revised budget that would include capital costs, allowance for funds used during construction, our allocation of the project-level contingency as well as a potential, separate Oglethorpe contingency. If construction on the project continues, we anticipate that our project budget may increase from $7.0 billion to a range of $7.25 to $7.5 billion. A revised project budget will affect the timing and amount of the projected capital expenditures related to the EPC Contractor's filing for bankruptcy protection under Chapter 11Vogtle project disclosed in our Form 10-K, although the timing of such expenditures remains uncertain. Any budget increase would likely increase our capital expenditures through 2022 and lead to a corresponding increase in our long-term debt outstanding at completion of the United States Bankruptcy CodeVogtle units from the previously disclosed amount of approximately $11.5 billion. These increases in capital expenditures and its subsequent rejectionin our long-term debt will continue to constrain our equity ratio and will affect certain of our financial metrics. Increased debt and the fixed price EPC Agreement.related impacts on our financial metrics could negatively impact our credit ratings. Any downgrade in our
credit ratings would increase our borrowing costs and decrease our access to the credit and capital markets.
We continue to be subject toand the other Co-owners are responsible for all construction risks and no longer have the benefit of the "fixed" price EPC Agreement, which means that any cost overruns will be allocated to the Co-ownerscosts based on theirour ownership interest percentage.percentages. Factors that could lead to further cost increases and schedule delays or even the inability to complete this project include:
Additionally, we do not controlIn November 2017, the determination asCo-owners entered into an amendment to whether the Vogtle project continues to move forward as continued construction oftheir Joint Ownership Agreements for Vogtle Units No. 3 and No. 4 is subject to provide for, among other conditions, additional Co-owner approval by the Georgia Public Service Commission. On August 31, 2017, Georgia Power recommended that construction on Vogtle Units No. 3 and No. 4 be continued with Southern Nuclear serving as project manager in its VCM 17 Report filed with the Georgia Public Service Commission. The recommendationrequirements. Pursuant to continue construction is supported by all the Co-owners and is based on the results of a comprehensive schedule, cost-to-complete and cancellation assessment. The Georgia Public Service Commission is expected to make a decision on these matters by February 6, 2018.
Further, on November 2, 2017, the Co-owners amended the Joint Ownership Agreements, to provide thatthe holders of at least 90% of the ownership interests in Vogtle Units No. 3 and No. 4 must vote to continue construction, uponor can vote to suspend construction, if certain adverse events occur, including: (i) the occurrencebankruptcy of Toshiba Corporation; (ii) termination or rejection in bankruptcy of certain agreements, including the Services Agreement or the Bechtel Agreement; (iii) the Georgia Public Service Commission or Georgia Power determines that any of those adverse events. As we are a 30% ownerGeorgia Power's costs relating to the construction of Vogtle Units No. 3 and No. 4 will not be recovered in retail rates; or (iv) an increase in the Vogtleconstruction budget contained in Georgia Power's seventeenth VCM report of more than $1 billion or extension of the project we, along with schedule contained in the seventeenth VCM report of more than one year.
Georgia Power and the Municipal Electricity Authority of Georgia, will needhas stated that it does not intend to each determine to move forward with the Vogtle project upon the occurrence of certain adverse events. In the event the Vogtle project is cancelled, ourseek rate recovery for its proportionate share of the Co-owners' cancellationadditional capital costs are estimatedin its nineteenth VCM report to be approximately $230 million. filed with the Georgia Public Service Commission. As a result of Georgia Power's decision not to seek rate recovery of its allocation of these costs and the increased construction budget, the holders of at least 90% of the ownership interests in Vogtle Units No. 3 and No. 4 must vote to continue construction. The Co-owners are expected to
conduct these votes in the third quarter of 2018, and each of Georgia Power, Oglethorpe and MEAG will have to affirmatively vote to continue construction. If the Co-owners vote to move forward, they will also approve a revised project budget.
