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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 September 30, 2000
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 |
|
|
120 Tredegar Street |
23219 |
|
|
(804) 819-2000 |
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 October 31, 2000, 171,484 shares of common stock, without par value, of the registrant were outstanding, all of which were held, beneficially and of record, by Dominion Resources, Inc.
PAGE 2
VIRGINIA ELECTRIC AND POWER COMPANY
INDEX
Page |
||
Number |
||
Item 1. |
PART I. Financial Information |
|
Consolidated Financial Statements |
||
Consolidated Statements of Income - September 30, 2000 and 1999 |
3 |
|
Consolidated Balance Sheets - |
4-5 |
|
Consolidated Statements of Cash Flows - |
6 |
|
Notes to Consolidated Financial Statements |
7-11 |
|
Item 2. |
Management's Discussion and Analysis of |
12-22 |
Item 3. |
Quantitative and Qualitative Disclosures About |
23 |
PART II. Other Information |
||
Item 1. |
Legal Proceedings |
24 |
Item 5. |
Other Information |
24 |
Item 6. |
Exhibits and Reports on Form 8-K |
26 |
PAGE 3
VIRGINIA ELECTRIC AND POWER COMPANY
PART I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended |
Nine Months Ended |
|||
September 30, |
September 30, |
|||
2000 |
1999 |
2000 |
1999 |
|
(Millions) |
(Millions) |
|||
Revenue: |
||||
Electric service |
$ 1,265 |
$ 1,290 |
$ 3,439 |
$ 3,320 |
Other |
113 |
150 |
212 |
295 |
Total |
1,378 |
1,440 |
3,651 |
3,615 |
Expenses: |
||||
Fuel, net |
309 |
318 |
815 |
779 |
Purchased power capacity, net |
184 |
196 |
558 |
604 |
Restructuring costs |
1 |
70 |
||
Operations and maintenance |
227 |
264 |
682 |
703 |
Depreciation and amortization |
140 |
146 |
414 |
420 |
Taxes other than income |
73 |
86 |
189 |
220 |
Total |
934 |
1,010 |
2,728 |
2,726 |
Income from operations |
444 |
430 |
923 |
889 |
Other income |
22 |
5 |
41 |
21 |
Income before interest and income taxes |
466 |
435 |
964 |
910 |
Interest and related charges: |
||||
Interest expense, net |
72 |
72 |
210 |
212 |
Distributions - Preferred securities of subsidiary |
3 |
3 |
8 |
8 |
Total |
75 |
75 |
218 |
220 |
Income before income taxes |
391 |
360 |
746 |
690 |
Income tax expense |
128 |
124 |
256 |
241 |
Income before extraordinary item and cumulative effect of change in accounting principle |
263 |
236 |
490 |
449 |
Extraordinary item (net of income taxes of $197) |
(255) |
|||
Cumulative effect of change in accounting |
||||
principle (net of income taxes of $11) |
________ |
_______ |
21 |
_______ |
Net income |
263 |
236 |
511 |
194 |
Preferred dividends |
9 |
9 |
28 |
27 |
Balance available for common stock |
$ 254 |
$ 227 |
$ 483 |
$ 167 |
The Company had no other comprehensive income reportable in accordance with Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
The accompanying notes are an integral part of the consolidated financial statements.
PAGE 4
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED BALANCE SHEETS
Assets
(Unaudited)
September 30, |
December 31, |
|
2000 |
1999* |
|
(Millions) |
||
CURRENT ASSETS: |
||
Cash and cash equivalents |
$ 164 |
$ 62 |
Accounts receivable: |
||
Customer accounts receivable, net |
958 |
664 |
Other |
71 |
67 |
Materials and supplies: |
||
Plant and general |
127 |
124 |
Fossil fuel |
130 |
111 |
Commodity contract assets |
853 |
362 |
Other |
105 |
125 |
Total current assets |
2,408 |
1,515 |
INVESTMENTS: |
||
Nuclear decommissioning trust funds |
910 |
818 |
Other |
52 |
52 |
Total investments |
962 |
870 |
DEFERRED DEBITS AND OTHER ASSETS: |
||
Regulatory assets |
234 |
221 |
Unamortized debt issuance costs |
31 |
31 |
Other |
124 |
49 |
Total deferred debits and other assets |
389 |
301 |
PROPERTY, PLANT AND EQUIPMENT: |
||
Property, plant and equipment |
16,046 |
15,688 |
Less accumulated depreciation |
7,152 |
6,746 |
8,894 |
8,942 |
|
Nuclear fuel, net |
137 |
137 |
Net property, plant and equipment |
9,031 |
9,079 |
Total assets |
$ 12,790 |
$ 11,765 |
The accompanying notes are an integral part of the consolidated financial statements.
* The consolidated balance sheet at December 31, 1999 has been derived from the audited consolidated financial statements at that date.
PAGE 5
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED BALANCE SHEETS
Liabilities and Stockholder's Equity
(Unaudited)
|
September 30, |
December 31, |
|
2000 |
1999* |
|
(Millions) |
|
CURRENT LIABILITIES: |
|
|
Securities due within one year |
$ 200 |
$ 375 |
Short-term debt |
374 |
378 |
Accounts payable, trade |
831 |
534 |
Payrolls accrued |
79 |
88 |
Interest accrued |
82 |
97 |
Taxes accrued |
248 |
52 |
Commodity contract liabilities |
831 |
347 |
Other |
142 |
165 |
Total current liabilities |
2,787 |
2,036 |
|
|
|
LONG-TERM DEBT |
3,612 |
3,551 |
|
|
|
DEFERRED CREDITS AND OTHER LIABILITIES: |
|
|
Accumulated deferred income taxes |
1,459 |
1,452 |
Deferred investment tax credits |
134 |
146 |
Other |
299 |
193 |
Total deferred credits and other liabilities |
1,892 |
1,791 |
|
|
|
COMMITMENTS AND CONTINGENCIES (See Note E) |
|
|
|
|
|
COMPANY OBLIGATED MANDATORILY REDEEMABLE |
135 |
135 |
|
|
|
PREFERRED STOCK: |
|
|
Preferred stock not subject to mandatory redemption |
509 |
509 |
|
|
|
COMMON STOCKHOLDER'S EQUITY: |
|
|
Common stock |
2,738 |
2,738 |
Other paid-in capital |
16 |
17 |
Earnings reinvested in business |
1,101 |
988 |
Total common stockholder's equity |
3,855 |
3,743 |
|
|
|
Total liabilities and stockholder's equity |
$ 12,790 |
$ 11,765 |
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
*The consolidated balance sheet at December 31, 1999 has been derived from the audited consolidated financial statements at that date.
** As described in Note F, the 8.05% Junior Subordinated Notes totaling $139 million principal amount constitute 100 percent of the Trust's assets.
