SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-8489
DOMINION RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1229715
(State or other jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
901 East Byrd Street, Richmond, Virginia 23219
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (804) 775-5700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
At April 30, 1997 the latest practicable date for determination, 184,451,336
shares of common stock, without par value, of the registrant were outstanding.
<PAGE>
DOMINION RESOURCES, INC.
INDEX
Page
Number
------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Income - Three 3
Months Ended March 31, 1997 and 1996
Consolidated Balance Sheets - March 31, 1997 4-5
and December 31, 1996
Consolidated Statements of Cash Flows 6-7
Three Months Ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements 8-14
Item 2. Management's Discussion and Analysis 15-26
PART II. Other Information
Item 1. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of 27-28
Security Holders
Item 5. Other Information 28-30
Item 6. Exhibits and Reports on Form 8-K 31
<PAGE>
DOMINION RESOURCES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---------------------------------
Millions, except
per share amounts
<S> <C>
Operating revenues and income:
Virginia Power $1,127.7 $1,164.8
East Midlands 555.4
Nonutility 172.1 74.5
-------- --------
1,855.2 1,239.3
-------- --------
Operating expenses:
Fuel, net 281.3 263.1
Purchased power capacity, net 184.4 194.2
Supply and distribution - East Midlands 446.7
Other operation 231.7 169.6
Maintenance 54.2 59.6
Restructuring 5.4
Depreciation and amortization 194.3 148.1
Other taxes 73.5 74.0
-------- --------
1,466.1 914.0
-------- --------
Operating income 389.1 325.3
-------- --------
Other income 6.9 2.8
-------- --------
Income before fixed charges and
income taxes 396.0 328.1
-------- --------
Fixed charges:
Interest charges, net 135.5 95.2
Preferred dividends and distributions
of Virginia Power, net 10.6 10.8
-------- --------
146.1 106.0
-------- --------
Income before provision for
income taxes 249.9 222.1
Provision for income
taxes 80.0 71.9
-------- --------
Net income $ 169.9 $ 150.2
======== ========
Average common stock 183.0 176.6
Earnings per common share $ 0.93 $ 0.85
Dividends paid per common share $ 0.645 $ 0.645
- ------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
3
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
<CAPTION>
March 31, December 31,
1997 1996*
----------------------------------
(Millions)
Current assets:
Cash and cash equivalents $ 153.3 $ 110.8
Trading securities 17.2 16.4
Customer accounts receivable, net 676.8 354.8
Other accounts receivable 159.6 174.9
Accrued unbilled revenues 136.7 162.8
Materials and supplies:
Plant and general 162.0 148.7
Fossil fuel 64.4 76.8
Mortgage loans in warehouse 265.1 65.8
Other 204.2 209.5
--------- ---------
1,839.3 1,320.5
--------- ---------
Investments 2,372.8 1,893.4
-------- ---------
Property, plant and equipment: 18,804.9 16,815.8
Less accumulated depreciation
and amortization 6,500.7 6,306.4
--------- ---------
12,304.2 10,509.4
--------- ---------
Deferred charges and other assets:
Regulatory assets 776.6 773.9
Goodwill 1,905.3 179.1
Other 213.7 229.3
--------- ---------
2,895.6 1,182.3
--------- ---------
Total assets $19,411.9 $14,905.6
========= =========
- ------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* The Balance Sheet at December 31, 1996 has been taken from the audited
Consolidated Financial Statements at that date.
4
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
<CAPTION>
March 31, December 31,
1997 1996*
----------------------------------
(Millions)
Current liabilities:
Securities due within one year $ 1,463.5 $ 750.7
Short-term debt 452.2 378.2
Accounts payable, trade 541.9 410.6
Accrued interest 109.2 107.3
Accrued taxes 112.1
Accrued payroll 96.7 73.1
Customer deposits 49.1 50.0
Severance costs accrued 50.2
Other 373.3 155.4
--------- ---------
3,198.0 1,975.5
--------- ---------
Long-term debt:
Virginia Power 3,777.2 3,579.4
East Midlands 1,719.0
Nonrecourse - nonutility 1,442.7 505.7
Other 300.0 642.5
--------- ---------
7,238.9 4,727.6
--------- ---------
Deferred credits and other liabilities:
Deferred income taxes 1,982.2 1,743.3
Investment tax credits 251.1 255.3
Deferred fuel expenses 11.6 3.3
Other 880.7 452.2
--------- ---------
3,125.6 2,454.1
--------- ---------
Total liabilities 13,562.5 9,157.2
--------- ---------
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 3,515.5 3,471.4
Retained earnings 1,486.4 1,437.9
Accumulated translation adjustments (10.4)
Allowance on available-for-sale
securities (4.5) (1.1)
Other 38.4 16.2
--------- ---------
5,025.4 4,924.4
--------- ---------
Total liabilities & shareholders'
equity $19,411.9 $14,905.6
========= =========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* The Balance Sheet at December 31, 1996 has been taken from the audited
Consolidated Financial Statements at that date.
** As described in Note (H) to NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, the
8.05% Junior Subordinated Notes totaling $139.2 million principal amount
constitute 100% of the Trust's assets.
5
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
March 31,
1997 1996
---------------------------------
(Millions)
Cash flows from (used in) operating activities:
Net income $ 169.9 $ 150.2
Adjustments to reconcile net income to
net cash:
Depreciation and amortization 200.1 169.4
Amortization of goodwill 10.8
Currency translation adjustment (11.0)
Minority interests 46.2
Gain on sale of assets (11.1)
Deferred income taxes 13.3 18.3
Investment tax credits, net (4.2) (4.2)
Allowance for other funds used
during construction 0.4 (1.1)
Deferred fuel expenses 8.3 (11.5)
Deferred capacity expenses (15.8) 5.5
Non-cash return on terminated
construction projects costs (pre-tax) (1.3) (1.8)
Changes in assets and liabilities:
Accounts receivable (28.3) (23.8)
Accrued unbilled revenues 25.9 24.8
Materials and supplies 11.7 28.6
Accounts payable, trade (93.4) 3.5
Accrued interest and taxes 26.7 92.8
Mortgage loans in warehouse (199.3)
Other changes (66.4) (44.3)
------- -------
Net cash flows from operating activities 82.5 406.4
------- -------
Cash flows from (used in) financing activities:
Issuance of common stock 44.1 37.4
Issuance of long-term debt:
Utility 200.0 24.5
East Midlands 1,143.8
Nonrecourse-nonutility 280.4 29.8
Issuance (repayment) of short-term debt 728.7 (148.0)
Repayment of long-term debt and
preferred stock (315.0) (67.9)
Common dividend payments (118.3) (113.9)
Other 110.5 11.5
------- -------
Net cash flows from (used in) financing
activities 2,074.2 (226.6)
------- -------
6
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<CAPTION>
Three Months Ended
March 31,
1997 1996
-----------------------------
(Millions)
Cash flows from (used in) investing activities:
Capital expenditures-(excluding
AFC-equity funds) (204.6) (165.8)
Purchase of East Midlands (1,883.6)
Acquisition of business, net of cash (96.1)
Investments in marketable securities 61.8 0.9
Other 8.2 (23.3)
-------- ------
Net cash flows used in investing activities (2,114.3) (188.2)
-------- ------
Increase (decrease) in cash and cash equivalents 42.4 (8.4)
Cash and cash equivalents at beginning of
period 110.9 66.7
-------- ------
Cash and cash equivalents at end of period $ 153.3 $ 58.3
======== ======
Supplementary cash flows information:
Cash paid during the period for:
Interest (net of interest capitalized) $ 124.5 $101.0
Income taxes 3.4 0.2
Non-cash investing and financing activities:
Equity contribution for Wolverine acquisition $ 22.2
Issuance of loan notes 19.4
- ----------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
</TABLE>
7
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) ACQUISITIONS
EAST MIDLANDS
East Midlands Electricity plc (East Midlands) was acquired in January 1997
for total consideration of $2.2 billion.
