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, 1999
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.)
120 Tredegar Street
Richmond, Virginia 23219
- ------------------ -----
(Address of principal executive offices) (Zip Code)
(804) 819-2000
--------------
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 July 31, 1999, the latest practicable date for determination, 191,979,845
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 and Six 3
Months Ended June 30, 1999 and 1998
Consolidated Balance Sheets - June 30, 1999 4-5
and December 31, 1998
Consolidated Statements of Cash Flows - 6
Six Months Ended June 30, 1999 and 1998
Consolidated Statements of Changes in 7
Other Comprehensive Income - Three and Six Months
Ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements 8-17
Item 2. Management's Discussion and Analysis of Financial 18-30
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 31-32
Market Risk
PART II. Other Information
Item 1. Legal Proceedings 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 34-36
Item 6. Exhibits and Reports on Form 8-K 36
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,
1999 1998 1999 1998
---- ---- ---- ----
(Millions, except per share amounts)
Operating revenues and income:
Virginia Power $ 1,086.7 $ 906.0 $2,175.1 $1,956.8
East Midlands 458.7 1,009.5
Nonutility 228.6 220.5 433.2 392.4
-------- ------- ----- -----
1,315.3 1,585.2 2,608.3 3,358.7
-------- ------- ------- -------
Operating expenses:
Fuel, net 243.1 244.4 461.2 470.5
Purchased power capacity, net 198.5 203.5 408.4 384.3
Impairment of regulatory assets 158.6 158.6
Supply and distribution-East Midlands 293.5 654.9
Other operation and maintenance 336.4 369.9 631.3 703.4
Depreciation, depletion
and amortization 175.8 170.9 354.2 387.8
Other 65.6 77.3 144.1 151.5
-------- ------- ----- -----
1,019.4 1,518.1 1,999.2 2,911.0
-------- ------- ------- -------
Operating income 295.9 67.1 609.1 447.7
-------- ------- ----- -----
Other income 14.9 18.1 48.7 33.0
-------- ---- ---- ----
310.8 85.2 657.8 480.7
-------- ------- ----- ------
Fixed charges:
Interest charges, net 119.2 176.4 238.9 337.8
Preferred dividends and distributions
of subsidiary trusts 16.6 16.7 33.0 33.3
-------- ------- ---- ----
135.8 193.1 271.9 371.1
-------- ------- ----- -----
175.0 (107.9) 385.9 109.6
Provision (benefit) for income taxes 53.4 (32.2) 119.7 34.3
Minority interests 4.2 7.0 10.3 18.5
-------- ------- ---- ----
Income (loss) before extraordinary
Item 117.4 (82.7) 255.9 56.8
Extraordinary item, net of tax 254.8
-------- ------- ----- -----
Net income (loss) $ 117.4 $ (82.7) $ 1.1 $ 56.8
======== ======= ======= =======
Average shares of common stock - basic
and diluted 192.0 195.8 192.8 194.4
Basic and diluted earnings per share:
Income (loss) before extraordinary
item $0.61 $(0.42) $1.33 $0.29
Extraordinary item $(1.32)
Net income (loss) $0.61 $(0.42) $0.01 $0.29
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,
1999 1998*
--------------------------------------------
(Millions)
Current assets:
Cash and cash equivalents $ 238.9 $ 425.6
Customer accounts receivable, net 894.1 777.8
Other accounts receivable 324.4 256.5
Materials and supplies:
Plant and general 143.3 142.0
Fossil fuel 103.3 95.0
Mortgage loans in warehouse 170.6 140.3
Commodity contract assets 283.5 179.8
Other 323.5 268.3
-------- --------
2,481.6 2,285.3
-------- --------
Investments:
Investments in affiliates 448.6 382.1
Available-for-sale securities 494.9 500.0
Nuclear decommissioning trust funds 780.0 705.1
Loans receivable, net 1,719.7 1,686.5
Investments in real estate 90.5 93.9
Other 372.8 263.0
------- -------
3,906.5 3,630.6
------- -------
Property, plant and equipment:
Property, plant and equipment 18,814.8 18,106.0
Less accumulated depreciation, depletion
and amortization 7,807.4 7,469.4
-------- --------
11,007.4 10,636.6
-------- --------
Deferred charges and other assets:
Regulatory assets 215.0 620.0
Goodwill 146.7 150.0
Other 235.3 194.5
-------- --------
597.0 964.5
------- -------
Total assets $17,992.5 $17,517.0
======== ========
- ------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* The Balance Sheet at December 31, 1998 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,
1999 1998*
--------------------------------------------
(Millions)
Current liabilities:
Securities due within one year $ 390.4 $ 442.9
Short-term debt 842.4 300.8
Accounts payable, trade 904.6 698.5
Accrued interest 111.9 109.1
Accrued payroll 66.2 79.0
Accrued taxes 151.7 175.3
Commodity contract liabilities 338.0 265.8
Other 207.7 266.8
-------- --------
3,012.9 2,338.2
-------- --------
Long-term debt:
Virginia Power 3,509.8 3,464.7
Nonrecourse - nonutility 2,758.0 2,727.9
Dominion UK 52.9 55.6
Other 300.0 3.1
-------- --------
6,620.7 6,251.3
-------- --------
Deferred credits and other liabilities:
Deferred income taxes 1,643.2 1,792.5
Investment tax credits 155.0 221.4
Other 223.2 212.8
-------- --------
2,021.4 2,226.7
-------- --------
Total liabilities 11,655.0 10,816.2
-------- --------
Minority interest 298.2 310.9
-------- --------
Commitments and contingencies (Note I)
Company 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 3,831.7 3,933.4
Retained earnings 1,136.2 1,386.4
Accumulated other comprehensive
income (18.8) (20.1)
Other 16.2 16.2
------- --------
4,965.3 5,315.9
Total liabilities & shareholders'
equity $17,992.5 $17,517.0
======== ========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* The Balance Sheet at December 31, 1998 has been derived from the audited
Consolidated Financial Statements at that date.
** As described in Note(G)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,
1999 1998
----------------------------
(Millions)
Cash flows from (used in) operating activities:
Net income $ 1.1 $ 56.8
Adjustments to reconcile net income to net cash:
Depreciation, depletion and amortization 396.4 431.0
Purchase and originations of mortgage loans (1,145.8) (999.7)
Proceeds from sales and principal collections
of mortgage loans 1,115.5 867.2
Extraordinary item, net of income taxes 254.8
Deferred income taxes (103.7)
Impairment of regulatory assets 158.6
Provision for rate refund 186.3
Changes in assets and liabilities:
Accounts receivable (153.8) (91.5)
Accounts payable, trade 156.6 177.6
Accrued interest and taxes (79.0) (16.0)
Other changes (117.5) (45.6)
-------- -------
Net cash flows from operating activities 428.3 621.0
-------- -------
Cash flows from (used in) financing activities:
Issuance of common stock 348.5
Repurchase of common stock (109.0)
Issuance of long-term debt 2,552.9 2,245.3
Issuance of short-term debt 253.5 60.4
Repayment of long-term debt (2,203.5) (1,871.9)
Common dividend payments (248.4) (251.9)
Other (10.3) (48.9)
-------- ---------
Net cash flows from financing activities 235.2 481.5
-------- ---------
Cash flows from (used in) investing activities:
Utility capital expenditures (316.4) (308.0)
Acquisition of natural gas and independent power
properties (151.8) (37.4)
Loan originations (1,052.6) (1,110.2)
Repayment of loan originations 1,023.6 788.4
Acquisition of businesses (166.6) (343.8)
Purchase of securities (90.7) (38.8)
Purchase of other investments (51.0)
Proceeds from sale of securities 100.3 54.1
Other (145.0) (57.2)
-------- ---------
Net cash flows used in investing activities (850.2) (1,052.9)
-------- --------
Increase (decrease) in cash and cash equivalents (186.7) 49.6
Cash and cash equivalents at beginning of period 425.6 321.6
-------- -------
Cash and cash equivalents at end of period $ 238.9 $ 371.2
======== ========
6
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN OTHER COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(Millions)
Other Comprehensive Income:
Unrealized gains (losses) on investment securities:
Pre-tax $ 7.0 $ 7.3 $ 4.0
Tax (3.4) (4.0) (1.1)
---- ---- ----
Net of tax 3.6 3.3 2.9
Foreign currency translation
adjustments 0.8 $1.2 (2.0) 5.9
--- ---- ---- ---
Increase in other
comprehensive income 4.4 1.2 1.3 8.8
Accumulated other comprehensive
income at beginning of period (23.2) 4.3 (20.1) (3.3)
----- --- ----- ----
Accumulated other comprehensive
income at end of period $(18.8) $5.5 $(18.8) $ 5.5
====== ==== ====== =====
- ----------------------
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
NATURE OF OPERATIONS
General Organization and Legal Description
Dominion Resources is a holding company headquartered in Richmond, Virginia. Its
principal subsidiary is Virginia Electric and Power Company (Virginia Power),
which is a regulated public utility. Virginia Power is 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, power marketers and
municipalities. The Virginia service area comprises about 65 percent of
Virginia's total land area, but accounts for 80 percent of its population.
