Exhibit 13
CONSOLIDATED FINANCIAL HIGHLIGHTS
Percent
1994 1993 Change
Operating results (millions)
Operating revenues and income $4,491.1 $ 4,433.9 1.3
Operating income 1,038.2 1,127.3 (7.9)
Net income 478.2 516.6 (7.4)
Data per common share
Earnings $2.81 $3.12 (9.9)
Dividends paid 2.55 2.48 (2.8)
Market value (year-end) 36.00 45.38 (20.7)
Book value (year-end) 26.60 26.38
Financial position at December 31
Assets (millions) $13,562.2 $13,349.5
Capitalization (millions) 9,787.5 9,474.9
Capitalization ratios(1):
Long-term debt and capital lease obligations 45% 44%
Preferred stock 8% 9%
Common equity 47% 47%
Other statistics
Return on average common equity 10.6% 12.2%
Market to book value (year-end) 135.3% 172.0%
Common stock price range 453/8-347/8 491/2-381/4
Common shares outstanding--average (thousands) 170,316 165,697
Common shares outstanding--at year-end
(thousands) 172,408 168,123
Number of registered common shareholders
(year-end) 235,062 223,668
Number of employees 10,789 12,057
(1) Excludes nonrecourse-nonutility financings and short-term debt.
SELECTED CONSOLIDATED FINANCIAL DATA
1994 1993 1992 1991 1990 1989
(MILLIONS, EXCEPT PER SHARE AMOUNTS
AND PERCENTAGES)
Revenues and other income $ 4,491.1 $ 4,433.9 $ 3,791.1 $ 3,785.7 $ 3,532.5 $ 3,661.7
Income before cumulative effect of
a change in accounting principle $ 478.2 $ 516.6 $ 428.9 $ 459.9 $ 445.7 $ 410.7
Cumulative effect on prior years of
changing the method of accounting
for income taxes 15.6
Net income $ 478.2 $ 516.6 $ 444.5 $ 459.9 $ 445.7 $ 410.7
Total assets $13,562.2 $13,349.5 $12,615.1 $11,201.4 $10,990.9 $11,033.5
Long-term debt and preferred stock
subject to mandatory redemption $ 4,934.2 $ 4,976.7 $ 4,667.4 $ 4,668.2 $ 4,697.3 $ 4,865.5
Common stock data:
Earnings per share before cumulative effect
of a change in accounting principle $ 2.81 $ 3.12 $ 2.66 $ 2.94 $ 2.92 $ 2.76
Cumulative effect on prior years of changing
the method of accounting for income taxes .10
Earnings per share $ 2.81 $ 3.12 $ 2.76 $ 2.94 $ 2.92 $ 2.76
Dividends paid per share $ 2.55 $ 2.48 $ 2.40 $ 2.32 $ 2.23 $ 2.15
Market value per share at year-end 36.00 45.38 39.50 38.00 31.25 31.67
Book value per share at year-end 26.60 26.38 25.21 24.41 23.41 22.67
Return on equity--average 10.6% 12.2% 11.2% 12.4% 12.6% 12.5%
Payout ratio 90.7% 79.5% 87.0% 78.9% 76.4% 77.9%
Price/earnings ratio at year-end 12.8 14.5 14.3 12.9 10.7 11.5
Outstanding shares of common stock
--average 170.3 165.7 161.1 156.5 152.5 148.8
--actual (year-end) 172.4 168.1 163.8 158.8 154.8 150.9
Capitalization:*
Long-term debt $ 4,384.1 $ 4,219.5 $ 4,111.8 $ 4,025.6 $ 4,105.2 $ 4,260.7
Preferred stock 816.1 819.5 845.6 761.7 775.9 807.5
Common equity 4,586.1 4,435.9 4,131.3 3,877.8 3,623.9 3,420.7
Total capitalization $ 9,786.3 $ 9,474.9 $ 9,088.7 $ 8,665.1 $ 8,505.0 $ 8,488.9
*Capitalization excludes:
Nonrecourse-nonutility financing $ 727.1 $ 726.8 $ 593.4 $ 545.7 $ 494.8 $ 442.3
Short-term debt $ 146.0 $ 262.8 $ 125.2 $ 154.0 $ 142.4 $ 119.1
Property, plant and equipment:
Electric utility $13,896.6 $13,376.1 $12,930.6 $12,397.7 $11,822.4 $11,184.5
Nuclear fuel 817.2 814.1 754.6 766.4 732.9 684.6
Gas 181.4
Other 701.6 724.5 451.4 213.4 108.8 86.6
Total 15,415.4 14,914.7 14,136.6 13,377.5 12,664.1 12,137.1
Less accumulated depreciation,
depletion and amortization 5,170.0 4,802.1 4,459.5 4,110.5 3,725.5 3,415.0
Net property, plant and equipment $10,245.4 $10,112.6 $ 9,677.1 $ 9,267.0 $ 8,938.6 $ 8,722.1
CWIP included in property,
plant and equipment $ 828.2 $ 913.1 $ 840.9 $ 736.1 $ 691.7 $ 752.5
CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994 1993 1992
(MILLIONS, EXCEPT PER SHARE AMOUNTS)
Operating revenues and income:
Electric utility $4,170.8 $4,187.3 $3,679.6
Nonutility 320.3 246.6 111.5
Total operating revenues and income 4,491.1 4,433.9 3,791.1
Operating expenses:
Fuel, net 973.0 959.5 917.9
Purchased power capacity, net 669.4 646.1 348.8
Other operation 739.6 647.8 526.4
Maintenance 263.2 279.5 280.6
Depreciation, depletion and amortization 533.1 509.5 450.2
Other taxes 274.6 264.2 238.0
Total operating expenses 3,452.9 3,306.6 2,761.9
Operating income 1,038.2 1,127.3 1,029.2
Other income 13.5 15.1 22.7
Income before fixed charges and
federal income taxes 1,051.7 1,142.4 1,051.9
Fixed charges:
Interest charges, net 360.3 373.5 373.7
Preferred dividends of Virginia Power 42.2 42.1 45.7
Total fixed charges 402.5 415.6 419.4
Income before provision for federal income taxes 649.2 726.8 632.5
Provision for federal income taxes 171.0 210.2 203.6
Income before cumulative effect of a change
in accounting principle 478.2 516.6 428.9
Cumulative effect on prior years of changing
the method of accounting for income taxes 15.6
Net income $ 478.2 $ 516.6 $ 444.5
Retained earnings, January 1 1,417.8 1,319.1 1,267.7
Common dividends and other deductions:
Dividends (434.7) (411.2) (386.9)
Other deductions (6.1) (6.7) (6.2)
Retained earnings, December 31 $1,455.2 $1,417.8 $1,319.1
Average common shares outstanding 170.3 165.7 161.1
Earnings per share before cumulative
effect of a change in accounting principle $ 2.81 $ 3.12 $ 2.66
Cumulative effect on prior years of
changing the method of accounting
for income taxes .10
Earnings per common share $ 2.81 $ 3.12 $ 2.76
Dividends paid per common share $ 2.55 $ 2.48 $ 2.40
The accompanying notes are an integral part of the Consolidated Financial
Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS:
(Unaudited)
OVERVIEW
Dominion Resources achieved earnings of $478.2 million in 1994, or $2.81 per
average common share, compared with earnings of $516.6 million in 1993, or $3.12
per share. Virginia Power contributed $2.38 per share in 1994, down 44 cents
from $2.82 per share in 1993. Dominion Resources' non-utility businesses
contributed 43 cents per share in 1994, up 13 cents from 30 cents per share in
1993.
EPS
1994 Change 1993 Change 1992
Virginia Power $2.38 (15.6)% $2.82 7.2% $2.63
Nonutility $0.43 43.3% $0.30 130.8% $0.13
Consolidated $2.81 (9.9)% $3.12 13.0% $2.76
NET INCOME
1994 Change 1993 Change 1992
(millions)
Net income $478.2 (7.4)% $516.6 16.2% $444.5
Avg. shares 170.3 2.8% 165.7 2.9% 161.1
Return on equity 10.6% 12.2% 11.2%
The 1994 results were affected by a number of factors described below:
VIRGINIA POWER:
EARNINGS IMPACTS INCLUDED:
- --decrease in base revenues;
- --decrease in kilowatt-hour (kwh) sales from residential customers; and
- --increase in other operating expenses attributable to a workforce reduction
cost, which reduced earnings by 16 cents per share (see Note N).
These negative earnings impacts were somewhat offset by the reduction in
interest charges and the utility's continued commitment to controlling costs
wherever possible without impacting the safety, adequacy and reliability of its
electric service.
NONUTILITY BUSINESSES:
EARNINGS IMPACTS INCLUDED:
- --increase in income from Dominion Energy attributable to the sale of the Black
Warrior Trust units, which increased earnings by 17 cents per share in the
second quarter of 1994.
This was partially offset by the lower revenues from the Vidalia
hydroelectric plant when compared with extraordinary water flows experienced in
1993.
VIRGINIA POWER
VIRGINIA POWER'S OPERATING RESULTS
Virginia Power in 1994 recognized a net cost of $41.6 million associated with
voluntary separation and early retirement packages accepted by about 1,400
employees (see Note N). In addition, lower base revenues when compared with 1993
contributed to a decrease in the balance for common in 1994.
Virginia Power's balance for common increased by $43.1 million in 1993
primarily because of warmer than normal weather as compared to more moderate
weather in 1992.
1994 Change 1993 Change 1992
(millions)
Revenues $4,170.8 (0.4)% $4,187.3 13.8% $3,679.6
Operating expenses 3,216.4 3.1% 3,120.4 15.8% 2,695.8
Balance for common 404.9 (13.3)% 466.9 10.2% 423.8
VIRGINIA POWER'S OPERATING REVENUES
Revenues decreased in 1994 primarily because of lower base revenues for Virginia
jurisdictional and County and Municipal customers. In February 1994, Virgina
Power received a final order from the Virginia Commission in its 1992 base rate
case that lowered the allowed return on equity to 11.4%.
In 1993 Virginia Power's revenues increased primarily due to increases in
kilowatt-hour sales and in base revenues. Unit sales increased primarily due to
warmer summer weather in 1993. Operating revenues also rose because of an
increase of 47.3% in sales to wholesale customers, primarily due to the sale of
firm capacity and associated energy to Old Dominion Electric Cooperative (ODEC).
OPERATING REVENUES:
Increase (decrease)
from prior year
1994 1993
(millions)
Operating revenues:
Kwh sales $ 22.5 $333.5
Change in base revenues (35.0) 230.7
Fuel cost recovery (7.9) (55.2)
Other 3.9 (1.3)
Total $(16.5) $507.7
During 1994, Virginia Power had 46,741 new connections to its system compared to
43,014 in 1993. This growth in the service area results in an overall increase
in kilowatt-hour sales. However, sales decreased in the large, weather-sensitive
residential segment.
KILOWATT-HOUR SALES
1994 Change 1993 Change 1992
(millions)
Residential 21,621 (1.0)% 21,846 9.3% 19,984
Commercial 18,665 0.8% 18,526 4.7% 17,693
Industrial 10,371 5.4% 9,840 4.5% 9,419
Other 7,950 (0.3)% 7,971 5.3% 7,569
Total retail 58,607 0.7% 58,183 6.4% 54,665
Wholesale 7,134 4.1% 6,853 47.3% 4,652
Total sales 65,741 1.1% 65,036 9.6% 59,317
The increase in kilowatt-hour sales in 1994 as compared to 1993 reflects the
extreme weather experienced in January 1994, partially offset by lower sales
during the second half of 1994 because of milder weather. The number of actual
cooling degree days in 1994 was 5.7% above the normal number of cooling degree
days, and the number of actual heating degree days was 3.8% below the number of
normal heating degree days.
The increase in kilowatt-hour sales in 1993 compared to 1992 reflects the
warmer than normal summer weather in 1993 compared to the moderate weather in
1992. The number of actual cooling degree days in 1993 was 10% above the number
of normal cooling degree days, and the number of actual heating degree days was
1.2% above the number of normal heating degree days.