The acquisition has been accounted for using the purchase method of
accounting. The excess of the purchase price plus acquisition costs over the
net fair value of tangible and identifiable intangible assets acquired and
liabilities assumed resulted in goodwill of $1.7 billion. The goodwill is
being amortized over a 40- year period. For additional information, see EAST
MIDLANDS-Financing the Acquisition in ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following unaudited pro forma combined results of operations for the
three months ended March 31, 1996 has been prepared assuming the acquisition
of East Midlands had occurred at the beginning of the period. The pro forma
results are provided for information only. The results are not necessarily
indicative of the actual results that would have been realized had the
acquisition occurred on the indicated dates, nor are they necessarily
indicative of future results of operations of the combined companies.
<TABLE>
<CAPTION>
<S> <C>
Three Months Ended
March 31,
1997 1996
---- ----
As Reported As Reported Pro Forma
----------- ----------- ---------
Consolidated Results
(millions, except earnings per share)
Revenues $1,855.2 $1,239.3 $1,851.8
Net Income $169.9 $150.2 $182.4
Earnings Per Share $0.93 $0.85 $1.03
</TABLE>
FIRST SOURCE FINANCIAL
On March 21, 1997, Dominion Capital, Inc. (Dominion Capital) completed the
acquisition of the remaining 50% interest in First Source Financial LLP
(FSF) and all of the outstanding common stock of HCFS Corporate Finance
Venture, Inc. from Household Commercial Financial Services, Inc. This
acquisition resulted in Dominion Capital owning directly and indirectly 100%
of FSF and 100% of First Source Financial, Inc., the manager of FSF. The
resulting wholly-owned entities will be consolidated for accounting and
financial reporting purposes with Dominion Capital.
WOLVERINE GAS AND OIL COMPANY
In January 1997, Dominion Energy, Inc. (Dominion Energy) acquired the stock
of Wolverine Gas and Oil Company, Inc. and related entities (Wolverine) in
exchange for Dominion Resources, Inc. (Dominion Resources) Common Stock.
Wolverine is an oil and gas production and operating company headquartered
in Grand Rapids, Michigan. The transaction has been recorded using the
pooling of interests method.
8
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(B) DOMINION RESOURCES AND INTERIM REPORTING POLICIES
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 government 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 80
percent of its population.
Acquired early in 1997, East Midlands, a subsidiary of Dominion Resources, is
principally a power distribution company serving 2.3 million homes and
businesses in the growing East Midlands region of the United Kingdom.
Dominion Resources also operates business subsidiaries active in independent
power production; the acquisition and sale of natural gas reserves; financial
services; and real estate. Some of the independent power and natural gas
projects are located in foreign countries. Net assets of approximately $445
million are involved in independent power production operations in Central and
South America.
In the opinion of Dominion Resources' management, the accompanying unaudited
Consolidated Financial Statements contain all adjustments, consisting only of
normal recurring accruals, necessary to present fairly the financial position
as of March 31, 1997, the results of operations for the three-month periods
ended March 31, 1997 and 1996, and cash flows for the three-month periods
ended March 31, 1997 and 1996.
These Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in the Dominion
Resources Annual Report on Form 10-K for the year ended December 31, 1996.
The consolidated financial statements include the accounts of Dominion
Resources and its subsidiaries, with all significant intercompany transactions
and accounts being eliminated on consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year. Information for
quarterly periods is affected by seasonal variations in sales, rate changes,
timing of fuel expense recovery and other factors.
9
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(C) COMMON STOCK
At March 31, 1997 there were 300,000,000 shares of common stock authorized of
which 184,245,661 were issued and outstanding. Common shares issued during the
referenced periods were as follows:
Three Months Ended
March 31,
1997 1996
---- ----
Automatic Dividend
Reinvestment and
Stock Purchase Plan 690,476
Dominion Direct Investment 911,419
Wolverine pooling 1,879,974
Employee Savings Plan 223,697 609
Stock repurchase and retirement (136,800)
Other 9,825 75,155
--------- -------
Total Shares 3,024,915 629,440
========= =======
(D) LONG-TERM INCENTIVE PLAN
On December 20, 1996, the Organization and Compensation Committee of the Board
of Directors of Dominion Resources awarded participants 11,499 shares of
restricted common stock at the award price of $38.250 per share.
For the three-month period ended March 31, 1997, 2,250 common shares were
issued associated with exercised stock options from previous awards. As of
March 31, 1997, options from 8,351 shares were exercisable from previous
awards.
(E) PREFERRED STOCK - VIRGINIA POWER
As of March 31, 1997, there were 1,800,000 and 5,090,140 issued and
outstanding shares of preferred stock subject to mandatory redemption and
preferred stock not subject to mandatory redemption, respectively. There are a
total of 10,000,000 authorized shares of Virginia Power's preferred stock.
10
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(F) PROVISION FOR FEDERAL INCOME TAXES
Total Federal income tax expense differs from the amount computed by applying
the statutory Federal income tax rate to pre-tax income for the following
reasons:
Three Months Ended
March 31,
1997 1996
---- ----
(Millions)
Computation of Provision
for Federal Income Tax:
Income before income taxes $249.9 $222.1
Foreign income tax (28.6) (0.3)
Other income tax (2.2) (1.5)
------ ------
Income before Federal tax $219.1 $220.3
====== ======
Tax at statutory federal
income tax rate of 35% applied
to pre-tax income $ 76.7 $ 77.1
Changes in federal income
taxes resulting from:
Preferred dividends
of Virginia Power 3.1 3.1
Nonconventional Fuel credit (6.0) (6.6)
Ratable amortization of
investment tax credits (4.2) (4.2)
Other, net 4.0 0.7
Foreign tax (24.4)
Total Provisions for Federal
Income Tax Expense $ 49.2 $ 70.1
====== ======
Effective Tax Rate 22.4% 31.8%
====== ======
(G) INTEREST RATE AND FOREIGN CURRENCY RISK
DR Investments, a U.K. indirect subsidiary of Dominion Resources, expects to
issue 100 million of Euro-Sterling Bonds, the proceeds of which will be used
to refinance a portion of the short-term debt incurred in connection with the
acquisition of East Midlands. In anticipation of the issuance of these bonds,
DR Investments entered into forward rate agreements for the purpose of fixing
the interest rate for the Euro-Sterling Bonds.
On May 9, 1997, DR Investments issued $819 million of senior notes. The
obligations are denominated in US dollars and the net proceeds will be used to
repay a portion of the short-term debt incurred in connection with the
acquisition of East Midlands. In order to hedge the currency exposures
associated with a US dollar financing, DR Investments has entered into certain
interest rate and currency swaps that are intended to minimize any
cross-currency exposures and maintain the fixed nature of the interest payment
obligations.
(H) 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
$135.0 million, representing preferred beneficial interests and 97% beneficial
ownership in the assets held by VP Capital Trust.
Virginia Power issued $139.2 million of its 1995 Series A, 8.05% Junior
Subordinated Notes (the Notes) in exchange for the $135.0 million realized
from the sale of the Preferred Securities and $4.2 million of common
securities of VP Capital Trust. The common securities represent the remaining
3% beneficial ownership interest in the assets held by VP Capital Trust. The
Notes constitute 100% of VP Capital Trust's assets.
11
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(I) RESTRUCTURING CHARGES
In 1995, Virginia Power announced the implementation phase of its Vision 2000
program which included comprehensive involuntary severance packages for
employees who lose their positions as a result of Vision 2000 initiatives.
Virginia Power's Vision 2000 review of operations was substantially complete
at December 31, 1996.
For additional information, see Note O to CONSOLIDATED FINANCIAL STATEMENTS
included in Dominion Resources' Annual report on Form 10-K for the year ended
December 31, 1996.
(J) CONTINGENCIES
VIRGINIA POWER
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. Virginia Power is a
member of certain insurance programs that provide coverage for property damage
to members' nuclear generating plants, replacement power and liability in the
event of a nuclear incident. Virginia Power may be subject to retrospective
premiums in the event of major incidents at nuclear units owned by covered
utilities (including Virginia Power). For additional information, see Note Q
to CONSOLIDATED FINANCIAL STATEMENTS included in Dominion Resources' Annual
Report on Form 10-K for the year ended December 31, 1996.
Virginia Jurisdictional Rates
On November 12, 1996, the State Corporation Commission of Virginia (the
Virginia Commission) instituted a proceeding concerning Virginia Power's cost
of service and the possible restructuring of the electric utility industry and
directed Virginia Power to provide certain information, including any
alternative form of regulation proposed by Virginia Power, by March 31, 1997.
Virginia Power filed its proposed alternative regulatory plan with the
Virginia Commission on March 24, 1997. Virginia Power's plan proposes a freeze
of present base rates through December 31, 2002, during which time a portion
of earnings above the approved level would be used to accelerate the write-off
of generation-related regulatory assets and mitigate the costs associated with
payments under power purchase contracts with non-utility generators. It also
seeks approval in the principle of continued recovery of certain costs that
remain unrecovered at the end of the freeze period.
On March 28, 1997, the Staff of the Virginia Commission filed its Report in a
proceeding on Virginia Power's 1995 Annual Informational Filing (AIF). The
Report concludes that Virginia Power's earnings in 1995, after considering the
effect of the Staff's proposed adjustments, had not exceeded the 11.4% rate of
return on equity last authorized by the Virginia Commission. However, the
Staff's review of Virginia Power's 1995 AIF also considered certain updated
cost of service information and projected Virginia Power to earn in excess of
its authorized return on equity. Based on that analysis, the Report concludes
that, for purposes of establishing rates prospectively, a rate reduction of
$95.6 million, composed of $65.9 million of changes in Virginia Power's
current and ongoing cost of service and a $29.7 million one-time reduction in
Virginia Power's deferred capacity balance at December 31, 1996, may be
necessary in order to realign rates to the authorized level. Alternatively,
the Report states that, in view of the evolving nature of the electric utility
industry, the Commission may wish to consider remedies other than, or in
addition to, a rate reduction. Other remedies suggested by the Report included
allowing Virginia Power to maintain its current rate structure with residual
earnings being used to write off regulatory assets in order to mitigate the
recovery risk associated with such assets recorded on Virginia Power's books
or to establish a reserve for strandable assets.
12
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Virginia Power's alternative regulatory plan, which was filed subsequent to
the Staff's review of Virginia Power's 1995 AIF but before issuance of the
Staff's Report, provided for increases in certain costs not considered by the
Staff in its review of the 1995 AIF cost of service. As a result, Virginia
Power demonstrates that it is appropriate to retain the current level of base
rates. Furthermore, Virginia Power's plan, similar to an alternative suggested
in the Staff Report, proposes a five-year rate freeze during which time a
portion of earnings above the approved level would be used to write off
regulatory assets or to mitigate costs associated with power purchase
contracts with non-utility generators.
On March 6, 1997, in the proceeding in which Virginia Power filed its
alternative rate plan and in the separate 1995 AIF 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. On April 30, 1997, the
Virginia Commission entered an Order consolidating the proceedings on the
consideration of its 1996 cost of service, its present rates, and its fuel
cost recovery factor and other deferred accounting mechanisms. The Order
directs the Commission's Staff to conduct a full investigation into these
matters and encourages the parties and the Staff to engage in collaborative
and creative efforts to help achieve resolution of issues, especially issues
related to Virginia Power's contracts with non-utility generators, where
possible. The Order establishes a schedule for filing testimony, exhibits,
proposed settlements and stipulations, and responses beginning on October 15,
1997, and continuing through February 3, 1998. A public hearing is scheduled
to begin on February 16, 1998.
Federal Energy Regulatory Commission Audit
The Federal Energy Regulatory Commission (FERC) conducted a compliance audit
of Virginia Power's financial statements for the years 1990 through 1994 and
issued its final audit report dated April 18, 1997. The compliance exceptions
noted in the FERC's preliminary audit report were resolved without significant
effect on Virginia Power's financial position or results of operations.
Site Remediation
The Environmental Protection Agency (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 cost is expected to be in
the range of $1.7 million to $2.5 million, based upon allocation formulas and
the volume of waste shipped to the sites. As of March 31, 1997, Virginia Power
had accrued a reserve of $1.7 million to meet its obligations at these two
sites. Based on a financial assessment of the PRPs involved at these sites,
Virginia Power has determined that it is probable 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 two million dollar 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 has filed answers denying liability. A
trial date of August 18, 1997 has been set for one of the two actions seeking
$15 million.
13
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Virginia Power generally seeks to recover its costs associated with
environmental remediation from third party insurers. At March 31, 1997, any
pending or possible claims were not recognized as an asset or offset against
recorded obligations of Virginia Power.
NONUTILITY SUBSIDIARIES
Dominion Energy
Dominion Cogen, Inc., a wholly owned subsidiary of Dominion Energy, has an
investment interest in a corporation that owns two cogeneration plants in
Texas. Under terms of various equity support agreements entered into in
connection with this investment, Dominion Resources must provide contingent
equity support to Dominion Energy. While management believes that the
possibility of such support is remote, Dominion Resources could be required to
ensure that Dominion Energy has sufficient funds to meet its equity support
obligations which management does not believe will exceed $51.3 million.
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 March 31, 1997 no payments
have been required.
Dominion Capital
As of March 31, 1997, Saxon Mortgage, Inc. a wholly-owned subsidiary of
Dominion Capital has entered into commitments of approximately $153.2 million
to fund mortgage loans. The commitments for mortgages have original terms of
not more than 60 days.
Under certain circumstances Dominion Capital may be required to provide up to
$50 million of additional capital to FSF. This obligation is supported by a
letter of credit from Dominion Capital which is guaranteed by Dominion
Resources.
(K) LINES OF CREDIT
Dominion Resources and its subsidiaries have lines of credit and revolving
credit agreements that provide for maximum borrowings of $3,775 million. At
March 31, 1997, $2,581.2 million had been borrowed under such agreements. In
addition, these credit agreements supported $391.7 million of Dominion
Resources' commercial paper and $395 million of nonrecourse commercial paper
issued by Dominion Resources' subsidiaries which was outstanding at March 31,
1997. A total of $300 million of the commercial paper is classified as
long-term debt since it is supported by revolving credit agreements that have
expiration dates extending beyond one year.
(L) CHANGE IN ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share". This new standard
requires dual presentation of basic and diluted earnings per share ("EPS") on
the face of the earnings statement and requires a reconciliation of the
numerators and denominators of basic and diluted EPS calculations. This
statement will be effective for Dominion Resources' 1997 fiscal year. Dominion
Resources' current EPS calculation conforms to the diluted EPS presentation.
Basic EPS is not expected to be materially different from diluted EPS since
potential common shares in the form of stock options are not materially
dilutive.
14
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DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
This 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, the Virginia
Commission and UK regulatory authorities), industry and rate structure, general
industry trends, 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, 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, including
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 cost,
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
forwardlooking statement or statements to reflect events or circumstances after
the date on which such statement is made.
DOMINION RESOURCES - CONSOLIDATED
FINANCIAL CONDITION
Earnings Per Share
Three Months Ended
March 31,
1997 1996
---- ----
Virginia Power $0.56 $0.81
East Midlands .27
Nonutility .10 .04
----- -----
$0.93 $0.85
===== =====
The results of operations for the interim periods are not necessarily indicative
of the results to be expected for the full year. Information for quarterly
periods is affected by seasonal variations in sales, rate changes, timing of
fuel expense recovery and other factors.
15
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Consolidated earnings were up 8 cents per share in the first quarter of 1997
when compared to the same period in 1996. The increase was primarily due to
earnings supplied by East Midlands, which was acquired in 1997. The earnings
from East Midlands were offset by the decrease in earnings from Virginia Power
which were primarily due to unusually mild weather experienced in the first
quarter of 1997 versus the extremely cold weather in the first quarter of 1996.
Dominion Resources' nonutility subsidiaries earned 10 cents per share in the
first quarter of 1997, up 6 cents per share from the same period last year.
Dominion Energy's earnings increased primarily due to increased production
volumes and prices for natural gas produced and sold and increased power
generation production. Dominion Capital's earnings increased primarily due to
the securitization of a package of residential mortgages at its mortgage
servicing operation.
RESULTS OF OPERATIONS
Operating revenues increased in the first quarter of 1997 as compared to the
same period last year primarily due to the revenues of East Midlands, which was
acquired in 1997. Operating expenses increased in the first quarter of 1997 as
compared to the same period last year primarily due to the addition of East
Midlands' operating expenses.
LIQUIDITY
Cash Flows From Operations
Cash flows from operating activities for the first quarter 1997 decreased as
compared to the first quarter of 1996 primarily due to normal operations plus
the funding of mortgage loans prior to the securitization of such loans in
Dominion Resources' financial service business.
Cash Flows From Financing Activities
During the first three months of 1997, net cash flows from financing activities
were $2,074.2 million due to the issuance of long-term debt to finance, the
first quarter mandatory maturities of First and Refunding Mortgage Bonds at
Virginia Power, the acquisitions of East Midlands and the remaining interest in
a subsidiary by Dominion Capital. In addition, the increase was due to the
issuance of short-term debt to finance the acquisition of East Midlands.
On April 18, 1997, the Board of Directors of Dominion Resources declared a
quarterly common stock dividend of $0.645 per share, payable June 20, 1997 to
holders of record at the close of business May 30, 1997.
Dominion Resources issued 1,135,116 net shares of common stock through its
Dominion Direct Investment and Employee Savings Plan (see Note (C) to
CONSOLIDATED FINANCIAL STATEMENTS) during the three-month period ended March 31,
1997.
The proceeds from issuance of common stock are invested on a short-term basis by
Dominion Resources and ultimately utilized to provide equity capital to its
subsidiaries generally within the same calendar year as the issuance of the
common stock.
Cash Flows Used In Investing Activities
Cash flows used in investing activities for the first quarter of 1997 were
$2,114.3 million primarily due to, the acquisition of East Midlands, utility
plant capital expenditures at Virginia Power and Dominion Capital's acquisition
of the remaining interest of a subsidiary.
16
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
VIRGINIA POWER
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operations
Internal generation of cash during the first quarter of 1997 provided 186% of
funds required for Virginia Power's capital requirements compared to 284% during
the first quarter of 1996.
With the completion of the Clover Power Station in 1996, Virginia Power is in a
period in which internal cash generation should exceed construction
expenditures.
As detailed in the Consolidated Statements of Cash Flows, cash flow from
operating activities for the three-month period ended March 31, 1997 decreased
$94.9 million as compared to the three-month period ended March 31, 1996. The
decrease was primarily attributable to a decline in sales caused by the
unusually mild weather in the first quarter of 1997, coupled with the higher
level of sales in the first quarter of 1996 due to extremely cold weather.
Cash Flows To Financing Activities
Cash from (used in) financing activities was as follow:
Three Months Ended
March 31,
1997 1996
---- ----
(Millions)
Mortgage bonds $ 200.0
Short-term debt (8.6) $(144.0)
Pollution control securities 24.5
Repayment of long-term debt (299.3) (58.9)
Dividends (104.6) (104.2)
Preferred securities distribution (2.7) (2.7)
Other (2.5) (2.1)
------- -------
Total $(217.7) $(283.2)
======= =======
Financing activities for the first three months of 1997 resulted in a net cash
outflow of $217.7 million.
On February 25, 1997, Virginia Power issued $200 million of First and Refunding
Mortgage Bonds of 1997, Series A, 6.75%, due February 1, 2007. The proceeds from
the sale of these bonds and cash provided by operating activities were used to
fund first quarter 1997 mandatory maturities of First and Refunding Mortgage
Bonds in the amount of $299.3 million.
On April 8, 1997, the Industrial Development Authority of the Town of Louisa,
Virginia issued $10 million of Solid Waste and Sewage Disposal Revenue Bonds,
Series 1997A, due April 1, 2022, that were secured by a pledge of payments to be
made by Virginia Power. The bonds bear interest at a fixed rate of 5.15% for an
initial five-year period. The interest rate may be either fixed or variable for
subsequent specified periods. The proceeds from the sale of these bonds were
used to finance certain solid waste and sewage disposal equipment previously
installed at Virginia Power's North Anna Power Station located in Louisa County,
Virginia.
17
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DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Virginia Power's commercial paper program is supported by credit facilities
totaling $500 million. Borrowings under the commercial paper program were $303.8
million at March 31, 1997, which is a decrease of $8.6 million from the balance
at December 31, 1996. Proceeds from the sale of commercial paper are primarily
used to finance working capital for operations.
In January 1997, Virginia Power filed a registration statement with the
Securities and Exchange Commission for $400 million of Junior Subordinated
Debentures. Virginia Power has two additional shelf registration statements for
debt securities registered with the Securities and Exchange Commission, one for
$575 million of First and Refunding Mortgage Bonds (of which $200 million has
been issued) and the other for $200 million of Medium-Term Notes, Series F.
These three shelf registrations combine to provide 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 Flows Used in Investing Activities
Cash from (used in) investing activities was as follows:
Three Months Ended
March 31,
1997 1996
---- ----
(Millions)
Utility plant expenditures $ (73.9) $ (75.9)
Nuclear fuel (18.8) (31.5)
Nuclear decommissioning
contributions (9.1) (9.0)
Purchase of assets (20.0) (13.7)
Other 1.3 (4.0)
------- -------
Total $(120.5) $(134.1)
======= =======
Investing activities for the first three months of 1997 resulted in a net cash
outflow of $120.5 million primarily due to $73.9 million of construction
expenditures, $18.8 million of nuclear fuel expenditures and approximately $20
million for the purchase of a gas-fired combined cycle generator. Of the
construction expenditures, Virginia Power spent approximately $57.2 million on
transmission and distribution projects, $9.2 million on production projects,
$6.6 million on general support facilities, and $0.9 million on clean air
projects.
RESULTS OF OPERATIONS
Balance available for Common Stock decreased by $42.3 million for the
three-month period ended March 31, 1997, as compared to the same period in 1996,
primarily as a result of the unusually mild weather experienced in the first
quarter of 1997 versus the extremely cold weather in the first quarter of 1996.
18
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Operating Revenues
Operating revenues changed primarily due to the following:
Three Months Ended March 31,
----------------------------
1997 vs. 1996
-------------
(Millions)
Customer growth $ 12.7
Weather (80.8)
Change in base revenues (1.4)
Fuel cost recovery 11.0
Other, net (7.8)
------
Total retail (66.3)
------
Sales for resale 24.5
Other operating revenues 4.7
------
Total $(37.1)
======
Customer kilowatt-hour sales changed as follows:
Three Months Ended March 31,
----------------------------
1997 vs. 1996
-------------
Residential (11.8)%
Commercial (4.9)
Industrial 0.7
Public authorities (5.1)
Total retail sales (7.3)
Resale 47.2
Total sales 1.0
Heating and cooling degree days during the first quarter were as follows:
1997 1996 Normal
---- ---- ------
Heating degree days 1,856 2,334 2,050
Percentage change
compared to prior year (20.5) 21.4
Cooling degree days 6 0 7
The decrease in retail kilowatt-hour sales for the three-month period ended
March 31, 1997 reflects the mild weather experienced in the first quarter of
1997 compared to the unusually cold weather in the first quarter of 1996. The
decline was partially offset by sales to 30,200 retail customers added during
1996.
The increase in sales for resale for the three-month period ended March 31,
1997, as compared to the same period in 1996, was primarily due to Virginia
Power's heightened power marketing efforts.
19
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Operation - Other
Other operating expenses increased for the three-month period ended March 31,
1997, as compared to the same period in 1996, primarily due to the wages and
salaries associated with certain employees who have been redesignated as
supporting operations rather than maintenance activities, transmission expenses
related to Virginia Power's increased off-system sales, expenses attributable to
the growth of Virginia Power's Energy Service Business, increased computer lease
expenses, and lump sum merit payments to Virginia Power's employees. The
increases in other operating expenses were partially offset by a decrease in
salaries and wages pursuant to Vision 2000 involuntary separations.
Restructuring
As part of the Vision 2000 program (see Note (I) to CONSOLIDATED FINANCIAL
STATEMENTS), Virginia Power recorded $5.4 million of restructuring charges in
the first quarter of 1996. Virginia Power had completed the significant portions
of its Vision 2000 review as of December 31, 1996. The savings from Virginia
Power's Vision 2000 initiatives, including those staffing reductions, are being
realized as lower construction and operation and maintenance costs than
otherwise would have been incurred. A portion of these savings, to the extent
that they result in earnings above the approved level, will be used to
accelerate the write-off of generation-related regulatory assets and mitigate
the costs associated with payments under power purchase contracts with
non-utility generators. For additional information, see Note (J) to CONSOLIDATED
FINANCIAL STATEMENTS.
Income Taxes
Income taxes decreased for the three-month period ended March 31, 1997, as
compared to the same period in 1996 primarily as a result of decreased income
subject to tax.
Contingencies
For information on contingencies, see Note (J) to CONSOLIDATED FINANCIAL
STATEMENTS.
FUTURE ISSUES
Competition
Presently, Virginia Power expects to continue to operate under regulation and to
recover its cost of providing traditional electric service. However, the form of
cost-based rate regulation under which Virginia Power operates is likely to
evolve as a result of various legislative or regulatory initiatives, including
Virginia Power's alternative regulatory plan filed with the Virginia Commission
on March 24, 1997 (see Note (J) to CONSOLIDATED FINANCIAL STATEMENTS). At this
time, Virginia Power management can predict neither the ultimate outcome of
regulatory reform in the electric utility industry nor the impact such changes
would have on Virginia Power.
For additional information, see Future Issues-Competition under MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION included
in Dominion Resources' Annual Report on Form 10-K for the year ended December
31, 1996.
20
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
DOMINION ENERGY
LIQUIDITY
Cash Flows From Operations
Cash flows from operations for the three months ended March 31, 1997 increased
by $58.6 million as compared to the three months ended March 31, 1996 primarily
due to cash flows from income from the acquisition of power generation assets in
Peru in August 1996 and higher gas prices and greater production volumes due to
the acquisition of natural gas properties in the Gulf Coast area in March 1996
and in Michigan in January 1997.