Virginia Power's wholesale power group engages in off-system wholesale purchases
and sales of electricity and purchases and sales of natural gas beyond the
geographic limits of Virginia Power's service territory.
Dominion Resources' subsidiary Dominion Energy is engaged in independent power
production and the acquisition and sale of natural gas and oil reserves. Some of
the independent power and natural gas and oil businesses are located in foreign
countries. In Latin America, Dominion Energy is engaged in power generation. In
Canada, Dominion Energy is engaged in natural gas exploration, production and
storage. Dominion Energy's net investment in foreign operations is approximately
$412 million at June 30, 1999. See Note (L).
Dominion Capital is Dominion Resources' financial services subsidiary. Dominion
Capital's primary business is financial services which includes commercial
lending, merchant banking and residential mortgage lending.
Dominion Resources' United Kingdom subsidiary, Dominion U.K. Holding, Inc., owns
an 80% interest in Corby Power Station, a 350 megawatt natural gas fired
facility located in Northamptonshire, about 90 miles north of London.
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.
GENERAL
In the opinion of Dominion Resources' management, the accompanying unaudited
Consolidated Financial Statements contain all adjustments, including normal
recurring accruals, necessary to present fairly the financial position as of
June 30, 1999, the results of operations for the three-month and six-month
periods ended June 30, 1999 and 1998, and cash flows for the six-month periods
ended June 30, 1999 and 1998.
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, 1998.
The Consolidated Financial Statements include the accounts of Dominion Resources
and its subsidiaries, with all significant intercompany transactions and
accounts being eliminated on consolidation.
8
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Dominion Resources uses the equity method when accounting for its 80% investment
in Corby Power Ltd. (Corby) as the company believes that Corby's governing
agreements give substantive participating rights to the minority shareholder.
Corby owns and operates a 350-megawatt gas-fired power station in England. Corby
had total revenues of $27.1 million and total expenses of $30.7 million for the
second quarter ending June 30, 1999. Also, Corby had total revenues of $63.6
million and total expenses of $60 million for the six month period ending June
30, 1999.
Interest and taxes were included in total expenses for each time period.
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.
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 1998 financial statements have been reclassified to
conform to the 1999 presentation.
Under Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS No. 128), Dominion Resources computation of diluted earnings per share is
the same as basic earnings per share. The computation did not include the 6.9
million nonqualified stock options to purchase common shares because they are
antidilutive. For more information, see Note K to the Notes to the Consolidated
Financial Statements.
As discussed in the Dominion Resources' Form 8-K, filed March 29, 1999, Virginia
Power discontinued the application of Statement of Financial Accounting
Standards No. 71 (SFAS No. 71), Accounting for the Effects of Certain Types of
Regulation, to its generation operations. The effect thereof was an after-tax
charge of $254.8 million. See Note (C) below.
Segment Reporting
Effective December 31, 1998, Dominion Resources adopted SFAS No. 131, Disclosure
About Segments of an Enterprise and Related Information. Dominion Resources has
defined Dominion Resources segments based on product, geographic location and
regulatory environment.
In preparation for the transition to competition for electric generation in
Virginia, beginning May 1, 1999 Dominion Resources began to evaluate the
operating results and financial information across Virginia Power's and Dominion
Energy's current organizational structure. Although the employees and assets
involved remain with their respective companies, Dominion Resources currently
evaluates the companies of Dominion Energy and Virginia Power in the following
business segments:
o generation-related operations of both Virginia Power and Dominion Energy
(referred to as Dominion Generation);
o regulated electric transmission and distribution services (referred to as
Virginia Power - Wires Business); and
9
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
o oil and gas operations of Dominion Energy (referred to as Dominion Energy -
Gas Operations).
In addition to the business segments mentioned above, Dominion Resources also
reviews the following as business segments:
o the financial services of Dominion Capital;
o Dominion UK which was sold by Dominion Resources on July 27, 1998; and
o Corporate Operations.
The Corporate Operations category includes:
o corporate costs of Dominion Resources' holding company,
o Corby Power (UK)operations,
o intercompany eliminations,
o impact of the impairment of regulatory assets and one-time refund recorded
as a result of the settlement of Virginia Power's 1998 Virginia
jurisdictional rate proceedings in the second quarter of 1998, and
o extraordinary item recorded in the first quarter of 1999. See Note C to the
Notes to the Consolidated Financial Statements.
For more information on business segments, see Note (M) to the Notes to the
Consolidated Financial Statements.
(B) DOMINION RESOURCES, Inc. and CONSOLIDATED NATURAL GAS COMPANY MERGER
On June 30, 1999, the shareholders of Dominion Resources and Consolidated
Natural Gas Company (CNG) approved the pending merger of the companies at each
company's Special Meeting of Shareholders.
Also, the Pennsylvania Public Utility Commission and the West Virginia Public
Service Commission have approved the merger, subject to certain conditions
agreed to by Dominion Resources and CNG. The Virginia State Corporation
Commission and the North Carolina Utilities Commission have set dates for
consideration of the proposed merger.
Filings are also pending with the Department of Justice, Federal Trade
Commission, the Securities and Exchange Commission and the Federal Energy
Regulatory Commission and other agencies.
(C) VIRGINIA JURISDICTIONAL RATES
In 1998, Virginia Power negotiated a settlement with the Virginia State
Corporation Commission (Virginia Commission) that resolved then outstanding rate
proceedings. As part of the settlement, Virginia Power agreed to a one-time rate
refund paid to customers in 1998 and a two-phased rate reduction and base rate
freeze through February 2002. For additional information, see Note (R) to the
Notes to Consolidated Financial Statements included in Dominion Resources'
Annual Report on Form 10-K for the year ended December 31, 1998.
In March 1999, the Governor of Virginia signed into law legislation establishing
a detailed plan to restructure the electric utility industry in Virginia. Such
legislation will deregulate generation by 2002 with the phase-in of retail
customer choice beginning at that time. Under this legislation, Virginia Power's
base rates will remain generally unchanged until July 2007 and recovery of
generation-related costs will continue to be provided through the capped rates.
The legislation's deregulation of generation required discontinuation of SFAS
No.
10
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
71 for Virginia Power's generation operations in the first quarter of 1999.
Virginia Power's transmission and distribution operations continue to meet the
criteria for recognition of regulatory assets and liabilities as defined by SFAS
No. 71. In addition, fuel expense continues to be subject to deferral
accounting.
The effect of discontinuing SFAS No. 71 was an after-tax charge to earnings of
$254.8 million. The $254.8 million charge included the write-off of
generation-related assets that were not expected to be recovered during the
transition period. It also included the write-off of approximately $38 million,
after-tax, of deferred investment tax credits.
Also, in conjunction with the discontinuance of SFAS No. 71, Virginia Power
reviewed its utility plant assets and long-term power purchase contracts for
possible impairment. No impairments were recorded based on Virginia Power's
analyses which were highly dependent on the underlying assumptions. Significant
estimates were required in recording the effect of the deregulation legislation,
including the fair value determination for generating facilities and estimated
purchases under long-term power purchase contracts.
