ML18151A377

Conveys Use of Financial Test Contained in App a to 10CFR30 to Support VEPCO Demonstration of Financial Assurance as Specified in 10CFR50.75

ML18151A377
Person / Time
Site:	Surry, North Anna
Issue date:	11/23/1998
From:	Roach E External (Affiliation Not Assigned)
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
Shared Package
ML18151A378	List: ML18151A377 ML18152B700
References
NUDOCS 9812010119
Download: ML18151A377 (70)

Text

Dominion Resources, Inc .

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

• ~

Post Office Box 26532 Richmond, Virginia 23261 nesources EDGAR M. ROACH, JR.

Executive Vice President and Chief Financial Officer November 23, 1998 U.S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, D.C. 20555 RE: VIRGINIA ELECTRIC AND POWER COMPANY Surry Power Station Units 1 and 2 North Anna Power Station Units 1 and 2 Decommissioning Financial Assurance Certification Madam/Sir:

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

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

Facility Name Location License No. 1998 Assurance Amount Surry Unit 1 Surry, VA DPR-32 $ 30,905,946 Surry Unit 2 Surry, VA DPR-37 30,511,601 North Anna Unit 1 t Louisa, VA NPF-4 14,607,057 North Anna Unit 2 t Louisa, VA NPF-7 14,716,738

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

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

c*. 2 :*.~: c: /: .:

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

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

Total Assets $20,192.7

-OlO ll9

LESS: Intangible Assets

• 2,971.1 Nuclear Plant 1,773.0 Nuclear Decommissioning Trusts 569.1 Total Liabilities 13,675.3 Tangible Net Worth $ 1,204.2 C. Total assets located in United States: $14.9 billion FINANCIAL TESTS YES NO

1. Is line Bat least $10 million? 0 D

2. Is line Bat least 6 times the guarantee amount of $91 million? 0 D

3. a. Are at least 90 percent of the firm's assets located in the U.S.? D 0 or

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

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

b. Are bond ratings Baa or above as issued by Moody's? D I hereby certify that the content of this letter is true and correct to the best of my knowledge.

Sincerely, tlgQJ I"'. ~

Edgar M. Roach, Jr.

c---/

Executive Vice President and Chief Financial Officer Enclosure 2

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

• Form 10-K

• "(Mark One)

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997

. or

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR. 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 . .

For the transition period from to _____

Commission file number 1-8489 .

Dominion Resources, Inc . .

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

VIRGINIA* 54-1229715'

.t*, * (State or other jurisdiction of (IRS employer identification no.)

incorporation or organization) 901 East Byrd Street Suite 1700.

Richmond, Virginia

• 23219a6111 (Add;ess of principal executive offices) (Zip Code).

(804) 775-5700

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

)1

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

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

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

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

' arid will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendmentto this Form 10-K. [. l

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

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

Class Outstanding at February 28, 1998

• Common-*Stock, no par value . 194,805,099

. DOCUMENTS INCORPORATED BY

REFERENCE:

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

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

.e DOMINION RESOURCES, INC.

Item Page Number Number PART I

1. Business The Company ........................................................................................................... . 1 Dominion Capital ........................... :.; ....................................................................... . 1 Dominion Energy ...................................... , ..............................................................* 1 East Midlands ..._......................_. ................................................................................. . 1 Distribution Business .......................... : .................................................................. . 2 Supply Business .......................................... : .. : ..................................................... . 3 Competition ............................... , ...... *.................... '. ...................... , ....................... . 3 Environmental Regulation .......... : ................. : ............._. ........................................... . 4 Virginia Power. ......................................................................................................... . 4 Competition and Strategic Initiatives ........................................................................ , 4.

Regulation .................................... .-: .................... .-;._. ....... _..................... : ................ . .5 Rates .................... ; ................................. : ................................................. : ......... . 7 Sources of Power. .................................. *... '. ...................... *..................................... . 10 Interconnections ........... , ........................................................................................ . 12 Capital Requirements and Financing Program *******************************,******:************************** 14

2. Properties ........*............................................................................ *............................... . 14

3. Legal Proceedings ....................................................................................................... . 14

4. Submission of Matters to a Vote of Security Holders ..................................... , .................. . 14 Executive Officers of the Registrant ............................................................ :, ................. . 14 PART II

5. Market for the Registrant's Common Equity _and Related Stockholder Matters ...................... . 15

6. Selected Financial Data ........................... *.....*. :.:...... ;, ............. ; ...................................... . 15

7. Management's Discussion and-Analysis of Financial Condition and Results of Operations ...... . 16 7A. Quantitative and Qualitative. Disclosures About Market Risk .............................................. . 16

8. Financial Statements and Supplementary Data.: .... '.:: ................................ '.:~ ...................... . 16

9. Changes in ancl Disagreements with_ Accountants on Accounting and Financial Disclosui:e_ ...... . 16 PART III

10. Directors and Executive Officers *of the Registrant ............ :: ... '. ... , ....................................... . 16

11. Executive Compensation .......... : ....................... , .............................. .-............................. . 16

12. Security Ownership_ of Certa~~ Beneficial Owners .and Management.. .... , ............................ :. 16 13.: Certain* Relationships and Related Transactions

. i6' PART IV

14. . Exhibits, Finai;icial Statement Schedules, and Reports on Form 8-K. .............. :...................... 17

e PART I ITEM 1. BUSINESS THE COMPANY bominion Resources, Inc. (Dominion Resources), organized in 1983, has its principal office at 901 East Byrd Street, Richmond, Virginia 23219-4072, telephone (804) 775-5700. The principal assets of Dominion Resources are its investments in its subsidiaries.

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

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

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

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

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

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

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

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

East Midlands' Franchise Area (or service area) has a resident population of over five million and covers approximately 6,200 square miles extending from Coventry to the Lincolnshire coast and from Milton Keynes to Chesterfield of which the southernmost part is less than 60 miles from London

• Dominion UK, through wholly-owned subsidiaries, holds an 80% interest in Corby Power Limited (Corby), a 350 MW gas-fired power station. Corby was commissioned in 1994 and is one of the earliest UK independent power *ge_neration projects in the deregulated UK.

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

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

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

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

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

East Midlands' di.stribution facilities also include approximately:

• Number Transformers:

132 kv/lower voltages ............................ ~ .............. : ... , ... . 183 33 kv/11 kv or 6/6 kv ..................................................... . 675 II kv or 6.6 kv/lower voltages (including 22,165 pole moun.ted transformers) ................................................ . 37,913 Substations:

132 kv/33 kv .. : ............................................................ . 85 33 kv/11 kv or 6.6 kv ..... *................................................ . 368 11 kv or 6.6 kv/415 v or 240 v ........................................ . 15,689 Substantially all substations are owned and the balance are leased under arrangements which will not expire for 10 years.*

2

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

Franchise Supply Market

• • East Midlands *holds a PES License under which it currently has the exclusive right to supply electricity to Fran-chise Supply Customers, who have a peak demand of less than lOOkW, within its Franchise Area. At_ the time that the electricity industry was privatized, "Franchise Supply Customers" included all customers whose supply peak demand was less than lMW. The lMW threshold was reduced to 100 kW on April 1, 1994. The exclusive right to.supply Fran-chise Supply Customers is .currently scheduled to be phased in over a 6 month period beginning June 1998 and end-

• ing in December .1998. On completion of this phase-in period,, there will be no Franchise Supply*Customers and all supply customers ,will have the abilit)'. to choose their electricity supplier. Supply prices of electricity from Franchise Supply Customers.are based on the Supply Price Control Formula, whereby certain limits are placed on East Midlands as to the prices it can charge customers for the supply of electricity.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3

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

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

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

Environmental Regulation

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

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

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

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

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

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

• Nuclear Services - offering management and operations services to other electri.c utilities;

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

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

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

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

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

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

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

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

• Regulation .

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

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

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

Both federal and state legislative bodies have been studying competition and restructuring in the electric utility industry. See Future Issues - Competition - Legislative Initiatives section of MD&A on page 27 of the 1997 Annual

.. Report to Shareholders.

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

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

.

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

In December .1995, Virginia Power applied to_the Virginia Commission for approval of arrangements with Chesa-peake Paper Products Company (CPPC), under which Virginia Power w*ould facilitate the design, construction *and financing of a cogeneration plant to meet CPPC's energy requirements for its industrial processes at its plant in West Point, Virginia. On August 13, 1_997, the Virginia Commission approved, in substantial part, the proposed transactions 5

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

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

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

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

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

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

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

~~ .

For addi.tional discussion of open access issues see Future Issues - Competition under MD&A on pages 26 through 28 of the 1997 Annual Report to Shareholders.

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

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

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

Permits under the Clean Water Act and state laws have been issued for all of Virginia Power's steam generating stations now in operation. These permits are subject to reissuance and continuing review. The Clean Air Act, as amended in 1990, requires Virginia Power to reduce its *emissions of sulfur dioxide (S0 2) and nitrogen oxides (NOx). Beginning in 1995, the S02 reduction program is based on the issuance of a limited number of S02 emission allowances, each of 6

e gram is administered by the EPA.

which may be used as a permit to emit one ton of S02 into the atmosphere or may be sold to someone else. The pro-For additional information on Environmental Matters and related issues see Future Issues -

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

Environmental Mat-Nuclear All aspects of the operation and maintenance of Virginia Power's nuclear power stations are *regulated by the NRC.

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

From time to time, the NRC adopts new requirements for the operation and maintenance' of nuclear facilities. In many cases, these new regulations require changes in the design, operation and maintenance of existing nuclear facili-ties. If the NRC adopts such requirements in the future, it could result in substantial increases in* the cost of operating and maintaining Virginia Power's nuclear generating units.

In July 1995, the Virginia Commission instituted an investigation regarding spent nuclear fuel disposal. As directed, Virginia Power and others filed comments on legal and public policy issues* related to spent nuclear fuel storage and disposal. In February 1996, the Commission Staff filed its Report recommending that adoption of a definitive policy on spent nuclear fuel disposal issues be delayed pending the outcome of litigation against the Department of Energy con-cerning spent nuclear fuel acceptance, the outcome of proposed federal legislation concerning development of an interim storage facility, and development of a vision of the likely outcome of the electric utility industry's restructuring efforts.

The Virginia Commission consolidated the proceeding with Virginia Power's pending fuel cost recovery proceeding in October 1996. On March 20, 1?97, the Virginia Commission returned the spent nuclear fuel. disposal issue to a sepa-rate proceeding.

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

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

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

1997 Percent Percent of , of Revenues Kwh Sales Virginia retail:

Non-Governmental customers ................... . Virginia Commission 81% 76%

Governmental customers .......................... . Negotiated Agreements 10 12 North Carolina retail .................................. . North Carolina Commission 5 5

'l' Wholesale -Sales for Resale* ........ ; ........... . FERC 4 7 JOO% 100%

• Excludes wholesale power marketing sales subject to FERC regulation.

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

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

7

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

In compliance with FERC's Order No. 889, on January 3, 1997, Virginia Power filed its Procedures For Standards of Conduct for Unbundled Transmissions and Wholesale Merchant Function (Standards of Conduct) effective on that date. On July 1, 1997, Virginia Power filed an amendment to the Standards of Conduct in Compliance with FERC's Order No. 889-A. On July 16, 1997, Virginia Power filed another amendment in response to a FERC Staff request. Vir-ginia Power. is awaiting FERC action on the filing.

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

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

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

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

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

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

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

8

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

On October 31, 1997, Virginia Power filed with the Virginia Commission its application for a reduction of $45.6 mil-lion in its fuel cost recovery factor for the period December l, 1997 through November 30, 1998. The reduction became effective on an interim basis on December 1, 1997. Subsequently, as a result *of amendments to two non-utility power purchase contracts, the Company proposed two additional reductions of approximately $30.2 million and $18 million for the same period, bringing the total proposed fuel factor reduction to $93.8 million. Both additional reductions were approved on an interim basis, effective March 1, 1998. A hearing is scheduled for April 9, 1998:

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

9

Sources Of Power Virginia Power Generating Units

- Years e

Type

,of Summer Capability Name of Station, Units and Location Installed Fuel MW Nuclear:

Surry Units 1 & 2, Surry, Va .......................................... . 1972-73 Nuclear

• 1,602 North Anna Units 1 & 2, Mineral, Va .............................. . 1978-80 Nuclear 1,790(a)

Total nuclear stations ........... , .................................... .. 3,392 Fossil Fuel:

Steam:

Bremo Units 3 & 4, Bremo Bluff, Va......................... .. 1950-58 Coal 227 Chesterfield Units 3-6, Chester, Va. .. .......................... . 1952-69 Coal 1,250 Clover Units 1 & 2, Clover, Va................................. .. 1995-96 Coal 882(b) *,

Mt. Storm Units 1-3, Mt. Storm, W. Va......... : .... : ....... .. 1965-73 Coal

• 1,587 Chesapeake Units 1-4, Chesapeake, Va. .. ........ ;............ . 1953-62 Coal 595 Possum Point Units 3 & 4, Dumfries, Va................ , ..... . 1955-62 Coal 322 Yorktown Units 1 & 2; Yorktown, Va ......................... .. 1957-59 Coal 326 Possum Point Units 1, 2, & 5, Dumfries;.Va ........ : ...... '. .. 1948-75 Oil .-~ . '*. \ '.

929 Yorktown Unit 3, Yorktown, Va ................................. .. 1974 Oil & Gas 818 North Branch Unit 1, Bayard, W. Va........................... . 1994 Waste Coal 74(c)

Combustion Turbines:

35 units (8 locations) .................................................... . 1967-90 Oil & Gas 1,019 Combined Cycle:

Belimeade, Richmond, Va. .. .......................................... . 1991 Oil & Gas 230 Chesterfield Units 7 & 8, Chester, Va............................. . 1990-92 Oil & Gas 397 Total fossil stations .................................................... . 8,656 Hydroelectric:

Gaston Units 1-4, Roanoke Rapids, N.C. ........................ .. 1963 Conventional 225 Roanoke Rapids Units 1-4, Roanoke Rapids, N.C. ............ . 1955 Conventional 99 Other .......................................................................... . 1930-87 Conventional 3 Bath County Units 1-6, Warm Springs, Va....................... . 1985 Pumped Storage l,260(d)

Total hydro stations .................................................. .. 1,587 Total Virginia Power generating unit capability .. ; .......... .. 13,635 Net Purchases ................................... : ............................ .. 1,480 Non-Utility Generation ..................................................... . 3,277 Total Capability ........................................................ . 18,392 (a) Includes an undivided interest of 11.6 percent (208 MW) owned by ODEC.

(b) Includes an undivided interest of 50 percent (441 MW) owned by ODEC.

(c) Effective January 25, 1996, this unit was placed in a cold reserve status.

(d) Reflects Virginia Power's 60 percent undivided Q\.ynership interest in the 2,100 MW station. A 40 percent undivided interest in the facility is owned by Allegheny Generating Company, a subsidiary of Allegheny Energy, Inc (AE).

Virginia Power's highest one-hour integrated service area summer'peak demand was 14,537 MW on July 28, 1997, and an all-time high one-hour integrated winter peak demand of 14,910 MW was reached on February 5, 1996.

. 10

Energy Used And Fuel Costs e

System energy output by energy source and the average fuel cost for each are shown below. Fuel cost is presented in mills (one tenth of one' cent) per kilowatt hour.

• 1997 1996 1995 Source Cost Source Cost Source Cost

. Nuclear (*) ................................... 34% 4.52 32% 4.48 32% 4.92 Coal(**) ************************************** 40 13.54 38 14.32 39 14.44 Oil ********************************************** 1 26.32 1 27.75 1 25.11 Purchased power, net ...................... 23 21.54 27 21.99 25 22.50 Other ........................................... 2 30.65 2 26.98 3 23.82 Total **************************************** 100% 100% 100%

Average fuel cost .....*.................. 12.67 13.47 13.73

(*) Excludes ODEC's 11.6 percent ownership interest in the North Anna Power Station ..

(**) Excludes ODEC's 50 percent ownership interest in the Clover Power Station.

Nuclear Operations and Fuel Supply In 1997, Virginia Power's four nuclear units achieved a combined capacity factor of 91.1 percent.

Virginia Power utilizes both long-term contracts and spot purchases to support its needs for nuclear fuel. Virginia Power continually evaluates worldwide market conditions in order to ensure a range of supply options :;it reasonable prices. Current agreements, inventories and spot market availability will support Virginia Power's current and planned fuel supply needs for fuel cycles throughout the remainder of the 1990's and into the early 2000's. Beyond that p~riod, additional fuel will be purchased as required to ensure optimum cost and inventory levels.

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

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

Fossil Operations and Fuel Supply

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

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

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

er's own generation costs.

11

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

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

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

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

ers and sellers on a nationwide basis.

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

ment provides for the transition from cost-based rates for capacity and energy purchases by ODEC to market-based rates by 2002. The second two agreements are the Service and Operating Agreements for Network Integration Trans-mission Service, which unbundled the transmission services provided to ODEC under the I&O Agreement.

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

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

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

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

1997 Annual Report to Shareholders. * '

Interconnections Virginia Power maintains major interconnections with Carolina Power and Light Company, AEP, AE and the utilities in the Pennsylvania-New Jersey-Maryland Power Pool. Through this major transmission network, Virginia Power has.arra_nge-ments with these utilities for coordinated planning, operation, emergency assistance*and exchanges of capacity and energy.

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

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

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

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

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

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

13

1-~

e CAPITAL REQUIREMENTS AND FINANCING PROGRAM e

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

ITEM 2. PROPERTIES Dominion Resources owns the building at One Jarries River Plaza, Richmond, Virginia, in which Virginia Power has its principal offices. Dominion Resources' other assets consist primarily of its investments in its subsidiaries, which invest various enterprises and assets, as described in THE COMPANY under Item 1. BUSINESS above. See also Virginia Power Generating Units under Item 1. BUSINESS above.

ITEM 3. LEGAL PROCEEDINGS From time to time, Dominion Resources and its subsidiari.es are alleged to be in violation .or in defa,ult .under orders, statutes, rules or 'regulations relating tci the environment; compliance plans imposed upon or agreed to by th~m, or. permits issued by various local, state and federal agencies for the construction or operation of facilities. From time to time, there may be administrative proceedings on these matters pending. In addition, in* the normal course of business, Dominion Resources and its subsidiaries are in involved. in various* legal proceedings. Management believes that the ultimate *resolu-tion of these proceedings will not have a material adverse effect on the company's financial position, liquidity or_results of operations.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None EXECUTIVE OFFICERS OF THE REGISTRANT Name and Age Business Experience Past Five Years Thos. E. Capps (62) Chairman of the Board. of Directors, President and Chief Executive .

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

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

• Chairman of the Board of Directors, President and Chief Executive *.

• Officer of Dominion Resources prior to August 15, 1994.

Norman B.M. Askew (55) Executive Vice President of Dominion Resources and President and Chief Executive Officer of Virginia Electric and Power Company from August 1, 1997 to date; Executive Vice President of Dominion Resources and Chief Executive of East Midlands from February 21, 1997 to August 1, 1997; Chief Executive of East Midlands from April 1, 1994 to February 21, 1997; Managing Director prior to April 1, 1994.

Thom<!,S N. Chewning (52) Executive Vice President of Dominion Resources from January 1, 1997 to date and President of Dominion Energy; Senior Vice President of Dominion Resources from October 1, 1994 to January 1, 1997; Vice President of Dominion Resources prior to October l, 1994..

• David L. Heavenridge (51) Executive Vice President of Dominion Resources from January 1, 1997 to date and President of Dominion Capital; Senior Vice President of Dominion Resources from March 1, 1994 to January 1, 1997; Senior Vice President and Controller of Dominion Resources prior to March 1, 1994.

14

Edgar M. Roach, Jr. (49)

Executive Vice President of Dominion Resources from September 15, 1997 to date; _Senior Vice President-Finance, Regulation and General Counsel of Virginia Electric and Power Company January 1, 1996 to September 15, 1997; Vice President-Regulation and General Counsel, January 1, 1995 to January l, 1996; Vice President-Regulation, February 1, 1994 to January l, 1995; Partner in the law firm of Hunton & Williams, Raleigh, North Carolina prior to

• February 1, 1994.

Robert J. Davies (49) Chief Executive of East Midlands from August 1, 1997 to date; Finance Director February 1, 1994 to August 1, 1997; Finance Director of Ferranti International pie prior to February l, 1994.

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

• Thomas F. Farren, II (43) Senior.Vice President-Corporate Affairs of Dominion Resources and Executive Vice President of Virginia Electric and Power Company from September 1, 1997 to date; Senior Vice. President-Corporate and General Counsel of Dominion Resources .from January 1, 1997 to

• September 1, 1997; Vice Presiden_t and General Counsel cif Dominion Resources from July 1, 1995 to January 1, 1997; Partner in the law firm of McGuire, Woods, Battle & Boothe LLP prior to July 1, 1995.

Donald T. Herrick, Jr (54) Vice President of Dominion Resources G. Scott Hetzer (41) Vice President and Treasurer of Dominion Resources from October 1, 1997 to date; Managing Director of Wheat First Butcher Singer prior to October 1, 1997.

William S. Mistr (50) Vice President of Dominion Resources from February 20, 1998 to date and Vice President-Information Technology of Virginia Electric

• and Power Company from January 1, 1996 to date; Vice President and Treasurer, Dominion Energy, Inc., October 1, 1994 to January 1,

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

James F. Stutts (53) Vice Pr~sident and General Counsel ofDominion Resources from September 15, 1997 to date; Partner in the law firm of McGuire, Woods, Battle & Boothe LLP prior to September 15, 1997.

James L. Trueheart (46) Vice President and Controller of Dominion Resources from March 1,

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

Patricia A. Wilkerson (42) Corporate Secretary of Dominion Resources from January 1, 1997 to date; Assistant Corporate Secretary prior to January 1, 1997.

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

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

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

15

e ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS e

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information contained under the caption MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS on- pages 22 through 33 and MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION on pages 37 through 40 of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997, filed herein as Exhibit 13, is hereby incorporated herein by reference.

. . . .ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information contained under the caption MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS on pages 30 through 33 of the 1997 Annual to Shareholders for the fiscal year ended December 31, 1997, filed herein as Exhibit- 13, is hereby incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information contained in the CONSOLIDATED FINANCIAL STATEMENTS on pages 21, 34 through 36, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on pages 37 through 56 and related report thereon of Deloitte & Touche LLP, independent auditors, appearing on page 57 of the_ 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997, filed herein as Exhibit 13, is hereby incorporated herein by reference.

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

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

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

. ITEM 12. SECURITY OWNERSIDP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning stock ownership by directors and executive officers contained on page 12 of the 1998 Proxy Statement is hereby incorporated herein by reference. There is no person known by Dominion Resources to be the beneficial owner of more than five percent of Dominion Resources common stock.

.ITEM 13. CERTAIN RELATIONSIDPS AND RELATED TRANSACTIONS None.

16

e PARJ:IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8~K

• A. Certain documents are filed as part, of this Form 10-K and are incorporated herein by reference and found on the pages noted.

1. Financial Statements 1997 Annual Report to Shareholders (Page)

Report of Independent Auditors ... :.................... :.................................. ;_ ......................................... . 57

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

• Consolidated Statements of Income and Retained Earnings 57 for the years ended December 31, 1997, 1996 and 1995 .. , ..................... :.....................,. ................ . 21 Consolidated Balance Sheets at December 31, 1997 and 1996 .................................. : ...................... :.. 34-35 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ............ :............. .-.._........................................................ , .... . 36 NOtes to Consolid_ated Financial Statements ... ;";'.:;; .. ';.; ............................ : .... ;................................. . 41-56*

17

2. Exhibits 3(i)

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

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

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

4(ii) Indenture of Mortgage of Virginia Electric and Power Company, dated November 1,. 1935, as . . .

• supplemented and modified by fifty-eight Supplemental Indentures (Exhibit 4(ii), Form 10-K for the fiscal year ended December 31, 1985, File No. 1-225,5, incorporated by reference); Fifty-Ninth Supplemental Indenture (Exhibit 4(ii), Form 10-Q for the quarter ended March 31, 1986, File No. 1-2255, incorporated by reference); Sixtieth Supplemental Inden~ure (Exhibit 4(ii), Form 10-Q for the quarter ended September 30, 1986, File No. 1-2255, incorporated by reference); Sixty-First.

Supplemental Indenture (Exhibit 4(ii), Form 10-Q for the quarter ended June 30, 1987; File No. 1-2255, incorporated by reference); Sixty-Second Supplemental Indenture (Exhibit 4(ii), Form 8~K, dated

• November 3, 1987, File No. 1-2255, incorporated by reference); .Sixty-Thir<;l Supplemental I.ndenture (Exhibit 4(i); Form 8-K, dated June 8, 1988, File No. 1-2255, incorporated by reference); Sixty~Fourth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated February 8, 1989, File No. 1-2255, incorporated.

by reference); Sixty-Fifth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated June 22, 1989, File .

No. 1-2255, incorporated by reference); Sixty-Sixth Supplemental Indenture, (Exhibit 4(i), Form 8-K,

. dated February 27, 1990, File No. 1 -2255, incorporated t,y reference); Sixty-Seventh Supplemental Indenture (Exhibit 4(i), Form 8-K, dated April 2, 1991, File No. 1-2255, incorporated by reference);.

Sixty-Eighth Supplemental Indenture, (Exhibit 4(i)), Sixty-Ninth Supplemental Indenture, (Exhibit 4(ii))

and Seventieth Supplemental Indenture, (Exhibit 4(iii), Form 8-K, dated February 25, 1992, File No. 1-2255, incorporated by reference); Seventy-First Supplemental Indenture (Exhibit 4(i)) and ..