As of SeptemberJune 30, 2017,2018, our total investment in the additional Vogtle units was approximately $3.9$3.4 billion. In the event that fewer than 90% of the Co-owners determine to continue construction, we and the other Co-owners will assess options for the Vogtle project. If the project is cancelled,investment were to be written off, we would seek regulatory accounting treatment to amortize ourthe investment in the Vogtle project over a long-term period, which would requirerequires the approval of our board of directors, and we would submit the regulatory accounting treatment requestdetails to the Rural Utilities Service for its approval.
Following the bankruptcyThe scheduled in-service dates of November 2021 and November 2022 for Vogtle Units No. 3 and No. 4, respectively, are not expected to change in connection with these budget revisions. However, any extension of the EPC Contractor,project schedule is currently estimated to result in additional base capital costs of approximately $30 million per month based on our ownership interests and allowance for funds used during construction of approximately $12.5 million per month per unit.
As construction continues, risks remain that construction-related challenges, including management of contractors, subcontractors, and vendors, labor productivity, availability, and/or cost escalation; procurement, fabrication, delivery, assembly and/or installation, including any required engineering changes, of plant systems, structures and components, or other issues could further impact the rejectionprojected schedule and cost. Monthly construction production targets required to maintain the current project schedule increase significantly later in 2018 through 2019. To meet these increasing monthly targets, existing craft construction productivity must improve and additional craft laborers must be deployed. Aspects of the EPC AgreementWestinghouse AP1000 design are based on new technologies that are just beginning initial operation in the global nuclear industry at this scale.
There have been technical and our comprehensive cost-to-complete assessment, we increased our project budgetprocedural challenges to $7.0 billion from $5.0 billion. This increase is expectedthe construction and licensing of Vogtle Units No. 3 and No. 4 at the federal and state level and additional challenges may arise. Processes are in place that are designed to increase our capital expenditures through 2022assure compliance with the requirements specified in the Westinghouse Design Control Document and lead tothe combined construction and operating licenses, including inspections by Southern Nuclear and the Nuclear Regulatory Commission that occur throughout construction. As a corresponding increase in our long-term debt outstanding at completionresult of such compliance processes, certain license amendment requests have been filed and approved or are pending before the Vogtle units to $11.5 billion fromNuclear Regulatory Commission. Various design and other licensing-based compliance matters, including the previously disclosed amounttimely resolution of $10 billion. These increases in capital expendituresinspections, tests, analyses, and in our long-term debt will continue to constrain our equity ratio and will affect certain of our other financial metrics. Increased debtacceptance criteria and the related impacts on our financial metricsapprovals by the Nuclear Regulatory Commission, may arise, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be further delays in the project schedule that could negatively impact our credit ratings. Any downgraderesult in our credit ratings would increase our borrowingincreased costs and decrease our access to the credit and capital markets.Co-owners.
The long-term project cost will also be impacted by our ability to finance the capital costs at competitive interest rates. We are currently unable to make advanceshave a $3.1 billion federal loan guarantee from the remaining $1.4 billion of committed funds under our Loan Guarantee Agreement with the Department of Energy, and will not be able to make additional advances untilunder which we enter into an amendmenthave borrowed $1.8 billion as of June 30, 2018. Pursuant to the Loan Guarantee Agreement withterms of the loan guarantee agreement, no further advances are permitted pending satisfaction of certain conditions. On September 28, 2017, the Department of Energy issued a conditional commitment to us for up to $1.6 billion of additional guaranteed funding under the loan guarantee agreement. This conditional commitment expires on September 30, 2018, subject to any extension approved by the Department of Energy. We do not anticipate closing on the new loan before September 30, 2018 and anticipate seeking an extension from the Department of Energy. Final approval and issuance of the additional loan guarantee by the Department of Energy cannot be assured and is subject to an amendment and restatement of the loan guarantee agreement and satisfaction of other conditions, including the Co-owners vote to continue construction.
