SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-Q
___________
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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 1-2255
VIRGINIA ELECTRIC AND POWER COMPANY
VIRGINIA |
54-0418825 |
|
|
701 East Cary Street |
23219 |
|
|
(804) 771-3000 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No __
At September 30, 2001, 171,484 shares of common stock, without par value, of the registrant were outstanding, all of which were held, beneficially and of record, by Dominion Resources, Inc.
PAGE 2
VIRGINIA ELECTRIC AND POWER COMPANY
INDEX
|
|
Page |
PART I. Financial Information |
||
Item 1. |
|
|
|
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2001 and 2000 |
3 |
|
Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 |
4-5 |
|
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000 |
6 |
|
7 |
|
|
8-14 |
|
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
15-23 |
Item 3. |
24 |
|
|
PART II. Other Information |
|
Item 1. |
|
|
Item 5. |
25 |
|
Item 6. |
25 |
PAGE 3
VIRGINIA ELECTRIC AND POWER COMPANY
PART I. Financial Information
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended |
Nine Months Ended |
||||
September 30, |
September 30, |
||||
2001 |
2000 |
2001 |
2000 |
||
(Millions) |
|||||
Operating Revenue |
$1,444 |
$1,378 |
$3,843 |
$3,651 |
|
Operating Expenses |
|||||
Electric fuel and energy purchases, net |
354 |
309 |
976 |
815 |
|
Purchased electric capacity |
170 |
184 |
516 |
558 |
|
Restructuring costs |
- |
1 |
- |
70 |
|
Operations and maintenance |
255 |
227 |
936 |
682 |
|
Depreciation and amortization |
128 |
140 |
383 |
414 |
|
Other taxes |
42 |
73 |
131 |
189 |
|
Total operating expenses |
949 |
934 |
2,942 |
2,728 |
|
Income from operations |
495 |
444 |
901 |
923 |
|
Other income |
5 |
22 |
22 |
41 |
|
Interest and related charges: |
|||||
Interest expense, net |
71 |
73 |
221 |
210 |
|
Distributions - preferred securities of subsidiary trust |
2 |
2 |
8 |
8 |
|
Total interest and related charges |
73 |
75 |
229 |
218 |
|
Income before income taxes |
427 |
391 |
694 |
746 |
|
Income tax expense |
161 |
128 |
269 |
256 |
|
Income before cumulative effect of a change in accounting principle |
266 |
263 |
425 |
490 |
|
Cumulative effect of a change in accounting principle (net of income taxes of $11) |
- |
- |
- |
21 |
|
Net Income |
266 |
263 |
425 |
511 |
|
Preferred dividends |
6 |
9 |
19 |
28 |
|
Balance available for common stock |
$ 260 |
$ 254 |
$ 406 |
$ 483 |
_______________
The accompanying notes are an integral part of the Consolidated Financial Statements.
PAGE 4
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, |
December 31, |
|
ASSETS |
2001 |
2000 * |
(Millions) |
||
Current Assets |
||
Cash and cash equivalents |
$ 103 |
$ 141 |
Accounts receivable: |
||
Customer accounts receivable, net |
1,154 |
1,134 |
Other |
31 |
82 |
Receivables from affiliates |
48 |
30 |
Inventories (average cost method): |
||
Materials and supplies |
137 |
129 |
Fossil fuel |
102 |
83 |
Gas stored |
68 |
19 |
Commodity contract assets |
1,167 |
1,047 |
Broker margin deposits |
48 |
3 |
Deferred income taxes |
60 |
55 |
Other |
34 |
106 |
Total current assets |
2,952 |
2,829 |
Investments |
||
Nuclear decommissioning trust funds |
849 |
851 |
Other |
23 |
63 |
Total investments |
872 |
914 |
Property, Plant and Equipment |
||
Property, plant and equipment |
16,542 |
16,190 |
Less accumulated depreciation |
7,426 |
7,165 |
9,116 |
9,025 |
|
Nuclear fuel, net |
141 |
140 |
Total property, plant and equipment, net |
9,257 |
9,165 |
Deferred Charges and Other Assets |
||
Regulatory assets |
240 |
235 |
Commodity contract assets |
366 |
79 |
Other |
72 |
109 |
Total deferred charges and other assets |
678 |
423 |
Total assets |
$13,759 |
$13,331 |
_______________
The accompanying notes are an integral part of the Consolidated Financial Statements.
* The Consolidated Balance Sheet at December 31, 2000 has been derived from the audited Consolidated Financial
Statements at that date.
PAGE 5
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
September 30, |
December 31, |
|
2001 |
2000 * |
LIABILITIES AND STOCKHOLDER'S EQUITY |
(Millions) |
|
|
|
|
Current Liabilities |
|
|
Securities due within one year |
$ 524 |
$ 241 |
Short-term debt |
178 |
714 |
Accounts payable, trade |
960 |
882 |
Payables to affiliated companies |
100 |
122 |
Customer deposits |
61 |
55 |
Accrued interest |
104 |
94 |
Accrued payroll |
75 |
88 |
Accrued taxes |
182 |
60 |
Commodity contract liabilities |
1,157 |
994 |
Other |
88 |
100 |
Total current liabilities |
3,429 |
3,350 |
|
|
|
Long-Term Debt |
3,645 |
3,561 |
|
|
|
Deferred Credits and Other Liabilities |
|
|
Deferred income taxes |
1,529 |
1,494 |
Deferred investment tax credits |
117 |
130 |
Commodity contract liabilities |
304 |
87 |
Other |
173 |
216 |
Total deferred credits and other liabilities |
2,123 |
1,927 |
Total liabilities |
9,197 |
8,838 |
|
|
|
Commitments and Contingencies (See Note 8) |
|
|
|
|
|
Company Obligated Mandatorily Redeemable |
|
|
|
|
|
Preferred Stock |
|
|
Preferred stock not subject to mandatory redemption |
509 |
509 |
|
|
|
Common Stockholder's Equity |
|
|
Common stock |
2,738 |
2,738 |
Other paid-in capital |
17 |
16 |
Accumulated other comprehensive loss |
(5) |
- |
Retained earnings |
1,168 |
1,095 |
Total common stockholder's equity |
3,918 |
3,849 |
|
|
|
Total liabilities and stockholder's equity |
$13,759 |
$13,331 |
_______________
The accompanying notes are an integral part of the Consolidated Financial Statements.
