Table of Contents 1
Financial and Operational Highlights A brief financial recap of what we accomplished in 2006 2
Executive Letter An overview of the major events of 2006 6
Strength in Our Structure The building blocks for a solid foundation 7
It Begins with a Spark It’s all about the spark that ignites inside each ODEC employee that defines our success 22
Board of Directors The architects of our growth 24
Report of Management Summary of management’s responsibilities for the consolidated financial statements and internal controls 25
Securities and Exchange Commission Annual Report on Form 10-K 2006 ODEC Annual Report Back Cover
Member Distribution Cooperatives’ Service Territories Map showing the individual service areas of ODEC member distribution cooperatives
ODEC is a not-for-profit wholesale power supply cooperative whose mission is to provide reliable wholesale electric service in a cost-effective, environmentally sensitive manner to its member distribution cooperatives who serve member-owners in Virginia, Delaware, Maryland and a small portion of West Virginia.
Financial and Operational Highlights
2006
2005
2004
2003
2002
Margins for Interest Ratio
1.39
1.22
1.25
1.31
1.20
26.5%
24.6%
23.3%
22.1%
23.9%
6.5%
6.5%
6.4%
6.7%
7.4%
11,026,284
11,191,729
10,518,241
9,716,029
9,835,412
67.70
58.71
53.68
52.64
49.71
Clover Capacity Factor
91.1%
83.7%
87.2%
84.0%
82.4%
North Anna Capacity Factor
94.0%
95.6%
91.5%
85.5%
84.7%
Combustion Turbine Facilities Availability Factor
94.7%
97.1%
94.6%
96.5%
–
Equity Ratio Embedded Debt Cost Sales to Members (MWh) Cost to Class A Members (per MWh)
Disposition of Revenue Dollars
(in thousands)
%
$470,461
57.5%
220,984
27.0%
Depreciation, Amortization, and Accretion
43,877
5.4%
Interest
60,949
7.5%
Margins
21,244
2.6%
$817,515
100.0%
Purchased Power and Deferred Energy Operations
Total Revenue
Members’ Revenue Base
(in thousands)
%
$784,871
69.4%
Commercial & Industrial - Small Revenue
187,565
16.6%
Commercial & Industrial - Large Revenue
130,598
11.6%
27,677
2.4%
$1,130,711
100.0%
Residential Revenue
Other Revenue Total Revenue
one
Welcome to Our Home
We are an electric cooperative by design. It was the unanimous intent of the founders and members that Old Dominion Electric Cooperative (ODEC) be formed as a generation and transmission (G&T) cooperative to provide electric power for the aggregated needs of our member distribution cooperatives. Being a G&T electric cooperative is our business model. It is our purpose. It is what was created, and it is who we are. Being a generation and transmission cooperative. Being a G&T cooperative means that of all the business models available, we choose the cooperative business structure. We believe in, operate under and support the seven cooperative principles listed below. Voluntary and Open Membership Democratic Member Control Members’ Economic Participation Autonomy and Independence Education, Training and Information Cooperation among Cooperatives Concern for Community ODEC has an obligation to ensure that power is available to our member distribution cooperatives (so they can serve their member-owners) and that together we provide this power to the benefit of those at the end of the line‌ today and tomorrow.
As an electric utility and a G&T, we have a commitment to provide safe, reliable, environmentally responsible power, at the lowest possible cost, to our member distribution cooperatives‌ who represent our market. We have accomplished this mission for over 20 years, and we remain firmly committed to this goal for the next 20 years and beyond. Like an old, well-designed cathedral, which has maintained its reverence and usefulness throughout the decades and into the 21st century, we are a seasoned, established business model that continues to thrive and bring value to those it serves in a modern global economy.
Executive Letter
Going about our business. We review and confirm our foundation and make the changes necessary to meet our obligations. Two critical factors dictate our future and our decisions – our business model and our market. Our business model is that of a G&T, an electric cooperative. Cooperatives can be traced to Europe hundreds of years ago. Electric cooperatives began in the United States with legislation passed by Congress in the mid-1930s. Being owned by our customers is an advantageous form of business, and the model continues to prove beneficial for member-owners, especially in the electric utility industry. Cooperatives work well for the distribution and generation processes of electricity, and many argue it may ultimately be the best model for transmission, as well. ODEC is committed to continuing as a G&T and meeting the needs of our member-owners. We are one organization of twelve member distribution cooperatives all committed to the member-owners we serve.