We anticipate financing any project costs not financed with Department of Energy in the capital markets. The timing and availability of further advancesfunds under the Loan Guarantee Agreement is uncertain but is likelyDepartment of Energy loan guarantee will
guide our decisions as to occur in 2018.the timing of any capital markets offerings. Prolonged inability to access funding pursuant to the Department of Energy Loan Guarantee Agreementloan guarantee agreement may constrain our liquidity and lead us to finance certain expenditures through alternative resources, likely at a higher interest rate. We have received a conditional commitment from the Department of Energy for approximately $1.6 billion of additional loan guarantees; however final approval of these additional amounts cannot be assured. See Note K of Notes to Unaudited Consolidated Financial Statements for additional information about the Loan Guarantee Agreement and related conditions.
The ultimate outcome of these matters cannot be determined at this time.
Tabletime; however, these risks could continue to impact the in-service dates and cost of Contents
Any inability or other failure by Toshibathe additional units at Plant Vogtle which would increase the cost of electric service we provide to our members and, as a result, could affect their ability to perform itstheir contractual obligations under the Guarantee Settlement Agreement could have a further material impact on the cost to the Co-owners of Vogtle Units No. 3 and No. 4, and therefore on our financial condition and results of operations.us.
On June 9, 2017, Georgia Power and the other Co-owners and Toshiba entered into the Guarantee Settlement Agreement. Pursuant to the Guarantee Settlement Agreement, Toshiba acknowledged the $3.68 billion amount of its Guarantee Obligations, of which our proportionate share is approximately $1.1 billion, and that the Guarantee Obligations exist regardless of whether Vogtle Units No. 3 and No. 4 are completed. The Guarantee Settlement Agreement also provides for a schedule of payments for the Guarantee Obligations that began in October 2017 and continues through January 2021. In the event Toshiba receives certain payments, including sale proceeds, from or related to Westinghouse (or its subsidiaries) or Toshiba Nuclear Energy Holdings (UK) Limited (or its subsidiaries), it will hold a portion of such payments in trust for the Co-owners and promptly pay them over as offsets against any remaining Guarantee Obligations. Under the Guarantee Settlement Agreement, the Co-owners will forbear from exercising remedies in respect of the Toshiba Guarantee, including drawing on the Westinghouse Letters of Credit, until June 30, 2020, unless certain events of nonpayment, insolvency, or other material breach of the Guarantee Settlement Agreement by Toshiba occur. If such an event occurs, the balance of the Guarantee Obligations will become immediately due and payable, and the Co-owners may exercise any and all rights and remedies, including drawing on the Westinghouse Letters of Credit without restriction. In addition, the Guarantee Settlement Agreement does not restrict the Co-owners from fully drawing on the Westinghouse Letters of Credit in the event they are not renewed or replaced prior to the expiration date.
On November 9, 2017, Toshiba released its financial results for the second quarter of fiscal year 2017, which reflected a negative shareholders' equity balance of approximately $5.5 billion as of September 30, 2017. Toshiba also announced the existence of material events and conditions that raise substantial doubt about Toshiba's ability to continue as a going concern. As a result, substantial risk regarding the Co-owners' ability to fully collect the Guarantee Obligations continues to exist. An inability or other failure by Toshiba to perform its obligations under the Guarantee Settlement Agreement could have a further material impact on the net cost to the Co-owners of Vogtle Units No. 3 and No. 4, and, therefore, on our financial condition and results of operations as well.
In October and November 2017, Georgia Power, on behalf of the Co-owners, received the first two installments of the Guarantee Obligations totaling $377.5 million from Toshiba, of which our proportionate share was $113.3 million. We are considering potential options with respect to our right to payments under the Guarantee Settlement Agreement and our claims against the EPC Contractor in the EPC Contractor's bankruptcy proceeding, including a potential sale of those payment rights and bankruptcy claims. Any such transaction cannot be assured and would be subject to Department of Energy consents and related approvals under the Loan Guarantee Agreement and related agreements.
The ultimate outcome of these matters cannot be determined at this time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults upon Senior Securities
Not Applicable.
Item 4. Mine Safety Disclosures
Not Applicable.
Not Applicable.
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: | By: | /s/ Michael L. Smith | ||
Michael L. Smith President and Chief Executive Officer | ||||
Date: | /s/ Elizabeth B. Higgins | |||
Elizabeth B. Higgins Executive Vice President and Chief Financial Officer (Principal Financial Officer) |