The increase in sales to wholesale customers in 1993 compared to 1992 was
primarily attributable to the sale of firm capacity and associated energy to
ODEC. Under the terms of the agreement signed November 26, 1991, Virginia Power
is committed to sell up to 300Mw of capacity to ODEC through the commercial
operation date of Clover Power Station.
VIRGINIA POWER'S OPERATING EXPENSES
(excluding federal income taxes)
1994 Change 1993 Change 1992
(millions)
Fuel, net $ 973.0 1.4% $ 959.5 4.5% $ 917.9
Purchased power capacity, net 669.4 3.6% 646.1 85.2% 348.8
Other operation 577.4 9.8% 525.7 10.0% 477.7
Maintenance 263.2 (5.8)% 279.5 (0.4)% 280.6
Depreciation/amortization 480.7 3.8% 462.9 5.8% 437.6
Taxes, other than income 252.7 2.4% 246.7 5.8% 233.2
Total $3,216.4 3.1% $3,120.4 15.8% $2,695.8
Other operation and maintenance expenses in 1994 actually decreased 7by
approximately 1%, excluding $41.6 million related to costs associated with the
early retirement and voluntary separation programs offered by the company in
1994 (see Note N).
Total fuel and purchased power expenses in 1993 increased compared to 1992 as
a result of higher sales in 1993 and a decrease in nuclear generation because of
scheduled outages in 1993. The increased sales, the reduced generation from the
nuclear units, and the increased use of purchased power resulted in higher
overall fuel costs.
Purchased power capacity expenses in 1993 increased compared to 1992
primarily due to the recovery of expenses deferred in 1992. Virginia Power
implemented deferral accounting for certain capacity expenses in 1992.
Other operation expenses increased in 1993 because of the implementation of
Statement of Financial Accounting Standards (SFAS) No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," which increased
expenses associated with the accrual of other postretirement benefits.
NONUTILITY
NONUTILITY OPERATING RESULTS
The nonutility companies increased net income in 1994 by 47.7% because of
Dominion Energy's sale of the Black Warrior Trust units. The sale of the units,
which hold royalty interests in proven, developed natural gas properties,
provided a net gain of $28.9 million in the second quarter of 1994.
Earnings in 1993 for nonutility operations increased from 1992 because of
higher revenues from Dominion Capital's Vidalia hydroelectric plant created by
higher water flow and increased income from Dominion Energy's natural gas
operations.
1994 Change 1993 Change 1992
(millions)
Revenues $320.3 29.9% $246.6 121.2% $111.5
Operating expenses 233.4 28.7% 181.4 63.4% 111.0
Net income 73.4 47.7% 49.7 140.1% 20.7
NONUTILITY OPERATING REVENUES
The 1994 revenue increase was attributable to the sale of the Black Warrior
Trust units, partially offset by lower revenues from the Vidalia hydroelectric
plant when compared with extraordinary water flows experienced in 1993.
The 1993 revenue increase came from greater production of natural gas. Annual
production in 1993 rose to 33.7 billion cubic feet (BCFE) compared to 9.2 BCFE
in 1992. Revenues from Vidalia increased over 1992 revenue levels primarily
because of higher water flows.
NONUTILITY OPERATING EXPENSES
The increase in 1994 operating expenses was consistent with revenue increases.
The 1993 operating expenses of the nonutility companies increased with the
addition of the Cerros Colorados hydroelectric power station in Argentina and
the higher production at oil and gas businesses.
CONSOLIDATED NON-OPERATING ITEMS
INCOME TAXES
Income taxes decreased in 1994 compared to 1993 primarily because of decreased
pre-tax book income from the utility. This was partially offset by a tax
increase from the nonutility companies because of the sale of the Black Warrior
Trust units. The nonutility companies recorded tax credits of $36.6 million in
1994. They were primarily generated from investments in low- income housing
projects and natural gas production activities.
Income taxes increased in 1993 because of an increase in pre-tax book income
and an increase in the federal income tax rate from 34% to 35%. The nonutility
companies recorded tax credits of $36.1 million in 1993.
INTEREST CHARGES
Interest charges decreased in 1994 as a result of the utility's reduction of
$10.6 million in the interest accrued for prior years on certain tax
obligations, and the utility's refinancing activities in current and prior
years.
FUTURE ISSUES
UTILITY ISSUES
REGULATORY POLICY: Regulatory policy continues to be of fundamental importance
to Virginia Power. Recently and in the near-term future, the cost of purchased
capacity constitutes the largest category of increased costs requiring rate
relief. The Virginia Commission has authorized rates providing for the current
recovery of the ongoing levels of capacity payments. Moreover, the Commission
has established and reaffirmed deferral accounting that is intended to ensure
dollar for dollar recovery of reasonably incurred capacity costs.
COMPETITION: Virginia Power will continue to be affected by the developing
competitive market in wholesale power. Under the Energy Policy Act of 1992, any
participant in the wholesale market can obtain a FERC order to provide
transmission services, under certain conditions.
FERC has completed an industrywide formal inquiry aimed at reforming the
pricing of transmission services. Virginia Power was an active participant in
that inquiry. FERC is also encouraging the development of regional transmission
groups (RTGs) in which transmission-owning utilities and transmission users
would jointly plan facilities and administer the provision of transmission
services. It is too early to determine what effects reformed transmission
pricing and the development of RTGs could have on the company.
At present, competition for retail customers is limited. It arises primarily
from the ability of certain business customers to relocate among utility service
territories, to substitute other energy sources for electric power and to
generate their own electricity. The Energy Policy Act bans federal orders of
transmission service to ultimate customers. Broader retail competition that
would allow customers to choose among electric suppliers has been the subject of
intense debate in federal and state forums. If such competition were to develop,
it would have the potential to shift costs among customer classes and to create
significant transitional costs. Certain state actions that affect retail
competition may be preempted by federal law.
Potential competition also exists for Virginia Power's sales to its
cooperative and municipal customers. However, nearly all of this service is
under contracts with multi-year notice provisions. To date, Virginia Power has
not experienced any material loss of load, revenues or net income due to
competition for its customers. The utility believes it has a strong capability
to meet future competition.
In accordance with SFAS No. 71, "Accounting for the Effects of Certain Types
of Regulation," the company's financial statements reflect assets and costs
based on current cost-based ratemaking regulations. Continued accounting under
SFAS No. 71 requires that the following criteria be met:
a) A utility's rates for regulated services provided to its customers are
established by, or are subject to approval by, an independent third-party
regulator;
b) The regulated rates are designed to recover specific costs of providing
the regulated services or products; and
c) In view of the demand for the regulated services and the level of
competition, direct and indirect, it is reasonable to assume that rates set at
levels that will recover a utility's costs can be charged to and collected from
customers. This criterion requires consideration of anticipated changes in
levels of demand or competition during the recovery period for any capitalized
costs.
A utility's operations or portion of operations can cease to meet these
criteria for various reasons, including a change in the method of regulation or
a change in the competitive environment for regulated services. A utility whose
operations or portion of operations cease to meet these criteria should
discontinue application of SFAS No. 71 and write off any regulatory assets and
liabilities for those operations that no longer meet the requirements of SFAS
No. 71. The company's operations currently satisfy the SFAS No. 71 criteria.
However, if events or circumstances should change so that those criteria are no
longer satisfied, management believes that a material adverse effect on the
company's results of operations and financial position may result.
ENVIRONMENTAL MATTERS: Virginia Power is subject to rising costs resulting
from a steadily increasing number of federal, state and local laws and
regulations designed to protect human health and the environment. These laws and
regulations affect future planning and existing operations. They can result in
increased capital, operating and other costs as a result of remediation,
containment and monitoring obligations of Virginia Power. These costs have been
historically recovered through the ratemaking process; however, should material
costs be incurred and not recovered through rates, Virginia Power's results of
operations and financial condition could be adversely impacted.
Virginia Power incurred expenses of $67.3 million, $72.2 million and $65.2
million (including depreciation) during 1994, 1993 and 1992, respectively, for
environmental protection facilities and expects these expenses to be
approximately $64.3 million in 1995. In addition, capital expenditures to limit
or monitor hazardous substances were $4 million, $3.6 million and $6.6 million
for 1994, 1993 and 1992, respectively. The amount estimated for 1995 for these
expenditures is $33.1 million.
The Clean Air Act, as amended in 1990, requires Virginia Power to reduce its
emissions of sulfur dioxide and nitrogen oxides. Beginning in 1995, the sulfur
dioxide reduction program is based on the issuance of a limited number of sulfur
dioxide emission allowances, each of which may be used as a permit to emit one
ton of sulfur dioxide into the atmosphere or may be sold to someone else. The
program is administered by the Environmental Protection Agency (EPA). Virginia
Power is assessing the economic reasonableness of constructing two additional
scrubbers at its Mt. Storm Power Station or acquiring allowances as a means of
maintaining compliance with the Air Act's standards.
The Virginia Water Control Board adopted water quality standards for toxic
pollutants pursuant to the Clean Water Act. The standards became effective April
20, 1992 and will be applicable to Virginia Power as Virginia Pollution
Discharge Elimination System Permits are reissued. Virginia Power is studying
the potential impact of the standards and cannot presently determine whether or
to what extent changes to facilities or operating procedures might ultimately be
required, but incremental compliance costs could be significant.
Permits under the Clean Water Act and state laws have been issued for all of
Virginia Power's steam generating stations now in operation. Such permits are
subject to reissuance and continuing review.
ELECTROMAGNETIC FIELDS: The possibility that exposure to electromagnetic
fields (EMFs) emanating from power lines, household appliances and other
electric sources may result in adverse health effects has been a subject of
increased public, governmental and media attention. A considerable amount of
scientific research has been conducted on this topic without definitive results.
Research is continuing to resolve scientific uncertainties. It is too soon to
tell what, if any, impact EMFs may have on the company's financial condition.
NUCLEAR OPERATIONS: Three refueling outages are currently scheduled for 1995.
The North Anna Unit 2 outage will include steam generator replacement. The Surry
Unit 2 outage will include a ten-year in-service inspection, while Surry Unit 1
will have a normal refueling. Refueling outages typically occur every 18 months
and last for approximately 60 days. Virginia Power's goal is to reduce refueling
outages from an average of 60 days to 48 days. When nuclear units are refueled,
Virginia Power replaces the nuclear-generated power with other more expensive
sources. A reduction in the length of an outage should result in increased
availability of low-cost nuclear generation, thereby lowering expenses.
Stress corrosion cracking has occurred in steam generators of a certain
design, including those at the Surry and North Anna Power Stations. The steam
generators at Surry Units 1 and 2 were replaced in 1981 and 1979, respectively.
The replacement of the steam generators at North Anna Unit 1 was completed in
1993 at a cost of $106 million. Replacement of the North Anna Unit 2 steam
generators is scheduled for 1995 at a total estimated company cost of $110
million. Costs associated with the steam generator replacements at North Anna
Unit 1 and Unit 2 are expected to be recovered through rates.
The Nuclear Regulatory Commission has proposed revisions to the nuclear power
plant license renewal rules issued in 1991. Virginia Power intends to work with
industry groups on life extension programs and to comment on the proposed
rulemaking.
CONSERVATION AND LOAD MANAGEMENT: The company is committed to integrated
resource planning by using effective combinations of demand-side and supply-side
options to meet customer needs. Demand-side programs are selected annually at
Virginia Power. The process is designed to ensure selection of the most
cost-effective demand-side packages.
NONUTILITY ISSUES
INDEPENDENT POWER: The major emphasis in expanding Dominion Energy's core
independent power business is international. With investments in Belize and
Argentina and growing interest elsewhere, the trends and risks will have a
foreign focus. Risks include currency fluctuations, developments in national
markets, and governmental actions. Dominion Energy does not consider such risks
to be an impediment to operations abroad. It is managing these risks by limiting
its investments to stable developing countries, by investing when there is an
appropriate balance of risk and reward, and by avoiding over-commitment to one
country or region. In the United States, the continuing industry trend toward
deregulation will offer opportunities to acquire existing assets. With overall
demand for electricity projected to be relatively flat, however, opportunities
to build new capacity will be very limited.
