-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MexF9/FtIMzlvosWV+knCWiREnEhXGdOD4Y2y43o7FiV6eTCZGYyhyO3IxFsG60z 2wOCI6w8EL/6aEpalM+XbA== 0000916641-97-000229.txt : 19970325 0000916641-97-000229.hdr.sgml : 19970325 ACCESSION NUMBER: 0000916641-97-000229 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIRGINIA ELECTRIC & POWER CO CENTRAL INDEX KEY: 0000103682 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 540418825 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-02255 FILM NUMBER: 97561319 BUSINESS ADDRESS: STREET 1: ONE JAMES RIVER PLAZA CITY: RICHMOND STATE: VA ZIP: 23219-3932 BUSINESS PHONE: 8047713000 10-K405 1 VIRGINIA ELECTRIC AND POWER COMPANY 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ Form 10-K ------------------------ (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 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 (Exact name of registrant as specified in its charter) VIRGINIA (State or other jurisdiction of incorporation or organization) 701 East Cary Street Richmond, Virginia (Address of principal executive offices) 54-0418825 (I.R.S. Employer Identification no.) 23219-3932 (Zip Code) (804) 771-3000 (Registrant's telephone number, including area code) ------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - ------------------------------- ------------------------ Preferred Stock (cumulative) New York Stock Exchange $100 liquidation value: $5.00 dividend Trust Preferred Securities New York Stock Exchange $25 liquidation value: 8.05% dividend ------------------------ Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 1997 was zero. As of February 28, 1997, there were issued and outstanding 171,484 shares of the registrant's common stock, without par value, all of which were held, beneficially and of record, by Dominion Resources, Inc. DOCUMENTS INCORPORATED BY REFERENCE. None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- VIRGINIA ELECTRIC AND POWER COMPANY Page Item Number Number - ------------------------------------------------------------------------- ------ PART I 1. Business.............................................................. 1 The Company.......................................................... 1 Regulation........................................................... 2 General............................................................ 2 Virginia........................................................... 2 North Carolina..................................................... 4 FERC............................................................... 4 Environmental...................................................... 5 Nuclear............................................................ 6 Capital Requirements and Financing Program........................... 7 Construction and Nuclear Fuel Expenditures......................... 7 Financing Program.................................................. 7 Rates................................................................ 7 FERC............................................................... 8 Virginia........................................................... 8 North Carolina..................................................... 9 Sources of Power..................................................... 9 Company Generating Units........................................... 9 Net Utility Purchases.............................................. 9 Non-Utility Generation............................................. 9 Sources of Energy Used and Fuel Costs................................ 10 Nuclear Operations and Fuel Supply................................. 10 Fossil Operations and Fuel Supply.................................. 10 Purchases and Sales of Power....................................... 10 Interconnections..................................................... 11 Future Sources of Power.............................................. 12 Company Owned Generation........................................... 12 Non-Utility Generation............................................. 12 Competition and Strategic Initiatives................................ 12 Conservation and Load Management..................................... 13 2. Properties............................................................ 13 3. Legal Proceedings..................................................... 14 4. Submission of Matters to a Vote of Security Holders................... 14 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters........................................... 15 6. Selected Financial Data............................................... 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 16 Liquidity and Capital Resources...................................... 16 Capital Requirements................................................. 17 Results of Operations................................................ 17 Future Issues........................................................ 20 8. Financial Statements and Supplementary Data........................... 26 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................................ 49 PART III 10. Directors and Executive Officers of the Registrant................... 50 11. Executive Compensation............................................... 52 12. Security Ownership of Certain Beneficial Owners and Management....... 56 13. Certain Relationships and Related Transactions....................... 56 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... 57 PART I ITEM 1. BUSINESS THE COMPANY Virginia Electric and Power Company was incorporated in Virginia in 1909 and has its principal office at 701 East Cary Street, Richmond, Virginia 23219-3932, telephone (804) 771-3000. It is a wholly-owned subsidiary of Dominion Resources, Inc. (Dominion Resources), a Virginia corporation. Virginia Electric and Power Company is a regulated public utility engaged in the generation, transmission, distribution and sale of electric energy within a 30,000 square mile area in Virginia and northeastern North Carolina. It transacts business under the name Virginia Power in Virginia and under the name North Carolina Power in North Carolina. It sells electricity to retail customers (including governmental agencies) and to wholesale customers such as rural electric cooperatives and municipalities. The Virginia service area comprises about 65 percent of Virginia's total land area, but accounts for over 80 percent of its population. As used herein, the terms "Virginia Power" and the "Company" shall refer to the entirety of Virginia Electric and Power Company, including, without limitation, its Virginia and North Carolina operations, and all of its subsidiaries. The electric utility industry in the United States is witnessing an evolutionary trend toward less regulation and more competition. This is evidenced by legislative and regulatory action at both the federal and state level. To the extent that competition is either authorized or mandated and regulation is eliminated or relaxed, electric utilities will no longer, in the absence of appropriate legislative or regulatory action during the transition period, be guaranteed an opportunity to recover their prudently-incurred costs including their cost of capital, and utilities with costs that exceed the market prices established by the competitive market will run the risk of suffering losses, which may be substantial. Virginia Power has responded to this evolution by undertaking cost-cutting measures, engaging in re-engineering efforts of its core business processes, and pursuing a strategic planning initiative (called Vision 2000) to encourage innovative approaches to servicing traditional markets and to develop appropriate methods by which to service future markets. A significant part of the Company's strategy relies on developing "non-traditional" business opportunities designed to provide growth in earnings by leveraging existing core competencies. The Company has established separate business units for its nuclear operations, fossil and hydroelectric operations, commercial operations, and its energy services business in an effort to pursue these opportunities to grow by offering multiple markets a broad portfolio of energy-related products and services. In addition, the Company is actively pursuing opportunities to expand its market reach through strategic alliances with partners whose strengths, market position and strategies complement the Company's and where efficiencies can be gained through the alliance. For additional information on the changing utility industry and the Company's strategy see COMPETITION AND STRATEGIC INITIATIVES below and Competition under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Company has franchises or permits for electric operations in substantially all cities and towns now served. It also has certificates of convenience and necessity from the State Corporation Commission of Virginia (the Virginia Commission) for service in all territory served at retail in Virginia. The North Carolina Utilities Commission (the North Carolina Commission) has assigned territory to the Company for substantially all of its retail service outside certain municipalities in North Carolina. The Company strives to operate its generating facilities in accordance with prudent utility industry practices and in conformity with applicable statutes, rules and regulations. Like other electric utilities, the Company's generating facilities are subject to unanticipated or extended outages for repairs, replacements or modifications of equipment or otherwise to comply with regulatory requirements. Such outages may involve significant expenditures not previously budgeted, including replacement energy costs. The Company and its subsidiaries had 9,681 full-time employees on December 31, 1996. A total of 3,481 of the Company's employees are represented by the International Brotherhood of Electrical Workers under a contract extending to March 31, 1998. 1 The matters discussed in this annual report on form 10-K contain "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995, including (without limitation) discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this document. These discussions, and any other discussions contained in this report that are not historical facts, are forward-looking and, accordingly, involve estimates, projections, goals, forecasts, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. In addition to certain contingency matters (and their respective cautionary statements) discussed elsewhere in this report, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS indicates some important factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking discussions. REGULATION General In a wide variety of matters in addition to rates, Virginia Power is presently subject to regulation by the Virginia Commission and the North Carolina Commission, the Environmental Protection Agency (EPA), Department of Energy (DOE), Nuclear Regulatory Commission (NRC), the Federal Energy Regulatory Commission (FERC), the Army Corps of Engineers, and other federal, state and local authorities. Compliance with numerous laws and regulations increases the Company's operating and capital costs by requiring, among other things, changes in the design and operation of existing facilities and changes or delays in the location, design, construction and operation of new facilities. The commissions regulating the Company's rates have historically permitted recovery of such costs. Virginia Power may not construct, or incur financial commitments for construction of, any substantial generating facilities or large capacity transmission lines without the prior approval of state and federal governmental agencies having jurisdiction over various aspects of its business. Such approvals relate to, among other things, the environmental impact of such activities, the relationship of such activities to the need for providing adequate utility service and the design and operation of proposed facilities. Various provisions of the Energy Policy Act of 1992 (Energy Act) that could affect the Company include those provisions encouraging the development of non-utility generation, giving FERC authority to order transmission access for wholesale transactions, requiring higher energy efficiency and alternative fuels use, restructuring of nuclear plant licensing procedures and requiring state regulatory authorities to give full rate treatment for the effects of conservation and demand management programs, including the effects of reduced sales. While the full impact of the Energy Act on the Company cannot at this time be quantified, it is likely, over time, to be significant. The Virginia General Assembly, during the 1996 session, adopted Senate Joint Resolution No. 118, which created a joint legislative subcommittee to study competition and restructuring in the electric utility industry. The subcommittee conducted public hearings and met at various times throughout the year. The 1997 Virginia General Assembly adopted Senate Joint Resolution No. 259, which would continue the existence of the joint subcommittee for an additional year and request that the Staff of the Virginia Commission provide by November 7, 1997, a draft of a working model for the future structure of the electric utility industry in Virginia, statutory or regulatory changes appropriate for the model, and an appropriate timetable and transition for implementation of the model. The Virginia Commission has commenced its work in response to this request. Virginia On September 18, 1995, the Virginia Commission established a proceeding to review and consider its policy regarding restructuring of, and competition in, the electric utility industry. The Commission Staff issued its Report on July 31, 1996. The Report contained 14 recommendations, including continued monitoring of wholesale and retail competition in the industry, increased monitoring of service quality, preservation of state jurisdiction over retail service, improved price signals, further study of stranded cost recovery, and increased efforts to renegotiate non-utility generation contracts. On September 23, 1996 Virginia Power filed its comments on the Staff Report and a request for oral argument. The comments generally supported most of the Staff's specific recommendations as well as its overall recommendation that Virginia should pursue a cautious and measured approach to the adoption of competitive initiatives, but Virginia Power stated that it would continue to pursue its Vision 2000 restructuring (see Note (P) to CONSOLIDATED FINANCIAL STATEMENTS). The comments stated that the question of recovery of potential stranded costs should be addressed now. On November 8, 1996, Virginia Power gave the Virginia Commission notice that it intended to institute a proceeding under a recently enacted statute that allows the 2 Virginia Commission to consider alternative forms of regulation. On November 12, 1996, the Commission directed its staff and electric utilities in Virginia to provide additional information relevant to potential changes in and possible emergence of competition in the electric industry. It directed utilities that have contracts for non-utility generation that impacts their Virginia jurisdictional rates to file, by June 1, 1997, a report detailing efforts to restructure contracts with non-utility generators (NUGs) to mitigate the potentially negative effect on current and future rates, and subsequently to file quarterly reports detailing continuing efforts in this area. The Commission has established separate working groups to consider the issues of reliability, costs and benefits of competition, stranded costs and benefits, models for industry restructuring, and environmental matters. Each working group includes a Staff member and representatives of consumer groups, industrial customers, non- utility generators, utilities and cooperatives. On November 12, 1996, the Commission also instituted a new proceeding and directed the Company to provide other information by March 31, 1997. Information required to be filed includes detailed cost-of-service studies, suggested adjustments for eliminating cross subsidies among customer classes, methods for improving price signals to customers, illustrative tariffs that unbundle rates, analysis of reserve margin requirements, analysis of whether incremental capacity needs could be met by a competitive market, evaluation of the capacity solicitation process, evaluation of conservation and load management programs and other information. The Commission also directed that any proposed alternative form of regulation be filed in the newly instituted proceeding, and required that a 1996 calendar year be used as the test period, with an anticipated rate year beginning 150 days after the date of filing. On March 7, 1997, in this proceeding and in a separate Annual Information Filing proceeding, the Commission entered an order providing that the Company's rates shall become interim rates subject to refund as of March 1, 1997. On March 24, 1997, Virginia Power filed a proposed alternative regulatory plan with the Virginia Commission, in which it proposes a freeze of present rates through December 31, 2002, during which a portion of earnings above the approved level would be used to accelerate the write-off of generation-related regulatory assets and mitigate the costs associated with payments under power purchase contracts with NUGs. The Company also seeks approval of the principle of stranded cost recovery as well as approval of a Transition Cost Charge mechanism by which costs that may become stranded at the onset of competition will be recoverable from customers who elect to purchase their power in the competitive market if retail competition is allowed in Virginia. The Commission has not established a procedural schedule in this case, and the extent to which it will grant the Company's request cannot be predicted. For a more detailed discussion of competition and the recovery of stranded costs, see Competition under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. On December 18, 1995, Virginia Power applied to the Virginia Commission for approval of arrangements with Chesapeake Paper Products Company (CPPC), under which Virginia Power would facilitate the design, construction and financing of a cogeneration plant to meet CPPC's energy requirements for its industrial processes at its plant in West Point, Virginia. A hearing has been held, and briefs have been filed. Several parties opposed the arrangements by which Virginia Power would provide gas sales, fuel management and fuel procurement services to the plant as being anticompetitive and beyond the Company's corporate and regulatory authority. Briefs were filed on January 6, 1997. After consideration of briefs, a hearing examiner's report will be issued. On May 29, 1996, the Company filed an Application with the Virginia Commission seeking authority to implement a monitoring program that requires certain non-utility generators to provide certain information sufficient to determine continued compliance with the "Qualifying Facility" (QF) requirements of the Public Utility Regulatory Policies Act of 1978 (PURPA). On October 10, 1996, the Commission Staff filed its brief concluding that the Commission had legal authority to require QFs to provide it with operating data and to adopt a monitoring program. On December 18, 1996, the Staff filed a report generally supporting the Application. On December 30, 1996, the Company filed its response requesting that the Commission adopt the Staff conclusions. On June 7, 1996, the Company filed an application with the Virginia Commission to purchase a gas-fired combined cycle generator from Richmond Power Enterprise, L.P. (RPE) and to enter into a purchased power contract with RPE and Enron Power Marketing, Inc. (EPMI) without competitive bidding. Under this proposal, Virginia Power will purchase the generator, at a price of approximately $20 million, and the power purchase and operating agreement (PPOA) will be amended to reduce capacity payments, shorten the term of the agreement and provide for sales of capacity and energy by RPE's assignee, EPMI, to Virginia Power from sources outside Virginia Power's service territory rather than from the generator. The Company estimates this arrangement will result in a savings of $63 million over the life of the existing PPOA. The Staff supported the application, and the Commission granted approval on November 18, 1996. On January 15, 1997, FERC issued the necessary approvals. The purchase was concluded on February 25, 1997. 3 On October 8, 1996, Virginia Power filed with the Virginia Commission an application for authority to provide interexchange non-switched dedicated telecommunication services throughout Virginia. If the application is granted, Virginia Power will be authorized to provide a range of telecommunications services, including private line and special access services and high capacity telecommunications services. The application is opposed by the City of Richmond, and several telecommunications providers have intervened neither supporting nor opposing the application. Virginia Power filed its brief on March 7, 1997, supporting its authority to offer the telecommunications services and responding to the positions taken by the other parties. On November 8, 1996, the Virginia Commission approved arrangements for services and transfers of assets between Virginia Power and A&C Enercom, Inc., a wholly-owned subsidiary of Virginia Power that provides energy services to utility customers. On February 7, 1997, Virginia Power filed an application with the Virginia Commission requesting approval of arrangements between it and a wholly-owned subsidiary, Virginia Power Services, Inc., (VPS), by which Virginia Power would provide to VPS services that would enable Virginia Power Nuclear Services Company (VPN), a VPS subsidiary, to furnish nuclear management and operation services to electric utilities seeking assistance in the management and operation of their nuclear generating facilities. The arrangements contemplate the possibility of the creation of additional subsidiaries of VPS that would provide other unregulated services, such as energy services, to third parties seeking such services. VPN has executed a Letter of Intent with Northeast Nuclear Energy Company to provide management services for Northeast Utilities' Millstone Unit 2 nuclear plant. North Carolina On May 15, 1996, the North Carolina Commission issued an order initiating an investigation of emerging issues in the restructuring of the electric industry. As ordered, the Company filed comments on July 16, 1996, addressing the implications of FERC Order No. 888, Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities. FERC On April 24, 1996, FERC issued final rules on open access transmission service, stranded costs, standards of conduct and open access same-time information systems (OASIS). On July 9, 1996, Virginia Power filed an open access transmission service tariff in compliance with FERC's Order No. 888. Also, in compliance with FERC's directive, Virginia Power's OASIS became operational and company-filed standards of conduct requiring separation of transmission operations/reliability functions from wholesale merchant/marketing functions became effective on January 3, 1997. The Company also made filings to comply with FERC's directive that, effective January 1, 1997, utilities no longer make bundled sales of transmission and generation services in economy energy transactions. In certain of those filings, Virginia Power canceled or committed not to use the economy energy rate schedules contained in interconnection agreements that Virginia Power has with neighboring utilities. With regard to its Wholesale Power Sales Tariff, Virginia Power filed amendments to that tariff to unbundle the bundled economy rates contained therein. On March 4, 1997, FERC issued Order No. 888-A, in which it addressed requests for rehearing of Order No. 888. Order No. 888-A essentially reaffirms the basic principles of Order No. 888 and clarifies and makes limited modifications to Order No. 888. Parties seeking judicial review of Order Nos. 888 and 888-A must file petition for review with the appropriate United States Court of Appeal by May 5, 1997. For a discussion of the status of the Company's Open Access Transmission Tariff filing, see ITEM 1, RATES, FERC below. FERC also issued a notice of proposed rulemaking (NOPR) proposing replacement of open access tariffs with a capacity reservation tariff by December 31, 1997. For additional discussion of Open Access issues see COMPETITION AND STRATEGIC INITIATIVES under BUSINESS and Competition under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. On July 31, 1996, FERC denied in part and granted in part, LG&E Westmoreland Southampton's (Southampton) request for a waiver of the Commission's operating requirements for QFs under PURPA. Southampton owns and operates a 62.6 MW cogeneration facility located in Franklin, Virginia and sells the output of the facility to Virginia Power. FERC's decision preserved Southampton's QF status under the Public Utility Holding Company Act, but refused to waive Southampton's violation of the QF operating standards. The Order provided that Southampton refund to Virginia Power the difference between the amount that Virginia Power paid to Southampton in 1992 under its QF contract and a Commission-approved rate 4 equal to Virginia Power's incremental cost of economy energy during 1992. On August 23, 1996, Southampton filed a Motion for Clarification, and on August 30, 1996, it filed a Request for Rehearing. Virginia Power filed responses to each Southampton pleading. On September 30, 1996, FERC issued an order granting rehearing for the purpose of further consideration. On October 15, 1996, Virginia Power filed the data requested by FERC order showing Virginia Power's incremental cost of economy energy during each hour of 1992. On October 30, 1996, Southampton filed a response to Virginia Power's data filing. Southampton also filed a Petition for Review on September 23, 1996, against FERC in the United States Court of Appeals for the D.C. Circuit. Virginia Power filed a Motion to Intervene, which the Court granted on November 25, 1996. On November 27, 1996, Southampton initiated a separate rate proceeding at FERC seeking approval of the contract rates paid to it by Virginia Power in 1992 only. On December 26, 1996, Virginia Power filed a Motion to Intervene, Motion to Reject and Terminate Proceeding, and Protest. On January 10, 1997, Southampton filed its answer. Environmental From time to time, the Company may be identified as a potentially responsible party (PRP) with respect to a Superfund site. EPA (or a state) can either (a) allow such a party to conduct and pay for a remedial investigation, feasibility study and remedial action or (b) conduct the remedial investigation and action and then seek reimbursement from the parties. Each party can be held jointly, severally and strictly liable for all costs, but the parties can then bring contribution actions against each other and seek reimbursement from their insurance companies. As a result of the Superfund Act or other laws or regulations regarding the remediation of waste, the Company may be required to expend amounts on remedial investigations and actions. Although the Company is not currently aware of any sites or events, including those sites currently identified likely to result in significant liabilities, such amounts, in the future, could be significant. Permits under the Clean Water Act and state laws have been issued for all of the Company's steam generating stations now in operation. Such permits are subject to reissuance and continuing review. The Clean Air Act, as amended in 1990, requires the Company to reduce its emissions of sulfur dioxide (SO(2)) and nitrogen oxides (NO(x)). Beginning in 1995, the SO(2) reduction program is based on the issuance of a limited number of SO(2) emission allowances, each of which may be used as a permit to emit one ton of SO(2) into the atmosphere or may be sold to someone else. The program is administered by the EPA. The Company installed SO(2) control equipment on Unit 3 at Mt. Storm Power Station during 1994. Additional plans for SO(2) control involve switching to lower sulfur coal, purchase of emission allowances and additional SO(2) controls. Maximum flexibility and least-cost compliance will be maintained through annual studies. The Company has completed its compliance plan for NO(x) control, with the exception of some additional studies concerning Phase II, for which EPA issued final regulations in December 1996, and ozone control requirements, for which final regulations have not yet been promulgated. In 1996 the Company installed NO(x) controls on Possum Point Unit 4 and at Mt. Storm Unit 3 at a total approximate cost of $10 million. The Company plans to install additional NO(x) controls and modify existing controls at Mt. Storm Units 1 and 2 in 1997, and to seek alternative emission limitations from EPA for all three Mt. Storm Units. The Company has notified EPA of its decision (called "early election") to begin complying with Phase I NO(x) limits at ten of its units in Virginia in 1997, three years earlier than otherwise required. As a result, and provided that Phase I compliance limits are met, the units will not be subject to more stringent Phase II limits until 2008. In order to assist the Virginia Department of Environmental Quality in maintaining good air quality in the Richmond and Hampton Roads regions, and to avoid the necessity of more stringent regulations, the Company made voluntary commitments in 1996 to cap NO(x) emissions at its Chesterfield and Yorktown Power Stations and the Chesapeake Energy Center beginning in 2000. Capital expenditures on Clean Air Act compliance over the next five years are projected to be approximately $21 million. Changes in the regulatory environment, availability of allowances, and emissions control technology could substantially impact the timing and magnitude of compliance expenditures. The Clean Air Act amendments also require the Company to obtain operating permits for all major generating facilities. Permit applications have been submitted, and deemed complete by the regulatory authorities, for the Mt. Storm and North Branch power stations. Applications for the Virginia stations are expected to be filed within the next two years. The Company continues to work with the West Virginia Office of Air Quality concerning opacity requirements applicable to the Mt. Storm Power Station. In regard to ambient air quality standards, the EPA recently announced proposals to add a fine particulate matter standard and to revise the ozone standard, which could potentially result in significant expenditures to install controls to reduce sulfur dioxide and nitrogen oxide emissions. 5 In 1993 the United Nations' Framework Convention on Climate Change, also called The Global Warming Treaty, which was signed by more than 150 countries, including the United States, became effective. The objective of the treaty is the stabilization of greenhouse gas concentrations at a level that would prevent manmade emissions from interfering with the climate system. Although there is considerable scientific disagreement concerning the effects of greenhouse gas emissions on global climate, the United States and many other nations are supporting an international treaty, to be finalized in December 1997, containing legally binding emissions targets to be achieved between 2010 and 2020. The reduction in greenhouse gas emissions necessary to achieve these targets is likely to have a substantial financial impact on companies that consume or produce fossil fuel derived electric power, including Virginia Power. For additional information on Environmental Matters, see Note Q to CONSOLIDATED FINANCIAL STATEMENTS and ITEM 3. LEGAL PROCEEDINGS below. Nuclear All aspects of the operation and maintenance of the Company's nuclear power stations are regulated by the NRC. Operating licenses issued by the NRC are subject to revocation, suspension or modification, and operation of a nuclear unit may be suspended if the NRC determines that the public interest, health or safety so requires. From time to time, the NRC adopts new requirements for the operation and maintenance of nuclear facilities. In many cases, these new regulations require changes in the design, operation and maintenance of existing nuclear facilities. If the NRC adopts such requirements in the future, it could result in substantial increases in the cost of operating and maintaining the Company's nuclear generating units. On July 18, 1995, the Virginia Commission instituted an investigation regarding spent nuclear fuel disposal. It directed interested parties to provide comments on legal and public policy issues related to spent nuclear fuel storage and disposal, including, but not limited to, whether to allow utilities to recover from ratepayers some or all money paid to the Nuclear Waste Fund established by the Nuclear Policy Act of 1982, whether to establish an escrow account for spent nuclear fuel storage and/or disposal, and whether utilities should develop their own plans for storage and disposal of spent nuclear fuel. The Commission's Order Establishing Investigation recites that Virginia Power has paid $343.6 million to the Nuclear Waste Fund through 1994, including $44.8 million in 1994, and that future payments could exceed $400 million assuming its North Anna and Surry reactors continue to operate through the end of their existing operating licenses. Virginia Power and others filed comments on October 31, 1995. On February 27, 1996, the Commission Staff filed its Report recommending that adoption of a definitive policy on the spent nuclear fuel disposal fee be delayed until (1) a ruling is forthcoming on pending litigation which seeks to impose an obligation on the federal government to begin acceptance of spent nuclear fuel no later than January 31, 1998, (2) the outcome of proposed legislation which would amend the Nuclear Waste Policy Act to require the development of a centralized interim storage facility has been determined, and (3) a vision of the likely outcome of the electric utility industry's restructuring efforts has been more fully conceptualized. The Virginia Commission entered an order on October 7, 1996 in its proceeding regarding spent nuclear fuel disposal in which it directed that the proceeding be consolidated with Virginia Power's pending fuel cost recovery proceeding. On March 7, 1997, the Commission Staff filed a motion requesting that the Commission remove the spent nuclear fuel disposal issue from the Company's pending fuel factor proceeding and return it to a separate proceeding. For additional information on the Virginia fuel factor proceeding, see ITEM 1, RATES, Virginia, below. On January 31, 1997, Virginia Power joined thirty-five other utility petitioners in filing a lawsuit against the U.S. Department of Energy in the U.S. Court of Appeals for the District of Columbia, asking the court to authorize suspension of payments to the Nuclear Waste Fund and to authorize payment into escrow those fees that are collected from customers until the DOE begins accepting used fuel. 6 CAPITAL REQUIREMENTS AND FINANCING PROGRAM Construction and Nuclear Fuel Expenditures Virginia Power's estimated construction and nuclear fuel expenditures, including Allowance for Funds Used During Construction (AFC), for the three-year period 1997-1999, total $1.5 billion. It has adopted a 1997 budget for construction and nuclear fuel expenditures as set forth below: Estimated 1997 Expenditures (millions) -------------- Production: Clean Air Act........................................... $ 8 Other................................................... 53 General Support Facilities................................ 72 Transmission.............................................. 46 Distribution.............................................. 253 Nuclear Fuel.............................................. 97 -------------- Total Construction Requirements and Nuclear Fuel........ 529 AFC.................................................. 4 -------------- Total Expenditures...................................... $533 -------------- -------------- Financing Program In 1996 the Company issued $24.5 million of variable rate solid waste disposal securities to refund $24.5 million of securities assumed in its acquisition of the North Branch Power Station. Also in 1996, the Company retired a total of $259.6 million of Medium-Term Notes through mandatory maturities. In January 1997, the Company filed a new shelf registration statement with the Securities and Exchange Commission (SEC) for $400 million of Junior Subordinated Debentures. In 1995, the Company filed two shelf registration statements with the SEC, one for $575 million of First and Refunding Mortgage Bonds and the other for $200 million of Medium-Term Notes, Series F, respectively. In February 1997, the Company sold and issued $200 million of its First and Refunding Mortgage Bonds. These three facilities combine to provide the Company with $975 million in unused debt capital resources. In addition, the Company has a Preferred Stock shelf registered with the SEC, for $100 million in aggregate principal amount, which has not been utilized. The Company intends to issue securities from time to time to meet its capital requirements, which includes $311.3 million of long-term debt maturities in 1997. In June 1996, the Company increased the limit for its commercial paper program from $300 million to $500 million with the execution of $500 million of revolving credit facilities, which replaced existing liquidity support. Proceeds from the sale of commercial paper are primarily used to finance working capital for operations. Net borrowings under the commercial paper program were $312.4 million and $169.0 million at December 31, 1996 and December 31, 1995, respectively. RATES The Company was subject to rate regulation in 1996 as follows:
1996 ---------------------- Percent Percent of of Revenues Kwh Sales -------- --------- Virginia retail: Non-Governmental customers.................... Virginia Commission 77% 70% Governmental customers........................ Negotiated Agreements 10 11 North Carolina retail........................... North Carolina Commission 5 4 Wholesale: Requirements -- Sales for Resale.............. FERC 4 5 Non-Requirements -- Sales for Resale.......... FERC 4 10 --- --- 100% 100% --- --- --- ---
7 Substantially all of the Company's electric sales are subject to recovery of changes in fuel costs either through fuel adjustment factors or periodic adjustments to base rates, each of which requires prior regulatory approval. Each of these jurisdictions has the authority to disallow recovery of costs it determines to be excessive or imprudently incurred. Various cost items may be reviewed on occasion, including costs of constructing or modifying facilities, on-going purchases of capacity or providing replacement power during generating unit outages. The principal rate proceedings in which the Company was involved in 1996 are described below by jurisdiction. Rate relief obtained by the Company is frequently less than requested. FERC On May 14, 1996, the Department of the Navy, on behalf of the Department of Defense (DOD), filed a Petition requesting FERC to declare DOD a wholesale customer within Virginia. Alternatively, the Petition requested FERC to order Virginia Power to wheel to DOD installations in Virginia. An agreement in principle was subsequently reached for a new power supply contract, and the Navy moved to withdraw its Petition, stating that the concerns expressed in the Petition had been resolved. On July 15, 1996, three power marketers filed a protest with DOD challenging the sole source negotiation and impending contract with Virginia Power. The Department of the Navy, Naval Facilities Engineering Command issued a decision on October 22, 1996, denying the protest, and finding that competition between providers other than Virginia Power for the provisions of electrical service to DOD facilities and activities within Virginia Power's service territory in Virginia is not currently available. The Navy also noted that the impending contract was not in contemplation of a new acquisition, but was the result of periodic review of, and negotiation of a new rate under an existing indefinite term contract. The supplemental agreement incorporating the new rate was executed on October 30, 1996. In compliance with FERC's Order No. 888, on July 9, 1996, Virginia Power filed an open access transmission service tariff, which became effective on July 9, 1996. On October 10, 1996, FERC issued a procedural order, scheduling a hearing for April 28, 1997. The Company and all parties reached a settlement of issues raised in the proceeding, and on March 20, 1997, those parties jointly filed with FERC the Settlement Agreement and Motion to Certify the Settlement Agreement. The Company is awaiting action on that motion by the presiding Administrative Law Judge. Virginia In 1995, the Virginia Commission authorized Virginia Power to implement a pilot program providing a real time pricing (RTP) option for its industrial customers with loads in excess of 10 Mw. Under this option, all or a portion of an industrial customer's load growth would be supplied at projected incremental hourly production costs, adjusted for line losses and taxes, plus a margin of 0.6 cents per Kwh. Additionally, a marginal cost-based Generation Capacity Adder and a Transmission Capacity Adder would be applicable during those hours when the Virginia Power system is approaching its forecasted annual peak demand. Up to 20% of an industrial customer's existing load could be served on an RTP basis if the customer executes a five-year contract for such service. On July 24, 1996, the Commission expanded the RTP schedule to make it available to commercial and industrial customers with loads above 5 Mw. On July 31, 1996, Virginia Power filed with the Virginia Commission a revised Schedule 19, which governs purchases from cogenerators and small power producers of 100 kW or less. The schedule, which contains rates substantially lower than those previously specified, became effective on an interim basis on January 1, 1997. A hearing was held on January 30, 1997. The parties filed briefs on March 14, 1997. On October 7, 1996, the Virginia Commission ordered that its investigation regarding spent nuclear fuel disposal be consolidated with Virginia Power's next fuel recovery proceeding. On October 21, 1996, Virginia Power filed an application with the Commission to increase its fuel cost recovery by approximately $48.2 million. On November 12, 1996, the Commission ordered that the hearing on the consolidated proceedings be delayed from November 27, 1996 to February 27, 1997, and that the Company's proposed fuel factor become effective on December 1, 1996. On January 8, 1997, the Commission postponed the hearing to April 17, 1997. Any potential adjustments to the factor ordered after hearing will be reflected prospectively after entry of the final order. On March 7, 1997, the Commission Staff filed a motion requesting that the Commission remove the spent nuclear fuel disposal issue from the Company's pending fuel factor proceeding and return it to a separate proceeding. 8 North Carolina On September 13, 1996, the Company filed an application with the North Carolina Utilities Commission for a $3.2 million decrease in fuel rates. On December 10, 1996, the Commission approved a $3.3 million decrease, effective January 1, 1997. On November 4, 1996, the Company filed for approval of a new Schedule 19 which governs purchases from cogenerators and small power producers. The Company proposed rates substantially lower than those previously specified as well as proposed to reduce the applicability threshold to 100 kW and shorten the maximum term of contracts under Schedule 19 to five years. SOURCES OF POWER Company Generating Units
Type Summer Years of Capability Name of Station, Units and Location Installed Fuel Mw - ------------------------------------------------------ -------- --------------- ---------- Nuclear: Surry Units 1 & 2, Surry, Va....................... 1972-73 Nuclear 1,602 North Anna Units 1 & 2, Mineral, Va................ 1978-80 Nuclear 1,790(a) ---------- Total nuclear stations.......................... 3,392 ---------- Fossil Fuel: Steam: Bremo Units 3 & 4, Bremo Bluff, Va. ............ 1950-58 Coal 227 Chesterfield Units 3-6, Chester, Va. ........... 1952-69 Coal 1,250 Clover Units 1 & 2, Clover, Va. ................ 1995-96 Coal 882(b) Mt. Storm Units 1-3, Mt. Storm, W. Va. ......... 1965-73 Coal 1,587 Chesapeake Units 1-4, Chesapeake, Va. .......... 1953-62 Coal 595 Possum Point Units 3 & 4, Dumfries, Va. ........ 1955-62 Coal 322 Yorktown Units 1 & 2, Yorktown, Va. ............ 1957-59 Coal 326 Possum Point Units 1, 2, & 5, Dumfries, Va. .... 1948-75 Oil 929 Yorktown Unit 3, Yorktown, Va. ................. 1974 Oil & Gas 818 North Branch Unit 1, Bayard, W. Va. ............ 1994 Waste Coal 74(c) Combustion Turbines: 35 units (8 locations)............................. 1967-90 Oil & Gas 1,019 Combined Cycle: Chesterfield Units 7 & 8, Chester, Va. ............ 1990-92 Oil & Gas 397 ---------- Total fossil stations........................... 8,426 Hydroelectric: Gaston Units 1-4, Roanoke Rapids, N.C. ............ 1963 Conventional 225 Roanoke Rapids Units 1-4, Roanoke Rapids, N.C. .... 1955 Conventional 96 Other.............................................. 1930-87 Conventional 3 Bath County Units 1-6, Warm Springs, Va. .......... 1985 Pumped Storage 1,260(d) ---------- Total hydro stations............................ 1,584 ---------- Total Company generating unit capability........ 13,402 ---------- Net Utility Purchases................................ 1,030 Non-Utility Generation............................... 3,509 ---------- Total Capability................................ 17,941 ---------- ----------
