[PAGE 1]
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 1-2255
VIRGINIA ELECTRIC AND POWER COMPANY
(Exact name of registrant as specified in its charter)
VIRGINIA 54-0418825
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
701 East Cary Street, Richmond, Virginia 23219 - 3932
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (804) 771-3000
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 April 30, 1997, 171,484 shares of common stock, without par value, of the
registrant were outstanding.
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[PAGE 2]
VIRGINIA ELECTRIC AND POWER COMPANY
INDEX
Page
Number
------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Income -
Three Months Ended March 31, 1997
and 1996 3
Consolidated Balance Sheets -
March 31, 1997 and
December 31, 1996 4-5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and
1996 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-15
PART II. Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security
Holders 16
Item 5. Other Information 16
Regulation 16
Rates 18
Item 6. Exhibits and Reports on Form 8-K 18-19
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[PAGE 3]
VIRGINIA ELECTRIC AND POWER COMPANY
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
---------------------
1997 1996
(Millions)
----------
Operating revenues $1,127.7 $1,164.8
-------- --------
Operating expenses:
Operation:
Fuel, net 281.3 263.1
Purchased power capacity, net 184.4 194.2
Other 144.8 127.3
Maintenance 54.2 59.6
Restructuring 5.4
Depreciation and amortization 131.7 124.4
Amortization of terminated construction
project costs 8.6 8.6
Taxes - Income 61.6 80.3
- Other 70.2 70.6
------- --------
Total 936.8 933.5
------- --------
Operating income 190.9 231.3
Other income (deductions) (1.3) 2.3
-------- --------
Income before interest charges 189.6 233.6
-------- --------
Interest charges:
Interest on long-term debt 68.9 74.1
Other 9.0 5.7
Allowance for borrowed funds used
during construction (0.4) (0.8)
-------- --------
Total 77.5 79.0
-------- --------
Distributions-preferred securities of
subsidiary trust, net 1.8 1.8
-------- --------
Net income 110.3 152.8
Preferred dividends 8.8 9.0
-------- --------
Balance available for Common Stock $ 101.5 $ 143.8
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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[PAGE 4]
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
March 31, December 31,
1997 1996
--------- ---------
(Millions)
----------
(*)
Utility plant (includes $196.3 plant
under construction in 1997 and $180.1
in 1996) $14,582.6 $14,506.8
Less accumulated depreciation 5,345.5 5,218.3
--------- ---------
9,237.1 9,288.5
Nuclear fuel, net 144.3 145.3
--------- ---------
Net utility plant 9,381.4 9,433.8
--------- ---------
Investments:
Nuclear decommissioning trust funds 467.2 443.3
Other 29.0 34.5
--------- ---------
Total investments 496.2 477.8
--------- ---------
Current assets:
Cash and cash equivalents 24.4 47.9
Accounts receivable:
Customer accounts receivable, net 366.0 354.8
Other 73.3 80.4
Accrued unbilled revenues 136.7 162.8
Materials and supplies:
Plant and general 149.3 148.7
Fossil fuel 64.4 76.8
Other 108.5 124.5
--------- ---------
Total current assets 922.6 995.9
--------- ---------
Deferred debits and other assets:
Regulatory assets 776.6 773.9
Unamortized debt issuance costs 24.7 24.7
Other 111.9 121.9
--------- ---------
Total deferred debits and other
assets 913.2 920.5
--------- ---------
Total assets $11,713.4 $11,828.0
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
(*) The consolidated balance sheet at December 31, 1996 has been taken from the
audited consolidated financial statements at that date.
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[PAGE 5]
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS'EQUITY
(UNAUDITED)
March 31, December 31,
1997 1996
--------- ---------
(Millions)
----------
(*)
Long-term debt $ 3,777.2 $ 3,579.4
--------- ---------
Company obligated mandatorily redeemable
preferred securities of subsidiary trust(**) 135.0 135.0
--------- ---------
Preferred stock subject to
mandatory redemption 180.0 180.0
--------- ---------
Preferred stock not subject to
mandatory redemption 509.0 509.0
--------- ---------
Common stockholder's equity:
Common Stock 2,737.4 2,737.4
Other paid-in capital 16.9 16.9
Earnings reinvested in business 1,314.2 1,308.4
--------- ---------
Total common stockholder's equity 4,068.5 4,062.7
--------- ---------
Current liabilities:
Securities due within one year 12.0 311.3
Short-term debt 303.8 312.4
Accounts payable, trade 308.1 368.5
Interest accrued 86.0 95.3
Other 330.2 299.5
--------- ---------
Total current liabilities 1,040.1 1,387.0
--------- ---------
Deferred credits and other liabilities:
Accumulated deferred income taxes 1,572.4 1,565.2
Deferred investment tax credits 251.1 255.3
Other 180.1 154.4
--------- ---------
Total deferred credits and
other liabilities 2,003.6 1,974.9
Total liabilities and shareholders' equity $11,713.4 $11,828.0
The accompanying notes are an integral part of the consolidated financial
statements.
(*) The consolidated balance sheet at December 31, 1996 has been taken from the
audited consolidated financial statements at that date.
(**) As described in Note (c) to CONSOLIDATED FINANCIAL STATEMENTS, the 8.05%
Junior Subordinated Notes totaling $139.2 million principal amount constitute
100% of the Trust's assets.
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[PAGE 6]
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
1997 1996
------- -------
(Millions)
----------
Cash flow from (to) operating activities:
Net income $ 110.3 $ 152.8
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 159.5 154.7
Allowance for other funds used during
construction 0.4 (1.1)
Deferred income taxes 13.5 16.7
Deferred investment tax credits, net (4.2) (4.2)
Noncash return on terminated construction
project costs - pretax (1.3) (1.8)
Deferred fuel expenses 8.3 (11.5)
Deferred capacity expenses (15.8) 5.5
Restructuring 5.4
Changes in:
Accounts receivable (3.9) (17.4)
Accrued unbilled revenues 25.9 24.8
Materials and supplies 11.7 28.6
Accounts payable, trade (60.4) 7.9
Accrued expenses 54.3 58.2
Other 16.4 (9.0)
------- -------
Net cash flow from operating activities 314.7 409.6
------- -------
Cash flow from (to) financing activities:
Issuance of long-term debt 200.0 24.5
Issuance (repayment) of short-term debt (8.6) (144.0)
Repayment of long-term debt (299.3) (58.9)
Common Stock dividend payments (95.8) (95.3)
Preferred stock dividend payments (8.8) (8.9)
Distribution-preferred securities of
subsidiary trust (2.7) (2.7)
Other (2.5) 2.1
------- -------
Net cash to financing activities (217.7) (283.2)
------- -------
Cash flow from (used in) investing activities:
Utility plant expenditures (excluding
AFC-other funds) (73.9) (75.9)
Nuclear fuel (excluding AFC-other funds) (18.8) (31.5)
Nuclear decommissioning contributions (9.1) (9.0)
Purchase of assets (20.0) (13.7)
Other 1.3 (4.0)
------- -------
Net cash flow used in investing activities (120.5) (134.1)
------- -------
Decrease in cash and cash equivalents (23.5) (7.7)
Cash and cash equivalents at beginning of period 47.9 29.8
------- -------
Cash and cash equivalents at end of period $ 24.4 $ 22.1
======= =======
Cash Paid During The Period For:
Interest (reduced for the net cost of
borrowed funds capitalized as AFC) $ 78.7 $ 88.8
Income taxes .8 4.0
The accompanying notes are an integral part of the consolidated financial
statements.
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[PAGE 7]
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) General
Virginia Electric and Power Company is a regulated public utility engaged in
the generation, transmission, distribution and sale of electric energy within a
30,000 square mile area in Virginia and northeastern North Carolina. It sells
electricity to retail customers (including governmental agencies) and to
wholesale customers such as rural electric cooperatives and municipalities. The
Virginia service area comprises about 65 percent of Virginia's total land area,
but accounts for over 80 percent of its population. As used herein, the terms
"Virginia Power" and the "Company" shall refer to the entirety of Virginia
Electric and Power Company, including, without limitation, its Virginia and
North Carolina operations, and all of its subsidiaries.
In the opinion of the management of Virginia Power, the accompanying
unaudited consolidated financial statements contain all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the financial
position as of March 31, 1997, the results of operations for the three-month
periods ended March 31, 1997 and 1996, and the cash flows for the three-month
periods ended March 31, 1997 and 1996. Certain amounts in the 1996 consoli dated
financial statements have been reclassified to conform to the 1997 presentation.
The results of operations for the interim period are not necessarily
indicative of the results to be expected for the full year.
The consolidated financial statements include the accounts of the Company
and its subsidiaries, with all significant intercompany transactions and
accounts being eliminated on consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These financial statements should be read in conjunction with the financial
statements, and notes thereto, included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
(b) Contingencies
Nuclear Insurance
The Price-Anderson Act limits the public liability of an owner of a nuclear
power plant to $8.9 billion for a single nuclear incident. The Company is a
member of certain insurance programs that provide coverage for property damage
to members' nuclear generating plants, replacement power and liability in the
event of a nuclear incident. The Company may be subject to retrospective
premiums in the event of major incidents at nuclear units owned by covered
utilities (including the Company). For additional information, see Note C to
CONSOLIDATED FINANCIAL STATEMENTS included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
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[PAGE 8]
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(b) Contingencies (continued)
Virginia Jurisdictional Rates
On November 12, 1996, the State Corporation Commission of Virginia (the
Virginia Commission) instituted a proceeding concerning Virginia Power's cost of
service and the possible restructuring of the electric utility industry and
directed the Company to provide certain information, including any alternative
form of regulation proposed by the Company, by March 31, 1997. The Company filed
its proposed alternative regulatory plan with the Virginia Commission on March
24, 1997. The Company's plan proposes a freeze of present base rates through
December 31, 2002, during which a portion of earnings above the approved level
would be used to accelerate the write-off of generation-related regulatory
assets and mitigate the costs associated with payments under power purchase
contracts with non-utility generators. It also seeks approval in principle of
continued recovery of certain costs that remain unrecovered at the end of the
freeze period.
On March 28, 1997, the Staff of the Virginia Commission filed its Report in
a proceeding on the Company's 1995 Annual Informational Filing (AIF). The Report
concludes that the Company's earnings in 1995, after considering the effect of
the Staff's proposed adjustments, had not exceeded the 11.4% rate of return on
equity last authorized by the Virginia Commission. However, the Staff's review
of the Company's 1995 AIF also considered certain updated cost of service
information and projected Virginia Power to earn in excess of its authorized
return on equity. Based on that analysis, the Report concludes that, for
purposes of establishing rates prospectively, a rate reduction of $95.6 million,
composed of $65.9 million of changes in the Company's current and ongoing cost
of service and a $29.7 million one-time reduction in the Company's deferred
capacity balance at December 31, 1996, may be necessary in order to realign
rates to the authorized level. Alternatively, the Report states that, in view of
the evolving nature of the electric utility industry, the Commission may wish to
consider remedies other than, or in addition to, a rate reduction. Other
remedies suggested by the Report included allowing the Company to maintain its
current rate structure with residual earnings being used to write off regulatory
assets in order to mitigate the recovery risk associated with such assets
recorded on the Company's books or to establish a reserve for strandable assets.
The Company's alternative regulatory plan, which was filed subsequent
to the Staff's review of the Company's 1995 AIF but before issuance of the
Staff's Report, provided for increases in certain costs not considered by the
Staff in its review of the 1995 AIF cost of service. As a result, the Company
believes that the cost of service filed with its alternative regulatory plan
demonstrates that it is appropriate to retain the current level of base rates.
Furthermore, the Company's plan, similar to an alternative suggested in the
Staff Report, proposes a five-year rate freeze during which time a portion of
earnings above the approved level would be used to write off regulatory assets
or to mitigate costs associated with power purchase contracts with non-utility
generators.
On March 6, 1997, in the proceeding in which the Company filed its
alternative rate plan and in the separate 1995 AIF proceeding, the Virginia
Commission entered an order providing that the Company's rates shall become
interim rates subject to refund as of March 1, 1997. On April 30, 1997, the
Virginia Commission entered an Order consolidating the proceedings on the
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[PAGE 9]
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(b) Contingencies (continued)
Company's 1995 AIF and its alternative regulatory plan, which includes
consideration of its 1996 cost of service, its present rates, and its fuel cost
recovery factor and other deferred accounting mechanisms. The Order directs the
Commission's Staff to conduct a full investigation into these matters and
encourages the parties and the Staff to engage in collaborative and creative
efforts to help achieve resolution of issues, especially issues related to the
Company's contracts with non-utility generators, where possible. The Order
establishes a schedule for filing testimony, exhibits, proposed settlements and
stipulations, and responses beginning on October 15, 1997, and continuing
through February 3, 1998. A public hearing is scheduled to begin on February 16,
1998.
Federal Energy Regulatory Commission Audit
The Federal Energy Regulatory Commission (FERC) conducted a compliance audit
of the Company's financial statements for the years 1990 through 1994 and issued
its final audit report dated April 18, 1997. The compliance exceptions noted in
the FERC's preliminary audit report were resolved without significant effect on
the Company's financial position or results of operations.
Site Remediation
The Environmental Protection Agency (EPA) has identified the Company 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 $61.5 million to $72.5
million. The Company's proportionate share of the cost is expected to be in the
range of $1.7 million to $2.5 million, based upon allocation formulas and the
volume of waste shipped to the sites. As of March 31, 1997, the Company had
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, the Company
has determined that it is probable that the PRPs will fully pay the costs
apportioned to them.
The Company and Dominion Resources, Inc., along with Consolidated Natural
Gas have remedial action responsibilities remaining at two coal tar sites. The
Company accrued a $2 million reserve to meet its estimated liability based on
site studies and investigations performed at these sites. In addition, two civil
actions have been instituted against the City of Norfolk and Virginia Power by
property owners who allege that their property has been contaminated by toxic
pollutants originating from one of the coal tar sites now owned by the City of
Norfolk and formerly owned by the Company. The plaintiffs are seeking
compensatory damages of $12 million and punitive damages of $6 million. It is
too early in the cases for the Company to predict their outcome. The Company has
filed answers denying liability. A trial date of August 18, 1997 has been set
for one of the two actions seeking fifteen million dollars.
The Company generally seeks to recover its costs associated with environ
mental remediation from third party insurers. At March 31, 1997, any pending or
possible claims were not recognized as an asset or offset against recorded
obligations of the Company.
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[PAGE 10]
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(c) Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust
In 1995, the Company established Virginia Power Capital Trust I (VP Capital
Trust). VP Capital Trust sold 5,400,000 shares of Preferred Securities for
$135.0 million, representing preferred beneficial interests and 97% beneficial
ownership in the assets held by VP Capital Trust.
Virginia Power issued $139.2 million of its 1995 Series A, 8.05% Junior
Subordinated Notes (the Notes) in exchange for the $135.0 million realized from
the sale of the Preferred Securities and $4.2 million of common securities of VP
Capital Trust. The common securities represent the remaining 3% beneficial
ownership interest in the assets held by VP Capital Trust. The Notes constitute
100% of VP Capital Trust's assets.
(d) Preferred Stock
As of March 31, 1997, 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 a
total of 10,000,000 authorized shares of the Company's preferred stock.
(e) Restructuring Charges
In 1995, the Company announced the implementation phase of its Vision 2000
program which included comprehensive involuntary severance packages for
employees who lose their positions as a result of Vision 2000 initiatives. The
Company's Vision 2000 review of operations was substantially complete at
December 31, 1996.
For additional information, see Note P to CONSOLIDATED FINANCIAL STATEMENTS
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
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[PAGE 11]
VIRGINIA ELECTRIC AND POWER COMPANY
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 limita tion)
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.
Some important factors that could cause actual results or outcomes to differ
materially from those discussed in the forward-looking statements include
current governmental policies and regulatory actions (including those of FERC,
the EPA, the Nuclear Regulatory Commission and the Virginia State Corporation
Commission), industry and rate structure, operation of nuclear power facilities,
acquisition and disposal of assets and facilities, operation and storage
facilities, recovery of the cost of purchased power, nuclear decommissioning
costs, and present or prospective wholesale and retail competition. The business
and profitability of Virginia Power are also influenced by economic and
geographic factors including political and economic risks, changes in and
compliance with environmental laws and policies, weather conditions and
catastrophic weather-related damage, competition for retail and wholesale
customers, pricing and transportation of commodities, market demand for energy,
inflation, capital market conditions, unanticipated changes in operating
expenses and capital expenditures, competition for new energy development
opportunities and legal and administrative proceedings. All such factors are
difficult to predict, contain uncertainties that may materially affect actual
results, and may be beyond the control of Virginia Power. 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 the business of the
Company.
Any forward-looking statement speaks only as of the date on which such
statement is made, and Virginia Power 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.
Liquidity and Capital Resources
Internal generation of cash during the first quarter of 1997 provided 186%
of funds required for the Company's capital requirements compared to 284% during
the first quarter of 1996.
With the completion of the Clover Power Station in 1996, the Company is in a
period in which internal cash generation should exceed construction
expenditures.
As detailed in the Consolidated Statements of Cash Flows, cash flow from
operating activities for the three-month period ended March 31, 1997 decreased
$94.9 million as compared to the three-month period ended March 31, 1996. The
decrease was primarily attributable to a decline in sales caused by the
unusually mild weather in the first quarter of 1997, coupled with the higher
level of sales in the first quarter of 1996 due to extremely cold weather.
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[PAGE 12]
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cash from (to) financing activities was as follows:
Three Months Ended March 31,
----------------------
1997 1996
------- -------
(Millions)
Mortgage bonds $ 200.0
Short-term debt (8.6) $(144.0)
Pollution control securities 24.5
Repayment of long-term debt (299.3) (58.9)
Dividends (104.6) (104.2)
Preferred securities distribution (2.7) (2.7)
Other (2.5) 2.1
------- -------
Total $(217.7) $(283.2)
======= =======
Financing activities for the first three months of 1997 resulted in a net
cash outflow of $217.7 million.
On February 25, 1997, the Company issued $200 million of First and Refunding
Mortgage Bonds of 1997, Series A, 6.75%, due February 1, 2007. The proceeds from
the sale of these bonds and cash provided by operating activities were used to
fund first quarter 1997 mandatory maturities of First and Refunding Mortgage
Bonds in the amount of $299.3 million.
On April 8, 1997, the Industrial Development Authority of the Town of
Louisa, Virginia issued $10 million of Solid Waste and Sewage Disposal Revenue
Bonds, Series 1997A, due April 1, 2022, that were secured by a pledge of
payments to be made by the Company. The bonds bear interest at a fixed rate of
5.15% for an initial five-year period. The interest rate may be either fixed or
variable for subsequent specified periods. The proceeds from the sale of these
bonds were used to finance certain solid waste and sewage disposal equipment
previously installed at the Company's North Anna Power Station located in Louisa
County, Virginia.
The Company's commercial paper program is supported by credit facilities
totaling $500 million. Borrowings under the commercial paper program were $303.8
million at March 31, 1997, which is a decrease of $8.6 million from the balance
at December 31, 1996. Proceeds from the sale of commercial paper are primarily
used to finance working capital for operations.
In January 1997, the Company filed a registration statement with the
Securities and Exchange Commission for $400 million of Junior Subordinated
Debentures. The Company has two additional shelf registration statements for
debt securities registered with the Securities and Exchange Commission, one for
$575 million of First and Refunding Mortgage Bonds (of which $200 million has
been issued) and the other for $200 million of Medium-Term Notes, Series F.
These three shelf registrations combine to provide the Company with $975 million
of unused debt capital resources. In addition, the Company has a Preferred Stock
shelf, registered with the Securities and Exchange Commission, for $100 million
in aggregate principal amount, which has not been utilized. The Company intends
to issue securities from time to time to meet its capital requirements.
<PAGE>
[PAGE 13]
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cash from (used in) investing activities was as follows:
Three Months Ended March 31,
-----------------------
1997 1996
------- -------
(Millions)
Utility plant expenditures $ (73.9) $( 75.9)
Nuclear fuel (18.8) (31.5)
Nuclear decommissioning contributions (9.1) (9.0)
Purchase of assets (20.0) (13.7)
Other 1.3 (4.0)
------- -------
Total $(120.5) $(134.1)
======= =======
Investing activities for the first three months of 1997 resulted in a net
cash outflow of $120.5 million primarily due to $73.9 million of construction
expenditures, $18.8 million of nuclear fuel expenditures and approximately $20
million for the purchase of a gas-fired combined cycle generator. Of the
construction expenditures, the Company spent approximately $57.2 million on
transmission and distribution projects, $9.2 million on production projects,
$6.6 million on general support facilities, and $0.9 million on clean air
projects.
Results of Operations
Balance available for Common Stock decreased by $42.3 million for the
three-month period ended March 31, 1997, as compared to the same period in 1996,
primarily as a result of the unusually mild weather experienced in the first
quarter of 1997 versus the extremely cold weather in the first quarter of 1996.
Operating Revenues
Operating revenues changed primarily due to the following:
Three Months Ended March 31,
----------------------------
1997 vs. 1996
-------------
(Millions)
Customer growth $ 12.7
Weather (80.8)
Change in base revenues (1.4)
Fuel cost recovery 11.0
Other, net (7.8)
------
Total retail (66.3)
Sales for resale 24.5
Other operating revenues 4.7
Total $(37.1)
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[PAGE 14]
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Customer kilowatt-hour sales changed as follows:
Three Months Ended March 31,
----------------------------
1997 vs. 1996
-------------
Residential (11.8)%
Commercial (4.9)
Industrial 0.7
Public authorities (5.1)
Total retail sales (7.3)
Resale 47.2
Total sales 1.0
Heating and cooling degree days during the first quarter were as follows:
1997 1996 Normal
---- ---- ------
Heating degree days 1,856 2,334 2,050
Percentage change
compared to prior year (20.5) 21.4
Cooling degree days 6 0 7
The decrease in retail kilowatt-hour sales for the three-month period ended
March 31, 1997 reflects the mild weather experienced in the first quarter of
1997 compared to the unusually cold weather in the first quarter of 1996. The
decline was partially offset by sales to 30,200 retail customers added during
1996.
The increase in sales for resale for the three-month period ended March 31,
1997, as compared to the same period in 1996, was primarily due to the Company's
heightened power marketing efforts.
Operation - Other
Other operating expenses increased for the three-month period ended March
31, 1997, as compared to the same period in 1996, primarily due to the wages and
salaries associated with certain employees who have been redesignated as
supporting operations rather than maintenance activities, transmission expenses
related to the Company's increased off-system sales, expenses attributable to
the growth of the Company's Energy Services Business, increased computer lease
expenses, and lump sum merit payments to the Company's employees. The increases
in other operating expenses were partially offset by a decrease in salaries and
wages pursuant to Vision 2000 involuntary separations.
<PAGE>
[PAGE 15]
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Restructuring
As part of the Vision 2000 program (see Note (e) to CONSOLIDATED FINANCIAL
STATEMENTS), the Company recorded $5.4 million of restructuring charges in the
first quarter of 1996. The Company had completed the significant portions of its
Vision 2000 review as of December 31, 1996.
The savings from the Company's Vision 2000 initiatives, including those from
staffing reductions, are being realized as lower construction and operation and
maintenance costs than otherwise would have been incurred. A portion of these
savings, to the extent that they result in earnings above the approved level,
will be used to accelerate the write-off of generation-related regulatory assets
and mitigate the costs associated with payments under power purchase contracts
with non-utility generators. For additional information, see Note (b) to
CONSOLIDATED FINANCIAL STATEMENTS.
Income Taxes
Income taxes decreased for the three-month period ended March 31, 1997, as
compared to the same period in 1996 primarily as a result of decreased income
subject to tax.
Contingencies
For information on contingencies, see Note (b) to CONSOLIDATED FINANCIAL
STATEMENTS.
Future Issues
Competition
Presently, Virginia Power expects to continue to operate under regulation
and to recover its cost of providing traditional electric service. However, the
form of cost-based rate regulation under which Virginia Power operates is likely
to evolve as a result of various legislative or regulatory initiatives,
including Virginia Power's alternative regulatory plan filed with the Virginia
Commission on March 24, 1997 (see Note (b) to CONSOLIDATED FINANCIAL STATE
MENTS). At this time, Virginia Power management can predict neither the ultimate
outcome of regulatory reform in the electric utility industry nor the impact
such changes would have on Virginia Power.
For additional information, see Future Issues-Competition under MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
<PAGE>
[PAGE 16]
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
On April 2, 1997, Doswell Limited Partnership (Doswell) filed a motion for
judgment against Virginia Power in the Circuit Court of the City of Richmond.
Doswell is an independent power producer that has entered into two power
purchase agreements with the Company for the supply of dependable capacity and
electrical power. The motion for judgment claims that the Company breached one
of those agreements by assessing liquidated damages against Doswell totaling
approximately $38 million due to a Forced Outage that Doswell experienced. The
Forced Outage allegedly was caused by a turbine blade failure in one of
Doswell's turbines. Doswell claims that the failure is excused as an event of
Force Majeure and that the liquidated damages provisions in the agreement at
issue are not enforceable. On April 25, 1997, the Company filed a Demurrer
seeking to dismiss the lawsuit.
On April 2, 1997, Doswell also filed a complaint against Virginia Power in
the United States District Court for the Eastern District of Virginia, Richmond
Division. The complaint alleges that the Company has breached the two power
purchase agreements by improperly dispatching Doswell's generating facilities
and by underpaying certain Energy Payments specified in the agreements. Doswell
has asserted state law claims of fraud and breach of contract for which it seeks
no less than $20,000,000. Doswell also contends that the Company's conduct
violates the federal Racketeer Influenced and Corrupt Organizations Act (RICO).
Doswell seeks treble damages of no less than $60,000,000 under that count. The
Company denies any wrongdoing and on April 24, 1997, filed a Motion to Dismiss
the lawsuit.
Item 4. Submission of Matters to a Vote of Security Holders
By consent in lieu of an Annual Meeting, Dominion Resources, Inc., the sole
holder of all the voting Common Stock of the Company, on April 18, 1997, elected
the following persons to serve as Directors of the Company for the term
indicated:
Class II-Term Expires in 2000
James F. Betts
Jean E. Clary
James T. Rhodes
Robert H. Spilman
Item 5. Other Information
Regulation
General
In February 1997, Senate Bill No. 38, entitled the Study Commission on
the Future of Electric Service in North Carolina, was introduced in the North
Carolina Legislature. The legislation, which was enacted on April 30,
establishes a study committee to examine the cost, adequacy, availability and
pricing of electricity in the state. The study commission will be comprised of
consumers, legislators and industry officers.
<PAGE>
[PAGE 17]
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. - OTHER INFORMATION
(Continued)
Virginia
In reference to its application before the Virginia Commission for
authority to provide interexchange non-switched dedicated telecommunication
services throughout Virginia, on April 28, 1997, Virginia Power and its
wholly-owned subsidiary, VPS Communications, Inc. (VPSC), filed with the
Virginia Commission an amendment to that application requesting that the
authority to provide such services be given to VPSC instead of Virginia Power.
Also on April 28, 1997, Virginia Power and VPSC filed for approval of three
affiliate agreements that will support VPSC's provision of telecommunications
service: an Affiliate Services Agreement, a Fiber Lease Agreement, and an
Inter-Company Credit Agreement.
On April 30, 1997, the Virginia Commission entered an order
consolidating the proceedings on the Company's 1995 Annual Informational Filing
and its proposed alternative regulatory plan, filed on March 24, 1997. An
extensive discussion of the proceedings is provided in Note (b) to CONSOLIDATED
FINANCIAL STATEMENTS, Contingencies, Virginia Jurisdictional Rates.
In reference to the proceeding before the Virginia Commission for
approval of certain power supply arrangements between Virginia Power and
Chesapeake Paper Products Company, on April 21, 1997 a Hearing Examiner for the
Virginia Commission issued her report recommending approval of those arrange
ments.
FERC
In reference to LG&E Westmoreland Southampton's request for a waiver of
FERC operating requirements for Qualifying Facilities (Qfs) under the Public
Utility Regulatory Policies Act of 1978 (PURPA) and its resulting Petition for
Review against FERC in the United States Court of Appeals for the D. C. Circuit,
the United States Court of Appeals for the D.C. Circuit entered an Order
granting the FERC's motion to dismiss Southampton's Petition for Review on March
31, 1997.
Nuclear
In reference to Virginia Power's joint petition with thirty-five other
utility petitioners against the U.S. Department of Energy (DOE) in the U.S.
Court of Appeals for the District of Columbia, on March 19, 1997, the Court
consolidated the utilities' lawsuit with a parallel lawsuit filed by numerous
states and state agencies against the Department of Energy on January 31, 1997.
In April, the utilities and the state petitioners filed motions to expedite the
calendaring of these cases. On April 30, the Court ordered that the pending
petitions be construed as seeking to compel DOE to comply with the mandate in
Indiana Michigan Power Co. v. Department of Energy, in which the court held that
DOE has an unconditional obligation to begin disposing of spent nuclear fuel by
January 31, 1998, reciprocal to the utilities' obligation to pay fees into the
Nuclear Waste Fund. On May 7, in response to the court's order, the utilities
and state petitioners filed petitions for mandamus seeking relief similar to
that sought in the original petitions.
<PAGE>
[PAGE 18]
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. - OTHER INFORMATION
(Continued)
Rates
Virginia
In the proceeding before the Virginia Commission involving an increase
in the Power Company's recovery of fuel expenses and the Commission's
investigation regarding disposal of spent nuclear fuel, on March 20, 1997 the
Commission granted its Staff's motion to remove the spent nuclear fuel disposal
issue from the case and return it to a separate proceeding. A hearing was held
on the requested increase in the recovery of fuel expenses on April 17, 1997.
North Carolina
In the Company's filing for approval of a new Schedule 19, a public
hearing was held on February 4, 1997. Briefs were filed by parties to the
proceeding on March 4, 1997.
Interconnections
In reference to the planned test of principles developed by the General
Agreement on Parallel Paths (GAPP), whose participants would include Virginia
Power and five other North American utilities, on March 25, 1997, FERC approved
the GAPP Experiment Participation Agreement for a two-year period, beginning on
April 2, 1997. FERC stated that the experiment will provide the industry with
information about the effects of regional power flows under the new Open Access
regulations and allow participants to analyze actual power flow paths to ensure
equitable compensation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3(i) - Restated Articles of Incorporation, as amended, as in effect on September
12, 1994 (Exhibit 3(i), Form 8-K dated October 19, 1994, File No. 1-2255,
incorporated by reference).
3(ii) - Bylaws, as amended, as in effect on December 31, 1994 (Exhibit 3(ii),
Form 10-K for the fiscal year ended December 31, 1994, File No. 1-2255,
incorporated by reference).
4(i) - Indenture of Mortgage of the Company, dated November 1, 1935, as
supplemented and modified by fifty-eight Supplemental Indentures,
Exhibit 4(ii), Form 10-K for the fiscal year ended December 31, 1985,
File No. 1-2255, incorporated by reference; Fifty-Ninth Supplemental
Indenture, Exhibit 4(ii), Form 10-Q for the quarter ended March 31,
1986, File No. 1-2255, incorporated by reference; Sixtieth Supplemental
Indenture, Exhibit 4(ii), Form 10-Q for the quarter ended September 30,
1986, File No. 1-2255, incorporated by reference; Sixty-First Supple
mental Indenture, Exhibit 4(ii), Form 10-Q for the quarter ended June
30, 1987, File No. 1-2255, incorporated by reference; Sixty-Second
Supplemental Indenture, Exhibit 4(ii), Form 8-K, dated November 3, 1987,
File No. 1-2255, incorporated by reference; Sixty-Third Supple mental
Indenture, Exhibit 4(i), Form 8-K, dated June 8, 1988, File No. 1-2255,
incorporated by reference; Sixty-Fourth Supplemental Indenture, Exhibit
4(i), Form 8-K, dated February 8, 1989, File No. 1-2255, incorporated by
reference; Sixty-Fifth Supplemental Indenture, Exhibit 4(i), Form 8-K,
dated June 22, 1989, File No. 1-2255, incorporated by reference;
Sixty-Sixth Supplemental Indenture, Exhibit 4(i), Form 8-K, dated
February 27, 1990, File No. 1-2255, incorporated by reference;
Sixty-Seventh Supplemental Indenture, Exhibit 4(i), Form 8-K, dated
April 2, 1991, File No. 1-2255, incorporated by reference; Sixty-Eighth
<PAGE>
[PAGE 19]
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. - OTHER INFORMATION
(Continued)
Supplemental Indenture, Exhibit 4(i), Sixty-Ninth Supplemental Inden
ture, Exhibit 4(ii), and Seventieth Supplemental Indenture, Exhibit
4(iii), Form 8-K, dated February 25, 1992, File No. 1-2255, incorpo
rated by reference; Seventy-First Supplemental Indenture, Exhibit 4(i)
and Seventy-Second Supplemental Indenture, Exhibit 4(ii), Form 8-K,
dated July 7, 1992, File No. 1-2255, incorporated by reference;
Seventy-Third Supplemental Indenture, Exhibit 4(i), Form 8-K dated
August 6, 1992, File No. 1-incorporated by reference; Seventy-Fourth
Supplemental Indenture, Exhibit 4(i), Form 8-K, dated February 10,
1993, File No. 1-2255, incorporated by reference; Seventy-Fifth
Supplemental Indenture, Exhibit 4(i), Form 8-K, dated April 6, 1993,
File No. 1-2255, incorporated by reference; Seventy-Sixth Supplemental
Indenture, Exhibit 4(i), Form 8-K, dated April 21, 1993, File No. 1-
2255, incorporated by reference. Seventy-Seventh Supplemental Inden
ture, Exhibit 4(i), Form 8-K, dated June 8, 1993, File No. 1-2255,
incorporated by reference; Seventy-Eighth Supplemental Indenture,
Exhibit 4(i), Form 8-K, dated August 10, 1993, File No. 1-2255,
incorporated by reference; Seventy-Ninth Supplemental Indenture,
Exhibit 4(i), Form 8-K, dated August 10, 1993, File No. 1-2255,
incorporated by reference, Eightieth Supplemental Indenture, Exhibit
4(i), Form 8-K dated October 12, 1993, File No. 1-2255, incorporated by
reference, Eighty-First Supplemental Indenture, Exhibit 4(iii), Form
10-K for the fiscal year ended December 31, 1993, File No. 1- 2255,
incorporated by reference; Eighty-Second Supplemental Indenture,
Exhibit 4(i), Form 8-K, dated January 18, 1994, File No. 1-2255,
incorporated by reference, Eighty-Third Supplemental Indenture, Exhibit
4(i), Form 8-K, dated October 19, 1994, File No. 1-2255, incorporated
by reference, Eighty-Fourth Supplemental Indenture, Exhibit 4(i), Form
8-K dated March 22, 1995, File No. 1-2255, incorpo rated by reference
and Eighty-Fifth Supplemental Indenture, Exhibit 4(i), Form 8-K dated
February 20, 1997, File No. 1-2255, incorporated by reference.
4(ii) - Indenture, dated as of June 1, 1986, from Virginia Electric and
Power Company to Chemical Bank pursuant to which Medium-Term Notes,
Series B were issued (Exhibit 4(v), Form 10-K for the fiscal year ended
December 31, 1993, File No. 1-2255, incorporated by refer ence).
4(iii) - Indenture, dated as of April 1, 1988, from Virginia Electric
and Power Company to Chemical Bank, Trustee, pursuant to which
MediumTerm Notes, Series C (Multi-Currency) were issued as supplemented
and modified by a First Supplemental Indenture, dated as of August 1,
1989, pursuant to which Medium-Term Notes, Series D(Multi-Currency),
Series E and Series F were issued (Exhibit 4(vi), Form 10-K for the
fiscal year ended December 31, 1993, File No. 1-2255, incorporated by
reference).
4(iv) - Subordinated Note Indenture, dated as of August 1, 1995,
between Virginia Electric and Power Company and Chase Manhattan Bank
(formerly Chemical Bank), as Trustee, as supplemented (Exhibit 4(a),
Form S-3 Registration Statement No. 333-20561 as filed on January 28,
1997, incorporated by reference).
27 - Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K;
The Company filed a report on Form 8-K, dated February 20, 1997,
relating to the sale of $200 million First and Refunding Mortgage
Bonds.
<PAGE>
[PAGE 20]
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.
VIRGINIA ELECTRIC AND POWER COMPANY
Registrant
May 12, 1997
/S/ E.M. ROACH, JR.
-------------------------------------
E. M. Roach, Jr.
Senior Vice President-Finance,
Regulation and General Counsel
(Chief Financial Officer)
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