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 June 30, 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 July 31, 1997, 171,484 shares of common stock, without par value, of the
registrant were outstanding.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income - Three
and Six Months Ended June 30, 1997
and 1996 3
Consolidated Balance Sheets - June 30, 1997
and December 31, 1996 4-5
Consolidated Statements of Cash Flows - Six
Months Ended June 30, 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 11-16
PART II. Other Information
Item 1. Legal Proceedings 17
Item 5. Other Information 17
The Company 17
Regulation 17
Rates 18
Sources of Energy Used and Fuel Costs 19
Item 6. Exhibits and Reports on Form 8-K 19-20
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
(Millions)
<S> <C>
Operating revenues $1,028.0 $1,029.1 $2,155.8 $2,193.9
Operating expenses:
Operation:
Fuel, net 264.4 225.6 545.6 488.7
Purchased power capacity,
net 159.5 165.9 344.0 360.1
Other 148.0 135.3 292.9 262.6
Maintenance 61.6 60.3 115.8 119.9
Restructuring 6.3 19.3 6.3 24.7
Accelerated cost recovery 2.8 2.8
Depreciation and amortization 130.5 125.9 262.2 250.3
Amortization of terminated
construction project costs 8.6 8.6 17.2 17.2
Taxes - Income 38.4 50.4 100.0 130.7
- Other 62.8 64.7 133.0 135.3
-------- ------ -------- --------
Total 882.9 856.0 1,819.8 1,789.5
-------- ------ -------- --------
Operating income 145.1 173.1 336.0 404.4
-------- ------ -------- --------
Other income 3.2 2.6 1.9 4.9
-------- ------ -------- --------
Income before interest charges 148.3 175.7 337.9 409.3
-------- ------ -------- --------
Interest charges:
Interest on long-term debt 68.0 72.8 136.9 146.9
Other 6.6 5.0 15.6 10.7
Allowance for borrowed funds
used during construction (0.4) (0.5) (0.8) (1.3)
-------- ------ -------- --------
Total 74.2 77.3 151.7 156.3
-------- ------ -------- --------
Distributions - preferred
securities of subsidiary trust,
net 1.8 1.8 3.5 3.6
-------- ------ -------- --------
Net income 72.3 96.6 182.7 249.4
Preferred dividends 9.0 8.8 17.8 17.8
-------- ------ -------- --------
Balance available for Common
Stock $ 63.3 $ 87.8 $ 164.9 $ 231.6
======== ====== ======== ========
- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
(Millions)
(*)
<S> <C>
Utility plant (includes $218.4
plant under construction in 1997
and $180.1 in 1996) $14,656.2 $14,506.8
Less accumulated depreciation 5,480.1 5,218.3
--------- ---------
9,176.1 9,288.5
Nuclear fuel, net 153.0 145.3
--------- ---------
Net utility plant 9,329.1 9,433.8
--------- ---------
Investments:
Nuclear decommissioning trust funds 499.0 443.3
Other 29.6 34.5
--------- ---------
Total investments 528.6 477.8
--------- ---------
Current assets:
Cash and cash equivalents 63.0 47.9
Accounts receivable:
Customer accounts receivable, net 388.5 354.8
Other 69.3 80.4
Accrued unbilled revenues 169.7 162.8
Materials and supplies:
Plant and general 152.8 148.7
Fossil fuel 66.5 76.8
Other 146.3 124.5
--------- ---------
Total current assets 1,056.1 995.9
--------- ---------
Deferred debits and other assets:
Regulatory assets 787.7 773.9
Unamortized debt issuance costs 24.7 24.7
Other 117.6 121.9
--------- ---------
Total deferred debits and
other assets 930.0 920.5
--------- ---------
Total assets $11,843.8 $11,828.0
========= =========
- ----------------
</TABLE>
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.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS'EQUITY
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------- ------------
(Millions)
(*)
<S> <C>
Long-term debt $ 3,570.0 $ 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 1,284.2 1,308.4
--------- ---------
Total common stockholder's equity 4,038.5 4,062.7
--------- ---------
Current liabilities:
Securities due within one year 229.5 311.3
Short-term debt 440.2 312.4
Accounts payable, trade 343.2 368.5
Severance costs accrued 34.7 50.2
Interest accrued 93.3 95.3
Other 238.1 249.3
--------- ---------
Total current liabilities 1,379.0 1,387.0
--------- ---------
Deferred credits and other liabilities:
Accumulated deferred income taxes 1,594.9 1,565.2
Deferred investment tax credits 246.8 255.3
Other 190.6 154.4
--------- ---------
