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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
____________
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
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 |
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701 EAST CARY STREET |
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(804) 819-2000 |
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
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). Yes No X
At September 30, 2004, the latest practicable date for determination, 177,932 shares of common stock, without par value, of the registrant were outstanding.
PAGE 2
VIRGINIA ELECTRIC AND POWER COMPANY
INDEX
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Page |
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PART I. Financial Information |
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3 |
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4 |
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6 |
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7 |
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16 |
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33 |
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35 |
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36 |
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36 |
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 |
|||
2004 |
2003 |
2004 |
2003 |
|
(millions) |
||||
Operating Revenue |
$1,659 |
$1,518 |
$4,308 |
$4,244 |
Operating Expenses |
||||
Electric fuel and energy purchases, net |
492 |
387 |
1,369 |
1,073 |
Purchased electric capacity |
139 |
152 |
421 |
463 |
Other purchased energy commodities |
180 |
72 |
416 |
214 |
Other operations and maintenance-other |
145 |
318 |
527 |
626 |
Other operations and maintenance-affiliated |
74 |
71 |
210 |
223 |
Depreciation and amortization |
126 |
115 |
369 |
344 |
Other taxes |
37 |
41 |
129 |
133 |
Total operating expenses |
1,193 |
1,156 |
3,441 |
3,076 |
Income from operations |
466 |
362 |
867 |
1,168 |
Other income |
25 |
18 |
55 |
57 |
Interest and related charges: |
||||
Interest expense-junior subordinated notes payable |
|
|
|
|
Interest expense-other |
64 |
55 |
182 |
186 |
Distributions-mandatorily redeemable trust |
|
|
|
|
Total interest and related charges |
72 |
62 |
205 |
208 |
Income before income taxes |
419 |
318 |
717 |
1,017 |
Income tax expense |
160 |
118 |
277 |
377 |
Income before cumulative effect of changes in accounting |
|
|
|
|
Cumulative effect of changes in accounting principles |
|
|
|
|
Net Income |
259 |
200 |
440 |
724 |
Preferred dividends |
4 |
4 |
12 |
12 |
Balance available for common stock |
$ 255 |
$ 196 |
$ 428 |
$ 712 |
_______________
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, |
|
(millions) |
||
ASSETS |
||
Current Assets |
||
Cash and cash equivalents |
$ 29 |
$ 46 |
Customer accounts receivable (net of allowance of $12 in 2004 |
|
|
Other accounts receivable |
52 |
67 |
Receivables from affiliates |
39 |
81 |
Inventories |
530 |
496 |
Derivative assets |
1,718 |
1,096 |
Margin deposit assets |
77 |
41 |
Prepayments |
25 |
56 |
Other |
65 |
66 |
Total current assets |
3,854 |
3,530 |
Investments |
||
Nuclear decommissioning trust funds |
1,050 |
1,010 |
Other |
22 |
39 |
Total investments |
1,072 |
1,049 |
Property, Plant and Equipment |
||
Property, plant and equipment |
19,585 |
19,129 |
Accumulated depreciation and amortization |
(7,693) |
(7,391) |
Net property, plant and equipment |
11,892 |
11,738 |
Deferred Charges and Other Assets |
||
Regulatory assets |
385 |
438 |
Derivative assets |
249 |
227 |
Other |
292 |
334 |
Total deferred charges and other assets |
926 |
999 |
Total assets |
$17,744 |
$17,316 |
________________
(1)
The Consolidated Balance Sheet at December 31, 2003 has been derived from the audited Consolidated Financial Statements at that date.The accompanying notes are an integral part of the Consolidated Financial Statements.
PAGE 5
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED BALANCE SHEETS-(Continued)
(Unaudited)
|
September 30, |
December 31, |
|
(millions) |
|
LIABILITIES AND SHAREHOLDER'S EQUITY |
|
|
|
|
|
Current Liabilities |
|
|
Securities due within one year |
$ 82 |
$ 325 |
Short-term debt |
348 |
717 |
Accounts payable, trade |
953 |
1,282 |
Payables to affiliates |
104 |
138 |
Affiliated current borrowings |
689 |
154 |
Accrued interest, payroll and taxes |
277 |
202 |
Derivative liabilities |
1,760 |
1,123 |
Other |
182 |
284 |
Total current liabilities |
4,395 |
4,225 |
|
|
|
Long-Term Debt |
|
|
Long-term debt |
4,257 |
4,112 |
Junior subordinated notes payable to affiliated trust |
412 |
412 |
Notes payable-other affiliates |
220 |
220 |
Total long-term debt |
4,889 |
4,744 |
|
|
|
Deferred Credits and Other Liabilities |
|
|
Deferred income taxes and investment tax credits |
2,208 |
2,044 |
Asset retirement obligations |
770 |
740 |
Derivative liabilities |
265 |
393 |
Regulatory liabilities |
383 |
374 |
Other |
154 |
126 |
Total deferred credits and other liabilities |
3,780 |
3,677 |
Total liabilities |
13,064 |
12,646 |
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Commitments and Contingencies (see Note 9) |
|
|
|
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Preferred Stock Not Subject to Mandatory Redemption |
257 |
257 |
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|
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Common Shareholder's Equity |
|
|
Common stock-no par value, 300,000 shares authorized; |
2,888 |
|
Other paid-in capital |
39 |
38 |
Retained earnings |
1,412 |
1,405 |
Accumulated other comprehensive income |
84 |
82 |
Total common shareholder's equity |
4,423 |
4,413 |
|
|
|
Total liabilities and shareholder's equity |
$17,744 |
$17,316 |
_______________
(1)
The Consolidated Balance Sheet at December 31, 2003 has been derived from the audited Consolidated Financial Statements at that date.The accompanying notes are an integral part of the Consolidated Financial Statements.
PAGE 6
VIRGINIA ELECTRIC AND POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months Ended |
|
|
2004 |
2003 |
|
(millions) |
|
Operating Activities |
|
|
Net Income |
$ 440 |
$ 724 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
Cumulative effect of changes in accounting principles, net of income taxes |
- |
(84) |
Depreciation and amortization |
432 |
397 |
Deferred income taxes and investment tax credits, net |
176 |
229 |
Deferred fuel expenses, net |
60 |
(180) |
Net unrealized (gains) losses on energy-related derivatives held |
|
|
Changes in: |
|
|
Accounts receivable |
278 |
39 |
Affiliated accounts receivable and payable |
8 |
32 |
Inventories |
(34) |
(57) |
Accounts payable, trade |
(329) |
(137) |
Accrued interest, payroll and taxes |
75 |
85 |
Margin deposit assets and liabilities |
(24) |
3 |
Prepayments |
31 |
24 |
Other operating assets and liabilities |
(77) |
78 |
Net cash provided by operating activities |
1,090 |
1,094 |
|
|
|
Investing Activities |
|
|
Plant construction and other property additions |
(504) |
(656) |
Nuclear fuel |
(63) |
(75) |
Purchases of securities |
(215) |
(177) |
Proceeds from sales of securities |
182 |
141 |
Other |
20 |
(4) |
Net cash used in investing activities |
(580) |
(771) |
|
|
|
Financing Activities |
|
|
Repayment of short-term debt, net |
(369) |
(107) |
Issuance of affiliated current borrowings, net |
534 |
42 |
Issuance of long-term debt |
- |
400 |
Repayment of long-term debt |
(259) |
(236) |
Common stock dividend payments |
(421) |
(451) |
Other |
(12) |
(15) |
Net cash used in financing activities |
(527) |
(367) |
|
|
|
Decrease in cash and cash equivalents |
(17) |
(44) |
Cash and cash equivalents at beginning of period |
46 |
132 |
Cash and cash equivalents at end of period |
$ 29 |
$ 88 |
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|
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Supplemental Cash Flow Information |
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Assumption of debt related to the acquisition of a non-utility generating facility |
$ 134 |
- |
_______________
The accompanying notes are an integral part of the Consolidated Financial Statements.
PAGE 7
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations
Virginia Electric and Power Company (the Company), a Virginia public service company, is a wholly-owned subsidiary of Dominion Resources, Inc. (Dominion). The Company is a regulated public utility that generates, transmits and distributes electricity within a 30,000 square-mile area in Virginia and northeastern North Carolina. It serves approximately 2.3 million retail customer accounts, including governmental agencies, and 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 has trading relationships beyond the geographic limits of its retail service territory and buys and sells natural gas, electricity and other energy-related commodities.
The Company manages its daily operations through three primary operating segments: Generation, Energy and Delivery. In addition, the Company reports its corporate and other functions as a segment.
The "Company" is used throughout this report and, depending on the context of its use, may represent any of the following: the legal entity, Virginia Electric and Power Company, one of Virginia Electric and Power Company's consolidated subsidiaries or the entirety of Virginia Electric and Power Company and its consolidated subsidiaries.