Seventy-Second Supplemental Indenture, (Exhibit 4(ii), Form 8-K, dated July 7, 1992, File No. 1-2255, incorporated by reference); Seventy-Third Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated August 6, 1992, File No. 1-2255, incorporated by reference); Seventy-Fourth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated February 10, 1993, File No. 1-2255, incorporated by reference); .

Seventy-Fifth Supplemental Indenture, (Exhibit 4(i);Form 8-K, dated April 6, 1993, File No. 1-2255, incorporated by reference); Seventy-Sixth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated April 21, 1993, File No. 1 ~2255, incorporated by reference); Seventy-Seventh Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated June 8, 1993, File No. 1-2255, incorporated by reference);

Seventy-Eighth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated August 10, 1993, File No. 1-2255, incorporated by reference); Seventy-Ninth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated August 10, 1993, File No. 1-2255, incorporated by reference); Eightieth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated October 12, 1993, File No. 1-2255, iricorporated by reference);

Eighty-First Supplemental Indenture, (Exhibit 4(iii), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference); Eighty-Second Supplemental Indenture, (Exhibit 4(i),

Form 8-K, dated January 18, 1994, File No. 1-2255, incorporated by reference); Eighty-Third Supplemental Indenture (Exhibit 4(i), Form 8~K, dated October 19, 1994, File No. 1-2255, incorporated by reference); Eighty-Fourth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated March 23, 1995, File No. 1-2255, incorporated by reference, and Eighty-Fifth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated February 20, 1997, File No. 1-2255, incorporated by reference).

4(iii) Indenture, dated April 1, 1985, between Virginia Electric and Power Company and Crestar Bank (formerly United Virginia Bank) (Exhibit 4(iv), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference).

• 4(iv) Indenture, dated as of June 1, 1986, between Virginia Electric and Power Company and The Chase Manhattan Bank (formerly Chemical Bank) (Exhibit 4(v), Form 10-K for thefiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference).

4(v) Indenture, dated April 1, 1988, between Virginia Electric and Power Company and The Chase Manhattan Bank (formerly Chemical Bank), as supplemented and modified by a First Supplemental, ,

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

• 4(vi) Subordinated Note Indenture, dated as of August 1, 1995 between Virginia Electric and Power Company and The Chase Manhattan Bank (formerly Chemical Bank), as Trustee, as supplemented (Exhibit 4(a),

Form S-3 Registration Statement File No. 333-20561 as filed on January 28, 1997, incorporated by reference).

4(vii) Dominion Resources agrees to furnish to the Commission upon request any other instrument with respect to long-term debt as to which the total amount of securities authorized thereunder does not exceed 10% of Dominion Resources' total assets.

18

IO(i) e Qperating Agreement, dated June 17, 1981, between Virginia Electric and Power Company and Monongahela Power Company, the Potomac Edison Company, West Penn Power Company, and Allegheny Generating Company (Exhibit IO(vi), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by reference). . .

IO(ii) Purchase, Construction and Ownership Agreement, dated as of December 28, 1982 but amended and restated on October 17, 1983, between Virginia Electric and Power Company and.Old Dominion Electric Cooperative (Exhibit IO(viii), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by reference). * . * .

• IO(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 E.lectric

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

lO(iy) Nutlear Fuel Agreement, dated as of December 28, 1982 as amended and restated on October 17, 1983,

\

• between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit IO(x),

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

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

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

period ended June 30, 1996. File No. 1-2255, incorporatec;l by reforence)i . **

• IO(vii) Inter-Company Credit Agreement, dated December 20, 1985, as modified on August 21,

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

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

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

IO(x) Form of Amended and Restated Articles of Partnership in Commendam of Catalyst Old River Hydroelectric Limited Partnership, by and between Catalyst Vidalia Corporation and Dominion Capital, Inc. ~ffective as of August 24, 1990 (Exhibit lO(xii) Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8489, incorporated by reference). ** . .

IO(xi) Supplemental Fu~ding Agreement, dated as of August 24, 1990, by and among* Dominion Capital, Inc.,

Catalyst Old River Hydroelectric Limited Partnership and First National Bank of Commerce (Exhibit

• IQ(xiii) Foryri lO-K for the fiscal year ended December 31, 1990, File No. 1-8489; incorporated by reference}. * * .

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

IO(xiii) *

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

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

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

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

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

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

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

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

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

lO(xviii) First Amendment of Trust Agreement of Dominion Resources Black Warrior Trust, dated }une 27, 1994,

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

19

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

• lO(xx)* Dominion Resources, Inc. Performance Achievement Plan, effective J~nuary 1, 1986, as a~ended and.

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

lO(xxi)* Dominion Resources, Inc: Executive Supplemental Retirement Plan, effective January 1, 1981 as amended and restated September l, 1996 (Exhibit lO(iv), Form 10-Q for the quarter ended June 30, 1997, File No. 1~8489; incorporated-by reference) and as amended June 20, 1997 and as amended *

. March 3, 1998 (filed herewith).

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

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

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

• lO(xxv)* Form of Employment Continuity Agreement for certain officers of Dominion Resources (Exhibit (xxvi),

. Form 10-K for the fiscal year ended December 31, 1994, File No. 1-8489, incorporated by reference).*

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

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

• lO(xxviii)* - Dominion Resources, Inc. Executives' Deferred Compensation Plan, effective January 1, 1994 and as amended and restated January 1, 1997 (Exhibit 10 (xxvi), Form 10-K for the fiscal year ended December 31, 1996, incorporated by reference). * * '

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

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

lO(xxxi)* - Dominion Resources, Inc. Stock Accumulation Plan for Outside Directors, effective April 23, 1996 (Exhibit 10, Form 10-Q for the quarter ended March 31, 1996, File No.1~8489, incorporated by reference). * * * , **

• lO(xxxii)* - Employment Agreement dated February 21, 1997 between Dominion.Resources and Norman Askew.

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

lO(xxxiii)* -

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

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

• lO(xxxv)* - Employment Agreement, dated January 1, 1998 between Dominion Resources and William S. Mistr (filed herewith),

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

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

• 21 Subsidiaries of the Registrant (filed herewith).

23 Consent of Deloitte & Touche LLP (filed herewith).

27 Financial Data Schedule (filed herewith).

• Indicates management contract or compensatory plan or arrangement.

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

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

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

• 20

• SIGNATURES

• Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DOMINION RESOURCES, INC.

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

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

Signature* Title JOHN B. ADAMS JR. Director John B. Adams, Jr.

JoHN B. BERNHARDT Director John* B. Bernhardt THOS. E. CAPPS Chairman of the Board of Directors, President

• Thos. E. Capps (Chief Executive Officer) and Director BENJAMIN J. LAMBERT, III Director Benjamin). Lambert, III RICHARD L. LEATHERWOOD Director Richard L. Leatherwood HARVEY L. LINDSAY, JR. Director Harvey L. Lindsay, Jr.

K. A. RANDALL Director K. A. Randall WILLIAM T. Roos Director William T. Roos FRANKS. ROYAL Director Frank S. Royal 21

e \

Signature Title JUDITH B. SACK Director Judith B. Sack

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

Edgar M. Roach, Jr. (Chief Financial Officer)

Vice President and Controller J.L. TRUEHEART J .L. Trueheart (Principal Accounting Officer) 22

DOMINION RESOURCES, INC.

PORTIONS.

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

CQNSOL,IDATED STATEMENTS OF INCOME AND RETAINED EA'R:NINGS* 21 For The Years Ended December 31, 1997 1996 1995 (miJlions,*except per share amounts) ' "

operatin\{revenues arid in.come: "

,Virgin fa Power , , $ 5,079.0 $4,420.9 ,' J4,35r.9 fast* Midlands *,. ,, ' 1,970.1

- **** f *. :_::-.

N9;~~tility"' 628'.5 433.1 281.2, Jotal operating revenues and incolT!e 7,677.6 4,854.0 4,633.1 Operating expenses: ', "

Fuel, net  ; 1,620.7 i,016.6 1,009.7

• :Purch.as~d po.,;_;er capacity, net ,,

717.5 700.6 ,,

688.4 Supply and distribution-Eas'tMidlands 1';46'6.1'

Accelerated cost 'recovery* '* ***.-. 38.4 *,

26.7 Restructuring ..

18.4. 64.9 I 2.1.5

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

other taxes ' ' . I 282:5 274.9 267:5 Total oper~ting expenses 6,200.6 3,744.2 3,606.'~

Operating ,income. ' 1,477.0: 1,10';!.8., ,  : 1,02~-4 Othe~\n~_~me.and.expense: ,.

.*;"':" .*; ~ '

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

,10.9 ' .

" - - . " ., . ~

,Nonutiiity 8.'6 '*

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

Total other income and,;expense  ;

(122.9) '" 2ft'.6 ,23.6 lrit,ome ~ef6r~' fixed charges 'arid in_come t~xes 1_,354.1 1,.1.34.4 ., ... 1,050_.o Fixed charges:

) '*. "

JriWtesJ charges, net 627.4, 387.0 ,

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

,35.8. 35*5, 4_4.1,

.Jcital fi~~d charges ,, *. -. ,. 675.3 433.4 429.5 lnco.rn.e.befo~e_provision

. *.' ~ '* .. ' . . -~ , . . .. '

for income

.taxes and. min9rity interests 678.8 . 701.0 .. 620.5 Provision for income taxes .,**,;

• 23~.o , 219.3 187;1:

. Minority interests ' 46.6 *9.6 .. 8.4 Net income I

$' 399.2 $ 472.1 $ 425.0 Retained (;?arnings, Janµary 1 1,437.9 .. 1,_427._6 1,455.2 common dividends and other deductions: *.

,. ~

Dividends  ;

(478.0)

• I (460.1) (44~.7)

..Othe{ d~ductio'ns  ;

(5.1) (.1.7) (3.9)

Retained earnings, December 31 $ .1,354.0 $1,437.9 .. , . :$1,427:6*

Earnings per common share ., .. $ 2.15 $ 2.65 $ 2.45 Dividends paia per' common share $ 2.58 $ 2.58 $ 2.58 A

vk~ige common shares outstanding 185.2

• 178.3 173.8 The accompanying notes are.an-integral part of the-Consolidated Financial Statements.

22 (unaudited) e MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS

• I' Introduction Overview In Managements Discussion and Analysis (MD8A) we explain the Dominion Resources achieved earnings from operations of $555.s general financial condition and the results of operations for million in 1997 or $3.00 per average common share, compared with Dominion Resources and its subsidiaries. As you read this section, earnings of $472.1 million in 1996 or$2.65 per share. The 1997 figure it may be helpful to refer to our consolidated financial statements excludes a one-time windfall profits tax of $156.6 million, or 85 and notes. The MD8A is important when making investment deci- cents per share, incurred at East Midlands. Below we have pro-sions about Dominion Resources. vided a comparison of net income and earnings per share contri-In 1983, Dominion Resources began a diversification strategy butions by company along with reasons for the changes in these to enable the company to make investments in nonutility busi- contributions.

nesses. These diversified businesses-Dominion Energy and NET INCOME Dominion Capital-operate in competitive environments. There is 1997 Change 1996 Change *1995 no monopoly or regulated rate of return on investments as you (millions) currently find in our core electric utility business, Virginia Power.

Virginia Power $ 433.4 2.85' $421.8 -8.5% $388.7 Such a move changes the risk profile of a company and provides Dominion UK 46.9 the opportunity to achieve returns above those found in a regu-Dominion Energy 45.0 38.5~ 32.5 (7.1 )% 35.0 lated business.

Dominion Capital 45.1 58.2~ 28.5 61:9% 17.6 The investments outside of Virginia Power during 1997 Corporate (14.6) (36.4)~ (10.7) 34.4% (16.3) accounted for approximately 20 percent of the consolidated com-555.8 17.7~ $472.1 11.1% $425.0 pany's earnings from operations. The recent acquisition of East Windfall Profits Tax-Midlands Electricity pie (East Midlands) in the U.K. adds a strong East Midlands ( 156.6) international utility to ourportfolio of companies. East Midlands --*-

is the principal operating subsidiary of our U.K. holding company, Dominion U.K. Holding, Inc. (Dominion UK).

Consolidated Shares

$ 399.2 185.2 (15.4)~

3-9~

$472.1 178.3

' I.

2.6% -

I% $425.0 173.8 As the electric utility industry is significantly changing in EARNINGS PER SHARE many states across the nation, Dominion Resources is working with Change 1997 1996 Change -199*5 its state legislators and regulators to move the restructuring Virginia Power (1.3)%

$2.34 $2.37 5.8% . $2.24 process towards a workable form of competition in Virginia. The Dominion UK .25 generation business of Virginia Power-representing about 50 Dominion Energy (, 0.0)%

.24 33.3% .18 .20 percent of..its assets-may become deregulated at some point in Dominion Capital .24 50.o~ .16 60.0% .10 the future, depending on legislative and regulatory action. Cus- Corporate (.07) ( 16.7)~ (.06) (.0-9) 33-3%

tomers in Virginia and North Carolina currently have low electric-

$3.00 13.2~ $2.65 8:2% . $2;45 ity costs relative to regional and national electricity prices. But Windfal I Profits Tax-management believes that competition can bring benefits to both East Midlands (.85) consumers and the company. These matters are discussed in more Consolidated 8.2% $2.45 detail on page 26 of the MD8A report.

Both Virginia Power and East Midlands enjoy above average The 1997 results as c*ompared to 1996 were affected by a ~urnber of customer growth in their respective service areas. Virginia Power factors described below:

has strong plant operatio_ns and is recognized as a leader in low-V-1 R G I N I A P O W E R cost generation. East Midlands receives approximately 85 percent of its operating profit from its regulated distribution business- Earnings were impacted by:

which is the transfer of electricity across its low voltage distribu-.

• mild weather which caused a decrease in electricity sales- to tion system to consumers. Virtually all of the remainder comes retail customers, partially offset by continued customer .growth from its supply business-purchasing electricity and arranging in the Virginia and North Carolina service areas; _

for its distribution to end users. Managements strategy is to con-

• an increase in sales from non-traditional businesses, including tinue building on the fundamental strengths at Virginia Power power marketing, natural gas, and energy products and ser-and East Midlands while growing its nonutility businesses in vices; power generation, natural gas production, and financial services.

• higher purchased power expenses asa result cif increased power

• marketing and higher operation and maintenance expenses;.:

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

• lower restructuring expenses;

• a reserve for potential adjustments to regulatory assets; and *

• higher depreciation of plant and equipment, higher decom-missioning expenses for t_he future retirement of nuclear plants, and depreciation related to Clover Unit 2-the companys newest coal-fired station.

23*

DOMi'N.ION°UK 1997 Change 1996 Change 1995 Eim.irigs ~ere impadtec1. ~y: (millions)

• an ~nticipated_cme-tin:ie windfall profits tax levied on Ea;t Mid- Operating revenues $5,079;0 11,.9~ 1.6% $4,351.9

- lanq.s and.other utilities in Britain as *part of the* newly elected Operating expenses:

Labo;ir_ Party's 1997 budget plan. ' : . .- .' Fuel and purchased power, net* 2,338.2 36.2~

oo' 'M I N I o'..N E.....

N E R.Q v ......

. . Other operatio*n and -

Earnings were'irripacted by: . . . * , .* .* . . . .maintenance 812.7 1.2~ 803.1 (0.3)%., .,;805.6 ii'an increas,e in natu;a( gas producti9n, re~ulting p~rtly from the Accelerated cost .. :*.-.-; ,:1

. ,ac;quisiticm of,\VolverineGas,and Oil in Michigar,;,a,:id.ov'er:all ,recovery 38;4 43.8~*

• 26.7

. hig:hernat1;1ral gas pric/!~;. arid * *

• Restrui:turihg 18.4 (71.6)~ 64.9 (45.0)% ' 117.9 11.*an incre.ase i~ g_~;ner~tion frnm its.power piants in Lat'in Amer-. *, ~epreciation .and

,;)c!l, .result_ingjrom more normal.water f.lows ~tits hydro pl~nts amorti7:ation 584.3 8.9~ 536..4 6.5~ 503.5

, , . : ** i

.. ~nd t.he ac;quisition of pe>wer generation assets in Peru in the la~7 Other taxes 267.7. 1.9~ _262.6

• 3,p%.,,."254.9

,_ .. ter h_alf,.of 19,9~-. - - .. Operating income 1,~19.3 o,.9CJ. 1,010.0 .3.9%. , ' ,9TI *,9 I

DOMINl"ON CAPITAL Other income* 14.2 ;oa:a~* io.o I

Earnings were impaded*by:**. . 'Jixed charges, ' -

i **an increase,irifoan production*and securitizations_from Saxon Mortgage, the financial services business which origin'ates.non-including preferred dividends ' . 350.8 (1:1)CJ. 354.8 (3.0)% 365.7 II conforming (or sub-prime) residentlal mortgages and sells Income

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

.. 249,3 ,3.8~ . *.' 2,4r;i,2 5.6')1;., , m-5

• them---:through securitization transactions-to institutional .. *-*

common stock * $ 433.4 2:~;r;* $ .4 21,.8, .. K5ci. $ 388_.7 investors.  :* ** - * * ,

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

• As detai.led in the chart on the next page, the:6,v~rillgrowth in rev:-

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

enues in f997 reflects strong wholesale.powe'r marketing and nat-

,: 'r '. / *

• .:1;,* u.ral gas sales. Electric serv!ce revenues increased slightly ih spite Y!rgi~iil;Power. of mild weather due'to new;customer connections and an increase '

RESULTS **OF OPERATIONS','

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

Virginia* Power's balance available* for comf(lon stock for. 1997 to. higher fuel r~tEJS' 'which _went inti{¢ffed December I;* 1996, amounted to $433-4 million as compared to $421.8 million,in1996. increasing recov11ry of fuel costs by appro,ximately $4~.2 million. *

• The earnings were impacted by customer growth and* lower In addition, revenues increased as a result of the company's strat-

• restructuring expenses, partially offset by. higher depreciation egy fo develop non2-fraditional business opportunities designed 1nd *amortization expenses and the provision of a reserve for to provide growth iri revenues. These include* sales' 1of eriefgy pot~ntial adjustments to regulatory assets. Virginia Power's con~ *products and services offered .by Virghiia *power's energy services business arid- nuclea'r management and operation's. '*services fribution to earnings per share in 1997 amountea to $2.34 com~

,offered.to other eJec::t~ic ~tilities. . ' *:' s. '

pared to $2.37 in 1996 due to the dilutive impact of common stock issuances by Dominion Resources during 1997- . . Rev~nues in.creased in. 1996, as compared to 1995, due to incieased'powermarketing; sales of natural gas.arid sales ofother 0

• In 1996, Virginia Powerreported a $33.1 million increase in bal-an~e- avaiJable for common stock when compared to the:- 1995 energy products and services by Virginia Powers energy services results of $388.7 million. The increase was primarily due to lower business. This increase in revenues was offset in part by a decrease 0

restruduring e_xpenses in 1996. in eled,ric ser~ice revenues, resulting fro m the effect of mild

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

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

• • \ .,.

24 e Increase

• growth opportunities. While Virginia Power may incur additional (decrease) restructuring charges in 1998, the amounts are not expected to be OPERATING REVENUES** from prior year significant.

1997 1996 In thi~ increasingly competitive erivironment, Virginia Po,wer (millions) has concluded that it may be appropriate to utilize available. sav-Customer growth $ 55.8 , $ 45.1 ings and cost reductions, such as thos~ from the Vision 2000 pro-Weather C111.1) 4.4 gram, to accelerate the write-off of unamortized regulatory assets Base rate variance (18.7) * (35.5)

• an_d potentially stranded costs (see Note 0). As of December 31, Fuel rate variance 44.1 (89.6) 1997, Virginia Po\ver has accumulated a reserve of $65.1 million. Not Other, net 47.7 41.5 only wiil this strategically position Virginia Power in anticipation

• Total retail 17.8 ~) of competition, but it also reflects managements commitm*ent to Other electric service 11.0 (49.8) mitigate its exposure to potentially stranded costs.

• Total electric service 28.8 (83.9) ,. Depreciation and amortization increased in 1997, as compared Wholesale power marketing 363.4. 96.6 to 1996, due to additional depreciation and nuclear decommis~

Natural gas 232.6 33-2 sioning expense and depreciation related to Clover Unit 2 - the 9th_er, including energy products and services 33.3 23.1 company's newest coal-fired station. Virginia Power recorded Total other revenues 629.3 I 52.9 additional depreciation and decommissioning expense consis-

$ 658.1 $ 69.0 tent With its proposal in the rate proceeding* before the Virginia Commission. (see Note Q ). **

During 1997, Virginia Po~er added 50,8~9 new customers, t.he la!gest number of new connections since 1990, compared to 44,528

• oominiqn UK and 44,955 in 1996 and 1995, respectively.

RESULTS OF OPERATIONS . . . .

Kl LOWATT* HOUR SALES Dominion UK earned $46.9 mHlion, or 25 cents per share, in 1997.

• ,1997 Change 1996 Change .

• 1995

(_millions)

The 1997 figure excludes a one-time windfall profits tax of $156.6 Retail sales . (0.5)%

million, or 85 cents per share, incurred at East Midlands. The antic-61,997 62,298 2.4% 60,865 Wholesale 11,020 ipated one-time windfall profits tax was levied on East Midlands 23,965 1_17.5'1, 36.3% 8!oB8 Total *sales and other utility companies in Britain as part of the newly.elected 85;962 17.2% 73,318 6.3% 68,953 Labour Party's 1997 budget plan. Including the windfall profits DECREE* PAYS CHART tax, .Dominion UK reported a net loss of $109.7 million, or 60 cents Normal per share:.

1997 1996 Cooling degree days 1,349 1,365 1,530 1997 Percentage change compared to prior year* ( 1.2)~ (18.1 )%

(miUi,ons)

Heating degree days . 3,787 4,131 3,726 Operating income: .

Percentage change co~pared to prior year, (8.3)~ 9.0%

' purchased power, net increased due.to highervo!um,es of Distribution ..

Supply .

$ 333,7 35.4 Fuel and _Other .( 122.5) purchased power. .Virginia Power has significantly increas_ed_its .Total operating income 246.6.

marketing _efforts to generate more sales of elec:tric energy to Other_inc:ome a~d expense: ..

wholesale customers and more sales of natural gas. Other 10.8 Other operation and maintenance expenses in.creased in 1997 Windfal I profits tax ( 156.6) as a result of the growth in sales by the company's energy services Fixed charges 189.4 business: This increase was partially offset by a reduction in Income taxes 21.1 expenses attributable to Virginia Powers Vision 2000 initiatives to Net income $ ( 109.7) t~ke co_sts out of the_ core (traditional) utility business. Expenses i~

1996 includ*e high storm damage costs resulting from destructive summer storms, including Hurricane Fran. Dominion Energy Virginia Power embarked on its Vision 2000 re*structuring pro-NEW BUSIN.ESSES gram in 1995_ as part of an initiative to prepare for competition in the electric utility industry. Charges of $18-4 million in 1997 pri- Dominion Energy has expanded its oil and natural gas business marily include employee severance costs and costs to renegotiate through the development of existing assets and the acquisition of contracts to purchase power from third parties. Charges in 1996 Wolverine Gas and Oil Company. now known as Dominion Midwest and 1995 were $64.9 million and $117.9 million, respectively (see Energy. Inc., and the related entities (Dominion Midwest), effec,.

Note N). Virginia Power estimates that its restructuring efforts will tive as of January 1997. Dominion Midwest is an oil and gas pro-result in future annual savings of $80 million to $90 million. How- duction and operation company headquartered in Grand Rapids, ever, such savings are being offset by salary increases, outsourc- Michigan.

ing costs and increased payroll costs associated with staffing for

25

.

• Dominion Energy expects to expand its domestic *power gen~ Foreign power generation operating *income increased $22.1 er'ation in-thlfirst quarter of 1998 with the acquisition of the Kin- million and$4.7 million for the 1997 and 1996 P!!t:ioq,s, respectiyely.:

caid gen_erating station, an 1,108-megawatt facility *located in The 1997 increase results from more normal water flows at hydro 1i11*nois. In addition, Dominion Energy expects to expand its for- plants and the acquisition of an interest in Egenor, a Peruvian E!ign power generation businesses with the cornpletion of certain power generation business, in August 1996. The 1996 increase

~apita I expansion activities. ' .. .' results also from the EgeT)or acquisition and the acquisili<>TI of af!.

RESULTS OF OPERATIONS interest in Empresa Corani, a Bolivian power generation b~siness, D~triinion. Energy's net inco~e* amounte~( to $45.9 mi,l li'on ai, corri~ in July 1995. * *

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

marily. Jo net .income from power gene~ation assets in Peru Dominion Capital 1! acq~ired in Augus{ 1996, generally higher natural gas prices and NEW BUSINESSE_S

• grE!ater pro.duct ion ~o!ur;.1es due to the acquisition of naturc!,_1 gas

• Th.ere w~re two sig_nificant enhancements ~o D.ominfon*capital's pr~perties .in the . Gulf Coast

. . area in Marc;h 1996, and. in Michigan in

. ~ '

diversified financial services strategy. hi early: 1997, Dc;iminion January 1997.

