Draft 3/18/97
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-K
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(Mark One)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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Commission file number 1-8489
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Dominion Resources, Inc.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1229715
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
901 East Byrd Street
Richmond, Virginia 23219-4072
(Address of principal executive offices) (Zip Code)
(804) 775-5700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, no par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None:
(Title of Class)
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 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $7,382,370,433 at February 28, 1997, based on the closing price
of the Common Stock on such date, as reported on the composite tape by The Wall
Street Journal.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at February 28, 1997
Common Stock, no par value 183,412,930
DOCUMENTS INCORPORATED BY REFERENCE:
(a) Portions of the 1996 Annual Report to Shareholders for the fiscal year ended
December 31, 1996 are incorporated by reference in Parts I, II and IV
hereof.
(b) Portions of the 1997 Proxy Statement, dated March 7, 1997, are incorporated
by reference in Part III hereof.
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DOMINION RESOURCES, INC.
Item Page
Number Number
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PART I
1. Business
The Company...................................................... 1
Regulation....................................................... 3
Capital Requirements and Financing Program....................... 9
Rates............................................................ 9
Virginia Power Sources of Power.................................. 11
Virginia Power Sources of Energy Used and Fuel Costs............. 12
Interconnections................................................. 13
Future Sources of Power.......................................... 14
Competition and Strategic Initiatives............................ 15
Conservation and Load Management................................. 16
2. Properties......................................................... 16
3. Legal Proceedings.................................................. 16
4. Submission of Matters to a Vote of Security Holders................ 16
Executive Officers of the Registrant............................... 17
PART II
5. Market for the Registrant's Common Equity
and Related Stockholder Matters.................................. 18
6. Selected Financial Data............................................ 18
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 18
Management's Discussion and Analysis of Cash Flows
and Financial Condition........................................ 29
8. Financial Statements and Supplementary Data........................ 33
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 37
PART III
10. Directors and Executive Officers of the Registrant................. 37
11. Executive Compensation............................................. 37
12. Security Ownership of Certain Beneficial Owners and Management..... 37
13. Certain Relationships and Related Transactions..................... 37
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 38
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PART I
ITEM 1. BUSINESS
THE COMPANY
Dominion Resources, Inc. (Dominion Resources), organized in 1983, has its
principal office at 901 East Byrd Street, Richmond, Virginia 23219-4072,
telephone (804) 775-5700. The principal assets of Dominion Resources are its
investments in its subsidiaries.
At December 31, 1996, Dominion Resources owned all of the outstanding
common stock of its subsidiaries: Dominion Capital, Inc. (Dominion Capital);
Dominion Energy, Inc. (Dominion Energy) and Virginia Electric and Power Company
(Virginia Power), its largest subsidiary. Dominion Resources is currently exempt
from registration as a holding company under the Public Utility Holding Company
Act of 1935 (the 1935 Act).
On November 13, 1996, Dominion Resources announced its intention to make a
cash offer to purchase, through a newly created United Kingdom subsidiary, DR
Investments (UK) PLC (DR Investments (UK)), all of the outstanding shares of
East Midlands Electricity plc (East Midlands), a United Kingdom regional
electricity company, for a total purchase price of approximately $2.2 billion.
As of January 10, 1997, 140,298,528 shares of East Midlands, or approximately
70.7% of the shares outstanding, had been tendered and the offer was declared
unconditional, thereby committing DR Investments (UK) to purchase all East
Midlands shares validly tendered pursuant to the offer. Earlier DR Investments
(UK) had purchased 29,700,000 shares, or approximately 15% of East Midlands
outstanding shares. As of March 14, 1997, all the outstanding shares of East
Midlands have been acquired. The interim financing for the offer is in the form
of a short-term credit agreement and a revolving credit agreement, each with
Union Bank of Switzerland, New York Branch, as Administrative Agent and
NationsBank, N.A. as Syndication Agent, and is guaranteed by Dominion Resources.
In addition, DR Investments (UK) has issued Loan Notes in lieu of cash to
certain shareholders of East Midlands with Dominion Resources providing the
remainder of the consideration as equity. Dominion Resources expects the
permanent financing will be a combination of non-recourse debt, issued at a
subsidiary level, as well as equity provided by Dominion Resources. East
Midlands owns and operates the electricity distribution network in the East
Midlands region of England and provides power to approximately 2.3 million
businesses and homes. The company buys electricity from the U.K. competitive
pool and supplies it to all smaller business and domestic customers in its
franchise area and to larger business customers anywhere in the country on a
negotiated contract basis. East Midlands also operates small electricity
generation and gas supply businesses and an electrical contracting business.
Dominion Capital, established as a subsidiary of Dominion Resources in
1985, is a diversified investment and financial services company. The principal
assets of Dominion Capital are its joint venture with Household Commercial
Financial Services, Inc., First Source Financial, LLP, a middle market
commercial lender; Saxon Mortgage, Inc. and its affiliates, subsidiaries engaged
in the origination, servicing and securitization of residential mortgages;
Cambrian Capital, a merchant banking enterprise for emerging independent oil and
natural gas producers; a 50% limited partnership interest in a Louisiana
hydroelectric project; Dominion Lands, Inc., a subsidiary involved in planned
community real estate development and management; investments in marketable
securities and fixed income instruments; OptaCor Financial Services Company, a
consumer lender; and Rincon Securities, Inc., a subsidiary which holds a
diversified portfolio of preferred stocks. Dominion Capital also has investments
in affordable housing and a commercial real estate management company. On March
21, 1997, Dominion Capital completed the purchase of Household Commercial
Financial Services Inc. interest in First Source Financial, LLP.
Dominion Energy, established as a subsidiary of Dominion Resources in 1987,
is active in the nonutility electric power generation businesses outside the
territory served by Virginia Power and the development, exploration and
operation of oil and natural gas reserves. Dominion Energy is involved in power
projects in six states, Argentina, Bolivia, Belize and Peru, which total
approximately 2,561 Mw. Domestic power projects in operation throughout 1996 in
which Dominion Energy has an interest include three gas-fueled projects in
Texas, two geothermal projects, two gas-fueled projects and one solar project in
California, four small hydroelectric projects in New York, a waste coal-fueled
project in West Virginia and a waste wood-and coal- fueled project in Maine.
International power projects in operation throughout 1996 in which Dominion
Energy has an interest include one hydroelectric and one gas-fired project in
Argentina, two hydroelectric projects in Bolivia, a run-of-river hydroelectric
project in Belize and two hydroelectric projects and six diesel oil-fueled
projects in Peru. Dominion Energy is involved in oil and natural gas development
and exploration in the Appalachian Basin, the Michigan Basin, the Illinois
Basin, the Black Warrior Basin, the Uinta Basin, the Powder River Basin, the
Gulf Coast and the Mid-Continent, and owns oil and natural gas reserves in such
areas totaling approximately 460 billion cubic feet (BCFE). In 1996, Dominion
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Energy added approximately 105 BCFE of natural gas reserves. Production from
Dominion Energy's natural gas reserve holdings in 1996 totaled approximately 52
BCFE.
On March 29, 1996, a subsidiary of Dominion Energy, Kincaid Generation,
L.L.C. (LLC) entered into an asset sale agreement with Commonwealth Edison
Company (ComEd) to purchase ComEd's 1,108 Mw coal-fired Kincaid Power Station in
Central Illinois and entered into a power purchase agreement with ComEd to sell,
upon closing under the asset sale agreement, capacity and energy back to ComEd
for a period of 15 years. The closing under the asset sale agreement and
effectiveness of the power purchase agreement are subject to various regulatory
approvals and other conditions, including certain approvals from the Illinois
Commerce Commission (ICC) and the Federal Energy Regulatory Commission (FERC).
ComEd filed a petition for ICC approval and on November 27, 1996, a Hearing
Examiners' Proposed Order was issued recommending to the ICC that the
transaction be approved. Exceptions to that Report have been filed and are
pending before the ICC. The ICC may issue a final order by early spring. On July
26, 1996, the International Brotherhood of Electrical Workers, AFL-CIO, Local
Union 15 (IBEW) filed a complaint in Illinios state court requesting injunctive
relief to prevent the transaction. IBEW has claimed that the asset sale
agreement is in violation of an Illiniois statute concerning collective
bargaining agreements because the asset sale agreement does not state that LLC
will be subject to the current collective bargaining agreement between ComEd and
IBEW. The case was removed to the United States District Court for the Northern
District of Illinois. In February 1997, the Court issued an order granting LLC
and ComEd's motions for summary judgement and invalidating the Illinois statute.
The IBEW has appealed to the Seventh Circuit. The IBEW has also filed an unfair
labor practice charge with the National Labor Relations Board alleging failure
to bargain in good faith. Regulatory approval of various aspects of the
transaction have been requested and received from FERC. An additional filing
with FERC will be made after ICC approval is obtained. The present closing date
deadline under the asset sale agreement is June 30, 1997.
In August 1996, Dominion Energy, through wholly-owned subsidiaries,
acquired a 60% ownership and management interest in Empresa de Generacion
Electrica NorPeru S.A. (EGENOR). EGENOR is a generation company providing power
to Peru's northern region. The government-owned ElectroPeru S.A. and the
employees of EGENOR collectively retain a 40% interest in EGENOR. Dominion
Energy continues to assess sale opportunities for a portion of its interest in
EGENOR to a third party.
For additional information on the nonutility businesses, see Nonutility
Issues under FUTURE ISSUES in MANAGEMENT'S DISCUSSION AND ANALYSIS OF
OPERATIONS.
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 sells electricity to retail customers
(including governmental agencies) and to wholesale customers such as rural
electric cooperatives and municipalities. The Virginia service area comprises
about 65 percent of Virginia's total land area, but accounts for over 80 percent
of its population. As used herein, the term "Virginia Power" refers to the
entirety of Virginia Electric and Power Company, including, without limitation,
its Virginia and North Carolina operations, and all of its subsidiaries.
The electric utility industry in the United States is witnessing an
evolutionary trend toward less regulation and more competition. This is
evidenced by legislative and regulatory action at both the federal and state
level. To the extent that competition is either authorized or mandated and
regulation is eliminated or relaxed, electric utilities will no longer, in the
absence of appropriate legislative or regulatory action during the transition
period, be guaranteed an opportunity to recover their prudently-incurred costs
including their cost of capital, and utilities with costs that exceed the market
prices established by the competitive market will run the risk of suffering
losses, which may be substantial.
Virginia Power has responded to this evolution by undertaking cost-cutting
measures, engaging in re-engineering efforts of its core business processes, and
pursuing a strategic planning initiative (called Vision 2000) to encourage
innovative approaches to servicing traditional markets and to develop
appropriate methods by which to service future markets.
A significant part of Virginia Power's strategy relies on developing
"non-traditional" business opportunities designed to provide growth in earnings
by leveraging existing core competencies. Virginia Power has established
separate business units for its nuclear operations, fossil and hydroelectric
operations, commercial operations, and its energy services business in an effort
to pursue these opportunities to grow by offering multiple markets a broad
portfolio of energy-related products and services.
In addition, Virginia Power is actively pursuing opportunities to expand
its market reach through strategic alliances with partners whose strengths,
market position and strategies complement Virginia Power's and where
efficiencies can be gained through the alliance.
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For additional information on the changing utility industry and Virginia
Power's strategy see COMPETITION AND STRATEGIC INITIATIVES below and Competition
under FUTURE ISSUES in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Virginia Power has franchises or permits for electric operations in
substantially all cities and towns now served. It also has certificates of
convenience and necessity from the State Corporation Commission of Virginia (the
Virginia Commission) for service in all territory served at retail in Virginia.
The North Carolina Utilities Commission (the North Carolina Commission) has
assigned territory to Virginia Power for substantially all of its retail service
outside certain municipalities in North Carolina.
Virginia Power strives to operate its generating facilities in accordance
with prudent utility industry practices and in conformity with applicable
statutes, rules and regulations. Like other electric utilities, Virginia Power's
generating facilities are subject to unanticipated or extended outages for
repairs, replacements or modifications of equipment or otherwise to comply with
regulatory requirements. Such outages may involve significant expenditures not
previously budgeted, including replacement energy costs.
The matters discussed in this annual report on Form 10-K 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 contained 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. In addition to certain contingency matters (and
their respective cautionary statements) discussed elsewhere in this report, the
FORWARD-LOOKING INFORMATION section contained in MANAGEMENT'S DISCUSSION AND
ANALYSIS OF OPERATIONS indicates some important factors that could cause actual
results or outcomes to differ materially from those addressed in the
forward-looking discussions.
Dominion Resources and its subsidiaries had 11,174 full-time employees as
of December 31, 1996.
REGULATION
General
In a wide variety of matters in addition to rates, Virginia Power is
presently subject to regulation by the Virginia Commission and the North
Carolina Commission, the Environmental Protection Agency (EPA), Department of
Energy (DOE), Nuclear Regulatory Commission (NRC), FERC, the Army Corps of
Engineers, and other federal, state and local authorities. Compliance with
numerous laws and regulations increases Virginia Power's operating and capital
costs by requiring, among other things, changes in the design and operation of
existing facilities and changes or delays in the location, design, construction
and operation of new facilities. The commissions regulating Virginia Power's
rates have historically permitted recovery of such costs.
Virginia Power may not construct, or incur financial commitments for
construction of, any substantial generating facilities or large capacity
transmission lines without the prior approval of state and federal governmental
agencies having jurisdiction over various aspects of its business. Such
approvals relate to, among other things, the environmental impact of such
activities, the relationship of such activities to the need for providing
adequate utility service and the design and operation of proposed facilities.
Various provisions of the Energy Policy Act of 1992 (the Energy Act) that
could affect Virginia Power include those provisions encouraging the development
of non-utility generation, giving FERC authority to order transmission access
for wholesale transactions, requiring higher energy efficiency and alternative
fuels use, restructuring of nuclear plant licensing procedures and requiring
state regulatory authorities to give full rate treatment for the effects of
conservation and demand management programs, including the effects of reduced
sales. While the full impact of the Energy Act on Virginia Power cannot at this
time be quantified, it is likely, over time, to be significant.
The Virginia General Assembly, during the 1996 session, adopted Senate
Joint Resolution No. 118, which created a joint legislative subcommittee to
study competition and restructuring in the electric utility industry. The
subcommittee conducted public hearings and met at various times throughout the
year. The 1997 Virginia General Assembly adopted Senate Joint Resolution No.
259, which would continue the existence of the joint subcommittee for an
additional year and request that the
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Staff of the Virginia Commission provide by November 7, 1997, a draft of a
working model for the future structure of the electric utility industry in
Virginia, statutory or regulatory changes appropriate for the model, and an
appropriate timetable and transition for implementation of the model. The
Virginia Commission has commenced its work in response to this request.
In connection with the offer for East Midlands and in order to obtain
certifications from the Virginia Commission and the North Carolina Commission
necessary for the maintenance of Dominion Resources' exemption from the 1935
Act, as amended, notwithstanding the acquisition of East Midlands, Dominion
Resources and Virginia Power proffered on October 31, 1996 an Undertaking and
Covenant to such regulatory agencies for the benefit of, and enforceable by,
such agencies. The Undertaking and Covenant provides, among other things, that
Virginia Power will have no role in the financing of the acquisition of East
Midlands, whether as primary obligor or guarantor, nor will Virginia Power or
Dominion Resources agree in any way to obligate Virginia Power to commit funds
to maintain the financial viability of East Midlands or to become liable for any
debts of East Midlands. Further, Dominion Resources agreed that following the
East Midlands acquisition, it would reduce and maintain its Aggregate Investment
to no more than 35% of its consolidated net worth within 180 days of the East
Midlands acquisition. For purposes of the Undertaking and Covenant, "Aggregate
Investment" means all amounts invested in exempt wholesale generators located
outside the United States and in foreign utilities, in the form of equity, or
debt which is recourse, directly and indirectly, to Dominion Resources, and
consolidated net worth means all common equity of Dominion Resources.
The Undertaking and Covenant imposes various reporting obligations on
Dominion Resources and Virgina Power designed to assure compliance with the
Undertaking and Covenant and creates remedies for its violation, including,
without limitation, authorization for the agencies to order partial divestiture
by Dominion Resources of any Aggregate Investment which is in excess of the 35%
limitation.
Virginia
On September 18, 1995, the Virginia Commission established a proceeding to
review and consider its policy regarding restructuring of, and competition in,
the electric utility industry. The Commission Staff issued its Report on July
31, 1996. The Report contained 14 recommendations, including continued
monitoring of wholesale and retail competition in the industry, increased
monitoring of service quality, preservation of state jurisdiction over retail
service, improved price signals, further study of stranded cost recovery, and
increased efforts to renegotiate non-utility generation contracts. On September
23, 1996, Virginia Power filed its comments on the Staff Report and a request
for oral argument. The comments generally supported most of the Staff's specific
recommendations as well as its overall recommendation that Virginia should
pursue a cautious and measured approach to the adoption of competitive
initiatives, but Virginia Power stated that it would continue to pursue its
Vision 2000 restructuring (see Note O to the NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS in the 1996 Annual Report to Shareholders, incorporated herein by
reference). The comments stated that the question of recovery of potential
stranded costs should be addressed now. On November 8, 1996, Virginia Power gave
the Virginia Commission notice that it intended to institute a proceeding under
a recently enacted statute that allows the Virginia Commission to consider
alternative forms of regulation. On November 12, 1996, the Commission directed
its staff and electric utilities in Virginia to provide additional information
relevant to potential changes in and possible emergence of competition in the
electric industry. It directed utilities that have contracts for non-utility
generation that impacts their Virginia jurisdictional rates to file, by June 1,
1997, a report detailing efforts to restructure contracts with non-utility
generators (NUGs) to mitigate the potentially negative effect on current and
future rates, and subsequently to file quarterly reports detailing continuing
efforts in this area. The Commission has established separate working groups to
consider the issues of reliability, costs and benefits of competition, stranded
costs and benefits, models for industry restructuring, and environmental
matters. Each working group includes a Staff member and representatives of
consumer groups, industrial customers, non-utility generators, utilities and
cooperatives.
On November 12, 1996, the Commission also instituted a new proceeding and
directed Virginia Power to provide other information by March 31, 1997.
Information required to be filed includes detailed cost-of-service studies,
suggested adjustments for eliminating cross subsidies among customer classes,
methods for improving price signals to customers, illustrative tariffs that
unbundle rates, analysis of reserve margin requirements, analysis of whether
incremental capacity needs could be met by a competitive market, evaluation of
the capacity solicitation process, evaluation of conservation and load
management programs and other information. The Commission also directed that any
proposed alternative form of regulation be filed in the newly instituted
proceeding, and required that a 1996 calendar year be used as the test period,
with an anticipated rate year beginning 150 days after the date of filing. On
March 7, 1997, in this proceeding and in a separate Annual Information
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Filing proceeding, the Commission entered an order providing that Virginia
Power's rates shall become interim rates subject to refund as of March 1, 1997.
On March 24, 1997, Virginia Power filed a proposed alternative regulatory
plan with the Virginia Commission, in which it proposes a freeze of present
rates through December 31, 2002, during which a portion of earnings above the
approved level would be used to accelerate the write-off of generation-related
regulatory assets and mitigate the costs associated with payments under power
purchase contracts with NUGs. Virginia Power also seeks approval of the
principle of stranded cost recovery as well as approval of a Transition Cost
Charge mechanism by which costs that may become stranded at the onset of
competition will be recoverable from customers who elect to purchase their power
in the competitive market if retail competition is allowed in Virginia. The
Commission has not established a procedural schedule in this case, and the
extent to which it will grant Virginia Power's request cannot be predicted. For
a more detailed discussion of competition and the recovery of stranded costs,
see Competition under FUTURE ISSUES in MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
On December 18, 1995, Virginia Power applied to the Virginia Commission for
approval of arrangements with Chesapeake Paper Products Company (CPPC), under
which Virginia Power would facilitate the design, construction and financing of
a cogeneration plant to meet CPPC's energy requirements for its industrial
processes at its plant in West Point, Virginia. A hearing has been held, and
briefs have been filed. Several parties opposed the arrangements by which
Virginia Power would provide gas sales, fuel management and fuel procurement
services to the plant as being anticompetitive and beyond the Virginia Power's
corporate and regulatory authority. Briefs were filed on January 6, 1997. After
consideration of briefs, a hearing examiner's report will be issued.
On May 29, 1996, Virginia Power filed an Application with the Virginia
Commission seeking authority to implement a monitoring program that requires
certain non-utility generators to provide certain information sufficient to
determine continued compliance with the "Qualifying Facility" (QF) requirements
of the Public Utility Regulatory Policies Act of 1978 (PURPA). On October 10,
1996, the Commission Staff filed its brief concluding that the Commission had
legal authority to require QFs to provide it with operating data and to adopt a
monitoring program. On December 18, 1996, the Staff filed a report generally
supporting the Application. On December 30, 1996, Virginia Power filed its
response requesting that the Commission adopt the Staff conclusions.
On June 7, 1996, Virginia Power filed an application with the Virginia
Commission to purchase a gas-fired combined cycle generator from Richmond Power
Enterprise, L.P. (RPE) and to enter into a purchased power contract with RPE and
Enron Power Marketing, Inc. (EPMI) without competitive bidding. Under this
proposal, Virginia Power will purchase the generator, at a price of
approximately $20 million, and the power purchase and operating agreement (PPOA)
will be amended to reduce capacity payments, shorten the term of the agreement
and provide for sales of capacity and energy by RPE's assignee, EPMI, to
Virginia Power from sources outside Virginia Power's service territory rather
than from the generator. Virginia Power estimates this arrangement will result
in a savings of $63 million over the life of the existing PPOA. The Staff
supported the application, and the Commission granted approval on November 18,
1996. On January 15, 1997, FERC issued the necessary approvals. The purchase was
concluded on February 25, 1997.
On October 8, 1996, Virginia Power filed with the Virginia Commission an
application for authority to provide interexchange non-switched dedicated
telecommunication services throughout Virginia. If the application is granted,
Virginia Power will be authorized to provide a range of telecommunications
services, including private line and special access services and high capacity
telecommunications services. The application is opposed by the City of Richmond
and several telecommunications providers have intervened neither supporting nor
opposing the application. Virginia Power filed its brief on March 7, 1997
supporting its authority to offer the telecommunications services and responding
to the positions taken by the other parties.
On November 8, 1996, the Virginia Commission approved arrangements for
services and transfers of assets between Virginia Power and A&C Enercom, Inc., a
wholly-owned subsidiary of Virginia Power that provides energy services to
utility customers.
On February 7, 1997, Virginia Power filed an application with the Virginia
Commission requesting approval of arrangements between it and a wholly-owned
subsidiary, Virginia Power Services, Inc., (VPS), by which Virginia Power would
provide to VPS services that would enable Virginia Power Nuclear Services
Company (VPN), a VPS subsidiary, to furnish nuclear management and operation
services to electric utilities seeking assistance in the management and
operation of their nuclear generating facilities. The arrangements contemplate
the possibility of the creation of additional subsidiaries of VPS that would
provide other unregulated services, such as energy services, to third parties
seeking such services. VPN has
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executed a Letter of Intent with Northeast Nuclear Energy Company to provide
management services for Northeast Utilities' Millstone Unit 2 nuclear plant.
North Carolina
On May 15, 1996, the North Carolina Commission issued an order initiating
an investigation of emerging issues in the restructuring of the electric
industry. As ordered, Virginia Power filed comments on July 16, 1996, addressing
the implications of FERC Order No. 888, Promoting Wholesale Competition Through
Open Access Non-discriminatory Transmission Services by Public Utilities.
FERC
On April 24, 1996, FERC issued final rules on open access transmission
service, stranded costs, standards of conduct and open access same-time
information systems (OASIS). On July 9, 1996, Virginia Power filed an open
access transmission service tariff in compliance with FERC's Order No. 888.
Also, in compliance with FERC's directive, Virginia Power's OASIS became
operational and company-filed standards of conduct requiring separation of
transmission operations/reliability functions from wholesale merchant/marketing
functions became effective on January 3, 1997. Virginia Power also made filings
to comply with FERC's directive that, effective January 1, 1997, utilities no
longer make bundled sales of transmission and generation services in economy
energy transactions. In certain of those filings, Virginia Power canceled or
committed not to use the economy energy rate schedules contained in
interconnection agreements that Virginia Power has with neighboring utilities.
With regard to its Wholesale Power Sales Tariff, Virginia Power filed amendments
to that tariff to unbundle the bundled economy rates contained therein. On March
4, 1997, FERC issued Order No. 888-A, in which it addressed requests for
rehearing of Order No. 888. Order No. 888-A essentially reaffirms the basic
principles of Order No. 888 and clarifies and makes limited modifications to
Order No. 888. Parties seeking judicial review of Order Nos. 888 and 888-A must
file petition for review with the appropriate United States Court of Appeal by
May 5, 1997. For a discussion of the status of Virginia Power's Open Access
Transmission Tariff filing, see ITEM 1, RATES, FERC below.
FERC also issued a notice of proposed rulemaking (NOPR) proposing
replacement of open access tariffs with a capacity reservation tariff by
December 31, 1997.
For additional discussion of Open Access issues see COMPETITION AND
STRATEGIC INITIATIVES below and Competition under FUTURE ISSUES in MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
On July 31, 1996, FERC denied in part and granted in part, LG&E
Westmoreland Southampton's (Southampton) request for a waiver of the
Commission's operating requirements for QFs under PURPA. Southampton owns and
operates a 62.6 Mw cogeneration facility located in Franklin, Virginia and sells
the output of the facility to Virginia Power. FERC's decision preserved
Southampton's QF status under the Public Utility Holding Company Act, but
refused to waive Southampton's violation of the QF operating standards. The
Order provided that Southampton refund to Virginia Power the difference between
the amount that Virginia Power paid to Southampton in 1992 under its QF contract
and a Commission-approved rate equal to Virginia Power's incremental cost of
economy energy during 1992. On August 23, 1996, Southampton filed a Motion for
Clarification, and on August 30, 1996, it filed a Request for Rehearing.
Virginia Power filed responses to each Southampton pleading. On September 30,
1996, FERC issued an order granting rehearing for the purpose of further
consideration. On October 15, 1996, Virginia Power filed the data requested by
the FERC order showing Virginia Power's incremental cost of economy energy
during each hour of 1992. On October 30, 1996, Southampton filed a response to
Virginia Power's data filing. Southampton also filed a Petition for Review on
September 23, 1996, against FERC in the United States Court of Appeals for the
D.C. Circuit. Virginia Power filed a Motion to Intervene, which the Court
granted on November 25, 1996. On November 27, 1996, Southampton initiated a
separate rate proceeding at FERC seeking approval of the contract rates paid to
it by Virginia Power in 1992 only. On December 26, 1996, Virginia Power filed a
Motion to Intervene, Motion to Reject and Terminate Proceeding, and Protest. On
January 10, 1997, Southampton filed its answer.
Environmental
From time to time, Virginia Power may be identified as a potentially
responsible party (PRP) with respect to a Superfund site. EPA (or a state) can
either (a) allow such a party to conduct and pay for a remedial investigation,
feasibility study and remedial action or (b) conduct the remedial investigation
and action and then seek reimbursement from the parties. Each party can be held
jointly, severally and strictly liable for all costs, but the parties can then
bring contribution actions against each other and seek reimbursement from their
insurance companies. As a result of the Superfund Act or other laws or
6
<PAGE>
regulations regarding the remediation of waste, Virginia Power may be required
to expend amounts on remedial investigations and actions. Although Virginia
Power is not currently aware of any sites or events, including those sites
currently identified, likely to result in significant liabilities, such amounts,
in the future, could be significant.
Permits under the Clean Water Act and state laws have been issued for all
of Virginia Power's steam generating stations now in operation. Such permits are
subject to reissuance and continuing review.
The Clean Air Act, as amended in 1990, requires Virginia Power to reduce
its emissions of sulfur dioxide (SO(2)) and nitrogen oxides (NO(x)). Beginning
in 1995, the SO(2) reduction program is based on the issuance of a limited
number of SO(2) emission allowances, each of which may be used as a permit to
emit one ton of SO(2) into the atmosphere or may be sold to someone else. The
program is administered by the EPA.
Virginia Power installed SO(2) control equipment on Unit 3 at Mt. Storm
Power Station during 1994. Additional plans for SO(2) control involve switching
to lower sulfur coal, purchase of emission allowances and additional SO(2)
controls. Maximum flexibility and least-cost compliance will be maintained
through annual studies. Virginia Power has completed its compliance plan for
NO(x) control, with the exception of some additional studies concerning Phase
II, for which EPA issued final regulations in December 1996, and ozone control
requirements, for which final regulations have not yet been promulgated.
In 1996 Virginia Power installed NO(x) controls on Possum Point Unit 4 and
at Mt. Storm Unit 3 at a total approximate cost of $10 million. Virginia Power
plans to install additional NO(x) controls and modify existing controls at Mt.
Storm Units 1 and (2) in 1997, and to seek alternative emission limitations from
EPA for all three Mt. Storm Units. Virginia Power has notified EPA of its
decision (called "early election") to begin complying with Phase I NO(x) limits
at ten of its units in Virginia in 1997, three years earlier than otherwise
required. As a result, and provided that Phase I compliance limits are met, the
units will not be subject to more stringent Phase II limits until 2008.
In order to assist the Virginia Department of Environmental Quality in
maintaining good air quality in the Richmond and Hampton Roads regions, and to
avoid the necessity of more stringent regulations,Virginia Power made voluntary
commitments in 1996 to cap NO(x) emissions at its Chesterfield and Yorktown
Power Stations and the Chesapeake Energy Center beginning in 2000.
Capital expenditures on Clean Air Act compliance over the next five years
are projected to be approximately $21 million. Changes in the regulatory
environment, availability of allowances, and emissions control technology could
substantially impact the timing and magnitude of compliance expenditures.
The Clean Air Act amendments also require Virginia Power to obtain
operating permits for all major generating facilities. Permit applications have
been submitted, and deemed complete by the regulatory authorities, for the Mt.
Storm and North Branch power stations. Applications for the Virginia stations
are expected to be filed within the next two years.
Virginia Power continues to work with the West Virginia Office of Air
Quality concerning opacity requirements applicable to the Mt. Storm Power
Station.
In regard to ambient air quality standards, the EPA recently announced
proposals to add a fine particulate matter standard and to revise the ozone
standard, which could potentially result in significant expenditures to install
controls to reduce sulfur dioxide and nitrogen oxide emissions.
In 1993 the United Nations' Framework Convention on Climate Change, also
called The Global Warming Treaty, which was signed by more than 150 countries,
including the United States, became effective. The objective of the treaty is
the stabilization of greenhouse gas concentrations at a level that would prevent
manmade emissions from interfering with the climate system.
Although there is considerable scientific disagreement concerning the
effects of greenhouse gas emissions on global climate, the United States and
many other nations are supporting an international treaty, to be finalized in
December 1997, containing legally binding emissions targets to be achieved
between 2010 and 2020. The reduction in greenhouse gas emissions necessary to
achieve these targets is likely to have a substantial financial impact on
companies that consume or produce fossil fuel derived electric power, including
Virginia Power.
For additional information on Environmental Matters, see Note Q to the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual Report to
Shareholders and ITEM 3. LEGAL PROCEEDINGS below.
7
<PAGE>
Nuclear
All aspects of the operation and maintenance of Virginia Power's nuclear
power stations are regulated by the NRC. Operating licenses issued by the NRC
are subject to revocation, suspension or modification, and operation of a
nuclear unit may be suspended if the NRC determines that the public interest,
health or safety so requires.
From time to time, the NRC adopts new requirements for the operation and
maintenance of nuclear facilities. In many cases, these new regulations require
changes in the design, operation and maintenance of existing nuclear facilities.
If the NRC adopts such requirements in the future, it could result in
substantial increases in the cost of operating and maintaining Virginia Power's
nuclear generating units.
On July 18, 1995, the Virginia Commission instituted an investigation
regarding spent nuclear fuel disposal. It directed interested parties to provide
comments on legal and public policy issues related to spent nuclear fuel storage
and disposal, including, but not limited to, whether to allow utilities to
recover from ratepayers some or all money paid to the Nuclear Waste Fund
established by the Nuclear Policy Act of 1982, whether to establish an escrow
account for spent nuclear fuel storage and/or disposal, and whether utilities
should develop their own plans for storage and disposal of spent nuclear fuel.
The Commission's Order Establishing Investigation recites that Virginia Power
has paid $343.6 million to the Nuclear Waste Fund through 1994, including $44.8
million in 1994, and that future payments could exceed $400 million assuming its
North Anna and Surry reactors continue to operate through the end of their
existing operating licenses. Virginia Power and others filed comments on October
31, 1995. On February 27, 1996, the Commission Staff filed its Report
recommending that adoption of a definitive policy on the spent nuclear fuel
disposal fee be delayed until (1) a ruling is forthcoming on pending litigation
which seeks to impose an obligation on the federal government to begin
acceptance of spent nuclear fuel no later than January 31, 1998, (2) the outcome
of proposed legislation which would amend the Nuclear Waste Policy Act to
require the development of a centralized interim storage facility has been
determined, and (3) a vision of the likely outcome of the electric utility
industry's restructuring efforts has been more fully conceptualized. The
Virginia Commission entered an order on October 7, 1996 in its proceeding
regarding spent nuclear fuel disposal in which it directed that the proceeding
be consolidated with Virginia Power's pending fuel cost recovery proceeding. On
March 7, 1997, the Commission Staff filed a motion requesting that the
Commission remove the spent nuclear fuel disposal issue from Virginia Power's
pending fuel factor proceeding and return it to a separate proceeding.
For additional information on the Virginia fuel factor proceeding, see ITEM
1, RATES, Virginia, below.
On January 31, 1997, Virginia Power joined thirty-five other utility
petitioners in filing a lawsuit against the DOE in the U.S. Court of Appeals for
the District of Columbia, asking the court to authorize suspension of payments
to the Nuclear Waste Fund and to authorize payment into escrow those fees that
are collected from customers until the DOE begins accepting used fuel.
8
<PAGE>
CAPITAL REQUIREMENTS AND FINANCING PROGRAM
Capital Requirements
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL
CONDITION on pages 30 through 32.
Construction and Nuclear Fuel Expenditures
Virginia Power's estimated construction and nuclear fuel expenditures,
including Allowance for Funds Used During Construction (AFC), for the three-year
period 1997-1999, total $1.5 billion. It has adopted a 1997 budget for
construction and nuclear fuel expenditures as set forth below:
<TABLE>
<CAPTION>
Estimated 1997
Expenditures
(millions)
--------------
<S> <C>
Production:
Clean Air Act....................................................................... $ 8
Other............................................................................... 53
General Support Facilities............................................................ 72
Transmission.......................................................................... 46
Distribution.......................................................................... 253
Nuclear Fuel.......................................................................... 97
--------------
Total Construction Requirements and Nuclear Fuel.................................... 529
AFC.............................................................................. 4
--------------
Total Expenditures.................................................................. $533
--------------
--------------
</TABLE>
Financing Program
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL
CONDITION on pages 29 through 32.
RATES
Virginia Power was subject to rate regulation in 1996 as follows:
<TABLE>
<CAPTION>
1996
----------------------
Percent Percent
of of
Revenues Kwh Sales
-------- ---------
<S> <C>
Virginia retail:
Non-Governmental customers.................... Virginia Commission 77% 70%
Governmental customers........................ Negotiated Agreements 10 11
North Carolina retail........................... North Carolina Commission 5 4
Wholesale:
Requirements -- Sales for Resale.............. FERC 4 5
Non-Requirements -- Sales for Resale.......... FERC 4 10
--- ---
100% 100%
--- ---
--- ---
</TABLE>
Substantially all of Virginia Power's electric sales are subject to
recovery of changes in fuel costs either through fuel adjustment factors or
periodic adjustments to base rates, each of which requires prior regulatory
approval.
Each of these jurisdictions has the authority to disallow recovery of costs
it determines to be excessive or imprudently incurred. Various cost items may be
reviewed on occasion, including costs of constructing or modifying facilities,
on-going purchases of capacity or providing replacement power during generating
unit outages.
The principal rate proceedings in which Virginia Power was involved in 1996
are described below by jurisdiction. Rate relief obtained by Virginia Power is
frequently less than requested.
9
<PAGE>
FERC
On May 14, 1996, the Department of the Navy, on behalf of the Department of
Defense (DOD), filed a Petition requesting FERC to declare DOD a wholesale
customer within Virginia. Alternatively, the Petition requested FERC to order
Virginia Power to wheel to DOD installations in Virginia. An agreement in
principle was subsequently reached for a new power supply contract, and the Navy
moved to withdraw its Petition, stating that the concerns expressed in the
Petition had been resolved. On July 15, 1996, three power marketers filed a
protest with DOD challenging the sole source negotiation and impending contract
with Virginia Power. The Department of the Navy, Naval Facilities Engineering
Command issued a decision on October 22, 1996, denying the protest, and finding
that competition between providers other than Virginia Power for the provisions
of electrical service to DOD facilities and activities within Virginia Power's
service territory in Virginia is not currently available. The Navy also noted
that the impending contract was not in contemplation of a new acquisition, but
was the result of periodic review of, and negotiation of a new rate under an
existing indefinite term contract. The supplemental agreement incorporating the
new rate was executed on October 30, 1996.
In compliance with FERC's Order No. 888, on July 9, 1996, Virginia Power
filed an open access transmission service tariff, which became effective on July
9, 1996. On October 10, 1996, FERC issued a procedural order, scheduling a
hearing for April 28, 1997. Virginia Power and all parties reached a settlement
of issues raised in the proceeding, and on March 20, 1997, those parties jointly
filed with FERC the Settlement Agreement and Motion to Certify the Settlement
Agreement. Virginia Power is awaiting action on that motion by the presiding
Administrative Law Judge.
Virginia
In 1995, the Virginia Commission authorized Virginia Power to implement a
pilot program providing a real time pricing (RTP) option for its industrial
customers with loads in excess of 10 Mw. Under this option, all or a portion of
an industrial customer's load growth would be supplied at projected incremental
hourly production costs, adjusted for line losses and taxes, plus a margin of
0.6 cents per Kwh. Additionally, a marginal cost-based Generation Capacity Adder
and a Transmission Capacity Adder would be applicable during those hours when
the Virginia Power system is approaching its forecasted annual peak demand. Up
to 20% of an industrial customer's existing load could be served on an RTP basis
if the customer
executes a five-year contract for such service. On July 24, 1996, the Commission
expanded the RTP schedule to make it available to commercial and industrial
customers with loads above 5 Mw.
On July 31, 1996, Virginia Power filed with the Virginia Commission a
revised Schedule 19, which governs purchases from cogenerators and small power
producers of 100 kW or less. The schedule, which contains rates substantially
lower than those previously specified, became effective on an interim basis on
January 1, 1997. A hearing was held on January 30, 1997. The parties filed
briefs on March 14, 1997.
On October 7, 1996, the Virginia Commission ordered that its investigation
regarding spent nuclear fuel disposal be consolidated with Virginia Power's next
fuel recovery proceeding. On October 21, 1996, Virginia Power filed an
application with the Commission to increase its fuel cost recovery by
approximately $48.2 million. On November 12, 1996, the Commission ordered that
the hearing on the consolidated proceedings be delayed from November 27, 1996 to
February 27, 1997, and that Virginia Power's proposed fuel factor become
effective on December 1, 1996. On January 8, 1997, the Commission postponed the
hearing to April 17, 1997. Any potential adjustments to the factor ordered after
hearing will be reflected prospectively after entry of the final order. On March
7, 1997, the Commission Staff filed a motion requesting that the Commission
remove the spent fuel disposal issue from Virginia Power's pending fuel factor
proceeding and return it to a separate proceeding.
North Carolina
On September 13, 1996, Virginia Power filed an application with the North
Carolina Utilities Commission for a $3.2 million decrease in fuel rates. On
December 10, 1996, the Commission approved a $3.3 million decrease, effective
January 1, 1997.
On November 4, 1996, Virginia Power filed for approval of a new Schedule 19
which governs purchases from cogenerators and small power producers. Virginia
Power proposed rates substantially lower than those previously specified as well
as proposed to reduce the applicability threshold to 100 kW and shorten the
maximum term of contracts under Schedule 19 to five years.
10
<PAGE>
VIRGINIA POWER SOURCES OF POWER
Virginia Power Generating Units
<TABLE>
<CAPTION>
Type Summer
Years of Capability
Name of Station, Units and Location Installed Fuel Mw
----------------------------------- -------- --------------- ----------
<S> <C>
Nuclear:
Surry Units 1 & 2, Surry, Va..................................................... 1972-73 Nuclear 1,602
North Anna Units 1 & 2, Mineral, Va.............................................. 1978-80 Nuclear 1,790(a)
----------
Total nuclear stations........................................................ 3,392
----------
Fossil Fuel:
Steam:
Bremo Units 3 & 4, Bremo Bluff, Va. .......................................... 1950-58 Coal 227
Chesterfield Units 3-6, Chester, Va. ......................................... 1952-69 Coal 1,250
Clover Units 1 & 2, Clover, Va. .............................................. 1995-96 Coal 882(b)
Mt. Storm Units 1-3, Mt. Storm, W. Va. ....................................... 1965-73 Coal 1,587
Chesapeake Units 1-4, Chesapeake, Va. ........................................ 1953-62 Coal 595
Possum Point Units 3 & 4, Dumfries, Va. ...................................... 1955-62 Coal 322
Yorktown Units 1 & 2, Yorktown, Va. .......................................... 1957-59 Coal 326
Possum Point Units 1, 2, & 5, Dumfries, Va. .................................. 1948-75 Oil 929
Yorktown Unit 3, Yorktown, Va. ............................................... 1974 Oil & Gas 818
North Branch Unit 1, Bayard, W. Va. .......................................... 1994 Waste Coal 74(c)
Combustion Turbines:
35 units (8 locations)........................................................... 1967-90 Oil & Gas 1,019
Combined Cycle:
Chesterfield Units 7 & 8, Chester, Va. .......................................... 1990-92 Oil & Gas 397
----------
Total fossil stations......................................................... 8,426
Hydroelectric:
Gaston Units 1-4, Roanoke Rapids, N.C. .......................................... 1963 Conventional 225
Roanoke Rapids Units 1-4, Roanoke Rapids, N.C. .................................. 1955 Conventional 96
Other............................................................................ 1930-87 Conventional 3
Bath County Units 1-6, Warm Springs, Va. ........................................ 1985 Pumped Storage 1,260(d)
----------
Total hydro stations.......................................................... 1,584
----------
Total Virginia Power generating unit capability............................... 13,402
----------
Net Utility Purchases.............................................................. 1,030
Non-Utility Generation............................................................. 3,509
----------
Total Capability.............................................................. 17,941
----------
----------
</TABLE>
- ---------------
(a) Includes an undivided interest of 11.6 percent (208 Mw) owned by Old
Dominion Electric Cooperative (ODEC).
(b) Includes an undivided interest of 50 percent (441 Mw) owned by ODEC.
(c) Effective January 25, 1996, this unit was placed in a cold reserve status.
(d) Reflects Virginia Power's 60 percent undivided ownership interest in the
2,100 Mw station. A 40 percent undivided interest in the facility is owned by
Allegheny Generating Company, a subsidiary of Allegheny Power System, Inc. (AP).
Virginia Power's highest one-hour integrated service area summer peak
demand of 14,003 Mw was established on August 2, 1995, and the all-time high
one-hour integrated winter peak demand of 14,910 Mw was established on February
5, 1996.
11
<PAGE>
VIRGINIA POWER SOURCES OF ENERGY USED AND FUEL COSTS
The average fuel cost of system energy output is shown below:
<TABLE>
<CAPTION>
Mills Per Kilowatt-hour
-------------------------
1996 1995 1994
----- ----- -----
<S> <C>
Nuclear............................. 4.48 4.92 4.89
Coal................................ 14.32 14.44 14.61
Oil................................. 27.75 25.11 23.00
Purchased power, net................ 21.99 22.50 23.99
Other............................... 26.98 23.82 25.46
Average fuel cost................... 13.47 13.73 14.02
</TABLE>
System energy output is shown below:
<TABLE>
<CAPTION>
Estimated Actual
--------- ----------------------
1997 1996 1995 1994
--------- ---- ---- ----
<S> <C>
Nuclear(*).......................... 33% 32 % 32 % 34 %
Coal(**)............................ 40 38 39 36
Oil................................. 1 1 3
Purchased power, net................ 24 27 25 23
Other............................... 3 2 3 4
--- ---- ---- ----
100% 100 % 100 % 100 %
--- ---- ---- ----
--- ---- ---- ----
</TABLE>
- ---------------
(*) Excludes ODEC's 11.6 percent ownership interest in the North Anna Power
Station.
(**) Excludes ODEC's 50 percent ownership interest in the Clover Power Station
Nuclear Operations and Fuel Supply
In 1996, Virginia Power's four nuclear units achieved a combined capacity
factor of 88.2 percent.
Virginia Power utilizes both long-term contracts and spot purchases to
support its needs for nuclear fuel. Virginia Power's nuclear fuel supply and
related services are expected to be adequate to support current and planned
nuclear generation requirements. Virginia Power continually evaluates worldwide
market conditions in order to obtain an adequate nuclear fuel supply. Current
agreements, inventories and market availability should support planned fuel
cycles throughout the remainder of the 1990s.
On December 17, 1996, the DOE indicated that it will have to delay the
acceptance of spent fuel scheduled to begin in 1998. On-site spent nuclear fuel
storage at the Surry Power Station is adequate for Virginia Power's needs until
the DOE begins accepting spent fuel. The North Anna Power Station will require
additional spent fuel storage capacity in 1998. Virginia Power submitted a
license application to the NRC in May 1995 for such a facility at North Anna.
For details regarding nuclear insurance and certain related contingent
liabilities as well as a NRC rule that requires proceeds from certain insurance
policies to be used first to pay stabilization and decontamination expenses, see
Note Q to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual
Report to Shareholders.
Fossil Operations and Fuel Supply
The commercial operation of Clover Power Station Unit 2 began on March 28,
1996. The summer capability of both Units 1 and 2 have been determined to be 441
Mw.
Virginia Power's fossil fuel mix consists of coal, oil and natural gas. In
1996, Virginia Power consumed approximately 12 million tons of coal. As with
nuclear fuel, Virginia Power utilizes both long-term contracts and spot
purchases to support its needs. Virginia Power presently anticipates that
sufficient coal supplies at reasonable prices will be available for the
remainder of the 1990s. Current projections for an adequate supply of oil remain
favorable, barring unusual international events or extreme weather conditions
which could affect both price and supply.
Virginia Power uses natural gas as needed throughout the year for two
combined cycle units and at several combustion turbine units. For winter usage
at the combined cycle sites, gas is purchased and stored during the summer and
fall and consumed during the colder months when gas supplies are not available
at favorable prices. Virginia Power has firm transportation contracts for the
delivery of gas to the combined cycle units. Current projections indicate gas
supplies will be available for the next several years.
12
<PAGE>
Purchases and Sales of Power
Virginia Power relies on purchases of power to meet a portion of its
capacity requirements. Virginia Power also makes economy purchases of power from
other utility systems when it is available at a cost lower than Virginia Power's
own generation costs.
Under contracts effective January 1, 1985, Virginia Power agreed to
purchase 400 Mw of electricity annually through 1999 from Hoosier Energy Rural
Electric Cooperative, Inc. (Hoosier), and agreed to purchase 500 Mw of
electricity annually during 1987-99 from certain operating units of American
Electric Power Company, Inc. (AEP).
Virginia Power has a diversity exchange agreement with AP under which AP
delivers 200 Mw to Virginia Power in the summer and Virginia Power delivers 200
Mw to AP in the winter.
Virginia Power also has 65 non-utility power purchase contracts with a
combined dependable summer capacity of 3,524 Mw. Of this amount, 3,509 Mw were
operational at the end of 1996 with the balance scheduled to come on-line
through 1999 (see Non-Utility Generation under VIRGINIA POWER FUTURE SOURCES OF
POWER below and Note Q to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the
1996 Annual Report to Shareholders). In an effort to mitigate its exposure to
above-market long-term purchased power contracts, Virginia Power is evaluating
its long-term purchased power contracts and negotiating modifications to their
terms, including cancellations, where it is determined to be economically
advantageous to do so. Virginia Power has also negotiated settlements with
several other parties to terminate their rights to sell power to Virginia Power.
In 1995, a wholesale power group was formed within Virginia Power to
actively participate in the purchase and sale of wholesale electric power in the
open market. The wholesale power group has expanded Virginia Power's trading
range beyond the geographic limits of the Virginia Power service territory, and
has developed trading relationships with utilities on a nationwide basis. During
1996, Virginia Power expanded its gas marketing activities, trading in the open
market both within and outside the Virginia Power service territory. The gas
marketing function is organized as a part of the wholesale power group and
broadens Virginia Power's product mix to provide a full range of wholesale
energy marketing services.
On August 15, 1996, pursuant to the provisions of the Interconnection and
Operating Agreement between ODEC and Virginia Power, ODEC gave written notice of
its intent to reduce its supplemental demand purchases under that Agreement to
zero within nine years. 1997 supplemental demand charges (other than charges
relating to transmission and distribution which will continue in any case) are
expected to be $63 million. On November 19, 1996, Virginia Power and ODEC
reached principles of agreement providing that Virginia Power will continue to
supply all of ODEC's supplemental capacity needs through 2005, rather than the
declining amounts after 1999 under prior agreements. Under the principles of
agreement, Virginia Power's recovery of fixed charges will be reduced over time
as supplemental capacity rates transition from fully-embedded costs to
market-based pricing. Virginia Power estimates the reduced rates, offset in part
by other revenues which may be earned under the agreement, will decrease income
before taxes by approximately $38 million through 2005.
INTERCONNECTIONS
Virginia Power maintains major interconnections with Carolina Power and
Light Company, AEP, AP and the utilities in the Pennsylvania-New Jersey-Maryland
Power Pool. Through this major transmission network, Virginia Power has
arrangements with these utilities for coordinated planning, operation, emergency
assistance and exchanges of capacity and energy.
On June 19, 1996, a transmission alliance was formed among Virginia Power,
AP, Centerior Energy and Ohio Edison to promote fair and equitable use of the
transmission systems. This alliance is an outgrowth of the General Agreement on
Parallel Paths (GAPP), a group of 21 utilities, independent power producers,
cooperatives, and public power authorities, that was formed in the early 1990s
to work on a series of principles to govern inter-system wholesale power
transfers. The four utilities that are initiating the transmission alliance are
all members of the GAPP initiative and are forming the alliance to specifically
further the principles of GAPP as the electric utility industry continues the
evolution to, and beyond, open access transmission service. The alliance has
adopted the specific GAPP principles to ensure that proper reimbursement is made
to each alliance utility handling a power transfer through the parallel path
concept. A GAPP Matrix Subcommittee will determine the parallel paths any
specific transaction will take and the GAPP compensation procedure will
determine the compensation owed to the utilities involved. Virginia Power views
the alliance as an important step towards implementing flow and distance
sensitive pricing of transmission service.
On December 4, 1996, Virginia Power and five other North American utilities
announced plans for a test of principles designed to maintain the reliability of
electric transmission systems, encourage optimal use of the facilities, and
ensure fair payment for their use. Virginia Power and the four other U.S.
utilities involved in the plan asked FERC for permission to test
13
<PAGE>
compensation methods contained in GAPP. Using the GAPP principles, participants
in the test would use actual power flows to allocate among themselves
transmission service revenues. The five U.S. participants asked FERC for
permission to begin the test on April 2, 1997. In addition to Virginia Power,
the U.S. participants in the test include Allegheny Power, Centerior Energy,
Ohio Edison and the Southern Company. While not under FERC jurisdiction, Ontario
Hydro is also a participant in the experiment. The experiment would also give
utilities more thorough information on the use of regional transmission capacity
by utilizing the GAPP Information System (GIS). This system stores data
regarding scheduled power transactions and analyzes the anticipated paths the
power will take during the transfers. The information is essential for optimal
use of the integrated transmission network.
The GAPP principles have been developed during the last five years by a
broad cross-section of transmission users, including utilities in the United
States and Canada, public power authorities, rural electric cooperatives, power
marketers and independent power producers. The principles are designed to deal
with the issue of parallel flows. Within tightly interconnected transmission
grids, power does not always flow in a direct path -- often called the "contract
path" -- from seller to buyer. The power may in fact flow through several
adjoining systems to get to the end-user, even if the buyer and seller are
directly interconnected. Under current rules, utilities are not fully
compensated for the use of these "parallel paths." Compensation for transmission
services historically has been based on contract paths. The companies in the
GAPP experiment will analyze the paths power actually takes through their
system, then allocate transmission service compensation to reflect those paths.
For the five utilities in the United States, the allocations will be based on
the open access transmission tariffs each filed with FERC in response to FERC
Order 888. In their filing, the participants noted that the test could be
expanded to include additional utilities and other entities that receive revenue
from transmission services. The test will have no effect on the rates the six
utilities charge for transmission services.
Virginia Power and Appalachian Power Company (AEP Virginia) (an operating
unit of AEP) have each sought approval from the Virginia Commission to construct
interconnecting transmission facilities. AEP Virginia proposes to construct 116
miles of 765 Kv line to connect with Virginia Power's proposed 102 miles of 500
Kv line. Virginia Power does not intend to build its facility unless the AEP
Virginia facility, which requires approval in West Virginia as well as Virginia,
is also approved and built. Approval of both facilities has been recommended by
a Virginia Commission Hearing Examiner. On December 13, 1995, the Virginia
Commission issued an Interim Order in the AEP Virginia case in which it found
that additional transmission capacity is needed but directed AEP Virginia to
provide further information as to routing, mitigation of visual impact, and uses
of the line.
FUTURE SOURCES OF POWER
As reported earlier, both the Hoosier 400 Mw long-term purchase and the AEP
500 Mw long-term purchase will expire on December 31, 1999. With the scheduled
termination of 900 Mw of long-term purchases and continued system load growth,
Virginia Power presently anticipates adding 1,200 Mw of short-term (three-year)
purchases beginning in the year 2000. Virginia Power has and will pursue
capacity acquisition plans to provide that capacity and maintain a high degree
of service reliability. This capacity may be owned and operated by others and
sold to Virginia Power or may be built by Virginia Power if it determines it can
build capacity at a lower overall cost. Virginia Power also pursues conservation
and demand-side management (see CONSERVATION AND LOAD MANAGEMENT below).
Virginia Power's continuing program to meet future capacity requirements is
summarized in the following table:
Company Owned Generation
No Company owned generation is currently in the planning or construction
stages.
Non-Utility Generation
<TABLE>
<CAPTION>
Number of
Projects Mw
--------- -----
<S> <C>
Projects Operational 62 3,509
Projects Financed 0 0
Unfinanced Projects 3 15
--
-----
Total Contracts 65 3,524
-- -----
-- -----
</TABLE>
For additional information, see Note Q to the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS in the 1996 Annual Report to Shareholders.
14
<PAGE>
COMPETITION AND STRATEGIC INITIATIVES
A number of developments in the United States are causing a trend toward
less regulation of and more competition in the electric utility industry. This
is evidenced by legislative and regulatory action at both the federal and state
levels. To the extent that competition is either authorized or mandated and
regulation is eliminated or relaxed, electric utilities will no longer, in the
absence of appropriate legislative or regulatory action during the transition
period, be guaranteed an opportunity to recover all of their prudently-incurred
costs including their cost of capital, and utilities with costs that exceed the
market prices established by the competitive market will run the risk of
suffering losses, which may be substantial.
Virginia Power has responded to these trends by undertaking cost-cutting
measures, engaging in re-engineering efforts of its core business processes, and
pursuing a strategic planning initiative (called Vision 2000) to encourage
innovative approaches to servicing traditional markets and to develop
appropriate methods by which to service future markets. Virginia Power has
established separate business units for its nuclear operations, fossil and
hydroelectric operations, commercial operations and its energy services
business. A re-engineering and re-missioning review of the Fossil and
Hydroelectric Business Unit and Nuclear Business Unit has been completed and
implementation is now complete. The Corporate Center is now in the final stages
of review. Virginia Power's Commercial Operations Business Unit has completed
its review and has begun implementation of several organizational modifications
and applications of new technology to improve customer service and reduce
operational costs. Some of these improvements will require investments of
approximately $100 million, which will be expended over several years.
Virginia Power has created a subsidiary to provide nuclear management and
operation services to electric utilities seeking assistance in the management
and operation of their nuclear generating facilities; it acquired an operating
business, A&C Enercom, Inc., a provider of marketing, program planning and
design, customer engineering and energy consulting services; it is seeking
approval to engage in the telecommunications business; and it is in the planning
stages of creating additional subsidiaries to engage in these and other
unregulated businesses. It is also taking regulatory and legislative initiatives
designed to enhance the likelihood that the transition to competition is an
orderly one and that Virginia Power will not be prevented from recovering
prudently-incurred costs and investments.
In addition, Virginia Power is actively pursuing opportunities to expand
its markets through strategic alliances with partners whose strengths, market
position and strategies complement Virginia Power's and where efficiencies can
be gained through the alliance.
A significant part of Virginia Power's strategy relies on developing
"non-traditional" business opportunities designed to provide growth in earnings.
The Energy Services Business Unit is the most prominent example of this growth
strategy. The Energy Services Business Unit is expected to contribute to
earnings growth by offering the market a portfolio of energy related products
and services. Other examples of such opportunities include the Fossil & Hydro
Business Unit, through which Virginia Power will target process type industries,
such as chemical, paper, plastics and petroleum to become a service provider of
instrumentation equipment, and the Nuclear Business Unit, whose position as an
industry leader offers opportunities to provide services to other nuclear
utilities striving to improve their safety records. The Commercial Operations
Business Unit will provide power distribution related service. Finally, the
Telecommunications Act of 1996 opened up opportunities to generate growth
through use of existing telecommunications infrastructure to provide
telecommunications services and new energy services through Virginia Power's
existing fiber-optic network.
Virginia Power has organized a wholesale power group to engage in
off-system wholesale purchases and sales, and that group is developing trading
relationships beyond the geographic limits of Virginia Power's retail service
territory. Virginia Power has also been successful in negotiation of wholesale
requirements contracts with multi-year provisions for notice of termination of
service and a long-term contract with large federal government customers for
service to facilities within Virginia Power's service territory and has obtained
regulatory approval of innovative pricing proposals for industrial loads,
although rate concessions have been necessary in some cases. To date, Virginia
Power has not experienced any material loss of load, and the reduction of 1997
revenues attributable to such rate concessions is expected to approximate $22
million.
For a more detailed discussion, see Competition under FUTURE ISSUES in
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
15
<PAGE>
CONSERVATION AND LOAD MANAGEMENT
Virginia Power is committed to evaluating and selecting demand-side and
supply-side options on a consistent basis in order to provide reliable, low-cost
service to its customers. Conservation and load management programs are selected
annually at Virginia Power through an integrated resource planning process which
directly compares the stream of costs and benefits from supply-side and
demand-side options. This process supports the selection of a conservation and
load management portfolio which contributes both to the selection of low-cost
resources to meet the future electricity needs of Virginia Power's customers as
well as the efficient use of current resources.
Recent declines in avoided costs and the arrival of competition have caused
Virginia Power to modify the package of cost-effective measures which it
supports in the annual Energy Efficiency Plan. In the future, Virginia Power
anticipates a greater reliance on the use of price signals to convey information
to our customers regarding costs, resulting in more efficient purchase
decisions. Finally, in an investigation sparked by the fundamental changes
occurring in the electric utility industry, the Virginia Commission has
requested Virginia Power to evaluate the Commission's current policies regarding
conservation and load management programs.
ITEM 2. PROPERTIES
Dominion Resources owns the building at One James River Plaza, Richmond,
Virginia, in which Virginia Power has its principal offices. Dominion Resources'
other assets consist primarily of its investments in its subsidiaries, which
invest in various enterprises and assets, as described in THE COMPANY under Item
1. BUSINESS above. See also Virginia Power Generating Units under VIRGINIA POWER
SOURCES OF POWER under Item 1. BUSINESS.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Virginia Power may be in violation of or in default
under orders, statutes, rules or regulations relating to protection of the
environment, compliance plans imposed upon or agreed to by Virginia Power or
permits issued by various local, state and federal agencies for the construction
or operation of facilities. There may be pending from time to time
administrative proceedings involving violations of state or federal
environmental regulations that Virginia Power believes are not material with
respect to it and for which its aggregate liability for fines or penalties will
not exceed $100,000. There are no material agency enforcement actions or citizen
suits pending or, to Virginia Power's present knowledge, threatened against
Virginia Power.
The civil action filed December 13, 1995, in the United States District
Court for the Eastern District of Virginia, Norfolk Division, was dismissed by
the Federal Court on August 7, 1996. However, two civil actions have been filed
in the Virginia Circuit Court of the City of Norfolk against the City of Norfolk
and Virginia Power, one for fifteen million dollars and one for three million
dollars, by property owners who each allege contamination of their respective
properties by hazardous substances originating on nearby property now owned by
the city and formerly owned by Virginia Power. Virginia Power has filed answers
denying liability. A trial date of August 18, 1997 has been set for the action
seeking fifteen million dollars.
In reference to the lawsuit filed by Dominion Energy and Dominion Cogen
D.C., Inc. (collectively, Plaintiffs) against the District of Columbia (the
District) for deprivation of due process, the Court on March 4, 1997 denied in
part the District's partial motion for summary judgment on Plaintiff's contracts
clause claim and denied in its entirety the District's motion for partial
summary judgment on Plaintiff's claims for damages. The Court also permitted 1)
the District to assert its counterclaims; and 2) Plaintiffs to amend their
complaint. In addition, all parties were ordered to meet and confer regarding
the completion of discovery.
On May 24, 1996, in the proceeding to investigate the holding company
structure and the relationship between Dominion Resources and Virginia Power,
the Virginia Commission entered an order imposing certain requirements as to the
adoption of conflict-of-interest standards, auditing of affiliate transactions,
and compensation for executive services. The proceeding was continued until July
12, 1997 to allow the Commission and its Staff to monitor the companies and
evaluate whether further action by the Commission might be desirable. A consent
order requiring Commission approval before Dominion Resources can take certain
actions involving Virginia Power was allowed to expire in accordance with its
terms on July 2, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name and Age Business Experience Past Five Years
- ------------------------------ ------------------------------------------------------------------------------
<S> <C>
Thos. E. Capps (61) Chairman of the Board of Directors, President and Chief Executive Officer of
Dominion Resources from September 1, 1995 to date; Chairman of the Board of
Directors and Chief Executive Officer of Dominion Resources from August 15,
1994 to September 1, 1995; Chairman of the Board of Directors, President and
Chief Executive Officer of Dominion Resources from December 30, 1992 to August
15, 1994; President and Chief Executive Officer of Dominion Resources and Vice
Chairman of the Virginia Electric and Power Company Board of Directors prior
to December 30, 1992.
James T. Rhodes (55) President and Chief Executive Officer of Virginia Electric and Power Company.
Norman B. M. Askew (54) Executive Vice President of Dominion Resources and Chief Executive Officer of
East Midlands from February 21, 1997 to date; Chief Executive Officer of East
Midlands from April 1, 1994 to February 21, 1997; Managing Director from
September 1, 1992 to April 1, 1994; President and Managing Director of TI
Aerospace and Titeflex International prior to September 1, 1992.
Thomas N. Chewning (51) Executive Vice President of Dominion Resources from January 1, 1997 to date;
Senior Vice President of Dominion Resources from October 1, 1994 to January 1,
1997; Vice President of Dominion Resources from November 15, 1992 to October
1, 1994; Vice President, Treasurer and Corporate Secretary of Virginia
Electric and Power Company prior to November 15, 1992.
