SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 25, 1999
Virginia Electric and Power Company
(Exact name of registrant as specified in its charter)
Virginia 1-2255 54-0418825
(State or other jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
701 E. Cary Street, Richmond, Virginia 23219-3932
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804) 771-3000
(Former name or former address, if changed since last report.)
ITEM 5. OTHER EVENTS
On March 25, 1999, the Governor of Virginia signed into law legislation
establishing a detailed plan to restructure the electric utility industry in
Virginia. The major elements of the bill include:
o Phase-in of retail customer choice beginning in 2002 with
full retail customer choice by 2004; the schedule is to be
determined by the Virginia Commission, which has the
authority to accelerate or delay implementation under
certain conditions; however, the phase-in of retail customer
choice may not be delayed beyond January 1, 2005;
o No mandatory divestiture of generating assets;
o Deregulation of generation in 2002;
o Capped base rates from January 1, 2001 to July 1, 2007;
o Recovery of net stranded costs through capped rates or a
wires charge paid by those customers opting, while capped
rates are in effect, to purchase energy from a competitive
supplier;
o Consumer protection safeguards;
o Establishment of default service beginning January 1, 2004;
and
o Creation of a Legislative Transition Task Force to oversee
the implementation of the statute.
Under this legislation, our base rates would remain unchanged until
July 2007 although recovery of generation-related costs would continue to be
provided through the capped rates. In the absence of the capped rates, we would
be exposed, on a pre-tax basis, to approximately $3.2 billion of potential
losses related to long-term power purchase commitments and an additional $0.5
billion of potential losses in generation-related regulatory assets.
As discussed in our annual report filed on Form 10-K for the year ended
December 31, 1998, our financial statements reflect regulatory assets and
liabilities under cost-based rate regulation in accordance with Statement of
Financial Accounting Standards No. 71 (SFAS No. 71), Accounting for the Effects
of Certain Types of Regulation. Rate-regulated companies are required to write
off regulatory assets against current earnings whenever changes in facts and
circumstances result in those assets no longer satisfying criteria for
recognition as defined by SFAS No. 71. The legislation's deregulation of
generation is an event that requires discontinuation of SFAS No. 71 for our
generation operations. Our transmission and distribution operations continue to
meet the criteria for recognition of regulatory assets and liabilities as
defined by SFAS No. 71.
In order to measure the amount of regulatory assets to be written off,
we evaluated to what extent recovery of regulatory assets would be provided
through cost-based rates or a rate recovery mechanism during the transition
period. Emerging Issues Task Force Issue No. 97-4, "Deregulation of the Pricing
of Electricity Issues Related to the Application of FASB Statements No. 71,
Accounting for the Effects of Certain Types of Regulation, and No. 101,
Regulated Enterprises - Accounting for the Discontinuance of Application of FASB
Statement No. 71" (EITF 97-4), provides guidance about writing off regulatory
assets when SFAS No. 71 is discontinued for only a portion of a utility's
operations. The provisions of the Virginia legislation provide an opportunity to
recover generation-related costs, including certain regulatory assets, through
capped rates prior to July 2007. Under EITF 97-4 such generation-related
regulatory assets will continue to be recognized until they are recovered
through capped rates. Generation-related assets and liabilities that will not be
recovered through the capped rates will be written off in the first quarter of
1999, resulting in an estimated after-tax charge to earnings of $251 million. In
addition, cost-based recovery of fuel expenses continues until July 2007.
Also, as discussed in our 1998 Form 10-K, the events or changes in
circumstances that cause discontinuance of SFAS No. 71, and write-off of
regulatory assets, also require a review of utility plant assets and long-term
power purchase contracts for possible impairment. This review is based on
estimates of possible future market prices, load growth, competition and many
other assumptions. We evaluated our generation assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. These evaluations included the
effects of nuclear decommissioning and other currently identified environmental
expenditures. Based on these analyses which are highly dependent on the
underlying assumptions, no plant write-downs are appropriate at this time.
We reviewed our long-term power purchase commitments for potential loss
in accordance with SFAS No. 5, Accounting for Contingencies, and Accounting
Research Bulletin No. 43, Chapter 4, Inventory Pricing. Based on our projection
of possible future market prices for wholesale electricity, the results of the
analyses of our long-term power purchase contracts indicated no loss recognition
is appropriate at this time. Other projections of possible future market prices
indicated a possible loss of $500 million. In the absence of capped rates as
provided by the legislation, the potential exposure related to our power
purchase contracts would be approximately $3.2 billion.
We have taken significant recent write-offs of generation-related
regulatory assets and are subject to a base rate freeze at reduced revenue
levels until July 2007. In addition, we remain subject to numerous risks
including, among others, exposure to long-term power purchase commitment losses,
environmental contingencies, changes in tax laws, decommissioning costs,
inflation, increased capital costs, and recovery of certain other items. We
believe the stable rates that are provided until July 2007 by the legislation
present a reasonable opportunity to recover a substantial portion of our
potentially stranded costs as more fully described in our 1998 Form 10-K. See
Competition--Exposure to Potentially Stranded Costs, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
This report contains 'forward-looking statements' as defined by the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
inherently uncertain and subject to risks as they involve the use of estimates,
projections, goals, assumptions and uncertainties that could cause actual
results or outcomes to differ materially from those expressed in the
forward-looking statements. Some of these factors are described above and others
are discussed in our Form 10-K. See Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
The full text of the final legislation is filed herewith as Exhibit 99
to this Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
Exhibit 99 - VIRGINIA ACTS OF ASSEMBLY -VIRGINIA ELECTRIC
UTILITY RESTRUCTURING ACT
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 hereunto duly authorized.
VIRGINIA ELECTRIC AND POWER COMPANY
By: /S/John A. Shaw
-----------------------------------
John A. Shaw
Senior Vice President, Chief
Financial Officer and Treasurer
March 29, 1999