-----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, Fs6qdsVN8nvaGX6bwROvD7EuNi7SJAhbin3oH7hn4QFY6Kpk7VFGrOViCZHyLO+u 6Qo7L3fTs6FtPBYcAv0iAA== 0000916641-97-000230.txt : 19970325 0000916641-97-000230.hdr.sgml : 19970325 ACCESSION NUMBER: 0000916641-97-000230 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOMINION RESOURCES INC /VA/ CENTRAL INDEX KEY: 0000715957 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 541229715 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08489 FILM NUMBER: 97561395 BUSINESS ADDRESS: STREET 1: 901 E BYRD ST, WEST TOWER STREET 2: P O BOX 26532 CITY: RICHMOND STATE: VA ZIP: 23219 BUSINESS PHONE: 8047755700 MAIL ADDRESS: STREET 1: P O BOX 26532 STREET 2: 901 EAST BYRD STREET CITY: RICHMOND STATE: VA ZIP: 23261 10-K405 1 DOMINION RESOURCES, INC. 10-K405 Draft 3/18/97 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 1-8489 ---------------------------------------- Dominion Resources, Inc. (Exact name of registrant as specified in its charter) VIRGINIA 54-1229715 (State or other jurisdiction of (IRS employer identification no.) incorporation or organization) 901 East Byrd Street Richmond, Virginia 23219-4072 (Address of principal executive offices) (Zip Code) (804) 775-5700 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered --------------------------- ------------------------------------------ Common Stock, no par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None: (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 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 voting stock held by nonaffiliates of the registrant was $7,382,370,433 at February 28, 1997, based on the closing price of the Common Stock on such date, as reported on the composite tape by The Wall Street Journal. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at February 28, 1997 Common Stock, no par value 183,412,930 DOCUMENTS INCORPORATED BY REFERENCE: (a) Portions of the 1996 Annual Report to Shareholders for the fiscal year ended December 31, 1996 are incorporated by reference in Parts I, II and IV hereof. (b) Portions of the 1997 Proxy Statement, dated March 7, 1997, are incorporated by reference in Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DOMINION RESOURCES, INC. Item Page Number Number - ------- ------ PART I 1. Business The Company...................................................... 1 Regulation....................................................... 3 Capital Requirements and Financing Program....................... 9 Rates............................................................ 9 Virginia Power Sources of Power.................................. 11 Virginia Power Sources of Energy Used and Fuel Costs............. 12 Interconnections................................................. 13 Future Sources of Power.......................................... 14 Competition and Strategic Initiatives............................ 15 Conservation and Load Management................................. 16 2. Properties......................................................... 16 3. Legal Proceedings.................................................. 16 4. Submission of Matters to a Vote of Security Holders................ 16 Executive Officers of the Registrant............................... 17 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................................. 18 6. Selected Financial Data............................................ 18 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ 18 Management's Discussion and Analysis of Cash Flows and Financial Condition........................................ 29 8. Financial Statements and Supplementary Data........................ 33 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................................... 37 PART III 10. Directors and Executive Officers of the Registrant................. 37 11. Executive Compensation............................................. 37 12. Security Ownership of Certain Beneficial Owners and Management..... 37 13. Certain Relationships and Related Transactions..................... 37 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 38 PART I ITEM 1. BUSINESS THE COMPANY Dominion Resources, Inc. (Dominion Resources), organized in 1983, has its principal office at 901 East Byrd Street, Richmond, Virginia 23219-4072, telephone (804) 775-5700. The principal assets of Dominion Resources are its investments in its subsidiaries. At December 31, 1996, Dominion Resources owned all of the outstanding common stock of its subsidiaries: Dominion Capital, Inc. (Dominion Capital); Dominion Energy, Inc. (Dominion Energy) and Virginia Electric and Power Company (Virginia Power), its largest subsidiary. Dominion Resources is currently exempt from registration as a holding company under the Public Utility Holding Company Act of 1935 (the 1935 Act). On November 13, 1996, Dominion Resources announced its intention to make a cash offer to purchase, through a newly created United Kingdom subsidiary, DR Investments (UK) PLC (DR Investments (UK)), all of the outstanding shares of East Midlands Electricity plc (East Midlands), a United Kingdom regional electricity company, for a total purchase price of approximately $2.2 billion. As of January 10, 1997, 140,298,528 shares of East Midlands, or approximately 70.7% of the shares outstanding, had been tendered and the offer was declared unconditional, thereby committing DR Investments (UK) to purchase all East Midlands shares validly tendered pursuant to the offer. Earlier DR Investments (UK) had purchased 29,700,000 shares, or approximately 15% of East Midlands outstanding shares. As of March 14, 1997, all the outstanding shares of East Midlands have been acquired. The interim financing for the offer is in the form of a short-term credit agreement and a revolving credit agreement, each with Union Bank of Switzerland, New York Branch, as Administrative Agent and NationsBank, N.A. as Syndication Agent, and is guaranteed by Dominion Resources. In addition, DR Investments (UK) has issued Loan Notes in lieu of cash to certain shareholders of East Midlands with Dominion Resources providing the remainder of the consideration as equity. Dominion Resources expects the permanent financing will be a combination of non-recourse debt, issued at a subsidiary level, as well as equity provided by Dominion Resources. East Midlands owns and operates the electricity distribution network in the East Midlands region of England and provides power to approximately 2.3 million businesses and homes. The company buys electricity from the U.K. competitive pool and supplies it to all smaller business and domestic customers in its franchise area and to larger business customers anywhere in the country on a negotiated contract basis. East Midlands also operates small electricity generation and gas supply businesses and an electrical contracting business. Dominion Capital, established as a subsidiary of Dominion Resources in 1985, is a diversified investment and financial services company. The principal assets of Dominion Capital are its joint venture with Household Commercial Financial Services, Inc., First Source Financial, LLP, a middle market commercial lender; Saxon Mortgage, Inc. and its affiliates, subsidiaries engaged in the origination, servicing and securitization of residential mortgages; Cambrian Capital, a merchant banking enterprise for emerging independent oil and natural gas producers; a 50% limited partnership interest in a Louisiana hydroelectric project; Dominion Lands, Inc., a subsidiary involved in planned community real estate development and management; investments in marketable securities and fixed income instruments; OptaCor Financial Services Company, a consumer lender; and Rincon Securities, Inc., a subsidiary which holds a diversified portfolio of preferred stocks. Dominion Capital also has investments in affordable housing and a commercial real estate management company. On March 21, 1997, Dominion Capital completed the purchase of Household Commercial Financial Services Inc. interest in First Source Financial, LLP. Dominion Energy, established as a subsidiary of Dominion Resources in 1987, is active in the nonutility electric power generation businesses outside the territory served by Virginia Power and the development, exploration and operation of oil and natural gas reserves. Dominion Energy is involved in power projects in six states, Argentina, Bolivia, Belize and Peru, which total approximately 2,561 Mw. Domestic power projects in operation throughout 1996 in which Dominion Energy has an interest include three gas-fueled projects in Texas, two geothermal projects, two gas-fueled projects and one solar project in California, four small hydroelectric projects in New York, a waste coal-fueled project in West Virginia and a waste wood-and coal- fueled project in Maine. International power projects in operation throughout 1996 in which Dominion Energy has an interest include one hydroelectric and one gas-fired project in Argentina, two hydroelectric projects in Bolivia, a run-of-river hydroelectric project in Belize and two hydroelectric projects and six diesel oil-fueled projects in Peru. Dominion Energy is involved in oil and natural gas development and exploration in the Appalachian Basin, the Michigan Basin, the Illinois Basin, the Black Warrior Basin, the Uinta Basin, the Powder River Basin, the Gulf Coast and the Mid-Continent, and owns oil and natural gas reserves in such areas totaling approximately 460 billion cubic feet (BCFE). In 1996, Dominion 1 Energy added approximately 105 BCFE of natural gas reserves. Production from Dominion Energy's natural gas reserve holdings in 1996 totaled approximately 52 BCFE. On March 29, 1996, a subsidiary of Dominion Energy, Kincaid Generation, L.L.C. (LLC) entered into an asset sale agreement with Commonwealth Edison Company (ComEd) to purchase ComEd's 1,108 Mw coal-fired Kincaid Power Station in Central Illinois and entered into a power purchase agreement with ComEd to sell, upon closing under the asset sale agreement, capacity and energy back to ComEd for a period of 15 years. The closing under the asset sale agreement and effectiveness of the power purchase agreement are subject to various regulatory approvals and other conditions, including certain approvals from the Illinois Commerce Commission (ICC) and the Federal Energy Regulatory Commission (FERC). ComEd filed a petition for ICC approval and on November 27, 1996, a Hearing Examiners' Proposed Order was issued recommending to the ICC that the transaction be approved. Exceptions to that Report have been filed and are pending before the ICC. The ICC may issue a final order by early spring. On July 26, 1996, the International Brotherhood of Electrical Workers, AFL-CIO, Local Union 15 (IBEW) filed a complaint in Illinios state court requesting injunctive relief to prevent the transaction. IBEW has claimed that the asset sale agreement is in violation of an Illiniois statute concerning collective bargaining agreements because the asset sale agreement does not state that LLC will be subject to the current collective bargaining agreement between ComEd and IBEW. The case was removed to the United States District Court for the Northern District of Illinois. In February 1997, the Court issued an order granting LLC and ComEd's motions for summary judgement and invalidating the Illinois statute. The IBEW has appealed to the Seventh Circuit. The IBEW has also filed an unfair labor practice charge with the National Labor Relations Board alleging failure to bargain in good faith. Regulatory approval of various aspects of the transaction have been requested and received from FERC. An additional filing with FERC will be made after ICC approval is obtained. The present closing date deadline under the asset sale agreement is June 30, 1997. In August 1996, Dominion Energy, through wholly-owned subsidiaries, acquired a 60% ownership and management interest in Empresa de Generacion Electrica NorPeru S.A. (EGENOR). EGENOR is a generation company providing power to Peru's northern region. The government-owned ElectroPeru S.A. and the employees of EGENOR collectively retain a 40% interest in EGENOR. Dominion Energy continues to assess sale opportunities for a portion of its interest in EGENOR to a third party. For additional information on the nonutility businesses, see Nonutility Issues under FUTURE ISSUES in MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS. 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 term "Virginia Power" refers 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 Virginia Power's strategy relies on developing "non-traditional" business opportunities designed to provide growth in earnings by leveraging existing core competencies. Virginia Power 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, Virginia Power is actively pursuing opportunities to expand its market reach through strategic alliances with partners whose strengths, market position and strategies complement Virginia Power's and where efficiencies can be gained through the alliance. 2 For additional information on the changing utility industry and Virginia Power's strategy see COMPETITION AND STRATEGIC INITIATIVES below and Competition under FUTURE ISSUES in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Virginia Power 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 Virginia Power for substantially all of its retail service outside certain municipalities in North Carolina. Virginia Power 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, Virginia Power'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 matters discussed in this annual report on Form 10-K 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 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, the FORWARD-LOOKING INFORMATION section contained in MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS indicates some important factors that could cause actual results or outcomes to differ materially from those addressed in the forward-looking discussions. Dominion Resources and its subsidiaries had 11,174 full-time employees as of December 31, 1996. 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), FERC, the Army Corps of Engineers, and other federal, state and local authorities. Compliance with numerous laws and regulations increases Virginia Power's operating and capital costs by requiring, among other things, changes in the design and operation of existing facilities and changes or delays in the location, design, construction and operation of new facilities. The commissions regulating Virginia Power's rates have historically permitted recovery of such costs. Virginia Power may not construct, or incur financial commitments for construction of, any substantial generating facilities or large capacity transmission lines without the prior approval of 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 (the Energy Act) that could affect Virginia Power 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 Virginia Power 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 3 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. In connection with the offer for East Midlands and in order to obtain certifications from the Virginia Commission and the North Carolina Commission necessary for the maintenance of Dominion Resources' exemption from the 1935 Act, as amended, notwithstanding the acquisition of East Midlands, Dominion Resources and Virginia Power proffered on October 31, 1996 an Undertaking and Covenant to such regulatory agencies for the benefit of, and enforceable by, such agencies. The Undertaking and Covenant provides, among other things, that Virginia Power will have no role in the financing of the acquisition of East Midlands, whether as primary obligor or guarantor, nor will Virginia Power or Dominion Resources agree in any way to obligate Virginia Power to commit funds to maintain the financial viability of East Midlands or to become liable for any debts of East Midlands. Further, Dominion Resources agreed that following the East Midlands acquisition, it would reduce and maintain its Aggregate Investment to no more than 35% of its consolidated net worth within 180 days of the East Midlands acquisition. For purposes of the Undertaking and Covenant, "Aggregate Investment" means all amounts invested in exempt wholesale generators located outside the United States and in foreign utilities, in the form of equity, or debt which is recourse, directly and indirectly, to Dominion Resources, and consolidated net worth means all common equity of Dominion Resources. The Undertaking and Covenant imposes various reporting obligations on Dominion Resources and Virgina Power designed to assure compliance with the Undertaking and Covenant and creates remedies for its violation, including, without limitation, authorization for the agencies to order partial divestiture by Dominion Resources of any Aggregate Investment which is in excess of the 35% limitation. 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 O to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual Report to Shareholders, incorporated herein by reference). 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 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 Virginia Power 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 4 Filing proceeding, the Commission entered an order providing that Virginia Power'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. Virginia Power 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 Virginia Power's request cannot be predicted. For a more detailed discussion of competition and the recovery of stranded costs, see Competition under FUTURE ISSUES in 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 Virginia Power'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, Virginia Power 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, Virginia Power filed its response requesting that the Commission adopt the Staff conclusions. On June 7, 1996, Virginia Power 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. Virginia Power 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. 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 5 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, Virginia Power 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. Virginia Power 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 Virginia Power'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 below and Competition under FUTURE ISSUES in 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 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 the 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, Virginia Power 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 6 regulations regarding the remediation of waste, Virginia Power may be required to expend amounts on remedial investigations and actions. Although Virginia Power 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 Virginia Power'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 Virginia Power 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. Virginia Power 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. Virginia Power 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 Virginia Power installed NO(x) controls on Possum Point Unit 4 and at Mt. Storm Unit 3 at a total approximate cost of $10 million. Virginia Power 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. Virginia Power 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,Virginia Power 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 Virginia Power 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. Virginia Power 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. 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 the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual Report to Shareholders and ITEM 3. LEGAL PROCEEDINGS below. 7 Nuclear All aspects of the operation and maintenance of Virginia Power's nuclear power stations are regulated by the NRC. Operating licenses issued by the NRC are subject to revocation, suspension or modification, and 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 Virginia Power'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 Virginia Power'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 DOE 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. 8 CAPITAL REQUIREMENTS AND FINANCING PROGRAM Capital Requirements See MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION on pages 30 through 32. 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 See MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION on pages 29 through 32. RATES Virginia Power 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% --- --- --- ---
Substantially all of Virginia Power'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 Virginia Power was involved in 1996 are described below by jurisdiction. Rate relief obtained by Virginia Power is frequently less than requested. 9 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. Virginia Power and all parties reached a settlement of issues raised in the proceeding, and on March 20, 1997, those parties jointly filed with FERC the Settlement Agreement and Motion to Certify the Settlement Agreement. Virginia Power 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 Virginia Power'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 fuel disposal issue from Virginia Power's pending fuel factor proceeding and return it to a separate proceeding. North Carolina On September 13, 1996, Virginia Power 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, Virginia Power filed for approval of a new Schedule 19 which governs purchases from cogenerators and small power producers. Virginia Power proposed rates substantially lower than those previously 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. 10 VIRGINIA POWER SOURCES OF POWER Virginia Power 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 Virginia Power 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 Virginia Power'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). Virginia Power's highest one-hour integrated service area summer peak demand of 14,003 Mw was established on August 2, 1995, and the all-time high one-hour integrated winter peak demand of 14,910 Mw was established on February 5, 1996. 11 VIRGINIA POWER SOURCES OF ENERGY USED AND FUEL COSTS 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. (**) Excludes ODEC's 50 percent ownership interest in the Clover Power Station Nuclear Operations and Fuel Supply In 1996, Virginia Power's four nuclear units achieved a combined capacity factor of 88.2 percent. Virginia Power 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. Virginia Power 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 Virginia Power's needs until the DOE begins accepting spent fuel. The North Anna Power Station will require additional spent fuel storage capacity in 1998. Virginia Power submitted a license application to the NRC in May 1995 for 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 Q to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual Report to Shareholders. Fossil Operations and Fuel Supply The commercial operation of Clover Power Station Unit 2 began on March 28, 1996. The summer capability of both Units 1 and 2 have been determined to be 441 Mw. Virginia Power'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, Virginia Power utilizes both long-term contracts and spot purchases to support its needs. Virginia Power 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. Virginia Power 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. Virginia Power 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. 12 Purchases and Sales of Power Virginia Power relies on purchases of power to meet a portion of its capacity requirements. Virginia Power also makes economy purchases of power from other utility systems when it is available at a cost lower than Virginia Power'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). Virginia Power 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 VIRGINIA POWER FUTURE SOURCES OF POWER below and Note Q to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual Report to Shareholders). In an effort to mitigate its exposure to above-market long-term purchased power contracts, Virginia Power 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. Virginia Power has also negotiated settlements with several other parties to terminate their rights to sell power to Virginia Power. In 1995, a wholesale power group was formed within Virginia Power to actively participate in the purchase and sale of wholesale electric power in the open market. The wholesale power group has expanded Virginia Power's trading range beyond the geographic limits of the Virginia Power service territory, and has developed trading relationships with utilities on a nationwide basis. During 1996, Virginia Power 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 Virginia Power'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, Virginia Power 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, Virginia Power's recovery of fixed charges will be reduced over time as supplemental capacity rates transition from fully-embedded costs to market-based pricing. Virginia Power 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 Virginia Power 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, Virginia Power 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, AP, 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. Virginia Power 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 13 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 the 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 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. Virginia Power 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, Virginia Power presently anticipates adding 1,200 Mw of short-term (three-year) purchases beginning in the year 2000. Virginia Power 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 Virginia Power or may be built by Virginia Power if it determines it can build capacity at a lower overall cost. Virginia Power also pursues conservation and demand-side management (see CONSERVATION AND LOAD MANAGEMENT below). Virginia Power'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 the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual Report to Shareholders. 14 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. Virginia Power 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. Virginia Power'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. Virginia Power 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 Virginia Power 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 Virginia Power's and where efficiencies can be gained through the alliance. A significant part of Virginia Power'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 Virginia Power 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 Virginia Power'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. Virginia Power 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 Virginia Power'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, Virginia Power 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 Competition under FUTURE ISSUES in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 15 CONSERVATION AND LOAD MANAGEMENT Virginia Power 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 Virginia Power's customers as well as the efficient use of current resources. Recent declines in avoided costs and the arrival of competition have caused Virginia Power to modify the package of cost-effective measures which it supports in the annual Energy Efficiency Plan. In the future, Virginia Power 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 Virginia Power to evaluate the Commission's current policies regarding conservation and load management programs. ITEM 2. PROPERTIES Dominion Resources owns the building at One James River Plaza, Richmond, Virginia, in which Virginia Power has its principal offices. Dominion Resources' other assets consist primarily of its investments in its subsidiaries, which invest in various enterprises and assets, as described in THE COMPANY under Item 1. BUSINESS above. See also Virginia Power Generating Units under VIRGINIA POWER SOURCES OF POWER under Item 1. BUSINESS. ITEM 3. LEGAL PROCEEDINGS From time to time, Virginia Power 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 Virginia Power 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 Virginia Power 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 Virginia Power's present knowledge, threatened against Virginia Power. 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 Virginia Power. Virginia Power has filed answers denying liability. A trial date of August 18, 1997 has been set for the action seeking fifteen million dollars. In reference to the lawsuit filed by Dominion Energy and Dominion Cogen D.C., Inc. (collectively, Plaintiffs) against the District of Columbia (the District) for deprivation of due process, the Court on March 4, 1997 denied in part the District's partial motion for summary judgment on Plaintiff's contracts clause claim and denied in its entirety the District's motion for partial summary judgment on Plaintiff's claims for damages. The Court also permitted 1) the District to assert its counterclaims; and 2) Plaintiffs to amend their complaint. In addition, all parties were ordered to meet and confer regarding the completion of discovery. 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 compensation for executive services. 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 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. 16 EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Age Business Experience Past Five Years - ------------------------------ ------------------------------------------------------------------------------ Thos. E. Capps (61) Chairman of the Board of Directors, President and Chief Executive Officer of Dominion Resources from September 1, 1995 to date; Chairman of the Board of Directors and Chief Executive Officer of Dominion Resources from August 15, 1994 to September 1, 1995; Chairman of the Board of Directors, President and Chief Executive Officer of Dominion Resources from December 30, 1992 to August 15, 1994; President and Chief Executive Officer of Dominion Resources and Vice Chairman of the Virginia Electric and Power Company Board of Directors prior to December 30, 1992. James T. Rhodes (55) President and Chief Executive Officer of Virginia Electric and Power Company. Norman B. M. Askew (54) Executive Vice President of Dominion Resources and Chief Executive Officer of East Midlands from February 21, 1997 to date; Chief Executive Officer of East Midlands from April 1, 1994 to February 21, 1997; Managing Director from September 1, 1992 to April 1, 1994; President and Managing Director of TI Aerospace and Titeflex International prior to September 1, 1992. Thomas N. Chewning (51) Executive Vice President of Dominion Resources from January 1, 1997 to date; Senior Vice President of Dominion Resources from October 1, 1994 to January 1, 1997; Vice President of Dominion Resources from November 15, 1992 to October 1, 1994; Vice President, Treasurer and Corporate Secretary of Virginia Electric and Power Company prior to November 15, 1992. David L. Heavenridge (50) Executive Vice President of Dominion Resources from January 1, 1997 to date; Senior Vice President of Dominion Resources from March 1, 1994 to January 1, 1997; Senior Vice President and Controller of Dominion Resources from April 1, 1992 to March 1, 1994; Vice President and Controller of Dominion Resources prior to April 1, 1992. Linwood R. Robertson (57) Executive Vice President and Treasurer of Dominion Resources from January 1, 1997 to date; Senior Vice President-Finance, Treasurer and Corporate Secretary of Dominion Resources from January 1, 1995 to January 1, 1997; Vice President-Finance and Treasurer of Dominion Resources from March 1, 1994 to January 1, 1995; Vice President, Treasurer and Assistant Corporate Secretary of Dominion Resources prior to March 1, 1994. Thomas F. Farrell, II (42) Senior Vice President-Corporate and General Counsel of Dominion Resources from January 1, 1997 to date; Vice President and General Counsel of Dominion Resources from July 1, 1995 to January 1, 1997; Partner in the law firm of McGuire, Woods, Battle & Boothe, L.L.P. prior to July 1, 1995. Donald T. Herrick, Jr. (53) Vice President of Dominion Resources. James L. Trueheart (45) Vice President and Controller of Dominion Resources from March 1, 1994 to date; Assistant Controller of Dominion Resources prior to March 1, 1994. Patricia A. Wilkerson (41) Corporate Secretary of Dominion Resources from January 1, 1997 to date; Assistant Corporate Secretary prior to January 1, 1997.
17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Dominion Resources common stock is listed on the New York Stock Exchange and at December 31, 1996 there were 248,929 registered common shareholders of record. Quarterly information concerning stock prices and dividends contained on page 50 of the 1996 Annual Report to Shareholders for the fiscal year ended December 31, 1996 in Note U to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS which is filed herein as Exhibit 13, is hereby incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA This information contained under the caption "Selected Consolidated Financial Data" on page 53 of the 1996 Annual Report to Shareholders for the fiscal year ended December 31, 1996 filed herein as Exhibit 13, is hereby incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION This annual report 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 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, the following important factors should be considered with respect to any forward-looking statements made herein: Current governmental policies and regulatory actions both domestic and international (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, present or prospective wholesale and retail competition, economic and geographic factors including political and economic risks (particularly those associated with international development and operations, including currency fluctuation), 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 development project delays or changes in project costs, 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 Dominion Resources. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the businesses of Dominion Resources. Any forward-looking statement speaks only as of the date on which such statement is made, and Dominion Resources 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. Overview Dominion Resources achieved earnings of $472.1 million in 1996 or $2.65 per average common share, compared with earnings of $425 million in 1995 or $2.45 per share. Virginia Power's utility operations increased its contribution to $421.8 million in 1996 or $2.37 per share, from the $388.7 million earned in 1995 or $2.24 per share. Dominion Energy's independent power and natural gas operations earned $32.5 million in 1996 or 18 cents per share, a slight decrease from the $35 million earned in 1995 or 20 cents per share. Dominion Capital's financial services and real estate businesses earned $28.5 million in 1996 or 16 cents per share, an increase over the $17.6 million earned in 1995 or 10 cents per share. Corporate overhead expenses fell in 1996, reducing its net loss to $10.7 million or 6 cents per share, compared with a net loss in 1995 of $16.3 million or 9 cents per share. 18 NET INCOME
1996 Change 1995 Change 1994 ------ ------ ------ ------ ------ (millions) Virginia Power........................................................ $421.8 8.5% $388.7 (4.0)% $404.9 Dominion Energy....................................................... 32.5 (7.1)% 35.0 (41.3) 59.6 Dominion Capital...................................................... 28.5 61.9% 17.6 (6.9)% 18.9 Corporate............................................................. (10.7) (34.4)% (16.3) 213.5% (5.2) ------ ------ ------ Consolidated.......................................................... $472.1 11.1% $425.0 (11.1)% $478.2 ------ ------ ------ ------ ------ ------ Shares................................................................ 178.3 2.6% 173.8 2.1% 170.3 ------ ------ ------ ------ ------ ------
EARNINGS PER SHARE
1996 Change 1995 Change 1994 ----- ------ ----- ------ ----- Virginia Power............................................................ $2.37 5.8% $2.24 (5.9)% $2.38 Dominion Energy........................................................... .18 (10.0)% .20 (42.9)% .35 Dominion Capital.......................................................... .16 60.0% .10 (9.1)% .11 Corporate................................................................. (.06) 33.3% (.09) (200.0)% (.03) ----- ----- ----- Consolidated.............................................................. $2.65 8.2% $2.45 (12.8)% $2.81 ----- ----- ----- ----- ----- -----
The 1996 results were affected by a number of factors described below: Virginia Power Earnings were impacted by: (Bullet) an increase in kilowatt-hour sales from retail customers due to continued customer growth in the Virginia Power and North Carolina Power service areas; partially offset by lower base revenues due to the effect of mild summer weather in 1996 on summer retail rates; and (Bullet) an increase in power marketing (wholesale) and energy services (A&C Enercom) revenues; and (Bullet) lower other operation and maintenance expenses, even with an additional $21 million in service restoration costs resulting from severe storms like Hurricane Fran, and an additional $22 million due to growth in the energy services business (A&C Enercom); and (Bullet) lower restructuring expenses; and (Bullet) higher depreciation expenses relating to the new Clover Power Station whose units began operating in October 1995 and March 1996. Dominion Energy Earnings were impacted by: (Bullet) an increase in natural gas production and prices; offset by (Bullet) a decrease in income when compared to the gain ($5.4 million, net of tax) realized in 1995 from the sale of the remaining units of the Black Warrior Trust. Dominion Capital Earnings were impacted by: (Bullet) an increase in income from Saxon Mortgage, the new financial services business which originates non-conforming residential mortgages and packages them -- through a securitization -- for sale to institutional investors. Corporate Earnings were impacted by: (Bullet) a decrease in expenses when compared to the $12.4 million of restructuring costs and other charges incurred in 1995. Virginia Power Results of Operations As part of the Vision 2000 program to transition Virginia Power to a potential future of competition in the electric utility industry, Virginia Power recorded $91.6 million in restructuring expenses in 1996 and $117.9 million in 1995 (see Note O). Restructuring charges included severance costs, purchased power contract restructuring and negotiated settlement costs, capital project cancellation costs, reserve for expected adjustments to regulatory assets, and other costs. Without restructuring 19 expenses, balance available for common stock in 1996 and 1995 would have increased by $59.5 million and $76.6 million, respectively. Virginia Power estimates that the staffing reductions will result in annual savings 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 Virginia Power may incur additional charges for further staffing reductions in 1997, the amounts are not expected to be significant. In 1995, Virginia Power reported a decrease in balance available for common stock of $16.2 million when compared to the 1994 results of $404.9 million. The decrease was primarily due to increases in operating expenses attributable to restructuring costs which reduced earnings by $0.44 per share offset in part by an increase in kilowatt-hour sales from both retail and wholesale customers.
1996 Change 1995 Change 1994 -------- ------ -------- ------ -------- (millions) Revenues......................................................... $4,382.6 0.7% $4,350.4 4.3% $4,170.8 Operating expenses............................................... 3,379.4 0.0% 3,379.2 5.0% 3,219.5 Nonoperating expenses, net....................................... 581.4 0.2% 582.5 6.6% 546.4 -------- -------- -------- Balance available for common stock............................... $ 421.8 8.5% $ 388.7 (4.0)% $ 404.9 -------- -------- -------- -------- -------- --------
Operating Revenues As detailed in the chart below, the decrease in 1996 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 Virginia Power'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 to wholesale customers were primarily a result of Virginia Power's marketing efforts during 1996, offset by a decrease in sales to Old Dominion Electric Cooperative (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 Virginia Power's energy services subsidiary, A&C Enercom. In 1995 Virginia Power's revenues increased primarily due to the weather experienced in the last six months of 1995, customer growth and increased sales to wholesale customers. OPERATING REVENUES
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 Wholesale.................................................................................................. 33.1 32.8 Other operating revenues................................................................................... 33.2 (2.4) ------ ------ Total revenues........................................................................................... $ 32.2 $179.6 ------ ------ ------ ------
During 1996, Virginia Power had 44,528 new connections to its system compared to 44,955 and 46,741 in 1995 and 1994, respectively. KILOWATT-HOUR SALES
1996 Change 1995 Change 1994 ------ ------ ------ ------ ------ (millions) Residential................................................................... 23,039 2.3% 22,512 4.1% 21,621 Commercial.................................................................... 19,934 2.3% 19,486 3.6% 18,801 Industrial.................................................................... 10,851 2.3% 10,606 3.6% 10,235 Public authorities............................................................ 8,474 2.6% 8,261 4.0% 7,950 ------ ------ ------ Total retail sales.......................................................... 62,298 2.4% 60,865 3.8% 58,607 Wholesale..................................................................... 11,020 36.3% 8,088 13.4% 7,134 ------ ------ ------ Total sales................................................................. 73,318 6.3% 68,953 4.9% 65,741 ------ ------ ------ ------ ------ ------
20 The increase in retail kilowatt-hour sales in 1996 compared to 1995 reflects continued customer growth. The increase in sales to wholesale customers was primarily due to Virginia Power's power marketing efforts. The increase in kilowatt-hour sales in 1995 compared to 1994 reflects increased customer growth and the weather experienced in the last six months of 1995, partially offset by the milder weather experienced in the first six months of 1995. DEGREE-DAYS CHART
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%
OPERATING EXPENSES (EXCLUDING FEDERAL INCOME TAXES)
1996 Change 1995 Change 1994 -------- ------ -------- ------ -------- (millions) Fuel, net........................................................... $ 987.0 (2.0)% $1,006.9 3.5% $ 973.0 Purchased power capacity, net....................................... 700.5 1.8% 688.4 2.8% 669.4 Other operation..................................................... 546.9 0.6% 543.7 (5.8)% 577.4 Maintenance......................................................... 250.9 (3.7)% 260.5 (1.0)% 263.2 Restructuring....................................................... 91.6 (22.3)% 117.9 Depreciation and amortization....................................... 536.4 6.5% 503.5 4.7% 480.7 Taxes, other than federal income.................................... 266.1 3.0% 258.3 1.0% 255.8 -------- -------- -------- Total............................................................... $3,379.4 0.0% $3,379.2 5.0% $3,219.5 -------- -------- -------- -------- -------- --------
Maintenance decreased compared to 1995, primarily as a result of a reduction in expenses attributable to Virginia Power's Vision 2000 initiatives, offset in part by the higher storm damage costs incurred from destructive summer storms, including Hurricane Fran. Depreciation and amortization increased 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. Other operation and maintenance decreased in 1995 compared to 1994. Expenses during 1994 included payroll and voluntary separation costs for those employees who elected to terminate service with Virginia Power 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. Nonoperating Income and Expenses, Net Nonoperating expenses, net increased in 1995 as compared to 1994 primarily as a result of higher interest rates on the utility's First and Refunding Mortgage Bonds and Pollution Control Notes and as a result of a reduction of $10.6 million in the interest accrued for prior years on certain tax obligations in 1994. Dominion Energy New Businesses Dominion Energy has expanded its oil and natural gas and foreign power generation businesses through the development of existing assets and the following acquisitions. In March 1996, Dominion Energy, through a wholly-owned subsidiary, acquired interests in natural gas and oil properties in the Gulf of Mexico. The estimated proved reserves from this acquisition were 36 billion cubic feet of natural gas and 1.9 million barrels of oil and liquids. In April 1996, Dominion Energy acquired a gas management and marketing company, Carthage Energy Services, Inc. In August 1996, Dominion Energy, through wholly-owned subsidiaries, acquired a 60-percent ownership and management interest in Empresa de Generacion Electrica NorPeru S.A. (EGENOR). EGENOR is a generation company providing power to Peru's northern region. The government-owned ElectroPeru S.A. and the employees of EGENOR collectively retain 21 a 40-percent interest in EGENOR. Dominion Energy continues to assess sale opportunities for a portion of its interest in EGENOR to a third party. Results of Operations Dominion Energy's net income amounted to $32.5 million as compared to $35 million in 1995. The decrease in earnings was due primarily to a reduction in the company's reported gain on sale of assets which in 1995 included a $5.4 million after tax gain on the sale of Black Warrior Trust Units. In 1995, net income decreased by $24.6 million when compared to 1994 primarily due to the sale of the Black Warrior Trust Units in 1994. The sale of the units, which hold royalty interests in proven, developed natural gas properties, provided a net gain of $28.9 million in 1994.
1996 Change 1995 Change 1994 ------ ------ ------ ------ ------ (millions) Revenues.............................................................. $267.1 46.5% $182.3 (13.4)% $210.6 Operating expenses.................................................... 233.8 54.7% 151.1 1.8% 148.4 Nonoperating expenses, net............................................ 0.8 121.1% (3.8) (246.2)% 2.6 ------ ------ ------ Net income............................................................ $ 32.5 (7.1)% $ 35.0 (41.3)% $ 59.6 ------ ------ ------ ------ ------ ------
Revenues In 1996, revenues increased compared to 1995 by $84.8 million. The increase was due to added capacity in foreign power generation resulting from a full year of operations by Empresa Electrica Corani S.A. (Corani) in Bolivia and the 1996 acquisition of EGENOR. In addition, gas price increases and the increase in gas production due to the acquisition and development of natural gas properties provided additional revenues in 1996 not available in 1995. In 1995, revenues decreased as compared to 1994 by $28.3 million due to the sale in 1994 of the Black Warrior Trust Units. This revenue reduction was partially offset by the increase in 1995 in gas revenues due to increased gas prices and production. Operating Expenses In 1996, operating expenses increased by $82.7 million as compared to 1995, primarily due to a full year's incurrence of operating, maintenance and depreciation expenses at Corani. The increase was also due to similar expenses incurred by EGENOR, which was not part of Dominion Energy's operations in 1995, and the additional depreciation and depletion expenses incurred due to the acquisition and development of oil and gas properties. Dominion Capital New Businesses On May 13, 1996, Dominion Capital, through a wholly-owned subsidiary, acquired the stock of Saxon Mortgage, Inc. (Saxon Mortgage), the company's single-family mortgage origination division and Meritech Mortgage Services, Inc., the company's single-family mortgage servicing operation. Dominion Capital also organized a new indirect subsidiary, Saxon Asset Securities, Inc., which is responsible for securitizing the single-family residential loans. Results of Operations Dominion Capital's net income for 1996 amounted to $28.5 million as compared to $17.6 million in 1995. The increase in earnings was primarily due to residential mortgage loan securitizations performed by Saxon Asset Securities, Inc. In 1995, Dominion Capital reported a decrease in net income of $1.3 million when compared to the 1994 results of $18.9 million. The results were primarily due to the increase in taxes because of a reduction in other tax benefits and higher income subject to tax. These expenses were offset in part by an increase in revenues at First Source Financial, Inc. (First Source Financial). First Source Financial, which began operations in April 1995, is a commercial lender to middle-market businesses.