. Capital .acquired the remai~ing 50% of First Source Financial*.* 1t is In 1996, net income decreased by $2.5 million when compared anticipated that First Source Financial, the Chicago:-base1'.ientler fo 1995 primarily due to the*sale of the Black Warrior Trust Units in to middle market industries, .will in~rease Junde4 _lriaris and 19*95. the sale of the units, which hold royalty interests in proven,

. loan commitments as a result of this transaction. Late. in 1997, developed natural gas properties, provided a net gain of $5-4 mil-Dominion *capital formed First Dominion Capital, an integrated lion in 1995. *

• merchant banking and asset rrianagement business. First Domin.:

1997_ Change.* ** *1996 ** Change

• 1995 ion Capital expands Dominion* Capitals'gro,;...t~ in 'fl_nan~ial's'er'-

(inllliohs). vices and is.based in New .York City.

Operating inco_me: . RESULTS:*OF OPERATIONS Oil'andgas(1) . $:59;4 42.4'J. $ 41.7 * '. 68.1%' $ 24.8 Dominion Capital's net income for 1997 am~U:nted to ~45.1 'mil-'

• '.

• I ' - * , j ,*,

Domestic power lio_n as compared to $28.5 million in 1996. The increase in earnings generation 9.4 . : (40.5)%

• _15.8  : was primarily' due to residential mortgage* 1oan *securit_iza.:'.

Foreign power .' tions performed by Saxon Mortgag~ and the acquisition oJ the*

generation 55.3 66.6'J,. .33.2 16.5% 28.5 remaining* 50 percent. of ~irst :Source* Financial that h did not C~rp~rate(2) . (3.~) 7-7.6'J, (14.7) (90._9)% . (7-7) already.own. * '* , ,. ,.

Adjustments(1)

(25.3)

Tot.al oper;.tting inco111e $ 82.7 4-5'J.

9*1.9%

(26.5)

$ 43-1 ..

• 6.0% . (2~.2) 2,9.8% $ 33.2 In 1996, Dominion Capital reported an increase in net income of $10.9 million wheri compared to th!! 1995 results. l;h,e r.esults wer_e

('1) *011 ana gas Operating Income includes Nonconventlon~I Fuels Tax Credits: Such"' primarily 1ue to ~esid~ntial mortgage loan*s*ecuritizatio11s'per~

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

as a e<>mpon_ent of Operating Income. ** *

• for!lled by.saxoT) Mortgage. * * ** * * * ** ** * , *.' .': *

(2) Represents corporate overhead charges*:

1997 . ~hange 1996.. *chang~ . 1995

<>'PERATI NG INCOME .

oil and gas operating i~come increased.$11:r million and $16.9 mil-(millions)

Operating in~ome:

lion fortiie*1997 and 1996 periods: respectively. The result*s reflect

.Financial services* $143.5 103.5'J, $70:5 ,**io3.2cJ/. $34.'7 a significant fncrease in the level of oil and gas pro'duced'due to ...

the development and acquisition* of properties during 1997 and Vidalia~ r~al estate 13.6 -~-2~ 9.7 "34.5)% 1*4.8 T9tal operating 1996. Natural gas production ro~e to 59.0 billion cubic feet equiv- income* ' $157.1 alent (Bcf e) in 1997, compared to 50.2 Bcfe in 1996, an 18 percent i_ncrease. At December 31, 1997, proved gas reserves totaled 460* OPERATING INCOME*.

Bcfe: Proved gas reserves*increased 60 Bcfe (15%) during 1997, pri- . Financial services operating incol}'le. incr!!ased J:?y$73.o million and

. mc!,rily from the development of existing acreage and the acqui- $35.8 million in the 1997 and i996-peri~ds,*re~pectively. Both saxqn sition of Wolverine Gas and Oil. The production results for 1997 Mortgage and First So.urce Financial benefitted from the healthy reflect a -$2.50 average gas sales price per thousand cubic feet regional and national economies. Loan volumes at* Saxon were equivalent (Mcfe), which increased $.18 per Mcfe compared to $1.8 billion in 1997, up from. $754 milli_on in 1996. In addition; 1996. The production results for 1996 reflect a $2.32 average gas Dominion Capital purchased the re.maining 50_-percent-.int~rest sales price per Mcfe, compared to $1.93 per Mcfe in 1995. 'in the Chicago-based First Source Financial-at the*beginning of l.

I.

• Domestic power generation operating income decreased in 1997 primarily due to the write-down of.Dominion Energy's invest-199t Funded and committed loans at First *source Financial have grown to $1.4 billion at the end *of. 1997, compared *to-$1.1 billion ment in two of its California projects. The 1996 results reflect lower

• at the end of 1996. Financial se*rvices operating income improved income cmntributions from the two geothermal projects in cal ifor- . in i996 compared to 1995 primarily d'ue to the* acquisition of nia due to scheduled ownership reductions. Saxon Mortgage.

26 e

Vidalia and real estate operating income increased in 1997 over tract negotiations and innovative pricing proposals are expected 1996 by $3.9 million due to higher water flow and improved real to reduce the company's 1998 revenues by approximately $40 mil-estate operations. Operating income decreased in 1996 compared lion. To date, the company has not experienced any material loss to 1995 primarily due to higher real estate project costs. of load ..

Virginia Power is actively participating in the legislative and regulatory processes relating to industry restructuring. The com-Nonoperating Income* and Expense.s pany has also responded to these trends toward competition by OTHER INCOME AND EXPENSE cutting its costs, re-engineering its core business processes, and The windfall profits tax of $156.6 million resulted in a decline in net pursuing innovative approaches to servicing traditio'nal ma.rkets income in 1997 by the same amqunt. and future markets. In addition, Virginia Power is developing FIXED CHARGES "non-traditional" businesses designed to provide growth in future earnings. These include the following businesses: wh.ole- }.

Interest charges increased in 1997 as a result of the additional debt ,,

associated with the $2.2 billion acquisition of East Midlands. While sale power marketing, nuclear management and operations ser-Dominion Resources financed the purchase with 106 percent vices, telecommunications servkes and energy services.

I interim debt, the final capital structure calls for approximately 60 Competition-Wholesale percent of the acquisition cost to be financed with long-term debt During 1997, sales to wholesale customers represented approxi-(see "EasfMidlands Financing" on page 37). mately 17 percent of Virginia Power's total revenues from electric sales. Approximately 73 percent of wholesale revenues resulted Future Issues from Virginia Powers wholesale power marketing efforts.

In July 1997, Virginia Power filed amendments to its existing This section discusses information that may have an impact on rate tariff with the Federal Energy Regulatory Commission (FERC) future operating results. The Securities and Exchange Commission so it could make wholesale sales at market-based rates. Under a encourages companies to provide forward-looking information FERC order conditionally accepting the company's rates, Virginia because it provides investors with an insight into management's Power began making market-based sales in 1997. FERCset for hear-ou,tlook for the future

' ,, .. It should

. .be noted that any forward-look-

' ing in June 1998 the issue of whether transmission constraints lim-ing information is expressly covered by the safe harbor rule for iting the transfer of power into the company's service territory projections. For a more detaiJ.ed description of some of the uncer- provide Virginia Power with generation dominance in localized tainties associated, with forwar.d~looking information, please refer markets. if FERC finds that transmission constraints give Virginia to the Forward-:-Looking lnformatiop section on page 33.

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

Competition in the ~lectric Industry-General Virginia Power has successfully negotiated a new power sup-For most of thi; century, the structure of the.electric industry in Vir- ply arrangement with its largest wholesale customer.. The new ginia Powers service territory and throughout the United States arrangement provides for a transition from cost-based rates to has been relatively stable. Virginia Power has recently seen, how- market-based rates, subject to FERC approval. Virginia Power esti-ever, federal and state developments toward increased competi- mates the reduced rates, offset in part by other revenues wh.ich tion. Electric utilities have been required to open up their may be earned under the agreement, will decrease income before.

transmission systems for use by potential wholesale competitors. taxes by approximately $38 million through 2005. Virginia Power In addition, nonutility power producers now compete with elec- anticipates that additional contract negotiations with other tric utilities in the wholesale generation market. At the federal wholesale customers will take place in the* future.

level, retail competition is under consideration. Some states have Competition-Retail enacted legislation requiring retail competition. Currently. Virginia Power has the exclusive right to provide elec-Today, Virginia Power faces competition in the wholesale mar- tricity at retail within its assigned service territories in Virginia and ket. Currently,. there is no general retail competition in Virginia North Carolina. As a result, Virginia Power now only faces compe-Power's principal service area. To the extent that competition is tition for retail sales if certain of its business customers move into permitted, Virginia Power's ability to sell power at prices that will another utility service territory, use other energy sources instead allow it to recover its prudently-incurred costs may be an issue. of electric power, or generate their own electricity. However, both See Competition-Exposure to Potentially Stranded Costs on Virginia and North Carolina are considering implementing retail page 28. comp et it ion.

In response to competition, Virginia Power has successfully*

renegotiated long term contracts with wholesale and large federal government customers. In addition, the company has obtained regulatory approval of innovative pricing proposals for large industrial customers. Rate concessions resulting from these con-

27 e

Competition-Legislative Initiatives company filed its ARP, the Commission consolidated its consider-Federal: The U.S. Congress is expected.to consider'federal legis-ation of the ARP with its consideration of the company's 1995 iation in the near future authorizing or requiring retail competi- Annual Informational Filing. For a discussion of the.1995 Annual tion. Virginia Power cannot predict what, if any, definitive actions Informational Filing, see Future lssues-:-Rate Proceeding. .

In December 1997, Virginia Power sought to withdraw its ARP, the Congress may take.

having concluded that resolution of the cost recovla!ry issues raised Virginia: .The company is actively supporting, and the Virginia by the ARP was unlikely without General Assembly action. The General Assembly is actively considering in its current session, Commission has agreed that the company may withdraw i_ts sup-legislative proposals that would address: port of the ARP, but has reserved,the right to continue considera-

• specific dates for wholesale and retail competition in the state; tion of the ARP as well as other regulatory alternatives. In addition,

• establishment of a regional power exchange (RPX) to conduct the Commission will continue to consi.der the issues arising .out competitive auctions for the sale of electricity; of the 1995 Annual Informational Filing. See Future lssues--:Rate

• establishment of an independent system operator (ISO) to con- Proceeding on page 28.

trol transmission systems and ensure nondiscriminatory access Competition-SFAS 71 to the transmission grid;

• continued regulation of the distribution of electricity in Virginia* Power's financial statements reflect assets *and costs assigned service territories; under cost-based rate*regulation'in accordance with Statement of

• deregulation of the generation of electricity; Financial Accounting Standards (SFAS) No. 71, "Accounting for the

• recovery of prudently incurred*stranded costs; and Effects of Certain Types of Regulation." SFAS 71 provides that cer-

• consumer protection issues. tain expenses normally reflected in income are deferred on the The General Assembly is scheduled to be in session through balance sheet as regulatory assets and are recognized as mid-March. The company is unable to predict at this time whether the related *amounts are included in rates and recovered from or when any of the bills now before the legislature will be enacted. customers. The presence of increasing competition that limits the utilitys ability to" charge rates thahecover its costs or a change North Carolina: The 1997 Session of the North Carolina General in the method of regulation could result in the discontinued Assembly created a Study Commission on the Future of Electric applicability of SFAS 71.

Service in North Carolina. An interim report is expected in 1998, Rate-regulated companies are required to*write off regulatory*

with final recomme~dations to be made to the.1999 session of the assets a*gainst earnings whenever those assets no longer meet the North Carolina General Assembly. criteria for recognition as defined by SFAS 71. lri addition, SFAS 121, Competition-Regulatory Initiatives "Accounting for the impairment of Long-Lived Assets and for The Virginia Commission has also been actively interested in Long-Lived Assets to Be Disposed of," requires a review of long-industry restructuring and competition. lived assets foi impairment whenever events or changes*in cir-

• In 1995, the Commission instituted an ongoing generic investi- cumstances indicate that the carrying amount of an asset may nor gation on restructuring, resulting in a number of reports by its be recoverable. Thus, events or changes in circumstances that Staff covering such issues as retail wheeling experiments and cause the discontinuance of SFAS 71, and write off of regulatory the status of wholesale power markets. The Staff also submitted assets, may also require a review of utility plant assets for possible a report to the General Assembly calling for a cautious, two- impairment. if the'*review indicates utility plant assets are phase, five-year period to address restructuring issues. The report impaired, the carrying amount of affected assets would be writ-acknowledged the need for direction from the Virginia legislature ten down. This would result in a loss being charged to earnings, concerning policy issues surrounding competition in the electric unless recovery of the loss is provided through operations that industry. remain regulated.

In late 1996 the Commission.ordered Virginia Power to file stud- Virginia Power's regulated operations currently satisfy the ies and reports on possible restructuring of the electric industry in SFAS 71 criteria. However, if events or circumstances should change '

Virginia. The Commission also invited Virginia Power to submit a so that those criteria are no. longer ?atisfied, management proposed alternative regulatory plan with its filing. In March 1997, believes that a material,adverse effect on Virginia Power's.results Virginia Power filed a two-phase alternative regulatory plan of operations anq. financial position may result. The form of cost-(ARP). The plan as filed requested a five-year freeze of existing based rate regulation under which Virginia Power operates is likely base rates with earnings above a certain range to be used to accel- to evolve as a result of various legislative or regulatory initiiitives.

erate the write-off of generation-related regulatory assets and to At this time, management can predict neither the ultima1e out-:-

mitigate the costs associated with payments to nonutility gener- come of regulatory reform in the electric utility industry nor the ators under power purchase contracts. Virginia Power also sought impact such changes would have on Virginia Power.

approval in principle of the recovery of prudently incurred costs beyond 2002 through a non-bypassable transition cost charge.

The filing presented an illustrative estimate of potentially stranded costs based on hypothetical market prices. When the

e e 28 Competition-Exposure.to Potentially Stranded c;c,Jt~. * * , *.

• made filings recommending rate reductions in excess of $:wo mil-Under traditional cost..:based re'gulatiori, utilities have generally lion. Virgihia PoWer is\Jrrently studying fhe filings of these p~r:-,

had an obiigation.t{;e~e sup'pprt~{b/an im~licif,pi~~i~e of the tiei:'rhe Commissio~*staff ii scheduled to make further filings in opportunity to rec,o~er:Pr.udently \ricu,rr~d coifs.' Tli~ most_ signif- late Febr~~ry 1998.' Hearings are schedul~d to begin in late April, .

.. ,' ' *: ' ' ' * , * :-: *_.r' : .. ,* : ' ' ' . ':

icant potential adverse effect oftompetitioh is "stranded costs." Environmental Matters .

Stranded costs are those costs iricurre'd OT commitm'enfs made by Virginia Power i~ *s~bj~~t to rising costs re~t,1lting from;_ steadily utilities und~r c~st-.based iegul~t,io~ 'tliat m~/rio'i be *r~asonably increasing nulT\ber offederal, state and l_ocal laws and regulatio~s expected t6be i'~covefad in a'compefitive TT1arket. _ ' * . . d~signed. to protect human health and .the environment. T.h~se Virginia Po~ers potential exposure tc, stranded costs .is c:orry- laws. a~d regulations ~an r~sult i!] increased capital, operating posed of the following: ' . . _* **. **. .*.* *. *. * . * *. ~nd ~ther costs as a result o*f compliance, remediation, contain-

• long-term purchased power contracts th.at may be above ment. ,md monitoring obligations 9f Virginia Power. ,:hese c~st~

market (see Note Q); . . . . , . ...*. . . . '

have_been.histori~al\yrecovered through.the ratemak.ing process;

• costs pertaining to ciirtain*g~nei'a!ing plants)hiit may become however, should material costs be incurred .and not._recovered uneconomic in a deregulated environment; ' . ' through rates, Virginia Power's results of operations and financial as

• regulatory assets for items iuch income ta/benefits.previ~ c.ondition could be adversely imp~cted. ' ' ' '.

, ously flowed.~through to,custqmers, deferred losses 011 reac- virginia'pciJer incurred expenses of $70-4 million, $71.1 million, quired debt; and ~t~ercosts (See Note' C);'and .. , .. . * ~nd $.68-3 miilion (ilicludihg d~preciation) durin'g 1997, 1996, and

• unfunded obligations: for nuclear. plant decommissioning and 1995, respectiv~ly. in ccinnection with the use of environmental postretiremen('.benefits not'yet,. recogniz~d in t~e financial pr6tectidn facilitle!{a'.tid expects these* expenses to be approxi~

statements (See Notes A' and M)., . . .. *. . . ' .

~~ti!ly $69:1 riiillibn' in 1998. In addition, capital expenditures to Any forecast of potentially stranded costs is extremely sensi- limit 0~ monitor hazardous substances were b,.6 million, $22-4 tive to the vario~ assumptions made. Such assumptions .include: million, and $23-4 million for 1997, .1996, and 1995, respectively. The

• the timing-an!f extentofcustomerrihoice in'themarket for elec~ arriountestimated for 1998 for these expenditures is $10.0 mill.ion .

tric service;** . The Clean'Air A'ct; as amended im990, requires Virginia Power'

• estimates of future competitive rriarket:prices;' to reduce'its emissions ofsulfurdioxide (S02) and nitrogen oxides

• stranded cost recovel)' mechanisms; and other factors. * (NOx). The Clean* Air Act's S02 reduction program is based on the

• certain combinations of these _assumptioi1s as applied to Vir- issuance' of a limited number of 502 emission allowances, each of ginia Power would produce little to no stranded costs;'under other which may be used as a permit to emit one ton of so2 into the scenariosVirginia Powers*exposure to potentially stranded costs atmosphere or may be sold to someone else. Virginia Power's cmm-could be substantial: :

• pliance plans may include switching to lower sulfur coal, purchas-Virginia Power has* assessed' the reasonableness* of various ing emission.allowances and)nstalling S02 control equipment possible assumptions, but it has not been able to settle cm any . Virginia, Power:began ~omplying with Clean Air Act Phase I NOx particular combination thereof. Thus, Virginia Power's maximum limits at. eight of its units i~ Virginia in 1997, three years earlier than exposure to potentially stranded costs is uncertain. Management otherwise requir:eq. As .a re;ult, the units will not be subject to believes that recovery of any*potehtially stranded costs is appro- more stringent phase 11.limi.t~ until 2008:

priate and will vigorously pursue such recovery with the regula- From. 1.994 thro.ugh 1997, Virginia Power invested over $160 mil-tory commissions. having* .jurisdiction over *its. operations. lion to install and upgrade emission control equipment at its Mt However, Virginia i>ower. cannot predicf the extent-to which such Storm ~nd Pos_s.~m .Point power stations. Capital expenditures costs, if any. will be recoverable.from customer~, Also, in an effort related to .Cl.ean Air Act compliance over the .next five years are to mitigate the amount at risk, Virginia* Powe*r will continue to projected to be approximately, $40 m_illion. Changes in the regu-implement cost re<;iuction meas:ures, *

• liitory en:vironmem, availability qf. allowances, and emissions

. Rate Proceeding . . . . . , control techr:iology .could substantially impact.the timing and In March 1997, the Vhginia *commission issued :an order that Vir- magnitude of compliance expenditures ..

ginia Power's base rates be made interim and subject to refund as . In Novemben997, t~e EPA proposed new requirements for 22 of.March 1, 1997. This order was the res uh *oft he Commission Staff's states, including No.rth Carolina, Virginia and West Virginia, to re~ort ori its review o{Virginia Powers 1995 Annual Informational reduce an!f cap emissions of NOx. AlthoughJhe proposal leaves it Filing which concluded thatVirginia*Pciwers present rates would upJo each. stat!!to determine how to achieve the required reduc-cause Virginia Power to earn in excess of its authorized return on tion in emissions, the caps y,1ere calculated based on emission lim-*

equity. The Staff found that, for purposes of establishing rates its for utility boilers. if the states in which Virginia Power operates prospectively. a rate reduction of $95.6 million may be necessary choose to impose this limit, major additional emission control in order to realign}ates to' the authorized level: In March 1997, Vir- equipment, with attendant significant capital and operating costs,

• ginia Power filed its.'alternative regulatory plan (ARP) based on could be required. The EPA will issue a final rule by September 1998.

1996 financial information. Subsequently. the commission consol-idated the proceeding concerned with the 1995 Annual Informa-tional Filing with the proceeding that includes the ARP proposed by the company. Opposing parties in the rate proceeding have

29 Global Climate Change . Supplyco'!1_P;~~itio!1_:., .* ,. ,: ,:*, ... *,,,.,:.__ ,.,,,;*_, : .. ',, .:.*.

1.n 1993, the United Nation's Global Warming Treaty became effec: .Ea~t Mic:llari~s,c.\lt;ren~ly has,t~e sc:il~ .rig:ht tg s,µ-pi>!y elect~idty to tiye; The objective of the treaty is the stabilization of gr~enhous~ substanti~Jly ~11,of._th~. ~ustorrier~.}~ \~~. ~.ut_ho_r!zec;i ~:re~,' exc.ept gas concentrations at a level that would prevent marm:iade emis- where the customer's.demand isl *,abbiie

.;:* * *, 1 :~', * * * ' ; *'. .' * * . * * ~i .; *

• 1ookw. competition is cur-

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

sions. from interfering with the climate system, To furthei; this rentlysche9-ule_d t_o.be ph~sed int<>.t,h~ ry~t_io,n~I ~l~c:tri~ity ma,i:ket objective, an international Protocol was formulated 'on December for small customers whose demand is below (ookw, re'f erred to as 10;,1997 in Kyoto, Japan. This Protocol calls for the U.nited States to the do~.e~U~ c~s~m11er;:* -b.~gi~r,i.DgJ,' se,1¥,111~~i1ij9~:E~~t Mii reduce greenhouse emissions by 7% from 1990 baseline,level~.by lands is getting,ready for,~oinp,etit)~n.by,~,ii.i.lq!i,ig_~~-stomer loy~

the period 2008-2012. The Pro.tocol will not constitute a binding ~lty. It will clCComplish this*goal PYi ;, , < . , , :, . ,. , .. , ,:*

. commitment unless submitted to and approvec;i, by the Senate, '

• offering compet'itive prices', ' ' . ' "' ' ' ' ' ' ', '

Emission reductions of the magnitude included in the Protocol, if

• providing superior customer service, . -

• adopted, would likely result /n a substantial financial impact on

• providing' reliable distribution ~er~ice, and *': '. :*. **. ',' i. i'\

companies that consume OT produce fossil fuel~deri~ec,t' electric

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

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

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

On 'september 10, 1997, the Nuclear Reg,ulatory Commission (NRC)  :, . '.):**,. :*: .**;.**.'",_  :..'*: *< *.. *.;,,~: . *.\*,.'; ... .,,,*,*:,.,.,~*:*',, . . *-~

pu):>Hshed a proposed rul~ for finanda1 assurance requirements In its supply business, -East M1.dland5 1s .focused on taking

'reiated 'to nuclear decommiss,ioning. lf'the NRC's proposed r:u,,e ', ~dvantage 'of ttie, :mai;,+* t>pp6rt'unity i~ 'the d~i:ne's,r~

• gas's'Lip-were implemented without further ~larification :OT modjfication, ' piy 'busine'ii :tid'ding ga~ s~r~s'will :,ornplerri~ht 'it~. ~ie"ct"ri{'

or Virginia Power might have to either pre-'fLi~d provide° ac.cept~ s\ipply salk{to'.*d~rriestic; srriii)~' to' medium-s'i~ed'.~ommerci~I aridind~striai customers.'~ *,: *. ',: ,,. ;: ,:, .-.,,, .< '

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

• DOM,INIOW UK D.OMI.NIO:~ .. EN.ERCiY,.:- . .; _*, r,;,,,;*i*:*1.,:- .. *.. *... ,,,. _

0 East Midlantls operates in thre~ strategic.b.usiness lines~distri~ The financial;P!!Jfor:n:.i~nc!!: .of:DomiJ1ion Energy's 11,~t~Tcl.l ga~,a,nd.

• bution, suppli and other. East Midland's distribution ~n~ supply oil opeTclti011S,depeT)dS'tO a certair,i,d,egree on future mark!!t prices businesses are subject to extensive r~guiation. ']'.he 4istribution whi.ch a!e !nf!uenc~_d,.py many fact9rsiqut~i~!!.the cortr<>I of th,e business inyolves the transfer of electricity a~oss its)ow voitag~ company.- ., , : ,, . , :* .*., .. , :*,, ".. *:.:, **::*, ::*,.,::. * .

distribution sy~tem to custom~rs. Tlie. ~upply busines~ *erycom-:- Much of .Dominion Energy's g~_s resery!?S;. hcl,vt pr9d.u~tio,n-

• pa~ses purchasing elestricity and arranging fo~ iits distributipry to based ta~ credits. This tax' credit is due to*expire.on December 31, end users. ~O~i!,;Th(!, expirati.on of:thi~ t~?<,~re~i't,~i1th~~e -~~j~pa~. 0~ t~~'

.companys future profitapjlity.'To replace ,these.earn,ing~. 'th~ !=or.rr Regulati_on of Distributi~n pany continu~s.t~ grp,~,its resef"1e ~aseJhro_ugh:~hl! dri)l}ng:?nd

. East 'Midland's distribution business is fully regulated and acqui~i~i on of.oil ar.id g~s properti(!s.which .do i;iot ,qu_aiify for)re accounts for approximately 85% of its operating profit. The focus .credit ._, ..-, , *,i,. *. . ,. ,: *:* ., ,... ;* *. *.*.,.;,.*

in the distribution business is on the colitinuance,of'cost *reduc-

ln,

it~ foreign p<>~e.r ,h!:lsine~~e~. th~re a;.e ~om;i~t'~:ents.'to ~,4d tions and effic:iency improvements. The revenues.which East Mid-generat,ing capacity.,.E_gei:10.r,/~_eq>mpanxs. ~en.ivian. power g~r:i~

lands. derives from its distribution ,business ate controlled by a era~ion.busiriess, ha(acqmi;n!,t.ment.t9 a~d 100 N\,w.'r;,.y t~l! enq of specified formula. The elements in the formula are establishedfor 1999.. Corani, t.he comp~r1y'sio.ljyianb,µsiness, *hasilc,9,m!f)it~~nt .*

a five year period. Portions of the formula are subject to review at to invest_.-subs~an~ial. capital :to, increas_e generation ~apaci~y in

• the end of each five year period anct' cifother times at the discre- 8()1ivia by t.he end of .1998., Both, expansion projects ,are, C\lTTentJy.

tion of the regulator. An initial annual increase was established by progressing on .schedule. Foreign operations are also sµbjettto.

the regulator for the five year period ending March 3~ 1995. Since poH,ic,al and econo.rn,i~ risks. DomJnion Energy~seeks, to,qi~nage then; the regulator has on two separate occasioris decreased East these ris~s by limiting ,jts exposure in any single .count!Y and by Mi.dland's regulated d.istrib~tion prices which it. may charge its limiting i~s inv~s.tr,ner:it~ to th~se ~9u~tri_es ilTl(f !e.giot1s ~he.re th*e:

customers through the fiscal year ending Marclf31, 2000:There can company believes these risks are less signifi,Cil!)t.*' : * ; : i , . : :'

be no ass\l.rance that the regulator will not perform further DOMINION' C'APITA.L: * * ,,';, . . .

unscheduled distribution price reviews, or that any future distri_-

bution price review, whether scheduled or unscheduled, will not The financial performan~e of [?om inion Capitals diversified finan-result in price reductions or changes in the formula which could cial services business depends,to a certain ctegree:on the move-:

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

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

kets (see Note P). *

• RECENTLY ISSUED ACCOUNTING STAN DA.RDS.

e During 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosure About Segments of an Enterprise." Each of these BUSINESS OPPORTUNl,:IES

• Because the worldwide electric power industry is rapidly changing, especially in the U.S., there are*many opportunities for acquisitions of electric power assets and business combinations. We investigate statements is effective for fiscal years beginning after December any of the opportunities we learn about that may increase share-15, 1997. holder value or build on our existing businesses. Any acquisitions At this time, Dominion Resources does not expect the imple- or combinations may result in transactions involving cash, debt or mentation of these standards to have a m*aterial' impact on its equity securities, and may involve payment of a premium over results of operations and financial condition. book and market values. Such transactions or payments could YEAR 2000 COMPLIANCE dilute the interests of holders of common stock.

Dominion Resources is taking .an aggressive approach regard-ing computer. issues associated *with t_he onset of the n'ew Market Rate Sensitive Instruments and millennium-specifically. the impact of possible failure of com- Risk Managemen't puter systems and computer-driven eq~ipm_ent due to 'th_e roll-Dominion Resources is subject to market risk as a result of its ~e of ove~ to the year 2000. The year 2000 probiem is pervasive and various financial instruments, derivative financial instruments

. and complex as virtually every computer operati.on could be affected . . '.

derivative, comm~dity instruments . .l_nterest !ate risk generally is i~ some way by the roliover .of the t.;..,o-digit_ yea:r ~al~e from 99 associat.e~ with the.company's anci its subsidiaries' ou~standing to cio. rhe issue is ~hether computer systems wiil properly recog-debt as well a*~ its: comrnercia.l, *consumer, and mortgage le~di~g

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

activities .. Currency risk e~ists p~incipa!'y Jhrough the company'~

Systems that do not properly recognize such information could investments in.the United Kingdom and ~ome debt denominated generate erroneous data _or cause a syste~ t~ fail. . ..

in European currencies associated with the company's investment If not properly addressed, the year 2000 computer problem in South and Central America. The company is exposed to equity could result in failures in company computer systems and the price riskthrough various portfolios of equity securities.

computer systems of third parties with whonl'the company deals

. The company uses derivative commodity instruments to hedge on transactions worldwide. Such failures of the companys and/or exposures of underlying electric, gas production, and gas pro~

third parties' computer systems could have a material impact on curenient operations and is *also involved in trading activities the:companys ability to conduct business.

which* use these ins.tn.imehts. However, the fair value of these Since January 1997; the company has organized formal year derivative commodity. ilisfruments at becerriber 31, 1997 *and the 2000 project teams* to identify. correct or reprogram and test the potential near term losses in future earnings, fair values, or cash systems for year 2000 compliance. At this time, a ma}ority of the flows resulting from reasonably possible near term changes in project teams has completed their preliminary assessment. Based market-prices are no't anticipated to be material to .the results of on their evaluation, testing and conversion of system application operations, cash flows or financial position of the company..

• costs are projected to be within the range of $100 million to $150 The following analysis does not include the pricerisks associ~

million. The range is a function of our ong*oing ev~luation as to ated with the nonfinancial assets and liabilities of power produc-whether certain systems and equipment will be corrected *or tion operations, including underlying fuel requirements and replaced, which IS dependent cm*information*yet to be obtained natural gas operations: *,

• from suppliers and other exterrial sources. Mainteriance or mod-ification costs wHl-be expensed as incurred, while the costs of new software will be capitalized and amortized over the software's useful life.

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

are effectively addressed.

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

31 INT-ERE ST - RA TE RISK:

e NON - TRADING ACTIVITIES Weighted average variable rates are based on implied forward In managing interest-rate risk, the company enters into interest~ rates derivedjrom 1appropriate annual spohate observations as of rate sensitive derivatives. The following table presents descrip- the balance sheet* date. For interest rate derivatives, notional tions of the financial instruments and derivative financial amounts* have bee.n used -to --calculate the cash flows to be instruments that are held by the company _at December 31, 1997 and exchanged under the-contract.*

that are sensitive toJnt~rest rate change in some way.

EXPEC:rED MATURITY DATE Fair 1998 1999 2000 2001 2002 Thereafter Total Value (millions of US$)

0 ASS ETS Loans Receivable:

Variable rate 39.6 $ 73.7 $119.7 $226.0 $281_.4 . _ 207.2 947.6 974.5 Av_erage interest rate 8.8% 8.9% 8.9% 8.8% 8.7% 8.4%

Fixed rate 0.2 3.5 2.4 0.2 $ 0.1 .$ 5.0 $ I 1.4 I 1.4 Average interest rate 12.4% 12.4% 12.5% 11.7% 9.9% 8.7%

Nuclear decommissioning trusts' investments $ 1.7 .7 5.3 2.1 7..1 3.1 165.0 200.3 190.7 Average interest rate(() 5.5% 5.5% 5.5%. 5.5% 5.5% 5.5%

Mortgage loans in warehouse 88.2 88.2 91.4 Average interest rate 9.6%

LIABILITIES Fixed-rate debt $ 497.1 $335.6 $260.1 $175.8 $731.4 $3,255.5 $5,2_5 5. 5 $5,596.9 Average interest rate 6.5% 7.8% 6.1% 6.0% 5.1% 6.9%

Variable rate debt $1,501.8 $490.2 $ 88.8 $256.6 $366. 5 $_ 876.3 $3,580.2 $3,580.2 Average interest rate 6.1% 6.0% 5.6% 5.7% 5.5_% 4.9%.

Preferred securities of subsidiary trusts $1 35.0 250.0 _$385.0 387.7 Average interest rate 7.9% 7.9% 7.9% 7.9% 7.9% 7.9%.

Short-term debt 375.1 375.1 375.1 Average interest rate 6.1%

Mandatori ly redeemable pref erred stock $180.0 $ 180.0 $ 186.6 Average dividend rate 6.2 $ 6.2 $ 6.2 Off balance sheet Loan commitments $ 672.9 672.9 . 675.9 Average interest rate 9.3%

INTEREST-RATE DERIVATIVES ( 2)

Forwards Notional amount $ 54.0 54.0 Average strike price I 02.142 Average market price I 02.177 Futures con tr acts Notional amount $ 498.9 $ 498.9 (o.6)

Average strike price 99.077 Average market price 99.268

( 1) Interest rates are based on average coupon rates for entire portfolio at 12/31/97-(-2) Dominion Capital~ use of interest rate swaps to mitigate interest rate risk exposure in its residential and commercial lending businesses is immaterial.

32 INTEREST RATE RISK: TRADING ACTIVITIES e e spread over the prevailing 5-year Treasury interest rate. Should Dominion Capital, though its indirectly owned subsidiary Saxon interest rates increase by one percent, Saxon Mortgage could Mortgage, Inc., retains o.;,.nership:il) the residual classes o(the experience a loss of approximately $7-4 million.

asset backed **securities *utilized tb'sell home equity loans origi-FOREIGN-EXCHANGE RISK MANAGEMENT nated and purchased by Saxori Mortgag!;!. These assets are classi-Dominion Resource's exposure to foreign currency exchange rates fied as Trading securities* on the balance sheet and total $18"9.1 or cross currency exposure results from debt which is denomi-million as of December 31, 1997.

• _** *'

nated in a currency different from the company's functional cur-The residual securities represent the net pr_esent value of the rency. the U.S. dollar. In this situation, the company is subject to excess of the interest payments upon the underlying mortgage gains and losses due to the relative change in the foreign currency collateral net of interest payments to outs{anding borid holders, rate of the debt versus the U.S. dollar. The company uses currency servicing costs, over-collateralization requirements, -:and credit swaps to minimize this exposure. The table below provides infor-losses. Fair value of the residual *is ~nal'yzed quarterly by Saxon mation about the companys foreign currency-sensitive financial Mortgage to determine whether prepayment experience, losses instruments and derivative financial instruments. For debt, the and changes in the interest rate enyironmimt have had an impact table presents principal amounts and related weighted average on the valuation. E}\pected cash floWs of the underlying loans sold interest rates by expected maturity dates. The principal cash flows are reviewed based upon *current economic 'conditions and the are translated into U.S. dollars based on implied forward currency type of loans originated and are revised as necessary. As the secu-rates at the reporting date. For currency swaps, the table presents rities represent a net present valuE! of future c~s~ flows, changes the notional amounts, the weighted average pay rates, and t_he in the discount rate will result in valuation changes to the under-weighted average receive rates by maturity dates.

lying securities. The disco~nt ratJ utilized for the_ December 31, i997 fair-market value.determination:rs 11% and is derived from a EXPECTED MATURITY DATE Fair 1998 1999 2000 . 2001 2002 Thereafter Total Value (millions)

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

Unit of Currency-Inter American_

Development Bank Vari able rate $ 1.6 $ 1.6 1.6 $ 1.6 $ 1.6 $ 13.4 $ 21.4 , $ 21.4 Average interest rate 6.8% 6.7% 6.5% 6.3% 6.3% 6.5%

Foreign exchange rate $i.53 ' $1.37 $1.49 $1. 53 $1.49 $1.48 Unit of Currency-German Mark .

Fixed rate $ :7 $ ,7 $ ,7 $ ,7 .7 $ 20.3 $23.8 $ 22.6 Average interest Rate 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%

Foreign exchange rate $1.79 $1.77 $1.76 $1. 7 5 . $1.74 $i.76 (GBP functional currency)

Unit of Currency-US$

Fixed rate $409. 5 $409. 5 $819.0 $852.4 Average interest rate 7-3~ 7.3% 7.3% 7.3% 7-3% 7.5%

Foreign exchange rate $1.60 $1.58 $1.57 $1. 56 $1.56 $1. 55 Currency swap agreements related to long-term debt Notional amount $409. 5 $409.5 $819.0 $(26.8)

Average pay price 8.2% 8.6%

Average receive price 7.1% 7.5%

Foreign exchange rate $ 1.56 $ 1. 55

EQUITY PRICE RISK MANACEM.ENT e

The following table presents descriptions of the equity securities that are held by the company at December 31, 1997. As prescribed

.Dominion Capital's mortgage investments are adversely impacted by increases in the rate at which home equity loans pre-pay. Accordingly, Dominion Capital actively manages this risk by 1) 33 by the FASB, the marketable securities are reported on the balance imposing prepayment penalties on many of the underlying home sheet at fair market value. The company'.s securities consist of equity loans 2) aggressively enforcing premium recapture provi-trading (short-term) and available-for-sale securities. sions with correspondent sellers of mortgage collateral, 3) limiting the acquisition of adjustable rate mortgage collateral with below Fair market start rate (i.e., teaser rates), and 4) actively monitoring Cost Value trends in historical prepayment speeds and using prudent resid-(millions of US$) ual prepayment speed assumptions. Changes in interest rates are Trading: not considered to have a material impact upon prepayment speeds Short-term marketable securities $240. 7 $240.7 on the underlying home equity loan collateral as the credit Other than trading: impaired borrowers which make up the majority of the underlying Marketable securities $185.3 $190.8 collateral have not pr'oven to be sensitive to changes in interest Nuclear decommissioning trusts' investments $219.4 $360.4 rates during past periods of interest rate volatility.

OTHER RISK MANACEM.ENT FACTORS AND MATTERS Forward-Looking Information On a company-wide basis, the company is sensitive to interest rate risk. The company minimizes interest rate risk through a proper As we have pointed out earlier in this annual report, we have mix of fixed and variable rate debt. included certain information about the future for us and our sub-As mentioned earlier, a significant portion of the company'.s sidiaries. We have talked about our expectations and plans and, operations are located in foreign countries. These operations have when we felt we were able to make reasonable predictions, tried acquired debt in denominations different than the local func- to estimate the*impact of known trends and uncertainties that our tional currency. As a result, the company'.s foreign financial results busine~ses, are subject ~o. None of our statements about the future, could be significantly affected by factors such as changes in also referred to as "forward-looking statements", are guarantees exchange rates. To mitigate the effect of changes in currency of future results or outcomes. Any statement of this type neces-exchange rates in the United Kingdom, Dominion UK has insti- sarily involves assumptions and. uncertainties which could cause tuted a foreign currency swap. The swap is associated with senior actual results or outcomes to be substantially different from those notes denominated in u:*s. dollars. we have suggested. In many cases, the matter will be outside of our control. In addition to specific issues discussed in other parts Dominion Capital of this report, some of the factors that could make a significant dif-Dominion Capital's operations are affected by a number of risks. ference in the forward-looking statements we have made include:

Its lending institutions are concerned with credit, interest rate, legislative and regulatory actions, both domestic and interna-operation reserve, and market price of gas risks. Credit risk is tional; deregulation and increased competition in our industry; managed in the following ways: our operation of nuclear power facilities and related decommis-

• through its experienced management and underwriting sioning costs; our acquisition or disposition of assets or facilities; professionals; . . outcomes in legal proceedings, including rate proceedings;

• by minimizing the size of the.loan; changes in environmental requirements and costs of compliance;

• spreading the risk over a diversified client base, both geo- unanticipated changes in operating expenses and capital expen-graphically and industry wide; ditures; development project delays or changes in project costs;

• having first position on the collateralized assets; and competition for new energy development opportunities. We

• offsetting the credit risk of the customers with lower loan to are also influenced by more general economic and geographic value and higher interest rates; factors such as: weather conditions and catastrophic weather

• and retaining only a residual interest in the mortgage loans related damage; political and economic risks (particularly those through the securitization process.

associated with international development and operations, Dominion Capital is also concerned with interest rate risk. This including currency fluctuations); pricing and transportation costs risk is managed by making floating rate loans, loansecuritizations of commodities; the level of market demand for energy; inflation; which transfer most of the risk to investors, prepayment penalties and capital market conditions. *

• and hedging programs forpresecuritized loans. This period is rel-atively short because the loan portfolios are securitized every 90 days.

34 CONSOLIDATED BALANCE . E . TS Assets At December 31, 1997 1996 (millions)

Current assets:. ,.. . . ' *,::; ,' . I cash and ca~h equivalents (N.ote.s Aand G) '* $ 321'.6 $ 110.8 Trading securities (Notes\ Fand G) . . 240.7 16.4 customer accounts receivable, net , 6oi'.o 354.8 Other accounts receivable 336.5 174.9 Accrued unbilled revenu.~s . 245.2 162.8 Materials*and suppli;s at averag~ cosfor less: .

. Plant and general. ,,:, 163.3 148.7 Fossil.fuel. 67.4 76.8 Mortgage loans i~ war~hoJse (Notes Aand G) 88.2 ,65.8 Other .. , :*:- ** 209.1 209.5 2;273.0 1,320.5 Investments:.

• Investments in affiliates (Note A) *'404.0 448.3 Available-for-sale securities (Notes itF and'G) * . "190.8 . 692.4.'

Nuclear decomm issiorifng trust 'funds (~ot~s A~nd G)' 569.1. 443.3

. Lo~ns receivable, net<(Note~ A.and G): - - -, . ' 959.0 Investments in real.estate., '101:5 I 07.7_

Other .

• 19L6 234.2.

• 2,416.0 1,925.9

. *};_, '"' :,, .

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

(include~plant under construction.of $240.9 [ 1996-$18c;,.1]) , *. 19,5*19.2 16,815.8 Less accumulated depreciation, depletion and amortization*** - 6,986:6 6;306.4

'12,532.6 10,509.4

. i'.'.

Deferred charges and other ci;setii .

• Good;,..,n1 (Note A) ' . '. . ' 1,932.0 179.1 Regulatory assets (Note:c) 776;6,

• 773.9 Other* 262.5 187.6

'2,971.1 1,140.6 Total assets . $20, 192.7-The accompanying notes are an Integral part of the Consolidated Financial Statements.

Li~bilities ;nd Shareholders' Equie T:. ;., 35 At December 31, - . -- .. . ***--. ** * * *" ~-~v***** * ** ~ ****** - --*. -* .. .. .- ~ .

1997 1996 (millions)

Current liabilities:

Securities due within one year (Note H) .. $ 1,613.6 $ 431.0

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

Short-term debt (Notes Eand G) 375.1 378.2 Accounts payable, trade .. 679:3 410.6 Accrued interest 185.1 '.

107.3 Accrued payroll 107.2 73.1 Severance costs accrued (Note N)  ;-* .** *, 29:7 50.2 Customer deposits 44.6 50.0 Other 591.1 155.4 i";

3,625.7 1,655.8

., _l I~ ~ i :, I,,

Long-term debt (Notes G and H):

Virginia Power 3,514.6 3,579.4 Nonrecourse-nonutility 707.8 825.4 Dominion UK 2,673.6 342.5 other 300.0 300.0 7,196.0 5,047.3 Deferred credits and other liabilities: '.

Deferred income taxes (Notes A and B) ',. ,, 2,018.4 1,743.3 Investment tax credits (Note A)  : '~ ,; '.' .. _238.4 255.3 Other -~96.~ 162.5 2,853.6 2, 16.1.1 Total liabilities 13,675.3 8,864.2 Minority interest 402.9 293.0 Commitments and contingencies (Note Q)

Virginia Power and Dominion Resources obligated mandatqrily recie11mable preferred securities of subsidiary trusts* (Notes Gand K) *- 385.0 135.0 Preferred stock (Notes G and 0:

Virginia Power stock subject to mandatory redemption .*t.**'

18o.o 180.0 Virginia Power stock not subject to mandatory redemption ' *~ .,,. ..*. ' :: r: i ~-*.

509.0 509.0 Common shareholders' equity:

Common stock-no par authorized 300,000,000 shares, outstanding-187,799,443 shares at 1997 and 181,220,746 shares at 1996 (Note I) '* 3,673.6 3,471;4 Retained earnings 1,354.0 1,437.9 Accumulated translation adjustments (Note A) *c10.6) (9.2 )

Allowance on available-for-sale securities, net of tax (Note A) 7.3 (I. I )

other paid-in capital 16.2 16.2 5,040.5 4,915.2 Total liabilities and shareholders' equity $zo, 192.7 $14,896.4

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

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

• CONSOLIDATED STATEMENTS OF CASH FLOWS e -- --

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

Cash flows from (used in) operating activities:

Net income $ 399.2 $ .. 472.1 $ 425.0 Adjustments to reconcile net income to net cash:

Depreciation, depletion and amortization 905.7 694.4 633.5 Deferred income taxes 13.8 84.1 26.4 Investment tax credits, net (16.9) ( 16.9) ( 16.9 Deferred fuel expense 9.6 (54.4) 6.2 Deferred capacity expense (41.2) (9.2) 6.4 Restructuring expense 12.5 29.6 96.2 Accelerated cost recovery 38.4 26.7 Purchase of _mortgage loans (1,713.7) (769.2)

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

Accounts receivable (111.3) (47.0) (38.7 Accrued unbilled revenues (64.9) 17.6 (27-7 Materials and supplies 15.9 6.o 61.1 Accounts payable, trade 113.8 73.8 (37.6 Accrued interest and taxes 118.6 ( 17.5) 33.6 Other changes (89.9) . (161.3) 3.8 Net cash flows from operatirig activities 1,262.2 1,032.2 I, 171.3 Cash flows from (used in) financing activities:

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

Virginia Power 270.0 24.5 240.0 East Midlands 1,898.5 342.5 ..

Nonrecourse-nqnutility i{ , 4,i 13.0 434.5 54.3 Issuance (repayment) of short-term debt (98.5); 134.5 IOI. I Repayment of long-term debt and preferred stock (4,377.0) (336.5) (553.0 Common dividend payments .. *.(478.0) (460. I) (448.7 Other . .. ,*_;-]4*6* .. (,4.5) (20.5 Net cash flows from (used in) financing activities 1,828.8 304.6 (330.1 Cash flows from (used in) investing activities: ,i Utility capital expenditures (648,7) (484.0) (577-5 Acquisition of natural gas and independent power properties (52.6) (271 .2) ( 128.5 Loan originations ' '

(1,147.2)

. Repayments of loan originations 1,077.2 Purchase of East Midlands (1,901.5) "(342.5)

Sale of businesses 123.3 Purchase of fixed assets. (124.4) (34.8) (27-4 Purchase of marketable securities (8.5) (8.8) (61.8 Sale of marketable securities 127.7 '

Additions to mortgage investments (138.4) (58.3)

Acquisitions of businesses ' *- (144.5) ( 19.5) (52.4 Other investments (42.6) (73-6) (73-6 Net cash flows used in investing activities (2,880.2) (1,292.7) (921.2 Increase (decrease) in cash and cash equivalents $ 210.8 $ 44.1 $ (80.0 cash and cash equivalents at beginning of the year 110.8 66.7 146.7 cash and cash equivalents at end of the year $ 321.6 $ 110.8 $ 66.7 The accompanying notes are an integral part of the Consolidated Financial Statements.

l MANAGEMENT'S DISCU.J.i..lON AND ANALYSIS OF CASH F.LOWS AND 37 F I N A N C I A L C O N D I T I O .naudited)

Introduction lands acquisition. In January of 1998, Dominion Resources raised an additional $275 million (168 million pounds sterling) through In Management's Discussion and Analysis of Cash Flows and Finan-cial Condition, Dominion Resources' and its subsidiaries' general the issue of 6.8 million shares of common stock (see Note*S); also as a part of the program to capitalize the East Midlands. acquisi-financial condition and changes in financial condition are dis-tion. The remaining portion of the. fiye-y~ar revolving credit cussed by addressing the following topics: .

agreement is expe,ct~d to be refinanced with equity or equity

• What our capital expenditures were for the year 1997 and what we project them to be for the year-1998: In addition, we will dis- equivalents during the re~~inder of its five-year term. The capi-tal markets will continue to dictate the timing and methods of '

close trends that may have a material effect on our financial completing the equity capitalization of Ea~t Midlands. '

condition over the next couple of years.

• The sources of fupds u.tilized to pay for the expenditures EQUITY PLANS incurred during 1997 and the anticipated future capital Dominion Resources .raised capital from sales of com:mon stock expenditures. through the following plans: . . .

• Automatic Dividend Reinvestment and Sfock Pl,\rchase Plan;

• Customer.Stock Purchase Plan; .

Consolidated Financing Activity

',

• DominionDite'd fn.vestment;' and .

Dominion Resources funds its operations and supports the financ-

• Employee Savings Pian.

ing needs of its subsidiaries primarily as follows: (1) A$950 million On July 8, 1996, the company established Dominion Direct shelf registration through which the company may. over the next Investment. Dominion Dire.ct Investment' continues and expands two years, sell any combination of debt, preferred or *common the Automatic Dividend Reinvestment and Stock P.urchase Plan.

securities up to the $950 million limit. (2) The company continues Dominion Resources will continue to raise capital .through the to raise capital from sales of common stock through its equity Dominion Direct Investment and the Employee Savings Plans in plans. The company has raised over $100 million in each of the 1998. Proceeds from these.plans were (in millions); 1997-$176.2; last nine years from sales through these plans. (3) The company 1996~$164.2; and 1995-$136.9. Reflected in the amounts of the pro-also sells commercial paper backed by lines of credit and pro- ceeds from these pl/ins were the repurchases of136,800 shares of vides the proceeds to its subsidiaries under intercompany credit common stock in 1996 for an aggregate price of $5.5 million and 0

agreements. 685,500 shares of common sto~k in 1995.for an ag gregate price of

• our 1997 financing activities were focused on the acquisition of $24.8 million.

East Midlands and the related refinancings. A discussion of these COMMERCIAL PAPER activities follows:

Dominion Resources' nonutility suf?sidiaries m_ay finance their EAST MIDLANDS FINANCING . . working caphal for operations from the proceeds from Dominion Dominion Resources, through wholly owned UK financing sub- Resources commercial paper sales. Dom'inion Resources sells its sidiaries, initially financed 100 percent of the 1-3 billion pounds commercial paper in regional'and national markets and provides sterling ($2.2 billion) acquisition of East Midlands with interim the proceeds to the nonutility subsidiaries under the terms of deb( The funds necessary for the purchase were obtained in part inte~company crnd,it agreements. At the end of 1997, Dominion from borrowings of approximately 640 million pounds sterling ($1 Resources supported these borrowings th~ough bank lines of billion) under a short-term credit agreement and borrowings of credit totaling $500.8 miilion. The nonutilify subsidiaries repay.

700 million pounds sterling ($1.2 billion) under a five-year revolv- Dominion Resources through cash flows from operations and pro-ing cred.it agreement, both guaranteed by Dominion Resources. ceeds from permanent financings. Virginia .Power has a commer-During 1997, the entire short-term credit agreement and a por- cial paper program_ with. a limi.t of $500 million. The program is tion of-the five-year revolving credit agreement were refinanced supported by $500 million of revolving credit facilities a_nd is used with 8oo*million pounds sterling ($1.3 billion) raised from three primarily to finance working capitalfor operations. East Midlands bond offerings and one private bank facility. all on a non-recourse has a c*orrimercial paper program with a limit of 200 million basis to Dominion Resources. The final target capital structure pounds sterling. The program is supported ,by* a* 200 million calls for the remaining 40 percent of the acquisition cost, currently financed on an interim basis with the 5-year revolving credit facil-ity. to be refinanced with equity or equity equivalents.

In December of 1997, $250 million (150 million pounds sterling) in Capital Securities were issued by Dominion Resources Capital Trust I as the first part of the equity capitalization of the East Mid-

principally to fund its operations.

e pounds sterling five-year revolving credit facility and is utilized (millions)

Cash (used in) investing activities was as follows:

1997 1996 1995 Virginia Po~er Utility plant expenditures $(397.0) $(393.B) $(519.9)

LIQUIDITY AND CAPITAL RESOURCES Nuclear fuel (84.8) (90.2) (57.6)

Operating activities conUnue to be a strong'source of cash flow, Nuclear decommissioning P!Oviding $1,091 million in 1997 compared to $1,115 million in 1996. contributions (36.2) (36.2) (28. 5)

The decrease of $24 million (or 2 perce,nt) fr~m the previ~us* year Sale of accounts receivable, net ( 160.0) is attributable to normal busiTless fl~ctuations. O~er the past three Purchase of assets (19.8) ( 13,7) years, cash flow from operating activities* has, on average, covered Other (8.3) ( 12. 5) -( I I. I) 134 percent of its total construction req,uirem~nts\i.nd pro~ided 81

• Total $(546.1) $(546.4) $(777.1) percent of its total cash require~erits: Virginia Pqwe~*s remaining'.

cash needs are met generally wit ti proceeds frotnthe sale of secu- Investing activities in 1997 resulted in a net cash outflow of rities and short-term bcirro~ings. - , ' .. . . . $546.1 million, primarily due to $397.0 million of construction Cash from (used in) financing' activities wa~ as follows: expenditures and $84.8 million of nuclear fuel expend_itures. The construction expenditures included approximately $252-4 million

. '1997 1996 1995 for transmission and distribution projects, $52.1 million for pro-(mfllions) duction projects; $49.7 million for information technology projects Issuance of long-term debt and $42.8 million for other projects.

• Repayment of long-term debt CAPITAL REQUIREMENTS and-preferred stock c A PA c I TY - Virginia Power anticipates that kilowatt-hour sales Issuance of securities of subsidiary trust 135.0 will grow approximately 2-4 percent each year through 2000. We Issuance (repayment) of* will continue to pursue capacity acqu!sition plans to meet .the short-term debt ,~.2) 143.4 169.0 anticipated load growth and maintain a high degree of service Common dividend payments * (379.9) ,(385.B) (394. 3) reliability. The additional capacity may be purchased from othe,rs Other (49.2) (48.B) (58.0) or built by Virginia Power if we can build capacity at a lower over-Total $(556.6) $(5 50.B) all cost. Virginia Power has long-term purchase agreements with Hoosier (400 Mw) and AEP (500 Mw) which will expire on Decem-Financing activities* have represented a net outflow of cash* in ber 31, 1999. The company presently anticipates adding 584 Mw of recent years as strong cash flow from operations arid the absence market purchases beginning in the year 2000 to meet future load of major construction programs have reduced Virginia Powers growth.

reliance on debt financing. ** FI x E,D Ass ET s - Virginia Powers construction and n_u_clearfuel Virginia Power has taken advantage of declining interest rates_ expenditures during 1998, 1999 and 2000 are expe~ted to total by issuing new debt at lower rates as higher-rate* d*ebt has $588.1 million, $476.2 million and $395.1 million, respectively.

matured. For example, in 1997, $311.3 'million of Virginia Power's Virginia Power has adopted a plan to improve customer service long-term debt securities matured with an average effective rate and is spending in excess of $100 mi Ilion. Virginia Power estimates of 8.08%. As a partial replacement for this*maturing debt, Virginia that all of these expenditures will be met through cash fioy., from Power issued $270 millio,n of long-term debt securities during the operations.

year with an average effective rate of 6.84%.'.

Lo No -TERM DEBT - Virginia Power will require $333.5 million

• Virginici Power currently has three shelf registration'statements.

to meet maturities of long-term debt in 1998, which it expects to effective with the Securities and Exchange Commission.from which meet with cash flow from operations and refinancing of debt it can obtain additional debt capital: $400 million of Junior Sub-maturities. Other capital requirements will be met through a com-ordinated Debentures filed in January 1997, $575 million of First bination of sales of securities and short-term borrowings.

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

39 Dominion UK During 1997, cash flows used.in ,investing activities.was utilized LIQUIDITY AND CAPITAL RESOURCES primarily to acquire the outstanding shares of stock in East Mid-Dominion UK funds its capital* requirements through cash from lands, fund the investment in fixed assets, principally on the dis-operations, long- and short-term debt faci_lities, and equity con- tribution network, and acquire an additional 40% interest in the.

.tributions from Dominion Resources. In 1997, Dominion UK funded Corby Power Station .

the acquisition of East Midlands and the first of two installments CAPITAL REQUIREMENTS of the windfall profits tax. While the entire windfall profits tax was The projected 1998 capital requirements of Dominion UK include expensed in 1997, the cash payments are to be made in two install- approximately $229 million for cap(t~I expenditures, predomi-ments, half in December 1997 and half in December 1998.'

• nantly for the electricity distribution network and the completion C,ash flows from operations at East Midlands for 1997 were of new systems and facilities required for the opening up of com-

$(83-4) million and were due primarily to operating profit and petition in the ~lectricity and gas markets. Interest payments are w*orking capital management. A comparison :is not 'made to the e~pe~ted to be $216 Y)1illion and approximately $80 million will also year 1996 or 1995 because East Midlands did hot become a part of be required for the second and final installment of the windfall Dominion Resources' cbnsolidated entity until 1997. .. profits tax. The capital requirements are expected to be funded by

. Cash from. (used in) financing activities was as follows: cash g'enerated from oper~ticins and other existing financing sources .

1997 . The company anticipates approximately $300 million of equity

(~illions) contributions from the parent during 1998. i"o the extent these Contribution from parent $ 254.3 ' sources are available, they will be used to repay acquisition debt.

Issuance of long-term debt 1,898.5 Other 47.6 Total $2,200.4 Dominion Energy LIQUIDITY* AND *CA'Pl:rAL: RESOURCES**.

During 1997, cash from financing activities was primarily due to Dominion Energy funds its capital requirements through cash the funding of the acquisitJon of East Midlands by contrib~tions from operations, equity contributions by Dominion Resources, a,n from Dominion Resources ($254 million) and the iss_u?,nce of the intercompany. credit agreement. with Dominion Resources and following debt: bank revolving credi.t agreements.

• 321 million pounds sterli~g ($528 million) under a revolving Net cash provided by operating activities i.ncreased by $59.8 credit agreement and 200 million pounds sterling ($329 million) million in 1997, as compared to 1996, primarily due to: net income under a private bank facility, the proceeds of which were used from power generation assets in Peru acquired in August 1996; to fund the purchas~ of East'Midlands, aT)d  ;* generally higher natural gas prices; and greater production vol-

• $819 ~illio;n of five~ and ten-year Senior ~otes 'a,nd ioo mil'.. umes due to the acquisition of natural gas properties in the Gulf

• lion pounds ~terling ($165 million) o'f Eurobonds, which were Coast area in March 1996 and in Michigan in.January 1997. Net cash .

used to pay down debt borrowed under a short-term credit provided by operating activities increased by $52.1 million in 1996;

• agreement.

• as compared to 1995, primarily due to cash generated by op~ra- *

• In addition, $54 mill ionwas borrowed to fund the acquisition of tions of acquired companies and assets and from normal opera-an additional 40% interestin the Corby Power Station. tions.

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

1997

• 1997 1996 1995 .

(millions) (millions)

Utility plant expenditures $ (166.9) Contribution from parent $ 75.0 $149.3 Purchase of fixed assets ,*. (67.3) Issuance of long-term debt $ 107.9 221.7 Purchase of East Midlands (1,901.5) Repayment of debt (212.7) (B.9) (72. s)

Other 0.3 Common dividend payments (48.3) (43.3) (31.6)

Total Issuance of intercompany debt 21.9 19.7 32.4 Other 0.2 10,0 9.5 Total $(131.0) $274.2 $ 87.1

40

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

'.,' ,::. ,;1*::~\'*.:*.;.~i°:-!1_,*.~*y-::f",::**  :,. **:*:-:_:*.1*:*,,_*:  :**. _*;**,*1 Net cash provided by operating activities decreased by $179.1 miUion ln 1996 as compared to 1995, primarily as a result of the

• f~lJding of mortgage'.loan's prior to the securitization o{such loans (m.Hlions): <:*.,;:* *;-,., ..,;'(:,*,",.:;_.'- i~ it~'tinancial services business, ' ', ' . ' . ,

Pur,chase !Jffjxe~,a,ss.~t.s, ':::,,-; $(u.7) ' .'ca~hfrom' (1,1;~d in) financing

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

P;:~:,;;~rn~~~/ai,;as~i~P*~~~i~~ ;:- -

Sale ~{qu,sill:e~si ., ,°,  ; . : ::'

Cs~:6_). *, **:c-93.3}:.- ..*..

' , .:: ~: ,' *: ~ \°~3.3: . r.. : , .

Jt~; (millions)

Contribution from parent. $

1997 162.0 $

1~96 85.0 1995

$150.0 sal~o{trust units: - ' ', . . _ . 16.4 )ssuanc:~ of l~ng-term debt . 3,910.1. 104.7 16.1

,: -* ~: *- :.:r. ;; * . x.::*,: t *, J.*;  :-*r * '!.'..'. *. 1 " ,* ~ * .* i. * :: *' .* *, *, ,. ' .. '...

Acguisition oj business , (28.0) . (228.2). Repayment of long-term d~bt (3,865.3) (52.4) (41. 5) o'tii~r *.... *-' " 1 * * ',_ i '* . c21.2> * '\1ii.1'f '*:. c~i;.:1)

-, **** 1 !' ,. F.i'J:t:; *:.,i:1**..; .~*-,1 .~ '. -~* :,",;'-'-'-'"'-,,_,,._,._,--'---,,-,,.--,',--,-,-~ ~o,~oil divici~nd pay,ments (43.1) (30.7), (22. 7}

Total *:;.:,**~1. .. ~./1*1.:/.

$ 9 ..8. $~~~,.o) - _'_ $(.i 36.2)

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

• 79.6 (52.'1)

' l?~;i~\i' 1'9*9~.:.the ,rriaior,so:Urc~ 9f c~~h)9ws f;pm. in~~sting _actjyi~**: other 32.7 (0.4). (4.5) 1 t'ies ~as the sal~ of a:*-portion_ of_ Oo~i.nion En~rgy~ gene~ati~g, Tot~I * $ 226.0 $i.85:8 . $ 45.3 business, in_Perufor$123.3 mi'l,!lon, Th~se.funds were used.primarily to._pay'ci1f~lofigLfom_cJ._,-!!..h\. :',*.:, ',:: . '. :,

' , i 'j, i_.:,.': '. :. ' ... buri~*g* 1997, ca~h flo~s from fi~ancing activities were $226 million,

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

prim~ri ly due to the acquisitjon of the* remaining 50 percent i.nter-c;apita1 r~q~i;e~ent's't~~*o~min_ioij i:~erg.y in 1998 ~re foreca~ted est in.First Source Financial, loan origination~ and investment in.

to be_approximately-$3~8 milli~n. These requirement~ c;onsist of: marketable . q.ebt securities. Cash -from (used in)

• investirg

.. oil' and gas expenditures of $52 million a~d p~.'.,.,er g~ne~ation activities was as follows: .

e?(pendit.uresof $336 million (including the*~incaid acq,uisiti<;m).

1997 1996 1995

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

(millions)

. ct~b.t, cash' flt>~~ f~orr(i>peratio~s. bor~owingi from the re~ol~ing lnvestment.s in affiliat~s '$ (96.0) $(19.5) $(52.4)

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

Loan *originations, net (70.0)

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

Other (27.2) (23-9) (32.9) mates; coAs¢~~e~tiy. ..a~t.~a1 arn~un~s'.may diff~r'., , ' ' .* ' .

' *  : .. * ' . ' ' : *' * * .  :*, i ~ '. ' ' *. -: Total '$(i93.2) $(43-4) $(85. 3)

Do,minio*~*Capital .*. D~~ing 1997, cash flows used iYJ investing activities increased pri~

LIQ.UIDIT;Y AND CA*PHAL* .RES.OU RC ES marily <iueto the acquisition of the remaining 50 percent int~rest in

.Dominion ;Capital funds its .capital *requirements, through cash * 'First Source Financial and 1'.let investment in marketable securities:

from; :,operations, a11 . intercompany credit agreemen,t .with CAPl,TAL REQUI.REMENTS_

Dominion; Resq1rn:es; equity .'contributions.* from. Dominio.n . Dominion Capitals principal focus is. growing its financial services

~eso.urces(a,m!!dium-term note facility. b~rik revolv.in,g cre.dit ' companies. First Source Finai:icial .will increase its-loan portfolio agr_eemenfs, Jerm loans and a commercial paper program. Cash:' from $.970 .million. to approximately $12 .billion in 1998. Saxon flows useq in p_perations for 1997,.increased-by $i38.7 mi.I.lion as Mortgag*e plans to generate over $2 billion in loan origin~tions compared'.to1996 primarily due_ to a,.decrease in the net cash out- prirnari,ly in the sub-prime credit arena d_µring 1998. Cambrian, a flow-.of i'TioJ.t~age, loan activity for Saxon Mortgage. merchant banking enterprise for emerging independent oil and natural gas producers, will expand its loan portfoli_o to approxi-mately $*110 million in 1998. To fin~nce these expansion plans in i998, Dominion Capital plans to utilize approximately $75 million in new equity and intercompany debt. The remaining capital requi_rements wiU come from the reinvestment of cash from oper:..

ations,

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

• . ' .. ~ ...*J ,,.'

NOTES JO CONSOLIDA * . FINANCIAL STATEMENTS 41 Cost~ in_,e?<ces!; pf n~t.assets a~quired from equity i.nvestments NOTE, A Sig~ifica~t Acc~i.iiiting* Poli~i~s . ' are amortized over periods.not Jo _ex.ceed 4oyears. *

. ' . .  : .. *:. 'i . . *, ' ~  : ' .; . '

~ eNE.R A'L Domini~l1Res6Jrces; ln2. isa'h'oldh,g tqmpany head- G*AIN ON SAi.E OF l:OANS Gainonsale'ofloansrepresentsthe quartered in Richmond, Virginia. It; prirtJa;y busi)'.less is Vir~inia present value of the difference between t.he interest rate received Power, which is a r~gulat~d puhfic utilit.y 'e\*{gag'ed in the genera: on *the mottgage' loans *and ,*the interest rat'e received by the tion, transmission, distribution and*sa:le of electric energy within investor in the securiti~s after considering the effects of estimated a 30,00,0 square mile'*area in Virginia and northeasten, North ptepayments, costs to service the mortgage* loans and *non-Car.oJina. It sells electricity to retail customers (inclµding go~ern- refundable fees and premi~~s on loans sold: These gains on the mental agencies) and to 'vVholesale customers ~uch as r.ural elec- sate of loans are recogniied on the settlement date and are based tric. coopera~ives, municipalities, power rn!irketers.. a,]'.id _other on the relative.fair market value of the portion sold and .retained.

ut_ilities. The Virginia service area compri~es about 6.s* perc~nt Concurrently with recognizing such gain on sale, *a correspondihg of Virginia's total _land area, but accounts f~r over Bo percent of 'asset representing inte:re5-t.:oi1ly strips retained at securitization is its population. . * * *'* recorded on the balance sheet in an .initial amount equal to.the net

• . : Dominion R.esources recently acquired East Midlands in 1997,

• present value of the projected cash* flows, The asset recorded which is primarily a distribution and supply company. East Mid- which is classified 'a~ tr~di~g'i~ arriortized iri proportio'ri to the lands operates a 'distribution system serving a region of some income k'sthti~fod to be rec~i~~cfo~ring*ttie Jife: . .

6,200 square miles in east_ c~ntral Eng!an~ and it_ supp.lies e_lec- PRO PERT;*, P~~N-~ AN~ EQ~IPM~~T . U~i!i~/p_la~~ ~t V!;-.

tricity to 2-3 mi.I.lion customers, indu&ng b~si1:1e.~ses;acro~s.the ginia Power and.East Midlands is recorded at 6riginal'cost, which country. . . . .. . . includes labor, m*ate~ials, servi~es. a'nd other ihdirett costs. . .

. The company also _operates business subsidiaries active in . rtie cost of acquisitioh: expfor.ation.and d~vel~pment of nat~

independent power prod~dion, the acqui~iti,9_n and ;a:"t; ~f nat.- ~rai reso~rce .prop'ertie~ is. acco~nted fch uridir 'the successful ural gas 'reserves, financial services, and real estate. Some of the efforts method.'. . .. '*. . .* :_ *:.: ' : ;

independent power and iiatµral gas projects relocated in foreigna . Interest is capitalized ih' tonriection with tlie construction of countries. Net investments of approximately $374.6 million are major facilftie1'; T~e* capifa.llieci interest is recorded *as part of the

• involved in independent power production operat.ions in .Central assEi't to whi~h it" relates an.ct is amortized overt~~ asset's estimated a*nd South America. useful life. in 1997, 1~96, and 1995, '$3:s'mflii~n/$6'.3 million, and The preparation ~f financial statements in conformity ~it~ $14.1 i'n ii lion of intereit cost .;;,;as capi~alized, re~p~ct'ively. .

generally'accepted accounting principles requ_ir~s management Major das~es ~'f :property,. plant ;and equipment and t_heir to make estimates and assumptions that affect the reported respective balances ~re: 1.,.

amounts of assets and liabilities and di?closure ofcontingent lia-bilities at the date of the financial 5.tat~ments _and t_he *!eported At December 31; 1997 *1996 (millions) a111ounts of revenues and expenses during the reporting,))erio~,.  :

Actual results could differ from those estimates. UTILITY:**

0

. D0m ini~n Resources is currently exempt from' regulation as a Product'ion $ 7,973.9 $ 7,691.9 0

registered holding compaliy under the PubliC Utilit'y Holding Transmission 1,415.7 1,386.5 Company A~t of 1935i .* * . * * * * . *' * ., Distribution' ::

• 6,2*10.7 4,385.4

,. Accounting for the utiiity business confonils with'* g~nerally Other electric 1,127;1' 862.9 accepted accounting principles as applied to 'reguiated p~blic Plant und.er i:onst~uctio~ 240.9 f80.1

~tilities and as prescribed by fede~al a*g*e~cies and the commis" Nuclear fuel . *8.54.3 843.8 sions of the states in which the ~tility business operates. . .*. ' . Total utility i1;a22.6 15,350.6

• The Consolidated Financial Statementi include the accounts of NONUTILITY:

Dominion Resources and its subsidiaries. In consolidation; all Natural gas properti.es 52_1.8 492.4

~ignificant interconipany transactions and accounts' have' been Independent power properties 920.3 869.2 eliminated, . . . .. .. . Other 254.5 103.6 Total nonuti lity 1,691!.6 1,465.2 OP~RATI NG REVENUES AND .1 NCOME . Utility revenues are Total property, plant and equipment *$19,519.2 $16,815.8 recorded on the basis of services re_ndere~! commodities_.delivered or contracts settled. Dividend income on securities owne*d is recog-DEPRECIATION, DEPLETION .AND AMORTIZATION. Depre-nized on the ex-dividend date. Interest incorne is accrued on the ciation of utility plant (other than nuclear fuel) is computed using unpaid principal balance.

the straight-line method based on projected useful service lives.

1NVEST MENT*s IN A FF I LI ATE s Investments in common The cost of depreciable utility plant retired and the cost of stocks of affiliates representing 20 percent to 50 percent ownership, removal, less salvage, are charged to accumulated depreciation.

and.joint ventures and partnerships representing generally 50 per- The provision for depreciation provides for the recovery of the cost cent or less ownership interests, are accounted for under the of assets and the estimated cost of removal, net of salvage, and is equity method.

• based on the weighted average depreciable plant using a rate of 3.2 percent for 1997, 1996 and 1995.

42 e

• *Owned nu.clear.fuel is amortized on a.unit-of-production basis The FASB is reviewing the accounting for nuclear plant sufficient to amortize fully. over the estimated service life, the cost decommissioning. In 1996, FASB tentatively determined that the of the. fue.1 pl us. permanent storage and disposa.l costs. estimated cost of decommissioning should be reported as a SUTTY. North Anna liability rather than as accumulated depreciation and that a sub-Unit I Unit 2 Unit I Unit 2 stantial portion of the decommissioning obligation should be rec-NRC. Jicense expiration year

• 2012 2013 2018 2020 ognized earlier in the operating life of the nuclear unit. If the Method of decommissionipg DECON DECON DECON D,ECON industrys accounting were changed to reflect FASBs tentative (millions) proposal, tlien the annual provisions.for nuclear decommission-Current cost estimate ing would increase.

'(1994) dollars $272-4 $274.0 $247.0 $253.6 During its deliberations, the FASB expanded the scope of the Ext~inal trusts balanc~ project to include similar unavoidable obligations to perform clo-

• at December 31, 1997 '156.5 151.8 134.2 126.6 sure and post-closure activities for non-nuclear power plants.

1997 contribution to

• external*trusts, 10.6 . 10,8 , 7.6 7.2 Ther!:!fore, any forthcoming standard may also change industry plant depreciation practices. Any impact related to other com-When Virginia:Power's nuclea\unit~ cease operations, it is oblig- pany assets cannot be determined at this time.

ated to decontaminate *or remov~ radioactive contami)1ants so Independent power properties and East Midland's fixed assets t~at the. property will n,o.t req\J,i,re Nuclear Regulatqry Commission are depreciated using the straight..:line method based on esti-(NRC). over.sight. This phase. of a nuclear po,wer plant's life cycle is mated useful lives ranging from 30 to 40 years. Natura.I gas prop-ter~~d de~ommiss[OT)ing. Whlle the units are operating, Virginia erties are depleted using the units-of-production method.

Power. collects* f.r~m ra1epay~rs. a~ounts t.hat,' when combined 0

FEDERAL,, INCOME TAXES Dominion Resources and its sub-with' iT)vestment' earn,ings. will be us ed to f~rid this future sidiaries file a consolidated federal income tax return. ..

obligation .. ' ' ' ' ' .* ' Deferr~d income taxes are provided for all significant tempo-The amount being accruedJqr decommission_ing is equ.al to the raiy differences b~twe~n the financial and tax basis 'of a~sets and amount being collected from rcitepayers anc:t' is iri~luded indepre- liabiliti.es using presently enacted tax rates in accordance with ciation, depletion and a~ortizatlon expense, The decommission- SFAS No: 109, "Accounting for Income Taxes." Temporary differ-ing collectionswere$45.8milli'on, $36.2 millionand$28:5 million in ences occur when events and transactions recognized for finan-1997, 1996 and 1995, re~pectively._These dollars a're deposited into cial reporting result, in taxable *or tax-deductible amounts in e><ternal ~rusts through which the funds are irweste~. :N~t earnings future periods. The regulatory treatment of temporary differences of the.trusts' i~vestments are included in other ln~ome. In 1997, can differ from the requirements of SFAS No. 109. Accordingly.

1996 and 1995 net earnings were $20.5 million,'s16 million and $15.9 Virginia Power recognizes a regulatory asset if it is probable million, respectively. The accretion of the decommissioni~g.oblig- that future revenues will be provided for the payment of those ation is equal to the trusts' net earnings and is also recorded.in deferred tax liabilities. Similarly, in the event a deferred tax li.a-Other Income. Thus, the net impact of the trusts on Other Income bflity is reduced to reflect changes il'.l tax rates, a regulatory is zero . liability is established if it is probable that a future red.uction in

.The accumulated provision for decommissioning, which is revenue will result.

included in Accumulated Depreciation, Depletion and Amortiza- Due to regulatory requirements, Virginia Power accounts for tion in the company's Consolidated Balance Sheets, includes th.e investment tax credits under the "deferral method" which pro-accrued e:<pense and accretion descr.ibed above and any unreal- ~ides for the amortization of these credits over the service lives of ized: gains, and .losses on the trusts' investments. At December 31, the property giving rise to the credits: '

1997, the *net unrealized gains were $149.5 million, v,,nich is FOREIGN CURRENCY TRANSLATION Dominion Resources

. an increase of $69 million over the December 31, *1996 amount of translates foreign currency financial.statements by adjusting bal-

$80.5 million. Th.e total accumulated provision foqiecommission- ance sheet*accounts using the exchange rate at the balance sheet ing at December 31, 1997 was $578.7 million. It ~as $443.3 million at date and income statement accounts using the average exchange December 31, 1996. rate for the year. Translation gains and losses are recorded in The total estimated cost to decommission Virginia Powers four shareholder's equity. Gains and losses resulting from the settle-nuclear units is $1 billion based upon a site-specific study that was ment of transactions in a currency other than the functional cur-completed in 1994. Virginia Power plans t'~ ~pdate this estimate in ren~y are reflected in income.