- --------------- (a) Includes an undivided interest of 11.6 percent (208 Mw) owned by Old Dominion Electric Cooperative (ODEC). (b) Includes an undivided interest of 50 percent (441 Mw) owned by ODEC. (c) Effective January 25, 1996, this unit was placed in a cold reserve status. (d) Reflects the Company's 60 percent undivided ownership interest in the 2,100 Mw station. A 40 percent undivided interest in the facility is owned by Allegheny Generating Company, a subsidiary of Allegheny Power System, Inc. (AP). The Company's highest one-hour integrated service area summer peak demand was 14,003 Mw on August 2, 1995, and an all-time high one-hour integrated winter peak demand of 14,910 Mw was reached on February 5, 1996. 9 SOURCES OF ENERGY USED AND FUEL COSTS For information as to energy supply mix and the average fuel cost of energy supply, see Results of Operations under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Nuclear Operations and Fuel Supply In 1996, the Company's four nuclear units achieved a combined capacity factor of 88.2 percent. The Company utilizes both long-term contracts and spot purchases to support its needs for nuclear fuel. Virginia Power's nuclear fuel supply and related services are expected to be adequate to support current and planned nuclear generation requirements. The Company continually evaluates worldwide market conditions in order to obtain an adequate nuclear fuel supply. Current agreements, inventories and market availability should support planned fuel cycles throughout the remainder of the 1990s. On December 17, 1996, the DOE indicated that it will have to delay the acceptance of spent fuel scheduled to begin in 1998. On-site spent nuclear fuel storage at the Surry Power Station is adequate for the Company's needs until the DOE begins accepting spent fuel. The North Anna Power Station will require additional spent fuel storage capacity in 1998. The Company submitted a license application to the NRC in May 1995 for such a facility at North Anna. For details regarding nuclear insurance and certain related contingent liabilities as well as a NRC rule that requires proceeds from certain insurance policies to be used first to pay stabilization and decontamination expenses, see Note C to CONSOLIDATED FINANCIAL STATEMENTS. Fossil Operations and Fuel Supply The commercial operation of Clover Power Station Unit 2 commenced on March 28, 1996. The summer capability of both Units 1 and 2 have been determined to be 441 Mw. The Company's fossil fuel mix consists of coal, oil and natural gas. In 1996, Virginia Power consumed approximately 12 million tons of coal. As with nuclear fuel, the Company utilizes both long-term contracts and spot purchases to support its needs. The Company presently anticipates that sufficient coal supplies at reasonable prices will be available for the remainder of the 1990s. Current projections for an adequate supply of oil remain favorable, barring unusual international events or extreme weather conditions which could affect both price and supply. The Company uses natural gas as needed throughout the year for two combined cycle units and at several combustion turbine units. For winter usage at the combined cycle sites, gas is purchased and stored during the summer and fall and consumed during the colder months when gas supplies are not available at favorable prices. The Company has firm transportation contracts for the delivery of gas to the combined cycle units. Current projections indicate gas supplies will be available for the next several years. Purchases and Sales of Power Virginia Power relies on purchases of power to meet a portion of its capacity requirements. The Company also makes economy purchases of power from other utility systems when it is available at a cost lower than the Company's own generation costs. Under contracts effective January 1, 1985, Virginia Power agreed to purchase 400 Mw of electricity annually through 1999 from Hoosier Energy Rural Electric Cooperative, Inc. (Hoosier), and agreed to purchase 500 Mw of electricity annually during 1987-99 from certain operating units of American Electric Power Company, Inc. (AEP). The Company has a diversity exchange agreement with AP under which AP delivers 200 Mw to Virginia Power in the summer and Virginia Power delivers 200 Mw to AP in the winter. Virginia Power also has 65 non-utility power purchase contracts with a combined dependable summer capacity of 3,524 Mw. Of this amount, 3,509 Mw were operational at the end of 1996 with the balance scheduled to come on-line through 1999 (see Non-Utility Generation under FUTURE SOURCES OF POWER and Note Q to CONSOLIDATED FINANCIAL STATEMENTS). In an effort to mitigate its exposure to above-market long-term purchased power contracts, the Company is evaluating its long-term purchased power contracts and negotiating modifications to their terms, including cancellations, where it is determined to be economically advantageous to do so. The Company has also negotiated settlements with several other parties to terminate their rights to sell power to the Company. 10 In 1995, a wholesale power group was formed within the Company to actively participate in the purchase and sale of wholesale electric power in the open market. The wholesale power group has expanded the Company's trading range beyond the geographic limits of the Virginia Power service territory, and has developed trading relationships with utilities on a nationwide basis. During 1996, the Company expanded its gas marketing activities, trading in the open market both within and outside the Virginia Power service territory. The gas marketing function is organized as a part of the wholesale power group and broadens the Company's product mix to provide a full range of wholesale energy marketing services. On August 15, 1996, pursuant to the provisions of the Interconnection and Operating Agreement between ODEC and Virginia Power, ODEC gave written notice of its intent to reduce its supplemental demand purchases under that Agreement to zero within nine years. 1997 supplemental demand charges (other than charges relating to transmission and distribution which will continue in any case) are expected to be $63 million. On November 19, 1996, the Company and ODEC reached principles of agreement providing that Virginia Power will continue to supply all of ODEC's supplemental capacity needs through 2005, rather than the declining amounts after 1999 under prior agreements. Under the principles of agreement, the Company's recovery of fixed charges will be reduced over time as supplemental capacity rates transition from fully-embedded costs to market-based pricing. The Company estimates the reduced rates, offset in part by other revenues which may be earned under the agreement, will decrease income before taxes by approximately $38 million through 2005. INTERCONNECTIONS The Company maintains major interconnections with Carolina Power and Light Company, AEP, AP and the utilities in the Pennsylvania-New Jersey-Maryland Power Pool. Through this major transmission network, the Company has arrangements with these utilities for coordinated planning, operation, emergency assistance and exchanges of capacity and energy. On June 19, 1996, a transmission alliance was formed among Virginia Power, Allegheny Power, Centerior Energy, and Ohio Edison to promote fair and equitable use of the transmission systems. This alliance is an outgrowth of the General Agreement on Parallel Paths (GAPP), a group of 21 utilities, independent power producers, cooperatives, and public power authorities, that was formed in the early 1990s to work on a series of principles to govern inter-system wholesale power transfers. The four utilities that are initiating the transmission alliance are all members of the GAPP initiative and are forming the alliance to specifically further the principles of GAPP as the electric utility industry continues the evolution to, and beyond, open access transmission service. The alliance has adopted the specific GAPP principles to ensure that proper reimbursement is made to each alliance utility handling a power transfer through the parallel path concept. A GAPP Matrix Subcommittee will determine the parallel paths any specific transaction will take and the GAPP compensation procedure will determine the compensation owed to the utilities involved. The Company views the alliance as an important step towards implementing flow and distance sensitive pricing of transmission service. On December 4, 1996, Virginia Power and five other North American utilities announced plans for a test of principles designed to maintain the reliability of electric transmission systems, encourage optimal use of the facilities, and ensure fair payment for their use. Virginia Power and the four other U.S. utilities involved in the plan asked FERC for permission to test compensation methods contained in GAPP. Using the GAPP principles, participants in the test would use actual power flows to allocate among themselves transmission service revenues. The five U.S. participants asked FERC for permission to begin the test on April 2, 1997. In addition to Virginia Power, the U.S. participants in the test include Allegheny Power, Centerior Energy, Ohio Edison and Southern Company. While not under FERC jurisdiction, Ontario Hydro is also a participant in the experiment. The experiment would also give utilities more thorough information on the use of regional transmission capacity by utilizing the GAPP Information System (GIS). This system stores data regarding scheduled power transactions and analyzes the anticipated paths the power will take during the transfers. The information is essential for optimal use of the integrated transmission network. The GAPP principles have been developed during the last five years by a broad cross-section of transmission users, including utilities in the United States and Canada, public power authorities, rural electric cooperatives, power marketers and independent power producers. The principles are designed to deal with the issue of parallel flows. Within tightly interconnected transmission grids, power does not always flow in a direct path -- often called the "contract path" -- from seller to buyer. The power may in fact flow through several adjoining systems to get to the end-user, even if the buyer and seller are directly interconnected. Under current rules, utilities are not fully compensated for the use of these "parallel paths." Compensation for transmission services historically has been based on contract paths. The companies in the GAPP experiment will analyze the paths power actually takes through their system, then allocate transmission service compensation to reflect those paths. For the five utilities in the United States, the allocations will be based on the open access transmission tariffs each filed with FERC in response to FERC Order 888. In their filing, the participants noted that the test could be expanded to include 11 additional utilities and other entities that receive revenue from transmission services. The test will have no effect on the rates the six utilities charge for transmission services. The Company and Appalachian Power Company (AEP Virginia), an operating unit of AEP, have each sought approval from the Virginia Commission to construct interconnecting transmission facilities. AEP Virginia proposes to construct 116 miles of 765 Kv line to connect with Virginia Power's proposed 102 miles of 500 Kv line. Virginia Power does not intend to build its facility unless the AEP Virginia facility, which requires approval in West Virginia as well as Virginia, is also approved and built. Approval of both facilities has been recommended by a Virginia Commission Hearing Examiner. On December 13, 1995, the Virginia Commission issued an Interim Order in the AEP Virginia case in which it found that additional transmission capacity is needed but directed AEP Virginia to provide further information as to routing, mitigation of visual impact, and uses of the line. FUTURE SOURCES OF POWER As reported earlier, both the Hoosier 400 Mw long-term purchase and the AEP 500 Mw long-term purchase will expire on December 31, 1999. With the scheduled termination of 900 Mw of long-term purchases and continued system load growth, the Company presently anticipates adding 1,200 Mw of short-term (three-year) purchases beginning in the year 2000. The Company has and will pursue capacity acquisition plans to provide that capacity and maintain a high degree of service reliability. This capacity may be owned and operated by others and sold to the Company or may be built by the Company if it determines it can build capacity at a lower overall cost. The Company also pursues conservation and demand-side management (see CONSERVATION AND LOAD MANAGEMENT below). The Company's continuing program to meet future capacity requirements is summarized in the following table: Company Owned Generation No Company owned generation is currently in the planning or construction stages. Non-Utility Generation Number of Projects Mw --------- ----- Projects Operational 62 3,509 Projects Financed 0 0 Unfinanced Projects 3 15 -- ----- Total Contracts 65 3,524 -- ----- -- ----- For additional information, see Note Q to CONSOLIDATED FINANCIAL STATEMENTS. COMPETITION AND STRATEGIC INITIATIVES A number of developments in the United States are causing a trend toward less regulation of and more competition in the electric utility industry. This is evidenced by legislative and regulatory action at both the federal and state levels. To the extent that competition is either authorized or mandated and regulation is eliminated or relaxed, electric utilities will no longer, in the absence of appropriate legislative or regulatory action during the transition period, be guaranteed an opportunity to recover all of their prudently-incurred costs including their cost of capital, and utilities with costs that exceed the market prices established by the competitive market will run the risk of suffering losses, which may be substantial. Virginia Power has responded to these trends by undertaking cost-cutting measures, engaging in re-engineering efforts of its core business processes, and pursuing a strategic planning initiative (called Vision 2000) to encourage innovative approaches to servicing traditional markets and to develop appropriate methods by which to service future markets. The Company has established separate business units for its nuclear operations, fossil and hydroelectric operations, commercial operations and its energy services business. A re-engineering and re-missioning review of the Fossil and Hydroelectric Business Unit and Nuclear Business Unit has been completed and implementation is now complete. The Corporate Center is now in the final stages of review. The Company's Commercial Operations Business Unit has completed its review and has begun implementation of several organizational modifications and applications of new technology to improve customer service and reduce operational costs. Some of these improvements will require investments of approximately $100 million, which will be expended over several years. 12 The Company has created a subsidiary to provide nuclear management and operation services to electric utilities seeking assistance in the management and operation of their nuclear generating facilities; it acquired an operating business, A&C Enercom, Inc., a provider of marketing, program planning and design, customer engineering and energy consulting services; it is seeking approval to engage in the telecommunications business; and it is in the planning stages of creating additional subsidiaries to engage in these and other unregulated businesses. It is also taking regulatory and legislative initiatives designed to enhance the likelihood that the transition to competition is an orderly one and that the Company will not be prevented from recovering prudently-incurred costs and investments. In addition, Virginia Power is actively pursuing opportunities to expand its markets through strategic alliances with partners whose strengths, market position and strategies complement the Company's and where efficiencies can be gained through the alliance. A significant part of the Company's strategy relies on developing "non-traditional" business opportunities designed to provide growth in earnings. The Energy Services Business Unit is the most prominent example of this growth strategy. The Energy Services Business Unit is expected to contribute to earnings growth by offering the market a portfolio of energy related products and services. Other examples of such opportunities include the Fossil & Hydro Business Unit, through which the Company will target process type industries, such as chemical, paper, plastics and petroleum to become a service provider of instrumentation equipment, and the Nuclear Business Unit, whose position as an industry leader offers opportunities to provide services to other nuclear utilities striving to improve their safety records. The Commercial Operations Business Unit will provide power distribution related service. Finally, the Telecommunications Act of 1996 opened up opportunities to generate growth through use of existing telecommunications infrastructure to provide telecommunications services and new energy services through the Company's existing fiber-optic network. Virginia Power has organized a wholesale power group to engage in off-system wholesale purchases and sales, and that group is developing trading relationships beyond the geographic limits of Virginia Power's retail service territory. The Company has also been successful in negotiation of wholesale requirements contracts with multi-year provisions for notice of termination of service and a long-term contract with large federal government customers for service to facilities within the Company's service territory and has obtained regulatory approval of innovative pricing proposals for industrial loads, although rate concessions have been necessary in some cases. To date, the Company has not experienced any material loss of load, and the reduction of 1997 revenues attributable to such rate concessions is expected to approximate $22 million. For a more detailed discussion, see FUTURE ISSUES -- Competition under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CONSERVATION AND LOAD MANAGEMENT The Company is committed to evaluating and selecting demand-side and supply-side options on a consistent basis in order to provide reliable, low-cost service to its customers. Conservation and load management programs are selected annually at Virginia Power through an integrated resource planning process which directly compares the stream of costs and benefits from supply-side and demand-side options. This process supports the selection of a conservation and load management portfolio which contributes both to the selection of low-cost resources to meet the future electricity needs of the Company's customers as well as the efficient use of current resources. Recent declines in avoided costs and the arrival of competition have caused the Company to modify the package of cost-effective measures which it supports in the annual Energy Efficiency Plan. In the future, the Company anticipates a greater reliance on the use of price signals to convey information to our customers regarding costs, resulting in more efficient purchase decisions. Finally, in an investigation sparked by the fundamental changes occurring in the electric utility industry, the Virginia Commission has requested the Company to evaluate the Commission's current policies regarding conservation and load management programs. ITEM 2. PROPERTIES The Company owns its principal properties in fee (except as indicated below), subject to defects and encumbrances that do not interfere materially with their use. Substantially all of its property is subject to the lien of a mortgage securing its First and Refunding Mortgage Bonds. Right-of-way grants from the apparent owners of real estate have been obtained for most electric lines, but underlying titles have not been examined except for transmission lines of 69 Kv or more. Where rights of way have not been obtained, they could be acquired from private owners by condemnation if necessary. Many electric lines 13 are on publicly owned property as to which permission for use is generally revocable. Portions of the Company's transmission lines cross national parks and forests under permits entitling the federal government to use, at specified charges, surplus capacity in the line if any exists. The Company leases certain buildings and equipment. See Note H to CONSOLIDATED FINANCIAL STATEMENTS. See Company Generating Units under SOURCES OF POWER under Item 1. BUSINESS. ITEM 3. LEGAL PROCEEDINGS From time to time, the Company may be in violation of or in default under orders, statutes, rules or regulations relating to protection of 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. There may be pending from time to time administrative proceedings involving violations of state or federal environmental regulations that the Company believes are not material with respect to it and for which its aggregate liability for fines or penalties will not exceed $100,000. There are no material agency enforcement actions or citizen suits pending or, to the Company's present knowledge, threatened against the Company. The civil action filed December 13, 1995, in the United States District Court for the Eastern District of Virginia, Norfolk Division, was dismissed by the Federal Court on August 7, 1996. However, two civil actions have been filed in the Virginia Circuit Court of the City of Norfolk against the City of Norfolk and Virginia Power, one for fifteen million dollars and one for three million dollars, by property owners who each allege contamination of their respective properties by hazardous substances originating on nearby property now owned by the city and formerly owned by the Company. The Company has filed answers denying liability. A trial date of August 18, 1997 has been set for the action seeking fifteen million dollars. On May 24, 1996, in the proceeding to investigate the holding company structure and the relationship between Dominion Resources and Virginia Power, the Virginia Commission entered an order imposing certain requirements as to the adoption of conflict-of-interest standards, auditing of affiliate transactions, and review of executive services provided by Dominion Resources. The proceeding was continued until July 12, 1997 to allow the Commission and its Staff to monitor the companies and evaluate whether further action by the Commission might be desirable. A consent order requiring Commission approval before Dominion Resources can take certain corporate actions involving Virginia Power was allowed to expire in accordance with its terms on July 2, 1996. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the Company's Common Stock is owned by Dominion Resources. During 1996 and 1995, the Company paid quarterly cash dividends on its Common Stock as follows:
1st 2nd 3rd 4th ------ ----- ----- ------ (Millions) 1996................................ $ 95.3 $96.5 $96.1 $ 97.9 1995................................ $100.3 $96.0 $99.2 $ 98.8
ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (Millions, except percentages) Operating revenues........................ $ 4,382.6 $ 4,350.4 $ 4,170.8 $ 4,187.3 $ 3,679.6 Operating income.......................... 765.1 746.5 731.4 813.4 761.6 Income before cumulative effect of a change in accounting principle.......... 457.3 432.8 447.1 509.0 455.2 Cumulative effect of a change in accounting principle.................... 14.3 --------- --------- --------- --------- --------- Net income................................ $ 457.3 $ 432.8 $ 447.1 $ 509.0 $ 469.5 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Balance available for Common Stock........ $ 421.8 $ 388.7 $ 404.9 $ 466.9 $ 423.8 Total assets.............................. 11,828.0 11,827.7 11,647.9 11,520.5 11,316.7 Total net utility plant................... 9,433.8 9,573.1 9,623.4 9,459.7 9,254.7 Long-term debt, noncurrent capital lease obligations, preferred stock subject to mandatory redemption and preferred securities of subsidiary trust.......... 3,916.2 4,228.0 4,157.5 4,151.1 4,089.5 Utility plant expenditures (including nuclear fuel)........................... 484.0 577.5 660.9 712.8 716.5 Capitalization ratios (percent): Debt.................................... 46.4 47.2 46.7 46.4 46.3 Preferred stock......................... 7.5 7.5 9.0 9.2 9.7 Preferred securities.................... 1.5 1.5 Common equity........................... 44.6 43.8 44.3 44.4 44.0 Embedded cost (percent): Long-term debt.......................... 7.68 7.73 7.65 7.67 7.86 Preferred stock......................... 5.14 5.29 5.47 4.88 5.38 Preferred securities.................... 8.72 8.72 Weighted average........................ 7.34 7.41 7.29 7.18 7.42
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995, including (without limitation) discussions as to expectations, beliefs, plans, objectives and future financial performance, or assumptions underlying or concerning matters discussed in this document. These discussions, and any other discussions, including certain contingency matters (and their respective cautionary statements) discussed elsewhere in this report, that are not historical facts, are forward-looking and, accordingly, involve estimates, projections, goals, forecasts, assumptions and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. Some important factors that could cause actual results or outcomes to differ materially from those discussed in the forward-looking statements include current governmental policies and regulatory actions (including those of FERC, the EPA, the NRC and the Virginia Commission), industry and rate structure, operation of nuclear power facilities, acquisition and disposal of assets and facilities, operation and storage facilities, recovery of the cost of purchased power, nuclear decommissioning costs, and present or prospective wholesale and retail competition. The business and profitability of Virginia Power are also influenced by economic and geographic factors including political and economic risks, changes in and compliance with environmental laws and policies, weather conditions and catastrophic weather-related damage, competition for retail and wholesale customers, pricing and transportation of commodities, market demand for energy, inflation, capital market conditions, unanticipated changes in operating expenses and capital expenditures, competition for new energy development opportunities and legal and administrative proceedings. All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and may be beyond the control of Virginia Power. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and Virginia Power undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made. Liquidity and Capital Resources Cash flow from operating activities has accounted for, on average, 75% of the Company's cash requirements over the past three years. With the completion of the 882 Mw coal-fired power station near Clover, Virginia, the Company is in a period in which internal cash generation will exceed construction expenditures. The internal generation of cash in 1996, 1995 and 1994 provided 143%, 119% and 88%, respectively, of the funds required for the Company's capital requirements. Net cash provided by operating activities decreased $10.1 million in 1996 as compared to 1995, primarily as a result of normal operations. Net cash provided by operating activities increased by $107.1 million in 1995 as compared to 1994, primarily as a result of increased sales, partially offset by a number of other factors resulting from normal operations. Cash from (to) financing activities was as follows:
1996 1995 1994 -------- -------- -------- (Millions) Common Stock................................................ $ 75.0 Mortgage bonds.............................................. $ 200.0 325.0 Medium-term notes........................................... 40.0 100.0 Pollution control securities................................ $ 24.5 39.0 Preferred securities of subsidiary trust.................... 135.0 Short-term debt............................................. 143.4 169.0 (43.0) Repayment of long-term debt and preferred stock............. (284.1) (439.0) (334.3) Dividends................................................... (421.4) (438.6) (438.2) Preferred securities distribution........................... (10.9) (3.6) Other....................................................... (2.3) (10.1) (7.8) -------- -------- -------- Total..................................................... $ (550.8) $ (347.3) $ (284.3) -------- -------- -------- -------- -------- --------
16 In 1996, the Company issued $24.5 million of variable rate solid waste disposal securities to refund $24.5 million of securities assumed in its acquisition of the North Branch Power Station. Also in 1996, the Company retired a total of $259.6 million of Medium-Term Notes through mandatory maturities. In June 1996, the Company increased the limit for its commercial paper program from $300 million to $500 million with the execution of $500 million of revolving credit facilities, which replaced existing liquidity support. Proceeds from the sale of commercial paper are primarily used to finance working capital for operations. Net borrowings under the commercial paper program were $312.4 million at December 31, 1996. In January 1997, the Company filed a registration statement with the Securities and Exchange Commission for $400 million of Junior Subordinated Debentures. At December 31, 1996, the Company had two additional shelf registration statements for debt securities registered with the Securities and Exchange Commission, one for $575 million of First and Refunding Mortgage Bonds and the other for $200 million of Medium-Term Notes, Series F. In February 1997, the Company issued $200 million of First and Refunding Mortgage Bonds, the proceeds of which were primarily used to refund a portion of the Company's debt that matured in February and March of 1997. These three shelf registrations combine to provide the Company with $975 million of unused debt capital resources. In addition, the Company has a Preferred Stock shelf, registered with the Securities and Exchange Commission, for $100 million in aggregate principal amount, which has not been utilized. The Company intends to issue securities from time to time to meet its capital requirements. Cash used in investing activities was as follows:
1996 1995 1994 -------- -------- -------- (Millions) Utility plant expenditures.................................. $ (393.8) $ (519.9) $ (580.9) Nuclear fuel................................................ (90.2) (57.6) (80.0) Nuclear decommissioning contributions....................... (36.2) (28.5) (24.5) Sale of accounts receivable, net............................ (160.0) (40.0) Purchase of subsidiary assets............................... (13.7) Other....................................................... (12.5) (11.1) (1.4) -------- -------- -------- Total..................................................... $ (546.4) $ (777.1) $ (726.8) -------- -------- -------- -------- -------- --------
Investing activities in 1996 resulted in a net cash outflow of $546.4 million primarily due to $393.8 million of construction expenditures and $90.2 million of nuclear fuel expenditures. The construction expenditures included approximately $78.6 million for production projects, $244.6 million for transmission and distribution projects, and $17.1 million for new generating facilities. Capital Requirements The Company presently anticipates that kilowatt-hour sales will grow approximately 2.4 percent a year through 2011. The Hoosier 400 Mw and the AEP 500 Mw long-term purchase agreements will expire on December 31, 1999. With the scheduled termination of 900 Mw of long-term purchases and continued system load growth, the Company presently anticipates adding 1,200 Mw of short-term (three-year) purchases beginning in the year 2000. The Company has and will pursue capacity acquisition plans to provide that capacity and maintain a high degree of service reliability. This capacity may be owned and operated by others and sold to the Company or may be built by the Company if it determines it can build capacity at a lower overall cost. The Company's construction and nuclear fuel expenditures (excluding AFC), during 1997, 1998 and 1999 are expected to aggregate $529.2 million, $539.2 million and $397.0 million, respectively. Clover Unit 2, which is part of a two-unit facility jointly owned with ODEC, began commercial operation in March 1996. The Company's fifty percent ownership share of the cost of construction was completed at a cost of $235 million. The Company will require $311.3 million to meet long-term debt maturities in 1997. The Company presently estimates that all of its 1997 construction expenditures, including nuclear fuel expenditures, will be met through cash flow from operations. Other capital requirements will be met through a combination of sales of securities and short-term borrowings. Results of Operations The following is a discussion of results of operations for the years ended 1996 as compared to 1995, and 1995 as compared to 1994. 17 1996 Compared to 1995 Balance available for Common Stock increased by $33.1 million as compared to 1995, primarily as a result of an increase in operating revenues, a reduction in maintenance expenses primarily attributable to the Company's Vision 2000 initiatives, and a decline in restructuring costs, offset in part by the higher storm damage costs incurred from destructive summer storms, and increased depreciation expense related to nuclear decommissioning and Clover Units 1 and 2, which began operations in October 1995 and March 1996, respectively. Operating Revenues changed primarily due to the following:
Increase (Decrease) From Prior Year ------------------ 1996 1995 ------ ------- (Millions) Customer growth..................... $ 52.5 $ 76.2 Weather............................. 4.4 81.6 Base rate variance.................. (35.5) 6.3 Fuel rate variance.................. (89.6) (8.9) Other, net.......................... 34.1 (6.0) ------ ------- Total retail...................... (34.1) 149.2 Sales for resale.................... 33.1 32.8 Other operating revenues............ 33.2 (2.4) ------ ------- Total revenues.................... $ 32.2 $ 179.6 ------ ------- ------ -------
As detailed in the chart above, the decrease in retail revenues reflects a reduction in fuel rate revenues and a reduction in base revenues due to the effect of the mild summer weather in 1996 on the Company's summer retail rates which are designed to reflect expected usage during normal weather conditions, offset in part by continued customer growth during 1996. The increased sales for resale were primarily a result of the Company's marketing efforts during 1996, offset by a decrease in sales to ODEC due to completion of Clover Units 1 and 2, of which ODEC owns a 50 percent interest. Other operating revenues increased primarily as a result of the revenues generated by the Company's non-regulated subsidiary, A&C Enercom, Inc., which was formed in January 1996 to provide marketing, program planning and design, customer engineering and energy consulting services. During 1996, the Company had 44,528 new connections to its system compared to 44,955 and 46,741 in 1995 and 1994, respectively. Customer kilowatt-hour sales changed as follows:
Increase (Decrease) From Prior Year ---------------- 1996 1995 ----- ------ Residential......................... 2.3% 4.1% Commercial.......................... 2.3 3.6 Industrial.......................... 2.3 3.6 Public authorities.................. 2.6 4.0 Total retail sales.................. 2.4 3.8 Resale.............................. 36.3 13.4 Total sales......................... 6.3 4.9
Cooling and heating degree days were as follows:
1996 1995 Normal ----- ----- ------- Cooling degree days................. 1,365 1,667 1,531 Percentage change compared to prior year.............................. (18.1)% 3.3% Heating degree days................. 4,131 3,790 3,672 Percentage change compared to prior year.............................. 9.0% 7.8%
The increase in retail kilowatt-hour sales in 1996 as compared to 1995 reflects continued customer growth. The increase in kilowatt-hour sales for resale was primarily due to the Company's power marketing efforts. 18 The average fuel cost of system energy output is shown below:
Mills Per Kilowatt-hour ------------------------- 1996 1995 1994 ----- ----- ----- Nuclear............................. 4.48 4.92 4.89 Coal................................ 14.32 14.44 14.61 Oil................................. 27.75 25.11 23.00 Purchased power, net................ 21.99 22.50 23.99 Other............................... 26.98 23.82 25.46 Average fuel cost................... 13.47 13.73 14.02
System energy output is shown below:
Estimated Actual --------- ---------------------- 1997 1996 1995 1994 --------- ---- ---- ---- Nuclear(*).......................... 33% 32 % 32 % 34 % Coal(**)............................ 40 38 39 36 Oil................................. 1 1 3 Purchased power, net................ 24 27 25 23 Other............................... 3 2 3 4 --- ---- ---- ---- 100% 100 % 100 % 100 % --- ---- ---- ---- --- ---- ---- ----
- --------------- (*) Excludes ODEC's 11.6 percent ownership interest in the North Anna Power Station. The Company's four nuclear units operated at a combined capacity factor of 88.2% during 1996, a Company record. (**) Excludes ODEC's 50 percent ownership interest in the Clover Power Station Fuel, net decreased as compared to 1995, primarily as a result of a higher recovery of fuel expenses subject to deferral accounting in 1995, offset in part by increased purchases of energy from other wholesale power suppliers. Maintenance decreased as compared to 1995, primarily as a result of a reduction in expenses attributable to the Company's Vision 2000 initiatives, offset in part by the higher storm damage costs incurred from destructive summer storms, including Hurricane Fran. Restructuring charges incurred as part of the Vision 2000 program (see Note P to CONSOLIDATED FINANCIAL STATEMENTS) decreased as compared to 1995, primarily as a result of the $37.3 million charge during 1995 for the cancellation of a project to construct a facility to handle low level radioactive waste at the Company's North Anna Power Station and the 1995 writedown of inventory and certain real estate, partially offset by a reserve recorded in 1996 for expected adjustments to regulatory assets. The Company recorded $91.6 million and $117.9 million of restructuring charges in 1996 and 1995, respectively. Restructuring charges included severance costs, purchased power contract restructuring and negotiated settlement costs, capital project cancellation costs and other costs. The Company estimates that the staffing reductions will result in annual savings, net of outsourcing costs, in the range of $62 million to $90 million. When realized, savings from staffing reductions will be reflected in lower construction expenditures as well as lower operation and maintenance expenses. While the Company may incur additional charges for further staffing reductions in 1997, the amounts are not expected to be significant. The incurrence of restructuring charges and the savings resulting therefrom in subsequent periods are elements of the Company's cost of operations and will be considered in the cost of service information filed by the Company in response to the Virginia Commission's Order issued on November 12, 1996. See Regulation -- Virginia Commission under Item 1. BUSINESS for additional information on current rate proceedings. In this increasingly competitive environment, the Company has also concluded that it is appropriate to utilize available savings and cost reductions, such as those generated by the Vision 2000 program, to accelerate the write-off of existing unamortized regulatory assets. Not only will this strategically position the Company in anticipation of competition, but it also reflects the Company's commitment to mitigate its exposure to potentially stranded costs (see Competition below). As of December 31, 1996, the Company had identified savings of $26.7 million which were used to establish a reserve for expected adjustments to regulatory assets. 19 As part of re-engineering operations, the Company has adopted a plan to improve customer service which will require an investment in excess of $100 million over the next several years. That plan includes the installation of automated electric meters in metropolitan and inaccessible rural and urban locations. The plan also provides for the installation of mobile data dispatch technology in the Company's service fleet, accompanied by digitized mapping of the Company's service territory. Furthermore, technological changes are being made to enhance the Company's ability to handle customer calls during power outages. In order to increase service reliability, the Company has initiated both local and regional distribution line improvement projects. Depreciation and amortization increased as compared to 1995, primarily as a result of greater nuclear decommissioning expense and depreciation related to Clover Units 1 and 2 which were placed in service in October 1995 and March 1996, respectively. 1995 Compared to 1994 Operating revenues increased as compared to 1994, primarily as a result of the weather, i.e., increased heating and cooling degree days, experienced in the last six months of 1995, customer growth and increased sales for resale. Operating expenses -- Other and Maintenance decreased as compared to 1994. Expenses during 1994 included payroll and voluntary separation costs for those employees who elected to terminate service with the Company under the 1994 Early Retirement and Voluntary Separation Programs, offset in part by recognition of insurance policyholder distributions. Expenses in 1995 reflected a decrease in payroll costs due to reduced staffing levels and weather-related overtime, offset by 1995 salary increases and the impact of employees being reassigned from capital to operation and maintenance activities. In addition, 1995 expenses include expenses associated with the North Branch Power Station, increased obsolete inventory costs, increased accruals for employee benefits, and increased nuclear outage costs. Restructuring - The Company announced the implementation phase of its Vision 2000 program in March 1995. During 1995, the Company recorded $117.9 million of restructuring charges which included severance costs, purchase power contract cancellation and negotiated settlement costs, capital project cancellation costs and other costs. Interest Charges - Interest on long-term debt increased as compared to 1994 primarily as a result of higher interest rates on First and Refunding Mortgage Bonds and Pollution Control Notes. Interest Charges - Other increased in 1995 primarily as a result of a reduction of $10.6 million in the interest accrued for prior years on certain tax obligations in 1994. Future Issues Utility Rate Regulation Regulatory policy continues to be of fundamental importance to the Company and to its financial performance. On November 12, 1996, the Virginia Commission instituted a proceeding and directed the Company to provide certain information, including any alternative form of regulation proposed by the Company at this time, by March 31, 1997. On March 7, 1997, in this proceeding and in a separate Annual Information Filing proceeding, the Virginia Commission entered an order providing that the Company's rates shall become interim rates subject to refund as of March 1, 1997. For additional information on the current rate proceedings, see Regulation under Item 1. BUSINESS. Environmental Matters The Company is subject to rising costs resulting from a steadily increasing number of federal, state and local laws and regulations designed to protect human health and the environment. These laws and regulations affect future planning and existing operations. They can result in increased capital, operating and other costs as a result of compliance, remediation, containment and monitoring obligations of the Company. These costs have been historically recovered through the ratemaking process; however, should material costs be incurred and not recovered through rates, the Company's results of operations and financial condition could be adversely impacted. Environmental Protection and Monitoring Expenditures The Company incurred $71.1 million, $68.3 million and $67.3 million (including depreciation) during 1996, 1995 and 1994, respectively, in connection with the use of environmental protection facilities and expects these expenses to be approximately $71.5 million in 1997. In addition, capital expenditures to limit or monitor hazardous substances were $22.4 million, 20 $23.4 million and $47.3 million for 1996, 1995 and 1994, respectively. The amount estimated for 1997 for these expenditures is $14.3 million. Clean Air Act Compliance The Clean Air Act, as amended in 1990, requires the Company to reduce its emissions of sulfur dioxide (SO(2)) and nitrogen oxides (NO(x)). Beginning in 1995, the SO2 reduction program is based on the issuance of a limited number of SO2 emission allowances, each of which may be used as a permit to emit one ton of SO2 into the atmosphere or may be sold to someone else. The program is administered by the EPA. The Company has installed SO(2) control equipment on Unit 3 at Mt. Storm Power Station. The SO(2) control equipment began operation on October 31, 1994. The cost of this and related equipment was $147 million. Additional plans for SO(2) control involve switching to lower sulfur coal, purchase of emmission allowances and additional SO(2) controls. Maximum flexibility and least-cost compliance will be maintained through annual studies. The Company has completed its compliance plan for NO(x) control, with the exception of some additional studies concerning Phase II of the Clean Air Act, for which the EPA issued final regulations in December 1996, and ozone control requirements, for which final regulations have not yet been promulgated. In 1996, the Company installed NO(x) controls on Possum Point Unit 4 at a cost of about $4 million, and at Mt. Storm Unit 3 at a cost of about $6 million. The Company plans to install additional NO(x) controls and modify existing controls at Mt. Storm Units 1 and 2 in 1997, and to seek alternative emission limitations from the EPA for all three Mt. Storm units. The Company has notified the EPA of its decision (called "early election") to begin complying with Phase I NO(x) limits at ten of its units in Virginia in 1997, three years earlier than otherwise required. As a result, the units will not be subject to more stringent Phase II limits until 2008. In order to assist the Virginia Department of Environmental Quality in maintaining good air quality in the Richmond and Hampton Roads regions, and to avoid the necessity of more stringent regulations, the Company made voluntary commitments in 1996 to cap NO(x) emissions at its Chesterfield and Yorktown Power Stations and the Chesapeake Energy Center beginning in 2000. Capital expenditures on Clean Air Act compliance over the next five years are projected to be approximately $21 million. Changes in the regulatory environment, availability of allowances, and emissions control technology could substantially impact the timing and magnitude of compliance expenditures. The Clean Air Act amendments also require the Company to obtain operating permits for all major emissions-emitting facilities. Permit applications have been submitted, and deemed complete by the regulatory authorities, for the Mt. Storm and North Branch power stations. Applications for the Virginia stations are expected to be filed within the next two years. Global Climate Change In 1993, the United Nation's Framework Convention on Climate Change, also called The Global Warming Treaty, which was signed by more than 150 countries, including the United States, became effective. The objective of the treaty is the stabilization of greenhouse gas concentrations at a level that would prevent manmade emissions from interfering with the climate system. Although there is considerable scientific disagreement concerning the effects of greenhouse gas emissions on global climate, the United States and many other nations are supporting an international treaty, to be finalized in December 1997, containing legally binding emissions targets to be achieved between 2010 and 2020. The reduction in greenhouse gas emissions necessary to achieve these targets is likely to have a substantial financial impact on companies that consume or produce fossil fuel derived electric power, including Virginia Power. Electromagnetic Fields The possibility that exposure to electromagnetic fields emanating from power lines, household appliances and other electric sources may result in adverse health effects has been a subject of increased public, governmental and media attention. A considerable amount of scientific research has been conducted on this topic without definitive results. Research is continuing to resolve scientific uncertainties. It is too soon to tell what, if any, impact these actions may have on the Company's financial condition. 