SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission file number 1-8489
DOMINION RESOURCES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1229715
-------- ----------
(State or other jurisdiction (I.R.S. employer
incorporation or organization) identification no.)
901 East Byrd Street,
Suite 1700, Richmond, Virginia 23219-6111
- ------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(804) 775-5700
--------------
Registrant's telephone number
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
At June 30, 1998, the latest practicable date for determination, 196,508,138
shares of common stock, without par value, of the registrant were outstanding.
DOMINION RESOURCES, INC.
INDEX
Page
Number
------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Income - Three 3
and Six Months Ended June 30, 1998 and 1997
Consolidated Balance Sheets - June 30, 1998 4-5
and December 31, 1997
Consolidated Statements of Cash Flows 6-7
Six Months Ended June 30, 1998 and 1997
Consolidated Statements of Changes in
Other Comprehensive Income 7
Notes to Consolidated Financial Statements 8-16
Item 2. Management's Discussion and Analysis of Financial 17-32
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 33-34
Market Risk
PART II. Other Information
Item 1. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35-42
Item 6. Exhibits and Reports on Form 8-K 43
DOMINION RESOURCES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------------------- --------------------------
(Millions, except per share amounts)
Operating revenues and income:
Virginia Power $1,387.4 $1,051.5 $2,822.8 $2,226.3
East Midlands 458.7 407.3 1,009.5 962.7
Nonutility 220.5 194.2 392.4 361.8
-------- ------- ------- -------
2,066.6 1,653.0 4,224.7 3,550.8
-------- -------- --------- ---------
Operating expenses:
Fuel, net 710.5 282.1 1,320.0 611.6
Purchased power capacity, net 203.5 159.6 384.3 344.0
Impairment of regulatory assets 158.6 2.8 158.6 2.8
Supply and distribution-East Midlands 293.5 337.3 654.9 784.0
Other operation and maintenance 368.3 324.2 698.0 606.1
Depreciation, depletion
and amortization 170.7 195.6 387.4 389.9
Other taxes 77.4 65.0 151.5 140.0
-------- -------- --------- ---------
1,982.5 1,366.6 3,754.7 2,878.4
-------- -------- --------- ---------
Operating income 84.1 286.4 470.0 672.4
-------- -------- --------- ---------
Other income 1.3 10.2 11.0 24.3
-------- -------- --------- ---------
Income (loss) before fixed charges,
income taxes and minority interests 85.4 296.6 481.0 696.7
-------- -------- --------- ---------
Fixed charges:
Interest charges, net 176.6 160.8 338.1 295.9
Preferred dividends and distributions
of subsidiary trusts 16.7 11.7 33.3 23.2
-------- -------- --------- ---------
193.3 172.5 371.4 319.1
-------- -------- --------- ---------
Income (loss) before provision for
income taxes and minority interests (107.9) 124.1 109.6 377.6
Provision (benefit) for income taxes (32.2) 38.8 34.3 117.3
Minority interests 7.0 6.2 18.5 11.3
-------- -------- --------- ---------
Net (loss) income $ (82.7) $ 79.1 $ 56.8 $ 249.0
======== ======== ========= =========
Average common stock 195.8 184.7 194.4 183.8
Earnings (loss) per common share $ (0.42) $ 0.43 $ 0.29 $ 1.35
Dividends paid per common share $ 0.645 $ 0.645 $ 1.29 $ 1.29
- ------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
3
DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
June 30, December 31,
1998 1997*
-------------------------------------------
(Millions)
Current assets:
Cash and cash equivalents $ 371.2 $ 321.6
Trading securities 231.6 240.7
Customer accounts receivable, net 732.1 601.0
Other accounts receivable 328.1 333.6
Accrued unbilled revenues 212.5 245.2
Accrued taxes 32.5 5.6
Materials and supplies:
Plant and general 165.4 163.3
Fossil fuel 68.7 67.4
Mortgage loans in warehouse 220.7 88.2
Commodity contract assets 1,540.3 40.6
Other 279.0 203.5
--------- ---------
4,182.1 2,310.7
--------- ---------
Investments
Loans receivable, net 1,243.0 932.2
Other 1,517.3 1,483.8
--------- ---------
2,760.3 2,416.0
--------- ---------
Property, plant and equipment: 20,214.9 19,519.2
Less accumulated depreciation
and amortization 7,445.0 6,986.6
--------- ---------
12,769.9 12,532.6
--------- ---------
Deferred charges and other assets:
Regulatory assets 617.7 711.5
Goodwill 1,954.1 1,932.0
Other 257.4 261.7
--------- ---------
2,829.2 2,905.2
--------- ---------
Total assets $22,541.5 $20,164.5
========= =========
- ------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* The Balance Sheet at December 31, 1997 has been derived from the audited
Consolidated Financial Statements at that date.
4
DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
June 30, December 31,
1998 1997*
--------------------------------------------
(Millions)
Current liabilities:
Securities due within one year $ 1,410.6 $ 1,613.6
Short-term debt 316.8 375.1
Accounts payable, trade 927.5 679.3
Provision for rate refund 186.3
Accrued interest 162.1 185.1
Accrued payroll 82.1 77.5
Accrued taxes 141.9 125.4
Customer deposits 44.3 44.6
Commodity contract liabilities 1,571.7 52.9
Other 380.3 460.0
------------ ------------
5,223.6 3,613.5
------------ ------------
Long-term debt:
Virginia Power 3,416.2 3,514.6
Nonrecourse - nonutility 1,384.5 707.8
Dominion UK 2,776.6 2,673.6
Other 300.0 300.0
------------ ------------
7,877.3 7,196.0
------------ ------------
Deferred credits and other liabilities:
Deferred income taxes 1,960.6 2,018.4
Investment tax credits 229.9 238.4
Other 631.2 580.8
------------ ------------
2,821.7 2,837.6
------------ ------------
Total liabilities 15,922.6 13,647.1
------------ ------------
Minority interest 340.6 402.9
------------ ------------
Obligated mandatory redeemable preferred
securities ** 385.0 385.0
------------ ------------
Virginia Power preferred stock:
Subject to mandatory redemption 180.0 180.0
------------ ------------
Not subject to mandatory redemption 509.0 509.0
------------ ------------
Common shareholders' equity:
Common stock - no par 4,020.4 3,673.6
Retained earnings 1,162.2 1,354.0
Accumulated other comprehensive
income 5.5 (3.3)
Other 16.2 16.2
------------ ------------
5,204.3 5,040.5
------------ ------------
Total liabilities & shareholders'
equity $ 22,541.5 $ 20,164.5
============ ============
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* The Balance Sheet at December 31, 1997 has been derived from the audited
Consolidated Financial Statements at that date.
** As described in Note(F)to NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, the
7.83% and 8.05% Junior Subordinated Notes totaling $257.7 and $139.2
million principal amounts constitute 100% of the Trusts' assets.
5
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
1998 1997
---------------------------
(Millions)
Cash flows from (used in) operating activities:
Net income $ 56.8 $ 249.0
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation, depletion and amortization 438.0 430.2
Purchase and originations of mortgage loans (999.7) (1,055.3)
Proceeds from sales and principal collections
of mortgage loans 867.2 995.2
Deferred income taxes (102.0) 44.7
Impairment of regulatory assets 158.6 2.8
Provision for rate refund 186.3
Changes in assets and liabilities:
Accounts receivable (124.2) 52.3
Accounts payable, trade 177.6 (86.8)
Other changes (28.2) (146.7)
-------- --------
Net cash flows from operating activities 630.4 485.4
-------- --------
Cash flows from (used in) financing activities:
Issuance of common stock 348.5 90.4
Issuance of long-term debt:
Virginia Power 150.0 210.0
Dominion UK 1,904.2
Nonrecourse-nonutility 1,917.0 2,541.3
Issuance of short-term debt 252.5 154.6
Repayment of long-term debt and preferred stock (1,885.7) (2,682.3)
Common dividend payments (251.9) (237.4)
Other (48.9) 43.9
-------- --------
Net cash flows from financing activities 481.5 2,024.7
-------- --------
Cash flows from (used in) investing activities:
Utility capital expenditures-(excluding AFC) (308.0) (211.8)
Nonutility capital expenditures (50.4) (129.3)
Purchase of East Midlands (1,901.5)
Loan originations (1,106.7) (419.5)
Repayment of loan originations 784.8 378.0
Acquisition of business, net of cash (343.8) (96.1)
Other (38.2) (24.9)
-------- --------
Net cash flows used in investing activities (1,062.3) (2,405.1)
-------- --------
Increase in cash and cash equivalents 49.6 105.0
Cash and cash equivalents at beginning of period 321.6 110.8
-------- --------
Cash and cash equivalents at end of period $ 371.2 $ 215.8
======== ========
6
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
Six Months Ended
June 30,
1998 1997
--------------------------
(Millions)
Supplementary cash flows information:
Cash paid during the period for:
Interest (net of interest capitalized) $ 245.8 $ 252.0
Income taxes 120.5 76.3
Non-cash transactions from investing and
financing activities:
Equity contribution for Wolverine acquisition $ 22.2
Issuance of loan notes-East Midlands acquisition 19.4
Exchange of securities $ 9.9 21.8
The accompanying notes are an integral part of the Consolidated Financial
Statements.