NATURAL GAS: Natural gas operations are now making a significant contribution
to Dominion Energy's earnings and are expected to continue to do so. Since
Dominion Energy has acquired and developed primarily proven and/or producing
reserves, the trend of financial performance will depend largely on the market
price of natural gas. The market price of any commodity is influenced by many
factors outside of the control of Dominion Energy. However, because of the
advantageous cost basis of Dominion Energy's reserves and the related tax
credits, the natural gas operations are profitable at today's market prices.
Since the majority of the reserves have associated tax credits based on
production, future profitability could be impacted adversely by federal
legislation that would eliminate the tax credit before its current expiration in
2002. Management believes that such action is remote.
REAL ESTATE INVESTMENTS: Dominion Capital's investments in real estate have
historically been a relatively minor part of the nonutility business. Within
real estate in general are two very distinct segments: residential land
development and commercial real estate investments and services.
Residential property development primarily targets the middle- to upper-price
market. The critical risk to financial performance in this market is the
regional economy, which affects both market price and the rate at which the
market absorbs the developed product.
Commercial real estate investments are primarily income-producing properties.
With investments concentrated in the retail and office sectors of eastern
Virginia, financial performance will be most directly impacted by the growth of
that regional economy. Dominion Capital's investments in commercial real estate
and in a commercial real estate service and brokerage firm provide a balancing
of risks and returns over the entire commercial real estate cycle.
CORPORATE ISSUES
A dispute over corporate governance issues between Dominion Resources and
Virginia Power arose in 1994. In connection with that dispute, the Virginia
Commission commenced proceedings investigating these and related issues. A
description of the Virginia Commission proceedings is included in Note O to the
Consolidated Financial Statements. A Settlement Agreement was entered into by
the two companies and their respective boards with respect to these matters in
August 1994. The Settlement Agreement is also described in Note O.
During the 1995 session of the Virginia General Assembly, the Virginia
Commission caused legislation to be introduced that addressed the Commission's
authority to intervene in disputes involving public utilities owned by separate
holding companies. That legislation was opposed by Dominion Resources. On
February 20, 1995, the proposed legislation was withdrawn and Dominion
Resources, Virginia Power and the Virginia Commission Staff consented to an
order that is included in Dominion Resources' Current Report on Form 8-K of
February 21, 1995. Under this order which will be effective until July 2, 1996,
Dominion Resources must obtain the Commission's approval before taking steps
such as removing Virginia Power's board members or officers or changing Virginia
Power's articles of incorporation or by-laws. Although the order imposes for the
next fifteen months significant restrictions on the ability of Dominion
Resources to select the board and management of its subsidiary, Dominion
Resources and Virginia Power agreed to the order in the interest of enhancing
relations with the Virginia Commission and achieving the purposes of the
Settlement Agreement.
Disagreements between the companies have arisen from time to time since the
Settlement Agreement was executed. On February 28, 1995, upon recommendation of
a Joint Committee created under the Settlement Agreement, the boards of Dominion
Resources and Virginia Power took further action to enhance cooperation between
the two companies and their relationship with the Virginia Commission. Among
other things, the boards expanded the authority of the Joint Committee to act
for the boards on issues presented to it by the chief executives of the
companies. Each board directed corporate officials and employees of its company
to cooperate fully with the Joint Committee in resolution of issues acted on by
the committee and to support actions taken by the committee. In connection with
these initiatives, the chief executive officers of both companies made known
their intentions to retire in July 1996 and the boards directed the development
of executive succession plans for each company. Also, the Dominion Resources
board received the resignations of directors Bruce C. Gottwald and John W. Snow
and the Virginia Power board received the resignations of directors William W.
Berry and Frank S. Royal, and both boards voted to reduce their size by two
members.
At this time, Dominion Resources is unable to predict the ultimate resolution
of these matters or their effect on the company.
Consolidated Balance Sheets
ASSETS
AT DECEMBER 31, 1994 1993
(millions)
Current assets:
Cash and cash equivalents $ 146.7 $ 102.0
Trading securities 110.8
Marketable securities 149.5
Customer accounts receivable, net 202.7 202.9
Other accounts receivable 83.2 62.0
Accrued unbilled revenues 97.4 105.7
Materials and supplies at
average cost or less:
Plant and general 186.6 182.1
Fossil fuel 122.9 121.0
Other 136.2 123.9
1,086.5 1,049.1
Investments:
Investments in affiliates 282.8 280.9
Available-for-sale-securities 286.5
Marketable securities (cost $287.8) 287.4
Nuclear decommissioning trust funds 260.9 226.4
Investments in real estate 107.5 117.8
Other 222.4 176.8
1,160.1 1,089.3
Property, plant and equipment:
(includes plant under construction
of $828.2 [1993-$913.1]) 15,415.4 14,914.7
Less accumulated depreciation,
depletion and amortization 5,170.0 4,802.1
10,245.4 10,112.6
Deferred charges and other assets:
Regulatory assets 871.0 930.5
Other 199.2 168.0
1,070.2 1,098.5
Total assets $13,562.2 $13,349.5
The accompanying notes are an integral part of the Consolidated Financial
Statements.
LIABILITIES AND SHAREHOLDERS' EQUITY
AT DECEMBER 31, 1994 1993
(millions)
Current liabilities:
Securities due within one year $ 399.1 $ 195.0
Short-term debt 146.0 262.8
Accounts payable, trade 343.5 314.9
Accrued interest 106.3 112.0
Accrued taxes 15.8
Accrued payrolls 59.5 68.3
Customer deposits 55.0 53.9
Provision for rate refunds 12.2 101.7
Other 115.8 81.9
1,237.4 1,206.3
Long-term debt:
Utility 3,910.4 3,899.9
Nonrecourse-nonutility 640.2 700.6
Other 160.0 150.0
4,710.6 4,750.5
Deferred credits and other liabilities:
Deferred income taxes 1,613.6 1,586.7
Investment tax credits 289.2 306.3
Deferred fuel expenses 51.5 54.1
Other 257.7 191.7
2,212.0 2,138.8
Total liabilities 8,160.0 8,095.6
Commitments and contingencies
Preferred stock:
Virginia Power stock subject to
mandatory redemption 222.1 224.0
Virginia Power stock not subject to
mandatory redemption 594.0 594.0
Common shareholders' equity:
Common stock--no par,
authorized 300,000,000 shares,
outstanding--172,405,049 shares
at 1994 and 168,122,687 shares at 1993 3,157.6 2,991.0
Retained earnings 1,455.2 1,417.8
Allowance on available-for-sale securities (47.8) (0.6)
Other paid-in capital 21.1 27.7
4,586.1 4,435.9
Total liabilities and shareholders' equity $13,562.2 $13,349.5
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 1994 1993 1992
(millions)
Cash flows from (to) operating activities:
Net income $ 478.2 $ 516.6 $ 444.5
Adjustments to reconcile net income to net cash:
Cumulative effect of change in method of
accounting for income taxes (15.6)
Depreciation, depletion and amortization 610.7 593.9 560.0
Deferred income taxes 68.2 34.7 137.1
Investment tax credits, net (17.1) (19.2) (19.4)
Allowance for other funds used during construction (6.4) (5.1) (4.8)
Deferred fuel expenses (2.6) (36.1) 45.2
Deferred capacity expenses 26.5 72.8 (102.7)
Non-cash return on terminated construction
project costs--pre-tax (10.3) (11.9) (13.7)
Gain on sale of trust units (49.0)
Changes in current assets and liabilities:
Accounts receivable 19.1 (56.6) (35.7)
Accrued unbilled revenues 11.9 (6.3) 2.8
Materials and supplies (6.5) 27.4 (33.8)
Accounts payable, trade 32.6 26.5 79.2
Accrued interest and taxes (46.5) 31.1 (32.9)
Provision for rate refunds (89.5) (87.6) 161.9
Other changes (27.5) 16.8 9.7
Net cash flows from operating activities 991.8 1,097.0 1,181.8
Cash flows from (to) financing activities:
Issuance of common stock 186.7 196.6 192.6
Issuance of preferred stock 150.0 240.0
Issuance of long-term debt:
Utility 464.0 1,035.0 1,241.0
Nonrecourse-nonutility 18.7 288.4 72.9
Issuance (repayment) of short-term debt (117.0) 133.4 (43.5)
Repayment of long-term debt and preferred stock (349.6) (1,241.6) (1,347.4)
Common dividend payments (434.7) (411.2) (386.9)
Other (8.0) (8.8) (55.3)
Net cash flows from (to) financing activities (239.9) 141.8 (86.6)
Cash flows from (used in) investing activities:
Capital expenditures (excluding AFC-equity funds) (660.9) (712.8) (716.5)
Acquisition of natural gas and
independent power properties (60.4) (316.8) (222.6)
Sale of accounts receivable, net (40.0)
Sale of trust units 128.4
Other investments (74.3) (189.6) (136.0)
Net cash flows used in investing activities (707.2) (1,219.2) (1,075.1)
Increase in cash and cash equivalents $ 44.7 $ 19.6 $ 20.1
Cash and cash equivalents at beginning of the year 102.0 82.4 62.3
Cash and cash equivalents at end of the year $ 146.7 $ 102.0 $ 82.4
The accompanying notes are an integral part of the Consolidated Financial
Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION:
(Unaudited)
CONSOLIDATED
FINANCING ACTIVITY
Each of Dominion Resources subsidiaries--Virginia Power, Dominion Capital and
Dominion Energy--obtains capital primarily through cash from operations,
financings and equity contributed by the parent. The utility and nonutility
companies obtain financing based on their individual credit ratings and ability
to repay the debt. In no way are the other companies contingently liable for
each other's indebtedness.
COMMERCIAL PAPER
To finance working capital for operations, proceeds from the sale of Dominion
Resources commercial paper in regional and national markets are made available
to its subsidiaries under the terms of intercompany credit agreements. To
support these borrowings, Dominion Resources had available bank lines of credit
totaling $430.8 million at the end of 1994. Amounts borrowed by the subsidiaries
are repaid to Dominion Resources through cash flows from operations and through
proceeds from permanent financings. Virginia Power had no amount outstanding
under its commercial paper program at December 31, 1994.
COMMON EQUITY
Dominion Resources made no underwritten public offerings of common stock in 1994
but did raise capital from sales of common stock through an Automatic Dividend
Reinvestment and Stock Purchase Plan, a Customer Stock Purchase Plan, and an
Employee Savings Plan. Dominion Resources will continue to raise capital through
these plans in 1995. Proceeds from these plans were (in millions): 1994-$166;
1993-$196.6 and 1992-$192.6. Reflected in the 1994 amount of proceeds from these
plans was the repurchase of 566,000 shares of common stock for an aggregate
price of $20.7 million. Dominion Resources is authorized to repurchase up to 5
million shares of its common stock.
VIRGINIA POWER
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is important to Virginia Power because of the capital intensive nature
of its business, which requires large investments in long-lived assets.
Cash from operations has accounted for, on average, 74 percent of the
company's cash requirements during the past three years. Virginia Power's major
external sources of financing during 1994 were the issuances of $325 million of
First and Refunding Mortgage Bonds, $100 million of unsecured medium term notes
with annual interest rates ranging from 6.15% to 7.27%, and $75 million from
common stock issued to Dominion Resources. The proceeds from these financings
were used for redemptions of $119 million of higher-cost debt and payment of a
portion of Virginia Power's capital requirements. During the year, Virginia
Power retired $166.5 million of securities through mandatory debt maturities and
sinking fund requirements.
SOURCES AND USES OF CASH
1994 1993 1992
(millions)
Sources of cash:
Cash from operations $1,018.3 $1,022.9 $1,175.0
Common stock 75.0 50.0 75.0
Preferred stock 150.0 240.0
Long-term debt 464.0 1,035.0 1,241.0
Other 6.9 76.2
$1,564.2 $2,334.1 $2,731.0
Uses of cash:
Utility plant $ 580.9 $ 644.9 $ 662.2
Nuclear fuel 80.0 67.9 54.3
Repayment of long-term debt
and preferred stock 334.3 1,072.1 1,347.5
Dividends 438.2 421.1 416.1
Nuclear decommissioning
contributions 24.5 24.4 24.3
Other 106.3 103.7 226.6
$1,564.2 $2,334.1 $2,731.0
In addition, Virginia Power repurchased $9.8 million of its securities. These
transactions, among other factors, had the effect of lowering Virginia Power's
embedded cost of debt from 7.67 percent to 7.65 percent in 1994.