Total deferred credits and
other liabilities 2,032.3 1,974.9
--------- ---------
Commitments and contingencies (see Note b)
Total liabilities and shareholders' equity $11,843.8 $11,828.0
========= =========
- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(*) The balance sheet at December 31, 1996 has been taken from the audited
financial consolidated 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.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
------ ------
(Millions)
<S> <C>
Cash flow from (to) operating activities:
Net income $ 182.7 $ 249.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 316.2 311.3
Allowance for other funds used
during construction 0.1 (1.8)
Deferred income taxes 30.9 34.1
Deferred investment tax credits, net (8.5) (8.6)
Noncash return on terminated construction
project costs - pretax (2.4) (3.4)
Deferred fuel expenses (0.7) (23.6)
Deferred capacity expenses (38.4) 6.0
Accelerated cost recovery 2.8
Changes in:
Accounts receivable (23.4) 34.3
Accrued unbilled revenues (6.5) (7.2)
Materials and supplies 6.1 16.1
Accounts payable, trade (25.3) (20.8)
Accrued expenses (9.5) (30.2)
Other 16.6 (12.0)
------- -------
Net cash flow from operating activities 440.7 543.6
------- -------
Cash flow from (to) financing activities:
Issuance of long-term debt 210.0 24.5
Issuance of short-term debt, net 127.9 125.1
Repayment of long-term debt (299.3) (220.9)
Common Stock dividend payments (189.2) (191.9)
Preferred stock dividend payments (17.5) (17.6)
Distribution-preferred securities of
subsidiary trust (5.4) (5.4)
Other (1.1) 1.7
------- -------
Net cash flow to financing activities (174.6) (284.5)
------- -------
Cash flow used in investing activities:
Utility plant expenditures (excluding
AFC-other funds) (164.8) (157.6)
Nuclear fuel (excluding AFC-other funds) (47.0) (57.6)
Nuclear decommissioning contributions (18.1) (18.1)
Purchase of assets (20.0) (14.6)
Other (1.1) (7.2)
------- -------
Net cash flow used in investing activities (251.0) (255.1)
------- -------
Increase in cash and cash equivalents 15.1 4.0
Cash and cash equivalents at beginning of period 47.9 29.8
------- -------
Cash and cash equivalents at end of period $ 63.0 $ 33.8
======= =======
Cash paid during the period for:
Interest (reduced for the net cost of
borrowed funds capitalized as AFC) $ 154.7 $ 168.7
Income taxes 78.0 126.3
- ----------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(a) Significant Accounting Policies
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.
In addition, the Company has recently organized a wholesale power group to
engage in off-system wholesale purchases and sales, and that group is developing
trading relationships beyond the geographic limits of Virginia Power's retail
service territory. 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 Electric and Power
Company, the accompanying unaudited consolidated financial statements contain
all adjustments, consisting of only normal recurring accruals, necessary to
present fairly the financial position as of June 30, 1997, the results of
operations for the three- and six-month periods ended June 30, 1997 and 1996,
and the cash flows for the six-month periods ended June 30, 1997 and 1996.
Certain amounts in the 1996 consolidated 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 consolidated financial statements should be read in conjunction
with the consolidated financial statements, and notes thereto, included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(a) Significant Accounting Policies (continued)
Commodity Options and Futures Contracts
Virginia Power has organized a wholesale power group to engage in
offsystem purchases and sales of energy and capacity. A substantial portion of
its trading activities are through fixed-priced forward contracts which require
physical delivery of the underlying commodity. The Company's trading activities
also include the purchase and sale of over-the-counter options that require
physical delivery of the underlying commodity. Furthermore, in order to manage
price risk associated with natural gas requirements, the Company trades NYMEX
natural gas futures contracts, as well as options on such contracts.