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN OTHER COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------------------- -----------------------
(Millions)
Other Comprehensive Income:
Unrealized gains (losses) on
investment securities:
Pre-tax $ 6.2 $ 4.5 $ 0.9
Tax (expense) benefit (2.2) (1.6) (0.3)
----- ---- ------
Net of tax 4.0 2.9 0.6
Foreign currency translation
adjustment $ 1.2 (4.7) 5.9 ( 15.1)
---- ----- ---- ------
Increase (decrease) in other
comprehensive income 1.2 (0.7) 8.8 (14.5)
Other comprehensive income at
beginning of period 4.3 (14.9) (3.3) (1.1)
---- ----- ---- ------
Other comprehensive income at
end of period $ 5.5 $(15.6) $ 5.5 $(15.6)
===== ====== ===== ======
- ----------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
7
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) DOMINION RESOURCES AND INTERIM REPORTING POLICIES
GENERAL
Dominion Resources is a holding company headquartered in Richmond, Virginia. Its
primary business is Virginia Electric and Power Company (Virginia Power), which
is a regulated public utility engaged in the generation, transmission,
distribution and sale of electric energy within a 30,000 square mile area in
Virginia and northeastern North Carolina. It sells electricity to retail
customers (including government agencies) and to wholesale customers such as
rural electric cooperatives and municipalities. The Virginia service area
comprises about 65 percent of Virginia's total land area, but accounts for 80
percent of its population.
East Midlands Electricity plc (East Midlands), is the principal operating
subsidiary of our United Kingdom holding company, Dominion U.K. Holding, Inc.
(Dominion UK). On July 27, 1998, Dominion Resources sold East Midlands. For
additional information on the sale, see Note B, to the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
Dominion Resources translates foreign currency financial statements by adjusting
balance sheet accounts using the exchange rate at the balance sheet date and
income statement accounts using the average exchange rate for the reporting
period.
Dominion Resources also owns and operates subsidiaries active in independent
power production, the acquisition and sale of natural gas and oil reserves,
financial services, and real estate. Some of the independent power and natural
gas and oil businesses are located in foreign countries. Dominion Resources' net
investment through its subsidiaries in independent power production in Central
and South America is approximately $327 million.
In the opinion of Dominion Resources' management, the accompanying unaudited
Consolidated Financial Statements contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial position as
of June 30, 1998, the results of operations for the three-month and six-month
periods ended June 30, 1998 and 1997, and cash flows for the six-month periods
ended June 30, 1998 and 1997.
These Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and notes included in the Dominion Resources
Annual Report on Form 10-K for the year ended December 31, 1997.
The consolidated financial statements include the accounts of Dominion Resources
and its subsidiaries, with all significant intercompany transactions and
accounts being eliminated on consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
8
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The results of operations for the interim periods are not necessarily indicative
of the results expected for the full year. Information for quarterly periods is
affected by seasonal variations in sales, rate changes, timing of fuel expense
recovery and other factors.
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
(B) SALE OF DR INVESTMENTS
On July 27, 1998, Dominion Resources sold East Midlands to PowerGen plc, an
electricity generator and supplier in the United Kingdom. East Midlands is
principally an electricity supply and distribution company serving 2.3 million
homes and businesses in the East Midlands region of the United Kingdom.
PowerGen acquired 100 percent of DR Investments in a transaction valued at $3.2
billion. DR Investments is the holding company for DR Investments (UK) PLC and
East Midlands. Dominion Resources expects to record an after-tax gain of
approximately $205 million in the third quarter of 1998.
The unaudited pro forma condensed consolidated statements of income and balance
sheet and related notes reflecting the sale are filed as part of this Form 10-Q
in Part II, Item 5. Other Information, found on pages 35-40.
9
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(C) COMMON STOCK
At June 30, 1998 there were 300,000,000 shares of common stock authorized of
which 196,508,138 were issued and outstanding. Common shares issued during the
referenced periods were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
----------------------------- ---------------------------
Employee Savings Plans 198,168 245,598 399,356 469,295
Dominion Direct Investment 816,411 1,063,129 1,587,354 1,974,548
Acquisition of Wolverine 1,879,974
Public Offering 6,775,000
Other 8,414 49,885 (53,015) 59,710
--------- --------- ---------- ---------
Total Shares 1,022,993 1,358,612 8,708,695 4,383,527
========= ========= ========= =========
For additional information, see Future Issues-Stock Repurchase under
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
(D) LONG-TERM INCENTIVE PLAN
On January 23, 1998, the Board of Directors of Dominion Resources awarded
participants in the Dominion Resources Incentive Compensation Plan 8,366 shares
of restricted common stock at the award price of $39.5625 per share.
For the six-month period ended June 30, 1998, 750 common shares were issued
associated with exercised stock options from previous awards. As of June 30,
1998, options on 4,076 shares were exercisable from previous awards under
Dominion Resources Long-Term Incentive Plan.
(E) PREFERRED STOCK - VIRGINIA POWER
As of June 30, 1998, there were 1,800,000 and 5,090,140 issued and outstanding
shares of preferred stock subject to mandatory redemption and preferred stock
not subject to mandatory redemption, respectively. There is a total of
10,000,000 authorized shares of Virginia Power's preferred stock.
10
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(F) OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
In December 1997, Dominion Resources established Dominion Resources Capital
Trust I (DR Capital Trust). DR Capital Trust sold 250,000 shares of Capital
Securities for $250 million, representing preferred beneficial interests and 97
percent beneficial ownership in the assets held by DR Capital Trust.
Dominion Resources issued $257.7 million of 7.83% Junior Subordinated Debentures
(Debentures) in exchange for the $250 million realized from the sale of the
Capital Securities and $7.7 million of common securities of DR Capital Trust.
The common securities represent the remaining 3 percent beneficial ownership
interest in the assets held by DR Capital Trust. The Debentures constitute 100
percent of DR Capital Trust assets.
In 1995, Virginia Power established Virginia Power Capital Trust I (VP Capital
Trust). VP Capital Trust sold 5,400,000 shares of Preferred Securities for
$135.0 million, representing preferred beneficial interests and 97% beneficial
ownership in the assets held by VP Capital Trust.
Virginia Power issued $139.2 million of its 1995 Series A, 8.05% Junior
Subordinated Notes (the Notes) in exchange for the $135.0 million realized from
the sale of the Preferred Securities and $4.2 million of common securities of VP
Capital Trust. The common securities represent the remaining 3% beneficial
ownership interest in the assets held by VP Capital Trust. The Notes constitute
100% of VP Capital Trust's assets.
(G) CONTINGENCIES
VIRGINIA POWER
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. Effective August 20,
1998, that limit will increase to $9.9 billion due to an adjustment for
inflation. Virginia Power is a member of certain insurance programs that provide
coverage for property damage to members' nuclear generating plants, replacement
power and liability in the event of a nuclear incident. Virginia Power may be
subject to retrospective premiums in the event of major incidents at nuclear
units owned by covered utilities (including Virginia Power). For additional
information, see Note Q to CONSOLIDATED FINANCIAL STATEMENTS included in
Dominion Resources' Annual Report on Form 10-K for the year ended December 31,
1997.