Cash Flows Used In Investing Activities
Cash from (used in) investing activities was as follows:
Three Months Ended
March 31,
1997 1996
---- ----
(Millions)
Purchase of natural gas properties $ (6.5) $(53.3)
Purchase of generation assets (31.5) (6.2)
Other (12.8) 8.9
------ ------
Total $(50.8) $(50.6)
====== ======
As of March 31, 1997, cash used in investing activities was utilized to purchase
fixed assets primarily at the foreign power generation plants.
CAPITAL RESOURCES
During the first three months of 1997, Dominion Energy expended $39 million on
capital requirements. Total capital requirements for 1997 are estimated to be
$375 million.
RESULTS OF OPERATIONS
Net Income increased during the first quarter of 1997 as compared to the same
period in 1996 primarily due to income from the acquisition of power generation
assets in Peru in August 1996 and higher gas prices and greater production
volumes due to the acquisition of natural gas properties in the Gulf Coast area
in March 1996 and in Michigan in January 1997.
DOMINION CAPITAL
LIQUIDITY
Cash Flows From (Used In) Financing Activities
Cash from (to) financing activities was as follows:
Three Months Ended
March 31,
1997 1996
---- ----
(Millions)
Investment from parent $ 59.0 $ 15.0
Issuance of long-term debt 197.1
Repayment of long-term debt (9.5) (27.4)
Other 32.3 11.9
------ ------
Total $278.9 $ (0.5)
====== ======
During the first three months of 1997 cash flows from financing activities were
$278.9 primarily due to the issuance of long-term debt and the equity infusion
from Dominion Resources. The proceeds were utilized to acquire Household
Commercial Financial Services, Inc.'s interest in First Source Financial and
originate mortgage loans at Saxon Mortgage.
21
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Cash Flows Used In Investing Activities
Cash from (used in) investing activities was as follows:
Three Months Ended
March 31,
1997 1996
---- ----
(Millions)
Marketable securities $ 49.5
Acquisition of remaining interest
in subsidiary (96.1)
Other (3.2) $(0.1)
------ -----
Total $(49.8) $(0.1)
====== =====
During the first three months of 1997, cash flows used in investing activities
increased primarily due to the acquisition of the remaining interest in First
Source Financial, Inc.
CAPITAL RESOURCES
During the first three months of 1997, Dominion Capital expended $57 million on
capital requirements. Estimated capital requirements for 1997 are $104 million.
RESULTS OF OPERATIONS
Net income and operating revenues increased during the first quarter of 1997 as
compared to the same period in 1996 primarily due to a residential mortgage
securitization performed by Saxon Asset Securities Company.
22
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
EAST MIDLANDS
LIQUIDITY
Financing the Acquisition
In the first quarter of 1997, Dominion Resources acquired 100% indirect
ownership of East Midlands by means of a cash tender offer commenced on November
22, 1996. Dominion Resources, through two UK financing subsidiaries, obtained
the funds necessary for the tender offer in part from borrowings of
approximately 640 million pounds sterling ($1,055 million) under a short-term
credit agreement and borrowings of 700 million pounds sterling ($1,154 million)
under a revolving credit agreement, both guaranteed by Dominion Resources. The
direct holding company of East Midlands issued approximately 12 million pounds
sterling in unsecured loan notes, with the remainder of the funds contributed
indirectly by Dominion Resources.
On May 9, 1997, DR Investments, one of the UK financing subsidiaries, issued
$819 million (500 million pounds sterling) of five- and ten- year senior notes,
the net proceeds of which will be used to pay down debt borrowed under the
short-term credit agreement.
Dominion Resources anticipates additional capital markets borrowings, the net
proceeds of which will be used to repay the remainder of the short term debt and
to fund the expected return of share capital of 160 million pounds sterling to
the parent of DR Investments which previously had invested capital in DR
Investments as a part of the initial funding for the acquisition of East
Midlands. It is anticipated that these additional borrowings will consist of a
200 million pounds sterling five-year term loan and a 100 million pounds
sterling ten- to twelve-year Eurobond issuance.
CAPITAL RESOURCES
During the first three months of 1997, East Midlands expended $42.2 million on
capital requirements. Estimated capital requirements for 1997 are $210.6
million. The sources for these capital requirements plus normal costs of
operations are: cash from operations, various banking facilities, and a
commercial paper program.
RESULTS OF OPERATIONS
A separate discussion of East Midlands is not presented because it was not part
of Dominion Resources' consolidated entity during the first three months of
1996.
FUTURE ISSUES
Regulation - General
As a Regional Electric Company (REC) holding a Public Electricity Supply License
(PES License), East Midlands is subject to extensive regulation of its prices
and other aspects of its business, specifically including its rates and terms
and conditions for its distribution (transfer of electricity across its low
voltage distribution system to consumers) and supply (purchase of electricity
from generators for resale to consumers) businesses. The current regulatory
framework governing the electricity distribution and supply businesses in
England and Wales has been in existence since 1990. As with any regulated
company, no assurance can be given that laws or regulations will not change, or
that current laws and regulations will not be implemented, in a manner that
could adversely affect the operations of East Midlands.
23
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DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Price Regulation of Distribution
Because electricity customers in England and Wales have no choice as to the
distribution system from which they receive their electricity, the distribution
business is controlled by the Distribution Price Control Formula, a formula of P
x (1+(RPI-Xd)) where P reflects the previous maximum average price per unit of
electricity distributed, RPI reflects the percentage change in the UK Retail
Price Index (RPI) between the previous year and the current year and the Xd
factor is established by the Director General of Electricity Supply (the
Regulator) following review. The Distribution Price Control Formula determines
the maximum average price per unit of electricity distribution (express in
kilowatt hours, a unit) that any REC may charge in any year. The elements used
in the Distribution Price Control Formula have been established for a five-year
period and have been subject to review by the Regulator at the end of each
five-year period and at other times at the discretion of the Regulator. Upon
privatization of the RECs, the Regulator set the Xd factor to permit annual
price increases by East Midlands of 1.25% greater than RPI for the five year
period ending on March 31, 1995. Following a scheduled distribution price review
by the Regulator of all twelve RECs in August 1994, the Regulator required an
overall reduction in East Midland's regulated distribution prices for the year
ending March 31, 1996 of 11% from the previous year, and set the Xd factor for
the subsequent four year period ending on March 31, 2000 to subtract 2% from RPI
in each such year. Following an unscheduled distribution price review by the
Regulator of all twelve RECs in July 1995, the Regulator revised East Midland's
regulated distribution prices for the four-year period ending March 31, 2000,
requiring instead an overall reduction in East Midlands's regulated distribution
prices for the year ending March 31, 1997 of 13% from the previous year, and
resetting the Xd factor for the remaining three year period ending March 31,
2000 to subtract 3% from RPI for each such year. Because the maximum average
price in any year is based in part on the maximum average price in the preceding
year, a price reduction in any given year has an ongoing effect on the maximum
average price for all subsequent years. There can be no assurance that the
Regulator will not perform further unscheduled distribution price reviews, or
that any future distribution price review, whether unscheduled or scheduled,
will not result in price reductions or changes in the Xd factor which could
materially adversely affect East Midlands.
