ML18151A377

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Conveys Use of Financial Test Contained in App a to 10CFR30 to Support VEPCO Demonstration of Financial Assurance as Specified in 10CFR50.75
ML18151A377
Person / Time
Site: Surry, North Anna  Dominion icon.png
Issue date: 11/23/1998
From: Roach E
External (Affiliation Not Assigned)
To:
NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
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ML18151A378 List:
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NUDOCS 9812010119
Download: ML18151A377 (70)
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Text

Dominion Resources, Inc.

120 'ti-edegar Street Richmond, Virginia 23219 804.819.2 //6 PHONE 804.8]9.2233 FAX mache@domres.com E-MAIL

  • MAILING ADDRESS Post Office Box 26532 Richmond, Virginia 23261

~

nesources EDGAR M. ROACH, JR.

Executive Vice President and Chief Financial Officer November 23, 1998 U.S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, D.C. 20555 RE:

VIRGINIA ELECTRIC AND POWER COMPANY Surry Power Station Units 1 and 2 North Anna Power Station Units 1 and 2 Decommissioning Financial Assurance Certification Madam/Sir:

I am the chief financial officer of Dominion Resources, Inc. (DRI), located at 120 Tredegar Street, Richmond, Virginia 23219 and parent company of Virginia Electric and Power Company (Virginia Power). This letter conveys DRI's use of the financial test contained in appendix A to 10 CFR Part 30 to support Virginia Power's demonstration of financial assurance as specified in 10 CFR §50.75.

DRI guarantees, through the parent company guaranty submitted to demonstrate Virginia Power's compliance under 10 CFR §50.75 and dated as of November 23, 1998, the following amounts for the purpose of decommissioning of the nuclear facilities owned by Virginia Power:

Facility Name Surry Unit 1 Surry Unit 2 North Anna Unit 1 t North Anna Unit 2 t Location Surry, VA Surry, VA Louisa, VA Louisa, VA License No.

DPR-32 DPR-37 NPF-4 NPF-7 1998 Assurance Amount

$ 30,905,946 30,511,601 14,607,057 14,716,738

$ 90,741,342 t Note that the North Anna Nuclear Power Station is jointly owned by Virginia Electric and Power Company (88.4%) and Old Dominion Electric Cooperative (11.6%). However, Virginia Electric and Power Company is responsible for 89.6% of the decommissioning obligation. The amounts stated in the above table reflect only that portion of the decommissioning obligation attributable to Virginia Electric and Power Company and for which a parent company guaranty is being relied upon for financial assurance requirements.

DRI is required to file a Form lOK with the U.S. Securities and Exchange Commission, which is included herewith. The figures for line items Band C as shown below were derived from DRI's independently audited, year-end financial statements and footnotes for the 12-month period ended December 31, 1997.

c*. 2 :*.~: c: /:.:

A. DRI's current implied bond ratings are A-and Baal for Standard and Poor's and Moody's, respectively.

B. Computation of tangible net worth (millions of dollars):

Total Assets

$20,192.7

-OlO ll9

LESS: Intangible Assets Nuclear Plant Nuclear Decommissioning Trusts Total Liabilities Tangible Net Worth C. Total assets located in United States: $14.9 billion FINANCIAL TESTS

1. Is line Bat least $10 million?
2. Is line Bat least 6 times the guarantee amount of $91 million?
3. a. Are at least 90 percent of the firm's assets located in the U.S.?

or

b. Is line Cat least 6 times the guarantee amount of $91 million?

2,971.1 1,773.0 569.1 13,675.3

$ 1,204.2 YES 0

0 D

4. a. Are bond ratings BBB or above as issued by Standard and Poor's?

or

b. Are bond ratings Baa or above as issued by Moody's?

NO D

D 0

D D

D I hereby certify that the content of this letter is true and correct to the best of my knowledge.

Sincerely, tlgQJ I"'. ~ c---/

Edgar M. Roach, Jr.

Executive Vice President and Chief Financial Officer Enclosure 2

.t*,

)1

  • _;*j
  • "(Mark One)

(X)

(

)

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549.

  • Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 or TRANSITION REPORT PURSUANT TO SECTION 13 OR. 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ____ _

Commission file number 1-8489.

Dominion Resources, Inc..

(Exact name *of registrant as specified in its charter)

VIRGINIA*

54-1229715'

  • (State or other jurisdiction of incorporation or organization)

( IRS employer identification no.)

901 East Byrd Street Suite 1700.

Richmond, Virginia (Add;ess of principal executive offices)

  • 23219a6111 (Zip Code).

(804) 775-5700

. ***(Registrant's tel~phone number; including area code)

  • Securities registered pursuant. to Section 12(b} of the Act:

Title. of each class, * *

  • . Name ;of. each exchange on which registered Common Stock, no par value New York Stock Exchange Securities registered pursuant to.Section 12(g) of the Act:

None Indicate by check mark whether the registrant (i) *has filed ~11 reports required to be filed by Section: l '.?. or 15( d) of the Securi'ties Act of 1934 during the preceding 12 months (or for such shorter pe~iod that the registrant was required* to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes t/. No

  • Indicate by check mark if disclosure of delinquent filers pursuant to Item:,405 ofRegulation*s-K is not contained herein,

' arid 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 amendmentto this Form 10-K.

[. l

  • The aggregate market value of voting stock held by rionaffiliates of the registrant was $7,767,853,323 at February 27, 1998, based on the closing.price of the Common Stock on such date, as reported ori the composite tape by The Wall Street Journaf.

Indicate the number of shares outstanding of each of the registrant's classes of co~mon stock,. as of the latest practi-cable date.

Class Common-*Stock, no par value.

Outstanding at February 28, 1998

  • 194,805,099

. DOCUMENTS INCORPORATED BY

REFERENCE:

(a) Portions of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997 are incorpo-rated by reference in Parts I, II and IV hereof.

(b) Portions of the 1998 Proxy Statement, dated March 11., 1998, are incorporated by ref~rence in Part III hereof.

  • Item Number
1.
2.
3.
4.
5.
6.
7.

7A.

8.
9.
10.
11.
12.

13.:

.e DOMINION RESOURCES, INC.

PART I Business The Company............................................................................................................

Dominion Capital........................... :.;........................................................................

Dominion Energy......................................,..............................................................

  • East Midlands... _...................... _...................................................................................

Distribution Business.......................... :...................................................................

Supply Business.......................................... :.. :......................................................

Competition...............................,...... *.................... '.......................,........................

Environmental Regulation.......... :................. :............. _.............................................

Virginia Power...........................................................................................................

Competition and Strategic Initiatives........................................................................,

Regulation.....................................-:.....................-;._........ _..................... :.................

Rates.................... ;................................. :................................................. :..........

Sources of Power................................... *... '....................... *......................................

Interconnections...........,.........................................................................................

Capital Requirements and Financing Program *******************************,******:**************************

Properties........ *............................................................................ *................................

Legal Proceedings........................................................................................................

Submission of Matters to a Vote of Security Holders.....................................,...................

Executive Officers of the Registrant............................................................ :,..................

PART II Market for the Registrant's Common Equity _and Related Stockholder Matters.......................

Selected Financial Data........................... *.....*. :.:...... ;,............. ;.......................................

Management's Discussion and-Analysis of Financial Condition and Results of Operations.......

Quantitative and Qualitative. Disclosures About Market Risk...............................................

Financial Statements and Supplementary Data.:.... '.::................................ '.:~.......................

Changes in ancl Disagreements with_ Accountants on Accounting and Financial Disclosui:e_.......

PART III Directors and Executive Officers *of the Registrant............ ::... '....,........................................

Executive Compensation.......... :.......................,...............................-..............................

Security Ownership_ of Certa~~ Beneficial Owners.and Management......,............................ :.

Certain* Relationships and Related Transactions..................................... :...........................

PART IV Page Number 1

1 1

1 2

3 3

4 4

4.

.5 7

10 12 14 14 14 14 14 15 15 16 16 16 16 16 16 16 i6'

14.

. Exhibits, Finai;icial Statement Schedules, and Reports on Form 8-K............... :......................

17

e PART I ITEM 1. BUSINESS THE COMPANY

  • bominion Resources, Inc. (Dominion Resources), organized in 1983, has its principal office at 901 East Byrd Street, Richmond, Virginia 23219-4072, telephone (804) 775-5700. The principal assets of Dominion Resources are its investments in its subsidiaries.

At De~ember 31, 1997, Do!Jlinion Resources owned directly or indirectly all of the outstanding common stock of its subsidiaries:: Dominion Capital, foe. (Dominion Capital); Dominion Energy, Inc. (Dominion Energy); East Midlands Elec-tricity pie (East Midlands); and Virginia Electric and Power Company (Virginia Power), its largest subsidiary. Dominion Resources is currently exempt from registration as a holding company under the Public Utility Holding Company Act *of 1935 (the 1935 Act).

Dom:inion Resources and its subsidiaries h_adl5A58 full-time employees as of December 31, 1997..

  • Domini.on Capital Dominion-Capital, established as a subsidiary of Dominion Resources in 1985, is a diversified investment and finan-cial services company. The principal assets of Dominion Capital are First Source Financial, LLP, a middle market commer-cial lender; Saxon Mortgage, Inc. and its affiliates; subsidiaries engaged in the origination, servicing and securitization of residential mortgages; Cambrian Capiµl Partners, LP, a merchant banking enterprise for emerging independent oil and natu-ral gas producers; First porni.nion Capitai LLC, an integrated merchant bank and asset management business; a 50% lim-ited partnersh~p interest in a Loµisiana hydroelectric project; investments in marketable securities and fixed income instru-ments;* Op_taCor Financial Services Company,.a consumer lei;i.der and Rincon Securities, Inc., a subsidiary which holds a div~rsified portfolio of preferred stocks. Dominion Capit11l also has subsidiaries involved in planned community real estate development and management, a commercial real estate management company _and investments in affordable housing..

Dominion Energy Dominion Energy,-established as a subsidiary-of Dominion Resources in* 1987, is active in.the nonutility electric power generation businesses outside the territory served by-Virginia Power and the development, exploration and operation of oil and natural gas reserves. Dominion Energy is involved in power projects in six states, Argentina, Bolivia, Belize and Peru, which total approximately 2,561 Mw. Domesti~ power projects,in operation throughout 1997 in which Dominion Energy has an intere~t inc.lude three gas-fu.eled projects in Texas; two geothermal projects, two gas-fueled projects and one solar project in California; four small hydroelectric projects in New York; a waste coal-fueled project in West Virginia and a waste wood-and coal-fueled project in Maine. International power projects in operation throughout 1997 in which Dominion Energy has an interest i~clude one hydroelectric and one gas-fired project in Argentina, two hydroelectric projectsin Bolivia, a run~of-river hydroelectric project in Belize and two hydroelectric projects and six diesel oil-fueled projects in Peru. Domin-ion Energy is involved in oil and natural gas development and exploration in the Appalachian Basin, the Michigan Basin, the Illinois Basin, the Black Warrior Basin, the Uinta Basin, the Powder River Basin, the Gulf Coast and the Mid-Continent, and owns net proved oil and natural gas reserves in such areas totaling approximately 461 billion cubic feet (BCFE). In 1997, Dominion Energy added approximately 119 BCFE of natural gas reserves. Production from Dominion Energy's reserve holdings in 1997 totaled approximately 59 BCFE.

On March 29, 1996, a subsidiary of Dominion Energy, Kincaid Generation, L.L.C. (LLC) entered into an asset sale agreement with Commonwealth Edison Company (ComEd) to purchase ComEd's 1,108 Mw coal-fired Kincaid Power Sta-tion in Central Illinois and entered into a power purchase agreement with ComEd to sell, upon closing under the asset sale agreement, capacity and energy back to ComEd for a period of 15 years. The sale was completed on February 27, 1998.

On August 1, 1997, Dominion Energy sold to Chilgener S.A. 49% of its interest in Inversiones Dominion Peru S.A., a Peruvian company which holds a 60% interest in EGENOR S.A., a 405 megawatt electric generation business in which Dominion Energy had invested in Peru.

East Midlands Dominion Resources purchased East Midlands, the principal operating subsidiary of our UK holding company, Domin-ion UK Holding, Inc. (Dominion UK) in the first quarter of 1997. East Midlands' principal businesses are the distribution

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of electricity and the supply of electricity to approximately 2.3 million customers in the East Midlands region of the United Kingdom. East Midlands' primary business is its distribution business which is a regulated monopoly and its electricity sup-ply business. Together these businesses produced substantially all of East Midlands' consolidated operating income. East Midlands is also focused on taking advantage of the opportunity in the domestic gas supply business.

East Midlands' Franchise Area (or service area) has a resident population of over five million and covers approximately 6,200 square miles extending from Coventry to the Lincolnshire coast and from Milton Keynes to Chesterfield of which the southernmost part is less than 60 miles from London Dominion UK, through wholly-owned subsidiaries, holds an 80% interest in Corby Power Limited (Corby), a 350 MW gas-fired power station. Corby was commissioned in 1994 and is one of the earliest UK independent power *ge_neration projects in the deregulated UK.

Distribution Business East Midlands owns, manages and operates the electricity distri_bution network within its Franchise Area. The primary activity of the distribution business is the receipt of electricity from the national 'grid transmission system and its d*istribu-tion to end users connected to East Midlands' power lines. Because East Midlands is the exclusive holder of a Public Elec-tricity Supply (PES) license for its Franchise Area, virtually all electricity supplied (whether by East Midland's supply busi-ness or by other suppliers) to consumers in East Midland's Fran.chise Area is transported through East Midlands' distribution network. As a holder of a PES license, East Midlands is subject to a price control regulatory framework that retains eco-nomic incentives to. increase the number of units of electricity distributed and to operate in a more cost-efficient manner.

In addition to the network division, East Midlands' distribution business also includes construction* and metering divi-sfo~s. The construction division provides construction, standby and maintenance se~vi~es to the*network as we)) as perform"-

ing similar services for certain third-parties. East Midlands' metering division focuses on the ownership and fii~nagement of metering and related assets as well as data collection and transmission service. While portions of construction and metering businesses are gradually opening to competition, the network division, which generates ov.er 80% of the dii;tribution busi-ness' profits, is expected to remain a regulated monopoly subject tci price iegulation.

Distribution Facilities Electricity is transported.across the national grid transmission system (the high voltage transmission system in UK

. that"carries the generated electricity in bulk from power stations to regional and local distribution systems) at 400kv or 275kv to 14 grid supply points within East Midlands' distribution network, where East Midlands trahsforms the volt-age to 132ky for entry into East Midlands' distribution system. Electricity is also transported to one national grid sup-ply point located in a*neighboring Regional Electric Companies (REC) franchise area, which is connected to East Mid-lands' distribution system by overhead lines and underground cables. Substa~tially all electricity whiGh enters East Midlands' system is received at these 15 grid supply points:

East Midlands' di.stribution facilities also include approximately:

Transformers:

132 kv/lower voltages............................ ~.............. :...,....

33 kv/11 kv or 6/6 kv......................................................

II kv or 6.6 kv/lower voltages (including 22,165 pole moun.ted transformers).................................................

Substations:

132 kv/33 kv.. :.............................................................

33 kv/11 kv or 6.6 kv..... *.................................................

11 kv or 6.6 kv/415 v or 240 v.........................................

  • Number 183 675 37,913 85 368 15,689 Substantially all substations are owned and the balance are leased under arrangements which will not expire for 10 years.*

2

Supply Business East Midlands' supply business consists of selling electricity to end users, purchasing electricity primarily from the Pool and arranging for its distribution to those end users. The Pool is the wholesale trading market that was established at the time of privatization (1990) for bulk trading of electricity in UK between generators and suppliers. Basically all electricity generated in UK must be sold and purchased through the Pool. The Pool does not buy or. sell electricity. East Midlands' supply business supplies.Franchise* *supply Customers and Non-Franchise Supply Customers and is further developi.ng its gas l:iusines.s.to supply d_omestic and business customers. East Midlands currently supplies gas to approximately 6,000 cus-t9mers.a11d has contracted to supply gas to more than 80,000 customers.

Franchise Supply Market

    • East Midlands *holds a PES License under which it currently has the exclusive right to supply electricity to Fran-chise Supply Customers, who have a peak demand of less than lOOkW, within its Franchise Area. At_ the time that the electricity industry was privatized, "Franchise Supply Customers" included all customers whose supply peak demand was less than lMW. The lMW threshold was reduced to 100 kW on April 1, 1994. The exclusive right to.supply Fran-chise Supply Customers is.currently scheduled to be phased in over a 6 month period beginning June 1998 and end-
  • ing in December.1998. On completion of this phase-in period,, there will be no Franchise Supply*Customers and all supply customers,will have the abilit)'. to choose their electricity supplier. Supply prices of electricity from Franchise Supply Customers.are based on the Supply Price Control Formula, whereby certain limits are placed on East Midlands as to the prices it can charge customers for the supply of electricity.

Froin April 1, 1998 there ~ill be a revised Supply Price Control Formula in the form of price caps for all residen-tial customers and small business customers.

. Following the Supply Price Control Re\\'.iew in 1997,.the s*upply prices to franchise customers will reduce by. 6.4%

from Aprill998 ~nd an additional 3% from April 1999..,

Non-Franchise Supply Market Non-Franchise Supply Customers are currently defined as cu~tomers whose peak demand equals or exceeds lOOkW.

  • In addition to competing for Non-Franchi~~ Supply Customers in*its Franchise Area, East Midlands holds a second tier*

license t6 compete with the RECs and other* suppliers to provide *electricity to Non-Franchise Supply Customers out-side 'it!,i' Franchise Area,-':

  • The II).arket to supply.. Non-Franchise Supply' Customers is fully competitive, with the principal competit~rs b~1ng

. other RECs and major generators. Non-Franchis.e Supply Cust.omers are typically supplied through indi\\'.idual 12-month contr_acts with competitively bid or negotiated prices.

. Pow'er Purchasing and Risk Management In order to manage its power purchasing risks, the supply busine~s ent~rs into arrangements such as. contracts for

. differences (Cffis) to hedge against Pool price volatility. CFDs are contracts*predominantly entered into between gen~

erators and suppliers to fix the* price of a coritracted quantity of electricity over a specific period. Differences between the actual prices set by the Pool and the agreed prices give rise to difference payments between the parties to the par-ticular CFO. At the present time, East Midlands' forecast franchise supply market demand for fiscal 199& is substan-tially hedged through various types of agreements, including CFDs.

The most common ~ontracts for supply to Non-Franchise Supply customers are for a twelve,month term.and con-tain fixed rates. East Midlands is exposed to two principal-risks associated with such contracts: (a) purchasing price risk (East Midlands' cost ofpurchased electricity relative to the price East Midlands receives from the supply customer) and (b) load shape risk (the risk associated with a shift in the customer's usage pattern, including absolute amounts demanded and timing of amounts demanded). East Midlands see~s to hedge. purchasing price risk through a variety of risk management tools, including management of its supply contract portfolio, CFDs, option arrangements and other means which mitigate risk of future *Pool price volatility. Load shape risk is mitigated by paying detailed attention to forecasting demand.

Competition The UK electricity industry has changed significantly since* 1994, as the UK government has privatized and deregu~

lated.the industry. As a result, East Midlands' distribution and supply businesses are subject to varying degrees of competition.

3

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On the dis.tribution side of the business, East Midlands' network distribution division is currently a regulated monopoly that does not face direct competition. This division contributes 80% of the distribution business' profits, but could face indi-rect competition from alternative energy sources such as gas. In addition, the distribution business' metering division faces full competition by the year 2000 and the construction d.ivision's work is open to competition from a number of firms.

East Midlands' supply business has Franchise and Non-Franchise markets. East Midlands' exclusive right to supply electricity to its Franchise customers is currently scheduled to end over a 6-rilonth phase-in period beginning December 1, 1998. At that time, East Midlands will compete directly wrth electricity generators and other suppliers of electricity, prima-rily other PES license holders. The Non-Franchise portion of the business currently competes with those generators and suppliers.

Beginning March 27, 1998, the residential gas market will be open to competition in the East Midlands franchise region.

Environmental Regulation

. East Midlands' businesses are subject to numerous regulatory requirements with respect to the protection of the envi-ronment. The Electricity Act of 1989 obligates the UK Secretary of State for Trade and Industry to take into account the effect of electricity generation, transmission* and supply activities upon the environment in approving applications for the construction of generating facilities and the location of overhead power lines. The Electricity Act requires,East Midlands to adhere to such guidelines when it formulates proposals for-development Eas.t Midlands is required to mitigate any effect its proposals may have on the environment and *may be required to carry out an. environmental assessment when it intends to construct overhead lines. East Midlands also has produced an Environmental Policy Statement which* sets out the manner in which it intends to comply with its obligations under the Electricity Act.

The Environmental Prptection Act 1990 addresses waste management issues and imposes certain obligations and duties on companies which handle and dispose of waste. Some of East Midlands' distribution activities produce waste, but Domin-ion Resources believes East Midlands is in compliance with applicable standards.

Virg~nia PQwer Virginia Electric and Power Company is a regulated public utility engaged in the generation, transmission, distribution and sale of electric energy within a 30,000 square-mile area in Virginia and northeastern North Carolina. It transacts busi-ness under the name Virginia Power in Virginia and under the name North Carolina Power in North Carolina. Virginia Power has retail customers (including governmental agencies) and wholesale customers such as rural electric cooperatives, power marketers and municipalities and serves more than '80% of Vfrgiriia's popillat~on. Virgin.ia Power has certificates of conve-nience and necessity from the State Corporation Commission of Virginia (the Virginia Commission) for service in all terri-tories served at retail in Virginia. The North Carolina Utilities Commission (the North Carolin"- Commission) has assigned territory to Virginia Power for substantially all of its retail service outside certain municipalities in North Carolina.

The electric utility industry in the United States is undergoing an evolutionary change toward less regu,lation and more competition. To meet the challenges of this new competitive environment, Virginia Power has dt,weloped a broad aIT!l,Y of "non-traditional" product and service offerings from its operating business units and subsidiaries:

  • Energy Services -

offering,electric energy and capacity in the emerging wholesale market as well as natural gas and other energy-related products and services;

  • Fossil & Hydro -

targeting process type industries, such as chemical, paper, plastics and petroleum to become a ser-vice provider of instrumentation equipment;*

  • Nuclear Services -

offering management and operations services to other electri.c utilities;

  • Commercial Operations -

providing power distribution related services, including transmission and distribution, engi-neering and metering services to other gas, water and electric utilities;* and

  • Telecommunications -

offering telecommunication.s services through tl:l.e Company's existing fiber-optic network.

Competition and Strategic Initiatives A number of developments in the United States are causing a trend toward less regulation and more competition in the electric utility industry. This is evidenced by legislative and regulatory action at both the federal and state l.evels.. To the extent that competition is either authorized or mandated and regulation is eliminated or relaxed, electric utilities may no 4

e longer be guaranteed an opportunity to recover all of their prudently incurred costs, and utilities with costs that exceed the market prices established by the competitive market will run the risk of suffering losses, which may be substantial.

Virginia Power has responded to these trends by undertaking cost-cutting measures, engaging in re-engineering efforts, restructuring its core business processes, and pursuing a strategic planning initiative to encourage innovative approaches to serving traditional markets. Virginia Power has established separate business units, as discussed above, to fully execute these strategies.

Virginia Power also 'is vigorously participating in the state and federal legislative actions currently underway* to bring about competition in the electric utility industry, in an effort to ensure an orderly transition from a regulated environment.

Virginia Power's non-traditional businesses face competition from a variety of utility and non-utility entiti~s.

For a full discussion of the regulatory and legislative issues related to competition; read the Future Issues section of MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATIONS (MD&A) on pages 26 through 30 of the 1997 Annual Report to Shareholders.

Regulation.

General In a wide variety of matters in addition to rates, Virginia Power is presently subject to regulation by the Virginia Commission and the North Carolina Commission, the Environmental Protection Agency (EPA), Department of Energy (DOE), Nuclear Regulatory Commission (NRC), the Federal Energy Regulatory Commission (FERC), the Army Corps of Engineers, and other federal, state and local authorities. Compliance with numerous laws and regulations increases Virginia Power's operating and capital costs by requiring, among other things, changes in the design and operation of existing facilities and changes or delays in the location, design, construction and operation of new facilities. The com-missions regulating Virginia Power's rates have historically permitted recovery of such costs.

Virginia Power may not construct, or incur financial commitments for construction of, any substantial generating facilities or large capacity transmission lines without the prior approval of various state and federal governmental agen-cies.. Such approvals rela.te to, among other things, the environmental impact of such activities, the relationship of such

  • activities to the need for providing adequate utility service and the design and operation of proposed facilities.

Both federal and state legislative bodies have been studying competition and restructuring in the electric utility industry. See Future Issues -

Competition -

Legislative Initiatives section of MD&A on page 27 of the 1997 Annual

.. Report to Shareholders.

Virginia In 1995, the Virginia Commission instituted an ongoing generic investigation on electric industry restructuring, resulting in a number of reports by its Staff covering such issues as retail wheeling experiments and the status of wholesale power markets. The Staff also submitted a report to the General Assembly calling for a cautious, two-phase, five-year period to address restructuring issues. The report acknowledged the need for direction* from the Virginia leg-islature concerning policy issues surrounding competition in the electric industry.

In November 1996, the Virginia Commission instituted a proceeding concerning Virginia Power's cost of service and possible restructuring of the electric utility industry as it might relate to -Virginia Power. On March 24, 1997, Vir-ginia Power filed in that proceeding a calculation of its cost of service for 1996 and a proposed Alternative Regulatory Plan (ARP). Subsequently, the Commission consolidated this proceeding with the proceeding concerning Virginia Power's 1995 Annual Informational Filing, in which Virginia Power's base rates were made interim and subject to refund as of March 1, 1997. Please carefully read the Future Issues -

Competition -

Legislative Initiatives and Regu-

.

  • latory Initiatives sections of MD&A on page 27 of the 1997 Annual Report to Shareholders and Rates-Virginia, below for details concerning the ARP, its current status and related legislative developments.

In December.1995, Virginia Power applied to_the Virginia Commission for approval of arrangements with Chesa-peake Paper Products Company (CPPC), under which Virginia Power w*ould facilitate the design, construction

  • and financing of a cogeneration plant to meet CPPC's energy requirements for its industrial processes at its plant in West Point, Virginia. On August 13, 1_997, the Virginia Commission approved, in substantial part, the proposed transactions 5

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between Virginia Power and CPPC's successor in ownership, St. Laurent Paper Products Co. St. Laurent later deter-mined that the current design of the facility was no longer compatible with its long-term business strategies and termi-nated its contractual arrangement with Virginia Power. The Virginia Commission dismissed the proceeding on Janu-ary 15, 1998.

In June 1997, the Virginia Commission granted Virginia Power's request to implement a monitoring program that requires certain non-utility generators to provide certain information sufficient to determine continued compliance with the "Qualifying Facility" (QF) requirements of the Public Utility Regulatory Policies Act of 1978 (PURPA).

On August 8, 1997, the Virginia Commission granted Virginia Power's request to provide interchange telecommu-nications services and approved the proposed affiliate agreements between Virginia Power and our wholly-owned sub-sidiary, VPS Communications, Inc. (VPSC). Under the authority granted, VPSC will provide a range of telecommuni-cations services, including private line and special access services and high-capacity fiberoptic services.

On September 3, 1997, the Virginia Commission granted Virginia Power's request to provide services to our wholly-owned subsidiary, Virginia Power Services, Inc. (VPS), which would enable Virginia Power Nuclear Services Company (VPN), a VPS subsidiary, to furnish nuclear management and operation services to electric utilities seeking assistance in the management and operation of their nuclear generating facilities. VPN currently provides such services to Northeast Utilities at its Millstone Unit 2 nuclear plant.

FERC In April 1996, FERC issued final rules* in Order Nos. 888 and 889 addressing open access transmission service, stranded costs, standards of conduct and open access same-time information systems (OASIS). In July 1996, Virginia Power filed an open access transmission service tariff in compliance with FERC's Order No. 888. In compliance with FERC's directive, Virginia Power's OASIS became operational on January 3, 1997. Also, on that date the standards of conduct requiring separation of transmission operations/reliability functions from wholesale merchant/marketing func-tions became effective. Virginia Power also made filings to comply with FERC's directive that, effective January 1, 1997, utilities could no longer make bundled sales of transmission and generation services in economy energy trans-actions. In certain of those filings, Virginia Power canceled or committed not to use the economy energy rate sched-ules contained in interconnection agreements with neighboring utilitie.s. On March 4, 1997, FERC issued Order Nos.