PAGE 6
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months Ended |
|
|
September 30, |
|
|
2000 |
1999 |
|
(Millions) |
|
Cash flow from (to) operating activities: |
|
|
Net income |
$ 511 |
$ 194 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
Depreciation and amortization |
480 |
478 |
Deferred income taxes |
4 |
22 |
Deferred investment tax credits, net |
(13) |
(13) |
Deferred fuel expenses |
(32) |
(28) |
Extraordinary item, net of income taxes |
|
255 |
Restructuring costs |
62 |
|
Changes in: |
|
|
Accounts receivable |
(298) |
(23) |
Materials and supplies |
(22) |
(13) |
Accounts payable, trade |
297 |
53 |
Accrued expenses |
172 |
119 |
Commodity contract assets and liabilities |
(2) |
(104) |
Other |
(27 ) |
35 |
Net cash flow from operating activities |
1,132 |
975 |
|
|
|
Cash flow from (to) financing activities: |
|
|
Issuance (repayment) of short-term debt, net |
(4) |
36 |
Issuance of long-term debt |
250 |
230 |
Repayment of long-term debt and preferred stock |
(366) |
(333) |
Common Stock dividend payments |
(346) |
(285) |
Preferred stock dividend payments |
(29) |
(27) |
Distribution-preferred securities of subsidiary trust |
(5) |
(8) |
Other |
(1 ) |
(5 ) |
Net cash flow to financing activities |
(501 ) |
(392 ) |
|
|
|
Cash flow to investing activities: |
|
|
Plant expenditures |
(421) |
(453) |
Nuclear fuel |
(66) |
(39) |
Nuclear decommissioning contributions |
(27) |
(20) |
Other |
(15 ) |
(5 ) |
Net cash flow to investing activities |
(529 ) |
(517 ) |
|
|
|
Increase in cash and cash equivalents |
102 |
66 |
Cash and cash equivalents at beginning of period |
62 |
49 |
Cash and cash equivalents at end of period |
$ 164 |
$ 115 |
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
PAGE 7
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Significant Accounting Policies
General
Virginia Electric and Power Company, a wholly-owned subsidiary of Dominion Resources, Inc. (Dominion), 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, municipalities, power marketers and other utilities. The Virginia service area comprises about 65 percent of Virginia's total land area, but accounts for over 80 percent of its population. The Company engages in off-system wholesale purchases and sales of electricity and purchases and sales of natural gas, and is developing trading relationships beyond the geographic limits of its retail service territory. Within this document, 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 management, the accompanying unaudited consolidated financial statements contain all adjustments, including normal recurring accruals, necessary to present fairly the financial position as of September 30, 2000, the results of operations for the three months and nine months ended September 30, 2000 and 1999, and the cash flows for the nine months ended September 30, 2000 and 1999. Certain amounts in the 1999 consolidated financial statements have been reclassified to conform to the 2000 presentation. The results of operations for the interim periods 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 consolidated financial statements, and notes thereto, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 (1999 Form 10-K).
Note B. Accounting Change
During the quarter ended September 30, 2000, Dominion and its subsidiaries, including Virginia Power, adopted a new company-wide method of calculating the market related value of plan assets used to determine the expected return on plan assets, a component of net periodic pension cost. Prior to Dominion's acquisition of Consolidated Natural Gas Company (CNG), each company used different methods to determine the "calculated value" of market related value of plan assets. Dominion's previous method recognized interest income, dividends and realized gains and losses immediately and recognized unrealized gains and losses evenly over a five-year period. Under its new method, the market related value of plan assets would reflect the difference between actual investment returns and expected investment returns evenly over a four-year period. Dominion believes that the new method is preferable to continuing to use either or both of the former methods as the new method enhances the predictability of expected return on plan assets, provides consistent treatment of all investment gains and losses, and results in calculated market related plan asset values that are generally closer to market value as compared to values calculated under the previous methods.
As the primary participating employer in the Dominion Resources Retirement Plan, Virginia Power recorded its proportionate share of the cumulative effect of the change in accounting principle, $21 million (net of income taxes of $11 million). This amount is included in income of the nine months ended September 30, 2000. Other than the impact of the cumulative effect of the change in accounting principle, the effect of the change on net income for each of the quarterly and year-to-date periods in 2000 was not material.
Retroactive application of the new method, on a pro forma basis, would not have materially changed Virginia Power's net income for the three months and nine months ended September 30, 1999.
PAGE 8
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note C. Extraordinary Item
In 1999, the Governor of Virginia signed into law legislation establishing a detailed plan to restructure the electric utility industry in Virginia. Such legislation will deregulate generation by 2002 with the phase-in of retail customer choice beginning at that time. Under this legislation, the Company's base rates will remain generally unchanged until July 2007 and recovery of generation-related costs will continue to be provided through the capped rates. The legislation's deregulation of generation required discontinuation of SFAS No. 71, Accounting for the Effects of Certain Types of Regulation, for the Company's generation operations in the quarter ended March 31, 1999. Discontinuing SFAS No. 71 resulted in an after-tax charge of $255 million to write-off expected unrecoverable generation-related assets and reversal of previously deferred investment tax credits. The Company's transmission and distribution operations continue to meet the criteria for recognition of regulatory assets and liabilities as defined by SFAS No. 71 and fuel expense continues to be subject to deferral accounting.
For further discussion of the impact of deregulation in Virginia on the Company, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes B and R to the Consolidated Financial Statements included in the 1999 Form 10-K.
Note D. Restructuring Costs
Subsequent to the CNG acquisition on January 28, 2000, Dominion and its subsidiaries developed and began the implementation of a plan to restructure the operations of the combined companies. The restructuring plan includes the following components:
Dominion and its subsidiaries established a comprehensive involuntary severance package for salaried employees whose positions will be eliminated. Severance payments are based on the individual's base salary and years of service at the time of termination. Under the restructuring plan, approximately 200 employee positions at Virginia Power and its subsidiaries have been identified for elimination.
In the first quarter of 2000, the Company recorded an estimated expense of $20 million associated with the planned involuntary terminations. Through September 30, 2000, the estimated expense and related liability were reduced by $3 million. This revision resulted primarily from (1) reduced severance benefits for employees also receiving benefits under the ERP and (2) terminated employees having less years of service and lower monthly base pay than originally estimated. At September 30, 2000, a total of 165 positions had been eliminated, and $6 million of severance benefits had been paid.Salaried employees of Virginia Power, excluding officers, who had attained age 52 and completed at least five years of service as of July 1, 2000 were eligible under the ERP. The early retirement option provides up to three additional years of age and three additional years of employee service, subject to age and service maximums, for benefit formula purposes under Dominion's postretirement medical and pension plans. During the second quarter of 2000, approximately 400 Virginia Power employees elected to participate in the ERP, resulting in an expense approximating $51 million. Some of the ERP participants will receive benefits under both the involuntary severance package and the ERP. Benefits under the involuntary severance package are subject to reduction as a result of coordination with the additional retirement plan benefits provided by the ERP.