Virginia Power remains 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. Management believes the
stable rates that are provided until July 2007 by the 1999 legislation present a
reasonable opportunity to recover a substantial portion of Virginia Power's
potentially stranded costs as more fully described in Dominion Resources' 1998
annual report on Form 10-K in Competition--Exposure to Potentially Stranded
Costs, Management's Discussion and Analysis of Financial Condition and Results
of Operations. See also Note (B) to the Notes to Consolidated Financial
Statements included in Dominion Resources' Form 10-Q for the period ended March
31, 1999 for further discussion of the impact of the discontinuation of SFAS No.
71 and impairment review.
(D) PROVISION FOR INCOME TAXES
Income before provision for income taxes, classified by source of income, before
minority interest was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
(Millions)
U.S. $168.8 $(129.7) $371.0 $45.9
Non U.S. 6.2 21.8 14.9 63.7
--- ---- ---- ----
Total $175.0 $(107.9) $385.9 $109.6
===== ====== ===== =====
11
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The statutory U.S. federal income tax rate reconciles to the effective income
tax rates as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Percents
U.S. statutory rate 35.0 (35.0) 35.0 35.0
Utility plant differences 0.1 12.4 0.8 16.0
Amortization of investment tax
credits (2.0) (3.9) (2.0) (7.7)
Preferred dividends of Virginia
Power 1.8 2.9 1.6 5.7
Nonconventional fuel credit (5.1) (5.4) (4.5) (10.9)
Benefits and taxes related to
foreign operations (0.2) (4.5) (1.2) (14.9)
State taxes, net of federal
benefit 1.7 3.7 1.9 5.7
Other, net (0.8) (0.1) (0.6) 2.4
---- ----- ---- ---
Effective tax rate 30.5 (29.9) 31.0 31.3
==== ==== ==== ====
The effective income tax rate includes state and foreign income taxes.
(E) COMMON STOCK
At June 30, 1999, there were 300,000,000 shares of Dominion Resources common
stock authorized of which 191,979,845 were issued and outstanding. Common shares
issued and purchased during the referenced periods were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Employee Savings Plans 198,168 399,356
Dominion Direct Investment 816,411 1,587,354
Public Offering 6,775,000
Stock Repurchase (50,000) (2,618,400)
Other 25,492 8,414 140,139 (53,015)
------- --------- ---------- ---------
Total Shares (24,508) 1,022,993 (2,478,261) 8,708,695
======= ========= ========== =========
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 has repurchased $207.5 million to
date and continues to monitor market conditions for opportunities to repurchase
additional shares.
Also, effective August 1, 1998, shares required by Dominion Direct Investment
and the Employee Savings Plans are being acquired on the open market instead of
issuing new shares.
(F) PREFERRED STOCK - VIRGINIA POWER
As of June 30, 1999, 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 are 10,000,000
authorized shares of Virginia Power's preferred stock.
12
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(G) COMPANY 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%
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 which are held by Dominion Resources represent the
remaining 3% beneficial ownership interest in the assets held by DR Capital
Trust. The Debentures constitute 100 percent of DR Capital Trust's 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
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 million realized from
the sale of the preferred securities and $4.2 million of common securities of VP
Capital Trust. The common securities which are held by Virginia Power 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.
(H) RECENTLY ADOPTED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) recently issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133, which defers the effective date of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. As a
result, Dominion Resources must adopt SFAS No. 133 no later than January 1,
2001. SFAS No. 133 requires 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.
The FASB-sponsored Derivatives Implementation Group that is addressing
implementation issues related to SFAS No. 133 has tentatively concluded that
certain long-term power purchase contracts may be considered derivatives under
SFAS No. 133. Dominion Resources has not yet quantified the impacts of adopting
SFAS No. 133 and has not yet determined the timing of, or method of, adoption.
(I) CONTINGENCIES
VIRGINIA POWER
Nuclear Insurance
The Price-Anderson Act limits the public liability of an owner of a nuclear
power plant to $9.7 billion for a single nuclear incident. 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
13
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 (T) to the Notes to the Consolidated
Financial Statements included in Dominion Resources' Annual Report on Form 10-K
for the year ended December 31, 1998.
Environmental Matters
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 $1.6 million to $2.2 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 generally seeks to recover its costs associated with
environmental remediation from third party insurers. At June 30, 1999, any
pending or possible claims were not recognized as an asset or offset against
such obligations of Virginia Power.
In April 1999, Virginia Power was notified by the Department of Justice of
alleged noncompliance with the EPA's oil spill, prevention, control and
countermeasures plans and facility response requirements at one of its power
stations. If, in a legal proceeding, such instances of noncompliance are deemed
to have occurred, Virginia Power may be required to remedy any alleged
deficiencies and pay civil penalties. Settlement of this matter is currently in
negotiation and is not expected to be material to Virginia Power's financial
condition or results of operations.
DOMINION RESOURCES AND ITS NONUTILITY SUBSIDIARIES
Dominion Resources
DR Group Holdings Guarantee
On October 30, 1998, DR Group Holdings entered into a revolving credit agreement
with Bayerische Landesbank Girozentrale. The total commitment and outstanding
balance of the agreement is 33.5 million pounds sterling ($52.9 million at June
30, 1999). Dominion Resources is guarantor to DR Group Holdings for this
revolving credit agreement.
Dominion Energy
Subsidiaries of Dominion Energy have general partnership interests in certain of
its energy ventures. These subsidiaries may be required to fund future
operations of these investments, if operating cash flow is insufficient.
Under an agreement related to the acquisition and financing of the Kincaid Power
Station, Dominion Energy's wholly-owned subsidiary, Dominion Energy Construction
Company (DECCO), completed certain improvements to the facility. Dominion Energy
has provided a guarantee of DECCO's financial obligation under this agreement.
Also, Dominion Energy must fund up to approximately $142
14
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
million, less cash generated, in additional equity that may be required by
Kincaid Generation LLC (KGL), the owner of the Kincaid Power Station. Dominion
Resources has guaranteed Dominion Energy's obligation to make such equity
infusions to KGL.
Dominion Capital
As of June 30, 1999, Dominion Capital had commitments to fund loans of
approximately $591.9 million.
For additional information regarding Contingencies, see Note (T) to the Notes to
the Consolidated Financial Statements included in Dominion Resources' Annual
Report on Form 10-K for the year ended December 31, 1998.
(J) LINES OF CREDIT
Dominion Resources and its subsidiaries have lines of credit, revolving credit
agreements and bank commitments that provide for maximum borrowings of $5,156.3
million. At June 30, 1999, $2,153.4 million had been borrowed under such
agreements. In addition, these credit agreements supported $383.9 million of
Dominion Resources' commercial paper and $538.9 million of non-recourse
commercial paper issued by Dominion Resources' subsidiaries which was
outstanding at June 30, 1999. At June 30, 1999, $363.6 million of Dominion
Resources and its subsidiaries commercial paper is classified as long-term debt
since it is supported by revolving credit agreements that have expiration dates
extending beyond one year.
(K) LONG-TERM INCENTIVES
1999 Option Awards:
On May 17, 1999 Dominion Resources awarded 6.9 million of nonqualified stock
options under its Long Term Incentive Plan to employees and directors of
Dominion Resources, Virginia Power and Dominion Energy. Currently, the total
number of shares authorized to be issued under the Plan is 11 million. The
exercise price for the options is $41.25 which is equal to the market price of
Dominion Resources common stock on the date of the grant. These options vest
over three years and expire on May 17, 2009.
Accounting Treatment:
In 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123
Accounting for Stock Based Compensation. Under SFAS No. 123, compensation cost
is measured at the grant date based on the fair value of the award and is
recognized over the service (or vesting) period. However, as permitted under
SFAS No. 123, the company instead measures compensation cost in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. Under this standard, compensation cost is
measured as the difference between the market price of the company's common
stock and the exercise price of the option at the grant date. Accordingly, no
compensation expense has been recognized for the May 1999 stock option grant.
Had compensation cost associated with the May 1999 stock options been determined
under SFAS No. 123 based on the fair market value at the grant
15
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
date, such cost would have been approximately $1.8 million, net of related
income taxes, for the three month and six month periods ended June 30, 1999. In
addition, basic earnings per share for the three months ended June 30, 1999,
would have decreased by $0.01 due to the issuance of the 6,939,000 stock options
on May 17, 1999. Basic earnings per share for the six month period ended June
30, 1999, and fully diluted earnings per share for both the three and six month
periods ended June 30, 1999, would not have been affected.