Note 2. Significant Accounting Policies
As permitted by the rules and regulations of the Securities and Exchange Commission (SEC), the accompanying unaudited Consolidated Financial Statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles). These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.
In the opinion of the Company's 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, 2004, its results of operations for the three and nine months ended September 30, 2004 and 2003, and its cash flows for the nine months ended September 30, 2004 and 2003.
The Company makes certain estimates and assumptions in preparing its Consolidated Financial Statements in accordance with generally accepted accounting principles. These estimates and assumptions 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 may differ from those estimates.
The accompanying unaudited Consolidated Financial Statements include, after eliminating intercompany transactions and balances, the accounts of the Company and all majority-owned subsidiaries, and those variable interest entities (VIEs) where the Company has been determined to be the primary beneficiary.
The Company reports certain contracts and instruments at fair value in accordance with generally accepted accounting principles. Market pricing and indicative price information from external sources are used to measure fair value when available. In the absence of this information, the Company estimates fair value based on near-term and historical price information and statistical methods. For individual contracts, the use of differing assumptions could have a material effect on the contract's estimated fair value. See Note 2 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 for more discussion of the Company's estimation techniques.
PAGE 8
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The results of operations for the interim periods are not necessarily indicative of the results expected for the full year. Information for quarterly periods is affected by seasonal variations in sales and other factors.
Certain amounts in the 2003 Consolidated Financial Statements have been reclassified to conform to the 2004 presentation.
Note 3. Recently Adopted Accounting Standards
2004
FIN 46R
The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, (FIN 46R) for its interests in VIEs that are not considered special purpose entities on March 31, 2004. FIN 46R addresses the identification and consolidation of VIEs, which are entities that are not controllable through voting interests or in which the VIEs' equity investors do not bear the residual economic risks and rewards. There was no impact on the Company's results of operations or financial position related to this adoption.
As described in Note 20 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, the Company is a party to long-term contracts for purchases of electric generation capacity and energy from qualifying facilities and independent power producers. Certain variable pricing terms in some of these contracts cause them to be considered potential variable interests that require evaluation under the provisions of FIN 46R. If a power generator that holds one of these specific types of contracts is determined to be a VIE and the Company is determined to be the primary beneficiary, the Company would be required to consolidate the entity in its financial statements. Consolidation of one of these potential VIEs would primarily result in the addition of property, plant and equipment, long-term debt and minority interest to the Company's balance sheet. The impact on the Company's consolidated results of operations would be that purchased ene rgy and capacity expenses attributable to the long-term contract with the VIE would be replaced by the VIE's operations, maintenance and interest expense. The VIE's results of operations would be reported as income attributable to a minority interest, and would not affect the Company's net income. Long-term debt of these potential VIEs, even if consolidated, would be nonrecourse to the Company.
At March 31, 2004, the Company had determined that its contracts with ten of these entities would require further analysis under FIN 46R. Since these entities were established and are legally owned by parties not affiliated with the Company, the Company submitted requests to these potential VIEs for the information necessary to perform the required assessments. In response to these requests, one of the potential VIE supplier entities provided some of the requested information. Using this information, the Company has completed its analysis, the results of which indicate that the Company is not the primary beneficiary of this supplier entity under FIN 46R. The Emerging Issues Task Force (EITF) has added a project to its agenda to consider what variability should be considered when determining whether an interest is a variable interest. This EITF project or other efforts to further interpret FIN 46R could require a reassessment of this information.
Although limited information has been made available in certain instances, the Company has not obtained the requested information from the other nine potential VIEs. The Company will continue its efforts to obtain information and will complete an evaluation of its relationship with each of these potential VIEs, if sufficient information is ultimately obtained.
PAGE 9
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company has remaining purchase commitments under contracts with these ten potential VIEs of $4.5 billion at September 30, 2004. The Company purchased $167 million and $154 million of electric generation capacity and energy from these entities in the quarters ended September 30, 2004 and 2003, respectively, and $498 million and $482 in the nine-month periods ended September 30, 2004 and 2003, respectively. The Company's exposure to losses from its involvement with these entities cannot be determined since losses, if any, would be represented by either: 1) the difference between (a) the amount payable by the Company for energy and capacity under the long-term contract and (b) amounts recoverable through regulated electric sales or wholesale market transactions; or 2) if the potential VIE supplier fails to perform, any amount paid by the Company to obtain replacement energy and capacity in excess of the amounts otherwise payable under the long-term contract with the potential VIE supp lier entity.
As described more fully in Note 3 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, the Company adopted FIN 46R for its interests in special purpose entities on December 31, 2003.
2003
SFAS No. 143
Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, which provides accounting requirements for the recognition and measurement of liabilities associated with the retirement of tangible long-lived assets. Upon adoption, the Company recognized a $139 million after-tax gain as the cumulative effect of this change in accounting principle.
EITF 02-3
On January 1, 2003, the Company adopted EITF Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities, that rescinded EITF Issue No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. The implementation of EITF 02-3 resulted in the discontinuance of fair value accounting for non-derivative energy-related contracts held for trading purposes. Upon adoption, the Company recognized an after-tax loss of $55 million as the cumulative effect of this change in accounting principle.
EITF 03-11
On October 1, 2003, the Company adopted EITF Issue No. 03-11, Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133 and Not "Held for Trading Purposes" as Defined in Issue No. 02-3. EITF 03-11 addresses classification of income statement related amounts for derivative contracts. Income statement amounts related to periods prior to October 1, 2003 are presented as originally reported.
Note 4. Recently Issued Accounting Standards
EITF 03-1
In accordance with FASB Staff Position (FSP) EITF 03-1-1, the Company delayed its adoption of the recognition and measurement provisions of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides guidance for evaluating and recognizing other-than-temporary impairments for certain investments in debt and equity securities. This delay will be in effect until the FASB reaches a final conclusion on issues raised in the proposed FSP 03-1-a, which relates primarily to implementation issues concerning certain types of debt securities.
PAGE 10
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Pending the adoption of any new guidance that may be finalized in the future, the Company has continued to evaluate its available-for-sale securities for other-than-temporary impairment based on the accounting policy as described in Note 2 to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. In addition to issues being addressed by the FASB in FSP 03-1-a, the Company and other entities in the electric industry have sought additional guidance from the FASB concerning the proper application of EITF 03-1 to debt and equity securities held in nuclear decommissioning trusts. Given the delayed effective date and the request for additional guidance as described above, the Company cannot predict what the initial or ongoing impact of applying EITF 03-1 to its nuclear decommissioning trust investments may have on its results of operations and financial condition at this time.
Note 5. Operating Revenue
The Company's operating revenue consists of the following:
Three Months Ended |
Nine Months Ended |
|||
2004 |
2003 |
2004 |
2003 |
|
(millions) |
||||
Regulated electric sales |
$1,455 |
$1,383 |
$4,011 |
$3,742 |
Other(1) |
204 |
135 |
297 |
502 |
Total operating revenue |
$1,659 |
$1,518 |
$4,308 |
$4,244 |
_______________
(1)
Includes non-regulated electric sales, non-regulated gas sales and other revenue.Note 6. Comprehensive Income
The following table presents total comprehensive income:
|
Three Months Ended |
Nine Months Ended |
||
|
2004 |
2003 |
2004 |
2003 |
|
(millions) |
|||
Net income |
$259 |
$200 |
$440 |
$724 |
Other comprehensive income (loss): |
|
|
|
|
Net other comprehensive income (loss) associated |
|
|
|
|
Other(1) |
1 |
5 |
(2) |
29 |
Other comprehensive income (loss) |
(4) |
7 |
2 |
40 |
Total comprehensive income |
$255 |
$207 |
$442 |
$764 |
________________
(1)
Represents primarily unrealized gains and losses on investments held in nuclear decommissioning trusts.
PAGE 11
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 7. Hedge Accounting Activities
The Company is exposed to the impact of market fluctuations in the price of natural gas, electricity and other energy-related commodities marketed and purchased as well as the currency exchange and interest rate risks of its business operations. The Company uses derivative instruments to mitigate its exposure to these risks and designates derivative instruments as fair value or cash flow hedges for accounting purposes. Selected information about the Company's hedge accounting activities follows:
|
Three Months Ended |
Nine Months Ended |
||
|
2004 |
2003 |
2004 |
2003 |
|
(millions) |
|||
Portion of gains on hedging instruments |
|
|
|
|
Portion of losses on hedging instruments |
|
|
|
|
The following table presents selected information related to cash flow hedges included in accumulated other comprehensive income in the Consolidated Balance Sheet at September 30, 2004:
|
Portion Expected |
|
|
(millions) |
|||
Commodities-Gas |
$ (2) |
$(2) |
9 months |
Interest rate |
1 |
- |
133 months |
Foreign currency |
25 |
5 |
38 months |
Total |
$24 |
$ 3 |
The actual amounts that will be reclassified to earnings during the next 12 months will vary from the expected amounts presented above as a result of changes in market prices, interest rates and foreign exchange rates. The effect of amounts being reclassified from accumulated other comprehensive income to earnings will generally be offset by the recognition of the hedged transactions (e.g., anticipated purchases) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies.
