SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-2255
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)
(804) 771-3000
(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, 1998, 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. Consolidated Financial Statements
Consolidated Statements of Income -
Six Months Ended June 30, 1998
and 1997 3
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 4-5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998
and 1997 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II. Other Information
Item 1. Legal Proceedings 18
Item 5. Other Information 18
Regulation 18
Rates 18
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- --------- ---------
(Millions) (Millions)
<S> <C>
REVENUES:
Electric service $ 823.1 $ 953.6 $1,844.5 $1,999.9
Other 564.3 97.9 978.3 226.4
-------- -------- --------- ---------
1,387.4 1,051.5 2,822.8 2,226.3
-------- -------- --------- ---------
EXPENSES:
Fuel, net 710.5 282.1 1,320.0 611.6
Purchased power capacity, net 203.5 159.5 384.3 343.9
Impairment of regulatory assets 158.6 2.8 158.6 2.8
Restructuring 6.3 6.3
Operations and maintenance 210.0 213.8 398.1 414.6
Depreciation & amortization 96.2 130.5 236.1 262.2
Amortization of terminated
construction project costs 8.7 8.6 17.3 17.2
Taxes other than income 73.0 63.3 142.6 134.5
-------- -------- --------- ---------
Total 1,460.5 866.9 2,657.0 1,793.1
-------- -------- --------- ---------
Income (loss) from operations (73.1) 184.6 165.8 433.2
Other income (deductions) (7.4) 4.0 (12.1) 6.0
-------- -------- --------- ---------
Income (loss) before interest and
income taxes (80.5) 188.6 153.7 439.2
-------- -------- --------- ---------
Interest and related charges:
Interest expense, net 84.2 74.2 159.5 151.7
Distributions - preferred
securities of subsidiary trust 2.7 2.7 5.4 5.4
-------- -------- --------- ---------
Total 86.9 76.9 164.9 157.1
Income (loss) before income taxes (167.4) 111.7 (11.2) 282.1
Income taxes (benefit) (47.3) 39.4 10.3 99.4
-------- -------- --------- ---------
Net income (loss) (120.1) 72.3 (21.5) 182.7
Preferred dividends 8.9 9.0 17.8 17.8
-------- -------- --------- ---------
Balance for Common Stock $(129.0) $ 63.3 $ (39.3) $164.9
======== ======== ========= =========
</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,
1998 1997*
------------ -------------
(Millions)
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $55.0 $36.0
Accounts receivable:
Customer accounts receivable, net 604.6 462.4
Other 89.4 105.1
Accrued unbilled revenues 212.5 245.2
Materials and supplies:
Plant and general 146.0 145.2
Fossil fuel 68.7 67.4
Deferred income taxes 100.1 52.3
Commodity contract assets 1,540.3 40.6
Other 90.2 82.4
Total current assets ------------ -------------
2,906.8 1,236.6
------------ -------------
INVESTMENTS:
Nuclear decommissioning trust funds 665.0 569.1
Other 39.5 38.3
------------ -------------
Total net investments 704.5 607.4
------------ -------------
DEFERRED DEBITS AND OTHER ASSETS:
Regulatory assets 617.7 711.5
Unamortized debt issuance costs 27.8 24.2
33.8 .3
Commodity contract assets 88.6 126.0
Other
------------ -------------
Total deferred debits and other assets 767.9 862.0
------------ -------------
UTILITY PLANT:
Plant (includes $301.7 plant under
construction in
1998 and $240.9 in 1997) 14,946.4 14,794.2
Less accumulated depreciation 6,049.4 5,724.3
------------ -------------
8,897.0 9,069.9
Nuclear fuel, net 135.3 149.3
------------ -------------
Net utility plant 9,032.3 9,219.2
------------ -------------
Total assets $13,411.5 $11,925.2
============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(*) The consolidated balance sheet at December 31, 1997 has been taken from the
audited consolidated financial statements at that date.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997*
------------ -------------
(Millions)
<S> <C>
CURRENT LIABILITIES:
Securities due within one year $365.0 $333.5
Short-term debt 201.3 226.2
Accounts payable, trade 567.3 452.0
Customer deposits 44.3 44.6
Payrolls accrued 82.2 77.5
Interest accrued 105.2 95.1
Taxes accrued 51.1 30.5
Provision for rate refund 186.3
Commodity contract liabilities 1,571.7 52.9
Other 80.6 95.7
------------ -------------
Total current liabilities 3,255.0 1,408.0
------------ -------------
LONG-TERM DEBT 3,416.2 3,514.6
------------ -------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes 1,525.9 1,607.0
Deferred investment tax credits 229.9 238.4
Deferred fuel expenses 26.7 12.8
Commodity contract liabilities 41.2 1.9
Other 206.7 202.4
------------ -------------
Total deferred credits and other
liabilities 2,030.4 2,062.5
------------ -------------
COMMITMENTS AND CONTINGENCIES (See Note (b))
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST (**) 135.0 135.0
------------ -------------
PREFERRED STOCK:
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 1,131.6 1,361.8
------------ -------------
Total common stockholder's equity 3,885.9 4,116.1
------------ -------------
Total liabilities and stockholders' equity $13,411.5 $11,925.2
============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
(*) The consolidated balance sheet at December 31, 1997 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.