1998. The cost estimate.assume.s that the method of completing decommissioning. ac~ivities is prompt dismantlement. This DEFERRED CAPACITY AND FUEL EXPENSES* Approxi-method assumes that dismantlem.ent and other decommissioning mately 90 percent of Virginia Power's fu.el expenses and So per-activities. will begin shortly after .cessation of operati_ons, which cent of its purchased power capacity expenses incurred as part of under current.operating li.censes will begin in 2012 as detailed in providing regulated electric service are subject to deferral the table, accounting. Under this method, the.difference between reason-ably incurred actual expenses and the level of expenses included in current rates is deferred and matched against future rev~nues.

43 c;o0Dw'1 LL Goodwill is the excess of the cost of net assets MORTQAQE INVESTMENTS In accordance with SFAS No. 125, acquired in business combinations over their fair value. It is "Accounting for Transfers and Servicing of Financial Assets and amortized on a straight-line basis over periods ranging from 25 to Extinguishments of Liabilities," mortgage investments, which had 40 years. The company evaluates goodwill for impairment at least been held entirely as available for sale as defined by SFAS No. 115, annually. "Accounting for Certain Investments in Debt and Equity Securi-AMORTIZATION OF DEBT ISSUANCE COSTS Dominion ties," were reclassified as trading securities. Changes in the fair

• Resources defers and amortizes any expenses incurred in the value of the mortgage investments are reported in operating issuance of long-term debt including premiums and discounts results in the current period. No material gain or loss resulted from associated with such debt over the lives of the respective issues. the reclassification.

Any gains or losses resulting from the refinancing of Virginia NONR ECOU RSE-NONUTI LITY Fl NANCI NQS Dominion Resources' Power debt are also deferred and amortized over the lives of the nonutility subsidiaries issue debt to finance their operations and new issues of long-term debt as permitted by the appropriate obtain financings that generally are secured by the assets of the regulatory commission. At Virginia Power, gains or losses result- nonutility subsidiaries. However, Dominion Resources may be ing from the redemption of debt without refinancing are amor- required to provide contingent equity support or to maintain a tized over the remaining lives of the redeemed issues. minimum net worth at the rionutility subsidiaries. These financ-1N v Es.TM ENT s E cu RI TIE s Dominion Resources accounts for ings have been segregated on the accompanying financial state.:.

and classifies investments in equity securities that have readily ments to distinguish their nonrecourse nature.

determinable fair values and for all investments in debt securities DERIVATIVES AND FUT U RES - 0 TH ER THAN. T RAD I N c; based on management's intent. The investments are classified into Dominion Resources utilizes futures and forward contracts and three categories and accounted for in the following manner. derivative instruments, including swaps, caps and collars, to Debt securities which are intended to be held to maturity are m~nage exposure to fl~ctuations in interest rates, foreign cur-classified as held-to-maturity securities and reported at amor- rency exchange rates and natural gas and electricity prices.

tized cost. Debt and equity securities purchased and held with the These futures, forwards and derivative instruments are int~*rit of selling them in t*he current period are _classified as trad- deemed effective hedges when the item being hedged and the h1g securities. They are reported at fair value and unrealized gains underlying financial or commodity instrument show strong his-

.and losses are included in earnings. Debt and equity securities torical correlation. Dominion Resources uses deferral accountfng*

that are neither held-to-maturity or trading are classified as avail- to account for futures, forwards and derivative instruments which

_able-for-sale securities. These are reported at fair value with unre- are designated as hedges. Under this method, gains and losses a.l ized gains and losses reported in shareholders' equity, net of tax. (including the payment of any premium) related to effective MORTQAQE LOANS' IN WAREHOUSE Mortgage loans in hedges of existing assets and liabilities are recorded on the bal-warehouse consist of mortgage loans secured by single family res- ance sheet and recognized in earnings in conjunction with earn-idential properties. Any price premiums or discounts on mortgage ings of the designated asset or liability. Gains and losses related loans' including any capitalized costs or deferred fees on origi- to effective hedges.of firm commitments and anticipated transac-nated loans are deferred as an adjustment to the cost of the loans tions are included in the measurement of the subsequent transac-and are therefore included in the determination of any gains.or tion. Cash flows from derivatives designed as hedges are reported losses on sales of the related loans. Mortgage loans in warehouse in Net Cash Flows from Operating Activities.

are carried at the lower of cost or market value. DERIVATIVES AND FUTURES-TRADINQ The fair value L0ANS 0

RECEIVABLE, NET Loans receivable are stated at method, which is used for those derivative transactions which do their outstanding principal balance net of the allowance for credit not qualify for settlement or deferral accounting, requires that losses and any deferred fees or costs. Origination fees net of cer- derivatives are carried on the balance sheet at fair value with tain direct origination costs are deferred and recognized as an changes in that value recognized in earnings or stockholder's adjustment of the yield, of the related loans receivable. equity. Virginia Power uses this method for its wholesale power The allowance for credit losses is established through provi- group's trading activities.

sJons for credit losses charged against income. Loans deemed to Options, exchange-for-physical contracts, basis swaps and be uncollectible are charged against the allowance for credit futures contracts are marked to market with resulting gains and l,osses, and subsequent recoveries, if any, are credited to the losses reported in earnings. Fixed price forward contracts, initiated

~llowance. At December 31, 1997, the allowance for credit losses was for trading purposes, are also marked to market with resulting

$17.5 million.

gains and losses reported in earnings. For exchange-for-physical contracts, basis swaps, fixed price forward. contracts, and options which require physical delivery of the underlying commodity, market value reflects managements best estimates considering over-the-counter quotations, time value and volatility factors of the underlying commitments. Futures contracts and options on futures contracts are marked to market based on closing exchange prices. Gains and losses resulting from marking positions to mar-

44 e

ket are reported in Other Income and Expense. Net gains and losses The provision for income taxes,. classified by the timing and resulting from futures contracts and options on futures contracts location of payment, was as follows:

and sett Iement of basis swaps are included in Operating Expenses.

A_mortization of option premiums associated with sales and pur- 1997 1996 1995 (millions) chases are included in.Operating Revenues and Income *and Oper-CURRENT ating Expenses, respectively.

Purchased options and.options sold are reported in Deferred U.S. $221.9 $1 53. 7 $178.4 Charges and Other Assets and in Deferred Credits and Other Lia- State 9.1 3.0 0.9 bilities, respectively. until exercise or expiration. Gains and losses N01J-U.S. 24.7 4.3 I. 7 are reported in Other Income and Expense. Electric. options exer- Total Current 255.7 161.0 181.0 DEFERRED cise.cl are reflected in the recording of related purchases or sales of electricity as Oper~ting Expenses and Operating Revenues, u*.s. 22.1 71.9 19.2 respectively. Upon expira~ion, electric options written are recog- State 0.1 3.3 3.8 \

nized in Operating Revenues and options purchased are recog- Non-U.S. (28.o) nized in Operating Exp~nses. Cash flows from trading activities are Total Deferred (5.8) 75.2 *23.0_

reported in Net Cash Flows from Operating Activities. Amortization of deferred investment tax credits-net. (16.9) ( 16.9) ( 16.9)

CASH Current banking arrangements generally do not require Total Provision $233.0. $219.3 $187.1 checks to be funded until actually presen_ted for payment. At December 31, 1997 and 1996; the companys accounts payable The components of deferred income tax expense are as foll!):,vs:.

included the net effect of checks outstaJ]djng but not yet presented for payment of $62.3 m*ulion and $72.6 million. 1997 199? 1995 respectively. . * (millions)

For purposes of the Consolidated Statements of Cash Flows, Liberalized depreciation $ 4.1 $ 53.8 . $ 56.6 Dominion Resources considers cash and. cash* ~quivalents to Indirect construction costs 4.9 3.4 (13.8) include cash on h.a1;1d and temporary investments purchased with Other plant related items *5.1 12.6 12.1' a maturity of three months.or l_ess. Deferred fuel (3.3) 19.1 (2:2)

Separation costs 6.5 (2.6) (12.4)

SUPPLEMENTARY CASH- FLOWS INFORMATION:

• , MBS basis differences 24.6 1997 1996 1995 Deferred capacity 14.4 3.2 (3.8)

(millions)

Conti_ngent claims (25.9) (iJ. I) ( 1.2)

CASH PAID DURING THE Tax rate change (16.6)

YEAR FOR:

Deferred state taxes 0.1 . 3.3 .'3.8 Interest (reduced for net costs of_b_orrowed funds capitalized) $376.0. Other, net (19.7) (n 5) ( 16.1)

Federal income taxes 159.6 Total $ (5.8) $ 75.2 $ 23;0 NON-CASH TRANSACTIONS FROM INVESTING AND The statutory U.S. federal income tax rate reconciles to the effec-FINANCING ACTIVITIES: tive income tax rates as follows:

Note issued in acquisition of business 47.5 Exchange of securities .1 2. r 12.3 1997 1996 1995 Equity contribution for Wolverine acquisition 21.4 U.S. statutory rate 35~ 35% 35%

Preferred dividends of Virginia Power 1.8 1.8 2.5 RE c LA s s IF I c AT Io N Certain amounts in the 1996 an_d 1995 Con-_ Amortization of investment tax credits (2.5) . (2.4) (2. 7) solidated Financial Statements have been recla!;sified to conform Nonconventional fuel credit (3.7) (3.8) (4.5) to the 1997 presentation. Benefits and taxes related to foreign operations . 4.3 0.2 *'

0:3 N' OT E B I Taxes State taxes net of federal benefit Other, net Effective tax rate 0.9 C1.5) 34.3'1, o.6 (o; I) 31.3%

0.5 (0.9) 30:2%*

Income before provision for income taxes, classified by source of income, before minority interests was .as follows:

1997 ,. 1996 1995 (millions)

U.S. $712.7 $683. 5 $609.5 Non-U.S. (33-9) 17.5 11.0 Total $678.8 $701.0 $620. 5

,. 5

• e*

The-effective income tax rate includes state and forei_gn income taxes.

The 1997 budget of the nevi'Labour government in the United Kingdom reduce.d the corporate income tax rate fo* 31% effective The construqion of North Anna Unit 3 was term.inated in

• No~emb.er. 1982. All retail jurisdiction!? have permitted ~ecovery of the incurred costs .. For Virgini~ an.d FERC jurisdictional customers:.

the amounts deferred are being amortized from the d~te termina-April 1, 1997.

• Income tax expense from continuing operations has tion costs were first !ncludible in.rates.

• been reduced by $16.6 milliOf! to reflect the decrease in deferred The incurred costs underlying these regulatory ~sse~s may, tax liabilities resulting from the 2 percent <;iecrease in the corpo- represent expenditures by Virginia Power or may represent the rate tax rate. recognition of liabilities that ultimately will .be settled at some

.' '.Dominion Resources net noncurrent deferred tax liability .is time in the future. For some of those regulatory ai;sets repre*sent-attributable to: . irig past exp*endifures that are not included in Virginia Power's rate base or used to adjust Virginia Power's* capital structur~.

1997 Virginia Power is not allowed to earn a return on the umecovered (millions) balance. of the $776i, million of regulatory assets*at o'ece_mber 31, ASSETS:

1997,Virgirila Power does not earn a return on $i 5-4 million*of reef*

Deferred investment tax credits* $ 84-4 ulatory assets, effectively excluded'fiom rate base, to be recov-'

O~h~r 19~.3 ered over various rec,overy periods up to 21 years, depending'on 1otideferred inco~e tax asset 276.7 90.3 the nature oft he deferred *costs. . .

". In addition, Virginia Power's depreciation pi'actic~s for early LIABILITIES:

retireTT1ents ofplant and equipment and cost of removal, along Depreciation meth~d anii pla~t 1*,924,2.

with changing operating plant* scenarios, have resulted** in an basis differences 1,463.5 Income taxes recoverafie.through accumulated aepreciatio11 reserve deficiency *~stimated to he future rates *

• 169.5. 168:8 $235 million at Deceniber*31, 1997. Th~ reserve deficiency results*

Partnership *basi's differenc_es * ** ,,. ***,

126:4  : 130.3 . from deferral of costs in conformity with regulatory depredation b.ther .. 75.0: 71.0 practices authorized by regulatory commissions h~ving jurisdic-Total deferred income t~ liability. 2,295.1 1,833-6* tiort o*ver Virginia *Powers operations. Curre_ntly, Virginia Power t,let deferred income tax liability 'b;o18.4 $1,743-3 is allowed fo ' amortize reserve deficiencies *over estimated

• remaining functional plant lives in all of the regulat6ry jur*isdic- .

ti ons it* serves:'

certain expense:s no~mally reflected in income are deferred on the*.

• as balances~e.et regulatory*assets and are ret~g~ized:in ince>meas *The following infcnmation relates tQVirg_ini~ ~owers proportion-th~ related amounts are included i~ rates and.recovered from c~s- ateshare of joirtly owned pliints.at Decem~er 31, 199_7. .. .

to.mefa. Virginia Power's regulatory assets included the following: .

Biith ..

At Dec~mber 31,

• Col.inti North 1997 199_6 ,:~* Pumped*

• Anna Clover, (millions)

.storage* Power . Power,

. Deferred capacity exp*enses $ 47-3 $ 6.1 ,station .. : Station ..  :. Station

• inccime taxes recoverable through future rates *.. ~78.9 477.0 Ownership interest .. .. 60.0% :88-4% ..

• so.o?f>.

Cost of decommissioning DOE uranium (miliiO!]S)

. enrichment facilities 67.6 73-5 Utility pla)lt in service $1,072';9 $1,81.9.4 .$533:3 Deferr~d losses on reacquirect'debt,* net 85.4 91. 5 Accumulated depreciation 229._1. . 819.2 26.3

':North Anna Unit 3 project termination costs 42.3 73.1 N11clear fuel 403.6 Other 55.1 52.7 Accumulated amortization of Total $776.6 . $773.9  : nuclear fuel 383.4 0

construction work in progress* 0.1 61.2 I. i The costs of deco mmissioning the Department of Energys (DOE) uranium enrichment facilities have been deferred and represent the unamortized poftion of Virginia Power's require.d contribu-tions to a fund for decommissioning and decontaminating the DO Es uranium enrichment facilities. Virginia Power is making such

-contributions over a 15-year period with escalation for inflation.

• These costs are being recovered in fuel rates.

e The co-owners are obligated to pay their share of all future con-s,truction expenditures and operating costs of the jointly owned facilities in the same proportions as* their respective ownership interest. Virginia Power's share of operating costs is classified in NOTE F I

• investment Securities Securities.~lassified as available-for-sale as of.December31 follow:

the appropriate expense category in the Consolid'ated Statements Gros_s Gross of Income. *

• Security Unrealized Unrealized Aggregate Type Cost Gains Losses Fair Value (millions) 1997;.

Equity $185.3 $10.9 $ 5.4 . $190.8 Dominion Resource? and its subsidiaries have credit agreements 1996 with_ various expiratior1 dates. _These agreements provided for Equity $635.8 $ 8.2 $10.1 $633.9

• maximum borrowings of $5,402.6 million and*$3,882-4 million _at Debt 58.5 s*s. s --\

December 31, 1997 and 1996, respectively. A~ December 31, 1997- and 1996,_$1,907.3 million and $714.5 million, respectively, was borrowed Debt securities held at December 31, 1996 db not have stated con-under such agreements and classified as. long-term deb,,

tractural maturities because borrowers may have the_ right to call*

Dominion Resources credit agreements s_upported ~403.4 mil-cirrepay obligations with or without call or prepayment penalt'ies.

lion and $308 million 9f Domini.on Res_ources ~ommercial paper at For the years ended December 31, 1997 and 1996, the proce~ds December 31, 1997 and 1996, respec;tively.

from the sales of available-for-sale securities were $122.2 million Virginia Power has an* established commerdal paper program and $33.4 million, respectively. The gross realized gains and losses with a maximum borrowi'(lg capacity of$500 million which is sup-wer~ $12.8 milli~n and $0.5 million for 1997 ,ani;! $.!-4 million and $1, ported by two credit facil ities ..One is a$300 million, five-ye~rcredit million for 1996, respectively. The basis'on .,..;hicti the cost_ of these facility that was effective.on June 7, 1996 and expires on June 7, 2001.

securities was !}et ermined is specific identificatio.n: The changes in.

The other is a $200 million credit facility, also effective June 7, 1996, net.unreali~ed holding gain or loss on available-for-sale securi-with an initial term of 364 days and provisions for subsequent 364-ties has result~-d in an increase in_ the separate co!Jlponent _of day extension;. It was r_enewed on June 6, 1997 for 364 days. The

hareholders equity during the yea;s erJded l)ece.mber 31, 1997 and total amount of commercial paper outstanding was $2262 million 1996 of $8.i, million, net of tax, and $5.6 million, net of tax, respec-and $312.4 million at December 31, 1997 and 1996, respectively.

tively. The gross realized gains and losses included in earnings A subsidiary of Dominion Capital also had $85.5 million and from transfers of securities from t~e availabl.e-for-s~le category

$91 million of nonrecourse commercial paper outstanding at into the trading category was $.5 million and $3.6 million, respec~

December 31, 1997 and 1996, respectively. East Midlands has a com-t_ively. The cha~ges in netrealized h°.l~ing g~i~ or loss on trading mercial paper program wi.th a limit of 200 million pounds sterling s~~urlti.es increased earnings du'ring the years ended December 31,:

($329 million). The program is supported by 200 *million pounds 1997 ind 1996 by $0.6 million a'nd $3.i'million, respectively. . *. '

sterling ($329 million) five-year revolving credit facility and is uti- .  : ' ' .' ' , .. . . ' *: , .. ~ :. ' ' ' .. .

lized principally to fund its operations. There was no commercial paper outstanding at December 31, 1997. A total of $385.5 million and$39omillion of the commercial paper was classified as long-term debt at D*ecemher 31, 1997 and 1996, respectively. The commercial paper is supported by revolving credit agreements that have expira -

tion dates extending beyond one year. Dominion Resources and its subsidiaries pay fees in lieu of compensating balances in con-nection with these credit agreements. A summary of short-tetm debt outstanding at December 31 follows:

• Weighted Amount Average Outstanding Interest.Rate (millions, except percentages) 1997 Commercial paper $329.6 5.8%

Term-notes 45.5 7.3%

Total $375.1 1996 Commercial paper $320. 5 5.5%

Term-notes 57.7 7.4%

Total $378. 2

47 NO.TE G Fair Value of Financial Instruments The fair value amounts of Dominion Resources' financial instru- Accordingly, the estimates presented herein are not necessarily ments have been determined using available market information indicative of the amounts that the company could realize in a cur-and valuation methodologies deemed appropriate in the opinion rent market exchange. The use of different market assumptions of management. However, considerable judgment is required to and/or estimation assumptions may have a material effect on the interpret market data to develop the estimates of fair value. estimated fair value amounts.

Carrying Amount Estimated Fair Value December 31, 1997 1996. 1997 1996 (millions)

ASSETS:

Cash and cash equivalents $ 321.6 110.B $ 321.6 110.B Trading securities 240.7 16.4 240.7 16.4 Mortgage loans in warehouse 88.2 65.B ~1.4 67.9 Available-for-sale securities 190.8 692.4 190.8 692.4 Loans receivable 959.0 987.3 Nuclear decommissioning trust funds 569.1 443.3 569.1 443.3 LIABILIT.IES:

Short-term debt $ 375.1 378.2 $ 375.1 378.2 Long-term debt 8,So9.6 5,478.3 9,151.0 5,560.3 PREFERRED SECURITIES OF SUBSIDIARY TRUSTS $ 385.0 $ 135.0 $ 387.7 $ 135.0 PREFERRED STOCK $ 1So.o $ 1Bo.a $ 186.6 $ 185.B LOAN COMMITMENTS $ 675.9 547.0 DERIVATIVES-RELATING TO:

Foreign currency risk 9.8 $ (26.8) 9.8 Natural gas options in a net receivable (payable) position $ 0.1 o.6 $ o.8 (o.6) c,ASH AND CASH EQUIVALENTS The carrying amount of discounting the dividend and principal payments .for a repres-these items is a reasonable estimate of their fair value. entative issue of each series over the average remaining life of INVESTMENT SECURITIES AND NUCLEAR DECOMMIS-the series:

S Io NIN G TR us T Fu ND s The estimated fair*value is deter- LOAN COMMITMENTS The fair value of commitments is esti-mined based on quoted market prfces, dealer quotes, 'and prices mated using the fees currently charged to enter into similar agree-obtained from independent pricing sources. ments, taking.into account the remaining terms of the agreements MO RT GAG E LO ANS I N WAR EH OU S E The fair value of mort- and the present creditworthiness of the counterparties.

gage loans in warehouse is based on outstanding commitments FOREIGN CURRENCY CONTRACTS Thefairvalueofforeign from investors. currency contracts is estimated by obtaining quotes from brokers.

LOANS RECEIVABLE The*carrying value approximates fair 1NTE RE s T RATE s WA P s The fair value of interest rate swaps value due to the variable rate or term structure of the notes (used for hedging purposes) is the estimated amount that the receivable. company would receive or pay to terminate the.swap agreements SHORT-TERM DEBT A.ND LONG-TERM DEBT Market.values at the reporting date, taking into account current interest rates are used to determine the fair value for debt securities for which a and the current creditworthiness of the swap counterparties. Net market.exists. For debt issues that are not quoted on an exchange, market value at December 31, 1997 and 1996 was immaterial.

interest rates currently available to the company for issuance of NAT u R A.L G As o PT Io N s The fair value of natural gas options debt ~ith s*imilar terms and remaining maturities are used to esti- (used for hedging purposes) is estimated by obtaining quotes mate fair value. The carrying amount of debt issues with short- from bankers.

term maturities and variable rates that are refinanced at current Fu Tu RE s *co NT RA c Ts Derivatives used as hedging instru-market rates is a reasonable estimate of their fair value. ments are off-balance sheet items marked-to-market with any PREFERRED SECURITIES OF SUBSIDIARY TRUSTS unrealized gains or losses deferred until the related loans are The fair value is based on market quotations. securitized or sold. Net market value at December 31, 1997 and 1996 PREFERRED STOCK The fair.value of the fixed-rate preferred was immaterial.

stock subject to mandatory redemption was estimated by

~8 NOTE H I Long-Term Debt e (continued)

At December 31, 1997 1996 (millions)

At December 31, DOMINION CAPITAL:

1997 1996 (millions) Senior notes:(14)

Fixed rate, 6.12%, due 2000 50.0 50.0 VIRGINIA POWER FIRST AND Fixed rate, 7.60%, due 2003 46.0 46.0 R E FU ND I NG MORTGAGE BO ND S (1):

Term note, fixed rate, 12.1%, due 2006 44.6 44.1 Series U, 5.125%, due 1997 49.3 Line of Credit, due 1998(15) 57.7 57.2 1992 Series B, 7.25%, due 1997 250.0 Note payable, fixed rate, 6.04%, due 2002 50.0 26.8.

1988 Series A, 9.375%, due 1998 $ 150.0 150.0 Term loan, fixed rate, 6.00%, due 1996-1997 5.0 1992 Series F, 6.25%, due 1998 75.0 75.0 Commercial paper(16) 85.5 90.0 1989 Series B, 8.875%, due 1999 100.0 I 00.0 Term loan, fixed rate, 6.5%, due 2001 38.0 47.2 1993 Series C, 5.875%, due 2000 135.0 I 35.0 Medium term notes, fixed rates, 4.93%-6.25%,

Various series, 6.75%-7.625%, due 2007 415.0 215.0 due 1996-1998 134.0 r_o4.o Various series, 6%-8%, due 2001-2004 ao5.o 805.0 Term loan, fixed rates, 6.5%-11.25%, due 1996-2001 13.0 13.5 Various series, 5.45%-8.75%, due 2021-2025 1,144.5 1,144.5 Term loan, due 2008(17) 99.2 TOTAL FIRST AND REFUNDING Revolving credit agreement(18) 6.8 MORTGAGE BONDS 2,824.5 2,923.8 Revolving credit agreement(19) 675.3 OTHER LONG-TERM DEBT:

TOTAL-NONUTILITY DEBT 1,663.0 945.1 DOMINION RESOURCES:

LESS AMOUNTS DUE WITHIN Commercial paper(2) 300.0 300.0 ONE YE..&.R:

VIRGINIA POWER:

First and refunding mortgage bonds 225.0 299._3 Term notes, fixed interest rate, 6.15%-10%,

Loans 433.4 12.0 due 1996-2003 551.1 503.1 Nonrecourse-nonuti Iity 955.2 119.7 Tax exempt financings(3):

TOTAL AMOUNT DUE WITHIN Money market municipals, due 2007-2027(4) i,88.6 488.6 ONE YEAR 1,613.6 431.0 Convertible interest rate, due 2022 10,0 LESS UNAMORTIZED DISCOUNT, DOMINION UK:

NET OF PREMIUM 26.1 24.8 Eurobonds, fixed rate, 8.125%-12%,

TOTAL LONG-TERM DEBT $7,196.0 $5,047.3 due 2006-2016 Senior notes, fixed rate, 7.10%-7-45%, (1) Substantially all of Virginia Power's pr~perty is subject to the lien of the mortgage due 2002-2007 822.6 securing its First and Refunding Mortgage Bonds. '

(2) See Note Eto the Consolidated financial Statements.