11
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Virginia Jurisdictional Rates
In March 1997, the Virginia State Corporation Commission (Virginia Commission)
issued an order that Virginia Power's base rates be made interim and subject to
refund as of March 1, 1997. This order was the result of the Commission Staff's
report on its review of Virginia Power's 1995 Annual Informational Filing (AIF),
which concluded that Virginia Power's present rates would cause Virginia Power
to earn in excess of its authorized return on equity. The Staff found that, for
purposes of establishing rates prospectively, a rate reduction of $95.6 million
(including a one-time adjustment of $29.7 million to Virginia Power's deferred
capacity balance at December 31, 1996) may be necessary in order to realign
rates to the authorized level. Virginia Power filed its alternative regulatory
plan (ARP) in March 1997, based on 1996 financial information. The Commission
consolidated the AIF and ARP proceedings and encouraged parties to negotiate and
present settlement proposals. Virginia Power subsequently withdrew its ARP, but
the Commission reserved the right to continue consideration of the ARP as well
as other regulatory alternatives in the consolidated proceeding.
On June 8, 1998 Virginia Power, the Staff of the Virginia Commission, the office
of the Virginia Attorney General, the Virginia Committee for Fair Utility Rates
and the Apartment and Office Building Association of Metropolitan Washington
joined in an agreement which, if approved by the Virginia Commission, would
settle Virginia Power's current rate proceedings. These parties, representing
various interests, participated in the negotiations and ultimately joined in the
filing of the proposed plan which would reduce rates while addressing the
concerns of ratepayers, those charged with protecting ratepayers' interests and
Virginia Power.
The settlement defines a new regulatory framework for Virginia Power's
transition to electric competition. The major provisions of the settlement are
as follows:
o A two-phased base rate reduction: $100 million per annum beginning March
1, 1998 with one additional $50 million per annum reduction beginning March
1, 1999;
o A base rate freeze through February 28, 2002 unless a change is necessary
to protect the legitimate interests of Virginia Power, its shareholders or
ratepayers;
o An immediate, one-time refund of $150 million for the period March 1, 1997
through February 28, 1998;
o A discontinuation of deferral accounting for purchased power capacity
expenses effective February 28, 1998;
12
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
o A write-off of a minimum of $220 million of regulatory assets in addition
to normal amortization during the base rate freeze period;
o An incentive mechanism until March 1, 2002 for earnings above the following
return on equity (ROE) benchmarks: 1998 -10.5%; after 1998 - 30-year
Treasury bond rates plus 450 basis points. For rate incentive mechanism
purposes, all earnings up to the ROE benchmark would benefit Virginia
Power's shareholder. Any earnings above the benchmark would be allocated
one-third to Virginia Power's shareholder and two-thirds to the $220 million
write-off of regulatory assets; except that all earnings above the ROE
benchmark plus 270 basis points (initially 13.2%), would be allocated to the
write-off of regulatory assets.
Although the Virginia Commission could possibly reject or cause the parties to
modify the proposed settlement, Virginia Power believes that it is probable that
the Virginia Commission will adopt the settlement as proposed although some
modification may be possible. Virginia Power has recorded the financial
implications of the proposed settlement on its books of accounts in accordance
with Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for
Contingencies. Consistent with Virginia Power's prior practice for pending rate
cases, Virginia Power recorded a reserve for refunds in the second quarter of
1998 sufficient to cover the amounts contemplated by the settlement for the
period March 1, 1997 through June 30, 1998.
In addition, the proposed settlement would require that Virginia Power write-off
a minimum of $220 million of regulatory assets in addition to normal
amortization thereof during the rate freeze period. Under SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation, Virginia Power has
evaluated its regulatory assets for potential impairment. Based on the
uncertainty of Virginia Power's earnings potential during the rate freeze
period, management can no longer conclude that recovery of the $220 million is
probable, i.e., that earnings above its authorized rate of return would be
available to offset the $220 million write-off of regulatory assets.
Accordingly, Virginia Power charged $158.6 million to second quarter 1998
earnings, which when combined with the reserve for accelerated cost recovery
accrued in 1996 and 1997, provides for the impairment of regulatory assets
resulting from the proposed settlement. See Note O to CONSOLIDATED FINANCIAL
STATEMENTS included in Dominion Resources' Annual Report on Form 10-K for the
year ended December 31, 1997.
On July 21, 1998, a hearing convened before the Virginia Commission for
presentation of the proposed settlement and to allow parties an opportunity to
comment on the proposal as well as an alternative method of allocating proposed
refunds and rate reductions among customer classes. A ruling by the Commission
is currently pending. If the Commission should reject or cause the parties to
modify the proposed settlement, Virginia Power would adjust its books of
accounts to reflect the financial implications in the period in which the
Commission renders its decision.
13
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Site Remediation
The Environmental Protection Agency (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 $61.8 million to $69.5
million. Virginia Power's proportionate share of the cost is expected to be in
the range of $1.7 million to $2.3 million, based upon allocation formulas and
the volume of waste shipped to the sites. Virginia Power has accrued a reserve
of $1.7 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 have remedial action responsibilities
remaining at two coal tar sites. Virginia Power accrued a $2 million reserve to
meet its estimated liability based on site studies and investigations performed
at these sites. In addition, two civil actions have been instituted against the
City of Norfolk and Virginia Power by property owners who allege that their
property has been contaminated by toxic pollutants originating from one of the
coal tar sites now owned by the City of Norfolk and formerly owned by Virginia
Power. The first civil action reached settlement without trial in September
1997. The remaining plaintiff is seeking compensatory damages of $2 million and
punitive damages of $1 million. It is too early in this case for Virginia Power
to predict the outcome. Virginia Power has filed answers denying liability. No
trial date has been set.
Virginia Power generally seeks to recover its costs associated with
environmental remediation from third party insurers. At June 30, 1998, no
pending or possible claims have been recognized as an asset or offset against
recorded obligations of Virginia Power.
For additional information regarding Contingencies, see Note Q to CONSOLIDATED
FINANCIAL STATEMENTS included in Dominion Resources' Annual Report on Form 10-K
for the year ended December 31, 1997.
14
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
DOMINION RESOURCES AND ITS NONUTILITY SUBSIDIARIES
Dominion Resources
As of June 30, 1998, Dominion Resources is guarantor to DR Nottingham
Investments revolving credit agreement. The revolving credit agreement is with
Union Bank of Switzerland and various lending institutions. As of June 30, 1998,
the total commitment of the agreement is 430 million pounds sterling ($717.2
million). Under the agreement, Dominion Resources has guaranteed the prompt
payment in full of amounts outstanding. At June 30, 1998, 381 million pounds
sterling ($635.5 million) was outstanding under this agreement. On July 27,
1998, the outstanding balance was paid and the revolving credit agreement was
cancelled.
Effective July 27, 1998, Dominion Resources is guarantor for 90 days to DR Group
Holdings' revolving credit agreement. DR Group Holdings is the indirect holder
of Dominion Resources' 80% ownership interest in the Corby Power Station. The
revolving credit agreement is with Bayerische Landesbank Girozentrale and
National Westminister Bank Plc. As of July 27, 1998, the total commitment and
outstanding balance of the agreement was 33.5 million pounds sterling ($55.5
million).
Dominion Energy
Certain subsidiaries of Dominion Energy have general partnership interests in
certain of its energy ventures. Accordingly, such subsidiaries may be called
upon to fund future operations of these investments to the extent operating cash
flow is insufficient.
In connection with the acquisition of Kincaid Power Station in February 1998,
Dominion Energy's wholly-owned subsidiary, Dominion Energy Construction Company
(DECCO), is obligated to perform certain improvements to the facility pursuant
to an engineering, procurement and construction agreement (EPC Agreement).
Dominion Energy has provided a guaranty of DECCO's financial obligations under
the EPC Agreement. Until completion of improvements under the EPC Agreement,
Dominion Energy is also obligated to fund additional equity as required by
Kincaid Generation LLC (KGL), the owner of the Kincaid Power Station, up to
approximately $100 million less cash flows generated by KGL. Dominion Resources
has guaranteed Dominion Energy's obligation to make such equity infusions into
KGL.
Dominion Capital
As of June 30, 1998, Dominion Capital had commitments to fund loans of
approximately $878 million.