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
---------- ----------
(Millions)
<S> <C>
Cash flow from (used in) operating activities:
Net income (loss) $ (21.5) $ 182.7
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 293.6 316.2
Deferred income taxes (100.3) 30.9
Deferred investment tax credits, net (8.5) (8.5)
Deferred fuel expenses 13.9 (0.7)
Deferred capacity expenses (16.2) (38.4)
Impairment of regulatory assets 158.6 2.8
Provision for rate refund 186.3
Change in:
Accounts receivable (126.5) (22.6)
Accrued unbilled revenues 32.7 (6.5)
Materials and supplies (2.1) 6.1
Accounts payable, trade 115.3 (25.3)
Accrued expenses 28.7 (9.5)
Commodity contract assets and liabilities 24.9 2.4
Other 5.4 11.1
---------- ----------
Net cash flow from operating activities 584.3 440.7
---------- ----------
Cash flow from (used in) financing activities:
Issuance of long-term debt 150.0 210.0
(Repayment)Issuance of short-term debt, net (25.0) 127.9
Repayment of long-term debt (217.5) (299.3)
Common Stock dividend payments (191.1) (189.2)
Preferred stock dividend payments (17.8) (17.5)
Distribution-preferred securities of subsidiary trust (5.4) (5.4)
Other (2.0) (1.1)
---------- ----------
Net cash flow used in financing activities (308.8) (174.6)
---------- ----------
Cash flow from (used in) investing activities:
Utility plant expenditures (excluding AFC-other funds) (190.4) (164.8)
Nuclear fuel (excluding AFC-other funds) (25.7) (47.0)
Nuclear decommissioning contributions (33.5) (18.1)
Purchase of assets (20.0)
Other (6.9) (1.1)
---------- ----------
Net cash flow used in investing activities (256.5) (251.0)
---------- ----------
Increase in cash and cash equivalents 19.0 15.1
Cash and cash equivalents at beginning of period 36.0 47.9
---------- ----------
Cash and cash equivalents at end of period $ 55.0 $ 63.0
========== ==========
Cash paid during the period for:
Interest (reduced for the net cost of
Borrowed funds capitalized as AFC) $ 149.9 $ 154.7
Income taxes 97.7 78.0
</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
transacts business under the name Virginia Power in Virginia and under the name
North Carolina Power in North Carolina. It has retail customers (including
governmental agencies) and wholesale customers such as rural electric
cooperatives, power marketers and municipalities and serves more than 80 percent
of Virginia's population. The Company'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 retail service
territory. Virginia Power has developed a broad array of "non-traditional"
product and service offerings from its operating business units and
subsidiaries, including energy-related products and services, instrumentation
equipment services, nuclear management and operations services, power
distribution related services and telecommunications services through the
Company's existing fiber-optic network.
The Company is a wholly-owned subsidiary of Dominion Resources, Inc., a
Virginia corporation.
In the opinion of the management of Virginia Power, the accompanying
unaudited consolidated financial statements contain all adjustments, including
normal recurring accruals, necessary to present fairly the financial position as
of June 30, 1998, the results of operations for the three and six-month periods
ended June 30, 1998 and 1997, and the cash flows for the three and six-month
periods ended June 30, 1998 and 1997. Certain amounts in the 1997 consolidated
financial statements have been reclassified to conform to the 1998 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 in 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, 1997.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(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. Effective August 20,
1998, that limit will increase to $9.9 billion due to an adjustment for
inflation. 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, 1997.