The fair value of those options granted in May 1999 was estimated on the date of
grant using the Black-Scholes option pricing model. The following assumptions
were used:
o expected dividend yield of 5.88%,
o expected volatility of 15.5%,
o risk-free interest rate of 5.53% and
o expected lives of six years. The fair value of each option at the date of
the grant was $4.10.
Previous Option Awards:
For the six-month period ended June 30, 1999, 1,013 shares were issued
associated with exercised stock options from previous awards. These previous
awards were made under the Dominion Resources' Long-Term Incentive Plan which
expired in 1997 and was replaced with the Dominion Resources Incentive
Compensation Plan. As of June 30, 1999, options on 1,113 shares were exercisable
from previous awards under the Dominion Resources Long-term Incentive Plan.
Other Stock Awards:
In addition, during the first six months of 1999, the Board of Directors of
Dominion Resources awarded certain participants in the Dominion Resources, Inc.
Incentive Compensation Plan 5,000 shares of common stock at $44.50 per share,
13,916 shares of restricted stock at $44.50 per share and 10,842 shares at
$46.75 per share.
(L) SUBSEQUENT EVENTS
DOMINION ENERGY
On August 1, 1999, Dominion Energy reached an agreement to sell its interests in
approximately 1,200 megawatts of gross generation capacity located in Latin
America. The interests will be sold to Duke Energy International for $405
million.
The interests being sold are located in Argentina, Belize, Bolivia and Peru and
generate electricity from hydroelectric, natural gas and diesel fuel sources.
The transaction is expected to close by year end 1999 following governmental
approvals. It is estimated that the transaction will result in a one-time,
non-recurring after-tax loss in the range of $10 million to $15 million. This
estimate is subject to the closing date of the transaction, which is dependent
on the timing of governmental approvals. In addition, the estimate could be
affected by the results of operations between August 1, 1999 and the closing
date.
16
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Dominion Resources plans to use the proceeds from this sale to fund the
repurchase of outstanding common stock pursuant to our current corporate
repurchase program or in connection with the merger with CNG.
(M) BUSINESS SEGMENTS
Business segment financial information follows for the three month and six month
periods ended June 30, 1999 and 1998.
Virginia Dominion
Power- Energy-
Wires Dominion Dominion Dominion Gas Corporate Consolidated
Business Capital Generation UK Operations Operations Total
-------- ------- ---------- -- ---------- ---------- -----
(millions,
except total
assets)
Three Months
Ended June 30,
1999
Revenues $270.4 $120.8 $853.5 $64.7 $5.9 $1,315.3
Net Income $38.6 $22.5 $49.5 $9.4 $(2.6) $117.4
Total Assets
(billions) $4.6 $3.2 $8.8 $1.2 $0.2 $18.0
1998
Revenues $266.4 $124.2 $843.5 $423.8 $41.7 $(114.4) $1,585.2
Net Income $30.3 $32.3 $46.1 $9.0 $5.3 $(205.7) $(82.7)
Total Assets
at 12/31/98
(billions) $4.6 $3.1 $8.8 $0.2 $0.8 $17.5
Six Months
Ended June 30,
1999
Revenues $550.9 $228.4 $1,705.7 $111.8 $11.5 $2,608.3
Net Income $79.7 $35.9 $123.8 $20.5 $(258.8) $1.1
1998
Revenues $538.1 $211.0 $1,667.5 $934.8 $76.9 $(69.6) $3,358.7
Net Income $62.1 $45.7 $117.9 $30.2 $12.0 $(211.1) $56.8
17
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 business and financial condition of Dominion Resources are influenced by a
number of factors including political and economic risks, market demand for
energy, inflation, capital market conditions, governmental policies, legislative
and regulatory actions (including those of the Federal Energy Regulatory
Commission (FERC), the Securities and Exchange Commission (SEC), the
Environmental Protection Agency, the Department of Energy, the Nuclear
Regulatory Commission, the Virginia Commission and the North Carolina Utilities
Commission), industry and rate structure and legal and administrative
proceedings. Some other important factors that could cause actual results or
outcomes to differ materially from those discussed in the forward-looking
statements include changes in and compliance with environmental laws and
policies, weather conditions and catastrophic weather-related damage, present or
prospective wholesale and retail competition, competition for new energy
development opportunities, pricing and transportation of commodities, operation
of nuclear power facilities, acquisition and disposition of assets and
facilities, effects of the merger with CNG, recovery of the cost of purchased
power, nuclear decommissioning costs, the ability of Dominion Resources, its
suppliers, and its customers to successfully address Year 2000 readiness issues,
exposure to changes in the fair value of commodity contracts, counter-party
credit risk and unanticipated changes in operating expenses and capital
expenditures. 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 such factors, nor can it assess the impact of each
such factor on 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.
Business Segments
In preparation for the transition to competition for electric generation in
Virginia, beginning May 1, 1999 Dominion Resources began to evaluate the
operating results and financial information across Virginia Power's and Dominion
Energy's current organizational structure. Although the employees and assets
involved remain with their respective companies, Dominion Resources currently
evaluates the companies of Dominion Energy and Virginia Power in the following
business segments:
o the generation-related operations of both Virginia Power and Dominion
Energy (referred to as Dominion Generation);
18
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
o the regulated electric transmission and distribution services (referred to
as Virginia Power - Wires Business); and
o oil and gas operations of Dominion Energy (Dominion Energy - Gas
Operations).
As discussed above and in Note A to the Notes to the Consolidated Financial
Statements, because Dominion Resources evaluates separate financial information
for its business segments, it is required pursuant to Statement of Financial
Standards No. 131 Disclosures About Segments of an Enterprise and Related
Information to report on each segment separately. These six business segments
are:
o Dominion Generation,
o Virginia Power - Wires Business,
o Dominion Energy - Gas Operations,
o Dominion Capital (financial services operations),
o Dominion UK, and
o Corporate Operations (corporate costs of Dominion Resources' holding
company, Corby Power (UK) operations, intercompany eliminations, plus the
impact of the impairment of regulatory assets and one-time refund recorded
as a result of the settlement of Virginia Power's 1998 Virginia
jurisdictional rate proceedings in the second quarter of 1998 and the
extraordinary item (See Note C) recorded in the first quarter of 1999).
Dominion Resources has structured its Management's Discussion and Analysis of
Financial Condition and Results of Operations to reflect the above mentioned
business segments.
Certain activities discussed under Liquidity and Capital Resources are currently
evaluated based on existing legal entities rather than the operating segments
defined by the new organizational structure.
RESULTS OF OPERATIONS
We have organized our discussion of Results of Operations into the following
subsections:
1. Dominion Resources - Consolidated
2. Virginia Power - Wires Business
3. Dominion Generation
4. Dominion Energy - Gas Operations
5. Dominion Capital
1. DOMINION RESOURCES - CONSOLIDATED
Earnings Per Share
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Virginia Power-Wires Business $0.20 $0.15 $ 0.41 $ 0.32
Dominion Generation 0.26 0.24 0.64 0.60
Dominion Capital 0.12 0.17 0.19 0.23
Dominion Energy-Gas Operations 0.05 0.03 0.11 0.06
Dominion UK 0.00 0.04 0.00 0.14
Corporate Operations (0.02) (1.05) (1.34) (1.06)
----- ----- ---- ----
Consolidated $0.61 $(0.42) $ 0.01 $ 0.29
===== ====== ====== ======
19
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(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.
Consolidated earnings increased $1.03 per share for the second quarter of 1999
when compared to the same time period in 1998. The increase was primarily due to
the one-time charge associated with Virginia Power's rate settlement in the
second quarter of 1998.
Consolidated earnings decreased by $0.28 per share during the first six months
of 1999 as compared to the same period in 1998 primarily due to the write-off of
generation related assets and liabilities at Virginia Power in the first quarter
of 1999. The amount of the write-off was $254.8 million, net of tax, ($1.32 per
share) and was recorded on the financial statements as an extraordinary item.