(H) LINES OF CREDIT
Dominion Resources and its subsidiaries had lines of credit, revolving credit
agreements and bank commitments that provide for maximum borrowings of $4,982.3
million. At June 30, 1998, $2,242.4 million had been borrowed under such
agreements. In addition, these credit agreements supported $338.1
15
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
million of Dominion Resources' commercial paper and $1,140.4 million of
non-recourse commercial paper issued by Dominion Resources' subsidiaries which
was outstanding at June 30, 1998. At June 30, 1998, $300 million of Dominion
Resources commercial paper is classified as long-term debt since it is supported
by revolving credit agreements that have expiration dates extending
beyond one year.
(I) ACQUISITIONS
Archer Resources Ltd.
On April 22, 1998, Dominion Energy completed its purchase of all of the
outstanding shares of Archer Resources Ltd., a publicly traded natural gas and
oil exploration and production company headquartered in Calgary, Alberta, Canada
for approximately $119 million. The company's name was subsequently changed to
Dominion Energy Canada, Ltd.
Hidroelectrica Cerros Colorados
On May 22, 1998, Dominion Energy acquired, through wholly-owned subsidiaries, an
additional 39% interest in Hidroelectric Cerros Colorados S.A. (HCC) from the
Province of Neuquen, Argentina, for approximately $40 million. Subsequent to
this transaction, Dominion Energy owns an effective interest of 98% in HCC, a
hydroelectric power generation company located in Argentina.
16
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains "forward-looking statements" as defined by the Private
Securities Litigation Reform Act of 1995, including (without limitation)
discussions as to expectations, beliefs, plans, objectives and future financial
performance, or assumptions underlying or concerning matters discussed in this
document. These discussions, and any other discussions, including certain
contingency matters (and their respective cautionary statements) discussed
elsewhere in this report, that are not historical facts, are forward-looking
and, accordingly, involve estimates, projections, goals, forecasts, assumptions
and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements. The following
important factors should be considered with respect to any forward-looking
statements made herein:
Current governmental policies and regulatory actions both domestic and
international (including those of FERC, the EPA, the NRC, and the Virginia
Commission), industry and rate structure, general industry trends, operation of
nuclear power facilities, acquisition and disposal of assets and facilities,
operation and storage facilities, recovery of the cost of purchased power,
nuclear decommissioning costs, the ability of Dominion Resources and its
suppliers to successfully address Year 2000 compliance issues, economic and
geographic factors including political and economic risks (particularly those
associated with international development and operations, including currency
fluctuation), changes in and compliance with environmental laws and policies,
weather conditions and catastrophic weather related damage, competition,
including competition for retail and wholesale customers, pricing and
transportation of commodities, exposure to changes in the fair value of
commodity contracts, market demand for energy, inflation, capital market
conditions, unanticipated development project delays or changes in project cost,
unanticipated changes in operating expenses and capital expenditures,
competition for new energy development opportunities, counterparty credit risk
and legal and administrative proceedings. All such factors are difficult to
predict, contain uncertainties that may materially affect actual results, and
may be beyond the control of Dominion Resources. New factors emerge from time to
time and it is not possible for management to predict all of such factors, nor
can it assess the impact of each such factor on the businesses of Dominion
Resources.
Any forward-looking statement speaks only as of the date on which such statement
is made, and Dominion Resources undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made.
17
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
DOMINION RESOURCES - CONSOLIDATED
RESULTS OF OPERATIONS
Earnings Per Share Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------------------- ------------------------
Virginia Power $ (0.66) $ 0.34 $(0.20) $ 0.90
Dominion UK 0.04 (0.05) 0.14 0.22
Nonutility 0.20 0.14 0.35 0.23
------ ------ ----- ----
Consolidated $ (0.42) $ 0.43 $ 0.29 $ 1.35
====== ===== ===== =====
The results of operations for the interim periods are not necessarily indicative
of the results expected for the full year. Information for quarterly periods is
affected by seasonal variations in sales, rate changes, timing of fuel expense
recovery and other factors.
Consolidated earnings decreased 85 cents per share for the second quarter of
1998 when compared to the second quarter of 1997. The decline was primarily due
to the impact of Virginia Power's proposed rate case settlement. The settlement
reduced earnings by $1.03 per share. The decline was offset by:
o an increase in Virginia Power's retail and wholesale power marketing sales
and strong operating performance,
o increased contributions from diversified financial services businesses at
Dominion Capital, Dominion Resources' financial services subsidiary, and
o increased earnings at East Midlands as a result of reduced operating costs
and improved sales volumes at its distribution and supply businesses.
Consolidated earnings decreased by $1.06 per share during the six-month
period ended June 30, 1998 when compared to the same period in 1997. As in the
second quarter comparison, the primary reason for the decline was the recording
of the proposed rate case settlement at Virginia Power.
Operating Revenues and Expenses
Operating revenues increased by $ 413.6 million during the second quarter of
1998 as compared to the same period in 1997 and $673.9 million during the first
six months of 1998 as compared to the same period in 1997 primarily due to the
increased retail and wholesale power marketing sales at Virginia Power which was
offset by the provision for the rate refund.
Operating expenses increased by $615.9 million in the second quarter 1998 as
compared to the same period in 1997. In addition, operating expenses increased
by $876.3 million during the first six months of 1998 as compared to the same
period in 1997. The increases were primarily due to the proposed rate case
settlement and the increase in fuel and purchased power capacity costs at
Virginia Power.
18
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Provision for Income Taxes
The provision for income taxes decreased when comparing the second quarter and
six month period ending June 30, 1998 to the same periods in 1997 primarily due
to the write-off of costs associated with the proposed rate case settlement at
Virginia Power which reduced taxable income.
Contingencies
For information on contingencies, see Note (G) to the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
Cash flows from operating activities for the six months ended June 30, 1998
increased by $145 million as compared to the same period in 1997. The increase
was primarily due to trading activities of the Virginia Power's wholesale power
group.
Cash Flows From Financing Activities
Cash flows from financing activities during the first six months of 1998 were
$481.5 million. The increase was primarily due to the issuance of common stock
at Dominion Resources and the issuance of long-term debt to fund the needs for
loan originations at Dominion Capital.
On July 20, 1998, the Board of Directors of Dominion Resources declared a
quarterly common stock dividend of $0.645 per share, payable September 20, 1998
to holders of record at the close of business August 28, 1998.
Dominion Resources issued 1,014,579 shares of common stock through its Dominion
Direct Investment and Employee Savings Plans (see Note (C) to the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS) during the three-month period ended June 30,
1998. The proceeds from the issuance of common stock under these plans are used
to provide equity capital to Dominion Resources' subsidiaries.
19
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Cash Flows Used In Investing Activities
Net cash flows used in investing activities for the six-month period ending June
30, 1998 were $1,062.3 million. The primary reasons for the cash outflows were:
o the increase in loan originations at Dominion Capital's financial services
subsidiaries,
o utility plant expenditures at East Midlands and Virginia Power, and
o Dominion Energy investments in natural gas and independent power plants.
FUTURE ISSUES
Year 2000 Compliance
In reference to the Year 2000 Compliance, Dominion Resources project teams have
completed their preliminary assessment of compliance. Based on current
evaluation, the costs for remediation and testing of systems are now projected
to be within the range of $45 million to $55 million. These estimates reflect
the refinement of cost estimates and the recent sale of East Midlands.
On August 4, 1998, the Securities and Exchange Commission issued new disclosure
requirements with regards to Year 2000 Compliance. Dominion Resources is
evaluating these requirements and will include any required information not
previously disclosed in its Form 10-Q for the period ended September 30, 1998.
Stock Repurchase
On July 20, 1998, the Dominion Resources Board of Directors authorized the
repurchase of up to $650 million (approximately 8 percent) of Dominion Resources
common stock outstanding. Dominion Resources currently plans to buy back between
$100 and $200 million of common stock over the next six to twelve months.
Also, effective August 1, 1998, purchases of shares required by Dominion Direct
Investment and the Employee Savings Plans will be acquired on the open market
instead of issuing new shares.
See Note (C) to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for shares issued
for the second quarter and first six-months of 1998 and 1997, respectively.
20
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The statement establishes accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at fair value. The statement
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999; however, it may be adopted earlier. It cannot be applied retroactively to
financial statements of prior periods.
We have not yet quantified the impacts of adopting SFAS No. 133 on our financial
statements and have not determined the timing of or method of adoption. However,
adoption of the statement could increase volatility in earnings and other
comprehensive income.