David L. Heavenridge (50) Executive Vice President of Dominion Resources from January 1, 1997 to date;
Senior Vice President of Dominion Resources from March 1, 1994 to January 1,
1997; Senior Vice President and Controller of Dominion Resources from April 1,
1992 to March 1, 1994; Vice President and Controller of Dominion Resources
prior to April 1, 1992.
Linwood R. Robertson (57) Executive Vice President and Treasurer of Dominion Resources from January 1,
1997 to date; Senior Vice President-Finance, Treasurer and Corporate Secretary
of Dominion Resources from January 1, 1995 to January 1, 1997; Vice
President-Finance and Treasurer of Dominion Resources from March 1, 1994 to
January 1, 1995; Vice President, Treasurer and Assistant Corporate Secretary
of Dominion Resources prior to March 1, 1994.
Thomas F. Farrell, II (42) Senior Vice President-Corporate and General Counsel of Dominion Resources from
January 1, 1997 to date; Vice President and General Counsel of Dominion
Resources from July 1, 1995 to January 1, 1997; Partner in the law firm of
McGuire, Woods, Battle & Boothe, L.L.P. prior to July 1, 1995.
Donald T. Herrick, Jr. (53) Vice President of Dominion Resources.
James L. Trueheart (45) Vice President and Controller of Dominion Resources from March 1, 1994 to
date; Assistant Controller of Dominion Resources prior to March 1, 1994.
Patricia A. Wilkerson (41) Corporate Secretary of Dominion Resources from January 1, 1997 to date;
Assistant Corporate Secretary prior to January 1, 1997.
</TABLE>
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Dominion Resources common stock is listed on the New York Stock Exchange
and at December 31, 1996 there were 248,929 registered common shareholders of
record. Quarterly information concerning stock prices and dividends contained on
page 50 of the 1996 Annual Report to Shareholders for the fiscal year ended
December 31, 1996 in Note U to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which is filed herein as Exhibit 13, is hereby incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
This information contained under the caption "Selected Consolidated
Financial Data" on page 53 of the 1996 Annual Report to Shareholders for the
fiscal year ended December 31, 1996 filed herein as Exhibit 13, is hereby
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This annual report 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 contained 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. In addition to certain contingency matters
(and their respective cautionary statements) discussed elsewhere in this report,
the following important factors should be considered with respect to any
forward-looking statements made herein:
Current governmental policies and regulatory actions both domestic and
international (including those of FERC, the EPA, the NRC and the Virginia
Commission), industry and rate structure, operation of nuclear power facilities,
acquisition and disposal of assets and facilities, operation and storage
facilities, recovery of the cost of purchased power, nuclear decommissioning
costs, present or prospective wholesale and retail competition, economic and
geographic factors including political and economic risks (particularly those
associated with international development and operations, including currency
fluctuation), changes in and compliance with environmental laws and policies,
weather conditions and catastrophic weather related damage, competition for
retail and wholesale customers, pricing and transportation of commodities,
market demand for energy, inflation, capital market conditions, unanticipated
development project delays or changes in project costs, unanticipated changes in
operating expenses and capital expenditures, competition for new energy
development opportunities and legal and administrative proceedings. All such
factors are difficult to predict, contain uncertainties that may materially
affect actual results, and may be beyond the control of Dominion Resources. New
factors emerge from time to time and it is not possible for management to
predict all of such factors, nor can it assess the impact of each such factor on
the businesses of Dominion Resources.
Any forward-looking statement speaks only as of the date on which such
statement is made, and Dominion Resources undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made.
Overview
Dominion Resources achieved earnings of $472.1 million in 1996 or $2.65 per
average common share, compared with earnings of $425 million in 1995 or $2.45
per share. Virginia Power's utility operations increased its contribution to
$421.8 million in 1996 or $2.37 per share, from the $388.7 million earned in
1995 or $2.24 per share. Dominion Energy's independent power and natural gas
operations earned $32.5 million in 1996 or 18 cents per share, a slight decrease
from the $35 million earned in 1995 or 20 cents per share. Dominion Capital's
financial services and real estate businesses earned $28.5 million in 1996 or 16
cents per share, an increase over the $17.6 million earned in 1995 or 10 cents
per share. Corporate overhead expenses fell in 1996, reducing its net loss to
$10.7 million or 6 cents per share, compared with a net loss in 1995 of $16.3
million or 9 cents per share.
18
<PAGE>
NET INCOME
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
------ ------ ------ ------ ------
(millions)
<S> <C>
Virginia Power........................................................ $421.8 8.5% $388.7 (4.0)% $404.9
Dominion Energy....................................................... 32.5 (7.1)% 35.0 (41.3) 59.6
Dominion Capital...................................................... 28.5 61.9% 17.6 (6.9)% 18.9
Corporate............................................................. (10.7) (34.4)% (16.3) 213.5% (5.2)
------ ------ ------
Consolidated.......................................................... $472.1 11.1% $425.0 (11.1)% $478.2
------ ------ ------
------ ------ ------
Shares................................................................ 178.3 2.6% 173.8 2.1% 170.3
------ ------ ------
------ ------ ------
</TABLE>
EARNINGS PER SHARE
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
----- ------ ----- ------ -----
<S> <C>
Virginia Power............................................................ $2.37 5.8% $2.24 (5.9)% $2.38
Dominion Energy........................................................... .18 (10.0)% .20 (42.9)% .35
Dominion Capital.......................................................... .16 60.0% .10 (9.1)% .11
Corporate................................................................. (.06) 33.3% (.09) (200.0)% (.03)
----- ----- -----
Consolidated.............................................................. $2.65 8.2% $2.45 (12.8)% $2.81
----- ----- -----
----- ----- -----
</TABLE>
The 1996 results were affected by a number of factors described below:
Virginia Power
Earnings were impacted by:
(Bullet) an increase in kilowatt-hour sales from retail customers due to
continued customer growth in the Virginia Power and North Carolina
Power service areas; partially offset by lower base revenues due
to the effect of mild summer weather in 1996 on summer retail
rates; and
(Bullet) an increase in power marketing (wholesale) and energy services
(A&C Enercom) revenues; and
(Bullet) lower other operation and maintenance expenses, even with an
additional $21 million in service restoration costs resulting from
severe storms like Hurricane Fran, and an additional $22 million
due to growth in the energy services business (A&C Enercom); and
(Bullet) lower restructuring expenses; and
(Bullet) higher depreciation expenses relating to the new Clover Power
Station whose units began operating in October 1995 and March
1996.
Dominion Energy
Earnings were impacted by:
(Bullet) an increase in natural gas production and prices; offset by
(Bullet) a decrease in income when compared to the gain ($5.4 million, net
of tax) realized in 1995 from the sale of the remaining units of
the Black Warrior Trust.
Dominion Capital
Earnings were impacted by:
(Bullet) an increase in income from Saxon Mortgage, the new financial
services business which originates non-conforming residential
mortgages and packages them -- through a securitization -- for
sale to institutional investors.
Corporate
Earnings were impacted by:
(Bullet) a decrease in expenses when compared to the $12.4 million of
restructuring costs and other charges incurred in 1995.
Virginia Power
Results of Operations
As part of the Vision 2000 program to transition Virginia Power to a
potential future of competition in the electric utility industry, Virginia Power
recorded $91.6 million in restructuring expenses in 1996 and $117.9 million in
1995 (see Note O). Restructuring charges included severance costs, purchased
power contract restructuring and negotiated settlement costs, capital project
cancellation costs, reserve for expected adjustments to regulatory assets, and
other costs. Without restructuring
19
<PAGE>
expenses, balance available for common stock in 1996 and 1995 would have
increased by $59.5 million and $76.6 million, respectively.
Virginia Power estimates that the staffing reductions will result in annual
savings in the range of $62 million to $90 million. When realized, savings from
staffing reductions will be reflected in lower construction expenditures as well
as lower operation and maintenance expenses. While Virginia Power may incur
additional charges for further staffing reductions in 1997, the amounts are not
expected to be significant.
In 1995, Virginia Power reported a decrease in balance available for common
stock of $16.2 million when compared to the 1994 results of $404.9 million. The
decrease was primarily due to increases in operating expenses attributable to
restructuring costs which reduced earnings by $0.44 per share offset in part by
an increase in kilowatt-hour sales from both retail and wholesale customers.
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
-------- ------ -------- ------ --------
(millions)
<S> <C>
Revenues......................................................... $4,382.6 0.7% $4,350.4 4.3% $4,170.8
Operating expenses............................................... 3,379.4 0.0% 3,379.2 5.0% 3,219.5
Nonoperating expenses, net....................................... 581.4 0.2% 582.5 6.6% 546.4
-------- -------- --------
Balance available for common stock............................... $ 421.8 8.5% $ 388.7 (4.0)% $ 404.9
-------- -------- --------
-------- -------- --------
</TABLE>
Operating Revenues
As detailed in the chart below, the decrease in 1996 retail revenues
reflects a reduction in fuel rate revenues and a reduction in base revenues due
to the effect of the mild summer weather in 1996 on Virginia Power's summer
retail rates which are designed to reflect expected usage during normal weather
conditions, offset in part by continued customer growth during 1996. The
increased sales to wholesale customers were primarily a result of Virginia
Power's marketing efforts during 1996, offset by a decrease in sales to Old
Dominion Electric Cooperative (ODEC) due to completion of Clover Units 1 and 2,
of which ODEC owns a 50 percent interest. Other operating revenues increased
primarily as a result of the revenues generated by Virginia Power's energy
services subsidiary, A&C Enercom.
In 1995 Virginia Power's revenues increased primarily due to the weather
experienced in the last six months of 1995, customer growth and increased sales
to wholesale customers.
OPERATING REVENUES
<TABLE>
<CAPTION>
Increase
(decrease)
from prior year
----------------
1996 1995
------ ------
(millions)
<S> <C>
Customer growth............................................................................................ $ 52.5 $ 76.2
Weather.................................................................................................... 4.4 81.6
Base rate variance......................................................................................... (35.5) 6.3
Fuel rate variance......................................................................................... (89.6) (8.9)
Other, net................................................................................................. 34.1 (6.0)
------ ------
Total retail............................................................................................. (34.1) 149.2
Wholesale.................................................................................................. 33.1 32.8
Other operating revenues................................................................................... 33.2 (2.4)
------ ------
Total revenues........................................................................................... $ 32.2 $179.6
------ ------
------ ------
</TABLE>
During 1996, Virginia Power had 44,528 new connections to its system
compared to 44,955 and 46,741 in 1995 and 1994, respectively.
KILOWATT-HOUR SALES
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
------ ------ ------ ------ ------
(millions)
<S> <C>
Residential................................................................... 23,039 2.3% 22,512 4.1% 21,621
Commercial.................................................................... 19,934 2.3% 19,486 3.6% 18,801
Industrial.................................................................... 10,851 2.3% 10,606 3.6% 10,235
Public authorities............................................................ 8,474 2.6% 8,261 4.0% 7,950
------ ------ ------
Total retail sales.......................................................... 62,298 2.4% 60,865 3.8% 58,607
Wholesale..................................................................... 11,020 36.3% 8,088 13.4% 7,134
------ ------ ------
Total sales................................................................. 73,318 6.3% 68,953 4.9% 65,741
------ ------ ------
------ ------ ------
</TABLE>
20
<PAGE>
The increase in retail kilowatt-hour sales in 1996 compared to 1995
reflects continued customer growth. The increase in sales to wholesale customers
was primarily due to Virginia Power's power marketing efforts.
The increase in kilowatt-hour sales in 1995 compared to 1994 reflects
increased customer growth and the weather experienced in the last six months of
1995, partially offset by the milder weather experienced in the first six months
of 1995.
DEGREE-DAYS CHART
<TABLE>
<CAPTION>
1996 1995 Normal
----- ----- ------
<S> <C>
Cooling degree days................................................................................. 1,365 1,667 1,531
Percentage change compared to prior year............................................................ (18.1)% 3.3%
Heating degree days................................................................................. 4,131 3,790 3,672
Percentage change compared to prior year............................................................ 9.0% 7.8%
</TABLE>
OPERATING EXPENSES
(EXCLUDING FEDERAL INCOME TAXES)
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
-------- ------ -------- ------ --------
(millions)
<S> <C>
Fuel, net........................................................... $ 987.0 (2.0)% $1,006.9 3.5% $ 973.0
Purchased power capacity, net....................................... 700.5 1.8% 688.4 2.8% 669.4
Other operation..................................................... 546.9 0.6% 543.7 (5.8)% 577.4
Maintenance......................................................... 250.9 (3.7)% 260.5 (1.0)% 263.2
Restructuring....................................................... 91.6 (22.3)% 117.9
Depreciation and amortization....................................... 536.4 6.5% 503.5 4.7% 480.7
Taxes, other than federal income.................................... 266.1 3.0% 258.3 1.0% 255.8
-------- -------- --------
Total............................................................... $3,379.4 0.0% $3,379.2 5.0% $3,219.5
-------- -------- --------
-------- -------- --------
</TABLE>
Maintenance decreased compared to 1995, primarily as a result of a
reduction in expenses attributable to Virginia Power's Vision 2000 initiatives,
offset in part by the higher storm damage costs incurred from destructive summer
storms, including Hurricane Fran.
Depreciation and amortization increased compared to 1995, primarily as a
result of greater nuclear decommissioning expense and depreciation related to
Clover Units 1 and 2 which were placed in service in October 1995 and March
1996, respectively.
Other operation and maintenance decreased in 1995 compared to 1994.
Expenses during 1994 included payroll and voluntary separation costs for those
employees who elected to terminate service with Virginia Power under the 1994
Early Retirement and Voluntary Separation Programs, offset in part by
recognition of insurance policyholder distributions. Expenses in 1995 reflected
a decrease in payroll costs due to reduced staffing levels and weather-related
overtime, offset by 1995 salary increases and the impact of employees being
reassigned from capital to operation and maintenance activities. In addition,
1995 expenses include expenses associated with the North Branch Power Station,
increased obsolete inventory costs, increased accruals for employee benefits,
and increased nuclear outage costs.
Nonoperating Income and Expenses, Net
Nonoperating expenses, net increased in 1995 as compared to 1994 primarily
as a result of higher interest rates on the utility's First and Refunding
Mortgage Bonds and Pollution Control Notes and as a result of a reduction of
$10.6 million in the interest accrued for prior years on certain tax obligations
in 1994.
Dominion Energy
New Businesses
Dominion Energy has expanded its oil and natural gas and foreign power
generation businesses through the development of existing assets and the
following acquisitions.
In March 1996, Dominion Energy, through a wholly-owned subsidiary, acquired
interests in natural gas and oil properties in the Gulf of Mexico. The estimated
proved reserves from this acquisition were 36 billion cubic feet of natural gas
and 1.9 million barrels of oil and liquids.
In April 1996, Dominion Energy acquired a gas management and marketing
company, Carthage Energy Services, Inc.
In August 1996, Dominion Energy, through wholly-owned subsidiaries,
acquired a 60-percent ownership and management interest in Empresa de Generacion
Electrica NorPeru S.A. (EGENOR). EGENOR is a generation company providing power
to Peru's northern region. The government-owned ElectroPeru S.A. and the
employees of EGENOR collectively retain
21
<PAGE>
a 40-percent interest in EGENOR. Dominion Energy continues to assess sale
opportunities for a portion of its interest in EGENOR to a third party.
Results of Operations
Dominion Energy's net income amounted to $32.5 million as compared to $35
million in 1995. The decrease in earnings was due primarily to a reduction in
the company's reported gain on sale of assets which in 1995 included a $5.4
million after tax gain on the sale of Black Warrior Trust Units.
In 1995, net income decreased by $24.6 million when compared to 1994
primarily due to the sale of the Black Warrior Trust Units in 1994. The sale of
the units, which hold royalty interests in proven, developed natural gas
properties, provided a net gain of $28.9 million in 1994.
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
------ ------ ------ ------ ------
(millions)
<S> <C>
Revenues.............................................................. $267.1 46.5% $182.3 (13.4)% $210.6
Operating expenses.................................................... 233.8 54.7% 151.1 1.8% 148.4
Nonoperating expenses, net............................................ 0.8 121.1% (3.8) (246.2)% 2.6
------ ------ ------
Net income............................................................ $ 32.5 (7.1)% $ 35.0 (41.3)% $ 59.6
------ ------ ------
------ ------ ------
</TABLE>
Revenues
In 1996, revenues increased compared to 1995 by $84.8 million. The increase
was due to added capacity in foreign power generation resulting from a full year
of operations by Empresa Electrica Corani S.A. (Corani) in Bolivia and the 1996
acquisition of EGENOR. In addition, gas price increases and the increase in gas
production due to the acquisition and development of natural gas properties
provided additional revenues in 1996 not available in 1995.
In 1995, revenues decreased as compared to 1994 by $28.3 million due to the
sale in 1994 of the Black Warrior Trust Units. This revenue reduction was
partially offset by the increase in 1995 in gas revenues due to increased gas
prices and production.
Operating Expenses
In 1996, operating expenses increased by $82.7 million as compared to 1995,
primarily due to a full year's incurrence of operating, maintenance and
depreciation expenses at Corani. The increase was also due to similar expenses
incurred by EGENOR, which was not part of Dominion Energy's operations in 1995,
and the additional depreciation and depletion expenses incurred due to the
acquisition and development of oil and gas properties.
Dominion Capital
New Businesses
On May 13, 1996, Dominion Capital, through a wholly-owned subsidiary,
acquired the stock of Saxon Mortgage, Inc. (Saxon Mortgage), the company's
single-family mortgage origination division and Meritech Mortgage Services,
Inc., the company's single-family mortgage servicing operation. Dominion Capital
also organized a new indirect subsidiary, Saxon Asset Securities, Inc., which is
responsible for securitizing the single-family residential loans.
Results of Operations
Dominion Capital's net income for 1996 amounted to $28.5 million as
compared to $17.6 million in 1995. The increase in earnings was primarily due to
residential mortgage loan securitizations performed by Saxon Asset Securities,
Inc.
In 1995, Dominion Capital reported a decrease in net income of $1.3 million
when compared to the 1994 results of $18.9 million. The results were primarily
due to the increase in taxes because of a reduction in other tax benefits and
higher income subject to tax. These expenses were offset in part by an increase
in revenues at First Source Financial, Inc. (First Source Financial). First
Source Financial, which began operations in April 1995, is a commercial lender
to middle-market businesses.
<TABLE>
<CAPTION>
1996 Change 1995 Change 1994
------ ------ ------ ------ -----
(millions)
<S> <C>
Revenues....................................................................... $186.3 66.6% $111.8 12.7% $99.2
Operating expenses............................................................. 106.1 70.0% 62.4 (6.2)% 66.5
Nonoperating expenses, net..................................................... 51.7 62.6% 31.8 130.4% 13.8
------ ------ -----
Net income..................................................................... $ 28.5 61.9% $ 17.6 (6.9)% $18.9
------ ------ -----
------ ------ -----
</TABLE>
22
<PAGE>
Revenues
In 1996, Dominion Capital's revenues increased $74.5 million when compared
to 1995 primarily due to the gains recognized in the securitizations of
residential mortgage loans which contributed $41.9 million to revenues.
Revenues in 1995 were $12.6 million higher than revenues in 1994 primarily
due to revenues from First Source Financial.
Operating Expenses
In 1996, operating expenses increased by $43.7 million when compared to
1995 due to additional real estate project costs and the operating expenses
incurred at Saxon Mortgage, which was acquired in 1996 by Dominion Capital.
Nonoperating Income and Expenses, Net
Nonoperating expenses, net increased by $19.9 million in 1996 compared to
1995 primarily due to an increase in pre-tax book income.
Federal income taxes increased in 1995 compared to 1994 by $18.3 million
primarily due to the decrease in other tax benefits plus higher income subject
to tax.
Corporate
Results of Operations
In 1996, Corporate net loss has decreased by $5.6 million compared to 1995
primarily due to $3.6 million in restructuring expenses and the $8.8 million in
other charges recorded in 1995. These expenses included restructuring costs at
the holding company as well as litigation and other costs.
Net income in 1995 decreased $11.1 million compared to 1994 primarily due
to the recording of $3.6 million of restructuring expenses and $8.8 million in
other charges.
Future Issues
Utility Issues
Regulatory Matters: Regulatory policy continues to be of fundamental
importance to Virginia Power.
On October 7, 1996, the Virginia State Corporation Commission (the Virginia
Commission) ordered that its investigation regarding spent nuclear fuel disposal
be consolidated with Virginia Power's next fuel recovery proceeding. On October
21, 1996, Virginia Power filed an application with the Virginia Commission to
increase its annual fuel cost recovery approximately $48.2 million. The proposed
fuel factor became effective on December 1, 1996. A hearing has been scheduled
for April 17, 1997. Any potential adjustments to the factor ordered after the
hearing will be reflected prospectively after entry of the final order.
On November 12, 1996, the Virginia Commission instituted a proceeding and
directed Virginia Power to provide certain information, including any
alternative form of regulation proposed by Virginia Power at this time, by March
31, 1997. On March 7, 1997, in this proceeding and in a separate Annual
Information Filing proceeding, the Virginia Commission entered an order
providing that Virginia Power's rates shall become interim rates subject to
refund as of March 1, 1997.
Various provisions of the Energy Policy Act of 1992 (the Energy Act) that
could affect Virginia Power include those provisions encouraging the development
of non-utility generation, giving the Federal Energy Regulatory Commission
(FERC) authority to order transmission access for wholesale transactions,
requiring higher energy efficiency and alternative fuels use, restructuring of
nuclear plant licensing procedures and requiring state regulatory authorities to
give full rate treatment for the effects of conservation and demand management
programs, including the effects of reduced sales. While the full impact of the
Energy Act on Virginia Power cannot at this time be quantified, it is likely,
over time, to be significant.
Competition: A number of developments in the United States are causing a
trend toward less regulation of and more competition in the electric utility
industry. This is evidenced by legislative and regulatory action at both the
federal and state levels. To the extent that competition is either authorized or
mandated and regulation is eliminated or relaxed, electric utilities will no
longer, in the absence of appropriate legislative or regulatory action during
the transition period, be guaranteed an opportunity to recover all of their
prudently-incurred costs including their cost of capital, and utilities with
costs that exceed the market prices established by the competitive market will
run the risk of suffering losses, which may be substantial.
Virginia Power has responded to these trends by undertaking cost-cutting
measures, engaging in re-engineering efforts of its core business processes, and
pursuing a strategic planning initiative (called Vision 2000) to encourage
innovative approaches to servicing traditional markets and to develop
appropriate methods by which to service future markets. Virginia Power has
established separate business units for its nuclear operations, fossil and
hydroelectric operations, commercial operations and its energy services
business. It has created a subsidiary to provide nuclear management and
operation services
23
<PAGE>
to electric utilities seeking assistance in the management and operation of
their nuclear generating facilities; it has acquired an operating business, A&C
Enercom, Inc., a provider of marketing, program planning and design, customer
engineering and energy consulting services; it is seeking approval to engage in
the telecommunications business; and it is in the planning stages of creating
additional subsidiaries to engage in these and other unregulated businesses. It
is also taking regulatory and legislative initiatives designed to enhance the
likelihood that the transition to competition is an orderly one and that
Virginia Power will not be prevented from recovering prudently-incurred costs
and investments.
In addition, Virginia Power is actively pursuing strategic alliances with
partners whose strengths, market position and strategies complement Virginia
Power's and where efficiencies can be gained through the alliance.
Virginia Power has organized a wholesale power group to engage in
off-system wholesale purchases and sales, and that group is developing trading
relationships beyond the geographic limits of Virginia Power's retail service
territory. Virginia Power has also been successful in negotiation of wholesale
requirements contracts with multi-year provisions for notice of termination of
service and a long-term contract with large federal government customers for
service to facilities within Virginia Power's service territory and has obtained
regulatory approval of innovative pricing proposals for industrial loads,
although rate concessions have been necessary in some cases. To date, Virginia
Power has not experienced any material loss of load, and the reduction in 1997
revenues attributable to such rate concessions is expected to approximate $22
million.
Competition-Wholesale: Competition at the wholesale level has been mandated
by the Energy Act and FERC regulations thereunder. During 1996, sales to
wholesale customers represented approximately 8 percent of Virginia Power's
total revenues from electric sales. Approximately 4 percent of wholesale
revenues resulted from Virginia Power's marketing efforts to make off-system
sales.
FERC established the requirements for open transmission access and related
matters in final rules issued on April 24, 1996 in Order No. 888 and Order No.
889. This enables other suppliers of power to displace electric service provided
by a utility to wholesale customers served by the utility's transmission system,
unless those customers are required by contract to take service from the
utility. The orders required utilities to file with FERC an open access
transmission tariff, which Virginia Power did on July 9, 1996; they require
utilities to take transmission service under that tariff for wholesale power
sales; they provide for utilities to recover legitimate, prudent and verifiable
costs that would be unrecoverable in a competitive market (stranded costs); they
require utilities to participate in an open access same-time information system
(OASIS); and they require separation of transmission operations and reliability
functions from wholesale merchant and marketing functions. FERC also issued a
notice of proposed rulemaking proposing replacement of open access tariffs with
a capacity reservation tariff by December 31, 1997. On March 4, 1997, FERC
issued Order No. 888-A, in which it addressed requests for rehearing of Order
No. 888. Order No. 888-A essentially reaffirms the basic principles of Order No.
888 and clarifies and makes limited modifications to Order No. 888. Parties
seeking judicial review of Order Nos. 888 and 888-A must file petition for
review with the appropriate United States Court of Appeal by May 5, 1997.
On August 15, 1996, pursuant to the provisions of the Interconnection and
Operating Agreement between ODEC and Virginia Power, ODEC gave written notice of
its intent to reduce its supplemental demand purchases under that Agreement to
zero within nine years. 1997 supplemental demand charges (other than charges
relating to transmission and distribution which will continue in any case) are
expected to be $63 million. On November 19, 1996, Virginia Power and ODEC
reached principles of agreement providing that Virginia Power will continue to
supply all of ODEC's supplemental capacity needs through 2005, rather than the
declining amounts after 1999 under prior agreements. Under the principles of
agreement, Virginia Power's recovery of fixed charges will be reduced over time
as supplemental capacity rates transition from fully-embedded costs to
market-based pricing. Virginia Power estimates the reduced rates, offset in part
by other revenues which may be earned under the agreement, will decrease income
before taxes by approximately $38 million through 2005.
Competition-Retail: General retail competition presently is not authorized
in Virginia and North Carolina, and as a result Virginia Power faces competition
for retail sales only in the ability of certain business customers to relocate
among utility service territories, to substitute other energy sources for
electric power, and to generate their own electricity. But major customers,
principally industrial, and other suppliers of power are advocating retail
competition vigorously in Congress and in the Virginia and North Carolina
legislatures and commissions. Legislation either to authorize or require retail
competition is under consideration in the present Congress; a joint subcommittee
of the Virginia Senate and House of Delegates is considering whether and how
such competition should be allowed or required; and legislation is pending
before the North Carolina General Assembly that would establish a study
commission to determine whether legislation is necessary to ensure adequate,
reliable and economical electric service in light of current trends in the
industry.
Virginia Power has been advocating a cautious and measured approach to the
question of retail competition. In 1996 it initiated legislation, which was
enacted by the Virginia General Assembly and became effective on July 1, 1996,
that authorizes the Virginia Commission to approve alternative forms of
regulation, economic development rates and packages of incentive rates; that
facilitates a regulated utility's ability to enter into joint ventures and
partnerships; that authorizes the
24
<PAGE>
Virginia Commission to determine the treatment of stranded costs for service to
federal customer accounts, which are otherwise outside the Commission's
ratemaking jurisdiction; that establishes that a local referendum must be held
before municipalization of utility services may occur for services previously
provided by a utility; and that authorizes the Virginia Commission to determine
stranded cost payments when utility property is condemned by a municipality or
other corporation possessing the power of eminent domain. Virginia Power has
also obtained regulatory approval of innovative pricing proposals for industrial
loads in Virginia and North Carolina and entered into an energy partnership with
a key industrial customer.
The Virginia Commission is taking an active interest in retail competition
in the electric utility industry and the industry restructuring that might
accompany such competition. It has instituted both a generic investigation of
industry restructuring and competition and a separate proceeding specifically
involving Virginia Power. Virginia Power has proposed in that case an
alternative regulatory plan intended to facilitate an orderly transition to
competition, if such competition should be allowed, including full recovery of
any potentially stranded costs. Virginia Power's case was filed with the
Commission on March 24, 1997, and it proposes a freeze of present rates through
December 31, 2002, during which a portion of earnings above the approved level
would be used to accelerate the write-off of generation-related regulatory
assets and mitigate the costs associated with payments under power purchase
contracts with non-utility generators. If the proposed plan is approved,
Virginia Power would commit to writeoff $494 million of regulatory assets or
other potentially stranded costs during the five-year rate freeze period;
however, Virginia Power believes that current rates, which are requested to
remain in effect, would be sufficient to permit the recognition of these costs
without adversely impacting the results of operations during and after the five-
year period. Virginia Power also seeks approval of the principle of stranded
cost recovery as well as approval of a Transition Cost Charge mechanism by which
costs that may become stranded at the onset of competition will be recoverable
from customers who elect to purchase their power in the competitive market if
retail competition is allowed in Virginia. The Commission has not established a
procedural schedule for Virginia Power's case.
For a more detailed description of the Virginia Commission proceedings, see
Regulation under Item 1. BUSINESS.
Competition-SFAS 71: Virginia Power's regulated rates are designed to
recover its prudently incurred costs of providing service, including the
opportunity to earn a reasonable return on its shareholders' investment.
Virginia Power's financial statements reflect assets and costs under this
cost-based rate regulation in accordance with Statement of Financial Accounting
Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of
Regulation," which provides that certain expenses normally reflected in income
are deferred on the balance sheet as regulatory assets and are recognized as the
related amounts are included in rates and recovered from customers. Continued
accounting under SFAS 71 requires that rates designed to recover the utility's
specific costs of providing service, are, and will continue to be, established
by regulators. The presence of increasing competition that limits the utility's
ability to charge rates that recover its costs, or a change in the method of
regulation with the same effect, could result in the discontinued applicability
of SFAS 71.
Rate-regulated companies are required to write off regulatory assets
against earnings whenever those assets no longer meet the criteria for
recognition as defined by SFAS 71. In addition, SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires a review of long-lived assets for impairment whenever events or changes
in circumstances, such as those used to determine continued applicability of
SFAS 71, indicate that the carrying amount of an asset may not be recoverable.
Virginia Power's operations currently satisfy the SFAS 71 criteria.
However, if events or circumstances should change so that those criteria are no
longer satisfied, management believes that a material adverse effect on Virginia
Power's results of operations and financial position may result. In light of
changes predicted for the electric utility industry, Virginia Power will
continue monitoring its regulated operations in light of the SFAS 71
requirements.
Competition -- Exposure to Potentially Stranded Costs: Under traditional
cost-based regulation, utilities have generally had an obligation to serve
supported by an implicit promise of the opportunity to recover prudently
incurred costs. The most significant potential adverse effect of competition is
"stranded costs," those costs incurred or commitments made by utilities under
cost-based regulation that may not be reasonably expected to be recovered in a
competitive market. Regulatory assets recognized under SFAS 71, unrecovered
investment in power plants, commitments such as long-term purchased power
contracts and nuclear decommissioning costs are items that may become stranded
costs if prices for electric services are determined by the market rather than
based on the cost of providing that service.
Virginia Power's potential exposure to stranded costs is comprised of
long-term purchased power contracts that may be above market, costs pertaining
to certain generating plants that may become uneconomic in a deregulated
environment and regulatory assets for items such as income tax benefits
previously flowed-through to customers, deferred losses on reacquired debt, and
other costs (see Note D to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the
1996 Annual Report to Shareholders). In addition, unfunded obligations for
nuclear plant decommissioning and postretirement benefits not yet recognized in
the financial statements could contribute to Virginia Power's exposure to
potentially stranded costs (see
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<PAGE>
Notes A and N to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996
Annual Report to Shareholders).
Any forecast of potentially stranded costs is inextricably tied to the
assumptions made at the time of the analysis, including the timing of open
access (customer choice) in the market for electric service, the extent of open
access permitted, potential prices in the competitive market, sales and load
growth forecasts, future operating performance, rate revenues permitted during
the transition, cost structure over time, mitigation opportunities and stranded
cost recovery mechanisms. The calculation of potentially stranded costs is
extremely sensitive to the various assumptions made. Certain combinations of
these assumptions as applied to Virginia Power would produce little to no
stranded costs; under other scenarios Virginia Power's exposure to potentially
stranded costs could be substantial.
Virginia Power is presently assessing the reasonableness of various
possible assumptions, but it has not been able to settle on any particular
combination thereof. Thus Virginia Power's maximum exposure to potentially
stranded costs is uncertain, as is the extent to which such costs, if any, will
be recoverable from customers. Virginia Power believes that recovery of such
costs, if any, is appropriate and will vigorously pursue the recovery of any
potentially stranded costs with the regulatory commissions having jurisdiction
over its operations and continue to implement cost-reduction measures in an
effort to mitigate the amount at risk.
Presently, Virginia Power expects to continue to operate under regulation
and to recover its cost of providing traditional electric service. However, the
form of cost-based rate regulation under which Virginia Power operates is likely
to evolve as a result of various legislative or regulatory initiatives,
including Virginia Power's alternative regulatory plan filed with the Virginia
Commission on March 24, 1997.
At this time, Virginia Power management can predict neither the ultimate
outcome of regulatory reform in the electric utility industry nor the impact
such changes would have on Virginia Power.
Environmental Matters: Virginia Power is subject to rising costs resulting
from a steadily increasing number of federal, state and local laws and
regulations designed to protect human health and the environment. These laws and
regulations affect future planning and existing operations. They can result in
increased capital, operating and other costs as a result of compliance,
remediation, containment, and monitoring obligations of Virginia Power. These
costs have been historically recovered through the ratemaking process; however,
should material costs be incurred and not recovered through rates, Virginia
Power's results of operations and financial condition could be adversely
impacted.
Virginia Power incurred expenses of $71.1 million, $68.3 million, and $67.3
million (including depreciation) during 1996, 1995, and 1994, respectively, in
connection with the use of environmental protection facilities and expects these
expenses to be approximately $71.5 million in 1997. In addition, capital
expenditures to limit or monitor hazardous substances were $22.4 million, $23.4
million, and $47.3 million for 1996, 1995, and 1994, respectively. The amount
estimated for 1997 for these expenditures is $14.3 million.
The Clean Air Act, as amended in 1990, requires Virginia Power to reduce
its emissions of sulfur dioxide (SO(2)) and nitrogen oxides (NO(x)). Beginning
in 1995, the SO(2) reduction program is based on the issuance of a limited
number of SO(2) emission allowances, each of which may be used as a permit to
emit one ton of SO(2) into the atmosphere or may be sold to someone else. The
program is administered by the Environmental Protection Agency (EPA).
Virginia Power has installed SO(2) control equipment on Unit 3 at Mt. Storm
Power Station. The SO(2) control equipment began operation on October 31, 1994.
The cost of this and related equipment was $147 million. Additional plans for
SO2 control involve switching to lower sulfur coal, purchase of emission
allowances and additional SO(2) controls. Maximum flexibility and least-cost
compliance will be maintained through annual studies. Virginia Power has
completed its compliance plan for NO(x) control, with the exception of some
additional studies concerning Phase II of the Clean Air Act, for which the EPA
issued final regulations in December 1996, and ozone control requirements, for
which regulations have not yet been promulgated.
In 1996, Virginia Power installed NO(x) controls on Possum Point Unit 4 at
a cost of about $4 million, and at Mt. Storm Unit 3 at a cost of about $6
million. The utility plans to install additional NO(x) controls and modify
existing controls at Mt. Storm Units 1 and 2 in 1997, and to seek alternative
emission limitations from the EPA for all three Mt. Storm Units. The utility has
notified the EPA of its decision (called "early election") to begin complying
with Phase I NO(x) limits at ten of its units in Virginia in 1997, three years
earlier than otherwise required. As a result, the units will not be subject to
more stringent Phase II limits until 2008.
In order to assist the Virginia Department of Environmental Quality in
maintaining good air quality in the Richmond and Hampton Roads regions, and to
avoid the necessity of more stringent regulations, Virginia Power made voluntary
commitments in 1996 to cap NO(x) emissions at its Chesterfield and Yorktown
Power Stations and the Chesapeake Energy Center beginning in 2000.
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Capital expenditures on Clear Air Act compliance over the next five years
are projected to be approximately $21 million. Changes in the regulatory
environment, availability of allowances, and emissions control technology could
substantially impact the timing and magnitude of compliance expenditures.
The Clean Air Act amendments also require Virginia Power to obtain
operating permits for all major emissions-emitting facilities. Permit
applications have been submitted, and deemed complete by the regulatory
authorities, for the Mt. Storm and North Branch power stations. Applications for
the Virginia stations are expected to be filed within the next two years.
Electromagnetic Fields: The possibility that exposure to electromagnetic
fields (EMFs) emanating from power lines, household appliances and other
electric sources may result in adverse health effects has been a subject of
increased public, governmental and media attention. A considerable amount of
scientific research has been conducted on this topic without definitive results.
Research is continuing to resolve scientific uncertainties. It is too soon to
tell what, if any, impact EMFs may have on the company's financial condition.
Nuclear Operations: The Nuclear Regulatory Commission (NRC) revised the
nuclear power plant license renewal rules issued in 1991. Virginia Power intends
to work with industry groups on license renewal programs, and to apply for
renewal of the current 40-year licenses.
Nonutility Issues
Dominion Energy: Dominion Energy has evolved into a company that emphasizes
building businesses in the Americas with long-term earnings and value growth.
The key to this growth is the attainment of low cost production in geographical
areas where Dominion Energy has institutional experience and staff in place.
Dominion Energy will pursue this mission through its business lines of
independent power generation and natural gas and oil exploration, development
and operations.
Dominion Energy's strategy with respect to power generation is to grow
through selective bidding opportunities and the expansion of existing assets.
The primary international markets of interest to Dominion Energy are South and
Central America. Dominion Energy has also established regional offices for
development in Argentina and Bolivia.
Dominion Energy's strategy with respect to its natural gas and oil
businesses is to continue to grow its reserve base, either through drilling or
acquisition. In order to enhance the value in its oil and gas assets, Dominion
Energy will invest in pipeline, gathering and storage facilities where these
investments increase flexibility and market presence. Dominion Energy is also
exploring ways to add value by integrating its gas supply entities with its
power production units.
Coincident with the growing economic opportunities are related risks. These
risks include limited currency fluctuations, developments in both domestic and
international economic conditions, and governmental and regulatory actions.
Internationally, Dominion Energy is managing these risks by limiting its
investments to more stable countries and by avoiding over-commitment to one
country. The financial performance of the natural gas operations depends to a
degree on the market price of natural gas which is influenced by many factors
outside the control of Dominion Energy. However, due to the advantageous cost
basis of its reserves and related tax credits, natural gas operations are
profitable at today's market prices. Much of Dominion Energy's gas reserves has
production-based tax credits. Consequently, future profitability could be
affected adversely by federal legislation which would remove the tax credit
prior to its current expiration in 2002.
Dominion Capital: Dominion Capital has evolved from a company which
centered its earnings performance primarily on transactional activity to one
focused on obtaining earnings from ongoing operations. Dominion Capital's
strategy is to actively operate and manage a specialized financial services
business and to a lesser degree, continue its real estate activities. In
addition, Dominion Capital plans to continue to expand its flexibility by
achieving stand-alone taxpayer status and independent credit capacity.
Dominion Capital is divided into three major strategic areas. They consist
of (1) financial services businesses, (2) core investments of Rincon Securities
and Vidalia Hydroelectric, and (3) real estate and passive investments.
The financial services businesses, from which management expects continued
growth, focus on commercial lending to medium-sized companies, origination and
servicing of home mortgage and home equity loans to individuals, and a merchant
banking enterprise whose clients are small to medium sized oil and gas
producers. The primary risks characteristic of these businesses are credit,
interest rate, operation reserve, and market price of gas. The credit risk is
mitigated by diversification of client base, geographic and industry
concentrations. In addition, these companies are managed by experienced
management and underwriting professionals. The interest rate risk is managed by
floating rate loans, loan securitizations which transfer most of the risk to
investors, prepayment penalties and hedging programs for presecuritized loans.
The operation reserve risk is tempered by doing business with clients that have
management teams with proven track records and requiring quality third-party
reserve reports. The gas market price risk is hedged through a swap program that
establishes a price for reserves that supports the original loan underwritten.
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<PAGE>
Rincon Securities and Vidalia Hydroelectric will be managed to optimize
profitability but will not offer growth opportunities. The real estate and
passive direct investments will be managed to harvest capital for reinvestment.
The critical risk to the real estate investments is the regional economy which
affects both the market price and the product's absorption rate.
Corporate Issues
In November 1996, Dominion Resources through its indirect United Kingdom
(U.K.) subsidiary DR Investments (UK) PLC, posted a formal offer document to the
shareholders of East Midlands Electricity plc (East Midlands) and as of March
14, 1997, all outstanding shares of East Midland's have been acquired. This
offer amounts to approximately $2.2 billion.
East Midlands is a regional electricity company based in the Nottingham
area of England that serves about 2.3 million homes and businesses. It buys
electricity from the U.K. competitive pool and direct from generating companies
and supplies it to all smaller businesses and domestic customers in its
franchise area plus to larger business customers anywhere in the country on a
negotiated contract basis. This is a pattern which may be coming to the United
States as the push for more competition especially in the wholesale power market
sector of the electricity business intensifies. In addition, Dominion Resources
expects to gain valuable experience from the U.K. business in the area of direct
competition for individual consumers when deregulation comes to the U.K. in
1998.
Risk associated with this business includes the fact that the distribution
business of East Midlands is regulated under a license pursuant to which revenue
of the distribution business is controlled by a distribution price control
formula established and reviewed by U.K. regulators. There can be no assurance
that any review by the U.K. regulators will not adversely affect East Midlands.
Furthermore, the supply business in the U.K. is being progressively opened
to competition. Other factors that could adversely affect the business of East
Midlands are pool purchase price volatility (East Midlands obtains the
electricity it sells under fixed price contracts by purchases from wholesale
trading markets in the U.K.) and changes in U.K. governmental policies,
including the possible introduction of a one-time tax on excess profits of
privatized utilities. East Midlands expects to continue to effectively compete
in the U.K. supply business, utilizing elaborate hedging programs to manage
purchase price volatility risk.
Other Risk Factors and Risk Management Matters
In 1996 and January 1997, Dominion Resources instituted and implemented
risk management policies involving derivative transactions at the corporate,
nonutility and utility levels. In 1997, Dominion Resources will continue to use
derivative financial instruments for prudent risk management. For more
information on derivative transactions (see Notes A and P to the NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual Report to Shareholders).
As Dominion Resources continues to expand its operations in competitive
power supply markets, the possibility of challenges by contractual purchasers of
power exists. There could be a significant impact on the results of operations
of Dominion Resources if any of the contracts were to be successfully challenged
resulting in unfavorable modifications. Management continues to evaluate its
significant power contracts and has concluded that the terms are binding and
enforceable.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CASH FLOWS AND FINANCIAL CONDITION
(Unaudited)
Consolidated
Financing Activity
Each of Dominion Resources' subsidiaries -- Virginia Power, Dominion
Energy, and Dominion Capital -- obtains capital primarily through cash from
operations, debt financings and equity contributed by the parent. The utility
and nonutility companies obtain financing based on their individual credit
profiles and ability to repay the debt; in no way are the other companies
contingently liable for each other's indebtedness.
Commercial Paper
To finance working capital for operations, proceeds from the sale of
Dominion Resources commercial paper in regional and national markets are made
available to its nonutility subsidiaries under the terms of intercompany credit
agreements. To support these borrowings, Dominion Resources had available bank
lines of credit totaling $400.8 million at the end of 1996. Amounts borrowed by
the subsidiaries are repaid to Dominion Resources through cash flows from
operations and through proceeds from permanent financings.
Virginia Power has a commercial paper program with a limit of $500 million.
The program is supported by $500 million of revolving credit facilities and is
used primarily to finance working capital for operations.
Common Equity
Dominion Resources made no underwritten public offerings of common stock in
1996, but did raise capital from sales of common stock through the Automatic
Dividend Reinvestment and Stock Purchase Plan, Customer Stock Purchase Plan,
Dominion Direct Investment plan, and Employee Savings Plan. On July 8, 1996,
Dominion Resources established the Dominion Direct Investment plan. The Dominion
Direct Investment Plan continues and expands the Automatic Dividend Reinvestment
and Stock Purchase Plan. Dominion Resources will continue to raise capital
through Dominion Direct Investment and the Employee Savings plans in 1997.
Proceeds from these plans were (in millions): 1996-$164.2; 1995-$136.9; and
1994-$166. Reflected in the amounts of proceeds from these plans were the
repurchases of 136,800 shares of common stock in 1996 for an aggregate price of
$5.5 million, 685,500 shares of common stock in 1995 for an aggregate price of
$24.8 million, and 566,000 shares in 1994 for an aggregate price of $20.7
million. In 1997, Dominion Resources expects to make an underwritten public
offering of common stock in the amount of approximately $300 million to finance
the purchase of East Midlands.
Virginia Power
Liquidity and Capital Resources
Cash flow from operating activities has accounted for, on average, 75% of
Virginia Power's cash requirements over the past three years.
With the completion of the 882 Mw coal-fired power station near Clover,
Virginia, Virginia Power is in a period in which internal cash generation will
exceed construction expenditures. The internal generation of cash in 1996, 1995
and 1994 provided 143%, 119% and 88%, respectively, of the funds required for
Virginia Power's capital requirements.
Net cash provided by operating activities decreased $10.1 million in 1996
as compared to 1995, primarily as a result of normal operations.
Net cash provided by operating activities increased by $107.1 million in
1995 as compared to 1994, primarily as a result of increased sales, partially
offset by a number of other factors resulting from normal operations.
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Cash from (used in) financing activities was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(millions)
<S> <C>
Contribution from parent.................................................. $ 75.0
Issuance of long-term debt................................................ $ 24.5 $ 240.0 464.0
Repayment of long-term debt............................................... (284.1) (439.0) (334.3)
Issuance of securities of subsidiary trust................................ 135.0
Issuance (repayment) of short-term debt................................... 143.4 169.0 (43.0)
Common dividend payments.................................................. (385.8) (394.3) (395.5)
Other..................................................................... (48.8) (58.0) (50.5)
------- ------- -------
Total................................................................ $(550.8) $(347.3) $(284.3)
------- ------- -------
------- ------- -------
</TABLE>
In 1996, Virginia Power issued $24.5 million of variable rate solid waste
disposal securities to refund $24.5 million of securities assumed in its
acquisition of the North Branch Power Station. Also in 1996, Virginia Power
retired a total of $259.6 million of Medium-Term Notes through mandatory
maturities.
In June 1996, Virginia Power increased the limit for its commercial paper
program from $300 million to $500 million with the execution of $500 million of
revolving credit facilities, which replaced existing liquidity support. Proceeds
from the sale of commercial paper are primarily used to finance working capital
for operations. Net borrowings under the commercial paper program were $312.4
million at December 31, 1996.
In January 1997, Virginia Power filed a registration statement with the
Securities and Exchange Commission for $400 million of Junior Subordinated
Debentures. At December 31, 1996, Virginia Power had two additional shelf
registration statements for debt securities registered with the Securities and
Exchange Commission, one for $575 million of First and Refunding Mortgage Bonds
and the other for $200 million of Medium-Term Notes, Series F. In February 1997,
Virginia Power issued $200 million of First and Refunding Mortgage Bonds, the
proceeds of which were primarily used to refund a portion of Virginia Power's
debt that matured in February and March of 1997. These three shelf registrations
combine to provide Virginia Power with $975 million of unused debt capital
resources. In addition, Virginia Power has a Preferred Stock shelf, registered
with the Securities and Exchange Commission, for $100 million in aggregate
principal amount, which has not been utilized. Virginia Power intends to issue
securities from time to time to meet its capital requirements.
Cash (used in) investing activities was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(millions)
<S> <C>
Utility plant expenditures................................................ $(393.8) $(519.9) $(580.9)
Nuclear fuel.............................................................. (90.2) (57.6) (80.0)
Nuclear decommissioning contributions..................................... (36.2) (28.5) (24.5)
Sale of accounts receivable, net.......................................... (160.0) (40.0)
Purchase of subsidiary assets............................................. (13.7)
Other..................................................................... (12.5) (11.1) (1.4)
------- ------- -------
Total................................................................ $(546.4) $(777.1) $(726.8)
------- ------- -------
------- ------- -------
</TABLE>
Investing activities in 1996 resulted in a net cash outflow of $546.4
million primarily due to $393.8 million of construction expenditures and $90.2
million of nuclear fuel expenditures. The construction expenditures included
approximately $78.6 million for production projects, $244.6 million for
transmission and distribution projects, and $17.1 million on new generating
facilities.
Capital Requirements
Virginia Power presently anticipates that kilowatt-hour sales will grow
approximately 2.4 percent a year through 2011. Both the Hoosier 400 Mw long-term
purchase and the AEP 500 Mw long-term purchase agreements will expire on
December 31, 1999. With the scheduled termination of 900 Mw of long-term
purchases and continued system growth, Virginia Power presently anticipates
adding 1,200 Mw of short-term (three-year) purchases beginning in 2000. Virginia
Power has and will pursue capacity acquisition plans to provide that capacity
and maintain a high degree of service reliability. This capacity may be owned
and operated by others and sold to Virginia Power or may be built by Virginia
Power if it determines it can build capacity at a lower overall cost.
Clover Unit 2, which is part of a two-unit facility jointly owned with
ODEC, began commercial operation in March 1996. Virginia Power's fifty percent
ownership share of the cost of construction was completed at a cost of $235
million.
Virginia Power will require $311.3 million to meet long-term debt
maturities in 1997. Virginia Power presently estimates that all of its 1997
construction expenditures, including nuclear fuel expenditures, will be met
through cash flow from
30
<PAGE>
operations. Other capital requirements will be met through a combination of
sales of securities including the sale of $200 million of First and Refunding
Mortgage Bonds issued in February 1997 and short-term borrowings.
Dominion Energy
Liquidity and Capital Resources
Dominion Energy funds its capital requirements through operations, equity
contributions by Dominion Resources, an intercompany credit agreement with
Dominion Resources and bank revolving credit agreements.
Net cash provided by operating activities increased by $52.1 million in
1996, as compared to 1995, primarily due to cash generated by operations of
acquired companies and assets and from normal operations.
Cash from (used in) financing activities was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(millions)
<S> <C>
Contribution from parent.................................................. $ 75.0 $ 149.3
Issuance of long-term debt................................................ 221.7
Repayment of long-term debt............................................... (72.5)
Repayment of short-term debt.............................................. (8.9) $ (52.6)
Common dividend payments.................................................. (43.3) (31.6) (26.4)
Issuance (repayment) of intercompany debt................................. 19.7 32.4 (47.1)
Other..................................................................... 10.0 9.5 29.1
------- ------- -------
Total................................................................ $ 274.2 $ 87.1 $ (97.0)
------- ------- -------
------- ------- -------
</TABLE>
In 1996, cash flows from financing activities of $274.2 million, resulted
from long-term debt financing and equity contributions from Dominion Resources.
The additional debt and equity requirements were used primarily for the
acquisition of oil and gas properties and an interest in EGENOR.
In 1995, cash flows from financing activities of $87.1 million resulted
from the $149.3 million of equity contributions from Dominion Resources which
was used to retire long-term debt of approximately $72.5 million and fund the
acquisition of Corani.
In 1994, cash flows used in financing activities decreased by $97 million,
resulting from the repayment of short-term and intercompany debt. Proceeds from
the sale of the Black Warrior Trust Units which amounted to $128.4 million were
used to fund the repayments.
Cash from (used in) investing activities was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(millions)
<S> <C>
Purchase of independent power properties.................................. $(167.3) $ (60.2)
Purchase of natural gas properties........................................ (103.9) (68.3) $ (60.4)
Sale of trust units....................................................... 16.4 128.4
Other..................................................................... (82.8) (24.1) (31.1)
------- ------- -------
Total................................................................ $(354.0) $(136.2) $ 36.9
------- ------- -------
------- ------- -------
</TABLE>
Net cash flows used in investing activities in 1996 of $354 million were
used primarily to fund the acquisition of oil and gas properties and an interest
in EGENOR.
In 1995, net cash flows used in investing activities of $136.2 million were
primarily for the acquisitions of Corani and oil and gas properties.
In 1994, net cash flows from investing activities increased, primarily due
to the gain on the sale of the Black Warrior Trust Units offset by the purchase
of oil and natural gas properties.
Capital Requirements
Capital requirements for Dominion Energy in 1997 are forecasted to be
approximately $375 million. These requirements consist of: oil and gas
expenditures of $115 million. Power generation will have capital expenditures of
$260 million (including the Kincaid acquisition).
Sources for these capital requirements will be: nonrecourse debt, cash
flows from operations, equity from Dominion Resources and, if necessary,
borrowings from the revolving credit facility.
It should be noted that amounts enumerated above are estimates;
consequently, actual amounts may differ.
31
<PAGE>
Dominion Capital
Liquidity and Capital Resources
Dominion Capital funds its capital requirements through operations,
intercompany credit agreement with Dominion Resources, equity contributions from
Dominion Resources, a medium-term note facility, bank revolving credit
agreements, term loans and a commercial paper program.
Net cash provided by operating activities decreased by $179.1 million in
1996 as compared to 1995, primarily as a result of the funding of mortgage loans
prior to the securitization of such loans in its financial services business.
Net cash provided by operating activities increased to $49.3 million in
1995 as compared to 1994, primarily due to a number of factors resulting from
normal operations.
Cash from (used in) financing activities was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(millions)
<S> <C>
Contribution from parent..................................................... $ 85.0 $150.0 $ 4.9
Issuance of long-term debt................................................... 104.7 16.1
Repayment of long-term debt.................................................. (52.4) (41.5) (15.3)
Common dividend payments..................................................... (30.7) (22.7) (12.7)
Issuance (repayment) of intercompany debt.................................... 79.6 (52.1) 71.0
Other........................................................................ (0.4) (4.5) 0.8
------ ------ ------
Total................................................................... $185.8 $ 45.3 $ 48.7
------ ------ ------
------ ------ ------
</TABLE>
In 1996, cash flows from financing activities increased to $185.8 million,
primarily due to the following transactions. Dominion Capital received seller
financing of $47.5 million from Resource Mortgage Capital when it purchased
Saxon Mortgage. Intercompany debt which is available through Dominion Capital's
intercompany credit agreement with Dominion Resources, increased by $79.6
million. The proceeds were used to fund capital requirements not covered by
proceeds from operations or debt, including the initial cash payment of the
Saxon Mortgage acquisition, and medium term note maturities of $38.5 million.
During the year, Senior Notes of $46 million were refinanced with similar debt.
In 1995, cash flows from financing activities increased to $45.3 million
due to an equity infusion of $150 million from Dominion Resources. The proceeds
were used to invest in First Source Financial. The remaining proceeds from the
equity infusion were used to pay down intercompany and long-term debt.
In 1994, cash flows from financing activities increased to $48.7 million
due to borrowings from the intercompany credit agreement. The proceeds from the
borrowings were used to pay dividends and reduce long-term debt.
Cash from (used in) investing activities was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(millions)
<S> <C>
Investments in affiliates..................................................... $(19.5) $(52.4)
Capital expenditures.......................................................... (1.9)
Other......................................................................... (23.9) (31.0) $(32.5)
------ ------ ------
Total.................................................................... $(43.4) $(85.3) $(32.5)
------ ------ ------
------ ------ ------
</TABLE>
Net cash flows used in investing activities in 1996 resulted from the
acquisition of Saxon Mortgage, the residual interest in mortgage loans
securitized relating to Saxon Mortgage and equity investments in Cambrian
Capital (Cambrian), a merchant banking enterprise for emerging independent oil
and natural gas producers. Net cash flows used in investing activities in 1995
resulted primarily from its investment in First Source Financial. Investing
activities in 1994 resulted in a net cash outflow of $32.5 million as a result
of venture capital and other investments.
Capital Requirements
Dominion Capital's principal focus is growing its financial services
companies. First Source Financial will increase its loan portfolio from $650
million to approximately $954 million in 1997. Saxon Mortgage plans to generate
almost $2 billion in loan originations primarily in the sub-prime credit arena
during 1997. Cambrian will expand its loan portfolio to approximately $100
million in 1997. To finance these expansion plans in 1997, Dominion Capital
plans to utilize approximately $160 million in new equity and intercompany debt.
The remaining capital requirements will come from the reinvestment of cash from
operations, harvesting capital from existing real estate and other assets, and
various third party credit sources. Dominion Capital anticipates dividend
payments to Dominion Resources of approximately $31 million.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
For The Years Ended December 31,
1996 1995 1994
-------- -------- --------
(millions, except per share
amounts)
<S> <C>
OPERATING REVENUES AND INCOME:.............................................................
Electric utility...................................................................... $4,382.6 $4,350.4 $4,170.8
Nonutility............................................................................ 459.7 301.3 320.3
-------- -------- --------
Total operating revenues and income................................................... 4,842.3 4,651.7 4,491.1
-------- -------- --------
OPERATING EXPENSES:
Fuel, net............................................................................. 987.0 1,006.9 973.0
Purchased power capacity, net......................................................... 700.5 688.4 669.4
Restructuring......................................................................... 91.6 121.5
Other operation....................................................................... 807.5 721.6 739.6
Maintenance........................................................................... 250.9 260.5 263.2
Depreciation, depletion and amortization.............................................. 615.2 551.0 533.1
Other taxes........................................................................... 285.2 273.8 274.6
-------- -------- --------
Total operating expenses.............................................................. 3,737.9 3,623.7 3,452.9
-------- -------- --------
OPERATING INCOME........................................................................... 1,104.4 1,028.0 1,038.2
-------- -------- --------
OTHER INCOME............................................................................... 9.8 7.3 13.5
-------- -------- --------
INCOME BEFORE FIXED CHARGES AND FEDERAL INCOME TAXES....................................... 1,114.2 1,035.3 1,051.7
-------- -------- --------
FIXED CHARGES:
Interest charges, net................................................................. 387.0 381.7 360.3
Preferred dividends and distributions of Virginia Power, net.......................... 42.6 46.5 42.2
-------- -------- --------
Total fixed charges................................................................... 429.6 428.2 402.5
-------- -------- --------
Income before provision for federal income taxes........................................... 684.6 607.1 649.2
Provision for federal income taxes.................................................... 212.5 182.1 171.0
-------- -------- --------
NET INCOME................................................................................. $ 472.1 $ 425.0 $ 478.2
Retained earnings, January 1............................................................... 1,427.6 1,455.2 1,417.8
COMMON DIVIDENDS AND OTHER DEDUCTIONS:
Dividends............................................................................. (460.1) (448.7) (434.7)
Other deductions...................................................................... (1.7) (3.9) (6.1)
-------- -------- --------
RETAINED EARNINGS, DECEMBER 31............................................................. $1,437.9 $1,427.6 $1,455.2
-------- -------- --------
-------- -------- --------
Earnings per common share.................................................................. $ 2.65 $ 2.45 $ 2.81
-------- -------- --------
-------- -------- --------
Dividends paid per common share............................................................ $ 2.58 $ 2.58 $ 2.55
-------- -------- --------
-------- -------- --------
Average common shares outstanding.......................................................... 178.3 173.8 170.3
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
33
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> At December 31,
----------------------
1996 1995
--------- ---------
(millions)
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................................................... $ 110.8 $ 66.7
Trading securities................................................................................ 16.4 10.8
Customer accounts receivable, net................................................................. 354.8 362.6
Other accounts receivable......................................................................... 174.9 104.2
Accrued unbilled revenues......................................................................... 162.8 179.5
Materials and supplies at average cost or less:
Plant and general............................................................................ 148.7 160.2
Fossil fuel.................................................................................. 76.8 71.2
Mortgage loans in warehouse....................................................................... 65.8
Other............................................................................................. 209.5 141.5
--------- ---------
1,320.5 1,096.7
--------- ---------
INVESTMENTS:
Investments in affiliates.................................................................... 457.5 436.2
Available-for-sale securities................................................................ 692.4 285.5
Nuclear decommissioning trust funds.......................................................... 443.3 351.4
Investments in real estate................................................................... 107.7 133.0
Other........................................................................................ 234.2 236.6
--------- ---------
1,935.1 1,442.7
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
(includes plant under construction of $180.1 [1995-$512.1])......................................... 16,815.8 15,977.4
Less accumulated depreciation, depletion and amortization.................................... 6,306.4 5,655.1
--------- ---------
10,509.4 10,322.3
--------- ---------
DEFERRED CHARGES AND OTHER ASSETS:
Regulatory assets............................................................................ 773.9 816.4
Other........................................................................................ 366.7 225.2
--------- ---------
1,140.6 1,041.6
--------- ---------
TOTAL ASSETS........................................................................................ $14,905.6 $13,903.3
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
34
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
----------------------
1996 1995
--------- ---------
(millions)
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Securities due within one year............................................................... $ 750.7 $ 420.8
Short-term debt.............................................................................. 378.2 236.6
Accounts payable, trade...................................................................... 410.6 336.7
Accrued interest............................................................................. 107.3 110.5
Accrued payroll.............................................................................. 73.1 77.7
Severance costs accrued...................................................................... 50.2 42.5
Customer deposits............................................................................ 50.0 55.4
Other........................................................................................ 155.4 114.0
--------- ---------
1,975.5 1,394.2
--------- ---------
LONG-TERM DEBT:
Utility...................................................................................... 3,579.4 3,889.4
Nonrecourse-nonutility....................................................................... 505.7 523.5
Other........................................................................................ 642.5 199.0
--------- ---------
4,727.6 4,611.9
--------- ---------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes........................................................................ 1,743.3 1,661.1
Investment tax credits....................................................................... 255.3 272.2
Deferred fuel expenses....................................................................... 3.3 57.7
Other........................................................................................ 452.2 340.2
--------- ---------
2,454.1 2,331.2
--------- ---------
TOTAL LIABILITIES................................................................................... 9,157.2 8,337.3
--------- ---------
COMMITMENTS AND CONTINGENCIES
Virginia Power obligated mandatorily redeemable preferred securities of subsidiary trust*........... 135.0 135.0
PREFERRED STOCK:
Virginia Power stock subject to mandatory redemption......................................... 180.0 180.0
Virginia Power stock not subject to mandatory redemption..................................... 509.0 509.0
--------- ---------
COMMON SHAREHOLDERS' EQUITY:
Common stock -- no par authorized 300,000,000 shares, outstanding -- 181,220,746 shares at 1996
and 176,414,110 shares at 1995................................................................. 3,471.4 3,303.5
Retained earnings................................................................................. 1,437.9 1,427.6
Allowance on available-for-sale securities, net of tax............................................ (1.1) (6.7)
Other paid-in capital............................................................................. 16.2 17.6
--------- ---------
4,924.4 4,742.0
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................................... $14,905.6 $13,903.3
--------- ---------
--------- ---------
</TABLE>
- ---------------
* As described in Note L, the 8.05% Junior Subordinated Notes totaling $139.2
million principal amount constitute 100% of the Trust's assets.
The accompanying notes are an integral part of the Consolidated Financial
Statements.