The year of 2006 saw many activities related to strengthening our foundation. The baton was passed from key leaders of the past twenty years to new leaders for the future. In May, Lisa Johnson joined ODEC as Senior Vice President of Power Supply. Robert Kees was promoted from Vice President and Controller to Senior Vice President and Chief Financial Officer. Their knowledge, experience and leadership – which also defines each and every one of our dedicated employees – will continue moving ODEC forward well into the future.
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ODEC member distribution cooperatives recognized the need for future security in a changing world so we began the process of extending the Wholesale Power Contract. A board committee is in the process of studying modifications to the current contract and should complete that work in 2007. This will provide ODEC with a solid basis for future financial and operational growth and activities.
The geographic areas of the Commonwealth of Virginia and the Delmarva Peninsula served by the PJM Regional Transmission Organization define our wholesale power supply market. The characteristics of this market are high growth rates, high energy costs, growing generation and transmission needs, environmental concerns and diverse service areas from very sparse rural areas to very dense suburbs. Each characteristic brings unique concerns, and the combination of all provides rich challenges. Throughout 2006, ODEC continued to meet market challenges. Our financial position is strong. We have successfully defended attacks against our current Wholesale Power Contract and the relationship of our members. We have consistently maintained our wholesale power rates at levels below the available wholesale rates in our market. We have successfully assumed operations of our newest generating plants.
There is more to do. We will complete a new Wholesale Power Contract that will carry us forward well into the future. We must successfully do our part to move our rates more in line with other retail rates within our market. Our efforts to offer more environmentally friendly energy must expand. Significant power supply decisions for the future must begin in 2007. ODEC had a solid year in 2006. We are stronger today than in years past. The year 2007 will be one of decision for us as we continue to adapt to market landscape changes and prepare to meet our members’ power supply needs of the future. ODEC is well-positioned to move forward successfully with our strong foundation and the support
of our member distribution cooperatives and our staff.
Jackson E. Reasor
M. Johnson Bowman
President and CEO
Chairman of the Board
walls
roof
A 19th-century architect put forth the theory that humans need to have a sense of dwelling and membership in an organization before they can build a formal structure. At the center of this sense of dwelling is an idea ~ a spark igniting into fire ~ the primary element of architecture. Architecture, therefore, becomes the expression of social interaction and of society as a whole. It is the creative function that grows out of a collective social sense to protect our life-giving fires from the forces of nature. We do this by building a clay hearth in which to protect our fire upon a solid stone foundation supporting a strong wooden roof and walls that protect the furnishings within – the other elements of architecture.
Strength in Our Structure At ODEC we embody that sense of membership and dwelling. The spark ignites into fire in every one of us, providing new ideas to serve our member distribution cooperatives in the best way that we can. We nurture our fire so that it burns brightly throughout our entire organization – an organization built on a solid foundation, supporting a strong roof that shelters all of us within. There is strength in our structure. It’s strength that comes from our expertise, passion, innovation, commitment to high ethical standards and quiet confidence.
hearth
foundation
It begins with a spark.
We see it all around us. It’s within every one of our employees every day as they work together to meet the electricity needs of our member distribution cooperatives. It’s their sense of pride in doing a job well. We see it in their passion to be the best they can be at what they do best. We see it in their quiet confidence of knowing that everyone around them is as committed to maintaining the highest quality service standards – standards that can only be achieved through dedication and perseverance each and every day. We see the spark in their compassion for each other and for our member distribution cooperatives. We see it in the vision of their next great idea. It’s always ready to ignite into f lame.
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Home is Where the Hearth is The flame burns brightly in the employees of ODEC and in our twelve member distribution cooperatives. We nurture it and protect it at all times because we know that it’s critical in successfully meeting our growing needs. It’s all about making sure our fire is safe in our hearth. Our home is in an evolving market and with evolution comes opportunity. But only if we recognize it and embrace it. There is opportunity in providing reliable service to our member distribution cooperatives and their member-owners. There’s opportunity in the way we generate, purchase and sell electricity and in the way we manage costs. Fueling our flame to keep it burning brightly ensures our stability as a company. Our solid financial performance year after year – a fact supported by our solid ratings from Standard & Poor’s, Moody’s Investors Service and Fitch Ratings – is a strong testament to how strong our flame burns inside each of us.