Options and futures contracts are marked to market with resulting gains
and losses reported in earnings unless such instruments qualify, and are
designated, as hedges for accounting purposes. For options which require
physical delivery of the underlying commodity, market value reflects
management's best estimates considering over-the-counter quotations, time value
and volatility factors of the underlying commitments. Futures contracts and
options on futures contracts are marked to market based on closing exchange
prices. No options or futures contracts were designated as hedges during the six
months ended June 30, 1997.
Purchased options and options sold are reported in Deferred Debits and
Other Assets - Other and in Deferred Credits and Other Liabilities - Other,
respectively, until exercise or expiration. Gains and losses are reported in
Other Income unless the options or futures contracts have been designated as
hedges. For designated hedges, unrealized gains and losses are deferred during
the hedge period as Deferred Credits and Other Liabilities - Other and Deferred
Debits and Other Assets - Other, respectively, and are ultimately reflected in
the measurement of the hedged transaction. Electric options exercised are
reflected in the recording of related purchases or sales of electricity as
Operating Expenses or Operating Revenues, respectively. Upon expiration,
electric options written are recognized in Operating Revenues and options
purchased are recognized in Operating Expenses. Cash flows from options and
futures contracts are reported in Net Cash Flow from Operating Activities.
(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.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(b) Contingencies (continued)
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 June 30, 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. Based on site studies and investigations performed at these sites, the
Company accrued a $2 million reserve to meet its estimated liability. As of June
30, 1997, the Company had incurred remedial action costs for the two sites
totaling $2 million. The Company does not anticipate that it will be liable for
additional remedial action costs that are significant in amount.
In addition to the remedial action costs associated with the coal tar
sites, two civil actions have been instituted against the City of Norfolk and
Virginia Power. Several property owners 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
environmental remediation from third party insurers. At June 30, 1997, any
pending or possible claims were not recognized as an asset or offset against
recorded obligations of the Company.
Virginia Jurisdictional Rates
In the proceeding in which the Company filed its alternative rate plan
and in the separate 1995 Annual Informational Filing proceeding, the Virginia
State Corporation Commission (Virginia Commission) entered an order on March 6,
1997 providing that the Company's rates shall become interim rates subject to
refund as of March 1, 1997.
<PAGE>
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 June 30, 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.
<PAGE>
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 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.
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 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 six months of 1997
provided 110% of funds required for the Company's capital requirements compared
to 155% during the first six months 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.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
As detailed in the Consolidated Statements of Cash Flows, cash flow
from operating activities for the six-month period ended June 30, 1997 decreased
$102.9 million as compared to the six-month period ended June 30, 1996. The
decrease was primarily attributable to a decline in retail sales caused by the
unusually mild weather in the first six months of 1997 as compared to the colder
winter and warmer spring weather in the first six months of 1996.
Cash from (to) financing activities was as follows:
Six Months Ended June 30,
1997 1996
-------- ----------
(Millions)
Mortgage bonds $ 200.0
Pollution control securities 10.0
Issuance of short-term debt, net 127.9 $ 125.1
Issuance of tax exempt securities 24.5
Repayment of long-term debt (299.3) (220.9)
Dividends (206.7) (209.5)
Preferred securities distribution (5.4) (5.4)
Other (1.1) 1.7
------- -------
Total $(174.6) $(284.5)
======= =======
Financing activities for the first six months of 1997 resulted in a net
cash outflow of $174.6 million.
In February 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.
In April 1997, the Industrial Development Authority of the Town of
Louisa, Virginia issued $10 million of Solid Waste and Sewage Disposal Revenue
Bonds that were secured by a pledge of payments to be made by the Company. 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 $440.2 million at June 30, 1997, which is an increase of $127.8 million
from the balance at December 31, 1996. Proceeds from the sale of commercial
paper are primarily used to finance working capital for operations.
On July 2, 1997, the Company issued $60 million of its Medium Term
Notes, Series F, at an annual interest rate of 6.35%, maturing on July 2, 1999.