35
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended December 31,
--------------------------------
1996 1995 1994
--------- -------- -------
(millions)
<S> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income............................................................................... $ 472.1 $ 425.0 $ 478.2
Adjustments to reconcile net income to net cash:
Depreciation, depletion and amortization............................................ 694.4 633.5 610.7
Deferred income taxes............................................................... 84.1 26.4 68.2
Investment tax credits, net......................................................... (16.9) (16.9) (17.1)
Allowance for other funds used during construction.................................. (3.0) (6.7) (6.4)
Deferred fuel expense............................................................... (54.4) 6.2 (2.6)
Deferred capacity expense........................................................... (9.2) 6.4 26.5
Restructuring expense............................................................... 56.3 96.2
Non-cash return on terminated construction project costs -- pre-tax................. (6.4) (8.4) (10.3)
Gain on sale of trust units......................................................... (8.7) (49.0)
Purchase of mortgage loans.......................................................... (769.2)
Proceeds from sale and principal collections of mortgage loans...................... 703.4
Changes in current assets and liabilities:
Accounts receivable.............................................................. (47.0) (38.7) 19.1
Accrued unbilled revenues........................................................ 17.6 (27.7) 11.9
Materials and supplies........................................................... 6.0 61.1 (6.5)
Accounts payable, trade.......................................................... 73.8 (37.6) 32.6
Accrued interest and taxes....................................................... (17.5) 33.6 (46.5)
Provision for rate refunds.......................................................... (12.2) (89.5)
Other changes....................................................................... (151.9) 39.8 (27.5)
--------- -------- -------
Net cash flows from operating activities................................................... 1,032.2 1,171.3 991.8
--------- -------- -------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Issuance of common stock............................................................ 169.7 161.7 186.7
Preferred securities of subsidiary trust............................................ 135.0
Issuance of long-term debt:
Utility.......................................................................... 24.5 240.0 464.0
Nonrecourse-nonutility........................................................... 434.5 54.3 18.7
Other............................................................................ 342.5
Issuance (repayment) of short-term debt............................................. 134.5 101.1 (117.0)
Repayment of long-term debt and preferred stock..................................... (336.5) (553.0) (349.6)
Common dividend payments............................................................ (460.1) (448.7) (434.7)
Other............................................................................... (4.5) (20.5) (8.0)
--------- -------- -------
Net cash flows from (used in) financing activities......................................... 304.6 (330.1) (239.9)
--------- -------- -------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Utility capital expenditures (excluding AFC-equity funds)........................... (484.0) (577.5) (660.9)
Acquisition of natural gas and independent power properties......................... (271.2) (128.5) (60.4)
Sale of accounts receivable, net.................................................... (160.0) (40.0)
Sale of trust units................................................................. 16.4 128.4
Purchase of marketable securities................................................... (351.3) (61.8)
Additions to mortgage investments................................................... (58.3)
Acquisitions of businesses.......................................................... (19.5) (52.4)
Other investments................................................................... (108.4) 42.6 (74.3)
--------- -------- -------
Net cash flows used in investing activities................................................ (1,292.7) (921.2) (707.2)
--------- -------- -------
Increase (decrease) in cash and cash equivalents........................................... $ 44.1 $ (80.0) $ 44.7
Cash and cash equivalents at beginning of the year......................................... 66.7 146.7 102.0
--------- -------- -------
Cash and cash equivalents at end of the year............................................... $ 110.8 $ 66.7 $ 146.7
--------- -------- -------
--------- -------- -------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
36
<PAGE>
The NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on pages 36 through 50 and
related report of Deloitte & Touche LLP, independent auditors, appearing on page
52 of the 1996 Annual Report to Shareholders, for the fiscal year ended December
31, 1996, filed herein as Exhibit 13, is hereby incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of Dominion Resources contained on
pages 2 through 4 of the 1997 Proxy Statement, File No. 1-8489, dated March 7,
1997 is hereby incorporated herein by reference. The information concerning the
executive officers of Dominion Resources required by this Item is incorporated
by reference to the section in Part I hereof entitled "EXECUTIVE OFFICERS OF THE
REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive and director compensation contained on
pages 10 through 17 of the 1997 Proxy Statement is hereby incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning stock ownership by directors and executive
officers contained on page 5 of the 1997 Proxy Statement is hereby incorporated
herein by reference. There is no person known by Dominion Resources to be the
beneficial owner of more than five percent of Dominion Resources common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Certain documents are filed as part of this Form 10-K and are
incorporated herein by reference or found on the pages noted.
1. Financial Statements
<TABLE>
<CAPTION>
1996
Annual Report 1996
to Shareholders Form 10-K
(Page) (Page)
--------------- ---------
<S> <C>
Report of Independent Auditors.................................................... 52
Report of Management.............................................................. 51
Consolidated Statements of Income and Retained Earnings
for the years ended December 31, 1996, 1995 and 1994............................ 33
Consolidated Balance Sheets at December 31, 1996 and 1995......................... 34-35
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994................................................ 36
Notes to Consolidated Financial Statements........................................ 36-50
</TABLE>
2. Exhibits
<TABLE>
<S> <C>
3(i) - Articles of Incorporation as in effect May 4, 1987 (Exhibit 3(i), Form 10-K for the fiscal year ended
December 31, 1993, File No. 1-8489, incorporated by reference).
3(ii) - Bylaws as in effect on September 21, 1994 (Exhibit 3(ii), Form 10-K for the fiscal year ended December 31,
1994, File No. 1-8489, incorporated by reference).
4(i) - See Exhibit 3(i) above.
4(ii) - Indenture of Mortgage of Virginia Electric and Power Company, dated November 1, 1935, as supplemented and
modified by fifty-eight Supplemental Indentures (Exhibit 4(ii), Form 10-K for the fiscal year ended
December 31, 1985, File No. 1-2255, incorporated by reference); Fifty-Ninth Supplemental Indenture
(Exhibit 4(ii), Form 10-Q for the quarter ended March 31, 1986, File No. 1-2255, incorporated by
reference); Sixtieth Supplemental Indenture (Exhibit 4(ii), Form 10-Q for the quarter ended September 30,
1986, File No. 1-2255, incorporated by reference); Sixty-First Supplemental Indenture (Exhibit 4(ii), Form
10-Q for the quarter ended June 30, 1987, File No. 1-2255, incorporated by reference); Sixty-Second
Supplemental Indenture (Exhibit 4(ii), Form 8-K, dated November 3, 1987, File No. 1-2255, incorporated by
reference); Sixty-Third Supplemental Indenture (Exhibit 4(i), Form 8-K, dated June 8, 1988, File No.
1-2255, incorporated by reference); Sixty-Fourth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated
February 8, 1989, File No. 1-2255, incorporated by reference); Sixty-Fifth Supplemental Indenture (Exhibit
4(i), Form 8-K, dated June 22, 1989, File No. 1-2255, incorporated by reference); Sixty-Sixth Supplemental
Indenture, (Exhibit 4(i), Form 8-K, dated February 27, 1990, File No. 1 -2255, incorporated by reference);
Sixty-Seventh Supplemental Indenture (Exhibit 4(i), Form 8-K, dated April 2, 1991, File No. 1-2255,
incorporated by reference); Sixty-Eighth Supplemental Indenture, (Exhibit 4(i)), Sixty-Ninth Supplemental
Indenture, (Exhibit 4(ii)) and Seventieth Supplemental Indenture, (Exhibit 4(iii), Form 8-K, dated
February 25, 1992, File No. 1-2255, incorporated by reference); Seventy-First Supplemental Indenture
(Exhibit 4(i)) and Seventy-Second Supplemental Indenture, (Exhibit 4(ii), Form 8-K, dated July 7, 1992,
File No. 1-2255, incorporated by reference); Seventy-Third Supplemental Indenture, (Exhibit 4(i), Form
8-K, dated August 6, 1992, File No. 1-2255, incorporated by reference); Seventy-Fourth Supplemental
Indenture (Exhibit 4(i), Form 8-K, dated February 10, 1993, File No. 1-2255, incorporated by reference);
Seventy-Fifth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated April 6, 1993, File No. 1-2255,
incorporated by reference); Seventy-Sixth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated April 21,
1993, File No. 1-2255, incorporated by reference); Seventy-Seventh Supplemental Indenture, (Exhibit 4(i),
Form 8-K, dated June 8, 1993, File No. 1-2255, incorporated by reference); Seventy-Eighth Supplemental
Indenture, (Exhibit 4(i), Form 8-K, dated August 10, 1993, File No. 1-2255, incorporated by reference);
Seventy-Ninth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated August 10, 1993, File No. 1-2255,
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
incorporated by reference); Eightieth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated October 12,
1993, File No. 1-2255, incorporated by reference); Eighty-First Supplemental Indenture, (Exhibit 4(iii),
Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference);
Eighty-Second Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated January 18, 1994, File No. 1-2255,
incorporated by reference); Eighty-Third Supplemental Indenture (Exhibit 4(i), Form 8-K, dated October 19,
1994, File No. 1-2255, incorporated by reference); Eighty-Fourth Supplemental Indenture (Exhibit 4(i),
Form 8-K, dated March 23, 1995, File
No. 1-2255, incorporated by reference, and Eighty-Fifth Supplemental Indenture (Exhibit 4(i), Form 8-K,
dated February 20, 1997, File No. 1-2255, incorporated by reference).
4(iii) - Indenture, dated April 1, 1985, between Virginia Electric and Power Company and Crestar Bank (formerly
United Virginia Bank) (Exhibit 4(iv), Form 10-K for the fiscal year ended December 31, 1993, File No.
1-2255, incorporated by reference).
4(iv) - Indenture, dated as of June 1, 1986, between Virginia Electric and Power Company and Chemical Bank
(Exhibit 4(v), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by
reference).
4(v) - Indenture, dated April 1, 1988, between Virginia Electric and Power Company and Chemical Bank, as
supplemented and modified by a First Supplemental Indenture, dated August 1, 1989, (Exhibit 4(vi), Form
10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference).
4(vi) - Subordinated Note Indenture, dated as of August 1, 1995 between Virginia Electric and Power Company and
Chase Manhattan Bank (formerly Chemical Bank), as Trustee, as supplemented (Exhibit 4(a), Form S-3
Registration Statement File No. 333-20561 as filed on January 28, 1997, incorporated by reference).
4(vii) - Dominion Resources agrees to furnish to the Commission upon request any other instrument with respect to
long-term debt as to which the total amount of securities authorized thereunder does not exceed 10% of
Dominion Resources' total assets.
10(i) - Operating Agreement, dated June 17, 1981, between Virginia Electric and Power Company and Monongahela
Power Company, the Potomac Edison Company, West Penn Power Company, and Allegheny Generating Company
(Exhibit 10(vi), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by
reference).
10(ii) - Purchase, Construction and Ownership Agreement, dated as of December 28, 1982 but amended and restated on
October 17, 1983, between Virginia Electric and Power Company and Old Dominion Electric Cooperative
(Exhibit 10(viii), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by
reference).
10(iii) - Interconnection and Operating Agreement, dated as of December 28, 1982 as amended and restated on October
17, 1983, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit
10(ix), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by
reference).
10(iv) - Nuclear Fuel Agreement, dated as of December 28, 1982 as amended and restated on October 17, 1983, between
Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit 10(x), Form 10-K for
the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by reference).
10(v) - Credit Agreements, dated as of June 7, 1996, between Chase Manhattan Bank (formerly Chemical Bank) and
Virginia Electric and Power Company (Exhibit 10(i) and Exhibit 10(ii), Form 10-Q for the period ended June
30, 1996. File No. 1-2255, incorporated by reference).
10(vi) - Inter-Company Credit Agreement, dated December 20, 1985, as modified on August 21, 1987, between Dominion
Resources and Dominion Capital, Inc. (Exhibit 10(vi), Form 10-K for the fiscal year ended December 31,
1993, File No. 1-8489, incorporated by reference).
10(vii) - Inter-Company Credit Agreement, dated October 1, 1987 as amended and restated as of May 1, 1988 between
Dominion Resources and Dominion Energy, Inc. (Exhibit 10(vii), Form 10-K for the fiscal year ended
December 31, 1993, File No. 1-8489, incorporated by reference).
</TABLE>
39
<PAGE>
<TABLE>
<S> <C>
10(viii) - Inter-Company Credit Agreement, dated as of September 1, 1988 between Dominion Resources and Dominion
Lands, Inc. (Exhibit 10(viii), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8489,
incorporated by reference).
10(ix) - Form of Amended and Restated Articles of Partnership in Commendam of Catalyst Old River Hydroelectric
Limited Partnership, by and between Catalyst Vidalia Corporation and Dominion Capital, Inc. effective as
of August 24, 1990 (Exhibit 10(xii) Form 10-K for the fiscal year ended December 31, 1990, File No.
1-8489, incorporated by reference).
10(x) - Supplemental Funding Agreement, dated as of August 24, 1990, by and among Dominion Capital, Inc., Catalyst
Old River Hydroelectric Limited Partnership and First National Bank of Commerce (Exhibit 10(xiii) Form
10-K for the fiscal year ended December 31, 1990, File No. 1-8489, incorporated by reference).
10(xi) - Credit Agreement, dated December 1, 1985, between Virginia Electric and Power Company and Old Dominion
Electric Cooperative (Exhibit 10(xix), Form 10-K for the fiscal year ended December 31, 1985, File No.
1-8489, incorporated by reference).
10(xii) - Agreement for Northern Virginia Services, dated as of November 1, 1985, between Potomac Electric Power
Company and Virginia Electric and Power Company (Exhibit 10(xxi), Form 10-K for the fiscal year ended
December 31, 1985, File No. 1-8489, incorporated by reference).
10(xiii) - Purchase, Construction and Ownership Agreement, dated May 31, 1990, between Virginia Electric and Power
Company and Old Dominion Electric Cooperative (Exhibit 10(xi), Form 10-K for the fiscal year ended
December 31, 1990, File No. 1 -2255, incorporated by reference).
10(xiv) - Operating Agreement, dated May 31, 1990, between Virginia Electric and Power Company and Old Dominion
Electric Cooperative (Exhibit 10(xii), Form 10-K for the fiscal year ended December 31, 1990, File No.
1-2255, incorporated by reference).
10(xv) - Coal-Fired Unit Turnkey Contract (Volume 1), dated April 6, 1989, and the United 2 Amendment (Volume 1),
dated May 31, 1990 between Virginia Electric and Power Company and Old Dominion Electric Cooperative,
Westinghouse, Black & Veatch, Combustion Engineering and H. B. Zachry (Volumes 2-11 contain technical
specifications) (Exhibit 10(xiii), Form 10-K for the fiscal year ended December 31, 1990, File No. 1-2255,
incorporated by reference).
10(xvi) - Trust Agreement of Dominion Resources Black Warrior Trust, dated May 31, 1994, among Dominion Black
Warrior Basin, Inc., Dominion Resources, Inc., Mellon Bank (DE) National Association and Nationsbank of
Texas, N.A. (Exhibit 3.1, Amendment No. 1 to Registration Statement, File No. 33-53513, filed June 1,
1994, incorporated by reference).
10(xvii) - First Amendment of Trust Agreement of Dominion Resources Black Warrior Trust, dated June 27, 1994, among
Dominion Black Warrior Basin, Inc., Dominion Resources, Inc., Mellon Bank (DE) National Association and
Nationsbank of Texas, N.A. (Exhibit 10(ii), Form 10-Q for the quarter ended June 30, 1994, File No.
1-8489, incorporated by reference).
10(xviii)* - Dominion Resources, Inc. Directors' Deferred Compensation Plan, effective July 1, 1986, as amended and
restated effective January 1, 1996 (filed herewith).
10(xix)* - Dominion Resources, Inc. Performance Achievement Plan, effective January 1, 1986, as amended and restated
effective February 19, 1988 (Exhibit 10(xxi), Form 10-K for the fiscal year ended December 31, 1988, File
No. 1-8489, incorporated by reference).
10(xx)* - Dominion Resources, Inc. Executive Supplemental Retirement Plan, effective January 1, 1981 as amended and
restated effective October 22, 1988 and amended and restated June 15, 1990 (Exhibit 10(xxiv), Form 10-K
for the fiscal year ended December 31, 1990, File No. 1-8489, incorporated by reference).
10(xxi)* - Arrangements with certain executive officers regarding additional credited years of service for retirement
and retirement life insurance purposes (Exhibit 10(xxv), Form 10-K for the fiscal year ended December 31,
1991, File No. 1-8489, incorporated by reference).
10(xxii)* - Dominion Resources, Inc.'s Cash Incentive Plan as adopted December 20, 1991 (Exhibit 10(xxii), Form 10-K
for the fiscal year ended December 31, 1991, File No. 1-8489, incorporated by reference).
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
10(xxiii)* - Form of Employment Continuity Agreement for certain officers of Dominion Resources (Exhibit (xxvi), Form
10-K for the fiscal year ended December 31, 1994, File No. 1-8489, incorporated by reference).
10(xxiv)* - Dominion Resources, Inc. Retirement Benefit Funding Plan, effective June 29, 1990 (Exhibit 10(xxxiii),
Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8489, incorporated by reference).
10(xxv)* - Dominion Resources, Inc. Retirement Benefit Restoration Plan as adopted effective January 1, 1991 (Exhibit
10(xxvii), Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8489, incorporated by
reference).
10(xxvi)* - Dominion Resources, Inc. Executives' Deferred Compensation Plan, effective January 1, 1994 and as amended
and restated January 1, 1997 (filed herewith).
10(xxvii)* - Employment Agreement dated April 12, 1995 (Exhibit 10(i), Form 10-Q for the quarter ended March 31, 1995,
File No. 1-8489, incorporated by reference) and an amendment dated September 15, 1995 between Dominion
Resources and Thos. E. Capps (Exhibit 10(i), Form 10-Q for the quarter ended September 30, 1995, File No.
1-8489, incorporated by reference).
10(xxviii)* - Employment Agreement dated April 12, 1995 (Exhibit 10(i), Form 10-Q for the quarter ended March 31, 1995,
File No. 1-8489, incorporated by reference) and an amendment dated September 15, 1995 between Virginia
Power and James T. Rhodes (Exhibit 10(i), Form 10-Q for the quarter ended September 30, 1995, File No.
1-8489, incorporated by reference).
10(xxix)* - Form of three year Employment Agreement between Dominion Resources and David L. Heavenridge and certain
other executive officers of Dominion Resources (Exhibit 10(xxxiii), Form 10-K for the fiscal year ended
December 31, 1994, File No. 1-8489, incorporated by reference).
10(xxx)* - Dominion Resources, Inc. Stock Accumulation Plan for Outside Directors, effective April 23, 1996 (Exhibit
10, Form 10-Q for the quarter ended March 31, 1996, File No. 1-8489, incorporated by reference).
10(xxxi)* - Employment Agreement dated February 21, 1997 between Dominion Resources and Norman Askew (filed herewith).
10(xxxii) - Recommended Cash Offer dated November 22, 1996 by SBC Warburg and Wasserstein Perella & Co. Limited on
behalf of DR Investments (UK) PLC, a wholly owned subsidiary of Dominion Resources, Inc. (filed herewith).
11 - Computation of Earnings Per Share of Common Stock Assuming Full Dilution (filed herewith).
13 - Portions of the 1996 Annual Report to Shareholders for the fiscal year ended December 31, 1996 (filed
herewith).
21 - Subsidiaries of the Registrant (filed herewith).
23 - Consent of Deloitte & Touche LLP (filed herewith).
27 - Financial Data Schedule (filed herewith).
</TABLE>
- ---------------
* Indicates management contract or compensatory plan or arrangement.
B. Reports on Form 8-K
Dominion Resources filed a report on Form 8-K, dated January 23, 1997,
reporting the acquisition, through a newly created United Kingdom subsidiary, of
East Midlands Electricity plc, a regional electricity company based in the
United Kingdom.
Dominion Resources filed an amendment to the above Form 8-K, dated January
23, 1997, on March 20, 1997 (Form 8-K/A), reporting the financial statements and
pro forma financial information for the acquisition of East Midlands Electricity
plc in the United Kingdom.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DOMINION RESOURCES, INC.
By: THOS. E. CAPPS
------------------------------------
(Thos. E. Capps, Chairman of the
Board of Directors,
President and Chief Executive
Officer)
Date: MARCH 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the 24th day of March, 1997.
Signature Title
--------- -----
JOHN B. ADAMS, JR. Director
- ---------------------------------------
John B. Adams, Jr.
JOHN B. BERNHARDT Director
- ---------------------------------------
John B. Bernhardt
THOS. E. CAPPS Chairman of the Board of Directors,
- --------------------------------------- President (Chief Executive Officer)
Thos. E. Capps and Director
BENJAMIN J. LAMBERT, III Director
- ---------------------------------------
Benjamin J. Lambert, III
RICHARD L. LEATHERWOOD Director
- ---------------------------------------
Richard L. Leatherwood
HARVEY L. LINDSAY, JR. Director
- ---------------------------------------
Harvey L. Lindsay, Jr.
K. A. RANDALL Director
- ---------------------------------------
K. A. Randall
WILLIAM T. ROOS Director
- ---------------------------------------
William T. Roos
FRANK S. ROYAL Director
- ---------------------------------------
Frank S. Royal
JUDITH B. SACK Director
- ---------------------------------------
Judith B. Sack
42
<PAGE>
Signature Title
--------- -----
S. DALLAS SIMMONS Director
- ---------------------------------------
S. Dallas Simmons
Director
- ---------------------------------------
Robert H. Spilman
LINWOOD R. ROBERTSON Executive Vice President
- --------------------------------------- (Chief Financial Officer)
Linwood R. Robertson
J. L. TRUEHEART Vice President and Controller
- --------------------------------------- (Principal Accounting Officer)
J. L. Trueheart
43
<PAGE>
DOMINION RESOURCES, INC.
PORTIONS
OF THE
1996
ANNUAL REPORT
TO
SHAREHOLDERS
(Incorporated by Reference)
EXHIBIT 10 (xviii)
DOMINION RESOURCES, INC.
DIRECTORS' DEFERRED COMPENSATION PLAN
As Amended and Restated
Effective January 1, 1996
For the Directors of:
Dominion Resources, Inc.
Virginia Electric and Power Company
Dominion Capital, Inc.
Dominion Energy, Inc.
Dominion Lands, Inc.
<PAGE>
TABLE OF CONTENTS
Section Page
1. PURPOSE........................................................... 1
2. DEFINITIONS....................................................... 1
3. PARTICIPATION..................................................... 4
4. DEFERRAL ELECTION................................................. 4
5. EFFECT OF NO ELECTION............................................. 5
6. DEFERRED CASH BENEFITS............................................ 6
7. DEFERRED STOCK BENEFITS........................................... 6
8. DISTRIBUTION OF DEFERRED BENEFITS................................. 7
9. HARDSHIP DISTRIBUTIONS............................................ 10
10. COMPANY'S OBLIGATION.............................................. 10
11. CONTROL BY PARTICIPANT............................................ 11
12. CLAIMS AGAINST PARTICIPANT'S BENEFITS............................. 11
13. AMENDMENT OR TERMINATION.......................................... 11
14. NOTICES........................................................... 12
15. WAIVER............................................................ 12
16. CONSTRUCTION...................................................... 12
17. CORPORATE AND COMMITTEE ACTIONS AND RESPONSIBILITIES.............. 12
<PAGE>
1. PURPOSE. The Dominion Resources, Inc. Director's Deferred Compensation
Plan (the "Plan"), is intended to constitute a deferred compensation
plan for directors' fees in accordance with Revenue Ruling 71-419,
1971-2 C.B. 220.
2. DEFINITIONS. The following definitions apply to this Plan and to the
Deferral Election Forms.
(a) Beneficiary or Beneficiaries means a person or persons or
other entity designated on a Beneficiary Designation Form by a
Participant as allowed in subsection 8(C)to receive Deferred
Benefits. If there is no valid designation by the
Participant, or if the designated Beneficiary or Beneficiaries
fail to survive the Participant or otherwise fail to take the
benefit, the Participant's Beneficiary is the first of the
following who survives the Participant: a Participant's
spouse (the person legally married to the Participant when the
Participant dies); the Participant's children in equal shares
and the Participant's other surviving issue, per stirpes; the
Participant's parents; and the Participant's estate.
(b) Beneficiary Designation Form means a form acceptable to the
Chairman of the Committee or his designee used by a
Participant according to this Plan to name the Participant's
Beneficiary or Beneficiaries who will receive Deferred
Benefits under this Plan on account of the Participant's
death.
(c) Board means the board of directors of the Company, according
to law and to each entity's governing documents.
(d) Committee means the Organization and Compensation Committee of
Dominion in the case of a DRI Participant or his Beneficiary,
and the Organization and Compensation Committee of Virginia
Electric and Power Company, in the case of a Virginia Power
Participant or his Beneficiary; provided, however, that all
determinations involving the Deferred Stock Account of a
Participant who is not an Unrestricted Participant shall be
subject to the approval of the Organization and Compensation
Committee of Dominion.
(e) Company means Dominion Resources, Inc.; Virginia Electric and
Power Company; and any of their affiliates that with approval
of the board of directors of Dominion Resources, Inc. adopt or
have adopted this Plan; any successor business by merger,
purchase, or otherwise that maintains the Plan; or any
predecessor business or employer that has maintained the Plan.
(f) Compensation means a Director's Meeting Fees and Retainer Fees
for the Deferral Year.
(g) Deferral Election Form means a document governed by the
provisions of section 4 of this Plan, including the portion
that is the Distribution Election Form and the related
Beneficiary Designation Form that applies to all of that
Participant's Deferred Benefits under the Plan.
<PAGE>
-2-
(h) Deferral Year means a calendar year for which a Director has
an operative Deferral Election Form.
(i) Deferred Benefit means either a Deferred Cash Benefit or a
Deferred Stock Benefit under the Plan for a Participant who
has submitted an operative Deferral Election Form pursuant to
section 4 of this Plan.
(j) Deferred Cash Account means that bookkeeping record
established for each Participant who elects a Deferred Cash
Benefit under this Plan. A Deferred Cash Account is
established only for purposes of measuring a Deferred Cash
Benefit and not to segregate assets or to identify assets that
may or must be used to satisfy a Deferred Cash Benefit. A
Deferred Cash Account will be credited with the Participant's
Compensation deferred as a Deferred Cash Benefit according to
a Deferral Election Form and according to section 6 of this
Plan. A Deferred Cash Account will be credited periodically
with amounts based upon interest rates established by the
Committee under subsection 6(b) of this Plan.
(k) Deferred Cash Benefit means the Deferred Benefit elected by a
Participant under section 4 that results in payments governed
by sections 6 and 8 of this Plan.
(l) Deferred Stock Account means that bookkeeping record
established for each Participant who elects a Deferred Stock
Benefit under this Plan. A Deferred Stock Account is
established only for purposes of measuring a Deferred Stock
Benefit and not to segregate assets or to identify assets that
may or must be used to satisfy a Deferred Stock Benefit. A
Deferred Stock Account will be credited with the Participant's
Compensation deferred as a Deferred Stock Benefit according to
a Deferral Election Form and according to section 7 of this
Plan. A Deferred Stock Account will be credited periodically
with amounts determined by the Committee under subsection 7(b)
of this Plan.
(m) Deferred Stock Benefit means the Deferred Benefit elected by a
Participant under section 4 that results in payments governed
by sections 7 and 8 of this Plan.
(n) Director means a duly elected or appointed member of the Board
who is eligible to participate in this Plan according to
criteria which may from time to time be adopted by that
Company.
(o) Distribution Election Form means that part of a Deferral
Election Form used by a Participant according to this Plan to
establish the duration of deferral and the frequency of
payments of a Deferred Benefit. If a Deferred Benefit has no
Distribution Election Form that is operative according to
section 4 of this Plan, distribution of that Deferred Benefit
is governed by section 8(b) of this Plan.
<PAGE>
-3-
(p) Dominion means Dominion Resources, Inc.
(q) DRI Participant means a Participant to the extent that the
Participant deferred Compensation under this Plan that was
payable by Dominion or another Company that is a nonregulated
subsidiary of Dominion.
(r) Election Date means the date established by this Plan as the
date before which a Director must submit a valid Deferral
Election Form to the Committee. For each Deferral Year, the
Election Date is December 31 of the preceding calendar year.
However, for an individual who becomes a Director during a
Deferral Year, the Election Date is the thirtieth day
following the date that he becomes a Director. Despite the two
preceding sentences, the Committee may set an earlier date as
the Election Date for any Deferral Year.
(s) Meeting Fees means the portion of a Director's Compensation
that is based upon the Director's attendance at Board meetings
and meetings of the Company's committees, according to the
Company's established rules and procedures for compensating
Directors.
(t) Participant means, with respect to any Deferral Year, a
Director whose Deferral Election Form is operative for that
Deferral Year.
(u) Plan means the Dominion Resources, Inc. Directors' Deferred
Compensation Plan.
(v) Retainer Fee means that portion of a Director's Compensation
that is fixed and paid without regard to the Director's
attendance at meetings.
(w) Terminate, Terminating, or Termination, with respect to a
Participant, mean cessation of the Participant's relationship
with the Company as a Director whether by death, disability or
severance for any other reason. Unless the Committee
determines otherwise in its sole discretion, Terminate,
Terminating, or Termination do not include situations where
the Participant continues to be employed by a Company or a
Director on the Board of a Company.
(x) Unrestricted Participant means a Participant who is not
subject to the reporting requirements and other provisions of
Section 16 of the Securities Exchange Act of 1934 with respect
to Dominion.
(y) Virginia Power Participant means a Participant to the extent
that the Participant deferred Compensation under this Plan
that was payable by Virginia Electric and Power Company.
<PAGE>
-4-
3. PARTICIPATION. A Member becomes a Participant with respect to a
Deferred Benefit by filing a valid Deferral Election Form according to
section 4 on or before the Election Date for that Deferral Year, but
only if his Deferral Election Form is operative according to section 4.
4. DEFERRAL ELECTION. A deferral election is valid when a Deferral
Election Form is completed, signed by the electing Director, and
received by the Committee Chairman or the Committee Chairman's
delegate. Deferral elections are governed by the provisions of this
section.
(a) A Participant may elect a Deferred Benefit for any Deferral
Year if that person is a Director at the beginning of that
Deferral Year or becomes a Director during that Deferral Year.
(b) Before each Deferral Year's Election Date, each Director will
be provided with a Deferral Election Form and a Beneficiary
Designation Form. Under the Deferral Election Form for a
single Deferral Year, a Director may elect on or before the
Election Date to defer the receipt of all or part of the
Director's Retainer Fee (in 10% increments) or the Director's
Meeting Fees (in 10% increments), or both for the Deferral
Year. Under the Deferral Election Form for a single Deferral
Year, a Director may elect on or before the Election Date to
defer receipt of all or part of the Director's Retainer Fee
(in 10% increments) payable in specified calendar quarters of
the Deferral Year or all or part of the Director's Meeting
Fees (in 10% increments) payable in specified calendar
quarters of the Deferral Year, or both.
(c) A Participant's Deferral Election Form for the Participant's
Retainer Fee may specify either a Deferred Cash Benefit (in
10% increments of the deferred amount) or a Deferred Stock
Benefit (in 10% increments of the deferred amount), or a
combination thereof and for the Participant's Meeting Fees may
specify a Deferred Cash Benefit (in 10% increments of the
amount deferred) or a Deferred Stock Benefit (in 10%
increments of the amount deferred), or a combination thereof.
(d) If a Participant is a Director for more than one Company, the
Participant's Deferral Election Form shall apply to all the
Participant's Meeting Fees, Retainer Fees or Compensation
(based on the percentages indicated by the Participant on the
Deferral Election Form) payable to the Participant as a
Director; provided that the Participant may, with the
permission of the Committee, complete a separate Deferral
Election Form covering such fees payable to the Participant as
a Director from each such Company.
(e) Except as provided in this subsection and in the situation
described in subsection 13(b) of this Plan and subsections
6(C) and 7(c), a Participant may not elect to convert a
Deferred Cash Benefit to a Deferred Stock Benefit or to
convert a Deferred Stock
<PAGE>
-5-
Benefit to a Deferred Cash Benefit. If a Participant's
election of a Deferred Stock Benefit is subject to the
contingency described in subsection 13(b) of this Plan, the
Participant may file a Deferred Cash Benefit/Deferred Stock
Benefit Election Form for the affected Deferral Year (or part
thereof) on or before the designated Election Date and elect
to convert a Deferred Cash Benefit into a Deferred Stock
Benefit as of the effective date of the Plan provision
relating to Deferred Stock Benefits, determined under
subsection 13(b).
(f) Each Distribution Election Form is part of the Deferral
Election Form on which it appears or to which it states that
it is related. The Committee may allow a Participant to file
one Distribution Election Form for all of the Participant's
Deferred Cash Benefits, all of the Participant's Deferred
Stock Benefits or all of the Participant's Deferred Benefits.
The provisions of section 8(b) of this Plan apply to any
Deferred Benefit under this Plan if there is no operative
Distribution Election Form for that Deferred Benefit.
(g) If it does so before the last business day of the Deferral
Year, the Committee may reject any Deferral Election Form or
any Distribution Election Form or both, and the Committee is
not required to state a reason for any rejection. The
Committee may modify any Distribution Election Form at any
time to the extent necessary to comply with any federal
securities laws or regulations. However, the Committee's
rejection of any Deferral Election Form or any Distribution
Election Form or the Committee's modification of any
Distribution Election Form must be based upon action taken
without regard to any vote of the Director whose Deferral
Election Form or Distribution Election Form is under
consideration, and the Committee's rejections must be made on
a uniform basis with respect to similarly situated Directors.
If the Committee rejects a Deferral Election Form, the
Director must be paid the amounts that the Director would then
have been entitled to receive if the Director had not
submitted the rejected Deferral Election Form.
(h) A Director may not revoke a Deferral Election Form or a
Distribution Election Form after the Deferral Year begins. Any
revocation before the beginning of the Deferral Year is the
same as a failure to submit a Deferral Election Form or a
Distribution Election Form. Any writing signed by a
Participant expressing an intention to revoke a Deferral
Election Form or a related Distribution Election Form and
delivered to a member of the Committee before the close of
business on the relevant Election Date is a revocation.
5. EFFECT OF NO ELECTION. A Director who has not submitted a valid
Deferral Election Form to the Committee on or before the relevant
Election Date may not defer any part of the Director's Compensation for
the Deferral Year under this Plan. The Deferred Benefit of a Director
who submits a valid Deferral Election Form but fails to submit a valid
Distribution
<PAGE>
-6-
Election Form for that Deferred Benefit before the relevant Election
Date or who otherwise has no valid Distribution Election Form for that
Deferred Benefit is governed by section 8(b).
6. DEFERRED CASH BENEFITS.
(a) Deferred Cash Benefits will be set up in a Deferred Cash
Account for each Participant and credited with interest at
rates determined by the Committee. Deferred Cash Benefits
are credited to the applicable Participant's Deferred Cash
Account as of the day they would have been paid but for the
deferral or, in the case of an Unrestricted Participant's
transfer of an amount from the Unrestricted Participant's
Deferred Stock Account pursuant to subsection 7(c), the date
that the Unrestricted Participant's written transfer direction
is received by the Committee or its designate. Interest is
credited on the first day of each month based on the Deferred
Cash Account balance at the end of the preceding day.
(b) Interest will be credited to Deferred Cash Accounts based on
average three-month United States Treasury Bill rates
(equivalent yield, not discount yield) as published by the
Federal Reserve Board. The applicable rate for each month
will be determined on the last business day of the previous
month. Those interest rates will apply prospectively for all
current and future Deferred Cash Account balances until the
basis on which interest is determined is changed by the
Committee. Interest credits are accrued monthly on
accumulated Deferred Cash Accounts. Interest is accrued
through the end of the month preceding the month of
distribution of a Deferred Cash Benefit.
(c) If a Participant elects under the second sentence of
subsection 4(e) of this Plan to convert a Deferred Cash
Benefit into a Deferred Stock Benefit, the Participant's
Deferred Cash Account will be converted to a Deferred Stock
Account governed by section 7 of this Plan as of the date the
Plan's provisions relating to Deferred Stock Benefits become
effective for purposes of the Participant's election. In
addition, once during each calendar year an Unrestricted
Participant may transfer all or part (in 10% increments) of
the Unrestricted Participant's Deferred Cash Account to the
Unrestricted Participant's Deferred Stock Account.
7. DEFERRED STOCK BENEFITS. Subject to subsection 13(b) of this Plan,
electing Participants' Deferred Stock Benefits are governed by this
section.
(a) Deferred Stock Benefits will be set up in a Deferred Stock
Account for each electing Participant and credited with
earnings at rates determined by the Committee. A Deferred
Stock Benefit attributable to a Retainer Fee is credited to
the Participant's Deferred Stock Account on the last day of
each calendar quarter of the Deferral Year. A Deferred Stock
Benefit attributable to a Meeting Fee is credited to the
Participant's Deferred Stock Account on the last day of the
month in which a meeting occurs. A Deferred Stock Benefit
attributable to an Unrestricted Participant's transfer of an
<PAGE>
-7-
amount from the Unrestricted Participant's Deferred Cash
Account to the Unrestricted Participant's Deferred Stock
Account pursuant to subsection 7(c), the transferred amount is
credited to the Participant's Deferred Stock Account on the
date that the Unrestricted Participant's written transfer
direction is received by the Committee or its designate.
(b) Rates established by the Committee as the basis for additional
credits to Deferred Stock Accounts will be variable rates
equal to the value of dividends paid on Dominion common stock
when the additional credit is made. The value of a Deferred
Stock Account at any relevant time equals the value of the
shares of Dominion common stock as if the Compensation
deferred by the Participant under the Plan and any additional
credits under this subsection had been used to purchase
Dominion common stock on the date those amounts were credited
to the Deferred Stock Account. Additional credits are
credited on the last day of each calendar quarter on
accumulated Deferred Stock Accounts. Additional credits are
accrued through the end of the year preceding the year of
distribution of a Deferred Stock Benefit.
(c) Once during each calendar year an Unrestricted Participant may
transfer all or part (in 10% increments) of the Unrestricted
Participant's Deferred Stock Account to the Unrestricted
Participant's Deferred Cash Account.
(d) If a trust is established under subsections 10(b) and 13(C) of
this Plan, an electing Participant may instruct the trustee
under the governing trust agreement how to vote shares of
Dominion common stock allocated to that Participant's separate
account under the trust according to this subsection and
provisions of the governing trust agreement. Before each
annual or special meeting of the Dominion shareholders, the
trustee under the governing trust agreement must furnish each
Participant with a copy of the proxy solicitation and other
relevant material for the meeting as furnished to the trustee
by Dominion, and a form addressed to the trustee requesting
the Participant's confidential instructions on how to vote
shares of Dominion common stock allocated to that
Participant's account as of the valuation date established
under the governing trust agreement preceding the record date.
Upon receipt of those instructions, the trustee under the
governing trust agreement must vote such stock as instructed.
8. DISTRIBUTION OF DEFERRED BENEFITS.
(a) According to a Participant's Distribution Election Form, but
subject to Plan subsection 4(g), a Deferred Cash Benefit must
be distributed in cash. According to a Participant's
Distribution Election Form, but subject to Plan subsection
4(g), a Deferred Stock Benefit must be distributed in shares
of Dominion common stock equal in value to the value of the
Participant's Deferred Stock Account on the last day of the
month preceding the month of distribution. However, cash must
be paid in lieu of fractional shares of Dominion common stock
otherwise distributable. According
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to the procedures of Plan subsection 4(g), the Committee may
modify any Participant's Distribution Election Form to prevent
any distribution of Dominion common stock to pay a Deferred
Stock Benefit if the total number of shares of such stock
distributed under this Plan after such distribution would
exceed 100,000 shares times the number of Participants in the
Plan on the relevant date.
(b) Except for distributions triggered by a Participant's
disability, Deferred Benefits will be paid in a lump sum
unless the Participant's Distribution Election Form specifies
installment payments over 10 years. For a Deferred Cash
Benefit payable in installments, interest credits under Plan
subsection 6(b) continue to accrue on the unpaid balance of a
Deferred Cash Account. For a Deferred Stock Benefit payable
in installments, additional credits under Plan subsection 7(b)
do not accrue on the unpaid balance of a Deferred Stock
Account after the year preceding the year in which payments
begin. Instead, any additional credits that would have been
credited to a Deferred Stock Account are payable to the
applicable Participant in cash on the date that they would
otherwise have been credited.
If a Participant Terminates as a result of disability,
Deferred Benefits will be paid to such Participant in
installment payments over a period of 10 years commencing on
the date the Participant's disability is certified by the
Committee unless the Committee, in its sole discretion,
approves a longer or shorter payment period. If, after the
Participant's Termination as a result of disability, such
Participant recovers before the balance of the Participant's
Deferred Cash and Deferred Stock Accounts under the Plan are
exhausted, the Participant's distributions will be
discontinued and any remaining Deferred Benefits under the
Plan will be governed by the provisions of this section and
the Participant's Distribution Election Forms.
Unless otherwise specified in a Participant's Distribution
Election Form, any lump sum payment will be paid or
installment payments will begin to be paid on the February 15
of the year after the Participant's sixty-fifth birthday or on
the February 15 of the year after the Participant's
Termination, if earlier. For distributions that would
automatically be caused under the preceding sentence by a
Participant's Termination (other than by death or disability)
or for distributions that would otherwise automatically begin
because a Participant reaches age sixty-five, the Participant
may elect on his Distribution Election Form that payments are
to begin
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(i) on the February 15 following the
Participant's Termination, without regard to the Participant's
age; or
(ii) on the February 15 following the
Participant's Termination and the Participant's attainment of
a specified age; or
(iii) even if the Participant does not Terminate, on
the February 15 following attainment of a specified age.
For purposes of these distribution election alternatives, the
specified age must be not less than the Participant's age two
years from the Election Date pertaining to the applicable
Deferral Year and not greater than the age at which there are
no earnings limitations in order to receive full social
security benefits (currently age 70). With the consent of the
Committee (which shall be given or withheld in its sole
discretion), an Unrestricted Participant may amend the
Unrestricted Participant's Distribution Election Form to
accelerate or postpone the commencement of benefits if (I) in
the case of a postponed distribution, the amendment is
approved by the Committee before the calendar year in which
benefit payments are scheduled to begin and (ii) in the case
of a postponed or accelerated distribution, the amended
payment date conforms to the requirements of the Plan.
(c) Deferred Benefits may not be assigned by a Participant or
Beneficiary. A Participant may use only one Beneficiary
Designation Form to designate one or more Beneficiaries for
all of the Participant's Deferred Benefits under the Plan;
such designations are revocable. Each Beneficiary will
receive the Beneficiary's portion of the Participant's
Deferred Cash Account and Deferred Stock Account on February
15 of the year following the Participant's death unless the
Beneficiary's request for accelerated payment is approved at
the Committee's discretion under section 10 of this Plan or
unless the Beneficiary's request for a different distribution
schedule is received before distributions begin and is
approved at the Committee's discretion. The Committee may
insist that multiple Beneficiaries agree upon a single
distribution method.
(d) Any Dominion common stock distributed pursuant to the Plan
shall have been acquired by an "agent independent of the
issuer" (i.e., the Company) within the meaning of 17 CFR
240.10b-18, as such regulation is in effect on April 19, 1985.
Such acquisitions may be effected in all cases on the open
market or, in the event that the Company makes available newly
issued common stock, directly from the Company, provided that
such common stock has been registered with the Securities and
Exchange Commission under the Securities Act of 1933, as
amended, or any successor thereto at the time such purchase is
made or an exemption from such registration requirement is, in
the opinion of counsel to the Company, available.
<PAGE>
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9. HARDSHIP DISTRIBUTIONS.
(a) At its sole discretion and at the request of a Participant
before or after the Participant's Termination, or at the
request of any of the Participant's Beneficiaries after the
Participant's death, the Committee may accelerate and pay all
or part of any amount attributable to a Participant's Deferred
Benefits under this Plan. Except as provided in Plan
subsection 8(b), accelerated distributions may be allowed only
in the event of a financial emergency beyond the Participant's
or Beneficiary's control and only if disallowance of a
distribution would create a severe hardship for the
Participant or Beneficiary. An accelerated distribution must
be limited to the amount determined by the Committee to be
necessary to satisfy the financial emergency.
(b) For purposes of an accelerated distribution of a Deferred
Stock Benefit under this section, the Deferred Stock Benefit's
value is determined by the value of the Deferred Stock Account
at the time of the distribution.
(c) Only cash distributions are permitted under this section.
Distributions under this section must first be made from the
Participant's Deferred Cash Account before accelerating the
distribution of any amount attributable to a Deferred Stock
Benefit.
(d) A distribution under this section is in lieu of that portion
of the Deferred Benefit that would have been paid otherwise. A
Deferred Cash Benefit is adjusted for a distribution under
this section by reducing the Participant's Deferred Cash
Account balance by the amount of the distribution. A Deferred
Stock Benefit is adjusted for a distribution under this
section by reducing the value of the Participant's Deferred
Stock Account by the amount of the distribution.
10. COMPANY'S OBLIGATION.
(a) The Plan is unfunded. A Deferred Benefit is at all times a
mere contractual obligation of the Company. A Participant and
the Participant's Beneficiaries have no right, title, or
interest in the Deferred Benefits or any claim against them.
Except according to Plan subsections 10(b) and 13(c), the
Company will not segregate any funds or assets for Deferred
Benefits nor issue any notes or security for the payment of
any Deferred Benefit.
(b) Subject to Plan subsection 13(c), the Company may establish a
grantor trust and transfer to that trust shares of Dominion
common stock or other assets. Trust assets must be invested
primarily in Dominion common stock for the purpose of
measuring the value of Deferred Stock Accounts under the Plan
to be distributed as Deferred Stock Benefits in the form of
Dominion common stock, plus cash in lieu of fractional shares.
The governing trust agreement must require a separate account
to be established for each
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electing Participant. The governing trust agreement must also
require that all Company assets held in trust remain at all
times subject to the Company's judgment creditors.
11. CONTROL BY PARTICIPANT. A Participant has no control over Deferred
Benefits except according to the Participant's Deferral Election Forms,
Distribution Election Forms, and Beneficiary Designation Forms.
12. CLAIMS AGAINST PARTICIPANT'S BENEFITS. A Deferred Cash Account and a
Deferred Stock Account relating to a Participant under this Plan are
not subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge, and any attempt to do so is
void. Deferred Benefits are not subject to attachment or legal process
for a Participant's debts or other obligations. Nothing contained in
this Plan gives any Participant any interest, lien, or claim against
any specific asset of the Company. A Participant or the Participant's
Beneficiary has no rights other than as a general creditor.
13. AMENDMENT OR TERMINATION. Except as otherwise provided in this section,
this Plan may be altered, amended, suspended, or terminated at any time
as to Dominion, Virginia Electric and Power Company, or any Company
that has adopted the Plan (pursuant to Plan subsection 2(e)) by that
entity's Board.
(a) The Plan shall be operated according to its terms (as amended
periodically) and as directed by the Committee until it is
effective. Once the Plan is effective, the Board of Dominion,
Virginia Electric and Power Company, or any Company that has
adopted the Plan (pursuant to Plan subsection 2(e)) may alter,
amend, suspend, or terminate this Plan at any time as it
relates to its Directors. However, except for a termination
of the Plan caused by the determination of the applicable
Board that the laws upon which the Plan is based have changed
in a manner that negates the Plan's objectives, that Board may
not alter, amend, suspend, or terminate this Plan without the
majority consent of all Directors who are Participants if that
action would result either in a distribution of all Deferred
Benefits in any manner other than as provided in this Plan or
that would result in immediate taxation of Deferred Benefits
to Participants. Notwithstanding the preceding sentence, if
any amendment to the Plan, subsequent to the date the Plan
becomes effective, adversely affects Deferred Benefits elected
hereunder, after the effective date of any such amendment, and
the Internal Revenue Service declines to rule favorably on any
such amendment or to rule favorably only if the applicable
Board makes amendments to the Plan not acceptable to such
Board, the Board of each Company, in its sole discretion, may
accelerate the distribution of part or all amounts
attributable to affected Deferred Benefits due its Directors
hereunder.
(b) This subsection applies if shareholder approval is required
for any or all elections by a Company's participating
Directors of Deferred Stock Benefits under the Plan. Despite
Plan subsection 13(a), Plan subsection 10(b) and all
provisions of this Plan relating
<PAGE>
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to Deferred Stock Benefits as to a designated Participant are
effective only on the first day of the month following the
month in which (i) a sufficient majority of the appropriate
entity's shareholders, determined under applicable federal and
state laws, approves those Plan provisions as to that
designated Participant; or (ii) counsel selected by the
Company determines that such approval is unnecessary.
(c) The Company may only contribute to a trustee under a trust
agreement by transferring cash or assets with a fair market
value equal to the value (determined at the nearest month end)
of the related Deferred Stock Accounts if the trust agreement
contains provisions sufficient (in the opinion of either the
Internal Revenue Service or counsel selected by the Company)
to allow the Participants to defer income taxation on Deferred
Stock Benefits until they are distributed according to this
Plan and provisions sufficient (in the opinion of counsel
selected by the Company) to exempt the Plan and the trust from
sections 10(b) and 16(b) of the Securities Exchange Act of
1934 and applicable rules and regulations. If the Internal
Revenue Service refuses to give the required opinion on such a
trust, and if counsel selected by the Company is the opinion
that no such trust can be created, Plan subsection 10(b) and
all provisions of this Plan relating to Deferred Stock
Benefits will not become effective.
14. NOTICES. Notices and elections under this Plan must be in writing. A
notice or election is deemed delivered if it is delivered personally or
if it is mailed by registered or certified mail to the person at such
person's last known business address.
15. WAIVER. The waiver of a breach of any provision in this Plan does not
operate as and may not be construed as a waiver of any later breach.
16. CONSTRUCTION. This Plan is created, adopted, and maintained according
to the laws of Virginia (except its choice-of-law rules). It is
governed by those laws in all respects. Headings and captions are only
for convenience; they do not have substantive meaning. If a provision
of this Plan is not valid or not enforceable, that fact in no way
affects the validity or enforceability of any other provision. Use of
the one gender includes all, and the singular and plural include each
other.
17. CORPORATE AND COMMITTEE ACTIONS AND RESPONSIBILITIES. Each Company
shall be solely responsible for the Plan as it relates to its
Directors. Each Committee has delegated certain administrative
determinations under the Plan that do not affect individuals'
participation or awards. Notwithstanding any other provision of this
Plan, the issuance of Dominion common stock in settlement of a Deferred
Stock Benefit shall be subject to the approval of Dominion's Board
which approval is evidenced by its adoption of this Plan.
-13-
EXHIBIT 10(xxvi)
DOMINION RESOURCES, INC.
EXECUTIVES' DEFERRED COMPENSATION PLAN
Effective January 1, 1994
Amended and Restated as of January 1, 1997
For the Executives of:
Dominion Resources, Inc.
Virginia Electric and Power Company
<PAGE>
TABLE OF CONTENTS
Section Page
1. DEFINITIONS...........................................................1
2. PURPOSE...............................................................3
3. PARTICIPATION.........................................................3
4. DEFERRAL ELECTION.....................................................3
5. EFFECT OF NO ELECTION.................................................4
6. INVESTMENT FUNDS......................................................4
7. DRI STOCK FUND........................................................5
8. DISTRIBUTIONS.........................................................6
9. HARDSHIP DISTRIBUTIONS................................................7
10. COMPANY'S OBLIGATION..................................................8
11. CONTROL BY PARTICIPANT................................................8
12. CLAIMS AGAINST PARTICIPANT'S DEFERRED BENEFITS........................8
13. AMENDMENT OR TERMINATION..............................................8
14. NOTICES...............................................................9
15. WAIVER................................................................9
16. CONSTRUCTION..........................................................9
i
<PAGE>
1. DEFINITIONS. The following definitions apply to this Plan and to the
Deferral Election Forms.
(a) Beneficiary or Beneficiaries means a person or persons or
other entity that a Participant designates on a Beneficiary
Designation Form to receive Deferred Benefit payments pursuant
to Plan Section 8(c). If a Participant does not execute a
valid Beneficiary Designation Form, or if the designated
Beneficiary or Beneficiaries fail to survive the Participant
or otherwise fail to take the Deferred Benefit, the
Participant's Beneficiary or Beneficiaries shall be the first
of the following persons who survive the Participant: a
Participant's spouse (the person legally married to the
Participant when the Participant dies); the Participant's
children in equal shares and the Participant's estate.
(b) Beneficiary Designation Form means the form that a Participant
uses to name his Beneficiary or Beneficiaries.
(c) Company means Dominion Resources, Inc., Virginia Electric and
Power Company, and any of their affiliates that, with approval
of the DRI Board of Directors, adopt or have adopted this
Plan; any successor business by merger, purchase, or otherwise
that maintains the Plan.
(d) Company Stock means the common stock, no par value, of
Dominion Resources, Inc.
(e) Compensation means a Participant's base salary, cash incentive
pay and other cash compensation from the Company.
(f) Deferral Election Form means the form that a Participant uses
to elect to receive a Deferred Benefit pursuant to Plan
Section 4. A Participant's Distribution Election Form and
Beneficiary Designation Form are part of the Participant's
Deferral Election Form.
(g) Deferral Year means a calendar year for which an Executive's
Compensation is reduced pursuant to a valid Deferral Election
Form.
(h) Deferred Account means a bookkeeping record established for
each Participant who is eligible to receive a Deferred
Benefit. A Deferred Account shall be established only for
purposes of measuring a Deferred Benefit and not to segregate
assets or to identify assets that may be used to satisfy a
Deferred Benefit. A Deferred Account shall be credited with
that amount of a Participant's Compensation deferred as a
Deferred Benefit according to a Participant's Deferral
Election Form. A Deferred Account also shall be credited
periodically with deemed investment gain or loss under Plan
Section 6(b).
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(i) Deferred Benefit means the benefit available to an Deferred
who has executed a valid Deferral Election Form.
(j) Distribution Election Form means a form which a Participant
uses to establish the duration of the deferral of Compensation
and the frequency of payments of a Deferred Benefit. If a
Participant does not execute a valid Distribution Election
Form, the distribution of a Deferred Benefit shall be governed
by Plan Section 8.
(k) DRI means Dominion Resources, Inc.
(l) DRI Committee means the Organization and Compensation
Committee or DRI's Board.
(m) DRI Stock Fund means an Investment Fund in which the deemed
investment is Company Stock.
(n) Election Date means the date by which an Executive must submit
a valid Deferral Election Form. For each Deferral Year, the
Election Date shall be the preceding December 31. However, if
an individual becomes an Executive during a Deferral Year, his
Election Date shall be a date that is within thirty days after
such individual becomes an Executive. Notwithstanding the
preceding sentences, the Committee may set an earlier Election
Date for any Deferral Year.
(o) Executive means an individual who is employed by the Company
and who is a "highly-compensated employee" or a member of a
"select group of management" as those terms are used under
Title I of the Employee Retirement Income Security Act of
1974, as amended and who the DRI Committee (in the case of an
individual who is employed by DRI or one of its nonutility
subsidiaries) or the Virginia Power Committee (in the case of
an individual employed by Virginia Power), designates as being
eligible to participate in this Plan.
(p) Investment Fund means one or more deemed investment
alternatives made available for election by Participants for a
Deferred Account. The DRI Stock Fund shall be one of the
Investment Funds.
(q) Participant, with respect to any Deferral Year, means an
Executive who has executed a valid Deferral Election Form for
that Deferral Year.
(r) Plan means the Dominion Resources, Inc. Executives' Deferred
Compensation Plan.
2
<PAGE>
(s) Stock Unit means a hypothetical share of Company Stock. Each
Stock Unit credited to a Deferred Account shall be deemed to
have the same value, from time to time, as a share of Company
Stock. Notwithstanding the foregoing, Stock Units shall not
confer upon Participants any of the rights associated with
common stock, including, without limitation, the right to vote
or to receive distributions. Stock Units may not be sold,
assigned, transferred, disposed of, pledged, hypothecated or
otherwise encumbered.
(t) Terminate, Terminating, or Termination, with respect to a
Participant, mean the cessation of his employment with the
Company on account of death, disability, severance or any
other reason.
(u) Virginia Power means Virginia Electric and Power Company.
(v) Virginia Power Committee means the Organization and
Compensation Committee of Virginia Power's Board of Directors.
2. PURPOSE. The Plan is intended to permit Executives to defer all or a
portion of their Compensation.
3. PARTICIPATION. The DRI Committee shall select the DRI Executives who
are eligible to participate in the Plan. The Virginia Power Committee
shall select the Virginia Power Executives who are eligible to
participate in the Plan. An Executive becomes a Participant for any
deferral Year by filing a valid Deferral Election Form according to
Plan Section 4 on or before the Election Date for that Deferral Year.
4. DEFERRAL ELECTION. A deferral election shall be valid when the
Deferral Election Form is completed, signed by the electing Executive,
and received by DRI's Corporate Secretary on or before the Election
Date for that Deferral Year. The following provisions apply to
deferral elections.
(a) A Participant may elect a Deferred Benefit for any Deferral
Year if he is an Executive at the beginning of that Deferral
Year or becomes an Executive during that Deferral Year.
(b) Before each Deferral Year's Election Date, each Executive
shall be provided with a Deferral Election Form. Using the
Deferral Election Form, an Executive may elect on or before
the Election Date to defer the receipt of all or part of his
Compensation for the Deferral Year. An Executive may not defer
more than $1,000,000 of Compensation for any Deferral Year.
(c) An Executive must complete an Investment Election Form for all
amounts deferred from his Compensation. The Compensation
deferred under a Deferral Election Form
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<PAGE>
shall be allocated among available Investment Funds in 10%
multiples or such other multiples as are determined by the DRI
Committee and Virginia Power Committee.
(d) An Executive must complete a Distribution Election Form for
the distribution of the Executive's Deferral Account.
(e) If he does so before the last business day of the Deferral
Year, DRI's Corporate Secretary may reject any Deferral
Election Form or any Distribution Election Form or both that
does not conform to the provisions of the Plan. DRI's
Corporate Secretary may modify any Distribution Election Form
at any time to the extent necessary to comply with any federal
securities laws or regulations. DRI's Corporate Secretary's
rejection or modification must be made on a uniform basis with
respect to similarly-situated Executives. If DRI's Corporate
Secretary rejects a Deferral Election Form, the Executive
shall be paid the amounts he would have been entitled to
receive if the Executive had not submitted the rejected
Deferral Election Form.
(f) An Executive may not revoke a Deferral Election Form or a
Distribution Election Form after the Deferral Year begins. Any
revocation before the beginning of the Deferral Year has the
same effect as a failure to submit a Deferral Election Form or
a Distribution Election Form. Any writing signed by an
Executive expressing an intention to revoke his Deferral
Election Form and delivered to DRI's corporate Secretary
before the close of business on the relevant Election Date
shall be a revocation.
5. EFFECT OF NO ELECTION. An Executive who has not submitted a valid
Deferral Election Form to DRI's Corporate Secretary on or before the
relevant Election Date may not defer any part of his Compensation for
the Deferral Year. The Deferred Benefit of an Executive who submits a
valid Deferral Election Form but fails to submit a valid Distribution
Election Form (either as to the form or commencement of payment) before
the relevant Election Date shall be distributed in a lump sum on the
February 15 following his Termination.
6. INVESTMENT FUNDS.
(a) Each Participant shall have the right to direct the deemed
investment of his Deferral Account among the Investment Funds.
The number and type of Investment Funds that will be available
for investment in any Plan Year shall be determined by the DRI
Committee.
(b) Deferred Benefits shall be credited to an Investment Fund as
of the last day of the month in which the deferred
Compensation would have been paid. A separate bookkeeping
account shall be established for each Participant who has
directed a deemed investment in an Investment Fund. Deemed
transfers between Investment
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<PAGE>
Funds in the Participant's account shall be charged and
credited as the case may be to each Investment Fund account.
The Investment Fund account shall be charged or credited with
net earnings, gains, losses and expenses, as well as any
appreciation or depreciation in market value during each Plan
Year for the deemed investment in the Investment Fund.
(c) Pursuant to procedures established by the DRI Committee
uniformly applied, Participants may direct transfer of deemed
investments among Investment Funds at least once in each
Deferral Year.
7. DRI STOCK FUND. The following provisions apply to the DRI Stock Fund.
The DRI Stock Fund in a Participant's Deferred Account shall be
credited with Stock Units equal to the number of whole and fractional
shares of Company Stock that a Participant could have purchased with
amounts deferred from his Compensation based on the closing price of
Company Stock on the New York Stock Exchange on the last trading day of
the month in which the deferred Compensation would have been paid. The
value of the DRI Stock Fund on any date shall be the value of the Stock
Units (whole and fractional shares) deemed credited to the account
based on the immediately preceding closing price of Company Stock on
the New York Stock Exchange.
(a) The Stock Units credited to each Participant's DRI Stock Fund
account shall be credited with hypothetical cash dividends
equal to the cash dividends that are declared and paid with
respect to Company Stock. The Company shall determine as of
each record date the amount of cash dividends to be paid with
respect to a share of Company Stock, and on the payment date
of such dividend shall credit an equal amount of hypothetical
cash dividends to each Stock Unit credited to a DRI Stock Fund
account. The total hypothetical cash dividends credited to
all Stock Units shall then be converted into Stock Units by
dividing such hypothetical cash dividends by the average of
the high and low trading prices of a share of Company Stock,
as reported in The Wall Street Journal for the last trading
day before the day the Company pays dividends with respect to
Company Stock.
(b) The Stock Units credited to a DRI Stock Fund account shall be
credited to reflect any distribution with respect to Company
Stock other than cash dividends or stock dividends. The
Company shall determine as of each record date the amount of
the distribution to be paid with respect to a share of Company
Stock, and on the payment date of such distribution shall
credit an equal amount of hypothetical distribution to each
Stock Unit. The total hypothetical distribution credited to
all Stock Units shall then be converted into a hypothetical
cash amount based on the market value of such distribution as
determined by the DRI Committee. The hypothetical cash amount
shall then be converted into Stock Units by dividing such
hypothetical cash amount by the closing trading price of a
share of Company Stock,
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<PAGE>
as reported in The Wall Street Journal for the last trading
day before the day the Company makes the distribution with
respect to Company Stock.
8. DISTRIBUTIONS.
(a) All Deferred Benefits, less withholding for applicable income
and employment taxes, shall be paid in cash on the date
specified in the Participant's Distribution Election Form (but
subject to Plan Section 4(f)). Except in the event of
Termination, a Participant may only receive a distribution on
a date which is at least six months after the date on which
his most recent Deferral Election Form is valid.
(b) Except for distributions triggered by a Participant's
disability, Deferred Benefits shall be paid in a lump sum
unless the Participant's Distribution Election Form specifies
annual installment payments over a period of up to ten years.
Installment payments will be made in approximately equal
amounts during each year of the installment period. For a
Deferred Benefit payable in installments, the unpaid balance
of a Deferred Account shall continue to be maintained in
Investment Funds.
If a Participant Terminates as a result of his disability,
begins to receive Deferred Benefits and thereafter recovers
before the balance of his Deferred Account is exhausted,
distributions shall cease and any remaining Deferred Benefits
under the Plan shall be governed by this Plan Section 8 and
his Distribution Election Form.
Unless otherwise specified in a Participant's Distribution
Election Form, any lump sum payment shall be paid or
installment payments shall begin on February 15 of the year
after the Participant's Termination. For distributions that
would automatically begin because of a Participant's
Termination (other than by death), the Participant may elect
on his Distribution Election Form to begin payments (i) on the
February 15 following his Termination, without regard to his
age; or (ii) on the February 15 following his Termination and
his attainment of a specified age; (iii) even if the
Participant does not Terminate, on the February 15 following a
specified age. However, except in the event of payments on
account of Termination, no Participant may elect to receive
payments beginning sooner than six months after the date on
which his most recent Deferral Election Form is valid.
(c) Notwithstanding any other provision of this Plan or a
Participant's Distribution Election Form, the DRI Committee
(in the case of an individual employed by DRI or one of its
nonutility subsidiaries) or the Virginia Power Committee (in
the case of an individual employed by Virginia Power) in its
sole discretion may postpone the distribution of all or part
of a Deferred Benefit to the extent that the payment would not
be deductible under Section 162(m) of the Internal Revenue
Code of 1986, as amended (the Code) or any successor thereto.