VIRGINIA POWER
RESULTS OF OPERATIONS
Revenue
Revenue changed from the same period in the prior year primarily due to the
following:
Three Months Ended Six Months Ended
Revenue - Electric Service June 30, 1998 vs. 1997 June 30, 1998 vs. 1997
---------------------- ----------------------
Weather $ 18.2 $(6.2)
Customer growth 9.2 20.1
Provision for rate refund (186.3) (186.3)
Fuel rate variance (36.3) (50.5)
Other retail 50.5 69.0
------- ------
Total retail (144.7) (153.9)
Other electric service 14.2 (1.5)
------- -------
Total electric service (130.5) (155.4)
-------- -------
Revenue - Other
Wholesale-power marketing 373.1 507.6
Natural gas 87.9 238.8
Other, net 5.4 5.5
------ ------
Total revenue - other 466.4 751.9
------- ------
Total revenue $335.9 $596.5
------- ------
21
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Electric service revenue consists of sales to retail customers in our service
territory at rates authorized by the Virginia and North Carolina Commissions and
sales to cooperatives and municipalities at wholesale rates authorized by FERC.
The primary factor affecting this revenue in the first six months of 1998 was an
accrual of a provision for rate refund to reflect the proposed settlement of
Virginia Power's rate proceedings currently pending before the Virginia
Commission (see Note (G) to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS). In
addition, revenue was also affected by customer growth, weather and fuel rates.
Customer growth - Sales resulting from new customer connections increased
revenue by $9.2 million and $20.1 million for the three-month and six-month
periods, respectively, ending June 30, 1998 as compared to the same period in
1997.
Weather - Mild weather in the first quarter of 1998 caused customers to use less
electricity for heating. The return to more normal weather during the second
quarter of 1998 as compared to the milder weather of the second quarter of 1997
substantially offset the first quarter decrease in weather-related sales.
Heating and cooling degree-days for the second quarter were as follows:
1998 1997 Normal
---- ---- ------
Heating degree days 290 468 308
Percentage change compared
to prior year (38.0)% 25.1%
Cooling degree days 433 303 444
Percentage change compared
to prior year 42.9% (35.3)%
Heating and cooling degree-days for the first six months were as follows:
1998 1997 Normal
---- ---- ------
Heating degree days 2,030 2,324 2,413
Percentage change compared
to prior year (12.7)% (14.2)%
Cooling degree days 463 309 450
Percentage change compared
to prior year 49.8% (34.0)%
Fuel rates - The decrease in fuel rate revenue is attributable to lower fuel
rates which went into effect December 1, 1997 and an additional reduction
effective March 1, 1998. These reductions decreased fuel revenues by
approximately $36.3 million and $50.5 million for the three-month and six-month
periods, respectively, ending June 30, 1998.
22
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Customer kilowatt-hour sales changed as follows:
Three Months Ended Six Months Ended
June 30,1998 vs.1997 June 30,1998 vs. 1997
----------------------- ---------------------
Residential 8.5% 2.0%
Commercial 11.7% 8.0%
Industrial (2.3%) 1.0%
Public street & highway
lighting 1.7% 2.5%
Public authorities 12.9% 7.8%
Total retail sales 7.9% 4.4%
Wholesale - system 37.8% (0.2)%
Wholesale - power marketing 328.4% 251.0%
Total electric sales 66.5% 45.8%
The overall increase in kilowatt-hour sales reflects the success of Virginia
Power's wholesale power marketing efforts and increased sales resulting from
customer growth.
Other Revenues
Other revenue includes sales of electricity beyond Virginia Power's service
territory, natural gas sales, nuclear consulting services, energy management
services and other revenue. The growth in power marketing and natural gas sales
revenue for the six-month period ended June 30, 1998, as compared to the same
period in 1997, is primarily due to Virginia Power's success at marketing
electricity and natural gas beyond our service territory.
Fuel, net
Fuel, net increased as compared to the second quarter of 1997, primarily due to
the cost of the power marketing and natural gas sales which reflects increased
purchases of energy from other wholesale power suppliers and purchases of
natural gas.
Purchased Power Capacity, net
Purchased power capacity, net increased for the three-month and six-month
periods ended June 30, 1998, as compared to the same periods in 1997, due to 1)
the discontinuance of deferral accounting for such expenses and the write-off of
the deferred capacity expense balance based on the proposed settlement of
Virginia Power's rate proceedings currently pending before the Virginia
Commission and 2) increased expenses associated with the restructuring of
certain contracts. See Future Issues - Utility Rate Regulation under
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
23
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Other Operation and Maintenance
Operations and maintenance decreased for the six-month period ended June 30,
1998, as compared to the same period in 1997, as a result of scheduled
maintenance in 1997 at Virginia Power's Surry Unit 1 nuclear power station and
also due to reductions in expenses attributable to Virginia Power's strategic
initiatives.
Impairment of Regulatory Assets
Impairment of regulatory assets represents the recognition of the proposed
settlement of Virginia Power's rate proceedings currently pending before the
Virginia Commission (see Note (G) to the NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS). The amount reported for 1997 represents accelerated cost recovery
reserve accruals for expected adjustments to regulatory assets. See Note O to
CONSOLIDATED FINANCIAL STATEMENTS included in Dominion Resources' Annual Report
on Form 10-K for the year ended December 31, 1997.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization decreased primarily due to adjustments
to the provision for depreciation and decommissioning expenses for the period
March 1, 1997 through June 30, 1998, to reflect terms of the proposed settlement
of Virginia Power's rate proceedings currently pending before the Virginia
Commission. See Note (G)to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
Other Income
Other income decreased for the three-month and six-month periods ended June 30,
1998, as compared to the same periods in 1997, primarily due to unrealized net
losses associated with changes in the estimated fair value of natural gas and
electricity commodity contracts held for trading purposes.
Interest Expense, net
Interest expense, net increased primarily due to the accrual of interest on the
anticipated rate refund as a result of the proposed settlement of Virginia
Power's rate proceedings currently pending before the Virginia Commission. See
Note (G) to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Income Taxes
Income taxes decreased for the three-month and six-month periods ended June 30,
1998, as compared to the same period in 1997, primarily as a result of the
income tax provisions associated with Virginia Power's recognition of a
provision for rate refund and impairment of regulatory assets to reflect the
proposed settlement of Virginia Power's rate proceedings currently pending
before the Virginia Commission. See Note (G) to the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operations
Operating activities resulted in $143.6 million increased cash flow for the
six-month period ended June 30, 1998 as compared to the same period in 1997.
This increase was primarily attributable to trading activities of Virginia
Power's wholesale power group. Internal generation of cash exceeded Virginia
Power's capital requirements during the first six months of 1998 and 1997.
Cash Flows Used in Financing Activities
Six Months ending June 30,
1998 1997
---- ----
Issuance of long-term debt $ 150.0 $ 210.0
(Repayment) issuance of short-term debt (25.0) 127.9
(Repayment) issuance of long-term debt (217.5) (299.3)
Common stock dividend payments (191.1) (189.2)
Preferred stock dividend payments (17.8) (17.5)
Distribution-preferred securities of
subsidiary trust (5.4) (5.4)
Other (2.0) (1.1)
------- -------
Total $(308.8) $(174.6)
======= =======
Virginia Power currently has three shelf registration statements effective with
the Securities and Exchange Commission from which they can obtain additional
debt capital. The remaining principal amount of debt that can be issued under
these registrations totals $765 million. An additional capital resource of $100
million in preferred stock also is registered with the Securities and Exchange
Commission.
25
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
On June 17, 1998, Virginia Power issued $150 million of its 1998 Series A 7.15%
Senior Notes, due June 30, 2038. The proceeds from the sale of these notes and
cash provided by operating activities were used to fund second quarter 1998
mandatory maturities totaling $217.5 million.
Virginia Power has a commercial paper program that is supported by two credit
facilities totaling $500 million. Proceeds from the sale of commercial paper are
primarily used to provide working capital. Net borrowings under the program were
$201.3 million at June 30, 1998.