That’s why we guard it. Our flame drives our ability to generate electricity efficiently and deliver it economically to our member distribution cooperatives so they can, in turn, distribute it to their member-owners when they need it most.
eight
It lights our passion for giving back to the community as evidenced by our being the 2006 recipient of the United Telecom Council’s Apex Award. This award recognizes ODEC’s primary role in the formation of the Mid-Atlantic Broadband Cooperative (MABC), an organization dedicated to developing broadband service to communities in rural Virginia. While ODEC has no ownership in MABC, ODEC supports the effort to rejuvenate these economies hard hit by economic losses in the tobacco, textile and furniture industries. Our flame fuels the desire to help others as we continually rank among Richmond, Virginia’s best in dollars per employee contributed to the United Way, with our employee contributions having increased each year for the past six years. In addition to the United Way, we organize a charity drive each year. Our theme in 2006 was “People, Pets and Places.” Recipients of our employees’ generosity were the Central Virginia Food Bank, McGuire Veterans Hospital, the American Cancer Society, the Richmond SPCA and Meals on Wheels. It kindles the spirit of volunteerism as ODEC employees spread out in their communities and serve in civic and youth organization roles as board members, coaches, fundraisers and project coordinators. We embrace our flame at ODEC. Its energy generates new ideas. We talk about those new ideas. And plan around them. Then we act on the plans. Our flame lights our way. Our success depends on it.
nine
Our Foundation is Solid It takes more than the right ideas, executed well, to meet ODEC’s commitment to our member distribution cooperatives. It takes well-managed power generation facilities, of which we have five: Clover, located in Halifax County, Virginia; North Anna, located in Louisa County, Virginia; Louisa, located near Gordonsville, Virginia; Marsh Run, located near Remington, Virginia; and Rock Springs, located near Rock Springs, Maryland. Our power generation facilities form the foundation upon which ODEC is built. The Clover and North Anna facilities produce efficient, clean and reliable base load energy.
Clover, our flagship power station, stands as a testament to ODEC’s commitment to environmental quality. Clover is outfitted with over $400 million in state-of-the-art equipment designed to keep our air and water clean – making it one of the cleanest coal burning plants in the United States. This 860-megawatt power station, ranking among the best in the nation in operating efficiency, burns pulverized coal in its 220-foot boilers reaching temperatures of 2,000 degrees Fahrenheit. A shining example of our fuel and technology diversity is our part ownership of the North Anna generation facility. This widely acclaimed nuclear power facility generates 1,786 megawatts annually and consistently ranks as one of the best-operated stations in the nation in terms of performance, productivity and innovation. Our generation facilities at Louisa, Marsh Run and Rock Springs ensure our member distribution cooperatives a reliable economical power supply for their member-owners during peak demand periods. All are comprised of simple-cycle combustion turbines that burn natural gas to produce electricity quickly and cleanly. Louisa and Marsh Run have the added capability of burning low-sulfur fuel oil as a backup source, when needed.
The day-to-day operations of our Louisa and Marsh Run facilities are now successfully under the direct control of ODEC. Bringing the operations in house enables us to maximize the value of the units in our marketplace and meet the ever-increasing needs of our member distribution cooperatives. Our commitment to being respectful of the environment lights the way at all of our power generation facilities. We recycle water from a local wastewater treatment plant so it will not be released into a nearby river.
Clay berms and water retention pools are built to trap and absorb storm water runoff allowing us to use rainfall rather than precious ground water. Trees are planted to help preserve the natural beauty of the landscape surrounding our facilities. Conservation areas and wetlands are created to minimize the impact our power stations have on the local environment. ODEC power generation facilities play a key role in providing power safely to all twelve
of our member distribution cooperatives.