1996 Change 1995 Change 1994 ------ ------ ------ ------ ----- (millions) Revenues....................................................................... $186.3 66.6% $111.8 12.7% $99.2 Operating expenses............................................................. 106.1 70.0% 62.4 (6.2)% 66.5 Nonoperating expenses, net..................................................... 51.7 62.6% 31.8 130.4% 13.8 ------ ------ ----- Net income..................................................................... $ 28.5 61.9% $ 17.6 (6.9)% $18.9 ------ ------ ----- ------ ------ -----
22 Revenues In 1996, Dominion Capital's revenues increased $74.5 million when compared to 1995 primarily due to the gains recognized in the securitizations of residential mortgage loans which contributed $41.9 million to revenues. Revenues in 1995 were $12.6 million higher than revenues in 1994 primarily due to revenues from First Source Financial. Operating Expenses In 1996, operating expenses increased by $43.7 million when compared to 1995 due to additional real estate project costs and the operating expenses incurred at Saxon Mortgage, which was acquired in 1996 by Dominion Capital. Nonoperating Income and Expenses, Net Nonoperating expenses, net increased by $19.9 million in 1996 compared to 1995 primarily due to an increase in pre-tax book income. Federal income taxes increased in 1995 compared to 1994 by $18.3 million primarily due to the decrease in other tax benefits plus higher income subject to tax. Corporate Results of Operations In 1996, Corporate net loss has decreased by $5.6 million compared to 1995 primarily due to $3.6 million in restructuring expenses and the $8.8 million in other charges recorded in 1995. These expenses included restructuring costs at the holding company as well as litigation and other costs. Net income in 1995 decreased $11.1 million compared to 1994 primarily due to the recording of $3.6 million of restructuring expenses and $8.8 million in other charges. Future Issues Utility Issues Regulatory Matters: Regulatory policy continues to be of fundamental importance to Virginia Power. On October 7, 1996, the Virginia State Corporation Commission (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 Virginia Commission to increase its annual fuel cost recovery approximately $48.2 million. The proposed fuel factor became effective on December 1, 1996. A hearing has been scheduled for April 17, 1997. Any potential adjustments to the factor ordered after the hearing will be reflected prospectively after entry of the final order. On November 12, 1996, the Virginia Commission instituted a proceeding and directed Virginia Power to provide certain information, including any alternative form of regulation proposed by Virginia Power 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 Virginia Power's rates shall become interim rates subject to refund as of March 1, 1997. Various provisions of the Energy Policy Act of 1992 (the Energy Act) that could affect Virginia Power include those provisions encouraging the development of non-utility generation, giving the Federal Energy Regulatory Commission (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 Virginia Power cannot at this time be quantified, it is likely, over time, to be significant. Competition: 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. Virginia Power 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 23 to electric utilities seeking assistance in the management and operation of their nuclear generating facilities; it has 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 Virginia Power will not be prevented from recovering prudently-incurred costs and investments. In addition, Virginia Power is actively pursuing strategic alliances with partners whose strengths, market position and strategies complement Virginia Power's and where efficiencies can be gained through the alliance. 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. Virginia Power 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 Virginia Power'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, Virginia Power has not experienced any material loss of load, and the reduction in 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 Act and FERC regulations thereunder. During 1996, sales to wholesale customers represented approximately 8 percent of Virginia Power's total revenues from electric sales. Approximately 4 percent of wholesale revenues resulted from Virginia Power's 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, Virginia Power 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, Virginia Power's recovery of fixed charges will be reduced over time as supplemental capacity rates transition from fully-embedded costs to market-based pricing. Virginia Power 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 subcommittee 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 on 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 24 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 determine stranded cost payments when utility property is condemned by a municipality or other corporation possessing the power of eminent domain. Virginia Power 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. Virginia Power 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. Virginia Power'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, Virginia Power would commit to writeoff $494 million of regulatory assets or other potentially stranded costs during the five-year rate freeze period; however, Virginia Power 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. Virginia Power 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 Virginia Power'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 shareholders' investment. Virginia Power'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 Virginia Power's results of operations and financial position may result. In light of changes predicted for the electric utility industry, Virginia Power will continue monitoring its regulated 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," 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. Virginia Power'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 D to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual Report to Shareholders). In addition, unfunded obligations for nuclear plant decommissioning and postretirement benefits not yet recognized in the financial statements could contribute to Virginia Power's exposure to potentially stranded costs (see 25 Notes A and N to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual Report to Shareholders). 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. Environmental Matters: Virginia Power 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 Virginia Power. These costs have been historically recovered through the ratemaking process; however, should material costs be incurred and not recovered through rates, Virginia Power's results of operations and financial condition could be adversely impacted. Virginia Power incurred expenses of $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, $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. The Clean Air Act, as amended in 1990, requires Virginia Power 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 Environmental Protection Agency (EPA). Virginia Power 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 SO2 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. Virginia Power 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 regulations have not yet been promulgated. In 1996, Virginia Power 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 utility 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 utility 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, Virginia Power 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. 26 Capital expenditures on Clear 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 Virginia Power 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. Electromagnetic Fields: The possibility that exposure to electromagnetic fields (EMFs) 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 EMFs may have on the company's financial condition. Nuclear Operations: The Nuclear Regulatory Commission (NRC) revised the nuclear power plant license renewal rules issued in 1991. Virginia Power intends to work with industry groups on license renewal programs, and to apply for renewal of the current 40-year licenses. Nonutility Issues Dominion Energy: Dominion Energy has evolved into a company that emphasizes building businesses in the Americas with long-term earnings and value growth. The key to this growth is the attainment of low cost production in geographical areas where Dominion Energy has institutional experience and staff in place. Dominion Energy will pursue this mission through its business lines of independent power generation and natural gas and oil exploration, development and operations. Dominion Energy's strategy with respect to power generation is to grow through selective bidding opportunities and the expansion of existing assets. The primary international markets of interest to Dominion Energy are South and Central America. Dominion Energy has also established regional offices for development in Argentina and Bolivia. Dominion Energy's strategy with respect to its natural gas and oil businesses is to continue to grow its reserve base, either through drilling or acquisition. In order to enhance the value in its oil and gas assets, Dominion Energy will invest in pipeline, gathering and storage facilities where these investments increase flexibility and market presence. Dominion Energy is also exploring ways to add value by integrating its gas supply entities with its power production units. Coincident with the growing economic opportunities are related risks. These risks include limited currency fluctuations, developments in both domestic and international economic conditions, and governmental and regulatory actions. Internationally, Dominion Energy is managing these risks by limiting its investments to more stable countries and by avoiding over-commitment to one country. The financial performance of the natural gas operations depends to a degree on the market price of natural gas which is influenced by many factors outside the control of Dominion Energy. However, due to the advantageous cost basis of its reserves and related tax credits, natural gas operations are profitable at today's market prices. Much of Dominion Energy's gas reserves has production-based tax credits. Consequently, future profitability could be affected adversely by federal legislation which would remove the tax credit prior to its current expiration in 2002. Dominion Capital: Dominion Capital has evolved from a company which centered its earnings performance primarily on transactional activity to one focused on obtaining earnings from ongoing operations. Dominion Capital's strategy is to actively operate and manage a specialized financial services business and to a lesser degree, continue its real estate activities. In addition, Dominion Capital plans to continue to expand its flexibility by achieving stand-alone taxpayer status and independent credit capacity. Dominion Capital is divided into three major strategic areas. They consist of (1) financial services businesses, (2) core investments of Rincon Securities and Vidalia Hydroelectric, and (3) real estate and passive investments. The financial services businesses, from which management expects continued growth, focus on commercial lending to medium-sized companies, origination and servicing of home mortgage and home equity loans to individuals, and a merchant banking enterprise whose clients are small to medium sized oil and gas producers. The primary risks characteristic of these businesses are credit, interest rate, operation reserve, and market price of gas. The credit risk is mitigated by diversification of client base, geographic and industry concentrations. In addition, these companies are managed by experienced management and underwriting professionals. The interest rate risk is managed by floating rate loans, loan securitizations which transfer most of the risk to investors, prepayment penalties and hedging programs for presecuritized loans. The operation reserve risk is tempered by doing business with clients that have management teams with proven track records and requiring quality third-party reserve reports. The gas market price risk is hedged through a swap program that establishes a price for reserves that supports the original loan underwritten. 27 Rincon Securities and Vidalia Hydroelectric will be managed to optimize profitability but will not offer growth opportunities. The real estate and passive direct investments will be managed to harvest capital for reinvestment. The critical risk to the real estate investments is the regional economy which affects both the market price and the product's absorption rate. Corporate Issues In November 1996, Dominion Resources through its indirect United Kingdom (U.K.) subsidiary DR Investments (UK) PLC, posted a formal offer document to the shareholders of East Midlands Electricity plc (East Midlands) and as of March 14, 1997, all outstanding shares of East Midland's have been acquired. This offer amounts to approximately $2.2 billion. East Midlands is a regional electricity company based in the Nottingham area of England that serves about 2.3 million homes and businesses. It buys electricity from the U.K. competitive pool and direct from generating companies and supplies it to all smaller businesses and domestic customers in its franchise area plus to larger business customers anywhere in the country on a negotiated contract basis. This is a pattern which may be coming to the United States as the push for more competition especially in the wholesale power market sector of the electricity business intensifies. In addition, Dominion Resources expects to gain valuable experience from the U.K. business in the area of direct competition for individual consumers when deregulation comes to the U.K. in 1998. Risk associated with this business includes the fact that the distribution business of East Midlands is regulated under a license pursuant to which revenue of the distribution business is controlled by a distribution price control formula established and reviewed by U.K. regulators. There can be no assurance that any review by the U.K. regulators will not adversely affect East Midlands. Furthermore, the supply business in the U.K. is being progressively opened to competition. Other factors that could adversely affect the business of East Midlands are pool purchase price volatility (East Midlands obtains the electricity it sells under fixed price contracts by purchases from wholesale trading markets in the U.K.) and changes in U.K. governmental policies, including the possible introduction of a one-time tax on excess profits of privatized utilities. East Midlands expects to continue to effectively compete in the U.K. supply business, utilizing elaborate hedging programs to manage purchase price volatility risk. Other Risk Factors and Risk Management Matters In 1996 and January 1997, Dominion Resources instituted and implemented risk management policies involving derivative transactions at the corporate, nonutility and utility levels. In 1997, Dominion Resources will continue to use derivative financial instruments for prudent risk management. For more information on derivative transactions (see Notes A and P to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the 1996 Annual Report to Shareholders). As Dominion Resources continues to expand its operations in competitive power supply markets, the possibility of challenges by contractual purchasers of power exists. There could be a significant impact on the results of operations of Dominion Resources if any of the contracts were to be successfully challenged resulting in unfavorable modifications. Management continues to evaluate its significant power contracts and has concluded that the terms are binding and enforceable. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION (Unaudited) Consolidated Financing Activity Each of Dominion Resources' subsidiaries -- Virginia Power, Dominion Energy, and Dominion Capital -- obtains capital primarily through cash from operations, debt financings and equity contributed by the parent. The utility and nonutility companies obtain financing based on their individual credit profiles and ability to repay the debt; in no way are the other companies contingently liable for each other's indebtedness. Commercial Paper To finance working capital for operations, proceeds from the sale of Dominion Resources commercial paper in regional and national markets are made available to its nonutility subsidiaries under the terms of intercompany credit agreements. To support these borrowings, Dominion Resources had available bank lines of credit totaling $400.8 million at the end of 1996. Amounts borrowed by the subsidiaries are repaid to Dominion Resources through cash flows from operations and through proceeds from permanent financings. Virginia Power has a commercial paper program with a limit of $500 million. The program is supported by $500 million of revolving credit facilities and is used primarily to finance working capital for operations. Common Equity Dominion Resources made no underwritten public offerings of common stock in 1996, but did raise capital from sales of common stock through the Automatic Dividend Reinvestment and Stock Purchase Plan, Customer Stock Purchase Plan, Dominion Direct Investment plan, and Employee Savings Plan. On July 8, 1996, Dominion Resources established the Dominion Direct Investment plan. The Dominion Direct Investment Plan continues and expands the Automatic Dividend Reinvestment and Stock Purchase Plan. Dominion Resources will continue to raise capital through Dominion Direct Investment and the Employee Savings plans in 1997. Proceeds from these plans were (in millions): 1996-$164.2; 1995-$136.9; and 1994-$166. Reflected in the amounts of proceeds from these plans were the repurchases of 136,800 shares of common stock in 1996 for an aggregate price of $5.5 million, 685,500 shares of common stock in 1995 for an aggregate price of $24.8 million, and 566,000 shares in 1994 for an aggregate price of $20.7 million. In 1997, Dominion Resources expects to make an underwritten public offering of common stock in the amount of approximately $300 million to finance the purchase of East Midlands. Virginia Power Liquidity and Capital Resources Cash flow from operating activities has accounted for, on average, 75% of Virginia Power's cash requirements over the past three years. With the completion of the 882 Mw coal-fired power station near Clover, Virginia, Virginia Power 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 Virginia Power'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. 29 Cash from (used in) financing activities was as follows:
1996 1995 1994 ------- ------- ------- (millions) Contribution from parent.................................................. $ 75.0 Issuance of long-term debt................................................ $ 24.5 $ 240.0 464.0 Repayment of long-term debt............................................... (284.1) (439.0) (334.3) Issuance of securities of subsidiary trust................................ 135.0 Issuance (repayment) of short-term debt................................... 143.4 169.0 (43.0) Common dividend payments.................................................. (385.8) (394.3) (395.5) Other..................................................................... (48.8) (58.0) (50.5) ------- ------- ------- Total................................................................ $(550.8) $(347.3) $(284.3) ------- ------- ------- ------- ------- -------
In 1996, Virginia Power 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, Virginia Power retired a total of $259.6 million of Medium-Term Notes through mandatory maturities. In June 1996, Virginia Power 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, Virginia Power filed a registration statement with the Securities and Exchange Commission for $400 million of Junior Subordinated Debentures. At December 31, 1996, Virginia Power 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, Virginia Power issued $200 million of First and Refunding Mortgage Bonds, the proceeds of which were primarily used to refund a portion of Virginia Power's debt that matured in February and March of 1997. These three shelf registrations combine to provide Virginia Power with $975 million of unused debt capital resources. In addition, Virginia Power has a Preferred Stock shelf, registered with the Securities and Exchange Commission, for $100 million in aggregate principal amount, which has not been utilized. Virginia Power 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 on new generating facilities. Capital Requirements Virginia Power presently anticipates that kilowatt-hour sales will grow approximately 2.4 percent a year through 2011. Both the Hoosier 400 Mw long-term purchase 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 growth, Virginia Power presently anticipates adding 1,200 Mw of short-term (three-year) purchases beginning in 2000. Virginia Power 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 Virginia Power or may be built by Virginia Power if it determines it can build capacity at a lower overall cost. Clover Unit 2, which is part of a two-unit facility jointly owned with ODEC, began commercial operation in March 1996. Virginia Power's fifty percent ownership share of the cost of construction was completed at a cost of $235 million. Virginia Power will require $311.3 million to meet long-term debt maturities in 1997. Virginia Power presently estimates that all of its 1997 construction expenditures, including nuclear fuel expenditures, will be met through cash flow from 30 operations. Other capital requirements will be met through a combination of sales of securities including the sale of $200 million of First and Refunding Mortgage Bonds issued in February 1997 and short-term borrowings. Dominion Energy Liquidity and Capital Resources Dominion Energy funds its capital requirements through operations, equity contributions by Dominion Resources, an intercompany credit agreement with Dominion Resources and bank revolving credit agreements. Net cash provided by operating activities increased by $52.1 million in 1996, as compared to 1995, primarily due to cash generated by operations of acquired companies and assets and from normal operations. Cash from (used in) financing activities was as follows:
1996 1995 1994 ------- ------- ------- (millions) Contribution from parent.................................................. $ 75.0 $ 149.3 Issuance of long-term debt................................................ 221.7 Repayment of long-term debt............................................... (72.5) Repayment of short-term debt.............................................. (8.9) $ (52.6) Common dividend payments.................................................. (43.3) (31.6) (26.4) Issuance (repayment) of intercompany debt................................. 19.7 32.4 (47.1) Other..................................................................... 10.0 9.5 29.1 ------- ------- ------- Total................................................................ $ 274.2 $ 87.1 $ (97.0) ------- ------- ------- ------- ------- -------
In 1996, cash flows from financing activities of $274.2 million, resulted from long-term debt financing and equity contributions from Dominion Resources. The additional debt and equity requirements were used primarily for the acquisition of oil and gas properties and an interest in EGENOR. In 1995, cash flows from financing activities of $87.1 million resulted from the $149.3 million of equity contributions from Dominion Resources which was used to retire long-term debt of approximately $72.5 million and fund the acquisition of Corani. In 1994, cash flows used in financing activities decreased by $97 million, resulting from the repayment of short-term and intercompany debt. Proceeds from the sale of the Black Warrior Trust Units which amounted to $128.4 million were used to fund the repayments. Cash from (used in) investing activities was as follows:
1996 1995 1994 ------- ------- ------- (millions) Purchase of independent power properties.................................. $(167.3) $ (60.2) Purchase of natural gas properties........................................ (103.9) (68.3) $ (60.4) Sale of trust units....................................................... 16.4 128.4 Other..................................................................... (82.8) (24.1) (31.1) ------- ------- ------- Total................................................................ $(354.0) $(136.2) $ 36.9 ------- ------- ------- ------- ------- -------
Net cash flows used in investing activities in 1996 of $354 million were used primarily to fund the acquisition of oil and gas properties and an interest in EGENOR. In 1995, net cash flows used in investing activities of $136.2 million were primarily for the acquisitions of Corani and oil and gas properties. In 1994, net cash flows from investing activities increased, primarily due to the gain on the sale of the Black Warrior Trust Units offset by the purchase of oil and natural gas properties. Capital Requirements Capital requirements for Dominion Energy in 1997 are forecasted to be approximately $375 million. These requirements consist of: oil and gas expenditures of $115 million. Power generation will have capital expenditures of $260 million (including the Kincaid acquisition). Sources for these capital requirements will be: nonrecourse debt, cash flows from operations, equity from Dominion Resources and, if necessary, borrowings from the revolving credit facility. It should be noted that amounts enumerated above are estimates; consequently, actual amounts may differ. 31 Dominion Capital Liquidity and Capital Resources Dominion Capital funds its capital requirements through operations, intercompany credit agreement with Dominion Resources, equity contributions from Dominion Resources, a medium-term note facility, bank revolving credit agreements, term loans and a commercial paper program. Net cash provided by operating activities decreased by $179.1 million in 1996 as compared to 1995, primarily as a result of the funding of mortgage loans prior to the securitization of such loans in its financial services business. Net cash provided by operating activities increased to $49.3 million in 1995 as compared to 1994, primarily due to a number of factors resulting from normal operations. Cash from (used in) financing activities was as follows:
1996 1995 1994 ------ ------ ------ (millions) Contribution from parent..................................................... $ 85.0 $150.0 $ 4.9 Issuance of long-term debt................................................... 104.7 16.1 Repayment of long-term debt.................................................. (52.4) (41.5) (15.3) Common dividend payments..................................................... (30.7) (22.7) (12.7) Issuance (repayment) of intercompany debt.................................... 79.6 (52.1) 71.0 Other........................................................................ (0.4) (4.5) 0.8 ------ ------ ------ Total................................................................... $185.8 $ 45.3 $ 48.7 ------ ------ ------ ------ ------ ------
In 1996, cash flows from financing activities increased to $185.8 million, primarily due to the following transactions. Dominion Capital received seller financing of $47.5 million from Resource Mortgage Capital when it purchased Saxon Mortgage. Intercompany debt which is available through Dominion Capital's intercompany credit agreement with Dominion Resources, increased by $79.6 million. The proceeds were used to fund capital requirements not covered by proceeds from operations or debt, including the initial cash payment of the Saxon Mortgage acquisition, and medium term note maturities of $38.5 million. During the year, Senior Notes of $46 million were refinanced with similar debt. In 1995, cash flows from financing activities increased to $45.3 million due to an equity infusion of $150 million from Dominion Resources. The proceeds were used to invest in First Source Financial. The remaining proceeds from the equity infusion were used to pay down intercompany and long-term debt. In 1994, cash flows from financing activities increased to $48.7 million due to borrowings from the intercompany credit agreement. The proceeds from the borrowings were used to pay dividends and reduce long-term debt. Cash from (used in) investing activities was as follows:
1996 1995 1994 ------ ------ ------ (millions) Investments in affiliates..................................................... $(19.5) $(52.4) Capital expenditures.......................................................... (1.9) Other......................................................................... (23.9) (31.0) $(32.5) ------ ------ ------ Total.................................................................... $(43.4) $(85.3) $(32.5) ------ ------ ------ ------ ------ ------
Net cash flows used in investing activities in 1996 resulted from the acquisition of Saxon Mortgage, the residual interest in mortgage loans securitized relating to Saxon Mortgage and equity investments in Cambrian Capital (Cambrian), a merchant banking enterprise for emerging independent oil and natural gas producers. Net cash flows used in investing activities in 1995 resulted primarily from its investment in First Source Financial. Investing activities in 1994 resulted in a net cash outflow of $32.5 million as a result of venture capital and other investments. Capital Requirements Dominion Capital's principal focus is growing its financial services companies. First Source Financial will increase its loan portfolio from $650 million to approximately $954 million in 1997. Saxon Mortgage plans to generate almost $2 billion in loan originations primarily in the sub-prime credit arena during 1997. Cambrian will expand its loan portfolio to approximately $100 million in 1997. To finance these expansion plans in 1997, Dominion Capital plans to utilize approximately $160 million in new equity and intercompany debt. The remaining capital requirements will come from the reinvestment of cash from operations, harvesting capital from existing real estate and other assets, and various third party credit sources. Dominion Capital anticipates dividend payments to Dominion Resources of approximately $31 million. 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA DOMINION RESOURCES, INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
For The Years Ended December 31, 1996 1995 1994 -------- -------- -------- (millions, except per share amounts) OPERATING REVENUES AND INCOME:............................................................. Electric utility...................................................................... $4,382.6 $4,350.4 $4,170.8 Nonutility............................................................................ 459.7 301.3 320.3 -------- -------- -------- Total operating revenues and income................................................... 4,842.3 4,651.7 4,491.1 -------- -------- -------- OPERATING EXPENSES: Fuel, net............................................................................. 987.0 1,006.9 973.0 Purchased power capacity, net......................................................... 700.5 688.4 669.4 Restructuring......................................................................... 91.6 121.5 Other operation....................................................................... 807.5 721.6 739.6 Maintenance........................................................................... 250.9 260.5 263.2 Depreciation, depletion and amortization.............................................. 615.2 551.0 533.1 Other taxes........................................................................... 285.2 273.8 274.6 -------- -------- -------- Total operating expenses.............................................................. 3,737.9 3,623.7 3,452.9 -------- -------- -------- OPERATING INCOME........................................................................... 1,104.4 1,028.0 1,038.2 -------- -------- -------- OTHER INCOME............................................................................... 9.8 7.3 13.5 -------- -------- -------- INCOME BEFORE FIXED CHARGES AND FEDERAL INCOME TAXES....................................... 1,114.2 1,035.3 1,051.7 -------- -------- -------- FIXED CHARGES: Interest charges, net................................................................. 387.0 381.7 360.3 Preferred dividends and distributions of Virginia Power, net.......................... 42.6 46.5 42.2 -------- -------- -------- Total fixed charges................................................................... 429.6 428.2 402.5 -------- -------- -------- Income before provision for federal income taxes........................................... 684.6 607.1 649.2 Provision for federal income taxes.................................................... 212.5 182.1 171.0 -------- -------- -------- NET INCOME................................................................................. $ 472.1 $ 425.0 $ 478.2 Retained earnings, January 1............................................................... 1,427.6 1,455.2 1,417.8 COMMON DIVIDENDS AND OTHER DEDUCTIONS: Dividends............................................................................. (460.1) (448.7) (434.7) Other deductions...................................................................... (1.7) (3.9) (6.1) -------- -------- -------- RETAINED EARNINGS, DECEMBER 31............................................................. $1,437.9 $1,427.6 $1,455.2 -------- -------- -------- -------- -------- -------- Earnings per common share.................................................................. $ 2.65 $ 2.45 $ 2.81 -------- -------- -------- -------- -------- -------- Dividends paid per common share............................................................ $ 2.58 $ 2.58 $ 2.55 -------- -------- -------- -------- -------- -------- Average common shares outstanding.......................................................... 178.3 173.8 170.3 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of the Consolidated Financial Statements. 33 DOMINION RESOURCES, INC. CONSOLIDATED BALANCE SHEETS
At December 31, ---------------------- 1996 1995 --------- --------- (millions) ASSETS CURRENT ASSETS: Cash and cash equivalents......................................................................... $ 110.8 $ 66.7 Trading securities................................................................................ 16.4 10.8 Customer accounts receivable, net................................................................. 354.8 362.6 Other accounts receivable......................................................................... 174.9 104.2 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 Mortgage loans in warehouse....................................................................... 65.8 Other............................................................................................. 209.5 141.5 --------- --------- 1,320.5 1,096.7 --------- --------- INVESTMENTS: Investments in affiliates.................................................................... 457.5 436.2 Available-for-sale securities................................................................ 692.4 285.5 Nuclear decommissioning trust funds.......................................................... 443.3 351.4 Investments in real estate................................................................... 107.7 133.0 Other........................................................................................ 234.2 236.6 --------- --------- 1,935.1 1,442.7 --------- --------- PROPERTY, PLANT AND EQUIPMENT: (includes plant under construction of $180.1 [1995-$512.1])......................................... 16,815.8 15,977.4 Less accumulated depreciation, depletion and amortization.................................... 6,306.4 5,655.1 --------- --------- 10,509.4 10,322.3 --------- --------- DEFERRED CHARGES AND OTHER ASSETS: Regulatory assets............................................................................ 773.9 816.4 Other........................................................................................ 366.7 225.2 --------- --------- 1,140.6 1,041.6 --------- --------- TOTAL ASSETS........................................................................................ $14,905.6 $13,903.3 --------- --------- --------- ---------
The accompanying notes are an integral part of the Consolidated Financial Statements. 34 DOMINION RESOURCES, INC. CONSOLIDATED BALANCE SHEETS
At December 31, ---------------------- 1996 1995 --------- --------- (millions) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Securities due within one year............................................................... $ 750.7 $ 420.8 Short-term debt.............................................................................. 378.2 236.6 Accounts payable, trade...................................................................... 410.6 336.7 Accrued interest............................................................................. 107.3 110.5 Accrued payroll.............................................................................. 73.1 77.7 Severance costs accrued...................................................................... 50.2 42.5 Customer deposits............................................................................ 50.0 55.4 Other........................................................................................ 155.4 114.0 --------- --------- 1,975.5 1,394.2 --------- --------- LONG-TERM DEBT: Utility...................................................................................... 3,579.4 3,889.4 Nonrecourse-nonutility....................................................................... 505.7 523.5 Other........................................................................................ 642.5 199.0 --------- --------- 4,727.6 4,611.9 --------- --------- DEFERRED CREDITS AND OTHER LIABILITIES: Deferred income taxes........................................................................ 1,743.3 1,661.1 Investment tax credits....................................................................... 255.3 272.2 Deferred fuel expenses....................................................................... 3.3 57.7 Other........................................................................................ 452.2 340.2 --------- --------- 2,454.1 2,331.2 --------- --------- TOTAL LIABILITIES................................................................................... 9,157.2 8,337.3 --------- --------- COMMITMENTS AND CONTINGENCIES Virginia Power obligated mandatorily redeemable preferred securities of subsidiary trust*........... 135.0 135.0 PREFERRED STOCK: Virginia Power stock subject to mandatory redemption......................................... 180.0 180.0 Virginia Power stock not subject to mandatory redemption..................................... 509.0 509.0 --------- --------- COMMON SHAREHOLDERS' EQUITY: Common stock -- no par authorized 300,000,000 shares, outstanding -- 181,220,746 shares at 1996 and 176,414,110 shares at 1995................................................................. 3,471.4 3,303.5 Retained earnings................................................................................. 1,437.9 1,427.6 Allowance on available-for-sale securities, net of tax............................................ (1.1) (6.7) Other paid-in capital............................................................................. 16.2 17.6 --------- --------- 4,924.4 4,742.0 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................................... $14,905.6 $13,903.3 --------- --------- --------- ---------
- --------------- * As described in Note L, the 8.05% Junior Subordinated Notes totaling $139.2 million principal amount constitute 100% of the Trust's assets. The accompanying notes are an integral part of the Consolidated Financial Statements. 35 DOMINION RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 31, -------------------------------- 1996 1995 1994 --------- -------- ------- (millions) CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES: Net income............................................................................... $ 472.1 $ 425.0 $ 478.2 Adjustments to reconcile net income to net cash: Depreciation, depletion and amortization............................................ 694.4 633.5 610.7 Deferred income taxes............................................................... 84.1 26.4 68.2 Investment tax credits, net......................................................... (16.9) (16.9) (17.1) Allowance for other funds used during construction.................................. (3.0) (6.7) (6.4) Deferred fuel expense............................................................... (54.4) 6.2 (2.6) Deferred capacity expense........................................................... (9.2) 6.4 26.5 Restructuring expense............................................................... 56.3 96.2 Non-cash return on terminated construction project costs -- pre-tax................. (6.4) (8.4) (10.3) Gain on sale of trust units......................................................... (8.7) (49.0) Purchase of mortgage loans.......................................................... (769.2) Proceeds from sale and principal collections of mortgage loans...................... 703.4 Changes in current assets and liabilities: Accounts receivable.............................................................. (47.0) (38.7) 19.1 Accrued unbilled revenues........................................................ 17.6 (27.7) 11.9 Materials and supplies........................................................... 6.0 61.1 (6.5) Accounts payable, trade.......................................................... 73.8 (37.6) 32.6 Accrued interest and taxes....................................................... (17.5) 33.6 (46.5) Provision for rate refunds.......................................................... (12.2) (89.5) Other changes....................................................................... (151.9) 39.8 (27.5) --------- -------- ------- Net cash flows from operating activities................................................... 1,032.2 1,171.3 991.8 --------- -------- ------- CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES: Issuance of common stock............................................................ 169.7 161.7 186.7 Preferred securities of subsidiary trust............................................ 135.0 Issuance of long-term debt: Utility.......................................................................... 24.5 240.0 464.0 Nonrecourse-nonutility........................................................... 434.5 54.3 18.7 Other............................................................................ 342.5 Issuance (repayment) of short-term debt............................................. 134.5 101.1 (117.0) Repayment of long-term debt and preferred stock..................................... (336.5) (553.0) (349.6) Common dividend payments............................................................ (460.1) (448.7) (434.7) Other............................................................................... (4.5) (20.5) (8.0) --------- -------- ------- Net cash flows from (used in) financing activities......................................... 304.6 (330.1) (239.9) --------- -------- ------- CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES: Utility capital expenditures (excluding AFC-equity funds)........................... (484.0) (577.5) (660.9) Acquisition of natural gas and independent power properties......................... (271.2) (128.5) (60.4) Sale of accounts receivable, net.................................................... (160.0) (40.0) Sale of trust units................................................................. 16.4 128.4 Purchase of marketable securities................................................... (351.3) (61.8) Additions to mortgage investments................................................... (58.3) Acquisitions of businesses.......................................................... (19.5) (52.4) Other investments................................................................... (108.4) 42.6 (74.3) --------- -------- ------- Net cash flows used in investing activities................................................ (1,292.7) (921.2) (707.2) --------- -------- ------- Increase (decrease) in cash and cash equivalents........................................... $ 44.1 $ (80.0) $ 44.7 Cash and cash equivalents at beginning of the year......................................... 66.7 146.7 102.0 --------- -------- ------- Cash and cash equivalents at end of the year............................................... $ 110.8 $ 66.7 $ 146.7 --------- -------- ------- --------- -------- -------
The accompanying notes are an integral part of the Consolidated Financial Statements. 36 The NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on pages 36 through 50 and related report of Deloitte & Touche LLP, independent auditors, appearing on page 52 of the 1996 Annual Report to Shareholders, for the fiscal year ended December 31, 1996, filed herein as Exhibit 13, is hereby incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Directors of Dominion Resources contained on pages 2 through 4 of the 1997 Proxy Statement, File No. 1-8489, dated March 7, 1997 is hereby incorporated herein by reference. The information concerning the executive officers of Dominion Resources required by this Item is incorporated by reference to the section in Part I hereof entitled "EXECUTIVE OFFICERS OF THE REGISTRANT." ITEM 11. EXECUTIVE COMPENSATION The information regarding executive and director compensation contained on pages 10 through 17 of the 1997 Proxy Statement is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning stock ownership by directors and executive officers contained on page 5 of the 1997 Proxy Statement is hereby incorporated herein by reference. There is no person known by Dominion Resources to be the beneficial owner of more than five percent of Dominion Resources common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K A. Certain documents are filed as part of this Form 10-K and are incorporated herein by reference or found on the pages noted. 1. Financial Statements
1996 Annual Report 1996 to Shareholders Form 10-K (Page) (Page) --------------- --------- Report of Independent Auditors.................................................... 52 Report of Management.............................................................. 51 Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1996, 1995 and 1994............................ 33 Consolidated Balance Sheets at December 31, 1996 and 1995......................... 34-35 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994................................................ 36 Notes to Consolidated Financial Statements........................................ 36-50
2. Exhibits 3(i) - Articles of Incorporation as in effect May 4, 1987 (Exhibit 3(i), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8489, incorporated by reference). 3(ii) - Bylaws as in effect on September 21, 1994 (Exhibit 3(ii), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-8489, incorporated by reference). 4(i) - See Exhibit 3(i) above. 4(ii) - Indenture of Mortgage of Virginia Electric and Power Company, dated November 1, 1935, as supplemented and modified by fifty-eight Supplemental Indentures (Exhibit 4(ii), Form 10-K for the fiscal year ended December 31, 1985, File No. 1-2255, 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,
38 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 23, 1995, File No. 1-2255, incorporated by reference, and Eighty-Fifth Supplemental Indenture (Exhibit 4(i), Form 8-K, dated February 20, 1997, File No. 1-2255, incorporated by reference). 4(iii) - Indenture, dated April 1, 1985, between Virginia Electric and Power Company and Crestar Bank (formerly United Virginia Bank) (Exhibit 4(iv), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference). 4(iv) - Indenture, dated as of June 1, 1986, between Virginia Electric and Power Company and 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 Chase Manhattan Bank (formerly Chemical Bank), as Trustee, as supplemented (Exhibit 4(a), Form S-3 Registration Statement File No. 333-20561 as filed on January 28, 1997, incorporated by reference). 4(vii) - Dominion Resources agrees to furnish to the Commission upon request any other instrument with respect to long-term debt as to which the total amount of securities authorized thereunder does not exceed 10% of Dominion Resources' total assets. 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 as of June 7, 1996, between Chase Manhattan Bank (formerly Chemical Bank) and Virginia Electric and Power Company (Exhibit 10(i) and Exhibit 10(ii), Form 10-Q for the period ended June 30, 1996. File No. 1-2255, incorporated by reference). 10(vi) - Inter-Company Credit Agreement, dated December 20, 1985, as modified on August 21, 1987, between Dominion Resources and Dominion Capital, Inc. (Exhibit 10(vi), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8489, incorporated by reference). 10(vii) - Inter-Company Credit Agreement, dated October 1, 1987 as amended and restated as of May 1, 1988 between Dominion Resources and Dominion Energy, Inc. (Exhibit 10(vii), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8489, incorporated by reference).
39 10(viii) - Inter-Company Credit Agreement, dated as of September 1, 1988 between Dominion Resources and Dominion Lands, Inc. (Exhibit 10(viii), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-8489, incorporated by reference). 10(ix) - Form of Amended and Restated Articles of Partnership in Commendam of Catalyst Old River Hydroelectric Limited Partnership, by and between Catalyst Vidalia Corporation and Dominion Capital, Inc. effective as of August 24, 1990 (Exhibit 10(xii) Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8489, incorporated by reference). 10(x) - Supplemental Funding Agreement, dated as of August 24, 1990, by and among Dominion Capital, Inc., Catalyst Old River Hydroelectric Limited Partnership and First National Bank of Commerce (Exhibit 10(xiii) Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8489, incorporated by reference). 10(xi) - 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(xii) - 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(xiii) - 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(xiv) - 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(xv) - Coal-Fired Unit Turnkey Contract (Volume 1), dated April 6, 1989, and the United 2 Amendment (Volume 1), dated May 31, 1990 between Virginia Electric and Power Company and Old Dominion Electric Cooperative, Westinghouse, Black & Veatch, Combustion Engineering and H. B. Zachry (Volumes 2-11 contain technical specifications) (Exhibit 10(xiii), Form 10-K for the fiscal year ended December 31, 1990, File No. 1-2255, incorporated by reference). 10(xvi) - Trust Agreement of Dominion Resources Black Warrior Trust, dated May 31, 1994, among Dominion Black Warrior Basin, Inc., Dominion Resources, Inc., Mellon Bank (DE) National Association and Nationsbank of Texas, N.A. (Exhibit 3.1, Amendment No. 1 to Registration Statement, File No. 33-53513, filed June 1, 1994, incorporated by reference). 10(xvii) - First Amendment of Trust Agreement of Dominion Resources Black Warrior Trust, dated June 27, 1994, among Dominion Black Warrior Basin, Inc., Dominion Resources, Inc., Mellon Bank (DE) National Association and Nationsbank of Texas, N.A. (Exhibit 10(ii), Form 10-Q for the quarter ended June 30, 1994, File No. 1-8489, incorporated by reference). 10(xviii)* - Dominion Resources, Inc. Directors' Deferred Compensation Plan, effective July 1, 1986, as amended and restated effective January 1, 1996 (filed herewith). 10(xix)* - Dominion Resources, Inc. Performance Achievement Plan, effective January 1, 1986, as amended and restated effective February 19, 1988 (Exhibit 10(xxi), Form 10-K for the fiscal year ended December 31, 1988, File No. 1-8489, incorporated by reference). 10(xx)* - Dominion Resources, Inc. Executive Supplemental Retirement Plan, effective January 1, 1981 as amended and restated effective October 22, 1988 and amended and restated June 15, 1990 (Exhibit 10(xxiv), Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8489, incorporated by reference). 10(xxi)* - Arrangements with certain executive officers regarding additional credited years of service for retirement and retirement life insurance purposes (Exhibit 10(xxv), Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8489, incorporated by reference). 10(xxii)* - Dominion Resources, Inc.'s Cash Incentive Plan as adopted December 20, 1991 (Exhibit 10(xxii), Form 10-K for the fiscal year ended December 31, 1991, File No. 1-8489, incorporated by reference).
40 10(xxiii)* - Form of Employment Continuity Agreement for certain officers of Dominion Resources (Exhibit (xxvi), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-8489, incorporated by reference). 10(xxiv)* - Dominion Resources, Inc. Retirement Benefit Funding Plan, effective June 29, 1990 (Exhibit 10(xxxiii), Form 10-K for the fiscal year ended December 31, 1990, File No. 1-8489, incorporated by reference). 10(xxv)* - Dominion Resources, Inc. Retirement Benefit Restoration Plan as adopted effective January 1, 1991 (Exhibit 10(xxvii), Form 10-K for the fiscal year ended December 31, 1992, File No. 1-8489, incorporated by reference). 10(xxvi)* - Dominion Resources, Inc. Executives' Deferred Compensation Plan, effective January 1, 1994 and as amended and restated January 1, 1997 (filed herewith). 10(xxvii)* - Employment Agreement dated April 12, 1995 (Exhibit 10(i), Form 10-Q for the quarter ended March 31, 1995, File No. 1-8489, incorporated by reference) and an amendment dated September 15, 1995 between Dominion Resources and Thos. E. Capps (Exhibit 10(i), Form 10-Q for the quarter ended September 30, 1995, File No. 1-8489, incorporated by reference). 10(xxviii)* - Employment Agreement dated April 12, 1995 (Exhibit 10(i), Form 10-Q for the quarter ended March 31, 1995, File No. 1-8489, incorporated by reference) and an amendment dated September 15, 1995 between Virginia Power and James T. Rhodes (Exhibit 10(i), Form 10-Q for the quarter ended September 30, 1995, File No. 1-8489, incorporated by reference). 10(xxix)* - Form of three year Employment Agreement between Dominion Resources and David L. Heavenridge and certain other executive officers of Dominion Resources (Exhibit 10(xxxiii), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-8489, incorporated by reference). 10(xxx)* - Dominion Resources, Inc. Stock Accumulation Plan for Outside Directors, effective April 23, 1996 (Exhibit 10, Form 10-Q for the quarter ended March 31, 1996, File No. 1-8489, incorporated by reference). 10(xxxi)* - Employment Agreement dated February 21, 1997 between Dominion Resources and Norman Askew (filed herewith). 10(xxxii) - Recommended Cash Offer dated November 22, 1996 by SBC Warburg and Wasserstein Perella & Co. Limited on behalf of DR Investments (UK) PLC, a wholly owned subsidiary of Dominion Resources, Inc. (filed herewith). 11 - Computation of Earnings Per Share of Common Stock Assuming Full Dilution (filed herewith). 13 - Portions of the 1996 Annual Report to Shareholders for the fiscal year ended December 31, 1996 (filed herewith). 21 - Subsidiaries of the Registrant (filed herewith). 23 - Consent of Deloitte & Touche LLP (filed herewith). 27 - Financial Data Schedule (filed herewith).