Cash Flows Used in Investing Activities
Cash used in investing activities was as follows: Six Months ending June 30,
1998 1997
---- ----
Utility plant expenditures (excluding AFC-other funds) $(190.4) $(164.8)
Nuclear fuel (excluding AFC-other funds) (25.7) (47.0)
Nuclear decommissioning contributions (33.5) (18.1)
Purchase of assets (20.0)
Other (6.9) (1.1)
------- -------
Total $(256.5) $(251.0)
======= =======
Investing activities for the first six months of 1998 resulted in a net cash
outflow of $256.5 million primarily due to $190.4 million of construction
expenditures, $25.7 million of nuclear fuel expenditures and approximately $33.5
million of contributions to nuclear decommissioning trusts. Of the construction
expenditures, Virginia Power spent approximately $137.7 million on transmission
and distribution projects, $20.6 million on production projects and $32.1
million on support facilities.
26
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
FUTURE ISSUES
Competition
In the 1998 Session, the Virginia General Assembly passed House Bill No. 1172
(HB1172) to establish a schedule for Virginia's transition to retail competition
in the electric utility industry. Virginia Power actively supported HB1172,
which passed both houses of the General Assembly in amended form and was signed
into law by Virginia's Governor in April 1998. The law, which became effective
July 1, 1998, requires the following:
o establishment of one or more independent system operators (ISO) and one or
more regional power exchanges (RPX) for Virginia by January 1, 2001;
o deregulation of generating facilities beginning January 1, 2002;
o transition to retail competition to begin on January 1, 2002, with retail
competition to begin on January 1, 2004;
o recovery of just and reasonable net stranded costs; and,
o appropriate consumer safeguards related to stranded costs and consideration
of stranded benefits.
While the bill establishes a timeline for the transition to competition in
Virginia, a detailed plan to implement that transition must be developed through
future legislative and regulatory action. Virginia Power is unable at this time
to predict the timing or details of such a plan.
For additional information, see Future Issues-Virginia Power under MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
included in Dominion Resources' Annual Report on Form 10-K for the year ended
December 31, 1997.
Utility Rate Regulation
For information on Utility Rate Regulation, see Note (G) to the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
DOMINION UK
RESULTS OF OPERATIONS
Net income increased by $20 million during the second quarter of 1998 as
compared to the same period in 1997 primarily due to reduced operating costs and
improved sales volumes which more than offset higher interest expenses during
the period. Net income decreased during the six-month period June 30, 1998 as
compared to the same period in 1997 primarily due to interest charges which were
offset by reduced operating costs.
27
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities
Cash flows used in operations for the six months ended June 30, 1998 decreased
by $16.3 million as compared to the same period in 1997 primarily due to normal
operations.
Cash Flows From Financing Activities
Cash from (used in) financing activities was as follows:
Six Months Ended June 30,
1998 1997
Issuance (repayment) of long-term debt $(240.9) $1,904.2
Investment from parent 267.4 51.5
Other 28.4 49.5
------- --------
Net cash flows from financing activities $ 54.9 $2,005.2
======= ========
During the first six months of 1998, cash flows from financing activities were
$54.9 million primarily due to the investment from parent offset by the
repayment of long-term debt.
Cash Flows From Investing Activities
Cash from (used in) investing activities was as follows:
Six Months Ended June 30,
1998 1997
Purchase of East Midlands $(1,901.5)
Purchase of fixed assets $(92.0) (99.6)
Other (21.3) 36.3
------ ---------
Net cash flows from (used in)
financing activities $(113.3) $(1,964.8)
======= =========
During the first six months of 1998, cash flows used in investing activities was
$113.3 million primarily due to the purchase of fixed assets.
28
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
DOMINION ENERGY
RESULTS OF OPERATIONS
Net income decreased during the second quarter of 1998 as compared to the same
period in 1997 primarily due to: lower gas prices offset in part by
increased production in its oil and gas businesses due to the
acquisition of Archer Resources, Ltd.,
lower earnings in its foreign power businesses due to weaker hydrology,
offset in part by increased earnings in its domestic power business
primarily due to the impact of the addition of the Kincaid Power Station.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities
Cash flows from operations for the six months ended June 30, 1998 decreased by
$8.9 million as compared to the same period in 1997 primarily due to ordinary
business operations.
Cash Flows Used In Financing Activities
Cash from (used in) financing activities was as follows:
Six Months Ended
June 30,
1998 1997
---- ----
(Millions)
Issuance (repayment) of long-term debt $ 334.0 $ (19.9)
Dividend payment (23.7) (24.6)
Other 17.9 7.8
------- -------
Net cash flows from financing activities $ 328.2 $ (36.7)
======= ======
During the first six months of 1998, cash flows from financing activities were
$328.2 million primarily due to the issuance of long-term debt to fund the
acquisition of the Kincaid Power Station and Archer Resources, Ltd.
29
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Cash Flows Used In Investing Activities
Cash used in investing activities was as follows:
Six Months Ended
June 30,
1998 1997
---- ----
(Millions)
Investment in natural gas assets $(125.6) $(20.9)
Investment in power generation assets (198.0) (7.8)
Other (65.4) (3.4)
------- ------
Net cash flows from financing activities $(389.0) $(32.1)
======= ======
During the first six months of 1998, cash flows used in investing activities
were $389 million primarily due to the acquisition of the Kincaid Power Station,
an additional interest in Hidroelectric Cerros Colorados, and Archer Resources,
Ltd.
DOMINION CAPITAL
RESULTS OF OPERATIONS
Net income increased during the second quarter and the first six months of 1998
as compared to the same periods in 1997 primarily due to the strong performance
from its financial services businesses.
30
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities
Cash flows used in operations for the six months ended June 30, 1998 increased
by $39.8 million as compared to the six months ended June 30, 1997 primarily due
to an increase in cash flows from net mortgage originations and sales.
Cash Flows Used In Financing Activities
Cash from (used in) financing activities was as follows:
Six Months Ended
June 30,
1998 1997
---- ----
(Millions)
Issuance of long-term debt $1,577.4 $2,462.5
Repayment of long-term debt (1,361.5) (2,357.0)
Issuance of short-term debt 192.1
Investment from parent 49.1 99.0
Dividend payment (24.7) (21.4)
Issuance (repayment) of intercompany debt (62.4) (17.5)
Other 0.1 21.7
-------- --------
Net cash flows from financing activities $ 370.1 $ 187.3
======== ========
31
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
During the first six months of 1998, cash flows from financing activities were
$370.1 million to provide funding needs for loan origination during the period.
Cash Flows Used In Investing Activities
Cash from (used in) investing activities was as follows:
Six Months Ended
June 30,
1998 1997
---- ----
(Millions)
Investment in affiliates $ 24.8 $(102.7)
Loan originations (1,106.7) 419.4)
Repayments of loan originations 784.8 378.0
Other (17.3) (36.3)
--------- -------
Net cash flows used in investing activities $ (314.4) $(180.4)
========= =======
During the first six months of 1998, cash flows used in investing activities
increased primarily due to an increase in loan originations.
32
DOMINION RESOURCES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
MARKET RATE SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
Dominion Resources is subject to market risk as a result of its use of various
financial instruments, derivative financial instruments and derivative commodity
instruments. Interest rate risk generally is associated with Dominion Resources'
and its subsidiaries' outstanding debt as well as its commercial, consumer, and
mortgage lending activities. Currency risk exists principally through Dominion
Resources' investments in the United Kingdom, Canada and some debt denominated
in European currencies associated with Dominion Resources' investment in South
and Central America. Dominion Resources is exposed to equity price risk through
various portfolios of equity securities.
Dominion Resources uses derivative commodity instruments to hedge exposures of
underlying electric, gas production, and gas procurement operations and is also
involved in trading activities, which use these instruments.
Dominion Resources is also exposed to price risk associated with the
nonfinancial assets and liabilities of power production operations, including
underlying fuel requirements and natural gas operations.
Dominion Resources currency risk in the United Kingdom has been substantially
reduced due to the sale of East Midlands on July 27, 1998. For more information
on the sale of East Midlands, see Note B to the NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS.
Interest Rate Risk Non-Trading Activities
In managing interest-rate risk, Dominion Resources enters into interest rate
sensitive derivatives. Examples of these derivatives are swaps, forwards and
futures contracts.
Dominion Resources, as part of its routine risk management policy reviews the
level of market risk it faces.
Electric and Gas Commodity Price Risk Trading Activities
The use of electric and gas futures and derivative commodity contracts through
Virginia Power's wholesale power trading operation has significantly increased
during the first six months of 1998.