In 1994, Virginia Power issued $39 million of variable and fixed-rate
Pollution Control securities to refinance $39 million of higher-cost Pollution
Control securities.
Virginia Power's common equity portion of its capitalization was 44.3 percent
at December 31, 1994.
Proceeds from the sale of commercial paper are primarily used to finance
working capital for operations. Borrowings under this program are limited to
$200 million outstanding at any one time, of which no amount was outstanding at
December 31, 1994. In addition, Virginia Power paid common stock and preferred
stock dividends of $395.5 million and $42.7 million, respectively.
VIRGINIA POWER:
1994 LONG-TERM DEBT ACTIVITY
(excluding sinking fund payments)
Issuances Redemptions
(millions)
Jan. $ 19.5 @ 5.45% Jan. $ 19.5 @ 6.75%
Jan. $125.0 @ 7.60% Jan. $119.0 @ 9.75%
Mar. $ 19.5 @ variable Mar. $019.5 @ 5.63%
May $ 45.0 @ 6.28 to 6.35%
Jun. $ 55.0 @ 6.15 to 7.27%
Oct. $200.0 @ 8.625%
CAPITAL REQUIREMENTS
Virginia Power presently anticipates that kilowatt-hour sales will grow
approximately 2.1 percent a year through 2014. Capacity needed to support this
growth will be provided through a combination of generating units constructed by
Virginia Power, purchases from nonutility generators, and other utility
generators. Each of these options plays an important role in Virginia Power's
overall plan to meet capacity needs. Peaking units may be needed to meet demand
by the end of the decade, but no base load generation is expected to be needed
until the middle of the next decade.
Construction continues on the Clover project in which Virginia Power has a 50
percent ownership interest. Virginia Power's share of construction costs is
estimated to be $533 million. As of December 31, 1994, Virginia Power had
incurred $449.8 million in construction expenditures. Clover Units 1 and 2 are
expected in service by April 1995 and April 1996, respectively.
Virginia Power estimates that in 1995, 82 percent of its construction
expenditures, including nuclear fuel, will be met through cash flow from
operations and the balance, including other capital requirements, will be
obtained through sales of securities and short-term borrowings.
Projected construction and nuclear fuel expenditures for the next three years
are expected to total approximately $1.9 billion, excluding allowance for funds
used during construction (AFC).
NONUTILITY
LIQUIDITY AND CAPITAL RESOURCES
Current capital requirements for nonutility operations are funded from:
internally generated funds; intercompany credit agreements with Dominion
Resources; a $200 million medium-term note facility; $185 million in bank
revolving credit agreements and a $90 million commercial paper program. In 1994,
net borrowings decreased by $33.7 million, primarily due to the cash inflow from
the sale of the Black Warrior Trust units. Net borrowings increased by $264.2
million and $33.6 million during 1993 and 1992, respectively. These funds were
borrowed principally for investments in marketable securities, natural gas
acquisitions, land acquisitions and independent power projects.
CASH FLOWS:
1994 1993 1992
(millions)
Sources of cash:
Cash from operations $ 48.1 $116.9 $ 58.5
Issuance of debt 81.3 415.5 147.0
Sale of trust units 128.4
Contribution from parent 4.9 35.0 135.0
Other 55.9 91.9 100.1
$318.6 $659.3 $440.6
Uses of cash:
Investments $ 39.8 $ 61.7 $ 52.6
Independent power properties 214.1 33.7
Natural gas properties 60.4 102.7 188.9
Land and land development 0.6 14.1
Repayment of debt 115.0 151.3 113.4
Dividends 39.1 32.9 17.7
Other 64.3 96.0 20.2
$318.6 $659.3 $440.6
In 1994 Dominion Capital received $4.9 million from Dominion Resources to
finance its operations.
Nonutility capital requirements in 1995 are expected to be funded primarily
by equity contributions and cash flows from operations.
FINANCIAL POSITION:
1994 1993 1992
(millions)
Marketable securities $ 397.3 $ 436.9 $ 327.5
Hydroelectric project 123.5 116.6 100.6
Enron/Dominion Cogen Corp. 86.2 90.0 94.8
Energy partnerships 124.0 125.6 124.2
Real estate partnerships 11.2 10.3 10.4
Other 140.3 102.4 97.7
Total investments 882.5 881.8 755.2
Land and land development 97.2 104.7 111.5
Independent power properties 240.0 243.1 33.4
Natural gas properties 279.3 326.7 225.4
Other assets 472.1 303.0 199.4
Total assets $1,971.1 $1,859.3 $1,324.9
Total long-term debt $ 640.2 $ 700.6 $ 433.9
Notes to Consolidated Financial Statements
Note A:
SIGNIFICANT ACCOUNTING POLICIES:
Dominion Resources is currently exempt from regulation as a registered holding
company under the Public Utility Holding Company Act of 1935.
Accounting for the utility business conforms with generally accepted
accounting principles as applied to regulated public utilities and as prescribed
by federal agencies and the commissions of the states in which the utility
business operates.
CONSOLIDATION: The Consolidated Financial Statements include the accounts of
Dominion Resources and its subsidiaries. In consolidation, all significant
inter-company transactions and accounts have been eliminated.
OPERATING REVENUES AND INCOME: Utility revenues are recorded on the basis of
service rendered. Dividend income on securities owned is recognized on the
ex-dividend date.
Investments in common stocks of affiliates representing 20 percent to 50
percent ownership, and joint ventures and partnerships representing generally 50
percent or less ownership interests, are accounted for under the equity method.
PROPERTY, PLANT AND EQUIPMENT: Utility plant is recorded at original cost,
which includes labor, materials, services, AFC (where permitted by regulators),
and other indirect costs.
The cost of acquisition, exploration and development of natural resource
properties is accounted for under the successful efforts method.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to which
it relates and is amortized over the asset's estimated useful life. In 1994,
1993 and 1992, $7.4 million, $6 million, and $8.2 million of interest cost was
capitalized, respectively. Capitalized interest includes AFC-other funds for
certain regulatory jurisdictions of $4.2 million, $3.5 million and $4.7 million
for the years ended December 31, 1994, 1993 and 1992, respectively.
Major classes of property, plant and equipment and their respective balances
are:
AT DECEMBER 31, 1994 1993
(millions)
Utility:
Production $ 6,916.6 $ 6,659.0
Transmission 1,301.2 1,248.4
Distribution 3,989.8 3,761.0
Other electric 860.8 794.6
Construction work-in-progress 828.2 913.1
Nuclear fuel 817.2 814.1
Total utility 14,713.8 14,190.2
Nonutility:
Natural gas properties 331.6 381.1
Independent power properties 253.0 247.8
Construction work-in-progress 45.6 29.8
Other 71.4 65.8
Total nonutility 701.6 724.5
Total property,
plant and equipment $15,415.4 $14,914.7
DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation of utility plant (other
than nuclear fuel) is computed using the straight-line method based on projected
useful service lives. The cost of depreciable utility plant retired and the cost
of removal, less salvage, are charged to accumulated depreciation. The provision
for depreciation on utility plant was based on weighted average depreciable
plant using a rate of 3.2 percent for 1994, 1993 and 1992.
Owned nuclear fuel is amortized on a unit-of-production basis sufficient to
amortize fully, over the estimated service life, the cost of the fuel plus
permanent storage and disposal costs.
Costs in excess of net assets acquired from equity investments are amortized
over periods not to exceed 40 years.
NUCLEAR DECOMMISSIONING: Nuclear plant decommissioning costs are accrued and
recovered through rates over the expected service lives of Virginia Power's
nuclear generating units. The amounts collected from customers are being placed
in trust, which, with the accumulated earnings thereon, will be utilized solely
to fund future decommissioning obligations.
Approximately every four years, site-specific studies are prepared to
determine the decommissioning cost estimate for Virginia Power's four nuclear
units. The current cost estimate is based on the DECON method, which assumes the
decontamination or prompt removal of radioactive contaminants so that the
property may be released for unrestricted use shortly after cessation of
operations. Virginia Power currently estimates that decommissioning will begin
at the expiration date of each unit's operating license, which will occur in
2012, 2013, 2018 and 2020 for the Surry Units 1 & 2 and North Anna Units 1 & 2,
respectively. Based on Virginia Power's latest decommissioning study completed
in 1994, total decommissioning costs, including reclamation costs, are estimated
to be $1 billion in 1994 dollars.
The accumulated provision for decommissioning of $260.9 million and $226.4
million is included in accumulated depreciation, depletion and amortization at
December 31, 1994 and 1993, respectively. Provisions for decommissioning of
$24.5 million, $24.4 million and $24.3 million applicable to 1994, 1993 and
1992, respectively, are included in depreciation, depletion and amortization
expense. The balance in Virginia Power's Nuclear Decommissioning trust funds was
$260.9 million and $226.4 million at December 31, 1994 and 1993, respectively.
The net unrealized loss of $5.2 million at December 31, 1994 is included in the
accumulated provision for decommissioning.
Earnings of the trust funds were $15.2 million, $16.3 million and $9.1
million for 1994, 1993 and 1992, respectively, and are included in other income
in the Consolidated Financial Statements.
In 1994 and 1993, the accretion of the accumulated provision for
decommissioning, equal to the earnings of the trust funds, was recorded in other
income. Such amounts in 1992 were recorded in interest charges, net.
The Financial Accounting Standards Board (FASB) is reviewing the accounting
for nuclear plant decommissioning. If current electric utility industry
practices for such decommissioning are changed, annual provisions for
decommissioning could increase. FASB may ultimately determine that the estimated
cost of decommissioning should be reported as a liability rather than as
accumulated depreciation and that a substantial portion of the decommissioning
obligation should be recognized earlier in the operating life of the nuclear
plant.
FEDERAL INCOME TAXES: Dominion Resources and its subsidiaries file a
consolidated federal income tax return.
Dominion Resources adopted SFAS No. 109, "Accounting for Income Taxes" in
1992 which requires companies to measure and record deferred tax assets and
liabilities for all temporary differences. Temporary differences occur when
events and transactions recognized for financial reporting result in taxable or
tax-deductible amounts in future periods. The regulatory treatment of temporary
differences can differ from the requirements of SFAS No. 109. Accordingly,
Virginia Power recognizes a regulatory asset if it is probable that future
revenues will be provided for the payment of those deferred tax liabilities.
Similarly, in the event a deferred tax liability is reduced to reflect changes
in tax rates, a regulatory liability is established if it is probable that a
future reduction in revenue will result.
Due to regulatory requirements, Virginia Power accounts for investment tax
credits under the "deferral method" which provides for the amortization of these
credits over the service lives of the property giving rise to the credits.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION: The applicable regulatory
Uniform System of Accounts defines AFC as the cost during the construction
period of borrowed funds used for construction purposes and a reasonable rate on
other funds when so used.
The pre-tax AFC rates for 1994, 1993 and 1992 were 8.9, 9.4 and 10.3 percent,
respectively. Approximately 83 percent of Virginia Power's construction work in
progress (CWIP) is now included in rate base and a cash return is collected
currently thereon.
DEFERRED CAPACITY AND FUEL EXPENSES: In 1992, Virginia Power began to defer
certain capacity expenses based on an order by the Virginia Commission.
Approximately 90 percent of fuel expenses and 80 percent of capacity expenses
are subject to deferral accounting. Under this method, the difference between
reasonably incurred actual expenses and the level of expenses included in
current rates is deferred and matched against future revenues.
AMORTIZATION OF DEBT ISSUANCE COSTS: Dominion Resources defers and amortizes
any expenses incurred in the issuance of long-term debt including premiums and
discounts associated with such debt over the lives of the respective issues. Any
gains or losses resulting from the refinancing of Virginia Power debt are also
deferred and amortized over the lives of the new issues of long-term debt as
permitted by the appropriate regulatory commission. At Virginia Power, gains or
losses resulting from the redemption of debt without refinancing are amortized
over the remaining lives of the redeemed issues.
MARKETABLE SECURITIES: Dominion Resources adopted, effective January 1, 1994,
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The standard requires companies to account for and classify
investments in equity securities that have readily determinable fair values and
for all investments in debt securities, based on management's intent. The
investments are to be classified into three categories and accounted for in the
following manner.