A Deferred Benefit distribution that
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<PAGE>
is postponed pursuant to the preceding sentence shall be paid
as soon as it is possible to do so within the deduction
limitations of Section 162(m) of the Code.
(d) A Participant or Beneficiary may not assign Deferred Benefits.
A Participant may use only one Beneficiary Designation Form to
designate one or more Beneficiaries for all of his Deferred
Benefits under the Plan. Such designations are revocable.
Each Beneficiary shall receive his portion of the
Participant's Deferred Account and Deferred Stock Account on
February 15 of the year following the Participant's death.
However, the DRI Committee (in the case of an individual who
is employed by DRI or one of its nonutility subsidiaries) or
the Virginia Power Committee (in the case of an individual
employed by Virginia Power), at its discretion, may approve a
Beneficiary's request for accelerated payment under Plan
Section 9. The DRI Committee (in the case of an individual
who is employed by DRI or one of its nonutility subsidiaries)
or the Virginia Power Committee (in the case of an individual
employed by Virginia Power) may insist that multiple
Beneficiaries agree upon a single distribution method.
9. HARDSHIP DISTRIBUTIONS.
(a) At its sole discretion and at the request of a Participant
before or after his Termination, or at the request of any of
the Participant's Beneficiaries after the Participant's death,
the DRI Committee (in the case of an individual who is
employed by DRI or one of its nonutility subsidiaries) or the
Virginia Power Committee (in the case of an individual
employed by Virginia Power) may accelerate and pay all or part
of any amount attributable to a Participant's Deferred
Benefits. The DRI Committee (in the case of an individual who
is employed by DRI or one of its nonutility subsidiaries) or
the Virginia Power Committee (in the case of an individual who
is employed by Virginia Power) may accelerate distributions
only in the event of a financial emergency beyond the
Participant's or Beneficiary's control and only if
disallowance of a distribution request would create a severe
hardship for the Participant or Beneficiary. An accelerated
distribution under this Plan Section 9 shall be limited to the
amount necessary to satisfy the financial emergency.
(b) For purposes of an accelerated distribution of a Deferred
Benefit, the Investment Funds in the Participant's Deferred
Account value shall be determined by the value of the
Investment Funds on the last day of the month prior to the
month of distribution.
(c) Distributions under this Section shall be made in cash, shall
made proportionately from all of the Investment Funds in the
Participant's Deferred Account first, and shall be limited to
amounts attributable to Compensation deferred under a Deferral
Election Form that was effective at least six months before
the distribution.
7
<PAGE>
(d) A distribution under this section shall be in lieu of that
portion of a Participant's Deferred Benefit that would have
been paid otherwise. A Deferred Benefit shall be adjusted by
reducing the Participant's Deferred Account balance by the
amount of the distribution.
10. COMPANY'S OBLIGATION. The Plan shall be unfunded. The Company shall not
be required to segregate any assets that at any time may represent a
Deferred Benefit. Any liability of the Company to a Participant or
Beneficiary under this Plan shall be based solely on any contractual
obligations that may be created pursuant to this Plan. No such
obligation of the Company shall be deemed to be secured by any pledge
of, or other encumbrance on, any property of the Company.
11. CONTROL BY PARTICIPANT. A Participant shall have no control over
Deferred Benefits except according to his Deferral Election Forms, his
Distribution Election Forms and his Beneficiary Designation Form.
12. CLAIMS AGAINST PARTICIPANT'S DEFERRED BENEFITS. A Deferred Account
shall not be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, or charge, and any attempt
to do so shall be void. A Deferred Benefit shall not be subject to
attachment or legal process for a Participant's debts or other
obligations. Nothing contained in this Plan shall give any Participant
any interest, lien, or claim against any specific asset of the Company.
A Participant or his Beneficiary shall have no rights other than as a
general creditor of the Company.
13. AMENDMENT OR TERMINATION. Except as otherwise provided, this Plan may
be altered, amended, suspended, or terminated at any time as to DRI
Participants by DRI's Board of Directors. DRI's Board of Directors may
not alter, amend, suspend, or terminate this Plan as to any DRI
Participant without the consent of that Participant if such action
would result either in (i) a distribution of the Participant's Deferred
Benefit in any manner not provided in the Plan or (ii) immediate
taxation of a Deferred Benefit to a Participant. Notwithstanding the
preceding sentence, if any amendment to the Plan after the Plan's
effective date adversely affects a Deferred Benefit of a DRI
Participant and the Internal Revenue Service declines to rule favorably
on the amendment, DRI's Board of Directors, in its sole discretion, may
accelerate the distribution of any amounts attributable to an affected
Deferred Benefit. Except as otherwise provided, this Plan may be
altered, amended, suspended, or terminated at any time as to Virginia
Power Participants by Virginia Power's Board of Directors. Virginia
Power's Board of Directors may not alter, amend, suspend, or terminate
this Plan as to any Virginia Power Participant without the consent of
that Participant if such action would result either in (i) a
distribution of the Participant's Deferred Benefit in any manner not
provided in the Plan or (ii) immediate taxation of a Deferred Benefit
to a Participant. Notwithstanding the preceding sentence, if any
amendment to the Plan after the Plan's effective date adversely affects
a Deferred Benefit of a Virginia Power Participant and the Internal
Revenue Service declines to rule favorably on the amendment,
8
<PAGE>
Virginia Power's Board of Directors, in its sole discretion, may
accelerate the distribution of any amounts attributable to an affected
Deferred Benefit.
14. NOTICES. All notices or election required under the Plan must be in
writing. A notice or election shall be deemed delivered if it is
delivered personally or sent registered or certified mail to the person
at his last known business address.
15. WAIVER. The waiver of a breach of any provision in this Plan does not
operate as and may not be construed as a waiver of any later breach.
16. CONSTRUCTION. This Plan shall be adopted and maintained according to
the laws of the Commonwealth of Virginia (except its choice-of-law
rules). Headings and captions are only for convenience; they do not
have substantive meaning. If a provision of this Plan is not valid or
enforceable, the validity or enforceability of any other provision
shall not be affected. Use of one gender includes all, and the singular
and plural include each other.
IN WITNESS WHEREOF, this instrument has been executed this ____ day of
_____________, 1996.
DOMINION RESOURCES, INC.
By_______________________________________
Linwood R. Robertson
Senior Vice President and Chief Financial Officer
VIRGINIA ELECTRIC AND POWER COMPANY
By_______________________________________
T. J. O'Neil
Vice President, Human Resources
9
<PAGE>
Exhibit 10(xxxi)
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made as of February 1,
1997, between DOMINION RESOURCES, INC. (the "Company") and Norman Askew.
RECITALS:
The Board of Directors of Dominion Resources, Inc. (the "Board of
Directors") recognizes that outstanding management of the company is essential
to advancing the best interest of the Company, its shareholders and its
subsidiaries. The Board of Directors believes that it is particularly important
to have stable, excellent management at the present time. The Board of Directors
believes that this objective may be achieved by giving key management employees
assurances of financial security for a period of time, so that they will not be
distracted by personal risks and will continue to devote their full time and
best efforts to the performance of their duties.
The Organization and Compensation Committee of the Board of Directors
(the "Committee") has recommended, and the Board of Directors has approved,
entering into employment agreements with the Company's key management executives
in order to achieve the foregoing objectives. The Executive is a key management
executive of the Company, and is a valuable member of the Company's management
team. The Company acknowledges that the Executive's contributions to the growth
and success of the Company will be substantial. The Company and the Executive
are entering into this Agreement to induce the Executive to become an employee
of the Company and to devote his full energy to the Company's affairs. The
Executive has agreed to be employed by the Company under the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual
undertakings contained in this Agreement, the parties agree as follows:
1. Employment. The Company will employ the Executive, and the
Executive will continue in the employment of the Company as an
executive of the Company, for the period beginning March 1, 1997
and ending November 1, 2002 (the "Term of this Agreement"),
according to the terms of this Agreement.
2. Duties. The Company and the Executive agree that, during the Term
of this Agreement, the Executive will serve in a senior management
position with the Company. The Executive (i) will devote his
knowledge, skill and best efforts on a full-time basis to
performing his duties and obligations to the Company (with the
exceptions of absences on the account of illness or vacation in
accordance with the Company's policies and civic and charitable
commitments not involving a conflict with the Company's business),
and (ii) will comply with the lawful and nonarbitrary directions
and orders of the Board of Directors and Chief Executive Officer
of the Company with respect to the performance of his duties.
3. Effect on Other Agreements.
(a) The Board of Directors recognizes that the Executive has
entered or will enter into an Employment Continuity
Agreement with the Company, which provides benefits under
certain circumstances in the event of a change in control
of the Company. Notwithstanding anything in this Agreement
to the contrary, if the Executive's employment terminates
for any reason after a change in control and payments are
to be made to the Executive under the Executive's
Employment Continuity Agreement: (i) the Executive will
not receive payments under this Agreement as a result of
his termination of employment for any reason, (ii) after
payment of any amounts otherwise due the Executive under
this Agreement, this Agreement will terminate without
liability on the part of the Company, and (iii) if and to
the extent that any payments made under this Agreement are
considered "parachute payments" for purposes of Section
280G of the U.S. Internal Revenue Code of 1986, as amended
(the "Code"), the payments will be taken into account in
determining the amount to be paid to the Executive under
the Employment Continuity Agreement according to the Terms
of the Employment Continuity Agreement. If a change of
control occurs, and the Executive is not entitled to
receive payments under the Executive's Employment
Continuity Agreement, this Agreement will continue in
effect according to its terms.
(b) Except as provided above, this Agreement sets forth the
entire understanding of the parties with respect to the
Executive's employment with the Company. The Executive and
the Company agree that, effective as of the execution of
this Agreement, any prior employment agreements between
the Executive and East Midlands Electricity plc ("EME")
(other than the Executive's Employment Continuity
Agreement) are null and void. The term "employment
agreement" as used in the preceding sentence does not
include any retirement, incentive or benefit plan or
program in which the Executive participates.
4. Affiliates. Employment by an Affiliate of the Company or a
successor to the Company will be considered employment by the
Company for purposes of this Agreement, and termination of
employment with the Company means termination of employment with
the Company and all its Affiliates and successors. The term
"Company" as used in this Agreement will be deemed to included
Affiliates and successors. For purposes of this Agreement, the
term "Affiliate" means the subsidiaries of Dominion Resources,
Inc. and other entities under common control with Dominion
Resources, Inc.
5. Compensation and Benefits.
(a) During the Term of this Agreement, while the Executive is
employed by the Company, the Company will pay to the
Executive the following salary and incentive awards for
services rendered to the Company:
(i) The Company will pay to the Executive an annual
salary in an amount not less than the base salary
paid by EME in effect for the Executive as of the
date on which this Agreement is executed. The
Board of Directors will evaluate the Executive's
performance at least annually and will consider
annual increases in the Executive's salary based
on the Executive's performance.
(ii) The Executive will be entitled to receive
incentive awards if and to the extent that the
Board of Directors determines that the
Executive's performance merits payment of an
award. The Board of Directors will make its
determination consistent with the methodology
used by the Company for compensating its senior
management employees.
(b) During the Term of this Agreement, while the Executive is
employed by the Company, the Executive will be eligible to
participate in a similar manner as other senior executives
in the Company's Benefit Restoration Plan, Executive
Supplemental Retirement Plan ("ESRP"), cash and stock
incentive plans, and such other fringe benefit and
employee benefit plans and programs that the Company makes
available to the Executive from time to time.
(c) If the Executive attains age 60 while employed by the
Company, the Executive's retirement benefits under the
Company's Benefit Restoration Plan will be computed based
on the greater of (A) the Executive's years of credited
service (determined as if the Executive was a participant
in the Company's Retirement Plan and pursuant to the terms
of the Retirement Plan), or (B) thirty (30) years of
credited service, and will be reduced by the amount of
benefits payable to the Executive under the EME Pension
Plan and Amending Deed for the Pension and Death Benefits
Arrangement for N B M Askew. Any benefit to be provided
under this subsection (c) will be provided as a
supplemental benefit under this Agreement and will not be
provided from the Retirement Plan. The provisions of this
subsection (c) shall survive the termination of this
Agreement.
(d) The Executive will be entitled to a fully vested benefit
under the ESRP if the Executive attains age 58 while
employed by the Company. The Executive's benefit under the
ESRP will be funded in the Dominion Resources, Inc.
Executive Retirement Plan Trust in equal installments so
that at age 60 the Executive's benefit under the Plan is
100% funded. The provisions of this subsection (d) shall
survive the termination of this Agreement.
(e) A proforma payout schedule is attached as Appendix A
which is based on certain assumptions that may or may not
be applicable. This Appendix is attached for interpretive
purposes only and is not a binding payout schedule.
6. Termination of Employment.
(a) If the Company terminates the Executive's employment,
other than for Cause (as defined in Section 8 below),
during the Term of this Agreement, the Company will pay
the Executive a lump sum payment equal to the present
value of the Executive's annual base salary for the
balance of the Term of this Agreement. The lump sum
payment will be computed as follows:
(i) For purposes of this calculation, the
Executive's annual base salary for the balance of
the Term of the Agreement will be calculated at
the highest annual base salary rate in effect for
the Executive during the three-year period
preceding his termination of employment. Salary
that the Executive elected to defer will be taken
into account for purposes of this Agreement
without regard to the deferral.
(ii) The salary for any partial year in the Term of
this Agreement will be a pro-rated portion of the
annual amount.
(iii) Present value will be computed by the Company as
of the date of the Executive's termination of
employment, based on a discount rate equal to the
applicable, U.S. Federal short-term rate, as
determined under Section 1274 (d) of the Code,
compounded monthly, in effect on the date as of
which the present value is determined.
(iv) The lump sum payment will be paid within 30 days
after the Executive's termination of employment.
(b) If the Company terminates the Executive's employment,
other than for Cause, during the Term of this Agreement,
the Executive will be entitled to receive the following
additional benefits determined as of the date of his
termination of employment:
(i) Any outstanding restricted stock or stock
options that would become vested (that is,
transferable and nonforfeitable, or excercisable)
if the Executive remained an employee through the
Term of this Agreement will become vested as of
the date of the Executive's termination of
employment (or as of the date described in the
next sentence, if applicable). In addition, if
the Company has agreed to award the Executive
performance shares or restricted stock at the end
of a performance period, subject to the Company's
achievement of performance goals, and the date as
of which the performance shares are to be
awarded, or the restricted stock is to become
vested, falls within the Term of this Agreement,
the stock will be awarded and become vested at
the end of the performance period if and to the
extent that performance goals are met. The
Executive must satisfy the tax withholding
requirements described in Section 10 with respect
to the performance shares and restricted stock.
(ii) The Executive will be credited with age and
service credit through the end of the Term of
this Agreement for purposes of computing benefits
under any Company pension, medical and other
benefit plan, including ESRP, in which the
Executive was participating as of the date of his
termination of employment. Service credited to
the Executive for purposes of this subsection
(ii) shall be in addition to any service credited
to the Executive pursuant to Section 5 (c). The
Company will pay the Executive a lump sum cash
amount that reasonably approximates the after-tax
value to the Executive of such age and service
credit and continued coverage through the end of
the Term of this Agreement, in lieu of continuing
coverage under the Company's benefit plans.
(c) If the Executive voluntarily terminates employment with
the Company during the Term of this Agreement under
circumstances described in this subsection (c) , the
Executive will be entitled to receive the benefits
described in subsections (a) and (b) above as if the
Company had terminated the Executive's employment other
than for Cause. Subject to the provisions of this
subsection (c) , these benefits will only be provided if
the Executive voluntarily terminates employment after (i)
the Company reduces the Executive's base salary, (ii) the
Executive is not in good faith considered for incentive
awards as described in Section 5 (a) (ii), (iii) the
Company fails to provide benefits as required by Section 5
(b) and 5 (c), (iv) the Company relocates the Executive's
place of employment to a location further than 50 miles
from Nottingham, U.K. (other than in connection with a
temporary assignment to the United States of no more than
3 months), or (v) the Company demotes the Executive to a
position that is not a senior management position (other
than on account of the Executive's disability, as defined
in Section 7 below). For this purpose, a "senior
management position" means the position of Chief Executive
Officer or Chief Operating Officer of Dominion Resources,
Inc. ("DRI"), the position of President or Chief Executive
Officer of a subsidiary of DRI, or a position that reports
directly to the Chief Executive Officer, Chief Operating
Officer, or Senior Vice President of DRI. In order for
this subsection (c) to be effective: (1) the Executive
must give written notice to the Company indicating that
the Executive intends to terminate employment under this
subsection (c), (2) the Executive's voluntary termination
under this subsection must occur within 60 days after the
Executive knows or reasonably should know of an event
described in clause (i), (ii), (iii), (iv) or (v) above,
or within 60 days after the last in a series of such
events, and (3) the Company must have failed to remedy the
event described in clause (i), (ii), (iii), (iv) or (v),
as the case may be, within 30 days after receiving the
Executive's written notice. If the Company remedies the
event described in clause (i), (ii), (iii), (iv) or (v),
as the case may be, within 30 days after receiving the
Executive's written notice, the Executive may not
terminate employment under this subsection (c) on account
of the event specified in the Executive's notice.
(d) The amounts under this Agreement will be paid in lieu of
severance benefits under any severance plan or program
maintained by the Company in which the Executive
participates (subject to Section 3 above). The amounts
payable under this Agreement will not be reduced by any
amounts earned by the Executive from a subsequent employer
or otherwise. If the Executive's employment is terminated
by the Company for Cause this Agreement will immediately
terminate without liability on the part of the Company.
(e) If the Executive (i) voluntarily terminates employment for
a reason not described in subsection (c) above or Section
7 below, and (ii) gives the Company no less than 6 months
prior notice of termination in accordance with the
provisions of Section 15 below, the Company will pay to
the Executive an amount equal to the additional benefits
the Executive would have accrued under the EME Pension
Plan and the Amending Deed for the Pension and Death
Benefits Arrangement for N B M Askew, had he remained a
participant in such plans through the Term of the
Agreement. The amount paid under this subsection (e) will
be paid as a supplemental benefit under this Agreement and
will not be provided from the EME Pension Plan or the
Amending Deed for the Pension and Death Benefits
Arrangement for N B M Askew. This amount will be paid in
lieu of any other benefits payable under this Agreement,
which will immediately terminate without liability on the
part of the Company.
7. Disability or Death. If the Executive becomes disabled (as defined
below) during the Term of this Agreement while he is employed by
the Company, the Executive shall be entitled to receive the
benefits described in Section 6 (b) (i) of this Agreement as of
the date on which he is determined by the Company to be disabled.
If the Executive dies during the Term of this Agreement while he
is employed by the Company, the benefits described in Section 6
(b) (i) will be provided to the personal representative of the
Executive's estate. The foregoing benefits will be provided in
addition to any death, disability and other benefits provided
under Company benefit plans in which the Executive participates.
Upon the Executive's death or disability, the provisions of
Sections 1, 2, 5, and 6 of this Agreement will terminate. The term
"disability" means a condition, resulting from bodily injury or
disease, that renders, and for a six consecutive month period has
rendered, the Executive unable to perform substantially the duties
pertaining to his employment with the Company. A return to work of
less than 14 consecutive days will not be considered an
interruption in the Executive's six consecutive months of
disability. Disability will be determined by the Company on the
basis of medical evidence satisfactory to the Company.
8. Cause. For purposes of this Agreement, the term "Cause" means (i)
fraud or material misappropriation with respect to the business or
assets of the Company, (ii) persistent refusal or wilful failure
of the Executive to perform substantially his duties or
responsibilities to the Company, including any failure to comply
with the directions or orders of the Board of Directors or the
Chief Executive Officer of the Company with respect to the
performance of his duties or responsibilities, (iii) conduct that
constitutes disloyalty to the Company, and that materially harms,
or has the potential to cause material harm to the Company, (iv)
conviction of a felony or crime involving moral turpitude, or (v)
the use of drugs or alcohol that interferes materially with the
Executive's performance of his duties.
9. Post Termination.
(a) The Executive undertakes to the Company that the Executive
shall not during the period of 12 months from Executive's
date of termination of employment be directly or
indirectly interested or concerned (whether as
shareholder, director, employee, partner, consultant,
proprietor, agent or in any other capacity) in any
business firm or company which
(i) holds a public electricity supply license for the
supply of electricity anywhere within the United
Kingdom; or
(ii) carries on anywhere within the United Kingdom any
other business competing with any business
carried on by the Company at the date of the
Executive's termination of employment in which
the Executive has been engaged or interested
during the 12 months prior to the date of his
termination of employment ("other relevant
business")
but nothing in this Section 9 shall prevent the Executive
holding or being interested in listed securities not
representing more than 5% in nominal amount of the issued
securities of any class of any company which are listed on
any recognized stock exchange anywhere in the world.
(b) The Executive undertakes to the Company that the Executive
shall not during the period of 12 months from the date of
the Executive's termination of employment whether as
principal agent or employee and whether directly or
indirectly supply to any person, firm or company whom the
Executive dealt with as a customer or potential customer
of the Company in the last 12 months of the Executive's
employment either electricity or any goods or services
which are the same or substantially the same as the type
of goods or services provided by any other relevant
business of the Company at the date of termination of the
Executive's employment whether or not the Executive has
approached the customer or vice versa.
(c) The Executive undertakes to the Company that the Executive
shall not during the period of 12 months from the date of
the Executive's termination of employment whether as
principal agent or employee and whether directly or
indirectly approach any person firm or company whom the
Executive dealt with as a customer or potential customer
of the Company in the last 12 months of the Executive's
employment with the Company with an offer to supply them
with electricity or any goods or services which are the
same or substantially the same as the type of goods or
services provided by any other relevant business of the
Company at the date of termination of the Executive's
employment with the Company.
(d) The Executive undertakes to the Company that the Executive
shall not during the period of 12 months from the date of
termination of employment whether as principal agent or
employer and whether directly or indirectly recruit or try
to recruit any person as an employee or consultant or in
some other capacity if that person was at any time during
the last 12 months of the Executive's employment employed
by the Company as a director or senior employee and the
Executive had regular contact with such person through
that person's work for the Company.
(e) The Executive undertakes to the Company that the Executive
shall also perform and observe the undertakings set out in
Section 9 (a) to 9 (d) in relation to any Affiliates whose
business or affairs the Executive has been engaged or
interested in at any time during the last 12 months of the
Executive's employment with the Company as if a reference
to each such Affiliate was substituted for a reference to
the Company in each case. This undertaking shall be
construed and enforceable as a separate convenant in
relation to each Affiliate and the Company shall be deemed
to have the benefit of this covenant as trustee for any
Affiliates.
(f) It is agreed that each of the covenants contained on the
part of the Executive in each of Section 9(a) to 9(c)
inclusive is and shall be construed and enforceable as a
separate covenant.
(g) In this Section 9 references to acting directly or
indirectly include (without prejudice to the generality of
that expression) references to acting alone or jointly
with or through any other person.
(h) The Executive undertakes and covenants with the Company
that he shall not at any time after the Executive's
termination of employment hold himself out or permit
himself to be held out as being in any way interested in
or connected with the Company or any Affiliate and shall
use his best endeavors to prevent himself being so held
out, save that if and for so long as he remains a director
or an employee of an Affiliate he may hold himself out or
be held out as being so connected with that Company.
10. Indemnification. The Company will pay all reasonable fees and
expenses, if any, (including, without limitation, legal fees and
expenses) that are incurred by the Executive to enforce this
Agreement and that result from a breach of this Agreement by the
Company.
In Executive's capacity as a member of the Board of Directors of
East Midlands Electricity, plc, Executive is entitled to
indemnification provided by the Articles of Incorporation of
Dominion Resources, Inc.
11. Payment of Compensation and Taxes. All amounts payable under this
Agreement (other than stock, which will be paid according to the
terms of the Company's Incentive Compensation Plan) will be paid
in cash, subject to income and payroll tax withholdings. No shares
of stock will be issued to the Executive until the Executive has
paid to the Company the amount that must be withheld for
applicable income and employment taxes or the Executive has made
provisions satisfactory to the Company for the payment of such
taxes.
12. Administration. The Committee will be responsible for the
administration and interpretation of this Agreement on behalf of
the Company. If for any reason a benefit under this Agreement is
not paid when due, the Executive may file a written claim with the
Committee. If the claim is denied or no response is received,
within 90 days after the filing (in which case the claim is deemed
to be denied), the Executive may appeal the denial to the Board of
Directors within 60 days of the denial. The Executive may request
that the Board of Directors review the denial, the Executive may
review pertinent documents, and the Executive may submit issues
and comments in writing. A decision on appeal will be made within
60 days after the appeal is made, unless special circumstances
require that the Board of Directors extend the period for another
60 days. If the Company defaults in an obligation under this
Agreement, the Executive makes a written claim pursuant to the
claims procedure described above, and the Company fails to remedy
the default within the claims procedure period, then all amounts
payable to the Executive under this Agreement will become
immediately due and owing.
13. Assignment. The rights and obligations of the Company under this
Agreement will inure to the benefit of and will be binding upon
the successors and assigns of the Company. If the Company is
consolidated or merged with or into another corporation, or if
another entity purchases all or substantially all of the Company's
assets, the surviving or acquiring corporation will succeed to the
Company's rights and obligations under this Agreement. The
Executive's rights under this Agreement may not be assigned or
transferred in whole or in part, except that the personal
representative of the Executive's estate will receive any amounts
payable under this Agreement after the death of the Executive.
14. Rights Under the Agreement. The right to receive benefits under
the Agreement will not give the Executive any proprietary interest
in the Company or any of its assets. Benefits under the Agreement
will be payable from the general assets of the Company, and there
will be no required funding of amounts that may become payable
under the Agreement [except to the extent required pursuant to
Section 5 (d)]. The Executive will for all purposes be a general
creditor of the Company. The interest of the Executive under the
Agreement cannot be assigned, anticipated, sold, encumbered or
pledged and will not be subject to the claims of the Executive's
creditors.
15. Notice. For purposes of this Agreement, notices and all other
communications must be in writing and are effective when delivered
or mailed by United States registered mail, return receipt
requested, postage prepaid, addresses to the Executive or his
personal representative at his last known address. All notices to
the Company must be directed to the attention of the Chairman of
the Committee. Such other addresses may be used as either party
may have furnished to the other in writing. Notices of change of
address are effective only upon receipt.
16. Miscellaneous. This instrument contains the entire agreement of
the parties. To the extent not governed by U.S. federal law, the
parties contemplate and agree that this Agreement will be
construed in accordance with the laws of the Commonwealth of
Virginia, U.S.A., without reference to its conflict of laws rules.
Any action to enforce the terms of this Agreement shall be brought
in any court of competent jurisdiction in the Commonwealth of
Virginia, and each party hereby irrevocably consents to the
jurisdiction of such courts over its person and hereby waives any
defense based upon improper venue, inconvenient forum or lack of
jurisdiction. No provisions of this Agreement may be modified ,
waived or discharged unless such a waiver, modification or
discharge is agreed to in writing and the writing is signed by the
Executive and the Company. A waiver of any breach of our
compliance with any provision or condition of this Agreement is
not a waiver of similar or dissimilar provisions or conditions.
The invalidity or enforceability of any provision of this
Agreement will not affect the validity or enforceability of any
other provision of this Agreement, which will remain in full force
and effect. This Agreement may be executed in one more
counterparts, all of which will be considered one and the same
agreement.
WITNESS the following signatures.
DOMINION RESOURCES, INC.
By: /s/ THOS. E. CAPPS
________________________________
Thos. E. Capps
Chief Executive Officer
Dated: 2/21/97
_______________
/s/ NORMAN ASKEW
--------------------------------
Norman Brian Montague Askew
2-18-97
Appendix A
Norman B.M. Askew
Retirement Benefits at Specified Ages
Under Terms of Employment Agreement
<TABLE>
<CAPTION>
Additional
Years of Service Years of Credited Service Percent
Under EME ------------------------- Vested Estimated
Date of Age at Pension & DRI Qualified DRI Under DRI Monthly
Termination Termination Amending Deed Pension Plan BRP(1) ESRP(2) Payout(3)
- ----------- ----------- ---------------- ------------- ------ --------- ---------
<S> <C>
11-1-97 55 1 0 0 0 (Pounds) 3,700
11-1-98 56 2 0 0 0 (Pounds) 4,400
11-1-99 57 3 0 0 0 (Pounds) 5,200
11-1-00 58 4 0 0 100% (Pounds) 14,000
11-1-01 59 5 0 0 100% (Pounds) 15,200
11-1-02 60 6 5 30 100% (Pounds) 21,300
</TABLE>
Notes
1. Benefit Restoration Plan
2. Executive Supplemental Retirement plan
3. Estimated payout based on the following assumptions:
(bullet) DOB: October 4, 1942 (age 54)
(bullet) Retires November 1, 2002 (age 60)
(bullet) 1997 Base Pay = (Pounds)230,000
(bullet) Exchange rate: $1.60 = (Pounds)1.00
(bullet) Target bonus = 45% x base pay
(bullet) 5% salary increases each year
(bullet) 1997 EME Pension = (Pounds)44,000/year; + (Pounds)9,374
for each additional year
EXHIBIT 10(xxxii)
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in
any doubt as to the action you should take, you are recommended immediately to
seek your own financial advice from your stockbroker, bank manager, solicitor,
accountant or other independent financial adviser authorised under the Financial
Services Act 1986.
SBC Warburg, a division of Swiss Bank Corporation, which is regulated in the UK
by The Securities and Futures Authority Limited, is acting for Dominion
Resources and DR Investments and no one else in connection with the Offer and
will not be responsible to anyone other than Dominion Resources and DR
Investments for providing the protections afforded to customers of SBC Warburg
nor for giving advice in relation to the Offer.
Wasserstein Perella, which is regulated in the UK by The Securities and Futures
Authority Limited, is acting for Dominion Resources and DR Investments and no
one else in connection with the Offer and will not be responsible to anyone
other than Dominion Resources and DR Investments for providing the protections
afforded to customers of Wasserstein Perella nor for giving advice in relation
to the Offer.
Schroders, which is regulated in the UK by The Securities and Futures Authority
Limited, is acting for East Midlands Electricity and no one else in connection
with the Offer and will not be responsible to anyone other than East Midlands
Electricity for providing the protections afforded to customers of Schroders nor
for giving advice in relation to the Offer.
If you have sold or otherwise transferred all your East Midlands Electricity
Shares, please send this document and the reply paid envelope (but not the
accompanying Form of Acceptance because it is personalised) as soon as possible
to the purchaser or transferee or to the stockbroker, bank or other agent
through whom the sale or transfer was effected for transmission to the purchaser
or transferee. However, these documents should not be forwarded or transmitted
in or into the United States, Canada, Australia or Japan.
This document should be read in conjunction with the accompanying Form of
Acceptance.
Recommended Cash Offer by
SBC Warburg and Wasserstein Perella
A division of Swiss Bank Corporation & Co. Limited
on behalf of
DR Investments (UK) PLC
a wholly owned subsidiary of
[LOGO]
DOMINION RESOURCES
to acquire the whole of the issued share capital of
East Midlands Electricity plc
A letter from Sir Nigel Rudd, the Chairman of East Midlands Electricity, is set
out on pages 3 and 4.
ACCEPTANCES SHOULD BE DESPATCHED AS SOON AS POSSIBLE, AND IN ANY EVENT SO AS TO
BE RECEIVED BY NO LATER THAN 3.00 PM ON 13 DECEMBER 1996. The procedure for
acceptance of the Offer is set out on pages 11 and 12 of this document and in
the accompanying Form of Acceptance.
The Offer referred to in this document is not being made, directly or
indirectly, in or into or by use of the mails or any means or instrumentality of
interstate or foreign commerce or any facilities of a national securities
exchange of the United States, nor is it being made in Canada, Australia or
Japan. Accordingly, neither this Offer document nor the accompanying Form of
Acceptance is being or may be mailed or otherwise forwarded, distributed or sent
(including telephonically or electronically) in, into or from the United States,
Canada, Australia or Japan.
The Loan Notes to be issued pursuant to the Offer have not been, and will not
be, registered under the United States Securities Act of 1933 (as amended) nor
under any of the relevant securities laws of Canada, Australia or Japan.
Accordingly, unless an exemption under such Act or relevant securities law is
applicable, the Loan Notes may not be offered, sold or delivered, directly or
indirectly, in or into the United States, Canada, Australia or Japan. All East
Midlands Electricity Shareholders (including nominees, trustees or custodians)
who would, or otherwise intend to, forward this document, should read the
further details in this regard which are contained in paragraph 6 of Part B and
Part C of Appendix 1 to this document before taking any action.
<PAGE>
CONTENTS
Page
Letter from the Chairman of East Midlands Electricity ...................... 3
Letter from the Chairman of DR Investments ................................. 5
Letter from SBC Warburg and Wasserstein Perella ............................ 7
1. Introduction ................................................... 7
2. The Recommended Cash Offer ..................................... 7
3. The Loan Note Alternative ...................................... 8
4. Regulation ..................................................... 8
5. Information on Dominion Resources .............................. 9
6. Information on East Midlands Electricity ....................... 9
7. Management and employees ....................................... 9
8. United Kingdom taxation ........................................ 9
9. East Midlands Electricity Share Option Schemes ................. 11
10. Procedure for acceptance of the Offer .......................... 11
11. Settlement ..................................................... 12
12. Action to be taken ............................................. 13
13. Further information ............................................ 13
Appendix 1
Conditions and further terms of the Offer .......................... 14
Appendix 2
Particulars of the Loan Notes ...................................... 31
Appendix 3
Financial and other information relating to Dominion Resources ..... 34
Appendix 4
Financial and other information relating
to East Midlands Electricity...................................... 61
Appendix 5
Additional information ............................................. 75
Appendix 6
Definitions ........................................................ 83
2
<PAGE>
[LOGO]
EAST MIDLANDS ELECTRICITY
Corporate Office
PO Box 444
Wollaton,
Nottingham NG8 1EZ
22 November 1996
To East Midlands Electricity Shareholders and, for information only, to
participants in the East Midlands Electricity Share Option Schemes
Dear Shareholder,
Recommended Cash Offer for East Midlands Electricity
I wrote to you on 8 November to explain that Dominion Resources had announced
that it had been evaluating a potential offer for East Midlands Electricity. At
that time, the view of the executive management of Dominion Resources was that
it was unlikely to recommend to its own Board making an offer at a price much in
excess of 608p per share. Your Board clearly stated that it would reject any
offer at that level.
Dominion Resources then asked for a meeting with us to discuss a possible offer.
Following that meeting, your Board agreed to recommend a cash offer for your
company at 670p per share by DR Investments, a wholly owned subsidiary of
Dominion Resources. The Offer values the entire issued share capital of East
Midlands Electricity at approximately (pound)1.3 billion.
The Offer
The Offer is being made on the following basis:
for each Ordinary Share 670p in cash
The Offer represents a premium of 34.3% over the closing middle market price of
499p per Ordinary Share on 23 October 1996, the day before the recent bid
speculation for East Midlands Electricity commenced.
Assuming the Offer becomes wholly unconditional, the directors of East Midlands
Electricity do not intend to pay an interim dividend in respect of the six
months ended 30 September 1996.
A Loan Note Alternative is also being provided for which East Midlands
Electricity Shareholders may elect instead of some or all of the cash
consideration which would otherwise be receivable under the Offer. Further
information concerning the Loan Notes is set out on page 8 of this document and
in Appendix 2.
Reasons for recommending the Offer
As a Board we have always put the interests of shareholders and customers at the
top of our agenda. We also believe that East Midlands Electricity is an
excellent business which has successfully differentiated itself from the sector.
As a result, your Board had no hesitation in stating that it would reject any
offer at or around 608p per share. In arriving at its decision to recommend the
670p cash offer, your Board carefully considered the current and future
prospects for your company. This review convinced us that the Offer by DR
Investments represented fair value.
East Midlands Electricity plc
Registered in England and Wales No: 2366923
Registered Office: PO Box 444, Woodyard Lane,
Wollaton, Nottingham NG8 1EZ
3
<PAGE>
Management and employees
DR Investments has given assurances that the existing rights, including pension
rights, of all management and employees of East Midlands Electricity will be
fully protected.
Action to be taken
The procedure for acceptance of the Offer is set out on pages 11 and 12 of this
document and in the accompanying Form of Acceptance. In order to accept the
Offer, you should complete and return the enclosed Form of Acceptance in
accordance with the instructions printed thereon as soon as possible and, in any
event, so as to be received not later than 3.00 pm on 13 December 1996.
Recommendation
The Board of East Midlands Electricity, which has been so advised by Schroders,
its financial advisers, considers the terms of the Offer to be fair and
reasonable. In providing advice to the Board of East Midlands Electricity,
Schroders has taken account of the directors' commercial assessments. The Board
of East Midlands Electricity unanimously recommends East Midlands Electricity
Shareholders to accept the Offer, as the directors intend to do in respect of
their own beneficial holdings amounting to 27,401 Ordinary Shares.
Yours sincerely,
/s/ Sir Nigel Rudd
-------------------
Sir Nigel Rudd
Chairman
4
<PAGE>
DR Investments (UK) PLC Registered Office:
Registered in England under company number 165 Queen Victoria Street
3277634 London
EC4V 4DD
22 November 1996
To East Midlands Electricity Shareholders and, for information only, to
participants in the East Midlands Electricity Share Option Schemes
Dear Shareholder,
Recommended Cash Offer by DR Investments for East Midlands Electricity
Introduction
On 6 November 1996, Dominion Resources announced that its executive management
was evaluating a potential offer for East Midlands Electricity. On 12 November
1996, representatives of Dominion Resources and East Midlands Electricity met to
discuss the terms of such an offer.
On 13 November 1996, the Boards of Dominion Resources and East Midlands
Electricity announced the terms of a recommended cash offer to be made by DR
Investments, a wholly owned subsidiary of Dominion Resources, for the whole of
the issued share capital of East Midlands Electricity.
The Recommended Cash Offer
The Offer:
o is made on the basis of 670p in cash for each Ordinary Share (with a Loan
Note Alternative);
o values the entire issued share capital of East Midlands Electricity at
approximately (pound)1.3 billion;
o is recommended by the Board of East Midlands Electricity;
o represents a premium of 24.7% over the closing middle market price of
537.5p per Ordinary Share on 5 November 1996, the day before the Offer
Period commenced; and
o represents a premium of 34.3% over the closing middle market price of 499p
per Ordinary Share on 23 October 1996, the day before the recent bid
speculation concerning East Midlands Electricity commenced.
Background to and reasons for the Offer
Dominion Resources is one of the largest investor owned electric utility groups
in the US. In addition to developing Virginia Power, its core regulated
business, its strategy is to enhance shareholder value by making investments in
domestic and international ventures which complement its core business.
Significant investment has been made over the last decade and by 31 December
1995 the combined assets of these ventures was approximately $2 billion.
Dominion Resources has been studying the UK for a considerable period of time
and believes that it is an attractive market for investment. The proposed
acquisition of East Midlands Electricity enhances its strategy of entering new
geographic electric power markets where it can apply its existing experience and
expertise. Dominion Resources has been impressed by East Midlands Electricity's
management's record and is looking forward to working with them to continue the
development of East Midlands Electricity.
Dominion Resources considers that its operational expertise will enable East
Midlands Electricity to develop its existing businesses, to take advantage of
suitable opportunities for growth in the UK and to help position it to
participate actively in the post 1998 supply market. Dominion Resources places
strong emphasis on high levels of customer service and will seek to maintain and
enhance service levels to the benefit of customers of East Midlands Electricity.
5
<PAGE>
Conclusion
We believe that we are paying a full and fair price for East Midlands
Electricity, reflecting our belief in the growth opportunities for East Midlands
Electricity, and that the Offer benefits both shareholders and customers of East
Midlands Electricity. We urge you to accept the Offer as soon as possible.
Details of how to accept the Offer are set out on pages 11 and 12 of this
document and in the accompanying Form of Acceptance.
Yours sincerely,
/s/ Thos. E. Capps
-------------------
Thos. E. Capps
Chairman
6
<PAGE>
[SBC WARBURG LETTERHEAD] [WASSERSTEIN PERELLA LETTERHEAD]
2 Finsbury Avenue Wasserstein Perella & Co. Limited
London EC2M 2PP 3 Burlington Gardens
London W1X 1LE
22 November 1996
To East Midlands Electricity Shareholders and, for information only, to
participants in the East Midlands Electricity Share Option Schemes
Dear Shareholder,
Recommended Cash Offer for East Midlands Electricity on behalf of DR Investments
1. Introduction
On 13 November 1996, the Boards of Dominion Resources and East Midlands
Electricity announced the terms of a recommended cash offer for the whole of the
issued share capital of East Midlands Electricity. The Offer values the entire
issued share capital of East Midlands Electricity at approximately (pound)1.3
billion. This letter sets out the formal offer, which is being made by SBC
Warburg and Wasserstein Perella on behalf of DR Investments, a wholly owned
subsidiary of Dominion Resources. SBC Warburg is broker to the Offer.
Your attention is drawn to the letter from Sir Nigel Rudd, the Chairman of East
Midlands Electricity, on pages 3 and 4 of this document and the recommendation
contained therein.
The procedure for acceptance of the Offer is set out on pages 11 and 12 of this
document and in the accompanying Form of Acceptance.
Acceptances of the Offer should be received by The Royal Bank of Scotland plc,
Registrars Department, New Issues Section as soon as possible and, in any event,
by no later than 3.00 pm on 13 December 1996.
2. The Recommended Cash Offer
On behalf of DR Investments, SBC Warburg and Wasserstein Perella offer to
acquire, on the terms and subject to the conditions set out or referred to in
this document and in the accompanying Form of Acceptance, all the East Midlands
Electricity Shares on the following basis:
for each Ordinary Share 670p in cash
The Offer represents:
o a premium of 34.3% over the closing middle market price of 499p per
Ordinary Share on 23 October 1996, the day before the recent bid
speculation concerning East Midlands Electricity commenced; and
[LETTERHEAD] [LETTERHEAD]
7
<PAGE>
o a premium of 24.7% over the closing middle market price of 537.5p per
Ordinary Share on 5 November 1996, the day before the Offer Period
commenced.
Assuming the Offer is declared wholly unconditional, the directors of East
Midlands Electricity do not intend to pay an interim dividend in respect of the
six months ended 30 September 1996.
The Ordinary Shares will be acquired by DR Investments fully paid and free from
all liens, equities, charges, encumbrances and other interests and together with
all rights now or hereafter attaching thereto, including without limitation the
right to retain and receive all dividends and other distributions declared, made
or paid after 12 November 1996.
The Offer will be subject to the conditions and on the terms set out in Appendix
1 and in the accompanying Form of Acceptance.
3. Loan Note Alternative
Instead of some or all of the cash consideration which would otherwise be
receivable by them under the Offer, Ordinary Shareholders (other than certain
overseas shareholders) accepting the Offer will be entitled to elect to receive
Loan Notes on the following basis:
for each (pound)1 of cash (pound)1 nominal of Loan Notes
The Loan Notes will be issued by DR Investments credited as fully paid in
amounts and integral multiples of (pound)1 nominal value and any fractional
entitlements will be disregarded and not issued.
The Loan Notes will be unsecured and unguaranteed obligations of DR Investments.
The Loan Notes will bear interest, payable yearly at the rate of 1% below LIBOR
for twelve month sterling deposits. Interest on the Loan Notes will be payable
annually in arrears on 31 March (or, if not a business day in any year, on the
following business day). The first interest payment on the Loan Notes will be
made on 31 March 1998 in respect of the period from the first issue of the Loan
Notes. Holders of the Loan Notes will have the right to redeem them for cash at
par on 31 March 1998 and on interest payment dates thereafter. Unless previously
redeemed or repurchased, the Loan Notes will be redeemed on 31 March 2007.
No Loan Notes will be issued unless valid elections for the Loan Note
Alternative will result in the issue of at least (pound)10 million nominal value
of Loan Notes, or such smaller amount as DR Investments may decide. If the Loan
Notes are not issued in these circumstances, Ordinary Shareholders who elect for
the Loan Note Alternative will receive cash in accordance with the terms of the
Offer. The Loan Note Alternative will not be available to United States,
Canadian, Australian or Japanese persons. DR Investments does not intend to make
application to any stock exchange for the Loan Notes to be listed.
The value of the Loan Notes has been estimated by SBC Warburg and Wasserstein
Perella to be not less than 98p per (pound)1 nominal value as at 18 November
1996, the latest practicable day prior to the publication of this document.
Further details of the Loan Notes are set out in Appendix 2.
4. Regulation
The Offer gives rise to a merger situation qualifying for investigation within
the meaning of the Fair Trading Act 1973. It is therefore conditional on an
announcement being made indicating, in terms satisfactory to the Offeror, that
it is not the intention of the Secretary of State for Trade and Industry to
refer the Offer, or any matters arising therefrom or relating thereto, to the
Monopolies and Mergers Commission. In this connection, DR Investments has made
submissions to both the Director General of Fair Trading and the Director
General of Electricity Supply.
East Midlands Electricity is the holder of licences issued under the Electricity
Act 1989. These licences do not contain change of control provisions. It is,
however, open to the DGES to seek modification of these licences at any time by
agreement with the licensee or, in the absence of agreement, following a
reference to the Monopolies and Mergers Commission under the Electricity Act
1989. The Offer is conditional on indications being given by the DGES that it is
not his intention to seek modifications to such licences held by East Midlands
Electricity and on East Midlands Electricity not agreeing to any modification,
except in either case on terms satisfactory to the Offeror, and also on neither
the Secretary of State for Trade and Industry nor the DGES seeking undertakings
from any member of the Offeror Group or the East Midlands Electricity Group
except on terms satisfactory to the Offeror. In this connection, DR Investments
and East Midlands Electricity have jointly notified the DGES of the Offer.
8
<PAGE>
5. Information on Dominion Resources
Dominion Resources is a US holding company active in regulated electric power
activities in Virginia and North Carolina and competitive electric power
activities internationally and throughout the US. It is also active in natural
gas development, financial services and real estate.
Dominion Resources operates through three wholly owned subsidiaries. Its
principal subsidiary is Virginia Power, one of the 15 largest investor owned
electric utilities in the US, serving nearly two million homes and businesses in
Virginia and northeastern North Carolina. Dominion Energy, its independent power
and natural gas and oil subsidiary, has ownership interests in over 20 power
projects with generating capacity of over 2,500 MW in four Central and South
American countries and six US states. Dominion Capital, its financial services
and real estate subsidiary, has businesses which include lending to consumers
and energy production companies, ownership in a hydroelectric facility and real
estate holdings and transactions.
For the year ended 31 December 1995, Dominion Resources reported consolidated
net income of $425 million ((pound)258 million) on operating revenue of $4,652
million ((pound)2,819 million). As at 31 December 1995, Dominion Resources had
shareholders' equity of $4,742 million ((pound)2,874 million). Dominion
Resources' common stock is traded on the New York Stock Exchange, with a current
equity market capitalisation of approximately $7.0 billion ((pound)4.2 billion).
It employs more than 10,000 people.
6. Information on East Midlands Electricity
East Midlands Electricity owns and operates the electricity distribution network
for some 2.3 million customers in a region that extends from Coventry to the
Lincolnshire coast and from Milton Keynes to Chesterfield. Under the terms of
its licence, East Midlands Electricity supplies electricity to all domestic and
smaller business customers in its region. Larger business customers whose annual
consumption exceeds 100kW are entitled to purchase electricity in the
competitive market. East Midlands Electricity participates in this market and
sells electricity to these larger business customers both within and outside its
immediate region. Other activities include gas supply, electrical contracting
and power generation.
For the financial year ended 31 March 1996, East Midlands Electricity reported
consolidated profit after tax (excluding the effect of the distribution of the
National Grid Group plc and associated transactions referred to on pages 69 and
70 in Appendix 4) of (pound)150 million on turnover of (pound)1,300 million. It
employed an average of over 5,000 people during that financial year. As at 31
March 1996, East Midlands Electricity had net assets of (pound)391 million.
7. Management and employees
The existing employment rights, including pension rights, of all management and
employees of East Midlands Electricity will be fully protected.
8. United Kingdom taxation
The following paragraphs, which are intended as a general guide only, are based
on current legislation and Inland Revenue practice. They summarise certain
limited aspects of the UK taxation treatment of accepting the Offer and the Loan
Note Alternative. The information relates only to the position of East Midlands
Electricity Shareholders who hold their East Midlands Electricity Shares as
investments and (except to the extent that express reference to the position of
non UK residents is made) who are resident in the United Kingdom for taxation
purposes.
If you are in any doubt as to your taxation position or if you are subject to
taxation in any jurisdiction other than the United Kingdom, you should consult
an appropriate independent adviser without delay.
(a) Taxation of chargeable gains
Liability to United Kingdom taxation of chargeable gains will depend on
the individual circumstances of each East Midlands Electricity Shareholder
and on the form of consideration received.
Cash
To the extent that an East Midlands Electricity Shareholder receives cash
under the Offer, this will constitute a disposal, or part disposal, of his
East Midlands Electricity Shares which may, depending on the shareholder's
individual circumstances, give rise to a liability to United Kingdom
taxation of chargeable gains.
9
<PAGE>
Loan Notes
(i) Holdover
Any East Midlands Electricity Shareholder who, together with
persons connected with such shareholder, does not hold more than
5% of any class of shares in or debentures of East Midlands
Electricity will not be treated as having made a disposal of East
Midlands Electricity Shares for the purposes of United Kingdom
taxation of chargeable gains to the extent that such shareholder
receives Loan Notes in exchange for East Midlands Electricity
Shares. Any gain or loss which would otherwise have arisen on a
disposal of East Midlands Electricity Shares at market value at
the time of that exchange will be "held over" and deemed to accrue
on a subsequent disposal (including a redemption) of the Loan
Notes. No "indexation allowance" will be available for the period
during which any gain is "held over" in this way.
Any East Midlands Electricity Shareholder who, either alone or
together with persons connected with such shareholder, holds more
than 5% of any class of shares in or debentures of East Midlands
Electricity is advised that an application for clearance has been
made to the Inland Revenue under Section 138 of the Taxation of
Chargeable Gains Act 1992 in respect of the Offer. If such
clearance is given, any such East Midlands Electricity Shareholder
will be treated in the manner described in the preceding
paragraph. Neither the Offer nor the Loan Note Alternative is
conditional on such clearance being obtained.
(ii) Disposal of Loan Notes
The Loan Notes will be "qualifying corporate bonds" for the
purposes of United Kingdom taxation of chargeable gains.
Accordingly, except to the extent that a chargeable gain or
allowable loss previously "held over" in respect of East Midlands
Electricity Shares is deemed to accrue as described in (i) above,
any gains and losses arising on a disposal (including a
redemption) of the Loan Notes will not give rise to chargeable
gains or allowable losses for the purposes of United Kingdom
taxation of chargeable gains.
Holders of Loan Notes within the charge to corporation tax are
also referred to paragraph 8(b)(iii) below.
(b) Taxation of income
Loan Notes
(i) Withholding tax
Interest on the Loan Notes will be paid subject to deduction of
United Kingdom income tax (currently at the rate of 20%) by the
Offeror unless the Offeror has previously been directed by the
Inland Revenue in relation to a particular holding of Loan Notes
to make a payment free of deduction or subject to a reduced rate
of deduction by virtue of relief available to the holder of those
Loan Notes under an applicable double taxation treaty. Such a
direction will only be issued following a prior application to the
Inland Revenue in the appropriate manner by the holder of those
Loan Notes. The Offeror will not gross up payments of interest on
the Loan Notes to compensate for any tax which it is required to
deduct at source.
(ii) Individual holders of Loan Notes
Subject to the above, the gross amount of interest on the Loan
Notes will form part of the recipient's income for the purposes of
United Kingdom income tax, credit being allowed for the tax
withheld. Individuals who are taxable only at the lower or basic
rate will have no further tax to pay in respect of the interest.
In certain cases, holders of Loan Notes may be able to recover
from the Inland Revenue an amount in respect of the tax withheld
at source.
Under the "accrued income scheme", a charge to tax on income may
arise on a transfer of Loan Notes in respect of interest on the
Loan Notes which has accrued since the preceding interest payment
date.
10
<PAGE>
(iii) Corporate holders of Loan Notes
For a Loan Note holder within the charge to corporation tax, all
profits, gains and losses measured and recognised in accordance
with an appropriate accounting method in respect of the Loan Notes
will be taxed or relieved as income.
(c) Stamp duty and stamp duty reserve tax ("SDRT")
(i) Acceptance of the Offer
No stamp duty or SDRT will be payable by East Midlands Electricity
Shareholders as a result of accepting the Offer (including the
Loan Note Alternative).
(ii) Loan Notes
No stamp duty or SDRT will be payable on a transfer or sale of, or
an agreement to transfer or sell, Loan Notes.
(d) Other taxation matters
Special taxation provisions may apply to East Midlands Electricity
Shareholders who have acquired or acquire their East Midlands
Electricity Shares by exercising options under the East Midlands
Electricity Share Option Schemes, including provisions imposing a
charge to income tax.
9. East Midlands Electricity Share Option Schemes
The Offer will extend to any Ordinary Shares unconditionally allotted or issued
prior to the date on which the Offer closes (or such earlier date, not being
earlier than the date on which the Offer becomes unconditional as to acceptances
or, if later, the first closing date of the Offer, as the Offeror may determine)
as a result of the exercise of options granted under the East Midlands
Electricity Share Option Schemes. Appropriate proposals will be made to option
holders under the East Midlands Electricity Share Option Schemes in due course.
10. Procedure for acceptance of the Offer
(a) To accept the Offer
To accept the Offer in respect of all or any of your East Midlands
Electricity Shares, you must complete Boxes 1 and 4 and sign Box 3 of the
Form of Acceptance in the presence of a witness, who should sign in
accordance with the instructions printed on the Form. You must also
complete Boxes 5 and 6 if relevant.
If you have any questions as to how to complete the Form of Acceptance,
please contact the Receiving Agent on telephone number 0117 975 1594.
(b) To elect for the Loan Note Alternative
To elect for the Loan Note Alternative for all or part of your East
Midlands Electricity Shares in respect of which you accept the Offer, you
must complete the Form of Acceptance as set out in (a) above and in
addition complete Box 2 on the Form of Acceptance in accordance with the
instructions printed thereon. The Loan Note Alternative is not available
to certain overseas shareholders or persons acting for the account or
benefit of such persons. In addition, if you have completed Box 5 you may
only receive cash under the terms of the Offer.
(c) Return of Form of Acceptance
The completed, signed and witnessed Form of Acceptance should be lodged
with the Receiving Agent, The Royal Bank of Scotland plc, Registrars
Department, New Issues Section, either by post or by hand at PO Box No
859, Consort House, East Street, Bedminster, Bristol BS99 1XZ or by hand
only at PO Box 633, 5-10 Great Tower Street, London EC3R 5ER, together
with the relevant share certificate(s), documents of title, letters of
indemnity and supporting documents (if any) for the East Midlands
Electricity Shares in respect of which the Form of Acceptance has been
completed, as soon as possible, but in any event so as to arrive not later
than 3.00 pm on 13 December 1996. A reply-paid envelope for the UK only is
enclosed for your convenience.
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(d) Method of delivery
The method of delivery to the Receiving Agent of share certificates for
East Midlands Electricity Shares and all other required documents is at
the option and risk of accepting East Midlands Electricity Shareholders.
You may wish to use the enclosed reply-paid envelope, for use in the UK
only. If delivery is other than by UK post, registered mail with return
receipt requested, properly insured, is recommended. In all cases,
sufficient time should be allowed to ensure prompt delivery. No
acknowledgement of receipt of documents will be given.
The attention of East Midlands Electricity Shareholders who are residents
or citizens of territories outside the United Kingdom is drawn to
paragraph (g) below.
(e) Documents of title
A completed and signed Form of Acceptance should be accompanied by the
relevant share certificate(s) and/or other document(s) of title. No
acknowledgement of receipt of documents will be given. If for any reason
the relevant share certificate(s) and/or the other document(s) of title
is/are lost or not readily available, you should nevertheless complete,
sign and lodge the Form of Acceptance as stated above so as to be received
by the Receiving Agent by no later than 3.00 pm on 13 December 1996 and
you should arrange for the relevant share certificate(s) and/or other
document(s) of title to be forwarded as soon as possible thereafter. The
completed Form of Acceptance, together with any share certificate(s)
and/or other document(s) of title which you may have available, should be
lodged with the Receiving Agent at either of the addresses given in
paragraph (c) above, accompanied by a letter stating that the balance will
follow or that you have lost one or more of your share certificate(s)
and/or other document(s) of title. In the case of loss, you should then
write to East Midlands Electricity's Registrars, Lloyds Bank Registrars,
54 Pershore Road South, King's Norton, Birmingham B30 3EP, for a letter of
indemnity for lost share certificate(s) which, when completed in
accordance with the instructions given, should be lodged with the
Receiving Agent at either of the addresses given in paragraph (c) above.
(f) Validity of acceptances
DR Investments, SBC Warburg and Wasserstein Perella reserve the right,
subject to the Code, to treat as valid any acceptance of the Offer which
is not entirely in order or which is not accompanied by the relevant share
certificate(s) and/or other document(s) of title. In that event, the
consideration payable under such acceptances will not be despatched until
after the Form of Acceptance, complete in all respects, the share
certificate(s) and/or other document(s) of title or indemnities
satisfactory to DR Investments have been received.
(g) Overseas shareholders
The attention of East Midlands Electricity Shareholders not resident in
the United Kingdom or who are holding Ordinary Shares on behalf of
citizens, nationals or residents of jurisdictions outside the United
Kingdom or who may have an obligation to forward this document or any Form
of Acceptance outside the United Kingdom is drawn to paragraph 6 of Part B
of Appendix 1, paragraphs (b), (c) and (d) of Part C of Appendix 1 and to
the relevant provisions of the Form of Acceptance.
The Offer is not being made, directly or indirectly, in or into, or by
means of the mails or any means or instrumentality of interstate or
foreign commerce or any facilities of a national securities exchange of
the United States, nor is it being made in Canada, Australia or Japan.
Accordingly, any acceptors who are unable to give the warranties set out
in paragraph (b) and (d) of Part C of Appendix 1 to this document will be
deemed not to have accepted the Offer.
11. Settlement
Subject to the Offer becoming or being declared unconditional in all respects,
cheques in settlement of the cash consideration or Loan Note certificates will
be despatched (but not in or into the United States, Canada, Australia or Japan)
by first class post to persons accepting the Offer or their appointed agents not
later than 21 days after the Offer becomes unconditional in all respects or 21
days after receipt of a valid and completed acceptance, whichever is the later.
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12. Action to be taken
You are urged to complete, sign and return the Form of Acceptance as soon as
possible, but in any event so as to arrive not later than 3.00 pm on 13 December
1996.
13. Further information
Your attention is drawn to the Appendices which contain further information and
form part of this document.