VIRGINIA RATES
In March 1997, the Virginia State Corporation Commission (Virginia
Commission) issued an order that Virginia Power's base rates be made interim and
subject to refund as of March 1, 1997. This order was the result of the
Commission Staff's report on its review of Virginia Power's 1995 Annual
Informational Filing (AIF), which concluded that Virginia Power's present rates
would cause Virginia Power to earn in excess of its authorized return on equity.
The Staff found that, for purposes of establishing rates prospectively, a rate
reduction of $95.6 million (including a one-time adjustment of $29.7 million to
Virginia Power's deferred capacity balance at December 31, 1996) may be
necessary in order to realign rates to the authorized level. Virginia Power
filed its alternative regulatory plan (ARP) in March 1997, based on 1996
financial information. The Commission consolidated the AIF and ARP proceedings
and encouraged the parties to negotiate and present settlement proposals.
Virginia Power subsequently withdrew its ARP, but the Commission reserved the
right to continue consideration of the ARP as well as other regulatory
alternatives in the consolidated proceeding.
On June 8, 1998 Virginia Power, the Staff of the Virginia Commission, the
office of the Virginia Attorney General, the Virginia Committee for Fair Utility
Rates and the Apartment and Office Building Association of Metropolitan
Washington joined in an agreement which, if approved by the Virginia Commission,
would settle the Company's current rate proceedings. These parties, representing
various interests, participated in the negotiations and ultimately joined in the
filing of the proposed plan which would reduce rates while addressing the
concerns of ratepayers, those charged with protecting ratepayers' interests and
the Company.
The settlement defines a new regulatory framework for the Company's
transition to electric competition. The major provisions of the settlement are
as follows:
A two-phased base rate reduction: $100 million per annum beginning
March 1, 1998 with one additional $50 million per annum reduction
beginning March 1, 1999;
A base rate freeze through February 28, 2002 unless a change is
necessary to protect the legitimate interests of the Company, its
shareholders or ratepayers;
An immediate, one-time refund of $150 million for the period March 1,
1997 through February 28, 1998;
A discontinuation of deferral accounting for purchased power capacity
expenses effective February 28, 1998;
A write-off of a minimum of $220 million of regulatory assets in
addition to normal amortization thereof during the base rate freeze
period;
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
An incentive mechanism until March 1, 2002 for earnings above the
following return on equity (ROE) benchmarks: 1998 -10.5%; after 1998 -
30-year Treasury bond rates plus 450 basis points. For rate incentive
mechanism purposes, all earnings up to the ROE benchmark would benefit
the Company's shareholder. Any earnings above the benchmark would be
allocated one-third to the Company's shareholder and two-thirds to the
$220 million write-off of regulatory assets; except that all earnings
above the ROE benchmark plus 270 basis points (initially 13.2%), would
be allocated to the write-off of regulatory assets.
Although the Virginia Commission could possibly reject or cause the parties
to modify the proposed settlement, the Company believes that it is probable that
the Commission will adopt the settlement as proposed, although some modification
may be possible. The Company has recorded the financial implications of the
proposed settlement on its books of accounts in accordance with Statement of
Financial Accounting Standards (SFAS) No. 5, ACCOUNTING FOR CONTINGENCIES.
Consistent with the Company's prior practice for pending rate cases, the Company
recorded a reserve for refunds in the second quarter of 1998 sufficient to cover
the amounts contemplated by the settlement for the period March 1, 1997 through
June 30, 1998.