Debt securities which are intended to be held to maturity are classified as
held-to-maturity securities and reported at amortized cost. Debt and equity
securities purchased and held with the intent of selling them in the current
period are classified as trading securities. They are reported at fair value and
unrealized gains and losses are included in earnings. Debt and equity securities
that are neither heldto-maturity or trading are classified as available-for-sale
securities. These are reported at fair value with unrealized gains and losses
reported in shareholders' equity, net of tax.
This standard is to be applied on a prospective basis effective with fiscal
years beginning after December 15, 1993 and cannot be applied retroactively to
the prior year's financial statements.
In 1993, the company accounted for marketable securities as prescribed in
SFAS No. 12, "Accounting for Certain Marketable Securities." Based on this
standard, current and noncurrent marketable securities are carried at the lower
of aggregate cost or market value. A change in the valuation of the current
portfolio is recognized in the determination of net income in the current
period. For noncurrent marketable securities, a valuation allowance,
representing the excess of aggregate cost over the market value of these
securities, is included in common shareholders' equity for those securities
affected by a decline in value considered to be temporary.
NONRECOURSE-NONUTILITY FINANCINGS: Dominion Resources' nonutility
subsidiaries issue debt to finance their operations and obtain financings that
generally are secured by the assets of the nonutility subsidiaries. However,
Dominion Resources may be required to provide contingent equity support or to
maintain a minimum net worth at the nonutility subsidiaries. These financings
have been segregated on the accompanying financial statements to distinguish
their nonrecourse nature.
CASH: Current banking arrangements generally do not require checks to be
funded until actually presented for payment. At December 31, 1994 and 1993, the
company's accounts payable included the net effect of checks outstanding but not
yet presented for payment of $72.2 million and $78.1 million, respectively.
Dominion Resources considers cash and cash equivalents to include cash on
hand and temporary investments purchased with a maturity of three months or
less.
SUPPLEMENTARY CASH FLOWS INFORMATION:
1994 1993 1992
(millions)
Cash paid during
the year for:
Interest (reduced for net
costs of borrowed funds
capitalized) $355.9 $375.8 $379.8
Federal income taxes 154.2 187.8 111.9
Non-cash transactions
from investing and
financing activities:
Exchange of long-term
marketable securities 11.8 169.8 156.1
Assumption of obligations
and acquisition of utility
property 26.3
Other 3.1 (0.4) (0.9)
RECLASSIFICATION: Certain amounts in the 1993 and 1992 Consolidated Financial
Statements have been reclassified to conform to the 1994 presentation.
Note B:
SALE OF RECEIVABLES:
Virginia Power has an agreement to sell, with limited recourse, certain accounts
receivable including unbilled amounts, up to a maximum of $200 million.
Additional receivables are continually sold, at Virginia Power's discretion, to
replace those collected up to the limit. At December 31, 1994 and 1993, $160
million and $200 million, respectively, of such receivables had been sold and
were outstanding under this agreement. The limited recourse is provided by
Virginia Power's assignment of an additional undivided interest in accounts
receivable to cover any potential losses to the purchaser due to uncollectible
accounts. Virginia Power has provided for the estimated amount of such losses in
its accounts.
Note C:
TAXES:
1994 1993 1992
(MILLIONS, EXCEPT PERCENTAGES)
Taxes other than federal
income tax:
Real estate and property $ 83.9 $ 84.8 $ 79.2
State and local gross receipts 104.9 100.8 92.8
Payroll 33.9 31.3 30.8
Other 51.9 47.3 35.2
$274.6 $264.2 $238.0
Provision for federal
income taxes:
Included in operating expenses:
Current $120.8 $197.2 $ 96.3
Tax effects of temporary/
timing differences:
Liberalized depreciation 61.3 50.6 69.5
Indirect construction costs (21.5) (23.2) (12.6)
Other plant related items 4.0 19.9 10.0
Deferred fuel .8 11.8 (15.4)
Deferred capacity (9.0) (24.7) 34.9
Debt issuance costs 3.7 8.3 15.4
Customer accounts reserve 36.8 (34.9) 7.5
Intangible drilling costs 4.1 15.3 9.6
Other, net (12.9) 9.1 7.8
67.3 32.2 126.7
Net deferred investment tax
credits--amortization (17.1) (19.2) (19.4)
Total provision for federal
income tax expense $171.0 $210.2 $203.6
Computation of provision
for federal income tax:
Pre-tax income $649.2 $726.8 $632.5
Tax at statutory federal income
tax rate of 35% applied to
pre-tax income (34% in 1992)* $227.2 $254.4 $215.0
Changes in federal income
taxes resulting from:
Preferred dividends of
Virginia Power 14.8 14.8 15.5
Amortization of investment
tax credits (17.1) (16.1) (15.1)
Nonconventional fuel credit (32.0) (30.5) (5.8)
Other, net (21.9) (12.4) (6.0)
Total provision for federal
income tax expense $171.0 $210.2 $203.6
Effective tax rate 26.3% 28.9% 32.2%
(*) The Omnibus Budget Reconciliation Act of 1993 increased the corporate income
tax rate to 35 percent effective January 1, 1993.
In 1992, Dominion Resources adopted the provisions of SFAS No. 109. The
company implemented and reported the standard as a change in accounting
principle with the cumulative effect on prior years of a $15.6 million (10 cents
per share) increase in 1992 earnings. The adoption of SFAS No. 109 increased
deferred income tax liabilities by $459 million and resulted in the
establishment of a net regulatory asset by the same amount. For additional
information, see Federal Income Taxes under Note A.
Dominion Resources net noncurrent deferred tax liability is attributable to:
1994 1993
(MILLIONS)
Assets:
Deferred investment tax credits $ (102.4) $ (108.5)
Liabilities:
Depreciation method and plant basis
differences 1,349.7 1,310.6
Intangible drilling costs 31.0 31.4
Income taxes recoverable through
future rates 172.9 176.3
Terminated construction project costs 23.9 27.6
Partnership basis differences 104.3 93.0
Other 34.2 56.3
Total deferred income tax liability 1,716.0 1,695.2
Net deferred income tax liability $1,613.6 $1,586.7
Note D:
REGULATORY ASSETS:
Certain expenses normally reflected in income are deferred on the balance sheet
as regulatory assets and are recognized in income as the related amounts are
included in rates and recovered from customers. The company's regulatory assets
included the following:
AT DECEMBER 31, 1994 1993
(millions)
Income taxes recoverable through future rates $488.2 $497.8
Cost of decommissioning DOE uranium
enrichment facilities 83.7 85.2
Deferred losses or gains on reacquired debt 107.0 103.6
North Anna Unit 3 project termination costs 128.5 153.3
Other 63.6 90.6
Total $871.0 $930.5
Income taxes recoverable through future rates represent principally the tax
effect of depreciation differences not normalized. These amounts are amortized
as the related temporary differences reverse.
The costs of decommissioning the Department of Energy's (DOE) uranium
enrichment facilities have been deferred and represent the unamortized portion
of Virginia Power's required contributions to a fund for decommissioning and
decontaminating the DOE's uranium enrichment facilities. Virginia Power is
making such contributions over a 15-year period with escalation for inflation.
These costs are being recovered in fuel rates.
Deferred losses or gains on reacquired debt are deferred and amortized over
the lives of the new issues of long-term debt. Gains or losses resulting from
the redemption of debt without refinancing are amortized over the remaining
lives of the redeemed issues.
The construction of North Anna 3 was terminated in November 1982. All retail
jurisdictions have permitted recovery of the incurred costs. The amounts
deferred are being amortized over a 15-year period for Virginia and FERC
jurisdictional customers.
Note E:
JOINTLY OWNED PLANTS:
The following information relates to Virginia Power's proportionate share of
jointly owned plants at December 31, 1994:
Bath County
Pumped North Anna Clover
Storage Station Power Station Power Station
Ownership interest 60.0% 88.4% 50.0%
(millions)
Utility plant in service $1,078.3 $1,774.5
Accumulated depreciation 173.3 598.4
Nuclear fuel 409.8
Accumulated amortization
of nuclear fuel 382.0
CWIP 0.6 163.6 $449.8
The co-owners are obligated to pay their share of all future construction
expenditures and operating costs of the jointly owned facilities in the same
proportion as their respective ownership interest. Virginia Power's share of
operating costs is classified in the appropriate expense category in the
consolidated statements of income.
Note F:
SHORT-TERM DEBT:
Dominion Resources and its subsidiaries have credit agreements with various
expiration dates. These agreements provided for maximum borrowings of $705.8
million and $660.8 million at December 31, 1994 and 1993, respectively. At
December 31, 1994 and 1993, $135.2 million and $148.3 million, respectively, was
borrowed under such agreements and classified as long-term debt.
Dominion Resources credit agreements supported $224.0 million and $235.7
million of Dominion Resources' commercial paper at December 31, 1994 and 1993,
respectively. These agreements also supported $43 million of Virginia Power's
commercial paper at December 31, 1993. No Virginia Power commercial paper was
outstanding at December 31, 1994. A subsidiary of Dominion Capital also had
$90.7 million and $90.3 million of nonrecourse commercial paper outstanding at
December 31, 1994 and 1993, respectively. A total of $250 million and $240
million of the commercial paper was classified as long-term debt at December 31,
1994 and 1993, respectively. The commercial paper is supported by revolving
credit agreements that have expiration dates extending beyond one year.
Dominion Resources and its subsidiaries pay fees in lieu of compensating
balances in connection with these credit agreements. A summary of short-term
debt outstanding at December 31 follows:
Amount Weighted Average
Outstanding Interest Rate
(millions, except percentages)
1994
Commercial paper $64.0 6.08%
Term-notes 82.0 7.38%
Total $146.0
1993
Commercial paper $128.7 3.46%
Master notes 0.1 2.85%
Term-notes 134.0 7.60%
Total $262.8
Note G:
MARKETABLE SECURITIES:
Effective January 1, 1994, Dominion Resources adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities (SFAS No. 115)." The
standard prescribes how companies are to account for and report investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. This standard is effective for fiscal years
beginning after December 15, 1993. The adoption of SFAS No. 115 resulted in an
increase in earnings of $6.3 million, net of tax, for the unrealized gain on
marketable securities classified as trading at Janaury 1, 1994.
Securities classified as available-for-sale as of December 31, 1994:
Gross Gross
Unrealized Unrealized
Security Holding Holding Aggregate
Type Cost Gains Losses Fair Value
(millions)
Equity $334.5 $1.3 $54.2 $281.6
Debt 5.5 0.6 4.9
Maturities of debt securities classified as available-for-sale as of December
31, 1994:
Aggregate
Security Type Cost Fair Value
(millions)
Tax exempt obligations:
After five years $5.4 $4.8
Temporary investments and deposits:
After five years 0.1 0.1
For the year ended December 31, 1994, the proceeds from the sales of
available-for-sale securities is $35.8 million and the gross realized gains and
losses were $0.4 million and $1.6 million, respectively. The basis on which the
cost of these securities was determined is specific identification. The gross
gains included in earnings from transfers of securities from the
available-for-sale category into the trading category is $0.8 million. The
change in net unrealized holding gain or loss on available-for-sale securities
has resulted in a decrease in the separate component of shareholders' equity
during the year ended December 31, 1994 of $47.2 million, net of tax. The change
in net unrealized holding gain or loss on trading securities decreased earnings
during the year ended December 31, 1994 by $10 million.
In 1993, the company accounted for marketable securities as prescribed in
SFAS No. 12. At December 31, 1993 the marketable securities classified as
short-term had aggregate cost and aggregate market values of $149.5 million and
$157.7 million, respectively. The marketable securities classified as long-term
had aggregate cost and aggregate market values of $287.8 million and $287.4
million, respectively. During 1993, a decrease was recorded in the valuation
allowance included in common shareholders' equity of $11.2 million.
Net realized gains of $12.5 million and $15.8 million on the sale of
marketable securities were included in net income for the years ended December
31, 1993 and 1992, respectively.
Note H:
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value amounts of the company's financial instruments have been
determined using available market information and valuation methodologies deemed
appropriate in the opinion of management. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the company could realize in a current market exchange. The use
of different market assumptions and/or estimation assumptions may have a
material effect on the estimated fair value amounts.