33
DOMINION RESOURCES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
These contracts are sensitive to changes in the prices of natural gas and
electricity. Virginia Power employs established policies and procedures to
manage its risks associated with these price fluctuations and uses various
commodity instruments, such as futures, swaps and options, to reduce risk by
creating offsetting market positions.
One of the techniques commonly used to measure risk in a commodity trading
portfolio is sensitivity analysis, which determines a hypothetical change in the
fair value of the portfolio which would result from an assumed change in the
market prices of the related commodities. The fair value of the portfolio is a
function of the underlying commodity, contract prices and market prices
represented by each derivative commodity contract. For exchange-for-physical
contracts, basis swaps, fixed price forward contracts and options which require
physical delivery of the underlying commodity, market value reflects
management's best estimates considering over-the-counter quotations, time value
and volatility factors of the underlying commitments. Futures contracts and
options on futures contracts are marked to market based on closing exchange
prices.
Virginia Power has determined a hypothetical loss by calculating a hypothetical
fair value for each of Virginia Power's contracts assuming a 10% unfavorable
change in the market prices of the related commodity and comparing it to the
fair value of the contracts based on market prices at June 30, 1998. This
hypothetical 10% change in commodity prices would have resulted in a
hypothetical loss of approximately $18 million in the fair value of Virginia
Power's natural gas and electricity contracts as of June 30, 1998.
The sensitivity analysis does not include the price risks associated with
utility operations, including those underlying utility fuel requirements. In the
normal course of business, Virginia Power also faces risks that are either
nonfinancial or nonquantifiable. Such risks principally include credit risk,
which is not reflected in the sensitivity analysis above.
Other than the above change, the risk associated with Dominion Resources' other
uses of these instruments has not materially changed from that discussed in
Market Rate Sensitive Instruments and Risk Management under MANAGEMENT'S
DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION included in
Dominion Resources' Annual Report on Form 10-K for the year ended December 31,
1997.
34
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
VIRGINIA POWER
In reference to the motion for judgment filed by Doswell Limited Partnership
against Virginia Power, and the complaint in the United States District Court
for the Eastern District of Virginia, on March 18, 1998, the parties agreed to
stay both proceedings in order to negotiate amendments to the power purchase
agreements. On June 29, 1998, the parties executed an amendment and restatement
of both agreements and on July 2, 1998, the amendment and restatement was filed
with FERC. On July 30, 1998, FERC issued a letter order accepting for filing the
amendment and restatement of the power purchase and operating agreements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Dominion Resources Annual Shareholders Meeting was held on April 18, 1998 and
the results were reported in Dominion Resources first quarter ended March 31,
1998 Form 10-Q, dated May 14, 1998.
ITEM 5. OTHER INFORMATION
The Company
Sale of East Midlands
On July 27, 1998, Dominion Resources sold East Midlands Electricity plc (East
Midlands) to PowerGen plc, an electricity generator and supplier in the United
Kingdom in a transaction valued at $3.2 billion. Dominion Resources expects to
record an after-tax gain of approximately $205 million in the third quarter of
1998.
Dominion Resources purchased East Midlands in the first quarter of 1997. East
Midlands principal businesses are the distribution of electricity and the supply
of electricity to approximately 2.3 million customers in the East Midlands
region of the United Kingdom.
Dominion Resources continues to retain an 80 percent ownership interest in the
Corby Power Station, a 365 megawatt natural gas fired facility located in
Northamptonshire, about 90 miles north of London.
The following pro forma results give effect to the sale of DR Investments for
the six months ended June 30, 1998 and the twelve months ended December 31, 1997
as if the transaction has been consummated at the beginning of the periods
presented for the unaudited pro forma condensed consolidated statements of
income and at the end of the period presented for the consolidated balance
sheet. The unaudited pro forma condensed consolidated statements of income for
the six months ended June 30, 1998 and twelve months
35
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
ended December 31, 1997 exclude the results of operations of DR Investments for
that period. DR Investments is the holding company for DR Investments (UK) PLC
and East Midlands.
The unaudited pro forma condensed consolidated balance sheet as of June 30, 1998
excludes the balance sheet of DR Investments. The statement includes the
proceeds from the sale.
The condensed consolidated historical balance sheet and statements of income and
the pro forma consolidated financial statements for Dominion Resources have been
prepared in accordance with United States Generally Accepted Accounting
Principles. The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred if the DR Investments sale had taken place at the beginning of the
period specified, nor is it indicative of future operating results.
The unaudited pro forma condensed consolidated statements of income and balance
should be read in conjunction with the consolidated financial statements of
Dominion Resources and the related notes thereto included in Dominion Resources'
Combined Annual Report on Form 10-K for the year ended December 31, 1997 and
Dominion Resources' Combined Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
36
DOMINION RESOURCES, INC.
PART II - OTHER INFORMATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(in millions, except earnings per common share data)
PRO FORMA
DOMINION PRO FORMA CONSOLIDATED
RESOURCES ADJUSTMENTS INCOME
--------- ----------- ------
OPERATING REVENUES AND INCOME (1)
Virginia Power $2,822.8 $2,822.8
East Midlands 1,009.5 $1,009.5
Nonutility 392.4 392.4
-------- -------- --------
Total operating revenues and income 4,224.7 1,009.5 3,215.2
-------- -------- --------
OPERATING EXPENSES
Fuel, net 1,320.0 1,320.0
Purchased power capacity, net 384.3 384.3
Write-off of regulatory assets 158.6 158.6
Supply and distribution-East Midlands 654.9 654.9
Other operation and maintenance 698.0 137.6 560.4
Depreciation, depletion & amortization 387.4 75.3 312.1
Other taxes 151.5 151.5
-------- -------- --------
Total operating expenses 3,754.7 867.8 2,886.9
-------- -------- --------
OPERATING INCOME 470.0 141.7 328.3
-------- -------- --------
OTHER INCOME AND (EXPENSES) (7.5) (1.2) (6.3)
-------- -------- --------
FIXED CHARGES
Interest charges, net 338.1 102.4 235.7
Other 33.3 33.3
-------- -------- --------
Total fixed charges 371.4 102.4 269.0
-------- -------- --------
Income before provision for income taxes 91.1 38.1 53.0
Provision for income taxes 34.3 5.0 29.3
-------- -------- --------
Net income $ 56.8 $ 33.1 $ 23.7
======== ======== ========
EARNINGS PER SHARE $0.29 $0.12
==== ====
WEIGHTED AVERAGE SHARES OUTSTANDING 194.4 194.4
===== =====
See notes to pro forma condensed combined unaudited financial data.
37
DOMINION RESOURCES, INC.
PART II - OTHER INFORMATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
(in millions, except earnings per common share data)
PRO FORMA
DOMINION PRO FORMA CONSOLIDATED
RESOURCES ADJUSTMENTS INCOME
--------- ----------- ------
OPERATING REVENUES AND INCOME (1)
Virginia Power $5,079.0 $5,079.0
East Midlands 1,970.1 1,970.1
Nonutility 628.5 628.5
-------- -------- --------
Total operating revenues and income 7,677.6 1,970.1 5,707.5
-------- -------- --------
OPERATING EXPENSES
Fuel, net 1,620.7 1,620.7
Purchased power capacity, net 717.5 717.5
Supply and distribution-East Midlands 1,466.1 1,466.1
Other operation and maintenance 1,294.5 126.1 1,168.4
Depreciation, depletion & amortization 819.3 131.3 688.0
Other taxes 282.5 282.5
-------- -------- --------
Total operating expenses 6,200.6 1,723.5 4,477.1
-------- -------- --------
OPERATING INCOME 1,477.0 246.6 1,230.4
-------- -------- --------
OTHER INCOME AND EXPENSES
Windfall profits tax (156.6) (156.6)
Other (12.9) 10.8 (23.7)
-------- -------- --------
Total other income (169.5) (145.8) (23.7)
-------- -------- --------
FIXED CHARGES
Interest charges, net 627.4 189.4 438.0
Other 47.9 47.9
-------- -------- --------
Total fixed charges 675.3 189.4 485.9
-------- -------- --------
Income before provision for income taxes 632.2 (88.6) 720.8
Provision for income taxes 233.0 21.1 211.9
-------- -------- --------
Net income $ 399.2 ($ 109.7) $ 508.9
======== ======== ========
EARNINGS PER SHARE $2.15 $2.75
WEIGHTED AVERAGE SHARES OUTSTANDING 185.2 185.2
===== =====
See notes to pro forma condensed combined unaudited financial data.