Virginia Power may incur additional charges relating to restructuring activities as business operations are consolidated and administrative functions are integrated.
PAGE 9
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note E. Commitments and Contingencies
Environmental Matters
In 1987, the Environmental Protection Agency (EPA) identified the Company and a number of other entities as Potentially Responsible Parties (PRPs) at two Superfund sites located in Kentucky and Pennsylvania. Current cost studies estimate total remediation costs for the sites to range from $106 million to $156 million. The Company's proportionate share of the total cost is expected to be in the range of $2 million to $3 million, based upon allocation formulas and the volume of waste shipped to the sites. The Company has accrued a reserve of $2 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 generally seeks to recover its costs associated with environmental remediation from third party insurers. At September 30, 2000, any pending or possible claims were not recognized as an asset or offset against such obligations of the Company.
In 1999, the Company was notified by the Department of Justice of alleged noncompliance with the EPA's oil spill prevention, control and countermeasures (SPCC) plans and facility response plan (FRP) requirements at one of the Company's power stations. If, in a legal proceeding, such instances of noncompliance are deemed to have occurred, the Company may be required to remedy any alleged deficiencies and pay civil penalties. Settlement of this matter is currently in negotiation and is not expected to be material to the Company's financial condition or results of operations.
The Company also identified matters at certain other power stations that the EPA might view as not in compliance with the SPCC and FRP requirements. The Company reported these matters to the EPA and its plan for correction thereof. Presently, the EPA has not assessed any penalties against the Company, pending its review of the Company's disclosure information. Future resolution of these matters is not expected to have a material impact on the Company's financial condition or results of operations.
The Company received a Notice of Violation (NOV), dated April 24, 2000, from the EPA alleging that Virginia Power is operating its Mt. Storm Power Station in West Virginia in violation of the Clean Air Act. The NOV alleges that the Company failed to obtain New Source Review permits prior to undertaking specified construction projects at the station. EPA alleges that each of these projects resulted in an increase in the emission of air pollutants beyond levels that require a New Source Review permit specified under the Clean Air Act. Violations of the Clean Air Act may result in the imposition of substantial civil penalties and injunctive relief. The Company believes that it has obtained the permits necessary in connection with its generating facilities. Currently, Virginia Power is in discussions with the EPA concerning the implementation of certain additional environmental controls at Virginia Power's coal-fired generating stations in connection with the resolution of various Clean Air Act matters.
In July 2000, the Attorney General of New York filed a suit against Virginia Power alleging similar violations of the Clean Air Act at the Mt. Storm Power Station. The suit questions whether modifications were properly permitted under the Clean Air Act and allege that emissions have contributed to damage to public health and the environment in the Northeast. The Company has also received notices from the Attorneys General of Connecticut and New Jersey of their intentions to file suit against the Company for similar violations.
For additional information regarding Contingencies, see Note R to the Consolidated Financial Statements included in the 1999 Form 10-K.
PAGE 10
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note F. 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 5.4 million shares of Preferred Securities for $135 million, representing preferred beneficial interests and 97 percent beneficial ownership in the assets held by VP Capital Trust.
Virginia Power issued $139 million of its 1995 Series A, 8.05% Junior Subordinated Notes (the Notes) in exchange for the $135 million realized from the sale of the Preferred Securities and $4 million of common securities of VP Capital Trust. The common securities represent the remaining 3 percent beneficial ownership interest in the assets held by VP Capital Trust. The Notes constitute 100 percent of VP Capital Trust's assets.
Note G. Preferred Stock
As of September 30, 2000, the total number of authorized shares for all preferred stock (whether or not subject to mandatory redemption) was 10 million shares. There were 5.1 million issued and outstanding shares of preferred stock not subject to mandatory redemption. During the nine months ended September 30, 2000, the Company redeemed all 1.8 million issued and outstanding shares of preferred stock subject to mandatory redemption.
Note H. Recently Issued Accounting Standards
In June 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 138 addresses a limited number of SFAS No. 133 implementation issues including expanded availability of exclusions of normal purchase and normal sale agreements from classification as derivatives.
The Company holds some commodity contracts for trading purposes that are already subject to fair value accounting under Emerging Issues Task Force Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. After reviewing other contracts being used by the Company, management has determined that certain other contracts will be subject to fair value accounting under SFAS No. 133. A substantial portion of these contracts is used by Virginia Power in its production and delivery of energy to its customers and involves various hedging strategies. The Company is currently documenting these hedging strategies and assessing effectiveness thereof in anticipation of implementation of the standard. The Company expects any ineffectiveness related to its hedging strategies to primarily result from the time value component of certain options as well as from basis risks that may not be hedged. In addition to these commodity contracts, Virginia Power uses interest rate swaps to manage its cost of capital.
In light of the additional contracts that will be subject to fair value accounting, Virginia Power will report a cumulative effect of a change in accounting principle in the first quarter of 2001. The effect of implementation will be to adjust stockholder's equity through other comprehensive income for effective cash flow hedging strategies and the remaining impact will affect earnings. Virginia Power has not estimated the impact that will result from the adoption of SFAS No. 133, but believes it could be material, depending primarily on (1) market prices at January 1, 2001; (2) changes in the population of affected contracts between the date of this report and January 1, 2001; and (3) resolution of certain industry issues, including treatment of certain power purchase contracts, which may involve further interpretation by the Derivatives Implementation Group, a group sponsored by the FASB.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which revises the standards for accounting and disclosure of securitizations and other transfers of financial assets and extinguishments of liabilities. With certain exceptions, the standard will be applied prospectively to transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. The Company does not expect the adoption of this new standard to have a material impact on its financial condition or results of operations.
PAGE 11
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note I. Business Segments
The Company manages its operations along two primary business lines, Energy and Delivery. The Energy segment encompasses the Company's portfolio of generating facilities and purchased power contracts, trading and marketing activities, nuclear consulting services and energy services activities. The Delivery segment includes bulk power transmission, distribution and metering services, and customer service and continues to be subject to cost-based regulation.
The majority of the Company's revenue is provided through bundled rate tariffs. Such revenues generally are allocated between the two business lines for management reporting based on prior cost of service studies.
Amounts in Other include: (1) transactions or events for which the segments are not held accountable for internal reporting purposes (including 2000 restructuring costs, 2000 cumulative effect of a change in accounting principle, and the 1999 extraordinary item); (2) adjustments to reconcile internal financial statement groupings to those used to prepare the externally reported consolidated financial statements; and (3) intercompany eliminations, where applicable.
