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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
---------------
(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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM --------- TO ---------
COMMISSION FILE NUMBER 1-8489
-------------------------
DOMINION RESOURCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C>
VIRGINIA 54-1229715
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
120 TREDEGAR STREET
RICHMOND, VIRGINIA 23219
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(804) 819-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------------------ ------------------------------------------
<S> <C>
Common Stock, no par value New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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 $8,679,803,841 based on the closing price of our Common Stock on
January 29, 1999, 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.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT JANUARY 31, 1999
<S> <C>
Common Stock, no par value 193,962,097
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE:
(a) Portions of the 1998 Annual Report to Shareholders for the fiscal year
ended December 31, 1998 are incorporated by reference in Parts I, II and
IV hereof.
(b) Portions of the 1999 Proxy Statement, dated March 1999, are
incorporated by reference in Part III hereof.
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<PAGE>
DOMINION RESOURCES, INC.
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER NUMBER
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<S> <C> <C>
PART I
1. Business
The Company ............................................................................... 1
Dominion Capital .......................................................................... 1
Dominion Energy ........................................................................... 1
Virginia Power ............................................................................ 2
Competition ............................................................................... 2
Regulation ................................................................................ 3
Rates ..................................................................................... 5
Sources of Power .......................................................................... 7
Interconnections .......................................................................... 9
Capital Requirements and Financing Program ................................................ 10
2. Properties ................................................................................ 10
3. Legal Proceedings ......................................................................... 10
4. Submission of Matters to a Vote of Security Holders ....................................... 10
Executive Officers of the Registrant ...................................................... 11
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 11
6. Selected Financial Data ................................................................... 12
7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 12
7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 12
8. Financial Statements and Supplementary Data ............................................... 12
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 12
PART III
10. Directors and Executive Officers of the Registrant ........................................ 12
11. Executive Compensation .................................................................... 12
12. Security Ownership of Certain Beneficial Owners and Management ............................ 12
13. Certain Relationships and Related Transactions ............................................ 13
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 13
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
Dominion Resources, Inc. (Dominion Resources), a diversified utility
holding company, has its principal office at 120 Tredegar Street, Richmond,
Virginia 23219, telephone (804) 819-2000. Its principal subsidiary is Virginia
Electric and Power Company, a regulated public utility engaged in the
generation, transmission, distribution and sale of electric energy in Virginia
and northeastern North Carolina. Its other major subsidiaries are Dominion
Capital, Inc., its diversified financial services company, and Dominion Energy,
Inc., its independent power and natural gas subsidiary.
Dominion Resources was incorporated in 1983 as a Virginia corporation.
Dominion Resources and its subsidiaries had 11,033 full-time employees as of
December 31, 1998. Dominion Resources is currently exempt from registration as
a holding company under the Public Utility Holding Company Act of 1935.
Dominion Resources also owns and operates a 365 Mw natural gas fired
generating facility in the United Kingdom.
RECENT DEVELOPMENTS
On February 19, 1999, Dominion Resources and Consolidated Natural Gas
Company (CNG) entered into an Agreement and Plan of Merger whereby CNG will
merge into Dominion Resources, with Dominion Resources being the surviving
corporation. The CNG shareholder will receive 1.52 shares of Dominion Resources
common stock for each CNG share. At signing, the transaction was valued at $6.3
billion. Headquarters will remain in Richmond, Virginia. Each company's Board
of Directors has approved the merger; however, the following remaining
approvals must be obtained: shareholder approval by each company; various
federal and state regulatory approvals; opinions of counsel on the tax-free
nature of the merger and letters of independent certified public accountants
that the merger will qualify as a pooling of interests for accounting purposes.
The companies anticipate the transaction can be completed in about twelve
months. For a more detailed description of the merger, see: (1) the Agreement
and Plan of Merger, attached as Exhibit 2(ii) and (2) the Press Release,
attached as Exhibit 99, each exhibit filed as a part of this 1998 Form 10-K.
On July 27, 1998, Dominion Resources sold East Midlands Electricity plc,
the principal operating subsidiary of Dominion Resources' United Kingdom
holding company, Dominion U.K. Holding, Inc. East Midlands is principally an
electricity supply and distribution company serving more than 2.3 million homes
and businesses in the East Midlands region of the United Kingdom. PowerGen plc
acquired East Midlands in a transaction valued at $3.2 billion. Dominion
Resources recorded an after-tax gain on the sale of $200.7 million in the third
quarter of 1998.
DOMINION CAPITAL
Dominion Capital is a diversified financial services company with several
operating subsidiaries in the commercial lending, merchant banking and
residential lending business. Its principal subsidiaries are First Source
Financial, LLP, First Dominion Capital LLC and Saxon Mortgage, Inc. Dominion
Capital also owns a 46 percent interest in Cambrian Capital LLP.
First Source Financial provides cash-flow and asset-based financing to
middle-market companies seeking to expand, recapitalize or undertake buyouts.
First Dominion Capital is an integrated merchant banking and asset management
business located in New York. Saxon Mortgage and its affiliates originate and
securitize home equity and mortgage loans to individuals. Cambrian Capital
provides financing to small and mid-sized independent oil and natural gas
producers undertaking acquisitions, refinancings and expansions.
For information regarding a future competitive market, see Future Issues
- -- DOMINION CAPITAL under MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATION
(MD&A) on page 31 of the 1998 Annual Report to Shareholders.
DOMINION ENERGY
Dominion Energy is active in the competitive electric power generation
business and in the development, exploration and operation of oil and natural
gas reserves. Dominion Energy is involved in power projects in five states,
Argentina, Bolivia, Belize and Peru. Domestic power projects include the
Kincaid Power Station, a 1,108 Mw coal fired station in Central Illinois; a 600
Mw gas fired peaking facility under construction in Central Illinois; two
geothermal projects and one solar project
1
<PAGE>
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 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 also involved in oil
and natural gas development and exploration in Canada, the Appalachian Basin,
the Michigan Basin, the Illinois Basin, the Black Warrior Basin, the Uinta
Basin, the Gulf Coast and the Mid-Continent, and owns net proved oil and
natural gas reserves in key regions of the United States and Canada.
For information regarding a future competitive market, see Future Issues
- -- DOMINION ENERGY under MD&A on page 31 of the 1998 Annual Report to
Shareholders. For information regarding nitrogen oxide requirements, see
Dominion Energy -- CAPITAL REQUIREMENTS under MANAGEMENT'S DISCUSSION AND
ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION on page 38 of the 1998 Annual
Report to Shareholders.
VIRGINIA POWER
Virginia Electric and Power Company is a 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. Virginia
Power supplies energy at retail to approximately two million customers and
sells electricity at wholesale to rural electric cooperatives, power marketers
and certain municipalities. The term "Virginia Power" refers to the entirety of
Virginia Electric and Power Company, including its Virginia and North Carolina
operations and all of its subsidiaries.
In Virginia it trades under the name "Virginia Power." The Virginia
service area comprises about 65 percent of Virginia's total land area, but
accounts for over 80 percent of its population. In North Carolina it trades
under the name "North Carolina Power" and serves retail customers located in
the northeastern region of the state, excluding certain municipalities.
Virginia Power also engages in off-system wholesale purchases and sales of
electricity and purchases and sales of natural gas, and is developing trading
relationships beyond the geographic limits of its retail service territory.
Electric operations principal regulators are the Federal Energy Regulatory
Commission (FERC), the State Corporation Commission of Virginia (the Virginia
Commission) and the North Carolina Utilities Commission (the North Carolina
Commission).
Various factors are currently affecting the electric utility industry in
general, including increasing competition and related regulatory changes, costs
to comply with environmental regulations, and the potential for new business
opportunities outside of traditional rate-regulated operations. To meet the
challenges of this new competitive environment, Virginia Power continues to
consider new business opportunities, particularly those which allow it to use
the expertise and resources developed through its regulated utility experience.
Over the past several years Virginia Power has developed a broad array of
"non-traditional" products and services. Examples of non-traditional services
include wholesale power marketing and telecommunications. Virginia Power also
markets services to other utilities in areas such as nuclear consulting and
management and power distribution (i.e., transmission, distribution,
engineering and metering services). Virginia Power is continuing to focus on
new and existing programs to enhance customer satisfaction and energy
efficiency.
COMPETITION
For most of this century, the structure of the electric industry in
Virginia Power's service territory and throughout the United States has been
relatively stable. Recently, however, there have been both federal and state
developments toward less regulation and increased competition. Electric
utilities have been required to open up their transmission systems for non-
discriminatory use by potential wholesale competitors. In addition, non-utility
power marketers now compete with electric utilities in the wholesale generation
market. At the federal level, retail competition is under consideration. Some
states, including Virginia, have enacted legislation requiring retail
competition.
Currently, as in the past, there is no general retail competition in
Virginia Power's principal service area. Today Virginia Power's only
competition for retail sales is if certain of Virginia Power's business
customers move into another utility service territory, use other energy sources
instead of electric power, or generate their own electricity. However, Virginia
has adopted legislation requiring retail competition beginning in 2002 and
North Carolina is considering implementing retail competition. To the extent
that competition is permitted, Virginia Power's ability to sell power at prices
that will allow it to recover prudently incurred costs may be an issue.
The Virginia General Assembly is actively considering in its current
session, legislative proposals that would address more specifically the
timetable for retail competition in the state; deregulation of the generation
of electricity; transfer of management and control of transmission systems to a
regional transmission entity; recovery of prudently incurred stranded
2
<PAGE>
costs and consumer protection issues. Additionally, Virginia Power is in the
process of developing a retail access pilot program for implementation in
Virginia.
Virginia Power continues to participate actively in both the legislative
and regulatory processes relating to industry restructuring in an effort to
ensure an orderly transition from a regulated environment. Virginia Power has
also responded to the trends toward competition by cutting costs,
re-engineering its core business processes and pursuing innovative approaches
to servicing traditional and future markets. In addition, Virginia Power is
developing certain "non-traditional" products and services as described above
in an effort to provide growth in future earnings.
For a further review of Virginia Power's changing industry see Future
Issues -- VIRGINIA POWER under MD&A on pages 28 through 31 of the 1998 Annual
Report to Shareholders.
REGULATION
GENERAL
The Virginia Commission and the North Carolina Commission regulate
Virginia Power's rates for retail electric sales within their respective
states. FERC approves Virginia Power's rates for electric sales to wholesale
customers. A discussion of rate related matters is in the section below
entitled RATES.
In addition to rates, many other aspects of Virginia Power's business are
presently subject to regulation by the Virginia Commission, the North Carolina
Commission, FERC, the Environmental Protection Agency (EPA), the Department of
Energy (DOE), the Nuclear Regulatory Commission (NRC), the Army Corps of
Engineers and other federal, state and local authorities.
Virginia Power holds certificates of public convenience and necessity
issued by the Virginia Commission and the North Carolina Commission authorizing
it to construct and operate the electric facilities now in operation for which
certificates are required, and to sell electricity to retail customers.
However, 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 various state and federal
governmental agencies.
The following sections discuss various regulatory proceedings in which
Virginia Power is or has recently been involved. Rate specific proceedings are
discussed separately in the section below entitled RATES.
VIRGINIA
Virginia Power is subject to the jurisdiction of the Virginia Commission,
which has broad powers of supervision and regulation over public utilities,
including rates, service regulations and sales of securities. Specific recent
proceedings include the following.
On March 21, 1998, the Virginia Commission issued an Order Establishing
Investigation with regard to independent system operators (ISO's), regional
power exchanges (RPX's) and retail access pilot programs. The Order directed
all investor-owned electric utilities to begin work, in conjunction with the
Virginia Commission Staff and other interested stakeholders, to develop one or
more ISO's and RPX's to serve the public interest in Virginia. In addition, the
Order instructed Virginia Power and AEP-Virginia, as the Commonwealth's two
largest investor-owned utilities, each to design and file a retail access pilot
program. In response to the Order, Virginia Power filed a report describing the
details, objectives and characteristics of its proposed retail access pilot.
For more details on the proposed retail access pilot program, see Future Issues
- -- COMPETITION -- REGULATORY INITIATIVES under MD&A on page 29 of the 1998
Annual Report to Shareholders.
Virginia Power has sought approval from the Virginia Commission for the
construction of four gas fired turbine generators in Virginia and are
soliciting bids in accordance with the Virginia Commission's Order dated
January 14, 1999. Virginia Power has obtained the applicable zoning permits for
the construction of the generators and has applied for other required
environmental permits.
On January 28, 1999, the Virginia Commission issued an order approving the
addition of two wholly-owned subsidiaries of Virginia Power Services, Inc.,
namely Virginia Power Services Energy Corp., Inc. (VPSE) and Virginia Power
Energy Marketing, Inc. (VPEM), to the Affiliate Services Agreement approved by
the Virginia Commission in its Order dated September 3, 1997. In connection
with the organization of VPSE and VPEM, the Virginia Commission issued two
related orders approving transfer of certain contracts relating to the storage,
transportation, procurement and management of Virginia Power's natural gas and
oil inventory to these subsidiaries.
3
<PAGE>
FERC
The Federal Power Act subjects Virginia Power to regulation by FERC as a
company engaged in the transmission or sale of wholesale electric energy in
interstate commerce. The Energy Policy Act of 1992 (EPACT) and FERC's
subsequent rulemaking activities allow FERC to order access for third parties
to transmission facilities owned by another entity. This authority is limited,
however, and does not permit FERC to issue orders requiring transmission access
to retail customers. FERC has issued orders for third-party transmission
service. FERC also issued a number of rules of general applicability, including
Orders 888 and 889.
Pursuant to FERC's final rules, Virginia Power established an open access
same-time information system (OASIS) which became operational in January 1997.
In addition, in July 1997 Virginia Power filed amendments to its existing rate
tariff with FERC so that Virginia Power could make wholesale power sales at
market-based rates. Under a FERC order conditionally accepting Virginia Power's
market-based rate schedule, Virginia Power began making market-based sales of
wholesale power in 1997. FERC set for hearing the issue of whether transmission
constraints limiting the transfer of power into Virginia Power's service
territory would provide Virginia Power with generation dominance in local
markets. This issue was resolved through FERC's acceptance of an offer of
settlement in which Virginia Power agreed to refrain from making sales under
its market-based tariff to loads located within its service territory. This
settlement did not preclude Virginia Power from requesting FERC authorization
of such sales in the future, but until such authorization has been granted by
FERC, agreements by Virginia Power to sell wholesale power to loads located
within its service territory are to be at cost-based rates accepted by FERC.
On November 6, 1998, Virginia Power, along with American Electric Power
(AEP), First Energy Corp. and Consumers Energy announced their agreement to
move forward on a proposal to prepare a FERC filing to establish a regional
transmission organization. For more detail on this proposal, see the
INTERCONNECTIONS section below.
LG&E Westmoreland Southhampton (Southhampton) has requested waivers of
FERC operating requirements with respect to its cogeneration facility in
Franklin, Virginia. Virginia Power has previously reported the existence and
history of this proceeding. The parties have reached a settlement, which was
accepted by FERC in December 1998.
ENVIRONMENTAL
Virginia Power faces substantial regulation and compliance costs with
respect to environmental matters. For a discussion of significant aspects of
these matters, including planned capital expenditures in 1999 relating to
environmental compliance, see Future Issues -- ENVIRONMENTAL MATTERS and GLOBAL
CLIMATE CHANGE under MD&A on pages 30 and 31 of the 1998 Annual Report to
Shareholders.
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
regulations regarding the remediation of waste, Virginia Power may be required
to expend amounts on remedial investigations and actions. Virginia Power does
not believe that any currently identified sites will result in significant
liabilities. For a discussion of certain remediation efforts see ENVIRONMENTAL
MATTERS under Note T to NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on page 52
of the 1998 Annual Report to Shareholders.
In accordance with applicable Federal and state environmental laws, we
have applied for or obtained the necessary environmental permits material to
the operation of our generating stations. Many of these permits are subject to
re-issuance and continuing review.
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.
4
<PAGE>
One of the issues associated with operation and decommissioning of nuclear
facilities is disposal of spent nuclear fuel. The Nuclear Waste Policy Act of
1982 required the Federal Government to make available by January 31, 1998 a
permanent repository for high-level rediocative waste and spent fuel. To date,
no such repository is available.
In July 1995, the Virginia Commission instituted an investigation
regarding spent nuclear fuel disposal. As directed, Virginia Power and others
filed comments on legal and public policy issues related to spent nuclear fuel
storage and disposal. In February 1996, the Commission Staff filed its Report
recommending that adoption of a definitive policy on spent nuclear fuel
disposal issues be delayed pending the outcome of litigation against DOE
concerning spent nuclear fuel acceptance, the outcome of proposed federal
legislation concerning development of an interim storage facility and
development of a vision of the likely outcome of the electric utility
industry's restructuring efforts. The Virginia Commission consolidated the
proceeding with Virginia Power's pending fuel cost recovery proceeding in
October 1996. On March 20, 1997, the Virginia Commission returned the spent
nuclear fuel disposal issue to a separate proceeding. No procedural order has
been issued, but the proceeding is pending.
In response to DOE's insufficient progress towards a permanent repository
for spent nuclear fuel, in January 1997, Virginia Power and numerous other
electric utilities requested the United States Court of Appeals for the
District of Columbia Circuit (the DC Circuit) to order DOE to begin accepting
the utilities' spent nuclear fuel for disposal by January 31, 1998. In November
1997, the DC Circuit found that DOE's obligation to begin accepting spent
nuclear fuel by the deadline is "unconditional" and that DOE may not excuse its
delay on the grounds that delays were unavoidable. In February 1998, Virginia
Power and other electric utilities requested the DC Circuit to require DOE to
begin moving spent nuclear fuel, prohibit DOE from using the Nuclear Waste Fund
to pay damages and relieve utilities of their obligation to pay Nuclear Waste
Fund fees unless and until DOE complies with its obligations. In May 1998, the
DC Circuit refused to require DOE to begin moving spent nuclear fuel and found
that utilities should pursue their remedies under their spent nuclear fuel
contracts with DOE. In November 1998, the U.S. Supreme Court denied DOE's
request for review of the DC Circuit's decisions.
When Virginia Power's nuclear units cease to operate, Virginia Power will
be obligated to decontaminate the facilities. This process is referred to as
decommissioning and Virginia Power is required by the NRC to prepare for it
financially. For information on compliance with NRC financial assurance
requirements, see Future Issues -- NRC NUCLEAR DECOMMISSIONING RULE under MD&A
and Note B to NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on pages 31 and 40 of
the 1998 Annual Report to Shareholders.
RATES
Virginia Power electric service sales for 1998 included 64.3 million
megawatt-hours of retail sales and 4.5 million megawatt-hours of sales to
wholesale requirement contract customers were:
<TABLE>
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1998
---------------------
PERCENT PERCENT
OF OF
REVENUES KWH SALES
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<S> <C> <C> <C>
Virginia retail:
Non-Governmental customers ......... Virginia Commission 81% 77%
Governmental customers ............. Negotiated Agreements 10 13
North Carolina retail ............... North Carolina Commission 5 5
Wholesale * ......................... FERC 4 5
-- --
100% 100%
=== ===
</TABLE>
- ---------
* Excludes power marketing sales which are also subject to FERC regulation.
Substantially all of Virginia Power's electric service sales are currently
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.
Where cost-based rates are in effect, 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.
FERC
Recent FERC proceedings relating to Virginia Power rates include:
5
<PAGE>
o In compliance with FERC's Order 889, on January 3, 1997, Virginia Power
filed its Procedures For Standards of Conduct for Unbundled Transmissions and
Wholesale Merchant Function (Standards of Conduct) effective on that date. In
July 1997, Virginia Power filed several amendments to the Standards of Conduct
in compliance with FERC's Order 889-A. On September 29, 1998, FERC accepted
Virginia Power's revised Standards of Conduct with only some minor
modifications.
o On September 11, 1997, FERC authorized Virginia Power to make wholesale
power sales under its Market-Based Sales Tariff, but set a hearing to consider
the effect of transmission constraints on its ability to exercise generation
market power in localized areas within its service territory. Based upon a
settlement in principle reached by the participants, the hearing schedule was
suspended and Virginia Power was directed to file a formal Offer of Settlement
by May 11, 1998. The participants subsequently filed a formal Offer of
Settlement that was accepted by FERC in January 1999. Under the Offer of
Settlement, Virginia Power agreed to refrain from wholesale power sales under
its Market-Based Sales Tariff to loads located within its service territory.
This settlement did not preclude Virginia Power from requesting FERC
authorization of such sales in the future, but until such authorization has
been granted by FERC, agreements by Virginia Power to sell wholesale power to
loads located within its service territory must be at cost-based rates accepted
by FERC.
VIRGINIA
Recent Virginia proceedings related to Virginia Power rates include:
o On June 8, 1998, Virginia Power, the Staff of the Virginia Commission,
the office of the Virginia Attorney General, the Virginia Committee for Fair
Utility Rates and the Apartment and Office Building Association of Metropolitan
Washington agreed to settle pending rate proceedings before the Virginia
Commission. The Virginia Commission, by Order dated August 7, 1998, approved
the settlement with only a minor redistribution of the agreed rate reduction
among customer classes. The settlement defines a new regulatory framework for
Virginia Power's transition to retail competition. For provisions of the
settlement, see Note R to NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on page 50
of the 1998 Annual Report to Shareholders.
o On October 31, 1997, Virginia Power filed with the Virginia Commission
an application for a reduction of $45.6 million in fuel cost recovery factor
for the period December 1, 1997 through November 30, 1998. The reduction became
effective on an interim basis on December 1, 1997. Subsequently, as a result of
amendments to two non-utility power purchase contracts, Virginia Power proposed
two additional reductions of approximately $30.2 million and $18 million for
the same period, bringing the total proposed fuel factor reduction to $93.8
million. Both additional reductions were approved on an interim basis,
effective March 1, 1998. On April 24, 1998, the Virginia Commission approved
the decrease in the fuel factor effective May 1, 1998.
o On September 11, 1998, Virginia Power filed an application with the
Virginia Commission to modify cogeneration and small power production rates
under Schedule 19. An evidentiary hearing was held on this matter February 24,
1999.
o On October 19, 1998, Virginia Power filed an application with the
Virginia Commission for an increase of $55 million in fuel rates. The increase
was approved effective December 1, 1998.
NORTH CAROLINA
Recent North Carolina proceedings related to its rates include:
o On November 6, 1998, Virginia Power filed for approval of a new Schedule
19 which governs purchases from cogenerators and small power producers.
Virginia Power proposed shortening the maximum term of contracts under Schedule
19 to three years. A public hearing took place on February 2, 1999. All
proposed orders will be filed by March 12, 1999.
o On September 11, 1998, Virginia Power filed an application with the
North Carolina Commission for a $1.4 million increase in fuel rates. On
December 23, 1998, the North Carolina Commission approved the request for a
Fuel Charge Adjustment. This increased the annual fuel rates and charges paid
by the retail customers of North Carolina Power effective January 1, 1999.
6
<PAGE>
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> <C> <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:
Bellmeade, Richmond, Va ............................... 1991 Oil & Gas 230
Chesterfield Units 7 & 8, Chester, Va ................. 1990-92 Oil & Gas 397
---------
Total fossil stations ............................... 8,656
---------
Hydroelectric:
Gaston Units 1-4, Roanoke Rapids, N.C ................. 1963 Conventional 225
Roanoke Rapids Units 1-4, Roanoke Rapids, N.C ......... 1955 Conventional 99
Other ................................................. 1930-87 Conventional 3
Bath County Units 1-6, Warm Springs, Va ............... 1985 Pumped Storage 1,260 (d)
---------
Total hydro stations ................................ 1,587
---------
Total generating unit capability .................... 13,635
Net Purchases .......................................... 1,230
Non-Utility Generation ................................. 3,285
---------
Total Capability .................................... 18,150
=========
</TABLE>
- ---------
(a) Includes an undivided interest of 11.6 percent (208 Mw) owned by ODEC.
(b) Includes an undivided interest of 50 percent (441 Mw) owned by ODEC.
(c) This unit was placed in cold reserve status January 25, 1996.
(d) Reflects the 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 Energy,
Inc (AE).
Virginia Power's highest one-hour integrated service area summer peak
demand was 15,399 Mw on July 22, 1998, and an all-time high one-hour integrated
winter peak demand of 14,910 Mw was reached on February 5, 1996.
7
<PAGE>
ENERGY USED AND FUEL COSTS
System energy output by energy source and the average fuel cost for each
are shown below. Fuel cost is presented in mills (one tenth of one cent) per
kilowatt hour.
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
SOURCE COST SOURCE COST SOURCE COST
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Nuclear (*) .................. 33% 4.71 34% 4.52 32% 4.48
Coal (**) .................... 42 13.21 40 13.54 38 14.32
Oil .......................... 3 22.52 1 26.32 1 27.75
Purchased power, net ......... 19 21.85 23 21.54 27 21.99
Other ........................ 3 27.27 2 30.65 2 26.98
-- -- --
Total ...................... 100% 100% 100%
=== === ===
Average fuel cost .......... 12.71 12.67 13.47
</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 1998, Virginia Power's four nuclear units achieved a combined capacity
factor of 91.7 percent.
Virginia Power utilizes both long-term contracts and spot purchases to
support its needs for nuclear fuel. Virginia Power continually evaluates
worldwide market conditions in order to ensure a range of supply options at
reasonable prices. Current agreements, inventories and spot market availability
will support current and planned fuel supply needs for fuel cycles into the
early 2000's. Beyond that period, additional fuel will be purchased as required
to ensure optimum cost and inventory levels.
DOE did not begin the acceptance of spent fuel in 1998 as specified in
Virginia Power's contract with DOE. However, on-site spent nuclear fuel pool
and dry container storage at the Surry and North Anna Power Stations spent fuel
pool and dry container storage is expected to be adequate for Virginia Power's
needs until DOE begins accepting spent fuel.
For details on NUCLEAR INSURANCE, see Note T to NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS on page 52 of the 1998 Annual Report to Shareholders.
FOSSIL OPERATIONS AND FUEL SUPPLY
Virginia Power's fuel mix consists of coal, oil and natural gas. During
1998, Virginia Power burned approximately 14 million tons of coal. Virginia
Power utilizes both long-term contracts and spot purchases to support its coal
needs. Virginia Power presently anticipates sufficient supplies of coal will be
available at reasonable prices for the next 5 to 10 years. A sufficient supply
of oil and natural gas is expected over the same period with stable prices.
Virginia Power uses natural gas as needed throughout the year for three
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 may not be
available. Virginia Power has firm transportation contracts for the delivery of
gas to these combined cycle units.
PURCHASES AND SALES OF ENERGY
Virginia Power purchases electricity under long-term contracts with other
suppliers to meet a portion of its own system capacity requirements, as well as
for short-term sales transactions in the eastern United States. In addition to
wholesale electric power transactions, it also actively participates in the
purchase and sale of natural gas in the open market.
From the mid-1980's until the start of the 1990's, Virginia Power entered
into a number of long-term purchase contracts for electricity with both utility
and non-utility generators. At the end of 1999, 900 Mw of these purchases from
other utilities will end, and by the first quarter of 2000, an additional 200
Mw of diversity exchange transactions will be suspended. However, Virginia
Power continues to have contracts with 55 non-utility generators with a
combined dependable summer capacity of 3,285 Mw. During 1998, Virginia Power
entered into a long-term agreement to purchase 560 Mw of electricity for sale
to the wholesale market from two of three generating units at a plant being
constructed in Mississippi.
8
<PAGE>
For information on the financial obligations under these agreements see Note T
to NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on pages 51 and 52 of the 1998
Annual Report to Shareholders.
Long-term purchase contracts at fixed prices may be subject to market
fluctuations in electric prices. In a continuing effort to mitigate 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.
In 1997, Virginia Power executed three agreements with Old Dominion
Electric Cooperative (ODEC) which provide for the amendment of the parties'
Interconnection and Operating Agreement (I&O Agreement). The first agreement
provides for the transition from cost-based rates for capacity and energy
purchases by ODEC to market-based rates by 2002. The second two agreements are
the Service and Operating Agreements for Network Integration Transmission
Service, which unbundled the transmission services provided to ODEC under the
I&O Agreement.
As reported earlier, both the Hoosier 400 Mw long-term purchase contract
and the AEP 500 Mw long-term purchase contract will expire on December 31,
1999. Virginia Power presently anticipates adding peaking capacity beginning in
the year 2000 to meet anticipated load growth. In addition, work is being done
to return Virginia Power's North Branch unit, which is presently in cold
reserve status, to full operational capacity in the year 2000.
On August 11, 1998, Virginia Power filed an application with the Virginia
Commission for a Certificate of Public Convenience and Necessity to construct
five gas-fired combustion turbine units in Virginia. On October 21, 1998,
Virginia Power modified its application to seek approval for one additional
unit and expressed its intention to build four units in Fauquier County for
operation in July 2000 and to build the remaining two units in Caroline County
for operation in July 2001. On December 23, 1998, Virginia Power further
modified its application, withdrawing the pending request to construct the two
combustion turbine units in Caroline County and seeking approval only for the
four units to be constructed in Fauquier County for a total of 600 Mw. Virginia
Power proposed to seek the additional capacity from the wholesale market.
A hearing before the Virginia Commission was held in January 1999 and the
Virginia Commission determined that the Rules Governing the Use of Bidding
Programs to Purchase Electricity from Other Power Suppliers were applicable to
the proposed transaction. The Virginia Commission issued an Order directing
Virginia Power to issue a Request for Proposals (RFP) for this capacity. The
Order further provided for the Virginia Commission Staff to review the
solicitation process and set an expedited schedule that requires bidders to
submit responses to Virginia Power's RFP no later than March 26, 1999. Virginia
Power's proposed build option will be considered as the benchmark for assessing
the bid responses and, if its option represents the successful bid, Virginia
Power will be permitted to construct the four units proposed in its modified
application. Virginia Power has obtained the applicable zoning permits for
construction of the combustion turbine units in Fauquier County and has applied
for other required permits including applicable environmental permits.
Conservation and load management programs are evaluated in conjunction
with Virginia Power's annual resource planning process. This process supports a
conservation and load management portfolio, which contributes to the selection
of low-cost resources to meet the future electricity needs of its customers.
Events in the evolving electric power marketplace and regulatory and
legislative environment continue to impact utility-sponsored conservation and
load management programs. Virginia Power continues to anticipate a greater
reliance on price signals to convey information to its customers regarding
energy-related costs, resulting in more efficient purchase decisions.
INTERCONNECTIONS
Virginia Power maintains major interconnections with Carolina Power and
Light Company, AEP, AE 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 November 6, 1998, Virginia Power, AEP, FirstEnergy Corp., and Consumers
Energy announced their agreement to move forward on a proposal to prepare a
FERC filing to establish a regional transmission organization. The proposed
organization would operate the transmission systems of the companies, ensure
transmission reliability and provide non-discriminatory access to the
transmission grid. These companies have established a target date of Spring
1999 to prepare the filing.
As proposed, the governance and organization structures of the regional
transmission organization will enable the formation of an ISO or a regional
transmission company (TransCo). It will detail the mechanisms needed to
transition from an ISO to a TransCo in the event the organization does not
initially operate as a TransCo. It will be designed to meet the goals
9
<PAGE>
of reducing transmission costs that result from pancaked rates (accumulated
transmission access fees resulting from transferring power over several
transmission systems). It will also address transmission tariff, congestion
management, operations and planning issues, as well as assisting in the
development of a market approach to providing ancillary services.
While the companies are drafting the proposal and will be responsible to
seek appropriate regulatory approval, the companies will continue to utilize
the Alliance transmission development process established in December 1997.
This is an open and cooperative effort, involving regular meetings and
discussions with representatives from other investor-owned utilities,
regulatory staff members, transmission customers, public power companies,
municipal systems and rural electric cooperatives. This process provides input
from diverse sources to assist in the formation of the organization.
CAPITAL REQUIREMENTS AND FINANCING PROGRAM
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL
CONDITION on pages 36 through 38 of the 1998 Annual Report to Shareholders.
ITEM 2. PROPERTIES
Dominion Resources owns Virginia Power's principal executive office
building. Dominion Resources' other assets consist primarily of its investments
in its subsidiaries, the principal properties of which are described in THE
COMPANY under Item 1. BUSINESS above. See also VIRGINIA POWER GENERATING UNITS
under Item 1. BUSINESS above.
ITEM 3. LEGAL PROCEEDINGS
From time to time, Dominion Resources and its subsidiaries are alleged to
be in violation or in default under orders, statutes, rules or regulations
relating to the environment, compliance plans imposed upon or agreed to by
them, or permits issued by various local, state and federal agencies for the
construction or operation of facilities. From time to time, there may be
administrative proceedings on these matters pending. In addition, in the normal
course of business, Dominion Resources and its subsidiaries are in involved in
various legal proceedings. Management believes that the ultimate resolution of
these proceedings will not have a material adverse effect on the company's
financial position, liquidity or results of operations.
See REGULATION and RATES under VIRGINIA POWER under Item 1. BUSINESS for
information on various regulatory proceedings.
In December 1995, two civil actions were filed in the Virginia Circuit
Court of the City of Norfolk against the City of Norfolk and Virginia Power,
one for $15 million and one for $3 million. These matters have been resolved
through settlement by the parties. 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. On the same date, Doswell also filed a
complaint against Virginia Power in the United States District Court for the
Eastern District of Virginia. These matters have been settled and the suits
dismissed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AND AGE BUSINESS EXPERIENCE PAST FIVE YEARS
- ---------------------------- ---------------------------------------------------------------------------------------
<S> <C>
Chairman of the Board of Directors, President and Chief Executive Officer of
Thos. E. Capps (63)
Dominion Resources from September 1, 1995 to date; Chairman of the Board of
Directors and Chief Executive Officer of Dominion Resources prior to September 1,
1995.
Norman B. Askew (56) Executive Vice President of Dominion Resources and President and Chief Executive
Officer of Virginia Electric and Power Company from August 1, 1997 to date;
Executive Vice President of Dominion Resources and Chief Executive of East
Midlands from February 21, 1997 to August 1, 1997; Chief Executive of East
Midlands prior to February 21, 1997.
Thomas N. Chewning (53) Executive Vice President of Dominion Resources from January 1, 1997 to date and
President of Dominion Energy; Senior Vice President of Dominion Resources prior to
January 1, 1997.
David L. Heavenridge (52) Executive Vice President of Dominion Resources from January 1, 1997 to date and
President of Dominion Capital; Senior Vice President of Dominion Resources prior to
January 1, 1997.
Edgar M. Roach, Jr. (50) Executive Vice President of Dominion Resources from September 15, 1997 to date;
Senior Vice President-Finance, Regulation and General Counsel of Virginia Electric
and Power Company from January 1, 1996 to September 15, 1997; Vice President-
Regulation and General Counsel, prior to January 1, 1996.
Thomas F. Farrell, II (44) Senior Vice President-Corporate Affairs of Dominion Resources and Executive Vice
President of Virginia Electric and Power Company from September 1, 1997 to date;
Senior Vice President-Corporate and General Counsel of Dominion Resources from
January 1, 1997 to September 1, 1997; 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 LLP prior to July 1, 1995.
James L. Trueheart (47) Senior Vice President and Controller of Dominion Resources from November 1, 1998
to date; Vice President and Controller prior to November 1, 1998.
G. Scott Hetzer (42) Vice President and Treasurer of Dominion Resources from October 1, 1997 to date;
Managing Director of Wheat First Butcher Singer prior to October 1, 1997.
William S. Mistr (51) Vice President of Dominion Resources from February 20, 1998 to date and Vice
President-Information Technology of Virginia Electric and Power Company from
January 1, 1996 to date; Vice President and Treasurer, Dominion Energy, Inc., prior to
January 1, 1996.
James F. Stutts (54) Vice President and General Counsel of Dominion Resources from September 15, 1997
to date; Partner in the law firm of McGuire, Woods, Battle & Boothe LLP prior to
September 15, 1997.
Patricia A. Wilkerson (43) Corporate Secretary of Dominion Resources from January 1, 1997 to date; Assistant
Corporate Secretary prior to January 1, 1997.
</TABLE>
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, 1998 there were 201,553 registered common shareholders of
record. Quarterly information concerning stock prices and dividends contained
on page 54 of the 1998 Annual Report to Shareholders for the fiscal year ended
December 31, 1998 in Note Y to NOTES TO CONSOLIDATED FINANCIAL STATEMENTS which
is filed herein as Exhibit 13, is hereby incorporated herein by reference.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
This information contained under the caption "Selected Consolidated
Financial Data" on page 58 of the 1998 Annual Report to Shareholders for the
fiscal year ended December 31, 1998 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
This information contained under the caption MANAGEMENT'S DISCUSSION AND
ANALYSIS OF OPERATIONS on pages 24 through 35 and MANAGEMENT'S DISCUSSION AND
ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION on pages 36 through 38 of the
1998 Annual Report to Shareholders for the fiscal year ended December 31, 1998,
filed herein as Exhibit 13, is hereby incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This information contained under the caption MANAGEMENT'S DISCUSSION AND
ANALYSIS OF OPERATIONS on pages 33 through 35 of the 1998 Annual to
Shareholders for the fiscal year ended December 31, 1998, filed herein as
Exhibit 13, is hereby incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information contained in the CONSOLIDATED FINANCIAL STATEMENTS on
pages 19 through 23, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on pages 39
through 55 and related report thereon of Deloitte & Touche LLP, independent
auditors, appearing on page 56 of the 1998 Annual Report to Shareholders for
the fiscal year ended December 31, 1998, 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 in the
1999 Proxy Statement, under the heading THE BOARD, File No. 1-8489, dated March
1999, is hereby incorporated herein by reference. The information concerning
the executive officers of Dominion Resources required by this item is contained
in Part I, under the section EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is contained under the
heading EXECUTIVE COMPENSATION and the information regarding director
compensation is contained under the heading THE BOARD -- COMPENSATION AND OTHER
PROGRAMS in the 1999 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 is contained under the heading THE BOARD -- SHARE OWNERSHIP TABLE in
the 1999 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
12
<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 and found on the pages noted.
1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998
ANNUAL REPORT
TO SHAREHOLDERS
(PAGE)
----------------
<S> <C>
Report of Independent Auditors .................................... 56
Report of Management .............................................. 56
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 ................................ 19
Consolidated Balance Sheets at December 31, 1998 and 1997 ......... 20 and 21
Consolidated Statements of Shareholders'
Equity and Consolidated Statements of Comprehensive Income
for the years ended December 31, 1998, 1997 and 1996 ............ 22
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ................................ 23
Notes to Consolidated Financial Statements ........................ 39 - 55
</TABLE>
13
<PAGE>
2. EXHIBITS
<TABLE>
<S> <C> <C>
2(i) - Agreement, dated June 26, 1998, relating to the sale and purchase of East Midlands Electricity plc by
PowerGen plc (Exhibit 2, Form 10-Q for the quarter ended June 30, 1998, File No. 1-8489, incorporated
by reference).
2(ii) - Agreement and Plan of Merger, dated as of February 19, 1999, by and between Dominion Resources,
Inc. and Consolidated Natural Gas Company (filed herewith).
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, 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 The Chase
Manhattan Bank (formerly 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 The Chase
Manhattan Bank (formerly 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 The 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).
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
4(vii) - Form of Senior Indenture dated as of June 1, 1998, as supplemented by the First Supplemental
Indenture to the Senior Indenture, dated June 1, 1998, between Virginia Electric and Power Company
and The Chase Manhattan Bank (Exhibit 4.2, Form 8-K dated June 12, 1998 File No. 1-2255
incorporated by reference).
4(viii) - Indenture, Junior Subordinated Debentures, dated December 1, 1997, between Dominion Resources, Inc.
and The Chase Manhattan Bank as supplemented by a First Supplemental Indenture, dated December 1,
1997 (Exhibit 4.1 and Exhibit 4.2 to Form S-4 Registration Statement, File No. 333-50653, as filed on
April 21, 1998, incorporated by reference).
4(ix) - 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) - Amended and Restated Interconnection and Operating Agreement, dated as of July 29, 1997 between
Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit 10(v), Form
10-K for the fiscal year ended December 31, 1997 File No. 1-8489, incorporated by reference).
10(vi) - Credit Agreements, dated as of June 7, 1996, between The 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(vii) - 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(viii) - 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).
10(ix) - 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(x) - 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(xi) - 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(xii) - 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(xiii) - 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(xiv) - 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(xv) - 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(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).
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
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. Executive Supplemental Retirement Plan, effective January 1, 1981 as
amended and restated September 1, 1996 (Exhibit 10(iv), Form 10-Q for the quarter ended June 30,
1997, File No. 1-8489, incorporated by reference) and as amended June 20, 1997 and as amended
March 3, 1998 (Exhibit 10(xxi), Form 10-K for the fiscal year ended December 31, 1997, File No.
1-8489, incorporated by reference).
10(xix)* Arrangements with certain executive officers regarding additional credited years of service for retirement
and retirement life insurance purposes (Exhibit 10(xxii), Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-8489, incorporated by reference).
10(xx)* - 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).
10(xxi) - Dominion Resources, Inc. Incentive Compensation Plan, effective April 22, 1997 (Exhibit 99, Form S-8
Registration Statement, File No 333-25587, incorporated by reference).
10(xxii)* - 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(xxiii)* - Dominion Resources, Inc. Retirement Benefit Funding Plan, effective June 29, 1990 as amended and
restated September 1, 1996 (Exhibit 10(iii), Form 10-Q for the quarter ended June 30, 1997, File
No. 1-8489, incorporated by reference).
10(xxiv)* - Dominion Resources, Inc. Retirement Benefit Restoration Plan as adopted effective January 1, 1991 as
amended and restated September 1, 1996 (Exhibit 10(ii), Form 10-Q for the quarter ended June 30,
1997, File No. 1-8489, incorporated by reference).