Carrying Amount Estimated Fair Value
DECEMBER 31, 1994 1993 1994 1993
(millions)
Assets:
Cash and cash equivalents $ 146.7 $ 102.0 $ 146.7 $ 102.0
Marketable securities 418.0 464.1 418.0 464.1
Notes receivable 17.1 2.5 17.1 2.5
Nuclear decommissioning trust funds 260.9 226.4 260.9 243.8
Liabilities:
Short-term debt $ 146.0 $ 262.8 $ 146.0 $ 262.8
Long-term debt 5,134.4 4,966.1 4,951.9 5,237.5
Preferred stock $ 222.1 $ 225.5 $ 201.5 $ 251.8
CASH AND CASH EQUIVALENTS: The carrying amount of these items is a reasonable
estimate of their fair value.
MARKETABLE SECURITIES AND NUCLEAR DECOMMISSIONING TRUST FUNDS: The estimated
fair value is determined based on quoted market prices, dealer quotes, and
prices obtained from independent pricing sources.
NOTES RECEIVABLE: The carrying value approximates fair value due to the
variable rate or term structure of the notes receivable.
SHORT-TERM DEBT AND LONG-TERM DEBT:Market values are used to determine the
fair value for debt securities for which a market exists. For debt issues that
are not quoted on an exchange, interest rates currently available to the company
for issuance of debt with similar terms and remaining maturities are used to
estimate fair value. The carrying amount of debt issues with short-term
maturities and variable rates that are refinanced at current market rates is a
reasonable estimate of their fair value.
PREFERRED STOCK: The fair value of the fixed-rate preferred stock subject to
mandatory redemption was estimated by discounting the dividend and principal
payments for a representative issue of each series over the average remaining
life of the series.
Note I:
LONG-TERM DEBT:
AT DECEMBER 31, 1994 1993
(millions)
Virginia Power First and Refunding Mortgage Bonds(1):
1987 Series B, 9.375%, due 1994 $ 100.0
1992 Series A, 6.375%, due 1995 $ 180.0 180.0
Series T, 4.5%, due 1995 56.6 56.6
Series U, 5.125%, due 1997 49.3 49.3
1992 Series B, 7.25%, due 1997 250.0 250.0
1988 Series A, 9.375%, due 1998 150.0 150.0
1992 Series F, 6.25%, due 1998 75.0 75.0
1989 Series B, 8.875%, due 1999 100.0 100.0
Various series, 5.875%-8%, due 2000-2004 940.0 940.0
Various series, 6.75%-7.625%, due 2005-2009 215.0 234.5
Various series, 9.75%, due 2014-2019 119.0
Various series, 5.45%-8.75%, due 2020-2024 944.5 600.0
Total First and Refunding Mortgage Bonds 2,960.4 2,854.4
Other long-term debt:
Virginia Power:
Bank loans, notes and term loans, 6.15%-10.8%,
due 1994-2003 798.2 770.8
Pollution control financings(2):
Fixed interest rate, 5.625%, due 2002 19.5
Money market municipals, due 2008-2027(3) 488.6 444.6
Dominion Resources:
Commercial paper(4) 160.0 150.0
Total other long-term debt 1,446.8 1,384.9
Nonrecourse--nonutility debt:
Dominion Resources:
Bank loans, 9.25%, due 2008 22.5 23.4
Dominion Capital:
Senior notes, fixed rate, 6.12%-11.875%,
due 2000-2005(5) 102.0 102.0
Term notes, fixed rate, 4.6%-12.48%,
due 1994-2020 206.0 206.0
Revolving credit agreements, due 1994-1995(6) 61.7 69.8
Commercial paper(7) 90.0 90.3
Dominion Energy:
Term loan, 7.22% (1993-10.13%), due 1996(8) 71.3 63.6
Revolving credit agreements, due 1996(9) 69.5 75.0
Term loan, 5.445%, due 1998 75.0 95.0
Bank loans, 9.70-13.20%, due 2005 28.8
Other 0.3 1.7
Total nonrecourse--nonutility debt 727.1 726.8
Less amounts due within one year:
First and refunding mortgage bonds 236.6 100.0
Bank loans, notes and term loans 75.6 65.0
Sinking fund obligations 0.8
Nonrecourse--nonutility 86.9 26.2
Total amount due within one year 399.1 192.0
Less unamortized discount, net of premium 24.6 23.6
Total long-term debt $4,710.6 $4,750.5
(1) Substantially all of Virginia Power's property is subject to the lien of the
mortgage securing its First and Refunding Mortgage Bonds.
(2) Certain pollution control equipment at Virginia Power's generating
facilities has been pledged or conveyed to secure these financings.
(3) Interest rates vary based on short-term tax-exempt market rates. The
weighted avg. daily interest rates were 2.96% and 2.53% for 1994 and 1993,
respectively.
(4) See Note F to the Consolidated Financial Statements.
(5) The Rincon Securities common stock owned by Dominion Capital is pledged as
collateral to secure the loan.
(6) The weighted average interest rates during 1994 and 1993 were 5.19% and
4.05%, respectively.
(7) The weighted average interest rates during 1994 and 1993 were 5.91% and
3.22%, respectively.
(8) The Enron/Dominion Cogen Corp. common stock owned by Dominion Energy is
pledged as collateral to secure the loan.
(9) The weighted average interest rates during 1994 and 1993 were 4.72% and
3.66%, respectively.
With a portion of the proceeds from the sale of $200 million First and
Refunding Mortgage Bonds of 1993, Series G, Virginia Power, in 1993, irrevocably
placed in a trust $138.2 million to defease $119.1 million 1990 Series A Bonds.
As a result, the 1990 Series A Bonds are considered to be extinguished for
financial reporting purposes and are excluded from the balance sheet at December
31, 1994 and 1993. The cost of $19.1 million was deferred and is being amortized
over the life of the new issues.
Certain of the company's revolving credit agreements include capitalization
ratio covenants (currently no amounts are outstanding under these agreements).
The most restrictive of these covenants would require the maintenance of at
least $3.1 billion of the company's common shareholders' equity.
Maturities (including cash sinking fund obligations) through 1999 are as
follows (in millions): 1995-$399.1; 1996-$474.2; 1997-$427.1; 1998-$402.9 and
1999-$271.5.
Note J:
COMMON STOCK:
During 1994 the company purchased on the open market and retired 566,000 shares
of common stock for an aggregate price of $20.7 million. From 1992 through 1994,
the following changes in common stock occurred:
1994 1993 1992
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
(millions)
Balance at January 1 168.1 $2,991.0 163.8 $2,796.3 158.8 $2,614.3
Changes due to:
Automatic Dividend Reinvestment and
Stock Purchase Plan 2.9 112.2 2.6 115.3 3.1 117.9
Stock Purchase Plan for customers
of Virginia Power 1.3 51.3 1.0 51.6 1.0 40.6
Employee Savings Plan .6 23.2 .7 29.7 .9 34.1
Transfer to other paid-in capital (11.7)
Stock repurchase and retirement (.6) (20.7)
Other .1 .6 (1.9) 1.1
Balance at December 31 172.4 $3,157.6 168.1 $2,991.0 163.8 $2,796.3
Note K:
LONG-TERM INCENTIVE PLAN:
A long-term incentive plan (the Plan) provides for the granting of nonqualified
stock options and restricted stock to certain employees of Dominion Resources
and its affiliates. The aggregate number of shares of common stock that may be
issued pursuant to the Plan is 3,750,000. The changes in share and option awards
under the Plan were as follows:
Restricted Price Stock Option Shares
Shares Per Share Options Price Exercisable
Balance at December 31, 1991 18,029 72,945 50,145
Awards granted--1992 10,388 $36.375-$40.75 $37.58-$40.125
Exercised/distributed (11,393) (58,239)
Balance at December 31, 1992 17,024 14,706 14,706
Awards granted-1993 19,457 $41.875-$42.75 $27.75-$29.625
Exercised/distributed (9,582) (2,242)
Balance at December 31, 1993 26,899 12,464 12,464
Awards granted-1994 19,842 $40.625-$40.875 $29.625
Exercised/distributed (5,555) (1,388)
Balance at December 31, 1994 41,186 11,076 11,076
Note L:
PREFERRED STOCK:
Dominion Resources is authorized to issue up to 20,000,000 shares of preferred
stock; however, no such shares are issued and outstanding.
Virginia Power has authorized 10,000,000 shares of preferred stock, $100
liquidation preference. Upon involuntary liquidation, each share is entitled to
receive $100 plus accrued dividends. Dividends are cumulative. Virginia Power
preferred stock subject to mandatory redemption at December 31, 1994 was as
follows:
Entitled per share upon redemption
Shares And thereafter to amounts Annual sinking fund
Series Outstanding Amount Through declining in steps to fund requirements at $100 per share
$5.58 400,000 (1) (2)
6.35 1,400,000 (1) (3)
7.30 417,319 $105.84 4/14/95 $100.00 after 4/14/02 15,000(4)
Total 2,217,319
(1) Shares are non-callable prior to redemption.
(2) All shares to be redeemed on 3/1/00.
(3) All shares to be redeemed on 9/1/00.
(4) The 1995 and a portion of the 1996 sinking fund requirements were satisfied
by the 1994 open market purchase.
Maturities are $0.7 million for 1996 and $1.5 million for each of the years
1997-1999.
During the years 1992 through 1994, the following shares were redeemed:
Year Dividend Shares
1994 $7.30 37,681
1993 7.30 30,000
1993 7.58 480,000
1993 7.325 400,419
1992 8.20 330,000
1992 8.40 512,000
1992 8.60 228,764
1992 8.625 203,500
1992 8.925 164,500
At December 31, 1994 Virginia Power preferred stock not subject to mandatory
redemption, $100 liquidation preference, is listed in the table below.
Issued and Entitled Per
Outstanding Share Upon
Dividend Shares Redemption
$5.00 106,677 $112.50
4.04 12,926 102.27
4.20 14,797 102.50
4.12 32,534 103.73
4.80 73,206 101.00
7.45 400,000 101.00
7.20 450,000 101.00
7.05 500,000 105.00(1)
6.98 600,000 105.00(2)
MMP 1/87 series(3) 500,000 100.00
MMP 6/87 series(3) 750,000 100.00
MMP 10/88 series(3) 750,000 100.00
MMP 6/89 series(3) 750,000 100.00
MMP 9/92A(3) 500,000 100.00
MMP 9/92B(3) 500,000 100.00
Total 5,940,140
(1) Through 7/31/03 and thereafter to amounts declining in steps to $100.00
after 7/31/13.
(2) Through 8/31/03 and thereafter to amounts declining in steps to $100.00
after 8/31/13.
(3) Money Market Preferred (MMP) dividend rates are variable and are set every
49 days via an auction. The weighted average rates for these series in 1994,
1993 and 1992, including fees for broker/dealer agreements, were 3.75%,
3.01%, and 3.43%, respectively.
In 1993, 350,000 and 500,000 shares of the $7.72 and the $7.72 (1972 Series)
Dividend Preferred Stock, respectively, were redeemed.
Note M:
RETIREMENT PLAN AND POSTRETIREMENT BENEFITS:
RETIREMENT PLAN: Dominion Resources' Retirement Plan (the Plan) covers virtually
all employees of Dominion Resources and its subsidiaries. The benefits are based
on years of service and the employee's compensation. Dominion Resources' funding
policy is to contribute annually an amount that is in accordance with the
provisions of the Employment Retirement Income Security Act of 1974.