PAGE 12
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Significant Financing Transactions
Joint Credit Facilities and Short-term Debt
Dominion, Consolidated Natural Gas Company (CNG), a wholly-owned subsidiary of Dominion, and the Company have two three-year revolving joint credit facilities that allow aggregate borrowings of up to $2.25 billion. The facilities include a $1.5 billion credit facility that was entered into in May 2004 and terminates in May 2007 and a $750 million credit facility that was entered into in May 2002 and terminates in May 2005. These credit facilities are being used for working capital, as support for the combined commercial paper programs of Dominion, CNG and the Company and the issuance of letters of credit of up to $500 million under the $1.5 billion credit facility and $200 million under the $750 million credit facility.
At September 30, 2004, total outstanding commercial paper supported by the credit facilities was $348 million, all of which were the Company's borrowings. At September 30, 2004, total outstanding letters of credit supported by the credit facilities were $148 million, of which a total of $81 million was issued on behalf of an unregulated subsidiary of the Company. At September 30, 2004, capacity available under the two credit facilities was $1.75 billion.
Long-term Debt
In August 2004, in connection with the acquisition of a generating facility of UAE Mecklenburg Cogeneration LP (Mecklenburg), the Company assumed Mecklenburg's $109 million senior secured bonds and $25 million pollution control bonds. In October 2004, the Company offered to exchange $106 million of its 2004 Series A 7.25% senior notes due 2017 (the senior notes) for the outstanding Mecklenburg senior secured bonds, following the scheduled principal payment of $3 million. The senior notes have the same financial terms as the Mecklenburg senior secured bonds.
In the nine months ended September 30, 2004, the Company repaid $250 million of its 8% mortgage bonds due March 1, 2004.
Note 9. Commitments and Contingencies
Other than the matters discussed below, there have been no significant developments regarding commitments and contingencies 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, 2003, Notes 8 and 10 to the Consolidated Financial Statements in the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004, respectively, nor have any significant new matters arisen during the quarter ended September 30, 2004.
Environmental Matters
In March 2004, the State of North Carolina filed a petition under Section 126 of the Clean Air Act seeking the Environmental Protection Agency (EPA) to impose additional nitrogen oxide (NOx) and sulfur dioxide (SO2) reductions from electrical generating units in thirteen states, claiming emissions from the electrical generating units in those states are contributing to air quality problems in North Carolina. The Company has electrical generating units in two of the states. The issues raised by North Carolina are already being addressed by the EPA in current regulatory initiatives. The EPA is expected to respond to the petition later this year. Given the highly uncertain outcome and timing of future action, if any, by the EPA on this issue, the Company cannot predict the financial impact, if any, on its operations at this time.
In July 2004, the EPA published new regulations that govern existing utilities that employ a cooling water intake structure, and whose flow levels exceed a minimum threshold. The EPA's rule presents several compliance options. The Company is evaluating information from certain of its power stations and expects to spend approximately $14 million over the next 4 years conducting studies and technical evaluations. The Company cannot predict the outcome of the EPA regulatory process or state with any certainty what specific controls may be required.
PAGE 13
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Surety Bonds
At September 30, 2004, the Company had purchased $10 million of surety bonds for various purposes, including providing worker compensation coverage and obtaining licenses, permits and rights-of-way. Under the terms of surety bonds, the Company is obligated to indemnify the respective surety bond company for any amounts paid.
Restructuring of a Contract with a Non-Utility Generating Facility
In August 2004, the Company paid $42 million in cash and assumed $134 million in debt in connection with the termination of a long-term power purchase agreement and acquisition of the related generating facility used by Mecklenburg, a non-utility generator, to provide electricity to the Company. The purchase price was allocated to the assets and liabilities acquired based on their estimated fair values as of the date of acquisition. In connection with the termination of the agreement, the Company recorded a net gain of $34 million ($21 million after-tax), which resulted from a loss of $133 million related to terminating the agreement that was more than offset by the reversal of a $167 million liability representing the remaining balance related to the fair value of the Mecklenburg agreement recorded in October 2003 upon adoption of SFAS No. 133 Implementation Issue No. C20, Interpretation of the Meaning of "Not Clearly and Closely Related" in Paragraph 10(b) regarding Contracts with a Price Adjustment Feature, (Issue C20). The power purchase agreement, which contained pricing terms linked to a broad market index, was required to be recorded at fair value upon adoption of Issue C20; however, since it qualified as a normal purchase and sale contract, no further changes in its fair value were recognized.
Note 10. Credit Risk
The Company sells electricity and provides distribution and transmission services to a diverse group of customers, including residential, commercial and industrial customers as well as rural electric cooperatives and municipalities. Credit risk associated with trade accounts receivable from energy consumers is limited due to the large number of customers. In addition, the Company enters into contracts with various companies in the energy industry for purchases and sales of energy-related commodities, including natural gas and electricity in its energy trading and risk management activities. The Company's exposure to credit risk is concentrated primarily within its energy trading and risk management activities, as the Company transacts with a smaller, less diverse group of counterparties and transactions may involve large notional volumes and potentially volatile commodity prices. At September 30, 2004, gross credit exposure related to these transactions totaled $424 million, reflecting the unrealized gains f
or contracts carried at fair value plus any outstanding receivables (net of payables, where netting agreements exist), prior to the application of collateral. After the application of collateral, the Company's credit exposure totaled $411 million. Of this amount, investment grade counterparties represented 97% and no single counterparty exceeded 16%. The credit exposure amounts exclude amounts receivable from affiliated companies.
As of September 30, 2004 and December 31, 2003, the Company had margin deposit assets of $77 million and $41 million, respectively, and margin deposit liabilities (reported in other current liabilities) of $13 million and $1 million, respectively.
Note 11. Related Party Transactions
The Company engages in related party transactions primarily with other Dominion subsidiaries. The Company's accounts receivable and payable balances with affiliates are settled based on contractual terms or on a monthly basis, depending on the nature of the underlying transactions. The significant related party transactions are disclosed below.
PAGE 14
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Transactions with Other Dominion Subsidiaries
The Company, through an unregulated subsidiary, transacts with other Dominion subsidiaries for certain quantities of natural gas and other commodities at market prices in the ordinary course of business. Through the same unregulated subsidiary, the Company is involved in facilitating Dominion's enterprise risk management. In connection with this role, the Company's unregulated subsidiary enters into certain financial derivative commodity contracts with other Dominion subsidiaries. These contracts, which are principally comprised of commodity swaps, are used by Dominion subsidiaries to manage commodity price risks associated with purchases and sales of natural gas. As part of Dominion's enterprise risk management, the Company generally manages such risk exposures by entering into offsetting derivative instruments with non-affiliates. The Company reports both affiliated and non-affiliated derivative instruments at fair value, with related changes included in earnings, except to the e xtent designated as cash flow hedges.
The affiliated transactions are presented below:
|
Three Months Ended |
Nine Months Ended |
||
|
2004 |
2003 |
2004 |
2003 |
(millions) |
||||
Purchases of natural gas, gas transportation and storage services from affiliates |
|
|
|
|
Sales of natural gas to affiliates |
158 |
171 |
517 |
510 |
Sales of electricity to affiliates |
- |
5 |
- |
10 |
Net realized gains (losses) on affiliated commodity derivative contracts |
|
|
|
|
The Company's Consolidated Balance Sheets included derivative assets of $136 million and $86 million with Dominion subsidiaries at September 30, 2004 and December 31, 2003, respectively, and derivative liabilities of $56 million and $65 million with Dominion subsidiaries at September 30, 2004 and December 31, 2003, respectively.
Dominion Resources Services, Inc., a subsidiary of Dominion, provides accounting, legal and certain administrative and technical services to the Company. The Company recognized expenses of $74 million and $70 million in the third quarters of 2004 and 2003, respectively, and $210 million and $222 million in the first nine months of 2004 and 2003, respectively, in other operations and maintenance expense related to these services. The Company provided certain services to affiliates, including charges for facilities and equipment usage, which totaled $7 million in the third quarters of both 2004 and 2003, and $20 million and $21 million in the nine months ended September 30, 2004 and 2003, respectively.