This write-off was offset by a one-time charge of $201 million, net of tax
($1.03 per share) associated with the rate settlement in the second quarter of
1998 with the Virginia Commission. See Note (C) to the Notes to Consolidated
Financial Statements.
Operating Income
Operating income increased by $228.8 million and $161.4 million during the
second quarter and first six months of 1999, respectively, as compared to the
same periods in 1998, primarily due to the impairment of regulatory assets and
one-time rate refund recorded in the second quarter of 1998 discussed above. The
increase was offset by the absence of Dominion UK's East Midlands operations
which was sold in the third quarter of 1998.
Interest Charges, Net
Interest charges, net decreased by $57.2 million and $98.9 million during the
three month and six month periods ended June 30, 1999, respectively, as compared
to the same periods in 1998 primarily due to the absence of East Midlands debt
because of the sale of East Midlands in the third quarter of 1998.
Extraordinary Item, Net of Income Tax
Extraordinary item, net of income tax consists of a charge to earnings which
represents the write-off of assets and liabilities related to Virginia Power's
generation activities which will not be recovered through capped rates. For more
information on the extraordinary item, see Note (C) to the Notes to the
Consolidated Financial Statements.
2. VIRGINIA POWER - WIRES BUSINESS
The business segment Virginia Power-Wires Business includes customer service,
bulk power transmission, distribution and metering services that continue to be
subject to cost-based regulation.
Changes in the results of operations for the six-month period ended June 30,
1999, as compared to the same period in 1998, were due to increased revenues for
electric transmission services, increased customers and lower expenses which
were partially offset by increased storm costs and the rate reductions resulting
from the 1998 rate settlement.
20
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
3. DOMINION GENERATION
The business segment Dominion Generation consists of the combined generation
operations of Dominion Energy and Virginia Power.
Operating Revenue and Income
Operating revenues and income increased for the first six months of 1999 when
compared to the same period in 1998 primarily due to customer growth and weather
as well as power marketing and natural gas revenue which increased due to
favorable changes in commodity prices in 1999. These increases were partially
offset by the net impact of the 1998 rate settlement as it related to ongoing
revenues and depreciation.
Operating Expenses
Operating expenses for the six month period ended June 30, 1999 increased as
compared to the comparable period in 1998, primarily due to:
o increased expenses associated with the restructuring of certain power
purchase contracts and the discontinuance of deferral accounting for such
expenses, plus
o increased costs for planned outages.
4. DOMINION ENERGY - GAS OPERATIONS
The business segment Dominion Energy - Gas Operations consists of the gas and
oil operations of Dominion Energy.
Increases in the results of operations for the three-month and six-month periods
ended June 30, 1999 as compared to the same periods in 1998 resulted primarily
from the effects of higher oil and gas production. This incremental production
was related to increased reserves obtained through acquisition activities.
5. DOMINION CAPITAL
The business segment Dominion Capital's net income decreased during the second
quarter and first six months of 1999 as compared to the same periods in 1998
primarily due to the timing of net investment gains in 1998 partially offset by
a higher earnings contribution from the four financial services units in 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have organized our discussion of Liquidity and Capital Resources into the
following subsections:
1. Dominion Resources - Consolidated
2. Virginia Power
3. Dominion Energy
4. Dominion Capital
The reason that these sections are organized along legal entity lines rather
than by business segment is that we continue to analyze these matters internally
by legal entity.
21
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
DOMINION RESOURCES - CONSOLIDATED
Cash Flows From Operating Activities
Cash flows from operating activities for the six months ended June 30, 1999
decreased by $192.7 million as compared to the same period in 1998. The decrease
was primarily due to normal operations and an increase in fuel expenses for
which recovery was not received in the first six months of 1999.
Cash Flows From Financing Activities
Financing activities provided cash flows of $235.2 million during the first six
months of 1999 resulting primarily from the issuance of commercial paper but was
offset by the repurchase of common stock and the payment of common stock
dividends.
On July 12, 1999, the Board of Directors of Dominion Resources declared a
quarterly common stock dividend of $0.645 per share, payable September 20, 1999
to holders of record at the close of business August 27, 1999.
On July 20, 1998, the Dominion Resources Board of Directors approved the
repurchase of up to $650 million of Dominion Resources common stock. As part of
this program, Dominion Resources repurchased 2,618,400 shares of common stock
($109 million) during the first six months of 1999.
On March 31, 1999, Dominion Resources increased its bank lines of credit to $600
million by replacing the April 1, 1998, $200 million short-term credit agreement
with a new $300 million 364-day facility. Dominion Resources uses these credit
agreements to support its commercial paper borrowings. The proceeds from these
borrowings are used to finance Dominion Resources nonutility subsidiaries'
working capital for operations.
Cash Flows Used In Investing Activities
Net cash flows used in investing activities during the first six months of 1999
were $850.2 million. The primary reasons for the cash outflows were:
o utility plant (including nuclear fuel) expenditures at Virginia Power;
o Dominion Energy's acquisition of San Juan Partners, LLC and Remington
Energy, Ltd.; and
o funding to expand and upgrade certain independent power plants owned by
Dominion Energy.
VIRGINIA POWER
Cash Flows From Operations
Operating activities resulted in $121 million decreased cash flow for the
six-month period ended June 30, 1999 as compared to the same period in 1998.
This decrease was primarily attributable to an increase in fuel expenses for
which recovery was not received in the first six months and to the timing of
certain payments related to normal operations. Internal generation of cash
exceeded Virginia Power's capital requirements during the first six months of
1999 and 1998.
22
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Cash Flows Used in Financing Activities
Cash used in financing activities was as follows:
Six Months Ended
June 30,
1999 1998
---- ----
(Millions)
Issuance (repayment) of short-term debt, net $ 95.7 $ (25.0)
Repayment of long-term debt (249.0) (217.5)
Issuance of long-term debt 230.0 150.0
Payment of dividends (211.6) (208.9)
Other (10.1) (7.4)
----- ----
Total $(145.0) $(308.8)
====== ======
In April 1999, Virginia Power established a $400 million medium-term note shelf
registration (Series G) with the Securities and Exchange Commission. In June
1999, Virginia Power issued $150 million in aggregate principal of unsecured
Senior Notes, Series 1999-A, with an annual coupon rate of 6.7%, due June 30,
2009; and $80 million of Medium-Term Notes, Series G, with an annual coupon rate
of 6.3%, due June 21, 2001.
During the first two quarters of 1999, Virginia Power retired $249 million in
aggregate principal amount of mandatory debt maturities.
As of June 30, 1999, Virginia Power has available for its use to meet capital
requirements $915 million of remaining principal amount under its currently
effective shelf registrations with the Securities and Exchange Commission.
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
$317.5 million at June 30, 1999.
Cash Flows Used in Investing Activities
Cash used in investing activities was as follows:
Six Months Ended
June 30,
1999 1998
---- ----
(Millions)
Plant expenditures $(296.0) $(190.4)
Nuclear fuel (20.4) (25.7)
Nuclear decommissioning contributions (16.8) (33.5)
Other (3.2) (6.9)
------ ------
Total $(336.4) $(256.5)
====== ======
Investing activities for the first six months of 1999 resulted in a net cash
outflow of $336.4 million primarily due to $296 million of construction
expenditures, $20.4 million of nuclear fuel expenditures and $16.8 million of
contributions to nuclear decommissioning trusts. Of the construction
23
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
expenditures, Virginia Power spent approximately $143.5 million on the projects
within the business segment Virginia Power Wires Business projects, $123.6
million on the projects of the business segment Dominion Generation and $22.1
million on general support facilities.
DOMINION ENERGY
Cash Flows From Operating Activities
Cash flows from operations for the six months ended June 30, 1999 decreased by
$5 million as compared to the same period in 1998 primarily due to ordinary
business operations.
Cash Flows From Financing Activities
Cash from (used in) financing activities was as follows:
Six Months Ended
June 30,
1999 1998
---- ----
(Millions)
Issuance of long-term debt $ 10.1 $339.6
Investment from parent 115.0
Dividend payment (28.2) (23.7)
Issuance (repayment) of intercompany debt 159.2 (5.6)
Other (7.5) 17.9
----- -----
Total $248.6 $328.2
===== =====
During the first six months of 1999, cash flows from financing activities were
$248.6 million primarily due to intercompany borrowings and an equity
contribution from Dominion Energy's parent. Proceeds were used primarily to fund
the acquisition of Remington Energy, Ltd. and San Juan Partners, LLC by the
business segment Dominion Energy-Gas Operations.