A Strong Roof Protects Us Overhead Ours is a business that must constantly evolve in order to meet the dynamics of our ever-changing market landscape and the ever-increasing needs of the American consumer. Our executive team must manage the organization in a way that we are always able to meet the needs of our member distribution cooperatives, all of the time. It’s not enough to depend solely on the power we generate ourselves to meet increased demand when and where it is required. We must collaborate with energy marketing entities and external procurement sources to manage our business most effectively. To that end, ODEC continued our membership with PJM Interconnection (PJM) and ACES Power Marketing (ACES) in 2006.
sixteen
Our service territory is now fully integrated into the PJM grid. PJM, a regional transmission organization, is the world’s largest centrally dispatched grid operator and administers the largest competitive wholesale electricity market on the planet. As a member of PJM we have the ability to buy or sell power at competitive prices – depending on the needs of our member distribution cooperatives. In 2001, ODEC began its partnership with ACES, a nationally recognized wholesale energy trading and risk management firm. ACES is instrumental in executing our power transactions in the energy market. Our ability to procure market energy effectively forms the roof under which we live.
seventeen
Furnishing Our Place for the Future ODEC had another busy and productive year inside our home.
The price of fuels and energy purchases fluctuated again throughout 2006. We mitigate this volatility by the continuous use of our hedging program. That way we can assure our member distribution cooperatives and their member-owners the best available balance between rate stability and energy costs. Our employees successfully execute the cooperative’s energy hedging program under the guidance of our Risk Management Committee. We use many reporting tools to monitor and measure the impact of volatile energy costs on our business. ODEC is in the process of implementing the requirements of the Sarbanes-Oxley Act. We are committed to this process as it continues to improve our internal control effectiveness over financial reporting.
Our member distribution cooperatives are vital to our future success. Without them there would be no future. That’s why we strive to be the best we can be for them and the member-owners they serve each and every day. We all share the same home. ODEC’s strategic involvement in the wholesale power market enables us to proactively manage the way that we currently procure energy and how we’ll meet the future needs of those we serve.
Furnishing our future requires vision. Our vision is built on a solid foundation so that we are always in position to embrace opportunities in our industry – today and tomorrow. nineteen
We’re Proud of Our House At ODEC, our spark is safe. It ignites into flame every day bringing us new and innovative ideas to do what we do better. It’s these ideas that burn bright – blazing into action. Our generation facilities form the solid foundation for our house. They do their part, along with our approach to new energy marketing strategies, in providing our member distribution cooperatives with a reliable source for economical power. We thrive under our strong roof and within our resilient walls. ODEC embraces the future. The plans and processes we have in place today furnish us with the means to manage change effectively so that we may always be in a position to meet all of the electricity needs of our member distribution cooperatives – anytime, anywhere. That is what will define our success.
We protect the spark in our house. So our light can burn bright.
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Board of Directors
A&N
Community
Northern Neck
Rappahannock
Vernon N. Brinkley
Carl R. Eason
Hunter R. Greenlaw, Jr.
Kent D. Farmer
Philip B. Tankard
James M. Reynolds
Gregory W. White
William C. Frazier
BARC
Delaware
Northern Virginia
Shenandoah Valley
Bruce M. King
J. William Andrew, Jr.
Stanley C. Feuerberg
Fred C. Garber
William M. Leech, Jr.
Bruce A. Henry
Wade C. House
Myron D. Rummel
Choptank
Mecklenburg
Prince George
Southside
Frederick L. Hubbard
M. Johnson Bowman
M Dale Bradshaw
Calvin P. Carter
Carl R. Widdowson
David J. Jones
Glenn F. Chappell
M. Larry Longshore
Officers
Jackson E. Reasor President and Chief Executive Officer
M. Johnson Bowman Chairman of the Board
James M. Reynolds Vice Chairman
Frederick L. Hubbard Secretary/Treasurer
Lisa D. Johnson Senior Vice President of Power Supply
Robert L. Kees Senior Vice President and Chief Financial Officer
Elissa M. Ecker Vice President of Human Resources
John C. Lee, Jr. Vice President of Member and External Relations
twenty-two
Standing Committees of the Board of Directors
EXECUTIVE COMMITTEE
NOMINATING COMMITTEE
M. Johnson Bowman, Chairman of the Board
Hunter R. Greenlaw, Jr., Chairman
James M. Reynolds, Vice Chairman
Glenn F. Chappell
Frederick L. Hubbard, Secretary/Treasurer
William C. Frazier
Hunter R. Greenlaw, Jr.
William M. Leech, Jr.
Bruce A. Henry
Carl R. Widdowson
Wade C. House AUDIT COMMITTEE POWER SUPPLY AND RESOURCES COMMITTEE
M Dale Bradshaw, Chairman
M. Larry Longshore, Chairman
Calvin P. Carter
Vernon N. Brinkley
Vernon N. Brinkley
Kent D. Farmer
Glenn F. Chappell
Fred C. Garber
Carl R. Eason
David J. Jones
Stanley C. Feuerberg
Bruce M. King
William C. Frazier Hunter R. Greenlaw, Jr.