- --------------- * Indicates management contract or compensatory plan or arrangement. B. Reports on Form 8-K Dominion Resources filed a report on Form 8-K, dated January 23, 1997, reporting the acquisition, through a newly created United Kingdom subsidiary, of East Midlands Electricity plc, a regional electricity company based in the United Kingdom. Dominion Resources filed an amendment to the above Form 8-K, dated January 23, 1997, on March 20, 1997 (Form 8-K/A), reporting the financial statements and pro forma financial information for the acquisition of East Midlands Electricity plc in the United Kingdom. 41 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DOMINION RESOURCES, INC. By: THOS. E. CAPPS ------------------------------------ (Thos. E. Capps, Chairman of the Board of Directors, President and Chief Executive Officer) Date: MARCH 24, 1997 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 and on the 24th day of March, 1997. Signature Title --------- ----- JOHN B. ADAMS, JR. Director - --------------------------------------- John B. Adams, Jr. JOHN B. BERNHARDT Director - --------------------------------------- John B. Bernhardt THOS. E. CAPPS Chairman of the Board of Directors, - --------------------------------------- President (Chief Executive Officer) Thos. E. Capps and Director BENJAMIN J. LAMBERT, III Director - --------------------------------------- Benjamin J. Lambert, III RICHARD L. LEATHERWOOD Director - --------------------------------------- Richard L. Leatherwood HARVEY L. LINDSAY, JR. Director - --------------------------------------- Harvey L. Lindsay, Jr. K. A. RANDALL Director - --------------------------------------- K. A. Randall WILLIAM T. ROOS Director - --------------------------------------- William T. Roos FRANK S. ROYAL Director - --------------------------------------- Frank S. Royal JUDITH B. SACK Director - --------------------------------------- Judith B. Sack 42 Signature Title --------- ----- S. DALLAS SIMMONS Director - --------------------------------------- S. Dallas Simmons Director - --------------------------------------- Robert H. Spilman LINWOOD R. ROBERTSON Executive Vice President - --------------------------------------- (Chief Financial Officer) Linwood R. Robertson J. L. TRUEHEART Vice President and Controller - --------------------------------------- (Principal Accounting Officer) J. L. Trueheart 43 DOMINION RESOURCES, INC. PORTIONS OF THE 1996 ANNUAL REPORT TO SHAREHOLDERS (Incorporated by Reference) EX-10 2 EX-10(XVIII) EXHIBIT 10 (xviii) 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 EX-10(XXVI) EXHIBIT 10(xxvi) 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 EX-10(XXXI) Exhibit 10(xxxi) EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is made as of February 1, 1997, between DOMINION RESOURCES, INC. (the "Company") and Norman Askew. RECITALS: The Board of Directors of Dominion Resources, Inc. (the "Board of Directors") recognizes that outstanding management of the company is essential to advancing the best interest of the Company, its shareholders and its subsidiaries. The Board of Directors believes that it is particularly important to have stable, excellent management at the present time. The Board of Directors believes that this objective may be achieved by giving key management employees assurances of financial security for a period of time, so that they will not be distracted by personal risks and will continue to devote their full time and best efforts to the performance of their duties. The Organization and Compensation Committee of the Board of Directors (the "Committee") has recommended, and the Board of Directors has approved, entering into employment agreements with the Company's key management executives in order to achieve the foregoing objectives. The Executive is a key management executive of the Company, and is a valuable member of the Company's management team. The Company acknowledges that the Executive's contributions to the growth and success of the Company will be substantial. The Company and the Executive are entering into this Agreement to induce the Executive to become an employee of the Company and to devote his full energy to the Company's affairs. The Executive has agreed to be employed by the Company under the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing and the mutual undertakings contained in this Agreement, the parties agree as follows: 1. Employment. The Company will employ the Executive, and the Executive will continue in the employment of the Company as an executive of the Company, for the period beginning March 1, 1997 and ending November 1, 2002 (the "Term of this Agreement"), according to the terms of this Agreement. 2. Duties. The Company and the Executive agree that, during the Term of this Agreement, the Executive will serve in a senior management position with the Company. The Executive (i) will devote his knowledge, skill and best efforts on a full-time basis to performing his duties and obligations to the Company (with the exceptions of absences on the account of illness or vacation in accordance with the Company's policies and civic and charitable commitments not involving a conflict with the Company's business), and (ii) will comply with the lawful and nonarbitrary directions and orders of the Board of Directors and Chief Executive Officer of the Company with respect to the performance of his duties. 3. Effect on Other Agreements. (a) The Board of Directors recognizes that the Executive has entered or will enter into an Employment Continuity Agreement with the Company, which provides benefits under certain circumstances in the event of a change in control of the Company. Notwithstanding anything in this Agreement to the contrary, if the Executive's employment terminates for any reason after a change in control and payments are to be made to the Executive under the Executive's Employment Continuity Agreement: (i) the Executive will not receive payments under this Agreement as a result of his termination of employment for any reason, (ii) after payment of any amounts otherwise due the Executive under this Agreement, this Agreement will terminate without liability on the part of the Company, and (iii) if and to the extent that any payments made under this Agreement are considered "parachute payments" for purposes of Section 280G of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), the payments will be taken into account in determining the amount to be paid to the Executive under the Employment Continuity Agreement according to the Terms of the Employment Continuity Agreement. If a change of control occurs, and the Executive is not entitled to receive payments under the Executive's Employment Continuity Agreement, this Agreement will continue in effect according to its terms. (b) Except as provided above, this Agreement sets forth the entire understanding of the parties with respect to the Executive's employment with the Company. The Executive and the Company agree that, effective as of the execution of this Agreement, any prior employment agreements between the Executive and East Midlands Electricity plc ("EME") (other than the Executive's Employment Continuity Agreement) are null and void. The term "employment agreement" as used in the preceding sentence does not include any retirement, incentive or benefit plan or program in which the Executive participates. 4. Affiliates. Employment by an Affiliate of the Company or a successor to the Company will be considered employment by the Company for purposes of this Agreement, and termination of employment with the Company means termination of employment with the Company and all its Affiliates and successors. The term "Company" as used in this Agreement will be deemed to included Affiliates and successors. For purposes of this Agreement, the term "Affiliate" means the subsidiaries of Dominion Resources, Inc. and other entities under common control with Dominion Resources, Inc. 5. Compensation and Benefits. (a) During the Term of this Agreement, while the Executive is employed by the Company, the Company will pay to the Executive the following salary and incentive awards for services rendered to the Company: (i) The Company will pay to the Executive an annual salary in an amount not less than the base salary paid by EME in effect for the Executive as of the date on which this Agreement is executed. The Board of Directors will evaluate the Executive's performance at least annually and will consider annual increases in the Executive's salary based on the Executive's performance. (ii) The Executive will be entitled to receive incentive awards if and to the extent that the Board of Directors determines that the Executive's performance merits payment of an award. The Board of Directors will make its determination consistent with the methodology used by the Company for compensating its senior management employees. (b) During the Term of this Agreement, while the Executive is employed by the Company, the Executive will be eligible to participate in a similar manner as other senior executives in the Company's Benefit Restoration Plan, Executive Supplemental Retirement Plan ("ESRP"), cash and stock incentive plans, and such other fringe benefit and employee benefit plans and programs that the Company makes available to the Executive from time to time. (c) If the Executive attains age 60 while employed by the Company, the Executive's retirement benefits under the Company's Benefit Restoration Plan will be computed based on the greater of (A) the Executive's years of credited service (determined as if the Executive was a participant in the Company's Retirement Plan and pursuant to the terms of the Retirement Plan), or (B) thirty (30) years of credited service, and will be reduced by the amount of benefits payable to the Executive under the EME Pension Plan and Amending Deed for the Pension and Death Benefits Arrangement for N B M Askew. Any benefit to be provided under this subsection (c) will be provided as a supplemental benefit under this Agreement and will not be provided from the Retirement Plan. The provisions of this subsection (c) shall survive the termination of this Agreement. (d) The Executive will be entitled to a fully vested benefit under the ESRP if the Executive attains age 58 while employed by the Company. The Executive's benefit under the ESRP will be funded in the Dominion Resources, Inc. Executive Retirement Plan Trust in equal installments so that at age 60 the Executive's benefit under the Plan is 100% funded. The provisions of this subsection (d) shall survive the termination of this Agreement. (e) A proforma payout schedule is attached as Appendix A which is based on certain assumptions that may or may not be applicable. This Appendix is attached for interpretive purposes only and is not a binding payout schedule. 6. Termination of Employment. (a) If the Company terminates the Executive's employment, other than for Cause (as defined in Section 8 below), during the Term of this Agreement, the Company will pay the Executive a lump sum payment equal to the present value of the Executive's annual base salary for the balance of the Term of this Agreement. The lump sum payment will be computed as follows: (i) For purposes of this calculation, the Executive's annual base salary for the balance of the Term of the Agreement will be calculated at the highest annual base salary rate in effect for the Executive during the three-year period preceding his termination of employment. Salary that the Executive elected to defer will be taken into account for purposes of this Agreement without regard to the deferral. (ii) The salary for any partial year in the Term of this Agreement will be a pro-rated portion of the annual amount. (iii) Present value will be computed by the Company as of the date of the Executive's termination of employment, based on a discount rate equal to the applicable, U.S. Federal short-term rate, as determined under Section 1274 (d) of the Code, compounded monthly, in effect on the date as of which the present value is determined. (iv) The lump sum payment will be paid within 30 days after the Executive's termination of employment. (b) If the Company terminates the Executive's employment, other than for Cause, during the Term of this Agreement, the Executive will be entitled to receive the following additional benefits determined as of the date of his termination of employment: (i) Any outstanding restricted stock or stock options that would become vested (that is, transferable and nonforfeitable, or excercisable) if the Executive remained an employee through the Term of this Agreement will become vested as of the date of the Executive's termination of employment (or as of the date described in the next sentence, if applicable). In addition, if the Company has agreed to award the Executive performance shares or restricted stock at the end of a performance period, subject to the Company's achievement of performance goals, and the date as of which the performance shares are to be awarded, or the restricted stock is to become vested, falls within the Term of this Agreement, the stock will be awarded and become vested at the end of the performance period if and to the extent that performance goals are met. The Executive must satisfy the tax withholding requirements described in Section 10 with respect to the performance shares and restricted stock. (ii) The Executive will be credited with age and service credit through the end of the Term of this Agreement for purposes of computing benefits under any Company pension, medical and other benefit plan, including ESRP, in which the Executive was participating as of the date of his termination of employment. Service credited to the Executive for purposes of this subsection (ii) shall be in addition to any service credited to the Executive pursuant to Section 5 (c). The Company will pay the Executive a lump sum cash amount that reasonably approximates the after-tax value to the Executive of such age and service credit and continued coverage through the end of the Term of this Agreement, in lieu of continuing coverage under the Company's benefit plans. (c) If the Executive voluntarily terminates employment with the Company during the Term of this Agreement under circumstances described in this subsection (c) , the Executive will be entitled to receive the benefits described in subsections (a) and (b) above as if the Company had terminated the Executive's employment other than for Cause. Subject to the provisions of this subsection (c) , these benefits will only be provided if the Executive voluntarily terminates employment after (i) the Company reduces the Executive's base salary, (ii) the Executive is not in good faith considered for incentive awards as described in Section 5 (a) (ii), (iii) the Company fails to provide benefits as required by Section 5 (b) and 5 (c), (iv) the Company relocates the Executive's place of employment to a location further than 50 miles from Nottingham, U.K. (other than in connection with a temporary assignment to the United States of no more than 3 months), or (v) the Company demotes the Executive to a position that is not a senior management position (other than on account of the Executive's disability, as defined in Section 7 below). For this purpose, a "senior management position" means the position of Chief Executive Officer or Chief Operating Officer of Dominion Resources, Inc. ("DRI"), the position of President or Chief Executive Officer of a subsidiary of DRI, or a position that reports directly to the Chief Executive Officer, Chief Operating Officer, or Senior Vice President of DRI. In order for this subsection (c) to be effective: (1) the Executive must give written notice to the Company indicating that the Executive intends to terminate employment under this subsection (c), (2) the Executive's voluntary termination under this subsection must occur within 60 days after the Executive knows or reasonably should know of an event described in clause (i), (ii), (iii), (iv) or (v) above, or within 60 days after the last in a series of such events, and (3) the Company must have failed to remedy the event described in clause (i), (ii), (iii), (iv) or (v), as the case may be, within 30 days after receiving the Executive's written notice. If the Company remedies the event described in clause (i), (ii), (iii), (iv) or (v), as the case may be, within 30 days after receiving the Executive's written notice, the Executive may not terminate employment under this subsection (c) on account of the event specified in the Executive's notice. (d) The amounts under this Agreement will be paid in lieu of severance benefits under any severance plan or program maintained by the Company in which the Executive participates (subject to Section 3 above). The amounts payable under this Agreement will not be reduced by any amounts earned by the Executive from a subsequent employer or otherwise. If the Executive's employment is terminated by the Company for Cause this Agreement will immediately terminate without liability on the part of the Company. (e) If the Executive (i) voluntarily terminates employment for a reason not described in subsection (c) above or Section 7 below, and (ii) gives the Company no less than 6 months prior notice of termination in accordance with the provisions of Section 15 below, the Company will pay to the Executive an amount equal to the additional benefits the Executive would have accrued under the EME Pension Plan and the Amending Deed for the Pension and Death Benefits Arrangement for N B M Askew, had he remained a participant in such plans through the Term of the Agreement. The amount paid under this subsection (e) will be paid as a supplemental benefit under this Agreement and will not be provided from the EME Pension Plan or the Amending Deed for the Pension and Death Benefits Arrangement for N B M Askew. This amount will be paid in lieu of any other benefits payable under this Agreement, which will immediately terminate without liability on the part of the Company. 7. Disability or Death. If the Executive becomes disabled (as defined below) during the Term of this Agreement while he is employed by the Company, the Executive shall be entitled to receive the benefits described in Section 6 (b) (i) of this Agreement as of the date on which he is determined by the Company to be disabled. If the Executive dies during the Term of this Agreement while he is employed by the Company, the benefits described in Section 6 (b) (i) will be provided to the personal representative of the Executive's estate. The foregoing benefits will be provided in addition to any death, disability and other benefits provided under Company benefit plans in which the Executive participates. Upon the Executive's death or disability, the provisions of Sections 1, 2, 5, and 6 of this Agreement will terminate. The term "disability" means a condition, resulting from bodily injury or disease, that renders, and for a six consecutive month period has rendered, the Executive unable to perform substantially the duties pertaining to his employment with the Company. A return to work of less than 14 consecutive days will not be considered an interruption in the Executive's six consecutive months of disability. Disability will be determined by the Company on the basis of medical evidence satisfactory to the Company. 8. Cause. For purposes of this Agreement, the term "Cause" means (i) fraud or material misappropriation with respect to the business or assets of the Company, (ii) persistent refusal or wilful failure of the Executive to perform substantially his duties or responsibilities to the Company, including any failure to comply with the directions or orders of the Board of Directors or the Chief Executive Officer of the Company with respect to the performance of his duties or responsibilities, (iii) conduct that constitutes disloyalty to the Company, and that materially harms, or has the potential to cause material harm to the Company, (iv) conviction of a felony or crime involving moral turpitude, or (v) the use of drugs or alcohol that interferes materially with the Executive's performance of his duties. 9. Post Termination. (a) The Executive undertakes to the Company that the Executive shall not during the period of 12 months from Executive's date of termination of employment be directly or indirectly interested or concerned (whether as shareholder, director, employee, partner, consultant, proprietor, agent or in any other capacity) in any business firm or company which (i) holds a public electricity supply license for the supply of electricity anywhere within the United Kingdom; or (ii) carries on anywhere within the United Kingdom any other business competing with any business carried on by the Company at the date of the Executive's termination of employment in which the Executive has been engaged or interested during the 12 months prior to the date of his termination of employment ("other relevant business") but nothing in this Section 9 shall prevent the Executive holding or being interested in listed securities not representing more than 5% in nominal amount of the issued securities of any class of any company which are listed on any recognized stock exchange anywhere in the world. (b) The Executive undertakes to the Company that the Executive shall not during the period of 12 months from the date of the Executive's termination of employment whether as principal agent or employee and whether directly or indirectly supply to any person, firm or company whom the Executive dealt with as a customer or potential customer of the Company in the last 12 months of the Executive's employment either electricity or any goods or services which are the same or substantially the same as the type of goods or services provided by any other relevant business of the Company at the date of termination of the Executive's employment whether or not the Executive has approached the customer or vice versa. (c) The Executive undertakes to the Company that the Executive shall not during the period of 12 months from the date of the Executive's termination of employment whether as principal agent or employee and whether directly or indirectly approach any person firm or company whom the Executive dealt with as a customer or potential customer of the Company in the last 12 months of the Executive's employment with the Company with an offer to supply them with electricity or any goods or services which are the same or substantially the same as the type of goods or services provided by any other relevant business of the Company at the date of termination of the Executive's employment with the Company. (d) The Executive undertakes to the Company that the Executive shall not during the period of 12 months from the date of termination of employment whether as principal agent or employer and whether directly or indirectly recruit or try to recruit any person as an employee or consultant or in some other capacity if that person was at any time during the last 12 months of the Executive's employment employed by the Company as a director or senior employee and the Executive had regular contact with such person through that person's work for the Company. (e) The Executive undertakes to the Company that the Executive shall also perform and observe the undertakings set out in Section 9 (a) to 9 (d) in relation to any Affiliates whose business or affairs the Executive has been engaged or interested in at any time during the last 12 months of the Executive's employment with the Company as if a reference to each such Affiliate was substituted for a reference to the Company in each case. This undertaking shall be construed and enforceable as a separate convenant in relation to each Affiliate and the Company shall be deemed to have the benefit of this covenant as trustee for any Affiliates. (f) It is agreed that each of the covenants contained on the part of the Executive in each of Section 9(a) to 9(c) inclusive is and shall be construed and enforceable as a separate covenant. (g) In this Section 9 references to acting directly or indirectly include (without prejudice to the generality of that expression) references to acting alone or jointly with or through any other person. (h) The Executive undertakes and covenants with the Company that he shall not at any time after the Executive's termination of employment hold himself out or permit himself to be held out as being in any way interested in or connected with the Company or any Affiliate and shall use his best endeavors to prevent himself being so held out, save that if and for so long as he remains a director or an employee of an Affiliate he may hold himself out or be held out as being so connected with that Company. 10. Indemnification. The Company will pay all reasonable fees and expenses, if any, (including, without limitation, legal fees and expenses) that are incurred by the Executive to enforce this Agreement and that result from a breach of this Agreement by the Company. In Executive's capacity as a member of the Board of Directors of East Midlands Electricity, plc, Executive is entitled to indemnification provided by the Articles of Incorporation of Dominion Resources, Inc. 11. Payment of Compensation and Taxes. All amounts payable under this Agreement (other than stock, which will be paid according to the terms of the Company's Incentive Compensation Plan) will be paid in cash, subject to income and payroll tax withholdings. No shares of stock will be issued to the Executive until the Executive has paid to the Company the amount that must be withheld for applicable income and employment taxes or the Executive has made provisions satisfactory to the Company for the payment of such taxes. 12. Administration. The Committee will be responsible for the administration and interpretation of this Agreement on behalf of the Company. If for any reason a benefit under this Agreement is not paid when due, the Executive may file a written claim with the Committee. If the claim is denied or no response is received, within 90 days after the filing (in which case the claim is deemed to be denied), the Executive may appeal the denial to the Board of Directors within 60 days of the denial. The Executive may request that the Board of Directors review the denial, the Executive may review pertinent documents, and the Executive may submit issues and comments in writing. A decision on appeal will be made within 60 days after the appeal is made, unless special circumstances require that the Board of Directors extend the period for another 60 days. If the Company defaults in an obligation under this Agreement, the Executive makes a written claim pursuant to the claims procedure described above, and the Company fails to remedy the default within the claims procedure period, then all amounts payable to the Executive under this Agreement will become immediately due and owing. 13. Assignment. The rights and obligations of the Company under this Agreement will inure to the benefit of and will be binding upon the successors and assigns of the Company. If the Company is consolidated or merged with or into another corporation, or if another entity purchases all or substantially all of the Company's assets, the surviving or acquiring corporation will succeed to the Company's rights and obligations under this Agreement. The Executive's rights under this Agreement may not be assigned or transferred in whole or in part, except that the personal representative of the Executive's estate will receive any amounts payable under this Agreement after the death of the Executive. 14. Rights Under the Agreement. The right to receive benefits under the Agreement will not give the Executive any proprietary interest in the Company or any of its assets. Benefits under the Agreement will be payable from the general assets of the Company, and there will be no required funding of amounts that may become payable under the Agreement [except to the extent required pursuant to Section 5 (d)]. The Executive will for all purposes be a general creditor of the Company. The interest of the Executive under the Agreement cannot be assigned, anticipated, sold, encumbered or pledged and will not be subject to the claims of the Executive's creditors. 15. Notice. For purposes of this Agreement, notices and all other communications must be in writing and are effective when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addresses to the Executive or his personal representative at his last known address. All notices to the Company must be directed to the attention of the Chairman of the Committee. Such other addresses may be used as either party may have furnished to the other in writing. Notices of change of address are effective only upon receipt. 16. Miscellaneous. This instrument contains the entire agreement of the parties. To the extent not governed by U.S. federal law, the parties contemplate and agree that this Agreement will be construed in accordance with the laws of the Commonwealth of Virginia, U.S.A., without reference to its conflict of laws rules. Any action to enforce the terms of this Agreement shall be brought in any court of competent jurisdiction in the Commonwealth of Virginia, and each party hereby irrevocably consents to the jurisdiction of such courts over its person and hereby waives any defense based upon improper venue, inconvenient forum or lack of jurisdiction. No provisions of this Agreement may be modified , waived or discharged unless such a waiver, modification or discharge is agreed to in writing and the writing is signed by the Executive and the Company. A waiver of any breach of our compliance with any provision or condition of this Agreement is not a waiver of similar or dissimilar provisions or conditions. The invalidity or enforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, which will remain in full force and effect. This Agreement may be executed in one more counterparts, all of which will be considered one and the same agreement. WITNESS the following signatures. DOMINION RESOURCES, INC. By: /s/ THOS. E. CAPPS ________________________________ Thos. E. Capps Chief Executive Officer Dated: 2/21/97 _______________ /s/ NORMAN ASKEW -------------------------------- Norman Brian Montague Askew 2-18-97 Appendix A Norman B.M. Askew Retirement Benefits at Specified Ages Under Terms of Employment Agreement
Additional Years of Service Years of Credited Service Percent Under EME ------------------------- Vested Estimated Date of Age at Pension & DRI Qualified DRI Under DRI Monthly Termination Termination Amending Deed Pension Plan BRP(1) ESRP(2) Payout(3) - ----------- ----------- ---------------- ------------- ------ --------- --------- 11-1-97 55 1 0 0 0 (Pounds) 3,700 11-1-98 56 2 0 0 0 (Pounds) 4,400 11-1-99 57 3 0 0 0 (Pounds) 5,200 11-1-00 58 4 0 0 100% (Pounds) 14,000 11-1-01 59 5 0 0 100% (Pounds) 15,200 11-1-02 60 6 5 30 100% (Pounds) 21,300
Notes 1. Benefit Restoration Plan 2. Executive Supplemental Retirement plan 3. Estimated payout based on the following assumptions: (bullet) DOB: October 4, 1942 (age 54) (bullet) Retires November 1, 2002 (age 60) (bullet) 1997 Base Pay = (Pounds)230,000 (bullet) Exchange rate: $1.60 = (Pounds)1.00 (bullet) Target bonus = 45% x base pay (bullet) 5% salary increases each year (bullet) 1997 EME Pension = (Pounds)44,000/year; + (Pounds)9,374 for each additional year EX-10 5 EX-10(XXXII) EXHIBIT 10(xxxii) THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended immediately to seek your own financial advice from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services Act 1986. SBC Warburg, a division of Swiss Bank Corporation, which is regulated in the UK by The Securities and Futures Authority Limited, is acting for Dominion Resources and DR Investments and no one else in connection with the Offer and will not be responsible to anyone other than Dominion Resources and DR Investments for providing the protections afforded to customers of SBC Warburg nor for giving advice in relation to the Offer. Wasserstein Perella, which is regulated in the UK by The Securities and Futures Authority Limited, is acting for Dominion Resources and DR Investments and no one else in connection with the Offer and will not be responsible to anyone other than Dominion Resources and DR Investments for providing the protections afforded to customers of Wasserstein Perella nor for giving advice in relation to the Offer. Schroders, which is regulated in the UK by The Securities and Futures Authority Limited, is acting for East Midlands Electricity and no one else in connection with the Offer and will not be responsible to anyone other than East Midlands Electricity for providing the protections afforded to customers of Schroders nor for giving advice in relation to the Offer. If you have sold or otherwise transferred all your East Midlands Electricity Shares, please send this document and the reply paid envelope (but not the accompanying Form of Acceptance because it is personalised) as soon as possible to the purchaser or transferee or to the stockbroker, bank or other agent through whom the sale or transfer was effected for transmission to the purchaser or transferee. However, these documents should not be forwarded or transmitted in or into the United States, Canada, Australia or Japan. This document should be read in conjunction with the accompanying Form of Acceptance. Recommended Cash Offer by SBC Warburg and Wasserstein Perella A division of Swiss Bank Corporation & Co. Limited on behalf of DR Investments (UK) PLC a wholly owned subsidiary of [LOGO] DOMINION RESOURCES to acquire the whole of the issued share capital of East Midlands Electricity plc A letter from Sir Nigel Rudd, the Chairman of East Midlands Electricity, is set out on pages 3 and 4. ACCEPTANCES SHOULD BE DESPATCHED AS SOON AS POSSIBLE, AND IN ANY EVENT SO AS TO BE RECEIVED BY NO LATER THAN 3.00 PM ON 13 DECEMBER 1996. The procedure for acceptance of the Offer is set out on pages 11 and 12 of this document and in the accompanying Form of Acceptance. The Offer referred to in this document is not being made, directly or indirectly, in or into or by use of the mails or any means or instrumentality of interstate or foreign commerce or any facilities of a national securities exchange of the United States, nor is it being made in Canada, Australia or Japan. Accordingly, neither this Offer document nor the accompanying Form of Acceptance is being or may be mailed or otherwise forwarded, distributed or sent (including telephonically or electronically) in, into or from the United States, Canada, Australia or Japan. The Loan Notes to be issued pursuant to the Offer have not been, and will not be, registered under the United States Securities Act of 1933 (as amended) nor under any of the relevant securities laws of Canada, Australia or Japan. Accordingly, unless an exemption under such Act or relevant securities law is applicable, the Loan Notes may not be offered, sold or delivered, directly or indirectly, in or into the United States, Canada, Australia or Japan. All East Midlands Electricity Shareholders (including nominees, trustees or custodians) who would, or otherwise intend to, forward this document, should read the further details in this regard which are contained in paragraph 6 of Part B and Part C of Appendix 1 to this document before taking any action. CONTENTS Page Letter from the Chairman of East Midlands Electricity ...................... 3 Letter from the Chairman of DR Investments ................................. 5 Letter from SBC Warburg and Wasserstein Perella ............................ 7 1. Introduction ................................................... 7 2. The Recommended Cash Offer ..................................... 7 3. The Loan Note Alternative ...................................... 8 4. Regulation ..................................................... 8 5. Information on Dominion Resources .............................. 9 6. Information on East Midlands Electricity ....................... 9 7. Management and employees ....................................... 9 8. United Kingdom taxation ........................................ 9 9. East Midlands Electricity Share Option Schemes ................. 11 10. Procedure for acceptance of the Offer .......................... 11 11. Settlement ..................................................... 12 12. Action to be taken ............................................. 13 13. Further information ............................................ 13 Appendix 1 Conditions and further terms of the Offer .......................... 14 Appendix 2 Particulars of the Loan Notes ...................................... 31 Appendix 3 Financial and other information relating to Dominion Resources ..... 34 Appendix 4 Financial and other information relating to East Midlands Electricity...................................... 61 Appendix 5 Additional information ............................................. 75 Appendix 6 Definitions ........................................................ 83 2 [LOGO] EAST MIDLANDS ELECTRICITY Corporate Office PO Box 444 Wollaton, Nottingham NG8 1EZ 22 November 1996 To East Midlands Electricity Shareholders and, for information only, to participants in the East Midlands Electricity Share Option Schemes Dear Shareholder, Recommended Cash Offer for East Midlands Electricity I wrote to you on 8 November to explain that Dominion Resources had announced that it had been evaluating a potential offer for East Midlands Electricity. At that time, the view of the executive management of Dominion Resources was that it was unlikely to recommend to its own Board making an offer at a price much in excess of 608p per share. Your Board clearly stated that it would reject any offer at that level. Dominion Resources then asked for a meeting with us to discuss a possible offer. Following that meeting, your Board agreed to recommend a cash offer for your company at 670p per share by DR Investments, a wholly owned subsidiary of Dominion Resources. The Offer values the entire issued share capital of East Midlands Electricity at approximately (pound)1.3 billion. The Offer The Offer is being made on the following basis: for each Ordinary Share 670p in cash The Offer represents a premium of 34.3% over the closing middle market price of 499p per Ordinary Share on 23 October 1996, the day before the recent bid speculation for East Midlands Electricity commenced. Assuming the Offer becomes wholly unconditional, the directors of East Midlands Electricity do not intend to pay an interim dividend in respect of the six months ended 30 September 1996. A Loan Note Alternative is also being provided for which East Midlands Electricity Shareholders may elect instead of some or all of the cash consideration which would otherwise be receivable under the Offer. Further information concerning the Loan Notes is set out on page 8 of this document and in Appendix 2. Reasons for recommending the Offer As a Board we have always put the interests of shareholders and customers at the top of our agenda. We also believe that East Midlands Electricity is an excellent business which has successfully differentiated itself from the sector. As a result, your Board had no hesitation in stating that it would reject any offer at or around 608p per share. In arriving at its decision to recommend the 670p cash offer, your Board carefully considered the current and future prospects for your company. This review convinced us that the Offer by DR Investments represented fair value. East Midlands Electricity plc Registered in England and Wales No: 2366923 Registered Office: PO Box 444, Woodyard Lane, Wollaton, Nottingham NG8 1EZ 3 Management and employees DR Investments has given assurances that the existing rights, including pension rights, of all management and employees of East Midlands Electricity will be fully protected. Action to be taken The procedure for acceptance of the Offer is set out on pages 11 and 12 of this document and in the accompanying Form of Acceptance. In order to accept the Offer, you should complete and return the enclosed Form of Acceptance in accordance with the instructions printed thereon as soon as possible and, in any event, so as to be received not later than 3.00 pm on 13 December 1996. Recommendation The Board of East Midlands Electricity, which has been so advised by Schroders, its financial advisers, considers the terms of the Offer to be fair and reasonable. In providing advice to the Board of East Midlands Electricity, Schroders has taken account of the directors' commercial assessments. The Board of East Midlands Electricity unanimously recommends East Midlands Electricity Shareholders to accept the Offer, as the directors intend to do in respect of their own beneficial holdings amounting to 27,401 Ordinary Shares. Yours sincerely, /s/ Sir Nigel Rudd ------------------- Sir Nigel Rudd Chairman 4 DR Investments (UK) PLC Registered Office: Registered in England under company number 165 Queen Victoria Street 3277634 London EC4V 4DD 22 November 1996 To East Midlands Electricity Shareholders and, for information only, to participants in the East Midlands Electricity Share Option Schemes Dear Shareholder, Recommended Cash Offer by DR Investments for East Midlands Electricity Introduction On 6 November 1996, Dominion Resources announced that its executive management was evaluating a potential offer for East Midlands Electricity. On 12 November 1996, representatives of Dominion Resources and East Midlands Electricity met to discuss the terms of such an offer. On 13 November 1996, the Boards of Dominion Resources and East Midlands Electricity announced the terms of a recommended cash offer to be made by DR Investments, a wholly owned subsidiary of Dominion Resources, for the whole of the issued share capital of East Midlands Electricity. The Recommended Cash Offer The Offer: o is made on the basis of 670p in cash for each Ordinary Share (with a Loan Note Alternative); o values the entire issued share capital of East Midlands Electricity at approximately (pound)1.3 billion; o is recommended by the Board of East Midlands Electricity; o represents a premium of 24.7% over the closing middle market price of 537.5p per Ordinary Share on 5 November 1996, the day before the Offer Period commenced; and o represents a premium of 34.3% over the closing middle market price of 499p per Ordinary Share on 23 October 1996, the day before the recent bid speculation concerning East Midlands Electricity commenced. Background to and reasons for the Offer Dominion Resources is one of the largest investor owned electric utility groups in the US. In addition to developing Virginia Power, its core regulated business, its strategy is to enhance shareholder value by making investments in domestic and international ventures which complement its core business. Significant investment has been made over the last decade and by 31 December 1995 the combined assets of these ventures was approximately $2 billion. Dominion Resources has been studying the UK for a considerable period of time and believes that it is an attractive market for investment. The proposed acquisition of East Midlands Electricity enhances its strategy of entering new geographic electric power markets where it can apply its existing experience and expertise. Dominion Resources has been impressed by East Midlands Electricity's management's record and is looking forward to working with them to continue the development of East Midlands Electricity. Dominion Resources considers that its operational expertise will enable East Midlands Electricity to develop its existing businesses, to take advantage of suitable opportunities for growth in the UK and to help position it to participate actively in the post 1998 supply market. Dominion Resources places strong emphasis on high levels of customer service and will seek to maintain and enhance service levels to the benefit of customers of East Midlands Electricity. 5 Conclusion We believe that we are paying a full and fair price for East Midlands Electricity, reflecting our belief in the growth opportunities for East Midlands Electricity, and that the Offer benefits both shareholders and customers of East Midlands Electricity. We urge you to accept the Offer as soon as possible. Details of how to accept the Offer are set out on pages 11 and 12 of this document and in the accompanying Form of Acceptance. Yours sincerely, /s/ Thos. E. Capps ------------------- Thos. E. Capps Chairman 6 [SBC WARBURG LETTERHEAD] [WASSERSTEIN PERELLA LETTERHEAD] 2 Finsbury Avenue Wasserstein Perella & Co. Limited London EC2M 2PP 3 Burlington Gardens London W1X 1LE 22 November 1996 To East Midlands Electricity Shareholders and, for information only, to participants in the East Midlands Electricity Share Option Schemes Dear Shareholder, Recommended Cash Offer for East Midlands Electricity on behalf of DR Investments 1. Introduction On 13 November 1996, the Boards of Dominion Resources and East Midlands Electricity announced the terms of a recommended cash offer for the whole of the issued share capital of East Midlands Electricity. The Offer values the entire issued share capital of East Midlands Electricity at approximately (pound)1.3 billion. This letter sets out the formal offer, which is being made by SBC Warburg and Wasserstein Perella on behalf of DR Investments, a wholly owned subsidiary of Dominion Resources. SBC Warburg is broker to the Offer. Your attention is drawn to the letter from Sir Nigel Rudd, the Chairman of East Midlands Electricity, on pages 3 and 4 of this document and the recommendation contained therein. The procedure for acceptance of the Offer is set out on pages 11 and 12 of this document and in the accompanying Form of Acceptance. Acceptances of the Offer should be received by The Royal Bank of Scotland plc, Registrars Department, New Issues Section as soon as possible and, in any event, by no later than 3.00 pm on 13 December 1996. 2. The Recommended Cash Offer On behalf of DR Investments, SBC Warburg and Wasserstein Perella offer to acquire, on the terms and subject to the conditions set out or referred to in this document and in the accompanying Form of Acceptance, all the East Midlands Electricity Shares on the following basis: for each Ordinary Share 670p in cash The Offer represents: o a premium of 34.3% over the closing middle market price of 499p per Ordinary Share on 23 October 1996, the day before the recent bid speculation concerning East Midlands Electricity commenced; and [LETTERHEAD] [LETTERHEAD] 7 o a premium of 24.7% over the closing middle market price of 537.5p per Ordinary Share on 5 November 1996, the day before the Offer Period commenced. Assuming the Offer is declared wholly unconditional, the directors of East Midlands Electricity do not intend to pay an interim dividend in respect of the six months ended 30 September 1996. The Ordinary Shares will be acquired by DR Investments fully paid and free from all liens, equities, charges, encumbrances and other interests and together with all rights now or hereafter attaching thereto, including without limitation the right to retain and receive all dividends and other distributions declared, made or paid after 12 November 1996. The Offer will be subject to the conditions and on the terms set out in Appendix 1 and in the accompanying Form of Acceptance. 3. Loan Note Alternative Instead of some or all of the cash consideration which would otherwise be receivable by them under the Offer, Ordinary Shareholders (other than certain overseas shareholders) accepting the Offer will be entitled to elect to receive Loan Notes on the following basis: for each (pound)1 of cash (pound)1 nominal of Loan Notes The Loan Notes will be issued by DR Investments credited as fully paid in amounts and integral multiples of (pound)1 nominal value and any fractional entitlements will be disregarded and not issued. The Loan Notes will be unsecured and unguaranteed obligations of DR Investments. The Loan Notes will bear interest, payable yearly at the rate of 1% below LIBOR for twelve month sterling deposits. Interest on the Loan Notes will be payable annually in arrears on 31 March (or, if not a business day in any year, on the following business day). The first interest payment on the Loan Notes will be made on 31 March 1998 in respect of the period from the first issue of the Loan Notes. Holders of the Loan Notes will have the right to redeem them for cash at par on 31 March 1998 and on interest payment dates thereafter. Unless previously redeemed or repurchased, the Loan Notes will be redeemed on 31 March 2007. No Loan Notes will be issued unless valid elections for the Loan Note Alternative will result in the issue of at least (pound)10 million nominal value of Loan Notes, or such smaller amount as DR Investments may decide. If the Loan Notes are not issued in these circumstances, Ordinary Shareholders who elect for the Loan Note Alternative will receive cash in accordance with the terms of the Offer. The Loan Note Alternative will not be available to United States, Canadian, Australian or Japanese persons. DR Investments does not intend to make application to any stock exchange for the Loan Notes to be listed. The value of the Loan Notes has been estimated by SBC Warburg and Wasserstein Perella to be not less than 98p per (pound)1 nominal value as at 18 November 1996, the latest practicable day prior to the publication of this document. Further details of the Loan Notes are set out in Appendix 2. 4. Regulation The Offer gives rise to a merger situation qualifying for investigation within the meaning of the Fair Trading Act 1973. It is therefore conditional on an announcement being made indicating, in terms satisfactory to the Offeror, that it is not the intention of the Secretary of State for Trade and Industry to refer the Offer, or any matters arising therefrom or relating thereto, to the Monopolies and Mergers Commission. In this connection, DR Investments has made submissions to both the Director General of Fair Trading and the Director General of Electricity Supply. East Midlands Electricity is the holder of licences issued under the Electricity Act 1989. These licences do not contain change of control provisions. It is, however, open to the DGES to seek modification of these licences at any time by agreement with the licensee or, in the absence of agreement, following a reference to the Monopolies and Mergers Commission under the Electricity Act 1989. The Offer is conditional on indications being given by the DGES that it is not his intention to seek modifications to such licences held by East Midlands Electricity and on East Midlands Electricity not agreeing to any modification, except in either case on terms satisfactory to the Offeror, and also on neither the Secretary of State for Trade and Industry nor the DGES seeking undertakings from any member of the Offeror Group or the East Midlands Electricity Group except on terms satisfactory to the Offeror. In this connection, DR Investments and East Midlands Electricity have jointly notified the DGES of the Offer. 8 5. Information on Dominion Resources Dominion Resources is a US holding company active in regulated electric power activities in Virginia and North Carolina and competitive electric power activities internationally and throughout the US. It is also active in natural gas development, financial services and real estate. Dominion Resources operates through three wholly owned subsidiaries. Its principal subsidiary is Virginia Power, one of the 15 largest investor owned electric utilities in the US, serving nearly two million homes and businesses in Virginia and northeastern North Carolina. Dominion Energy, its independent power and natural gas and oil subsidiary, has ownership interests in over 20 power projects with generating capacity of over 2,500 MW in four Central and South American countries and six US states. Dominion Capital, its financial services and real estate subsidiary, has businesses which include lending to consumers and energy production companies, ownership in a hydroelectric facility and real estate holdings and transactions. For the year ended 31 December 1995, Dominion Resources reported consolidated net income of $425 million ((pound)258 million) on operating revenue of $4,652 million ((pound)2,819 million). As at 31 December 1995, Dominion Resources had shareholders' equity of $4,742 million ((pound)2,874 million). Dominion Resources' common stock is traded on the New York Stock Exchange, with a current equity market capitalisation of approximately $7.0 billion ((pound)4.2 billion). It employs more than 10,000 people. 6. Information on East Midlands Electricity East Midlands Electricity owns and operates the electricity distribution network for some 2.3 million customers in a region that extends from Coventry to the Lincolnshire coast and from Milton Keynes to Chesterfield. Under the terms of its licence, East Midlands Electricity supplies electricity to all domestic and smaller business customers in its region. Larger business customers whose annual consumption exceeds 100kW are entitled to purchase electricity in the competitive market. East Midlands Electricity participates in this market and sells electricity to these larger business customers both within and outside its immediate region. Other activities include gas supply, electrical contracting and power generation. For the financial year ended 31 March 1996, East Midlands Electricity reported consolidated profit after tax (excluding the effect of the distribution of the National Grid Group plc and associated transactions referred to on pages 69 and 70 in Appendix 4) of (pound)150 million on turnover of (pound)1,300 million. It employed an average of over 5,000 people during that financial year. As at 31 March 1996, East Midlands Electricity had net assets of (pound)391 million. 7. Management and employees The existing employment rights, including pension rights, of all management and employees of East Midlands Electricity will be fully protected. 8. United Kingdom taxation The following paragraphs, which are intended as a general guide only, are based on current legislation and Inland Revenue practice. They summarise certain limited aspects of the UK taxation treatment of accepting the Offer and the Loan Note Alternative. The information relates only to the position of East Midlands Electricity Shareholders who hold their East Midlands Electricity Shares as investments and (except to the extent that express reference to the position of non UK residents is made) who are resident in the United Kingdom for taxation purposes. If you are in any doubt as to your taxation position or if you are subject to taxation in any jurisdiction other than the United Kingdom, you should consult an appropriate independent adviser without delay. (a) Taxation of chargeable gains Liability to United Kingdom taxation of chargeable gains will depend on the individual circumstances of each East Midlands Electricity Shareholder and on the form of consideration received. Cash To the extent that an East Midlands Electricity Shareholder receives cash under the Offer, this will constitute a disposal, or part disposal, of his East Midlands Electricity Shares which may, depending on the shareholder's individual circumstances, give rise to a liability to United Kingdom taxation of chargeable gains. 9 Loan Notes (i) Holdover Any East Midlands Electricity Shareholder who, together with persons connected with such shareholder, does not hold more than 5% of any class of shares in or debentures of East Midlands Electricity will not be treated as having made a disposal of East Midlands Electricity Shares for the purposes of United Kingdom taxation of chargeable gains to the extent that such shareholder receives Loan Notes in exchange for East Midlands Electricity Shares. Any gain or loss which would otherwise have arisen on a disposal of East Midlands Electricity Shares at market value at the time of that exchange will be "held over" and deemed to accrue on a subsequent disposal (including a redemption) of the Loan Notes. No "indexation allowance" will be available for the period during which any gain is "held over" in this way. Any East Midlands Electricity Shareholder who, either alone or together with persons connected with such shareholder, holds more than 5% of any class of shares in or debentures of East Midlands Electricity is advised that an application for clearance has been made to the Inland Revenue under Section 138 of the Taxation of Chargeable Gains Act 1992 in respect of the Offer. If such clearance is given, any such East Midlands Electricity Shareholder will be treated in the manner described in the preceding paragraph. Neither the Offer nor the Loan Note Alternative is conditional on such clearance being obtained. (ii) Disposal of Loan Notes The Loan Notes will be "qualifying corporate bonds" for the purposes of United Kingdom taxation of chargeable gains. Accordingly, except to the extent that a chargeable gain or allowable loss previously "held over" in respect of East Midlands Electricity Shares is deemed to accrue as described in (i) above, any gains and losses arising on a disposal (including a redemption) of the Loan Notes will not give rise to chargeable gains or allowable losses for the purposes of United Kingdom taxation of chargeable gains. Holders of Loan Notes within the charge to corporation tax are also referred to paragraph 8(b)(iii) below. (b) Taxation of income Loan Notes (i) Withholding tax Interest on the Loan Notes will be paid subject to deduction of United Kingdom income tax (currently at the rate of 20%) by the Offeror unless the Offeror has previously been directed by the Inland Revenue in relation to a particular holding of Loan Notes to make a payment free of deduction or subject to a reduced rate of deduction by virtue of relief available to the holder of those Loan Notes under an applicable double taxation treaty. Such a direction will only be issued following a prior application to the Inland Revenue in the appropriate manner by the holder of those Loan Notes. The Offeror will not gross up payments of interest on the Loan Notes to compensate for any tax which it is required to deduct at source. (ii) Individual holders of Loan Notes Subject to the above, the gross amount of interest on the Loan Notes will form part of the recipient's income for the purposes of United Kingdom income tax, credit being allowed for the tax withheld. Individuals who are taxable only at the lower or basic rate will have no further tax to pay in respect of the interest. In certain cases, holders of Loan Notes may be able to recover from the Inland Revenue an amount in respect of the tax withheld at source. Under the "accrued income scheme", a charge to tax on income may arise on a transfer of Loan Notes in respect of interest on the Loan Notes which has accrued since the preceding interest payment date. 10 (iii) Corporate holders of Loan Notes For a Loan Note holder within the charge to corporation tax, all profits, gains and losses measured and recognised in accordance with an appropriate accounting method in respect of the Loan Notes will be taxed or relieved as income. (c) Stamp duty and stamp duty reserve tax ("SDRT") (i) Acceptance of the Offer No stamp duty or SDRT will be payable by East Midlands Electricity Shareholders as a result of accepting the Offer (including the Loan Note Alternative). (ii) Loan Notes No stamp duty or SDRT will be payable on a transfer or sale of, or an agreement to transfer or sell, Loan Notes. (d) Other taxation matters Special taxation provisions may apply to East Midlands Electricity Shareholders who have acquired or acquire their East Midlands Electricity Shares by exercising options under the East Midlands Electricity Share Option Schemes, including provisions imposing a charge to income tax. 9. East Midlands Electricity Share Option Schemes The Offer will extend to any Ordinary Shares unconditionally allotted or issued prior to the date on which the Offer closes (or such earlier date, not being earlier than the date on which the Offer becomes unconditional as to acceptances or, if later, the first closing date of the Offer, as the Offeror may determine) as a result of the exercise of options granted under the East Midlands Electricity Share Option Schemes. Appropriate proposals will be made to option holders under the East Midlands Electricity Share Option Schemes in due course. 10. Procedure for acceptance of the Offer (a) To accept the Offer To accept the Offer in respect of all or any of your East Midlands Electricity Shares, you must complete Boxes 1 and 4 and sign Box 3 of the Form of Acceptance in the presence of a witness, who should sign in accordance with the instructions printed on the Form. You must also complete Boxes 5 and 6 if relevant. If you have any questions as to how to complete the Form of Acceptance, please contact the Receiving Agent on telephone number 0117 975 1594. (b) To elect for the Loan Note Alternative To elect for the Loan Note Alternative for all or part of your East Midlands Electricity Shares in respect of which you accept the Offer, you must complete the Form of Acceptance as set out in (a) above and in addition complete Box 2 on the Form of Acceptance in accordance with the instructions printed thereon. The Loan Note Alternative is not available to certain overseas shareholders or persons acting for the account or benefit of such persons. In addition, if you have completed Box 5 you may only receive cash under the terms of the Offer. (c) Return of Form of Acceptance The completed, signed and witnessed Form of Acceptance should be lodged with the Receiving Agent, The Royal Bank of Scotland plc, Registrars Department, New Issues Section, either by post or by hand at PO Box No 859, Consort House, East Street, Bedminster, Bristol BS99 1XZ or by hand only at PO Box 633, 5-10 Great Tower Street, London EC3R 5ER, together with the relevant share certificate(s), documents of title, letters of indemnity and supporting documents (if any) for the East Midlands Electricity Shares in respect of which the Form of Acceptance has been completed, as soon as possible, but in any event so as to arrive not later than 3.00 pm on 13 December 1996. A reply-paid envelope for the UK only is enclosed for your convenience. 11 (d) Method of delivery The method of delivery to the Receiving Agent of share certificates for East Midlands Electricity Shares and all other required documents is at the option and risk of accepting East Midlands Electricity Shareholders. You may wish to use the enclosed reply-paid envelope, for use in the UK only. If delivery is other than by UK post, registered mail with return receipt requested, properly insured, is recommended. In all cases, sufficient time should be allowed to ensure prompt delivery. No acknowledgement of receipt of documents will be given. The attention of East Midlands Electricity Shareholders who are residents or citizens of territories outside the United Kingdom is drawn to paragraph (g) below. (e) Documents of title A completed and signed Form of Acceptance should be accompanied by the relevant share certificate(s) and/or other document(s) of title. No acknowledgement of receipt of documents will be given. If for any reason the relevant share certificate(s) and/or the other document(s) of title is/are lost or not readily available, you should nevertheless complete, sign and lodge the Form of Acceptance as stated above so as to be received by the Receiving Agent by no later than 3.00 pm on 13 December 1996 and you should arrange for the relevant share certificate(s) and/or other document(s) of title to be forwarded as soon as possible thereafter. The completed Form of Acceptance, together with any share certificate(s) and/or other document(s) of title which you may have available, should be lodged with the Receiving Agent at either of the addresses given in paragraph (c) above, accompanied by a letter stating that the balance will follow or that you have lost one or more of your share certificate(s) and/or other document(s) of title. In the case of loss, you should then write to East Midlands Electricity's Registrars, Lloyds Bank Registrars, 54 Pershore Road South, King's Norton, Birmingham B30 3EP, for a letter of indemnity for lost share certificate(s) which, when completed in accordance with the instructions given, should be lodged with the Receiving Agent at either of the addresses given in paragraph (c) above. (f) Validity of acceptances DR Investments, SBC Warburg and Wasserstein Perella reserve the right, subject to the Code, to treat as valid any acceptance of the Offer which is not entirely in order or which is not accompanied by the relevant share certificate(s) and/or other document(s) of title. In that event, the consideration payable under such acceptances will not be despatched until after the Form of Acceptance, complete in all respects, the share certificate(s) and/or other document(s) of title or indemnities satisfactory to DR Investments have been received. (g) Overseas shareholders The attention of East Midlands Electricity Shareholders not resident in the United Kingdom or who are holding Ordinary Shares on behalf of citizens, nationals or residents of jurisdictions outside the United Kingdom or who may have an obligation to forward this document or any Form of Acceptance outside the United Kingdom is drawn to paragraph 6 of Part B of Appendix 1, paragraphs (b), (c) and (d) of Part C of Appendix 1 and to the relevant provisions of the Form of Acceptance. The Offer is not being made, directly or indirectly, in or into, or by means of the mails or any means or instrumentality of interstate or foreign commerce or any facilities of a national securities exchange of the United States, nor is it being made in Canada, Australia or Japan. Accordingly, any acceptors who are unable to give the warranties set out in paragraph (b) and (d) of Part C of Appendix 1 to this document will be deemed not to have accepted the Offer. 11. Settlement Subject to the Offer becoming or being declared unconditional in all respects, cheques in settlement of the cash consideration or Loan Note certificates will be despatched (but not in or into the United States, Canada, Australia or Japan) by first class post to persons accepting the Offer or their appointed agents not later than 21 days after the Offer becomes unconditional in all respects or 21 days after receipt of a valid and completed acceptance, whichever is the later. 12 12. Action to be taken You are urged to complete, sign and return the Form of Acceptance as soon as possible, but in any event so as to arrive not later than 3.00 pm on 13 December 1996. 13. Further information Your attention is drawn to the Appendices which contain further information and form part of this document. Yours faithfully, for and on behalf of for and on behalf of Swiss Bank Corporation Wasserstein Perella & Co. Limited acting through its division SBC Warburg P A Kiernan H J Covington Managing Director Managing Director T K G Cooper Executive Director 13 APPENDIX 1 CONDITIONS AND FURTHER TERMS OF THE OFFER PART A: CONDITIONS OF THE OFFER 1. The Offer (which in this Appendix is deemed to include, where relevant, references to the Loan Note Alternative) will be subject to the following conditions: (a) valid acceptances being received (and not, where permitted, withdrawn) by not later than 3.00 pm on the first closing date of the Offer (or such later time(s) and/or date(s) as the Offeror may, subject to the rules of the Code, decide) in respect of not less than 90% (or such lower percentage as the Offeror may decide) in nominal value of the East Midlands Electricity Shares to which the Offer relates, provided that this condition will not be satisfied unless the Offeror and its wholly owned subsidiaries shall have acquired or agreed to acquire (whether pursuant to the Offer or otherwise) shares in East Midlands Electricity carrying more than 50% of the voting rights then normally exercisable at general meetings of East Midlands Electricity. For the purposes of this condition: (i) shares which have been unconditionally allotted shall be deemed to carry the voting rights they will carry upon their being entered in the register of members of East Midlands Electricity; and (ii) the expression "East Midlands Electricity Shares to which the Offer relates" shall mean (i) East Midlands Electricity Shares unconditionally allotted or issued on or before the date the Offer is made and (ii) East Midlands Electricity Shares unconditionally issued or allotted after that date but before the time at which the Offer closes or before such earlier time as the Offeror may decide (not, without the consent of the Panel, being earlier than the date on which the Offer becomes unconditional as to acceptances or, if later, the first closing date of the Offer) but excluding any East Midlands Electricity Shares which, at or before the time at which the Offer is made, are held (otherwise than under such a contract as is described in Section 428(5) of the Companies Act 1985) or contracted to be acquired by the Offeror or any of its associates (within the meaning of Section 430E of the Companies Act 1985); (b) an announcement being made indicating in terms satisfactory to the Offeror that it is not the intention of the Secretary of State for Trade and Industry to refer the proposed acquisition of East Midlands Electricity by the Offeror, or any matters arising therefrom, to the Monopolies and Mergers Commission; (c) neither the North Carolina Utilities Commission nor the Virginia State Corporation Commission having revised or withdrawn their certifications to the US Securities and Exchange Commission, for the purpose of Dominion Resources' exemption from regulation under the US Public Utility Holding Company Act of 1935 (as amended), that each such commission has the authority and resources to protect the ratepayers of Virginia Power subject to its jurisdiction and that it intends to exercise that authority; (d) the Director General of Electricity Supply indicating in terms satisfactory to the Offeror that: (i) with the exception of the proposed modifications announced by him on 6 July 1995 and subject to (ii) below, it is not his intention to seek any modification to one or more of the licences held by East Midlands Electricity under the Electricity Act 1989 and East Midlands Electricity not agreeing to any such modifications, except, in either case, on terms satisfactory to the Offeror; and (ii) he will give such consents and/or directions (if any) and seek such modifications (if any) as are necessary or appropriate with respect to such licences in connection with the Offer or the acquisition by the Offeror of shares in East Midlands Electricity in each case on terms satisfactory to the Offeror; (e) neither the Secretary of State for Trade and Industry nor the DGES seeking undertakings or assurances from any member of the Offeror Group or any member of the East Midlands Electricity Group, except on terms satisfactory to the Offeror; 14 (f) East Midlands Electricity's consent (announced by it on 17 July 1995) to the proposed modifications to the licence held by it under the Electricity Act 1989 proposed by the DGES on 6 July 1995 remaining in full force and effect; (g) all necessary filings having been made, all appropriate waiting periods (including extensions thereof) under any applicable legislation or regulations of any jurisdiction (including, without limitation, in the United States, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended) and the regulations made thereunder) having expired, lapsed or been terminated, in each case in respect of the Offer and the acquisition of any shares in, or control of, East Midlands Electricity by the Offeror and all necessary statutory and regulatory obligations in connection with the Offer in any jurisdiction having been complied with; (h) no government or governmental, quasi-governmental, supranational, statutory, regulatory or investigative body, court, trade agency, professional association or any other person or body whatsoever in any jurisdiction (each a "Third Party") having decided to take, institute, implement or threaten any action, proceeding, suit, investigation, enquiry or reference or made, proposed or enacted any statute, regulation or order or having done anything which would or might reasonably be expected to: (i) make the Offer, its implementation, or the acquisition or proposed acquisition by the Offeror or any of its subsidiaries or subsidiary undertakings or associated companies (including any joint venture, partnership, firm or company in which any member of the Offeror Group has a substantial interest) or any company in which any such member has a substantial interest (together the "wider Offeror Group") of any shares or other securities in, or control of, East Midlands Electricity illegal, void or unenforceable in any jurisdiction, or otherwise, directly or indirectly, prohibit or materially and adversely restrain, restrict, delay, or otherwise interfere with the implementation of, or impose additional material adverse conditions or obligations with respect to, or otherwise challenge, the Offer or such acquisition; (ii) require, prevent or delay the divestiture by any member of the wider Offeror Group of any shares or other securities in East Midlands Electricity; (iii) require, prevent or delay the divestiture or alter the terms envisaged for any proposed divestiture by East Midlands Electricity or any of its subsidiaries or subsidiary undertakings or associated companies (including any joint venture, partnership, firm or company in which any member of the East Midlands Electricity Group has a substantial interest) or any company in which any such member has a substantial interest (together the "wider East Midlands Electricity Group") or (as a result of the acquisition of East Midlands Electricity Shares or of control of East Midlands Electricity by the wider Offeror Group) by any member of the wider Offeror Group of all or any portion of their respective businesses, assets or property or impose any limitation on the ability of any of them to conduct their respective businesses (or any of them) or to own any of their respective assets or property or any part thereof in any such case to an extent which is material in the context of the East Midlands Electricity Group, or, as applicable, of the Offeror Group; (iv) impose any material limitation on the ability of any member of the wider Offeror Group or of the wider East Midlands Electricity Group to acquire or to hold or to exercise effectively, directly or indirectly, any rights of ownership of shares or other securities (or the equivalent) in East Midlands Electricity or any other member of the wider East Midlands Electricity Group or to exercise management control over East Midlands Electricity or any other member of the wider East Midlands Electricity Group; (v) require any member of the wider Offeror Group or the wider East Midlands Electricity Group to offer to acquire any shares or other securities (or the equivalent) in any member of the wider East Midlands Electricity Group owned by any third party; (vi) impose any limitation on the ability of any member of the wider East Midlands Electricity Group to co-ordinate its business, or any part of it, with the businesses of 15 any other member to an extent which is material in the context of the East Midlands Electricity Group; (vii) result in a material delay in the ability of any member of the Offeror Group, or render any member of the Offeror Group unable, to acquire all or some of the East Midlands Electricity Shares or require or prevent a divestiture by any member of the Offeror Group of any such shares; (viii) to an extent which is material in the context of the East Midlands Electricity Group result in any member of the wider East Midlands Electricity Group ceasing to be able to carry on business under any name which it presently does so; or (ix) to an extent which is material in the context of the East Midlands Electricity Group otherwise adversely affect the business, profits or prospects of any member of the wider Offeror Group or any member of the wider East Midlands Electricity Group; and applicable waiting periods during which any Third Party could institute, implement or threaten any action, proceedings, suit, investigation, enquiry or reference or otherwise intervene under the laws of any jurisdiction having expired, lapsed or been terminated; (i) all necessary filings having been made in connection with the Offer and all authorisations, orders, recognitions, grants, consents, clearances, confirmations, licences, permissions and approvals including, without limitation, any filings or approvals required under the laws of the Commonwealth of Virginia and the State of North Carolina governing the regulation of public utilities and their affiliates ("Authorisations") necessary or reasonably deemed appropriate by the Offeror or any member of the wider Offeror Group in any jurisdiction for or in respect of the Offer or the acquisition or proposed acquisition of any shares or other securities in, or control of, East Midlands Electricity by any member of the wider Offeror Group having been obtained, in terms and in a form reasonably satisfactory to the Offeror, from all appropriate Third Parties or (without prejudice to the generality of the foregoing) from any persons or bodies with whom any member of the wider East Midlands Electricity Group has entered into contractual arrangements and all such Authorisations together with all Authorisations necessary or reasonably deemed appropriate for any member of the wider East Midlands Electricity Group to carry on its business remaining in full force and effect and there being no notice or intimation of any intention to revoke or not to renew any of the same at the time at which the Offer becomes otherwise unconditional and all statutory or regulatory obligations necessary or reasonably deemed appropriate for the purposes of the Offer or the acquisition of shares or other securities in, or control of, East Midlands Electricity in all relevant jurisdictions having been complied with; (j) there being no provision of any arrangement, agreement, licence or other instrument to which any member of the wider East Midlands Electricity Group is a party or by or to which any such member or any part of its respective assets is or are or may be bound or subject, or any circumstance which, as a consequence of the Offer or the acquisition or proposed acquisition by any member of the wider Offeror Group of some or all of the share capital of East Midlands Electricity or other securities in East Midlands Electricity or because of a change in the control or management of East Midlands Electricity or otherwise, could or might reasonably be expected to result in to an extent which is material in the context of the East Midlands Electricity Group: (i) any such arrangement, agreement, licence or instrument being terminated or adversely modified or affected or any onerous obligation or liability arising or any adverse action being taken or arising thereunder; (ii) the rights, liabilities, obligations or interests of any member of the wider East Midlands Electricity Group under any such arrangement, agreement, licence or instrument or the interests or business of any member of the wider East Midlands Electricity Group or the wider Offeror Group in or with any other firm or company or body or person (or any arrangement or arrangements relating to any such business or interests) being terminated or adversely modified or affected; (iii) any assets or interests of any member of the wider East Midlands Electricity Group being or falling to be disposed of or charged or any right arising under which any such asset or interest could be required to be disposed of or charged; 16 (iv) the creation or enforcement of any mortgage, charge or other security interest over the whole or any part of the business, property or assets of any member of the wider East Midlands Electricity Group; (v) any moneys borrowed by, or any other indebtedness, actual or contingent, of, any member of the wider East Midlands Electricity Group being or becoming repayable, or capable of being declared repayable, immediately or prior to its or their stated maturity, or the ability of any such member to borrow moneys or incur any indebtedness being withdrawn or inhibited; (vi) the financial or trading position or prospects of any member of the wider East Midlands Electricity Group being prejudiced or adversely affected; or (vii) any member of the wider East Midlands Electricity Group ceasing to be able to carry on business under any name under which it presently does so; (k) no member of the wider East Midlands Electricity Group having, since 31 March 1996 (save as disclosed in the annual report and accounts of East Midlands Electricity for the year then ended or otherwise announced on or before 11 November 1996 on the London Stock Exchange): (i) issued or agreed to issue or authorised or proposed the issue of additional shares of any class or securities convertible into, or rights, warrants or options to subscribe for or acquire, any such shares or convertible securities (save as between East Midlands Electricity and wholly-owned subsidiaries of East Midlands Electricity and save for the issue of East Midlands Electricity Shares on the exercise of options granted before 12 November 1996 under the East Midlands Electricity Share Option Schemes); (ii) to an extent which is material in the context of the East Midlands Electricity Group and save for transactions between East Midlands Electricity and its wholly-owned subsidiaries, merged with any body corporate or acquired or disposed of, or transferred, mortgaged or charged or created any security interest over, any assets or any right, title or interest in any asset (including shares and trade investments) or authorised, proposed or announced any intention to propose any merger, demerger, acquisition, disposal, transfer, mortgage, charge or security interest; (iii) save as between East Midlands Electricity and its wholly-owned subsidiaries, made or authorised or proposed or announced an intention to propose any change in its loan capital to an extent which is material in the context of the East Midlands Electricity Group; (iv) entered into or varied or announced its intention to enter into or vary any contract, transaction or commitment (whether in respect of capital expenditure or otherwise) which is of a long-term or unusual or onerous nature or magnitude, or which involves or could involve an obligation of such a nature or magnitude which, in any case, is material in the context of the East Midlands Electricity Group; (v) to an extent which is material in the context of the East Midlands Electricity Group issued, authorised or proposed the issue of any debentures or (save as between East Midlands Electricity and its wholly-owned subsidiaries) incurred or increased any indebtedness or contingent liability; (vi) recommended, declared, paid or made, or proposed the recommendation, declaration, paying or making of, any bonus, dividend, or other distribution, other than to East Midlands Electricity or one of its wholly-owned subsidiaries; (vii) purchased, redeemed or repaid or announced any proposal to purchase, redeem or repay any of its own shares or other securities or reduced or made any other change to any part of its share capital to an extent which (other than in the case of East Midlands Electricity) is material in the context of East Midlands Electricity Group; (viii) entered into, or changed the terms of, any contract with any director of East Midlands Electricity other than in the ordinary course of business; 17 (ix) implemented, or authorised, proposed or announced its intention to implement or enter into any reconstruction, amalgamation, commitment, scheme or other transaction or arrangement otherwise than in the ordinary course of business; (x) waived or compromised any claim otherwise than in the ordinary course of business; (xi) proposed any voluntary winding up; (xii) entered into any contract, transaction or arrangement which is or is likely to be restrictive in a material respect on the business of any member of the wider East Midlands Electricity Group or the wider Offeror Group; (xiii) made any material alteration to its memorandum or articles of association or other incorporation documents; or (xiv) entered into any contract, commitment, agreement or arrangement or passed any resolution with respect to or announced an intention to effect or to propose any of the transactions, matters or events referred to in this condition; (l) since 31 March 1996, and save as disclosed in the annual report and accounts of East Midlands Electricity for the year then ended or as announced on the London Stock Exchange on or before 11 November 1996: (i) there having been no receiver, administrative receiver or other encumbrance appointed over any of the assets of any member of the wider East Midlands Electricity Group or any analogous proceedings or steps having taken place under the laws of any jurisdiction and there having been no petition presented for the administration of any member of the wider East Midlands Electricity Group or any equivalent proceedings or steps taken under the laws of any other jurisdictions; (ii) there having been no adverse change or deterioration in the business, assets, financial or trading position or profits or prospects of any member of the wider East Midlands Electricity Group to an extent which is material in the context of the East Midlands Electricity Group; (iii) no litigation, arbitration proceedings, prosecution or other legal proceedings having been threatened, announced or instituted by or against or remaining outstanding against any member of the wider East Midlands Electricity Group or to which any member of the wider East Midlands Electricity Group is or may become a party (whether as plaintiff or defendant or otherwise), and no investigation by any relevant authority against or in respect of any member of the wider East Midlands Electricity Group having been threatened, announced or instituted or remaining outstanding by, against or in respect of any member of the wider East Midlands Electricity Group, which in any such case might adversely affect any member of the wider East Midlands Electricity Group to an extent which is material in the context of the East Midlands Electricity Group; and (iv) no contingent or other liability having arisen or become apparent to the Offeror which might reasonably be expected adversely to affect any member of the wider East Midlands Electricity Group to an extent which is material in the context of the East Midlands Electricity Group; (m) the Offeror not having discovered: (i) that any financial, business or other information concerning the East Midlands Electricity Group publicly disclosed or disclosed to the Offeror prior to the announcement of the Offer by or on behalf of any member of the wider East Midlands Electricity Group which is material in the context of the acquisition of East Midlands Electricity by the Offeror is misleading, contains a misrepresentation of fact or omits to state a fact necessary to make the information contained therein not misleading and has not been corrected by subsequent announcement to the London Stock Exchange on or before 11 November 1996; or 18 (ii) that any partnership, company or other entity in which any member of the wider East Midlands Electricity Group has a significant economic interest and which is not a subsidiary undertaking of East Midlands Electricity is subject to any liability, contingent or otherwise, which is material in the context of the East Midlands Electricity Group and is not disclosed in the Annual Report and Accounts of East Midlands Electricity for the financial year ended 31 March 1996 or in an announcement to the London Stock Exchange on or before 11 November 1996; and (n) the Offeror not having discovered: (i) that any past or present member of the wider East Midlands Electricity Group has not complied with all applicable legislation or regulations of any jurisdiction with regard to the disposal, discharge, spillage, leak or emission of any waste or hazardous substance or any substance likely to impair the environment or harm human health, or otherwise relating to environmental matters, or that there has otherwise been any such disposal, discharge, spillage, leak or emission (whether or not the same constituted a non-compliance by any person with any such legislation or regulations and wherever the same may have taken place) which, in any such case, would be likely to give rise to any liability (whether actual or contingent) on the part of any member of the wider East Midlands Electricity Group which is material in the context of the East Midlands Electricity Group; or (ii) that there is, or is likely to be, any liability which is material in the context of the East Midlands Electricity Group (whether actual or contingent) to make good, repair, reinstate or clean up any property now or previously owned, occupied or made use of by any past or present member of the wider East Midlands Electricity Group under any environmental legislation, regulation, notice, circular or order of any relevant authority or otherwise. The Offeror reserves the right to waive all or any of the above conditions, in whole or in part, other than condition (a). Conditions (b) to (n) (inclusive), if not, where applicable, waived, must be fulfilled or satisfied within 21 days of the first closing date of the Offer or of the date on which condition (a) is fulfilled, whichever is the later (or in either case such later date as the Panel may agree), failing which the Offer will lapse. In such a case, the Offer will cease to be capable of further acceptance and the Offeror, SBC Warburg and Wasserstein Perella and East Midlands Electricity Shareholders shall thereupon cease to be bound by prior acceptances. The Offeror shall be under no obligation to waive or treat as satisfied any of the conditions by a date earlier than the latest date specified above for the satisfaction thereof notwithstanding that the other conditions of the Offer may at such earlier date have been waived or fulfilled and that there are at such earlier date no circumstances indicating that any of such conditions may not be capable of fulfilment. The Offer will lapse if the acquisition of East Midlands Electricity by the Offeror is referred to the Monopolies and Mergers Commission before 3.00 pm (London time), on the first closing date of the Offer or, if later, the date on which the Offer becomes or is declared unconditional as to acceptances, and if the Offer so lapses the Offer will cease to be capable of further acceptance and the Offeror, SBC Warburg and Wasserstein Perella and East Midlands Electricity Shareholders will cease to be bound by prior acceptances. The Offer is not being made, directly or indirectly, in or into the US, or by use of the mails or any means or instrumentality of interstate or foreign commerce of, or any facilities of a national securities exchange of the US, nor is it being made in Canada, Australia or Japan. Accordingly, copies of this document are not being, and must not be, mailed or otherwise distributed or sent in or into or from, the US, Canada, Australia or Japan. The Loan Notes to be issued pursuant to the Offer have not been and will not be registered under the US Securities Act of 1933 (as amended) nor under any of the relevant securities laws of Australia, Japan or Canada. Accordingly, unless an exemption under such Act or relevant securities law is applicable, the Loan Notes may not be offered, sold or delivered, directly or indirectly, in or into the US, Australia, Japan or Canada. The Loan Note Alternative is conditional upon the Offer becoming wholly unconditional. If the Offeror is required by the Panel to make an offer for East Midlands Electricity Shares under the provisions of Rule 9 of the Code, the Offeror may make such alterations to the conditions of the Offer, including condition (a), as are necessary to comply with the provisions of that Rule. 19 PART B:FURTHER TERMS OF THE OFFER The following further terms apply, unless the context requires otherwise, to the Offer and the Loan Note Alternative. Except where the context requires otherwise, any reference in Parts B or C of this Appendix 1 and in the Form of Acceptance to: (i) the "Offer" shall include the Offer (including the Loan Note Alternative) and any revision, variation or renewal thereof or extension thereto and shall include any election available in connection with it; (ii) the "Offer becoming unconditional" means the acceptance condition becoming or being declared satisfied whether or not any other condition of the Offer remains to be fulfilled; (iii) the "acceptance condition" means the condition as to acceptances set out in paragraph (a) of Part A of this Appendix 1; (iv) "acceptances of the Offer" shall include deemed acceptances of the Offer; and (v) the "Offer Document" shall mean this document and any other document containing the Offer. 1. Acceptance period (a) The Offer will initially be open for acceptance until 3.00 pm on 13 December 1996. Although no revision is envisaged, if the Offer is revised it will remain open for acceptance for a period of at least 14 days from the date on which written notification of the revision is posted to East Midlands Electricity Shareholders. Except with the consent of the Panel, no revision of the Offer may be posted to East Midlands Electricity Shareholders after 7 January 1997 or, if later, the date falling 14 days prior to the last date on which the Offer can become unconditional. (b) The Offer, whether revised or not, shall not (except with the consent of the Panel) be capable of becoming unconditional after midnight on 21 January 1997 (or any earlier time and/or date beyond which the Offeror has stated that the Offer will not be extended and in respect of which it has not withdrawn that statement), nor of being kept open for acceptance after that time unless it has previously become unconditional, provided that the Offeror reserves the right, with the permission of the Panel, to extend the Offer to (a) later time(s) and/or date(s). Except with the consent of the Panel, the Offeror may not, for the purpose of determining whether the acceptance condition has been satisfied, take into account acceptances received or purchases of East Midlands Electricity Shares made after 1.00 pm on 21 January 1997 (or any earlier time and/or date beyond which the Offeror has stated that the Offer will not be extended and in respect of which it has not withdrawn that statement) or, if the Offer is so extended, any such later time and/or date as may be agreed with the Panel. If the latest time at which the Offer may become unconditional is extended beyond midnight on 21 January 1997, acceptances received and purchases made in respect of which all relevant documents are received by the Receiving Agent after 1.00 pm on the relevant date may (except where the Code otherwise permits) only be taken into account with the agreement of the Panel. (c) If the Offer becomes or is declared unconditional, the Offer will remain open for acceptance for not less than 14 days from the date on which it would otherwise have expired. If the Offer has become unconditional and it is stated by or on behalf of the Offeror that the Offer will remain open until further notice, then not less than 14 days' notice will be given prior to the closing of the Offer. (d) If a competitive situation arises after the Offeror has given a "no extension" statement and/or a "no increase" statement, the Offeror may, if it has specifically reserved the right to do so at the time such statement was made, withdraw such statement provided that it complies with the requirements of the Code and, in particular, that: (i) it announces such withdrawal as soon as possible and in any event within four business days of the announcement of the competing offer and East Midlands Electricity Shareholders are informed in writing thereof at the earliest practicable opportunity or, in the case of East Midlands Electricity Shareholders with registered addresses outside the UK or whom the 20 Offeror knows to be nominees, custodians or trustees holding East Midlands Electricity Shares for such persons, by announcement in the UK; and (ii) any East Midlands Electricity Shareholders who accepted the Offer after the date of the "no extension" or "no increase" statement are given a right of withdrawal in accordance with paragraph 3(c) below. The Offeror may, if it has reserved the right to do so, choose not to be bound by a "no increase" or a "no extension" statement if it would otherwise prevent the posting of an increased or improved Offer which is recommended for acceptance by the board of directors of East Midlands Electricity or in other circumstances permitted by the Panel. (e) For the purpose of determining at any particular time whether the acceptance condition has been satisfied, the Offeror shall be entitled to take account only of those East Midlands Electricity Shares carrying voting rights which have been unconditionally allotted or issued before that time and written notice of the allotment or issue of which, containing all the relevant details, has been received before that time by the Receiving Agent from East Midlands Electricity or its agents at the address specified in paragraph 3(a) below. Telex or facsimile transmission will not be sufficient. 2. Announcements (a) By 8.30 am on the business day (the "relevant day") next following the day on which the Offer is due to expire or becomes or is declared unconditional or is revised or extended, as the case may be (or such later time or date as the Panel may agree), the Offeror will make an appropriate announcement and simultaneously inform the London Stock Exchange of the position. Such announcement will also state (unless otherwise permitted by the Panel) the total number of East Midlands Electricity Shares and rights over East Midlands Electricity Shares (as nearly as practicable) (i) for which acceptances of the Offer have been received, (ii) acquired or agreed to be acquired by or on behalf of the Offeror or any person deemed to be acting in concert with it during the course of the Offer Period, (iii) held by or on behalf of the Offeror or any person deemed to be acting in concert with it prior to the Offer Period, and (iv) for which acceptances of the Offer have been received from any person deemed to be acting in concert with the Offeror, and will specify the percentage of the relevant class of East Midlands Electricity Shares represented by each of these figures. Any decision to extend the date by which the acceptance condition has to be fulfilled may be made at any time up to, and will be announced not later than, 8.30 am on the relevant day or such later time or date as the Panel may agree and the announcement will (unless the Offer is unconditional) state the next expiry date. In computing the number of East Midlands Electricity Shares represented by acceptances and purchases, there may be included or excluded for announcement purposes, subject to paragraphs 5(o) and (p) below, acceptances and purchases which are not complete in all respects or which are subject to verification. (b) In this Appendix, references to the making of an announcement by or on behalf of the Offeror include the release of an announcement by public relations consultants or by SBC Warburg or Wasserstein Perella to the press and the delivery by hand or telephone or telex or facsimile or other electronic transmission of an announcement to the London Stock Exchange. An announcement made otherwise than to the London Stock Exchange shall be notified simultaneously to the London Stock Exchange. 3. Rights of withdrawal (a) If the Offeror, having announced the Offer to be unconditional, fails to comply by 3.30 pm on the relevant day (or such later time(s) and/or date(s) as the Panel may agree) with any of the other requirements specified in paragraph 2(a) above, an accepting East Midlands Electricity Shareholder may immediately thereafter withdraw his acceptance by written notice received by The Royal Bank of Scotland plc, Registrars Department, New Issues Section, either by post or by hand at PO Box 859, Consort House, East Street, Bedminster, Bristol BS99 1XZ or, by hand only, at PO Box 633, 5-10 Great Tower Street, London EC3R 5ER on behalf of the Offeror. Subject to paragraph 1(b) of this Part B, this right of withdrawal may be terminated not less than eight days after the 21 relevant day by the Offeror confirming, if that be the case, that the Offer is still unconditional, and complying with the other requirements specified in paragraph 2(a) of this Part B. If any such confirmation is given, the first period of 14 days referred to in paragraph 1(c) of this Part B will run from the date of such confirmation and compliance. (b) If by 3.00 pm on 3 January 1997 (or such later time and/or date as the Panel may agree) the Offer has not become unconditional, an accepting East Midlands Electricity Shareholder may withdraw his acceptance at any time thereafter by written notice received by the Receiving Agent at the address referred to in paragraph 3(a) above, on behalf of the Offeror, before the earlier of (i) the time when the Offer becomes unconditional, and (ii) the final time for lodgement of acceptances which can be taken into account in accordance with paragraph 1(b) of this Part B. (c) If a "no extension" statement and/or a "no increase" statement has been withdrawn in accordance with paragraph 1(d) of this Part B, any East Midlands Electricity Shareholder who accepted the Offer after the date of such a statement may withdraw his acceptance thereafter in the manner referred to in paragraph 3(a) of this Part B, not later than the eighth day after the date of posting of written notice of withdrawal of such statement to the relevant East Midlands Electricity Shareholder. (d) Except as provided by this paragraph 3, acceptances shall be irrevocable. (e) In this paragraph 3 "written notice" (including any letter of appointment, direction or authority) means notice in writing bearing the original signature(s) of the relevant accepting East Midlands Electricity Shareholder(s) or his/their agent(s) duly appointed in writing (evidence of whose appointment is produced with the notice in a form reasonably satisfactory to the Offeror). Telex or facsimile transmissions or copies will not be sufficient to constitute written notice. No notice which is postmarked in, or otherwise appears to the Offeror or its agents to have been sent from, the United States, Canada, Australia or Japan will be treated as valid. 4. Revised offer (a) No revision of the Offer is envisaged. However, if the Offer (in its original or any previously revised form(s)) is revised (either in its terms and conditions or in the value or nature of the consideration offered or otherwise) and such revision represents on the date on which such revision is announced (on such basis as SBC Warburg and Wasserstein Perella may consider appropriate) an improvement or no diminution in the value of the Offer as so revised compared with the consideration or terms previously offered or in the overall value received and/or retained by an East Midlands Electricity Shareholder (under the Offer or otherwise), the benefit of the revised Offer will, subject to paragraphs 4(c), 4(d) and 6 below, be made available to any East Midlands Electricity Shareholder who has accepted the Offer in its original or any previously revised form(s) (hereinafter called a "previous acceptor"). The acceptance by or on behalf of a previous acceptor of the Offer in its original or any previously revised form(s) shall, subject as provided in paragraphs 4(c), 4(d) and 6 below, be treated as an acceptance of the Offer as so revised and shall also constitute an authority to any director or authorised representative of the Offeror or of SBC Warburg or Wasserstein Perella as his attorney and/or agent to accept any such revised Offer on behalf of such previous acceptor and, if such revised Offer includes alternative forms of consideration, to make such elections for and accept such alternative forms of consideration in such proportions (as nearly as practicable) as those made by such previous acceptor in the Form of Acceptance previously executed by him or on his behalf and to execute on behalf of and in the name of such previous acceptor all such further documents (if any) as may be required to give effect to such acceptances and/or elections. In making any such acceptance and/or election, such attorney and/or agent shall take into account the nature of any previous acceptances made by or on behalf of the previous acceptor and such other facts or matters as he may reasonably consider relevant. (b) The authorities conferred by this paragraph 4 and any acceptance of a revised Offer and/or any election pursuant thereto shall be irrevocable unless and until the previous acceptor becomes entitled to withdraw his acceptance under paragraph 3 above and duly does so. 22 (c) The deemed acceptance referred to in paragraph 4(a) of this Part B shall not apply, and the authority conferred by this paragraph shall be ineffective, to the extent that a previous acceptor shall lodge with the Receiving Agent, within 14 days of the posting of the document containing the revised Offer, a form in which he validly elects to receive the consideration receivable by him in some other manner. (d) The deemed acceptance referred to in paragraph 4(a) of this Part B shall not apply, and the authorities conferred by that paragraph shall not be exercised by any director or authorised representative of the Offeror, SBC Warburg or Wasserstein Perella, if as a result thereof the previous acceptor would (on such basis as SBC Warburg and Wasserstein Perella may consider appropriate) thereby receive less in aggregate in consideration than he would have received in aggregate as a result of acceptance of the Offer in the form in which it was previously accepted by him. The authorities conferred by paragraph 4(a) of this Part B shall not be exercised in respect of any election available under the revised Offer save in accordance with this paragraph. (e) The Offeror, SBC Warburg and Wasserstein Perella reserve the right to treat an executed Form of Acceptance (in respect of the Offer in its original or any previously revised form(s)) which is received (or dated) after the announcement or issue of the Offer in any revised form as a valid acceptance of the revised Offer and/or, where applicable, a valid election for or acceptance of any of the alternative forms of consideration (if any), and such acceptances shall constitute an authority in the terms of paragraph 4(a) of this part B, mutatis mutandis, on behalf of the relevant East Midlands Electricity Shareholder. 5. General (a) Save with the consent of the Panel, the Offer will lapse unless all the conditions have been fulfilled or (if capable of waiver) waived or, where appropriate, have been determined by the Offeror in its reasonable opinion to be or remain satisfied by midnight on 3 January 1997 or by midnight on the date which is 21 days after the date on which the Offer becomes unconditional, whichever is the later, or such later date as the Offeror may, with the consent of the Panel, decide. In such a case, the Offer shall cease to be capable of further acceptance and the Offeror, SBC Warburg, Wasserstein Perella and East Midlands Electricity Shareholders shall thereupon cease to be bound by prior acceptances. (b) The Offer will lapse if it is referred to the Monopolies and Mergers Commission before 3.00 pm on 13 December 1996 or the date on which the Offer becomes unconditional, whichever is the later. In such a case, the second sentence of paragraph 5(a) of this Part B will apply. (c) The expression "Offer Period" when used in this document means, in relation to the Offer, the period commencing on 6 November 1996 until whichever of the following dates shall be the latest: (i) 3.00 pm on 13 December 1996; (ii) the date on which the Offer lapses; and (iii) the date on which the Offer becomes unconditional. (d) Except with the consent of the Panel and save as referred to in paragraph 10(f) of the letter from SBC Warburg and Wasserstein Perella contained in this document, settlement of the consideration to which any East Midlands Electricity Shareholder is entitled under the Offer will be implemented in full in accordance with the terms of the Offer without regard to any lien, right of set-off, counterclaim or other analogous right to which the Offeror, SBC Warburg or Wasserstein Perella may otherwise be, or claim to be, entitled as against such shareholder and will be posted not later than 21 days after the date on which the Offer becomes unconditional in all respects or 21 days after receipt of a valid and complete acceptance, whichever is the later. Any cash consideration will be settled by way of cheque drawn on a branch of a UK clearing bank. (e) Subject to paragraphs 5(o) and (p), notwithstanding that no certificate(s) is/are delivered in respect of it, a duly completed Form of Acceptance (i) executed under seal by SEPON Limited and endorsed on behalf of the London Stock Exchange to the effect that the East Midlands Electricity Shares to which it refers are the whole or part of a holding registered in the name of SEPON Limited and/or are East Midlands Electricity Shares to which SEPON Limited is unconditionally entitled immediately to become the registered holder, or (ii) executed by 23 any other person(s) and endorsed on behalf of the London Stock Exchange to the effect that such person(s) is/are unconditionally entitled immediately to become the registered holder(s) of the East Midlands Electricity Shares to which it refers and that one or more TALISMAN transfer(s) in favour of such person(s) in respect thereof is/are in the course of registration, shall be treated by the Offeror and by SBC Warburg and Wasserstein Perella as an acceptance valid in all respects on the date of its actual receipt provided that, on its presentation to East Midlands Electricity's registrars, it is unconditionally accepted for registration. (f) The Offer is made at 9.00 am on 22 November 1996 and is capable of acceptance thereafter. Copies of this document, the Form of Acceptance and any related documents are available from The Royal Bank of Scotland plc, Registrars Department, New Issues Section, at either of the addresses set out in paragraph 3(a) above. The Offer is being made by means of this document. (g) The instructions, terms, provisions and authorities contained in or deemed to be incorporated in the Form of Acceptance constitute part of the terms of the Offer. Words and expressions defined in this document have the same meanings when used in the Form of Acceptance, unless the context otherwise requires. (h) The Offer and all acceptances thereof or pursuant thereto and the relevant Form of Acceptance and all contracts made pursuant thereto and action taken or made or deemed to be taken or made under any of the foregoing shall be governed by and construed in accordance with English law. Execution by or on behalf of an East Midlands Electricity Shareholder of a Form of Acceptance will constitute his submission, in relation to all matters arising out of or in connection with the Offer and the Form of Acceptance, to the jurisdiction of the courts of England and his agreement that nothing shall limit the right of the Offeror, SBC Warburg or Wasserstein Perella to bring any action, suit or proceeding arising out of or in connection with the Offer and the Form of Acceptance in any other manner permitted by law or in any court of competent jurisdiction. (i) Any reference in this document and in the Form of Acceptance to 13 December 1996 shall, except in paragraph 1(a) of this Part B of this Appendix 1 and where the context otherwise requires, be deemed, if the closing date of the Offer is extended, to refer to the closing date of the Offer as so extended. (j) Any omission to despatch this document or the Form of Acceptance or any notice required to be despatched under the terms of the Offer to, or any failure to receive the same by, any person to whom the Offer is made, or should be made, shall not invalidate the Offer in any way. Subject to paragraph 6 below, the Offer extends to all East Midlands Electricity Shareholders to whom this document, the Form of Acceptance and any related documents may not be despatched and such persons may collect copies of those documents from The Royal Bank of Scotland plc, Registrars Department, New Issues Section, at either of the addresses set out in paragraph 3(a) above. (k) If the Offer does not become unconditional in all respects, the Form of Acceptance and any share certificate(s) and/or other document(s) of title will be returned by the Offeror by post (or by such other method as may be approved by the Panel) within 14 days of the Offer lapsing, at the risk of the East Midlands Electricity Shareholder concerned, to the person or agent whose name and address outside the US, Canada, Australia or Japan is set out in Box 6 of the Form of Acceptance or, if none is set out, to the first-named holder at the address outside the US, Canada, Australia or Japan set out in Box 4 of the Form of Acceptance or, if no address is set out, to the first-named holder at his registered address. No such documents will be sent to an address in the US, Canada, Australia or Japan. (l) All powers of attorney, appointments as agents and authorities on the terms conferred by or referred to in this Appendix 1 or in the Form of Acceptance are given by way of security for the performance of the obligations of the East Midlands Electricity Shareholder concerned and are irrevocable (in respect of powers of attorney in accordance with Section 4 of the Powers of Attorney Act 1971) except in the circumstances where the donor of such power of attorney, appointment or authority is entitled to withdraw his acceptance in accordance with paragraph 3 of this Part B and duly does so. 24 (m) No acknowledgement of receipt of any Form of Acceptance, share certificate(s) and/or other document(s) of title will be given by or on behalf of the Offeror. (n) Without prejudice to any other provision in this Part B of this Appendix 1, the Offeror, SBC Warburg and Wasserstein Perella reserve the right to treat acceptances of the Offer as valid if received by or on behalf of any of them at any place or places or in any manner determined by any of them otherwise than as set out herein or in the Form of Acceptance. (o) Notwithstanding the right reserved by the Offeror, SBC Warburg and Wasserstein Perella to treat Forms of Acceptance as valid even though not entirely in order or not accompanied by the relevant share certificate(s) and/or other documents of title, except as otherwise agreed with the Panel, an acceptance of the Offer will only be counted towards fulfilling the acceptance condition if the requirements of Note 4 and, if applicable, Note 6 on Rule 10 of the Code are satisfied in respect of it. (p) Except as otherwise agreed with the Panel, a purchase of East Midlands Electricity Shares by the Offeror or its nominees (or, if the Offeror is required by the Panel to make an offer for East Midlands Electricity Shares under the provisions of Rule 9 of the Code, by a person acting in concert with the Offeror (or its nominee)) shall be counted towards fulfilling the acceptance condition only if the requirements of Note 5 and, if applicable, Note 6 on Rule 10 of the Code are satisfied in respect of it. (q) Except with the consent of the Panel, the Offer shall not become or be declared unconditional unless the Royal Bank of Scotland shall have issued a certificate to the Offeror, SBC Warburg and Wasserstein Perella which states the number of acceptances which have been received which comply with paragraph 5(o) above and the number of East Midlands Electricity Shares otherwise acquired, whether before or during the Offer Period, which comply with paragraph 5(p) above. Copies of such certificate will be sent to the Panel and to East Midlands Electricity's financial adviser as soon as possible after it is issued. (r) All communications, notices, certificates, documents of title and remittances to be delivered by or sent to or from any East Midlands Electricity Shareholders will be delivered by or sent to or from them (or their designated agents) at their risk. (s) The Offeror, SBC Warburg and Wasserstein Perella reserve the right to notify any matter (including the making of the Offer) to all or any East Midlands Electricity Shareholder(s) with (a) registered addresses outside the UK or whom the Offeror, SBC Warburg and Wasserstein Perella know to be nominees, custodians or trustees for such persons by announcement or paid advertisement in any daily newspaper published and circulated in the UK, in which case such notice shall be deemed to have been sufficiently given notwithstanding any failure by any such shareholders to receive such notice, and all references in this document to notice in writing (other than in paragraphs 3(a), 3(b), 3(c) and 3(e) of this Part B) shall be construed accordingly. (t) If sufficient acceptances are received, the Offeror intends to apply the provisions of Sections 428 to 430F of the Act to acquire compulsorily any outstanding East Midlands Electricity Shares to which the Offer relates as defined in condition (a) of Part A of this Appendix 1. (u) Due completion of a Form of Acceptance will constitute an instruction to the Offeror, on the Offer becoming unconditional in all respects, that all mandates and other instructions or notices recorded in East Midlands Electricity's records immediately prior to the Offer becoming so unconditional will, unless and until revoked or varied, continue in full force in relation to the Loan Notes allotted or issued to the relevant East Midlands Electricity Shareholders pursuant to the Offer. (v) All references in this Appendix 1 to any statute or statutory provision shall include a statute or statutory provision which amends, consolidates or replaces the same (whether before or after the date hereof). (w) The Loan Note Alternative will lapse if the Offer lapses or expires. No Loan Notes will be issued unless valid elections for the Loan Note Alternative are received for at least (pound)10 million nominal amount of Loan Notes, or such smaller amount as DR Investments may, in its absolute discretion, decide, in which case any consideration due under the terms of the Offer will be payable in cash. 25 6. Overseas shareholders (a) The making of the Offer in, or to persons resident in or nationals or citizens of, jurisdictions outside the UK or who are nominees of, or custodians, trustees or guardians for, citizens or nationals of other countries ("overseas shareholders") may be prohibited or affected by the laws of the relevant jurisdictions. Such overseas shareholders should inform themselves about and observe any applicable legal requirements. It is the responsibility of any overseas shareholder wishing to accept the Offer to satisfy himself as to the full observance of the laws of the relevant jurisdiction in connection therewith, including the obtaining of any government, exchange control or other consents which may be required, or the compliance with other necessary formalities needing to be observed and the payment of any issue, transfer or other taxes or duties due in such jurisdiction. In particular, the Offeror, SBC Warburg and Wasserstein Perella (and any person acting on behalf of any of them) shall be entitled to be fully indemnified and held harmless by such shareholders for any such issue, transfer or other taxes or duties as the Offeror, SBC Warburg or Wasserstein Perella (or any person acting on behalf of any of them) may be required to pay. In particular, the Offer is not being made, directly or indirectly, in or into the US, or by use of the mails of, or by any means or instrumentality of interstate or foreign commerce of, or any facility of a national securities exchange of, the United States, Canada, Australia or Japan. This includes, but is not limited to, facsimile transmission, telex and telephone. Accordingly, copies of this document, the Form of Acceptance, the Chairman's Letter and any related offering documents are not being, and must not be, mailed or otherwise distributed or sent in, into or from the United States, Canada, Australia or Japan including to East Midlands Electricity Shareholders or participants in the East Midlands Electricity Share Option Schemes with registered addresses in the United States, Canada, Australia or Japan or to custodians, trustees or nominees holding East Midlands Electricity Shares for such persons. Persons receiving such documents (including, without limitation, custodians, trustees and nominees) must not distribute, send or mail them in, into or from the United States, Canada, Australia or Japan, use the United States, Canadian, Australian or Japanese mails or any such means or instrumentality for any purpose, directly or indirectly, in connection with the Offer, and so doing will invalidate any related purported acceptance of the Offer. Delivery of East Midlands Electricity ADRs will not constitute valid acceptance of the Offer. Persons wishing to accept the Offer must not use the United States, Canadian, Australian or Japanese mails or any such means or instrumentality for any purpose directly or indirectly related to acceptance of the Offer. Envelopes containing Forms of Acceptance should not be postmarked in the United States, Canada, Australia or Japan or otherwise despatched from the United States, Canada, Australia or Japan and all acceptors must provide addresses outside the United States, Canada, Australia or Japan for the receipt of Loan Notes and/or the remittance of cash, or for the return of Forms of Acceptance, East Midlands Electricity Share certificates and/or other documents of title. An East Midlands Electricity Shareholder will be deemed not to have accepted the Offer if: (1) he is unable to give the representations and warranties set out in paragraphs (b) and (d) of Part C of this Appendix 1; (2) having completed Box 4 of the Form of Acceptance with a registered address in the United States, Canada, Australia or Japan he does not insert in Box 6 of the Form of Acceptance the name and address of a person or agent outside the United States, Canada, Australia or Japan to whom he wishes the consideration to which he is entitled under the Offer to be sent; (3) he inserts in Box 6 of the Form of Acceptance the name and address of a person or agent in the United States, Canada, Australia or Japan to whom he wishes the consideration to which he is entitled under the Offer to be sent; or (4) in any case, the Form of Acceptance received from him is received in an envelope postmarked in, or which otherwise appears to the Offeror or its agents to have been sent from, the United States, Canada, Australia or Japan. The Offeror reserves the right, in its sole discretion, to investigate, in relation to any acceptance, whether the representations and warranties set out in paragraphs (b) and (d) of Part C of this Appendix 1 given by any East Midlands Electricity Shareholder are correct and, if such investigation is made and, as a result, the Offeror cannot satisfy itself that such representations and warranties are correct, such acceptance shall not be valid. If, in connection with the making of the Offer, notwithstanding the restrictions described above, any person (including, without limitation, custodians, nominees and trustees), 26 whether pursuant to a contractual or legal obligation or otherwise, forwards this document, the Form of Acceptance, or any related offering documents, in, into or from the United States, Canada, Australia or Japan or uses the mails of, or any means or instrumentality (including without limitation, facsimile transmission, telex and telephone) of interstate or foreign commerce of, or any facility of a national securities exchange of, the United States, Canada, Australia or Japan in connection with such forwarding, such person should (i) inform the recipient of such fact; (ii) explain to the recipient that such action will invalidate any purported acceptance by the recipient; and (iii) draw the attention of the recipient to this paragraph 6(a). (b) The availability of the Loan Notes to overseas shareholders may be affected by the laws of the relevant jurisdictions. Such overseas shareholders should inform themselves about and observe any applicable legal requirements. It is the responsibility of any overseas shareholder wishing to elect for the Loan Note Alternative to satisfy himself as to the full observance of the laws of the relevant jurisdiction in connection therewith, including the obtaining of any governmental or other consents which may be required, compliance with other formalities needing to be observed and payment of any issue, transfer or other taxes or duties due in such jurisdiction. The Loan Notes to be issued pursuant to the Offer have not been, and will not be, registered under the United States Securities Act of 1933, as amended, or under any of the relevant securities laws of Canada, Australia or Japan. Accordingly such securities may not be offered, sold or delivered, directly or indirectly, in or into the United States, Canada, Australia or Japan. Thus, the Offeror will not issue Loan Notes or authorise the delivery of any document(s) of title in respect of any Loan Notes falling to be allotted pursuant to the Offer to (a) any person who is, or whom the Offeror has reason to believe is, a Restricted Overseas Person or (b) any person who will, or whom the Offeror has reason to believe will, hold or acquire any of the Loan Notes for the account or benefit of any Restricted Overseas Person or with a view to the offer, sale, delivery or distribution, directly or indirectly, of any such Loan Notes in or into the United States, Canada, Australia or Japan or to or for the account or benefit of any Restricted Overseas Person or (c) any person with a registered address in the United States, Canada, Japan or Australia or (d) any person who by inserting "No" in Box 5 of the Form of Acceptance does not give the representations and warranties set out in paragraph (d) of Part C of this Appendix 1. (c) These provisions and any other terms of the Offer relating to overseas shareholders may be waived, varied or modified as regards specific East Midlands Electricity Shareholders or on a general basis by the Offeror in its absolute discretion. Subject thereto, the provisions of this paragraph 6 supersede any terms of the Offer inconsistent therewith. References in this paragraph 6 to an East Midlands Electricity Shareholder include references to the person or persons executing a Form of Acceptance and, in the event of more than one person executing the Form of Acceptance, the provisions of this paragraph 6 shall apply to them jointly and severally. 27 PART C: FORM OF ACCEPTANCE Each holder of East Midlands Electricity Shares by whom, or on whose behalf, the Form of Acceptance is executed and received by the Receiving Agent, or by or on behalf of the Offeror, SBC Warburg or Wasserstein Perella, irrevocably undertakes, represents, warrants and agrees to and with the Offeror, SBC Warburg and Wasserstein Perella (so as to bind him, his personal representatives, heirs, successors and assigns) to the following effect: (a) that the execution of the Form of Acceptance, whether or not any other Boxes are completed, shall constitute: (i) an acceptance of the Offer in respect of the relevant East Midlands Electricity Shareholder's entire holding of East Midlands Electricity Shares (or such lesser number as may have been inserted in Box 1 of the Form of Acceptance, provided that if a number is inserted in Box 1 which exceeds such shareholder's holding of East Midlands Electricity Shares, the acceptance will be deemed to have been made in respect of that shareholder's entire holding of East Midlands Electricity Shares); (ii) if Box 2 is completed, an election under the Loan Note Alternative to receive Loan Notes instead of such proportion of the cash amount which the relevant East Midlands Electricity Shareholder would otherwise have received under the basic terms of the Offer as corresponds to the number inserted (or deemed to have been inserted) in Box 2 divided by the relevant East Midlands Electricity Shareholder's entire holding of East Midlands Electricity Shares (or divided by such lesser number as may have been inserted or deemed to be inserted in Box 1 of the Form of Acceptance); and (iii) an undertaking to execute any further documents and give any further assurances which may be required to enable the Offeror to obtain the full benefit of the terms of this Part C of this Appendix 1 and/or to perfect any of the authorities expressed to be given hereunder, in each case on and subject to the terms and conditions set out or referred to in this document and in the Form of Acceptance and that, subject only to the rights of withdrawal set out or referred to in paragraph 3 of Part B of this Appendix 1, each such acceptance and election shall be irrevocable; (b) that (i) this document, the Form of Acceptance and any related offering documents have not been mailed or otherwise distributed or sent (directly or indirectly) in, into, or from the United States, Canada, Australia or Japan or any other jurisdiction where such actions may constitute a breach of any legal or regulatory requirements of such jurisdiction; (ii) in connection with the Offer, there has been no use, directly or indirectly, of the mails of, or any means or instrumentality (including, without limitation, electronic mail, or any electronic publication or advertisement, facsimile transmission, telex and telephone) of interstate or foreign commerce of, or any facility of a national securities exchange of, the United States, Canada, Australia or Japan; (iii) such East Midlands Electricity Shareholder was outside the United States, Canada, Australia and Japan when the Form of Acceptance was sent and at the time of accepting the Offer; and (iv) in respect of the East Midlands Electricity Shares to which the Form of Acceptance relates, such East Midlands Electricity Shareholder is not an agent or a fiduciary acting on a non-discretionary basis for a principal, unless such agent or fiduciary is an authorised employee of such principal or such principal has given any instructions with respect to the Offer from outside the United States, Canada, Australia and Japan; (c) that if such accepting East Midlands Electricity Shareholder is not resident in the United Kingdom he has observed the laws of all relevant territories, obtained any requisite governmental or other consents, complied with all requisite formalities and paid any issue, transfer or other taxes due from him, in connection with such acceptance, in any territory and that he has not taken or omitted to take any action which will or may result in the Offeror, SBC Warburg, Wasserstein Perella or any other person acting in breach of the legal or regulatory requirements of any territory in connection with the Offer or his acceptance thereof; (d) if electing for the Loan Note Alternative and unless "No" has been inserted in Box 5 of the Form of Acceptance, that such East Midlands Electricity Shareholder is not a Restricted Overseas Person, does not hold any East Midlands Electricity Shares for or on behalf of a 28 Restricted Overseas Person, will not hold or acquire any of the Loan Notes for the account or benefit of a Restricted Overseas Person or with a view to the offer, sale, delivery or distribution, directly or indirectly, of any Loan Notes in or into the United States, Canada, Australia or Japan or to or for the account or benefit of a Restricted Overseas Person and is lawfully entitled to make such election under the laws of any jurisdiction to which he is subject; (e) that the execution of the Form of Acceptance and its delivery to the Receiving Agent will constitute the irrevocable appointment of each director and authorised representative of the Offeror, SBC Warburg and Wasserstein Perella as such shareholder's attorney and/or agent (the "attorney") upon the terms of paragraph 4 of Part B of this Appendix 1 and this Part C and with the authority to execute any further documents and give any further assurances which may be required in connection with any matters referred to in Parts B and C of this Appendix 1 and an irrevocable undertaking with such attorney to execute any such further documents and/or give any such further assurances as may be required or expedient; (f) that the execution of the Form of Acceptance and its delivery to the Receiving Agent will constitute, subject to the Offer becoming or being declared unconditional in all respects in accordance with its terms and to the person accepting the Offer not having validly withdrawn his acceptance, the irrevocable separate appointment of the Offeror, Wasserstein Perella and SBC Warburg and any director and authorised representative of the Offeror, Wasserstein Perella and SBC Warburg as such shareholder's attorney and/or agent (the "attorney") and an irrevocable instruction to the attorney to complete and execute all or any form(s) of transfer and/or other document(s) at the attorney's discretion in relation to the East Midlands Electricity Shares referred to in subparagraph (a)(i) of this Part C of this Appendix 1 in respect of which an accepting East Midlands Electricity Shareholder has not validly withdrawn his acceptance in favour of the Offeror or such other person or persons as the Offeror may direct and to deliver such form(s) of transfer and, where applicable, renunciation and/or other document(s) at the attorney's discretion together with the share certificate(s) and/or other document(s) of title relating to such East Midlands Electricity Shares for registration within six months of the Offer becoming or being declared unconditional in all respects and to execute all such other documents and to do all such other acts and things as may in the opinion of the attorney be necessary or expedient for the purposes of or in connection with the acceptance of the Offer and to vest in the Offeror or its nominee(s) the East Midlands Electricity Shares as aforesaid; (g) that the execution of the Form of Acceptance and its delivery to the Receiving Agent will constitute, subject to the Offer becoming unconditional in all respects and to the person accepting the Offer not having validly withdrawn his acceptance, an irrevocable authority and request: (i) to East Midlands Electricity or its agents, to procure the registration of the transfer of the East Midlands Electricity Shares pursuant to the Offer and the delivery of the share or stock certificate(s) and/or other document(s) of title in respect thereof to the Offeror or as it may direct; (ii) to the Offeror, SBC Warburg or Wasserstein Perella or their respective agents, to procure the despatch by post (or by such other method as may be approved by the Panel) of a cheque for any cash to which an accepting East Midlands Electricity Shareholder may become entitled pursuant to his acceptance of the Offer and/or, subject to the provisions of paragraph 6 of Part B of this Appendix 1, any document of title for any Loan Notes in respect of any election for the Loan Note Alternative, at the risk of such East Midlands Electricity Shareholder, to the person whose name and address is set out in Box 6 of the Form of Acceptance or, if none is set out, to the first-named holder at his registered address (outside the United States, Canada, Australia or Japan); (iii) subject to the provisions of paragraph 6 of Part B of this Appendix 1, to the Offeror or its agents to procure that such shareholder's name is entered on the register of holdings of Loan Notes in respect of any Loan Notes to which such shareholder may become entitled under the Loan Note Alternative (subject in each case to the terms of the Loan Note Instrument constituting the Loan Notes); (h) that the Offeror shall be entitled after the Offer becomes unconditional in all respects (or if the Offer will become unconditional in all respects or lapse immediately upon the outcome 29 of the resolution in question or in such other circumstances as the Panel may allow) to direct the exercise of any votes and any or all other rights and privileges (including the right to requisition the convening of a general or separate class meeting of East Midlands Electricity) attaching to any East Midlands Electricity Shares in respect of which the Offer has been accepted and not validly withdrawn, and the execution of the Form of Acceptance will constitute an irrevocable authority to East Midlands Electricity from such shareholder to send any notice, circular, warrant or other document or communication which may be required to be sent to him as a member of East Midlands Electricity in respect of such shares to the Offeror at its registered office, and an irrevocable authority to the Offeror or any person nominated by the Offeror to sign any consent to short notice of a general or separate class meeting as his attorney and/or agent and on his behalf and/or to execute a form of proxy in respect of such shares appointing any person nominated by the Offeror to attend general and separate class meetings of East Midlands Electricity and to exercise the votes attaching to such shares on his behalf, where relevant, such votes to be cast so far as possible to satisfy or assist directly or indirectly to satisfy any outstanding condition of the Offer, and will also constitute the agreement of such shareholder not to exercise any such rights without the consent of the Offeror and the irrevocable undertaking of such shareholder not to appoint a proxy for or to attend such general or separate class meeting. This authority will cease to be valid if the acceptance is withdrawn in accordance with paragraph 3 of Part B of this Appendix 1; (i) that the East Midlands Electricity Shares in respect of which the Offer is accepted or deemed to be accepted will be acquired under the Offer free from all liens, equities, charges, encumbrances and other interests and together with all rights attaching thereto, including the right to receive and retain all dividends, interest and other distributions (if any) declared, made or paid after 12 November 1996; (j) that he will deliver, or procure the delivery, to the Receiving Agent at The Royal Bank of Scotland plc, Registrars Department, New Issues Section, either by post or by hand at PO Box 859, Consort House, East Street, Bedminster, Bristol BS99 1XZ or by hand only at PO Box 633, 5-10 Great Tower Street, London EC3R 5ER of his share certificate(s) and/or other document(s) of title in respect of the East Midlands Electricity Shares in respect of which the Offer has been accepted, or an indemnity acceptable to the Offeror in lieu thereof, as soon as possible and in any event within six months of the Offer becoming unconditional in all respects; (k) that, if he accepts the Offer, he shall do all such acts and things whatsoever as shall be necessary or expedient to vest in the Offeror or its nominees the East Midlands Electricity Shares referred to in paragraph (a)(i) of this Part C; (l) that he agrees to ratify each and every act or thing which may be done or effected by, or by any director of, or person authorised by, the Offeror, SBC Warburg or Wasserstein Perella in exercise of any of the powers and/or appointments and/or authorities hereunder; (m) that, if any provisions of Part B or this Part C of this Appendix 1 shall be unenforceable or invalid or shall not operate so as to afford the Offeror, SBC Warburg or Wasserstein Perella or any of their respective directors or authorised representatives the benefit of the authority expressed to be given therein or herein, he shall, with all practicable speed, do all such acts and things and execute all such documents that may be required or desirable to enable the Offeror and/or Wasserstein Perella and/or SBC Warburg and/or any of their respective directors or authorised representatives to secure the full benefit of Part B and this Part C of this Appendix 1; (n) that the terms and conditions of the Offer shall be deemed to be incorporated in, and form part of, the Form of Acceptance, which shall be read and construed accordingly; and (o) that the execution of the Form of Acceptance constitutes his submission, in relation to all matters arising out of the Offer and the Form of Acceptance, to the jurisdiction of the Courts of England. References in this Part C of this Appendix 1 to a holder of East Midlands Electricity Shares shall include references to the person or persons executing the Form of Acceptance and, in the event of more than one person executing a Form of Acceptance, the provisions of this Part C of this Appendix 1 shall apply to them jointly and to each of them. On execution, the Form of Acceptance shall take effect as a Deed. 30 APPENDIX 2 PARTICULARS OF THE LOAN NOTES The Floating Rate Unsecured Loan Notes 2007 of the Offeror will be created by a resolution of the Board of Directors of the Offeror (or a duly authorised committee thereof) and will be constituted by a Loan Note Instrument (the "Loan Note Instrument") to be entered into by the Offeror. The issue of the Loan Notes will be conditional on the Offer becoming or being declared unconditional in all respects. Elections for the Loan Note Alternative in respect of all the East Midlands Electricity Shares to which the Offer relates would involve the issue of a maximum nominal amount of approximately (pound)1.3 billion of Loan Notes. The Loan Note Instrument will contain provisions, inter alia, to the effect set out below. 1. Form and Status The Loan Notes will be issued by the Offeror in amounts and integral multiples of (pound)1 and will constitute unsecured and unguaranteed obligations of the Offeror and any fractional entitlements will be disregarded and not paid. The Loan Note Instrument will not contain any restrictions on borrowings, disposals or charging of assets by the Offeror. 2. Interest (a) Interest on the Loan Notes will be calculated on the basis of a 365 day year and will be payable (subject to any requirement to deduct tax therefrom) yearly on 31 March in each year (interest payment dates) in respect of the interest periods (as defined below) ending on the day immediately before those dates at a rate calculated as provided in subparagraph 2(b) (or, if applicable, subparagraph 2(c)) below, except that the first payment of interest on the Loan Notes, which will be made on 31 March 1998, will be in respect of the period from (and including) the first date of issue of any of the Loan Notes to (but excluding) 31 March 1998. The period from (and including) the first date of issue of any Loan Notes to (but excluding) 31 March 1998 and the period from (and including) 31 March 1998 or any subsequent interest payment date to (but excluding) the next following interest payment date is herein called an interest period. If any interest would otherwise fall to be paid on a day which is not a business day, such interest shall be paid on the next succeeding business day. (b) The rate of interest on the Loan Notes for each interest period will be the rate per annum calculated by the Offeror to be 1% per annum below the LIBOR rate for twelve month sterling deposits of (pound)5 million in the London Interbank market at or about 11 am (London time) on the first day of the relevant interest period or, if such a day is not a business day, on the preceding business day, as quoted by a duly authorised official of Barclays Bank PLC (or if Barclays Bank PLC is unable to quote such rate, such other reference bank selected by the Offeror for the purpose). For these purposes, reference banks will be those banks that are, as at the date of execution of the Loan Note Instrument, members of CHAPS Clearing Company Limited. (c) If a rate of interest cannot be established in accordance with the provisions of subparagraph 2(b) above for any interest period, then the rate of interest on the Loan Notes for such interest period shall be calculated by reference to such rate as the Offeror shall determine on the basis of quotations made for twelve month sterling deposits of similar size in any such other appropriate interbank market or markets as the Offeror may select. 3. Redemption of Loan Notes (a) On 31 March 1998 and thereafter on any interest payment date falling prior to 31 March 2007, a holder of Loan Notes ("Noteholder") shall be entitled to require the Offeror to redeem the whole (whatever the amount) or any part (being (pound)100 nominal amount or any integral multiple thereof) of the principal amount outstanding from time to time on his holding of Loan Notes for cash at par, together with accrued interest (subject to any requirement to deduct tax therefrom) to (but excluding) the date of payment, by giving not less than 30 days' notice in writing (which shall be irrevocable) to the Offeror (in the form endorsed on the Loan Note certificate) expiring on or before such interest payment 31 date accompanied by the certificate(s) for all the Loan Notes to be redeemed, provided that no such notice may be given in respect of any Loan Notes in respect of which notice of redemption has previously been given by the Offeror in accordance with subparagraph 3(b) below. (b) If, at any time, the nominal amount of all Loan Notes outstanding is (i) 20% or less of the total nominal amount of Loan Notes issued pursuant to the Loan Note Alternative and (ii) less than (pound)10 million, the Offeror shall have the right on giving to the remaining Noteholders not less than 30 days' notice in writing expiring on 31 March 1999 (or, if that is not a business day, the next succeeding business day) or on any subsequent interest payment date to redeem all (but not some only) of the outstanding Loan Notes by payment of the nominal amount thereof together with accrued interest (subject to any requirement to deduct tax therefrom) to (but excluding) the date of redemption. (c) Any Loan Notes not previously repaid, redeemed or purchased and cancelled will be redeemed in full at par on 31 March 2007 (or, if that is not a business day, the next succeeding business day) together with accrued interest (subject to any requirement to deduct tax therefrom) to (but excluding) that date. (d) Each Noteholder shall be entitled to require all or any part (being (pound)100 nominal amount or any integral multiple thereof) of the Loan Notes held by him to be repaid at par together with accrued interest (subject to any requirement to deduct tax therefrom) if: (i) any principal or interest on any of the Loan Notes held by that Noteholder shall fail to be paid in full within 30 days after the due date for payment thereof; or (ii) an order is made or an effective resolution is passed for the winding up or dissolution of the Offeror (other than for the purposes of a reconstruction or an amalgamation or a members' voluntary winding up on terms previously approved by an Extraordinary Resolution of the Noteholders (as defined in the Loan Note Instrument)); or (iii) an encumbrancer takes possession of or a trustee, receiver, administrator or similar officer is appointed or an administration order is made in respect of the Offeror or in respect of the whole or substantially the whole of the undertaking of the Offeror and such person has not been paid out or discharged within 30 days. 4. Purchase of Loan Notes The Offeror will be entitled at any time to purchase Loan Notes at any price by tender (available to all Noteholders alike), private treaty or otherwise by agreement with the relevant Noteholder(s). 5. Cancellation Any Loan Notes redeemed under paragraph 3 above or purchased by the Offeror under paragraph 4 above shall be cancelled and shall not be available for reissue. 6. Modifications The provisions of the Loan Note Instrument and the rights of the Noteholders will be subject to modification, abrogation or compromise in any respect with the sanction of an Extraordinary Resolution of the Noteholders, as defined in the Loan Note Instrument, but subject to the consent of the Offeror. 7. Substitution or exchange The Loan Notes will contain provisions entitling the Offeror, without the consent of Noteholders, to substitute DR Unlimited (an unlimited liability company incorporated in England and Wales and the holding company of the Offeror) or any other member of the Dominion Resources Group resident in the UK for tax purposes as the principal debtor under the Loan Note Instrument and the Loan Notes or to require all or any of the Noteholders to exchange their Loan Notes for loan notes issued on the same terms mutatis mutandis by DR Unlimited or such other member provided in either case that the Offeror guarantees DR Unlimited's or such other member's obligations thereunder. References to the Offeror in this summary shall be construed accordingly. The Offeror's right to require substitution or exchange 32 will be exercisable only if such substitution or exchange will not be treated as a disposal of the Loan Notes for the purposes of UK taxation of chargeable gains. 8. Registration and Transfer The Loan Notes will be evidenced by certificates and will be registered in amounts and integral multiples of (pound)1 nominal amount. The Loan Notes will be transferable in amounts or integral multiples of (pound)1 nominal amount, provided that transfers will not be registered during the 14 days immediately preceding any interest payment date or while the register of Noteholders is closed. 9. Prescription Noteholders will cease to be entitled to amounts in respect of interest which remain unclaimed for a period of five years and to amounts due in respect of principal which remain unclaimed for a period of ten years, in each case from the date on which the relevant payment first becomes due. 10. No Listing No application has been made or is intended to be made to any stock exchange for the Loan Notes to be listed or dealt in. 11. No Registration The Loan Notes have not been and will not be registered under the United States Securities Act of 1933, as amended, or under the securities laws of any State of the United States, no relevant clearances have been, or will be, obtained from the securities commission of any province of Canada, no prospectus has been, or will be, lodged with the Australian Securities Commission and no steps have been taken, nor will any be taken, to enable the Loan Notes to be offered in compliance with applicable securities laws of Japan. Accordingly, the Loan Notes may not be offered, sold, resold, delivered or distributed (directly or indirectly) in or into the United States (except in transactions exempt from, or not subject to, the registration requirements of the Securities Act), Canada, Australia or Japan nor to or for the account or benefit of any Restricted Overseas Person. 12. Governing Law The Loan Notes and the Loan Note Instrument will be governed by and construed in accordance with English law. 33 APPENDIX 3 FINANCIAL AND OTHER INFORMATION RELATING TO DOMINION RESOURCES Nature of financial information The financial information contained in this Appendix 3 is extracted from the audited consolidated accounts of Dominion Resources for the three years ended 31 December 1995, on which the audit opinions were unqualified, and from the unaudited quarterly statement for the period ended 30 September 1996. 1. Directors of Dominion Resources Thomas E. Capps Chairman, President and Chief Executive Officer John B. Adams Jr. Director John B. Bernhardt Director Benjamin J. Lambert, III Director Richard L. Leatherwood Director Harvey L. Lindsay Jr. Director Kenneth A. Randall Director William T. Roos Director Frank S. Royal Director Judith B. Sack Director S. Dallas Simmons Director Robert H. Spilman Director 2. Principal and registered office of Dominion Resources The principal and registered office of Dominion Resources is at Riverfront Plaza - - West Tower, 901 East Byrd Street, Richmond, Virginia 23219-4069, United States of America. 34 3. Financial Statements (a) Consolidated statements of income
Years ended 31 December 1995 1994 1993 ($ millions) ($ millions) ($ millions) ------------ ------------ ------------ Operating revenues and income: Electric utility 4,350.4 4,170.8 4,187.3 Nonutility 301.3 320.3 246.6 ------------ ------------ ------------ Total operating revenues and income 4,651.7 4,491.1 4,433.9 ------------ ------------ ------------ Operating expenses: Fuel, net 1,006.9 973.0 959.5 Purchased power capacity, net 688.4 669.4 646.1 Restructuring 121.5 - - Other operation 724.0 739.6 647.8 Maintenance 260.5 263.2 279.5 Depreciation, depletion and amortisation 551.0 533.1 509.5 Other taxes 273.8 274.6 264.2 ------------ ------------ ------------ Total operating expenses 3,626.1 3,452.9 3,306.6 ------------ ------------ ------------ Operating income 1,025.6 1,038.2 1,127.3 Other income 7.3 13.5 15.1 ------------ ------------ ------------ Income before fixed charges and federal income taxes 1,032.9 1,051.7 1,142.4 ------------ ------------ ------------ Fixed charges: Interest charges, net 381.7 360.3 373.5 Preferred dividends of Virginia Power 44.1 42.2 42.1 ------------ ------------ ------------ Total fixed charges 425.8 402.5 415.6 ------------ ------------ ------------ Income before provision for federal income taxes 607.1 649.2 726.8 Provision for federal income taxes 182.1 171.0 210.2 ------------ ------------ ------------ Net income 425.0 478.2 516.6 ============ ============ ============
Common Stock Data: Average number of shares of common stock outstanding (in millions) 173.8 170.3 165.7 Earnings per common share $2.45 $2.81 $3.12 Dividends paid per common share $2.58 $2.55 $2.48
(b) Consolidated statements of retained earnings
Years ended 31 December 1995 1994 1993 ($ millions) ($ millions) ($ millions) ------------ ------------ ------------ Net income 425.0 478.2 516.6 Retained earnings as at 1 January 1,455.2 1,417.8 1,319.1 Common dividends and other deductions: Dividends (448.7) (434.7) (411.2) Other deductions (3.9) (6.1) (6.7) ----------- ----------- ------------ Retained earnings as at 31 December 1,427.6 1,455.2 1,417.8 =========== =========== ============
35 (c) Consolidated balance sheet
At 31 December 1995 Assets ($ millions) ------------ Current assets: Cash and cash equivalents 66.7 Trading securities 10.8 Customer accounts receivable, net 362.6 Other accounts receivable 104.2 Accrued unbilled revenues 179.5 Materials and supplies at average cost or less Plant and general 160.2 Fossil fuel 71.2 Other 141.5 ------------ 1,096.7 ------------ Investments: Investments in affiliates 436.2 Available-for-sale securities 285.5 Nuclear decommissioning trust funds 351.4 Investments in real estate 133.0 Other 236.6 ------------ 1,442.7 ------------ Property, plant and equipment: (includes plant under construction of $512.1) 15,977.4 Less accumulated depreciation, depletion and amortisation 5,655.1 ------------ 10,322.3 ------------ Deferred charges and other assets: Regulatory assets 816.4 Other 225.2 ------------ 1,041.6 Total assets ------------ 13,903.3 ============
36
At 31 December 1995 Liabilities and shareholders' equity ($ millions) -------------- Current liabilities: Securities due within one year 420.8 Short-term debt 236.6 Accounts payable, trade 336.7 Accrued interest 110.5 Accrued payrolls 77.7 Severance costs accrued 42.5 Customer deposits 55.4 Other 114.0 ------------- 1,394.2 ------------- Long-term debt: Utility 3,889.4 Nonrecourse-nonutility 523.5 Other 199.0 ------------- 4,611.9 ------------- Deferred credits and other liabilities: Deferred income taxes 1,661.1 Investment tax credits 272.2 Deferred fuel expenses 57.7 Other 340.2 ------------- 2,331.2 ------------- Total liabilities 8,337.3 ------------- Commitments and contingencies Virginia Power obligated mandatorily redeemable preferred securities of subsidiary trust* 135.0 ------------- Preferred stock: Virginia Power stock subject to mandatory redemption 180.0 ------------- Virginia Power stock not subject to mandatory redemption 509.0 ------------- Common shareholders' equity: Common stock-no par authorised 300,000,000 shares, outstanding-176,414,110 shares at 1995 3,303.5 Retained earnings 1,427.6 Allowance on available-for-sale securities (6.7) Other paid-in capital 17.6 ------------- 4,742.0 ------------- Total liabilities and shareholders' equity 13,903.3 =============
*As described in Note (xii), the 8.05% Junior Subordinated Notes totalling $139.2 million principal amount constitute 100% of the Trust's assets. 37 (d) Consolidated statement of cash flows
Year ended 31 December 1995 ($ millions) ------------ Cash flows from (to) operating activities: Net income 425.0 Adjustments to reconcile net income to net cash: Depreciation, depletion and amortisation 633.5 Deferred income taxes 26.4 Investment tax credits, net (16.9) Allowance for other funds used during construction (6.7) Deferred fuel expenses 6.2 Deferred capacity expenses 6.4 Restructuring expenses 96.2 Non-cash return on terminated construction project costs - pre tax (8.4) Gain on sale of trust units (8.7) Changes in current assets and liabilities: Accounts receivable (38.7) Accrued unbilled revenues (27.7) Materials and supplies 61.1 Accounts payable, trade (37.6) Accrued interest and taxes 33.6 Provision for rate refunds (12.2) Other changes 39.8 ------------ Net cash flows from operating activities 1,171.3 ------------ Cash flows from (to) financing activities: Issuance of common stock 161.7 Issuance of preferred stock Preferred securities of subsidiary trust 135.0 Issuance of long-term debt: Utility 240.0 Non-recourse-non-utility 54.3 Issuance of short-term debt 101.1 Repayment of long-term debt and preferred stock (553.0) Common dividend payments (448.7) Other (20.5) ------------ Net cash flows to financing activities (330.1) ------------ Cash flows from (used in) investing activities: Utility capital expenditures (excluding AFC-equity funds) (577.5) Acquisition of natural gas and independent power properties (128.5) Sale of accounts receivable, net (160.0) Sale of trust units 16.4 Other investments (71.6) ------------ Net cash flows used in investing activities (921.2) ------------ Decrease in cash and cash equivalents (80.0) Cash and cash equivalents at beginning of the year 146.7 ------------ Cash and cash equivalents at end of the year 66.7 ============
38 (i) Significant Accounting Policies General Dominion Resources is a holding company headquartered in Richmond, Virginia. Its primary business is Virginia Electric and Power Company ("Virginia Power"), which 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% of Virginia's total land area, but accounts for over 80% of its population. The company also operates business subsidiaries active in independent power production; the acquisition and sale of natural gas reserves; in financial services, and in real estate. Some of the independent power and natural gas projects are located in foreign countries. Net assets of approximately $200 million are involved in independent power production operations in Latin America. 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. Dominion Resources is currently exempt from regulation as a registered holding company under the Public Utility Holding Company Act of 1935. Accounting for the utility business conforms with generally accepted accounting principles as applied to regulated public utilities and as prescribed by federal agencies and the commissions of the states in which the utility business operates. Consolidation The Consolidated Financial Statements include the accounts of Dominion Resources and its subsidiaries. In consolidation, all significant inter-company transactions and accounts have been eliminated. Operating Revenues and Income Utility revenues are recorded on the basis of service rendered. Dividend income on securities owned is recognised on the ex-dividend date. Investment in common stocks of affiliates representing 20% to 50% ownership, and joint ventures and partnerships representing generally 50% or less ownership interests, are accounted for under the equity method. Property, Plant and Equipment Utility plant is recorded at original cost, which includes labour, materials, services, AFC (where permitted by regulators), and other indirect costs. The cost of acquisition, exploration and development of natural resource properties is accounted for under the successful efforts method. Interest is capitalised in connection with the construction of major facilities. The capitalised interest is recorded as part of the asset to which it relates and is amortised over the asset's estimated useful life. In 1995, 1994 and 1993, $14.1 million, $13.8 million, and $11.1 million of interest cost was capitalised, respectively. Capitalised interest includes AFC - other funds for certain regulatory jurisdictions of $6.7 million, $6.4 million and $5.1 million for the years ended 31 December 1995, 1994 and 1993, respectively. 39 Major classes of property, plant and equipment and their respective balances are:
At 31 December 1995 ($ millions) ------------ Utility: Production 7,340.0 Transmission 1,316.1 Distribution 4,215.7 Other electric 817.7 Construction work-in-progress 512.1 Nuclear fuel 836.0 ------------ Total utility 15,037.6 ------------ Nonutility: Natural gas properties 395.7 Independent power properties 462.7 Construction work-in-progress - Other 81.4 ------------ Total nonutility 939.8 ------------ Total property, plant and equipment 15,977.4 ============
Depreciation, Depletion and Amortisation Depreciation of utility plant (other than nuclear fuel) is computed using 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 on utility plant was based on weighted average depreciable plant using a rate of 3.2% for 1995, 1994 and 1993. Owned nuclear fuel is amortised on a unit-of-production basis sufficient to amortise fully, over the estimated service life, the cost of the fuel plus permanent storage and disposal costs. Costs in excess of net assets acquired from equity investments are amortised over periods not to exceed 40 years. Nuclear Decommissioning Nuclear plant decommissioning costs are accrued and recovered through rates over the expected service lives of Virginia Power's nuclear generating units. The amounts collected from customers are being placed in trusts, which, with the accumulated earnings thereon, will be utilised solely to fund future decommissioning obligations.
North Anna Surry Unit 1 Unit2 Unit 1 Unit2 NRC licence expiration year 2018 2020 2012 2013 ($ millions) ($ millions) ($ millions) ($ millions) Method of decommissioning DECON DECON DECON DECON Current cost estimate (1994) 247.0 253.6 272.4 274.0 External trusts balance at 31 December 1995 84.1 78.9 96.2 92.2 1995 contribution to external trusts 6.1 5.7 8.0 8.7 ============ ============ ============ ============
Approximately every four years, site-specific studies are prepared to determine the decommissioning cost estimate for Virginia Power's four nuclear units. The current cost estimate is based on the DECON method, which assumes the activities associated with the decontamination or prompt removal of radioactive 40 contaminants will begin shortly after cessation of operations so that the property may be released for unrestricted use. The accumulated provision for decommissioning of $351.4 million is included in accumulated depreciation, depletion and amortisation at 31 December 1995. Provisions for decommissioning of $28.5 million, $24.5 million and $24.4 million applicable to 1995, 1994 and 1993, respectively, are included in depreciation, depletion and amortisation expense. The net unrealised gain of $40.7 million associated with securities held by Virginia Power's Nuclear Decommissioning Trust at 31 December 1995 are included in the accumulated provision for decommissioning. Earnings of the trust funds were $15.9 million, $15.2 million and $16.3 million for 1995, 1994 and 1993, respectively, and are included in other income in the Consolidated Financial Statements. 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. 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 recognised earlier in the operating life of the nuclear plant. During its deliberations, FASB has 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 Virginia Power 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. Federal Income Taxes Dominion Resources and its subsidiaries file a consolidated federal income tax return. Dominion Resources adopted SFAS No. 109, "Accounting for Income Taxes" in 1992 which requires companies to measure and record deferred tax assets and liabilities for all temporary differences. Temporary differences occur when events and transactions recognised for financial reporting result in taxable or tax-deductible amounts in future periods. The regulatory treatment of temporary differences can differ from the requirements of SFAS No. 109. Accordingly Virginia Power recognises a regulatory asset if it is probable that future revenues will be provided for the payment of those deferred tax liabilities. Similarly, in the event a deferred tax liability is reduced to reflect changes in tax rates, a regulatory liability is established if it is probable that a future reduction in revenue will result. Due to regulatory requirements, Virginia Power accounts for investment tax credits under the "deferral method" which provides for the amortisation of these credits over the service lives of the property giving rise to the 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 pre-tax AFC rates for 1995, 1994 and 1993 were 8.9%, 8.9% and 9.4%, respectively. Approximately 83% of Virginia Power's construction work in progress (CWIP) is now included in rate base and a cash return is collected currently thereon. Deferred Capacity and Fuel Expenses Approximately 90% of fuel expenses and 80% of capacity expenses are subject to deferral accounting. Under this method, the difference between reasonably incurred actual expenses and the level of expenses included in current rates is deferred and matched against future revenues. 41 Amortisation of Debt Issuance Costs Dominion Resources defers and amortises 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 Virginia Power debt are also deferred and amortised over the lives of the new issues of long-term debt as permitted by the appropriate regulatory commission. At Virginia Power, gains or losses resulting from the redemption of debt without refinancing are amortised over the remaining lives of the redeemed issues. Marketable Securities Dominion Resources adopted, effective 1 January 1994, SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The standard requires companies to account for and classify investments in equity securities that have readily determinable fair values and for all investments in debt securities based on management's intent. The investments are to be classified into three categories and accounted for in the following manner. Debt securities which are intended to be held to maturity are classified as held-to-maturity securities and reported at amortised cost. Debt and equity securities purchased and held with the intent of selling them in the current period are classified as trading securities. They are reported at fair value and unrealised gains and losses are included in earnings. Debt and equity securities that are neither held-to-maturity or trading are classified as available-for-sale securities. These are reported at fair value with unrealised gains and losses reported in shareholders' equity, net of tax. Nonrecourse-Nonutility Financings Dominion Resources' nonutility subsidiaries issue debt to finance their operations and obtain financings that generally are secured by the assets of the nonutilty subsidiaries. However, Dominion Resources may be required to provide contingent equity support or to maintain a minimum net worth at the nonutility subsidiaries. These financings have been segregated on the accompanying financial statements to distinguish their nonrecourse nature. Cash Current banking arrangements generally do not require checks to be funded until actually presented for payment. At 31 December 1995 and 1994, the company's accounts payable included the net effect of checks outstanding but not yet presented for payment of $70.1 million. For the purposes of the Consolidated Statements of Cash Flows, Dominion Resources considers cash and cash equivalents to include cash on hand and temporary investments purchased with a maturity of three months or less.
Supplementary Cash Flow Information 1995 ($ millions) ------------ Cash paid during the year for: Interest (reduced for net costs of borrowed funds capitalised) 376.0 Federal income taxes 159.6 Non-cash transactions from investing and financing activities: Exchange of long-term marketable securities 12.3
Reclassification Certain amounts in the 1994 and 1993 Consolidated Financial Statements have been reclassified to conform to the 1995 presentation. (ii) Sale of Receivables Virginia Power has an agreement to sell, with limited recourse, certain accounts receivable including unbilled amounts, up to a maximum of $200 million. Additional receivables are continually sold, at Virginia Powers' discretion, to 42 replace those collected up to the limit. At 31 December 1995 no amount was outstanding. The limited recourse is provided by Virginia Power's assignment of an additional undivided interest in accounts receivable to cover any potential losses to the purchaser due to uncollectable accounts. Virginia Power has provided for the estimated amount of such losses in its accounts.
(iii) Taxes Years ended 31 December 1995 1994 1993 ($ millions, except percentages) ------- ------- ------- Taxes other than federal income tax: Real estate and property 91.2 83.9 84.8 State and local gross receipts 104.8 104.9 100.8 Payroll 31.1 33.9 31.3 Other 46.7 51.9 47.3 ------- ------- ------- 273.8 274.6 264.2 ======= ======= ======= Provision for federal income taxes: Included in operating expenses: Current 179.8 120.8 197.2 ------- ------- ------- Tax effects of temporary/timing differences: Liberalised depreciation 56.6 61.3 50.6 Indirect construction costs (13.8) (21.5) (23.2) Other plant related items 12.1 4.0 19.9 Deferred fuel (2.2) 0.8 11.8 Deferred capacity (3.8) (9.0) (24.7) Separation costs (12.4) Customer accounts reserve 36.8 (34.9) Intangible drilling costs 3.6 4.1 15.3 Other, net (20.9) (9.2) 17.4 ------- ------- ------- 19.2 67.3 32.2 ------- ------- ------- Net deferred investment tax credits - amortisation (16.9) (17.1) (19.2) ------- ------- ------- Total provision for federal income tax expense 182.1 171.0 210.2 ======= ======= ======= Computation of provision for federal income tax: Pre-tax income 607.1 649.2 726.8 ======= ======= ======= Tax at statutory federal income tax rate of 35% applied to pre-tax income 212.5 227.2 254.4 Changes in federal income taxes resulting from: Preferred dividends of Virginia Power 15.4 14.8 14.8 Amortisation of investment tax credits (16.9) (17.1) (16.1) Nonconventional fuel credit (28.2) (32.0) (30.5) Other, net (0.7) (21.9) (12.4) ------- -------- ------- Total provision for federal income tax expense 182.1 171.0 210.2 ======= ======== ======= Effective tax rate 30.0% 26.3% 28.9% ======= ======== =======
43
Dominion Resources net noncurrent deferred tax liability is attributable to: At 31 December 1995 ($ millions) ------------ Assets: Deferred investment tax credits (96.4) ----------- Liabilities: Depreciation method and plant basis differences 1,403.5 Income taxes recoverable through future rates 171.6 Partnership basis differences 111.5 Other 70.9 ----------- Total deferred income tax liability 1,757.5 ----------- Net deferred income tax liability 1,661.1 ===========
(iv) Regulatory Assets Certain expenses normally reflected in income are deferred on the balance sheet as regulatory assets and are recognised in income as the related amounts are included in rates and recovered from customers. The company's regulatory assets included the following:
At 31 December 1995 ($ millions) ------------ Income taxes recoverable through future rates 484.5 Cost of decommissioning DOE uranium enrichment facilities 78.5 Deferred losses on reacquired debt, net 99.3 North Anna Unit 3 project termination costs 101.8 Other 52.3 ------------ Total 816.4 ============
Income taxes recoverable through future rates represent principally the tax effect of depreciation differences not normalised. These amounts are amortised as the related temporary differences reverse. The costs of decommissioning Department of Energy's (DOE) uranium enrichment facilities have been deferred and represent the unamortised 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 15-year period with escalation for inflation. These costs are being recovered in fuel rates. Losses or gains on reacquired debt are deferred and amortised over the lives of the new issues of longterms debt. Gains or losses resulting from the redemption of debt without refinancing are amortised over the remaining lives of the redeemed issues. The construction of North Anna 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 amortised from the date termination costs were first includible in rates. The incurred costs underlying these regulatory assets may represent expenditures by Virginia Power 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 Virginia Power's rate base or used to adjust Virginia Power's capital structure. 44 Virginia Power is not allowed to earn a return on the unrecovered balance. Of the $816.4 million of regulatory assets at 31 December 1995, approximately $123 million represent past expenditures that are effectively excluded from the rate base by the Virginia State Corporation Commission that has primary jurisdiction over Virginia Power's rates. However, of that amount $101.8 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 value of money. Virginia Power does not earn a return on the remaining $21.2 million of regulatory assets, effectively excluded from rate base, to be recovered over various recovery periods up to 23 years, depending on the nature of the deferred costs. (v) Jointly Owned Plants The following information relates to Virginia Power's proportionate share of jointly owned plants at 31 December 1995:
Bath County Pumped North Anna Clover Storage Power Power Station Station Station ------------ ------------ ------------ Ownership interest 60.0% 88.4% 50.0% ($ millions) ($ millions) ($ millions) ------------ ------------ ------------ Utility plant in service 1,074.8 1,798.5 289.6 Accumulated depreciation 188.6 635.7 1.5 Nuclear fuel - 405.1 - Accumulated amortisation of nuclear fuel - 387.3 - CWIP 0.7 110.9 211.1 ============ ============ ============
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 proportions as their respective ownership interest. Virginia Power's share of operating costs is classified in the appropriate expense category in the consolidated statements of income. (vi) Short-Term Debt Dominion Resources and its subsidiaries have credit agreements with various expiration dates. These agreements provided for maximum borrowings of $885.8 million at 31 December 1995. At 31 December 1995, $48.6 million was borrowed under such agreements and classified as long-term debt. Dominion Resources credit agreements supported $199 million of Dominion Resources commercial paper at 31 December 1995. Virginia Power credits agreements, which in September 1995 replaced the intercompany credit agreement with Dominion Resources, supported $169 million of Virginia Power commercial paper at 31 December 1995. A subsidiary of Dominion Capital also had $91 million of nonrecourse commercial paper outstanding at 31 December 1995. A total of $289 million of the commercial paper was classified as long-term debt at 31 December 1995. The commercial paper is supported by revolving credit agreements that have expiration dates extending beyond one year. 45 Dominion Resources and its subsidiairies pay fees in lieu of compensating balances in connection with these credit agreements. A summary of short-term debt outstanding at 31 December as follows: Weighted Average Amount Interest Outstanding Rate ($ millions) % ------------ ----------- 1995 Commercial paper 169.0 5.79 Term-notes 67.6 11.70 ------------ Total 236.6 ============ (vii) Marketable Securities Effective 1 January 1994, Dominion Resources adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). The standard prescribes how companies are to account for and report investments in equity securities that have readily determinable fair values and for all investments in debt securities. This standard is effective for fiscal years beginning after 15 December 1993. Securities classified as available-for-sale as of 31 December follow:
Gross Gross Unrealised Unrealised Holding Aggregate Cost Holding Gains Losses Fair Value Security Type ($ millions) ($ millions) ($ millions) ($ millions) ------------ --------------- --------------- ---------------- 1995 Equity 288.3 8.0 16.5 279.8 Debt 5.8 0.1 5.7
Maturities of debt securities classified as available-for-sale as of 31 December 1995. Aggregate Type Cost Fair Value ($ millions) ($ millions) ------------------- ------------ Tax exempt obligations: 0-5 years 0.3 0.3 After five years 5.1 5.0 Temporary investments and deposits: 0-5 years 0.1 0.1 After five years 0.3 0.3 For the years ended 31 December 1995 and 1994, the proceeds from the sales of available-for-sale securities were $49.4 million and $35.8 million, respectively. The gross realised gains and losses were $10.4 million and $0.1 million for 1995 and $0.4 million and $1.6 million for 1994, respectively. The basis on which the cost of these securities was determined is specific identification. For 1994, the gross gains included in earnings from transfers of securities from the available-for-sale category into the trading category was $0.8 million. The changes in net unrealised holding gain or loss on available-for-sale securities has resulted in an increase in the separate component of shareholders equity during the year ended 31 December 1995 of $41.1 million, net of tax, and a decrease of $47.2 million, net of tax, for the year ended 31 December 1994. The changes in net realised holding gain or loss on trading securities increased earnings during the year ended 31 December 1995 by $2.1 million and decreased earnings by $10 million for the year ended 31 December 1994. In 1993, the company accounted for marketable securities as prescribed in SFAS No. 12, "Accounting for Certain Marketable Securities." A net realised gain of $12.5 million on the sale of marketable securities was included in net income for the year ended 31 December 1993. 46 (viii) Fair Value of Financial Instruments The fair value amounts of the company's financial instruments have been determined using available market information and valuation methodologies deemed appropriate in the opinion of management. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the company could realise in a current market exchange. The use of different market assumptions and/or estimation assumptions may have a material effect on the estimated fair value amounts. At 31 December 1995 Carrying Amount Estimated Fair Value ($ millions) ($ millions) ------------ ------------ Assets: Cash and cash equivalents 66.7 66.7 Trading securities 10.8 10.8 Available-for-sale securities 285.5 285.5 Pollution control project funds 11.9 11.9 Notes receivable 43.1 43.7 Nuclear decommissioning trust funds 351.4 351.4 Liabilities: Short-term debt 236.6 236.6 Long-term debt 5,058.8 5,322.4 Preferred securities of a subsidiary trust 135.0 140.4 Preferred stock 180.0 190.9 Cash and Cash Equivalents: The carrying amount of these items is a reasonable estimate of their fair value. Marketable Securities and Nuclear Decommissioning Trust Funds: The estimated fair value is determined based on quoted market prices, dealer quotes, and prices obtained from independent pricing sources. Notes Receivable: The carrying value approximates fair value due to the variable rate or term structure of the notes receivable. Short Term Debt and Long Term Debt: Market values are used to determine the fair value for debt securities for which a market exists. For debt issues that are not quoted on an exchange, interest rates currently available to the company for issuance of debt with similar terms and remaining maturities are used to estimate fair value. The carrying amount of debt issues with short-term maturities and variable rates that are refinanced at current market rates is a reasonable estimate of their fair value. Preferred Securities of Subsidiary Trust: The fair value is based on market quotations. Preferred Stock: The fair value of the fixed-rate preferred stock subject to mandatory redemption was estimated by discounting the dividend and principal payments for a representative issue of each series over the average remaining life of the series. 47 (ix) Long-Term Debt Year ended 31 December 1995 ($ millions) -------------------------- Virginia Power First and Refunding Mortgage Bonds:(1) Series U, 5.125%, due 1997 49.3 1992 Series B, 7.25%, due 1997 250.0 1988 Series A, 9.375%, due 1998 150.0 1992 Series F, 6.25%, due 1998 75.0 1989 Series B, 8.875%, due 1999 100.0 1993 Series C, 5.875%, due 2000 135.0 1992 Series D, 7.625%, due 2007 215.0 Various series, 6.0%-8%, due 2001-2004 805.0 Various series, 5.45%-8.75%, due 2020-2025 1,144.5 ------- Total First and Refunding Mortgage Bonds 2,923.8 ------- Other long-term debt: Virginia Power: Bank loans, notes and term loans, 6.15%-10.8%, due 1995-2003 762.7 Pollution control and financings:(2) Money market municipals, due 2008-2027(3) 488.6 Dominion Resources: Commercial paper(4) 199.0 ------- Total other long-term debt 1,450.3 ------- Nonrecourse - Nonutility Debt: Dominion Resources: Bank loans, 9.25%, due 2008 21.7 Dominion Capital: Senior notes, fixed rate, 6.12%-11.875%, due 1996-2005(5) 102.0 Term notes, fixed rate, 4.6%-12.48%, due 1994-2020 204.0 Revolving credit agreements, due 1994-1998(6) 34.6 Commercial paper(7) 90.0 Dominion Energy: Term loan, 7.22% (1993 - 10.13%), due 1996(8) 68.6 Revolving credit agreements, due 1996(9) 14.0 Term loan, 5.445%, due 1998 55.0 Bank loans, 9.70%-13.20%, due 2005 35.0 Bank loans, 4.5%-6.43%, due 1996-2024 59.8 ------- Total nonrecourse - nonutility debt 684.7 ------- Less amounts due within one year: Bank loans, notes and term loans 259.6 Sinking fund obligations Nonrecourse - nonutility 161.2 ------- Total amount due within one year 420.8 ------- Less unamortised discount, net of premium 26.1 ------- Total long-term debt 4,611.9 ======= (1) Substantially all of Virginia Power's property is subject to the lien of the mortgage securing its First and Refunding Mortgage Bonds. (2) Certain pollution control equipment at Virginia Power's generating facilities has been pledged or conveyed to secure these financings. (3) Interest rates vary based on short-term tax-exempt market rates. The weighted average daily interest rates were 3.89% and 2.96% for 1995 and 1994, respectively. (4) See Note (vi) to the Consolidated Financial Statements. (5) The Rincon Securities common stock owned by Dominion Capital is pledged as collateral to secure the loan. (6) The weighted average interest rates during 1995 and 1994 were 6.76% and 5.19%, respectively. (7) The weighted average interest rates during 1995 and 1994 were 5.91% and 4.27%, respectively. (8) The Enron/Dominion Cogen Corp. common stock owned by Dominion Energy is pledged as collateral to secure the loan. (9) The weighted average interest rates during 1995 and 1994 were 6.04% and 4.72%, respectively. 48 On 8 February 1996, Dominion Energy established a $400 million revolving credit facility through ABN AMRO North America, Inc. The interest rate is variable and is presently set at LIBOR plus 14. Proceeds from the revolver were used to retire a $55 million term loan on 15 February 1996. In addition, a $100 million revolving credit agreement was cancelled by the company on 8 February 1996. Maturities (including cash sinking fund obligations) through 2000 are as follows (in millions): 1996-$420.8; 1997-$459.1; 1998-$481.2; 1999-$275.3; and 2000-$260.4. (x) Common stock During 1995 the company purchased on the open market and retired 685,500 shares of common stock for an aggregate price of $24.8 million. From 1993 through 1995, the following changes in common stock occurred:
1995 1994 1993 Amount Amount Amount Share Outstanding ($ millions) Shares Outstanding ($ millions) Shares Outstanding ($ millions) ----------------- ------------ ------------------ ------------ ------------------ ------------ Balance at 1 January 172.4 3,157.6 168.1 2,991.0 163.8 2,796.3 Changes due to: Automatic Dividend Reinvestment and Stock Purchase Plan 2.9 107.6 2.9 112.2 2.6 115.3 Stock Purchase Plan for Customers of Virginia Power 1.4 45.8 1.3 51.3 1.0 51.6 Employee Savings Plan 0.2 8.3 0.6 23.2 0.7 29.7 Stock repurchase and retirement (0.7) (24.8) (0.6) (20.7) Other 0.2 9.0 0.1 0.6 (1.9) ----- ------- ----- ------- ----- ------- Balance at 31 December 176.4 3,303.5 172.4 3,157.6 168.1 2,991.0 ===== ======= ===== ======= ===== =======
(xi) Long-term incentive plan A long-term incentive plan (the Plan) provides for the granting of nonqualified stock options and restricted stock to certain employees of Dominion Resources and its affiliates. The aggregate number of shares of common stock that may be issued pursuant to the Plan is 3,750,000. The changes in share and option awards under the Plan were as follows:
Price Option Restricted Per Share Stock Price Shares Shares ($) Options ($) Exercisable ---------- --------- ------- -------- ----------- Balance at 31 December 1992 17,024 14,706 14,706 ======= ====== ====== Awards granted - 1993 19,457 $41.875-$42.75 Exercised/distributed (9,582) (2,242) $27.75-$29.625 ------- ------ ------ Balance at 31 December 1993 26,899 12,464 12,464 ======= ====== ====== Awards granted - 1994 19,842 $40.625-$40.875 Exercised/distributed (5,555) (1,388) $29.625 ------- ------ ------ Balance at 31 December 1994 41,186 11,076 11,076 ======= ====== ====== Awards granted - 1995 25,320 $37.625 Exercised/distributed (21,576) ------- ------ ------ Balance at 31 December 1995 44,930 11,076 11,076 ======= ====== ======
(xii) Virginia Power Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust In 1995, Virginia Power 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. Virginia Power issued $139.2 million of its 1995 Series A, 8.05% Junior Subordinated Notes (the Notes) in exchange for the $135 million realised from the sale of the Preferred Securities and $4.2 million of common securities of VP 49 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 30 September 2025, but may be extended up to an additional ten years, subject to satisfying certain conditions. However, Virginia Power may redeem the Notes on or after 30September 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. (xiii) Preferred Stock Dominion Resources is authorised to issue up to 20,000,000 shares of preferred stock; however, no such shares are issued and outstanding. Virginia Power has authorised 10,000,000 shares of preferred stock, $100 liquidation preference. Upon voluntary liquidation, each share is entitled to receive $100 plus accrued dividends. Dividends are cumulative. Virginia Power preferred stock subject to mandatory redemption at 31 December 1995 was as follows: Series ($) Shares Outstanding - ---------- ------------------ 5.58 400,000(1)(2) 6.35 1,400,000(1)(3) --------- Total 1,800,000 ========= (1) Shares are non-callable prior to redemption. (2) All shares to be redeemed on 1/3/00. (3) All shares to be redeemedd on 1/9/00. During the years 1993 through 1995, the following shares were redeemed: Dividend Year ($) Shares -------- ------ 1995 7.30 417,319 1994 7.30 37,681 1993 7.30 30,000 1993 7.58 480,000 1993 7.325 400,419 50 At 31 December 1995, Virginia Power preferred stock not subject to mandatory redemption, $100 liquidation preference, is listed in the table below. Dividend Issued and Outstanding Shares Entitled Per Share Upon ($) ($) Redemption ($) - -------- ----------------------------- ----------------------- 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(1) 6.98 600,000 105.00(2) MMP 1/87 series(3) 500,000 100.00 MMP 6/87 series(3) 750,000 100.00 MMP 10/88 series(3) 750,000 100.00 MMP 6/89 series(3) 750,000 100.00 MMP 9/92A(3) 500,000 100.00 MMP 9/92B(3) 500,000 100.00 --------- Total 5,090,140 ========= (1) Through 31/7/03 and thereafter to amounts declining in steps to $100.00 after 31/7/13. (2) Through 31/8/03 and thereafter to amounts declining in steps to $100.00 after 31/8/13. (3) Money Market Preferred (MMP) dividend rates are variable and are set every 49 days via an auction. The weighted average rates for these series in 1995, 1994 and 1993, including fees for broker/dealer agreements, were 4.93%, 3.75% and 3.01%, respectively. During the years 1993 through 1995, the following shares were redeemed: Dividend Year ($) Shares -------- ------ 1995 7.45 400,000 1995 7.20 450,000 1993 7.72 350,000 1993 (1972 series) 7.72 500,000 (xiv) Retirement Plan, Postretirement Benefts and Other Benefits Retirement Plan: Dominion Resources' Retirement Plan (the Plan) covers virtually all employees of Dominion Resources and its subsidiaries. The benefits are based on years of service and the employee's compensation. Dominion Resources' funding policy is to contribute annually an amount that is in accordance with the provisions of the Employment Retirement Income Security Act of 1974. The components of the provision for net periodic pension expense were as follows:
Years ended 31 December 1995 1994 1993 ($ millions) ($ millions) ($ millions) ------------ ------------ ------------ Service cost-benefits earned during the year 23.4 24.6 21.9 Interest cost on projected benefit obligation 54.9 46.3 46.3 Actual return on plan assets (56.7) (51.3) (49.3) Net amortisation and deferral (0.7) 0.1 (2.6) ----- ----- ----- Net periodic pension cost 20.9 19.7 16.3 ===== ===== =====
51 The following table sets forth the Plan's funded status:
At 31 December 1995 ($ millions) -------------- Actuarial present value of benefit obligations: Accumulated benefit obligation, includuing vested benefit of 1995-$540.2 and 1994-$480.9 607.4 ====== Projected benefit obligation for service rendered to date 767.0 Plan assets at fair value, primarily listed stocks and U.S. bonds 763.6 ------ Plan assets in excess of projected benefit obligation (3.4) Unrecognised net loss from past experience different from that assumed and effects of changes in assumptions 35.7 Unrecognised prior services cost 5.3 Unrecognised net asset at 1st January being recognised over 16 years beginning in 1986 (25.1) ------ Prepaid (accrued) pension cost included in other assets (liabilities) 12.5 ======
Significant assumptions used in determining net periodic pension cost and the projected benefit obligation were: At 31 December 1995 (%) -------------- Discount rates 8.00 Rates of increase in compensation levels 5 Expected long-term rate of return 9.5 ============== Postretirement Benefits: Dominion Resources and its subsidiaries provide retiree health care and life insurance benefits through insurance companies with annual premiums based on benefits paid during the year. From time to time in the past, Dominion Resources and its subsidiaries have changed benefits. Some of these changes have reduced benefits. Under the terms of their benefits plans, the companies reserve the right to change, modify or terminate the plans. Net periodic postretirement benefit expense for 1995 and 1994 was as follows: Years ending 31 December 1995 1994 ($ millions) ($ millions) ------------ ------------ Service cost 8.9 11.2 Interest cost 21.9 21.8 Return on plan assets (6.1) 0.9 Amortisation of transition obligations 12.1 12.1 Net amortisation and deferral 0.1 (4.1) ----- ------ Net periodic postretirement benefit expense 36.9 41.9 ===== ====== 52 The following table sets forth the funded status of the plan: 31 December 1995 ($ millions) ------------ Fair value of plan assets 96.3 ----------- Accumulated postretirement benefit obligation: Retirees 211.4 Active plan participants 99.2 ----------- Accumulated postretirement benefit obligation 310.6 ----------- Accumulated postretirement benefit obligation in excess of plan assets (214.3) Unrecognised transition obligation 206.2 Unrecognised net experience gain 8.6 ----------- Prepaid postretirement benefit cost 0.5 =========== A 1% increase in the health care cost trend rate would result in an increase of $3.5 million in the service and interest cost components and a $37.2 million increase in the accumulated post-retirement benefit obligation. Significant assumptions used in determining the post-retirement benefit obligation were: 1995 ----------- Discount rates 8.0% Assumed return on plan assets 9.0% Medical cost trend rate 9% for first year 8% for second year Scaling down to 4.75% beginning in the year 2001 Virginia Power is recovering these costs in rates on an accrual basis in all material respects, in all jurisdictions. Current and future rate recoveries of OPEB accruals are expected to collect sufficient amounts to provide for the unfunded accumulated post-retirement obligation over time. The funds being collected for OPEB accrual in rates, in excess of OPEB benefits actually paid during the year, are contributed to external benefit trusts under Virginia Power's current funding policy. Other Benefits In 1994, Virginia Power offered an early retirement programme to employees aged 50 or older and offered a voluntary separation programme to all regular full-time employees. Approximately 1,400 employees accepted offers under these programmes. The costs associated with these programmes were $90.1 million. Virginia Power capitalised $25.9 million based upon regulatory precedent and expensed $64.2 million. (xv) Restructuring In March 1995, Virginia Power announced the implementation phase of its Vision 2000 programme. During this phase, Virginia Power began reviewing operations with the objective of out-sourcing services where economical and appropriate, and re-engineering the remaining functions to streamline operations. The re-engineering process is resulting in outsourcing, decentralisation, reorganisation and downsizing for portions of Virginia Power's operations. As part of this process, Virginia Power is re-evaluating its utilisation of capital resources in its operations to identify further opportunities for operational efficiencies through outsourcing or re-engineering of its processes. In 1995, restructuring charges of $121.5 million contain $117.9 million of Virginia Power's restructuring charges which included severance costs, purchased power contract cancellation and negotiated settlement costs, capital project 53 cancellation costs, and other costs incurred directly as a result of the Vision 2000 initiatives. The Vision 2000 review of operations is expected to continue through 1996. At this time, Virginia Power management cannot estimate the restructuring costs yet to be incurred. In May 1995, Virginia Power established a comprehensive involuntary severance package for salaried employees who lose their positions as a result of these initiatives. Virginia Power is recognising the cost associated with employee terminations in accordance with Emerging Issues Task Force Concensus 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 31 December 1995, management had decided to eliminate 1,018 positions. The recognition of severance costs resulted in a charge to operations in 1995 of $51.2 million. At 31 December 1995, 507 employees have been terminated and severance payments totalling $8.7 million have been paid. Virginia Power estimates that these staffing reductions will result in annual savings, net of outsourcing costs, in the range of $50 million to $60 million. These savings will be reflected in lower construction expenditures as well as lower operation and maintenance expenses. In an effort to minimise its exposure to potential stranded investment, Virginia Power 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. Virginia Power also negotiated settlements with several other parties to terminate their rights to sell power to Virginia Power. The cost of contract cancellations and negotiated settlements was $8.1 million in 1995. Based on contract terms and estimated quantities of power that would have otherwise been delivered, the cancellation of these contracts and rights to sell power to Virginia Power has the effect of reducing Virginia Power's future purchased power costs, including energy payments, by up to $214 million annually. The cost of alternative sources of power that might ultimately be required as a result of these settlements are expected to be significantly less than $214 million. 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 Virginia Power's North Anna Power Station. As a result of re-evaluating the handling of low level radioactive waste, Virginia Power concluded that the facility should not be completed due to the additional capital investment required, decreased Virginia Power volumes of low level radioactive waste resulting from improvements in station procedures and the availability of more economical offsite processing. As a regulated utility, Virginia Power provides service to its customers at rates based on its cost of operations and an opportunity to earn a return on its shareholder's investment. From time to time, Virginia Power reviews its cost of providing regulated services and files such information with certain regulatory commissions having jurisdiction. Virginia Power or the regulatory commissions may initiate proceedings to review rates charged to Virginia Power jurisdictional customers. The incurrence of restructuring charges and the savings resulting therefrom in subsequent periods are elements of Virginia Power's cost of operations. Accordingly, Vision 2000 costs and related savings will be considered in any future review of Virginia Power's overall regulatory cost of service. (xvi) Commitments and Contingencies As the result of issues generated in the course of daily business, the company is involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies. While some of the proceedings involve substantial amounts of money, management believes that the final disposition of these proceedings will not have an adverse material effect on operations or the financial position of the company. Virginia Power Federal Energy Regulatory Commission Audit The Federal Energy Regulatory Commission (FERC) has recently conducted a compliance audit of Virginia Power's financial statements for the years 1990 to 1994. Virginia Power has received a preliminary draft of the audit report in which certain compliance exceptions were noted. Virginia Power has supplied information to the FERC staff relating to these preliminary exceptions, but no final audit report has been issued. Based on information available at this time, the disposition of these issues is not expected to have a significant effect on Virginia Power's financial position or results of operations. Construction Programme Virginia Power has made substantial commitments in connection with its construction programme and nuclear fuel expenditures, which are estimated to total $569.3 million (excluding AFC) for 1996. Additional financing is contemplated in connection with this programme. 54 Purchased Power Contracts Since 1984, Virginia Power has entered into contracts for the long-term purchase of capacity and energy from other utilities, qualifying facilities and independent power producers. As of 31 December 1995, there were 67 non-utility generating facilities under contract to provide Virginia Power 3,493 megawatts of dependable summer capacity. Of these, 66 projects (aggregating 3,295 megawatts) were operational at the end of 1995, with the remaining project to become operational before 1998. The following table shows the minimum payments expected to be made under these contracts. The totals include payments for capacity, which are subject to generating performance as provided by the contracts, and payments for the minimum amounts of energy Virginia Power is obligated to buy and the producers provide. Commitments Capacity Other ($ millions) ($ millions) ------------ ------------ 1996 738.3 207.4 1997 784.7 213.2 1998 788.8 219.8 1999 791.6 224.2 2000 707.4 163.6 After 2000 11,106.3 1,200.9 -------- ------- Total 14,917.1 2,229.1 ======== ======= Present value of the total 6,860.7 1,243.4 ======== ======= In addition to the commitments listed above, under some contracts, Virginia Power may purchase, at its option, additional power as needed. Payments for purchased power (including economy, emergency, limited-term, short-term and long-term purchases) for the years 1995, 1994 and 1993 were $1,093 million, $1,025 million and $958 million, respectively. Fuel Purchase Commitments Virginia Power's estimated fuel purchase commitments for the next five years for system generation are as follows: 1996-$348 million; 1997-$319 million; 1998-$205 million; 1999-$137 million; and 2000-$151 million. Environmental Matters Environmental costs have been historically recovered through the ratemaking process; however, should material costs be incurred and not recovered through rates, Virginia Power's results of operations and financial condition could be adversely impacted. The Environmental Protection Agency has identified Virginia Power 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 $46.5 million to $134.6 million. Virginia Power's proportionate share of the costs is expected to be in the range of $0.5 million to $6.7 million, based upon allocation formulas and the volume of waste shipped to the sites. As of 31 December 1995, Virginia Power accrued a reserve of $1.4 million to meet its obligations at these two sites. Based on a financial assessment of the PRPs involved at these sites, Virginia Power has determined that it is probable that the PRPs will fully pay the costs apportioned to them. Virginia Power and Dominion Resources along with Consolidated Natural Gas have remedial action responsibilities remaining at two coal tar sites. Virginia Power and Dominion Resources have accrued a $2 million reserve to meet their estimated liability based on site studies and investigations performed at these sites. In addition, on 13 December 1995, a civil action was instituted against the City of Norfolk and Virginia Power by a landowner who alleges that his property has been contaminated by toxic pollutants originating from one of these sites, which is now owned by the City of Norfolk. The plaintiff seeks compensatory damages of $10 million and punitive damages of $5 million from Virginia Power. The Company filed its answer denying liability on 10 January 1996. 55 Virginia Power generally seeks to recover its costs associated with environmental remediation from third party insurers. At 31 December 1995 pending claims were not recognised as an asset or offset against recorded obligations. Nuclear 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. Virginia Power has purchased $200 million of coverage from commercial insurance pools with the remainder provided through a mandatory industry risk-sharing programme. In the event of a nuclear incident at any licensed nuclear reactor in the United States, Virginia Power 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 1 January 1988, except those arising out of an extraordinary nuclear occurrence, is provided under the Master Worker insurance programme. (Those first hired into the nuclear industry prior to 1 January 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 reinstatement of an additional $200 million). Virginia Power's maximum retrospective assessment is approximately $12.5 million (including a 3% insurance premium tax for Virginia). Virginia Power's current level of property insurance coverage ($2.55 billion for North Anna and $2.4billion for Surry) exceeds the NRC's minimum requirement for nuclear power plant licensees of $1.06billion 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. Virginia Power'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 at the first incident of the current policy period is $42.7 million. The maximum assessment related to a second incident is an additional $15.4 million. Based on the severity of the incident, the boards of directors of Virginia Power'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 stabilisation and decontamination. Virginia Power has the financial responsibility. Virginia Power purchases insurance from NEIL to cover the cost of replacement power during the prolonged outage of a nuclear unit due to direct physical damage of the unit. Under this programme, 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 assesssment is $9 million. As a joint owner of the North Anna Power Station, ODEC is responsible for its proportionate share (11.6%) of the insurance premiums applicable to that station, including any retrospective premium assessments and any losses not covered by insurance. Dominion Resources Under the terms of an investment agreement, Dominion Resources must provide contingent equity support to Dominion Energy in the amount of $56.5 million. Management believes the possibility of such support to Dominion Energy is remote. Dominion Energy Dominion Energy has general partnership interests in certain of its energy ventures. Accordingly, Dominion Energy may be called upon to fund future operation of these investments to the extent operating cash flow is insufficient. 56 4. Third Quarter Results Set out below are extracts from the text of the unaudited third-quarter results for Dominion for the period ended 30 September. (a) Consolidated statements of income (unaudited)
Nine months ended 30 September 1996 1995 ($ millions) ($ millions) ------------ ------------ Operating revenues and income: Electric utility 3,371.0 3,324.0 Nonutility 276.0 193.1 ------- ------- Total operating revenues and income 3,647.0 3,517.1 ------- ------- Operating expenses: Fuel, net 745.4 769.8 Purchased power capacity, net 539.0 518.2 Other operations 556.1 507.9 Maintainence 187.0 202.6 Restructuring 29.2 36.6 Depreciation and amortisation 456.7 407.2 Other taxes 217.3 207.0 ------- ------- Total operating expenses 2,730.7 2,649.3 ------- ------- Operating income 916.3 867.8 Other income 8.4 8.7 ------- ------- Income before fixed charges and federal income taxes 924.7 876.5 ------- ------- Fixed charges: Interest charges, net 293.5 287.4 Preferred dividends of Virginia Power 26.7 34.9 Preferred distribution of Virginia Power affiliate, net 5.3 - ------- ------- Total fixed charges 325.5 322.3 ------- ------- Income before provision for federal income taxes 599.2 554.2 Provision for federal income taxes 192.6 169.7 ------- ------- Net income 406.6 384.5 ======= ======= Common Stock Data: Average number of shares of common stock outstanding (in millions) 177.6 173.2 Earnings per common share $2.29 $2.22 Dividends paid per common share $1.935 $1.935
57 (b) Consolidated balance sheet (unaudited) At 30 September 1996 ($ millions) -------------- Assets Current assets: Cash and cash equivalents 56.0 Trading securities 23.2 Customer accounts receivable, net 366.0 Other accounts receivable 125.2 Accrued unbilled revenues 154.2 Accrued taxes 20.4 Materials and supplies: Plant and general 148.9 Fossil fuel 70.6 Mortgage loans in warehouse 228.1 Other 162.4 -------- 1,355.0 -------- Investments 1,487.5 -------- Property, plant and equipment: 16,763.0 Less accumulated depreciation and amortisation 6,230.1 -------- 10,532.9 -------- Deferred charges and other assets: Regulatory assets 688.9 Other 431.4 -------- 1,120.3 -------- Total assets 14,495.7 ======== 58 At 30 September 1996 ($ millions) -------------- Liabilities and shareholders' equity Current liabilities: Securities due within one year 394.4 Short-term debt 193.9 Accounts payable, trade 351.7 Accrued payroll 98.2 Accrued interest 102.7 Accrued taxes 81.5 Severance costs accrued 24.7 Other 134.8 -------- 1,381.9 -------- Long-term debt: Utility 3,581.1 Nonrecourse - nonutility 1,067.7 Other 271.5 -------- 4,920.3 -------- Deferred credits and other liabilities: Deferred income taxes 1,711.0 Investment tax credits 259.5 Deferred fuel expenses 11.8 Other 477.7 -------- 2,460.0 -------- Total liabilities 8,762.2 -------- Commitments and contingencies Virginia Power obligated mandatorily redeemable preferred securities of subsidiary trust 135.0 -------- Preferred stock: Virginia Power stock subject to mandatory redemption 180.0 -------- Virginia Power stock not subject to mandatory redemption 509.0 -------- Common shareholders' equity: Common stock-no par 3,412.7 Retained earnings 1,487.8 Allowance on available-for-sale securities (8.1) Other 17.1 -------- 4,909.5 -------- Total liabilities and shareholders' equity 14,495.7 ======== 59 (c) Consolidated statement of cash flows (unaudited) Nine months ended 30 September 1996 ($ millions) ----------------- Cash flows from (used in) operating activities: Net income 406.6 Adjustments to reconcile net income to net cash: Depreciation, depletion and amortisation 521.1 Deferred income taxes 60.4 Investment tax credits, net (12.8) Allowance for other funds used during construction (2.6) Deferred fuel expenses (45.9) Deferred capacity expenses 14.8 Non-cash return on terminated construction projects (5.0) Changes in assets and liabilities: Accounts receivable (7.1) Accrued unbilled revenues 25.7 Materials and supplies 12.0 Accounts payable, trade 7.6 Accrued interest and taxes 56.9 Mortgage loans in warehouse (228.1) Other changes (94.5) ------ Net cash flows from operating activities 709.1 ------ Cash flows from (used in) financing activites: Issuance of common stock 122.9 Issuance of long-term debt: Utility 24.5 Nonrecourse-nonutility 552.3 Repayment of short-term debt, net (41.9) Repayment of long-term debt and preferred stock (283.0) Common dividend payments (343.8) Other (19.5) ------ Net cash flows from financing activities 11.5 ------ Cash flows from (used in) investing activities: Capital expenditures (excluding AFC-equity funds) (511.4) Investments in marketable securities (8.1) Other (211.8) ------ Net cash flows used in investing activities (731.3) ------ Decrease in cash and cash equivalents (10.7) Cash and cash equivalents at beginning of period 66.7 ------ Cash and cash equivalents at end of period 56.0 ====== 5. Material Changes Save as disclosed in paragraph 4 of this Appendix 3 there has been no material change in the financial or trading position of the Dominion Resources Group since 31 December 1995, the date to which the latest published audited financial statements of Dominion Resources were prepared. 60 APPENDIX 4 FINANCIAL AND OTHER INFORMATION RELATING TO EAST MIDLANDS ELECTRICITY Nature of financial information The financial information contained in this Appendix 4 is extracted from the audited consolidated accounts of East Midlands Electricity for the years ended 31 March 1994, 1995 and 1996, as appropriate. The split of turnover and operating profit between continuing and discontinued businesses has not been shown on the basis that it is not material to the overall understanding of the financial information. 1. Directors of East Midlands Electricity Sir Nigel Rudd (Chairman)* Norman Askew (Chief Executive) Nicholas Corah (Deputy Chairman)* Chris Boon Gareth Cooper* Bob Davies Jim Keohane Alan Schroeder* Keith Stanyard David Thompson* * Non-executive director 61 2. Financial Statements (a) Consolidated profit and loss accounts
Years ended 31 March 1996 1995 1994 Excluding Total NGG NGG ((pound) ((pound) ((pound) ((pound) ((pound) millions) millions) millions) millions) millions) --------- --------- --------- --------- --------- Turnover 1,194.5 (105.3) 1,299.8 1,369.0 1,444.5 ======= ======= ======= ======= ======= Operating profit Operating profit excluding exceptional core business restructuring costs 106.9 (102.2) 209.1 199.4 182.8 Exceptional core business restructuring costs (21.2) - (21.2) - - Utilisation of fundamental restructuring provisions 0.7 - 0.7 8.5 - ------- ------- ------- ------- ------- Total operating profit (loss) 86.4 (102.2) 188.6 207.9 182.8 ------- ------- ------- ------- ------- Exceptional items Losses incurred in connection with discontinued operations (4.0) - (4.0) (4.6) - Utilisation of fundamental restructuring provisions 4.0 - 4.0 4.6 - ------- ------- ------- ------- ------- Fundamental restructuring charges - - - (12.0) (129.5) Release of fundamental restructuring provisions 11.4 - 11.4 12.4 - Surplus on disposal of discontinued operations 20.0 - 20.0 - - ------- ------- ------- ------- ------- Total exceptional items 31.4 - 31.4 0.4 (129.5) ------- ------- ------- ------- ------- Share of profits (losses) of associated undertakings 2.6 - 2.6 (0.9) (2.2) Dividends from The National Grid Group plc (NGG) 175.5 175.5 - 17.0 15.8 Other income from fixed asset investments 1.5 - 1.5 - - ------- ------- ------- ------- ------- Profit on ordinary activities before interest and taxation 297.4 73.3 224.1 224.4 66.9 Net interest payable (9.9) - (9.9) (10.4) (15.7) ------- ------- ------- ------- ------- Profit on ordinary activities before taxation 287.5 73.3 214.2 214.0 51.2 Tax on profit on ordinary activities (49.8) 14.0 (63.8) (49.3) (23.5) ------- ------- ------- ------- ------- Profit for the financial year 237.7 87.3 150.4 164.7 27.7 Dividends Ordinary dividends (62.3) - (62.3) (56.0) (49.7) Special dividend (238.6) - (238.6) (186.5) - Distribution of NGG shares (292.5) (292.5) - - - ------- ------- ------- ------- ------- Total dividends (593.4) (292.5) (300.9) (242.5) (49.7) ------- ------- ------- ------- ------- Transferred from reserves (355.7) (205.2) (150.5) (77.8) (22.0) ======= ======= ======= ======= =======
62
Years ended 31 March 1996 1995 1994 Excluding Total NGG NGG (Pence per (Pence per (Pence per (Pence per (Pence per share) share) share) share) share) ---------- ---------- ---------- ---------- ---------- Earnings per share Earnings per share, before exceptional items 78.7 - 78.7 71.8 58.0 Earnings per share relating to NGG, after tax 45.0 45.0 - 6.5 5.7 Other exceptional items, after tax 12.3 - 12.3 0.2 (51.0) ------ ------ ------ ------ ------ Earnings per share - nil basis 136.0 45.0 91.0 78.5 12.7 Advance corporation tax written off (13.4) - (13.4) - - ------ ------ ------ ------ ------ Earnings per share - net basis 122.6 45.0 77.6 78.5 12.7 ====== ====== ====== ====== ======
(b) Statement of total recognised gains and losses
Years ended 31 March 1996 1995 1994 Excluding Total NGG NGG ((pound) ((pound) ((pound) ((pound) ((pound) millions) millions) millions) millions) millions) ---------- ---------- ---------- ---------- ---------- Profit for the financial year 237.7 87.3 150.4 164.7 27.7 Surplus on revaluation of investment in NGG 212.9 212.9 - - - Capital gains tax (49.1) (49.1) - - - ------ ------ ------ ------ ------ Total recognised gains and losses 401.5 251.1 150.4 164.7 27.7 ====== ====== ====== ====== ======
The investment in NGG was revalued as at 1 October 1995 and the surplus arising was subsequently realised on the distribution and listing of NGG in December 1995. (c) Reconciliation of movements in equity shareholders' funds
Years ended 31 March 1996 Excluding Total NGG NGG ((pound) ((pound) ((pound) millions) millions) millions) ---------- ---------- ---------- Profit for the financial year 237.7 87.3 150.4 Ordinary dividends (62.3) - (62.3) Special dividend (238.6) - (238.6) Distribution of NGG shares (292.5) (292.5) - ------- ------- ------- (355.7) (205.2) (150.5) Surplus on revaluation of investment in NGG 212.9 212.9 - Capital gains tax (49.1) (49.1) - Proceeds from shares issued during the year 10.8 - 10.8 ------- ------- ------- Net reduction in equity shareholders' funds (181.1) (41.4) (139.7) ======= ======= Equity shareholders' funds at 1 April 1995 572.5 ------- Equity shareholders' funds at 31 March 1996 391.4 =======
Equity shareholders' funds comprise called up share capital and reserves. 63 (d) Consolidated balance sheet At 31 March 1996 ((pound) millions) --------- Fixed assets Tangible assets 765.7 Investments 18.2 ------- 783.9 Current assets Stocks 7.6 Debtors - due within one year 127.5 - due after more than one year 18.8 Current asset investments 109.2 Cash at bank and in hand 8.2 ------- 271.3 Creditors: amounts falling due within one year (346.8) ------- Net current liabilities (75.5) ------- Total assets less current liabilities 708.4 Creditors: amounts falling due after more than one year (253.0) Provisions for liabilities and charges (64.0) ------- Net assets 391.4 ======= Capital and reserves Called up share capital 112.7 Share premium account 11.0 Capital redemption reserve 0.1 Profit and loss account 267.6 ------- Equity shareholders' funds 391.4 ======= 64 (e) Consolidated statement of cash flows
Years ended 31 March 1996 Excluding Total NGG NGG ((pound) ((pound) ((pound) millions) millions) millions) --------- --------- --------- Net cash inflow (outflow) from operating activities 185.7 (68.6) 254.3 Returns on investments and servicing of finance Interest received 10.4 - 10.4 Interest paid (19.7) - (19.7) Dividends received from NGG 113.7 113.7 - Distribution from PSB Holding Limited 48.0 48.0 - Dividends and other income received from other fixed asset investments 0.7 - 0.7 Special dividends paid (239.7) - (239.7) Other dividends paid (58.3) - (58.3) ------- ------- ------- Net cash (outflow) inflow from returns on investments and servicing of finance (144.9) 161.7 (306.6) Taxation ACT on distribution of NGG shares (53.4) (53.4) - Other corporation tax paid (0.2) - (0.2) ------- ------- ------- Tax paid (53.6) (53.4) (0.2) Investing activities Purchase of tangible fixed assets (104.5) - (104.5) Customers' contributions to tangible fixed assets 25.0 - 25.0 Sale of tangible fixed assets 3.0 - 3.0 Purchase of shares in NGG (14.4) (14.4) - Investment in own shares (10.3) - (10.3) Options exercised through ESOP 8.3 - 8.3 Disposal of businesses 38.3 - 38.3 Net redemption of other fixed asset investments 0.1 - 0.1 Purchase of current asset investments (1.8) - (1.8) ------- ------- ------- Net cash outflow from investing activities (56.3) (14.4) (41.9) ------- ------- ------- Net cash (outflow) inflow before financing (69.1) 25.3 (94.4) Financing Proceeds from shares issued during the year 10.8 - 10.8 Issue of Eurobonds 100.0 - 100.0 Net cash outflow from bank and other loans (46.2) - (46.2) ------- ------- ------- Net cash inflow from financing 64.6 - 64.6 ------- ------- ------- (Decrease) increase in cash and cash equivalents (4.5) 25.3 (29.8) ======= ======= =======
65 (f) Accounting policies Basis of preparation The financial statements have been prepared under the historical cost convention, as modified by the valuation of certain fixed assets. The consolidated financial statements incorporate the results of the company and all its subsidiary and associated undertakings. Accounting for acquisitions, disposals and goodwill The results of companies and businesses acquired are dealt with in the group accounts from the date of acquisition. Adjustments are made on acquisition to restate the reported net assets acquired to their fair value to the group. Purchased goodwill, being the excess of the acquisition cost over the fair value of the assets acquired, is written off to reserves at the time of acquisition. A business which is sold or closed is classified as discontinued if its sale or closure has a material effect on the nature and focus of the group's operations, represents a material reduction in the group's operating facilities, and is completed prior to the date of approval of the financial statements. Goodwill which has suffered a permanent diminution in value or which relates to a discontinued business is reinstated in the balance sheet from reserves and then written off through the profit and loss account. Turnover Electricity turnover represents the value of electricity supplied and charges for electricity distributed during the year, exclusive of value added tax, including estimates of the sales value of units supplied and charges for electricity distributed to consumers between the date of the last meter reading and the year end. Where there is an over recovery of distribution or supply business revenues against the regulated maximum allowable amount, revenues are deferred equivalent to the over recovered amount. The deferred amount is deducted from turnover and included in creditors within accruals and deferred income. Where there is an under recovery, no anticipation of any future recovery is made. Other turnover represents the sale value of contract work performed in the year and the invoice value of other goods sold and services provided, exclusive of value added tax. Credit sales charges are apportioned over the period of the sales agreements. Research and development Expenditure on research and development is written off to the profit and loss account in the year in which it is incurred. Contributions to pension funds Pension costs are calculated as a substantially level percentage of pensionable salary and are charged to the profit and loss account so as to spread the cost of pensions over employees' working lives with the group. Investments In the consolidated accounts, shares in associated undertakings are accounted for using the equity method of accounting. The consolidated profit and loss account includes the group's share of the pre-tax results and attributable taxation of the associated undertakings. In the consolidated balance sheet, the shares in associated undertakings are shown at the group's share of their net assets, less provisions. Other fixed asset investments are stated at cost less provisions for permanent diminution in value. Current asset investments are stated at the lower of cost and net realisable value. Leases Rental costs under operating leases are charged to the profit and loss account in the period in which they are incurred. 66 Tangible fixed assets Tangible fixed assets, other than investment properties, are stated at cost less depreciation and customers' contributions where applicable. Cost includes attributable labour and overheads. The charge for depreciation is calculated to write off these assets over their estimated useful lives. Provision is made for permanent diminution in value where such diminution occurs. The lives of each major class of depreciable asset are as follows: Distribution network assets - 40 years Depreciation is charged at 3 per cent. for 20 years, followed by 2 per cent. for the remaining 20 years. Customers' contributions are credited to the profit and loss account over a 40 year period at a rate of 3 per cent. for the first 20 years, followed by 2 per cent. for the remaining 20 years. Other assets Buildings - freehold - Up to 60 years - leasehold - Lower of lease period or 60 years Plant, machinery, fixtures and equipment - Up to 10 years Vehicles and mobile plant - Up to 10 years No depreciation is charged on land or assets in the course of construction. Investment properties In accordance with Statement of Standard Accounting Practice No. 19, investment properties are revalued annually and the aggregate surplus or deficit is transferred to revaluation reserve. The Companies Act 1985 requires all properties to be depreciated. However, this requirement conflicts with the generally accepted accounting principle set out in SSAP19. By the adoption of SSAP19 the investment properties have not been depreciated, but in the opinion of the directors this is not material to the financial statements and therefore does not have any effect on the true and fair view. Property clawback HM Government is entitled to a proportion of any gain realised by the company on certain property disposals made up to 31 March 2000. Full provision for clawback liabilities is made as soon as any disposal decision is taken. Employee Share Ownership Plan (ESOP) The consolidated accounts include the accounts of the East Midlands Electricity ESOP. Shares held by the ESOP are included in fixed asset investments at their issue price. Stocks Stocks are valued at the lower of cost and net realisable value. The valuation of work in progress is based on the cost of labour plus appropriate production overheads and the cost of materials. Deferred taxation Deferred taxation arises in respect of items where there is a timing difference between their treatment for accounting purposes and their treatment for taxation purposes. Provision for deferred taxation, using the liability method, is made to the extent that it is probable that the liability or asset will crystallise in the foreseeable future. Restructuring Provision is made when the group becomes demonstrably committed to a restructuring programme. 67 (g) Exceptional items Years ended 31 March 1996 1995 1994 ((pound) ((pound) ((pound) millions) millions) millions) --------- --------- --------- Fundamental restructuring charges Goodwill - - (31.5) Provisions for future costs - (5.2) (49.5) Permanent diminution in value of assets - (6.8) (48.5) ------- ------- ------- - (12.0) (129.5) ======= ======= =======
1996 1996 1995 1995 1994 ((pound) ((pound) ((pound) ((pound) ((pound) millions) millions) millions) millions) millions) --------- --------- --------- --------- --------- Movement in fundamental restructuring provisions Operating losses charged 0.7 8.5 - Utilisation of provisions in connection with discontinued activities emco 2.7 3.1 Homepower 1.3 4.0 1.5 4.6 - ----- ----- Release of provisions no longer required 11.4 12.4 - ------ ----- ------ Total movement in fundamental restructuring provisions 16.1 25.5 - ====== ===== ======
Year ended 31 March 1996 Exceptional core business restructuring costs in 1996 were in respect of the implementation of the restructuring announced in November 1995 and the changes required in anticipation of the extension of competition in 1998. The programme to dispose of non-core businesses was completed during the year ended 31 March 1996 with the sale of Ambassador Security Group plc on 30 June 1995 and of the trade and assets of Furse Specialist Contracting (formerly emco Furse) on 1 July 1995 and on 6 December 1995 of W J Furse & Co Limited. Group operating profit is stated after utilising provisions of (pound)0.4 million in respect of operating losses of Ambassador Security Group plc and (pound)0.3 million in respect of operating losses of discontinued emco divisions. The surpluses of (pound)8.0 million on disposal of Ambassador Security Group plc and (pound)12.0 million from W J Furse & Co Limited were credited to the profit and loss account. In addition closure costs of (pound)4.0 million incurred in the period in respect of discontinued operations were charged directly to provisions. The taxation credit relating to the non-operating exceptional items amounted to (pound)8.7 million. 68 Year ended 31 March 1995 During the year ended 31 March 1995 the North, North West and South divisions of the emco contracting business were closed and the emco Boulting division was sold. Net losses relating to the emco divisions discontinued amounting to (pound)11.6 million were charged to provisions, including (pound)8.5 million of operating losses and (pound)3.1 million of other losses. After retaining full provision for future liabilities a net amount of (pound)12.4 million was released to the profit and loss account. On 22 February 1995 the company announced the sale of the trade and assets of its electrical retailing and appliance servicing joint venture, Homepower Retail Limited, to PowerStore Trading Limited. The sale was completed on 7 May 1995. The company's share of the costs of withdrawal was (pound)30.2 million, (pound)18.2 million of which was covered by the provision for permanent diminution in the value of Homepower related assets at 31 March 1994. The balance of (pound)12.0 million was charged to the profit and loss account, (pound)1.5 million of this was expended before the year end. Year ended 31 March 1994 On 10 May 1994 the company announced a fundamental realignment of its business, following a thorough review of all the non-core business activities. Restructuring charges of (pound)129.5 million resulted from this review. (h) The National Grid Group plc (NGG) At an Extraordinary General Meeting held on 8 December 1995 shareholders approved the distribution in specie of the company's interest in NGG, the holding company of The National Grid Company plc, which owns and operates the high voltage electricity transmission system in England and Wales. The major transactions associated with the distribution were as follows: - each East Midlands Electricity shareholder received 0.713 NGG shares for each East Midlands Electricity share they held on 8 December 1995, rounded down to the nearest whole number of shares; - each East Midlands Electricity domestic customer received a one-off discount of (pound)54.60 (including VAT credit) during the early part of 1996; - the company received a number of one-off dividends from NGG as part of its capital reorganisation prior to flotation, including a specie dividend of approximately 8.37% of the shares of PSB Holding Limited, the holding company of First Hydro Limited, which owned and operated two pumped storage power stations in Wales; - the company reinvested (pound)14.4 million of the above dividends to take up its entitlement under a rights issue made by NGG; - the company received an interim dividend from NGG of (pound)7.3 million (including associated tax credit). Subsequent to the distribution, First Hydro Limited was sold by PSB Holding Limited and PSB Holding Limited entered into a members' voluntary liquidation. An initial distribution of (pound)48.0 million was paid by the liquidator on 4 March 1996 and a further (pound)3.2 million was included in current asset investments. 69 (h) The National Grid Group plc (NGG) (continued) The financial effects of these transactions on East Midlands Electricity are summarised below:
Statement of recognised gains and Net reserve Profit and loss account losses movement ((pound) ((pound) ((pound) ((pound) Year ended 31 March 1996 millions) millions) millions) millions) --------- --------- --------- --------- Turnover rebate (105.3) Cost of sales adjustment due to effect of rebate on fossil fuel levy 9.6 (95.7) ------- Transaction costs (6.5) ------- Net charge to operating results (102.2) Dividends received from NGG Specie dividend of shares in PSB Holding Limited 51.2 Interim dividend 7.3 Other dividends 117.0 175.5 ------- Tax relief on operating items 33.7 Tax credits on franked dividends received (19.7) 14.0 ------- ------- Profit for the financial year 87.3 87.3 87.3 Revaluation of shareholding in NGG to flotation value - 212.9 212.9 Capital gains tax, before offset of available capital losses - (49.1) (49.1) Distribution to shareholders of NGG (292.5) - (292.5) ------- ------- ------- Total (205.2) 251.1 (41.4) ======= ======= =======
Prior to the distribution the company's shareholding in NGG comprised 141,473,684 ordinary shares of 10p each. This holding was revalued, as at 1 October 1995, at (pound)2.07 per share, being the share price on the opening day of trading, 11 December 1995. The distribution to shareholders comprised 141,316,883 shares in NGG, and the remaining 156,801 shares were retained. A further 128,424 shares in NGG were held by the ESOP. Net cash receipts arising from transactions associated with NGG in the year comprised (pound)9.1 million received in respect of the final dividend for 1995, and (pound)16.2 million in respect of transactions associated with the distribution. 70 (i) Tax on profit on ordinary activities
Years ended 31 March 1996 1995 1994 Excluding Total NGG NGG ((pound) ((pound) ((pound) ((pound) ((pound) millions) millions) millions) millions) millions) -------- -------- -------- -------- -------- The group taxation charge comprises UK corporation tax at 33% (1995: 33%, 1994: 33%) 52.3 15.4 36.9 52.9 50.5 Tax credits on franked investment income 19.7 19.7 - 3.4 3.3 Deferred taxation 6.0 - 6.0 12.5 (22.5) Associated undertakings 0.1 - 0.1 - 0.2 Adjustment to taxation in respect of prior year profits (5.2) - (5.2) (19.5) (8.0) Advance corporation tax written off 26.0 - 26.0 - - ----- ----- ----- ----- ----- Total taxation charge for the year 98.9 35.1 63.8 49.3 23.5 ===== ===== ===== ===== ===== Charged (credited) to profit and loss account 49.8 (14.0) 63.8 49.3 23.5 Statement of recognised gains and losses 49.1 49.1 - - - ----- ----- ----- ----- ----- Total taxation charge for the year 98.9 35.1 63.8 49.3 23.5 ===== ===== ===== ===== =====
The tax charge for 1996 included the gain on the NGG distribution. It has been decreased principally by the tax effect of net timing differences for which no deferred tax has been recognised and the benefit of capital losses that have crystallised in 1996. Advance corporation tax, in respect of the special dividend, was written off to the extent that the directors did not anticipate its recovery against taxable profits prior to 31 March 1997. In 1995 the taxation charge for the year reflected the tax effect ((pound)10.9 million) of an excess of tax allowances over depreciation for which no deferred taxation was provided. The movement in the deferred tax asset related to the release of the asset recognised in respect of the fundamental restructuring costs provided for in 1994 ((pound)8.0 million) and to the adjustment ((pound)4.5 million) in respect of prior year profits. In 1994 a deferred tax asset was set up primarily to recognise the effect of tax on the exceptional restructuring costs. (j) Dividends
Years ended 31 March 1996 1995 1994 ((pound) ((pound) ((pound) millions) millions) millions) ---------- ---------- ---------- Interim paid 9.2p (1995: 8.6p) per 569p share (1994: 6.8p per 50p share) 17.8 16.6 14.8 Final proposed 22.4p (1995: 20.4p) per 569p share (1994: 15.9p per 50p share) 44.5 39.4 34.9 Special dividend 120.0p per 569p share (1995: 85.0p per 50p share) 238.6 186.5 - Specie dividend of shares in NGG 292.5 - - ------- ------ ------ 593.4 242.5 49.7 ======= ====== ======
71 Share capital consolidation At an Extraordinary General Meeting held on 18 November 1994 shareholders approved the payment of a special dividend of (pound)186.5 million, being 85p (net) on each 50p ordinary share (106.25p on each ordinary share including associated tax credit) and a consolidation of the company's share capital by the issue of 22 new ordinary shares of 569p each in place of every 25 ordinary shares of 50p previously held. These changes took effect on 24 November 1994. (k) Earnings per share The calculation of earnings per share, on the net basis, is based on earnings of (pound)237.7 million (1995: (pound)164.7 million, 1994: (pound)27.7 million) and a weighted average of 193.9 million (1995: 209.9 million, 1994: 218.6 million) ordinary shares in issue and ranking for dividend during the year. In calculating the weighted average number of ordinary shares in issue, shares held under the Employee Share Ownership Plan (ESOP) established on 4 July 1995 have been excluded as the rights to ordinary dividends on these shares have been waived by the ESOP Trustee. In 1996, earnings per share, on the nil basis, is calculated on earnings of (pound)263.7m. This excludes the advance corporation tax written off. Earnings per share before exceptional items is stated in order to indicate the effects, in the respective periods, of core business restructuring, transactions relating to NGG, and other exceptional items. (l) Tangible fixed assets
Plant, machinery, Less: Distribution Land and fixtures & Vehicles & customers' network buildings equipment mobile plant contributions Total ((pound) ((pound) ((pound) ((pound) ((pound) ((pound) millions) millions) millions) millions) millions) millions) ---------- ---------- ---------- ---------- ---------- ---------- Net book value At 31 March 1996 884.2 40.5 48.9 10.8 218.7 765.7 ======== ======= ======= ======= ====== ======
(m) Fixed asset investments The principal fixed asset investment was a 40% holding in the ordinary share capital of Corby Power Limited (CPL), which owns a 350MW gas fired power station which became operational in March 1994. The other shareholders in CPL are Electricity Supply Board International Consultants Limited, a subsidiary of Electricity Supply Board of Ireland (20%), and Hawker Siddeley Power (Corby) Limited, a subsidiary of BTR plc (40%). On 30 June 1995, CPL was served with a writ issued by Hawker Siddeley Power Engineering Limited (HSPE) claiming the sum of (pound)43.7 million. The claim relates to the repayment of liquidated damages, cost increases, release of retentions and electricity sold during the commissioning phase of the Corby power station built under contract by HSPE. The directors have been informed by the directors of CPL that, having considered the claim and taken legal and technical advice, the directors of CPL believe that CPL has a good defence to the claim. Accordingly, no further provision has been made in its latest accounts, which relate to its financial year ended 30 September 1995. CPL submitted a defence to the writ to the High Court and legal proceedings have commenced. The directors of East Midlands Electricity plc are of the opinion that the amount at which the investment in CPL is included in the group balance sheet is appropriate. At 31 March 1996 Corby Power Limited had non-recourse loan financing liabilities of (pound)171.4 million. The company has entered into a contract for differences expiring on 1 October 2008 with Corby Power Limited, covering the purchase of generated electricity, transactions under which are reflected in these financial statements. 72 (n) Borrowings At 31 March 1996 ((pound) millions)) ---------- Eurobonds 2016 150.0 Eurobonds 2006 100.0 Other loans 22.0 Bank overdraft 76.9 ---------- 348.9 ========== Analysis of repayments Within one year Cash equivalents 76.9 Other 22.0 Over five years 250.0 ---------- 348.9 ========== Eurobonds 2006 On 20 March 1996, the company issued (pound)100 million of unsecured 8.375% bonds, which are repayable at par on 20 March 2006 unless previously redeemed, at the company's option, at a market linked premium to issue price. The net proceeds of the issue were received on 20 March 1996 and have been used for corporate purposes. Eurobonds 2016 The 12% Eurobonds, which are unsecured, were issued on 13 March 1991. They are repayable at par on 25 March 2016, unless previously redeemed, at the company's option, at a market linked premium to issue price. At 31 March 1996 ((pound) millions)) ---------- Net borrowings Borrowings 348.9 Money market investments and deposits (106.0) Cash at bank and in hand (8.2) ---------- 234.7 ========== 73 (o) Provisions for liabilities and charges Restructuring Other Total ((pound) ((pound) ((pound) millions) millions) millions) ------------- --------- --------- At 1 April 1995 37.6 19.1 56.7 Applied during the year (7.2) (3.8) (11.0) Released to profit and loss account (11.7) - (11.7) Charged to profit and loss account 27.0 3.0 30.0 ------ ----- ----- At 31 March 1996 45.7 18.3 64.0 ====== ===== ===== (p) Reconciliation of operating profit (loss) to net cash inflow (outflow) from operating activities Year ended 31 March 1996 Excluding Total NGG NGG ((pound) ((pound) ((pound) millions millions millions -------- -------- -------- Operating profit (loss) 86.4 (102.2) 188.6 Depreciation charges 44.8 - 44.8 Profit on disposal of tangible fixed assets* (2.4) - (2.4) Increase in stocks* (1.3) - (1.3) Decrease in debtors* 54.5 34.4 20.1 Decrease in creditors* (13.8) (0.8) (13.0) Increase in provisions* 23.0 - 23.0 -------- -------- -------- Net cash inflow (outflow) from operating activities before exceptional costs 191.2 (68.6) 259.8 Net cash outflow relating to fundamental restructuring (5.5) - (5.5) -------- -------- -------- Net cash inflow (outflow) from operating activities 185.7 (68.6) 254.3 ======== ======== ======== *Excludes movement related to fundamental restructuring and business disposals. 3. Material changes So far as the directors of East Midlands Electricity are aware, there has been no material change in the financial or trading position of East Midlands Electricity since 31 March 1996, the date to which the latest published accounts were prepared. 74 APPENDIX 5 ADDITIONAL INFORMATION 1. Responsibility The directors of DR Investments, whose names are set out below, accept responsibility for the information contained in this document, other than that relating to the East Midlands Electricity Group, the directors of East Midlands Electricity and members of their immediate families. To the best of the knowledge and belief of the directors of DR Investments (who have taken all reasonable care to ensure that such is the case), the information contained herein for which they are responsible is in accordance with the facts and does not omit anything likely to affect the import of such information. The directors of East Midlands Electricity, whose names are listed in Appendix 4, paragraph 1, accept responsibility for the information contained in this document relating to the East Midlands Electricity Group, the directors of East Midlands Electricity and members of their immediate families. To the best of the knowledge and belief of the directors of East Midlands Electricity (who have taken all reasonable care to ensure that such is the case), such information is in accordance with the facts and does not omit anything likely to affect the import of such information. 2. Directors (a) The directors of DR Investments are: Thomas E. Capps Thomas F. Farrell II Linwood R. Robertson James L. Trueheart (b) The directors of East Midlands Electricity are as listed in Appendix 4, paragraph 1. 3. Holdings and dealings In this paragraph 3, disclosure period means the period commencing on 6 November 1995 (the date twelve months prior to the commencement of the Offer Period) and ending on 18 November 1996 (the latest practicable date prior to the publication of this document). (a) None of the Offeror or any of the directors of the Offeror, members of their immediate families and persons deemed to be acting in concert with the Offeror for the purposes of the Offer owns or controls or (in the case of the directors of the Offeror) is interested in any East Midlands Electricity Shares or any securities convertible into, rights to subscribe for, options (including traded options) or derivatives in respect of East Midlands Electricity Shares, nor has any such person dealt for value therein during the disclosure period. (b) The interests of the directors of East Midlands Electricity and their immediate families, all of which are beneficial unless otherwise stated, in the share capital of East Midlands Electricity as at 18 November 1996 (the latest practicable date prior to the publication of this document), which have been notified to East Midlands Electricity pursuant to Section 324 or 328 of the Act or which were required to be entered in the register maintained under the provisions of section 325 of the Act, are set out below: Number of Ordinary Shares -------- Norman Askew 3,520 Chris Boon 779 Nicholas Corah 2,657 Jim Keohane 9,748 Keith Stanyard 10,426 David Thompson 271 75 (c) As at 18 November 1996 (the latest practicable date prior to the publication of this document), the following options over Ordinary Shares had been granted to the directors of East Midlands Electricity under the East Midlands Electricity Share Option Schemes and remained outstanding: No. of Ordinary Exercise Shares Date of Exercisable price in under grant from Lapse date pence option --------- ----------- ---------- -------- -------- Norman Askew 14.12.93 14.12.96 13.12.03 637 44,000 04.04.96 01.06.01 30.11.01 490 3,196* Chris Boon 14.12.93 14.12.96 13.12.03 637 22,000 04.04.96 01.06.01 30.11.01 490 3,196* Bob Davies 04.04.96 01.06.01 30.11.01 490 3,196* Jim Keohane 14.12.93 14.12.96 13.12.03 637 8,750 04.04.96 01.06.01 30.11.01 490 3,196* Keith Stanyard 09.12.91 09.12.94 08.12.01 303 25,750 14.12.93 14.12.96 13.12.03 637 6,000 04.04.96 01.06.01 30.11.01 490 1,957* *Maximum number of Ordinary Shares under the five year Sharesave Scheme Mr Askew, Mr Boon, Mr Keohane and Mr Stanyard are potential beneficiaries under the East Midlands Electricity Employee Share Ownership Plan (ESOP) and are therefore deemed to have a beneficial interest in all the East Midlands Electricity Shares of the ESOP by virtue of the provisions of section 324 of the Act. As at close of business on 18 November 1996, the ESOP Trustee held 427,733 East Midlands Electricity Shares. Under the terms of his contract Mr Davies participates in a bonus scheme which is based on the East Midlands Electricity Share price performance. The bonus is calculated by reference to the stock market value of a notional holding of 66,650 East Midlands Electricity Shares, relative to a base price of (pound)5.93 per share, on a date determinable by Mr Davies between 7 July 1997 and 7 July 1998. Mr Davies may also exercise his rights under the bonus scheme within six months of a person obtaining control (within the meaning of section 840 ICTA 1988) of East Midlands Electricity. 76 (d) The dealings for value in East Midlands Electricity Shares by the directors of East Midlands Electricity and members of their immediate families during the disclosure period are set out below:
Price per Number of Ordinary Ordinary Share in Nature of transaction Date Shares pence ------------------------------- -------- ---------- --------- Norman Askew Exercise of share option 14.12.95 102,500 406 Transfer to Mrs D Askew 14.12.95 51,250 - Sale 14.12.95 51,250 702 Sale by Mrs D Askew 14.12.95 51,250 702 Chris Boon Purchase of shares in a PEP 25.1.96 131 675 Jim Keohane Exercise of share option 05.02.96 18,000 303 Exercise of share option 05.02.96 16,750 358 Sale 05.02.96 34,750 713 Exercise of sharesave option 01.03.96 3,600 175 Sale 01.03.96 1,100 723 Transfer to Mrs C A Keohane 01.03.96 2,090 - Sale by Mrs C A Keohane 01.03.96 1,100 723 Transfer to Mrs C A Keohane 09.04.96 1,700 - Sale 09.04.96 1,700 614 Sale by Mrs C A Keohane 09.04.96 1,700 614 Transfer to Mrs C A Keohane 24.04.96 227 - Transfer to PEP 14.05.96 410 - Re-investment of dividend in PEP 01.10.96 16 530 Keith Stanyard Sale 05.02.96 1,400 711 Sale by Mrs M J Stanyard 05.02.96 1,500 711 Sale by Mrs M J Stanyard 22.02.96 15,000 729 Exercise of sharesave option 01.03.96 3,600 175 Sale 01.03.96 3,600 723
(e) Save as disclosed above, none of East Midlands Electricity or any of the directors of East Midlands Electricity or members of their immediate families owns or controls or (in the case of the directors of East Midlands Electricity) is interested in any East Midlands Electricity Shares or any securities convertible into, rights to subscribe for, or options (including traded options) or derivatives in respect of, East Midlands Electricity Shares ("relevant securities") nor has any such person dealt for value therein during the disclosure period. (f) As at 18 November 1996, Hoare Govett Corporate Finance Limited and its affiliates owned 4,400 Ordinary Shares. (g) As at 18 November 1996, save as disclosed above: (i) no subsidiary of East Midlands Electricity, no pension fund of any member of the East Midlands Electricity Group, no bank or financial or other professional adviser of East Midlands Electricity (including stockbrokers but excluding exempt market-makers), including any person controlling, controlled by or under the same control as such bank or financial or other professional adviser; and (ii) no discretionary fund manager (other than an exempt fund manager) connected with East Midlands Electricity owns or controls any relevant securities, nor has any such person dealt for value therein during the Offer Period. Neither East Midlands Electricity, nor any associate of East Midlands Electricity, has any arrangement with any person in relation to relevant securities where "arrangement" includes any indemnity or option arrangement and any agreement or understanding, formal or informal, of whatever nature which may be an inducement to deal or refrain from dealing. 77 References in this paragraph to: (1) an "associate" are to: (i) subsidiaries and associated companies of East Midlands Electricity and companies of which any such subsidiaries or associated companies are associated companies; (ii) banks, financial and other professional advisers (including stockbrokers) to East Midlands Electricity or any company covered in (i) above, including persons controlling, controlled by or under the same control as, such banks or financial or other professional advisers; (iii) the directors of East Midlands Electricity together with the directors of any company covered in (i) above (together in each case with any member of their immediate families or related trusts); (iv) the pension funds of East Midlands Electricity or any company covered in (i) above; (2) a "bank" do not apply to a bank whose sole relationship with East Midlands Electricity is the provision of normal commercial banking services or such activities in connection with the Offer as handling acceptances and other registration work. Ownership or control of 20% or more of the equity share capital of a company is regarded as the test of associated company status and "control" means a holding, or aggregate holdings, of shares carrying 30% or more of the voting rights attributable to the share capital of the company which are currently exercisable at a general meeting, irrespective of whether the holding gives de facto control. (h) None of East Midlands Electricity or any of the directors of East Midlands Electricity or members of their immediate families is interested in any shares in DR Investments or any securities convertible into, rights to subscribe for, options (including traded options) or derivatives in respect of any shares in DR Investments, nor has any such person dealt for value therein during the disclosure period. 4. Market quotations The following table shows the closing middle market quotations for East Midlands Electricity Shares as derived from the London Stock Exchange Daily Official List on the first dealing day of each of the six months immediately prior to the date of this document, on 23 October 1996 (the day before the recent bid speculation concerning East Midlands Electricity commenced) and on 5 November 1996 (the last business day prior to the commencement of the Offer Period) and on 18 November 1996 (the latest practicable date prior to the publication of this document): East Midlands Date Electricity Shares - ----------------- ------------------ 1 May 1996 614p 3 June 1996 588p 1 July 1996 529p 1 August 1996 594p 2 September 1996 565.5p 1 October 1996 537.5p 23 October 1996 499p 1 November 1996 544.5p 5 November 1996 537.5p 18 November 1996 618.5p 5. Bases of Calculations and Sources of Information (a) Unless otherwise stated, the information concerning Dominion Resources is extracted from Dominion Resources' 1995 Annual Report, 1994 Annual Report, 1993 Annual Report and Form 10-Q for the quarter ended 30 September 1996 or has been supplied by Dominion. (b) Unless otherwise stated, the information concerning East Midlands Electricity is extracted from East Midlands Electricity's annual reports and accounts for the years ended 31 March 1996, 31 March 1995 and 31 March 1994 or has been supplied by East Midlands Electricity. 78 (c) The value of the Offer is based on 198.4 million Ordinary Shares in issue. (d) The closing middle market prices of Ordinary Shares are derived from the London Stock Exchange Daily Official Lists for the relevant dates. (e) All amounts in US Dollars have been translated to sterling at a rate of (pound)1=$1.65. 6. Regulatory position of Dominion Resources Dominion Resources holds "exempt status" under the US Public Utility Holding Company Act of 1935. In order to retain this status under the 1935 Act, in connection with the proposed acquisition of East Midlands Electricity, Dominion Resources has obtained the necessary certifications from the Virginia State Corporation Commission ("SCC") and the North Carolina Public Utility Commission ("PUC") that the SCC and the PUC have the authority and resources to protect the ratepayers within their jurisdictions and that they have the intention to do so if necessary. These certifications have been filed with the US Securities and Exchange Commission. In obtaining the necessary certifications from the SCC and the PUC, Dominion Resources and Virginia Power have given certain undertakings to the SCC and the PUC which effectively "ring fence" Virginia Power from the effects of any acquisition by Dominion Resources of East Midlands Electricity. The overall effect of these undertakings with respect to the Offer is somewhat similar to the effect of the licence modifications which the DGES has applied in circumstances where a REC has become a subsidiary of another company. 7. Financing arrangements It is estimated that full acceptance of the Offer would require the payment by the Offeror of a maximum amount of approximately (pound)1.3 billion in cash. SBC Warburg and Wasserstein Perella are satisfied that the necessary financial resources are available to the Offeror to satisfy full acceptance of the Offer in cash. The funds required to make payment under the Offer will come from DR Unlimited pursuant to the subscription agreement referred to in paragraph 8(a)(ii) below. The credit facilities available to DR Unlimited are described below. (a) Five year revolving credit agreement Dominion Resources and DR Unlimited on 12 November 1996 entered into a five year revolving credit agreement (the "Five Year Revolving Credit Agreement") among themselves as borrowers, Dominion Resources as guarantor, various lending institutions, Union Bank of Switzerland, New York Branch as Administrative Agent and NationsBank, N.A. as Syndication Agent. DR Unlimited may borrow up to (pound)520,000,000 in aggregate under this facility for the purpose of making an equity investment in or subordinated loans to the Offeror. These proceeds are to be used for the acquisition of shares in East Midlands Electricity and other liabilities arising in connection with such acquisition. The borrowings by DR Unlimited under the Five Year Revolving Credit Agreement are guaranteed in full by Dominion Resources but are otherwise unsecured and are repayable in full on or before 12 November 2001. Union Bank of Switzerland and NationsBank, N.A. have agreed with Dominion Resources and DR Unlimited pursuant to a commitment letter to an increase in the facility amount from (pound)520,000,000 to (pound)560,000,000 at such time as Dominion Resources and DR Unlimited so request. The borrowings under the Five Year Revolving Credit Agreement will bear interest, at the relevant borrower's choice, from time to time during the term the borrowings are outstanding, at (i) the London inter-bank offer rate for the relevant currency for the relevant period plus a margin and, if the borrowing is in sterling, costs associated with mandatory liquid assets or (ii) the base rate (defined as the higher of (a) the prime or reference rate of interest of the New York office of Union Bank of Switzerland, and (b) 0.5% over the federal funds rate). The borrowers will be able to change among the interest rate options at periodic intervals specified in the Five Year Revolving Credit Agreement. There is also a facility fee payable on the amount of the facility. The applicable margin, if any, and facility fee is determined in accordance with a schedule tied to the credit rating of Dominion Resources, as rated by certain nationally recognised rating agencies in the United States. The aggregate amount payable in respect of the margin and the facility fee may range from 0.11% to 0.55%. Dominion Resources currently expects that the borrowings under the Five Year Revolving Credit Agreement will be repaid over approximately a three year period by Dominion Resources (or one or more members of the Dominion Resources Group) 79 subscribing additional equity in DR Unlimited, the proceeds of which will be used by DR Unlimited to repay such borrowings. As at the close of business on 18 November 1996, DR Unlimited had made no drawings under the Five Year Revolving Credit Agreement. (b) Short term credit agreement Dominion Resources and DR Unlimited on 12 November 1996 also entered into a one year credit agreement (the "Short Term Credit Agreement") among themselves as borrowers, Dominion Resources as guarantor, various lending institutions, Union Bank of Switzerland, New York Branch as Administrative Agent and NationsBank, N.A. as Syndication Agent. DR Unlimited may borrow up to (pound)780,000,000 in aggregate under this facility for the same purposes as under the Five Year Revolving Credit Agreement. The final repayment date of the borrowings under this facility is 11 November 1997 but otherwise the terms of the Short Term Credit Agreement, including as to the guarantee of DR Unlimited by Dominion Resources and the interest rates and facility fee payable (with a range of 0.08% to 0.5%), are broadly the same as apply under the Five Year Revolving Credit Agreement. Union Bank of Switzerland and NationsBank, N.A. have agreed with Dominion Resources and DR Unlimited pursuant to a commitment letter to an increase in the facility amount from (pound)780,000,000 to (pound)840,000,000 at such time as Dominion Resources and DR Unlimited so request. At the close of business on 18 November 1996, DR Unlimited had made no drawings under the Short Term Credit Agreement. Dominion Resources has undertaken to the SCC and the PUC that it will refinance in full the amount drawn under the Short Term Credit Agreement without the benefit of the Dominion Resources guarantee and Dominion Resources is currently in discussions to put in place that refinancing. (c) The Offeror intends that the payment of interest on, and the repayment of, the credit facilities described above will depend to a significant extent on East Midlands Electricity. 8. Material Contracts (a) Dominion Resources The following contracts, not being contracts entered into in the ordinary course of business, which are or may be material, have been entered into by Dominion Resources and its subsidiaries within the two years immediately preceding the commencement of the Offer Period: (i) the financing arrangements described in paragraph 7 of this Appendix 5; and (ii) a subscription agreement dated 12 November 1996 between DR Investments and DR Unlimited in which DR Unlimited agreed to subscribe at par for such number of ordinary shares of (pound)1 each in the capital of DR Investments as will ensure provision of sufficient funds to DR Investments to allow it to satisfy full acceptance of the Offer. (b) East Midlands Electricity The following contracts, not being contracts entered into in the ordinary course of business, which are or may be material, have been entered into by East Midlands Electricity and its subsidiaries within the two years immediately preceding the commencement of the Offer Period: (i) An agreement (the "Master Agreement") between the 12 RECs, The National Grid Group plc ("NGG") and The National Grid Company plc ("NGC") dated 25 October 1995 under which the parties agreed to seek the listing of NGG on the London Stock Exchange and East Midlands Electricity and certain other RECs agreed to despatch circulars to their respective shareholders to obtain approval for the distribution to their shareholders of NGG shares. The Master Agreement provided for the pre-flotation capital restructuring of NGG and included undertakings by East Midlands Electricity to take up its share of the proposed NGG rights issue and to grant a customer discount. (ii) An agreement (the "Shareholders Agreement") dated 17 November 1995 between each of the RECs and PSB Holding Limited under which the parties approved a management structure for PSB Holding Limited and First Hydro 80 Limited, governed by a separate management agreement (the "Management Agreement"), and an agenda under which First Hydro Limited was to be sold and the proceeds of sale distributed to the shareholders of PSB Holding Limited. The Shareholders Agreement set out the procedures for collecting offers for the shares in First Hydro Limited, the selection of bidders and sale completion. The RECs gave undertakings not to redeem redeemable shares, to vote in favour of a resolution to put PSB Holding Limited into members' voluntary liquidation after the completed sale and to execute an indemnity in favour of the liquidator for distribution of sale proceeds to shareholders. Both the Shareholders Agreement and the Management Agreement terminated on completion of the First Hydro Limited share sale. 9. Service contracts of the directors of East Midlands Electricity There are no service contracts between any of the directors of East Midlands Electricity and any member of the East Midlands Electricity Group except for those which are disclosed below. Name Date of service contract Basic annual salary ------------------------ ------------------- Norman Askew 24 August 1992 (pound)210,200 Chris Boon 5 December 1994 (pound)103,000 Bob Davies 17 February 1994 (pound)166,100 Jim Keohane 7 April 1992 (pound)115,600 Keith Stanyard 31 December 1990 (pound)115,600 Following the annual salary review for executive directors by the Remuneration and Nomination Committee on 5 November 1996 the basic annual salary for executive directors will be increased by 3.3% with effect from 1 December 1996. All the directors referred to above are employed under two year rolling contracts and compensation for loss of office has been limited to a maximum of eighteen months' basic salary. All the directors referred to above participate in a three year performance related reward scheme which runs from 1 April 1994 to 31 March 1997. Under the scheme, which is based on earnings per East Midlands Electricity Share performance, an individual can earn up to 60% of his base salary for the financial year. The bonus is proportionately reduced if lower earnings per share growth is achieved. 10. Other Information (a) Neither the Offeror nor any person acting in concert with the Offeror for the purposes of the Offer has any indemnity or option arrangement or any agreement or understanding, formal or informal of whatever nature, relating to East Midlands Electricity Shares or any securities convertible into, rights to subscribe for, or options (including traded options) or derivatives in respect of, any East Midlands Electricity Shares, which may be an inducement to deal or refrain from dealing. (b) Save as referred to in this document, there is no agreement, arrangement or understanding (including any compensation arrangement) between the Offeror or any person acting in concert with it for the purposes of the Offer and any of the directors, recent directors, shareholders or recent shareholders of East Midlands Electricity having any connection with or dependence upon, or which is conditional on, the outcome of the Offer. (c) There is no agreement, arrangement or understanding whereby the beneficial ownership of any of the East Midlands Electricity Shares to be acquired pursuant to the Offer will be transferred to any other person, save that the Offeror reserves the right to transfer any such shares to any other member of the Dominion Resources Group. (d) No proposal exists in connection with the Offer that any payment be made to any person as compensation for loss of office or as consideration for, or in connection with, his retirement from office. (e) The registered office of the Offeror is 165 Queen Victoria Street, London EC4V 4DD. The Offeror is a wholly owned subsidiary of DR Unlimited (an unlimited company incorporated in England and Wales); DR Unlimited is owned 81 equally by DEI U.K., Inc. and Dominion Energy U.K., Inc. which are each wholly owned by Dominion Resources. The Offeror was incorporated in England and Wales on 7 November 1996 as a special purpose vehicle for the making of an offer for East Midlands Electricity. The principal place of business and registered office of Dominion Resources is at Riverfront Plaza - West Tower, 901 East Byrd Street, Richmond, Virginia 23219-4069, United States of America. (f) SBC Warburg, Wasserstein Perella and Schroders have each given and not withdrawn their respective written consent to the issue of this document with the references to their name in the form and context in which they appear. SBC Warburg, Wasserstein Perella and Schroders are each regulated in the UK by The Securities and Futures Authority Limited. 11. Documents available for inspection Copies of the following documents will be available for inspection, during normal business hours, on any weekday (Saturdays and public holidays excepted) at the offices of Freshfields, 65 Fleet Street, London EC4Y 1HS whilst the Offer remains open for acceptance: (a) the Memorandum and Articles of Association of the Offeror and East Midlands Electricity and the Articles of Incorporation and ByLaws of Dominion Resources; (b) the audited consolidated accounts of Dominion Resources for the financial years ended 31 December 1994 and 1995; (c) the audited consolidated accounts of East Midlands Electricity for the financial years ended 31 March 1995 and 1996; (d) the financing documents described in paragraph 7 above; (e) the material contracts referred to in paragraph 8 above; (f) the letters of consent referred to in paragraph 10(f) above; (g) a draft (subject to modification) of the Loan Note Instrument; (h) the service contracts of the Directors of East Midlands Electricity referred to in paragraph 9 of this Appendix; and (i) this Offer document. 82 APPENDIX 6 DEFINITIONS The following definitions apply throughout this document and in the accompanying Form of Acceptance, unless the context otherwise requires: "Act" the Companies Act 1985 (as amended) "ADRs" American depositary receipts, evidencing American depositary shares representing underlying East Midlands Electricity Shares "Code" The City Code on Takeovers and Mergers "DGES" The Director General of Electricity Supply "Dominion" or "Dominion Resources" Dominion Resources, Inc. "DR Investments" or the "Offeror" DR Investments (UK) PLC, a wholly owned subsidiary of Dominion Resources "DR Unlimited" DR Investments, an unlimited company incorporated in England and Wales, a wholly owned subsidiary of Dominion Resources "Dominion Resources Group" or "Offeror Group" Dominion and its subsidiaries and subsidiary undertakings "East Midlands Electricity" East Midlands Electricity plc "East Midlands Electricity Group" East Midlands Electricity and its subsidiaries and subsidiary undertakings "East Midlands Electricity Share Option Schemes" the East Midlands Electricity Executive Share Option Scheme and the East Midlands Electricity Sharesave Scheme II "Form" or "Form of Acceptance" the form of acceptance, election and authority relating to the Offer accompanying this document "ICTA 1988" Income and Corporation Taxes Act 1988 "LIBOR" the London Interbank Offered Rate for twelve month sterling deposits of (pound)5,000,000 in the London Interbank market at or about 11.00 am (London time) on the first day of the relevant interest period or, if such a day is not a business day, on the preceding business day as quoted by a duly authorised official of Barclays Bank PLC (or if Barclays Bank PLC is unable to quote such rate, such other reference bank selected by the Offeror for the purpose) "Loan Notes" the loan notes of the Offeror to be issued pursuant to the Loan Note Alternative "Loan Note Alternative" the loan note alternative as described in this document, by which holders of East Midlands Electricity Shares (other than certain overseas shareholders) who validly accept the Offer may elect to receive Loan Notes instead of all or part of the cash consideration otherwise payable under the Offer "London Stock Exchange" the London Stock Exchange Limited "Offer" or "Recommended Cash Offer" the offer (including the Loan Note Alternative) made by SBC Warburg and Wasserstein Perella on behalf of the Offeror to acquire the East Midlands Electricity Shares as set out in this document including, where the context so requires, any subsequent revision, variation, extension, or renewal thereof "Offer Period" the period defined in paragraph 5(c) of Part B of Appendix 1 "Ordinary Shareholders" or "East Midlands Electricity Shareholders" holders of East Midlands Electricity Shares 83 "Ordinary Shares" or "East Midlands Electricity Shares" the existing issued and fully paid ordinary shares of 569 pence each in East Midlands Electricity and any further such shares which are unconditionally allotted or issued before the date on which the Offer closes (or such earlier date, not being earlier than the date on which the Offer becomes unconditional as to acceptances or, if later, the first closing date of the Offer, as the Offeror may decide) "Panel" The Panel on Takeovers and Mergers "Receiving Agent" The Royal Bank of Scotland plc which has been engaged by the Offeror to receive Forms of Acceptance from East Midlands Electricity Shareholders "RECs" the regional electricity companies in England and Wales "Restricted Overseas Person" a person (including an individual, limited liability company, partnership, unincorporated syndicate, unincorporated organisation, trust, trustee, executor, administrator or other legal representative) in, or resident in, the United States, Canada, Australia or Japan or a US person "SBC Warburg" SBC Warburg, a division of Swiss Bank Corporation "Schroders" J. Henry Schroder & Co. Limited "United Kingdom" or "UK" United Kingdom of Great Britain and Northern Ireland "United States" or "US" the United States of America, its territories and possessions, any state of the United States of America and the District of Columbia "US person" or "United States person" a US person as defined in Regulation S of the US Securities Act of 1933, as amended "Virginia Power" Virginia Electric and Power Company, the principal subsidiary of Dominion Resources "Wasserstein Perella" Wasserstein Perella & Co. Limited 84 EX-11 6 EX-11 EXHIBIT 11 Dominion Resources, Inc. Computation of Earnings Per Share of Common Stock Assuming Full Dilution Years (Million, Except Per Share Amounts) 1996 1995 1994 Consolidated net income (1) $472.1 $425.0 $478.2 ====== ====== ====== Adjustments to average common shares: Shares of common stock -average shares outstanding 178.3 173.8 170.3 Plus: Additional shares assuming conversion of installments received on Stock Purchase Plan for Customers of Virginia Power at average market value (2) .0 .5 .6 ------ ------ ------ Adjusted average common shares 178.3 174.3 170.9 ====== ====== ====== Earnings per share $ 2.65 $2.44 $ 2.80 ======= ===== ======= Notes: (1) See the Consolidated Statements of Income. (2) Based on the following date: 1996 1995 1994 Installments received on Stock Purchase Plan for Customers of Virginia Power at year-end $ 0.0 $17.81 $ 22.4 Average market per common share $ 40.63 $38.25 $ 40.13
EX-13 7 EX-13 Dominion Resources, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A: SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- General: Dominion Resources, Inc. is a holding company headquartered in Richmond, Virginia. Its primary business is Virginia Power, which 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 also operates business subsidiaries active in independent power production, the acquisition and sale of natural gas reserves, in financial services, and in real estate. Some of the independent power and natural gas projects are located in foreign countries. Net assets of approximately $440 million are involved in independent power production operations in Central and South America. 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. Dominion Resources is currently exempt from regulation as a registered holding company under the Public Utility Holding Company Act of 1935. Accounting for the utility business conforms with generally accepted accounting principles as applied to regulated public utilities and as prescribed by federal agencies and the commissions of the states in which the utility business operates. Consolidation: The Consolidated Financial Statements include the accounts of Dominion Resources and its subsidiaries. In consolidation, all significant intercompany transactions and accounts have been eliminated. Operating Revenues and Income: Utility revenues are recorded on the basis of service rendered. Dividend income on securities owned is recognized on the ex-dividend date. Investments in common stocks of affiliates representing 20 percent to 50 percent ownership, and joint ventures and partnerships representing generally 50 percent or less ownership interests, are accounted for under the equity method. Gain on sale of loans: Gain on sale of loans represents the present value of the difference between the interest rate received on the mortgage loans and the interest rate received by the investor in the securities after considering the effects of estimated prepayments, costs to service the mortgage loans and non-refundable fees and premiums on loans sold. These gains on the sale of loans are recognized on the settlement date and are based on the relative fair market value of the portion sold and retained. Concurrently with recognizing such gain on sale, a corresponding asset representing interest-only strips retained at securitization is recorded on the balance sheet in an initial amount equal to the net present value of the projected cash flows. The asset recorded which is classified as available-for-sale is amortized in proportion to the income estimated to be received during the life. 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 acquisition, exploration and development of natural resource properties is accounted for under the successful efforts method. Interest is capitalized in connection with the construction of major facilities. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset's estimated useful life. In 1996, 1995, and 1994, $6.3 million, $14.1 million, and $13.8 million of interest cost was capitalized, respectively. Capitalized interest includes AFC--other funds for certain regulatory jurisdictions of $3 million, $6.7 million, and $6.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. Major classes of property, plant and equipment and their respective balances are: - -------------------------------------------------------------------------------- At December 31, 1996 1995 (millions) UTILITY: Production $ 7,691.9 $ 7,340.0 Transmission 1,386.5 1,316.1 Distribution 4,385.4 4,215.7 Other electric 862.9 817.7 Construction work-in-progress 180.1 512.1 Nuclear fuel 843.8 836.0 - -------------------------------------------------------------------------------- Total utility 15,350.6 15,037.6 - -------------------------------------------------------------------------------- NONUTILITY: Natural gas properties 492.4 395.7 Independent power properties 869.2 462.7 Other 103.6 81.4 - -------------------------------------------------------------------------------- Total nonutility 1,465.2 939.8 - -------------------------------------------------------------------------------- Total property, plant and equipment $16,815.8 $15,977.4 ================================================================================ Depreciation, Depletion and Amortization: Depreciation of utility plant (other than nuclear fuel) is computed using 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 and 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. Owned nuclear fuel is amortized on a unit-of-production basis sufficient to amortize fully, over the estimated service life, the cost of the fuel plus permanent storage and disposal costs. Costs in excess of net assets acquired from equity investments are amortized over periods not to exceed 40 years. 36 Dominion Resources, Inc. Nuclear Decommissioning: Nuclear plant decommissioning costs are accrued and recovered through rates over the expected service lives of Virginia Power'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 External trusts balance 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 Virginia Power's four nuclear units. The current cost estimate is based on the DECON method, which assumes the activities associated with the 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 accumulated depreciation, depletion and amortization 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, depletion and amortization expense. The net unrealized gain of $80.5 million and $40.7 million associated with securities held by Virginia Power'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 million, $15.9 million, and $15.2 million for 1996, 1995, and 1994, respectively, and are included in other income in the Consolidated Financial Statements. 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. 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, 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 Virginia Power 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. Federal Income Taxes: Dominion Resources and its subsidiaries file a consolidated federal income tax return. Deferred income taxes are provided for all significant temporary differences between the financial and tax basis of assets and liabilities using presently enacted tax rates in accordance with SFAS No. 109, "Accounting for Income Taxes." Temporary differences occur when events and transactions recognized for financial reporting result in taxable or tax-deductible amounts in future periods. The regulatory treatment of temporary differences can differ from the requirements of SFAS No. 109. Accordingly, Virginia Power recognizes a regulatory asset if it is probable that future revenues will be provided for the payment of those deferred tax liabilities. Similarly, in the event a deferred tax liability is reduced to reflect changes in tax rates, a regulatory liability is established if it is probable that a future reduction in revenue will result. Due to regulatory requirements, Virginia Power accounts for investment tax credits under the "deferral method" which provides for the amortization of these credits over the service lives of the property giving rise to the credits. Allowance for Funds Used During Construction (AFC): 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 pre-tax AFC rates for 1996, 1995, and 1994 were 8.1, 8.9, and 8.9 percent, respectively. Approximately 82 percent of Virginia Power's construction work in progress is now included in rate base and a cash return is collected currently thereon. Deferred Capacity and Fuel Expenses: Approximately 90 percent of fuel expenses and 80 percent of capacity expenses are subject to deferral accounting. Under this method, 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: Dominion Resources 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 Virginia Power debt are also deferred and amortized over the lives of the new issues of long-term debt as permitted by the appropriate regulatory commission. At Virginia Power, gains or losses resulting from the redemption of debt without refinancing are amortized over the remaining lives of the redeemed issues. Investment Securities: Dominion Resources accounts for and classifies investments in equity securities that have readily determinable fair values and for all investments in debt securities based on management's intent. The investments are classified into three categories and accounted for in the following manner. Debt securities which are intended to be held to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities purchased and held with the intent of selling them in the current period are classified as trading securities. They are reported at fair value and unrealized gain and losses are included in earnings. Debt and 37 Dominion Resources, Inc. equity securities that are neither held-to-maturity or trading are classified as available-for-sale securities. These are reported at fair value with unrealized gains and losses reported in shareholders' equity, net of tax. Mortgage Loans in Warehouse: Mortgage loans in warehouse consist of mortgage loans secured by single family residential properties. Any price premiums or discounts on mortgage loans including any capitalized costs or deferred fees on originated loans, as required by SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases," are deferred as an adjustment to the cost of the loans and are therefore included in the determination of any gains or losses on sales of the related loans. Mortgage loans in warehouse are carried at the lower of cost or market value. Mortgage Investments: Included in available-for-sale securities are mortgage investments. Mortgage investments at December 31, 1996 are interest-only strips retained at securitization of the mortgage loans. Unrealized holding gains and losses, net of tax, are reported as a net amount in a separate component of stockholders' equity until realized. Nonrecourse-Nonutility Financings: Dominion Resources' nonutility subsidiaries issue debt to finance their operations and obtain financings that generally are secured by the assets of the nonutility subsidiaries. However, Dominion Resources may be required to provide contingent equity support or to maintain a minimum net worth at the nonutility subsidiaries. These financings have been segregated on the accompanying financial statements to distinguish their nonrecourse nature. Derivatives: Dominion Resources utilizes derivative instruments to manage exposure to fluctuations in interest rates, foreign exchange rates and natural gas prices. Derivative financial instruments, which are principally used by the company in the management of its interest rate and foreign currency exposures, are accounted for on an accrual basis. Income and expense are recorded in the same category as that arising from the related asset or liability. For example, amounts to be paid or received under interest rate swap agreements are recognized as interest income or expense in the periods in which they accrue. Gains and losses related to effective hedges of existing assets or liabilities are deferred and recognized over the expected remaining life of the related asset or liability. Changes in the market value of derivatives that do not qualify as hedges are recognized as interest income or expense in the period in which the changes occur. The company does not hold or issue derivative financial instruments for trading purposes. An additional derivative instrument managed by the company is a call option to fix in United States dollars the investment amount in the East Midlands acquisition. Unrealized gains or losses on the call option are included in income. Cash: 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 $72.6 million and $70.1 million, respectively. For purposes of the Consolidated Statements of Cash Flows, Dominion Resources considers cash and cash equivalents to include cash on hand and temporary investments purchased with a maturity of three months or less. Supplementary Cash Flows Information: - -------------------------------------------------------------------------------- 1996 1995 1994 (millions) CASH PAID DURING THE YEAR FOR: Interest (reduced for net costs of borrowed funds capitalized) $373.0 $376.0 $355.9 Federal income taxes 169.8 159.6 154.2 NON-CASH TRANSACTIONS FROM INVESTING AND FINANCING ACTIVITIES: Note issued in acquisition of business 47.5 Exchange of long-term marketable securities 12.1 12.3 11.8 Assumption of obligations and acquisition of utility property 26.3 Other 3.1 ================================================================================ Reclassification: Certain amounts in the 1995 and 1994 Consolidated Financial Statements have been reclassified to conform to the 1996 presentation. NOTE B: SALE OF RECEIVABLES - -------------------------------------------------------------------------------- Virginia Power 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. NOTE C: TAXES - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 (millions) PROVISION FOR FEDERAL INCOME TAXES: Included in operating expenses: Current $157.5 $179.8 $120.8 - -------------------------------------------------------------------------------- Tax effects of temporary/ timing differences: Liberalized depreciation 53.8 56.6 61.3 Indirect construction costs 3.4 (13.8) (21.5) Other plant related items 12.6 12.1 4.0 Deferred fuel 19.1 (2.2) 0.8 Deferred capacity 3.2 (3.8) (9.0) Separation costs (2.6) (12.4) Customer accounts reserve 36.8 Intangible drilling costs 5.7 3.6 4.1 Other, net (23.3) (20.9) (9.2) - -------------------------------------------------------------------------------- 71.9 19.2 67.3 - -------------------------------------------------------------------------------- Net deferred investment tax credits--amortization (16.9) (16.9) (17.1) - -------------------------------------------------------------------------------- Total provision for federal income tax expense $212.5 $182.1 $171.0 ================================================================================ 38 Dominion Resources, Inc. - -------------------------------------------------------------------------------- (millions, except percentages) 1996 1995 1994 COMPUTATION OF PROVISION FOR FEDERAL INCOME TAX: Pre-tax income $684.6 $607.1 $649.2 ================================================================================ Tax at statutory federal income tax rate of 35% applied to pre-tax income $239.6 $212.5 $227.2 Changes in federal income taxes resulting from: Preferred dividends of Virginia Power 12.4 15.4 14.8 Amortization of investment tax credits (16.9) (16.9) (17.1) Nonconventional fuel credit (26.5) (28.2) (32.0) Other, net 3.9 (0.7) (21.9) - -------------------------------------------------------------------------------- Total provision for federal income tax expense $212.5 $182.1 $171.0 ================================================================================ Effective tax rate 31% 30% 26.3% ================================================================================ Dominion Resources net noncurrent deferred tax liability is attributable to: - -------------------------------------------------------------------------------- 1996 1995 (millions) ASSETS: Deferred investment tax credits $ (90.3) $ (96.4) - -------------------------------------------------------------------------------- LIABILITIES: Depreciation method and plant basis differences 1,463.5 1,403.5 Income taxes recoverable through future rates 168.8 171.6 Partnership basis differences 130.3 111.5 Other 71.0 70.9 - -------------------------------------------------------------------------------- Total deferred income tax liability 1,833.6 1,757.5 - -------------------------------------------------------------------------------- Net deferred income tax liability $1,743.3 $1,661.1 ================================================================================ NOTE D: 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. Virginia Power'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 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 ================================================================================ 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 15-year period with escalation for inflation. These costs are being recovered in fuel rates. 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 Virginia Power 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 Virginia Power's rate base or used to adjust Virginia Power's capital structure, Virginia Power 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 the rate base by the Virginia Commission which has primary jurisdiction over Virginia Power's rates. However, of that amount $73.1 million represents the present value of amounts to be recovered through future rates for North Anna Unit 3 project termination costs, and thus reflects a reduction in the actual dollars to be recovered through future rates for the time value of money. Virginia Power 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, Virginia Power'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. The reserve deficiency results from deferral of costs in conformity with regulatory depreciation practices authorized by regulatory commissions having jurisdiction over Virginia Power's operations. Currently, Virginia Power is allowed to amortize reserve deficiencies over estimated remaining functional plant lives in all of the regulatory jurisdictions it serves. 39 Dominion Resources, Inc. NOTE E: JOINTLY OWNED PLANTS - -------------------------------------------------------------------------------- The following information relates to Virginia Power's proportionate share of jointly owned plants at December 31, 1996: Bath County Pumped North Anna Clover Storage Station Power Station Power 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 0.1 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 proportions as their respective ownership interest. Virginia Power's share of operating costs is classified in the appropriate expense category in the Consolidated Statements of Income. NOTE F: SHORT-TERM DEBT - -------------------------------------------------------------------------------- Dominion Resources and its subsidiaries have credit agreements with various expiration dates. These agreements provided for maximum borrowings of $3,882.4 million and $885.8 million at December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, $714.5 million and $48.6 million, respectively, was borrowed under such agreements and classified as long-term debt. Dominion Resources credit agreements supported $308 million and $199 million of Dominion Resources commercial paper at December 31, 1996 and 1995, respectively. Virginia Power 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. A subsidiary of Dominion Capital also had $91 million of nonrecourse commercial paper outstanding at December 31, 1996 and 1995. A total of $391 million and $289 million of the commercial paper was classified as long-term debt at December 31, 1996 and 1995, respectively. The commercial paper is supported by revolving credit agreements that have expiration dates extending beyond one year. Dominion Resources and its subsidiaries pay fees in lieu of compensating balances in connection with these credit agreements. A summary of short-term debt outstanding at December 31 follows: - -------------------------------------------------------------------------------- Weighted Amount Average Outstanding Interest Rate (millions, except percentages) 1996 Commercial paper $320.5 5.5% Term-notes 57.7 7.4% - -------------------------------------------------------------------------------- Total $378.2 ================================================================================ 1995 Commercial paper $169.0 5.8% Term-notes 67.6 11.1% - -------------------------------------------------------------------------------- Total $236.6 ================================================================================ NOTE G: INVESTMENT SECURITIES - -------------------------------------------------------------------------------- Securities classified as available-for-sale as of December 31 follow: - -------------------------------------------------------------------------------- Gross Gross Security Unrealized Unrealized Aggregate Type Cost Gains Losses Fair Value (millions) 1996 Equity $635.8 $8.2 $10.1 $633.9 Debt 58.5 58.5 1995 Equity $288.3 $8.0 $16.5 $279.8 Debt 5.8 0.1 5.7 ================================================================================ Debt securities held at December 31, 1996 do not have stated contractural maturities because borrowers may have the right to call or repay obligations with or without call or prepayment penalties. For the years ended December 31, 1996 and 1995, the proceeds from the sales of available-for-sale securities were $33.4 million and $49.4 million, respectively. The gross realized gains and losses were $2.4 million and $1 million for 1996 and $10.4 million and $0.1 million for 1995, respectively. The basis on which the cost of these securities was determined is specific identification. The changes in net unrealized holding gain or loss on available-for-sale securities has resulted in an increase in the separate component of shareholders equity during the years ended December 31, 1996 and 1995 of $5.6 million, net of tax, and $41.1 million, net of tax, respectively. The changes in net realized holding gain or loss on trading securities increased earnings during the years ended December 31, 1996 and 1995 by $3.1 million and $2.1 million, respectively. 40 Dominion Resources, Inc. NOTE H: FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The fair value amounts of the company's financial instruments have been determined using available market information and valuation methodologies deemed appropriate in the opinion of management. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the company could realize in a current market exchange. The use of different market assumptions and/or estimation assumptions may have a material effect on the estimated fair value amounts.
Carrying Amount Estimated Fair Value - ----------------------------------------------------------------------------------------------------------------- December 31, 1996 1995 1996 1995 (millions) ASSETS: Cash and cash equivalents $ 110.8 $ 66.7 $ 110.8 $ 66.7 Trading securities 16.4 10.8 16.4 10.8 Mortgage loans in warehouse 65.8 67.9 Available-for-sale securities 692.4 285.5 692.4 285.5 Pollution control project funds 9.7 11.9 9.7 11.9 Notes receivable 40.3 43.1 40.3 43.7 Nuclear decommissioning trust funds 443.3 351.4 443.3 351.4 LIABILITIES: Short-term debt $ 378.2 $ 236.6 $ 378.2 $ 236.6 Long-term debt 5,478.3 5,058.8 5,560.3 5,322.4 PREFERRED SECURITIES OF A SUBSIDIARY TRUST $ 135.0 $ 135.0 $ 135.0 $ 140.4 PREFERRED STOCK $ 180.0 $ 180.0 $ 185.8 $ 190.9 LOAN COMMITMENTS $ 547.0 DERIVATIVES--RELATING TO: Foreign currency contract $ 9.8 $ 9.8 $ (13.6) Natural gas options in a net receivable (payable) position $ 0.6 $ 0.6 $ (0.6) $ 0.1 =================================================================================================================
Cash and Cash Equivalents: The carrying amount of these items is a reasonable estimate of their fair value. Investment Securities and Nuclear Decommissioning Trust Funds: The estimated fair value is determined based on quoted market prices, dealer quotes, and prices obtained from independent pricing sources. Mortgage Loans in Warehouse: The fair value of mortgage loans in warehouse is based on outstanding commitments from investors. Notes Receivable: The carrying value approximates fair value due to the variable rate or term structure of the notes receivable. Short-Term Debt and Long-Term Debt: Market values are used to determine the fair value for debt securities for which a market exists. For debt issues that are not quoted on an exchange, interest rates currently available to the company for issuance of debt with similar terms and remaining maturities are used to estimate fair value. The carrying amount of debt issues with short-term maturities and variable rates that are refinanced at current market rates is a reasonable estimate of their fair value. Preferred Securities of Subsidiary Trust: The fair value is based on market quotations. Preferred Stock: The fair value of the fixed-rate preferred stock subject to mandatory redemption was estimated by discounting the dividend and principal payments for a representative issue of each series over the average remaining life of the series. Loan Commitments: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. Foreign Currency Contracts: The fair value of foreign currency contracts is estimated by obtaining quotes from brokers. Interest Rate Swaps: The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the company would receive or pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Net market value at December 31, 1996 was immaterial. Natural Gas Options: The fair value of natural gas options (used for hedging purposes) is estimated by obtaining quotes from bankers. Futures Contracts: Derivatives used as hedging instruments are off-balance sheet items marked-to-market with any unrealized gains or losses deferred until the related loans are securitized or sold. Net market value at December 31, 1996 was immaterial. 41 Dominion Resources, Inc. NOTE I: LONG-TERM DEBT - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------- At December 31, 1996 1995 (millions) VIRGINIA POWER 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 1992 Series D, 7.625%, due 2007 215.0 215.0 Various series, 6%-8%, due 2001-2004 805.0 805.0 Various series, 5.45%-8.75%, due 2020-2025 1,144.5 1,144.5 - --------------------------------------------------------------------------------------- TOTAL FIRST AND REFUNDING MORTGAGE BONDS 2,923.8 2,923.8 - --------------------------------------------------------------------------------------- OTHER LONG-TERM DEBT: VIRGINIA POWER: Bank loans, notes and term loans, 6.15%-10%, due 1996-2003 503.1 762.7 Pollution control financings(2): Money market municipals, due 2008-2027(3) 488.6 488.6 DOMINION RESOURCES: Revolving credit agreement, 6.46%, due 2001 342.5 Commercial paper(4) 300.0 199.0 - --------------------------------------------------------------------------------------- TOTAL OTHER LONG-TERM DEBT 1,634.2 1,450.3 - --------------------------------------------------------------------------------------- NONRECOURSE--NONUTILITY DEBT: DOMINION RESOURCES: Bank loans, 9.25%, due 2008 20.8 21.7 DOMINION CAPITAL: Senior notes, fixed rate, 6.12%-11.875%, due 1996-2005(5) 96.0 102.0 Term notes, fixed rate, 4.93%-12.48%, due 1994-2020 212.8 204.0 Revolving credit agreements, due 1995-1999(6) 85.0 34.6 Commercial paper(7) 90.0 90.0 DOMINION ENERGY: Term loan, 7.22%, due 1996(8) 68.6 Revolving credit agreements, due 1997(9) 320.0 14.0 Term loan, 5.445%, due 1998 35.0 55.0 Bank loans, 9.70%-13.20%, due 2005 32.5 35.0 Bank loans, 4.5%-6.76%, due 1996-2024 53.0 59.8 - --------------------------------------------------------------------------------------- TOTAL NONRECOURSE--NONUTILITY DEBT 945.1 684.7 - --------------------------------------------------------------------------------------- LESS AMOUNTS DUE WITHIN ONE YEAR: First and refunding mortgage bonds 299.3 Bank loans, notes and term loans 12.0 259.6 Nonrecourse--nonutility 439.4 161.2 - --------------------------------------------------------------------------------------- TOTAL AMOUNT DUE WITHIN ONE YEAR 750.7 420.8 - --------------------------------------------------------------------------------------- LESS UNAMORTIZED DISCOUNT, NET OF PREMIUM 24.8 26.1 - --------------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT $4,727.6 $4,611.9 =======================================================================================
(1) Substantially all of Virginia Power's property is subject to the lien of the mortgage, securing its First and Refunding Mortgage Bonds. (2) Certain pollution control equipment at Virginia Power's generating facilities has been pledged or conveyed to secure these 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. (4) See Note F to the Consolidated Financial Statements. (5) The Rincon Securities common stock owned by Dominion Capital is pledged as collateral to secure the loan. (6) The weighted average interest rates during 1996 and 1995 were 6.24% and 6.76%, respectively. (7) The weighted average interest rates during 1996 and 1995 were 5.37% and 5.91%, respectively. (8) The Enron/Dominion Cogen Corp. common stock owned by Dominion Energy is pledged as collateral to secure the loan. (9) The weighted average interest rates during 1996 and 1995 were 5.89% and 6.04%, respectively. 42 Dominion Resources, Inc. Maturities (including sinking fund obligations) through 2001 are as follows (in millions): 1997-$750.7; 1998-$440.7; 1999-$359.2; 2000-$253.9; and 2001-$512.6. In January 1997, Virginia Power filed a registration statement with the Securities and Exchange Commission for $400 million of Junior Subordinated Debentures. NOTE J: COMMON STOCK - -------------------------------------------------------------------------------- During 1996 the company purchased on the open market and retired 136,800 shares of common stock for an aggregate price of $5.5 million. On July 8, 1996, the company established Dominion Direct Investment which continues and expands the Automatic Dividend Reinvestment and Stock Purchase Plan. From 1994 through 1996, the following changes in common stock occurred:
1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount (millions) Balance at January 1 176.4 $3,303.5 172.4 $3,157.6 168.1 $2,991.0 Changes due to: Dominion Direct Investment 1.9 70.9 Automatic Dividend Reinvestment and Stock Purchase Plan 1.4 55.1 2.9 107.6 2.9 112.2 Stock Purchase Plan for Customers of Virginia Power 1.0 23.2 1.4 45.8 1.3 51.3 Employee Savings Plan 0.5 20.5 0.2 8.3 0.6 23.2 Stock repurchase and retirement (0.1) (5.5) (0.7) (24.8) (0.6) (20.7) Other 0.1 3.7 0.2 9.0 0.1 0.6 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31 181.2 $3,471.4 176.4 $3,303.5 172.4 $3,157.6 ===================================================================================================================================
NOTE K: LONG-TERM INCENTIVE PLAN - ------------------------------------------------------------------------------- A long-term incentive plan (the Plan) provides for the granting of nonqualified stock options and restricted stock to certain employees of Dominion Resources and its affiliates. The aggregate number of shares of common stock that may be issued pursuant to the Plan is 3,750,000. The changes in share and option awards under the Plan were as follows:
- --------------------------------------------------------------------------------------------------------------- Restricted Weighted Stock Weighted Shares Shares Average Price Options Average Price Exercisable Balance at December 31, 1993 26,899 $40.37 12,464 $29.39 12,464 - --------------------------------------------------------------------------------------------------------------- Awards granted--1994 19,842 $40.64 Exercised/distributed (5,555) $36.25 (1,388) $29.63 - --------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 41,186 $41.05 11,076 $29.36 11,076 - --------------------------------------------------------------------------------------------------------------- Awards granted--1995 25,320 $37.63 Exercised/distributed (21,576) $38.69 - --------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 44,930 $41.60 11,076 $29.36 11,076 - --------------------------------------------------------------------------------------------------------------- Awards granted--1996 79,784 $41.76 Exercised/distributed/forfeited (29,433) $39.94 (475) $29.63 - --------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 95,281 $41.78 10,601 $29.34 10,601 ===============================================================================================================
In 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation." However, the company continues to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for the plan. Accordingly, no compensation expense has been recognized for stock options awarded. Had compensation cost for the company's plan been determined consistent with the methodology prescribed under SFAS No. 123 there would have been no significant impact on the company's operations for the year ended December 31, 1996. 43 Dominion Resources, Inc. NOTE L: VIRGINIA POWER OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST - -------------------------------------------------------------------------------- In 1995, Virginia Power 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 percent beneficial ownership in the assets held by VP Capital Trust. Virginia Power issued $139.2 million of its 1995 Series A, 8.05 percent 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 percent beneficial ownership interest in the assets held by VP Capital Trust. The Notes constitute 100 percent 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, Virginia Power 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. NOTE M: PREFERRED STOCK - -------------------------------------------------------------------------------- Dominion Resources is authorized to issue up to 20,000,000 shares of preferred stock; however, no such shares are issued and outstanding. Virginia Power has authorized 10,000,000 shares of preferred stock, $100 liquidation preference. Upon voluntary liquidation, each share is entitled to receive $100 plus accrued dividends. Dividends are cumulative. Virginia Power preferred stock subject to mandatory redemption at December 31, 1996 was as follows: - ------------------------------------------- Shares Series Outstanding $5.58 400,000(1)(2) $6.35 1,400,000(1)(3) - ------------------------------------------- Total 1,800,000 =========================================== (1) Shares are non-callable prior to redemption. (2) All shares to be redeemed on 3/1/00. (3) All shares to be redeemed on 9/1/00. During the years 1994 through 1996, the following shares were redeemed: - ------------------------------------------------------------ Year Dividend Shares 1995 $7.30 417,319 1994 7.30 37,681 ============================================================ At December 31, 1996 Virginia Power preferred stock not subject to mandatory redemption, $100 liquidation preference, is listed in the table below. - -------------------------------------------------------------------- Issued and Entitled Per Outstanding Share Upon Dividend Shares Redemption $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(1) 6.98 600,000 105.00(2) MMP 1/87 series(3) 500,000 100.00 MMP 6/87 series(3) 750,000 100.00 MMP 10/88 series(3) 750,000 100.00 MMP 6/89 series(3) 750,000 100.00 MMP 9/92A(3) 500,000 100.00 MMP 9/92B(3) 500,000 100.00 - -------------------------------------------------------------------- TOTAL 5,090,140 ==================================================================== (1) Through 7/31/03 and thereafter to amounts declining in steps to $100.00 after 7/31/13. (2) Through 8/31/03 and thereafter to amounts declining in steps to $100.00 after 8/31/13. (3) Money Market Preferred (MMP) dividend rates are variable and are set every 49 days via an auction. The weighted average rates for these series in 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 ============================================================================= NOTE N: RETIREMENT PLAN, POSTRETIREMENT BENEFITS AND OTHER BENEFITS - -------------------------------------------------------------------------------- Retirement Plan: Dominion Resources' Retirement Plan (the Plan) covers virtually all employees of Dominion Resources and its subsidiaries. The benefits are based on years of service and the employee's compensation. Dominion Resources' funding policy is to contribute annually an amount that is in accordance with the provisions of the Employment Retirement Income Security Act of 1974. 44 Dominion Resources, Inc. The components of the provision for net periodic pension expense were as follows: - ------------------------------------------------------------------- Year ending December 31, 1996 1995 1994 (millions) Service cost--benefits earned during the year $ 26.7 $ 23.4 $ 24.6 Interest cost on projected benefit obligation 61.1 54.9 46.3 Actual return on plan assets (63.5) (56.7) (51.3) Net amortization and deferral 1.2 (0.7) 0.1 - ------------------------------------------------------------------- Net periodic pension cost $ 25.5 $ 20.9 $ 19.7 =================================================================== The following table sets forth the Plan's funded status: - ------------------------------------------------------------------------ As of December 31, 1996 1995 (millions) ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS: Accumulated benefit obligation, including vested benefit of 1996-$586.7 and 1995-$540.2 $660.0 $607.4 - ------------------------------------------------------------------------ Projected benefit obligation for service rendered to date $852.2 $767.0 Plan assets at fair value, primarily listed stocks and U.S. bonds 845.0 763.6 - ------------------------------------------------------------------------ Plan assets less than projected benefit obligation (7.2) (3.4) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 40.4 35.7 Unrecognized prior service cost 4.7 5.3 Unrecognized net asset at January 1, being recognized over 16 years beginning in 1986 (21.8) (25.1) - ------------------------------------------------------------------------ Prepaid pension cost included in other assets $ 16.1 $ 12.5 ======================================================================== Significant assumptions used in determining net periodic pension cost and the projected benefit obligation were: - ------------------------------------------------------------------- As of December 31, 1996 1995 Discount rates 8.0% 8.0% Rates of increase in compensation levels 5.0% 5.0% Expected long-term rate of return 9.5% 9.5% =================================================================== Postretirement Benefits: Dominion Resources and its subsidiaries provide retiree health care and life insurance benefits through insurance companies with annual premiums based on benefits paid during the year. From time to time in the past, Dominion Resources and its subsidiaries have changed benefits. Some of these changes have reduced benefits. Under the terms of their benefits plans, the companies reserve the right to change, modify or terminate the plans. Net periodic postretirement benefit expense for 1996 and 1995 was as follows: - ------------------------------------------------------------------- Year ending December 31, 1996 1995 (millions) Service cost $ 12.3 $ 8.9 Interest cost 24.2 21.9 Return on plan assets (16.6) (6.1) Amortization of transition obligation 12.1 12.1 Net amortization and deferral 7.2 0.1 - ------------------------------------------------------------------- Net periodic postretirement benefit expense $ 39.2 $36.9 =================================================================== The following table sets forth the funded status of the plan: - ------------------------------------------------------------------- As of December 31, 1996 1995 (millions) Fair value of plan assets $ 133.0 $ 96.3 Accumulated postretirement benefit obligation: Retirees $ 202.7 $ 211.4 Active plan participants 125.0 99.2 - ------------------------------------------------------------------- Accumulated postretirement benefit obligation 327.7 310.6 Accumulated postretirement benefit obligation in excess of plan assets (194.7) (214.3) Unrecognized transition obligation 194.1 206.2 Unrecognized net experience gain (3.0) 8.6 - ------------------------------------------------------------------- Prepaid (accrued) postretirement benefit cost $ (3.6) $ 0.5 =================================================================== A one percent increase in the health care cost trend rate would result in an increase of $4.8 million in the service and interest cost components and a $35 million increase in the accumulated postretirement benefit obligation. Significant assumptions used in determining the postretirement benefit obligation were: - ----------------------------------------------------------------------------- 1996 1995 Discount rates 8.0% 8.0% Assumed return on plan assets 9.0% 9.0% Medical cost trend rate 8% for first year 9% for first year 7% for second year 8% for second year Scaling down to Scaling down to 4.75% beginning in 4.75% beginning in the year 2001 the year 2001 ============================================================================= Virginia Power 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 accrual in rates, in excess of other postretirement benefits actually paid during the year, are contributed to external benefit trusts under Virginia Power's current funding policy. Other Benefits: In 1994, Virginia Power 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. Virginia Power capitalized $25.9 million based upon regulatory precedent and expensed $64.2 million. 45 Dominion Resources, Inc. NOTE O: RESTRUCTURING - -------------------------------------------------------------------------------- In March 1995, Virginia Power announced the implementation phase of its Vision 2000 program. During this phase, Virginia Power began reviewing operations with the objective of outsourcing services where economical and appropriate, and re-engineering the remaining functions to streamline operations. The re-engineering process is resulting in outsourcing, decentralization, reorganization and downsizing for portions of Virginia Power's operations. As part of this process, Virginia Power is reevaluating its utilization of capital resources in its operations 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 Virginia Power may incur additional charges for severance in 1997, the amounts are not expected to be significant. In 1995, Virginia Power established a comprehensive involuntary severance package for salaried employees who may no longer be employed as a result of these initiatives. Virginia Power is 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 are being 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 Virginia Power'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 a charge to operations in 1996 and 1995 of $49.2 million and $51.2 million, respectively. At December 31, 1996, 1,266 employees have been terminated and severance payments totaling $45 million have been paid. Virginia Power estimates that these staffing reductions will result in annual savings in the range of $62 million to $90 million for its restructured operations. 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 Virginia Power's Energy Services Business Unit. 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, Virginia Power 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. Virginia Power also negotiated settlements with several other parties to terminate their rights to sell power to Virginia Power. 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, Virginia Power estimated that its annual future purchased power costs, including energy payments, would be reduced by up to $5.8 million and $147 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 Virginia Power's North Anna Power Station. As a result of reevaluating the handling of low level radioactive waste, Virginia Power concluded that the facility should not be completed due to the additional capital investment required, decreased Virginia Power 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 Virginia Power's cost of operations and will be considered in the cost of service information filed by Virginia Power in response to the Virginia Commission's Order issued on November 12, 1996. In this increasingly competitive environment, Virginia Power 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 Virginia Power in anticipation of competition, but it also reflects Virginia Power's commitment to mitigate its exposure to potentially strandable costs. As of December 31, 1996, Virginia Power 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, Virginia Power 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 utility's service fleet, accompanied by digitized mapping of Virginia Power's service territory. Furthermore, technological changes are being made to enhance the utility's ability to handle customer calls during power outages. In order to increase service reliability, Virginia Power has initiated both local and regional distribution line improvement projects. 46 Dominion Resources, Inc. NOTE P: DERIVATIVE TRANSACTIONS - -------------------------------------------------------------------------------- Dominion Resources uses derivative financial instruments for the purposes of managing interest rate, natural gas price and foreign currency risks. The company does not hold or issue derivative financial instruments for trading purposes. Natural Gas Risks: Dominion Energy enters into natural gas options, collars, and swaps as a hedge against fluctuations in natural gas prices existing for future production periods. Dominion Energy addresses market risk by selecting natural gas-based financial instruments whose historical value fluctuations correlate strongly with those of the item being hedged. Revenues received from such contracts which are held until expiration are recognized in the corresponding production month for the contract. Dominion Energy has some risk since the price received for the underlying production may exceed the reference price included in the hedging transaction. As of December 31, 1996, Dominion Energy has entered into various natural gas put options, collars and swap contracts as hedges expiring on various dates until March 1998 on approximately 10 Bcf of natural gas and the weighted average put price per MMBTU of natural gas was $1.94. At December 31, 1995, Dominion Energy had entered into natural gas put option contracts as hedges extending through March 31, 1996 on approximately 5 Bcf of natural gas and the weighted average put price per MMBTU of natural gas was $1.98. Foreign Currency Risks: On November 13, 1996, Dominion Resources purchased a call option at a cost of $9.8 million (face amount, (pound)1.35 billion) to stabilize the amount of its U.S. dollar investment in its acquisition of East Midlands Electricity plc, an English utility. At December 31, 1996, the unrealized gain recorded in net income was $2.2 million. The option expires on May 12, 1997. In 1989, Dominion Energy obtained a loan that was denominated in Japanese yen. Immediately upon obtaining the loan, Dominion Energy entered into a currency exchange agreement in order to exchange the yen for $55 million. At December 31, 1995, Dominion Energy had an unrealized translation currency loss of $13.6 million and the currency exchange rate was one U.S. dollar equaled 103.43 Japanese yen. On February 15, 1996, Dominion Energy repaid the loan in its entirety without incurring any foreign translation loss. Interest Rate Risks: In 1996, Dominion Capital began using interest rate swaps to manage interest rate costs. The purpose of the transactions was to effectively convert floating rate debt to a fixed rate obligation. The face or notional amount of the interest rate swaps at December 31, 1996 was $30 million. The difference between the amounts paid or received on interest rate swaps in 1996 was recognized as an adjustment to interest expense. Credit risk exists to the extent that the counterparties to the swap do not perform their obligation under the agreements. Saxon Mortgage, a subsidiary of Dominion Capital, enters into forward delivery contracts, financial futures and options contracts for the purpose of reducing exposure to the effects of changes in interest rates on mortgage loans which the company has funded or has committed to fund. Gains and losses on such contracts relating to mortgage loans are recognized when the loans are sold. If the counterparties to the hedging transactions are unable to perform according to the terms of the contracts, the company may incur losses upon selling the mortgage loans at prevailing prices. As of December 31, 1996, Saxon has outstanding liabilities related to its hedging positions with certain counter parties of $0.8 million. The deferred hedging losses, net, at December 31, 1996 were immaterial. Interest rate swaps were utilized in 1996 at a number of the cogeneration projects in which Dominion Energy maintains 50% ownership interests. The purpose of theses transactions was to reduce the risk of interest rate fluctuations by effectively converting variable rate debt to a fixed rate liability. NOTE Q: COMMITMENTS AND CONTINGENCIES - -------------------------------------------------------------------------------- As the result of issues generated in the course of daily business, the company is involved in legal, tax and regulatory proceedings before various courts, regulatory commissions and governmental agencies. While some of the proceedings involve substantial amounts of money, management believes that the final disposition of these proceedings will not have an adverse material effect on operations or the financial position of the company. VIRGINIA POWER Federal Energy Regulatory Commission Audit: FERC has conducted a compliance audit of Virginia Power's financial statements for the years 1990 to 1994. Virginia Power has received a preliminary audit report from FERC, in which certain compliance exceptions were noted. Virginia Power 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 Virginia Power's financial position or results of operations. Construction Program: Virginia Power has made substantial commitments in connection with its construction program and nuclear fuel expenditures, which are estimated to total $529.2 million (excluding AFC) for 1997. Virginia Power 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, Virginia Power has entered into contracts for the long-term purchase of capacity and energy from other utilities, qualifying facilities and independent power producers. As of December 31, 1996, there were 65 nonutility generating facilities under contract to provide Virginia Power 3,524 megawatts of dependable summer capacity. Of these, 62 projects (aggregating 3,509 megawatts) were 47 Dominion Resources, Inc. operational at the end of 1996, with the remaining three projects to become operational before 1999. The following table shows the minimum commitments as of December 31, 1996 for power purchases from utility and nonutility suppliers. Commitments - ------------------------------------------------------------------ (millions) Capacity Other 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 After 2001 10,098.0 788.0 - ------------------------------------------------------------------ Total $13,900.1 $1,755.7 - ------------------------------------------------------------------ Present value of the total $ 6,147.2 $ 986.7 ================================================================== In addition to the commitments listed above, under some contracts, Virginia Power may purchase, at its option, additional power as needed. Payments for purchased power (including economy, emergency, 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 discussion of Virginia Power's efforts to restructure certain purchased power contracts, see Note O to the Consolidated Financial Statements. Fuel Purchase Commitments: Virginia Power's estimated fuel purchase commitments for the next five years for system generation are as follows: 1997-$326 million; 1998-$274 million; 1999-$194 million; 2000-$157 million; and 2001-$110 million. Environmental Matters: Environmental costs have been historically recovered through the ratemaking process; however, should material costs be incurred and not recovered through rates, Virginia Power's results of operations and financial condition could be adversely impacted. The EPA has identified Virginia Power 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. Virginia Power's proportionate share of the costs 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, Virginia Power accrued a reserve of $1.7 million to meet its obligations at these two sites. Based on a financial assessment of the PRPs involved at these sites, Virginia Power has determined that it is probable that the PRPs will fully pay the costs apportioned to them. Virginia Power and Dominion Resources, along with Consolidated Natural Gas, have remedial action responsibilities remaining at two coal tar sites. Virginia Power 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 Virginia Power. The plaintiffs are seeking compensatory damages of $12 million and punitive damages of $6 million. It is too early in the cases for Virginia Power to predict their outcome. Virginia Power generally seeks to recover its costs associated with environmental remediation from third-party insurers. At December 31, 1996 pending claims were not recognized as an asset or offset against recorded obligations. Nuclear 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. Virginia Power has purchased $200 million of coverage from 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, Virginia Power could be assessed up to $81.7 million (including a 3 percent insurance premium tax for Virginia) for each of its four licensed reactors not to exceed $10.3 million (including a 3 percent 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). Virginia Power's maximum retrospective assessment is approximately $12.5 million (including a 3 percent insurance premium tax for Virginia). Virginia Power's current level of property insurance coverage ($2.55 billion for North Anna and $2.4 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. Virginia Power'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 Virginia Power'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, Virginia Power has the financial responsibility. 48 Dominion Resources, Inc. Virginia Power purchases insurance from NEIL to cover the cost of replacement power during the prolonged outage of a nuclear unit due to direct physical damage of the unit. Under this 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 a joint 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. DOMINION RESOURCES Under the terms of an investment agreement, Dominion Resources must provide contingent equity support to Dominion Energy in the amount of $52.6 million. Management believes the possibility of such support to Dominion Energy is remote. DOMINION ENERGY Dominion Energy has general partnership interests in certain of its energy ventures. Accordingly, Dominion Energy may be called upon to fund future operation of these investments to the extent operating cash flow is insufficient. In addition, Dominion Energy may be required to make payments under certain agreements on behalf of its energy ventures. As of December 31, 1996 no payments have been required. DOMINION CAPITAL At December 31, 1996, Saxon Mortgage had commitments to fund mortgage loans of approximately $525 million. Saxon had a commitment to sell approximately $7 million of mortgage loans to the trust of its last securitization. This commitment expired on February 5, 1997. NOTE R: ACQUISITIONS - -------------------------------------------------------------------------------- In May 1996, Dominion Capital acquired from Resource Mortgage Capital its single-family mortgage operations for $67 million. The resulting $56.3 million of purchase price in excess of assets acquired is being amortized over 25 years. The transaction has been recorded using the purchase method of accounting. In August 1996, Dominion Energy, through wholly-owned subsidiaries, acquired a 60 percent ownership and management interest in EGENOR for $228.2 million. EGENOR is a power generation company providing electricity to Peru's northern region. This transaction has been accounted for using the purchase method of accounting. NOTE S: SUBSEQUENT EVENTS - -------------------------------------------------------------------------------- Effective January 1997, Dominion Energy acquired the stock of Wolverine Gas and Oil Company and related entities (Wolverine) in exchange for stock in Dominion Resources. Wolverine is an oil and gas production and operating company headquartered in Grand Rapids, Michigan. The transaction will be recorded using the pooling of interest method. Dominion Resources announced in November 1996, that its indirect subsidiary DR Investments (U.K.) PLC had made an offer to purchase East Midlands for approximately $2.2 billion. East Midlands is a regional electricity company based in the Nottingham area of the United Kingdom. Dominion Resources expects the transaction to be completed during the first quarter of 1997. NOTE T: BUSINESS SEGMENTS - -------------------------------------------------------------------------------- The company's principal business segments include Virginia Power, Dominion Energy, Dominion Capital and corporate. The company's business segment information was: BUSINESS SEGMENTS - ----------------------------------------------------------------------- 1996 1995 1994 (in millions, except Identifiable Assets amounts) REVENUE Virginia Power $4,382.6 $4,350.4 $4,170.8 Dominion Capital 186.3 111.8 99.2 Dominion Energy 267.1 182.3 210.6 Corporate 20.1 19.3 19.3 Eliminations (13.8) (12.1) (8.8) - ----------------------------------------------------------------------- Consolidated $4,842.3 $4,651.7 $4,491.1 - ----------------------------------------------------------------------- INCOME FROM OPERATIONS Virginia Power $1,003.2 $ 971.3 $ 951.3 Dominion Capital 80.2 49.5 32.7 Dominion Energy 33.3 31.2 62.2 Corporate 1.5 (11.9) 0.8 Eliminations (13.8) (12.1) (8.8) - ----------------------------------------------------------------------- Consolidated $1,104.4 $1,028.0 $1,038.2 - ----------------------------------------------------------------------- (billions) IDENTIFIABLE ASSETS Virginia Power $ 11.8 $ 11.8 $ 11.6 Dominion Capital 1.1 0.9 0.8 Dominion Energy 1.6 1.1 0.9 Corporate 5.6 5.0 4.9 Eliminations (5.2) (4.9) (4.6) - ----------------------------------------------------------------------- Consolidated $ 14.9 $ 13.9 $ 13.6 - ----------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION Virginia Power $ 536.4 $ 503.5 $ 480.7 Dominion Capital 6.8 3.0 2.8 Dominion Energy 69.9 42.6 47.7 Corporate 2.1 1.9 1.9 - ----------------------------------------------------------------------- Consolidated $ 615.2 $ 551.0 $ 533.1 - ----------------------------------------------------------------------- CAPITAL EXPENDITURES Virginia Power $ 484.0 $ 577.5 $ 660.9 Dominion Capital 17.7 1.9 0.3 Dominion Energy 176.0 25.1 39.8 Corporate 1.3 0.4 0.3 - ----------------------------------------------------------------------- Consolidated $ 679.0 $ 604.9 $ 701.3 ======================================================================= 49 Dominion Resources, Inc. NOTE U: QUARTERLY FINANCIAL AND COMMON STOCK DATA (UNAUDITED) - -------------------------------------------------------------------------------- The following amounts reflect all adjustments, consisting of only normal recurring accruals (except as disclosed below), necessary in the opinion of Dominion Resources' management for a fair statement of the results for the interim periods. QUARTERLY FINANCIAL AND COMMON STOCK DATA--UNAUDITED - ------------------------------------------------------------------ 1996 1995 (in millions, except per share amounts) REVENUES First Quarter $1,239.3 $1,129.3 Second Quarter 1,121.0 1,042.8 Third Quarter 1,286.7 1,345.0 Fourth Quarter 1,195.3 1,134.6 - ------------------------------------------------------------------ Year $4,842.3 $4,651.7 ================================================================== INCOME BEFORE PROVISION FOR FEDERAL INCOME TAXES First Quarter $ 220.3 $ 151.9 Second Quarter 138.5 107.3 Third Quarter 240.4 295.1 Fourth Quarter 85.4 52.8 - ------------------------------------------------------------------ Year $ 684.6 $ 607.1 ================================================================== NET INCOME First Quarter $ 150.2 $ 108.5 Second Quarter 94.2 78.1 Third Quarter 162.2 197.9 Fourth Quarter 65.5 40.5 - ------------------------------------------------------------------ Year $ 472.1 $ 425.0 ================================================================== EARNINGS PER SHARE First Quarter $ 0.85 $ 0.63 Second Quarter 0.53 0.45 Third Quarter 0.91 1.14 Fourth Quarter 0.36 0.23 - ------------------------------------------------------------------ Year $ 2.65 $ 2.45 ================================================================== DIVIDENDS PER SHARE First Quarter $ 0.645 $ 0.645 Second Quarter 0.645 0.645 Third Quarter 0.645 0.645 Fourth Quarter 0.645 0.645 - ------------------------------------------------------------------ Year $ 2.58 $ 2.58 ================================================================== STOCK PRICE RANGE First Quarter 44 3/8-37 5/8 39 1/4-35 1/2 Second Quarter 40 1/4-37 38 5/8-35 7/8 Third Quarter 40-36 7/8 37 7/8-34 7/8 Fourth Quarter 41-37 1/8 41 5/8-37 5/8 - ------------------------------------------------------------------ Year 44 3/8-36 7/8 41 5/8-34 7/8 ================================================================== As part of the Vision 2000 program (see Note O), Virginia Power 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 incurred directly as a result of the Vision 2000 initiatives. The following chart shows the quarterly impact of restructuring charges on expense and balance available for common stock for 1996 and 1995. VIRGINIA POWER - ------------------------------------------------------------------ Balance Available Quarter Expense For Common Stock (millions) 1996 1st $ 5.4 $ 3.5 2nd 19.3 12.5 3rd 4.6 3.0 4th 62.3 40.6 1995 1st $ 3.5 $ 2.3 2nd 1.8 1.1 3rd 30.6 19.9 4th 82.0 53.3 ================================================================== In the fourth quarter of 1995, Dominion Resources incurred at the holding company restructuring expenses amounting to $3.6 million and other charges amounting to $8.8 million. The other charges included litigation costs which were incurred to resolve the shareholder claims made in 1994. The impact of the restructuring expenses reduced net income by $2.3 million and the other charges reduced net income by $5.8 million. During December 1995, Dominion Energy settled certain outstanding disputes with a supplier and renegotiated the terms of related long-term supply contracts. As a result, the fourth quarter earnings include gains from these changes which total $6.2 million, net of tax. In June 1995, Dominion Resources Black Warrior Trust units were sold to third parties amounting to a gain of $5.4 million, net of tax. These were the remaining ownership units of a trust established in June 1994 when Dominion Energy transferred from Dominion Black Warrior Basin to Dominion Resources Black Warrior Trust a 65 percent overriding royalty interest in coal seam gas properties. 50 Dominion Resources, Inc. Report of Management's Responsibilities The management of Dominion Resources, Inc. is responsible for all information and representations contained in the Consolidated Financial Statements and other sections of the annual report. 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 annual report 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 Dominion Resources' and its subsidiaries' 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 objectives. The Consolidated Financial Statements have been audited by Deloitte & Touche LLP, independent auditors, whose designation by the Board of Directors was ratified by the shareholders. Their audits were conducted in accordance with generally accepted auditing standards and include a review of Dominion Resources' and its subsidiaries' accounting systems, procedures and internal controls, and the performance of tests and other auditing procedures sufficient to provide reasonable assurance that the Consolidated Financial Statements are not materially misleading and do not contain material errors. The Audit Committees of the Boards of Directors, composed entirely of directors who are not officers or employees of Dominion Resources or its subsidiaries, meet periodically with independent auditors, the internal auditors and management to discuss auditing, internal accounting control and financial reporting matters and to ensure that each is properly discharged. Both independent auditors and the internal auditors periodically meet alone with the Audit Committees and have free access to the Committees at any time. Management recognizes its responsibility for fostering a strong ethical climate so that Dominion Resources' affairs are conducted according to the highest standards of personal corporate conduct. This responsibility is characterized and reflected in Dominion Resources' Code of Ethics, which addresses potential conflicts of interest, compliance with all domestic and foreign laws, the confidentiality of proprietary information, and full disclosure of public information. Dominion Resources, Inc. /s/ Thos. E. Capps /s/ James L. Trueheart Thos. E. Capps James L. Trueheart CHAIRMAN, PRESIDENT AND VICE PRESIDENT AND CONTROLLER CHIEF EXECUTIVE OFFICER 51 Dominion Resources, Inc. REPORT OF INDEPENDENT AUDITORS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF DOMINION RESOURCES, INC. We have audited the accompanying consolidated balance sheets of Dominion Resources, Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of income and retained earnings and of cash flows for each of the three years in the period ended December 31, 1996. These Consolidated Financial Statements are the responsibility of the company's management. Our responsibility is to express an opinion on these Consolidated 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 consolidated financial position of Dominion Resources, Inc. and subsidiaries as of 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. /s/ Deloitte & Touche LLP Richmond, Virginia February 11, 1997 [Deloitte & Touche LLP Logo] 52 Dominion Resources, Inc.
SELECTED CONSOLIDATED FINANCIAL DATA - ---------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 (millions, except per share amounts and percentages) Revenues and other income $ 4,842.3 $ 4,651.7 $ 4,491.1 $ 4,433.9 $ 3,791.1 $ 3,785.7 Income before cumulative effect of a change in accounting principle $ 472.1 $ 425.0 $ 478.2 $ 516.6 $ 428.9 $ 459.9 Cumulative effect on prior years of changing the method of accounting for income taxes 15.6 - ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 472.1 $ 425.0 $ 478.2 $ 516.6 $ 444.5 $ 459.9 ================================================================================================================================== Total assets $ 14,905.06 $ 13,903.3 $ 13,562.2 $ 13,349.5 $ 12,615.1 $ 11,201.4 Long-term debt, preferred stock subject to mandatory redemption and preferred securities of a subsidiary trust $ 5,042.6 $ 4,926.9 $ 4,934.2 $ 4,976.7 $ 4,667.4 $ 4,668.2 Common stock data: Earnings per share before cumulative effect of a change in accounting principle $ 2.65 $ 2.45 $ 2.81 $ 3.12 $ 2.66 $ 2.94 Cumulative effect on prior years of changing the method of accounting for income taxes .10 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings per share $ 2.65 $ 2.45 $ 2.81 $ 3.12 $ 2.76 $ 2.94 ================================================================================================================================== Dividends paid per share $ 2.58 $ 2.58 $ 2.55 $ 2.48 $ 2.40 $ 2.32 Market value per share at year-end 38.50 41.25 36.00 45.38 39.50 38.00 Book value per share at year-end 27.17 26.88 26.60 26.38 25.21 24.41 Return on equity--average 9.8% 9.2% 10.6% 12.2% 11.2% 12.4% Payout ratio 97.4% 105.3% 90.7% 79.5% 87.0% 78.9% Price/earnings ratio at year-end 14.5 16.8 12.8 14.5 14.3 12.9 Outstanding shares of common stock --average 178.3 173.8 170.3 165.7 161.1 156.5 --actual (year-end) 181.2 176.4 172.4 168.1 163.8 158.8 Capitalization:* Long-term debt $ 4,533.4 $ 4,348.9 $ 4,384.1 $ 4,219.5 $ 4,111.8 $ 4,025.6 Preferred securities 135.0 135.0 Preferred stock 689.0 689.0 816.1 819.5 845.6 761.7 Common equity 4,924.4 4,742.0 4,586.1 4,435.9 4,131.3 3,877.8 - ---------------------------------------------------------------------------------------------------------------------------------- Total capitalization $ 10,281.8 $ 9,914.9 $ 9,786.3 $ 9,474.9 $ 9,088.7 $ 8,665.1 ================================================================================================================================== *Capitalization excludes: Nonrecourse-nonutility financing $ 945.1 $ 684.7 $ 727.1 $ 726.8 $ 593.4 $ 545.7 Short-term debt $ 378.2 $ 236.6 $ 146.0 $ 262.8 $ 125.2 $ 154.0 Property, plant and equipment: Electric utility $ 14,506.8 $ 14,201.6 $ 13,896.6 $ 13,376.1 $ 12,930.6 $ 12,397.7 Nuclear fuel 843.8 836.0 817.2 814.1 754.6 766.4 Other 1,465.2 939.8 701.6 724.5 451.4 213.4 - ---------------------------------------------------------------------------------------------------------------------------------- Total 16,815.8 15,977.4 15,415.4 14,914.7 14,136.6 13,377.5 Less accumulated depreciation, depletion and amortization 6,306.4 5,655.1 5,170.0 4,802.1 4,459.5 4,110.5 - ---------------------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment $ 10,509.4 $ 10,322.3 $ 10,245.4 $ 10,112.6 $ 9,677.1 $ 9,267.0 ================================================================================================================================== CWIP included in property, plant and equipment $ 180.1 $ 512.1 $ 828.2 $ 913.1 $ 840.9 $ 736.1 ==================================================================================================================================
EX-21 8 EX-21 DOMINION RESOURCES, INC. SUBSIDIARIES OF THE REGISTRANT JURISDICTION OF NAME UNDER WHICH NAME INCORPORATION BUSINESS IS CONDUCTED Virgina Power in Virginia Virginia Electric and and North Carolina Power Power Company Virginia in North Carolina Dominion Energy, Inc. Virginia Dominion Energy, Inc. Dominion Capital, Inc. Virginia Dominion Capital, Inc. East Midlands Electricity plc United Kingdom East Midlands Electricity plc EX-23 9 EX-23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement File No. 333-02769 of Dominion Resources, Inc. on Form S-3 and Registration Statement File No. 33-62705, File No. 333-02733 and File No. 333-09167 of Dominion Resources, Inc. on Forms S-8 of our report dated February 11, 1997, appearing in and incorporated by reference in the Annual Report on Form 10-K of Dominion Resources, Inc. for the year ended December 31, 1996. /s/ Deloitte & Touche LLP - ---------------------------------- DELOITTE & TOUCHE LLP Richmond, Virginia March 24, 1997 EX-27 10 EX-27
UT 1,000,000 12-MOS DEC-31-1996 DEC-31-1996 PER-BOOK 9,434 1,075 1,321 1,141 0 14,906 3,471 16 1,437 4,924 180 509 4,728 378 0 0 751 0 0 0 3,436 14,906 4,842 219 3,731 3,738 1,104 10 1,114 430 472 36 0 460 0 1,032 2.65 2.65
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