Cash Flows Used In Investing Activities
Cash from (used in) investing activities was as follows:
Six Months Ended
June 30,
1999 1998
---- ----
(Millions)
Investment in natural gas assets $(211.7) $(125.6)
Investment in power generation assets (102.6) (198.0)
Other (39.5) (65.4)
----- ------
Total $(353.8) $(389.0)
====== ======
During the first six months of 1999, cash flows used in investing activities
were $353.8 million primarily due to the following:
o the acquisition by the Dominion Energy-Gas Operations business segment of
San Juan Partners, L.L.C. and Remington Energy, Ltd. and
o the Dominion Generation business segment's investment in expansion and
upgrade activities at certain of its independent power plants.
24
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
DOMINION CAPITAL
Cash Flows Used In Operating Activities
Dominion Capital's cash flows from operations for the six months ended June 30,
1999 increased by $82.8 million as compared to the same period for 1998
primarily due to an increase in cash flows from net mortgage originations and
sales.
Cash Flows From Financing Activities
Cash from financing activities was as follows:
Six Months Ended
June 30,
1999 1998
---- ----
(Millions)
Issuance of long-term debt $ 1,847.4 $ 1,577.4
Repayment of long-term debt (1,954.5) (1,347.7)
Issuance of commercial paper 243.1 178.3
Investment from parent 50.0 49.1
Dividend payment (34.0) (24.7)
Issuance (repayment) of intercompany debt (76.6) (62.4)
Other 0.1
-------- -------
Total $ 75.4 $ 370.1
======== ========
During the first six months of 1999, Dominion Capital's cash flows from
financing activities were $75.4 million due to funding needs for a net increase
in finance receivables (originations less amounts syndicated and repaid).
Cash Flows Used In Investing Activities
Cash used in investing activities was as follows:
Six Months Ended
June 30,
1999 1998
---- ----
(Millions)
Loan originations $(1,052.6) $(1,110.2)
Repayments of loan originations 1,023.6 788.4
Purchase of securities (90.7) (27.6)
Proceeds from sale of securities 100.3 29.3
Purchase of other investments (51.0)
Other (50.1) 14.9
------ --------
Total $(120.5) $ (305.2)
======= =======
During the first six months of 1999, Dominion Capital's cash flows used in
investing activities were $120.5 million primarily due to the funding for
commercial lending activities.
Contingencies
For information on contingencies, see Note (I) to the Notes to the Consolidated
Financial Statements.
25
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
FUTURE ISSUES
DOMINION RESOURCES - CONSOLIDATED
CNG Merger
On June 30, 1999, shareholders of Dominion Resources and Consolidated Natural
Gas Company (CNG) approved the pending merger of the companies at each companies
Special Meeting of Shareholders.
Also, the Pennsylvania Public Utility Commission and the West Virginia Public
Service Commission have approved the merger, subject to certain conditions
agreed to by Dominion Resources and CNG. The Virginia State Corporation
Commission (Virginia Commission) and the North Carolina Utilities Commission
have set dates for consideration of the proposed merger.
Filings are also pending with the Department of Justice, Federal Trade
Commission, the Securities and Exchange Commission and the Federal Energy
Regulatory Commission and other agencies.
On August 9, 1999, Dominion Resources and CNG announced that they have agreed to
sell CNG's Virginia Natural Gas, Inc. (VNG) its local gas distribution
subsidiary under an agreement with the Staff of the Virginia Commission
(Virginia Commission Staff). In exchange, the Virginia Commission Staff will
support the proposed merger of Dominion Resources and CNG. The agreement states
that Dominion Resources has one year after the merger is completed to sell VNG
to a third party. If the sale of VNG is not completed within the timeframe of
one year, VNG will be spun off as an independent company with the common stock
distributed to Dominion Resources shareholders. Both deadlines are subject to
reasonable extensions, which may be granted by the Virginia Commission.
The Virginia Commission is not bound by the agreement but will consider it
during its deliberations about the merger as well as any comments or testimonies
by other parties to the proceeding.
Power Generation Development
On April 14, 1999, Dominion Resources and a subsidiary of CNG signed an
agreement to develop natural gas-fired power generation facilities along CNG's
natural gas pipeline system. This agreement is not conditional upon the proposed
merger between Dominion Resources and CNG. For additional information on the
proposed merger, see Note X in Dominion Resources' Annual Report on Form 10-K
for the year ended December 31, 1998.
Under terms of the agreement the companies have identified 45 potential
development sites along CNG's natural gas pipeline network in Ohio,
Pennsylvania, New York, West Virginia and Virginia. Dominion Resources and CNG
affiliates will develop, own, operate and maintain the facilities on a 50-50
ownership basis.
On May 25, 1999, Dominion Resources and CNG announced that subsidiaries of the
two companies expect to jointly construct and operate natural gas-fired electric
generating facilities in Wood County in Ohio and Armstrong County in
Pennsylvania. They also announced that they are evaluating several sites in
Muskingum County in Ohio and Pleasants County in West Virginia. Final site
selection for each county is expected in the near future.
26
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
VIRGINIA POWER
Competition
On March 25, 1999, the Governor of Virginia signed into law legislation
establishing a detailed plan to restructure the electric utility industry in
Virginia which will provide for customer choice beginning in 2002. Under this
legislation, Virginia Power's base rates will remain unchanged until July 2007
and recovery of generation-related costs will continue to be provided through
the capped rates and the wires charge assessed to those customers opting for
alternate suppliers. In the absence of the capped rates, Virginia Power would be
exposed, on a pre-tax basis, to approximately $3.2 billion of potential losses
related to long-term power purchase commitments.
The legislation's deregulation of generation is an event that required
discontinuation of SFAS No. 71 for Virginia Power's generation operations.
Virginia Power's transmission and distribution operations continue to meet the
criteria for recognition of regulatory assets and liabilities as defined by SFAS
No. 71. In addition, cost-based recovery of fuel expenses continues until July
2007.
Virginia Power is subject to a base rate freeze at reduced revenue levels until
July 2007. In addition, Virginia Power remains 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.
Virginia Power believes the stable rates that are provided until July 2007 by
the legislation present a reasonable opportunity to recover a substantial
portion of Virginia Power's potentially stranded costs as more fully described
in Virginia Power's 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.
For additional information, see Note (C) to the Notes to the Consolidated
Financial Statements.
DOMINION ENERGY
Sale of Power
In April 1999, Elwood Energy LLC, (Elwood Energy) a joint venture between
subsidiaries of Dominion Energy and Peoples Energy Corporation signed agreements
with Commonwealth Edison Company (ComEd) and Engage Energy US, L.P. (Engage) to
sell all generating capacity from its natural gas-fired facility. Under the
agreements, ComEd and Engage have each contracted for one-half of the generating
capacity of Elwood Energy.
In July 1999, Elwood Energy began commercial operations.
Sale of Latin American Interests
For information on Dominion Energy's sale of its interests in Latin American
generating capacity to Duke Energy International, see Note (L) to the Notes to
the Consolidated Financial Statements.
27
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
DOMINION CAPITAL
As reported in the merger proxy sent to shareholders of both companies, Dominion
Resources expects to divest its financial services subsidiary, Dominion Capital.
However, no formal plan of disposal has been adopted.
YEAR 2000 COMPLIANCE
DOMINION RESOURCES CONSOLIDATED
Dominion Resources remains on schedule to complete all necessary work to prepare
the company for the year 2000. The following table summarizes our status and
projected timetable:
Percent of Critical Systems Year 2000 Ready
Actual Planned
------ -------
6/30/99 7/31/99 10/31/99
Virginia Power 99% 99% 99%*
Dominion Resources 75% 100% 100%
Dominion Energy 78% 84% 100%
Dominion Capital 100% 100% 100%
* 100% planned to be ready by 12/31/99
We expect year 2000 costs to be within the range of $30 million to $40 million
dollars of which $28 million to $33 million relates to Virginia Power.