Transactions with Dominion
As of September 30, 2004 and December 31, 2003, the Company has borrowed funds from Dominion under a short-term demand note of $689 million and $154 million, respectively, and a long-term note of $220 million for both periods. Interest charges incurred by the Company related to these borrowings were $3 million and $7 million in the three and nine months ended September 30, 2004, respectively. Interest charges were not material in the three and nine months ended September 30, 2003.
Transactions with Other Related Parties
An unregulated subsidiary of the Company, at its sole discretion, has provided $8 million at both September 30, 2004 and December 31, 2003 of cash collateral to third parties on behalf of several of its natural gas supply customers. For this and other financial support services, the unregulated subsidiary receives fees and has a security interest in the customers' assets. The arrangements terminate at various dates beginning in 2005 through 2007, subject to periodic renewal thereafter unless terminated by either party.
PAGE 15
VIRGINIA ELECTRIC AND POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 12. Operating Segments
The Company is organized primarily on the basis of products and services sold in the United States. The majority of the Company's revenue is provided through bundled rate tariffs. Generally, such revenue is allocated for management reporting based on prior cost-of-service studies among the three operating segments:
Generation
includes the Company's portfolio of electric generating facilities, power purchase contracts and marketing of its excess generation resources not needed to serve utility customers.Energy includes the Company's electric transmission operations and its energy trading and risk management activities (Clearinghouse). The electric transmission operations are subject to cost-of-service rate regulation.
Delivery includes the Company's electric distribution systems and customer service operations. The Delivery segment is subject to cost-of-service rate regulation.
Corporate and Other includes the Company's corporate and other functions. The contribution to net income by the Company's primary operating segments is determined based on a measure of profit that executive management believes to be representative of the segments' core earnings. As a result, certain specific items attributable to those segments are not included in profit measures evaluated by executive management in assessing the segment's performance or allocating resources among the segments. These specific items are instead reported in the Corporate and Other segment.
|
|
|
|
Corporate |
Consolidated Total |
(millions) |
|||||
Three Months Ended September 30, 2004 |
|||||
Operating revenue |
$1,107 |
$225 |
$325 |
$ 2 |
$1,659 |
Net income |
135 |
7 |
95 |
22 |
259 |
Three Months Ended September 30, 2003 |
|||||
Operating revenue |
$1,025 |
$178 |
$314 |
$ 1 |
$1,518 |
Net income (loss) |
160 |
29 |
93 |
(82) |
200 |
Nine Months Ended September 30, 2004 |
|||||
Operating revenue |
$3,055 |
$360 |
$887 |
$ 6 |
$4,308 |
Net income (loss) |
283 |
(100) |
234 |
23 |
440 |
Nine Months Ended September 30, 2003 |
|||||
Operating revenue |
$2,784 |
$610 |
$846 |
$ 4 |
$4,244 |
Net income (loss) |
333 |
172 |
222 |
(3) |
724 |
PAGE 16
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) discusses the results of operations and general financial condition of the Company. MD&A should be read in conjunction with the Consolidated Financial Statements. The "Company" is used throughout MD&A and, depending on the context of its use, may represent any of the following: the legal entity, Virginia Electric and Power Company, one of Virginia Electric and Power Company's consolidated subsidiaries or the entirety of Virginia Electric and Power Company and its consolidated subsidiaries. The Company is a wholly-owned subsidiary of Dominion.
Contents of MD&A
The MD&A consists of the following information:
Forward-Looking Statements
This report contains statements concerning the Company's expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by words such as "anticipate," "estimate," "forecast," "expect," "believe," "should," "could," "plan," "may" or other similar words.
The Company makes forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to differ materially from predicted results. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additionally, other risks that may cause actual results to differ from predicted results are set forth in Risk Factors and Cautionary Statements That May Affect Future Results.
The Company bases its forward-looking statements on management's beliefs and assumptions using information available at the time the statements are made. The Company cautions the reader not to place undue reliance on its forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. The Company undertakes no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.
Accounting Matters
Critical Accounting Policies and Estimates
As of September 30, 2004, there have been no significant changes with regard to critical accounting policies and estimates as disclosed in MD&A in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The policies disclosed included the accounting for: derivative contracts at fair value; long-lived asset impairment testing; asset retirement obligations and regulated operations.
PAGE 17
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
FIN 46R
The Company adopted FIN 46R for its interests in VIEs that are not considered special purpose entities on March 31, 2004. FIN 46R addresses the identification and consolidation of VIEs, which are entities that are not controllable through voting interests or in which the VIEs' equity investors do not bear the residual economic risks and rewards. There was no impact on the Company's results of operations or financial position related to this adoption. See Note 3 to the Consolidated Financial Statements for further discussion.
Presented below is a summary of contributions by the Company's operating segments to its net income:
Third Quarter Ended |
Nine Months Ended |
|||
2004 |
2003 |
2004 |
2003 |
|
(millions) |
||||
Generation |
$135 |
$160 |
$283 |
$333 |
Energy |
7 |
29 |
(100) |
172 |
Delivery |
95 |
93 |
234 |
222 |
Corporate and Other |
22 |
(82) |
23 |
(3) |
Consolidated net income |
$259 |
$200 |
$440 |
$724 |
Overview
Third Quarter Ended September 30, 2004 vs. 2003
Net income increased 30% to $259 million for the third quarter ended September 30, 2004, as compared to 2003, primarily reflecting:
The third quarter results were also impacted by the following specific items reported in the Corporate and Other segment:
2004
2003
PAGE 18
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Nine Months Ended September 30, 2004 vs. 2003
Net income decreased 39% to $440 million for the nine months ended September 30, 2004, as compared to 2003, primarily reflecting:
The nine-month results were also impacted by the following specific items reported in the Corporate and Other segment:
2004
2003
PAGE 19
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Analysis of Consolidated Operations
Presented below are selected amounts related to the Company's results of operations:
|
Third Quarter Ended |
Nine Months Ended |
||
|
2004 |
2003 |
2004 |
2003 |
|
(millions) |
|||
Operating Revenue |
|
|
|
|
Regulated electric sales |
$1,455 |
$1,383 |
$4,011 |
$3,742 |
Other |
204 |
135 |
297 |
502 |
Operating Expenses |
|
|
|
|
Electric fuel and energy purchases, net |
492 |
387 |
1,369 |
1,073 |
Purchased electric capacity |
139 |
152 |
421 |
463 |
Other purchased energy commodities |
180 |
72 |
416 |
214 |
Other operations and maintenance |
219 |
389 |
737 |
849 |
Depreciation and amortization |
126 |
115 |
369 |
344 |
Other taxes |
37 |
41 |
129 |
133 |
Other income |
25 |
18 |
55 |
57 |
Interest and related charges |
72 |
62 |
205 |
208 |
Income tax expense |
160 |
118 |
277 |
377 |
Cumulative effect of changes in accounting principles (net of income taxes) |
|
|
|
|
An analysis of the Company's results of operations for the third quarter and nine months ended September 30, 2004, as compared to the same periods of 2003 follows:
Third Quarter Ended September 30, 2004 vs. 2003
Operating Revenue
Regulated electric sales revenue increased 5% to $1.5 billion, primarily reflecting:
Other revenue increased 51% to $204 million, primarily reflecting a $122 million increase in coal sales revenue, partially offset by:
PAGE 20
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating Expenses and Other Items
Electric fuel and energy purchases, net expense increased 27% to $492 million, primarily reflecting:
Purchased electric capacity expense decreased 9% to $139 million, primarily resulting from the termination of certain long-term power purchase contracts.
Other purchased energy commodities expense increased 150% to $180 million, primarily reflecting an increase in the cost of coal purchased for resale.
Other operations and maintenance expense decreased 44% to $219 million, primarily reflecting a $129 million charge recognized in September 2003 associated with restoration activities related to Hurricane Isabel and a $34 million benefit from the termination of a long-term power purchase contract in 2004.
Depreciation and amortization expense increased 10% to $126 million, due to incremental expense resulting from property additions, including the consolidation of a special purpose lessor entity as a result of adopting FIN 46R on December 31, 2003.
Interest and related charges increased 16% to $72 million, primarily reflecting the favorable resolution in 2003 of previously outstanding income tax issues.
Nine Months Ended September 30, 2004 vs. 2003
Operating Revenue
Regulated electric sales revenue increased 7% to $4.0 billion, primarily reflecting:
Other revenue decreased 41% to $297 million, primarily reflecting:
PAGE 21
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating Expenses and Other Items
Electric fuel and energy purchases, net expense increased 28% to $1.4 billion, primarily reflecting:
Purchased electric capacity expense decreased 9% to $421 million, primarily resulting from the termination of certain long-term power purchase contracts.