The components of the provision for net periodic pension expense were as
follows:
1994 1993 1992
(millions)
Service cost--benefits earned
during the year $ 24.6 $ 21.9 $ 20.7
Interest cost on projected
benefit obligation 46.3 46.3 41.0
Actual return on plan assets (51.3) (49.3) (45.7)
Net amortization and deferral 0.1 (2.6) (2.6)
Net periodic pension cost $ 19.7 $ 16.3 $ 13.4
The following table sets forth the Plan's funded status:
1994 1993
(millions)
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefit of 1994-$480.9
and 1993-$414.9 $577.5 $440.7
Projected benefit obligation
for service rendered to date $678.4 $602.8
Plan assets at fair value, primarily
listed stocks and U.S. bonds 588.1 588.3
Projected benefit obligation in excess
of plan assets (90.3) (14.5)
Unrecognized net loss from past experience
different from that assumed and effects
of changes in assumptions 102.8 54.1
Unrecognized prior service cost 5.9 6.5
Unrecognized net asset at January 1,
being recognized over 16 years
beginning in 1986 (28.5) (31.8)
Prepaid (accrued) pension cost included
in other assets (liabilities) $(10.1) $ 14.3
Significant assumptions used in determining net periodic pension cost and the
projected benefit obligation were:
AS OF DECEMBER 31, 1994 1993
Discount rates 8.25% 7.75%
Rates of increase in
compensation levels 5% 5%
Expected long-term
rate of return 9.5% 9.5%
POSTRETIREMENT BENEFITS: Dominion Resources and its subsidiaries provide retiree
health care and life insurance benefits through insurance companies with annual
premiums based on benefits paid during the year. From time to time in the past,
Dominion Resources and its subsidiaries have changed benefits. Some of these
changes have reduced benefits. Under the terms of their benefits plans, the
companies reserve the right to change, modify or terminate the plans.
Effective January 1, 1993, Dominion Resources adopted the provisions of SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which requires the accrual of the cost of providing other
postretirement benefits (OPEB), including medical and life insurance coverage,
during the active service of the employee. Prior to 1993, Dominion Resources
recognized expense in the year the benefits were provided and paid $10.5 million
for these benefits in 1992.
Net periodic postretirement benefit expense for 1994 and 1993 was as follows:
YEAR ENDING DECEMBER 31, 1994 1993
(millions)
Service cost $11.2 $ 9.8
Interest cost 21.8 20.8
Return on plan assets 0.9 (2.0)
Amortization of transition obligation 12.1 12.1
Net amortization and deferral (4.1) 0.7
Net periodic postretirement benefit expense $41.9 $41.4
The following table sets forth the funded status of the plan:
DECEMBER 31, 1994 1993
(millions)
Fair value of plan assets $ 59.7 $ 28.4
Accumulated postretirement benefit obligation:
Retirees $ 208.7 $ 142.4
Active plan participants 93.9 112.1
Accumulated postretirement benefit obligation 302.6 254.5
Accumulated postretirement benefit obligation
in excess of plan assets (242.9) (226.1)
Unrecognized transition obligation 218.3 230.4
Unrecognized net experience gain 16.9 (8.9)
Accrued postretirement benefit cost $ (7.7) $ (4.6)
A one percent increase in the health care cost trend rate would result in an
increase of $5 million in the service and interest cost components and a $27.1
million increase in the accumulated postretirement benefit obligation.
Significant assumptions used in determining the postretirement benefit
obligation were:
1994 1993
Discount rates 8.25% 7.75%
Assumed return on
plan assets 9.0% 9.0%
Medical cost
trend rate 10% for first year 11% for first year
9% for second year 10% for second year
Scaling down to Scaling down to
4.75% beginning in 4.75% beginning in
the year 2001 the year 2001
Virginia Power is recovering these costs in rates on an accrual basis in all
material respects, in all jurisdictions. Current and future rate recoveries of
OPEB accruals are expected to collect sufficient amounts to provide for the
unfunded accumulated postretirement obligation over time.
The funds being collected for OPEB accrual in rates, in excess of OPEB
benefits actually paid during the year, are contributed to external benefit
trusts under Virginia Power's current funding policy.
Note N:
EARLY RETIREMENT AND VOLUNTARY SEPARATION PROGRAMS:
During the first quarter of 1994, Virginia Power offered an early retirement
program to employees aged 50 or older and offered a voluntary separation program
to all regular full-time employees. The offers under the program expired
September 1, 1994. Approximately 1,400 employees accepted offers under these
programs. The costs associated with these programs were $90.1 million. Virginia
Power capitalized $25.9 million based upon prior regulatory precedent and
expensed $64.2 million.
Note O:
COMMITMENTS AND CONTINGENCIES:
As the result of issues generated in the course of daily business, the company
is involved in legal, tax and regulatory proceedings before various courts,
regulatory commissions and governmental agencies. While some of the proceedings
involve substantial amounts of money, management believes that the final
disposition of these proceedings will not have an adverse material effect on
operations or the financial position of the company.
VIRGINIA POWER
Rates: On February 3, 1994, the Virginia Commission entered its Final Order in
Virginia Power's 1992 rate case, approving an increase in annual revenues of
$241.9 million. Refunds of $129.2 million (representing the amount recovered
under interim rates in excess of the rates finally approved, with interest) were
completed by the end of April.
Construction Program: Virginia Power has made substantial commitments in
connection with its construction program and nuclear fuel expenditures, which
are estimated to total $673.2 million (excluding AFC) for 1995. Additional
financing is contemplated in connection with this program.
Purchased Power Contracts: Since 1984, Virginia Power has entered into contracts
for the long-term purchase of capacity and energy from other utilities,
qualifying facilities and independent power producers. As of December 31, 1994,
there were 75 nonutility generating facilities under contract to provide
Virginia Power 3,506 megawatts of dependable summer capacity. Of these, 65
projects (aggregating 3,244 megawatts) were operational at the end of 1994, with
the balance to become operational at various dates before 1997. The following
table shows the minimum payments expected to be made under these contracts for
projects that are currently operating or have obtained construction financing.
The totals include payments for capacity, which are subject to generating
performance as provided by the contracts, and payments for the minimum amounts
of energy Virginia Power is obligated to buy and the producers provide.
Commitments
(millions) Capacity Other
1995 $735.5 $198.6
1996 750.8 203.9
1997 796.9 210.5
1998 800.4 216.8
1999 803.5 217.9
After 1999 12,186.3 2,839.0
Total $16,073.4 $3,886.7
Present value of
the total $7,104.7 $1,602.4
In addition to the commitments listed above, under some contracts, Virginia
Power may purchase, at its option, additional power as needed. Payments for
purchased power (including economy, emergency, limited-term, short-term, and
long-term purchases) for the years 1994, 1993 and 1992 were $1,025 million, $958
million and $766 million, respectively.
Fuel Purchase Commitments: Virginia Power's estimated fuel purchase commitments
for the next five years for system generation are as follows: 1995-$351 million;
1996-$266 million; 1997-$153 million; 1998-$33 million; and 1999-$32 million.
Environmental Matters: Environmental costs have been historically recovered
through the ratemaking process; however, should material costs be incurred and
not recovered through rates, Virginia Power's results of operations and
financial condition could be adversely impacted.
The EPA has identified Virginia Power and several other entities as Potentially
Responsible Parties (PRPs) at two Superfund sites located in Kentucky and
Pennsylvania. The estimated future remediation costs for the sites are in the
range of $46.5 million to $134.6 million. Virginia Power's proportionate share
of the costs is expected to be in the range of $0.5 million to $6.7 million,
based upon allocation formulas and the volume of waste shipped to the sites. As
of December 31, 1994, Virginia Power had provided for $1.4 million to meet its
obligations at these two sites. Based on a financial assessment of the PRPs
involved at these sites, Virginia Power has determined that it is probable that
the PRPs will fully pay the costs apportioned to them.
Virginia Power and Dominion Resources along with Consolidated Natural Gas have
remedial action responsibilities remaining at three coal tar sites. Virginia
Power had provided a $2 million reserve to meet its estimated liability, based
on site studies and investigations performed at these sites.
Virginia Power generally seeks to recover its costs associated with
environmental remediation from third-party insurers. At December 31, 1994
pending claims were not recognized as an asset or offset against recorded
obligations.
In order to comply with the Clean Air Act, Virginia Power has installed a
scrubber at its Mt. Storm Unit 3 Power Station. The scrubber began operation on
October 31, 1994. The cost of this scrubber and related equipment was $147
million.
Virginia Power is presently conducting studies leading to the compliance plan
for Phase II of the Clean Air Act, which may involve the installation of two
additional scrubbers, the addition of nitrogen oxide (NOx) controls and other
methods for compliance.
The present estimate for the total capital cost for compliance, assuming the
installation of three scrubbers, nitrogen oxide controls and emission monitoring
instrumentation, is $481 million (1992 dollars). Annual incremental compliance
costs for operation, maintenance and fuel costs are estimated to be $128
million. These cost estimates may change upon completion of the study effort now
under way.
Virginia Power continues to work with the West Virginia Office of Air Quality
concerning opacity requirements applicable to the Mt. Storm Power Station.
Litigation: Virginia Power and Doswell Limited Partnership (Doswell) have been
unable to agree on the calculation of a fixed fuel transportation charge to be
paid to Doswell under a purchased power contract. Doswell filed suit in the
Circuit Court in the City of Richmond alleging breach of contract and actual and
constructive fraud and seeking damages of not less than $75 million. The issues
of actual and constructive fraud were dismissed from the case, with prejudice,
leaving only the contract claim, which reduced alleged damages to approximately
$19 million. On March 2, 1995, the court announced its verdict in favor of
Virginia Power.
A dispute over corporate governance issues between Dominion Resources and
Virginia Power arose in 1994. On June 17, 1994, Dominion Resources and Virginia
Power received an order from the Virginia Commission (the 1994 Order) that,
among other things, initiated an investigation into the affiliate relationships
and corporate governance issues between Dominion Resources and Virginia Power
(the First Proceeding). The text of the 1994 Order was set forth in Dominion
Resources' Current Report on Form 8-K of June 17, 1994. Between June and August
1994, Dominion Resources and Virginia Power made various filings with the
Commission, and the Commission issued several procedural orders, in connection
with the First Proceeding. A description of those filings and orders is set
forth in Dominion Resources' Quarterly Report on Form 10-Q for the period ending
June 30, 1994.
On or around August 5, 1994, Dominion Resources received a letter from a
purported shareholder, Barbara Margulis, demanding that Dominion Resources
commence a suit against certain of its directors and officers for conduct
related to the corporate governance issues addressed in the 1994 Order. By
letter dated October 19, 1994, Ms. Margulis clarified her earlier letter to
limit it to certain defined matters including conduct relating to the
renegotiation of a coal transportation contract between Virginia Power and CSX
Transportation. The board appointed a special committee of directors to
investigate these allegations, and that investigation is ongoing.
On August 15, 1994, Dominion Resources, Virginia Power and their respective
directors entered into a Settlement Agreement resolving certain of the disputed
corporate governance issues. The terms of that settlement are summarized in
Dominion Resources' Current Report on Form 8-K of August 17, 1994. Pursuant to
the Settlement Agreement, Dominion Resources and Virginia Power filed a Joint
Motion to Dismiss certain of the corporate governance issues from the First
Proceeding. The Commission denied that Motion on August 24, 1994, continued the
First Proceeding, and instituted a new proceeding (the Second Proceeding) into
the holding company structure and the relationship between Dominion Resources
and Virginia Power. The Virginia Commission stated that the proceeding would be
an "investigation directed not at averting a crisis or penalizing past conduct,
but toward protecting the public interest in the future." The Commission
directed its Staff to conduct an investigation and file an interim report on or
before December 1, 1994.
On December 1, 1994, the Staff of the Virginia Commission and its consultants
filed an Interim Report in the Second Proceeding. That Report is included in
Dominion Resources' Current Report on Form 8-K of December 5, 1994. The Interim
Report made numerous recommendations for Commission involvement in matters of
corporate governance, corporate structure, affiliate service arrangements, and
operating relationships between Dominion Resources and Virginia Power, and
suggested certain financial constraints on Dominion Resources and new regulatory
authority for the Commission. Many of these suggestions were far-reaching. On
December 21, 1994, Dominion Resources and Virginia Power filed a Joint Response
to the Interim Report, in which they accepted some of the recommendations and
urged that the corporate governance structure established by the Settlement
Agreement continue while they considered the other recommendations in the course
of a strategic planning effort by Dominion Resources.
On January 23, 1995, the Staff of the Virginia Commission issued a report in the
Second Proceeding on its investigation of a coal transportation contract between
Virginia Power and CSX Transportation. The Staff's report concluded that
Dominion Resources improperly pressured Virginia Power to renegotiate the
contract, and recommended that approximately $11 million ($8.3 million Virginia
jurisdictional) of the coal transportation costs incurred under the contract
from 1991 through May 31, 1994, be disallowed in determining Virginia Power's
rates. The Staff's report further recommended that any future transportation
costs that it identified as excess be disallowed over the remainder of the
contract, which expires on May 31, 2000.