The estimate of $30 million to $40 million is a change from our previous range
of $35 million to $45 million. This downward revision is largely due to the
current status of the following:
o remediation and testing of critical and non-critical components,
o assessment of critical suppliers,
o contingency planning, and
o scope of rollover activities.
Actual year 2000 costs of $25.1 million have been expended as of June 30, 1999.
Expenses not yet incurred relate to contingency planning, communications
activities, remediation of non-critical systems and continued remediation
validation.
In addition to our remediation programs directed at our critical information
systems, embedded systems and external relationships, our year 2000 readiness
efforts include evaluation of reasonably likely worst case scenarios and the
development of contingency plans to address how we would respond to problems,
should they occur. Our contingency planning efforts to support continuity of
operations into and beyond the year 2000 are essentially complete. These plans
will continue to be refined and validated throughout the remainder of 1999.
28
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
As part of our contingency planning process, we have considered and evaluated,
and continue to evaluate, reasonably likely worst case scenarios and their
impact on critical business processes. Based on our evaluations, such potential
scenarios could include the following:
o minor variations in voltage or frequency with no significant effect on
electric service;
o temporary loss of a portion of generation capacity, including possibly
non-utility generators; however, such loss is not expected to be sufficient
to adversely affect electric service;
o temporary loss of some telecommunications functionality and other services
with no impact expected on electric service; and
o temporary loss of a small portion of commercial and industrial customer
loads due to customer year 2000 issues with no expected adverse impact on
stability of electric service.
When considering these scenarios or others specifically related to our major
subsidiary, Virginia Power, we first take into account that Virginia Power, and
the entire electric power industry, already have extensive contingency plans in
place for many events such as extreme heat, storms, equipment failures, sudden
loss of customer load or sudden loss of a generation unit.
Year 2000 contingency plans address the scenarios recommended in the North
American Electric Reliability Council Year 2000 Contingency Planning Guide, as
well as additional company specific scenarios. For example, one contingency plan
prescribes that in the event voice communications fail, satellite phones will be
used to provide operational information to our operations center and to other
utilities.
Our contingency planning efforts also include developing precautionary measures.
Precautionary measures are intended to place us in a position to mitigate the
impact of year 2000 related problems, in the unlikely event problems occur.
Examples of precautionary measures include planned additional staffing in key
operational positions to facilitate quick responses to unusual situations, and
having extra supplies on hand to minimize the impact if we experience
interrupted access to key supplies.
In addition, Virginia Power is actively participating in industry contingency
planning efforts at the regional and national level. Virginia Power submitted
its finalized contingency plans to the North American Electric Reliability
Council in June 1999. Virginia Power successfully participated in the first
nationwide drill by electric utilities on April 9, 1999, coordinated by the
North American Electric Reliability Council. The exercise simulated the partial
failure of some primary voice and data communications to demonstrate the ability
of electric utilities to communicate operating information using backup systems.
No actual communications systems or generating units were shut down during the
exercise. Service to Virginia Power's customers was not affected. Virginia Power
will participate in the second nationwide drill on September 8-9, 1999.
Dominion Resources cannot estimate or predict the potential adverse
consequences, if any, that could result from a third party's failure to
effectively address the year 2000 issue, but believes that any impact would be
short-term in nature and would not have a material adverse impact on results of
operations. Based on Dominion Resources' and industry analyses to date, we do
not believe the most reasonably likely worst case scenarios identified above, if
they were to occur, would have a material adverse affect on Dominion Resources'
businesses or results of operations.
29
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
For additional information, see Year 2000 Compliance, Management's Discussion
and Analysis of Operations in Dominion Resources' Annual Report on Form 10-K for
the year ended December 31, 1998.
RECENTLY ISSUED ACCOUNTING STANDARD
For information on recently issued accounting standards, see Note (H) to the
Notes to Consolidated Financial Statements.
30
DOMINION RESOURCES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
MARKET RATE SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
Dominion Resources is exposed to market risk because it utilizes financial
instruments, derivative financial instruments and derivative commodity
instruments. The market risks inherent in these instruments are represented by
the potential loss due to adverse changes in commodity prices, equity security
prices, interest rates and foreign currency exchange rates as described below.
Interest rate risk generally is related to Dominion Resources' and its
subsidiaries' outstanding debt as well as their commercial, consumer, and
mortgage lending activities. Currency risk exists principally through Dominion
Energy's investments in Canada and some debt denominated in European currencies
associated with Dominion Energy's investments in South America. Dominion
Resources is exposed to equity price risk through various portfolios of equity
securities. Commodity price risk is experienced in Dominion Resources'
subsidiaries Dominion Energy and Virginia Power. They are exposed to effects of
market shifts in the prices they receive and pay for natural gas and
electricity.
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 also 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 uses the Sensitivity Analysis methodology to disclose the
quantitative information for the interest rate, commodity price and foreign
exchange risks. Sensitivity analysis provides a presentation of the potential
loss of future earnings, fair values, or cash flows from market risk sensitive
instruments over a selected time period due to one or more hypothetical changes
in interest rates, foreign currency exchange rates, commodity prices, or other
similar price changes. The Tabular Presentation methodology is used to disclose
equity price market risk. The tabular presentation of summarized information
requires disclosure of key terms and information for market risk sensitive
instruments.
Interest Rate Risk - Non-Trading Activities
Dominion Resources manages its interest rate risk exposure by maintaining a mix
of fixed and variable rate debt. In addition, 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 its
exposure to market risk.
Gas Commodity Price Risk - Non-Trading Activities
Dominion Energy is exposed to the impact of market fluctuations in the sales
price Dominion Energy receives for its produced natural gas and oil. To reduce
price risk caused by market fluctuations, Dominion Energy generally follows a
policy of hedging a portion of its natural gas and oil sales commitments by
selecting derivative commodity instruments whose historical price fluctuations
correlate strongly with those of the production being hedged. Dominion Energy
enters into options, swaps, and collars to mitigate a loss in revenues, should
natural gas or oil prices decline in future production periods. Dominion Energy
also mitigates price risk by entering
31
DOMINION RESOURCES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
into fixed price sale agreements with physical purchasers of natural gas. The
impact of a change in oil and natural gas commodity prices on Dominion Energy's
financial condition at a point in time is not necessarily representative of the
effect of price movements during the year.
When conducting sensitivity analysis of the change in the fair value of Dominion
Energy's oil and natural gas contracts which would result from a hypothetical
change in the future market price of oil and natural gas, the fair value of the
contracts are determined from option pricing models which take into account the
market prices of oil and natural gas in future periods, the volatility of the
market prices in each period, as well as the time value factors of the
underlying commitments. In most instances, market prices and volatility are
determined from quoted prices on the futures exchange.
Dominion Resources has determined a hypothetical decrease in fair value for the
oil and natural gas contracts assuming a 10% unfavorable change in market prices
and comparing it to the fair value of the contracts based on market prices at
June 30, 1999 and December 31, 1998. This hypothetical 10% change in market
prices would have resulted in a decrease in fair value of approximately $19.3
million and $8 million as of June 30, 1999 and December 31, 1998, respectively.
Electric and Gas Commodity Price Risk - Trading Activities
As part of its strategy to market energy from its generation capacity and to
manage related risks, Virginia Power manages a portfolio of derivative commodity
contracts held for trading purposes. These contracts are sensitive to changes in
the prices of natural gas and electricity. Virginia Power employs established
policies and procedures to manage the 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. In addition,
Virginia Power seeks to use its generation capacity, when not needed to serve
customers in its service territory, to satisfy commitments to sell energy.
Based on the sensitivity analysis methodology discussed previously in this
section, Virginia Power has determined a hypothetical loss by calculating a
hypothetical fair value for each contract assuming a 10 percent 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, 1999 and December
31, 1998. This hypothetical 10 percent change in commodity prices would have
resulted in a hypothetical loss of approximately $8.6 million and $13.5 million
in the fair value of our commodity contracts as of June 30, 1999 and December
31, 1998, respectively.