Yours faithfully,
for and on behalf of for and on behalf of
Swiss Bank Corporation Wasserstein Perella & Co. Limited
acting through its division
SBC Warburg
P A Kiernan H J Covington
Managing Director Managing Director
T K G Cooper
Executive Director
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APPENDIX 1
CONDITIONS AND FURTHER TERMS OF THE OFFER
PART A: CONDITIONS OF THE OFFER
1. The Offer (which in this Appendix is deemed to include, where relevant,
references to the Loan Note Alternative) will be subject to the following
conditions:
(a) valid acceptances being received (and not, where permitted, withdrawn)
by not later than 3.00 pm on the first closing date of the Offer (or
such later time(s) and/or date(s) as the Offeror may, subject to the
rules of the Code, decide) in respect of not less than 90% (or such
lower percentage as the Offeror may decide) in nominal value of the
East Midlands Electricity Shares to which the Offer relates, provided
that this condition will not be satisfied unless the Offeror and its
wholly owned subsidiaries shall have acquired or agreed to acquire
(whether pursuant to the Offer or otherwise) shares in East Midlands
Electricity carrying more than 50% of the voting rights then normally
exercisable at general meetings of East Midlands Electricity. For the
purposes of this condition:
(i) shares which have been unconditionally allotted shall be deemed
to carry the voting rights they will carry upon their being
entered in the register of members of East Midlands Electricity;
and
(ii) the expression "East Midlands Electricity Shares to which the
Offer relates" shall mean (i) East Midlands Electricity Shares
unconditionally allotted or issued on or before the date the
Offer is made and (ii) East Midlands Electricity Shares
unconditionally issued or allotted after that date but before
the time at which the Offer closes or before such earlier time
as the Offeror may decide (not, without the consent of the
Panel, being earlier than the date on which the Offer becomes
unconditional as to acceptances or, if later, the first closing
date of the Offer) but excluding any East Midlands Electricity
Shares which, at or before the time at which the Offer is made,
are held (otherwise than under such a contract as is described
in Section 428(5) of the Companies Act 1985) or contracted to be
acquired by the Offeror or any of its associates (within the
meaning of Section 430E of the Companies Act 1985);
(b) an announcement being made indicating in terms satisfactory to the
Offeror that it is not the intention of the Secretary of State for
Trade and Industry to refer the proposed acquisition of East Midlands
Electricity by the Offeror, or any matters arising therefrom, to the
Monopolies and Mergers Commission;
(c) neither the North Carolina Utilities Commission nor the Virginia State
Corporation Commission having revised or withdrawn their certifications
to the US Securities and Exchange Commission, for the purpose of
Dominion Resources' exemption from regulation under the US Public
Utility Holding Company Act of 1935 (as amended), that each such
commission has the authority and resources to protect the ratepayers of
Virginia Power subject to its jurisdiction and that it intends to
exercise that authority;
(d) the Director General of Electricity Supply indicating in terms
satisfactory to the Offeror that:
(i) with the exception of the proposed modifications announced by
him on 6 July 1995 and subject to (ii) below, it is not his
intention to seek any modification to one or more of the
licences held by East Midlands Electricity under the Electricity
Act 1989 and East Midlands Electricity not agreeing to any such
modifications, except, in either case, on terms satisfactory to
the Offeror; and
(ii) he will give such consents and/or directions (if any) and seek
such modifications (if any) as are necessary or appropriate with
respect to such licences in connection with the Offer or the
acquisition by the Offeror of shares in East Midlands
Electricity in each case on terms satisfactory to the Offeror;
(e) neither the Secretary of State for Trade and Industry nor the DGES
seeking undertakings or assurances from any member of the Offeror Group
or any member of the East Midlands Electricity Group, except on terms
satisfactory to the Offeror;
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(f) East Midlands Electricity's consent (announced by it on 17 July 1995)
to the proposed modifications to the licence held by it under the
Electricity Act 1989 proposed by the DGES on 6 July 1995 remaining in
full force and effect;
(g) all necessary filings having been made, all appropriate waiting periods
(including extensions thereof) under any applicable legislation or
regulations of any jurisdiction (including, without limitation, in the
United States, the Hart-Scott-Rodino Antitrust Improvements Act of 1976
(as amended) and the regulations made thereunder) having expired,
lapsed or been terminated, in each case in respect of the Offer and the
acquisition of any shares in, or control of, East Midlands Electricity
by the Offeror and all necessary statutory and regulatory obligations
in connection with the Offer in any jurisdiction having been complied
with;
(h) no government or governmental, quasi-governmental, supranational,
statutory, regulatory or investigative body, court, trade agency,
professional association or any other person or body whatsoever in any
jurisdiction (each a "Third Party") having decided to take, institute,
implement or threaten any action, proceeding, suit, investigation,
enquiry or reference or made, proposed or enacted any statute,
regulation or order or having done anything which would or might
reasonably be expected to:
(i) make the Offer, its implementation, or the acquisition or
proposed acquisition by the Offeror or any of its subsidiaries
or subsidiary undertakings or associated companies (including
any joint venture, partnership, firm or company in which any
member of the Offeror Group has a substantial interest) or any
company in which any such member has a substantial interest
(together the "wider Offeror Group") of any shares or other
securities in, or control of, East Midlands Electricity illegal,
void or unenforceable in any jurisdiction, or otherwise,
directly or indirectly, prohibit or materially and adversely
restrain, restrict, delay, or otherwise interfere with the
implementation of, or impose additional material adverse
conditions or obligations with respect to, or otherwise
challenge, the Offer or such acquisition;
(ii) require, prevent or delay the divestiture by any member of the
wider Offeror Group of any shares or other securities in East
Midlands Electricity;
(iii) require, prevent or delay the divestiture or alter the terms
envisaged for any proposed divestiture by East Midlands
Electricity or any of its subsidiaries or subsidiary undertakings
or associated companies (including any joint venture,
partnership, firm or company in which any member of the East
Midlands Electricity Group has a substantial interest) or any
company in which any such member has a substantial interest
(together the "wider East Midlands Electricity Group") or (as a
result of the acquisition of East Midlands Electricity Shares or
of control of East Midlands Electricity by the wider Offeror
Group) by any member of the wider Offeror Group of all or any
portion of their respective businesses, assets or property or
impose any limitation on the ability of any of them to conduct
their respective businesses (or any of them) or to own any of
their respective assets or property or any part thereof in any
such case to an extent which is material in the context of the
East Midlands Electricity Group, or, as applicable, of the
Offeror Group;
(iv) impose any material limitation on the ability of any member of
the wider Offeror Group or of the wider East Midlands Electricity
Group to acquire or to hold or to exercise effectively, directly
or indirectly, any rights of ownership of shares or other
securities (or the equivalent) in East Midlands Electricity or
any other member of the wider East Midlands Electricity Group or
to exercise management control over East Midlands Electricity or
any other member of the wider East Midlands Electricity Group;
(v) require any member of the wider Offeror Group or the wider East
Midlands Electricity Group to offer to acquire any shares or
other securities (or the equivalent) in any member of the wider
East Midlands Electricity Group owned by any third party;
(vi) impose any limitation on the ability of any member of the wider
East Midlands Electricity Group to co-ordinate its business, or
any part of it, with the businesses of
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any other member to an extent which is material in the context
of the East Midlands Electricity Group;
(vii) result in a material delay in the ability of any member of the
Offeror Group, or render any member of the Offeror Group unable,
to acquire all or some of the East Midlands Electricity Shares
or require or prevent a divestiture by any member of the Offeror
Group of any such shares;
(viii) to an extent which is material in the context of the East
Midlands Electricity Group result in any member of the wider
East Midlands Electricity Group ceasing to be able to carry on
business under any name which it presently does so; or
(ix) to an extent which is material in the context of the East
Midlands Electricity Group otherwise adversely affect the
business, profits or prospects of any member of the wider
Offeror Group or any member of the wider East Midlands
Electricity Group;
and applicable waiting periods during which any Third Party could
institute, implement or threaten any action, proceedings, suit,
investigation, enquiry or reference or otherwise intervene under the
laws of any jurisdiction having expired, lapsed or been terminated;
(i) all necessary filings having been made in connection with the Offer and
all authorisations, orders, recognitions, grants, consents, clearances,
confirmations, licences, permissions and approvals including, without
limitation, any filings or approvals required under the laws of the
Commonwealth of Virginia and the State of North Carolina governing the
regulation of public utilities and their affiliates ("Authorisations")
necessary or reasonably deemed appropriate by the Offeror or any member
of the wider Offeror Group in any jurisdiction for or in respect of the
Offer or the acquisition or proposed acquisition of any shares or other
securities in, or control of, East Midlands Electricity by any member
of the wider Offeror Group having been obtained, in terms and in a form
reasonably satisfactory to the Offeror, from all appropriate Third
Parties or (without prejudice to the generality of the foregoing) from
any persons or bodies with whom any member of the wider East Midlands
Electricity Group has entered into contractual arrangements and all
such Authorisations together with all Authorisations necessary or
reasonably deemed appropriate for any member of the wider East Midlands
Electricity Group to carry on its business remaining in full force and
effect and there being no notice or intimation of any intention to
revoke or not to renew any of the same at the time at which the Offer
becomes otherwise unconditional and all statutory or regulatory
obligations necessary or reasonably deemed appropriate for the purposes
of the Offer or the acquisition of shares or other securities in, or
control of, East Midlands Electricity in all relevant jurisdictions
having been complied with;
(j) there being no provision of any arrangement, agreement, licence or
other instrument to which any member of the wider East Midlands
Electricity Group is a party or by or to which any such member or any
part of its respective assets is or are or may be bound or subject, or
any circumstance which, as a consequence of the Offer or the
acquisition or proposed acquisition by any member of the wider Offeror
Group of some or all of the share capital of East Midlands Electricity
or other securities in East Midlands Electricity or because of a change
in the control or management of East Midlands Electricity or otherwise,
could or might reasonably be expected to result in to an extent which
is material in the context of the East Midlands Electricity Group:
(i) any such arrangement, agreement, licence or instrument being
terminated or adversely modified or affected or any onerous
obligation or liability arising or any adverse action being
taken or arising thereunder;
(ii) the rights, liabilities, obligations or interests of any
member of the wider East Midlands Electricity Group under any
such arrangement, agreement, licence or instrument or the
interests or business of any member of the wider East Midlands
Electricity Group or the wider Offeror Group in or with any
other firm or company or body or person (or any arrangement or
arrangements relating to any such business or interests) being
terminated or adversely modified or affected;
(iii) any assets or interests of any member of the wider East
Midlands Electricity Group being or falling to be disposed of
or charged or any right arising under which any such asset or
interest could be required to be disposed of or charged;
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(iv) the creation or enforcement of any mortgage, charge or other
security interest over the whole or any part of the business,
property or assets of any member of the wider East Midlands
Electricity Group;
(v) any moneys borrowed by, or any other indebtedness, actual or
contingent, of, any member of the wider East Midlands
Electricity Group being or becoming repayable, or capable of
being declared repayable, immediately or prior to its or their
stated maturity, or the ability of any such member to borrow
moneys or incur any indebtedness being withdrawn or inhibited;
(vi) the financial or trading position or prospects of any member
of the wider East Midlands Electricity Group being prejudiced
or adversely affected; or
(vii) any member of the wider East Midlands Electricity Group
ceasing to be able to carry on business under any name under
which it presently does so;
(k) no member of the wider East Midlands Electricity Group having, since 31
March 1996 (save as disclosed in the annual report and accounts of East
Midlands Electricity for the year then ended or otherwise announced on
or before 11 November 1996 on the London Stock Exchange):
(i) issued or agreed to issue or authorised or proposed the issue
of additional shares of any class or securities convertible
into, or rights, warrants or options to subscribe for or
acquire, any such shares or convertible securities (save as
between East Midlands Electricity and wholly-owned
subsidiaries of East Midlands Electricity and save for the
issue of East Midlands Electricity Shares on the exercise of
options granted before 12 November 1996 under the East
Midlands Electricity Share Option Schemes);
(ii) to an extent which is material in the context of the East
Midlands Electricity Group and save for transactions between
East Midlands Electricity and its wholly-owned subsidiaries,
merged with any body corporate or acquired or disposed of, or
transferred, mortgaged or charged or created any security
interest over, any assets or any right, title or interest in
any asset (including shares and trade investments) or
authorised, proposed or announced any intention to propose any
merger, demerger, acquisition, disposal, transfer, mortgage,
charge or security interest;
(iii) save as between East Midlands Electricity and its wholly-owned
subsidiaries, made or authorised or proposed or announced an
intention to propose any change in its loan capital to an
extent which is material in the context of the East Midlands
Electricity Group;
(iv) entered into or varied or announced its intention to enter
into or vary any contract, transaction or commitment (whether
in respect of capital expenditure or otherwise) which is of a
long-term or unusual or onerous nature or magnitude, or which
involves or could involve an obligation of such a nature or
magnitude which, in any case, is material in the context of
the East Midlands Electricity Group;
(v) to an extent which is material in the context of the East
Midlands Electricity Group issued, authorised or proposed the
issue of any debentures or (save as between East Midlands
Electricity and its wholly-owned subsidiaries) incurred or
increased any indebtedness or contingent liability;
(vi) recommended, declared, paid or made, or proposed the
recommendation, declaration, paying or making of, any bonus,
dividend, or other distribution, other than to East Midlands
Electricity or one of its wholly-owned subsidiaries;
(vii) purchased, redeemed or repaid or announced any proposal to
purchase, redeem or repay any of its own shares or other
securities or reduced or made any other change to any part of
its share capital to an extent which (other than in the case
of East Midlands Electricity) is material in the context of
East Midlands Electricity Group;
(viii) entered into, or changed the terms of, any contract with any
director of East Midlands Electricity other than in the
ordinary course of business;
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(ix) implemented, or authorised, proposed or announced its
intention to implement or enter into any reconstruction,
amalgamation, commitment, scheme or other transaction or
arrangement otherwise than in the ordinary course of business;
(x) waived or compromised any claim otherwise than in the ordinary
course of business;
(xi) proposed any voluntary winding up;
(xii) entered into any contract, transaction or arrangement which is
or is likely to be restrictive in a material respect on the
business of any member of the wider East Midlands Electricity
Group or the wider Offeror Group;
(xiii) made any material alteration to its memorandum or articles of
association or other incorporation documents; or
(xiv) entered into any contract, commitment, agreement or
arrangement or passed any resolution with respect to or
announced an intention to effect or to propose any of the
transactions, matters or events referred to in this condition;
(l) since 31 March 1996, and save as disclosed in the annual report and
accounts of East Midlands Electricity for the year then ended or as
announced on the London Stock Exchange on or before 11 November 1996:
(i) there having been no receiver, administrative receiver or
other encumbrance appointed over any of the assets of any
member of the wider East Midlands Electricity Group or any
analogous proceedings or steps having taken place under the
laws of any jurisdiction and there having been no petition
presented for the administration of any member of the wider
East Midlands Electricity Group or any equivalent proceedings
or steps taken under the laws of any other jurisdictions;
(ii) there having been no adverse change or deterioration in the
business, assets, financial or trading position or profits or
prospects of any member of the wider East Midlands Electricity
Group to an extent which is material in the context of the
East Midlands Electricity Group;
(iii) no litigation, arbitration proceedings, prosecution or other
legal proceedings having been threatened, announced or
instituted by or against or remaining outstanding against any
member of the wider East Midlands Electricity Group or to
which any member of the wider East Midlands Electricity Group
is or may become a party (whether as plaintiff or defendant or
otherwise), and no investigation by any relevant authority
against or in respect of any member of the wider East Midlands
Electricity Group having been threatened, announced or
instituted or remaining outstanding by, against or in respect
of any member of the wider East Midlands Electricity Group,
which in any such case might adversely affect any member of
the wider East Midlands Electricity Group to an extent which
is material in the context of the East Midlands Electricity
Group; and
(iv) no contingent or other liability having arisen or become
apparent to the Offeror which might reasonably be expected
adversely to affect any member of the wider East Midlands
Electricity Group to an extent which is material in the
context of the East Midlands Electricity Group;
(m) the Offeror not having discovered:
(i) that any financial, business or other information concerning
the East Midlands Electricity Group publicly disclosed or
disclosed to the Offeror prior to the announcement of the
Offer by or on behalf of any member of the wider East Midlands
Electricity Group which is material in the context of the
acquisition of East Midlands Electricity by the Offeror is
misleading, contains a misrepresentation of fact or omits to
state a fact necessary to make the information contained
therein not misleading and has not been corrected by
subsequent announcement to the London Stock Exchange on or
before 11 November 1996; or
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(ii) that any partnership, company or other entity in which any
member of the wider East Midlands Electricity Group has a
significant economic interest and which is not a subsidiary
undertaking of East Midlands Electricity is subject to any
liability, contingent or otherwise, which is material in the
context of the East Midlands Electricity Group and is not
disclosed in the Annual Report and Accounts of East Midlands
Electricity for the financial year ended 31 March 1996 or in
an announcement to the London Stock Exchange on or before 11
November 1996; and
(n) the Offeror not having discovered:
(i) that any past or present member of the wider East Midlands
Electricity Group has not complied with all applicable
legislation or regulations of any jurisdiction with regard to
the disposal, discharge, spillage, leak or emission of any
waste or hazardous substance or any substance likely to impair
the environment or harm human health, or otherwise relating to
environmental matters, or that there has otherwise been any
such disposal, discharge, spillage, leak or emission (whether
or not the same constituted a non-compliance by any person
with any such legislation or regulations and wherever the same
may have taken place) which, in any such case, would be likely
to give rise to any liability (whether actual or contingent)
on the part of any member of the wider East Midlands
Electricity Group which is material in the context of the East
Midlands Electricity Group; or
(ii) that there is, or is likely to be, any liability which is
material in the context of the East Midlands Electricity Group
(whether actual or contingent) to make good, repair, reinstate
or clean up any property now or previously owned, occupied or
made use of by any past or present member of the wider East
Midlands Electricity Group under any environmental
legislation, regulation, notice, circular or order of any
relevant authority or otherwise.
The Offeror reserves the right to waive all or any of the above conditions, in
whole or in part, other than condition (a). Conditions (b) to (n) (inclusive),
if not, where applicable, waived, must be fulfilled or satisfied within 21 days
of the first closing date of the Offer or of the date on which condition (a) is
fulfilled, whichever is the later (or in either case such later date as the
Panel may agree), failing which the Offer will lapse. In such a case, the Offer
will cease to be capable of further acceptance and the Offeror, SBC Warburg and
Wasserstein Perella and East Midlands Electricity Shareholders shall thereupon
cease to be bound by prior acceptances. The Offeror shall be under no obligation
to waive or treat as satisfied any of the conditions by a date earlier than the
latest date specified above for the satisfaction thereof notwithstanding that
the other conditions of the Offer may at such earlier date have been waived or
fulfilled and that there are at such earlier date no circumstances indicating
that any of such conditions may not be capable of fulfilment.
The Offer will lapse if the acquisition of East Midlands Electricity by the
Offeror is referred to the Monopolies and Mergers Commission before 3.00 pm
(London time), on the first closing date of the Offer or, if later, the date on
which the Offer becomes or is declared unconditional as to acceptances, and if
the Offer so lapses the Offer will cease to be capable of further acceptance and
the Offeror, SBC Warburg and Wasserstein Perella and East Midlands Electricity
Shareholders will cease to be bound by prior acceptances.
The Offer is not being made, directly or indirectly, in or into the US, or by
use of the mails or any means or instrumentality of interstate or foreign
commerce of, or any facilities of a national securities exchange of the US, nor
is it being made in Canada, Australia or Japan. Accordingly, copies of this
document are not being, and must not be, mailed or otherwise distributed or sent
in or into or from, the US, Canada, Australia or Japan.
The Loan Notes to be issued pursuant to the Offer have not been and will not be
registered under the US Securities Act of 1933 (as amended) nor under any of the
relevant securities laws of Australia, Japan or Canada. Accordingly, unless an
exemption under such Act or relevant securities law is applicable, the Loan
Notes may not be offered, sold or delivered, directly or indirectly, in or into
the US, Australia, Japan or Canada.
The Loan Note Alternative is conditional upon the Offer becoming wholly
unconditional.
If the Offeror is required by the Panel to make an offer for East Midlands
Electricity Shares under the provisions of Rule 9 of the Code, the Offeror may
make such alterations to the conditions of the Offer, including condition (a),
as are necessary to comply with the provisions of that Rule.
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PART B:FURTHER TERMS OF THE OFFER
The following further terms apply, unless the context requires otherwise, to the
Offer and the Loan Note Alternative. Except where the context requires
otherwise, any reference in Parts B or C of this Appendix 1 and in the Form of
Acceptance to:
(i) the "Offer" shall include the Offer (including the Loan Note
Alternative) and any revision, variation or renewal thereof or
extension thereto and shall include any election available in
connection with it;
(ii) the "Offer becoming unconditional" means the acceptance
condition becoming or being declared satisfied whether or not
any other condition of the Offer remains to be fulfilled;
(iii) the "acceptance condition" means the condition as to
acceptances set out in paragraph (a) of Part A of this
Appendix 1;
(iv) "acceptances of the Offer" shall include deemed acceptances of
the Offer; and
(v) the "Offer Document" shall mean this document and any other
document containing the Offer.
1. Acceptance period
(a) The Offer will initially be open for acceptance until 3.00 pm
on 13 December 1996. Although no revision is envisaged, if the
Offer is revised it will remain open for acceptance for a
period of at least 14 days from the date on which written
notification of the revision is posted to East Midlands
Electricity Shareholders. Except with the consent of the
Panel, no revision of the Offer may be posted to East Midlands
Electricity Shareholders after 7 January 1997 or, if later,
the date falling 14 days prior to the last date on which the
Offer can become unconditional.
(b) The Offer, whether revised or not, shall not (except with the
consent of the Panel) be capable of becoming unconditional
after midnight on 21 January 1997 (or any earlier time and/or
date beyond which the Offeror has stated that the Offer will
not be extended and in respect of which it has not withdrawn
that statement), nor of being kept open for acceptance after
that time unless it has previously become unconditional,
provided that the Offeror reserves the right, with the
permission of the Panel, to extend the Offer to (a) later
time(s) and/or date(s). Except with the consent of the Panel,
the Offeror may not, for the purpose of determining whether
the acceptance condition has been satisfied, take into account
acceptances received or purchases of East Midlands Electricity
Shares made after 1.00 pm on 21 January 1997 (or any earlier
time and/or date beyond which the Offeror has stated that the
Offer will not be extended and in respect of which it has not
withdrawn that statement) or, if the Offer is so extended, any
such later time and/or date as may be agreed with the Panel.
If the latest time at which the Offer may become unconditional
is extended beyond midnight on 21 January 1997, acceptances
received and purchases made in respect of which all relevant
documents are received by the Receiving Agent after 1.00 pm on
the relevant date may (except where the Code otherwise
permits) only be taken into account with the agreement of the
Panel.
(c) If the Offer becomes or is declared unconditional, the Offer
will remain open for acceptance for not less than 14 days from
the date on which it would otherwise have expired. If the
Offer has become unconditional and it is stated by or on
behalf of the Offeror that the Offer will remain open until
further notice, then not less than 14 days' notice will be
given prior to the closing of the Offer.
(d) If a competitive situation arises after the Offeror has given
a "no extension" statement and/or a "no increase" statement,
the Offeror may, if it has specifically reserved the right to
do so at the time such statement was made, withdraw such
statement provided that it complies with the requirements of
the Code and, in particular, that:
(i) it announces such withdrawal as soon as possible and
in any event within four business days of the
announcement of the competing offer and East Midlands
Electricity Shareholders are informed in writing
thereof at the earliest practicable opportunity or,
in the case of East Midlands Electricity Shareholders
with registered addresses outside the UK or whom the
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Offeror knows to be nominees, custodians or trustees
holding East Midlands Electricity Shares for such
persons, by announcement in the UK; and
(ii) any East Midlands Electricity Shareholders who
accepted the Offer after the date of the "no
extension" or "no increase" statement are given a
right of withdrawal in accordance with paragraph 3(c)
below.
The Offeror may, if it has reserved the right to do so, choose
not to be bound by a "no increase" or a "no extension"
statement if it would otherwise prevent the posting of an
increased or improved Offer which is recommended for
acceptance by the board of directors of East Midlands
Electricity or in other circumstances permitted by the Panel.
(e) For the purpose of determining at any particular time whether
the acceptance condition has been satisfied, the Offeror shall
be entitled to take account only of those East Midlands
Electricity Shares carrying voting rights which have been
unconditionally allotted or issued before that time and
written notice of the allotment or issue of which, containing
all the relevant details, has been received before that time
by the Receiving Agent from East Midlands Electricity or its
agents at the address specified in paragraph 3(a) below. Telex
or facsimile transmission will not be sufficient.
2. Announcements
(a) By 8.30 am on the business day (the "relevant day") next
following the day on which the Offer is due to expire or
becomes or is declared unconditional or is revised or
extended, as the case may be (or such later time or date as
the Panel may agree), the Offeror will make an appropriate
announcement and simultaneously inform the London Stock
Exchange of the position. Such announcement will also state
(unless otherwise permitted by the Panel) the total number of
East Midlands Electricity Shares and rights over East Midlands
Electricity Shares (as nearly as practicable) (i) for which
acceptances of the Offer have been received, (ii) acquired or
agreed to be acquired by or on behalf of the Offeror or any
person deemed to be acting in concert with it during the
course of the Offer Period, (iii) held by or on behalf of the
Offeror or any person deemed to be acting in concert with it
prior to the Offer Period, and (iv) for which acceptances of
the Offer have been received from any person deemed to be
acting in concert with the Offeror, and will specify the
percentage of the relevant class of East Midlands Electricity
Shares represented by each of these figures. Any decision to
extend the date by which the acceptance condition has to be
fulfilled may be made at any time up to, and will be announced
not later than, 8.30 am on the relevant day or such later time
or date as the Panel may agree and the announcement will
(unless the Offer is unconditional) state the next expiry
date. In computing the number of East Midlands Electricity
Shares represented by acceptances and purchases, there may be
included or excluded for announcement purposes, subject to
paragraphs 5(o) and (p) below, acceptances and purchases which
are not complete in all respects or which are subject to
verification.
(b) In this Appendix, references to the making of an announcement
by or on behalf of the Offeror include the release of an
announcement by public relations consultants or by SBC Warburg
or Wasserstein Perella to the press and the delivery by hand
or telephone or telex or facsimile or other electronic
transmission of an announcement to the London Stock Exchange.
An announcement made otherwise than to the London Stock
Exchange shall be notified simultaneously to the London Stock
Exchange.
3. Rights of withdrawal
(a) If the Offeror, having announced the Offer to be
unconditional, fails to comply by 3.30 pm on the relevant day
(or such later time(s) and/or date(s) as the Panel may agree)
with any of the other requirements specified in paragraph 2(a)
above, an accepting East Midlands Electricity Shareholder may
immediately thereafter withdraw his acceptance by written
notice received by The Royal Bank of Scotland plc, Registrars
Department, New Issues Section, either by post or by hand at
PO Box 859, Consort House, East Street, Bedminster, Bristol
BS99 1XZ or, by hand only, at PO Box 633, 5-10 Great Tower
Street, London EC3R 5ER on behalf of the Offeror. Subject to
paragraph 1(b) of this Part B, this right of withdrawal may be
terminated not less than eight days after the
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relevant day by the Offeror confirming, if that be the case,
that the Offer is still unconditional, and complying with the
other requirements specified in paragraph 2(a) of this Part B.
If any such confirmation is given, the first period of 14 days
referred to in paragraph 1(c) of this Part B will run from the
date of such confirmation and compliance.
(b) If by 3.00 pm on 3 January 1997 (or such later time and/or
date as the Panel may agree) the Offer has not become
unconditional, an accepting East Midlands Electricity
Shareholder may withdraw his acceptance at any time thereafter
by written notice received by the Receiving Agent at the
address referred to in paragraph 3(a) above, on behalf of the
Offeror, before the earlier of (i) the time when the Offer
becomes unconditional, and (ii) the final time for lodgement
of acceptances which can be taken into account in accordance
with paragraph 1(b) of this Part B.
(c) If a "no extension" statement and/or a "no increase" statement
has been withdrawn in accordance with paragraph 1(d) of this
Part B, any East Midlands Electricity Shareholder who accepted
the Offer after the date of such a statement may withdraw his
acceptance thereafter in the manner referred to in paragraph
3(a) of this Part B, not later than the eighth day after the
date of posting of written notice of withdrawal of such
statement to the relevant East Midlands Electricity
Shareholder.
(d) Except as provided by this paragraph 3, acceptances shall be
irrevocable.
(e) In this paragraph 3 "written notice" (including any letter of
appointment, direction or authority) means notice in writing
bearing the original signature(s) of the relevant accepting
East Midlands Electricity Shareholder(s) or his/their agent(s)
duly appointed in writing (evidence of whose appointment is
produced with the notice in a form reasonably satisfactory to
the Offeror). Telex or facsimile transmissions or copies will
not be sufficient to constitute written notice. No notice
which is postmarked in, or otherwise appears to the Offeror or
its agents to have been sent from, the United States, Canada,
Australia or Japan will be treated as valid.
4. Revised offer
(a) No revision of the Offer is envisaged. However, if the Offer
(in its original or any previously revised form(s)) is revised
(either in its terms and conditions or in the value or nature
of the consideration offered or otherwise) and such revision
represents on the date on which such revision is announced (on
such basis as SBC Warburg and Wasserstein Perella may consider
appropriate) an improvement or no diminution in the value of
the Offer as so revised compared with the consideration or
terms previously offered or in the overall value received
and/or retained by an East Midlands Electricity Shareholder
(under the Offer or otherwise), the benefit of the revised
Offer will, subject to paragraphs 4(c), 4(d) and 6 below, be
made available to any East Midlands Electricity Shareholder
who has accepted the Offer in its original or any previously
revised form(s) (hereinafter called a "previous acceptor").
The acceptance by or on behalf of a previous acceptor of the
Offer in its original or any previously revised form(s) shall,
subject as provided in paragraphs 4(c), 4(d) and 6 below, be
treated as an acceptance of the Offer as so revised and shall
also constitute an authority to any director or authorised
representative of the Offeror or of SBC Warburg or Wasserstein
Perella as his attorney and/or agent to accept any such
revised Offer on behalf of such previous acceptor and, if such
revised Offer includes alternative forms of consideration, to
make such elections for and accept such alternative forms of
consideration in such proportions (as nearly as practicable)
as those made by such previous acceptor in the Form of
Acceptance previously executed by him or on his behalf and to
execute on behalf of and in the name of such previous acceptor
all such further documents (if any) as may be required to give
effect to such acceptances and/or elections. In making any
such acceptance and/or election, such attorney and/or agent
shall take into account the nature of any previous acceptances
made by or on behalf of the previous acceptor and such other
facts or matters as he may reasonably consider relevant.
(b) The authorities conferred by this paragraph 4 and any
acceptance of a revised Offer and/or any election pursuant
thereto shall be irrevocable unless and until the previous
acceptor becomes entitled to withdraw his acceptance under
paragraph 3 above and duly does so.
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(c) The deemed acceptance referred to in paragraph 4(a) of this
Part B shall not apply, and the authority conferred by this
paragraph shall be ineffective, to the extent that a previous
acceptor shall lodge with the Receiving Agent, within 14 days
of the posting of the document containing the revised Offer, a
form in which he validly elects to receive the consideration
receivable by him in some other manner.
(d) The deemed acceptance referred to in paragraph 4(a) of this
Part B shall not apply, and the authorities conferred by that
paragraph shall not be exercised by any director or authorised
representative of the Offeror, SBC Warburg or Wasserstein
Perella, if as a result thereof the previous acceptor would
(on such basis as SBC Warburg and Wasserstein Perella may
consider appropriate) thereby receive less in aggregate in
consideration than he would have received in aggregate as a
result of acceptance of the Offer in the form in which it was
previously accepted by him. The authorities conferred by
paragraph 4(a) of this Part B shall not be exercised in
respect of any election available under the revised Offer save
in accordance with this paragraph.
(e) The Offeror, SBC Warburg and Wasserstein Perella reserve the
right to treat an executed Form of Acceptance (in respect of
the Offer in its original or any previously revised form(s))
which is received (or dated) after the announcement or issue
of the Offer in any revised form as a valid acceptance of the
revised Offer and/or, where applicable, a valid election for
or acceptance of any of the alternative forms of consideration
(if any), and such acceptances shall constitute an authority
in the terms of paragraph 4(a) of this part B, mutatis
mutandis, on behalf of the relevant East Midlands Electricity
Shareholder.
5. General
(a) Save with the consent of the Panel, the Offer will lapse
unless all the conditions have been fulfilled or (if capable
of waiver) waived or, where appropriate, have been determined
by the Offeror in its reasonable opinion to be or remain
satisfied by midnight on 3 January 1997 or by midnight on the
date which is 21 days after the date on which the Offer
becomes unconditional, whichever is the later, or such later
date as the Offeror may, with the consent of the Panel,
decide. In such a case, the Offer shall cease to be capable of
further acceptance and the Offeror, SBC Warburg, Wasserstein
Perella and East Midlands Electricity Shareholders shall
thereupon cease to be bound by prior acceptances.
(b) The Offer will lapse if it is referred to the Monopolies and
Mergers Commission before 3.00 pm on 13 December 1996 or the
date on which the Offer becomes unconditional, whichever is
the later. In such a case, the second sentence of paragraph
5(a) of this Part B will apply.
(c) The expression "Offer Period" when used in this document
means, in relation to the Offer, the period commencing on 6
November 1996 until whichever of the following dates shall be
the latest: (i) 3.00 pm on 13 December 1996; (ii) the date on
which the Offer lapses; and (iii) the date on which the Offer
becomes unconditional.
(d) Except with the consent of the Panel and save as referred to
in paragraph 10(f) of the letter from SBC Warburg and
Wasserstein Perella contained in this document, settlement of
the consideration to which any East Midlands Electricity
Shareholder is entitled under the Offer will be implemented in
full in accordance with the terms of the Offer without regard
to any lien, right of set-off, counterclaim or other analogous
right to which the Offeror, SBC Warburg or Wasserstein Perella
may otherwise be, or claim to be, entitled as against such
shareholder and will be posted not later than 21 days after
the date on which the Offer becomes unconditional in all
respects or 21 days after receipt of a valid and complete
acceptance, whichever is the later. Any cash consideration
will be settled by way of cheque drawn on a branch of a UK
clearing bank.
(e) Subject to paragraphs 5(o) and (p), notwithstanding that no
certificate(s) is/are delivered in respect of it, a duly
completed Form of Acceptance (i) executed under seal by SEPON
Limited and endorsed on behalf of the London Stock Exchange to
the effect that the East Midlands Electricity Shares to which
it refers are the whole or part of a holding registered in the
name of SEPON Limited and/or are East Midlands Electricity
Shares to which SEPON Limited is unconditionally entitled
immediately to become the registered holder, or (ii) executed
by
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any other person(s) and endorsed on behalf of the London Stock
Exchange to the effect that such person(s) is/are
unconditionally entitled immediately to become the registered
holder(s) of the East Midlands Electricity Shares to which it
refers and that one or more TALISMAN transfer(s) in favour of
such person(s) in respect thereof is/are in the course of
registration, shall be treated by the Offeror and by SBC
Warburg and Wasserstein Perella as an acceptance valid in all
respects on the date of its actual receipt provided that, on
its presentation to East Midlands Electricity's registrars, it
is unconditionally accepted for registration.
(f) The Offer is made at 9.00 am on 22 November 1996 and is
capable of acceptance thereafter. Copies of this document, the
Form of Acceptance and any related documents are available
from The Royal Bank of Scotland plc, Registrars Department,
New Issues Section, at either of the addresses set out in
paragraph 3(a) above. The Offer is being made by means of this
document.
(g) The instructions, terms, provisions and authorities contained
in or deemed to be incorporated in the Form of Acceptance
constitute part of the terms of the Offer. Words and
expressions defined in this document have the same meanings
when used in the Form of Acceptance, unless the context
otherwise requires.
(h) The Offer and all acceptances thereof or pursuant thereto and
the relevant Form of Acceptance and all contracts made
pursuant thereto and action taken or made or deemed to be
taken or made under any of the foregoing shall be governed by
and construed in accordance with English law. Execution by or
on behalf of an East Midlands Electricity Shareholder of a
Form of Acceptance will constitute his submission, in relation
to all matters arising out of or in connection with the Offer
and the Form of Acceptance, to the jurisdiction of the courts
of England and his agreement that nothing shall limit the
right of the Offeror, SBC Warburg or Wasserstein Perella to
bring any action, suit or proceeding arising out of or in
connection with the Offer and the Form of Acceptance in any
other manner permitted by law or in any court of competent
jurisdiction.
(i) Any reference in this document and in the Form of Acceptance
to 13 December 1996 shall, except in paragraph 1(a) of this
Part B of this Appendix 1 and where the context otherwise
requires, be deemed, if the closing date of the Offer is
extended, to refer to the closing date of the Offer as so
extended.
(j) Any omission to despatch this document or the Form of
Acceptance or any notice required to be despatched under the
terms of the Offer to, or any failure to receive the same by,
any person to whom the Offer is made, or should be made, shall
not invalidate the Offer in any way. Subject to paragraph 6
below, the Offer extends to all East Midlands Electricity
Shareholders to whom this document, the Form of Acceptance and
any related documents may not be despatched and such persons
may collect copies of those documents from The Royal Bank of
Scotland plc, Registrars Department, New Issues Section, at
either of the addresses set out in paragraph 3(a) above.
(k) If the Offer does not become unconditional in all respects,
the Form of Acceptance and any share certificate(s) and/or
other document(s) of title will be returned by the Offeror by
post (or by such other method as may be approved by the Panel)
within 14 days of the Offer lapsing, at the risk of the East
Midlands Electricity Shareholder concerned, to the person or
agent whose name and address outside the US, Canada, Australia
or Japan is set out in Box 6 of the Form of Acceptance or, if
none is set out, to the first-named holder at the address
outside the US, Canada, Australia or Japan set out in Box 4 of
the Form of Acceptance or, if no address is set out, to the
first-named holder at his registered address. No such
documents will be sent to an address in the US, Canada,
Australia or Japan.
(l) All powers of attorney, appointments as agents and authorities
on the terms conferred by or referred to in this Appendix 1 or
in the Form of Acceptance are given by way of security for the
performance of the obligations of the East Midlands
Electricity Shareholder concerned and are irrevocable (in
respect of powers of attorney in accordance with Section 4 of
the Powers of Attorney Act 1971) except in the circumstances
where the donor of such power of attorney, appointment or
authority is entitled to withdraw his acceptance in accordance
with paragraph 3 of this Part B and duly does so.
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(m) No acknowledgement of receipt of any Form of Acceptance, share
certificate(s) and/or other document(s) of title will be given
by or on behalf of the Offeror.
(n) Without prejudice to any other provision in this Part B of
this Appendix 1, the Offeror, SBC Warburg and Wasserstein
Perella reserve the right to treat acceptances of the Offer as
valid if received by or on behalf of any of them at any place
or places or in any manner determined by any of them otherwise
than as set out herein or in the Form of Acceptance.
(o) Notwithstanding the right reserved by the Offeror, SBC Warburg
and Wasserstein Perella to treat Forms of Acceptance as valid
even though not entirely in order or not accompanied by the
relevant share certificate(s) and/or other documents of title,
except as otherwise agreed with the Panel, an acceptance of
the Offer will only be counted towards fulfilling the
acceptance condition if the requirements of Note 4 and, if
applicable, Note 6 on Rule 10 of the Code are satisfied in
respect of it.
(p) Except as otherwise agreed with the Panel, a purchase of East
Midlands Electricity Shares by the Offeror or its nominees
(or, if the Offeror is required by the Panel to make an offer
for East Midlands Electricity Shares under the provisions of
Rule 9 of the Code, by a person acting in concert with the
Offeror (or its nominee)) shall be counted towards fulfilling
the acceptance condition only if the requirements of Note 5
and, if applicable, Note 6 on Rule 10 of the Code are
satisfied in respect of it.
(q) Except with the consent of the Panel, the Offer shall not
become or be declared unconditional unless the Royal Bank of
Scotland shall have issued a certificate to the Offeror, SBC
Warburg and Wasserstein Perella which states the number of
acceptances which have been received which comply with
paragraph 5(o) above and the number of East Midlands
Electricity Shares otherwise acquired, whether before or
during the Offer Period, which comply with paragraph 5(p)
above. Copies of such certificate will be sent to the Panel
and to East Midlands Electricity's financial adviser as soon
as possible after it is issued.
(r) All communications, notices, certificates, documents of title
and remittances to be delivered by or sent to or from any East
Midlands Electricity Shareholders will be delivered by or sent
to or from them (or their designated agents) at their risk.
(s) The Offeror, SBC Warburg and Wasserstein Perella reserve the
right to notify any matter (including the making of the Offer)
to all or any East Midlands Electricity Shareholder(s) with
(a) registered addresses outside the UK or whom the Offeror,
SBC Warburg and Wasserstein Perella know to be nominees,
custodians or trustees for such persons by announcement or
paid advertisement in any daily newspaper published and
circulated in the UK, in which case such notice shall be
deemed to have been sufficiently given notwithstanding any
failure by any such shareholders to receive such notice, and
all references in this document to notice in writing (other
than in paragraphs 3(a), 3(b), 3(c) and 3(e) of this Part B)
shall be construed accordingly.
(t) If sufficient acceptances are received, the Offeror intends to
apply the provisions of Sections 428 to 430F of the Act to
acquire compulsorily any outstanding East Midlands Electricity
Shares to which the Offer relates as defined in condition (a)
of Part A of this Appendix 1.
(u) Due completion of a Form of Acceptance will constitute an
instruction to the Offeror, on the Offer becoming
unconditional in all respects, that all mandates and other
instructions or notices recorded in East Midlands
Electricity's records immediately prior to the Offer becoming
so unconditional will, unless and until revoked or varied,
continue in full force in relation to the Loan Notes allotted
or issued to the relevant East Midlands Electricity
Shareholders pursuant to the Offer.
(v) All references in this Appendix 1 to any statute or statutory
provision shall include a statute or statutory provision which
amends, consolidates or replaces the same (whether before or
after the date hereof).
(w) The Loan Note Alternative will lapse if the Offer lapses or
expires. No Loan Notes will be issued unless valid elections
for the Loan Note Alternative are received for at least
(pound)10 million nominal amount of Loan Notes, or such
smaller amount as DR Investments may, in its absolute
discretion, decide, in which case any consideration due under
the terms of the Offer will be payable in cash.
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6. Overseas shareholders
(a) The making of the Offer in, or to persons resident in or
nationals or citizens of, jurisdictions outside the UK or who
are nominees of, or custodians, trustees or guardians for,
citizens or nationals of other countries ("overseas
shareholders") may be prohibited or affected by the laws of
the relevant jurisdictions. Such overseas shareholders should
inform themselves about and observe any applicable legal
requirements. It is the responsibility of any overseas
shareholder wishing to accept the Offer to satisfy himself as
to the full observance of the laws of the relevant
jurisdiction in connection therewith, including the obtaining
of any government, exchange control or other consents which
may be required, or the compliance with other necessary
formalities needing to be observed and the payment of any
issue, transfer or other taxes or duties due in such
jurisdiction. In particular, the Offeror, SBC Warburg and
Wasserstein Perella (and any person acting on behalf of any of
them) shall be entitled to be fully indemnified and held
harmless by such shareholders for any such issue, transfer or
other taxes or duties as the Offeror, SBC Warburg or
Wasserstein Perella (or any person acting on behalf of any of
them) may be required to pay.
In particular, the Offer is not being made, directly or
indirectly, in or into the US, or by use of the mails of, or
by any means or instrumentality of interstate or foreign
commerce of, or any facility of a national securities exchange
of, the United States, Canada, Australia or Japan. This
includes, but is not limited to, facsimile transmission, telex
and telephone. Accordingly, copies of this document, the Form
of Acceptance, the Chairman's Letter and any related offering
documents are not being, and must not be, mailed or otherwise
distributed or sent in, into or from the United States,
Canada, Australia or Japan including to East Midlands
Electricity Shareholders or participants in the East Midlands
Electricity Share Option Schemes with registered addresses in
the United States, Canada, Australia or Japan or to
custodians, trustees or nominees holding East Midlands
Electricity Shares for such persons. Persons receiving such
documents (including, without limitation, custodians, trustees
and nominees) must not distribute, send or mail them in, into
or from the United States, Canada, Australia or Japan, use the
United States, Canadian, Australian or Japanese mails or any
such means or instrumentality for any purpose, directly or
indirectly, in connection with the Offer, and so doing will
invalidate any related purported acceptance of the Offer.
Delivery of East Midlands Electricity ADRs will not constitute
valid acceptance of the Offer. Persons wishing to accept the
Offer must not use the United States, Canadian, Australian or
Japanese mails or any such means or instrumentality for any
purpose directly or indirectly related to acceptance of the
Offer. Envelopes containing Forms of Acceptance should not be
postmarked in the United States, Canada, Australia or Japan or
otherwise despatched from the United States, Canada, Australia
or Japan and all acceptors must provide addresses outside the
United States, Canada, Australia or Japan for the receipt of
Loan Notes and/or the remittance of cash, or for the return of
Forms of Acceptance, East Midlands Electricity Share
certificates and/or other documents of title.
An East Midlands Electricity Shareholder will be deemed not to
have accepted the Offer if: (1) he is unable to give the
representations and warranties set out in paragraphs (b) and
(d) of Part C of this Appendix 1; (2) having completed Box 4
of the Form of Acceptance with a registered address in the
United States, Canada, Australia or Japan he does not insert
in Box 6 of the Form of Acceptance the name and address of a
person or agent outside the United States, Canada, Australia
or Japan to whom he wishes the consideration to which he is
entitled under the Offer to be sent; (3) he inserts in Box 6
of the Form of Acceptance the name and address of a person or
agent in the United States, Canada, Australia or Japan to whom
he wishes the consideration to which he is entitled under the
Offer to be sent; or (4) in any case, the Form of Acceptance
received from him is received in an envelope postmarked in, or
which otherwise appears to the Offeror or its agents to have
been sent from, the United States, Canada, Australia or Japan.
The Offeror reserves the right, in its sole discretion, to
investigate, in relation to any acceptance, whether the
representations and warranties set out in paragraphs (b) and
(d) of Part C of this Appendix 1 given by any East Midlands
Electricity Shareholder are correct and, if such investigation
is made and, as a result, the Offeror cannot satisfy itself
that such representations and warranties are correct, such
acceptance shall not be valid.
If, in connection with the making of the Offer,
notwithstanding the restrictions described above, any person
(including, without limitation, custodians, nominees and
trustees),
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<PAGE>
whether pursuant to a contractual or legal obligation or
otherwise, forwards this document, the Form of Acceptance, or
any related offering documents, in, into or from the United
States, Canada, Australia or Japan or uses the mails of, or
any means or instrumentality (including without limitation,
facsimile transmission, telex and telephone) of interstate or
foreign commerce of, or any facility of a national securities
exchange of, the United States, Canada, Australia or Japan in
connection with such forwarding, such person should (i) inform
the recipient of such fact; (ii) explain to the recipient that
such action will invalidate any purported acceptance by the
recipient; and (iii) draw the attention of the recipient to
this paragraph 6(a).
(b) The availability of the Loan Notes to overseas shareholders
may be affected by the laws of the relevant jurisdictions.
Such overseas shareholders should inform themselves about and
observe any applicable legal requirements. It is the
responsibility of any overseas shareholder wishing to elect
for the Loan Note Alternative to satisfy himself as to the
full observance of the laws of the relevant jurisdiction in
connection therewith, including the obtaining of any
governmental or other consents which may be required,
compliance with other formalities needing to be observed and
payment of any issue, transfer or other taxes or duties due in
such jurisdiction.
The Loan Notes to be issued pursuant to the Offer have not
been, and will not be, registered under the United States
Securities Act of 1933, as amended, or under any of the
relevant securities laws of Canada, Australia or Japan.
Accordingly such securities may not be offered, sold or
delivered, directly or indirectly, in or into the United
States, Canada, Australia or Japan. Thus, the Offeror will not
issue Loan Notes or authorise the delivery of any document(s)
of title in respect of any Loan Notes falling to be allotted
pursuant to the Offer to (a) any person who is, or whom the
Offeror has reason to believe is, a Restricted Overseas Person
or (b) any person who will, or whom the Offeror has reason to
believe will, hold or acquire any of the Loan Notes for the
account or benefit of any Restricted Overseas Person or with a
view to the offer, sale, delivery or distribution, directly or
indirectly, of any such Loan Notes in or into the United
States, Canada, Australia or Japan or to or for the account or
benefit of any Restricted Overseas Person or (c) any person
with a registered address in the United States, Canada, Japan
or Australia or (d) any person who by inserting "No" in Box 5
of the Form of Acceptance does not give the representations
and warranties set out in paragraph (d) of Part C of this
Appendix 1.
(c) These provisions and any other terms of the Offer relating to
overseas shareholders may be waived, varied or modified as
regards specific East Midlands Electricity Shareholders or on
a general basis by the Offeror in its absolute discretion.
Subject thereto, the provisions of this paragraph 6 supersede
any terms of the Offer inconsistent therewith. References in
this paragraph 6 to an East Midlands Electricity Shareholder
include references to the person or persons executing a Form
of Acceptance and, in the event of more than one person
executing the Form of Acceptance, the provisions of this
paragraph 6 shall apply to them jointly and severally.
27
<PAGE>
PART C: FORM OF ACCEPTANCE
Each holder of East Midlands Electricity Shares by whom, or on whose behalf, the
Form of Acceptance is executed and received by the Receiving Agent, or by or on
behalf of the Offeror, SBC Warburg or Wasserstein Perella, irrevocably
undertakes, represents, warrants and agrees to and with the Offeror, SBC Warburg
and Wasserstein Perella (so as to bind him, his personal representatives, heirs,
successors and assigns) to the following effect:
(a) that the execution of the Form of Acceptance, whether or not any
other Boxes are completed, shall constitute:
(i) an acceptance of the Offer in respect of the relevant East
Midlands Electricity Shareholder's entire holding of East
Midlands Electricity Shares (or such lesser number as may
have been inserted in Box 1 of the Form of Acceptance,
provided that if a number is inserted in Box 1 which
exceeds such shareholder's holding of East Midlands
Electricity Shares, the acceptance will be deemed to have
been made in respect of that shareholder's entire holding
of East Midlands Electricity Shares);
(ii) if Box 2 is completed, an election under the Loan Note
Alternative to receive Loan Notes instead of such
proportion of the cash amount which the relevant East
Midlands Electricity Shareholder would otherwise have
received under the basic terms of the Offer as corresponds
to the number inserted (or deemed to have been inserted) in
Box 2 divided by the relevant East Midlands Electricity
Shareholder's entire holding of East Midlands Electricity
Shares (or divided by such lesser number as may have been
inserted or deemed to be inserted in Box 1 of the Form of
Acceptance); and
(iii) an undertaking to execute any further documents and give
any further assurances which may be required to enable the
Offeror to obtain the full benefit of the terms of this
Part C of this Appendix 1 and/or to perfect any of the
authorities expressed to be given hereunder,
in each case on and subject to the terms and conditions set
out or referred to in this document and in the Form of
Acceptance and that, subject only to the rights of
withdrawal set out or referred to in paragraph 3 of Part B
of this Appendix 1, each such acceptance and election shall
be irrevocable;
(b) that (i) this document, the Form of Acceptance and any related
offering documents have not been mailed or otherwise distributed or
sent (directly or indirectly) in, into, or from the United States,
Canada, Australia or Japan or any other jurisdiction where such
actions may constitute a breach of any legal or regulatory
requirements of such jurisdiction; (ii) in connection with the
Offer, there has been no use, directly or indirectly, of the mails
of, or any means or instrumentality (including, without limitation,
electronic mail, or any electronic publication or advertisement,
facsimile transmission, telex and telephone) of interstate or
foreign commerce of, or any facility of a national securities
exchange of, the United States, Canada, Australia or Japan; (iii)
such East Midlands Electricity Shareholder was outside the United
States, Canada, Australia and Japan when the Form of Acceptance was
sent and at the time of accepting the Offer; and (iv) in respect of
the East Midlands Electricity Shares to which the Form of Acceptance
relates, such East Midlands Electricity Shareholder is not an agent
or a fiduciary acting on a non-discretionary basis for a principal,
unless such agent or fiduciary is an authorised employee of such
principal or such principal has given any instructions with respect
to the Offer from outside the United States, Canada, Australia and
Japan;
(c) that if such accepting East Midlands Electricity Shareholder is not
resident in the United Kingdom he has observed the laws of all
relevant territories, obtained any requisite governmental or other
consents, complied with all requisite formalities and paid any
issue, transfer or other taxes due from him, in connection with such
acceptance, in any territory and that he has not taken or omitted to
take any action which will or may result in the Offeror, SBC
Warburg, Wasserstein Perella or any other person acting in breach of
the legal or regulatory requirements of any territory in connection
with the Offer or his acceptance thereof;
(d) if electing for the Loan Note Alternative and unless "No" has been
inserted in Box 5 of the Form of Acceptance, that such East Midlands
Electricity Shareholder is not a Restricted Overseas Person, does
not hold any East Midlands Electricity Shares for or on behalf of a
28
<PAGE>
Restricted Overseas Person, will not hold or acquire any of the Loan
Notes for the account or benefit of a Restricted Overseas Person or
with a view to the offer, sale, delivery or distribution, directly
or indirectly, of any Loan Notes in or into the United States,
Canada, Australia or Japan or to or for the account or benefit of a
Restricted Overseas Person and is lawfully entitled to make such
election under the laws of any jurisdiction to which he is subject;
(e) that the execution of the Form of Acceptance and its delivery to the
Receiving Agent will constitute the irrevocable appointment of each
director and authorised representative of the Offeror, SBC Warburg
and Wasserstein Perella as such shareholder's attorney and/or agent
(the "attorney") upon the terms of paragraph 4 of Part B of this
Appendix 1 and this Part C and with the authority to execute any
further documents and give any further assurances which may be
required in connection with any matters referred to in Parts B and C
of this Appendix 1 and an irrevocable undertaking with such attorney
to execute any such further documents and/or give any such further
assurances as may be required or expedient;
(f) that the execution of the Form of Acceptance and its delivery to the
Receiving Agent will constitute, subject to the Offer becoming or
being declared unconditional in all respects in accordance with its
terms and to the person accepting the Offer not having validly
withdrawn his acceptance, the irrevocable separate appointment of
the Offeror, Wasserstein Perella and SBC Warburg and any director
and authorised representative of the Offeror, Wasserstein Perella
and SBC Warburg as such shareholder's attorney and/or agent (the
"attorney") and an irrevocable instruction to the attorney to
complete and execute all or any form(s) of transfer and/or other
document(s) at the attorney's discretion in relation to the East
Midlands Electricity Shares referred to in subparagraph (a)(i) of
this Part C of this Appendix 1 in respect of which an accepting East
Midlands Electricity Shareholder has not validly withdrawn his
acceptance in favour of the Offeror or such other person or persons
as the Offeror may direct and to deliver such form(s) of transfer
and, where applicable, renunciation and/or other document(s) at the
attorney's discretion together with the share certificate(s) and/or
other document(s) of title relating to such East Midlands
Electricity Shares for registration within six months of the Offer
becoming or being declared unconditional in all respects and to
execute all such other documents and to do all such other acts and
things as may in the opinion of the attorney be necessary or
expedient for the purposes of or in connection with the acceptance
of the Offer and to vest in the Offeror or its nominee(s) the East
Midlands Electricity Shares as aforesaid;
(g) that the execution of the Form of Acceptance and its delivery to the
Receiving Agent will constitute, subject to the Offer becoming
unconditional in all respects and to the person accepting the Offer
not having validly withdrawn his acceptance, an irrevocable
authority and request:
(i) to East Midlands Electricity or its agents, to procure the
registration of the transfer of the East Midlands
Electricity Shares pursuant to the Offer and the delivery
of the share or stock certificate(s) and/or other
document(s) of title in respect thereof to the Offeror or
as it may direct;
(ii) to the Offeror, SBC Warburg or Wasserstein Perella or their
respective agents, to procure the despatch by post (or by
such other method as may be approved by the Panel) of a
cheque for any cash to which an accepting East Midlands
Electricity Shareholder may become entitled pursuant to his
acceptance of the Offer and/or, subject to the provisions
of paragraph 6 of Part B of this Appendix 1, any document
of title for any Loan Notes in respect of any election for
the Loan Note Alternative, at the risk of such East
Midlands Electricity Shareholder, to the person whose name
and address is set out in Box 6 of the Form of Acceptance
or, if none is set out, to the first-named holder at his
registered address (outside the United States, Canada,
Australia or Japan);
(iii) subject to the provisions of paragraph 6 of Part B of this
Appendix 1, to the Offeror or its agents to procure that
such shareholder's name is entered on the register of
holdings of Loan Notes in respect of any Loan Notes to
which such shareholder may become entitled under the Loan
Note Alternative (subject in each case to the terms of the
Loan Note Instrument constituting the Loan Notes);
(h) that the Offeror shall be entitled after the Offer becomes
unconditional in all respects (or if the Offer will become
unconditional in all respects or lapse immediately upon the outcome
29
<PAGE>
of the resolution in question or in such other circumstances as the
Panel may allow) to direct the exercise of any votes and any or all
other rights and privileges (including the right to requisition the
convening of a general or separate class meeting of East Midlands
Electricity) attaching to any East Midlands Electricity Shares in
respect of which the Offer has been accepted and not validly
withdrawn, and the execution of the Form of Acceptance will
constitute an irrevocable authority to East Midlands Electricity
from such shareholder to send any notice, circular, warrant or other
document or communication which may be required to be sent to him as
a member of East Midlands Electricity in respect of such shares to
the Offeror at its registered office, and an irrevocable authority
to the Offeror or any person nominated by the Offeror to sign any
consent to short notice of a general or separate class meeting as
his attorney and/or agent and on his behalf and/or to execute a form
of proxy in respect of such shares appointing any person nominated
by the Offeror to attend general and separate class meetings of East
Midlands Electricity and to exercise the votes attaching to such
shares on his behalf, where relevant, such votes to be cast so far
as possible to satisfy or assist directly or indirectly to satisfy
any outstanding condition of the Offer, and will also constitute the
agreement of such shareholder not to exercise any such rights
without the consent of the Offeror and the irrevocable undertaking
of such shareholder not to appoint a proxy for or to attend such
general or separate class meeting. This authority will cease to be
valid if the acceptance is withdrawn in accordance with paragraph 3
of Part B of this Appendix 1;
(i) that the East Midlands Electricity Shares in respect of which the
Offer is accepted or deemed to be accepted will be acquired under
the Offer free from all liens, equities, charges, encumbrances and
other interests and together with all rights attaching thereto,
including the right to receive and retain all dividends, interest
and other distributions (if any) declared, made or paid after 12
November 1996;
(j) that he will deliver, or procure the delivery, to the Receiving
Agent at The Royal Bank of Scotland plc, Registrars Department, New
Issues Section, either by post or by hand at PO Box 859, Consort
House, East Street, Bedminster, Bristol BS99 1XZ or by hand only at
PO Box 633, 5-10 Great Tower Street, London EC3R 5ER of his share
certificate(s) and/or other document(s) of title in respect of the
East Midlands Electricity Shares in respect of which the Offer has
been accepted, or an indemnity acceptable to the Offeror in lieu
thereof, as soon as possible and in any event within six months of
the Offer becoming unconditional in all respects;
(k) that, if he accepts the Offer, he shall do all such acts and things
whatsoever as shall be necessary or expedient to vest in the Offeror
or its nominees the East Midlands Electricity Shares referred to in
paragraph (a)(i) of this Part C;
(l) that he agrees to ratify each and every act or thing which may be
done or effected by, or by any director of, or person authorised by,
the Offeror, SBC Warburg or Wasserstein Perella in exercise of any
of the powers and/or appointments and/or authorities hereunder;
(m) that, if any provisions of Part B or this Part C of this Appendix 1
shall be unenforceable or invalid or shall not operate so as to
afford the Offeror, SBC Warburg or Wasserstein Perella or any of
their respective directors or authorised representatives the benefit
of the authority expressed to be given therein or herein, he shall,
with all practicable speed, do all such acts and things and execute
all such documents that may be required or desirable to enable the
Offeror and/or Wasserstein Perella and/or SBC Warburg and/or any of
their respective directors or authorised representatives to secure
the full benefit of Part B and this Part C of this Appendix 1;
(n) that the terms and conditions of the Offer shall be deemed to be
incorporated in, and form part of, the Form of Acceptance, which
shall be read and construed accordingly; and
(o) that the execution of the Form of Acceptance constitutes his
submission, in relation to all matters arising out of the Offer and
the Form of Acceptance, to the jurisdiction of the Courts of
England.
References in this Part C of this Appendix 1 to a holder of East
Midlands Electricity Shares shall include references to the person or
persons executing the Form of Acceptance and, in the event of more than
one person executing a Form of Acceptance, the provisions of this Part C
of this Appendix 1 shall apply to them jointly and to each of them. On
execution, the Form of Acceptance shall take effect as a Deed.
30
<PAGE>
APPENDIX 2
PARTICULARS OF THE LOAN NOTES
The Floating Rate Unsecured Loan Notes 2007 of the Offeror will be created by a
resolution of the Board of Directors of the Offeror (or a duly authorised
committee thereof) and will be constituted by a Loan Note Instrument (the "Loan
Note Instrument") to be entered into by the Offeror. The issue of the Loan Notes
will be conditional on the Offer becoming or being declared unconditional in all
respects. Elections for the Loan Note Alternative in respect of all the East
Midlands Electricity Shares to which the Offer relates would involve the issue
of a maximum nominal amount of approximately (pound)1.3 billion of Loan Notes.
The Loan Note Instrument will contain provisions, inter alia, to the effect set
out below.
1. Form and Status
The Loan Notes will be issued by the Offeror in amounts and integral
multiples of (pound)1 and will constitute unsecured and unguaranteed
obligations of the Offeror and any fractional entitlements will be
disregarded and not paid. The Loan Note Instrument will not contain any
restrictions on borrowings, disposals or charging of assets by the Offeror.
2. Interest
(a) Interest on the Loan Notes will be calculated on the basis of a 365 day
year and will be payable (subject to any requirement to deduct tax
therefrom) yearly on 31 March in each year (interest payment dates) in
respect of the interest periods (as defined below) ending on the day
immediately before those dates at a rate calculated as provided in
subparagraph 2(b) (or, if applicable, subparagraph 2(c)) below, except
that the first payment of interest on the Loan Notes, which will be made
on 31 March 1998, will be in respect of the period from (and including)
the first date of issue of any of the Loan Notes to (but excluding) 31
March 1998. The period from (and including) the first date of issue of
any Loan Notes to (but excluding) 31 March 1998 and the period from (and
including) 31 March 1998 or any subsequent interest payment date to (but
excluding) the next following interest payment date is herein called an
interest period.
If any interest would otherwise fall to be paid on a day which is not a
business day, such interest shall be paid on the next succeeding business
day.
(b) The rate of interest on the Loan Notes for each interest period will be
the rate per annum calculated by the Offeror to be 1% per annum below the
LIBOR rate for twelve month sterling deposits of (pound)5 million in the
London Interbank market at or about 11 am (London time) on the first day
of the relevant interest period or, if such a day is not a business day,
on the preceding business day, as quoted by a duly authorised official of
Barclays Bank PLC (or if Barclays Bank PLC is unable to quote such rate,
such other reference bank selected by the Offeror for the purpose). For
these purposes, reference banks will be those banks that are, as at the
date of execution of the Loan Note Instrument, members of CHAPS Clearing
Company Limited.
(c) If a rate of interest cannot be established in accordance with the
provisions of subparagraph 2(b) above for any interest period, then the
rate of interest on the Loan Notes for such interest period shall be
calculated by reference to such rate as the Offeror shall determine on
the basis of quotations made for twelve month sterling deposits of
similar size in any such other appropriate interbank market or markets as
the Offeror may select.
3. Redemption of Loan Notes
(a) On 31 March 1998 and thereafter on any interest payment date falling
prior to 31 March 2007, a holder of Loan Notes ("Noteholder") shall be
entitled to require the Offeror to redeem the whole (whatever the amount)
or any part (being (pound)100 nominal amount or any integral multiple
thereof) of the principal amount outstanding from time to time on his
holding of Loan Notes for cash at par, together with accrued interest
(subject to any requirement to deduct tax therefrom) to (but excluding)
the date of payment, by giving not less than 30 days' notice in writing
(which shall be irrevocable) to the Offeror (in the form endorsed on the
Loan Note certificate) expiring on or before such interest payment
31
<PAGE>
date accompanied by the certificate(s) for all the Loan Notes to be
redeemed, provided that no such notice may be given in respect of any
Loan Notes in respect of which notice of redemption has previously been
given by the Offeror in accordance with subparagraph 3(b) below.
(b) If, at any time, the nominal amount of all Loan Notes outstanding is (i)
20% or less of the total nominal amount of Loan Notes issued pursuant to
the Loan Note Alternative and (ii) less than (pound)10 million, the
Offeror shall have the right on giving to the remaining Noteholders not
less than 30 days' notice in writing expiring on 31 March 1999 (or, if
that is not a business day, the next succeeding business day) or on any
subsequent interest payment date to redeem all (but not some only) of the
outstanding Loan Notes by payment of the nominal amount thereof together
with accrued interest (subject to any requirement to deduct tax
therefrom) to (but excluding) the date of redemption.
(c) Any Loan Notes not previously repaid, redeemed or purchased and cancelled
will be redeemed in full at par on 31 March 2007 (or, if that is not a
business day, the next succeeding business day) together with accrued
interest (subject to any requirement to deduct tax therefrom) to (but
excluding) that date.
(d) Each Noteholder shall be entitled to require all or any part (being
(pound)100 nominal amount or any integral multiple thereof) of the Loan
Notes held by him to be repaid at par together with accrued interest
(subject to any requirement to deduct tax therefrom) if:
(i) any principal or interest on any of the Loan Notes held by that
Noteholder shall fail to be paid in full within 30 days after
the due date for payment thereof; or
(ii) an order is made or an effective resolution is passed for the
winding up or dissolution of the Offeror (other than for the
purposes of a reconstruction or an amalgamation or a members'
voluntary winding up on terms previously approved by an
Extraordinary Resolution of the Noteholders (as defined in the
Loan Note Instrument)); or
(iii) an encumbrancer takes possession of or a trustee, receiver,
administrator or similar officer is appointed or an
administration order is made in respect of the Offeror or in
respect of the whole or substantially the whole of the
undertaking of the Offeror and such person has not been paid
out or discharged within 30 days.
4. Purchase of Loan Notes
The Offeror will be entitled at any time to purchase Loan Notes at any price by
tender (available to all Noteholders alike), private treaty or otherwise by
agreement with the relevant Noteholder(s).
5. Cancellation
Any Loan Notes redeemed under paragraph 3 above or purchased by the Offeror
under paragraph 4 above shall be cancelled and shall not be available for
reissue.
6. Modifications
The provisions of the Loan Note Instrument and the rights of the Noteholders
will be subject to modification, abrogation or compromise in any respect with
the sanction of an Extraordinary Resolution of the Noteholders, as defined in
the Loan Note Instrument, but subject to the consent of the Offeror.
7. Substitution or exchange
The Loan Notes will contain provisions entitling the Offeror, without the
consent of Noteholders, to substitute DR Unlimited (an unlimited liability
company incorporated in England and Wales and the holding company of the
Offeror) or any other member of the Dominion Resources Group resident in the UK
for tax purposes as the principal debtor under the Loan Note Instrument and the
Loan Notes or to require all or any of the Noteholders to exchange their Loan
Notes for loan notes issued on the same terms mutatis mutandis by DR Unlimited
or such other member provided in either case that the Offeror guarantees DR
Unlimited's or such other member's obligations thereunder. References to the
Offeror in this summary shall be construed accordingly. The Offeror's right to
require substitution or exchange
32
<PAGE>
will be exercisable only if such substitution or exchange will not be treated as
a disposal of the Loan Notes for the purposes of UK taxation of chargeable
gains.
8. Registration and Transfer
The Loan Notes will be evidenced by certificates and will be registered in
amounts and integral multiples of (pound)1 nominal amount. The Loan Notes will
be transferable in amounts or integral multiples of (pound)1 nominal amount,
provided that transfers will not be registered during the 14 days immediately
preceding any interest payment date or while the register of Noteholders is
closed.