* The Consolidated Balance Sheet at December 31, 2000 has been derived from the audited Consolidated Financial
Statements at that date.
** As described in Note 9 to the Consolidated Financial Statements, the 8.05% Junior Subordinated Notes totaling $139 million in principal amount constitute 100% of the Trust's assets.
PAGE 6
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months Ended |
|
|
September 30, |
|
|
2001 |
2000 |
|
(Millions) |
|
|
|
|
Net Cash Flows From Operating Activities |
$ 966 |
$1,132 |
|
|
|
Cash Flows From (Used In) Investing Activities |
|
|
Plant expenditures |
(438) |
(421) |
Nuclear fuel |
(58) |
(66) |
Nuclear decommissioning contributions |
(27) |
(27) |
Other |
57 |
(15) |
Net cash used in investing activities |
(466) |
(529) |
|
|
|
Cash Flows From (Used In) Financing Activities |
|
|
Issuance of long-term debt |
650 |
250 |
Repayment of long-term debt and preferred stock |
(290) |
(366) |
Repayment of short-term debt, net |
(536) |
(4) |
Common stock dividend payments |
(333) |
(346) |
Preferred stock dividend payments |
(17) |
(29) |
Distribution - preferred securities of subsidiary trust |
(5) |
(5) |
Other |
(7) |
(1) |
Net cash used in financing activities |
(538) |
(501) |
|
|
|
Increase (decrease) in cash and cash equivalents |
(38) |
102 |
Cash and cash equivalents at beginning of period |
141 |
62 |
Cash and cash equivalents at end of period |
$ 103 |
$ 164 |
_______________
The accompanying notes are an integral part of the Consolidated Financial Statements.
PAGE 7
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
Three Months Ended |
Nine Months Ended |
||
September 30, |
September 30, |
|||
|
2001 |
2000 |
2001 |
2000 |
|
(Millions) |
|||
|
|
|
|
|
Net income |
$266 |
$263 |
$425 |
$511 |
|
|
|
|
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
Cumulative effect of a change in accounting principle |
|
|
|
|
(net of income taxes of $9) |
- |
- |
(14) |
- |
Unrealized derivative gains - hedging activities |
4 |
- |
1 |
- |
Reclassification for derivative losses included in net income |
9 |
- |
8 |
- |
Other comprehensive income (loss) |
13 |
- |
(5) |
- |
|
|
|
|
|
Comprehensive income |
$279 |
$263 |
$420 |
$511 |
_______________
The accompanying notes are an integral part of the Consolidated Financial Statements.
PAGE 8
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Virginia Electric and Power Company, a Virginia public service company and a wholly-owned subsidiary of Dominion Resources, Inc. (Dominion), is a regulated public utility engaged in the generation, transmission, distribution and sale of electric energy within a 30,000 square-mile area in Virginia and northeastern North Carolina. It sells electricity to approximately 2.1 million retail customers (including governmental agencies) and to wholesale customers such as rural electric cooperatives, municipalities, power marketers and other utilities. The Virginia service area comprises about 65% of Virginia's total land area, but accounts for over 80% of its population. The Company also engages in off-system wholesale purchases and sales of electricity and purchases and sales of natural gas, and has developed trading relationships beyond the geographic limits of its retail service territory. Within this document, the term "Company" refers to the entirety of Virginia Electric and Power Company, including its Virginia and North Carolina operations, and all of its subsidiaries.
The Company manages its operations along two primary business lines, Energy and Delivery. The Energy segment encompasses the Company's portfolio of generating facilities and power purchase agreements, and its trading and marketing activities. The Delivery segment includes bulk power transmission, distribution and metering services, and customer service and continues to be subject to the requirements of Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation.
In the opinion of management, the accompanying unaudited Consolidated Financial Statements contain all adjustments, including normal recurring accruals, necessary to present fairly the Company's financial position as of September 30, 2001, the results of operations and comprehensive income for the three and nine months ended September 30, 2001 and 2000, and the cash flows for the nine months ended September 30, 2001 and 2000. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Consolidated Financial Statements, and notes thereto, included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
The Consolidated Financial Statements represent the accounts of the Company after the elimination of intercompany transactions.
The Consolidated Financial Statements reflect certain estimates and assumptions made by management that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the periods presented. Actual results could differ from those estimates.
Certain amounts in the 2000 Consolidated Financial Statements have been reclassified to conform to the 2001 presentation.
PAGE 9
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Business Combination and Goodwill
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) Nos. 141, Business Combinations, and 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, thus eliminating the use of the "pooling" method of accounting. Under SFAS No. 142, goodwill is no longer subject to amortization; instead it will be subject to new impairment testing criteria. Other intangible assets will continue to be amortized over their estimated useful lives, although those with indefinite lives are not to be amortized but will be tested at least annually for impairment. The new standards also provide new guidance regarding the identification and recognition of intangible assets, other than goodwill, acquired as part of a business combination. The Company will adopt this standard effective January 1, 2002. At September 30, 2001, the Company had no material goodwill or other intangible assets, obtained in business combinations, on its books.
Asset Retirement Obligations
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which provides accounting requirements for the recognition and measurement of liabilities for obligations associated with the retirement of tangible long-lived assets. Under the standard, these liabilities will be recognized at fair value as incurred and capitalized as part of the cost of the related tangible long-lived assets. Accretion of the liabilities due to the passage of time will be expensed. The Company will adopt this standard effective January 1, 2003.
The Company has identified retirement obligations associated with the decommissioning of its nuclear generation facilities but has not determined the impact of recognition and measurement of such obligations under the new standard.
Also, under the new standard, the realized and unrealized earnings of external trusts available for funding decommissioning activities at the Company's utility nuclear plants will be recorded in other income and other comprehensive income, as appropriate. Currently, the Company records these trusts' earnings in other income with an offsetting charge to expense, also recorded in other income, associated with the accretion of the decommissioning liability. See Note 8 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Upon adoption of the new standard, the Company will discontinue its practice of accruing, as part of depreciation expense, amounts associated with the future costs of removal for its electric utility. However, the Company may continue its practice of accruing for future costs of removal subject to cost of service utility rate regulation even when an asset removal obligation does not exist but would do so through the recognition of regulatory assets and liabilities, as appropriate.
The Company has not performed a complete assessment of possible retirement obligations associated with its other property and has not yet determined the impact of adopting this new standard.
PAGE 10
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Impairment or Disposal of Long-Lived Assets
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which provides guidance that will eliminate inconsistencies in accounting for the impairment or disposal of long-lived assets under existing accounting pronouncements. The Company will generally apply the provisions of this standard prospectively beginning January 1, 2002 and does not expect the adoption to have a material impact on its results of operations or financial condition.
Note 4. Derivatives and Hedge Accounting
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, on January 1, 2001. The Company recorded an after-tax charge to accumulated other comprehensive income (AOCI) of approximately $14 million (net of a $9 million tax benefit) in the first quarter of 2001 in connection with the initial adoption of SFAS No. 133 as the cumulative effect of a change in accounting principle. The Company expects to reclassify approximately $13 million of this amount to earnings during the year ending December 31, 2001. The actual amounts that will be reclassified to earnings over the twelve months subsequent to initial adoption may vary from this amount as a result of changes in market conditions. The effect of the amounts being reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., anticipated sales) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies.
Risk Management Policy
The Company uses derivatives to manage the commodity, currency exchange and financial market risks of its business operations. The Company manages the price risk associated with purchases of natural gas and oil by utilizing derivative commodity instruments including futures and swaps. The Company manages its foreign exchange risk associated with anticipated future purchases denominated in foreign currencies by utilizing currency forward contracts. The Company manages its interest rate risk exposure, in part, by entering into interest rate swap transactions. All of the Company's derivatives that are designated as hedges at September 30, 2001 represent cash flow hedges of the variable price risk associated with purchases of natural gas and oil, the risk of variability in foreign exchange rates and the risk of variable interest rates on long-term debt.
As part of its strategy to market energy from its generation capacity and to manage related risks, the Company manages a portfolio of derivative commodity contracts held for trading purposes. These contracts are sensitive to changes in the prices of natural gas and electricity. The Company employs established policies and procedures to manage the risks associated with these price fluctuations and uses various commodity instruments, such as futures, swaps and options, to reduce risk by creating offsetting market positions.
Certain of the Company's non-trading derivative instruments, which management believes are economic hedges and mitigate exposure to fluctuations in commodity prices and interest rates, are not designated as hedges for accounting purposes.
PAGE 11
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accounting Policy
Under SFAS No. 133, derivatives are recognized on the Consolidated Balance Sheets at fair value, unless a scope exception is available under the standard. Commodity contracts representing unrealized gain positions are reported as commodity contract assets; commodity contracts representing unrealized losses are reported as commodity contract liabilities. In addition, purchased options and options sold are reported as commodity contract assets and commodity contract liabilities, respectively, at estimated market value until exercise or expiration. Cash flows from derivative instruments are presented in net cash flow from operating activities.
For all derivatives designated as hedges, the Company formally documents the relationship between the hedging instrument and the hedged item, as well as the risk management objective and strategy for the use of the hedging instrument. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the hedge relationship between the derivative and the hedged item is highly effective in offsetting changes in fair value or cash flows. Any change in the fair value of the derivative resulting from ineffectiveness, as defined by SFAS No. 133, is recognized currently in earnings. Further, for derivatives that have ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.
For fair value hedge transactions in which the Company is hedging changes in the fair value of an asset, liability, or firm commitment, changes in the fair value of the derivative will generally be offset in the Consolidated Statements of Income by changes in the hedged item's fair value. For cash flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable-priced asset, liability, commitment, or forecasted transaction, changes in the fair value of the derivative are reported in AOCI. The gains and losses on the derivatives that are reported in AOCI are reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of the change in fair value of derivatives and the change in fair value of derivatives not designated as hedges for accounting purposes are recognized in current-period earnings. For foreign currency forward contracts designated as cash flow hedges, hedge effectiveness is measured based on changes in the fair value of the contract attributable to changes in the forward exchange rate. For options designated either as fair value or cash flow hedges, changes in the time value are excluded from the measurement of hedge effectiveness and are, therefore, recorded in earnings.
Gains and losses on derivatives designated as hedges, when recognized, are included in operating revenue and income, expenses and interest and related charges in the Consolidated Statements of Income. Specific line item classification is determined based on the nature of the risk underlying individual hedge strategies. Net derivative gains and losses associated with the Company's commodity trading activities are reported net of related cost of sales in non-regulated electric sales and non-regulated gas sales. Changes in the fair value of derivatives not designated as hedges and the portion of hedging derivatives excluded from the measurement of effectiveness are included in other operation and maintenance expense in the Consolidated Statements of Income.
Certain commodity contracts held by the Company for trading purposes are not derivatives as defined by SFAS No. 133, but are reported at fair value in accordance with Emerging Issues Task Force Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities, as described above.
Derivatives and Hedge Accounting Results
For the three months ended September 30, 2001, the Company recognized a pre-tax decrease in earnings of approximately $1 million for hedge ineffectiveness. This amount is reported as an increase to cost of sales in the Consolidated Statements of Income. Hedge ineffectiveness recognized in the nine months ended September 30, 2001 was not significant.
PAGE 12
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Approximately $12 million of net losses in AOCI at September 30, 2001 is expected to be reclassified to earnings within the next twelve-month period. The actual amounts that will be reclassified to earnings over the next twelve months may vary from this amount as a result of changes in market conditions. The effect of the amounts being reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., anticipated sales) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies. As of September 30, 2001, the Company is hedging its exposure to the variability in future cash flows for forecasted transactions over periods of up to five years.
In late June 2001, the Financial Accounting Standards Board (FASB) cleared guidance that permits certain option-type contracts for the purchase or sale of electricity to qualify for the normal purchases and normal sales scope exception, if certain criteria are met. In response to this guidance and other guidance issued during the second quarter, the Company reevaluated certain of its long-term power purchase contracts. Based on this reevaluation, the Company determined that such contracts qualify for the normal purchases and normal sales exception based on the criteria set forth in the recently issued guidance. As such, these contracts continue to be exempt from fair value accounting otherwise required by SFAS No. 133. In early October, the FASB made certain editorial changes to the criteria specified in the June 2001 guidance. The effective date of the revisions to the previously issued guidance is January 1, 2002 for the Company. The Company is currently in the process of evaluating the significance of these editorial changes to determine whether certain of its long-term power purchase contracts will continue to qualify for the normal purchases and normal sales exception at the effective date of the revised guidance.
Future interpretations of SFAS No. 133 by the FASB or other standard-setting bodies could result in fair value accounting being required for certain contracts that are not currently being subjected to such requirements. Accordingly, such future interpretations may impact the Company's ultimate application of the standard. However, if future changes in the application of SFAS No. 133 should result in additional Company contracts becoming subject to fair value accounting under SFAS No. 133, the Company would pursue hedging strategies to mitigate any potential future volatility in reported earnings.
Note 5. Change in Accounting for Pensions
The Consolidated Financial Statements for the three and nine months ended September 30, 2000 have been restated to reflect a change in the method of calculating the market related value of pension plan assets used to determine the expected return on pension plan assets, a component of net periodic pension cost. The new method was adopted in the third quarter of 2000 and made effective as of January 1, 2000. A cumulative effect of a change in accounting principle of $21 million (net of income taxes of $11 million) was included in income for the nine months ended September 30, 2000. The overall effect of the change for the nine months ended September 30, 2000, other than the cumulative effect of a change in accounting principle, was not material.
For additional information concerning the cumulative effect of a change in accounting principle for net periodic pension costs, see Note 3 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Note 6. Restructuring Costs
On January 28, 2000, as a result of the acquisition of Consolidated Natural Gas Company (CNG), Dominion implemented a plan to restructure the operations of the combined companies. During the three and nine months ended September 30, 2000, the Company recorded $1 million and $70 million, respectively, for charges in connection with consolidation of post-acquisition operations and the integration of information technology systems. At December 31, 2000, the Company's restructuring plan was substantially complete.
PAGE 13
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At September 30, 2001, the remaining severance liability of $1 million represents remaining amounts payable to employees already terminated.
The change in the liability for severance and related benefit costs is presented below:
|
(Millions) |
Balance at December 31, 2000 |
$6 |
Amounts paid |
(4) |
Revision of estimates |
(1) |
Balance at September 30, 2001 |
$1 |
For additional information on restructuring costs, see Note 5 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Note 7. Long-Term Debt
During March 2001, the Company issued $50 million in aggregate principal amount of Series 2001A, variable rate tax-exempt pollution control Revenue Bonds due March 1, 2031. The net proceeds were used to finance qualifying expenditures made during the construction of facilities at the North Anna Power Station. In addition, the Company issued $600 million of 5.75% Senior Notes due March 31, 2006 (Senior Notes). The net proceeds were used for general corporate purposes including repayment of commercial paper and payments associated with the purchase of three generation facilities from non-utility generators and the termination of related long-term power purchase agreements (See Note 8 to the Consolidated Financial Statements on restructuring of contracts with non-utility generating facilities for further discussion).
In April 2001, the Company repaid $5 million of Medium-Term Notes, which matured on April 23, 2001 and redeemed $100 million of its 1991 Series A, 8.75% First and Refunding Mortgage Bonds due April 1, 2021. In addition, the Company repaid two Medium-Term Notes of $5 million and $80 million which matured on May 1, 2001 and June 21, 2001, respectively, and $100 million of its 1993 Series E, 6% First and Refunding Mortgage Bonds on August 1, 2001.
Note 8. Commitments and Contingencies
Restructuring of Contracts with Non-Utility Generating Facilities (NUGs)
In the first quarter of 2001, the Company completed the purchase of three generating facilities and the termination of seven contracts which provided electricity to the Company under long-term power purchase agreements with non-utility generators. The Company recorded a charge of $136 million after-tax in connection with the purchase and termination of the long-term power purchase agreements. Cash payments related to the purchase of the three generating facilities totaled $207 million. The allocation of the purchase price was assigned to the assets and liabilities acquired based upon estimated fair values and future cash flows as of the date of acquisition. Substantially all of the value was attributed to the long-term power purchase agreements which were terminated and resulted in a charge to operations and maintenance expense.
Environmental Matters
There have been no significant developments with regard to environmental matters, as disclosed in Note 20 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2000, nor have any significant new environmental matters arisen during the nine months ended September 30, 2001.
PAGE 14
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 9. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust
In 1995, the Company established Virginia Power Capital Trust I (VP Capital Trust). In this transaction, VP Capital Trust sold 5.4 million trust preferred securities for $135 million, representing preferred beneficial interests and 97% beneficial ownership in the assets held by VP Capital Trust.
In exchange for the $135 million realized from the sale of the trust preferred securities and $4 million of common securities that represent the remaining 3% beneficial ownership interest in the assets held by VP Capital Trust, the Company issued $139 million of its 1995 Series A, 8.05% Junior Subordinated Notes (the Notes) due September 30, 2025. The Notes constitute 100% of VP Capital Trust's assets. The Notes may be extended for up to an additional ten years from date of original maturity if certain conditions are satisfied.
Note 10. Operating Segments
The Company manages its operations along two primary business lines, Energy and Delivery. The majority of the Company's revenue is provided through bundled rate tariffs. Generally, such revenue is allocated between the two business lines for management reporting based on prior cost of service studies. There were no significant intersegment activities for the three and nine months ended September 30, 2001.
Corporate and Other include certain expenses which are not allocated to the Energy and Delivery segments, including those related to the following: 1) corporate operations and assets; 2) transactions or events not allocated to the segments for internal reporting purposes (including 2001 NUG restructuring charge, 2000 restructuring costs, 2000 cumulative effect of a change in accounting principle); and 3) intersegment eliminations, where applicable.
|
|
Corporate |
|
|
(Millions) |
||||
Three Months Ended September 30, 2001 |
||||
Operating revenue |
$1,092 |
$349 |
$ 3 |
$1,444 |
Net income |
180 |
86 |
- |
266 |
Three Months Ended September 30, 2000 |
||||
Operating revenue |
$1,040 |
$346 |
$ (8) |
$1,378 |
Net income |
176 |
87 |
- |
263 |
Nine Months Ended September 30, 2001 |
||||
Operating revenue |
$2,893 |
$942 |
$ 8 |
$3,843 |
Net income (loss) |
359 |
203 |
(137) |
425 |
Nine Months Ended September 30, 2000 |
||||
Operating revenue |
$2,732 |
$934 |
$ (15) |
$3,651 |
Net income (loss) |
325 |
210 |
(24) |
511 |
PAGE 15
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements Regarding Forward-Looking Information
From time to time the Company makes statements concerning its expectations, plans, objectives, future financial performance and other statements that are not historic facts. These statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, the reader can identify these forward-looking statements by words such as "anticipate", "estimate", "expect", "believe", "could", "plan", "may" or other words with similar meaning.
Forward-looking statements are issued by the Company with full knowledge that risks and uncertainties exist that may cause actual results to be materially different from the results predicted. Factors that could cause actual results to differ are often presented with forward-looking statements. In addition, other factors could cause actual results to differ materially from those indicated in any forward-looking statement. These include:
* Factors affecting operations, such as:
* State, federal and international legislative and regulatory developments, including deregulation and restructuring of the electric utility industry and changes in environmental and other relevant laws and regulations to which the Company is subject;
* The timing and implementation of the Company's business separation plan currently under consideration with the Virginia State Corporation Commission (Virginia Commission);
* The effects of competition, including the extent and timing of the entry of additional competitors in the electric market;
* The pursuit of potential business strategies, including acquisitions or dispositions of assets or the development of additional power generation facilities;
* Regulatory factors such as changes in the policies or procedures that set rates, changes in the ability to recover investments made under traditional regulation through rates, and changes to the frequency and timing of rate increases;
* Financial or regulatory accounting principles or policies imposed by standard-setting bodies;
* Political and economic conditions and developments in jurisdictions where the Company operates;
* Changing market conditions and other factors related to physical and financial energy trading activities, including price, basis, counterparty credit risk, liquidity, volatility, capacity, transmission, currency exchange rates, interest rates and warranty risks;
* Financial market conditions, including availability and cost of capital, and the ability to obtain financing on favorable terms;
* The performance of projects and the success of efforts to invest in and develop new opportunities;
* Employee workforce factors, including collective bargaining agreements with union employees; and
* The effects of geopolitical events, including the threat of domestic terrorism.
PAGE 16
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company has based its forward-looking statements on management's beliefs and assumptions using information available at the time the statements were made. The Company cautions readers not to place undue reliance on its forward-looking statements because the assumptions, beliefs, expectations and projections about future events may and often do materially differ from actual results. The Company undertakes no obligation to update any forward-looking statements to reflect developments occurring after the statement is made.
The Company manages its operations in a manner that requires disclosure of two primary operating segments - Energy and Delivery. The Energy segment includes the Company's portfolio of generating facilities and power purchase agreements, and its trading and marketing activities. The Delivery segment includes bulk power transmission, distribution and metering services, and customer service.
Currently, the majority of the Company's revenue is provided through bundled rate tariffs. This revenue is allocated between the Energy and Delivery segments for internal reporting purposes and discussion herein. Certain activities discussed in Liquidity and Capital Resources are currently not managed at the segment level; however, specific references to segments are made as appropriate. All discussion of trends and variations generally applies to the Company as a whole.
This section provides a general discussion of contributions to net income by the Energy and Delivery segments. Certain expenses not allocated to those segments are included in Corporate and Other. The decrease in other taxes in 2001 reflects the change in Virginia law whereby the Company is now subject to income taxes rather than gross receipts taxes.
|
Three Months Ended |
Nine Months Ended |
||
|
September 30, |
September 30, |
||
|
2001 |
2000 |
2001 |
2000 |
|
(Millions) |
|||
|
|
|
|
|
Energy |
$180 |
$176 |
$359 |
$325 |
Delivery |
86 |
87 |
203 |
210 |
Corporate and other |
- |
- |
(137) |
(24) |
Total net income |
$266 |
$263 |
$425 |
$511 |
PAGE 17
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Energy Segment
Net income for the Energy segment increased $4 million to $180 million and $34 million to $359 million for the three and nine months ended September 30, 2001, respectively, as compared to the comparable periods in 2000. The results in both three-month and nine-month periods of 2001 over 2000 reflect higher operating revenue from increased fuel rate recoveries from regulated electric sales and from electric marketing and trading activities. Revenue from gas marketing and trading activities in the current quarter was unchanged as compared to the comparable period in 2000. Regulated electric sales revenue increased primarily due to higher fuel rates and customer growth for the three and nine month periods ended September 30, 2001, and warmer weather in the third quarter of 2001, as compared to the comparable periods in 2000. The Energy segment's higher operating revenue was offset by increases in operating expenses for the quarter and year-to-date as compared to the comparable periods in 2000. Electric fuel and purchased energy expenses in 2001 were higher, reflecting higher fuel prices in coal and oil as well as higher levels of recovery of previously deferred fuel costs; however, such expenses were mitigated by the increased fuel rate revenue. Higher operations and maintenance expense in the third quarter of 2001, as compared to the comparable quarter in 2000, was offset by lower purchased electric capacity costs, depreciation expense and other taxes. Lower purchased electric capacity costs resulted from the restructuring of the long-term power purchase agreements in the first quarter of 2001. The decrease in depreciation expense reflects the anticipated life-extensions of the Company's operating licenses for its nuclear facilities by 20 years. The application was filed with the Nuclear Regulatory Commission in May 2001.
Delivery Segment
Net income for the Delivery segment decreased $1 million to $86 million and $7 million to $203 million for the three and nine months ended September 30, 2001, respectively, as compared to the comparable periods in 2000. The Delivery segment's increased regulated electric sales revenue and decreased service restoration costs in 2001 were more than offset by lower other income, as compared to both comparable periods in 2000. Regulated electric sales increased in the third quarter of 2001 primarily as a result of customer growth and warmer weather as compared to the comparable quarter in 2000.
Corporate and Other
Corporate and Other includes certain expenses which are not allocated to the Energy and Delivery segments, including those related to the following: 1) corporate operations and assets; 2) transactions or events not allocated to the segments for internal reporting purposes (including 2001 charge for NUG restructuring, 2000 restructuring costs, 2000 cumulative effect of a change in accounting principle); and 3) intersegment eliminations, where applicable.
NUG Restructuring - During the nine months ended September 30, 2001, the Company recorded a charge of $219 million in operations and maintenance expense in connection with the purchase and termination of long-term power purchase agreements. The charge reduced net income by approximately $136 million for the nine months ended September 30, 2001. For further information on restructuring of power purchase agreements, see Note 8 to Consolidated Financial Statements.
Restructuring Costs - During the three and nine months ended September 30, 2000, the Company incurred restructuring costs of $1 million and $70 million, respectively, in connection with the implementation of a plan to restructure the operations of the subsidiaries of Dominion Resources, Inc. (Dominion), the Company's parent company, following Dominion's acquisition of Consolidated Natural Gas Company (CNG). These charges related primarily to costs associated with work-force reduction activities. See Note 6 to the Consolidated Financial Statements for further information.
PAGE 18
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cumulative Effect of a Change in Accounting Principle - Effective January 1, 2000, as a result of its acquisition of CNG, Dominion adopted a new company-wide standard method of calculating the market related value of plan assets for all pension plans of Dominion and its subsidiaries. The market related value of plan assets is used to determine the expected return on plan assets, a component of net periodic pension cost. The cumulative effect of this accounting change as of January 1, 2000 was $21 million (net of income taxes of $11 million). See Note 5 to the Consolidated Financial Statements for further discussion.
Internal Sources of Liquidity
Cash flow from operating activities provided approximately $1.0 billion and $1.1 billion during the nine months ended September 30, 2001 and 2000, respectively. The increase in cash flow from operating activities reflects higher operating revenue from increased fuel rate recoveries and continued growth in regulated electric sales and from electric marketing and trading activities as compared to the prior year. After dividend payments, cash flow from operating activities for the nine months ended September 30, 2001 was sufficient to cover all plant and nuclear fuel expenditures during each of the quarters and, on average, covered approximately 80% of the Company's total cash requirements. Short-term cash requirements not met by the timing or amount of cash flow from operations were generally satisfied with proceeds from short-term borrowings. Long-term cash needs were met through the sale of securities.
External Sources of Liquidity
During the nine months ended September 30, 2001, the Company issued the following securities:
* $50 million in aggregate principal amount of Series 2001A, variable rate tax-exempt pollution control Revenue Bonds due March 1, 2031. The net proceeds were used to finance qualifying expenditures made during the construction of facilities at the North Anna Power Station; and
* $600 million of 5.75% Senior Notes due March 31, 2006. The net proceeds were used for general corporate purposes including repayment of commercial paper and payments associated with the purchase of three generation facilities and the termination of related long-term power purchase agreements. See Note 8 to Consolidated Financial Statements for further discussion.
In April 2001, the Company repaid $5 million of Medium-Term Notes, which matured on April 23, 2001 and redeemed $100 million of its 1991 Series A, 8.75% First and Refunding Mortgage Bonds due April 1, 2021. In addition, the Company repaid two Medium-Term Notes of $5 million and $80 million which matured on May 1, 2001 and June 21, 2001, respectively, and $100 million of its 1993 Series E, 6% First and Refunding Mortgage Bonds on August 1, 2001.
The Company has a commercial paper program which is supported by a $1.75 billion credit facility established by Dominion in June 2000 to support the combined commercial paper programs of the Company, Dominion and CNG. The $1.75 billion credit facility matures on May 30, 2002. The Company has full access to the $1.75 billion credit facility; however, it operates with an internal allocation that varies depending upon the needs of the three participating entities.
At September 30, 2001, net borrowings under the commercial paper program were $178 million, a decrease of $536 million from December 31, 2000. Borrowings under these facilities are used primarily to fund working capital requirements and may vary significantly during the course of the year depending upon the timing and amount of cash requirements not satisfied by cash provided from operations.
PAGE 19
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In addition to commercial paper, the Company may also issue up to $200 million in aggregate principal of extendible commercial notes (ECNs) to meet working capital requirements. ECNs are unsecured notes expected to be sold in private placements. All ECNs would have a stated maturity of 390 days from issuance and may be redeemed within 90 days or less from issuance at the Company's option. At September 30, 2001, there were no ECNs outstanding.
At September 30, 2001, the Company had available $1 billion of remaining principal amount under currently effective shelf registrations with the Securities and Exchange Commission to meet capital requirements.
Capital Expenditures
During the nine months ended September 30, 2001, investing activities resulted in a net cash outflow of $466 million. These activities included plant expenditures of $438 million and nuclear fuel expenditures of $58 million. The plant expenditures related to generation-related projects were approximately $177 million and included costs related to construction of two combustion turbines, environmental upgrades, and routine capital improvements. The plant expenditures related to transmission and distribution-related projects approximated $236 million, reflecting routine capital improvements and expenditures associated with new connections. Other general and information technology projects represented the remaining capital expenditures of $25 million.
There have been no significant changes in the planned levels of spending for capacity and other capital projects and maturities of securities as disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The Company expects to fund its capital requirements and maturities with cash flow from operations and a combination of sales of securities and short-term borrowings.
The following discussion includes information about significant developments in previously disclosed matters and new issues arising during the period covered by and subsequent to these financial statements. It is recommended that this section be read in conjunction with MD&A included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.
Electric Retail Access Pilot Program in Virginia
At September 30, 2001, approximately 82,000 customers have volunteered for the retail access pilot program. Approximately 23,000 customers are using a competitive energy supplier, decreasing from 24,000 customers reported in the second quarter of 2001. Beginning January 1, 2002, when full retail access is implemented in Virginia, pilot participants will automatically become eligible to participate in full retail access.
Transition to Competitive Retail Electric Industry in Virginia
During 1998 and 1999, legislation was enacted in Virginia that established a plan to restructure Virginia's electric utility industry and provided for a phased-in transition to a fully competitive retail electric market during the period January 1, 2002 through January 1, 2004. However, in April 2001, the Virginia State Corporation Commission (Virginia Commission) announced a shorter phase-in schedule, which requires retail choice that be made available for all customers in the Company's Virginia service territory by January 1, 2003.
PAGE 20
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Virginia Commission approved the final rules designed to advance a competitive energy supply market in Virginia and to protect Virginians who participate in retail access beginning January 1, 2002. The rules became effective August 1, 2001 and are applicable to competitive retail energy services beginning January 1, 2002. The rules govern code of conduct, affiliate transactions, and business practices and responsibilities of utilities in the competitive marketplace.
In October 2001, the Virginia Commission issued a final order allowing a 12-month minimum-stay period for customers with an annual peak demand of 500 kW or greater who return to the Company's capped rate service after having purchased competitive electricity supply service.
The Virginia Commission has also established separate proceedings to issue rules and regulations for competition in the provision of metering and billing services; and the determination of market prices for generation and associated wires charges. Such wires charges are to provide the Company with a method to recover any just and reasonable net stranded costs.
In July 2001, the Company filed with the Virginia Commission its proposed methodologies for determining market prices for generation and for calculating wires charges and associated rate design. A hearing was held in September 2001 and the Company is waiting for approval of its methodologies by the Virginia Commission.
Functional Separation of Electric Generation and Delivery Operations
In May 2001, the Company pre-filed testimony and exhibits with the Virginia Commission supporting the Company's proposed plan to separate its electric generation from its electric delivery operations in Virginia. The testimony also supported the Company's proposed index-based fuel recovery mechanism and unbundled rates reflecting the separation and deregulation of generation.
In September 2001, the Staff of the Virginia Commission (Staff) pre-filed direct testimony and exhibits opposing the Company's proposed functional separation plan. The Staff supports "divisional separation" of the generation and delivery functions as opposed to the "legal separation" proposed by the Company. The Company has filed rebuttal testimony and exhibits in continued support of legal separation.
The Staff also recommended that the Company's request for approval of the index-based fuel recovery mechanism be denied in favor of the current Commission-approved fuel factor methodology. The Company has agreed to continue the current fuel factor recovery method in 2002 while the Staff and the Company study alternative fuel methodologies to replace the current method.
The Virginia Commission held a hearing in October 2001 to consider the Company's functional separation plan. Legal briefs will be filed by November 9, 2001. The Virginia Commission is expected to rule on the Company's proposed plan by year-end. The outcome of these proceedings cannot be predicted at this time. However, regardless of whether legal or divisional separation is approved, the Company anticipates that at January 1, 2002, when functional separation is required by Virginia deregulation legislation, such separation will be effected using the same divisional lines that are in existence today.
Also in September 2001, the Company filed with the North Carolina Commission concerning separation of electric generation and delivery operations in North Carolina.
PAGE 21
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Alliance Regional Transmission Organization (RTO)
In May 2001, an application to transfer control of the Company's transmission facilities to the Alliance RTO was filed with the Virginia Commission as required under its order issued in March 2001. In September 2001, a similar application was filed with the North Carolina Utilities Commission. Hearings will be scheduled to consider the Company's applications.
In March 2001, in connection with the application of Illinois Power Company to join the Alliance RTO, a settlement agreement was filed with the FERC involving the Alliance Companies, the Midwest ISO, certain transmission owners in the Midwest ISO and other parties. The settlement agreement provided for two RTOs in the Midwest region with single super-regional rates, an agreement to negotiate a joint rate with PJM and the approval of certain transmission owners to withdraw from the Midwest ISO and join the Alliance RTO. FERC approved that settlement in May 2001.
In July 2001, FERC issued an order conditionally approving the Alliance Companies' RTO filing subject to further filings by the Alliance Companies. Also, FERC initiated mediation for the purpose of facilitating the formation of a single RTO for the northeastern United States and for a single RTO for the southeastern United States. In the northeast, PJM Interconnection, Alleghney Power, the New York ISO, and the New England ISO were directed to participate in the mediation. In the southeast, FERC directed GridSouth RTO, Southwest Power Pool, Southern Company and Entergy to participate in the mediation.
In August 2001, the Alliance Companies filed a business plan for the formation of a for-profit, separately chartered transmission company as a non-market participant for RTO's independence as requested by FERC under its order issued in July 2001. The plan proposed National Grid USA, an international company based in the United Kingdom, as the managing member of the new company.
Also in August 2001, the Alliance Companies made a compliance filing responding to FERC's July 2001 order conditionally approving the Alliance Companies' RTO filing. Simultaneously, the Alliance Companies filed with FERC proposed rates, terms and conditions for the Alliance RTO Open Access Transmission Tariff ("OATT"). In addition, the Company submitted proposed rates with FERC for transmission service and certain ancillary services within the Company's pricing zone of the Alliance RTO. FERC will schedule hearings to consider the proposed rates for the Alliance RTO OATT and the Company's pricing zone.
Environmental Matters
There have been no significant developments with regard to environmental matters disclosed in MD&A and notes to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 nor have any significant new environmental matters arisen during the first nine months of 2001.
Nuclear Relicensing
The Company filed an application in May 2001 with the Nuclear Regulatory Commission (NRC) to renew the operating licenses of the North Anna and Surry nuclear power stations for an additional 20 years. The NRC is in the process of reviewing the applications for completeness. Over the next two years, the NRC will perform site visits and review the application in detail.
PAGE 22
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Derivatives and Hedge Accounting
Future interpretations of SFAS No. 133 by the Financial Accounting Standards Board or other standard-setting bodies could adversely affect conclusions concerning the applicability of the standard to the Company's existing contracts, therefore resulting in fair value accounting for such contracts. In that event, if the Company cannot document cash flow or fair value hedging strategies which would utilize such contracts as hedging instruments, the application of fair value accounting to any contract could result in volatility in reported earnings. Such volatility would result from unrealized gains or losses attributable to changes in the contracts' fair value during a particular reporting period. These unrealized gains and losses may not be indicative of actual cash transactions or profitability that would ultimately be realized over the life of a contract. Thus, the Company believes any increased volatility in earnings attributable to fair value accounting in these circumstances would be of a non-cash nature and would not be accompanied by corresponding volatility in cash flows or a change in liquidity.
Recently Issued Accounting Standards
Business Combination and Goodwill
In July 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) Nos. 141, Business Combinations, and 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, thus eliminating the use of the "pooling" method of accounting. For any business combination, which will be accounted for using the purchase method, initiated before July 1, 2001 and completed before January 2002, the provisions of SFAS No. 141 will also apply. Under SFAS No. 142, goodwill is no longer subject to amortization; instead it will be subject to new impairment testing criteria. Other intangible assets will continue to be amortized over their estimated useful lives, although those with indefinite lives are not to be amortized but will be tested at least annually for impairment. The new standards also provide new guidance regarding the identification and recognition of intangible assets, other than goodwill, acquired as part of a business combination. The Company will adopt this standard effective January 1, 2002. At September 30, 2001, the Company had no material goodwill or other intangible assets, obtained in business combinations, on its books.
Asset Retirement Obligations
In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which provides accounting requirements for the recognition and measurement of liabilities for obligations associated with the retirement of tangible long-lived assets. Under the standard, these liabilities will be recognized at fair value as incurred and capitalized as part of the cost of the related tangible long-lived assets. Accretion of the liabilities due to the passage of time will be expensed. The Company will adopt this standard effective January 1, 2003.
The Company has identified retirement obligations associated with the decommissioning of its nuclear generation facilities but has not determined the impact of recognition and measurement of such obligations under the new standard.
Also, under the new standard, the realized and unrealized earnings of external trusts available for funding decommissioning activities at the Company's utility nuclear plants will be recorded in other income and other comprehensive income, as appropriate. Currently, the Company records these trusts' earnings in other income with an offsetting charge to expense, also recorded in other income, associated with the accretion of the decommissioning liability. See Note 8 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Upon adoption of the new standard, the Company will discontinue its practice of accruing, as part of depreciation expense, amounts associated with the future costs of removal for its electric utility. However, the Company may continue its practice of accruing for future costs of removal subject to cost of service utility rate regulation even when an asset removal obligation does not exist but would do so through the recognition of regulatory assets and liabilities, as appropriate.
PAGE 23
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The Company has not performed a complete assessment of possible retirement obligations associated with its other property and has not yet determined the impact of adopting this new standard.
Impairment or Disposal of Long-Lived Assets
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which provides guidance that will eliminate inconsistencies in accounting for the impairment or disposal of long-lived assets under existing accounting pronouncements. The Company will generally apply the provisions of this standard prospectively beginning January 1, 2002 and does not expect the adoption to have a material impact on its results of operations or financial condition.
Other
After completing the transition period for fully integrating the Consolidated Natural Gas Company into Dominion's existing organization and operations, senior management initiated a focused review of Dominion's combined operations, including Virginia Power, in October 2001. The objective of this review is to identify any activities or resources which are no longer necessary now that the transition period has ended. By elimination of such activities or resources, costs may be reduced without impacting the responsiveness or effectiveness of Dominion's operations. As a result, restructuring charges may be incurred in the fourth quarter of 2001 for items such as employee severance and other special termination benefits and cancellation or modification of leases to eliminate office space no longer needed.
PAGE 24
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information presented in this Item contains "forward looking statements" as described in the introductory paragraphs of Part I, Item 2 of this Form 10-Q. Your attention is directed to those paragraphs for discussion of various risks and uncertainties that may affect future operations and financial condition.
Market Risk Sensitive Instruments and Risk Management
On a quarterly basis, an updated sensitivity analysis is presented to disclose quantitative information about the Company's exposure to commodity price risk as the portfolio of derivative commodity contracts held for trading purposes may change significantly each quarter. The Company does not present quarterly updates to the quantitative information regarding interest rate and equity price risk disclosed in Market Risk Sensitive Instruments and Risk Management under MD&A included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Generally, changes in the portfolio of securities subject to such risks do not give rise to significant changes in the quantitative information reported on an annual basis. At present, the Company's exposure to foreign currency risk associated with purchases denominated in foreign currencies is minimal and therefore the Company has not presented quantitative information about foreign currency risk.
The Company has determined a hypothetical loss on the portfolio of derivative commodity contracts held for trading purposes by calculating a hypothetical fair value for each contract assuming a 10% unfavorable change in the market prices of the related commodity and comparing it to the fair value of the contracts based on market prices at September 30, 2001 and December 31, 2000. This hypothetical 10% change in commodity prices would have resulted in a hypothetical loss of approximately $2 million and $3 million in the fair value of the commodity contracts as of September 30, 2001 and December 31, 2000, respectively.
PAGE 25
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans imposed upon or agreed to by us, or permits issued by various local, state and federal agencies for the construction or operation of facilities. From time to time, there also may be administrative proceedings on these matters pending. In addition, in the normal course of business, the Company and its subsidiaries are involved in various legal proceedings. Management believes that the ultimate resolution of these proceedings will not have a material adverse effect on the Company's financial position, liquidity or results of operations. See Future Issues in Management's Discussion and Analysis (MD&A) and Item 5 - Other Information for discussion on various regulatory proceedings to which we are a party.
The matters discussed in this Item may contain "forward looking statements" as described in the introductory paragraphs of Part I, Item 2 of this Form 10-Q. See Cautionary Statements Regarding Forward Looking Information in Part I, Item 2 for discussion of various risks and uncertainties that may affect the future of the Company. See Future Issues in MD&A for additional information concerning Virginia Electric Retail Access Pilot Program, Transition to Competitive Retail Electric Industry in Virginia, Separation of Electric Generation and Delivery Operations, Alliance Regional Transmission Organization and Nuclear Re-Licensing
Rates
On September 14, 2001, the Company filed with an application with the North Carolina Commission to revise the fuel factor applicable to retail customers in its North Carolina service territory. The Company proposed an increase in the factor from the current level of 1.207 to 1.296 cents per kWh, to be effective on January 1, 2002. The requested factor, if approved, will result in an annual revenue increase of approximately $2.8 million.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 |
Restated Articles of Incorporation, as amended, as in effect on May 6, 1999 (Exhibit 3.1), Form 10-Q for the period ended March 31, 1999, File No. 1-2255, incorporated by reference). |
|
|
3.2 |
Bylaws, as amended, as in effect on April 28, 2000 (Exhibit 3, Form 10- Q for the period ended March 31, 2000, File No. 1-2255, incorporated by reference). |
|
|
(b) Reports on Form 8-K:
|
There have been no Forms 8-K filed which were not previously reported. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
VIRGINIA ELECTRIC AND POWER COMPANY. |
November 5, 2001 |
/s/ Steven A. Rogers |
|
Steven A. Rogers |
|
|