10(xxv)* - Dominion Resources, Inc. Executives' Deferred Compensation Plan, effective January 1, 1994 and as
amended and restated January 1, 1997 (Exhibit 10 (xxvi), Form 10-K for the fiscal year ended
December 31, 1996, incorporated by reference).
10(xxvi)* - Employment Agreement dated June 20, 1997 between Dominion Resources and Thos. E. Capps
(Exhibit 10(i), Form 10-Q for the quarter ended June 30, 1997, File No. 1-8489, incorporated by
reference).
10(xxvii)* - Form of Employment Agreement between Dominion Resources certain executive officers including
Thomas N. Chewning and David L. Heavenridge (Exhibit 10 (xxx), Form 10-K for the fiscal year ended
December 31, 1997, File No. 1-8489, incorporated by reference and Exhibit 10(ii), Form 10-Q for the
quarter ended March 31, 1998, File No. 1-8489, incorporated by reference).
10(xxviii)* - 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(xxix)* - Dominion Resources, Inc. Directors Stock Compensation Plan, effective April 9, 1998 (Exhibit 99, Form
S-8 Registration Statement, File No. 333-49725, incorporated by reference).
10(xxx)* - Dominion Resources, Inc. Directors Deferred Cash Compensation Plan, effective December 21, 1998
(Exhibit 99, Form S-8 Registration Statement, File No. 333-69305, incorporated by reference).
10(xxxi)* - Employment Agreement dated February 21, 1997 between Dominion Resources and Norman Askew
(Exhibit 10(xxxi), Form 10-K for the fiscal year ended December 31, 1996, File No. 1-8489,
incorporated by reference).
10(xxxii)* - Employment Agreement, dated September 12, 1997 between Dominion Resources and Edgar M.
Roach, Jr. (Exhibit 10(xxxiv), Form 10-K for the fiscal year ended December 31, 1997, File No. 1-8489,
incorporated by reference).
10(xxxiii)* - Employment Agreement dated September 12, 1997 between Dominion Resources and Thomas F. Farrell,
II (filed herewith).
11 - Computation of Earnings Per Share of Common Stock Assuming Full Dilution (filed herewith).
13 - Portions of the 1998 Annual Report to Shareholders for the fiscal year ended December 31, 1998
(filed herewith).
21 - Subsidiaries of the Registrant (filed herewith).
23 - Consent of Deloitte & Touche LLP (filed herewith).
27 - Financial Data Schedule (filed herewith).
99 - Joint Press Release, dated February 22, 1999, of Dominion Resources, Inc. and Consolidated Natural
Gas Company (filed herewith).
</TABLE>
- ---------
* Indicates management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
None.
16
<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 1, 1999
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 1st day of March, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------ ----------------------------------------------
<S> <C>
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
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
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------ -------------------------------------
<S> <C>
S. DALLAS SIMMONS Director
------------------------------
S. Dallas Simmons
ROBERT H. SPILMAN Director
------------------------------
Robert H. Spilman
JUDITH B. WARRICK Director
------------------------------
Judith B. Warrick
EDGAR M. ROACH, JR. Executive Vice President
------------------------------ (Chief Financial Officer)
Edgar M. Roach, Jr.
J.L. TRUEHEART Senior Vice President and Controller
------------------------------ (Principal Accounting Officer)
J.L. Trueheart
</TABLE>
18
<PAGE>
DOMINION RESOURCES, INC.
PORTIONS
OF THE
1998
ANNUAL REPORT
TO
SHAREHOLDERS
(Incorporated by Reference)
AGREEMENT AND PLAN
OF MERGER
by and between
DOMINION RESOURCES, INC.
and
CONSOLIDATED NATURAL GAS COMPANY
Dated as of February 19, 1999
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
THE MERGER.............................................................1
Section 1.1 The Merger................................................1
Section 1.2 Effective Time of the Merger..............................2
ARTICLE II
TREATMENT OF SHARES....................................................2
Section 2.1 Effect of Merger on Capital Stock.........................2
Section 2.2 Exchange of Common Stock Certificates.....................3
ARTICLE III
THE CLOSING............................................................5
Section 3.1 Closing...................................................5
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DRI..................................5
Section 4.1 Organization and Qualification............................5
Section 4.2 Subsidiaries..............................................6
Section 4.3 Capitalization............................................6
Section 4.4 Authority; Non-Contravention; Statutory Approvals;
Compliance.......................................................7
Section 4.5 Reports and Financial Statements..........................8
Section 4.6 Absence of Certain Changes or Events......................9
Section 4.7 Registration Statement and Proxy Statement................9
Section 4.8 Employee Matters; ERISA...................................9
Section 4.9 Regulation as a Utility..................................10
Section 4.10 Vote Required............................................10
Section 4.11 Accounting Matters.......................................11
Section 4.12 Opinion of Financial Advisor.............................11
Section 4.13 Ownership of CNG Common Stock............................11
Section 4.14 Anti-Takeover Provisions.................................11
Section 4.15 Nuclear Operations.......................................11
Section 4.16 NRC Actions..............................................12
Section 4.17 Environmental Protection.................................12
Section 4.18 Trading Position Risk Management.........................12
Section 4.19 Litigation...............................................12
Section 4.20 Dividends................................................13
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CNG.................................13
Section 5.1 Organization and Qualification...........................13
Section 5.2 Subsidiaries.............................................13
Section 5.3 Capitalization...........................................14
Section 5.4 Authority; Non-Contravention; Statutory Approvals;
Compliance......................................................14
Section 5.5 Reports and Financial Statements.........................15
Section 5.6 Absence of Certain Changes or Events.....................16
Section 5.7 Registration Statement and Proxy Statement...............16
Section 5.8 Employee Matters; ERISA..................................16
Section 5.9 Regulation as a Utility..................................17
Section 5.10 Vote Required............................................17
Section 5.11 Accounting Matters.......................................17
Section 5.12 Opinion of Financial Advisor.............................17
Section 5.13 Ownership of DRI Common Stock............................18
Section 5.14 CNG Rights Agreement.....................................18
Section 5.15 Anti-Takeover Provisions.................................18
Section 5.16 Environmental Protection.................................18
Section 5.17 Trading Position Risk Management.........................19
Section 5.18 Litigation...............................................19
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER................................19
Section 6.1 Ordinary Course of Business..............................19
Section 6.2 Dividends................................................19
Section 6.3 Issuance of Securities...................................20
Section 6.4 Charter Documents........................................20
Section 6.5 Acquisitions.............................................20
Section 6.6 No Dispositions..........................................21
Section 6.7 Indebtedness.............................................21
Section 6.8 Capital Expenditures.....................................21
Section 6.9 Compensation, Benefits...................................22
Section 6.10 1935 Act.................................................22
Section 6.11 Accounting...............................................22
Section 6.12 Pooling..................................................22
Section 6.13 Tax-Free Status..........................................23
Section 6.14 Discharge of Liabilities.................................23
Section 6.15 Cooperation, Notification................................23
Section 6.16 Rate Matters.............................................23
Section 6.17 Third-Party Consents.....................................23
Section 6.18 No Breach, Etc...........................................24
Section 6.19 Tax-Exempt Status........................................24
Section 6.20 Transition Management....................................24
Section 6.21 Insurance................................................24
Section 6.22 Permits..................................................24
<PAGE>
ARTICLE VII
ADDITIONAL AGREEMENTS.................................................25
Section 7.1 Access to Information....................................25
Section 7.2 Joint Proxy Statement and Registration Statement.........25
Section 7.3 Regulatory Matters.......................................26
Section 7.4 Shareholder Approvals....................................27
Section 7.5 Directors' and Officers' Indemnification.................27
Section 7.6 Disclosure Schedules.....................................29
Section 7.7 Public Announcements.....................................29
Section 7.8 Rule 145 Affiliates......................................29
Section 7.9 Certain Employee Agreements..............................30
Section 7.10 Incentive, Stock and Other Plans.........................30
Section 7.11 No Solicitations.........................................31
Section 7.12 DRI Board of Directors...................................32
Section 7.13 Corporate Offices........................................32
Section 7.14 Expenses.................................................32
Section 7.15 Community Support........................................33
Section 7.16 Further Assurances.......................................33
ARTICLE VIII
CONDITIONS............................................................33
Section 8.1 Conditions to Each Party's Obligation
to Effect the Merger............................................33
Section 8.2 Conditions to Obligation of CNG to Effect the Merger.....34
Section 8.3 Conditions to Obligation of DRI to Effect the Merger.....35
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER.....................................36
Section 9.1 Termination..............................................36
Section 9.2 Effect of Termination....................................39
Section 9.3 Termination Fee; Expenses................................39
Section 9.4 Amendment................................................41
Section 9.5 Waiver...................................................41
<PAGE>
ARTICLE X
GENERAL PROVISIONS....................................................41
Section 10.1 Non-Survival of Representations, Warranties,
Covenants and Agreements........................................41
Section 10.2 Brokers.................................................41
Section 10.3 Notices.................................................42
Section 10.4 Miscellaneous...........................................43
Section 10.5 Interpretation..........................................43
Section 10.6 Counterparts; Effect....................................43
Section 10.7 Parties in Interest.....................................43
Section 10.8 Specific Performance....................................44
Section 10.9 WAIVER OF JURY TRIAL....................................44
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of February 19, 1999 (this
"Agreement"), by and between DOMINION RESOURCES, INC., a corporation organized
under the laws of the Commonwealth of Virginia ("DRI"), and CONSOLIDATED NATURAL
GAS COMPANY, a corporation formed under the laws of the State of Delaware
("CNG").
WHEREAS, the respective Boards of Directors of DRI and CNG have
approved the merger of CNG into DRI on the terms and conditions set forth in
this Agreement (such transaction being referred to herein as the "Merger");
WHEREAS, for accounting purposes, it is intended that the Merger
will be accounted for as a pooling of interests in accordance with generally
accepted accounting principles ("GAAP") and applicable regulations of the
Securities and Exchange Commission (the "SEC");
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a transaction described in Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended (the "Code"), and that the
shareholders of CNG will not recognize any gain or loss as a result thereof,
except with respect to any cash received in lieu of fractional shares; and
NOW THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Pursuant to the terms and subject to the
conditions of this Agreement, at the Effective Time (as defined in Section 1.2),
CNG shall be merged into DRI in accordance with the laws of the Commonwealth of
Virginia and the State of Delaware. DRI shall be the surviving corporation in
the Merger and shall continue its existence under the laws of the Commonwealth
of Virginia. The effects and consequences of the Merger shall be as set forth in
this Agreement and in Section 13.1-721 of the Virginia Stock Corporation Act
(the "VSCA").
<PAGE>
Section 1.2 Effective Time of the Merger. On the Closing Date (as
defined in Section 3.1), articles of merger with respect to the Merger, in form
acceptable to DRI and CNG (the "Articles of Merger"), shall be executed and
filed by the parties hereto with the State Corporation Commission of the
Commonwealth of Virginia pursuant to Section 13.1-720 of the VSCA and a
certificate of merger, in form acceptable to DRI and CNG (the "Certificate of
Merger"), shall be executed and filed with the Secretary of State of Delaware
pursuant to Section 252 of the Delaware General Corporation Law. The Merger
shall become effective at the time that DRI and CNG shall agree as specified in
the Articles of Merger and Certificate of Merger (the time the Merger becomes
effective being hereinafter called the "Effective Time").
ARTICLE II
TREATMENT OF SHARES
Section 2.1 Effect of Merger on Capital Stock. At the Effective
Time, by virtue of the Merger and without any action on the part of any holder
of any capital stock of DRI or CNG:
(a) Cancellation of Certain Common Stock. Each share of CNG common
stock, par value $2.75 per share ("CNG Common Stock"), together with any CNG
Rights (as defined in Section 5.14) that are owned by DRI or any of its
subsidiaries (as defined in Section 4.1), shall be cancelled and shall cease to
exist, and no consideration shall be delivered in exchange therefor.
(b) Conversion of CNG Common Stock. Each share of CNG Common Stock
issued and outstanding immediately prior to the Effective Time (other than
shares cancelled pursuant to Section 2.1(a)) shall be converted into the right
to receive 1.52 share(s) (the "Conversion Ratio") of duly authorized, validly
issued, fully paid and nonassessable DRI common stock, no par value ("DRI Common
Stock"). Upon such conversion, each holder of any shares of CNG Common Stock
(whether held in book entry or certificated form) shall cease to have any rights
with respect thereto, except the right to receive the shares of DRI Common Stock
to be issued in consideration therefor (and cash in lieu of fractional shares
pursuant to Section 2.2(d)) upon the conversion of such CNG Common Stock in
accordance with Section 2.2.
(c) DRI Common Stock to Remain Outstanding. Each share of DRI Common
Stock issued and outstanding immediately prior to the Effective Time shall
remain outstanding following the Effective Time.
<PAGE>
Section 2.2 Exchange of Common Stock Certificates.
(a) Deposit with Exchange Agent. As soon as practicable after the
Effective Time, DRI shall deposit with a bank, trust company or other agent
selected by DRI (the "Exchange Agent") certificates representing shares of DRI
Common Stock required to effect the conversion of CNG Common Stock into DRI
Common Stock as provided in Section 2.1(b).
(b) Exchange Procedures. As soon as practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of a certificate or
certificates ("Certificate") which immediately prior to the Effective Time
represented issued and outstanding shares of CNG Common Stock ("CNG Shares"),
(i) a letter of transmittal (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
actual delivery of the Certificates to the Exchange Agent) and (ii) instructions
for use in effecting the exchange of Certificates for certificates representing
shares of DRI Common Stock ("DRI Shares") or for effecting the exchange of
Certificates for DRI Shares to be held in book entry form. As soon as
practicable after the Effective Time, the Exchange Agent shall also mail to each
holder of record of CNG Shares held in book entry form ("Book Entry Shares")
instructions for use in effecting the conversion of said Book Entry Shares into
DRI Shares. Upon delivery of a Certificate to the Exchange Agent for exchange,
together with a duly executed letter of transmittal and such other documents as
the Exchange Agent shall require, or, in the case of Book Entry Shares,
compliance with the instructions for conversion thereof, the holder of such
Certificate or Book Entry Shares shall be entitled to receive in exchange
therefor that number of whole DRI Shares and the amount of cash in lieu of
fractional share interests (pursuant to Section 2.2(d)) which such holder has
the right to receive pursuant to the provisions of this Article II. In the event
of a transfer of ownership of CNG Shares which is not registered in the transfer
records of CNG, the proper number of DRI Shares will be issued to a transferee
if, in addition to the other requirements for conversion, the Exchange Agent
receives all documents required to evidence and effect such transfer and
evidence satisfactory to the Exchange Agent that any applicable stock transfer
taxes have been paid. Until delivered as contemplated by this Section 2.2, each
Certificate, and until converted as contemplated by this Section 2.2, all Book
Entry Shares, shall be deemed at any time after the Effective Time to represent
only the right to receive DRI Shares and cash in lieu of any fractional shares
of DRI Common Stock as contemplated by this Section 2.2.
(c) Distributions with Respect to Unexchanged Shares. No dividends
or other distributions declared or made after the Effective Time with respect to
DRI Shares with a record date after the Effective Time shall be paid to the
holder of any undelivered Certificate or unconverted Book Entry Shares with
respect to the DRI Shares represented thereby, and no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 2.2(d),
until the holder of record of such Certificate or unconverted Book Entry Shares
(or a transferee as described in Section 2.2(b)) shall have delivered such
Certificate or effected the conversion of such Book Entry Shares as contemplated
in Section 2.2(b). Subject to the effect of unclaimed property, escheat and
other applicable laws, following delivery of any such Certificate or conversion
of any such Book Entry Shares, there shall be paid to the record holder (or
transferee) of the whole DRI Shares issued in exchange or conversion therefor,
without interest, (i) at the time of such delivery, the amount of any cash
payable in lieu of a fractional share of DRI Common Stock to which such holder
(or transferee) is entitled pursuant to Section 2.2(d) and the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole DRI Shares and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to delivery or conversion and a
payment date subsequent to delivery or conversion payable with respect to such
whole DRI Shares, as the case may be.
<PAGE>
(d) No Fractional Shares. (i) No certificates or scrip representing
fractional shares of DRI Common Stock shall be issued upon the exchange of
Certificates or conversion of Book Entry Shares, and such fractional share
interests will not entitle the owner thereof to vote or to any rights of a
shareholder of DRI. All holders of CNG Common Stock who would otherwise be
entitled to receive a fractional share of DRI Common Stock shall receive, in
lieu thereof upon exchange or conversion of its CNG Shares, an amount of cash
determined by multiplying the fraction of a share of DRI Common Stock to which
such shareholder would otherwise be entitled by the closing sales price of DRI
Common Stock as reported under "NYSE Composite Transition Reports," in The Wall
Street Journal on the trading day immediately prior to the Effective Time. From
time to time, DRI shall, subject to Section 2.2(f) hereof, deliver to the
Exchange Agent cash in such amounts as shall be necessary to pay to the holders
of CNG Shares cash in lieu of fractional shares of DRI Common Stock.
(e) Closing of Transfer Books. From and after the Effective Time,
the stock transfer books of CNG with respect to shares of CNG Common Stock
issued and outstanding prior to the Effective Time shall be closed and no
transfer of any such shares shall thereafter be made. If, after the Effective
Time, Certificates are presented to DRI, they shall be cancelled and exchanged
for certificates representing the appropriate number of whole DRI Shares and
cash in lieu of fractional shares of DRI Common Stock as provided in this
Section 2.2.
(f) Termination of Exchange Agent. Any certificates representing DRI
Shares deposited with the Exchange Agent pursuant to Section 2.2(a) and not
exchanged or converted within six (6) months after the Effective Time pursuant
to this Section 2.2 shall be returned by the Exchange Agent to DRI, which shall
thereafter act as Exchange Agent. All funds held by the Exchange Agent for
payment to the holders of undelivered Certificates or unconverted Book Entry
Shares and unclaimed at the end of six (6) months from the Effective Time shall
be remitted to DRI, after which time any holder of undelivered Certificates or
unconverted Book Entry Shares shall look as a general creditor only to DRI for
payment of such funds which may be due to such holder, subject to applicable
law. DRI shall not be liable to any person for such shares or funds delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.
<PAGE>
ARTICLE III
THE CLOSING
Section 3.1 Closing. The closing (the "Closing") of the Merger
shall take place at the offices of LeBoeuf, Lamb, Greene & MacRae, L.L.P., 125
West 55th Street, New York, New York 10019-5389, or such other place as may be
mutually agreed upon by the parties hereto at 10:00 A.M., local time, on the
second business day immediately following the date on which the last of the
conditions set forth in Article VIII is fulfilled or waived, or at such other
time and date as CNG and DRI shall mutually agree (the "Closing Date").
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DRI
Except as disclosed in the DRI SEC Reports (as defined in Section
4.5) filed prior to the date hereof or as set forth on the Disclosure Schedule
delivered by DRI to CNG prior to the execution of this Agreement (the "DRI
Disclosure Schedule"), DRI represents and warrants to CNG as follows:
Section 4.1 Organization and Qualification. DRI and each of its
Significant Subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation, has all
requisite corporate power and authority, to own, lease and operate its assets
and properties and to carry on its business as it is now being conducted, and is
duly qualified and in good standing to do business in each jurisdiction in which
the nature of its business or the ownership or leasing of its assets and
properties makes such qualification necessary, other than in such jurisdictions
where the failure to be so qualified and in good standing will not, when taken
together with all other such failures, have a material adverse effect on the
business, operations, properties, assets, condition (financial or otherwise),
prospects or results of operations of DRI and its subsidiaries taken as a whole
or on the consummation of this Agreement (any such material adverse effect being
hereinafter referred to as a "DRI Material Adverse Effect"). True, accurate and
complete copies of the articles of incorporation and bylaws of DRI, as in effect
on the date hereof, have been delivered to CNG. As used in this Agreement, the
term "subsidiary" with respect to any person shall mean any corporation or other
entity (including partnerships and other business associations) in which such
person directly or indirectly owns outstanding capital stock or other voting
securities having the power, under ordinary circumstances, to elect a majority
of the directors or similar members of the governing body of such corporation or
other entity, or otherwise to direct the management and policies of such
corporation or other entity. As used in this Agreement, a "Significant
Subsidiary" means any subsidiary of DRI or CNG, as the case may be, that
constitutes a "significant subsidiary" of such party within the meaning of Rule
1-02 of Regulation S-X of the SEC.
<PAGE>
Section 4.2 Subsidiaries. Exhibit 21 to the Annual Report of DRI on
Form 10-K for the fiscal year ended December 31, 1997 includes all subsidiaries
of DRI which as of the date of this Agreement are Significant Subsidiaries. All
the outstanding shares of capital stock of, or other equity interests in, each
such Significant Subsidiary have been duly authorized and validly issued and are
fully paid and nonassessable and are owned directly or indirectly by DRI, free
and clear of all pledges, claims, liens, charges, encumbrances and security
interests of any kind or nature whatsoever (collectively, "Liens"). None of the
subsidiaries of DRI is a "public utility company", a "holding company", a
"subsidiary company" or an "affiliate" of any public utility company within the
meaning of the Public Utility Holding Company Act of 1935, as amended (the "1935
Act"). There are no outstanding subscriptions, options, calls, contracts, voting
trusts, proxies or other commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, instrument or other agreement, obligating any
Significant Subsidiary to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of its capital stock or obligating it to
grant, extend or enter into any such agreement or commitment. As used in this
Agreement, the term "joint venture" with respect to any person shall mean any
corporation or other entity (including partnerships and other business
associations and joint ventures) in which such person or one or more of its
subsidiaries owns an equity interest that is less than a majority of any class
of the outstanding voting securities or equity, other than equity interests held
for passive investment purposes that are less than 5% of any class of the
outstanding voting securities or equity.
Section 4.3 Capitalization. The authorized capital stock of DRI
consists of 300,000,000 shares of DRI Common Stock and 20,000,000 shares of
preferred stock. As of the close of business on January 31, 1999, 193,962,097
shares of DRI Common Stock and no shares of preferred stock were issued and
outstanding. All of the issued and outstanding shares of the capital stock of
DRI are validly issued, fully paid, nonassessable and free of preemptive rights.
As of the date hereof, there are no outstanding subscriptions, options, calls,
contracts, voting trusts, proxies or other commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement, obligating DRI or any of its subsidiaries to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of the capital stock
or other voting securities of DRI or obligating DRI or any of its subsidiaries
to grant, extend or enter into any such agreement or commitment.
<PAGE>
Section 4.4 Authority; Non-Contravention; Statutory Approvals;
Compliance.
(a) Authority. DRI has all requisite power and authority to enter
into this Agreement and, subject to the DRI Shareholders' Approval (as defined
in Section 4.10) and the DRI Required Statutory Approvals (as defined in Section
4.4(c)), to consummate the transactions contemplated hereby. The Board of
Directors of DRI has (a) determined that the Merger is fair and in the best
interest of DRI and its shareholders, (b) approved and adopted this Agreement,
and (c) resolved to recommend to the holders of DRI Common Stock that they give
the DRI Shareholders' Approval. The execution and delivery of this Agreement and
the consummation by DRI of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of DRI, subject to
obtaining the DRI Shareholders' Approval. This Agreement has been duly and
validly executed and delivered by DRI and, assuming the due authorization,
execution and delivery of this Agreement by CNG, constitutes the legal, valid
and binding obligation of DRI enforceable against DRI in accordance with its
terms.
(b) Non-Contravention. The execution and delivery of this Agreement
by DRI do not and the consummation of the transactions contemplated hereby will
not, violate, conflict with or result in a breach of any provision of, or
constitute a default (with or without notice or lapse of time or both) under, or
result in the termination of, or accelerate the performance required by, or
result in a right of termination, cancellation or acceleration of any material
obligation under or the loss of a material benefit under, or result in the
creation of any Lien upon any of the properties or assets (any such violation,
conflict, breach, default, right of termination, cancellation or acceleration,
loss or creation being hereinafter referred to as a "Violation") by DRI or any
of its Significant Subsidiaries under any provisions of (i) the articles of
incorporation, bylaws or similar governing documents of DRI or any of its
Significant Subsidiaries, (ii) subject to obtaining the DRI Required Statutory
Approvals and the receipt of the DRI Shareholders' Approval, any statute, law,
ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit
or license of any court, governmental or regulatory body (including a stock
exchange or other self-regulatory body) or authority, domestic or foreign (each,
a "Governmental Authority") applicable to DRI or any of its Significant
Subsidiaries or any of their respective properties or assets, or (iii) subject
to obtaining the third-party consents or other approvals set forth in Section
4.4(b) of the DRI Disclosure Schedule (the "DRI Required Consents"), any note,
bond, mortgage, indenture, deed of trust, license, franchise, permit,
concession, contract, lease or other instrument, obligation or agreement of any
kind to which DRI or any of its Significant Subsidiaries is now a party or by
which any of them or any of their respective properties or assets may be bound
or affected, excluding from the foregoing clauses (ii) and (iii) such Violations
as would not have, individually or in the aggregate, a DRI Material Adverse
Effect.
(c) Statutory Approvals. No declaration, filing or registration
with, or notice to or authorization, consent, finding by or approval of, any
Governmental Authority is necessary for the execution and delivery of this
Agreement by DRI or the consummation by DRI of the transactions contemplated
hereby, which, if not obtained, made or given, would have, individually or in
the aggregate, a DRI Material Adverse Effect (the "DRI Required Statutory
Approvals"), it being understood that references in this Agreement to
"obtaining" such DRI Required Statutory Approvals shall mean making such
declarations, filings or registrations; giving such notice; obtaining such
consents or approvals; and having such waiting periods expire as are necessary
to avoid a violation of law.
<PAGE>
(d) Compliance. Neither DRI nor any of its subsidiaries nor, to the
best knowledge of DRI, any of its joint ventures, is in violation of or under
investigation with respect to, or has been given notice or been charged with any
violation of, any law, statute, order, rule, regulation, ordinance or judgment
(including, without limitation, any "Environmental Laws") of any Governmental
Authority, except for violations that, individually or in the aggregate, do not
have, and, to the best knowledge of DRI, are not reasonably likely to have, a
DRI Material Adverse Effect. DRI, its subsidiaries and, to the best knowledge of
DRI, its joint ventures have all permits, licenses, franchises and other
governmental authorizations, consents and approvals necessary to conduct their
respective businesses as currently conducted (collectively, "Permits"), except
those Permits the failure to obtain which would not have, individually or in the
aggregate, a DRI Material Adverse Effect. As used in this Agreement, the term
"Environmental Laws" means any law, statute, order, rule, regulation, ordinance
or judgment relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, indoor air, surface
water, ground water, land surface or subsurface strata and natural resources)
including, without limitation, those relating to the release or threatened
release of Hazardous Materials or to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous Materials.
As used in this Agreement, the term "Hazardous Materials" means chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
materials or constituents, petroleum or petroleum products or any other
substances or materials subject to regulation under Environmental Laws.
Section 4.5 Reports and Financial Statements. The filings required
to be made by DRI and its subsidiaries since January 1, 1996 under the
Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Federal Power Act
(the "Power Act"), the Atomic Energy Act of 1954, as amended (the "Atomic Energy
Act"), the 1935 Act and applicable state laws and regulations have been filed
with the SEC, the Federal Energy Regulatory Commission (the "FERC"), the Nuclear
Regulatory Commission (the "NRC") or the applicable state regulatory
authorities, as the case may be, including all forms, statements, reports,
agreements (oral or written) and all documents, exhibits, amendments and
supplements appertaining thereto, and complied in all material respects with all
applicable requirements of the appropriate act and the rules and regulations
thereunder. DRI has made available to CNG a true and complete copy of each
report, schedule, registration statement and definitive proxy statement filed by
DRI with the SEC under the Securities Act and the Exchange Act since January 1,
1996 and through the date hereof (as such documents have since the time of their
filing been amended, the "DRI SEC Reports"). The DRI SEC Reports, including
without limitation any financial statements or schedules included therein, at
the time filed, and any forms, reports or other documents filed by DRI with the
SEC after the date hereof, did not and will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The audited consolidated financial
statements and unaudited interim financial statements of DRI included in the DRI
SEC Reports (collectively, the "DRI Financial Statements") have been prepared,
and will be prepared, in accordance with GAAP (except as may be indicated
therein or in the notes thereto and except with respect to unaudited statements
as permitted by Form 10-Q under the Exchange Act) and fairly present the
consolidated financial position of DRI as of the respective dates thereof or the
consolidated results of operations and cash flows for the respective periods
then ended, as the case may be, subject, in the case of the unaudited interim
financial statements, to normal, recurring audit adjustments.
<PAGE>
Section 4.6 Absence of Certain Changes or Events. From September
30, 1998 through the date hereof, each of DRI and each of its subsidiaries has
conducted its business only in the ordinary course of business consistent with
past practice and no event has occurred which has had, and no fact or condition
exists that would have or, to the best knowledge of DRI, is reasonably likely to
have, a DRI Material Adverse Effect.
Section 4.7 Registration Statement and Proxy Statement. None of the
information supplied or to be supplied by or on behalf of DRI for inclusion or
incorporation by reference in (i) the registration statement on Form S-4 to be
filed with the SEC by DRI in connection with the issuance of shares of DRI
Common Stock in the Merger (the "Registration Statement") will, at the time the
Registration Statement becomes effective under the Securities Act, and as the
same may be amended, at the effective time of such amendment, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading, and
(ii) the joint proxy in definitive form, relating to the meetings of the
shareholders of CNG and DRI to be held in connection with the Merger and the
prospectus relating to DRI Common Stock to be issued in the Merger (the "Joint
Proxy Statement/Prospectus") will at the date such Joint Proxy
Statement/Prospectus is mailed to such shareholders and, as the same may be
amended or supplemented, at the times of such meetings, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Registration Statement and the Joint Proxy
Statement/Prospectus will comply as to form in all material respects with the
provisions of the Securities Act and the Exchange Act and the rules and
regulations thereunder.
Section 4.8 Employee Matters; ERISA.
(a) Each "employee benefit plan" (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), bonus,
deferred compensation, stock option, employment, severance, change in control or
other written agreement relating to employment, fringe benefits or perquisites
for current or former employees of DRI or any of its subsidiaries, maintained or
contributed to by DRI or any of its subsidiaries at any time during the
seven-calendar year period immediately preceding the date hereof (collectively,
the "DRI Employee Benefit Plans") is listed in Section 4.8(a) of the DRI
Disclosure Schedule.
<PAGE>
(b) With respect to the DRI Employee Benefit Plans, individually and
in the aggregate, no event has occurred and, there exists no condition or set of
circumstances, in connection with which DRI or any of its subsidiaries could be
subject to any liability that is reasonably likely to have a DRI Material
Adverse Effect (except liability for benefits claims and funding obligations
payable in the ordinary course) under ERISA, the Code or any other applicable
law.
(c) Each DRI Employee Benefit Plan has been administered in
accordance with its terms, except for any failures to so administer any DRI
Employee Benefit Plans as would not, individually or in the aggregate, have a
DRI Material Adverse Effect. DRI, its subsidiaries and all the DRI Employee
Benefit Plans are in compliance with the applicable provisions of ERISA, the
Code and all other applicable laws and the terms of all applicable collective
bargaining agreements as they relate to the DRI Employee Benefit Plans, except
for any failures to be in such compliance as would not, individually or in the
aggregate, have a DRI Material Adverse Effect. Each DRI Employee Benefit Plan
which is intended to be qualified within the meaning of Section 401(a) of the
Code has received a favorable determination letter from the IRS and, to the
knowledge of DRI, no event has occurred and no condition exists which could
reasonably be expected to result in the revocation of any such determination.
(d) Except for all equity-based and other awards, the vesting and
exercisability of which will, by their terms, be accelerated as a result of the
transactions contemplated hereunder, no employee of DRI will be entitled to any
additional benefits or any acceleration of the time of payment or vesting of any
benefits under any DRI Employee Benefit Plan as a result of the transactions
contemplated by this Agreement.
Section 4.9 Regulation as a Utility. Neither DRI nor any subsidiary
company or affiliate of DRI is subject to regulation as a public utility or
public service company (or similar designation) by any state in the United
States, by the United States or any agency or instrumentality of the United
States or by any foreign country. As used in this Section 4.9 and in Section
5.9, the terms "subsidiary company" and "affiliate" shall have the respective
meanings ascribed to them in the 1935 Act.
Section 4.10 Vote Required. (a) The approval of the Merger by a
majority of all votes cast by the holders of DRI Common Stock at a duly called
meeting of such shareholders at which a quorum is present (the "DRI
Shareholders' Approval") is the only vote of the holders of any class or series
of the capital stock of DRI required to approve this Agreement, the Merger and
the other transactions contemplated hereby.
<PAGE>
(b) None of the shareholders of DRI are entitled to exercise any
appraisal rights in connection with the DRI Shareholders Approval.
Section 4.11 Accounting Matters. DRI has not, through the date
hereof, taken or agreed to take any action that would prevent DRI from
accounting for the business combination to be effected by the Merger as a
pooling-of-interests in accordance with GAAP and applicable SEC regulations.
Section 4.12 Opinion of Financial Advisor. DRI has received the
opinion of Lehman Brothers Inc., dated the date hereof, to the effect that, as
of the date hereof, the Conversion Ratio is fair from a financial point of view
to the holders of DRI Common Stock.
Section 4.13 Ownership of CNG Common Stock. DRI does not
"beneficially own" (as such term is defined in Rule 13d-3 under the Exchange
Act) any shares of CNG Common Stock.
Section 4.14 Anti-Takeover Provisions. None of the business
combination provisions of Article 13.1 of Chapter 9 of the VSCA or any similar
provisions of the VSCA or the articles of incorporation or bylaws of DRI are
applicable to the transactions contemplated by this Agreement. No other fair
price," "moratorium," "control share acquisition" or similar anti-takeover
statute or regulation is applicable to DRI, the Merger or any other transaction
contemplated hereby.
Section 4.15 Nuclear Operations. To the knowledge of DRI, the
operations of DRI's and its subsidiaries' nuclear generating stations are and
have at all times been conducted in compliance with applicable health, safety,
regulatory and other legal requirements, except for those requirements the
failure with which to comply would not, individually or in the aggregate, have a
DRI Material Adverse Effect. To the knowledge of DRI, DRI's and its
subsidiaries' nuclear generating stations maintain emergency plans designed to
respond to an unplanned release therefrom of radioactive materials into the
environment and liability insurance to the extent required by law, and such
further insurance (other than liability insurance) as is consistent with DRI's
view of the risks inherent in the operation of a nuclear power facility. To the
knowledge of DRI, plans for the decommissioning of each of DRI's and its
subsidiaries' nuclear generating stations and for the short-term storage of
spent nuclear fuel conform with applicable regulatory or other legal
requirements (other than those with which the failure to comply would not,
individually or in the aggregate, have a DRI Material Adverse Effect), and such
plans have at all times been funded to the extent required by law, which is
consistent with DRI's reasonable budget projections for such plans. To the
knowledge of DRI, neither DRI nor any of its subsidiaries has incurred any
liability as a result of operating nuclear power facilities for third parties
which liability, individually or in the aggregate, would have a DRI Material
Adverse Effect.
<PAGE>
Section 4.16 NRC Actions. Neither DRI nor any of its subsidiaries
has been given written notice of or been charged with actual or potential
violation of, or is the subject of any ongoing proceeding, inquiry, special
inspection, diagnostic evaluation or other NRC action (excluding rulemakings of
general application that may affect the conduct of DRI's business regarding
DRI's nuclear power facilities) of which DRI or any of its subsidiaries has
received written notice, under the Atomic Energy Act, any applicable regulations
thereunder or the terms and conditions of any license granted to DRI or any of
its subsidiaries regarding DRI's or any of its subsidiaries' nuclear power
facilities or any third party's nuclear power facility operated by DRI or any of
its subsidiaries that would have, or DRI reasonably believes would be reasonably
likely to have, a DRI Material Adverse Effect.
Section 4.17 Environmental Protection. Except as would not have,
individually or in the aggregate, a DRI Material Adverse Effect, (A) neither DRI
nor any of its subsidiaries is in violation of, or has received any written
notice that it is subject to liability under, any Environmental Laws, (B) DRI
and its subsidiaries have, or have filed timely application for, all permits,
licenses, authorizations and approvals required under any applicable
Environmental Laws, all of which are in full force and effect, and are each in
compliance with their requirements, (C) there are no pending, or to the
knowledge of DRI, threatened administrative, regulatory or judicial actions,
suits, demands, demand letters, claims, liens, notices of noncompliance,
violation or potential responsibility or liability, investigation or proceeding
pursuant to any Environmental Law against DRI or any of its subsidiaries, or to
the knowledge of DRI, any of their respective predecessors-in-interest for which
DRI or any of its subsidiaries is or may be liable and (D) there are no past or
present events, conditions or circumstances which would reasonably be expected
to form the basis of an order or other requirement to conduct responsive or
corrective action, or an action, suit or proceeding by any private party or
governmental agency, against or affecting, or requiring capital or operating
expenditures by, DRI or any of its subsidiaries, in each case pursuant to any
Environmental Laws.
Section 4.18 Trading Position Risk Management. DRI has established
a risk management committee which, from time to time, establishes risk
parameters to restrict the level of risk that DRI and its subsidiaries are
authorized to take with respect to the net position resulting from physical
commodity transactions, exchange traded futures and options and over-the-counter
derivative instruments. The risk management committee of DRI regularly monitors
the compliance of DRI and its subsidiaries with such risk parameters.
Section 4.19 Litigation. (i) There are no suits, actions or
proceedings pending or, to the best knowledge of DRI threatened against or
affecting DRI or any of its subsidiaries and (ii) there are no judgments,
decrees, injunctions, rules or orders of any court, governmental department,
commission, agency, instrumentality or authority or any arbitrator outstanding
against DRI or any of its subsidiaries that, in each case, individually or in
the aggregate, would have, or are reasonably likely to have, a DRI Material
Adverse Effect.
<PAGE>
Section 4.20 Dividends. It is the present intention of DRI's Board
of Directors to maintain the dividends on DRI Common Stock at its current annual
rate.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CNG
Except as disclosed in the CNG SEC Reports (as defined in Section
5.5) filed prior to the date hereof or as set forth on the Disclosure Schedule
delivered by CNG to DRI prior to the execution of this Agreement (the "CNG
Disclosure Schedule"), CNG represents and warrants to DRI as follows:
Section 5.1 Organization and Qualification. CNG and each of its
Significant Subsidiaries is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation, has all
requisite corporate power and authority, to own, lease and operate its assets
and properties and to carry on its business as it is now being conducted, and is
duly qualified and in good standing to do business in each jurisdiction in which
the nature of its business or the ownership or leasing of its assets and
properties makes such qualification necessary, other than in such jurisdictions
where the failure to be so qualified and in good standing will not, when taken
together with all other such failures, have a material adverse effect on the
business, operations, properties, assets, condition (financial or otherwise),
prospects or results of operations of CNG and its subsidiaries taken as a whole
or on the consummation of this Agreement (any such material adverse effect being
hereinafter referred to as a "CNG Material Adverse Effect"). True, accurate and
complete copies of the articles of incorporation and bylaws of CNG, as in effect
on the date hereof, have been delivered to DRI.
Section 5.2 Subsidiaries. Exhibit 21 to the Annual Report of CNG on
Form 10-K for the fiscal year ended December 31, 1997 includes all subsidiaries
of CNG which as of the date of this Agreement are Significant Subsidiaries. All
the outstanding shares of capital stock of, or other equity interests in, each
such Significant Subsidiary have been duly authorized and validly issued and are
fully paid and nonassessable and are owned directly or indirectly by CNG, free
and clear of all Liens. There are no outstanding subscriptions, options, calls,
contracts, voting trusts, proxies or other commitments, understandings,
restrictions, arrangements, rights or warrants, including any right of
conversion or exchange under any outstanding security, instrument or other
agreement, obligating any Significant Subsidiary to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of its capital stock or
obligating it to grant, extend or enter into any such agreement or commitment.
<PAGE>
Section 5.3 Capitalization. The authorized capital stock of CNG
consists of 400,000,000 shares of CNG Common Stock and 5,000,000 shares of
preferred stock. As of the close of business on January 31, 1999, 95,397,649
shares of CNG Common Stock and no shares of preferred stock were issued and
outstanding. All of the issued and outstanding shares of the capital stock of
CNG are validly issued, fully paid, nonassessable and free of preemptive rights.
Except for the CNG Rights (as defined in Section 5.14), as of the date hereof,
there are no outstanding subscriptions, options, calls, contracts, voting
trusts, proxies or other commitments, understandings, restrictions,
arrangements, rights or warrants, including any right of conversion or exchange
under any outstanding security, instrument or other agreement, obligating CNG or
any of its subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of the capital stock or other voting
securities of CNG or obligating CNG or any of its subsidiaries to grant, extend
or enter into any such agreement or commitment.
Section 5.4 Authority; Non-Contravention; Statutory Approvals;
Compliance.
(a) Authority. CNG has all requisite power and authority to enter
into this Agreement and, subject to the CNG Shareholders' Approval (as defined
in Section 5.10) and the CNG Required Statutory Approvals (as defined in Section
5.4(c), to consummate the transactions contemplated hereby. The Board of
Directors of CNG has (a) determined that the Merger is fair and in the best
interest of CNG and its shareholders, (b) approved and adopted this Agreement,
and (c) resolved to recommend to the holders of CNG Common Stock that they give
the CNG Shareholders' Approval. The execution and delivery of this Agreement and
the consummation by CNG of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of CNG, subject to
obtaining the CNG Shareholders' Approval. This Agreement has been duly and
validly executed and delivered by CNG and, assuming the due authorization,
execution and delivery of this Agreement by DRI, constitutes the legal, valid
and binding obligation of CNG enforceable against CNG in accordance with its
terms.
(b) Non-Contravention. The execution and delivery of this Agreement
by CNG do not and the consummation of the transactions contemplated hereby will
not result in any Violation by CNG or any of its Significant Subsidiaries under
any provisions of (i) the articles of incorporation, bylaws or similar governing
documents of CNG or any of its Significant Subsidiaries, (ii) subject to
obtaining the CNG Required Statutory Approvals and the receipt of the CNG
Shareholders' Approval, any statute, law, ordinance, rule, regulation, judgment,
decree, order, injunction, writ, permit or license of any Governmental Authority
applicable to CNG or any of its Significant Subsidiaries or any of their
respective properties or assets, or (iii) subject to obtaining the third-party
consents or other approvals disclosed in Section 5.4(b) of the CNG Disclosure
Schedule (the "CNG Required Consents"), any note, bond, mortgage, indenture,
deed of trust, license, franchise, permit, concession, contract, lease or other
instrument, obligation or agreement of any kind to which CNG or any of its
Significant Subsidiaries is now a party or by which any of them or any of their
respective properties or assets may be bound or affected, excluding from the
foregoing clauses (ii) and (iii) such Violations as would not have, individually
or in the aggregate, a CNG Material Adverse Effect.
<PAGE>
(c) Statutory Approvals. No declaration, filing or registration with,
or notice to or authorization, consent, finding by or approval of, any
Governmental Authority is necessary for the execution and delivery of this
Agreement by CNG or the consummation by CNG of the transactions contemplated
hereby which if not obtained, made or given, would have, individually or in the
aggregate, a CNG Material Adverse Effect (the "CNG Required Statutory
Approvals"), it being understood that references in this Agreement to
"obtaining" such CNG Required Statutory Approvals shall mean making such
declarations, filings or registrations; giving such notice; obtaining such
consents or approvals; and having such waiting periods expire as are necessary
to avoid a violation of law.
(d) Compliance. Neither CNG nor any of its subsidiaries nor, to the
best knowledge of CNG, any of its joint ventures, is in violation of or under
investigation with respect to, or has been given notice or been charged with any
violation of, any law, statute, order, rule, regulation, ordinance or judgment
(including, without limitation, any Environmental Laws) of any Governmental
Authority, except for violations that, individually or in the aggregate, do not
have, and, to the best knowledge of CNG, are not reasonably likely to have, a
CNG Material Adverse Effect. CNG, its subsidiaries and, to the best knowledge of
CNG, its joint ventures have all Permits, except those Permits the failure to
obtain which would not have, individually or in the aggregate, a CNG Material
Adverse Effect.
Section 5.5 Reports and Financial Statements. The filings required
to be made by CNG and its subsidiaries since January 1, 1996 under the
Securities Act, the Exchange Act, the Power Act, the Natural Gas Act (the "Gas
Act"), the Natural Gas Policy Act of 1978 (the "Gas Policy Act"), the 1935 Act
and applicable state laws and regulations have been filed with the SEC, the FERC
or the applicable state regulatory authorities, as the case may be, including
all forms, statements, reports, agreements (oral or written) and all documents,
exhibits, amendments and supplements appertaining thereto, and complied in all
material respects with all applicable requirements of the appropriate act and
the rules and regulations thereunder. CNG has made available to DRI a true and
complete copy of each report, schedule, registration statement and definitive
proxy statement filed by CNG with the SEC under the Securities Act and the
Exchange Act, since January 1, 1996 and through the date hereof (as such
documents have since the time of their filing been amended, the "CNG SEC
Reports"). The CNG SEC Reports, including without limitation any financial
statements or schedules included therein, at the time filed, and any forms,
reports or other documents filed by CNG with the SEC after the date hereof, did
not and will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The audited consolidated financial statements and unaudited
interim financial statements of CNG included in the CNG SEC Reports
(collectively, the "CNG Financial Statements") have been prepared, and will be
prepared, in accordance with GAAP (except as may be indicated therein or in the
notes thereto and except with respect to unaudited statements as permitted by
Form 10-Q under the Exchange Act) and fairly present the consolidated financial
position of CNG as of the respective dates thereof or the consolidated results
of operations and cash flows for the respective periods then ended, as the case
may be, subject, in the case of the unaudited interim financial statements, to
normal, recurring audit adjustments.
<PAGE>
Section 5.6 Absence of Certain Changes or Events. From September 30,
1998 through the date hereof, each of CNG and each of its subsidiaries has
conducted its business only in the ordinary course of business consistent with
past practice and no event has occurred which has had, and no fact or condition
exists that would have or, to the best knowledge of CNG, is reasonably likely to
have, a CNG Material Adverse Effect.
Section 5.7 Registration Statement and Proxy Statement. None of the
information supplied or to be supplied by or on behalf of CNG for inclusion or
incorporation by reference in (i) the Registration Statement will, at the time
the Registration Statement becomes effective under the Securities Act, and as
the same may be amended, at the effective time of such amendment, contain any
untrue statement or a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
and (ii) the Joint Proxy Statement/Prospectus will, at the date such Joint Proxy
Statement/Prospectus is mailed to the shareholders of CNG and DRI and, as the
same may be amended or supplemented, at the times of the meetings of such
shareholders to be held in connection with the Merger, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. The Registration Statement and the Joint Proxy
Statement/Prospectus will comply as to form in all material respects with the
provisions of the Securities Act and the Exchange Act and the rules and
regulations thereunder.
Section 5.8 Employee Matters; ERISA.
(a) Each "employee benefit plan" (as defined in Section 3(3) of
ERISA), bonus, deferred compensation, stock option, employment, severance,
change in control or other written agreement relating to employment, fringe
benefits or perquisites for current or former employees of CNG or any of its
subsidiaries, maintained or contributed to by CNG or any of its subsidiaries at
any time during the seven-calendar year period immediately preceding the date
hereof (collectively, the "CNG Employee Benefit Plans") is listed in Section
5.8(a) of the CNG Disclosure Schedule.
(b) With respect to the CNG Employee Benefit Plans, individually and
in the aggregate, no event has occurred and, to the knowledge of CNG, there
exists no condition or set of circumstances, in connection with which CNG or any
of its subsidiaries could be subject to any liability that is reasonably likely
to have a CNG Material Adverse Effect (except liability for benefits claims and
funding obligations payable in the ordinary course) under ERISA, the Code or any
other applicable law.
<PAGE>
(c) Each CNG Employee Benefit Plan has been administered in
accordance with its terms, except for any failures to so administer any CNG
Employee Benefit Plans as would not, individually or in the aggregate, have a
CNG Material Adverse Effect, CNG, its subsidiaries and all the CNG Employee
Benefit Plans are in compliance with the applicable provisions of ERISA, the
Code and all other applicable laws and the terms of all applicable collective
bargaining agreements as they relate to the CNG Employee Benefit Plans, except
for any failures to be in such compliance as would not, individually or in the
aggregate, have a CNG Material Adverse Effect. Each CNG Employee Benefit Plan
which is intended to be qualified within the meaning of Section 401(a) of the
Code has received a favorable determination letter from the IRS and, to the
knowledge of CNG, no event has occurred and no condition exists which could
reasonably be expected to result in the revocation of any such determination.
(d) Except for all equity-based and other awards, the vesting and
exercisability of which will, by their terms, be accelerated as a result of the
transactions contemplated hereunder, no employee of CNG will be entitled to any
additional benefits or any acceleration of the time of payment or vesting of any
benefits under any CNG Employee Benefit Plan as a result of the transactions
contemplated by this Agreement.
Section 5.9 Regulation as a Utility. Neither CNG nor any subsidiary
company or affiliate of CNG is subject to regulation as a public utility or
public service company (or similar designation) by any state in the United
States, by the United States or any agency or instrumentality of the United
States or by any foreign country.
Section 5.10 Vote Required. (a) The approval of the Merger by a
majority of all votes entitled to be cast by the holders of CNG Common Stock
(the "CNG Shareholders' Approval"), is the only vote of the holders of any class
or series of the capital stock of CNG required to approve this Agreement, the
Merger and the other transactions contemplated hereby.
(b) None of the shareholders of CNG are entitled to exercise any
appraisal rights in connection with the CNG Shareholders' Approval.
Section V.11 Accounting Matters. CNG has not, through the date
hereof, taken or agreed to take any action that would prevent CNG from
accounting for the business combination to be effected by the Merger as a
pooling-of-interests in accordance with GAAP and applicable SEC regulations.
Section 5.12 Opinion of Financial Advisor. CNG has received the
opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated dated the date
hereof, to the effect that, as of the date hereof, the Conversion Ratio to be
received by the holders of CNG Common Stock is fair from a financial point of
view to the holders of CNG Common Stock.
<PAGE>
Section 5.13 Ownership of DRI Common Stock. CNG does not
"beneficially own" (as such term is defined in Rule 13d-3 under the Exchange
Act) any shares of DRI Common Stock.
Section 5.14 CNG Rights Agreement. CNG shall take all necessary
action with respect to all of the outstanding rights to purchase common stock of
CNG (the "CNG Rights") issued pursuant to the Rights Agreement dated as of
January 23, 1996 between CNG and First Chicago Trust Company of New York, as
Rights Agent (the "CNG Rights Agreement"), so that CNG, as of the time
immediately prior to the Effective Time, will have no obligations under the CNG
Rights or the CNG Rights Agreement, except for the payment of any redemption
price, if required, and so that the holders of the CNG Rights will have no
rights under the CNG Rights or the CNG Rights Agreement, except for the payment
of any redemption price, if required. The execution, delivery and performance of
this Agreement will not result in a distribution of, or otherwise, trigger, the
CNG Rights under the CNG Rights Agreement.
Section 5.15 Anti-Takeover Provisions. None of the business
combination provisions of Section 203 of the Delaware General Corporation Law or
the certificate of incorporation or bylaws of CNG are applicable to the
transactions contemplated by this Agreement. No other "fair price,"
"moratorium," "control share acquisition" or similar anti-takeover statute or
regulation is applicable to CNG, the Merger or any other transaction
contemplated hereby.
Section 5.16 Environmental Protection. Except as would not have,
individually or in the aggregate, a CNG Material Adverse Effect, (A) neither CNG
nor any of its subsidiaries is in violation of, or has received any written
notice that it is subject to liability under, any Environmental Laws, (B) CNG
and its subsidiaries have or have filed timely application for, all permits,
licenses, authorizations and approvals required under any applicable
Environmental Laws, all of which are in full force and effect, and are each in
compliance with their requirements, (C) there are no pending or, to the
knowledge of CNG, threatened administrative, regulatory or judicial actions,
suits, demands, demand letters, claims, liens, notices of noncompliance,
violation or potential responsibility or liability, investigation or proceedings
pursuant to any Environmental Law against CNG or any of its subsidiaries, or to
the knowledge of CNG, any of their respective predecessors-in-interest for which
CNG or any of its subsidiaries is or may be liable and (D) there are no past or
present events, conditions or circumstances which would reasonably be expected
to form the basis of an order or other requirement to conduct responsive or
corrective action, or an action, suit or proceeding by any private party or
governmental agency, against or affecting, or requiring capital or operating
expenditures by, CNG or any of its subsidiaries, in each case pursuant to any
Environmental Laws.
<PAGE>
Section 5.17 Trading Position Risk Management. CNG has established a
risk management department which, from time to time, establishes risk parameters
to restrict the level of risk that CNG and its subsidiaries are authorized to
take with respect to the net position resulting from physical commodity
transactions, exchange traded futures and options and over-the-counter
derivative instruments. The risk management department of CNG regularly monitors
the compliance by CNG and its subsidiaries with such risk parameters.
Section 5.18 Litigation. (i) There are no suits, actions or
proceedings pending or, to the best knowledge of CNG threatened against or
affecting CNG or any of its subsidiaries and (ii) there are no judgments,
decrees, injunctions, rules or orders of any court, governmental department,
commission, agency, instrumentality or authority or any arbitrator outstanding
against CNG or any of its subsidiaries that, in each case, individually or in
the aggregate, would have, or are reasonably likely to have, a CNG Material
Adverse Effect.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
DRI and CNG have each delivered to the other a budget for the years
1999 and 2000 (respectively, the "DRI Budget" and the "CNG Budget"), which DRI
or CNG, as the case may be, may update or otherwise modify in writing for
purposes of this Article VI only with the consent in writing of CNG or DRI, as
the case may be. After the date hereof and prior to the Effective Time or
earlier termination of this Agreement, each of DRI and CNG agrees as to itself
and its subsidiaries, except as expressly contemplated or permitted in this
Agreement, or to the extent the other party shall otherwise consent in writing,
as follows:
Section 6.1 Ordinary Course of Business. Each of DRI and CNG shall,
and each shall cause its respective subsidiaries to, carry on their respective
businesses in the usual, regular and ordinary course consistent with past
practice and use all commercially reasonable efforts to preserve intact their
present business organizations and goodwill, preserve the goodwill and
relationships with customers, suppliers and others having business dealings with
them , subject to prudent management of workforce needs and ongoing or planned
programs relating to downsizing, re-engineering and similar programs to the end
that their goodwill and ongoing businesses shall not be impaired in any material
respect at the Effective Time.
Section 6.2 Dividends. Neither DRI nor CNG shall, nor shall either
permit any of its subsidiaries to: (a) declare or pay any dividends on or make
other distributions in respect of any of their capital stock other than (i) in
the case of subsidiaries, to such subsidiary's shareholders, (ii) regular
dividends on DRI Common Stock with usual record and payment dates not in excess
of an annual rate of $2.58 per share, and (iii) regular dividends on CNG Common
Stock with usual record and payment dates not in excess of an annual rate of
$1.94 per share; (b) split, combine or reclassify any of their capital stock or
issue or authorize or propose the issuance of any other securities in respect
of, in lieu of, or in substitution for, shares of its capital stock; or (c)
redeem, repurchase or otherwise acquire any shares of their capital stock other
than (but in all cases subject to Section 6.12) (i) redemptions, repurchases and
other acquisitions of shares of capital stock in the ordinary course of business
consistent with past practice including, without limitation, repurchases,
redemptions and other acquisitions in connection with the administration of
employee benefit and dividend reinvestment plans as in effect on the date hereof
in the ordinary course of the operation of such plans, (ii) intercompany
acquisitions of capital stock, (iii) purchases under DRI's existing share
repurchase program and (iv) the redemption, if required, of the CNG Rights
pursuant to the CNG Rights Agreement.
<PAGE>
Section 6.3 Issuance of Securities. Except as provided in the DRI
Budget or the CNG Budget, as the case may be, neither DRI nor CNG shall, nor
shall either permit any of its subsidiaries to, issue, deliver or sell, or
authorize or propose the issuance, delivery or sale of, any shares of their
capital stock of any class or any securities convertible into or exchangeable
for, or any rights, warrants or options to acquire, any such shares or
convertible or exchangeable securities, other than (a) the issuance of common
stock, stock options, restricted stock or stock appreciation or similar rights
pursuant to (i) the existing Dominion Direct Investment, Incentive Compensation
Plan, Directors' Stock Compensation Plan, Directors' Stock Accumulation Plan,
Directors' Deferred Cash Compensation Plan, Executive Deferred Compensation
Plan, Employee Savings Plan, Subsidiary Savings Plan, Hourly Employee Savings
Plan and other existing plans and practices of DRI or (ii) the existing 1991
Stock Incentive Plan, 1997 Stock Incentive Plan, 1995 Employee Stock Incentive
Plan, Non-Employee Directors Restricted Stock Plan, Dividend Reinvestment Plan,
Employee Stock Ownership Plan and other existing plans and practices of CNG, in
each case consistent in kind and amount with past practice and in the ordinary
course of business under such plans substantially in accordance with their
present terms, (b) the issuance by a subsidiary of shares of its capital stock
to its shareholders, (c) the issuance or sale of treasury stock to satisfy the
requirements to use the pooling of interests method of accounting for the
transaction, and (d) the issuance by DRI of shares of its capital stock in
connection with any acquisition permitted pursuant to Section 6.5, except that
such issuance by DRI shall not exceed an aggregate value of $800,000,000 without
the prior written consent of CNG.
Section 6.4 Charter Documents. Except as disclosed in Section 6.4
of the DRI Disclosure Schedule or the CNG Disclosure Schedule, neither DRI nor
CNG shall amend or propose to amend its articles of incorporation or by-laws,
except as contemplated herein, in any way adverse to the other party.
Notwithstanding the foregoing, DRI may increase the number of authorized shares
of DRI Common Stock and may amend its articles of incorporation to eliminate the
staggered terms of its Board of Directors
<PAGE>
Section 6.5 Acquisitions. Except as disclosed in Section 6.5 of the
DRI Disclosure Schedule or the CNG Disclosure Schedule and except as provided in
the DRI Budget or the CNG Budget, as the case may be, neither DRI nor CNG shall,
nor shall either permit any of its subsidiaries to, acquire or agree to acquire,
by merging or consolidating with, or by purchasing a substantial equity interest
in or a substantial portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets (i) which would, in the case of either DRI and its subsidiaries or CNG
and its subsidiaries, require a vote of the shareholders of DRI or CNG, as the
case may be, or (ii) which would exceed $100,000,000 individually or
$300,000,000 in the aggregate (including, in each case, any recourse
indebtedness assumed in connection therewith) and which, in the case of CNG have
not been approved in writing by DRI, which approval shall not be unreasonably
withheld, or in the case of DRI, with respect to which DRI has not consulted
with CNG or in the case of non-energy industry related acquisitions in excess of
$2,000,000,000 in the aggregate, to which CNG has not consented, which consent
shall not be unreasonably withheld. Notwithstanding the foregoing, neither party
shall acquire any nuclear power facilities without the prior written consent of
the other party.
Section 6.6 No Dispositions. Except as disclosed in Section 6.6 of
the DRI Disclosure Schedule or the CNG Disclosure Schedule, and other than (a)
dispositions not exceeding $100,000,000 individually or $300,000,000 in the
aggregate, in the case of, on the one hand, DRI and its subsidiaries and, on the
other hand, CNG and its subsidiaries, (b) as may be required by law to
consummate the transactions contemplated hereby, (c) in the ordinary course of
business consistent with past practices, or (d) in the case of CNG, as may be
approved in writing by DRI, which approval shall not be unreasonably withheld,
or, in the case of DRI, with respect to which DRI has consulted with CNG,
neither DRI nor CNG shall, nor shall either permit any of its subsidiaries to,
sell, lease, license, encumber or otherwise dispose of, any of its assets that
are material, individually or in the aggregate, to such party and its
subsidiaries taken as a whole.
Section 6.7 Indebtedness. Except as disclosed in Section 6.7 of the
DRI Disclosure Schedule or the CNG Disclosure Schedule and except as provided in
the DRI Budget or the CNG Budget, as the case may be, neither DRI nor CNG shall,
nor shall either permit any of its subsidiaries to, incur or guarantee any
indebtedness (including any debt borrowed or guaranteed or otherwise assumed,
including, without limitation, the issuance of debt securities or warrants or
rights to acquire debt) other than (a) short-term indebtedness in the ordinary
course of business consistent with past practice, (b) long-term indebtedness in
connection with the refinancing of existing indebtedness either at its stated
maturity or at a lower cost of funds, (c) additional indebtedness aggregating in
any year not more than 110% of the amount provided therefor in the DRI Budget
with respect to DRI and its subsidiaries or in the CNG Budget with respect to
CNG and its subsidiaries, and (d) in the case of CNG, as may be approved in
writing by DRI, which approval shall not be unreasonably withheld, or, in the
case of DRI, with respect to which DRI has consulted with CNG.
<PAGE>
Section 6.8 Capital Expenditures. Except as disclosed in Section
6.8 of the DRI Disclosure Schedule or the CNG Disclosure Schedule or as required
by law, neither DRI nor CNG shall, nor shall either permit any of its
subsidiaries to, make any capital expenditures, other than (a) capital
expenditures to repair or replace facilities destroyed or damaged due to
casualty or accident (whether or not covered by insurance), (b) additional
capital expenditures in any year of not more than 110% of the amount provided
therefor in the DRI Budget for that year with respect to DRI and its
subsidiaries and in the CNG Budget for that year with respect to CNG and its
subsidiaries, and (c) in the case of CNG, as may be approved in writing by DRI,
which approval shall not be unreasonably withheld, or, in the case of DRI, with
respect to which DRI has consulted with CNG.
Section 6.9 Compensation, Benefits. Except as disclosed in Section
6.9 of the CNG Disclosure Schedule or the CNG Budget, CNG shall not, nor shall
it permit any of its subsidiaries to, (i) enter into, adopt or amend (except as
may be required by applicable law), or increase the amount or accelerate the
payment or vesting of any benefit or amount payable under, any employee benefit
plan or other contract, agreement, commitment, arrangement, plan or policy
maintained by, contributed to or entered into by such party or any of its
subsidiaries, or increase, or enter into any contract, agreement, commitment or
arrangement to increase in any manner, the compensation or fringe benefits, or
otherwise to extend, expand or enhance the engagement, employment or any related
rights, of any director, officer or other employee of such party or any of its
subsidiaries, except pursuant to binding legal commitments or as a result of
normal collective bargaining processes, and except for normal (including
incentive) increases, extensions, expansions, enhancements, amendments,
replacements or adoptions in the ordinary course of business consistent with
past practice that, in the aggregate, do not result in a material increase in
benefits or compensation expense to such party and its subsidiaries taken as a
whole or (ii) enter into or amend any employment, severance or special pay
arrangement with respect to termination of employment or other similar contract,
agreement or arrangement with any director or officer other than in the ordinary
course of business consistent with past practice.
Section 6.10 1935 Act. None of the parties hereto shall, nor shall
any such party permit any of its Significant Subsidiaries to, except as required
or contemplated by this Agreement, engage in any activities that would cause a
change in its status, or that of its Significant Subsidiaries, under the 1935
Act.
Section 6.11 Accounting. Neither DRI nor CNG shall, nor shall
either permit any of its subsidiaries to, make any changes in their accounting
methods, except as required by law, rule, regulation or GAAP.
Section 6.12 Pooling. DRI and CNG shall use their respective best
efforts, and shall cause each of their respective subsidiaries to use its best
efforts, to take such actions as may be necessary to permit the parties to
account for the Merger, and shall not and shall not permit any of their
respective subsidiaries to, take any actions that would, or would reasonably
likely to, prevent the parties from accounting for the Merger, as a pooling of
interests in accordance with GAAP and applicable SEC regulations.
<PAGE>
Section 6.13 Tax-Free Status. Neither DRI nor CNG shall, nor shall
either permit any of its subsidiaries to, take any actions that would, or would
be reasonably likely to, adversely affect the qualification of the Merger as a
transaction described in Section 368(a)(1)(A) of the Code.
Section 6.14 Discharge of Liabilities. Neither DRI nor CNG shall
pay, discharge or satisfy any material claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice (which includes the payment of judgments and
settlements and the refinancing of existing indebtedness for borrowed money
either at its stated maturity or at a lower cost of funds) or in accordance with
their terms, of liabilities reflected or reserved against in, or contemplated
by, the most recent consolidated financial statements (or the notes thereto) of
such party included in such party's reports filed with the SEC, or incurred in
the ordinary course of business consistent with past practice or as disclosed in
Section 6.7 of the DRI Disclosure Schedule or the CNG Disclosure Schedule.
Section 6.15 Cooperation, Notification. Each of DRI and CNG shall:
(a) confer on a regular and frequent basis with one or more representatives of
the other to discuss the general status of its ongoing operations; (b) promptly
notify the other of any significant changes in its business, properties, assets,
condition (financial or other), prospects or results of operations; (c) advise
the other of any change or event that has had or, insofar as reasonably can be
foreseen, is reasonably likely to result in, a DRI Material Adverse Effect or a
CNG Material Adverse Effect, as the case may be; and (d) promptly provide the
other with copies of all filings made by it or any of its subsidiaries with any
state or federal court, administrative agency, commission or other Governmental
Authority in connection with this Agreement and the transactions contemplated
hereby.
Section 6.16 Rate Matters. Other than currently pending rate
filings, each of DRI and CNG shall, and shall cause its subsidiaries to, discuss
with the other any changes in its or its subsidiaries' regulated rates or
charges (other than fuel and gas rates or charges), standards of service or
accounting from those in effect on the date hereof and consult with the other
prior to making any filing (or any amendment thereto), or effecting any
agreement, commitment, arrangement or consent, whether written or oral, formal
or informal, with respect thereto, and neither DRI nor CNG shall make any filing
to change its rates on file with any state regulatory authority or the FERC that
would have a material adverse effect on the benefits associated with the Merger.
Section 6.17 Third-Party Consents. DRI shall, and shall cause its
subsidiaries to, use all commercially reasonable efforts to obtain all DRI
Required Consents. DRI shall promptly notify CNG of any failure or anticipated
failure to obtain any such consents and, if requested by CNG, shall provide
copies of all DRI Required Consents obtained by DRI to CNG. CNG shall, and shall
cause its subsidiaries to, use all commercially reasonable efforts to obtain all
CNG Required Consents. CNG shall promptly notify DRI of any failure or
anticipated failure to obtain any such consents and, if requested by DRI, shall
provide copies of all CNG Required Consents obtained by CNG to DRI.
<PAGE>
Section 6.18 No Breach, Etc. No party shall, nor shall any party
permit any of its subsidiaries to, take any action that would or is reasonably
likely to result in a material breach of any provision of this Agreement or in
any of its representations and warranties set forth in this Agreement being
untrue on and as of the Closing Date.
Section 6.19 Tax-Exempt Status. No party hereto shall, nor shall
any party permit any subsidiary to, take any action that would likely jeopardize
the qualification of the outstanding revenue bonds issued for the benefit of DRI
(or any subsidiary thereof) or for the benefit of CNG (or any subsidiary
thereof) that qualify on the date hereof under Section 142(a) of the Code as
"exempt facility bonds" or as tax-exempt industrial development bonds under
Section 103(b)(4) of the Internal Revenue Code of 1954, as amended prior to the
Tax Reform Act of 1986.
Section 6.20 Transition Management. (a) DRI and CNG shall create a
special transition management task force (the "Task Force") to be headed by
Thomas E. Capps, Chairman and Chief Executive Officer of DRI, and in addition,
to consist of two members nominated by CNG and two additional members nominated
by DRI. The Task Force shall report its findings to the Board of Directors of
each of DRI and CNG.
(b) The functions of the Task Force shall include (i) serving as a
conduit for the flow of information and documents between DRI and CNG as
contemplated by Section 6.15, (ii) development of transition plans, corporate
organizational and management plans, workforce combination proposals, and such
other matters as may be appropriate and (iii) otherwise assisting DRI and CNG in
making an orderly transition.
Section 6.21 Insurance. Each of DRI and CNG shall, and shall cause
its subsidiaries to, maintain with financially responsible insurance companies
insurance in such amounts and against such risks and losses as are customary for
companies engaged in their respective industries, taking into account, in the
case of DRI, DRI's methods of generating electric power and fuel sources.
Section 6.22 Permits. Each party shall, and shall cause its
subsidiaries to, use commercially reasonable efforts to maintain in effect all
existing Permits (as defined in Section 4.4) pursuant to which such party or
such party's subsidiaries operate.
<PAGE>
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.1 Access to Information. Upon reasonable notice and
during normal business hours, each party shall, and shall cause its subsidiaries
to, afford to the officers, directors, employees, accountants, counsel,
investment banker, financial advisor and other representatives of the other
(collectively, "Representatives") reasonable access, during normal business
hours throughout the period prior to the Effective Time, to all of its
properties, books, contracts, commitments and records (including, but not
limited to, tax returns) and, during such period, each party shall, and shall
cause its subsidiaries to, furnish promptly to the other (i) a copy of each
reasonably available report, schedule and other document filed or received by it
or any of its subsidiaries pursuant to the requirements of federal or state
securities laws or filed with the SEC, the FERC, the NRC, the Department of
Justice, the Federal Trade Commission, or any other federal or any state
regulatory agency or commission, and (ii) all information concerning themselves,
their subsidiaries, directors, officers and shareholders and such matters as may
be reasonably requested by the other party in connection with any filings,
applications or approvals required or contemplated by this Agreement. All
documents and information furnished pursuant to this Section 7.1 shall be
subject to the Confidentiality Agreement between the parties (the
"Confidentiality Agreement"). The party requesting copies of any documents from
any other party hereto shall be responsible for all out-of-pocket expenses
incurred by the party to whom such request is made in complying with such
request, including any cost of reproducing and delivering any required
information.
Section 7.2 Joint Proxy Statement and Registration Statement.
(a) Preparation and Filing. As promptly as reasonably practicable
after the date hereof, DRI shall, in consultation with CNG, prepare and file
with the SEC the Registration Statement and the Joint Proxy Statement/Prospectus
(together the "Joint Proxy/Registration Statement"). DRI shall take such actions
as may be reasonably required to cause the Registration Statement to be declared
effective under the Securities Act as promptly as practicable after such filing
and shall also take such action as may be reasonably required to cause the
shares of DRI Common Stock issuable in connection with the Merger to be
registered or to obtain an exemption from registration under applicable state
"blue sky" or securities laws. Each of the parties shall furnish all information
concerning itself that is required or customary for inclusion in the Joint
Proxy/Registration Statement. No representation, covenant or agreement contained
in this Agreement is made by any party hereto with respect to information
supplied by any other party hereto for inclusion in the Joint Proxy/Registration
Statement. The parties shall take such actions as may be reasonably required to
cause Joint Proxy/Registration Statement to comply as to form in all material
respects with the Securities Act, the Exchange Act and the 1935 Act and the
rules and regulations thereunder. DRI shall take such action as may be
reasonably required to cause the shares of DRI Common Stock to be issued in the
Merger to be approved for listing on the NYSE and any other stock exchanges
agreed to by the parties, each upon official notice of issuance.
<PAGE>
(b) Letter of DRI's Accountants. DRI shall use best efforts to cause
to be delivered to DRI and CNG letters of Deloitte & Touche LLP, one dated a
date within two (2) business days before the effective date of the Registration
Statement and one dated the Closing Date, and addressed to DRI and CNG, in form
and substance reasonably satisfactory to DRI and CNG and customary in scope and
substance for "cold comfort" letters delivered by independent public accountants
in connection with registration statements and proxy statements similar to the
Joint Proxy/Registration Statement.
(c) Letter of CNG's Accountants. CNG shall use best efforts to cause
to be delivered to CNG and DRI letters of PricewaterhouseCoopers LLP, one dated
a date within two (2) business days before the effective date of the
Registration Statement and one dated the Closing Date, and addressed to CNG and
DRI, in form and substance satisfactory to CNG and DRI and customary in scope
and substance for "cold comfort" letters delivered by independent public
accountants in connection with registration statements and proxy statements
similar to the Joint Proxy/Registration Statement.
Section 7.3 Regulatory Matters.
(a) HSR Filings. Each party hereto shall file or cause to be filed
with the Federal Trade Commission and the Department of Justice any
notifications required to be filed by them or their respective "ultimate parent"
companies under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), and the rules and regulations promulgated thereunder
with respect to the transactions contemplated hereby. Such parties will use all
commercially reasonable efforts to make such filings promptly and shall respond
promptly to any requests for additional information made by either of such
agencies.
(b) Other Regulatory Approvals. Each party hereto shall cooperate and
use its best efforts to promptly prepare and file all necessary documentation,
to effect all necessary applications, notices, petitions, filings and other
documents, and to use all commercially reasonable efforts to obtain all
necessary permits, consents, approvals and authorizations of all Governmental
Authorities and all other persons necessary or advisable to consummate the
transactions contemplated by this Agreement, including, without limitation, the
DRI Required Statutory Approvals and the CNG Required Statutory Approvals. CNG
shall have the right to review and approve in advance all characterizations of
the information relating to CNG, on the one hand, and DRI shall have the right
to review and approve in advance all characterizations of the information
relating to DRI, on the other hand, in either case, which appear in any filing
made in connection with the transactions contemplated by this Agreement or the
Merger, such approvals not to be unreasonably withheld. DRI and CNG shall each
consult with the other with respect to the obtaining of all such necessary or
advisable permits, consents, approvals and authorizations of Governmental
Authorities and shall keep each other informed of the status thereof.
<PAGE>
Section 7.4 Shareholder Approvals.
(a) Approval of CNG Shareholders. CNG shall, as promptly as
reasonably practicable after the date hereof (i) take all steps reasonably
necessary to call, give notice of, convene and hold a special meeting of its
shareholders (the "CNG Special Meeting") for the purpose of securing the CNG
Shareholders' Approval, (ii) distribute to its shareholders the Joint Proxy
Statement/Prospectus in accordance with applicable federal and state law and
with its certificate of incorporation and bylaws, (iii) recommend to its
shareholders that they give the CNG Shareholders' Approval (provided that
nothing contained in this Section 7.4 shall require the Board of Directors of
CNG to take any action or refrain from taking any action that such Board
determines in good faith and with the advice of counsel as set forth in a
written, reasoned opinion would result in a breach of its fiduciary duties under
applicable law), and (iv) cooperate and consult with DRI with respect to each of
the foregoing matters.
(b) Approval of DRI Shareholders. DRI shall, as promptly as
reasonably practicable after the date hereof (i) take all steps reasonably
necessary to call, give notice of, convene and hold a special meeting of its
shareholders (the "DRI Special Meeting") for the purpose of securing the DRI
Shareholders' Approval, (ii) distribute to its shareholders the Joint Proxy
Statement/Prospectus in accordance with applicable federal and state law and its
articles of incorporation and bylaws, (iii) recommend to its shareholders that
they give the DRI Shareholders' Approval (provided that nothing contained in
this Section 7.4 shall require the Board of Directors of DRI to take any action
or refrain from taking any action that such Board determines in good faith and
with the advice of counsel as set forth in a written, reasoned opinion would
result in a breach of its fiduciary duties under applicable law), and (iv)
cooperate and consult with CNG with respect to each of the foregoing matters.
(c) Meeting Date. The DRI Special Meeting and the CNG Special
Meeting shall be held on the same day unless otherwise agreed by DRI and CNG.
Section 7.5 Directors' and Officers' Indemnification.
<PAGE>
(a) Indemnification. To the extent, if any, not provided by an
existing right of indemnification or other agreement or policy, from and after
the Effective Time, DRI shall, to the fullest extent provided by CNG prior to
the Closing and not prohibited by applicable law, indemnify, defend and hold
harmless the present and former directors, officers and management employees of
CNG and its subsidiaries (each an "Indemnified Party" and, collectively, the
"Indemnified Parties") against (i) all losses, expenses (including reasonable
attorneys' fees and expenses), claims, damages, costs, liabilities, judgments or
(subject to the proviso of the next succeeding sentence) amounts that are paid
in settlement of or in connection with any claim, action, suit, proceeding or
investigation based in whole or in part on or arising in whole or in part out of
the fact that such person is or was a director, officer or management employee
of CNG or any subsidiary thereof, whether pertaining to any matter existing or
occurring at or prior to or after the Effective Time and whether asserted or
claimed prior to, at or after the Effective Time and (ii) all liabilities based
in whole or in part on, or arising in whole or in part out of, or pertaining to
this Agreement or the transactions contemplated hereby. In the event of any such
loss, expense, claim, damage, cost, liability, judgment or settlement (whether
or not arising before the Effective Time), (x) DRI shall pay the reasonable fees
and expenses of counsel selected by the Indemnified Parties, which counsel shall
be reasonably satisfactory to DRI, promptly after statements therefor are
received, and otherwise advance to the Indemnified Parties upon request
reimbursement of documented expenses reasonably incurred, in either case, to the
extent not prohibited by the laws of the Commonwealth of Virginia, (y) DRI shall
cooperate in the defense of any such matter and (z) any determination required
to be made with respect to whether an Indemnified Party's conduct complies with
the standards under applicable law or as set forth in DRI's articles of
incorporation or bylaws shall be made by independent counsel mutually acceptable
to DRI and the Indemnified Party; provided, however, that DRI shall not be
liable for any settlement effected without its written consent (which consent
shall not be unreasonably withheld or delayed). The Indemnified Parties as a
group may retain only one law firm (other than local counsel) with respect to
each related matter except to the extent there is, in the sole opinion of
counsel to an Indemnified Party, under applicable standards of professional
conduct, a conflict on any significant issue between positions of any two or
more Indemnified Parties, in which case each Indemnified Party with a
conflicting position on a significant issue shall be entitled to separate
counsel. In the event any Indemnified Party is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, DRI shall reimburse such Indemnified Party for all of its
expenses in bringing and pursuing such action. Each Indemnified Party shall be
entitled to the advancement of expenses to the full extent contemplated in this
Section 7.5(a) in connection with any such action.
(b) Insurance. For a period of six (6) years after the Effective
Time, DRI shall cause to be maintained in effect the policies of directors' and
officers' liability insurance maintained by CNG; provided that DRI may
substitute therefor policies of at least the same coverage containing terms that
are no less advantageous with respect to matters occurring at or prior to the
Effective Time to the extent such liability insurance can be maintained annually
at a cost to DRI not greater than 200% of the current annual premiums for the
policies currently maintained by CNG for its directors' and officers' liability
insurance; provided further, that if such insurance cannot be so maintained or
obtained at such cost, DRI shall maintain or obtain as much of such insurance
for CNG as can be so maintained or obtained at a cost equal to 200% of the
respective current annual premiums of CNG for its directors' and officers'
liability insurance and other indemnity agreements.
(c) Successors. In the event DRI or any of its successors or assigns
(i) consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers all or substantially all of its properties and assets to any
person, then and in either such case, proper provision shall be made so that the
successors and assigns of DRI shall assume the obligations set forth in this
Section 7.5.
<PAGE>
(d) Survival of Indemnification. To the fullest extent not prohibited
by law, from and after the Effective Time, all rights to indemnification now
existing in favor of the employees, agents, directors or officers of CNG and its
subsidiaries with respect to their activities as such prior to or at the
Effective Time, as provided in their respective articles of incorporation or
bylaws or indemnification agreements in effect on the date of such activities or
otherwise in effect on the date hereof, shall survive the Merger and shall
continue in full force and effect for a period of not less than six (6) years
from the Effective Time.
Section 7.6 Disclosure Schedules. On or before the date of this
Agreement, (i) CNG has delivered to DRI a schedule (the "CNG Disclosure
Schedule") accompanied by a certificate signed by the chief financial officer of
CNG stating that the CNG Disclosure Schedule is being delivered pursuant to this
Section 7.6(i) and (ii) DRI has delivered to CNG a schedule (the "DRI Disclosure
Schedule") accompanied by a certificate signed by the chief financial officer of
DRI stating that the DRI Disclosure Schedule is being delivered pursuant to this
Section 7.6(ii). The CNG Disclosure Schedule and the DRI Disclosure Schedule are
collectively referred to herein as the "Disclosure Schedules". The Disclosure
Schedules constitute an integral part of this Agreement and modify the
respective representations, warranties, covenants or agreements of the parties
hereto contained herein to the extent that such representations, warranties,
covenants or agreements expressly refer to the Disclosure Schedules. Any and all
statements, representations, warranties or disclosures set forth in the
Disclosure Schedules shall be deemed to have been made on and as of the date of
this Agreement.
Section 7.7 Public Announcements. DRI and CNG shall cooperate with
each other in the development and distribution of all news releases and other
public information disclosures with respect to this Agreement or any of the
transactions contemplated hereby and, subject to each party's disclosure
obligations imposed by law or any applicable national securities exchange, shall
not issue any public announcement or statement prior to consultation with the
other party.
Section 7.8 Rule 145 Affiliates. (a) Prior to the Closing Date,
CNG shall identify in a letter to DRI all persons who are, at the Closing Date,
"affiliates" of CNG, as such term is used in Rule 145 under the Securities Act.
CNG shall use its best efforts to cause its affiliates to deliver to DRI on or
prior to the Closing Date a written agreement substantially in the form attached
as Exhibit A.
(b) Prior to the Closing Date, DRI shall identify in a letter to CNG
all persons who are at the Closing Date, "affiliates" of DRI, as such term is
used in Rule 145 under the Securities Act. DRI shall use its best efforts to
cause its affiliates to deliver to CNG on or prior to the Closing Date a written
agreement substantially in the form attached as Exhibit B.
<PAGE>
Section 7.9 Certain Employee Agreements. (a) Subject to Section
7.10, DRI and its subsidiaries shall honor, without modification, all contracts,
agreements, collective bargaining agreements and commitments of CNG that apply
to any current or former employees or current or former directors of CNG;
provided, however, that this undertaking is not intended to prevent DRI from
enforcing such contracts, agreements, collective bargaining agreements and
commitments in accordance with their terms or from exercising any right to
amend, modify, suspend, revoke or terminate any such contract, agreement,
collective bargaining agreement or commitment.
(b) Before undertaking any reductions in workforce following the
Effective Time, DRI will consider whether such reductions have a
disproportionate effect on employees of CNG and its subsidiaries in light of the
circumstances and the objectives to be achieved and the needs of the combined
businesses of DRI and CNG.
(c) Subject to applicable law and obligations under applicable
collective bargaining agreements, DRI shall maintain for a period of at least
two (2) years after the Closing Date, without interruption, such employee
compensation, welfare and benefit plans, programs, policies and fringe benefits
as will, in the aggregate, provide benefits to the employees or former employees
of CNG and its subsidiaries, respectively, who were employees immediately prior
to the Closing Date that are no less favorable than those provided pursuant to
such employee compensation, welfare and benefit plans, programs, policies and
fringe benefits of CNG and its subsidiaries, as in effect on the Closing Date.
Section 7.10 Incentive, Stock and Other Plans. With respect to
each of CNG's 1991 Stock Incentive Plan, 1997 Stock Incentive Plan, 1995
Employee Stock Incentive Plan, Non-Employee Directors Restricted Stock Plan and
Employee Stock Ownership Plan and each other employee benefit plan, program or
arrangement under which the delivery of CNG Common Stock is required to be used
for purposes of the payment of benefits, grant of awards or exercise of options
(each a "Stock Plan"), at the election of DRI, either (A) (i) DRI and CNG shall
take such action as may be necessary so that, after the Effective Time, such
Stock Plan shall provide for the issuance only of DRI Common Stock and, with
respect to outstanding options and/or awards, provide that the holder thereof
shall be entitled to a number of shares of DRI Common Stock equal to the number
such holder would have received if such option or award had been exercised prior
to the Effective Date with appropriate adjustments to the exercise price and
(ii) DRI shall (x) take all corporate action necessary or appropriate to obtain
shareholder approval with respect to such Stock Plan to the extent such approval
is required for purposes of the Code or other applicable law, or, to the extent
DRI deems it desirable, to enable such Stock Plan to comply with Rule 16b-3
promulgated under the Exchange Act, (y) reserve for issuance under such Stock
Plan or otherwise provide a sufficient number of shares of DRI Common Stock for
delivery upon payment of benefits, grants of awards or exercise of options under
such Stock Plan and (z) as soon as practicable after the Effective Time, file
one or more registration statements under the Securities Act with respect to the
shares of DRI Common Stock subject to such Stock Plan to the extent such filing
is required under applicable law and use its best efforts to maintain the
effectiveness of such registration statement(s) (and the current status of the
prospectuses contained therein or related thereto) so long as such benefits,
grants or awards remain payable or such options remain outstanding, as the case
may be, or (B) DRI and CNG shall use their respective best efforts to take such
action as may be necessary so that, at the Effective Time, all benefits, grants
of awards and options are converted to the right to receive at the Effective
Time a number of shares of DRI Common Stock having a value equal to the fair
value of each such benefit, grant of award or option as determined in good faith
by DRI, and based on the closing sales price of DRI Common Stock as reported
under "NYSE Composit Transaction Reports" in The Wall Street Journal on the day
immediately prior to the Effective Time. With respect to those individuals who
subsequent to the Merger will be subject to the reporting requirements under
Section 16(a) of the Exchange Act, DRI shall administer the Stock Plans, where
applicable, in a manner that complies with Rule 16b-3 under the Exchange Act.
DRI shall obtain any shareholder approvals that may be necessary for the
deduction of any compensation payable under any Stock Plan or other compensation
arrangement.
<PAGE>
Section 7.11 No Solicitations. No party hereto shall, and each
such party shall cause its subsidiaries not to, permit any of its
Representatives to, and shall use its best efforts to cause such persons not to,
directly or indirectly, initiate, solicit or encourage, or take any action to
facilitate the making of any offer or proposal that constitutes or is reasonably
likely to lead to any Takeover Proposal (as defined below), or, in the event of
any unsolicited Takeover Proposal, engage in negotiations or provide any
confidential information or data to any person relating to any Takeover
Proposal. Each party shall notify the other orally and in writing of any such
inquiries, offers or proposals (including, without limitation, the terms and
conditions of any such proposal and the identity of the person making it) within
24 hours of the receipt thereof and shall give the other five (5) days' advance
notice of any agreement to be entered into with or any information to be
supplied to any person making such inquiry, offer or proposal. Each party hereto
shall immediately cease and cause to be terminated all existing discussions and
negotiations, if any, with any other persons conducted heretofore with respect
to any Takeover Proposal. Notwithstanding anything in this Section 7.11 to the
contrary, in the event of an unsolicited Takeover Proposal, unless the DRI
Shareholders' Approval and the CNG Shareholders' Approval have both been
obtained, DRI or CNG may participate in discussions or negotiations with,
furnish information to, and afford access to the properties, books and records
of such party and its subsidiaries to any person in connection with a possible
Takeover Proposal with respect to such party by such person, if and to the
extent that (A) the Board of Directors of such party has reasonably concluded in
good faith (after consultation with its financial advisors) that the person or
group making the Takeover Proposal will have adequate sources of financing to
consummate the Takeover Proposal and that the Takeover Proposal is more
favorable to such party's shareholders than the Merger, (B) the Board of
Directors of such party is advised in a written, reasoned opinion of outside
counsel that a failure to do so would result in a breach of its fiduciary duties
under applicable law and (C) such party has entered into a confidentiality
agreement with the person or group making the Takeover Proposal containing terms
and conditions no less favorable to such party than the Confidentiality
Agreement. As used in this Section 7.11, "Takeover Proposal" shall mean any
tender or exchange offer, proposal for a merger, consolidation or other business
combination involving any party or any of its material subsidiaries, or any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the assets of, any party or any of its material
subsidiaries, other than pursuant to the transactions contemplated by this
Agreement.
<PAGE>
Section 7.12 DRI Board of Directors. The DRI Board of Directors
will take such action as may be necessary to cause the number of directors
comprising the full Board of Directors of DRI at the Effective Time to be
seventeen persons, ten of whom shall be designated by DRI prior to the Effective
Time and seven of whom shall be designated by CNG prior to the Effective Time,
to be divided as equally as possible among classes of directors if, at the
Effective Time, DRI has a staggered Board of Directors. The Board of Directors
of DRI will have at least three committees consisting of an audit committee, an
organization, compensation and nominating committee and a finance committee and
such other committees as the Board of Directors of DRI may determine is
appropriate under the circumstances. The finance committee will be chaired by a
director nominated by CNG. In addition, CNG will have a proportionate number of
representatives on each committee. Further, if the Closing Date occurs prior to
August 1, 2000 and if George A. Davidson, Jr. is then Chairman of the CNG Board
of Directors, he shall be Chairman of the DRI Board of Directors from the
Closing Date to August 1, 2000 and Thomas E. Capps shall be Vice Chairman of the
DRI Board of Directors. If, George A. Davidson, Jr. does not become Chairman of
the DRI Board of Directors pursuant to the preceding sentence, Thomas E. Capps
shall continue as Chairman of the DRI Board of Directors. If George A. Davidson,
Jr. becomes Chairman of the DRI Board of Directors, Thomas E. Capps shall
reassume his position as Chairman of the DRI Board of Directors upon the earlier
of George A. Davidson, Jr.'s retirement or August 1, 2000.
Section 7.13 Corporate Offices. Following the Effective Time, DRI
shall maintain its corporate offices in Richmond, Virginia but shall continue to
maintain a significant operating office in Pittsburgh, Pennsylvania.
Section 7.14 Expenses. Subject to Section 7.1 and Section 9.3, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses, except that those expenses incurred in connection with printing the
Joint Proxy/Registration Statement, as well as the filing fee relating thereto,
shall be shared equally by DRI, on the one hand, and CNG, on the other hand.
<PAGE>
Section 7.15 Community Support. DRI acknowledges that after the
Effective Time, it intends to provide charitable contributions and community
support within the service areas of the parties and their respective
subsidiaries at levels consistent with past practice.
Section 7.16 Further Assurances.
(a) Each of CNG and DRI shall, and shall cause its subsidiaries to,
execute such further documents and instruments and take such further actions as
may reasonably be requested by the other in order to consummate the Merger and
other transactions contemplated by this Agreement, and to use its best efforts
to take or cause to be taken all actions, and to do or cause to be done all
things, necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Merger and the other transactions contemplated
hereby (subject to the votes of its shareholders described in Sections 4.10 and
5.10, respectively), including fully cooperating with the other in obtaining the
CNG Required Statutory Approvals, the DRI Required Statutory Approvals and all
other approvals and authorizations of any Governmental Authorities necessary or
advisable to consummate the transactions contemplated hereby.
(b) CNG and DRI shall be responsible for the taking of any action
necessary or advisable to obtain the CNG Required Statutory Approvals and to
obtain the DRI Required Statutory Approvals, respectively. CNG and DRI agree to
cooperate in obtaining the necessary approvals from the NRC, the FERC and the
SEC under the 1935 Act, the Securities Act and the Exchange Act and from the
applicable state authorities. CNG and DRI shall each provide the other with
copies of any filings made with any Governmental Authorities in connection with
the foregoing.
ARTICLE VIII
CONDITIONS
Section VIII.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the satisfaction on or prior to the Closing Date of the following
conditions, except, to the extent permitted by applicable law, that such
conditions may be waived in writing pursuant to Section 9.5:
(a) Shareholder Approvals. The CNG Shareholders' Approval and the
DRI Shareholders' Approval shall have been obtained.
(b) No Injunction. No temporary restraining order or preliminary or
permanent injunction or other order by any federal or state court preventing
consummation of the Merger shall have been issued and continuing in effect, and
the Merger and the other transactions contemplated hereby shall not have been
prohibited under any applicable federal or state law or regulation.
<PAGE>
(c) Registration Statement. The Registration Statement shall have
become effective in accordance with the provisions of the Securities Act, and no
stop order suspending such effectiveness shall have been issued and remain in
effect.
(d) Listing of Shares. The shares of DRI Common Stock issuable in
the Merger pursuant to Article II shall have been approved for listing on the
NYSE, subject to official notice of issuance.
(e) Pooling. Each of DRI and CNG shall have received letters of its
independent public accountants, one dated the date the Registration Statement is
declared effective and the other dated the Closing Date, in form and substance
reasonably satisfactory to CNG and DRI, respectively, stating that the Merger
will qualify as a pooling-of-interests transaction under GAAP and applicable SEC
regulations.
(f) Statutory Approvals. The DRI Required Statutory Approvals and
the CNG Required Statutory Approvals shall have been obtained at or prior to the
Effective Time, such approvals shall have become Final Orders (as hereinafter
defined), and no Final Order shall impose terms or conditions that would have,
or would be reasonably likely to have a material adverse effect on the business,
operations, properties, assets, condition (financial or otherwise), prospects or
results of operations of DRI and CNG and their subsidiaries on a consolidated
basis as if the Merger had been consummated (but without giving effect to the
impact of such material adverse effect). A "Final Order" means action by the
relevant regulatory authority that has not been reversed, stayed, enjoined, set
aside, annulled or suspended, with respect to which any waiting period
prescribed by law before the transactions contemplated hereby may be consummated
has expired, and as to which all conditions to the consummation of such
transactions prescribed by law, regulation or order have been satisfied, and as
to which all opportunities for rehearing are exhausted (whether or not any
appeal thereof is pending).
Section 8.2 Conditions to Obligation of CNG to Effect the Merger.
The obligation of CNG to effect the Merger shall be further subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
except as may be waived by CNG in writing pursuant to Section 9.5:
(a) Performance of Obligations of DRI. DRI shall have performed in
all material respects its agreements and covenants contained in or contemplated
by this Agreement required to be performed by it at or prior to the Effective
Time.
(b) Representations and Warranties. The representations and
warranties of DRI set forth in this Agreement shall be true and correct as of
the date hereof and as of the Closing Date as if made on and as of the Closing
Date, except as otherwise contemplated by this Agreement, except for such
failures of representations or warranties to be true and correct (without giving
effect to any materiality qualification or standard contained in any such
representation or warranties) which, individually or in the aggregate, would not
be reasonably likely to result in a DRI Material Adverse Effect.
<PAGE>
(c) Closing Certificates. CNG shall have received a certificate
signed by the Chief Executive Officer and Chief Financial Officer of DRI, dated
the Closing Date, to the effect that, to the best of each such officer's
knowledge, the conditions set forth in Section 8.2(a) and Section 8.2(b) have
been satisfied.
(d) DRI Material Adverse Effect. No DRI Material Adverse Effect
shall have occurred and there shall exist no fact or circumstance that would
have, or would be reasonably likely to have, a DRI Material Adverse Effect.
(e) Tax Opinion. CNG shall have received an opinion of counsel, in
form and substance satisfactory to CNG, dated the Closing Date, which opinion
may be based on appropriate representations of DRI and CNG that are in form and
substance reasonably satisfactory to such counsel, to the effect that the Merger
will be treated as a non-taxable transaction described in Section 368(a)(1)(A)
of the Code and that no gain or loss will be recognized by the stockholders of
CNG who exchange CNG Common Stock solely for DRI Common Stock pursuant to the
Merger (except with respect to cash received in lieu of fractional shares).
(f) DRI Required Consents. The DRI Required Consents shall have been
obtained.
Section 8.3 Conditions to Obligation of DRI to Effect the Merger.
The obligation of DRI to effect the Merger shall be further subject to the
satisfaction, on or prior to the Closing Date, of the following conditions,
except as may be waived by DRI in writing pursuant to Section 9.5:
(a) Performance of Obligations of CNG. CNG shall have performed in
all material respects its agreements and covenants contained in or contemplated
by this Agreement required to be performed by it at or prior to the Effective
Time.
(b) Representations and Warranties. The representations and
warranties of CNG set forth in this Agreement shall be true and correct in all
material respects as of the date hereof and as of the Closing Date as if made on
and as of the Closing Date, except as otherwise contemplated by this Agreement,
except for such failures of representations or warranties to be true and correct
(without giving effect to any materiality qualification or standard contained in
any such representations or warranties) which, individually or in the aggregate,
would not be reasonably likely to result in a CNG Material Adverse Effect.
<PAGE>
(c) Closing Certificates. DRI shall have received a certificate
signed by the Chief Executive Officer and Chief Financial Officer of CNG, dated
the Closing Date, to the effect that, to the best of each such officer's
knowledge, the conditions set forth in Section 8.3(a) and Section 8.3(b) have
been satisfied.
(d) CNG Material Adverse Effect. No CNG Material Adverse Effect
shall have occurred and there shall exist no fact or circumstance that would
have, or would be reasonably likely to have, a CNG Material Adverse Effect.
(e) Tax Opinion. DRI shall have received an opinion of counsel, in
form and substance satisfactory to DRI, dated the Closing Date, which opinion
may be based on appropriate representations of DRI and CNG that are in form and
substance reasonably satisfactory to such counsel, to the effect that the Merger
will be treated as a non-taxable transaction described in Section 368(a)(1)(A)
of the Code.
(f) CNG Required Consents. The CNG Required Consents shall have been
obtained.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.1 Termination. This Agreement may be terminated at any
time prior to the Closing Date, whether before or after approval by the
shareholders of the respective parties hereto contemplated by this Agreement:
(a) by mutual written consent of the Boards of Directors of DRI
and CNG;
(b) by DRI or CNG, by written notice to the other, if the Effective
Time shall not have occurred on or before January 31, 2000; provided, however,
that such date shall automatically be extended to July 31, 2000 if, on January
31, 2000: (i) the condition set forth in Section 8.1(f) has not been satisfied
or waived; (ii) the other conditions to the consummation of the transactions
contemplated hereby are then capable of being satisfied; and (iii) any approvals
required by Section 8.1(f) that have not yet been obtained are being pursued
with diligence; provided further, that the right to terminate this Agreement
under this Section 9.1(b) shall not be available to any party whose failure to
fulfill any obligation under this Agreement has been the cause of, or resulted
in, the failure of the Effective Time to occur on or before the termination
date;
(c) by DRI or CNG, by written notice to the other party, if the DRI
Shareholders' Approval shall not have been obtained at a duly held DRI Special
Meeting, including any adjournments thereof, or the CNG Shareholders' Approval
shall not have been obtained at a duly held CNG Special Meeting, including any
adjournments thereof;
<PAGE>
(d) by DRI or CNG, if any state or federal law, order, rule or
regulation is adopted or issued, that has the effect, as supported by the
written, reasoned opinion of outside counsel for such party, of prohibiting the
Merger or causing a DRI Material Adverse Effect or CNG Material Adverse Effect,
or if any court of competent jurisdiction in the United States or any State
shall have issued an order, judgment or decree permanently restraining,
enjoining or otherwise prohibiting the Merger or causing a DRI Material Adverse
Effect or CNG Material Adverse Effect, and such order, judgment or decree shall
have become final and nonappealable;
(e) by CNG, upon two (2) days' prior notice to DRI, if, as a result
of a tender offer by a party other than DRI or any of its affiliates or any
written offer or proposal with respect to a merger, sale of a material portion
of its assets or other business combination (each, a "Business Combination") by
a party other than DRI or any of its affiliates, the Board of Directors of CNG
determines in good faith that the fiduciary obligations of such directors under
applicable law require that such tender offer or other written offer or proposal
be accepted; provided, however, that (i) (A) the Board of Directors of CNG has
reasonably concluded in good faith (after consultation with its financial
advisors) that the person or group proposing the Business Combination will have
adequate sources of financing to consummate the Business Combination and that
the Business Combination is more favorable to CNG's shareholders than the Merger
and (B) the Board of Directors of CNG shall have been advised in a written,
reasoned opinion by outside counsel that, notwithstanding a binding commitment
to consummate an agreement of the nature of this Agreement entered into in the
proper exercise of their applicable fiduciary duties, and notwithstanding all
concessions that may be offered by DRI in negotiations entered into pursuant to
clause (ii) below, such fiduciary duties would also require the directors to
reconsider such commitment as a result of such tender offer or such written
offer or proposal and (ii) prior to any such termination, CNG shall, and shall
cause its respective financial and legal advisors to, negotiate with DRI to make
such adjustments in the terms and conditions of this Agreement as would enable
CNG to proceed with the transactions contemplated herein; provided further, that
DRI and CNG acknowledge and affirm that, notwithstanding anything in this
Section 9.1(e) to the contrary, DRI and CNG intend this Agreement to be an
exclusive agreement and, accordingly, nothing in this Agreement is intended to
constitute a solicitation of an offer or proposal for a Business Combination, it
being acknowledged and agreed that any such offer or proposal would interfere
with the strategic advantages and benefits that DRI and CNG expect to derive
from the Merger and other transactions contemplated hereby;
<PAGE>
(f) by DRI, upon two (2) days' prior notice to CNG, if, as a result
of a tender offer by a party other than CNG or any of its affiliates or any
written offer or proposal with respect to a Business Combination by a party
other than CNG or any of its affiliates, the Board of Directors of DRI
determines in good faith that the fiduciary obligations of such directors under
applicable law require that such tender offer or other written offer or proposal
be accepted; provided, however, that (i) (A) the Board of Directors of DRI has
reasonably concluded in good faith (after consultation with its financial
advisors) that the person or group proposing the Business Combination will have
adequate sources of financing to consummate the Business Combination and that
the Business Combination is more favorable to DRI's shareholders than the Merger
and (B) the Board of Directors of DRI shall have been advised in a written,
reasoned opinion by outside counsel that, notwithstanding a binding commitment
to consummate an agreement of the nature of this Agreement entered into in the
proper exercise of their applicable fiduciary duties, and notwithstanding all
concessions that may be offered by CNG in negotiations entered into pursuant to
clause (ii) below, such fiduciary duties would also require the directors to
reconsider such commitment as a result of such tender offer or such written
offer or proposal and (ii) prior to any such termination, DRI shall, and shall
cause its respective financial and legal advisors to, negotiate with CNG to make
such adjustments in the terms and conditions of this Agreement as would enable
DRI to proceed with the transactions contemplated herein; provided further, that
DRI and CNG acknowledge and affirm that, notwithstanding anything in this
Section 9.1(f) to the contrary, DRI and CNG intend this Agreement to be an
exclusive agreement and, accordingly, nothing in this Agreement is intended to
constitute a solicitation of an offer or proposal for a Business Combination, it
being acknowledged and agreed that any such offer or proposal would interfere
with the strategic advantages and benefits that DRI and CNG expect to derive
from the Merger and other transactions contemplated hereby;
(g) by CNG, by written notice to DRI, if (i) there exist breaches of
the representations and warranties of DRI made herein as of the date hereof
which breaches, individually or in the aggregate, would or would be reasonably
likely to result in a DRI Material Adverse Effect, and such breaches shall not
have been remedied within twenty (20) days after receipt by DRI of notice in
writing from CNG, specifying the nature of such breaches and requesting that
they be remedied, (ii) DRI (and/or its appropriate subsidiaries) shall not have
in all material respects performed and complied with its agreements and
covenants contained in Section 6.2 (Dividends), Section 6.3 (Issuance of
Securities) and Section 6.7 (Indebtedness) or shall have failed to perform and
comply with, in all material respects, its other agreements and covenants
hereunder and such failure to perform or comply with shall not have been
remedied within twenty (20) days after receipt by DRI of a notice in writing
from CNG, specifying the nature of such failure and requesting that it be
remedied; or (iii) the Board of Directors of DRI or any committee thereof (A)
shall withdraw or modify in any manner adverse to CNG its approval or
recommendation of this Agreement or the Merger, (B) shall fail to reaffirm such
approval or recommendation upon CNG's request, (C) shall approve or recommend
any acquisition of DRI or a material portion of DRI's assets or any tender offer
for shares of capital stock of DRI, in each case, by a party other than CNG or
any of its affiliates or (D) shall resolve to take any of the actions specified
in clause (A), (B) or (C).
<PAGE>
(h) by DRI, by written notice to CNG, if (i) there exist breaches of
the representations and warranties of CNG made herein as of the date hereof
which breaches, individually or in the aggregate, would or would be reasonably
likely to result in a CNG Material Adverse Effect, and such breaches shall not
have been remedied within twenty (20) days after receipt by CNG of notice in
writing from DRI, specifying the nature of such breaches and requesting that
they be remedied, (ii) CNG (and/or its appropriate subsidiaries) shall not have
in all material respects performed and complied with its agreements and
covenants contained in Section 6.2 (Dividends), Section 6.3 (Issuance of
Securities) and Section 6.7 (Indebtedness) or shall have failed to perform and
comply with, in all material respects, its other agreements and covenants
hereunder and such failure to perform or comply with shall not have been
remedied within twenty (20) days after receipt by CNG of a notice in writing
from DRI, specifying the nature of such failure and requesting that it be
remedied; or (iii) the Board of Directors of CNG or any committee thereof (A)
shall withdraw or modify in any manner adverse to DRI its approval or
recommendation of this Agreement or the Merger, (B) shall fail to reaffirm such
approval or recommendation upon DRI's request, (C) shall approve or recommend
any acquisition of CNG or a material portion of CNG's assets or any tender offer
for shares of capital stock of CNG, in each case, by a party other than DRI or
any of its affiliates or (D) shall resolve to take any of the actions specified
in clause (A), (B) or (C).
Section 9.2 Effect of Termination. In the event of termination of
this Agreement by either DRI or CNG pursuant to Section 9.1, there shall be no
liability on the part of either DRI or CNG or their respective officers or
directors hereunder, except that Section 7.14 and Section 9.3 and the agreement
contained in the second to the last sentence of Section 7.1 shall survive any
such termination.
Section 9.3 Termination Fee; Expenses.
(a) Expenses Payable upon Breach. If this Agreement is terminated
pursuant to one (but not both) of Section 9.1(g)(i) or (ii)or Section 9.1(h)(i)
or (ii), then (i) the breaching party (the "Nonterminating Party") shall
promptly (but not later than five business days after receipt of notice of the
amount due from the other party) pay to the terminating party an amount equal to
all documented out-of-pocket expenses and fees incurred by such terminating
party (including, without limitation, fees and expenses payable to all legal,
accounting, financial, public relations and other professional advisors arising
out of, in connection with or related to the Merger or the transactions
contemplated by this Agreement) not to exceed $25 million in the aggregate
("Out-of-Pocket Expenses"); provided, however, that, if this Agreement is
terminated by a party as a result of a willful breach or failure to perform or
comply with agreements and covenants by the Nonterminating Party, the
Nonterminating Party shall in addition to the other parties' Out-of-Pocket
Expenses, be liable to the other party for such party's actual damages as a
result of such breach.
<PAGE>
(b) Termination Fee Payable upon Acceptance of a Proposal. If this
Agreement is terminated pursuant to one of Section 9.1(e) or Section 9.1(f) but
not the other on the basis of a good faith determination made as provided in
such Section 9.1(e) or Section 9.1(f) that the fiduciary obligations of the
directors of the terminating party under applicable law require acceptance of a
tender offer or other written offer or proposal with respect to a Business
Combination and such terminating party (or an affiliate thereof) enters into an
agreement (whether or not such agreement is embodied in a definitive manner) to
consummate a Business Combination with a third party within two (2) years of
such termination, then the terminating party shall promptly (but not later than
five (5) business days after receipt of notice of the amount due from the other
party), but prior to entering into such agreement with the third party, pay to
the other party an amount equal to Out-of-Pocket Expenses plus $200 million.
(c) Termination Fee In Certain Other Events. If this Agreement is
terminated (i) pursuant to Section 9.1(g)(iii) or Section 9.1(h)(iii), or
(ii)(x) pursuant to Section 9.1(b), (y) following a failure of the shareholders
of CNG or DRI to grant the necessary approvals described in Section 4.10 or
Section 5.10, as the case may be (a "Shareholder Disapproval"), or (z) as a
result of a material breach of Section 7.4, and in the case of a termination
pursuant to clause (ii) hereof, at the time of such termination (or, in the case
of any termination following a Shareholder Disapproval, prior to the shareholder
meeting at which such Shareholder Disapproval occurred), there shall have been a
third-party tender offer for shares of, or a third-party offer or proposal with
respect to a Business Combination involving, CNG or DRI (as the case may be, the
"Target Party") or the affiliates thereof which, at the time of such termination
(or of the meeting of the Target Party's shareholders, as the case may be) shall
not have been (A) rejected by the Target Party and its Board of Directors and
(B) withdrawn by the third party, then promptly (but not later than five
business days after receipt of notice of the amount due from the other party)
after the termination of this Agreement (1) if DRI is the Target Party or the
termination is pursuant to Section 9(g)(iii), DRI shall pay to CNG a termination
fee equal to $200 million plus Out-of-Pocket Expenses and (2) if CNG is the
Target Party or the termination is pursuant to Section 9(h)(iii), CNG shall pay
to DRI a termination fee equal to $200 million plus Out-of-Pocket Expenses;
provided, however, that no such amounts shall be payable if and to the extent
the party to make such payment shall have paid such amounts pursuant to Section
9.3(a) or Section 9.3(b).
(d) Expenses. The parties agree that the agreements contained in
this Section 9.3 are an integral part of the transactions contemplated by this
Agreement and constitute liquidated damages and not a penalty. If one party
fails to promptly pay to the other any fees due hereunder, such defaulting party
shall pay the costs and expenses (including legal fees and expenses) in
connection with any action, including the filing of any lawsuit or other legal
action, taken to collect payment, together with interest on the amount of any
unpaid fee at the publicly announced prime rate of Citigroup, N.A. in effect
from time to time from the date such fee was required to be paid.
<PAGE>
Section 9.4 Amendment. This Agreement may be amended by the parties
hereto pursuant to action of the respective Boards of Directors of each of DRI
and CNG, at any time before or after approval hereof by the shareholders of DRI
and CNG and prior to the Effective Time, but after such approvals, no such
amendment shall (a) alter or change the amount or kind of shares, rights or any
of the proceedings of the exchange and/or conversion under Article II, or (b)
alter or change any of the terms and conditions of this Agreement if any of the
alterations or changes, alone or in the aggregate, would materially and
adversely affect the rights of holders of CNG Common Stock, except for
alterations or changes that could otherwise be adopted by the Board of Directors
of DRI and/or CNG, without the further approval of such shareholders, as
applicable. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
Section 9.5 Waiver. At any time prior to the Effective Time, the
parties hereto may (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed by
a duly authorized officer of each party.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Non-Survival of Representations, Warranties, Covenants
and Agreements. None of the representations, warranties, covenants and
agreements in this Agreement shall survive the Merger, except the covenants and
agreements contained in this Section 10.1 and in Article II (Treatment of
Shares), the second to the last sentence of Section 7.1 (Access to Information),
Section 7.5 (Directors' and Officers' Indemnification), Section 7.9 (Certain
Employee Agreements), Section 7.10 (Incentive, Stock and Other Plans), Section
7.12 (DRI Board of Directors), Section 7.13 (Corporate Offices), Section 7.14
(Expenses), Section 7.15 (Community Support) and Section 10.7 (Parties in
Interest), each of which shall survive in accordance with its terms.
Section 10.2 Brokers. DRI represents and warrants that, except for
Lehman Brothers Inc., its investment banking firm, no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of DRI. CNG
represents and warrants that, except for Merrill Lynch, Pierce, Fenner & Smith
Incorporated, its investment banking firm, no broker, finder or investment
banker is entitled to any brokerage, finder's or other fee or commission in
connection with the Merger or the transactions contemplated by this Agreement
based upon arrangements made by or on behalf of CNG.
<PAGE>
Section 10.3 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given (a) if delivered personally, or
(b) if sent by overnight courier service (receipt confirmed in writing), or (c)
if delivered by facsimile transmission (with receipt confirmed), or (d) five
days after being mailed by registered or certified mall (return receipt
requested) to the parties, in each case to the following addresses (or at such
other address for a party as shall be specified by like notice):
(i) If to CNG, to:
Stephen E. Williams
Senior Vice President and General Counsel
Consolidated Natural Gas Company
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222
Fax: (412) 690-7633
with a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attn: Gary W. Wolf
Fax: (212) 269-5420
(ii) If to DRI, to:
James F. Stutts
Vice President and General Counsel
Dominion Resources, Inc.
120 Tredegar Street
Richmond, Virginia 23219
Fax: (804) 819-2233
with a copy to
LeBoeuf, Lamb, Greene & MacRae L.L.P.
125 West 55th Street
New York, New York 10019
Attn: Douglas W. Hawes
Fax: (212) 424-8500
and
McGuire, Woods, Battle & Booth LLP
901 East Cary Street
Richmond, Virginia 23219
Attn: Robert L. Burrus
Fax: (804) 698-2170
<PAGE>
Section 10.4 Miscellaneous. This Agreement (including the documents
and instruments referred to herein): (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them, with respect to the subject matter hereof
other than the Confidentiality Agreement; and (b) shall not be assigned by
operation of law or otherwise. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
executed in and to be fully performed in such State, without giving effect to
its conflicts of laws statutes, rules or principles. The invalidity or
unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect. The parties hereto shall negotiate in good
faith to replace any provision of this Agreement so held invalid or
unenforceable with a valid provision that is as similar as possible in substance
to the invalid or unenforceable provision.
Section 10.5 Interpretation. When reference is made in this Agreement
to Articles, Sections or Exhibits, such reference shall be to an Article,
Section or Exhibit of this Agreement, as the case may be, unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes", or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation." Whenever "or" is used in this Agreement it shall
be construed in the nonexclusive sense.
Section 10.6 Counterparts; Effect. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an original, but
all of which shall constitute one and the same agreement.
Section 10.7 Parties in Interest. This Agreement shall be binding
upon and inure solely to the benefit of each party hereto, and, except for
rights of Indemnified Parties as set forth in Section 7.5 (Directors' and
Officers' Indemnification), nothing in this Agreement, express or implied, is
intended to confer upon any person any rights or remedies of any nature
whatsoever under or by reason of this Agreement.
<PAGE>
Section 10.8 Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties hereto shall be
entitled to an injunction or injunctions to prevent breaches of this Agreement
and to enforce specifically the terms and provisions hereof in any court of the
United States or any state having jurisdiction, this being in addition to any
other remedy to which they are entitled at law or in equity.
Section 10.9 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES,
TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A
TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTION CONTEMPLATED HEREBY (WHETHER BASED
ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO
REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED EXPRESSLY
OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK
TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER
PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
<PAGE>
IN WITNESS WHEREOF, DRI and CNG have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first above written.
DOMINION RESOURCES, INC.
By: /s/ Thomas E. Capps
------------------------------
Name: Thomas E. Capps
Title: Chairman and Chief Executive
Officer
CONSOLIDATED NATURAL GAS
COMPANY
By: /s/ George A. Davidson, Jr.
-------------------------------
Name: George A. Davidson, Jr.
Title: Chairman and Chief Executive
Officer
<PAGE>
INDEX OF DEFINED TERMS
Term Page
1935 Act ....................................................................6
affiliate ..................................................................10
Agreement ...................................................................1
Articles of Merger...........................................................2
Atomic Energy Act............................................................8
Book Entry Shares............................................................3
Business Combination........................................................37
Certificate .................................................................3
Certificate of Merger........................................................2
Closing .....................................................................5
Closing Date.................................................................5
CNG .........................................................................1
CNG Budget .................................................................19
CNG Common Stock.............................................................2
CNG Disclosure Schedule.....................................................13
CNG Employee Benefit Plans..................................................16
CNG Financial Statements....................................................15
CNG Material Adverse Effect.................................................13
CNG Required Consents.......................................................14
CNG Required Statutory Approvals............................................15
CNG Rights .................................................................18
CNG Rights Agreement........................................................18
CNG SEC Reports.............................................................15
CNG Shareholders' Approval..................................................17
CNG Shares ..................................................................3
CNG Special Meeting.........................................................27
Code ........................................................................1
Confidentiality Agreement...................................................25
Conversion Ratio.............................................................2
Disclosure Schedules........................................................29
DRI .........................................................................1
DRI Budget .................................................................19
DRI Common Stock.............................................................2
DRI Disclosure Schedule......................................................5
DRI Employee Benefit Plans..................................................10
DRI Financial Statements.....................................................9
DRI Material Adverse Effect..................................................5
DRI Required Consents........................................................7
DRI Required Statutory Approvals.............................................8
<PAGE>
DRI SEC Reports..............................................................8
DRI Shareholders' Approval..................................................10
DRI Shares ..................................................................3
DRI Special Meeting.........................................................27
Effective Time...............................................................2
Environmental Laws...........................................................8
ERISA .......................................................................9
Exchange Act.................................................................8
Exchange Agent...............................................................3
FERC ........................................................................8
Final Order ................................................................34
GAAP ........................................................................9
Gas Act ....................................................................15
Gas Policy Act..............................................................15
Governmental Authority.......................................................7
Hazardous Materials..........................................................8
HSR Act ....................................................................26
Indemnified Parties.........................................................27
Indemnified Party...........................................................27
Joint Proxy Statement/Prospectus.............................................9
Joint Proxy/Registration Statement..........................................25
Joint venture................................................................6
Liens .......................................................................6
Merger ......................................................................1
Non-terminating Party.......................................................39
NRC .........................................................................8
NYSE Composite Transition Reports............................................4
Out-of-Pocket Expenses......................................................39
Permits .....................................................................8
Power Act ...................................................................8
Registration Statement.......................................................9
Representatives.............................................................25
SEC .........................................................................1
Securities Act...............................................................8
Shareholder Disapproval.....................................................40
Significant Subsidiary.......................................................6
Stock Plan .................................................................30
Subsidiary ................................................................. 5
subsidiary company..........................................................10
Takeover Proposal...........................................................32
Target Party................................................................40
Task Force .................................................................24
<PAGE>
Violation ....................................................................7
VSCA .........................................................................1
<PAGE>
EXHIBIT A
[Date]
Dominion Resources, Inc.
120 Tredegar Street
Richmond, Virginia 23219
Ladies and Gentlemen:
I have been advised that as of the date hereof, I may be deemed to be
an "affiliate" of Consolidated Natural Gas Company, a Delaware corporation (the
"Company"), as such term (i) is defined for purposes of paragraphs (c) and (d)
of Rule 145 of the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Securities Act
of 1933, as amended (the "Securities Act"), or (ii) is used in and for purposes
of Accounting Series Releases 130 and 135, as amended, of the Commission.
Pursuant to the terms of the Agreement and Plan of Merger dated as of February
19, 1999, as it may be amended, supplemented or modified from time to time (the
"Merger Agreement"), between the Company and Dominion Resources, Inc., a
Virginia corporation ("DRI"), the Company will be merged into DRI (the
"Merger"). Capitalized terms used herein but not defined herein shall have the
meanings ascribed to such terms in the Merger Agreement.
I further understand that the Merger will be treated for financial
accounting purposes as a "pooling of interests" in accordance with generally
accepted accounting principles and that the Staff of the Commission has issued
certain guidelines that should be followed to ensure the pooling of entities.
I hereby represent and warrant that, since 30 days prior to the closing
and including the date hereof, I have not sold, transferred or otherwise
disposed of any shares of Common Stock, par value $2.75 per share, of the
Company (the "Company Common Stock").
In consideration of the agreements contained herein, DRI's reliance on
this letter in connection with the consummation of the Merger and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, I hereby represent, warrant and agree that (i) I will not make any
sale, transfer or other disposition of Company Common Stock prior to the earlier
of the Effective Time or the termination of the Merger Agreement, (ii) I will
not make any sale, transfer or other disposition of Common Stock, no par value
of DRI (the "DRI Common Stock") received by me pursuant to the Merger until
after such time as results covering at least 30 days of combined operations of
the Company and DRI have been published by DRI, in the form of a quarterly
earnings report, an effective registration statement filed with the Commission,
a report to the Commission on Form 10-K, 10-Q or 8-K, or any other public filing
or announcement which includes such combined results of operations, and (iii) I
will not make any sale, transfer or other disposition of any shares of DRI
Common Stock received by me pursuant to the Merger in violation of the
Securities Act or the rules and regulations thereunder. I have been advised that
the issuance of the shares of DRI Common Stock pursuant to the Merger will have
been registered with the Commission under the Securities Act on a Registration
Statement on Form S-4. I have also been advised, however, that since I may be
deemed to be an affiliate of the Company at the time the Merger is submitted for
a vote of the shareholders of the Company, the DRI Common Stock received by me
may be disposed by me only (i) pursuant to an effective registration under the
Securities Act, (ii) in conformity with the volume and other limitations of Rule
145 promulgated by the Commission under the Securities Act, or (iii) in reliance
upon an exemption from registration that is available under the Securities Act.
I also understand that instructions will be given to DRI's transfer
agent with respect to the DRI Common Stock to be received by me pursuant to the
Merger and that there will be placed on the certificates representing such
shares of DRI Common Stock, or any substitutes therefor, a legend stating in
substance as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, APPLIES AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED
IN COMPLIANCE WITH THE REQUIREMENTS OF RULE 145 OR PURSUANT TO A
REGISTRATION STATEMENT UNDER THAT ACT OR AN EXEMPTION FROM SUCH
REGISTRATION."
It is understood and agreed that the legend set forth above shall be
removed upon surrender of certificates bearing such legend by delivery of
substitute certificates without such legend if I shall have delivered to DRI an
opinion of counsel, in form and substance reasonably satisfactory to DRI, to the
effect that (i) the sale or disposition of the shares represented by the
surrendered certificates may be effected without registration of the offering,
sale and delivery of such shares under the Securities Act, and (ii) the shares
to be so transferred may be publicly offered, sold and delivered by the
transferee thereof without compliance with the registration provisions of the
Securities Act.
I further understand and agree that DRI is under no obligation to
register the sale, transfer or other disposition of the DRI Common Stock by me
or on my behalf under the Securities Act or to take any other action necessary
in order to make compliance with an exemption form such registration available.
Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of the Company as described in the first paragraph
of this letter, or as a waiver of any rights I may have to object to any claim
that I am such an affiliate on or after the date of this letter.
This letter agreement constitutes the complete understanding between
DRI and me concerning the subject matter hereof. Any notice required to be sent
to either party hereunder shall be sent by registered or certified mail, return
receipt requested, using the addresses set forth herein or such other address as
shall be furnished in writing by the parties. This letter agreement shall be
governed by and construed and interpreted in accordance with, the laws of the
State of New York.
If you are in agreement with the foregoing, please so indicate by
signing below and returning a copy of this letter to the undersigned, at which
time this letter shall become a binding agreement between us.
Very truly yours,
-----------------
Name:
Accepted this ___ day
of ________, 19__
DOMINION RESOURCES, INC.
By: ___________________
Name:
Title
<PAGE>
EXHIBIT B
[Date]
Consolidated Natural Gas Company
CNG Tower
625 Liberty Avenue
Pittsburgh, PA 15222
Gentlemen:
I have been advised that as of the date hereof, I may be deemed to be an
"affiliate" of Dominion Resources, Inc., a Virginia corporation ("DRI"), as such
term (i) is defined for purposes of paragraphs (c) and (d) of Rule 145 of the
Rules and Regulations of the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended, or (ii) is used in
and for purposes of Accounting Series Releases 130 and 135, as amended, of the
Commission. Pursuant to the terms of the Agreement and Plan of Merger, dated as
of February 19, 1999, as it may be amended, supplemented or modified from time
to time, between DRI and Consolidated Natural Gas Company ("CNG"), CNG will be
merged with and into DRI (the "Merger"). Capitalized terms used herein but not
defined herein shall have the meanings ascribed to such terms in the Merger
Agreement.
I further understand that the Merger will be treated for financial
accounting purposes as a "pooling of interests" in accordance with generally
accepted accounting principles and that the Staff of the Commission has issued
certain guidelines that should be followed to ensure the pooling of the
entities.
I hereby represent and warrant that, since 30 days prior to the closing and
including the date hereof, I have not sold, transferred or otherwise disposed of
any shares of Common Stock, no par value, of DRI ("DRI Common Stock").
In consideration of the agreements contained herein, CNG's reliance on this
letter in connection with the consummation of the Merger and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, I hereby represent, warrant and agree that I will not make any
sale, transfer, or other disposition of DRI Common Stock until after such time
as results covering at least 30 days of combined operations of DRI and CNG have
been published by DRI, in the form of a quarterly earnings report, an effective
registration statement filed with the Commission, a report to the Commission on
Form 10-K, 10-Q or 8-K, or any other public filing or announcement which
includes such combined results of operations.
Execution of this letter should not be considered an admission on my part
that I am an "affiliate" of DRI as described in the first paragraph of this
letter, or as a waiver of any rights I may have to object to any claim that I am
such an affiliate on or after the date of this letter.
This letter agreement constitutes the complete understanding between the
CNG and me concerning the subject matter hereof. Any notice required to be sent
to either party hereunder shall be sent by registered or certified mail, return
receipt requested, using the addresses set forth herein or such other address as
shall be furnished in writing by the parties. This letter agreement shall be
governed by and construed and interpreted in accordance with, the laws of the
State of New York.
If you are in agreement with the foregoing, please so indicate by signing
below and returning a copy of this letter to the undersigned, at which time this
letter shall become a binding agreement between us.
Very truly yours,
-----------------
Name:
Accepted this ___th day
of _______________, 19__
CONSOLIDATED NATURAL GAS COMPANY
By:_______________________
Name:
Title:
Exhibit 10(xxxiii)
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is made as of September 12,
1997, between DOMINION RESOURCES, INC. (the "Company") and THOMAS F. FARRELL,
II (the "Executive").
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 interests 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 serve as 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 be employed by the Company, as an executive of the Company, for the period
beginning September 12, 1997 (the "Effective Date") and ending on the third
anniversary of such date, subject to the further provisions of this Section 1
(the "Term of this Agreement"). If Thos. E. Capps ceases to be the Chief
Executive Officer of the Company before the third anniversary of the Effective
Date, the Term of this Agreement shall be extended for a period of three years
from the date Thos. E. Capps ceases to be the Chief Executive Officer of the
Company.
<PAGE>
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 exception of absences on 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 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 may 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 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 the
Company (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 or any credited service agreement under which the
Executive receives years of service credit for retirement plan purposes.
<PAGE>
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 include 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 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.
If the Executive is employed by an Affiliate or a successor (as described in
Section 4), the term "Board of Directors" as used in this Section 5(a) and in
Section 6(a)(iii) means the Board of Directors of the Executive's employer.
(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 of the Company in retirement plans,
cash and stock incentive plans, fringe benefit plans and other employee benefit
plans and programs provided by the Company for its senior management employees
from time to time.
(c) If the Executive attains age 55 while employed by the Company,
the Executive's retirement benefits under the Company's Retirement Plan and
Benefit Restoration Plan will be computed based on the greater of (A) the
Executive's years of credited service (as determined pursuant to the terms of
the Retirement Plan), or (B) twenty-five (25) years of credited service. If the
Executive attains age 60 while employed by the Company, the Executive's
retirement benefits under the Company's Retirement Plan and Benefit Restoration
Plan will be computed at such date, and at any time thereafter, based on the
greater of (A) the Executive's years of credited service (as determined pursuant
to the terms of the Retirement Plan), or (B) thirty (30) years of credited
service. Any supplemental benefit to be provided under this subsection (c) will
be provided as a supplemental benefit under this Agreement and will not be
provided directly from the Retirement Plan. The provisions of this subsection
(c) shall survive the termination of this Agreement.
<PAGE>
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 and annual cash incentive awards (computed
as described below) 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. For purposes of this calculation, the Executive's annual
cash incentive awards for the balance of the Term of the Agreement
will be calculated at a rate equal to the highest annual cash
incentive award paid to the Executive during the three-year period
preceding his termination of employment. Salary and bonus that the
Executive elected to defer will be taken into account for purposes
of this Agreement without regard to the deferral.
(ii) The salary and incentive award for any partial year in the
Term of this Agreement will be a pro-rated portion of the annual
amount.
(iii) If the Executive has not yet received an annual cash
incentive award for the year in which his employment terminates, the
lump sum payment will be increased to include a pro-rated award for
the portion of the year preceding the Executive's termination of
employment. If the Executive has not yet received payment of his
annual cash incentive award for the year preceding his termination
of employment, the lump sum payment will be increased to include an
award for the year preceding the Executive's termination of
employment. The incentive award for the year or portion of the year
preceding the Executive's termination of employment will be
determined according to clause (i) above, unless the Board of
Directors made a good faith final determination of the amount of the
applicable incentive award pursuant to Section 5(a)(ii) before the
Executive's termination of employment. If the Board of Directors
made such a determination, the applicable incentive award will be
computed according to the Board of Directors' determination.
(iv) 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 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.
(v) 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:
<PAGE>
(i) Any outstanding restricted stock that would become vested
(that is, transferable and nonforfeitable) 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
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 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 the
performance goals are met. The Executive must satisfy the tax
withholding requirements described in Section 10 with respect to the
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 the Company's pension, medical and other
benefit plans, and the Company will continue the Executive's
coverage under the Company's welfare benefit plans as if the
Executive remained employed through the end of the Term of this
Agreement. Service credited to the Executive for purposes of the
Company's pension plans pursuant to this subsection (ii) shall be in
addition to any service credited to the Executive pursuant to
Section 5(c). Notwithstanding the foregoing, if the Company
determines that giving such age and service credit or continued
coverage could adversely affect the tax qualification or tax
treatment of a benefit plan, or otherwise have adverse legal
ramifications, the Company may 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 giving
such credit and continued coverage.
(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 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), or (iv) 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 President of a subsidiary of
the Company, or a position that reports directly to the Chief Executive Officer,
Chief Operating officer or Senior Vice President of the Company or to the
President of a subsidiary of the Company. 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) or (iv) 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) or (iv), 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) or (iv), 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.
<PAGE>
(d) The amounts under this Agreement will be paid in lieu of
severance benefits under any severance plan or program maintained by the Company
(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
or if the Executive voluntarily terminates employment for a reason not described
in subsection (c) above or Section 7 below, this Agreement 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 and
after Thos. E. Capps ceases to be the Chief Executive Officer of 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 during the Term of this Agreement and while he is
employed by the Company the Executive qualifies to receive benefits under the
Company's short-term disability policy, the Executive will be treated as having
eleven or more years of service with the Company for purposes of determining the
amount of his benefits under that policy. 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 willful failure of the Executive to perform
substantially his duties and responsibilities to the Company, which continues
after the Executive receives notice of such refusal or failure, (iii) conviction
of a felony or crime involving moral turpitude, or (iv) the use of drugs or
alcohol that interferes materially with the Executive's performance of his
duties.
9. 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.
10. Payment of Compensation and Taxes. All amounts payable under this
Agreement (other than restricted stock, which will be paid according to the
terms of the Company's Long-Term Incentive Plan) will be paid in cash, subject
to required income and payroll tax withholdings. No unrestricted stock will be
issued to the Executive with respect to the vesting of restricted stock 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.
<PAGE>
11. 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.
12. 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.
13. 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. 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.
14. 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,
addressed 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.
15. Miscellaneous. This instrument contains the entire agreement of the
parties. To the extent not governed by federal law, this Agreement will be
construed in accordance with the laws of the Commonwealth of Virginia, without
reference to its conflict of laws rules. No provisions of this Agreement may be
modified, waived or discharged unless such 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 or compliance with any provision or condition of this
Agreement is not a waiver of similar or dissimilar provisions or conditions. The
invalidity or unenforceability 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 or more counterparts, all of which will be considered one and the same
agreement.
<PAGE>
WITNESS the following signatures.
DOMINION RESOURCES, INC.
By: /s/ Thos. E. Capps
-----------------------------
Thos. E. Capps,
Chief Executive Officer
Dated: 9/12/97
----------------
/s/ Thomas F. Farrell, II
-----------------------------
Thomas F. Farrell, II
Dated: 9/12/97
----------------
EXHIBIT 11
DOMINION RESOURCES, INC.
COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
ASSUMING FULL DILUTION
(Million, Except Per Share Amounts)
1998 1997 1996
---- ---- ----
Consolidated net income (1) $535.6 $399.2 $472.1
------ ------ ------
Adjustment to average common shares:
Shares of common stock - average
shares outstanding 194.9 185.2 178.3
Plus: Additional shares assuming conversion
of installments received on stock purchase plan
at average market value (2) 0.0 0.0 0.0
Adjusted average common shares 194.9 185.2 178.3
------ ------ ------
Earnings per share $ 2.75 $ 2.15 $ 2.65
------ ------ ------
Notes: (1) See the Consolidated Statements of
Income.
(2) Based on the following data:
1998 1997 1996
---- ---- ----
Installments received on stock purchase plan
at year-end $ 0.4 $ 0.7 $ 0.0
Average market per common share $43.38 $38.06 $40.63
<TABLE>
<CAPTION>
Consolidated Statements of Income
- --------------------------------------------------------------------------------------------------------
For The Years Ended December 31, 1998 1997 1996
(millions, except per share amounts)
<S> <C> <C> <C>
Operating revenues and income:
Virginia Power $4,284.6 $4,663.9 $4,382.0
East Midlands (Note C) 1,009.5 1,970.1
Nonutility 792.1 628.5 433.1
-------------------------------------
Total operating revenues and income 6,086.2 7,262.5 4,815.1
-------------------------------------
Operating expenses:
Fuel, net 953.5 1,204.2 979.3
Purchased power capacity, net 806.0 717.5 700.6
Supply and distribution--East Midlands (Note C) 654.9 1,466.1
Impairment of regulatory assets (Note R) 158.6 38.4 26.7
Restructuring (Note Q) 18.4 64.9
Other operation and maintenance 1,381.2 1,243.7 1,053.8
Depreciation, depletion and amortization 734.2 819.3 615.2
Other taxes 306.6 282.5 275.0
-------------------------------------
Total operating expenses 4,995.0 5,790.1 3,715.5
-------------------------------------
Operating income 1,091.2 1,472.4 1,099.6
-------------------------------------
Other income and expense:
Gain on sale of East Midlands (Note C) 332.3
Windfall profits tax--East Midlands (Notes D and Y) (156.6)
Other 93.2 38.3 34.8
-------------------------------------
Total other income and expense 425.5 (118.3) 34.8
-------------------------------------
Income before fixed charges and income taxes 1,516.7 1,354.1 1,134.4
-------------------------------------
Fixed charges:
Interest charges 582.7 627.4 387.0
Distributions--preferred securities of subsidiary trusts 29.3 12.2 10.9
Preferred dividends of Virginia Power 35.8 35.7 35.5
-------------------------------------
Total fixed charges 647.8 675.3 433.4
-------------------------------------
Income before provision for income taxes and minority interests 868.9 678.8 701.0
Provision for income taxes (Note D) 306.0 233.0 219.3
Minority interests 27.3 46.6 9.6
-------------------------------------
Net income $ 535.6 $ 399.2 $ 472.1
-------------------------------------
Earnings per common share $ 2.75 $ 2.15 $ 2.65
-------------------------------------
Dividends paid per common share $ 2.58 $ 2.58 $ 2.58
-------------------------------------
Average common shares outstanding 194.9 185.2 178.3
- --------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
19
<PAGE>
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
At December 31, 1998 1997
(millions)
<S> <C> <C>
Current assets:
Cash and cash equivalents (Notes B and I) $ 425.6 $ 321.6
Trading securities (Notes B, H and I) 0.7 240.7
Customer accounts receivable (less allowances for doubtful
accounts $5.4 in 1998 and $2.4 in 1997) 777.8 880.8
Other accounts receivable 256.5 299.0
Materials and supplies at average cost or less:
Plant and general 142.0 163.3
Fossil fuel 95.0 67.4
Mortgage loans in warehouse (Notes B and I) 140.3 88.2
Commodity contract assets 179.8 40.6
Other 267.6 209.2
-----------------------
2,285.3 2,310.8
-----------------------
Investments:
Investments in affiliates (Note B) 382.1 404.0
Available-for-sale securities (Notes B, H and I) 500.0 190.8
Nuclear decommissioning trust funds (Notes B and I) 705.1 569.1
Loans receivable, net (Notes B and I) 1,686.5 959.0
Investments in real estate 93.9 101.5
Other 263.0 193.4
-----------------------
3,630.6 2,417.8
-----------------------
Property, plant and equipment (Note B):
(includes plant under construction of $449.3 [1997-$240.9]) 18,106.0 19,565.1
Less accumulated depreciation, depletion and amortization 7,469.4 7,004.4
-----------------------
10,636.6 12,560.7
-----------------------
Deferred charges and other assets:
Goodwill (Note B) 150.0 1,932.0
Regulatory assets (Note E) 620.0 757.4
Other 194.5 185.8
-----------------------
964.5 2,875.2
-----------------------
Total assets $17,517.0 $20,164.5
- --------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
20
<PAGE>
Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
At December 31, 1998 1997
(millions)
<S> <C> <C>
Current liabilities:
Securities due within one year (Notes I and J) $ 1,623.3 $ 1,613.6
Short-term debt (Notes G and I) 300.8 375.1
Accounts payable, trade 698.5 702.2
Accrued interest 109.1 185.1
Accrued payroll 79.0 77.5
Accrued taxes 175.3 125.4
Commodity contract liabilities 265.8 52.9
Other 266.8 504.7
------------------------
3,518.6 3,636.5
------------------------
Long-term debt (Notes I and J):
Virginia Power 3,464.7 3,514.6
Nonrecourse-nonutility 1,547.5 707.8
Dominion UK 55.6 2,673.6
Other 3.1 300.0
------------------------
5,070.9 7,196.0
------------------------
Deferred credits and other liabilities:
Deferred income taxes (Notes B and D) 1,792.5 2,018.4
Investment tax credits (Notes B and D) 221.4 238.4
Other 212.8 557.8
------------------------
2,226.7 2,814.6
------------------------
Total liabilities 10,816.2 13,647.1
------------------------
Minority interest 310.9 402.9
------------------------
Commitments and contingencies (Note T)
Virginia Power and Dominion Resources obligated mandatorily redeemable preferred
securities of subsidiary trusts* (Notes I and N) 385.0 385.0
------------------------
Preferred stock (Notes I and O):
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 300.0 shares,
outstanding--194.5 shares at 1998 and
187.8 shares at 1997 (Note K) 3,933.4 3,673.6
Retained earnings 1,386.4 1,354.0
Accumulated other comprehensive income (20.1) (3.3)
Other paid-in capital 16.2 16.2
------------------------
5,315.9 5,040.5
------------------------
Total liabilities and shareholders' equity $17,517.0 $20,164.5
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* As described in Note N, the 7.83% and 8.05% Junior Subordinated Notes
totaling $257.7 and $139.2 million principal amounts constitute 100% of the
Trusts' assets.
The accompanying notes are an integral part of the Consolidated Financial
Statements.
21
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Accumulated Other
Common Stock Retained Comprehensive Paid-In
Shares Amount Earnings Income Capital Total
(millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 187.8 $3,673.6 $1,354.0 $ (3.3) $16.2 $5,040.5
Issuance of stock through public offering 6.8 267.8 267.8
Issuance of stock through employee and
customer plans 2.1 86.6 86.6
Stock repurchase and retirement (2.3) (98.5) (98.5)
Other common stock activity 0.1 3.9 3.9
Comprehensive income 535.6 (16.8) 518.8
Dividends and other adjustments (503.2) (503.2)
------ -------- -------- ------ ----- --------
Balance at December 31, 1998 194.5 $3,933.4 $1,386.4 $(20.1) $16.2 $5,315.9
- ------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 181.2 $3,471.4 $1,437.9 $(10.3) $16.2 $4,915.2
Issuance of stock through employee and
customer plans 4.6 176.2 176.2
Other common stock activity 2.0 26.0 26.0
Comprehensive income 399.2 7.0 406.2
Dividends and other adjustments (483.1) (483.1)
------ -------- -------- ------ ----- --------
Balance at December 31, 1997 187.8 $3,673.6 $1,354.0 $ (3.3) $16.2 $5,040.5
- ------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1996 176.4 $3,303.5 $1,427.6 $ (6.7) $17.6 $4,742.0
Issuance of stock through employee and
customer plans 4.8 169.7 169.7
Other common stock activity 0.1 3.7 3.7
Stock repurchase and retirement (0.1) (5.5) (1.4) (6.9)
Comprehensive income 472.1 (3.6) 468.5
Dividends and other adjustments (461.8) (461.8)
------ -------- -------- ------ ----- --------
Balance at December 31, 1996 181.2 $3,471.4 $1,437.9 $(10.3) $16.2 $4,915.2
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Comprehensive income
Net income $535.6 $399.2 $472.1
Other comprehensive income, net of tax
Unrealized gains (losses) on investment securities (5.6) 8.5 5.6
Foreign currency translation adjustment (11.2) (1.5) (9.2)
-------------------------------
Other comprehensive income (16.8) 7.0 (3.6)
-------------------------------
Comprehensive income $518.8 $406.2 $468.5
- ----------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
For The Years Ended December 31, 1998 1997 1996
(millions)
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 535.6 $ 399.2 $ 472.1
Adjustments to reconcile net income to net cash:
Depreciation, depletion and amortization 826.2 904.8 694.4
Gain on sale of East Midlands (332.3)
Deferred income taxes 22.5 13.0 84.1
Investment tax credits, net (16.9) (16.9) (16.9)
Deferred fuel expense (34.4) 9.6 (54.4)
Deferred capacity expense (16.2) (41.2) (9.2)
Restructuring expense 12.5 29.6
Impairment of regulatory assets 158.6 38.4 26.7
Purchase and origination of mortgages (2,502.6) (1,695.1) (769.2)
Proceeds from sale and principal collections of mortgages 2,450.4 1,672.6 703.4
Changes in current assets and liabilities:
Accounts receivable (89.8) (176.2) (29.4)
Commodity contract assets and liabilities 66.0 13.9
Materials and supplies (24.2) 15.9 6.0
Accounts payable, trade 64.7 113.1 73.8
Accrued interest and taxes 100.0 118.6 (17.5)
Other changes (0.8) (70.4) (161.3)
------------------------------
Net cash flows from operating activities 1,206.8 1,311.8 1,032.2
------------------------------
Cash flows from (used in) financing activities:
Issuance of common stock 354.3 176.2 169.7
Repurchase of common stock (98.5)
Preferred securities of subsidiary trust 250.0
Issuance of long-term debt:
Virginia Power 270.0 270.0 24.5
Dominion UK 1,898.5 342.5
Nonrecourse-nonutility 3,667.4 4,146.5 434.5
Issuance of short-term debt 574.6 143.4
Repayment of short-term debt (4.5) (99.5) (8.9)
Repayment of long-term debt (4,622.0) (4,376.0) (336.5)
Common dividend payments (504.2) (478.0) (460.1)
Other (90.4) 41.9 (4.5)
------------------------------
Net cash flows from (used in) financing activities (453.3) 1,829.6 304.6
------------------------------
Cash flows from (used in) investing activities:
Utility capital expenditures (624.1) (648.7) (484.0)
Acquisition of natural gas and independent power properties (131.1) (52.6) (271.2)
Loan originations (2,580.0) (1,147.2)
Repayments of loan originations 1,777.8 1,065.0
Purchase of East Midlands (1,901.5) (342.5)
Proceeds from sale of East Midlands 1,409.4
Sale of businesses 52.7 123.3
Purchase of fixed assets (79.6) (124.4) (34.8)
Purchase of equity securities (23.7) (0.1) (8.8)
Sale of marketable securities 70.0 117.1
Purchase of debt securities (119.7) (138.4) (58.3)
Acquisitions of businesses (338.4) (144.5) (19.5)
Other investments (62.8) (78.6) (73.6)
------------------------------
Net cash flows used in investing activities (649.5) (2,930.6) (1,292.7)
------------------------------
Increase in cash and cash equivalents $ 104.0 $ 210.8 $ 44.1
Cash and cash equivalents at beginning of the year 321.6 110.8 66.7
------------------------------
Cash and cash equivalents at end of the year $ 425.6 $ 321.6 $ 110.8
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
23
<PAGE>
Management's Discussion and Analysis of Operations
(unaudited)
Introduction
In Management's Discussion and Analysis (MD&A), we explain the general
financial condition and the results of operations for Dominion Resources and
its subsidiaries. As you read this section, it will be helpful to refer to
our consolidated financial statements and notes. It is important to consider
MD&A when making investment decisions about Dominion Resources.
In the period covered by this discussion, Dominion Resources operated
through four business segments: Virginia Electric and Power Company (Virginia
Power), Dominion Energy, Inc. (Dominion Energy), Dominion Capital, Inc.
(Dominion Capital), and Dominion U.K. Virginia Power, a regulated public
utility, is engaged in generation, transmission, distribution and sale of
electric energy within a 30,000 square mile area in Virginia and northeastern
North Carolina. Dominion Energy is engaged in independent power production
and the acquisition and sale of natural gas and oil reserves. Dominion
Capital's primary business is financial services which includes commercial
lending, merchant banking and residential mortgage lending. Dominion U.K.
owned East Midlands Electricity plc (East Midlands) which is an electricity
distribution and supply company located in the East Midlands region of the
United Kingdom. We have also provided certain information on "Corporate".
Corporate consists of the corporate holding company activities of Dominion
Resources.
Two important events impacted the 1998 results of Dominion Resources. The
first event was the sale of East Midlands on July 27, 1998. Dominion
Resources sold East Midlands to PowerGen plc (PowerGen), an electricity
generator and supplier in the United Kingdom. PowerGen acquired 100 percent
of DR Investments in a transaction valued at $3.2 billion. DR Investments is
the holding company of East Midlands. The sale enabled Dominion Resources to
record an immediate one-time after-tax gain of $200.7 million or $1.03 per
share and eliminated the need to issue additional common stock to complete
the permanent financing of East Midlands.
The second event was the settlement of Virginia Power's rate proceeding
before the Virginia State Corporation Commission (Virginia Commission). The
Virginia Commission adopted the settlement between Virginia Power, the Staff
of the Virginia Commission, the office of the Virginia Attorney General, the
Virginia Committee for Fair Utility Rates and the Apartment and Office
Building Association of Metropolitan Washington. Rate refunds and the
write-off of regulatory assets as a result of the order reduced after-tax
earnings by $201 million or $1.03 cents per share. See Note R. This
settlement is part of a two-pronged strategy of both legislative and
regulatory agendas initiated by Virginia Power in 1998. Virginia Power was
the principal advocate of a bill passed in 1998 by the Virginia General
Assembly that provides a roadmap for competition. The legislation sets a
timetable for the transition to competition and the deregulation of
generation. It also establishes a policy that just and reasonable net
stranded costs should be recoverable. For additional information, see "Future
Issues-- Virginia Power" under Management's Discussion and Analysis of
Operations.
Overview
Dominion Resources achieved earnings of $535.6 million in 1998 or $2.75 per
average common share, compared with earnings of $399.2 million in 1997 or
$2.15 per share. The comparative earnings have been impacted by the following
significant one-time events:
o the gain on the sale of East Midlands in July 1998 offset by the impact of
Virginia Power's rate case settlement in the second quarter of 1998;
o the recognition of the windfall profits tax by East Midlands in the third
quarter of 1997.
Earnings decreased $72.9 million in 1997 as compared to 1996 primarily due
to the recognition of the windfall profits tax in 1997 offset by earnings
from normal operations at Virginia Power, Dominion Energy and Dominion
Capital.
Below we have provided a comparison of net income and earnings per share
contributions by segment and for Corporate.
Net Income
- --------------------------------------------------------------------------------
1998 Change 1997 Change 1996
- --------------------------------------------------------------------------------
(millions)
Virginia Power $ 395.1 (8.8)% $ 433.4 2.8% $421.8
Dominion Energy 57.1 26.9% 45.0 38.5% 32.5
Dominion Capital 58.7 30.2% 45.1 58.2% 28.5
Dominion UK 26.5 (43.5)% 46.9
Corporate (1.5) 89.7% (14.6) (36.4)% (10.7)
----- ----- ------
Consolidated 535.9 (3.6)% 555.8 17.7% $472.1
----- ----- ------
East Midlands:
Sale of Company 200.7
Windfall Profits Tax (156.6)
Virginia Power:
Rate case settlement (201.0)
----- ----- ------
Consolidated $ 535.6 34.2% $ 399.2 (15.4)% $472.1
----- ----- ------
Average Shares 194.9 5.2% 185.2 3.9% 178.3
- --------------------------------------------------------------------------------
Earnings Per Share
- --------------------------------------------------------------------------------
1998 Change 1997 Change 1996
- --------------------------------------------------------------------------------
Virginia Power $2.03 (13.2)% $2.34 (1.3)% $2.37
Dominion Energy 0.29 20.8% 0.24 33.3% 0.18
Dominion Capital 0.30 25.0% 0.24 50.0% 0.16
Dominion UK 0.14 (44.0)% 0.25
Corporate (0.01) 85.7% (0.07) (16.7)% (0.06)
----- ----- ------
Consolidated $2.75 (8.3)% $3.00 13.2% $2.65
----- ----- ------
East Midlands:
Sale of Company 1.03
Windfall Profits Tax (0.85)
Virginia Power:
Rate case settlement (1.03)
----- ----- ------
Consolidated $ 2.75 27.9% $2.15 (18.9)% $2.65
- --------------------------------------------------------------------------------
The following information gives you a more detailed explanation by segment of
the factors that led to the increase in net income from 1997 to 1998.
24
<PAGE>
Virginia Power
Earnings were impacted by:
o settlement of the Virginia rate proceedings which resulted in a base rate
reduction and refund, a write-off of regulatory assets, discontinuance of
deferral accounting for purchased power capacity expenses and adjustments
to the provision for depreciation and decommissioning;
o higher operation and maintenance costs due to 1998 storm damage caused by
December ice storms and Hurricane Bonnie; and
o continued customer growth in Virginia and North Carolina service areas.
Dominion Energy
Earnings were impacted by:
o increased earnings in its domestic power business primarily due to the
addition of the Kincaid Power Station;
o increased production in its oil and gas business, offset by lower gas
prices.
Dominion Capital
Earnings were impacted by:
o the strong performance from its financial services businesses, primarily
the commercial finance businesses;
o a full year of operations of First Dominion Capital, the merchant banking
and asset management business;
o increased volume in the mortgage lending business offset by the impact of
prepayment speeds and securitization spreads; and
o a valuation adjustment to other investments and higher real estate
operating costs.
Dominion UK
Earnings were impacted by:
o the sale of East Midlands in July 1998. Dominion Resources had a partial
year benefit from the earnings of East Midlands, consequently, net income,
revenues, operating expenses, etc. are less than the corresponding amounts
recorded in the full year of operations in 1997.
Virginia Power
Results of Operations
Virginia Power's balance available for common stock for 1998 decreased by
$239.3 million when compared to 1997. Earnings were impacted by the 1998
settlement of the Virginia rate proceedings. The principal effects were a
one-time rate refund of $150 million, a base rate reduction, and a write-off
of $220 million of regulatory assets in addition to normal amortization. See
Note R.
Virginia Power's balance available for common stock for 1997 amounted to
$433.4 million as compared to $421.8 million in 1996. Earnings were impacted
by customer growth and lower restructuring expenses, partially offset by
higher depreciation and amortization expenses and the provision of a reserve
for potential adjustments to regulatory assets. Virginia Power's contribution
to earnings per share in 1997 amounted to $2.34 compared to $2.37 in 1996 due
to the dilutive impact of common stock issuances by Dominion Resources during
1997.
- --------------------------------------------------------------------------------
1998 Change 1997 Change 1996
(millions)
Operating revenues $4,284.6 (8.1)% $4,663.9 6.4% $4,382.0
Operating expenses:
Fuel, net 953.5 (20.8)% 1,204.2 23.0% 979.3
Purchase power
capacity, net 806.0 12.3% 717.5 2.4% 700.6
Other operation and
maintenance 854.3 4.3% 818.7 0.9% 811.7
Impairment of
regulatory assets 158.6 313.0% 38.4 43.8% 26.7
Restructuring 18.4 (71.6)% 64.9
Depreciation and
amortization 536.4 (8.2)% 584.3 8.9% 536.4
Other taxes 290.0 8.3% 267.7 1.9% 262.6
----- ----- -----
Operating income 685.8 (32.4)% 1,014.7 1.5% 999.8
Other income 18.0 (4.3)% 18.8 10.6% 17.0
Fixed charges,
including preferred
dividends 352.4 0.5% 350.8 (1.1)% 354.8
Income taxes 157.3 (36.9)% 249.3 3.8% 240.2
----- ----- -----
Balance available for
common stock $ 194.1 (55.2)% $ 433.4 2.8% $ 421.8
- --------------------------------------------------------------------------------
At Virginia Power, operating revenues include electric service revenues and
other revenues. Electric service revenue consists of retail sales to
customers in Virginia Power's service territory and wholesale sales to
cooperatives, and municipalities. The Virginia Commission and the North
Carolina Utilities Commission establish the rates that Virginia Power charges
its retail customers. The Federal Energy Regulatory Commission (FERC)
authorizes the wholesale rates. The primary factors affecting electric
service revenue in 1998 were a base rate refund and rate reduction arising
from the settlement of Virginia Power's rate proceedings before the Virginia
Commission and adjustments to annual fuel rates. Customer growth also
affected electric service revenue as new customer connections increased
revenue by $50.1 million in 1998 as compared to 1997. Lower fuel rates went
into effect in December 1997 and March and May 1998. The rate changes
decreased fuel revenues by approximately $120.9 million when compared to
1997.
Operating revenues also include sales of electricity beyond Virginia
Power's service territory and sales of natural gas, net of the related cost
of purchased commodities. These revenues decreased in 1998 as compared to
1997 due to electricity trading revenues being reported net of purchased
energy for the entirety of 1998 and only for the last four months of 1997.
These revenues were reported gross until September 1997 because they were
subject to cost of service regulation until that time.
Operating revenues were higher in 1997 as compared to 1996 primarily due
to an increase in other revenues. The increase was due mostly to Virginia
Power's marketing electricity beyond its service territory. Electric service
revenues increased slightly in spite of mild weather due to new customer
connections and an increase in fuel rates. The increase in fuel revenues was
mainly attributable to higher fuel rates which went into effect in December
1996, increasing recovery of fuel costs by approximately $48.2 million.
25
<PAGE>
Management's Discussion and Analysis of Operations, continued
Increase
(decrease)
Operating Revenues from prior year
- --------------------------------------------------------------------------------
1998 1997
(millions)
Revenues--electric service
Customer growth $ 50.1 $ 55.8
Weather (7.0) (111.1)
Base rate variance (226.3) (18.7)
Fuel rate variance (120.9) 44.1
Other retail, net 93.2 47.7
------- -------
Total retail (210.9) 17.8
Other electric service (6.3) 9.8
------- -------
Total electric service (217.2) 27.6
------- -------
Revenues--Other (162.1) 254.3
------- -------
Total revenues $(379.3) $ 281.9
- --------------------------------------------------------------------------------
Degree-Days Chart
- --------------------------------------------------------------------------------
1998 1997 Normal
Cooling degree days 1,640 1,349 1,564
Percentage change compared
to prior year 21.6% (1.2)%
Heating degree days 3,197 3,787 3,753
Percentage change compared
to prior year (15.6)% (8.3)%
- --------------------------------------------------------------------------------
Fuel, net decreased in 1998, as compared to 1997, mostly due to the inclusion
of the cost of power marketing purchases for the first eight months of 1997.
However, the cost of power marketing purchases for the last four months of
1997 and the entirety of 1998 is being reported net of related revenues in
Operating revenues and income--Virginia Power. Prior to September 1997, this
activity was subject to cost of service rate regulation.
Fuel, net increased in 1997 as compared to 1996, primarily due to the cost
of the increased purchases of energy from other wholesale power suppliers
associated with power marketing.
Purchased power capacity, net increased in 1998 as compared to 1997
chiefly because of increased expenses associated with the restructuring of
certain contracts and the discontinuance of deferral accounting for such
expenses. See Note R.
Impairment of regulatory assets in 1998 is a write-down of regulatory
assets as a result of Virginia Power's settlement of the rate proceeding
before the Virginia Commission. See Note R. The 1996 and 1997 amounts
represent a reserve for potential adjustments to regulatory assets.
Other operations and maintenance increased in 1998 as compared to 1997
primarily due to (1) costs to repair storm damage caused by December 1998 ice
storms and by Hurricane Bonnie in the third quarter of 1998 and (2) the cost
of preparing Virginia Power's computer systems for year 2000. See "Future
Issues--Year 2000 Compliance."
Restructuring expenses decreased in 1998 as compared to 1997. Although
Virginia Power is continuing to evaluate its operations in anticipation of
the restructuring of the electric industry, no significant restructuring
expenses were incurred in 1998. See Note Q.
Restructuring expenses decreased in 1997 as compared to 1996 due to lower
expenses from Virginia Power's strategic initiatives in anticipation of
industry restructuring. Charges for restructuring primarily include employee
severance costs, costs to restructure agreements to purchase power from third
parties and, when necessary, to negotiate settlement and termination of these
contracts and other costs.
Depreciation and amortization decreased in 1998 as compared to 1997,
mainly because of adjustments to the provision for depreciation and
decommissioning expenses to reflect terms of Virginia Power's settlement of
the Virginia rate proceeding. See Note R.
Depreciation and amortization increased in 1997, as compared to 1996, due
to the recognition of additional depreciation and nuclear decommissioning
expense to reflect adjustments expected to be made in the Virginia rate
proceeding. In addition, higher depreciation expense was incurred relating to
Clover Unit 2, which began operations in March 1996.
Taxes other than income increased in 1998 as compared to 1997 due to
increased taxes associated with Virginia Power's wholesale power and natural
gas marketing activities.
Dominion Energy
Acquisitions and Dispositions
Dominion Energy expanded its oil and natural gas business with the
acquisition of Archer Resources, Ltd. on April 22, 1998 for $119 million plus
$26 million of assumed debt. Archer Resources, Ltd., (subsequently renamed
Dominion Energy Canada, Ltd.) is a natural gas and oil exploration and
production company headquartered in Calgary, Alberta.
Dominion Energy expanded its domestic power generation in the first
quarter of 1998 with the acquisition of the Kincaid Power Station, an
1,108-megawatt facility located in Illinois. In addition, Dominion Energy
expanded its foreign power generation businesses in 1998 with the acquisition
of an additional 39% interest in Hidroelectrica Cerros Colorados S.A.,
increasing its ownership interest to 98%.
On March 31, 1998, Dominion Cogen, Inc., a wholly-owned subsidiary of
Dominion Energy, sold its 50% interest in Texas Cogeneration Company and
related assets to its partner in the business for $109.5 million. Texas
Cogeneration Company owns two natural gas-fired, combined-cycle cogeneration
units in Texas.
Results of Operations
Dominion Energy's 1998 net income was $57.1 million as compared to $45
million in 1997. The earnings change was due to:
o increased earnings in its domestic power business primarily due to the
addition of the Kincaid Power Station; and
o increased production in its oil and gas businesses primarily due to the
addition of Dominion Energy Canada, Ltd., offset by lower gas prices.
In 1997, Dominion Energy's net income increased by $12.5 million as
compared to 1996 mainly due to:
o net income from power generation assets in Peru acquired in August 1996;
o higher natural gas prices; and
o greater production volumes due to the acquisitions of natural gas
properties in the Gulf Coast area in March 1996 and in Michigan in January
1997.
26
<PAGE>
Operating Income
- --------------------------------------------------------------------------------
1998 Change 1997 Change 1996
- --------------------------------------------------------------------------------
(millions)
Operating income:
Oil and gas(1) $ 44.1 (16.5)% $ 52.8 42.3% $ 37.1
Domestic power
generation 44.91 1,347.2% (3.6) (139.1)% 9.2
Foreign power
generation 47.5 (7.4)% 51.3 61.8% 31.7
Corporate(2) (22.3) (486.8)% (3.8) 74.5% (14.9)
Adjustments(1) (24.6) 2.8% (25.3) 4.5% (26.5)
----- ----- -----
Total operating income $ 89.6 25.5% $ 71.4 95.1% $ 36.6
- --------------------------------------------------------------------------------
(1) Oil and gas Operating income includes Nonconventional Fuels Tax Credits.
Such credits are reversed on the Adjustments line as they are not
ordinarily reported as a component of Operating income.
(2) Represents corporate overhead charges.
Oil and gas operating income decreased by $8.7 million for 1998 and increased
by $15.7 million for 1997. During 1997 and 1998 oil and gas production
increased significantly due to the development and acquisition of properties.
Natural gas production rose to 69 billion cubic feet equivalent (Bcfe) in
1998, compared to 59 Bcfe in 1997, a 17 percent increase. At December 31,
1998, proved gas reserves totaled 616 Bcfe, an increase of 157 Bcfe (34%)
over 1997. The 1998 increase resulted primarily from the development of
existing acreage and the acquisition of Dominion Energy Canada, Ltd. The
improved production results for 1998 were offset by a $0.38 reduction in
average sales price per thousand cubic feet (Mcfe), from $2.44 in 1997 to
$2.06 in 1998. The production results for 1997 reflect a $2.44 average gas
sales price per Mcfe, compared to $2.32 per Mcfe in 1996. The 1998 decreases
in gas prices are the results of a combination of shifting geographic
production mix and lower overall market price.
In 1998, domestic power generation operating income increased when
compared to 1997 primarily due to the addition of Kincaid Power Station.
Domestic power generation operating income decreased in 1997 when compared to
1996 primarily due to the write-down of Dominion Energy's investment in two
of its California projects.
Foreign power generation operating income decreased $3.8 million in 1998
when compared to 1997 primarily due to lower than normal water flows at hydro
plants and lower average prices. 1997 foreign power generation operating
income increased when compared to 1996 as a result of strong water flows at
hydro plants and the acquisition of an interest in EGENOR, a Peruvian power
generation business, in August 1996.
Dominion Capital
Results of Operations
Dominion Capital's net income increased over the past two years primarily due
to the strong performance from its financial services businesses. The 1998
increase over 1997 net income was chiefly due to earnings contribution from
its merchant banking and middle market loan businesses at First Dominion
Capital and First Source Financial, respectively. The $16.6 million increase
in net income in 1997 over 1996 was primarily due to residential mortgages
originated and securitized by Saxon Mortgage and the funded loans at First
Source Financial.
- --------------------------------------------------------------------------------
1998 Change 1997 Change 1996
- --------------------------------------------------------------------------------
(millions)
Operating income:
Financial services $212.1 47.8% $143.5 98.8% $72.2
Vidalia, real estate
and other (1.6) (111.8)% 13.6 40.2% 9.7
---- ---- ---
Total operating
income $210.5 34.0% $157.1 91.8% $81.9
- --------------------------------------------------------------------------------
Operating Income
Financial services operating income increased by $68.6 million and $71.3
million in the 1998 and 1997 periods, respectively. Loan volumes at Saxon
were $2.1 billion in 1998, up from $1.8 billion in 1997. Funded loans at
First Source Financial have grown to $1.5 billion at the end of 1998,
compared to $932 million at the end of 1997. Funded merchant banking loans at
First Dominion Capital in 1998 were $205 million and assets under management
were $2.1 billion. First Dominion Capital was formed in late 1997.
Dominion Capital also has an interest in a hydroelectric facility
(Vidalia), real estate and other investments. Vidalia, real estate and other
operating income decreased in 1998 over 1997 by $15.2 million primarily due
to a valuation adjustment to other investments and higher real estate
operating costs. Vidalia, real estate and other operating income increased in
1997 over 1996 by $3.9 million due to higher water flow and improved real
estate operations.
Nonoperating Income and Expenses
Other Income and Expense
Other income and expense increased in 1998 as compared to 1997 primarily due
to the gain on the sale of East Midlands in the third quarter of 1998 and the
recognition of the windfall profits tax by East Midlands in the third quarter
of 1997. Other income and expense decreased in 1997 as compared to 1996
primarily from the recognition of the windfall profits tax in 1997.
Fixed Charges
Interest charges decreased in 1998 as compared to 1997 because of the
cancellation of the debt associated with East Midlands which was sold in July
1998. The debt cancellation for East Midlands was offset by the issuance of
debt to fund Dominion Energy's acquisitions of Kincaid Power Station and
Dominion Energy Canada, Ltd.
Interest charges increased in 1997 over 1996 as a result of the additional
debt associated with the $2.2 billion acquisition of East Midlands in early
1997.
Provision for Income Taxes
The provision for income taxes increased for 1998 as compared to 1997
primarily due to the taxes on the gain on the sale of East Midlands. The
taxes related to the sale of East Midlands were offset by the income tax
provisions associated with the effects of Virginia Power's Virginia rate
proceeding settlement.
27
<PAGE>
Management's Discussion and Analysis of Operations, continued
Future Issues
This section discusses information that may have an impact on future
operating results. The Securities and Exchange Commission encourages
companies to provide forward-looking information because it provides
investors with an insight into management's outlook for the future. It should
be noted that any forward-looking information is expressly covered by the
safe harbor rule for projections. For a more detailed description of some of
the uncertainties associated with forward-looking information, please refer
to the "Forward-Looking Information" section on page 35.
Virginia Power
Competition in the Electric Industry--General
For most of this century, the structure of the electric industry in Virginia
and throughout the United States has been relatively stable. We have recently
seen, however, federal and state developments toward increased competition.
Electric utilities have been required to open up their transmission systems
for use by potential wholesale competitors. In addition, non-utility power
producers now compete with electric utilities in the wholesale generation
market. At the federal level, retail competition is under consideration. Some
states, including Virginia, have enacted legislation requiring the
introduction of retail competition.
Today, Virginia Power faces competition in the wholesale market. There is
no general retail competition in Virginia Power's principal service area at
this time. However, during its 1998 session, the Virginia General Assembly
passed a law that requires a transition to retail competition between January
1, 2002 and January 1, 2004. The legislation established the principle that
just and reasonable net stranded costs would be recoverable, but it left the
details as to how that would be accomplished to future enabling legislation.
At the time of this report, the General Assembly of Virginia is in session
and is considering proposed legislation that would establish a detailed plan
to restructure the electric utility industry in Virginia. Virginia Power is
actively supporting restructuring legislation, which would provide the
necessary details to implement the legislation passed in 1998. See
"Competition--Retail" and "Competition--Legislative Initiatives" below.
In addition to its legislative activity, Virginia Power has responded to
the trend toward competition by renegotiating long-term contracts with
wholesale and large federal government customers. It has obtained regulatory
approval of innovative pricing proposals for large industrial customers. Rate
concessions resulting from these contract negotiations and innovative pricing
proposals are expected to reduce Virginia Power's 1999 revenue by
approximately $45 million as compared to the amounts that would have been
billed prior to such measures.
Virginia Power has also responded to the trend toward competition by
cutting its costs, re-engineering its core business processes, and pursuing
innovative approaches to serving traditional markets and future markets.
Virginia Power's strategy also includes the development of non-traditional
products and services with an objective of providing growth in future
earnings. These products and services include electric energy and capacity in
the emerging wholesale market; natural gas and other energy-related products
and services; nuclear management and consulting services; power distribution
and transmission related services, including engineering and metering; and
telecommunication services. In addition, Virginia Power may from time to
time, identify and investigate opportunities to expand its markets through
strategic alliances with partners whose strengths, market position and
strategies complement those of Virginia Power.
Competition--Wholesale
On September 11, 1997 FERC authorized Virginia Power to make wholesale power
sales under the company's Market-Based Sales Tariff, but set a hearing to
consider the effect of transmission constraints on Virginia Power's ability
to exercise generation market power in localized areas within its service
territory. In connection with such proceeding, the participants filed a
formal Offer of Settlement that was accepted by FERC in January 1999. Under
the Offer of Settlement Virginia Power agreed that it would not make
wholesale power sales under its Market-Based Sales Tariff to loads located
within its service territory. This settlement did not preclude Virginia Power
from requesting FERC authorization of such sales in the future, but until
such authorization has been granted by FERC, agreements by Virginia Power to
sell wholesale power to loads located within its service territory are to be
at cost-based rates accepted by FERC.
During 1998, sales to wholesale customers under requirements contracts
represented approximately 4% of Virginia Power's total revenues from electric
sales. Since FERC issued its Order 888 requiring open access to transmission
service, Virginia Power has faced increased competitive pressures on sales to
wholesale customers served under requirements contracts. In response,
Virginia Power has renegotiated long-term contracts with wholesale customers.
Virginia Power has implemented a new arrangement with its largest wholesale
customer that provides for a transition from cost-based rates to market-based
rates. The reduced rates, offset in part by other revenues which may be
earned under the agreement, are expected to decrease net income by
approximately $21 million during the period 1999 through 2005.
As a result of the increased competitive pressures on sales to wholesale
customers, Virginia Power is reevaluating the recoverability of regulatory
assets previously assigned to its wholesale customers from such customers or
by reallocation to its retail customers. Based on the principles included in
the settlement of Virginia Power's Virginia rate proceedings in 1998 and the
restructuring legislation now before the Virginia General Assembly, recovery
of these costs from Virginia Power's Virginia retail customers would be
unlikely. Furthermore, although future federal legislation may ultimately
address the restructuring of the electric utility industry, Virginia Power
does not believe it would provide for the recovery of regulatory assets from
its wholesale customers. See "Competition--SFAS No. 71."
Competition--Retail
Currently, Virginia Power has the exclusive right to provide electricity at
retail within its assigned service territories in Virginia and North
Carolina. As a result, Virginia Power now faces competition for retail sales
only if certain of its business customers move into another utility service
territory, use other energy sources instead of electric power, or generate
their own electricity.
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However, the 1998 Virginia General Assembly passed House Bill No. 1172
(HB1172) which established the principles and a schedule for Virginia's
transition to retail competition in the electric utility industry. The new
law, which became effective on July 1, 1998, requires the following:
o establishment of one or more independent system operators (ISO) and one
or more regional power exchanges (RPX) for Virginia by January 1, 2001;
o deregulation of generating facilities beginning January 1, 2002;
o transition to retail competition to begin on January 1, 2002, with full
retail competition to be completed on January 1, 2004;
o recovery of just and reasonable net stranded costs; and
o appropriate consumer safeguards related to stranded costs and
consideration of stranded benefits.
This legislation established a timeline for deregulation of retail
electric service but left the details regarding implementation to future
enabling legislation. Such legislation is now under consideration by the
Virginia General Assembly. See "Competition--Legislative Initiatives" below.
North Carolina is also considering implementing retail competition.
Competition--Legislative Initiatives
Virginia Virginia Power actively supported HB1172 during the 1998 General
Assembly session and currently supports the comprehensive restructuring
legislation being considered by the 1999 General Assembly. A special joint
legislative subcommittee, which has been proactively examining electric
industry restructuring for the past three years, has drafted and presented a
bill to the Senate for consideration during the 1999 session of the General
Assembly. The major elements of the bill, which is supported by a broad
coalition of consumer groups and utilities, include:
o phase-in of retail customer choice beginning in 2002 with full retail
customer choice by 2004; the schedule is to be determined by the Virginia
Commission, which has the authority to accelerate or delay implementation
under certain conditions; however, the phase-in of retail customer choice
may not be delayed beyond January 1, 2005;
o no mandatory divestiture of generating assets;
o deregulation of generation in 2002;
o capped base rates from January 1, 2001 to July 1, 2007;
o recovery of net stranded costs through capped rates or a wires charge paid
by those customers opting, while capped rates are in effect, to purchase
energy from a competitive supplier;
o consumer protection safeguards;
o establishment of default service beginning January 1, 2004; and
o creation of a Legislative Transition Task Force to oversee the
implementation of the statute.
Under this proposed legislation, Virginia Power's base rates would remain
unchanged until July 2007. If this legislation is enacted, the generation
portion of Virginia Power's Virginia jurisdictional operations would no
longer be subject to cost-based rate regulation beginning in 2002, although
recovery of generation-related costs would continue to be provided through
the capped rates until July 2007.
The Senate approved this legislation in Senate Bill No. 1269 on February
9, 1999 (the Senate Bill). Whether all of the provisions of the Senate Bill
will ultimately be included in enacted legislation is uncertain. Virginia
Power believes passage of Virginia restructuring legislation is likely in
1999 but cannot predict what provisions would be included, if restructuring
legislation is ultimately enacted. See "Competition--Exposure to Potentially
Stranded Costs and Competition--SFAS No. 71."
Federal The U. S. Congress is expected to consider federal legislation in the
near future authorizing or requiring retail competition. Virginia Power
cannot predict what, if any, definitive actions the Congress may take.
North Carolina The 1997 Session of the North Carolina General Assembly
created a Study Commission on the Future of Electric Service in North
Carolina. The North Carolina Commission received and published comments from
interested parties in May 1998. An interim report was expected in 1998 but
has not yet been issued.
Competition--Regulatory Initiatives
The Virginia Commission has been actively interested in industry
restructuring and competition, as illustrated by its establishment of several
generic and utility-specific restructuring related proceedings since 1995.
On March 20, 1998, the Virginia Commission issued an Order regarding the
establishment of independent system operators (ISOs), regional power
exchanges (RPXs) and retail access pilot programs. In direct response to that
Order, Virginia Power filed a report on November 2, 1998, describing the
details, objectives and characteristics of its proposed retail access pilot
program. Virginia Power is also complying with the Order by filing reports on
a regular basis on activities concerning Virginia Power's efforts to
establish an ISO and RPX.
Virginia Power's proposed retail access pilot program envisions retail
customer choice being available to 24,000 customers, or about 1% of Virginia
Power's retail load under the jurisdiction of the Virginia Commission. The
Virginia Commission created a generic proceeding to address issues common to
both electric and gas retail access pilot programs throughout the
Commonwealth of Virginia. On December 3, 1998, the Virginia Commission issued
an Order setting Virginia Power's retail access pilot program proposal for
hearing on June 29, 1999, to consider the remaining issues and details. It is
anticipated that the regulatory proceedings will take much of 1999 to
complete and delivery of competitively procured electricity under Virginia
Power's pilot program will not occur until mid-2000.
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 impact of
transitioning from a regulated to a competitive environment is "stranded
costs." Stranded costs are 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. If no recovery mechanism is provided
during the transition, the financial position of a utility could be
materially adversely affected.
Virginia Power's exposure to stranded costs is comprised of the following:
o long-term purchased power contracts that may be above-market (see Note T);
o costs pertaining to certain generating plants that may become uneconomic
in a deregulated environment;
o regulatory assets for items such as income tax benefits previously
flowed-through to customers, deferred losses on reacquired debt and other
costs (see Note E); and
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Management's Discussion and Analysis of Operations, continued
o unfunded obligations for nuclear plant decommissioning and postretirement
benefits not yet recognized in the financial statements (see Notes B and
P).
As previously discussed under "Competition -- Legislative Initiatives,"
any recovery of potentially stranded costs from Virginia retail customers
under the Senate Bill, would occur during the rate freeze period. See
"Competition--SFAS No. 71." If such legislation is enacted, the extent of
Virginia Power's recovery of these costs would depend on many factors,
including, but not limited to, weather, sales and load growth, future power
station performance and unanticipated expenses (e.g., equipment failures and
storm damage).
Competition--SFAS No. 71
Virginia Power's financial statements reflect assets and costs under
cost-based rate regulation in accordance with Statement of Financial
Accounting Standards No. 71 (SFAS No. 71), "Accounting for the Effects of
Certain Types of Regulation." SFAS No. 71 provides that certain expenses
normally reflected in income are deferred on the balance sheet as regulatory
assets. Regulatory assets represent probable future revenue associated with
certain costs that will be recovered from customers through the ratemaking
process. 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 No. 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 No. 71. In addition, SFAS No. 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 indicate that the carrying amount of an
asset may not be recoverable. Thus, events or changes in circumstances that
cause the discontinuance of SFAS No. 71, and write-off of regulatory assets,
would also require a review of utility plant assets for possible impairment.
If such review indicates utility plant assets are impaired, the carrying
amount of the affected assets would be written down. See Note B. This would
result in a loss being charged to earnings, unless recovery of the loss is
provided through operations that remain regulated. It would also be
appropriate to review long-term purchase commitments for potential impairment
in accordance with SFAS No. 5, "Accounting for Contingencies." See Note T.
At December 31, 1998, Virginia Power's regulated operations satisfied SFAS
No. 71 requirements for continued recognition of regulatory assets. However,
if the Senate Bill is enacted, the generation portion of Virginia Power's
Virginia jurisdictional operations would no longer be subject to cost-based
regulation beginning in 2002, although recovery of generation-related costs
would continue to be provided through the capped rates until July 2007. When
enacted legislation provides sufficient details about the transition to
deregulation of generation, Virginia Power would discontinue the application
of SFAS No. 71 for the generation portion of its Virginia jurisdictional
operations and determine the amount of regulatory assets to be written off.
In order to measure the amount of regulatory assets to be written off,
Virginia Power must evaluate to what extent recovery of regulatory assets
would be provided through cost-based rates. Virginia Power would not be
required to write off regulatory assets for which recovery would be provided
by either cost-based rates or a separate, stranded cost recovery mechanism.
Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of the
Pricing of Electricity--Issues Related to the Application of FASB Statements
No. 71, 'Accounting for the Effects of Certain Types of Regulation,' and No.
101, 'Regulated Enterprises--Accounting for the Discontinuance of Application
of FASB Statement No. 71' " (EITF 97-4), provides guidance about writing off
regulatory assets when SFAS No. 71 is discontinued for only a portion of a
utility's operations. However, until the final provisions of the Virginia
legislation are known, Virginia Power believes the measurement of regulatory
assets to be written off under SFAS No. 71 and EITF 97-4 is uncertain. If a
write-off of regulatory assets is required, such write-off could materially
affect Virginia Power's financial position and results of operations. See
Note E. At the time of this report, Virginia Power believes passage of the
Virginia restructuring legislation is likely in 1999, but cannot predict what
provisions would be included, if restructuring legislation is ultimately
enacted.
Virginia Power believes the stable rates that would be provided until July
2007 by the Senate Bill coupled with the opportunity to pursue further
reductions in Virginia Power's operating costs, would present a reasonable
opportunity to recover a substantial portion of Virginia Power's potentially
stranded costs. However, as discussed above, if the application of SFAS No.
71 is discontinued for any part of utility operations, Virginia Power would
also perform an impairment evaluation with respect to property, plant and
equipment as well as long-term power purchase commitments. The impairment
assessment may be required on a disaggregated basis rather than as an
aggregate portfolio. Thus, the recognition of impairments, if any, could
potentially not be mitigated by other assets or contracts with estimated
values in excess of respective carrying amounts or contract payments. If
Virginia Power's evaluation concludes that an impairment exists, an
additional loss would be charged to earnings. Because the impairment
evaluation has not been completed, Virginia Power cannot estimate the amount
of loss, if any, that would be recognized. However, such amount could
materially affect Virginia Power's financial position and results of
operations.
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 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 rate making
process. However, see "Competition -- Legislative Initiatives" for a
discussion of legislation that, if enacted, would provide a transition from
cost-based to competitive pricing in Virginia.
Virginia Power incurred expenses of $71.9 million, $70.4 million, and
$71.1 million (including depreciation) during 1998, 1997, and 1996,
respectively, in connection with the use of environmental protection
facilities and expects these expenses to be $71.1 million in 1999. In
addition, capital expenditures to limit or monitor hazardous substances were
$22.2 million, $24.6 million, and $22.4 million for 1998, 1997, and 1996,
respectively. The amount estimated for 1999 for these expenditures is $106.9
million.
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The Clean Air Act, as amended in 1990, requires Virginia Power to reduce
its emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx). NOx and SO2
are gaseous by-products of fossil fuel combustion. The Clean Air Act's SO2
reduction program is based on the issuance of a limited number of SO2
emission allowances, each of which may be used as a permit to emit one ton of
SO2 into the atmosphere or may be sold to someone else. Virginia Power's
compliance plans may include switching to lower sulfur coal, purchasing
emission allowances and installing SO2 control equipment. In December 1998,
Virginia Power initiated a capital project to install SO2 control equipment
on two units at its Mt. Storm Power Station at an estimated cost of $115
million.
Virginia Power began complying with Clean Air Act Phase I NOx limits at
eight 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.
However, in September 1998, the Environmental Protection Agency (EPA)
adopted a rule which requires 22 states, including Virginia, North Carolina
and West Virginia, to reduce and cap emissions of NOx beginning in 2003. The
rule allows each state to determine how to achieve the required reduction in
emissions. By September 1999, each affected state must develop and submit a
plan to the EPA that details how the state will achieve its emission cap. If
states adopt the approach suggested by the EPA, it is probable Virginia Power
will incur major capital expenditures, presently expected to be in the range
of $500 million, to install additional emission control equipment. These
expenditures would satisfy the Clean Air Act Phase II standards for NOx,
thereby eliminating the need under existing law to make additional investment
beginning in 2008 for that purpose. Virginia Power will closely monitor the
development of NOx emission cap plans by the various states.
Evaluation and planning on future projects to comply with the SO2 and NOx
reduction requirements are ongoing and will be influenced by changes in the
regulatory environment, availability of allowances, and emission control
technology.
Global Climate Change
In 1993, the United Nation's Global Warming Treaty became effective. The
objective of the treaty is the stabilization of greenhouse gas concentrations
at a level that would prevent man-made emissions from interfering with the
climate system. To further this objective, an international Protocol was
formulated on December 10, 1997 in Kyoto, Japan. This Protocol calls for the
United States to reduce greenhouse emissions by 7% from 1990 baseline levels
by the period 2008-2012. The Protocol will not constitute a binding
commitment unless submitted to and approved by the United States Senate.
Emission reductions of the magnitude included in the Protocol, if adopted,
would likely result in a substantial financial impact on companies that
consume or produce fossil fuel-derived electric power.
NRC Nuclear Decommissioning Rule
Effective November 23, 1998, the Nuclear Regulatory Commission (NRC) amended
its nuclear decommissioning financial assurance requirements. In particular,
the NRC limited the use of the sinking fund method to only that portion of a
licensee's collections for decommissioning that is recovered through either
traditional cost of service rate regulation or through non-bypassable
charges. The majority of Virginia Power's decommissioning collections are
currently recovered through cost of service rate regulation. However, a
portion of decommissioning collections are recovered through contracted
rates, and Virginia Power has established a parent company guarantee to
satisfy the NRC's revised requirements. Other methods are available and may
be used in the future.
Further, Virginia Power will evaluate the implications on its method of
satisfying the NRC financial assurance requirements that may result from
enactment of the legislation currently before the Virginia General Assembly.
See "Future Issues, Competition--Legislative Initiatives."
Dominion Energy
One of Dominion Energy's primary goals in its oil and gas business is to
sustain and increase earnings from non-tax credit oil and gas properties.
Dominion Energy's operating focus is on cost structure and operating
efficiencies. Dominion Energy expects to compete in regional markets by
expanding its reserve base through drilling and the acquisition of oil and
gas properties.
In its foreign power businesses, Dominion Energy has commitments to add
generating capacity in Peru and Bolivia. Dominion Energy may expand and
acquire additional power generation in Latin America. Dominion Energy plans
to consider the acquisition of controlling interests in generating assets
through a selective and conservative bidding process. Dominion Energy intends
to mitigate the political and economic risks in its foreign operations by
setting limits on its investments in any one country and operating in areas
where it believes these risks are less significant.
Dominion Energy's future focus in its domestic power generation business
is to acquire and develop additional power generation in the MAIN to Maine
region. The MAIN region consists of the Mid America Interconnected Network.
This network includes the range of electric utility service territories that
begins in the United States upper mid west and covers an area north eastward
through Maine.
Dominion Energy's business is increasingly competitive. In its existing
independent power investments, Dominion Energy intends to counter competition
by focusing on cost structure, operating efficiencies and actively exercising
management control. Dominion Energy expansion is planned to be in areas where
it has existing gas reserves and power generation presence. The focus for
potential acquisitions will be targeted at low-cost producers and utility
generation divestitures.
Dominion Capital
The financial performance of Dominion Capital's diversified financial
services business depends to a certain degree on the movement of interest
rates, overall economic conditions, and increasing competition. Dominion
Capital intends to manage the effect of these issues by maintaining a
balanced diversified business approach, maintaining underwriting and credit
quality, and focusing on specialized markets. Dominion Capital plans to grow
its existing financial service business units through increased market share,
developing new products and services and entering new financial markets.
Recently Issued Accounting Standards
In February 1998, the Financial Accounting Standards Board (FASB) issued
SFASNo. 132, "Employers Disclosure about Pensions and Other Postretirement
Benefits." Dominion Resources adopted SFAS No. 132 in 1998. This new standard
revises employers' disclosure about pension and other postretirement benefit
plans. It does not
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Management's Discussion and Analysis of Operations, continued
change the measurement or recognition of those plans. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The statement requires that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at fair value. The statement requires that changes in a derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows
a derivative's gains and losses to offset related results on the hedged item
in the income statement, and requires that a company formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
Dominion Resources currently plans to adopt SFAS No. 133 in its 2000
financial statements. We are currently in the process of quantifying the
effect of adopting SFAS No. 133 on our financial statements. Since the impact
is a function of market prices and other measures of fair value, any
quantification will be subject to change. The adoption of the statement could
increase volatility in earnings and other comprehensive income.
In October 1998, FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained After the Securitization of Mortgage Loans Held for Sale
by a Mortgage Banking Enterprise." This new statement allows residual
interests retained after securitization to be classified as available for
sale.
In November 1998, the EITF reached consensus on Issue No. 98-10,
"Accounting for Contracts Involved in Energy Trading and Risk Management
Activities" (EITF 98-10). Dominion Resources will adopt EITF 98-10 in 1999.
EITF 98-10 requires energy trading contracts to be recorded at fair value on
the balance sheet with the changes in fair value included in earnings. The
effects of the initial application of EITF 98-10 will be reported as a
cumulative effect of a change in accounting principle.
Virginia Power manages a portfolio of energy contracts which are currently
recorded at fair value on the balance sheet with the changes in fair value
included in earnings as required by EITF 98-10. However, we have not yet
completed our review of other energy-related contracts held by Dominion
Resources that could possibly be subject to EITF 98-10. Until our contract
review is complete, we will not be in a position to quantify the impact of
adopting EITF 98-10.
Year 2000 Compliance
Dominion Resources is preparing its computer systems and computer-driven
equipment and devices for the year 2000. Virtually every computer operation
could be affected in some way by the rollover of the two-digit year value
from 99 to 00. Systems or devices that do not properly recognize
date-sensitive information when the year changes to 2000 could generate
erroneous data or fail. The year 2000 problem could affect traditional
information systems, embedded systems and specialized computers used to
control, monitor, or assist the operations of equipment. It could also affect
software or computer applications that use, store, transmit or receive
information involving dates.
If not properly addressed, the year 2000 problem could result in computer
and other equipment failures at the company and our suppliers and customers.
Because of the extensive use of computers and embedded systems throughout our
business and the businesses of our suppliers and customers, if failures
occur, they could have a material impact on our business.
Dominion Resources' objective is to be year 2000 ready. "Year 2000 ready"
means that critical systems, devices, applications and business relationships
have been evaluated and are expected to be suitable for continued use into
and beyond the year 2000. Dominion Resources and its subsidiaries have
organized formal year 2000 project teams to identify, correct or reprogram
and test its systems for year 2000 readiness. These teams are addressing all
critical aspects of our business, including information systems, embedded
systems and external relationships with business partners. The teams are
overseen by an executive who reports regularly to management and the Boards
of Directors.
Our year 2000 remediation program involves completing four major phases:
(1) inventorying of computer systems and embedded systems that could
potentially be affected by the year 2000 problem; (2) screening to determine
date sensitivity within the inventoried systems; (3) impact assessment; and
(4) remediation and testing. We have completed our internal inventory and
screening process. The following tables summarize our status and projected
timetable for preparing our company for year 2000.
Percent of Critical Systems Year 2000 Ready
- --------------------------------------------------------------------------------
Actual Planned
12/31/98 7/31/99 10/31/99
Virginia Power 93 99 99*
Dominion Resources 10 100 100
Dominion Energy 45 73 100
Dominion Capital 85 100 100
- --------------------------------------------------------------------------------
*100% planned to be ready before 12/31/99
In addition to these internal efforts, Dominion Resources is assessing the
state of readiness of its critical suppliers and service providers. We have
implemented initiatives to prevent future procurement of non-year 2000
compliant technology. Additionally, Virginia Power is participating in
industry groups and sharing information with other utilities to ensure
continuity of service to its customers. Dominion Energy's representatives are
making inquiries of appropriate authorities in countries where the
transmission network used for delivery of energy is operated by the local
government. Virginia Power is also meeting with the nonutility power
producers that supply it with energy under power purchase contracts to share
information about year 2000 readiness.
Based on our efforts to date, we expect year 2000 costs to be within the
range of $35 million to $45 million dollars, of which $12.8 million
(including $10.8 million for Virginia Power) has been expended to date. Of
this amount, $30 million to $40 million is for Virginia Power. Year 2000
costs at our other subsidiaries are not expected to be material. These ranges
are a function of Dominion Resources' ongoing evaluation as to whether
certain systems and equipment will be corrected or replaced, which is
dependent on information which is still being obtained from suppliers and
other external sources. The current projection is a downward revision of an
earlier one of $45 million to $55 million which is due in part to completion
of the assessment phase at Virginia Power, progress made on remediation and
testing, and an increase in information from significant external
relationships.
Maintenance and modification costs will be expensed as incurred, while the
costs of new software and hardware will be capitalized and amortized over the
asset's useful life. These costs do not include
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capital expenditures for major information systems (hardware and software)
that were initiated for normal business reasons without regard to year 2000
issues.
Of primary importance to Dominion Resources' energy businesses is the
reliability of the transmission network for delivery of energy to its
customers. This reliability is achieved by participation of many utilities in
the supply to, and control of, their individually owned portions of the
network. Failure of an individual utility to successfully manage its
transmission network could affect this reliability which could have a
material adverse affect on the total operations of Dominion Resources.
Congress has directed the Department of Energy (DOE) to ascertain the
readiness of all electric utilities for year 2000. The DOE is working with
the North American Reliability Council (NERC) to coordinate and monitor year
2000 activities of the electric utility industry to ensure continued supply
of energy to all customers. NERC is comprised of ten regional councils whose
members represent the major bulk power suppliers of the electric industry.
Virginia Power is actively participating with other NERC members, including
its local council, the Southeastern Electric Reliability Council (SERC).
Dominion Resources is also in the process of contingency planning to
ensure continuous operation of its businesses. Contingency planning involves
an ongoing evaluation of our internal efforts as well as the efforts of
critical third-parties to successfully address the year 2000 issue. Virginia
Power is on schedule to complete its contingency planning by June 30, 1999.
Dominion Resources intends to have all contingency plans identified and
tested prior to year-end 1999. Virginia Power and the U.S. electric utility
industry already have extensive contingency plans in place for many events
such as extreme heat, storms and equipment failures. Its year 2000
contingency planning is an extension of these existing plans. It is also
coordinating with SERC and NERC and will participate in at least two
nationwide drills planned for 1999.
As part of its year 2000 process, Dominion Resources must consider and
evaluate the most reasonably likely worst case scenarios and their impact on
continuous operations of its businesses. Based on our preliminary
evaluations, which include SERC and NERC efforts to date, the most reasonably
likely worst case scenarios could include:
o minor variations in voltage or frequency with no significant effect on
electric service;
o temporary loss of a portion of generation capacity including possibly
non-utility generation; however, such loss is not expected to be
sufficient to adversely affect electric supplies;
o temporary loss of some telecommunications functionality and other services
with no impact expected on electric service; and
o temporary loss of a small portion of commercial and industrial customer
loads.
Dominion Resources cannot estimate or predict the potential adverse
consequences, if any, that could result from a third party's failure to
effectively address the year 2000 issue, but believes that any impact would
be short-term in nature and would not have a material adverse impact on
results of operations. Based on Dominion Resources' and industry analyses to
date, we do not believe the most reasonably likely worst case scenarios
identified above, if they were to occur, would have a material adverse affect
on Dominion Resources' businesses or results of operations.
Market Rate Sensitive Instruments and Risk Management
Dominion Resources is exposed to market risk because it utilizes financial
instruments, derivative financial instruments and derivative commodity
instruments. The market risks inherent in these instruments are represented
by the potential loss due to adverse changes in commodity prices, equity
security prices, interest rates and foreign currency exchange rates as
described below. Interest rate risk generally is related to Dominion
Resources and its subsidiaries' outstanding debt as well as their commercial,
consumer, and mortgage lending activities. Currency risk exists principally
through Dominion Energy's investment in Canada and some debt denominated in
European currencies associated with Dominion Energy's investment in South
America. Dominion Resources is exposed to equity price risk through various
portfolios of equity securities. Commodity price risk is experienced in
Dominion Resources' subsidiaries Dominion Energy and Virginia Power. They are
exposed to effects of market shifts in the sales prices they receive and pay
for natural gas and electricity.
For the current annual report, Dominion Resources has utilized the
Sensitivity Analysis methodology to disclose the quantitative information for
the interest rate, commodity price and foreign exchange risks. Sensitivity
analysis provides a presentation of the potential loss of future earnings,
fair values, or cash flows from market risk sensitive instruments over a
selected time period due to one or more hypothetical changes in interest
rates, foreign currency exchange rates, commodity prices, or other similar
price changes. The Tabular Presentation methodology continues to be used to
disclose equity price market risk in 1998. Tabular presentation of summarized
information requires disclosure of key terms and information for market risk
sensitive instruments.
In the 1997 Annual Report, Dominion Resources adopted the Tabular
Presentation methodology to disclose quantitative information concerning
interest rate risk (non-trading), foreign exchange risk and equity price risk
activities. In 1998, the change was made to Sensitivity Analysis because we
believe it will better assist the reader in understanding the exposure
Dominion Resources has to various market risks. Commodity price risk related
to non-trading activities was considered immaterial in 1997. Consequently,
its effect was not disclosed in the 1997 Annual Report. In 1997, Dominion
Resources used the Sensitivity Analysis method to disclose quantitative
information regarding interest rate risk in trading activities.
Interest Rate Risk Non-Trading Activities
Dominion Resources manages its interest rate risk exposure by maintaining a
mix of fixed and variable rate debt. In addition, Dominion Resources enters
into interest rate sensitive derivatives. Examples of these derivatives are
swaps, forwards and futures contracts.
If interest rates in 1999 are 10% higher than the rates reported at the
end of 1998, Dominion Resources' interest expense, after considering the
effects of the derivative financial instruments would increase by
approximately $10 million before considering the effect of income taxes. If
the same situation had occurred in the previous year, Dominion Resources'
interest expense after considering the effects of the swap, forward and
futures agreements would have increased by approximately $25 million prior to
the effect of income taxes. This amount has been determined by considering
the impact of the hypothetical interest rates on Dominion Resources'
financial instruments.
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Management's Discussion and Analysis of Operations, continued
Dominion Capital, through its indirectly owned subsidiary Saxon Mortgage,
Inc., retains ownership in the residual classes of the asset-backed
securities utilized to sell home equity loans originated and purchased by
Saxon Mortgage. At December 31, 1998, these assets are classified as
available for sale securities on the balance sheet and total $266.1 million.
The residual securities represent the net present value of the excess of
the interest payments upon the underlying mortgage collateral net of interest
payments to outstanding bond holders, servicing costs, over-collateralization
requirements, and credit losses. Fair value of the residual is analyzed
quarterly by Saxon Mortgage to determine whether prepayment experience,
losses and changes in the interest rate environment have had an impact on the
valuation. Expected cash flows of the underlying loans sold are reviewed
based upon current economic conditions and the type of loans originated and
are revised as necessary.
Foreign Exchange Risk Activities
Dominion Resources' exposure to foreign currency exchange rates results from
debt which is denominated in a currency different from the company's
functional currency, the U.S. dollar. In this situation, the company is
subject to gains and losses due to the relative change in the foreign
currency rate of the debt versus the U.S. dollar. This risk is mitigated by
entering into contracts which are denominated or indexed to the U.S. dollar.
In the past, the company has used currency swaps to minimize this exposure.
As of December 31, 1998, no cross currency swaps were outstanding.
Dominion Resources has performed sensitivity analyses to estimate its
exposure to foreign-exchange market risk. If the U.S. dollar declines in
value by 10% in 1999 when compared to 1998, the impact on the fair value of
the foreign denominated debt would be insignificant. Comparatively, in 1998,
the same percentage decline of the U.S. dollar over 1997 would have resulted
in an $87 million increase in the fair value of the foreign denominated debt.
The decrease in Dominion Resources foreign currency exposure in 1998 is due
to the absence after July 1998 of the debt associated with East Midlands.
This debt was subject to foreign currency risk in 1997.
Commodity Price Risk Non-Trading Activities
Dominion Energy is exposed to the impact of market fluctuations in the sales
price Dominion Energy receives for its produced natural gas. To reduce price
risk caused by market fluctuations, Dominion Energy generally follows a
policy of hedging a portion of its natural gas sales commitments by selecting
derivative commodity instruments whose historical price fluctuations
correlate strongly with those of the production being hedged. Dominion Energy
enters into options, swaps, and collars to mitigate a loss in revenues,
should natural gas prices decline in future production periods. Dominion
Energy also mitigates price risk by entering into fixed price sale agreements
with physical purchasers of natural gas. The impact of a change in price on
Dominion Energy's financial condition at a point in time is not necessarily
representative of the effect of price movements during the year.
When conducting sensitivity analysis of the change in the fair value of
Dominion Energy's gas portfolio which would result from a hypothetical change
in the future market price of natural gas, the fair value of the portfolios
are determined from option pricing models which take into account the market
prices of natural gas in future periods, the volatility of the market prices
in each period, as well as the time value factors of the underlying
commitments. In most instances, market prices and volatility are determined
from quoted prices on the futures exchange.
If natural gas prices increase 10% in 1999 over their value in 1998, the
change in the fair value of Dominion Energy's natural gas portfolio would be
immaterial. Similarly, if a 10% change had occurred in the price of natural
gas in 1998 over 1997, the change in the fair value of Dominion Energy's
portfolio at December 31, 1997 would also have been immaterial.
Commodity Price Risk Trading Activities
As part of Virginia Power's strategy to market energy from its generation
capacity and to manage related risks, it enters into contracts for the
purchase and sale of energy commodities. Virginia Power manages a portfolio
of derivative commodity contracts held for trading purposes. These contracts
are sensitive to changes in the prices of natural gas and electricity.
Virginia Power employs established policies and procedures to manage its
risks associated with these price fluctuations and uses various commodity
instruments, such as futures, swaps and options, to reduce risk by creating
offsetting market positions. In addition, Virginia Power seeks to use its
generation capacity, not needed to serve customers in its service territory,
to satisfy commitments to sell energy.
When conducting sensitivity analysis of the fair value of the portfolio,
we take into account the underlying commodity, contract prices and market
prices represented by each derivative commodity contract. For
exchange-for-physical contracts, basis swaps, fixed price forward contracts
and options which require physical delivery of the underlying commodity,
market value reflects management's best estimates considering
over-the-counter quotations, time value and volatility factors of the
underlying commitments. Exchange-traded futures and options are marked to
market based on closing exchange prices.
Virginia Power has determined a hypothetical loss by calculating a
hypothetical fair value for each of its contracts assuming a 10% unfavorable
change in the market prices of the related commodity and comparing it to the
fair value of the contracts based on market prices at December 31, 1998 and
1997. This hypothetical 10% change in commodity prices would have resulted in
a hypothetical loss of approximately $13.5 million and $2.5 million in the
fair value of Virginia Power's contracts as of December 31, 1998 and 1997,
respectively. The commodity contracts' sensitivity to unfavorable price
changes increased in 1998 as compared to 1997 primarily due to the increased
volume of contracts and associated commodities.
The sensitivity analysis does not include the price risks associated with
utility operations, including those underlying utility fuel requirements. In
the normal course of business, Virginia Power also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally include credit
risk, which is not reflected in the sensitivity analysis above.
Equity Price Risk Activities
Dominion Resources is subject to equity price risk due to its investment in
marketable securities and trust funds. Trust funds are maintained by Virginia
Power in order to fund certain nuclear decommissioning costs. Because nuclear
decommissioning costs have been recovered through Virginia Power's rates,
fluctuations in equity prices have not affected the earnings of Dominion
Resources. See "Future Issues--NRC Nuclear Decommissioning Rule."
The following table presents descriptions of the equity securities that
are held by the company at December 31, 1998. In accordance with current
accounting standards, the marketable securities are reported on the balance
sheet at fair value.
34
<PAGE>
- --------------------------------------------------------------------------------
1998 1997
Fair Fair
Cost Value Cost Value
(millions)
Trading:
Short-term marketable
securities $ 0.7 $ 0.7 $240.7 $240.7
Other than trading:
Marketable securities $164.6 $169.1 $185.3 $190.8
Nuclear decommissioning
trust investments $252.4 $470.3 $219.4 $360.4
- --------------------------------------------------------------------------------
Other Risk Management Factors and Matters
Dominion Energy A significant portion of the company's operations are located
in foreign countries. These investments represent primarily investments in
affiliates which own energy-related production, generation and transmission
facilities.
The company is exposed to foreign currency risk and sovereignty risk with
respect to these. How the company manages foreign currency risk is explained
in the previous section, "Foreign Exchange Risk Activities." Sovereignty risk
relates to losses due to actions initiated by foreign governments that
preclude performance by the company to mitigate these losses. Dominion Energy
seeks to manage this risk by limiting its exposure in any single country and
by limiting its investments to those countries and regions where the company
believes these risks are less significant.
Dominion Capital Dominion Capital manages a number of risks in its
operations in addition to interest rate risk as discussed above. Its lending
groups are concerned with credit risks, loan loss reserves, prepayments, and
oil and natural gas market fluctuations.
Consumer credit risks are managed in the following ways:
o experienced management and effective underwriting policies and procedures;
o controlling the average loan size;
o geographic diversification of the portfolio;
o compensating for risk grade by lowering loan to values and higher interest
rates;
o servicing and quality control efforts.
Commercial credit risks are managed in these ways:
o diversification of clients by geography and industry classification;
o primarily maintaining first position in collateralized assets;
o underwriting by experienced professionals and effective underwriting
policies and procedures; and
o portfolio monitoring and credit collection.
Dominion Capital's mortgage investments are adversely impacted by
increases in the rate at which home equity loans prepay. Accordingly,
Dominion Capital actively manages this risk by:
o including prepayment penalties, when possible, as part of loan structure;
o aggressively enforcing premium recapture provisions with sellers of
mortgage loans;
o limiting the acquisition of below market (teaser) start rates on
adjustable rate mortgages to those covered by prepayment penalties; and
o constructing prudent valuation assumptions based on historical prepayment
speeds globally and within the company.
Dominion Capital's loan loss reserves are set based on the nature of its
assets and the prevailing economic outlooks affecting the sectors in which
the companies operate. Reserves also reflect historical experience within the
operating entities. Loss reserves are imbedded within the securitization
structures and are reflected in residual values.
The market price of natural gas assets are monitored and coverages are
maintained in the underwriting structures of Dominion Capital's loan assets
as well as oil and gas hedges.
Business Opportunities
Because our industry is rapidly changing, especially in the U.S., there are
many opportunities for acquisitions of assets and business combinations. We
investigate any of the opportunities we learn about that may increase
shareholder value or build on our existing businesses. Any acquisitions or
combinations may result in transactions involving cash, debt or equity
securities, and may involve payment of a premium over book and market values.
Such transactions or payments could dilute the interests of holders of common
stock.
Forward-Looking Information
As we have pointed out earlier in this annual report, we have included
certain information about the future for us and our subsidiaries. We have
talked about our expectations and plans and, when we felt we were able to
make reasonable predictions, tried to estimate the impact of known trends and
uncertainties that our businesses are subject to. None of our statements
about the future, also referred to as "forward-looking statements," are
guarantees of future results or outcomes. Any statement of this type
necessarily involves assumptions and uncertainties which could cause actual
results or outcomes to be substantially different from those we have
suggested. In many cases, the matter will be outside of our control. In
addition to specific issues discussed in other parts of this report, some of
the factors that could make a significant difference in the forward-looking
statements we have made include: legislative and regulatory actions, both
domestic and international; deregulation and increased competition in our
industry; our operation of nuclear power facilities and related
decommissioning costs; our acquisition or disposition of assets or
facilities; outcomes in legal proceedings, including rate proceedings;
changes in environmental requirements and costs of compliance; unanticipated
changes in operating expenses and capital expenditures; development project
delays or changes in project costs; and competition for new energy
development opportunities. We are also influenced by more general economic
and geographic factors such as: weather conditions and catastrophic weather
related damage; political and economic risks (particularly those associated
with international development and operations, including currency
fluctuations); the ability of the company, its suppliers, and its customers
to successfully address Year 2000 compliance issues, pricing and
transportation costs of commodities; the level of market demand for energy;
inflation; capital market conditions; and interest rates.
Any forward-looking statement speaks only as of the date on which such
statement is made, and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made.
35
<PAGE>
Management's Discussion and Analysis of Cash Flows and Financial Condition
(unaudited)
Introduction
In Management's Discussion and Analysis of Cash Flows and Financial Condition,
Dominion Resources' and its subsidiaries' general financial condition and
changes in financial condition are discussed by addressing the following topics:
o what our capital expenditures were for the year 1998 and what we project
them to be for the year 1999. In addition, we will disclose trends that
may have a material effect on our financial condition over the next few
years.
o the sources of funds utilized to pay for the expenditures incurred
during 1998 and the anticipated future capital expenditures.
Corporate Financing Activity
Dominion Resources funds its operations and supports the financing needs of
its subsidiaries primarily through:
o the issuance of commercial paper, backed by lines of credit; and
o the issuance of debt, preferred or common securities, which is facilitated
by the equity plans described below and a $950 million dollar shelf
registration, $675 million of which was still available to Dominion
Resources as of December 31, 1998. During 1998 Dominion Resources issued
approximately 6.8 million shares of common stock at a value of $267.8
million.
The proceeds of the Dominion Resources' financing activities are provided to
its subsidiaries as needed under inter-company agreements.
Commercial Paper
Dominion Resources' nonutility subsidiaries may finance their working capital
for operations from the proceeds of Dominion Resources commercial paper
sales. Dominion Resources sells its commercial paper in regional and national
markets and provides the proceeds to the nonutility subsidiaries under the
terms of intercompany credit agreements. At the end of 1998, Dominion
Resources supported these borrowings through bank lines of credit totaling
$500.8 million. The nonutility subsidiaries repay Dominion Resources through
cash flows from operations and 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.
Equity Plans
Until mid-1998, Dominion Resources has also raised additional capital from
the sale of common stock through the following equity plans:
o Dominion Direct Investment and
o Employee Savings Plan.
On July 8, 1996, the company established Dominion Direct Investment.
Dominion Direct Investment continues and expands the Automatic Dividend
Reinvestment and Stock Purchase Plan. Proceeds from all these equity plans
were (in millions): 1998-$86.6; 1997-$176.2; and 1996-$169.7.
In nine of the last ten years, Dominion Resources has raised over $100
million from sales through these plans. Effective August 1, 1998, management
made the decision that purchases of shares required by the company's equity
plans would be purchased on the open market instead of issuing new shares.
Therefore, these plans are currently not a source of capital to the company.
However, Dominion Resources continues to have access to capital through the
Dominion Direct Investment and the Employee Savings Plans in the future.
Sale of East Midlands--Financial Benefits
Due to the sale of East Midlands, Dominion Resources has attained certain
financial benefits. Dominion Resources received an immediate gain of $200.7
million. In addition, the sale has eliminated the need to issue an additional
$400 million in Dominion Resources common stock required to complete the
permanent financing for East Midlands. Finally, Dominion Resources retained
$647 million in after-tax cash proceeds from the sale. The proceeds provide
Dominion Resources with the financial strength and flexibility to either
repurchase shares of Dominion Resources common stock or take advantage of
investment opportunities. On July 20, 1998, the Dominion Resources Board of
Directors authorized the repurchase of up to $650 million (approximately 8%)
of Dominion Resources common stock outstanding. Since July 1998, Dominion
Resources repurchased approximately 2.3 million shares at a cost of
approximately $98 million. Dominion Resources plans to buy back between $100
and $200 million of common stock over the next year, depending on market
conditions.
Virginia Power
Liquidity and Capital Resources
Operating activities continue to be a strong source of cash flow, providing
$1,094 million in 1998 compared to $1,091 million in 1997. Over the past
three years, cash flow from operating activities has, on average, covered
137% of Virginia Power's total construction requirements and provided 83% of
its total cash requirements. Virginia Power's remaining cash needs are met
generally with proceeds from the sale of securities and short-term
borrowings.
Cash from (used in) financing activities was as follows:
1998 1997 1996
(millions)
Issuance of long-term debt $ 270.0 $ 270.0 $ 24.5
Repayment of long-term debt (333.5) (311.3) (284.1)
Issuance (repayment) of
short-term debt (4.5) (86.2) 143.4
Common dividend payments (377.7) (379.9) (385.8)
Other (52.9) (49.2) (48.8)
----- ----- -----
Total $(498.6) $(556.6) $(550.8)
Financing activities have represented a net outflow of cash in recent years
as strong cash flow from operations and the absence of major construction
programs have reduced Virginia Power's reliance on debt financing.
Virginia Power has continued to take advantage of declining interest rates
by issuing new debt at lower rates as higher-rate debt has matured. In 1998,
$333.5 million of Virginia Power's long-term debt securities matured with an
average effective rate of 8.36%. As a partial replacement for this maturing
debt, Virginia Power issued $270 million of long-term debt securities during
the year with an average effective rate of 6.71%.
36
<PAGE>
Virginia Power currently has three shelf registration statements effective
with the Securities and Exchange Commission from which it can obtain
additional debt capital: $400 million of Junior Subordinated Debentures; $375
million of Debt Securities, including First and Refunding Mortgage Bonds,
Senior Notes and Senior Subordinated Notes; and $200 million of Medium-Term
Notes, Series F. The remaining principal amount of debt that can be issued
under these registrations totals $645 million. An additional capital resource
of $100 million in preferred stock is also registered with the Securities and
Exchange Commission.
Virginia Power has a commercial paper program that is supported by two
credit facilities totaling $500 million. Proceeds from the sale of commercial
paper are primarily used to provide working capital. Net borrowings under the
program were $221.7 million at December 31, 1998.
Cash used in investing activities was as follows:
1998 1997 1996
(millions)
Plant and equipment $(450.8) $(397.0) $(393.8)
Nuclear fuel (80.9) (84.8) (90.2)
Nuclear decommissioning
contributions (37.5) (36.2) (36.2)
Purchase of assets (19.8) (13.7)
Other (12.7) (8.3) (12.5)
----- ---- -----
Total $(581.9) $(546.1) $(546.4)
Investing activities in 1998 resulted in a net cash outflow of $581.9
million, mostly due to $450.8 million of construction expenditures and $80.9
million of nuclear fuel expenditures. The construction expenditures included
approximately $281.8 million for transmission and distribution projects,
$80.5 million for production projects, $57.9 million for information
technology projects and $30.6 million for other projects.
Capital Requirements
Capacity Virginia Power anticipates that kilowatt-hour sales will grow
approximately 3.0% a year through 2001. In addition, Virginia Power has
long-term purchase agreements which will expire on December 31, 1999. To meet
these requirements, Virginia Power has developed plans to construct four
150-megawatt combustion turbines in Fauquier County, Virginia by midyear 2000
at a projected cost of $175 million to $190 million. However, on January 14,
1999, the Virginia Commission issued an Order directing Virginia Power to
solicit bids from independent suppliers to determine if a lower overall cost
option is available.
Fixed Assets Virginia Power's construction and nuclear fuel expenditures
during 1999, 2000 and 2001 are expected to total $802.5 million, $756.7
million and $762.7 million, respectively. Virginia Power expects 1999
construction and nuclear fuel expenditures to be met through cash flow from
operations, sales of securities and short-term borrowings.
Virginia Power also plans to install SO2 emission control equipment at two
coal-fired generating units. This will require a $115 million investment over
the next four years. Management believes the installation of scrubbers on
these two units will provide the most cost-effective means of complying with
the Clean Air Act.
In response to a rule adopted by the EPA in September 1998, Virginia Power
plans to install NOx reduction equipment at its coal-fired generating
stations at an estimated capital cost of $500 million over the next five
years. Whether these costs are actually incurred is
<PAGE>
dependent on the implementation plans adopted by the states in which Virginia
Power operates. See "Future Issues--Environmental Matters."
Long-Term Debt Virginia Power will require $321million to meet maturities of
long-term debt in 1999, which it expects to meet with cash flow from
operations and issuance of replacement debt securities. Other capital
requirements will be met through a combination of sales of securities and
short-term borrowings.
Dominion Energy
Liquidity and Capital Resources
Dominion Energy funds its capital requirements through cash from operations,
equity contributions by Dominion Resources, an intercompany credit agreement
with Dominion Resources and bank revolving credit agreements.
During 1998, cash flows from operating activities decreased by $14.8
million as compared to 1997 primarily due to a reduction in ownership of a
subsidiary that occurred during the third quarter of 1997.
Net cash provided by operating activities increased by $56.9 million in
1997, as compared to 1996, primarily due to:
o net income from power generation assets in Peru acquired in August 1996;
o generally higher natural gas prices; and
o 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 from (used in) financing activities was as follows:
1998 1997 1996
(millions)
Contribution from parent $ 75.0
Issuance of long-term debt $ 455.4 $ 107.9 221.7
Repayment of debt (212.7) (8.9)
Common dividend payments (47.9) (48.3) (43.3)
Issuance (repayment) of
intercompany debt 1.2 21.9 19.7
Other 3.0 0.2 10.0
--- --- ----
Total $ 411.7 $(131.0) $274.2
During 1998, cash flows from financing activities were $411.7 million
primarily due to the issuance of long-term debt to fund the acquisitions of
the Kincaid Power Station and Dominion Energy Canada, Ltd. as well as to fund
the expansion of EGENOR.
Cash from (used in) investing activities was as follows:
1998 1997 1996
(millions)
Purchase of fixed assets $ (72.8) $ (11.7) $ (15.8)
Purchase of natural gas
properties (35.4) (52.6) (93.3)
Purchase of electric plant (95.7)
Sale of business 52.7 123.3
Acquisition of business (338.4) (28.0) (228.2)
Other (25.9) (21.2) (16.7)
----- ----- -----
Total $(515.5) $ 9.8 $(354.0)
37
<PAGE>
Management's Discussion And Analysis Of Cash Flows And Financial Condition,
continued
During 1998, the major uses of cash flows used in investing activities were:
o the acquisition of Kincaid and Dominion Energy Canada, Ltd.;
o expansion of various electric plant facilities;
o investments in natural gas and power generation assets; offset by,
o proceeds from the sale of Dominion Energy's interest in Texas Cogeneration
Company.
Capital Requirements
Dominion Energy and Peoples Energy Corporation plan to develop and operate a
jointly-owned electric generating peaking facility near Elwood, Illinois. The
facility will have the capacity to generate 600 megawatts of natural
gas-fired electric power. The plant is expected to begin operation in early
June 1999. The cost of the Elwood facility is estimated at $200 million.
Dominion Energy and Peoples Energy Corporation will share equally in the
facility's construction costs.
Dominion Energy's 1999 capital requirements for the Kincaid Power Station
are $57.2 million. Dominion Energy will contribute $46.6 million to the
project. The remaining capital requirements will be funded by cash flows from
operations and existing financing.
In response to a rule adopted by the EPA in September 1998, Dominion
Energy plans to install NOx reduction equipment at its Kincaid plant at an
estimated capital cost of approximately $100 million over the next 5 years.
The Power Purchase Agreement between Commonwealth Edison Company and Kincaid
provides that Kincaid will recover a portion of the capital expenditure
through monthly reimbursement over the term of the Power Purchase Agreement.
The Power Purchase Agreement also provides that Kincaid will be reimbursed
for operations, maintenance and fuel costs that may be incurred as a result
of NOx emission reduction regulations.
Dominion Capital
Liquidity and Capital Resources
Dominion Capital funds its capital requirements through cash from operations,
an intercompany credit agreement with Dominion Resources, equity
contributions from Dominion Resources, bank revolving credit agreements, term
loans and commercial paper programs.
On November 3, 1998, Dominion Capital entered into a senior unsecured
364-day $400 million revolving credit agreement. The credit agreement will be
used by Dominion Capital for general corporate purposes including providing
liquidity to support a commercial paper program planned for 1999.
Cash flows provided by operations for 1998 increased by $42.2 million as
compared to 1997 primarily due to higher net income from financial services,
liquidation of marketable equity securities, and establishment of loan loss
provisions partially offset by net mortgage loan activity.
Cash flows from operating activities increased by $188.2 million in 1997
as compared to 1996, primarily due to a decrease in the net cash outflow of
mortgage loan activity for Saxon Mortgage.
<PAGE>
Cash from (used in) financing activities was as follows:
1998 1997 1996
(millions)
Contribution from parent $ 118.1 $ 162.0 $ 85.0
Issuance of long-term debt 3,212.0 3,910.7 104.7
Repayment of long-term debt (2,992.3) (3,865.3) (52.4)
Common dividend payments (54.6) (43.1) (30.7)
Issuance of commercial paper,
net 491.5 32.7
Issuance (repayment) of
intercompany debt 114.5 29.0 79.6
Other 0.1 (0.4)
--------- -------- ---------
Total $ 889.3 $ 226.0 $185.8
During 1998, cash flows from financing activities were $889.3 million,
primarily due to the funding needs for loan originations during the period.
Cash from (used in) investing activities was as follows:
1998 1997 1996
(millions)
Investments in affiliates $ 1.9 $ (96.1) $(19.5)
Loan originations, net (802.2) (82.2)
Other (111.8) (65.2) (23.9)
--------- -------- ---------
Total $(912.1) $(243.5) $(43.4)
During 1998, cash flows used in investing activities increased chiefly
because of an increase in loan originations.
Capital Requirements
Dominion Capital's principal focus is on growing its financial services
companies. First Source Financial intends to increase its loan portfolio from
$1.5 billion to approximately $1.8 billion in 1999. Saxon Mortgage plans to
generate over $2.6 billion in loan originations primarily in the sub-prime
credit arena during 1999. Cambrian Capital, a merchant banking enterprise for
emerging independent oil and natural gas producers, plans to expand its loan
portfolio to approximately $164 million in 1999. To finance these expansion
plans in 1999, Dominion Capital plans to utilize approximately $100 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.
38
<PAGE>
Notes to Consolidated Financial Statements
Note A: Nature of Operations
Dominion Resources is a holding company headquartered in Richmond, Virginia.
Dominion Resources' principal business is Virginia Power, a regulated public
utility. Virginia Power is 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, power marketers and municipalities. The Virginia
service area comprises about 65% of Virginia's total land area, but accounts
for 80 percent of its population. Virginia Power engages in off-system
wholesale purchases and sales of electricity and purchases and sales of
natural gas beyond the geographic limits of Virginia Power's service
territory.
Dominion Resources' subsidiary Dominion Energy is engaged in independent
power production and the acquisition and sale of natural gas and oil
reserves. Some of the independent power and natural gas and oil businesses
are located in foreign countries. In Latin America, Dominion Energy is
engaged in power generation. In Canada, Dominion Energy is engaged in natural
gas exploration, production and storage. Dominion Energy's net investment in
foreign operations is approximately $401.9 million.
Dominion Capital is Dominion Resources' financial services subsidiary.
Dominion Capital's primary business is financial services which includes
commercial lending, merchant banking and residential mortgage lending.
Dominion Resources' United Kingdom electricity distribution and supply
company, East Midlands, was sold on July 27,1998. East Midlands provides
electricity to approximately 2.3 million homes and businesses in the East
Midlands region of the United Kingdom. For more information on the sale of
East Midlands, see Note C.
Effective December 31, 1998, Dominion Resources adopted SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information."
Dominion Resources' management has defined Dominion Resources' segments based
on product, geographic location and regulatory environment. Dominion
Resources' principal business segment is Virginia Power.
The other reportable business segments are Dominion Energy, Dominion
Capital, and Dominion U.K. A description of these segments' products and
services are provided above.
A Corporate category includes the corporate costs of Dominion Resources'
holding company plus intercompany eliminations.
Note B: Significant Accounting Policies
General 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.
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 services rendered, commodities delivered or contracts settled and include
amounts yet to be billed to customers. At Virginia Power, revenues from
trading activities include realized commodity contract revenues, net of
related cost of sales, amortization of option premiums and unrealized gains
and losses resulting from marking to market those commodity contracts not yet
settled. Dividend income on securities owned is recognized on the ex-dividend
date. Interest income is accrued on the unpaid principal balance.
Fuel, Net At Virginia Power, fuel, net includes the cost of fossil fuel,
nuclear fuel and purchased energy used to serve electric sales. It also
includes the cost of purchased energy associated with power marketing sales
subject to cost of service rate regulation.
Approximately 90% of Virginia Power's rate regulated fuel costs are
subject to deferral accounting. Deferral accounting provides that the
difference between reasonably incurred actual expenses and the level of
expenses included in current rates is deferred and matched against future
revenues. Fuel, net includes the effect of this deferral accounting and may
therefore show expenses that are marginally higher or lower than the actual
cost of fuel consumed during the period. Investments in Affiliates
Investments 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.
Dominion Resources also uses the equity method when accounting for its 80%
investment in Corby Power Ltd. (Corby) as the company believes that Corby's
governing agreements give substantive participating rights to the minority
shareholder. Corby owns and operates a 350-megawatt gas-fired power station
in England.
At December 31, 1998, Corby's assets and liabilities were as follows:
Current assets $50.3 million, Current liabilities $21.7 million, Non-current
assets $275.1 million, Non-current liabilities $254.0 million. Corby had
total revenues of $152.5 million and total expenses (including interest and
tax) of $139.6 million for the year.
Costs in excess of net assets acquired from equity investments are
amortized over periods not to exceed 40 years. 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, credit losses, 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.
39
<PAGE>
Notes to Consolidated Financial Statements, continued
Property, Plant and Equipment Property, plant and equipment at Virginia Power
in 1998 and 1997 and East Midlands in 1997 is recorded at original cost,
which includes labor, materials, services, 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
1998, 1997 and 1996, $9.7 million, $3.5 million and $6.3 million of interest
cost was capitalized, respectively.
Major classes of property, plant and equipment and their respective
balances are:
- --------------------------------------------------------------------------------
At December 31, 1998 1997
(millions)
Utility:
Production $ 7,714.2 $ 7,973.9
Transmission 1,421.4 1,415.7
Distribution 4,682.3 6,210.7
Other electric 940.4 1,199.3
Plant under construction 449.3 240.9
Nuclear fuel 816.0 854.3
----------------------------------
Total utility 16,023.6 17,894.8
----------------------------------
Nonutility:
Natural gas properties 710.7 521.8
Independent power properties 1,189.8 920.3
Other 181.9 228.2
----------------------------------
Total nonutility 2,082.4 1,670.3
----------------------------------
Total property, plant and equipment $18,106.0 $19,565.1
- --------------------------------------------------------------------------------
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% for
1998, 1997 and 1996.
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.
Surry North Anna
- --------------------------------------------------------------------------------
Unit 1 Unit 2 Unit 1 Unit 2
NRC license expiration year 2012 2013 2018 2020
(millions)
Current cost estimate
(1998) dollars $410.6 $413.1 $400.5 $388.0
External trusts balance
at December 31, 1998 194.1 189.1 165.5 156.4
1998 contribution to
external trusts* 10.6 10.8 7.6 7.2
- --------------------------------------------------------------------------------
*Excludes an additional $1.3 million deposited into the trusts prior to the
settlement of the Virginia rate case, which will be considered as a partial
prepayment for calendar year 1999 contributions.
When Virginia Power's nuclear units cease operations, it is obligated to
decontaminate or remove radioactive contaminants so that the property will
not require NRC oversight. This phase of a nuclear power plant's life cycle
is termed decommissioning. While the units are operating, amounts are
currently being collected from ratepayers that, when combined with investment
earnings, will be used to fund this future obligation. These dollars are
deposited into external trusts through which the funds are invested.
The amount being accrued for decommissioning is equal to the amount being
collected from ratepayers and is included in depreciation, depletion and
amortization expense. The decommissioning collections were $36.2 million per
year for the period 1996 through 1998. However, an additional $9.6 million
was expensed in 1997 based on an expected increase in the decommissioning
collections for 1997 as provided in Virginia Power's rate case then pending
before the Virginia Commission. Since the Virginia rate case settlement did
not include such an increase, the 1998 expense provision was decreased by
$9.6 million. Therefore, the expense levels were $26.6 million, $45.8 million
and $36.2 million in 1998, 1997 and 1996, respectively.
Net earnings of the trusts' investments are included in Other income. In
1998, 1997 and 1996, net earnings were $17.5 million, $20.5 million and $16
million, respectively. The accretion of the decommissioning obligation is
equal to the trusts' net earnings and is also recorded in Other income.
The accumulated provision for decommissioning, which is included in
accumulated depreciation, depletion and amortization in the company's
Consolidated Balance Sheets, includes the accrued expense and accretion
described above and any unrealized gains and losses on the trusts'
investments. At December 31, 1998, the net unrealized gains were $230.5
million, which is an increase of $81million over the December 31, 1997 amount
of $149.5 million. The accumulated provision for decommissioning at December
31, 1998 was $703.9 million. It was $578.7 million at December 31, 1997.
The total estimated cost to decommission Virginia Power's four nuclear
units is $1.6 billion based upon a site-specific study that was completed in
1998. The cost estimate assumes that the method of completing decommissioning
activities is prompt dismantlement. This method assumes that dismantlement
and other decommissioning activities will begin shortly after cessation of
operations, which under current operating licenses will begin in 2012 as
detailed in the table above.
FASB is reviewing the accounting for nuclear plant decommissioning. In
1996, FASB 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 unit. If the
industry's accounting were changed to reflect FASB's tentative proposal, the
annual provisions for nuclear decommissioning would also increase. During its
deliberations, FASB expanded the scope of the project to include similar
unavoidable obligations to perform closure and post-closure activities for
other long-lived assets, including for non-nuclear power plants. Therefore,
any forthcoming standard may also change industry plant depreciation
practices. Any impact related to other company assets cannot be determined at
this time.
Independent power properties are depreciated using the straight-line
method based on estimated useful lives ranging from 30 to 40 years. Natural
gas properties are depleted using the units-of-production method.
40
<PAGE>
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.
Regulatory Assets Virginia Power's financial statements reflect assets and
costs in accordance with SFAS No. 71. SFAS No. 71 provides that certain
expenses normally reflected in income are deferred on the balance sheet as
regulatory assets. Regulatory assets represent probable future revenue
associated with certain costs that will be recovered from customers through
the ratemaking process. See Notes E and T for information on Virginia Power's
regulatory assets and the potential impact of legislation on continued
application of SFAS No. 71.
Foreign Currency Translation Dominion Resources translates foreign currency
financial statements by adjusting balance sheet accounts using the exchange
rate at the balance sheet date and income statement accounts using the
average exchange rate for the year. Translation gains and losses are recorded
in shareholder's equity as a component of accumulated other comprehensive
income. Gains and losses resulting from the settlement of transactions in a
currency other than the functional currency are reflected in income.
Goodwill Goodwill is the excess of the cost of net assets acquired in
business combinations over their fair value. It is amortized on a
straight-line basis over periods ranging from 20 to 40 years. The company
evaluates goodwill for impairment at least annually.
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 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
unrealized gains and losses reported in shareholders' equity, as a component
of accumulated other comprehensive income, 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 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.
Loans Receivable, Net Loans receivable are stated at their outstanding
principal balance net of the allowance for credit losses and any deferred
fees or costs. Origination fees net of certain direct origination costs are
deferred and recognized as an adjustment of the yield of the related loans
receivable.
The allowance for credit losses is established through provisions for
credit losses charged against income. Loans deemed to be uncollectible are
charged against the allowance for credit losses, and subsequent recoveries,
if any, are credited to the allowance. At December 31, 1998 and 1997, the
allowances for credit losses were $46.9 million and $17.5 million,
respectively.
Mortgage Investments In accordance with SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," mortgage investments were reclassified as available for sale as
defined by SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." Prior to 1998, such investments were classified as
trading securities. In 1998, mortgage investments were reclassified as
available for sale securities as allowed by SFAS No. 134. Changes in the fair
value of the mortgage investments are reported in accumulated other
comprehensive income.
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 and Futures-Other than Trading Dominion Resources utilizes
futures and forward contracts and derivative instruments, including swaps,
caps and collars, to manage exposure to fluctuations in interest rates,
foreign currency exchange rates, credit risk, lease payments and natural gas
and electricity prices.
These futures, forwards and derivative instruments are deemed effective
hedges when the item being hedged and the underlying financial or commodity
instrument show strong historical correlation. Dominion Resources uses
deferral accounting to account for futures, forwards and derivative
instruments which are designated as hedges. Under this method, gains and
losses (including the payment of any premium) related to effective hedges of
existing assets and liabilities
41
<PAGE>
Notes to Consolidated Financial Statements, continued
are recorded on the balance sheet and recognized in earnings in conjunction
with earnings of the designated asset or liability. Gains and losses related
to effective hedges of firm commitments and anticipated transactions are
included in the measurement of the subsequent transaction. Cash flows from
derivatives designed as hedges are reported in Net Cash Flows from Operating
Activities.
Derivatives and Futures-Trading The fair value method, which is used for
those derivative transactions which do not qualify for settlement or deferral
accounting, requires that derivatives are carried on the balance sheet at
fair value with changes in that value recognized in earnings or stockholder's
equity. As part of Virginia Power's strategy to market energy from its
generation capacity and to manage the risks related thereto, it enters into
contracts for the purchase and sale of energy commodities. Virginia Power
uses the fair value method for its trading activities.
Options, exchange-for-physical contracts, basis swaps and futures
contracts are marked to market with resulting gains and losses reported in
earnings. Fixed price forward contracts, initiated for trading purposes, are
also marked to market with resulting gains and losses reported in earnings.
For exchange-for-physical contracts, basis swaps, fixed price forward
contracts, and options which require physical delivery of the underlying
commodity, market value reflects management's best estimates considering
over-the-counter quotations, time value and volatility factors of the
underlying commitments. Exchange-traded futures and options are marked to
market based on closing exchange prices. No commodity contracts were
designated as hedges.
Commodity contracts representing unrealized gain positions are reported as
Commodity contract assets; commodity contracts representing unrealized losses
are reported as Commodity contract liabilities. In addition, purchased
options and options sold are reported as Commodity contract assets and
Commodity contract liabilities, respectively, at estimated market value until
exercise or expiration. Realized commodity contract revenues, net of related
cost of sales, settlement of futures contracts, amortization of option
premiums and unrealized gains and losses resulting from marking positions to
market are included in Operating revenues and income--Virginia Power. Cash
flows from trading activities are reported in Net Cash Flow from Operating
Activities.
Other Derivatives Dominion Resources uses total return swaps to accumulate
securities for future sale into a collateralized loan obligation. Gains and
losses from the settlements and sale of total return swaps are recorded as
Operating revenues and income--Nonutility. Total return swaps are marked to
market with the corresponding unrealized gains and losses recorded in
Operating revenues and income--Nonutility. Cash flows from total return swaps
are reported in Net cash flows from operating activities.
Cash Current banking arrangements generally do not require checks to be
funded until actually presented for payment. At December 31, 1998 and 1997,
the company's accounts payable included the net effect of checks outstanding
but not yet presented for payment of $58 million and $62.3 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:
- --------------------------------------------------------------------------------
1998 1997 1996
(millions)
Cash paid during the year for:
Interest (reduced for net costs
of borrowed funds capitalized) $474.0 $439.6 $373.0
Federal income taxes 182.9 190.0 169.8
Non-cash transactions from
investing and financing
activities:
Note issued in acquisition of
business 18.4 47.5
Exchange of securities 11.9 51.9 12.1
Equity contribution for
Wolverine acquisition 21.4
Reclassification Certain amounts in the 1997 and 1996 Consolidated Financial
Statements have been reclassified to conform to the 1998 presentation. In
addition, in the fourth quarter of 1998, Virginia Power changed the way it
reports energy commodity contracts. Prior to the fourth quarter, the gross
amount of revenue and expense generated from these contracts were reported in
Operating revenues and income--Virginia Power and Fuel, net, respectively. In
the fourth quarter, the revenue and expense are combined and reported net in
Operating revenues and income--Virginia Power.
Note C: Gain on Sale of DR Investments
On July 27, 1998, Dominion Resources sold East Midlands to PowerGen, an
electricity generator and supplier in the United Kingdom. East Midlands is
principally an electricity supply and distribution company serving 2.3
million homes and businesses in the East Midlands region of the United
Kingdom.
PowerGen acquired 100% of DR Investments in a transaction valued at $3.2
billion. DR Investments is the holding company for DR Investments (UK) PLC
and East Midlands. Dominion Resources recorded an after-tax gain of $200.7
million or $1.03 cents per share.
Dominion Resources continues to retain an 80% ownership interest in the
Corby Power Station located in Northamptonshire.
Note D: Taxes
Income before provision for income taxes, classified by source of income,
before minority interests was as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
(millions)
U.S. $397.4 $712.7 $683.5
Non-U.S. 471.5 (33.9) 17.5
- --------------------------------------------------------------------------------
Total $868.9 $678.8 $701.0
- --------------------------------------------------------------------------------
42
<PAGE>
The provision for income taxes, classified by the timing and location of
payment, was as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
(millions)
Current
U.S. $153.6 $221.9 $153.7
State 25.0 9.1 3.0
Non-U.S. 100.8 24.7 4.3
---------------------------------------------
Total Current 279.4 255.7 161.0
---------------------------------------------
Deferred
U.S. 24.4 22.1 71.9
State (3.4) 0.1 3.3
Non-U.S. 22.5 (28.0)
---------------------------------------------
Total Deferred 43.5 (5.8) 75.2
---------------------------------------------
Amortization of deferred
investment tax credits--net (16.9) (16.9) (16.9)
---------------------------------------------
Total Provision $306.0 $233.0 $219.3
- --------------------------------------------------------------------------------
The components of deferred income tax expense are as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
(millions)
Liberalized depreciation $ 28.2 $ 4.1 $ 53.8
Indirect construction costs 5.3 4.9 3.4
Other plant related items 0.4 5.1 12.6
Deferred fuel 12.0 (3.3) 19.1
Separation costs 4.9 6.5 (2.6)
Mortgage-backed securities
basis differences 20.3 24.6
Deferred capacity (16.6) 14.4 3.2
Contingent claims 14.2 (25.9) (0.1)
Tax rate change (8.3) (16.6)
Deferred state taxes (3.4) 0.1 3.3
Reacquired debt (18.6) (2.1) (2.7)
Partnership basis differences 4.7 (2.2) 8.8
Other, net 0.4 (15.4) (23.6)
---------------------------------------------
Total $ 43.5 $ (5.8) $ 75.2
- --------------------------------------------------------------------------------
The statutory U.S. Federal income tax rate reconciles to the effective income
tax rates as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
U.S. statutory rate 35% 35% 35%
Plant differences 3.0 0.9 0.8
Preferred dividends of
Virginia Power 1.4 1.5 1.8
Amortization of investment
tax credits (1.9) (2.0) (2.4)
Nonconventional fuel credit (2.8) (3.0) (3.8)
UK windfall profits tax 12.1
Other--benefits and taxes related
to foreign operations (0.1) 3.6 0.2
State taxes net of federal benefit 1.5 0.7 0.6
Other, net (0.9) (2.2) (0.9)
---------------------------------------------
Effective tax rate 35.2% 46.6% 31.3%
- --------------------------------------------------------------------------------
The effective income tax rate includes state and foreign income taxes. The
effective income tax rate was higher in 1997 due to the one-time windfall
profits tax at East Midlands.
United States Federal income taxes have not been provided on substantially
all the unremitted earnings of company's subsidiaries in Argentina, Bolivia,
and Peru, since it is management's practice and intent to reinvest such
earnings in the foreign country. The total amount of the net unremitted
foreign earnings was approximately $95 million at December 31, 1998. It is
not practicable to determine the amount of U.S. income tax which would be
payable if such unremitted earnings were repatriated since the tax liability
depends on circumstances existing when a remittance occurs and it may be
offset, at least in part, by a U.S. foreign tax credit. U.S. income taxes
have been provided on the unremitted earnings of the company's subsidiaries
in the United Kingdom, Canada and Belize.
The 1998 budget of the Labour government in the United Kingdom reduced the
corporate income tax rate to 30% effective April 1, 1999. Income tax expense
from continuing operations for 1998 has been reduced by $8.3 million to
reflect the decrease in deferred tax liabilities resulting from the 1%
decrease in the corporate tax rate. The 1997 budget of the Labour government
in the United Kingdom reduced the corporate income tax rate to 31% effective
April 1, 1997. Income tax expense from continuing operations in 1997 has been
reduced by $16.6 million to reflect the decrease in deferred tax liabilities
resulting from the 2% decrease in the corporate tax rate.
Dominion Resources' net noncurrent deferred tax liability is attributable
to:
- --------------------------------------------------------------------------------
1998 1997
(millions)
Assets:
Deferred investment tax credits $ 78.3 $ 84.4
Other 192.3
-------------------------------
Total deferred income tax asset 78.3 276.7
-------------------------------
Liabilities:
Depreciation method and plant
basis differences 1,497.9 1,924.2
Income taxes recoverable through
future rates 155.1 169.5
Partnership basis differences 167.8 126.4
Other 50.0 75.0
-------------------------------
Total deferred income tax liability 1,870.8 2,295.1
-------------------------------
Net deferred income tax liability $1,792.5 $2,018.4
- --------------------------------------------------------------------------------
Note E: Regulatory Assets
Virginia Power's regulatory assets included the following:
- --------------------------------------------------------------------------------
At December 31, 1998 1997
(millions)
Income taxes recoverable through future rates $438.8 $478.9
Cost of decommissioning DOE uranium
enrichment facilities 61.8 67.6
Deferred losses on reacquired debt, net 31.2 85.4
Nuclear design basis documentation cost 20.9 45.9
North Anna Unit 3 project termination costs 9.8 42.3
Other 57.5 102.4
Reserve for impairment of regulatory assets (65.1)
-------------------------------
Total $620.0 $757.4
- --------------------------------------------------------------------------------
Income taxes recoverable through future rates represent principally the tax
effect of depreciation differences not normalized in earlier years for rate
making purposes. These amounts are amortized as the related temporary
differences reverse. Such amounts are net of related regulatory liabilities
and $109 million associated with deferred income taxes which were established
at rates in excess of the current federal rate and are subject to Internal
Revenue Code normalization requirements.
43
<PAGE>
Notes to Consolidated Financial Statements, continued
The costs of decommissioning the Department of Energy's (DOE) uranium
enrichment facilities represents 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 currently being recovered in fuel rates.
The cost of preparing detailed design documentation of Virginia Power's
nuclear power stations required by the Nuclear Regulatory Commission has been
deferred and is currently being recovered through rates over the life of the
respective power stations.
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
currently being amortized from the date termination costs were first
includible in rates. The recovery of these costs will be completed in 1999.
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.
Virginia Power does not earn a return on $15.4 million of regulatory assets,
effectively excluded from rate base, to be recovered over various recovery
periods up to 20 years, depending on the nature of the deferred costs.
For information about the settlement of Virginia Power's Virginia rate
case proceedings and its impact on regulatory assets, see Note R. Also, see
Note T for the potential impact on regulatory assets that may result from
legislation now being considered by the Virginia General Assembly.
Note F: Jointly Owned Plants
The following information relates to Virginia Power's proportionate share of
jointly owned plants at December 31, 1998.
- --------------------------------------------------------------------------------
Bath
County North
Pumped Anna Clover
Storage Power Power
Station Station Station
Ownership interest 60.0% 88.4% 50.0%
(millions)
Plant in service $1,073.1 $1,809.9 $535.6
Accumulated depreciation 249.4 852.1 39.6
Nuclear fuel 402.7
Accumulated amortization of
nuclear fuel 334.4
Construction work in progress 0.3 72.1 2.3
- --------------------------------------------------------------------------------
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 G: Short-Term Debt
Dominion Resources and its subsidiaries have credit agreements with various
expiration dates. These agreements provided for maximum borrowings of
$4,627.6 million and $5,402.6 million at December 31, 1998 and 1997,
respectively. At December 31, 1998 and 1997, $1,160 million and $1,907.3
million, respectively, was borrowed under such agreements and classified as
long-term debt.
Dominion Resources credit agreements supported $3.1 million and $403.4
million of Dominion Resources commercial paper at December 31, 1998 and 1997,
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 expires in
June 2001. The other is a $200 million credit facility that originated in
June 1996 and is renewed annually. The total amount of Virginia Power's
commercial paper outstanding was $221.7 million and $226.2 million at
December 31, 1998 and 1997, respectively.
A subsidiary of Dominion Capital also had $71.9 million and $85.5 million
of nonrecourse commercial paper outstanding at December 31, 1998 and 1997,
respectively. A total of $75 million and $385.5 million of the commercial
paper was classified as long-term debt at December 31, 1998 and 1997,
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)
1998
Commercial paper $221.7 5.38%
Term-notes 79.1 7.82%
------
Total $300.8
- --------------------------------------------------------------------------------
1997
Commercial paper $329.6 5.8%
Term-notes 45.5 7.3%
------
Total $375.1
- --------------------------------------------------------------------------------
Note H: 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)
1998
Equity $164.6 $11.3 $ 6.8 $169.1
Debt $332.5 $ 0.4 $ 2.0 $330.9
1997
Equity $185.3 $10.9 $ 5.4 $190.8
- --------------------------------------------------------------------------------
Debt securities held at December 31, 1998 do not have stated contractual
maturities because borrowers have the right to call or repay obli-gations
with or without call or prepayment penalties.
44
<PAGE>
For the years ended December 31, 1998 and 1997, the proceeds from the
sales of available-for-sale securities were $40.2 million and $122.2 million,
respectively. The gross realized gains and losses were $3.4 million and $1.0
million for 1998 and $12.8 million and $0.5 million for 1997, 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, 1998 and
1997 of $5 million, net of tax, and $8.4 million, net of tax, respectively.
The changes in net unrealized holding gain or loss on trading securities
increased earnings during the years ended December 31, 1998 and 1997 by $9
million and $0.6 million, respectively.
Note I: Fair Value of Financial Instruments
The fair value amounts of Dominion Resources' 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.
Cash and Cash Equivalents The carrying amount of these items is a reasonable
estimate of their fair value.
<TABLE>
<CAPTION>
Carrying Amount Estimated Fair Value
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1998 1997
(millions)
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 425.6 $ 321.6 $ 425.6 $ 321.6
Trading securities 0.7 240.7 0.7 240.7
Mortgage loans in warehouse 140.3 88.2 146.0 91.4
Available-for-sale securities 500.0 190.8 500.0 190.8
Loans and notes receivable 1,721.9 959.0 1,768.4 987.3
Nuclear decommissioning trust funds 705.1 569.1 705.1 569.1
Liabilities:
Short-term debt 300.8 375.1 300.8 375.1
Long-term debt 6,719.2 8,835.7 6,970.6 9,177.1
Preferred securities of subsidiary trusts 385.0 385.0 430.2 387.7
Preferred stock 180.0 180.0 186.2 186.6
Loan commitments 761.5 675.9
Derivatives:
Foreign currency risk (26.8)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
Loans and 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 Trusts 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, 1998 and 1997 was
immaterial.
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, 1998 and 1997 was immaterial.
45
<PAGE>
Notes to Consolidated Financial Statements, continued
Note J: Long-Term Debt
- --------------------------------------------------------------------------------
At December 31, 1998 1997
(millions)
Virginia Power First and
Refunding Mortgage Bonds(1):
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 $ 100.0 100.0
1993 Series C, 5.875%, due 2000 135.0 135.0
1993 Series E, 6.0%, due 2001 100.0 100.0
1992 Series E, 7.375%, due 2002 155.0 155.0
1993 Series F, 6.0%, due 2002 100.0 100.0
Various series, 6.625%-8.0%, due 2003-2007 865.0 865.0
Various series, 5.45%-8.75%, due 2021-2025 1,144.5 1,144.5
-----------------------
Total First and Refunding Mortgage Bonds 2,599.5 2,824.5
-----------------------
Other long-term debt:
Dominion Resources:
Commercial paper(2) 3.1 300.0
Virginia Power:
Term notes, fixed interest rate, 5.73%-10%,
due 1998-2008 562.6 551.1
1998 Series A, Senior Notes, 7.15%, due 2038 150.0
Tax exempt financings(3):
Money market municipals, due 2007-2027(4) 488.6 488.6
Convertible interest rate bonds, due 2022 10.0 10.0
Dominion UK:
Eurobonds and Senior notes, fixed rates,
7.10%-12%, due 2002-2016 1,465.8
Variable rate debt, due 1998-2007(5) 55.6 1,532.7
-----------------------
Total other long-term debt 1,269.9 4,348.2
-----------------------
Nonrecourse--nonutility:
Dominion Resources:
Bank loans, 9.25%, due 2008 18.6 19.7
Dominion Energy:
Revolving credit agreement, due 2001(6) 290.0 255.0
Term loan, fixed rate, 5.445%, due 1998 15.0
Bank loans, fixed rate, 9.70%-9.92%, due 2005 17.5 20.0
Bank loans, 4.5%-6.64%, due 1997-2024 45.2 45.2
Term loan, due 2002(7) 8.0
Senior secured bonds, fixed rate, 7.33%, due 2020 265.0
Bonds, 7.6875%-8.75%, due 2001-2003 60.0
Revolving credit agreement, 5.43%-5.46%, due 2002 141.6
Other
0.6
(continued)
- --------------------------------------------------------------------------------
At December 31, 1998 1997
(millions)
Dominion Capital:
Senior notes(8):
Fixed rate, 6.12%, due 2000 $ 50.0 $ 50.0
Fixed rate, 7.60%, due 2003 46.0 46.0
Term note, fixed rate, 12.1%, due 2006 44.8 44.6
Line of Credit, due 1998(9) 118.1 57.7
Note payable, fixed rate, 6.04%, due 2002 50.0
Note payable, due 2002(10) 350.0
Commercial paper(11) 71.9 85.5
Term loan, fixed rate, 6.5%, due 2001 19.0 38.0
Medium term notes, fixed rates, 4.93%-6.25%,
due 1997-1998 134.0
Term loan, fixed rates, 6.5%-11.25%, due
1997-2001 10.6 13.0
Term loan, due 2008(12) 100.0 99.2
Revolving credit agreement(13) 20.5 6.8
Revolving credit agreement(14) 1,180.4 675.3
--------------------------------
Total--nonutility debt 2,849.8 1,663.0
--------------------------------
Total debt 6,719.2 8,835.7
--------------------------------
Less amounts due within one year:
First and Refunding Mortgage Bonds 100.0 225.0
Term notes and Loans 221.0 433.4
Nonrecourse--nonutility 1,302.3 955.2
--------------------------------
Total amount due within one year 1,623.3 1,613.6
--------------------------------
Less unamortized discount,
net of premium 25.0 26.1
--------------------------------
Total long-term debt $5,070.9 $7,196.0
- --------------------------------------------------------------------------------
Notes:
(1) Substantially all of Virginia Power's property is subject to the lien of
the mortgage, securing its First and Refunding Mortgage Bonds.
(2) See Note G to the Consolidated Financial Statements.
(3) Certain pollution control equipment at Virginia Power's generating
facilities has been pledged or conveyed to secure these financings.
(4) Interest rates vary based on short-term tax-exempt market rates. For
1998 and 1997, the weighted average daily interest rates were 3.49% and
3.74%, respectively. Although these bonds are re-marketed within a one
year period, they are classified as long-term debt because Virginia
Power intends to maintain the debt, and it is supported by long-term
bank commitments.
(5) The weighted average interest rates were 7.64% and 6.68% during 1998 and
1997, respectively.
(6) The weighted average interest rates during 1998 and 1997 were 6.01% and
6.06%, respectively.
(7) The weighted average interest rate during 1997 was 3.94%.
(8) The Rincon Securities common stock owned by Dominion Capital is pledged
as collateral to secure the loan.
(9) The weighted average interest rates during 1998 and 1997 were 6.26% and
6.24%, respectively.
(10) The weighted average interest rate during 1998 was 5.96%.
(11) The weighted average interest rates during 1998 and 1997 were 5.21% and
5.57%, respectively.
(12) The weighted average interest rates were 7.67% and 7.67% during 1998 and
1997, respectively.
(13) The weighted average interest rates were 5.53% and 5.63% during 1998 and
1997, respectively.
(14) The weighted average interest rates were 6.19% and 6.19% during 1998 and
1997, respectively.
Maturities (including sinking fund obligations) through 2003 are as follows
(in millions): 1999-$1,623.3; 2000-$339.3; 2001-$493.8; 2002-$840.4; and
2003-$341.1.
46
<PAGE>
Note K: Common Stock
During 1998, Dominion Resources issued 6.8 million shares of common stock
valued at $267.8 million. On July 20, 1998, the Dominion Resources Board of
Directors authorized the repurchase of up to $650 million (approximately 8%)
of Dominion Resources common stock outstanding. Dominion Resources currently
plans to buy back between $100 and $200 million of common stock over the next
year, depending upon market conditions and other investment opportunities. As
of December 31, 1998, Dominion Resources had repurchased approximately 2.3
million shares valued at approximately $98 million. 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.
Note L: Comprehensive Income
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
(Expense) (Expense) (Expense)
Before-Tax or Net-of-Tax Before-Tax or Net-of-Tax Before-Tax or Net-of-Tax
Amount Benefit Amount Amount Benefit Amount Amount Benefit Amount
(millions)
<S> <C> <C> <C> <C>> <C> <C> <C> <C>
Foreign currency translation
adjustments $(11.2) $(11.2) $(1.5) $(1.5) $(9.2) $(9.2)
----------------------------------------------------------------------------------------------
Unrealized gains on securities:
Unrealized holding gains arising
during a period (0.3) $(2.5) (2.8) 7.5 $1.0 8.5 7.1 $(1.5) 5.6
Less: reclassification adjustment
for gains realized in net income 3.7 (0.9) 2.8
----------------------------------------------------------------------------------------------
Net realized gains (4.0) (1.6) (5.6) 7.5 1.0 8.5 7.1 (1.5) 5.6
----------------------------------------------------------------------------------------------
Other comprehensive income $(15.2) $(1.6) $(16.8) $ 6.0 $1.0 $ 7.0 $(2.1) $(1.5) $(3.6)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following schedule reflects the activity in the accumulated other
comprehensive income account for the years ended December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
Accumulated Accumulated Accumulated
Foreign Unrealized Other Foreign Unrealized Other Foreign Unrealized Other
Currency Gains on Comprehensive Currency Gains on Comprehensive Currency Gains on Comprehensive
Item Securities Income Items Securities Income Items Securities Income
(millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning balance $(10.7) $ 7.4 $ (3.3) $ (9.2) $(1.1) $(10.3) $(6.7) $ (6.7)
Current period change (11.2) (5.6) (16.8) (1.5) 8.5 7.0 $(9.2) 5.6 (3.6)
---------------------------------------------------------------------------------------------------------
Ending balance $(21.9) $ 1.8 $(20.1) $(10.7) $ 7.4 $ (3.3) $(9.2) $(1.1) $(10.3)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note M: Long-Term Incentive Plan
In 1997, Dominion Resources' Long-Term Incentive plan (LTIP) expired and
was replaced with the Dominion Resources Incentive Compensation Plan
(Incentive Plan). At December 31, 1998, remaining options outstanding under
the LTIP totaled 2,126 shares, all of which were exercisable. No further
awards will be made under the LTIP. The Incentive Plan provides for the
granting of stock options, restricted stock and performance shares to
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
million. The changes in restricted share incentives and option awards under
the combined plans were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Restricted Weighted Stock Weighted Shares
Shares Average Price Options Average Price Exercisable
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 44,930 $40.92 10,101 $29.33 10,101
- ------------------------------------------------------------------------------------------------------------------------
Awards granted--1996 79,784 $41.76
Exercised/distributed (29,433) $41.32 (475) $29.63
-------------------------------------------------------------------
Balance at December 31, 1996 95,281 $41.19 9,626 $29.32 9,626
- ------------------------------------------------------------------------------------------------------------------------
Awards granted--1997 53,884 $35.24
Exercised/distributed/forfeited (44,399) $39.42 (4,800) $29.25
-------------------------------------------------------------------
Balance at December 31, 1997 104,766 $38.88 4,826 $29.38 4,826
- ------------------------------------------------------------------------------------------------------------------------
Awards granted--1998 75,866 $39.78
Exercised/distributed/forfeited (83,162) $38.37 (2,700) $29.29
-------------------------------------------------------------------
Balance at December 31, 1998 97,470 $40.02 2,126 $29.49 2,126
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
Notes to Consolidated Financial Statements, continued
In 1995, FASB 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 years ended December 31, 1998 and 1997.
Note N: Obligated Mandatorily Redeemable Preferred Securities of Dominion
Resources and Virginia Power Subsidiary Trusts
In December 1997, Dominion Resources established Dominion Resources Capital
Trust I (DR Capital Trust). DR Capital Trust sold 250,000 shares of capital
securities for $250 million, representing preferred beneficial interests and
97% beneficial ownership in the assets held by DR Capital Trust.
Dominion Resources issued $257.7 million of 7.83% Junior Subordinated
Debentures (Debentures) in exchange for the $250 million realized from the
sale of the Capital Securities and $7.7 million of common securities of DR
Capital Trust. The common securities represent the remaining 3% beneficial
ownership interest in the assets held by DR Capital Trust. The Debentures
constitute 100% of DR Capital Trust's assets.
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 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.
Note O: 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 involuntary liquidation, dissolution or
winding-up of Virginia Power, each share is entitled to receive $100 per
share plus accrued dividends. Dividends are cumulative. Virginia Power
preferred stock subject to mandatory redemption at December 31, 1998 was as
follows:
- --------------------------------------------------------------------------------
Shares
Series Outstanding(1)
$5.58 400,000(2)
$6.35 1,400,000(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.
There were no redemptions of preferred stock during 1996 through 1998.
At December 31, 1998, 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(3) 500,000 100.00
MMP 6/87(3) 750,000 100.00
MMP 10/88(3) 750,000 100.00
MMP 6/89(3) 750,000 100.00
MMP 9/92 series A(3) 500,000 100.00
MMP 9/92 series B(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 1998, 1997, and 1996, including fees for broker/dealer
agreements, were 4.6%, 4.71%, and 4.48%, respectively.
Note P: Retirement Plan, Postretirement Benefits and Other Benefits
In 1998 and 1997, Dominion Resources' Retirement Plan covered virtually all
employees of Dominion Resources and its subsidiaries. The majority of the
employees of Dominion's U.K.-based subsidiary, East Midlands Electricity were
covered by a separate multi-employer plan administered on behalf of the U.K.
electricity industry. 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. In 1997, the Non U.S. plan
is the pension plan
48
<PAGE>
activity of East Midlands. East Midlands was sold in July 1998. Dominion
Resources and its subsidiaries, except for U.K.-based subsidiaries, provide
retiree health care and life insurance benefits through insurance companies
with annual premiums based on benefits paid during the year. Retiree health
benefits in the U.K. are generally provided by the state. From time to time
in the past, Dominion Resources and its sub sidiaries have changed benefits.
Some of these changes have reduced benefits. Under the terms of their benefit
plans, the companies reserve the right to change, modify or terminate the
plans.
The components of the provision for net periodic benefit costs were as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------------------------------ --------------------------------
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
Year ending December 31, U.S. Non U.S. U.S. Non U.S.
(millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service costs $ 32.2 $10.4 $27.5 $22.6 $26.7 $ 12.3 $12.7 $12.3
Interest costs 71.3 43.8 64.2 83.0 61.1 24.3 25.4 24.2
Actual return on plan assets (80.6) (49.4) (69.6) (94.9) (92.9) (16.2) (11.9) (9.4)
Amortization of transition obligation 12.1 12.1 12.1
Net amortization and deferral (1.2) (0.6) 30.6 (1.2)
--------------------------------------------------------------------------------
Net periodic benefit cost $ 21.7 $ 4.8 $21.5 $10.7 $25.5 $ 31.3 $38.3 $39.2
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
-------------------------- -------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets U.S. U.S. Non U.S.
<S> <C> <C> <C> <C>
Fair value of plan assets at beginning of year $ 966.4 $844.4 $1,161.6 $ 176.6 $133.0
Actual return on plan assets 149.3 136.1 195.6 24.0 25.3
Contributions 21.7 27.9 19.6 11.2 18.3
Benefits paid from plan assets (42.9) (42.0) (57.1)
-------------------------------------------------------------------------
Fair value of plan assets at end of year 1,094.5 966.4 1,319.7 211.8 176.6
-------------------------------------------------------------------------
Expected benefit obligation at beginning of year 945.3 852.2 364.9 327.7
Actuarial (gain)/loss during prior period (4.3) (29.9) (41.9) (1.5)
-------------------------------------------------------------------------
Actual benefit obligation at beginning of year 941.0 822.3 1,090.2 323.0 326.2
Service cost 32.2 27.5 20.6 12.3 12.7
Interest cost 71.3 64.2 82.3 24.3 25.4
Benefits paid (42.9) (42.0) (51.8) (15.8) (15.9)
Actuarial (gain)/loss during the year 124.9 73.3 9.5 33.1 16.5
-------------------------------------------------------------------------
Expected benefit obligation at end of year 1,126.5 945.3 1,150.8 376.9 364.9
-------------------------------------------------------------------------
Funded status (32.0) 21.1 168.9 (165.1) (188.3)
Unrecognized net actuarial (gain)/loss 66.1 15.8 (91.8) (16.9) (1.5)
Unamortized prior service cost 3.5 4.1 0.2 0.2
Unrecognized net transition (asset)/obligation (15.1) (18.5) 169.8 181.9
-------------------------------------------------------------------------
Prepaid (accrued) benefit costs $ 22.5 $ 22.5 $ 77.1 $ (12.0) $ (7.7)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Significant assumptions used in determining net periodic pension cost, the
projected benefit obligation, and postretirement benefit obligations were:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Pension Benefits Other Benefits
-------------------------------- -------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Non U.S. U.S. Non U.S
<S> <C> <C> <C> <C> <C> <C>
Discount rates 7.00% 6.75% 7.75% 6.75% 7.00% 7.75%
Expected return on plan assets 9.50% 7.00% 9.50% 7.00% 9.00% 9.00%
Rate of increase for compensation income 5.00% 4.75% 5.00% 4.75% 5.00% 5.00%
Medical cost trend rate 5% for first year 6% for first year
4.75% second year 5% second year
4.75% thereafter Scaling down to
4.75% beginning in
the year 2000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
Notes to Consolidated Financial Statements, continued
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
Other Postretirement Benefits
- --------------------------------------------------------------------------------
(millions) 1-Percentage 1-Percentage
Point Increase Point Decrease
Effect on total of service and interest
cost components for 1998 $ 5.3 $ (3.3)
Effect on postretirement benefit obligation
at 12/31/98 $42.0 $(33.8)
- --------------------------------------------------------------------------------
Virginia Power is presently recovering these costs in rates on an accrual
basis in all material respects, in all jurisdictions. However, see Note T for
a discussion of legislation that, if enacted, would provide the necessary
details about the restructuring of the electric utility industry in Virginia.
The funds collected for other postretirement benefits 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.
Note Q: Restructuring
Virginia Power announced a program in anticipation of industry restructuring
in March 1995. This program has resulted in outsourcing, decentralization,
reorganization and downsizing for portions of Virginia Power's operations.
Restructuring charges of $18.4 million and $64.9 million were recorded in
1997 and 1996, respectively. These charges included severance costs,
purchased power contract restructuring and negotiated settlement costs and
other costs. Virginia Power established a comprehensive involuntary severance
package for salaried employees who may no longer be employed as a result of
these initiatives. The package provides for severance to be paid over a
period of twenty months or less. Virginia Power is recognizing the cost
associated with employee terminations in accordance with EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" as management identifies the positions to be eliminated. The
recognition of severance costs resulted in charges to operations of $1.8
million, $12.5 million and $49.2 million in 1998, 1997 and 1996,
respectively. At December 31, 1998, management had identified 1,932 positions
to be eliminated, of which 1,810 employees had been terminated and severance
payments totaling $89 million had been paid. The 1998 severance costs were
charged to operations and maintenance expense.
Note R: Virginia Rates
On June 8, 1998, Virginia Power, the Staff of the Virginia Commission, the
office of the Virginia Attorney General, the Virginia Committee for Fair
Utility Rates and the Apartment and Office Building Association of
Metropolitan Washington joined in a proposed agreement to settle Virginia
Power's outstanding base rate proceedings. The Virginia Commission approved
the settlement by Order dated August 7, 1998.
The settlement defines a new regulatory framework for Virginia Power's
transition to electric competition. The major provisions of the settlement
are as follows:
o a two-phased base rate reduction: $100 million per annum beginning March
1, 1998 with one additional $50 million per annum reduction beginning
March 1, 1999;
o a base rate freeze through February 28, 2002 unless a change is necessary
to protect the legitimate interests of Virginia Power, its shareholders or
ratepayers;
o an immediate, one-time refund of $150 million for the period March 1, 1997
through February 28, 1998;
o a discontinuation of deferral accounting for purchased power capacity
expenses effective February 28, 1998;
o a write-off of a minimum of $220 million of regulatory assets in addition
to normal amortization thereof during the base rate freeze period; and
o an incentive mechanism until March 1, 2002 for earnings above the
following return on equity (ROE) benchmarks: 1998 -10.5%; after
1998--30-year Treasury bond rates plus 450 basis points. For rate
incentive mechanism purposes, all earnings up to the ROE benchmark would
benefit Virginia Power's shareholder. Any earnings above the benchmark
would be allocated one-third to Virginia Power's shareholder and
two-thirds to the $220 million write-off of regulatory assets; except that
all earnings above the ROE benchmark plus 270 basis points (initially
13.2%), would be allocated to the write-off of regulatory assets.
Due to the required write-off of a minimum of $220 million of regulatory
assets in addition to normal amortization thereof during the rate freeze
period, Virginia Power evaluated its regulatory assets for potential
impairment under SFAS No. 71. Based on the uncertainty of Virginia Power's
earnings potential during the rate freeze period, management could no longer
conclude that recovery of the $220 million is probable, i.e., that earnings
above its authorized rate of return would be available to offset the $220
million write-off of regulatory assets. Virginia Power had previously
identified reductions in operating costs of $38.4 million in 1997 and $26.7
million in 1996, which were used to establish a reserve for potential
impairment of regulatory assets. Accordingly, Virginia Power charged $158.6
million to second quarter 1998 earnings, which when combined with the reserve
for accelerated cost recovery accrued in 1996 and 1997, provides for the
impairment of regulatory assets resulting from the settlement.
Note S: Derivative Transactions
Dominion Resources uses derivative financial instruments for the purposes of
managing interest rate, natural gas price and foreign currency risks.
Interest Rate Risks Saxon Mortgage, enters into forward delivery contracts,
financial futures, options contracts and interest rate swap agreements 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 as
well as residual interest retained. 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, 1998 and 1997, Saxon
has outstanding liabilities related to its hedging positions with certain
counter parties and notional amounts of $1,298.1 million and $552.9 million,
respectively. The deferred hedging losses, net, at December 31, 1998, 1997
and 1996 were immaterial.
50
<PAGE>
Other Derivatives In 1998, First Dominion entered into total return swap
agreements with swap counter-parties. The notional amount of the swaps is
based on the purchase price of the securities which are acquired by the swap
counter-parties. At December 31, 1998, the notional amount is $756 million.
The gains or losses from the sale, settlement or mark to market of the total
return swaps are recorded in Other revenues and income--Nonutility in the
income statement. The net amount of the adjustment to earnings due to the
swap transactions was $7.9 million in 1998. Total return swap transactions
require additional funding of or return of cash collateral resulting from
decreases or increases in the fair market value of the swap position. Total
return swap cash collateral is included in cash and cash equivalents on the
balance sheet. Such cash collateral was $71.4 million at December 31, 1998.
Note T: 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, some of which
involve substantial amounts of money. Except as described below under
"Virginia Power--Utility Rate Regulation," management believes that the final
disposition of these proceedings will not have an adverse material effect on
operations or the financial position, liquidity or results from operations of
the company.
Virginia Power
Utility Rate Regulation The current session of the General Assembly of
Virginia is scheduled to end in late February 1999. The legislators are
considering proposed legislation that would establish a detailed plan to
restructure the electric utility industry in Virginia. The Senate approved
restructuring legislation in Senate Bill No. 1269 on February 9, 1999 (the
Senate Bill). If enacted, it would provide the necessary details to implement
legislation passed in 1998 which established a timeline for the transition to
retail competition in Virginia. Virginia Power is actively supporting the
Senate Bill. Whether all of the provisions of the Senate Bill will ultimately
be included in enacted legislation is uncertain. Virginia Power currently
believes passage of Virginia restructuring legislation is likely in 1999 but
cannot predict what provisions would be included, if restructuring
legislation is ultimately enacted. Under the Senate Bill, Virginia Power's
base rates would remain unchanged until July 2007.
If the Senate Bill is enacted, the generation portion of Virginia Power's
Virginia jurisdictional operations would no longer be subject to cost-based
regulation beginning in 2002, although recovery of generation-related costs
would continue to be provided through the capped rates until July 2007. When
enacted legislation provides sufficient details about the transition to
deregulation of generation, Virginia Power would discontinue the application
of SFAS No. 71 for the generation portion of its Virginia jurisdictional
operations and determine the amount of regulatory assets to be written off.
In order to measure the amount of regulatory assets to be written off,
Virginia Power must evaluate to what extent recovery of regulatory assets
would be provided through cost-based rates. Virginia Power would not be
required to write off regulatory assets for which recovery would be provided
by either cost-based rates or a separate, stranded cost recovery mechanism.
Emerging Issues Task Force Issue No. 97-4, "Deregulation of the Pricing of
Electricity -- Issues Related to the Application of FASB Statements No. 71,
'Accounting for the Effects of Certain Types of Regulation,' and No. 101,
'Regulated Enterprises -- Accounting for the Discontinuance of Application of
FASB Statement No. 71'" (EITF 97-4), provides guidance about writing off
regulatory assets when SFAS No. 71 is discontinued for only a portion of a
utility's operations. However, until the final provisions of the Virginia
legislation are known, Virginia Power believes the measurement of regulatory
assets to be written off under SFAS 71 and EITF 97-4 is uncertain. If a
write-off of regulatory assets is required, such write-off could materially
affect Virginia Power's financial position and results of operations. See
Note E.
Virginia Power believes the stable rates that would be provided through
July 2007 by the Senate Bill, coupled with the opportunity to pursue further
reductions in Virginia Power's operating costs, would present a reasonable
opportunity to recover a substantial portion of Virginia Power's potentially
stranded costs. However, as discussed above, if the application of SFAS No.
71 is discontinued for any part of utility operations, Virginia Power would
also perform an impairment evaluation with respect to property, plant and
equipment as well as long-term power purchase commitments. See Note B and
"Purchased Power Contracts" below. The impairment assessment may be required
on a disaggregated basis rather than as an aggregate portfolio. Thus, the
recognition of impairments, if any, could potentially not be mitigated by
other assets or contracts with estimated values in excess of respective
carrying amounts or contract payments. If Virginia Power's evaluation
concludes that an impairment exists, an additional loss would be charged to
earnings. Because the impairment evaluation has not been completed, Virginia
Power cannot estimate the amount of loss, if any, that would be recognized.
However, such amount could materially affect Virginia Power's financial
position and 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 $802.5 million for 1999. Virginia Power presently
estimates that all of its 1999 construction expenditures, including nuclear
fuel, will be met through cash flow from operations and through a combination
of sales of securities and short-term borrowing.
Purchased Power Contracts 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, 1998, Virginia
Power has 55 nonutility purchase contracts with a combined dependable summer
capacity of 3,285 megawatts. The following table shows the minimum
commitments as of December 31, 1998 for power purchases from utility and
nonutility suppliers.
Commitments
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(millions) Capacity Other
1999 $ 836.7 $133.1
2000 760.1 47.9
2001 757.5 37.2
2002 757.7 32.8
2003 717.2 34.3
After 2003 8,573.6 301.0
----------------------------------
Total $12,402.8 $586.3
Present value of the total $ 5,389.7 $269.2
- --------------------------------------------------------------------------------
In addition to the commitments listed above, under some contracts, Virginia
Power may purchase, at its option, additional power as needed. Purchased
power expenditures, subject to cost of service rate regulation (including
economy, emergency, limited-term, short-term, and long-term purchases), for
the years 1998, 1997, and 1996 were $1,137 million, $1,381 million and $1,183
million, respectively.
51
<PAGE>
Notes to Consolidated Financial Statements, continued
Fuel Purchase Commitments Virginia Power's estimated fuel purchase
commitments for the next five years for system generation are as follows
(millions): 1999-$328; 2000-$248; 2001-$205; 2002-$115; and 2003-$118.
Sales of Power Virginia Power enters into agreements with other utilities and
with other parties to purchase and sell capacity and energy. These agreements
may cover current and future periods ("forward positions"). The volume of
these transactions varies from day to day based on the market conditions, our
current and anticipated load, and other factors. The combined amounts of
sales and purchases range from 3,000 megawatts to 15,000 megawatts at various
times during a given year. These operations are closely monitored from a risk
management perspective.
Environmental Matters Environmental costs have been historically recovered
through the rate making process. However, see "Utility Rate Regulation" above
for a discussion of legislation that, if enacted, would restructure the
electric utility industry in Virginia. If material costs are incurred and not
recovered through rates, Virginia Power's results of operations and financial
position 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 $61.8 million to $69.5 million. Virginia Power's
proportionate share of the costs is expected to be in the range of $1.6
million to $2.2 million, based upon allocation formulas and the volume of
waste shipped to the sites. As of December 31, 1998, 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 that the PRPs will fully pay the
costs apportioned to them.
Virginia Power generally seeks to recover its costs associated with
environmental remediation from third-party insurers. At December 31, 1998
pending claims were not recognized as an asset or offset against such
obligations.
Nuclear Insurance The Price-Anderson Act limits the public liability
of an owner of a nuclear power plant to $9.7 billion for a single
nuclear incident. The Price-Anderson Act Amendment 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 $90.7 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.
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 Electric Insurance Limited (NEIL), a mutual
insurance company, and is subject to retrospective premium assessments in any
policy year in which losses exceed the funds available to the insurance
company. The maximum assessment for the current policy period is $28.8
million. Based on the severity of the incident, the boards of directors of
Virginia Power's nuclear insurers have the discretion to lower or eliminate
the maximum retrospective premium assessment. 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.
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
$6.8 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
On October 30, 1998, DR Group Holdings entered into a revolving credit
agreement with Bayerische Landesbank Girozentrale. The total commitment and
outstanding balance of the agreement is 33.5 million pounds sterling ($56.1
million). The term of the agreement is five years. This agreement replaces
the short-term and five-year credit agreements with Bayerische Landesbank
Girozentrale and National Westminister Bank which also totaled 33.5 million
pounds sterling. Dominion Resources is guarantor to DR Group Holdings for
this revolving credit agreement.
Dominion Energy
Subsidiaries of Dominion Energy have general partnership interests in certain
of its energy ventures. These subsidiaries may be required to fund future
operations of these investments, if operating cash flow is insufficient.
Under an agreement related to the acquisition of the Kincaid Power
Station, Dominion Energy's wholly-owned subsidiary, Dominion Energy
Construction Company (DECCO), must make certain improvements to the facility.
Dominion Energy has provided a guarantee of DECCO's financial obligations
under this agreement. Also, until the improvements are completed, Dominion
Energy must fund up to approximately $130 million, less cash generated, in
additional equity that may be required by Kincaid Generation LLC (KGL), the
owner of the Kincaid Power Station. Dominion Resources has guaranteed
Dominion Energy's obligation to make such equity infusions to KGL.
Dominion Capital
At December 31, 1998, Dominion Capital had commitments to fund loans of
approximately $761.5 million.
52
<PAGE>
Note U: Business Segments
Business segment financial information follows for each of the three years in
the period ended December 31, 1998. Corporate includes intersegment
eliminations.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Virginia Dominion Dominion Dominion Corporate Total
Power Capital Energy UK Operations Consolidated
(millions, except total assets)
<S> <C> <C> <C> <C> <C> <C>
1998
Revenues $4,284.6 $409.1 $383.0 $1,009.5 $6,086.2
Interest income 14.1 $ 14.7 28.8
Interest expense 305.7 121.1 46.8 102.4 6.7 582.7
Operating income 685.8 210.5 89.6 141.6 (36.3) 1,091.2
Depreciation 536.4 25.2 90.8 75.3 6.5 734.2
Unusual items 332.3 332.3
Equity: income 21.1 18.0 2.4 41.5
investment 203.3 140.3 38.5 382.1
Income tax expense (benefit) 157.3 30.6 (12.7) 133.1 (2.3) 306.0
Net income 194.1 58.7 57.1 227.2 (1.5) 535.6
Capital expenditures 531.7 6.2 203.9 92.4 0.6 834.8
Total assets (billions) 12.0 3.1 2.2 0.2 17.5
1997
Revenues 4,663.9 295.7 332.8 1,970.1 7,262.5
Interest income 9.9 8.5 0.8 19.2
Interest expense 304.2 91.7 34.9 189.4 7.2 627.4
Operating income 1,014.7 157.1 71.4 246.6 (17.4) 1,472.4
Depreciation 584.3 17.5 85.0 131.3 1.2 819.3
Unusual items (156.6) (156.6)
Equity: income 16.1 14.2 30.3
investment 189.3 211.0 3.7 404.0
Income tax expense (benefit) 249.3 20.2 (50.6) 21.2 (7.1) 233.0
Net income 433.4 45.1 45.0 (109.7) (14.6) 399.2
Capital expenditures 481.8 7.8 64.3 234.2 17.7 805.8
Total assets (billions) 12.0 2.1 1.6 4.4 0.1 20.2
1996
Revenues 4,382.0 177.5 255.6 4,815.1
Interest income 7.4 0.7 8.1
Interest expense 308.4 44.5 29.9 4.2 387.0
Operating income 999.8 81.9 36.6 (18.7) 1,099.6
Depreciation 536.4 6.8 69.9 2.1 615.2
Unusual items
Equity: income 26.0 9.7 35.7
investment 242.8 214.7 457.5
Income tax expense (benefit) 240.2 8.9 (23.9) (5.9) 219.3
Net income 421.8 28.5 32.5 (10.7) 472.1
Capital expenditures 484.0 17.7 109.1 1.3 612.1
Total assets (billions) 11.8 1.1 1.6 0.4 14.9
</TABLE>
<TABLE>
<CAPTION>
Geographic Areas
- --------------------------------------------------------------------------------------------------
Revenues
-------------------------------------------------
(millions) International
-------------------------------------------------
United Latin Total
Year Domestic Kingdom America Other International Consolidated
<S> <C> <C> <C> <C> <C> <C>
1998 $4,918.2 $1,009.5 $132.5 $26.0 $1,168.0 $6,086.2
1997 5,129.8 1,970.1 162.6 2,132.7 7,262.5
1996 4,707.4 107.7 107.7 4,815.1
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Long-Lived Assets
----------------------------------------------
(billions) International
-----------------------------------------------
United Latin Total
Year Domestic Kingdom America Other International Consolidated
<S> <C> <C> <C> <C> <C> <C>
1998 $10.6 $0.1 $0.7 $0.2 $1.0 $11.6
1997 10.5 4.0 0.8 4.8 15.3
</TABLE>
53
<PAGE>
Notes to Consolidated Financial Statements, continued
Note V: Leases
Future minimum lease payments under operating leases that have initial or
remaining lease terms in excess of one year as of December 31, 1998 are
1999-$28.9 million, 2000-$30.2 million, 2001-$14.2 million, 2002-$11.7
million, 2003-$10.5 million and years after 2003-$25 million. Rent on leases,
which have been charged to operations expense, were $21.6 million, $20.3
million, and $18.1 million for 1998, 1997 and 1996, respectively.
Note W: Acquisitions
Dominion Energy
In February 1998, Dominion Energy completed its purchase of Kincaid Power
Station from Commonwealth Edison Company of Chicago. The purchase price was
$186 million and the transaction has been recorded using the purchase method
of accounting.
In April 1998, Dominion Energy purchased Archer Resources, Ltd., a natural
gas and oil exploration and production company. The purchase price of Archer
Resources, Ltd. was $119 million plus the assumption of debt amounting to $26
million. The transaction has been recorded using the purchase method of
accounting.
Note X: Subsequent Events
Dominion Resources
On February 22, 1999, Dominion Resources announced its agreement to merge
with Consolidated Natural Gas Company (CNG). The merged company will form the
nation's fourth largest electric and gas utility with operations focused
primarily in the East. Under the terms of the merger agreement, Dominion
Resources will acquire all of the shares of CNG in exchange for approximately
$6.3 billion in Dominion Resources common stock.
The transaction is conditioned, among other things, upon:
o approvals of shareholders of both companies;
o opinions of counsel on the tax-free nature of the transaction;
o reports of independent accountants that the transaction will qualify as a
pooling of interests for accounting purposes;
o approvals of various federal regulatory agencies; and
o completion of regulatory processes in the states where the combined company
will operate.
Closing of the transaction is expected to take place in approximately one
year.
Dominion Energy
In January 1999, Dominion Energy announced that it acquired
San Juan Partners L.L.C., a natural gas investment company. The acquisition
more than doubles Dominion Energy's existing production and reserves in the
Rocky Mountain region and increases its total base in North America to
approximately 715 billion cubic feet equivalent.
Dominion Capital
In February 1999, Dominion Capital established a $400 million commercial
paper program. Borrowings from the program will be used to fund operating
needs of Dominion Capital.
Note Y: 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
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1998 1997
(millions, except per share amounts)
<S> <C> <C>
Revenues and income
First Quarter $1,773.5 $1,850.0
Second Quarter 1,585.1 1,633.5
Third Quarter 1,549.4 2,040.6
Fourth Quarter 1,178.2 1,738.4
------------------------------
Year $6,086.2 $7,262.5
- --------------------------------------------------------------------------
Income (loss) before provision for
income taxes and minority interests
First Quarter $ 217.5 $ 253.5
Second Quarter (107.9) 124.1
Third Quarter 665.5 152.1
Fourth Quarter 93.8 149.1
------------------------------
Year $ 868.9 $ 678.8
- --------------------------------------------------------------------------
Net income (loss)
First Quarter $ 139.5 $ 169.9
Second Quarter (82.7) 79.1
Third Quarter 424.5 50.4
Fourth Quarter 54.3 99.8
------------------------------
Year $ 535.6 $ 399.2
- --------------------------------------------------------------------------
Earnings (loss) per share
First Quarter $ 0.72 $ 0.92
Second Quarter (0.42) 0.43
Third Quarter 2.17 0.27
Fourth Quarter 0.28 0.53
-----------------------------
Year $ 2.75 $ 2.15
- --------------------------------------------------------------------------
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 42 15/16 - 39 3/8 41 3/8 - 35 1/2
Second Quarter 42 1/16 - 37 13/16 36 3/4 - 33 1/4
Third Quarter 44 15/16 - 39 5/16 38 1/4 - 35 5/16
Fourth Quarter 48 15/16 - 44 3/8 42 7/8 - 34 7/8
---------------------------------------
Year 48 15/16 - 37 13/16 42 7/8 - 33 1/4
- ----------------------------------------------------------------------------
</TABLE>
54
<PAGE>
In the second quarter of 1998, Virginia Power had an after-tax charge to net
income of $201.0 million or $1.03 cents per share. The charge reflects the
settlement of the rate proceedings before the Virginia Commission. For more
information, see Note R. In the third quarter of 1998, Dominion Resources
recorded an after-tax gain of $200.7 million or $1.03 cents per share to
reflect the sale of East Midlands to PowerGen.
In the third quarter of 1997, East Midlands recorded a liability of
approximately $157 million to reflect the anticipated one-time windfall tax
levied by the U.K. government. The tax was levied on regional electric
companies in the United Kingdom and is based on the privatized utilities'
excess profits. East Midlands paid one-half of the tax levy in December 1997.
Certain accruals recorded in 1998 and 1997 were not ordinary, recurring
adjustments. These adjustments included (1) the impact resulting from the
1998 settlement of Virginia Power's Virginia rate proceeding and (2) 1997
restructuring costs.
Rate Refund Virginia Power recognized a $153.7 million provision for rate
refund and related interest expense of $10.7 million and other taxes of $3.9
million in the second quarter of 1998 as a result of the settlement of its rate
proceeding in Virginia. See Note R.
Impairment of Regulatory Assets Virginia Power charged $158.6 million to
second quarter 1998 earnings to provide for the impairment of regulatory assets
resulting from the settlement of its rate proceeding in Virginia. Virginia Power
accrued $2.8 million, $28.3 million and $7.3 million during the second, third
and fourth quarters of 1997, respectively, to provide for impairment of
regulatory assets. See Note R.
Restructuring Virginia Power expensed $6.3 million, $1.4 million and $10.7
million during the second, third and fourth quarters of 1997, respectively.
See Note Q.
Depreciation and AmortizationVirginia Power recorded adjustments of $27.6
million in the second quarter of 1998 decreasing the year-to-date provision for
depreciation and decommissioning expenses to reflect terms of the settlement of
its Virginia rate proceedings. See Note R.
Charges for the rate refund and the impairment of regulatory assets,
offset by the adjustments to depreciation and decommissioning expenses
reduced Balance Available for Common Stock by $201 million in the second
quarter of 1998. Charges to provide for impairment of regulatory assets and
for restructuring expenses reduced Balance Available for Common Stock by $5.9
million, $19.3 million, and $11.7 million in the second, third, and fourth
quarters of 1997, respectively.
55
<PAGE>
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 1998 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.
Thos. E. Capps James L. Trueheart
- ----------------------- ---------------------------
Thos. E. Capps James L. Trueheart
Chairman, President and Senior Vice President and
Chief Executive Officer Controller
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, 1998 and 1997 and the
related consolidated statements of income, of cash flows, shareholders'
equity and comprehensive income for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997 and the
results of their operations and their cash flows and shareholders' equity for
each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
Deloitte & Touche L.L.P.
- ----------------------------
Richmond, Virginia
February 8, 1999
(February 22, 1999 as to Note X)
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.
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statements File No.
333-35501 and 333-46043 of Dominion Resources, Inc. on Forms S-3 and
Registration Statements File No. 33-62705, File No. 333-02733, File No.
333-09167, File No. 333-25587, File No. 333-42553, File No. 333-18391, File No.
333-49725 and File No. 333-69305 of Dominion Resources, Inc. on Forms S-8 of
our report dated February 8, 1999 (February 22, 1999 as to Note X), appearing
in and incorporated by reference in the Annual Report on Form 10-K of
Dominion Resources, Inc. for the year ended December 31, 1998.
/s/ Deloitte & Touche LLP
- ----------------------------------
DELOITTE & TOUCHE LLP
Richmond, Virginia
March 1, 1999
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 9,082
<OTHER-PROPERTY-AND-INVEST> 5,185
<TOTAL-CURRENT-ASSETS> 2,285
<TOTAL-DEFERRED-CHARGES> 965
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 17,517
<COMMON> 3,933
<CAPITAL-SURPLUS-PAID-IN> (4)
<RETAINED-EARNINGS> 1,386
<TOTAL-COMMON-STOCKHOLDERS-EQ> 5,316
180
509
<LONG-TERM-DEBT-NET> 5,071
<SHORT-TERM-NOTES> 301
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,623
0
<CAPITAL-LEASE-OBLIGATIONS> 7
<LEASES-CURRENT> 9
<OTHER-ITEMS-CAPITAL-AND-LIAB> 4,501
<TOT-CAPITALIZATION-AND-LIAB> 17,517
<GROSS-OPERATING-REVENUE> 6,086
<INCOME-TAX-EXPENSE> 306
<OTHER-OPERATING-EXPENSES> 4,995
<TOTAL-OPERATING-EXPENSES> 4,995
<OPERATING-INCOME-LOSS> 1,091
<OTHER-INCOME-NET> 425
<INCOME-BEFORE-INTEREST-EXPEN> 1,517
<TOTAL-INTEREST-EXPENSE> 648
<NET-INCOME> 536
36
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 504
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 1,207
<EPS-PRIMARY> 2.75
<EPS-DILUTED> 2.75
</TABLE>
DOMINION RESOURCES AND CONSOLIDATED NATURAL GAS COMBINE TO FORM $25
BILLION ENERGY GIANT
SERVING 4 MILLION CUSTOMERS
IN MIDWEST, MID-ATLANTIC AND NORTHEAST
Creates Fully Integrated Electric And Gas Company
Positioned for Converging Energy Marketplace
RICHMOND, VA and PITTSBURGH - February 22, 1999 - Dominion Resources, Inc.
("DRI") [NYSE: D] and Consolidated Natural Gas Company ("CNG") [NYSE: CNG] today
announced they are merging to form the nation's fourth largest electric and
natural gas utility, serving nearly 4 million retail customers in five states.
Market capitalization of the combined entity will exceed $25 billion -
consisting of approximately $14.5 billion in equity, $9.5 billion in debt and
minority interests, and $1.1 billion in preferred stock.
Under the terms of the definitive merger agreement approved unanimously by each
company's board of directors, DRI will acquire all of the shares of CNG. Under
the agreement, each common share of CNG will be converted into 1.52 shares of
DRI. Based upon the closing price of DRI on Friday, February 19, 1999, this
represents a premium of 25.3 percent over the average closing stock price of CNG
shares during the 20 trading day period ended February 19, 1999. DRI will issue
approximately $6.3 billion in stock to CNG stockholders to complete the
transaction. CNG stockholders will own approximately 43 percent of the combined
company. It is expected to become accretive to earnings per share by the end of
the second year after completion of the transaction.
When the merger is completed, it will create the premier fully integrated
electric and gas company in the United States with approximately $8.8 billion in
revenues, $23.9 billion in assets, annual cash flow in excess of $2 billion, and
17,000 employees. The combined company will have an energy portfolio of more
than 20,000 megawatts of power generation, 2.4 trillion cubic feet equivalent in
natural gas and oil reserves producing nearly 300 billion cubic feet equivalent
annually, and will operate a major interstate gas pipeline system and the
largest natural gas storage system in North America. The combined company will
rank as the eleventh largest independent oil and gas producer in the United
States measured by reserves.
"This is an irresistible combination. It unites two of the most respected names
in electricity and natural gas and provides us the critical mass needed for
today's dynamic energy sector," said Thos. E. Capps, chairman, president and
chief executive officer of DRI. "Fundamentally, we are bringing together
high-quality assets with excellent, complementary operations that serve strong,
neighboring gas and electric markets."
"This strategic merger will enhance value across the energy production and
delivery system - from the wellhead all the way to the final destination, the
customer. The company will be able to offer a complete line of energy products
as the $300 billion gas and electric industries continue to converge. The energy
industry is changing. Utility deregulation, competition and fuel convergence are
rapidly sweeping across the nation. Our combined company will have the scale,
scope and skills to be successful in the competitive energy marketplace. We are
creating a formidable platform for growth in a region that is home to 40 percent
of the nation's demand for energy," Mr. Capps added.
"It's a natural fit for our shareholders, customers and employees," said George
A. Davidson, Jr., chairman and chief executive officer of CNG. "Shareholders
will benefit from the earnings growth created by a larger, strategically
positioned company with a track record of financial strength. Customers will
benefit from a strong, new competitor aggressively pursuing gas and electric
retail markets. And, our employees will share in opportunities created by one of
the nation's largest and best positioned energy companies.
"Additionally, the merger aligns our own successful leadership team with
seasoned managers who are proven in the competitive marketplace. It's also
important to note that DRI and CNG have similar corporate cultures, strategies
and management styles. And each has a long history of community and civic
involvement that will continue," Mr. Davidson said.
Mr. Capps said, "We welcome the capable and experienced employees of CNG to our
DRI family. We'll work together to deliver superior results for our customers
and our owners. Our employees' skill and dedication represent our greatest
strength."
CNG shareholders will receive the DRI dividend in effect at the time of the
close of the merger. DRI currently pays an annual dividend of $2.58 per share.
DRI anticipates achieving revenue enhancements and cost savings of approximately
$150 million to $200 million annually by 2002.
The combined entity expects to enhance revenues by:
* Aggressively marketing a complete portfolio of energy products and services
in rapidly deregulating markets in the Midwest, Mid-Atlantic, and
Northeast, comprising 40 percent of the nation's energy demand. The
combined company will have an asset network already serving a retail
footprint of 4 million customers in the region.
* Capitalizing on economies of scale and our unique set of assets up and down
the energy production and distribution value chain to become the lowest
cost provider of gas and electric products at both the wholesale and retail
levels.
* Combining our complementary asset base and existing skills required to
site, build, and operate efficient, gas-fired power generation facilities
in strategic locations in the Midwest, Mid-Atlantic and Northeast.
* Expanding exploration and production opportunities to diversify risks and
lower operating costs. The combined company will have a broad portfolio of
oil and gas reserves and production in the Gulf of Mexico, Appalachian
Basin, Rocky Mountains and Canada.
And, the companies expect to realize cost savings from the elimination of
duplicate corporate and administrative programs, greater efficiencies in
operations and business processes, and streamlined purchasing practices.
Customers will continue to enjoy the same safe, reliable service provided by the
same people who serve them today. Because this combination is based on growth,
the companies anticipate minimal workforce reductions as a result of the merger.
The company will use a combination of growth, reduced hiring and attrition to
minimize the need for employee separations. All union contracts will be honored.
Mr. Capps will be president and chief executive officer of the combined company,
and Mr. Davidson will serve as chairman until his previously announced
retirement in August 2000. The board of directors will have 17 members, ten of
whom will be designated by DRI and seven of whom will be designated by CNG. The
combined company will be named Dominion Resources and be headquartered in
Richmond, Virginia. The gas distribution, pipeline and storage operations will
continue to be headquartered in Pittsburgh. The combined company will also
maintain significant operation centers in the cities of New Orleans and Norfolk,
VA, as well as in Ohio and West Virginia.
The transaction is conditioned, among other things, upon the approvals of
shareholders of both companies, opinions of counsel on the tax-free nature of
the transaction, opinions of independent auditors that the transaction will be
treated as a pooling of interests for accounting purposes, approvals of various
federal regulatory agencies, and the completion of regulatory processes in the
states where the combined company will operate. The companies anticipate that
regulatory procedures can be completed in about 12 months.
Lehman Brothers Inc. acted as financial advisor to DRI. Merrill Lynch & Co.
acted as financial advisor to CNG. LeBoeuf, Lamb, Greene & MacRae, L.L.P. and
McGuire Woods Battle & Boothe, LLP are legal counsel to DRI and Cahill Gordon &
Reindel and Buchanan, Ingersoll P.C. are legal counsel to CNG.
Consolidated Natural Gas Company (CNG) is one of the nation's largest producers,
transporters, distributors and retail marketers of natural gas. The company's
natural gas transmission and distribution operations serve customers in Ohio,
Pennsylvania, Virginia, West Virginia, New York and other states in the
Northeast and Mid-Atlantic regions. CNG explores for and produces oil and
natural gas in the United States and Canada, and makes selective investments
abroad.
Dominion Resources is an $18 billion holding company active in regulated and
competitive electric power, natural gas and oil development and selected
financial services. It has electric power and natural gas operations throughout
the United States and in Canada, the United Kingdom, Bolivia, Peru, Argentina
and Belize.
This press release contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. The forward-looking
statements are subject to various risks and uncertainties. Discussion of factors
that could cause actual results to differ materially from management's
projections, forecasts, estimates and expectations may include factors that are
beyond the company's ability to control or estimate precisely, such as estimates
of future market conditions and the behavior of other market participants. Other
factors include, but are not limited to, weather conditions, economic conditions
in the company's service territory, fluctuations in energy-related commodity
prices, conversion activity, other marketing efforts and other uncertainties.
Other risk factors are detailed from time to time in the two companies' SEC
reports.