BY-LAWS AND POLICY COMMITTEE
Bruce A. Henry
Kent D. Farmer, Chairman
Frederick L. Hubbard
Glenn F. Chappell
William M. Leech, Jr.
Stanley C. Feuerberg
Myron D. Rummel
Bruce A. Henry Frederick L. Hubbard
FINANCE COMMITTEE
M. Larry Longshore
James M. Reynolds, Chairman
Myron D. Rummel
J. William Andrew, Jr.
Philip B. Tankard
M Dale Bradshaw
Gregory W. White
Calvin P. Carter Kent D. Farmer
GENERAL COUNSEL
Fred C. Garber
LeClair Ryan
Wade C. House
A Professional Corporation
David J. Jones
4201 Dominion Boulevard
Bruce M. King
Glen Allen, VA 23060
Philip B. Tankard Gregory W. White
INDEPENDENT AUDITORS
Carl R. Widdowson
Ernst & Young LLP
HUMAN RESOURCES COMMITTEE J. William Andrew, Jr. Vernon N. Brinkley Carl R. Eason Gregory W. White twenty-three
901 East Cary Street Richmond, VA 23219
Report of Management Management is responsible for the preparation of all information contained in this Annual Report. The consolidated financial statements from which certain information was extracted for inclusion in this Annual Report were prepared in conformity with accounting principles generally accepted in the United States consistently applied during the period. Management uses its best judgement to ensure that such statements reflect fairly the financial position, results of operations, comprehensive income, and cash flows of ODEC. ODEC maintains a system of internal controls, which provides reasonable assurance that transactions are executed in
accordance with management’s authorization, and that assets are properly accounted for and safeguarded.
The Board of Directors, through its Audit Committee consisting only of directors, has responsibility for determining that management fulfills its responsibilities for the preparation of financial statements and financial control of operations. The Audit Committee periodically meets with management and the independent accountants to discuss auditing, internal control and financial reporting matters.
Jackson E. Reasor
Robert L. Kees, CPA
President and CEO
Senior Vice President and CFO
1000
15
375
800
12
300
600
9
225
400
6
150
200
3
75
0 2006
2005
2004
2003
2002
0 2006
2005
2004
2003
2002
0 2006
2004
2003
Operating Revenues & Expenses
Annual Energy Sales to Members
Patronage Capital
(in millions of dollars)
(in millions of MWh’s)
(in millions of dollars)
100
100
100
80
80
80
60
60
60
40
40
40
20
20
20
0 2006
2005
2005
2004
2003
2002
0 2006
2005
2004
2003
Clover Capacity
North Anna Capacity
(percent)
(percent)
2002
0 2006
2005
2004
Louisa* Marsh Run** Rock Springs* Availability (percent)
* Was available for commercial operation in June 2003
** Was available for commercial operation in September 2004
twenty-four
2003
2002
2002
Member Distribution Cooperatives’ Service Territories
Pennsylvania
ia irgin
Delaware
New Jersey 13
Washington D.C. 66
Delaware Maryland
95
81
495
Northern Virginia Prince George
Delaware Maryland
MARSH RUN
Rappahannock Shenandoah Valley Southside
95
113
Maryland LOUISA
64
13
Virginia
NORTH ANNA
Chesapeake Bay
Existing Generating Facilities
ike Turnp
Dover 81
Mecklenburg Northern Neck
New Jersey
95
695
inia
Choptank Community
Baltimore
Virg
Wes tV
A&N BARC
95
ROCK SPRINGS
Maryland
64
64
295
Richmond
64
81
13
Atlantic Ocean 13
CLOVER
85
95
Norfolk 64
77
Virginia North Carolina
Additional Information
A digital pdf file of the Old Dominion Electric Cooperative 2006 Annual Report or SEC Form 10-K may be obtained from our web site at www.odec.com Old Dominion Electric Cooperative’s 2006 SEC Form 10-K may also be obtained from the SEC at www.sec.gov Requests should be made by writing to: Old Dominion Electric Cooperative Vice President and Controller P.O. Box 2310 Glen Allen, Virginia 23058-2310
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