Text

Forwards Listed Info Re Licensee Guarantees of Payment of Deferred Premiums,Per 10CFR140.21(e)
	ML18151A494
Person / Time
Site:	Surry, North Anna
Issue date:	03/29/1990
From:	Stewart W; VIRGINIA POWER (VIRGINIA ELECTRIC & POWER CO.)
To:	; Office of Nuclear Reactor Regulation
References
	90-161, NUDOCS 9004050479
	Download: ML18151A494 (81)
	v • d • e

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VIRGINIA ELECTRIC AND POWER COMPANY RICHMOND, VIRGINIA 23261

- 10 CFR 140.21 (e)

March 29, 1990 Director, Nuclear Reactor Regulation Serial No.90-161 United States Nuclear Regulatory Commission NURPC Washington, D. C. 20555 Docket Nos. 50-280 50-281 50-338 50-339 License Nos. DPR-32 DPR-37 NPF-4 NPF-7 Gentlemen:

VIRGINIA ELECTRIC AND POWER COMPANY SURRY POWER STATION UNITS 1 AND 2 NORTH ANNA POWER STATION UNITS 1 AND 2 PRICE-ANDERSON ACT Pursuant to 10 CFR 140.21 (e) regarding licensee guarantees of payment of deferred premiums, we are providing the following information:

1. Annual Report to Securities and Exchange Commission on Form 10-K for 1989.

2. Comparative Statement of Income for the three months ended December 31, 1989 and 1988.

3. Internal cash flow projection for calendar year 1990 with certification by officer of the Company.

4. Statement ensuring availability of funds for payment of retrospective premiums without curtailment of required nuclear construction expenditures.

In accordance with 10 CFR 140.7, we submitted a check to the NRC for $1,000 on October 31, 1989, which is the minimum required premium for the period November 15, 1989, through November 14, 1990.

Ve[\ truly yo,urs,

\,_V~

W. L. Stewart Senior Vice President - Nuclear Enclosures 9004050475') '::°"l()():~:~2*:=-'-- ---,

PDR ,c1:00CI< 050002:30 I PDC

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cc: U. S. Nuclear Regulatory Commission Region II 101 Marietta Street, N. W.

Suite 2900 Atlanta, Georgia 30323 U. S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, D. C. 20555 Mr. W. E. Holland NRC Senior Resident Inspector Surry Power Station Mr. J. L. Caldwell NRC Senior Resident Inspector North Anna Power Station

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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, 1989 Commission file number 1-2255 VIRGINIA ELECTRIC AND POWER COMPAN-Y (Exact name of registrant as specified in its charter)

VIRGINIA 54-0418825 .

(State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.)

One James River Plaza Richmond, Virginia 23261-6666 (Address of principal executive offices) (Zip Code)

(804) 771-3000 (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange Title of each class on which registered Preferred Stock (cumulative) New York Stock Exchange

$100 liquidation value:

$5.00 dividend

$7. 72 dividend

$7.45 dividend

$7 .20 dividend

$7.72 dividend (1972 Series)

$8.60 dividend Securities registered pursuant to Section 12(g) of the Act:

None (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes """ No The aggregate market value of the voting stock held by non-affiliates of the registrant as of January 31, 1990 was zero.

As of January 31, 1990, there were issued and outstanding 147,077 shares of the registrant's common stock, without par value, all of which were held, beneficially and of record, by Dominion Resources, Inc.

DOCUMENTS INCORPORATED BY REFERENCE.

None

VIRGINIA ELECTRIC AND POWER COMPANY

.. l i I ITEM PAGE NUMBER NUMBER PART I

1. Business.................................................................................... 1 The Company ................................... : ........... ;................................ 1 Capital Requirements and Financing Program .......................... *.;.................... 2 Construction and Nuclear Fuel Expenditures ..... ;........................................ 2 Financing Program ..........* ..... ; ......................................*....... ;........... 2 Rates . ................................................ .'.................*. . . . . . . . . . . * . . . . . . . 3 Virginia ....................................... *......................................... 3 North Carolina ................ *.............................................*..... ;....... 4 County and Municipal Customers ............. , . . . . . . . . . . . . . . . . . . . . .. .. . . . . . * .. . . . . . . * . . . . . . 4

Governmental-C0111110nwealth of Virginia ........................... ;....................... 4 Sources of Power............................................................................ 5 Company Generating Units ................................................. .'.. .'............ 5 Utility Purchases ..............................*... *.......... ; ...... ; ...... ; ........... :.. 5 Non-Utility Generation ..................................................... ,............. 5 Sources of Energy Used and Fuel Costs....................................................... 6 Hue lear Fuel Supply ........*.................. *........ ; . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Coal Supply .. *........................................................................... 6

coal Conversions ................................................ , .............. : . . . . . . . . . . 7 Purchases and Sales of Power ............. *................... : ..........., . . . . . . . . . . . . . . . . 7 Interconnect ions ........*.............. .'...............: . : ............................... *.. . 7 Future Sources of Power ..........................*......................... ; .... *. ; . . . . . . . . . 7 Company Owned Generation: ..... ; .................................................... ;...... 9 Non-Utility Generation.................................................................. 9 Competition .............. ;.'.... ; ............. *............ :................. '. .. .'............ 10

2. Properties ............................................... *................................... 10

3. Legal Proceedings .................................. ;.......................................... 10 Regulation-General. ............................................... ~....................... 10 Water Quality Control..................................................................... 11 Air Quality Control. ..................*.... *.. *................. ;;............................ 12 Nuclear Operations ................................................................... *....... 12

4. Submission of Matters to a Vote of Security Holders ...... ; .... .'...................... ;...... 14 PART II

5. Market for the Registrant's Conmen Equity and Related Stockholder Matters, .... : ......... ~.... 14

6. Selected Financial Data ....................... *....... *..............................*... .' ... ;. 15

7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 15

8. Financial Statements and Supplementary Data................................................. 22

9. Changes in and Disagreements with Accountants on Accounting and' Financial ' ' .

Disclosure........ 55 PART III

10. Directors and Executive Officers of the Registrant ......... ; ..... *.~ ....... *................. 55

11. Executive Compensation ........*................... ;.' ..........'.*.......... *................ .'. 61

12. Security Ownership of Certain Beneficial Owners and Management .............. : ...... ;........ 66

13. Certain Relationships and Related Transactions............................................. 66 PART IV

14. Exhibits, Financial Statement Schedules, and Reports. on Form 8-K........................... 67

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PART I ITEM I. BUSINESS THE COMPANY Virginia Electric and Power Company was incorporated in Virginia in 1909 and has its principal office at. One James River Plaza, Richmond, Virginia 23261-6666, telephone (804) 771-3000. It is a wholly-owned subsidiary of Dominion Resources, Inc. (Dominion Resources), a Virginia corporation.

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 i~ Virginia and northeastern North Carolina. It transacts business under the name Virginia Power in Virginia and under the name North Carolina Power in North Carolina.

It sells electricity to retail customers (including governmenta1 agencies) and to wholesale customers such as rural electric cooperatives and municipalities. The Virginia service area comprises about 65 percent of Virginia's total land area, but accounts for over 80 percent of its population. As used herein, the terms "Virginia Power" and the "Company" shall refer to the entirety of Virginia Electric and Power Company, including, without limitation, its Virginia and North Carolina operations.

The Company has nonexclusive franchi'Ses or permits .for electric operations in substantially all cities ~nd towns now served. It also has certificates of convenience and necessity from the Virginia State Corporation Commis*sion (the Virginia Commission) for service in all territory served at retail in that State.

The North Carolina Utilities Commission (the North Carolina Commission) has assigned territory to the Company for substantially all of its retail service outside certain municipalities in that State.

The Company owns . its principal properties in fee (except as indicated below), subject to defects and encumbrances that do not interfere materially with their use. Substantially all of its property is subject to the lien of a mortgage securing its First and Refunding Mortgage Bonds. Right-of-way grants from. the apparent owners of real estate have been obtained for. most electric lines, but underlying titles have not been examined except for transmission lines-of 69,000 .volts or more. Where rights of way have not been obtained, they co.uld be acquired from private owners by condemnation if necessary. Many electric lines are*on publicly owned property as to which permission for use is generally revocable. Portions of a 500,000 volt transmission Hne from the Company's coal-fired station at Mt. Storm, West Virginia, cross national parks and forests-under permits entitling the. federal government to use, at specified charges, surplus electricity in the line if any exists.

The Company leases combustion turbines and certain buildings and equipment.

See Note E to FINANCIAL STATEMENTS.

A wholly-owned subsidiary of the Company, Virginia Power Fuel Corporation (VP Fuel), owns and finances nuclear fuel and related materials for the Company's Surry nuclear units, and sells the heat from such fuel to the Company. See Note 0 to FINANCIAL STATEMENTS.

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) t The Company strives to operate its generating facilities in accordance w;th prudent utility industry practice .and in conformity with applicable statutes, rules and regulations. like other. electric utilities, the Company's generating facilities are subject to. unanticipated .or extended outages for repairs, replacements or modifications of equipment or otherwise to comply with regulatory requirements. Such outages may involve significant expenditures not previously budgeted, including replacement energy costs. See Rates under BUSINESS and Nuclear Operations under LEGAL PROCEEDINGS.

The Company had 12,688 employees on December 31, 1989. Approximately 4,530 of the Company's employees are represented .by-the International Brotherhood of Electrical Workers under a contract extending: to March 31, 1992. The Company considers its relations with .its union and* .nonunion employees to be good.

CAPITAL REQUIREMENTS AND FINANCING PROGRAM .

Construction and Nuclear Fuel Expenditures Virginia Power's estimated construction and nucle~r fuel . expenditures, including Allowance for Funds Used During*Construction (AFC), for the three-year period 1990-1992, total $3.0 billion. It has adopted a 1990 budget for construction and.nuclear fuel expenditures. as set forth below:

ESTIMATED 1990 EXPENDITURES CMILLIONSl New Generating Facilities:

Chesterfield Unit 7 ... ~ ...**.*....*.******* ~ ******.**.* $ 21 Chesterfield Unit.a *..**..**......*..**** ; ********.**.* 73 Darbytown Combustion Turbines~.*....~ ... ~ **********..**** 44 C1over Project ._ .* ..........................................

53 Other Product 1on . ........................ *.............. *. 207 General Support Facilities *.... ~*************~*********** 59 TransRlission ....... ~ ....*. ~ .......... ~. *..*.....~ .. ~ ~ .... ~. *...

79 Distribution *. ~ *........**... ~ .*.*. ~~ .* ~~~; ** ,.: **** ~ **.* 338 Nuclear Fuel ...... ,._ ....* .... *......... * ........... ~ ....... ; .. 84 Total Construction Requirements and Nuclear Fuel *.**** ~ 958 AFC * ** ...***..*****...*... ~ .*...*.*.***********.******** ~ .* *

8 Total Expenditures.~* .... ~ .. ;~ .... ~:- ........ ~.-.-~.~-...... ~ * $966 Financing Program In 1989, Virginia Power obtained $747million from the sale of securities.

Its long-term financings included $250 million of.First and Refunding Mortgage Bonds, $75 mi 11 ion of preferred stock, $322 mi 11 ion of unse.cured notes having maturiti.es ranging from 2 to 12 years and $100 million of Common Stock sold to Dominion Resources. From the procee(Js .of the 1989 securities sales, the Company retired $114. 6 mi 11 ion of securities through mandatory debt maturities and sinking fund requirements, retired an additional $37 million of debt financing 2

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'1 e e and preferred stock through optional redemptions and sinking fund payments and reduced borrowings by $198.7 million under the Virginia Power Financing Trust, which was terminated on March 27, 1989. See liquidity and Capital Resources under MANAGEMENT'S DISCUSSION AND *ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Virgin*i a Power's 1990 capital requirements, e~cl usive of AFC and refundings, are 'estimated to be $958 million, as detailed above. Of this amount, it is expected that approximately $463 million will be obtained from internal sources.

The remaining $495' mil lion of capital requirements, as wel 1 as the. $160 mil 1 ion of debt and preferred stock maturities and sinking fund requirements, wil 1 be financed by a' combination of sales of securities and borrowings under an inter-company credit agreement w;th Dominion Resources. See liquidity and Capital Resources under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

RATES The Company was subject to electric rate regulation in 1989 as follows:

1989 Percent Percent of Electric of Revenues Kwh Sales Virginia retail:

Non-Governmental*customers *.. Virginia Co*ission 81 78 Governmental customers .***... Not regulated (negotiated agreements) 11 13 North Carolina retail ***.***. North Carolina Commission 4 4 Wholesale ..*.** ~ *.**.****.**.. Federal Energy Regulatory Co11111ission (FERC) ~ ~

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All of the Company's electric sales are subject to recovery of changes in fuel costs either through fuel adjustment factors or periodic adjustments to base rates, each of which. requires prior regulatory-approval. Rate relief obtained by the Company is frequently less than requested.

The principal rate proceedings in *which the Company was involved in 1989 are described below by jurisdiction.

Virginia On March 31, 1989; the Company filed with the Virginia. Co11111ission an app 1i cation for a .rate *.increase of $95 mi 11 ion, requesting a May 1, 1989 effective date under the Virginia Commission's rules for expedited rate proceedings.* On' May 1, *1989, the proposed rates were placed in effect on ari interim basis, 'sijbject to*refund pending the Virginia Co11111ission's Final Order.

On January 12, 1990, the Virginia. Commis*sion entered its Final Order in the proceeding. The Virginia Co11111ission approved a rate increase of $64.4 million 3

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on a 1988 test year, an amount $8.4 million more than recommended by the Hearing Examiner but $30.6 million less* than the Company requested. Refunds of amounts collected in excess of the amount approved are required to be made, with I

1, interest, by April 1, 1990.

On January 30, 1990, the Company notified the Virginia Commission of its intention to file an application on .March 30, 1990 for a rate increase to take effect on May 1, 1990. The Company did not specify the amount of the rate increase it will seek.

North C~rolina On October 5, 1989, North Carolina Power fi.led. an application for an increase in the fuel factor with .the North Carolina Commission. Utilities in North Carolina undergo an annual fuel cost proceeding in which fuel costs from the past test year are reviewed and a fuel cost factor for the current test year is set. One element in determining the fuel factor consists of comparing the nuclear performance capacity factor for the test year with a target nuclear performance capacity factor -defined by North Carol i na law. The Company f i 1ed testimony in this proceeding seeking approval of a net fuel component of 1.398 cents per kilowatt-hour. On November 14, 1989, the Company filed revised testimony modifying the net fuel component to 1.391 cents per kilowatt-hour.

These rates went into effect, subject to refund, effective with the billing month of January 1990. The Company's testimony indicated that the outages at the Surry Power Station during the past test year caused the Company's nuclear operations to fall short of the target capacity factor. The Public Staff of the North Carolina Convnission and the Attorney General of North Carolina conducted investigations into the Surry Power Station outages and other aspects of the Compa~y's nuclear operations related to fuel costs. The Company is attempting to negotiate a settlement among all of the parties to this proceeding but, in the absence of such a settlement, a hearing is scheduled to begin on March 13, 1990.

County and Municipal Customers On February 15, 1989, Virginia Power reached agreement on the terms of a three-year contract governing rates for county and municipal customers in .

Vi~ginia, which will continue th~ough June 30, 1991~

P~rsuant to this contract and effective with the billing month of February 19a9, a decrease of $25.5-million for the period from July 1, 1988 to June 30, 1989 was implemented and adequately reserved on the books of the Company:* 'An increase of $4 mill ion became effective July 1, 1989, and another increase of $4 million will become effective July 1, 1990.

Governmenta1-Conmonweal,th of V.i rgi ni a Governmental base rates for the Commonwealth of Virginia are unregulated but follow the methodology approved by the Virginia Conunission for jurisdictional base rates. On May 1, 1989, existing rates were placed under bond, subject to refund, 'in anticipation of a slight rate decrease based upon the allocation methodology of the rates filed in Virginia on March 31, 1989.

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' I' e SOURCES OF POWER Company Generating Units Type Winter Years of Capability Name of Station, Units and Location Installed fygI ~

Nuclear:

Surry Units 1 & 2, Surry, Va ................ 1972-73 Nuclear 1,562 North Anna Units 1 & 2, Mineral, Va ......... 1978-80 Nuclear l,830(a)

Total nuclear stations .*.*.*..*.********** 3,392

Fossil:

Bremo Units 3 & 4, Bremo Bluff, Va .......... 1950-58 Coal 234 Chesterfield Units 3-6, Chester, Va ........* 1952-69 Coal 1;280 Mt. Storm Units 1-3, Mt. Storm, W. Va....... 1965-73 Coal 1,635 Chesapeake Units 1-4, Chesapeake, Va.: .*.... 1953~62 Coal 605 Possum Point Units 3 &4, Dumfries, Va *.*... 1955-62 Coal . 326 Yorktown Units 1 & 2, Yorktown, Va .**.*..... 1957-59 Coal 346 Possum Point Units 1, 2, &5, Dumfries, Va .. 1948-75 Oil 946 Yorktown Unit 3, Yorktown, Va............... 1974 Oil & Gas 82,0 Total fossil stations..................... 6,192 Combustion Turbines .*.**. .'. * . . . . . . . . . . . . . . . * . . 1967-89 Oil & Gas 906 ,,:I I

Hydroelectric:

Gaston Units 1-4, Roanoke Rapids, N.C ....*.. 1963 Conventional 225 Roanoke Rapids Units 1-4, Roanoke i Rapids, N. C********* *** ~ ******************* 1955 Conventional 104 ;I Other . .................... '* ................ . 1930-87 Conventional 3 Bath County Units 1-6 .**. ~ ....*....**.*.*... 1985 Pumped Storage l,260(b)

Total hydro stations .*.**...**..**.**..**. *l, 592 Total Company generating units capability. 12,082 Ut i l i ty Purchases . .......,..* .................... . 1,380 Non-Utility Generation.~ ....................... . 376 Tota1 Capabi 1 i ty . . .' ....................... . 13.838 (a) Includes an undivided interest of 11.6 percent (212 Mw) owned by Old Dominion Electric Cooperative (ODEC).

(b) Includes only the Company's 60 percent undivided interest in the 2,100 Mw station. A 40 percent undivided interest in the facility is owned by Allegheny Generating C.ompany, a subsi,~iary of Allegheny Power System, Inc. (APS).

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The Company's highest one-hour integrated service area winter peak demand was 12,697 Mw established on December 22, 1989, and the highest one-hour integrated summer peak demand was 11,945 Mw established on July 11, 1989. At the time of these peaks, the Company had an aggregate winter capability of 13,838 Mw and an aggregate sumer capability of 13,841 Mw, in each case including utility purchases and non-utility generation.

The Company and certain other utilities in the mid-Atlantic and Northeast regions of the United States experienced difficulties in 1988 in obtaining purchased power from sources to the west. The principal reasons for this were (i) high demand for purchased.power due to growth and hot weather, (ii) outages at certain generating facilities in the Northeast and-mid-Atlantic areas and (iii) full capacity usage of the transmission facilities through which the power flows from west to east. The installation of four peaking units, two of which began operation during June 1989 and the remaining two units in November 1989 will help alleviate this situation.

For financial data as to the property, plant and equipment of the Company, see Schedule V to FINANCIAL STATEMENTS Schedules.

SOURCES OF ENERGY USED AND FUEL COSTS For information as to energy supply mix and the average fuel cost of energy supply, see Results of Operations under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Nuclear Fuel Supply Virginia Power's nuclear fuel supply and related services are expected to be adequate to support current and planned nuclear generation requirements. A combination of long-term contracts and spot purchases is utilized by the Company to fulfill its nuclear fuel needs. The Company continually evaluates market

conditions in order to assure adequate nuclear fuel supply. Current agreements, inventories and market conditions will support planned fuel cycles into the mid-1990s.