In addition, the proposed settlement would require that Virginia Power
write-off a minimum of $220 million of regulatory assets in addition to normal
amortization thereof during the rate freeze period. Under SFAS No. 71,
ACCOUNTING FOR THE EFFECTS OF CERTAIN TYPES OF REGULATION, the Company has
evaluated its regulatory assets for potential impairment. Based on the
uncertainty of the Company's earnings potential during the rate freeze period,
management can no longer conclude that recovery of the $220 million is probable,
i.e., that earnings above its authorized rate of return would be available to
offset the $220 million write-off of regulatory assets. Accordingly, the Company
charged $158.6 million to second quarter 1998 earnings, which when combined with
the reserve for accelerated cost recovery accrued in 1996 and 1997, provides for
the impairment of regulatory assets resulting from the proposed settlement. See
Note P to CONSOLIDATED FINANCIAL STATEMENTS included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
On July 21, a hearing convened before the Virginia Commission for
presentation of the proposed settlement and to allow parties an opportunity to
comment on the proposal, as well as an alternative method of allocating proposed
refunds and rate reductions among customer classes. A ruling by the Commission
is currently pending. If the Commission should reject or cause the parties to
modify the proposed settlement, the Company would adjust its books of accounts
to reflect the financial implications in the period in which the Commission
renders its decision.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 $61.8 million to $69.5
million. The Company's proportionate share of the cost is expected to be in the
range of $1.7 million to $2.3 million, based upon allocation formulas and the
volume of waste shipped to the sites. The Company 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, the Company has determined that
it is probable that the PRPs will fully pay the costs apportioned to them.
The Company and Dominion Resources 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 first civil action reached settlement without trial in September
1997. The remaining plaintiff is seeking compensatory damages of $2 million and
punitive damages of $1 million. It is too early in this case for the Company to
predict the outcome. The Company has filed answers denying liability. No trial
date has been set.
The Company generally seeks to recover its costs associated with
environmental remediation from third party insurers. At June 30, 1998, no
pending or possible claims have been recognized as an asset or offset against
recorded obligations of the Company.
For additional information regarding Contingencies, see Note Q to
CONSOLIDATED FINANCIAL STATEMENTS included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
(c) Company Obligated Mandatory 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, 1998, there were 1,800,000 and 5,090,140 issued and
outstanding shares of preferred stock subject to mandatory redemption and
preferred stock not subject to mandatory redemption, respectively. There is a
total of 10,000,000 authorized shares of the Company's preferred stock.
(e) Recently Issued Accounting Standards
During 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE
INCOME. This statement is effective for fiscal years beginning after December
15, 1997. For the six-month periods ended June 30, 1998 and 1997, the Company
did not have any material items of other comprehensive income as defined in SFAS
No. 130.
<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 the
Federal Energy Regulatory Commission (FERC), the EPA, the Nuclear Regulatory
Commission, the Virginia State Corporation Commission and the North Carolina
Utilities 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, the ability of the Company and its suppliers to
successfully address Year 2000 compliance issues, 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, exposure to changes in the fair value of commodity contracts,
market demand for energy, inflation, capital market conditions, unanticipated
changes in operating expenses and capital expenditures, competition for new
energy development opportunities, counter-party credit risk and legal and
administrative proceedings. All such factors are difficult to predict, contain
uncertainties that may materially affect actual results, and may be beyond the
control of 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
OPERATING ACTIVITIES resulted in $143.6 million increased cash flow for the
six-month period ended June 30, 1998 as compared to the same period in 1997.
This increase was primarily attributable to trading activities of the Company's
wholesale power group. Internal generation of cash exceeded the Company's
capital requirements during the first six months of 1998 and 1997.
FINANCING ACTIVITIES for the first six months of 1998 resulted in a net cash
outflow of $308.8 million.
Cash to financing activities was as follows:
Six Months ending
June 30,
1998 1997
---- ----
$ $
Issuance of long-term debt 150.0 210.0
(Repayment) issuance of short-term debt (25.0) 127.9
(Repayment) issuance of long-term debt (217.5) (299.3)
Common stock dividend payments (191.1) (189.2)
Preferred stock dividend payments (17.8) (17.5)
Distribution-preferred securities of subsidiary
trust (5.4) (5.4)
Other (2.0) (1.1)
-------- ---------
Total $(308.8) $(174.6)
======== =========
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
There are currently three shelf registration statements effective with
the Securities and Exchange Commission from which the Company can obtain
additional debt capital. The remaining principal amount of debt that can be
issued under these registrations totals $765 million. An additional capital
resource of $100 million in preferred stock also is registered with the
Securities and Exchange Commission.
On June 17, 1998, the Company issued $150 million of its 1998 Series A 7.15%
Senior Notes, due June 30, 2038. The proceeds from the sale of these notes and
cash provided by operating activities were used to fund second quarter 1998
mandatory maturities totaling $217.5 million.
The Company has a commercial paper program that is supported by two credit
facilities totaling $500 million. Proceeds from the sale of commercial paper are
primarily used to provide working capital. Net borrowings under the program were
$201.3 million at June 30, 1998.
INVESTING ACTIVITIES for the first six months of 1998 resulted in a net cash
outflow of $256.5 million primarily due to $190.4 million of construction
expenditures, $25.7 million of nuclear fuel expenditures and approximately $33.5
million of contributions to nuclear decommissioning trusts. Of the construction
expenditures, the Company spent approximately $137.7 million on transmission &
distribution projects, $20.6 million on production projects and $32.1 million on
support facilities.
Six Months ending
Cash used in investing activities was as follows: June 30,
1998 1997
---- ----
Utility plant expenditures (excluding AFC-other
funds) $(190.4) $ (164.8)
Nuclear fuel (excluding AFC-other funds) (25.7) (47.0)
Nuclear decommissioning contributions (33.5) (18.1)
Purchase of assets (20.0)
Other (6.9) (1.1)
-------- ---------
Total $(256.5) $(251.0)
======== =========
RESULTS OF OPERATIONS
REVENUE changed from the same period in the prior year primarily due to
the following:
Three Months Ended Six Months Ended
June 30, 1998 vs. 1997 June 30, 1998 vs. 1997
---------------------- ----------------------
Weather $ 18.2 $ (6.2)
Customer growth 9.2 20.1
Provision for rate refund (186.3) (186.3)
Fuel rate variance (36.3) (50.5)
Other retail 50.5 69.0
-------- --------
Total retail (144.7) (153.9)
Other electric service 14.2 (1.5)
-------- --------
Total electric service (130.5) (155.4)
Revenue - Other
Wholesale - power
marketing 373.1 507.6
Natural gas 87.9 238.8
Other, net 5.4 5.5
-------- --------
Total revenue - other 466.4 751.9
-------- --------
Total revenue $335.9 $596.5
======== ========
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
ELECTRIC SERVICE REVENUE consists of sales to retail customers in our service
territory at rates authorized by the Virginia and North Carolina Commissions and
sales to cooperatives and municipalities at wholesale rates authorized by FERC.
The primary factor affecting this revenue in the first six months of 1998 was an
accrual of a provision for rate refund to reflect the proposed settlement of the
Company's rate proceedings currently pending before the Virginia Commission. See
VIRGINIA RATES under Note (b) to CONSOLIDATED FINANCIAL STATEMENTS. In addition
this revenue was also affected by customer growth, weather and fuel rates.
Customer growth - Sales resulting from new customer connections increased our
revenue by $9.2 million and $20.1 million for the three-month and six-month
periods, respectively, ending June 30, 1998 as compared to the same period in
1997.
Weather - Mild weather in the first quarter of 1998 caused customers to use
less electricity for heating. The return to more normal weather during the
second quarter of 1998 as compared to the milder weather of the second
quarter of 1997 substantially offset the first quarter decrease in
weather-related sales.
Heating and cooling degree-days for the second quarter were as follows:
1998 1997 Normal
---- ---- ------
Heating degree days 290 468 308
Percentage change compared
to prior year (38.0)% 25.1%
Cooling degree days 433 303 444
Percentage change compared
to prior year 42.9% (35.3)%
Heating and cooling degree-days
for the first six months were as follows:
1998 1997 Normal
---- ---- ------
Heating degree days 2,030 2,324 2,413
Percentage change compared to
prior year (12.7)% (14.2)%
Cooling degree days 463 309 450
Percentage change compared
to prior year 49.8% (34.0)%
Fuel rates - The decrease in fuel rate revenue is attributable to lower fuel
rates which went into effect December 1, 1997 and an additional reduction
effective March 1, 1998. These reductions decreased fuel revenues by
approximately $36.3 million and $50.5 million for the three-month and
six-month periods, respectively, ending June 30, 1998.
<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 Six Months
Ended Ended
June 30, June 30,
1998 vs. 1997 1998 vs. 1997
----------------- ---------------
Residential 8.5% 2.0%
Commercial 11.7% 8.0%
Industrial (2.3%) 1.0%
Public street & highway
lighting 1.7% 2.5%
Public authorities 12.9% 7.8%
Total retail sales 7.9% 4.4%
Wholesale - system 37.8% (0.2%)
Wholesale - power
marketing 328.4% 251.0%
Total electric sales 66.5% 45.8%
The overall increase in kilowatt-hour sales reflects the success of our
wholesale power marketing efforts and increased sales resulting from customer
growth.
OTHER REVENUE includes sales of electricity beyond our service territory,
natural gas, nuclear consulting services, energy management services and other
revenue. The growth in power marketing and natural gas sales revenue for the
six-month period ended June 30, 1998, as compared to the same period in 1997, is
primarily due to our success at marketing electricity and natural gas beyond our
service territory.
FUEL, NET increased as compared to the second quarter of 1997, primarily due
to the cost of the power marketing and natural gas sales which reflects
increased purchases of energy from other wholesale power suppliers and purchases
of natural gas.
PURCHASED POWER CAPACITY, NET increased for the three-month and six-month
periods ended June 30, 1998, as compared to the same periods in 1997, due to 1)
the discontinuance of deferral accounting for such expenses and the write-off of
the deferred capacity expense balance based on the proposed settlement of the
Company's rate proceedings currently pending before the Virginia Commission and
2) increased expenses associated with the restructuring of certain contracts.
See VIRGINIA RATES under Note (b) to CONSOLIDATED FINANCIAL STATEMENTS.
OPERATIONS AND MAINTENANCE decreased for the six-month period ended June 30,
1998, as compared to the same period in 1997, as a result of scheduled
maintenance in 1997 at the Company's Surry Unit 1 nuclear power station and also
due to reductions in expenses attributable to the Company's strategic
initiatives.
IMPAIRMENT OF REGULATORY ASSETS represents the recognition of the proposed
settlement of the Company's rate proceedings currently pending before the
Virginia Commission. See VIRGINIA RATES under Note (b) to CONSOLIDATED FINANCIAL
STATEMENTS. The amount reported for 1997 represents accelerated cost recovery
reserve accruals for expected adjustments to regulatory assets. See Note P to
CONSOLIDATED FINANCIAL STATEMENTS included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
DEPRECIATION AND AMORTIZATION decreased primarily due to adjustments to the
provision for depreciation and decommissioning expenses for the period March 1,
1997 through June 30, 1998, to reflect terms of the proposed settlement of the
Company's rate proceedings currently pending before the Virginia Commission. See
VIRGINIA RATES under Note (b) to CONSOLIDATED FINANCIAL STATEMENTS.
OTHER INCOME decreased for the three-month and six-month periods ended June
30, 1998, as compared to the same periods in 1997, primarily due to unrealized
net losses associated with changes in the estimated fair value of natural gas
and electricity commodity contracts held for trading purposes.
INTEREST EXPENSE, NET increased primarily due to the accrual of interest on
the anticipated rate refund as a result of the proposed settlement of the
Company's rate proceedings currently pending before the Virginia Commission. See
VIRGINIA RATES under Note (b) to CONSOLIDATED FINANCIAL STATEMENTS.
INCOME TAXES decreased for the three-month and six-month periods ended June
30, 1998, as compared to the same period in 1997, primarily as a result of the
income tax provisions associated with the Company's recognition of a provision
for rate refund and impairment of regulatory assets to reflect the proposed
settlement of the Company's rate proceedings currently pending before the
Virginia Commission. See VIRGINIA RATES under Note (b) to CONSOLIDATED FINANCIAL
STATEMENTS.
CONTINGENCIES
For information on contingencies, see Note (b) to CONSOLIDATED FINANCIAL
STATEMENTS.
FUTURE ISSUES
COMPETITION
In the 1998 Session, the Virginia General Assembly passed House Bill No. 1172
(HB1172) to establish a schedule for Virginia's transition to retail competition
in the electric utility industry. The Company actively supported HB1172, which
passed both houses of the General Assembly in amended form and was signed into
law by Virginia's Governor in April 1998. The law, which became effective July
1, 1998, requires the following:
o establishment of one or more independent system operators (ISO) and one or
more regional power exchanges (RPX) for Virginia by January 1, 2001;
o deregulation of generating facilities beginning January 1, 2002;
o transition to retail competition to begin on January 1, 2002, with retail
competition to begin on January 1, 2004;
o recovery of just and reasonable net stranded costs; and,
o appropriate consumer safeguards related to stranded costs and
consideration of stranded benefits.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
While the bill establishes a timeline for the transition to competition in
Virginia, a detailed plan to implement that transition must be developed through
future legislative and regulatory action. The Company is unable at this time to
predict the timing or details of such a plan.
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, 1997.
UTILITY RATE REGULATION
For information about the Company's Virginia jurisdictional rate proceeding
and proposed settlement thereof, see VIRGINIA RATES under Note (b) to
CONSOLIDATED FINANCIAL STATEMENTS.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. The statement establishes accounting and
reporting standards requiring that derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at fair value. The statement
requires that changes in a derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
formally document, designate, and assess the effectiveness of transactions that
receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999;
however, it may be adopted earlier. It cannot be applied retroactively to
financial statements of prior periods.
The Company has not yet quantified the impacts of adopting SFAS No. 133 on
its financial statements and has not determined the timing of or method of
adoption. However, adoption of the statement could increase volatility in
earnings and other comprehensive income.
YEAR 2000 COMPLIANCE
On August 4, 1998, the Securities and Exchange Commission issued new
disclosure requirements in regard to Year 2000 compliance. The Company will
evaluate these requirements and include any required information not previously
disclosed in its Form 10-Q for the period ended September 30, 1998.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
MARKET RISK SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
COMMODITY PRICE RISK
Virginia Power's wholesale power group 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. The Company employs
established policies and procedures to manage its risks associated with these
price fluctuations and uses various commodity instruments, such as futures,
swaps and options, to reduce risk by creating offsetting market positions.
One of the techniques commonly used to measure risk in a commodity trading
portfolio is sensitivity analysis, which determines a hypothetical change in the
fair value of the portfolio which would result from an assumed change in the
market prices of the related commodities. The fair value of the portfolio is a
function of the underlying commodity, contract prices and market prices
represented by each derivative commodity contract. For exchange-for-physical
contracts, basis swaps, fixed price forward contracts and options which require
physical delivery of the underlying commodity, market value reflects
management's best estimates considering over-the-counter quotations, time value
and volatility factors of the underlying commitments. Futures contracts and
options on futures contracts are marked to market based on closing exchange
prices.
The Company has determined a hypothetical loss by calculating a hypothetical
fair value for each of the Company's contracts assuming a 10% unfavorable change
in the market prices of the related commodity and comparing it to the fair value
of the contracts based on market prices at June 30, 1998. This hypothetical 10%
change in commodity prices would have resulted in a hypothetical loss of
approximately $18 million in the fair value of the Company's natural gas and
electricity contracts as of June 30, 1998.
The sensitivity analysis does not include the price risks associated with
utility operations, including those underlying utility fuel requirements. In the
normal course of business, the Company also faces risks that are either
nonfinancial or nonquantifiable. Such risks principally include credit risk,
which is not reflected in the sensitivity analysis above.
EQUITY PRICE RISK AND INTEREST RATE RISK
Virginia Power is exposed to fluctuations in interest rates related to debt
securities and prices of marketable equity securities held in its Nuclear
Decommissioning Trusts. In addition, the Company is exposed to interest rate
risk through its use of fixed rate and variable rate debt and preferred
securities as sources of capital. For additional information, see Market Risk
Sensitive Instruments and Risk Management 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, 1997.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
See Market Risk Sensitive Instruments and Risk Management under MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
<PAGE>
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 and claims that the Company breached one of
those agreements. On the same date, Doswell also filed a complaint against
Virginia Power in the United States District Court for the Eastern District of
Virginia alleging that the Company breached the two power purchase agreements.
On March 18, 1998, the parties agreed to stay both proceedings in order to
negotiate amendments to the power purchase agreements. On June 29, 1998, the
parties executed an amendment and restatement of both agreements and on July 2,
1998, the amendment and restatement was filed with FERC. On July 30, 1998, FERC
issued a letter order accepting for filing the amendment and restatement of the
power purchase and operating agreements.
ITEM 5. OTHER INFORMATION
REGULATION
VIRGINIA
In reference to the March 1998 Virginia Commission Order Establishing
Investigation with regard to independent system operators (ISOs), regional power
exchanges (RPXs) and retail access pilot programs, the Commission's order
directed Virginia Power and AEP-Virginia to begin work immediately, in
conjunction with the Staff, to implement at least one retail access pilot
program and study. On July 16, 1998, the Commission extended the time to file
retail access pilot programs from August 1, 1998 to November 1, 1998.
FERC
Regarding the LG&E Westmoreland Southampton (Southampton) proceedings, in May
1998, FERC denied a rehearing, granted the clarification and accepted
Southampton's 1992 rates subject to a refund to the Company. In June 1998,
Southampton and Virginia Power each filed separate requests for rehearing. On
July 13, 1998, FERC granted both rehearing requests for further clarification.
The parties are proceeding with settlement discussions with a report due by the
administrative law judge in mid-August.
RATES
VIRGINIA
In reference to the consolidated Alternative Regulatory Plan (ARP) originally
filed in March of 1997 and the 1995 Annual Informational Filing (AIF) proceeding
before the Virginia Commission, a stipulation was filed jointly on June 8, 1998
by Virginia Power, the SCC Staff, the Attorney General's Office, the Virginia
Committee for Fair Utility Rates, and the Apartment and Office Building
Association of Metropolitan Washington to resolve certain issues in the rate
case. The Stipulation proposed a five-year rate plan which would direct Virginia
Power to refund its ratepayers $150 million, plus interest, for revenues
collected between March 1, 1997 and March 1, 1998, and would further reduce its
rates by $100 million for the period March 1, 1998 to March 1, 1999. Rates would
be reduced by an additional $50 million on March 1, 1999. The Stipulation
provided a mechanism for accelerating the recovery of regulatory assets and
assures that Virginia Power will write-off a minimum of $220 million in
regulatory assets with additional incentives based on earnings. On July 21, a
hearing convened at the Virginia Commission to allow parties an opportunity to
comment on the Stipulation. For additional information, see note (b) to
CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. - OTHER INFORMATION
(CONTINUED)
FERC
In reference to the Standards of Conduct filed in compliance with FERC's
Order No. 889-A, FERC issued an order directing the Company to file certain
revisions to its Standards of Conduct. In March 1998, the Company made the
changes directed by the FERC order, and also sought rehearing on the order. On
June 30, 1998, FERC granted the Company's request for rehearing.
In March 1998, the Company requested that FERC suspend the procedural
schedule in the proceeding on market-based rates due to a settlement in
principle reached by the participants in the proceeding. The Presiding
Administrative Law Judge suspended the procedural schedule and directed the
Company to file a formal Offer of Settlement. A formal Offer of Settlement was
filed as directed and on June 15, 1998, the presiding Administrative Law Judge
certified the Offer of Settlement to FERC as uncontested. The Company is
awaiting further FERC action on the Offer of Settlement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1 -- Form of Senior Indenture dated as of June 1, 1998 as supplemented and
modified by the First Supplemental Indenture to the Senior Indenture dated
as of June 1, 1998. (Exhibit 4.2, Form 8-K dated June 12, 1998, File No.
1-2255, incorporated by reference).
10.1* -- Form of an Employment Agreement dated March 16, 1998 between Virginia
Power and certain executive officers, including John A. Shaw and James A.
White (Exhibit 10.1, Form 10-Q for the period ended March 31, 1998, File
No. 1-2255, incorporated by reference). [The only material respect in
which the particular employment agreements differ is the base salary set
forth therein.]
27 -- Financial Data Schedule (filed herewith).
* Indicates management contract or compensatory plan or arrangement
(b) Reports on Form 8-K;
The Company filed a Current Report on Form 8-K dated June 8, 1998,
reporting a proposed settlement of the consolidated proceeding pending
before the Virginia State Corporation Commission concerning the Company's
1995 Annual Informational Filing. The settlement defines a new regulatory
framework for the Company's transition to electric competition.
The Company filed a Current Report on Form 8-K dated June 12, 1998,
regarding the sale of $150 million of Senior Notes.
<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 7, 1998
/S/ J. A. SHAW
------------------------------
J. A. SHAW
Senior Vice President and
Chief Financial Officer
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