Other purchased energy commodities expense increased 94% to $416 million, primarily reflecting an increase in the cost of coal purchased for resale.
Other operations and maintenance expense decreased 13% to $737 million, primarily reflecting:
Depreciation and amortization expense increased 7% to $369 million, due to incremental expense resulting from property additions, including the consolidation of a special purpose lessor entity as a result of adopting FIN 46R on December 31, 2003.
Cumulative effect of changes in accounting principles-On January 1, 2003, the Company adopted two new accounting standards, resulting in a net after-tax gain of $84 million, which included:
Segment Results of Operations
Generation Segment
The Generation segment includes the Company's portfolio of electric generating facilities, power purchase contracts and marketing of its excess generation resources not needed to serve utility customers.
|
Third Quarter Ended |
Nine Months Ended |
||
|
2004 |
2003 |
2004 |
2003 |
|
(millions) |
|||
Net income contribution |
$135 |
$160 |
$283 |
$333 |
Electricity sold (million mwhrs) |
21 |
21 |
60 |
58 |
_______________
mwhrs = megawatt hours
PAGE 22
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Presented below, on an after-tax basis, are the key factors impacting the Generation segment's operating results:
|
Third Quarter Ended |
Nine Months Ended |
|
(millions) |
|
Fuel expenses in excess of rate recovery |
$(44) |
$(106) |
Weather |
(14) |
8 |
Customer growth |
6 |
15 |
Lost revenue due to Hurricane Isabel |
7 |
7 |
Capacity expenses |
6 |
20 |
Depreciation and amortization expense |
(6) |
(16) |
2003 fuel rate case settlement |
9 |
9 |
Other |
11 |
13 |
Change in net income contribution |
$(25) |
$ (50) |
The Generation segment's net income decreased $25 million and $50 million for the third quarter and nine months ended September 30, 2004, respectively, as compared to 2003, primarily reflecting the following:
PAGE 23
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Energy Segment
The Energy segment includes the Company's electric transmission operations and its energy trading and risk management activities (Clearinghouse).
|
Third Quarter Ended |
Nine Months Ended |
||
|
2004 |
2003 |
2004 |
2003 |
|
(millions) |
|||
Net income (loss) |
$7 |
$29 |
$(100) |
$172 |
Presented below, on an after-tax basis, are the key factors impacting the Energy segment's operating results:
|
Third Quarter Ended |
|
|
(millions) |
|
Energy trading and risk management activities |
$ (5) |
$(251) |
Economic hedges |
(13) |
(13) |
Electric transmission margins |
(5) |
(9) |
Other |
1 |
1 |
Change in net income contribution |
$(22) |
$(272) |
The Energy segment's net income decreased $22 million and $272 million for the third quarter and nine months ended September 30, 2004, respectively, as compared to 2003, primarily reflecting:
Delivery Segment
The Delivery segment includes the Company's electric distribution and customer service operations.
|
Third Quarter Ended |
Nine Months Ended |
||
|
2004 |
2003 |
2004 |
2003 |
|
(millions) |
|||
Net income contribution |
$95 |
$93 |
$234 |
$222 |
Electricity delivered to utility customers (million mwhrs) |
21 |
21 |
60 |
58 |
PAGE 24
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Presented below, on an after-tax basis, are the key factors impacting the Delivery segment's operating results:
|
Third Quarter Ended |
|
|
(millions) |
|
Weather |
$(6) |
$ 4 |
Customer growth |
3 |
7 |
Lost revenue due to Hurricane Isabel |
3 |
3 |
Other |
2 |
(2) |
Change in net income contribution |
$ 2 |
$12 |
The Delivery segment's net income increased $2 million and $12 million for the third quarter and nine months ended September 30, 2004, respectively, as compared to 2003, primarily reflecting the following:
Corporate and Other
The Corporate and Other segment includes the Company's corporate and other functions. Presented below are the Corporate and Other segment's after-tax operating results:
|
Third Quarter Ended |
Nine Months Ended |
||
|
2004 |
2003 |
2004 |
2003 |
|
(millions) |
|||
Net income (loss) |
$22 |
$(82) |
$23 |
$(3) |
Third Quarters Ended September 30, 2004 and 2003
The Corporate and Other segment reported a net benefit of $22 million and a net loss of $82 million, primarily attributable to its operating segments for the third quarters ended September 30, 2004 and 2003, respectively.
The net benefit of $22 million recognized in 2004 primarily reflected a $34 million ($21 million after-tax) benefit from the termination of a long-term power purchase contract (Generation).
The net loss of $82 million recognized in 2003 primarily reflected a $129 million ($80 million after-tax) charge associated with restoration activities related to Hurricane Isabel: $127 million (Delivery), $1 million (Generation) and $1 million (Energy).
PAGE 25
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Nine Months Ended September 30, 2004 and 2003
The Corporate and Other segment reported a net benefit of $23 million and a net loss of $3 million, primarily attributable to its operating segments for the nine months ended September 30, 2004 and 2003, respectively.
The net benefit of $23 million recognized in 2004 primarily reflected:
The net loss of $3 million recognized in 2003 primarily reflected:
Selected Information-Energy Trading Activities
See Selected Information-Energy Trading Activities in MD&A in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 for a detailed discussion of the energy trading and risk management activities and related accounting policies. For additional discussion of the Company's trading activities, see Market Rate Sensitive Instruments and Risk Management in Item 3.
A summary of the changes in the unrealized gains and losses recognized for the Company's energy-related derivative instruments held for trading purposes follows:
|
Nine Months Ended |
|
(millions) |
Net unrealized loss at December 31, 2003 |
$ (45) |
Contracts realized or otherwise settled during the period |
54 |
Net unrealized gain at inception of contracts initiated during the period |
- |
Other changes in fair value |
(108) |
Changes in valuation techniques |
- |
Net unrealized loss at September 30, 2004 |
$ (99) |
PAGE 26
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The balance of net unrealized gains and losses recognized for the Company's energy-related derivative instruments held for trading purposes at September 30, 2004 is summarized in the following table based on the approach used to determine fair value and contract settlement or delivery dates:
|
Maturity Based on Contract Settlement or Delivery Date(s) |
|||||
|
|
|
|
|
In Excess |
|
|
Less Than |
1-2 |
2-3 |
3-5 |
of 5 |
|
|
1 Year |
Years |
Years |
Years |
Years |
Total |
|
(millions) |
|||||
Source of Fair Value: |
|
|
|
|
|
|
Actively quoted(1) |
$(82) |
$(12) |
$ 5 |
$- |
- |
$(89) |
Other external sources(2) |
- |
(4) |
(7) |
1 |
- |
(10) |
Models and other |
|
|
|
|
|
|
Total |
$(82) |
$(16) |
$(2) |
$ 1 |
- |
$(99) |
_________________
(1)
Exchange-traded and over-the-counter contracts.Sources and Uses of Cash
Sources and Uses of Cash
The Company depends on both internal and external sources of liquidity to provide working capital and to fund capital requirements. Short-term cash requirements not met by cash provided by operations are generally satisfied with proceeds from short-term borrowings. Long-term cash needs are met through issuances of securities and additional long-term debt financings.
Cash Provided By Operations
As presented on the Company's Consolidated Statements of Cash Flows, net cash flows from operating activities were $1 billion during both nine-month periods ended September 30, 2004 and 2003. Management believes that its operations provide a stable source of cash flow sufficient to contribute to planned levels of capital expenditures and maintain or grow current dividends payable to Dominion.
The Company's operations are subject to risks and uncertainties that may negatively impact the timing or amounts of operating cash flows. See the discussion of such factors in Cash Provided by Operations in MD&A in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
PAGE 27
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cash Used In Investing Activities
During the nine months ended September 30, 2004, investing activities resulted in a net cash outflow of $580 million. The significant investing activities included $504 million for the construction and expansion of generation facilities (see details below) and $63 million for nuclear fuel expenditures:
Investing activities for the nine months ended September 30, 2004 also included $215 million for purchases of securities and $182 million from sales of securities related to investments held in the Company's nuclear decommissioning trusts.
Cash Used In Financing Activities
The Company relies on access to bank and capital markets as a significant source of funding for capital requirements not satisfied by the cash provided by the Company's operations. As discussed in Credit Ratings and Debt Covenants below, the Company's ability to borrow funds or issue securities and the return demanded by investors are affected by the Company's credit ratings. In addition, the raising of external capital is subject to certain regulatory approvals, including authorization by the Virginia State Corporation Commission (Virginia Commission).
As presented on the Company's Consolidated Statements of Cash Flows, net cash flows used in financing activities were $527 million for the nine months ended September 30, 2004.