See Nuclear Operations under LEGAL PROCEEDINGS for information relating to spent fuel storage and disposal and the effect thereof on continued operations.

Coal Supply In 1989, Virginia Power consumed approximately 11.0 million tons of coal.

As with nuclear fuel, the Company utilizes both long-term contracts and spot purchases to support its needs. The central Appalachian coal market, from which the Company purchases

most of its coal , continues to produce coa1 suppl i es sufficient for the Company's needs. The Company presently anticipates that sufficient coal supplies at reasonable prices will be available at least into the*mid-1990s.

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Coal Conversions

e Since 1975,twelve of Virginia Power's generating units (aggregating 2,503 Mw) have been converted from oil to coa1. The Company presently has four operating oil-fired generating units (Yorktown Unit 3 and Possum Point Units 1, 2 & 5, aggregating 1,747 Mw). Possum Point Unit 1 (74 Mw), the last oil-fired unit to undergo renovation, was completed and returned to service in June 1989.

Purchases arid Sales of Power Virginia Power reduces fossil fuel costs by purchasing power from other utility systems when it is available at* a cost lower than the Company's own.

generation costs~ Conversely, it seeks to sell energy to other utilities when the proceeds from such sales will reduce its fuel expenses. It also relies upon purchases of power to meet an increasing amount of its capacity requirements.

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

In late 1988, the Company contracted to purchase 200 Mw of electricity through 1990 from South Carolina* Public Service Authority (SCPSA). The SCPSA contract requires the Company to purchase the power during the summer and winter peak seasons of 1989 and 1990 and during any other six non~peak months during the two-year period, totaling required purchases for 18 of the 24 months. In May 1989, the Company contracted with Carolina Power and Light Company to purchase 250 Mw of electricity during June, July, and August of 1989 and 1990; 350 Mw for December 1989 through February 1990; and 100 Mw for December 1990 through February 1991. In late 1989, the Company contracted with South Carolina Electric &Gas to purchase 200 Mw of short-term power during January*and February and from June through September 1990.

As of December 31, 1989, Virginia Power al so has 31 non-utility power purchase contracts with a combined dependable capacity of 376 Mw (see Note N to FINANCIAL STATEMENTS).

INTERCONNECTIONS

The Company and its neighboring utilities maintain major interconnection~

and arrangements for coordinated planning, operation, emergency assistance and exchanges of capacity and energy.

FUTURE SOURCES OF POWER Virginia Power is conunitted to obtaining new sources *of reliable and economic generating capacity. This capacity may be built, owned and operated by others and sold to the Company under a competitive bid process or may be built by Virginia Power if the Company determines it can build capacity at a lower overall cost.

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The Company presently anticipates that system load growth will require approximately 5,000 Mw of additional capacity through 1997. The Company has pursued several options to provide that capacity and maintain a high degree of service reliability.

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On* January 26, 1989, the Company filed with the* Virginia Commission an application:for approval to construct a second combined cycle generating unit (Chesterfield Unit 8, 218 Mw) at its Chesterfield Power Station. On March 15, 1989, the Company filed with the Virginia Commission an application for approval of construction of four combustion turbine units aggregating from 325 to 340 Mw of generating capacity. On March 20, 1989, the Virginia Commission .:onsol idated this proceeding with the earlier application for appr~val to construct Chesterfield Un.it 8. A combined hearing was held before the Virginia Commission on July 5-7, 1989, and on August 25,

1989 the Virginia Commission approved construction of Chesterfield Unit 8 and the four combustion turbine units. The proceeding, however, was continued on the Virginia Commission's docket for

. investigation of the Company's capacity planning process *.. On January 22, 1990, a Hearing Examiner issued a report criticizing the Company's capacity planning and reconvnending that it be monitored more closely by . the Virginia Commission's staff.

On August 15, 1989, the Company applied to the Virginia Commission for permission to construct, along with ODEC, a 786 Mw coal-fired generating station.

The station will include two 393 Mw units scheduled to be completed in December 1993 and December 1994. The Company and ODEC are presently negotiating purchase and operating agreements under which each company will own a 50 percent interest in the units and the Company will operate the station. A hearing on the proposed units was held on October 30 and 31, 1989 and approval was granted on December 28, 1989.

On January 8, 1990, the Company filed with the Virginia Commission an application for approval of construction of three or four additional combustion turbines with an aggregate capacity of 325-340 Mw. A hearing on the application has been set for June 12, 1990.

On J~nuary 29, 1988, the Virginia Conunission issued an Order approving in concept the voluntary use of competitive bidding for procuring new capacity.

Virginia Power supported such a result. Notwithstanding its Order, the Virginia Commission allowed, as a transition to competitive bidding, certain*third parties to retain the right to negotiate contracts for the sale of power to the Company from planned facilities aggregating approximately 750 Mw. The Company has reached agreement with the developers of several of these projects to purchase approximately 250 Mw of power. The developer of a project aggregating approximately 350 Mw is continuing discussions with the Company while the remainder have withdrawn. On October 18, 1989, a developer petitioned the Virginia Commission for an arbitration and award of a power purchase agreement for a 316 Mw facility outside of the competitive bidding process. The Company has opposed the petition, but the Virginia Commission has set the matter for oral argument for March 14, 1990.

In 1987, the Company signed agreements for the purchase of approximately 1,300 Mw of additional capacity from six non-utility power producers. In 1988, 8

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'/ e e as a result of a competitive bidding solicitation, the Company*entered into 19 contracts for 2,086 Mw of addit.ional capacity for initial delivery .at various dates through 1994. The~e contracts are-generally for a duration of 25 years after initial delivery.

The projects cover a variety of technologies, fuel supplies, pricing mechanisms and in-service dates. Although approximately 900 Mw are now under construction, none of the generating facilities discussed in this paragraph has been comp1eted. Each* agreement for the purchase of power contains provisions which require the project developers to keep the Company informed of constructi.on progress. These agreements also contain liquidated damage provisions that may be invoked if the-electricity is not available as scheduled. The Company is developing a contingency plan to meet the demand for power in the event that the growth.in demand exceeds present forecasts or in the event of a failure of any of these power purchase agreements to be performed.

The Company also issued . a Request* for Proposals on August 15, 1989 for competitive bids for an additional 1,100 Mw of power to come on line during 1995-1997. Bids were received in January 1990 ... The Company received proposals from 38 developers for 78 projects aggregating. 11,600 Mw of capacity. About 70 percent of the proposed capacity would be* fired by coal*or coal waste, about 25 percent fired.by natural .gas or oil *and the rema.ining 5 percent would be fired by municipal solid waste, peat or wood products. The Company is in the process of evaluating the proposals, and contracts are expected to be executed in the summer of 1990.

The Company's continuing program -to meet future energy requirements is summarized in the following table:

Company Owned Generation Capabi 1 i ty Expected .

.Name of Units ~ In-Service Date status Darbytown Combustion Turbines 1-4 344 6/1990 On schedule

-for completion Chesterfield 7 2i4 6/1990 On schedule for completion Chesterfield 8

218 6/1992 On *s.chedu1e for completion Clover Project:

Unit 1 393 12/1993 (*)

Unit 2 393 12/1994

Non-Utility Generation Number of Projects Mw Contracts Executed . 77 3,607 Projects Financed 11 992 9

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The Company and ODEC have signed a non-binding agreement in principle to l

develop jointly two 393 Mw units at Clover, Virginia with each having 50 percent I'

ownership of each unit, subject to negotiation of final documentation. The Application for a Certificate of Convenience and. Necessity filed with the Virginia Co11111ission was granted on December 28, 1989.

C<IIPETITION Competition is playing an increasingly important role in the Company's business. Public utilities such as the Company have been granted exclusive franchises to serve all classes of retail customers within designated service areas in return for a conmitment to provide adequate service on a fair and reasonable basis. This traditional arrangement is bei'ng altered* due* to changing federal and state governmental regulations, technological developments, rising costs of constructing generating facilities*and alternative.energy sources. As a result of these factors, some industrial and municipal customers of the Company are presented with a greater variety of power supply*options *. The Company now has, and in the future will have, increased opportunities to obtain power from sources other than its own generating facilities (see Future Sources of Power under BUSINESS). In particular, the Public Utility Regulatory Policies Act of 1978 (PURPA) has encouraged non-utilities to enter the business .of producing electricity. The Company supports a competitive system for utilities to buy capacity to meet future demand.

Technological developments have. given some. retail customers

increased opportunities to obtain power. through* self-generation. But the Company's relatively low retail rates make widespread use of this* option unlikely for the foreseeable future. Competition for retail customers would require fundamental changes in law and regulatory policies that are not currently under consideration. The Company is co11111itted to maintaining high standards of service at competitive rates for all classes of customers.

ITEM 2. PROPERTIES

See Company Generating Units under Sources Of Power under BUSINESS and Schedule V of the FINANCIAL STATEMENTS Schedules.

ITEM 3. LEGAL PROCEEDINGS Regulation-General The Company is presently subject to regulation by the Virginia Commission and the North Carolina Conmission, Department of Energy (DOE), the Environmental Protection Agency (EPA), FERC, the Nuclear Regulatory Commission (NRC), the Army Corps of Engineers and other federal, state and .local authorities..

Virginia Power may not construct, or incur financial conmitments for construction of, any substantial generating facilities or large capacity transmission lines without the prior approval of state and federal governmental 10

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agencies having jurisdiction over various. aspects of its business.* Such approvals relate to, among other things, the* environmental impact of such activities, the relationship of such activities to the need for providing adequate utility service and the design and operation of proposed facilities.

Operating licenses issued by theNRC are subject to revocation, suspension or modification, =and operation of a nuclear unit may be* suspended if the NRC determines that the public interest, health or safety so requires.

From time to time, the Company may be in violation of or .in default under orders, statutes, rules or regul at.ions re 1at i ng to protection of the environment, compl i ance pl~ns imposed upon .or agreed .to by the Company or. permits issued by various local; state and federal agencies for the construction or operation of facilities. There may be pending from time to time administrative proceedings involving violations . of state or federal environmental regulations that the Company believes are not material with respect to it and for which its aggregate 1iabil ity for fines or penalti.es will not exceed* $100,000. There are no material agency enforcement.actions or citizen suits pending or, to. the Company's present knowledge, th.reatened' against the Company~

Water Quality Control From 1957 through 1974, fly ash from Virginia Power's-Yorktown.Power Station was deposited at sites near Chisman Creek, York County, Virginia. Pursuant to the Superfund Act, EPA identified the site as a Superfund site *. EPA and the Company entered into consent. decrees in 1987 and 1989 for cleanup of the site.

The Company has substantially completed the actions. required under those consent decrees. Future EPA costs* and site. operation and maintenance costs are not expected to be material . .

In 1986, Virginia Power began a project to expand the capacity of two existing clsh disposal ponds at its-Possum Point Power Station. As a condition of the environmental permitting process, on April 14, 1987, the Company accepted a.special order, issued by the Virginia Water Control Board (VWCB), requiring it to perform a six-m~mth evaluation of groundwater quality in the vicinity of the twoI:ponds *. The study, which has been completed and submitted. to the VWCB, concluded that the quality of groundwater near existing domestic wells adjacent to the site was good and met all health-based EPA primary drinking water standards. However, some groundwater contamination associated with the disposal of certain fossil fuel. by-products .at the facilities was identified. In order to remedy this impact, the Company has proposed a course of action that includes removal and relocation .of certain wastes, back-fitting impermeable liners and additional monitoring to measure improvement in site groundwater. The proposed action is estimated to cost up to $3.5 million. The Company believes that this is the most. pr act i cab1e and. sc*i ent i fi ca 11 y sound means of protecting groundwater quality while managing waste disposal in an environmentally responsible manner.

Before the introduction of natural gas into the Company's system, various divisions of the Company and their predecessors manufactured gas for heating and 1ighting from coal. Various organic materials associated with the production of coal gas, generally referred to. as coal tar, are regulated under various federa 1 and state 1aws, .. and a contingent l i abi 1i ty may

exist for their 11

remediation. Four sites involving the presence of such materials have been identified by the Company. Preliminary work* at the sites indicates that a contingent liability (estimated to be between $3 million and $8 million) may l

l

_\

exist because of the presence on the sites of coal tar. The significance, if any, of finding coal tar constituents off of the sites is unknown at this time.

On June*l2, 1989, Dominion Resources and Virginia Natural Gas, Inc. (VNG) entered into a Stock Purchase Agreement (the Agreement) with Consolidated Natural Gas Company (CNG) whereby CNG will purchase from Dominion Resources all of VNG's common and preferred stock. Under certain provi$ions of the Agreement (which was amended on January 23, 1990) that relate to the sharing of costs associated with remediation at the sites, the contingent liability related to the sites, as currently estimated, would be limited for the Company to approximately $4 million. VNG was sold to CNG on February 15, 1990.

From time to time, the Company may be identified as a potentially responsible party with respect to a Superfund site~ EPA (or a state) can either (a) allow such a party to conduct and pay for .a remedial investigation and feasibility study and remedial action or (b) conduct the remedial investigation and action and then seek reimbursement from the parties .. Each party can be held jointly, severally and strictly liable for all costs, but the parties can then bring contribution actions against each other. As a result of the Superfund Act, the Company may be required to expend amounts on remedial investigations and actions, which amounts cannot be determined at the present time but could ultimately prove to be significant.

Permits under the Clean. Water Act and*state*laws have ,been issued for all of the *Company's steam generating stations now in operation~** Such permits are subject to reissuance and continuing review.

Air Quality Control The Company is subject to the* Clean Air Act (the Air Act), which. provides the statutory basis for ambient air quality standards. In order to maintain compliance with such standards and reduce the*impact of emissions on ambient air quality, the Company may be required to incur additional expenditures;* the *amount of which is not presently determinable but which could be significant, in constructing new facilities or in modifying existing facilities.

There are presently bills pending in Congress that would substantially amend the Air Act. The most significant proposals relate to acid emission control and air toxics. While many changes in the proposed legislation may occur between now and final passage, it appears likely that legislation will be passed amending the Air Act during this session of Congress. The Company's emissions of sulfur dioxide and nitrogen dioxide are relatively low in comparison to many companies. Nevertheless, the cost impacts from the proposed amendments could be significant.

Nuclear Operations Surry Unit 1 was taken out of service on September 1988 for a maintenance outage because of concerns with emergency diesel generators. Surry Unit 2 was taken out of service in September 1988 for a scheduled refueling. These outages 12

~

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were extended to *undertake safety system inspections and upgrades, as well as engineering and support analysis. Surry Unit 1 returned.to service on July 7, 1989 and Surry Unit 2 returned . to. service on September 19, 1989.

On May 19, 1989, the NRC imposed fines-.on. Virginia Power totaling $500,000 at the Sµrry Power Station.for twelve violations of NRC rules and regulations during inspections conducted at ,that station between September 12, 1988 and March 4, 1989. The Company initiated sign.ificant corrective actions . and made management changes. designed to prevent. recurrence of these problems in the future. In June 1989,

the Company paid. the imposed_ fine without protest and advised the NRC staff in writing of the corrective.actions it has taken to avoid further violations and the*date by which full compliance with NRC rules and regulations will be achieved.

On June l,

1989, the NRC placed the Company's Surry Uni ts l and 2 in the second category out of three categories on a list of nuclear power stations that are to receive increased attention by the NRC staff.:.. Stations in the second category are authorized to operate under monitoring .by the regional office and the Office of Nuclear Reactor Regulation of the*NRc*~

On September 22, 1989, the NRC issued a performance assessment .report based upon an evaluation of the Surry Power*Station during the period between May 1, 1988 and June 30, 1989. This:NRC report 'Covered most of the period when both Surry units were out of service .. The report evaluated Surry.ls performance in seven functional areas. The report indicated that over the evaluation period, the Surry *over a11 performance. was mixed and did not significant1y exceed mini ma l regulatory requirements~ * -The report noted that while. performance* during the first half of the assessment period was generally poor, it improved significantly toward the end of the period. It was recognized in the report that extensive management changes in the nuclear operations area have resulted- in increased attention to detail and improving trends were noted during the latter part of the evaluation period in all *of the* functional areas assessed. The NRC staff noted an increased sensitivity and a positive attitude toward nuclear power pl ant operat-i ons by -the Company *. * -

The Nuclear wa*ste Pol icy Act of 1982 (the Nuclear Waste Act) requires the federal government to create a permanent repository for high-level radioactive waste and spent nuclear fuel. The permanent repository is being financed from a fee imposed on licensees (including the Company)'. of. 1.0 mill per kilowatt-hour of net nuclear generation on and after*April 7, 1983, and an equivalent fee for spent nuc,lear fuel .discharged .or in the reactor prior to that date. The Company has paid-the one time fee.for spent fuel discharged or i.n. the reactor prior to April 7, 1983,.. and* continues to. pay the quarterly fee of 1.0 mill per kilowatt-hour on nuclear generation .. The fees collected by DOE are credited to a Nuclear Waste Fund and are invested in government securities. All of the costs of the permanent disposal are being paid from this fund. DOE performs periodic studies of the adequacy of the fee, and the fee for future nuclear generation can be increased.

The Nuclear Waste.Act requjred the DOE to complete the permanent repository and begin accepting spent fuel by January 31, 1998.- However, DOE has. stated that the repository wi 11

not be completed by. -1998 and . announced in a recent report 13.

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to Congress that the repository wil 1 not be comp1eted unt i 1 2008. DOE has stated that it is still convnitted to meeting the 1998 date for beginning to accept spent fuel by construction of a Monitored Retrievable Storage facility. Completion of a Monitored Retrievable Storage facility by 1998 will require Congressional action.

The Company has licensed arid is currently operating. an Independent Spent Fuel Storage Installation at the Surry Power Station that utilizes large metal dry storage casks and . is designed and licensed to provide adequate interim storage capacity.for the current licensed life of the Surry Power Station. If DOE acceptance of spent fuel h delayed significantly beyond 1998, a similar interim storage facility may be required for the Company's North Anna Power Station in the late 1990's.

The NRC has adopted stringent requirements for emergency planning, personnel training, procedures and facilities for prevention of and minimizing the effect of nuclear accidents, and staffing of nuclear operations. The NRC has also required,* and the. Company has made, certain modifications in the Company's operating nuclear generating units. If the NRC were to adopt further requirements for changes in the design and operation of nuclear reactors, this could result in substantial increases in the costs of operating and maintaining the Company's nuclear generating units. *

For details regarding nuclear insurance*and certain contingent liabilities related thereto, as well as a NRC rule that requ*ires proceeds from certain insurance policies to be used first to pay stabilization and decontamination expenses, see Note N to FINANCIAL STATEMENTS.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

. All of the Company's Common Stock is owned by Dominion Resources ..

During 1989 and 1988, the Company paid quarterly cash dividends on its Common Stock as follows:

1st 2nd }rd m (Mill ions) 1989 . ................. .$ 74.3 $ 75.0 $ 75.2 $ 78.4 1988 . ................. $ 71. 7 $ 71.6 $ 71.3 $ 74.5 14

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ITEM 6. SELECTED FINANCIAL DATA 12ml 1988

1987 llB§ . ~

{Mill ions)

Operating revenues *.*.*.......*.***. $ 3,459 $3,098$ 3,078$ 2,960 $ 2,712 Operating income ..*..**.*......*..** 759 737 737 693 600 Net income . ......................... - 435 460 456 428 391 Balance available for Common Stock *.