Virginia Power has recorded a regulatory liability of $10.5 million at December
31, 1994. Virginia Power currently estimates that the total amount called into
question by the Virginia Commission Staff report is a net present value of $60
million ($100 million over the life of the contract). On February 1, 1995,
without admitting any imprudence, fault or liability, and believing that their
relationship with the Commission would be enhanced, Dominion Resources and
Virginia Power filed a motion in the Second Proceeding offering to refund to
Virginia Power customers $8.3 million in settlement of these issues regarding
transportation rates.
During the 1995 session of the Virginia General Assembly, the Virginia
Commission caused legislation to be introduced that addressed the Commission's
authority to intervene in disputes involving public utilities owned by separate
holding companies. That legislation was opposed by Dominion Resources. On
February 20, 1995, the proposed legislation was withdrawn and Dominion
Resources, Virginia Power and the Virginia Commission Staff consented to an
order that is included in Dominion Resources' Current Report on Form 8-K of
February 21, 1995. Under this order, which will be effective until July 2, 1996,
Dominion Resources must obtain the Commission's approval before taking steps
such as removing Virginia Power's board members or officers or changing Virginia
Power's articles of incorporation or by-laws. Although the order imposes for a
period of time significant restrictions on the ability of Dominion Resources to
select the board and management of its subsidiary, Dominion Resources and
Virginia Power agreed to the order in the interest of enhancing relations with
the Virginia Commission and achieving the purposes of the Settlement Agreement.
Disagreements between the companies have arisen from time to time since the
Settlement Agreement was executed. On February 28, 1995, upon recommendation of
a Joint Committee created under the Settlement Agreement, the boards of Dominion
Resources and Virginia Power took further action to enhance cooperation between
the two companies and their relationship with the Virginia Commission. Among
other things, the boards expanded the authority of the Joint Committee to act
for the boards on issues presented to it by the chief executives of the
companies. Each board directed corporate officials and employees of its company
to cooperate fully with the Joint Committee in resolution of issues acted on by
the committee and to support actions taken by the committee. In connection with
these initiatives, the chief executive officers of both companies made known
their intentions to retire in July 1996 and the boards directed the development
of executive succession plans for each company. Also, the Dominion Resources
board received the resignations of directors Bruce C. Gottwald and John W. Snow
and the Virginia Power board received the resignations of directors William W.
Berry and Frank S. Royal, and both boards voted to reduce their size by two
members.
At this time, Dominion Resources is unable to predict the ultimate resolution of
these matters or their effect on the company.
Nuclear Insurance: The Price-Anderson Act limits the public liability of an
owner of a nuclear power plant to $8.9 billion for a single nuclear incident.
The Price Anderson Amendments Act of 1988 allows for an inflationary provision
adjustment every five years. Virginia Power has purchased $200 million of
coverage from commercial insurance pools with the remainder provided through a
mandatory industry risk-sharing program. In the event of a nuclear incident at
any licensed nuclear reactor in the United States, Virginia Power could be
assessed up to $81.7 million (including a 3 percent insurance premium tax for
Virginia) for each of its four licensed reactors not to exceed $10.3 million
(including a 3 percent insurance premium tax for Virginia) per year per reactor.
There is no limit to the number of incidents for which this retrospective
premium can be assessed.
Nuclear liability coverage for claims made by nuclear workers first hired on or
after January 1, 1988, except those arising out of an extraordinary nuclear
occurrence, is provided under the Master Worker insurance program. (Those first
hired into the nuclear industry prior to January 1, 1988, are covered by the
policy discussed above). The aggregate limit of coverage for the industry is
$400 million ($200 million policy limit with automatic reinstatements of an
additional $200 million). Virginia Power's maximum retrospective assessment is
approximately $12.7 million (including a 3 percent insurance premium tax for
Virginia).
Virginia Power's current level of property insurance coverage ($2.55 billion for
North Anna and $2.4 billion for Surry) exceeds the NRC's minimum requirement for
nuclear power plant licensees of $1.06 billion per reactor site, and includes
coverage for premature decommissioning and functional total loss. The NRC
requires that the proceeds from this insurance be used first to return the
reactor to and maintain it in a safe and stable condition, and second to
decontaminate the reactor and station site in accordance with a plan approved by
the NRC. The property insurance coverage provided to Virginia Power is subject
to retrospective premium assessments in any policy year in which losses exceed
the funds available to these insurance companies. The maximum assessment at the
first incident of the current policy period is $45.4 million. The maximum
assessment related to a second incident is an additional $15.1 million.
Based on the severity of the incident, the board of directors of Virginia
Power's nuclear insurers has the discretion to lower the maximum retrospective
premium assessment or eliminate either or both completely. For any losses that
exceed the limits, or for which insurance proceeds are not available because
they must first be used for stabilization and decontamination, Virginia Power
has the financial responsibility.
Virginia Power purchases insurance from Nuclear Electric Insurance Limited
(NEIL) to cover the cost of replacement power during the prolonged outage of a
nuclear unit due to direct physical damage of the unit. Under this program,
Virginia Power is subject to a retrospective premium assessment for any policy
year in which losses exceed funds available to NEIL. The current policy period's
maximum assessment is $9.2 million.
As a joint owner of the North Anna Power Station, ODEC is responsible for its
proportionate share (11.6 percent) of the insurance premiums applicable to that
station, including any retrospective premium assessments and any losses not
covered by insurance.
DOMINION ENERGY
Dominion Cogen, Inc., is a wholly owned subsidiary of Dominion Energy with an
investment interest in the Clear Lake cogeneration plant near Houston, Texas.
Under terms of the investment agreement, Dominion Resources must provide
contingent equity support to Dominion Energy. While management believes that the
possibility of such support is remote, Dominion Resources could be required to
insure that Dominion Energy has sufficient funds to meet its guarantee of $59.3
million.
Dominion Energy has general partnership interests in certain of its energy
ventures. Accordingly, Dominion Energy may be called upon to fund future
operation of these investments to the extent operating cash flow is
insufficient.
Note P:
QUARTERLY FINANCIAL AND COMMON STOCK DATA:
(UNAUDITED)
The following amounts reflect all adjustments, consisting of only normal
recurring accruals (except as disclosed below), necessary in the opinion of
Dominion Resources management for a fair statement of the results for the
interim periods.
1994 1993
(millions, except per share amounts)
Revenues
First Quarter $1,167.0 $1,105.8
Second Quarter 1,109.7 1,005.3
Third Quarter 1,209.8 1,287.1
Fourth Quarter 1,004.6 1,035.7
Year $4,491.1 $4,433.9
Income before provision for federal
income taxes
First Quarter $197.5 $170.8
Second Quarter 188.9 143.7
Third Quarter 234.5 300.0
Fourth Quarter 28.3 112.3
Year $649.2 $726.8
Net income
First Quarter $141.4 $122.5
Second Quarter 136.2 103.1
Third Quarter 161.3 199.0
Fourth Quarter 39.3 92.0
Year $478.2 $516.6
Earnings per share
First Quarter $0.84 $0.74
Second Quarter 0.80 0.63
Third Quarter 0.94 1.20
Fourth Quarter 0.23 0.55
Year $2.81 $3.12
Dividends per share
First Quarter $0.635 $0.615
Second Quarter 0.635 0.615
Third Quarter 0.635 0.615
Fourth Quarter 0.645 0.635
Year $2.550 $2.480
Common stock price range
First Quarter 45-3/8-39-5/8 44-1/4-38-1/4
Second Quarter 42-1/2-35-7/8 451/2-41-7/8
Third Quarter 38-3/8-34-7/8 48-7/8-44-1/8
Fourth Quarter 38-1/8-35-1/8 49-1/2-43-7/8
Year 45-3/8-34-7/8 49-1/2-38-1/4
During the first quarter of 1994, Virginia Power offered an early retirement
program to employees aged 50 or older and offered a voluntary separation program
to all regular full-time employees. The offers under the programs expired
September 1, 1994. Approximately 1,400 employees accepted offers under these
programs. The costs associated with these programs were $90.1 million.
Virginia Power capitalized $25.9 million based upon prior regulatory precedent
and expensed $2.8 million, $10.4 million and $51 million during the second,
third and fourth quarters, respectively. The impact of the write-off was to
reduce net income by $1.8 million, $6.7 million and $33.1 million for the
second, third and fourth quarters, respectively.
On June 28, 1994, Dominion Energy transferred a 65% overriding royalty interest
in coal seam gas properties then owned by Dominion Black Warrior Basin, a wholly
owned subsidiary of Dominion Energy, to Dominion Resources Black Warrior Trust,
which is sponsored by Dominion Resources. Units in the trust were sold in the
second quarter to third parties, culminating in a gain of $28.9 million, net of
tax. Total federal and state taxes for this transaction amounted to $20.1
million.
Report of Management's Responsibilities
The management of Dominion Resources, Inc. is responsible for all information
and representations contained in the Consolidated Financial Statements and other
sections of the annual report. The Consolidated Financial Statements, which
include amounts based on estimates and judgments of management, have been
prepared in conformity with generally accepted accounting principles. Other
financial information in the annual report is consistent with that in the
Consolidated Financial Statements.
Management maintains a system of internal accounting controls designed to
provide reasonable assurance, at a reasonable cost, that Dominion Resources' and
its subsidiaries' assets are safeguarded against loss from unauthorized use or
disposition and that transactions are executed and recorded in accordance with
established procedures. Management recognizes the inherent limitations of any
system of internal accounting control, and therefore cannot provide absolute
assurance that the objectives of the established internal accounting controls
will be met.
This system includes written policies, an organizational structure designed
to ensure appropriate segregation of responsibilities, careful selection and
training of qualified personnel, and internal audits. Management believes that
during 1994 the system of internal control was adequate to accomplish the
intended objectives.
The Consolidated Financial Statements have been audited by Deloitte & Touche
LLP, independent auditors, whose designation by the Board of Directors was
ratified by the shareholders. Their audits were conducted in accordance with
generally accepted auditing standards and include a review of Dominion
Resources' and its subsidiaries' accounting systems, procedures and internal
controls, and the performance of tests and other auditing procedures sufficient
to provide reasonable assurance that the Consolidated Financial Statements are
not materially misleading and do not contain material errors.
The Audit Committees of the Boards of Directors, composed entirely of
directors who are not officers or employees of Dominion Resources or its
subsidiaries, meet periodically with independent auditors, the internal auditors
and management to discuss auditing, internal accounting control and financial
reporting matters and to ensure that each is properly discharged. Both
independent auditors and the internal auditors periodically meet alone with the
Audit Committees and have free access to the Committees at any time.
Management recognizes its responsibility for fostering a strong ethical
climate so that Dominion Resources' affairs are conducted according to the
highest standards of personal corporate conduct. This responsibility is
characterized and reflected in Dominion Resources' Code of Ethics, which
addresses potential conflicts of interest, compliance with all domestic and
foreign laws, the confidentiality of proprietary information, and full
disclosure of public information.
Dominion Resources, Inc.
Thos. E. Capps
Chairman and
Chief Executive Officer
James L. Trueheart
Vice President and Controller
Report of Independent Auditors
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF DOMINION RESOURCES, INC.
We have audited the accompanying consolidated balance sheets of Dominion
Resources, Inc. and subsidiaries as of December 31, 1994 and 1993 and the
related consolidated statements of income and retained earnings and of cash
flows for each of the three years in the period ended December 31, 1994. These
Consolidated Financial Statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these Consolidated
Financial Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such Consolidated Financial Statements present fairly, in all
material respects, the consolidated financial position of Dominion Resources,
Inc. and subsidiaries as of December 31, 1994 and 1993 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994 in conformity with generally accepted accounting principles.
Dominion Resources, Inc. changed its methods of accounting for postretirement
benefits other than pensions in 1993 (see Note M) and for accounting for income
taxes in 1992 (see Note C) in order to conform with recently issued accounting
standards.
Richmond, Virginia
February 6, 1995