21 Nuclear Operations The NRC revised the nuclear power plant license renewal rules issued in 1991. The Company intends to work with industry groups on license renewal programs, and apply for renewal of the current 40-year licenses. For information on nuclear decommissioning, see Note C to CONSOLIDATED FINANCIAL STATEMENTS. Risk Management Policy In January 1997, the Company adopted a formal risk management policy. The primary purpose of that policy is to ensure that the Company's risk management activities (1) support the advancement of the Company's strategic business plan, (2) properly manage and mitigate the business and financial risks of the Company through the implementation of strategies with respect to trading, contracting, and other tactics in order to coordinate the effective management of the Company's physical assets, and (3) manage the total risk profile of the Company including physical and financial risk positions utilizing a portfolio approach. NYMEX futures, NYMEX exchange options, over-the-counter (OTC) swaps, and OTC options are permitted financial instruments if utilized in the natural gas, oil products, electric power and coal markets. The use of derivatives with financial instruments as underlyings are also permitted, but are subject to review and approval on an individual transaction basis. The risk management policy strictly prohibits the undertaking of activities for purely speculative purposes. While the Company has in the past used swaps, options and other derivative instruments to hedge business and other financial risks, such activity has not been material. Competition -- In General A number of developments in the United States are causing a trend toward less regulation of and more competition in the electric utility industry. This is evidenced by legislative and regulatory action at both the federal and state levels. To the extent that competition is either authorized or mandated and regulation is eliminated or relaxed, electric utilities will no longer, in the absence of appropriate legislative or regulatory action during the transition period, be guaranteed an opportunity to recover all of their prudently-incurred costs including their cost of capital, and utilities with costs that exceed the market prices established by the competitive market will run the risk of suffering losses, which may be substantial. Virginia Power has responded to these trends by undertaking cost-cutting measures, engaging in re-engineering efforts of its core business processes, and pursuing a strategic planning initiative (called Vision 2000) to encourage innovative approaches to servicing traditional markets and to develop appropriate methods by which to service future markets. The Company has established separate business units for its nuclear operations, fossil and hydroelectric operations, commercial operations and its energy services business. It has created a subsidiary to provide nuclear management and operation services to electric utilities seeking assistance in the management and operation of their nuclear generating facilities; it acquired an operating business, A&C Enercom, Inc., a provider of marketing, program planning and design, customer engineering and energy consulting services; it is seeking approval to engage in the telecommunications business; and it is in the planning stages of creating additional subsidiaries to engage in these and other unregulated businesses. It is also taking regulatory and legislative initiatives designed to enhance the likelihood that the transition to competition is an orderly one and that the Company will not be prevented from recovering prudently-incurred costs and investments. In addition, Virginia Power is actively pursuing opportunities to expand its markets through strategic alliances with partners whose strengths, market position and strategies complement the Company's and where efficiencies can be gained through the alliance. A significant part of the Company's strategy relies on developing "non-traditional" business opportunities designed to provide growth in earnings. The Energy Services Business Unit is the most prominent example of this growth strategy. The Energy Services Business Unit is expected to contribute to earnings growth by offering the market a portfolio of energy related products and services. Other examples of such opportunities include the Fossil & Hydro Business Unit, through which the company will target process type industries, such as chemical, paper, plastics and petroleum to become a service provider of instrumentation equipment, and the Nuclear Business Unit, whose position as an industry leader offers opportunities to provide services to other nuclear utilities striving to improve their safety and operating records. The Commercial Operations Business Unit will provide power distribution related services. Finally, the Telecommunications Act of 1996 opened up opportunities to generate growth through use of existing telecommunications infrastructure to provide telecommunications services and new energy services through the Company's existing fiber-optic network. 22 Virginia Power has organized a wholesale power group to engage in off-system wholesale purchases and sales, and that group is developing trading relationships beyond the geographic limits of Virginia Power's retail service territory. The Company has also been successful in negotiation of wholesale requirements contracts with multi-year provisions for notice of termination of service and a long-term contract with large federal government customers for service to facilities within the Company's service territory and has obtained regulatory approval of innovative pricing proposals for industrial loads, although rate concessions have been necessary in some cases. To date, the Company has not experienced any material loss of load, and the reduction of 1997 revenues attributable to such rate concessions is expected to approximate $22 million. Competition -- Wholesale Competition at the wholesale level has been mandated by the Energy Policy Act and the FERC regulations thereunder. During 1996, sales to wholesale customers represented approximately 8 percent of the Company's total revenues from electric sales. Approximately 4 percent of wholesale revenues resulted from the Company's power marketing efforts to make off-system sales. FERC established the requirements for open transmission access and related matters in final rules issued on April 24, 1996 in Order No. 888 and Order No. 889. This enables other suppliers of power to displace electric service provided by a utility to wholesale customers served by the utility's transmission system, unless those customers are required by contract to take service from the utility. The orders required utilities to file with FERC an open access transmission tariff, which Virginia Power did on July 9, 1996; they require utilities to take transmission service under that tariff for wholesale power sales; they provide for utilities to recover legitimate, prudent and verifiable costs that would be unrecoverable in a competitive market (stranded costs); they require utilities to participate in an open access same-time information system (OASIS); and they require separation of transmission operations and reliability functions from wholesale merchant and marketing functions. FERC also issued a notice of proposed rulemaking proposing replacement of open access tariffs with a capacity reservation tariff by December 31, 1997. On March 4, 1997, FERC issued Order No. 888-A, in which it addressed requests for rehearing of Order No. 888. Order No. 888-A essentially reaffirms the basic principles of Order No. 888 and clarifies and makes limited modifications to Order No. 888. Parties seeking judicial review of Order Nos. 888 and 888-A must file petition for review with the appropriate United States Court of Appeal by May 5, 1997. On August 15, 1996, pursuant to the provisions of the Interconnection and Operating Agreement between ODEC and Virginia Power, ODEC gave written notice of its intent to reduce its supplemental demand purchases under that Agreement to zero within nine years. 1997 supplemental demand charges (other than charges relating to transmission and distribution which will continue in any case) are expected to be $63 million. On November 19, 1996, the Company and ODEC reached principles of agreement providing that Virginia Power will continue to supply all of ODEC's supplemental capacity needs through 2005, rather than the declining amounts after 1999 under prior agreements. Under the principles of agreement, the Company's recovery of fixed charges will be reduced over time as supplemental capacity rates transition from fully-embedded costs to market-based pricing. The Company estimates the reduced rates, offset in part by other revenues which may be earned under the agreement, will decrease income before taxes by approximately $38 million through 2005. Competition -- Retail General retail competition presently is not authorized in Virginia and North Carolina, and as a result Virginia Power faces competition for retail sales only in the ability of certain business customers to relocate among utility service territories, to substitute other energy sources for electric power, and to generate their own electricity. But major customers, principally industrial, and other suppliers of power are advocating retail competition vigorously in Congress and in the Virginia and North Carolina legislatures and commissions. Legislation either to authorize or require retail competition is under consideration in the present Congress, a joint sub-committee of the Virginia Senate and House of Delegates is considering whether and how such competition should be allowed or required, and legislation is pending before the North Carolina General Assembly that would establish a study commission to determine whether legislation is necessary to ensure adequate, reliable and economical electric service in light of current trends in the industry. Virginia Power has been advocating a cautious and measured approach to the question of retail competition. In 1996 it initiated legislation, which was enacted by the Virginia General Assembly and became effective July 1, 1996, that authorizes the Virginia Commission to approve alternative forms of regulation, economic development rates and packages of incentive rates; that facilitates a regulated utility's ability to enter into joint ventures and partnerships; that authorizes the Virginia Commission to determine the treatment of stranded costs for service to federal customer accounts, which are otherwise outside the Commission's ratemaking jurisdiction; that establishes that a local referendum must be held before municipalization of utility services may occur for services previously provided by a utility; and that authorizes the Virginia Commission to 23 determine stranded cost payments when utility property is condemned by a municipality or other corporation possessing the power of eminent domain. The Company has also obtained regulatory approval of innovative pricing proposals for industrial loads in Virginia and North Carolina and entered into an energy partnership with a key industrial customer. The Virginia Commission is taking an active interest in retail competition in the electric utility industry and the industry restructuring that might accompany such competition. It has instituted both a generic investigation of industry restructuring and competition and a separate proceeding specifically involving Virginia Power. The Company has proposed in that case an alternative regulatory plan intended to facilitate an orderly transition to competition, if such competition should be allowed, including full recovery of any potentially stranded costs. The Company's case was filed with the Commission on March 24, 1997, and it proposes a freeze of present rates through December 31, 2002, during which a portion of earnings above the approved level would be used to accelerate the write-off of generation-related regulatory assets and mitigate the costs associated with payments under power purchase contracts with non-utility generators. If the proposed plan is approved, the Company would commit to write-off $494 million of regulatory assets or other potentially stranded costs during the five-year rate freeze period; however, the Company believes that current rates, which are requested to remain in effect, would be sufficient to permit the recognition of these costs without adversely impacting the results of operations during and after the five-year period. The Company also seeks approval of the principle of stranded cost recovery as well as approval of a Transition Cost Charge mechanism by which costs that may become stranded at the onset of competition will be recoverable from customers who elect to purchase their power in the competitive market if retail competition is allowed in Virginia. The Commission has not established a procedural schedule for the Company's case. For a more detailed description of the Virginia Commission proceedings, see Regulation under Item 1. BUSINESS. Competition -- SFAS 71 Virginia Power's regulated rates are designed to recover its prudently incurred costs of providing service, including the opportunity to earn a reasonable return on its shareholder's investment. The Company's financial statements reflect assets and costs under this cost-based rate regulation in accordance with Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation," which provides that certain expenses normally reflected in income are deferred on the balance sheet as regulatory assets and are recognized as the related amounts are included in rates and recovered from customers. Continued accounting under SFAS 71 requires that rates designed to recover the utility's specific costs of providing service, are, and will continue to be, established by regulators. The presence of increasing competition that limits the utility's ability to charge rates that recover its costs, or a change in the method of regulation with the same effect, could result in the discontinued applicability of SFAS 71. Rate-regulated companies are required to write off regulatory assets against earnings whenever those assets no longer meet the criteria for recognition as defined by SFAS 71. In addition, SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires a review of long-lived assets for impairment whenever events or changes in circumstances, such as those used to determine continued applicability of SFAS 71, indicate that the carrying amount of an asset may not be recoverable. Virginia Power's operations currently satisfy the SFAS 71 criteria. However, if events or circumstances should change so that those criteria are no longer satisfied, management believes that a material adverse effect on the Company's results of operations and financial position may result. In light of changes predicted for the electric utility industry, however, the Company will continue monitoring its regulatory operations in light of the SFAS 71 requirements. Competition -- Exposure to Potentially Stranded Costs Under traditional cost-based regulation, utilities have generally had an obligation to serve supported by an implicit promise of the opportunity to recover prudently incurred costs. The most significant potential adverse effect of competition is "stranded costs." Stranded costs are those costs incurred or commitments made by utilities under cost-based regulation that may not be reasonably expected to be recovered in a competitive market. Regulatory assets recognized under SFAS 71, unrecovered investment in power plants, commitments such as long-term purchased power contracts and nuclear decommissioning costs are items that may become stranded costs if prices for electric services are determined by the market rather than based on the cost of providing that service. The Company's potential exposure to stranded costs is comprised of long-term purchased power contracts that may be above market, costs pertaining to certain generating plants that may become uneconomic in a deregulated environment and regulatory assets for items such as income tax benefits previously flowed-through to customers, deferred losses on reacquired debt, and other costs (see Note G to CONSOLIDATED FINANCIAL STATEMENTS). In addition, unfunded obligations for 24 nuclear plant decommissioning and postretirement benefits not yet recognized in the financial statements could contribute to the Company's exposure to potentially stranded costs. See Notes C and O to CONSOLIDATED FINANCIAL STATEMENTS. Any forecast of potentially stranded costs is inextricably tied to the assumptions made at the time of the analysis, including the timing of open access (customer choice) in the market for electric service, the extent of open access permitted, potential prices in the competitive market, sales and load growth forecasts, future operating performance, rate revenues permitted during the transition, cost structure over time, mitigation opportunities and stranded cost recovery mechanisms. The calculation of potentially stranded costs is extremely sensitive to the various assumptions made. Certain combinations of these assumptions as applied to Virginia Power would produce little to no stranded costs; under other scenarios Virginia Power's exposure to potentially stranded costs could be substantial. Virginia Power is presently assessing the reasonableness of various possible assumptions, but it has not been able to settle on any particular combination thereof. Thus Virginia Power's maximum exposure to potentially stranded costs is uncertain, as is the extent to which such costs, if any, will be recoverable from customers. Virginia Power believes that recovery of such costs, if any, is appropriate and will vigorously pursue the recovery of any potentially stranded costs with the regulatory commissions having jurisdiction over its operations and continue to implement cost-reduction measures in an effort to mitigate the amount at risk. Presently, Virginia Power expects to continue to operate under regulation and to recover its cost of providing traditional electric service. However, the form of cost-based rate regulation under which Virginia Power operates is likely to evolve as a result of various legislative or regulatory initiatives, including Virginia Power's alternative regulatory plan filed with the Virginia Commission on March 24, 1997. At this time, Virginia Power management can predict neither the ultimate outcome of regulatory reform in the electric utility industry nor the impact such changes would have on Virginia Power. 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX Page No. ---- Report of Management..................................................... 27 Report of Independent Auditors........................................... 28 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994................................. 29 Consolidated Balance Sheets at December 31, 1996 and 1995............................................. 30 Consolidated Statements of Earnings Reinvested in Business for the years ended December 31, 1996, 1995 and 1994....... 32 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994....................................... 33 Notes to Consolidated Financial Statements............................... 34 26 REPORT OF MANAGEMENT The Company's management is responsible for all information and representations contained in the Consolidated Financial Statements and other sections of the Company's annual report on Form 10-K. The Consolidated Financial Statements, which include amounts based on estimates and judgments of management, have been prepared in conformity with generally accepted accounting principles. Other financial information in the Form 10-K is consistent with that in the Consolidated Financial Statements. Management maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that the Company's assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed and recorded in accordance with established procedures. Management recognizes the inherent limitations of any system of internal accounting control and, therefore cannot provide absolute assurance that the objectives of the established internal accounting controls will be met. This system includes written policies, an organizational structure designed to ensure appropriate segregation of responsibilities, careful selection and training of qualified personnel and internal audits. Management believes that during 1996 the system of internal control was adequate to accomplish the intended objective. The Consolidated Financial Statements have been audited by Deloitte & Touche LLP, independent auditors, who have been engaged by the Board of Directors. Their audits were conducted in accordance with generally accepted auditing standards and included a review of the Company's accounting systems, procedures and internal controls, and the performance of tests and other auditing procedures sufficient to provide reasonable assurance that the Consolidated Financial Statements are not materially misleading and do not contain material errors. The Audit Committee of the Board of Directors, composed entirely of directors who are not officers or employees of the Company, meets periodically with the independent auditors, the internal auditors and management to discuss auditing, internal accounting control and financial reporting matters and to ensure that each is properly discharging its responsibilities. Both the independent auditors and the internal auditors periodically meet alone with the Audit Committee and have free access to the Committee at any time. Management recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Company's Code of Ethics, which is distributed throughout the Company. The Code of Ethics addresses, among other things, the importance of ensuring open communication within the Company; potential conflicts of interest; compliance with all domestic and foreign laws, including those relating to financial disclosure; the confidentiality of proprietary information; and full disclosure of public information. VIRGINIA ELECTRIC AND POWER COMPANY J. T. Rhodes E. M. Roach, Jr. President and Senior Vice President-Finance, Chief Executive Regulation & General Counsel Officer 27 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of Virginia Electric and Power Company: We have audited the accompanying consolidated balance sheets of Virginia Electric and Power Company (a wholly-owned subsidiary of Dominion Resources, Inc.) and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of income, earnings reinvested in business, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Richmond, Virginia February 11, 1997 28 VIRGINIA ELECTRIC AND POWER COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (Millions) Operating revenues................................................ $4,382.6 $4,350.4 $4,170.8 -------- -------- -------- Operating expenses: Operation: Fuel, net.................................................... 987.0 1,006.9 973.0 Purchased power capacity, net................................ 700.5 688.4 669.4 Other........................................................ 546.9 543.8 577.4 Maintenance..................................................... 250.9 260.5 263.2 Restructuring................................................... 91.6 117.9 Depreciation and amortization................................... 502.0 469.1 446.3 Amortization of terminated construction project costs........... 34.4 34.4 34.4 Taxes -- Income................................................. 241.9 228.1 223.0 -- Other................................................. 262.3 254.8 252.7 -------- -------- -------- Total...................................................... 3,617.5 3,603.9 3,439.4 -------- -------- -------- Operating income.................................................. 765.1 746.5 731.4 Other income...................................................... 7.7 6.7 10.9 -------- -------- -------- Income before interest charges.................................... 772.8 753.2 742.3 -------- -------- -------- Interest charges: Interest on long-term debt...................................... 287.9 302.6 291.9 Other........................................................... 22.4 20.1 7.5 Allowance for borrowed funds used during construction........... (1.9) (4.7) (4.2) -------- -------- -------- Total...................................................... 308.4 318.0 295.2 -------- -------- -------- Distributions -- preferred securities of subsidiary trust, net.... 7.1 2.4 -------- -------- -------- Net income........................................................ 457.3 432.8 447.1 Preferred dividends............................................... 35.5 44.1 42.2 -------- -------- -------- Balance available for Common Stock................................ $ 421.8 $ 388.7 $ 404.9 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of the financial statements. 29 VIRGINIA ELECTRIC AND POWER COMPANY CONSOLIDATED BALANCE SHEETS Assets
At December 31, ----------------------- 1996 1995 --------- --------- (Millions of Dollars) UTILITY PLANT: Plant (includes plant under construction of $180.1 in 1996 and $512.1 in 1995)................................................................... $14,506.8 $14,201.6 Less accumulated depreciation............................................... 5,218.3 4,760.9 --------- --------- 9,288.5 9,440.7 Nuclear fuel (less accumulated amortization of $698.5 in 1996 and $703.6 in 1995).................................................................... 145.3 132.4 --------- --------- Total net utility plant................................................ 9,433.8 9,573.1 --------- --------- INVESTMENTS: Nuclear decommissioning trust funds......................................... 443.3 351.4 Other....................................................................... 34.5 32.9 --------- --------- Total net investments.................................................. 477.8 384.3 --------- --------- CURRENT ASSETS: Cash and cash equivalents................................................... 47.9 29.8 Accounts receivable: Customers (less allowance for doubtful accounts of $2.4 in 1996 and $1.7 in 1995)............................................................... 354.8 362.6 Other.................................................................... 80.4 58.3 Accrued unbilled revenues................................................... 162.8 179.5 Materials and supplies at average cost or less: Plant and general........................................................ 148.7 160.2 Fossil fuel.............................................................. 76.8 71.2 Other....................................................................... 124.5 75.2 --------- --------- Total current assets................................................... 995.9 936.8 --------- --------- DEFERRED DEBITS AND OTHER ASSETS: Regulatory assets........................................................... 773.9 816.4 Unamortized debt issuance costs............................................. 24.7 26.6 Other....................................................................... 121.9 90.5 --------- --------- Total deferred debits and other assets................................. 920.5 933.5 --------- --------- Total assets........................................................... $11,828.0 $11,827.7 --------- --------- --------- ---------
The accompanying notes are an integral part of the financial statements. 30 VIRGINIA ELECTRIC AND POWER COMPANY CONSOLIDATED BALANCE SHEETS Liabilities and Shareholders' Equity
At December 31, ----------------------- 1996 1995 --------- --------- (Millions of Dollars) LONG-TERM DEBT................................................................ $ 3,579.4 $ 3,889.4 --------- --------- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST*...................................................................... 135.0 135.0 --------- --------- PREFERRED STOCK: Preferred stock subject to mandatory redemption............................. 180.0 180.0 --------- --------- Preferred stock not subject to mandatory redemption......................... 509.0 509.0 --------- --------- COMMON STOCKHOLDER'S EQUITY: Common Stock, no par, 300,000 shares authorized, 171,484 shares outstanding at December 31, 1996 and 1995............................................ 2,737.4 2,737.4 Other paid-in capital....................................................... 16.9 16.9 Earnings reinvested in business............................................. 1,308.4 1,272.5 --------- --------- Total common stockholder's equity........................................ 4,062.7 4,026.8 --------- --------- CURRENT LIABILITIES: Securities due within one year.............................................. 311.3 259.6 Short-term debt............................................................. 312.4 169.0 Accounts payable, trade..................................................... 368.5 310.7 Customer deposits........................................................... 50.0 55.4 Payrolls accrued............................................................ 73.2 77.7 Severance costs accrued..................................................... 50.2 42.5 Interest accrued............................................................ 95.3 101.8 Other....................................................................... 126.1 99.0 --------- --------- Total current liabilities................................................ 1,387.0 1,115.7 --------- --------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes........................................... 1,565.2 1,498.8 Deferred investment tax credits............................................. 255.3 272.2 Deferred fuel expenses...................................................... 3.3 57.7 Other....................................................................... 151.1 143.1 --------- --------- Total deferred credits and other liabilities............................. 1,974.9 1,971.8 --------- --------- COMMITMENTS AND CONTINGENCIES (See Note Q) Total liabilities and shareholders' equity............................... $11,828.0 $11,827.7 --------- --------- --------- ---------
(*) As described in Note J to CONSOLIDATED FINANCIAL STATEMENTS, the 8.05% Junior Subordinated Notes totalling $139.2 million principal amount constitute 100% of the Trust's assets. - --------------- The accompanying notes are an integral part of the financial statements. 31 VIRGINIA ELECTRIC AND POWER COMPANY CONSOLIDATED STATEMENTS OF EARNINGS REINVESTED IN BUSINESS
For the Years Ended December 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (Millions) Balance at beginning of year...................................... $1,272.5 $1,277.8 $1,269.3 Net income........................................................ 457.3 432.8 447.1 -------- -------- -------- Total........................................................ 1,729.8 1,710.6 1,716.4 -------- -------- -------- Cash dividends: Preferred stock subject to mandatory redemption................. 11.1 13.5 14.4 Preferred stock not subject to mandatory redemption............. 24.5 30.8 28.3 Common Stock.................................................... 385.8 394.3 395.5 -------- -------- -------- Total dividends.............................................. 421.4 438.6 438.2 -------- -------- -------- Other additions (deductions), net................................. 0.5 (0.4) -------- -------- -------- Balance at end of year............................................ $1,308.4 $1,272.5 $1,277.8 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of the financial statements. 32 VIRGINIA ELECTRIC AND POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (Millions) Cash Flow From Operating Activities: Net income............................................................... $ 457.3 $ 432.8 $ 447.1 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................................... 616.0 585.1 558.3 Allowance for other funds used during construction.................. (3.0) (6.7) (6.4) Deferred income taxes............................................... 69.1 11.8 56.7 Deferred investment tax credits..................................... (17.0) (16.9) (17.1) Noncash return on terminated construction project costs -- pretax... (6.4) (8.4) (10.3) Deferred fuel expenses, net......................................... (54.4) 6.2 (2.6) Deferred capacity expenses.......................................... (9.2) 6.4 26.5 Restructuring....................................................... 56.3 96.2 Changes in: Accounts receivable.............................................. (11.3) (54.3) 36.5 Accrued unbilled revenues........................................ 17.6 (27.7) 11.9 Materials and supplies........................................... 6.0 61.1 (6.5) Accounts payable, trade.......................................... 57.8 (8.9) 21.1 Accrued expenses................................................. (62.6) 44.7 (29.0) Provision for rate refunds....................................... (12.2) (89.5) Other............................................................... (.9) 16.2 21.6 -------- -------- -------- Net Cash Flow From Operating Activities.................................... 1,115.3 1,125.4 1,018.3 -------- -------- -------- Cash Flow From (To) Financing Activities: Issuance of Common Stock................................................. 75.0 Issuance of long-term debt............................................... 24.5 240.0 464.0 Issuance of preferred securities of subsidiary trust..................... 135.0 Issuance (Repayment) of short-term debt.................................. 143.4 169.0 (43.0) Repayment of long-term debt and preferred stock.......................... (284.1) (439.0) (334.3) Common Stock dividend payments........................................... (385.8) (394.3) (395.5) Preferred stock dividend payments........................................ (35.6) (44.3) (42.7) Distribution-preferred securities of subsidiary trust.................... (10.9) (3.6) Other.................................................................... (2.3) (10.1) (7.8) -------- -------- -------- Net Cash Flow To Financing Activities...................................... (550.8) (347.3) (284.3) -------- -------- -------- Cash Flow From Used In Investing Activities: Utility plant expenditures (excluding AFC -- other funds)................ (393.8) (519.9) (580.9) Nuclear fuel (excluding AFC -- other funds).............................. (90.2) (57.6) (80.0) Nuclear decommissioning contributions.................................... (36.2) (28.5) (24.5) Sale of accounts receivable, net......................................... (160.0) (40.0) Purchase of subsidiary assets............................................ (13.7) Other.................................................................... (12.5) (11.1) (1.4) -------- -------- -------- Net Cash Flow Used In Investing Activities................................. (546.4) (777.1) (726.8) -------- -------- -------- Increase in cash and cash equivalents...................................... 18.1 1.0 7.2 Cash and cash equivalents at beginning of year............................. 29.8 28.8 21.6 -------- -------- -------- Cash and cash equivalents at end of year................................... $ 47.9 $ 29.8 $ 28.8 -------- -------- -------- -------- -------- -------- Cash paid during the year for: Interest (reduced for the cost of borrowed funds capitalized as AFC)..... $ 295.4 $ 314.5 $ 302.9 Income taxes............................................................. 216.1 215.8 190.5 Non-cash transactions for financing and investing activities: Assumption of obligations................................................ 26.3 Acquisition of utility property.......................................... 26.3
The accompanying notes are an integral part of the financial statements. 33 VIRGINIA ELECTRIC AND POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Significant Accounting Policies: General Virginia Electric and Power Company is a regulated public utility engaged in the generation, transmission, distribution and sale of electric energy within a 30,000 square mile area in Virginia and northeastern North Carolina. It sells electricity to retail customers (including governmental agencies) and to wholesale customers such as rural electric cooperatives and municipalities. The Virginia service area comprises about 65 percent of Virginia's total land area, but accounts for over 80 percent of its population. The Company's accounting practices are generally prescribed by the Uniform System of Accounts promulgated by the regulatory commissions having jurisdiction and are in accordance with generally accepted accounting principles applicable to regulated enterprises. The financial statements include the accounts of the Company and its subsidiaries, with all significant intercompany transactions and accounts being eliminated on consolidation. The Company is a wholly-owned subsidiary of Dominion Resources, Inc., a Virginia corporation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenues Operating revenues are recorded on the basis of service rendered. Property, Plant and Equipment Utility plant is recorded at original cost which includes labor, materials, services, AFC, where permitted by regulators, and other indirect costs. The cost of maintenance and repairs is charged to the appropriate operating expense and clearing accounts. The cost of additions and replacements is charged to the appropriate utility plant account, except that the cost of minor additions and replacements, as provided in the Uniform System of Accounts, is charged to maintenance expense. Depreciation and Amortization Depreciation of utility plant (other than nuclear fuel) is computed on the straight-line method based on projected useful service lives. The cost of depreciable utility plant retired and the cost of removal, less salvage, are charged to accumulated depreciation. The provision for depreciation provides for the recovery of the cost of assets including the estimated cost of removal, net of salvage, and is based on the weighted average depreciable plant using a rate of 3.2 percent for 1996, 1995 and 1994. Operating expenses include amortization of nuclear fuel, which is provided on a unit of production basis sufficient to fully amortize, over the estimated service life, the cost of the fuel plus permanent storage and disposal costs. 34 Federal Income Taxes The Company files a consolidated federal income tax return with Dominion Resources. Deferred investment tax credits are being amortized over the service lives of the property giving rise to such credits. Allowance for Funds Used During Construction The applicable regulatory Uniform System of Accounts defines AFC as the cost during the construction period of borrowed funds used for construction purposes and a reasonable rate on other funds when so used. The pretax AFC rates for 1996, 1995 and 1994 were 8.1, 8.9 and 8.9 percent, respectively. No AFC is accrued for approximately 82 percent of the Company's construction work in progress which is instead included in rate base. A cash return is currently collected on the portion of construction work in progress included in rate base. Deferred Capacity and Fuel Expense Approximately 80% of capacity expenses and 90% of fuel expenses are subject to deferral accounting. The difference between reasonably incurred actual expenses and the level of expenses included in current rates is deferred and matched against future revenues. Amortization of Debt Issuance Costs The Company defers and amortizes any expenses incurred in the issuance of long-term debt, including premiums and discounts associated with such debt, over the lives of the respective issues. Any gains or losses resulting from the refinancing of debt are also deferred and amortized over the lives of the new issues of long-term debt as permitted by the appropriate regulatory jurisdictions. Gains or losses resulting from the redemption of debt without refinancing are amortized over the remaining lives of the redeemed issues. Cash and Cash Equivalents Current banking arrangements generally do not require checks to be funded until actually presented for payment. At December 31, 1996 and 1995, the Company's accounts payable included the net effect of checks outstanding but not yet presented for payment of $64.8 million and $62.7 million, respectively. For purposes of the Consolidated Statements of Cash Flows, the Company considers cash and cash equivalents to include cash on hand and temporary investments purchased with an initial maturity of three months or less. Reclassification Certain amounts in the 1995 and 1994 financial statements have been reclassified to conform to the 1996 presentation. 35 B. Income Taxes: Details of income tax expense are as follows:
Years ------------------------------- 1996 1995 1994 ------- ------- ------- (Millions) Current expense: Federal............................................................ $ 185.3 $ 231.0 $ 185.6 State.............................................................. 2.3 2.1 2.1 ------- ------- ------- 187.6 233.1 187.7 ------- ------- ------- Deferred expense: Plant related items................................................ 65.4 48.9 39.0 Deferred fuel and capacity......................................... 22.3 (6.0) (8.2) Debt issuance costs................................................ (2.8) 1.3 3.7 Customer accounts reserve.......................................... 36.8 Terminated construction project costs.............................. (7.3) (7.3) (7.3) Other.............................................................. (6.4) (25.0) (11.6) ------- ------- ------- 71.2 11.9 52.4 ------- ------- ------- Net deferred investment tax credits-amortization..................... (16.9) (16.9) (17.1) ------- ------- ------- Income tax expense-operating income.................................. 241.9 228.1 223.0 ------- ------- ------- Income tax expense associated with nonoperating income: Current expense: Federal............................................................ 4.2 0.8 (1.7) Deferred expense..................................................... (2.1) (0.1) 4.3 ------- ------- ------- Income tax expense-nonoperating income............................... 2.1 0.7 2.6 ------- ------- ------- Total income tax expense............................................. $ 244.0 $ 228.8 $ 225.6 ------- ------- ------- ------- ------- -------
Total federal income tax expense differs from the amount computed by applying the statutory federal income tax rate to pretax income for the following reasons:
Years ---------------------------- 1996 1995 1994 ------ ------ ------ (Millions) Federal income tax expense at statutory rate of 35%...... $242.8 $229.9 $234.4 ------ ------ ------ Increases (decreases) resulting from: Utility plant differences.............................. 5.7 3.2 (1.8) Ratable amortization of investment tax credits......... (16.9) (16.9) (17.1) Terminated construction project costs.................. 5.0 5.0 5.0 Other, net............................................. 3.7 4.2 2.1 ------ ------ ------ (2.5) (4.5) (11.8) ------ ------ ------ Total federal income tax expense......................... $240.3 $225.4 $222.6 ------ ------ ------ ------ ------ ------ Effective tax rate....................................... 34.6% 34.3% 33.2%
The following chart reconciles total income tax expense as shown on the Consolidated Statements of Income:
Years ---------------------------- 1996 1995 1994 ------ ------ ------ (Millions) Total federal income tax expense......................... $240.3 $225.4 $222.6 Less: federal income tax charged other income............ 2.1 0.7 2.6 Add: state income tax charged to operating income........ 3.7 3.4 3.0 ------ ------ ------ Total income tax expense charged to operating income..... $241.9 $228.1 $223.0 ------ ------ ------ ------ ------ ------
36 The Company's net accumulated deferred income taxes consist of the following:
Years --------------------- 1996 1995 -------- -------- (Millions) Deferred income tax assets: Investment tax credits................................................... $ 90.3 $ 96.4 -------- -------- Deferred income tax liabilities: Plant-method and basis differences....................................... 1,440.5 1,384.4 Terminated construction project costs.................................... 14.4 19.5 Income taxes recoverable through future rates............................ 168.8 171.6 Other.................................................................... 31.8 19.7 -------- -------- Total deferred income tax liabilities...................................... 1,655.5 1,595.2 -------- -------- Total net accumulated deferred income taxes................................ $1,565.2 $1,498.8 -------- -------- -------- --------
C. Nuclear Operations: Decommissioning Nuclear plant decommissioning costs are accrued and recovered through rates over the expected service lives of the Company's nuclear generating units. The amounts collected from customers are being placed in trusts, which, with the accumulated earnings thereon, will be utilized solely to fund future decommissioning obligations.