Joint Credit Facilities and Short-term Debt
The Company's financial policy precludes issuing commercial paper in excess of its supporting lines of credit. Dominion, CNG and the Company have two three-year revolving joint credit facilities that allow aggregate borrowings of up to $2.25 billion. The facilities include a $1.5 billion credit facility that was entered into in May 2004 and terminates in May 2007 and a $750 million credit facility that was entered into in May 2002 and terminates in May 2005. These credit facilities are being used for working capital, as support for the combined commercial paper programs of Dominion, CNG and the Company and the issuance of letters of credit of up to $500 million under the $1.5 billion credit facility and $200 million under the $750 million credit facility.
At September 30, 2004, total outstanding commercial paper supported by the credit facilities was $348 million, all of which were the Company's borrowings. Commercial paper borrowings are used primarily to fund working capital requirements and may vary significantly during the course of the period, depending upon the timing and amount of cash requirements not satisfied by cash provided by operations.
At September 30, 2004, total outstanding letters of credit supported by the credit facilities were $148 million, of which a total of $81 million was issued on behalf of an unregulated subsidiary of the Company.
At September 30, 2004, capacity available under the two credit facilities was $1.75 billion.
PAGE 28
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Borrowings from Parent
As of September 30, 2004, the Company has borrowed funds from Dominion totaling $689 million under a short-term demand note and $220 million under a long-term note. Interest charges incurred by the Company related to these borrowings were $3 million and $7 million in the three and nine months ended September 30, 2004, respectively.
Long-term Debt
In August 2004, in connection with the acquisition of a generating facility of Mecklenburg, the Company assumed Mecklenburg's $109 million senior secured bonds and $25 million pollution control bonds. In October 2004, the Company offered to exchange $106 million of its 2004 Series A 7.25% senior notes due 2017 (the senior notes) for the outstanding Mecklenburg senior secured bonds, following the scheduled principal payment of $3 million. The senior notes have the same financial terms as the Mecklenburg senior secured bonds.
In the nine months ended September 30, 2004, the Company repaid $250 million of its 8% mortgage bonds due March 1, 2004.
Amounts Available under Shelf Registrations
At September 30, 2004, the Company had $670 million of available capacity under currently effective shelf registrations with the SEC that would permit the Company to issue debt and preferred securities to meet future capital requirements.
Credit Ratings and Debt Covenants
In Credit Ratings and Debt Covenants of MD&A in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, the Company discussed its use of capital markets and the impact of credit ratings on the accessibility and costs of using these markets, as well as various covenants present in the enabling agreements underlying the Company's debt. As of September 30, 2004, there have been no changes in the Company's credit ratings nor changes to or events of default under the Company's debt covenants.
Credit Risk
The Company's exposure to potential concentrations of credit risk results primarily from its energy trading and risk management activities. Presented below is a summary of the Company's gross and net credit exposure as of September 30, 2004 for these activities. The credit exposure amounts presented exclude amounts receivable from affiliated companies. The Company calculates its gross credit exposure for each counterparty as the unrealized fair value of derivative contracts plus any outstanding receivables (net of payables, where netting agreements exist), prior to the application of collateral.
|
Gross |
|
Net |
|
(millions) |
||
Investment grade(1) |
$201 |
$12 |
$189 |
Non-investment grade(2) |
4 |
1 |
3 |
No external ratings: |
|
|
|
Internally rated-investment grade(3) |
210 |
- |
210 |
Internally rated-non-investment grade(4) |
9 |
- |
9 |
Total |
$424 |
$13 |
$411 |
_________________
(1)
Designations as investment grade are based on minimum credit ratings assigned by Moody's and Standard & Poor's. The five largest counterparty exposures, combined, for this category, represented approximately 16% of the total gross credit exposure.
PAGE 29
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Future Cash Payments for Contractual Obligations
As of September 30, 2004, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in MD&A in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.
Future Issues and Other Matters
The following discussion of future issues and other information includes current developments of previously disclosed matters and new issues arising during the period covered by and subsequent to the Consolidated Financial Statements. This section should be read in conjunction with Future Issues and Other Matters in MD&A in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004.
Regional Transmission Organization (RTO)
In September 2002, the Company and PJM Interconnection, LLC (PJM) entered into an agreement that provides, subject to regulatory approval and certain provisions, the Company will become a member of PJM, transfer functional control of its electric transmission facilities to PJM for inclusion in a new PJM South Region and integrate its control area into the PJM energy markets. The agreement also allocates costs of implementation of the agreement among the parties.
The Company has made filings with both the Virginia State Corporation Commission (Virginia Commission) and North Carolina Utilities Commission (North Carolina Commission) requesting authorization to become a member of PJM. In October 2004, the Company filed a settlement agreement with the Virginia Commission resolving most of the issues raised by interested parties in the proceeding and hearings were held to address the remaining issues. The North Carolina Commission evidentiary hearing scheduled for October 2004 was postponed. A new hearing date has not been set at this time.
In October 2004, FERC issued an order conditionally approving the Company's application to join PJM. In its order, FERC determined that: (i) the Company's proposed transmission rate treatment must conform to a regional transmission rate design, and (ii) the Company must assess all available evidence and determine whether the requested deferral of expenditures related to the establishment and operation of an RTO should be recorded as a regulatory asset until the end of the Virginia retail rate cap period. In a separate order issued in September 2004, FERC granted authority to the Company and its affiliates with market-based rate authority to charge market-based rates for sales of electric energy and capacity to loads located within the Company's service territory upon its integration into PJM.
North Carolina Regulatory Matter
In April 2004, the North Carolina Commission commenced an investigation into the Company's North Carolina base rates and subsequently ordered the Company to file a general rate case. The rate case was filed in September 2004 and a hearing was scheduled for February 2005. The Company cannot predict the outcome of this matter at this time.
PAGE 30
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Restructuring of Contracts with Non-Utility Generating Facilities
In June 2004, the Company reached agreements, pending regulatory approvals, to terminate two long-term power purchase contracts and purchase the related generating facilities used by the non-utility generators to provide electricity to the Company for an aggregate purchase price of approximately $197 million. The Company expects the transactions to be completed in the fourth quarter of 2004, resulting in an after-tax charge in the range of $90 million to $110 million relating to the purchase and termination of the long-term power purchase contracts. The purchase of the stations is consistent with the Company's continuing efforts to lower the cost of long-term power purchase contracts with non-utility generators.
Clearinghouse Trading and Marketing Operations
Management is currently evaluating its Clearinghouse trading and marketing operations and may decide to scale back or completely exit proprietary energy trading. Management is not at this time able to precisely estimate the financial impact of exiting proprietary energy trading. However, this could result in a change in the future expected earnings from the Clearinghouse and a reduced level of financial risk. A decision regarding proprietary energy trading is expected by year-end.
American Jobs Creation Act of 2004
The American Jobs Creation Act of 2004 (the Act) was signed into law in October 2004 and has several provisions for energy companies including a deduction related to qualified production activities taxable income. Under the Act, qualified production activities include the Company's electric generation activities.
The FASB is currently reviewing the impact of the qualified production activities deduction on deferred taxes and is expected to issue guidance in the fourth quarter of 2004. Until this guidance is issued, the impact on the Company cannot be determined.
Risk Factors and Cautionary Statements That May Affect Future Results
Factors that may cause actual results to differ materially from those indicated in any forward-looking statement include weather conditions; governmental regulations; cost of environmental compliance; inherent risk in the operation of nuclear facilities; fluctuations in energy-related commodities prices and the effect these could have on the Company's earnings, liquidity position and the underlying value of its assets; trading counterparty credit risk; capital market conditions, including price risk due to marketable securities held as investments in trusts and benefit plans; fluctuations in interest rates; changes in rating agency requirements or ratings; changes in accounting standards; collective bargaining agreements and labor negotiations; the risks of operating businesses in regulated industries that are becoming deregulated; the transfer of control over electric transmission facilities to a regional transmission organization; and political and economic conditions (including inflation and deflation). O
ther more specific risk factors are as follows:
The Company's operations are weather sensitive. The Company's results of operations can be affected by changes in the weather. Weather conditions directly influence the demand for electricity and affect the price of energy commodities. In addition, severe weather, including hurricanes, winter storms and droughts, can be destructive, causing outages and property damage that require the Company to incur additional expenses.
The Company is subject to complex government regulation that could adversely affect its operations. The Company's operations are subject to extensive federal, state and local regulation and may require numerous permits, approvals and certificates from various governmental agencies. The Company must also comply with environmental legislation and associated regulations. Management believes the necessary approvals have been obtained for the Company's existing operations and that its business is conducted in accordance with applicable laws. However, new laws or regulations, or the revision or reinterpretation of existing laws or regulations, may require the Company to incur additional expenses.