Revolving credit agreement, due 2001(5) 857.1 342. 5 (3) Certain pollution control equipment at Virginia Po~er"s generating facilities has been

• Term loan, due 2002(6) 329.0 pledged or conveyed to secure these financings. .

Loan notes, due 2007(7) '19.6 (4) Interest rates vary based on short-term tax-exempt market rates. For 1997 and 1996, the weighted average daily interest rates were 3.74% and 3.57%. respectively. Although Revolving credit agreement, due 1998(8) 27.-1 these bonds are re-marketed within a one year period, they are classified as long-term debt because Virginia Power intends to maintain the debt and it is supported by long-Revolving credit agreement, due 2002(9) 28.0 term bank commitments.

Finance \ease(10) 255.5 (5) The weighted average interest rate was 6.9% during 1997.

(6) The weighted average interest rate was 7.56% during 1997.

.other borrowings(11) '16.4 (7) The weighted average interest rate was 5.81% during 1997.

TOTAL OTHER LONG-TERM DEBT 4,348.2 1,634.2 (8) The weighted average interest rate was 7.66% du ring 1997.

NO NR ECOU RS E-NON UTILITY: (9) The weighted average interest rate was 7-76% during 1997.

( 10) The weighted average interest rate was. 4.6% during 1997, DOMINION RESOURCES:

( 11) The weighted average interest rate was 7.58% during 1997.

Bank loans, 9.25%, due 2008 19.7 20.8 ( 12) The weighted average interest rates during 1997 and 1996 were 6.06% and 5.89%.

DOMINION ENERGY: respectively.

( 13) The weighted average interest rate was 3.94% during 1997.

Revolving credit agreements, due 2001(12) 255.0 320.0 ( 14) The Rincon Securities common stock owned by Dominion Capital is pledged as Term loan, fixed rate, 5.445%, due 1998 15.0 35.0 collateral to secure the loan.

( 15) The weighted average Interest rates during 1997 and 1996 were 6.24% and 6.24%,

Bank loans, fixed rate, 9.70%-9.92%, due 2005 20.0 32.5 respectively.

Bank loans, 4.5%-6.64%, due 1996-2024 45.2 53.0 ( 16) The weighted average interest rates during 1997 and 1996 were 5.57% and 5.37%,

respectively. . .

Term loan, due 2002(13) 8.o ( 17) The weighted average interest rate was 7.67% during 1997.

(18) The weighted average interest rate was 5.63% during 1997.

( I 9) The weighted average interest rate was 6.19% during 1997.

Maturities (including sinking fund obligations) through 2002 are as follows (in millions): 1998-$1,613.6; 1999-$826; 2000-$349.1; 2001-$432.6; and 2002-$1,098.3.

NOTE I I Common Stock e

During 1996 the company purcha.sed on the *open market and Direct Investment which continues and expands the Automatic retired 136,800 shares of common stock for an aggregate price of Dividend Reinvestment and Stock Purchase Plan. From 1995

$5.5 million. On July 8, 1996, the company established_ Dominion through 1997, the following changes in common stock occurred:

1997 1996 1995 Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount (millions)

Balance at January 1 181.2 176.4 $3,303.5 172.4 h157.6 changes due to:

Dominion Direct Investment 3.7 142.2 1.9 70.9 Automatic Dividend Reinvestment and Stock Purchase Plan 1.4 55.1 2.9 107.6 Stock Purchase Plan for Customers of Virginia Power 1.0 23.2 1.4 45.8 Employee Savings Plan 0.9 34.0 o. 5 20.5 0.2 8.3 Wolverine acquisition 1.9 21.4 Stock repurchase and retirement (0.1) (5. 5) (o. 7) (24.8)

Other 0.1 4.6 0.1 3.7 0.2 9.0 Balance at December 31 187.8 I 81.2 $3,471.4 176.4 $3,303.5 NOTE J I Long-Term Incentive Plan A long-term incentive plan (the Plan) provides for the granting of number of shares of common stock that may be issued pursuant to nonqualified stock options and restricted stock to certain*

employees of Dominion Resources and its affiliates. The aggregate I the Plan is 3,750,000. Th.e changes in share and option awards under the Plan were as follows:

Restricted Weighted Stock Weighted Shares Shares Average Price Options Average Price Exercisable Balance at December 31, 1994 41,186 $41.05 11,076 $29.36 11,076 Awards granted-1995 25,320 $37.63 Exercised/distributed (21,576) $38.60 Balance at Dece.mber 31, 1995 44,930 .$40.92 11,076 $29. 36 11,076 Awards granted:._1996 79,784. ._$41.76 Exercised/distributed (29,433) .. $39.94 (475) $29.63 Balance at December 3_1, 1996 95,28 I , $41.61 10,601 $29. 34 10,601 Awards granted-1997 53,884 $35.24

• Exercised/ di str ibu ted/forf ei ted (44,399) $39.42 * (4,800) $29.25 Balance at December 3_1, 1997 104,766 $39.29 5,So1 _$29.42 5,So1 In 1995, the FASB issued SFAS No. 123, "Accounting for Stock Based East Midlands launched sharesave plans in -December 1997 Compensation." However, the company continues to apply under which employees, who enter into Inland Revenue approved Accounting Principles Board Opinion No. 25, "Accounting for Stock savings contract for periods of three or five years, are granted Issued to Employees," and related interpretations in accounting for options to purchase shares in Dominion Resources common stock.

the plan. Accordingly, no compensation expense has been recog- Under these arrangements options were granted on December 22, nized for stock options awarded. Had compensation cost for the 1997, on 149,881 shares to 918 employees under the three year plan company's plan been determined consistent with the methodol- and*on 514,947 shares to.1,511 employees under the five year plan.

ogy prescribed under SFAS No. 123 therewould have been no sig- No charge has been made to the income statement for the year nificant impact on the companys operations for the years ended ended December 31, 1997 with respect to the 20% discount on the December 31, 1997 and 1996. market price of the options on their date of issue. The discount will be recorded as compensation expense overt he periods of the plans.

50 e

NOTE K Obligated Mandatorily Redeemable Preferred Securities of Dominion Resources NOTE L I Preferred Stock and Virginia Power Subsidiary Trusts Dominion Resources is authorized to issue up to 20,000,000 shares of preferred stock; however, no such shares are issued and out-In December 1997, Dominion Resources established Dominion staryding.

Resources Capital Tn~st I (DR Capital Trust). DR Capital Trust sold Virginia Power has authorized 10,000,000 shares of preferred 250,000 shares of Capital Securities for $250 million, representing stock, $100 liquidation preference. Upon involuntary liquidation, preferred beneficial interests and 97 percent beneficial ownership dissolution or winding-up of Virginia Power, each share is entitled in the assets held by DR Capital Trust. Dominion Resources issued to receive $100 per share plus accrued dividends. Dividends are

$257-7 million of 7.83% Junior Subordinated Debentures (Deben- cumulative. Virginia Power preferred stock subject to mandatory tures) in exchange for the $250 million realized from the sale of the redemption at"December 31, 1997 was as follows:

Capital Securities and $7.7 million of corrimon securities of DR Cap-ital Trust. The common securities represent the remaining 3 percent Shares beneficial ownership interest in the assets held by DR Capital Trust. Series Outstanding The Debentures constitute 100 percent of DR Capital Trust assets. $5.58 400, ooo( 1)(2)

The Debentures are due December 1, 2027. The distribution rate on $6.35 1,400,0DD( I )(3) the Capital Securities and the interest rate on the Debentures are Total 1,Soo,000 each subject to increase if Dominion Resources and DR Capital Trust ( 1) Shares are _non-callable pr"ior to redemption.

(2) All shares to be redeemed on 3/1/00.

do not comply with an agreement they made to exchange the Cap-(3) All shares to be redeemed on 9/1/00.

ital Securities and the Debentures, which were not registered under the securities laws at the time of issuance, for registered substan- There were no redemptions of preferred stock during 1997 and tially identical securities within 180 days after the date of original 1996. In 1995 Virginia Powerredeemed 417,319shares of its$7.30 div-issuance. Dominion Resources may redeem the Debentures prior to idend preferred stock subject to mandatory redemption.

December 1, 2007 under certain conditions at a specified redemp- At December 31, 1997 Virginia Power preferred stock not subject tive price. The Debentures may be redeemed on or after December to mandatory redemption, $100 liquidation preference, is listed in 1, 2007 at another redemptive price. The Capital Securities are sub- the table below.

ject to mandatory redemption upon repayment of the Debentures at maturity or earlier redemption. At redemption, each Capital Issued and Entitled Per Outstanding Share Upon Security shall be entitled to receive a liquidation amount of $1,000 Dividend Shares Redemption plus accumulated distributions from December 8, 1997. $5.00 I 06,677 $1 12. 50 VP Capital Trust I (VP Capital Trust) was established as a sub~ 4.04 12,926 102.27 sidiary of Virginia Power for the sole purpose of selling $135 mil- 4.20 14,797 I 02.50 lion of preferred securities (5.4 million shares at $25 par) in 1995. 4.12 32,534 103.73 These securities represent preferred beneficial interests and 97 4.80 73,206 I DI.DO percent beneficial ownership in the assets held by VP Capital Trust. . 7.05 500,000 I 05.00( I)

Virginia Power concurrently issued $139.2 million of its 1995 Series 6.98 600,000 I 05.00(2)

A, 8.05% Junior Subordinated Notes (the Notes) in exchange for the MMP 1/87(3) 500,000 100.00

$135 million realized from the sale of the preferred securities and MMP 6/87(3) 750,000 100.00

$4.2 mi 11 ion of common securities of VP Capital Trust. The preferred MMP 10/88(3) 750,000 100.00 securities and the common securities represent the total beneficial MMP 6/89(3) 750,000 100.00 ownership interest in the assets held by VP Capital Trust. The Notes MMP 9/92 series A(3) 500,000 I OD.DD are the sole assets of VP Capital Trust. MMP 9/92 series 8(3) 500,000 100.00 The preferred securities are subject to mandatory redemption Total 5,090,140 upon repayment of the Notes at a liquidation amount of $25 plus

( 1) Through 7/31/03 and thereafter to amounts declining in steps to $100.00 after accrued and unpaid distributions, including interest. The Notes 7/31/13. .'

are due September 30, 2025. However, that date may be extended (2) Through 8/31/03 and thereafter to am~unts declining in steps to $100.00 after 8/31/13.

up to an additional ten years if certain conditions are satisfied. (3) Money Market Preferred (MMP) dividend rates are variable and are set every 49 days via an auction. The weighted average rates for these series in 1997, 1996, and 1995, including fees for broker/dealer agreements, were 4.71%, 4.48%, and 4.93%,

respectively. *

• During the years 1995 through 1997, the following shares were.

redeemed:

Year Dividend Shares 1995 $7.45 400,000 1995 7.20 450,000

e 51

' . ' . . Significant assumptions used in determining net perfodic pension NOTE M Retirement Plan, Postretirement ,cost and the projected benefit obligation were:

.Benefits and Other Benefits 1997

• 1996 R E T_I REM ENT PLAN Dominiqn Resources' RetlreTT)ent Plan cov-Non ers virtually all empioyees of Dominion Resources and its sub-U.S. u.s.. u.s_.

sidia_ries except for its U.K. subsidic1,ry. East Midlands. Th*e benefits As of December 31, Plan Plan Plan are* based oil years of service and 'th~ *employees comperi'sation.

Discount rates 7.75~ 6.75~ 8.0%

Dominion Resources funding policy is to contribute annually an Rates of increase in compensation levels 5.0~

• 4.75~ 5.0%

am*ount that is in acc_ordance with the.*provisions of the Employ-Expected long-term rate of return 9.5~ ,7.00~ 9.5%

ment Retirement Income Security Act of 1974- The majority of- East Midlands' employees joined a pimsio'() plan that is administered for the United Kingdom's electricity .industry. The assets of-this POSTRETIREMENT BENEFITS Dominion Resources and its plan are held in a separate trustee-administered fund that is .subsidiaries provide retiree health care and life insurance benefits actuarially valued every-three.years. East Midlapds.and its par- through *insurance companies with annual premiums based on ticipating_ ~mployees contribute to their, pen~ion plan. . benefits .paid. during. the year. From time to time in the pa~t.

• The* co~ponents .of tbE?. pri:>vision -f~r net periodic* pension D~minion Resources and its subsidiar'ies have changed benefits.

expense were as follows:_ . Some of th~se changes have reduced benefits. Under the terms of 1997 . 1996 1995 tbeir benefit plans, the companies reserve the right to change,*

Nein modify cir terminate the plan,s. Net periodic postretirement bene~

Total U.S. U.S.

• U.S. U.S.

• plans

• Plan fit exy:>ense for 1997 and 1996 was as follows:

Year ending December 31, Plan Plan Plan (millions)* *'

.. Year* end'ing December 31, 1997 1996 Service costs benefits ..

.(millions)*

earned during the year $ 50.1.$ *. 27.5 $ 22.6 * $ 26.7 $ 23.4 Service *cost $ 12.7 *n2:3 Interest cost on projected

. benefit obi igation 147'.2 83.0 61.1 54.9 Interest cost 25.4 24.2

. ~4-2 Actual return on Return on plan asse_ts (25;3) (16.6) pl an assets* (231.0) *, 136.1) (94.9) (92.9) (172.3) Amortization of transition obligation 12, I 12.1 Net amortization .. *Net amortization and deferral 13.4: 7.2 and deferral '65.9' 65.9_ 30.6 114.9 . _Net periodic postretirement benefit expense $ 38.3 $ 39.2 Net periodic pension cost'. $ '32.2 $ 21:5 $

• 10.7 $ 25.5 $ '*20.9 The following table sets forth the funded status of the plan:

The.following table sets forth the Plans funded status:

.1996 As of December 31, _1997, 1996

---

~----~- 1997 .*

Non (millions)

Total u.s U.S. *. U;S. . Fair value of plan assets $ 176.6 $ i 33.0 As of D~cember 31,. Plans pIan Plan,*, Plan. Accumulated" posh et irement benefit obligation:

Actuarial present value'*of Retirees $ 225.5 $ 202.7 benefit obi igations: Active plan participants 139;4 125.0 Accumulated benefit obligatio~/ . *Accumulate,d postretirement Vested $1,730.9 $646 :6 $1,084;3 $586. 7 benefit-obligation 364.9 .. 327.7

• Non Vested 79.0** 77.5 1.5 73-3 Accumulated postretirement

• $1,So9.9 $72 4;1*- $1,085.8 $660;0 ,. benefit obligation in excess of plan assets C188.3) (194.7)

Projected benefit obi igation for*. . Unrecognized transition obligation .*181.9 194.1 service rendered t~ date :

• 2,111.7. 945:3 1,166.4 852.2 Unrecognized net experience gain (1.3) (3.0)

Plan assets at fair value, Accrued postretirement benefit cost $ (7,7) $ (3.6) .

primarily listed stocks and corporate bonds

• 2,299.6 966.4 1,333.2

• 845.0 '.

Plan assets in excess of (less than) *..

projectedbenefitobligation 187.9 21.1 166.8 (7:2) ,.

Unrecognized net loss from pasf experience.different from that .

assumed and effects of changes .

in assumptions (73,9) 5.8 (89.7) 40.4

• unrecognized prior service cost 4.1 4..1 4.7 Unrecognized net asset at January 1, being recognized over 16 years beginning 1986 (18.5) (1 8.5) (21.8)

Prepaid pension cost included in other assets * $ 99.6 $ 22.5 $ 77.1 $ 16.1

52 e

A one percent increase in the health care cost trend rate would result in an increase of $5.1 million in the service and interest cost components and a $39.9 million increase in the accumulated post-payments totaling $74 million have been paid. Virginia Power esti-mates that these staffing reductions will result in annual savings in the range of $80 million to $90 million for its restructured oper-retirement benefit obligation. Significant assumptions_ used in ations. However, such savings are being offset by salary increases, determining the postretirement benefit obligation were: outsourcing costs and increased payroll costs associated with staffing for growth opportunities.

1997 1996 In a.n effort to. minimize its exposure to potential stranded Discount rates 7.75~ 8.0%

investment, Virginia Power.is evaluating _its long-term purchased Assumed return on plan assets 9.0% 9.0%

power contracts and negotiating modifications to their term~.

Medi cal cost trend rate 6% for first year 7% for first year including cancellations, where it is determined to be economically 5% for second year 6% for second year Scaling down to Scaling down to advantageous to do so. Virginia Power also negotiated settle-4.75'l. beginning in 4.7 5% beginning in ments with several other parties to terminate their rights to sell the year 2000 the year 2000 power to Virginia Power. The cost of contract modifications, con-tract cancellations and negotiated settlements was $3.8 million, Virginia Power is recovering these costs in rates on an accrual basis $7.8 million and $8.1 million in 1997, 1996 and 1995, respectively.

in all material respects, in all jurisdictions. The funds being col" Virginia Power estimated that its annual future purchased power lected for other postretirement benefits accrual in rates, in excess costs, inclµding energy p~yments, would be reduced by up to of other postretirement .benefits actually paid during the year, are $0.8 million, $5.8 million arid $147 million for the 1997, 1996 and 1995 contributed to external benefit trusts under Virginia Power's cur- transactions, respectively. The cost of alternative sources of power rent funding policy. Employer provided health care benefits are that might ultimately be required as a result of these settlements not common in the United Kingdom due to the country's national is expected to be significantly less than the estimated reduction in health care system. Accordingly. East Midlands does not provide purchased power costs.

health care benefits to the majority of its employees. * *Restructuring charges reported in 1995 included $37.3 million fort he cancellation of a project to construct a facility to handle Iow NOTE N I Restructuring level radioactive waste at Virginia *Power's North Anna Power Station. Virginia Power concluded that the facility should not be completed due to the additional capital investment required, In March '1995, Virginia Power announced the implementation decreased Virginia Power volumes of low level radioactive waste phase _of its Vision 2000 program. During this phase, Virginia.

result.ing from improvements in station-procedures and the avail-Power began reviewing operations with the objective of outsourc-ability of more economical offsite processing.

ing services where economical and appropriate, and re-engineer-ing the remaining functions to streamline operations. The re-engineering process has resulted in outsourcing, decentraliza*-

tion, reorganization and downsizing for portions of Virginia NOTE O I Accelerated .Cost Recovery Power's operations. As part of this process, Virginia Power _has In this increasingly competitive environment, Virginia Power has evaluated its utilization of capital resources in its operations_to concluded that it is appropriate to utilize available savings and identify further opportunities for operational efficiencies through cost reductions, such as those generated by the Vision 2000 pro-outsourcing or re-engineering of its processes. _ gram (see Note N). to accelerate the write-off of existing unamor-Restructuring charges of $18.4 million, $64.9 million and $117.9 tized regulatory assets. Not only will this strategically position million in 1997, 1996 and 1995, respectively, included severance Virginia Power in anticipation of competition, but it also reflects costs, purchased power contract restructuring and negotiated Virginia Powers commitment to mitigate its exposure to poten-settlement costs, capital project cancellation costs, and other tially stranded. costs. Virginia Power identified savings of $38,4 costs incurred directly as a result of the Vision 2000 initiatives. million in 1997 and $26.7 million in 1996 which were used to estab-While Virginia Power may incur additional charges for severance lish a reserve for expected adjustments to regulatory assets. (See in 1998, the amounts are not expected to be significant. Note Q).

In 1995, Virginia Power established a comprehensive involuntary severance package for salaried employees who may no longer be employed as a result of these initiatives. Virginia Power is NO TE- P r Derivative Tr~nsactions recognizing the cost associated with employee terminations as Dominion Resources uses derivative financial instruments for the management identifies the positions to be eliminated. Severance purposes of managing interest rate, natural gas price and foreign payments are being made over a period not to exceed twenty currency risks.

months. Through December 31, 1997, management had identified 1,977 positions to be eliminated. The recognition of severance costs resulted in a charge to operations in 1997, 1996 and 1995 of $12.5 mil-lion, $49.2 million and $51.2 million, respectively. At December 31, 1997, 1,619 employees have

• been terminated and severance

INTER Es T RATE RI s Ks e

Saxon Mortgage, enters into forward delivery contracts, financial futures and options contracts for the purpose of reducing exposure to the effects of changes in interest excess of $200 million. The company is currently studying the fil-ings of those parties. The Commission Staff is scheduled to make further filings in late February 1998. Hearings are scheduled to 53 rates on mortgage loans which the company has funded or has begin in late April 1998.

committed to fund. Gains and losses on such contracts relating to CONSTRUCTION PROGRAM Virginia Power has made sub-mortgage loans are recognized when the loans are sold. If the stantial commitments in connection with its construction pro-counterparties to the hedging transactions are unable to perform gram and nuclear fuel expenditures, which are estimated to total according to the terms of the contracts, the company may incur S588.1 million (excluding AFC) for 1998. Virginia Power presently losses upon selling the mortgage loans at prevailing prices. As of estimates that all of its 1998 construction expenditures, including December 31, 1997, Saxon has outstanding liabilities related to its nuclear fuel, will be met through cash flow from operations ..

hedging positions with certain counter parties a notional amount of $552.9 mil lion. The deferred hedging losses, net, at December 31, PURCHASE'o POWER CONTRACTS Since 1984, Virginia Power 1997 and 1996 were immaterial. has entered into contracts for the long-term purchase of capacity and energy from other utilities, qualifying facilities and indepen-FOREIGN CURRENCY RISKS lnMay1997,DominionUKissued dent power producers. As of December 31, 1997, there were 57

$819 million of Yank_ee bonds. The bonds are denomirn.ted in U.S. nonutility generating facilities under contract to provide Virginia dollars, exposing the company to foreign currency risk. Coinci- Power 3,277 megawatts of dependable summer capacity. The fol-dent with the issuance of the debt, Dominion UK acquired cross lowing table shows the minimum commitments as of December 31, currency swaps to mitigate the foreign currency risk. The swaps 1997 for power purchases from utility and nonutility suppliers.

• are in effect until the debt matures in five and ten years, respec-Commitments tively. The cash settlement and the peri.odic payments under the (millions) Capacity Other hedge are treated as_ yield adjustments to the underlyin,g debt 1998 $ 813.5 154.9 and recognize_d over the period the bonds are outstanding. The 1999 816.7 I 56.7 notional amount of these swaps at December 31, 1997 was $819 mil-2000 723.8 92.0 lion and the deferred hedging losses, net as of December 31, 1997 2001 716.0 83.7 were immaterial.

2002 721.1 81. 5 NOTE Q I Commitments and Contingencies After 2002 Total Present value of the to_tal 9,069.6

$12,86o.7,

$ 5,878.0 388.2

$ 957.0

$ 553.3 As the result of issues generated in the course of daily business, the company is involved* in legal, tax and regulatory proceedings In addition t_o the commitments listed above, under some con-before various courts, regulatory commissions and governmental tracts, Virginia Power may purchase, at its option, additional agencies. While some of the proceedings involve substantial power as needed. Payments for purchased_ power (including amounts of money. management believes that the final disposi- economy. emergency. limited-term, short-term, and long-t"erm tion of these proceedings will not have an adverse material effect purchases) for the years 1997, 1996, and 1995 were $1,381 million, on operations or the financial position of the company. $1,183 million, and $1,093 million, respectively. For discussion of Vir-ginia Power's efforts to restructure certain purchased power con~

• tracts (see Note N).