North Anna Surry ---------------- ---------------- Unit 1 Unit 2 Unit 1 Unit 2 ------ ------ ------ ------ NRC license expiration year................................................ 2018 2020 2012 2013 Method of decommissioning.................................................. DECON DECON DECON DECON (Millions) Current cost estimate (1994) dollars....................................... $247.0 $253.6 $272.4 $274.0 Funds in external trusts at December 31, 1996.............................. 105.1 98.9 121.8 117.5 1996 contribution to external trusts....................................... 7.6 7.2 10.6 10.8
Approximately every four years, site-specific studies are prepared to determine the decommissioning cost estimate for the Company's four nuclear units. DECON assumes the activities associated with decontamination or prompt removal of radioactive contaminants will begin shortly after cessation of operations so that the property may be released for unrestricted use. The accumulated provision for decommissioning of $443.3 million and $351.4 million is included in Utility Plant Accumulated Depreciation at December 31, 1996 and 1995, respectively. Provisions for decommissioning of $36.2 million, $28.5 million and $24.5 million applicable to 1996, 1995 and 1994, respectively, are included in Depreciation and Amortization Expense. The net unrealized gains of $80.5 million and $40.7 million associated with securities held by the Company's Nuclear Decommissioning trusts at December 31, 1996 and 1995, respectively, are included in the accumulated provision for decommissioning. Earnings of the trust funds were $16.0 million, $15.9 million and $15.2 million for 1996, 1995 and 1994, respectively, and are included in Other Income in the Company's Consolidated Statements of Income. The accretion of the accumulated provision for decommissioning, equal to the earnings of the trust funds, is also recorded in Other Income. The Financial Accounting Standards Board (FASB) is reviewing the accounting for nuclear plant decommissioning. If current electric utility industry practices for such decommissioning are changed, annual provisions for decommissioning could increase. The FASB has tentatively determined that the estimated cost of decommissioning should be reported as a liability rather than as accumulated depreciation and that a substantial portion of the decommissioning obligation should be recognized earlier in the operating life of the nuclear plant. During its deliberations, the FASB expanded the scope of this project to include similar unavoidable obligations to perform closure and post-closure activities incurred as a condition to operate assets other than nuclear power plants. Whether this position, if adopted, would impact other assets of the Company cannot be determined at this time. Furthermore, the FASB has tentatively determined that it would be inappropriate to account for cost of removal as negative salvage; thus, any forthcoming standard may also cause changes in industry plant depreciation practices. 37 Insurance The Price-Anderson Act limits the public liability of an owner of a nuclear power plant to $8.9 billion for a single nuclear incident. The Price-Anderson Amendments Act of 1988 allows for an inflationary provision adjustment every five years. The Company has purchased $200 million of coverage from the commercial insurance pools with the remainder provided through a mandatory industry risk sharing program. In the event of a nuclear incident at any licensed nuclear reactor in the United States, the Company could be assessed up to $81.7 million (including a 3% insurance premium tax for Virginia) for each of its four licensed reactors not to exceed $10.3 million (including a 3% insurance premium tax for Virginia) per year per reactor. There is no limit to the number of incidents for which this retrospective premium can be assessed. Nuclear liability coverage for claims made by nuclear workers first hired on or after January 1, 1988, except those arising out of an extraordinary nuclear occurrence, is provided under the Master Worker insurance program. (Those first hired into the nuclear industry prior to January 1, 1988, are covered by the policy discussed above.) The aggregate limit of coverage for the industry is $400 million ($200 million policy limit with automatic reinstatements of an additional $200 million). The Company's maximum retrospective assessment is approximately $12.5 million (including a 3% insurance premium tax for Virginia). The Company's current level of property insurance coverage ($2.55 billion for North Anna and $2.40 billion for Surry) exceeds the NRC's minimum requirement for nuclear power plant licensees of $1.06 billion per reactor site and includes coverage for premature decommissioning and functional total loss. The NRC requires that the proceeds from this insurance be used first to return the reactor to and maintain it in a safe and stable condition and second to decontaminate the reactor and station site in accordance with a plan approved by the NRC. The Company's nuclear property insurance is provided by Nuclear Mutual Limited (NML) and Nuclear Electric Insurance Limited (NEIL), two mutual insurance companies, and is subject to retrospective premium assessments, in any policy year in which losses exceed the funds available to these insurance companies. The maximum assessment for the current policy period is $44.8 million. Based on the severity of the incident, the Boards of Directors of the Company's nuclear insurers have the discretion to lower the maximum retrospective premium assessment or eliminate either or both completely. For any losses that exceed the limits or for which insurance proceeds are not available because they must first be used for stabilization and decontamination, the Company has the financial responsibility for these losses. The Company purchases insurance from NEIL to cover the cost of replacement power during the prolonged outage of a nuclear unit due to direct physical damage of the unit. Under this program, Virginia Power is subject to a retrospective premium assessment for any policy year in which losses exceed funds available to NEIL. The current policy period's maximum assessment is $9 million. As part owner of the North Anna Power Station, ODEC is responsible for its proportionate share (11.6 percent) of the insurance premiums applicable to that station, including any retrospective premium assessments and any losses not covered by insurance. D. Sale of Receivables: The Company had an agreement to sell, with limited recourse, certain accounts receivable including unbilled amounts, up to a maximum of $200 million. The agreement was allowed to expire on October 1, 1996. At December 31, 1995, no amounts were outstanding under this agreement. E. Utility Plant: Utility plant consisted of the following:
At December 31, ---------------------- 1996 1995 --------- --------- (Millions) Production.......................................................................................... $ 7,691.9 $ 7,340.0 Transmission........................................................................................ 1,386.5 1,316.1 Distribution........................................................................................ 4,385.4 4,215.7 Other............................................................................................... 862.9 817.7 --------- --------- 14,326.7 13,689.5 Construction work in progress....................................................................... 180.1 512.1 --------- --------- Total........................................................................................ $14,506.8 $14,201.6 --------- --------- --------- ---------
38 F. Jointly Owned Plants: The following information relates to the Company's proportionate share of jointly owned plants at December 31, 1996:
North Bath County Anna Clover Pumped Storage Power Power Station Station Station -------------- -------- ------- Ownership interest............................................. 60.0% 88.4% 50.0% (Millions) Utility plant in service....................................... $1,075.4 $1,819.5 $ 530.1 Accumulated depreciation....................................... 208.8 716.9 13.2 Nuclear fuel................................................... 449.4 Accumulated amortization of nuclear fuel....................... 380.7 Construction work in progress.................................. .1 49.1 3.6
The co-owners are obligated to pay their share of all future construction expenditures and operating costs of the jointly owned facilities in the same proportion as their respective ownership interest. The Company's share of operating costs is classified in the appropriate operating expense (fuel, maintenance, depreciation, taxes, etc.) in the Consolidated Statements of Income. G. Regulatory Assets: Certain expenses normally reflected in income are deferred on the balance sheet as regulatory assets and are recognized in income as the related amounts are included in rates and recovered from customers. The Company's regulatory assets included the following:
At December 31, ---------------- 1996 1995 ------ ------ (Millions) Income taxes recoverable through future rates.............................................................. $477.0 $484.5 Cost of decommissioning DOE uranium enrichment facilities.................................................. 73.5 78.5 Deferred losses (gains) on reacquired debt, net............................................................ 91.5 99.3 North Anna Unit 3 project termination costs................................................................ 73.1 101.8 Other...................................................................................................... 58.8 52.3 ------ ------ Total............................................................................................... $773.9 $816.4 ------ ------ ------ ------
Income taxes recoverable through future rates represent principally the tax effect of depreciation differences not normalized in earlier years for ratemaking purposes. These amounts are amortized as the related temporary differences reverse. The costs of decommissioning the Department of Energy's (DOE) uranium enrichment facilities have been deferred and represent the unamortized portion of Virginia Power's required contributions to a fund for decommissioning and decontaminating the DOE's uranium enrichment facilities. Virginia Power is making such contributions over a fifteen-year period with escalation for inflation. These costs are being recovered in fuel rates. Losses or gains on reacquired debt are deferred and amortized over the lives of the new issues of long-term debt. Gains or losses resulting from the redemption of debt without refinancing are amortized over the remaining lives of the redeemed issues. The construction of North Anna Unit 3 was terminated in November 1982. All retail jurisdictions have permitted recovery of the incurred costs. For Virginia and FERC jurisdictional customers, the amounts deferred are being amortized from the date termination costs were first includible in rates. The incurred costs underlying these regulatory assets may represent expenditures by the Company or may represent the recognition of liabilities that ultimately will be settled at some time in the future. For some of those regulatory assets representing past expenditures that are not included in the Company's rate base or used to adjust the Company's capital structure, the Company is not allowed to earn a return on the unrecovered balance. Of the $773.9 million of regulatory assets at December 31, 1996, approximately $117 million represent past expenditures that are effectively excluded from rate base by the Virginia State Corporation Commission which has primary jurisdiction over the Company's rates. However, of that amount $73.1 million represent the present value of amounts to be recovered through future rates for North Anna Unit 3 project termination costs, and thus reflect a reduction in the actual dollars to be recovered through future rates for the time 39 value of money. The Company does not earn a return on the remaining $43.9 million of regulatory assets, effectively excluded from rate base, to be recovered over various recovery periods up to 23 years, depending on the nature of the deferred costs. In addition, the Company's depreciation practices for early retirements of plant and equipment and cost of removal, along with changing operating plant scenarios, have resulted in an accumulated depreciation reserve deficiency estimated to be $245 million at December 31, 1996. Currently, the Company is allowed to amortize reserve deficiencies over estimated remaining functional plant lives in all of the regulatory jurisdictions it serves. H. Leases: Plant and property under capital leases included the following:
At December 31, --------------- 1996 1995 ----- ----- (Millions) Office buildings (*)....................................................... $34.4 $34.4 Data processing equipment.................................................. 2.5 2.8 ----- ----- Total plant and property under capital leases....................... 36.9 37.2 Less accumulated amortization.............................................. 13.3 11.8 ----- ----- Net plant and property under capital leases................................ $23.6 $25.4 ----- ----- ----- -----
- --------------- (*) The Company leases its principal office building from its parent, Dominion Resources. The capitalized cost of the property under that lease, net of accumulated amortization, represented $23 million and $24 million at December 31, 1996 and 1995, respectively. Rental payments for such lease were $3 million for each of the three years ended December 31, 1996, 1995 and 1994. The Company is responsible for expenses in connection with the leases noted above, including maintenance. Future minimum lease payments under noncancellable capital leases and for operating leases that have initial or remaining lease terms in excess of one year as of December 31, 1996, are as follows:
Capital Operating Leases Leases ------- --------- (Millions) 1997....................................................................... $ 3.6 $12.5 1998....................................................................... 3.3 7.8 1999....................................................................... 3.0 5.8 2000....................................................................... 3.0 3.6 2001....................................................................... 3.0 3.4 After 2001................................................................. 19.7 25.4 ------- --------- Total future minimum lease payments........................................ 35.6 $58.5 --------- --------- Less interest element included above....................................... 12.0 ------- Present value of future minimum lease payments............................. $23.6 ------- -------
Rents on leases, which have been charged to other operation expenses, were $12.8 million, $9.8 million and $9.6 million for 1996, 1995 and 1994, respectively. 40 I. Long-term Debt: Long-term debt included the following:
At December 31, --------------------- 1996 1995 -------- -------- (Millions) First and Refunding Mortgage Bonds (1): Series U, 5.125%, due 1997.............................................................. $ 49.3 $ 49.3 1992 Series B, 7.25%, due 1997.......................................................... 250.0 250.0 1988 Series A, 9.375%, due 1998......................................................... 150.0 150.0 1992 Series F, 6.25%, due 1998.......................................................... 75.0 75.0 1989 Series B, 8.875%, due 1999......................................................... 100.0 100.0 1993 Series C, 5.875%, due 2000......................................................... 135.0 135.0 Various series, 6.0-8%, due 2001-2004................................................... 805.0 805.0 1992 Series D, 7.625%, due 2007......................................................... 215.0 215.0 Various series, 5.45-8.75%, due 2021-2025............................................... 1,144.5 1,144.5 -------- -------- Total First and Refunding Mortgage Bonds........................................... 2,923.8 2,923.8 -------- -------- Other long-term debt: Bank loans, notes and term loans: Fixed interest rate, 6.15%-10.00%, due 1996-2003..................................... 503.1 762.7 Pollution control financings (2): Money Market Municipals, due 2007-2027(3)............................................ 488.6 488.6 -------- -------- Total other long-term Debt......................................................... 991.7 1,251.3 -------- -------- 3915.5 4,175.1 -------- -------- Less amounts due within one year: First and Refunding Mortgage Bonds...................................................... 299.3 Bank loans, notes and term loans........................................................ 12.0 259.6 -------- -------- Total amount due within one year................................................... 311.3 259.6 -------- -------- Less unamortized discount, net of premium................................................. 24.8 26.1 -------- -------- Total long-term debt............................................................... $3,579.4 $3,889.4 -------- -------- -------- --------
- --------------- (1) Substantially all of the Company's property is subject to the lien of its mortgage, securing its First and Refunding Mortgage Bonds. (2) Certain pollution control facilities at the Company's generating facilities have been pledged or conveyed to secure the financings. (3) Interest rates vary based on short-term, tax-exempt market rates. The weighted average daily interest rates were 3.57% and 3.89% for 1996 and 1995, respectively. Pollution control bonds subject to remarketing within one year are classified as long-term debt to the extent that the Company's intention to maintain the debt is supported by long-term bank commitments. Maturities through 2001 are as follows (millions): 1997 -- $311.3; 1998 -- $333.5; 1999 -- $261; 2000 -- $195.5; and 2001 -- $160.7. In January 1997, the Company filed a registration statement with the Securities and Exchange Commission for $400 million of Junior Subordinated Debentures. In February 1997, the Company issued $200 million of First and Refunding Mortgage Bonds, the proceeds of which were primarily used to refund a portion of the Company's debt that matured in February and March of 1997. J. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust: In 1995, the Company established Virginia Power Capital Trust I (VP Capital Trust). VP Capital Trust sold 5,400,000 shares of Preferred Securities for $135 million, representing preferred beneficial interests and 97% beneficial ownership in the assets held by VP Capital Trust. 41 The Company issued $139.2 million of its 1995 Series A, 8.05% Junior Subordinated Notes (the Notes) in exchange for the $135 million realized from the sale of the Preferred Securities and $4.2 million of common securities of VP Capital Trust. The common securities represent the remaining 3% beneficial ownership interest in the assets held by VP Capital Trust. The Notes constitute 100% of VP Capital Trust's assets. The Notes are due September 30, 2025, but may be extended up to an additional ten years, subject to satisfying certain conditions. However, the Company may redeem the Notes on or after September 30, 2000, under certain circumstances. The Preferred Securities are subject to mandatory redemption upon repayment of the Notes at maturity or earlier redemption. At redemption, each Preferred Security shall be entitled to receive a liquidation amount of $25 plus accrued and unpaid distributions, including any interest thereon. K. Preferred Stock Subject to Mandatory Redemption: Preferred stock subject to mandatory redemption, $100 liquidation preference, at December 31, 1996, was as follows:
Issued and Outstanding Dividend Shares -------- ----------- $5.58......................... 400,000(a)(b) 6.35......................... 1,400,000(a)(c) ----------- Total.................. 1,800,000 ----------- -----------
- --------------- (a) Shares are non-callable prior to redemption. (b) All shares to be redeemed on 3/1/2000. (c) All shares to be redeemed on 9/1/2000. During the years 1994 through 1996, the following shares were redeemed:
Year Dividend Shares - ---- -------- ------- 1995......................................... $ 7.30 417,319 1994......................................... 7.30 37,681
The total number of authorized shares for all preferred stock is 10,000,000 shares. Upon involuntary liquidation, all presently outstanding preferred stock is entitled to receive $100 per share plus accrued dividends. Dividends are cumulative. L. Preferred Stock Not Subject to Mandatory Redemption: Preferred stock not subject to mandatory redemption, $100 liquidation preference, at December 31, 1996, was as follows:
Entitled per Share upon Liquidation -------------------------------------------- Issued and And Thereafter to Outstanding Amounts Declining in Dividend Shares Amount Through Steps to -------- ----------- ------- -------- ---------------------- $5.00............................................................. 106,677 $112.50 4.04............................................................. 12,926 102.27 4.20............................................................. 14,797 102.50 4.12............................................................. 32,534 103.73 4.80............................................................. 73,206 101.00 7.05............................................................. 500,000 105.00 7/31/03 $100.00 after 7/31/13 6.98............................................................. 600,000 105.00 8/31/03 $100.00 after 8/31/13 MMP 1/87 (*)...................................................... 500,000 100.00 MMP 6/87 (*)...................................................... 750,000 100.00 MMP 10/88 (*)..................................................... 750,000 100.00 MMP 6/89 (*)...................................................... 750,000 100.00 MMP 9/92A (*)..................................................... 500,000 100.00 MMP 9/92B (*)..................................................... 500,000 100.00 ----------- Total............................................................. 5,090,140 ----------- -----------
42 - --------------- (*) Money Market Preferred (MMP) dividend rates are variable and are set every 49 days via an auction process. The combined weighted average rates for these series in 1996, 1995 and 1994, including fees for broker/dealer agreements, were 4.48%, 4.93% and 3.75%, respectively. During the years 1994 through 1996, the following shares were redeemed:
Year Dividend Shares - ----- -------- ------- 1995 $ 7.45 400,000 1995 7.20 450,000
M. Common Stock: During the years 1994 through 1996, the following changes in Common Stock occurred:
Years ---------------------------------------------------------------------------------------- 1996 1995 1994 --------------------------- --------------------------- ------------------------ Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount ----------- ----------- ----------- ----------- ----------- -------- (Millions, Except Shares) Balance at January 1............ 171,484 $ 2,737.4 171,484 $ 2,737.4 168,277 $2,662.4 Issuance to Dominion Resources..................... 3,207 75.0 ----------- ----------- ----------- ----------- ----------- -------- Balance at December 31.......... 171,484 $ 2,737.4 171,484 $ 2,737.4 171,484 $2,737.4 ----------- ----------- ----------- ----------- ----------- -------- ----------- ----------- ----------- ----------- ----------- --------
N. Short-term Debt: The Company has an established commercial paper program with a maximum borrowing capacity of $500 million which is supported by two credit facilities. One is a $300 million, five-year credit facility that was effective on June 7, 1996 and expires on June 7, 2001. The other is a $200 million credit facility, also effective June 7, 1996, with an initial term of 364 days and provisions for subsequent 364-day extensions. The total amount of commercial paper outstanding was $312.4 million and $169.0 million at December 31, 1996 and 1995, respectively. The weighted average interest rate for commercial paper was 5.51% and 5.79% on December 31, 1996 and 1995, respectively. O. Retirement Plan, Postretirement Benefits and Other Benefits: Under the terms of its benefit plans, the Company reserves the right to change, modify or terminate the plans. From time to time in the past, benefits have changed, and some of these changes have reduced benefits. Retirement Plan The Company participates in the Dominion Resources, Inc. Retirement Plan (the Retirement Plan), a defined benefit pension plan. The Retirement Plan covers virtually all employees of Dominion Resources and its subsidiaries, including the Company. The benefits are based on years of service and average base compensation over the consecutive 60-month period in which pay is highest. Pension plan expenses were $24.8 million, $20.3 million and $19.3 million for 1996, 1995 and 1994, respectively and the amounts funded were $28.4 million, $42.7 million and $42.7 million in 1996, 1995 and 1994, respectively. 43 Postretirement Benefits Net periodic postretirement benefit expense was as follows:
Year Ended December 31, ---------------- 1996 1995 ------ ----- (Millions) Service cost............................................................... $ 12.1 $ 8.7 Interest cost.............................................................. 23.9 21.7 Return on plan assets...................................................... (16.6) (6.2) Amortization of transition obligation...................................... 12.1 12.1 Net amortization and deferral.............................................. 7.1 0.1 ------ ----- Net periodic postretirement benefit expense................................ $ 38.6 $36.4 ------ ----- ------ -----
The following table sets forth the funded status of the plan:
At December 31, ------------------- 1996 1995 ------- ------- (Millions) Fair value of plan assets.................................................. $ 133.0 $ 96.3 Accumulated postretirement benefit obligation: Retirees................................................................. $ 201.7 $ 210.7 Active plan participants................................................. 122.2 96.5 ------- ------- Accumulated postretirement benefit obligation......................... 323.9 307.2 ------- ------- Accumulated postretirement benefit obligation in excess of plan assets.............................................................. (190.9) (210.9) Unrecognized transition obligation......................................... 192.8 204.9 Unrecognized net experience (gain)/loss.................................... (3.6) 7.9 ------- ------- Accrued postretirement benefit cost........................................ $ (1.7) $ 1.9 ------- ------- ------- -------
A one percent increase in the health care cost trend rate would result in an increase of $31.8 million in the service and interest cost components and a $268.0 million increase in the accumulated postretirement benefit obligation. Significant assumptions used in determining the postretirement benefit obligation were:
1996 1995 --------------------- --------------------- Discount rates....................................................... 8% 8% Assumed return on plan assets........................................ 9% 9% Medical cost trend rate.............................................. 7% for 1st year 8%for 1st year 6% for 2nd year 7% for 2nd year Scaling down to 4.75% Scaling down to 4.75% beginning in the year beginning in the year 2000 2000
The Company is recovering these costs in rates on an accrual basis in all material respects, in all jurisdictions. The funds being collected for Other Postretirement Benefits (OPEB) accruals in rates, in excess of OPEB benefits actually paid during the year, are contributed to external benefit trusts under the Company's current funding policy (see Competition under MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS). Other Benefits In 1994, the Company offered an early retirement program to employees aged 50 or older and offered a voluntary separation program to all regular full-time employees. Approximately 1,400 employees accepted offers under these programs. The costs associated with these programs were $90.1 million. The Company capitalized $25.9 million based upon regulatory precedent and expensed $64.2 million. P. Restructuring: In March 1995, the Company announced the implementation phase of its Vision 2000 program. During this phase, the Company began reviewing operations with the objective of outsourcing services where economical and appropriate and re- 44 engineering the remaining functions to streamline operations. The re-engineering process is resulting in outsourcing, decentralization, reorganization and downsizing for portions of the Company's operations. As part of this process, the Company is reevaluating its utilization of capital resources in the operations of the Company to identify further opportunities for operational efficiencies through outsourcing or re-engineering of its processes. Restructuring charges of $91.6 million and $117.9 million in 1996 and 1995, respectively, included severance costs, purchased power contract restructuring and negotiated settlement costs, capital project cancellation costs, and other costs incurred directly as a result of the Vision 2000 initiatives. While the Company may incur additional charges for severance in 1997, the amounts are not expected to be significant. In 1995, the Company established a comprehensive involuntary severance package for salaried employees who may no longer be employed as a result of these initiatives. The Company is recognizing the cost associated with employee terminations in accordance with Emerging Issues Task Force Consensus No. 94-3 as management identifies the positions to be eliminated. Severance payments will be made over a period not to exceed twenty months. Through December 31, 1996, management had identified 1,811 positions to be eliminated. Those positions were identified as a result of the Company's review of the Fossil and Hydroelectric, Nuclear and Commercial Operations Business Units and portions of the corporate center operations. The recognition of severance costs resulted in charges to operations in 1996 and 1995 of $49.2 million and $51.2 million, respectively. At December 31, 1996, 1,266 employees had been terminated and severance payments totaling $45 million had been paid. The Company estimates that these staffing reductions will result in annual savings, net of outsourcing costs, in the range of $62 million to $90 million. However, such savings may be offset in part by future salary increases, possible outsourcing costs and increased payroll costs associated with staffing for growth opportunities such as those in the Energy Services Business Unit. The savings from staffing reductions will be reflected in lower construction expenditures as well as lower operation and maintenance expenses. In an effort to minimize its exposure to potential stranded investment, the Company is evaluating its long-term purchased power contracts and negotiating modifications to their terms, including cancellations, where it is determined to be economically advantageous to do so. The Company has also negotiated settlements with several other parties to terminate their rights to sell power to the Company. The cost of contract modifications, contract cancellations and negotiated settlements was $7.8 million and $8.1 million in 1996 and 1995, respectively. Using contract terms, estimated quantities of power that would have otherwise been delivered and other relevant factors at the time of each transaction, the Company estimated that its annual future purchased power costs, including energy payments, would be reduced by up to $5.8 million and $147.0 million for the 1996 transactions and 1995 transactions, respectively. The cost of alternative sources of power that might ultimately be required as a result of these settlements is expected to be significantly less than the estimated reduction in purchased power costs. Restructuring charges reported in 1995 included $37.3 million for the cancellation of a project to construct a facility to handle low level radioactive waste at the Company's North Anna Power Station. As a result of reevaluating the handling of low level radioactive waste, the Company concluded that the facility should not be completed due to the additional capital investment required, decreased Company volumes of low level radioactive waste resulting from improvements in station procedures and the availability of more economical offsite processing. The incurrence of restructuring charges and the savings resulting therefrom in subsequent periods are elements of the Company's cost of operations and will be considered in the cost of service information filed by the Company in response to the Virginia Commission's Order issued on November 12, 1996. See Regulation -- Virginia Commission under Item 1. BUSINESS for additional information on current rate proceedings. In this increasingly competitive environment, the Company has also concluded that it is appropriate to utilize available savings and cost reductions, such as those generated by the Vision 2000 program, to accelerate the write-off of existing unamortized regulatory assets. Not only will this strategically position the Company in anticipation of competition, but it also reflects the Company's commitment to mitigate its exposure to potentially stranded costs (see Competition in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS). As of December 31, 1996, the Company had identified savings of $26.7 million which were used to establish a reserve for expected adjustments to regulatory assets. As part of re-engineering operations, the Company has adopted a plan to improve customer service which will require an investment in excess of $100 million over the next several years. That plan includes the installation of automated electric meters in metropolitan and inaccessible rural and urban locations. The plan also provides for the installation of mobile data dispatch technology in the Company's service fleet, accompanied by digitized mapping of the Company's service territory. Furthermore, technological changes are being made to enhance the Company's ability to handle customer calls during power 45 outages. In order to increase service reliability, the Company has initiated both local and regional distribution line improvement projects. Q. Commitments and Contingencies: The Company is involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies regarding matters arising in the ordinary course of business, some of which involve substantial amounts. Management is of the opinion that the final disposition of these proceedings will not have a material adverse effect on the results of operations or the financial position of the Company. Federal Energy Regulatory Commission Audit The FERC has conducted a compliance audit of the Company's financial statements for the years 1990 through 1994. The Company has received a preliminary audit report in which certain compliance exceptions were noted. The Company has supplied information to the FERC staff relating to these preliminary exceptions. Based on information available at this time, the disposition of these issues is not expected to have a significant effect on the Company's financial position or results of operations. Retrospective Premium Assessments Under several of the Company's nuclear insurance policies, the Company is subject to retrospective premium assessments in any policy year in which losses exceed the funds available to these insurance companies. For additional information, see Note C to CONSOLIDATED FINANCIAL STATEMENTS. Construction Program The Company has made substantial commitments in connection with its construction program and nuclear fuel expenditures. Those expenditures are estimated to total $529.2 million (excluding AFC) for 1997. The Company presently estimates that all of its 1997 construction expenditures, including nuclear fuel, will be met through cash flow from operations. Purchased Power Contracts Since 1984, the Company has entered into contracts for the long-term purchases of capacity and energy from other utilities, qualifying facilities and independent power producers. The Company has 65 non-utility purchase contracts with a combined dependable summer capacity of 3,524 Mw. Of these, 62 projects (aggregating 3,509 Mw) were operational as of the end of 1996 with the remaining three projects to become operational before 1999. The table below reflects the Company's minimum commitments as of December 31, 1996, for power purchases from utility and non-utility suppliers.
Commitment ---------------------- Year Capacity Other - ---- --------- -------- (Millions) 1997......................................... $ 790.7 $ 211.2 1998......................................... 793.5 216.8 1999......................................... 796.6 220.3 2000......................................... 709.2 157.9 2001......................................... 712.1 161.5 Later years.................................. 10,098.0 788.0 --------- -------- Total...................................... $13,900.1 $1,755.7 --------- -------- --------- -------- Present value of the total................... $ 6,147.2 $ 986.7 --------- -------- --------- --------
Payments made by Virginia Power in satisfaction of the minimum purchase commitments shown in the above table are subject to reduction or partial refund if (1) the non-utility suppliers fail to meet performance requirements or (2) changes in federal or state law or administrative actions disallow or have the effect of disallowing Virginia Power's recovery of such costs from its customers. The amount of such payment reductions or refunds, if any, will be determined and administered as provided in individual supply contracts, although (1) the deferral of refund obligations, (2) disputes over the applicability of such payment reductions or refund obligations and (3) the ability of some non-utility suppliers to make refunds could limit Virginia Power's ability to benefit from these contract provisions. In addition to the minimum purchase commitments in the table above, under some of these contracts, the Company may purchase, at its option, additional power as needed. Actual payments for purchased power (including economy, emergency, 46 limited term, short-term and long-term purchases) for the years 1996, 1995 and 1994 were $1,183 million, $1,093 million and $1,025 million, respectively. For a discussion of the Company's efforts to restructure certain purchased power contracts, see Note P to CONSOLIDATED FINANCIAL STATEMENTS. Fuel Purchase Commitments The Company's estimated fuel purchase commitments for the next five years for system generation are as follows (millions): 1997 -- $326; 1998 -- $274; 1999 -- $194; 2000 -- $157; and 2001 -- $110. Sale of Power The Company has a diversity exchange agreement with AP under which AP delivers 200 Mw to Virginia Power in the summer and Virginia Power delivers 200 Mw to AP in the winter. In addition, the Company has entered into agreements to supply wholesale power under various terms on a firm basis during certain upcoming winter and summer months. Under these agreements, the Company has the following commitments:
Years ------------------ 1997 1998 ----- ----- (Mw of Capacity) Winter..................................................................................... 200 110 Summer..................................................................................... 510 200
Environmental Matters The Company is subject to rising costs resulting from a steadily increasing number of federal, state and local laws and regulations designed to protect human health and the environment. These laws and regulations affect future planning and existing operations. These laws and regulations can result in increased capital, operating and other costs as a result of compliance, remediation, containment and monitoring obligations of the Company. These costs have been historically recovered through the ratemaking process; however, should material costs be incurred and not recovered through rates, the Company's results of operations and financial condition could be adversely impacted. Site Remediation The EPA has identified the Company and several other entities as Potentially Responsible Parties (PRPs) at two Superfund sites located in Kentucky and Pennsylvania. The estimated future remediation costs for the sites are in the range of $61.5 million to $72.5 million. The Company's proportionate share of the cost is expected to be in the range of $1.7 million to $2.5 million, based upon allocation formulas and the volume of waste shipped to the sites. As of December 31, 1996, the Company had accrued a reserve of $1.7 million to meet its obligations at these two sites. Based on a financial assessment of the PRPs involved at these sites, the Company has determined that it is probable that the PRPs will fully pay the costs apportioned to them. The Company and Dominion Resources along with Consolidated Natural Gas have remedial action responsibilities remaining at two coal tar sites. The Company accrued a $2 million reserve to meet its estimated liability based on site studies and investigations performed at these sites. In addition, two civil actions have been instituted against the City of Norfolk and Virginia Power by property owners who allege that their property has been contaminated by toxic pollutants originating from one of the coal tar sites now owned by the City of Norfolk and formerly owned by the Company. The plaintiffs are seeking compensatory damages of $12 million and punitive damages of $6 million. It is too early in the cases for the Company to predict their outcome. The Company has filed answers denying liability. A trial date of August 18, 1997 has been set for one of the two actions seeking fifteen million dollars. The Company generally seeks to recover its costs associated with environmental remediation from third party insurers. At December 31, 1996, any pending or possible claims were not recognized as an asset or offset against recorded obligations of the Company. R. Fair Value of Financial Instruments: The Company used available market information and appropriate valuation methodologies to estimate the fair value of each class of financial instrument for which it is practicable to estimate fair value. These estimates are not necessarily indicative of the amounts the Company could realize in a market exchange. In addition, the use of different market assumptions may have a material effect on the estimated fair value amounts. 47
December 31, ----------------------------------------------- 1996 1995 --------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- (Millions) Assets: Cash and cash equivalents.................................... $ 47.9 $ 47.9 $ 29.8 $ 29.8 Nuclear decommissioning trust funds.......................... 443.3 443.3 351.4 351.4 Pollution control project funds.............................. 9.7 9.7 11.9 11.9 Liabilities and capitalization: Short-term debt.............................................. 312.4 312.4 169.0 169.0 Long-term debt: First and Refunding Mortgage Bonds........................ 2,923.8 2,957.4 2,923.8 3,106.3 Medium-term notes......................................... 503.1 531.3 762.7 810.1 Money Market Municipal pollution control notes............ 488.6 488.6 488.6 488.6 Preferred stock subject to mandatory redemption.............. 180.0 185.8 180.0 190.9 Preferred securities of subsidiary trust..................... 135.0 135.0 135.0 140.4
Cash and cash equivalents, pollution control project funds and short-term debt: The carrying amount of these items approximates fair value because of their short maturity. Nuclear decommissioning trust funds: The fair value is based on available market information and generally is the average of bid and asked price. First and Refunding Mortgage Bonds and pollution control bonds: Fair value is based on market quotations. Medium-term notes: These notes were valued by discounting the remaining cash flows at a rate estimated for each issue. A yield curve rate was estimated to relate Treasury Bond rates for specific issues to the corresponding maturities. Money Market Municipal pollution control notes: These notes have variable interest rates which are set so that fair value approximates carrying value. Preferred stock subject to mandatory redemption: The fair value is based on market quotations or is estimated by discounting the dividend and principal payments for a representative issue of each series over the average remaining life of the series. Preferred securities of subsidiary trust: Fair value is based on market quotations. S. Quarterly Financial Data (unaudited): The following amounts reflect all adjustments, consisting of only normal recurring accruals (except as discussed below), necessary in the opinion of the management for a fair statement of the results for the interim periods.
Operating Operating Net Balance Available Quarter Revenues Income Income for Common Stock - ------------------------ --------- --------- ------ ----------------- (Millions) 1996 1st..................... $1,164.8 $ 231.3 $152.8 $ 143.8 2nd..................... 1,029.1 173.1 96.6 87.8 3rd..................... 1,177.1 239.0 162.2 153.3 4th..................... 1,011.6 121.7 45.7 36.9 1995 1st..................... $1,076.3 $ 191.8 $115.0 $ 103.3 2nd..................... 971.1 156.7 78.0 66.3 3rd..................... 1,276.6 279.1 201.8 190.3 4th..................... 1,026.4 118.9 38.0 28.8
Results for interim periods may fluctuate as a result of weather conditions, rate relief and other factors. As part of the Vision 2000 program (see Note P to CONSOLIDATED FINANCIAL STATEMENTS) the Company recorded $91.6 million and $117.9 million of restructuring charges in 1996 and 1995, respectively. Restructuring charges 48 included severance costs, purchased power contract restructuring and negotiated settlement costs, capital project cancellation costs, and other costs incurred directly as a result of the Vision 2000 initiatives. The Company expensed $5.4 million, $19.3 million, $4.6 million and $62.3 million of these costs during the first, second, third and fourth quarters of 1996, and $3.5 million, $1.8 million, $30.6 million and $82.0 million during the first, second, third and fourth quarters of 1995. The impact of the write-off reduced Balance Available for Common Stock by $3.5 million, $12.5 million, $3.0 million and $40.6 million for the first, second, third, and fourth quarters of 1996, respectively, and by $2.3 million, $1.1 million, $19.9 million and $53.3 million for the first, second, third, and fourth quarters of 1995, respectively. T. Subsequent Event (unaudited): On November 12, 1996, the Virginia Commission instituted a proceeding and directed the Company to provide certain information, including any alternative form of regulation proposed by the Company at this time, by March 31, 1997. On March 7, 1997, in this proceeding and in a separate Annual Information Filing proceeding, the Virginia Commission entered an order providing that the Company's rates shall become interim rates subject to refund as of March 1, 1997. For additional information, see Regulation under Item 1. BUSINESS. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 49 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Information concerning directors of Virginia Electric and Power Company is as follows:
Year First Principal Occupation for Last 5 Years, Elected a Name and Age Directorships in Public Corporations Director ------------ -------------------------------------- ----------- John B. Adams, Jr. (52) President and Chief Executive Officer of The Bowman Companies, 1987 Fredericksburg, Virginia, a manufacturer and bottler of alcohol beverages and Chairman of the Board of Directors and a Director of Virginia Electric and Power Company. He is a Director of Dominion Resources. James T. Rhodes (55) President and Chief Executive Officer of Virginia Electric and 1989 Power Company. He is a Director of NationsBank, N.A. James F. Betts (64) Former Chairman of the Board and President, The Life Insurance 1978 Company of Virginia, Richmond, Virginia. He is a Director of Central Fidelity Bank, Inc. Jean E. Clary (53) President and owner of Century 21 Clary and Associates, Inc., 1996 South Hill, Virginia Benjamin J. Lambert, III (60) Optometrist, Richmond, Virginia. He is a Director of 1992 Consolidated Bank and Trust Company, Student Loan Marketing Association (SallieMae) and Dominion Resources. Richard L. Leatherwood (57) Retired, Baltimore, Maryland (prior to December 1, 1991, 1994 President and Chief Executive Officer, CSX Equipment, an operating unit of CSX Transportation, Inc.). He is a Director of Dominion Resources. Harvey L. Lindsay, Jr. (67) Chairman and Chief Executive Officer of Harvey Lindsay 1986 Commercial Real Estate, Norfolk, Virginia, a commercial real estate firm. He is a Director of Dominion Resources. William T. Roos (69) Retired, Hampton, Virginia (prior to December 31, 1993, 1975 President of Penn Luggage, Inc., retail specialty stores). He is a Director of Dominion Resources. Robert H. Spilman (69) Chairman, Chief Executive Officer and a Director of Bassett 1994 Furniture Industries, Inc., Bassett, Virginia. He is Chairman of the Board and a Director of Jefferson-Pilot Corp., Greensboro, North Carolina. He is a Director of NationsBank Corporation, TRINOVA Corporation, The Pittston Company and Dominion Resources. William G. Thomas (57) President of Hazel & Thomas, Alexandria, Virginia, a law firm. 1987
The Directors are divided into three classes, with staggered terms. Each class consists, as nearly as possible, of one-third of the total number of Directors. Each Director holds office until the annual meeting for the year in which his class term expires, or until his successor is duly qualified and elected as provided in the Company's Articles of Incorporation. Mr. Thomas has entered into a Consent Decree with the Office of Thrift Supervision in connection with the lending and credit granting activities of Perpetual Savings Bank, FSB, which Mr. Thomas formerly served as a director. The Consent Decree requires that Mr. Thomas obtain approval from the appropriate federal banking agency before accepting certain positions involving lending or credit activities with an insured depository institution. 50 (b) Information concerning the executive officers of Virginia Electric and Power Company is as follows:
Name and Age Business Experience past Five Years ------------ ----------------------------------- James T. Rhodes (55) President and Chief Executive Officer. Robert E. Rigsby (47) Executive Vice President, January 1, 1996 to date; Senior Vice President-Finance and Controller, January 1, 1995 to January 1, 1996; Vice President-Human Resources prior to January 1, 1995. William R. Cartwright (54) Senior Vice President-Fossil and Hydro, July 1, 1995 to date; Vice President Fossil and Hydro prior to July 1, 1995. Lawrence E. De Simone (49) Senior Vice President-Energy Services, July 15, 1996 to date; vice president-strategic planning for Central & South West Corp., a Dallas-based electric utility holding company, prior to July 15, 1996. Larry M. Girvin (53) Senior Vice President-Commercial Operations, January 1, 1996 to date; Vice President-Human Resources, January 1, 1995 to January 1, 1996; Vice President-Nuclear Services, September 1, 1992 to January 1, 1995; Vice President-Central Division prior to September 1, 1992. James P. O'Hanlon (53) Senior Vice President-Nuclear, June 1, 1994 to date; Vice President-Nuclear Operations, January 1, 1992 to June 1, 1994; Vice President-Nuclear Services prior to January 1, 1992. Edgar M. Roach, Jr. (48) Senior Vice President-Finance, Regulation and General Counsel, January 1, 1996 to date; Vice President-Regulation and General Counsel, January 1, 1995 to January 1, 1996; Vice President-Regulation, February 1, 1994 to January 1, 1995; Partner in the law firm of Hunton & Williams, Raleigh, North Carolina prior to February 1, 1994. Charles A. Brown (54) Vice President-Central Division, September 1, 1992 to date; Vice President-Procurement prior to September 1, 1992. Thomas L. Caviness, Jr. (51) Vice President-Retail Energy Services, July 1, 1995 to date;Vice President-Eastern Division prior to July 1, 1995. J. Kennerly Davis, Jr. (51) Vice President-Finance and Administrative Services, Treasurer and Corporate Secretary, January 1, 1996 to date; Vice President, Treasurer and Corporate Secretary, October 1, 1994 to January 1, 1996; Vice President and Corporate Secretary of Dominion Resources prior to October 1, 1994. James T. Earwood, Jr. (53) Vice President-Bulk Power Delivery, January 1, 1997 to date;Vice President-Energy Efficiency and Division Services, January 1, 1996 to January 1, 1997; Vice President-Division Services prior to January 1, 1996. Thomas A. Hyman, Jr. (45) Vice President-Eastern Division and North Carolina Power, July 1, 1995 to date; Vice President-Southern Division, June 1, 1994 to July 1, 1995; Station Manager-Bremo Power Station, September 1, 1992 to June 1, 1994; Assistant Controller Financial Services, prior to September 1, 1992. Michael R. Kansler (42) Vice President-Nuclear Operations, January 1, 1997 to date;Vice President-Nuclear Engineering and Services, October 1, 1995 to January 1, 1997; Vice President-Nuclear Services, January 1, 1995 to October 1, 1995 ; Manager-Nuclear Operations Support, September 1, 1994 to January 1, 1995; Station Manager-Surry Nuclear Power Station prior to September 1, 1994. Mark F. McGettrick (39) Vice President-Customer Service, January 1, 1997 to date; Corporate Restructuring Project Manager, February 1, 1995 to January 1, 1997; Assistant Controller, September 1, 1992 to February 1, 1995; Manager-Budgeting and Administration prior to September 1, 1992. William S. Mistr (49) Vice President-Information Technology, January 1, 1996 to date; Vice President and Treasurer, Dominion Energy, Inc., October 1, 1994 to January 1, 1996; Assistant Treasurer, Dominion Resources, December 1, 1992 to October 1, 1994; Assistant Treasurer prior to December 1, 1992. F. Kenneth Moore (55) Vice President-Fossil and Hydro Services, July 1, 1995 to date. Vice President-Procurement, September 1, 1992 to July 1, 1995; Vice President-Nuclear Engineering Services prior to September 1, 1992. Thomas J. O'Neil (54) Vice President-Human Resources, January 1, 1996 to date; Vice President-Energy Efficiency, September 1, 1992 to January 1, 1996; Vice President-Regulation, prior to September 1, 1992. Robert F. Saunders (53) Vice President-Nuclear Engineering and Services, January 1, 1997 to date; Vice President-Nuclear Operations, June 1, 1994 to January 1, 1997; Assistant Vice President-Nuclear Operations, prior to June 1, 1994. Johnny V. Shenal (51) Vice President-Northern and Western Divisions, June 1, 1994 to date; Vice President-Western Division, prior to June 1, 1994. Eva S. Teig (52) Vice President-Public Affairs.
51 There is no family relationship between any of the persons named in response to Item 10. ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The Summary Table below includes compensation paid by the Company for services rendered in 1996, 1995 and 1994 for the Chief Executive Officer and the four other most highly compensated executive officers (as of December 31, 1996) as determined by total salary and incentive payments for 1996. Summary Compensation Table
Long-Term Compensation ---------------------------------- Awards ------------------------ Securities Annual Compensation Underlying Payouts -------------------------------------------------- Restricted Options/ ------- Other Annual Stock Sar LTIP Name & Principal Position Year Salary Incentives(1) Compensation(2) Awards Grants Payout - ----------------------------- ----- -------- -------------- --------------- ---------- ----------- ------- J. T. Rhodes 1996 $410,575 $247,506 $ 0 $0(3) $ 0 $75,684(4) President & CEO 1995 406,075 273,000 0 0 0 77,970 1994 356,000 193,830 0 0 0 69,709 R. E. Rigsby 1996 226,469 143,892 0 0(5) 0 43,157(6) Executive Vice President 1995 171,456 105,000 0 0 0 34,569 1994 135,825 50,800 0 0 0 16,230 J. P. O'Hanlon 1996 220,815 128,511 0 0(8) 0 56,152(9) Senior Vice President -- 1995 207,555 136,400 0 0 0 45,109 Nuclear 1994 172,625 87,980 0 0 0 19,787 E. M. Roach, Jr. 1996 184,094 99,820 0 0(10) 0 29,466(11) Senior Vice President -- 1995 164,800 69,010 0 0 0 0 Finance, Regulation & General 1994 142,083 50,052 0 0 0 0 Counsel L. W. Ellis 1996 191,754 87,077 0 0(12) 0 50,333(13) Senior Vice President 1995 189,360 102,900 0 0 0 54,041 Power Operations and Planning 1994 181,160 82,950 0 0 0 29,096 (Retired December 31, 1996) All Other Name & Principal Position Compensation - ----------------------------- ------------ J. T. Rhodes $ 4,500(7) President & CEO 4,500(7) 4,500(7) R. E. Rigsby 4,500(7) Executive Vice President 4,500 4,075 J. P. O'Hanlon 4,500(7) Senior Vice President -- 4,500(7) Nuclear 4,500 E. M. Roach, Jr. 4,500(7) Senior Vice President -- 4,500 Finance, Regulation & General 387 Counsel L. W. Ellis 128,523(14) Senior Vice President 4,500(7) Power Operations and Planning 4,500(7) (Retired December 31, 1996)
- --------------- (1) The Company does not maintain "bonus" plans which are used by some companies to supplement salaries based on the success of the company without regard to individual performance. However, the Company has in place various incentive plans that compensate officers and employees for achieving pre-determined specified performance goals. (2) None of the executive officers above received perquisites or other personal benefits in excess of either $50,000 or 10% of their total salary and bonus. (3) The aggregate number of shares of restricted stock at December 31, 1996 totaled: 7,326 with an aggregate value of $282,051 (based on a closing price on December 31, 1996 of $38.50 per share). (4) 1,863 shares of stock were awarded February 21, 1997, at the end of a three-year performance period (1994-1996). (5) The aggregate number of shares of restricted stock at December 31, 1996 totaled: 5,421 with an aggregate value of $208,709 (based on a closing price on December 31, 1996 of $38.50 per share). (6) 549 shares of stock and $20,854 in cash were awarded February 21, 1997, at the end of a three-year performance period (1994-1996). (7) Employer matching contribution on Employee Savings Plan contributions. (8) The aggregate number of shares of restricted stock at December 31, 1996 totaled: 3,507 with an aggregrate value of $135,020 (based on a closing price on December 31, 1996 of $38.50 per share). (9) 714 shares of stock and $27,146 in cash were awarded February 21, 1997, at the end of a three-year performance period (1994-1996). (10) The aggregate number of shares of restricted stock at December 31, 1996 totaled: 2,868 with an aggregate value of $110,418 (based on a closing price on December 31, 1996 of $38,50 per share). 52 (11) $29,466 in cash was awarded February 21, 1997, at the end of a three-year performance period (1994-1996). (12) The aggregate number of shares of restricted stock at December 31, 1996 totaled: 2,868 with an aggregate value of $110,418 (based on a closing price on December 31, 1996 of $38.50 per share). (13) 640 shares of stock and $24,333 in cash were awarded February 21, 1997, at the end of a three-year performance period (1994-1996). (14) Employer matching contribution on Employee Savings Plan contributions ($4,500), retirement payment as provided by Company's Early Retirement and Voluntary Separation Program ($97,266) and payment at retirement for accrued vacation ($26,757). Long-term Incentive Compensation Long-term incentive awards made during 1996 are shown in the following table. Long-term Incentive Plans -- Awards in the Last Fiscal Year 1996-1998 Long-term Incentive Plan
Estimated Future Payouts under Non-stock Price Based Performance or Plans(2) Number of Other Period -------------------------------- Shares, Units until Maturation Threshold Target Maximum Name or Other Rights(1) or Payout (#) (#) (#) - ---------------------- ------------------- ----------------- ---------- ------ -------- J. T. Rhodes 7,326 3 years 3,663 4,884 7,326 R. E. Rigsby 5,421 3 years 2,711 3,614 5,421 J. P. O'Hanlon 3,507 3 years 1,754 2,338 3,507 E. M. Roach, Jr. 2,868 3 years 1,434 1,912 2,868 L. W. Ellis 2,868 3 years 1,434 1,912 2,868
- --------------- (1) The restricted shares of Dominion Resources Common Stock to be awarded at the end of performance period. (2) Performance based restricted stock, the vesting of which is tied to the achievement of the cumulative measure of Economic Value Added (EVA) over a three year period (1996-1998). The threshold amount will be earned if the minimum specified EVA is achieved. The maximum amount will be earned if 320% of the EVA goal is achieved. Retirement Plans The table below sets forth the estimated annual straight life benefit that would be paid following retirement under the benefit formula of the Dominion Resources, Inc. Retirement Plan (the Retirement Plan). Estimated Annual Benefits Payable upon Retirement
Credited Years of Service ----------------------------------------------- Final Average Earnings 15 20 25 30 - ---------------------- -------- -------- -------- -------- $150,000 $ 40,901 $ 54,535 $ 68,169 $ 81,803 175,000 48,514 64,685 80,857 97,028 200,000 56,126 74,835 93,544 112,253 225,000 63,739 84,985 106,232 127,478 250,000 71,351 95,135 118,919 142,703 300,000 86,576 115,435 144,294 173,153 350,000 101,801 135,735 169,669 203,603 400,000 117,026 156,035 195,044 234,053 450,000 132,251 176,335 220,419 264,503 500,000 147,476 196,635 245,794 294,953 550,000 162,701 216,935 271,169 325,403 600,000 177,926 237,235 296,544 355,853 650,000 193,151 257,535 321,919 386,303
Benefits under the Retirement Plan are based on (i) average base compensation over the consecutive 60-month period in which pay is highest, (ii) years of credited service, (iii) age at retirement, and (iv) the offset of Social Security Benefits. 53 Certain officers have entered into retirement agreements that give additional credited years of service for retirement and retirement life insurance purposes, and retirement medical benefit purposes contingent upon the officer reaching a specified age and remaining in the employ of the Company or an affiliate. For purposes of the above table, based on 1996 compensation, credited years of service (including any additional years earned in connection with the retirement agreements) for each of the individuals named in the cash compensation table would be as follows: James T. Rhodes: 30; Robert E. Rigsby: 25; James P. O'Hanlon: 7; Edgar M. Roach, Jr: 2; and Larry W. Ellis: 30. Virginia Power's executive compensation program has placed increased emphasis on incentive compensation opportunities linked to financial and operating performance. Base salaries have been held below the mean for comparable positions at comparable companies. The Retirement Plan benefit formula recognizes base salary, but not incentive compensation payments. Therefore, each year the Organization and Compensation Committee approves a market-based adjustment to executive base salaries for use in calculating the retirement benefit under the Dominion Resources, Inc. Benefit Restoration Plan (the Restoration Plan). In 1996, this adjustment was 11 percent. Also, the Internal Revenue Code limits the annual retirement benefit that may be paid from a qualified retirement plan and the amount of compensation that may be recognized by the Retirement Plan. To the extent that benefits determined under the Retirement Plan's benefit formula exceed the limitations imposed by the Internal Revenue Code, they will be paid under the Dominion Resources, Inc. Benefit Restoration Plan. The Company also provides an Executive Supplemental Retirement Plan (the Supplemental Plan) to its elected officers designated to participate by the Board of Directors. The Supplemental Plan provides an annual retirement benefit equal to 25 percent of a participant's final compensation (base pay plus annual incentive plan payments). The normal form of benefit is monthly installments for 120 months to a participant with 60 months of service, who (i) retires at or after age 55 from the employ of the Company, (ii) has become permanently disabled, or (iii) dies. If a participant dies while employed, the normal form of benefit will be paid to a designated beneficiary. If a participant dies while retired, but before receiving all benefit payments, the remaining installments will be paid to a designated beneficiary. In order to be entitled to benefits under the Supplemental Plan, an employee must be employed as an elected officer of the Company until death, disability or retirement. In addition, an employee will vest in 20% of the supplemental plan benefit for each year of service as an elected officer after age 50. Dr. Rhodes' benefit is payable for life with a minimum of 10 years payments. A lump sum payment is available under certain conditions. Based on 1996 compensation, the estimated annual retirement benefit for each of the executive officers under the Supplemental Plan would be as follows: James T. Rhodes: $165,600; Robert E. Rigsby: $92,651; James P. O'Hanlon: $86,291; Edgar M. Roach, Jr.: $70,668; and Larry W. Ellis: $72,018. Retirement Benefit Funding Plan The Company maintains a Retirement Benefit Funding Plan to provide a means to secure obligations under the Supplemental Plan, the Restoration Plan, and retirement agreements. The Retirement Benefit Funding Plan does not provide any additional benefits; it simply helps secure the funding for these benefit obligations. The amount payable by Virginia Power under the Supplemental Plan, the Restoration Plan and retirement agreements is reduced, on a dollar-for-dollar basis, by the funds available under the Retirement Benefit Funding Plan. Employment Agreements The Company has entered into employment continuity agreements (the Agreements) with its key management executives, including James T. Rhodes, Robert E. Rigsby, Edgar M. Roach, Jr., Larry W. Ellis and James P. O'Hanlon, which provide benefits in the event of a change in control. Each Agreement has a three-year term and thereafter is automatically extended on its anniversary date for an additional year unless notified that the Agreement will not be extended by the Company. If, following a change in control (as defined in the Agreements) of Dominion Resources or the Company, an executive's employment is terminated by the Company without cause, or voluntarily by the executive within sixty days after a material reduction in the executive's compensation, benefits or responsibilities, the Company will be obligated to pay to the executive continued compensation equaling the average base salary and cash incentive bonuses for the thirty-six full month period of employment preceding the change in control or employment termination. In addition, the terminated executive will continue to be entitled to any benefits due under any stock or benefit plans. The Agreements do not alter the compensation and benefits available to an executive whose employment with the Company continues for the full term of the executive's Agreement. The amount of benefits provided under each executive's Agreement will be reduced by any compensation earned 54 by the executive from comparable employment by another employer during the thirty-six months following termination of employment with the Company. An executive shall not be entitled to the above benefits in the event termination is for cause. The Company has entered into an employment agreement with Dr. James T. Rhodes which provides that Dr. Rhodes will continue in the employ of the Company, as Chief Executive Officer until July 31, 1999. During this term, Dr. Rhodes' base salary will not be reduced, and he will participate in the compensation and benefit plans provided for senior management. If Dr. Rhodes' employment is terminated, for any reason, his retirement benefits will be calculated using his final salary and will assume 60 years of age and 30 years of service. In addition, any restricted stock held for Dr. Rhodes will become fully vested, his benefit under the Executive Supplemental Retirement Plan will be paid for life, he will receive immediate payment for all outstanding awards under the Performance Achievement Plan, and he will receive a lump sum payment approximately equal to his 1994 salary plus incentive, and he will receive a cash payment equal to the net present value of base salary and incentives that he would be projected to receive between August 1, 1996 and April 21, 1997. Salary and incentive will be calculated at a rate not less than the maximum rate paid during the prior three years. Termination as a result of disability, at any time during the term of employment, will also result in the payment of the benefits described above. In the case of termination due to death, the benefits described above will be paid to the designated beneficiary, but payments under the Executive Supplemental Retirement Plan will be made for ten years. Compensation of Directors The non-employee members of the Board receive an annual retainer of $19,000 and a fee of $900 for each Board or committee meeting attended. Committee chairmen receive an additional annual retainer of $3,000 and the Chairman of the Board receives an additional $25,000 annual retainer. These Directors may elect to defer their annual retainer and/or their meeting fees under the Deferred Compensation Plan until they retire from the Board or otherwise direct. The deferred fees are credited, for bookkeeping purposes, with earnings and losses as if they were invested in either an interest bearing account or Dominion Resources Common Stock, depending on the Director's election. In 1996, the Company adopted the Dominion Resources, Inc. Stock Accumulation Plan for Outside Directors. This plan aligns a portion of a non-employee director's compensation with the interests of the shareholders by increasing the director's ownership of common stock. Upon election to the Board, a non-employee director receives a one-time award of Stock Units (which are equivalent in value to common stock). The award is determined by (i) multiplying the director's retainer by 17 and (ii) dividing the result by the average price of common stock on the last trading days of the three months before the director's election to the Board. The Stock Units awarded to a director are credited to a book account. A separate account is credited with additional Stock Units equal in value to dividends. A director must have 17 years of service in order to receive all of the Stock Units awarded and accumulated under the plan. Directors Charitable Contribution Program Dominion Resources administers a Directors' Charitable Contribution Program (the Program) that covers Directors of the Company, as part of its overall program of charitable giving. Beginning at the death of a Director a donation in an aggregate amount of $50,000 per year for 10 years will be made to one or more qualifying charitable organizations recommended by the individual Director. Life insurance policies have been purchased on the lives of the Directors in connection with the Program. These policies are owned by Dominion Resources, which is also the beneficiary. The Directors derive no financial or tax benefits from the Program. 55 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The table below sets forth as of February 21, 1997, except as noted, the number of shares of Common Stock of Dominion Resources owned by Directors and four other more highly compensated executive officers of Virginia Electric and Power Company.
Shares of Common Stock Director Plan Name Beneficially Owned Accounts(2) - -------------------------------------------------- ---------------------- ------------- James T. Rhodes................................... 22,961(1) Robert E. Rigsby.................................. 14,422(1) Larry W. Ellis.................................... 9,595(1) James P. O'Hanlon................................. 7,343(1) Edgar M. Roach, Jr................................ 3,295(1) John B. Adams, Jr................................. 3,509 8,500 James F. Betts.................................... 7,500 0 Jean E. Clary..................................... 0 0 Benjamin J. Lambert, III.......................... 0 9,548 Richard L. Leatherwood............................ 1,000 14,724 Harvey L. Lindsay, Jr............................. 400 8,500 William T. Roos................................... 11,496(3) 11,405 Robert H. Spilman................................. 1,164 8,500 William G. Thomas................................. 0 3,267
- --------------- (1) The amounts indicated include restricted stock as follows: Dr. Rhodes - -- 7,326; Mr. Rigsby -- 5,421; Mr. Ellis -- 956; Mr. O'Hanlon -- 3,507; Mr. Roach -- 2,868; and all Directors and executive officers as a group -- 44,777. (2) The number noted under this heading represents the number of shares that may be distributable to the Director under the Deferred Compensation Plan and/or the Stock Accumulation Plan. (3) Members of Mr. Roos' family are beneficiaries of trusts that own 4,387 shares of Common Stock for which he disclaims beneficial ownership. All Directors and executive officers as a group (31 persons) beneficially own, in the aggregate, 256,934 shares of Common Stock of Dominion Resources. Beneficial ownership of shares of the total are disclaimed. No shares of the Company's Preferred Stock are owned by the Directors or executive officers as a group. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Hazel & Thomas, a professional corporation, from time to time acts as counsel to the Company. Mr. Thomas, a Director of the Company, is a shareholder of Hazel & Thomas. 56 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form 10-K: 1. Financial Statements See Index on page 21. 2. Exhibits 3(i) -- Restated Articles of Incorporation, as amended, as in effect on September 12, 1994 (Exhibit 3(i), Form 8-K, dated October 19, 1994, File No. 1-2255, incorporated by reference). 3(ii) -- Bylaws, as amended, as in effect on December 31, 1994 (Exhibit 3(ii), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-2255, incorporated by reference). 4(i) -- See Exhibit 3 (i) above. 4(ii) -- Indenture of Mortgage of the Company, dated November 1, 1935, as supplemented and modified by fifty-eight Supplemental Indentures (Exhibit 4(ii), Form 10-K for the fiscal year ended December 31, 1985, File No. 1-2255, incorporated by reference); Fifty-Ninth Supplemental Indenture (Exhibit 4(ii), Form 10-Q for the quarter ended March 31, 1986, File No. 1-2255, incorporated by reference); Sixtieth Supplemental Indenture (Exhibit 4(ii), Form 10-Q for the quarter ended September 30, 1986, File No. 1-2255, incorporated by reference); Sixty-First Supplemental Indenture (Exhibit 4(ii), Form 10-Q for the quarter ended June 30, 1987, File No. 1-2255, incorporated by reference); Sixty-Second Supplemental Indenture (Exhibit 4(ii), Form 8-K, dated November 3, 1987, File No. 1-2255, incorporated by reference); Sixty-Third Supplemental Indenture (Exhibit 4(i), Form 8-K, dated June 8, 1988, File No. 1-2255, incorporated by reference); Sixty Fourth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated February 8, 1989, File No. 1-2255, incorporated by reference); Sixty-Fifth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated June 22, 1989, File No. 1-2255, incorporated by reference); Sixty-Sixth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated February 27, 1990, File No. 1-2255, incorporated by reference); Sixty-Seventh Supplemental Indenture (Exhibit 4(i), Form 8-K, dated April 2, 1991, File No. 1-2255, incorporated by reference); Sixty-Eighth Supplemental Indenture, (Exhibit 4(i)), Sixty-Ninth Supplemental Indenture, (Exhibit 4(ii)) and Seventieth Supplemental Indenture, (Exhibit 4(iii), Form 8-K, dated February 25, 1992, File No. 1-2255, incorporated by reference); Seventy-First Supplemental Indenture (Exhibit 4(i)) and Seventy-Second Supplemental Indenture, (Exhibit 4(ii), Form 8-K, dated July 7, 1992, File No. 1-2255, incorporated by reference); Seventy-Third Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated August 6, 1992, File No. 1-2255, incorporated by reference); Seventy-Fourth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated February 10, 1993, File No. 1-2255, incorporated by reference); Seventy-Fifth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated April 6, 1993, File No. 1-2255, incorporated by reference); Seventy-Sixth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated April 21, 1993, File No. 1-2255, incorporated by reference); Seventy-Seventh Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated June 8, 1993, File No. 1-2255, incorporated by reference); Seventy-Eighth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated August 10, 1993, File No. 1-2255, incorporated by reference); Seventy-Ninth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated August 10, 1993, File No. 1-2255, incorporated by reference); Eightieth Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated October 12, 1993, File No. 1-2255, incorporated by reference); Eighty-First Supplemental Indenture, (Exhibit 4(iii), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference); Eighty-Second Supplemental Indenture, (Exhibit 4(i), Form 8-K, dated January 18, 1994, File No. 1-2255, incorporated by reference); Eighty-Third Supplemental Indenture (Exhibit 4(i), Form 8-K, dated October 19, 1994, File No. 1-2255, incorporated by reference); Eighty-Fourth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated March 22, 1995, File No. 1-2255, incorporated by reference; and Eighty-Fifth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated February 20, 1997, File No. 1-2255, incorporated by reference). 4(iii) -- Indenture, dated April 1, 1985, between Virginia Electric and Power Company and Crestar Bank (formerly United Virginia Bank) (Exhibit 4(iv), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference).
57 4(iv) -- Indenture, dated as of June 1, 1986, between Virginia Electric and Power Company and Chemical Bank (Exhibit 4(v), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference). 4(v) -- Indenture, dated April 1, 1988, between Virginia Electric and Power Company and Chemical Bank, as supplemented and modified by a First Supplemental Indenture, dated August 1, 1989, (Exhibit 4(vi), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference). 4(vi) -- Subordinated Note Indenture, dated as of August 1, 1995 between Virginia Electric and Power Company and The Chase Manhattan Bank (formerly Chemical Bank), as Trustee, as supplemented (Exhibit 4(a), Form S-3 Registration Statement File No. 333-20561 as filed on January 28, 1997, incorporated by reference). 4(vii) -- Virginia Electric and Power Company agrees to furnish to the Commission upon request any other instrument with respect to long-term debt as to which the total amount of securities authorized thereunder does not exceed 10 percent of Virginia Electric and Power Company's total assets. 10(i) -- Operating Agreement, dated June 17, 1981, between Virginia Electric and Power Company and Monongahela Power Company, the Potomac Edison Company, West Penn Power Company, and Allegheny Generating Company (Exhibit 10(vi), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by reference). 10(ii) -- Purchase, Construction and Ownership Agreement, dated as of December 28, 1982 but amended and restated on October 17, 1983, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit 10(viii), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by reference). 10(iii) -- Interconnection and Operating Agreement, dated as of December 28, 1982 as amended and restated on October 17, 1983, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit 10(ix), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by reference). 10(iv) -- Nuclear Fuel Agreement, dated as of December 28, 1982 as amended and restated on October 17, 1983, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit 10(x), Form 10-K for the fiscal year ended December 31, 1983, File No. 1-8489, incorporated by reference). 10(v) -- Credit Agreements dated June 7, 1996, between Chase Manhattan Bank (formerly Chemical Bank) and Virginia Electric and Power Company (Exhibits 10(i) and 10(ii), Form 10-Q for the period ended June 30, 1996, File No. 1-2255, incorporated by reference). 10(vi) -- Credit Agreement, dated December 1, 1985, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit 10(xix), Form 10-K for the fiscal year ended December 31, 1985, File No. 1-8489, incorporated by reference). 10(vii) -- Agreement for Northern Virginia Services, dated as of November 1, 1985, between Potomac Electric Power Company and Virginia Electric and Power Company (Exhibit 10(xxi), Form 10-K for the fiscal year ended December 31, 1985, File No. 1-8489, incorporated by reference). 10(viii) -- Purchase, Construction and Ownership Agreement, dated May 31, 1990, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit 10(xi), Form 10-K for the fiscal year ended December 31, 1990, File No. 1-2255, incorporated by reference). 10(ix) -- Operating Agreement, dated May 31, 1990, between Virginia Electric and Power Company and Old Dominion Electric Cooperative (Exhibit 10(xii), Form 10-K for the fiscal year ended December 31, 1990, File No. 1-2255, incorporated by reference). 10(x) -- Coal-Fired Unit Turnkey Contract (Volume 1), dated April 6, 1989, and the Unit 2 Amendment (Volume 1), dated May 31, 1990 between Virginia Electric and Power Company and Old Dominion Electric Cooperative, Westinghouse, Black & Veatch, Combustion Engineering and H. B. Zachry (Volumes 2-11 contain technical specifications) (Exhibit 10(xiii), Form 10-K for the fiscal year ended December 31, 1990, File No. 1-2255, incorporated by reference). 10(xi)* -- Description of arrangements with certain officers regarding additional credited years of service for retirement purposes (Exhibit 10(xii), Form 10-K for the fiscal year ended December 31, 1992, File No. 1-2255, incorporated by reference). 10(xii)* -- Dominion Resources, Inc. Directors' Deferred Compensation Plan effective July 1, 1986, as amended and restated on January 1, 1996 (filed herewith). 10(xiii)* -- Dominion Resources, Inc. Performance Achievement Plan, effective January 1, 1986, as amended and restated effective February 19, 1988 (Exhibit 10(xxiii), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-2255, incorporated by reference).
58 10(xiv)* -- Dominion Resources, Inc. Executive Supplemental Retirement Plan, effective January 1, 1981 as amended and restated effective October 22, 1988 and as amended and restated June 15, 1990 (Exhibit 10(xxiv), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-2255, incorporated by reference). 10(xv)* -- Dominion Resources, Inc.'s Cash Incentive Plan as adopted December 20, 1991 (Exhibit 10(xxv), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-2255, incorporated by reference). 10(xvi)* -- Employment Continuity Agreement for James T. Rhodes of Virginia Power (Exhibit 10(xxvii), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-2255, incorporated by reference). 10(xvii)* -- Dominion Resources, Inc. Retirement Benefit Funding Plan, effective June 29, 1990 (Exhibit 10(xxviii), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-2255, incorporated by reference). 10(xviii)* -- Dominion Resources, Inc. Retirement Benefit Restoration Plan as adopted effective January 1, 1991 (Exhibit 10(xxix), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-2255, incorporated by reference). 10(xix)* -- Dominion Resources, Inc. Executives' Deferred Compensation Plan, effective January 1, 1994, as amended and restated on January 1, 1997 (filed herewith). 10(xx)* -- Employment Agreement dated April 21, 1995 between Virginia Power and James T. Rhodes (Exhibit 10, Form 10-Qfor the period ended March 31, 1995, incorporated by reference) and an amendment dated September 15, 1995 (Exhibit 10, Form 10-Q for the period ended September 30, 1995, incorporated by reference). 10(xxi) -- Form of an Employment Agreement dated June 23, 1994 between Virginia Power and certain executive officers (filed herewith). 10(xxii) -- Employment Agreement dated September 15, 1995 between Virginia Power and Robert E. Rigsby (filed herewith). 10(xxiii) -- Employment Agreement dated September 15, 1995 between Virginia Power and Edgar M. Roach, Jr. (filed herewith). 10(xxiv) -- Dominion Resources, Inc. Stock Accumulation Plan for Outside Directors, effective April 23, 1996 (filed herewith). 23(i) -- Consent of Hunton & Williams (filed herewith). 23(ii) -- Consent of Jackson & Kelly (filed herewith). 23(iii) -- Consent of Deloitte & Touche LLP (filed herewith). 27 -- Financial Data Schedule (filed herewith).
- --------------- *Indicates management contract or compensatory plan or arrangement (b) Reports on Form 8-K The Company filed a report on Form 8-K, dated February 20, 1997, relating to the sale of $200 million First and Refunding Mortgage Bonds. 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VIRGINIA ELECTRIC AND POWER COMPANY Date: March 24, 1997 By /s/ JOHN B. ADAMS, JR. -------------------------- (John B. Adams, Jr., Chairman of the Board of Directors) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 24, 1997. Signature Title - ------------------------------------- ----------------------------- /s/ JOHN B. ADAMS, JR. - -------------------------------------- Chairman of the Board of Directors and John B. Adams, Jr. Director /s/ JAMES F. BETTS - -------------------------------------- James F. Betts Director /s/ JEAN E. CLARY - -------------------------------------- Jean E. Clary Director /s/ BENJAMIN J. LAMBERT, III - -------------------------------------- Benjamin J. Lambert, III Director /s/ RICHARD L. LEATHERWOOD - -------------------------------------- Richard L. Leatherwood Director /s/ HARVEY L. LINDSAY, JR. - -------------------------------------- Harvey L. Lindsay, Jr. Director /s/ J. T. RHODES - -------------------------------------- President (Chief Executive Officer) and J. T. Rhodes Director /s/ WILLIAM T. ROOS - -------------------------------------- William T. Roos Director - -------------------------------------- Robert H. Spilman Director /s/ WILLIAM G. THOMAS - -------------------------------------- William G. Thomas Director /s/ R. E. RIGSBY - ------------------------------------- R. E. Rigsby Executive Vice President 60 /s/ E. M. ROACH, JR. - ------------------------------------- Senior Vice President-Finance, E. M. Roach, Jr. Regulation and General Counsel (Chief Financial Officer) /s/ M. S. BOLTON, JR. - ------------------------------------- M. S. Bolton, Jr. Controller (Principal Accounting Officer) 61 EX-10 2 EXHIBIT 10(XII) EXHIBIT 10(xii) DOMINION RESOURCES, INC. DIRECTORS' DEFERRED COMPENSATION PLAN As Amended and Restated Effective January 1, 1996 For the Directors of: Dominion Resources, Inc. Virginia Electric and Power Company Dominion Capital, Inc. Dominion Energy, Inc. Dominion Lands, Inc. TABLE OF CONTENTS Section Page 1. PURPOSE........................................................... 1 2. DEFINITIONS....................................................... 1 3. PARTICIPATION..................................................... 4 4. DEFERRAL ELECTION................................................. 4 5. EFFECT OF NO ELECTION............................................. 5 6. DEFERRED CASH BENEFITS............................................ 6 7. DEFERRED STOCK BENEFITS........................................... 6 8. DISTRIBUTION OF DEFERRED BENEFITS................................. 7 9. HARDSHIP DISTRIBUTIONS............................................ 10 10. COMPANY'S OBLIGATION.............................................. 10 11. CONTROL BY PARTICIPANT............................................ 11 12. CLAIMS AGAINST PARTICIPANT'S BENEFITS............................. 11 13. AMENDMENT OR TERMINATION.......................................... 11 14. NOTICES........................................................... 12 15. WAIVER............................................................ 12 16. CONSTRUCTION...................................................... 12 17. CORPORATE AND COMMITTEE ACTIONS AND RESPONSIBILITIES.............. 12 1. PURPOSE. The Dominion Resources, Inc. Director's Deferred Compensation Plan (the "Plan"), is intended to constitute a deferred compensation plan for directors' fees in accordance with Revenue Ruling 71-419, 1971-2 C.B. 220. 2. DEFINITIONS. The following definitions apply to this Plan and to the Deferral Election Forms. (a) Beneficiary or Beneficiaries means a person or persons or other entity designated on a Beneficiary Designation Form by a Participant as allowed in subsection 8(C)to receive Deferred Benefits. If there is no valid designation by the Participant, or if the designated Beneficiary or Beneficiaries fail to survive the Participant or otherwise fail to take the benefit, the Participant's Beneficiary is the first of the following who survives the Participant: a Participant's spouse (the person legally married to the Participant when the Participant dies); the Participant's children in equal shares and the Participant's other surviving issue, per stirpes; the Participant's parents; and the Participant's estate. (b) Beneficiary Designation Form means a form acceptable to the Chairman of the Committee or his designee used by a Participant according to this Plan to name the Participant's Beneficiary or Beneficiaries who will receive Deferred Benefits under this Plan on account of the Participant's death. (c) Board means the board of directors of the Company, according to law and to each entity's governing documents. (d) Committee means the Organization and Compensation Committee of Dominion in the case of a DRI Participant or his Beneficiary, and the Organization and Compensation Committee of Virginia Electric and Power Company, in the case of a Virginia Power Participant or his Beneficiary; provided, however, that all determinations involving the Deferred Stock Account of a Participant who is not an Unrestricted Participant shall be subject to the approval of the Organization and Compensation Committee of Dominion. (e) Company means Dominion Resources, Inc.; Virginia Electric and Power Company; and any of their affiliates that with approval of the board of directors of Dominion Resources, Inc. adopt or have adopted this Plan; any successor business by merger, purchase, or otherwise that maintains the Plan; or any predecessor business or employer that has maintained the Plan. (f) Compensation means a Director's Meeting Fees and Retainer Fees for the Deferral Year. (g) Deferral Election Form means a document governed by the provisions of section 4 of this Plan, including the portion that is the Distribution Election Form and the related Beneficiary Designation Form that applies to all of that Participant's Deferred Benefits under the Plan. -2- (h) Deferral Year means a calendar year for which a Director has an operative Deferral Election Form. (i) Deferred Benefit means either a Deferred Cash Benefit or a Deferred Stock Benefit under the Plan for a Participant who has submitted an operative Deferral Election Form pursuant to section 4 of this Plan. (j) Deferred Cash Account means that bookkeeping record established for each Participant who elects a Deferred Cash Benefit under this Plan. A Deferred Cash Account is established only for purposes of measuring a Deferred Cash Benefit and not to segregate assets or to identify assets that may or must be used to satisfy a Deferred Cash Benefit. A Deferred Cash Account will be credited with the Participant's Compensation deferred as a Deferred Cash Benefit according to a Deferral Election Form and according to section 6 of this Plan. A Deferred Cash Account will be credited periodically with amounts based upon interest rates established by the Committee under subsection 6(b) of this Plan. (k) Deferred Cash Benefit means the Deferred Benefit elected by a Participant under section 4 that results in payments governed by sections 6 and 8 of this Plan. (l) Deferred Stock Account means that bookkeeping record established for each Participant who elects a Deferred Stock Benefit under this Plan. A Deferred Stock Account is established only for purposes of measuring a Deferred Stock Benefit and not to segregate assets or to identify assets that may or must be used to satisfy a Deferred Stock Benefit. A Deferred Stock Account will be credited with the Participant's Compensation deferred as a Deferred Stock Benefit according to a Deferral Election Form and according to section 7 of this Plan. A Deferred Stock Account will be credited periodically with amounts determined by the Committee under subsection 7(b) of this Plan. (m) Deferred Stock Benefit means the Deferred Benefit elected by a Participant under section 4 that results in payments governed by sections 7 and 8 of this Plan. (n) Director means a duly elected or appointed member of the Board who is eligible to participate in this Plan according to criteria which may from time to time be adopted by that Company. (o) Distribution Election Form means that part of a Deferral Election Form used by a Participant according to this Plan to establish the duration of deferral and the frequency of payments of a Deferred Benefit. If a Deferred Benefit has no Distribution Election Form that is operative according to section 4 of this Plan, distribution of that Deferred Benefit is governed by section 8(b) of this Plan. -3- (p) Dominion means Dominion Resources, Inc. (q) DRI Participant means a Participant to the extent that the Participant deferred Compensation under this Plan that was payable by Dominion or another Company that is a nonregulated subsidiary of Dominion. (r) Election Date means the date established by this Plan as the date before which a Director must submit a valid Deferral Election Form to the Committee. For each Deferral Year, the Election Date is December 31 of the preceding calendar year. However, for an individual who becomes a Director during a Deferral Year, the Election Date is the thirtieth day following the date that he becomes a Director. Despite the two preceding sentences, the Committee may set an earlier date as the Election Date for any Deferral Year. (s) Meeting Fees means the portion of a Director's Compensation that is based upon the Director's attendance at Board meetings and meetings of the Company's committees, according to the Company's established rules and procedures for compensating Directors. (t) Participant means, with respect to any Deferral Year, a Director whose Deferral Election Form is operative for that Deferral Year. (u) Plan means the Dominion Resources, Inc. Directors' Deferred Compensation Plan. (v) Retainer Fee means that portion of a Director's Compensation that is fixed and paid without regard to the Director's attendance at meetings. (w) Terminate, Terminating, or Termination, with respect to a Participant, mean cessation of the Participant's relationship with the Company as a Director whether by death, disability or severance for any other reason. Unless the Committee determines otherwise in its sole discretion, Terminate, Terminating, or Termination do not include situations where the Participant continues to be employed by a Company or a Director on the Board of a Company. (x) Unrestricted Participant means a Participant who is not subject to the reporting requirements and other provisions of Section 16 of the Securities Exchange Act of 1934 with respect to Dominion. (y) Virginia Power Participant means a Participant to the extent that the Participant deferred Compensation under this Plan that was payable by Virginia Electric and Power Company. -4- 3. PARTICIPATION. A Member becomes a Participant with respect to a Deferred Benefit by filing a valid Deferral Election Form according to section 4 on or before the Election Date for that Deferral Year, but only if his Deferral Election Form is operative according to section 4. 4. DEFERRAL ELECTION. A deferral election is valid when a Deferral Election Form is completed, signed by the electing Director, and received by the Committee Chairman or the Committee Chairman's delegate. Deferral elections are governed by the provisions of this section. (a) A Participant may elect a Deferred Benefit for any Deferral Year if that person is a Director at the beginning of that Deferral Year or becomes a Director during that Deferral Year. (b) Before each Deferral Year's Election Date, each Director will be provided with a Deferral Election Form and a Beneficiary Designation Form. Under the Deferral Election Form for a single Deferral Year, a Director may elect on or before the Election Date to defer the receipt of all or part of the Director's Retainer Fee (in 10% increments) or the Director's Meeting Fees (in 10% increments), or both for the Deferral Year. Under the Deferral Election Form for a single Deferral Year, a Director may elect on or before the Election Date to defer receipt of all or part of the Director's Retainer Fee (in 10% increments) payable in specified calendar quarters of the Deferral Year or all or part of the Director's Meeting Fees (in 10% increments) payable in specified calendar quarters of the Deferral Year, or both. (c) A Participant's Deferral Election Form for the Participant's Retainer Fee may specify either a Deferred Cash Benefit (in 10% increments of the deferred amount) or a Deferred Stock Benefit (in 10% increments of the deferred amount), or a combination thereof and for the Participant's Meeting Fees may specify a Deferred Cash Benefit (in 10% increments of the amount deferred) or a Deferred Stock Benefit (in 10% increments of the amount deferred), or a combination thereof. (d) If a Participant is a Director for more than one Company, the Participant's Deferral Election Form shall apply to all the Participant's Meeting Fees, Retainer Fees or Compensation (based on the percentages indicated by the Participant on the Deferral Election Form) payable to the Participant as a Director; provided that the Participant may, with the permission of the Committee, complete a separate Deferral Election Form covering such fees payable to the Participant as a Director from each such Company. (e) Except as provided in this subsection and in the situation described in subsection 13(b) of this Plan and subsections 6(C) and 7(c), a Participant may not elect to convert a Deferred Cash Benefit to a Deferred Stock Benefit or to convert a Deferred Stock -5- Benefit to a Deferred Cash Benefit. If a Participant's election of a Deferred Stock Benefit is subject to the contingency described in subsection 13(b) of this Plan, the Participant may file a Deferred Cash Benefit/Deferred Stock Benefit Election Form for the affected Deferral Year (or part thereof) on or before the designated Election Date and elect to convert a Deferred Cash Benefit into a Deferred Stock Benefit as of the effective date of the Plan provision relating to Deferred Stock Benefits, determined under subsection 13(b). (f) Each Distribution Election Form is part of the Deferral Election Form on which it appears or to which it states that it is related. The Committee may allow a Participant to file one Distribution Election Form for all of the Participant's Deferred Cash Benefits, all of the Participant's Deferred Stock Benefits or all of the Participant's Deferred Benefits. The provisions of section 8(b) of this Plan apply to any Deferred Benefit under this Plan if there is no operative Distribution Election Form for that Deferred Benefit. (g) If it does so before the last business day of the Deferral Year, the Committee may reject any Deferral Election Form or any Distribution Election Form or both, and the Committee is not required to state a reason for any rejection. The Committee may modify any Distribution Election Form at any time to the extent necessary to comply with any federal securities laws or regulations. However, the Committee's rejection of any Deferral Election Form or any Distribution Election Form or the Committee's modification of any Distribution Election Form must be based upon action taken without regard to any vote of the Director whose Deferral Election Form or Distribution Election Form is under consideration, and the Committee's rejections must be made on a uniform basis with respect to similarly situated Directors. If the Committee rejects a Deferral Election Form, the Director must be paid the amounts that the Director would then have been entitled to receive if the Director had not submitted the rejected Deferral Election Form. (h) A Director may not revoke a Deferral Election Form or a Distribution Election Form after the Deferral Year begins. Any revocation before the beginning of the Deferral Year is the same as a failure to submit a Deferral Election Form or a Distribution Election Form. Any writing signed by a Participant expressing an intention to revoke a Deferral Election Form or a related Distribution Election Form and delivered to a member of the Committee before the close of business on the relevant Election Date is a revocation. 5. EFFECT OF NO ELECTION. A Director who has not submitted a valid Deferral Election Form to the Committee on or before the relevant Election Date may not defer any part of the Director's Compensation for the Deferral Year under this Plan. The Deferred Benefit of a Director who submits a valid Deferral Election Form but fails to submit a valid Distribution -6- Election Form for that Deferred Benefit before the relevant Election Date or who otherwise has no valid Distribution Election Form for that Deferred Benefit is governed by section 8(b). 6. DEFERRED CASH BENEFITS. (a) Deferred Cash Benefits will be set up in a Deferred Cash Account for each Participant and credited with interest at rates determined by the Committee. Deferred Cash Benefits are credited to the applicable Participant's Deferred Cash Account as of the day they would have been paid but for the deferral or, in the case of an Unrestricted Participant's transfer of an amount from the Unrestricted Participant's Deferred Stock Account pursuant to subsection 7(c), the date that the Unrestricted Participant's written transfer direction is received by the Committee or its designate. Interest is credited on the first day of each month based on the Deferred Cash Account balance at the end of the preceding day. (b) Interest will be credited to Deferred Cash Accounts based on average three-month United States Treasury Bill rates (equivalent yield, not discount yield) as published by the Federal Reserve Board. The applicable rate for each month will be determined on the last business day of the previous month. Those interest rates will apply prospectively for all current and future Deferred Cash Account balances until the basis on which interest is determined is changed by the Committee. Interest credits are accrued monthly on accumulated Deferred Cash Accounts. Interest is accrued through the end of the month preceding the month of distribution of a Deferred Cash Benefit. (c) If a Participant elects under the second sentence of subsection 4(e) of this Plan to convert a Deferred Cash Benefit into a Deferred Stock Benefit, the Participant's Deferred Cash Account will be converted to a Deferred Stock Account governed by section 7 of this Plan as of the date the Plan's provisions relating to Deferred Stock Benefits become effective for purposes of the Participant's election. In addition, once during each calendar year an Unrestricted Participant may transfer all or part (in 10% increments) of the Unrestricted Participant's Deferred Cash Account to the Unrestricted Participant's Deferred Stock Account. 7. DEFERRED STOCK BENEFITS. Subject to subsection 13(b) of this Plan, electing Participants' Deferred Stock Benefits are governed by this section. (a) Deferred Stock Benefits will be set up in a Deferred Stock Account for each electing Participant and credited with earnings at rates determined by the Committee. A Deferred Stock Benefit attributable to a Retainer Fee is credited to the Participant's Deferred Stock Account on the last day of each calendar quarter of the Deferral Year. A Deferred Stock Benefit attributable to a Meeting Fee is credited to the Participant's Deferred Stock Account on the last day of the month in which a meeting occurs. A Deferred Stock Benefit attributable to an Unrestricted Participant's transfer of an -7- amount from the Unrestricted Participant's Deferred Cash Account to the Unrestricted Participant's Deferred Stock Account pursuant to subsection 7(c), the transferred amount is credited to the Participant's Deferred Stock Account on the date that the Unrestricted Participant's written transfer direction is received by the Committee or its designate. (b) Rates established by the Committee as the basis for additional credits to Deferred Stock Accounts will be variable rates equal to the value of dividends paid on Dominion common stock when the additional credit is made. The value of a Deferred Stock Account at any relevant time equals the value of the shares of Dominion common stock as if the Compensation deferred by the Participant under the Plan and any additional credits under this subsection had been used to purchase Dominion common stock on the date those amounts were credited to the Deferred Stock Account. Additional credits are credited on the last day of each calendar quarter on accumulated Deferred Stock Accounts. Additional credits are accrued through the end of the year preceding the year of distribution of a Deferred Stock Benefit. (c) Once during each calendar year an Unrestricted Participant may transfer all or part (in 10% increments) of the Unrestricted Participant's Deferred Stock Account to the Unrestricted Participant's Deferred Cash Account. (d) If a trust is established under subsections 10(b) and 13(C) of this Plan, an electing Participant may instruct the trustee under the governing trust agreement how to vote shares of Dominion common stock allocated to that Participant's separate account under the trust according to this subsection and provisions of the governing trust agreement. Before each annual or special meeting of the Dominion shareholders, the trustee under the governing trust agreement must furnish each Participant with a copy of the proxy solicitation and other relevant material for the meeting as furnished to the trustee by Dominion, and a form addressed to the trustee requesting the Participant's confidential instructions on how to vote shares of Dominion common stock allocated to that Participant's account as of the valuation date established under the governing trust agreement preceding the record date. Upon receipt of those instructions, the trustee under the governing trust agreement must vote such stock as instructed. 8. DISTRIBUTION OF DEFERRED BENEFITS. (a) According to a Participant's Distribution Election Form, but subject to Plan subsection 4(g), a Deferred Cash Benefit must be distributed in cash. According to a Participant's Distribution Election Form, but subject to Plan subsection 4(g), a Deferred Stock Benefit must be distributed in shares of Dominion common stock equal in value to the value of the Participant's Deferred Stock Account on the last day of the month preceding the month of distribution. However, cash must be paid in lieu of fractional shares of Dominion common stock otherwise distributable. According -8- to the procedures of Plan subsection 4(g), the Committee may modify any Participant's Distribution Election Form to prevent any distribution of Dominion common stock to pay a Deferred Stock Benefit if the total number of shares of such stock distributed under this Plan after such distribution would exceed 100,000 shares times the number of Participants in the Plan on the relevant date. (b) Except for distributions triggered by a Participant's disability, Deferred Benefits will be paid in a lump sum unless the Participant's Distribution Election Form specifies installment payments over 10 years. For a Deferred Cash Benefit payable in installments, interest credits under Plan subsection 6(b) continue to accrue on the unpaid balance of a Deferred Cash Account. For a Deferred Stock Benefit payable in installments, additional credits under Plan subsection 7(b) do not accrue on the unpaid balance of a Deferred Stock Account after the year preceding the year in which payments begin. Instead, any additional credits that would have been credited to a Deferred Stock Account are payable to the applicable Participant in cash on the date that they would otherwise have been credited. If a Participant Terminates as a result of disability, Deferred Benefits will be paid to such Participant in installment payments over a period of 10 years commencing on the date the Participant's disability is certified by the Committee unless the Committee, in its sole discretion, approves a longer or shorter payment period. If, after the Participant's Termination as a result of disability, such Participant recovers before the balance of the Participant's Deferred Cash and Deferred Stock Accounts under the Plan are exhausted, the Participant's distributions will be discontinued and any remaining Deferred Benefits under the Plan will be governed by the provisions of this section and the Participant's Distribution Election Forms. Unless otherwise specified in a Participant's Distribution Election Form, any lump sum payment will be paid or installment payments will begin to be paid on the February 15 of the year after the Participant's sixty-fifth birthday or on the February 15 of the year after the Participant's Termination, if earlier. For distributions that would automatically be caused under the preceding sentence by a Participant's Termination (other than by death or disability) or for distributions that would otherwise automatically begin because a Participant reaches age sixty-five, the Participant may elect on his Distribution Election Form that payments are to begin -9- (i) on the February 15 following the Participant's Termination, without regard to the Participant's age; or (ii) on the February 15 following the Participant's Termination and the Participant's attainment of a specified age; or (iii) even if the Participant does not Terminate, on the February 15 following attainment of a specified age. For purposes of these distribution election alternatives, the specified age must be not less than the Participant's age two years from the Election Date pertaining to the applicable Deferral Year and not greater than the age at which there are no earnings limitations in order to receive full social security benefits (currently age 70). With the consent of the Committee (which shall be given or withheld in its sole discretion), an Unrestricted Participant may amend the Unrestricted Participant's Distribution Election Form to accelerate or postpone the commencement of benefits if (I) in the case of a postponed distribution, the amendment is approved by the Committee before the calendar year in which benefit payments are scheduled to begin and (ii) in the case of a postponed or accelerated distribution, the amended payment date conforms to the requirements of the Plan. (c) Deferred Benefits may not be assigned by a Participant or Beneficiary. A Participant may use only one Beneficiary Designation Form to designate one or more Beneficiaries for all of the Participant's Deferred Benefits under the Plan; such designations are revocable. Each Beneficiary will receive the Beneficiary's portion of the Participant's Deferred Cash Account and Deferred Stock Account on February 15 of the year following the Participant's death unless the Beneficiary's request for accelerated payment is approved at the Committee's discretion under section 10 of this Plan or unless the Beneficiary's request for a different distribution schedule is received before distributions begin and is approved at the Committee's discretion. The Committee may insist that multiple Beneficiaries agree upon a single distribution method. (d) Any Dominion common stock distributed pursuant to the Plan shall have been acquired by an "agent independent of the issuer" (i.e., the Company) within the meaning of 17 CFR 240.10b-18, as such regulation is in effect on April 19, 1985. Such acquisitions may be effected in all cases on the open market or, in the event that the Company makes available newly issued common stock, directly from the Company, provided that such common stock has been registered with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or any successor thereto at the time such purchase is made or an exemption from such registration requirement is, in the opinion of counsel to the Company, available. -10- 9. HARDSHIP DISTRIBUTIONS. (a) At its sole discretion and at the request of a Participant before or after the Participant's Termination, or at the request of any of the Participant's Beneficiaries after the Participant's death, the Committee may accelerate and pay all or part of any amount attributable to a Participant's Deferred Benefits under this Plan. Except as provided in Plan subsection 8(b), accelerated distributions may be allowed only in the event of a financial emergency beyond the Participant's or Beneficiary's control and only if disallowance of a distribution would create a severe hardship for the Participant or Beneficiary. An accelerated distribution must be limited to the amount determined by the Committee to be necessary to satisfy the financial emergency. (b) For purposes of an accelerated distribution of a Deferred Stock Benefit under this section, the Deferred Stock Benefit's value is determined by the value of the Deferred Stock Account at the time of the distribution. (c) Only cash distributions are permitted under this section. Distributions under this section must first be made from the Participant's Deferred Cash Account before accelerating the distribution of any amount attributable to a Deferred Stock Benefit. (d) A distribution under this section is in lieu of that portion of the Deferred Benefit that would have been paid otherwise. A Deferred Cash Benefit is adjusted for a distribution under this section by reducing the Participant's Deferred Cash Account balance by the amount of the distribution. A Deferred Stock Benefit is adjusted for a distribution under this section by reducing the value of the Participant's Deferred Stock Account by the amount of the distribution. 10. COMPANY'S OBLIGATION. (a) The Plan is unfunded. A Deferred Benefit is at all times a mere contractual obligation of the Company. A Participant and the Participant's Beneficiaries have no right, title, or interest in the Deferred Benefits or any claim against them. Except according to Plan subsections 10(b) and 13(c), the Company will not segregate any funds or assets for Deferred Benefits nor issue any notes or security for the payment of any Deferred Benefit. (b) Subject to Plan subsection 13(c), the Company may establish a grantor trust and transfer to that trust shares of Dominion common stock or other assets. Trust assets must be invested primarily in Dominion common stock for the purpose of measuring the value of Deferred Stock Accounts under the Plan to be distributed as Deferred Stock Benefits in the form of Dominion common stock, plus cash in lieu of fractional shares. The governing trust agreement must require a separate account to be established for each -11- electing Participant. The governing trust agreement must also require that all Company assets held in trust remain at all times subject to the Company's judgment creditors. 11. CONTROL BY PARTICIPANT. A Participant has no control over Deferred Benefits except according to the Participant's Deferral Election Forms, Distribution Election Forms, and Beneficiary Designation Forms. 12. CLAIMS AGAINST PARTICIPANT'S BENEFITS. A Deferred Cash Account and a Deferred Stock Account relating to a Participant under this Plan are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so is void. Deferred Benefits are not subject to attachment or legal process for a Participant's debts or other obligations. Nothing contained in this Plan gives any Participant any interest, lien, or claim against any specific asset of the Company. A Participant or the Participant's Beneficiary has no rights other than as a general creditor. 13. AMENDMENT OR TERMINATION. Except as otherwise provided in this section, this Plan may be altered, amended, suspended, or terminated at any time as to Dominion, Virginia Electric and Power Company, or any Company that has adopted the Plan (pursuant to Plan subsection 2(e)) by that entity's Board. (a) The Plan shall be operated according to its terms (as amended periodically) and as directed by the Committee until it is effective. Once the Plan is effective, the Board of Dominion, Virginia Electric and Power Company, or any Company that has adopted the Plan (pursuant to Plan subsection 2(e)) may alter, amend, suspend, or terminate this Plan at any time as it relates to its Directors. However, except for a termination of the Plan caused by the determination of the applicable Board that the laws upon which the Plan is based have changed in a manner that negates the Plan's objectives, that Board may not alter, amend, suspend, or terminate this Plan without the majority consent of all Directors who are Participants if that action would result either in a distribution of all Deferred Benefits in any manner other than as provided in this Plan or that would result in immediate taxation of Deferred Benefits to Participants. Notwithstanding the preceding sentence, if any amendment to the Plan, subsequent to the date the Plan becomes effective, adversely affects Deferred Benefits elected hereunder, after the effective date of any such amendment, and the Internal Revenue Service declines to rule favorably on any such amendment or to rule favorably only if the applicable Board makes amendments to the Plan not acceptable to such Board, the Board of each Company, in its sole discretion, may accelerate the distribution of part or all amounts attributable to affected Deferred Benefits due its Directors hereunder. (b) This subsection applies if shareholder approval is required for any or all elections by a Company's participating Directors of Deferred Stock Benefits under the Plan. Despite Plan subsection 13(a), Plan subsection 10(b) and all provisions of this Plan relating -12- to Deferred Stock Benefits as to a designated Participant are effective only on the first day of the month following the month in which (i) a sufficient majority of the appropriate entity's shareholders, determined under applicable federal and state laws, approves those Plan provisions as to that designated Participant; or (ii) counsel selected by the Company determines that such approval is unnecessary. (c) The Company may only contribute to a trustee under a trust agreement by transferring cash or assets with a fair market value equal to the value (determined at the nearest month end) of the related Deferred Stock Accounts if the trust agreement contains provisions sufficient (in the opinion of either the Internal Revenue Service or counsel selected by the Company) to allow the Participants to defer income taxation on Deferred Stock Benefits until they are distributed according to this Plan and provisions sufficient (in the opinion of counsel selected by the Company) to exempt the Plan and the trust from sections 10(b) and 16(b) of the Securities Exchange Act of 1934 and applicable rules and regulations. If the Internal Revenue Service refuses to give the required opinion on such a trust, and if counsel selected by the Company is the opinion that no such trust can be created, Plan subsection 10(b) and all provisions of this Plan relating to Deferred Stock Benefits will not become effective. 14. NOTICES. Notices and elections under this Plan must be in writing. A notice or election is deemed delivered if it is delivered personally or if it is mailed by registered or certified mail to the person at such person's last known business address. 15. WAIVER. The waiver of a breach of any provision in this Plan does not operate as and may not be construed as a waiver of any later breach. 16. CONSTRUCTION. This Plan is created, adopted, and maintained according to the laws of Virginia (except its choice-of-law rules). It is governed by those laws in all respects. Headings and captions are only for convenience; they do not have substantive meaning. If a provision of this Plan is not valid or not enforceable, that fact in no way affects the validity or enforceability of any other provision. Use of the one gender includes all, and the singular and plural include each other. 17. CORPORATE AND COMMITTEE ACTIONS AND RESPONSIBILITIES. Each Company shall be solely responsible for the Plan as it relates to its Directors. Each Committee has delegated certain administrative determinations under the Plan that do not affect individuals' participation or awards. Notwithstanding any other provision of this Plan, the issuance of Dominion common stock in settlement of a Deferred Stock Benefit shall be subject to the approval of Dominion's Board which approval is evidenced by its adoption of this Plan. -13- EX-10 3 EXHIBIT 10(XIX) EXHIBIT 10(xix) DOMINION RESOURCES, INC. EXECUTIVES' DEFERRED COMPENSATION PLAN Effective January 1, 1994 Amended and Restated as of January 1, 1997 For the Executives of: Dominion Resources, Inc. Virginia Electric and Power Company TABLE OF CONTENTS Section Page 1. DEFINITIONS...........................................................1 2. PURPOSE...............................................................3 3. PARTICIPATION.........................................................3 4. DEFERRAL ELECTION.....................................................3 5. EFFECT OF NO ELECTION.................................................4 6. INVESTMENT FUNDS......................................................4 7. DRI STOCK FUND........................................................5 8. DISTRIBUTIONS.........................................................6 9. HARDSHIP DISTRIBUTIONS................................................7 10. COMPANY'S OBLIGATION..................................................8 11. CONTROL BY PARTICIPANT................................................8 12. CLAIMS AGAINST PARTICIPANT'S DEFERRED BENEFITS........................8 13. AMENDMENT OR TERMINATION..............................................8 14. NOTICES...............................................................9 15. WAIVER................................................................9 16. CONSTRUCTION..........................................................9 i 1. DEFINITIONS. The following definitions apply to this Plan and to the Deferral Election Forms. (a) Beneficiary or Beneficiaries means a person or persons or other entity that a Participant designates on a Beneficiary Designation Form to receive Deferred Benefit payments pursuant to Plan Section 8(c). If a Participant does not execute a valid Beneficiary Designation Form, or if the designated Beneficiary or Beneficiaries fail to survive the Participant or otherwise fail to take the Deferred Benefit, the Participant's Beneficiary or Beneficiaries shall be the first of the following persons who survive the Participant: a Participant's spouse (the person legally married to the Participant when the Participant dies); the Participant's children in equal shares and the Participant's estate. (b) Beneficiary Designation Form means the form that a Participant uses to name his Beneficiary or Beneficiaries. (c) Company means Dominion Resources, Inc., Virginia Electric and Power Company, and any of their affiliates that, with approval of the DRI Board of Directors, adopt or have adopted this Plan; any successor business by merger, purchase, or otherwise that maintains the Plan. (d) Company Stock means the common stock, no par value, of Dominion Resources, Inc. (e) Compensation means a Participant's base salary, cash incentive pay and other cash compensation from the Company. (f) Deferral Election Form means the form that a Participant uses to elect to receive a Deferred Benefit pursuant to Plan Section 4. A Participant's Distribution Election Form and Beneficiary Designation Form are part of the Participant's Deferral Election Form. (g) Deferral Year means a calendar year for which an Executive's Compensation is reduced pursuant to a valid Deferral Election Form. (h) Deferred Account means a bookkeeping record established for each Participant who is eligible to receive a Deferred Benefit. A Deferred Account shall be established only for purposes of measuring a Deferred Benefit and not to segregate assets or to identify assets that may be used to satisfy a Deferred Benefit. A Deferred Account shall be credited with that amount of a Participant's Compensation deferred as a Deferred Benefit according to a Participant's Deferral Election Form. A Deferred Account also shall be credited periodically with deemed investment gain or loss under Plan Section 6(b). 1 (i) Deferred Benefit means the benefit available to an Deferred who has executed a valid Deferral Election Form. (j) Distribution Election Form means a form which a Participant uses to establish the duration of the deferral of Compensation and the frequency of payments of a Deferred Benefit. If a Participant does not execute a valid Distribution Election Form, the distribution of a Deferred Benefit shall be governed by Plan Section 8. (k) DRI means Dominion Resources, Inc. (l) DRI Committee means the Organization and Compensation Committee or DRI's Board. (m) DRI Stock Fund means an Investment Fund in which the deemed investment is Company Stock. (n) Election Date means the date by which an Executive must submit a valid Deferral Election Form. For each Deferral Year, the Election Date shall be the preceding December 31. However, if an individual becomes an Executive during a Deferral Year, his Election Date shall be a date that is within thirty days after such individual becomes an Executive. Notwithstanding the preceding sentences, the Committee may set an earlier Election Date for any Deferral Year. (o) Executive means an individual who is employed by the Company and who is a "highly-compensated employee" or a member of a "select group of management" as those terms are used under Title I of the Employee Retirement Income Security Act of 1974, as amended and who the DRI Committee (in the case of an individual who is employed by DRI or one of its nonutility subsidiaries) or the Virginia Power Committee (in the case of an individual employed by Virginia Power), designates as being eligible to participate in this Plan. (p) Investment Fund means one or more deemed investment alternatives made available for election by Participants for a Deferred Account. The DRI Stock Fund shall be one of the Investment Funds. (q) Participant, with respect to any Deferral Year, means an Executive who has executed a valid Deferral Election Form for that Deferral Year. (r) Plan means the Dominion Resources, Inc. Executives' Deferred Compensation Plan. 2 (s) Stock Unit means a hypothetical share of Company Stock. Each Stock Unit credited to a Deferred Account shall be deemed to have the same value, from time to time, as a share of Company Stock. Notwithstanding the foregoing, Stock Units shall not confer upon Participants any of the rights associated with common stock, including, without limitation, the right to vote or to receive distributions. Stock Units may not be sold, assigned, transferred, disposed of, pledged, hypothecated or otherwise encumbered. (t) Terminate, Terminating, or Termination, with respect to a Participant, mean the cessation of his employment with the Company on account of death, disability, severance or any other reason. (u) Virginia Power means Virginia Electric and Power Company. (v) Virginia Power Committee means the Organization and Compensation Committee of Virginia Power's Board of Directors. 2. PURPOSE. The Plan is intended to permit Executives to defer all or a portion of their Compensation. 3. PARTICIPATION. The DRI Committee shall select the DRI Executives who are eligible to participate in the Plan. The Virginia Power Committee shall select the Virginia Power Executives who are eligible to participate in the Plan. An Executive becomes a Participant for any deferral Year by filing a valid Deferral Election Form according to Plan Section 4 on or before the Election Date for that Deferral Year. 4. DEFERRAL ELECTION. A deferral election shall be valid when the Deferral Election Form is completed, signed by the electing Executive, and received by DRI's Corporate Secretary on or before the Election Date for that Deferral Year. The following provisions apply to deferral elections. (a) A Participant may elect a Deferred Benefit for any Deferral Year if he is an Executive at the beginning of that Deferral Year or becomes an Executive during that Deferral Year. (b) Before each Deferral Year's Election Date, each Executive shall be provided with a Deferral Election Form. Using the Deferral Election Form, an Executive may elect on or before the Election Date to defer the receipt of all or part of his Compensation for the Deferral Year. An Executive may not defer more than $1,000,000 of Compensation for any Deferral Year. (c) An Executive must complete an Investment Election Form for all amounts deferred from his Compensation. The Compensation deferred under a Deferral Election Form 3 shall be allocated among available Investment Funds in 10% multiples or such other multiples as are determined by the DRI Committee and Virginia Power Committee. (d) An Executive must complete a Distribution Election Form for the distribution of the Executive's Deferral Account. (e) If he does so before the last business day of the Deferral Year, DRI's Corporate Secretary may reject any Deferral Election Form or any Distribution Election Form or both that does not conform to the provisions of the Plan. DRI's Corporate Secretary may modify any Distribution Election Form at any time to the extent necessary to comply with any federal securities laws or regulations. DRI's Corporate Secretary's rejection or modification must be made on a uniform basis with respect to similarly-situated Executives. If DRI's Corporate Secretary rejects a Deferral Election Form, the Executive shall be paid the amounts he would have been entitled to receive if the Executive had not submitted the rejected Deferral Election Form. (f) An Executive may not revoke a Deferral Election Form or a Distribution Election Form after the Deferral Year begins. Any revocation before the beginning of the Deferral Year has the same effect as a failure to submit a Deferral Election Form or a Distribution Election Form. Any writing signed by an Executive expressing an intention to revoke his Deferral Election Form and delivered to DRI's corporate Secretary before the close of business on the relevant Election Date shall be a revocation. 5. EFFECT OF NO ELECTION. An Executive who has not submitted a valid Deferral Election Form to DRI's Corporate Secretary on or before the relevant Election Date may not defer any part of his Compensation for the Deferral Year. The Deferred Benefit of an Executive who submits a valid Deferral Election Form but fails to submit a valid Distribution Election Form (either as to the form or commencement of payment) before the relevant Election Date shall be distributed in a lump sum on the February 15 following his Termination. 6. INVESTMENT FUNDS. (a) Each Participant shall have the right to direct the deemed investment of his Deferral Account among the Investment Funds. The number and type of Investment Funds that will be available for investment in any Plan Year shall be determined by the DRI Committee. (b) Deferred Benefits shall be credited to an Investment Fund as of the last day of the month in which the deferred Compensation would have been paid. A separate bookkeeping account shall be established for each Participant who has directed a deemed investment in an Investment Fund. Deemed transfers between Investment 4 Funds in the Participant's account shall be charged and credited as the case may be to each Investment Fund account. The Investment Fund account shall be charged or credited with net earnings, gains, losses and expenses, as well as any appreciation or depreciation in market value during each Plan Year for the deemed investment in the Investment Fund. (c) Pursuant to procedures established by the DRI Committee uniformly applied, Participants may direct transfer of deemed investments among Investment Funds at least once in each Deferral Year. 7. DRI STOCK FUND. The following provisions apply to the DRI Stock Fund. The DRI Stock Fund in a Participant's Deferred Account shall be credited with Stock Units equal to the number of whole and fractional shares of Company Stock that a Participant could have purchased with amounts deferred from his Compensation based on the closing price of Company Stock on the New York Stock Exchange on the last trading day of the month in which the deferred Compensation would have been paid. The value of the DRI Stock Fund on any date shall be the value of the Stock Units (whole and fractional shares) deemed credited to the account based on the immediately preceding closing price of Company Stock on the New York Stock Exchange. (a) The Stock Units credited to each Participant's DRI Stock Fund account shall be credited with hypothetical cash dividends equal to the cash dividends that are declared and paid with respect to Company Stock. The Company shall determine as of each record date the amount of cash dividends to be paid with respect to a share of Company Stock, and on the payment date of such dividend shall credit an equal amount of hypothetical cash dividends to each Stock Unit credited to a DRI Stock Fund account. The total hypothetical cash dividends credited to all Stock Units shall then be converted into Stock Units by dividing such hypothetical cash dividends by the average of the high and low trading prices of a share of Company Stock, as reported in The Wall Street Journal for the last trading day before the day the Company pays dividends with respect to Company Stock. (b) The Stock Units credited to a DRI Stock Fund account shall be credited to reflect any distribution with respect to Company Stock other than cash dividends or stock dividends. The Company shall determine as of each record date the amount of the distribution to be paid with respect to a share of Company Stock, and on the payment date of such distribution shall credit an equal amount of hypothetical distribution to each Stock Unit. The total hypothetical distribution credited to all Stock Units shall then be converted into a hypothetical cash amount based on the market value of such distribution as determined by the DRI Committee. The hypothetical cash amount shall then be converted into Stock Units by dividing such hypothetical cash amount by the closing trading price of a share of Company Stock, 5 as reported in The Wall Street Journal for the last trading day before the day the Company makes the distribution with respect to Company Stock. 8. DISTRIBUTIONS. (a) All Deferred Benefits, less withholding for applicable income and employment taxes, shall be paid in cash on the date specified in the Participant's Distribution Election Form (but subject to Plan Section 4(f)). Except in the event of Termination, a Participant may only receive a distribution on a date which is at least six months after the date on which his most recent Deferral Election Form is valid. (b) Except for distributions triggered by a Participant's disability, Deferred Benefits shall be paid in a lump sum unless the Participant's Distribution Election Form specifies annual installment payments over a period of up to ten years. Installment payments will be made in approximately equal amounts during each year of the installment period. For a Deferred Benefit payable in installments, the unpaid balance of a Deferred Account shall continue to be maintained in Investment Funds. If a Participant Terminates as a result of his disability, begins to receive Deferred Benefits and thereafter recovers before the balance of his Deferred Account is exhausted, distributions shall cease and any remaining Deferred Benefits under the Plan shall be governed by this Plan Section 8 and his Distribution Election Form. Unless otherwise specified in a Participant's Distribution Election Form, any lump sum payment shall be paid or installment payments shall begin on February 15 of the year after the Participant's Termination. For distributions that would automatically begin because of a Participant's Termination (other than by death), the Participant may elect on his Distribution Election Form to begin payments (i) on the February 15 following his Termination, without regard to his age; or (ii) on the February 15 following his Termination and his attainment of a specified age; (iii) even if the Participant does not Terminate, on the February 15 following a specified age. However, except in the event of payments on account of Termination, no Participant may elect to receive payments beginning sooner than six months after the date on which his most recent Deferral Election Form is valid. (c) Notwithstanding any other provision of this Plan or a Participant's Distribution Election Form, the DRI Committee (in the case of an individual employed by DRI or one of its nonutility subsidiaries) or the Virginia Power Committee (in the case of an individual employed by Virginia Power) in its sole discretion may postpone the distribution of all or part of a Deferred Benefit to the extent that the payment would not be deductible under Section 162(m) of the Internal Revenue Code of 1986, as amended (the Code) or any successor thereto. A Deferred Benefit distribution that 6 is postponed pursuant to the preceding sentence shall be paid as soon as it is possible to do so within the deduction limitations of Section 162(m) of the Code. (d) A Participant or Beneficiary may not assign Deferred Benefits. A Participant may use only one Beneficiary Designation Form to designate one or more Beneficiaries for all of his Deferred Benefits under the Plan. Such designations are revocable. Each Beneficiary shall receive his portion of the Participant's Deferred Account and Deferred Stock Account on February 15 of the year following the Participant's death. However, the DRI Committee (in the case of an individual who is employed by DRI or one of its nonutility subsidiaries) or the Virginia Power Committee (in the case of an individual employed by Virginia Power), at its discretion, may approve a Beneficiary's request for accelerated payment under Plan Section 9. The DRI Committee (in the case of an individual who is employed by DRI or one of its nonutility subsidiaries) or the Virginia Power Committee (in the case of an individual employed by Virginia Power) may insist that multiple Beneficiaries agree upon a single distribution method. 9. HARDSHIP DISTRIBUTIONS. (a) At its sole discretion and at the request of a Participant before or after his Termination, or at the request of any of the Participant's Beneficiaries after the Participant's death, the DRI Committee (in the case of an individual who is employed by DRI or one of its nonutility subsidiaries) or the Virginia Power Committee (in the case of an individual employed by Virginia Power) may accelerate and pay all or part of any amount attributable to a Participant's Deferred Benefits. The DRI Committee (in the case of an individual who is employed by DRI or one of its nonutility subsidiaries) or the Virginia Power Committee (in the case of an individual who is employed by Virginia Power) may accelerate distributions only in the event of a financial emergency beyond the Participant's or Beneficiary's control and only if disallowance of a distribution request would create a severe hardship for the Participant or Beneficiary. An accelerated distribution under this Plan Section 9 shall be limited to the amount necessary to satisfy the financial emergency. (b) For purposes of an accelerated distribution of a Deferred Benefit, the Investment Funds in the Participant's Deferred Account value shall be determined by the value of the Investment Funds on the last day of the month prior to the month of distribution. (c) Distributions under this Section shall be made in cash, shall made proportionately from all of the Investment Funds in the Participant's Deferred Account first, and shall be limited to amounts attributable to Compensation deferred under a Deferral Election Form that was effective at least six months before the distribution. 7 (d) A distribution under this section shall be in lieu of that portion of a Participant's Deferred Benefit that would have been paid otherwise. A Deferred Benefit shall be adjusted by reducing the Participant's Deferred Account balance by the amount of the distribution. 10. COMPANY'S OBLIGATION. The Plan shall be unfunded. The Company shall not be required to segregate any assets that at any time may represent a Deferred Benefit. Any liability of the Company to a Participant or Beneficiary under this Plan shall be based solely on any contractual obligations that may be created pursuant to this Plan. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company. 11. CONTROL BY PARTICIPANT. A Participant shall have no control over Deferred Benefits except according to his Deferral Election Forms, his Distribution Election Forms and his Beneficiary Designation Form. 12. CLAIMS AGAINST PARTICIPANT'S DEFERRED BENEFITS. A Deferred Account shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so shall be void. A Deferred Benefit shall not be subject to attachment or legal process for a Participant's debts or other obligations. Nothing contained in this Plan shall give any Participant any interest, lien, or claim against any specific asset of the Company. A Participant or his Beneficiary shall have no rights other than as a general creditor of the Company. 13. AMENDMENT OR TERMINATION. Except as otherwise provided, this Plan may be altered, amended, suspended, or terminated at any time as to DRI Participants by DRI's Board of Directors. DRI's Board of Directors may not alter, amend, suspend, or terminate this Plan as to any DRI Participant without the consent of that Participant if such action would result either in (i) a distribution of the Participant's Deferred Benefit in any manner not provided in the Plan or (ii) immediate taxation of a Deferred Benefit to a Participant. Notwithstanding the preceding sentence, if any amendment to the Plan after the Plan's effective date adversely affects a Deferred Benefit of a DRI Participant and the Internal Revenue Service declines to rule favorably on the amendment, DRI's Board of Directors, in its sole discretion, may accelerate the distribution of any amounts attributable to an affected Deferred Benefit. Except as otherwise provided, this Plan may be altered, amended, suspended, or terminated at any time as to Virginia Power Participants by Virginia Power's Board of Directors. Virginia Power's Board of Directors may not alter, amend, suspend, or terminate this Plan as to any Virginia Power Participant without the consent of that Participant if such action would result either in (i) a distribution of the Participant's Deferred Benefit in any manner not provided in the Plan or (ii) immediate taxation of a Deferred Benefit to a Participant. Notwithstanding the preceding sentence, if any amendment to the Plan after the Plan's effective date adversely affects a Deferred Benefit of a Virginia Power Participant and the Internal Revenue Service declines to rule favorably on the amendment, 8 Virginia Power's Board of Directors, in its sole discretion, may accelerate the distribution of any amounts attributable to an affected Deferred Benefit. 14. NOTICES. All notices or election required under the Plan must be in writing. A notice or election shall be deemed delivered if it is delivered personally or sent registered or certified mail to the person at his last known business address. 15. WAIVER. The waiver of a breach of any provision in this Plan does not operate as and may not be construed as a waiver of any later breach. 16. CONSTRUCTION. This Plan shall be adopted and maintained according to the laws of the Commonwealth of Virginia (except its choice-of-law rules). Headings and captions are only for convenience; they do not have substantive meaning. If a provision of this Plan is not valid or enforceable, the validity or enforceability of any other provision shall not be affected. Use of one gender includes all, and the singular and plural include each other. IN WITNESS WHEREOF, this instrument has been executed this ____ day of _____________, 1996. DOMINION RESOURCES, INC. By_______________________________________ Linwood R. Robertson Senior Vice President and Chief Financial Officer VIRGINIA ELECTRIC AND POWER COMPANY By_______________________________________ T. J. O'Neil Vice President, Human Resources 9 EX-10 4 EXHIBIT 10(XXI) Exhibit 10(xxi) June 23, 1994 Dear _______________: A Special Committee of the Board of Directors of Virginia Electric and Power Company (the Company) was established on Monday, June 20, to act on behalf of the Board in matters relating to the recent Order of the State Corporation Commission calling for an investigation of the relationship between Dominion Resources, Inc. and the Company. One of the matters that the Special Committee addressed was the importance of preserving the stability and continuity of the senior management personnel of the Company. The Board wants the officers of the Company to remain in place and to carry out their assigned jobs to the best of their abilities. To that end, the Special Committee has approved a resolution intended to promote your continuing employment relationship with the Company. The resolution provides that, if at any time prior to June 21, 1997, your employment as an officer of the Company should be terminated for any reason other than cause (after a good faith determination by the President of the Company or the Board of Directors that such cause exists), then the Company will pay to you the amount (as detailed in Attachment A) that you would have otherwise received in base salary and incentive compensation through June 21, 1997, as if you had remained employed until that date. In addition, the Company will pay to you a special severance benefit equal to (i) your then annual base salary, or at your election (ii) the retirement or other severance benefits that you would have been eligible to receive as a participant in the 1994 Early Retirement Program. If you continue as an employee of the Company until June 21, 1997, you shall be entitled to receive on the date you retire or leave the employment of the Company for any reason after June 21, 1997, a special severance benefit equal to (i) your then annual base salary, or at your election (ii) the retirement and other severance benefits that you would have been eligible to receive as a participant in the 1994 Early Retirement Program. This special severance benefit shall be paid in addition to and shall not diminish any rights that you may have based on your individual employment agreement or any other benefits that you may be entitled to receive under the benefit plans of Dominion Resources, Inc. or the Company. Please acknowledge by signing a copy of this letter and returning it to me. We will then make this document a part of your permanent file. If you have any questions, please let me know. Sincerely, - --------------- J.T. Rhodes Attachment Acknowledged: - --------------- Date: June 23, 1994 ------------- ATTACHMENT A - ------------ If you are terminated for any reason other than for cause, the company will pay you the following: 1. Base salary which you would have earned from the date of termination until June 21, 1997. This number will be computed by dividing the annual base salary at time of termination by 12 and multiplying by the number of whole or partial months between the date of termination and June 21, 1997. The base salary used in this calculation shall not be less than your highest base salary on or after June 21, 1994. 2. Potential annual incentive award from date of termination until June 21, 1997. This number will be computed by dividing the Success Sharing target award in effect for you at time of termination by 12 and multiplying by the number of whole or partial months between the end of the most recently completed plan year and June 21, 1997. Payment of this amount shall cancel your rights to any other Success Sharing payments for the same time period. The target award used in this calculation shall not be less than the highest target award in effect for you on or after June 21, 1994. 3. Potential long term incentive award until June 21, 1997. The total number of hypothetical shares (at 100% goal accomplishment) of Dominion Resources, Inc. stock granted in all cycles of the Performance Achievement Plan which were active on the date of termination will be multiplied by the closing price of the stock on the day of termination. This amount will be paid to you in dollars. Payment of this amount will cancel your rights to any additional payments in cash or stock from these active cycles. EX-10 5 EXHIBIT 10(XXII) Exhibit 10(xxii) September 15, 1995 Mr. Robert E. Rigsby Senior Vice President-Finance and Controller Dear Bob, In order to preserve the stability and continuity of the senior management personnel of the Company, the Special Committee of the Board of Directors of Virginia Electric and Power Company, in June 1994, approved a resolution intended to promote your continuing employment relationship with the Company. This was formalized through my letter of June 23, 1994 to you. Since that time, you have been promoted to your current position. The Company believes it is appropriate to modify the terms of the June 23, 1994 letter to provide additional assurance of financial security so that you will not be distracted by personal risks and will devote your best efforts to contribute to the future growth and success of the Company. Upon my recommendation, the Organization and Compensation Committee of the Board of Directors and the Board of Directors of Virginia Electric and Power Company have approved the provisions of this present letter. Upon your agreement, the terms of this letter will completely replace the terms of the June 23, 1994 agreement which will lapse. Section 1 provides you with the salary, short-term incentive and long-term incentive protection which was provided in the June 23, 1994 agreement. 1. If at any time prior to June 21, 1997, your employment as an officer of the Company should be terminated for any reason other than cause (i.e. in the absence of a good faith determination by the President of Company or the Board of Directors that such cause exists), then the Company will pay to you the amount (as detailed in a, b and c below) that you would have otherwise received, as if you had remained employed until that date. You will also be considered to have been terminated without cause if your base salary is reduced, or if you are not considered for incentive awards comparable to similar executives, or if you are not provided benefits similar to those of similar executives, or if the company diminishes your executive status, working conditions or management responsibilities, or if the company relocates your place of employment more than 30 miles from Richmond, Virginia, and you resign within 60 days of the Company's action. "Termination without cause" does not include voluntary retirement or voluntary resignation. If you are terminated for any reason other than for cause, prior to June 21, 1997, the company will pay you the following: a. The base salary which you would have earned from the date of termination until June 21, 1997. This number will be computed by dividing the annual base salary at time of termination by 12 and multiplying by the number of whole or partial months between the date of termination and June 21, 1997. The base salary used in this calculation shall not be less than your highest base 2 R.E. Rigsby salary on or after September 1, 1995. b. Potential annual incentive award from date of termination until June 21, 1997. This number will be computed by dividing the Success Sharing target award in effect for you at time of termination by 12 and multiplying by the number of whole or partial months between the end of the most recently completed plan year and June 21, 1997. Payment of this amount shall cancel your rights to any other Success Sharing payments for the same time period. The target used in this calculation shall not be less than the highest target award in effect for you on or after September 1, 1995. c. Potential long-term incentive award until June 21, 1997. The total number of hypothetical shares (at 100%) goal accomplishment) of Dominion Resources, Inc. stock granted in all cycles of the Performance Achievement Plan which were active on the date of termination will be multiplied by the closing price of the stock on the day of termination. This amount will be paid to you in dollars. Payment of this amount will cancel your rights to any additional payments in cash or stock from these active cycles. Dual payment limitation: If events occur in such a manner that you are entitled to the same or similar benefits under this agreement and your August 1, 1988 "Employment Continuity Agreement" with the company, you may choose which version of the benefit to receive, i.e. the benefit as provided by this agreement or the benefit as provided by the "Employment Continuity Agreement," but will not receive payments for that benefit from both agreements. 2. If you continue as an employee of the Company until June 21, 1997, you shall be entitled to receive one year's base salary on the date you retire or leave the Company for any reason after June 21, 1997. This special severance benefit is in addition to and does not diminish any other rights you may have based on other agreements or benefit plans. This benefit is reduced to six months' salary if you choose the benefit provided by 3 following. 3. If you serve as an officer until May 23, 1999, you will be eligible, at retirement, for 5 additional years of credited age and 5 additional years of credited service to be added for pension and other retirement benefits, such as the Executive Supplemental Retirement Plan, the Retirement Benefit Funding Plan, medical coverage and life insurance. Any minimum age requirement shall be waived. Choosing this benefit will reduce the benefit in 2 above as noted. You will also be eligible for this benefit if you are terminated without cause prior to May 23, 1999. 4. If your termination is due to death or disability, you, your estate or your beneficiary will receive benefits 1, if death or disability is prior to June 21, 1997, or benefit 2 and/or 3 above, if death or disability is after that date. 5. The Company will pay all reasonable fees and expenses which you incur to enforce this Agreement and that result from a breach of the Agreement by the Company. The Company will 3 R.E. Rigsby also indemnify you for any excise tax you incur if any portion of the benefits provided by this letter is considered to be an "excess parachute payment" under the Internal Revenue Code. In either case, the indemnification will be structured to be tax neutral to you. Please acknowledge your agreement by signing a copy of this letter and returning it to me. I will then make this document a part of your permanent file. If you have any questions, please let me know. Approved: /s/ JAMES T. RHODES /s/ WILLIAM G. THOMAS - ------------------- --------------------- James T. Rhodes William G. Thomas President and Chairman Chief Executive Officer Organization and Compensation Committee Attachment Agreed and Acknowledged: /s/ ROBERT E. RIGSBY - -------------------- Robert E. Rigsby Date: 9/15/95 ------------- EX-10 6 EXHIBIT 10(XXIII) Exhibit 10(xxiii) September 15, 1995 Mr. Edgar M. Roach, Jr. Vice President-Regulation and General Counsel Dear Ed, In order to preserve the stability and continuity of the senior management personnel of the Company, the Special Committee of the Board of Directors of Virginia Electric and Power Company, in June 1994, approved a resolution intended to promote your continuing employment relationship with the Company. This was formalized through my letter of June 23, 1994 to you. Since that time, a variety of events have happened. The Company believes it is appropriate to modify the terms of the June 23, 1994 letter to provide additional assurance of financial security so that you will not be distracted by personal risks and will devote your best efforts to contribute to the future growth and success of the Company. Upon my recommendation, the Organization and Compensation Committee of the Board of Directors and the Board of Directors of Virginia Electric and Power Company have approved the provisions of this present letter. Upon your agreement, the terms of this letter will completely replace the terms of the June 23, 1994 agreement which will lapse. Section 1 provides you with the salary, short-term incentive and long-term incentive protection which was provided in the June 23, 1994 agreement. 1. If at any time prior to June 21, 1997, your employment as an officer of the Company should be terminated for any reason other than cause (i.e. in the absence of a good faith determination by the President of Company or the Board of Directors that such cause exists), then the Company will pay to you the amount (as detailed in a, b and c below) that you would have otherwise received, as if you had remained employed until that date. You will also be considered to have been terminated without cause if your base salary is reduced, or if you are not considered for incentive awards comparable to similar executives, or if you are not provided benefits similar to those of similar executives, or if the company diminishes your executive status, working conditions or management responsibilities, or if the company relocates your place of employment more than 30 miles from Richmond, Virginia, and you resign within 60 days of the Company's action. "Termination without cause" does not include voluntary retirement or voluntary resignation. If you are terminated for any reason other that for cause, prior to June 21, 1997, the company will pay you the following: a. The base salary which you would have earned from the date of termination until June 21, 1997. This number will be computed by dividing the annual base salary at time of termination by 12 and multiplying by the number of whole or partial months between the date of termination and June 21, 1997. The base salary used in this calculation shall not be less than your highest base 2 salary on or after September 1, 1995. Edgar M. Roach, Jr. b. Potential annual incentive award from date of termination until June 21, 1997. This number will be computed by dividing the Success Sharing target award in effect for you at time of termination by 12 and multiplying by the number of whole or partial months between the end of the most recently completed plan year and June 21, 1997. Payment of this amount shall cancel your rights to any other Success Sharing payments for the same time period. The target used in this calculation shall not be less than the highest target award in effect for you on or after September 1, 1995. c. Potential long-term incentive award until June 21, 1997. The total number of hypothetical shares (at 100%) goal accomplishment) of Dominion Resources, Inc. stock granted in all cycles of the Performance Achievement Plan which were active on the date of termination will be multiplied by the closing price of the stock on the day of termination. This amount will be paid to you in dollars. Payment of this amount will cancel your rights to any additional payments in cash or stock from these active cycles. Dual payment limitation: If events occur in such a manner that you are entitled to the same or similar benefits under this agreement and your March 8, 1994 "Employment Continuity Agreement" with the company, you may choose which version of the benefit to receive, i.e. the benefit as provided by this agreement or the benefit as provided by the "Employment Continuity Agreement," but will not receive payments for that benefit from both agreements. 2. If you continue as an employee of the Company until June 21, 1997, you shall be entitled to receive one year's base salary on the date you retire or leave the Company for any reason after June 21, 1997. This special severance benefit is in addition to and does not diminish any other rights you may have based on other agreements or benefit plans. This benefit is reduced to six months' salary if you choose the benefit provided by 3 following. 3. If you serve as an officer until June 2, 1998, you will be eligible, at retirement, for 5 additional years of credited age and 5 additional years of credited service to be added for pension and other retirement benefits, such as the Executive Supplemental Retirement Plan, the Retirement Benefit Funding Plan, medical coverage and life insurance. Any minimum age requirement shall be waived. Choosing this benefit will reduce the benefit in 2 above as noted. You will also be eligible for this benefit if you are terminated without cause prior to June 2, 1998. 4. If your termination is due to death or disability, you, your estate or your beneficiary will receive benefits 1, if death or disability is prior to June 21, 1997, or benefit 2 and/or 3 above, if death or disability is after that date. 3 Section 5 reduces the threshold age for earning additional years of service to 50. 5. As part of the arrangements for your employment with Virginia Power, the company promised to provide you with 20 years of total credited service (for retirement benefits) when you reach age 55, and 30 years of total credit service when you reach age 60. On your 50th birthday (June 2, 1998), you will be credited with total credited service of 15 years. This will increase on a year by year basis until your 59th birthday when you will have 24 years of total credited service. This will become 30 years of credited service on your 60th birthday. Thirty years is the maximum allowed under our plan. Any additional credited years of service which might be provided to you under section 3 above will be added to the years discussed in the current section. Additional credited years of age provided to you under section 3 above do not count toward your eligibility for additional credited years of service. 6. The Company will pay all reasonable fees and expenses which you incur to enforce this Agreement and that result from a breach of the Agreement by the Company. The Company will also indemnify you for any excise tax you incur if any portion of the benefits provided by this letter is considered to be an "excess parachute payment" under the Internal Revenue Code. In either case, the indemnification will be structured to be tax neutral to you. Please acknowledge your agreement by signing a copy of this letter and returning it to me. I will then make this document a part of your permanent file. If you have any questions, please let me know. Approved: /s/ JAMES T. RHODES /s/ WILLIAM G. THOMAS - ------------------- --------------------- James T. Rhodes William G. Thomas President and Chairman Chief Executive Officer Organization and Compensation Committee Attachment Agreed and Acknowledged: /s/ EDGAR M. ROACH, JR. - ----------------------- Edgar M. Roach, Jr. Date: September 15, 1995 -------------------- [LETTERHEAD] Post Office Box 26666 Richmond, Virginia 23261 September 15, 1995 [LOGO] Mr. Edgar M. Roach, Jr. Vice President-Regulation and General Counsel The sentence, "Any minimum age requirement shall be waived." appears in the section numbered 3 in the September 15, 1995 agreement signed by Dr. Rhodes, Mr. Thomas and you. The purpose of this letter is to assure you that this sentences refers to all retirement programs which impose a minimum age requirement. This includes the Executive Supplement Retirement Plan and the Retirement Benefit Funding Plan. A copy of this letter has been attached to the September 15, 1995 agreement in your personnel file. Please contact me if you have any questions. Sincerely, /s/ LARRY M. GIRVIN - ------------------- Larry M. Girvin Vice President-Human Resources cc: Personnel File EX-10 7 EXHIBIT 10(XXIV) Exhibit 10(xxiv) DOMINION RESOURCES, INC. STOCK ACCUMULATION PLAN FOR OUTSIDE DIRECTORS DOMINION RESOURCES, INC. (the "Company"), hereby adopts the Dominion Resources, Inc. Stock Accumulation Plan for Outside Directors. 1. Purpose and Background. This Stock Accumulation Plan for Outside Directors (the "Plan") is designed to align the interests of the directors of the Company and certain of its subsidiaries who are not employees of the Company or its subsidiaries more closely with the interests of the Company's shareholders by paying a portion of their compensation in units whose value is based on the value of the Company's common stock. The Plan is intended to advance the interests of the Company by providing these directors with an incentive to remain in the service of the Company and to increase their efforts for the success of the Company. 2. Definitions. Whenever used in the Plan, the following terms shall have the meanings set forth below unless the context clearly requires a different meaning: (a) Account. Collectively a Participant's Stock Unit Account and Dividend Account. (b) Affiliate. Any corporation or business organization that is under common control with the Company (as determined under Code section 414(b) or (c)), or that is a member of an affiliated service group with the Company (as determined under Code section 414(m)). (c) Anniversary Date. The twelve-month anniversary of the date on which an Outside Director is first elected or appointed to any Board as an Outside Director. If an Outside Director who has previously received an award under this Plan has a Cessation of Service and is subsequently elected or appointed to a Board, the Anniversary Date for the Outside Director for service after the reelection or reappointment shall be the twelve-month anniversary of the date of the reelection or reappointment. (d) Board or Boards. The Dominion Resources Board and the respective boards of directors of the Participating Subsidiaries. (e) Cessation of Service. The date on which an Outside Director ceases to be an Outside Director on all of the Boards. (f) Change of Control. For purposes of this Plan, a Change of Control means: (i) The acquisition by any unrelated person of beneficial ownership (as that term is used for purposes of the Exchange Act) of 20% or more of the then outstanding shares of Company Stock or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors. The term "unrelated person" means any person other than (x) the Company and its Subsidiaries, (y) an employee benefit plan or trust of the Company or its Subsidiaries, and (z) a person who acquires stock of the Company pursuant to an agreement with the Company that is approved by the Dominion Resources Board in advance of the acquisition, unless the acquisition results in the persons who were directors of the Company before the acquisition ceasing to constitute a majority of the Dominion Resources Board. For purposes of this subsection, a "person" means an individual, entity or group, as that term is used for purposes of the Exchange Act. -1- (ii) Approval by the shareholders of the Company of a reorganization, merger, consolidation or other transaction (collectively a "transaction") with respect to which the persons who were the beneficial owners of the Company Stock and other voting securities of the Company immediately prior to the transaction do not, following the transaction, beneficially own, directly or indirectly, more than 50% of the then outstanding shares of the Company Stock (or the successor corporation) or the combined voting power of the then outstanding voting securities of the Company (or the successor corporation) entitled to vote generally in the election of directors. (iii)A liquidation or dissolution of the Company, or a sale or other disposition of all or substantially all of the assets of the Company (other than a transaction in which a Participating Subsidiary ceases to be a Subsidiary). (iv)As a result of any single or combination of the events described in Section 2(f)(i), (ii) or (iii), individuals who, before the first of such events, constituted the Board cease for any reason to constitute at least a majority of the Board within two (2) years of the last such event. (v) With respect to an Outside Director on the board of directors of a Participating Subsidiary, the Participating Subsidiary ceases to be a Subsidiary of the Company, the Outside Director ceases to be a member of all the Boards other than of the Participating Subsidiary, and the terms of the transaction in which the Participating Subsidiary ceased to be a Subsidiary do not provide that the value of the benefits under the Plan for the Outside Director will be guaranteed by the Participating Subsidiary or a successor entity. (g) Code. The Internal Revenue Code of 1986, as amended. (h) Company. Dominion Resources, Inc., and any successor by merger or otherwise. (i) Company Stock. The common stock, no par value, of the Company. (j) Disability. A condition, resulting from bodily injury or disease or mental impairment, that renders, and for a six consecutive month period has rendered, an Outside Director unable to perform the duties of a director. Disability shall be determined by a licensed medical physician selected by the Dominion Resources Board. (k) Dividend Account. The book account established and maintained for each Outside Director to record the conversion of hypothetical dividends and other distributions into Stock Units under Section 4 of the Plan. (l) Dominion Resources Board. The board of directors of the Company. (m) Effective Date. January 1, 1996. (n) Exchange Act. The Securities Exchange Act of 1934, as amended. (o) Fair Market Value. The average of the closing trading prices of a share of Company Stock, as reported in The Wall Street Journal, on the last trading day of each of the three months immediately preceding the month in which the determination of value is made. (p) Outside Director. A director on any one of the Boards who is not an employee of the Company or any of its Subsidiaries or Affiliates. -2- (q) Participating Subsidiary. Virginia Electric and Power Company, Dominion Capital, Inc., Dominion Energy, Inc., or any other Subsidiary which is directly and wholly owned by the Company. (r) Plan. The Dominion Resources, Inc. Stock Accumulation Plan for Outside Directors. (s) Retainer. The annual base retainer paid to all Outside Directors for service on a Board. The term "Retainer" shall not include meeting fees, travel expenses, fees or additional retainer for service on committees of a Board, and fees or additional retainer for service as chairman of a Board. If an Outside Director is serving on more than one Board, the highest annual retainer for any of the Boards shall be used. When an Outside Director is first elected or appointed to a Board, the Retainer shall be the annual retainer payable for a full year, even if the Outside Director serves less than a full year. (t) Retirement Date. The later of age 62 or the latest date on which an Outside Director is required to resign from a Board in accordance with the provisions of the directors' retirement policy for that Board as in effect from time to time (if the Outside Director is a member of more than one Board, the latest date for resignation on any of the Boards shall be used). (u) Rule 16b-3. Rule 16b-3 of the Securities and Exchange Commission promulgated under the Exchange Act. A reference in the Plan to Rule 16b-3 shall include a reference to any corresponding rule (or number redesignation) or any amendments to Rule 16b-3 enacted after the Effective Date. (v) Stock Unit. A hypothetical share of Company Stock. Each Stock Unit credited to an Outside Director's Stock Unit Account or Dividend Account shall be deemed to have the same value, from time to time, as a share of Company Stock. Notwithstanding the foregoing, Stock Units shall not confer upon Outside Directors any of the rights associated with Company Stock, including, without limitation, the right to vote or to receive distributions. Stock Units may not be sold, assigned, transferred, disposed of, pledged, hypothecated or otherwise encumbered. (w) Stock Unit Account. The book account established and maintained for each Outside Director to record the Stock Units awarded to an Outside Director under Section 3 of the Plan. (x) Subsidiary. Any corporation that is a subsidiary corporation of the Company (as determined under Code section 424(f)). (y) Year of Service. A twelve-month period ending on an Anniversary Date during which an Outside Director continuously serves on any of the Boards. An Outside Director shall be credited with a Year of Service in the year in which a Cessation of Service occurs if the period from the last Anniversary Date until Cessation of Service is at least six (6) months. 3. Eligibility and Award of Stock Units. (a) Each person who is an Outside Director on January 1, 1996 shall receive an award of Stock Units as provided in this Section 3(a). The number of Stock Units granted under the award shall be determined by (i) multiplying the Outside Director's Retainer for 1995 by seventeen (17), and (ii) dividing the result by the Fair Market Value of Company Stock determined as of April 1, 1996. (b) Each Outside Director who is first elected or appointed to any of the Boards after the Effective Date shall receive an award of Stock Units as of the date of election or appointment. The number of Stock Units granted under the award shall be determined by (i) multiplying the Outside Director's Retainer for the first year of service on the Board by seventeen (17), and (ii) dividing the result by the Fair Market Value of Company Stock as of the date of election or appointment. An Outside Director who has -3- previously received an award of Stock Units under the Plan shall not receive another award of Stock Units if the Outside Director is elected to another of the Boards. (c) This Section 3(c) shall apply if an Outside Director who has previously received an award under this Plan has a Cessation of Service and subsequently is elected or appointed to any of the Boards. If the Outside Director was not fully vested in both the Stock Unit Account and the Dividend Account at the Cessation of Service, the Outside Director shall receive an award of Stock Units equal to the number of Stock Units in the Outside Director's Account which were not distributable to the Outside Director due to the Cessation of Service. The award shall be allocated between the Outside Director's Stock Unit Account and the Dividend Account in the same amounts as the Stock Units in those Accounts which were not distributable at the Cessation of Service. If the Outside Director was fully vested in both the Stock Unit Account and the Dividend Account at the Cessation of Service, the Outside Director shall not receive any award under this Plan due to the subsequent election or appointment of the Outside Director. (d) The Stock Units awarded to an Outside Director under Section 3(a) or (b) shall be credited to the Director's Stock Unit Account. The Stock Units credited to the Stock Unit Account shall vest in accordance with the provisions of Section 5 and shall be payable in accordance with the provisions of Sections 6 and 7. 4. Crediting of Dividends. (a) The Stock Units credited to each Outside Director's Stock Unit Account and Dividend Account shall be credited with hypothetical cash dividends equal to the cash dividends that are declared and paid with respect to Company Stock. The Company shall determine as of each record date the amount of cash dividends to be paid with respect to a share of Company Stock, and on the payment date of such dividend shall credit an equal amount of hypothetical cash dividends to each Stock Unit credited to an Outside Director's Stock Unit Account and Dividend Account. The total hypothetical cash dividends credited to all Stock Units shall then be converted into Stock Units by dividing such hypothetical cash dividends by the average of the high and low trading prices of a share of Company Stock, as reported in The Wall Street Journal for the last trading day before the day the Company pays dividends with respect to Company Stock. (b) The Stock Units credited to each Outside Director's Stock Unit Account and Dividend Account shall be credited to account for any distribution with respect to Company Stock other than cash dividends or stock dividends. The Company shall determine as of each record date the amount of the distribution to be paid with respect to a share of Company Stock, and on the payment date of such distribution shall credit an equal amount of hypothetical distribution to each Stock Unit credited to an Outside Director's Stock Unit Account and Dividend Account. The total hypothetical distribution credited to all Stock Units shall then be converted into a hypothetical cash amount based on the market value of such distribution as determined by the Dominion Resources Board. The hypothetical cash amount shall then be converted into Stock Units by dividing such hypothetical cash amount by the closing trading price of a share of Company Stock, as reported in The Wall Street Journal for the last trading day before the day the Company makes the distribution with respect to Company Stock. (c) Stock Units allocated to an Outside Director pursuant to Section 4(a) or (b) shall be credited to the Director's Dividend Account. The Stock Units credited to the Dividend Account shall vest in accordance with the provisions of Section 5 and shall be payable in accordance with the provisions of Sections 6 and 7. Hypothetical dividends shall continue to be credited to Stock Units and shall be converted into additional Stock Units pursuant to this Section 4 until all of the Stock Units credited to an Outside Directors' Stock Unit Account and Dividend Account under the Plan have been distributed. -4- 5. Vesting. (a) Except in the case of death, Disability, Change of Control, attainment of Retirement Date or as provided in Section 5(g), an Outside Director shall not be vested in the Stock Unit Account until the completion of ten (10) Years of Service. Except as provided in Section 5(g), an Outside Director shall vest in a portion of the Stock Unit Account in accordance with the following schedule upon completion of the designated Years of Service: Years of Service Portion Vested ---------------- -------------- 10 10/17ths 11 11/17ths 12 12/17ths 13 13/17ths 14 14/17ths 15 15/17ths 16 16/17ths 17 17/17ths (b) Except in the case of death, Disability, Change of Control, attainment of Retirement Date or as provided in Section 5(g), an Outside Director shall not be vested in the Dividend Account until the completion of ten (10) Years of Service. Upon completion of ten (10) Years of Service, an Outside Director shall be fully vested in the Dividend Account. (c) If an Outside Director has a Cessation of Service on or after the Outside Director's Retirement Date, but before completion of ten (10) Years of Service, the Outside Director shall be fully vested in the Dividend Account and shall be vested in a percentage of the Stock Unit Account equal to the total Years of Service at the Cessation of Service (up to 17) divided by seventeen (17). (d) If an Outside Director has a Cessation of Service on account of death or Disability, the Outside Director shall be fully vested in the Dividend Account and shall be vested in a percentage of the Stock Unit Account equal to the total Years of Service at death or Disability (up to 17) divided by seventeen (17). (e) After a Change of Control, an Outside Director shall be fully vested in the Dividend Account and shall be vested in a percentage of the Stock Unit Account equal to the total Years of Service at the date on which the Outside Director has a Cessation of Service (up to 17) divided by seventeen (17). (f) An Outside Director will receive credit for Years of Service from the date on which an Outside Director is first elected or appointed to any Board as an Outside Director, including Years of Service before the Effective Date, until a Cessation of Service. (g) With respect to an award under Section 3(c), the following provisions shall apply. If the Outside Director had completed less than ten (10) Years of Service at a Cessation of Service, the -5- Outside Director shall receive credit for the Years of Service before the Cessation of Service and the provisions of Section 5(a)-(f) shall apply. If the Outside Director had completed ten (10) or more Years of Service at the Cessation of Service, the Outside Director shall be fully vested in the Dividend Account and shall vest in a percentage of the Stock Unit Account equal to (i) Years of Service after the award is made under Section 3(c), divided by (ii) seventeen (17) minus the Outside Director's Years of Service at the Cessation of Service. (h) An Outside Director who is not vested in the Accounts at a Cessation of Service shall receive no payment from the Plan. 6. Form of Payment of Accounts. (a) Except as provided in Section 10(c), if an Outside Director is entitled to receive payment of the Accounts, the Company shall distribute to the Outside Director that number of whole shares of Company Stock equal to the number of Stock Units to be distributed. Except as provided in Section 10(c), if the Outside Director is entitled to receive payment of only a portion of the total Stock Units credited to the Accounts, the Company will distribute to the Outside Director that number of whole shares of Company Stock that as nearly as possible equals, but does not exceed, the portion of the Stock Units to be distributed. (b) Distributions to an Outside Director shall be made in accordance with one of the payment methods described below as elected by the Outside Director pursuant to Section 6(c): (i) Single lump sum payment; (ii) Annual installment payments over a term of five (5) years; or (iii)Annual installment payments over a term of (10) years. The amount of each annual installment payment shall be a pro rata portion of the total number of Stock Units credited to an Outside Director's accounts as of the date on which the installment payment is to be paid. For example, an Outside Director who has elected to receive a distribution of the Accounts in annual installments over five years will be paid one-fifth of the Accounts in the first year, one-fourth of the remaining Accounts in the second year, one-third in the third year, one-half in the fourth year, and the remaining balance of the Accounts in the fifth year. (c) An Outside Director shall elect one of the payment methods described in Section 6(b) within thirty (30) days after the date of receipt of an award of Stock Units under the Plan. The election must be made in writing on a form provided by the Company and must be delivered to the Company. The Outside Director may change the election of a payment method with a subsequent election. To be valid, any subsequent election must be made at least one year prior to the commencement date of a distribution under Section 7. Any election of an optional payment method shall remain in effect until one year after a revocation of the election or a subsequent election is made. If an Outside Director has not elected the method in which the Accounts are to be paid, the Accounts will be paid in a single lump sum payment. Any payment to a beneficiary of an Outside Director shall be a single lump sum payment. (d) Notwithstanding any other provision of this Plan to the contrary, the Company shall not be required to issue or deliver any certificate for shares of Company Stock before (i) the admission of such shares to listing on any stock exchange on which the Company Stock may then be listed, (ii) effectiveness of any required registration or other qualification of such shares under any state or federal law or regulation that the Company's counsel shall determine is necessary or advisable, and (iii) the Company shall have been advised by counsel that all applicable legal requirements have been fulfilled. Until the -6- Outside Director has been issued a certificate for the shares of Company Stock acquired, the Outside Director shall possess no shareholder rights with respect to the shares. 7. Timing of Payment of Accounts. (a) If an Outside Director has a Cessation of Service for any reason other than death (including resignation, completion of an elected term without reelection, attainment of Retirement Date or Disability), the vested portions of the Accounts (if any) will be or begin to be distributed in the method provided under Section 6 within sixty (60) days following the Cessation of Service. (b) If an Outside Director has a Cessation of Service on account of death, the vested portions of the Accounts will be distributed to the Outside Director's beneficiary in the method provided under Section 6 within sixty (60) days following the date of death. 8. Stock Reserved for the Plan. The aggregate number of shares of Company Stock authorized for issuance under the Plan is four hundred thousand (400,000), subject to adjustment pursuant to Section 10. Shares of Company Stock delivered hereunder may be either authorized but unissued shares or previously issued shares reacquired and held by the Company. 9. Fractional Shares. For purposes of determining the number of Stock Units for initial grants under Section 3 and payments under Section 6, fractional Stock Units shall be eliminated by rounding down to the nearest whole Stock Unit. For purposes of crediting dividends under Section 4, vesting under Section 5, and determining the number of Stock Units in a Participant's Dividend Account, fractional Stock Units shall be maintained. 10.Effect of Stock Dividends and Other Changes to Company Stock. (a) In the event of a stock dividend, stock split, subdivision or consolidation of shares, spin-off, recapitalization, reorganization or merger in which the Company is the surviving corporation or other change in the Company's capital stock (including, but not limited to, the creation or issuance to shareholders generally of rights, options or warrants for the purchase of common stock or preferred stock of the Company), the number and kind of shares of stock of the Company to be subject to the Plan, the maximum number of shares which may be delivered under the Plan, and other relevant provisions shall be automatically adjusted, subject to the right of the Dominion Resources Board to make such further adjustment as it shall deem necessary to effect the provisions of this Section 10. If the adjustment would produce fractional shares, the fractional shares shall be eliminated by rounding down to the nearest whole share. (b) If an adjustment is made to stock of the Company under Section 10(a), Stock Units also shall be automatically adjusted to the same extent as if the Stock Unit were a share of Company Stock. If the adjustment would produce fractional Stock Units, the fractional Stock Units shall be eliminated by rounding down to the nearest whole Stock Unit. (c) If the Company is a party to a consolidation or a merger in which the Company is not the surviving corporation, a transaction that results in the acquisition of substantially all of the Company's outstanding stock by a single person or entity, or a sale or transfer of substantially all of the Company's assets, the Dominion Resources Board, in its discretion, may declare that all Stock Units granted hereunder shall pertain to and apply with appropriate adjustment as determined by the Dominion Resources Board to hypothetical securities of the resulting corporation to which a holder of the number of shares of Company Stock would be entitled; provided, however, that in the absence of any such determination, the right of an Outside Director to receive shares of Company Stock pursuant to Section 6 of this Plan shall terminate and the Company shall pay such Outside Director any amount payable under the Plan in cash. -7- 11. Interpretation and Administration of the Plan. This Plan shall be self-administering; provided, however, that to the extent the Plan is not self-administering, the Plan shall be administered, construed and interpreted by the Dominion Resources Board, to the extent permitted by Rule 16b-3. The Dominion Resources Board shall have all powers vested in it by the terms of the Plan. Any decision of the Dominion Resources Board with respect to the Plan shall be final, conclusive and binding upon all Outside Directors and each of the Boards. The Dominion Resources Board may act by a majority of its members, except that the members may authorize any one or more of their number or any officer of the Company to execute and deliver documents on behalf of the Dominion Resources Board. The Dominion Resources Board may consult with counsel, who may be counsel to the Company, and shall not incur any liability for action taken in good faith in reliance upon the advice of counsel. The Corporate Secretary of the Company shall be authorized to take or cause to be taken such actions of a ministerial nature as shall be necessary to effectuate the intent and purposes of the Plan, including maintaining records of the Accounts of Outside Directors and arranging for distributions of Accounts. 12. Outside Director Representations. By participating in the Plan, an Outside Director represents and, if requested by the Company, shall, at or before the time of the issuance of any shares of Company Stock, deliver to the Company a written statement satisfactory in form and content to the Company that the Outside Director intends to hold the shares so acquired for investment and not with a view to resale or other distribution thereof to the public in violation of the Securities Act of 1933, as amended (the "Securities Act"). Moreover, in the event that the Company shall determine that, in compliance with the Securities Act or other applicable statutes or regulations, it is necessary to register any of the shares to be distributed or to qualify any such shares for exemption from any of the requirements of the Securities Act or any other applicable statute or regulation, no shares shall be issued to the Outside Director until the required action has been completed; provided, however, that the Company shall use its reasonable best efforts to take all action necessary to comply with such requirements of law or regulation. 13. Term of the Plan. The Plan shall become effective as of the Effective Date upon adoption of the Plan by all the Boards; provided, however, such effectiveness shall be subject to the approval of the Plan by the holders of a majority of the voting power of the outstanding shares of the Company Stock within twelve months of adoption by the Boards. The Plan shall terminate on December 31, 2005 as to future grants, but the Boards may terminate the Plan at any time prior to that date by action of all the Boards. Such termination of the Plan by the Boards shall not alter or impair any of the rights or obligations under any award of Stock Units, Stock Unit Account balance, or Dividend Account balance unless the affected Outside Director shall so consent. After termination of the Plan, no Outside Director shall be entitled to receive any further award of Stock Units. 14. Amendments. By action of all the Boards, the Boards may from time to time make such changes in and additions to the Plan as it may deem appropriate; provided that, if and to the extent required by Rule 16b-3, no change shall be made that changes the class of persons eligible to receive Stock Units, or materially increases the benefits accruing to Outside Directors under the Plan, unless such change is authorized by the shareholders of the Company. To the extent required by Rule 16b-3, the Plan may not be amended more often than every six months. The Boards may unilaterally amend the Plan as they deem appropriate to ensure compliance with Rule 16b-3. Except as provided in the preceding sentence, any change or addition to the Plan shall not, without the consent of any Outside Director who is adversely affected thereby, alter any Stock Unit awards previously made to the Outside Director pursuant to the Plan. 15. Rights Under the Plan. (a) The Plan is an unfunded deferred compensation arrangement and there is no fund associated with this Plan. Title to and beneficial ownership of all benefits described in the Plan shall at all times remain with the Company. Participation in the Plan and the right to receive payments under the Plan shall not give an Outside Director any proprietary interest in the Company or any subsidiary, or in any of -8- their assets. An Outside Director shall, for all purposes, be a general creditor of the Company. (b) During the lifetime of an Outside Director, the interests of an Outside Director under the Plan cannot be assigned, anticipated, sold, encumbered or pledged and shall not be subject to the claims of the Outside Director's creditors. In the event of an Outside Director's death, an Outside Director's rights and interests under the Plan shall be transferred to the Outside Director's beneficiary. 16. Beneficiary. An Outside Director may designate in writing on a form provided by and delivered to the Company, one or more beneficiaries (which may include a trust) to receive any payments that may become due under the Plan after the death of the Outside Director. If an Outside Director fails to designate a beneficiary, or no designated beneficiary survives the Outside Director, any payments to be made with respect to the Outside Director after death shall be made to the personal representative of the Outside Director's estate. 17. Notice. All notices and other communications required or permitted to be given under the Plan shall be in writing and shall be deemed to have been duly given if delivered personally or mailed first class, postage prepaid, as follows: (d) if to the Company, at its principal business address, to the attention of the Corporate Secretary of the Company; (e) if to any Outside Director, at the last address of the Outside Director known to the sender at the time the notice or other communication is sent. 18. Interpretation and Construction. This Plan is intended to comply with the provisions of Rule 16b-3 and shall be construed to so comply. The terms of this Plan are subject to all present and future rulings of the Securities and Exchange Commission with respect to Rule 16b-3. If any provision of the Plan would cause the Plan to fail to meet the requirements of Rule 16b-3, then that provision of the Plan shall be void and of no effect. To the extent not inconsistent with the requirements of Rule 16b-3, the Plan shall be construed and enforced according to the laws of the Commonwealth of Virginia. Headings and captions are for convenience only and have no substantive meaning. Reference to one gender includes the other, and references to the singular and plural include each other. IN WITNESS WHEREOF, the Company has caused this Plan to be executed this 22nd day of April, 1996. DOMINION RESOURCES, INC. /s/LINWOOD R. ROBERTSON By: LINWOOD R. ROBERTSON Title: Senior Vice President, Treasurer (Chief Financial Officer) and Corporate Secretary -9- EX-23 8 EXHIBIT 23(I) Exhibit 23(i) [LETTERHEAD] HUNTON & WILLIAMS RIVERFRONT PLAZA, EAST TOWER 951 EAST BYRD STREET RICHMOND, VIRGINIA 23219-4074 TELEPHONE (804) 788-8200 FACSIMILE (804) 788-8218 March 24, 1997 Virginia Electric and Power Company Richmond, Virginia 23261 Virginia Electric and Power Company Form 10-K Gentlemen: We consent to the incorporation by reference into the Registration Statements of Virginia Electric and Power Company on Form S-3 (File Nos. 33-50423, 33-50425, 33-59581, 33-60271 and 333-20561) of the statements, included in this Annual Report on Form 10-K, made in regard to our firm that relate to franchises, title to properties, and limitations upon the issuance of bonds and preferred stock. Sincerely, /s/ HUNTON & WILLIAMS --------------------- HUNTON & WILLIAMS EX-23 9 EXHIBIT 23(II) Exhibit 23(ii) [LETTERHEAD] JACKSON & KELLY ATTORNEYS AT LAW 1600 LAIDLEY TOWER P.O. BOX 553 CHARLESTON, WEST VIRGINIA 25322 ----------- TELEPHONE 304-340-1000 TELECOPIER 304-340-1130 WRITERS DIRECT DIAL NO. (304) 340-1287 March 24, 1997 Virginia Electric and Power Company Richmond, Virginia 23261 Re: Virginia Electric and Power Company Form 10-K Gentlemen: We consent to the incorporation by reference into the registration statements of Virginia Electric and Power Company on Form S-3 (File No. 33-50423, File No. 33-59581 and File No. 33-60271) of the statements, included in this Annual Report on Form 10-K, made in regard to our firm that are governed by the laws of West Virginia and that relate to franchises, title to properties, limitations upon the issuance of bonds and preferred stock, rate and other regulatory matters, and litigation. Sincerely yours, /s/ JACKSON & KELLY ------------------- JACKSON & KELLY EX-23 10 EXHIBIT 23(III) Exhibit 23(iii) CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference of our report dated February 11, 1997, appearing in the Annual Report on Form 10-K of Virginia Electric and Power Company for the year ended December 31, 1996, in the following Registration Statements: Registration Form: Number: ---- ------------ S-3 33-50425 S-3 33-59581 S-3 33-60271 S-3 333-20561 S-3 33-50423 /s/ Deloitte & Touche LLP Richmond, Virginia March 24, 1997 EX-27 11 EXHIBIT 27
UT YEAR DEC-31-1996 DEC-31-1996 PER-BOOK 9,434 478 996 921 0 11,828 2,737 17 1,308 4,063 180 509 3,579 0 0 312 311 0 22 2 2,850 11,828 4,383 242 3,376 3,618 765 8 773 308 457 36 422 421 217 1,115 0 0
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