375 407 407 380 340 Total assets *..*..**.*........*.***. 10,086 9,495 9,256 8,750 8,295 Total net utility plant .*....*...**. 8,498 7,998 7,639 7,228 6,805 Long-term debt, noncurrent capital lease obligations and preferred stock subject to mandatory redemption . ...................... . 4,331 4,089 4,052 3,978 3,426 Utility plant expenditures (including nuclear fuel) .* *....**.. 905 807 836 835 679 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The Company's major sources of financing during 1989 were the issuance of

$250 mill ion of First and Refunding Mortgage Bonds, $75 mil 1ion of Money Market Cumulati.ve Preferred Stock, $322 million of Medium-Term Notes and $100 million of Common Stock sold to Dominion Resources. From these proceeds, the Company retired $114.6 mill ion of securities through mandatory debt maturities and sinking fund requirements, retired an additional $17.2 million of high cost debt and preferred stock through optional sinking fund payments and retired borrowings of $198. 7. mill ion under the Virginia Power Financing Trust. In addition, the Company redeemed at par all of its outstanding $20 million* First and Refunding Mortgage Bonds of 1984, Series D, 11.5 percent, due 1991. At December 31, 1989, the Company's borrowing from Dominion Resources under the inter-company credit agreement was $84.0 million.

From 1987 to 1989, the Company's major sources of financing were as follows:

~ 1988 1987 (Thousands)

Common Stock . ...........*.........*..*....**...*.. $ 99, 999 $ 34,994 $ 79,990 Preferred stock ...... _............................. 75,000 75,000 175,000 Mortgage bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000 150,000 200,000 Medium-term notes .......*...*..*.....*.*.****.**.. 322,000 118,000 121,850 Pollution control financings (including refunding) 108,000 15

Funds used in investing activities during 1987 through 1989 (most of which were from operating activities) were as follows:

1989 1988 1987 (Thousands)

Utility plant expenditures (excluding AFC-other funds) **.****...****.** ~ *..*** ~ *. ~ **** ~ ****.*.*. $870,186 $743,270 $677,539 Nuclear fuel expenditures (excluding AFC-other funds) ***. : ***.*..**.

-** ~ *********.***.* 34,552 63,444 .158,201 The acquisition and ownership of certain nuclear. fuel is financed by VP Fuel, a wholly-owned subsidiary of the Company, through the sale of commercial paper that is guaranteed by the Company. The total amount of commercial paper outstanding at December 31, 1989, was $125.8 million, of which $39.3 million was classified as short-term debt, representing the Company's estimated cost of the nuclear fuel to be consumed by the Company during 1990. The increase in the long-term debt portion of VP Fuel for 1989 was $20 million.

The Company has significant capital requirements due to its program of maintenance, upgrading and expansion of facilities, and the need for working capital and cash requirements for the retirement of maturing debt and sinking fund obligations (see Note N to FINANCIAL STATEMENTS). .

The 1990 construction .requirements (excluding AFC) include $874 million for construction expenditures and $84 million for nuclear fuel expenditures.

Other capital requirements are for $111.9 million of securities due within one year, plus an additional $48~1 million of sinking fund payments. These obligations, as well as those construction requirements not met by internal cash generation, are expected to be financed by a combination of sales of Virginia Power's securities and borrowings under its inter-company credit agreement with Dominion Resources. The Company presently estimates that approximately 48 percent of its 1990 construction requirements, including nuclear fuel expenditures, will be met by internal cash generation and that the balance will be financed. In 1990, the Company estimates an equity contribution from Dominion Resources of up* to $175 million.

The Company's construction costs for new generating facilities for 1990 through 1992 will constitute a larger portion of the Company's total capital requirements than in the past three years in order to meet future customer needs.

Projected construction and nuclear fuel expenditures for the next three years are $3.0 billion. Actual construction costs may vary from this estimate because of such factors as design changes, modifications of environmental regulations, revised load projections, the cost and efficiency of construction labor, equipment and materials and the cost of capital.

At the end of 1989, the Company's capital structure, excluding securities due within one year, consisted of 40.0 percent common equity, 9.8 percent preferred stock and 50.2 percent long-term debt (including noncurrent capital leases). By the end of 1990, management projects the capital structure to consist of approximately 41 percent common equity.

16

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Results of Operations The following is a discussion of results of operations for the years ended 1989 as compared to 1988, and 1988 as compared to 1987.

1989 Compared to 1988 Operating revenues were $361.3 mill i.on higher in 1989 due principally to a $88.5 million increase in 1989 attributable to increased fuel rates, $82.4 million in 1989 as a result of increased unit sales resulting from new customer connections, $72.0 million as a result of increased customer usage, $50.0 million attributable to an increase in base rates, effective May 1, 1989 and the effect of a one-time refund in 1988 of approximately $80 million attributable to a reduction of certain deferred income tax balances ordered by the Virginia Commission. The effect of these items, among others, on operating revenues is shown in the following table.

Increase (Decrease) Fr~

Prior Years (Mill ions)

JJm2 1988 .H8Z Kwh sa l 8s ........... *...... . $161.3 $69.l $161. 2 Base and fuel rates ....... . 196.9 (57.3) 24.7

. Other, net *............*... 3,1 ~ 3.0 Total ...*.*..... : ....*.*. $361.3 $.IL.4 $188.9 Purchased.and interchanged power, net increased in 1989 due to the reduced availability of Company-owned generation.

The average fuel cost of energy supply is shown below (a):

Mills Per Kilowatt-hour 1m 1ml Jm Nuclear *.*....*. ; .*... ~ ..*..... *. 4.30 5.72 6.. 05 Coal-Mt. Storm (mine-mouth) .... 13.47 13 .12 13.47

-Other **.**..*.......* ~ ....* 15.59 . 15.54 16.42 Oil . *.......................... * .

29.21 30.04 32 ..81 Purchased.* and interchanged (b). 26.15 26.21 . 26. 94 Gas *..*.*..* -.*............**.. ~ 25.33 -26~31 27.84 Combustion turbines~ ......*...* 62.01 60.88 65.40 Average fuel costs .*......**..* 16.04 14.13 15.02 17

e Energy supply mix is shown below (a):

11 I

-.,t

(

Estimated actgal

.mg lln ~ ' l2Bl.

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

33% 22% 34% 32%

-Coal *.* ~.~ *.*. ~--~*~******** 46 47 45 . . *, 45 o; 1... ~ ..................... 4 7 4 5 Purchased and interchanged .* 15 23

16 17 Other . ..... * ... ~ ~ ........... _J _l _l. _l lQ._0% lQQ% 100% * *100%

(a) The table *does no*t include any explicit reference t_o the Bath County Pumped Storage Station, which uses electricity generated from ot~er fuel_ sources to pump water from a valley reservoir to another reservoir at the* top of an adjacent mountain. The water stored in the upper reservoir is used to.generate electricity when the water flows through a hydroelectric generator into the lower reservoir. Accordingly, the Bath County Pumped Storage Station may be ..viewed as* storing prl;lvfously generated electricity for later us*e. Hydroelectric generation is included in determining average fuel costs._

(b) Excludes costs attributable to capacity charges paid under long-term power purchase agreements. * *

(c) Exel udes ODEC' s 1i. 6 percent ownership interest in .the No~th Anna Power Station (s~e Note F to FINANCIAL STATEMENTS). . . . ..

Deferred fuel expenses~ net decreased in 1989 because fuel costs subject to deferral accounting increased due to a more expensive energy supply mix resulting from the ~uclear unit outages during the year, offset in par:t by a higher level of recover,v of previously deferred fuel expenses~- . * -* * * .* . ;

Other operation expensesincreased as.a result of the.increased operation costs related to the extend.ed refueling and repair outages at Surry Units __ l an<f 2, and the establishment of a regulatory liability ($11.2 million at December 31, 1989) associated with the rate treatment of a gain resulting from t~e 1988 settlement of a portion of the projected benefit obligation under the Retirement Pl an, offset in part by the exce 11 ent performance of coa 1-fi red. generating units.

Maintenance expenses increased as a result of the extended refueling and repair outages at Surry Units 1 and 2 and the normal refueling outages at North Anna Units land 2 in 1989, offset in part, by the establishment of a,reg_ulatory asset ($19.5 mill ion at December 31., 1989) for nonrecurrfog costs jncurred during 1988 and 1989 associated with the extended outages at the Surry Nuc_l ear: Power.

Station. * *

Federal income taxes increased primarily as a result of the one-time refund to customers in 1988 for reductions in certain deferred income tax balances as ordered by the Virginia Commission. For additional information with rE!spect to Federal income and other taxes, see Notes Band D to FINANCIAL .STATEMENTS.

18

(

Other taxes-operating increased $26.2 million primarily due to $12.4 million resulting from a change in law whkh had the effect of increasing the West Virginia Business and Occupation taxes on power generation, $7.0 million attributable to increased gross receipts taxes due to increased revenues, $3.3 million for a provision for an estimated Virginia Sales and Use taxes audit deficiency, which is being contested by the Company, and $3.1 million due to increased property taxes resulting from an increase in Company-owned property.

Other income-mi see 11 aneous, net decreased approximately $31. 4 million as a result *of the income received during 1988 from ODEC to compensate for the 300 Mw load reduction effective January 1, 1988.

Interest on long-term debt increased primarily as a result of the issuance of First and Refunding Mortgage Bonds and Medium-Term Notes, offset in part, by the termination of the Virginia Power Financing Trust.

1988 Compared to 1987 Operating revenues were $19.4 million higher in 1988 as a res.ult, in part, of increased unit sales resulting from weather conditions and a continuing high level of new customer connections. This increase is offset, in part, by a decrease in sales to ODEC, primarily as a result of the reduction of ODEC's purchases by 300 Mw (see Results of Operations, Other income-miscellaneous, net and income taxes associated with miscellaneous, net under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS) and a reduction in electric rates, including the effect of a one-time refund of approximately

$80 million attributable to a reduction in certain deferred income tax balances ordered by the Virginia Co*ission.

Deferred fuel expenses, net increased as a result of: (1) a higher level of recovery in current rates for previously deferred fuel expenses, (2) deferral in 1987 of $33 million of certain capacity costs which were written off in 1988 as ordered by the Virginia Commission and (3) a decrease in fuel cost subject to deferral accounting in 1988 attributable to a lower cost of fossil fuel and an improved energy supply mix consisting of more economical nuclear generation.

Depreciation expenses increased as a result of an increase in depreciable plant in service, due, in part, to the placing, in service of additional distribution facilities, a higher level of decommissioning accrual approved by the Virginia Comiss.ion effective September 14, 1987 and an increase in the amortization of leasehold improvements and computer software.

Federal income taxes decreased primarily as a result of the effect of a one-tinie refund to customers for reductions in certain deferred income tax balances as ordered by the Virginia Commission and the reduction in tax rates under the Tax Reform Act of 1986. For additional information with respect to Federal income and other taxes, see Notes Band D to FINANCIAL STATEMENTS.

Other income-miscellaneous, net and income taxes associated . with miscellaneous, net reflect the payments received from ODEC. Virginia Power and ODEC entered into an agreement, approved by the Virginia Commission, allowing ODEC to reduce its purchases of supplemental power from the Company by 300 Mw, 19

e

effective January 1, 1988. Th is reduction, for which the Company received compensation from ODEC over a period of one year approximating $29 million, is l<'

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expected to benefit the Company's remaining customers over the long term by avoiding increased costs that would have been incurred to purchase such power from other sources.

FUTURE ISSUES Recently Issued Accounting.Standards In December 1987, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 96, "Accounting for Income Taxes." As a result of subsequent amendments, the provisions of SFAS No. 96 must be adopted by the Company no 1ater than 1992.. The objective of the new standard is to recognize. the amount of current and deferred taxes payable and refundable for all events that have been recognized in the financial statements

. based on enacted tax laws at the date of .the financial statements. (For the effect of adopting these provisions, see Note A to FINANCIAL STATEMENTS, Significant Accounting Policies, .Federal Income Taxes.)

Activity Review and Resource Allocation *Study The Company pursues the most cost-effective means of meeting the growing electric power needs of its* customers. In 1989, the Company completed an activity review and resource allocation study. As .a result of this review, the Company elimina~ed 824 pos;tions and released several hundred contr~ctors, and added* 148 company.* positions to strengthen* the nuclear operations -area. *. The annual savings from this review are estimated to be _approximately $28 million.

A regulatory asset of $8.1 million was established as of December 31, 1989, for the Virginia jurisdictional balance of deferred severanc~. costs which have not yet been recovered through savings.

Future Sources of Power The-Company is committed to filli-ng a.portion of its total requirements for new generating capacity through the purchase of power as an alternative to the construction of power plants when it proves economically advantageous to _do so or when required by federal or state regulations.

Utility Rate Regulation The lack of rate relief in 1988 coupled with nuclear plant outages in 1989 has adversely impacted the Company's revenues and earnings during 1989.* A rate increase. of $64. 4 mi 11 ion, effective May .I, 1989, on the Company's request for

$95.0 million was approved by the. Virginia Commission on January 12, 1990.

Rate relief, especially in Virginia, continues to be of great importance to the Company, and it is a major variable that can materially affect its financial results. The Virginia Commission fixes rates based on a past test year, and in a period of increasing costs, such ratemak-i ng. methodo 1ogy causes.

attrition in earnings, especially if the_ utility is engaged in .a .,.large construction program. The Virginia Commission has traditionally allowed certain 20

.I

e ratemaking adjustments*that tend to offset such attrition, although in recent cases changes have*been required*that have diminished the attrition adjustments to some extent. Failure by the Virginia CoR111ission to allow adequate attrition adjustments, which the Company will vigorously pursue, will have an adverse effect on the Company's financial results.

In its Order of January 12, 1990, the Virginia Commission indicated its intent to review, as part of the Company's next rate request, costs associated with the 1988-1989 outages at the Surry Nuclear Power Station. The result of such a review presently cannot be determined.

Other Trends Operation and maintenance expenses are expected to increase in the future due to changing regulations and costs associated with customer growth. However, with its four* nuclear units in full service at the end of 1989, the Company anticipates. a more economical energy supply mix in 1990. In addition, the buy/build strategy of meeting the growing demand for electric power should continue to provide a low cost energy mix.

For more information on commitments and contingencies, see Note N to FINANCIAL STATEMENTS.

Environmental Matters.

The Company is subject to increasing. costs resulting from -a steadily increasing number of federal, state, and local laws and regulations designed to protect human health and the environment by imposing stringent controls with regard to planning and construction activities, land use, air pollution, water pollution, and in recent years by comprehensively governing the use, treatment, storage, and disposal of hazardous or toxic materials. These 1aws and regulations affect future planning and existing operations. In response, the Company has undertaken specific compliance efforts, the costs of which have historically been recovered through the ratemaking process.

21

e ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX

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Page No.

Reports of Independent Auditors................................. 23 Report of Management . ........... o * * * * * * * * * * * * * * * * * * * * ** * - * * * * * * * *

25 Statements of Income for the years ended December 31, 1989, 1988 and 1987..................................... ............ 26 Balance Sheets at December 31, 1989 and 1988.................... 27 Statements of Earnings Reinvested in Business for the years ended December 31, 1989, 1988 and 1987........................ 29 Statements of Cash Flows for the years ended December 31, 1989, 1988 and 1987 ... ~*************************************** 30 Statements of Capitalization at December 31, 1989 and 1988...... 32 Notes to Ftnanc i al Statements. * . . . . . . * * . . . .. . . . * * * . . . . . . . * . . . * . . . 34 Financial Statements Schedules:

IV-Indebtedness of and to Related Parties Not Current for the years ended December 31, 1989, 1988 and 1987.. 50 V-Property, Plant and Equipment for the years ended

December 31, 1989, 1988 arid 1987...................... 51 VI-Accumulated Depreciation, Depletion and Amortization of Property, Plant and Equipment for the years ended December 31, 1989, 1988 and 1987...................... 54 Schedules* other than those listed above have been omitted since they are not required, are inapplicable or are unnecessary due to the presentation of the required information in the financial statements or notes thereto.

22

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REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Virginia Electric and Power Company:

We have audited the accompanying financial statements of Virginia Electric and Power Company as of December 31, 1989 and 1988 and for the years then ended listed in the index on page 22 *. These financial statements and the supplemental schedules discussed below are the responsibility of the Company's management.

Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement *presentation *

. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material

respects, the financial position of Virginia Electric and Power Company at December 31, 1989 and 1988 and the results of its operations and its cash flows for the years then ended in conformity with genera 11 y accepted accounting principles.

Our audits also comprehended the supplemental schedules of Virginia Electric

.:and Power Company for the years ended December 31, 1989 and 1988 listed in the index on page 22.

In our opinion, such supplemental schedules, when considered in relation to the basic financial statements, present fairly in all material respects the information shown therein.

DELOITTE & TOUCHE Richmond, Virginia February 2, 1990 23

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS l'.

I To the Board of Directors of Virginia Electric and Power Company:

We have examined the financial statements and the financial* statement schedules of Virginia Electric and Power Company as of and for the year ended December 31, 1987 as listed in the index on page 22 of this Form 10-K. Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances

In our opinion, the financial statements referred to above present fairly the results of operations and cash flows of Virginia Electric and Power Company for the year ended December 31, 1987 in conformity with genera 11 y accepted accounting principles applied on a basis consistent with that of the. preceding year. In addition, the financial statement schedules referred to above, when considered. in rel at ion to the basic financial statements taken. as a whole, present fairly the information required to be included. therein.

COOPERS &LYBRAND Richmond, Virginia February 5, 1988 24

I

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REPORT OF MANAGEMENT The Company's management is responsible for all information and representations contained i_n the Financial Statements and other sections of the Company's report on Form 10-K. The Financial Statements, which include amounts based on estimates and judgments of management, have been prepared in conformity with generally accepted accounting principles. Other financial information in the,form 10-K is consistent with that in the Financial Statements.

Management maintains a systeni of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that the Company's assets are safeguarded against loss from unauthorized use or dispositi<>n and that transactions are executed -and r~corded in accordance with established procedures.

Management recognizes the inherent 1imitations of any system of internal ac~ounting control and,,~thetefore cannot _provide absolute assurance that the objectives of the established internal accounting controls will be met.

The Financial Statements have been audited by Deloitte & Touche (for the years ended December 31, 1989 and 1988) _and Coopers & Lybrand (for the year. ended December 31, 1987), independent auditors, whose designation was approved by the Board of Directors. Their audits were. conducted in accordance with generally accepted auditing standards aJJd included a review of the Company's accounting systems, procedures and internal controls, and the performance of tests and other auditing procedures sufficient to provide reasonable assurance that the Financial Statements are not materially misleading and do not contain material err_ors.

. The Audit" Cominittee **of the Board of Directors, compos.ed entirely of directors who are not officers or employees of the Company, meets periodically with the independent auditors, the interna:l. auditors- and management to discuss auditing, internal accounting control and financial reporting m_atters and to ensure . that each is properly discharging its responsibilities.. Both. the independent auditors and the internal auditors periodically meet alone with the

. Aud*it Committee and have fr_ee access to. the Committee at any time.

_ Management recognizes its responsibility for fostering a strong ethical cliniate *so that the Company's affairs are conducted according to the highest standards of persona 1 and corporate conduct. This. responsibility is characterized and reflected in the Company's Code of Ethics, which is distributed throughout the Company. The Code of Ethics addresses, among other things, the importance of ensuring open convnunication within the Company; potential conflicts of interest; compliance with all domestic and foreign laws, including those reiating to financial* disclosure; and the confidentiality of proprietary information.