Competition in Supply
Currently, each PES License holder has an exclusive right, subject to price cap
regulation based on the Supply Price Control Formula(P x (1+(RPI-Xs)))+Y where
P reflects the maximum average price per unit of electricity supplied, RPI
reflects the percentage change in the Retail Price Index between the previous
year and the current year, the Xs factor is established by the Regulator
following review and the Y term is a pass through of certain costs, to supply
its franchise area customers that have a maximum three-month average peak demand
(as used herein, peak demand) of not more than 100kW (the Franchise Supply
Customers). However, in contrast with the distribution business referred to
above, the supply business is being progressively opened to full competition.
The market for customers with a peak demand above 1 MW has been open to
competition among suppliers of electricity since privatization in 1990 while,
for customers with a peak demand above 100kW (the Non-Franchise Supply
Customers), the market became competitive in April 1994. The final stage of this
process is currently scheduled to begin on April 1, 1998, when the exclusive
right of PES License holders to supply Franchise Supply Customers is scheduled
to end. The current proposal is for a fully competitive market to be introduced
over a six-month period beginning April 1, 1998. There can be no assurance that
competition among suppliers of electricity will not adversely affect East
Midlands.
24
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Pool Purchase Price Volatility
East Midlands Electricity's supply business generally involves entering into
fixed price contracts to supply electricity to customers. East Midlands obtains
substantially all of the electricity to satisfy its obligations under such
contracts through purchases from the wholesale trading market for electricity in
England and Wales (the Pool).
Within the Pool, the prices are set, for each half hour period and are only
fixed one day ahead. In order to stabilize the Pool price, Contracts For
Differences (CFDs) are entered into to hedge against the price volatilities.
CFDs are contracts predominantly entered into between generators and suppliers
to fix the price of a contracted quantity of electricity over a specified
period. Differences between the actual prices set by the Pool and the agreed
prices give rise to different payments between the parties to the particular CFD
within the franchise market.
The legislation governing the market for Franchise Supply Customers permits the
pass-through to customers of prudent costs, including CFDs which hedge against
Pool price volatility. At the present time, East Midlands' forecast franchise
supply market demand for Fiscal 1998 is substantially hedged through various
types of agreements, including CFDs.
In a competitive supply market, East Midlands is exposed to two principal risks
associated with such contracts: (i) purchasing price risk (East Midlands' cost
of purchased electricity relative to the price East Midlands receives from the
supply customer) and (ii) load shape risk (the risk associated with a shift in
the customer's usage pattern, including absolute amounts demanded and timing of
amounts demanded). East Midlands' employs risk management methods to maximize
its return consistent with an acceptable level of risk. East Midlands seeks to
hedge purchasing price risk through a variety of risk management tools,
including management of its supply contract portfolio, CFDs, option arrangements
and other means which mitigate risk of future Pool price volatility. Load shape
risk is mitigated by paying detailed attention to forecasting demand.
East Midland's ability to manage its purchasing price risk depends, in part, on
the future availability of appropriately priced risk management mechanisms such
as CFDs. No assurance can be given that an adequate, transparent market for such
products will continue to be available. No assurance can be given that this risk
will be effectively mitigated.
Possible Change in Government Policy
At the UK general election held on May 1, 1997, the Labour Party obtained a
majority in the House of Commons, ending 18 years of government by the
Conservative Party. Certain senior members of the Labour Party have recently
made statements regarding policies which a Labour government will introduce,
including a windfall tax on so-called excess profits of certain companies,
including certain utilities such as the RECs, as well as referring the whole
electricity industry to the competition authorities. Labour Party leaders have
indicated that a windfall tax applicable to privatized companies, including the
RECs will be included in the Labour government's first budget. Although Labour
Party leaders have indicated that such tax might seek to raise from 3 billion to
10 billion pounds sterling in aggregate, the size and timing of any such tax
made applicable to East Midlands would depend upon many factors that have not
been decided, including the number of companies or type of industries subject to
such tax, the method of applying such tax to such companies and the amount
sought to be raised. Any such tax may result in additional borrowings by East
Midlands and/or DR Investments. There can be no assurance that the policies of
the UK government would not materially adversely affect East Midlands.
25
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Electromagnetic Fields
Possible adverse health effects of electro-magnetic fields (EMFs) from various
sources, including transmission and distribution lines, have been the subject of
a number of studies and increasing public discussion. The scientific research
currently is inconclusive as to whether EMFs can cause adverse health effects.
Claims are currently being brought against other companies within the UK
electricity business alleging damages caused by EMFs. East Midlands believes
that it has taken and continues to take sufficient measures to comply with the
applicable laws and governmental regulations for the protection of the
environment.
26
<PAGE>
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DOMINION ENERGY
In reference to the lawsuit filed by Dominion Energy and Dominion Cogen D.C.,
Inc. (collectively, the Plaintiffs) against the District of Columbia (the
District) for deprivation of due process, on April 21, 1997 the Plaintiffs filed
with the Court their Amended Answer and Affirmative Defenses to Counterclaim in
which they denied all of the District's allegations of fraud, negligent
misrepresentation, negligent retention, unjust enrichment and civil conspiracy
and stated affirmative defenses to those allegations.
VIRGINIA POWER
On April 2, 1997, Doswell Limited Partnership (Doswell) filed a motion for
judgment against Virginia Power in the Circuit Court of the City of Richmond.
Doswell is an independent power producer that has entered into two power
purchase agreements with Virginia Power for the supply of dependable capacity
and electrical power. The motion for judgment claims that Virginia Power
breached one of those agreements by assessing liquidated damages against Doswell
totaling approximately $38 million due to a forced outage that Doswell
experienced. The forced outage allegedly was caused by a turbine blade failure
in one of Doswell's turbines. Doswell claims that the failure is excused as an
event of Force Majeure and that the liquidated damages provisions in the
agreement at issue are not enforceable. On April 25, 1997, Virginia Power filed
a Demurrer seeking to dismiss the lawsuit.
Also, on April 2, 1997, Doswell filed a complaint against Virginia Power in the
US District Court for the Eastern District of Virginia, Richmond Division. The
complaint alleges that Virginia Power has breached the two power purchase
agreements by improperly dispatching Doswell's generating facilities and by
underpaying certain energy payments specified in the agreements. Doswell has
asserted state law claims of fraud and breach of contract for which it seeks no
less than $20 million. Doswell also contends that Virginia Power's conduct
violates the federal Racketeer Influenced and Corrupt Organizations Act (RICO).
Doswell seeks treble damages of no less than $60 million under that count.
Virginia Power denies any wrongdoing and on April 24, 1997, filed a Motion to
Dismiss the lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Dominion Resources Annual Shareholders Meeting was held on April 18, 1997 and
the following issues were voted on by shareholders:
ELECTION OF DIRECTORS
a) The following Directors were elected to the Board of Directors for terms
expiring in the year 2000:
Votes
-------------------------------------
Director For Withheld
- -------- --- --------
John B. Bernhardt 154,789,073 5,273,091
Thos. E. Capps 154,607,299 5,454,865
S. Dallas Simmons 154,087,667 5,974,497
Robert H. Spilman 154,700,609 5,361,555
27
<PAGE>
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
b) The following incumbent Directors will continue on the Board of Directors
with terms expiring in the years indicated:
Director Term Expiring
- -------- -------------
John B. Adams, Jr. 1998
Benjamin J. Lambert, III 1998
Richard L. Leatherwood 1998
Frank S. Royal 1998
Harvey L. Lindsay, Jr. 1999
Kenneth A. Randall 1999
William T. Roos 1999
Judith B. Sack 1999
DOMINION RESOURCES, INC. INCENTIVE COMPENSATION PLAN
The shareholders voted in favor of an employee Incentive Compensation Plan as
follows:
Votes
-----
For 141,790,125
Against 14,261,931
Abstain 4,010,106
DESIGNATION OF INDEPENDENT CERTIFIED PUBIC ACCOUNTANTS
The shareholders also voted in favor of the designation of Deloitte & Touche LLP
as Dominion Resources' independent certified public accountants to audit the
consolidated financial statements for the year 1997. The vote was as follows:
Votes
-----
For 157,475,887
Against 1,017,191
Abstain 1,569,086
ITEM 5. OTHER INFORMATION
In reference to the purchase of the Kincaid Power Station from Commonwealth
Edison Company (ComEd) by Kincaid Generation, L.L.C. (LLC), a subsidiary of
Dominion Energy, in March 1997, the Illinois Commerce Commission (ICC) issued an
order approving the transaction. ComEd and certain intervenors requested
rehearing before the ICC, and certain intervenors requested the ICC to stay the
effort of its approval order, all requests were denied by the ICC. ComEd and an
intervenor have filed appeals to the Appellate Court of Illinois for the Fourth
District.
VIRGINIA POWER
Regulation
General
In February 1997, Senate Bill No. 38, entitled the Study Commission on the
Future of Electric Service in North Carolina, was introduced in the North
Carolina Legislature. The legislation, which was enacted on April 30, 1997,
establishes a study committee to examine the cost, adequacy, availability and
pricing of electricity in the state. The study commission will be comprised of
consumers, legislators and industry officers.
28
<PAGE>
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
Virginia
In reference to its application before the Virginia Commission for authority to
provide interexchange non-switched dedicated telecommunication services
throughout Virginia, on April 28, 1997, Virginia Power and its wholly-owned
subsidiary, VPS Communications, Inc. (VPSC), filed with the Virginia Commission
an amendment to that application requesting that the authority to provide such
services be given to VPSC instead of Virginia Power. Also on April 28, 1997,
Virginia Power and VPSC filed for approval of three affiliate agreements that
will support VPSC's provision of telecommunications service: an Affiliate
Services Agreement, a Fiber Lease Agreement, and an Inter-Company Credit
Agreement.
On April 30, 1997, the Virginia Commission entered an order consolidating the
proceedings on Dominion Resources' 1995 Annual Information Filing and its
proposed alternative regulatory plan, filed on March 24, 1997. An extensive
discussion of the proceedings is provided in Note (J) to CONSOLIDATED FINANCIAL
STATEMENTS, Contingencies, Virginia Power, Virginia Jurisdictional Rates.
In reference to the proceeding before the Virginia Commission for approval of
certain power supply arrangements between Virginia Power and Chesapeake Paper
Products Company, on April 21, 1997, a Hearing Examiner for the Virginia
Commission issued a report recommending approval of those arrangements.
FERC
In reference to LG&E Westmoreland Southampton's request for a waiver of the
Federal Energy Regulatory Commission (FERC) operating requirements for
Qualifying Facilities (Qfs) under the Public Utility Regulatory Policies Act of
1978 (PURPA) and its resulting Petition for Review against FERC in the U.S.
Court of Appeals for the D.C. Circuit, the U.S. Court of Appeals for the D.C.
Circuit entered an Order granting FERC's motion to dismiss Southampton's
Petition for Review on March 31, 1997.
Nuclear
In reference to Virginia Power's joint petition with thirty-five other utility
petitioners against the U.S. Department of Energy (DOE) in the U.S. Court of
Appeals for the District of Columbia, on March 19, 1997, the court consolidated
the utilities' lawsuit with a parallel lawsuit filed by numerous states and
state agencies against DOE on January 31, 1997. In April, the utilities and the
state petitioners filed motions to expedite the calendaring of these cases. On
April 30, the Court ordered that the pending petitions be construed as seeking
to compel DOE to comply with the mandate in Indiana Michigan Power Co. v.
Department of Energy, in which the court held that DOE has an unconditional
obligation to begin disposing of spent nuclear fuel by January 31, 1998,
reciprocal to the utilities obligation to pay fees into the Nuclear Waste Fund.
On May 7, in response to the court's order, the utilities and state petitioners
filed petitions for mandamus seeking relief similar to that sought in the
original petitions.
29
<PAGE>
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
Rates
Virginia
In the proceeding before the Virginia Commission involving an increase in
Virginia Power's recovery of fuel expenses and the Commission's investigation
regarding disposal of spent nuclear fuel, on March 20, 1997, the Commission
granted its Staff's motion to remove the spent nuclear fuel disposal issue from
the case and return it to a separate proceeding. A hearing was held on the
requested increase in the recovery of fuel expenses on April 17, 1997.
North Carolina
In Virginia Power's filing for approval of a new Schedule 19, a public hearing
was held on February 4, 1997. Briefs were filed by parties to the proceeding on
March 4, 1997.
Interconnections
In reference to the planned test of principles developed by the General
Agreement on Parallel Paths (GAPP), whose participants would include Virginia
Power and five other North American utilities, on March 25, 1997, FERC approved
the GAPP Experiment Participation Agreement for a two-year period, beginning on
April 2, 1997. FERC stated that the experiment will provide the industry with
information about the effects of regional power flows under the new Open Access
regulations and allow participants to analyze actual power flow paths to ensure
equitable compensation.
30
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10 - Dominion Resources, Inc. Incentive Compensation Plan, effective
April 22, 1997 (Exhibit 99, Form S-8 Registration Statement,
File No. 333- 25587, incorporated by reference)
11 - Statement re: computation of per share earnings (included
in this Form 10-Q on page 4)
27 - Financial Data Schedule (filed herewith)
(b) Report on Form 8-K.
Dominion Resources filed a report on January 23, 1997 on Form 8-K
relating to the acquisition 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, Form
8-K/A, filed March 20, 1997, reporting the required financial and
proforma financial information for the acquisition of East Midlands
Electricity, plc.
31
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOMINION RESOURCES, INC.
Registrant
BY JAMES L. TRUEHEART
-----------------------------
James L. Trueheart
Vice President and Controller
(Principal Accounting Officer)
May 14, 1997
32
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