9. Prescription
Noteholders will cease to be entitled to amounts in respect of interest which
remain unclaimed for a period of five years and to amounts due in respect of
principal which remain unclaimed for a period of ten years, in each case from
the date on which the relevant payment first becomes due.
10. No Listing
No application has been made or is intended to be made to any stock exchange for
the Loan Notes to be listed or dealt in.
11. No Registration
The Loan Notes have not been and will not be registered under the United States
Securities Act of 1933, as amended, or under the securities laws of any State of
the United States, no relevant clearances have been, or will be, obtained from
the securities commission of any province of Canada, no prospectus has been, or
will be, lodged with the Australian Securities Commission and no steps have been
taken, nor will any be taken, to enable the Loan Notes to be offered in
compliance with applicable securities laws of Japan. Accordingly, the Loan Notes
may not be offered, sold, resold, delivered or distributed (directly or
indirectly) in or into the United States (except in transactions exempt from, or
not subject to, the registration requirements of the Securities Act), Canada,
Australia or Japan nor to or for the account or benefit of any Restricted
Overseas Person.
12. Governing Law
The Loan Notes and the Loan Note Instrument will be governed by and construed in
accordance with English law.
33
<PAGE>
APPENDIX 3
FINANCIAL AND OTHER INFORMATION RELATING TO
DOMINION RESOURCES
Nature of financial information
The financial information contained in this Appendix 3 is extracted from the
audited consolidated accounts of Dominion Resources for the three years ended 31
December 1995, on which the audit opinions were unqualified, and from the
unaudited quarterly statement for the period ended 30 September 1996.
1. Directors of Dominion Resources
Thomas E. Capps Chairman, President and Chief Executive Officer
John B. Adams Jr. Director
John B. Bernhardt Director
Benjamin J. Lambert, III Director
Richard L. Leatherwood Director
Harvey L. Lindsay Jr. Director
Kenneth A. Randall Director
William T. Roos Director
Frank S. Royal Director
Judith B. Sack Director
S. Dallas Simmons Director
Robert H. Spilman Director
2. Principal and registered office of Dominion Resources
The principal and registered office of Dominion Resources is at Riverfront Plaza
- - West Tower, 901 East Byrd Street, Richmond, Virginia 23219-4069, United States
of America.
34
<PAGE>
3. Financial Statements
(a) Consolidated statements of income
<TABLE>
<CAPTION>
Years ended 31 December
1995 1994 1993
($ millions) ($ millions) ($ millions)
------------ ------------ ------------
<S> <C>
Operating revenues and income:
Electric utility 4,350.4 4,170.8 4,187.3
Nonutility 301.3 320.3 246.6
------------ ------------ ------------
Total operating revenues and income 4,651.7 4,491.1 4,433.9
------------ ------------ ------------
Operating expenses:
Fuel, net 1,006.9 973.0 959.5
Purchased power capacity, net 688.4 669.4 646.1
Restructuring 121.5 - -
Other operation 724.0 739.6 647.8
Maintenance 260.5 263.2 279.5
Depreciation, depletion and amortisation 551.0 533.1 509.5
Other taxes 273.8 274.6 264.2
------------ ------------ ------------
Total operating expenses 3,626.1 3,452.9 3,306.6
------------ ------------ ------------
Operating income 1,025.6 1,038.2 1,127.3
Other income 7.3 13.5 15.1
------------ ------------ ------------
Income before fixed charges and federal income taxes 1,032.9 1,051.7 1,142.4
------------ ------------ ------------
Fixed charges:
Interest charges, net 381.7 360.3 373.5
Preferred dividends of Virginia Power 44.1 42.2 42.1
------------ ------------ ------------
Total fixed charges 425.8 402.5 415.6
------------ ------------ ------------
Income before provision for federal income taxes 607.1 649.2 726.8
Provision for federal income taxes 182.1 171.0 210.2
------------ ------------ ------------
Net income 425.0 478.2 516.6
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Common Stock Data:
<S> <C>
Average number of shares of common stock
outstanding (in millions) 173.8 170.3 165.7
Earnings per common share $2.45 $2.81 $3.12
Dividends paid per common share $2.58 $2.55 $2.48
</TABLE>
(b) Consolidated statements of retained earnings
<TABLE>
<CAPTION>
Years ended 31 December
1995 1994 1993
($ millions) ($ millions) ($ millions)
------------ ------------ ------------
<S> <C>
Net income 425.0 478.2 516.6
Retained earnings as at 1 January 1,455.2 1,417.8 1,319.1
Common dividends and other deductions:
Dividends (448.7) (434.7) (411.2)
Other deductions (3.9) (6.1) (6.7)
----------- ----------- ------------
Retained earnings as at 31 December 1,427.6 1,455.2 1,417.8
=========== =========== ============
</TABLE>
35
<PAGE>
(c) Consolidated balance sheet
<TABLE>
<CAPTION>
At 31 December
1995
Assets ($ millions)
------------
<S> <C>
Current assets:
Cash and cash equivalents 66.7
Trading securities 10.8
Customer accounts receivable, net 362.6
Other accounts receivable 104.2
Accrued unbilled revenues 179.5
Materials and supplies at average cost or less
Plant and general 160.2
Fossil fuel 71.2
Other 141.5
------------
1,096.7
------------
Investments:
Investments in affiliates 436.2
Available-for-sale securities 285.5
Nuclear decommissioning trust funds 351.4
Investments in real estate 133.0
Other 236.6
------------
1,442.7
------------
Property, plant and equipment:
(includes plant under construction of $512.1) 15,977.4
Less accumulated depreciation, depletion and amortisation
5,655.1
------------
10,322.3
------------
Deferred charges and other assets:
Regulatory assets 816.4
Other 225.2
------------
1,041.6
Total assets ------------
13,903.3
============
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
At 31 December
1995
Liabilities and shareholders' equity ($ millions)
--------------
<S> <C>
Current liabilities:
Securities due within one year 420.8
Short-term debt 236.6
Accounts payable, trade 336.7
Accrued interest 110.5
Accrued payrolls 77.7
Severance costs accrued 42.5
Customer deposits 55.4
Other 114.0
-------------
1,394.2
-------------
Long-term debt:
Utility 3,889.4
Nonrecourse-nonutility 523.5
Other 199.0
-------------
4,611.9
-------------
Deferred credits and other liabilities:
Deferred income taxes 1,661.1
Investment tax credits 272.2
Deferred fuel expenses 57.7
Other 340.2
-------------
2,331.2
-------------
Total liabilities 8,337.3
-------------
Commitments and contingencies
Virginia Power obligated mandatorily redeemable
preferred securities of subsidiary trust* 135.0
-------------
Preferred stock:
Virginia Power stock subject to mandatory redemption 180.0
-------------
Virginia Power stock not subject to mandatory redemption 509.0
-------------
Common shareholders' equity:
Common stock-no par authorised 300,000,000 shares,
outstanding-176,414,110 shares at 1995 3,303.5
Retained earnings 1,427.6
Allowance on available-for-sale securities (6.7)
Other paid-in capital 17.6
-------------
4,742.0
-------------
Total liabilities and shareholders' equity 13,903.3
=============
</TABLE>
*As described in Note (xii), the 8.05% Junior Subordinated Notes totalling
$139.2 million principal amount constitute 100% of the Trust's assets.
37
<PAGE>
(d) Consolidated statement of cash flows
<TABLE>
<CAPTION>
Year ended
31 December
1995
($ millions)
------------
<S> <C>
Cash flows from (to) operating activities:
Net income 425.0
Adjustments to reconcile net income to net cash:
Depreciation, depletion and amortisation 633.5
Deferred income taxes 26.4
Investment tax credits, net (16.9)
Allowance for other funds used during construction (6.7)
Deferred fuel expenses 6.2
Deferred capacity expenses 6.4
Restructuring expenses 96.2
Non-cash return on terminated construction project costs - pre tax (8.4)
Gain on sale of trust units (8.7)
Changes in current assets and liabilities:
Accounts receivable (38.7)
Accrued unbilled revenues (27.7)
Materials and supplies 61.1
Accounts payable, trade (37.6)
Accrued interest and taxes 33.6
Provision for rate refunds (12.2)
Other changes 39.8
------------
Net cash flows from operating activities 1,171.3
------------
Cash flows from (to) financing activities:
Issuance of common stock 161.7
Issuance of preferred stock
Preferred securities of subsidiary trust 135.0
Issuance of long-term debt:
Utility 240.0
Non-recourse-non-utility 54.3
Issuance of short-term debt 101.1
Repayment of long-term debt and preferred stock (553.0)
Common dividend payments (448.7)
Other (20.5)
------------
Net cash flows to financing activities (330.1)
------------
Cash flows from (used in) investing activities:
Utility capital expenditures (excluding AFC-equity funds) (577.5)
Acquisition of natural gas and independent power properties (128.5)
Sale of accounts receivable, net (160.0)
Sale of trust units 16.4
Other investments (71.6)
------------
Net cash flows used in investing activities (921.2)
------------
Decrease in cash and cash equivalents (80.0)
Cash and cash equivalents at beginning of the year 146.7
------------
Cash and cash equivalents at end of the year 66.7
============
</TABLE>
38
<PAGE>
(i) Significant Accounting Policies
General
Dominion Resources is a holding company headquartered in Richmond, Virginia. Its
primary business is Virginia Electric and Power Company ("Virginia Power"),
which is a regulated public utility engaged in the generation, transmission,
distribution and sale of electric energy within a 30,000 square mile area in
Virginia and northeastern North Carolina. It sells electricity to retail
customers (including governmental agencies) and to wholesale customers such as
rural electric cooperatives and municipalities. The Virginia service area
comprises about 65% of Virginia's total land area, but accounts for over 80% of
its population.
The company also operates business subsidiaries active in independent power
production; the acquisition and sale of natural gas reserves; in financial
services, and in real estate. Some of the independent power and natural gas
projects are located in foreign countries. Net assets of approximately $200
million are involved in independent power production operations in Latin
America.
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.
Dominion Resources is currently exempt from regulation as a registered holding
company under the Public Utility Holding Company Act of 1935.
Accounting for the utility business conforms with generally accepted accounting
principles as applied to regulated public utilities and as prescribed by federal
agencies and the commissions of the states in which the utility business
operates.
Consolidation
The Consolidated Financial Statements include the accounts of Dominion Resources
and its subsidiaries. In consolidation, all significant inter-company
transactions and accounts have been eliminated.
Operating Revenues and Income
Utility revenues are recorded on the basis of service rendered. Dividend income
on securities owned is recognised on the ex-dividend date.
Investment in common stocks of affiliates representing 20% to 50% ownership, and
joint ventures and partnerships representing generally 50% or less ownership
interests, are accounted for under the equity method.
Property, Plant and Equipment
Utility plant is recorded at original cost, which includes labour, materials,
services, AFC (where permitted by regulators), and other indirect costs.
The cost of acquisition, exploration and development of natural resource
properties is accounted for under the successful efforts method.
Interest is capitalised in connection with the construction of major facilities.
The capitalised interest is recorded as part of the asset to which it relates
and is amortised over the asset's estimated useful life. In 1995, 1994 and 1993,
$14.1 million, $13.8 million, and $11.1 million of interest cost was
capitalised, respectively. Capitalised interest includes AFC - other funds for
certain regulatory jurisdictions of $6.7 million, $6.4 million and $5.1 million
for the years ended 31 December 1995, 1994 and 1993, respectively.
39
<PAGE>
Major classes of property, plant and equipment and their respective balances
are:
<TABLE>
<CAPTION>
At 31
December
1995
($ millions)
------------
<S> <C>
Utility:
Production 7,340.0
Transmission 1,316.1
Distribution 4,215.7
Other electric 817.7
Construction work-in-progress 512.1
Nuclear fuel 836.0
------------
Total utility 15,037.6
------------
Nonutility:
Natural gas properties 395.7
Independent power properties 462.7
Construction work-in-progress -
Other 81.4
------------
Total nonutility 939.8
------------
Total property, plant and equipment 15,977.4
============
</TABLE>
Depreciation, Depletion and Amortisation
Depreciation of utility plant (other than nuclear fuel) is computed using the
straight-line method based on projected useful service lives. The cost of
depreciable utility plant retired and the cost of removal, less salvage, are
charged to accumulated depreciation. The provision for depreciation on utility
plant was based on weighted average depreciable plant using a rate of 3.2% for
1995, 1994 and 1993.
Owned nuclear fuel is amortised on a unit-of-production basis sufficient to
amortise fully, over the estimated service life, the cost of the fuel plus
permanent storage and disposal costs.
Costs in excess of net assets acquired from equity investments are amortised
over periods not to exceed 40 years.
Nuclear Decommissioning
Nuclear plant decommissioning costs are accrued and recovered through rates over
the expected service lives of Virginia Power's nuclear generating units. The
amounts collected from customers are being placed in trusts, which, with the
accumulated earnings thereon, will be utilised solely to fund future
decommissioning obligations.
<TABLE>
<CAPTION>
North Anna Surry
Unit 1 Unit2 Unit 1 Unit2
NRC licence expiration year 2018 2020 2012 2013
($ millions) ($ millions) ($ millions) ($ millions)
Method of decommissioning DECON DECON DECON DECON
<S> <C>
Current cost estimate (1994) 247.0 253.6 272.4 274.0
External trusts balance at 31 December 1995 84.1 78.9 96.2 92.2
1995 contribution to external trusts 6.1 5.7 8.0 8.7
============ ============ ============ ============
</TABLE>
Approximately every four years, site-specific studies are prepared to determine
the decommissioning cost estimate for Virginia Power's four nuclear units. The
current cost estimate is based on the DECON method, which assumes the activities
associated with the decontamination or prompt removal of radioactive
40
<PAGE>
contaminants will begin shortly after cessation of operations so that the
property may be released for unrestricted use.
The accumulated provision for decommissioning of $351.4 million is included in
accumulated depreciation, depletion and amortisation at 31 December 1995.
Provisions for decommissioning of $28.5 million, $24.5 million and $24.4 million
applicable to 1995, 1994 and 1993, respectively, are included in depreciation,
depletion and amortisation expense. The net unrealised gain of $40.7 million
associated with securities held by Virginia Power's Nuclear Decommissioning
Trust at 31 December 1995 are included in the accumulated provision for
decommissioning.
Earnings of the trust funds were $15.9 million, $15.2 million and $16.3 million
for 1995, 1994 and 1993, respectively, and are included in other income in the
Consolidated Financial Statements.
The accretion of the accumulated provision for decommissioning, equal to the
earnings of the trust funds, is also recorded in other income.
The Financial Accounting Standards Board (FASB) is reviewing the accounting for
nuclear plant decommissioning. If current electric utility industry practices
for such decommissioning are changed, annual provisions for decommissioning
could increase. FASB has tentatively determined that the estimated cost of
decommissioning should be reported as a liability rather than as accumulated
depreciation and that a substantial portion of the decommissioning obligation
should be recognised earlier in the operating life of the nuclear plant.
During its deliberations, FASB has expanded the scope of this project to include
similar unavoidable obligations to perform closure and post-closure activities
incurred as a condition to operate assets other than nuclear power plants.
Whether this position, if adopted, would impact other assets of Virginia Power
cannot be determined at this time. Furthermore, the FASB has tentatively
determined that it would be inappropriate to account for cost of removal as
negative salvage; thus, any forthcoming standard may also cause changes in
industry plant depreciation practices.
Federal Income Taxes
Dominion Resources and its subsidiaries file a consolidated federal income tax
return.
Dominion Resources adopted SFAS No. 109, "Accounting for Income Taxes" in 1992
which requires companies to measure and record deferred tax assets and
liabilities for all temporary differences. Temporary differences occur when
events and transactions recognised for financial reporting result in taxable or
tax-deductible amounts in future periods. The regulatory treatment of temporary
differences can differ from the requirements of SFAS No. 109. Accordingly
Virginia Power recognises a regulatory asset if it is probable that future
revenues will be provided for the payment of those deferred tax liabilities.
Similarly, in the event a deferred tax liability is reduced to reflect changes
in tax rates, a regulatory liability is established if it is probable that a
future reduction in revenue will result.
Due to regulatory requirements, Virginia Power accounts for investment tax
credits under the "deferral method" which provides for the amortisation of these
credits over the service lives of the property giving rise to the credits.
Allowance for Funds Used During Construction
The applicable regulatory Uniform System of Accounts defines AFC as the cost
during the construction period of borrowed funds used for construction purposes
and a reasonable rate on other funds when so used.
The pre-tax AFC rates for 1995, 1994 and 1993 were 8.9%, 8.9% and 9.4%,
respectively. Approximately 83% of Virginia Power's construction work in
progress (CWIP) is now included in rate base and a cash return is collected
currently thereon.
Deferred Capacity and Fuel Expenses
Approximately 90% of fuel expenses and 80% of capacity expenses are subject to
deferral accounting. Under this method, the difference between reasonably
incurred actual expenses and the level of expenses included in current rates is
deferred and matched against future revenues.
41
<PAGE>
Amortisation of Debt Issuance Costs
Dominion Resources defers and amortises any expenses incurred in the issuance of
long-term debt including premiums and discounts associated with such debt over
the lives of the respective issues. Any gains or losses resulting from the
refinancing of Virginia Power debt are also deferred and amortised over the
lives of the new issues of long-term debt as permitted by the appropriate
regulatory commission. At Virginia Power, gains or losses resulting from the
redemption of debt without refinancing are amortised over the remaining lives of
the redeemed issues.
Marketable Securities
Dominion Resources adopted, effective 1 January 1994, SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". The standard requires
companies to account for and classify investments in equity securities that have
readily determinable fair values and for all investments in debt securities
based on management's intent. The investments are to be classified into three
categories and accounted for in the following manner.
Debt securities which are intended to be held to maturity are classified as
held-to-maturity securities and reported at amortised cost. Debt and equity
securities purchased and held with the intent of selling them in the current
period are classified as trading securities. They are reported at fair value and
unrealised gains and losses are included in earnings. Debt and equity securities
that are neither held-to-maturity or trading are classified as
available-for-sale securities. These are reported at fair value with unrealised
gains and losses reported in shareholders' equity, net of tax.
Nonrecourse-Nonutility Financings
Dominion Resources' nonutility subsidiaries issue debt to finance their
operations and obtain financings that generally are secured by the assets of the
nonutilty subsidiaries. However, Dominion Resources may be required to provide
contingent equity support or to maintain a minimum net worth at the nonutility
subsidiaries. These financings have been segregated on the accompanying
financial statements to distinguish their nonrecourse nature.
Cash
Current banking arrangements generally do not require checks to be funded until
actually presented for payment. At 31 December 1995 and 1994, the company's
accounts payable included the net effect of checks outstanding but not yet
presented for payment of $70.1 million.
For the purposes of the Consolidated Statements of Cash Flows, Dominion
Resources considers cash and cash equivalents to include cash on hand and
temporary investments purchased with a maturity of three months or less.
<TABLE>
<CAPTION>
Supplementary Cash Flow Information
1995
($ millions)
------------
<S> <C>
Cash paid during the year for:
Interest (reduced for net costs of borrowed funds capitalised) 376.0
Federal income taxes 159.6
Non-cash transactions from investing and financing activities:
Exchange of long-term marketable securities 12.3
</TABLE>
Reclassification
Certain amounts in the 1994 and 1993 Consolidated Financial Statements have been
reclassified to conform to the 1995 presentation.
(ii) Sale of Receivables
Virginia Power has an agreement to sell, with limited recourse, certain accounts
receivable including unbilled amounts, up to a maximum of $200 million.
Additional receivables are continually sold, at Virginia Powers' discretion, to
42
<PAGE>
replace those collected up to the limit. At 31 December 1995 no amount was
outstanding. The limited recourse is provided by Virginia Power's assignment of
an additional undivided interest in accounts receivable to cover any potential
losses to the purchaser due to uncollectable accounts. Virginia Power has
provided for the estimated amount of such losses in its accounts.
<TABLE>
<CAPTION>
(iii) Taxes
Years ended 31 December
1995 1994 1993
($ millions, except percentages)
------- ------- -------
<S> <C>
Taxes other than federal income tax:
Real estate and property 91.2 83.9 84.8
State and local gross receipts 104.8 104.9 100.8
Payroll 31.1 33.9 31.3
Other 46.7 51.9 47.3
------- ------- -------
273.8 274.6 264.2
======= ======= =======
Provision for federal income taxes:
Included in operating expenses:
Current 179.8 120.8 197.2
------- ------- -------
Tax effects of temporary/timing differences:
Liberalised depreciation 56.6 61.3 50.6
Indirect construction costs (13.8) (21.5) (23.2)
Other plant related items 12.1 4.0 19.9
Deferred fuel (2.2) 0.8 11.8
Deferred capacity (3.8) (9.0) (24.7)
Separation costs (12.4)
Customer accounts reserve 36.8 (34.9)
Intangible drilling costs 3.6 4.1 15.3
Other, net (20.9) (9.2) 17.4
------- ------- -------
19.2 67.3 32.2
------- ------- -------
Net deferred investment tax credits - amortisation (16.9) (17.1) (19.2)
------- ------- -------
Total provision for federal income tax expense 182.1 171.0 210.2
======= ======= =======
Computation of provision for federal income tax:
Pre-tax income 607.1 649.2 726.8
======= ======= =======
Tax at statutory federal income tax rate of 35%
applied to pre-tax income 212.5 227.2 254.4
Changes in federal income taxes resulting from:
Preferred dividends of Virginia Power 15.4 14.8 14.8
Amortisation of investment tax credits (16.9) (17.1) (16.1)
Nonconventional fuel credit (28.2) (32.0) (30.5)
Other, net (0.7) (21.9) (12.4)
------- -------- -------
Total provision for federal income tax expense 182.1 171.0 210.2
======= ======== =======
Effective tax rate 30.0% 26.3% 28.9%
======= ======== =======
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Dominion Resources net noncurrent deferred tax liability is attributable to:
At 31
December
1995
($ millions)
------------
<S> <C>
Assets:
Deferred investment tax credits (96.4)
-----------
Liabilities:
Depreciation method and plant basis differences 1,403.5
Income taxes recoverable through future rates 171.6
Partnership basis differences 111.5
Other 70.9
-----------
Total deferred income tax liability 1,757.5
-----------
Net deferred income tax liability 1,661.1
===========
</TABLE>
(iv) Regulatory Assets
Certain expenses normally reflected in income are deferred on the balance sheet
as regulatory assets and are recognised in income as the related amounts are
included in rates and recovered from customers. The company's regulatory assets
included the following:
<TABLE>
<CAPTION>
At 31
December
1995
($ millions)
------------
<S> <C>
Income taxes recoverable through future rates 484.5
Cost of decommissioning DOE uranium enrichment facilities 78.5
Deferred losses on reacquired debt, net 99.3
North Anna Unit 3 project termination costs 101.8
Other 52.3
------------
Total 816.4
============
</TABLE>
Income taxes recoverable through future rates represent principally the tax
effect of depreciation differences not normalised. These amounts are amortised
as the related temporary differences reverse.
The costs of decommissioning Department of Energy's (DOE) uranium enrichment
facilities have been deferred and represent the unamortised portion of Virginia
Power's required contributions to a fund for decommissioning and decontaminating
the DOE's uranium enrichment facilities.
Virginia Power is making such contributions over a 15-year period with
escalation for inflation. These costs are being recovered in fuel rates.
Losses or gains on reacquired debt are deferred and amortised over the lives of
the new issues of longterms debt. Gains or losses resulting from the redemption
of debt without refinancing are amortised over the remaining lives of the
redeemed issues.
The construction of North Anna 3 was terminated in November 1982. All retail
jurisdictions have permitted recovery of the incurred costs. For Virginia and
FERC jurisdictional customers, the amounts deferred are being amortised from the
date termination costs were first includible in rates.
The incurred costs underlying these regulatory assets may represent expenditures
by Virginia Power or may represent the recognition of liabilities that
ultimately will be settled at some time in the future. For some of those
regulatory assets representing past expenditures that are not included in
Virginia Power's rate base or used to adjust Virginia Power's capital structure.
44
<PAGE>
Virginia Power is not allowed to earn a return on the unrecovered balance. Of
the $816.4 million of regulatory assets at 31 December 1995, approximately
$123 million represent past expenditures that are effectively excluded from the
rate base by the Virginia State Corporation Commission that has primary
jurisdiction over Virginia Power's rates. However, of that amount $101.8 million
represent the present value of amounts to be recovered through future rates for
North Anna Unit 3 project termination costs, and thus reflect a reduction in the
actual dollars to be recovered through future rates for the time value of money.
Virginia Power does not earn a return on the remaining $21.2 million of
regulatory assets, effectively excluded from rate base, to be recovered over
various recovery periods up to 23 years, depending on the nature of the deferred
costs.
(v) Jointly Owned Plants
The following information relates to Virginia Power's proportionate share of
jointly owned plants at 31 December 1995:
<TABLE>
<CAPTION>
Bath County
Pumped North Anna Clover
Storage Power Power
Station Station Station
------------ ------------ ------------
<S> <C>
Ownership interest 60.0% 88.4% 50.0%
($ millions) ($ millions) ($ millions)
------------ ------------ ------------
Utility plant in service 1,074.8 1,798.5 289.6
Accumulated depreciation 188.6 635.7 1.5
Nuclear fuel - 405.1 -
Accumulated amortisation of nuclear fuel - 387.3 -
CWIP 0.7 110.9 211.1
============ ============ ============
</TABLE>
The co-owners are obligated to pay their share of all future construction
expenditures and operating costs of the jointly owned facilities in the same
proportions as their respective ownership interest. Virginia Power's share of
operating costs is classified in the appropriate expense category in the
consolidated statements of income.
(vi) Short-Term Debt
Dominion Resources and its subsidiaries have credit agreements with various
expiration dates. These agreements provided for maximum borrowings of $885.8
million at 31 December 1995. At 31 December 1995, $48.6 million was borrowed
under such agreements and classified as long-term debt.
Dominion Resources credit agreements supported $199 million of Dominion
Resources commercial paper at 31 December 1995.
Virginia Power credits agreements, which in September 1995 replaced the
intercompany credit agreement with Dominion Resources, supported $169 million of
Virginia Power commercial paper at 31 December 1995.
A subsidiary of Dominion Capital also had $91 million of nonrecourse commercial
paper outstanding at 31 December 1995. A total of $289 million of the commercial
paper was classified as long-term debt at 31 December 1995. The commercial paper
is supported by revolving credit agreements that have expiration dates extending
beyond one year.
45
<PAGE>
Dominion Resources and its subsidiairies pay fees in lieu of compensating
balances in connection with these credit agreements. A summary of short-term
debt outstanding at 31 December as follows:
Weighted
Average
Amount Interest
Outstanding Rate
($ millions) %
------------ -----------
1995
Commercial paper 169.0 5.79
Term-notes 67.6 11.70
------------
Total 236.6
============
(vii) Marketable Securities
Effective 1 January 1994, Dominion Resources adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS No. 115). The
standard prescribes how companies are to account for and report investments in
equity securities that have readily determinable fair values and for all
investments in debt securities. This standard is effective for fiscal years
beginning after 15 December 1993.
Securities classified as available-for-sale as of 31 December follow:
<TABLE>
<CAPTION>
Gross
Gross Unrealised
Unrealised Holding Aggregate
Cost Holding Gains Losses Fair Value
Security Type ($ millions) ($ millions) ($ millions) ($ millions)
------------ --------------- --------------- ----------------
<S> <C>
1995
Equity 288.3 8.0 16.5 279.8
Debt 5.8 0.1 5.7
</TABLE>
Maturities of debt securities classified as available-for-sale as of 31 December
1995.
Aggregate Type Cost Fair Value
($ millions) ($ millions)
------------------- ------------
Tax exempt obligations:
0-5 years 0.3 0.3
After five years 5.1 5.0
Temporary investments and deposits:
0-5 years 0.1 0.1
After five years 0.3 0.3
For the years ended 31 December 1995 and 1994, the proceeds from the sales of
available-for-sale securities were $49.4 million and $35.8 million,
respectively. The gross realised gains and losses were $10.4 million and $0.1
million for 1995 and $0.4 million and $1.6 million for 1994, respectively. The
basis on which the cost of these securities was determined is specific
identification. For 1994, the gross gains included in earnings from transfers of
securities from the available-for-sale category into the trading category was
$0.8 million. The changes in net unrealised holding gain or loss on
available-for-sale securities has resulted in an increase in the separate
component of shareholders equity during the year ended 31 December 1995 of $41.1
million, net of tax, and a decrease of $47.2 million, net of tax, for the year
ended 31 December 1994. The changes in net realised holding gain or loss on
trading securities increased earnings during the year ended 31 December 1995 by
$2.1 million and decreased earnings by $10 million for the year ended 31
December 1994.
In 1993, the company accounted for marketable securities as prescribed in SFAS
No. 12, "Accounting for Certain Marketable Securities." A net realised gain of
$12.5 million on the sale of marketable securities was included in net income
for the year ended 31 December 1993.
46
<PAGE>
(viii) Fair Value of Financial Instruments
The fair value amounts of the company's financial instruments have been
determined using available market information and valuation methodologies deemed
appropriate in the opinion of management. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the company could realise in a current market exchange. The use
of different market assumptions and/or estimation assumptions may have a
material effect on the estimated fair value amounts.
At 31 December 1995
Carrying Amount Estimated Fair Value
($ millions) ($ millions)
------------ ------------
Assets:
Cash and cash equivalents 66.7 66.7
Trading securities 10.8 10.8
Available-for-sale securities 285.5 285.5
Pollution control project funds 11.9 11.9
Notes receivable 43.1 43.7
Nuclear decommissioning trust funds 351.4 351.4
Liabilities:
Short-term debt 236.6 236.6
Long-term debt 5,058.8 5,322.4
Preferred securities of a subsidiary trust 135.0 140.4
Preferred stock 180.0 190.9
Cash and Cash Equivalents: The carrying amount of these items is a reasonable
estimate of their fair value.
Marketable Securities and Nuclear Decommissioning Trust Funds: The estimated
fair value is determined based on quoted market prices, dealer quotes, and
prices obtained from independent pricing sources.
Notes Receivable: The carrying value approximates fair value due to the variable
rate or term structure of the notes receivable.
Short Term Debt and Long Term Debt: Market values are used to determine the fair
value for debt securities for which a market exists. For debt issues that are
not quoted on an exchange, interest rates currently available to the company for
issuance of debt with similar terms and remaining maturities are used to
estimate fair value. The carrying amount of debt issues with short-term
maturities and variable rates that are refinanced at current market rates is a
reasonable estimate of their fair value.
Preferred Securities of Subsidiary Trust: The fair value is based on market
quotations.
Preferred Stock: The fair value of the fixed-rate preferred stock subject to
mandatory redemption was estimated by discounting the dividend and principal
payments for a representative issue of each series over the average remaining
life of the series.
47
<PAGE>
(ix) Long-Term Debt
Year ended 31
December 1995
($ millions)
--------------------------
Virginia Power First and Refunding Mortgage Bonds:(1)
Series U, 5.125%, due 1997 49.3
1992 Series B, 7.25%, due 1997 250.0
1988 Series A, 9.375%, due 1998 150.0
1992 Series F, 6.25%, due 1998 75.0
1989 Series B, 8.875%, due 1999 100.0
1993 Series C, 5.875%, due 2000 135.0
1992 Series D, 7.625%, due 2007 215.0
Various series, 6.0%-8%, due 2001-2004 805.0
Various series, 5.45%-8.75%, due 2020-2025 1,144.5
-------
Total First and Refunding Mortgage Bonds 2,923.8
-------
Other long-term debt:
Virginia Power:
Bank loans, notes and term loans, 6.15%-10.8%, due 1995-2003 762.7
Pollution control and financings:(2)
Money market municipals, due 2008-2027(3) 488.6
Dominion Resources:
Commercial paper(4) 199.0
-------
Total other long-term debt 1,450.3
-------
Nonrecourse - Nonutility Debt:
Dominion Resources:
Bank loans, 9.25%, due 2008 21.7
Dominion Capital:
Senior notes, fixed rate, 6.12%-11.875%, due 1996-2005(5) 102.0
Term notes, fixed rate, 4.6%-12.48%, due 1994-2020 204.0
Revolving credit agreements, due 1994-1998(6) 34.6
Commercial paper(7) 90.0
Dominion Energy:
Term loan, 7.22% (1993 - 10.13%), due 1996(8) 68.6
Revolving credit agreements, due 1996(9) 14.0
Term loan, 5.445%, due 1998 55.0
Bank loans, 9.70%-13.20%, due 2005 35.0
Bank loans, 4.5%-6.43%, due 1996-2024 59.8
-------
Total nonrecourse - nonutility debt 684.7
-------
Less amounts due within one year:
Bank loans, notes and term loans 259.6
Sinking fund obligations
Nonrecourse - nonutility 161.2
-------
Total amount due within one year 420.8
-------
Less unamortised discount, net of premium 26.1
-------
Total long-term debt 4,611.9
=======
(1) Substantially all of Virginia Power's property is subject to the lien of the
mortgage securing its First and Refunding Mortgage Bonds.
(2) Certain pollution control equipment at Virginia Power's generating
facilities has been pledged or conveyed to secure these financings.
(3) Interest rates vary based on short-term tax-exempt market rates. The
weighted average daily interest rates were 3.89% and 2.96% for 1995 and
1994, respectively.
(4) See Note (vi) to the Consolidated Financial Statements.
(5) The Rincon Securities common stock owned by Dominion Capital is pledged as
collateral to secure the loan.
(6) The weighted average interest rates during 1995 and 1994 were 6.76% and
5.19%, respectively.
(7) The weighted average interest rates during 1995 and 1994 were 5.91% and
4.27%, respectively.
(8) The Enron/Dominion Cogen Corp. common stock owned by Dominion Energy is
pledged as collateral to secure the loan.
(9) The weighted average interest rates during 1995 and 1994 were 6.04% and
4.72%, respectively.
48
<PAGE>
On 8 February 1996, Dominion Energy established a $400 million revolving credit
facility through ABN AMRO North America, Inc. The interest rate is variable and
is presently set at LIBOR plus 14. Proceeds from the revolver were used to
retire a $55 million term loan on 15 February 1996. In addition, a $100 million
revolving credit agreement was cancelled by the company on 8 February 1996.
Maturities (including cash sinking fund obligations) through 2000 are as follows
(in millions): 1996-$420.8; 1997-$459.1; 1998-$481.2; 1999-$275.3; and
2000-$260.4.
(x) Common stock
During 1995 the company purchased on the open market and retired 685,500 shares
of common stock for an aggregate price of $24.8 million. From 1993 through 1995,
the following changes in common stock occurred:
<TABLE>
<CAPTION>
1995 1994 1993
Amount Amount Amount
Share Outstanding ($ millions) Shares Outstanding ($ millions) Shares Outstanding ($ millions)
----------------- ------------ ------------------ ------------ ------------------ ------------
<S> <C>
Balance at 1 January 172.4 3,157.6 168.1 2,991.0 163.8 2,796.3
Changes due to:
Automatic Dividend
Reinvestment and Stock
Purchase Plan 2.9 107.6 2.9 112.2 2.6 115.3
Stock Purchase Plan for
Customers of Virginia Power 1.4 45.8 1.3 51.3 1.0 51.6
Employee Savings Plan 0.2 8.3 0.6 23.2 0.7 29.7
Stock repurchase and retirement (0.7) (24.8) (0.6) (20.7)
Other 0.2 9.0 0.1 0.6 (1.9)
----- ------- ----- ------- ----- -------
Balance at 31 December 176.4 3,303.5 172.4 3,157.6 168.1 2,991.0
===== ======= ===== ======= ===== =======
</TABLE>
(xi) Long-term incentive plan
A long-term incentive plan (the Plan) provides for the granting of nonqualified
stock options and restricted stock to certain employees of Dominion Resources
and its affiliates. The aggregate number of shares of common stock that may be
issued pursuant to the Plan is 3,750,000. The changes in share and option awards
under the Plan were as follows:
<TABLE>
<CAPTION>
Price Option
Restricted Per Share Stock Price Shares
Shares ($) Options ($) Exercisable
---------- --------- ------- -------- -----------
<S> <C>
Balance at 31 December 1992 17,024 14,706 14,706
======= ====== ======
Awards granted - 1993 19,457 $41.875-$42.75
Exercised/distributed (9,582) (2,242) $27.75-$29.625
------- ------ ------
Balance at 31 December 1993 26,899 12,464 12,464
======= ====== ======
Awards granted - 1994 19,842 $40.625-$40.875
Exercised/distributed (5,555) (1,388) $29.625
------- ------ ------
Balance at 31 December 1994 41,186 11,076 11,076
======= ====== ======
Awards granted - 1995 25,320 $37.625
Exercised/distributed (21,576)
------- ------ ------
Balance at 31 December 1995 44,930 11,076 11,076
======= ====== ======
</TABLE>
(xii) Virginia Power Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trust
In 1995, Virginia Power established Virginia Power Capital Trust I (VP Capital
Trust). VP Capital Trust sold 5,400,000 shares of Preferred Securities for $135
million, representing preferred beneficial interests and 97% beneficial
ownership in the assets held by VP Capital Trust.
Virginia Power issued $139.2 million of its 1995 Series A, 8.05% Junior
Subordinated Notes (the Notes) in exchange for the $135 million realised from
the sale of the Preferred Securities and $4.2 million of common securities of VP
49
<PAGE>
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.
The Notes are due 30 September 2025, but may be extended up to an additional ten
years, subject to satisfying certain conditions. However, Virginia Power may
redeem the Notes on or after 30September 2000, under certain circumstances. The
Preferred Securities are subject to mandatory redemption upon repayment of the
Notes at maturity or earlier redemption. At redemption, each Preferred Security
shall be entitled to receive a liquidation amount of $25 plus accrued and unpaid
distributions, including any interest thereon.
(xiii) Preferred Stock
Dominion Resources is authorised to issue up to 20,000,000 shares of preferred
stock; however, no such shares are issued and outstanding.
Virginia Power has authorised 10,000,000 shares of preferred stock, $100
liquidation preference. Upon voluntary liquidation, each share is entitled to
receive $100 plus accrued dividends. Dividends are cumulative. Virginia Power
preferred stock subject to mandatory redemption at 31 December 1995 was as
follows:
Series ($) Shares Outstanding
- ---------- ------------------
5.58 400,000(1)(2)
6.35 1,400,000(1)(3)
---------
Total 1,800,000
=========
(1) Shares are non-callable prior to redemption.
(2) All shares to be redeemed on 1/3/00.
(3) All shares to be redeemedd on 1/9/00.
During the years 1993 through 1995, the following shares were redeemed:
Dividend
Year ($) Shares
-------- ------
1995 7.30 417,319
1994 7.30 37,681
1993 7.30 30,000
1993 7.58 480,000
1993 7.325 400,419
50
<PAGE>
At 31 December 1995, Virginia Power preferred stock not subject to mandatory
redemption, $100 liquidation preference, is listed in the table below.
Dividend Issued and Outstanding Shares Entitled Per Share Upon
($) ($) Redemption ($)
- -------- ----------------------------- -----------------------
5.00 106,677 112.50
4.04 12,926 102.27
4.20 14,797 102.50
4.12 32,534 103.73
4.80 73,206 101.00
7.05 500,000 105.00(1)
6.98 600,000 105.00(2)
MMP 1/87 series(3) 500,000 100.00
MMP 6/87 series(3) 750,000 100.00
MMP 10/88 series(3) 750,000 100.00
MMP 6/89 series(3) 750,000 100.00
MMP 9/92A(3) 500,000 100.00
MMP 9/92B(3) 500,000 100.00
---------
Total 5,090,140
=========
(1) Through 31/7/03 and thereafter to amounts declining in steps to $100.00
after 31/7/13.
(2) Through 31/8/03 and thereafter to amounts declining in steps to $100.00
after 31/8/13.
(3) Money Market Preferred (MMP) dividend rates are variable and are set every
49 days via an auction. The weighted average rates for these series in 1995,
1994 and 1993, including fees for broker/dealer agreements, were 4.93%,
3.75% and 3.01%, respectively.
During the years 1993 through 1995, the following shares were redeemed:
Dividend
Year ($) Shares
-------- ------
1995 7.45 400,000
1995 7.20 450,000
1993 7.72 350,000
1993 (1972 series) 7.72 500,000
(xiv) Retirement Plan, Postretirement Benefts and Other Benefits
Retirement Plan: Dominion Resources' Retirement Plan (the Plan) covers virtually
all employees of Dominion Resources and its subsidiaries. The benefits are based
on years of service and the employee's compensation. Dominion Resources' funding
policy is to contribute annually an amount that is in accordance with the
provisions of the Employment Retirement Income Security Act of 1974.
The components of the provision for net periodic pension expense were as
follows:
<TABLE>
<CAPTION>
Years ended 31 December
1995 1994 1993
($ millions) ($ millions) ($ millions)
------------ ------------ ------------
<S> <C>
Service cost-benefits earned during the year 23.4 24.6 21.9
Interest cost on projected benefit obligation 54.9 46.3 46.3
Actual return on plan assets (56.7) (51.3) (49.3)
Net amortisation and deferral (0.7) 0.1 (2.6)
----- ----- -----
Net periodic pension cost 20.9 19.7 16.3
===== ===== =====
</TABLE>
51
<PAGE>
The following table sets forth the Plan's funded status:
<TABLE>
<CAPTION>
At 31 December
1995
($ millions)
--------------
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, includuing vested benefit
of 1995-$540.2 and 1994-$480.9 607.4
======
Projected benefit obligation for service rendered to date 767.0
Plan assets at fair value, primarily listed stocks and U.S. bonds 763.6
------
Plan assets in excess of projected benefit obligation (3.4)
Unrecognised net loss from past experience different
from that assumed and effects of changes in assumptions 35.7
Unrecognised prior services cost 5.3
Unrecognised net asset at 1st January being recognised over
16 years beginning in 1986 (25.1)
------
Prepaid (accrued) pension cost included in other assets (liabilities) 12.5
======
</TABLE>
Significant assumptions used in determining net periodic pension cost and the
projected benefit obligation were:
At 31 December
1995
(%)
--------------
Discount rates 8.00
Rates of increase in compensation levels 5
Expected long-term rate of return 9.5
==============
Postretirement Benefits: Dominion Resources and its subsidiaries provide retiree
health care and life insurance benefits through insurance companies with annual
premiums based on benefits paid during the year. From time to time in the past,
Dominion Resources and its subsidiaries have changed benefits. Some of these
changes have reduced benefits. Under the terms of their benefits plans, the
companies reserve the right to change, modify or terminate the plans.
Net periodic postretirement benefit expense for 1995 and 1994 was as follows:
Years ending 31 December
1995 1994
($ millions) ($ millions)
------------ ------------
Service cost 8.9 11.2
Interest cost 21.9 21.8
Return on plan assets (6.1) 0.9
Amortisation of transition obligations 12.1 12.1
Net amortisation and deferral 0.1 (4.1)
----- ------
Net periodic postretirement benefit expense 36.9 41.9
===== ======
52
<PAGE>
The following table sets forth the funded status of the plan:
31 December
1995
($ millions)
------------
Fair value of plan assets 96.3
-----------
Accumulated postretirement benefit obligation:
Retirees 211.4
Active plan participants 99.2
-----------
Accumulated postretirement benefit obligation 310.6
-----------
Accumulated postretirement benefit obligation in
excess of plan assets (214.3)
Unrecognised transition obligation 206.2
Unrecognised net experience gain 8.6
-----------
Prepaid postretirement benefit cost 0.5
===========
A 1% increase in the health care cost trend rate would result in an increase of
$3.5 million in the service and interest cost components and a $37.2 million
increase in the accumulated post-retirement benefit obligation.
Significant assumptions used in determining the post-retirement benefit
obligation were:
1995
-----------
Discount rates 8.0%
Assumed return on plan assets 9.0%
Medical cost trend rate 9% for first year
8% for second year
Scaling down to
4.75% beginning in
the year 2001
Virginia Power is recovering these costs in rates on an accrual basis in all
material respects, in all jurisdictions. Current and future rate recoveries of
OPEB accruals are expected to collect sufficient amounts to provide for the
unfunded accumulated post-retirement obligation over time.
The funds being collected for OPEB accrual in rates, in excess of OPEB benefits
actually paid during the year, are contributed to external benefit trusts under
Virginia Power's current funding policy.
Other Benefits
In 1994, Virginia Power offered an early retirement programme to employees aged
50 or older and offered a voluntary separation programme to all regular
full-time employees. Approximately 1,400 employees accepted offers under these
programmes. The costs associated with these programmes were $90.1 million.
Virginia Power capitalised $25.9 million based upon regulatory precedent and
expensed $64.2 million.
(xv) Restructuring
In March 1995, Virginia Power announced the implementation phase of its Vision
2000 programme. During this phase, Virginia Power began reviewing operations
with the objective of out-sourcing services where economical and appropriate,
and re-engineering the remaining functions to streamline operations. The
re-engineering process is resulting in outsourcing, decentralisation,
reorganisation and downsizing for portions of Virginia Power's operations. As
part of this process, Virginia Power is re-evaluating its utilisation of capital
resources in its operations to identify further opportunities for operational
efficiencies through outsourcing or re-engineering of its processes.
In 1995, restructuring charges of $121.5 million contain $117.9 million of
Virginia Power's restructuring charges which included severance costs, purchased
power contract cancellation and negotiated settlement costs, capital project
53
<PAGE>
cancellation costs, and other costs incurred directly as a result of the Vision
2000 initiatives. The Vision 2000 review of operations is expected to continue
through 1996. At this time, Virginia Power management cannot estimate the
restructuring costs yet to be incurred.
In May 1995, Virginia Power established a comprehensive involuntary severance
package for salaried employees who lose their positions as a result of these
initiatives. Virginia Power is recognising the cost associated with employee
terminations in accordance with Emerging Issues Task Force Concensus No. 94-3 as
management identifies the positions to be eliminated. Severance payments will be
made over a period not to exceed twenty months. Through 31 December 1995,
management had decided to eliminate 1,018 positions. The recognition of
severance costs resulted in a charge to operations in 1995 of $51.2 million. At
31 December 1995, 507 employees have been terminated and severance payments
totalling $8.7 million have been paid. Virginia Power estimates that these
staffing reductions will result in annual savings, net of outsourcing costs, in
the range of $50 million to $60 million. These savings will be reflected in
lower construction expenditures as well as lower operation and maintenance
expenses.
In an effort to minimise its exposure to potential stranded investment, Virginia
Power is evaluating its long-term purchased power contracts and negotiating
modifications to their terms, including cancellations, where it is determined to
be economically advantageous to do so. Virginia Power also negotiated
settlements with several other parties to terminate their rights to sell power
to Virginia Power. The cost of contract cancellations and negotiated settlements
was $8.1 million in 1995. Based on contract terms and estimated quantities of
power that would have otherwise been delivered, the cancellation of these
contracts and rights to sell power to Virginia Power has the effect of reducing
Virginia Power's future purchased power costs, including energy payments, by up
to $214 million annually. The cost of alternative sources of power that might
ultimately be required as a result of these settlements are expected to be
significantly less than $214 million.
Restructuring charges reported in 1995 included $37.3 million for the
cancellation of a project to construct a facility to handle low level
radioactive waste at Virginia Power's North Anna Power Station. As a result of
re-evaluating the handling of low level radioactive waste, Virginia Power
concluded that the facility should not be completed due to the additional
capital investment required, decreased Virginia Power volumes of low level
radioactive waste resulting from improvements in station procedures and the
availability of more economical offsite processing.
As a regulated utility, Virginia Power provides service to its customers at
rates based on its cost of operations and an opportunity to earn a return on its
shareholder's investment. From time to time, Virginia Power reviews its cost of
providing regulated services and files such information with certain regulatory
commissions having jurisdiction. Virginia Power or the regulatory commissions
may initiate proceedings to review rates charged to Virginia Power
jurisdictional customers. The incurrence of restructuring charges and the
savings resulting therefrom in subsequent periods are elements of Virginia
Power's cost of operations. Accordingly, Vision 2000 costs and related savings
will be considered in any future review of Virginia Power's overall regulatory
cost of service.
(xvi) Commitments and Contingencies
As the result of issues generated in the course of daily business, the company
is involved in legal, tax and regulatory proceedings before various courts,
regulatory commissions and governmental agencies. While some of the proceedings
involve substantial amounts of money, management believes that the final
disposition of these proceedings will not have an adverse material effect on
operations or the financial position of the company.
Virginia Power
Federal Energy Regulatory Commission Audit
The Federal Energy Regulatory Commission (FERC) has recently conducted a
compliance audit of Virginia Power's financial statements for the years 1990 to
1994. Virginia Power has received a preliminary draft of the audit report in
which certain compliance exceptions were noted. Virginia Power has supplied
information to the FERC staff relating to these preliminary exceptions, but no
final audit report has been issued. Based on information available at this time,
the disposition of these issues is not expected to have a significant effect on
Virginia Power's financial position or results of operations.
Construction Programme
Virginia Power has made substantial commitments in connection with its
construction programme and nuclear fuel expenditures, which are estimated to
total $569.3 million (excluding AFC) for 1996. Additional financing is
contemplated in connection with this programme.
54
<PAGE>
Purchased Power Contracts
Since 1984, Virginia Power has entered into contracts for the long-term purchase
of capacity and energy from other utilities, qualifying facilities and
independent power producers. As of 31 December 1995, there were 67 non-utility
generating facilities under contract to provide Virginia Power 3,493 megawatts
of dependable summer capacity. Of these, 66 projects (aggregating 3,295
megawatts) were operational at the end of 1995, with the remaining project to
become operational before 1998. The following table shows the minimum payments
expected to be made under these contracts. The totals include payments for
capacity, which are subject to generating performance as provided by the
contracts, and payments for the minimum amounts of energy Virginia Power is
obligated to buy and the producers provide.
Commitments
Capacity Other
($ millions) ($ millions)
------------ ------------
1996 738.3 207.4
1997 784.7 213.2
1998 788.8 219.8
1999 791.6 224.2
2000 707.4 163.6
After 2000 11,106.3 1,200.9
-------- -------
Total 14,917.1 2,229.1
======== =======
Present value of the total 6,860.7 1,243.4
======== =======
In addition to the commitments listed above, under some contracts, Virginia
Power may purchase, at its option, additional power as needed. Payments for
purchased power (including economy, emergency, limited-term, short-term and
long-term purchases) for the years 1995, 1994 and 1993 were $1,093 million,
$1,025 million and $958 million, respectively.
Fuel Purchase Commitments
Virginia Power's estimated fuel purchase commitments for the next five years for
system generation are as follows: 1996-$348 million; 1997-$319 million;
1998-$205 million; 1999-$137 million; and 2000-$151 million.
Environmental Matters
Environmental costs have been historically recovered through the ratemaking
process; however, should material costs be incurred and not recovered through
rates, Virginia Power's results of operations and financial condition could be
adversely impacted.
The Environmental Protection Agency has identified Virginia Power and several
other entities as Potentially Responsible Parties (PRPs) at two Superfund sites
located in Kentucky and Pennsylvania. The estimated future remediation costs for
the sites are in the range of $46.5 million to $134.6 million. Virginia Power's
proportionate share of the costs is expected to be in the range of $0.5 million
to $6.7 million, based upon allocation formulas and the volume of waste shipped
to the sites. As of 31 December 1995, Virginia Power accrued a reserve of $1.4
million to meet its obligations at these two sites.
Based on a financial assessment of the PRPs involved at these sites, Virginia
Power has determined that it is probable that the PRPs will fully pay the costs
apportioned to them.
Virginia Power and Dominion Resources along with Consolidated Natural Gas have
remedial action responsibilities remaining at two coal tar sites. Virginia Power
and Dominion Resources have accrued a $2 million reserve to meet their estimated
liability based on site studies and investigations performed at these sites. In
addition, on 13 December 1995, a civil action was instituted against the City of
Norfolk and Virginia Power by a landowner who alleges that his property has been
contaminated by toxic pollutants originating from one of these sites, which is
now owned by the City of Norfolk. The plaintiff seeks compensatory damages of
$10 million and punitive damages of $5 million from Virginia Power. The Company
filed its answer denying liability on 10 January 1996.
55
<PAGE>
Virginia Power generally seeks to recover its costs associated with
environmental remediation from third party insurers. At 31 December 1995 pending
claims were not recognised as an asset or offset against recorded obligations.
Nuclear Insurance
The Price-Anderson Act limits the public liability of an owner of a nuclear
power plant to $8.9 billion for a single nuclear incident. The Price Anderson
Amendments Act of 1988 allows for an inflationary provision adjustment every
five years. Virginia Power has purchased $200 million of coverage from
commercial insurance pools with the remainder provided through a mandatory
industry risk-sharing programme. In the event of a nuclear incident at any
licensed nuclear reactor in the United States, Virginia Power could be assessed
up to $81.7 million (including a 3% insurance premium tax for Virginia, for each
of its four licensed reactors not to exceed $10.3 million (including a 3%
insurance premium tax for Virginia) per year per reactor. There is no limit to
the number of incidents for which this retrospective premium can be assessed.
Nuclear liability coverage for claims made by nuclear workers first hired on or
after 1 January 1988, except those arising out of an extraordinary nuclear
occurrence, is provided under the Master Worker insurance programme. (Those
first hired into the nuclear industry prior to 1 January 1988 are covered by the
policy discussed above.) The aggregate limit of coverage for the industry is
$400 million ($200 million policy limit with automatic reinstatement of an
additional $200 million).
Virginia Power's maximum retrospective assessment is approximately $12.5 million
(including a 3% insurance premium tax for Virginia).
Virginia Power's current level of property insurance coverage ($2.55 billion for
North Anna and $2.4billion for Surry) exceeds the NRC's minimum requirement for
nuclear power plant licensees of $1.06billion per reactor site, and includes
coverage for premature decommissioning and functional total loss. The NRC
requires that the proceeds from this insurance be used first to return the
reactor to and maintain it in a safe and stable condition, and second to
decontaminate the reactor and station site in accordance with a plan approved by
the NRC. Virginia Power's nuclear property insurance is provided by Nuclear
Mutual Limited (NML) and Nuclear Electric Insurance Limited (NEIL), two mutual
insurance companies, and is subject to retrospective premium assessments in any
policy year in which losses exceed the funds available to these insurance
companies. The maximum assessment at the first incident of the current policy
period is $42.7 million. The maximum assessment related to a second incident is
an additional $15.4 million. Based on the severity of the incident, the boards
of directors of Virginia Power's nuclear insurers have the discretion to lower
the maximum retrospective premium assessment or eliminate either or both
completely. For any losses that exceed the limits, or for which insurance
proceeds are not available because they must first be used for stabilisation and
decontamination. Virginia Power has the financial responsibility.
Virginia Power purchases insurance from NEIL to cover the cost of replacement
power during the prolonged outage of a nuclear unit due to direct physical
damage of the unit. Under this programme, Virginia Power is subject to a
retrospective premium assessment for any policy year in which losses exceed
funds available to NEIL. The current policy period's maximum assesssment is $9
million.
As a joint owner of the North Anna Power Station, ODEC is responsible for its
proportionate share (11.6%) of the insurance premiums applicable to that
station, including any retrospective premium assessments and any losses not
covered by insurance.
Dominion Resources
Under the terms of an investment agreement, Dominion Resources must provide
contingent equity support to Dominion Energy in the amount of $56.5 million.
Management believes the possibility of such support to Dominion Energy is
remote.
Dominion Energy
Dominion Energy has general partnership interests in certain of its energy
ventures. Accordingly, Dominion Energy may be called upon to fund future
operation of these investments to the extent operating cash flow is
insufficient.
56
<PAGE>
4. Third Quarter Results
Set out below are extracts from the text of the unaudited third-quarter results
for Dominion for the period ended 30 September.
(a) Consolidated statements of income (unaudited)
<TABLE>
<CAPTION>
Nine months ended
30 September
1996 1995
($ millions) ($ millions)
------------ ------------
<S> <C>
Operating revenues and income:
Electric utility 3,371.0 3,324.0
Nonutility 276.0 193.1
------- -------
Total operating revenues and income 3,647.0 3,517.1
------- -------
Operating expenses:
Fuel, net 745.4 769.8
Purchased power capacity, net 539.0 518.2
Other operations 556.1 507.9
Maintainence 187.0 202.6
Restructuring 29.2 36.6
Depreciation and amortisation 456.7 407.2
Other taxes 217.3 207.0
------- -------
Total operating expenses 2,730.7 2,649.3
------- -------
Operating income 916.3 867.8
Other income 8.4 8.7
------- -------
Income before fixed charges and federal income taxes 924.7 876.5
------- -------
Fixed charges:
Interest charges, net 293.5 287.4
Preferred dividends of Virginia Power 26.7 34.9
Preferred distribution of Virginia Power affiliate, net 5.3 -
------- -------
Total fixed charges 325.5 322.3
------- -------
Income before provision for federal income taxes 599.2 554.2
Provision for federal income taxes 192.6 169.7
------- -------
Net income 406.6 384.5
======= =======
Common Stock Data:
Average number of shares of common stock outstanding (in millions) 177.6 173.2
Earnings per common share $2.29 $2.22
Dividends paid per common share $1.935 $1.935
</TABLE>
57
<PAGE>
(b) Consolidated balance sheet (unaudited)
At 30 September 1996
($ millions)
--------------
Assets
Current assets:
Cash and cash equivalents 56.0
Trading securities 23.2
Customer accounts receivable, net 366.0
Other accounts receivable 125.2
Accrued unbilled revenues 154.2
Accrued taxes 20.4
Materials and supplies:
Plant and general 148.9
Fossil fuel 70.6
Mortgage loans in warehouse 228.1
Other 162.4
--------
1,355.0
--------
Investments 1,487.5
--------
Property, plant and equipment: 16,763.0
Less accumulated depreciation and amortisation 6,230.1
--------
10,532.9
--------
Deferred charges and other assets:
Regulatory assets 688.9
Other 431.4
--------
1,120.3
--------
Total assets 14,495.7
========
58
<PAGE>
At 30 September 1996
($ millions)
--------------
Liabilities and shareholders' equity
Current liabilities:
Securities due within one year 394.4
Short-term debt 193.9
Accounts payable, trade 351.7
Accrued payroll 98.2
Accrued interest 102.7
Accrued taxes 81.5
Severance costs accrued 24.7
Other 134.8
--------
1,381.9
--------
Long-term debt:
Utility 3,581.1
Nonrecourse - nonutility 1,067.7
Other 271.5
--------
4,920.3
--------
Deferred credits and other liabilities:
Deferred income taxes 1,711.0
Investment tax credits 259.5
Deferred fuel expenses 11.8
Other 477.7
--------
2,460.0
--------
Total liabilities 8,762.2
--------
Commitments and contingencies
Virginia Power obligated mandatorily redeemable
preferred securities of subsidiary trust 135.0
--------
Preferred stock:
Virginia Power stock subject to mandatory redemption 180.0
--------
Virginia Power stock not subject to mandatory redemption 509.0
--------
Common shareholders' equity:
Common stock-no par 3,412.7
Retained earnings 1,487.8
Allowance on available-for-sale securities (8.1)
Other 17.1
--------
4,909.5
--------
Total liabilities and shareholders' equity 14,495.7
========
59
<PAGE>
(c) Consolidated statement of cash flows (unaudited)
Nine months ended
30 September 1996
($ millions)
-----------------
Cash flows from (used in) operating activities:
Net income 406.6
Adjustments to reconcile net income to net cash:
Depreciation, depletion and amortisation 521.1
Deferred income taxes 60.4
Investment tax credits, net (12.8)
Allowance for other funds used during construction (2.6)
Deferred fuel expenses (45.9)
Deferred capacity expenses 14.8
Non-cash return on terminated construction projects (5.0)
Changes in assets and liabilities:
Accounts receivable (7.1)
Accrued unbilled revenues 25.7
Materials and supplies 12.0
Accounts payable, trade 7.6
Accrued interest and taxes 56.9
Mortgage loans in warehouse (228.1)
Other changes (94.5)
------
Net cash flows from operating activities 709.1
------
Cash flows from (used in) financing activites:
Issuance of common stock 122.9
Issuance of long-term debt:
Utility 24.5
Nonrecourse-nonutility 552.3
Repayment of short-term debt, net (41.9)
Repayment of long-term debt and preferred stock (283.0)
Common dividend payments (343.8)
Other (19.5)
------
Net cash flows from financing activities 11.5
------
Cash flows from (used in) investing activities:
Capital expenditures (excluding AFC-equity funds) (511.4)
Investments in marketable securities (8.1)
Other (211.8)
------
Net cash flows used in investing activities (731.3)
------
Decrease in cash and cash equivalents (10.7)
Cash and cash equivalents at beginning of period 66.7
------
Cash and cash equivalents at end of period 56.0
======
5. Material Changes
Save as disclosed in paragraph 4 of this Appendix 3 there has been no material
change in the financial or trading position of the Dominion Resources Group
since 31 December 1995, the date to which the latest published audited financial
statements of Dominion Resources were prepared.
60
<PAGE>
APPENDIX 4
FINANCIAL AND OTHER INFORMATION RELATING TO
EAST MIDLANDS ELECTRICITY
Nature of financial information
The financial information contained in this Appendix 4 is extracted from
the audited consolidated accounts of East Midlands Electricity for the years
ended 31 March 1994, 1995 and 1996, as appropriate. The split of turnover and
operating profit between continuing and discontinued businesses has not been
shown on the basis that it is not material to the overall understanding of the
financial information.
1. Directors of East Midlands Electricity
Sir Nigel Rudd (Chairman)*
Norman Askew (Chief Executive)
Nicholas Corah (Deputy Chairman)*
Chris Boon
Gareth Cooper*
Bob Davies
Jim Keohane
Alan Schroeder*
Keith Stanyard
David Thompson*
* Non-executive director
61
<PAGE>
2. Financial Statements
(a) Consolidated profit and loss accounts
<TABLE>
<CAPTION>
Years ended 31 March 1996 1995 1994
Excluding
Total NGG NGG
((pound) ((pound) ((pound) ((pound) ((pound)
millions) millions) millions) millions) millions)
--------- --------- --------- --------- ---------
<S> <C>
Turnover 1,194.5 (105.3) 1,299.8 1,369.0 1,444.5
======= ======= ======= ======= =======
Operating profit
Operating profit excluding exceptional
core business restructuring costs 106.9 (102.2) 209.1 199.4 182.8
Exceptional core business
restructuring costs (21.2) - (21.2) - -
Utilisation of fundamental
restructuring provisions 0.7 - 0.7 8.5 -
------- ------- ------- ------- -------
Total operating profit (loss) 86.4 (102.2) 188.6 207.9 182.8
------- ------- ------- ------- -------
Exceptional items
Losses incurred in connection
with discontinued operations (4.0) - (4.0) (4.6) -
Utilisation of fundamental
restructuring provisions 4.0 - 4.0 4.6 -
------- ------- ------- ------- -------
Fundamental restructuring charges - - - (12.0) (129.5)
Release of fundamental restructuring provisions 11.4 - 11.4 12.4 -
Surplus on disposal of discontinued operations 20.0 - 20.0 - -
------- ------- ------- ------- -------
Total exceptional items 31.4 - 31.4 0.4 (129.5)
------- ------- ------- ------- -------
Share of profits (losses) of associated
undertakings 2.6 - 2.6 (0.9) (2.2)
Dividends from The National Grid Group plc (NGG) 175.5 175.5 - 17.0 15.8
Other income from fixed asset investments 1.5 - 1.5 - -
------- ------- ------- ------- -------
Profit on ordinary activities before interest
and taxation 297.4 73.3 224.1 224.4 66.9
Net interest payable (9.9) - (9.9) (10.4) (15.7)
------- ------- ------- ------- -------
Profit on ordinary activities before taxation 287.5 73.3 214.2 214.0 51.2
Tax on profit on ordinary activities (49.8) 14.0 (63.8) (49.3) (23.5)
------- ------- ------- ------- -------
Profit for the financial year 237.7 87.3 150.4 164.7 27.7
Dividends
Ordinary dividends (62.3) - (62.3) (56.0) (49.7)
Special dividend (238.6) - (238.6) (186.5) -
Distribution of NGG shares (292.5) (292.5) - - -
------- ------- ------- ------- -------
Total dividends (593.4) (292.5) (300.9) (242.5) (49.7)
------- ------- ------- ------- -------
Transferred from reserves (355.7) (205.2) (150.5) (77.8) (22.0)
======= ======= ======= ======= =======
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Years ended 31 March 1996 1995 1994
Excluding
Total NGG NGG
(Pence per (Pence per (Pence per (Pence per (Pence per
share) share) share) share) share)
---------- ---------- ---------- ---------- ----------
<S> <C>
Earnings per share
Earnings per share, before exceptional items 78.7 - 78.7 71.8 58.0
Earnings per share relating to NGG,
after tax 45.0 45.0 - 6.5 5.7
Other exceptional items, after tax 12.3 - 12.3 0.2 (51.0)
------ ------ ------ ------ ------
Earnings per share - nil basis 136.0 45.0 91.0 78.5 12.7
Advance corporation tax written off (13.4) - (13.4) - -
------ ------ ------ ------ ------
Earnings per share - net basis 122.6 45.0 77.6 78.5 12.7
====== ====== ====== ====== ======
</TABLE>
(b) Statement of total recognised gains and losses
<TABLE>
<CAPTION>
Years ended 31 March 1996 1995 1994
Excluding
Total NGG NGG
((pound) ((pound) ((pound) ((pound) ((pound)
millions) millions) millions) millions) millions)
---------- ---------- ---------- ---------- ----------
<S> <C>
Profit for the financial year 237.7 87.3 150.4 164.7 27.7
Surplus on revaluation of
investment in NGG 212.9 212.9 - - -
Capital gains tax (49.1) (49.1) - - -
------ ------ ------ ------ ------
Total recognised gains
and losses 401.5 251.1 150.4 164.7 27.7
====== ====== ====== ====== ======
</TABLE>
The investment in NGG was revalued as at 1 October 1995 and the surplus arising
was subsequently realised on the distribution and listing of NGG in December
1995.
(c) Reconciliation of movements in equity shareholders' funds
<TABLE>
<CAPTION>
Years ended 31 March 1996
Excluding
Total NGG NGG
((pound) ((pound) ((pound)
millions) millions) millions)
---------- ---------- ----------
<S> <C>
Profit for the financial year 237.7 87.3 150.4
Ordinary dividends (62.3) - (62.3)
Special dividend (238.6) - (238.6)
Distribution of NGG shares (292.5) (292.5) -
------- ------- -------
(355.7) (205.2) (150.5)
Surplus on revaluation of investment
in NGG 212.9 212.9 -
Capital gains tax (49.1) (49.1) -
Proceeds from shares issued during
the year 10.8 - 10.8
------- ------- -------
Net reduction in equity
shareholders' funds (181.1) (41.4) (139.7)
======= =======
Equity shareholders' funds at
1 April 1995 572.5
-------
Equity shareholders' funds at
31 March 1996 391.4
=======
</TABLE>
Equity shareholders' funds comprise called up share capital and reserves.
63
<PAGE>
(d) Consolidated balance sheet
At
31 March
1996
((pound)
millions)
---------
Fixed assets
Tangible assets 765.7
Investments 18.2
-------
783.9
Current assets
Stocks 7.6
Debtors - due within one year 127.5
- due after more than one year 18.8
Current asset investments 109.2
Cash at bank and in hand 8.2
-------
271.3
Creditors: amounts falling due within one year (346.8)
-------
Net current liabilities (75.5)
-------
Total assets less current liabilities 708.4
Creditors: amounts falling due
after more than one year (253.0)
Provisions for liabilities and charges (64.0)
-------
Net assets 391.4
=======
Capital and reserves
Called up share capital 112.7
Share premium account 11.0
Capital redemption reserve 0.1
Profit and loss account 267.6
-------
Equity shareholders' funds 391.4
=======
64
<PAGE>
(e) Consolidated statement of cash flows
<TABLE>
<CAPTION>
Years ended 31 March 1996
Excluding
Total NGG NGG
((pound) ((pound) ((pound)
millions) millions) millions)
--------- --------- ---------
<S> <C>
Net cash inflow (outflow) from operating activities 185.7 (68.6) 254.3
Returns on investments and servicing of finance
Interest received 10.4 - 10.4
Interest paid (19.7) - (19.7)
Dividends received from NGG 113.7 113.7 -
Distribution from PSB Holding Limited 48.0 48.0 -
Dividends and other income received from
other fixed asset investments 0.7 - 0.7
Special dividends paid (239.7) - (239.7)
Other dividends paid (58.3) - (58.3)
------- ------- -------
Net cash (outflow) inflow from returns
on investments and servicing of finance (144.9) 161.7 (306.6)
Taxation
ACT on distribution of NGG shares (53.4) (53.4) -
Other corporation tax paid (0.2) - (0.2)
------- ------- -------
Tax paid (53.6) (53.4) (0.2)
Investing activities
Purchase of tangible fixed assets (104.5) - (104.5)
Customers' contributions to tangible fixed assets 25.0 - 25.0
Sale of tangible fixed assets 3.0 - 3.0
Purchase of shares in NGG (14.4) (14.4) -
Investment in own shares (10.3) - (10.3)
Options exercised through ESOP 8.3 - 8.3
Disposal of businesses 38.3 - 38.3
Net redemption of other fixed asset investments 0.1 - 0.1
Purchase of current asset investments (1.8) - (1.8)
------- ------- -------
Net cash outflow from investing activities (56.3) (14.4) (41.9)
------- ------- -------
Net cash (outflow) inflow before financing (69.1) 25.3 (94.4)
Financing
Proceeds from shares issued during the year 10.8 - 10.8
Issue of Eurobonds 100.0 - 100.0
Net cash outflow from bank and other loans (46.2) - (46.2)
------- ------- -------
Net cash inflow from financing 64.6 - 64.6
------- ------- -------
(Decrease) increase in cash and cash equivalents (4.5) 25.3 (29.8)
======= ======= =======
</TABLE>
65
<PAGE>
(f) Accounting policies
Basis of preparation
The financial statements have been prepared under the historical cost
convention, as modified by the valuation of certain fixed assets. The
consolidated financial statements incorporate the results of the company and all
its subsidiary and associated undertakings.
Accounting for acquisitions, disposals and goodwill
The results of companies and businesses acquired are dealt with in the group
accounts from the date of acquisition. Adjustments are made on acquisition to
restate the reported net assets acquired to their fair value to the group.
Purchased goodwill, being the excess of the acquisition cost over the fair value
of the assets acquired, is written off to reserves at the time of acquisition. A
business which is sold or closed is classified as discontinued if its sale or
closure has a material effect on the nature and focus of the group's operations,
represents a material reduction in the group's operating facilities, and is
completed prior to the date of approval of the financial statements. Goodwill
which has suffered a permanent diminution in value or which relates to a
discontinued business is reinstated in the balance sheet from reserves and then
written off through the profit and loss account.
Turnover
Electricity turnover represents the value of electricity supplied and
charges for electricity distributed during the year, exclusive of value added
tax, including estimates of the sales value of units supplied and charges for
electricity distributed to consumers between the date of the last meter reading
and the year end.
Where there is an over recovery of distribution or supply business revenues
against the regulated maximum allowable amount, revenues are deferred equivalent
to the over recovered amount. The deferred amount is deducted from turnover and
included in creditors within accruals and deferred income. Where there is an
under recovery, no anticipation of any future recovery is made.
Other turnover represents the sale value of contract work performed in
the year and the invoice value of other goods sold and services provided,
exclusive of value added tax.
Credit sales charges are apportioned over the period of the sales agreements.
Research and development
Expenditure on research and development is written off to the profit and loss
account in the year in which it is incurred.
Contributions to pension funds
Pension costs are calculated as a substantially level percentage of pensionable
salary and are charged to the profit and loss account so as to spread the cost
of pensions over employees' working lives with the group.
Investments
In the consolidated accounts, shares in associated undertakings are accounted
for using the equity method of accounting. The consolidated profit and loss
account includes the group's share of the pre-tax results and attributable
taxation of the associated undertakings. In the consolidated balance sheet, the
shares in associated undertakings are shown at the group's share of their net
assets, less provisions.
Other fixed asset investments are stated at cost less provisions for permanent
diminution in value. Current asset investments are stated at the lower of cost
and net realisable value.
Leases
Rental costs under operating leases are charged to the profit and loss account
in the period in which they are incurred.
66
<PAGE>
Tangible fixed assets
Tangible fixed assets, other than investment properties, are stated at cost less
depreciation and customers' contributions where applicable. Cost includes
attributable labour and overheads. The charge for depreciation is calculated to
write off these assets over their estimated useful lives. Provision is made for
permanent diminution in value where such diminution occurs. The lives of each
major class of depreciable asset are as follows:
Distribution network assets - 40 years
Depreciation is charged at 3 per cent. for 20 years, followed by 2 per
cent. for the remaining 20 years. Customers' contributions are credited
to the profit and loss account over a 40 year period at a rate of 3 per
cent. for the first 20 years, followed by 2 per cent. for the remaining
20 years.
Other assets
Buildings - freehold - Up to 60 years
- leasehold - Lower of lease period or 60 years
Plant, machinery, fixtures
and equipment - Up to 10 years
Vehicles and mobile plant - Up to 10 years
No depreciation is charged on land or assets in the course of
construction.
Investment properties
In accordance with Statement of Standard Accounting Practice No. 19,
investment properties are revalued annually and the aggregate surplus or
deficit is transferred to revaluation reserve.
The Companies Act 1985 requires all properties to be depreciated.
However, this requirement conflicts with the generally accepted
accounting principle set out in SSAP19. By the adoption of SSAP19 the
investment properties have not been depreciated, but in the opinion of
the directors this is not material to the financial statements and
therefore does not have any effect on the true and fair view.
Property clawback
HM Government is entitled to a proportion of any gain realised by the
company on certain property disposals made up to 31 March 2000. Full
provision for clawback liabilities is made as soon as any disposal
decision is taken.
Employee Share Ownership Plan (ESOP)
The consolidated accounts include the accounts of the East Midlands Electricity
ESOP. Shares held by the ESOP are included in fixed asset investments at their
issue price.
Stocks
Stocks are valued at the lower of cost and net realisable value. The valuation
of work in progress is based on the cost of labour plus appropriate production
overheads and the cost of materials.
Deferred taxation
Deferred taxation arises in respect of items where there is a timing difference
between their treatment for accounting purposes and their treatment for taxation
purposes. Provision for deferred taxation, using the liability method, is made
to the extent that it is probable that the liability or asset will crystallise
in the foreseeable future.
Restructuring
Provision is made when the group becomes demonstrably committed to a
restructuring programme.
67
<PAGE>
(g) Exceptional items
Years ended 31 March
1996 1995 1994
((pound) ((pound) ((pound)
millions) millions) millions)
--------- --------- ---------
Fundamental restructuring charges
Goodwill - - (31.5)
Provisions for future costs - (5.2) (49.5)
Permanent diminution in value of
assets - (6.8) (48.5)
------- ------- -------
- (12.0) (129.5)
======= ======= =======
<TABLE>
<CAPTION>
1996 1996 1995 1995 1994
((pound) ((pound) ((pound) ((pound) ((pound)
millions) millions) millions) millions) millions)
--------- --------- --------- --------- ---------
<S> <C>
Movement in fundamental
restructuring provisions
Operating losses charged 0.7 8.5 -
Utilisation of provisions
in connection with
discontinued activities
emco 2.7 3.1
Homepower 1.3 4.0 1.5 4.6 -
----- -----
Release of provisions no longer required 11.4 12.4 -
------ ----- ------
Total movement in fundamental
restructuring provisions 16.1 25.5 -
====== ===== ======
</TABLE>
Year ended 31 March 1996
Exceptional core business restructuring costs in 1996 were in respect of the
implementation of the restructuring announced in November 1995 and the changes
required in anticipation of the extension of competition in 1998.
The programme to dispose of non-core businesses was completed during the year
ended 31 March 1996 with the sale of Ambassador Security Group plc on 30 June
1995 and of the trade and assets of Furse Specialist Contracting (formerly emco
Furse) on 1 July 1995 and on 6 December 1995 of W J Furse & Co Limited.
Group operating profit is stated after utilising provisions of (pound)0.4
million in respect of operating losses of Ambassador Security Group plc and
(pound)0.3 million in respect of operating losses of discontinued emco
divisions. The surpluses of (pound)8.0 million on disposal of Ambassador
Security Group plc and (pound)12.0 million from W J Furse & Co Limited were
credited to the profit and loss account. In addition closure costs of (pound)4.0
million incurred in the period in respect of discontinued operations were
charged directly to provisions.
The taxation credit relating to the non-operating exceptional items amounted to
(pound)8.7 million.
68
<PAGE>
Year ended 31 March 1995
During the year ended 31 March 1995 the North, North West and South divisions of
the emco contracting business were closed and the emco Boulting division was
sold. Net losses relating to the emco divisions discontinued amounting to
(pound)11.6 million were charged to provisions, including (pound)8.5 million of
operating losses and (pound)3.1 million of other losses. After retaining full
provision for future liabilities a net amount of (pound)12.4 million was
released to the profit and loss account.
On 22 February 1995 the company announced the sale of the trade and assets of
its electrical retailing and appliance servicing joint venture, Homepower Retail
Limited, to PowerStore Trading Limited. The sale was completed on 7 May 1995.
The company's share of the costs of withdrawal was (pound)30.2 million,
(pound)18.2 million of which was covered by the provision for permanent
diminution in the value of Homepower related assets at 31 March 1994. The
balance of (pound)12.0 million was charged to the profit and loss account,
(pound)1.5 million of this was expended before the year end.
Year ended 31 March 1994
On 10 May 1994 the company announced a fundamental realignment of its business,
following a thorough review of all the non-core business activities.
Restructuring charges of (pound)129.5 million resulted from this review.
(h) The National Grid Group plc (NGG)
At an Extraordinary General Meeting held on 8 December 1995 shareholders
approved the distribution in specie of the company's interest in NGG, the
holding company of The National Grid Company plc, which owns and operates the
high voltage electricity transmission system in England and Wales.
The major transactions associated with the distribution were as follows:
- each East Midlands Electricity shareholder received 0.713 NGG shares for
each East Midlands Electricity share they held on 8 December 1995, rounded
down to the nearest whole number of shares;
- each East Midlands Electricity domestic customer received a one-off discount
of (pound)54.60 (including VAT credit) during the early part of 1996;
- the company received a number of one-off dividends from NGG as part of its
capital reorganisation prior to flotation, including a specie dividend of
approximately 8.37% of the shares of PSB Holding Limited, the holding
company of First Hydro Limited, which owned and operated two pumped storage
power stations in Wales;
- the company reinvested (pound)14.4 million of the above dividends to take up
its entitlement under a rights issue made by NGG;
- the company received an interim dividend from NGG of (pound)7.3 million
(including associated tax credit).
Subsequent to the distribution, First Hydro Limited was sold by PSB Holding
Limited and PSB Holding Limited entered into a members' voluntary liquidation.
An initial distribution of (pound)48.0 million was paid by the liquidator on 4
March 1996 and a further (pound)3.2 million was included in current asset
investments.
69
<PAGE>
(h) The National Grid Group plc (NGG) (continued)
The financial effects of these transactions on East Midlands Electricity are
summarised below:
<TABLE>
<CAPTION>
Statement of
recognised
gains and Net reserve
Profit and loss account losses movement
((pound) ((pound) ((pound) ((pound)
Year ended 31 March 1996 millions) millions) millions) millions)
--------- --------- --------- ---------
<S> <C>
Turnover rebate (105.3)
Cost of sales adjustment due to
effect of rebate on fossil fuel levy 9.6 (95.7)
-------
Transaction costs (6.5)
-------
Net charge to operating results (102.2)
Dividends received from NGG
Specie dividend of shares in PSB Holding
Limited 51.2
Interim dividend 7.3
Other dividends 117.0 175.5
-------
Tax relief on operating items 33.7
Tax credits on franked dividends received (19.7) 14.0
------- -------
Profit for the financial year 87.3 87.3 87.3
Revaluation of shareholding in
NGG to flotation value - 212.9 212.9
Capital gains tax, before offset of
available capital losses - (49.1) (49.1)
Distribution to shareholders of NGG (292.5) - (292.5)
------- ------- -------
Total (205.2) 251.1 (41.4)
======= ======= =======
</TABLE>
Prior to the distribution the company's shareholding in NGG comprised
141,473,684 ordinary shares of 10p each. This holding was revalued, as at 1
October 1995, at (pound)2.07 per share, being the share price on the opening day
of trading, 11 December 1995. The distribution to shareholders comprised
141,316,883 shares in NGG, and the remaining 156,801 shares were retained. A
further 128,424 shares in NGG were held by the ESOP.
Net cash receipts arising from transactions associated with NGG in the year
comprised (pound)9.1 million received in respect of the final dividend for 1995,
and (pound)16.2 million in respect of transactions associated with the
distribution.
70
<PAGE>
(i) Tax on profit on ordinary activities
<TABLE>
<CAPTION>
Years ended 31 March 1996 1995 1994
Excluding
Total NGG NGG
((pound) ((pound) ((pound) ((pound) ((pound)
millions) millions) millions) millions) millions)
-------- -------- -------- -------- --------
<S> <C>
The group taxation charge comprises
UK corporation tax at 33% (1995: 33%, 1994: 33%) 52.3 15.4 36.9 52.9 50.5
Tax credits on franked investment income 19.7 19.7 - 3.4 3.3
Deferred taxation 6.0 - 6.0 12.5 (22.5)
Associated undertakings 0.1 - 0.1 - 0.2
Adjustment to taxation in respect
of prior year profits (5.2) - (5.2) (19.5) (8.0)
Advance corporation tax written off 26.0 - 26.0 - -
----- ----- ----- ----- -----
Total taxation charge for the year 98.9 35.1 63.8 49.3 23.5
===== ===== ===== ===== =====
Charged (credited) to profit and loss account 49.8 (14.0) 63.8 49.3 23.5
Statement of recognised gains and losses 49.1 49.1 - - -
----- ----- ----- ----- -----
Total taxation charge for the year 98.9 35.1 63.8 49.3 23.5
===== ===== ===== ===== =====
</TABLE>
The tax charge for 1996 included the gain on the NGG distribution. It has been
decreased principally by the tax effect of net timing differences for which no
deferred tax has been recognised and the benefit of capital losses that have
crystallised in 1996.
Advance corporation tax, in respect of the special dividend, was written off to
the extent that the directors did not anticipate its recovery against taxable
profits prior to 31 March 1997.
In 1995 the taxation charge for the year reflected the tax effect ((pound)10.9
million) of an excess of tax allowances over depreciation for which no deferred
taxation was provided. The movement in the deferred tax asset related to the
release of the asset recognised in respect of the fundamental restructuring
costs provided for in 1994 ((pound)8.0 million) and to the adjustment
((pound)4.5 million) in respect of prior year profits.
In 1994 a deferred tax asset was set up primarily to recognise the effect of tax
on the exceptional restructuring costs.
(j) Dividends
<TABLE>
<CAPTION>
Years ended 31 March
1996 1995 1994
((pound) ((pound) ((pound)
millions) millions) millions)
---------- ---------- ----------
<S> <C>
Interim paid 9.2p (1995: 8.6p) per 569p share
(1994: 6.8p per 50p share) 17.8 16.6 14.8
Final proposed 22.4p (1995: 20.4p)
per 569p share (1994: 15.9p per 50p share) 44.5 39.4 34.9
Special dividend 120.0p per 569p share
(1995: 85.0p per 50p share) 238.6 186.5 -
Specie dividend of shares in NGG 292.5 - -
------- ------ ------
593.4 242.5 49.7
======= ====== ======
</TABLE>
71
<PAGE>
Share capital consolidation
At an Extraordinary General Meeting held on 18 November 1994 shareholders
approved the payment of a special dividend of (pound)186.5 million, being 85p
(net) on each 50p ordinary share (106.25p on each ordinary share including
associated tax credit) and a consolidation of the company's share capital by the
issue of 22 new ordinary shares of 569p each in place of every 25 ordinary
shares of 50p previously held. These changes took effect on 24 November 1994.
(k) Earnings per share
The calculation of earnings per share, on the net basis, is based on earnings of
(pound)237.7 million (1995: (pound)164.7 million, 1994: (pound)27.7 million) and
a weighted average of 193.9 million (1995: 209.9 million, 1994: 218.6 million)
ordinary shares in issue and ranking for dividend during the year. In
calculating the weighted average number of ordinary shares in issue, shares held
under the Employee Share Ownership Plan (ESOP) established on 4 July 1995 have
been excluded as the rights to ordinary dividends on these shares have been
waived by the ESOP Trustee.
In 1996, earnings per share, on the nil basis, is calculated on earnings of
(pound)263.7m. This excludes the advance corporation tax written off.
Earnings per share before exceptional items is stated in order to indicate the
effects, in the respective periods, of core business restructuring, transactions
relating to NGG, and other exceptional items.
(l) Tangible fixed assets
<TABLE>
<CAPTION>
Plant,
machinery, Less:
Distribution Land and fixtures & Vehicles & customers'
network buildings equipment mobile plant contributions Total
((pound) ((pound) ((pound) ((pound) ((pound) ((pound)
millions) millions) millions) millions) millions) millions)
---------- ---------- ---------- ---------- ---------- ----------
<S> <C>
Net book value
At 31 March 1996 884.2 40.5 48.9 10.8 218.7 765.7
======== ======= ======= ======= ====== ======
</TABLE>
(m) Fixed asset investments
The principal fixed asset investment was a 40% holding in the ordinary share
capital of Corby Power Limited (CPL), which owns a 350MW gas fired power station
which became operational in March 1994. The other shareholders in CPL are
Electricity Supply Board International Consultants Limited, a subsidiary of
Electricity Supply Board of Ireland (20%), and Hawker Siddeley Power (Corby)
Limited, a subsidiary of BTR plc (40%).
On 30 June 1995, CPL was served with a writ issued by Hawker Siddeley Power
Engineering Limited (HSPE) claiming the sum of (pound)43.7 million. The claim
relates to the repayment of liquidated damages, cost increases, release of
retentions and electricity sold during the commissioning phase of the Corby
power station built under contract by HSPE. The directors have been informed by
the directors of CPL that, having considered the claim and taken legal and
technical advice, the directors of CPL believe that CPL has a good defence to
the claim. Accordingly, no further provision has been made in its latest
accounts, which relate to its financial year ended 30 September 1995. CPL
submitted a defence to the writ to the High Court and legal proceedings have
commenced.
The directors of East Midlands Electricity plc are of the opinion that the
amount at which the investment in CPL is included in the group balance sheet is
appropriate.
At 31 March 1996 Corby Power Limited had non-recourse loan financing liabilities
of (pound)171.4 million. The company has entered into a contract for differences
expiring on 1 October 2008 with Corby Power Limited, covering the purchase of
generated electricity, transactions under which are reflected in these financial
statements.
72
<PAGE>
(n) Borrowings
At
31 March
1996
((pound)
millions))
----------
Eurobonds 2016 150.0
Eurobonds 2006 100.0
Other loans 22.0
Bank overdraft 76.9
----------
348.9
==========
Analysis of repayments
Within one year
Cash equivalents 76.9
Other 22.0
Over five years 250.0
----------
348.9
==========
Eurobonds 2006
On 20 March 1996, the company issued (pound)100 million of unsecured 8.375%
bonds, which are repayable at par on 20 March 2006 unless previously redeemed,
at the company's option, at a market linked premium to issue price. The net
proceeds of the issue were received on 20 March 1996 and have been used for
corporate purposes.
Eurobonds 2016
The 12% Eurobonds, which are unsecured, were issued on 13 March 1991. They are
repayable at par on 25 March 2016, unless previously redeemed, at the company's
option, at a market linked premium to issue price.
At
31 March
1996
((pound)
millions))
----------
Net borrowings
Borrowings 348.9
Money market investments and deposits (106.0)
Cash at bank and in hand (8.2)
----------
234.7
==========
73
<PAGE>
(o) Provisions for liabilities and charges
Restructuring Other Total
((pound) ((pound) ((pound)
millions) millions) millions)
------------- --------- ---------
At 1 April 1995 37.6 19.1 56.7
Applied during the year (7.2) (3.8) (11.0)
Released to profit and loss account (11.7) - (11.7)
Charged to profit and loss account 27.0 3.0 30.0
------ ----- -----
At 31 March 1996 45.7 18.3 64.0
====== ===== =====
(p) Reconciliation of operating profit (loss) to net cash inflow (outflow) from
operating activities
Year ended 31 March 1996
Excluding
Total NGG NGG
((pound) ((pound) ((pound)
millions millions millions
-------- -------- --------
Operating profit (loss) 86.4 (102.2) 188.6
Depreciation charges 44.8 - 44.8
Profit on disposal of
tangible fixed assets* (2.4) - (2.4)
Increase in stocks* (1.3) - (1.3)
Decrease in debtors* 54.5 34.4 20.1
Decrease in creditors* (13.8) (0.8) (13.0)
Increase in provisions* 23.0 - 23.0
-------- -------- --------
Net cash inflow (outflow) from
operating activities before
exceptional costs 191.2 (68.6) 259.8
Net cash outflow relating
to fundamental restructuring (5.5) - (5.5)
-------- -------- --------
Net cash inflow (outflow)
from operating activities 185.7 (68.6) 254.3
======== ======== ========
*Excludes movement related to fundamental restructuring and business disposals.
3. Material changes
So far as the directors of East Midlands Electricity are aware, there has been
no material change in the financial or trading position of East Midlands
Electricity since 31 March 1996, the date to which the latest published accounts
were prepared.
74
<PAGE>
APPENDIX 5
ADDITIONAL INFORMATION
1. Responsibility
The directors of DR Investments, whose names are set out below, accept
responsibility for the information contained in this document, other than that
relating to the East Midlands Electricity Group, the directors of East Midlands
Electricity and members of their immediate families. To the best of the
knowledge and belief of the directors of DR Investments (who have taken all
reasonable care to ensure that such is the case), the information contained
herein for which they are responsible is in accordance with the facts and does
not omit anything likely to affect the import of such information.
The directors of East Midlands Electricity, whose names are listed in Appendix
4, paragraph 1, accept responsibility for the information contained in this
document relating to the East Midlands Electricity Group, the directors of East
Midlands Electricity and members of their immediate families. To the best of the
knowledge and belief of the directors of East Midlands Electricity (who have
taken all reasonable care to ensure that such is the case), such information is
in accordance with the facts and does not omit anything likely to affect the
import of such information.
2. Directors
(a) The directors of DR Investments are:
Thomas E. Capps
Thomas F. Farrell II
Linwood R. Robertson
James L. Trueheart
(b) The directors of East Midlands Electricity are as listed in Appendix 4,
paragraph 1.
3. Holdings and dealings
In this paragraph 3, disclosure period means the period commencing on 6 November
1995 (the date twelve months prior to the commencement of the Offer Period) and
ending on 18 November 1996 (the latest practicable date prior to the publication
of this document).
(a) None of the Offeror or any of the directors of the Offeror, members of their
immediate families and persons deemed to be acting in concert with the
Offeror for the purposes of the Offer owns or controls or (in the case of
the directors of the Offeror) is interested in any East Midlands Electricity
Shares or any securities convertible into, rights to subscribe for, options
(including traded options) or derivatives in respect of East Midlands
Electricity Shares, nor has any such person dealt for value therein during
the disclosure period.
(b) The interests of the directors of East Midlands Electricity and their
immediate families, all of which are beneficial unless otherwise stated, in
the share capital of East Midlands Electricity as at 18 November 1996 (the
latest practicable date prior to the publication of this document), which
have been notified to East Midlands Electricity pursuant to Section 324 or
328 of the Act or which were required to be entered in the register
maintained under the provisions of section 325 of the Act, are set out
below:
Number of
Ordinary
Shares
--------
Norman Askew 3,520
Chris Boon 779
Nicholas Corah 2,657
Jim Keohane 9,748
Keith Stanyard 10,426
David Thompson 271
75
<PAGE>
(c) As at 18 November 1996 (the latest practicable date prior to the publication
of this document), the following options over Ordinary Shares had been
granted to the directors of East Midlands Electricity under the East
Midlands Electricity Share Option Schemes and remained outstanding:
No. of
Ordinary
Exercise Shares
Date of Exercisable price in under
grant from Lapse date pence option
--------- ----------- ---------- -------- --------
Norman Askew 14.12.93 14.12.96 13.12.03 637 44,000
04.04.96 01.06.01 30.11.01 490 3,196*
Chris Boon 14.12.93 14.12.96 13.12.03 637 22,000
04.04.96 01.06.01 30.11.01 490 3,196*
Bob Davies 04.04.96 01.06.01 30.11.01 490 3,196*
Jim Keohane 14.12.93 14.12.96 13.12.03 637 8,750
04.04.96 01.06.01 30.11.01 490 3,196*
Keith Stanyard 09.12.91 09.12.94 08.12.01 303 25,750
14.12.93 14.12.96 13.12.03 637 6,000
04.04.96 01.06.01 30.11.01 490 1,957*
*Maximum number of Ordinary Shares under the five year Sharesave Scheme
Mr Askew, Mr Boon, Mr Keohane and Mr Stanyard are potential beneficiaries under
the East Midlands Electricity Employee Share Ownership Plan (ESOP) and are
therefore deemed to have a beneficial interest in all the East Midlands
Electricity Shares of the ESOP by virtue of the provisions of section 324 of the
Act.
As at close of business on 18 November 1996, the ESOP Trustee held 427,733 East
Midlands Electricity Shares.
Under the terms of his contract Mr Davies participates in a bonus scheme which
is based on the East Midlands Electricity Share price performance. The bonus is
calculated by reference to the stock market value of a notional holding of
66,650 East Midlands Electricity Shares, relative to a base price of (pound)5.93
per share, on a date determinable by Mr Davies between 7 July 1997 and 7 July
1998. Mr Davies may also exercise his rights under the bonus scheme within six
months of a person obtaining control (within the meaning of section 840 ICTA
1988) of East Midlands Electricity.
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<PAGE>
(d) The dealings for value in East Midlands Electricity Shares by the directors
of East Midlands Electricity and members of their immediate families during
the disclosure period are set out below:
<TABLE>
<CAPTION>
Price per
Number of Ordinary
Ordinary Share in
Nature of transaction Date Shares pence
------------------------------- -------- ---------- ---------
<S> <C>
Norman Askew Exercise of share option 14.12.95 102,500 406
Transfer to Mrs D Askew 14.12.95 51,250 -
Sale 14.12.95 51,250 702
Sale by Mrs D Askew 14.12.95 51,250 702
Chris Boon Purchase of shares in a PEP 25.1.96 131 675
Jim Keohane Exercise of share option 05.02.96 18,000 303
Exercise of share option 05.02.96 16,750 358
Sale 05.02.96 34,750 713
Exercise of sharesave option 01.03.96 3,600 175
Sale 01.03.96 1,100 723
Transfer to Mrs C A Keohane 01.03.96 2,090 -
Sale by Mrs C A Keohane 01.03.96 1,100 723
Transfer to Mrs C A Keohane 09.04.96 1,700 -
Sale 09.04.96 1,700 614
Sale by Mrs C A Keohane 09.04.96 1,700 614
Transfer to Mrs C A Keohane 24.04.96 227 -
Transfer to PEP 14.05.96 410 -
Re-investment of dividend in PEP 01.10.96 16 530
Keith Stanyard Sale 05.02.96 1,400 711
Sale by Mrs M J Stanyard 05.02.96 1,500 711
Sale by Mrs M J Stanyard 22.02.96 15,000 729
Exercise of sharesave option 01.03.96 3,600 175
Sale 01.03.96 3,600 723
</TABLE>
(e) Save as disclosed above, none of East Midlands Electricity or any of the
directors of East Midlands Electricity or members of their immediate
families owns or controls or (in the case of the directors of East Midlands
Electricity) is interested in any East Midlands Electricity Shares or any
securities convertible into, rights to subscribe for, or options (including
traded options) or derivatives in respect of, East Midlands Electricity
Shares ("relevant securities") nor has any such person dealt for value
therein during the disclosure period.
(f) As at 18 November 1996, Hoare Govett Corporate Finance Limited and its
affiliates owned 4,400 Ordinary Shares.
(g) As at 18 November 1996, save as disclosed above:
(i) no subsidiary of East Midlands Electricity, no pension fund of any
member of the East Midlands Electricity Group, no bank or financial or
other professional adviser of East Midlands Electricity (including
stockbrokers but excluding exempt market-makers), including any person
controlling, controlled by or under the same control as such bank or
financial or other professional adviser; and
(ii) no discretionary fund manager (other than an exempt fund manager)
connected with East Midlands Electricity
owns or controls any relevant securities, nor has any such person dealt for
value therein during the Offer Period.
Neither East Midlands Electricity, nor any associate of East Midlands
Electricity, has any arrangement with any person in relation to relevant
securities where "arrangement" includes any indemnity or option arrangement
and any agreement or understanding, formal or informal, of whatever nature
which may be an inducement to deal or refrain from dealing.
77
<PAGE>
References in this paragraph to:
(1) an "associate" are to:
(i) subsidiaries and associated companies of East Midlands Electricity and
companies of which any such subsidiaries or associated companies are
associated companies;
(ii) banks, financial and other professional advisers (including stockbrokers)
to East Midlands Electricity or any company covered in (i) above,
including persons controlling, controlled by or under the same control
as, such banks or financial or other professional advisers;
(iii) the directors of East Midlands Electricity together with the directors of
any company covered in (i) above (together in each case with any member
of their immediate families or related trusts);
(iv) the pension funds of East Midlands Electricity or any company covered in
(i) above;
(2) a "bank" do not apply to a bank whose sole relationship with East Midlands
Electricity is the provision of normal commercial banking services or such
activities in connection with the Offer as handling acceptances and other
registration work.
Ownership or control of 20% or more of the equity share capital of a company
is regarded as the test of associated company status and "control" means a
holding, or aggregate holdings, of shares carrying 30% or more of the voting
rights attributable to the share capital of the company which are currently
exercisable at a general meeting, irrespective of whether the holding gives de
facto control.
(h) None of East Midlands Electricity or any of the directors of East Midlands
Electricity or members of their immediate families is interested in any
shares in DR Investments or any securities convertible into, rights to
subscribe for, options (including traded options) or derivatives in respect
of any shares in DR Investments, nor has any such person dealt for value
therein during the disclosure period.
4. Market quotations
The following table shows the closing middle market quotations for East Midlands
Electricity Shares as derived from the London Stock Exchange Daily Official List
on the first dealing day of each of the six months immediately prior to the date
of this document, on 23 October 1996 (the day before the recent bid speculation
concerning East Midlands Electricity commenced) and on 5 November 1996 (the last
business day prior to the commencement of the Offer Period) and on 18 November
1996 (the latest practicable date prior to the publication of this document):
East Midlands
Date Electricity Shares
- ----------------- ------------------
1 May 1996 614p
3 June 1996 588p
1 July 1996 529p
1 August 1996 594p
2 September 1996 565.5p
1 October 1996 537.5p
23 October 1996 499p
1 November 1996 544.5p
5 November 1996 537.5p
18 November 1996 618.5p
5. Bases of Calculations and Sources of Information
(a) Unless otherwise stated, the information concerning Dominion Resources is
extracted from Dominion Resources' 1995 Annual Report, 1994 Annual Report,
1993 Annual Report and Form 10-Q for the quarter ended 30 September 1996 or
has been supplied by Dominion.
(b) Unless otherwise stated, the information concerning East Midlands
Electricity is extracted from East Midlands Electricity's annual reports and
accounts for the years ended 31 March 1996, 31 March 1995 and 31 March 1994
or has been supplied by East Midlands Electricity.
78
<PAGE>
(c) The value of the Offer is based on 198.4 million Ordinary Shares in issue.
(d) The closing middle market prices of Ordinary Shares are derived from the
London Stock Exchange Daily Official Lists for the relevant dates.
(e) All amounts in US Dollars have been translated to sterling at a rate of
(pound)1=$1.65.
6. Regulatory position of Dominion Resources
Dominion Resources holds "exempt status" under the US Public Utility Holding
Company Act of 1935. In order to retain this status under the 1935 Act, in
connection with the proposed acquisition of East Midlands Electricity, Dominion
Resources has obtained the necessary certifications from the Virginia State
Corporation Commission ("SCC") and the North Carolina Public Utility Commission
("PUC") that the SCC and the PUC have the authority and resources to protect the
ratepayers within their jurisdictions and that they have the intention to do so
if necessary. These certifications have been filed with the US Securities and
Exchange Commission.
In obtaining the necessary certifications from the SCC and the PUC, Dominion
Resources and Virginia Power have given certain undertakings to the SCC and the
PUC which effectively "ring fence" Virginia Power from the effects of any
acquisition by Dominion Resources of East Midlands Electricity. The overall
effect of these undertakings with respect to the Offer is somewhat similar to
the effect of the licence modifications which the DGES has applied in
circumstances where a REC has become a subsidiary of another company.
7. Financing arrangements
It is estimated that full acceptance of the Offer would require the payment by
the Offeror of a maximum amount of approximately (pound)1.3 billion in cash. SBC
Warburg and Wasserstein Perella are satisfied that the necessary financial
resources are available to the Offeror to satisfy full acceptance of the Offer
in cash.
The funds required to make payment under the Offer will come from DR Unlimited
pursuant to the subscription agreement referred to in paragraph 8(a)(ii) below.
The credit facilities available to DR Unlimited are described below.
(a) Five year revolving credit agreement
Dominion Resources and DR Unlimited on 12 November 1996 entered into a five year
revolving credit agreement (the "Five Year Revolving Credit Agreement") among
themselves as borrowers, Dominion Resources as guarantor, various lending
institutions, Union Bank of Switzerland, New York Branch as Administrative Agent
and NationsBank, N.A. as Syndication Agent. DR Unlimited may borrow up to
(pound)520,000,000 in aggregate under this facility for the purpose of making an
equity investment in or subordinated loans to the Offeror. These proceeds are to
be used for the acquisition of shares in East Midlands Electricity and other
liabilities arising in connection with such acquisition. The borrowings by DR
Unlimited under the Five Year Revolving Credit Agreement are guaranteed in full
by Dominion Resources but are otherwise unsecured and are repayable in full on
or before 12 November 2001. Union Bank of Switzerland and NationsBank, N.A. have
agreed with Dominion Resources and DR Unlimited pursuant to a commitment letter
to an increase in the facility amount from (pound)520,000,000 to
(pound)560,000,000 at such time as Dominion Resources and DR Unlimited so
request.
The borrowings under the Five Year Revolving Credit Agreement will bear
interest, at the relevant borrower's choice, from time to time during the term
the borrowings are outstanding, at (i) the London inter-bank offer rate for the
relevant currency for the relevant period plus a margin and, if the borrowing is
in sterling, costs associated with mandatory liquid assets or (ii) the base rate
(defined as the higher of (a) the prime or reference rate of interest of the New
York office of Union Bank of Switzerland, and (b) 0.5% over the federal funds
rate). The borrowers will be able to change among the interest rate options at
periodic intervals specified in the Five Year Revolving Credit Agreement. There
is also a facility fee payable on the amount of the facility. The applicable
margin, if any, and facility fee is determined in accordance with a schedule
tied to the credit rating of Dominion Resources, as rated by certain nationally
recognised rating agencies in the United States. The aggregate amount payable in
respect of the margin and the facility fee may range from 0.11% to 0.55%.
Dominion Resources currently expects that the borrowings under the Five Year
Revolving Credit Agreement will be repaid over approximately a three year period
by Dominion Resources (or one or more members of the Dominion Resources Group)
79
<PAGE>
subscribing additional equity in DR Unlimited, the proceeds of which will be
used by DR Unlimited to repay such borrowings.
As at the close of business on 18 November 1996, DR Unlimited had made no
drawings under the Five Year Revolving Credit Agreement.
(b) Short term credit agreement
Dominion Resources and DR Unlimited on 12 November 1996 also entered into a one
year credit agreement (the "Short Term Credit Agreement") among themselves as
borrowers, Dominion Resources as guarantor, various lending institutions, Union
Bank of Switzerland, New York Branch as Administrative Agent and NationsBank,
N.A. as Syndication Agent. DR Unlimited may borrow up to (pound)780,000,000 in
aggregate under this facility for the same purposes as under the Five Year
Revolving Credit Agreement. The final repayment date of the borrowings under
this facility is 11 November 1997 but otherwise the terms of the Short Term
Credit Agreement, including as to the guarantee of DR Unlimited by Dominion
Resources and the interest rates and facility fee payable (with a range of 0.08%
to 0.5%), are broadly the same as apply under the Five Year Revolving Credit
Agreement. Union Bank of Switzerland and NationsBank, N.A. have agreed with
Dominion Resources and DR Unlimited pursuant to a commitment letter to an
increase in the facility amount from (pound)780,000,000 to (pound)840,000,000 at
such time as Dominion Resources and DR Unlimited so request.
At the close of business on 18 November 1996, DR Unlimited had made no drawings
under the Short Term Credit Agreement.
Dominion Resources has undertaken to the SCC and the PUC that it will refinance
in full the amount drawn under the Short Term Credit Agreement without the
benefit of the Dominion Resources guarantee and Dominion Resources is currently
in discussions to put in place that refinancing.
(c) The Offeror intends that the payment of interest on, and the repayment of,
the credit facilities described above will depend to a significant extent on
East Midlands Electricity.
8. Material Contracts
(a) Dominion Resources
The following contracts, not being contracts entered into in the ordinary course
of business, which are or may be material, have been entered into by Dominion
Resources and its subsidiaries within the two years immediately preceding the
commencement of the Offer Period:
(i) the financing arrangements described in paragraph 7 of this Appendix 5;
and
(ii) a subscription agreement dated 12 November 1996 between DR Investments
and DR Unlimited in which DR Unlimited agreed to subscribe at par for
such number of ordinary shares of (pound)1 each in the capital of DR
Investments as will ensure provision of sufficient funds to DR
Investments to allow it to satisfy full acceptance of the Offer.
(b) East Midlands Electricity
The following contracts, not being contracts entered into in the ordinary course
of business, which are or may be material, have been entered into by East
Midlands Electricity and its subsidiaries within the two years immediately
preceding the commencement of the Offer Period:
(i) An agreement (the "Master Agreement") between the 12 RECs, The National
Grid Group plc ("NGG") and The National Grid Company plc ("NGC") dated
25 October 1995 under which the parties agreed to seek the listing of
NGG on the London Stock Exchange and East Midlands Electricity and
certain other RECs agreed to despatch circulars to their respective
shareholders to obtain approval for the distribution to their
shareholders of NGG shares. The Master Agreement provided for the
pre-flotation capital restructuring of NGG and included undertakings by
East Midlands Electricity to take up its share of the proposed NGG
rights issue and to grant a customer discount.
(ii) An agreement (the "Shareholders Agreement") dated 17 November 1995
between each of the RECs and PSB Holding Limited under which the parties
approved a management structure for PSB Holding Limited and First Hydro
80
<PAGE>
Limited, governed by a separate management agreement (the "Management
Agreement"), and an agenda under which First Hydro Limited was to be
sold and the proceeds of sale distributed to the shareholders of PSB
Holding Limited. The Shareholders Agreement set out the procedures for
collecting offers for the shares in First Hydro Limited, the selection
of bidders and sale completion. The RECs gave undertakings not to redeem
redeemable shares, to vote in favour of a resolution to put PSB Holding
Limited into members' voluntary liquidation after the completed sale and
to execute an indemnity in favour of the liquidator for distribution of
sale proceeds to shareholders. Both the Shareholders Agreement and the
Management Agreement terminated on completion of the First Hydro Limited
share sale.
9. Service contracts of the directors of East Midlands Electricity
There are no service contracts between any of the directors of East Midlands
Electricity and any member of the East Midlands Electricity Group except for
those which are disclosed below.
Name Date of service contract Basic annual salary
------------------------ -------------------
Norman Askew 24 August 1992 (pound)210,200
Chris Boon 5 December 1994 (pound)103,000
Bob Davies 17 February 1994 (pound)166,100
Jim Keohane 7 April 1992 (pound)115,600
Keith Stanyard 31 December 1990 (pound)115,600
Following the annual salary review for executive directors by the Remuneration
and Nomination Committee on 5 November 1996 the basic annual salary for
executive directors will be increased by 3.3% with effect from 1 December 1996.
All the directors referred to above are employed under two year rolling
contracts and compensation for loss of office has been limited to a maximum of
eighteen months' basic salary.
All the directors referred to above participate in a three year performance
related reward scheme which runs from 1 April 1994 to 31 March 1997. Under the
scheme, which is based on earnings per East Midlands Electricity Share
performance, an individual can earn up to 60% of his base salary for the
financial year. The bonus is proportionately reduced if lower earnings per share
growth is achieved.
10. Other Information
(a) Neither the Offeror nor any person acting in concert with the Offeror for
the purposes of the Offer has any indemnity or option arrangement or any
agreement or understanding, formal or informal of whatever nature, relating
to East Midlands Electricity Shares or any securities convertible into,
rights to subscribe for, or options (including traded options) or
derivatives in respect of, any East Midlands Electricity Shares, which may
be an inducement to deal or refrain from dealing.
(b) Save as referred to in this document, there is no agreement, arrangement or
understanding (including any compensation arrangement) between the Offeror
or any person acting in concert with it for the purposes of the Offer and
any of the directors, recent directors, shareholders or recent shareholders
of East Midlands Electricity having any connection with or dependence upon,
or which is conditional on, the outcome of the Offer.
(c) There is no agreement, arrangement or understanding whereby the beneficial
ownership of any of the East Midlands Electricity Shares to be acquired
pursuant to the Offer will be transferred to any other person, save that the
Offeror reserves the right to transfer any such shares to any other member
of the Dominion Resources Group.
(d) No proposal exists in connection with the Offer that any payment be made to
any person as compensation for loss of office or as consideration for, or in
connection with, his retirement from office.
(e) The registered office of the Offeror is 165 Queen Victoria Street, London
EC4V 4DD. The Offeror is a wholly owned subsidiary of DR Unlimited (an
unlimited company incorporated in England and Wales); DR Unlimited is owned
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<PAGE>
equally by DEI U.K., Inc. and Dominion Energy U.K., Inc. which are each
wholly owned by Dominion Resources. The Offeror was incorporated in England
and Wales on 7 November 1996 as a special purpose vehicle for the making of
an offer for East Midlands Electricity. The principal place of business and
registered office of Dominion Resources is at Riverfront Plaza - West Tower,
901 East Byrd Street, Richmond, Virginia 23219-4069, United States of
America.
(f) SBC Warburg, Wasserstein Perella and Schroders have each given and not
withdrawn their respective written consent to the issue of this document
with the references to their name in the form and context in which they
appear. SBC Warburg, Wasserstein Perella and Schroders are each regulated in
the UK by The Securities and Futures Authority Limited.
11. Documents available for inspection
Copies of the following documents will be available for inspection, during
normal business hours, on any weekday (Saturdays and public holidays excepted)
at the offices of Freshfields, 65 Fleet Street, London EC4Y 1HS whilst the Offer
remains open for acceptance:
(a) the Memorandum and Articles of Association of the Offeror and East
Midlands Electricity and the Articles of Incorporation and ByLaws of
Dominion Resources;
(b) the audited consolidated accounts of Dominion Resources for the
financial years ended 31 December 1994 and 1995;
(c) the audited consolidated accounts of East Midlands Electricity for
the financial years ended 31 March 1995 and 1996;
(d) the financing documents described in paragraph 7 above;
(e) the material contracts referred to in paragraph 8 above;
(f) the letters of consent referred to in paragraph 10(f) above;
(g) a draft (subject to modification) of the Loan Note Instrument;
(h) the service contracts of the Directors of East Midlands Electricity
referred to in paragraph 9 of this Appendix; and
(i) this Offer document.
82
<PAGE>
APPENDIX 6
DEFINITIONS
The following definitions apply throughout this document and in the
accompanying Form of Acceptance, unless the context otherwise requires:
"Act" the Companies Act 1985 (as amended)
"ADRs" American depositary receipts, evidencing
American depositary shares representing
underlying East Midlands Electricity Shares
"Code" The City Code on Takeovers and Mergers
"DGES" The Director General of Electricity Supply
"Dominion" or
"Dominion Resources" Dominion Resources, Inc.
"DR Investments" or the
"Offeror" DR Investments (UK) PLC, a wholly owned
subsidiary of Dominion Resources
"DR Unlimited" DR Investments, an unlimited company
incorporated in England and Wales, a wholly
owned subsidiary of Dominion Resources
"Dominion Resources Group"
or "Offeror Group" Dominion and its subsidiaries and subsidiary
undertakings
"East Midlands Electricity" East Midlands Electricity plc
"East Midlands
Electricity Group" East Midlands Electricity and its subsidiaries
and subsidiary undertakings
"East Midlands Electricity
Share Option Schemes" the East Midlands Electricity Executive Share
Option Scheme and the East Midlands Electricity
Sharesave Scheme II
"Form" or "Form of Acceptance" the form of acceptance, election and authority
relating to the Offer accompanying this
document
"ICTA 1988" Income and Corporation Taxes Act 1988
"LIBOR" the London Interbank Offered Rate for twelve
month sterling deposits of (pound)5,000,000 in
the London Interbank market at or about 11.00
am (London time) on the first day of the
relevant interest period or, if such a day is
not a business day, on the preceding business
day as quoted by a duly authorised official of
Barclays Bank PLC (or if Barclays Bank PLC is
unable to quote such rate, such other reference
bank selected by the Offeror for the purpose)
"Loan Notes" the loan notes of the Offeror to be issued
pursuant to the Loan Note Alternative
"Loan Note Alternative" the loan note alternative as described in this
document, by which holders of East Midlands
Electricity Shares (other than certain overseas
shareholders) who validly accept the Offer may
elect to receive Loan Notes instead of all or
part of the cash consideration otherwise
payable under the Offer
"London Stock Exchange" the London Stock Exchange Limited
"Offer" or "Recommended
Cash Offer" the offer (including the Loan Note Alternative)
made by SBC Warburg and Wasserstein Perella on
behalf of the Offeror to acquire the East
Midlands Electricity Shares as set out in this
document including, where the context so
requires, any subsequent revision, variation,
extension, or renewal thereof
"Offer Period" the period defined in paragraph 5(c) of Part B
of Appendix 1
"Ordinary Shareholders" or
"East Midlands Electricity
Shareholders" holders of East Midlands Electricity Shares
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<PAGE>
"Ordinary Shares" or "East
Midlands Electricity Shares" the existing issued and fully paid ordinary
shares of 569 pence each in East Midlands
Electricity and any further such shares which
are unconditionally allotted or issued before
the date on which the Offer closes (or such
earlier date, not being earlier than the date
on which the Offer becomes unconditional as to
acceptances or, if later, the first closing
date of the Offer, as the Offeror may decide)
"Panel" The Panel on Takeovers and Mergers
"Receiving Agent" The Royal Bank of Scotland plc which has been
engaged by the Offeror to receive Forms of
Acceptance from East Midlands Electricity
Shareholders
"RECs" the regional electricity companies in England
and Wales
"Restricted Overseas Person" a person (including an individual, limited
liability company, partnership, unincorporated
syndicate, unincorporated organisation, trust,
trustee, executor, administrator or other legal
representative) in, or resident in, the United
States, Canada, Australia or Japan or a US
person
"SBC Warburg" SBC Warburg, a division of Swiss Bank
Corporation
"Schroders" J. Henry Schroder & Co. Limited
"United Kingdom" or "UK" United Kingdom of Great Britain and Northern
Ireland
"United States" or "US" the United States of America, its territories
and possessions, any state of the United States
of America and the District of Columbia
"US person" or "United
States person" a US person as defined in Regulation S of the
US Securities Act of 1933, as amended
"Virginia Power" Virginia Electric and Power Company, the
principal subsidiary of Dominion Resources
"Wasserstein Perella" Wasserstein Perella & Co. Limited
84
EXHIBIT 11
Dominion Resources, Inc.
Computation of Earnings Per Share of Common Stock
Assuming Full Dilution
<TABLE>
Years
(Million, Except Per Share Amounts)
1996 1995 1994
<S> <C> <C> <C>
Consolidated net income (1) $472.1 $425.0 $478.2
====== ====== ======
Adjustments to average common shares:
Shares of common stock -average shares
outstanding 178.3 173.8 170.3
Plus: Additional shares assuming conversion
of installments received on Stock Purchase
Plan for Customers of Virginia Power at
average market value (2) .0 .5 .6
------ ------ ------
Adjusted average common shares 178.3 174.3 170.9
====== ====== ======
Earnings per share $ 2.65 $2.44 $ 2.80
======= ===== =======
Notes: (1) See the Consolidated Statements of Income.
(2) Based on the following date:
1996 1995 1994
Installments received on Stock Purchase
Plan for Customers of Virginia Power at
year-end $ 0.0 $17.81 $ 22.4
Average market per common share $ 40.63 $38.25 $ 40.13
</TABLE>
Dominion Resources, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
General: Dominion Resources, Inc. is a holding company headquartered in
Richmond, Virginia. Its primary business is Virginia Power, which is a
regulated public utility engaged in the generation, transmission,
distribution and sale of electric energy within a 30,000 square mile area in
Virginia and northeastern North Carolina. It sells electricity to retail
customers (including governmental agencies) and to wholesale customers such
as rural electric cooperatives and municipalities. The Virginia service area
comprises about 65 percent of Virginia's total land area, but accounts for
over 80 percent of its population.
The company also operates business subsidiaries active in independent
power production, the acquisition and sale of natural gas reserves, in
financial services, and in real estate. Some of the independent power and
natural gas projects are located in foreign countries. Net assets of
approximately $440 million are involved in independent power production
operations in Central and South America.
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.
Dominion Resources is currently exempt from regulation as a registered
holding company under the Public Utility Holding Company Act of 1935.
Accounting for the utility business conforms with generally accepted
accounting principles as applied to regulated public utilities and as
prescribed by federal agencies and the commissions of the states in which the
utility business operates.
Consolidation: The Consolidated Financial Statements include the
accounts of Dominion Resources and its subsidiaries. In consolidation,
all significant intercompany transactions and accounts have been eliminated.
Operating Revenues and Income: Utility revenues are recorded on the basis
of service rendered. Dividend income on securities owned is recognized on the
ex-dividend date. Investments in common stocks of affiliates representing 20
percent to 50 percent ownership, and joint ventures and partnerships
representing generally 50 percent or less ownership interests, are accounted
for under the equity method.
Gain on sale of loans: Gain on sale of loans represents the present value
of the difference between the interest rate received on the mortgage loans
and the interest rate received by the investor in the securities after
considering the effects of estimated prepayments, costs to service the
mortgage loans and non-refundable fees and premiums on loans sold. These
gains on the sale of loans are recognized on the settlement date and are
based on the relative fair market value of the portion sold and retained.
Concurrently with recognizing such gain on sale, a corresponding asset
representing interest-only strips retained at securitization is recorded on
the balance sheet in an initial amount equal to the net present value of the
projected cash flows. The asset recorded which is classified as
available-for-sale is amortized in proportion to the income estimated to be
received during the life.
Property, Plant and Equipment: Utility plant is recorded at original cost,
which includes labor, materials, services, AFC (where permitted by
regulators), and other indirect costs.
The cost of acquisition, exploration and development of natural resource
properties is accounted for under the successful efforts method.
Interest is capitalized in connection with the construction of major
facilities. The capitalized interest is recorded as part of the asset to
which it relates and is amortized over the asset's estimated useful life. In
1996, 1995, and 1994, $6.3 million, $14.1 million, and $13.8 million of
interest cost was capitalized, respectively. Capitalized interest includes
AFC--other funds for certain regulatory jurisdictions of $3 million, $6.7
million, and $6.4 million for the years ended December 31, 1996, 1995 and
1994, respectively.
Major classes of property, plant and equipment and their respective
balances are:
- --------------------------------------------------------------------------------
At December 31, 1996 1995
(millions)
UTILITY:
Production $ 7,691.9 $ 7,340.0
Transmission 1,386.5 1,316.1
Distribution 4,385.4 4,215.7
Other electric 862.9 817.7
Construction work-in-progress 180.1 512.1
Nuclear fuel 843.8 836.0
- --------------------------------------------------------------------------------
Total utility 15,350.6 15,037.6
- --------------------------------------------------------------------------------
NONUTILITY:
Natural gas properties 492.4 395.7
Independent power properties 869.2 462.7
Other 103.6 81.4
- --------------------------------------------------------------------------------
Total nonutility 1,465.2 939.8
- --------------------------------------------------------------------------------
Total property, plant and equipment $16,815.8 $15,977.4
================================================================================
Depreciation, Depletion and Amortization: Depreciation of utility plant
(other than nuclear fuel) is computed using the straight-line method based on
projected useful service lives. The cost of depreciable utility plant retired
and the cost of removal, less salvage, are charged to accumulated
depreciation. The provision for depreciation provides for the recovery of the
cost of assets and the estimated cost of removal, net of salvage, and is
based on the weighted average depreciable plant using a rate of 3.2 percent
for 1996, 1995 and 1994.
Owned nuclear fuel is amortized on a unit-of-production basis sufficient
to amortize fully, over the estimated service life, the cost of the fuel plus
permanent storage and disposal costs.
Costs in excess of net assets acquired from equity investments are
amortized over periods not to exceed 40 years.
36
<PAGE>
Dominion Resources, Inc.
Nuclear Decommissioning: Nuclear plant decommissioning costs are accrued
and recovered through rates over the expected service lives of Virginia
Power's nuclear generating units. The amounts collected from customers are
being placed in trusts, which, with the accumulated earnings thereon, will be
utilized solely to fund future decommissioning obligations.
North Anna Surry
- --------------------------------------------------------------------------------
Unit 1 Unit 2 Unit 1 Unit 2
NRC license expiration year 2018 2020 2012 2013
Method of decommissioning DECON DECON DECON DECON
(millions)
Current cost estimate
(1994) dollars $247.0 $253.6 $272.4 $274.0
External trusts balance
at December 31, 1996 105.1 98.9 121.8 117.5
1996 contribution to
external trusts 7.6 7.2 10.6 10.8
================================================================================
Approximately every four years, site-specific studies are prepared to
determine the decommissioning cost estimate for Virginia Power's four nuclear
units. The current cost estimate is based on the DECON method, which assumes
the activities associated with the decontamination or prompt removal of
radioactive contaminants will begin shortly after cessation of operations so
that the property may be released for unrestricted use.
The accumulated provision for decommissioning of $443.3 million and $351.4
million is included in accumulated depreciation, depletion and amortization
at December 31, 1996 and 1995, respectively. Provisions for decommissioning
of $36.2 million, $28.5 million, and $24.5 million applicable to 1996, 1995,
and 1994, respectively, are included in depreciation, depletion and
amortization expense. The net unrealized gain of $80.5 million and $40.7
million associated with securities held by Virginia Power's Nuclear
Decommissioning trusts at December 31, 1996 and 1995, respectively, are
included in the accumulated provision for decommissioning.
Earnings of the trust funds were $16 million, $15.9 million, and $15.2
million for 1996, 1995, and 1994, respectively, and are included in other
income in the Consolidated Financial Statements. The accretion of the
accumulated provision for decommissioning, equal to the earnings of the trust
funds, is also recorded in other income.
The Financial Accounting Standards Board (FASB) is reviewing the
accounting for nuclear plant decommissioning. If current electric utility
industry practices for such decommissioning are changed, annual provisions
for decommissioning could increase. FASB has tentatively determined that the
estimated cost of decommissioning should be reported as a liability rather
than as accumulated depreciation and that a substantial portion of the
decommissioning obligation should be recognized earlier in the operating life
of the nuclear plant.
During its deliberations, FASB expanded the scope of this project to
include similar unavoidable obligations to perform closure and post-closure
activities incurred as a condition to operate assets other than nuclear power
plants. Whether this position, if adopted, would impact other assets of
Virginia Power cannot be determined at this time. Furthermore, the FASB has
tentatively determined that it would be inappropriate to account for cost of
removal as negative salvage; thus, any forthcoming standard may also cause
changes in industry plant depreciation practices.
Federal Income Taxes: Dominion Resources and its subsidiaries file a
consolidated federal income tax return.
Deferred income taxes are provided for all significant temporary
differences between the financial and tax basis of assets and liabilities
using presently enacted tax rates in accordance with SFAS No. 109,
"Accounting for Income Taxes." Temporary differences occur when events and
transactions recognized for financial reporting result in taxable or
tax-deductible amounts in future periods. The regulatory treatment of
temporary differences can differ from the requirements of SFAS No. 109.
Accordingly, Virginia Power recognizes a regulatory asset if it is probable
that future revenues will be provided for the payment of those deferred tax
liabilities. Similarly, in the event a deferred tax liability is reduced to
reflect changes in tax rates, a regulatory liability is established if it is
probable that a future reduction in revenue will result.
Due to regulatory requirements, Virginia Power accounts for investment tax
credits under the "deferral method" which provides for the amortization of
these credits over the service lives of the property giving rise to the
credits.
Allowance for Funds Used During Construction (AFC): The applicable
regulatory Uniform System of Accounts defines AFC as the cost during the
construction period of borrowed funds used for construction purposes and a
reasonable rate on other funds when so used.
The pre-tax AFC rates for 1996, 1995, and 1994 were 8.1, 8.9, and 8.9
percent, respectively. Approximately 82 percent of Virginia Power's
construction work in progress is now included in rate base and a cash return
is collected currently thereon.
Deferred Capacity and Fuel Expenses: Approximately 90 percent of fuel
expenses and 80 percent of capacity expenses are subject to deferral
accounting. Under this method, the difference between reasonably incurred
actual expenses and the level of expenses included in current rates is
deferred and matched against future revenues.
Amortization of Debt Issuance Costs: Dominion Resources defers and
amortizes any expenses incurred in the issuance of long-term debt including
premiums and discounts associated with such debt over the lives of the
respective issues. Any gains or losses resulting from the refinancing of
Virginia Power debt are also deferred and amortized over the lives of the new
issues of long-term debt as permitted by the appropriate regulatory
commission. At Virginia Power, gains or losses resulting from the redemption
of debt without refinancing are amortized over the remaining lives of the
redeemed issues.
Investment Securities: Dominion Resources accounts for and classifies
investments in equity securities that have readily determinable fair values
and for all investments in debt securities based on management's intent. The
investments are classified into three categories and accounted for in the
following manner.
Debt securities which are intended to be held to maturity are classified
as held-to-maturity securities and reported at amortized cost. Debt and
equity securities purchased and held with the intent of selling them in the
current period are classified as trading securities. They are reported at
fair value and unrealized gain and losses are included in earnings. Debt and
37
<PAGE>
Dominion Resources, Inc.
equity securities that are neither held-to-maturity or trading are
classified as available-for-sale securities. These are reported at fair
value with unrealized gains and losses reported in shareholders' equity, net
of tax.
Mortgage Loans in Warehouse: Mortgage loans in warehouse consist of
mortgage loans secured by single family residential properties. Any price
premiums or discounts on mortgage loans including any capitalized costs or
deferred fees on originated loans, as required by SFAS No. 91, "Accounting
for Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases," are deferred as an adjustment to
the cost of the loans and are therefore included in the determination of any
gains or losses on sales of the related loans. Mortgage loans in warehouse
are carried at the lower of cost or market value.
Mortgage Investments: Included in available-for-sale securities are
mortgage investments. Mortgage investments at December 31, 1996 are
interest-only strips retained at securitization of the mortgage loans.
Unrealized holding gains and losses, net of tax, are reported as a net amount
in a separate component of stockholders' equity until realized.
Nonrecourse-Nonutility Financings: Dominion Resources' nonutility
subsidiaries issue debt to finance their operations and obtain financings
that generally are secured by the assets of the nonutility subsidiaries.
However, Dominion Resources may be required to provide contingent equity
support or to maintain a minimum net worth at the nonutility subsidiaries.
These financings have been segregated on the accompanying financial
statements to distinguish their nonrecourse nature.
Derivatives: Dominion Resources utilizes derivative instruments to
manage exposure to fluctuations in interest rates, foreign exchange rates and
natural gas prices.
Derivative financial instruments, which are principally used by the
company in the management of its interest rate and foreign currency
exposures, are accounted for on an accrual basis. Income and expense are
recorded in the same category as that arising from the related asset or
liability. For example, amounts to be paid or received under interest rate
swap agreements are recognized as interest income or expense in the periods
in which they accrue.
Gains and losses related to effective hedges of existing assets or
liabilities are deferred and recognized over the expected remaining life of
the related asset or liability. Changes in the market value of derivatives
that do not qualify as hedges are recognized as interest income or expense in
the period in which the changes occur. The company does not hold or issue
derivative financial instruments for trading purposes.
An additional derivative instrument managed by the company is a call
option to fix in United States dollars the investment amount in the East
Midlands acquisition. Unrealized gains or losses on the call option are
included in income.
Cash: Current banking arrangements generally do not require checks to be
funded until actually presented for payment. At December 31, 1996 and 1995,
the company's accounts payable included the net effect of checks outstanding
but not yet presented for payment of $72.6 million and $70.1 million,
respectively.
For purposes of the Consolidated Statements of Cash Flows, Dominion
Resources considers cash and cash equivalents to include cash on hand and
temporary investments purchased with a maturity of three months or less.
Supplementary Cash Flows Information:
- --------------------------------------------------------------------------------
1996 1995 1994
(millions)
CASH PAID DURING THE YEAR FOR:
Interest (reduced for net costs
of borrowed funds capitalized) $373.0 $376.0 $355.9
Federal income taxes 169.8 159.6 154.2
NON-CASH TRANSACTIONS FROM
INVESTING AND FINANCING ACTIVITIES:
Note issued in acquisition of business 47.5
Exchange of long-term marketable
securities 12.1 12.3 11.8
Assumption of obligations and
acquisition of utility property 26.3
Other 3.1
================================================================================
Reclassification: Certain amounts in the 1995 and 1994 Consolidated
Financial Statements have been reclassified to conform to the 1996
presentation.
NOTE B: SALE OF RECEIVABLES
- --------------------------------------------------------------------------------
Virginia Power had an agreement to sell, with limited recourse, certain
accounts receivable including unbilled amounts, up to a maximum of $200
million. The agreement was allowed to expire on October 1, 1996. At December
31, 1995, no amounts were outstanding under this agreement.
NOTE C: TAXES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 1995 1994
(millions)
PROVISION FOR FEDERAL INCOME TAXES:
Included in operating expenses:
Current $157.5 $179.8 $120.8
- --------------------------------------------------------------------------------
Tax effects of temporary/
timing differences:
Liberalized depreciation 53.8 56.6 61.3
Indirect construction costs 3.4 (13.8) (21.5)
Other plant related items 12.6 12.1 4.0
Deferred fuel 19.1 (2.2) 0.8
Deferred capacity 3.2 (3.8) (9.0)
Separation costs (2.6) (12.4)
Customer accounts reserve 36.8
Intangible drilling costs 5.7 3.6 4.1
Other, net (23.3) (20.9) (9.2)
- --------------------------------------------------------------------------------
71.9 19.2 67.3
- --------------------------------------------------------------------------------
Net deferred investment tax
credits--amortization (16.9) (16.9) (17.1)
- --------------------------------------------------------------------------------
Total provision for federal
income tax expense $212.5 $182.1 $171.0
================================================================================
38
<PAGE>
Dominion Resources, Inc.
- --------------------------------------------------------------------------------
(millions, except percentages) 1996 1995 1994
COMPUTATION OF PROVISION FOR FEDERAL
INCOME TAX:
Pre-tax income $684.6 $607.1 $649.2
================================================================================
Tax at statutory federal income
tax rate of 35% applied to
pre-tax income $239.6 $212.5 $227.2
Changes in federal income taxes
resulting from:
Preferred dividends of
Virginia Power 12.4 15.4 14.8
Amortization of investment tax
credits (16.9) (16.9) (17.1)
Nonconventional fuel credit (26.5) (28.2) (32.0)
Other, net 3.9 (0.7) (21.9)
- --------------------------------------------------------------------------------
Total provision for federal
income tax expense $212.5 $182.1 $171.0
================================================================================
Effective tax rate 31% 30% 26.3%
================================================================================
Dominion Resources net noncurrent deferred tax liability is attributable to:
- --------------------------------------------------------------------------------
1996 1995
(millions)
ASSETS:
Deferred investment tax credits $ (90.3) $ (96.4)
- --------------------------------------------------------------------------------
LIABILITIES:
Depreciation method and plant
basis differences 1,463.5 1,403.5
Income taxes recoverable through
future rates 168.8 171.6
Partnership basis differences 130.3 111.5
Other 71.0 70.9
- --------------------------------------------------------------------------------
Total deferred income tax liability 1,833.6 1,757.5
- --------------------------------------------------------------------------------
Net deferred income tax liability $1,743.3 $1,661.1
================================================================================
NOTE D: REGULATORY ASSETS
- --------------------------------------------------------------------------------
Certain expenses normally reflected in income are deferred on the balance
sheet as regulatory assets and are recognized in income as the related
amounts are included in rates and recovered from customers. Virginia Power's
regulatory assets included the following:
- --------------------------------------------------------------------------------
At December 31, 1996 1995
(millions)
Income taxes recoverable through future rates $477.0 $484.5
Cost of decommissioning DOE uranium
enrichment facilities 73.5 78.5
Deferred losses on reacquired debt, net 91.5 99.3
North Anna Unit 3 project termination costs 73.1 101.8
Other 58.8 52.3
- --------------------------------------------------------------------------------
Total $773.9 $816.4
================================================================================
The costs of decommissioning the Department of Energy's (DOE) uranium
enrichment facilities have been deferred and represent the unamortized
portion of Virginia Power's required contributions to a fund for
decommissioning and decontaminating the DOE's uranium enrichment facilities.
Virginia Power is making such contributions over a 15-year period with
escalation for inflation. These costs are being recovered in fuel rates.
The construction of North Anna Unit 3 was terminated in November 1982. All
retail jurisdictions have permitted recovery of the incurred costs. For
Virginia and FERC jurisdictional customers, the amounts deferred are being
amortized from the date termination costs were first includible in rates.
The incurred costs underlying these regulatory assets may represent
expenditures by Virginia Power or may represent the recognition of
liabilities that ultimately will be settled at some time in the future. For
some of those regulatory assets representing past expenditures that are not
included in Virginia Power's rate base or used to adjust Virginia Power's
capital structure, Virginia Power is not allowed to earn a return on the
unrecovered balance. Of the $773.9 million of regulatory assets at December
31, 1996, approximately $117 million represent past expenditures that are
effectively excluded from the rate base by the Virginia Commission which has
primary jurisdiction over Virginia Power's rates. However, of that amount
$73.1 million represents the present value of amounts to be recovered through
future rates for North Anna Unit 3 project termination costs, and thus
reflects a reduction in the actual dollars to be recovered through future
rates for the time value of money. Virginia Power does not earn a return on
the remaining $43.9 million of regulatory assets, effectively excluded from
rate base, to be recovered over various recovery periods up to 23 years,
depending on the nature of the deferred costs.
In addition, Virginia Power's depreciation practices for early retirements
of plant and equipment and cost of removal, along with changing operating
plant scenarios, have resulted in an accumulated depreciation reserve
deficiency estimated to be $245 million at December 31, 1996. The reserve
deficiency results from deferral of costs in conformity with regulatory
depreciation practices authorized by regulatory commissions having
jurisdiction over Virginia Power's operations. Currently, Virginia Power is
allowed to amortize reserve deficiencies over estimated remaining functional
plant lives in all of the regulatory jurisdictions it serves.
39
<PAGE>
Dominion Resources, Inc.
NOTE E: JOINTLY OWNED PLANTS
- --------------------------------------------------------------------------------
The following information relates to Virginia Power's proportionate share of
jointly owned plants at December 31, 1996:
Bath County
Pumped North Anna Clover
Storage Station Power Station Power Station
Ownership interest 60.0% 88.4% 50.0%
- --------------------------------------------------------------------------------
(millions)
Utility plant in service $1,075.4 $1,819.5 $530.1
Accumulated
depreciation 208.8 716.9 13.2
Nuclear fuel 449.4
Accumulated
amortization of
nuclear fuel 380.7
Construction work
in progress 0.1 49.1 3.6
- --------------------------------------------------------------------------------
The co-owners are obligated to pay their share of all future construction
expenditures and operating costs of the jointly owned facilities in the same
proportions as their respective ownership interest. Virginia Power's share of
operating costs is classified in the appropriate expense category in the
Consolidated Statements of Income.
NOTE F: SHORT-TERM DEBT
- --------------------------------------------------------------------------------
Dominion Resources and its subsidiaries have credit agreements with various
expiration dates. These agreements provided for maximum borrowings of
$3,882.4 million and $885.8 million at December 31, 1996 and 1995,
respectively. At December 31, 1996 and 1995, $714.5 million and $48.6
million, respectively, was borrowed under such agreements and classified as
long-term debt.
Dominion Resources credit agreements supported $308 million and $199
million of Dominion Resources commercial paper at December 31, 1996 and
1995, respectively.
Virginia Power has an established commercial paper program with a maximum
borrowing capacity of $500 million which is supported by two credit
facilities. One is a $300 million, five-year credit facility that was
effective on June 7, 1996 and expires on June 7, 2001. The other is a $200
million credit facility, also effective June 7, 1996, with an initial term of
364 days and provisions for subsequent 364-day extensions. The total amount
of commercial paper outstanding was $312.4 million and $169.0 million at
December 31, 1996 and 1995, respectively.
A subsidiary of Dominion Capital also had $91 million of nonrecourse
commercial paper outstanding at December 31, 1996 and 1995. A total of $391
million and $289 million of the commercial paper was classified as long-term
debt at December 31, 1996 and 1995, respectively. The commercial paper is
supported by revolving credit agreements that have expiration dates extending
beyond one year. Dominion Resources and its subsidiaries pay fees in lieu of
compensating balances in connection with these credit agreements. A summary
of short-term debt outstanding at December 31 follows:
- --------------------------------------------------------------------------------
Weighted
Amount Average
Outstanding Interest Rate
(millions, except percentages)
1996
Commercial paper $320.5 5.5%
Term-notes 57.7 7.4%
- --------------------------------------------------------------------------------
Total $378.2
================================================================================
1995
Commercial paper $169.0 5.8%
Term-notes 67.6 11.1%
- --------------------------------------------------------------------------------
Total $236.6
================================================================================
NOTE G: INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Securities classified as available-for-sale as of December 31 follow:
- --------------------------------------------------------------------------------
Gross Gross
Security Unrealized Unrealized Aggregate
Type Cost Gains Losses Fair Value
(millions)
1996
Equity $635.8 $8.2 $10.1 $633.9
Debt 58.5 58.5
1995
Equity $288.3 $8.0 $16.5 $279.8
Debt 5.8 0.1 5.7
================================================================================
Debt securities held at December 31, 1996 do not have stated contractural
maturities because borrowers may have the right to call or repay obligations
with or without call or prepayment penalties.
For the years ended December 31, 1996 and 1995, the proceeds from the
sales of available-for-sale securities were $33.4 million and $49.4 million,
respectively. The gross realized gains and losses were $2.4 million and $1
million for 1996 and $10.4 million and $0.1 million for 1995, respectively.
The basis on which the cost of these securities was determined is specific
identification. The changes in net unrealized holding gain or loss on
available-for-sale securities has resulted in an increase in the separate
component of shareholders equity during the years ended December 31, 1996 and
1995 of $5.6 million, net of tax, and $41.1 million, net of tax,
respectively. The changes in net realized holding gain or loss on trading
securities increased earnings during the years ended December 31, 1996 and
1995 by $3.1 million and $2.1 million, respectively.
40
<PAGE>
Dominion Resources, Inc.
NOTE H: FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The fair value amounts of the company's financial instruments have been
determined using available market information and valuation methodologies
deemed appropriate in the opinion of management. However, considerable
judgment is required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the company could realize in a current market
exchange. The use of different market assumptions and/or estimation
assumptions may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
Carrying Amount Estimated Fair Value
- -----------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1996 1995
<S><C>
(millions)
ASSETS:
Cash and cash equivalents $ 110.8 $ 66.7 $ 110.8 $ 66.7
Trading securities 16.4 10.8 16.4 10.8
Mortgage loans in warehouse 65.8 67.9
Available-for-sale securities 692.4 285.5 692.4 285.5
Pollution control project funds 9.7 11.9 9.7 11.9
Notes receivable 40.3 43.1 40.3 43.7
Nuclear decommissioning trust funds 443.3 351.4 443.3 351.4
LIABILITIES:
Short-term debt $ 378.2 $ 236.6 $ 378.2 $ 236.6
Long-term debt 5,478.3 5,058.8 5,560.3 5,322.4
PREFERRED SECURITIES OF A SUBSIDIARY TRUST $ 135.0 $ 135.0 $ 135.0 $ 140.4
PREFERRED STOCK $ 180.0 $ 180.0 $ 185.8 $ 190.9
LOAN COMMITMENTS $ 547.0
DERIVATIVES--RELATING TO:
Foreign currency contract $ 9.8 $ 9.8 $ (13.6)
Natural gas options in a net receivable (payable) position $ 0.6 $ 0.6 $ (0.6) $ 0.1
=================================================================================================================
</TABLE>
Cash and Cash Equivalents: The carrying amount of these items is a
reasonable estimate of their fair value.
Investment Securities and Nuclear Decommissioning Trust Funds: The
estimated fair value is determined based on quoted market prices, dealer
quotes, and prices obtained from independent pricing sources.
Mortgage Loans in Warehouse: The fair value of mortgage loans in
warehouse is based on outstanding commitments from investors.
Notes Receivable: The carrying value approximates fair value due to
the variable rate or term structure of the notes receivable.
Short-Term Debt and Long-Term Debt: Market values are used to determine
the fair value for debt securities for which a market exists. For debt issues
that are not quoted on an exchange, interest rates currently available to the
company for issuance of debt with similar terms and remaining maturities are
used to estimate fair value. The carrying amount of debt issues with
short-term maturities and variable rates that are refinanced at current
market rates is a reasonable estimate of their fair value.
Preferred Securities of Subsidiary Trust: The fair value is based on
market quotations.
Preferred Stock: The fair value of the fixed-rate preferred stock subject
to mandatory redemption was estimated by discounting the dividend and
principal payments for a representative issue of each series over the average
remaining life of the series.
Loan Commitments: The fair value of commitments is estimated using the
fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the
counterparties.
Foreign Currency Contracts: The fair value of foreign currency contracts
is estimated by obtaining quotes from brokers.
Interest Rate Swaps: The fair value of interest rate swaps (used for
hedging purposes) is the estimated amount that the company would receive or
pay to terminate the swap agreements at the reporting date, taking into
account current interest rates and the current creditworthiness of the swap
counterparties. Net market value at December 31, 1996 was immaterial.
Natural Gas Options: The fair value of natural gas options (used for
hedging purposes) is estimated by obtaining quotes from bankers.
Futures Contracts: Derivatives used as hedging instruments are off-balance
sheet items marked-to-market with any unrealized gains or losses deferred
until the related loans are securitized or sold. Net market value at December
31, 1996 was immaterial.
41
<PAGE>
Dominion Resources, Inc.
NOTE I: LONG-TERM DEBT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
<S><C>
At December 31, 1996 1995
(millions)
VIRGINIA POWER FIRST AND REFUNDING MORTGAGE BONDS(1):
Series U, 5.125%, due 1997 $ 49.3 $ 49.3
1992 Series B, 7.25%, due 1997 250.0 250.0
1988 Series A, 9.375%, due 1998 150.0 150.0
1992 Series F, 6.25%, due 1998 75.0 75.0
1989 Series B, 8.875%, due 1999 100.0 100.0
1993 Series C, 5.875%, due 2000 135.0 135.0
1992 Series D, 7.625%, due 2007 215.0 215.0
Various series, 6%-8%, due 2001-2004 805.0 805.0
Various series, 5.45%-8.75%, due 2020-2025 1,144.5 1,144.5
- ---------------------------------------------------------------------------------------
TOTAL FIRST AND REFUNDING MORTGAGE BONDS 2,923.8 2,923.8
- ---------------------------------------------------------------------------------------
OTHER LONG-TERM DEBT:
VIRGINIA POWER:
Bank loans, notes and term loans, 6.15%-10%, due 1996-2003 503.1 762.7
Pollution control financings(2):
Money market municipals, due 2008-2027(3) 488.6 488.6
DOMINION RESOURCES:
Revolving credit agreement, 6.46%, due 2001 342.5
Commercial paper(4) 300.0 199.0
- ---------------------------------------------------------------------------------------
TOTAL OTHER LONG-TERM DEBT 1,634.2 1,450.3
- ---------------------------------------------------------------------------------------
NONRECOURSE--NONUTILITY DEBT:
DOMINION RESOURCES:
Bank loans, 9.25%, due 2008 20.8 21.7
DOMINION CAPITAL:
Senior notes, fixed rate, 6.12%-11.875%, due 1996-2005(5) 96.0 102.0
Term notes, fixed rate, 4.93%-12.48%, due 1994-2020 212.8 204.0
Revolving credit agreements, due 1995-1999(6) 85.0 34.6
Commercial paper(7) 90.0 90.0
DOMINION ENERGY:
Term loan, 7.22%, due 1996(8) 68.6
Revolving credit agreements, due 1997(9) 320.0 14.0
Term loan, 5.445%, due 1998 35.0 55.0
Bank loans, 9.70%-13.20%, due 2005 32.5 35.0
Bank loans, 4.5%-6.76%, due 1996-2024 53.0 59.8
- ---------------------------------------------------------------------------------------
TOTAL NONRECOURSE--NONUTILITY DEBT 945.1 684.7
- ---------------------------------------------------------------------------------------
LESS AMOUNTS DUE WITHIN ONE YEAR:
First and refunding mortgage bonds 299.3
Bank loans, notes and term loans 12.0 259.6
Nonrecourse--nonutility 439.4 161.2
- ---------------------------------------------------------------------------------------
TOTAL AMOUNT DUE WITHIN ONE YEAR 750.7 420.8
- ---------------------------------------------------------------------------------------
LESS UNAMORTIZED DISCOUNT, NET OF PREMIUM 24.8 26.1
- ---------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $4,727.6 $4,611.9
=======================================================================================
</TABLE>
(1) Substantially all of Virginia Power's property is subject to the lien of
the mortgage, securing its First and Refunding Mortgage Bonds.
(2) Certain pollution control equipment at Virginia Power's generating
facilities has been pledged or conveyed to secure these financings.
(3) Interest rates vary based on short-term tax-exempt market rates. The
weighted average daily interest rates were 3.57% and 3.89% for 1996 and
1995, respectively.
(4) See Note F to the Consolidated Financial Statements.
(5) The Rincon Securities common stock owned by Dominion Capital is pledged
as collateral to secure the loan.
(6) The weighted average interest rates during 1996 and 1995 were 6.24% and
6.76%, respectively.
(7) The weighted average interest rates during 1996 and 1995 were 5.37% and
5.91%, respectively.
(8) The Enron/Dominion Cogen Corp. common stock owned by Dominion Energy is
pledged as collateral to secure the loan.
(9) The weighted average interest rates during 1996 and 1995 were 5.89% and
6.04%, respectively.
42
<PAGE>
Dominion Resources, Inc.
Maturities (including sinking fund obligations) through 2001 are as follows
(in millions): 1997-$750.7; 1998-$440.7; 1999-$359.2; 2000-$253.9; and
2001-$512.6.
In January 1997, Virginia Power filed a registration statement with the
Securities and Exchange Commission for $400 million of Junior Subordinated
Debentures.
NOTE J: COMMON STOCK
- --------------------------------------------------------------------------------
During 1996 the company purchased on the open market and retired 136,800
shares of common stock for an aggregate price of $5.5 million. On July 8,
1996, the company established Dominion Direct Investment which continues and
expands the Automatic Dividend Reinvestment and Stock Purchase Plan. From
1994 through 1996, the following changes in common stock occurred:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Shares Shares
Outstanding Amount Outstanding Amount Outstanding Amount
<S><C>
(millions)
Balance at January 1 176.4 $3,303.5 172.4 $3,157.6 168.1 $2,991.0
Changes due to:
Dominion Direct Investment 1.9 70.9
Automatic Dividend Reinvestment and Stock Purchase Plan 1.4 55.1 2.9 107.6 2.9 112.2
Stock Purchase Plan for Customers of Virginia Power 1.0 23.2 1.4 45.8 1.3 51.3
Employee Savings Plan 0.5 20.5 0.2 8.3 0.6 23.2
Stock repurchase and retirement (0.1) (5.5) (0.7) (24.8) (0.6) (20.7)
Other 0.1 3.7 0.2 9.0 0.1 0.6
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 181.2 $3,471.4 176.4 $3,303.5 172.4 $3,157.6
===================================================================================================================================
</TABLE>
NOTE K: LONG-TERM INCENTIVE PLAN
- -------------------------------------------------------------------------------
A long-term incentive plan (the Plan) provides for the granting of
nonqualified stock options and restricted stock to certain employees of
Dominion Resources and its affiliates. The aggregate number of shares of
common stock that may be issued pursuant to the Plan is 3,750,000. The
changes in share and option awards under the Plan were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Restricted Weighted Stock Weighted Shares
Shares Average Price Options Average Price Exercisable
<S><C>
Balance at December 31, 1993 26,899 $40.37 12,464 $29.39 12,464
- ---------------------------------------------------------------------------------------------------------------
Awards granted--1994 19,842 $40.64
Exercised/distributed (5,555) $36.25 (1,388) $29.63
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 41,186 $41.05 11,076 $29.36 11,076
- ---------------------------------------------------------------------------------------------------------------
Awards granted--1995 25,320 $37.63
Exercised/distributed (21,576) $38.69
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 44,930 $41.60 11,076 $29.36 11,076
- ---------------------------------------------------------------------------------------------------------------
Awards granted--1996 79,784 $41.76
Exercised/distributed/forfeited (29,433) $39.94 (475) $29.63
- ---------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 95,281 $41.78 10,601 $29.34 10,601
===============================================================================================================
</TABLE>
In 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock Based Compensation." However, the company continues to
apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for the plan.
Accordingly, no compensation expense has been recognized for stock options
awarded. Had compensation cost for the company's plan been determined consistent
with the methodology prescribed under SFAS No. 123 there would have been no
significant impact on the company's operations for the year ended December 31,
1996.
43
<PAGE>
Dominion Resources, Inc.
NOTE L: VIRGINIA POWER OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST
- --------------------------------------------------------------------------------
In 1995, Virginia Power established Virginia Power Capital Trust I (VP
Capital Trust). VP Capital Trust sold 5,400,000 shares of Preferred
Securities for $135 million, representing preferred beneficial interests and
97 percent beneficial ownership in the assets held by VP Capital Trust.
Virginia Power issued $139.2 million of its 1995 Series A, 8.05 percent
Junior Subordinated Notes (the Notes) in exchange for the $135 million
realized from the sale of the Preferred Securities and $4.2 million of common
securities of VP Capital Trust. The common securities 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.
The Notes are due September 30, 2025, but may be extended up to an
additional ten years, subject to satisfying certain conditions. However,
Virginia Power may redeem the Notes on or after September 30, 2000, under
certain circumstances. The Preferred Securities are subject to mandatory
redemption upon repayment of the Notes at maturity or earlier redemption. At
redemption, each Preferred Security shall be entitled to receive a
liquidation amount of $25 plus accrued and unpaid distributions, including
any interest thereon.
NOTE M: PREFERRED STOCK
- --------------------------------------------------------------------------------
Dominion Resources is authorized to issue up to 20,000,000 shares of
preferred stock; however, no such shares are issued and outstanding.
Virginia Power has authorized 10,000,000 shares of preferred stock, $100
liquidation preference. Upon voluntary liquidation, each share is entitled to
receive $100 plus accrued dividends. Dividends are cumulative. Virginia Power
preferred stock subject to mandatory redemption at December 31, 1996 was as
follows:
- -------------------------------------------
Shares
Series Outstanding
$5.58 400,000(1)(2)
$6.35 1,400,000(1)(3)
- -------------------------------------------
Total 1,800,000
===========================================
(1) Shares are non-callable prior to redemption.
(2) All shares to be redeemed on 3/1/00.
(3) All shares to be redeemed on 9/1/00.
During the years 1994 through 1996, the following shares were redeemed:
- ------------------------------------------------------------
Year Dividend Shares
1995 $7.30 417,319
1994 7.30 37,681
============================================================
At December 31, 1996 Virginia Power preferred stock not subject to mandatory
redemption, $100 liquidation preference, is listed in the table below.
- --------------------------------------------------------------------
Issued and Entitled Per
Outstanding Share Upon
Dividend Shares Redemption
$5.00 106,677 $112.50
4.04 12,926 102.27
4.20 14,797 102.50
4.12 32,534 103.73
4.80 73,206 101.00
7.05 500,000 105.00(1)
6.98 600,000 105.00(2)
MMP 1/87 series(3) 500,000 100.00
MMP 6/87 series(3) 750,000 100.00
MMP 10/88 series(3) 750,000 100.00
MMP 6/89 series(3) 750,000 100.00
MMP 9/92A(3) 500,000 100.00
MMP 9/92B(3) 500,000 100.00
- --------------------------------------------------------------------
TOTAL 5,090,140
====================================================================
(1) Through 7/31/03 and thereafter to amounts declining in steps to $100.00
after 7/31/13.
(2) Through 8/31/03 and thereafter to amounts declining in steps to $100.00
after 8/31/13.
(3) Money Market Preferred (MMP) dividend rates are variable and are set
every 49 days via an auction. The weighted average rates for these series
in 1996, 1995, and 1994, including fees for broker/dealer agreements,
were 4.48%, 4.93%, and 3.75%, respectively.
During the years 1994 through 1996, the following shares were redeemed:
- -----------------------------------------------------------------------------
Year Dividend Shares
1995 $7.45 400,000
1995 7.20 450,000
=============================================================================
NOTE N: RETIREMENT PLAN, POSTRETIREMENT BENEFITS AND
OTHER BENEFITS
- --------------------------------------------------------------------------------
Retirement Plan: Dominion Resources' Retirement Plan (the Plan) covers
virtually all employees of Dominion Resources and its subsidiaries. The
benefits are based on years of service and the employee's compensation.
Dominion Resources' funding policy is to contribute annually an amount that
is in accordance with the provisions of the Employment Retirement Income
Security Act of 1974.
44
<PAGE>
Dominion Resources, Inc.
The components of the provision for net periodic pension expense were as
follows:
- -------------------------------------------------------------------
Year ending December 31, 1996 1995 1994
(millions)
Service cost--benefits earned
during the year $ 26.7 $ 23.4 $ 24.6
Interest cost on projected
benefit obligation 61.1 54.9 46.3
Actual return on plan
assets (63.5) (56.7) (51.3)
Net amortization and deferral 1.2 (0.7) 0.1
- -------------------------------------------------------------------
Net periodic pension cost $ 25.5 $ 20.9 $ 19.7
===================================================================
The following table sets forth the Plan's funded status:
- ------------------------------------------------------------------------
As of December 31, 1996 1995
(millions)
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS:
Accumulated benefit obligation, including
vested benefit of 1996-$586.7 and
1995-$540.2 $660.0 $607.4
- ------------------------------------------------------------------------
Projected benefit obligation
for service rendered to date $852.2 $767.0
Plan assets at fair value, primarily
listed stocks and U.S. bonds 845.0 763.6
- ------------------------------------------------------------------------
Plan assets less than projected benefit obligation (7.2) (3.4)
Unrecognized net loss from past
experience different from that
assumed and effects of changes in
assumptions 40.4 35.7
Unrecognized prior service cost 4.7 5.3
Unrecognized net asset at January 1,
being recognized over
16 years beginning in 1986 (21.8) (25.1)
- ------------------------------------------------------------------------
Prepaid pension cost included in
other assets $ 16.1 $ 12.5
========================================================================
Significant assumptions used in determining net periodic pension cost and the
projected benefit obligation were:
- -------------------------------------------------------------------
As of December 31, 1996 1995
Discount rates 8.0% 8.0%
Rates of increase in
compensation levels 5.0% 5.0%
Expected long-term
rate of return 9.5% 9.5%
===================================================================
Postretirement Benefits: Dominion Resources and its subsidiaries provide
retiree health care and life insurance benefits through insurance companies
with annual premiums based on benefits paid during the year. From time to
time in the past, Dominion Resources and its subsidiaries have changed
benefits. Some of these changes have reduced benefits. Under the terms of
their benefits plans, the companies reserve the right to change, modify or
terminate the plans.
Net periodic postretirement benefit expense for 1996 and 1995 was as
follows:
- -------------------------------------------------------------------
Year ending December 31, 1996 1995
(millions)
Service cost $ 12.3 $ 8.9
Interest cost 24.2 21.9
Return on plan assets (16.6) (6.1)
Amortization of transition obligation 12.1 12.1
Net amortization and deferral 7.2 0.1
- -------------------------------------------------------------------
Net periodic postretirement benefit expense $ 39.2 $36.9
===================================================================
The following table sets forth the funded status of the plan:
- -------------------------------------------------------------------
As of December 31, 1996 1995
(millions)
Fair value of plan assets $ 133.0 $ 96.3
Accumulated postretirement
benefit obligation:
Retirees $ 202.7 $ 211.4
Active plan participants 125.0 99.2
- -------------------------------------------------------------------
Accumulated postretirement
benefit obligation 327.7 310.6
Accumulated postretirement
benefit obligation in excess of plan assets (194.7) (214.3)
Unrecognized transition obligation 194.1 206.2
Unrecognized net experience gain (3.0) 8.6
- -------------------------------------------------------------------
Prepaid (accrued) postretirement benefit cost $ (3.6) $ 0.5
===================================================================
A one percent increase in the health care cost trend rate would result in an
increase of $4.8 million in the service and interest cost components and a
$35 million increase in the accumulated postretirement benefit obligation.
Significant assumptions used in determining the postretirement benefit
obligation were:
- -----------------------------------------------------------------------------
1996 1995
Discount rates 8.0% 8.0%
Assumed return on plan assets 9.0% 9.0%
Medical cost trend rate 8% for first year 9% for first year
7% for second year 8% for second year
Scaling down to Scaling down to
4.75% beginning in 4.75% beginning in
the year 2001 the year 2001
=============================================================================
Virginia Power is recovering these costs in rates on an accrual basis in all
material respects, in all jurisdictions. The funds being collected for other
postretirement benefits accrual in rates, in excess of other postretirement
benefits actually paid during the year, are contributed to external benefit
trusts under Virginia Power's current funding policy.
Other Benefits: In 1994, Virginia Power offered an early retirement
program to employees aged 50 or older and offered a voluntary separation
program to all regular full-time employees. Approximately 1,400 employees
accepted offers under these programs. The costs associated with these
programs were $90.1 million. Virginia Power capitalized $25.9 million based
upon regulatory precedent and expensed $64.2 million.
45
<PAGE>
Dominion Resources, Inc.
NOTE O: RESTRUCTURING
- --------------------------------------------------------------------------------
In March 1995, Virginia Power announced the implementation phase of its
Vision 2000 program. During this phase, Virginia Power began reviewing
operations with the objective of outsourcing services where economical and
appropriate, and re-engineering the remaining functions to streamline
operations. The re-engineering process is resulting in outsourcing,
decentralization, reorganization and downsizing for portions of Virginia
Power's operations. As part of this process, Virginia Power is reevaluating
its utilization of capital resources in its operations to identify further
opportunities for operational efficiencies through outsourcing or
re-engineering of its processes.
Restructuring charges of $91.6 million and $117.9 million in 1996 and
1995, respectively, included severance costs, purchased power contract
restructuring and negotiated settlement costs, capital project cancellation
costs, and other costs incurred directly as a result of the Vision 2000
initiatives. While Virginia Power may incur additional charges for severance
in 1997, the amounts are not expected to be significant.
In 1995, Virginia Power established a comprehensive involuntary severance
package for salaried employees who may no longer be employed as a result of
these initiatives. Virginia Power is recognizing the cost associated with
employee terminations in accordance with Emerging Issues Task Force Consensus
No. 94-3 as management identifies the positions to be eliminated. Severance
payments are being made over a period not to exceed twenty months. Through
December 31, 1996, management had identified 1,811 positions to be
eliminated. Those positions were identified as a result of Virginia Power's
review of the Fossil and Hydroelectric, Nuclear and Commercial Operations
Business Units and portions of the corporate center operations. The
recognition of severance costs resulted in a charge to operations in 1996 and
1995 of $49.2 million and $51.2 million, respectively. At December 31, 1996,
1,266 employees have been terminated and severance payments totaling $45
million have been paid. Virginia Power estimates that these staffing
reductions will result in annual savings in the range of $62 million to $90
million for its restructured operations. However, such savings may be offset
in part by future salary increases, possible outsourcing costs and increased
payroll costs associated with staffing for growth opportunities such as those
in Virginia Power's Energy Services Business Unit. Savings from staffing
reductions will be reflected in lower construction expenditures as well as
lower operation and maintenance expenses.
In an effort to minimize its exposure to potential stranded investment,
Virginia Power is evaluating its long-term purchased power contracts and
negotiating modifications to their terms, including cancellations, where it
is determined to be economically advantageous to do so. Virginia Power also
negotiated settlements with several other parties to terminate their rights
to sell power to Virginia Power. The cost of contract modifications, contract
cancellations and negotiated settlements was $7.8 million and $8.1 million in
1996 and 1995, respectively. Using contract terms, estimated quantities of
power that would have otherwise been delivered and other relevant factors at
the time of each transaction, Virginia Power estimated that its annual future
purchased power costs, including energy payments, would be reduced by up to
$5.8 million and $147 million for the 1996 transactions and 1995
transactions, respectively. The cost of alternative sources of power that
might ultimately be required as a result of these settlements is expected to
be significantly less than the estimated reduction in purchased power costs.
Restructuring charges reported in 1995 included $37.3 million for the
cancellation of a project to construct a facility to handle low level
radioactive waste at Virginia Power's North Anna Power Station. As a result
of reevaluating the handling of low level radioactive waste, Virginia Power
concluded that the facility should not be completed due to the additional
capital investment required, decreased Virginia Power volumes of low level
radioactive waste resulting from improvements in station procedures and the
availability of more economical offsite processing.
The incurrence of restructuring charges and the savings resulting
therefrom in subsequent periods are elements of Virginia Power's cost of
operations and will be considered in the cost of service information filed by
Virginia Power in response to the Virginia Commission's Order issued on
November 12, 1996.
In this increasingly competitive environment, Virginia Power has also
concluded that it is appropriate to utilize available savings and cost
reductions, such as those generated by the Vision 2000 program, to accelerate
the write-off of existing unamortized regulatory assets. Not only will this
strategically position Virginia Power in anticipation of competition, but it
also reflects Virginia Power's commitment to mitigate its exposure to
potentially strandable costs. As of December 31, 1996, Virginia Power had
identified savings of $26.7 million which were used to establish a reserve
for expected adjustments to regulatory assets.
As part of re-engineering operations, Virginia Power has adopted a plan to
improve customer service which will require an investment in excess of $100
million over the next several years. That plan includes the installation of
automated electric meters in metropolitan and inaccessible rural and urban
locations. The plan also provides for the installation of mobile data
dispatch technology in the utility's service fleet, accompanied by digitized
mapping of Virginia Power's service territory. Furthermore, technological
changes are being made to enhance the utility's ability to handle customer
calls during power outages. In order to increase service reliability,
Virginia Power has initiated both local and regional distribution line
improvement projects.
46
<PAGE>
Dominion Resources, Inc.
NOTE P: DERIVATIVE TRANSACTIONS
- --------------------------------------------------------------------------------
Dominion Resources uses derivative financial instruments for the purposes of
managing interest rate, natural gas price and foreign currency risks. The
company does not hold or issue derivative financial instruments for trading
purposes.
Natural Gas Risks: Dominion Energy enters into natural gas options,
collars, and swaps as a hedge against fluctuations in natural gas prices
existing for future production periods. Dominion Energy addresses market risk
by selecting natural gas-based financial instruments whose historical value
fluctuations correlate strongly with those of the item being hedged. Revenues
received from such contracts which are held until expiration are recognized
in the corresponding production month for the contract. Dominion Energy has
some risk since the price received for the underlying production may exceed
the reference price included in the hedging transaction. As of December 31,
1996, Dominion Energy has entered into various natural gas put options,
collars and swap contracts as hedges expiring on various dates until March
1998 on approximately 10 Bcf of natural gas and the weighted average put
price per MMBTU of natural gas was $1.94. At December 31, 1995, Dominion
Energy had entered into natural gas put option contracts as hedges extending
through March 31, 1996 on approximately 5 Bcf of natural gas and the weighted
average put price per MMBTU of natural gas was $1.98.
Foreign Currency Risks: On November 13, 1996, Dominion Resources purchased
a call option at a cost of $9.8 million (face amount, (pound)1.35 billion) to
stabilize the amount of its U.S. dollar investment in its acquisition of East
Midlands Electricity plc, an English utility. At December 31, 1996, the
unrealized gain recorded in net income was $2.2 million. The option expires
on May 12, 1997. In 1989, Dominion Energy obtained a loan that was
denominated in Japanese yen. Immediately upon obtaining the loan, Dominion
Energy entered into a currency exchange agreement in order to exchange the
yen for $55 million. At December 31, 1995, Dominion Energy had an unrealized
translation currency loss of $13.6 million and the currency exchange rate was
one U.S. dollar equaled 103.43 Japanese yen. On February 15, 1996, Dominion
Energy repaid the loan in its entirety without incurring any foreign
translation loss.
Interest Rate Risks: In 1996, Dominion Capital began using interest rate
swaps to manage interest rate costs. The purpose of the transactions was to
effectively convert floating rate debt to a fixed rate obligation. The face
or notional amount of the interest rate swaps at December 31, 1996 was $30
million. The difference between the amounts paid or received on interest rate
swaps in 1996 was recognized as an adjustment to interest expense. Credit
risk exists to the extent that the counterparties to the swap do not perform
their obligation under the agreements.
Saxon Mortgage, a subsidiary of Dominion Capital, enters into forward
delivery contracts, financial futures and options contracts for the purpose
of reducing exposure to the effects of changes in interest rates on mortgage
loans which the company has funded or has committed to fund. Gains and losses
on such contracts relating to mortgage loans are recognized when the loans
are sold. If the counterparties to the hedging transactions are unable to
perform according to the terms of the contracts, the company may incur losses
upon selling the mortgage loans at prevailing prices. As of December 31,
1996, Saxon has outstanding liabilities related to its hedging positions with
certain counter parties of $0.8 million. The deferred hedging losses, net, at
December 31, 1996 were immaterial.
Interest rate swaps were utilized in 1996 at a number of the cogeneration
projects in which Dominion Energy maintains 50% ownership interests. The
purpose of theses transactions was to reduce the risk of interest rate
fluctuations by effectively converting variable rate debt to a fixed rate
liability.
NOTE Q: COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
As the result of issues generated in the course of daily business, the
company is involved in legal, tax and regulatory proceedings before various
courts, regulatory commissions and governmental agencies. While some of the
proceedings involve substantial amounts of money, management believes that
the final disposition of these proceedings will not have an adverse material
effect on operations or the financial position of the company.
VIRGINIA POWER
Federal Energy Regulatory Commission Audit: FERC has conducted a compliance
audit of Virginia Power's financial statements for the years 1990 to 1994.
Virginia Power has received a preliminary audit report from FERC, in which
certain compliance exceptions were noted. Virginia Power has supplied
information to the FERC staff relating to these preliminary exceptions. Based
on information available at this time, the disposition of these issues is not
expected to have a significant effect on Virginia Power's financial position
or results of operations.
Construction Program: Virginia Power has made substantial commitments in
connection with its construction program and nuclear fuel expenditures, which
are estimated to total $529.2 million (excluding AFC) for 1997. Virginia
Power presently estimates that all of its 1997 construction expenditures,
including nuclear fuel, will be met through cash flow from operations.
Purchased Power Contracts: Since 1984, Virginia Power has entered into
contracts for the long-term purchase of capacity and energy from other
utilities, qualifying facilities and independent power producers. As of
December 31, 1996, there were 65 nonutility generating facilities under
contract to provide Virginia Power 3,524 megawatts of dependable summer
capacity. Of these, 62 projects (aggregating 3,509 megawatts) were
47
<PAGE>
Dominion Resources, Inc.
operational at the end of 1996, with the remaining three projects to become
operational before 1999. The following table shows the minimum commitments as
of December 31, 1996 for power purchases from utility and nonutility
suppliers.
Commitments
- ------------------------------------------------------------------
(millions) Capacity Other
1997 $ 790.7 $ 211.2
1998 793.5 216.8
1999 796.6 220.3
2000 709.2 157.9
2001 712.1 161.5
After 2001 10,098.0 788.0
- ------------------------------------------------------------------
Total $13,900.1 $1,755.7
- ------------------------------------------------------------------
Present value of the total $ 6,147.2 $ 986.7
==================================================================
In addition to the commitments listed above, under some contracts, Virginia
Power may purchase, at its option, additional power as needed. Payments for
purchased power (including economy, emergency, limited-term, short-term, and
long-term purchases) for the years 1996, 1995, and 1994 were $1,183 million,
$1,093 million, and $1,025 million, respectively. For discussion of Virginia
Power's efforts to restructure certain purchased power contracts, see Note O
to the Consolidated Financial Statements.
Fuel Purchase Commitments: Virginia Power's estimated fuel purchase
commitments for the next five years for system generation are as follows:
1997-$326 million; 1998-$274 million; 1999-$194 million; 2000-$157
million; and 2001-$110 million.
Environmental Matters: Environmental costs have been historically
recovered through the ratemaking process; however, should material costs be
incurred and not recovered through rates, Virginia Power's results of
operations and financial condition could be adversely impacted.
The EPA has identified Virginia Power and several other entities as
Potentially Responsible Parties (PRPs) at two Superfund sites located in
Kentucky and Pennsylvania. The estimated future remediation costs for the
sites are in the range of $61.5 million to $72.5 million. Virginia Power's
proportionate share of the costs is expected to be in the range of $1.7
million to $2.5 million, based upon allocation formulas and the volume of
waste shipped to the sites. As of December 31, 1996, Virginia Power accrued a
reserve of $1.7 million to meet its obligations at these two sites. Based on
a financial assessment of the PRPs involved at these sites, Virginia Power
has determined that it is probable that the PRPs will fully pay the costs
apportioned to them.
Virginia Power and Dominion Resources, along with Consolidated Natural
Gas, have remedial action responsibilities remaining at two coal tar sites.
Virginia Power 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 Virginia Power. The
plaintiffs are seeking compensatory damages of $12 million and punitive
damages of $6 million. It is too early in the cases for Virginia Power to
predict their outcome.
Virginia Power generally seeks to recover its costs associated with
environmental remediation from third-party insurers. At December 31, 1996
pending claims were not recognized as an asset or offset against recorded
obligations.
Nuclear Insurance: The Price-Anderson Act limits the public liability of
an owner of a nuclear power plant to $8.9 billion for a single nuclear
incident. The Price-Anderson Amendments Act of 1988 allows for an
inflationary provision adjustment every five years. Virginia Power has
purchased $200 million of coverage from commercial insurance pools with the
remainder provided through a mandatory industry risk-sharing program. In the
event of a nuclear incident at any licensed nuclear reactor in the United
States, Virginia Power could be assessed up to $81.7 million (including a 3
percent insurance premium tax for Virginia) for each of its four licensed
reactors not to exceed $10.3 million (including a 3 percent insurance premium
tax for Virginia) per year per reactor. There is no limit to the number of
incidents for which this retrospective premium can be assessed.
Nuclear liability coverage for claims made by nuclear workers first hired
on or after January 1, 1988, except those arising out of an extraordinary
nuclear occurrence, is provided under the Master Worker insurance program.
(Those first hired into the nuclear industry prior to January 1, 1988 are
covered by the policy discussed above.) The aggregate limit of coverage for
the industry is $400 million ($200 million policy limit with automatic
reinstatements of an additional $200 million). Virginia Power's maximum
retrospective assessment is approximately $12.5 million (including a 3
percent insurance premium tax for Virginia).
Virginia Power's current level of property insurance coverage ($2.55
billion for North Anna and $2.4 billion for Surry) exceeds the NRC's minimum
requirement for nuclear power plant licensees of $1.06 billion per reactor
site, and includes coverage for premature decommissioning and functional
total loss. The NRC requires that the proceeds from this insurance be used
first to return the reactor to and maintain it in a safe and stable
condition, and second to decontaminate the reactor and station site in
accordance with a plan approved by the NRC. Virginia Power's nuclear property
insurance is provided by Nuclear Mutual Limited (NML) and Nuclear Electric
Insurance Limited (NEIL), two mutual insurance companies, and is subject to
retrospective premium assessments in any policy year in which losses exceed
the funds available to these insurance companies. The maximum assessment for
the current policy period is $44.8 million. Based on the severity of the
incident, the boards of directors of Virginia Power's nuclear insurers have
the discretion to lower the maximum retrospective premium assessment or
eliminate either or both completely. For any losses that exceed the limits,
or for which insurance proceeds are not available because they must first be
used for stabilization and decontamination, Virginia Power has the financial
responsibility.
48
<PAGE>
Dominion Resources, Inc.
Virginia Power purchases insurance from NEIL to cover the cost of
replacement power during the prolonged outage of a nuclear unit due to direct
physical damage of the unit. Under this program, Virginia Power is subject to
a retrospective premium assessment for any policy year in which losses exceed
funds available to NEIL. The current policy period's maximum assessment is $9
million.
As a joint owner of the North Anna Power Station, ODEC is responsible for
its proportionate share (11.6 percent) of the insurance premiums applicable
to that station, including any retrospective premium assessments and any
losses not covered by insurance.
DOMINION RESOURCES
Under the terms of an investment agreement, Dominion Resources must provide
contingent equity support to Dominion Energy in the amount of $52.6 million.
Management believes the possibility of such support to Dominion Energy is
remote.
DOMINION ENERGY
Dominion Energy has general partnership interests in certain of its energy
ventures. Accordingly, Dominion Energy may be called upon to fund future
operation of these investments to the extent operating cash flow is
insufficient.
In addition, Dominion Energy may be required to make payments under
certain agreements on behalf of its energy ventures. As of December 31, 1996
no payments have been required.
DOMINION CAPITAL
At December 31, 1996, Saxon Mortgage had commitments to fund mortgage loans
of approximately $525 million. Saxon had a commitment to sell approximately
$7 million of mortgage loans to the trust of its last securitization. This
commitment expired on February 5, 1997.
NOTE R: ACQUISITIONS
- --------------------------------------------------------------------------------
In May 1996, Dominion Capital acquired from Resource Mortgage Capital its
single-family mortgage operations for $67 million. The resulting $56.3
million of purchase price in excess of assets acquired is being amortized
over 25 years. The transaction has been recorded using the purchase method of
accounting.
In August 1996, Dominion Energy, through wholly-owned subsidiaries,
acquired a 60 percent ownership and management interest in EGENOR for $228.2
million. EGENOR is a power generation company providing electricity to Peru's
northern region. This transaction has been accounted for using the purchase
method of accounting.
NOTE S: SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
Effective January 1997, Dominion Energy acquired the stock of Wolverine Gas
and Oil Company and related entities (Wolverine) in exchange for stock in
Dominion Resources. Wolverine is an oil and gas production and
operating company headquartered in Grand Rapids, Michigan. The
transaction will be recorded using the pooling of interest method.
Dominion Resources announced in November 1996, that its indirect
subsidiary DR Investments (U.K.) PLC had made an offer to purchase East
Midlands for approximately $2.2 billion. East Midlands is a regional
electricity company based in the Nottingham area of the United Kingdom.
Dominion Resources expects the transaction to be completed during the first
quarter of 1997.
NOTE T: BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
The company's principal business segments include Virginia Power, Dominion
Energy, Dominion Capital and corporate. The company's business segment
information was:
BUSINESS SEGMENTS
- -----------------------------------------------------------------------
1996 1995 1994
(in millions, except Identifiable Assets amounts)
REVENUE
Virginia Power $4,382.6 $4,350.4 $4,170.8
Dominion Capital 186.3 111.8 99.2
Dominion Energy 267.1 182.3 210.6
Corporate 20.1 19.3 19.3
Eliminations (13.8) (12.1) (8.8)
- -----------------------------------------------------------------------
Consolidated $4,842.3 $4,651.7 $4,491.1
- -----------------------------------------------------------------------
INCOME FROM OPERATIONS
Virginia Power $1,003.2 $ 971.3 $ 951.3
Dominion Capital 80.2 49.5 32.7
Dominion Energy 33.3 31.2 62.2
Corporate 1.5 (11.9) 0.8
Eliminations (13.8) (12.1) (8.8)
- -----------------------------------------------------------------------
Consolidated $1,104.4 $1,028.0 $1,038.2
- -----------------------------------------------------------------------
(billions)
IDENTIFIABLE ASSETS
Virginia Power $ 11.8 $ 11.8 $ 11.6
Dominion Capital 1.1 0.9 0.8
Dominion Energy 1.6 1.1 0.9
Corporate 5.6 5.0 4.9
Eliminations (5.2) (4.9) (4.6)
- -----------------------------------------------------------------------
Consolidated $ 14.9 $ 13.9 $ 13.6
- -----------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION
Virginia Power $ 536.4 $ 503.5 $ 480.7
Dominion Capital 6.8 3.0 2.8
Dominion Energy 69.9 42.6 47.7
Corporate 2.1 1.9 1.9
- -----------------------------------------------------------------------
Consolidated $ 615.2 $ 551.0 $ 533.1
- -----------------------------------------------------------------------
CAPITAL EXPENDITURES
Virginia Power $ 484.0 $ 577.5 $ 660.9
Dominion Capital 17.7 1.9 0.3
Dominion Energy 176.0 25.1 39.8
Corporate 1.3 0.4 0.3
- -----------------------------------------------------------------------
Consolidated $ 679.0 $ 604.9 $ 701.3
=======================================================================
49
<PAGE>
Dominion Resources, Inc.
NOTE U: QUARTERLY FINANCIAL AND
COMMON STOCK DATA (UNAUDITED)
- --------------------------------------------------------------------------------
The following amounts reflect all adjustments, consisting of only normal
recurring accruals (except as disclosed below), necessary in the opinion of
Dominion Resources' management for a fair statement of the results for the
interim periods.
QUARTERLY FINANCIAL AND COMMON STOCK DATA--UNAUDITED
- ------------------------------------------------------------------
1996 1995
(in millions, except per share amounts)
REVENUES
First Quarter $1,239.3 $1,129.3
Second Quarter 1,121.0 1,042.8
Third Quarter 1,286.7 1,345.0
Fourth Quarter 1,195.3 1,134.6
- ------------------------------------------------------------------
Year $4,842.3 $4,651.7
==================================================================
INCOME BEFORE PROVISION
FOR FEDERAL INCOME TAXES
First Quarter $ 220.3 $ 151.9
Second Quarter 138.5 107.3
Third Quarter 240.4 295.1
Fourth Quarter 85.4 52.8
- ------------------------------------------------------------------
Year $ 684.6 $ 607.1
==================================================================
NET INCOME
First Quarter $ 150.2 $ 108.5
Second Quarter 94.2 78.1
Third Quarter 162.2 197.9
Fourth Quarter 65.5 40.5
- ------------------------------------------------------------------
Year $ 472.1 $ 425.0
==================================================================
EARNINGS PER SHARE
First Quarter $ 0.85 $ 0.63
Second Quarter 0.53 0.45
Third Quarter 0.91 1.14
Fourth Quarter 0.36 0.23
- ------------------------------------------------------------------
Year $ 2.65 $ 2.45
==================================================================
DIVIDENDS PER SHARE
First Quarter $ 0.645 $ 0.645
Second Quarter 0.645 0.645
Third Quarter 0.645 0.645
Fourth Quarter 0.645 0.645
- ------------------------------------------------------------------
Year $ 2.58 $ 2.58
==================================================================
STOCK PRICE RANGE
First Quarter 44 3/8-37 5/8 39 1/4-35 1/2
Second Quarter 40 1/4-37 38 5/8-35 7/8
Third Quarter 40-36 7/8 37 7/8-34 7/8
Fourth Quarter 41-37 1/8 41 5/8-37 5/8
- ------------------------------------------------------------------
Year 44 3/8-36 7/8 41 5/8-34 7/8
==================================================================
As part of the Vision 2000 program (see Note O), Virginia Power recorded
$91.6 million and $117.9 million of restructuring charges in 1996 and 1995,
respectively. Restructuring charges included severance costs, purchased power
contract restructuring and negotiated settlement costs, capital project
cancellation costs, and other costs incurred directly as a result of the
Vision 2000 initiatives. The following chart shows the quarterly impact of
restructuring charges on expense and balance available for common stock for
1996 and 1995.
VIRGINIA POWER
- ------------------------------------------------------------------
Balance Available
Quarter Expense For Common Stock
(millions)
1996
1st $ 5.4 $ 3.5
2nd 19.3 12.5
3rd 4.6 3.0
4th 62.3 40.6
1995
1st $ 3.5 $ 2.3
2nd 1.8 1.1
3rd 30.6 19.9
4th 82.0 53.3
==================================================================
In the fourth quarter of 1995, Dominion Resources incurred at the holding
company restructuring expenses amounting to $3.6 million and other charges
amounting to $8.8 million. The other charges included litigation costs which
were incurred to resolve the shareholder claims made in 1994. The impact of
the restructuring expenses reduced net income by $2.3 million and the other
charges reduced net income by $5.8 million.
During December 1995, Dominion Energy settled certain outstanding disputes
with a supplier and renegotiated the terms of related long-term supply
contracts. As a result, the fourth quarter earnings include gains from these
changes which total $6.2 million, net of tax.
In June 1995, Dominion Resources Black Warrior Trust units were sold to
third parties amounting to a gain of $5.4 million, net of tax. These were the
remaining ownership units of a trust established in June 1994 when Dominion
Energy transferred from Dominion Black Warrior Basin to Dominion Resources
Black Warrior Trust a 65 percent overriding royalty interest in coal seam gas
properties.
50
<PAGE>
Dominion Resources, Inc.
Report of Management's Responsibilities
The management of Dominion Resources, Inc. is responsible for all information
and representations contained in the Consolidated Financial Statements and
other sections of the annual report. The Consolidated Financial Statements,
which include amounts based on estimates and judgments of management, have
been prepared in conformity with generally accepted accounting principles.
Other financial information in the annual report is consistent with that in
the Consolidated Financial Statements.
Management maintains a system of internal accounting controls designed to
provide reasonable assurance, at a reasonable cost, that Dominion Resources'
and its subsidiaries' assets are safeguarded against loss from unauthorized
use or disposition and that transactions are executed and recorded in
accordance with established procedures. Management recognizes the inherent
limitations of any system of internal accounting control, and therefore
cannot provide absolute assurance that the objectives of the established
internal accounting controls will be met.
This system includes written policies, an organizational structure
designed to ensure appropriate segregation of responsibilities, careful
selection and training of qualified personnel, and internal audits.
Management believes that during 1996 the system of internal control was
adequate to accomplish the intended objectives.
The Consolidated Financial Statements have been audited by Deloitte &
Touche LLP, independent auditors, whose designation by the Board of Directors
was ratified by the shareholders. Their audits were conducted in accordance
with generally accepted auditing standards and include a review of Dominion
Resources' and its subsidiaries' accounting systems, procedures and internal
controls, and the performance of tests and other auditing procedures
sufficient to provide reasonable assurance that the Consolidated Financial
Statements are not materially misleading and do not contain material errors.
The Audit Committees of the Boards of Directors, composed entirely of
directors who are not officers or employees of Dominion Resources or its
subsidiaries, meet periodically with independent auditors, the internal
auditors and management to discuss auditing, internal accounting control and
financial reporting matters and to ensure that each is properly discharged.
Both independent auditors and the internal auditors periodically meet alone
with the Audit Committees and have free access to the Committees at any time.
Management recognizes its responsibility for fostering a strong ethical
climate so that Dominion Resources' affairs are conducted according to the
highest standards of personal corporate conduct. This responsibility is
characterized and reflected in Dominion Resources' Code of Ethics, which
addresses potential conflicts of interest, compliance with all domestic and
foreign laws, the confidentiality of proprietary information, and full
disclosure of public information.
Dominion Resources, Inc.
/s/ Thos. E. Capps /s/ James L. Trueheart
Thos. E. Capps James L. Trueheart
CHAIRMAN, PRESIDENT AND VICE PRESIDENT AND CONTROLLER
CHIEF EXECUTIVE OFFICER
51
<PAGE>
Dominion Resources, Inc.
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
DOMINION RESOURCES, INC.
We have audited the accompanying consolidated balance sheets of Dominion
Resources, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income and retained earnings and of cash
flows for each of the three years in the period ended December 31, 1996.
These Consolidated Financial Statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
Consolidated Financial Statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such Consolidated Financial Statements present fairly, in
all material respects, the consolidated financial position of Dominion
Resources, Inc. and subsidiaries as of December 31, 1996 and 1995 and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Richmond, Virginia
February 11, 1997
[Deloitte & Touche LLP Logo]
52
<PAGE>
Dominion Resources, Inc.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
(millions, except per share amounts and percentages)
<S> <C>
Revenues and other income $ 4,842.3 $ 4,651.7 $ 4,491.1 $ 4,433.9 $ 3,791.1 $ 3,785.7
Income before cumulative effect of
a change in accounting principle $ 472.1 $ 425.0 $ 478.2 $ 516.6 $ 428.9 $ 459.9
Cumulative effect on prior
years of changing the method of
accounting for income taxes 15.6
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 472.1 $ 425.0 $ 478.2 $ 516.6 $ 444.5 $ 459.9
==================================================================================================================================
Total assets $ 14,905.06 $ 13,903.3 $ 13,562.2 $ 13,349.5 $ 12,615.1 $ 11,201.4
Long-term debt, preferred stock
subject to mandatory redemption
and preferred securities of
a subsidiary trust $ 5,042.6 $ 4,926.9 $ 4,934.2 $ 4,976.7 $ 4,667.4 $ 4,668.2
Common stock data:
Earnings per share before
cumulative effect of a change in
accounting principle $ 2.65 $ 2.45 $ 2.81 $ 3.12 $ 2.66 $ 2.94
Cumulative effect on prior years of
changing the method of accounting
for income taxes .10
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings per share $ 2.65 $ 2.45 $ 2.81 $ 3.12 $ 2.76 $ 2.94
==================================================================================================================================
Dividends paid per share $ 2.58 $ 2.58 $ 2.55 $ 2.48 $ 2.40 $ 2.32
Market value per share at year-end 38.50 41.25 36.00 45.38 39.50 38.00
Book value per share at year-end 27.17 26.88 26.60 26.38 25.21 24.41
Return on equity--average 9.8% 9.2% 10.6% 12.2% 11.2% 12.4%
Payout ratio 97.4% 105.3% 90.7% 79.5% 87.0% 78.9%
Price/earnings ratio at year-end 14.5 16.8 12.8 14.5 14.3 12.9
Outstanding shares of common stock
--average 178.3 173.8 170.3 165.7 161.1 156.5
--actual (year-end) 181.2 176.4 172.4 168.1 163.8 158.8
Capitalization:*
Long-term debt $ 4,533.4 $ 4,348.9 $ 4,384.1 $ 4,219.5 $ 4,111.8 $ 4,025.6
Preferred securities 135.0 135.0
Preferred stock 689.0 689.0 816.1 819.5 845.6 761.7
Common equity 4,924.4 4,742.0 4,586.1 4,435.9 4,131.3 3,877.8
- ----------------------------------------------------------------------------------------------------------------------------------
Total capitalization $ 10,281.8 $ 9,914.9 $ 9,786.3 $ 9,474.9 $ 9,088.7 $ 8,665.1
==================================================================================================================================
*Capitalization excludes:
Nonrecourse-nonutility
financing $ 945.1 $ 684.7 $ 727.1 $ 726.8 $ 593.4 $ 545.7
Short-term debt $ 378.2 $ 236.6 $ 146.0 $ 262.8 $ 125.2 $ 154.0
Property, plant and equipment:
Electric utility $ 14,506.8 $ 14,201.6 $ 13,896.6 $ 13,376.1 $ 12,930.6 $ 12,397.7
Nuclear fuel 843.8 836.0 817.2 814.1 754.6 766.4
Other 1,465.2 939.8 701.6 724.5 451.4 213.4
- ----------------------------------------------------------------------------------------------------------------------------------
Total 16,815.8 15,977.4 15,415.4 14,914.7 14,136.6 13,377.5
Less accumulated depreciation,
depletion and amortization 6,306.4 5,655.1 5,170.0 4,802.1 4,459.5 4,110.5
- ----------------------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 10,509.4 $ 10,322.3 $ 10,245.4 $ 10,112.6 $ 9,677.1 $ 9,267.0
==================================================================================================================================
CWIP included in property, plant
and equipment $ 180.1 $ 512.1 $ 828.2 $ 913.1 $ 840.9 $ 736.1
==================================================================================================================================
</TABLE>
DOMINION RESOURCES, INC.
SUBSIDIARIES OF THE REGISTRANT
JURISDICTION OF NAME UNDER WHICH
NAME INCORPORATION BUSINESS IS CONDUCTED
Virgina Power in Virginia
Virginia Electric and and North Carolina Power
Power Company Virginia in North Carolina
Dominion Energy, Inc. Virginia Dominion Energy, Inc.
Dominion Capital, Inc. Virginia Dominion Capital, Inc.
East Midlands Electricity plc United Kingdom East Midlands Electricity plc
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement File No.
333-02769 of Dominion Resources, Inc. on Form S-3 and Registration Statement
File No. 33-62705, File No. 333-02733 and File No. 333-09167 of Dominion
Resources, Inc. on Forms S-8 of our report dated February 11, 1997, appearing in
and incorporated by reference in the Annual Report on Form 10-K of Dominion
Resources, Inc. for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
- ----------------------------------
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 9,434
<OTHER-PROPERTY-AND-INVEST> 1,075
<TOTAL-CURRENT-ASSETS> 1,321
<TOTAL-DEFERRED-CHARGES> 1,141
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 14,906
<COMMON> 3,471
<CAPITAL-SURPLUS-PAID-IN> 16
<RETAINED-EARNINGS> 1,437
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4,924
180
509
<LONG-TERM-DEBT-NET> 4,728
<SHORT-TERM-NOTES> 378
<LONG-TERM-NOTES-PAYABLE> 0
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0
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<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,436
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<INCOME-TAX-EXPENSE> 219
<OTHER-OPERATING-EXPENSES> 3,731
<TOTAL-OPERATING-EXPENSES> 3,738
<OPERATING-INCOME-LOSS> 1,104
<OTHER-INCOME-NET> 10
<INCOME-BEFORE-INTEREST-EXPEN> 1,114
<TOTAL-INTEREST-EXPENSE> 430
<NET-INCOME> 472
36
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 460
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 1,032
<EPS-PRIMARY> 2.65
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