VIRGINIA ELECTRIC AND POWER COMPANY 25

e VIRGINIA ELECTRIC AND POWER COMPANY STATEMENTS OF INC<>>IE

t '

I, '*

For The Years Ended December 31, 1988 (Thousands)

Operating revenues *....*.*..**...*..******. $3,458,928 $3,097,579 $3,078.180 Operating expenses:

Operation:

Fuel used in current generation **...*** 595,452 562,732 578,458 Purchased and interchanged power, net ** 536,841 396,737 412,647 Deferred fuel expenses, net ..**.**.**. ~ (6,989) 38,026 (128,440)

Other . ............................ C, **** 485,656* 414,374 430,827 Maintenance ***..*****........**......*.*. 295,436 271,883 275,047 Depree i at ion . ........................... . 347,~46 322,738 293,612

. Amortization of terminated construction project costs . ........................ . 53,061 62~068 57,349 Taxes-federal income ...**..*...*...*.* ~ .* 185,128 110,780 243,272

-Other . ............................ . 207,867 181.713 177,963

Total ............... ,............... ~ .. . 2,700.098 2,361,051 2.340,735 Operating income ....................... o. C,. 758,830 736,528 737.445 Other income:

Allowance for other funds used during construction **.**......*............**. 3., 703 1,845 1,966 Mi see 11 aneous, net *...*.......*....*....* 36,005 71,401 35,930 Income taxes associated with miscellaneous, net .......*............. (4,823) (28,901) 02,093)

Tota 1 o ********** o **** o

o ******** Cl ***** ~ 34,885 44,345 25.803 Income before interest charges **.*.*..... ~, ~

793. 715 780,873 763,248 Interest charges:

Interest on long-term debt............... 344,520 313,625 301,022 Other .... o............................... 16,258 8,757 12,853 Allowance for borrowed funds used during construction.................... (2,529) (1,615) . ,~.482)

Total.................................. 358,249 320,767 307,393 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435,466 460,106 455,855 Preferred dividends........................ 60,226 53,095 49,195 Balance available for Common Stock .*....*.. $ 375,240 $

407,011 $ 406,660 The accompany; ng notes are an integral part of the financial statem.ents.

26

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J.

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VIRGINIA ELECTRIC AND POWER COMPANY BALANCE SHEETS Assets At Deceimer 31.

1989 1988 (Thousai,ds)

UTILITY Pl.MT:

Electric (includes $745,369 plant under construction in 1989 and $641,491 in 1988) ***..........*.... , *****.. $11,135,791 $10,353,800 Less accumulated depreciation .*.......**.............**** 2;880.084 2,615.011 8.~55.707 7,738.789

Nuclear fuel (less accumulated amortization of $576,840 in 1989 and $525,623 in 1988) ............*.*****.**.... 242.237 258.888 Total net utility plant ............................ . 8,497.944 7,997.677 Pl.MT AND PROPERTY UNDER CAPITAL LEASES (less accumulated amortization of $41,892 in 1989 and

$40,000 in 1988) .**........................*.****..*. *.. 41,536 47.982 INVESTMENTS:

Non-utility property (less accumulated depreciation of

$239 in 1989 and 1988) ................................ . . 5,528 5,632 Notes receivable .*.*.........**.*....................*... 25,959 30,733 Pollution control project funds ........*................* 40,151 87,062 Nuclear decornnissioning trust funds ..............**...... 98,920 69,079 Other ...................................**.**.*.....***.. 1.838 3.206 Total net investments ..............................** 172.396 195.712 ClRRENT ASSETS:

Cash .............................**.. **** .. ************** 17,977 10,557.

Accounts receivable:

Customers ..........*..........***...................... $321,597 $277,505 Other .............*......*.*.**...........***... ,....... 33.324 36.938 354,921 314,443 Less allowance for doubtful accounts ..*.*********.... ~ 353,773 1,286 313,157 Accrued unbilled revenues ....................*.*.......*. 177,304 134,419 Materials and supplies at average cost or less:

Plant and general ...............*..*.*................. 172,981 158,123 Fossil fuel ... *.... ~ .............*...................... 99.928 272,909 90,258 248,381 Other ....*.*.... **..***.....*...**........................ 35,602 38,186 Total current assets ..***...........****............. 857,565 744,700 DEFERRED DEBITS AND OTHER ASSETS:

Terminated construction project costs (less accumulated amortization of $410,706 in 1989 and $357,645~in 1988). 246,992 276,214 Deferred fuel expenses ..............**........*.*.*.....* 142,077 135,832 Other ..**.................................*.****......... 127,023 97,101 Total deferred debits and other assets .....*...**.*.. 516,092 509,147 Total assets .......... ; ...*..........*.*............. $10,085,533 $ 9,495,218 The accompanying notes are an integral part of the financial statements.

27

I I

)

i

VIRGINIA ELECTRIC AND l>OVER COMPANY BALANCE SHEETS CapUal ization and Liabilities At December 31, 1989 1288 (Thousands)

CAPITALIZATION:

Long-term debt (see Statements of Capitalization) ***** $ 3,977,649 $3,695,545 Preferred stock subject to mandatory redemption....... 318,652 349,743 Preferred stock not subject to mandatory redemption... 469,014 394,014 Common stockholder's equity:

Common Stock.-, no par ***..........*.*****.... ~ .****.* ** 2,197,506 2,096,671 Other paid-in capital ****........*...* ~************** 17,985 18,666 Earnings reinvested in business ..**..***..**..* ~.~.. 980,606 910,335 Total common stockholder's equity~ .***...*.. ~~: *..

3,196,097 3,025,672 Total capitalization *.*........*.*...*.....*.**..* 7,961,412 7,464,974 OBLIGATIONS UNDER CAPITAL LEASES ........................ . 43,350 CURRENT LIABILITIES:

Securities due within one year (see.Statements of Capitalization) ......**..........*.*..*.........**** 159,976 114,622 Short-term debt . ..................................... . 39,295 35,640 Obligations under capital leases due within one year ** 6,869 6,301 Accounts payable, trade .. ............................. . 197,407 202,946 Cash due to banks . .................................... . 49,424 48,807 Customer deposits.. ..... G ****************************** 43,645 40,245 Payro 11 s accrued . .................................... . 46,131 36,374 Taxes accrued . ............... * ........................ . 93,856 55,681 Interest accrued .. ................................... . 104,958 86,579 Other . ...................... *... *..... ., ............. o

0 ** 70,366 84,193 Total current liabilities ..*...**.......* !*****~** 811,927 711,388 DEFERRED CREDITS AND OTHER LIABILITIES:

Accumulated deferred income taxes:

Liberalized depreciation ...* ~ ....*.*..**..... ~ ***... 695,963 625-,648 Terminated construction project costs .**...*..****.* 27,439 29,090 Other . ........................... o ****************** 129,771 155,585 Deferred investment tax credits *...*....*..* ~ *...***** 385,341 409,621 Other ........... : ..................................... . 39,013 55,562 Total deferred credits and other liabilities .... *.~ 1,277,521 1,275,506 COMMITMENTS AND CONTINGENCIES Total capitalization and liabilities **....**. w **** $10,085,533 $9,495,218 The accompanying notes are an integral part of the financial statements.

VIRGINIA ELECTRIC AND POWER COMPANY STATEMENTS OF EARNINGS REINVESTED IN BUSINESS EQr thg Ye1rs Ended December 311

~ 1988 1987 (Thousands)

Balance at beginning of year .*...********** $ 910,335 $ 795,107 $ 668,966 Net income (see Statements of Income) **..** 4351466 460,106 4551855 Total ................................. . L345,801 L 2551213 111241821 Cash dividends:

Preferred stock subject to mandatory redemption ............................ . 28,668 30,480 30,670 Preferred stock not subject to mandatory redemption ............... c ********* : *** 31,234 23,646 18,798 Co111111on Stock . ........................... . 302,994 289,101 272,284 Other dividends to Dominion Resources:

Preferred stock re.ceived on sale of Laurel Run Mining Company ...........*.* 41000 Total dividends .........*............ 3621896 3431227 3251752 Other deductions, net .*.....*.*.......**..* 21299 1,651 31962 Balance at end of year *.......*...******. ~. $ 9801606 $ 9101335 $ 7951107 The accompanying notes are an integral part of the financial statements.

29 l

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VIRGINIA ELECTRIC AND POWER COMPANY STATEMENTS OF CASH FLOWS For the JHrs Ended Qec:ellber 31.

1989 1988 ll§Z (Thousands)

Cash Flow From Operating Activities:

Net income ..*..........................................*... $435,466 $460,106 $ 455,855 Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization .. :*...............***.*... 458,372 489,928 428,631 Allowance for.other funds used during construction .*.*. (3,703) (1 ;845) (1,966)

Deferred incoine taxes .... : .....*..** : ...*.....*.**.*... 35,358 (27,843) '109,739 Deferred investment tax credits, net ..*......*.***..... (24,279) (10,270) 3,893 Pretax loss on sale of West ,Virginia territory ****.*... 3,784 Partial settlement-pension plan .....***.**....*...*.*.. 11,200 (17,287)

Noncash return on terminated construction project

costs-pretax ............... *. ; .............*.**....... (24,980) (27,995) **(30,726)

Deferred fuel expenses ................*..*...*.*...*.*.. (6,245)

37,976 (128,346)

Changes in current assets and liabilities(*):

Accounts receivable ................... *......... ; *.**. (40,616) (36,549) (32,253)

Accrued unbilled revenues ............................. . (42,885) (12,733) (433)

Materials and supplies.; ............................ .. (24,528) 87,341 (68,869)

Accounts payable; trade ............. : .......... : .... . (5,539) 47,905 (19,196)

Accrued expenses ..........*.*....*......**...*.** ; .. . 66,311 32,961 (43,554)

Other ..............................*............... -... . [13 .976) 15,911 {1,328)

Net.Cash Flow From Operating Activities ...*............*. , .*. 819.956 1.037 .606 675.231 Cash Flow From (To) Financing Activities:

Conmon Stock .*.........**.........*..........*.*........... 99,999 . 34,994 79,990 Preferred stock .........*....................*..*.*.....*.. 75,000 75,000 175,000 Long-term debt ....*..*...................*.*.....*.......... 592,589 273,258 491,170 Short-term debt *.....*...........................*.......... 3,655 (6,664) 41,804 Inter-company credit agreement ........................*.... 55,500 1,500 (22,600)

Repayment of long-term debt and preferred stock ........... . (350,501) (267,095) (264,295)

Conmon Stock dividend payments ...................*........*. (302,994) (289,101) (272,284)

Preferred stock dividend payments ....**. ; *..*.........* ; .*. (59,902) (54,126) (49;468)

Principal payments under capital lease obligations ........ . (6,301) (6,009) * (37 ,()83)

Other ...................................................... . (3,521) (2,;i56) c 4,805)

Net Cash Flow From (To) Financing Activities ...*............. 103.524 {240,599) 137.429 Cash *Flow (Used in) Investing Activities:

Utility plant expenditures (excluding AFC-other funds) *.... (870;18~) (743,270) (677,539)

Nuclear fuel (excluding AFC-other funds) ... : ............. .. (34,552) (63,444.) (158,201)

Pollution control project funds.*.*.... :."* .*...*.........*. 46,911 34,613 9,508 Nuclear dec011111issioning trust funds ..*.***......*.*........ (29,841) (24,839) (15,617)

Nuclear fuel progress payments ..............*.**..*.....*.* (28,997)

Sales of nuclear fuel to lessor ........................... . 25,982 Sale of West Virginia service territory ...**....... ;., .... . 23,013 Other ....*...............*.............................**.. {29,009) 11,170 21,785 Net Cash Flow (Used in) I.nvesting Activities ......**..*...... {916,677) (785,770) {800,066)

Increase in cash and cash equivalents .............*......*... 6,803 11,237 12,594 Cash and cash equivalents at beginning of year .......****.... {38,250) (49,487) [62. 081)

Cash and cash equivalents at end of year .*...........***..... $ {31,447) $ {38.~50) $ {49,487)

(*) Does not include reclassification as current liabilities of maturing long-term* debt and cash sinking fund obligations of debt and preferred stock as follows: 1989-$159,976; 1988-$114;622; and 1987-$150,663.

(Continued) 30

VIRGINIA ELECTRIC AND POWER COMPANY

.STATEMENTS OF CASH FLOWS (Continued) .

i f'

~ 1988 1987 (Thousands)

CASH PAID DURING THE YEAR FOR:

Interest (reduced for the net cost of borrowed funds capitalized as AFC) *...*..*****..* ~ ****** $350,003*$329,091 $314,028 Income taxes **.***..**.*...*........****.*..*.*** 145,352 146,391 202,029 NONCASH TRANSACTIONS FROM INVESTING AND FINANCING ACTIVITIES:

. Capital lease obligations:

Additions ..................................... . 26,299 Retirements . .. *................ ~ .. .- ...... .- ... * .. 4,554 106,385 Sale of Laurel Run Mining Company:

Cash received* ... .............................. . 623 Preferred stock received .*.......**.*..*..**.. 4,000 Noncash dividends to Dominion Resources:

Preferred stock received on sale of .Laurel Run

Mining Company . . *~*** ~

o* .************************ ,,ooo DISCLOSURE OF ACCOUNTING POLICY:

For purposes of the Statements of Cash Flows, the Company considers cash and cash equivalents to include cash on hand,

cash due to banks and temporary investments purchased with a maturity of three months or less.

The accompanying notes are an integral part *of the financial statements.

31

\

.\

j VIRGINIA ELECTRIC ANO POWER COMPANY STATEMENTS OF CAPITALIZATION At December 31,

.1989 ~

(Thousands)

Long-term debt:

First and refunding mortgage bonds (1):

Series P, 4.625%, due 1990 ..*.**.*********..****.*... $ 25,000 $ 25,000 Series Q, 4.875%, due 1991. .********..*****.********* 30,000 30,000 1984 Series D, 11.5%, due 1991(2) *********.********-** 20,000 Series R, 4.375%, due 1993 ..*******.**.************** 30,000 30,000 Series S, 4.5%,. due 1993 .............................. . 29,985 29,985 1984 Series A,--13.3%, due 1994 *..*******.************ 66,000 66,000

1984 Series B,

13.25%, due 1994 ****...*****.********* 75,000 75,000 1987 Series B, 9.375%, due 1994 .******************.** 100,000 100,000 Various series, 4.5%-15.75%, due 1995-1999 ..* _*****... 629,890 535,640 Various series, 7.375%-12.85%, due 2000-2004 ****...** 564,700 581,200 Various series, 6.75%-10.25%, due 2005-2009 **...***** 682,000 691,396

Various series, 8.5%-9.875%, due 2015-2019 ****......* 500,000 350,000 Total first and refunding mortgage bonds ..******.** 2,73Z,5Z5 Z,53~1ZZl Other long-term debt:

Bank loans, notes and term loans:

Fixed interest rate, .6.85%-12.375%, due 1990-2003 ** 809,823 563,591 Pollution control financings: _ _

Fixed interest rate, 5.625%, due 2002 ********** ~ *** 21,500 22,000 Money Market Municipals, due 2008-2017 (3) **.****** 388,600 388,600 Virginia Power Financing Trust (4) .................. . 198,695 Inter-company credit agreement.(5) ***...****.******** 84,000 28,500 Nuclear fuel financing (6).i ........................ . 86,519 65,930 Total other long-term debt *.*.**** .-._.************** 1,390,442 1,267,316

' 4.123, 017 3,801,537 Less amounts due within one year:

First and refunding mortgage bonds ********.***.****.* 25,000 Bank loans, notes and term loans.~ ********.*******.** 86,910 74,860

Sinking fund obligations (7) ....................... .. 22,783 21,679 Total amount due within one year ********..*.*....** 134,693 96,539 Less unamortized discount, net of premium *.***.******** 10,675 ,9,453 Total long-term debt ... ~ .........................* .. 3,977,649 3,695,545 Preferred stock . ........................................ . 812,-949 761,840 Less amounts due within one year-sinking fund obligations ***.******...**..**..*.....****..*..*.....

25,283 18,083 Total preferred stock .....************ ~ *. ;......... 787,666 743,757 Common stockholder's equity (8) ***..**..**.**..********** 3,196,097 3,025,612 Tqtal capitalization .......... ~ **.*.**.*.*.*****.***.**.* ~$7 ,961,412 $7,464,974 (Continued) 32

~RGINIA ELECTRIC AND POWER COM~ !

STATEMENTS OF CAPITALIZATION *

(Continued)

(1) Substant ia 11 y a11 of the Company's property ;s subject to the l i en of its mortgage, securing its First and Refunding Mortgage Bonds.

( 2) On December 4, 1989, . the Company ca 11 ed for redemption a11 of its outstanding First and Refunding Mortgage Bonds of 1984, Series.D, at a redemption price of 100 percent of the principal amount.

(3) Interest rates vary based on short-term tax-'exempt market rates.

Pollution control bonds subject* to remarketing within one* year are' classified as long-term debt to the extent that the Company's intention to maintain.the debt is supported by long-term b~nk conuni tments. ***

(4) In April 1986, the Company established the Virginia Power Financing Trust, a $400 million multi-option credit facility to *replace the $250 million Bath County Pumped Storage Station financing, two floating rate bank loans aggregating $100 mi 11 ion and $50 mi 11 ion of inter-company borrowings from Dominion Resources. . On March 27, 1989,

the Trust* was terminated .and the borrowings thereunder retired principally with the proceeds of' the Company's First and Refunding Mortgage Bonds of 1989, Series A. The weighted average interest rate for 1989, including fees for supporting .letters and lines of cred i_t, for borrowings made through the Trust. was. 9. 9 *percent.

(5) Under the terms of an agreement with Dominion Resources, the Company may borrow funds from Dominion Resources on a daily basis and repay all or any part of the loan at any time during the term of the agre~ment, presently due to expire on July I,* 1991. Borrowings under the,'.agr_eement are_ limited* to _$300 mill ion. The weighted average interest rat~ for J~89 was_* 9.24 percent.

(6) In October 1987, VP Fuel, a wholly-owned ~ubsidiary of the Compilny, entered into a four-year standby revolving credit agreement, in support of its commercial paper financing of nuclear fueJ used at the Company's Surry Power Station. Subject to. the terms of* the revolving credit agreement, which is unconditionally guaranteed by the Company, VP Fuel n:iat borrow and reborrow up to $200 million at any one time, minus the* aggregate amour:it of outstanding commercial paper. The weighted average interest ra*te for VP*Fuel

financing in 1989, including bank facility fees, was 9.58 percent. *

(7) $8,383,250 of the annual sinking fund requirements on* th*e First and Refunding Mortgage Bonds may be satisfi'ed by waiving the privilege to issue an equa 1 amount of bonds. and by substituting property therefor'. The Company intends

to exercise such waiver in 1990. * * *

(8) Common Stock was representei by 147,077 shares outstandlng at December 31, 1989 (300,000 shares auth9rized)*. *

_Maturities (including preferred sto.ck cash sinkir1g fund obligations)through 1994 are as follows: 1990-$159,976,400; 1991-$237,960,451; 1992-$98,991,400; 1993-$175,601,400 and 1994-$337,616,400. *

The accompanying notes are an integral part of the financial statements.

33

.\

j VIRGINIA ELECTRIC AND POWER COMPANY

.. NOTES TO FINANCIAL STATEMENTS A. S_ignificant Accounting Pol icie~:

General:*

. . The CQmpany's accounting practices are prescribed by the Uniform System of Accounts promulg,ated by th.e regulatory_ .commissions having jurisdicti.on.

The Compariy is a.wholly-owned subsidiary of Dominion Resources, a Virginia corporation. The financial statements include the accounts of the Company and VP Fuel, . with all significant int~r*-company transactions and accounts being eliminated in consolidation.*

Revenues:*

.* Operating revenues are recorded on the basis of service rendered.

Utility Plant *and. Depre.ciation: **

Utility plant is.recorded at original cost which includes labor, materials, services, AFC and other indirect costs.

, Depree tat ion of utility plant ( other than nuclear fuel) is computed on the

" straight.:..line method based on -projected useful service lives. The cost of depreciable utfl ity plant retired and the cost of removal, less. salvage, are charged to accumulated depreci.ation.

The provision 'for* depreciation is based on weighted .average_ depreciable plant using rates of 3.2 percent for 1989 and

1988* *and 3. 3 percent for *1997. * . *.. .

\.