Virginia Power FUEL PURCHASE COMMITMENTS VirginiaPowersestimated REGULATORY MA TT ER S In March, 1997, th_e Virginia Commis-fuel purchase commitments fort he next five years for system gen-sion issued an order that Virginia Power's base rates be made eration are as follows (millions): 1998-$293; 1999-$233; 2000-$144; interim and subject to refund as of March 1, 1997. This order was the 2001-$144; and 2002-$127.

result of the Commission Staff's report on its review of Virginia Powers 1995 Annual Information Filing which concluded that the ENVIRONMENTAL MAT"(ERS Environmental costs have been companys present rates would cause Virginia Power to earn in historically recovered through the raternaking process; however, excess of its authorized return on equity. The Staff found that, for should material costs* be incurred and not recovered through purposes of establishing rates prospectively. a rate reduction of rates, Virginia Power's results of operations and financial condi-

$95.6 million may be necessary in order to realign rates to the tion could be adversely impacted.

authorized level. The EPA has identified Virginia Power and several other entities

• . Virginia Power filed an Alternative Rate Plan (ARP) in March as Potentially Responsible Parties (PRPs) at two Superfund sites 1997 based on 1996 financial information. Subsequently. the Com~ located in Kentucky and Pennsylvania. The estimated future reme-mission consolidated the proceeding concerned with the 1995 diation costs for the sites are in*the range of $61.5 million to $72.5 Annual Informational Fi ling with the proceeding that includes the million. Virginia Power's proportionate share of the costs is ARP proposed by the company. Opposing parties in the rate pro- expected to be in the range of $1.7 million to $2.5 million, based

. ceeding have made filings recommending rate reductions in upon allocation formulas and the volume of waste shipped to the

54 e

sites. As of December 31, 1997, Virginia Power had accrued a reserve of $1.7 million to meet its obligations at these two sites. Based on a financial assessment of the PRPs involved at these sites, Virginia gram, Virginia Power is subject to a retrospective premium assessment for any policy year in which losses exceed funds avail~

able to NEIL. The current policy period's maximum assessment is Power has determined that it is probable that the PRPs will fully $8.7 million.

pay the costs apportioned tp them. As a joint owner of the North Anna Power Station, ODEC is Virginia _Power gene.rally seeks.to recover its costs associ.ated responsible for its proportionate share (11.6 percent) of the insur-with envirn~mental r~mediation from third-party Insurers. At ance premiums applicable to that station, including any retro-December 31, 1997 pending cla.ims were not recognized as.an asset spective premium assessments and any losses not covered or offset against recorded oblig~tip)'ls: by insurance. ,

Nu CLE AR IN s u RA~ CE The Price-Anderson Act limits the pub-1ic liability of an owner of a nudear. power plant t.o $8.9 billio~ for Dominion Resources a single nuclear incidei:it. The Price.:Anderson Ame)'ldments Act of Under the terms of a~ investment agreement, Dominion Resources 1988 allowsfor_an inflatioriiny pr9~isi-o~ adjustrr:ienJ every five must provide contingent equity support to Dominion Energy in years. Virginia Power has purchased $2_00 m(lli~n of co.verage from the amount of $47.4 million. Management believes the possibility commercial insurance pools with th,e remaind,er'provided through of such support to Dominion Energy is remote.

a mandatory industry risk-sharing program. lnth.e event of a Dominion Resources is guarantor to Dominion UKs revolving nuclear incidem at any licensed* nu<;lear reac:tor in. the United credit agreement. The revolving credit agreement is with Union States, Virginia Power could be. assessed. up to ,$81.7. million Bank of Switzerland and various lending instit.~tions. The total (inciuding a 3 percent insurance premium tax fo*r Virginia) for commitment of the agreement 'is 700 million pounds sterling ($1.2 each of its four licensed reactors not to- exceed $10.3 million

. b.illion). Uncle; the agre'ement, Dominion Resources has guaran-(in~luding a 3 percent insurance premium tax for Virginia) per teed the prompt payment in full of amounts outstanding. In addi-

• year per reactor. There is no limit to the number of incidents for tion, 'if Dominion UK fails to pay when due any of the amounts

. which this retrospective premium can be assessed. *** '.

o~tstanding, Dominion Resources is obligated to promptly pay the

.* Nuclear liability coverage for claims made by nuclear workers amount outstanding. This agreement expi.res im November 12, 2001.

first hired on or after January 1, 1988, except those arising out of an extraordinary nuclear occurrence, is provided under the Master Worker insurance program. (Those first hired into the nuclear Dominion UK industry pri~r to January I, 1988 are covered by the policy dis- Dominion UK's indirect subsidiary, Corby Power Limited, has cussed above.) The aggregate limit of coverage for the i~dustry is .. entered into long-term commitments to purchase gas. The con-

$400 million ($200 million policy limit_ with automatic reinstate- tract commenced on October 1, 1993 and terminates on September

.ments of an additional $200 million). virginia Power's maximun:i 30, 2008 .. The following table shows the net pr~sent value of the

~etrospective assessment isappro~im~tely $12-3 milli~n (including commi1ments as of December 31, _1997.

a 3 percent insurance pr~mi.um tax for Virginia). . .

.Virginia Pow~r's current le~el' o(pr;perty ins~rance coverage Comrriitmen.ts

($2.55 billion for North Anna and $2l .billiori for:s~rry) exceeds the (millions)

NRCs minimum requirement for nuclear power plant licensees of 1998 82.3

. $1.06 billion per reactor site, and'rncludes coverage for premature 1999 82.3 decommissioning and functional total loss. The NRC requires that 2000 88.8 the proceeds from*this insurance be used first to return the reac- 2001 92.1 tor to and maintain it in a safe'*and stable condition, *and second 2002 93-.8 to decontaminate the reactor and station site in accordance with After 2002 605.3 a plan approved by the NRC. Virginia Power's nuclear property Total insurance is provided ,by Nuclear. Mutual Limited. (NML) and Present value of the total Nuclear Electric lnsuranc:.e Limited (NEIL), two mutual insurance companies, and is.su.\:)ject t_o retrospective premium assessments in any policy year in which l_osses exceed .the funds avail.able to Dominion Energy these insurance companies. The maximum-assessment for the cur-Dominion Energy, through certain wholly-owned subsidiaries, has rent policy period is- $37 milliqn. Bas_ed -on _the severity of the general partnership interests in certain of its energy ventures.

incident, the boards of directors of Virgi,nia Poy,,er's nuclear insur-Accordingly, such subsidiaries may be called upon to fund future ers have the discretion to lower.the.maximum retrospective pre-operation of these. investments to the extent operating cash flow mium assessment or eliminate either or both completely. For any is insufficient.

losses that exceed th~ limits, or for which insurance:proceeds are In addition, Dominion Energy may be required to make pay-not _available because they must first _b_e used for stabilization and ments under certain agreements on behalf of its energy ventures.

decontamination; Virginia Power has the financial responsibility.

As of December 31, 1997 no payments have been required.

Virginia Power purchases insurance from NEIL to cover the cost of replacement power during the prolonged outage of a nuclear unit due to direct physical damage of the unit. Under this pro-

Dominion Capital

• At December 31, 1997, Dominion Capital h~d. commitments to fund loans of approximat~ly $672.9 million.

NOTE T I e

Business Segments The company's principal business segments include Virginia 55 Power, Dominion UK, Dominion Energy, Dominion Capital and NOTE R I Acquisitions corporate .. The*company's business segment information was:

BUSINESS SEGMENTS EAST MIDLANDS .ACQUISITION AND FINANCING In the 1997 1996" 1995 (millions, except Identifiable first quarter of 1997, Dominion Resources acquired 1_00% indirect assets amounts) ownership of East Midlands .qy.,means of a C!l,Sh tender offer, com- OPERATING REVENUES mence~ on November 22,:.1996. Total co:nsideration for the acqui- AND INCOME siti_on was $2.2 billion. The acquisition has,been account~d for Virginia Power $5,079.? $4,420.9 . $4,351.9 using the purchase method of accounting. The excess of the pur- Dominion UK 1,970.1 chase price o~er the net assets acquired resulted in goodwill of $1.7 Dominion Capital 295.7 177.5 I 05.4 billion. (Net assets acquireq cCJnsists of the fa.ir value of tangible Dominion Energy 332.8 255.6 1r5.8 and. identifia_ble intangi.Qle asse~s* 1.ess the fair value .of liabilities Consolidated $7,677-6 $4,854.0 $4,633- I assumed by,th_e purchaser.) The goodwill is being amortized O\'.er.

a 40-year per_iod .. OPERATING INCOME The Joli owing lltJaucl.i_ted pro.f Ol"(na co1TibiT1ed results of oper- Virginia Power $1,0.19.3 $1,010.0 $971.9 a1ions for the twelve_ .months epde4 _DeceT11ber 31, 1996 has been Dominion UK 246.6 prepare,d assuming,tbe:acquisi~iori of East_Mi~lands had*occurre1 Dominion Capital 157.1 81.9 50.2 at the beginning of the period. The pro.formaresults i!,re provi~ed Dominion Energy. 71.4 36.6 35.3 for informati9n only.. The :results are not neces~arily indica~ Corporate (17.4) ( 18. 7) (31.0 tive of the actual results that would have been realized had the Consolidated $1,477.0 $1,109.8 $1,026.4

• acquisition occurred on the indicated dates, nor are they neces- I DENTI FIABlE ASSETS sarily indicative of future results of operations of the combined (billions) companies. Virginia Power $ 12.0 $ 11.B $ 11.8 Twelve Months Ended Dominion UK . 4.4 December 31, Dominion Capital* 2.1 I.I 0.9 1997 1996 D.ominion Energy 1.6 1.6 I; I As As Corporate 6.1 5.6 5.0 Reported Reported Pro Forma CONSOLIDATED RESULTS Eliminations (6.o) * (5.2) (4.9 Consolidated $ 20.2 $ 14.9 $ 13.9 (millions, except earnings per share amounts) DEPRECIATION AND

• Revenues $7,677.6 AMORTIZAT.ION

$4,854.0 $6,924.2 Net income" Yirginia PoV,'.er $ 584.3 $ 536.4 $ 503._5

$ 399.2 $ 472.1 $ 598.8 Earnings per share" 2.15 Dominion UK 131.3

$ 2.65 3.36 Dominion C~pital 17.5 6.8 3.0 1997 results include ($156.6) windfall profits tax ($0.85 per share).

0 Dominion Energy 85.0 69.9 42.6 NOTE S I Subsequent Events Corporate Consolidated CAPITAL EXPENDITURES 1.2 819.3 $ 615.2 2.1 1.9

$ 551.0 On January 21, 1998, Dominion Resources issued 6.5 million shares Virginia Power $ 481.8 $ 484.0 $ 577.5 of common stock. On January 27, 1998, the company sold an addi- Dominion UK 234.2 tional 275 thousand shares. Proceeds from the sale amounted to Dominion Capital ,. 7.8 17.7 1_.9 approximately$275 million. Aportion of the funds was used to pay Dominion Energy 11.7 176.0 25.1 down part of the five-year revolving credit facility used to finance Corporate 17.7 1.3 0.4 the purchase of East Midlands. _consolidated $ 753.2 $ 679.0 $ 604.9

56 NOTE U Quarterly Financial and

• Common Stock Data (unaudited)

In the third quarter of 1997, East Midlands recorded a liability of approximate)y $157 million to_ reflect the anticipated one-time windfall tax levied by the UK government. The tax was levied on The following amounts reflect all adjustments, consisting of only regional electric companies in the United Kingdom and is-based normal recurring accruals (except as disclosed below), necessary on the privatized utilities' excess profits. East Midlands paid one-in the opinion of Dominion Resources' management for a fair half of the tax levy in December 1997. The remaining payment ,is statement of the results for the interim periods. due in December 19'98.

QUARTERLY FINANCIAL AND COMMON STOCK Certain accruals were recorded in 1997 and 1996 that are not DATA-UNAUDITED ordinary. recurring adjustments, consisting of restructuring (see Note N) and accelerated costs recovery (see Note O). **

1997 1996 (millions, except per share amounts) Restructuring-Virginia Power expensed $0, $6.3 million, $1:1, REVENUES AND INCOME million and $10.7 million during the first, second, third and fourth First Quarter $1,891.4 $1 :223.9 quarters of 1997, respectively. and $5-4 million, $19:3 million; $4:6 Second Quarter 1,655.1 1,088.3 million and $35.6 million during the same periods in 1996.

Third Quarter. 2,094.3 1,327.3_

-*Accelerated cost recovery-Amounts reserved "for accelerated Fourth Quarter_. 2,036.8 1,214.5 cost recovery were $0, $2.7 million, $28.3 million and $7.3 million Year $7,677.6 $4,854.0

. during the first, second, third and fourth quarters of 1997, respec-INCOME BEFORE PROVISION tively. and $26.7 million during the fourth quarter of 1996.

FOR INCOME TAXES AND Charges for restructuring 'and accelerated' cost recovery MINORITY INTERESTS reduced Balance Available for CoT)1mon *stock by $0, $5:8 million, First Quarter $ 255,0 $ , 224.2 $i9.3 million, and$11.7 million for the first, second, third, and-fourth Second Quarter .124.3 144.3 quarters of 1997, respectively and $3.5 million, $12.5 million, $3:0 Third Quarter 153.2 244.9 million and $40.6 million for the same periods in 1996.

Fourth Quarter 146.3 87.6 Year $ 678.8 $ 701.0 NET INCOME First Quarter $ 169.9 $ 150.2 Second Quarter 79.1 94.2 Third Quarter

• 50:4 r62.2 Fourth Quarter 99.8 65.5 Year $ 399.2 $ 472.1 EARNINGS PER SHARE First Quarter $ 0.92 $ 0.85 Second Quarter 0.43 0.53 Third Quarter 0.27 0.91 Fourth Quarter- 0.53 0.36 Year $ 2.15 $ 2.65 DIV ID E°N D S PER SHARE First Quarter $ 0.645 $ 0.645 Second Quarter 0.645 0.645 Third Quarter 0.645 0.645 Fourth Quarter 0.645 0.645 Year $ _2.58 $ 2.58 STOCK PRICE RANGE First Quarter 41'/s-35'/, 443/,-37 5/a Second Quarter 36 3 /,-33'/, 40'!.-37 Third Quarter 38'/,-35'/,6 40-36'/a Fourth Quarter ., 42 7 /,-347 /a 41-37'/a Year 42 7 /s-33'/, 443/,-36 7/a

RE"PORT*OF MANAGEME.'S REPORT OF .EPENDENT AUDITORS 57 RESPONSIBILITIES The management of Dominion Resources, Inc. is responsible for al I TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF information and representations contained in the Consolidated DOMINION RESOURCES, INC.

Financial Statements and other sections of the annual report. The We have audited the accompanying consolidated balance sheets Consolidated Financial Statements, which include amounts based of Dominion Resources, Inc. and subsidiaries as of December 31, on estimates and judgments of rrianagement, have been prepared 1997 and 1996 and the related cqnsolidated statements of income in conformity with generally accepted .accounting principles. and retained earnings and of cash flows for each of the three years Other financial information in the annual report is consistent with in the period ended December 31, 1997. These Consolidated Finan-that in the Consolidated Financial Statements. cial Statements are the responsibility of the company's manage-

• Management maintains a system,of internal accounting con- ment. Our responsibility is to express an opinion on these trols designed to provide reasonable assurance, at a reasonable Consolidated Financial Statements based on our audits.

cost, *that Don,inion Resources' and its subsidiaries' assets are We conducted our audits in accordance with generally safeguarded against loss from unauthorized use or disposition accepted auditing standards. Those standards require that we and that transactions are executed and recorded in accordance plan and perform the audit to obtain reasonable assurance about with established procedures. Management recognizes the inher- whether the financial statements are free of material misstate-ent limitations of any system of internal accounting control, and ment. An audit includes examining, on a test basis, evidence sup-therefore cannot provide absolute assurance that the objectives of porting the amounts and disclosures in the financial statements.

the established internal accounting controls. will be met. An audit also includes assessing the accounting principles used This system includes written policies, an organizational struc- and significant estimates made by management, as well as eval-ture designed to ensure appropriate segregation of responsibili- uating the overall financial statement presentation. We believe ties, 'careful selection and training of qualified personnel, and that our audits provide a reasonable basis for our opinion.

internal audits. Management believes that during 1997 the system In our opinion, such Consolidated Financial Statements pre-of internal control was adequate to accomplish the intended sent fairly, in all material respects, the consolidated financial objectives. position of Dominion Resources, Inc. and subsidiaries as of The Consolidat~d Financial Statements have been audited by December 31, 1997 and 1996 and the results of their operations Deloitte 6 Touche LLP, independent auditors, whose designation and their cash flows for each of the three years in the period by the Board of Directors was ratified by the shareholders. Their ended December 31, 1997 in conformity with generally accepted audits were conducted in accordance with generally accepted accounting principles.

auditing standards and include a review of Dominion Resources' and its subsidiaries' accounting systems, procedures and internal*

controls, and the performance of tests and other auditing proce-dures sufficient to provide reasonable assurance that the Consol- Richmond, Virginia February 9, 1998 idated Financial Statements are not materially misleading and do not contain material errors.

The Audit Committees of the Boards of Directors, composed entirely of directors who are not officers or employees of Domin-ion Resources or its subsidiaries, meet periodically with indepen-dent auditors, the internal auditors and management to discuss auditing, internal accounting control and financial reporting matters and to ensure that each is properly discharged. Both inde-pendent auditors and the internal auditors periodically meet alone with the Audit Committees and have free access to the Com-mittees at any time.

Management recognizes its responsibility for fostering a strong ethical climate so that Dominion Resources' affairs are con-ducted according to the highest standards of personal corporate conduct. This responsibility is characterized and reflected in Dominion Resources' Code of Ethics, which addresses potential conflicts of interest, compliance with all domestic and foreign laws, the confidentiality of proprietary information, and full dis-closure of public information.

Dominion Resources, Inc.

7~~

Thos. E. Capps James L. Trueheart Chairman, President and Vice President and Chief Executive Officer Controller

.~..

• LIMITED GUARANTY This Limited Guaranty, effective as ofNovember 23, 1998, by Dominion Resources, Inc.,

a Virginia corporation ("Guarantor") and sole common shareholder of Virginia Electric and Power Company, a Virginia public service corporation, ("Virginia Power") is established for the purpose of supporting Virginia Power's financial assurance obligation as it relates to nuclear decommissioning pursuant to 10 CFR §50.75.

WHEREAS, Virginia Power is a licensee of four nuclear power reactors; namely, Surry Nuclear Power Station Units 1 and 2, and North Anna Nuclear Power Station Units 1 and 2 (collectively, the "Reactors"); and WHEREAS, Virginia Power has established external trusts for the purpose of collecting sufficient funds over the respective Reactors' licensed operating periods for their ultimate decommissioning; and WHEREAS, the name of one of the trusts, as established by a Trust Agreement dated December 31, 1986, amended and restated April 18, 1989, and further amended and restated May 4, 1994, is VIRGINIA ELECTRIC AND POWER COMPANY NON-QUALIFIED NUCLEAR DECOMMISSIONING TRUST ("Nuclear Decommissioning Trust"); and WHEREAS, the Nuclear Decommissioning Trust includes separate Reserve Funds for each nuclear operating unit such that each Reserve Fund is established as a trust under state law; and WHEREAS, the Nuclear Regulatory Commission ("NRC), through its regulations contained in 10 CFR §50.75, requires certain amounts and methods to be used in the demonstration of financial assurance for decommissioning of nuclear power reactors; and WHEREAS, pursuant to 10 CFR §50.75 as amended by regulations effective November 23, 1998, Virginia Power's total nuclear decommissioning financial assurance amount does not qualify for continued use of the sinking fund method as the sole method for satisfying the obligation; and WHEREAS, pursuant to 10 CFR §50.75 as amended by regulations effective November 23, 1998, Virginia Power's nuclear decommissioning financial assurance obligation may be satisfied via a parent company guaranty in addition to the sinking fund method; and WHEREAS, Guarantor is willing to guarantee payment for an amount not to exceed $91 million and for which it is qualified under the financial tests contained in appendix A to 10 CFR Part 30 for Virginia Power's nuclear decommissioning financial assurance obligation.

NOW, THEREFORE, because .of the above Recitals, which are incorporated herein, Guarantor hereby unconditionally guarantees the following:

1. Guarantor shall make on behalf of Virginia Power, for the benefit of its Nuclear Decommissioning Trust, any and all required payments or obligations under the nuclear decommissioning financial assurance regulations contained in 10 CFR §50.75 to the extent Guarantor qualifies under appendix A to 10 CFR Part 30, such payments or obligations in an aggregate amount not to exceed $91 million.

2.

Based upon the financial tests as contained in appendix A to 10 CFR Part 30, specifically paragraph II.A.2, and applied to Guarantor's December 31, 1997 audited financial statements, the limit to which Guarantor qualifies to guarantee is currently $200 million.

Such limitation will vary from time to time based upon the continued application of the financial tests on the financial statements of the Guarantor.

a) Guarantor's current implied unsecured bond ratings are A- and Baal for Standard and Poor's and Moody's, respectively.

b) Guarantor's tangible net worth at December 31, 1997 is $1.204 billion, which would support a maximum decommissioning financial assurance amount of $200 million.

c) Guarantor's total assets at December 31, 1997 are $20.2 billion with assets located in the United States of $14.9 biHion, which would support a maximum decommissioning financial assurance amount of $2.48 billion.

3. Guarantor agrees to submit revised financial statements, financial test data, and a special auditor's report and reconciling schedule annually within 90 days of the close of the succeeding calendar years.

4. If Guarantor fails to meet the financial test criteria contained in appendix-A to 10 CFR Part 30 for an amount equal to or exceeding $91 million, then Guarantor will send notice of cancellation by certified mail to Virginia Power and the NRC. Cancellation may not occur, however, during the 120 days beginning on the date ofreceipt of the notice of cancellation by both Virginia Power and the NRC, as evidenced by the return receipts.

5. If Virginia Power fails to provide alternate financial assurance as specified in 10 CFR §50.75 within 90 days after receipt of a notice of cancellation of this Guaranty, Guarantor agrees to provide such alternative financial assurance in the name of Virginia Power prior to cancellation of this Guaranty or make full payment under this Guaranty.

6. This Guaranty shall remain in effect until the NRC terminates the licenses of the Reactors or until such time as alternative financial assurance meeting the requirements of 10 CFR

§50.75 is provided by either Guarantor or Virginia Power.

7. All notices and communications to Virginia Power under this Guaranty, until Guarantor is notified to the contrary in writing, shall be addressed to Virginia Electric and Power Company, P. 0. Box 26666, Richmond, Virginia 23261.

8. All notices and communications to the Guarantor under this Guaranty, until Virginia Power is notified to the contrary in writing, shall be addressed to Dominion Resources, Inc., P. 0.

Box 26532, Richmond, Virginia 23261.

9. This Guaranty shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia, without regard to principles of conflicts oflaws.

10. The provisions of this Guaranty may not be waived, changed, modified or discharged orally, but only by an agreement in writing signed by Guarantor and Virginia Power.

2

'*,,,.)'

11. Any delay by Virginia Power in exercising, or any failure of Virginia Power to exercise, any right hereunder shall not constitute either a waiver of the right of Virginia Power to exercise such option or a waiver of any other remedy to which Virginia Power may be entitled hereunder or under applicable law.

12. The provisions of this Guaranty shall be binding upon Guarantor and its successors and assigns. Guarantor shall not assign its rights nor delegate its obligations under this Guaranty in whole or part, without written consent of Virginia Power, which shall not be unreasonably withheld, and proper notice to the NRC.

13. A determination that any provision of this Guaranty is unenforceable shall not affect the enforceability of any other specific provision herein or of this Guaranty generally.

14. This Guaranty is the entire and only agreement between Guarantor and Virginia Power with respect to the guarantee of the nuclear decommissioning financial assurance obligations of Virginia Power by Guarantor. All representations, warranties, agreements, or undertakings heretofore or contemporaneously made, which are not set forth herein, are superseded hereby.

15. This Guaranty will be effective upon the approval and ratification of the Dominion Resources, Inc. Board of Directors.

Dominion Resources, Inc.

By: Dated: November 23, 1998 E ~ :Roach, Jr.

Executive Vice President and Chief Financial Officer I hereby certify that Edgar M. Roach, Jr. is the duly elected and incumbent Executive Vice President and Chief Financial Officer of Dominion Resources, Inc., and that the signature set forth above is his gen uni : gnature.

ByJ£. *~

Name:**

Dated: November 23, 1998

~~~~.............,,-J'-'~~~~-'----

Title:

3

e Deloitte &

ToucheLLP 0 Suite 500 Eighth & Main Building 707 East Main Street Telephone: (804) 697-1500 Facsimile: (804) 697-1825 Richmond, Virginia 23219 INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING AGREED-UPON PROCEDURES Board of Directors Dominion Resources, Inc.

Richmond, VA We have performed the procedures included in the Code of Federal Regulations (CFR) Title 10, Part 30, Appendix A (Appendix A to 10 CFR part 30), which were established by the Nuclear Regulatory Commission (NRC) and agreed to by the NRC and Dominion Resources, Inc., (the "Company"), solely to assist the users in evaluating management's assertion about the Company's compliance with the financial tests as of December 31, 1997, included in the accompanying letter dated November 23, 1998 from Edgar M. Roach, Jr., Executive Vice President and Chief Financial Officer of the Company (related to the licensee, Virginia Electric and Power Company, License No. DPR-32 Surry Unit 1, License No.

DPR-37 Surry Unit 2, License No. NPF-4 North Anna Unit 1, and License No. NPF-7 North Anna Unit 2). This agreed-upon procedures engagement was performed in accordance with standards established by the American Institute of Certified Public Accountants. The sufficiency of these procedures is solely the responsibility of the specified users of the report. Consequently, we make no representation regarding the sufficiency of the procedures described below either for the purpose for which this report has been requested or for any other purpose.

The procedures that we performed with respect to the attached schedule prepared by the Company are as follows:

1. We compared the amounts in the column "Per Financial Statements" with amounts contained in the audited consolidated financial statements of Dominion Resources, Inc. as of and for the year ended December 31, 1997, on which we have issued our report dated February 9, 1998, and noted that such amounts were in agreement.

2. We compared the amounts in the column "Per CFO's Letter" with the letter prepared in response to the NRC's request, and noted that such amounts were in agreement.

3. We compared the amounts in the column "Reconciling Items" with analyses/schedules prepared by the company setting forth the indicated items.

4. We recalculated the totals in the attached schedule.

Deloitte Touche Tohmatsu International

We were not engaged to, and did not, perform an examination, the objective of which would be the expression of an opinion on the attached schedule or the accompanying letter dated November 23, 1998.

Accordingly, we do not express such an opinion. Had we performed additional procedures, other matters might have come to our attention that would have been reported to you.

This report is intended solely for the information and use of the board of directors and management of Dominion Resources, Inc., its subsidiary Virginia Electric and Power Company and the Nuclear Regulatory Commission, and is not intended to be and should not be used by anyone other than these specified parties.

j)~:~ ~I November 23, 1998

SCHEDULE RECONCILING AMOUNTS CONTAINED IN THE CHIEF FINANCIAL OFFICER'S LETTER WITH AMOUNTS IN THE FINANCIAL STATEMENTS Dominion Resources, Inc.

Year Ended December 31, 1997 Line in CFO's Letter ($M) Per Financial Statements Reconciling Items Per CFO's Letter Total Assets $20,192.7 LESS:

Intangible Assets 2971.1 Nuclear Plant $1,773.0 Nuclear Decommissioning Trusts 569.1 Total Liabilities 13,675.3 Tangible Net Worth $1,204.2 Line in CFO's Letter ($B) Per Financial Statements Reconciling Items Per CFO's Letter Total Assets $20.2 LESS:

Dominion U.K. 4.4 Dominion Energy 0.9 Total Assets In U.S. $ 14.9