PAGE 31
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Costs of environmental compliance, liabilities and litigation could exceed the Company's estimates. Compliance with federal, state and local environmental laws and regulations may result in increased capital, operating and other costs, including remediation and containment expenses and monitoring obligations. In addition, the Company may be a responsible party for environmental clean-up at a site identified by a regulatory body. Management cannot predict with certainty the amount and timing of all future expenditures related to environmental matters because of the difficulty of estimating clean-up and compliance costs, and the possibility that changes will be made to the current environmental laws and regulations. There is also uncertainty in quantifying liabilities under environmental laws that impose joint and several liability on all potentially responsible parties.
The Company is exposed to cost-recovery shortfalls because of capped base rates and amendments to the fuel factor statute in effect in Virginia for its regulated electric utility. Under the Virginia Restructuring Act, as amended in April 2004, the Company's base rates (excluding, generally, a fuel factor with limited adjustment provisions, and certain other allowable adjustments) remain unchanged until December 31, 2010 unless modified or terminated consistent with the Virginia Restructuring Act. Although the Virginia Restructuring Act allows for the recovery of certain generation-related costs during the capped rates periods, the Company remains exposed to numerous risks of cost-recovery shortfalls. These include exposure to potentially stranded costs, future environmental compliance requirements, tax law changes, costs related to hurricanes or other weather events, inflation, the cost of obtaining replacement power during unplanned plant outages and increased capital costs. In addition, under the 2004 amendments to the Virginia fuel factor statute, the Company's current Virginia fuel factor provisions are locked-in until the earlier of July 1, 2007 or the termination of capped rates by order of the Virginia State Corporation Commission. The amendments provide for a one-time adjustment of the Company's fuel factor, effective July 1, 2007 through December 31, 2010, with no adjustment for previously incurred over-recovery or under-recovery, thus eliminating deferred fuel accounting. As a result, the Company is exposed to fuel price risk. This risk includes exposure to increased costs of fuel, including the energy portion of certain purchased power costs.
Under the Virginia Restructuring Act, the generation portion of the Company's electric utility operations is open to competition and resulting uncertainty. Under the Virginia Restructuring Act, the generation portion of the Company's electric utility operations in Virginia is open to competition and is no longer subject to cost-based regulation. To date, the competitive market has been slow to develop. Consequently, it is difficult to predict the pace at which the competitive environment will evolve and the extent to which the Company will face increased competition and be able to operate profitably within this competitive environment.
There are inherent risks in the operation of nuclear facilities. The Company operates nuclear facilities that are subject to inherent risks. These include the threat of terrorist attack and ability to dispose of spent nuclear fuel, the disposal of which is subject to complex federal and state regulatory constraints. These risks also include the cost of and the Company's ability to maintain adequate reserves for decommissioning, costs of plant maintenance and exposure to potential liabilities arising out of the operation of these facilities. The Company maintains decommissioning trusts and external insurance coverage to minimize the financial exposure to these risks. However, it is possible that costs arising from claims could exceed the amount of any insurance coverage.
The use of derivative instruments could result in financial losses and liquidity constraints. The Company uses derivative instruments, including futures, forwards, options and swaps, to manage its commodity and financial market risks. In addition, the Company purchases and sells commodity-based contracts in the natural gas, electricity and oil markets for trading purposes. In the future, the Company could recognize financial losses on these contracts as a result of volatility in the market values of the underlying commodities or if a counterparty fails to perform under a contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these contracts involves management's judgment or use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts.
PAGE 32
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
For additional information concerning derivatives and commodity-based trading contracts, see "Quantitative and Qualitative Disclosures About Market Risk-Market Rate Sensitive Instruments and Risk Management" and Notes 2 and 7 to the Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2003.
The Company is exposed to market risks beyond its control in its energy clearinghouse operations. The Company's energy clearinghouse and risk management operations, including proprietary energy trading, are subject to multiple market risks including market liquidity, counterparty credit strength and price volatility. Many industry participants have experienced severe business downturns resulting in some companies exiting or curtailing their participation in the energy trading markets. This has led to a reduction in the number of trading partners and lower industry trading revenues. Declining creditworthiness of some of the Company's trading counterparties may limit the level of its trading activities with these parties and increase the risk that these parties may not perform under a contract.
An inability to access financial markets could affect the execution of the Company's business plan. The Company relies on access to both short-term money markets and longer-term capital markets as a significant source of liquidity for capital requirements not satisfied by the cash flows from its operations. Management believes that the Company will maintain sufficient access to these financial markets based upon current credit ratings. However, certain disruptions outside of the Company's control may increase its cost of borrowing or restrict its ability to access one or more financial markets. Such disruptions could include an economic downturn, the bankruptcy of an unrelated energy company or changes to the Company's credit ratings. Restrictions on the Company's ability to access financial markets may affect its ability to execute its business plan as scheduled.
Changing rating agency requirements could negatively affect the Company's growth and business strategy. As of September 30, 2004, the Company's senior secured debt was rated A-, stable outlook, by Standard & Poor's and A2, stable outlook, by Moody's. Both agencies have implemented more stringent applications of the financial requirements for various ratings levels. In order to maintain its current credit ratings in light of these or future new requirements, the Company may find it necessary to take steps or change its business plans in ways that may adversely affect the Company's growth and earnings. A reduction in the Company's credit ratings by either Standard & Poor's or Moody's could increase the Company's borrowing costs and adversely affect operating results and could require it to post additional margin in connection with some of its trading and marketing activities.
Potential changes in accounting practices may adversely affect the Company's financial results. The Company cannot predict the impact future changes in accounting standards or practices may have on public companies in general, the energy industry or its operations specifically. New accounting standards could be issued that could change the way the Company records revenues, expenses, assets and liabilities. These changes in accounting standards could adversely affect the Company's reported earnings or could increase reported liabilities.
PAGE 33
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The matters discussed in this item may contain "forward-looking statements" as described in the introductory paragraphs under Part I, Item 2, MD&A of this Form 10-Q. The reader's attention is directed to those paragraphs and Risk Factors and Cautionary Statements That May Affect Future Results in MD&A, for discussion of various risks and uncertainties that may affect the future of the Company.
Market Rate Sensitive Instruments and Risk Management
The Company's financial instruments, commodity contracts and related derivative instruments are exposed to potential losses due to adverse changes in interest rates, foreign currency exchange rates, commodity prices and equity security prices, as described below. Interest rate risk generally is related to the Company's outstanding debt. Commodity price risk is present in the Company's electric operations and energy marketing and trading operations due to the exposure to market shifts for prices received and paid for natural gas, electricity and other commodities. The Company uses derivative instruments to manage price risk exposures for these operations. The Company is exposed to equity price risk through various portfolios of equity securities.
The following sensitivity analysis estimates the potential loss of future earnings or fair value from market risk sensitive instruments over a selected time period due to a 10% unfavorable change in commodity prices, interest rates and foreign currency exchange rates.
Commodity Price Risk-Trading Activities
As part of its strategy to market energy and to manage related risks, the Company manages a portfolio of commodity-based derivative instruments held for trading purposes. These contracts are sensitive to changes in the prices of natural gas, electricity and certain other commodities. The Company uses established policies and procedures to manage the risks associated with these price fluctuations and uses derivative instruments, such as futures, forwards, swaps and options, to mitigate risk by creating offsetting market positions. A hypothetical 10% unfavorable change in commodity prices would have resulted in a decrease of approximately $70 million and $100 million in the fair value of its commodity-based financial derivatives held for trading purposes as of September 30, 2004 and December 31, 2003, respectively.
The impact of a change in energy commodity prices on the Company's trading derivative commodity instruments at a point in time is not necessarily representative of the results that will be realized when such contracts are ultimately settled.
Commodity Price Risk-Non-Trading Activities
The Company manages the price risk associated with purchases and sales of natural gas and electricity by using derivative commodity instruments including futures, forwards, options and swaps. For sensitivity analysis purposes, the fair value of the Company's non-trading derivative commodity instruments is determined based on models that consider the market prices of commodities in future periods, the volatility of the market prices in each period, as well as the time value factors of the derivative instruments. Market prices and volatility are principally determined based on quoted prices on the futures exchange. A hypothetical 10% unfavorable change in market prices of the Company's non-trading commodity-based financial derivative instruments would have resulted in a decrease in fair value of approximately $11 million and $6 million as of September 30, 2004 and December 31, 2003, respectively.
The impact of a change in energy commodity prices on the Company's non-trading commodity based financial derivative instruments at a point in time is not necessarily representative of the results that will be realized when such contracts are ultimately settled. Net losses from derivative commodity instruments used for hedging purposes, to the extent realized, are substantially offset by recognition of the hedged transaction, such as revenue from sales.