".: . The. cost of maintenance and repairs is charged to, the appropriate operating

. exp~nse and c1earing accounts. The cost of additions and rep 1acements is charged

.* *. to the appropr-i at~ :ut i l i .tY . pl ant account,

except that the cost of. mi nor additions

and rep 1acements . is*. charged *to maintenance expense. . * . * .

Nuclear Dec~naissioning:

Based on the most recent decommissioning cost study completed fn 1986, future _dec.ommissioning costs for the Company's four nuclear units are approximately $665 million, .as me.asured in 1986 dollars.

Funds collected in 1984-1989 have been *placed in a special trust in order that the Company may avail itself of certain federal. income tax benefits. Pre-1984 collections have been placed in a separate tru*st. *Trust funds will be invested with earnings generated and accumulated in the trusts for funding of future decommissioning obligations.

Ad_d it i ona 1 funds needed for dec;ommiss ion i ng wi 11 be co Tl ected as approved by the jurisdictional

regulatory commissions. The accumulated provision for decommissioning. of $98.7 million and. $71.8 million is included in Utility Plant Accumulated Depreciation at December 31, 1989 and 1988, respectively. Provisions for decommissioning of.$21.3 million, $21.2 million and $15.9 million ap*plicable 34

to 1989, 1988 and 1987, respectively, are included in Depreciation .Expense.

Nuclear Fuel:

Operating expenses include amortization of nuclear fuel, which is provided on a unit of production basis sufficient to fully amortize, over the estimated service life, the cost of the fuel plus future storage and disposal costs.

Federal Income Taxes:

. The Company files a consolidated federal income tax return with Dominion Resources.

The Company's practice is to reduce the current provision for federal income taxes to reflect the tax benefit resulting from the use . of the acce1erated depreciation methodology for property additions. Prior to 1974, the Company flowed through to income the tax effect of most timing differences between book and tax accounting. Effective with property additions placed in service in 1974, deferred income taxes have been provided on the effects ,of accelerated depreciation and, subsequently, deferred taxes have been provided on most other timing differences between book income and federal taxa.ble income to the extent permitted by the regulatory commissions having jurisdiction.

To the extent.timing differences have arisen in prior periods w~ich have not been norma 1i zed, the t.ax increase or decrease will be recorded when the

timing differences reverse. The Company's,only significant non-normalized timing difference pertains primarily to accelerated tax depreciation of plant placed in service prior to 1974 *. Deferred tax pro.visions have. not been recorded on these timing differences*(with the exception of FERC jurisdictional operations) because they are not allowed for ratemaking purposes. As of December 31, 1989, the cumulati~e net amount of such timing differences was approximately $749.8 million. The tax effect of this amount is not recorded currently, but such

. costs are expected to be reflected in rates when the timing differences reverse.

Deferred investment tax credits are being amortized over the service lives of the property giving rise to such credits. The Tax Reform Act of 1986 repealed the investment tax credit, effective January 1, 1986, except for certain transitional property qualifying for the credit.

In. December 1987, the FASB issued SFAS No. 96, "Accounting for Income Taxes." As a result of subsequent amendments, the provisions of SFAS No. 96 must be adopted by the Company no later than 1992. The objective of the new standard is to recognize the amount of current and deferred taxes payable and refundable for all events that have been recognized in the financial statements based on enacted tax laws at the date of the financial statements. Implementation of the standard may be accomplished by either restating financial statements fo~ prior peri ads or reporting the cumulative effect of the change in income of the current year. *

' .\

. The Company has preliminarily determined that the net effect *provided by adoption of the standard will be recording of additional deferred income tax liabilities on the Company's balance sheet. These additional deferred income 35

I tax 1i abi 1it i es represent the tax effects of those differences between book income and federal taxable income for which deferred income taxes have not been provided and differences in bases of assets and liabilities for book and income tax purposes. At the time the Company records these additional deferred income taxes~ a regulatory receivable will also be recorded. The Company will recognize the tax effects in future customer rates when such differences reverse.

Allowance for Funds Used During Construction:

The applicable regulatory Uniform System of Accounts defines AFC as the net cost during the construction period of borrowe~ .funds used for construction purposes and a reasonable rate on other funds when soused.

The Company separately determines rates and reports amounts applicable to borrowed funds~ calculated on a net-of-tax basis, and to equity funds. Aggregate AFC rates of 8. 95 percent, 8.89 percent and 8!26 percent were u*sed for 1989, 1988 and 1987, respectively*. Substantially all of the Company's construction work in progress is now - inc 1uded in rate base, and a .cash return is co 11 ected currently thereon ..

. Deferred Fuel and Capacity:

Approximately 78 percent of fuel expenses is subject to a deferral method of accounting. Under this method, the difference between actual fuel expenses and the level of fuel expenses included in current rates is deferred and matched against anticipated future fuel-related rate_tncreases.

During 1987, the Company, based on

regulatory authorization, deferred approximately $33 million_ of capacity charges *in excess of the level of such charges included - in base* rates. Subsequently,. in Virginia's base rate proceeding, the Company sought recovery of these deferred capacity charges over a two-year period. -On December 30, 1988, the *Virginia Commission denied recovery of these costs in its Order. As a result, these capacity costs were expensed in 1988.

Pollution Control Project Funds: -*

Pollution control project funds represent unexpended proceeds, plus interest earned thereon, from the sale of pollution control securities. These funds are placed in a trust for the benefit of the Company, until the Company requis;tions monies from the trustee for the reimbursement of qualified project expenditures.

For certain regulatory jurisdictions, investment earnings generated from the unused portion of such funds are recorded as interest income.

Reclassification:

Certain amounts in the 1988 and 1987 financial statements have been reclassified to conform to the 1989 presentation.*

36

B. -Federal Income Taxes:.

Details of federal income tax expense are as follows:

I I'*

Years 1989 1988 (Thousands)

Current expense . ......... : ............................... ; .. $ 168.005 $151,726 $132,609 Deferred expense, resulting from timing differences:

Plant related items:

Liberalized depreciation ............... , ................

69,672 58,809 80,649 Indirect construction costs ............................ . "(20,854) (13,924) (9,576)

Cost of remova 1-property retirements ........... *.... : ... .

5,501 4,788 3,120

Nuclear deconmissioning costs ............... ; ....... *... . (188)

1,928 (4,.563)

Other ....................................... ; .......... . 3,189 (2,439) (3,978)

Deferred fuel adjustment ................................ .. 2,297 (15,167) 50,844 Unbilled revenues ................ *.................. .- *.. : .. (4,127) (4,127) 32,614 Terminated construction project costs ..................... . (13,142) (15,976) (19,067)

Customer accounts reserve ........ *......................... . 3,474 (333) (11,932)

Refund of certain deferred tax balances pursuant to regulatory order (1) ....................**............... . (4,906) (49,062) (5;436)

Other ..........* ; ................................... *;****.* 486 4,827 (7 .418) 41,402 (30,676) 105,257 Deferred investment tax credits:

Gross ............ : ........*............................... (5,644) 10,969 30,483 Amortization ................*....*..................... *... . (18,635) (21,239) (25,077)

Net deferred investment tax credits ........................ . (24,279) (10,270) 5,406 Federal income tax expense-operating income ................ . 185,128 110,780 243.272 Federal incQme tax expense associated with nonoperating income:

Current ............................................. ; .... . 10,867 26,068 9,124 Deferred ................................................ *:. (6, 044.)

2,833 4,482

Net deferred investment tax credits ..................... .. (1,513) 4,823 28,901 12,093 Total federal income tax expense ........................... . $189,951 *$ 139.681 $ 255.365 *

(1). Represents the effect of a refund to customers for a reduction in.certain deferred income tax balances as ordered.by the Virginia Coinnission. (See Item* 1,* Rates under BUSINESS.)

37

> I l

It Total federal income tax expense differs from the amount computed.by applying the statutory federal income tax rate to pretax income for the following reasons:

Years 1989 1988 1987 SM SM SM Pretax Pretax Pretax Aillount .lnm!!! ~ Inccne ~ .Ima!

(Thousands, except percentages)

Computed federal tax expense at statutory rate on income (1) .....*..*.....** $~ li,..Q.% $g03,9g8 .li...Q% $Z84,l3l 39.9%

Increases (decreases) resulting from:

Utility.plant differences (2) .*.**.......*** 6,876 1.1 (2,753) (0.5) (4,931) (0.7)

Ratable amortization of investment tax credits .*...........*.*. ; **......*.... (18,635) (3.0) (21,2~9). (3.5) . (26,590) (3.7)

Refund of certain deferred tax balances pursuant to regulatory order (3) *....***.. (4,906) (0.8) (49,062) (8.2) . (5,436) (0.8)

Terminated construction project costs (2) .....**......*.....*.......... ; ... 8,285 1.3 8,880 1.5 6,208 0.9 Other, net ........ , ..........**........**.... (l4,3Ul il:11 (73) ..Q..Q 1,98g .JU ill...lli) ll...§) (64.247) (10.7) (28,767) {4.0)

Total*federal income tax expense ..**.......*. $189.951 30.4% $139.681 23.3% $255,365 35.9%

(O Net income pl us total f ~dera l income tax expense.

(2) Items for .which deferred taxes had.not been provided in prior years, net of amortization of certain defer_red tax provisions recorded at higher levels than the current statutory rate.

(3) Represents the effect of a refund to customers*for a reduction in certain deferred income tax balances as ordered by t~e Virginia Conmission. (See Item 1,.Rates under BUSINESS.)

C. Terminated Construction Project Costs:

Costs, net of taxes, incurred in *connection with terminated construction projects are summarized as follows:

~rt1zei:t ****

Balance At Period of Net Cost Decel!lber 31, Allortization Nuclear Unit Date Con~truction Ter11inated .Incurred 1989 In Rates (Thousands)

North Anna 3 November 1982 $387,583 $203,073 (*)

North.Anna 4 November 1980 85,641 l~.410 10 years Surry 3 & 4 March 1977 54,611 70 10 years.

(*) The amounts deferred are being .amortized over 15 years for .Virginia and FERC jurisdictional customers and over a ten-year period in the North Carolina jurisdiction.

D. Supplementary Income Statement Information:

Taxes other than federal income taxes charged to expenses were as follows:

Years 1989 1988 naz (Thousands)

Real estate and property *..*.....** ~ ..***.*... $ 60,832 $ 57,714 $ 51,746 State and local gross receipts ..* ~~ .*.*.*** ~ .* 87,480 81,438 87,410 Payroll related .... *..................... ~ ....... . 27,684 26,659 24,756 Other . ...............*~ ...........*...... :...... . 311871 151902 141051 Total ............. *...... *...*... ~ ..... *......... . $2Q71867 $1811 713 $1271963 38

E. Leases:

The Company has leases for certain property and equipment that meet the criteria for capitalization under the provisions of SFAS No. 13, "Accounting for leases," which require recognition of all capital leases. Plant and property under capital leases at December 31, 1989 and 1988 included the following:

~ 1988 (Thousands)

Combustion turbines .......*********.......****** $42,'601 $42,601 Office buildings(*) ...*********..******** ~ ***** 40,827 40;827 Data processing equipment and other ************* . 41554 Total plant and property under capital leases. 83,428 87,982 less accumulated amortization **.*..*** ~ ...****.* U1892 401000 Net plant *nd property under capital leases~ *.** $41,536 $471982

(*) The Company currently leases one building from its parent, *Dominion Resources. The capitalized cost of the property under that* 1ease, net of accumulated amortization, represented $29.2.mi11 ion and $29. 9 mi 11 ion at December 31, 1989 and 1988, respectively. Rental payments for such lease were $3.0 million for each of the three years ended December 31, 1989, 1988 and 1987.

The Company is responsible for expenses in connection with the leased turbines and buildings noted above, including ins.urance, taxes and maintenance.

Future minimum lease payments for each of the next five years and in the aggregate under noncancellable capital leases and for operating leases that have initial or remaining lease terms in excess of one year as of December*31, 1989, are as follows:

Capital Operating Leases Leases (Thousands) 1990 . ........................... *....... -. ..... ~ . $10,048 $ 8,204 1991 ................................ *~ ....... :* ~ 10,048 3,371 .

1992 . ..........* .............................. . 3,603 2,281 1993 ................... ~ ..................... . 3,603 1,523 1994 . ........................................ . 3,603 1,293 After 1994 . .................................. . 40.661 51358 Total future minimum lease payments *****.***** . 71,566 $221030 less interest element included above ..******** 281216 Present value of future minimum lease payments $431350 39

-' I l,

l Rents on 1eases have been charged to fue 1 used in current generation (payments under nuclear fuel heat supply contracts) and other operation expenses (all other leases) and included the following:

m.9 ~ .um (Thousands)

Inte.rest on capital lease obligations .. -.*..**. $ 3,271 $ 3,723 $ 9,949 Amortization of property under capital leases. 4,402 4,417 40,183 Rental expense*relating to capital leases(*). 7,673 8,140 50,132 Rental expense relaiing to operating leases *.. 10,450 10,878 11,218 Less: sublease rentals~ ****....**..*...******* 56 59 52 Total .......................................... . $18,067 $18,959 $61,298

(*) In October 1987, the Company terminated several heat supply contracts for nuclear fuel used at its Surry Power Station that qualified as capital 1eases. Upon termination of these heat supp 1y contracts, the nuc 1ear fue 1 subject to the* contracts* was acquired by VP Fuel (see Note O to FINANCIAL STATEMENTS). . .

F. Jointly Owned Plants:

The following information relates to the Company's proportionate share of jointly owned plants at December 31, 1989:

Bath County North Anna Pumped Storage Power

Station Station Ownership interest ........*****.......* 60.0% 88.4%

(Millions)

Utility plant in service ............*.. $1,069.6 $2,074.4 Accumulated depreciation ..****.*....... 86.7 907.9 Construction work in progress ....*.. ~ *. 1.5 156.8 The co-owners are obligated to pay their share of all future construction*

expenditures and operating costs of the jointly owned facilities in the same proportion as their respective ownership interests. The Company's share of operating costs is .classified in the appropriate operating expense (fuel, maintenance, depreciation, taxes, etc.) in the Statements of Income.

40

G.

Preferred Stock Subject to Mandatory Redemption:

r

't.. . A C

Preferred stock subject to mandatory redemption, $100 liquidation preference, at December 31, 1989, was represented by the following:

*

Annual Sinking Fund Requirements Entitled Per Share at $100 Per Upon Voluntary Ljgujdation Redemption Share Authorized and And Thereafter To Outstanding Amounts Declining.

Dividend Shares Amount Through In Steps To* Shares

$ 7.30 500,000 $107.30 4/14/93 $100.00 after 4/14/02 (a) 7.325. 484,419 101.00 28,000 7.58 600,000 107.58 6/19/92 . 100.00 after 6/19/93 (b) 8.40 576,000 104.20 3/31/90 100.00 after 3/31/04 32,000 8.20 390,000 103.28 9/20/90

100. 41 after 9/20/96 30,000 8.60 252,432 105.00 12/19/92 100.00 after 12/19/97 11,834 8.625 240,500 104.68 6/20/90 100.00 after 6/20/02 18,500 8.925 196,000 105.95 9/20/90 . 100.00 after 9/20/09 10,500 10.25 200,000 102.00 4/20/90 101.00 after . 4/20/90 (cl 3,439,351 Less shares .

due w;thin one year 252,834 Total 3,186,517 (a) 15,000 shares annually commencing in June 1992.

(b) 120,000 shares annually commencing in June 1992.

(c) 150,000 and 50,000 shares in April 1990 and 1991, respectively.*

Maturities through 1994 are as follows: 1990-$25,283,400; 1991-$18,083,400; 1992-$26,583,400; 1993-$26,583,400; and 1994~$26,583,400.

In 1989, 47,581 shares of the $7.325 Dividend*Preferred Stock and 10,500 shares of the $8.925 Dividend Preferred Stock were redeemed through an optional sinking fund.

In 1988, 32,000 shares of the $8.40 Dividend Preferred Stock were redeemed through an optional sinking fund.

In 1987, 500,000 shares of $7.30 Dividend Preferred Stock were issued and 32,000 shares of the $8.40 Dividend Preferred Stock were redeemed through an optional sinking fund.

41

The total number of authorized shares for all preferred stock is 10,000,000 shares. Upon involuntary liquidation, all presently outstanding preferred stock is entitled to receive $100 per share plus accrued dividends. Dividends are cumulative.

H. Preferred Stock Not *Subject to Mandatory Redemption:

Preferred stock not subject to mandatory redemption, $100 1iquidation preference, at December 31, 1989, was represented by the following:

Entitled Per Share Upon Voluntary Ljgujdatjon Redemption Authorized And Outstanding Dividend Shares Amount Ihrough And Thereafter To

$5.00 106,677 $112. 50 4.04 12,926 102.27 4.20 14,797 102.50 4.12 32,534 103.73 4.80 73,206 101.00 7.72 350,000 101.50 7.45 400,000 101.00 7.20 450,000 101.00 7.72 (1972 Series) 500,000 101.00 Money Market Preferred (January 1987 Series) (*) 500,000 101.00 1/21/90 $100.00 after 1/21/90 Money Market Preferred (June 1987 Series) (*) 750,000 101.00 6/2i/90 $100.00 after.6/22/90 Money Market Preferred (October 1988 Series)(*) 750,000 100.00 Money Market Preferred (June 1989 Series) (*) 750:.000 100.00 Total 416901140

(*) Dividend rates are variable and are set every 49 days via an auction process. The combined weighted average rates for these series in 1989 and 1988, including fees for broker/dealer agreements, were 7.45 percent and 6.39 percent, respectively.

42

I. Connon Stock:

During the years 1987 through 1989 the following changes in Common Stock r

occurred:

Yea 1989 1988 1987.

(Thousands. except shares)

Shares Shares

Shares Outstanding Allount Outstanding Amount Outstanding Amount Balance at January 1. .. :.... 142,433 $2,096,671 . 140,788 $2,060,841' 136,885 $1,980,015 Transfer from Other Paid-in Capital......... 83~ 836 836 Issuance to Dominion Resources. * * . . * * * * . . . * * . 4 1 644 99 1 999 1.645 34.994 3.903 79.990 Balance at December *31 ...... 147.077 $2,197.506 142.433 $2.096.671. 140.788 $2,060.841 J. Short-Tera Debt:

Daily Year End Average Outstanding Interest Interest Maxi-Maturity* Rate(a) Amount Ratela) Outstanding (Thousands. except percentages .

. 1989 Nuclear fuel financing ****..* (b) $39,295 (c) (c) 9.46% (c)

Real. estate notes *..*........ . (d) $ 525 10.00% $ 825

.Total ..*.......*..**.*.*... $39.295 1988 Nuclear fuel *financing ..**..* (b) $34,815 (c) (c) 7.66% (c)

Real estate notes .****.... : .. (d) 825 ,10.00%, * * $ 2 10.. 00% $ 825 Total, ...**.*......***.*... $ 35.640 1987 Nuclear fuel financing ****.*. (b) $ 42,304 (c) (c) 7.68% (c)

Pollution control notes **..** (d) $ 661 4.61% . $1,000 Total ....*...*..*.**..*..** $ 42,304 (a) Weighted average:*

(b) Maximum 270 days.

(c) The total amount of conmercial paper outstanding under this arrangement at December 31, 1989, 1988 and 1987 was $125.8 million, $100.7 million and $103.6 million, respectively. The totals include amounts classified as other long-term debt of $86.5 million, $65.9 million and $61.3 million at December 31, 1989, 1988 and 1987, respectively (see Note (6) to the Statements of Capitalization). The amount of such debt that is classified as short-term is based on the Company's estimate of the cost of the nuclear fue 1 to be consumed during the subsequent twelve-month period.

(d) Maximum 364 days; K. Effect of Rate Changes on Operating Revenues:

See Item 1, Rates under BUSINESS.

43

L L. Retirement Plan and Postretirement Benefits:

The Company participates in Dominion Resources' Retirement Plan (the Retirement Plan), a defined benefit pension plan. The Retirement Plan covers virtually all employees Of Dominion*Resources and its subsidiaries, including the Comp~ny. The Company's disclosure regarding participation by its employees in the Retirement Plan is provided in accordance with guidelines applicable to plans of a controlled group of corporations. The benefits are based on years of*service and the employee's final average compensation.

For 1989, the pension plan expense was $6.7 million and funding was provided in the amount of $6.7 million. In 1988, the pension plan expense was $2.5 million; no funding was .provided to the Retirement Plan in accordance with:the full funding limitation of the Employee Retirement Income Security Act of 1974 (ERISA). A~option of SFAS N,.o. 87; "Employers' Accounthig for Pensions," had the effect of eliminating the need for any pension plan funding or expense provision in 1987.

. In November 1988, $72.2 million of the Retirement Plan's projected benefit obligation was settled by purchasing nonparticipating insured annuUies for certain retirees. The settlement was accounted for in accordance with SFAS No.

88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination B.enefits. 11 As a result, a gain of $11.4 million (net of associated taxes of $5.9 million) attributable to the Company's allocable portion of the transaction was recognized in 1988 and reported as a reduction

. of Other Operating Expenses. In September 1989, the Company established. a

regulatory liability associated with the rate treatment of the gain resulting from the settlement. As a result, the balance available for Common Stock was decreased by $8.2 million (net of associated taxes of $4.2 million)'. This included the amortization of $2. 0 mil Hon of the l i ability for May through September 1989. *

in addition to* providing pension benefits, Dominion Resources and its subsidiaries, including the Company, provide certain health care and life insurance *benefits for retired employees. Generally, employees remain eligible at retirement for certain heal th

and life insurance benefits if they reach retirement age . while working* for the Company. These and similar benefits for active employees are provided through insurance companies w;th annual premiums based on benefits paid during the, year *. The Company recognizes the cost, of providing heal th care and life insurance benefits by expensing the anriua l insura.nce premiums. The approximate number of retired employees for 1989, ,1988 and 1987 was 2,400, 2,100 and . 1,900, respectively. Health care premiums attributable to these reti.rees were $6.3 million, $3.0 million and $2.7 million for 1989, 1988 and 1987, respectively. Beginning in 1989, health care premiums for retirees were based on. the separate claims experiences of retirees, whereas in previous years premiums were based on the combined claims experiences of employees and retirees. In 1989, the cost of life .insur~nce premiums was $4.3 million. Prior to 1989, the cost of providing life insurance benefits for retirees was. not separable from the .cost of providing benefits for active employees; As a result of life insurance benefit claims being paid from reserve funds held by the insurance company, the Company P~aid no* premiums for this coverage in 1987. Du.ring 1988, the Company resumed premium payments and paid 44

From time to time in the past, the Company has changed benefits. Some of these changes have reduced benefits. Under the terms of its benefits. p1ans, the J

.4'

$1.2 million, covertng approximately 13,000 active and 1,700 retired employees.

Companyreserves the right to change, modify or terminate the plans.

In February

1989, . FASB issued an

exposure draft of a proposed SFAS, "Employers' Accounting for Postretirement* Benefits Other Than Pensions." The proposed statement would require companies to accrue for the estimated future

cost of postretirement health care and other non-pension benefits during the working careers of their active employees rather than recognizing the cost of such benefits after employees have retired and when the *benefits are actually paid. The proposed accounting would be effective for fiscal years beginning after December 15, 1991. The Company is unable to assess the *ultimate outcome of the proposal. Therefore, management is not able to determine the financial and regulatory impacts that a final statement may have on the Company.

M. Activity Review and Resource Allocation Study:

As a result of the activity review and resource allocation study completed in. 1989, the Company eliminated 824 positions and released several hundred contractors but added 148 Company positions to strengthen the nuclear operations area. Based on this study the estimated annual savings -is approximately $28 million. A regulatory asset of $8.1 million was established as of December 31, 1989 for the Virginia jurisdictional balance of deferred :severance costs which have not yet* been recovered through savings.-

N. Conmitments and Contingencies:

Construction Program:

The Company has made. substant i a1 commitments in connection with its construction program and nuclear fuel expenditures. Those commitments are estimated to total $958 million (excluding AFC) for 1990~. Additional financing is contemplated in connection with.this program.

Purchased Power Contracts:

The Company has an agreement with Hoosier for the* purchase of 400 Mw of electricity through 1999; and an agreement with certain operating subsidiaries of AEP for the purchase of 500 Mw of electricity through 1999. The AEP agreement also provides for the transmission of the power purchased from Hoosier.* In late 1988, the Company contracted to purchase 200 Mw of electricity through 1990 from the South Carolina Public Service Authority (SCPSA).. The SCPSA' contract requires the.Company to purchase the power during the summer and winter seasons of 1989 and 1990, and during any other six non-peak months during the two-year period, totaling required purchases for 18 of the 24 months. In May 1989, the Company contracted with Carolina Power and Light to purchase 250 Mw of electricity during June, July and August of 1989 and 1990; 350 Mw for December 1989 through February 1990 and 100 Mw for December 1990 through February 1991. *

In 1ate 1989, the Company conmitted to purchase 200 Mw of short-term power from South Carolina Electric and Gas Company during January and February and from June through September 1990. The Company also has 31 contracts as of December 31, 1989, 45

',../

producing 376 Mw of electricity from non-utility generating facilities.

In 1987, the Company signed agreements for the purchase of approximately 1,300 Mw of add it i ona1 capacity from six non- ut 11 i ty power producers. As a result of the 1988 competitive bidding solicitation, the Company entered into 19 contracts for 2,086 Mw of additional capacity for initial delivery at various dates through 1994. These contracts are generally for a duration of 25 years after in it 1al deli very. The Company al so issued a Request for Proposal on August 15, 1989, for competitive bids from all supply side sources for an additional 1,100 Mw of power to come on line during 1995-1997. Bids were received in January 1990 with contracts expected to be executed in the sunvner of 1990.

The table below reflects the Company's. minimum c011111itments for power purchases from utility and non-utility suppliers that are currently operating or have obtained construction financing. The table does not reflect the remainder of the above-mentioned contracts, where necessary financing for the generating facility has not yet been obtained. This minimum purchase co11111itment includes both capacity payments and the minimum required energy payments.

Conmitment (Millions) 1990 . ............................... . $ 411.0 1991 .............. * ................. . 486.8 1992 . ............................... . 525.1 I 993 . ........................ *....... . 571.8 1994 . ............................... . 597.2 Later years . ........................ . 18,534.1 Tota 1 ............................. . $21,126.0 Present value of the total.: *..*.*. $ 5,294.0 In addition to the minimum purchase commitments in the table above, under some of these contracts the Company may purchase, at its option, additional power as needed. Actual payments for purchased power (including economy, emergency, limited term, short-term and long-term purchases and interchange received} for

the years 1989, 1988 and 1987 were $559.1 million, $410.3 million and $430.6 million, respectively.

Coal and Uranium Purchases:

The Company's estimated coal and uranium contract purchases for the next five years for system generation are as follows (millions}: 1990-$318.7; 1991-

$273.8; 1992-$211.3; 1993-$187.2 and 1994-$153.7.

Nuclear Insurance:

The Price-Anderson Amendments Act of 1988 amends and extends for fifteen years the fede.ral mandates regarding compensaticm of the public in the event of an accident at a federally licensed nuclear reactor. The current limit imposed by the Price-Anderson Act for.the public liability of an owner of a nuclear power 46

plant for a single nuclear incident, including the 5 percent s.urcharge if funds are insufficient to pay the claims, is $7.8 billion as of December 31, 1989.

The Company's insurance coverages and maximum retrospective assessments for its nuclear ope rat ions are as fo 11 ows: ** * *

. Maximum Retrospective Assessments for a Single Type and Source of Coverage Coverage Incident (Millions)

Public Liability:.

American Nuclear Insurers .**..*....*..**.**... * $ 200

Federal Government (a) .......................*.. 7,607 $264.6(b)

$7,807 $264.6 New Nuclear Workers:.

American Nuclear Insurers (c) .*........*.***.. $-400 - $ 13.l Property Damage (per site):

Nuclear Mutual Limited (d) .....*........*..*... $ 500 $ 44.8

Nuclear Electric Insurance Limited (NEIL) (d). 975 16.2 American Nuclear Insurers ..........***.*.*..*. 400

$1,875 $ 61.0 Replacement Power:

.NEIL .** ~ ******.*.**.....**..***.*.....****.*** $1,074 $ 16.5 (a) Retrospective premium program under the

Price-Anderson Liability provisions of the Atomic Energy Act of 1954, as amended. Subject to retrospective assessment with respect to loss from a nuclear incident at any licensed nuclear reactor in the United States.

(b) $66.15 million for each of the four reactors owned by the Company with assessments .not to exceed*$10 million per year per reactor for any one nuclear incident .. This assessment is subject to -inflation indexing every fifth year based on the consumer price index. There is no limit on the number of nuclear incidents for which the licensee of a reactor may be retroactively assessed.

(c) Includes one automatic reinstatement of $200 million. Provides coverage against claims, except those arising out of an extraordinary nuclear occurrence~

made by nuclear workers fi-rst hi red after January 1, 1988. The maximum coverage is for the entire nuclear industry and not just the Company. The amount of the maximum retrospective assessment is the most the Company could be assessed under the Master Worker insurance program which is effeet i ve from January 1, 1988 through December 31, 1992.*

(d) Mutual insurance companies of which the* Company is a member. The Company is subject to retrospective assessment with respect .to loss at any nuclear generating station covered by such insurance.

47

For any property losses in excess of the $1. 9 bi l1 ion property coverage, and to the extent that insurance proceeds would be unava il ab 1e for property coverage because they must be used for decontamination as required by the NEIL Decontamination Li abi l i ty and Excess Property Program, the Company has the financial responsibility for the losses.

A 1988 NRC rule requires licensees of nuclear plants, including the Company, to maintain at least $1.06 billion of property insurance on each reactor site.

It also requires that the insurance proceeds be used first to pay stabilization and decontamination expenses and that the proceeds required to be used for decontamination be paid by the insurer into a special trust. The effect of the rule is to prevent the use of property insurance proceeds for the rebuilding of damaged facilities or the payment of holders of the Company's First and Refunding Mortgage Bonds (which are secured in part by such facilities) until after stabi 1i zat ion and decontamination are comp 1eted. The NRC has exempted the Company and other similarly situated utilities from implementing this rule until April 4, 1990. Prior to such date, the NRC will review petitions filed by the Company's insurers and others suggesting alternatives to the rule in its current form.

As part owner of the North Anna Power Station, ODEC is responsible for its proportionate share (11.6 percent) of the insurance premiums applicable to that station, including any retrospective premium assessments and any losses not covered by insurance.

Chisman Creek Superfund Cleanup:

See Item 3, Water Quality Control under LEGAL PROCEEDINGS.

0 *. Corporate Restructuring:

On March 1, 1987, the Company sold its West Virginia service**territory to UtiliCorp United Inc. for $22.3 million and a related transmission line to Appalachian Power Company for $0.7 million.

VP Fuel, a wholly-owned subsidiary of the Company, was incorporated in Virginia on October 8, 1987. VP Fuel was formed for the purpose of purchasing nuclear fuel, the heat from which is sold to the Company for use in electric generation at the Company's Surry Power-Station. The acquisition and ownership of the nuclear fuel is financed by VP Fuel through the sale of commercial paper that is guaranteed by the Company .. A heat supply contract betw~en the parties provides that the Company will make quarterly payments to VP Fuel for the thermal output of the nuclear fuel plus financing costs.

P. ODEC Load Loss See Results of Operations, Other income miscellaneous, net and income taxes associated with miscellaneous, net under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.

48

Q.

Quarterly Financial Data {Unaudited):

.(

~ .

The following amounts reflect all adjustments, consisting of only normal recurring accruals (except as discussed below), necessary in the opinion of the management for a fair statement of the results for the interim periods.

Operating Operating Balance Available for Quarter Revenges Income Co111110n Stock

{Thousands)

~

1st . ..... Cl ******** $851,695 $ 181,249 $ 88,107 2nd . .............. 798,363 136,880 40,858 3rd . ..... *..* ....... 943,179 242,146 138,415 4th . ..... *- ........ 865,691 196,597 107,860 liJm

1st ............. *.. $ 744,594 $ 208,405 $ 118,997 2nd * *...*.....*.*. 707,005 141,169 70,849 3rd . .............. 876,819 227,185 144,847 4th . ...........*... 769,161 159,769 72,318 Results for interim periods may fluctuate as a result of weather conditions, rate relief and other factors.

In the third quarter of 1989, the Company established a regulatory liability associated with the rate treatment of a gain resulting from the fourth quarter 1988 settlement of project benefit obligations for certain retirees.* Operating income and balance available for Common Stock were decreased by $8.2 million (net of associated taxes of $4.2 million). This included the amortization of $2.0 million of the 1i abi 1ity for May through September 1989.

In the fourth quarter of 1988, a portion of the Retirement Plan's projected benefit obligation was settled. As a result, operating income and balance available for Common Stock increased by $11.4 million (net of associated taxes of $5.9 million). (See Note L to FINANCIAL STATEMENTS.)

In December 1988, the Virginia Commission found that the Company had earned a reasonable rate of return in 1987, and, therefore, had fully recovered the approximately $33 million of capacity charges previously deferred in 1987. As a result, in the fourth quarter of 1988, the Company expensed such costs, resulting in a decrease in operating income and balance available for Common Stock of $19.8 million (net of associated taxes of $13.2 million).

49

VIRGINIA ELECTRIC AND POWER COMPANY

SCHEDULE IV SCHEDULE IV INDEBTEDNESS OF AND TO RELATED PARTIES NOT CURRENT For the years ended December 31, 1989, 1988 and 1987 Col. A Col. B Col. C Col. D .G2.J.......I f,QL_f fd!L..Ji Col. H fd!L....l Indebtedness gf Indebtedness :l;g Nae of Balance at Balance Balance at Balance.

person l!!!ginni!'.!!I Additions Deduction§ at End J!!gjnoi!'.!!I ~Uigos Deductigos .11...Em (Thousands)

Daninion Resources:

1989 .............. . . $ 28,500 $1,344,200 $1,288,700 $ 84,000 1988 .............. . $ 27,000 $ 504,006 $ 502,506 $ 28,500 1987 .............. . $49,600 $1,096,000 $1,118,600 $ 27,000 See Note (5) to the Statements of Capitalization included herein.

50

. VIRGINIA ELECTRIC AND POWER COMPANY

SCHEDULE V

\'

SCHEDULE V PROPERTY, PLANT AND EQUIPMENT For the year ended December 31, 1989 Col. A '91. I 9.11, ' Co]. ll Col. E Col. F Other Balance at Changes Balance Beginning Additions Rettl'eEl'ltS Add at End Classification gf tecim! et Cost or Sales (Deduct) of Period (Thousands)

Utility plant:

Electric plant:

In service:

Intangible *****.*.**..**.*** $ 43,220 $13,524 $ 7,686 $ 49,058 Production ****.**.*...**.*.* 5,504,370 313,943 31,634 $ 778 5,787,457 Transmission *****.**..**.**. 972,486 42,818 5,046 (251) 1,010,007 Distribution ***...***.**.**. 2,675,825 326,511 38,633 228 2,963,931 General .**...**.*.***.**..*. 469,152 .E.Ml 8,885 {101) 532,713 Total electric *plant in service ****....*****..** 9,665,053 769,343 91,884 654 .10, 343,166 Construction work in progress. 641.491 103,878(*) 745,369 Held for future use ..***.*..** 4,478 4,478 Electric plant acquisition adjustment ...*.****..*..*.** 42,778 . 42,778 Total electric plant *.*... 10,353,800 873.221 91,884 654 11,135.791 Nuclear fuel *.**.***.**.***.**.. 784.511 34,566 819.077 Total utility plant....... $11,138,311 $ 907. 787 * $ 91,884 $ ~-6=5.._4 $11,954.868 Non-utility property **.*.* ;....... $ 5,871 $ 15 $ 5,767

-- ==:::::'8:::9) $

Capital leases .*****...* ~~~~~~.... $ 87,982 $ 4,554 $ 83,428

(*)Includes additions of $873.2 million net of $769.3 million transferred to plant in service.

51

VIRGINIA ELECTRIC AND POWER COMPANY

SCHEDULE V SCHEDULE V PROPERTY, PLANT AND EQUIPMENT For the year ended December 31, 1988 Col. A Col. B Col, C ~1. g Col. E ~1. F Other Balance at Changes Balance Beginning Additions Ret ir£Entl!I Add at End Classification of Period at Cost or Salm! (Deduct) of Period (Thousands)

Utility plant:

Electric plant:

In service:

Intangible .*...**....*... $ 36,226 $ 11,904 $ 4,910 $ 43;220 Production ................ 5,379,668 136,599 13,778 $ 1.881 5,504,370 Transmission *..*......... 920,103 58,848 6,229 (236) 972,486 Distribution ......*...... 2,404,886 304,757 33,934 116 2,675,825 Genera 1.*...........*...* 418,617 62,633 12,068 (30) 469,152 Total electric plant in service ........... 9,159,500 574,741 70,919 1,731 9,665,053 Construction work in progress .....*........... 488,674 152,817(*) 641,491 Held for future use ........ 4,050 659 13 (218) 4,478

Electric plant acquisition adjustment ............... 42,778 42,778 Total electric plant ... 9,695,002 728,217 70,932 1;513 10,353,800 Nuclear fue 1. .................. 720,752 64,797 1,038 784,SU Total utility plant *..* $10,415,754 $ 793,014 $ 71,970 $ l,513 $11,138,311 Non-utility property. . . . . . . . . . . $ 6,309 $ 2 $ (436) $ 5,871 Capital leases ............ : . . . . $ 87,982 $ 87,982

(*) Includes additions of $727.5 million net of $574.7 million transferred to plant in service .

. 52

SCHEDULE V l'

. V VIRGINIA ELECTRIC AND POWER COMPANY SCHEDULE V PROPERTY, PLANT AND EQUIPMENT For the year ended December 31, 1987 Col, A fig]* II fig]' c Co], D Col. E Other Col. F Balance at Changes Balance Beginning Additions Retiraents Add at End Classification of Period Jt Cost

or l@les (Deduct) of Period (Thousands)

Utility plant:

Electric plant:

In service:

Intangible ....... ., ....... .. $ 18,661 $ 18,263 $ 698 $ 36,226 Product ion ................. . 4,962,922 450,380 33,953 $ 319 5,379,668 Transmission .**..*......**.* 905,481 19,305 5,070 387 920,103 Distribution ............... . 2,158,666 309,129 . 62,413 (496) 2,404,886 General **.*..**********.**** 279.892 152,490 13.779 14 418.617 Total electric plant in service .*..*......*....* 8,325,622 949,567 115,913 224 9,159,500 Construction work in progress 766,350 (277 ,676)(a) 488,674 Held for future use *****...*.* 861 3,189 4,050 Electric plant acquisition adjustment ****.*.........**. 42,063 715 42.778 Total electric plant ...*** 9,134.896 675.080 115,913 939 9.695,002 Nuclear fuel ...*..*...*.***....* 545.344 44.099 131,309(b) 120;152

Total utility plant....... $ 9,680.240 $ 719.179 $ 115.913 $ 132.248 $10,415.754 Non-utility property ..**.........* $ 7.999 $ (1,690) $_ ___.6.....3=0=9 Capital leases:

Nuclear fuel .................... $ 198,425 $ 26,299 $ 224,724(b)

Other ..*...*.*...*..*****.**..*. 89,182 l.200(c) $ 87.982 Total capital leases **....** $ 287.607 $ 26,299 $ 225.924 $ 87.982 (a) Includes additions of $671.9 million net of $949.6 million transferred to plant in service.

(b) In October 1987, the Company terminated several heat supply contracts that qualified as capital leases and the nuclear fuel subject thereto was acquired by VP Fuel. Also includes the reclassification of nuclear*

fuel progress payments to nuclear fuel ( see Note Oto FINANCIAL STATEMENTS).

(c) The Herndon District office building was repurchased on June 30, 1987.

53

VIRGINIA ELECTRIC AND POWER COMPANY

SCHEDULE VI SCHEDULE VI ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT For the years ended December 31, 1989, 1988 and 1987 Col. A CoJ. B Col. c Col. Q Col. E Other Col. F Balance at Additions Changes Balance Beginning Charged to Add at End Classification of Period Costs I Expenses Retirements (Deduct) of Period (Thousands) 1989 Accumulated depreciation and amortization of electric plant.;. $2,615,011 $fil..!!Q $ '84,177 $ 30,140 $2,880,084 Accumulated amortization of capital leases .....*.........*. ~. $ 40 1 000

$.....i,lli $ 4,554 $ 41,892 Accumulated amortization of Nucl~ar fuel..................... $ ~25.623 $ 576.840 1988 Accumulated depreciation and amortization of electric plant... $2,350,065 * $ 30,!99 $2.61~,011 Accumulated amortization of capital leases .*....*.* ~......... $ 33,854 $ 2 $ 40,000 Accumulated amortization of nuclear fuel..................... $ 426,721 $ 525.623 1987 Accumulated depreciation and amortization of electric plant... $2,085.648 $114,848 $33,623 $2,350.065 Accumulated amortization of capita 1 leases:

Nuclear fue 1. ..........*...*..* $ 87,516 $ 31.497 $119,013 Other ...............*.. *.......* 27,262 ~ 526 $ 1.532 $ 33,854 Total........................ $ 114,778 $ 37,083 $119,539 $ 1,532 .$ 33,854 Accumulated amortization of nuclear fuel. ...........** :...... $ 366,153 $~. $17,176 $ 426,721 Note:

Provision for depreciation of automobiles and trucks is charged to transportation expense clearing account and redistributed to operation _ expense, utility plant and_other accounts.

54

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On November 10, 1987, Deloitte & Touche (formerly Deloitte Haskins & Sells) was engaged to audit the 1988 financial statements of the Company. The 1987 and earlier year financial statements had been audited by Coopers & Lybrand, whose engagement as auditors was terminated by the Company effective with the conclusion of the audit of the Company's 1987 financial statements. The engagement of Deloitte

& Touche was recommended by the Audit Committee and approved by the Board of Directors of the Company at their respective meetings on October 24, 1987.

In the last two fiscal .years that Coopers &Lybrand served as auditors, there were no disagreements with Coopers &Lybrand on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

Coopers & Lybrand' s reports on the financial statements for those fi seal years contained. no adverse opinion, disclaimer of opinion or qualification as to uncertainty, audit s'cope or accounting principles~ Coopers & Lybrand furnished the Company with a letter addressed to the Securities and Exchange Commission stating that it agreed with the statements made in this paragraph. A copy of this letter was filed as an exhibit to the Company's Quarterly Report to the Securities and Exchange-Commission (Form 10-Q) for the quarter ended September 30,. 1987.

PART Ill ITEM,10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Information concerning directors of Virginia Electric and Power Company is as fol lows: *

Year First Principal Occupation for Last 5 Years,* Elected a Name and Age Directorships in Public Corporations Director William W. Berry (57) Chairman of the Board of Directors of 1980 ,

Virginia Electric and Power Company and Domini on Resources ( from May 1, 1985 to

July 1, 1986~ Ch~irman of the Board of Directors and Chief Executive Officer of Dominion Resources and Virginia Electric and Power Company; prior to May 1, 1985, President and Chief Executive Officer of Dominion Resources and Virginia Electric and Power Company). He is a Director of Dominion Resources, Sovran Financial Corporation, Ethyl Corporation and Universal Corporation.

55

Principal Occupation for Last 5 Years, Year First Elected a Name.and Age Directorships in Public Corporations Director Thos. E. Capps (54) Vice Chairman of the Board of Directors 1989 of Virginia Electric and Power Company (from November 1, 1986 to April 1, 1989, President and Chief Operati.ng Officer of Dominion Resources; prior to November 1, 1986, Executive Vice President of v;rginia Electric and Power Company) *. He is a Director of Dominion Resources, Signet Banking Corporation and Bassett Furniture Industries, Incorporated.

James T. Rhodes (48). President and Chief Executive Officer of 1989 Virginia Electric and Power Company (from*

January 1, 1988 to April 1, 1989, Senior Vice President-Finance; from May 1, 1985 to January 1, 1988, Senior Vice President-Power Operations; prior to May 1, 1985, Vice President-Personnel). He is a director of Dominion Resources.

John B. Adams, Jr. (45) President and Chief Executive Officer of 1987

,A. Smith Bowman Distillery; Inc.,

Fredericksburg, Virginia, a manufacturer and bottler of alcoholic beverages, December 27, 1989 to date; (prior

December 27; 1989 Vice President and Director)~

Anna Ruth Inskeep (64) . Battle Park Farms, Rapidan, Virginia, a 1987 dairy farm and milk hauling business. She is involved iti numerous civic activities:

Dr. Allix B. James (67) Chancellor of Virginia Union University, ; 1971 Richmond, Virginia, January 1, 1986 to date (prior to January 1, 1986, President Emeritus and Henderson-Griffith Professor of Pastoral Theology). He is a Director of Consolidated Bank &Trust Company.

Harvey L. Lindsay, Jr. (60) Chairman and Chief Executive Officer of 1986 Harvey Lindsay *Commercial Real Estate, a commercial real estate development firm,

.Norfolk, Virginia.

56

Principal Occupation for Last 5 Years, Year First Elected a Name and Age Directorshjps in Public Corporations Director Shirley S. Pierce (66) .* Chairman of the Board and President of The 1972 Ahoskie Fertilizer Company, Inc., Ahoskie, North Carolina, a manufacturer and dis-tributor of fertilizer and agricultural products. He is a Director of Planters National Bank and Trust Company.

William T. Roos (62) President of Penn Luggage, Inc., retail 1975 specialty stores, Hampton, Virginia.

William G. Thomas (50) President of Hazel, Thomas, Fiske, Beckhorn 1987

& Hanes, P.C., Alexandria, Virginia, a law firm. He is a Director of Perpetual Savings Bank, F.s . B.

Each Director holds office until the next Annual Meeting of Shareholders or until his successor is duly elected.

(bl Information concerning the executive officers of Virginia Electric and Power Company is as follows:

Name and Age Business Experience Past Five Years.

William W. Berry (57) Chairman of the Board of Directors, July 1, 1986 to date; Chairman of the Board of Directors and Chief Executive Officer, May 1, 1985 to July 1, 1986; President and Chief Executive Officer prior to May 1, 1985.

Thos. E. Capps ( 54) , Vi.ce Chairman of the Board of Di rectors, April 1, 1989 to date; President and Chief Operating Officer of Dominion Resources, Inc., November 1, 1986 to April 1, 1989; Executive Vice President prior to November 1, 1986.

James T. Rhodes (48) President and Chief Executive Officer, April 1, 1989 to date; Senior Vice President-Finance, January 1, 1988 to April 1, 1989; Senior Vice President-Power Operations, May 1, 1985 to January 1, 1988; Vice President-Personnel prior to May 1, 1985.

57

1

.I'

i Name and Age Business Experience Past Five Years John I. Oatts (60)* Executhe Vice President-Staff, January 1, 1986 to January 1, 1990; Executive Vice President-Operations, May 1, 1985 to January 1, 1986; Senior Vice President-Power Operations prior to May 1, 1985.

John A. Ahladas (47) Senior Vice President-Corporate Services, January 1, 1990 to date; Senior Vice President-Corporate Technical Services, April 1, 1988 to January 1, 1990; Vice President-Engineering, April 1, 1985 to April 1, 1988; Manager, Maintenance and Performance Services prior to April 1, 1985.

Larry W. Ell is (49) Senior Vice President-Power Operations and Planning, January 1, 1990 to date; Vice President-System Planning &Power Supply, March 18, 1988 to January 1, 1990; Manager, System Planning &Power Supply, October 1, 1986 to March 18, 1988; Manager, Power Supply prior to October 1, 1986.

Robert F. Hill (54) Senior Vice President~Commercial Operations.

B. D. Johnson (57) Senior Vice President-Finance &Controller, January 1, 1990 to date; Vice President and*Controller prior to Ja~uary 1, 1990.

William L. Stewart (46) Senior Vice President-Nuclear, January 1, 1990 to date; Senior Vice President-Power, April 1, 1988 to

January 1, 1990; Vice President-Nuclear Operations prior to April 1, 1988.

William H. Blackwell, Jr. (60)* Vice President-Eastern Division.

Charles A. Brown (47) Vice President-Procurement, September 1, 1988 to

date; M.anager, Materials Management, May 1, 1988 to September*!, 1988; Manager, Contracts,

prior to May 1, 1988.

William R. Cartwright (47) Vice President-Fossil and Hydro Operations, January 1, 1990 to date; Vice President-Nuclear Operations,

September 1, 1988to January 1, 1990;-Vice President-Fossil and Hydro, March 1, 1986 to September 1, 1988; Manager, Maintenance and Performance Services, June 1, 1985 to March 1, 1986; Manager, Nuclear

Operations Support prior to June 1, 1985.

58

Name and Age Thomas L. Caviness, Jr. (44)

Business Experjence Past Five Years Vice President-Eastern Division, November 1, 1989 to date; Executive Project Director, November 1, 1988 to November 1, 1989; Manager, Productivity prior to November 1, 1988.

James T. Earwood, Jr. (46)* ** Vice President-Division Services, September 1, 1986 to date; Vice President-Central Division, July 1, 1985 to September 1, 1986; Vice President-Southern Division prior to July 1, 1985.

Paul G. Edwards (51) Vice President-Public Affairs.

James R. Frazier, Jr. (48) . Vice President-Southern Division, July*l, 1985 to date; Manager, Community and Government Affairs prior to July 1, 1985.

Earl R. Gore (49) Vice President-Northern Division, September 1, 1988 to date; Manager, Operations and Construction, January 1, 1986 to September 1, 1988; District Manager (Metro) prior to

January 1, 1986.

E. Wayne Harrell (43) Vice President-Nuclear Operations, January 1, 1990 to date; Vice President-Fossil &Hydro Operations, September 1, 1988 to January 1, 1990; Manager, Fossil &Hydro Operation Support, April 1, 1988 to September 1, 1988; Station Manager, Nuclear prior to April 1, 1988.

Horace A. Keever, Jr. (58) . Vice President-Human Resources, September 1, 1986 to date; Vice President-Division Services prior to September 1, 1986.

Donald T. Herrick, Jr. (46) Transferred to Dominion Resources as Vite President, January 1, 1990 to date; Vice President-Information Systems, April 1, 1985 to January 1, 1990; Executive Manager, Management Information Services prfor to April 1, 1985 *.

Randolph D~ Mciver (59) Vice President-Central Division, September 1, 1988 to date; Vice President-Northern Division, prior to September 1, 1988.

F. Kenneth Moore (48) Vice President-Power Engineering Services, March 18, 1988 to date; Manager, Purchasing, May 1, 1985 to March 18, 1988; Manager, Projects-Fossil

&Hydro prior to May 1, 1985.

59

Name and Age

Business Experience Past Fjve Years Irene M. Moszer (46) Vice President, Treasurer **and Corporate Secretary,.

Janu~ry 1, 1990 to date; Vice President-Administrative Services prior to January 1, 1990.

James P. O'Hanlon (46) Vice President-Nuclear Services, June 15, 1989 to date; Vice President, United Energy Services Corporation, February 1, 1985 to June 15, 1989; Division Deputy Director, Institute of Nuclear Power Operations prior to February 1, 1985.

Thomas J. O'Neil (47)

Vice President-Regulation, August 1, 1988 to date; Vice President-Western Division, May 1, 1985

., to August 1, 1988; District Manager, Peninsula prior to May.l,.*=1985. ._;~'.**** ,

Robert E. Rigsby (40) Vice President~Information Systems, January 1, 1990 to date; Vice President-Western Division, August 1, 1988 to January.I, 1990; General Auditor, July 19; 1985 to August 1, 1988; Assistant Controller prior to July 19, 1985.

Linwood R. Robertson (50) Transferred to Dominion Resources as Vice President

. *and Treasurer, January 1, 1990 to date; Vice 1,JL President, Treasurer and Corporate Secretary,. June 1, 1985 to January 1, 1990; Corporate Secretary

prior to June 1, 1985.

Johnny V~ Shenal (44) . Vice President~Western Division, January 1, 1990 to date; Manager, Transmission and Substation Engineering, August 1, 1988 to January 1, 1990; Di strict Manager, Alexandria, January 1, 1986 to

August 1, 1988; Manager, Operations and Construction prior to January 1, 1986.

Eva S. Teig (45) Vice President-Government'Affairs, January 1, 1990 to date; Secretary of Health and Human Resources, Commonwealth of Virginia, Janu~ry 11, 1986 to January 1, 1990; Division Manager, Community and Government Affairs, October 1, 1985 to January 11, 1986; Commissioner of Labor and Industry Commonwealth of Virginia prior .to. October 1, .* 1985.

Jack L. Wilson (59) Assistant Vice President-Nuclear, April 21, 1989 to

~ate; Manager, Nuclear Operations Support, April 1, 1985 to Aprtl 21, 1989; Manager, Forecasting Analysis prior to April 1, 1985.

Retired January 1, 1990 60

There is no family relationship between any of the persons named in response to Item 10.

. ITEM 11. EXECUTIVE COMPENSATION The following table lists all cash compensation paid by the Company for services rendered in 1989 to each of the five most highly compensated executive officers and to all executive officers as a group.

Cash Name and Capacitv jn Which Served Compensation William W. Berry, Chairman of the Board and Director **.**..*.* $ 270,840 James T. Rhodes, President and Chief Executive Officer and o;rector ................................................... . 218,120

.John I. Catts, Executive Vice President* **.**********.**..**** 285,976 Robert F. Hill, Senior Vice President **.***.*..**** ~********** 194,587 B. D. Johnson, Senior Vice President ....**.....******.*..**.*. 166,753 Executive officers of the Company as a group 29 persons (inc 1ud i ng those n.amed above) ........ . 3,861,675

Retired January 1, 1990 Certain executive officers of the Company are eligible to participate in one of two annual incentive plans. The Virginia Power Management Incentive Plan (the Management Incentive Plan) has been in effect since 1981 and provides incentive compensation for designated executives and employees of the Company.

The Dominion Resources, Inc. Short-Term Incentive Plan (the Dominion Resources Incentive Plan) provides incentive compensation for designated executives of the Company who are employees of Dominion Resources, including Mr. Berry. The Company's Board 9f Directors' Organization and Compensation Committee administers and establishes the rules of eligibility, participants' goals and actual awards for the Management Incentive Plan. The Dominion Resources' Board of Directors' Organization and Compensation Committee performs the same administrative function for the Dominion Resources Incentive Plan.

Under both incentive plans, annual awards to participants are based on the achievement of individual and corporate performance goals that are adopted annually. **The individual component of each incentive plan is based on the achievement of individual management goals. To the extent that awards paid by the Dominion Resources Incentive Plan are for the achievement of corporate performance goals related to the Company, that portion of the award is paid by the Company.

The 1989 Management Incentive Plan provided for incentive compensation based on (1) individual management goals, (2) achieving a stated return on equity and (3). a comparison of the annual change in expenses per kilowatt-hour to the annual change in the Consumer Price Index. For executives of the Company, the 1989 Dominion Resources Incentive Plan included return on equity objectives for the Company. Payments under the 1989 Management Incentive Plan will be made in March 1990 to the executive officers of the Company, except for Mr. Berry, who received a payment under the 1989 Dominion Resources Incentive Plan in February 1990.

These payments are inc 1udes in the cash compensation tab 1e above. Amounts earned 61

for the year 1988 under the Management Incentive Plan were paid in March 1989 and were reported in the 1988 Form 10-K and are not included in the above compensation table.

A Performance Achievement Pl an (the Performance Pl an) was established effective January 1, 1985, and was approved by the Dominion Resources Stockholders.at the 1985 Annual Meeting. The Perfomance Plan awards shares of Dominion Resources Common Stock for the achievement of specific long-term goals and strategies that are approved by the Organization and Compensation Committee (the Committee) of the Board of Directors of the Company. Distributions of stock under the Performance Plan may not exceed 10,000 shares times the number of participants in the Performance Plan on the relevant date. The duration of each performance period is three years, and a new performance period and set of goals are initiated annually. Participants in the Performance Plans for the periods of 1987-89, 1988-90 and 1989-91 include the President and all Vice Presidents of the Company and do not include the Chairman or Vice Chairman of the Board of Directors.* -Subject to the Committee's approval and within certain time periods established in the Performance Plan, each participant may elect to receive up to 50 percent of any award in cash and to defer all or part of any award. To be eligible for an award, an employee must occupy a qualifying position for an entire performance cycle. Individual awards will be determined on the basis of goal achievement, positions held during the performance period, the salary grade mid-points of tho*se positions and the average price of .the Common Stock on the last day of September, October and November of the year before the start of the performance cycle. Following the conclusion of each performance period, the Committee determines the level of achievement of the goals for that performance period. The Board of Directors must approve each participant's award, and may approve pro rata awards to participants who retire, die, become disabled, or transfer during a performance cycle and Dominion Resources' Board of Directors must approve any award for any participant who is also an officer or director.

of Dominion Resources. In the 1987-1989 Performance Plan cycle, the following executive officers of Dominion Resources were executive officers of the Company

.and will receive pro rata awards: Tyndall L. Baucom, who was Vice President of the Company prior to his election as an executive officer of Dominion Resources in September 1988; Jack H. Ferguson, who was President of the Company prior to his retirement on March 31, 1989; and Ronald H. Leasburg, who was Senior Vice President of the Company until his election as an executive officer of Dominion Resources in April 1988 and who retired from Dominion Resources on October 1, 1989.

Awards for the 1987-89 performance period were made in February 1990 and were based on (1) the performance of Virginia Power's return on equity over the three-year period as compared to the average for comparable electric utilities, and (2) a comparison between the increase in expenses per kilowatt-hour and the increase in the Consumer Price Index over the three-year period. The following awards of Dominion Resources Common Stock and cash were made for the 1987-89 performance period: James T. Rhodes: 358 shares and $6,962; John I. Oatts:

527 shares; Robert F. Hill: 198 shares and $9,009; and B. D. Johnson: 278 shares; and 4,210 shares and $81,673 for the 23 participating executive officers as a group.

No awards can be determined or made under the 1988-90 and the 1989-91 62

performance periods of the Performance Pl aris until March 1991 and 1992, respectively. In addition, Messrs. Baucom, Ferguson and Leasburg are eligible

.J *

,t I

.~

l for pro rata awards under the 1988-90 performance cycle, and Mr. Ferguson is also eligible for a pro rata award under the 1989-91 performance cycle .

. An Employee Savings Plan (the Savings Plan) has been in effect since 1963 and. was .revised effective July 1, 1987 to incorporate a salary reduction provision under Section 40l(k) of the Internal Revenue Code of 1986 (the Code) for officers-and employees. Effective January 1, 1989, this plan was amended by separating it into a savings plan for-salaried employees and a savjngs plan for nonsalaried employees. The two plans are identical-in all material respects.

Under the Savings Plan, employees who have at:tained age 18 and completed six months of service may make contributions of between 2 percent and 6 percent of their base compensation, and the Company contribute_s* an amount .equal to 50 percent of such contributions. Employees may also make additional contributions, which are not matched by their employer. (In accordance with Section 40l(k) of the Code, the Savings Plan provides participants with the option to reduce their gross income for federal income tax purposes and the Company contributes that amount to the* Savings Plan on behalf of the employee.) Participants' contributions and deferrals under Section 40l(k) are subject to certain limitations prescribed in the Code. The compensation table above includes amounts deferred pursuant to Section 40I(k). The employees may direct that their contributions be allocated between an interest bearing fund, which invests primarily in U.S. Government securities, and a stock fund, which invests -in Dominion Resources Common Stock. All of the Company's matching contributions to the Savings Plan are invested in Dominion Resources Common Stock. Effective January 1, 1989, the Savings Plan was amended to provide for the vesting of the Company's matching contributions at the earlier of (a) the beginning of the third year following the year in which the contribution was made and (b) the date the participant completes five years of service with the Company. However, matching contributions vest immediately for participants aged 55 or older. Amounts shown in the Cash Compensation table above do not include any Company matching contributions. The following Company matching contributions vested under the Savings Plan during 1989: William W. Berry: 525 shares; James T. Rhodes: 25 shares; John I. Oatts: 387 shares; Robert F. Hill: 332 shares; B. D. Johnson:

291 shares; and 5,964 shares to the 29.executive officers as a group.

The Retirement Plan provides retirement benefits for all eligible officers and employees of Virginia Power who have attained age 21 and completed six months of service. The Retirement Pl an is a contributory defined benefit pl an that provides for vesting of retirement benefits upon completion of five years of vesting service or, if earlier, upon attainment of age 50. Employer contributions to the Retirement Plan are determined actuarially. Benefits under the Retirement Plan, as of December 31, 1989, are based on (i) average base compensation over the consecutive 60-month period in which pay is highest, (ii) years of credited service, (iii) age at retirement, and (iv) the offset of Social Securjty Benefits. For years beginning in 1989, no compensation in excess of

$200,000 may ~e taken into account under the Plan. Benefits under the Retirement Plan are payable as a straight life benefit or a joint and survivor benefit.,

. Due to changes in the Internal Revenue Code that apply to the Retirement Plan, the benefit formula must be changed for 1989 and future years. Benefit accruals under the Retirement Plan's present benefit formula have ceased as of December 63

~ -..

'J 31~ 1988, for certain highly compensated employees of -the Company. Benefits will accrue for these individuals under the new formula retroactive to January 1, 1989.

The table below sets forth the estimated annual straight life benefit that would be paid following retirement under the Retirement Plan's benefit formula.

Certain officers have entered into retirement agreements that give additional credited years of service for retirement and retirement life insurance purposes, contingent upon the officer reaching a specified age and remaining in the employ of the Company. At this time, credited years of service under the Retirement Plan and such retirement agreements (excluding contingent years) for the individuals named in the compensation table on page 61 are as follows: William W. Berry: 30, James T. Rhodes: 18; John I. Oatts: 30; Robert F. Hill: 18; and B. D. Johnson: 30. Estimated annual benefit figures are based on the formulas in effect under the Retirement Plan as of December 31, 1988.

Estimated Annual Benefits Payable Upon Retirement*

Credited Years of Service Final Average Earnings** ll 20 ll ~

$ 75,000 $18,990 $ 25,320 $ 31,650 $ 37,980 100,000

26,490 35,320 44,150 52,980 125,000

33,990 45,320 * - 56,650 67,980 150,000 41,490. 55,320 69,150 82,980 175,000 48,990 65,320 * -81,.650 97,980 200,000 56,490

75,320 94,150 112,980 250,000 71,490 95,320 119,150 142,980 300,000 86,490 115,320 144,150 172,980 .

350,000

101,490 135,320 169,150' 202,980 400,000 116,490 * , 1ss*,320

194,150 232,980 450,000 131,490 175~320 219., 150 262,980 500,000 146,490 195*,320 244,150 292,980 550,000 161,490 215,320 269,150 322,980 600,000 176,490 235,320 294,150 352,980

Based on normal retirement at age 65.

- Final Average Earnings is one-fifth of the earnings during the 60 consecutive calendar months during which the individual's earnings are the highest.

For purposes of the above table, based on 1989 compensation, final average earnings for each of the individuals named in the compensation table on page 61 would be as follows: William W. Berry: $330,029; James T. Rhodes: $147,388; John I. Oatts: $185,053; *Robert *F .. Hill: $161,495; .and B. -0. Johnson: $141,800.

The Internal Revenue Code limits the annual retirement benefit that may be paid from a qualified retirement plan. To the extent that benefits determined 64

under the Retirement Plan's benefit formula exceed the limitations imposed by the Internal Revenue Code, they will be paid from general funds as an operating

~.'

~

1' .*

expense.

The Company also provides an Executive Supplemental Retirement Plan (the Supplemental Plan) to its elected officers designated to participate by the Board of Directors. The Supplemental Plan provides an annual retirement benefit equal to 25 percent of a participant's final compensation (base pay plus annual incentive plan payments and Directors' fees). The normal form of benefit is payable in equal monthly installments for 120 months to a participant with 60 months of service, who ( i) retires at or after age 55 from the employ of the Company, (ii) has become permanently disabled, or (iii) di es. In case of a participant who dies while employed, the normal form of benefit will be paid to a designated beneficiary. If a participant dies while retired, but before receiving all benefit payments, the remaining installments will be paid to a designated beneficiary. In order to be entitled to benefits under the Supplemental Plan, an employee must be employed as an elected officer of the Company until death, disability or retirement.

Based on 1989 compensation, the increase to the estimated annual benefit figures for each of the executive officers under the Supplemental Plan would be as follows: William W. Berry: $146,705; James T. Rhodes: $68,575; John I. Oatts:

$69,965; Robert F. Hill*: $48,105; and B. D. Johnson: $46,270.

The Company has purchased an insurance pol icy that provides certain managers and all elected officers with accidental death and dismemberment insurance. The pol icy provides a benefit to managers and officers ranging from $25,000 to

$250,000, with the specific dollar amount-of coverage being determined on the basis of the covered employee's position. The policy also provides accidental death and dismemberment insurance to the spouses of all officers who are Vice Presidents or higher in rank, and the benefit ranges from $50,000 to $150,000 (depending on the officer's position). This insurance coverage is provided at no cost to covered employees.

The Company .has entered into employment agreements (the Agreements) with key *management executives, including the officers named above. Each agreement has a three-year term and thereafter is automatically extended on its anniversary date for an additional year unless notified that the agreement will not be extended by the Company. If, following a change in control of Dominion Resources (as defined in the Agreements), an executive's employment is terminated by the Company without cause, or voluntarily by the executive within sixty days after a material reduction in

the executive's compensation, benefits or responsibilities, the Company will be obligated to pay to the executive continued compensation equaling the average base salary and cash incentive bonuses for the thirty-six full month period of employment preceding the change in control or employment termination. In addition, the terminated executive will continue to be entitled to any benefits due under any stock or benefit pl ans. The Agreements do not alter the compensation and benefits available to an executive whose employment with the Company continues for the full term of the executive's Agreement. The amount of benefits provided under each executive's Agreement wi 11 be reduced by any compensation earned by the executive from comparable employment by another employer during the thirty-six months following termination of 65

employment with the Company. An executive shall not be entitled to the above benefits in the event termination is for cause.

The Company has transferred cash, and in its discretion may make future transfers of cash or other property, to an irrevocable trust. The assets of the trust must be used to satisfy employee benefit and similar obligations to employees and former employees of the Company, including the obligations described above for executive employees.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The table below sets forth as of December 31, 1989, except as noted, the number of shares of Convnon Stock of Dominion Resources owned by directors of Virginia Electric and Power Company.

Shares of Connon Stock Beneficially Owned William W. Berry ..**...*.*......... 17,868(a)

Thos. E. Capps .......**.....***..*. 9,336(b)

James T. Rhodes . *...........*.*.*** l,222(c)

John B. Adams, Jr *..............*** 465 Anna Ruth Inskeep ...............*** 1,888 A11 i X BO James . ..**..**. e * * * * * ** * * *

2,648 Harvey L Lindsay, Jr ...*.*... -.*.*. 0 Shirley S. Pierce ....***..........* 2,014 Wi 11 i am T. Roos . .*....* ~ **...* : .*** '310 Will i am G. Thomas .*.....**..*....**

0 (a)A member of Mr. Berry's family is a beneficiary of a trust that owns an additional 827 shares of Common Stock. Also includes 2,580 shares represented by options awarded and exercisable under the Dominion Resources, Inc. Long-Term Incentive Plan.

(b)A member of Mr. Capp's family is a beneficiary of a trust that owns an additional 1,000 shares of Convnon Stock. Also includes 1,575 shares represented by options award~d and exercisable under the Dominion Resources, Inc. Long-Term Incentive Plan.

(c)Ownership as of February 16, 1990.

All current Directors and officers as a group (29 persons) beneficially own, in the aggregate, less than 1 percent of each class of Dominion Resources and the Company's equity securities, respectively.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 66

PART IV

'Yj.

i: 1 I

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following docu*ments are filed as part of this Form 10-K:

1. Financial Statements See Index on page 22.

2. Financial Statement Schedules See .Index on page 22.

3. Exhibits 3(i) -Restated Articles of Incorporation, as amended, as in effect on June 16, 1989 (Exhibit 3(i), Form 10-Q for the quarter ended September 30, 1989, File No. 1-2255, incorporated by reference).

3(ii) -Bylaws,. as amended, as in effect on April 1, 1989 (Exhibit 3(i),

Form 10-Q for quarter year ended March 31, 1989, File No. 1-2255, incorporated by reference).

4(i) -See Exhibit (3(i)) above.

4 (ii) -Indenture of Mortgage of the Company, dated November 1, 1935, as supplemented and modified by fifty-eight Supplemental Indentures,

Exhibit 4(ii), Form 10-K for the fiscal year ended December 31, 1985, File No. 1-2255, incorporated by reference; Fifty-Ninth Supplemental Indenture, Exhibit 4(ii), Form 10-Q for the quarter ended March*31, 1986, File No. 1-2255, incorporated by reference; Sixtieth Supplemental Indenture, Exhibit 4(ii), Form 10-Q for the quarter ended September 30, 1986, File No. 1-2255, incorporated by reference; Sixty-First Supplemental Indenture, Exhibit 4(ii), Form 10-Q for the quarter ended June 30, 1987, File No.

1-2255, incorporated by reference; Sixty-Second Supplemental Indenture, Exhibit 4(ii), Form 8-K, dated November 3, 1987, File No. 1-2255, incorporated by reference; Sixty-Third Supplemental Indenture, Exhibit 4(i), Form 8-K, dated June 8, 1988, File No.

1-2255, incorporated by reference; *Sixty-Fourth Supplemental Indenture, Exhibit 4(i), Form 8-K, dated February 8, 1989, File No. 1-2255, incorporated by reference and Sixty-Fifth Supplemental Indenture, Exhibit 4(1), Form 8-K, dated June 22, 1989, File No.

1-2255, incorporated by reference.

4(iii) -Indenture, dated April 1, 1985,* between Virginia Electric and Power Company and Crestar Bank (formerly United Virginia Bank)

(Exhibit 4(i), File No. 2-96772, incorporated by reference).

4(iv) -Indenture dated as of June 1, 1986, between Virginia Electric and Power Company and Chemical Bank (Exhibit 4(i), File No. 33-5763, incorporated by reference).

67

4(v)

-Indenture, dated April 1, 1988, between Virginia Electric and Power Company and Chemical Bank (Exhibit 4(1), File No. 33-21319, incorporated by reference) as supplemented and modified by a First Supplemental Indenture, dated August, 1989, (Exhibit 4(ii),

File No. 33-30532, incorporated by reference)

4(vi) . -Virginia Electric and Power Company 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 percent of Vtrginia Electric and Power Company's total assets.

10(1) -Operating Agreement, dated June 17, 1981, between Virginia Electric and Power Company and Monongahela Power Company, The Potomac Edison Company, West Penn Power Company and Allegheny Generating Company (Exhibit lO(vi), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-2255, incorporated by reference).

lO(ii) -Purchase, Construction and Ownership 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 lO(viii), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-2255; incorporated by reference).

JO(iii) -Interconnection and Operating Agreement, dated as of December 28, 1982 as amended and restated on October 17, 1983, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit lO(ix), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-2255, incorporated by reference).

. lO(iv) -Nuclear Fuel Agreement, dated as of December 28, 1982 as amended and re$tated on October 17, 1983, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit lO(x), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-2255, incorporated by reference).

lO(v) -Heat Supply Contract; dated.as of October 14, 1987, between Virginia Electric and Power Company and Virginia Power Fuel Corporation (Exhibit lO(v), Form 10-K for the fiscal year ended December 31, 1987, File No. 1-2255, incorporated by reference).

lO(vi) -Credit Agreement,*dated as of October 14, 1987, among Virginia Power Fuel Corporat i.on, .Al gemene Bank Nederland N. V., New York Branch, as Facility Agent, and the Banks named therein (Exhibit lO(vi), Form 10-K for the fiscal year ended December 31, 1987, File No. 1-2255, incorporated _by reference).

lO(vii) -Guarantee, dated as of Octobe.r 14, 1987, by Virginia Electric and Power Company in favor of Algemene Bank Nederland N.V., as Facility Agency,* and the Banks named therein (Exhibit *1o(vii),

Form 10-K for the fiscal year ended December 31, 1987, File No.

1-2255, . incorporated by reference). .

lO(viii) -Inter-Company Credit Agreement, dated July 1, 1986, as amended

and restated as of September 1, 1987 between Dominion Resources and Virginia Electric and Power Company (Exhibit lO(viii), Form 10-K for the fiscal year ended December 31, 1987, File No. 1-2255, incorporated by reference).

68

lC>(ix)

-Credit Agreement, dated December 1, 1985, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit 10 (xix), Form 10-K for the fiscal year ended December 31, 1985, File No. 1-2255, incorporated by reference).

lO(x) -Agreement for Northern Virginia Services, dated as of November 1, 1985, between Potomac Electric Power Company and Virginia Electric and Power Company (Exhibit lO(xxi), Form 10-K for the fiscal year ended December 31, 1985, File No. 1-2255, incorporated by reference)

22 -Subsidiaries of Virginia Electric and Power Company (not included because Virginia Electric and Power Company's subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a Rsignificant subsidiaryR under Rule l-02(v) of Regulation S-X as of the end of the year covered by this report).

24(i) -Consent of Hunton &Williams (filed herewith).

24(ii) -Consent of Jackson &Kelly (filed herewith).

24(iii) -Consent of Coopers & Lybrand (filed herewith).

24(iv) -Consent of Deloitte &Touche (filed herewith).

(b) Report on Form 8-K None 69

.J

SIGNATURES Pursuant to the requirements of Section 13 or lS(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.

VIRGINIA ELECTRIC AND POWER COMPANY BY ~~~~W...,I....L-=-LI.. _AM"-'--"W. . . """"B,....E..:.:R.....

RY.__~~~

(William W. Berry, Chairman of the Board of Directors)

Date: February 16, 1990 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature Date WILLIAM W. BERRY Chainnan of the Board of Directors February 16, 1990 William W. Berry and Director THOS. E. CAPPS Vice Chainnan of the Board of Directors February 16, 1990

Thos. E. Capps and Director J. T. RHODES President (Chief Executive Officer) February 16, 1990 J. T. Rhodes and Director JOHN B. ADAMS, JR. Director February 16, 1990 John B. Adams, Jr.

ANNA RUTH INSKEEP Director February 16, 1990 Anna Ruth Inskeep ALLIX B. JAMES Director February 16, 1990 Allix B. James HARVEY L. LINDSAY, JR. Director February. 16, 1990 Harvey L. Lindsay, Jr.

SHIRLEY S. PIERCE Director February 16, 1990 Shirley S. Pierce WILLIAM T. ROOS Director February 16, 1990 Wi 11 iam T. Roos WILLIAM G. THOMAS Director February 16, 1990 William G. Thomas B. D. JOHNSON Senior Vice President and Controller February 16, 1990 B. D. Johnson (Principal Accounting Officer)

IRENE M. MOSZER Vice President and Treasurer February 16, 1990 Irene M. Moszer (Chief Financial Officer) 70

"' A (This Page Intentionally Left Blank)

(This Page Intentionally Left Blank)

{ \'.~

VIRGINIA ELECTRIC AND POWER COMPANY STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended December 31, 1989 1988 (OOO's)

Operating Revenues $865,691 $769,162 Operating Expenses:

Operation - Fuel used in electric generation 146,037 -147,347

- Purchased and interchanged power 100,554 . 98,759

- Other 155,521 125,663 Maintenance 59,247 76,546 Depreciation 89,193 76,886 Amortization of abandoned project costs 12,452 15,497 Taxes - Federal income 53,990 24,375

- Other 50,142 44,319 Total 667,136 609,392 Operating Income 198,555 159J70, Other Income:

Allowance for other funds used during construction 701 655 M1scellaneous, net 8,~99 18,540 Income taxes associated with miscellaneous, net 3,957 (9,684)

Total 13,357 9,511 Income Before Interest Charges 211,912 169,281 Interest Charges:

Interest on long-term debt 86,934 79,408 Other 2,210 2,282 Allowance for borrowed funds used during construction (404) 1,018 Total 88,740 82,708 Net Income 123,172 86,573 Preferred Dividends 15,312 14,255 Balance Available for Common Stock $107,860 $ 72,318

VIRGINIA ELECTRIC AND POWER COMPANY 1990 ESTIMATED INTERNAL CASH FLOW (Millions of Dollars)

January April . July October Estimated through through through through* 1990 March June September December Total Cash Receipts $952.6 $815.2 $973.7 $ 889.8 $3,631.3 Less:

Cash for Operations 402.5 414.2 466.5 505.0 1,788.2 Taxes paid 85.1 189.8 99.1 212.4 586.4 Interest paid 80.5 95.7 88.4 127.3 391. 9 Dividends paid

- Preferred Stock 13.9 15.5 13.4 15.1 , 57. 9

- Common Stock 81.4 81.3 82.5 82.9 328.1 Decommissioning Trust 5.5 5.5 5.5 5.5 22.0 Changes in working capital 89.8 {10.5) 6.3 {92.2) {6.6)

Internal cash flow 193.9 23.7 212.0 33.8 463;4 Pl us:

Proceeds from sale of 11.6% of North Anna to Old Dominion Electric Co-op 1.2 1.2 1.2 1.2 4.8 Total Cash Flow(l) $195.1 $ 24.9 $213.2 $ 35.0 $ 468.2 (1) Before financing and construction requirements.

r VIRGINIA ELECTRIC AND POWER COMPANY CERTIFICATE I, the undersigned B. D. Johnson, do hereby certify, pursuant to the guarantee requirements set forth in the Commission's letter dated June 15, 1977, that the cash flow projection for 1990, provided herewith, is based on the best available information and is a reasonably accurate projection of the Company's 1990 cash flow.

Johnson resident-Finance ler Sworn to and subscribed before me this 23 day of March 1990.

My commission expires: 6/30/93 NOTARIAL SEAL

VIRGINIA ELECTRIC & POWER COMPANY STATEMENT The Company currently estimates 1990 construction and nuclear fuel expenditures to be $958 million. In addition, the Company must provide $160 million for debt maturities and mandatory sinking fund payments. The Company expects to raise about $650 million through the sale of securities and through borrowings under its inter-company credit agreement with Dominion Resources. The Company is reasonably assured that, based on the best available cash flow projections which are provided herewith, curtail-ment of capital expenditures for required nuclear programs would not be required to cover the Price-Anderson maximum retrospective premium assessment for a single incident of $264.6 million ($66.15 million for each of the four reactors owned by the Company with assessments not to exceed $10 million per reactor per year) currently in force.

ML18151A494

Text

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