Note I. Business Segments (continued)
Description |
Energy |
Delivery |
Other |
Consolidated Total |
|
(Millions) |
|||||
Three Months Ended September 30, 2000 |
|||||
Revenue |
$ 1,026 |
$ 347 |
$ 5 |
$ 1,378 |
|
Income before interest and income taxes |
297 |
171 |
(2) |
466 |
|
Net income |
177 |
87 |
(1) |
263 |
|
Three Months Ended September 30, 1999 |
|||||
Revenue |
$ 1,076 |
$ 355 |
$ 9 |
$ 1,440 |
|
Income before interest and income taxes |
289 |
144 |
2 |
435 |
|
Net income |
168 |
68 |
236 |
||
Nine Months Ended September 30, 2000 |
|||||
Revenue |
$ 2,698 |
$ 936 |
$ 17 |
$ 3,651 |
|
Income before interest and income taxes |
598 |
441 |
(75) |
964 |
|
Net income |
326 |
210 |
(25) |
511 |
|
Nine Months Ended September 30, 1999 |
|||||
Revenue |
$ 2,689 |
$ 906 |
$ 20 |
$ 3,615 |
|
Income before interest and income taxes |
541 |
367 |
2 |
910 |
|
Net income |
284 |
164 |
(254) |
194 |
PAGE 12
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 (MD&A) contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995, including (without limitation) discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this document. These discussions, and any other discussions, including certain contingency matters (and their respective cautionary statements) discussed elsewhere in this report, that are not historical facts, are forward-looking and, accordingly, involve estimates, projections, goals, forecasts, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.
The business and financial condition of Virginia Power are influenced by a number of factors including political and economic risks, market demand for energy, inflation, capital market conditions, governmental policies, legislative and regulatory actions (including those of the Federal Energy Regulatory Commission (FERC), the Environmental Protection Agency (EPA), the Department of Energy, the Nuclear Regulatory Commission, the State Corporation Commission of Virginia (Virginia Commission) and the North Carolina Utilities Commission (North Carolina Commission), industry and rate structure and legal and administrative proceedings. Some other important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements include changes in and compliance with environmental laws and policies, weather conditions and catastrophic weather-related damage, present or prospective wholesale and retail competition, competition for new energy development opportunities, pricing and transportation of commodities, operation of nuclear power facilities, acquisition and disposition of assets and facilities, nuclear decommissioning costs, exposure to changes in the fair value of commodity contracts, counter-party credit risk and unanticipated changes in operating expenses and capital expenditures. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of 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 Virginia Power.
Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made.
Business Segments
We manage our operations in a manner that requires disclosure of two business segments-Energy and Delivery. Our Energy segment includes our portfolio of generating facilities and purchased power contracts, trading and marketing activities, nuclear consulting services, and energy services activities. Our Delivery segment includes bulk power transmission, distribution and metering services, and customer service and continues to be subject to cost-based regulation.
The majority of our revenue is provided through bundled rate tariffs. Such revenue is allocated between the Energy and Delivery segments for internal reporting purposes and discussion herein. Certain activities discussed in Liquidity and Capital Resources are not managed currently at the segment level; however, specific references to segments are made as appropriate. Our discussion of trends and variations generally applies to Virginia Power as a whole.
Liquidity and Capital Resources
Internal Sources of Liquidity
Cash flow from operating activities provided approximately $1 billion during the nine months ended September 30, 2000 and 1999. After dividend payments, cash flow from operating activities was sufficient to cover all of our plant and nuclear fuel expenditures during each of these nine month periods and, on average, covered approximately 86 percent of our total cash requirements. Cash requirements not met by the timing or amount of cash flow from operations are generally satisfied with proceeds from the sale of securities and short-term borrowings.
PAGE 13
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
External Sources of Liquidity
In March 2000, we issued $220 million in aggregate principal of variable-rate medium-term notes maturing in 2002. We also entered into a swap agreement as a hedge to synthetically convert $200 million of these variable rate notes to fixed rate debt. Under the swap agreement, we will pay a 7.27% fixed rate. Proceeds from the notes were used to retire outstanding debt and preferred stock. During the nine months ended September 30, 2000, we retired $366 million of outstanding debt and preferred stock.
In September, 2000, we issued through the Industrial Development Authority of the Town of Louisa, Virginia $30 million in aggregate principal amount of Tax-Exempt Pollution Control Revenue Bonds due September 1, 2030. The net proceeds of the bonds were used to finance qualifying expenditures made during the construction of facilities at our North Anna Power Station.
We have a commercial paper program limited to $500 million based on amounts available under two credit facilities. We have a $300 million credit facility and also participate in a credit facility established by Dominion Resources, Inc. (Dominion), our parent company, that supports the combined commercial paper programs of Dominion, Virginia Power and Consolidated Natural Gas Company (CNG). This facility, established in June 2000, is for $1.75 billion and matures May 2001. Although we have access to the full amount of the $1.75 billion facility, we operate with an internal allocation of $200 million.
Net borrowings under the commercial paper program were $374 million at September 30, 2000, a decrease of $4 million from amounts outstanding at December 31, 1999. Borrowings under these facilities are used primarily to fund working capital requirements and may vary significantly during the course of the year depending upon the timing and amount of cash requirements not satisfied by current cash provided from operations.
In addition to commercial paper, we may also issue extendible commercial notes (ECNs) to meet working capital requirements. This program became effective in July 2000 and will allow us to issue up to $100 million aggregate outstanding principal of ECNs. ECNs are unsecured notes expected to be sold in private placements. Any ECNs we issue would have a stated maturity of 390 days from issuance and may be redeemed, at our option, within 90 days or less from issuance.
As of September 30, 2000, we have available $1.62 billion of remaining principal amount under currently effective shelf registrations with the Securities and Exchange Commission to meet capital requirements.
Capital Expenditures
During the nine months ended September 30, 2000, our investing activities resulted in a net cash outflow of $529 million. These activities included plant expenditures of $421 million and nuclear fuel expenditures of $66 million. Generation-related projects totaled approximately $188 million and included construction of four combustion turbines, environmental upgrades, and routine capital improvements. We spent approximately $215 million on transmission and distribution-related projects reflecting routine capital improvements and expenditures associated with new connections. Remaining capital expenditures of $18 million included other general and information technology projects.
There have been no significant changes in the planned levels of spending for capacity and other capital projects and maturities of securities as disclosed in MD&A included in our Annual Report on Form 10-K for the year ended December 31, 1999. We expect to fund our capital requirements and maturities with cash flow from operations and a combination of sales of securities and short-term borrowings.
PAGE 14
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Results Of Operations
The following General discussion of the results of operations for Virginia Power considers those aspects of the results of our operations that relate to both our Energy and Delivery segments, and accordingly, are discussed on a consolidated basis. In addition, we discuss separately the results of operations specific to our Energy and Delivery segments.
General
Total revenue for the three months and nine months ended September 30, 2000 and 1999, respectively was allocated to the Energy and Delivery segments as follows:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
||
|
2000 |
1999 |
2000 |
1999 |
|
(Millions) |
(Millions) |
||
Energy |
$ 1,026 |
$ 1,076 |
$ 2,698 |
$ 2,689 |
Delivery |
347 |
355 |
936 |
906 |
Other |
5 |
9 |
17 |
20 |
Total revenue |
$ 1,378 |
$ 1,440 |
$ 3,651 |
$ 3,615 |
Electric service revenue
consists primarily of sales to retail customers in our service territory at rates authorized by the Virginia and North Carolina regulatory commissions and sales to cooperatives and municipalities at wholesale rates authorized by FERC. The following analysis and discussion present estimates of the primary factors affecting electric service revenue for the three months and nine months ended September 30, 2000 as compared to the same periods in 1999:
|
Three Months Ended |
Nine Months Ended |
|
(Millions) |
|
Electric service revenue |
|
|
Retail customer growth |
20 |
58 |
Weather |
(112) |
(38) |
Base rate reduction |
|
(8) |
Fuel rate variance |
34 |
81 |
Other retail, net |
45 |
36 |
Total retail |
(13) |
129 |
Other electric service |
(12) |
(10) |
Total electric service |
(25) |
119 |
|
|
|
Retail customer growth-Electric service revenue for the three months and nine months ended September 30, 2000 increased as compared to those periods in 1999 as we served approximately 39,000 more retail customers during those periods in 2000 versus 1999.
PAGE 15
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Weather-Cooler weather in the third quarter of 2000, as compared to 1999, decreased electric service revenue for the quarter and nine months ended September 30, 2000 over the same periods in 1999.
Heating and cooling degree-days were as follows:
Heating degree-days Percentage change from prior year |
||||||||||||
Three Months Ended |
Nine Months Ended |
|||||||||||
|
|
|
2,220 |
2,240 |
2,430 |
|||||||
|
|
|
(0.9)% |
10.1% |
|
|||||||
|
|
|
|
|
|
|||||||
790 |
1,095 |
1,056 |
1,262 |
1,460 |
1,502 |
|||||||
(27.8)% |
(4.6)% |
|
(13.6)% |
(9.4)% |
|
Fuel rates-Currently, we recover the cost of fuel used in generating electricity through fuel rates approved by regulatory authorities. The increase in fuel rate revenue reflects higher fuel rates approved during the quarter ended March 31, 2000.
Other retail, net-Electric service revenue increased for the extra "leap-year" day in February 2000 as well as various other factors that were individually insignificant.
Other revenue includes sales of electricity beyond our service territory, sales of natural gas, and other revenue. The decrease in other revenue during the three months and nine months ended September 30, 2000, as compared to the same periods in 1999, reflect primarily lower net revenues associated with power and gas marketing and trading activities.
Certain expenses, which are not allocated separately to the Energy and Delivery segments, changed as follows when compared to the applicable prior year periods:
Restructuring Costs -During the three months and nine months ended September 30, 2000, we incurred restructuring costs of $1 million and $70 million, respectively, in connection with the implementation of a plan to restructure the operations of Dominion subsidiaries following Dominion's acquisition of CNG. These charges related primarily to costs associated with work-force reduction activities. See Restructuring Costs in the Future Issues section below and Note D to the Consolidated Financial Statements for further information.
Extraordinary Item-We recorded this extraordinary item in connection with the passage of new legislation in 1999 establishing a detailed plan to restructure the electric utility industry in Virginia. The legislation's deregulation of generation was an event that required discontinuation of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation, for our generation operations. Generation-related assets and liabilities not expected to be recovered during the transition period were written off in March 1999, resulting in an after-tax charge of $255 million. See Note C to the Consolidated Financial Statements.
PAGE 16
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cumulative effect of a change in accounting principle-During the quarter ended September 30, 2000, as a result of its acquisition of CNG, Dominion adopted a new company-wide standard method of calculating the market related value of plan assets for all pension plans of Dominion and its subsidiaries. The market related value of plan assets is used to determine the expected return on plan assets, a component of net periodic pension cost. The cumulative effect of this accounting change as of January 1, 2000 was $21 million (net of income taxes of $11 million). See Note B to the Consolidated Financial Statements.
Energy Segment
Third Quarter Results
Net income for our Energy segment increased for the third quarter of 2000 as compared to the same period in 1999. For the comparative periods, revenue decreased reflecting the impact of comparatively mild weather on retail electric sales and power and gas marketing and trading activities. This decrease in revenue was substantially offset by an overall reduction in operating expenses for the third quarter of 2000 as compared to 1999. Operations and maintenance expenses decreased reflecting the timing of planned outages in 2000 as compared to 1999. Fuel and capacity expenses were also lower in the comparative third quarters reflecting reduced customer usage commensurate with lower revenues and the expiration of purchased power agreements in late 1999. Other income for the third quarter of 2000 includes an accrual of interest income to be received in connection with favorable resolution of tax litigation during the quarter.
Nine Months Results
Net income for our Energy segment increased for the nine months ended September 30, 2000 as compared to the same period in 1999. Revenue increased reflecting growth in our retail customer base partially offset by the adverse effect of comparatively mild weather in the third quarter of 2000 as well as lower net revenue associated with power and gas marketing and trading activities. The overall decrease in operating expenses for the comparative nine-month periods primarily reflects a reduction in other taxes due to the accrual of a tax refund in the first quarter of 2000 and increased accruals for sales tax in 1999. Changes in other operating expenses include increased fuel and operations and maintenance expenses substantially offset by decreased purchased power capacity and depreciation. Other income for nine months ended September 30, 2000 includes an accrual of interest income to be received in connection with favorable resolution of tax litigation during the third quarter of 2000.
Selected financial information for our Energy segment for the comparative quarters and year-to-date periods is as follows:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||
|
2000 |
1999 |
2000 |
1999 |
|||
|
(Millions) |
||||||
Revenue Fuel, net Purchased power capacity, net Operations and maintenance Depreciation and amortization Taxes other than income Other income Income before interest and income taxes |
$ 1,026 |
$ 1,076 |
$2,698 |
$ 2,689 |
|||
309 |
318 |
816 |
779 |
||||
184 |
196 |
558 |
605 |
||||
139 |
158 |
447 |
437 |
||||
67 |
70 |
199 |
214 |
||||
42 |
48 |
97 |
118 |
||||
12 |
2 |
16 |
4 |
||||
297 |
289 |
598 |
541 |
||||
Net income |
177 |
168 |
326 |
284 |
Revenue-
see General section for discussion of revenue on a consolidated basis.Fuel, net decreased in the third quarter of 2000, as compared to the same quarter of 1999, primarily due to decreased energy purchases. For the nine months ended September 30, 2000, fuel, net increased due to increased energy purchases and the inclusion of previously deferred fuel expenses being recovered in current fuel rates.
PAGE 17
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Purchased power capacity, net decreased in the quarter and nine months ended September 30, 2000 as compared to 1999 reflecting the expiration of two major long-term power purchase contracts as of December 31, 1999.
Operations and maintenance decreased in the third quarter of 2000, as compared to 1999, primarily reflecting higher outage costs in the prior year due to the timing of outage activities during the comparative periods. For the nine months ended September 30, 2000, as compared to same period of 1999, operations and maintenance increased reflecting higher corporate general and administrative support costs.
Depreciation and amortization decreased for the nine months ended September 30, 2000, as compared to 1999, reflecting primarily the amortization of certain terminated construction projects in the first quarter of 1999 with no such expenses occurring in the current year. The terminated construction projects were completely amortized as of the end of the first quarter 1999.
Taxes other than income decreased during the nine months ended September 30, 2000 as compared to 1999 due to the accrual for a tax refund in the first quarter of 2000.
Other income for the quarter and nine months ended September 30, 2000 includes an accrual of interest income to be received in connection with favorable resolution of tax litigation during the third quarter of 2000.
Delivery Segment
Third Quarter Results
Net income for our Delivery segment increased for the third quarter of 2000 as compared to the same period in 1999. For the comparative periods, revenue decreased reflecting the impact of comparatively mild weather. This decrease in revenue was substantially offset by a reduction in operating expenses for the third quarter of 2000 as compared to 1999 primarily reflecting significant service restoration costs associated with hurricane damage in the third quarter of 1999.
Nine Months Results
Net income for our Delivery segment increased for the nine months ended September 30, 2000 as compared to the same period in 1999. Revenue increased reflecting growth in our retail customer base and electric transmission services partially offset by the adverse effect of comparatively mild weather in the third quarter of 2000. Operating expenses for the nine months ended September 30, 2000, as compared to 1999, decreased as we incurred significant service restoration costs associated with ice storm and hurricane damage in the first and third quarters of 1999.
Selected financial information relevant to the operations of our Delivery segment for the comparative quarters and year-to-date periods is as follows:
|
Three Months Ended |
Nine Months Ended |
|||||
|
2000 |
1999 |
2000 |
1999 |
|||
|
(Millions) |
||||||
Revenue |
$ 347 |
$ 355 |
$ 936 |
$ 906 |
|||
96 |
126 |
270 |
302 |
||||
171 |
144 |
441 |
367 |
||||
87 |
68 |
210 |
164 |
Revenue-
see General section for discussion of revenue on a consolidated basis.Operations and maintenance decreased for the quarter and nine months ended September 30, 2000, as compared to 1999, primarily reflecting significant service restoration costs associated with hurricane damage in the third quarter of 1999 and ice storms in the first quarter of 1999.
PAGE 18
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Future Issues and Other Information
The following discussion of future issues and other information includes current developments of previously disclosed matters and new issues arising during the period covered by and subsequent to these financial statements. We recommend that this section be read in connection with Future Issues in MD&A included in our Annual Report on Form 10-K for the year ended December 31, 1999 (1999 Form 10-K).
Competition-Legislative Initiatives
Virginia
In March 1999, the Governor of Virginia signed into law legislation establishing a detailed plan to restructure the electric utility industry in Virginia which will provide for customer choice beginning in 2002. For additional information on the impact of this legislation and customer choice, see Note B to the Consolidated Financial Statements and MD&A included in our 1999 Form 10-K. Since March 1999, we have supported certain technical amendments which were passed by the 2000 General Assembly and were signed by the Governor in April 2000.
In March 1998, the Virginia Commission issued an Order Establishing Investigation with regard to independent system operators, regional power exchanges and retail access pilot programs. The Order instructed Virginia Power and American Electric Power-Virginia (AEP) each to design and file a retail access pilot program. In response, we filed a report describing the details, objectives and characteristics of our proposed retail access pilot program and a hearing was held. In April 2000, the Virginia Commission entered a Final Order adopting, with certain exceptions, the Hearing Examiner's recommendations, including the Hearing Examiner's market price methodology. The Company's pilot program began on September 1, 2000, providing approximately 35,000 customers the ability to choose their electric supplier. The program will be expanded to include approximately 71,000 customers by January 2001. A final order from the Virginia Commission on the interim rules governing electric and gas retail pilot programs in Virginia was issued in May 2000.
In April 2000, the Virginia Commission entered an order proposing regulations governing the functional separation of the generation, retail transmission, and distribution of incumbent electric utilities under the Virginia Electric Utility Restructuring Act (the Act). Pursuant to the Act, Virginia electric utilities are required to file their functional separation plans with the Virginia Commission by January 1, 2001. Comments on the Commission's proposed functional separation rules were filed by the Company in June 2000.
In October 2000, the Virginia Commission issued regulations governing the functional separation of incumbent electric utilities' generation, transmission and distribution services by January 1, 2002. These regulations outline the specific information to be included in functional separation plans filed with the Virginia Commission. Under the Virginia Electric Utility Restructuring Act (the Act), electric utilities are obligated to serve retail customers at capped rates until July 1, 2007, unless capped rates are terminated sooner by order of the Virginia Commission. The obligation to provide default service to retail customers who do not select a generation supplier, are unable to obtain service from an alternative supplier, or have contracted with an alternative supplier who fails to perform, may be imposed on incumbent utilities as early as January 1, 2004.
PAGE 19
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
By January 1, 2002, as required under the Act, the generation portion of Virginia Power's Virginia jurisdictional operations will no longer be subject to cost-based regulation. On November 1, 2000, also in keeping with the requirements of the Act, Virginia Power filed with the Virginia Commission an Application for Approval of a Functional Separation Plan (the Plan). The Plan provides for the following:
The Virginia Commission is expected to act on the Plan prior to January 1, 2002.
In July 2000, the Virginia Commission issued an Order Prescribing Notice and Inviting Comments with regard to retail electric metering and billing services. The Virginia Commission is directed by statute to recommend to a Virginia Legislative Transition Task Force, on or before January 1, 2001, whether metering services, billing services, or both may be provided by persons licensed to provide such services, and an appropriate date for the commencement of such services. The Virginia Commission is also directed to develop a draft plan for implementation. We filed comments and a request for hearing in August 2000. A hearing was held on November 1 and 2, 2000.
North Carolina
In April 2000, a study commission, established by the North Carolina General Assembly to explore the future of electric service in North Carolina, developed a proposal to provide full retail competition to North Carolina by January 1, 2006, with a phase-in beginning on January 1, 2005 of up to 50% of each power supplier's customer load. These recommendations were part of a report given to the General Assembly in May 2000. During the 2000 short session, legislation was passed that extended the study commission through 2006 and added North Carolina Power's CEO, or his designee, to its membership. The study commission resumed its meetings in September 2000 and will continue to address the specifics needed to accomplish its recommendations.
PAGE 20
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Competition-Regulatory Initiatives
Virginia
In July 2000, the Virginia Commission issued a Final Order promulgating regulations governing the transfer of ownership or control of electric transmission assets to regional transmission entities (RTE). The regulations establish: (1) the elements of an RTE essential to the public interest to be applied by the Virginia Commission in determining whether to authorize transfer of control of electric transmission facilities to an RTE, (2) the filing requirements for entities seeking authorization to transfer the facilities, and (3) a schedule for such filings. In October 2000, we filed our application with the Virginia Commission pursuant to the RTE regulations seeking authorization to transfer control of our electric transmission facilities to the Alliance Regional Transmission Organization (Alliance RTO).
In October 2000, the Virginia Commission approved our application for the construction and operation of two 160 Mw combustion turbine units in Caroline County, Virginia for additional peaking capacity. We expect these units to be operational by June 2001.
Federal
In June 1999, Virginia Power, together with AEP, Consumers Energy Company, The Detroit Edison Company and First Energy Corporation, on behalf of themselves and their public utility operating company subsidiaries (Alliance Companies), filed with FERC applications under Sections 205 and 203 of the Federal Power Act for approval of the proposed Alliance RTO. In December 1999, FERC issued an Order granting the application subject to certain conditions and filing requirements.
During the first quarter of 2000, the Alliance Companies filed amendments to the Alliance RTO documents to comply with certain conditions and requirements of the Order and also filed an application seeking rehearing of certain of those conditions and requirements. In May 2000, FERC issued an Order on Compliance Filing and Requests for Rehearing and Clarification in response to the Alliance Companies' application for rehearing and request for clarifications and to the compliance filings. The Order granted in part and denied in part the Alliance Companies' request for rehearing and clarifications, and directed the Alliance Companies to make further filings to comply with certain conditions and requirements of the Order. In September 2000, the Alliance Companies filed a response complying with the conditions and requirements of the FERC's December 1999 and May 2000 Orders.
Rate Matters
In July 2000, the Virginia Commission issued an Order Establishing Cogeneration Tariff to modify our cogeneration and small power production rates under Schedule 19. The order sustained our proposed method to determine avoided costs, agreed with our position that off system sales should be excluded from the calculation of avoided costs, and that the cogeneration rate should be effective through 2001.
Restructuring Costs
Subsequent to Dominion's acquisition of CNG, Dominion and its subsidiaries developed and began the implementation of a plan to restructure the operations of the combined companies. Restructuring activities include workforce reductions and the consolidation of post-merger operations and information technology systems. For the three and nine month periods ended September 30, 2000, the Company recognized $1 million and $70 million, respectively, of restructuring costs as discussed below.
Under the restructuring plan, approximately 200 employee positions at Virginia Power and its subsidiaries have been identified for elimination. Through September 30, 2000, the Company has recorded $17 million in employee severance related costs, a reduction from amounts originally estimated in the first quarter of 2000. The revision reflects coordination of benefits under the severance and early retirement programs and lower than expected employee credited service and salaries. At September 30, 2000, a total of 165 positions had been eliminated, and $6 million of severance benefits had been paid.
PAGE 21
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
During the second quarter of 2000, approximately 400 Virginia Power employees elected to participate in the early retirement program, resulting in an expense approximating $51 million.
We may incur additional charges relating to restructuring activities as business operations are consolidated and administrative functions are integrated. The planned workforce reductions should avoid future annualized operating costs of approximately $37 million that would have otherwise been incurred.
See Note D to the Consolidated Financial Statements for further discussion of restructuring activities and related costs.
Clean Air Act Matters
The Virginia Department of Environmental Quality (DEQ) has proposed to impose a plantwide ozone season NOx emission limit of 0.15 lb/mmBtu at the Possum Point Power Station beginning in May 2003 as part of a State Implementation Plan to address ozone levels in Northern Virginia, which is classified as a serious ozone non-attainment area. Given the age of the existing units at Possum Point and the high probability of additional control requirements in the future, we evaluated various options to optimize the ability to continue to operate these units in a cost-effective manner while providing the Northern Virginia area with a reliable source of electricity. Based on this evaluation, we recently announced the planned replacement of 143 MW of existing oil-fired generation and conversion of 322 MW of coal-fired generation to natural gas or number 6 fuel oil at Possum Point. Additionally, a new, cleaner 540 MW combined cycle gas unit will be constructed and owned by a third party and operated by Virginia Power under an operating lease. This arrangement has been filed for approval with the Virginia Commission, and a hearing has been scheduled for January 2001.
We received a Notice of Violation (NOV) from the EPA dated April 24, 2000, alleging that we failed to obtain New Source Review permits under the Clean Air Act prior to undertaking specified construction projects at our Mt. Storm Power Station in West Virginia. EPA alleges that each of these projects resulted in an increase in the emission of air pollutants beyond levels that require a New Source Review permit specified under the Clean Air Act. In July 2000, the Attorney General of New York filed a suit alleging similar violations of the Clean Air Act at the Mt. Storm Power Station. We also received notices from the Attorneys General of Connecticut and New Jersey of their intentions to file suit for similar violations. Violations of the Clean Air Act may result in the imposition of substantial civil penalties and injunctive relief. We believe that we have obtained the permits necessary in connection with our generating facilities. Currently, Virginia Power is in discussion with the EPA concerning the implementation of certain additional environmental controls at Virginia Power's coal-fired generating stations in connection with the resolution of various Clean Air Act matters. See Note E to the Consolidated Financial Statements for further discussion of this matter.
Transfer of VPS Communications, Inc. to Dominion
In July 2000, the Virginia Commission approved our planned transfer of all issued and outstanding common stock in VPS Communications, Inc. to Dominion. This transfer took place in August 2000 resulting in VPS Communications becoming a direct subsidiary of Dominion.
Recently Issued Accounting Standards
In June 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 138 addresses a limited number of SFAS No. 133 implementation issues including expanded availability of exclusions of normal purchase and normal sale agreements from classification as derivatives.
PAGE 22
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company holds some commodity contracts for trading purposes that are already subject to fair value accounting under Emerging Issues Task Force Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. After reviewing other contracts being used by the Company, management has determined that certain other contracts will be subject to fair value accounting under SFAS No. 133. A substantial portion of these contracts is used by Virginia Power in its production and delivery of energy to its customers and involves various hedging strategies. The Company is currently documenting these hedging strategies and assessing effectiveness thereof in anticipation of implementation of the standard. The Company expects any ineffectiveness related to its hedging strategies to primarily result from the time value component of certain options as well as from basis risks that may not be hedged. In addition to these commodity contracts, Virginia Power uses interest rate swaps to manage its cost of capital.
In light of the additional contracts that will be subject to fair value accounting, Virginia Power will report a cumulative effect of a change in accounting principle in the first quarter of 2001. The effect of implementation will be to adjust stockholder's equity through other comprehensive income for effective cash flow hedging strategies and the remaining impact will affect earnings. Virginia Power has not estimated the impact that will result from the adoption of SFAS No. 133, but believes it could be material, depending primarily on (1) market prices at January 1, 2001; (2) changes in the population of affected contracts between the date of this report and January 1, 2001; and (3) resolution of certain industry issues, including treatment of certain power purchase contracts, may involve further interpretation by the Derivatives Implementation Group, a group sponsored by the FASB.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which revises the standards for accounting and disclosure of securitizations and other transfers of financial assets and extinguishments of liabilities. With certain exceptions, the standard will be applied prospectively to transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. We do not expect the adoption of this new standard to have a material impact on our financial condition or results of operations.
Market Risk Sensitive Instruments and Risk Management
On a quarterly basis, we present an updated sensitivity analysis to disclose quantitative information about our exposure to commodity price risk as our portfolio of derivative commodity contracts held for trading purposes may change significantly each quarter. We do not present quarterly updates to the quantitative information regarding interest rate and equity price risk disclosed in Market Risk Sensitive Instruments and Risk Management under MD&A included in our Annual Report on Form 10-K for the year ended December 31, 1999. Generally, changes in our portfolio of securities subject to such risks do not give rise to significant changes in the quantitative information reported on an annual basis.
We have determined a hypothetical loss on our portfolio of derivative commodity contracts held for trading purposes by calculating a hypothetical fair value for each contract assuming a 10 percent unfavorable change in the market prices of the related commodity and comparing it to the fair value of the contracts based on market prices at September 30, 2000 and December 31, 1999. This hypothetical 10 percent change in commodity prices would have resulted in a hypothetical loss of approximately $1 million and $5 million in the fair value of our commodity contracts as of September 30, 2000 and December 31, 1999, respectively.
PAGE 23
VIRGINIA ELECTRIC AND POWER COMPANY
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 24
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 20, 2000, the New York Attorney General filed a lawsuit against Virginia Power for alleged violations of the Clean Air Act at one of its plants. The complaint alleges Virginia Power made upgrades at the station without installing appropriate emissions controls. For more details, see Note E to the Consolidated Financial Statements.
Item 5. Other Information
Regulation
Virginia
In January 2000, we filed an application with the Virginia Commission to build and operating two 160 MW combustion turbine units in Caroline County, Virginia for additional peaking capacity. In May, a hearing was held on our application and the Virginia Commission approved it in October 2000.
In March 1998, the Virginia Commission issued an Order instructing Virginia Power to establish a retail access pilot program. The Company's pilot program began on September 1, 2000, providing approximately 35,000 customers the ability to choose their electric supplier. The program will be expanded to include approximately 71,000 customers by January 1, 2001.
In July 2000, the Virginia Commission issued an Order Prescribing Notice and Inviting Comments with regard to retail electric metering and billing services. The Virginia Commission is directed by statute to recommend to a Virginia Legislative Transition Task Force, on or before January 1, 2001, whether metering services, billing services, or both may be provided by persons licensed to provide such services, and an appropriate date for commencement of such services. We filed comments and a request for hearing in August 2000. A hearing was held on November 1, 2000.
In October, 2000, the Virginia Commission issued regulations governing the functional separation of incumbent electric utilities' generation, transmission and distribution services by January 1, 2002. These regulations outline the specific information to be included in functional separation plans filed with the Virginia Commission. Under the Virginia Electric Utility Restructuring Act (the Act), electric utilities are obligated to serve retail customers at capped rates until July 1, 2007, unless capped rates are terminated sooner by order of the Virginia Commission. The obligation to provide default service to retail customers who do not select a generation supplier, are unable to obtain service from an alternative supplier, or have contracted with an alternative supplier who fails to perform, may be imposed on incumbent utilities as early as January 1, 2004.
By January 1, 2002, as required under the Act, the generation portion of Virginia Power's Virginia jurisdictional operations will no longer be subject to cost-based regulation. On November 1, 2000, also in keeping with the requirements of the Act, Virginia Power filed with the Virginia Commission an Application for Approval of a Functional Separation Plan (the Plan). The Plan provides for the following:
PAGE 25
VIRGINIA ELECTRIC AND POWER COMPANY
PART II - OTHER INFORMATION
(Continued)
The Virginia Commission is expected to act on the Plan prior to January 1, 2002.
Interconnections
On May 18, 2000, FERC issued an Order on Compliance Filing and Requests for Rehearing and Clarification in response to the Alliance Companies' January 2000 application for rehearing and request for clarification and to the February 2000 compliance filing. The Order granted in part and denied in part the Alliance Companies' requests for rehearing and clarifications, and directed the Alliance Companies to make further filings to comply with certain
conditions and requirements of the Order. In September 2000, the Alliance Companies filed a response complying with the conditions and requirements of the FERC's previous order.
On July 19, 2000, the Virginia Commission issued a Final Order promulgating regulations governing the transfer of ownership or control of electric transmission assets to regional transmission entities (RTE). The regulations: (1) establish the elements of RTE essential to the public interest to be applied by the Virginia Commission in determining whether to authorize transfer of control of electric transmission facilities to RTE, (2) establish the filing requirements for entities seeking authorization to transfer the facilities, and (3) establish a schedule for such filings. In October 2000, we filed our application with the Virginia Commission pursuant to the RTE regulations seeking authorization to transfer control of our electric transmission facilities to the Alliance Regional Transmission Organization (Alliance RTO).
For additional information, see Future Issues and Other Information under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
PAGE 26
VIRGINIA ELECTRIC AND POWER COMPANY
PART II - OTHER INFORMATION
(Continued)
Item 6. Exhibits and Reports on Form 8-K
18 |
Letter re change in accounting principles (filed herewith). |
27 |
Financial Data Schedule (filed herewith). |
99 |
Virginia Electric and Power Company Application for Approval of Functional Separation Plan to the Virginia State Corporation Commission filed by Dominion Resources, Inc. on Form 8-K, dated November 2, 2000 (incorporated by reference). |
(b) Reports on Form 8-K:
None
PAGE 27
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
November 13, 2000 |
/s/ Steven A. Rogers |
|
Steven A. Rogers |
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