The proceeds from the sale of the notes were used to reduce commercial paper
borrowings.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Cash used in investing activities was as follows:
Six Months Ended June 30,
1997 1996
-------- ----------
(Millions)
Utility plant expenditures $(164.8) $(157.6)
Nuclear fuel (47.0) (57.6)
Nuclear decommissioning contributions (18.1) (18.1)
Purchase of assets (20.0) (14.6)
Other (1.1) (7.2)
------- -------
Total $(251.0) $(255.1)
======= =======
Investing activities for the first six months of 1997 resulted in a net
cash outflow of $251.0 million primarily due to $164.8 million of construction
expenditures, $47.0 million of nuclear fuel expenditures and $20.0 million for
the purchase of a gas-fired combined cycle generator. Of the construction
expenditures, the Company spent approximately $121 million on transmission and
distribution projects, $22 million on production projects, $21 million on
general support facilities, and $1 million on clean air projects.
Results of Operations
Balance available for Common Stock decreased by $24.5 million and $66.7
million for the three months and six months, respectively, ended June 30, 1997,
as compared to the same periods in 1996, primarily as a result of the unusually
mild weather experienced in 1997 versus the more extreme weather experienced in
the first six months of 1996.
Operating Revenues
Operating revenues changed primarily due to the following:
Three Months Ended Six Months Ended
June 30, June 30,
1997 vs. 1996 1997 vs. 1996
-----------------------------------
(Millions)
Weather $(31.1) $(111.9)
Customer growth 9.2 21.9
Change in base revenues (16.2) (17.6)
Fuel cost recovery 12.2 23.2
Other, net (7.1) (14.9)
------ -------
Total retail (33.0) (99.3)
------ -------
Sales for resale 25.0 49.5
Other operating revenues 6.9 11.7
------ -------
Total revenues $ (1.1) $ (38.1)
====== =======
<PAGE>
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 Six Months Ended
June 30, June 30,
1997 vs. 1996 1997 vs. 1996
-----------------------------------
Residential (6.9)% (9.8)%
Commercial (2.8) (3.9)
Industrial 6.1 3.5
Public authorities (7.2) (7.1)
Total retail sales (3.1) (5.3)
Resale 67.5 56.4
Total sales 7.1 3.8
Heating and cooling degree days during the second quarter were as follows:
1997 1996 Normal
---- ---- ------
Heating degree days 468 374 303
Percentage change compared to prior year 25.1% 33.1%
Cooling degree days 303 468 451
Percentage change compared to prior year (35.3)% 9.3%
Heating and cooling degree days during the first six months were as follows:
1997 1996 Normal
---- ---- ------
Heating degree days 2,324 2,708 2,375
Percentage change compared to prior year (14.2)% 22.9%
Cooling degree days 309 468 459
Percentage change compared to prior year (34.0)% (24.9)%
Retail operating revenues and retail kilowatt-hour sales for the three-
and six-month periods ended June 30, 1997, decreased as compared to the same
periods in 1996. The decreases are primarily attributable to the mild weather
experienced in the first two quarters of 1997 combined with the colder and
warmer weather experienced in the first two quarters of 1996. To illustrate, the
first quarter of 1996 was the third coldest quarter in 28 years whereas the
first quarter of 1997 was the fifth warmest. In addition, the second quarter of
1997 was the third mildest quarter in twenty-eight years.
The increase in sales for resale for the three- and six-month periods
ended June 30, 1997, as compared to the same periods in 1996, is due primarily
to the Company's heightened power marketing efforts.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Fuel, net
Fuel, net increased for the three-month and six-month periods ended
June 30, 1997, as compared to the same periods in 1996, primarily due to an
increase in the volume and price of power purchased for resale by the Company's
wholesale power group in connection with the Company's power marketing efforts.
Restructuring
The Company recorded $6.3 million of restructuring charges in the three
and six months ended June 30, 1997, as compared to $19.3 million and $24.7
million, respectively, recorded in the three- and six-month periods ended June
30, 1996. The restructuring costs are associated with the implementation of
Vision 2000, Virginia Power's strategic plan to prepare for the increasingly
competitive electric industry in the United States.
Accelerated Cost Recovery
In the second quarter of 1997, the Company established a $2.8 million
reserve for potential costs related to the transition to competition for
electric operations in Virginia. The reserve is consistent with Virginia Power's
alternative regulatory plan pending before the Virginia State Corporation
Commission.
Operation - Other and Maintenance
Other operating and maintenance expenses increased for the three- and
six-month periods ended June 30, 1997, as compared to the same periods in 1996,
primarily due to the timing of maintenance and refueling outages at the
Company's power stations. The increase in the expenses for the six months ended
June 30, 1997, as compared to the six months ended June 30, 1996, was also
attributable to transmission expenses related to the Company's increased
off-system sales, expenses related to the growth of the Company's Energy
Services Business, increased computer lease expenses, fees paid to the Nuclear
Regulatory Commission and lump sum merit payments to the Company's employees.
These increases were partially offset by a decrease in salaries and wages
pursuant to Vision 2000 involuntary separations.
Income Taxes
Income taxes decreased for the three- and six-month periods ended June
30, 1997, as compared to the same periods in 1996, primarily as a result of
decreased income subject to tax.
Contingencies
For information on contingencies, see Note (b) to CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 STATEMENTS). 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.
Other
Year 2000 Compliance
The Company is undertaking a coordinated approach to address possible
remedial efforts in connection with computer software and devices containing
embedded microprocessors necessitated by the upcoming millennium change. In
January 1997, a formal Year 2000 project was initiated and a project team,
comprised of representatives from each of the Company's business units, was
established to oversee compliance efforts. At this time, the Company believes,
with respect to its computerized systems and devices containing embedded
microprocessors, that the Year 2000 compliance issue is being addressed properly
to prevent any adverse operational or financial impacts. Management has not yet
determined an estimate or range of estimates of the costs to be incurred.
The Year 2000 issue may impact other entities with which the Company
transacts business. The Company cannot estimate or predict the potential adverse
consequences, if any, that could result from such entities' failure to address
this issue.
Sale of Subsidiary
On August 6, 1997, the Company sold its wholly-owned subsidiary, A&C
Enercom, Inc. (A&C). Earlier this year, the TriTech division of A&C was
integrated into Evantage, the retail side of Virginia Power's energy services
business unit. Management believes that TriTech's experience in helping
commercial and industrial customers improve performance and increase
competitiveness, combined with its geographic presence around the country,
strengthens Evantage's position as an energy services provider. The sale of A&C
will not have a material impact on the Company's financial statements.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
On July 10, 1997, the Virginia Commission entered an Order terminating
the proceedings to investigate the holding company structure and the
relationship between Dominion Resources and Virginia Power. The Order noted that
all actions required by prior order of the Commission had been taken and that
relative harmony had continued over the past year. The Order directed Virginia
Power to continue to file an independent certified annual audit of affiliate
transactions each year.
In reference to the motion for judgment filed by Doswell Limited
Partnership against Virginia Power on April 2, 1997, in the circuit Court of the
City of Richmond, a hearing on the Demurrer filed by the company, which seeks
dismissal of the lawsuit, has been scheduled for August 26, 1997. In reference
to the complaint filed by Doswell Limited Partnership against the company on
April 2, 1997 in the United States District Court for the Eastern District of
Virginia, no hearing date has been set on the Company's Motion to Dismiss filed
on April 25, 1997.
Item 5. Other Information
The Company
During April, Dr. James T. Rhodes, President and Chief Executive
Officer since 1989, announced his retirement effective August 1, 1997. On May
23, 1997 the Board of Directors elected Mr. Norman B.M. Askew as the new
President and Chief Executive Officer, effective August 1, 1997. Mr. Askew was
previously the Chief Executive of East Midlands Electricity plc, a United
Kingdom regional electricity company acquired by Dominion Resources during the
first quarter of 1997. Pursuant to the Company's policy on employee Directors,
Dr. Rhodes resigned from and Mr. Askew was appointed to the Board of Directors
effective August 1, 1997.