888-A and 889~A, which addressed requests for rehearing of Order Nos. 888 and 889. Orders No. 888-A and 889-A essentially reaffirm the basic principles of 888 and 889 and clarify and make limited modifications to those orders. On December 17-, 1997, FERC issued Order Nos. 888-B and 889-B. FERC rejected all requests for rehearing filed with respect to Order Nos. 888-A and 889-A and clarified and made limited modifications to those orders. Several parties have appealed the 888 orders to the United States Court of Appeals for the District of Columbia Circuit.

For a discussion of the status of Virginia Power's Open Access Transmission Tariff filing, see Rates -

FERC

~~

For addi.tional discussion of open access issues see Future Issues -

Competition under MD&A on pages 26 through 28 of the 1997 Annual Report to Shareholders.

LG&E Westmoreland Southampton owns a cogeneration facility in Franklin, Virginia, and sells its output to Vir-ginia Power. Southampton has sought a waiver of FERC operating requirements for Qualifying Facilities (QF's) under PURPA, howev~r:FI;:RC refused to grant such a waiver. On March 31, 1997, the United States Court of Appeals for the Di.strict of Columbia Circuit granted FERC's motion to dismiss Southampton's Petition for Review.

Environmental From time to time, Virginia Power may be designated by the -EPA as a potentially responsible party (PRP) with.

respect to a Superfund site. As a result of that designation or other regulations regarding the remediation of waste, we may become obligated to fund remedial investigations or actions. We do not believe that any currently identified sites will result in sign~ficant liabilities. For a discussion of Virginia Power's site remediation efforts, see Note Q to the CONSOLIDATED FINANCIAL STATEMENTS on page 53 of the 1997 Annual Report to Shareholders.

Permits under the Clean Water Act and state laws have been issued for all of Virginia Power's steam generating stations now in operation. These permits are subject to reissuance and continuing review. The Clean Air Act, as amended in 1990, requires Virginia Power to reduce its *emissions of sulfur dioxide (S02) and nitrogen oxides (NOx). Beginning in 1995, the S02 reduction program is based on the issuance of a limited number of S02 emission allowances, each of 6

'l' e

which may be used as a permit to emit one ton of S02 into the atmosphere or may be sold to someone else. The pro-gram is administered by the EPA.

For additional information on Environmental Matters and related issues see Future Issues -

Environmental Mat-ters section of MD&A on pages 28 and 29 of the 1997 Annual Report to Shareholders.

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 operntion 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 facili-ties. 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.

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 the Department of Energy con-cerning 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, 1 ?97, the Virginia Commission returned the spent nuclear fuel. disposal issue to a sepa-rate proceeding.

On January 31, 1997, Virginia Power joined thirty-five other electric utilities in filing a petition in the Uni_ted States Court of Appeals for the District of Columbia Circuit, seeking to compel DOE to comply with its obligation to begin accepting the utilities' spent nuclear fuel for disposal by January 31, 1998, the date imposed by the Nuclear Waste Policy Act. Additional utilities have joined *since the original filing. On November 14, 1997, the Court issued an Order finding 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 it has not prepared a permanent repository or interim storage facility. The Court

  • found that DOE's spent fuel disposal contracts with the utilities offer a potentially adequate remedy for DOE's failure to meet its obligation. DOE filed a petition for rehearing on December 29, 1997.

Rates Virginia Power electric service sales were subject to rate regulation in 1997 as follows:

Virginia retail:

Non-Governmental customers....................

Governmental customers...........................

North Carolina retail...................................

Wholesale -Sales for Resale*........ ;............

Virginia Commission Negotiated Agreements North Carolina Commission FERC

  • Excludes wholesale power marketing sales subject to FERC regulation.

Percent of Revenues 81%

10 5

4 JOO%

1997 Percent of Kwh Sales 76%

12 5

7 100%

Substantially all of Virginia Power's electric service sales are subject to recovery of changes in fuel costs either through fuel -adjustment factors or periodic adjustments to base rates, each of which requires prior regulatory approval.

Each of these jurisdictions has the authority to disallow recovery of costs it determines to be excessive or imprudently incurred. Various cost items may be reviewed on occasion, including costs of constructing or modifying facilities, on-going purchases of capacity or providing replacement power during generating unit outages.

7

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FERG In compliance with FERC's Order No. 888, Virginia Power filed an open access transmission service tariff, which became effective on July 9, 1996. In October 1996, FERC issued a procedural order, scheduling a hearing for April 28, 1997. Virginia Power and all parties reached a settlement of issues raised in the proceeding, and on March 20, 1997, those parties jointly filed with FERC the Settlement Agreement and Motion to Certify the Settlement Agreement. On April 23, _1997 the presiding Administrative Law Judge certified the Settlement Agreement to the FERC and on June 11, 1997, the FERC approved the settlement.

In compliance with FERC's Order No. 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. On July 1, 1997, Virginia Power filed an amendment to the Standards of Conduct in Compliance with FERC's Order No. 889-A. On July 16, 1997, Virginia Power filed another amendment in response to a FERC Staff request. Vir-ginia Power. is awaiting FERC action on the filing.

On September 11, 1997, FERC authorized Virginia Power to sell power at market-based rates but set for hearing the issue of the impact of any transmission constraints on Virginia Power's ability to exercise generation market power in localized areas within its service territory. If FERC finds that transmission constraints give Virginia Power genera-tion dominance, it could either revoke or limit the scope of the market-based rate authority. The hearing is scheduled to commence June 2, 1998.

On October 31, 1997, Virginia Power filed at FERC three agreements with Old Dominion Electric Cooperative (ODEC) to amend the parties' Interconnection and Operating Agreement (I&O Agreement) and to unbundle transmis-sion services provided to ODEC under the I&O Agreement. On December 22, 1997, FERC issued a deficiency"letter with respect to the filing directing Virginia Power to provide additional information. On January 21, 1998, Virginia Power provided the requested information. FERC accepted the agreements on March 12, 1998.

Virginia In March 1997, the Virginia Commission issued an order that Virginia Power's base rates be made interim and subject to refund as.of March 1, 1997. This order was the result of the Commission Staff's report on its review of Vir-ginia Power's 1995 Annual Informational Filing, which concluded that Virginia Power's present rates would cause Vir-ginia Power to earn in excess of its authorized return on equity. The Staff found that, for purposes of establishing rates prospectively, a rate reduction of $95.6 million (including a one-time adjustment of $29.7 million to Virginia Power's deferred capacity balance at December 31, 1996) may be necessary in* order to realign rates to the authorized level.

Virginia Power filed its Alternative Regulatory Plan (ARP) in March 1997, based on 1996 financial information. Sub-sequently, the Commission consolidated the proceeding concerned with the 1995 Annual Informational Filing with the proceeding that includes the ARP proposed by Virginia Power.

In December 1997, Virginia Power sought to withdraw its ARP, having concluded that resolution of the cost recov-ery issues raised by the ARP was unlikely without General Assembly action. The Commission has agreed that Virginia Power may withdraw its support of the ARP but has reserved the right to continue consideration of the ARP as well as other regulatory alternatives. In addition, the Commission will continue to consider the issues arising out of the 1995 Annual Informational Filing. The Commission's Staff is scheduled to file its testimony on March 24, 1998; Virginia Power's rebuttal is to be filed by April 27, 1998; and the reply testimony' is to be filed by May 11, 1998. A public hearing is scheduled to commence on May 19, 1998.

Virginia Power's previous filings in this proceeding support maintaining Virginia Power's rates at current levels; however, opposing parties have made filings recommending rate reductions in excess of $200 million. At this time, management cannot predict the ultimate outcome of the proceeding and its impact on Virginia Power's results of opera-tions, cash flows or financial position.

In July 1996, Virginia Power proposed to substantially reduce the rates paid under Schedule 19 to cogenerators and small power producers of 100 kW or less: The rates became effective on an interim basis on January 1, 1997. On January 21, 1998, the Virginia Commission approved revised Schedule 19 rates. The approved rates do not differ in any significant way from the rates originally proposed by Virginia Power.

8

e In October 1996, Virginia Power filed an application with the Virginia Commission to increase its fuel factor from 1.299 cents per kWh to 1.322 cents per kWh, reflecting a fuel factor annual revenue increase of approximately $48.2 mil-lion. The increase became effective on an interim basis on December i, 1996. On June 11, 1997, the Commission entered an Order Establishing Fuel Factor approving the requested increase.

On October 31, 1997, Virginia Power filed with the Virginia Commission its application for a reduction of $45.6 mil-lion in its fuel cost recovery factor for the period December l, 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, the Company 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. A hearing is scheduled for April 9, 1998:

North Carolina On November 4, 1996, Virg'inia Power filed for approval of a new Schedule 19 which governs purchases from cogenerators and small power producers. Virginia Power proposed rates substantially lower than those previously speci-fied. It also proposed to reduce the applicability threshold to 100 kW and shorten the maximum term of contracts under Schedule 19 to five years. On June 19, 1997, the North Carolina Commission issued an Order requiring Virginia Power to offer long-term (5-, 10- and 15-year) levelized capacity payments to hydroelectric and certain landfill and waste facilities contracting for up to 5 MW; a 5-year levelized rate.option to other QFs contracting for up to 100 kW; and optional long-term levelized energy payments for QFs rated at 100 kW or less capacity.

9

Sources Of Power Virginia Power Generating Units Name of Station, Units and Location Nuclear:

Surry Units 1 & 2, Surry, Va...........................................

North Anna Units 1 & 2, Mineral, Va...............................

Total nuclear stations...........,......................................

Fossil Fuel:

Steam:

Bremo Units 3 & 4, Bremo Bluff, Va...........................

Chesterfield Units 3-6, Chester, Va..............................

Clover Units 1 & 2, Clover, Va...................................

Mt. Storm Units 1-3, Mt. Storm, W. Va......... :.... :.........

Chesapeake Units 1-4, Chesapeake, Va........... ;.............

Possum Point Units 3 & 4, Dumfries, Va................,......

Yorktown Units 1 & 2; Yorktown, Va...........................

Possum Point Units 1, 2, & 5, Dumfries;.Va........ :...... '...

Yorktown Unit 3, Yorktown, Va...................................

North Branch Unit 1, Bayard, W. Va............................

Combustion Turbines:

35 units (8 locations).....................................................

Combined Cycle:

Be limeade, Richmond, Va..............................................

Chesterfield Units 7 & 8, Chester, Va..............................

Total fossil stations.....................................................

Hydroelectric:

Gaston Units 1-4, Roanoke Rapids, N.C...........................

Roanoke Rapids Units 1-4, Roanoke Rapids, N.C..............

Other...........................................................................

Bath County Units 1-6, Warm Springs, Va........................

Total hydro stations....................................................

Total Virginia Power generating unit capability.. ;............

Net Purchases................................... :..............................

Non-Utility Generation......................................................

Total Capability.........................................................

Years Installed 1972-73 1978-80 1950-58 1952-69 1995-96 1965-73 1953-62 1955-62 1957-59 1948-75 1974 1994 1967-90 1991 1990-92 1963 1955 1930-87 1985 (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) Effective January 25, 1996, this unit was placed in a cold reserve status.

e Type

,of Fuel Nuclear Nuclear Coal Coal Coal Coal Coal Coal Coal Oil Oil & Gas Waste Coal Oil & Gas Oil & Gas Oil & Gas Conventional Conventional Conventional Pumped Storage Summer Capability MW

  • 1,602 1,790(a) 3,392 227 1,250 882(b)
  • 1,587 595 322 326

.-~. '*.

\\ '. 929 818 74(c) 1,019 230 397 8,656 225 99 3

l,260(d) 1,587 13,635 1,480 3,277 18,392 (d) Reflects Virginia Power's 60 percent undivided Q\\.ynership 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 14,537 MW on July 28, 1997, and an all-time high one-hour integrated winter peak demand of 14,910 MW was reached on February 5, 1996.

. 10

e 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.

1997 1996 1995 Source Cost Source Cost Source Cost

. Nuclear (*)...................................

34%

4.52 32%

4.48 32%

4.92 Coal(**) **************************************

40 13.54 38 14.32 39 14.44 Oil **********************************************

1 26.32 1

27.75 1

25.11 Purchased power, net......................

23 21.54 27 21.99 25 22.50 Other...........................................

2 30.65 2

26.98 3

23.82 Total ****************************************

100%

100%

100%

Average fuel cost..... *..................

12.67 13.47 13.73

(*) 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 1997, Virginia Power's four nuclear units achieved a combined capacity factor of 91.1 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 :;it reasonable prices. Current agreements, inventories and spot market availability will support Virginia Power's current and planned fuel supply needs for fuel cycles throughout the remainder of the 1990's and into the early 2000's. Beyond that p~riod, additional fuel will be purchased as required to ensure optimum cost and inventory levels.

The DOE is not expected to begin the acceptance of spent fuel in 1998 as specified in Virginia Power's contract with the DOE. However, on-site spent nuclear fuel storage at the Surry Power Station (spent fuel pool and dry cask storage) is expected to be adequate for Virginia Power's needs until the DOE begins accepting spent fuel. The North Anna Power Station will require additional spent fuel storage capacity in 1998. Virginia Power submitted a license application to the NRC in May 1995 for a dry cask facility at North Anna. Virginia Power anticipates that this appli-cation will be approved in mid-1998.

For details on the issues of decommissioning and nuclear insurance, see Note Q to the CONSOLIDATED FINAN-CIAL STATEMENTS on page 54 of the 1997 Annual Report to Shareholders.

Fossil Operations and Fuel Supply

.. Virginia Power's fossil fuel mix consists of coal, oil and natural gas. In 1997, Virginia Power consumed approxi-mately i3 milli.on tons of coal. As with nuclear fuel, Virginia Power utilizes both long-term contracts arid spot pur-chases ~o support its needs. Virginia Power presently anticipates that sufficient coal supplies at reasonable prices will be available for the remainder of the 1990's. Current projections for an adequate supply of oil remain favorable, bar7 ring unusual international events or extreme weather conditions which could affect both price and supply.

Virginia Power uses natural gas as needed throughout the year for two combined cycle units and at several com-bustion turbine units. For winter usage at the combined cycle sites, gas.is purchased and stored during the summer and fall and consumed during the colder months when gas supplies are not available at favorable prices. Virginia Power has firm transportation contracts for the delivery of gas to the combined cycle units. Current projections indicate gas sup-plies will be available for the next several years.

Purchases and Sales of Energy Virginia Power relies on purchases of power to meet a portion of its capacity requirements. Virginia Power also makes economy purchases of power from other utility systems when it is available at a cost lower than Virginia Pow-*

er's own generation costs.

11

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Under contracts effective January 1, 1985, Virginia Power agreed to purchase 400 MW of electricity annually through 1999 from Hoosier Energy Rural Electric Cooperative, Inc. (Hoosier), and agre~d to purchase 500 MW of electricity annually during 1987-99 from certain operating units of American Electric Power Company, Inc. (AEP),

Virginia Power has a diversity exchange agreement with AE under which AE delivers 200 MW to Virginia.Power in the summer and Virginia Power delivers 200 MW to AE in the winter.

Virginia Power also has 57 non-utility power purchase contracts with a combined dependable summer capacity of 3,277 MW (for information on the financial obligations under these agreements see Note Q to the CONSOLIDATED FINANCIAL STATEMENTS on page 53 of the 1997 Annual Report to Shareholders). In a continuing effort'to rmti-gate its exposure to above-market long-term purchased power contracts, Virginia Power is evaluating its long-term pur-chased power contracts and negotiating modifications to.their terms, including cancellations, where it is determined to be economically advantageous to do so.

Virginia Power's wholesale power group actively participates in the purchase and sale of wholesale electric power and natural gas in the open market. The wholesale power group has expanded.Virginia Power's trading range beyond the geographic limits of the Virginia Power service territory, and has developed trading relationships with energy buy~

ers and sellers on a nationwide basis.

In July 1997, Virginia Power executed tirr"ee agreements* with Old Dominion Electric C~operative (ODEC) which provide for the amendment of the parties' Interconnection and Operating Agreement (I&O Agreement). The first agree~

ment 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 Trans-mission Service, which unbundled the transmission services provided to ODEC under the I&O Agreement.

'As reported above, both the Hoosier 400 MW long-term purchase and the AEP 500 MW long-terinp~rchase \\Yill expire on December 31, 1999. Virginia Power presently anticipates adding peaking capacity beginning in the year 2000 to meet its anticipated load growth. Virgi~ia Power has and will pursue capacity acquisition plans to provide that capac~

ity and maintain a high degree of service reliability. This capacity may be owned and operated' by*others and sold to.

,Virginia Power or may be built by Virginia Power if it determines it can build*capacity at a lower overall cost. Virginia Power also pursues conservation and demand-side management. No Virginia Power owned generatioff is currently in the planning or construction stages.

For additional information, see Note Q to the CONSOLIDATED 'FINANCIAL STATEMENTS ~n page 53 of ~h~

1997 Annual Report to Shareholders.

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.arra_nge-ments with these utilities for coordinated planning, operation, emergency assistance*and exchanges of capacity and energy.

In December 1996, Virginia Power joined with Allegheny Power Sei:vice Corporation, Cleveland Electric Illuminating Company, Toledo Edison Company, Ohio Edison Company, Pennsylvania Power Company and Southern Company Services, Inc. (the Transmission Alliance) to file a cm:itract with the FERC entitled the GAPP Experiment Participation Agreement (GAPP Agreement). The Transmission Alliance and the GAPP Agreement were established to promote fair and equitable use of the transmission systems based on the General Agreement on Parallel Paths (GAPP) model for coordinating the flow of bulk supplies of electricity among utilities. GAPP principles allow electric companies to determine where electricity actu-ally flows in bulk power transactions, as opposed to the "contract" paths that are based on power purchase and transmission agreements among buying,.selling and transmitting utilities; Compensation for transmission services has historically been based on contract paths. The GAPP Agreement was designed to determine the physical path electricity actually takes through the system and allocate open access transmission revenues among the parties. The GAPP Agreement was designed as an experiment to test the GAPP methods and proce-dures for a period of two years. The FERC accepted the contract on March 25, 1997. Virginia Power and the Transmission Alliance implemented the GAPP Agreement on April 2, 1997..

On November 14, 1997, in accordance with the FERC order accepting the G.APP Agreement, the Transmission Alli-ance issued a report detailing the resuits of the first six months of the experiment. The preliminary results of the experiment indicate that it is technically possible to monitor and predict the physical flow of electricity over multiple systems and that 12

e transmission revenues reallocated according to actual use of the system differ significantly from collections under a contract path approach. In October 1997, Virginia Power gave notice to the Transmission Alliance that, effective January 1, 1998, it was exercising its option under the GAPP Agreement to terminate its involvement in the experiment..

On December 9, 1997, Virginia Power, the Transmission Alliance and other utilities agreed to study the creation of an independent regional transmission entity. The memorandum of understanding to initiate this study was signed by eleven investor-owned electric companies, including Virginia Power, Consumers Energy, Detroit Edison, Duquesne Light Company, The Illuminating Company, Ohio Edison Company, Pennsylvania Power Company, Toledo Edison Company, and the Allegheny Energy Companies (Monongahela Power Company, The Potomac Edison Company, and West Penn Power Company); This group* is an outgrowth of the GAPP Agreement and its key goals are *to maintain the long-term reliability and security of the utilities' interconnected transmission systems; ensure the most efficient use of resources; eliminate pancaking of rates within and between transmission entities; avoid duplication of costs and achieve transmission cost savings; and, strike an appropri-ate balance among the diverse interests of energy suppliers, customers, and shareholders. The group will also explore coop-erative agreements designed to achieve these goals while ensuring nondiscriminatory and comparable access to all users of the group's transmission system. The companies intend* to be responsive to industry changes, especially with the introduc-tion of retail competition in some of the areas served by the signatories and as some other industry participants' consider creation of independent transmission operating companies or separate transmission companies. Further, the companies will have the flexibility to continue to investigate and pursue other opportunities and arrangements that could develop regarding independent system operators or independent transmission companies.

Virginia Power and Appalachian Power Company (AEP-Virginia), an operating unit of AEP, each sought approval from the SCC in 1991_ to construct certain interconnecting transmission facilities. These applications resulted from a joint plan-ning effort of Virginia Power and AEP to meet the requirements of their customers. At the time of Virginia Power's appli-cation, particularly during the summer of 1992, constraints were being experien*ced ori transfers of power into the Virginia Power service territory from the west. On November 7, 1997, the SCC issued an Order directing Virginia Power to report to the Commission on the continued need for certain new interconnected transmission facilities, on the relationship between Virginia Power's application to build the new faciliti()S and certain other pending proceedings, and on_ Virginia Power's con-struction plans, if the SCC grants Virginia Power's application.

On December 15, 1997, Virginia Power filed a report in compliance with the SCC Order stating that since the filing of Virginia Power's application, the constraints _have been less frequent, due in _part to less severe summer weather, and actual power requirements have been less than originally forecasted. In addition, generating resources within the Virginia Power service area have been increased by the higher performance level of the nuclear units, as well as the* completion of the Clover Station. Completion of the AEP project is a prerequisite for the Virginia Power project to go forward. The pro-posed Virginia Power project :would* not fulfiff its intended purpose without the AEP line being built. AEP has withdrawn its original application and has instituted a new-proceeding before the Commission in which different routing is proposed. Vir-ginia Power continues to monitor_ closely the progress of AEP in this proceeding with respect to its new proposal, but until more is known about these proceedings, Virginia Power cannot predict what its construction plans will be.

13

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CAPITAL REQUIREMENTS AND FINANCING PROGRAM See MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDgION on pages 37 through 40 of the 1997 Annual Report to Shareholders.

ITEM 2. PROPERTIES Dominion Resources owns the building at One Jarries River Plaza, Richmond, Virginia, in which Virginia Power has its principal offices. Dominion Resources' other assets consist primarily of its investments in its subsidiaries, which invest various enterprises and assets, as 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 subsidiari.es are alleged to be in violation.or in defa,ult.under orders, statutes, rules or 'regulations relating tci the environment; compliance plans imposed upon or agreed to by th~m, 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 *resolu-tion of these proceedings will not have a material adverse effect on the company's financial position, liquidity or_results of operations.

In reference to the lawsuit filed by Dominion Energy and Dominion Cogen D.C., Inc, against the ])istrict of Colµm-bia and the Districf s counterclaims to the lawsuit, the parties settled all claims anq dismissed the lawsuit and related coun-terclaims on August 20, 1997.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Name and Age Thos. E. Capps (62)

Norman B.M. Askew (55)

Thom<!,S N. Chewning (52)

David L. Heavenridge (51)

EXECUTIVE OFFICERS OF THE REGISTRANT Business Experience Past Five Years Chairman of the Board. of Directors, President and Chief Executive.

Officer of Dominion Resources from September 1, 1995 to date; * *..

Chairman of the Board of Directors and Chief Executive Officer of Dominion Resources from August 15, 1994 to September 1, 1995;

  • Chairman of the Board of Directors, President and Chief Executive *.
  • Officer of Dominion Resources prior to August 15, 1994.

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 from April 1, 1994 to February 21, 1997; Managing Director prior to April 1, 1994.

Executive Vice President of Dominion Resources from January 1, 1997 to date and President of Dominion Energy; Senior Vice President of Dominion Resources from October 1, 1994 to January 1, 1997; Vice President of Dominion Resources prior to October l, 1994..

  • Executive Vice President of Dominion Resources from January 1, 1997 to date and President of Dominion Capital; Senior Vice President of Dominion Resources from March 1, 1994 to January 1, 1997; Senior Vice President and Controller of Dominion Resources prior to March 1, 1994.

14

Edgar M. Roach, Jr. (49)

Robert J. Davies (49)

Thomas F. Farren, II (43)

Donald T. Herrick, Jr (54)

G. Scott Hetzer ( 41)

William S. Mistr (50)

James F. Stutts (53)

James L. Trueheart ( 46)

Patricia A. Wilkerson ( 42)

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 January 1, 1996 to September 15, 1997; Vice President-Regulation and General Counsel, January 1, 1995 to January l, 1996; Vice President-Regulation, February 1, 1994 to January l, 1995; Partner in the law firm of Hunton & Williams, Raleigh, North Carolina prior to February 1, 1994.

Chief Executive of East Midlands from August 1, 1997 to date; Finance Director February 1, 1994 to August 1, 1997; Finance Director of Ferranti International pie prior to February l, 1994.

Mr. Davies* was the Finance Director and Manager of the Board of Ferranti International pie and four of its subsidiaries which entered insolvency proceedings in the UK in December 1993.

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 Presiden_t and General Counsel cif 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.

Vice President of Dominion Resources 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.

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., October 1, 1994 to January 1,
  • 1996; Assistant Treasurer, Dominion Resources prior to October 1, 1994.

Vice Pr~sident and General Counsel ofDominion Resources from September 15, 1997 to date; Partner in the law firm of McGuire, Woods, Battle & Boothe LLP prior to September 15, 1997.

Vice President and Controller of Dominion Resources from March 1,

  • 1994 to date; Assistant Controller of Dominion Resources prior to March 1, 1994.

Corporate Secretary of Dominion Resources from January 1, 1997 to date; Assistant Corporate Secretary prior to January 1, 1997.

PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND.

RELATED STOCKHOLDER MATTERS Dominion Resomces common stock is listed on the New York Stock Exchange and at December 31, 1997 there were 215,685 registered common shareholders of record. Quarterly information concerning stock prices and dividends contained on page 56 of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997 in Note U to CON-SOLIDATED FINANCIAL STATEMENTS which is filed herein as Exhibit 13, is hereby incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA This information contained under the caption "Selected Consolidated Financial Data" on page 60 of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997 filed herein as Exhibit 13, is hereby incorporated herein by reference.

15

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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 22 through 33 and MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION on pages 37 through 40 of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997, 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 OPERA TIO NS on pages 30 through 33 of the 1997 Annual to Shareholders for the fiscal year ended December 31, 1997, 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 21, 34 through 36, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on pages 37 through 56 and related report thereon of Deloitte & Touche LLP, independent auditors, appearing on page 57 of the_ 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997, filed herein as Exhibit 13, is hereby incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.

PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Directors of Dominion Resources contained on pages 6 through 8 of the 1998 Proxy State-ment, File No. 1-8489, dated March 11, 1998 is hereby incorporated herein by reference. The information concerning the executive officers of Dominion Resources required by this Item is set forth in Part I, under the section EXECUTIVE OFFIC-ERS OF THE REGISTRANT. Information regarding Section 16(a) Beneficial Ownership Reporting Compliance is con-tained on page 26 of the 1998 Proxy Statement, dated March 11, 1998, which is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION The information regarding executive and director compensation contained on pages 6 through 19 of the 1998 Proxy Statement is hereby i11corporated herein by reference.

. ITEM 12. SECURITY OWNERSIDP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning stock ownership by directors and executive officers contained on page 12 of the 1998 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 RELATIONSIDPS AND RELATED TRANSACTIONS None.

16

e PARJ: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 Report of Independent Auditors... :.................... :.................................. ;_..........................................

Report of*Management.. ::.......................................... :.................................................................

  • Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1997, 1996 and 1995..,..................... :.....................,..................

Consolidated Balance Sheets at December 31, 1997 and 1996.................................. :...................... :..

Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............ :..............-.. _........................................................,.....

N Otes to Consolid_ated Financial Statements... ;";'.:;;.. ';.;............................ :.... ;..................................

17 1997 Annual Report to Shareholders (Page) 57 57 21 34-35 36 41-56*

2. Exhibits 3(i) 3(ii) 4(i) 4(ii) 4(iii) 4(iv) 4(v) 4(vi) 4(vii)

Articles of Incorporation as in effect May 4, 1987 (Exhibit 3(i), Form 10-K for the fiscal year ended December 31, 1993, File Nb. 1-8489, incorporated by reference).

Bylaws as in effect on September 21, 1994 (Exhibit 3(ii), Form 10-K for the fisca.l year ended December 31, 1994, File No. 1-8489, incorporated by reference).

See Exhibit 3(i) above.

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. 1-225,5, 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 Inden~ure (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-Thir<;l Supplemental I.ndenture (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 t,y 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, iricorporated 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).

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).

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 thefiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference).

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 I, 1989, (Exhibit 4(vi), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference).

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).

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.

18

IO(i)

IO(ii)

IO(iii)

\\

lO(iy)

IO(v) lb(vi)

IO(vii) lO(viii) lO(ix)

IO(x)

IO(xi) lO(xii)

IO(xiii) *

  • lO(xiv) lO(xv) lO(xvi) lO(xvii) lO(xviii) e Qperating 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 IO(vi), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by reference).

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 IO(viii), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by reference).

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 E.lectric

. Cooperative (Exhibit lO(ix), Form 10-K for the fisc~l year ended December 31, 1983, Fi!e No. 1-8489, incorporated.by reference),.

Nutlear 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 IO(x),

Form lQ-K for the fiscal year ended December 31, 1983, FBe No. 1-8489, iqcorporated by refer~nce).

Amended and Restated Interconnection arid Operating Agreement, dated* as of July 29, 19,97 between Virginia Electric and Power Company and Old Dominion Electric Cooperative (filed herewith).

Credit Agree~ents, dated as of June 7, 1996, between The Chase Manhattan Bank (formerly Chemical Bank) arid V~rginia Electric and Power Company (Exhibit lO(i) and Exhibit lO(ii), Form, 10-Q for the.

period ended June 30, 1996. File No. 1-2255, incorporatec;l by reforence)i Inter-Company Credit Agreement, dated December 20, 1985, as modified on August 21,

  • 1987, between Dominion Resources and Dominion Capital, Inc. (Exhibit lO(vi), Form* 10-K for the fiscal year ended December 31, 1993, File No. 1-8489, incorporated by reference).

Inter-Company Credit Agreement, dated October 1, 1987 as am~nded and restated as of May 1, 1988 between Dominion Resources and Dominion Energy, Inc. (Exhibit IO(vii), Form 10-K for the fiscal year ended December* 31, 1993, File No.' 1-8489, incorporated by reference).

. Inter-Company Credit Agreement, dated as of September 1, 1988 between Dominion Resources and Dominion Lands, Inc. (Exhibit lO(viii), Form 10-K for the fiscal year ended December 31, 1993, File No.1-8489, incorporated by reference).

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. ~ffective as of August 24, 1990 (Exhibit lO(xii) Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8489, incorporated by reference).

Supplemental Fu~ding 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

  • IQ(xiii) Foryri lO-K for the fiscal year ended December 31, 1990, File No. 1-8489; incorporated by reference}.
  • Credit Agreement, dated December 1, 1985, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit IO(xix), Form 10-K for the fiscal year ended December 31, 1985, File No. 1-8489, incorporated by reference).

Agreement for'Northem Virginia Servfoes, dated as of November 1, 1985, between Potomac Electric Power Company and Virginia Electric and Power Company (Exhibit lO(xxi), Form rn~K for the fiscal

. year ended December 31, 1985, File No. 1-8489, incorporated by reference).-.

Purchase, Construction and Ownership Agreement, dated May 31, 1990, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit IO(xi), Form 10-K for the fiscal year.

ended December 31, 1990, File No. 1 -2255, incorporated by reference)..

Operating Agreement, dated May 31, 1990, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit IO(xii), Form 10-K for the fiscal year ended December 31, 1990, File No. 1-2255, incorporated by reference).

Coal-Fired Unit Turnkey Contract (Volume 1), dated April 6, 1989, and the United.2 Amendment (Volume 1 ), dated May 31, 1990 between Virginia Electric and Power Company and Old Dominion Electric Cooperative, Westinghouse, Black & Veatch, Combustion Engineering and H. B. Zachry (Volumes 2-11 contain technical specifications) (Exhibit IO(xiii), Form 10-K for the fiscal year ended December 31, 1990, File No. 1-2255, incorporated by reference).

. Trust Agreement of Dominion Resources Black Warrior Trust, d_ated May 31, 1994, among Domini,;m Black Warrior Basin, Inc., Dominion Resources, Inc., Mellon Bank (DE) National Association and

  • Nationsbank of Texas, N.A. (Exhibit 3. l, Amendment No. 1 to Registration Statement, File No.

33-53513, filed June 1, 1994, incorporated by reference).

First Amendment of Trust Agreement of Dominion Resources Black Warrior Trust, dated }une 27, 1994,

  • among Dominion Black Warrior Basin, Inc., Dominion Resources, Inc., Mellon Bank (DE) National Association and Nationsbank of Texas, N.A. (Exhibit lO(ii), Form 10-Q for the quarter ended June 30, 1994, File No. 1-8489, incorporated by reference).

19

lO(xix)*

lO(xx)*

lO(xxi)*

lO(xxii)*

lO(X:xiii)*

lO(xxiv) lO(xxv)*

lO(xxvi)* -

lO(xxvii)* -

lO(xxviii)* -

lO(xxix)* -

lO(xxx)*

lO(xxxi)* -

lO(xxxii)* -

lO(xxxiii)* -

lO(xxxiv)* -

lO(xxxv)* -

11 13 21 23 27 e

e Dominion Resources, Inc. Directors' Deferred Compensation Plan, effective July 1, 1986, as amended and restated effective January 1, 1996 (Exhibit lO(xviii), Form 10-K for the fiscal year*ended December 31, 1996, File No.1-8489, incorporated by reference).

Dominion Resources, Inc. Performance Achievement Plan, effective J~nuary 1, 1986, as a~ended and.

restated effective February 19, 1988 (Exhibit lO(xxi), Form 10-K for the fiscal year ended December 31, 1988, File No. 1-8489, incorporated by reference).

Dominion Resources, Inc: Executive Supplemental Retirement Plan, effective January 1, 1981 as amended and restated September l, 1996 (Exhibit lO(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 (filed herewith).

Arrangements with certain executive officers regarding additional credited years of servi~e for retire~ent and retirement life insurance purposes (filed herewith).

Dominion Resources, Inc.'s Cash Incentive Plan as adopted December.20,.1991 (Exhibit lO(xxii), Form lO~K for the fiscal year ended December 31, 1991, File No.. 1-8489, incorporated by reference),

Dominion Resources, Inc. Incentive Compensation* Plan, effective April 22, 1997 (Exhibit 99, Forni S-8 Registration Statement, File No 333~25587, incorporated by reference).

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).*

Dominion Resources, Ii:ic. Retirement Benefit Funding Plan, effective June 29,,l990. as amended and restated September I, 1996 (Exhibit 10(iii), Form 10-Q for the quarter endedJtine,30, 1997, File No. J-8489, incorporated by reference).

Dominion. Resources, Inc. Retirement Benefit Restoration Plan as. adopted effective January 1, 199 i as amended and restated September 1, 1996 (Exhibit lO(ii), Form 10-Q for the quarter ended June 30, 1997, File No. f-8489, incorporated by reference).

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).

Employ~ent Agreement dated June 20, 1997 between Dominion.Resources and Thos.*E. Capps (Exhibit lO(i), Form 10-Q for the quarter ended June 30, 1997, File No. 1-8489, incorporated by reference).

Form of three year Employment Agreement between Dominion Resources and Thomas N. Chewning ana certain other executive officers of Dominion Resources (filed herewith).

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).

Employment Agreement dated February 21, 1997 between Dominion.Resources and Norman Askew.

(Exhibit IO(xxxi), Form 10-K for the fiscal year ended December 31, 1996, File No. 1-8489, incorporated by reference).

  • Service Agreement, dated February 17, 1994 as amended through December 2, 1995 bet\\Veen East Midlands and Robert J. Davies (filed herewith).

Employment Agreement, dated September 12, 1997 between Dominion Resources and-Edgar M. Roach, Jr. (filed herewith).

Employment Agreement, dated January 1, 1998 between Dominion Resources and William S. Mistr (filed herewith),

Computation of Earnings Per Share of Common Stock Assuming Full Dilution (filed herewith).

Portions of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997 (filed herewith).

Subsidiaries of the Registrant (filed herewith).

Consent of Deloitte & Touche LLP (filed herewith).

Financial Data Schedule (filed herewith).

  • Indicates management contract or compensatory plan or arrangement.

B. Reports on Form 8-K Dominion Resources filed a report on Form 8-K, dated Dece,mber 11, 1997, reporting the issuance of 250,000 i83%

Capital Securities (liquidation amount $1,000 per security) through its Dominion Resources Capital Trust I, a Delaware business trust.

Dominion Resources filed a report.on Form 8-K, dated January 15, 1998, reporting the issuance of 6,500,000 sh~es of Common Stock.

20

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 (Tho s. E. Capps, Chairman of the Board of Directors, President and Chief Executive Officer)

Date: MARCH 20, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the follow-ing persons on behalf of the registrant and in the capacities indicated and on the 20th day of March, 1998.

Signature*

JOHN B. ADAMS JR.

John B. Adams, Jr.

JoHN B. BERNHARDT John* B. Bernhardt THOS. E. CAPPS

  • Thos. E. Capps BENJAMIN J. LAMBERT, III Benjamin). Lambert, III RICHARD L. LEATHERWOOD Richard L. Leatherwood HARVEY L. LINDSAY, JR.

Harvey L. Lindsay, Jr.

K. A. RANDALL K. A. Randall WILLIAM T. Roos William T. Roos FRANKS. ROYAL Frank S. Royal Title Director Director Chairman of the Board of Directors, President (Chief Executive Officer) and Director Director Director Director Director Director Director 21

Signature JUDITH B. SACK Judith B. Sack

s. DALLAS SIMMONS S. Dallas Simmons ROBERT H. SPILMAN Robert H. Spilman EDGAR M. ROACH JR.

Edgar M. Roach, Jr.

J.L. TRUEHEART J.L. Trueheart Title Director Director Director Executive Vice President (Chief Financial Officer) e Vice President and Controller (Principal Accounting Officer) 22

\\

DOMINION RESOURCES, INC.

PORTIONS.

OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS (Incorporated by Reference)

CQNSOL,IDATED STATEMENTS OF INCOME AND RETAINED EA'R:NINGS*

21 For The Years Ended December 31, 1997 1996 1995 (miJlions,*except per share amounts) operatin\\{revenues arid in.come:

,Virgin fa Power,,

$ 5,079.0

$4,420.9,'

J4,35r.9 fast Midlands *,.

1,970.1

        • f *. :_::-.

N9;~~tility"'

628'.5 281.2, 433.1 Jotal operating revenues and incolT!e 7,677.6 4,854.0 4,633.1 Operating expenses:

Fuel, net 1,620.7 i,016.6 1,009.7

  • :Purch.as~d po.,;_;er capacity, net 688.4 717.5 700.6 Supply and distribution-Eas'tMidlands 1';46'6.1'
Accelerated cost 'recovery*

38.4 26.7 Restructuring 18.4.

64.9 I 2.1.5

'ot~er ~peration an~ maintenance 1;237.7 1,045.3 968.6 Qepreciati~n. depletion and.a.~ort,ization 819;3 615.2 551.0

other taxes 282:5 267:5 I

274.9 Total oper~ting expenses 6,200.6 3,744.2 3,606.'~

Operating,income.

1,477.0:

1,10';!.8.,,

1,02~-4 Othe~\\n~_~me.and.expense:

.*; ~ '

I Virginia P*ower 14.2 6.8 10;0 East Midlands

,10.9

~.

,Nonutiiity 8.'6 11.'a*

-;, 13'.6 Wiridfall'profits tax'-E~stMidlands (156.6) '. '*

Total other income and,;expense (122.9) 2ft'.6

,23.6 lrit,ome ~ef6r~' fixed charges 'arid in_come t~xes 1_,354.1 1,.1.34.4

.,... 1,050_.o Fixed charges:

)

JriWtesJ charges, net 627.4, 387.0,

  • 381.7 Distributions-preferred securities of subsidiary trusts 12.1 10.9 3.7 Preferred dividends of Virginia Power

,35.8.

35*5, 4_4.1,

.Jcital fi~~d charges 675.3 433.4 429.5 lnco.rn.e.befo~e_provision for income.taxes and min9rity interests 678.8

~ '*.. '.. -~,

. 701.0..

620.5 Provision for income taxes

  • 23~.o

, 219.3 187;1:

.. Minority interests 46.6

  • 9.6 8.4 Net income I

$' 399.2

$ 472.1

$ 425.0 Retained (;?arnings, Janµary 1 1,437.9

.. 1,_427._6 1,455.2 common dividends and other deductions:

Dividends

..... ~

(478.0) *

(460.1)

(44~.7)

I Othe{ d~ductio'ns (5.1)

(.1.7)

(3.9)

Retained earnings, December 31

$.1,354.0

$1,437.9

..,. :$1,427:6*

Earnings per common share 2.15 2.65 2.45 Dividends paia per' common share 2.58 2.58 2.58

vk~ige common shares outstanding 185.2
  • 178.3 173.8 A

The accompanying notes are.an-integral part of the-Consolidated Financial Statements.

22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS (unaudited) e Introduction In Managements Discussion and Analysis (MD8A) we explain the general financial condition and the results of operations for Dominion Resources and its subsidiaries. As you read this section, it may be helpful to refer to our consolidated financial statements and notes. The MD8A is important when making investment deci-sions about Dominion Resources.

In 1983, Dominion Resources began a diversification strategy to enable the company to make investments in nonutility busi-nesses. These diversified businesses-Dominion Energy and Dominion Capital-operate in competitive environments. There is no monopoly or regulated rate of return on investments as you currently find in our core electric utility business, Virginia Power.

Such a move changes the risk profile of a company and provides the opportunity to achieve returns above those found in a regu-lated business.

The investments outside of Virginia Power during 1997 accounted for approximately 20 percent of the consolidated com-pany's earnings from operations. The recent acquisition of East Midlands Electricity pie (East Midlands) in the U.K. adds a strong international utility to ourportfolio of companies. East Midlands is the principal operating subsidiary of our U.K. holding company, Dominion U.K. Holding, Inc. (Dominion UK).

As the electric utility industry is significantly changing in many states across the nation, Dominion Resources is working with its state legislators and regulators to move the restructuring process towards a workable form of competition in Virginia. The generation business of Virginia Power-representing about 50 percent of..its assets-may become deregulated at some point in the future, depending on legislative and regulatory action. Cus-tomers in Virginia and North Carolina currently have low electric-ity costs relative to regional and national electricity prices. But management believes that competition can bring benefits to both consumers and the company. These matters are discussed in more detail on page 26 of the MD8A report.

Both Virginia Power and East Midlands enjoy above average customer growth in their respective service areas. Virginia Power has strong plant operatio_ns and is recognized as a leader in low-cost generation. East Midlands receives approximately 85 percent of its operating profit from its regulated distribution business-which is the transfer of electricity across its low voltage distribu-.

tion system to consumers. Virtually all of the remainder comes from its supply business-purchasing electricity and arranging for its distribution to end users. Managements strategy is to con-tinue building on the fundamental strengths at Virginia Power and East Midlands while growing its nonutility businesses in power generation, natural gas production, and financial services.

Overview Dominion Resources achieved earnings from operations of $555.s million in 1997 or $3.00 per average common share, compared with earnings of $472.1 million in 1996 or$2.65 per share. The 1997 figure excludes a one-time windfall profits tax of $156.6 million, or 85 cents per share, incurred at East Midlands. Below we have pro-vided a comparison of net income and earnings per share contri-butions by company along with reasons for the changes in these contributions.

NET INCOME 1997 Change 1996 Change

  • 1995 (millions)

Virginia Power

$ 433.4 2.85'

$421.8 Dominion UK 46.9 Dominion Energy 45.0 38.5~

32.5 Dominion Capital 45.1 58.2~

28.5 Corporate (14.6) (36.4)~

(10.7) 555.8 17.7~

$472.1 Windfall Profits Tax-East Midlands

( 156.6)

Consolidated Shares

$ 399.2 (15.4)~

$472.1 185.2 3-9~

178.3 EARNINGS PER SHARE 1997 Change 1996 Virginia Power

$2.34 (1.3)%

$2.37 Dominion UK

.25 Dominion Energy

.24 33.3%

.18 Dominion Capital

.24 50.o~

.16 Corporate

(.07) ( 16.7)~

(.06)

$3.00 13.2~

$2.65 Windfal I Profits Tax-East Midlands

(.85)

Consolidated

-8.5% $388.7 (7.1 )%

35.0 61:9%

17.6 34.4%

(16.3) 11.1% $425.0

' I. I% $425.0 -

2.6%

173.8 Change

-199*5 5.8%. $2.24

(, 0.0)%

.20 60.0%

.10 33-3%

(.0-9) 8:2%. $2;45 8.2%

$2.45 The 1997 results as c*ompared to 1996 were affected by a ~urnber of factors described below:

V-1 R G I N I A P O W E R Earnings were impacted by:

  • mild weather which caused a decrease in electricity sales-to retail customers, partially offset by continued customer.growth in the Virginia and North Carolina service areas;
  • an increase in sales from non-traditional businesses, including power marketing, natural gas, and energy products and ser-vices;
  • higher purchased power expenses asa result cif increased power
  • marketing and higher operation and maintenance expenses;.:

reflecting the growth in the costs _of products and services offered by the new energy services business;

  • lower restructuring expenses;
  • a reserve for potential adjustments to regulatory assets; and *
  • higher depreciation of plant and equipment, higher decom-missioning expenses for t_he future retirement of nuclear plants, and depreciation related to Clover Unit 2-the companys newest coal-fired station.

I'

I I i

I I

I.

DOMi'N.ION°UK Eim.irigs ~ere impadtec1. ~y:

  • an ~nticipated_cme-tin:ie windfall profits tax levied on Ea;t Mid-
- lanq.s and.other utilities in Britain as *part of the* newly elected Labo;ir_ Party's 1997 budget plan.

o o 'M I N I o' N E N E R.Q v Earnings were'irripacted by:

ii'an increas,e in natu;a( gas producti9n, re~ulting p~rtly from the

.,ac;quisiticm of,\\VolverineGas,and Oil in Michigar,;,a,:id.ov'er:all

. hig:hernat1;1ral gas pric/!~;. arid 11.*an incre.ase i~ g_~;ner~tion frnm its.power piants in Lat'in Amer-.

,;)c!l,.result_ingjrom more normal.water f.lows ~tits hydro pl~nts

.. ~nd t.he ac;quisition of pe>wer generation assets in Peru in the la~7

,_.. ter h_alf,.of 19,9~-. -

DOMINl"ON CAPITAL Earnings were impaded*by:**.

    • an increase,irifoan production*and securitizations_from Saxon Mortgage, the financial services business which origin'ates.non-conforming (or sub-prime) residentlal mortgages and sells
  • them---:through securitization transactions-to institutional investors.

!I the. purch*ase of the remaining 50 percent of First Sourceflnan*- *

' *cial, :a 'cliicago..:hased lender to middle-'r'narket industtie~.'

'r

/

  • .:1;,*

Y!rgi~iil;Power.

RESULTS **OF OPERATIONS','

Virginia* Power's balance available* for comf(lon stock for. 1997 amounted to $433-4 million as compared to $421.8 million,in1996.

  • The earnings were impacted by customer growth and* lower restructuring expenses, partially offset by. higher depreciation 1nd *amortization expenses and the provision of a reserve for pot~ntial adjustments to regulatory assets. Virginia Power's con~

fribution to earnings per share in 1997 amountea to $2.34 com~

pared to $2.37 in 1996 due to the dilutive impact of common stock issuances by Dominion Resources during 1997-.

  • In 1996, Virginia Powerreported a $33.1 million increase in bal-an~e-avaiJable for common stock when compared to the:- 1995 results of $388.7 million. The increase was primarily due to lower restruduring e_xpenses in 1996.

1997 Change (millions)

Operating revenues

$5,079;0 11,.9~

Operating expenses:

Fuel and purchased power, net*

2,338.2 36.2~

Other operatio*n and -

.maintenance 812.7 1.2~

Accelerated cost

,recovery Restrui:turihg

  • , ~epreciation.and amorti7:ation Other taxes Operating income Other income*

'Jixed charges, ' -

including preferred dividends '

Income taxes..

Balan-ce:av~ila!;ile for.

common stock 38;4 43.8~*

18.4 (71.6)~

584.3 8.9~

267.7.

1.9~

1,~19.3 o,.9CJ.

14.2 ;oa:a~*

350.8 (1:1)CJ.

.. 249,3

,3.8~..

  • -* 2:~;r;*

433.4 1996 Change 1995 1.6% $4,351.9 803.1 (0.3)%.,.,;805.6

.. :*.-.-;,:1

  • 26.7 64.9 (45.0)% '

117.9 536.. 4

_262.6 1,010.0 354.8

  • .' 2,4r;i,2

.421,.8,..

6.5~

503.5 i

  • 3,p%.,,."254.9

.3.9%., ',9TI *,9 io.o (3.0)%

365.7 5.6')1;.,, m-5 K5ci. $ 388_.7 As detai.led in the chart on the next page, the:6,v~rillgrowth in rev:-

enues in f997 reflects strong wholesale.powe'r marketing and nat-u.ral gas sales. Electric serv!ce revenues increased slightly ih spite of mild weather due'to new;customer connections and an increase '

lrifuel rates.The increase in ftiei revenues is primarily attributable.

to. higher fuel r~tEJS' 'which _went inti{¢ffed December I;* 1996, increasing recov11ry of fuel costs by appro,ximately $4~.2 million.

  • In addition, revenues increased as a result of the company's strat-
  • egy fo develop non2-fraditional business opportunities designed to provide growth iri revenues. These include* sales'1of eriefgy
  • products and services offered.by Virghiia *power's energy services business arid-nuclea'r management and operation's. '*services

,offered.to other eJec::t~ic ~tilities.

  • ' s. '

Rev~nues in.creased in. 1996, as compared to 1995, due to incieased'powermarketing; sales of natural gas.arid sales 0

ofother energy products and services by Virginia Powers energy services business. This increase in revenues was offset in part by a decrease in eled,ric ser~ice revenues, resulting fro 0m the effect of mild

_ weathero*n the company'ssumm'erretail rates, which are designed fo reflect normaf'weat'her conditions. The redu'ctlon 'in r:eve~ues froin the mild we*ather was.offset in'pa,fby revenues from ne~

'customers: Other electric servi'ce revenues decreas~d primarily.as a r~sult of' red~cect'*sales to Old-Dominion -~lectric*co*operative (ODEC) due to_ the completion of Clover Unlt_s 1antl 2; of whlch'0DEC owns a fifty percent interest*:

    • \\.,.

23*

24 OPERATING REVENUES**

(millions)

Customer growth Weather Base rate variance Fuel rate variance Other, net

  • Total retail Other electric service
  • Total electric service Wholesale power marketing Natural gas 9th_er, including energy products and services Total other revenues e

Increase (decrease) from prior year 1997 1996

$ 55.8,

$ 45.1 C 111.1) 4.4 (18.7)

  • (35.5) 44.1 (89.6) 47.7 41.5 17.8

~)

11.0 (49.8) 28.8 (83.9) 363.4.

96.6 232.6 33-2 33.3 23.1 629.3 I 52.9

$ 658.1

$ 69.0 During 1997, Virginia Po~er added 50,8~9 new customers, t.he la!gest number of new connections since 1990, compared to 44,528 and 44,955 in 1996 and 1995, respectively.

Kl LOWATT* HOUR SALES

  • ,1997 Change 1996

(_millions)

Retail sales.

61,997 (0.5)%

62,298 Wholesale 23,965 1_17.5'1, 11,020 Total *sales 85;962 17.2%

73,318 DECREE* PAYS CHART 1997 Cooling degree days 1,349 Percentage change compared to prior year* ( 1.2)~

Heating degree days

. 3,787 Percentage change co~pared to prior year, (8.3)~

Change

.

  • 1995 2.4%

60,865 36.3%

8!oB8 6.3%

68,953 1996 Normal 1,365 1,530 (18.1 )%

4,131 3,726 9.0%

Fuel and purchased power, net increased due.to highervo!um,es of purchased power..Virginia Power has significantly increas_ed_its marketing _efforts to generate more sales of elec:tric energy to wholesale customers and more sales of natural gas.

Other operation and maintenance expenses in.creased in 1997 as a result of the growth in sales by the company's energy services business: This increase was partially offset by a reduction in expenses attributable to Virginia Powers Vision 2000 initiatives to t~ke co_sts out of the __ core (traditional) utility business. Expenses i~

1996 includ*e high storm damage costs resulting from destructive summer storms, including Hurricane Fran.

Virginia Power embarked on its Vision 2000 re*structuring pro-gram in 1995_ as part of an initiative to prepare for competition in the electric utility industry. Charges of $18-4 million in 1997 pri-marily include employee severance costs and costs to renegotiate contracts to purchase power from third parties. Charges in 1996 and 1995 were $64.9 million and $117.9 million, respectively (see Note N). Virginia Power estimates that its restructuring efforts will result in future annual savings of $80 million to $90 million. How-ever, such savings are being offset by salary increases, outsourc-ing costs and increased payroll costs associated with staffing for

  • growth opportunities. While Virginia Power may incur additional restructuring charges in 1998, the amounts are not expected to be significant.

In thi~ increasingly competitive erivironment, Virginia Po,wer has concluded that it may be appropriate to utilize available. sav-ings and cost reductions, such as thos~ from the Vision 2000 pro-gram, to accelerate the write-off of unamortized regulatory assets

  • an_d potentially stranded costs (see Note 0). As of December 31, 1997, Virginia Po\\ver has accumulated a reserve of $65.1 million. Not only wiil this strategically position Virginia Power in anticipation of competition, but it also reflects managements commitm*ent to mitigate its exposure to potentially stranded costs.

,. Depreciation and amortization increased in 1997, as compared to 1996, due to additional depreciation and nuclear decommis~

sioning expense and depreciation related to Clover Unit 2 - the company's newest coal-fired station. Virginia Power recorded additional depreciation and decommissioning expense consis-tent With its proposal in the rate proceeding* before the Virginia Commission. (see Note Q ). **

  • oominiqn UK RESULTS OF OPERATIONS Dominion UK earned $46.9 mHlion, or 25 cents per share, in 1997.

The 1997 figure excludes a one-time windfall profits tax of $156.6 million, or 85 cents per share, incurred at East Midlands. The antic-ipated one-time windfall profits tax was levied on East Midlands and other utility companies in Britain as part of the newly.elected Labour Party's 1997 budget plan. Including the windfall profits tax,.Dominion UK reported a net loss of $109.7 million, or 60 cents per share:.

(miUi,ons)

Operating income:.

Distribution..

Supply.

_Other

.Total operating income Other_inc:ome a~d expense:..

Other Windfal I profits tax Fixed charges Income taxes Net income Dominion Energy NEW BUSIN.ESSES 1997

$ 333,7 35.4

.( 122.5) 246.6.

10.8

( 156.6) 189.4 21.1

$ ( 109.7)

Dominion Energy has expanded its oil and natural gas business through the development of existing assets and the acquisition of Wolverine Gas and Oil Company. now known as Dominion Midwest Energy. Inc., and the related entities (Dominion Midwest), effec,.

tive as of January 1997. Dominion Midwest is an oil and gas pro-duction and operation company headquartered in Grand Rapids, Michigan.

1 l..

I.

.

  • Dominion Energy expects to expand its domestic *power gen~

er'ation in-thlfirst quarter of 1998 with the acquisition of the Kin-caid gen_erating station, an 1,108-megawatt facility *located in 1i11*nois. In addition, Dominion Energy expects to expand its for-E!ign power generation businesses with the cornpletion of certain

~a pita I expansion activities. '

RESULTS OF OPERATIONS D~triinion. Energy's net inco~e* amounte~( to $45.9 mi,l li'on ai, corri~

pa;ed.to $_3~.5 million in 1996. The increasein.eamings was due pri:

marily. Jo net. income from power gene~ation assets in Peru acq~ired in Augus{ 1996, generally higher natural gas prices and grE!ater pro.duct ion ~o!ur;.1es due to the acquisition of naturc!,_1 gas

  • pr~perties.in the Gulf Coast area in Marc;h 1996, and in Michigan in

~

January 1997.

In 1996, net income decreased by $2.5 million when compared fo 1995 primarily due to the*sale of the Black Warrior Trust Units in 19*95. the sale of the units, which hold royalty interests in proven, developed natural gas properties, provided a net gain of $5-4 mil-lion in 1995.

  • 1997_

Change.*

    • *1996 ** Change
  • 1995 (inllliohs).

Operating inco_me:.

Oil'andgas(1).

$:59;4 42.4'J.

$ 41.7

  • '. 68.1%' $ 24.8 Domestic power generation Foreign power.'

generation C~rp~rate(2)

Adjustments(1) 55.3

. (3.~)

(25.3) 66.6'J,.

7-7.6'J, 4-5'J.

9.4. : (40.5)%

  • _15.8

.33.2 16.5%

28.5 (14.7)

(90._9)%

. (7-7)

(26.5) 6.0%. (2~.2)

Tot.al oper;.tting inco111e $ 82.7 9*1.9%

$ 43-1 2,9.8% $ 33.2

('1) *011 ana gas Operating Income includes Nonconventlon~I Fuels Tax Credits: Such"'

.'*.' credits are reversed on the Adjustment_s line as they are not ordinarily reported.*

as a e<>mpon_ent of Operating Income.

(2) Represents corporate overhead charges*:

<>'PERATI NG INCOME oil and gas operating i~come increased.$11:r million and $16.9 mil-lion fortiie*1997 and 1996 periods: respectively. The result*s reflect a significant fncrease in the level of oil and gas pro'duced'due to the development and acquisition* of properties during 1997 and 1996. Natural gas production ro~e to 59.0 billion cubic feet equiv-alent (Bcf e) in 1997, compared to 50.2 Bcfe in 1996, an 18 percent i_ncrease. At December 31, 1997, proved gas reserves totaled 460*

Bcfe: Proved gas reserves*increased 60 Bcfe (15%) during 1997, pri-

. mc!,rily from the development of existing acreage and the acqui-sition of Wolverine Gas and Oil. The production results for 1997 reflect a -$2.50 average gas sales price per thousand cubic feet equivalent (Mcfe), which increased $.18 per Mcfe compared to 1996. The production results for 1996 reflect a $2.32 average gas sales price per Mcfe, compared to $1.93 per Mcfe in 1995.

  • Domestic power generation operating income decreased in 1997 primarily due to the write-down of.Dominion Energy's invest-ment in two of its California projects. The 1996 results reflect lower
  • income cmntributions from the two geothermal projects in cal ifor-nia due to scheduled ownership reductions.

Foreign power generation operating *income increased $22.1 million and$4.7 million for the 1997 and 1996 P!!t:ioq,s, respectiyely.:

The 1997 increase results from more normal water flows at hydro plants and the acquisition of an interest in Egenor, a Peruvian power generation business, in August 1996. The 1996 increase results also from the EgeT)or acquisition and the acquisili<>TI of af!.

interest in Empresa Corani, a Bolivian power generation b~siness, in July 1995.

Dominion Capital NEW BUSINESSE_S

  • Th.ere w~re two sig_nificant enhancements ~o D.ominfon*capital's diversified financial services strategy. hi early: 1997, Dc;iminion

. Capital.acquired the remai~ing 50% of First Source Financial*.* 1t is anticipated that First Source Financial, the Chicago:-base1'.ientler to middle market industries,.will in~rease Junde4 _lriaris and

. loan commitments as a result of this transaction. Late. in 1997, Dominion *capital formed First Dominion Capital, an integrated merchant banking and asset rrianagement business. First Domin.:

ion Capital expands Dominion* Capitals'gro,;...t~ in 'fl_nan~ial's'er'-

vices and is.based in New.York City.

RESULTS:*OF OPERATIONS Dominion Capital's net income for 1997 am~U:nted to ~45.1 'mil-'

I j

lio_n as compared to $28.5 million in 1996. The increase in earnings

was primarily' due to residential mortgage* 1oan *securit_iza.:'.

tions performed by Saxon Mortgag~ and the acquisition oJ the*

remaining* 50 percent. of ~irst :Source* Financial that h did not already.own.

In 1996, Dominion Capital reported an increase in net income of $10.9 million wheri compared to th!! 1995 results. l;h,e r.esults wer_e primarily 1ue to ~esid~ntial mortgage loan*s*ecuritizatio11s'per~

for!lled by.saxoT) Mortgage. * *

(millions)

Operating in~ome:

. Financial services*

Vidalia~ r~al estate T9tal operating income*

1997

. ~hange

$143.5 103.5'J, 13.6

-~-2~

' $157.1 OPERATING INCOME*.

1996.. *chang~

. 1995

$70:5

,**io3.2cJ/.

$34.'7 "34.5)%

1*4.8 9.7

. Financial services operating incol}'le. incr!!ased J:?y$73.o million and

$35.8 million in the 1997 and i996-peri~ds,*re~pectively. Both saxqn Mortgage and First So.urce Financial benefitted from the healthy regional and national economies. Loan volumes at* Saxon were

$1.8 billion in 1997, up from. $754 milli_on in 1996. In addition; Dominion Capital purchased the re.maining 50_-percent-.int~rest

'in the Chicago-based First Source Financial-at the*beginning of 199t Funded and committed loans at First *source Financial have grown to $1.4 billion at the end *of. 1997, compared *to-$1.1 billion at the end of 1996. Financial se*rvices operating income improved

. in i996 compared to 1995 primarily d'ue to the* acquisition of Saxon Mortgage.

25

26 e

Vidalia and real estate operating income increased in 1997 over 1996 by $3.9 million due to higher water flow and improved real estate operations. Operating income decreased in 1996 compared to 1995 primarily due to higher real estate project costs.

Nonoperating Income* and Expense.s OTHER INCOME AND EXPENSE The windfall profits tax of $156.6 million resulted in a decline in net income in 1997 by the same amqunt.

FIXED CHARGES Interest charges increased in 1997 as a result of the additional debt associated with the $2.2 billion acquisition of East Midlands. While Dominion Resources financed the purchase with 106 percent interim debt, the final capital structure calls for approximately 60 percent of the acquisition cost to be financed with long-term debt (see "EasfMidlands Financing" on page 37).

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 ou,tlook for the future.. It should be noted that any forward-look-ing information is expressly covered by the safe harbor rule for projections. For a more detaiJ.ed description of some of the uncer-tainties associated, with forwar.d~looking information, please refer to the Forward-:-Looking lnformatiop section on page 33.

VI RGrN IA POWER Competition in the ~lectric Industry-General For most of thi; century, the structure of the.electric industry in Vir-ginia Powers service territory and throughout the United States has been relatively stable. Virginia Power has recently seen, how-ever, federal and state developments toward increased competi-tion. Electric utilities have been required to open up their transmission systems for use by potential wholesale competitors.

In addition, nonutility power producers now compete with elec-tric utilities in the wholesale generation market. At the federal level, retail competition is under consideration. Some states have enacted legislation requiring retail competition.

Today, Virginia Power faces competition in the wholesale mar-ket. Currently,. there is no general retail competition in Virginia Power's principal service area. To the extent that competition is permitted, Virginia Power's ability to sell power at prices that will allow it to recover its prudently-incurred costs may be an issue.

See Competition-Exposure to Potentially Stranded Costs on page 28.

In response to competition, Virginia Power has successfully*

renegotiated long term contracts with wholesale and large federal government customers. In addition, the company has obtained regulatory approval of innovative pricing proposals for large industrial customers. Rate concessions resulting from these con-tract negotiations and innovative pricing proposals are expected to reduce the company's 1998 revenues by approximately $40 mil-lion. To date, the company has not experienced any material loss of load..

Virginia Power is actively participating in the legislative and regulatory processes relating to industry restructuring. The com-pany has also responded to these trends toward competition by cutting its costs, re-engineering its core business processes, and pursuing innovative approaches to servicing traditio'nal ma.rkets and future markets. In addition, Virginia Power is developing "non-traditional" businesses designed to provide growth in future earnings. These include the following businesses: wh.ole-sale power marketing, nuclear management and operations ser-vices, telecommunications servkes and energy services.

Competition-Wholesale During 1997, sales to wholesale customers represented approxi-mately 17 percent of Virginia Power's total revenues from electric sales. Approximately 73 percent of wholesale revenues resulted from Virginia Powers wholesale power marketing efforts.

In July 1997, Virginia Power filed amendments to its existing rate tariff with the Federal Energy Regulatory Commission (FERC) so it could make wholesale sales at market-based rates. Under a FERC order conditionally accepting the company's rates, Virginia Power began making market-based sales in 1997. FERCset for hear-ing in June 1998 the issue of whether transmission constraints lim-iting the transfer of power into the company's service territory provide Virginia Power with generation dominance in localized markets. if FERC finds that transmission constraints give Virginia

  • Power generation dominance, it could either revoke or limit the scope of the market-based rate authority.

Virginia Power has successfully negotiated a new power sup-ply arrangement with its largest wholesale customer.. The new arrangement provides for a transition from cost-based rates to market-based rates, subject to FERC approval. Virginia Power esti-mates the reduced rates, offset in part by other revenues wh.ich may be earned under the agreement, will decrease income before.

taxes by approximately $38 million through 2005. Virginia Power anticipates that additional contract negotiations with other wholesale customers will take place in the* future.

Competition-Retail Currently. Virginia Power has the exclusive right to provide elec-tricity at retail within its assigned service territories in Virginia and North Carolina. As a result, Virginia Power now only faces compe-tition for retail sales 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. However, both Virginia and North Carolina are considering implementing retail comp et it ion.

}.

I

e Competition-Legislative Initiatives Federal: The U.S. Congress is expected.to consider'federal legis-iation in the near future authorizing or requiring retail competi-tion. Virginia Power cannot predict what, if any, definitive actions the Congress may take.

Virginia:.The company is actively supporting, and the Virginia General Assembly is actively considering in its current session, legislative proposals that would address:

  • specific dates for wholesale and retail competition in the state;
  • establishment of a regional power exchange (RPX) to conduct competitive auctions for the sale of electricity;
  • establishment of an independent system operator (ISO) to con-trol transmission systems and ensure nondiscriminatory access to the transmission grid;
  • continued regulation of the distribution of electricity in assigned service territories;
  • deregulation of the generation of electricity;
  • recovery of prudently incurred*stranded costs; and
  • consumer protection issues.

The General Assembly is scheduled to be in session through mid-March. The company is unable to predict at this time whether or when any of the bills now before the legislature will be enacted.

North Carolina: The 1997 Session of the North Carolina General Assembly created a Study Commission on the Future of Electric Service in North Carolina. An interim report is expected in 1998, with final recomme~dations to be made to the.1999 session of the North Carolina General Assembly.

Competition-Regulatory Initiatives The Virginia Commission has also been actively interested in industry restructuring and competition.

  • In 1995, the Commission instituted an ongoing generic investi-gation on restructuring, resulting in a number of reports by its Staff covering such issues as retail wheeling experiments and the status of wholesale power markets. The Staff also submitted a report to the General Assembly calling for a cautious, two-phase, five-year period to address restructuring issues. The report acknowledged the need for direction from the Virginia legislature concerning policy issues surrounding competition in the electric industry.

In late 1996 the Commission.ordered Virginia Power to file stud-ies and reports on possible restructuring of the electric industry in Virginia. The Commission also invited Virginia Power to submit a proposed alternative regulatory plan with its filing. In March 1997, Virginia Power filed a two-phase alternative regulatory plan (ARP). The plan as filed requested a five-year freeze of existing base rates with earnings above a certain range to be used to accel-erate the write-off of generation-related regulatory assets and to mitigate the costs associated with payments to nonutility gener-ators under power purchase contracts. Virginia Power also sought approval in principle of the recovery of prudently incurred costs beyond 2002 through a non-bypassable transition cost charge.

The filing presented an illustrative estimate of potentially stranded costs based on hypothetical market prices. When the company filed its ARP, the Commission consolidated its consider-ation of the ARP with its consideration of the company's 1995 Annual Informational Filing. For a discussion of the.1995 Annual Informational Filing, see Future lssues-:-Rate Proceeding.

In December 1997, Virginia Power sought to withdraw its ARP, having concluded that resolution of the cost recovla!ry issues raised by the ARP was unlikely without General Assembly action. The Commission has agreed that the company may withdraw i_ts sup-port of the ARP, but has reserved,the right to continue considera-tion of the ARP as well as other regulatory alternatives. In addition, the Commission will continue to consi.der the issues arising.out of the 1995 Annual Informational Filing. See Future lssues--:Rate Proceeding on page 28.

Competition-SFAS 71 Virginia* Power's financial statements reflect assets *and costs under cost-based rate*regulation'in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 provides that cer-tain expenses normally reflected in income are deferred on the balance sheet as regulatory assets and are recognized as the related *amounts are included in rates and recovered from customers. The presence of increasing competition that limits the utilitys ability to" charge rates thahecover its costs or a change in the method of regulation could result in the discontinued applicability of SFAS 71.

Rate-regulated companies are required to*write off regulatory*

assets a*gainst earnings whenever those assets no longer meet the criteria for recognition as defined by SFAS 71. lri addition, SFAS 121, "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," requires a review of long-lived assets foi impairment whenever events or changes*in cir-cumstances indicate that the carrying amount of an asset may nor be recoverable. Thus, events or changes in circumstances that cause the discontinuance of SFAS 71, and write off of regulatory assets, may also require a review of utility plant assets for possible impairment. if the'*review indicates utility plant assets are impaired, the carrying amount of affected assets would be writ-ten down. This would result in a loss being charged to earnings, unless recovery of the loss is provided through operations that remain regulated.

Virginia Power's regulated operations currently satisfy the SFAS 71 criteria. However, if events or circumstances should change '

so that those criteria are no. longer ?atisfied, management believes that a material,adverse effect on Virginia Power's.results of operations anq. financial position may result. The form of cost-based rate regulation under which Virginia Power operates is likely to evolve as a result of various legislative or regulatory initiiitives.

At this time, management can predict neither the ultima1e out-:-

come of regulatory reform in the electric utility industry nor the impact such changes would have on Virginia Power.

27

28 e

Competition-Exposure.to Potentially Stranded c;c,Jt~. * *, *..

  • Under traditional cost..:based re'gulatiori, utilities have generally had an obiigation.t{;e~e sup'pprt~{b/an im~licif,pi~~i~e of the opportunity to rec,o~er:Pr.udently \\ricu,rr~d coifs.' Tli~ most_ signif-icant potential adverse effect oftompetitioh is "stranded costs."

Stranded costs are those costs iricurre'd OT commitm'enfs made by utilities und~r c~st-.based iegul~t,io~ 'tliat m~/rio'i be *r~asonably expected t6be i'~covefad in a'compefitive TT1arket. _ ' *..

Virginia Po~ers potential exposure tc, stranded costs.is c:orry-posed of the following: '.

  • long-term purchased power contracts th.at may be above market (see Note Q);.
  • costs pertaining to ciirtain*g~nei'a!ing plants)hiit may become uneconomic in a deregulated environment;
  • regulatory assets for items iuch as income ta/benefits.previ~

, ously flowed.~through to,custqmers, deferred losses 011 reac-quired debt; and ~t~ercosts (See Note' C);'and..,..

  • unfunded obligations: for nuclear. plant decommissioning and postretiremen('.benefits not'yet,. recogniz~d in t~e financial statements (See Notes A' and M).,.... *.

Any forecast of potentially stranded costs is extremely sensi-tive to the vario~ assumptions made. Such assumptions.include:

  • the timing-an!f extentofcustomerrihoice in'themarket for elec~

tric service;**

  • estimates of future competitive rriarket:prices;'
  • stranded cost recovel)' mechanisms; and other factors. *
  • certain combinations of these _assumptioi1s as applied to Vir-ginia Power would produce little to no stranded costs;'under other scenariosVirginia Powers*exposure to potentially stranded costs could be substantial: :

Virginia Power has* assessed' the reasonableness* of various possible assumptions, but it has not been able to settle cm any particular combination thereof. Thus, Virginia Power's maximum exposure to potentially stranded costs is uncertain. Management believes that recovery of any*potehtially stranded costs is appro-priate and will vigorously pursue such recovery with the regula-tory commissions. having*.jurisdiction over *its. operations.

However, Virginia i>ower. cannot predicf the extent-to which such costs, if any. will be recoverable.from customer~, Also, in an effort to mitigate the amount at risk, Virginia* Powe*r will continue to implement cost re<;iuction meas:ures, *

. Rate Proceeding.

In March 1997, the Vhginia *commission issued :an order that Vir-ginia Power's base rates be made interim and subject to refund as of.March 1, 1997. This order was the res uh *oft he Commission Staff's re~ort ori its review o{Virginia Powers 1995 Annual Informational Filing which concluded thatVirginia*Pciwers present rates would cause Virginia Power to earn in excess of its authorized return on equity. The Staff found that, for purposes of establishing rates prospectively. a rate reduction of $95.6 million may be necessary in order to realign}ates to' the authorized level: In March 1997, Vir-

  • ginia Power filed its.'alternative regulatory plan (ARP) based on 1996 financial information. Subsequently. the commission consol-idated the proceeding concerned with the 1995 Annual Informa-tional Filing with the proceeding that includes the ARP proposed by the company. Opposing parties in the rate proceeding have e

made filings recommending rate reductions in excess of $:wo mil-lion. Virgihia PoWer is\\Jrrently studying fhe filings of these p~r:-,

tiei:'rhe Commissio~*staff ii scheduled to make further filings in late Febr~~ry 1998.' Hearings are schedul~d to begin in late April,.

*,* :-: *_.r' Environmental Matters.

Virginia Power i~ *s~bj~~t to rising costs re~t,1lting from;_ steadily increasing nulT\\ber offederal, state and l_ocal laws and regulatio~s d~signed. to protect human health and.the environment. T.h~se laws. a~d regulations ~an r~sult i!] increased capital, operating

~nd ~ther costs as a result o*f compliance, remediation, contain-ment.,md monitoring obligations 9f Virginia Power.,:hese c~st~

have_been.histori~al\\yrecovered through.the ratemak.ing process; however, should material costs be incurred.and not._recovered through rates, Virginia Power's results of operations and financial c.ondition could be adversely imp~cted.

virginia'pciJer incurred expenses of $70-4 million, $71.1 million,

~nd $.68-3 miilion (ilicludihg d~preciation) durin'g 1997, 1996, and 1995, respectiv~ly. in ccinnection with the use of environmental pr6tectidn facilitle!{a'.tid expects these* expenses to be approxi~

~~ti!ly $69:1 riiillibn' in 1998. In addition, capital expenditures to limit 0~ monitor hazardous substances were b,.6 million, $22-4 million, and $23-4 million for 1997,.1996, and 1995, respectively. The arriountestimated for 1998 for these expenditures is $10.0 mill.ion.

. The Clean'Air A'ct; as amended im990, requires Virginia Power' to reduce'its emissions ofsulfurdioxide (S02) and nitrogen oxides (NOx). The Clean* Air Act's S02 reduction program is based on the issuance' of a limited number of 502 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 cmm-pliance plans may include switching to lower sulfur coal, purchas-ing emission.allowances and)nstalling S02 control equipment

. Virginia, Power:began ~omplying with Clean Air Act Phase I NOx limits at. eight of its units i~ Virginia in 1997, three years earlier than otherwise requir:eq. As.a re;ult, the units will not be subject to more stringent phase 11.limi.t~ until 2008:

From. 1.994 thro.ugh 1997, Virginia Power invested over $160 mil-lion to install and upgrade emission control equipment at its Mt Storm ~nd Pos_s.~m.Point power stations. Capital expenditures related to.Cl.ean Air Act compliance over the.next five years are projected to be approximately, $40 m_illion. Changes in the regu-liitory en:vironmem, availability qf. allowances, and emissions control techr:iology.could substantially impact.the timing and magnitude of compliance expenditures..

. In Novemben997, t~e EPA proposed new requirements for 22 states, including No.rth Carolina, Virginia and West Virginia, to reduce an!f cap emissions of NOx. AlthoughJhe proposal leaves it upJo each. stat!!to determine how to achieve the required reduc-tion in emissions, the caps y,1ere calculated based on emission lim-*

its for utility boilers. if the states in which Virginia Power operates choose to impose this limit, major additional emission control equipment, with attendant significant capital and operating costs, could be required. The EPA will issue a final rule by September 1998.

Global Climate Change 1.n 1993, the United Nation's Global Warming Treaty became effec:

tiye; The objective of the treaty is the stabilization of gr~enhous~

gas concentrations at a level that would prevent marm:iade emis-sions. from interfering with the climate system, To furthei; this objective, an international Protocol was formulated 'on December 10;,1997 in Kyoto, Japan. This Protocol calls for the U.nited States to reduce greenhouse emissions by 7% from 1990 baseline,level~.by the period 2008-2012. The Pro.tocol will not constitute a binding

.. commitment unless submitted to and approvec;i, by the Senate, Emission reductions of the magnitude included in the Protocol, if adopted, would likely result /n a substantial financial impact on companies that consume OT produce fossil fuel~deri~ec,t' electric power, including Virginia Power.

Nuclear Operations On 'september 10, 1997, the Nuclear Reg,ulatory Commission (NRC) pu):>Hshed a proposed rul~ for finanda1 assurance requirements

'reiated 'to nuclear decommiss,ioning. lf'the NRC's proposed r:u,,e were implemented without further ~larification :OT modjfication, Virginia Power might have to either pre-'fLi~d or provide° ac.cept~

able security for a portion of the'decommissioning obiigation.: * * *

~,

  • DOM,INIOW UK East 0Midlantls operates in thre~ strategic.b.usiness lines~distri~
  • bution, suppli and other. East Midland's distribution ~n~ supply businesses are subject to extensive r~guiation. ']'.he 4istribution business inyolves the transfer of electricity a~oss its)ow voitag~

distribution sy~tem to custom~rs. Tlie. ~upply busines~ *erycom-:-

pa~ses purchasing elestricity and arranging fo~ iits distributipry to end users.

Regulati_on of Distributi~n

. East 'Midland's distribution business is fully regulated and accounts for approximately 85% of its operating profit. The focus in the distribution business is on the colitinuance,of'cost *reduc-tions and effic:iency improvements. The revenues.which East Mid-lands. derives from its distribution,business ate controlled by a specified formula. The elements in the formula are establishedfor a five year period. Portions of the formula are subject to review at the end of each five year period anct' cifother times at the discre-tion of the regulator. An initial annual increase was established by the regulator for the five year period ending March 3~ 1995. Since then; the regulator has on two separate occasioris decreased East Mi.dland's regulated d.istrib~tion prices which it. may charge its customers through the fiscal year ending Marclf31, 2000:There can be no ass\\l.rance that the regulator will not perform further unscheduled distribution price reviews, or that any future distri_-

bution price review, whether scheduled or unscheduled, will not result in price reductions or changes in the formula which could materially adversely affect East Midlands.

Supplyco'!1_P;~~itio!1_:.,.*,.,:,:*,... *,,,.,:. __,.,,,;*_, :.. ',,.:.*

.Ea~t Mic:llari~s,c.\\lt;ren~ly has,t~e sc:il~.rig:ht tg s,µ-pi>!y elect~idty to substanti~Jly ~11,of._th~. ~ustorrier~.}~ \\~~. ~.ut_ho_r!zec;i ~:re~,' exc.ept where the customer's.demand is abbiie 1ookw. competition is cur-

.;:* * *, 1

~', * *
  • * ~i.; *
  • l *,

'. '.fr:'..,,. *:* \\~ /',*; *-* : *. ;._.

rentlysche9-ule_d t_o.be ph~sed int<>.t,h~ ry~t_io,n~I ~l~c:tri~ity ma,i:ket for small customers whose demand is below (ookw, re'f erred to as the do~.e~U~ c~s~m11er;:* -b.~gi~r,i.DgJ,' se,1¥,111~~i1ij9~:E~~t Mii lands is getting,ready for,~oinp,etit)~n.by,~,ii.i.lq!i,ig_~~-stomer loy~

~lty. It will clCComplish this*goal PYi ;,, <.,, :,.,.,..,,:*

'

  • offering compet'itive prices', ' ' . '
  • providing superior customer service,. -*
  • providing' reliable distribution ~er~ice, and *': '. :*. **.

',' i. i'\\

  • bei,~g respo~si.ve.in dealing with.t,,ili'ing ~na'oti,~~-rriitters.. ;

',* ri,;;.e cah biino aisur~~ce t*h~t 'coJp~tition ~iricin!i's~pplier~

o(electric.ity will n<>t'adverse1y*affect EaiJMittlands ahci.Dbm'i~ion Resources.**.-..,:.

. '.):**,. :*:.**;.**.'",_

..'*: *< *.. *.;,,~:.. *.\\*,.';....,,,*,*:,.,.,~*:*',,... *-~

In its supply business, -East M1.dland5 1s.focused on taking

', ~dvantage 'of ttie, :mai;,+* t>pp6rt'unity i~ 'the d~i:ne's,r~

  • gas's'Lip-

' piy 'busine'ii :tid'ding ga~ s~r~s'will :,ornplerri~ht 'it~. ~ie"ct"ri{'

s\\ipply salk{to'.*d~rriestic; srriii)~' to' medium-s'i~ed'.~ommerci~I aridind~striai customers.'~

D.OMI.NIO:~.. EN.ERCiY,.:-.. ; _*,

r,;,,,;*i*:*1.,:-.. *.. *...,,,.

The financial;P!!Jfor:n:.i~nc!!:.of:DomiJ1ion Energy's 11,~t~Tcl.l ga~,a,nd.

oil opeTclti011S,depeT)dS'tO a certair,i,d,egree on future mark!!t prices whi.ch a!e !nf!uenc~_d,.py many fact9rsiqut~i~!!.the cortr<>I of th,e company.-

Much of.Dominion Energy's g~_s resery!?S;. hcl,vt pr9d.u~tio,n-

  • based ta~ credits. This tax' credit is due to*expire.on December 31,

~O~i!,;Th(!, expirati.on of:thi~ t~?<,~re~i't,~i1th~~e -~~j~pa~. 0~ t~~'

.companys future profitapjlity.'To replace,these.earn,ing~. 'th~ !=or.rr pany continu~s.t~ grp,~,its resef"1e ~aseJhro_ugh:~hl! dri)l}ng:?nd acqui~i~i on of.oil ar.id g~s properti(!s.which.do i;iot,qu_aiify for)re

.credit

._,..-,, *,i,. *.

ln,
it~ foreign p<>~e.r,h!:lsine~~e~. th~re a;.e ~om;i~t'~:ents.'to ~,4d generat,ing capacity.,.E_gei:10.r,/~_eq>mpanxs. ~en.ivian. power g~r:i~

era~ion.busiriess, ha(acqmi;n!,t.ment.t9 a~d 100 N\\,w.'r;,.y t~l! enq of 1999.. Corani, t.he comp~r1y'sio.ljyianb,µsiness, *hasilc,9,m!f)it~~nt.*

to invest_.-subs~an~ial. capital :to, increas_e generation ~apaci~y in

  • 8()1ivia by t.he end of.1998., Both, expansion projects,are, C\\lTTentJy.

progressing on.schedule. Foreign operations are also sµbjettto.

poH,ic,al and econo.rn,i~ risks. DomJnion Energy~seeks, to,qi~nage these ris~s by limiting,jts exposure in any single.count!Y and by limiting i~s inv~s.tr,ner:it~ to th~se ~9u~tri_es ilTl(f !e.giot1s ~he.re th*e:

company believes these risks are less signifi,Cil!)t.*' : * ; : i,. : :'

DOMINION' C'APITA.L:

  • The financial perf orman~e of [?om inion Capitals diversified finan-cial services business depends,to a certain ctegree:on the move-:

ment. of interest. rates, c;>Verall economic conditions, and increasing competition.* Dominion*Capital. intends.to manag,e the effect of these issues by r~acting quickly to changing _econ<>mic market factors, maintaining. underwrit,ing. and. credit quality.

expanding origination channels and fo.cusing on specializl!d mar-*

kets (see Note P).

  • 29

e RECENTLY ISSUED ACCOUNTING STAN DA.RDS.

During 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosure About Segments of an Enterprise." Each of these statements is effective for fiscal years beginning after December 15, 1997.

At this time, Dominion Resources does not expect the imple-mentation of these standards to have a m*aterial' impact on its results of operations and financial condition.

YEAR 2000 COMPLIANCE Dominion Resources is taking.an aggressive approach regard-ing computer. issues associated *with t_he onset of the n'ew millennium-specifically. the impact of possible failure of com-puter systems and computer-driven eq~ipm_ent due to 'th_e roll-ove~ to the year 2000. The year 2000 probiem is pervasive and complex as virtually every computer operati.on could be affected i~ some way by the roliover.of the t.;..,o-digit_ yea:r ~al~e from 99 to cio. rhe issue is ~hether computer systems wiil properly recog-

~ize* date-sensitive infoi;mation when the year.changes to 2000.

Systems that do not properly recognize such information could generate erroneous data _or cause a syste~ t~ fail.

If not properly addressed, the year 2000 computer problem could result in failures in company computer systems and the computer systems of third parties with whonl'the company deals on transactions worldwide. Such failures of the companys and/or third parties' computer systems could have a material impact on the:companys ability to conduct business.

Since January 1997; the company has organized formal year 2000 project teams* to identify. correct or reprogram and test the systems for year 2000 compliance. At this time, a ma}ority of the project teams has completed their preliminary assessment. Based on their evaluation, testing and conversion of system application costs are projected to be within the range of $100 million to $150 million. The range is a function of our ong*oing ev~luation as to whether certain systems and equipment will be corrected *or replaced, which IS dependent cm*information*yet to be obtained from suppliers and other exterrial sources. Mainteriance or mod-ification costs wHl-be expensed as incurred, while the costs of new software will be capitalized and amortized over the software's useful life.

At this time, Dominion Resources is actively pursuing solutions to year 2000-related computer problems in* order to ens*ure that foreseeable situations related to company computer systems, etc.*

are effectively addressed.

The company cannot estimate or predict the potential adverse consequences, if any. that could result from a third party's failure to effectively address this issue.

BUSINESS OPPORTUNl,:IES Because the worldwide electric power industry is rapidly changing, especially in the U.S., there are*many opportunities for acquisitions of electric power assets and business combinations. We investigate any of the opportunities we learn about that may increase share-holder 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.

Market Rate Sensitive Instruments and Risk Managemen't Dominion Resources is subject to market risk as a result of its ~e of various financial instruments, derivative financial instruments and derivative, comm~dity instruments..l_nterest !ate risk generally is associat.e~ with the.company's anci its subsidiaries' ou~standing debt as well a*~ its: comrnercia.l, *consumer, and mortgage le~di~g activities.. Currency risk e~ists p~incipa!'y Jhrough the company'~

investments in.the United Kingdom and ~ome debt denominated in European currencies associated with the company's investment in South and Central America. The company is exposed to equity price riskthrough various portfolios of equity securities.

. The company uses derivative commodity instruments to hedge exposures of underlying electric, gas production, and gas pro~

curenient operations and is *also involved in trading activities which* use these ins.tn.imehts. However, the fair value of these derivative commodity. ilisfruments at becerriber 31, 1997 *and the potential near term losses in future earnings, fair values, or cash flows resulting from reasonably possible near term changes in market-prices are no't anticipated to be material to.the results of operations, cash flows or financial position of the company..

  • The following analysis does not include the pricerisks associ~

ated with the nonfinancial assets and liabilities of power produc-tion operations, including underlying fuel requirements and natural gas operations: *,

  • e INT-ERE ST - RA TE RISK: NON - TRADING ACTIVITIES In managing interest-rate risk, the company enters into interest~

rate sensitive derivatives. The following table presents descrip-tions of the financial instruments and derivative financial instruments that are held by the company _at December 31, 1997 and that are sensitive toJnt~rest rate change in some way.

EXPEC:rED MATURITY DATE 1998 1999 (millions of US$)

ASS 0

ETS Loans Receivable:

Variable rate 39.6

$ 73.7 Av_erage interest rate 8.8%

8.9%

Fixed rate 0.2 3.5 Average interest rate 12.4%

12.4%

Nuclear decommissioning trusts' investments 1.7.7 5.3 Average interest rate(()

5.5%

5.5%

Mortgage loans in warehouse 88.2 Average interest rate 9.6%

LIABILITIES Fixed-rate debt

$ 497.1

$335.6 Average interest rate 6.5%

7.8%

Variable rate debt

$1,501.8

$490.2 Average interest rate 6.1%

6.0%

Preferred securities of subsidiary trusts

$1 35.0 Average interest rate 7.9%

7.9%

Short-term debt 375.1 Average interest rate 6.1%

Mandatori ly redeemable pref erred stock Average dividend rate 6.2

$ 6.2 Off balance sheet Loan commitments

$ 672.9 Average interest rate 9.3%

INTEREST-RATE DERIVATIVES ( 2)

Forwards Notional amount 54.0 Average strike price I 02.142 Average market price I 02.177 Futures con tr acts Notional amount

$ 498.9 Average strike price 99.077 Average market price 99.268

( 1) Interest rates are based on average coupon rates for entire portfolio at 12/31/97-2000 Weighted average variable rates are based on implied forward rates derivedjrom 1appropriate annual spohate observations as of the balance sheet* date. For interest rate derivatives, notional amounts* have bee.n used -to --calculate the cash flows to be exchanged under the-contract.*

Fair 2001 2002 Thereafter Total Value

$119.7

$226.0

$281_.4. _

207.2 947.6 974.5 8.9%

8.8%

8.7%

8.4%

2.4 0.2

$ 0.1 5.0 I 1.4 I 1.4 12.5%

11.7%

9.9%

8.7%

2.1 7..1 3.1 165.0 200.3 190.7 5.5%.

5.5%

5.5%

5.5%

88.2 91.4

$260.1

$175.8

$731.4

$3,255.5

$5,2_5 5. 5

$5,596.9 6.1%

6.0%

5.1%

6.9%

$ 88.8

$256.6

$366. 5

$_ 876.3

$3,580.2

$3,580.2 5.6%

5.7%

5.5_%

4.9%.

250.0

_$385.0 387.7 7.9%

7.9%

7.9%

7.9%.

375.1 375.1

$180.0

$ 180.0

$ 186.6

$ 6.2 672.9

. 675.9 54.0

$ 498.9 (o.6)

(-2) Dominion Capital~ use of interest rate swaps to mitigate interest rate risk exposure in its residential and commercial lending businesses is immaterial.

31

32 e

INTEREST RATE RISK: TRADING ACTIVITIES Dominion Capital, though its indirectly owned subsidiary Saxon Mortgage, Inc., retains o.;,.nership:il) the residual classes o(the asset backed **securities *utilized tb'sell home equity loans origi-nated and purchased by Saxori Mortgag!;!. These assets are classi-fied as Trading securities* on the balance sheet and total $18"9.1 million as of December 31, 1997.

The residual securities represent the net pr_esent value of the excess of the interest payments upon the underlying mortgage collateral net of interest payments to outs{anding borid holders, servicing costs, over-collateralization requirements, -:and credit losses. Fair value of the residual *is ~nal'yzed quarterly by Saxon Mortgage to determine whether prepayment experience, losses and changes in the interest rate enyironmimt have had an impact on the valuation. E}\\pected 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. As the secu-rities represent a net present valuE! of future c~s~ flows, changes in the discount rate will result in valuation changes to the under-lying securities. The disco~nt ratJ utilized for the_ December 31, i997 fair-market value.determination:rs 11% and is derived from a EXPECTED MATURITY DATE 1998 1999 (millions)

LIABILITIES Long-term debt denomin~ted_ in foreign c,urrencies (US$ functional curre~cy)

Unit of Currency-Inter American_

Development Bank Vari able rate

$ 1.6

$ 1.6 Average interest rate 6.8%

6.7%

Foreign exchange rate

$i.53

' $1.37 Unit of Currency-German Mark.

Fixed rate

$ :7

$,7 Average interest Rate 4.5%

4.5%

Foreign exchange rate

$1.79

$1.77 (GBP functional currency)

Unit of Currency-US$

Fixed rate Average interest rate 7-3~

7.3%

Foreign exchange rate

$1.60

$1.58 Currency swap agreements related to long-term debt Notional amount Average pay price Average receive price Foreign exchange rate 2000 1.6 e

spread over the prevailing 5-year Treasury interest rate. Should interest rates increase by one percent, Saxon Mortgage could experience a loss of approximately $7-4 million.

FOREIGN-EXCHANGE RISK MANAGEMENT Dominion Resource's exposure to foreign currency exchange rates or cross currency exposure results from debt which is denomi-nated in a currency different from the company's functional cur-rency. 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. The company uses currency swaps to minimize this exposure. The table below provides infor-mation about the companys foreign currency-sensitive financial instruments and derivative financial instruments. For debt, the table presents principal amounts and related weighted average interest rates by expected maturity dates. The principal cash flows are translated into U.S. dollars based on implied forward currency rates at the reporting date. For currency swaps, the table presents the notional amounts, the weighted average pay rates, and t_he weighted average receive rates by maturity dates.

Fair

. 2001 2002 Thereafter Total Value

$ 1.6

$ 1.6

$ 13.4

$ 21.4

, $ 21.4 6.5%

6.3%

6.3%

6.5%

$1.49

$1. 53

$1.49

$1.48

$,7

$,7

.7

$ 20.3

$23.8

$ 22.6 4.5%

4.5%

4.5%

4.5%

$1.76

$1. 7 5

. $1.74

$i.76

$409. 5

$409. 5

$819.0

$852.4 7.3%

7.3%

7-3%

7.5%

$1.57

$1. 56

$1.56

$1. 5 5

$409. 5

$409.5

$819.0

$(26.8) 8.2%

8.6%

7.1%

7.5%

$ 1.56

$ 1. 5 5

e EQUITY PRICE RISK MANACEM.ENT The following table presents descriptions of the equity securities that are held by the company at December 31, 1997. As prescribed by the FASB, the marketable securities are reported on the balance sheet at fair market value. The company'.s securities consist of trading (short-term) and available-for-sale securities.

Fair Cost Value (millions of US$)

Trading:

Short-term marketable securities

$240. 7

$240.7 Other than trading:

Marketable securities

$185.3

$190.8 Nuclear decommissioning trusts' investments

$219.4

$360.4 OTHER RISK MANACEM.ENT FACTORS AND MATTERS On a company-wide basis, the company is sensitive to interest rate risk. The company minimizes interest rate risk through a proper mix of fixed and variable rate debt.

As mentioned earlier, a significant portion of the company'.s operations are located in foreign countries. These operations have acquired debt in denominations different than the local func-tional currency. As a result, the company'.s foreign financial results could be significantly affected by factors such as changes in exchange rates. To mitigate the effect of changes in currency exchange rates in the United Kingdom, Dominion UK has insti-tuted a foreign currency swap. The swap is associated with senior notes denominated in u:*s. dollars.

Dominion Capital Dominion Capital's operations are affected by a number of risks.

Its lending institutions are concerned with credit, interest rate, operation reserve, and market price of gas risks. Credit risk is managed in the following ways:

  • through its experienced management and underwriting professionals;
  • by minimizing the size of the.loan;
  • spreading the risk over a diversified client base, both geo-graphically and industry wide;
  • having first position on the collateralized assets;
  • offsetting the credit risk of the customers with lower loan to value and higher interest rates;
  • and retaining only a residual interest in the mortgage loans through the securitization process.

Dominion Capital is also concerned with interest rate risk. This risk is managed by making floating rate loans, loansecuritizations which transfer most of the risk to investors, prepayment penalties and hedging programs forpresecuritized loans. This period is rel-atively short because the loan portfolios are securitized every 90 days.

.Dominion Capital's mortgage investments are adversely impacted by increases in the rate at which home equity loans pre-pay. Accordingly, Dominion Capital actively manages this risk by 1) imposing prepayment penalties on many of the underlying home equity loans 2) aggressively enforcing premium recapture provi-sions with correspondent sellers of mortgage collateral, 3) limiting the acquisition of adjustable rate mortgage collateral with below market start rate (i.e., teaser rates), and 4) actively monitoring trends in historical prepayment speeds and using prudent resid-ual prepayment speed assumptions. Changes in interest rates are not considered to have a material impact upon prepayment speeds on the underlying home equity loan collateral as the credit impaired borrowers which make up the majority of the underlying collateral have not pr'oven to be sensitive to changes in interest rates during past periods of interest rate volatility.

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 sub-sidiaries. 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 busine~ses, are subject ~o. 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 neces-sarily 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 dif-ference in the forward-looking statements we have made include:

legislative and regulatory actions, both domestic and interna-tional; deregulation and increased competition in our industry; our operation of nuclear power facilities and related decommis-sioning 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 expen-ditures; 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); pricing and transportation costs of commodities; the level of market demand for energy; inflation; and capital market conditions.

33

34 CONSOLIDATED BALANCE.E. TS Assets At December 31, (millions)

Current assets:

cash and ca~h equivalents (N.ote.s A and G)

Trading securities (Notes\\ F and G) customer accounts receivable, net,

Other accounts receivable Accrued unbilled revenu.~s.

Materials*and suppli;s at averag~ cosfor less:.

. Plant and general.

Fossil.fuel.

Mortgage loans i~ war~hoJse (Notes A and G)

Other Investments:.

    • Investments in affiliates (Note A)

Available-for-sale securities (Notes itF and'G) *.

Nuclear decomm issiorifng trust 'funds (~ot~s A ~nd G)'

. Lo~ns receivable, net<(Note~ A.and G):

Investments in real.estate.,

Other. *

. *};_,

Prop.erty,, plant an!i'equ;pmertC'~Ji~. A):

(include~plant under construction.of $240.9 [ 1996-$18c;,.1]), *.

Less accumulated depreciation, depletion and amortization***

. i'.'.

Deferred charges and other ci;setii.

  • Good;,..,n1 (Note A) '. '.

Regulatory assets (Note:c)

Other*

Total assets.

The accompanying notes are an Integral part of the Consolidated Financial Statements.

I 1997 321'.6 240.7 6oi'.o 336.5 245.2 163.3 67.4 88.2 209.1 2;273.0

  • '404.0 "190.8 569.1.

959.0

'101:5 19L6

  • 2,416.0 19,5*19.2

- 6,986:6

'12,532.6 1,932.0 776;6,

  • 262.5

'2,971.1

$20, 192.7-1996 110.8 16.4 354.8 174.9 162.8 148.7 76.8

,65.8 209.5 1,320.5 448.3

. 692.4.'

443.3 I 07.7_

234.2.

1,925.9 16,815.8 6;306.4 10,509.4 179.1 773.9 187.6 1,140.6

Li~bilities ;nd Shareholders' Equie T:. ;.,.

At December 31,

  • " ~-~v***** *

~ ****** -

~.

1997 (millions)

Current liabilities:

Securities due within one year (Note H)

$ 1,613.6

._..... -* 1,; i\\.* *.,

Short-term debt (Notes E and G) 375.1 Accounts payable, trade 679:3 Accrued interest 185.1 '.

Accrued payroll 107.2 Severance costs accrued (Note N) 29:7 Customer deposits 44.6 Other 591.1 3,625.7 Long-term debt (Notes G and H):

_l I~ ~ i :,

i"; I,,

Virginia Power 3,514.6 Nonrecourse-nonutility 707.8 Dominion UK 2,673.6 other 300.0 7,196.0 Deferred credits and other liabilities:

Deferred income taxes (Notes A and B) 2,018.4 Investment tax credits (Note A)

'~,;

_238.4 Other

-~96.~

2,853.6 Total liabilities 13,675.3 Minority interest 402.9 Commitments and contingencies (Note Q)

Virginia Power and Dominion Resources obligated mandatqrily recie11mable preferred securities of subsidiary trusts* (Notes G and K) 385.0 Preferred stock (Notes G and 0:

Virginia Power stock subject to mandatory redemption 18o.o

.*t.**'

Virginia Power stock not subject to mandatory redemption

' *~.,,. *.

r: i ~-*.

509.0 Common shareholders' equity:

Common stock-no par authorized 300,000,000 shares, outstanding-187,799,443 shares at 1997 and 181,220,746 shares at 1996 (Note I) 3,673.6 Retained earnings 1,354.0 Accumulated translation adjustments (Note A)

  • c10.6)

Allowance on available-for-sale securities, net of tax (Note A) 7.3 other paid-in capital 16.2 5,040.5 Total liabilities and shareholders' equity

$zo, 192.7

  • As described in Note K, 1he 7.83% and 8.05% Junior and Subordina1ed Noles 1otallng $232,7 and $139.2 million principal amoun1s cons111u1e 100% of 1he Trus1s' asse1s.

The accompanying no1es are an in1egral part of 1he Consolida1ed Financial S1a1emen1s.

1996 431.0 378.2 410.6 107.3 73.1 50.2 50.0 155.4 1,655.8 3,579.4 825.4 342.5 300.0 5,047.3 1,743.3 255.3 162.5 2, 16.1.1 8,864.2 293.0 135.0 180.0 509.0 3,471;4 1,437.9 (9.2 (I. I 16.2 4,915.2

)

)

$14,896.4 35

CONSOLIDATED STATEMENTS OF CASH FLOWS e

e For The Years Ended December 31, 1997 1996 1995 (millions)

Cash flows from (used in) operating activities:

Net income 399.2

$.. 472.1

$ 425.0 Adjustments to reconcile net income to net cash:

Depreciation, depletion and amortization 905.7 694.4 633.5 Deferred income taxes 13.8 84.1 26.4 Investment tax credits, net (16.9)

( 16.9)

( 16.9 Deferred fuel expense 9.6 (54.4) 6.2 Def erred capacity expense (41.2)

(9.2) 6.4 Restructuring expense 12.5 29.6 96.2 Accelerated cost recovery 38.4 26.7 Purchase of _mortgage loans (1,713.7)

(769.2)

Proceeds from sale and principal collections of mortgage loans 1,672.6 703.4 Changes in current assets and liabilities:

Accounts receivable (111.3)

(47.0)

(38.7 Accrued unbilled revenues (64.9) 17.6 (27-7 Materials and supplies 15.9 6.o 61.1 Accounts payable, trade 113.8 73.8 (37.6 Accrued interest and taxes 118.6

( 17.5) 33.6 Other changes (89.9)

. (161.3) 3.8 Net cash flows from operatirig activities 1,262.2 1,032.2 I, 171.3 Cash flows from (used in) financing activities:

Issuance of common stock 176.2 169.7 161.7 Preferred securities of subsidiary trust 250.0 135.0 Issuance of long-term debt:

Virginia Power 270.0 24.5 240.0 East Midlands 1,898.5 342.5 Nonrecourse-nqnutility i{

, 4,i 13.0..

434.5 54.3 Issuance (repayment) of short-term debt (98.5);

134.5 IOI. I Repayment of long-term debt and preferred stock (4,377.0)

(336.5)

(553.0 Common dividend payments

.. *.(478.0)

(460. I)

(448.7 Other

,*_;-]4*6*..

(,4.5)

(20.5 Net cash flows from (used in) financing activities 1,828.8 304.6 (330.1 Cash flows from (used in) investing activities:

,i Utility capital expenditures (648,7)

(484.0)

(577-5 Acquisition of natural gas and independent power properties (52.6)

(271.2)

( 128.5 Loan originations (1,147.2)

. Repayments of loan originations 1,077.2 Purchase of East Midlands (1,901.5)

"(342.5)

Sale of businesses 123.3 Purchase of fixed assets.

(124.4)

(34.8)

(27-4 Purchase of marketable securities (8.5)

(8.8)

(61.8 Sale of marketable securities 127.7 Additions to mortgage investments (138.4)

(58.3)

Acquisitions of businesses (144.5)

( 19.5)

(52.4 Other investments (42.6)

(73-6)

(73-6 Net cash flows used in investing activities (2,880.2)

(1,292.7)

(921.2 Increase (decrease) in cash and cash equivalents 210.8 44.1

$ (80.0 cash and cash equivalents at beginning of the year 110.8 66.7 146.7 cash and cash equivalents at end of the year 321.6 110.8 66.7 The accompanying notes are an integral part of the Consolidated Financial Statements.

MANAGEMENT'S DISCU.J.i..lON AND ANALYSIS OF CASH F.LOWS AND F I N A N C I A L C O N D I T I O.naudited)

Introduction In Management's Discussion and Analysis of Cash Flows and Finan-cial Condition, Dominion Resources' and its subsidiaries' general financial condition and changes in financial condition are dis-cussed by addressing the following topics:

  • What our capital expenditures were for the year 1997 and what we project them to be for the year-1998: In addition, we will dis-close trends that may have a material effect on our financial condition over the next couple of years.
  • The sources of fupds u.tilized to pay for the expenditures incurred during 1997 and the anticipated future capital expenditures.

Consolidated Financing Activity Dominion Resources funds its operations and supports the financ-ing needs of its subsidiaries primarily as follows: (1) A $950 million shelf registration through which the company may. over the next two years, sell any combination of debt, preferred or *common securities up to the $950 million limit. (2) The company continues to raise capital from sales of common stock through its equity plans. The company has raised over $100 million in each of the last nine years from sales through these plans. (3) The company also sells commercial paper backed by lines of credit and pro-vides the proceeds to its subsidiaries under intercompany credit agreements.

  • our 1997 financing activities were focused on the acquisition of East Midlands and the related refinancings. A discussion of these activities follows:

EAST MIDLANDS FINANCING Dominion Resources, through wholly owned UK financing sub-sidiaries, initially financed 100 percent of the 1-3 billion pounds sterling ($2.2 billion) acquisition of East Midlands with interim deb( The funds necessary for the purchase were obtained in part from borrowings of approximately 640 million pounds sterling ($1 billion) under a short-term credit agreement and borrowings of 700 million pounds sterling ($1.2 billion) under a five-year revolv-ing cred.it agreement, both guaranteed by Dominion Resources.

During 1997, the entire short-term credit agreement and a por-tion of-the five-year revolving credit agreement were refinanced with 8oo*million pounds sterling ($1.3 billion) raised from three bond offerings and one private bank facility. all on a non-recourse basis to Dominion Resources. The final target capital structure calls for the remaining 40 percent of the acquisition cost, currently financed on an interim basis with the 5-year revolving credit facil-ity. to be refinanced with equity or equity equivalents.

In December of 1997, $250 million (150 million pounds sterling) in Capital Securities were issued by Dominion Resources Capital Trust I as the first part of the equity capitalization of the East Mid-lands acquisition. In January of 1998, Dominion Resources raised an additional $275 million (168 million pounds sterling) through the issue of 6.8 million shares of common stock (see Note*S); also as a part of the program to capitalize the East Midlands. acquisi-tion. The remaining portion of the. fiye-y~ar revolving credit agreement is expe,ct~d to be refinanced with equity or equity equivalents during the re~~inder of its five-year term. The capi-tal markets will continue to dictate the timing and methods of '

completing the equity capitalization of Ea~t Midlands.

EQUITY PLANS Dominion Resources.raised capital from sales of com:mon stock through the following plans:

  • Automatic Dividend Reinvestment and Sfock Pl,\\rchase Plan;
  • Customer.Stock Purchase Plan;.
  • DominionDite'd fn.vestment;' and.
  • Employee Savings Pian.

On July 8, 1996, the company established Dominion Direct Investment. Dominion Dire.ct Investment' continues and expands the Automatic Dividend Reinvestment and Stock P.urchase Plan.

Dominion Resources will continue to raise capital.through the Dominion Direct Investment and the Employee Savings Plans in 1998. Proceeds from these.plans were (in millions); 1997-$176.2; 1996~$164.2; and 1995-$136.9. Reflected in the amounts of the pro-ceeds from these pl/ins were the repurchases of136,800 shares of common stock in 1996 for an aggregate price of $5.5 million and 685,500 shares of common sto~k in 1995.for an ag 0

gregate price of

$24.8 million.

COMMERCIAL PAPER Dominion Resources' nonutility suf?sidiaries m_ay finance their working caphal for operations from the proceeds from Dominion Resources commercial paper sales. Dom'inion Resources sells its commercial paper in regional'and national markets and provides the proceeds to the nonutility subsidiaries under the terms of inte~company crnd,it agreements. At the end of 1997, Dominion Resources supported these borrowings th~ough bank lines of credit totaling $500.8 miilion. The nonutilify subsidiaries repay.

Dominion Resources through cash flows from operations and pro-ceeds from permanent financings. Virginia.Power has a commer-cial paper program_ with. a limi.t of $500 million. The program is supported by $500 million of revolving credit facilities a_nd is used primarily to finance working capitalfor operations. East Midlands has a c*orrimercial paper program with a limit of 200 million pounds sterling. The program is supported,by* a* 200 million l

37

e pounds sterling five-year revolving credit facility and is utilized principally to fund its operations.

Virginia Po~er LIQUIDITY AND CAPITAL RESOURCES Operating activities conUnue to be a strong'source of cash flow, P!Oviding $1,091 million in 1997 compared to $1,115 million in 1996.

The decrease of $24 million (or 2 perce,nt) fr~m the previ~us* year is attributable to normal busiTless fl~ctuations. O~er the past three years, cash flow from operating activities* has, on average, covered 134 percent of its total construction req,uirem~nts\\i.nd pro~ided 81

  • percent of its total cash require~erits: Virginia Pqwe~*s remaining'.

cash needs are met generally wit ti proceeds frotnthe sale of secu-rities and short-term bcirro~ings. --,

Cash from (used in) financing' activities wa~ as follows:

(mfllions)

Issuance of long-term debt Repayment of long-term debt and-preferred stock Issuance of securities of subsidiary trust Issuance (repayment) of*

short-term debt Common dividend payments

  • Other Total

. '1997 1996

,~.2) 143.4 (379.9)

,(385.B)

(49.2)

(48.B)

$(556.6)

$(5 50.B) 1995 135.0 169.0 (394. 3)

(58.0)

Financing activities* have represented a net outflow of cash* in recent years as strong cash flow from operations arid the absence of major construction programs have reduced Virginia Powers reliance on debt financing.

Virginia Power has taken advantage of declining interest rates_

by issuing new debt at lower rates as higher-rate* d*ebt has matured. For example, in 1997, $311.3 'million of Virginia Power's long-term debt securities matured with an average effective rate of 8.08%. As a partial replacement for this*maturing debt, Virginia Power issued $270 millio,n of long-term debt securities during the year with an average effective rate of 6.84%.'.

  • Virginici 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 Sub-ordinated Debentures filed in January 1997, $575 million of First and Refunding Mortgage Bonds, and $200 million of Medium-Term Notes, Series F. The remaining principal amount of debt that can be issued under these registrations_ totals $915 million. An additional capital resou_rce of $100 million in preferred stock is also registered with the Securities and Exchange Commission.

Cash (used in) investing activities was as follows:

1997 1996 1995 (millions)

Utility plant expenditures

$(397.0)

$(393.B)

$(519.9)

Nuclear fuel (84.8)

(90.2)

(57.6)

Nuclear decommissioning contributions (36.2)

(36.2)

(28. 5)

Sale of accounts receivable, net

( 160.0)

Purchase of assets (19.8)

( 13,7)

Other (8.3)

( 12. 5)

-( I I. I)

Total

$(546.1)

$(546.4)

$(777.1)

Investing activities in 1997 resulted in a net cash outflow of

$546.1 million, primarily due to $397.0 million of construction expenditures and $84.8 million of nuclear fuel expend_itures. The construction expenditures included approximately $252-4 million for transmission and distribution projects, $52.1 million for pro-duction projects; $49.7 million for information technology projects and $42.8 million for other projects.

CAPITAL REQUIREMENTS c A PA c I TY - Virginia Power anticipates that kilowatt-hour sales will grow approximately 2-4 percent each year through 2000. We will continue to pursue capacity acqu!sition plans to meet.the anticipated load growth and maintain a high degree of service reliability. The additional capacity may be purchased from othe,rs or built by Virginia Power if we can build capacity at a lower over-all cost. Virginia Power has long-term purchase agreements with Hoosier (400 Mw) and AEP (500 Mw) which will expire on Decem-ber 31, 1999. The company presently anticipates adding 584 Mw of market purchases beginning in the year 2000 to meet future load growth.

FI x E,D Ass ET s - Virginia Powers construction and n_u_clearfuel expenditures during 1998, 1999 and 2000 are expe~ted to total

$588.1 million, $476.2 million and $395.1 million, respectively.

Virginia Power has adopted a plan to improve customer service and is spending in excess of $100 mi Ilion. Virginia Power estimates that all of these expenditures will be met through cash fioy., from operations.

Lo No -TERM DEBT -

Virginia Power will require $333.5 million to meet maturities of long-term debt in 1998, which it expects to meet with cash flow from operations and refinancing of debt maturities. Other capital requirements will be met through a com-bination of sales of securities and short-term borrowings.

Dominion UK LIQUIDITY AND CAPITAL RESOURCES Dominion UK funds its capital* requirements through cash from operations, long-and short-term debt faci_lities, and equity con-

. tributions from Dominion Resources. In 1997, Dominion UK funded the acquisition of East Midlands and the first of two installments of the windfall profits tax. While the entire windfall profits tax was expensed in 1997, the cash payments are to be made in two install-ments, half in December 1997 and half in December 1998.'

C,ash flows from operations at East Midlands for 1997 were

$(83-4) million and were due primarily to operating profit and w*orking capital management. A comparison :is not 'made to the year 1996 or 1995 because East Midlands did hot become a part of Dominion Resources' cbnsolidated entity until 1997.

Cash from. (used in) financing activities was as follows:

(~illions)

Contribution from parent Issuance of long-term debt Other Total 1997

$ 254.3 '

1,898.5 47.6

$2,200.4 During 1997, cash from financing activities was primarily due to the funding of the acquisitJon of East Midlands by contrib~tions from Dominion Resources ($254 million) and the iss_u?,nce of the following debt:

  • 321 million pounds sterli~g ($528 million) under a revolving credit agreement and 200 million pounds sterling ($329 million) under a private bank facility, the proceeds of which were used to fund the purchas~ of East'Midlands, aT)d
  • $819 ~illio;n of five~ and ten-year Senior ~otes 'a,nd ioo mil'..

lion pounds ~terling ($165 million) o'f Eurobonds, which were used to pay down debt borrowed under a short-term credit agreement. *

  • In addition, $54 mill ionwas borrowed to fund the acquisition of an additional 40% interestin the Corby Power Station.

Cash from (used'in) investing activities was as follows:

(millions)

Utility plant expenditures Purchase of fixed assets,*.

Purchase of East Midlands Other Total 1997

$ (166.9)

(67.3)

(1,901.5) 0.3 During 1997, cash flows used.in,investing activities.was utilized primarily to acquire the outstanding shares of stock in East Mid-lands, fund the investment in fixed assets, principally on the dis-tribution network, and acquire an additional 40% interest in the.

Corby Power Station.

CAPITAL REQUIREMENTS The projected 1998 capital requirements of Dominion UK include approximately $229 million for cap(t~I expenditures, predomi-nantly for the electricity distribution network and the completion of new systems and facilities required for the opening up of com-petition in the ~lectricity and gas markets. Interest payments are e~pe~ted to be $216 Y)1illion and approximately $80 million will also be required for the second and final installment of the windfall profits tax. The capital requirements are expected to be funded by cash g'enerated from oper~ticins and other existing financing sources.

.. The company anticipates approximately $300 million of equity contributions from the parent during 1998. i"o the extent these sources are available, they will be used to repay acquisition debt.

Dominion Energy LIQUIDITY* AND *CA'Pl:rAL: RESOURCES**.

Dominion Energy funds its capital requirements through cash from operations, equity contributions by Dominion Resources, a,n intercompany. credit agreement. with Dominion Resources and bank revolving credi.t agreements.

Net cash provided by operating activities i.ncreased by $59.8 million in 1997, as compared to 1996, primarily due to: net income from power generation assets in Peru acquired in August 1996; generally higher natural gas prices; and greater production vol-umes due to the acquisition of natural gas properties in the Gulf

  • Coast area in March 1996 and in Michigan in.January 1997. Net cash.

provided by operating activities increased by $52.1 million in 1996;

  • as compared to 1995, primarily due to cash generated by op~ra-
  • tions of acquired companies and assets and from normal opera-tions.

Cash from (used in) financing activities was as follows:

  • 1997 1996 1995.

(millions)

Contribution from parent

$ 75.0

$149.3 Issuance of long-term debt

$ 107.9 221.7 Repayment of debt (212.7)

(B.9)

(72. s)

Common dividend payments (48.3)

(43.3)

(31.6)

Issuance of intercompany debt 21.9 19.7 32.4 Other 0.2 10,0 9.5 Total

$(131.0)

$274.2

$ 87.1 39

40

. * -cash from (tis'ed in) i'n'vestfng acfivities was ~s fbllows:*

,::.,;1*::~\\'*.:*.;.~i°:-!1_,*.~*y-::f",::**

,.. **:*:-:_:*.1*:*,,_*: :**. _*;**,*1 (m.Hlions):
  • -,.,..,;'(
    ,*,",.:;_.'-

Pur,chase !Jffjxe~,a,ss.~t.s, ':::,,-;

$(u.7)

Pur.chasepf ind~JJ.en?ent po~,er.,. l;,., c., 1-.;:.

P;:~:,;;~rn~~~/ai,;as~i~P*~~~i~~ ;:- - Cs~:6_). *, **:c-93.3}:.-..*.. Jt~;

Sale ~{qu,sill:e~si.,,°, ;. : ::' ',. :: ~:,' *: ~ \\°~3.3:. r.. :,.

sal~o{trust units:

16.4

,: -* ~: *- :.:r. ;; *. x.::*,: t *, J.*; :-*r

  • '!.'..'. *. 1 "

~

  • .* i. * :: *'

Acguisition oj business (28.0)

. (228.2).

o'tii~r *.... *-'

" 1 *

  • ',_ i '*

. c21.2> * '\\1ii.1'f '*:. c~i;.:1)

        • 1 !',. F.i'J:t:;
  • .,i:1**..;.~*-,1.~

'. -~* :,",;'-' -'-'"'-,,_,,._,._,--'---,,-,,.--,',--,-,-~

Total

$ 9.. 8.

$~~~,.o) -

_'_ $(.i 36.2)

  • .
    ,**~1... ~./1*1.:/.

' l?~;i~\\i' 1'9*9~.:.the,rriaior,so:Urc~ 9f c~~h)9ws f;pm. in~~sting _actjyi~**:

t'ies ~as the sal~

1of a:*-portion_ of_ Oo~i.nion En~rgy~ gene~ati~g, business, in_Perufor$123.3 mi'l,!lon, Th~se.funds were used.primarily to._pay'ci1f~lofigLfom_cJ._,-!!.. h\\

.. :',*.:, ',::. '. :, i_.:,.':

, i 'j,

'CAPITAL.REQUIR.EMENTS.. **.:****,-

c;apita1 r~q~i;e~ent's't~~*o~min_ioij i:~erg.y in 1998 ~re foreca~ted to be_approximately-$3~8 milli~n. These requirement~ c;onsist of:

.. oil' and gas expenditures of $52 million a~d p~.'.,.,er g~ne~ation e?(pendit.uresof $336 million (including the*~incaid acq,uisiti<;m).

' *~ Sou~ceS-'tor th~se capital reqJiremehts,wiif; be_ nonrec_ourse '

. ct~b.t, cash' flt>~~ f~orr(i>peratio~s. bor~owingi from the re~ol~ing

~r~dlt facili!y;~d, lf n~<:~~sa\\y.: !!q'aity from.Dominion R~sour;:es:.

.. It shou.ld be noted ttiat\\amounts enUmerated,'above *are* esti-.

mates; coAs¢~~e~tiy...a~t.~a1 arn~un~s'.may diff~r'.,, ' '.* '.

  • , i ~

Do,minio*~*Capital.*.

LIQ.UIDIT;Y AND CA*PHAL*.RES.OU RC ES

. Dominion ;Capital funds its.capital *requirements, through cash

  • from; :,operations, a11. intercompany credit agreemen,t. with Dominion; Resq1rn:es; equity.'contributions.* from. Dominio.n.

~eso.urces(a,m!!dium-term note facility. b~rik revolv.in,g cre.dit '

agr_eemenfs, Jerm loans and a commercial paper program. Cash:'

flows useq in p_perations for 1997,.increased-by $i38.7 mi.I.lion as compared'.to1996 primarily due_ to a,.decrease in the net cash out-flow-.of i'TioJ.t~age, loan activity for Saxon Mortgage.

  • J
  • . '.. ~

Net cash provided by operating activities decreased by $179.1 miUion ln 1996 as compared to 1995, primarily as a result of the

  • f~lJding of mortgage'.loan's prior to the securitization o{such loans i~ it~'tinancial services business,

' 'ca~hfrom (1,1;~d in) financing activities ~as as foliows; 1997 1~96 1995 (millions)

Contribution from parent.

162.0

$ 85.0

$150.0

)ssuanc:~ of l~ng-term debt 3,910.1.

104.7 16.1 Repayment of long-term d~bt (3,865.3)

(52.4)

(41. 5)

~o,~oil divici~nd pay,ments (43.1)

(30.7),

(22. 7}

lssu~~i:e (r~p~yrh~nt) bf' interconipany debt 29.0

  • 79.6 (52.'1) other 32.7 (0.4).

(4.5)

Tot~I

  • 226.0

$i.85:8.

$ 45.3 buri~*g* 1997, ca~h flo~s from fi~ancing activities were $226 million, prim~ri ly due to the acquisitjon of the* remaining 50 percent i.nter-est in.First Source Financial, loan origination~ and investment in.

marketable. q.ebt securities. Cash -from (used in)

  • investirg activities was as follows:.

1997 1996 1995 (millions) lnvestment.s in affiliat~s

'$ (96.0)

$(19.5)

$(52.4)

Loan *originations, net (70.0)

Other (27.2)

(23-9)

(32.9)

Total

'$(i93.2)

$(43-4)

$(85. 3)

D~~ing 1997, cash flows used iYJ investing activities increased pri~

marily <iueto the acquisition of the remaining 50 percent int~rest in

'First Source Financial and 1'.let investment in marketable securities:

CAPl,TAL REQUI.REMENTS_

Dominion Capitals principal focus is. growing its financial services companies. First Source Finai:icial.will increase its-loan portfolio from $.970.million. to approximately $12.billion in 1998. Saxon Mortgag*e plans to generate over $2 billion in loan origin~tions prirnari,ly in the sub-prime credit arena d_µring 1998. Cambrian, a merchant banking enterprise for emerging independent oil and natural gas producers, will expand its loan portfoli_o to approxi-mately $*110 million in 1998. To fin~nce these expansion plans in i998, Dominion Capital plans to utilize approximately $75 million in new equity and intercompany debt. The remaining capital requi_rements wiU come from the reinvestment of cash from oper:..

ations,

  • harvesting capital from existing *real estate and other assets, and various third party credit sources.

NOTES JO CONSOLIDA *. FINANCIAL STATEMENTS

  • NOTE, A Sig~ifica~t Acc~i.iiiting* Poli~i~s. '
  • . 'i..

' ~

~ e N E.R A'L Domini~l1Res6Jrces; ln2. isa'h'oldh,g tqmpany head-quartered in Richmond, Virginia. It; prirtJa;y busi)'.less is Vir~inia Power, which is a r~gulat~d puhfic utilit.y 'e\\*{gag'ed in the genera:

tion, transmission, distribution and*sa:le of electric energy within a 30,00,0 square mile'*area in Virginia and northeasten, North Car.oJina. It sells electricity to retail customers (inclµding go~ern-mental agencies) and to 'vVholesale customers ~uch as r.ural elec-tric. coopera~ives, municipalities, power rn!irketers.. a,]'.id _other ut_ilities. The Virginia service area compri~es about 6.s* perc~nt of Virginia's total _land area, but accounts f~r over Bo percent of its population.

  • . : Dominion R.esources recently acquired East Midlands in 1997,
  • which is primarily a distribution and supply company. East Mid-lands operates a 'distribution system serving a region of some 6,200 square miles in east_ c~ntral Eng!an~ and it_ supp.lies e_lec-tricity to 2-3 mi.I.lion customers, indu&ng b~si1:1e.~ses;acro~s.the country.

. The company also _operates business subsidiaries active in independent power prod~dion, the acqui~iti,9_n and ;a:"t; ~f nat.-

ural gas 'reserves, financial services, and real estate. Some of the independent power and iiatµral gas projects a relocated in foreign countries. Net investments of approximately $374.6 million are

  • involved in independent power production operat.ions in.Central a*nd South America.

The preparation ~f financial statements in conformity ~it~

generally'accepted accounting principles requ_ir~s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and di?closure ofcontingent lia-bilities at the date of the financial 5.tat~ments _and t_he *!eported a111ounts of revenues and expenses during the reporting,))erio~,.

Actual results could differ from those estimates.

. D0m 0

ini~n Resources is currently exempt from' regulation as a registered holding compaliy under the 0PubliC Utilit'y Holding Company A~t of 1935i.* *.

Accounting for the utiiity business confonils with'* g~nerally accepted accounting principles as applied to 'reguiated p~blic

~tilities and as prescribed by fede~al a*g*e~cies and the commis" sions of the states in which the ~tility business operates...*.

  • The Consolidated Financial Statementi include the accounts of Dominion Resources and its subsidiaries. In consolidation; all

~ignificant interconipany transactions and accounts' have' been eliminated, OP~RATI NG REVENUES AND.1 NCOME. Utility revenues are recorded on the basis of services re_ndere~! commodities_.delivered or contracts settled. Dividend income on securities owne*d is recog-nized on the ex-dividend date. Interest incorne is accrued on the unpaid principal balance.

1 NVEST MENT*s IN A FF I LI ATE s Investments in common stocks of affiliates representing 20 percent to 50 percent ownership, and.joint ventures and partnerships representing generally 50 per-cent or less ownership interests, are accounted for under the equity method.

  • Cost~ in_,e?<ces!; pf n~t.assets a~quired from equity i.nvestments are amortized over periods.not Jo _ex.ceed 4oyears.
  • G*AIN ON SAi.E OF l:OANS Gainonsale'ofloansrepresentsthe present value of the difference between t.he interest rate received on *the mottgage' loans *and,*the interest rat'e received by the investor in the securiti~s after considering the effects of estimated ptepayments, costs to service the mortgage* loans and *non-refundable fees and premi~~s on loans sold: These gains on the sate of loans are recogniied 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 correspondihg

'asset representing inte:re5-t.:oi1ly 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 'a~ tr~di~g'i~ arriortized iri proportio'ri to the income k'sthti~fod to be rec~i~~cfo~ring*ttie Jife:

PRO PERT;*, P~~N-~ AN~ EQ~IPM~~T. U~i!i~/p_la~~ ~t V!;-.

ginia Power and.East Midlands is recorded at 6riginal'cost, which includes labor, m*ate~ials, servi~es. a'nd other ihdirett costs..

. rtie cost of acquisitioh: expfor.ation.and d~vel~pment of nat~

~rai reso~rce.prop'ertie~ is. acco~nted f ch uridir 'the successful efforts method.'.... '*.

. Interest is capitalized ih' tonriection with tlie construction of major facilftie1'; T~e* capifa.llieci interest is recorded *as part of the assEi't to whi~h it" relates an.ct is amortized overt~~ asset's estimated useful life. in 1997, 1~96, and 1995, '$3:s'mflii~n/$6'.3 million, and

$14.1 i'n ii lion of intereit cost.;;,;as capi~alized, re~p~ct'ively..

Major das~es ~'f :property,. plant ;and equipment and t_heir respective balances ~re:

1.,.

At December 31; 1997

  • 1996 (millions)

UTILITY:** :

Product'ion

$ 7,973.9

$ 7,691.9 Transmission 1,415.7 1,386.5 Distribution' ::

  • 6,2*10.7 4,385.4 Other electric 1,127;1' 862.9 Plant und.er i:onst~uctio~

240.9 f80.1 Nuclear fuel

.. *8.54.3 843.8 Total utility i1;a22.6 15,350.6 NONUTILITY:

Natural gas properti.es 52_1.8 492.4 Independent power properties 920.3 869.2 Other 254.5 103.6 Total nonuti lity 1,691!.6 1,465.2 Total property, plant and equipment

  • $19,519.2

$16,815.8 DEPRECIATION, DEPLETION.AND AMORTIZATION. Depre-ciation of utility plant (other than nuclear fuel) is computed using the straight-line method based on projected useful service lives.

The cost of depreciable utility plant retired and the cost of removal, less salvage, are charged to accumulated depreciation.

The provision for depreciation provides for the recovery of the cost of assets and the estimated cost of removal, net of salvage, and is based on the weighted average depreciable plant using a rate of 3.2 percent for 1997, 1996 and 1995.

41

42 e

  • *Owned nu.clear.fuel is amortized on a.unit-of-production basis sufficient to amortize fully. over the estimated service life, the cost of the. fue.1 pl us. permanent storage and disposa.l costs.

SUTTY.

North Anna Unit I Unit 2 Unit I Unit 2 NRC. Jicense expiration year

  • 2012 2013 2018 2020 Method of decommissionipg DECON DECON DECON D,ECON (millions)

Current cost estimate

'(1994) dollars

$272-4

$274.0

$247.0

$253.6 Ext~inal trusts balanc~

  • at December 31, 1997

'156.5 151.8 134.2 126.6 1997 contribution to

  • external*trusts, 10.6

. 10,8,

7.6 7.2 When Virginia:Power's nuclea\\unit~ cease operations, it is oblig-ated to decontaminate *or remov~ radioactive contami)1ants so t~at the. property will n,o.t req\\J,i,re Nuclear Regulatqry Commission (NRC). over.sight. This phase. of a nuclear po,wer plant's life cycle is ter~~d de~ommiss[OT)ing. Whlle the units are operating, Virginia Power. collects* f.r~m ra1epay~rs. a~ounts t.hat,' when combined with' iT)vestment' earn,ings. will be us 0

ed to f~rid this future obligation.. '

The amount being accruedJqr decommission_ing is equ.al to the amount being collected from rcitepayers anc:t' is iri~luded indepre-ciation, depletion and a~ortizatlon expense, The decommission-ing collectionswere$45.8milli'on, $36.2 millionand$28:5 million in 1997, 1996 and 1995, re~pectively._These dollars a're deposited into e><ternal ~rusts through which the funds are irweste~. :N~t earnings of the.trusts' i~vestments are included in other ln~ome. In 1997, 1996 and 1995 net earnings were $20.5 million,'s16 million and $15.9 million, respectively. The accretion of the decommissioni~g.oblig-ation is equal to the trusts' net earnings and is also recorded.in Other Income. Thus, the net impact of the trusts on Other Income is zero.

. The accumulated provision for decommissioning, which is included in Accumulated Depreciation, Depletion and Amortiza-tion in the company's Consolidated Balance Sheets, includes th.e accrued e:<pense and accretion descr.ibed above and any unreal-ized: gains, and.losses on the trusts' investments. At December 31, 1997, the *net unrealized gains were $149.5 million, v,,nich is

. an increase of $69 million over the December 31, *1996 amount of

$80.5 million. Th.e total accumulated provision foqiecommission-ing at December 31, 1997 was $578.7 million. It ~as $443.3 million at December 31, 1996.

The total estimated cost to decommission Virginia Powers four nuclear units is $1 billion based upon a site-specific study that was completed in 1994. Virginia Power plans t'~ ~pdate this estimate in 1998. The cost estimate.assume.s that the method of completing decommissioning. ac~ivities is prompt dismantlement. This method assumes that dismantlem.ent and other decommissioning activities. will begin shortly after.cessation of operati_ons, which under current.operating li.censes will begin in 2012 as detailed in the table, The 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 sub-stantial portion of the decommissioning obligation should be rec-ognized earlier in the operating life of the nuclear unit. If the industrys accounting were changed to reflect FASBs tentative proposal, tlien the annual provisions.for nuclear decommission-ing would increase.

During its deliberations, the FASB expanded the scope of the project to include similar unavoidable obligations to perform clo-sure and post-closure activities for non-nuclear power plants.

Ther!:!fore, any forthcoming standard may also change industry plant depreciation practices. Any impact related to other com-pany assets cannot be determined at this time.

Independent power properties and East Midland's fixed assets are depreciated using the straight..:line method based on esti-mated useful lives ranging from 30 to 40 years. Natura.I gas prop-erties are depleted using the units-of-production method.

FEDERAL,, INCOME TAXES Dominion Resources and its sub-sidiaries file a consolidated federal income tax return.

Deferr~d income taxes are provided for all significant tempo-raiy differences b~twe~n the financial and tax basis 'of a~sets and liabiliti.es using presently enacted tax rates in accordance with SFAS No: 109, "Accounting for Income Taxes." Temporary differ-ences occur when events and transactions recognized for finan-cial 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 li.a-bflity is reduced to reflect changes il'.l tax rates, a regulatory liability is established if it is probable that a future red.uction in revenue will result.

Due to regulatory requirements, Virginia Power accounts for investment tax credits under the "deferral method" which pro-

~ides for the amortization of these credits over the service lives of the property giving rise to the credits: '

FOREIGN CURRENCY TRANSLATION Dominion Resources translates foreign currency financial.statements by adjusting bal-ance 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. Gains and losses resulting from the settle-ment of transactions in a currency other than the functional cur-ren~y are reflected in income.

DEFERRED CAPACITY AND FUEL EXPENSES*

Approxi-mately 90 percent of Virginia Power's fu.el expenses and So per-cent of its purchased power capacity expenses incurred as part of providing regulated electric service are subject to deferral accounting. Under this method, the.difference between reason-ably incurred actual expenses and the level of expenses included in current rates is deferred and matched against future rev~nues.

c;o0Dw'1 LL 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 25 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 result-ing from the redemption of debt without refinancing are amor-tized over the remaining lives of the redeemed issues.

1 N v Es.TM ENT s E cu RI TIE s 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 amor-tized cost. Debt and equity securities purchased and held with the int~*rit of selling them in t*he current period are _classified as trad-h1g 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 avail-

_able-for-sale securities. These are reported at fair value with unre-a.l ized gains and losses reported in shareholders' equity, net of tax.

MORTQAQE LOANS' IN WAREHOUSE Mortgage loans in warehouse consist of mortgage loans secured by single family res-idential properties. Any price premiums or discounts on mortgage loans' including any capitalized costs or deferred fees on origi-nated 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.

L 0

0ANS 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 cer-tain 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 provi-sJons for credit losses charged against income. Loans deemed to be uncollectible are charged against the allowance for credit l,osses, and subsequent recoveries, if any, are credited to the

~llowance. At December 31, 1997, the allowance for credit losses was

$17.5 million.

MORTQAQE INVESTMENTS In accordance with SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," mortgage investments, which had been held entirely as available for sale as defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securi-ties," were reclassified as trading securities. Changes in the fair value of the mortgage investments are reported in operating results in the current period. No material gain or loss resulted from the reclassification.

NONR ECOU RSE-NONUTI LITY Fl NANCI NQS 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 rionutility subsidiaries. These financ-ings have been segregated on the accompanying financial state.:.

ments to distinguish their nonrecourse nature.

DERIVATIVES AND FUT U RES -

0 TH ER THAN. T RAD I N c; Dominion Resources utilizes futures and forward contracts and derivative instruments, including swaps, caps and collars, to m~nage exposure to fl~ctuations in interest rates, foreign cur-rency exchange rates 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 his-torical correlation. Dominion Resources uses deferral accountfng*

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 are recorded on the bal-ance sheet and recognized in earnings in conjunction with earn-ings of the designated asset or liability. Gains and losses related to effective hedges.of firm commitments and anticipated transac-tions are included in the measurement of the subsequent transac-tion. Cash flows from derivatives designed as hedges are reported in Net Cash Flows from Operating Activities.

DERIVATIVES AND FUTURES-TRADINQ 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. Virginia Power uses this method for its wholesale power group's 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 managements best estimates considering over-the-counter quotations, time value and volatility factors of the underlying commitments. Futures contracts and options on futures contracts are marked to market based on closing exchange prices. Gains and losses resulting from marking positions to mar-43

44 e

ket are reported in Other Income and Expense. Net gains and losses resulting from futures contracts and options on futures contracts and sett I ement of basis swaps are included in Operating Expenses.

A_mortization of option premiums associated with sales and pur-chases are included in.Operating Revenues and Income *and Oper-ating Expenses, respectively.

Purchased options and.options sold are reported in Deferred Charges and Other Assets and in Deferred Credits and Other Lia-bilities, respectively. until exercise or expiration. Gains and losses are reported in Other Income and Expense. Electric. options exer-cise.cl are reflected in the recording of related purchases or sales of electricity as Oper~ting Expenses and Operating Revenues, respectively. Upon expira~ion, electric options written are recog-nized in Operating Revenues and options purchased are recog-nized in Operating Exp~nses. Cash flows from trading activities are reported in Net Cash Flows from Operating Activities.

CASH Current banking arrangements generally do not require checks to be funded until actually presen_ted for payment. At December 31, 1997 and 1996; the companys accounts payable included the net effect of checks outstaJ]djng but not yet presented for payment of $62.3 m*ulion and $72.6 million.

respectively.

For purposes of the Consolidated Statements of Cash Flows, Dominion Resources considers cash and. cash* ~quivalents to include cash on h.a1;1d and temporary investments purchased with a maturity of three months.or l_ess.

SUPPLEMENTARY CASH-FLOWS INFORMATION:

(millions)

CASH PAID DURING THE YEAR FOR:

Interest ( reduced for net costs of_b_orrowed funds capitalized)

Federal income taxes NON-CASH TRANSACTIONS FROM INVESTING AND FINANCING ACTIVITIES:

Note issued in acquisition of business Exchange of securities Equity contribution for Wolverine acquisition 1997 21.4 1996 47.5

.1 2. r 1995

$376.0.

159.6 12.3 RE c LA s s IF I c AT Io N Certain amounts in the 1996 an_d 1995 Con-_

solidated Financial Statements have been recla!;sified to conform to the 1997 presentation.

N' OT E B I Taxes Income before provision for income taxes, classified by source of income, before minority interests was.as follows:

1997,.

1996 1995 (millions)

U.S.

$712.7

$683. 5

$609.5 Non-U.S.

(33-9) 17.5 11.0 Total

$678.8

$701.0

$620. 5 The provision for income taxes,. classified by the timing and location of payment, was as follows:

1997 1996 1995 (millions)

CURRENT U.S.

$221.9

$1 53. 7

$178.4 State 9.1 3.0 0.9 N01J-U.S.

24.7 4.3 I. 7 Total Current 255.7 161.0 181.0 DEFERRED u*.s.

22.1 71.9 19.2 State 0.1 3.3 3.8

\\

Non-U.S.

(28.o)

Total Deferred (5.8) 75.2

  • 23.0_

Amortization of deferred investment tax credits-net.

(16.9)

( 16.9)

( 16.9)

Total Provision

$233.0.

$219.3

$187.1 The components of deferred income tax expense are as foll!):,vs:.

1997 199?

1995 (millions)

Liberalized depreciation

$ 4.1

$ 53.8

. $ 56.6 Indirect construction costs 4.9 3.4 (13.8)

Other plant related items

  • 5.1 12.6 12.1' Deferred fuel (3.3) 19.1 (2:2)

Separation costs 6.5 (2.6)

(12.4)

MBS basis differences 24.6 Deferred capacity 14.4 3.2 (3.8)

Conti_ngent claims (25.9)

(iJ. I)

( 1.2)

Tax rate change (16.6)

Deferred state taxes 0.1

. 3.3

. '3.8 Other, net (19.7)

(n 5)

( 16.1)

Total

$ (5.8)

$ 75.2

$ 23;0 The statutory U.S. federal income tax rate reconciles to the effec-tive income tax rates as follows:

1997 1996 1995 U.S. statutory rate 35~

35%

35%

Preferred dividends of Virginia Power 1.8 1.8 2.5 Amortization of investment tax credits (2.5)

. (2.4)

(2. 7)

Nonconventional fuel credit (3.7)

(3.8)

(4.5)

Benefits and taxes related to foreign operations.

4.3 0.2

  • ' 0:3 State taxes net of federal benefit 0.9 o.6 0.5 Other, net C 1.5)

(o; I)

(0.9)

Effective tax rate 34.3'1, 31.3%

30:2%*

  • e*

The-effective income tax rate includes state and forei_gn income taxes.

The 1997 budget of the nevi'Labour government in the United Kingdom reduce.d the corporate income tax rate fo* 31% effective April 1, 1997.

  • Income tax expense from continuing operations has been reduced by $16.6 milliOf! to reflect the decrease in deferred tax liabilities resulting from the 2 percent <;iecrease in the corpo-rate tax rate.

.' '.Dominion Resources net noncurrent deferred tax liability.is attributable to:.

(millions)

ASSETS:

Deferred investment tax credits*

O~h~r 1otideferred inco~e tax asset LIABILITIES:

Depreciation meth~d anii pla~t basis differences Income taxes recoverafie.through future rates

  • Partnership *basi's differenc_es * * *,,. ***,

b.ther..

Total deferred income t~ liability.

t,let deferred income tax liability 1997 84-4 19~.3 276.7 90.3 1*,924,2.

1,463.5 169.5.

168:8

,, 126:4

130.3 75.0:

71.0 2,295.1 1,833-6*

'b;o18.4

$1,743-3 certain expense:s no~mally reflected in income are deferred on the*.

  • balances~e.et as regulatory*assets and are ret~g~ized:in ince>meas th~ related amounts are included i~ rates and.recovered from c~s-to.mefa. Virginia Power's regulatory assets included the following:

At Dec~mber 31,

  • 1997 199_6 (millions)

. Deferred capacity exp*enses

$ 47-3

$ 6.1

  • inccime taxes recoverable through future rates *..

~78.9 477.0 Cost of decommissioning DOE uranium

. enrichment facilities 67.6 73-5 Deferr~d losses on reacquirect'debt,* net 85.4

91. 5

':North Anna Unit 3 project termination costs 42.3 73.1 Other 55.1 52.7 Total

$776.6

. $773.9 The costs of deco 0

mmissioning the Department of Energys (DOE) uranium enrichment facilities have been deferred and represent the unamortized poftion of Virginia Power's require.d contribu-tions to a fund for decommissioning and decontaminating the DO Es uranium enrichment facilities. Virginia Power is making such

-contributions over a 15-year period with escalation for inflation.

  • These costs are being recovered in fuel rates.

The construqion of North Anna Unit 3 was term.inated in

  • No~emb.er. 1982. All retail jurisdiction!? have permitted ~ecovery of the incurred costs.. For Virgini~ an.d FERC jurisdictional customers:..

the amounts deferred are being amortized from the d~te termina-tion costs were first !ncludible in.rates.

The incurred costs underlying these regulatory ~sse~s may, represent expenditures by Virginia Power or may represent the recognition of liabilities that ultimately will.be settled at some time in the future. For some of those regulatory ai;sets repre*sent-irig past exp*endifures that are not included in Virginia Power's rate base or used to adjust Virginia Power's* capital structur~.

Virginia Power is not allowed to earn a return on the umecovered balance. of the $776i, million of regulatory assets*at o'ece_mber 31, 1997,Virgirila Power does not earn a return on $i 5-4 million*of reef*

ulatory assets, effectively excluded'fiom rate base, to be recov-'

ered over various rec,overy periods up to 21 years, depending'on the nature oft he deferred *costs.

In addition, Virginia Power's depreciation pi'actic~s for early retireTT1ents ofplant and equipment and cost of removal, along with changing operating plant* scenarios, have resulted** in an accumulated aepreciatio11 reserve deficiency *~stimated to he

$235 million at Deceniber*31, 1997. Th~ reserve deficiency results*

. from deferral of costs in conformity with regulatory depredation practices authorized by regulatory commissions h~ving jurisdic-tiort o*ver Virginia *Powers operations. Curre_ntly, Virginia Power is allowed fo ' amortize reserve deficiencies *over estimated

  • remaining functional plant lives in all of the regulat6ry jur*isdic-.

ti ons it* serves:'

  • The following infcnmation relates tQVirg_ini~ ~owers proportion-ateshare of joirtly owned pliints.at Decem~er 31, 199_7.

Biith Col.inti North

,:~*

Pumped*

  • Anna
Clover,

. storage*

Power.

Power,

,station.. :

Station..

. Station Ownership interest..

.. 60.0%

88-4%..
  • so.o?f>.

(miliiO!]S)

Utility pla)lt in service

$1,072';9

$1,81.9.4

.$533:3 Accumulated depreciation 229._1.

. 819.2 26.3 N11clear fuel 403.6 Accumulated amortization of

nuclear fuel 383.4 construction work in progress*

0.1 61.2 I. i

,. 5

e The co-owners are obligated to pay their share of all future con-s,truction 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 Consolid'ated Statements of Income.

Dominion Resource? and its subsidiaries have credit agreements with_ various expiratior1 dates. _These agreements provided for maximum borrowings of $5,402.6 million and*$3,882-4 million _at December 31, 1997 and 1996, respectively. A~ December 31, 1997-and 1996,_$1,907.3 million and $714.5 million, respectively, was borrowed under such agreements and classified as. long-term deb,,

Dominion Resources credit agreements s_upported ~403.4 mil-l ion and $308 million 9f Domini.on Res_ources ~ommercial paper at December 31, 1997 and 1996, respec;tively.

Virginia Power has an* established commerdal paper program with a maximum borrowi'(lg capacity of$500 million which is sup-ported by two credit facil ities.. One is a$300 million, five-ye~rcredit facility that was effective.on June 7, 1996 and expires on June 7, 2001.

The other is a $200 million credit facility, also effective June 7, 1996, with an initial term of 364 days and provisions for subsequent 364-day extension;. It was r_enewed on June 6, 1997 for 364 days. The total amount of commercial paper outstanding was $2262 million and $312.4 million at December 31, 1997 and 1996, respectively.

A subsidiary of Dominion Capital also had $85.5 million and

$91 million of nonrecourse commercial paper outstanding at December 31, 1997 and 1996, respectively. East Midlands has a com-mercial paper program wi.th a limit of 200 million pounds sterling

($329 million). The program is supported by 200 *million pounds sterling ($329 million) five-year revolving credit facility and is uti-lized principally to fund its operations. There was no commercial paper outstanding at December 31, 1997. A total of $385.5 million and$39omillion of the commercial paper was classified as long-term debt at D*ecemher 31, 1997 and 1996, respectively. The commercial paper is supported by revolving credit agreements that have expira -

tion dates extending beyond one year. Dominion Resources and its subsidiaries pay fees in lieu of compensating balances in con-nection with these credit agreements. A summary of short-tetm debt outstanding at December 31 follows:

  • Weighted Amount Average Outstanding Interest.Rate (millions, except percentages) 1997 Commercial paper

$329.6 5.8%

Term-notes 45.5 7.3%

Total

$375.1 1996 Commercial paper

$320. 5 5.5%

Term-notes 57.7 7.4%

Total

$378. 2 NOTE F I investment Securities Securities.~lassified as available-for-sale as of.December31 follow:

Gros_s Gross Security Unrealized Unrealized Aggregate Type Cost Gains Losses Fair Value (millions) 1997;.

Equity

$185.3

$10.9

$ 5.4

. $190.8 1996 Equity

$635.8

$ 8.2

$10.1

$633.9 Debt 58.5 s*s. s Debt securities held at December 31, 1996 db not have stated con-tractural maturities because borrowers may have the_ right to call*

cirrepay obligations with or without call or prepayment penalt'ies.

For the years ended December 31, 1997 and 1996, the proce~ds from the sales of available-for-sale securities were $122.2 million and $33.4 million, respectively. The gross realized gains and losses wer~ $12.8 milli~n and $0.5 million for 1997,ani;! $.!-4 million and $1, million for 1996, respectively. The basis'on.,..;hicti the cost_ of these securities was !}et ermined is specific identificatio.n: The changes in.

net.unreali~ed holding gain or loss on available-for-sale securi-ties has result~-d in an increase in_ the separate co!Jlponent _of

hareholders equity during the yea;s erJded l)ece.mber 31, 1997 and 1996 of $8.i, million, net of tax, and $5.6 million, net of tax, respec-tively. The gross realized gains and losses included in earnings from transfers of securities from t~e availabl.e-for-s~le category into the trading category was $.5 million and $3.6 million, respec~

t_ively. The cha~ges in netrealized h°.l~ing g~i~ or loss on trading s~~urlti.es increased earnings du'ring the years ended December 31,:

1997 ind 1996 by $0.6 million a'nd $3.i'million, respectively.

~ :.

--\\

NO.TE G Fair Value of Financial Instruments The fair value amounts of Dominion Resources' financial instru-ments 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.

December 31, (millions)

ASSETS:

Cash and cash equivalents Trading securities Mortgage loans in warehouse Available-for-sale securities Loans receivable Nuclear decommissioning trust funds LIABILIT.IES:

Short-term debt Long-term debt PREFERRED SECURITIES OF SUBSIDIARY TRUSTS PREFERRED STOCK LOAN COMMITMENTS DERIVATIVES-RELATING TO:

Foreign currency risk Natural gas options in a net receivable (payable) position c,ASH AND CASH EQUIVALENTS The carrying amount of these items is a reasonable estimate of their fair value.

INVESTMENT SECURITIES AND NUCLEAR DECOMMIS-S Io NIN G TR us T Fu ND s The estimated fair*value is deter-mined based on quoted market prfces, dealer quotes, 'and prices obtained from independent pricing sources.

MO RT GAG E LO ANS I N WAR EH OU S E The fair value of mort-gage loans in warehouse is based on outstanding commitments from investors.

LOANS RECEIVABLE The*carrying value approximates fair value due to the variable rate or term structure of the notes receivable.

SHORT-TERM DEBT A.ND 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 ~ith s*imilar terms and remaining maturities are used to esti-mate 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 Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the company could realize in a cur-rent market exchange. The use of different market assumptions and/or estimation assumptions may have a material effect on the estimated fair value amounts.

Carrying Amount Estimated Fair Value 1997 1996.

1997 1996

$ 321.6 110.B

$ 321.6 110.B 240.7 16.4 240.7 16.4 88.2 65.B

~1.4 67.9 190.8 692.4 190.8 692.4 959.0 987.3 569.1 443.3 569.1 443.3

$ 375.1 378.2

$ 375.1 378.2 8,So9.6 5,478.3 9,151.0 5,560.3

$ 385.0

$ 135.0

$ 387.7

$ 135.0

$ 1So.o

$ 1 Bo.a 186.6

$ 185.B

$ 675.9 547.0 9.8

$ (26.8) 9.8 0.1 o.6 o.8 (o.6) discounting the dividend and principal payments.for a repres-entative issue of each series over the average remaining life of the series:

LOAN COMMITMENTS The fair value of commitments is esti-mated using the fees currently charged to enter into similar agree-ments, taking.into account the remaining terms of the agreements and the present creditworthiness of the counterparties.

FOREIGN CURRENCY CONTRACTS Thefairvalueofforeign currency contracts is estimated by obtaining quotes from brokers.

1 NTE RE s T RATE s WA P s 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, 1997 and 1996 was immaterial.

NAT u R A.L G As o PT Io N s The fair value of natural gas options (used for hedging purposes) is estimated by obtaining quotes from bankers.

Fu Tu RE s *co NT RA c Ts Derivatives used as hedging instru-ments 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, 1997 and 1996 was immaterial.

47

~8 e

NOTE H I Long-Term Debt At December 31, (millions)

VIRGINIA POWER FIRST AND R E FU ND I NG MORTGAGE BO ND S (1):

Series U, 5.125%, due 1997 1992 Series B, 7.25%, due 1997 1988 Series A, 9.375%, due 1998 1992 Series F, 6.25%, due 1998 1989 Series B, 8.875%, due 1999 1993 Series C, 5.875%, due 2000 Various series, 6.75%-7.625%, due 2007 Various series, 6%-8%, due 2001-2004 Various series, 5.45%-8.75%, due 2021-2025 TOTAL FIRST AND REFUNDING MORTGAGE BONDS OTHER LONG-TERM DEBT:

DOMINION RESOURCES:

Commercial paper(2)

VIRGINIA POWER:

Term notes, fixed interest rate, 6.15%-10%,

due 1996-2003 Tax exempt financings(3):

Money market municipals, due 2007-2027(4)

Convertible interest rate, due 2022 DOMINION UK:

Eurobonds, fixed rate, 8.125%-12%,

due 2006-2016 Senior notes, fixed rate, 7.10%-7-45%,

due 2002-2007 Revolving credit agreement, due 2001(5)

  • Term loan, due 2002(6)

Loan notes, due 2007(7)

Revolving credit agreement, due 1998(8)

Revolving credit agreement, due 2002(9)

Finance \\ease(10)

.other borrowings(11)

TOTAL OTHER LONG-TERM DEBT NO NR ECOU RS E-NON UTILITY:

DOMINION RESOURCES:

Bank loans, 9.25%, due 2008 DOMINION ENERGY:

Revolving credit agreements, due 2001(12)

Term loan, fixed rate, 5.445%, due 1998 Bank loans, fixed rate, 9.70%-9.92%, due 2005 Bank loans, 4.5%-6.64%, due 1996-2024 Term loan, due 2002(13) 1997 150.0 75.0 100.0 135.0 415.0 ao5.o 1,144.5 2,824.5 300.0 551.1 i,88.6 10,0 822.6 857.1 329.0

'19.6 27.-1 28.0 255.5

'16.4 4,348.2 19.7 255.0 15.0 20.0 45.2 8.o 1996 49.3 250.0 150.0 75.0 I 00.0 I 35.0 215.0 805.0 1,144.5 2,923.8 300.0 503.1 488.6 342. 5 1,634.2 20.8 320.0 35.0 32.5 53.0 (continued)

At December 31, 1997 1996 (millions)

DOMINION CAPITAL:

Senior notes:(14)

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 44.6 44.1 Line of Credit, due 1998(15) 57.7 57.2 Note payable, fixed rate, 6.04%, due 2002 50.0 26.8.

Term loan, fixed rate, 6.00%, due 1996-1997 5.0 Commercial paper(16) 85.5 90.0 Term loan, fixed rate, 6.5%, due 2001 38.0 47.2 Medium term notes, fixed rates, 4.93%-6.25%,

due 1996-1998 134.0 r_o4.o Term loan, fixed rates, 6.5%-11.25%, due 1996-2001 13.0 13.5 Term loan, due 2008(17) 99.2 Revolving credit agreement(18) 6.8 Revolving credit agreement(19) 675.3 TOTAL-NONUTILITY DEBT 1,663.0 945.1 LESS AMOUNTS DUE WITHIN ONE YE..&.R:

First and refunding mortgage bonds 225.0 299._3 Loans 433.4 12.0 Nonrecourse-nonuti I ity 955.2 119.7 TOTAL AMOUNT DUE WITHIN ONE YEAR 1,613.6 431.0 LESS UNAMORTIZED DISCOUNT, NET OF PREMIUM 26.1 24.8 TOTAL LONG-TERM DEBT

$7,196.0

$5,047.3 (1) Substantially all of Virginia Power's pr~perty is subject to the lien of the mortgage securing its First and Refunding Mortgage Bonds.

(2) See Note E to the Consolidated financial Statements.

(3) Certain pollution control equipment at Virginia Po~er"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 1997 and 1996, the weighted average daily interest rates were 3.74% and 3.57%. 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 rate was 6.9% during 1997.

(6) The weighted average interest rate was 7.56% during 1997.

(7) The weighted average interest rate was 5.81% during 1997.

(8) The weighted average interest rate was 7.66% du ring 1997.

(9) The weighted average interest rate was 7-76% during 1997.

( 10) The weighted average interest rate was. 4.6% during 1997,

( 11) The weighted average interest rate was 7.58% during 1997.

( 12) The weighted average interest rates during 1997 and 1996 were 6.06% and 5.89%.

respectively.

( 13) The weighted average interest rate was 3.94% during 1997.

( 14) The Rincon Securities common stock owned by Dominion Capital is pledged as collateral to secure the loan.

( 15) The weighted average Interest rates during 1997 and 1996 were 6.24% and 6.24%,

respectively.

( 16) The weighted average interest rates during 1997 and 1996 were 5.57% and 5.37%,

respectively.

( 17) The weighted average interest rate was 7.67% during 1997.

(18) The weighted average interest rate was 5.63% during 1997.

( I 9) The weighted average interest rate was 6.19% during 1997.

Maturities (including sinking fund obligations) through 2002 are as follows (in millions): 1998-$1,613.6; 1999-$826; 2000-$349.1; 2001-$432.6; and 2002-$1,098.3.

e NOTE I I Common Stock During 1996 the company purcha.sed 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 1997 Direct Investment which continues and expands the Automatic Dividend Reinvestment and Stock Purchase Plan. From 1995 through 1997, the following changes in common stock occurred:

1996 1995 Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount (millions)

Balance at January 1 changes due to:

Dominion Direct Investment Automatic Dividend Reinvestment and Stock Purchase Plan Stock Purchase Plan for Customers of Virginia Power Employee Savings Plan Wolverine acquisition Stock repurchase and retirement Other Balance at December 31 NOTE J I Long-Term Incentive Plan 181.2 3.7 0.9 1.9 0.1 187.8 A long-term incentive plan (the Plan) provides for the granting of nonqualified stock options and restricted stock to certain*

employees of Dominion Resources and its affiliates. The aggregate I Restricted Shares Balance at December 31, 1994 41,186 Awards granted-1995 25,320 142.2 34.0 21.4 4.6 176.4 1.9 1.4 1.0

o. 5 (0.1) 0.1 I 81.2

$3,303.5 70.9 55.1 23.2 20.5 (5. 5) 3.7

$3,471.4 172.4 h157.6 2.9 107.6 1.4 45.8 0.2 8.3 (o. 7)

(24.8) 0.2 9.0 176.4

$3,303.5 number of shares of common stock that may be issued pursuant to the Plan is 3,750,000. Th.e changes in share and option awards under the Plan were as follows:

Weighted Average Price

$41.05

$37.63 Stock Options 11,076 Weighted Average Price

$29.36 Shares Exercisable 11,076 Exercised/distributed (21,576)

$38.60 Balance at Dece.mber 31, 1995 Awards granted:._1996 Exercised/distributed Balance at December 3_1, 1996 Awards granted-1997 Exercised/ di str i bu ted/f orf ei ted Balance at December 3_1, 1997 In 1995, the 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 recog-nized for stock options awarded. Had compensation cost for the company's plan been determined consistent with the methodol-ogy prescribed under SFAS No. 123 therewould have been no sig-nificant impact on the companys operations for the years ended December 31, 1997 and 1996.

44,930

.$40.92 11,076

$29. 36 11,076 79,784.

._$41.76 (29,433)

.. $39.94 (475)

$29.63 95,28 I

, $41.61 10,601

$29. 34 10,601 53,884

$35.24 *

(44,399)

$39.42 *

(4,800)

$29.25 104,766

$39.29 5,So1

_$29.42 5,So1 East Midlands launched sharesave plans in -December 1997 under which employees, who enter into Inland Revenue approved savings contract for periods of three or five years, are granted options to purchase shares in Dominion Resources common stock.

Under these arrangements options were granted on December 22, 1997, on 149,881 shares to 918 employees under the three year plan and*on 514,947 shares to.1,511 employees under the five year plan.

No charge has been made to the income statement for the year ended December 31, 1997 with respect to the 20% discount on the market price of the options on their date of issue. The discount will be recorded as compensation expense overt he periods of the plans.

50 e

NOTE K Obligated Mandatorily Redeemable Preferred Securities of Dominion Resources and Virginia Power Subsidiary Trusts In December 1997, Dominion Resources established Dominion Resources Capital Tn~st I (DR Capital Trust). DR Capital Trust sold 250,000 shares of Capital Securities for $250 million, representing preferred beneficial interests and 97 percent beneficial ownership in the assets held by DR Capital Trust. Dominion Resources issued

$257-7 million of 7.83% Junior Subordinated Debentures (Deben-tures) in exchange for the $250 million realized from the sale of the Capital Securities and $7.7 million of corrimon securities of DR Cap-ital Trust. The common securities represent the remaining 3 percent beneficial ownership interest in the assets held by DR Capital Trust.

The Debentures constitute 100 percent of DR Capital Trust assets.

The Debentures are due December 1, 2027. The distribution rate on the Capital Securities and the interest rate on the Debentures are each subject to increase if Dominion Resources and DR Capital Trust do not comply with an agreement they made to exchange the Cap-ital Securities and the Debentures, which were not registered under the securities laws at the time of issuance, for registered substan-tially identical securities within 180 days after the date of original issuance. Dominion Resources may redeem the Debentures prior to December 1, 2007 under certain conditions at a specified redemp-tive price. The Debentures may be redeemed on or after December 1, 2007 at another redemptive price. The Capital Securities are sub-ject to mandatory redemption upon repayment of the Debentures at maturity or earlier redemption. At redemption, each Capital Security shall be entitled to receive a liquidation amount of $1,000 plus accumulated distributions from December 8, 1997.

VP Capital Trust I (VP Capital Trust) was established as a sub~

sidiary of Virginia Power for the sole purpose of selling $135 mil-lion of preferred securities (5.4 million shares at $25 par) in 1995.

These securities represent preferred beneficial interests and 97 percent beneficial ownership in the assets held by VP Capital Trust..

Virginia Power concurrently 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 mi 11 ion of common securities of VP Capital Trust. The pref erred securities and the common securities represent the total beneficial ownership interest in the assets held by VP Capital Trust. The Notes are the sole assets of VP Capital Trust.

The preferred securities are subject to mandatory redemption upon repayment of the Notes at a liquidation amount of $25 plus accrued and unpaid distributions, including interest. The Notes are due September 30, 2025. However, that date may be extended up to an additional ten years if certain conditions are satisfied.

NOTE L I Preferred Stock Dominion Resources is authorized to issue up to 20,000,000 shares of preferred stock; however, no such shares are issued and out-staryding.

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, 1997 was as follows:

Series

$5.58

$6.35 Total

( 1) Shares are _non-callable pr"ior to redemption.

(2) All shares to be redeemed on 3/1/00.

(3) All shares to be redeemed on 9/1/00.

Shares Outstanding 400, ooo( 1 )(2) 1,400,0DD( I )(3) 1,Soo,000 There were no redemptions of preferred stock during 1997 and 1996. In 1995 Virginia Powerredeemed 417,319shares of its$7.30 div-idend preferred stock subject to mandatory redemption.

At December 31, 1997 Virginia Power pref erred 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 I 06,677

$1 12. 50 4.04 12,926 102.27 4.20 14,797 I 02.50 4.12 32,534 103.73 4.80 73,206 I DI.DO 7.05 500,000 I 05.00( I) 6.98 600,000 I 05.00(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 I OD.DD MMP 9/92 series 8(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 am~unts 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 1997, 1996, and 1995, including fees for broker/dealer agreements, were 4.71%, 4.48%, and 4.93%,

respectively.

During the years 1995 through 1997, the following shares were.

redeemed:

Year 1995 1995 Dividend

$7.45 7.20 Shares 400,000 450,000

e NOTE M Retirement Plan, Postretirement

.Benefits and Other Benefits R E T_I REM ENT PLAN Dominiqn Resources' RetlreTT)ent Plan cov-ers virtually all empioyees of Dominion Resources and its sub-sidia_ries except for its U.K. subsidic1,ry. East Midlands. Th*e benefits are* based oil years of service and 'th~ *employees comperi'sation.

Dominion Resources funding policy is to contribute annually an am*ount that is in acc_ordance with the.*provisions of the Employ-ment Retirement Income Security Act of 1974-The majority of-East Midlands' employees joined a pimsio'() plan that is administered for the United Kingdom's electricity.industry. The assets of-this plan are held in a separate trustee-administered fund that is actuarially valued every-three.years. East Midlapds.and its par-ticipating_ ~mployees contribute to their, pen~ion plan.

  • The* co~ponents.of tbE?. pri:>vision -f~r net periodic* pension expense were as follows:_.

Year ending December 31, (millions)*

Service costs benefits earned during the year Interest cost on projected

. benefit obi igation Actual return on pl an assets*

Net amortization and deferral 1997 Total U.S.

  • plans
  • Plan 50.1.$ *. 27.5 147'.2

. ~4-2 (231.0) *, 136.1)

'65.9' 65.9_

Net periodic pension cost'.

$ '32.2 $ 21:5 1996 Nein U.S.

  • U.S.

Plan Plan

$ 22.6 *

$ 26.7 83.0 61.1 (94.9)

(92.9) 30.6

$

  • 10.7

$ 25.5 The.following table sets forth the Plans funded status:

1997.*

~----~-

As of D~cember 31,.

Actuarial present value'*of benefit obi igations:

Total Plans p

u.s Ian Accumulated benefit obligatio~/

Vested

$1,730.9 $646 :6 Non Vested 79.0** 7 7.5 Non U.S.

Plan,*,

$1,084;3 1.5

  • $1,So9.9 $72 4;1*- $1,085.8 Projected benefit obi igation for*..

service rendered t~ date :

Plan assets at fair value, primarily listed stocks and corporate bonds 2,111.7.

  • 2,299.6 Plan assets in excess of (less than) *..

94 5:3 1,166.4 96 6.4 1,333.2

  • projectedbenefitobligation 187.9 21.1 166.8 Unrecognized net loss from pasf experience.different from that.

assumed and effects of changes.

in assumptions

  • unrecognized prior service cost Unrecognized net asset at January 1, being recognized over 16 years beginning 1986 Prepaid pension cost included in other assets *

(73,9) 4.1 (18.5) (1 99.6 $ 2 5.8 (89.7) 4..1 8.5) 2.5 $

77.1 1995 U.S.

Plan

$ 23.4 54.9 (172.3) 114.9

$ '*20.9

.1996

  • . U;S.

Plan.

$586. 7 73-3

$660;0 852.2 845.0 (7:2) 40.4 4.7 (21.8)

$ 16.1 Significant assumptions used in determining net perfodic pension

,cost and the projected benefit obligation were:

1997

  • 1996 Non U.S.

u.s..

u.s_.

As of December 31, Plan Plan Plan Discount rates 7.75~

6.75~

8.0%

Rates of increase in compensation levels 5.0~

  • 4.75~

5.0%

Expected long-term rate of return 9.5~,7.00~

9.5%

POSTRETIREMENT BENEFITS Dominion Resources and its

.subsidiaries provide retiree health care and life insurance benefits through *insurance companies with annual premiums based on

. benefits.paid. during. the year. From time to time in the pa~t.

D~minion Resources and its subsidiar'ies have changed benefits.

Some of th~se changes have reduced benefits. Under the terms of tbeir benefit plans, the companies reserve the right to change,*

modify cir terminate the plan,s. Net periodic postretirement bene~

fit exy:>ense for 1997 and 1996 was as follows:

Year* end'ing December 31, 1997 1996

.(millions)*

Service *cost

$ 12.7

  • n2:3 Interest cost 25.4 24.2 Return on plan asse_ts (25;3)

(16.6)

Amortization of transition obligation 12, I 12.1

  • Net amortization and deferral 13.4:

7.2

. _Net periodic postretirement benefit expense

$ 38.3

$ 39.2 The following table sets forth the funded status of the plan:

As of December 31, (millions)

_1997, 1996

. Fair value of plan assets

$ 176.6

$ i 33.0 Accumulated" posh et irement benefit obligation:

Retirees

$ 225.5

$ 202.7 Active plan participants 139;4 125.0

. *Accumulate,d postretirement benefit-obligation 364.9

.. 327.7

  • Accumulated postretirement benefit obligation in excess of plan assets C 188.3)

(194.7)

Unrecognized transition obligation

.*181.9 194.1 Unrecognized net experience gain (1.3)

(3.0)

Accrued postretirement benefit cost

$ (7,7) '

$ (3.6).

51

52 e

A one percent increase in the health care cost trend rate would result in an increase of $5.1 million in the service and interest cost components and a $39.9 million increase in the accumulated post-retirement benefit obligation. Significant assumptions_ used in determining the postretirement benefit obligation were:

Discount rates 1997 7.75~

9.0%

Assumed return on plan assets Medi cal cost trend rate 6% for first year 5% for second year Scaling down to 4.75'l. beginning in the year 2000 1996 8.0%

9.0%

7% for first year 6% for second year Scaling down to 4.7 5% beginning in the year 2000 Virginia Power is recovering these costs in rates on an accrual basis in all material respects, in all jurisdictions. The funds being col" lected for other postretirement benefits accrual in rates, in excess of other postretirement.benefits actually paid during the year, are contributed to external benefit trusts under Virginia Power's cur-rent funding policy. Employer provided health care benefits are not common in the United Kingdom due to the country's national health care system. Accordingly. East Midlands does not provide health care benefits to the majority of its employees.

NOTE N I Restructuring In March '1995, Virginia Power announced the implementation phase _of its Vision 2000 program. During this phase, Virginia.

Power began reviewing operations with the objective of outsourc-ing services where economical and appropriate, and re-engineer-ing the remaining functions to streamline operations. The re-engineering process has resulted in outsourcing, decentraliza*-

tion, reorganization and downsizing for portions of Virginia Power's operations. As part of this process, Virginia Power _has evaluated its utilization of capital resources in its operations_to identify further opportunities for operational efficiencies through outsourcing or re-engineering of its processes.

Restructuring charges of $18.4 million, $64.9 million and $117.9 million in 1997, 1996 and 1995, respectively, included severance costs, purchased power contract restructuring and negotiated settlement costs, capital project cancellation costs, and other costs incurred directly as a result of the Vision 2000 initiatives.

While Virginia Power may incur additional charges for severance in 1998, the amounts are not expected to be significant.

In 1995, Virginia Power established a comprehensive involuntary severance package for salaried employees who may no longer be employed as a result of these initiatives. Virginia Power is recognizing the cost associated with employee terminations as management identifies the positions to be eliminated. Severance payments are being made over a period not to exceed twenty months. Through December 31, 1997, management had identified 1,977 positions to be eliminated. The recognition of severance costs resulted in a charge to operations in 1997, 1996 and 1995 of $12.5 mil-lion, $49.2 million and $51.2 million, respectively. At December 31, 1997, 1,619 employees have

  • been terminated and severance payments totaling $74 million have been paid. Virginia Power esti-mates that these staffing reductions will result in annual savings in the range of $80 million to $90 million for its restructured oper-ations. However, such savings are being offset by salary increases, outsourcing costs and increased payroll costs associated with staffing for growth opportunities.

In a.n effort to. minimize its exposure to potential stranded investment, Virginia Power.is evaluating _its long-term purchased power contracts and negotiating modifications to their term~.

including cancellations, where it is determined to be economically advantageous to do so. Virginia Power also negotiated settle-ments with several other parties to terminate their rights to sell power to Virginia Power. The cost of contract modifications, con-tract cancellations and negotiated settlements was $3.8 million,

$7.8 million and $8.1 million in 1997, 1996 and 1995, respectively.

Virginia Power estimated that its annual future purchased power costs, inclµding energy p~yments, would be reduced by up to

$0.8 million, $5.8 million arid $147 million for the 1997, 1996 and 1995 transactions, respectively. The cost of alternative sources of power that might ultimately be required as a result of these settlements is expected to be significantly less than the estimated reduction in purchased power costs.

  • *Restructuring charges reported in 1995 included $37.3 million fort he cancellation of a project to construct a facility to handle I ow level radioactive waste at Virginia *Power's North Anna Power Station. Virginia Power concluded that the facility should not be completed due to the additional capital investment required, decreased Virginia Power volumes of low level radioactive waste result.ing from improvements in station-procedures and the avail-ability of more economical offsite processing.

NOTE O I Accelerated.Cost Recovery In this increasingly competitive environment, Virginia Power has concluded that it is appropriate to utilize available savings and cost reductions, such as those generated by the Vision 2000 pro-gram (see Note N). to accelerate the write-off of existing unamor-tized regulatory assets. Not only will this strategically position Virginia Power in anticipation of competition, but it also reflects Virginia Powers commitment to mitigate its exposure to poten-tially stranded. costs. Virginia Power identified savings of $38,4 million in 1997 and $26.7 million in 1996 which were used to estab-lish a reserve for expected adjustments to regulatory assets. (See Note Q).

NO TE-P r Derivative Tr~nsactions Dominion Resources uses derivative financial instruments for the purposes of managing interest rate, natural gas price and foreign currency risks.

e INTER Es T RATE RI s Ks Saxon Mortgage, enters into forward delivery contracts, financial futures and options contracts for the purpose of reducing exposure to the effects of changes in interest rates on mortgage loans which the company has funded or has committed to fund. Gains and losses on such contracts relating to mortgage loans are recognized when the loans are sold. If the counterparties to the hedging transactions are unable to perform according to the terms of the contracts, the company may incur losses upon selling the mortgage loans at prevailing prices. As of December 31, 1997, Saxon has outstanding liabilities related to its hedging positions with certain counter parties a notional amount of $552.9 mil lion. The deferred hedging losses, net, at December 31, 1997 and 1996 were immaterial.

FOREIGN CURRENCY RISKS lnMay1997,DominionUKissued

$819 million of Yank_ee bonds. The bonds are denomirn.ted in U.S.

dollars, exposing the company to foreign currency risk. Coinci-dent with the issuance of the debt, Dominion UK acquired cross currency swaps to mitigate the foreign currency risk. The swaps are in effect until the debt matures in five and ten years, respec-tively. The cash settlement and the peri.odic payments under the hedge are treated as_ yield adjustments to the underlyin,g debt and recognize_d over the period the bonds are outstanding. The notional amount of these swaps at December 31, 1997 was $819 mil-lion and the deferred hedging losses, net as of December 31, 1997 were immaterial.

NOTE Q I Commitments and Contingencies As the result of issues generated in the course of daily business, the company is involved* in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies. While some of the proceedings involve substantial amounts of money. management believes that the final disposi-tion of these proceedings will not have an adverse material effect on operations or the financial position of the company.

Virginia Power REGULATORY MA TT ER S In March, 1997, th_e Virginia Commis-sion issued an order that Virginia Power's base rates be made interim and subject to refund as of March 1, 1997. This order was the result of the Commission Staff's report on its review of Virginia Powers 1995 Annual Information Filing which concluded that the companys present rates would cause Virginia Power to earn in excess of its authorized return on equity. The Staff found that, for purposes of establishing rates prospectively. a rate reduction of

$95.6 million may be necessary in order to realign rates to the authorized level.

  • . Virginia Power filed an Alternative Rate Plan (ARP) in March 1997 based on 1996 financial information. Subsequently. the Com~

mission consolidated the proceeding concerned with the 1995 Annual Informational Fi ling with the proceeding that includes the ARP proposed by the company. Opposing parties in the rate pro-

. ceeding have made filings recommending rate reductions in excess of $200 million. The company is currently studying the fil-ings of those parties. The Commission Staff is scheduled to make further filings in late February 1998. Hearings are scheduled to begin in late April 1998.

CONSTRUCTION PROGRAM Virginia Power has made sub-stantial commitments in connection with its construction pro-gram and nuclear fuel expenditures, which are estimated to total S588.1 million (excluding AFC) for 1998. Virginia Power presently estimates that all of its 1998 construction expenditures, including nuclear fuel, will be met through cash flow from operations..

PURCHASE'o POWER CONTRACTS Since 1984, Virginia Power has entered into contracts for the long-term purchase of capacity and energy from other utilities, qualifying facilities and indepen-dent power producers. As of December 31, 1997, there were 57 nonutility generating facilities under contract to provide Virginia Power 3,277 megawatts of dependable summer capacity. The fol-lowing table shows the minimum commitments as of December 31, 1997 for power purchases from utility and nonutility suppliers.

  • Commitments (millions)

Capacity Other 1998 813.5 154.9 1999 816.7 I 56.7 2000 723.8 92.0 2001 716.0 83.7 2002 721.1

81. 5 After 2002 9,069.6 388.2 Total

$12,86o.7,

$ 957.0 Present value of the to_tal

$ 5,878.0

$ 553.3 In addition t_o the commitments listed above, under some con-tracts, Virginia Power may purchase, at its option, additional power as needed. Payments for purchased_ power (including economy. emergency. limited-term, short-term, and long-t"erm purchases) for the years 1997, 1996, and 1995 were $1,381 million,

$1,183 million, and $1,093 million, respectively. For discussion of Vir-ginia Power's efforts to restructure certain purchased power con~

  • tracts (see Note N).

FUEL PURCHASE COMMITMENTS VirginiaPowersestimated fuel purchase commitments fort he next five years for system gen-eration are as follows (millions): 1998-$293; 1999-$233; 2000-$144; 2001-$144; and 2002-$127.

ENVIRONMENTAL MAT"(ERS Environmental costs have been historically recovered through the raternaking process; however, should material costs* be incurred and not recovered through rates, Virginia Power's results of operations and financial condi-tion 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 reme-diation costs for the sites are in*the range of $61.5 million to $72.5 million. Virginia Power's proportionate share of the costs is expected to be in the range of $1.7 million to $2.5 million, based upon allocation formulas and the volume of waste shipped to the 53

54 e

sites. As of December 31, 1997, Virginia Power had accrued a reserve of $1.7 million to meet its obligations at these two sites. Based on a financial assessment of the PRPs involved at these sites, Virginia Power has determined that it is probable that the PRPs will fully pay the costs apportioned tp them.

Virginia _Power gene.rally seeks.to recover its costs associ.ated with envirn~mental r~mediation from third-party Insurers. At December 31, 1997 pending cla.ims were not recognized as.an asset or offset against recorded oblig~tip)'ls:

Nu CLE AR IN s u RA~ CE The Price-Anderson Act limits the pub-1 ic liability of an owner of a nudear. power plant t.o $8.9 billio~ for a single nuclear incidei:it. The Price.:Anderson Ame)'ldments Act of 1988 allowsfor_an inflatioriiny pr9~isi-o~ adjustrr:ienJ every five years. Virginia Power has purchased $2_00 m(lli~n of co.verage from commercial insurance pools with th,e remaind,er'provided through a mandatory industry risk-sharing program. lnth.e event of a nuclear incidem at any licensed* nu<;lear reac:tor in. the United States, Virginia Power could be. assessed. up to,$81.7. million (inciuding a 3 percent insurance premium tax fo*r Virginia) for each of its four licensed reactors not to-exceed $10.3 million (in~luding a 3 percent insurance premium tax for Virginia) per

  • year per reactor. There is no limit to the number of incidents for

. which this retrospective premium can be assessed.

.* Nuclear liability coverage for claims made by nuclear workers first hired on or after January 1, 1988, except those arising out of an extraordinary nuclear occurrence, is provided under the Master Worker insurance program. (Those first hired into the nuclear industry pri~r to January I, 1988 are covered by the policy dis-cussed above.) The aggregate limit of coverage for the i~dustry is..

$400 million ($200 million policy limit_ with automatic reinstate-

.ments of an additional $200 million). virginia Power's maximun:i

~etrospective assessment isappro~im~tely $12-3 milli~n (including a 3 percent insurance pr~mi.um tax for Virginia).

.Virginia Pow~r's current le~el' o(pr;perty ins~rance coverage

($2.55 billion for North Anna and $2l.billiori for:s~rry) exceeds the NRCs minimum requirement for nuclear power plant licensees of

. $1.06 billion per reactor site, and'rncludes coverage for premature decommissioning and functional total loss. The NRC requires that the proceeds from*this insurance be used first to return the reac-tor to and maintain it in a safe'*and stable condition, *and second to decontaminate the reactor and station site in accordance with a plan approved by the NRC. Virginia Power's nuclear property insurance is provided,by Nuclear. Mutual Limited. (NML) and Nuclear Electric lnsuranc:.e Limited (NEIL), two mutual insurance companies, and is.su.\\:)ject t_o retrospective premium assessments in any policy year in which l_osses exceed.the funds avail.able to these insurance companies. The maximum-assessment for the cur-rent policy period is- $37 milliqn. Bas_ed -on _the severity of the incident, the boards of directors of Virgi,nia Poy,,er's nuclear insur-ers have the discretion to lower.the.maximum retrospective pre-mium assessment or eliminate either or both completely. For any losses that exceed th~ limits, or for which insurance:proceeds are not _available because they must first _b_e 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 pro-gram, Virginia Power is subject to a retrospective premium assessment for any policy year in which losses exceed funds avail~

able to NEIL. The current policy period's maximum assessment is

$8.7 million.

As a joint owner of the North Anna Power Station, ODEC is responsible for its proportionate share (11.6 percent) of the insur-ance premiums applicable to that station, including any retro-spective premium assessments and any losses not covered by insurance.,

Dominion Resources Under the terms of a~ investment agreement, Dominion Resources must provide contingent equity support to Dominion Energy in the amount of $47.4 million. Management believes the possibility of such support to Dominion Energy is remote.

Dominion Resources is guarantor to Dominion UKs revolving credit agreement. The revolving credit agreement is with Union Bank of Switzerland and various lending instit.~tions. The total commitment of the agreement 'is 700 million pounds sterling ($1.2

. b.illion). Uncle; the agre'ement, Dominion Resources has guaran-teed the prompt payment in full of amounts outstanding. In addi-tion, 'if Dominion UK fails to pay when due any of the amounts o~tstanding, Dominion Resources is obligated to promptly pay the amount outstanding. This agreement expi.res im November 12, 2001.

Dominion UK Dominion UK's indirect subsidiary, Corby Power Limited, has entered into long-term commitments to purchase gas. The con-tract commenced on October 1, 1993 and terminates on September 30, 2008.. The following table shows the net pr~sent value of the commi1ments as of December 31, _1997.

(millions) 1998 1999 2000 2001 2002 After 2002 Total Present value of the total Dominion Energy Comrriitmen.ts 82.3 82.3 88.8 92.1 93-.8 605.3 Dominion Energy, through certain wholly-owned subsidiaries, has general partnership interests in certain of its energy ventures.

Accordingly, such subsidiaries may be called upon to fund future operation of these. investments to the extent operating cash flow is insufficient.

In addition, Dominion Energy may be required to make pay-ments under certain agreements on behalf of its energy ventures.

As of December 31, 1997 no payments have been required.

Dominion Capital At December 31, 1997, Dominion Capital h~d. commitments to fund loans of approximat~ly $672.9 million.

NOTE R I Acquisitions EAST MIDLANDS.ACQUISITION AND FINANCING In the first quarter of 1997, Dominion Resources acquired 1_00% indirect ownership of East Midlands.qy.,means of a C!l,Sh tender offer, com-mence~ on November 22,:.1996. Total co:nsideration for the acqui-siti_on was $2.2 billion. The acquisition has,been account~d for using the purchase method of accounting. The excess of the pur-chase price o~er the net assets acquired resulted in goodwill of $1.7 billion. (Net assets acquireq cCJnsists of the fa.ir value of tangible and. identifia_ble intangi.Qle asse~s* 1.ess the fair value.of liabilities assumed by,th_e purchaser.) The goodwill is being amortized O\\'.er.

a 40-year per_iod..

The Joli owing lltJaucl.i_ted pro.f Ol"(na co1TibiT1ed results of oper-a1ions for the twelve_.months epde4 _DeceT11ber 31, 1996 has been prepare,d assuming,tbe:acquisi~iori of East_Mi~lands had*occurre1 at the beginning of the period. The pro.formaresults i!,re provi~ed for informati9n only.. The :results are not neces~arily indica~

tive of the actual results that would have been realized had the

  • acquisition occurred on the indicated dates, nor are they neces-sarily indicative of future results of operations of the combined companies.

CONSOLIDATED RESULTS (millions, except earnings per share amounts)

  • Revenues Net income" Earnings per share" Twelve Months Ended December 31, 1997 As Reported

$7,677.6

$ 399.2 2.15 1996 As Reported Pro Forma

$4,854.0

$ 472.1 2.65

$6,924.2

$ 598.8 3.36 0 1997 results include ($156.6) windfall profits tax ($0.85 per share).

NOTE S I Subsequent Events On January 21, 1998, Dominion Resources issued 6.5 million shares of common stock. On January 27, 1998, the company sold an addi-tional 275 thousand shares. Proceeds from the sale amounted to approximately$275 million. A portion of the funds was used to pay down part of the five-year revolving credit facility used to finance the purchase of East Midlands.

e NOTE T I Business Segments The company's principal business segments include Virginia Power, Dominion UK, Dominion Energy, Dominion Capital and corporate.. The*company's business segment information was:

BUSINESS SEGMENTS 1997 1996" 1995 (millions, except Identifiable assets amounts)

OPERATING REVENUES AND INCOME Virginia Power

$5,079.?

$4,420.9

. $4,351.9 Dominion UK 1,970.1 Dominion Capital 295.7 177.5 I 05.4 Dominion Energy 332.8 255.6 1 r5.8 Consolidated

$7,677-6

$4,854.0

$4,633-I OPERATING INCOME Virginia Power

$1,0.19.3

$1,010.0

$971.9 Dominion UK 246.6 Dominion Capital 157.1 81.9 50.2 Dominion Energy.

71.4 36.6 35.3 Corporate (17.4)

( 18. 7)

(31.0 Consolidated

$1,477.0

$1,109.8

$1,026.4 I DENTI FIABlE ASSETS (billions)

Virginia Power 12.0 11.B 11.8 Dominion UK.

4.4 Dominion Capital*

2.1 I.I 0.9 D.ominion Energy 1.6 1.6 I; I Corporate 6.1 5.6 5.0 Eliminations (6.o)

  • (5.2)

(4.9 Consolidated 20.2 14.9 13.9 DEPRECIATION AND AMORTIZAT.ION Yirginia PoV,'.er

$ 584.3

$ 536.4

$ 503._5 Dominion UK 131.3 Dominion C~pital 17.5 6.8 3.0 Dominion Energy 85.0 69.9 42.6 Corporate 1.2 2.1 1.9 Consolidated

$ 819.3

$ 615.2

$ 551.0 CAPITAL EXPENDITURES Virginia Power

$ 481.8

$ 484.0

$ 577.5 Dominion UK 234.2 Dominion Capital 7.8 17.7 1_.9 Dominion Energy 11.7 176.0 25.1 Corporate 17.7 1.3 0.4

_consolidated

$ 753.2

$ 679.0

$ 604.9 55

56 NOTE U Quarterly Financial and Common Stock Data (unaudited)

The following amounts reflect all adjustments, consisting of only normal recurring accruals (except as disclosed below), necessary in the opinion of Dominion Resources' management for a fair statement of the results for the interim periods.

QUARTERLY FINANCIAL AND COMMON STOCK DATA-UNAUDITED 1997 (millions, except per share amounts)

REVENUES AND INCOME First Quarter

$1,891.4 Second Quarter 1,655.1 Third Quarter.

2,094.3 Fourth Quarter_.

2,036.8 Year

$7,677.6 INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTERESTS First Quarter

$ 255,0 Second Quarter

.124.3 Third Quarter 153.2 Fourth Quarter 146.3 Year

$ 678.8 NET INCOME First Quarter

$ 169.9 Second Quarter 79.1 Third Quarter

  • 50:4 Fourth Quarter 99.8 Year

$ 399.2 EARNINGS PER SHARE First Quarter 0.92 Second Quarter 0.43 Third Quarter 0.27 Fourth Quarter-0.53 Year 2.15 DIV ID E°N D S PER SHARE First Quarter

$ 0.645 Second Quarter 0.645 Third Quarter 0.645 Fourth Quarter 0.645 Year

$ _ 2.58 STOCK PRICE RANGE First Quarter 41'/s-35'/,

Second Quarter 363/,-33'/,

Third Quarter 38'/,-35'/,6 Fourth Quarter 427 /,-347 /a Year 427/s-33'/,

1996

$1 :223.9 1,088.3 1,327.3_

1,214.5

$4,854.0

$, 224.2 144.3 244.9 87.6

$ 701.0

$ 150.2 94.2 r62.2 65.5

$ 472.1 0.85 0.53 0.91 0.36 2.65

$ 0.645 0.645 0.645 0.645 2.58 443/,-375/a 40'!.-37 40-36' /a 41-37'/a 443/,-367 /a In the third quarter of 1997, East Midlands recorded a liability of approximate)y $157 million to_ reflect the anticipated one-time windfall tax levied by the UK 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. The remaining payment,is due in December 19'98.

Certain accruals were recorded in 1997 and 1996 that are not ordinary. recurring adjustments, consisting of restructuring (see Note N) and accelerated costs recovery (see Note O). **

Restructuring-Virginia Power expensed $0, $6.3 million, $1:1, million and $10.7 million during the first, second, third and fourth quarters of 1997, respectively. and $5-4 million, $19:3 million; $4:6 million and $35.6 million during the same periods in 1996.

-*Accelerated cost recovery-Amounts reserved "for accelerated cost recovery were $0, $2.7 million, $28.3 million and $7.3 million

. during the first, second, third and fourth quarters of 1997, respec-tively. and $26.7 million during the fourth quarter of 1996.

Charges for restructuring 'and accelerated' cost recovery reduced Balance Available for CoT)1mon *stock by $0, $5:8 million,

$i9.3 million, and$11.7 million for the first, second, third, and-fourth quarters of 1997, respectively and $3.5 million, $12.5 million, $3:0 million and $40.6 million for the same periods in 1996.

RE"PORT*OF MANAGEME.'S RESPONSIBILITIES The management of Dominion Resources, Inc. is responsible for al I 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 rrianagement, 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 con-trols designed to provide reasonable assurance, at a reasonable cost, *that Don,inion 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 inher-ent 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 struc-ture designed to ensure appropriate segregation of responsibili-ties, 'careful selection and training of qualified personnel, and internal audits. Management believes that during 1997 the system of internal control was adequate to accomplish the intended objectives.

The Consolidat~d Financial Statements have been audited by Deloitte 6 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 proce-dures sufficient to provide reasonable assurance that the Consol-idated 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 Domin-ion Resources or its subsidiaries, meet periodically with indepen-dent 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 inde-pendent auditors and the internal auditors periodically meet alone with the Audit Committees and have free access to the Com-mittees at any time.

Management recognizes its responsibility for fostering a strong ethical climate so that Dominion Resources' affairs are con-ducted 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 dis-closure of public information.

Dominion Resources, Inc.

7~~

Thos. E. Capps Chairman, President and Chief Executive Officer James L. Trueheart Vice President and Controller REPORT OF.EPENDENT 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, 1997 and 1996 and the related cqnsolidated statements of income and retained earnings and of cash flows for each of the three years in the period ended December 31, 1997. These Consolidated Finan-cial Statements are the responsibility of the company's manage-ment. 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 misstate-ment. An audit includes examining, on a test basis, evidence sup-porting 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 eval-uating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such Consolidated Financial Statements pre-sent fairly, in all material respects, the consolidated financial position of Dominion Resources, Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.

Richmond, Virginia February 9, 1998 57

.~.. '

LIMITED GUARANTY This Limited Guaranty, effective as ofNovember 23, 1998, by Dominion Resources, Inc.,

a Virginia corporation ("Guarantor") and sole common shareholder of Virginia Electric and Power Company, a Virginia public service corporation, ("Virginia Power") is established for the purpose of supporting Virginia Power's financial assurance obligation as it relates to nuclear decommissioning pursuant to 10 CFR §50.75.

WHEREAS, Virginia Power is a licensee of four nuclear power reactors; namely, Surry Nuclear Power Station Units 1 and 2, and North Anna Nuclear Power Station Units 1 and 2 (collectively, the "Reactors"); and WHEREAS, Virginia Power has established external trusts for the purpose of collecting sufficient funds over the respective Reactors' licensed operating periods for their ultimate decommissioning; and WHEREAS, the name of one of the trusts, as established by a Trust Agreement dated December 31, 1986, amended and restated April 18, 1989, and further amended and restated May 4, 1994, is VIRGINIA ELECTRIC AND POWER COMP ANY NON-QUALIFIED NUCLEAR DECOMMISSIONING TRUST ("Nuclear Decommissioning Trust"); and WHEREAS, the Nuclear Decommissioning Trust includes separate Reserve Funds for each nuclear operating unit such that each Reserve Fund is established as a trust under state law; and WHEREAS, the Nuclear Regulatory Commission ("NRC), through its regulations contained in 10 CFR §50.75, requires certain amounts and methods to be used in the demonstration of financial assurance for decommissioning of nuclear power reactors; and WHEREAS, pursuant to 10 CFR §50.75 as amended by regulations effective November 23, 1998, Virginia Power's total nuclear decommissioning financial assurance amount does not qualify for continued use of the sinking fund method as the sole method for satisfying the obligation; and WHEREAS, pursuant to 10 CFR §50.75 as amended by regulations effective November 23, 1998, Virginia Power's nuclear decommissioning financial assurance obligation may be satisfied via a parent company guaranty in addition to the sinking fund method; and WHEREAS, Guarantor is willing to guarantee payment for an amount not to exceed $91 million and for which it is qualified under the financial tests contained in appendix A to 10 CFR Part 30 for Virginia Power's nuclear decommissioning financial assurance obligation.

NOW, THEREFORE, because.of the above Recitals, which are incorporated herein, Guarantor hereby unconditionally guarantees the following:

1.

Guarantor shall make on behalf of Virginia Power, for the benefit of its Nuclear Decommissioning Trust, any and all required payments or obligations under the nuclear decommissioning financial assurance regulations contained in 10 CFR §50.75 to the extent Guarantor qualifies under appendix A to 10 CFR Part 30, such payments or obligations in an aggregate amount not to exceed $91 million.

J

2.

Based upon the financial tests as contained in appendix A to 10 CFR Part 30, specifically paragraph II.A.2, and applied to Guarantor's December 31, 1997 audited financial statements, the limit to which Guarantor qualifies to guarantee is currently $200 million.

Such limitation will vary from time to time based upon the continued application of the financial tests on the financial statements of the Guarantor.

a)

Guarantor's current implied unsecured bond ratings are A-and Baal for Standard and Poor's and Moody's, respectively.

b)

Guarantor's tangible net worth at December 31, 1997 is $1.204 billion, which would support a maximum decommissioning financial assurance amount of $200 million.

c)

Guarantor's total assets at December 31, 1997 are $20.2 billion with assets located in the United States of $14.9 biHion, which would support a maximum decommissioning financial assurance amount of $2.48 billion.

3.

Guarantor agrees to submit revised financial statements, financial test data, and a special auditor's report and reconciling schedule annually within 90 days of the close of the succeeding calendar years.

4.

If Guarantor fails to meet the financial test criteria contained in appendix-A to 10 CFR Part 30 for an amount equal to or exceeding $91 million, then Guarantor will send notice of cancellation by certified mail to Virginia Power and the NRC. Cancellation may not occur, however, during the 120 days beginning on the date ofreceipt of the notice of cancellation by both Virginia Power and the NRC, as evidenced by the return receipts.

5.

If Virginia Power fails to provide alternate financial assurance as specified in 10 CFR §50.75 within 90 days after receipt of a notice of cancellation of this Guaranty, Guarantor agrees to provide such alternative financial assurance in the name of Virginia Power prior to cancellation of this Guaranty or make full payment under this Guaranty.

6.

This Guaranty shall remain in effect until the NRC terminates the licenses of the Reactors or until such time as alternative financial assurance meeting the requirements of 10 CFR

§50.75 is provided by either Guarantor or Virginia Power.

7.

All notices and communications to Virginia Power under this Guaranty, until Guarantor is notified to the contrary in writing, shall be addressed to Virginia Electric and Power Company, P. 0. Box 26666, Richmond, Virginia 23261.

8.

All notices and communications to the Guarantor under this Guaranty, until Virginia Power is notified to the contrary in writing, shall be addressed to Dominion Resources, Inc., P. 0.

Box 26532, Richmond, Virginia 23261.

9.

This Guaranty shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without regard to principles of conflicts oflaws.

10.

The provisions of this Guaranty may not be waived, changed, modified or discharged orally, but only by an agreement in writing signed by Guarantor and Virginia Power.

2

r

'*,,,.)'

11.

Any delay by Virginia Power in exercising, or any failure of Virginia Power to exercise, any right hereunder shall not constitute either a waiver of the right of Virginia Power to exercise such option or a waiver of any other remedy to which Virginia Power may be entitled hereunder or under applicable law.

12.

The provisions of this Guaranty shall be binding upon Guarantor and its successors and assigns. Guarantor shall not assign its rights nor delegate its obligations under this Guaranty in whole or part, without written consent of Virginia Power, which shall not be unreasonably withheld, and proper notice to the NRC.

13.

A determination that any provision of this Guaranty is unenforceable shall not affect the enforceability of any other specific provision herein or of this Guaranty generally.

14.

This Guaranty is the entire and only agreement between Guarantor and Virginia Power with respect to the guarantee of the nuclear decommissioning financial assurance obligations of Virginia Power by Guarantor. All representations, warranties, agreements, or undertakings heretofore or contemporaneously made, which are not set forth herein, are superseded hereby.

15.

This Guaranty will be effective upon the approval and ratification of the Dominion Resources, Inc. Board of Directors.

Dominion Resources, Inc.

By:

E~ :Roach, Jr.

Executive Vice President and Chief Financial Officer Dated: November 23, 1998 I hereby certify that Edgar M. Roach, Jr. is the duly elected and incumbent Executive Vice President and Chief Financial Officer of Dominion Resources, Inc., and that the signature set forth above is his gen uni :

gnature.

ByJ £. *

~

Dated: November 23, 1998 Name:**

~~~~.............,,-J'-'~~~~-'----

Title:

3

Deloitte &

ToucheLLP 0

e Suite 500 Eighth & Main Building 707 East Main Street Richmond, Virginia 23219 Telephone: (804) 697-1500 Facsimile: (804) 697-1825 INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING AGREED-UPON PROCEDURES Board of Directors Dominion Resources, Inc.

Richmond, VA We have performed the procedures included in the Code of Federal Regulations (CFR) Title 10, Part 30, Appendix A (Appendix A to 10 CFR part 30), which were established by the Nuclear Regulatory Commission (NRC) and agreed to by the NRC and Dominion Resources, Inc., (the "Company"), solely to assist the users in evaluating management's assertion about the Company's compliance with the financial tests as of December 31, 1997, included in the accompanying letter dated November 23, 1998 from Edgar M. Roach, Jr., Executive Vice President and Chief Financial Officer of the Company (related to the licensee, Virginia Electric and Power Company, License No. DPR-32 Surry Unit 1, License No.

DPR-37 Surry Unit 2, License No. NPF-4 North Anna Unit 1, and License No. NPF-7 North Anna Unit 2). This agreed-upon procedures engagement was performed in accordance with standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the specified users of the report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose.

The procedures that we performed with respect to the attached schedule prepared by the Company are as follows:

1. We compared the amounts in the column "Per Financial Statements" with amounts contained in the audited consolidated financial statements of Dominion Resources, Inc. as of and for the year ended December 31, 1997, on which we have issued our report dated February 9, 1998, and noted that such amounts were in agreement.
2. We compared the amounts in the column "Per CFO's Letter" with the letter prepared in response to the NRC's request, and noted that such amounts were in agreement.
3. We compared the amounts in the column "Reconciling Items" with analyses/schedules prepared by the company setting forth the indicated items.
4. We recalculated the totals in the attached schedule.

Deloitte Touche Tohmatsu International

We were not engaged to, and did not, perform an examination, the objective of which would be the expression of an opinion on the attached schedule or the accompanying letter dated November 23, 1998.

Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

This report is intended solely for the information and use of the board of directors and management of Dominion Resources, Inc., its subsidiary Virginia Electric and Power Company and the Nuclear Regulatory Commission, and is not intended to be and should not be used by anyone other than these specified parties.

j)~:~ ~I November 23, 1998

SCHEDULE RECONCILING AMOUNTS CONTAINED IN THE CHIEF FINANCIAL OFFICER'S LETTER WITH AMOUNTS IN THE FINANCIAL STATEMENTS Line in CFO's Letter ($M)

Total Assets LESS:

Intangible Assets Nuclear Plant Nuclear Decommissioning Trusts Total Liabilities Tangible Net Worth Line in CFO's Letter ($B)

Total Assets LESS:

Dominion U.K.

Dominion Energy Total Assets In U.S.

Dominion Resources, Inc.

Year Ended December 31, 1997 Per Financial Statements

$20,192.7 2971.1 569.1 13,675.3 Per Financial Statements

$20.2 Reconciling Items

$1,773.0 Reconciling Items 4.4 0.9 Per CFO's Letter

$1,204.2 Per CFO's Letter 14.9

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