The sensitivity analysis does not include the price risks associated with
utility fuel requirements, since these costs are generally provided for through
our rates established by the regulatory commissions having jurisdiction over
fuel cost recovery, nor does it include risks that are either nonfinancial or
nonquantifiable. In addition, provisions are made in the financial statements to
address credit risk.
The risk associated with Dominion Resources' use 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, 1998.
32
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
VIRGINIA POWER
In April 1999, Virginia Power was notified by the Department of Justice of
alleged noncompliance with the EPA's oil spill, prevention, control and
countermeasures plans and facility response requirements at one of its power
stations. If, in a legal proceeding, such instances of noncompliance are deemed
to have occurred, Virginia Power may be required to remedy any alleged
deficiencies and pay civil penalties. Settlement of this matter is currently in
negotiation and is not expected to be material to Virginia Power's financial
condition or results of operations
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Dominion Resources Annual Meeting of Shareholders was held on April 16, 1999 and
the results were reported in Dominion Resources first quarter March 31, 1999
Form 10-Q, dated May 14, 1999.
Dominion Resources Special Meeting of Shareholders relating to the merger with
Consolidated Natural Gas Company (CNG) was held on June 30, 1999 and the
following items were voted on:
Item 1. The First Merger - The adoption and approval of the merger agreement
with respect to the First Merger in which a subsidiary of Dominion Resources
will be merged into Dominion Resources and Dominion will survive.
Votes Broker
For Against Abstained Non-Votes
--- ------- --------- ---------
149,146,583 1,796,543 1,274,248 20,978,781
Item 2. The Second Merger - The adoption and approval of the merger
agreement with respect to the Second Merger in which CNG will
either (i) be merged into another subsidiary of Dominion Resources
and the Dominion Resources subsidiary will survive, or (ii) be
merged directly into Dominion Resources, with Dominion Resources as
the surviving entity. The Second Merger includes the issuance of
Dominion Resources common stock for the merger.
Votes Broker
For Against Abstained Non-Votes
--- ------- --------- ---------
148,665,084 2,140,072 1,412,218 20,978,781
Item 3. Amendments to Dominion Resources Articles of Incorporation -
Shareholders approved the amendment to Dominion Resources Articles
of Incorporation to increase the number of authorized common stock,
without par value, to 500,000,000 shares.
Votes
For Against Abstained
--- ------- ---------
166,289,111 4,929,558 1,978,482
33
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
ITEM 5. OTHER INFORMATION
THE COMPANY
The Merger
Shareholders of Dominion Resources and CNG have approved the pending merger
between the companies (See Item 4. above).
With respect to state regulatory approvals regarding the merger, the
Pennsylvania Public Utility Commission and the West Virginia Public Service
Commission have approved the merger, subject to certain conditions agreed to by
Dominion Resources and CNG. Applications are still pending before the Virginia
Commission and the North Carolina Utilities Commission, which have set dates for
consideration of the proposed merger. Filings are also pending with the
Department of Justice, the Federal Trade Commission, the Securities and Exchange
Commission, The Federal Energy Regulatory Commission (FERC) and other agencies.
As reported in the merger proxy sent to shareholders of both companies, Dominion
Resources expects to divest its financial services subsidiary, Dominion Capital,
and certain other non-core assets to help finance the merger. No formal plan of
disposal has been adopted for Dominion Capital.
On August 1, 1999, Dominion Energy reached an agreement to sell its interests in
approximately 1,200 megawatts of gross generation capacity located in Latin
America. The interests will be sold to Duke Energy International for $405
million. Dominion Resources plans to use the proceeds from the sale of its Latin
American interests to fund the repurchase of its common stock outstanding,
either pursuant to our current corporate repurchase program or in connection
with the merger with CNG.
For additional information, see Notes (E) and (L) to the Notes to the
Consolidated Financial Statements.
On August 9, 1999, Dominion Resources and CNG announced that they have agreed to
sell CNG's Virginia Natural Gas, Inc. (VNG), its local gas distribution
subsidiary under an agreement with the Staff of the Virginia Commission. In
exchange, the Virginia Commission staff will support the proposed merger of
Dominion Resources and CNG. The agreement states that Dominion Resources has one
year after the merger is completed to sell VNG to a third party. If the sale of
VNG is not completed within the timeframe of one year, VNG will be spun off as
an independent company with the common stock distributed to Dominion Resources
shareholders. Both deadlines are subject to reasonable extensions, which may be
granted by the Virginia Commission. The Virginia Commission is not bound by the
agreement but will consider it during its deliberations about the merger as well
as any comments or testimonies by other parties to the proceeding.
34
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
VIRGINIA POWER
Regulation
Virginia
As previously reported, on March 20, 1998, the Virginia Commission issued an
Order instructing Virginia Power and AEP-Virginia, as the Commonwealth's two
largest investor-owned utilities, each to design and file a retail access pilot
program. Virginia Power filed a report on November 2, 1998, describing the
details, objectives and characteristics of the proposed retail access pilot
program. On December 3, 1998, the Virginia Commission issued an Order setting
its retail access pilot program proposal for hearing on June 29, 1999, to
consider the remaining issues and details. On May 6, 1999, the Hearing Examiner
issued a ruling changing the hearing date to September 8, 1999. On August 6,
1999, the Hearing Examiner issued a report on interim rules for the introduction
of electric and natural gas retail competition in Virginia. There is a 21-day
comment period on the recommendations that will require final approval by the
Virginia Commission.
FERC
On June 3, 1999, Virginia Power, together with American Electric Power Services
Corporation, Consumers Energy Company, The Detroit Edison Company, and First
Energy Corporation, on behalf of themselves and their public utility operating
company subsidiaries filed with FERC applications under Sections 205 and 203 of
the Federal Power Act for approval of the proposed Alliance Regional
Transmission Organization (Alliance RTO).
The application seeks approval to create the Alliance RTO. If accepted, the
Alliance RTO would operate the transmission systems of the companies, ensure
transmission reliability and provide non-discriminatory access to the
transmission grid. The applications include a proposed Alliance RTO open access
transmission tariff that would cover service into, from and through the Alliance
RTO.
Rates
North Carolina
As previously reported, on November 6, 1998, Virginia Power filed for approval
of a new Schedule 19 which governs purchases from cogenerators and small power
producers. On July 16, 1999, the North Carolina Commission issued an order
directing Virginia Power to file, on or before July 26, 1999, a long-term
standard contract terms and conditions for five, ten and fifteen year periods
for qualifying hydro-electric facilities and small power producers. Virginia
Power filed for a 30-day extension to provide the required information which was
granted by the North Carolina Commission.
Sources of Power
Virginia Power established a new one-hour integrated service area summer peak
demand of 16,216 Mw on July 6, 1999. Also on July 6, 1999, Virginia Power
established a new system energy output record for a 24-hour period of 326,188
Mwh.
Future Sources of Power
As previously reported, Virginia Power requested approval from the Virginia
35
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
Commission to construct four gas-fired turbine generators in Virginia. On May
14, 1999, the Virginia Commission approved the construction of the four
gas-fired turbine generators in Virginia. A Petition to Appeal the approval was
filed by an opposing party July 13, 1999, in the Virginia Supreme Court. The
same party has appealed the air permit issued to Virginia Power by the
Department of Environmental Quality. Virginia Power will participate in both of
the appeals in support of upholding the applicable order and permit.
Construction of the units has begun with commercial operation expected by mid
2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3 (i) - Articles of Incorporation as in effect August 9, 1999
(filed herewith).
3 (ii) - Bylaws as in effect July 12, 1999 (filed herewith).
10(i)* - Form of Employment Continuity Agreement for certain
officers of Dominion Resources (filed herewith).
10(ii)* - First Amendment, dated July 12, 1999 to the Form of
Employment Agreement (Exhibit 10(xxx), Form 10-K for
the fiscal year ended December 31, 1997, File No.
1-8489, incorporated by reference) between Dominion
Resources and David L. Heavenridge (filed herewith).
10(iii)*- Form of Amendment to Employment Agreements for
certain officers of Dominion Resources including
Thos. E. Capps, Thomas N. Chewning and Thomas F.
Farrell, II (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).
* - Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None
36
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
Senior Vice President and Controller
(Principal Accounting Officer)
August 12, 1999
37