On August 6, 1997, the Company sold its wholly-owned subsidiary, A&C
Enercom, Inc. (A&C) to Intellisource, Inc. of Fairfield, CT. Earlier this year,
the TriTech division of A&C was integrated into Evantage, the retail side of
Virginia Power's energy services business unit. For additional information see
Other under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Regulation
Virginia
In the proceeding before the Virginia Commission for authority to
implement a program for monitoring of compliance by non-utility generators with
the "Qualifying Facility" (QF) requirements of the Public Utility Regulatory
Policies Act of 1978, on June 13, 1997, the Commission granted the authority
requested.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. - OTHER INFORMATION
(Continued)
In reference to the application before the Virginia Commission for
authority to provide interexchange non-switched dedicated telecommunication
services throughout Virginia, on August 8, 1997, the Commission issued an order
granting the certificate to provide such telecommunications services and
approving the proposed affiliate agreements between Virginia Power and its
wholly-owned subsidiary, VPS Communications, Inc.
In reference to the consolidated alternative regulatory plan and 1995
Annual Information Filing proceeding before the Virginia Commission, a public
hearing has been rescheduled to February 17, 1998. On June 2, 1997, the Company
issued a NUG Mitigation Report and the Staff issued its report on the
developments in the wholesale power market. The Staff has requested an extension
of time to file its report on increased monitoring of electric service quality
from July 1, 1997 to March 1, 1998.
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 and a parallel lawsuit filed by
numerous states and state agencies, DOE filed a response to mandamus petitions
on June 6, 1997, and the utilities and state petitioners filed replies on June
16, 1997. Oral argument has been scheduled for September 25, 1997.
Rates
FERC
In reference to Virginia Power's Open Access Transmission service
tariff, on June 11, 1997, FERC issued a Letter Order approving the Company's
tariff. On July 14, 1997, the Company filed amendments to its Open Access
Transmission tariff and Standards of Conduct to conform with the requirements of
FERC Orders 888-A and 889-A.
On July 1, 1997, the Company filed an amendment to its Power Sales
Tariff to Eligible Customers dated June 28, 1994. The amendments provide for
sales of electric capacity and energy at market-based rates and for the resale
of transmission rights. As part of the filing, Virginia Power attached an
analysis of the Company's generation market power for installed and uncommitted
capacity that illustrates the Company is within the parameters previously found
by the Commission to establish a lack of generation dominance.
Virginia
In the proceeding before the Virginia Commission involving an increase
in Virginia Power's recovery of fuel expenses, on June 11, 1997, the Commission
approved the requested increase in the fuel factor from 1.299 cents per kWh to
1.322 cents per kWh.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. - OTHER INFORMATION
(Continued)
North Carolina
On June 19, 1997, the North Carolina Commission issued an Order
requiring the Company to offer long-term (5,10 and 15 year) levelized capacity
payments to hydroelectric and certain landfill and waste facilities contracting
for up to 5 MW; a 5-year levelized rate option to other QFs contracting for up
to 100 kW; and optional long-term levelized energy payments for QFs rated at 100
kW or less capacity.
Sources of Energy Used and Fuel Costs
Purchases and Sales of Power
In reference to the principles of agreement reached between the Company and Old
Dominion Electric Cooperative (ODEC) in November 1996 providing for Virginia
Power's continued supply of ODEC's supplemental capacity needs through 2005, on
July 29, 1997, the parties executed a revised agreement in keeping with those
principles of agreement.
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 Supplemental 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 Supplemental Indenture, Exhibit 4(i), Form 8-K,
dated June 8, 1988, File No. 1-2255, incorporated by reference; SixtyFourth
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;
SixtyEighth Supplemental Indenture, Exhibit 4(i), Sixty-Ninth Supplemental
Indenture, Exhibit 4(ii), and Seventieth Supplemental Indenture, Exhibit
4(iii), Form 8-K, dated February 25, 1992, File No. 1-2255, incorporated by
reference; Seventy-First Supplemental Indenture, Exhibit 4(i) and
Seventy-Second Supplemental Indenture, Exhibit 4(ii), Form 8-K, dated July
7, 1992,
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. - OTHER INFORMATION
(Continued)
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;
SeventySixth Supplemental Indenture, Exhibit 4(i), Form 8-K, dated April
21, 1993, File No. 1-2255, incorporated by reference. Seventy-Seventh
Supplemental Indenture, 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,
incorporated 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 reference).
4(iii) - Indenture, dated as of April 1, 1988, from Virginia Electric and
Power Company to Chemical Bank, Trustee, pursuant to which Medium-Term
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;
None.
<PAGE>
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
August 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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