38
DOMINION RESOURCES, INC.
PART II - OTHER INFORMATION
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
(in millions)
PRO FORMA
DOMINION DR PRO FORMA CONSOLIDATED
RESOURCES INVESTMENTS ADJUSTMENTS BALANCE SHEET
--------- ----------- ----------- -------------
ASSETS (1)
Current assets $ 2,644.1 $298.0 $739.6 (2) $ 3,085.7
Investments 2,760.3 5.4 2,754.9
Property, Plant and Equipment:
Utility plant and nuclear fuel 18,166.4 2,040.1 16,126.3
Nonutility property 2,048.5 2,048.5
Less accumulated depreciation and
amortization 7,445.0 126.2 7,318.8
-------- ------- ------ ---------
12,769.9 1,913.9 10,856.0
-------- ------- ------ ---------
Deferred Charges & Other Assets 2,830.0 1,768.3 1,061.7
-------- ------- ------ ---------
TOTAL ASSETS $21,004.3 $3,985.6 $739.6 $17,758.3
========= ======== ====== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities $ 2,765.4 $879.7 164.1 (3) $ 2,049.8
Long-Term Debt:
Virginia Power 3,416.2 3,416.2
Dominion UK 2,517.6 1,825.4 (636.3) (4) 55.9
Nonrecourse-nonutility 2,251.9 2,251.9
Other 559.0 (25.0) (5) 534.0
-------- ------- ------ ---------
8,744.7 1,825.4 (661.3) 6,258.0
-------- ------- ------ ---------
Deferred Credits and Other
Liabilities 3,215.9 248.7 2,967.2
Preferred stock & preferred
securities 1,074.0 1,074.0
Shareholders' Equity:
Common stock 4,020.4 4,020.4
Other 1,183.9 1,031.8 1,236.8 1,388.9
-------- ------- ------ ---------
5,204.3 1,031.8 1,236.8 5,409.3
-------- ------- ------ ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$21,004.3 $3,985.6 $739.6 $17,758.3
========= ======== ====== =========
See notes to pro forma condensed combined unaudited financial data.
39
DOMINION RESOURCES, INC.
PART II - OTHER INFORMATION
NOTES TO PRO FORMA CONDENSED COMBINED UNAUDITED FINANCIAL DATA
The pro forma adjustments to reflect the effect of the DR Investments sale are
as follows:
1. The column reflects on the statement of income the operations of DR
Investments adjusted for historical interest paid ($66.3 million for the
twelve months ended December 31, 1997 and $24.3 million for the six months
ended June 30, 1998) on the debt retired in Note 4. On the balance sheet,
it reflects the financial position of DR Investments. These amounts are
deducted from the income statements and balance sheets of Dominion
Resources. The purpose is to provide pro forma income statements that
reflect the sale of DR Investments at the beginning of the time period
presented. The pro forma balance sheet reflects the consummation of the
sale of DR Investments at the date of the balance sheet.
2. The adjustment reflects net cash proceeds received by Dominion Resources
from the sale. The Company intends to use the proceeds for: (a) the
investment in short-term marketable securities, (b) the buyback of stock,
and (c) the settlement of the tax liability related to the sale.
3. The adjustment reflects the tax liability and transaction costs of the
sale.
4. The adjustment reflects the retirement of debt at DR Nottingham, an
intermediate holding company of DR Investments.
5. The adjustment reflects the paydown of debt associated with Commercial
Paper.
The investment in marketable securities at the beginning of the operating
periods of the pro forma income statements would have generated approximately
$11 million in after tax income for the six-month period ended June 30, 1998 and
approximately $20 million in after tax income for the twelve month period ended
December 31, 1997. The interest savings related to the pay down of debt
associated with Commercial Paper is minimal for the six months ended June 30,
1998 and twelve months ended December 31, 1997.
40
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
Stock Repurchase
The Dominion Resources Board authorized the repurchase of up to $650 million
(approximately 8 percent) of Dominion Resources common stock outstanding.
Dominion Resources plans to buy back between $100 and $200 million of common
stock over the next 6 to 12 months. In addition, effective August 1, 1998,
Dominion Resources changed from issuing new shares to using shares purchased in
the open market for its Dominion Direct Investment program and Employee Savings
Plans.
Dominion Energy
Archer Resources Ltd.
On April 22, 1998, Dominion Energy completed its purchase of all of the
outstanding shares of Archer Resources Ltd., a publicly traded natural gas and
oil exploration and production company headquartered in Calgary, Alberta, Canada
for approximately $119 million. The company's name was subsequently changed to
Dominion Energy Canada, Ltd.
Virginia Power
Regulation
Virginia
In reference to the March 1998 Virginia Commission Order Establishing
Investigation with regard to independent system operators (ISOs), regional power
exchanges (RPXs) and retail access pilot programs, the Virginia Commission's
order directed Virginia Power and AEP-Virginia to begin work immediately, in
conjunction with the Staff, to implement at least one retail access pilot
program and study. On July 16, 1998, the Virginia Commission extended the time
to file retail access pilot programs from August 1, 1998 to November 1, 1998.
FERC
Regarding the LG&E Westmoreland Southampton (Southampton) proceedings in May
1998, FERC denied a rehearing, granted the clarification and accepted
Southampton's 1992 rates subject to a refund to Virginia Power. In June 1998,
Southampton and Virginia Power each filed separate requests for rehearing. On
July 13, 1998, FERC granted both rehearing requests for further clarification.
The parties are proceeding with settlement discussions with a report due by the
Administrative Law Judge in mid-August.
41
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
Rates
Virginia
In reference to the consolidated Alternative Regulatory Plan (ARP) originally
filed in March of 1997 and the 1995 Annual Informational Filing (AIF) proceeding
before the Virginia Commission, a stipulation was filed jointly on June 8, 1998
by Virginia Power, the SCC Staff, the Attorney General's Office, the Virginia
Committee for Fair Utility Rates, and the Apartment and Office Building
Association of Metropolitan Washington to resolve certain issues in the rate
case. The Stipulation proposed a five-year rate plan which would direct Virginia
Power to refund its ratepayers $150 million, plus interest, for revenues
collected between March 1, 1997 and March 1, 1998, and would further reduce its
rates by $100 million for the period March 1, 1998 to March 1, 1999. Rates would
be further reduced by $50 million on March 1, 1999. The Stipulation provided a
mechanism for accelerating the recovery of regulatory assets and assures that
Virginia Power will write-off a minimum of $220 million in regulatory assets
with additional incentives based on earnings. On July 21, a hearing convened at
the Virginia Commission to allow parties an opportunity to comment on the
Stipulation. For additional information, see Note (G) to the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
FERC
In reference to the Standards of Conduct filed in compliance with FERC's Order
No. 889-A, FERC issued an order directing Virginia Power to file certain
revisions to its Standards of Conduct. In March 1998, Virginia Power made the
changes directed by the FERC order, and also sought rehearing on the order. On
June 30, 1998, FERC granted, Virginia Power's request for rehearing.
In March 1998, Virginia Power requested FERC suspend the procedural schedule in
the proceeding on market-based rates due to a settlement in principle reached by
the participants in the proceeding. The Presiding Administrative Law Judge
suspended the procedural schedule and directed Virginia Power to file a formal
Offer of Settlement. A formal Offer of Settlement was filed as directed and on
June 15, 1998, the presiding Administrative Law Judge certified the Offer of
Settlement to FERC as uncontested. Virginia Power is awaiting further FERC
action on the Offer of Settlement.
42
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2- Agreement, dated June 26, 1998, relating to the sale
and purchase of East Midlands Electricity plc by
PowerGen plc(filed herewith).
11- Statement re: computation of per share earnings
(included in this Form 10-Q on page 3).
27- Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
Dominion Resources filed a report on Form 8-K, dated
June 9, 1998, relating to its wholly owned
subsidiary, Virginia Power, proposed rate settlement
with the Virginia State Corporation Commission.
43
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOMINION RESOURCES, INC.
Registrant
BY JAMES L. TRUEHEART
-------------------------------------
James L. Trueheart
Vice President and Controller
(Principal Accounting Officer)
August 7, 1998