PAGE 34
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
(Continued)
Interest Rate Risk
The Company manages its interest rate risk exposure predominantly by maintaining a balance of fixed and variable rate debt. The Company also enters into interest rate sensitive derivatives, including interest rate swaps and interest rate lock agreements. For financial instruments outstanding at September 30, 2004 and December 31, 2003, a hypothetical 10% increase in market interest rates would increase annual interest expense by approximately $3 million for both periods.
Foreign Currency Exchange Risk
The Company manages its foreign currency exchange risk exposure associated with anticipated future purchases of nuclear fuel processing services denominated in foreign currencies by utilizing currency forward contracts. As a result of holding these contracts as hedges, the Company's exposure to foreign currency risk for these purchases is minimal. A hypothetical 10% unfavorable change in relevant foreign exchange rates would have resulted in a decrease of approximately $11 million and $15 million in the fair value of currency forward contracts held by the Company at September 30, 2004 and December 31, 2003, respectively.
Investment Price Risk
The Company is subject to investment price risk due to marketable securities held as investments in nuclear decommissioning trust funds. In accordance with current accounting standards, these marketable securities are reported on the Consolidated Balance Sheets at fair value. The Company recognized net realized gains (including investment income) in net income on nuclear decommissioning trust investments of $16 million for the nine months ended September 30, 2004 and $36 million for the year ended December 31, 2003. The Company recorded, in accumulated other comprehensive income, net unrealized losses on nuclear decommissioning trust investments of $3 million for the nine months ended September 30, 2004 and net unrealized gains on nuclear decommissioning trust investments of $100 million for the year ended December 31, 2003.
Dominion sponsors employee pension and other postretirement benefit plans, in which the Company's employees participate, that hold investments in trusts to fund benefit payments. To the extent that the values of investments held in these trusts decline, the effect will be reflected in the Company's recognition of the periodic cost of such employee benefit plans and the determination of the amount of cash to be contributed by the Company to the employee benefit plans.
PAGE 35
VIRGINIA ELECTRIC AND POWER COMPANY
ITEM 4. CONTROLS AND PROCEDURES
Senior management, including the Chief Executive Officers and Principal Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, the Chief Executive Officers and Principal Financial Officer have concluded that the Company's disclosure controls and procedures are effective. There were no changes in the Company's internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
On December 31, 2003, the Company adopted FIN 46R for its interests in special purpose entities referred to as SPEs and, as a result, has included in its Consolidated Financial Statements the SPE described in Note 3 to the Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2003. The Consolidated Balance Sheet as of September 30, 2004 reflects $344 million of net property, plant and equipment and deferred charges and $370 million of related debt attributable to the SPE. As the SPE is owned by unrelated parties, the Company does not have the authority to dictate or modify, and therefore cannot assess, the disclosure controls and procedures or internal control over financial reporting in place at these entities.
PAGE 36
VIRGINIA ELECTRIC AND POWER COMPANY
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is 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 the Company, or permits issued by various local, state and federal agencies for the construction or operation of facilities. Administrative proceedings may also be pending on these matters. In addition, in the ordinary 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 and Other Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations for discussion on various regulatory proceedings to which the Company is a party.
(a) Exhibits: |
||
|
||
3.1 |
Restated Articles of Incorporation, as in effect on October 28, 2003 (Exhibit 3.1, Form 10-Q for the quarter ended September 30, 2003, 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). |
|
4 |
Virginia Electric and Power Company agrees to furnish to the Securities and Exchange Commission upon request any other instrument with respect to long-term debt as to which the total amount of securities authorized does not exceed 10% of its total consolidated assets. |
|
12.1 |
Ratio of earnings to fixed charges (filed herewith). |
|
12.2 |
Ratio of earnings to fixed charges and preferred dividends (filed herewith). |
|
31.1 |
Certification by Registrant's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
31.2 |
Certification by Registrant's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
31.3 |
Certification by Registrant's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
31.4 |
Certification by Registrant's Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
32 |
Certification to the Securities and Exchange Commission by Registrant's Chief Executive Officers and Principal Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
|
99 |
Condensed consolidated earnings statements (unaudited) (filed herewith). |
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 3, 2004 |
/s/ Steven A. Rogers Vice President (Principal Accounting Officer) |
|
|
|
|
Exhibit 12.1
Virginia Electric and Power Company
Computation of Ratio of Earnings to Fixed Charges
Years Ended |
||||||||
12 Months Ended |
|
|
|
|
|
|||
Earnings, as defined: |
||||||||
Earnings before income taxes and minority interests in consolidated subsidiaries |
|
|
|
|
|
|
||
Fixed charges included in the determination of net income |
|
|
|
|
|
|
||
Total earnings, as defined |
$ 925 |
$ 1,230 |
$ 1,502 |
$ 1,043 |
$ 1,140 |
$ 1,040 |
||
Fixed charges, as defined: |
||||||||
Interest charges |
$ 309 |
$ 320 |
$ 311 |
$ 320 |
$ 297 |
$ 290 |
||
Rental interest factor |
9 |
10 |
10 |
10 |
6 |
7 |
||
Total fixed charges, as defined |
$ 318 |
$ 330 |
$ 321 |
$ 330 |
$ 303 |
$ 297 |
||
Ratio of Earnings to Fixed Charges |
2.91 |
3.73 |
4.68 |
3.16 |
3.76 |
3.50 |
||
Exhibit 12.2
Virginia Electric and Power Company
Computation of Ratio of Earnings to Fixed Charges and Preferred Dividend's
|
||||||||
12 Months Ended Sept. 30, 2004 |
|
|
|
|
|
|||
Earnings, as defined: |
||||||||
Earnings before income taxes and minority interests in consolidated subsidiaries |
|
|
|
|
|
|
||
Fixed charges included in the determination of net income |
|
|
|
|
|
|
||
Total earnings, as defined |
$ 925 |
$ 1,230 |
$ 1,502 |
$ 1,043 |
$ 1,140 |
$ 1,040 |
||
Fixed charges, as defined: |
||||||||
Interest charges |
$ 309 |
$ 320 |
$ 311 |
$ 320 |
$ 297 |
$ 290 |
||
Preference security dividend requirements of consolidated subsidiaries |
26 |
25 |
|
|
|
|
||
Rental interest factor |
9 |
10 |
10 |
10 |
6 |
7 |
||
Total fixed charges, as defined |
$ 344 |
$ 355 |
$ 346 |
$ 368 |
$ 357 |
$ 354 |
||
Ratio of Earnings to Fixed Charges and Preferred Dividends |
|
|
|
|
|
|
||
Exhibit 31.1
I, Jay L. Johnson, certify that:
1. I have reviewed this report on Form 10-Q of Virginia Electric and Power Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d- 5(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 3, 2004 |
|
|
/s/ Jay L. Johnson President and Chief Executive Officer |
|
|
Exhibit 31.2
I, Paul D. Koonce, certify that:
1. I have reviewed this report on Form 10-Q of Virginia Electric and Power Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d- 5(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 3, 2004 |
|
|
/s/ Paul D. Koonce Chief Executive Officer-Energy |
|
|
Exhibit 31.3
I, Mark F. McGettrick, certify that:
1. I have reviewed this report on Form 10-Q of Virginia Electric and Power Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d- 5(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 3, 2004 |
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/s/ Mark F. McGettrick President and Chief Executive Officer-Generation |
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Exhibit 31.4
I, G. Scott Hetzer, certify that:
1. I have reviewed this report on Form 10-Q of Virginia Electric and Power Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d- 5(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 3, 2004 |
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/s/ G. Scott Hetzer Senior Vice President and Treasurer (Principal Financial Officer) |
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Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Virginia Electric and Power Company (the Company), certify that:
/s/ Jay L. Johnson President and Chief Executive Officer November 3, 2004 |
/s/ Paul D. Koonce Chief Executive Officer-Energy November 3, 2004 |
/s/ Mark F. McGettrick President and Chief Executive Officer-Generation November 3, 2004 |
/s/ G. Scott Hetzer Senior Vice President and Treasurer (Principal Financial Officer) November 3, 2004 |
Exhibit 99
VIRGINIA ELECTRIC AND POWER COMPANY
CONDENSED CONSOLIDATED EARNINGS STATEMENT
(Unaudited)
|
Twelve Months |
|
(millions) |
Operating Revenue |
$5,501 |
Operating Expenses |
4,663 |
Income from operations |
838 |
Other income |
79 |
Interest and related charges |
299 |
Income before income taxes |
618 |
Income taxes |
236 |
Income before cumulative effect of changes in |
|
Cumulative effect of changes in accounting principles |
|
Net income |
277 |
Preferred dividends |
15 |
Balance available for common stock |
$ 262 |
The condensed consolidated earnings statement for the twelve months ended September 30, 2004 reflects the cumulative effect of adopting the following accounting standards: