-----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, Uxq59zxYMI+Gc/f3Ol/GfA11S9RYzdqMcy0EuLvKJ3Kmip/X0tqZOr6VQgPnusoM X2V0Q5XkPlEfMk3MvLTkCQ== 0000916641-98-000261.txt : 19980323 0000916641-98-000261.hdr.sgml : 19980323 ACCESSION NUMBER: 0000916641-98-000261 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NONE 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-K SEC ACT: SEC FILE NUMBER: 001-08489 FILM NUMBER: 98570163 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-K 1 DOMINION RESOURES, INC. 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- Form 10-K --------------- (Mark One) ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 or ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from --------- to --------- Commission file number 1-8489 ------------------------- Dominion Resources, Inc. (Exact name of registrant as specified in its charter)
VIRGINIA 54-1229715 (State or other jurisdiction of (IRS employer identification no.) incorporation or organization) 901 East Byrd Street Suite 1700 Richmond, Virginia 23219-6111 (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 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. [ ] The aggregate market value of voting stock held by nonaffiliates of the registrant was $7,767,853,323 at February 27, 1998, based on the closing price of the Common Stock on such date, as reported 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, 1998 Common Stock, no par value 194,805,099
DOCUMENTS INCORPORATED BY REFERENCE: (a) Portions of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997 are incorporated by reference in Parts I, II and IV hereof. (b) Portions of the 1998 Proxy Statement, dated March 11, 1998, are incorporated by reference in Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DOMINION RESOURCES, INC.
Item Page Number Number - ---------- ------- PART I 1. Business The Company .............................................................................. 1 Dominion Capital .......................................................................... 1 Dominion Energy ........................................................................... 1 East Midlands ............................................................................. 1 Distribution Business ..................................................................... 2 Supply Business ........................................................................... 3 Competition ............................................................................... 3 Environmental Regulation .................................................................. 4 Virginia Power ............................................................................ 4 Competition and Strategic Initiatives ..................................................... 4 Regulation ................................................................................ 5 Rates ..................................................................................... 7 Sources of Power .......................................................................... 10 Interconnections .......................................................................... 12 Capital Requirements and Financing Program ............................................... 14 2. Properties ................................................................................ 14 3. Legal Proceedings ......................................................................... 14 4. Submission of Matters to a Vote of Security Holders ....................................... 14 Executive Officers of the Registrant ...................................................... 14 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 15 6. Selected Financial Data ................................................................... 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 16 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 16 8. Financial Statements and Supplementary Data ............................................... 16 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 16 PART III 10. Directors and Executive Officers of the Registrant ........................................ 16 11. Executive Compensation .................................................................... 16 12. Security Ownership of Certain Beneficial Owners and Management ............................ 16 13. Certain Relationships and Related Transactions ............................................ 16 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 17
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, 1997, Dominion Resources owned directly or indirectly all of the outstanding common stock of its subsidiaries: Dominion Capital, Inc. (Dominion Capital); Dominion Energy, Inc. (Dominion Energy); East Midlands Electricity plc (East Midlands); and Virginia Electric and Power Company (Virginia Power), its largest subsidiary. Dominion Resources is currently exempt from registration as a holding company under the Public Utility Holding Company Act of 1935 (the 1935 Act). Dominion Resources and its subsidiaries had 15,458 full-time employees as of December 31, 1997. Dominion Capital 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 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 Partners, LP, a merchant banking enterprise for emerging independent oil and natural gas producers; First Dominion Capital LLC, an integrated merchant bank and asset management business; a 50% limited partnership interest in a Louisiana hydroelectric project; 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 subsidiaries involved in planned community real estate development and management, a commercial real estate management company and investments in affordable housing. Dominion Energy Dominion Energy, established as a subsidiary of Dominion Resources in 1987, is active in the nonutility electric power generation businesses outside the territory served by Virginia Power and the development, exploration and operation of oil and natural gas reserves. Dominion Energy is involved in power projects in six states, Argentina, Bolivia, Belize and Peru, which total approximately 2,561 Mw. Domestic power projects in operation throughout 1997 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 1997 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 net proved oil and natural gas reserves in such areas totaling approximately 461 billion cubic feet (BCFE). In 1997, Dominion Energy added approximately 119 BCFE of natural gas reserves. Production from Dominion Energy's reserve holdings in 1997 totaled approximately 59 BCFE. On March 29, 1996, a subsidiary of Dominion Energy, Kincaid Generation, L.L.C. (LLC) entered into an asset sale agreement with Commonwealth Edison Company (ComEd) to purchase ComEd's 1,108 Mw coal-fired Kincaid Power 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 sale was completed on February 27, 1998. On August 1, 1997, Dominion Energy sold to Chilgener S.A. 49% of its interest in Inversiones Dominion Peru S.A., a Peruvian company which holds a 60% interest in EGENOR S.A., a 405 megawatt electric generation business in which Dominion Energy had invested in Peru. East Midlands Dominion Resources purchased East Midlands, the principal operating subsidiary of our UK holding company, Dominion UK Holding, Inc. (Dominion UK) in the first quarter of 1997. East Midlands' principal businesses are the distribution 1 of electricity and the supply of electricity to approximately 2.3 million customers in the East Midlands region of the United Kingdom. East Midlands' primary business is its distribution business which is a regulated monopoly and its electricity supply business. Together these businesses produced substantially all of East Midlands' consolidated operating income. East Midlands is also focused on taking advantage of the opportunity in the domestic gas supply business. East Midlands' Franchise Area (or service area) has a resident population of over five million and covers approximately 6,200 square miles extending from Coventry to the Lincolnshire coast and from Milton Keynes to Chesterfield of which the southernmost part is less than 60 miles from London Dominion UK, through wholly-owned subsidiaries, holds an 80% interest in Corby Power Limited (Corby), a 350 MW gas-fired power station. Corby was commissioned in 1994 and is one of the earliest UK independent power generation projects in the deregulated UK. Distribution Business East Midlands owns, manages and operates the electricity distribution network within its Franchise Area. The primary activity of the distribution business is the receipt of electricity from the national grid transmission system and its distribution to end users connected to East Midlands' power lines. Because East Midlands is the exclusive holder of a Public Electricity Supply (PES) license for its Franchise Area, virtually all electricity supplied (whether by East Midland's supply business or by other suppliers) to consumers in East Midland's Franchise Area is transported through East Midlands' distribution network. As a holder of a PES license, East Midlands is subject to a price control regulatory framework that retains economic incentives to increase the number of units of electricity distributed and to operate in a more cost-efficient manner. In addition to the network division, East Midlands' distribution business also includes construction and metering divisions. The construction division provides construction, standby and maintenance services to the network as well as performing similar services for certain third-parties. East Midlands' metering division focuses on the ownership and management of metering and related assets as well as data collection and transmission service. While portions of construction and metering businesses are gradually opening to competition, the network division, which generates over 80% of the distribution business' profits, is expected to remain a regulated monopoly subject to price regulation. Distribution Facilities Electricity is transported across the national grid transmission system (the high voltage transmission system in UK that carries the generated electricity in bulk from power stations to regional and local distribution systems) at 400kv or 275kv to 14 grid supply points within East Midlands' distribution network, where East Midlands transforms the voltage to 132kv for entry into East Midlands' distribution system. Electricity is also transported to one national grid supply point located in a neighboring Regional Electric Companies (REC) franchise area, which is connected to East Midlands' distribution system by overhead lines and underground cables. Substantially all electricity which enters East Midlands' system is received at these 15 grid supply points. East Midlands' distribution facilities also include approximately:
Number --------- Transformers: 132 kv/lower voltages ............................... 183 33 kv/ll kv or 6/6 kv ............................... 675 ll kv or 6.6 kv/lower voltages (including 22,165 pole mounted transformers) ............................. 37,913 Substations: 132 kv/33 kv ........................................ 85 33 kv/ll kv or 6.6 kv ............................... 368 ll kv or 6.6 kv/415 v or 240 v ...................... 15,689
Substantially all substations are owned and the balance are leased under arrangements which will not expire for 10 years. 2 Supply Business East Midlands' supply business consists of selling electricity to end users, purchasing electricity primarily from the Pool and arranging for its distribution to those end users. The Pool is the wholesale trading market that was established at the time of privatization (1990) for bulk trading of electricity in UK between generators and suppliers. Basically all electricity generated in UK must be sold and purchased through the Pool. The Pool does not buy or sell electricity. East Midlands' supply business supplies Franchise Supply Customers and Non-Franchise Supply Customers and is further developing its gas business to supply domestic and business customers. East Midlands currently supplies gas to approximately 6,000 customers and has contracted to supply gas to more than 80,000 customers. Franchise Supply Market East Midlands holds a PES License under which it currently has the exclusive right to supply electricity to Franchise Supply Customers, who have a peak demand of less than 100kW, within its Franchise Area. At the time that the electricity industry was privatized, "Franchise Supply Customers" included all customers whose supply peak demand was less than 1MW. The 1MW threshold was reduced to 100 kW on April 1, 1994. The exclusive right to supply Franchise Supply Customers is currently scheduled to be phased in over a 6 month period beginning June 1998 and ending in December 1998. On completion of this phase-in period, there will be no Franchise Supply Customers and all supply customers will have the ability to choose their electricity supplier. Supply prices of electricity from Franchise Supply Customers are based on the Supply Price Control Formula, whereby certain limits are placed on East Midlands as to the prices it can charge customers for the supply of electricity. From April 1, 1998 there will be a revised Supply Price Control Formula in the form of price caps for all residential customers and small business customers. Following the Supply Price Control Review in 1997, the supply prices to franchise customers will reduce by 6.4% from April 1998 and an additional 3% from April 1999. Non-Franchise Supply Market Non-Franchise Supply Customers are currently defined as customers whose peak demand equals or exceeds 100kW. In addition to competing for Non-Franchise Supply Customers in its Franchise Area, East Midlands holds a second tier license to compete with the RECs and other suppliers to provide electricity to Non-Franchise Supply Customers outside its Franchise Area. The market to supply Non-Franchise Supply Customers is fully competitive, with the principal competitors being other RECs and major generators. Non-Franchise Supply Customers are typically supplied through individual 12-month contracts with competitively bid or negotiated prices. Power Purchasing and Risk Management In order to manage its power purchasing risks, the supply business enters into arrangements such as contracts for differences (CFDs) to hedge against Pool price volatility. CFDs are contracts predominantly entered into between generators and suppliers to fix the price of a contracted quantity of electricity over a specific period. Differences between the actual prices set by the Pool and the agreed prices give rise to difference payments between the parties to the particular CFD. At the present time, East Midlands' forecast franchise supply market demand for fiscal 1998 is substantially hedged through various types of agreements, including CFDs. The most common contracts for supply to Non-Franchise Supply customers are for a twelve-month term and contain fixed rates. East Midlands is exposed to two principal-risks associated with such contracts: (a) purchasing price risk (East Midlands' cost of purchased electricity relative to the price East Midlands receives from the supply customer) and (b) load shape risk (the risk associated with a shift in the customer's usage pattern, including absolute amounts demanded and timing of amounts demanded). East Midlands seeks to hedge purchasing price risk through a variety of risk management tools, including management of its supply contract portfolio, CFDs, option arrangements and other means which mitigate risk of future Pool price volatility. Load shape risk is mitigated by paying detailed attention to forecasting demand. Competition The UK electricity industry has changed significantly since 1994, as the UK government has privatized and deregulated the industry. As a result, East Midlands' distribution and supply businesses are subject to varying degrees of competition. 3 On the distribution side of the business, East Midlands' network distribution division is currently a regulated monopoly that does not face direct competition. This division contributes 80% of the distribution business' profits, but could face indirect competition from alternative energy sources such as gas. In addition, the distribution business' metering division faces full competition by the year 2000 and the construction division's work is open to competition from a number of firms. East Midlands' supply business has Franchise and Non-Franchise markets. East Midlands' exclusive right to supply electricity to its Franchise customers is currently scheduled to end over a 6-month phase-in period beginning December 1, 1998. At that time, East Midlands will compete directly with electricity generators and other suppliers of electricity, primarily other PES license holders. The Non-Franchise portion of the business currently competes with those generators and suppliers. Beginning March 27, 1998, the residential gas market will be open to competition in the East Midlands franchise region. Environmental Regulation East Midlands' businesses are subject to numerous regulatory requirements with respect to the protection of the environment. The Electricity Act of 1989 obligates the UK Secretary of State for Trade and Industry to take into account the effect of electricity generation, transmission and supply activities upon the environment in approving applications for the construction of generating facilities and the location of overhead power lines. The Electricity Act requires East Midlands to adhere to such guidelines when it formulates proposals for development. East Midlands is required to mitigate any effect its proposals may have on the environment and may be required to carry out an environmental assessment when it intends to construct overhead lines. East Midlands also has produced an Environmental Policy Statement which sets out the manner in which it intends to comply with its obligations under the Electricity Act. The Environmental Protection Act 1990 addresses waste management issues and imposes certain obligations and duties on companies which handle and dispose of waste. Some of East Midlands' distribution activities produce waste, but Dominion Resources believes East Midlands is in compliance with applicable standards. Virginia Power 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. Virginia Power has retail customers (including governmental agencies) and wholesale customers such as rural electric cooperatives, power marketers and municipalities and serves more than 80% of Virginia's population. Virginia Power has certificates of convenience and necessity from the State Corporation Commission of Virginia (the Virginia Commission) for service in all territories 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. The electric utility industry in the United States is undergoing an evolutionary change toward less regulation and more competition. To meet the challenges of this new competitive environment, Virginia Power has developed a broad array of "non-traditional" product and service offerings from its operating business units and subsidiaries: o Energy Services -- offering electric energy and capacity in the emerging wholesale market as well as natural gas and other energy-related products and services; o Fossil & Hydro -- targeting process type industries, such as chemical, paper, plastics and petroleum to become a service provider of instrumentation equipment; o Nuclear Services -- offering management and operations services to other electric utilities; o Commercial Operations -- providing power distribution related services, including transmission and distribution, engineering and metering services to other gas, water and electric utilities; and o Telecommunications -- offering telecommunications services through the Company's existing fiber-optic network. Competition and Strategic Initiatives A number of developments in the United States are causing a trend toward less regulation and more competition in the electric utility industry. This is evidenced by legislative and regulatory action at both the federal and state levels. To the extent that competition is either authorized or mandated and regulation is eliminated or relaxed, electric utilities may no 4 longer be guaranteed an opportunity to recover all of their prudently incurred costs, and utilities with costs that exceed the market prices established by the competitive market will run the risk of suffering losses, which may be substantial. Virginia Power has responded to these trends by undertaking cost-cutting measures, engaging in re-engineering efforts, restructuring its core business processes, and pursuing a strategic planning initiative to encourage innovative approaches to serving traditional markets. Virginia Power has established separate business units, as discussed above, to fully execute these strategies. Virginia Power also is vigorously participating in the state and federal legislative actions currently underway to bring about competition in the electric utility industry, in an effort to ensure an orderly transition from a regulated environment. Virginia Power's non-traditional businesses face competition from a variety of utility and non-utility entities. For a full discussion of the regulatory and legislative issues related to competition, read the Future Issues section of MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATIONS (MD&A) on pages 26 through 30 of the 1997 Annual Report to Shareholders. Regulation General In a wide variety of matters in addition to rates, Virginia Power is presently subject to regulation by the Virginia Commission and the North Carolina Commission, the Environmental Protection Agency (EPA), Department of Energy (DOE), Nuclear Regulatory Commission (NRC), the Federal Energy Regulatory Commission (FERC), the Army Corps of Engineers, and other federal, state and local authorities. Compliance with numerous laws and regulations increases Virginia Power's operating and capital costs by requiring, among other things, changes in the design and operation of existing facilities and changes or delays in the location, design, construction and operation of new facilities. The 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 various state and federal governmental agencies. 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. Both federal and state legislative bodies have been studying competition and restructuring in the electric utility industry. See Future Issues -- Competition -- Legislative Initiatives section of MD&A on page 27 of the 1997 Annual Report to Shareholders. Virginia In 1995, the Virginia Commission instituted an ongoing generic investigation on electric industry restructuring, resulting in a number of reports by its Staff covering such issues as retail wheeling experiments and the status of wholesale power markets. The Staff also submitted a report to the General Assembly calling for a cautious, two-phase, five-year period to address restructuring issues. The report acknowledged the need for direction from the Virginia legislature concerning policy issues surrounding competition in the electric industry. In November 1996, the Virginia Commission instituted a proceeding concerning Virginia Power's cost of service and possible restructuring of the electric utility industry as it might relate to Virginia Power. On March 24, 1997, Virginia Power filed in that proceeding a calculation of its cost of service for 1996 and a proposed Alternative Regulatory Plan (ARP). Subsequently, the Commission consolidated this proceeding with the proceeding concerning Virginia Power's 1995 Annual Informational Filing, in which Virginia Power's base rates were made interim and subject to refund as of March 1, 1997. Please carefully read the Future Issues -- Competition -- Legislative Initiatives and Regulatory Initiatives sections of MD&A on page 27 of the 1997 Annual Report to Shareholders and Rates--Virginia, below for details concerning the ARP, its current status and related legislative developments. In December 1995, Virginia Power applied to the Virginia Commission for approval of arrangements with 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. On August 13, 1997, the Virginia Commission approved, in substantial part, the proposed transactions 5 between Virginia Power and CPPC's successor in ownership, St. Laurent Paper Products Co. St. Laurent later determined that the current design of the facility was no longer compatible with its long-term business strategies and terminated its contractual arrangement with Virginia Power. The Virginia Commission dismissed the proceeding on January 15, 1998. In June 1997, the Virginia Commission granted Virginia Power's request to implement a monitoring program that requires certain non-utility generators to provide certain information sufficient to determine continued compliance with the "Qualifying Facility" (QF) requirements of the Public Utility Regulatory Policies Act of 1978 (PURPA). On August 8, 1997, the Virginia Commission granted Virginia Power's request to provide interchange telecommunications services and approved the proposed affiliate agreements between Virginia Power and our wholly-owned subsidiary, VPS Communications, Inc. (VPSC). Under the authority granted, VPSC will provide a range of telecommunications services, including private line and special access services and high-capacity fiberoptic services. On September 3, 1997, the Virginia Commission granted Virginia Power's request to provide services to our wholly-owned subsidiary, Virginia Power Services, Inc. (VPS), which would enable Virginia Power Nuclear Services Company (VPN), a VPS subsidiary, to furnish nuclear management and operation services to electric utilities seeking assistance in the management and operation of their nuclear generating facilities. VPN currently provides such services to Northeast Utilities at its Millstone Unit 2 nuclear plant. FERC In April 1996, FERC issued final rules in Order Nos. 888 and 889 addressing open access transmission service, stranded costs, standards of conduct and open access same-time information systems (OASIS). In July 1996, Virginia Power filed an open access transmission service tariff in compliance with FERC's Order No. 888. In compliance with FERC's directive, Virginia Power's OASIS became operational on January 3, 1997. Also, on that date the standards of conduct requiring separation of transmission operations/reliability functions from wholesale merchant/marketing functions became effective. Virginia Power also made filings to comply with FERC's directive that, effective January 1, 1997, utilities could no longer make bundled sales of transmission and generation services in economy energy transactions. In certain of those filings, Virginia Power canceled or committed not to use the economy energy rate schedules contained in interconnection agreements with neighboring utilities. On March 4, 1997, FERC issued Order Nos. 888-A and 889-A, which addressed requests for rehearing of Order Nos. 888 and 889. Orders No. 888-A and 889-A essentially reaffirm the basic principles of 888 and 889 and clarify and make limited modifications to those orders. On December 17, 1997, FERC issued Order Nos. 888-B and 889-B. FERC rejected all requests for rehearing filed with respect to Order Nos. 888-A and 889-A and clarified and made limited modifications to those orders. Several parties have appealed the 888 orders to the United States Court of Appeals for the District of Columbia Circuit. For a discussion of the status of Virginia Power's Open Access Transmission Tariff filing, see Rates -- FERC below. For additional discussion of open access issues see Future Issues -- Competition under MD&A on pages 26 through 28 of the 1997 Annual Report to Shareholders. LG&E Westmoreland Southampton owns a cogeneration facility in Franklin, Virginia, and sells its output to Virginia Power. Southampton has sought a waiver of FERC operating requirements for Qualifying Facilities (QF's) under PURPA, however FERC refused to grant such a waiver. On March 31, 1997, the United States Court of Appeals for the District of Columbia Circuit granted FERC's motion to dismiss Southampton's Petition for Review. Environmental From time to time, Virginia Power may be designated by the EPA as a potentially responsible party (PRP) with respect to a Superfund site. As a result of that designation or other regulations regarding the remediation of waste, we may become obligated to fund remedial investigations or actions. We do not believe that any currently identified sites will result in significant liabilities. For a discussion of Virginia Power's site remediation efforts, see Note Q to the CONSOLIDATED FINANCIAL STATEMENTS on page 53 of the 1997 Annual Report to Shareholders. Permits under the Clean Water Act and state laws have been issued for all of Virginia Power's steam generating stations now in operation. These permits are subject to reissuance and continuing review. The Clean Air Act, as amended in 1990, requires Virginia Power to reduce its emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx). Beginning in 1995, the SO2 reduction program is based on the issuance of a limited number of SO2 emission allowances, each of 6 which may be used as a permit to emit one ton of SO2 into the atmosphere or may be sold to someone else. The program is administered by the EPA. For additional information on Environmental Matters and related issues see Future Issues -- Environmental Matters section of MD&A on pages 28 and 29 of the 1997 Annual Report to Shareholders. 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. In July 1995, the Virginia Commission instituted an investigation regarding spent nuclear fuel disposal. As directed, Virginia Power and others filed comments on legal and public policy issues related to spent nuclear fuel storage and disposal. In February 1996, the Commission Staff filed its Report recommending that adoption of a definitive policy on spent nuclear fuel disposal issues be delayed pending the outcome of litigation against the Department of Energy concerning spent nuclear fuel acceptance, the outcome of proposed federal legislation concerning development of an interim storage facility, and development of a vision of the likely outcome of the electric utility industry's restructuring efforts. The Virginia Commission consolidated the proceeding with Virginia Power's pending fuel cost recovery proceeding in October 1996. On March 20, 1997, the Virginia Commission returned the spent nuclear fuel disposal issue to a separate proceeding. On January 31, 1997, Virginia Power joined thirty-five other electric utilities in filing a petition in the United States Court of Appeals for the District of Columbia Circuit, seeking to compel DOE to comply with its obligation to begin accepting the utilities' spent nuclear fuel for disposal by January 31, 1998, the date imposed by the Nuclear Waste Policy Act. Additional utilities have joined since the original filing. On November 14, 1997, the Court issued an Order finding that DOE's obligation to begin accepting spent nuclear fuel by the deadline is unconditional, and that DOE may not excuse its delay on the grounds that it has not prepared a permanent repository or interim storage facility. The Court found that DOE's spent fuel disposal contracts with the utilities offer a potentially adequate remedy for DOE's failure to meet its obligation. DOE filed a petition for rehearing on December 29, 1997. Rates Virginia Power electric service sales were subject to rate regulation in 1997 as follows:
1997 ----------------------- Percent Percent of of Revenues Kwh Sales ---------- ---------- Virginia retail: Non-Governmental customers ........... Virginia Commission 81% 76% Governmental customers ............... Negotiated Agreements 10 12 North Carolina retail ................. North Carolina Commission 5 5 Wholesale--Sales for Resale* .......... FERC 4 7 -- -- 100% 100% === ===
- --------- * Excludes wholesale power marketing sales subject to FERC regulation. Substantially all of Virginia Power's electric service sales are subject to recovery of changes in fuel costs either through fuel adjustment factors or periodic adjustments to base rates, each of which requires prior regulatory approval. Each of these jurisdictions has the authority to disallow recovery of costs it determines to be excessive or imprudently incurred. Various cost items may be reviewed on occasion, including costs of constructing or modifying facilities, on-going purchases of capacity or providing replacement power during generating unit outages. 7 FERC In compliance with FERC's Order No. 888, Virginia Power filed an open access transmission service tariff, which became effective on July 9, 1996. In October 1996, FERC issued a procedural order, scheduling a hearing for April 28, 1997. Virginia Power and all parties reached a settlement of issues raised in the proceeding, and on March 20, 1997, those parties jointly filed with FERC the Settlement Agreement and Motion to Certify the Settlement Agreement. On April 23, 1997 the presiding Administrative Law Judge certified the Settlement Agreement to the FERC and on June 11, 1997, the FERC approved the settlement. In compliance with FERC's Order No. 889, on January 3, 1997, Virginia Power filed its Procedures For Standards of Conduct for Unbundled Transmissions and Wholesale Merchant Function (Standards of Conduct) effective on that date. On July 1, 1997, Virginia Power filed an amendment to the Standards of Conduct in Compliance with FERC's Order No. 889-A. On July 16, 1997, Virginia Power filed another amendment in response to a FERC Staff request. Virginia Power is awaiting FERC action on the filing. On September 11, 1997, FERC authorized Virginia Power to sell power at market-based rates but set for hearing the issue of the impact of any transmission constraints on Virginia Power's ability to exercise generation market power in localized areas within its service territory. If FERC finds that transmission constraints give Virginia Power generation dominance, it could either revoke or limit the scope of the market-based rate authority. The hearing is scheduled to commence June 2, 1998. On October 31, 1997, Virginia Power filed at FERC three agreements with Old Dominion Electric Cooperative (ODEC) to amend the parties' Interconnection and Operating Agreement (I&O Agreement) and to unbundle transmission services provided to ODEC under the I&O Agreement. On December 22, 1997, FERC issued a deficiency letter with respect to the filing directing Virginia Power to provide additional information. On January 21, 1998, Virginia Power provided the requested information. FERC accepted the agreements on March 12, 1998. Virginia In March 1997, the Virginia Commission issued an order that Virginia Power's base rates be made interim and subject to refund as of March 1, 1997. This order was the result of the Commission Staff's report on its review of Virginia Power's 1995 Annual Informational Filing, which concluded that Virginia Power's present rates would cause Virginia Power to earn in excess of its authorized return on equity. The Staff found that, for purposes of establishing rates prospectively, a rate reduction of $95.6 million (including a one-time adjustment of $29.7 million to Virginia Power's deferred capacity balance at December 31, 1996) may be necessary in order to realign rates to the authorized level. Virginia Power filed its Alternative Regulatory Plan (ARP) in March 1997, based on 1996 financial information. Subsequently, the Commission consolidated the proceeding concerned with the 1995 Annual Informational Filing with the proceeding that includes the ARP proposed by Virginia Power. In December 1997, Virginia Power sought to withdraw its ARP, having concluded that resolution of the cost recovery issues raised by the ARP was unlikely without General Assembly action. The Commission has agreed that Virginia Power may withdraw its support of the ARP but has reserved the right to continue consideration of the ARP as well as other regulatory alternatives. In addition, the Commission will continue to consider the issues arising out of the 1995 Annual Informational Filing. The Commission's Staff is scheduled to file its testimony on March 24, 1998; Virginia Power's rebuttal is to be filed by April 27, 1998; and the reply testimony is to be filed by May 11, 1998. A public hearing is scheduled to commence on May 19, 1998. Virginia Power's previous filings in this proceeding support maintaining Virginia Power's rates at current levels; however, opposing parties have made filings recommending rate reductions in excess of $200 million. At this time, management cannot predict the ultimate outcome of the proceeding and its impact on Virginia Power's results of operations, cash flows or financial position. In July 1996, Virginia Power proposed to substantially reduce the rates paid under Schedule 19 to cogenerators and small power producers of 100 kW or less. The rates became effective on an interim basis on January 1, 1997. On January 21, 1998, the Virginia Commission approved revised Schedule 19 rates. The approved rates do not differ in any significant way from the rates originally proposed by Virginia Power. 8 In October 1996, Virginia Power filed an application with the Virginia Commission to increase its fuel factor from 1.299 cents per kWh to 1.322 cents per kWh, reflecting a fuel factor annual revenue increase of approximately $48.2 million. The increase became effective on an interim basis on December 1, 1996. On June 11, 1997, the Commission entered an Order Establishing Fuel Factor approving the requested increase. On October 31, 1997, Virginia Power filed with the Virginia Commission its application for a reduction of $45.6 million in its fuel cost recovery factor for the period December 1, 1997 through November 30, 1998. The reduction became effective on an interim basis on December 1, 1997. Subsequently, as a result of amendments to two non-utility power purchase contracts, the Company proposed two additional reductions of approximately $30.2 million and $18 million for the same period, bringing the total proposed fuel factor reduction to $93.8 million. Both additional reductions were approved on an interim basis, effective March 1, 1998. A hearing is scheduled for April 9, 1998. North Carolina On November 4, 1996, 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. It also proposed to reduce the applicability threshold to 100 kW and shorten the maximum term of contracts under Schedule 19 to five years. On June 19, 1997, the North Carolina Commission issued an Order requiring Virginia Power to offer long-term (5-, 10- and 15-year) levelized capacity payments to hydroelectric and certain landfill and waste facilities contracting for up to 5 MW; a 5-year levelized rate option to other QFs contracting for up to 100 kW; and optional long-term levelized energy payments for QFs rated at 100 kW or less capacity. 9 Sources Of Power Virginia Power Generating Units
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: Bellmeade, Richmond, Va. ................................. 1991 Oil & Gas 230 Chesterfield Units 7 & 8, Chester, Va. ................... 1990-92 Oil & Gas 397 Total fossil stations ................................... 8,656 -------- Hydroelectric: Gaston Units 1-4, Roanoke Rapids, N.C. ................... 1963 Conventional 225 Roanoke Rapids Units 1-4, Roanoke Rapids, N.C. ........... 1955 Conventional 99 Other .................................................... 1930-87 Conventional 3 Bath County Units 1-6, Warm Springs, Va. ................. 1985 Pumped Storage 1,260 (d) -------- Total hydro stations .................................... 1,587 -------- Total Virginia Power generating unit capability ......... 13,635 Net Purchases ............................................. 1,480 Non-Utility Generation .................................... 3,277 -------- Total Capability ........................................ 18,392 ========
--------- (a) Includes an undivided interest of 11.6 percent (208 MW) owned by ODEC. (b) Includes an undivided interest of 50 percent (441 MW) owned by ODEC. (c) Effective January 25, 1996, this unit was placed in a cold reserve status. (d) Reflects Virginia Power's 60 percent undivided 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 Energy, Inc (AE). Virginia Power's highest one-hour integrated service area summer peak demand was 14,537 MW on July 28, 1997, and an all-time high one-hour integrated winter peak demand of 14,910 MW was reached on February 5, 1996. 10 Energy Used And Fuel Costs System energy output by energy source and the average fuel cost for each are shown below. Fuel cost is presented in mills (one tenth of one cent) per kilowatt hour.
1997 1996 1995 -------------------- -------------------- -------------------- Source Cost Source Cost Source Cost -------- --------- -------- --------- -------- --------- Nuclear (*) .................. 34% 4.52 32% 4.48 32% 4.92 Coal (**) .................... 40 13.54 38 14.32 39 14.44 Oil .......................... 1 26.32 1 27.75 1 25.11 Purchased power, net ......... 23 21.54 27 21.99 25 22.50 Other ........................ 2 30.65 2 26.98 3 23.82 -- -- -- Total ....................... 100% 100% 100% === === === Average fuel cost ........... 12.67 13.47 13.73
--------- (*) Excludes ODEC's 11.6 percent ownership interest in the North Anna Power Station. (**) Excludes ODEC's 50 percent ownership interest in the Clover Power Station. Nuclear Operations and Fuel Supply In 1997, Virginia Power's four nuclear units achieved a combined capacity factor of 91.1 percent. Virginia Power utilizes both long-term contracts and spot purchases to support its needs for nuclear fuel. Virginia Power continually evaluates worldwide market conditions in order to ensure a range of supply options at reasonable prices. Current agreements, inventories and spot market availability will support Virginia Power's current and planned fuel supply needs for fuel cycles throughout the remainder of the 1990's and into the early 2000's. Beyond that period, additional fuel will be purchased as required to ensure optimum cost and inventory levels. The DOE is not expected to begin the acceptance of spent fuel in 1998 as specified in Virginia Power's contract with the DOE. However, on-site spent nuclear fuel storage at the Surry Power Station (spent fuel pool and dry cask storage) is expected to be adequate for Virginia Power's needs until the DOE begins accepting spent fuel. The North Anna Power Station will require additional spent fuel storage capacity in 1998. Virginia Power submitted a license application to the NRC in May 1995 for a dry cask facility at North Anna. Virginia Power anticipates that this application will be approved in mid-1998. For details on the issues of decommissioning and nuclear insurance, see Note Q to the CONSOLIDATED FINANCIAL STATEMENTS on page 54 of the 1997 Annual Report to Shareholders. Fossil Operations and Fuel Supply Virginia Power's fossil fuel mix consists of coal, oil and natural gas. In 1997, Virginia Power consumed approximately 13 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 1990's. 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. Purchases and Sales of Energy Virginia Power relies on purchases of power to meet a portion of its capacity requirements. Virginia Power also makes economy purchases of power from other utility systems when it is available at a cost lower than Virginia Power's own generation costs. 11 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 AE under which AE delivers 200 MW to Virginia Power in the summer and Virginia Power delivers 200 MW to AE in the winter. Virginia Power also has 57 non-utility power purchase contracts with a combined dependable summer capacity of 3,277 MW (for information on the financial obligations under these agreements see Note Q to the CONSOLIDATED FINANCIAL STATEMENTS on page 53 of the 1997 Annual Report to Shareholders). In a continuing effort to 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's wholesale power group actively participates in the purchase and sale of wholesale electric power and natural gas in the open market. The wholesale power group has expanded Virginia Power's trading range beyond the geographic limits of the Virginia Power service territory, and has developed trading relationships with energy buyers and sellers on a nationwide basis. In July 1997, Virginia Power executed three agreements with Old Dominion Electric Cooperative (ODEC) which provide for the amendment of the parties' Interconnection and Operating Agreement (I&O Agreement). The first agreement provides for the transition from cost-based rates for capacity and energy purchases by ODEC to market-based rates by 2002. The second two agreements are the Service and Operating Agreements for Network Integration Transmission Service, which unbundled the transmission services provided to ODEC under the I&O Agreement. As reported above, both the Hoosier 400 MW long-term purchase and the AEP 500 MW long-term purchase will expire on December 31, 1999. Virginia Power presently anticipates adding peaking capacity beginning in the year 2000 to meet its anticipated load growth. 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. No Virginia Power owned generation is currently in the planning or construction stages. For additional information, see Note Q to the CONSOLIDATED FINANCIAL STATEMENTS on page 53 of the 1997 Annual Report to Shareholders. Interconnections Virginia Power maintains major interconnections with Carolina Power and Light Company, AEP, AE and the utilities in the Pennsylvania-New Jersey-Maryland Power Pool. Through this major transmission network, Virginia Power has arrangements with these utilities for coordinated planning, operation, emergency assistance and exchanges of capacity and energy. In December 1996, Virginia Power joined with Allegheny Power Service Corporation, Cleveland Electric Illuminating Company, Toledo Edison Company, Ohio Edison Company, Pennsylvania Power Company and Southern Company Services, Inc. (the Transmission Alliance) to file a contract with the FERC entitled the GAPP Experiment Participation Agreement (GAPP Agreement). The Transmission Alliance and the GAPP Agreement were established to promote fair and equitable use of the transmission systems based on the General Agreement on Parallel Paths (GAPP) model for coordinating the flow of bulk supplies of electricity among utilities. GAPP principles allow electric companies to determine where electricity actually flows in bulk power transactions, as opposed to the "contract" paths that are based on power purchase and transmission agreements among buying, selling and transmitting utilities. Compensation for transmission services has historically been based on contract paths. The GAPP Agreement was designed to determine the physical path electricity actually takes through the system and allocate open access transmission revenues among the parties. The GAPP Agreement was designed as an experiment to test the GAPP methods and procedures for a period of two years. The FERC accepted the contract on March 25, 1997. Virginia Power and the Transmission Alliance implemented the GAPP Agreement on April 2, 1997. On November 14, 1997, in accordance with the FERC order accepting the GAPP Agreement, the Transmission Alliance issued a report detailing the results of the first six months of the experiment. The preliminary results of the experiment indicate that it is technically possible to monitor and predict the physical flow of electricity over multiple systems and that 12 transmission revenues reallocated according to actual use of the system differ significantly from collections under a contract path approach. In October 1997, Virginia Power gave notice to the Transmission Alliance that, effective January 1, 1998, it was exercising its option under the GAPP Agreement to terminate its involvement in the experiment. On December 9, 1997, Virginia Power, the Transmission Alliance and other utilities agreed to study the creation of an independent regional transmission entity. The memorandum of understanding to initiate this study was signed by eleven investor-owned electric companies, including Virginia Power, Consumers Energy, Detroit Edison, Duquesne Light Company, The Illuminating Company, Ohio Edison Company, Pennsylvania Power Company, Toledo Edison Company, and the Allegheny Energy Companies (Monongahela Power Company, The Potomac Edison Company, and West Penn Power Company). This group is an outgrowth of the GAPP Agreement and its key goals are to maintain the long-term reliability and security of the utilities' interconnected transmission systems; ensure the most efficient use of resources; eliminate pancaking of rates within and between transmission entities; avoid duplication of costs and achieve transmission cost savings; and, strike an appropriate balance among the diverse interests of energy suppliers, customers, and shareholders. The group will also explore cooperative agreements designed to achieve these goals while ensuring nondiscriminatory and comparable access to all users of the group's transmission system. The companies intend to be responsive to industry changes, especially with the introduction of retail competition in some of the areas served by the signatories and as some other industry participants consider creation of independent transmission operating companies or separate transmission companies. Further, the companies will have the flexibility to continue to investigate and pursue other opportunities and arrangements that could develop regarding independent system operators or independent transmission companies. Virginia Power and Appalachian Power Company (AEP-Virginia), an operating unit of AEP, each sought approval from the SCC in 1991 to construct certain interconnecting transmission facilities. These applications resulted from a joint planning effort of Virginia Power and AEP to meet the requirements of their customers. At the time of Virginia Power's application, particularly during the summer of 1992, constraints were being experienced on transfers of power into the Virginia Power service territory from the west. On November 7, 1997, the SCC issued an Order directing Virginia Power to report to the Commission on the continued need for certain new interconnected transmission facilities, on the relationship between Virginia Power's application to build the new facilities and certain other pending proceedings, and on Virginia Power's construction plans, if the SCC grants Virginia Power's application. On December 15, 1997, Virginia Power filed a report in compliance with the SCC Order stating that since the filing of Virginia Power's application, the constraints have been less frequent, due in part to less severe summer weather, and actual power requirements have been less than originally forecasted. In addition, generating resources within the Virginia Power service area have been increased by the higher performance level of the nuclear units, as well as the completion of the Clover Station. Completion of the AEP project is a prerequisite for the Virginia Power project to go forward. The proposed Virginia Power project would not fulfill its intended purpose without the AEP line being built. AEP has withdrawn its original application and has instituted a new proceeding before the Commission in which different routing is proposed. Virginia Power continues to monitor closely the progress of AEP in this proceeding with respect to its new proposal, but until more is known about these proceedings, Virginia Power cannot predict what its construction plans will be. 13 CAPITAL REQUIREMENTS AND FINANCING PROGRAM See MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION on pages 37 through 40 of the 1997 Annual Report to Shareholders. 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 various enterprises and assets, as described in THE COMPANY under Item 1. BUSINESS above. See also Virginia Power Generating Units under Item 1. BUSINESS above. ITEM 3. LEGAL PROCEEDINGS From time to time, Dominion Resources and its subsidiaries are alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans imposed upon or agreed to by them, or permits issued by various local, state and federal agencies for the construction or operation of facilities. From time to time, there may be administrative proceedings on these matters pending. In addition, in the normal course of business, Dominion Resources and its subsidiaries are in involved in various legal proceedings. Management believes that the ultimate resolution of these proceedings will not have a material adverse effect on the company's financial position, liquidity or results of operations. In reference to the lawsuit filed by Dominion Energy and Dominion Cogen D.C., Inc. against the District of Columbia and the District's counterclaims to the lawsuit, the parties settled all claims and dismissed the lawsuit and related counterclaims on August 20, 1997. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Age Business Experience Past Five Years ------------ ----------------------------------- Chairman of the Board of Directors, President and Chief Executive Thos. E. Capps (62) Officer of Dominion Resources from September 1, 1995 to date; Chairman of the Board of Directors and Chief Executive Officer of Dominion Resources from August 15, 1994 to September 1, 1995; Chairman of the Board of Directors, President and Chief Executive Officer of Dominion Resources prior to August 15, 1994. Norman B.M. Askew (55) Executive Vice President of Dominion Resources and President and Chief Executive Officer of Virginia Electric and Power Company from August 1, 1997 to date; Executive Vice President of Dominion Resources and Chief Executive of East Midlands from February 21, 1997 to August 1, 1997; Chief Executive of East Midlands from April 1, 1994 to February 21, 1997; Managing Director prior to April 1, 1994. Thomas N. Chewning (52) Executive Vice President of Dominion Resources from January 1, 1997 to date and President of Dominion Energy; Senior Vice President of Dominion Resources from October 1, 1994 to January 1, 1997; Vice President of Dominion Resources prior to October 1, 1994. David L. Heavenridge (51) Executive Vice President of Dominion Resources from January 1, 1997 to date and President of Dominion Capital; Senior Vice President of Dominion Resources from March 1, 1994 to January 1, 1997; Senior Vice President and Controller of Dominion Resources prior to March 1, 1994.
14 Edgar M. Roach, Jr. (49) Executive Vice President of Dominion Resources from September 15, 1997 to date; Senior Vice President-Finance, Regulation and General Counsel of Virginia Electric and Power Company January 1, 1996 to September 15, 1997; Vice President-Regulation and General Counsel, January 1, 1995 to January 1, 1996; Vice President- Regulation, February 1, 1994 to January 1, 1995; Partner in the law firm of Hunton & Williams, Raleigh, North Carolina prior to February 1, 1994. Robert J. Davies (49) Chief Executive of East Midlands from August 1, 1997 to date; Finance Director February 1, 1994 to August 1, 1997; Finance Director of Ferranti International plc prior to February 1, 1994. Mr. Davies was the Finance Director and Manager of the Board of Ferranti International plc and four of its subsidiaries which entered insolvency proceedings in the UK in December 1993. Thomas F. Farrell, II (43) Senior Vice President-Corporate Affairs of Dominion Resources and Executive Vice President of Virginia Electric and Power Company from September 1, 1997 to date; Senior Vice President-Corporate and General Counsel of Dominion Resources from January 1, 1997 to September 1, 1997; Vice 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 LLP prior to July 1, 1995. Donald T. Herrick, Jr (54) Vice President of Dominion Resources G. Scott Hetzer (41) Vice President and Treasurer of Dominion Resources from October 1, 1997 to date; Managing Director of Wheat First Butcher Singer prior to October 1, 1997. William S. Mistr (50) Vice President of Dominion Resources from February 20, 1998 to date and Vice President-Information Technology of Virginia Electric and Power Company from January 1, 1996 to to date; Vice President and Treasurer, Dominion Energy, Inc., October 1, 1994 to January 1, 1996; Assistant Treasurer, Dominion Resources prior to October 1, 1994. James F. Stutts (53) Vice President and General Counsel of Dominion Resources from September 15, 1997 to date; Partner in the law firm of McGuire, Woods, Battle & Boothe LLP prior to September 15, 1997. James L. Trueheart (46) Vice President and Controller of Dominion Resources from March 1, 1994 to date; Assistant Controller of Dominion Resources prior to March 1, 1994. Patricia A. Wilkerson (42) Corporate Secretary of Dominion Resources from January 1, 1997 to date; Assistant Corporate Secretary prior to January 1, 1997.
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Dominion Resources common stock is listed on the New York Stock Exchange and at December 31, 1997 there were 215,685 registered common shareholders of record. Quarterly information concerning stock prices and dividends contained on page 56 of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997 in Note U to 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 60 of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997 filed herein as Exhibit 13, is hereby incorporated herein by reference. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This information contained under the caption MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS on pages 22 through 33 and MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION on pages 37 through 40 of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997, filed herein as Exhibit 13, is hereby incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information contained under the caption MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS on pages 30 through 33 of the 1997 Annual to Shareholders for the fiscal year ended December 31, 1997, filed herein as Exhibit 13, is hereby incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information contained in the CONSOLIDATED FINANCIAL STATEMENTS on pages 21, 34 through 36, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS on pages 37 through 56 and related report thereon of Deloitte & Touche LLP, independent auditors, appearing on page 57 of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997, filed herein as Exhibit 13, is hereby incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding the Directors of Dominion Resources contained on pages 6 through 8 of the 1998 Proxy Statement, File No. 1-8489, dated March 11, 1998 is hereby incorporated herein by reference. The information concerning the executive officers of Dominion Resources required by this Item is set forth in Part I, under the section EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding Section 16(a) Beneficial Ownership Reporting Compliance is contained on page 26 of the 1998 Proxy Statement, dated March 11, 1998, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information regarding executive and director compensation contained on pages 6 through 19 of the 1998 Proxy Statement is hereby 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 12 of the 1998 Proxy Statement is hereby incorporated herein by reference. There is no person known by Dominion Resources to be the beneficial owner of more than five percent of Dominion Resources common stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 16 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 and found on the pages noted. 1. Financial Statements
1997 Annual Report to Shareholders (Page) ------ Report of Independent Auditors .................................... 57 Report of Management .............................................. 57 Consolidated Statements of Income and Retained Earnings for the years ended December 31, 1997, 1996 and 1995 ............ 21 Consolidated Balance Sheets at December 31, 1997 and 1996 ......... 34-35 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ................................ 36 Notes to Consolidated Financial Statements ........................ 41-56
17 2. Exhibits 3(i) - Articles of Incorporation as in effect May 4, 1987 (Exhibit 3(i), Form 10-K for the fiscal year ended December 31, 1993, File 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, 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 The Chase Manhattan Bank (formerly 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 The Chase Manhattan Bank (formerly Chemical Bank), as supplemented and modified by a First Supplemental Indenture, dated August 1, 1989, (Exhibit 4(vi), Form 10-K for the fiscal year ended December 31, 1993, File No. 1-2255, incorporated by reference). 4(vi) - Subordinated Note Indenture, dated as of August 1, 1995 between Virginia Electric and Power Company and The Chase Manhattan Bank (formerly Chemical Bank), as Trustee, as supplemented (Exhibit 4(a), Form S-3 Registration Statement File No. 333-20561 as filed on January 28, 1997, incorporated by reference). 4(vii) - Dominion Resources agrees to furnish to the Commission upon request any other instrument with respect to long-term debt as to which the total amount of securities authorized thereunder does not exceed 10% of Dominion Resources' total assets.
18 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) - Amended and Restated Interconnection and Operating Agreement, dated as of July 29, 1997 between Virginia Electric and Power Company and Old Dominion Electric Cooperative (filed herewith). 10(vi) - Credit Agreements, dated as of June 7, 1996, between The 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(vii) - 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(viii) - 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). 10(ix) - 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(x) - Form of Amended and Restated Articles of Partnership in Commendam of Catalyst Old River Hydroelectric Limited Partnership, by and between Catalyst Vidalia Corporation and Dominion Capital, Inc. 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(xi) - 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(xii) - 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(xiii) - 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(xiv) - 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(xv) - 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(xvi) - Coal-Fired Unit Turnkey Contract (Volume 1), dated April 6, 1989, and the United 2 Amendment (Volume 1), dated May 31, 1990 between Virginia Electric and Power Company and Old Dominion Electric Cooperative, Westinghouse, Black & Veatch, Combustion Engineering and H. B. Zachry (Volumes 2-11 contain technical specifications) (Exhibit 10(xiii), Form 10-K for the fiscal year ended December 31, 1990, File No. 1-2255, incorporated by reference). 10(xvii) - 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(xviii) - 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).
19 10(xix)* Dominion Resources, Inc. Directors' Deferred Compensation Plan, effective July 1, 1986, as amended and restated effective January 1, 1996 (Exhibit 10(xviii), Form 10-K for the fiscal year ended December 31, 1996, File No.1-8489, incorporated by reference). 10(xx)* 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(xxi)* Dominion Resources, Inc. Executive Supplemental Retirement Plan, effective January 1, 1981 as amended and restated September 1, 1996 (Exhibit 10(iv), Form 10-Q for the quarter ended June 30, 1997, File No. 1-8489, incorporated by reference) and as amended June 20, 1997 and as amended March 3, 1998 (filed herewith). 10(xxii)* Arrangements with certain executive officers regarding additional credited years of service for retirement and retirement life insurance purposes (filed herewith). 10(xxiii)* 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). 10(xxiv) Dominion Resources, Inc. Incentive Compensation Plan, effective April 22, 1997 (Exhibit 99, Form S-8 Registration Statement, File No 333-25587, incorporated by reference). 10(xxv)* Form of Employment Continuity Agreement for certain officers of Dominion Resources (Exhibit (xxvi), Form 10-K for the fiscal year ended December 31, 1994, File No. 1-8489, incorporated by reference). 10(xxvi)* Dominion Resources, Inc. Retirement Benefit Funding Plan, effective June 29, 1990 as amended and restated September 1, 1996 (Exhibit 10(iii), Form 10-Q for the quarter ended June 30, 1997, File No. 1-8489, incorporated by reference). 10(xxvii)* Dominion Resources, Inc. Retirement Benefit Restoration Plan as adopted effective January 1, 1991 as amended and restated September 1, 1996 (Exhibit 10(ii), Form 10-Q for the quarter ended June 30, 1997, File No. 1-8489, incorporated by reference). 10(xxviii)* Dominion Resources, Inc. Executives' Deferred Compensation Plan, effective January 1, 1994 and as amended and restated January 1, 1997 (Exhibit 10 (xxvi), Form 10-K for the fiscal year ended December 31, 1996, incorporated by reference). 10(xxix)* Employment Agreement dated June 20, 1997 between Dominion Resources and Thos. E. Capps (Exhibit 10(i), Form 10-Q for the quarter ended June 30, 1997, File No. 1-8489, incorporated by reference). 10(xxx)* Form of three year Employment Agreement between Dominion Resources and Thomas N. Chewning and certain other executive officers of Dominion Resources (filed herewith). 10(xxxi)* Dominion Resources, Inc. Stock Accumulation Plan for Outside Directors, effective April 23, 1996 (Exhibit 10, Form 10-Q for the quarter ended March 31, 1996, File No. 1-8489, incorporated by reference). 10(xxxii)* Employment Agreement dated February 21, 1997 between Dominion Resources and Norman Askew. (Exhibit 10(xxxi), Form 10-K for the fiscal year ended December 31, 1996, File No. 1-8489, incorporated by reference). 10(xxxiii)* Service Agreement, dated February 17, 1994 as amended through December 2, 1995 between East Midlands and Robert J. Davies (filed herewith). 10(xxxiv)* Employment Agreement, dated September 12, 1997 between Dominion Resources and Edgar M. Roach, Jr. (filed herewith). 10(xxxv)* Employment Agreement, dated January 1, 1998 between Dominion Resources and William S. Mistr (filed herewith). 11 Computation of Earnings Per Share of Common Stock Assuming Full Dilution (filed herewith). 13 Portions of the 1997 Annual Report to Shareholders for the fiscal year ended December 31, 1997 (filed herewith). 21 Subsidiaries of the Registrant (filed herewith). 23 Consent of Deloitte & Touche LLP (filed herewith). 27 Financial Data Schedule (filed herewith).
- --------- * Indicates management contract or compensatory plan or arrangement. B. Reports on Form 8-K Dominion Resources filed a report on Form 8-K, dated December 11, 1997, reporting the issuance of 250,000 7.83% Capital Securities (liquidation amount $1,000 per security) through its Dominion Resources Capital Trust I, a Delaware business trust. Dominion Resources filed a report on Form 8-K, dated January 15, 1998, reporting the issuance of 6,500,000 shares of Common Stock. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DOMINION RESOURCES, INC. By: THOS. E. CAPPS ------------------------------------------------------ (Thos. E. Capps, Chairman of the Board of Directors, President and Chief Executive Officer) Date: MARCH 20, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the 20th day of March, 1998.
Signature Title --------- ----- JOHN B. ADAMS, JR. Director ------------------------------ John B. Adams, Jr. JOHN B. BERNHARDT Director ------------------------------ John B. Bernhardt THOS. E. CAPPS Chairman of the Board of Directors, President ------------------------------ (Chief Executive Officer) and Director Thos. E. Capps Director BENJAMIN J. LAMBERT, III ------------------------------ 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
21
Signature Title - ------------------------------------ ------------------------------- JUDITH B. SACK Director ------------------------------ Judith B. Sack S. DALLAS SIMMONS Director ------------------------------ S. Dallas Simmons ROBERT H. SPILMAN Director ------------------------------ Robert H. Spilman EDGAR M. ROACH, JR. Executive Vice President ------------------------------ (Chief Financial Officer) Edgar M. Roach, Jr. J.L. TRUEHEART Vice President and Controller ------------------------------ (Principal Accounting Officer) J.L. Trueheart
22 DOMINION RESOURCES, INC. PORTIONS OF THE 1997 ANNUAL REPORT TO SHAREHOLDERS (Incorporated by Reference) EX-10.5 2 EXHIBIT 10(V) Exhibit 10.5 AMENDED AND RESTATED INTERCONNECTION AND OPERATING AGREEMENT Between VIRGINIA ELECTRIC AND POWER COMPANY and OLD DOMINION ELECTRIC COOPERATIVE Dated: As of July 29, 1997 TABLE OF CONTENTS ARTICLE I - DEFINITIONS...................................................... 1.01 Agreement............................................................ 1.02 Alternate Power Source............................................... 1.03 Annual Fuel Adjustment Factor........................................ 1.04 Capability........................................................... 1.05 Clover Agreements.................................................... 1.06 Clover Facilities.................................................... 1.07 Clover Operating Agreement........................................... 1.08 Clover Ownership Interest............................................ 1.09 Clover Purchase, Construction and Ownership Agreement................ 1.10 Combined Electric Systems............................................ 1.11 Combined System Annual Peak Demand................................... 1.12 Combined System Loss Percentage...................................... 1.13 Combined System Monthly Capability................................... 1.14 Combined System Monthly Peak Demand.................................. 1.15 Common Facilities.................................................... 1.16 Displacement Peaking Energy.......................................... 1.17 Displacement Reserve Energy.......................................... 1.18 Displacement Supplemental Energy..................................... 1.19 Effective Date....................................................... 1.20 Events of Default.................................................... 1.21 Excluded Peaking Capacity............................................ 1.22 Excluded Peaking Energy.............................................. 1.23 Excluded Supplemental Capacity....................................... 1.24 Excluded Supplemental Energy......................................... 1.25 Executive Committee.................................................. 1.26 FERC................................................................. 1.27 Fixed Monthly A&G Fee................................................ 1.28 Holidays............................................................. 1.29 Interconnected Systems............................................... 1.30 Interconnection Points............................................... 1.31 Interest Rates....................................................... 1.32 Major Spare Parts.................................................... 1.33 Market Price......................................................... 1.34 Monthly Peaking Energy Charge........................................ 1.35 Monthly Reserve Energy Charge........................................ 1.36 Monthly Supplemental Demand Charge................................... 1.37 Monthly Supplemental Energy Charge................................... 1.38 Network Operating Agreement.......................................... 1.39 North Anna A&G Costs................................................. 1.40 North Anna Facilities................................................ 1.41 North Anna Nuclear Power Station..................................... 1.42 North Anna Operating Committee....................................... 1.43 North Anna Unit 1.................................................... 1.44 North Anna Unit 2.................................................... 1.45 North Anna Unit(s)................................................... 1.46 Nuclear Fuel......................................................... 1.47 Nuclear Fuel Agreement............................................... 1.48 Off-Peak Hours....................................................... 1.49 Old Dominion......................................................... 1.50 Old Dominion Generation Resources.................................... 1.51 Old Dominion Members................................................. 1.52 Old Dominion Monthly Accredited Firm Capacity........................ 1.53 Old Dominion Monthly Accredited Firm Energy.......................... 1.54 Old Dominion Monthly Accredited Non-firm Capacity.................... 1.55 Old Dominion Monthly Accredited Non-firm Energy...................... 1.56 Old Dominion Monthly Billing Demand.................................. 1.57 Old Dominion Monthly Billing Energy.................................. 1.58 Old Dominion Monthly Clover Capacity................................. 1.59 Old Dominion Monthly Delivered Demand................................ 1.60 Old Dominion Monthly Delivered Energy................................ 1.61 Old Dominion Monthly Delivered SEPA Capacity......................... 1.62 Old Dominion Monthly Delivered SEPA Energy........................... 1.63 Old Dominion Monthly Demand.......................................... 1.64 Old Dominion Monthly Energy.......................................... 1.65 Old Dominion Monthly Maximum Diversified Demand...................... 1.66 Old Dominion Monthly North Anna Capacity............................. 1.67 Old Dominion Monthly North Anna Energy............................... 1.68 Old Dominion Monthly Reserve Energy.................................. 1.69 Old Dominion Monthly Supplemental Demand............................. 1.70 Old Dominion Monthly Supplemental Energy............................. 1.71 Old Dominion's North Anna Percentage Ownership Interest.............. 1.72 Old Dominion Reserve Capacity........................................ 1.73 Old Dominion System.................................................. 1.74 On-Peak Hours........................................................ 1.75 Open Access Transmission Tariff...................................... 1.76 Operating Inventory.................................................. 1.77 Parties.............................................................. 1.78 Peaking Capacity..................................................... 1.79 Peaking Capacity Charge.............................................. 1.80 Peaking Energy....................................................... 1.81 Planning and Administration Committee................................ 1.82 Prudent Utility Practices............................................ 1.83 Purchase, Construction and Ownership Agreement....................... 1.84 Reserve Capacity Charge.............................................. 1.85 RUS.................................................................. 1.86 SEPA................................................................. 1.87 Support Facilities................................................... 1.88 System Reserve Margin................................................ 1.89 Transmission Service Agreement....................................... 1.90 Virginia Power....................................................... 1.91 Virginia Power System................................................ 1.92 Wholesale Power Contracts............................................ ARTICLE II - NORTH ANNA OPERATING COMMITTEE.................................. 2.01 North Anna Operating Committee....................................... 2.02 Meetings and Voting Rights........................................... 2.03 Duties of Operating Committee........................................ 2.04 Expenses of Operating Committee...................................... 2.05 Resolution of Disputes............................................... ARTICLE III - PLANNING AND ADMINISTRATION.................................... 3.01 Planning and Administration Committee................................ 3.02 Meetings............................................................. 3.03 Duties of the Planning and Administration Committee.................. 3.04 Future Transmission Planning......................................... 3.05 Exchange of Information.............................................. 3.06 Expenses of the Planning and Administration Committee................ 3.07 Resolution of Disputes............................................... 3.08 SEPA Contract........................................................ ARTICLE IV - INTERCONNECTION AND PROTECTION OF SYSTEMS....................... 4.01 Obligation for Adequate Facilities................................... 4.02 Protection of Systems................................................ ARTICLE V - VIRGINIA POWER'S AUTHORITY AND RESPONSIBILITY WITH RESPECT TO OLD DOMINION'S NORTH ANNA GENERATION.......................... 5.01 Virginia Power as Agent of Old Dominion.............................. ARTICLE VI - TRANSMISSION SERVICES........................................... 6.01 Old Dominion Transmission Service.................................... 6.02 Native Load Status................................................... 6.03 SEPA Capacity Transmission Service................................... ARTICLE VII - ENTITLEMENTS TO CAPACITY AND ENERGY............................ 7.01 Entitlements of the Parties to Capacity and Energy................... ARTICLE VIII - SUPPLEMENTAL DEMAND AND ENERGY, PEAKING CAPACITY AND ENERGY, AND RESERVE CAPACITY AND ENERGY..................... 8.01 Supplemental Demand and Energy....................................... 8.02 Charges for Purchases By Old Dominion Pursuant to Section 8.01....... 8.03 Peaking Capacity and Energy Purchases................................ 8.04 Limitation on Virginia Power's Obligation to Serve Supplemental Demand and Provide Supplemental Energy.................. 8.05 Reserve Capacity and Energy and Charges Therefor Related to the North Anna Facilities and Clover Facilities................... 8.06 Reserve Capacity and Reserve Capacity Charges for Jointly Planned Generation Resources................................. 8.07 Exchange of Displacement Energy...................................... 8.08 Limitations of Parties' Rights to Seek Regulatory Review............. ARTICLE IX - FACILITIES CHARGES.............................................. 9.01 Facilities Charges................................................... ARTICLE X - BILLING.......................................................... 10.01 Billing Methods..................................................... 10.02 Rendering Bill...................................................... 10.03 Payment............................................................. 10.04 Methods of Payment.................................................. 10.05 No Arbitration; Resolution of Disputes.............................. 10.06 Billing Adjustments................................................. ARTICLE XI - OPERATING COSTS................................................. 11.01 Operating Costs..................................................... 11.02 Nuclear Fuel Costs.................................................. ARTICLE XII - ACCOUNTING MATTERS AND ACCESS TO BOOKS AND RECORDS.............................................................. 12.01 Responsibility and Method of Accounting............................. 12.02 Right to Inspect Records, Etc....................................... 12.03 Confidentiality..................................................... ARTICLE XIII - LIABILITY, SERVICE INTERRUPTIONS AND FORCE MAJEURE........................................................... 13.01 Liability........................................................... 13.02 Responsibility on Either Side of Interconnection Point.............. 13.03 Force Majeure....................................................... 13.04 Remedy.............................................................. ARTICLE XIV - REPRESENTATIONS AND WARRANTIES................................. 14.01 Representations and Warranties of Virginia Power.................... 14.02 Representations and Warranties of Old Dominion...................... 14.03 Conditions Precedent................................................ ARTICLE XV - TERM OF AGREEMENT............................................... ARTICLE XVI - FILING WITH FERC............................................... ARTICLE XVII - DEFAULT....................................................... 17.01 Events of Default................................................... 17.02 Virginia Power's Rights on Default of Old Dominion.................. 17.03 Old Dominion's Rights on Default of Virginia Power.................. 17.04 Disputes Concerning Default......................................... 17.05 Additional Obligations.............................................. 17.06 Injunctive Relief................................................... 17.07 No Remedy Exclusive................................................. 17.08 Agreement to Pay All Costs to Cure Default.......................... 17.09 General Covenant by the Parties..................................... ARTICLE XVIII - MISCELLANEOUS................................................ 18.01 No Delay............................................................ 18.02 Further Documentation............................................... 18.03 Notice.............................................................. 18.04 Headings Not to Affect Meaning...................................... 18.05 No Association, Trust, Joint Venture or Partnership; Tax Matters.... 18.06 Successors and Assigns.............................................. 18.07 Counterparts........................................................ 18.08 Severability........................................................ 18.09 Applicable Law...................................................... 18.10 No Waiver........................................................... 18.11 Computation of Time................................................. 18.12 Survivorship of Obligations......................................... 18.13 Executive Committee................................................. 18.14 Entire Agreement.................................................... 18.15 Non-Exclusive Agreement............................................. 18.16 Relationship of the Parties......................................... 18.17 Singular and Plural................................................. 18.18 Equal Opportunity................................................... 18.19 Good Faith.......................................................... 18.20 Merger of Documents................................................. 18.21 Environment......................................................... 18.22 Kick-backs.......................................................... 18.23 Nonsegregated Facilities............................................ 18.24 Historic Places..................................................... 18.25 Public Officials Not to Benefit..................................... 18.26 Flood Insurance Act................................................. 18.27 Safety.............................................................. 18.28 Buy American........................................................ 18.29 Regulatory Changes.................................................. ARTICLE XIX - AMENDMENT...................................................... APPENDIX A - COMMON FACILITIES APPENDIX B - MAJOR SPARE PARTS APPENDIX C - NORTH ANNA UNIT 1 APPENDIX D - NORTH ANNA UNIT 2 APPENDIX E - OLD DOMINION MEMBERS APPENDIX F - SUPPORT FACILITIES APPENDIX G - CHARGES FOR PURCHASES BY OLD DOMINION APPENDIX H - DETERMINATION OF PURCHASE AMOUNTS BY OLD DOMINION APPENDIX I - CHARGES FOR RESERVE CAPACITY APPENDIX J - FACILITIES CHARGES APPENDIX K - VIRGINIA ELECTRIC AND POWER COMPANY MONTHLY STATEMENT TO OLD DOMINION APPENDIX L - VIRGINIA POWER NORTH ANNA NUCLEAR STATION NUCLEAR PRODUCTION AND MAINTENANCE EXPENSES APPENDIX M - PEAKING CAPACITY AND ENERGY This AGREEMENT, dated as of July 29, 1997 and amending and restating the Interconnection and Operating Agreement Between Virginia Electric and Power Company and Old Dominion Electric Cooperative Dated: As of December 28, 1982, Amended and Restated October 17, 1983, between VIRGINIA ELECTRIC AND POWER COMPANY ("Virginia Power"), a Virginia public service corporation with its principal office at One James River Plaza, Richmond, Virginia, and OLD DOMINION ELECTRIC COOPERATIVE ("Old Dominion"), a Virginia generation and transmission cooperative with its principal office at 4201 Dominion Boulevard, Glen Allen, Virginia (individually, a "Party," together, the "Parties"), provides as follows: WHEREAS, Virginia Power is a public service corporation engaged in furnishing electric utility service in portions of Virginia and North Carolina, and as such owns and operates facilities for the generation, transmission and distribution of electricity within those states; and WHEREAS, Old Dominion, a generation and transmission cooperative organized and existing under the laws of the Commonwealth of Virginia and comprising, among others, the Old Dominion Members, is charged with the responsibility of providing power and energy to its Old Dominion Members either through generation facilities owned by it or by the purchase of power and energy from others; and WHEREAS, Virginia Power and Old Dominion entered into a Purchase, Construction and Ownership Agreement, under which Virginia Power sold and Old Dominion purchased an ownership interest in North Anna Unit 1, North Anna Unit 2, Common Facilities, Support Facilities, Major Spare Parts, Operating Inventory and the Nuclear Fuel used or to be used for North Anna Units 1 and 2, all as set forth in the Purchase, Construction and Ownership Agreement and Nuclear Fuel Agreement; and WHEREAS, pursuant to that Purchase, Construction and Ownership Agreement, Virginia Power sold to Old Dominion a portion of its North Anna generation facilities and, through the Interconnection and Operating Agreement Between Virginia Power and Old Dominion Dated: December 28, 1982, Amended and Restated October 17, 1983 ("Interconnection and Operating Agreement"), agreed to operate Old Dominion's portion of such generation, supplying to it at the Interconnection Points such electricity as is generated from Old Dominion's portion of these facilities; and WHEREAS, pursuant to this amended and restated Agreement, Virginia Power will continue to operate Old Dominion's portion of the North Anna generation facilities and supply such electricity as is generated from Old Dominion's portion of these facilities to the Interconnection Points; and WHEREAS, pursuant to the Clover Purchase, Construction and Ownership Agreement and the Clover Operating Agreement, Virginia Power and Old Dominion each hold a fifty-percent undivided interest in the two unit, coal-fired Clover Power Station, and Virginia Power has agreed to operate and supply to Old Dominion such electricity that is generated from Old Dominion's portion of that facility in accordance with the terms and conditions of the Clover Operating Agreement; and WHEREAS, Old Dominion will require capacity and energy in an amount exceeding that available from its portion of generation at North Anna and Clover and may desire to purchase supplemental electric service from Virginia Power, or from others, or to construct and operate additional generation facilities of its own pursuant to the terms and conditions of this amended and restated Agreement; and WHEREAS, Virginia Power and Old Dominion entered into Amendment No. 1 to the Interconnection and Operating Agreement, dated as of the 12th day of October 1994, which amendment provided for the purchase and sale of firm Peaking Capacity and associated energy and Virginia Power and Old Dominion wish to incorporate the terms of that Amendment No. 1, as modified herein, into this amended and restated Agreement; and WHEREAS, Virginia Power and Old Dominion desire to enter into this Agreement which will include revised terms, conditions, and pricing under which Virginia Power will provide, among other things, Old Dominion supplemental demand and energy, reserve capacity and energy, peaking capacity and energy, and transmission service. NOW, THEREFORE, in consideration of the premises and the mutual obligations hereafter stated, the Parties hereto agree as follows: ARTICLE I Definitions The following definitions shall be included as part of this Agreement. Other terms used herein shall have the respective meanings set forth in the Purchase, Construction and Ownership Agreement, the Nuclear Fuel Agreement, the Clover Agreements and the Virginia Power Open Access Transmission Tariff. 1.01 Agreement . This amended and restated Interconnection and Operating Agreement dated as of July 29, 1997, between Virginia Power and Old Dominion. 1.02 Alternate Power Source . Any source of capacity or energy that provides Excluded Supplemental Capacity, Excluded Supplemental Energy, Displacement Supplemental Energy, Excluded Peaking Capacity, Excluded Peaking Energy, Displacement Peaking Energy or Displacement Reserve Energy. Virginia Power shall be an Alternate Power Source to the extent it supplies such capacity or energy on terms and conditions other than those set forth in this Agreement. 1.03 Annual Fuel Adjustment Factor. The annual fuel cost adjustment factor described in Appendix G, Section VI. hereof. 1.04 Capability. The net summer or winter (as applicable) rating of a generating unit or other power supply resource, measured in megawatts, as determined by Virginia Power. Capability shall be established and modified in accordance with Prudent Utility Practices following the same methodology Virginia Power uses in establishing the capability of all generating units on its system. 1.05 Clover Agreements. The Clover Operating Agreement and the Clover Purchase, Construction and Ownership Agreement. 1.06 Clover Facilities . The coal-fired generating units located in Halifax County, Virginia, ("Clover") designated as Clover Unit 1 and Clover Unit 2, and the related real property, equipment and facilities, as more specifically defined in the Clover Purchase, Construction and Ownership Agreement, wherever located, that are properly chargeable to Clover Unit 1 or Clover Unit 2 under the Uniform System of Accounts. 1.07 Clover Operating Agreement. The Clover Operating Agreement Between Virginia Electric and Power Company and Old Dominion Electric Cooperative Dated as of May 31, 1990. 1.08 Clover Ownership Interest. The respective fee simple undivided ownership interest, expressed as a percentage, in the Clover Facilities owned by each Party, as may be modified from time to time pursuant to the Clover Agreements. 1.09 Clover Purchase, Construction and Ownership Agreement . The Clover Purchase, Construction and Ownership Agreement Between Old Dominion Electric Cooperative and Virginia Electric and Power Company Dated as of May 31, 1990. 1.10 Combined Electric Systems . The combined electric generating, transmission, and distribution facilities of the Virginia Power System and the Old Dominion System. 1.11 Combined System Annual Peak Demand . The maximum 60-minute integrated Combined System Monthly Peak Demand in a single clock hour at generation level for the calendar year. 1.12 Combined System Loss Percentage. The losses, expressed as a percentage, incurred by Virginia Power in delivering capacity and energy from the generation level to the Interconnection Points, including transmission and distribution energy losses pursuant to the Open Access Transmission Tariff. 1.13 Combined System Monthly Capability. The sum of North Anna Unit 1 monthly Capability, North Anna Unit 2 monthly Capability, Clover Unit 1 monthly Capability, Clover Unit 2 monthly Capability, Old Dominion Monthly Accredited Firm Capacity and Old Dominion Monthly Accredited Non-Firm Capacity, plus the monthly Capability of all other Virginia Power owned or leased generation. 1.14 Combined System Monthly Peak Demand. The maximum combined net one-hour kilowatt demand at the generation level for that calendar month made up of the combined individual demands for that hour of Virginia Power and Old Dominion Members excluding those demands of the Old Dominion Members supplied through arrangements with parties other than Virginia Power. 1.15 Common Facilities. All those facilities, including but not limited to both real and personal property, exclusive of North Anna Unit 1, North Anna Unit 2, Support Facilities, Nuclear Fuel, Operating Inventory and Major Spare Parts which are purchased, leased or otherwise obtained only in connection with the construction, operation and maintenance of more than one nuclear unit located at North Anna Nuclear Power Station. Common Facilities are more specifically described as of the date hereof in Appendix A. 1.16 Displacement Peaking Energy. The amount of energy, at generation level, by which Old Dominion's purchase of Peaking Energy from Virginia Power is reduced pursuant to Section 8.03(b)(ii). 1.17 Displacement Reserve Energy. The amount of energy, at generation level, by which Old Dominion's purchase of Old Dominion Monthly Reserve Energy from Virginia Power is reduced pursuant to Section 8.05(c). 1.18 Displacement Supplemental Energy. The amount of energy, at generation level, by which Old Dominion's purchase of Old Dominion Monthly Supplemental Energy from Virginia Power is reduced pursuant to Section 8.01(d)(ii). 1.19 Effective Date. The later of (1) January 1, 1998 or (2) the date on which FERC permits this Agreement to become effective. 1.20 Events of Default. The events of default pursuant to Section 17.01 hereof. 1.21 Excluded Peaking Capacity. The amount of capacity, at generation level, which Old Dominion obtains pursuant to Section 8.03(a)(iii), other than purchases from Virginia Power under this Agreement to serve Peaking Capacity, and such capacity shall be treated as Old Dominion Monthly Accredited Firm Capacity. 1.22 Excluded Peaking Energy. The amount of energy, at generation level, associated with Excluded Peaking Capacity. 1.23 Excluded Supplemental Capacity. The amount of capacity, at generation level, which Old Dominion obtains pursuant to Sections 8.01(a)(iii), (iv) or (v), other than purchases from Virginia Power under this Agreement to serve the Old Dominion Monthly Supplemental Demand and also the amount of capacity, at generation level, described in Section 8.02 (c)(v). All such capacity shall be treated as Old Dominion Monthly Accredited Firm Capacity. 1.24 Excluded Supplemental Energy. The amount of energy, at generation level, associated with Old Dominion's Excluded Supplemental Capacity. 1.25 Executive Committee. The committee as provided in Section 18.13 hereof. 1.26 FERC. The Federal Energy Regulatory Commission, including any successor governmental agency. 1.27 Fixed Monthly A&G Fee. The fixed amount of monthly North Anna A&G Costs to be paid by Old Dominion for administration and general services performed by Virginia Power on behalf of the North Anna plant and its employees, as described in Section 11.01(b) and Appendix L. 1.28 Holidays. The days on which banking institutions in the City of Richmond, Virginia, are authorized by law to close. 1.29 Interconnected Systems. The Virginia Power System and the Old Dominion System. 1.30 Interconnection Points. The points at which the Virginia Power System and the Old Dominion System are interconnected. 1.31 Interest Rates (a) Special Interest Rate. A rate per annum equal to the prime rate of The Chase Manhattan Bank, N.A., New York, New York, or its successor, in effect from time to time plus three percentage points (3%). (b) Regular Interest Rate. In the case of interest payments owing to Virginia Power or Old Dominion pursuant to this Agreement, an interest rate per annum equal to the prime rate of the Chase Manhattan Bank, N.A., or its successor, as in effect from time to time. 1.32 Major Spare Parts. Those major items designated by the Parties that the Parties keep in inventory for possible use in replacing similar items in units located not only at the North Anna Nuclear Power Station but also at other power stations. The parts that shall be designated as Major Spare Parts for purposes of this Agreement shall be designated by the Parties in Appendix B. Thereafter, Major Spare Parts shall be designated by the North Anna Operating Committee established under Article II of this Agreement. The Major Spare Parts are further described, and the methods of calculating the percentage ownership and cost responsibilities of the Parties in the Major Spare Parts are also included in Appendix B. 1.33 Market Price. The price for electric capacity as determined by market forces and based on existing or projected market conditions for wholesale power. Old Dominion and Virginia Power agree that on or before July 1, 2000, Old Dominion and Virginia Power shall begin negotiations that are to be concluded no later than December 31, 2000, to select a methodology to determine a benchmark of the Market Price. 1.34 Monthly Peaking Energy Charge. The monthly charge for peaking energy as calculated pursuant to Appendix G, Sections V. and VI., hereof. 1.35 Monthly Reserve Energy Charge. The monthly charge for reserve energy as calculated pursuant to Appendix G, Sections IV. and VI., hereof. 1.36 Monthly Supplemental Demand Charge. The monthly charge for supplemental demand calculated pursuant to Appendix G, Section I., hereof. 1.37 Monthly Supplemental Energy Charge. The monthly charge for supplemental energy as calculated pursuant to Appendix G , Sections III. and VI., hereof. 1.38 Network Operating Agreement. The Network Operating Agreement Between Virginia Electric and Power Company and Old Dominion Electric Cooperative under Virginia Power's Open Access Transmission Tariff and any amendments or supplements thereto entered into by Old Dominion and Virginia Power for network service that have been accepted and permitted to go into effect by FERC. 1.39 North Anna A&G Costs. Any administrative and general costs directly attributable to North Anna pursuant to Article XI. 1.40 North Anna Facilities. North Anna Unit 1, North Anna Unit 2, the Common Facilities, the Support Facilities, the Operating Inventory, and the Major Spare Parts, but excluding Nuclear Fuel, which is the subject of the Nuclear Fuel Agreement. 1.41 North Anna Nuclear Power Station. The nuclear generating plant located in Louisa, Orange, and Spotsylvania Counties, Virginia ("North Anna"). 1.42 North Anna Operating Committee. The committee ("Operating Committee") as provided in Article II hereof. 1.43 North Anna Unit 1. The nuclear generating unit located in Louisa County, Virginia, designated as North Anna Unit 1 (more specifically described in Appendix C hereto), representing the cost of all additions, improvements, betterments and replacements thereto, but excluding the Common Facilities, the Support Facilities, the Nuclear Fuel, the Operating Inventory and the Major Spare Parts. 1.44 North Anna Unit 2. The nuclear generating unit located in Louisa County, Virginia, designated as North Anna Unit 2 (more specifically described in Appendix D hereto), representing the cost of all additions, improvements, betterments and replacements thereto, but excluding the Common Facilities, the Support Facilities, the Nuclear Fuel, the Operating Inventory and the Major Spare Parts. 1.45 North Anna Unit(s). Either, or both, of North Anna Unit 1 or North Anna Unit 2. 1.46 Nuclear Fuel. For the purpose of this Agreement, Nuclear Fuel shall have the meaning as defined in the Nuclear Fuel Agreement. 1.47 Nuclear Fuel Agreement. The Nuclear Fuel Agreement Between Virginia Electric and Power Company and Old Dominion Electric Cooperative Dated: As of December 28, 1982, Amended and Restated October 17, 1983. 1.48 Off-Peak Hours. Off-Peak Hours are all hours other than those described as On-Peak Hours. 1.49 Old Dominion. Old Dominion Electric Cooperative, a Virginia generation and transmission cooperative, and its successors and assigns. 1.50 Old Dominion Generation Resources. Old Dominion Monthly North Anna Capacity, Old Dominion Monthly Accredited Firm Capacity, Old Dominion Monthly Accredited Non-firm Capacity, Old Dominion Monthly Delivered SEPA Capacity and any additional generation resources obtained by Old Dominion through joint planning with Virginia Power provided, however, any portion of an Old Dominion generating resource that serves demands other than those of the Old Dominion Members shall not be considered Old Dominion Generation Resources. 1.51 Old Dominion Members. For purposes of this Agreement, those rural electric distribution cooperatives, including their successors and assigns, each of which distributes electricity in areas in which Virginia Power provides requirements service at wholesale or retail as of the Effective Date. For purposes of this Agreement, the Old Dominion Members shall mean those cooperatives listed in Appendix E as of the Effective Date subject to the deletion of members from time to time, together with their respective delivery points, as such delivery points have been added or deleted from time to time. 1.52 Old Dominion Monthly Accredited Firm Capacity. Monthly firm capacity owned or obtained by Old Dominion and that is determined by the Planning and Administration Committee in accordance with Prudent Utility Practice as not requiring reserves. 1.53 Old Dominion Monthly Accredited Firm Energy. The energy associated with the Old Dominion Monthly Accredited Firm Capacity. 1.54 Old Dominion Monthly Accredited Non-firm Capacity. Monthly non-firm capacity owned or obtained by Old Dominion and that is determined by the Planning and Administration Committee in accordance with Prudent Utility Practice as requiring reserves. 1.55 Old Dominion Monthly Accredited Non-firm Energy. The energy associated with the Old Dominion Monthly Accredited Non-firm Capacity. 1.56 Old Dominion Monthly Billing Demand. The Old Dominion Monthly Supplemental Demand less Excluded Supplemental Capacity plus, if any, the kilowatts by which the most recent 12-month average Old Dominion Monthly Maximum Diversified Demand exceeds 110% of the most recent 12-month average Old Dominion Monthly Delivered Demand with such excess being adjusted for losses to reflect load at the generation level by multiplying by the factor of 100 divided by 100 minus the Combined System Loss Percentage. 1.57 Old Dominion Monthly Billing Energy. The Old Dominion Monthly Supplemental Energy, less Excluded Supplemental Energy, less Displacement Supplemental Energy. 1.58 Old Dominion Monthly Clover Capacity. For each Clover Unit, the Capability of such unit multiplied by Old Dominion's Clover Ownership Interest. The total Old Dominion Monthly Clover Capacity shall be the sum of such capacity for Clover Units 1 and 2. Such capacity shall be considered an Old Dominion Generation Resource and treated as Old Dominion Monthly Accredited Non-Firm Capacity. 1.59 Old Dominion Monthly Delivered Demand. The combined Old Dominion hourly demands measured at the Interconnection Points for the clock-hour during which the Combined System Monthly Peak Demand occurs. 1.60 Old Dominion Monthly Delivered Energy. The combined Old Dominion Members' energy requirements for that month measured at the Interconnection Points. 1.61 Old Dominion Monthly Delivered SEPA Capacity. The total megawatts of monthly capacity delivered at the Interconnection Points in accordance with contract(s) between SEPA and Old Dominion Members. 1.62 Old Dominion Monthly Delivered SEPA Energy. The energy associated with the Old Dominion Monthly Delivered SEPA Capacity. 1.63 Old Dominion Monthly Demand. The Old Dominion Monthly Delivered Demand less Old Dominion Monthly Delivered SEPA Capacity with such difference being adjusted for losses to reflect load at the generation level by multiplying by the factor of 100 divided by 100 minus the Combined System Loss Percentage. 1.64 Old Dominion Monthly Energy. Old Dominion Monthly Delivered Energy less Old Dominion Monthly Delivered SEPA Energy, as such energy may be available from time to time, with such difference being adjusted for losses to reflect energy at the generation level by multiplying by the factor of 100 divided by 100 minus the Combined System Loss Percentage. 1.65 Old Dominion Monthly Maximum Diversified Demand. The combined Old Dominion Members' monthly maximum coincident hourly demand measured at the Interconnection Points during the On-Peak Hours. 1.66 Old Dominion Monthly North Anna Capacity. For each generating unit at the North Anna Nuclear Power Station, the Capability of such unit multiplied by Old Dominion's North Anna Percentage Ownership Interest. The total Old Dominion Monthly North Anna Capacity shall be the sum of such capacity for North Anna Units l and 2. 1.67 Old Dominion Monthly North Anna Energy. The energy associated with Old Dominion Monthly North Anna Capacity at the North Anna Nuclear Power Station. 1.68 Old Dominion Monthly Reserve Energy . The total amount of energy at 100% capacity factor that could have been produced by Old Dominion Monthly North Anna Capacity and any other Old Dominion Monthly Accredited Nonfirm Capacity for which Virginia Power provides reserves when the resource is subject to full or partial outage conditions (planned, unplanned, scheduled or unscheduled outages and including any deration of generator units), less Old Dominion Monthly Accredited Non-firm Energy that could have been produced but was not produced for economic dispatch reasons, less Old Dominion Monthly North Anna Energy, less Old Dominion Monthly Accredited Non-firm Energy, less Displacement Reserve Energy. 1.69 Old Dominion Monthly Supplemental Demand. The Old Dominion Monthly Demand, less the Old Dominion Monthly North Anna Capacity, less other Old Dominion Monthly Accredited Firm Capacity, less Old Dominion Monthly Accredited Non-firm Capacity, less Peaking Capacity and less Excluded Peaking Capacity. 1.70 Old Dominion Monthly Supplemental Energy. The Old Dominion Monthly Energy, less the Old Dominion Monthly North Anna Energy, less the Old Dominion Monthly Accredited Firm Energy, less the Old Dominion Monthly Accredited Non-firm Energy (less Clover Economy Sales to Virginia Power), less the Old Dominion Monthly Reserve Energy, less Displacement Reserve Energy, less the energy associated with Clover Economy Purchases from Virginia Power, less Peaking Energy, less Displacement Peaking Energy and less Excluded Peaking Energy. 1.71 Old Dominion's North Anna Percentage Ownership Interest. Except as otherwise modified by the operation of Sections 15.03, 16.01 or 16.02 of the Purchase, Construction and Ownership Agreement, an undivided ownership interest in the North Anna Facilities equal to 11.6 percent in each of North Anna Unit 1, North Anna Unit 2, the Common Facilities, the Operating Inventory and the Major Spare Parts, and a percentage in the Support Facilities as determined in accordance with Appendix F. 1.72 Old Dominion Reserve Capacity. An amount in kilowatts equal to: the sum of (a) the actual Old Dominion Monthly North Anna Capacity and (b) the actual Old Dominion Monthly Accredited Non-firm Capacity, such sum multiplied by the System Reserve Margin. 1.73 Old Dominion System. The generation, transmission, distribution and other facilities owned or leased by Old Dominion or the Old Dominion Members as shown on their books of account from time to time and located in the area in which Virginia Power provides requirements service at wholesale or retail as of the Effective Date. 1.74 On-Peak Hours. On-Peak Hours are the hours between 7:00 a.m. and 10:00 p.m., Monday through Friday, for the months of October through May, and the hours between 10:00 a.m. and 10:00 p.m., Monday through Friday, for the months of June through September. 1.75 Open Access Transmission Tariff. Virginia Power's Open Access Transmission Tariff, and any successors thereto, filed with, accepted, and permitted to go into effect by FERC. 1.76 Operating Inventory. Equipment, spare parts, tools, goods and supplies (excluding Nuclear Fuel and Major Spare Parts) to be used solely for the operation, maintenance or modification of the North Anna Units and recorded on Virginia Power's books of account in accordance with the Uniform System of Accounts. 1.77 Parties. Virginia Power and Old Dominion. 1.78 Peaking Capacity. Firm peaking capacity supplied by Virginia Power pursuant to Sections 8.03(a)(i) and (ii) and 8.03(e) hereof. Old Dominion's purchase of such capacity shall be considered an additional Old Dominion Generation Resource and treated as Old Dominion Monthly Accredited Firm Capacity. 1.79 Peaking Capacity Charge. The monthly charge for Peaking Capacity as calculated pursuant to Appendix G, Section II. hereof. 1.80 Peaking Energy. The energy associated with the Peaking Capacity as determined pursuant to Sections 8.03(b)(i) and (ii). 1.81 Planning and Administration Committee. The committee as provided in Article III hereof. 1.82 Prudent Utility Practices. Any of the practices, methods, and acts engaged in or accepted by a significant portion of the electric utility industry at the time the decision was made, or any of the practices, methods, and acts that, in the exercise of reasonable judgment in light of the facts known at the time the decision was made, would have been expected to accomplish the desired result at a reasonable cost consistent with reasonable reliability, safety, expedition and protection of the environment. Prudent Utility Practices are not intended to be limited to the optimum practices, methods, or acts to the exclusion of all others, but rather to a spectrum of possible practices, methods, or acts engaged in or accepted by a significant portion of the electric utility industry at the time the decision was made. 1.83 Purchase, Construction and Ownership Agreement. The Purchase, Construction and Ownership Agreement Between Virginia Electric and Power Company and Old Dominion Electric Cooperative Dated: As of December 28, 1982 Amended and Restated October 17, 1983. 1.84 Reserve Capacity Charge. The monthly charge for Old Dominion Reserve Capacity as determined pursuant to Section 8.05 and Appendix I, hereof. 1.85 RUS. The Rural Utilities Service, successor agency to the Rural Electrification Administration, and any successor governmental agency. 1.86 SEPA. The Southeastern Power Administration, including any successor governmental agency. 1.87 Support Facilities. All those facilities, wherever situated, including, but not limited to, both real and personal property, exclusive of Common Facilities, Nuclear Fuel, Operating Inventory and Major Spare Parts, which are purchased, leased or otherwise obtained for the construction, operation and maintenance of one or more nuclear unit(s) located at the North Anna Nuclear Power Station and one or more nuclear unit(s) located at Virginia Power's Surry Nuclear Power Station or at such other location as Virginia Power may have an interest in any nuclear facility. Support Facilities, and investment and cost responsibilities of the Parties therefor, are more specifically described in Appendix F hereto. 1.88 System Reserve Margin . Shall be determined for the month of the projected Combined System Annual Peak Demand as (1) the ratio of (a) the projected Combined System Monthly Capability in that month plus projected purchases from third parties in that month of the approximate reliability of the Combined System Monthly Capability less projected sales to third parties in that month of the approximate reliability of the Combined System Monthly Capability, but in no event to include purchases or sales of economy energy, emergency energy, or other such nondependable transactions, divided by (b) the projected Combined System Annual Peak Demand, (2) less one. The System Reserve Margin shall be calculated in accordance with the orders, directives or guidelines of regulatory bodies or regional reliability councils. 1.89 Transmission Service Agreement . The Service Agreement For Network Integration Transmission Service To Old Dominion Electric Cooperative under Virginia Power's Open Access Transmission Tariff and any amendments or supplements thereto entered into by Old Dominion and Virginia Power for transmission service that have been accepted and permitted to go into effect by FERC. 1.90 Virginia Power. Virginia Electric and Power Company, a Virginia public service corporation, and its successors and assigns. 1.91 Virginia Power System. The generation, transmission, distribution and other facilities owned by Virginia Power as shown on its books of accounts from time to time or facilities leased by Virginia Power. 1.92 Wholesale Power Contracts. The several wholesale power contracts between Old Dominion and the Old Dominion Members for the purchase of electric energy and capacity by the Old Dominion Members from Old Dominion, as in effect from time to time. ARTICLE II North Anna Operating Committee 2.01 North Anna Operating Committee. To coordinate operations in carrying out the terms of this Agreement associated with the North Anna Facilities, Virginia Power will appoint four members and Old Dominion will appoint two members to the North Anna Operating Committee ("Operating Committee"). Each member of the Operating Committee shall be fully authorized to act on behalf of its Party with respect to all matters contemplated by this Agreement but will not be authorized to alter or amend the Agreement. Each Party shall notify the other in writing of the names of the persons who will serve as the members of the Operating Committee and, if desired, the names of any persons who may serve as alternates when the members are unable to act. Virginia Power's members may be changed, in Virginia Power's sole discretion and from time to time, by at least ten (10) days' prior written notice to Old Dominion. Old Dominion's members may be changed, in Old Dominion's sole discretion and from time to time, by at least ten (10) days' prior written notice to Virginia Power. 2.02 Meetings and Voting Rights. Meetings shall be held at the discretion of the Operating Committee but at least shall be held quarterly. Minutes of each meeting shall be kept and shall be approved by the Operating Committee at its next meeting. Decisions of the Operating Committee shall be made upon vote by the Operating Committee with the voting power of each Party determined by its entitlement to the capability of North Anna Units 1 and 2 as provided in Section 2.03 of the Purchase, Construction and Ownership Agreement. 2.03 Duties of Operating Committee. The Operating Committee shall, subject to Virginia Power's authority and obligations under Article V and any other limitations in this Agreement, act upon those matters relating to the coordination of the operation of the North Anna Facilities necessary for the implementation of this Agreement. 2.04 Expenses of Operating Committee. The expenses of each member of the Operating Committee, and his alternate and associates, shall be borne by the Party he represents. Other expenses of the Operating Committee will be shared as agreed upon by the Operating Committee. Any expense not agreed to unanimously by the Operating Committee shall be borne by the Party incurring it. 2.05 Resolution of Disputes. If any dispute should arise regarding the operating function that cannot be resolved by the Operating Committee, the dispute and the circumstances surrounding such dispute shall be presented to the Executive Committee, which is empowered in Section 18.13 to resolve such disputes. ARTICLE III Planning and Administration 3.01 Planning and Administration Committee. In order to carry out the terms of this Agreement, Virginia Power will appoint four members and Old Dominion will appoint two members to the Planning and Administration Committee. Each member of the Planning and Administration Committee shall be fully authorized to act on behalf of its Party with respect to all matters contemplated by this Agreement but will not be authorized to alter or amend the Agreement. Each Party shall notif the other in writing of the names of the persons who will serve as the members of the Planning and Administration Committee and, if desired, the names of any persons who may serve as alternate when the members are unable to act. Virginia Power's members may be changed in Virginia Power's sole discretion and from time to time, by at least ten (10) days' prior written notice to Old Dominion. Old Dominion's members may be changed, in Old Dominion's sole discretion and from time to time, by at least ten (10) days' prior written notice to Virginia Power. 3.02 Meetings. Meetings shall be held at the discretion of the Planning and Administration Committee but at least shall be held semi-annually. 3.03 Duties of the Planning and Administration Committee. (a) The Planning and Administration Committee shall be responsible for the general administration of this Agreement in accordance with Prudent Utility Practices. In addition, the Planning and Administration Committee may, but is not obligated to, consider joint planning of future generation facilities. The Planning and Administration Committee will also discuss new governmental regulations, issues and changes in the industry in which the Parties have a mutual interest, establish committees required for the orderly administration of the Agreement but not specifically provided for in the Agreement, and address any other matter in which cooperation, coordination or agreement is necessary. (b) For the purposes of joint planning, Old Dominion shall furnish Virginia Power annually, prior to January 1, a forecast of its system loads for at least the succeeding ten (10) year period. Virginia Power shall furnish Old Dominion annually, prior to January 1, a forecast of its system loads for at least the succeeding ten (10) year period and its target reserve level. If either Old Dominion or Virginia Power makes an official revision to the forecasts during the year, notification of such revision shall be given in writing to the other Party in a timely fashion. Each Party shall provide an explanation of any significant deviation from historic trends in its forecast. 3.04 Future Transmission Planning. Virginia Power shall continue to plan and be responsible for its future transmission system pursuant to the Virginia Power Open Access Transmission Tariff and the Network Operating Agreement. Virginia Power and Old Dominion agree to consider in the future joint ownership of transmission facilities where reasonable net benefits will accrue to both Parties. 3.05 Exchange of Information. Each Party will make available, upon request, information used in, or useful to, the administration of this Agreement. Other specific rights for information are covered in other parts of this Agreement. 3.06 Expenses of the Planning and Administration Committee. Each Party shall pay all expenses of its representatives. Other expenses incurred by the committee will be shared as agreed upon by the Planning and Administration Committee. Any expense not agreed to unanimously by the Planning and Administration Committee shall be borne by the Party incurring it. 3.07 Resolution of Disputes. If any disputes relating to the duties of the Planning and Administration Committee should arise that cannot be resolved by the Planning and Administration Committee, the dispute and the circumstances surrounding such dispute shall be presented to the Executive Committee, which is empowered in Section 18.13 to resolve such disputes. 3.08 SEPA Contract. The Parties agree that if and when Virginia Power's contract with SEPA is changed from time to time, the Planning and Administration Committee shall recommend to the Parties such modifications in this Agreement as are necessary to conform with any such changes. ARTICLE IV Interconnection and Protection of Systems 4.01 Obligation for Adequate Facilities. Virginia Power and Old Dominion are each obliged to provide, on its own system or through this Agreement and other arrangements, generation or distribution facilities or service adequate to serve expected loads and to maintain all such facilities in a suitable condition of repair so that they may be operated in accordance with Prudent Utility Practices and not impose a burden on any other system. 4.02 Protection of Systems. Old Dominion shall refrain from, and shall require Old Dominion Members to refrain from, any acts, transactions, and uses of equipment, appliances or devices which may have a significant adverse effect upon the reliability or characteristics of the Virginia Power System. Virginia Power shall refrain and shall require its customers to refrain from any acts, transactions, and uses of equipment, appliances or devices which may have a significant adverse effect upon the reliability or characteristics of the Old Dominion System. 24 ARTICLE V Virginia Power's Authority and Responsibility with Respect to Old Dominion's North Anna Generation 5.01 Virginia Power as Agent of Old Dominion . (a) Old Dominion hereby appoints Virginia Power (such appointment shall be irrevocable for the term of this Agreement and coupled with an interest) its sole agent, subject, however, to Old Dominion's right of reasonable inspection through authorized representatives, to act on its behalf for the operation, maintenance, modifications and fueling (including the procurement of nuclear fuel), of the North Anna Facilities and authorizes Virginia Power in the name of and on behalf of Old Dominion to take all reasonable actions which, in the discretion and judgment of Virginia Power, are deemed necessary or advisable to effect the operation, maintenance, modifications and fueling (including the procurement of nuclear fuel) of the North Anna Facilities, including, without limitation, the following: (i) the making of such agreements and modifications of existing agreements and the taking of such other action as Virginia Power deems necessary or appropriate, in its sole discretion, or as may be required under the regulations or directives of such governmental bodies and regulatory agencies having jurisdiction, with respect to the operation, maintenance, modifications and fueling (including the procurement of nuclear fuel) of the North Anna Facilities; (ii) the execution and filing with such governmental bodies and regulatory agencies having jurisdiction of applications, amendments, reports and other documents and filings for or in connection with licensing, operation and other regulatory matters with respect to the North Anna Facilities; and 25 (iii) the receipt on Old Dominion's behalf of any notice or other communication from any governmental body or regulatory agency having jurisdiction, as to any licensing, operation or other regulatory matter with respect to the North Anna Facilities. (b) As relates to all third parties, this agency designation shall be binding on Old Dominion, and such appointment shall be deemed in effect by each third party until termination of this Agreement pursuant to the terms hereof and until such third party receives written notification from Virginia Power of any termination thereof. (c) Virginia Power accepts such appointment. In discharging all of its duties and responsibilities hereunder, Virginia Power will act in good faith and in accordance with Prudent Utility Practices. Virginia Power's duties and responsibilities shall include, but not be limited to, establishing organizational structure and manpower requirements, maintaining an adequate work force through Virginia Power's personnel administration policies, arranging and procuring necessary or desirabl materials and services for operation of the North Anna Facilities, determining scheduled outages for routine inspections, refueling and general maintenance, scheduling, dispatching and loading of the North Anna Facilities, preparing and filing applications, reports and other documents relating to operation of the North Anna Facilities, establishing reasonable rules for visits to the North Anna Facilities, and determining the need for, and subsequently constructing, any capital additions or modifications to the North Anna Facilities. Virginia Power shall not, solely because of Old Dominion's ownership interest in the North Anna Facilities make any adverse distinctions in operation, maintenance, modifications, fueling, scheduling, or dispatching as between the North Anna Facilities and any other generating 26 unit or facilities in which Virginia Power has an ownership interest. Nothing herein shall interfere with Virginia Power's authority and responsibility for the operation of, maintenance of, modifications to, fueling of, and improvements to all of its other generation facilities. Virginia Power shall make available upon request by Old Dominion regularly prepared monthly reports which contain specific information on all generating facilities including, but not limited to, operating expenses, maintenance expenses, fuel expenses, generating statistics, fuel reports, operating statistics and other information reasonably available. Virginia Power will also have the right to submit data relating to operation of the North Anna Facilities to any other entity. Old Dominion will make available all information or data necessary for Virginia Power to schedule and dispatch generation. (d) Old Dominion agrees that it will take all necessary action in a prompt manner to execute any agreements for the operation, maintenance, modifications and fueling of the North Anna Facilities as and when requested by Virginia Power to permit Virginia Power to carry out its authority and responsibilities pursuant to this Section 5.01. 27 ARTICLE VI Transmission Services 6.01 Old Dominion Transmission Service. Except as provided for in Section 6.03, Virginia Power will furnish transmission service and all related ancillary services required by Old Dominion for the Old Dominion Members under Virginia Power's Open Access Transmission Tariff, commencing on the Effective Date. Due to the unique characteristics of network customers' systems and the level of customer-specific information and arrangements required under a network operating agreement, specific terms and conditions recognizing local or system-specific factors affecting transmission service to Old Dominion will be stated in the Transmission Service Agreement or Network Operating Agreement. 6.02 Native Load Status. (a) Virginia Power will plan, construct, operate and maintain the Virginia Power transmission system, in accordance with Prudent Utility Practices, such that Virginia Power will be able to provide reliable transmission service to Old Dominion over the Virginia Power transmission system. Virginia Power shall include Old Dominion's network load in its transmission system planning and shall, consistent with Prudent Utility Practices, construct and place into service sufficient transmission capacity to deliver Old Dominion's network resources to serve Old Dominion's network load on a basis comparable to Virginia Power's delivery of its own generating and purchased resources. (b) Protecting and preserving Old Dominion's native load status as defined under Order Nos. 888 and 888A is a fundamental principle of this Agreement. Failure to meet the requirements of Section 6.02(a) shall frustrate the intent of the Parties to this Agreement. 28 6.03 SEPA Capacity Transmission Service. Old Dominion Monthly Delivered SEPA Capacity and Old Dominion Monthly Delivered SEPA Energy will be transmitted to the Interconnection Points by separate agreement between Virginia Power and SEPA or pursuant to Virginia Power's Open Access Transmission Tariff. 29 ARTICLE VII Entitlements to Capacity and Energy 7.01 Entitlements of the Parties to Capacity and Energy. Subject to the provisions of Sections 15.03, 16.01 and 16.02 of the Purchase, Construction and Ownership Agreement, Old Dominion shall be entitled to 11.6% of the capacity and energy from North Anna Units 1 and 2. Subject to the provisions of Sections 15.03, 16.01 and 16.02 of the Purchase, Construction and Ownership Agreement, Virginia Power shall be entitled to the balance of the capacity and energy from each unit. 30 ARTICLE VIII Supplemental Demand and Energy, Peaking Capacity and Energy, and Reserve Capacity and Energy 8.01 Supplemental Demand and Energy . (a) Supplemental Demand. (i) Virginia Power shall sell monthly to Old Dominion, and Old Dominion shall purchase monthly from Virginia Power, the Old Dominion Monthly Supplemental Demand in the amounts necessary to supply the needs of the Old Dominion Members not met from Old Dominion Generation Resources, from the Effective Date through December 31, 2001, and one-half of the Old Dominion Monthly Supplemental Demand requirements for calendar year 2002. (ii) Except as otherwise provided in this Article VIII of the Agreement, effective January 1, 2002 through December 31, 2002, Virginia Power shall also offer to sell capacity equal to the remaining one-half of the Old Dominion Monthly Supplemental Demand requirements and for January 1, 2003, through August 31, 2005, Virginia Power shall offer to sell all of the Old Dominion Monthly Supplemental Demand requirements, unless Virginia Power provides written notice to Old Dominio prior to January 1, 2000, that it elects not to so supply Old Dominion. Prior to October 1, 2000, Old Dominion shall provide to Virginia Power a projection of the remaining one-half of the Old Dominion Monthly Supplemental Demand for each month of calendar year 2002. The Parties shall review Old Dominion's projection, and the projection of the remaining one-half of the Old Dominion Monthly Supplement Demand shall be subject to the mutual 31 acceptance of the Parties. The remaining one-half of the Old Dominion Monthly Supplemental Demand shall be equivalent to this mutually accepted projection and shall be considered fixed and Virginia Power shall provide the balance of the Old Dominion Monthly Supplemental Demand pursuant to Section 8.01(a)(i) regardless of the actual Old Dominion Monthly Supplemental Demand in calendar year 2002. (iii) For calendar year 2002, if Virginia Power has provided the notice described in Section 8.01(a)(ii), Old Dominion shall purchase capacity from an Alternate Power Source to serve the remaining one-half of the Old Dominion Monthly Supplemental Demand for that year. Such capacity shall be deemed Excluded Supplemental Capacity. (iv) For calendar year 2002, if Virginia Power does not provide the notice described in Section 8.01(a)(ii), Old Dominion shall by January 1, 2001, provide Virginia Power with written notice of whether Old Dominion will: (1) purchase the remaining one-half of the Old Dominion Monthly Supplemental Demand from Virginia Power at the Monthly Supplemental Demand Charge rates applicable for that year under Appendix G, Section I.A.; or (2) obtain the remaining one-half of the Old Dominion Monthly Supplemental Demand from Virginia Power or an Alternate Power Source pursuant to the terms of Section 8.02(b)(ii). Such capacity obtained from an Alternate Power Source shall be deemed Excluded Supplemental Capacity. (v) From January 1, 2003 through August 31, 2005, if Virginia Power does not provide the notice described in Section 8.01(a)(ii), Old Dominion will obtain all of the Old Dominion Monthly Supplemental Demand from Virginia 32 Power or an Alternate Power Source pursuant to the terms of Section 8.02(b)(ii). Such capacity obtained from an Alternate Power Source shall be deemed Excluded Supplemental Capacity. (vi) After August 31, 2005, Virginia Power is not obligated to sell to Old Dominion, and Old Dominion is not obligated to purchase from Virginia Power, the Old Dominion Monthly Supplemental Demand. (vii) The calculation to determine the Old Dominion Monthly Supplemental Demand shall be as set forth in Appendix H, Section I. (b) Increases in Supplemental Demand. Old Dominion may not increase the Old Dominion Monthly Supplemental Demand requirements beyond that occasioned by normally expected load growth unless Virginia Power shall agree. Except as otherwise provided in this Article VIII of the Agreement, Virginia Power agrees to provide the Old Dominion Monthly Supplemental Demand in the amounts required by Old Dominion to serve its present and future demands except for such increases in demands which may arise from an undertaking by Old Dominion, or one or more of the Old Dominion Members, to serve (1) a source of demand outside the area in which Virginia Power provides requirements service at wholesale or retail as of the Effective Date or (2) any additional load which is substantially different from the size and type of load included by Virginia Power in its system planning and which, if served, (i) would compel an enlargement of Virginia Power's generation facilities not otherwise included by Virginia Power in its system planning or (ii) would impair Virginia Power's ability to render reasonably adequate service to its other retail and wholesale customers. However, a new customer imposing a load in excess of 100 megawatts shall not be defined as normally expected load growth unless sufficient notice shall have been provided to Virginia Power. Furthermore, 33 increases in load occurring after the Effective Date resulting from mergers between Old Dominion Members and entities that are not Old Dominion Members or acquisitions of new wholesale customers by Old Dominion or Old Dominion Members shall not be defined as normally expected load growth. (c) Reductions in Supplemental Demand. Old Dominion's purchases of supplemental demand shall be reduced by the amount of Old Dominion Monthly Accredited Firm Capacity and Old Dominion Monthly Accredited Non-firm Capacity obtained by Old Dominion, which for any period shall be equal to the sum of: (1) the amount of capacity jointly owned or planned with Virginia Power, other than North Anna, (2) the amount of Excluded Supplemental Capacity obtained by Old Dominion, (3) the amount o Peaking Capacity obtained by Old Dominion, (4) the amount of Excluded Peaking Capacity obtained by Old Dominion, and (5) those amounts purchased pursuant to Section 8.02(c). (d) Supplemental Energy. (i) Except as otherwise provided in this Article VIII of the Agreement, from the Effective Date through August 31, 2005, Virginia Power shall offer to sell to Old Dominion the Old Dominion Monthly Supplemental Energy less any Excluded Supplemental Energy, to the extent that Virginia Power supplies supplemental capacity. (ii) Old Dominion shall be entitled to displace up to two-thirds of the annual Old Dominion Monthly Supplemental Energy requirements for calendar year 1998 by obtaining such energy from an Alternate Power Source. Effective January 1, 1999, Old Dominion shall be entitled to displace all or any portion of its annual purchases of Old Dominion Monthly Supplemental Energy requirements 34 from Virginia Power by obtaining such energy from an Alternate Power Source. Such displaced energy shall be deemed Displacement Supplemental Energy. (iii) From the Effective Date forward, delivery of any Displacement Supplemental Energy will be in accordance with the schedules provided by Old Dominion or its power suppliers to Virginia Power and pursuant to Sections 6.01 and 6.02 of this Agreement and the Transmission Service Agreement. (iv) From the Effective Date through August 31, 2005, whenever Old Dominion obtains Excluded Supplemental Capacity, it also shall be responsible for obtaining all of the energy associated with such Excluded Supplemental Capacity. Such energy shall be deemed Excluded Supplemental Energy. (v) Prior to October 1, 2000, Old Dominion shall provide to Virginia Power a projection of the remaining one-half of the Old Dominion Monthly Supplemental Energy for each month of calendar year 2002. The Parties shall review Old Dominion's projection, and the projection of the remaining one-half of the Old Dominion Monthly Supplemental Energy shall be subject to the mutual acceptance of the Parties. The remaining one-half of the Old Dominion Monthly Supplemental Energy shall be equivalent to this mutually accepted projection and shall be considered fixed and Virginia Power shall provide the balance of the Old Dominion Monthly Supplemental Energy pursuant to 8.01(d)(i) regardless of the actual Old Dominion Monthly Supplemental Energy in calendar year 2002. (vi) The calculation to determine Old Dominion Monthly Supplemental Energy shall be as set forth in Appendix H, Section V. 8.02 Charges for Purchases By Old Dominion Pursuant to Section 8.01. 35 (a) Supplemental Energy. (i) Through December 31, 2000, for purchases by Old Dominion of Old Dominion Monthly Supplemental Energy from Virginia Power pursuant to Section 8.01(d), Old Dominion shall pay Virginia Power a Monthly Supplemental Energy Charge based on Virginia Power's average system energy cost, less North Anna energy cost, as set forth initially in Appendix G, Sections III.A. and VI. (ii) Commencing January 1, 2001, for purchases by Old Dominion of Old Dominion Monthly Supplemental Energy from Virginia Power pursuant to Section 8.01(d), Old Dominion shall pay Virginia Power at rates, set by Virginia Power, that are based on the projected cost of energy from its combined cycle and peaking units subject to an annual true-up as set forth in Appendix G, Section III.B. The generating units to be included in the determination of the Old Dominion Monthly Supplemental Energy cost during this period shall be agreed to by the Parties. Selection of the generating units and the appropriate rate calculation will be finalized on or before October 1 of each year for the following calendar year, as set forth in Appendix G, Section III.B. (b) Supplemental Demand. (i) Old Dominion shall pay Virginia Power for Old Dominion Monthly Supplemental Demand purchased, exclusive of Excluded Supplemental Capacity, pursuant to Section 8.01(a) at the rates set forth in Appendix G, Section I. (ii) For the capacity defined in Section 8.01(a)(ii), the maximum price Old Dominion shall pay to Virginia Power for capacity to serve such Old Dominion Monthly Supplemental Demand shall be the Market Price for wholesale 36 capacity at that time. As an incentive for Virginia Power to minimize the rate to Old Dominion, Old Dominion agrees to share the savings between the Market Price and Virginia Power's proposed price to supply such capacity if Old Dominion purchases from Virginia Power. If however, Old Dominion demonstrates to Virginia Power that Old Dominion can obtain Excluded Supplemental Capacity at a lower cost under comparable terms and conditions from an Alternate Power Source, then Virginia Power will have the option to adjust its price to match the lower cost from an Alternate Power Source or Old Dominion may obtain the Excluded Supplemental Capacity from the Alternate Power Source without any obligation to Virginia Power under this Agreement. At such time as Virginia Power has no obligation to serve any Old Dominion Monthly Supplemental Demand, Old Dominion will have no obligation to pay Virginia Power for any Old Dominion Monthly Billing Demand as set forth in Appendix H, Section III. (c) Alternative Power Supply and Rates. (i) In the event that (1) any existing customer of Old Dominion or any Old Dominion Member or (2) any future customer located in an Old Dominion Member's service territory obtains the right to receive electric service from an "alternate power supplier" and receives a firm offer from such "alternate power supplier", Old Dominion and its appropriate Member shall use their best efforts to obtain or retain that service to the customer. Such best efforts by Old Dominion and its Member shall include, but shall not be limited to, proposing to the 37 customer reasonable options using economic development or discounted rates, each of which may include a reasonable margin over costs. (ii) In order to assist Old Dominion or any Old Dominion Member in attracting a new retail customer or retaining the load of an existing Old Dominion Member retail customer that is considered by Old Dominion to be at risk ("at-risk load"), Virginia Power, upon notification by Old Dominion, shall make available to Old Dominion and Old Dominion shall, through the Old Dominion Members, make available to the "at-risk load" the most cost-effective alternative tariff contained in Virginia Power's then-current Virginia retail tariffs for which such "at-risk load" would qualify pursuant to that tariff's applicability clause. Verifiable billing determinants shall be made available to Virginia Power each month, and Virginia Power shall calculate the billing credit based on the difference in the "at-risk load" billing determinants billed under this Agreement and those billing determinants billed under the alternate available Virginia Power rate schedule and credit Old Dominion accordingly. (iii) In the event that Old Dominion or the Old Dominion Member is still at risk of losing a retail customer after making all of the efforts as set forth herein, then Old Dominion shall have the right to reduce its purchases from Virginia Power accordingly and generate, purchase or otherwise obtain an equivalent amount of power (i.e., demand and energy) elsewhere in order to retain that customer. (iv) In the event that, notwithstanding Old Dominion's and the Old Dominion Member's best efforts as defined above, a retail customer of Old 38 Dominion or one of its Members has rejected in writing all of the proposals set forth in this section and has purchased electric service from an "alternate power supplier," then Old Dominion may reduce its purchases of supplemental demand and energy from Virginia Power to the extent of the existing load lost to the "alternate power supplier" and may purchase an equivalent amount of demand and energy elsewhere. (v) When Virginia Power's obligation to provide Peaking Capacity ceases, the capacity and energy serving load (1) under an alternative Virginia Power tariff pursuant to Section 8.02(c)(ii), (2) with power purchased or obtained elsewhere pursuant to Section 8.02 (c)(iii), or (3) lost to the "alternate power supplier" pursuant to Section 8.02(c)(iv) shall be deemed to be Old Dominion Excluded Supplemental Capacity and Excluded Supplemental Energy. (vi) This Section 8.02(c) shall not be applicable to any new "at risk load" after December 31, 2002. 8.03 Peaking Capacity and Energy Purchases. Virginia Power shall sell to Old Dominion and Old Dominion shall purchase Peaking Capacity and associated energy as provided below: (a) Peaking Capacity (i) Except as provided otherwise in this Article VIII of the Agreement, for each month from March 28, 1996, through December 31, 2002, Virginia Power shall provide and sell to Old Dominion firm Peaking Capacity as determined pursuant to Appendix M, Section I., in an amount equal to four percent (4%) of the maximum Old Dominion Monthly Delivered Demand in each 39 of the preceding calendar years beginning with January 1, 1995, and Old Dominion shall purchase suc capacity, which shall be considered an additional Old Dominion Generation Resource. The Old Dominion annual supplemental demand reductions and the related Peaking Capacity supplied by Virginia Power will be cumulative. The four percent (4%) annual supplemental demand reduction will occur on January 1 of each subsequent year. (ii) For calendar year 2003, Old Dominion will have the option of continuing to purchase Peaking Capacity from Virginia Power. Old Dominion must notify Virginia Power by January 1, 2002, if Old Dominion will continue to purchase the cumulative Peaking Capacity. If Old Dominion does not provide such notice, Virginia Power's obligations to provide Peaking Capacity shall cease on December 31, 2002 and the amount of such Peaking Capacity shall be fixed at the capacity level in effect for 2002 through August 31, 2005. If Old Dominion provides such notice, Old Dominion will continue to purchase Peaking Capacity from Virginia Power in 2003, which will increase from the capacity level in effect for 2002 by the four percent (4%) calculation. After December 31, 2003, the amount of such Peaking Capacity shall be fixed at the capacity level in effect for 2003 through August 31, 2005. Virginia Power will not be obligated to provide Peaking Capacity after December 31, 2003. (iii) After Virginia Power's obligation to provide Peaking Capacity ceases, Old Dominion shall obtain such capacity from an Alternate Power Source and such capacity shall be deemed Excluded Peaking Capacity. 40 (iv) The amount of cumulative Peaking Capacity shall be reduced by the amount of any load transfers after the Effective Date either to other utility's(ies') control area(s) or through the installation of diesel generators, by Old Dominion or any of the Old Dominion Members for improvement in operations or reliability. Furthermore, if for any reason existing load is transferred from another utility's(ies') control area(s) to Old Dominion or any Old Dominion Member's service territory falling within Virginia Power's control area, the cumulative Peaking Capacity shall be increased by the amount of such load transfer. (b) Peaking Energy Purchases. (i) Virginia Power shall sell and Old Dominion shall purchase Peaking Energy as determined pursuant to Appendix M, Section II. (ii) Old Dominion will have the right to displace up to two-thirds of the accumulated Peaking Energy from January 1, 1998, through December 31, 1998, and all or any portion of its accumulated Peaking Energy requirements beginning January 1, 1999 through December 31, 2002 by obtaining such energy from an Alternate Power Source. Such displaced Peaking Energy shall be deemed Displacement Peaking Energy. However, whether or not Old Dominion obtains Displacemen Peaking Energy, Virginia Power is obligated to plan for and be prepared to supply Old Dominion's Peaking Energy requirements until Virginia Power's obligation to provide Peaking Capacity ceases. Thereafter, Virginia Power will not be obligated to provide Old Dominion's Peaking Energy requirements and Old Dominion shall obtain Peaking Energy from an Alternate 41 Power Source to serve such energy requirements. Such energy shall be deemed Excluded Peaking Energy. (c) Peaking Capacity Charges. Old Dominion shall pay Virginia Power for Peaking Capacity purchased pursuant to Section 8.03(a) at the rates set forth in Appendix G, Section II. (d) Peaking Energy Charges. Through December 31, 1999, for purchases by Old Dominion of monthly Peaking Energy from Virginia Power pursuant to Section 8.03(b), Old Dominion shall pay Virginia Power a Monthly Peaking Energy Charge based on Virginia Power's average system energy cost, less North Anna energy cost, as set forth in Appendix G, Sections V.A. and VI. For the period commencing January 1, 2000, Virginia Power shall charge Old Dominion a Monthly Peaking Energy Charge for Peaking Energy purchased from Virginia Power based on the projected generation cost of Virginia Power's owned and operated peaking units subject to an annual true-up as set forth in Appendix G, Section V.B. The Virginia Power peaking units to be used in determining a Monthly Peaking Energy Charge shall be mutually agreed to by the Parties on or before each October 1 for the following calendar year. (e) Supplemental Billing Demands. On a monthly basis, if the Old Dominion Monthly Supplemental Demand, as determined in accordance with Appendix H, Section I., prior to crediting the Peaking Capacity, is less than the total Peaking Capacity provided by Virginia Power, then the Peaking Capacity shall be equal to the Old Dominion Monthly Demand less the sum of the Old Dominion Monthly North Anna Capacity and Old Dominion Monthly Accredited Firm Capacity (other than Peaking Capacity) and Old Dominion Monthly Accredited Non-Firm Capacity. Accordingly, the Old Dominion Monthly Supplemental Demand component of the Old Dominion Monthly Billing Demand shall be equal to zero for the month. 42 8.04 Limitation on Virginia Power's Obligation to Serve Supplemental Demand and Provide Supplemental Energy. (a) Virginia Power shall not be required by this Agreement to serve supplemental demand or provide energy outside the area in which Virginia Power provides requirements service at wholesale or retail as of the Effective Date, except for any minor boundary adjustments and minor reallocations between Old Dominion Members and contiguous systems. (b) If generating capacity or energy should become inadequate to supply the full needs of both the Old Dominion Members' consumers and Virginia Power customers, Old Dominion and Virginia Power shall share such deficiency on a pro rata basis for Old Dominion purchases from Virginia Power. (c) For any amount of the Old Dominion Monthly Supplemental Demand with respect to which Old Dominion obtains Excluded Supplemental Capacity, Old Dominion shall not be entitled to obtain from Virginia Power and Virginia Power shall have no obligations to serve such amount of Old Dominion Monthly Supplemental Demand or the associated Old Dominion Monthly Supplemental Energy. 8.05 Reserve Capacity and Energy and Charges Therefor Related to the North Anna Facilities and Clover Facilities. (a) During the term of this Agreement, Old Dominion will purchase and Virginia Power will provide Old Dominion Reserve Capacity for Old Dominion's ownership interest in North Anna Unit 1 and Unit 2 and Clover Unit 1 and Unit 2 until each of these units is retired or Old Dominion's ownership interest in any of such units is reduced to zero. For the period January 1, 1998, through December 31, 2001, for Old Dominion Monthly North Anna 43 Capacity and Old Dominion Monthly Clover Capacity Old Dominion shall carry generation reserves equal to the annual projected System Reserve Margin, less three and 23/100ths percent (3.23%). Beginning January 1, 2002, for Old Dominion Monthly North Anna Capacity and Old Dominion Monthly Clover Capacity, Old Dominion shall carry a percentage of generation reserves equal to the annually projected System Reserve Margin. Virginia Power agrees to sell and Old Dominion agrees to purchase Old Dominion Reserve Capacity at the rates set forth in Appendix I. Prior to October 1, 2001, the Parties will negotiate a Reserve Capacity Charge for 2002 and beyond. The Reserve Capacity Charge will be calculated based on mutually acceptable, designated Virginia Power-owned peaking units operating at that time. (b) Subject to the provisions of Section 8.05(c), Old Dominion Monthly Reserve Energy for the North Anna Facilities and Clover Facilities shall be sold by Virginia Power and purchased by Old Dominion at the Monthly Reserve Energy Charge based on Virginia Power average system energy costs, less North Anna energy costs, as set forth initially in Appendix G, Sections IV.A. and VI., through December 31, 2001. Effective January 1, 2002, Virginia Power will charge Old Dominion the negotiated and agreed upon Monthly Reserve Energy Charge based on the associated peaking energy costs from mutually acceptable, designated Virginia Power-owned peaking units operating at that time subject to an annual true-up pursuant to Appendix G, Section IV.B. Selection of the generating units and the appropriate rate calculation will be finalized on or before October 1 of each year for the following calendar year. (c) Old Dominion may displace all or any portion of its purchases of Old Dominion Monthly Reserve Energy from Virginia Power by purchasing such energy from an Alternate Power Source as of the Effective Date. Such energy shall be deemed Displacement 44 Reserve Energy. Delivery of any Displacement Reserve Energy will be scheduled in accordance with the schedules provided by Old Dominion or its reserve energy suppliers to Virginia Power, pursuant to Sections 6.01 and 6.02 and the Transmission Service Agreement. 8.06 Reserve Capacity and Reserve Capacity Charges for Jointly Planned Generation Resources. For future generation resources jointly planned between Virginia Power and Old Dominion, Old Dominion and Virginia Power shall at all times carry a percentage of generation reserves equal to the annually projected System Reserve Margin. If Virginia Power provides the necessary reserves for the jointly planned generation resource to Old Dominion, the Planning and Administrative Committee shall determine the price of such reserves. 8.07 Exchange of Displacement Energy. For any overscheduling of Displacement Supplemental Energy, Displacement Reserve Energy and Displacement Peaking Energy, Old Dominion and Virginia Power will exchange like-kind energy. 8.08 Limitations of Parties' Rights to Seek Regulatory Review. The terms and conditions of service specified in this Agreement, including the terms regarding rates for service and the term of the Agreement itself shall remain in effect for the term of the Agreement and shall not be subject to change through application to FERC pursuant to the provisions of Section 205 or 206 of the Federal Power Act absent the consent of both Parties hereto. 45 ARTICLE IX Facilities Charges 9.01 Facilities Charges. Old Dominion shall pay all facilities charges related to the facilities listed on Appendix J and any additional excess facilities requested by Old Dominion. Those charges shall be for facilities in excess of those normally required and shall initially be at the levels shown on Appendix J and shall be changed from time to time pursuant to the provisions of Appendix J. 46 ARTICLE X Billing 10.01 Billing Methods. Billing for all payments due under this Agreement shall be in the format provided in Appendix K. 10.02 Rendering Bill. Each Party shall render to the other Party monthly a billing statement no later than the twentieth day of the month, transmitted by wire or delivered by courier, covering the charges for rendering services under the Agreement. 10.03 Payment. (a) Payment for items 3 through 17 on Appendix K shall be due upon presentation of the bill. If payment is not received within ten (10) days from the date the invoice is transmitted or delivered, interest at the Special Interest Rate will accrue from date of presentation until payment is received. Date of presentation is the day the bill is wired or, if delivered by courier, the date delivered. (b) Payment for items 1 and 2 of Appendix K shall be due upon presentation. If payment is not received by the fifteenth of the month following presentation of the bill, interest at the Special Interest Rate will accrue from date of presentation until payment is received. Date of presentation is the day the bill is wired or, if delivered by courier, the date delivered. 10.04 Methods of Payment. All payments required to be made by either Party under this Agreement in excess of $10,000 shall be paid on or before the due date in immediately available funds by delivery (before 11:00 a.m., Richmond time) of either a Federal Reserve check or evidence of bank wire to the other Party's account, at a bank designated by such Party. If any such payment is to be made by bank wire, the Party entitled to the payment shall advise the other Party of the appropriate bank and account number at least one business day before the payment is 47 due. All other payments required to be made under this Agreement may be made by check deposited in the United States mail, first-class postage prepaid, and addressed to Treasurer, Virginia Electric and Power Company, P.O. Box 26666, Richmond, Virginia 23261, if payable to Virginia Power, and addressed to Vice President - Finance and Accounting, Old Dominion Electric Cooperative, P. O. Box 2310, Glen Allen, Virginia 23060, if payable to Old Dominion. 10.05 No Arbitration; Resolution of Disputes. No Party shall have the right to arbitrate any dispute that might arise with respect to this Agreement. Any disagreement between the Parties as to their rights or obligations under this Agreement shall first be addressed by consultation between the Authorized Virginia Power Representatives as determined in accordance with Section 19.03 of the Purchase, Construction and Ownership Agreement and the Authorized Old Dominion Representatives as determined in accordance with Section 19.02 of the Purchase, Construction and Ownership Agreement. In the event such representatives are unable to satisfactorily resolve their disagreement, they shall refer the matter to the Executive Committee created pursuant to Section 18.13 of this Agreement. No dispute as to the payment of an invoice rendered by either Party shall permit the other Party to delay payment of the disputed invoice, in full, on its payment date. If the invoiced Party shall have paid any such disputed invoice, in full, on or before its payment date and if the Authorized Virginia Power Representatives and the Authorized Old Dominion Representatives, or the Executive Committee created pursuant to Section 18.13, or a court of competent jurisdiction, should later determine that a disputed invoice was for an amount in excess of the correct amount due, then the invoicing Party shall be obligated to refund the difference to the invoiced Party within ten (10) days of such determination with interest, if any, upon such amount as follows: 48 (a) If such difference resulted from a deviation from an estimate not caused by error or bad faith, interest shall be payable at the Regular Interest Rate; (b) If such difference resulted from an error, interest shall be payable at the Regular Interest Rate; and (c) If such difference resulted from bad faith, such interest shall be payable at the Special Interest Rate. 10.06 Billing Adjustments. Billing errors or adjustments to estimates of $5,000 per event or more discovered through (i) resolution of billing disagreements pursuant to Section 10.05, (ii) audit or (iii) normal billing procedures, will be adjusted and interest will accrue at the Regular Interest Rate from the date of payment of the original bill through the date of payment of the adjustment. Adjustments of less than $5,000 per event will be made, but no interest will accrue. Adjustments including interest must be paid in accordance with Section 10.03 hereof. 49 ARTICLE XI Operating Costs 11.01 Operating Costs. (a) During the term of this Agreement, Old Dominion shall pay to Virginia Power only its pro rata share of the direct costs of operating and maintaining the North Anna Facilities, including any administrative and general costs directly attributable to North Anna ("North Anna A&G Costs"). A billing format is presented in Appendix L, Section I. hereto. The billing format is subject to review in accordance with Section 11.01(e) and any proposed changes to the format must be agreed to by both parties prior to any changes being implemented. For purposes of this Section 11.01(a), Old Dominion's pro rata share of the North Anna Facilities shall be 11.6%. This pro rata share shall be subject to change from time to time in accordance with Sections 15.03, 16.01 and 16.02 of the Purchase, Construction and Ownership Agreement. (b) As of the Effective Date, the Parties have been unable to identify to their mutual satisfaction those administrative and general costs that are to be allocated to Old Dominion under the "directly attributable" standard of Section 11.01(a). In lieu of allocating costs under this standard, the Parties agree that for the period January 1, 1996, through December 31, 2000, Old Dominion shall pay to Virginia Power a fixed monthly fee of $100,000, inclusive of costs previously billed as Cooperative Billing Fees and Nuclear Fuel Accounting Fees ("Fixed Monthly A&G Fee") as full and complete compensation for administrative and general services on behalf of the North Anna plant and its employees provided by Virginia Power. Virginia Power will not transfer costs from current corporate center functions and activities to North Anna or nuclear support O&M cost centers in order to recover costs from Old Dominion that are not directly attributable to North Anna. (c) "Administrative and general services" as used in this Article XI includes all functions or activities properly chargeable to the "Administrative and General Expenses" category of accounts as defined by FERC in its Uniform System of Accounts (accounts 920-935). Without regard to whether these are appropriate categories for inclusion in a future methodology for determining North Anna A&G Costs, services covered by the Fixed Monthly A&G Fee include, but are not limited to, the following Virginia Power corporate center functions or activities: Payroll Telecommunications Purchasing Human Resources Data Processing Auditing Rates Public Affairs Legal Governmental Affairs Treasury Corporate Communications Accounting General Administration and Supervision Finance The Parties agree that for the period January 1, 1996, through December 31, 2000, the Fixed Monthly A&G Fee expressly covers all administrative and general services and that these services or functions shall not be directly charged or allocated in any other fashion to Old Dominion except as follows: (i) North Anna NRC fees will be billed to Old Dominion as part of the North Anna operating costs based on Old Dominion's North Anna Percentage Ownership Interest. (ii) North Anna insurance premiums will be billed to Old Dominion as part of the "new investment" section of the invoice based on Old Dominion's North Anna Percentage Ownership Interest. (iii) North Anna and nuclear support payroll benefits (billed as payroll add-on) related to salaries included in the O&M FERC accounts will be billed to Old Dominion as part of the O&M section of the invoice. (The Fixed Monthly A&G Fee will cover payroll benefits (billed as payroll add-on) related to North Anna A&G Costs.) (d) In addition, Old Dominion shall pay a pro rata share of only the specific expenses associated with involuntary severance of employees arising out of Virginia Power's Vision 2000 program directly attributable to North Anna for only the years 1996 through 1998. Those payments shall be calculated as follows: 1996 - pro rata share of actual severance expenses, not to exceed $400,000; 1997 - pro rata share of actual severance expenses, not to exceed $200,000; 1998 - pro rata share of actual severance expenses, not to exceed $20,000. For purposes of this Section 11.01 (d), Old Dominion's pro rata share of actual severance expenses shall be based on: (i) 11.6% of severance expenses associated with employees at North Anna, in accordance with Appendix L, Footnote (A); (ii) 6.12% of severance expenses associated with employees in nuclear support business units in accordance with Appendix L, Footnote (B); (iii) .881% of severance expenses associated with employees in the corporate center. (e) In the event Virginia Power institutes a cost savings program after the Effective Date that is intended to benefit both Parties, Virginia Power shall give Old Dominion prior notice of the program and demonstrate the expected cost savings to Old Dominion from the program if it expects Old Dominion to bear its reasonable proportion of the costs of such program. Old Dominion shall pay its reasonable, proportionate share of the costs of such program provided that the cost savings have been adequately demonstrated. (f) The Parties shall negotiate in good faith so that on or before December 31, 2000, they (1) mutually agree to a new methodology to calculate the North Anna A&G Costs, (2) mutually agree to use improved Virginia Power accounting or billing systems which allow for the specific identification and assignment of North Anna A&G Costs or; (3) mutually agree to adjust the Fixed Monthly A&G Fee to reflect changes in the costs or benefits to either Party. In the event the Parties are unable to agree on any of the foregoing, Virginia Power shall bill Old Dominion based on Virginia Power's understanding of the administrative and general costs directly attributable to North Anna for Old Dominion's share of North Anna A&G Costs and Old Dominion reserves all of its rights to take exception to and to object to such billings including making payments to Virginia Power under protest, based on Old Dominion's understanding of the administrative and general costs directly attributable to North Anna. (g) Virginia Power will continue to be obligated to provide all information provided to Old Dominion as of January 1, 1997, including all information shown in Appendix L, Section II. Any changes or improvements made by Virginia Power in its accounting system for North Anna costs should also be incorporated into the information provided to Old Dominion. 11.02 Nuclear Fuel Costs. Old Dominion will pay its pro rata share of the expenses associated with nuclear fuel as provided in the Nuclear Fuel Agreement. ARTICLE XII Accounting Matters and Access to Books and Records 12.01 Responsibility and Method of Accounting. All accounting related to the transactions contemplated by this Agreement shall utilize the accrual method of accounting and shall be in accordance with Generally Accepted Accounting Principles, FERC's Uniform System of Accounts or as prescribed by other regulatory agencies having jurisdiction, all as in effect from time to time. 12.02 Right to Inspect Records, Etc . (a) During normal business hours and subject to conditions consistent with the conduct by Virginia Power of its regular business affairs and responsibilities, Virginia Power will provide Old Dominion, Old Dominion's Authorized Representative(s) or any auditor utilized by Old Dominion reasonably acceptable to Virginia Power or any nationally recognized auditing firm retained by Old Dominion, access to Virginia Power's books, records, and other documents, directly related to the performance of Virginia Power's obligations under this Agreement (but excluding internal memoranda, records and documents relating to such matters and minutes of the Board of Directors and committees thereof) and, upon request, copies thereof, which set forth (i) all costs applicable to the construction, operation, maintenance and retirement of the North Anna Facilities to the extent necessary to enable Old Dominion to verify the costs for which Old Dominion is billed pursuant to the provisions of this Agreement, and (ii) matters relating to the design, construction, operation, and retirement of the North Anna Facilities in proceedings before any regulatory body or governmental agency having jurisdiction. Old Dominion will bear the cost of any copying, review or audit of such books and records. Notwithstanding the foregoing, however, Virginia Power shall not be required to make available to Old Dominion any reports and information relating to personnel practices, staffing or labor relations. (b) During normal business hours and subject to conditions consistent with the conduct by Old Dominion of its regular business affairs and responsibilities, Old Dominion will provide Virginia Power, Virginia Power's Authorized Representative(s), or any auditor utilized by Virginia Power reasonably acceptable to Old Dominion or any nationally recognized auditing firm retained by Virginia Power, access to Old Dominion's books, records, and other documents (but excluding internal memoranda, records and documents relating to such matters and minutes of the Board of Directors and committees thereof), and, upon request, copies thereof, which relate to this Agreement. Virginia Power will bear the cost of any copying, review or audit of such books and records. Notwithstanding the foregoing, however, Old Dominion shall not be required to make available to Virginia Power any reports and information relating to personnel practices, staffing or labor relations. 12.03 Confidentiality. During the term of this Agreement, it may become necessary or desirable, from time to time, for one Party to provide to the other Party information which is either privileged, confidential or proprietary (whether so designated by the Party providing it or at the time of that Party's having obtained it from a third party, and if the latter, there will be no obligation to disclose such information to the requesting Party without the consent of such third party; provided, however, that the Party that obtained such information will use its best efforts to obtain such consent). The Party desiring to protect any such information (the labeling Party) may label such information as either privileged, confidential or proprietary and thereafter the other Party will not reproduce, copy, use or disclose (except when required by governmental authorities or in connection with obtaining requisite governmental licenses, permits or approvals) any such information in whole or i part for any purpose without the written consent of the labeling Party, which consent will not be unreasonably withheld. Each Party may use any such copy, the information contained therein, or both, only in the exercise of its respective rights and obligations pursuant to this Agreement and such information will neither be sold nor used in connection with other generating plants or for the benefit of any third party. Each Party will take all reasonable steps to protect the other Party's proprietary, privileged, or confidential information, including, but not limited to, by (a) restricting its use internally on a "need-to-know" basis, (b) obtaining appropriate confidentiality agreements from those employees, agents, and contractors to whom such information may be otherwise disclosed under this Agreement, and (c) ensuring the return of all copies of labeled information to the labeling party when the need therefor to aid in performance of this Agreement no longer exists. The respective mortgagees and security deed holders of the Parties will be entitled to inspect (but not to copy) any information labeled by one of the Parties that has not been designated as proprietary, privileged or confidential by any other person or entity. In disclosing confidential or proprietary information to governmental authorities, the disclosing Party shall cooperate with the labeling Party in minimizing the amount of such information furnished including the redaction of information appearing on specific documents as is appropriate under the circumstances. At the specific request of the labeling Party, the other Party will endeavor to secure the agreement of such governmental authorities to maintain specified portions of such information in confidence. Notwithstanding the foregoing, no Party will be liable to protect the confidentiality of information as provided in this Section 12.03 if such information is otherwise available to such Party or is in the public domain. This Section 12.03 will not limit or restrict compliance by RUS or any governmental authority with requests under the Freedom of Information Act for any copies of, or the information contained in, anything in the possession of RUS or other governmental authority obtained pursuant to this Agreement. Compliance by RUS or other governmental authority with any such request will not constitute a violation of this Agreement. ARTICLE XIII Liability, Service Interruptions and Force Majeure 13.01 Liability. (a) In providing the services called for by this Agreement, Virginia Power shall use reasonable diligence at all times to provide reasonably adequate service. Virginia Power, however, does not guarantee continuous service. The Parties acknowledge that, at the request of and for the convenience of Old Dominion, Virginia Power is to have full responsibility for the maintenance and operation of the North Anna Facilities. The judgment of Virginia Power personnel shall be final in decisions concerning operation and maintenance of the North Anna Facilities. With respect to claims of third parties, Old Dominion agrees that Virginia Power does not by this Agreement assume any risks or liabilities with respect to the operation and maintenance of Old Dominion's share in the North Anna Facilities, and that the amounts payable to Virginia Power for its performance under this Agreement are determined on the basis that Virginia Power does not assume such risks or liabilities. Virginia Power's obligation to Old Dominion with respect to the operation and maintenance of the North Anna Facilities shall be as set forth in this Agreement, the Purchase, Construction and Ownership Agreement and the Nuclear Fuel Agreement. (b) In addition to all other limitations on liability contained in this Agreement, neither Party hereto shall be liable to the other Party to this Agreement for any damage or loss resulting from the interruption, prevention, suspension or failure of service caused by: (i) Force Majeure, as defined in Section 13.03 below; or (ii) An emergency action due to an adverse condition or disturbance on a Party's system, or on any other system which requires automatic or manual interruption of the supply of electricity to some customers or areas in order to limit the extent of, or damage caused by, the adverse condition or disturbance, or to prevent damage to generating or transmission facilities, or to expedite restoration of service, or to effect a reduction in service to compensate for an emergency condition on an interconnected system; or (iii) The making of necessary inspections of, adjustments to, changes in, or repairs to a Party's lines, substations or other facilities and in cases where the continuation of services would endanger persons or property. (c) With respect to claims relating to the quality, continuity, reliability or price of electric service, (i) Virginia Power shall not be liable to Old Dominion Members or the member-consumers of Old Dominion Members or any other persons or entities claiming through or against Old Dominion or Old Dominion Members for any expenses, damages, injuries or loss arising out of or resulting from the maintenance or operation of facilities, and Old Dominion shall indemnify Virginia Power against such liability; and (ii) Old Dominion shall not be liable to the retail or wholesale customers of Virginia Power or any other persons or entities claiming through or against Virginia Power for any expenses, damages, injuries or loss arising out of or resulting from the operation or maintenance of the North Anna Facilities, and Virginia Power shall indemnify Old Dominion against such liabilities. With respect to all other claims, the Parties will share all expenses and liabilities in the same proportion that they share ownership in the North Anna Facilities. 13.02 Responsibility on Either Side of Interconnection Point. Neither Party shall be responsible for the transmission, control, use or application of electric power provided under this Agreement on the other Party's side of any Interconnection Point. Electricity is supplied by Virginia Power to Old Dominion upon the express condition that after it passes the Interconnection Point it becomes the property of Old Dominion; and neither Party, unless and except to the extent that such results from the negligence or misuse of the property on the part of its employees or agents, subject to the limitations of Section 13.01, will be liable for loss or damage to any persons or property whatsoever, resulting directly or indirectly from the use, misuse, or presence of the said electricity, on the other Party's side of the Interconnection Point or for any loss or damage resulting from the presence, character, or condition of the wires or equipment of the other Party, nor shall it be responsible for the inspection or repair of such wires or equipment. 13.03 Force Majeure. Virginia Power and Old Dominion shall not be liable or responsible for any delay in the performance of, or the ability to perform, any duties or obligations required by this Agreement when such delay in performance or inability to perform results from a Force Majeure occurrence, except that the obligation to pay money in a timely manner is absolute and shall not be subject to the Force Majeure provisions. Force Majeure as used herein shall mean without limitation, the following: Acts of God; strikes, lockouts or other industrial disturbances; acts of public enemies; orders, or absence of necessary orders and permits of any kind which have been properly applied for, from the Government of the United States or from any State or Territory, or any of their departments, agencies or officials, or from any civil or military authority; extraordinary delay in transportation; inability to transport, store or reprocess spent nuclear fuel; unforeseen soil conditions; equipment, material, supplies, labor or machinery shortages; epidemics; landslides; lightning; earthquakes; fire; hurricanes; tornadoes; storms; floods; washouts; drought; war; civil disturbances; explosions; breakage or accident to machinery, generation, transmission or distribution facilities, pipes or canals; partial or entire failure of utilities; breach of contract by any supplier, contractor, subcontractor, laborer or materialman; sabotage; injunction; blight; famine; blockade; quarantine; or any other similar cause or event not reasonably within the control of Virginia Power or Old Dominion. 13.04 Remedy. A Party suffering an occurrence of Force Majeure shall remedy with all reasonable dispatch the cause or causes preventing such Party from carrying out its duties and obligations as required in this Agreement; provided, that the settlement of strikes, lockouts and other industrial disturbances affecting Virginia Power or Old Dominion facilities shall be entirely within the discretion of that Party, and it shall not be required to make settlement of strikes, lockouts, or other industrial disturbances by acceding to the demands of the opposing party or parties when such course is unfavorable in the judgment of such employer. ARTICLE XIV Representations and Warranties 14.01 Representations and Warranties of Virginia Power. Virginia Power represents and warrants as follows: (a) Virginia Power is a corporation duly incorporated and validly existing, in good standing, under the laws of Virginia, is duly qualified and authorized to do business and is in good standing in each jurisdiction where the character of its properties or the nature of its actions makes such qualification necessary, and has the corporate power to carry on its business as now being conducted and possesses all Federal and State authority and local franchises necessary for the maintenance and operation of its properties and business with such minor exceptions as will not materially interfere with the operation and maintenance of the North Anna Facilities. (b) Consummation of the transactions hereby contemplated and performance of this Agreement by Virginia Power will not result in violation of any laws, ordinance or governmental rules to which Virginia Power is subject. Virginia Power either has obtained, or at the Effective Date shall have obtained, all necessary governmental approvals and consents in connection with the consummation by Virginia Power of the transactions hereby contemplated and the performance by it of this Agreement. (c) The consummation of the transactions hereby contemplated and the performance by Virginia Power of this Agreement will not result in the breach of, or constitute a default under, the Articles of Incorporation or By-Laws of Virginia Power or any indenture (including the Indenture of Mortgage), mortgage, deed of trust, bank loan or credit agreement, or other agreement or instrument to which Virginia Power is a party or by which Virginia Power or its properties may be bound or affected, or result in the creation of any lien, charge, security interest or encumbrance upon any property of Virginia Power, and Virginia Power is not in default under any term of any such agreement or instrument. (d) Virginia Power is not a "registered holding company," but is a "subsidiary company" of an exempt registered holding company within the meaning of the Public Utility holding Company Act of 1935; and Virginia Power is not, and is not directly or indirectly controlled by, or acting on behalf of any person which is, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (e) On the date hereof there exists, as to Virginia Power, no Event of Default or event or condition which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. 14.02 Representations and Warranties of Old Dominion. Old Dominion represents and warrants as follows: (a) Old Dominion is a generation and transmission cooperative duly incorporated and validly existing, in good standing, under the laws of Virginia, is duly qualified and authorized to do business and is in good standing in each jurisdiction where the character of its properties or the nature of its actions makes such qualification necessary, and has the corporate power to carry on its business as now being conducted and possesses substantially all Federal and State authority and local franchises necessary for the maintenance, operation of its properties and business with such minor exceptions as will not materially interfere with the maintenance and operation of the North Anna Facilities. (b) Consummation of the transactions hereby contemplated and performance of this Agreement by Old Dominion will not result in violation of any laws, ordinances, or governmental rules to which it is subject. Old Dominion either has obtained, or at the Effective Date shall have obtained, all necessary governmental approvals and consents, including the approval of RUS, if needed, in connection with the consummation by Old Dominion of the transactions hereby contemplated and the performance by it of this Agreement. (c) The consummation of the transactions hereby contemplated and the performance by Old Dominion of this Agreement, the Purchase Construction and Ownership Agreement and the Nuclear Fuel Agreement will not result in the breach of, or constitute a default under, the Articles of Incorporation or By-Laws of Old Dominion or any indenture, mortgage, deed of trust, bank loan or credit agreement, or other agreement or instrument to which Old Dominion is a party or by which Old Dominion or its properties may be bound or affected, or result in the creation of any lien, charge, security interest or encumbrance upon any property of Old Dominion (other than Permitted Encumbrances, as that term is defined in the Purchase Construction and Ownership Agreement) and Old Dominion is not in default under any term of any such agreement or instrument. (d) On the date hereof there exists, as to Old Dominion, no Event of Default or event or condition which, with the giving of notice or the lapse of time or both, would constitute an Event of Default. (e) Each of the Old Dominion Members has entered into and will be bound by the Wholesale Power Contracts on the Effective Date. (f) Old Dominion is authorized to act solely for each and all of the Old Dominion Members in all communications, transactions and relationships with Virginia Power pursuant to this Agreement. 14.03 Conditions Precedent. On or prior to the Effective Date, each of the following conditions shall have been satisfied: (a) this Agreement shall have been accepted for filing by the FERC, (b) all representations and warranties in Sections 14.01 and 14.02 hereof shall be true with the same effect as though such representations and warranties had been made on and as of such date, and (c) each Party shall have performed all agreements on its part required to be performed on or prior to such date. ARTICLE XV Term of Agreement This Agreement shall become effective on the Effective Date. Unless earlier terminated pursuant to the provisions of Article XVII, this Agreement shall terminate upon the earlier of (1) the date on which the last of the North Anna Facilities is retired (2) the date upon which Old Dominion's ownership interest in the North Anna Facilities and Nuclear Fuel is reduced to zero, or (3) or as otherwise agreed to by the Parties. ARTICLE XVI Filing with FERC This Agreement shall be filed with FERC, with the request that it become effective on the Effective Date. Old Dominion will join in Virginia Power's request that this Agreement and the initial rates contained herein be accepted for filing with a suspension of no longer than one day and will support the other provisions of this Agreement. If FERC does not accept the provisions of this Agreement for filing or allows the contract to become effective only with changes or conditions which materially alter the Agreement (thereby defeating the intent of the Parties), then, notwithstanding any other provisions of this Agreement the Parties will make a good faith effort to re-negotiate this Agreement to make mutually acceptable changes to remedy any issues cited by FERC as reasons for its non-acceptance. In the event that the Parties are unable to reach a mutually satisfactory re-negotiated Agreement, this Agreement shall be null and void. In the event implementation of this Agreement is delayed beyond January 1, 1998, because of required regulatory approvals, Virginia Power, with the support of Old Dominion, will take such steps as are necessary and feasible to provide Old Dominion with the economic benefit of the pricing agreed upon herein. ARTICLE XVII Default 17.01 Events of Default. Each of the following shall be "Events of Default" under this Agreement: (a) The failure of either Party to make any payment then due to the other Party as required by this Agreement within 30 days of the date when such payment became due and payable; provided, however, that no Party shall be in default for nonpayment of any amount due and payable hereunder to the other Party that can be offset within 30 days after the date on which such amount became due and payable. (b) Willful failure by any Party to perform any other obligation to the other Party, other than obligations for the payment of money, provided that the defaulting party shall have been given not less than 60 days' notice of such willful failure by the non-defaulting Party and such defaulting Party shall have failed to correct such default or shall have failed to use its reasonable best efforts to correct such default. (c) Any of the following acts by any Party: (i) the insolvency or bankruptcy of a Party or its inability or admission in writing of its inability to pay its debts as they mature, or the making of a general assignment for the benefit of, or entry into any composition or arrangement with, its creditors other than Old Dominion's or Virginia Power's mortgagee, as the case may be; or (ii) the application for, or consent (by admission of material allegations of a petition or otherwise) to, the appointment of a receiver, trustee or liquidator for any Party or for all or substantially all of its assets, or its authorization of such application or consent, or the commencement of any proceedings seeking such appointment against it without such authorization, consent or application, which proceedings continue undismissed or unstayed for a period of 60 days; or (iii) the authorization or filing by any Party of a voluntary petition in bankruptcy or application for or consent (by admission of material allegations of a petition or otherwise) to the application of any bankruptcy, reorganization, readjustment of debt, insolvency, dissolution, liquidation or other similar law of any jurisdiction or the institution of such proceedings against any Party without such authorization, application or consent, which proceedings remain undismissed or unstayed for 60 days or which result in adjudication of bankruptcy or insolvency within such time. 17.02 Virginia Power's Rights on Default of Old Dominion. Whenever any Event of Default by Old Dominion shall have occurred and Virginia Power intends to require that the default be remedied, Virginia Power shall give Old Dominion written notice to remedy the default. If the default shall not have been fully cured within 30 days from the date of the notice, Virginia Power shall have the rights set forth herein, in addition to all other rights it may have at law or in equity. (a) Where the default is a failure to pay money when due: (i) Subject to the limitations contained in the Federal Power Act or regulations duly promulgated thereunder, Virginia Power may, 30 days after delivery to Old Dominion and the Old Dominion Members of written notice of termination, terminate all service under this Agreement. Notwithstanding such termination, Virginia Power shall be authorized to continue to operate, maintain and fuel the North Anna Facilities and to schedule and dispatch the capacity and energy from such North Anna Facilities. In the event this provision is invoked Virginia Power shall maintain an accurate record of all the benefits, including but not limited to the capacity and energy from Old Dominion's ownership interest in the North Anna Facilities, and costs of such continued operation, maintenance and fueling to provide for a reasonable settlement following removal of the default. (ii) Failure of Old Dominion to make any payment on the date required under this Agreement shall obligate Old Dominion to pay to Virginia Power (a) the unpaid amount, (b) interest on the unpaid amount at the Special Interest Rate from the date such payment was due until the amount is paid and (c) the reasonable expenses incurred by Virginia Power in collecting the unpaid amount. (iii) Where a default under Article XV of the Purchase, Construction and Ownership Agreement shall have otherwise permitted Virginia Power to purchase all or a portion of Old Dominion's ownership interest in the North Anna Facilities (as those terms are defined in the Purchase, Construction and Ownership Agreement) any amount in default hereunder shall be offset against the purchase price to be paid to Old Dominion. (b) Where the default is the willful failure by Old Dominion to perform an obligation hereunder other than the obligation to pay money when due, Virginia Power may take any lawful action that will remedy the default or mitigate its effects, and Old Dominion shall, upon demand by Virginia Power, pay reasonable losses or damages incurred by Virginia Power as a direct and proximate result of the default and all expenses incurred by Virginia Power in remedying the default or mitigating its effects, together with interest at the Special Interest Rate on that amount until the total amount is paid. A failure by Old Dominion to make payment hereunder shall constitute a default under Section 17.01(a) and give rise to the remedies available under Section 17.02(a). (c) Where the default is any of the acts set forth in Section 17.01(c), Virginia Power shall have the right to take any lawful action, including termination of this Agreement, that Virginia Power determines to be necessary to minimize its losses or enhance its prospects of recovery of amounts due and to become due to it. 17.03 Old Dominion's Rights on Default of Virginia Power. Whenever any Event of Default by Virginia Power shall have occurred and Old Dominion intends to require that the default be remedied, Old Dominion shall give Virginia Power written notice to remedy the default. If the default shall not have been fully cured within 30 days from the date of the notice, Old Dominion shall have the rights set forth herein, in addition to all other rights it may have at law or in equity. (a) Where the default is a failure to pay money when due, Old Dominion shall have the right to withhold from Virginia Power payment of Old Dominion's obligations hereunder to the extent of the amount in default plus interest at the Special Interest Rate thereon until the amount is paid. (b) Where the default is the willful failure by Virginia Power to perform an obligation hereunder other than the obligation to pay money when due, Old Dominion may take any lawful action that will remedy the default or mitigate its effects, and Virginia Power shall, upon demand by Old Dominion, pay reasonable losses or damages incurred by Old Dominion as a direct and proximate result of the default and all expenses incurred by Old Dominion in remedying the default or mitigating its effects, together with interest at the Special Interest Rate on that amount until the total amount is paid. A failure by Virginia Power to make payment hereunder shall constitute a default under Section 17.01(a) and give rise to the remedies available under Section 17.03(a). (c) Where the default is any of the acts set forth in Section 17.01(c), Old Dominion shall have the right to take any lawful action, including termination of this Agreement, that Old Dominion determines to be necessary to minimize its losses or enhance its prospects of recovery of amounts due and to become due to it. 17.04 Disputes Concerning Default . In the event that any Party shall dispute an asserted default by it, such Party shall pay the disputed payment or perform the disputed obligations, but may do so under protest. The protest shall be in writing, shall precede or accompany the disputed payment or performance of the disputed obligations, shall specify the reasons upon which the protest is based and shall be delivered to the other Party hereunder. In the event it is determined that the protesting Party is entitled to a refund of all or any portion of a disputed payment or payments, or is entitled to reimbursement of the cost of performing a disputed obligation theretofore made or performed, then the protesting Party shall be reimbursed such amount with interest at the Regular Interest Rate for the period involved. 17.05 Additional Obligations . With respect to any Party as to which an Event of Default has occurred, such Party shall use its best efforts to take any and all such further actions and shall execute and file, where appropriate, any and all such further legal documents and papers as may be reasonable under the circumstances in order to facilitate the carrying out of this Agreement or otherwise effectuating its purpose, including but not limited to action to seek any required governmental or regulatory approval and to obtain any other required consent, release, amendment or other similar document. 17.06 Injunctive Relief . The Parties hereto agree and acknowledge that the failure of a Party to perform any of its obligations under this Agreement, including the execution of legal documents which may be reasonably requested as set forth in this Article XVII, would cause irreparable injury to the other Party and that the remedy at law for any violations or threatened violation thereof would be inadequate, and agree that the other Party shall be entitled to a temporary or permanent injunction or other equitable relief specifically to enforce such obligation without the necessity of proving the inadequacy of its legal remedies. 17.07 No Remedy Exclusive . No remedy conferred upon or reserved to the Parties hereto in this Article XVII is intended to be exclusive of any other remedy or remedies available hereunder or now or hereafter existing at law, in equity, or by statute or otherwise, but each and every such remedy shall be cumulative and shall be in addition to every other such remedy. The pursuit by any Party of any specific remedy shall not be deemed to be an election of that remedy to the exclusion of any other or others, whether provided hereunder or by law, equity or statute. 17.08 Agreement to Pay All Costs to Cure Default . (a) A late payment charge during periods of default shall accrue on any amount in default at an annual rate equal to that of the Special Interest Rate. (b) If an Event of Default should occur and a Party not in default should employ attorneys or incur other expenses for the collection of any payment or the enforcement of performance or observation of any condition or obligation on the part of a defaulting Party or for the exercise of any other remedy hereunder, the defaulting Party agrees that it will on demand therefore reimburse the other Party for its reasonable expenses of such attorneys and such other expenses incurred. No default shall be deemed cured until all costs payable under this Article, including any attorneys' fees incurred by the Party not in default, and payments pursuant to this Agreement shall have been paid or reimbursed. 17.09 General Covenant by the Parties. Each Party hereto covenants and agrees that if any event shall occur or condition exist which constitutes, or which after notice, lapse of time or both, would constitute an Event of Default on its part pursuant to this Article, it shall immediately notify the other Party thereof, specifying the nature thereof and any action taken or proposed to be taken with respect thereto. ARTICLE XVIII Miscellaneous 18.01 No Delay. No disagreement or dispute of any kind between the Parties to this Agreement or between a Party and any other entity, concerning any matter, including, without limitation, the amount of any payment due from said Party or the correctness of any billing made to the Party, shall permit either Party to delay or withhold any payment or the performance of any other obligation pursuant to this Agreement. Each Party shall promptly and diligently undertake to resolve such disagreement or dispute without undue delay and in good faith. 18.02 Further Documentation. From time to time after the execution of this Agreement, the Parties hereto shall, within their legal authority, execute other documents as may be necessary, helpful or appropriate to carry out the terms of this Agreement. 18.03 Notice. Any notice, request, consent or other communication permitted or required by this Agreement (other than payments as provided in Section 10.04) shall be in writing and shall be deemed given when delivered by hand or (unless otherwise required by the terms of this Agreement) when deposited in the United States Mail, first class, postage prepaid, and if to Virginia Power, addressed to: Senior Vice President - Commercial Operations Virginia Electric and Power Company P.O. Box 26666 Richmond, Virginia 23261 and if to Old Dominion, addressed to: President Old Dominion Electric Cooperative P. O. Box 2310 Glen Allen, Virginia 23060 unless a different officer or address shall have been designated by the respective Party by notice in writing sent to the other Party hereto. 18.04 Headings Not to Affect Meaning. The descriptive headings of the various articles and sections of this Agreement have been inserted for convenience of reference only and shall in no way modify or restrict any of the terms and provisions hereof. 18.05 No Association, Trust, Joint Venture or Partnership; Tax Matters. Notwithstanding any provision of this Agreement, the Parties do not intend to create hereby any association, trust, joint venture or partnership under the law of Virginia, although the Parties acknowledge that the ownership and operation of the North Anna Facilities may constitute a partnership for tax purposes. If it should appear that one or more changes to this Agreement would be required in order to avoid the creation or terminate the existence of any such entity, the Parties agree to negotiate promptly and in good faith with respect to such changes. Virginia Power and Old Dominion hereby agree that they will both elect to exclude the arrangement created by this Agreement from the application of Subchapter K of the Internal Revenue Code of 1954, as amended, and execute all documents required by either Party to effect that result. 18.06 Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of Virginia Power and Old Dominion, and their respective successors and assigns, provided that no succession to or assignment of any rights or obligations created hereunder, other than an assignment or transfer to the U.S. Government or any agency thereof, the National Rural Utilities Cooperative Finance Corporation, or any other domestic financing institution solely as security for loans or advances, shall take place without the prior written consent of the other Party. 18.07 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 18.08 Severability. In the event any of the terms, covenants or conditions of this Agreement or amendments thereof or the application of any such term, covenant or condition or amendment thereof shall be held invalid as to a Party or circumstance by any court or governmental agency having jurisdiction, all of the other terms, covenants and conditions of this Agreement and amendments thereof shall not be affected thereby and shall remain in full force and effect. 18.09 Applicable Law. This Agreement is made under and shall be governed by the laws of the Commonwealth of Virginia. 18.10 No Waiver. The failure of either Party to enforce at any time any of the provisions of this Agreement or to require at any time performance by the other Party of any of the provisions hereof, shall in no way be construed to be a waiver of such provisions, nor in any way to affect the validity of this Agreement or any part hereof or the right of such Party thereafter to enforce each and every such provision. 18.11 Computation of Time. In computing any period of time prescribed or allowed under this Agreement, the day on which the act or event occurs after which the designated period of time begins to run shall not be included. The last day of the period so computed shall be included if it is a business day; if it is not a business day, the period shall run until the end of the next day which is a business day. 18.12 Survivorship of Obligations. The termination of this Agreement shall not discharge either Party hereto from any obligation it owes to the other Party under this Agreement by reason of any transaction, loss, cost, damage, expense or liability which shall occur or arise (or the circumstances, events or basis of which shall occur or arise) prior to such termination. It is the intent of the Parties hereby that any such obligation owed (whether the same shall be known or unknown at the termination of this Agreement or whether the circumstances, events, or basis of the same shall be known or unknown at the termination of this Agreement) shall survive the termination of this Agreement. 18.13 Executive Committee. An Executive Committee, consisting of the Chief Executive Officer and the Chief Operating Officer of Virginia Power, or their designees, and the President of Old Dominion, or his designee, shall meet from time to time for the purpose of resolving disputes arising from the activities of the North Anna Operating Committee and the Planning and Administration Committee established pursuant to Sections 2.01 and 3.01, respectively, of this Agreement and for the purpose of resolving disputes arising under the Purchase, Construction and Ownership Agreement pursuant to the procedures established by Section 20.03 of the Purchase, Construction and Ownership Agreement. 18.14 Entire Agreement. This Agreement, the Purchase, Construction and Ownership Agreement and the Nuclear Fuel Agreement together with appendices and exhibits incorporated by reference, shall constitute the entire understanding between the Parties hereto, pertaining to the subject matter contained herein. Neither Party hereto has relied, nor will rely, upon any oral or written representation or oral or written information made or given to such Party by the other Party hereto or any representative of or anyone on the behalf of the other Party hereto. 18.15 Non-Exclusive Agreement. Subject to the limitations in this Agreement, Virginia Power and Old Dominion shall have the right at all times to hereunder. 18.16 Relationship of the Parties. The duties, obligations, and liabilities of the Parties herein are intended to be several and not joint or collective. The Parties shall be individually responsible for their own obligations as provided herein. Neither of the Parties shall have the right or power to bind the other Party except as expressly provided in this Agreement. 18.17 Singular and Plural. Throughout this Agreement, whenever any word in the singular number is used, it should include the plural unless the context otherwise requires; and whenever the plural number is used, it shall include the singular, unless the context otherwise requires. 18.18 Equal Opportunity. During the performance of those parts of this Agreement relating to the construction by Virginia Power of any additions, betterments, improvements or replacements to the North Anna Facilities, Old Dominion and Virginia Power agree as follows: (a) The parties will not discriminate against any employee or applicant for employment because of race, color, religion, sex, age or national origin. The Parties will take affirmative action to ensure that applicants are employed, and that employees are treated during employment without regard to their race, color, religion, sex, or national origin. Such action shall include, but not be limited to, the following: employment, upgrading, demotion or transfer; recruitment or recruitmen advertising; layoff or termination; rates of pay or other forms of compensation; and selection for training, including apprenticeship. The Parties agree to post in conspicuous places, available to employees and applicants for employment, notices to be provided setting forth the provisions of this Equal Opportunity Clause. (b) The Parties will, in all solicitations or advertisements for employees placed by or on behalf of either party, state that all qualified applicants will receive consideration for employment without regard to race, color, sex, or national origin. (c) The Parties will send to each labor union or representative of workers with which it has a collective bargaining agreement or other contract or understanding, a notice to be provided advising the said labor union or workers' representatives of the Parties commitments under this Section, and shall post copies of the notice in conspicuous places available to employees and applicants for employment. (d) The Parties will comply with all provisions of Executive Order 11246, dated September 24, 1965, and of the rules, regulations and relevant order of the Secretary of Labor. (e) The Parties will furnish all information and reports required by Executive Order 11246, dated September 24, 1965, and by rules, regulations and relevant orders of the Secretary of Labor, or pursuant thereto, and will permit access to their books, records and accounts by the administering agency and the Secretary of Labor for purposes of investigation to ascertain compliance with such rules, regulations and orders. (f) In the event of either Party's noncompliance with the nondiscrimination clauses of this Agreement or with any of the said rules, regulations or orders, the Parties may be declared ineligible for further Government procedures authorized in Executive Order 11246, dated September 24, 1965, and such other sanctions may be imposed and remedies invoked as provided in said Executive Order or by rule, regulation or order of the Secretary of Labor, or as otherwise provided by law. (g) The Parties agree that, unless exempted by the rules, regulations or orders of the Secretary of Labor issued pursuant to Section 204 of Executive Order 11246, dated September 24, 1965, all subcontracts and purchase orders will cite that such contract or purchase orders are subject to Executive Order 11246 and such provisions will be binding upon each subcontractor or vendor. The Parties will take such action with respect to any subcontract or purchase order as the administering agency may direct as a means of enforcing such provisions, including sanctions for noncompliance; provided, however, that in the event either Party becomes involved in, or is threatened with, litigation with a subcontractor or vendor as a result of such direction by the administering agency, that Party may request the United States to enter into such litigation to protect the interests of the United States. 18.19 Good Faith. The Parties hereto expressly agree that every obligation undertaken in this Agreement will be performed in good faith. 18.20 Merger of Documents. All understandings and agreements, written or oral, among the Parties prior to the Effective Date, with respect to the matters herein contained, including the Interconnection and Operating Agreement, have been superseded in all respects by this Agreement, and all such understandings and agreements prior to the Effective Date are null and void and of no effect whatsoever. 18.21 Environment. The provisions of Section 20.17 of the Purchase, Construction and Ownership Agreement are incorporated herein by reference and shall apply as if set forth herein in full. 18.22 Kick-backs. The provisions of Section 20.18 of the Purchase, Construction and Ownership Agreement are incorporated herein by reference and shall apply as if set forth herein in full. 18.23 Nonsegregated Facilities. The provisions of Section 20.19 of the Purchase, Construction and Ownership Agreement are incorporated herein by reference and shall apply as if set forth herein in full. 18.24 Historic Places. The provisions of Section 20.21 of the Purchase, Construction and Ownership Agreement are incorporated herein by reference and shall apply as if set forth herein in full. 18.25 Public Officials Not to Benefit. The provisions of Section 20.22 of the Purchase, Construction and Ownership Agreement are incorporated herein by reference and shall apply as if set forth herein in full. 18.26 Flood Insurance Act. The provision of Section 20.23 of the Purchase, Construction and Ownership Agreement are incorporated herein by reference and shall apply as if set forth herein in full. 18.27 Safety. The provisions of Section 20.24 of the Purchase, Construction and Ownership Agreement are incorporated herein by reference and shall apply as if set forth herein in full. 18.28 Buy American. The provisions of Section 20.25 of the Purchase, Construction and Ownership Agreement are incorporated herein by reference and shall apply as if set forth herein in full. 18.29 Regulatory Changes. Nothing contained in this Agreement shall be construed as preventing either Party from pursuing its interests in independent system operators, pools, poolcos, transmission arrangements and pricing, ancillary services, or other issues that may be debated before regulatory or other bodies. ARTICLE XIX Amendment This Agreement may not be amended, modified, or terminated, nor may any obligation hereunder be waived orally. Any amendment shall be in writing, and shall be signed by the Chief Executive Officer or the President of Virginia Power or the person either of them may designate in writing and by the President of Old Dominion, or the person he may designate in writing, and must be approved by the Board of Directors of Old Dominion and Virginia Power subject to any required regulatory approval including the approval of RUS, as needed. IN WITNESS WHEREOF, the Parties have caused this amended and restated Agreement to be executed by their duly authorized officers as of the day and year first above written. VIRGINIA ELECTRIC AND POWER COMPANY By _________________________________________ Dr. James T. Rhodes President and Chief Executive Officer OLD DOMINION ELECTRIC COOPERATIVE By _________________________________________ R. W. Watkins President & Chief Executive Officer STATE OF VIRGINIA: COUNTY OF HENRICO to wit: The foregoing instrument was acknowledged before me this _____ day of __________, 1997, by Dr. James T. Rhodes, President and Chief Executive Officer of Virginia Electric and Power Company, a Virginia corporation, on behalf of the corporation and by R.W. Watkins, President and Chief Executive Officer of Old Dominion Electric Cooperative, a Virginia cooperative, on behalf of the cooperative. --------------------------- Notary Public My Commission expires: Virginia Electric and Power Company Secretary's Certificate I, J. Kennerly Davis, Jr., do hereby certify that I am the Secretary/Treasurer of Virginia Electric and Power Company (the "Company"), and that, as such, I am authorized to execute this certificate on behalf of the Company. I do hereby further certify that Dr. James T. Rhodes was duly elected or appointed, qualified and acting as President and Chief Executive Officer of the Company at the time of signing and delivery of the attached Amended and Restated Interconnection and Operating Agreement an was duly authorized to execute such Agreement on behalf of the Company, and that the signature appearing in such Agreement is his genuine signature. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Company this ________ day of _______________, 1997. ----------------------------- J. Kennerly Davis, Jr. Secretary/Treasurer STATE OF VIRGINIA: CITY OF RICHMOND to wit: The foregoing instrument was acknowledged before me this _____ day of __________, 1997, by J. Kennerly Davis, Jr., Secretary and Treasurer, of Virginia Electric and Power Company, a Virginia corporation, on behalf of the corporation. --------------------------- Notary Public My Commission expires: Old Dominion Electric Cooperative Secretary's Certificate I, Cecil E. Viverette, Jr., do hereby certify that I am the Secretary/Treasurer of Old Dominion Electric Cooperative (the "Cooperative"), and that, as such, I am authorized to execute this certificate on behalf of the Cooperative. I do hereby further certify that R. W. Watkins was duly elected or appointed, qualified and acting as President and Chief Executive Officer of the Cooperative at the time of signing and delivery of the attached Amended and Restated Interconnection and Operating Agreement and was duly authorized to execute such Agreement on behalf of the Cooperative, and that the signature appearing in such Agreement is his genuine signature. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the Cooperative this ________ day of _______________, 1997. ----------------------------- Cecil E. Viverette, Jr. Secretary/Treasurer STATE OF VIRGINIA: COUNTY OF ___________________ to wit: The foregoing instrument was acknowledged before me this _____ day of __________, 1997, by Cecil E. Viverette, Secretary and Treasurer of Old Dominion Electric Cooperative, a Virginia cooperative, on behalf of the cooperative. --------------------------- Notary Public My Commission expires: Appendix A Page 1 of 3 APPENDIX A COMMON FACILITIES All property of Virginia Power in the following accounts on Virginia Power's books of account that is within the definition of Common Facilities as well as the Construction Work in Progress and the Completed Construction Not Classified related thereto: FERC ACCOUNT DESCRIPTION 320 Land and Land Rights 321 Structures & Improvements Clearing Water System Storm Sewers Sanitary Sewers Fire Protection Fuel Oil Storage RR Track Yard Yard Lighting Boat Dock Rifle Range Gun Towers Medical Classroom Condensate Fill Pump Station Auxiliary Building Turbine Building Turbine Outage Building Office Building Screenwell Structure Vacuum Priming Pump House Fuel Building Fuel Oil Pump House Yard Crane Water Treatment Building Service Building Weather Towers FERC ACCOUNT DESCRIPTION Meteorological Towers Security Building Security Control Center Dam Reservoirs Spillways Dikes Service Water Pump House Decontamination Building Waste Disposal Building Roadways Walkways Parking Lots 322 Reactor Plant Equipment Boron Recovery System Moving Platform Spent Fuel Pit Fuel Building Cranes Decontamination Cranes Fuel Receiving Equipment Spent Fuel Racks Reactor Cavity Purification Radioactive Waste Treatment and Disposal System Liquid Waste Solidification System Waste Disposal Evaporator Radioactive Gaseous Waste Radioactive Solid Waste Decontamination System Raw Water Supply System Condensate Storage Tank Auxiliary Boiler System 323 Turbo-Generator Equipment Service Water Pump House Equipment Bearing Cooling Water Tower Turbine Room Crane 324 Accessory Electric Equipment Screenwell Area Transformers and Equipment Reserve Station Transformer Bearing Cooling Tower Switch Boards 325 Miscellaneous Power Plant Equipment Compressed Air Systems Miscellaneous Shop Equipment Machine Shop Equipment Laboratory Testing Equipment Office Furniture and Equipment Other General Station Equipment Weather Station Equipment Marine Equipment Kitchen Equipment Fire Protection Equipment Plant Communications Telephone System Security Equipment Radiation Monitoring Equipment Gasoline Storage Equipment 352 Transmission Structures and Improvements 353 Transmission Station Equipment 390 Structures and Improvements Visitors Information Center 391 Office Furniture and Equipment 392 Transportation Equipment COMPLETED CONSTRUCTION NOT CLASSIFIED PROJECT NO. DESCRIPTION CONSTRUCTION WORK IN PROGRESS PROJECT NO. DESCRIPTION Appendix B Page 1 of 6 APPENDIX B MAJOR SPARE PARTS B.01 Description of Major Spare Parts. Those major items, each costing more than $100,000, as follows: Quantity Item Serial Number 1 Motor Charging Pump 17528LN01 1 Motor Charging Pump 17528LN02 1 RCP Motor S/N 3S-81P355 3S-81P355 1 Low Head Safety INJ Pump Motor 17538LN01 1 2B LP Rotor TN12763 15 2B LP Rotor TN12763 2 LP Rotor Discs-Spare 23A3932 2 LP Rotor Discs Spare 23A3932 2 LP Rotor Discs Spare 23A3932 10 LP Rotor Blades Spare 23A3932 4 LP Rotor Discs Spare 23A3932 1 LP Rotor Shaft Spare 23A3932 4 LP Rotor Blades Spare 23A3932 2 Spare Blade Rows 1A Rotor 23A3932 10 2B LP Rotor Turbine Disc TN12763 Major Spare Parts shall also include any other major items that the Parties agree (i) to keep in inventory and (ii) to designate as Major Spare Parts for possible use in replacing similar items in units located not only at the North Anna Nuclear Power Station but also at other power stations. Such designation shall state the units that the Major Spare Part is designated to serve. B.02 Old Dominion's Percentage Ownership Interest in Major Spare Parts. (a) Except as otherwise modified by the operation of Sections 15.03, 16.01 or 16.02 of the Purchase, Construction and Ownership Agreement, Old Dominion shall own its Old Dominion's Percentage Ownership Interest in any Major Spare Part until such Major Spare Part is used in a unit other than the Units. Upon use in any such unit, Virginia Power shall purchase such Major Spare Part from Old Dominion in accordance with B.04 hereof. (b) Virginia Power agrees to pay carrying charges, if any, with respect to each Major Spare Part equal to (i) Old Dominion's Percentage Ownership Interest, less (ii) the sum of Old Dominion's Percentage Ownership Interest in any Unit that the Major Spare Part serves, divided by the total number of units served by the Major Spare Part. (c) It is the intention of the Parties that the formula be reapplied at any time that the number of units served by any Major Spare Part or Old Dominion's Percentage Ownership Interest changes for any reason. In any case where ownership interest of the Parties are adjusted, the provisions of Section 16.04 of the Purchase, Construction and Ownership Agreement shall apply and appropriate payment shall be made pursuant to Section B.04 hereof. B.03 Ownership Responsibilities - Major Spare Parts. Virginia Power may make use of any Major Spare Part in any of the units at the North Anna Nuclear Power Station or other power stations for which such parts have been designated to serve in accordance with Section B.01 hereof and in accordance with the following conditions: A. If at any time a unit at the North Anna Nuclear Power Station or other power stations has need of a Major Spare Part to replace any part of an equivalent item that has been damaged, such Major Spare Part may be used in such unit; provided that another unit (for which the part has been designated in accordance with Section B.01 hereof) located at either station had not been damaged earlier and made prior claim to use such Major Spare Part. B. When a Major Spare Part is used in any unit, Virginia Power and Old Dominion shall have an obligation either to (i) repair such damaged item or (ii) to acquire a new item in place of the damaged item, as expeditiously as possible, and to return it to the original location of the Major Spare Part that was used. Payment therefor will be in accordance with Section B.04 hereof. Any time that any Major Spare Part is used in any unit other than the Units, Virginia Power shall be obliged to make payment to Old Dominion. The adjustment of ownership interest at the time a Major Spare Part is used shall conform, in all respects, to the provisions of Section 16.04 of the Purchase, Construction and Ownership Agreement. B.04 Cost Responsibilities - Major Spare Parts. Cost and payment responsibilities of the Parties for the Major Spare Parts shall be determined in accordance with the following: A. Subject to the provisions of Section B.04 (D) hereof, the responsibility of the Parties for any New Investment or costs for any Major Spare Part will be shared in proportion to the Parties then current ownership interest in that Major Spare Part. B. Virginia Power shall pay carrying charges on the interest stated in Section B.02(b), based upon the same principles under which carrying charges are paid pursuant to this Appendix B. excluding cancellation costs, taxes payable at closing and deferred taxes set forth in Exhibit N of the Purchase Agreement and the 15 percent mark-up reflected therein, while reflecting Old Dominion's actual cost of capital used to finance such Major Spare Parts, rather than 11%. C. Upon the use of any Major Spare Part in a non-North Anna unit, Virginia Power shall pay Old Dominion the amount necessary so that Old Dominion's net investment as reflected on Old Dominion's books in that Major Spare Part is $0. Upon the use of any Major Spare Part in a Unit, Virginia Power will cease paying carrying charges pursuant to Section B.02(b) on that Major Spare Part until a replacement Major Spare Part is acquired. The provisions of Section 16.04 of the Purchase, Construction and Ownership Agreement shall apply to any adjustment under that Section. D. The parties shall pay for any replacement Major Spare Part, subject to the next sentence, in proportion to their respective ownership interests in the unit in which the Major Spare Part was used, but the investment attributed to the replacement Major Spare Part when such part is designated as a Major Spare Part shall be equal to the dollar amount initially invested in the Major Spare Part that was used in the Unit needing that part. Accordingly, when the repaired or replacement part is designated a Major Spare Part, a payment shall be made to the appropriate Party so that the then resulting investment of the Parties in the Major Spare Part shall be equal to the investment of the Parties in the Major Spare Part that was used in the Unit needing that part. E. Upon any adjustment in Old Dominion's Percentage Ownership Interest in any Major Spare Part pursuant to Section B.02(c), payment shall be made to the Party whose ownership interest decreased, so that the percentage investment (including all cost components comprising New Investment, undepreciated) of each Party shall be equal to that Party's percentage ownership interest in the respective Major Spare Part. B.05 Hypothetical Illustration. Hypothetical Illustration of Cost Responsibility Associated with Ownership, Use and Replacement of Major Spare Parts Pursuant to Exhibit C 1. Major Spare Part - Net Investment $10,000,000 2. Ownership Responsibility Virginia Power 88.4% $ 8,840,000 Old Dominion 11.6% $ 1,160,000 Case (1) Major Spare Part Utilized at the Surry Nuclear Power Station - Replacement Costs More 1. Payment to Old Dominion at the time Major Spare Part is taken from its storage location $ 1,160,000 2. Cost of replacement (FOB) paid by Virginia Power (100%) $20,000,000 3. Payment by Old Dominion at the time Major Spare Part is replaced in its original location $ 1,160,000 4. Net Investment in the Major Spare Part for computation of cost responsibility when such part is next utilized $ 10,000,000 Case (2) Major Spare Part Utilized at the North Anna Nuclear Power Station - Replacement Costs More 1. No payment at the time Major Spare Part is taken from its storage location $ 2. Cost of replacement (FOB) paid by: Virginia Power (88.4% x $20,000,000) $17,680,000 Old Dominion (11.6% x $20,000,000) $ 2,320,000 3. Net Investment in the Major Spare Part for computation of cost responsibility when such part is next utilized $10,000,000 Case (3) Major Spare Part Utilized at the Surry Nuclear Power Station - Replacement Costs Less 1. Payment to Old Dominion at the time Major Spare Part is taken from its storage location $ 1,160,000 2. Cost of replacement (FOB) paid by Virginia Power (100%) $ 5,000,000 3. Payment by Old Dominion at the time Major Spare Part is replaced in its original location $ 1,160,000 4. Net Investment in the Major Spare Part for computation of cost responsibility when such part is next utilized $10,000,000 Case (4) Major Spare Part Utilized at the North Anna Nuclear Power Station - Replacement Costs Less 1. No payment at the time Major Spare Part is taken from its storage location $ 2. Cost of replacement (FOB) paid by: Virginia Power (88.4% x $5,000,000) $ 4,420,000 Old Dominion (11.6% x $5,000,000) $ 580,000 3. Net Investment in the Major Spare Part for computation of cost responsibility when such part is next utilized $10,000,000 Appendix C Page 1 of 1 APPENDIX C NORTH ANNA UNIT 1 All property of Virginia Power appearing in the following accounts on Virginia Power's books of account that is defined as North Anna Unit 1 in this Agreement as well as the Construction Work in Progress and the Completed Construction Not Classified related thereto: FERC ACCOUNT DESCRIPTION ------- ----------- 321 Structures and Improvements 322 Reactor Plant Equipment 323 Turbogenerator Units 324 Accessory Electric Equipment 325 Miscellaneous Power Plant Equipment Appendix D Page 1 of 1 APPENDIX D NORTH ANNA UNIT 2 All property of Virginia Power appearing in the following accounts on Virginia Power's books of account that is defined as North Anna Unit 2 in this Agreement as well as the Construction Work in Progress and the Completed Construction Not Classified related thereto: FERC ACCOUNT DESCRIPTION ------- ----------- 321 Structures and Improvements 322 Reactor Plant Equipment 323 Turbogenerator Units 324 Accessory Electric Equipment 325 Miscellaneous Power Plant Equipment Appendix E Page 1 of 1 APPENDIX E OLD DOMINION MEMBERS BARC Electric Cooperative Millboro, VA Community Electric Cooperative Windsor, VA Mecklenburg Electric Cooperative Chase City, VA Northern Neck Electric Cooperative Warsaw, VA Northern Virginia Electric Cooperative Manassas, VA Prince George Electric Cooperative Waverly, VA Rappahannock Electric Cooperative Fredericksburg, VA Shenandoah Valley Electric Cooperative Mt. Crawford, VA Southside Electric Cooperative Crewe, VA Appendix F Page 1 of 3 APPENDIX F SUPPORT FACILITIES F.01 Definition of Support Facilities. At the Effective Date, the following shall be the Support Facilities: ELECTRIC PLANT IN SERVICE FERC ACCOUNT DESCRIPTION - ------- ----------- 353 Transmission Station Equipment Telemetering Equipment COMPLETED CONSTRUCTION NOT CLASSIFIED PROJECT NO. DESCRIPTION - ----------- ----------- 99-0182 Surry Nuclear Training Simulator 99-0313 Personnel Radiation Monitoring Exposure System 99-2291 Nuclear Station Emergency Plan Total Completed Construction Not Classified CONSTRUCTION WORK IN PROGRESS PROJECT NO. DESCRIPTION - ----------- ----------- Thereafter, Support Facilities shall mean all those North Anna Facilities, wherever situated, including, but not limited to, both real and personal property, exclusive of Nuclear Fuel, Operating Inventory and Major Spare Parts, which are purchased, leased or otherwise obtained for the construction, operation and maintenance of one or more Unit(s) located at the North Anna Nuclear Power Station and one or more nuclear Unit(s) located at Virginia Power Appendix F Page 2 of 3 Surry Nuclear Power Station or at such other location as Virginia Power may have an interest in any nuclear facility and are listed in the following accounts in accordance with the Uniform System of Accounts: Plant In Service CCNC Acct. 101 Acct. 106 321 - Structures and Improvements 325 - Miscellaneous Power Plant Equipment 353 - Transmission Station Equipment 397 - Communication Equipment Construction Work in Progress F.02 Old Dominion's Percentage Ownership Interest in Support Facilities. (a) Except as otherwise modified by the operation of Sections 15.03, 16.01 or 16.02 of the Purchase, Construction and Ownership Agreement, Old Dominion's Percentage Ownership Interest in any Support Facility shall be an undivided ownership interest determined in accordance with the following formula: Sum of Old Dominion Percentage Ownership Interests SFOI = in all Units that the Support Facility serves _____________________________________________ Number of units served by Support Facility (b) It is the intention of the Parties that the formula be reapplied at any time that the number of units served by any Support Facility changes for any reason. In any case where ownership interest of the Parties are adjusted, the provisions of Section 16.04 of the Purchase, Construction and Operating Agreement, shall apply and appropriate payment shall be made pursuant to Section F.03 hereof. F.03 Investment and Cost Responsibilities of the Parties for Support Facilities. The investment and cost responsibilities of the Parties for any Support Facility will be shared in Appendix F Page 3 of 3 proportion to the Parties' then current ownership interest in that Support Facility. Upon any adjustment in Old Dominion's Percentage Ownership Interest in any Support Facility, payment shall be to the Party whose ownership decreased, so that the percentage investment (including all cost components comprising New Investment, undepreciated) of each Party shall be equal to that Party's percentage ownership interest in the respective Support Facility. Appendix G Page 1 of 12 APPENDIX G CHARGES FOR PURCHASES BY OLD DOMINION Charges for Old Dominion's purchases of demand and energy from Virginia Power shall be calculated according to the following provisions, subject to approval of these terms, conditions and charges by FERC: I. Monthly Supplemental Demand Charge A. The Monthly Supplemental Demand Charge, as set forth below, shall be applicable to all Old Dominion Monthly Billing Demand as determined for each calendar month in accordance with Section 8.01(a)(i) and Appendix H, Section III. of this Agreement: For Calendar Year 1998 - $8.28413/kW-month For Calendar Year 1999 - $6.82413/kW-month For Calendar Year 2000 - $6.63413/kW-month For Calendar Year 2001 - $6.08413/kW-month For Calendar Year 2002 - $5.51413/kW-month B. The Monthly Supplemental Demand Charge applicable to any Old Dominion Monthly Billing Demand supplied by Virginia Power pursuant to Section 8.01(a)(ii) and (iv) shall be as determined pursuant to Section 8.02 (b) (ii) of this Agreement. C. The above Monthly Supplemental Demand Charges are exclusive of transmission service and ancillary services charges which shall be paid pursuant to the Transmission Service Agreement. II. Peaking Capacity Charge A. The Peaking Capacity Charge, as set forth below, shall be applicable to all Peaking Capacity supplied by Virginia Power as determined for each calendar month in accordance with Section 8.03(a) and Appendix M, Section I. of this Agreement: For the Period January 1, 1998 Through December 31, 1999 - $4.66413/kW- month For the Period January 1, 2000 Through December 31, 2003 - $1.93413/kW-month B. The above Peaking Capacity Charges are exclusive of transmission service and ancillary services charges which shall be paid pursuant to the Transmission Service Agreement. Appendix G Page 2 of 12 III. Monthly Supplemental Energy Charge A. For the period January 1, 1998 through December 31, 2000, the Monthly Supplemental Energy Charge, as set forth below, shall be applicable to all Old Dominion Monthly Billing Energy as determined for each calendar month in accordance with Section 8.01(d) and Appendix H, Section VI. of this Agreement: $0.02195/kWh for all On-peak kWh $0.01985/kWh for all Off-peak kWh B. Effective January 1, 2001, and pursuant to Section 8.02(a)(ii) of this Agreement, the Monthly Supplemental Energy Charge shall be determined annually based on the projected energy costs of Virginia Power's combined cycle and peaking units included in the production cost model used by Virginia Power to develop its annual corporate budget, subject to an annual true-up on fuel costs (including handling and analysis ("H&A")), in accordance with the provisions stated below. The projected energy costs shall include fuel, H&A, and variable operating and maintenance (O&M) expenses. The Monthly Supplemental Energy Charge determined in this section shall be applicable to all Old Dominion Monthly Billing Energy supplied by Virginia Power. The Monthly Supplemental Energy Charge will be determined annually based on a forecast of Old Dominion projected hourly loads excluding Old Dominion Monthly Delivered SEPA Capacity, adjusted for losses, then excluding Old Dominion Monthly North Anna Capacity, Old Dominion Monthly Accredited Firm Capacity, Old Dominion Monthly Accredited Non-Firm Capacity, Excluded Supplemental Capacity, Peaking Capacity, and Excluded Peaking Capacity. The remaining hourly values will be sorted in descending order. This shall be referred to as Old Dominion's supplemental "Load Duration Curve." The area under the Load Duration Curve shall be equal to Old Dominion's total projected supplemental energy requirements for the year used in the formula below. The formula below is based on the sum of the cost of energy from peaking units and combined cycle units as if the supplemental demand requirements of Old Dominion were purchased from Virginia Power as two thirds peaking capacity and one third combined cycle capacity. Therefore, the Monthly Supplemental Energy Charge shall be calculated as follows: Re = [ Pe\e\ x Pe\c\ ] + [ Ce\e\ x Ce\c\ ] + VOM\S\ ----- ----- Te\e\ Te\e\ Appendix G Page 3 of 12 hT Tee = (SIGMA) Old Dominion Monthly h=0 Supplemental Demand hx Pee = (SIGMA) Old Dominion Monthly h=0 Supplemental Demand -1/3D
Cee = Te\e\ - Pe\e\ Where: Re = Projected Monthly Supplemental Energy Charge Te\e\ = Total estimated annual Old Dominion Monthly Supplemental Energy Pe\e\ = Estimated annual Old Dominion Monthly Supplemental Energy related to peaking capacity Ce\e\ = Estimated annual Old Dominion Monthly Supplemental Energy related to combined cycle capacity Pe\c\ = Weighted average projected fuel cost (including H&A) for designated peaking units on a $/kWh basis Ce\c\ = Weighted average projected fuel cost (including H&A) for designated combined cycle units on a $/kWh basis n VOM\s\ = [Pe\e\ x [(SIGMA) [[projected year's peaking units' Te\e\ Sdpu=1 total O&M cost - projected year's peaking units' fuel and H&A cost] n x 0.35] / (SIGMA) projected year's Sdpu=1 peaking units' energy]] + a [Ce\e\ x [(SIGMA) [[projected year's combined Te\e\ dccu=1 cycle units' total O&M cost - projected year's combined cycle units' fuel and H&A cost] a x 0.35] / (SIGMA) projected year's combined dccu=1 cycle units energy]] Appendix G Page 4 of 12 Sdpu = designated peaking units index (for this Section III. B.) n = total number of peaking units dccu = designated combined cycle units index a = total number of combined cycle units D = Maximum Old Dominion Monthly Supplemental Demand for the year hT = The total number of hours during the year hx = That hour where the supplemental demand equals 1/3 D h = The hourly index The attached Exhibit A to this Appendix G is an illustration of the variables Pe\e\, Ce\e\ and Te\e\ for a sample year. Pursuant to Section 8.02(a)(ii), the Monthly Supplemental Energy Charge shall be subject to an annual true-up on fuel costs (including H&A) based on the following formula. Virginia Power's twelve month ending report entitled "Virginia Power - Fuels Consumed Within Power Stations" for each respective year shall be used to determine the "Weighted average actual fuel costs for the designated peaking units" and the "Weighted average actual fuel costs for the designated combined cycle units". FR\e\ = [Pe\e\ x Pe\c\] + [Ce\e\ x Ce\c\] ----- ----- Te\e\ Te\e\ Where: FR\e\ = Projected Monthly Supplemental Energy Charge, less O&M FR\a\ = [Pe\e\ x Pa\c\] + [Ce\e\ x Ca\c\] ----- ----- Te\e\ Te\e\ Where: FRa = Actual Monthly Supplemental Energy Charge, less O&M Pa\c\ = Weighted average actual fuel cost (including H&A) for designated peaking units on a $/kWh basis Ca\c\ = Weighted average actual fuel cost (including H&A) for designated combined cycle units on a $/kWh basis The amount of refund or credit due to the respective Party shall be determined as follows: Appendix G Page 5 of 12 SECD = Ta\e\ x (FRe - FRa) Where: SECD = Amount of Monthly Supplemental Energy Charge adjustment Ta\e\ = Actual annual Old Dominion Monthly Billing Energy IV. Monthly Reserve Energy Charge A. For the period January 1, 1998 through December 31, 2001, the Monthly Reserve Energy Charge shall be the Monthly Supplemental Energy Charge stated in III.A. above and shall be applicable to all Old Dominion Monthly Reserve Energy as determined for each calendar month in accordance with Section 8.05(b) and Appendix H, Section IV. of this Agreement. B. Effective January 1, 2002, and pursuant to Section 8.05(b) of this Agreement, the Monthly Reserve Energy Charge shall be determined annually based on the projected energy costs of designated Virginia Power peaking units operating at the time and included in the production cost model used by Virginia Power to develop its annual corporate budget, subject to an annual true-up on fuel costs (including H&A), in accordance with the provisions stated below. The projected energy costs shall include fuel, H&A, and variable O&M expenses. The Monthly Reserve Energy Charge determined in this section shall be applicable to all Old Dominion Monthly Reserve Energy supplied by Virginia Power. REC\e\ = RECRe + VOMr Where: RECR\e\= Projected Monthly Reserve Energy Charge rate based on projected fuel cost (including H&A) for designated peaking units on a $/kWh basis REC\e\ = Projected Monthly Reserve Energy Charge r VOMr = (SIGMA) [[projected year's peaking units' total Rdpu = 1 O&M cost - projected year's peaking units' fuel and H&A cost] r x 0.35] /(SIGMA) Projected Year's Peaking Units' Energy Rdpu Rdpu = designated peaking units index (for this Section IV. B.) r = total number of peaking units For the Monthly Reserve Energy Charge annual true-up, Virginia Power's twelve month ending report entitled "Virginia Power - Fuels Consumed Within Power Stations" for each respective year shall be used to determine the actual Appendix G Page 6 of 12 fuel costs of the designated Virginia Power peaking units. The amount of refund or credit due to the respective Party shall be determined as follows: RECD = RE\a\ x (RECRe - FRECa) Where: RECD = Amount of Monthly Reserve Energy Charge adjustment RE\a\ = Actual annual Old Dominion Monthly Reserve Energy FRECa = Monthly Reserve Energy Charge rate based on actual fuel cost (including H&A) for designated peaking units on a $/kWh basis V. Monthly Peaking Energy Charge A. For the period January 1, 1998 through December 31, 1999, the Monthly Peaking Energy Charge shall be the Monthly Supplemental Energy Charge stated in III. A. above and applicable to all Peaking Energy supplied by Virginia Power as determined for each calendar month in accordance with Section 8.03(b) and Appendix M, Section II, of this Agreement. B. Effective January 1, 2000, and pursuant to Section 8.03(d) of this Agreement, the Monthly Peaking Energy Charge shall be determined annually based on the projected energy costs of designated Virginia Power peaking units operating at the time and included in the production cost model used by Virginia Power to develop its annual corporate budget, subject to an annual true-up on fuel costs (including H&A), in accordance with the provisions stated below. The projected energy costs shall include fuel, H&A, and variable O&M expenses. The Monthly Peaking Energy Charge determined in this section shall be applicable to all monthly Peaking Energy supplied by Virginia Power. PEC\e\ = PECR\e\ + VOM\p\ Where: PECR\e\ = Projected Monthly Peaking Energy Charge rate based on projected fuel cost (including H&A) for designated peaking units on a $/kWh basis PEC\e\ = Projected Peaking Energy Charge p VOM\p\ = (SIGMA) [[projected year's peaking units' total O&M Pdpu=1 cost - projected year's peaking units' fuel and H&A cost] p x 0.35] / (SIGMA) projected year's peaking units' Pdpu=1 energy Appendix G Page 7 of 12 Pdpu = designated peaking units indexes (for this Section V.B.) p= total number of peaking units For the Monthly Peaking Energy Charge annual true-up, Virginia Power's twelve month ending report entitled "Virginia Power - Fuels Consumed Within Power Stations" for each respective year will be used to determine the actual fuel costs (including H&A) of the designated Virginia Power peaking units. The amount of refund or credit due to the respective Party shall be determined as follows: PECD = PE x (PECRe - FPECa) Where: PECD = Amount of Peaking Energy Charge adjustment PE = Actual Peaking Energy FPECa = Monthly Peaking Energy Charge rate based on actual fuel cost (including H&A) for designated peaking units on a $/kWh basis VI. Annual Fuel Adjustment Factor A. The Annual Fuel Adjustment Factor shall be applicable as follows: 1. To all Old Dominion Monthly Billing Energy for the period January 1, 1998 through December 31, 2000. 2. To all Old Dominion Monthly Reserve Energy for the period January 1, 1998 through December 31, 2001. 3. To all Monthly Peaking Energy for the period January 1, 1998 through December 31, 1999. B. For the above periods, Old Dominion Monthly Billing Energy, Peaking Energy and Old Dominion Monthly Reserve Energy (on-peak and off-peak kilowatt-hours, respectively) shall be multiplied by the annual time-differentiated on-peak and off-peak fuel adjustment factors which shall be equal to : 1. The sum of: (a) the estimated current-period fuel adjustment factor, and (b) the prior-period deferral adjustment factor, multiplied by 2. 1.04978 to determine the annual on-peak fuel adjustment factor and 0.94922 to determine the annual off-peak fuel adjustment factor. Appendix G Page 8 of 12 C. The estimated current-period fuel adjustment factor to become effective with the April billing month of each year shall be based on the estimated fuel expenses allocable to Old Dominion's estimated supplemental and peaking energy through the year 1999 and supplemental energy through the year 2000 for the 12-month period beginning in April of each year, and shall be calculated by the fuel adjustment factor formula shown below rounded to the nearest thousandth of a cent. D. The prior-period deferral adjustment factor to become effective with the April billing month of each year shall be based on the difference between the total fuel expenses (using the criteria outlined in (1) through (3) of Paragraph VI.H. below) allocable to Old Dominion and the total fuel recoveries by Old Dominion for the 12 months prior to April of each year, divided by Old Dominion's estimated supplemental and peaking energy through the year 1999 and supplemental energy through the year 2000 for the 12-month period beginning with April of each year (6 months where a semi-annual change is made pursuant to Paragraph F. below). The prior-period deferral adjustment factor will be adjusted for taxes. E. The intent of the annual fuel adjustment factor is to recover all fuel expenses allocable to Old Dominion. To the extent the amount recovered from Old Dominion through the annual fuel adjustment factor and the fuel component of the base rate exceeds the cost of fuel allocable to Old Dominion for the same time period, this over-recovery shall be a credit in the calculation of the prior-period deferral adjustment factor for the 12-month period beginning with the next April. To the extent the amount recovered from Old Dominion through the annual fuel adjustment factor and the fuel component of the base rate is less than the cost of fuel allocable to Old Dominion for the same time period, this under-recovery shall be a charge in the calculation of the prior-period deferral adjustment factor for the 12-month period beginning with the next April. F. The annual fuel adjustment factor shall be reviewed on a semi-annual basis to determine if any change is required. The current and prior period portions of the fuel adjustment factor will be reviewed individually, and a change to one or both may be made. The adjustment may be deferred until the end of the 12-month period, provided the net difference between the Company's actual and estimated under-recovery at the end of the 12-month period is no greater than seven and one-half per centum of actual and estimated fuel expenses or the net difference between the actual and estimated over-recovery at the end of the 12-month period is no greater than five per centum of actual and estimated fuel expenses. G. Fuel Adjustment Factor Formula: F = [ E - B] (T) - S Where: Appendix G Page 9 of 12 F = Estimated annual fuel adjustment factor in dollars per kilowatthour. E = Estimated total system fuel expenses as defined in Paragraph VI.H. below allocated to Old Dominion. The energy allocation factor for Old Dominion shall be the ratio of: (a) Old Dominion supplemental and peaking energy through the year 1999 and supplemental energy through the year 2000 for the 12-month period beginning with April of each year divided by; (b) the total Company system energy excluding energy generated from North Anna Units 1 and 2, for the 12-month period beginning with April of each year. S = Estimated Old Dominion supplemental and peaking energy through the year 1999 and supplemental energy through the year 2000 at the generation level for the 12-month period beginning with April of each year. B = The current base cost of fuel = $0.01386. T = Adjustment for state and local taxes measured by gross receipts determined separately for resale customers in Virginia: 100% divided by (100% minus applicable Gross Receipts Tax rate). H. The estimated system fuel expenses allocable to Old Dominion for the 12-month period beginning with April of each year shall be determined as follows: 1. Fossil and nuclear fuel consumed in the Utility's wholly owned plants, and the Utility's share of fossil and nuclear fuel consumed in jointly owned or leased plants excluding nuclear fuel consumed in North Anna Units 1 and 2. The cost of fossil fuel shall include no items other than those listed in Account 151 of the Commission's Uniform System of Accounts for Public Utilities and Licensees. The cost of nuclear fuel shall be that as shown in Account 518, excluding nuclear fuel consumed in North Anna Units 1 and 2, except that if Account 518 also contains any expense for fossil fuel, or another utility's share of jointly owned nuclear fuel, it shall be deducted from this account. Plus 2. The following purchased power costs: (a) The fuel cost component of any purchased power transaction. or Appendix G Page 10 of 12 (b) The total energy charges associated with economic purchases if the energy charges are less than the Company's total avoided variable costs during the purchase period. or (c) The total expense associated with purchased power of less than twelve months duration if the total cost of the purchase is less than the Company's total avoided variable costs and if the purpose of the purchase was solely to displace higher cost generation. Purchases made to solely displace higher cost generation exclude reliability purchases. A purchase shall be deemed for reliability where the Company's system reserve criterion is not met. Such criterion is as follows: Operating Reserve (consisting of largest generating unit plus regulating margin plus load forecast margin) Minus 75% of Emergency Contract Capacity Equals Spinning Reserve Requirement (d) Energy receipts that do not involve money payments such as diversity energy and pay-back of storage energy are not defined as purchased or interchanged power relative to the fuel clause. Minus 3. (a) The cost of fossil and nuclear fuel recovered through inter-system sales including the fuel costs related to economy energy sales and other energy sold on an economic dispatch basis. (Energy deliveries that do not involve billing transactions such as diversity energy and pay-back of storage energy are not defined as sales relative to the fuel factor.), and; (b) The fuel costs recovered through redispatch charges pursuant to the Open Access Transmission Tariff. I. Virginia Power will determine the balance of any under-recovery or over-recovery of fuel expense allocated to Old Dominion under this Section VI. for Old Dominion Monthly Billing Energy as of January 1, 2001. These amounts will be recovered through twelve equal monthly payments in 2001. Appendix G Page 11 of 12 For calendar year 2001, the Annual Fuel Adjustment Factor applicable to Old Dominion Monthly Reserve Energy shall be calculated based on the estimated annual system fuel expense and sales (MWh), less North Anna fuel expense and sales (MWh). Following calendar year 2001, Virginia Power shall determine the annual system average fuel rate based on actual fuel costs, exclusive of North Anna fuel expense and sales, for 2001. The difference between the estimated and the actual annual system fuel rates shall be multiplied by the Old Dominion Monthly Reserve Energy for 2001 to determine the over-recovery or under-recovery for fuel expense for Old Dominion Monthly Reserve Energy for the year 2001. Any over-recovered fuel expense will be refunded to Old Dominion within sixty (60) days as a credit to the monthly Charges For Purchases By Old Dominion. Any under-recovered fuel expense will be charged to Old Dominion within sixty (60) days as an addition to the monthly Charges For Purchases By Old Dominion. Effective January 1, 2002, this Annual Fuel Adjustment Factor will no longer be applicable to any Old Dominion Monthly Billing Energy, Peaking Energy or Old Dominion Monthly Reserve Energy. VII. Monthly Charges for Purchases by Old Dominion The Monthly Charges for Purchases by Old Dominion shall be the sum of Paragraphs I., II.,III.,IV.,V. and VI. [GRAPH] Supplemental Hourly Load Duration Curve *CUSTOMER PLEASE DEFINE GRAPH* Appendix H Page 1 of 3 APPENDIX H DETERMINATION OF PURCHASE AMOUNTS BY OLD DOMINION I. Old Dominion Monthly Supplemental Demand (a) Old Dominion Monthly Delivered Demand (combined Old Dominion hourly demand measured at the Interconnection Points for the clock hour during which the Combined System Monthly Peak Demand occurs), Less (b) Old Dominion Monthly Delivered SEPA Capacity. The resulting difference multiplied by (c) the factor of 100 divided by 100 minus multiplied the Combined System Loss Percentage (to reflect demand at the generation level), (Equal to Old Dominion Monthly Demand) Less (d) Old Dominion Monthly North Anna Capacity, Less (e) Old Dominion Monthly Accredited Firm Capacity (other than capacity specifically accounted for in Sections I. or III. of this Appendix H), Less (f) Old Dominion Monthly Accredited Non-firm Capacity (other than capacity specifically accounted for in Sections I. or III. of this Appendix H), Less (g) Peaking Capacity, Less (h) Excluded Peaking Capacity. II. Old Dominion Monthly Maximum Diversified Demand (a) The combined Old Dominion Members monthly maximum coincident hourly demand measured at the Interconnection Points during the On-Peak hours. III. Old Dominion Monthly Billing Demand (a) Old Dominion Monthly Supplemental Demand Less (b) Excluded Supplemental Capacity Appendix H Page 2 of 3 Plus (c) The kW, if any, by which the most recent 12 month average Old Dominion Monthly Maximum Diversified Demand exceeds 110% of the most recent 12-month average Old Dominion Monthly Delivered Demand with such excess multiplied by the factor of 100 divided by 100 minus the Combined System Loss Percentage. IV. Old Dominion Monthly Reserve Energy (a) Old Dominion Monthly North Anna Energy that would have been produced for the month were the Old Dominion Monthly North Anna Capacity fully available all month, Plus (b) Old Dominion Monthly Accredited Non-firm Energy that would have been produced for the month were the Old Dominion Monthly Accredited Non-firm Capacity fully available all month, Less (c) Old Dominion Monthly Accredited Non-firm Energy that could have been produced but was not produced for economic dispatch reasons, Less (d) Old Dominion Monthly North Anna Energy, Less (e) Old Dominion Monthly Accredited Non-Firm Energy, Less (f) Displacement Reserve Energy. V. Old Dominion Monthly Supplemental Energy (a) Old Dominion Monthly Delivered Energy, Less (b) Old Dominion Monthly Delivered SEPA Energy, with the resulting difference multiplied by (c) the factor of 100 divided by 100 minus the Combined System Transmission Loss Percentage (to reflect energy at the generation level), (equal to Old Dominion Monthly Energy) Less (d) Old Dominion Monthly North Anna Energy, Less (e) Old Dominion Monthly Accredited Firm Energy (other than energy specifically accounted for in Sections IV., V. or VI. of this Appendix H), Appendix H Page 3 of 3 Less (f) Old Dominion Monthly Accredited Non-Firm Energy, less Clover Economy Sales to Virginia Power (other than energy specifically accounted for in Sections IV., V. or VI. of this Appendix H), Less (g) Old Dominion Monthly Reserve Energy, Less (h) Displacement Reserve Energy Less (i) Energy associated with Clover Economy Purchases from Virginia Power, Less (j) Peaking Energy, Less (k) Displacement Peaking Energy, Less (l) Excluded Peaking Energy. VI. Old Dominion Monthly Billing Energy (a) Old Dominion Monthly Supplemental Energy, Less (b) Excluded Supplemental Energy, Less (c) Displacement Supplemental Energy. Appendix I Page 1 of 1 APPENDIX I CHARGES FOR RESERVE CAPACITY Charges for Old Dominion's purchases of demand and energy from Virginia Power shall be calculated according to the following provisions, subject to approval of these terms, conditions and charges by FERC: The Reserve Capacity Charge shall be determined in accordance with Section 8.05 of this Agreement. The Reserve Capacity Charge shall be as set forth below: Old Dominion Reserve Capacity - North Anna (a) ________kW Old Dominion Reserve Capacity - Clover (a) ________kW Reserve Capacity Charge per kW: For the Calendar Year 1998 - $6.97743/kW-month For the Calendar Year 1999 - $6.48667/kW-month For the Calendar Year 2000 - $5.97645/kW-month For the Calendar Year 2001 - $5.40973/kW-month For the year 2002 and beyond, the Reserve Capacity Charge shall be determined pursuant to Section 8.05 (a) of this Agreement based on designated Virginia Power-owned peaking units. The above Reserve Capacity Charges are exclusive of ancillary service charges which shall be paid pursuant to the Transmission Service Agreement. [Note(a): Old Dominion Reserve Capacity will be adjusted annually, effective January 1, to reflect adjustments to the System Reserve Margin, and from time to time to reflect the current rated capability of the generator units.] Appendix J Page 1 of 7 APPENDIX J FACILITIES CHARGES I. APPLICABILITY This Appendix J covering the supply of Excess Facilities Service is applicable to Old Dominion in the territory served by Virginia Power. II. AVAILABILITY Whenever Old Dominion requests Virginia Power to supply electricity in a manner which will require facilities in excess of Normal Service Facilities as defined in Paragraph IV. hereof, and Virginia Power finds it practicable, such facilities will be provided in accordance with Paragraphs III. and V. hereof. III. MONTHLY RATE 1. 1.73% of the estimated installed cost of all distribution equipment and facilities (rated below 69 kV) required in addition to Normal Service Facilities. 2. 1.44% of the estimated installed cost of all transmission equipment and facilities (rated 69 kV and above) required in addition to Normal Service Facilities. IV. DETERMINATION OF NORMAL SERVICE FACILITIES Virginia Power's Normal Service Facilities at an Interconnection Point with Old Dominion shall be those Virginia Power is committed to provide for service under this Agreement, as it may be amended from time to time, and agreed to by the Planning and Administration Committee. V. EXCESS FACILITIES SERVICE Excess Facilities Service supplied shall be subject to the provisions of this Agreement except as modified by the following: 1. Virginia Power's facilities will be installed in a place and manner satisfactory to Virginia Power; and, upon request by Virginia Power, Old Dominion will furnish the property on which any excess facilities may be located. 2. Virginia Power may change facilities at its convenience so long as equivalent service is rendered and the charge to Old Dominion is unaffected. In Paragraphs 3., 4., and 5. below, a change in facilities shall mean one for which an increase or decrease in the Monthly Charge for Excess Facilities Service becomes appropriate. Appendix J Page 2 of 7 3. If within ten years from the initial connection of Excess Facilities Service at any Interconnection Point or from the last change made in Virginia Power facilities at that point (1) Old Dominion wishes to discontinue Excess Facilities Service; or (2) Old Dominion ceases to take electric service from Virginia Power at that point; or (3) Virginia Power determines that, in accordance with good engineering and operating practice, service to Old Dominion at such Interconnection Point requires a further change in Virginia Power facilities or in their classification as Normal or Excess Facilities, other than a change provided for in Paragraph 4. below, Old Dominion will: (a) Agree to the new Monthly Excess Facilities Charge; or (b) Request that the Excess Facilities be removed and, in such event, Old Dominion will reimburse Virginia Power for the costs specified in Paragraph 5. below. 4. If the Excess Facilities serving an Interconnection Point are changed by Virginia Power within five years from the initial connection or from the last change made in Virginia Power facilities at that Interconnection Point, not as a direct result of a change in Old Dominion's load or request by Old Dominion, Old Dominion will: (a) Agree to such change by Virginia Power before the change is made, if service is still wanted by Old Dominion, provided that: (1) if the change causes an increase in the Monthly Charge for Excess Facilities, the increase will be effective only after the end of said five years, or (2) if the change causes a decrease in the Monthly Charge for Excess Facilities, the decrease will be effective from the date Virginia Power changes its facilities; or (b) Request Virginia Power to remove the Excess Facilities at no cost to Old Dominion at the time Virginia Power changes its facilities. 5. If facilities are removed or rearranged under Paragraph 3. above, Old Dominion will reimburse Virginia Power as follows: (a) When rights-of-way for such service are utilized for a period of less than 10 years, Old Dominion will pay Virginia Power the total cost of acquiring all rights-of-way which are abandoned within twelve months after any aforesaid event, plus (b) The original installed cost (for line facilities, being the year's average Appendix J Page 3 of 7 installed cost on units of property installed throughout Virginia Power's system in each calendar year) - plus - the estimated removal cost - less - salvage on all Virginia Power facilities installed to provide such service and removed as a result of any such event, and if applicable, (c) The original installed cost (for line facilities, being the year's average installed cost on units of property installed throughout Virginia Power's system in each calendar year) to rearrange and/or relocate such facilities to serve such Interconnection Point -plus- the estimated cost to return such facilities to their condition prior to serving such Interconnection Point if such facilities are changed as a result of any such event, less (d) A credit of 1/120th of such reimbursement for each full month Virginia Power facilities at such Interconnection Point were utilized to serve Old Dominion, or its predecessor, except that no credit will apply if such facilities were utilized for a period less than three years. 6. If at any time all or any part of the Excess Facilities become Normal Service Facilities, the Monthly Charge for Excess Facilities Service will cease or will be adjusted to reflect such change. VI. EXISTING EXCESS FACILITIES SERVICE The Old Dominion Members have certain existing Excess Facilities Service for which Old Dominion will pay Virginia Power the Monthly Rate as provided in Paragraph III. of this Appendix J. These Excess Facilities Services are listed on Pages 4 through 7 of this Appendix J. VII. CHANGES IN MONTHLY RATE Virginia Power shall have the right to unilaterally file with FERC for a change in rates contained in this Appendix J under Section 205 of the Federal Power Act and pursuant to the Commission's Rules and Regulations promulgated thereunder. In addition, nothing contained herein shall limit or modify in any respect Old Dominion's legal rights to oppose, in whole or in part, Virginia Power's filing for a change in the rates contained in this Appendix J or to complain of these rates pursuant to Section 206 of the Federal Power Act. Appendix J Page 4 of 7 Type of Excess Cooperative and Delivery Point Facilities - ------------------------------ ---------- B-A-R-C Electric Cooperative Bustleburg Delivery Point Data Pulse Callaghan Delivery Point Data Pulse Cornwall Delivery Point Data Pulse Effinger Delivery Point Data Pulse Fairfield Delivery Point Data Pulse Fordwick Delivery Point Data Pulse Goshen Delivery Point Data Pulse Lexington Delivery Point Data Pulse Mecklenburg Electric Cooperative Barnes Junction Delivery Point Data Pulse Beechwood Delivery Point Data Pulse Belfield Delivery Point Data Pulse Black Branch Delivery Point Data Pulse Boydton Delivery Point Data Pulse Brink Delivery Point Data Pulse Clarksville Delivery Point Data Pulse Climax Delivery Point Data Pulse Crystal Hill 2 Delivery Point Data Pulse Emporia Delivery Point Data Pulse Freeman Delivery Point Data Pulse Gasburg Delivery Point Data Pulse Gretna Delivery Point Data Pulse Grit Delivery Point Data Pulse Hickory Grove Data Pulse Huber Delivery Point Data Pulse Hurt Delivery Point Data Pulse Jones Store Delivery Point Data Pulse Kerr Delivery Point Data Pulse Mt. Airy Delivery Point Data Pulse Northview Delivery Point Data Pulse Omega Delivery Point Data Pulse Shockoe Delivery Point Data Pulse Appendix J Page 5 of 7 Type of Excess Cooperative and Delivery Point Facilities - ------------------------------ ---------- Northern Neck Cooperative Garner Delivery Point Data Pulse Oak Grove Delivery Point Data Pulse Office Hall Delivery Point Data Pulse Passapatanzy Delivery Point Data Pulse Sanders Data Pulse Northern Virginia Electric Coop Arcola Delivery Point Data Pulse Bethel Delivery Point Data Pulse Cardinal Totalized Metering Catharpin Delivery Point Data Pulse Country Club Delivery Point Data Pulse Cub Run 2 Delivery Point Data Pulse Godwin Delivery Point Alternate Circuits Herndon Delivery Point Data Pulse Hillsboro Delivery Point Data Pulse Independent Hill Data Pulse Johnson 3 Delivery Point Data Pulse Lindendale Delivery Point Data Pulse Middleton Delivery Point Data Pulse Minnieville Delivery Point Data Pulse Moore Delivery Point Data Pulse Smoketown Delivery Point Data Pulse Sowego 2 Delivery Point Data Pulse Wellington Delivery Point Data Pulse Prince George Electric Cooperative Bakers Pond Delivery Point Data Pulse Garysville Delivery Point Data Pulse Prince George Delivery Point Data Pulse Wakefield Delivery Point Data Pulse Waverly Delivery Point Data Pulse Waverly 2 Delivery Point Data Pulse Appendix J Page 6 of 7 Type of Excess Cooperative and Delivery Point Facilities - ------------------------------ ---------- Rappahannock Electric Coop Bear Island Delivery Point Data Pulse Brandy Delivery Point Data Pulse Clancie Delivery Point Data Pulse Cuckoo Delivery Point Data Pulse Culpeper #1 Delivery Point Data Pulse Decapolis Delivery Point Data Pulse Greenwood Delivery Point Data Pulse Goldmine Delivery Point Data Pulse Kings Dominion Delivery Point Data Pulse Locust Grove Data Pulse Millers Tavern Delivery Point Data Pulse Mitchell Delivery Point Data Pulse North Doswell Delivery Point Data Pulse Oak Shade Delivery Point Data Pulse Orchid Delivery Point Data Pulse Orleans Delivery Point Data Pulse Paytes Delivery Point Data Pulse Proffit Delivery Point Data Pulse Slabtown Delivery Point Data Pulse St. Johns Church 3 Delivery Point Data Pulse Unionville Delivery Point Data Pulse Warrenton Delivery Point Data Pulse Wilderness Delivery point Data Pulse Shenandoah Valley Electric Coop Barterbrook Delivery Point Data Pulse Brands Delivery Point Data Pulse Cold Springs Delivery Point Data Pulse Columbia Furnace Delivery Point Data Pulse Crimora Delivery Point Data Pulse Dayton Delivery Point Data Pulse Gardner Springs Delivery Point Data Pulse Mt. Jackson Delivery Point Data Pulse North River Delivery Point Data Pulse Timberville Delivery Point Data Pulse Trimbles Mill Delivery Point Data Pulse Woodstock Delivery Point Data Pulse Appendix J Page 7 of 7 Type of Excess Cooperative and Delivery Point Facilities - ------------------------------ ---------- Southside Electric Cooperative Altavista Delivery Point Data Pulse Amelia Delivery Point Data Pulse Center Star Delivery Point Data Pulse Cherry Hill Delivery Point Data Pulse Danieltown Delivery Point Data Pulse Drakes Branch Delivery Point Data Pulse Evergreen Delivery Point Data Pulse Fort Pickett Delivery Point Data Pulse Gary Delivery Point Data Pulse Gladys Delivery Point Data Pulse Hooper Delivery Point Data Pulse Madisonville Delivery Point Data Pulse Martins Delivery Point Data Pulse Moran Delivery Point Data Pulse Nutbush Delivery Point Data Pulse Pointon Delivery Point Data Pulse Powhatan 2 Delivery Point Data Pulse Reams 2 Delivery Point Data Pulse Redhouse Delivery Point Data Pulse Stoddert Delivery Point Data Pulse Victoria Delivery Point Data Pulse Appendix K Page 1 of 2 APPENDIX K VIRGINIA ELECTRIC AND POWER COMPANY MONTHLY STATEMENT TO OLD DOMINION MONTH OF 19 (1) Total Operation and Maintenance Charges (A) (2) New Investment including Nuclear Fuel (3) Supplemental Demand Charges (Appendix G) (4) Supplemental Energy Charges (Appendix G) (5) Reserve Energy Charges (Appendix G) (6) Reserve Capacity Charges (Appendix I) (7) Transmission Service Charges (8) Distribution Service Charges (9) Rappahannock Wheeling Charge Credit (10) Peaking Capacity Charges (Appendix G) (11) Peaking Energy Charges (Appendix G) (12) Cancellation Costs (ending December 1998) (13) Facilities Charges (Appendix J) (14) Clover Transmission Facilities Charge - 230 kV (15) Clover Transmission Facilities Charge - 500 kV (16) Economy Transactions (17) Other (Specify) TOTAL $ _______________ Appendix K Page 2 of 2 (A) Summary of Total Operation and Maintenance Charges from Appendix L:
ESTIMATE ADJUSTMENT (Month) (Year) (Month) (Year) TOTAL -------------- -------------- North Anna Nuclear Station, Nuclear Production Operation and Maintenance Expenses $ $ $ Other Nuclear Production Operation and Maintenance Expenses Administrative and General Expenses North Anna Switchyard and Operation and Maintenance Expenses Interest Revision ________ TOTAL $ ________
Appendix L Page 1 of 9 APPENDIX L VIRGINIA POWER NORTH ANNA NUCLEAR STATION NUCLEAR PRODUCTION OPERATION AND MAINTENANCE EXPENSES MONTH OF 19 (Month) Budget I. BILLING FORMAT
FERC ODEC's ACCOUNT (Excludes Nuclear Fuel) Total Share(A) - --------------------------------- ----- -------- Operation (1) 517 Supervision and Engineering $ $ (2) 519 Coolants and Water (3) 520 Steam Expenses (4) 523 Electric Expenses (5) 524 Miscellaneous Nuclear Power Expenses (6) 525 Rents (7) 928 Reg. Comm. - NRC -------- -------- (8) Total Operation ________ ________ Maintenance (9) 528 Supervision and Engineering (10) 529 Structures (12) 530 Reactor Plant Equip. (13) 531 Electric Plant ________ ________ (14) Total Maintenance ________ ________ (15) Payroll Base Payroll Add - On (C) Budget (16) 926 Pensions (17) 926 Benefits (18) 408.1 Taxes (19) 920 Success Share (20) 926 OPEB ________ ________ (21) TotalPayroll Add - On ________ ________ (22) Total North Anna Direct O&M and Payroll Add - On $ $ ________ ________
See Footnotes of Appendix L, Page 9 of 9 Appendix L Page 2 of 9 VIRGINIA POWER OTHER NUCLEAR PRODUCTION OPERATION AND MAINTENANCE EXPENSES MONTH OF 19 (Month) Budget
Va. Power FERC Nuclear ODEC's ACCOUNT (Excludes Nuclear Fuel) Support Share(B) - ------------------------------- ------- -------- Operation (1) 517 Supervision and Engineering $ $ (2) 519 Coolants and Water (3) 520 Steam Expenses (4) 523 Electric Expenses (5) 524 Miscellaneous Nuclear Power Expenses (6) 525 Rents (7) 556 System nuclear control and load dispatching (based on ratio of nuclear capacity to total Va. Power owned capacity) ________ ________ (8) Total Operation ________ ________ Maintenance (9) 528 Supervision and Engineering (10) 529 Structures (11) 530 Reactor Plant Equipment (12) 531 Electric Plant (13) 532 Miscellaneous Nuclear Plant ________ ________ (14) Total Maintenance ________ ________ (15) Payroll Base Payroll Add - On (C) Budget (16) 926 Pensions (17) 926 Benefits (18) 408.1 Taxes (19) 920 Success Share (20) 926 OPEB -------- -------- (21) Total Payroll Add-On ________ ________ (22) Total Nuclear Production Support and Payroll Add-On $ $ -------- --------
See Footnotes of Appendix L, Page 9 of 9 Appendix L Page 3 of 9 VIRGINIA POWER ADMINISTRATIVE AND GENERAL EXPENSES MONTH OF 19 Fixed Monthly A&G Fee for administrative and general services as described in Section 11.01(a), (b) and (c) $100,000.00 See Footnotes of Appendix L, Page 9 of 9 Appendix L Page 4 of 9 VIRGINIA POWER NORTH ANNA NUCLEAR STATION NUCLEAR PRODUCTION OPERATION AND MAINTENANCE EXPENSES MONTH OF 19 ADJUSTMENT - ACTUAL vs. BUDGET
Va. Power Va. Power ODEC's ODEC's FERC (Month, Yr) (Month, Yr) Share of Share of ACCOUNT (Excludes Nuclear Fuel) Actual Budget Actual (A) Budget (A) Adjustment - ------- ----------------------- ------ ------ ---------- ---------- ---------- Operation (1) 517 Supervision and Engineering $ $ $ $ $ (2) 519 Coolants and Water (3) 520 Steam Expenses (4) 523 Electric Expenses (5) 524 Misc. Nuclear Power Expenses (6) 525 Rents (7) 928 Reg. Comm. - NRC _______ __________ _________ _______ _______ (8) Total Operation _______ __________ _________ _______ _______ Maintenance (9) 528 Supervision and Engineering (10) 529 Structures (11) 530 Reactor Plant Equip. (12) 531 Electric Plant (13) 532 Miscellaneous Nuclear Plant _______ __________ _________ _______ _______ (14) Total Maintenance _______ __________ _________ _______ _______ (15) Payroll Base Payroll Add - On (C) Actual Budget (16) 926 Pensions (17) 926 Benefits (18) 408.1 Taxes (19) 920 Success Share (20) 926 OPEB _______ __________ _________ _______ _______ (21) Total Payroll Add-On _______ __________ _________ _______ _______ (22) Total North Anna Direct O&M and Payroll Add-On $ $ $ $ $ _______ __________ _________ _______ _______
See Footnotes of Appendix L, Page 9 of 9 Appendix L Page 5 of 9 VIRGINIA POWER OTHER NUCLEAR PRODUCTION OPERATION AND MAINTENANCE EXPENSES MONTH OF 19 ADJUSTMENT - ACTUAL vs. BUDGET
Va. Power Va. Power ODEC's ODEC's FERC (Month, Yr) (Month, Yr) Share of Share of ACCOUNT (Excludes Nuclear Fuel) Actual Budget Actual (B) Budget (B) Adjustment - ------- ----------------------- ------ ------ ---------- ---------- ---------- Operation (1) 517 Supervision and Eng. $ $ $ $ $ (2) 519 Coolants and Water (3) 520 Steam Expenses (4) 523 Electric Expenses (5) 524 Misc. Nuclear Pwr. Exp. (6) 525 Rents (7) 556 System Nuclear Control and Load Dispatching (Based on ratio of nuclear capacity to total Va. Power owned capacity) _______ __________ _________ _______ _______ (8) Total Operation _______ __________ _________ _______ _______ Maintenance (9) 528 Supervision and Engineering (10) 529 Structures (11) 530 Reactor Plant Equipment (12) 531 Electric Plant (13) 532 Misc. Nuclear Plant _______ __________ _________ _______ _______ (14) Total Maintenance _______ __________ _________ _______ _______ (15) Payroll Base Payroll Add - On (C) Actual Budget (16) 926 Pensions (17) 926 Benefits (18) 408.1 Taxes (19) 920 Success Share (20) 926 OPEB_________ _______ __________ _________ _______ _______ (21) Total Payroll Add-On _______ __________ _________ _______ _______ (22) Total Nuclear Production Support and payroll add-on $ $ $ $ $ _______ __________ _________ _______ _______
See Footnotes of Appendix L, Page 9 of 9 Appendix L Page 6 of 9 VIRGINIA POWER NORTH ANNA SWITCHYARD OPERATION AND MAINTENANCE EXPENSES MONTH OF 19
FERC ACCOUNT (Month, Year) ODEC's - ------- Actual Share (D) -------------- --------- Operation (1) 560 Supervision and Engineering (2) 562 Station Expenses (3) 563 Overhead Line Expenses (4) 566 Miscellaneous Trans. Expenses (5) 567 Rents ______________ ____________ (6) Total Operation ______________ ____________ Maintenance (7) 568 Supervision and Engineering (8) 569 Structures (9) 570 Station Equipment (10) 571 Overhead lines (11) 573 Miscellaneous Trans. Plant ______________ ____________ (12) Total Maintenance ______________ ____________ (13) Payroll Base Payroll Add-On Actual (14) 926 Pensions (15) 926 Benefits (16) 408.1 Taxes (17) 920 Success Share (18) 926 OPEB ______________ ____________ (19) Total Payroll Add-On ______________ ____________ (20) Total O&M and Payroll Add-On $ $ ______________ ____________
See Footnotes of Appendix L, Page 9 of 9 Appendix L Page 7 of 9 VIRGINIA POWER INTEREST RATE CALCULATION FOR BILLINGS TO OLD DOMINION For the period (Month, Day, Year) through (Month, Day, Year) the per annum interest rate equal to the weighted cost of short-term financing was _______%. This was based on the prime rate at Chase Manhattan Bank. The rate was calculated as follows: Time Period Days Interest Rate Factor - ----------- ---- ------------- ------ ---- ---------- ------ Total ____ __________ ______ Interest Rate (Factor)/Days = _____% NORTH ANNA True-Up Amount x Interest Rate x Proration = Interest Amount -------------- ------------- --------- ---------------
Operation and Maintenance New Investment See Footnotes of Appendix L, Page 9 of 9 Appendix L Page 8 of 9 VIRGINIA POWER ADMINISTRATIVE AND GENERAL EXPENSES MONTH OF 19 ACTUAL II. A&G INFORMATION FORMAT
FERC ACCOUNT - ------- Virginia Operation Power --------- -------- (1) 920 Administrative and General Salaries $ (2) 921 Office Supplies and Expense (3) 922 Administrative Expense and Transferred Credit (4) 923 Outside Services (5) 924 Property Insurance (6) 925 Injuries and Damages (7) 927 Franchise Requirement (8) 928 Regulatory Commission Expenses (9) 929 Duplicate Charges - Credit (10) 930.1 Misc. - Gen. Advertising Expenses 930.2 Misc. General Expense (11) 931 Rents _______ (12) Total Operation _______ Maintenance (13) 935 Maintenance of Gen. Plant _______ (14) Payroll Base _______ Payroll Add-On (C) Actual (15) 926 Pensions (16) 926 Benefits (17) 408.1 Taxes (18) 920 Success Share (19) 926 OPEB ------- (20) Total Payroll Add - On _______ (21) Total A&G and Payroll Add-On $ _______
See Footnotes of Appendix L, Page 9 of 9 Appendix L Page 9 of 9 FOOTNOTES (A) Costs of the North Anna Power Station will be allocated to Old Dominion based on its ownership percentage. Costs will be determined in accordance with Section 11.01 of the I&O Agreement. (B) Costs of the nuclear support function will be allocated to Old Dominion based on the ratio of Old Dominion's entitlement to nuclear capacity, to total nuclear capacity in commercial operation. (C) Old Dominion will pay its pro rata share of employee pensions and benefits which are charged to administrative and general expenses, based on the ratio of pension and benefit cost to total payroll. The aforementioned ratio will be applied to salaries and wages included in the various operation and maintenance expense accounts. Also, Old Dominion will pay its pro rata share of payroll taxes based on the ratio of payroll taxes to total payroll. (D) Costs of the North Anna switchyard will be allocated to Old Dominion based on Old Dominion's sixty percent (60%) ownership allocation of certain switchyard facilities times Old Dominion's ownership percentage. Appendix M Page 1 of 3 APPENDIX M PEAKING CAPACITY AND ENERGY I. Peaking Capacity Peaking Capacity shall be calculated in accordance with Section 8.03(a) and (e) and the following PC(y) = MODMDD(y-1) x 0.04 + PC(y-1) Where y is equal to the year's index, PC(y) = Peaking Capacity in year y PC(y-1) = Peaking Capacity in year prior to year y MODMDD (y-1) = Maximum Old Dominion Monthly Delivered Demand in year prior to year y This equation begins with year (y) = 1996 II. Peaking Energy Peaking Energy will be determined based upon a forecast of Old Dominion projected hourly delivered loads excluding SEPA and adjusted for losses. These loads will be sorted in descending order and shall be referred to as the Old Dominion "Load Duration Curve." The Peaking Energy shall be calculated based upon the following equation: hp PCe = (SIGMA) ODMD - P + P\c\ h = 0 Where, PC\e\ = Peaking Energy ODMD = Old Dominion Monthly Demand for each hour P = The maximum 60 minute Old Dominion Monthly Demand for the year PC = Peaking Capacity for the year Appendix M Page 2 of 3 h = The hourly index hT = The total number of hours during the year. hp = That hour where ODMD equals the maximum 60 minute Old Dominion Monthly Demand for the year less the Peaking Capacity for the year. An illustration of the peaking energy for a sample year follows. Appendix O Page 3 of 3 OLD DOMINION LOAD DURATION CURVE ANNUAL BASIS [GRAPH APPEARS HERE - PLOT POINTS NEEDED] Specifications for Service for Network Integration Transmission Service to Old Dominion Electric Cooperative The Specifications for the provision of Network Integration Transmission Service by Virginia Electric and Power Company to Old Dominion Electric Cooperative are as follows: VIRGINIA POWER UNITS:
Dependable Capacity Dependable Capacity Generation Resource Resource Location Summer MW Winter MW ------------------- ----------------- -------- --------- Nuclear: North Anna 1 Mineral VA 893 893 North Anna 2 Mineral VA 897 897 Surry 1 Surry VA 801 801 Surry 2 Surry VA 801 801 Coal: Bremo 3 Bremo Bluff VA 71 74 Bremo 4 Bremo Bluff VA 156 160 Chesapeake 1 Chesapeake VA 111 111 Chesapeake 2 Chesapeake VA 111 111 Chesapeake 3 Chesapeake VA 156 162 Chesapeake 4 Chesapeake VA 217 221 Chesterfield 3 Chester VA 100 105 Chesterfield 4 Chester VA 166 171 Chesterfield 5 Chester VA 326 333 Chesterfield 6 Chester VA 658 671 Clover 1 Clover VA 441 441 Clover 2 Clover VA 441 441 Mt. Storm 1 Mt. Storm WV 533 545
-2-
Dependable Capacity Dependable Capacity Generation Resource Resource Location Summer MW Winter MW ------------------- ----------------- ---------- --------- Mt. Storm 2 Mt. Storm WV 533 545 Mt. Storm 3 Mt. Storm WV 521 536 Possum Pt. 3 Dumfries VA 101 105 Possum Pt. 4 Dumfries VA 221 221 Yorktown 1 Yorktown VA 159 163 Yorktown 2 Yorktown VA 167 172 North Branch (R/S) Bayard WV 74 77 Heavy Oil: Possum Pt. 1 Dumfries VA 74 74 Possum Pt. 2 Dumfries VA 69 71 Possum Pt. 5 Dumfries VA 786 801 Yorktown 3 Yorktown VA 818 820 Hydro: Conventional 324 324 Bath County Warm Springs VA 1,260 1,260 Combustion Turbine: Bellemeade (R/S) 230 250 Chesterfield 7 Chester VA 197 232 Chesterfield 8 Chester VA 200 235
-3- NON-UTILITY GENERATORS:
Dependable Capacity Dependable Capacity Contract Generation Resource Resource Location Summer kW Winter kW Expiration ------------------- ----------------- --------- --------- ---------- Stone Container Hopewell VA 38,362 38,362 10/25/2004 Westvaco Convington VA 55,000 55,000 06/17/2001 Merck & Company Elkton VA 1,901 1,901 06/13/2003 Chapman Dam Woodstock VA 72 72 10/16/2004 Coiners Mill Dooms VA 10 10 12/29/2013 Chesapeake West Point VA 35,000 35,000 11/09/2000 Norfolk Naval Shipyard Portsmouth VA 0 0 04/26/2003 Emporia Hydro Emporia VA 1,100 1,100 03/20/2006 Park 500 Hopewell VA 10,000 10,000 12/30/2003 Columbia Mills Buena Vista VA 259 259 02/06/2015 Alexandria MSW Alexandria VA 19,500 01/28/2023 Cogentrix - Hopewell Hopewell VA 88,500 88,500 01/09/2008 Scott Energy Amelia VA 2,500 2,500 12/28/2015 Cogentrix - Portsmouth Portsmouth VA 11,500 115,000 06/08/2008 Union Camp Franklin VA 14,000 14,000 08/26/2006 Banister Halifax VA 100 100 09/27/2008 Harvell Petersburg VA 100 100 06/29/2012 Lakeview Hydro Colonial Heights VA 100 100 12/21/2008 Richmond Power Enterprises Richmond VA 230,256 250,000 03/12/2016 Hopewell Cogen, LP Hopewell VA 335,200 398,690 07/30/2015 Doswell #1 Doswell VA 302,500 363,000 05/09/2017 Doswell #2 Doswell VA 302,500 363,000 05/02/2017 Ogden-Martin Fairfax Fairfax VA 57,000 57,000 05/24/2015 Rivanna Water & Sewer Charlottesville VA 100 100 04/28/1998 Battersea Dam Ettrick VA 100 100 12/31/2015 Weyerhaeuser Plymouth NC 0 0 07/26/1997 Fries Hydro Fries VA 2,400 2,400 05/19/1999 LG&E-Westmoreland Altavista Altavista VA 62,700 62,700 02/21/2017 LG&E-Westmoreland Hopewell Hopewell VA 62,700 62,700 06/30/2017
-4-
Dependable Capacity Dependable Capacity Contract Generation Resource Resource Location Summer kW Winter kW Expiration ------------------- ----------------- --------- --------- ---------- LG&E-Westmoreland Southhampton Southampton VA 62,700 62,700 03/06/2017 Brasfield Dam Petersburg VA 2,500 2,500 10/11/2013 Schoolfield Dam Danville VA 3,000 3,000 11/30/2015 Roanoke Valley Project Halifax Co. NC 165,000 167,200 05/28/2019 Cogentrix - Rocky Mount Rocky Mount NC 115,500 115,500 10/14/2015 Cogentrix of Richmond - Unit 1 Richmond VA 115,500 115,500 07/31/2017 Cogentrix of Richmond - Unit 2 Richmond VA 93,500 93,024 07/31/2017 Commonwealth Atlantic LP Chesapeake VA 312,004 375,001 06/04/2017 Gordonsville Energy L.P. I Louisa Co. VA 108,702 143,902 05/31/2024 Gordonsville Energy L.P. II Louisa Co. VA 108,702 143,902 05/31/2024 Mecklenburg Clarksville VA 132,000 132,000 11/05/2017 Multitrade of Pittsylvania Co., LP Pittsylvania Co. VA 75,312 79,500 06/14/2019 Panda-Rosemary Roanoke Rapids NC 165,000 198,000 12/26/2015 Boydton Plank Road Dinwiddie Co. VA 3,000 3,000 12/29/2017 Wythe Park Power #2 Petersburg VA 3,000 3,000 12/31/2004 Wythe Park Power #3 Richmond VA 3,000 3,000 07/28/2006 Core-Chesterfield Chesterfield Co. VA 3,000 3,000 06/12/1997 Dale Chesterfield Co. VA 3,000 3,000 03/28/1998 I-95 Landfill Lorton VA 3,000 3,000 12/31/2011 Roanoke Valley II Halifax Co. NC 44,000 45,100 05/31/2020 SEI Birchwood King George Co. VA 217,800 222,200 11/14/2021 WE GEN Inc. Halifax Co. VA 2,900 2,900 06/28/2022 Baker Cogeneration Richmond VA 3,000 3,000 02/08/2022 Suffolk Landfill #1 Suffolk VA 3,000 3,000 11/03/2014 Handcraft Richmond VA 3,000 3,000 02/23/2022 Wiccacon Hertford Co. NC 5,000 5,000 12/30/2009 I-95 Phase II Lorton VA 3,000 3,000 02/09/2013 Johnston Willis Chesterfield Co. VA 3,000 3,000 03/15/2022 William Byrd Henrico Co. VA 3,000 3,000 12/01/2022 Carver Heights Chesterfield Co. VA 1,500 1,500 12/30/2008
-5-
Dependable Capacity Dependable Capacity Contract Generation Resource Resource Location Summer kW Winter kW Expiration ------------------- -------------------- --------- --------- ---------- Richmond Electric Generation Henrico Co. VA 2,900 2,900 08/26/2013 Kirk Lumber Suffolk VA 0 0 08/05/1997 Lanier Road Goochland Co. VA 3,000 3,000 12/30/2022 Lewiston NUG Lewiston NC 5,000 5,000 12/30/2013 Woodville NUG Woodville NC 5,000 5,000 12/30/2013 Robersonville NUG Robersonville NC 5,000 5,000 12/30/2013
-6- PURCHASES:
Dependable Capacity Dependable Capacity Contract Generation Resource Resources Location Summer KW Winter KW Expiration ------------------- --------------------- --------- --------- ---------- AEP/Rockport Spencer County IN 455 455 12/31/1999 AEP System Capacity 45 45 12/31/1999 Hoosier/Merom Bloomington ID 400 400 12/31/1999
-7- POINTS OF DELIVERY B-A-R-C EC
Name/Description Delivered Voltage (kV) 1996 Summer NCP (kW) 1996-97 Winter NCP (kW) - ---------------- ---------------------- -------------------- ----------------------- BUSTLEBURG 115.0 3,007 4,956 CALLAGHAN 46.0 9,075 15,251 GOSHEN 46.0 8,963 12,522 LEXINGTON 12.5 1,363 1,733 CORNWALL 46.0 2,376 3,069 FORDWICK 23.0 1,932 2,572 FAIRFIELD 23.0 1,195 1,890 EFFINGER 115.0 N/A 3,370 COMMUNITY EC BLACK CREEK 13.2 1,847 2,335 COURTLAND 13.2 2,397 3,027 HANDSOM 115.0 1,978 3,043 HOLLAND 115.0 5,023 6,661 LUMMIS 12.5 2,413 2,954 PAGAN 13.2 6,143 8,058 SADLERS 12.5 2,417 2,789 WINDSOR 115.0 6,528 7,469 HARRELLS 13.2 1,387 1,459 NOTTOWAY 34.5 2,835 2,520 MECKLENBURG EC BEECHWOOD 115.0 9,206 11,309 BLACK BRANCH 69.0 4,113 3,993 BRINKS 115.0 2,063 4,673 CLARKSVILLE 115.0 3,701 3,763
-8-
Name/Description Delivered Voltage (kV) 1996 Summer NCP (kW) 1996-97 Winter NCP (kW) - ---------------- ---------------------- --------------------- ------------------------ MECKLENBURG EC (continued) CLIMAX 69.0 4,770 4,907 EMPORIA 115.0 2,000 1,823 FREEMAN 115.0 4,934 4,522 GASBURG 69.0 7,272 7,930 GRETNA 69.0 5,566 5,897 GRIT 115.0 2,927 2,818 HICKORY GROVE 115.0 4,267 5,054 JONES STONE 69.0 3,358 3,422 MT. AIRY 69.0 2,789 2,837 NORTHVIEW 115.0 2,265 2,126 OMEGA 115.0 6,077 6,374 BOYDTON 115.0 3,461 3,307 BARNES JUNCTION 115.0 3,547 3,792 SHOCKOE 69.0 3,811 3,250 KERR 115.0 1,656 1,310 MECKGEN 115.0 3,456 3,514 MECKGEN 2 115.0 922 634 CRYSTAL HILL 2 115.0 7,910 8,842 BELFIELD 115.0 7,868 8,876 HURT #1 115.0 N/A N/A HURT #2 115.0 N/A N/A HUBER 115.0 7,248 7,344 NORTHERN NECK EC CROSS HILL 12.5 883 1,275 FOLLY 34.5 3,283 4,802 GARNER 115.0 12,877 16,590 OAK GROVE 34.5 8,669 8,316
-9-
Name/Description Delivered Voltage (kV) 1996 Summer NCP (kW) 1996-97 Winter NCP (kW) - ---------------- ---------------------- ----------- -------- ------------------------ NORTHERN NECK EC (continued) OFFICE HALL 13.2 3,038 4,500 PASSAPATANZY 13.2 3,314 4,289 SANDERS 230.0 10,234 14,966 NORTHERN VIRGINIA EC INDEPENDENT HILL 115.0 15,391 22,281 ARCOLA 115.0 4,162 4,824 BETHEL 115.0 13,571 9,222 CATHARPIN 115.0 5,126 5,789 COUNTRY CLUB 115.0 16,358 22,886 HARRISION 115.0 78,480 109,440 HERNDON 34.5 4,200 3,850 HILLSBORO 34.5 5,683 8,379 LINDENDALE 115.0 22,598 22,560 MIDDLETON 13.2 1,646 2,649 MINNIEVILLE 115.0 7,963 8,400 MOORE 34.5 8,749 15,210 MT. WEATHER 34.5 2,948 3,133 SMOKETOWN 115.0 25,998 18,619 WELLINGTON 115.0 8,010 9,048 GODWIN 115.0 950 317 SOWEGO 2 115.0 14,962 25,848 CARDINAL 115.0 17,271 23,613 CUB RUN 2 230.0 33,670 31,416 INDEPENDENT HILL 2 115.0 4,946 7,482 CEDAR GROVE 115.0 9,573 13,630 GAINESVILLE 2 115.0 79,315 80,179 JOHNSON 3 230.0 17,069 12,835
-10-
Name/Description Delivered Voltage (kV) 1996 Summer NCP (kW) 1996-97 Winter NCP (kW) - ---------------- ----------------------- --------------------- ----------------------- NORTHERN VIRGINIA EC (continued) JOHNSON 4 230.0 16,710 14,090 CLARKS GAP 34.5 3,276 5,733 GODWIN #2 (REC) 115.0 2,920 2,746 PRINCE GEORGE EC BEECHLAND 34.5 2,779 3,934 PRINCE GEORGE 13.2 5,388 7,209 SPRING GROVE 13.2 2,147 2,143 WAKEFIELD 13.2 1,933 2,601 WILKERSONS CORNER 13.2 594 824 BACONS CASTLE 13.2 932 1,432 BOOKER 13.2 511 582 ROWANTA 13.2 1,231 1,382 GARYSVILLE 13.2 3,980 4,389 BAKERS POND 115.0 13,430 17,645 WAVERLY #2 115.0 3,648 3,871 RAPPAHANNOCK EC BEAR ISLAND FIRM 230.0 98,112 100,170 BRANDY 115.0 2,952 3,250 CUCKOO 13.2 4,315 5,626 CULPEPER NO.1 13.2 13,209 14,285 CULPEPER NO.2 12.5 2,324 4,599 DECAPOLIS 34.5 4,975 6,070 GOLDMINE 13.2 5,698 8,813 GREENWOOD 115.0 49,040 81,216 KINGS DOMIINION 115.0 24,192 27,360
-11-
Name/Description - ---------------- Delivered Voltage (kV) 1996 Summer NCP (kW) 1996-97 Winter NCP (kW) ----------------------- --------------------- ---------------------- RAPPAHANNOCK EC (continued) LOCUST GROVE 115.0 18,266 26,777 MILLERS TAVERN 34.5 2,593 3,388 NORTH DOSWELL 115.0 8,554 8,026 OAK SHADE 34.5 4,774 7,099 ORANGE 12.5 1,690 1,970 ORCHID 13.2 3,655 5,999 ORLEANS 34.5 4,200 6,174 PAYTES 34.5 14,386 15,042 SLABTOWN 115.0 11,846 12,653 ST. JOHNS CHURCH #1 115.0 37,557 49,099 UNIONVILLE 13.2 2,998 3,568 WARRENTON 34.5 4,356 5,353 WHITE SHOP 13.2 1,150 1,813 WILDERNESS 12.5 11,128 23,597 WOODPECKER 115.0 2,323 2,338 NORTH ANNA 115.0 N/A N/A FOUR RIVERS 230.0 2,400 3,200 FOUR RIVERS 2 230.0 3,000 2,400 ELK RUN 115.0 934 947 CLANCIE 34.5 746 1,044 PROFFIT 230.0 20,880 31,104 MITCHELL 115.0 3,128 3,115
-12-
Name/Description Delivered Voltage (kV) 1996 Summer NCP (kW) 1996-97 Winter NCP (kW) - ---------------- ----------------------- --------------------- ---------------------- SHENANDOAH VALLEY EC BRANDS 115.0 9,274 12,624 COLD SPRING 23.0 2,525 2,671 CRIMORA 23.0 4,748 7,304 DAYTON 115.0 16,534 18,134 GARDNER SPRINGS 23.0 3,586 4,545 MT. JACKSON 34.5 5,385 6,439 NORTH RIVER 115.0 8,996 7,181 TIMBERVILLE 115.0 23,846 25,229 TRIMBLES MILL 115.0 6,086 8,534 COLUMBIA FURNACE 23.0 2,442 3,198 WOODSTOCK 34.5 3,291 4,392 ELKTON (COORS) 115.0 6,350 6,451 STUARTS DRAFTS 115.0 14,112 17,251 BARTERBROOK 115.0 5,731 5,347 SOUTHSIDE EC ALTAVISTA 12.5 3,422 3,614 AMELIA 34.5 7,373 10,454 FORT PICKETT 115.0 11,701 11,050 CENTER STAR 34.5 5,361 8,030 CHERRY HILL 34.5 2,541 3,049 DANIELTOWN 69.0 4,992 6,106 DRAKES BRANCH 12.5 3,186 3,701 EVERGREEN 34.5 2,345 2,880 GARY 115.0 3,168 3,395 GLADYS 69.0 4,399 5,386 HOOPER 115.0 3,845 4,651 MADISONVILLE 34.5 3,763 4,973
-13-
Name/Description Delivered Voltage (kV) 1996 Summer NCP (kW) 1996-97 Winter NCP (kW) - ---------------- ----------------------- --------------------- ---------------------- SOUTHSIDE EC (continued) MARTINS 115.0 2,634 2,666 MORAN 115.0 6,398 8,371 NUTBUSH 115.0 5,389 4,786 POINTON 34.5 2,667 2,995 REDHOUSE-NEW 115.0 9,024 11,688 STODDERT 34.5 2,506 3,043 REAMS 2 115.0 14,933 20,966 VICTORIA 115.0 2,112 5,386 POWHATAN #2 34.5 10,146 17,444
Service Agreement For Network Integration Transmission Service To Old Dominion Electric Cooperative THIS AGREEMENT is made as of this 29th day of July, 1997, by and between Virginia Electric and Power Company (hereinafter called "Transmission Provider"), and Old Dominion Electric Cooperative (hereinafter called "Transmission Customer"). In consideration of the mutual covenants and agreements herein contained, the Parties hereto agree as follows: 1. Transmission Provider agrees to furnish, and Transmission Customer agrees to take and pay for, Network Integration Transmission Service pursuant to Transmission Provider's FERC Transmission Tariff Volume No. 5, as modified from time to time. The terms and conditions of the Tariff are incorporated herein and made a part hereof. Nothing contained herein shall be construed as affecting in any way Transmission Provider's right to unilaterally make application to the Federal Energy Regulatory Commission, or other regulatory agency having jurisdiction, for any change in the Tariff or this Service Agreement under Section 205 of the Federal Power Act, or other applicable statute, and any rules and regulations promulgated thereunder; or Transmission Customer's rights under the Federal Power Act and rules and regulations promulgated thereunder. -2- 2. The specifications of service shall be agreed to from time to time by Transmission Provider and Transmission Customer. Changes in the specifications do not require amendment of the Service Agreement that is filed with the FERC unless the changes in specifications result in changes in the charges to Transmission Customer for Network Integration Transmission Service or related Ancillary Services. 3. The charge for Network Integration Transmission Service over Transmission Provider's Transmission System to Transmission Customer shall be the rate set out in Schedule 9 of the Tariff, applied to the difference between Transmission Customer's Network Load and any SEPA capacity for which the Transmission Provider receives payment for transmission service pursuant to another contract. In addition, Transmission Customer shall pay a proportional share of Redispatch Costs based on the ratio of its Network Load to the sum of all Network Loads and Transmission Provider's Native Load. In the event that Transmission Customer requests service from Network Resources or to delivery points that are not listed in the specifications for service commencing January 1, 1998, and Transmission Provider must construct additional transmission facilities or redispatch generation in order to provide such service, Transmission Provider may seek to amend this Service Agreement to provide for Transmission Customer to pay for such transmission service on an incremental basis pursuant to the policies of the Commission. Any fuel costs that Transmission Customer pays as a result of -3- redispatch charges pursuant to this section that would otherwise be included in fuel adjustment clause charges under the Interconnection and Operating Agreement Between Virginia Electric and Power Company and Old Dominion Electric Cooperative ("the I&O Agreement") will be excluded from Transmission Customer's fuel adjustment clause charges under that Agreement. 4. The charge for Distribution Service to Transmission Customer's Distribution-level points of delivery is $.8193/kW month, multiplied by Transmission Customer's maximum hourly demand coincident at all delivery points served at distribution voltages, less capacity supplied to such delivery points by SEPA, at production level. The charge for Distribution Service includes the cost of delivery point meters provided by Transmission Provider for service to Transmission Customer. The loss factor for such Distribution Service is 0.6924%. 5. Transmission Customer's arrangements for Ancillary Services are as follows: Scheduling, System Control and Dispatch Service: For the period January 1, 1998 through December 31, 2001, the rate shall be $.01133/kW month, applied to the difference between Transmission Customer's Network Load and any SEPA capacity for which Transmission Provider receives payment for this service pursuant to another contract. Beginning January 1, 2002, Schedule 1 of the Tariff, as modified from time to time, shall apply. Reactive Supply and Voltage Control from Generation Sources Service: For the period January 1, 1998 through December 31, 2001, the rate shall be -4- $.11000/kW month, applied to the difference between Transmission Customer's Network Load and any SEPA capacity for which Transmission Provider receives payment for this service pursuant to another contract, less Transmission Customer's ownership entitlement in the North Anna and Clover generating stations, for which Transmission Customer self-supplies this service. Beginning January 1, 2002, Schedule 2 of the Tariff, as modified from time to time, shall apply. Regulation and Frequency Response Service: For the period January 1, 1998 through December 31, 2001, Transmission Customer shall purchase this service from Transmission Provider at a rate of $6.72/kW month applied to .71% of the difference between Transmission Customer's Network Load and any SEPA capacity for which Transmission Provider receives payment for this service pursuant to another contract. Beginning January 1, 2002, Schedule 3 of the Tariff, as modified from time to time, shall apply. Energy Imbalance Service: For the period in which the dispatch of all of Transmission Customer's Network Resources is controlled by Transmission Provider, there is no charge for energy imbalance service because those Network Resources are automatically dispatched to meet Transmission Customer's entire Network Load. Schedule 4, as modified from time to time, shall apply to any Network Load served by Excluded Supplemental Capacity or Excluded Peaking Capacity under the I&O Agreement. -5- Operating Reserve -- Spinning Reserve Service: For the period January 1, 1998 through December 31, 2001, Transmission Customer shall purchase this service from Transmission Provider at a rate of $8.59000/kW month, applied to 1.26% of difference between Transmission Customer's Network Load and any SEPA capacity for which Transmission Provider receives payment for this service pursuant to another contract. Beginning January 1, 2002, Schedule 5 of the Tariff, as modified from time to time, shall apply. Operating Reserve -- Supplemental Reserve Service: For the period January 1, 1998 through December 31, 2001, Transmission Customer shall purchase this service from Transmission Provider at a rate of $5.55000/kW month, applied to 1.26% of the difference between Transmission Customer's Network Load and any SEPA capacity for which Transmission Provider receives payment for this service pursuant to another contract. Beginning January 1, 2002, Schedule 6 of the Tariff, as modified from time to time, shall apply. 6. Transmission Customer shall maintain a minimum power factor of 97.3% (lagging) at transmission-level delivery points and 99.0% (lagging) at distribution level delivery points. Power factors shall be determined based on the sums of the kW and rkva, respectively, for all of Transmission Customer's transmission level or distribution level delivery points within each of Transmission Provider's districts. If Transmission Customer fails to maintain these power factors Transmission Provider shall charge Transmission Customer for its historical -6- reactive requirements at embedded cost rates and for its reactive requirements in excess of historical levels on an incremental basis. 7. Transmission Customer may not assign the Service Agreement to any other entity; provided that Transmission Customer may assign or transfer its rights under this Agreement to the U.S. Government or any agency thereof, the National Rural Utilities Cooperative Finance Corporation, or any other financing institution solely as security for loans or advances without the prior written consent of Transmission Provider. 8. This Service Agreement is subject to any present and future state and federal laws, regulations, orders or other duly promulgated requirements. 9. This Service Agreement shall become effective on January 1, 1998 and shall have an initial term of four years. After the initial term, this Service Agreement shall continue in effect until terminated by Transmission Provider or Transmission Customer; provided that the terminating Party must provide not less than one year's written notice of termination. -7- IN WITNESS HEREOF, the Parties have caused this Service Agreement to be executed by their respective authorized officials. VIRGINIA ELECTRIC AND POWER COMPANY By: /s/J.T. Rhodes -------------- Name: Dr. James T. Rhodes Title: President and Chief Executive Officer Date: July 29, 1997 OLD DOMINION ELECTRIC COOPERATIVE By: /s/R.W. Watkins --------------- Name: R. W. Watkins Title: President and Chief Executive Officer Date: July 29, 1997 Network Operating Agreement Between Virginia Electric and Power Company and Old Dominion Electric Cooperative Preamble Virginia Electric and Power Company ("Transmission Provider") and Old Dominion Electric Cooperative ("Transmission Customer") agree that the provisions of this Network Operating Agreement ("Network Operating Agreement") and the Service Agreement govern Transmission Provider's provision of Network Integration Transmission Service to Transmission Customer in accordance with Part III of the Open Access Transmission Tariff ("Tariff"), as it may be amended from time to time. Unless specified herein, capitalized terms shall refer to terms defined in the Tariff. 1. Control Area Requirements 1. Control Area Requirements Transmission Provider shall be the Control Area Operator for the Network Loads of Transmission Customer. Transmission Provider and Transmission Customer shall plan, construct, operate, and maintain their facilities and systems in accordance with Good Utility Practice, which shall include, but not be limited to, all applicable guidelines of NERC and SERC, as they may be modified from time to time, and any generally accepted practices in the region that are consistently adhered to by Transmission Provider. -2- 2. Redispatch Procedures (a) If Transmission Provider determines that redispatching resources (including reductions in off-system purchases and sales) to relieve an existing or potential transmission constraint is the most effective way to ensure the reliable operation of the Transmission System, Transmission Provider will redispatch Transmission Provider's and Transmission Customer's resources on a least-cost basis, without regard to the ownership of such resources. Transmission Provider will apprise Transmission Customer of its redispatch practices and procedures, as they may be modified from time to time. (b) Transmission Customer shall submit to Transmission Provider verifiable cost data for any Network Resources that Transmission Provider does not dispatch, which estimate the cost to Transmission Customer of changing the generation output of each of its Network Resources. This cost data will be used, along with similar data for Transmission Provider's resources, as the basis for least-cost redispatch. Transmission Provider's bulk power operations personnel will keep this data confidential, and will not disclose it to Transmission Provider's marketing personnel. If Transmission Customer experiences changes to the costs for such Network Resources, Transmission Customer will submit those changes to Transmission Provider's system operation center. Transmission Provider will implement least-cost redispatch consistent with its current practices and procedures for its own -3- resources and its contract obligations with respect to any purchased resources. Transmission Customer shall respond within ten (l0) minutes to requests from Transmission Provider's system operation center for redispatch of such Network Resources that Transmission Provider does not dispatch. (c) In addition to the rights that Transmission Customer may have pursuant to other contracts with Transmission Provider, Transmission Customer may audit, at its own expense, redispatch events (such as the cause or necessity of the redispatch) during normal business hours following reasonable notice to Transmission Provider. Either Transmission Customer or Transmission Provider may request an audit of the other Party's cost data. Any audit of cost data shall be performed by an independent agent at the requesting Party's cost. Such independent agent shall be required to keep all cost data confidential and not disclose such information to Transmission Customer's marketing personnel or Transmission Provider's marketing personnel. (d) Once redispatch has been implemented, Transmission Provider shall book in a separate account the redispatch costs incurred by Transmission Provider and Transmission Customer based on the submitted cost data. 3. Metering (a) Unless otherwise agreed, Transmission Provider shall be responsible for the purchase, installation, operation, maintenance, repair and replacement of all -4- metering equipment necessary to enable Transmission Provider to provide Network Integration Transmission Service. Transmission Customer shall reimburse Transmission Provider for the cost of such meters through monthly charges as provided in the Service Agreement. If Transmission Customer obtains energy from any generator that is not owned or controlled by Transmission Provider, Transmission Customer must either provide a non- dynamic schedule between Control Areas or ensure that there is sufficient metering to measure the amount of energy provided to Transmission Provider's Control Area by that generator. All metering equipment shall conform to Good Utility Practice and the standards and practices of Transmission Provider's Control Area. If Transmission Customer is responsible for metering, then, prior to its installation, Transmission Provider shall approve the type of metering equipment to ensure conformance with such standards or practices, and such approval shall not be unreasonably withheld. (b) Electric capacity and energy received by Transmission Provider from Transmission Customer shall be measured by meters installed at Transmission Customer's Network Resources if such Network Resources are electronically located within Transmission Provider's Control Area. When measurement is made at any location other than a Point of Receipt, suitable adjustment for losses between the point of measurement and the -5- Point of Receipt shall be agreed upon in writing between the parties hereto and will be applied to all measurements so made. Metered receipts used in billing and accounting hereunder shall in all cases include adjustments for such losses. (c) Electric capacity and energy delivered to Transmission Customer's Network Load by Transmission Provider shall be measured by meters installed at the Point(s) of Delivery to such Network Loads. When measurement is made at any location other than Point(s) of Delivery, suitable adjustment for losses between the point of measurement and the Point(s) of Delivery will be agreed upon in writing between the parties hereto and will be applied to all measurements so made. Metering equipment shall normally be installed on Transmission Customer's side of the delivery point. Metered receipts used in billing and accounting hereunder shall in all cases include adjustments for such losses. (d) Meters at Transmission Customer's Network Resources and Network Loads shall be tested at least once every year. At the request of either Party, a special test of any meter will be performed. All costs of such a test will be paid by the Party requesting the test, unless metering inaccuracy as defined in paragraph 3(e) is discovered, in which case costs will be borne by the Party that owns the meter. Representatives of both parties shall be afforded an opportunity to be present at all routine or special tests. All meters will -6- be sealed and seals will be broken only by the owning Party and only when meters are to be tested or adjusted. (e) In the event any metering equipment used to measure capacity and energy is found to be inaccurate by more than one (l) percent or is inoperable, the meter will be promptly replaced, repaired or readjusted by the owner of the meter. Adjustments made for metering inaccuracy or other meter malfunctions will be made for the period the inaccuracy or malfunction is known, or for a mutually agreed upon period, if not known. If agreement on the period of adjustment cannot be reached, a period of three months from the date of discovery of the inaccuracy or malfunction shall be utilized. (f) Either Party shall have the right to install check metering at any Point(s) of Receipt or Delivery, as herein provided without charge by the Party owning the metering equipment for the purpose of checking the meters installed by the other Party. (g) Each Party shall read any meters owned by it, except as may be mutually agreed, and shall furnish to the other Party all meter readings and other information required for operations and for billing purposes. Such information shall remain available to the other Party for three (3) years. -7- 4. Operating Data and Equipment Requirements (a) Supervisory Control and Data Acquisition (SCADA) telemetry to Transmission Provider is required for: (i) Transmission Customer's aggregate Network Load; (ii) each Network Resource that is designated by Transmission Customer after the date of this Agreement; and (iii) each transmission-voltage delivery point that is established after the date of this Agreement for which such telemetry is determined by the Network Operating Committee to be necessary to support the reliability of the transmission system. Transmission Provider shall establish the requirements for SCADA telemetry, the data to be received at its system operations center and the protocol for communications between Transmission Provider and Transmission Customer based on Good Utility Practice and the reliability and security of the system. Transmission Provider shall coordinate its decisions concerning SCADA telemetry, data and communications protocols with Transmission Customer to the extent it can reasonably do so. (b) Transmission Customer shall be responsible for the purchase, installation, operation, repair and replacement of SCADA telemetry equipment and protection equipment and any related equipment and hardware that is required by this Agreement. Transmission Customer also shall be responsible for implementing any modifications to the SCADA software -8- and communications protocols necessary to communicate effectively with Transmission Provider. 5. Operating Requirements (a) Transmission Customer shall operate its generating resources inside Transmission Provider's Control Area (other than resources operated by Transmission Provider) in a manner consistent with that of Transmission Provider, following voltage schedules, free governor response, meeting power factor requirements at the points of interconnection with Transmission Provider's system, and other such criteria required by NERC and SERC and consistently adhered to by Transmission Provider. (b) Transmission Customer shall develop a load curtailment plan that provides for voltage reductions, voluntary load curtailments, manual load shedding and automatic load shedding that is comparable to the load curtailment plan that Transmission Provider has for its Native Load Customers. Transmission Provider and Transmission Customer shall work together to ensure the integrity of the interconnected systems, with Transmission Provider charged with the responsibility of initiating and coordinating any load curtailments and the subsequent restoration of these loads. Should Transmission Customer willfully fail, in the absence of good cause, to reduce voltage or shed load as required by Transmission Provider, it shall pay a charge equal to $25.77/kW-month (as amended from time to time) -9- multiplied by the amount of load that Transmission Customer fails to curtail. Insofar as practicable, Transmission Provider and Transmission Customer shall protect, operate, and maintain their respective systems so as to avoid or minimize the likelihood of disturbances which might cause impairment of service on the system(s) of the other. (c) In the event a temporary voltage reduction is required because of any condition, Transmission Provider will notify Transmission Customer as far in advance as practicable of its plan to reduce voltage and the period for which such voltage reduction is believed to be required and Transmission Customer will, upon such notification, effect a similar true voltage reduction on its system during the same period. Transmission Customer will be notified immediately when a voltage reduction is planned to be terminated. (d) Transmission Customer shall maintain the capability to manually shed its Network Load that is comparable to the capability of Transmission Provider to manually shed the loads of its Native Load Customers. When manual load shedding is necessary, Transmission Provider shall notify Transmission Customer of the required action and Transmission Customer shall comply within ten (10) minutes. Transmission Provider shall require, on a non- discriminatory basis, manual load shedding for Transmission -10- Customer's Network Load unless otherwise required by circumstances beyond the control of the Transmission Provider or Transmission Customer. (e) Prior to the date on which Transmission Customer serves any portion of its Network Load using Excluded Supplemental Capacity or Excluded Peaking Capacity under the I&O Agreement, the Parties shall agree on load shedding capabilities and procedures for that portion of Transmission Customer's Network Load. (f) Transmission Customer shall provide, operate and maintain in service automatic high-speed digital underfrequency load shedding equipment that has the capability, together with equipment installed by Transmission Provider, to disconnect Transmission Customer's Network Load in a manner that is comparable to Transmission Provider's automatic load shedding capability for its Native Load. Such automatic load shedding capability shall be established at frequency set points of 59.3 Hertz, 59.0 Hertz, and 58.5 Hertz, with no intentional time delay. The requirement to maintain automatic load shedding capability shall be phased in as agreed upon by Transmission Provider and Transmission Customer and shall be fully implemented by not later than January 1, 2002. (g) In the event Transmission Provider modifies the load shedding system, Transmission Customer shall, at its expense, make corresponding changes to its equipment and the setting of such equipment, as required. - 11 - (h) Transmission Customer shall test and inspect its load shedding equipment not less than thirty (30) days prior to the occurrence of an event that requires modification of its load shedding capability as set out in this Article and thereafter shall conduct additional tests in accordance with Good Utility Practice. Transmission Provider may request other tests of the load shedding equipment upon reasonable notice. Transmission Customer shall provide Transmission Provider written reports of all load shedding tests. 6. Operational Information Transmission Customer shall provide data needed for the safe and reliable operation of Transmission Customer's and Transmission Provider's Control Areas and to implement the provisions of the Tariff. Transmission Provider shall treat this information as confidential and shall not divulge it to its marketing personnel. (a) Transmission Customer shall provide by September 1st of each year Transmission Customer's Network Resource availability forecast (e.g., all planned resource outages, including off-line and on-line dates) for the following year for all Network Resources that are not dispatched by Transmission Provider. Such forecast shall be made in accordance with Good Utility Practice. Transmission Customer shall inform Transmission Provider, in a timely manner, of any changes to Transmission Customer's Network Resource availability forecast. In the event that Transmission -12- Provider determines that such forecast cannot be accommodated due to a transmission constraint on its Transmission System, and such constraint may jeopardize the security of the Transmission System or adversely affect the economic operation of either Transmission Provider or a Firm Point-to-Point or Network Integration Transmission Customer, the provisions of Section 32 of the Tariff shall be implemented. (b) Transmission Customer shall provide, at least 36 hours in advance of every calendar day, Transmission Customer's best forecast of any planned outages of Transmission Customer's non-radial transmission facilities and outages of Network Resources other than those dispatched by Transmission Provider and other operating information that the Network Operating Committee deems appropriate. In the event that such planned outages cannot be accommodated due to a transmission constraint on Transmission Provider's Transmission System, the provisions of Section 33 of the Tariff shall be implemented. 7. Network Planning In order for Transmission Provider to plan, on an ongoing basis, to meet Transmission Customer's requirements for Network Integration Transmission Service, Transmission Customer shall provide, by September 1st of each year, updated information (current year and 10-year projection) for Network Loads and Network Resources that are not dispatched by Transmission Provider, as well as any other -13- information reasonably necessary to plan for Network Integration Service. This type of information is consistent with Transmission Provider's information requirements for planning to serve its Native Load Customers. The data will be provided in a format consistent with that used by Transmission Provider. 8. Delivery Points 8.1 Delivery Points. Transmission Provider and Transmission Customer, during the term of this Agreement, shall remain interconnected. Unless otherwise mutually agreed upon, Transmission Customer or its Members shall own, operate and maintain all facilities, except interconnection metering, on Transmission Customer's side of the delivery points and these facilities shall be operated and maintained in accordance with Good Utility Practice. Unless otherwise mutually agreed upon, Transmission Provider shall own, operate and maintain all facilities on Transmission Provider's side of the delivery points and all interconnection metering no matter where located. These facilities shall be operated and maintained in accordance with Good Utility Practice. 8.2 Existing Delivery points. The Network Operating Committee shall from time to time modify the specifications to the Service Agreement to reflect the delivery points in service. All existing delivery points are defined as those points where electric power and energy are transferred as of the effective date of this Agreement from Transmission Provider's system to facilities owned by Transmission Customer or one of its members. -14- 8.3 Modifications to Delivery Points. Where modifications are suggested for delivery points the Network Operating Committee shall review the suggested modifications, allocate the costs of the changes between the Parties and, if necessary, establish a new point in the physical arrangement as the delivery point. If the change is mutually agreed upon or if the change is reasonably required for the giving or receiving of adequate service hereunder, the change will be made with each Party bearing its own costs. Otherwise, the Party requesting the change shall be fully responsible for the change and shall pay all costs incurred as the result of such change. Where a delivery point is discontinued, the costs of removal shall be paid for by the Party initiating the discontinuance. 8.4 Future Delivery Points. The Network Operating Committee shall coordinate planning of future delivery points through the following procedure: Transmission Customer shall determine its needs for future delivery points and shall give Transmission Provider as much advance notice of its needs as practicable. The Network Operating Committee shall review Transmission Customer's plans for reasonableness and consistency with Good Utility Practice. Transmission Provider may propose appropriate modifications to Transmission Customer's plans; however, Transmission Provider will not require unreasonable modifications to Transmission Customer's plans. It is the intent of the Parties that the number, capacity, and location of future delivery points will result from a planning process using Good Utility Practice and neither Party shall request changes or additions which would not be in accordance with this concept. -15- In establishing all future delivery points Transmission Customer shall construct and bear the costs of those facilities necessary to effect interconnection at the point where Transmission Provider facilities exist or will exist at the time of the need for the interconnection. Future delivery points will be established at 115 kV or higher, except in those cases where the Network Operating Committee, consistent with Good Utility Practice, determines that service at lower voltage levels is appropriate and Transmission Provider shall not unreasonably withhold service at such lower voltage levels. The delivery point will be defined and established by the Network Operating Committee so that Transmission Provider will, except as noted below, provide and bear the costs of those facilities on the supply side of the delivery point including the necessary switching and protective equipment, and Transmission Customer will provide and bear the costs of those facilities on the load side of the delivery point including the necessary isolation switching devices and protective equipment, transformers and lines. When the need for the future delivery point described by Transmission Customer could, through Good Utility Practice, be satisfied through the modification and/or upgrading of Transmission Customer's existing facilities, but Transmission Customer still desires the future delivery point and Transmission Provider agrees to supply it, Transmission Customer shall bear the cost of whatever facilities may be required, including those facilities on the supply side of the delivery point. The Parties interpret the Tariff as not requiring System Impact Studies or Facilities Studies for new delivery points that result from normal load growth. If the Commission -16- requires Transmission Provider to charge itself for studies in conjunction with new delivery points needed to accommodate Transmission Provider's normal load growth, Transmission Customer shall pay for studies in comparable circumstances in conjunction with its own requests for new delivery points. 8.5 Characteristics of Electricity. Except as provided in Section 8.4, Transmission Provider will furnish at future delivery points three phase, 60 Hertz alternating current electricity at 115 kV or higher or at the nominal voltage level determined to be appropriate by the Network Operating Committee. Transmission Provider will continue to furnish at all existing delivery points three phase, 60 Hertz alternating current electricity at Transmission Provider's nominal voltage now being furnished as listed in Specifications to the Service Agreement. Transmission Provider shall operate its system so that Transmission Customer's voltage at each delivery point is within the range Transmission Provider would maintain for its own purpose. 8.6 Access at Delivery Points. Transmission Customer and Transmission Provider will have the right of access at all delivery points and at all remote delivery point metering locations at reasonable times for the purposes of reading meters or installing, maintaining, changing or removing any property they own or for any other proper purpose. The handling of tape cartridges associated with tape metering at delivery points will be done only by the owner of the tape meters. 8.7 Notification of System Changes. Transmission Customer shall notify Transmission Provider in advance, and Transmission Provider shall notify Transmission -17- Customer in advance, of any changes to be made in their respective systems which will affect the proper coordination of protective devices on the two systems. Transmission Customer and Transmission Provider shall each be responsible for selection, installation, adjustment and setting, and maintenance of their own control and protective equipment. In no case shall operation of this equipment by either Transmission Provider or Transmission Customer place a burden upon or cause avoidable interruptions to the other's system. 9. Transfer of Power and Energy Through Other Systems In accord with regional practices, NERC requirements and the requirements of the Tariff, to the extent Transmission Provider and Transmission Customer's use of the Transmission System impacts other electric systems, Transmission Provider and Transmission Customer shall take actions to relieve constraints on third party systems as deemed necessary to the reliability and security of the third party system or the region. 10. Notice Any notice or request made to or by either Party regarding this Network Operating Agreement shall be made to the representative of the other Party as follows:
Virginia Electric and Power Company Old Dominion Electric Cooperative Manager Power Supply Dispatch Supervisor Virginia Electric and Power Company Old Dominion Electric Cooperative 5000 Dominion Boulevard 4201 Dominion Boulevard Glen Allen, Virginia 23060 Glen Allen, Virginia 23060
-18- 1 1. Amendment Nothing contained herein shall be construed as affecting in any way Transmission Provider's right to unilaterally make application to the Federal Energy Regulatory Commission, or other regulatory agency having jurisdiction, for any change in this Network Operating Agreement and the Tariff under Section 205 of the Federal Power Act, or other applicable statute, and any rules and regulations promulgated thereunder; or Transmission Customer's right under the Federal Power Act and rules and regulations promulgated thereunder. 12. Incorporation The Tariff and Service Agreement are incorporated herein and made a part hereof. 13. Term The term of this Network Operating Agreement shall be concurrent with the term of the Service Agreement between the Parties. 14. Network Operating Committee The Network Operating Committee shall be responsible for the coordination of the operating criteria established by this Network Operating Agreement including (i) operation and maintenance of equipment necessary for integrating Transmission Customer within Transmission Provider's Transmission System (including, but not limited to, remote terminal units, metering, communications and relaying equipment), (ii) transfer of data between Transmission Provider and Transmission Customer (including, but not limited to, operational characteristics of Network Resources not dispatched by -19- Transmission Provider, generation schedules for units outside Transmission Provider's Control Area, interchange schedules, unit output for redispatch required under Section 33 of the Tariff and voltage schedules), (iii) exchange of data on forecasted loads and resources necessary for long-term planning, (iv) coordination and implementation of modifications to delivery points and coordination of and planning for future delivery points in accordance with Good Utility Practice, and (v) resolution of any other technical and operational issues necessary for implementation of this Network Operating Agreement. Each member of the Network Operating Committee shall be fully authorized to act on behalf of its Party with respect to all matters contemplated in the Network Operating Agreement but will not be authorized to amend the Agreement. Transmission Provider's representative to the Network Operating Committee is the Manager Power Supply. Transmission Customer's representative to the Network Operating Committee is the Vice President Engineering and Operations. -20- IN WITNESS WHEREOF, the Parties have caused this Network Operating Agreement to be executed by their respective authorized officials. VIRGINIA ELECTRIC AND POWER COMPANY: By: /s/J.T. Rhodes -------------- Name: Dr. James T. Rhodes Title: President and Chief Executive Officer Date: July 29, 1997 OLD DOMINION ELECTRIC COOPERATIVE: By: /s/R. W. Watkins ---------------- Name: R. W. Watkins Title: President and Chief Executive Officer Date: July 29, 1997 EX-10.21 3 EXHIBIT 10(XXI) SECOND AMENDMENT TO DOMINION RESOURCES, INC. EXECUTIVE SUPPLEMENTAL RETIREMENT PLAN RESOLVED, that the Dominion Resources, Inc. Executive Supplemental Retirement Plan (the "Plan") as amended and restated September 1, 1996 is amended, pursuant to the authority in Section 8.1 of the Plan. This Amendment is effective as of February 20, 1998. 1. Section 1.14 is amended to read as follows: "Participant" means an elected officer of Dominion Resources, Inc., Virginia Power, or a subsidiary or Affiliate of Dominion Resources, Inc. who is eligible to participate in the Plan under Article II. 2. Article II is amended to read as follows: An elected officer of Dominion Resources, Inc., Virginia Power, or a subsidiary and Affiliate of Dominion Resources, Inc. or Virginia Power will become a Participant in the Plan upon his or her designation as a Participant by the O&C Committee of Dominion Resources, Inc. or Virginia Power. An individual shall remain a Participant only so long as the individual remains an elected officer. The appropriate O&C Committee may change its designation of any individual officer as a Participant at any time. The employer of a Participant will be a designated employer under the Plan. IN WITNESS WHEREOF, Dominion Resources, Inc. caused this Second Amendment to be executed by its duly authorized officer as of the date indicated above. By: /s/ THOMAS F. FARRELL ------------------------------------- Thomas F. Farrell, II Sr. Vice President - Corporate March 3, 1998 ------------------------------------- Date First Amendment to Dominion Resources, Inc. Executive Supplemental Retirement Plan RESOLVED, that the Dominion Resources, Inc. Executive Supplemental Retirement Plan (the "Plan") as amended and restated September 1, 1996 is amended, pursuant to the authority in Section 8.1 of the Plan. This Amendment is effective as of June 20, 1997 only with respect to Dominion Resources, Inc. Participants in the Plan. This Amendment is not effective with respect to Virginia Power Participants in the Plan. I. With respect to DRI Participants only, Section 3.1(d) is amended to read as follows: "(d) If a Participant has completed sixty (60) months of service with the Company, upon his severance from employment with the Company before the attainment of fifty-five (55) years of age, the Participant shall be entitled to the benefits provided under the Subsection 3.1(a) multiplied by the following fraction (not greater than one): Participant's completed months of service since becoming a Participant Total months from the date on which the individual became a Participant to the Participant's attainment of fifty-five (55) years of age In calculating months and months of service, partial months shall be disregarded. The actuarial equivalent of the benefit under this Subsection 3.1(d) shall be paid in a single lump sum payment. The actuarial equivalent shall be determined as provided in Section 3.2. Payment shall be made on the first day of the month following the severance from employment with the Company of the Participant or as soon thereafter as administratively possible." II. The second sentence of Section 3.2 (a) is amended to read as follows: "The actuarial equivalent of the benefit provided under Subsection 3.1(a) or 3.1 (b) shall be computed using actuarial factors, including interest rates, as determined by the Administrative Benefit Committee." IN WITNESS WHEREOF, Dominion Resources, Inc. caused this First Amendment to be executed by its duly authorized officer as of the date indicated above. DOMINION RESOURCES, INC. BY: /s/ LINWOOD R. ROBERTSON --------------------------------------- Linwood R. Robertson Executive Vice President and Chief Financial Officer 6-20-97 --------------------------------------- Date EX-10.22 4 EXHIBIT 10(XXII) Exhibit 1O(i) DOMINION RESOURCES, INC. ADDITIONAL RETIREMENT CREDITED YEARS OF SERVICE Additional Credited Executive Age Years of Service - --------- --- ---------------- Thomas N. Chewning and 55 25 Thomas F. Farrell, II 60 30 Edgar M. Roach, Jr. 50 15 55 20 60 30 James F. Stutts 65 20 G. Scott Hetzer 62.5 30 Norman B.M. Askew 60 30 EX-10.30 5 EXHIBIT 10(XXX) EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is made as of September 12, 1997, between DOMINION RESOURCES, INC. (the "Company") and THOMAS N. CHEWNING (the "Executive") 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 interests 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 serve as 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 be employed by the Company, as an executive of the Company, for the period beginning September 12, 1997 (the "Effective Date") and ending on the third anniversary of such date, subject to the further provisions of this Section 1 (the "Term of this Agreement"). If Thos. E. Capps ceases to be the Chief Executive Officer of the Company before the third anniversary of the Effective Date, the Term of this Agreement shall be extended for a period of three years from the date Thos.E. Capps ceases to be the Chief Executive Officer of the Company; provided that the Term of this Agreement shall end at the first day of the month following the Executive's sixty-fifth (65th) birthday. 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 exception of absences on account of illness or vacation 2 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 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 may 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 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 3 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 the Company (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 or any credited service agreement under which the Executive receives years of service credit for retirement plan purposes. 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 include 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. 4 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 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. If the Executive is employed by an Affiliate or a successor (as described in Section 4), the term "Board of Directors" as used in this Section 5(a) and in Section 6(a) (iii) means the Board of Directors of the Executive's employer. (b) During the Term of this Agreement, while the Executive is employed by the Company, the Executive will be 5 eligible to participate in a similar manner as other senior executives of the Company in retirement plans, cash and stock incentive plans, fringe benefit plans and other employee benefit plans and programs provided by the Company for its senior management employees from time to time. (c) If the Executive attains age 55 while employed by the Company, the Executive's retirement benefits under the Company's Retirement Plan and Benefit Restoration Plan will be computed based on the greater of (A) the Executive's years of credited service (as determined pursuant to the terms of the Retirement Plan), or (B) twenty-five (25) years of credited service. If the Executive attains age 60 while employed by the Company, the Executive's retirement benefits under the Company's Retirement Plan and Benefit Restoration Plan will be computed at such date, and at any time thereafter, based on the greater of (A) the Executive's years of credited service (as determined pursuant to the terms of the Retirement Plan), or (B) thirty (30) years of credited service. Any supplemental benefit to be provided under this subsection (c) will be provided as a supplemental benefit under this Agreement and will not be provided directly from the Retirement Plan. The provisions of this subsection (c) shall survive the termination of this Agreement. 6. Termination of Employment. (a) If the Company terminates the Executive's employment, other than for Cause (as defined in Section 8 below), 6 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 and annual cash incentive awards (computed as described below) 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. For purposes of this calculation, the Executive's annual cash incentive awards for the balance of the Term of the Agreement will be calculated at a rate equal to the highest annual cash incentive award paid to the Executive during the three-year period preceding his termination of employment. Salary and bonus that the Executive elected to defer will be taken into account for purposes of this Agreement without regard to the deferral. (ii) The salary and incentive award for any partial year in the Term of this Agreement will be a pro-rated portion of the annual amount. (iii) If the Executive has not yet received an annual cash incentive award for the year in which his employment terminates, the lump sum payment will be increased to include a pro-rated award for the portion 7 of the year preceding the Executive's termination of employment. If the Executive has not yet received payment of his annual cash incentive award for the year preceding his termination of employment, the lump sum payment will be increased to include an award for the year preceding the Executive's termination of employment. The incentive award for the year or portion of the year preceding the Executive's termination of employment will be determined according to clause (i) above, unless the Board of Directors made a good faith final determination of the amount of the applicable incentive award pursuant to Section 5(a) (ii) before the Executive's termination of employment. If the Board of Directors made such a determination, the applicable incentive award will be computed according to the Board of Directors' determination. (iv) 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 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. (v) The lump sum payment will be paid within 30 days after the Executive's termination of employment. 8 (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 that would become vested (that is, transferable and nonforfeitable) 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 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 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 the performance goals are met. The Executive must satisfy the tax withholding requirements described in Section 10 with respect to the 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 the Company's pension, medical and other benefit plans, and 9 the Company will continue the Executive's coverage under the Company's welfare benefit plans as if the Executive remained employed through the end of the Term of this Agreement. Service credited to the Executive for purposes of the Company's pension plans pursuant to this subsection (ii) shall be in addition to any service credited to the Executive pursuant to Section 5 (c). Notwithstanding the foregoing, if the Company determines that giving such age and service credit or continued coverage could adversely affect the tax qualification or tax treatment of a benefit plan, or otherwise have adverse legal ramifications, the Company may 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 giving such credit and continued coverage. (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 be provided if the Executive voluntarily terminates employment after (i) the Company reduces the Executive's base salary, (ii) the 10 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), or (iv) 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 President of a subsidiary of the Company, or a position that reports directly to the Chief Executive Officer, Chief Operating Officer or Senior Vice President of the Company or to the President of a subsidiary of the Company. 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) or (iv) 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) or (iv), 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) or (iv), 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. 11 (d) The amounts under this Agreement will be paid in lieu of severance benefits under any severance plan or program maintained by the Company (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 or if the Executive voluntarily terminates employment for a reason not described in subsection (c) above or Section 7 below, this Agreement 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 and after Thos. E. Capps ceases to be the Chief Executive Officer of 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 during the Term of this Agreement and while he is employed by the Company the Executive qualifies to receive benefits under the Company's short-term disability policy, the Executive will be treated as having eleven or more years of service with the Company for purposes of determining the amount of his benefits under that policy. 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 12 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 and responsibilities to the Company, which continues after the Executive receives notice of such refusal or failure, (iii) conviction of a felony or crime involving moral turpitude, or (iv) the use of drugs or alcohol that interferes materially with the Executive's performance of his duties. 9. 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. 13 10. Payment of Compensation and Taxes. All amounts payable under this Agreement (other than restricted stock, which will be paid according to the terms of the Company's Long-Term Incentive Plan) will be paid in cash, subject to required income and payroll tax withholdings. No unrestricted stock will be issued to the Executive with respect to the vesting of restricted stock 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. 11. 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 14 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. 12. 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. 13. 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. 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 14. 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, addressed 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. 15. Miscellaneous. This instrument contains the entire agreement of the parties. To the extent not governed by federal law, this Agreement will be construed in accordance with the laws of the Commonwealth of Virginia, without reference to its conflict of laws rules. No provisions of this Agreement may be modified, waived or discharged unless such 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 or compliance with any provision or condition of this Agreement is not a waiver of similar or dissimilar provisions or conditions. The invalidity or unenforceability 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 or more counterparts, all of which will be considered one and the same agreement. 16 WITNESS the following signatures. DOMINION RESOURCES, INC. By: /s/ THOS. E. CAPPS ------------------------- Thos. E. Capps, Chief Executive Officer Dated: 9-12-97 ------- /s/ THOMAS N. CHEWNING ----------------------------- Thomas N. Chewning Dated: 9-12-97 ------- 17 EX-10.33 6 EXHIBIT 10(XXXIII) A SERVICE AGREEMENT ----------------------------- in respect of ROBERT JOHN DAVIES and EAST MIDLANDS ELECTRICITY plc Amendment No. 4 dated 2 December 1995 ----------------------------- In accordance with Clause 6.2 of the Service Agreement in respect of Robert John Davies and East Midlands Electricity plc ("the Company") dated 17 February 1994, the Remuneration and Nomination Committee reviewed the salary payable under Clause 6.1 and approved an increase of salary from (pound)161,200 per annum to (pound)166,100 per annum with effect from 1 December 1995. Therefore, Clause 6.1 shall be deemed to be amended accordingly in respect of the year from 1 December 1995 to 30 November 1996. Save as amended, the Service Agreement shall continue in full force and effect and this Amendment and the Service Agreement shall be read and construed together. /s/ J G M CAMPBELL - ------------------------------------- J G M Campbell Secretary Remuneration and Nomination Committee [LOGO] East Midlands Electricity Our ref 398 Coppice Road Arnold Your ref Nottingham NG5 7HX Tel (0115)926 9711 or (0115)962 0033 Fax (0115)967 0403 PERSONAL R J Davies Esq Netherwood Shut Lane Head Butterton NEWCASTLE-UNDER-LYME Staffs ST5 4DS 6 December 1994 The purpose of this letter is to record the amendments which have been agreed between us to your service contract dated 17 February 1994 with East Midlands Electricity plc ("the Company") as amended by an agreement dated 29 July 1994. We have agreed that the service contract will be amended as follows: Normal Retirement Age 1. By the deletion of the definition of "Normal Retirement Age" and its replacement by the following new definition: "Normal Retirement Age The age of 60." Termination of Appointment 2. By the deletion of Clause 2.2 and its replacement by the following new Clauses 2.2 to 2.4: "2.2 The Appointment shall (subject to earlier termination as otherwise provided in this Agreement) be for a period starting on or with effect from the Commencement Date and continuing unless and until terminated by the Company giving to the Appointee not less than two years' notice in writing or by the Appointee giving to the Company not less than one year's notice in writing. The Company reserves 2 6 December 1994 R J Davies Esq the right to terminate the Appointment at any time by paying to the Appointee a sum equal to the basic salary that would have been payable under Clause 6.1 over the two year notice period, assuming that salary had continued to be paid at the same rate as immediately prior to the date of termination. 2.3 If the Appointment is terminated by the Company (or the Appointee leaves employment in circumstances where he is entitled to treat himself as being constructively dismissed) otherwise than in accordance with Clause 2.2 and in circumstances when the Company is not entitled to terminate the Appointment under any other provision of this Agreement, then the Company shall pay to the Appointee by way of liquidated damages a sum equal to 1.5 times the Appointee's basic salary under Clause 6.1, assuming that salary had continued to be paid at the same rate as immediately prior to the date of termination. Any such payment of liquidated damages shall be in full and final settlement of all and any claims (whether contractual, statutory or otherwise) which the Appointee may have arising out of termination of the Appointment or his ceasing to hold the office of director of the Company or any Associated Company. 2.4 Any payment made under this Clause 2 shall have PAYE tax and national insurance contributions deducted at source." and by the consequential renumbering of Clauses 2.3 and 2.4 as Clauses 2.5 and 2.6 respectively. Bonus Arrangements 3. By the deletion of the existing Clause 6.3 and its replacement by the following new Clause 6.3: "6.3 The Appointee may in respect of any financial year of the Company be paid a performance-related bonus in addition to the salary referred to in Clause 6.1 if the Board in its absolute discretion so determines in respect of that year. Any such bonus shall be payable to the Appointee only if the Appointment continues for the whole of the financial year in question. For the avoidance of doubt the parties expressly agree that the Appointee has no contractual entitlement to participate in or to continue to participate in or to receive a payment from any particular bonus scheme whether or not expressed to apply to employees at the same or similar level of employment as the Appointee and/or performing the same or similar duties and payment of a bonus in any one or more years shall not create any entitlement for the Appointee to be paid any bonus in any subsequent years notwithstanding the payment of a bonus in any subsequent years to any other employees 3 6 December 1994 R J Davies Esq whatsoever under the same or any other bonus scheme. Where the Appointee does participate in a bonus scheme he shall do so subject to the foregoing and on the terms and conditions contained in the Rules of such scheme, as amended from time to time. Copies of the Rules of any such scheme in which the Appointee so participates will be provided to him by the Company Secretary on request." Health Insurance etc 4. By the deletion of Clause 7.3 and its replacement by the following new Clause 7.3: "7.3 The Company will maintain private health insurance for the Appointee, the Appointee's spouse and the Appointee's children under the age of 21 during the Appointment in accordance with the terms of, and subject to the conditions and exclusions contained in, the Company's private health insurance scheme (as replaced or amended from time to time). The Company currently provides cover under Band C of the PPP Premier Healthcare Scheme. Details of the terms and conditions of the scheme operated by the Company at any time may be obtained from the Company Secretary." Termination 5. By the deletion of Clause 14.2(b) and its replacement by the following new Clause 14.2 (b): "(b) if the Company at any time terminates the Appointment in circumstances when it is not entitled so to do under this Agreement, the provisions of Clause 2.3 shall apply." 6. By the deletion of Clause 14.5 and the consequential renumbering of Clauses 14.6 and 14.7. Incapacity 7. By the deletion of Clause 15.2 and its replacement by the following new Clause 15.2: "15.2 The Appointee will, subject to compliance with Clause 15.1 and Clause 14, be entitled to payment of salary at the full basic rate (less any social security benefit or any other benefit payable under any disability, permanent health insurance scheme or similar arrangement to which the Company contributes or which is maintained by the Company for the benefit of the Appointee) during any periods 4 6 December 1994 R J Davies Esq of absence from work as a result of sickness or injury up to a maximum of 12 consecutive months but the Appointee will not be entitled to any payment of salary during any absence in excess of 12 months unless agreed by the Board." If there are any points regarding the content of this letter which you wish to discuss, please do not hesitate to contact the Company Secretary in the first instance. I would be grateful if you could sign the attached copy of this letter and return it to me to confirm your agreement to these amendments. Yours sincerely A N R RUDD Chairman I confirm my agreement to the amendments as set out in Mr A N R Rudds letter to me of 6 December 1994. /s/ R J DAVIES 10/1/1995 - ---------------------- R J Davies DATED 29th July 1994 EAST MIDLANDS ELECTRICITY plc - and - ROBERT J DAVIES ESQ ----------------------------- AGREEMENT amending A SERVICE AGREEMENT DATED 17 FEBRUARY 1994 ----------------------------- THIS AGREEMENT is made the 29th day of July 1994 BETWEEN: (1) EAST MIDLANDS ELECTRICITY plc whose registered office is at 398 Coppice Road, Arnold, Nottingham NG5 7HX ("Company"); and (2) ROBERT JOHN DAVIES of Netherwood, Shut Lane Head, Butterton, Newcastle under Lyme, Staffordshire ST5 4DS ("Appointee") AMENDING a Service Agreement dated 17 February 1994 between the Company and the Appointee ("the Service Agreement"). WHEREBY IT IS AGREED as follows: 1. DEFINITIONS Words and expressions used in this Agreement shall have the same meanings as are ascribed to them in the Service Agreement. 2. APPOINTMENT 2.1 Clause 2.2 of the Service Agreement is hereby deleted. 2.2 The following new Clause 2.2. is hereby substituted therefor: "2.2 The Appointment shall (subject to earlier termination as otherwise provided in this Agreement) be for a period starting on or with effect from the Commencement Date and continuing until terminated by the Company giving to the Appointee not less than 24 months written notice of termination at any time or by the Appointee giving to the Company not less than 6 months written notice of termination at any time PROVIDED ALWAYS THAT the Appointee will be offered a Service Agreement on terms no less favourable than those offered to the other Executive Directors by no later than 31 December 1994 to the extent, if any, that such terms are more favourable." 3. CONTINUITY OF AGREEMENTS Save as amended by this Agreement, the Service Agreement shall continue in full force and effect and this Agreement and the Service Agreement shall be read and construed together. IN WITNESS whereof this Agreement has been executed as a Deed the day and year first before written. EXECUTED as a Deed by ) the said ROBERT JOHN DAVIES) /s/ [ILLEGIBLE] in the presence of ) DATED 17 February 1994 EAST MIDLANDS ELECTRICITY plc - and - ROBERT J DAVIES ESQ ----------------- SERVICE AGREEMENT ----------------- THIS AGREEMENT is made on the 17th day of February 1994 BETWEEN: (1) EAST MIDLANDS ELECTRICITY plc (Company Number 2366923) whose registered office is at 398 Coppice Road Arnold Nottingham NG5 7HX ("Company"); and (2) ROBERT JOHN DAVIES of Netherwood, Shut Lane Head, Butterton, Newcastle under Lyme, Staffordshire ST5 4DS ("Appointee"). IT IS AGREED as follows: 1. DEFINITIONS AND INTERPRETATION 1.1 The following definitions apply in this Agreement: "Agreement" This agreement including the Schedule to it. "Appointment" The appointment of the Appointee under Clause 2.1. "Associated Company" Any body corporate which is for the time being: (a) a Subsidiary of the Company; or (b) a Holding Company or a Subsidiary of a Holding Company of the Company; or (c) a body corporate of which any one or more of the Company and any bodies corporate within sub-clauses (a) or (b) of this definition beneficially own at least 20% in nominal value of any class of equity share capital (within the meaning of Section 744 Companies Act 1985) carrying the right to vote in all circumstances at general meetings. "Board" The board of directors of the Company as from time to time constituted. 1 "Car" A motor car of an age and type considered appropriate by the Company for use by the Appointee in the course of the Appointee's duties. "Commencement Date" 1 February 1994 "the Date of Termination" The date upon which the Appointment terminates whether as a result of the Company's breach or for any other reason and whether such breach is repudiatory or otherwise. "Group" The Company and all Associated Companies. "Holding Company" As defined in Section 736 Companies Act 1985. "Normal Retirement Age" The age of 63 or such other age over 63 but not exceeding 65 as the Board or the Remuneration and Nomination Committee may specify in writing from time to time during the Appointment. "Remuneration and Nomination Committee" The Committee of the Board bearing that name or, if there is no committee with such name, such other committee as shall from time to time be delegated responsibility by the Board for determining the emoluments of directors and associate directors of the Company. "Subsidiary" As defined in Section 736 Companies Act 1985. 2 1.2 Any reference in this Agreement to any statute or statutory provision shall (except in Clause 1.1 where it means that statute or statutory provision as amended extended or re-enacted at the date of this Agreement) be construed as including a reference to that statute or statutory provision as from time to time amended extended or re-enacted whether before or after the date of this Agreement and to all statutory instruments orders and regulations for the time being made pursuant to it or deriving validity from it. 1.3 Except so far as the context otherwise requires words denoting the singular include the plural and vice versa and words denoting any one gender include all genders and words denoting persons include bodies corporate unincorporate associations and partnerships as well as individuals. 1.4 Unless otherwise stated references to clauses and sub-clauses of and the Schedule to this Agreement relate to the clauses and sub-clauses of and the Schedule to this Agreement. 1.5 Clause headings do not affect the interpretation of this Agreement. 2. APPOINTMENT 2.1 The Company employs the Appointee as Finance Director upon the following terms. The Company reserves the right to alter the Appointee's job title and/or function consistent with his existing status. 2.2 The Appointment shall (subject to earlier termination as otherwise provided in this Agreement) be for a period starting on or with effect from the Commencement Date and continuing until 31 January 1996. The Appointee's appointment hereunder will be reviewed by no later than 31 July 1994 and subject to satisfactory performance will be extended to 31 July 1996 PROVIDED ALWAYS THAT if the Appointee's appointment is so extended the Appointee will be offered a contract on terms no less favourable than those offered to the other Executive Directors by no later than 31 December 1994. 3 2.3 The Appointee's period of continuous employment with the Company shall be deemed to have begun on 1 February 1994. 2.4 The Company shall have the right to make the services of the Appointee available to Associated Companies and to third parties and the Appointee shall co-operate fully and follow all lawful directions and instructions from such Associated Companies and/or third parties consistent with his existing status. 3. DUTIES The Appointee undertakes and agrees with the Company that the Appointee shall: 3.1 work such hours as are necessary or desirable for the successful performance of the Appointee's duties without additional remuneration for any hours worked outside normal business hours; 3.2 devote the whole of the Appointee's time during the hours of work stipulated in Clause 3.1 to the duties of the Appointment; 3.3 use the Appointee's utmost endeavours to promote the business and interests of the Company and its Associated Companies; 3.4 render the services of the Appointee in a professional and workmanlike manner in willing co-operation with others; 3.5 diligently perform the duties and exercise the powers in relation to the Company and its Associated Companies and third parties that are from time to time assigned to or vested in the Appointee by or under the authority of the Board consistent with his existing status either alone or jointly with any other person appointed for such purpose by the Board; 3.6 obey all reasonable and lawful directions given to the Appointee by or under the authority of the Board; 4 3.7 whenever required to do so by the Board give an account to the Board of all matters relating to the Company or any Associated Company for which the Appointee is responsible; 3.8 attend such courses of training or personal development as the Company may require; 3.9 not during the Appointment except with the prior written consent of the Board be directly or indirectly engaged or interested in any other business whatsoever whether on the Appointee's own account or in partnership with any other person or persons or as employee consultant agent or director of any other person except that the Appointee may hold or be interested in listed investments not representing more than 5% in nominal amount of the issued investment of any class of any company which are listed on any recognised stock exchange anywhere in the world. 4. OFFICES 4.1 The Appointee agrees that the Appointee shall if requested by the Company become and remain a director of any Associated Company as the Board may from time to time require. The Appointee will not voluntarily resign from any such directorship without the prior written consent of the Board otherwise than by reason of rotation if required by the Articles of Association of the Company or relevant Associated Company nor do or refrain from doing anything that would lead to the Appointee being prevented from holding the office of director. 4.2 The Appointee shall at the request of the Board at any time (whether during or after the Appointment) resign without compensation any directorship or other office held by the Appointee in any Associated Company and should the Appointee fail to do so the Company is irrevocably authorised to appoint any person to sign the appropriate resignation documents and take any other action necessary for this purpose in the name and on behalf of the Appointee. 5 [LOGO] East Midlands Electricity From the Company Secretary and Solictor Our ref 398 Coppice Road Arnold Your ref Nottingham NG5 7HX Tel (0l15) 926 9711 or (0115) 962 0033 Fax (0115) 927 0459 Direct Dial (0115) 935 8054 Mr R J Davies In accordance with Clause 6.2 of this Agreement the Remuneration and Nomination Committee reviewed the salary payable under Clause 6.1 and approved an increase of salary from (pound)158,000 per annum to (pound)161,200 per annum with effect from 1 December 1994. 4.3 In the event of the Appointee being removed from office as a director of the Company during the Appointment (on grounds insufficient to justify termination of the Appointment) by any resolution of a general meeting of the Board or the Company or not being re-elected after retiring by rotation pursuant to the Articles of Association of the Company the Appointment shall automatically terminate but the Appointee shall be entitled to damages for breach of this Agreement unless at the time of such termination the Company was entitled to terminate the Appointment under any provision of this Agreement. 5. PLACE OF WORK 5.1 The Appointee shall work at arid travel to such places in the UK or elsewhere as the Board may from time to time determine for the purpose of the Appointment. 5.2 Notwithstanding any other provisions of this Agreement, the Company may at its sole discretion require the Appointee not to attend at the Company's premises during the Appointment and may choose not to allocate any duties to the Appointee. 6. SALARY 6.1 The Company shall pay to the Appointee during the continuance of the Appointment a salary at the rate of (pound)158,000 per annum (or such higher rate as may from time to time be agreed or determined by the Company and notified in writing to the Appointee). The salary shall accrue from day to day and shall be payable in arrear by equal monthly instalments on or before the last working day of each month. The salary shall be inclusive of any fees to which the Appointee may be or may become entitled as a director of the Company or any Associated Company. 6.2 The salary referred to in Clause 6.1 shall be reviewed at least once a year by the Remuneration and Nomination Committee. 6 6.3 The Appointee may in respect of any financial year of the Company be paid a performance-related bonus in addition to the salary referred to in Clause 6. 1 if the Board in its absolute discretion so determines in respect of that year. Any such bonus shall be payable to the Appointee only if the Appointment continues for the whole of the financial year in question. For the avoidance of doubt the parties expressly agree that the Appointee has no contractual entitlement to participate in or to continue to participate in or to receive a payment from any particular bonus scheme whether or not expressed to apply to employees at the same or similar level of employment as the Appointee and/or performing the same or similar duties and payment of a bonus in any one or more years shall not create any entitlement for the Appointee to be paid any bonus in any subsequent years notwithstanding the payment of a bonus in any subsequent years to any other employees whatsoever under the same or any other bonus scheme. Where the Appointee does participate in a bonus scheme he shall do so subject to the foregoing and on the terms and conditions contained in the rules of such scheme from time to time amended, a copy of which shall be supplied to the Appointee. 6.4 The Appointee will if so invited by the Remuneration and Nomination Committee in its absolute discretion be eligible to participate in the Company's share option or other employee share schemes (if any) on the terms and conditions contained in the Rules of such schemes from time to time, copies of which are obtainable on application to the Secretary of the Company. The Appointee hereby agrees and accepts that he shall have no contractual entitlement to participate in or to continue to participate in any such scheme and that the grant, variation or lapse of any option or other right pursuant to such scheme or schemes or the variation or termination of such scheme or schemes shall not constitute or give rise to any claim or right of action against the Company under this Agreement in respect of such grant, lapse, variation or termination. 6.5 The Appointee shall be reimbursed by the Company in respect of all hotel travelling entertaining and other expenses reasonably and properly incurred by the Appointee in carrying out the Appointee's duties under this Agreement and vouched for in the manner required by the Board from time to time. Any credit card supplied to the Appointee by the Company shall be used solely for expenses incurred by the Appointee in the course of the Appointment. 7 7. PENSION AND OTHER BENEFITS 7. 1 The Appointee will be offered membership of the East Midlands Electricity Pension Plan and will enter into a Deed with the Company covering the Appointee's unfunded unapproved pension benefits. The details of such arrangements are set out in a letter to the Appointee from the Chairman of the Company dated 25 January 1994, a copy of which is attached to this Service Agreement as Appendix I. 7.2 A contracting out certificate is in force in respect of the employment of the Appointee. 7.3 The Company will maintain private health and permanent sickness insurance for the Appointee, the Appointee's spouse and dependent children during the Appointment in accordance with the Company's scheme (as varied from time to time) details of which are available from the Company Secretary. 7.4 The Company shall provide the Appointee with life assurance during the Appointment in accordance with the Company's scheme (as varied from time to time) details of which are available from the Company Secretary. 8. HOLIDAYS 8.1 The Appointee shall be entitled in addition to public holidays to take 30 working days holiday in each holiday year at such times as may be approved by the Board. For the purposes of the Appointment the holiday year shall start on 1 April each year and run to the next following 31 March. 8.2 The Appointee may not without the prior written consent of the Board carry forward any unused part of the Appointee's holiday entitlement to a subsequent holiday year. No payment will be made by the Company during the continuance of the Appointment in lieu of holidays not taken unless the Board at its absolute discretion decides otherwise. 8 EAST MIDLANDS ELECTRICITY plc MANAGEMENT CAR SCHEME - LEVEL 1 MAKE AND MODEL BMW 740i V8 Saloon 4 door Mercedes Benz S320 Saloon 4 door (5spd) Jaguar Daimler 1.0 Saloon 4 door 1 May 1994 8.3 On the cessation of the Appointment for any reason the Appointee shall be entitled to a payment in lieu of holiday on a pro rata basis for any holiday not taken which has accrued in the holiday year including the Date of Termination or, if appropriate, the Appointee shall repay to the Company any salary received in respect of holiday taken prior to the Date of Termination in excess of the Appointee's pro rata entitlement in that year. 9. CAR 9.1 During the Appointment the Company shall so long as the Appointee is legally entitled to drive provide the Appointee with a Car for use by the Appointee in the course of the Appointee's duties. 9.2 The Company shall pay the running expenses maintenance costs and outgoings in respect of the Car in accordance with the Company's policy from time to time with regard to the provision of Cars for executives. 9.3 The Appointee shall ensure that the Car is at all times in the state and condition required by law and that it is properly serviced and maintained and that if so required a current test certificate is in force in respect of it. 9.4 The Appointee shall observe and comply with all laws applicable to the use and ownership of the Car. 9.5 The Car shall at all times remain the property of the Company but the Appointee and his spouse and adult children over 18 years shall be allowed private use of the car provided that the Appointee shall be responsible for ensuring that such private use does not invalidate any licence or insurance relating to the Car. 9.6 The Appointee shall not permit the Car to be taken out of the United Kingdom without the prior written consent of the Board. 9.7 On termination of the Appointment for any reason the Appointee shall immediately return the car in good condition to the Company together with the keys and all registration documents. 9 10. SHARE DEALINGS The Appointee undertakes that: 10.1 the Appointee shall not deal or become or cease to be interested in any securities of the Company or any Associated Company (namely shares or debentures (whether or not secured) or warrants or options to subscribe for any shares or debentures) unless prior notice of such proposed dealings has been given to the Chairman of the Company or other director(s) appointed for this specific purpose and a written acknowledgement of such notice is received; 10.2 during the periods of two months immediately preceding the announcement of the half yearly and annual results of the Company or any Associated Company together with dividends and distributions to be paid or passed or, if longer, during the periods from the last day of the trading period to which such results relate until the date of such announcement the Appointee shall not purchase any such securities of the Company or any Associated Company nor will the Appointee sell any such securities unless the circumstances are exceptional provided in any event that the provisions of Clause 10.1 above are complied with and the acknowledgement referred to in Clause 10.1 has been obtained; 10.3 the Appointee shall comply with all rules of law relating to dealings by directors in securities and shall use best endeavours to prevent any dealings by the Appointee's spouse and dealings on behalf of any infant child and any other dealings in which for the purposes of the Companies Act 1985 the Appointee is or is to be treated as interested at a time when the Appointee is not free to deal on the basis that Clauses 10.1 and 10.2 are to be regarded as equally applicable to any dealings by the Appointee's spouse and dealings on behalf of any infant child and any other dealings in which for the purposes of the Companies Act 1985 the Appointee is or is to be treated as interested; 10 10.4 so long as the Company or any Associated Company is a listed company the Appointee shall observe and comply at all times with the Model Code for Securities Transactions by Directors of Listed Companies issued from time to time by the International Stock Exchange of the United Kingdom and the Republic of Ireland Limited. 11. INVENTIONS If at any time during the continuance of the Appointment the Appointee whether alone or with any other employee of the Company or any Associated Company makes discovers or conceives any invention process technique design or development relating to or capable in the opinion of the Board of use or adaptation for use in connection with any activity of the Company or any Associated Company: 11.1 the same shall be the absolute property of the Company; and 11.2 the Appointee will immediately give full information to the Company as to such invention process technique design or development and the exact mode of working producing using and exploiting the same and also all such explanations and instructions to the Company as may be necessary or useful to enable the Company to obtain the full benefit of them and will at the expense of the Company furnish it with all necessary plans drawings formulae and models applicable to the same and shall at the cost and expense of the Company execute all documents and do all acts and things necessary to enable the Company or its nominees to apply for and obtain protection for such inventions processes techniques designs or developments throughout the world and for vesting the ownership of them in the Company or its nominee provided always that this clause shall take effect subject to any statutory rights of the Appointee. The Appointee irrevocably appoints the Company to be his attorney in his name and on his behalf to execute all documents and do all things necessary and generally to use his name for the purpose of giving to the Company (or its nominee) the full benefit of the provisions of this Clause and in favour of any third party a certificate in writing signed by any director or the secretary of the Company that any instrument or act falls within the authority conferred by this Clause shall be conclusive evidence that such is the case. 11 12. CONFIDENTIAL INFORMATION 12.1 The Appointee shall not during or at any time after the Appointment (except as authorised by the Board or required by the Appointee's duties as Appointee or by law) disclose to any person or use for the Appointee's own benefit or for the benefit of any other person or to the detriment or possible detriment of the Company or any Associated Company any information or material coming to the knowledge of the Appointee in the course of the Appointment belonging to or concerning the Company or any Associated Company or any of its or their customers or suppliers which the Company or any Associated Company is obliged to hold confidential or which the Appointee knows or ought reasonably to know to be confidential. 12.2 On the termination for any reason of the Appointment or the earlier request of the Company the Appointee shall immediately return to the Company all minutes records lists files papers books agreements discs tapes designs drawings and other documents and data of the Company or of any of its Associated Companies then in the Appointee's possession or under the Appointee's control together with any and all notes and memoranda relating to the business of the Company or any of its Associated Companies made or received by the Appointee during the course of the Appointment. The Appointee shall not retain copies of any of the foregoing. 13. GRIEVANCE PROCEDURE 13.1 The Appointee shall observe the disciplinary rules from time to time laid down by the Board for employees generally so far as consistent with the status of the Appointee. 13.2 If the Appointee has any concern or grievance relating to the Appointment he should discuss this with the Chairman of the Company. 12 14. TERMINATION 14. 1 The Company may without prejudice to any remedy which it may have against the Appointee for breach or non-performance of any of the provisions of this Agreement at any time determine the Appointment by summary notice in writing if the Appointee: (a) commits any serious breach or repeats or continues (after warning) any breach of any of the terms of this Agreement or is guilty of any serious neglect in the discharge of the Appointee's duties under this Agreement; or (b) is guilty whether or not in the course of the Appointee's employment of gross misconduct or other conduct tending to or likely to bring the Appointee or the Company or any Associated Company into disrepute or otherwise to affect prejudicially the interests of the Company or any Associated Company; or (c) has an interim order made under the Insolvency Act 1986 in respect of the Appointee or becomes bankrupt or makes any composition or enters into any deed of arrangement with the Appointee's creditors; or (d) becomes a patient as defined by the Mental Health Act 1983; or (e) is or becomes prevented by law from holding the office of director; or (f) without the prior consent of the Board resigns from being a director of the Company or any Associated Company (if so appointed) otherwise than by reason of rotation if required by the Articles of Association of the relevant company. 14.2 Notwithstanding any other provision of this Agreement: (a) it is a condition of the Appointment that the Apointee retires on the day on which the Appointee attains the Normal Retirement Age; 13 (b) the Company may at any time determine the Appointment for no cause by giving summary notice in writing to the Appointee and the Appointment shall then immediately terminate but in that event the Appointee shall be entitled to damages for breach of this Agreement. 14.3 If the Appointee is incapacitated by ill health or otherwise from carrying out his duties under this Agreement for a continuous period of 180 days or for an aggregate of 150 working days in any twelve consecutive months, the Company will be entitled to terminate his employment by not less than 6 months' written notice given within 3 months after the end of the 180 or (as the case may be) 150 working days. 14.4 Without prejudice to any other provision of this Agreement, the Company may suspend the Appointee on full pay at any time for up to four weeks where the Board wishes to consider whether an event specified under Clause 14.1 has taken place. [DELETED] 14.5 On termination of the Appointment (for whatever reason) the Company may without obligation and in its absolute discretion make payment to the Appointee in lieu of notice. Any such payment will have PAYE tax and national insurance contributions deducted at source. 14.6 On termination of the Appointment (for whatever reason) the Appointee shall immediately deliver to the Company all credit cards and other property of the Company or any Associated Company which may then be in the Appointee's possession or under the Appointee's control (together with the documents referred to in Clause 12.2 and the Car and associated articles referred to in Clause 9.7). 14.7 On the termination of the Appointment for whatever reason and whether or not the Company shall have been in breach of this Agreement, whether repudiatory or otherwise, the Appointee will promptly resign (if he has not already done so) from all offices held by him in the Company and its Associated Companies. 14 15. INCAPACITY 15.1 If the Appointee cannot because of ill-health or accident or other cause perform the Appointee's duties under this Agreement the Appointee shall as soon as possible (and in any event within 24 hours of commencement of the incapacity) notify or ensure that the Company is notified of the fact and nature of the incapacity and so long as the incapacity continues shall keep the Company informed of the reason for the Appointee's continued absence and its expected duration and shall produce medical certificates to the Company as often as the Company reasonably requires. 15.2 The Appointee will, subject to compliance with Clause 15.1 and to Clause 14, be entitled to: (a) payment of his salary at the full basic rate (less any social security or other benefits payable to him including benefits payable under any disability or permanent health insurance scheme maintained by the Company for the benefit of the Appointee) during any periods of absence from work as a result of sickness or injury up to a maximum of six months in aggregate in any twelve consecutive months; (b) payment of salary at half the full basic rate (less social security or other benefits payable to him as aforesaid) during any such periods of absence in excess of six months in aggregate in any twelve consecutive months; but he will not be entitled to any payment of salary during any absence in excess of twelve months unless agreed by the Board. 15.3 The Company will pay statutory sick pay, where appropriate, in accordance with the legislation in force at the time of absence, and any payment of salary in accordance with this Clause will go towards discharging its liability to pay statutory sick pay. 15 15.4 In order to assist the Company to make a judgement regarding the Appointee's capacity for work the Appointee shall if and whenever reasonably requested by the Company at the Company's expense undergo a medical examination by a doctor nominated by the Company. 16. TERMINATION BY RECONSTRUCTION If the Company wishes to terminate the Appointment or the Appointment is terminated in anticipation or by reason of an internal or external reorganisation reconstruction or amalgamation (whether or not involving the winding up of the Company) and the Appointee is offered employment with any Associated Company or with any company resulting from the reorganisation reconstruction or amalgamation on terms no less favourable than the terms of this Agreement the Appointee will have no claim against the Company in respect of or in connection with the termination of the Appointment. 17. POST TERMINATION 17.1 The Appointee undertakes to the Company that the Appointee shall not during the period of 12 months from the Date of Termination 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 (a) holds a public electricity supply licence for the supply of electricity anywhere within the United Kingdom; or (b) carries on anywhere within the United Kingdom any other business competing with any business carried on by the Company at the Date of Termination in which the Appointee has been engaged or interested during the 12 months prior to the Date of Termination ("other relevant business") 16 but nothing in this Clause 17.1 shall prevent the Appointee 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 recognised stock exchange anywhere in the world. 17.2 The Appointee undertakes to the Company that the Appointee shall not during the period of 12 months from the Date of Termination whether as principal agent or employee and whether directly or indirectly supply to any person firm or company whom the Appointee dealt with as a customer or potential customer of the Company in the last 12 months of the Appointment 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 Appointment whether or not the Appointee has approached the customer or vice versa. 17.3 The Appointee undertakes to the Company that the Appointee shall not during the period of 12 months from the Date of Termination whether as principal agent or employee and whether directly or indirectly approach any person firm or company whom the Appointee dealt with as a customer or potential customer of the Company in the last 12 months of the Appointment 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 Appointment. 17.4 The Appointee undertakes to the Company that the Appointee shall not during the period of 12 months from the Date of Termination 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 Appointment employed by the Company as a director or senior employee and the Appointee had regular contact with such person through that person's work for the Company. 17 17.5 The Appointee undertakes to the Company that the Appointee shall also perform and observe the undertakings set out in Clauses 17.1 to 17.4 in relation to any Associated Company whose business or affairs the Appointee has been engaged or interested in at any time during the last 12 months of the Appointment as if a reference to each such Associated Company was substituted for a reference to the Company in each case. This undertaking shall be construed and enforceable as a separate covenant in relation to each Associated Company and the Company shall be deemed to have the benefit of this covenant as trustee for any Associated Company. 17.6 It is agreed that each of the covenants contained on the part of the Appointee in each of Clauses 17.1 to 17.5 inclusive is and shall be construed and enforceable as a separate covenant. 17.7 In this Clause 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. 17.8 The Appointee undertakes and covenants with the Company that he shall not at any time after the termination of the Appointment hold himself out or permit himself to be held out as being in any way interested in or connected with the Company or any Associated Company and shall use his best endeavours to prevent himself being so held out, save that if and for so long as he remains a director or an employee of an Associated Company he may hold himself out or be held out as being so connected with that company. 18. PREVIOUS OR OTHER AGREEMENTS 18.1 This Agreement shall operate from the Commencement Date in substitution for any terms of service previously in force (whether written or oral) between the Appointee and the Company but without prejudice to any rights or obligations of either party which may have accrued prior to that date. Any remuneration paid or payable to the Appointee under such terms of service in respect of any period subsequent to the Commencement Date shall be set off against any amounts which would otherwise be payable to the Appointee under this Agreement in respect of the same period. 18 18.2 The Appointee shall if so requested by the Company enter into a separate agreement or undertaking directly with any Associated Company in terms of any agreement or undertaking by the Appointee in this Agreement relating to Associated Companies. 19. CONTINUING PROVISIONS The expiry or termination of the Appointment (however arising and notwithstanding that the termination may be held to be illegal or improper) shall not terminate any of the provisions of this Agreement which expressly or impliedly operate or have effect after expiry or termination of the Appointment. 20. NOTICE 20.1 Any notice or other document required to be given under this Agreement or any communication between the parties with respect to any of the provisions of this Agreement shall be in writing in English and be deemed duly given if left at or sent by pre-paid first class post in accordance with the provisions of this Clause. 20.2 Any such notice or other communication shall be deemed to be given to and received by the addressee: (a) if delivered personally, at the time the same is left at the address of or handed to a representative of the party to be served; (b) if despatched by post, on the next business day occurring two days after date of posting. 20.3 In proving the giving of a notice it should be sufficient to prove that the notice was left or that the envelope containing the notice was properly addressed and posted as the case may be to the address of the party receiving notice as set out at the head of this Agreement or such other address as may from time to time be disclosed to the other party. 19 21. CONSENTS AND DETERMINATIONS Wherever this Agreement refers to the consent or determination of the Company, this means the consent or determination of any person appointed by the Company for the specific purpose or failing such appointment the Board and any consent or determination to be given or made by the Board under this Agreement may be made by any committee of the Board duly appointed by the Board and acting within the scope of its delegated authority from the Board and shall be as valid as consent or determination of the Board. 22. WAIVER No failure or delay on the part of any party to this Agreement relating to the exercise of any right power privilege or remedy provided under this Agreement shall operate as a waiver of such right power privilege or remedy or as a waiver of any preceding or succeeding breach by any other party to this Agreement nor shall any single or partial exercise of any right power privilege or remedy preclude any other or further exercise of such or any other right power privilege or remedy provided in this Agreement all of which are several and cumulative and are not exclusive of each other or of any other rights or remedies otherwise available to a party at law or in equity. 23. SEVERABILITY If any provision of this Agreement is or becomes unlawful void or unenforceable in any respect under the law of any jurisdiction such provision shall to the extent required be severed from this Agreement and rendered ineffective as far as possible for the purposes of construing performing or enforcing this Agreement pursuant to the laws of such jurisdiction without prejudice to the validity or enforcement of such provision pursuant to the laws of any other jurisdiction and without modifying the remaining provisions of this Agreement or in any way affecting any other circumstances or the validity or enforceability of this Agreement pursuant to the laws of such jurisdiction. 20 24. LAW This Agreement shall be governed by and construed and interpreted in accordance with the laws of England whose courts shall be courts of competent jurisdiction. 21 IN WITNESS whereof this deed has been duly executed and is intended to be delivered on the day and year first before written. SIGNED AND DELIVERED AS A ) DEED by ROBERT JOHN DAVIES ) /S/ ROBERT JOHN DAVIES in the presence of: ) Witness' Signature /S/ JOHN CAMPBELL Name JOHN CAMPBELL Address 398 COPPICE ROAD NOTTINGHAM Occupation Solicitor 22 [LOGO] East Midlands Electricity APPENDIX 1 Mr R J Davies Netherwood Shut Lane Head I Butterton Newcastle under Lyme Staffordshire ST5 4D5 25 January 1994 Dear Mr. Davies, Retirement and Death Benefits I am now writing, further to my letter of 21 January, to sumniarise our proposals regarding retirement and death benefits to be provided to you and/or your dependants in respect or your period of employment with the Company. Your benefits will be provided from two sources: (i) From the East Midlands Electricity Pension Plan - benefits as set out in the attached letter dated 25 January 1994 based on the maximum benefits permitted by the Inland Revenue from an approved pension scheme. (ii) Directly by the Company on an unfunded unapproved basis in accordance with a Deed to be completed in due course. Contributions Your contributions to the East Midlands Electricity Pension Plan will amount to 5% of the earnings "cap" imposed by the Finance Act 1989, which is (pound)76,800 for tax year 1994/95. This figure normally increases each year in line with the annual rise in the retail prices Index. You are not required to pay any contributions towards your unfunded unapproved benefits. Your Pension Benefits from Previous Employments Any benefits arising from previous employments are in addition to the provisions set out in this letter. -2- Your East Midlands Electricity Benefits The following benefits are the total benefits to be provided by East Midlands Electricity plc. The amount of each benefit to be provided directly by the Company from the unfunded unapproved arrangement is the part thereof not provided from the East Midlands Electricity Pension Plan. (1) Retirement at your Normal Retirement Age (63) Your pension entitlement will amount to 50% of your Final Pensionable Earnings* at retirement. * Final Pensionable Earnings is as defined in the Rules of the East Midlands Electricity Plan without the limitation of the earnings "cap". In most circumstances it will be your basic salary received over the 12 months before you retire. (2) Early Retirement If the Company agrees, you may retire early at any time after your 50th birthday, with an immediate pension entitlement amounting to (*): N x 50% of your Final Pensionable Earnings at -- retirement NS where N is the number of years of your employment with the Company, and NS is the number of years of your total potential employment with the Company to your 63rd birthday (*) If you retire before your 55th birthday, your pension will be reduced by 4% for each year by which your retirement precedes that date, unless you are retiring at the request of the Company. (3) Death in Service In the event of your death in service before your Normal Retirement Age, the following benefits would be paid: -3- (a) a widow's pension equal to 60% of your own prospective pension entitlement at your Normal Retirement Age. (b) Pensions to your dependent children aged under 18 or, subject to Company discretion, under 25 if in full--time education amounting to: 20% of the widow's pension for each child up to a maximum of three children - the amount is doubled if no widow's pension is payable. (c) a lump sum death benefit of 3 times basic annual salary at date of death; increased to 4 times basic annual salary if no dependants' pensions are payable. (4) Death after Retirement The following benefits would be payable on your death after retirement: (a) A widow's pension of 60% of your full pension entitlement, including any part exchanged for cash at retirement. (b) Children's pensions as on death in service (c) If you die during the first five years of your retirement, a lump sum is payable equal to the outstanding pension payments during the initial five year period based on your rate of pension at your date of death. (5) Leaving Service Should you leave service without becoming entitled to an immediate pension, you would be granted a deferred pension payable from your Normal Retirement Age equal to: N x 50% of your Final pensionable Earnings at -- date of leaving NS where N and NS are as in (2) above. This would be subject to revaluation between your date of leaving and your Normal Retirement Age in line with the cumulative increase in the RPI, subject to a maximum of 5% per annum compound. -4- This proposal is made following a detailed examination of your pension position by our advisers and I very much hope that it meets with your acceptance. I look forward to hearing from you. Yours sincerely /s/ JOHN F HARRIS John F Harris JFH/JN EX-10.34 7 EXHIBIT 10(XXXIV) EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is made as of September 12, 1997 between DOMINION RESOURCES, INC. (the "Company") and EDGAR M. ROACH, JR. (the "Executive"). 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 interests 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 serve as 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 be employed by the Company, as an executive of the Company, for the period beginning September 12, 1997 (the "Effective Date") and ending on the third anniversary of such date, subject to the further provisions of this Section 1 (the "Term of this Agreement"). If Thos. E. Capps ceases to be the Chief Executive Officer of the Company before the third anniversary of the Effective Date, the Term of this Agreement shall be extended for a period of three years from the date Thos. E. Capps ceases to be the Chief Executive Officer of the Company. 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 exception of absences on 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 directions and 2 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 may 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 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. The agreement between the Executive and Virginia Electric and 3 Power Company dated September 15, 1995 (as supplemented and interpreted) which is attached as Exhibit A to this Agreement shall not be treated as an Employment Continuity Agreement for purposes of this Agreement. (b) Except as provided above and in Section 5 (c), 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 the Company (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 or any credited service agreement under which the Executive receives years of service credit for retirement plan purposes. 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 include 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. 4 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 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. If the Executive is employed by an Affiliate or a successor (as described in Section 4), the term "Board of Directors" as used in this Section 5(a) and in Section 6(a) (iii) means the Board of Directors of the Executive's employer. (b) During the Term of this Agreement, while the Executive is employed by the Company, the Executive will be 5 eligible to participate in a similar manner as other senior executives of the Company in retirement plans, cash and stock incentive plans, fringe benefit plans and other employee benefit plans and programs provided by the Company for its senior management employees from time to time. (c) The provisions of an agreement between the Executive and Virginia Electric Power Company dated September 15, 1995 (as supplemented and interpreted) which is attached as Exhibit A to this Agreement are incorporated by reference and any benefits accruing or amounts payable to the Executive under that agreement shall be deemed to be benefits or amounts payable under this Agreement. The provisions of this subsection (c) shall survive the termination of this Agreement. 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 and annual cash incentive awards (computed as described below) 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 6 of employment. For purposes of this calculation, the Executive's annual cash incentive awards for the balance of the Term of the Agreement will be calculated at a rate equal to the highest annual cash incentive award paid to the Executive during the three-year period preceding his termination of employment. Salary and bonus that the Executive elected to defer will be taken into account for purposes of this Agreement without regard to the deferral. (ii) The salary and incentive award for any partial year in the Term of this Agreement will be a pro-rated portion of the annual amount. (iii) If the Executive has not yet received an annual cash incentive award for the year in which his employment terminates, the lump sum payment will be increased to include a pro-rated award for the portion of the year preceding the Executive's termination of employment. If the Executive has not yet received payment of his annual cash incentive award for the year preceding his termination of employment, the lump sum payment will be increased to include an award for the year preceding the Executive's termination of employment. The incentive award for the year or portion of the year preceding the Executive's termination of employment will be determined according to clause (i) above, unless the Board of Directors made 7 a good faith final determination of the amount of the applicable incentive award pursuant to Section 5(a) (ii) before the Executive's termination of employment. If the Board of Directors made such a determination, the applicable incentive award will be computed according to the Board of Directors' determination. (iv) 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 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. (v) 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 that would become vested (that is, transferable and nonforfeitable) 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 8 sentence, if applicable). In addition, if the Company has agreed to award the Executive 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 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 the performance goals are met. The Executive must satisfy the tax withholding requirements described in Section 10 with respect to the 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 the Company's pension, medical and other benefit plans, and the Company will continue the Executive's coverage under the Company's welfare benefit plans as if the Executive remained employed through the end of the Term of this Agreement. Service credited to the Executive for purposes of the Company's pension plans pursuant to this subsection (ii) shall be in addition to any service credited to the Executive pursuant to Section 5 (c). Notwithstanding the foregoing, if the Company determines that giving such age and service credit or continued coverage could adversely affect the tax qualification or tax treatment of a benefit plan, or 9 otherwise have adverse legal ramifications, the Company may 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 giving such credit and continued coverage. (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 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), or (iv) 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 President of a subsidiary of the Company, or a position that reports directly to the Chief Executive Officer, Chief Operating Officer or Senior Vice President of the Company or to the President of a subsidiary of the Company. In order for this subsection (c) to be 10 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) or (iv) 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) or (iv), 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) or (iv), 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 (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 or if the Executive voluntarily terminates employment for a reason not described in subsection (c) above or Section 7 below, this Agreement will immediately terminate without liability on the part of the Company. 11 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 and after Thos. E. Capps ceases to be the Chief Executive Officer of 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 during the Term of this Agreement and while he is employed by the Company the Executive qualifies to receive benefits under the Company's short-term disability policy, the Executive will be treated as having eleven or more years of service with the Company for purposes of determining the amount of his benefits under that policy. 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. 12 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 and responsibilities to the Company, which continues after the Executive receives notice of such refusal or failure, (iii) conviction of a felony or crime involving moral turpitude, or (iv) the use of drugs or alcohol that interferes materially with the Executive's performance of his duties. 9. 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. 10. Payment of Compensation and Taxes. All amounts payable under this Agreement (other than restricted stock, which will be paid according to the terms of the Company's Long-Term Incentive Plan) will be paid in cash, subject to required income and payroll tax withholdings. No unrestricted stock will be issued to the Executive with respect to the vesting of restricted stock 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. 13 11. 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. 12. 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 14 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. 13. 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. 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. 14. 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, addressed 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. 15. Miscellaneous. This instrument contains the entire agreement of the parties. To the extent not governed by federal 15 law, this Agreement will be construed in accordance with the laws of the Commonwealth of Virginia, without reference to its conflict of laws rules. No provisions of this Agreement may be modified, waived or discharged unless such 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 or compliance with any provision or condition of this Agreement is not a waiver of similar or dissimilar provisions or conditions. The invalidity or unenforceability 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 or 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:___________________ /s/ Edgar M. Roach, Jr. -------------------------- Edgar M. Roach, Jr. Dated: Sept. 12, 1997 16 September 15, 1995 Mr. Edgar M. Roach, Jr. Vice President - Regulation and General Counsel [LOGO] VIRGINIA POWER Dear Ed, In order to preserve the stability and continuity of the senior management personnel of the Company, the Special Committee of the Board of Directors of Virginia Electric and Power Company, in June 1994, approved a resolution intended to promote your continuing employment relationship with the Company. This was formalized through my letter of June 23, 1994 to you. Since that time, a variety of events have happened. The Company believes it is appropriate to modify the terms of the June 23, 1994 letter to provide additional assurance of financial security so that you will not be distracted by personal risks and will devote your best efforts to contribute to the future growth and success of the Company. Upon my recommendation, the Organization and Compensation Committee of the Board of Directors and the Board of Directors of Virginia Electric and Power Company have approved the provisions of this present letter. Upon your agreement, the terms of this letter will completely replace the terms of the June 23, 1994 agreement which will lapse. Section 1 provides you with the salary, short-term incentive and long-term incentive protection which was provided in the June 23, 1994 agreement. 1. If at any time prior to June 21, 1997, your employment as an officer of the Company should be terminated for any reason other than cause (i.e. in the absence of a good faith determination by the President of Company or the Board of Directors that such cause exists), then the Company will pay to you the amount (as detailed in a, b and c below) that you would have otherwise received, as if you had remained employed until that date. You will also be considered to have been terminated without cause if your base salary is reduced, or if you are not considered for incentive awards comparable to similar executives, or if you are not provided benefits similar to those of similar executives, or if the company diminishes your executive status, working conditions or management responsibilities, or if the company relocates your place of employment more than 30 miles from Richmond, Virginia, and you resign within 60 days of the Company's action. "Termination without cause" does not include voluntary retirement or voluntary resignation. If you are terminated for any reason other than for cause, prior to June 21, 1997, the company will pay you the following: a. The base salary which you would have earned from the date of termination until June 21, 1997. This number will be computed by dividing the annual base salary at time of termination by 12 and multiplying by the number of whole or partial months between the date of termination and June 21, 1997. The base salary used in this calculation shall not be less than your highest base 2 salary on or after September 1, 1995. Edgar M. Roach, Jr. b. Potential annual incentive award from date of termination until June 21, 1997. This number will be computed by dividing the Success Sharing target award in effect for you at time of termination by 12 and multiplying by the number of whole or partial months between the end of the most recently completed plan year and June 21, 1997. Payment of this amount shall cancel your rights to any other Success Sharing payments for the same time period. The target used in this calculation shall not be less than the highest target award in effect for you on or after September 1, 1995. c. Potential long-term incentive award until June 21, 1997. The total number of hypothetical shares (at 100%) goal accomplishment) of Dominion Resources, Inc. stock granted in all cycles of the Performance Achievement Plan which were active on the date of termination will be multiplied by the closing price of the stock on the day of termination. This amount will be paid to you in dollars. Payment of this amount will cancel your rights to any additional payments in cash or stock from these active cycles. Dual payment limitation: If events occur in such a manner that you are entitled to the same or similar benefits under this agreement and your March 8, 1994 "Employment Continuity Agreement" with the company, you may choose which version of the benefit to receive, i.e. the benefit as provided by this agreement or the benefit as provided by the "Employment Continuity Agreement," but will not receive payments for that benefit from both agreements. 2. If you continue as an employee of the Company until June 21, 1997, you shall be entitled to receive one year's base salary on the date you retire or leave the Company for any reason after June 21, 1997. This special severance benefit is in addition to and does not diminish any other rights you may have based on other agreements or benefit plans. This benefit is reduced to six months' salary if you choose the benefit provided by 3 following. 3. If you serve as an officer until June 2, 1998, you will be eligible, at retirement, for 5 additional years of credited age and 5 additional years of credited service to be added for pension and other retirement benefits, such as the Executive Supplemental Retirement Plan, the Retirement Benefit Funding Plan, medical coverage and life insurance. Any minimum age requirement shall be waived. Choosing this benefit will reduce the benefit in 2 above as noted. You will also be eligible for this benefit if you are terminated without cause prior to June 2, 1998. 4. If your termination is due to death or disability, you, your estate or your beneficiary will receive benefits 1, if death or disability is prior to June 21, 1997, or benefit 2 and/or 3 above, if death or disability is after that date. 3 Section 5 reduces the threshold age for earning additional years of service to 50. 5. As part of the arrangements for your employment with Virginia Power, the company promised to provide you with 20 years of total credited service (for retirement benefits) when you reach age 55, and 30 years of total credit service when you reach age 60. On your 50th birthday (June 2, 1998), you will be credited with total credited service of 15 years. This will increase on a year by year basis until your 59th birthday when you will have 24 years of total credited service. This will become 30 years of credited service on your 60th birthday. Thirty years is the maximum allowed under our plan. Any additional credited years of service which might be provided to you under section 3 above will be added to the years discussed in the current section. Additional credited years of age provided to you under section 3 above do not count toward your eligibility for additional credited years of service. 6. The Company will pay all reasonable fees and expenses which you incur to enforce this Agreement and that result from a breach of the Agreement by the Company. The Company will also indemnify you for any excise tax you incur if any portion of the benefits provided by this letter is considered to be an "excess parachute payment" under the Internal Revenue Code. In either case, the indemnification will be structured to be tax neutral to you. Please acknowledge your agreement by signing a copy of this letter and returning it to me. I will then make this document a part of your permanent file. If you have any questions, please let me know. Approved: /s/ J. T. Rhodes /s/ William G. Thomas - ---------------------------- --------------------------- James T. Rhodes William G. Thomas President and Chairman Chief Executive Officer Organization and Compensation Committee Attachment Agreed and Acknowledged: /s/ Edgar M. Roach, Jr. - ---------------------------------- Edgar M. Roach, Jr. DAte: September 15, 1995 September 15, 1995 [LOGO] VIRGINIA POWER Mr Edgar M. Roach, Jr. Vice President - Regulation and General Counsel The sentence, "Any minimum age requirement shall be waived." appears in the section numbered 3 in the September 15, 1995 agreement signed by Dr. Rhodes, Mr. Thomas and you. The purpose of this letter is to assure you that this sentences refers to all retirement programs which impose a minimum age requirement. This includes the Executive Supplement Retirement Plan and the Retirement Benefit Funding Plan. A copy of this letter has been attached to the September 15, 1995 agreement in your personnel file. Please contact me if you have any questions. Sincerely /s/ Harry M. Girvin Harry M. Girvin Vice President - Human Resources cc: Personnel File November 1, 1995 Mr. E. M. Roach, Jr. Vice President - Regulation and General Counsel [LOGO] VIRGINIA POWER A reference to ""terminated without cause" appears in the section 3 in the September 15, 1995 agreement signed by Dr. Rhodes, Mr. Thomas and you. The purpose of this letter is to clarify the use of the term "terminated without cause" in section 3. The conditions which define "without cause" in numbered section 1 apply to the use of this term in section 3 A copy of this letter has been attached to the September 15, 1995 agreement in your personnel file. Please contact me if you have any questions. Sincerely, /s/ Larry M. Girvin Larry M. Girvin Vice President - Human Resources cc: Personnel File MEMORANDUM TO: File FROM: William G Thomas, Chairman Virginia Power Organization and Compensation Committee DATE: June 17, 1997 RE: Virginia Power Organization and Compensation Committee - -------------------------------------------------------------------------------- James T. Rhodes, President and Chief Executive Officer of Virginia Power recently raised an issue with me concerning the provisions of the Employment Agreements currently in place with Robert E. Rigsby, Executive Vice President, and Edgar M. Roach, Jr., Senior Vice President Finance, Regulation and General Counsel. The issue raised by Jim Rhodes was whether the Employment Agreements for Rigsby and Roach provided under Section 3 that benefits provided for in the Agreements would be available to them if they were terminated without cause prior to their 50th birthdays. I have reviewed the Employment Agreements, and both contain the following sentence at the end of paragraph 3: "You will also be eligible for this benefit if you are terminated without cause prior to (their respective 50th birthdays)." I've also read the balance of their Employment Agreements and have concluded that the Agreements do provide that the benefits under Section 3 are available to them if they are terminated without cause prior to their 50th birthdays. In the case of Roach, there is an additional provision found in paragraph 5 of his Employment Agreement concerning a credit for years of service. I've also concluded that this provision would be applicable and he would receive the appropriate years of service credit if he were terminated prior to his 50th birthday without cause. Having reached these conclusions, I felt that no other action was necessary. I have informed Jim Rhodes of my conclusion and will see that copies of this memorandum are placed in both Rigsby's and Roach's personnel files. WGT:ss cc: James T. Rhodes President and Chief Executive Officer Thomas J. O'Neal Vice President, Human Resources EX-10.35 8 EXHIBIT 10(XXXV) EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is made as of January 1, 1998, between DOMINION RESOURCES, INC. (the "Company") and William S. Mistr (the "Executive"). 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 interests 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 serve as 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 be employed by the Company, as an executive of the Company, for the period beginning January 1, 1998 (the "Effective Date") and ending on December 31, 1999 (the "Term of this Agreement"). 2. Duties. The Company and the Executive agree that, during the Term of this Agreement, the Executive will serve as a Vice President with the Company. The Executive (i) will devote his knowledge, skill and best efforts on a full-time basis to ensure the information systems operated by the Company and its subsidiaries are prepared 2 to meet the year 2000 with no interruption in service ("Year 2000 Project") (with the exception 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 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 may 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 3 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 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 the Company (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 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 include 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 compensation for services rendered to the Company: (i) The Company will pay to the Executive an annual salary of $175,000 (payable monthly), effective January 1,1998. 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. 5 (ii) In addition to incentive awards as described in Sec. 5 (b), Executive will be entitled to receive an incentive award of up to $200,000 in cash ("Completion Bonus"), if and to the extent that the Board of Directors determines that the Executive's performance merits payment of such incentive award. Such award, if any, will be paid to Executive at the completion of the Term of this Agreement. (iii) Executive will receive an allowance of up to $25,000 per year for reimbursement of round trip travel expenses for Executive's immediate family (spouse and/or children) from the United States to England while Executive is located at East Midlands Electricity during the Term of this Agreement. If the cost of U.S. - U.K. round trip tickets for both Executive and spouse is less than or equal to round trip Business Class ticket for Executive alone, such cost will not apply toward $25,000 allowance. If the Executive is employed by an Affiliate or a successor (as described in Section 4), the term "Board of Directors" as used 6 in this Section 5 (a) and in Section 6 (a) (iii) means the Board of Directors of the Executive's employer. (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 of the Company in retirement plans, cash and stock incentive plans, fringe benefit plans and other employee benefit plans and programs provided by the Company for its senior management employees from time to time. 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, Completion Bonus and annual cash incentive awards (computed as described below) 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 7 salary rate in effect for the Executive during the two-year period preceding his termination of employment. For purposes of this calculation, the Executive's Completion Bonus will be assumed to be $200,000. For purposes of this calculation, the Executive's annual cash incentive awards for the balance of the Term of the Agreement will be calculated at a rate equal to the highest annual cash incentive award paid to the Executive during the two-year period preceding his termination of employment. Salary and bonus that the Executive elected to defer will be taken into account for purposes of this Agreement without regard to the deferral. (ii) The salary and incentive award for any partial year in the Term of this Agreement will be a pro-rated portion of the annual amount. (iii) If the Executive has not yet received an annual cash incentive award for the year in which his employment terminates, the lump sum payment will be increased to include a pro-rated award for the portion of the year preceding the Executive's termination of employment. 8 If the Executive has not yet received payment of his annual cash incentive award for the year preceding his termination of employment, the lump sum payment will be increased to include an award for the year preceding the Executive's termination of employment. The incentive award for the year or portion of the year preceding the Executive's termination of employment will be determined according to clause (i) above, unless the Board of Directors made a good faith final determination of the amount of the applicable incentive award pursuant to Section 5 (a) (ii) before the Executive's termination of employment. If the Board of Directors made such a determination, the applicable incentive award will be computed according to the Board of Directors' determination. (iv) 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 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. 9 (v) 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 that would become vested (that is, transferable and nonforfeitable) 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 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 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 the performance goals are met. The Executive must satisfy the tax withholding 10 requirements described in Section 10 with respect to the 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 the Company's pension, medical and other benefit plans, and the Company will continue the Executive's coverage under the Company's welfare benefit plans as if the Executive remained employed through the end of the Term of this Agreement. Notwithstanding the foregoing, if the Company determines that giving such age and service credit or continued coverage could adversely affect the tax qualification or tax treatment of a benefit plan, or otherwise have adverse legal ramifications, the Company may 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 giving such credit and continued coverage. 11 (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 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), or (iv) 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 a position that reports directly to the Chief Executive Officer, Chief Operating Officer, Executive Vice President or Senior Vice President of the Company or to the President of a subsidiary of the Company. 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 12 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) or (iv) 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) or (iv) ,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) or (iv), 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 (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 or if the Executive voluntarily terminates employment for a reason not described in subsection (c) above or Section 7 below, this Agreement will immediately terminate without liability on the part of the Company. 13 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 during the Term of this Agreement and while he is employed by the Company the Executive qualifies to receive benefits under the Company's short-term disability policy, the Executive will be treated as having eleven or more years of service with the Company for purposes of determining the amount of his benefits under that policy. 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 14 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 and responsibilities to the Company, which continues after the Executive receives notice of such refusal or failure, (iii) conviction of a felony or crime involving moral turpitude, or (iv) the use of drugs or alcohol that interferes materially with the Executive's performance of his duties. 9. 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. 10. Payment of Compensation and Taxes. (a) All amounts payable under this Agreement (other than restricted stock, which will be paid according to the terms of the Company's Incentive Compensation Plan) will be paid in cash, subject to required income and payroll tax withholdings. No unrestricted stock will be issued to the Executive with respect to the vesting of restricted stock until the Executive has paid to the Company the 15 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. (b) Executive will be subject to Company's "tax equalization" policy as described in the Dominion Resources international Human Resources Manual with regard to his foreign tax liability (if any) incurred by Executive during the Term of Agreement. 11. 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 16 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. 12. 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. 13. 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. The Executive will for all purposes be a general creditor of the Company. The interest of the Executive under the Agreement cannot be 17 assigned, anticipated, sold, encumbered or pledged and will not be subject to the claims of the Executive's creditors. 14. 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, addressed 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. 15. Miscellaneous. This instrument contains the entire agreement of the parties. To the extent not governed by federal law, this Agreement will be construed in accordance with the laws of the Commonwealth of Virginia, without reference to its conflict of laws rules. No provisions of this Agreement may be modified, waived or discharged unless such 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 or compliance with any provision or condition of this Agreement is not a waiver of similar or dissimilar provisions or conditions. The invalidity or unenforceability 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 18 and effect. This Agreement may be executed in one or 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: 1-19-98 /s/ William S. Mistr ---------------------------- Dated: 1-20-98 William S. Mistr 19 EX-11 9 EXHIBIT 11 EXHIBIT 11 DOMINION RESOURCES, INC. COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK ASSUMING FULL DILUTION (Million, Except Per Share Amounts) 1997 1996 1995 ---- ---- ---- Consolidated net income (1) $399.2 $472.1 $425.0 ------ ------ ------ Adjustment to average common shares: Shares of common stock - average shares outstanding 185.2 178.3 173.8 Plus: Additional shares assuming conversion of installments received on stock purchase plan at average market value (2) 0.0 0.0 0.5 Adjusted average common shares 185.2 178.3 174.3 ------ ------ ------ Earnings per share $2.15 $2.65 $2.45 ------ ------ ------ Notes: (1) See the Consolidated Statements of Income. (2) Based on the following data: 1997 1996 1995 ---- ---- ---- Installments received on stock purchase plan at year-end $0.7 $0.0 $17.8 Average market per common share $38.06 $40.63 $38.25 EX-13 10 EXHIBIT 13 EXHIBIT 13 21 CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
- ----------------------------------------------------------------------------------------------------- For The Years Ended December 31, 1997 1996 1995 (millions, except per share amounts) Operating revenues and income: Virginia Power $5,079.0 $4,420.9 $4,351.9 East Midlands 1,970.1 Nonutility 628.5 433.1 281.2 ---------------------------------- Total operating revenues and income 7,677.6 4,854.0 4,633.1 ---------------------------------- Operating expenses: Fuel, net 1,620.7 1,016.6 1,009.7 Purchased power capacity, net 717.5 700.6 688.4 Supply and distribution--East Midlands 1,466.1 Accelerated cost recovery 38.4 26.7 Restructuring 18.4 64.9 121.5 Other operation and maintenance 1,237.7 1,045.3 968.6 Depreciation, depletion and amortization 819.3 615.2 551.0 Other taxes 282.5 274.9 267.5 ---------------------------------- Total operating expenses 6,200.6 3,744.2 3,606.7 ---------------------------------- Operating income 1,477.0 1,109.8 1,026.4 ---------------------------------- Other income and expense: Virginia Power 14.2 6.8 10.0 East Midlands 10.9 Nonutility 8.6 17.8 13.6 Windfall profits tax--East Midlands (156.6) ---------------------------------- Total other income and expense (122.9) 24.6 23.6 ---------------------------------- Income before fixed charges and income taxes 1,354.1 1,134.4 1,050.0 ---------------------------------- Fixed charges: Interest charges, net 627.4 387.0 381.7 Distributions--preferred securities of subsidiary trusts 12.1 10.9 3.7 Preferred dividends of Virginia Power 35.8 35.5 44.1 ---------------------------------- Total fixed charges 675.3 433.4 429.5 ---------------------------------- Income before provision for income taxes and minority interests 678.8 701.0 620.5 Provision for income taxes 233.0 219.3 187.1 Minority interests 46.6 9.6 8.4 ---------------------------------- Net income $399.2 $472.1 $425.0 Retained earnings, January 1 1,437.9 1,427.6 1,455.2 Common dividends and other deductions: Dividends (478.0) (460.1) (448.7) Other deductions (5.1) (1.7) (3.9) ---------------------------------- Retained earnings, December 31 $1,354.0 $1,437.9 $1,427.6 ---------------------------------- Earnings per common share $2.15 $2.65 $2.45 ---------------------------------- Dividends paid per common share $2.58 $2.58 $2.58 ---------------------------------- Average common shares outstanding 185.2 178.3 173.8 ----------------------------------
The accompanying notes are an integral part of the Consolidated Financial Statements. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS (unaudited) Introduction In Management's Discussion and Analysis (MD&A) we explain the general financial condition and the results of operations for Dominion Resources and its subsidiaries. As you read this section, it may be helpful to refer to our consolidated financial statements and notes. The MD&A is important when making investment decisions about Dominion Resources. In 1983, Dominion Resources began a diversification strategy to enable the company to make investments in nonutility businesses. These diversified businesses--Dominion Energy and Dominion Capital--operate in competitive environments. There is no monopoly or regulated rate of return on investments as you currently find in our core electric utility business, Virginia Power. Such a move changes the risk profile of a company and provides the opportunity to achieve returns above those found in a regulated business. The investments outside of Virginia Power during 1997 accounted for approximately 20 percent of the consolidated company's earnings from operations. The recent acquisition of East Midlands Electricity plc (East Midlands) in the U.K. adds a strong international utility to our portfolio of companies. East Midlands is the principal operating subsidiary of our U.K. holding company, Dominion U.K. Holding, Inc. (Dominion UK). As the electric utility industry is significantly changing in many states across the nation, Dominion Resources is working with its state legislators and regulators to move the restructuring process towards a workable form of competition in Virginia. The generation business of Virginia Power--representing about 50 percent of its assets--may become deregulated at some point in the future, depending on legislative and regulatory action. Customers in Virginia and North Carolina currently have low electricity costs relative to regional and national electricity prices. But management believes that competition can bring benefits to both consumers and the company. These matters are discussed in more detail on page 26 of the MD&A report. Both Virginia Power and East Midlands enjoy above average customer growth in their respective service areas. Virginia Power has strong plant operations and is recognized as a leader in low-cost generation. East Midlands receives approximately 85 percent of its operating profit from its regulated distribution business--which is the transfer of electricity across its low voltage distribution system to consumers. Virtually all of the remainder comes from its supply business--purchasing electricity and arranging for its distribution to end users. Management's strategy is to continue building on the fundamental strengths at Virginia Power and East Midlands while growing its nonutility businesses in power generation, natural gas production, and financial services. Overview Dominion Resources achieved earnings from operations of $555.8 million in 1997 or $3.00 per average common share, compared with earnings of $472.1 million in 1996 or $2.65 per share. The 1997 figure excludes a one-time windfall profits tax of $156.6 million, or 85 cents per share, incurred at East Midlands. Below we have provided a comparison of net income and earnings per share contributions by company along with reasons for the changes in these contributions. NET INCOME - --------------------------------------------------------------------------- 1997 Change 1996 Change 1995 (millions) Virginia Power $433.4 2.8% $421.8 8.5% $388.7 Dominion UK 46.9 Dominion Energy 45.0 38.5% 32.5 (7.1)% 35.0 Dominion Capital 45.1 58.2% 28.5 61.9% 17.6 Corporate (14.6) (36.4)% (10.7) 34.4% (16.3) ------ ------ ------ 555.8 17.7% $472.1 11.1% $425.0 Windfall Profits Tax-- East Midlands (156.6) ------ ------ ------ Consolidated $399.2 (15.4)% $472.1 11.1% $425.0 ------ ------ ------ Shares 185.2 3.9% 178.3 2.6% 173.8 -------------------------------------------------- EARNINGS PER SHARE - --------------------------------------------------------------------------- 1997 Change 1996 Change 1995 Virginia Power $2.34 (1.3)% $2.37 5.8% $2.24 Dominion UK .25 Dominion Energy .24 33.3% .18 (10.0)% .20 Dominion Capital .24 50.0% .16 60.0% .10 Corporate (.07) (16.7)% (.06) 33.3% (.09) ------ ------ ------ $3.00 13.2% $2.65 8.2% $2.45 Windfall Profits Tax-- East Midlands (.85) ------ ------ ------ Consolidated $2.15 (18.9)% $2.65 8.2% $2.45 -------------------------------------------------- The 1997 results as compared to 1996 were affected by a number of factors described below: VIRGINIA POWER Earnings were impacted by: o mild weather which caused a decrease in electricity sales to retail customers, partially offset by continued customer growth in the Virginia and North Carolina service areas; o an increase in sales from non-traditional businesses, including power marketing, natural gas, and energy products and services; o higher purchased power expenses as a result of increased power marketing and higher operation and maintenance expenses, reflecting the growth in the costs of products and services offered by the new energy services business; o lower restructuring expenses; o a reserve for potential adjustments to regulatory assets; and o higher depreciation of plant and equipment, higher decommissioning expenses for the future retirement of nuclear plants, and depreciation related to Clover Unit 2--the company's newest coal-fired station. 23 DOMINION UK Earnings were impacted by: o an anticipated one-time windfall profits tax levied on East Midlands and other utilities in Britain as part of the newly elected Labour Party's 1997 budget plan. DOMINION ENERGY Earnings were impacted by: o an increase in natural gas production, resulting partly from the acquisition of Wolverine Gas and Oil in Michigan, and overall higher natural gas prices; and o an increase in generation from its power plants in Latin America, resulting from more normal water flows at its hydro plants and the acquisition of power generation assets in Peru in the latter half of 1996. DOMINION CAPITAL Earnings were impacted by: o an increase in loan production and securitizations from Saxon Mortgage, the financial services business which originates non-conforming (or sub-prime) residential mortgages and sells them--through securitization transactions--to institutional investors. o the purchase of the remaining 50 percent of First Source Financial, a Chicago-based lender to middle-market industries. Virginia Power Results of Operations Virginia Power's balance available for common stock for 1997 amounted to $433.4 million as compared to $421.8 million in 1996. The earnings were impacted by customer growth and lower restructuring expenses, partially offset by higher depreciation and amortization expenses and the provision of a reserve for potential adjustments to regulatory assets. Virginia Power's contribution to earnings per share in 1997 amounted to $2.34 compared to $2.37 in 1996 due to the dilutive impact of common stock issuances by Dominion Resources during 1997. In 1996, Virginia Power reported a $33.1 million increase in balance available for common stock when compared to the 1995 results of $388.7 million. The increase was primarily due to lower restructuring expenses in 1996. - -------------------------------------------------------------------------------- 1997 Change 1996 Change 1995 (millions) Operating revenues $5,079.0 14.9% $4,420.9 1.6% $4,351.9 Operating expenses: Fuel and purchased power, net 2,338.2 36.2% 1,717.2 1.1% 1,698.1 Other operation and maintenance 812.7 1.2% 803.1 (0.3)% 805.6 Accelerated cost recovery 38.4 43.8% 26.7 Restructuring 18.4 (71.6)% 64.9 (45.0)% 117.9 Depreciation and amortization 584.3 8.9% 536.4 6.5% 503.5 Other taxes 267.7 1.9% 262.6 3.0% 254.9 -------- -------- -------- Operating income 1,019.3 0.9% 1,010.0 3.9% 971.9 Other income 14.2 108.8% 6.8 (32.0)% 10.0 Fixed charges, including preferred dividends 350.8 (1.1)% 354.8 (3.0)% 365.7 Income taxes 249.3 3.8% 240.2 5.6% 227.5 -------- -------- -------- Balance available for common stock $ 433.4 2.8% $ 421.8 8.5% $ 388.7 ------------------------------------------------------- As detailed in the chart on the next page, the overall growth in revenues in 1997 reflects strong wholesale power marketing and natural gas sales. Electric service revenues increased slightly in spite of mild weather due to new customer connections and an increase in fuel rates. The increase in fuel revenues is primarily attributable to higher fuel rates which went into effect December 1, 1996, increasing recovery of fuel costs by approximately $48.2 million. In addition, revenues increased as a result of the company's strategy to develop non-traditional business opportunities designed to provide growth in revenues. These include sales of energy products and services offered by Virginia Power's energy services business and nuclear management and operations services offered to other electric utilities. Revenues increased in 1996, as compared to 1995, due to increased power marketing, sales of natural gas and sales of other energy products and services by Virginia Power's energy services business. This increase in revenues was offset in part by a decrease in electric service revenues, resulting from the effect of mild weather on the company's summer retail rates, which are designed to reflect normal weather conditions. The reduction in revenues from the mild weather was offset in part by revenues from new customers. Other electric service revenues decreased primarily as a result of reduced sales to Old Dominion Electric Cooperative (ODEC) due to the completion of Clover Units 1 and 2, of which ODEC owns a fifty percent interest. 24 Increase (decrease) OPERATING REVENUES from prior year - ---------------------------------------------------------------------------- 1997 1996 (millions) Customer growth $ 55.8 $ 45.1 Weather (111.1) 4.4 Base rate variance (18.7) (35.5) Fuel rate variance 44.1 (89.6) Other, net 47.7 41.5 ------- ------ Total retail 17.8 (34.1) Other electric service 11.0 (49.8) ------- ------ Total electric service 28.8 (83.9) ------- ------ Wholesale power marketing 363.4 96.6 Natural gas 232.6 33.2 Other, including energy products and services 33.3 23.1 ------- ------ Total other revenues 629.3 152.9 ------- ------ Total revenues $ 658.1 $ 69.0 -------------------- During 1997, Virginia Power added 50,899 new customers, the largest number of new connections since 1990, compared to 44,528 and 44,955 in 1996 and 1995, respectively. KILOWATT-HOUR SALES - --------------------------------------------------------------------------- 1997 Change 1996 Change 1995 (millions) Retail sales 61,997 (0.5)% 62,298 2.4% 60,865 Wholesale 23,965 117.5% 11,020 36.3% 8,088 ------ ------ ------ Total sales 85,962 17.2% 73,318 6.3% 68,953 -------------------------------------------------- DEGREE-DAYS CHART - --------------------------------------------------------------------------- 1997 1996 Normal Cooling degree days 1,349 1,365 1,530 Percentage change compared to prior year (1.2)% (18.1)% Heating degree days 3,787 4,131 3,726 Percentage change compared to prior year (8.3)% 9.0% --------------------------- Fuel and purchased power, net increased due to higher volumes of purchased power. Virginia Power has significantly increased its marketing efforts to generate more sales of electric energy to wholesale customers and more sales of natural gas. Other operation and maintenance expenses increased in 1997 as a result of the growth in sales by the company's energy services business. This increase was partially offset by a reduction in expenses attributable to Virginia Power's Vision 2000 initiatives to take costs out of the core (traditional) utility business. Expenses in 1996 include high storm damage costs resulting from destructive summer storms, including Hurricane Fran. Virginia Power embarked on its Vision 2000 restructuring program in 1995 as part of an initiative to prepare for competition in the electric utility industry. Charges of $18.4 million in 1997 primarily include employee severance costs and costs to renegotiate contracts to purchase power from third parties. Charges in 1996 and 1995 were $64.9 million and $117.9 million, respectively (see Note N). Virginia Power estimates that its restructuring efforts will result in future annual savings of $80 million to $90 million. However, such savings are being offset by salary increases, outsourcing costs and increased payroll costs associated with staffing for growth opportunities. While Virginia Power may incur additional restructuring charges in 1998, the amounts are not expected to be significant. In this increasingly competitive environment, Virginia Power has concluded that it may be appropriate to utilize available savings and cost reductions, such as those from the Vision 2000 program, to accelerate the write-off of unamortized regulatory assets and potentially stranded costs (see Note O). As of December 31, 1997, Virginia Power has accumulated a reserve of $65.1 million. Not only will this strategically position Virginia Power in anticipation of competition, but it also reflects management's commitment to mitigate its exposure to potentially stranded costs. Depreciation and amortization increased in 1997, as compared to 1996, due to additional depreciation and nuclear decommissioning expense and depreciation related to Clover Unit 2 - the company's newest coal-fired station. Virginia Power recorded additional depreciation and decommissioning expense consistent with its proposal in the rate proceeding before the Virginia Commission (see Note Q ). Dominion UK RESULTS OF OPERATIONS Dominion UK earned $46.9 million, or 25 cents per share, in 1997. The 1997 figure excludes a one-time windfall profits tax of $156.6 million, or 85 cents per share, incurred at East Midlands. The anticipated one-time windfall profits tax was levied on East Midlands and other utility companies in Britain as part of the newly elected Labour Party's 1997 budget plan. Including the windfall profits tax, Dominion UK reported a net loss of $109.7 million, or 60 cents per share. - -------------------------------------------------------- 1997 (millions) Operating income: Distribution $ 333.7 Supply 35.4 Other (122.5) ------- Total operating income 246.6 ------- Other income and expense: Other 10.8 Windfall profits tax (156.6) Fixed charges 189.4 Income taxes 21.1 ------- Net income $(109.7) ------- Dominion Energy NEW BUSINESSES Dominion Energy has expanded its oil and natural gas business through the development of existing assets and the acquisition of Wolverine Gas and Oil Company, now known as Dominion Midwest Energy, Inc., and the related entities (Dominion Midwest), effective as of January 1997. Dominion Midwest is an oil and gas production and operation company headquartered in Grand Rapids, Michigan. 25 Dominion Energy expects to expand its domestic power generation in the first quarter of 1998 with the acquisition of the Kincaid generating station, an 1,108-megawatt facility located in Illinois. In addition, Dominion Energy expects to expand its foreign power generation businesses with the completion of certain capital expansion activities. RESULTS OF OPERATIONS Dominion Energy's net income amounted to $45.0 million as compared to $32.5 million in 1996. The increase in earnings was due primarily to net income from power generation assets in Peru acquired in August 1996, generally higher natural gas prices and greater production volumes due to the acquisition of natural gas properties in the Gulf Coast area in March 1996, and in Michigan in January 1997. In 1996, net income decreased by $2.5 million when compared to 1995 primarily due to the sale of the Black Warrior Trust Units in 1995. The sale of the units, which hold royalty interests in proven, developed natural gas properties, provided a net gain of $5.4 million in 1995. - --------------------------------------------------------------------------- 1997 Change 1996 Change 1995 (millions) Operating income: Oil and gas(1) $59.4 42.4% $41.7 68.1% $24.8 Domestic power generation (3.4) (136.2)% 9.4 (40.5)% 15.8 Foreign power generation 55.3 66.6% 33.2 16.5% 28.5 Corporate(2) (3.3) 77.6% (14.7) (90.9)% (7.7) Adjustments(1) (25.3) 4.5% (26.5) 6.0% (28.2) ----- ----- ----- Total operating income $82.7 91.9% $43.1 29.8% $33.2 ------------------------------------------------- (1) Oil and gas Operating Income includes Nonconventional Fuels Tax Credits. Such credits are reversed on the Adjustments line as they are not ordinarily reported as a component of Operating Income. (2) Represents corporate overhead charges. OPERATING INCOME Oil and gas operating income increased $17.7 million and $16.9 million for the 1997 and 1996 periods, respectively. The results reflect a significant increase in the level of oil and gas produced due to the development and acquisition of properties during 1997 and 1996. Natural gas production rose to 59.0 billion cubic feet equivalent (Bcfe) in 1997, compared to 50.2 Bcfe in 1996, an 18 percent increase. At December 31, 1997, proved gas reserves totaled 460 Bcfe. Proved gas reserves increased 60 Bcfe (15%) during 1997, primarily from the development of existing acreage and the acquisition of Wolverine Gas and Oil. The production results for 1997 reflect a $2.50 average gas sales price per thousand cubic feet equivalent (Mcfe), which increased $.18 per Mcfe compared to 1996. The production results for 1996 reflect a $2.32 average gas sales price per Mcfe, compared to $1.93 per Mcfe in 1995. Domestic power generation operating income decreased in 1997 primarily due to the write-down of Dominion Energy's investment in two of its California projects. The 1996 results reflect lower income contributions from the two geothermal projects in California due to scheduled ownership reductions. Foreign power generation operating income increased $22.1 million and $4.7 million for the 1997 and 1996 periods, respectively. The 1997 increase results from more normal water flows at hydro plants and the acquisition of an interest in Egenor, a Peruvian power generation business, in August 1996. The 1996 increase results also from the Egenor acquisition and the acquisition of an interest in Empresa Corani, a Bolivian power generation business, in July 1995. Dominion Capital NEW BUSINESSES There were two significant enhancements to Dominion Capital's diversified financial services strategy. In early 1997, Dominion Capital acquired the remaining 50% of First Source Financial. It is anticipated that First Source Financial, the Chicago-based lender to middle market industries, will increase funded loans and loan commitments as a result of this transaction. Late in 1997, Dominion Capital formed First Dominion Capital, an integrated merchant banking and asset management business. First Dominion Capital expands Dominion Capital's growth in financial services and is based in New York City. RESULTS OF OPERATIONS Dominion Capital's net income for 1997 amounted to $45.1 million as compared to $28.5 million in 1996. The increase in earnings was primarily due to residential mortgage loan securitizations performed by Saxon Mortgage and the acquisition of the remaining 50 percent of First Source Financial that it did not already own. In 1996, Dominion Capital reported an increase in net income of $10.9 million when compared to the 1995 results. The results were primarily due to residential mortgage loan securitizations performed by Saxon Mortgage. - --------------------------------------------------------------------------- 1997 Change 1996 Change 1995 (millions) Operating income: Financial services $143.5 103.5% $70.5 103.2% $34.7 Vidalia & real estate 13.6 40.2% 9.7 (34.5)% 14.8 ------ ----- ----- Total operating income $157.1 95.9% $80.2 62.0% $49.5 -------------------------------------------------- OPERATING INCOME Financial services operating income increased by $73.0 million and $35.8 million in the 1997 and 1996 periods, respectively. Both Saxon Mortgage and First Source Financial benefitted from the healthy regional and national economies. Loan volumes at Saxon were $1.8 billion in 1997, up from $754 million in 1996. In addition, Dominion Capital purchased the remaining 50 percent interest in the Chicago-based First Source Financial at the beginning of 1997. Funded and committed loans at First Source Financial have grown to $1.4 billion at the end of 1997, compared to $1.1 billion at the end of 1996. Financial services operating income improved in 1996 compared to 1995 primarily due to the acquisition of Saxon Mortgage. 26 Vidalia and real estate operating income increased in 1997 over 1996 by $3.9 million due to higher water flow and improved real estate operations. Operating income decreased in 1996 compared to 1995 primarily due to higher real estate project costs. Nonoperating Income and Expenses OTHER INCOME AND EXPENSE The windfall profits tax of $156.6 million resulted in a decline in net income in 1997 by the same amount. FIXED CHARGES Interest charges increased in 1997 as a result of the additional debt associated with the $2.2 billion acquisition of East Midlands. While Dominion Resources financed the purchase with 100 percent interim debt, the final capital structure calls for approximately 60 percent of the acquisition cost to be financed with long-term debt (see "East Midlands Financing" on page 37). Future Issues This section discusses information that may have an impact on future operating results. The Securities and Exchange Commission encourages companies to provide forward-looking information because it provides investors with an insight into management's outlook for the future. It should be noted that any forward-looking information is expressly covered by the safe harbor rule for projections. For a more detailed description of some of the uncertainties associated with forward-looking information, please refer to the Forward-Looking Information section on page 33. VIRGINIA POWER Competition in the Electric Industry--General For most of this century, the structure of the electric industry in Virginia Power's service territory and throughout the United States has been relatively stable. Virginia Power has recently seen, however, federal and state developments toward increased competition. Electric utilities have been required to open up their transmission systems for use by potential wholesale competitors. In addition, nonutility power producers now compete with electric utilities in the wholesale generation market. At the federal level, retail competition is under consideration. Some states have enacted legislation requiring retail competition. Today, Virginia Power faces competition in the wholesale market. Currently, there is no general retail competition in Virginia Power's principal service area. To the extent that competition is permitted, Virginia Power's ability to sell power at prices that will allow it to recover its prudently-incurred costs may be an issue. See Competition--Exposure to Potentially Stranded Costs on page 28. In response to competition, Virginia Power has successfully renegotiated long term contracts with wholesale and large federal government customers. In addition, the company has obtained regulatory approval of innovative pricing proposals for large industrial customers. Rate concessions resulting from these contract negotiations and innovative pricing proposals are expected to reduce the company's 1998 revenues by approximately $40 million. To date, the company has not experienced any material loss of load. Virginia Power is actively participating in the legislative and regulatory processes relating to industry restructuring. The company has also responded to these trends toward competition by cutting its costs, re-engineering its core business processes, and pursuing innovative approaches to servicing traditional markets and future markets. In addition, Virginia Power is developing "non-traditional" businesses designed to provide growth in future earnings. These include the following businesses: wholesale power marketing, nuclear management and operations services, telecommunications services and energy services. Competition--Wholesale During 1997, sales to wholesale customers represented approximately 17 percent of Virginia Power's total revenues from electric sales. Approximately 73 percent of wholesale revenues resulted from Virginia Power's wholesale power marketing efforts. In July 1997, Virginia Power filed amendments to its existing rate tariff with the Federal Energy Regulatory Commission (FERC) so it could make wholesale sales at market-based rates. Under a FERC order conditionally accepting the company's rates, Virginia Power began making market-based sales in 1997. FERC set for hearing in June 1998 the issue of whether transmission constraints limiting the transfer of power into the company's service territory provide Virginia Power with generation dominance in localized markets. If FERC finds that transmission constraints give Virginia Power generation dominance, it could either revoke or limit the scope of the market-based rate authority. Virginia Power has successfully negotiated a new power supply arrangement with its largest wholesale customer. The new arrangement provides for a transition from cost-based rates to market-based rates, subject to FERC approval. 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. Virginia Power anticipates that additional contract negotiations with other wholesale customers will take place in the future. Competition--Retail Currently, Virginia Power has the exclusive right to provide electricity at retail within its assigned service territories in Virginia and North Carolina. As a result, Virginia Power now only faces competition for retail sales if certain of its business customers move into another utility service territory, use other energy sources instead of electric power, or generate their own electricity. However, both Virginia and North Carolina are considering implementing retail competition. 27 Competition--Legislative Initiatives Federal: The U.S. Congress is expected to consider federal legislation in the near future authorizing or requiring retail competition. Virginia Power cannot predict what, if any, definitive actions the Congress may take. Virginia: The company is actively supporting, and the Virginia General Assembly is actively considering in its current session, legislative proposals that would address: o specific dates for wholesale and retail competition in the state; o establishment of a regional power exchange (RPX) to conduct competitive auctions for the sale of electricity; o establishment of an independent system operator (ISO) to control transmission systems and ensure nondiscriminatory access to the transmission grid; o continued regulation of the distribution of electricity in assigned service territories; o deregulation of the generation of electricity; o recovery of prudently incurred stranded costs; and o consumer protection issues. The General Assembly is scheduled to be in session through mid-March. The company is unable to predict at this time whether or when any of the bills now before the legislature will be enacted. North Carolina: The 1997 Session of the North Carolina General Assembly created a Study Commission on the Future of Electric Service in North Carolina. An interim report is expected in 1998, with final recommendations to be made to the 1999 session of the North Carolina General Assembly. Competition--Regulatory Initiatives The Virginia Commission has also been actively interested in industry restructuring and competition. In 1995, the Commission instituted an ongoing generic investigation on restructuring, resulting in a number of reports by its Staff covering such issues as retail wheeling experiments and the status of wholesale power markets. The Staff also submitted a report to the General Assembly calling for a cautious, two-phase, five-year period to address restructuring issues. The report acknowledged the need for direction from the Virginia legislature concerning policy issues surrounding competition in the electric industry. In late 1996 the Commission ordered Virginia Power to file studies and reports on possible restructuring of the electric industry in Virginia. The Commission also invited Virginia Power to submit a proposed alternative regulatory plan with its filing. In March 1997, Virginia Power filed a two-phase alternative regulatory plan (ARP). The plan as filed requested a five-year freeze of existing base rates with earnings above a certain range to be used to accelerate the write-off of generation-related regulatory assets and to mitigate the costs associated with payments to nonutility generators under power purchase contracts. Virginia Power also sought approval in principle of the recovery of prudently incurred costs beyond 2002 through a non-bypassable transition cost charge. The filing presented an illustrative estimate of potentially stranded costs based on hypothetical market prices. When the company filed its ARP, the Commission consolidated its consideration of the ARP with its consideration of the company's 1995 Annual Informational Filing. For a discussion of the 1995 Annual Informational Filing, see Future Issues--Rate Proceeding. In December 1997, Virginia Power sought to withdraw its ARP, having concluded that resolution of the cost recovery issues raised by the ARP was unlikely without General Assembly action. The Commission has agreed that the company may withdraw its support of the ARP, but has reserved the right to continue consideration of the ARP as well as other regulatory alternatives. In addition, the Commission will continue to consider the issues arising out of the 1995 Annual Informational Filing. See Future Issues--Rate Proceeding on page 28. Competition--SFAS 71 Virginia Power's financial statements reflect assets and costs under cost-based rate regulation in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 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. 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 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 indicate that the carrying amount of an asset may not be recoverable. Thus, events or changes in circumstances that cause the discontinuance of SFAS 71, and write off of regulatory assets, may also require a review of utility plant assets for possible impairment. If the review indicates utility plant assets are impaired, the carrying amount of affected assets would be written down. This would result in a loss being charged to earnings, unless recovery of the loss is provided through operations that remain regulated. Virginia Power's regulated 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. 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. At this time, 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. 28 Competition--Exposure to Potentially Stranded Costs Under traditional cost-based regulation, utilities have generally had an obligation to serve supported by an implicit promise of the opportunity to recover prudently incurred costs. The most significant potential adverse effect of competition is "stranded costs." Stranded costs are those costs incurred or commitments made by utilities under cost-based regulation that may not be reasonably expected to be recovered in a competitive market. Virginia Power's potential exposure to stranded costs is composed of the following: o long-term purchased power contracts that may be above market (see Note Q); o costs pertaining to certain generating plants that may become uneconomic in a deregulated environment; o regulatory assets for items such as income tax benefits previously flowed-through to customers, deferred losses on reacquired debt, and other costs (See Note C); and o unfunded obligations for nuclear plant decommissioning and postretirement benefits not yet recognized in the financial statements (See Notes A and M). Any forecast of potentially stranded costs is extremely sensitive to the various assumptions made. Such assumptions include: o the timing and extent of customer choice in the market for electric service; o estimates of future competitive market prices; o stranded cost recovery mechanisms; and other factors. 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 has assessed 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. Management believes that recovery of any potentially stranded costs is appropriate and will vigorously pursue such recovery with the regulatory commissions having jurisdiction over its operations. However, Virginia Power cannot predict the extent to which such costs, if any, will be recoverable from customers. Also, in an effort to mitigate the amount at risk, Virginia Power will continue to implement cost reduction measures. Rate Proceeding In March 1997, the Virginia Commission issued an order that Virginia Power's base rates be made interim and subject to refund as of March 1, 1997. This order was the result of the Commission Staff's report on its review of Virginia Power's 1995 Annual Informational Filing which concluded that Virginia Power's present rates would cause Virginia Power to earn in excess of its authorized return on equity. The Staff found that, for purposes of establishing rates prospectively, a rate reduction of $95.6 million may be necessary in order to realign rates to the authorized level. In March 1997, Virginia Power filed its alternative regulatory plan (ARP) based on 1996 financial information. Subsequently, the Commission consolidated the proceeding concerned with the 1995 Annual Informational Filing with the proceeding that includes the ARP proposed by the company. Opposing parties in the rate proceeding have made filings recommending rate reductions in excess of $200 million. Virginia Power is currently studying the filings of these parties. The Commission Staff is scheduled to make further filings in late February 1998. Hearings are scheduled to begin in late April. 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 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 $70.4 million, $71.1 million, and $68.3 million (including depreciation) during 1997, 1996, and 1995, respectively, in connection with the use of environmental protection facilities and expects these expenses to be approximately $69.1 million in 1998. In addition, capital expenditures to limit or monitor hazardous substances were $24.6 million, $22.4 million, and $23.4 million for 1997, 1996, and 1995, respectively. The amount estimated for 1998 for these expenditures is $10.0 million. The Clean Air Act, as amended in 1990, requires Virginia Power to reduce its emissions of sulfur dioxide (SO2) and nitrogen oxides (NOx). \The Clean Air Act's SO2 reduction program is based on the issuance of a limited number of SO2 emission allowances, each of which may be used as a permit to emit one ton of SO2 into the atmosphere or may be sold to someone else. Virginia Power's compliance plans may include switching to lower sulfur coal, purchasing emission allowances and installing SO2 control equipment. Virginia Power began complying with Clean Air Act Phase I NOx limits at eight 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. From 1994 through 1997, Virginia Power invested over $160 million to install and upgrade emission control equipment at its Mt. Storm and Possum Point power stations. Capital expenditures related to Clean Air Act compliance over the next five years are projected to be approximately $40 million. Changes in the regulatory environment, availability of allowances, and emissions control technology could substantially impact the timing and magnitude of compliance expenditures. In November 1997, the EPA proposed new requirements for 22 states, including North Carolina, Virginia and West Virginia, to reduce and cap emissions of NOx. Although the proposal leaves it up to each state to determine how to achieve the required reduction in emissions, the caps were calculated based on emission limits for utility boilers. If the states in which Virginia Power operates choose to impose this limit, major additional emission control equipment, with attendant significant capital and operating costs, could be required. The EPA will issue a final rule by September 1998. 29 Global Climate Change In 1993, the United Nation's Global Warming Treaty 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. To further this objective, an international Protocol was formulated on December 10, 1997 in Kyoto, Japan. This Protocol calls for the United States to reduce greenhouse emissions by 7% from 1990 baseline levels by the period 2008-2012. The Protocol will not constitute a binding commitment unless submitted to and approved by the Senate. Emission reductions of the magnitude included in the Protocol, if adopted, would likely result in a substantial financial impact on companies that consume or produce fossil fuel-derived electric power, including Virginia Power. Nuclear Operations On September 10, 1997, the Nuclear Regulatory Commission (NRC) published a proposed rule for financial assurance requirements related to nuclear decommissioning. If the NRC's proposed rule were implemented without further clarification or modification, Virginia Power might have to either pre-fund or provide acceptable security for a portion of the decommissioning obligation. DOMINION UK East Midlands operates in three strategic business lines--distribution, supply, and other. East Midland's distribution and supply businesses are subject to extensive regulation. The distribution business involves the transfer of electricity across its low voltage distribution system to customers. The supply business encompasses purchasing electricity and arranging for its distribution to end users. Regulation of Distribution East Midland's distribution business is fully regulated and accounts for approximately 85% of its operating profit. The focus in the distribution business is on the continuance of cost reductions and efficiency improvements. The revenues which East Midlands derives from its distribution business are controlled by a specified formula. The elements in the formula are established for a five year period. Portions of the formula are subject to review at the end of each five year period and at other times at the discretion of the regulator. An initial annual increase was established by the regulator for the five year period ending March 31, 1995. Since then, the regulator has on two separate occasions decreased East Midland's regulated distribution prices which it may charge its customers through the fiscal year ending March 31, 2000. There can be no assurance that the regulator will not perform further unscheduled distribution price reviews, or that any future distribution price review, whether scheduled or unscheduled, will not result in price reductions or changes in the formula which could materially adversely affect East Midlands. Supply Competition East Midlands currently has the sole right to supply electricity to substantially all of the customers in its authorized area, except where the customer's demand is above 100kW. Competition is currently scheduled to be phased into the national electricity market for small customers whose demand is below 100kW, referred to as the domestic customers, beginning in September 1998. East Midlands is getting ready for competition by building customer loyalty. It will accomplish this goal by; o offering competitive prices, o providing superior customer service, o providing reliable distribution service, and o being responsive in dealing with billing and other matters. There can be no assurance that competition among suppliers of electricity will not adversely affect East Midlands and Dominion Resources. In its supply business, East Midlands is focused on taking advantage of the major opportunity in the domestic gas supply business. Adding gas sales will complement its electric supply sales to domestic, small- to medium-sized commercial and industrial customers. DOMINION ENERGY The financial performance of Dominion Energy's natural gas and oil operations depends to a certain degree on future market prices which are influenced by many factors outside the control of the company. Much of Dominion Energy's gas reserves have production-based tax credits. This tax credit is due to expire on December 31, 2002. The expiration of this tax credit will have an impact on the company's future profitability. To replace these earnings, the company continues to grow its reserve base through the drilling and acquisition of oil and gas properties which do not qualify for the credit. In its foreign power businesses, there are commitments to add generating capacity. Egenor, the company's Peruvian power generation business, has a commitment to add 100 Mw by the end of 1999. Corani, the company's Bolivian business, has a commitment to invest substantial capital to increase generation capacity in Bolivia by the end of 1998. Both expansion projects are currently progressing on schedule. Foreign operations are also subject to political and economic risks. Dominion Energy seeks to manage these risks by limiting its exposure in any single country and by limiting its investments to those countries and regions where the company believes these risks are less significant. DOMINION CAPITAL The financial performance of Dominion Capital's diversified financial services business depends to a certain degree on the movement of interest rates, overall economic conditions, and increasing competition. Dominion Capital intends to manage the effect of these issues by reacting quickly to changing economic market factors, maintaining underwriting and credit quality, expanding origination channels and focusing on specialized markets (see Note P). 30 RECENTLY ISSUED ACCOUNTING STANDARDS During 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosure About Segments of an Enterprise." Each of these statements is effective for fiscal years beginning after December 15, 1997. At this time, Dominion Resources does not expect the implementation of these standards to have a material impact on its results of operations and financial condition. YEAR 2000 COMPLIANCE Dominion Resources is taking an aggressive approach regarding computer issues associated with the onset of the new millennium--specifically, the impact of possible failure of computer systems and computer-driven equipment due to the rollover to the year 2000. The year 2000 problem is pervasive and complex as virtually every computer operation could be affected in some way by the rollover of the two-digit year value from 99 to 00. The issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. If not properly addressed, the year 2000 computer problem could result in failures in company computer systems and the computer systems of third parties with whom the company deals on transactions worldwide. Such failures of the company's and/or third parties' computer systems could have a material impact on the company's ability to conduct business. Since January 1997, the company has organized formal year 2000 project teams to identify, correct or reprogram and test the systems for year 2000 compliance. At this time, a majority of the project teams has completed their preliminary assessment. Based on their evaluation, testing and conversion of system application costs are projected to be within the range of $100 million to $150 million. The range is a function of our ongoing evaluation as to whether certain systems and equipment will be corrected or replaced, which is dependent on information yet to be obtained from suppliers and other external sources. Maintenance or modification costs will be expensed as incurred, while the costs of new software will be capitalized and amortized over the software's useful life. At this time, Dominion Resources is actively pursuing solutions to year 2000-related computer problems in order to ensure that foreseeable situations related to company computer systems, etc., are effectively addressed. The company cannot estimate or predict the potential adverse consequences, if any, that could result from a third party's failure to effectively address this issue. BUSINESS OPPORTUNITIES Because the worldwide electric power industry is rapidly changing, especially in the U.S., there are many opportunities for acquisitions of electric power assets and business combinations. We investigate any of the opportunities we learn about that may increase shareholder value or build on our existing businesses. Any acquisitions or combinations may result in transactions involving cash, debt or equity securities, and may involve payment of a premium over book and market values. Such transactions or payments could dilute the interests of holders of common stock. Market Rate Sensitive Instruments and Risk Management Dominion Resources is subject to market risk as a result of its use of various financial instruments, derivative financial instruments and derivative commodity instruments. Interest rate risk generally is associated with the company's and its subsidiaries' outstanding debt as well as its commercial, consumer, and mortgage lending activities. Currency risk exists principally through the company's investments in the United Kingdom and some debt denominated in European currencies associated with the company's investment in South and Central America. The company is exposed to equity price risk through various portfolios of equity securities. The company uses derivative commodity instruments to hedge exposures of underlying electric, gas production, and gas procurement operations and is also involved in trading activities which use these instruments. However, the fair value of these derivative commodity instruments at December 31, 1997 and the potential near term losses in future earnings, fair values, or cash flows resulting from reasonably possible near term changes in market prices are not anticipated to be material to the results of operations, cash flows or financial position of the company. The following analysis does not include the price risks associated with the nonfinancial assets and liabilities of power production operations, including underlying fuel requirements and natural gas operations. 31 INTEREST-RATE RISK: NON-TRADING ACTIVITIES In managing interest-rate risk, the company enters into interest-rate sensitive derivatives. The following table presents descriptions of the financial instruments and derivative financial instruments that are held by the company at December 31, 1997 and that are sensitive to interest rate change in some way. Weighted average variable rates are based on implied forward rates derived from appropriate annual spot rate observations as of the balance sheet date. For interest rate derivatives, notional amounts have been used to calculate the cash flows to be exchanged under the contract.
EXPECTED MATURITY DATE - --------------------------------------------------------------------------------------------------------------------------- Fair 1998 1999 2000 2001 2002 Thereafter Total Value (millions of US$) ASSETS Loans Receivable: Variable rate $ 39.6 $ 73.7 $119.7 $226.0 $281.4 $ 207.2 $ 947.6 $ 974.5 Average interest rate 8.8% 8.9% 8.9% 8.8% 8.7% 8.4% Fixed rate $ 0.2 $ 3.5 $ 2.4 $ 0.2 $ 0.1 $ 5.0 $ 11.4 $ 11.4 Average interest rate 12.4% 12.4% 12.5% 11.7% 9.9% 8.7% Nuclear decommissioning trusts' investments $ 17.7 $ 5.3 $ 2.1 $ 7.1 $ 3.1 $ 165.0 $ 200.3 $ 190.7 Average interest rate(1) 5.5% 5.5% 5.5% 5.5% 5.5% 5.5% Mortgage loans in warehouse $ 88.2 $ 88.2 $ 91.4 Average interest rate 9.6% -------------------------------------------------------------------------------- LIABILITIES Fixed-rate debt $ 497.1 $335.6 $260.1 $175.8 $731.4 $ 3,255.5 $5,255.5 $5,596.9 Average interest rate 6.5% 7.8% 6.1% 6.0% 5.1% 6.9% Variable rate debt $1,501.8 $490.2 $ 88.8 $256.6 $366.5 $ 876.3 $3,580.2 $3,580.2 Average interest rate 6.1% 6.0% 5.6% 5.7% 5.5% 4.9% Preferred securities of subsidiary trusts $135.0 $ 250.0 $ 385.0 $ 387.7 Average interest rate 7.9% 7.9% 7.9% 7.9% 7.9% 7.9% Short-term debt $ 375.1 $ 375.1 $ 375.1 Average interest rate 6.1% Mandatorily redeemable preferred stock $180.0 $ 180.0 $ 186.6 Average dividend rate $ 6.2 $ 6.2 $ 6.2 Off balance sheet Loan commitments $ 672.9 $ 672.9 $ 675.9 Average interest rate 9.3% -------------------------------------------------------------------------------- INTEREST-RATE DERIVATIVES (2) Forwards Notional amount $ 54.0 $ 54.0 Average strike price 102.142 Average market price 102.177 -------------------------------------------------------------------------------- Futures contracts Notional amount $ 498.9 $ 498.9 $ (0.6) Average strike price 99.077 Average market price 99.268 --------------------------------------------------------------------------------
(1) Interest rates are based on average coupon rates for entire portfolio at 12/31/97. (2) Dominion Capital's use of interest rate swaps to mitigate interest rate risk exposure in its residential and commercial lending businesses is immaterial. 32 INTEREST RATE RISK: TRADING ACTIVITIES Dominion Capital, though its indirectly owned subsidiary Saxon Mortgage, Inc., retains ownership in the residual classes of the asset backed securities utilized to sell home equity loans originated and purchased by Saxon Mortgage. These assets are classified as Trading securities on the balance sheet and total $189.1 million as of December 31, 1997. The residual securities represent the net present value of the excess of the interest payments upon the underlying mortgage collateral net of interest payments to outstanding bond holders, servicing costs, over-collateralization requirements, and credit losses. Fair value of the residual is analyzed quarterly by Saxon Mortgage to determine whether prepayment experience, losses and changes in the interest rate environment have had an impact on the valuation. Expected cash flows of the underlying loans sold are reviewed based upon current economic conditions and the type of loans originated and are revised as necessary. As the securities represent a net present value of future cash flows, changes in the discount rate will result in valuation changes to the underlying securities. The discount rate utilized for the December 31, 1997 fair-market value determination is 11% and is derived from a spread over the prevailing 5-year Treasury interest rate. Should interest rates increase by one percent, Saxon Mortgage could experience a loss of approximately $7.4 million. FOREIGN-EXCHANGE RISK MANAGEMENT Dominion Resource's exposure to foreign currency exchange rates or cross currency exposure results from debt which is denominated in a currency different from the company's functional currency, the U.S. dollar. In this situation, the company is subject to gains and losses due to the relative change in the foreign currency rate of the debt versus the U.S. dollar. The company uses currency swaps to minimize this exposure. The table below provides information about the company's foreign currency-sensitive financial instruments and derivative financial instruments. For debt, the table presents principal amounts and related weighted average interest rates by expected maturity dates. The principal cash flows are translated into U.S. dollars based on implied forward currency rates at the reporting date. For currency swaps, the table presents the notional amounts, the weighted average pay rates, and the weighted average receive rates by maturity dates.
EXPECTED MATURITY DATE - ---------------------------------------------------------------------------------------------------------------------- Fair 1998 1999 2000 2001 2002 Thereafter Total Value (millions) LIABILITIES Long-term debt denominated in foreign currencies (US$ functional currency) Unit of Currency--Inter American Development Bank Variable rate $ 1.6 $ 1.6 $ 1.6 $ 1.6 $ 1.6 $ 13.4 $ 21.4 $ 21.4 Average interest rate 6.8% 6.7% 6.5% 6.3% 6.3% 6.5% Foreign exchange rate $1.53 $1.37 $1.49 $1.53 $ 1.49 $ 1.48 Unit of Currency-German Mark Fixed rate $ .7 $.7 $.7 $.7 $.7 $ 20.3 $ 23.8 $ 22.6 Average interest Rate 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% Foreign exchange rate $1.79 $1.77 $1.76 $1.75 $ 1.74 $ 1.76 (GBP functional currency) Unit of Currency-US$ Fixed rate $409.5 $ 409.5 $819.0 $852.4 Average interest rate 7.3% 7.3% 7.3% 7.3% 7.3% 7.5% Foreign exchange rate $1.60 $1.58 $1.57 $1.56 $ 1.56 $ 1.55 Currency swap agreements related to long-term debt Notional amount $409.5 $ 409.5 $819.0 $(26.8) Average pay price 8.2% 8.6% Average receive price 7.1% 7.5% Foreign exchange rate $ 1.56 $ 1.55 ----------------------------------------------------------------------------
33 EQUITY PRICE RISK MANAGEMENT The following table presents descriptions of the equity securities that are held by the company at December 31, 1997. As prescribed by the FASB, the marketable securities are reported on the balance sheet at fair market value. The company's securities consist of trading (short-term) and available-for-sale securities. - ----------------------------------------------------------------------------- Fair Cost Value (millions of US$) Trading: Short-term marketable securities $240.7 $240.7 Other than trading: Marketable securities $185.3 $190.8 Nuclear decommissioning trusts' investments $219.4 $360.4 ----------------- OTHER RISK MANAGEMENT FACTORS AND MATTERS On a company-wide basis, the company is sensitive to interest rate risk. The company minimizes interest rate risk through a proper mix of fixed and variable rate debt. As mentioned earlier, a significant portion of the company's operations are located in foreign countries. These operations have acquired debt in denominations different than the local functional currency. As a result, the company's foreign financial results could be significantly affected by factors such as changes in exchange rates. To mitigate the effect of changes in currency exchange rates in the United Kingdom, Dominion UK has instituted a for eign currency swap. The swap is associated with senior notes denominated in U.S. dollars. Dominion Capital Dominion Capital's operations are affected by a number of risks. Its lending institutions are concerned with credit, interest rate, operation reserve, and market price of gas risks. Credit risk is managed in the following ways: o through its experienced management and underwriting professionals; o by minimizing the size of the loan; o spreading the risk over a diversified client base, both geographically and industry wide; o having first position on the collateralized assets; o offsetting the credit risk of the customers with lower loan to value and higher interest rates; o and retaining only a residual interest in the mortgage loans through the securitization process. Dominion Capital is also concerned with interest rate risk. This risk is managed by making floating rate loans, loan securitizations which transfer most of the risk to investors, prepayment penalties and hedging programs for presecuritized loans. This period is relatively short because the loan portfolios are securitized every 90 days. Dominion Capital's mortgage investments are adversely impacted by increases in the rate at which home equity loans prepay. Accordingly, Dominion Capital actively manages this risk by 1) imposing prepayment penalties on many of the underlying home equity loans 2) aggressively enforcing premium recapture provisions with correspondent sellers of mortgage collateral, 3) limiting the acquisition of adjustable rate mortgage collateral with below market start rate (i.e., teaser rates), and 4) actively monitoring trends in historical prepayment speeds and using prudent residual prepayment speed assumptions. Changes in interest rates are not considered to have a material impact upon prepayment speeds on the underlying home equity loan collateral as the credit impaired borrowers which make up the majority of the underlying collateral have not proven to be sensitive to changes in interest rates during past periods of interest rate volatility. Forward-Looking Information As we have pointed out earlier in this annual report, we have included certain information about the future for us and our subsidiaries. We have talked about our expectations and plans and, when we felt we were able to make reasonable predictions, tried to estimate the impact of known trends and uncertainties that our businesses are subject to. None of our statements about the future, also referred to as "forward-looking statements", are guarantees of future results or outcomes. Any statement of this type necessarily involves assumptions and uncertainties which could cause actual results or outcomes to be substantially different from those we have suggested. In many cases, the matter will be outside of our control. In addition to specific issues discussed in other parts of this report, some of the factors that could make a significant difference in the forward-looking statements we have made include: legislative and regulatory actions, both domestic and international; deregulation and increased competition in our industry; our operation of nuclear power facilities and related decommissioning costs; our acquisition or disposition of assets or facilities; outcomes in legal proceedings, including rate proceedings; changes in environmental requirements and costs of compliance; unanticipated changes in operating expenses and capital expenditures; development project delays or changes in project costs; and competition for new energy development opportunities. We are also influenced by more general economic and geographic factors such as: weather conditions and catastrophic weather related damage; political and economic risks (particularly those associated with international development and operations, including currency fluctuations); pricing and transportation costs of commodities; the level of market demand for energy; inflation; and capital market conditions. 34 CONSOLIDATED BALANCE SHEETS Assets
- ------------------------------------------------------------------------------------------ At December 31, 1997 1996 (millions) Current assets: Cash and cash equivalents (Notes A and G) $ 321.6 $ 110.8 Trading securities (Notes A, F and G) 240.7 16.4 Customer accounts receivable, net 601.0 354.8 Other accounts receivable 336.5 174.9 Accrued unbilled revenues 245.2 162.8 Materials and supplies at average cost or less: Plant and general 163.3 148.7 Fossil fuel 67.4 76.8 Mortgage loans in warehouse (Notes A and G) 88.2 65.8 Other 209.1 209.5 -------------------------- 2,273.0 1,320.5 -------------------------- Investments: Investments in affiliates (Note A) 404.0 448.3 Available-for-sale securities (Notes A, F and G) 190.8 692.4 Nuclear decommissioning trust funds (Notes A and G) 569.1 443.3 Loans receivable, net (Notes A and G) 959.0 Investments in real estate 101.5 107.7 Other 191.6 234.2 -------------------------- 2,416.0 1,925.9 -------------------------- Property, plant and equipment (Note A): (includes plant under construction of $240.9 [1996-$180.1]) 19,519.2 16,815.8 Less accumulated depreciation, depletion and amortization 6,986.6 6,306.4 -------------------------- 12,532.6 10,509.4 -------------------------- Deferred charges and other assets: Goodwill (Note A) 1,932.0 179.1 Regulatory assets (Note C) 776.6 773.9 Other 262.5 187.6 -------------------------- 2,971.1 1,140.6 -------------------------- Total assets $20,192.7 $14,896.4 ==========================
The accompanying notes are an integral part of the Consolidated Financial Statements. 35 Liabilities and Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------- At December 31, 1997 1996 (millions) Current liabilities: Securities due within one year (Note H) $ 1,613.6 $ 431.0 Short-term debt (Notes E and G) 375.1 378.2 Accounts payable, trade 679.3 410.6 Accrued interest 185.1 107.3 Accrued payroll 107.2 73.1 Severance costs accrued (Note N) 29.7 50.2 Customer deposits 44.6 50.0 Other 591.1 155.4 ------------------------ 3,625.7 1,655.8 ------------------------ Long-term debt (Notes G and H): Virginia Power 3,514.6 3,579.4 Nonrecourse-nonutility 707.8 825.4 Dominion UK 2,673.6 342.5 Other 300.0 300.0 ------------------------ 7,196.0 5,047.3 ------------------------ Deferred credits and other liabilities: Deferred income taxes (Notes A and B) 2,018.4 1,743.3 Investment tax credits (Note A) 238.4 255.3 Other 596.8 162.5 ------------------------ 2,853.6 2,161.1 ------------------------ Total liabilities 13,675.3 8,864.2 ------------------------ Minority interest 402.9 293.0 ------------------------ Commitments and contingencies (Note Q) Virginia Power and Dominion Resources obligated mandatorily redeemable preferred securities of subsidiary trusts* (Notes G and K) 385.0 135.0 ------------------------ Preferred stock (Notes G and L): 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--187,799,443 shares at 1997 and 181,220,746 shares at 1996 (Note I) 3,673.6 3,471.4 Retained earnings 1,354.0 1,437.9 Accumulated translation adjustments (Note A) (10.6) (9.2) Allowance on available-for-sale securities, net of tax (Note A) 7.3 (1.1) Other paid-in capital 16.2 16.2 ------------------------ 5,040.5 4,915.2 ------------------------ Total liabilities and shareholders' equity $20,192.7 $14,896.4 ========================
* As described in Note K, the 7.83% and 8.05% Junior and Subordinated Notes totaling $232.7 and $139.2 million principal amounts constitute 100% of the Trusts' assets. The accompanying notes are an integral part of the Consolidated Financial Statements. 36 CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------- For The Years Ended December 31, 1997 1996 1995 (millions) Cash flows from (used in) operating activities: Net income $ 399.2 $ 472.1 $ 425.0 Adjustments to reconcile net income to net cash: Depreciation, depletion and amortization 905.7 694.4 633.5 Deferred income taxes 13.8 84.1 26.4 Investment tax credits, net (16.9) (16.9) (16.9) Deferred fuel expense 9.6 (54.4) 6.2 Deferred capacity expense (41.2) (9.2) 6.4 Restructuring expense 12.5 29.6 96.2 Accelerated cost recovery 38.4 26.7 Purchase of mortgage loans (1,713.7) (769.2) Proceeds from sale and principal collections of mortgage loans 1,672.6 703.4 Changes in current assets and liabilities: Accounts receivable (111.3) (47.0) (38.7) Accrued unbilled revenues (64.9) 17.6 (27.7) Materials and supplies 15.9 6.0 61.1 Accounts payable, trade 113.8 73.8 (37.6) Accrued interest and taxes 118.6 (17.5) 33.6 Other changes (89.9) (161.3) 3.8 ------------------------------------ Net cash flows from operating activities 1,262.2 1,032.2 1,171.3 ------------------------------------ Cash flows from (used in) financing activities: Issuance of common stock 176.2 169.7 161.7 Preferred securities of subsidiary trust 250.0 135.0 Issuance of long-term debt: Virginia Power 270.0 24.5 240.0 East Midlands 1,898.5 342.5 Nonrecourse-nonutility 4,113.0 434.5 54.3 Issuance (repayment) of short-term debt (98.5) 134.5 101.1 Repayment of long-term debt and preferred stock (4,377.0) (336.5) (553.0) Common dividend payments (478.0) (460.1) (448.7) Other 74.6 (4.5) (20.5) ------------------------------------ Net cash flows from (used in) financing activities 1,828.8 304.6 (330.1) ------------------------------------ Cash flows from (used in) investing activities: Utility capital expenditures (648.7) (484.0) (577.5) Acquisition of natural gas and independent power properties (52.6) (271.2) (128.5) Loan originations (1,147.2) Repayments of loan originations 1,077.2 Purchase of East Midlands (1,901.5) (342.5) Sale of businesses 123.3 Purchase of fixed assets (124.4) (34.8) (27.4) Purchase of marketable securities (8.5) (8.8) (61.8) Sale of marketable securities 127.7 Additions to mortgage investments (138.4) (58.3) Acquisitions of businesses (144.5) (19.5) (52.4) Other investments (42.6) (73.6) (73.6) ------------------------------------ Net cash flows used in investing activities (2,880.2) (1,292.7) (921.2) ------------------------------------ Increase (decrease) in cash and cash equivalents $ 210.8 $ 44.1 $ (80.0) Cash and cash equivalents at beginning of the year 110.8 66.7 146.7 ------------------------------------ Cash and cash equivalents at end of the year $ 321.6 $ 110.8 $ 66.7 ------------------------------------
The accompanying notes are an integral part of the Consolidated Financial Statements. 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND FINANCIAL CONDITION (unaudited) Introduction In Management's Discussion and Analysis of Cash Flows and Financial Condition, Dominion Resources' and its subsidiaries' general financial condition and changes in financial condition are discussed by addressing the following topics: o What our capital expenditures were for the year 1997 and what we project them to be for the year 1998. In addition, we will disclose trends that may have a material effect on our financial condition over the next couple of years. o The sources of funds utilized to pay for the expenditures incurred during 1997 and the anticipated future capital expenditures. Consolidated Financing Activity Dominion Resources funds its operations and supports the financing needs of its subsidiaries primarily as follows: (1) A $950 million shelf registration through which the company may, over the next two years, sell any combination of debt, preferred or common securities up to the $950 million limit. (2) The company continues to raise capital from sales of common stock through its equity plans. The company has raised over $100 million in each of the last nine years from sales through these plans. (3) The company also sells commercial paper backed by lines of credit and provides the proceeds to its subsidiaries under intercompany credit agreements. Our 1997 financing activities were focused on the acquisition of East Midlands and the related refinancings. A discussion of these activities follows: EAST MIDLANDS FINANCING Dominion Resources, through wholly owned UK financing subsidiaries, initially financed 100 percent of the 1.3 billion pounds sterling ($2.2 billion) acquisition of East Midlands with interim debt. The funds necessary for the purchase were obtained in part from borrowings of approximately 640 million pounds sterling ($1 billion) under a short-term credit agreement and borrowings of 700 million pounds sterling ($1.2 billion) under a five-year revolving credit agreement, both guaranteed by Dominion Resources. During 1997, the entire short-term credit agreement and a portion of the five-year revolving credit agreement were refinanced with 800 million pounds sterling ($1.3 billion) raised from three bond offerings and one private bank facility, all on a non-recourse basis to Dominion Resources. The final target capital structure calls for the remaining 40 percent of the acquisition cost, currently financed on an interim basis with the 5-year revolving credit facility, to be refinanced with equity or equity equivalents. In December of 1997, $250 million (150 million pounds sterling) in Capital Securities were issued by Dominion Resources Capital Trust I as the first part of the equity capitalization of the East Midlands acquisition. In January of 1998, Dominion Resources raised an additional $275 million (168 million pounds sterling) through the issue of 6.8 million shares of common stock (see Note S), also as a part of the program to capitalize the East Midlands acquisition. The remaining portion of the five-year revolving credit agreement is expected to be refinanced with equity or equity equivalents during the remainder of its five-year term. The capital markets will continue to dictate the timing and methods of completing the equity capitalization of East Midlands. EQUITY PLANS Dominion Resources raised capital from sales of common stock through the following plans: o Automatic Dividend Reinvestment and Stock Purchase Plan; o Customer Stock Purchase Plan; o Dominion Direct Investment; and o Employee Savings Plan. On July 8, 1996, the company established Dominion Direct Investment. Dominion Direct Investment continues and expands the Automatic Dividend Reinvestment and Stock Purchase Plan. Dominion Resources will continue to raise capital through the Dominion Direct Investment and the Employee Savings Plans in 1998. Proceeds from these plans were (in millions): 1997-$176.2; 1996-$164.2; and 1995-$136.9. Reflected in the amounts of the proceeds from these plans were the repurchases of 136,800 shares of common stock in 1996 for an aggregate price of $5.5 million and 685,500 shares of common stock in 1995 for an aggregate price of $24.8 million. COMMERCIAL PAPER Dominion Resources' nonutility subsidiaries may finance their working capital for operations from the proceeds from Dominion Resources commercial paper sales. Dominion Resources sells its commercial paper in regional and national markets and provides the proceeds to the nonutility subsidiaries under the terms of intercompany credit agreements. At the end of 1997, Dominion Resources supported these borrowings through bank lines of credit totaling $500.8 million. The nonutility subsidiaries repay Dominion Resources through cash flows from operations and 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. East Midlands has a commercial paper program with a limit of 200 million pounds sterling. The program is supported by a 200 million 38 pounds sterling five-year revolving credit facility and is utilized principally to fund its operations. Virginia Power LIQUIDITY AND CAPITAL RESOURCES Operating activities continue to be a strong source of cash flow, providing $1,091 million in 1997 compared to $1,115 million in 1996. The decrease of $24 million (or 2 percent) from the previous year is attributable to normal business fluctuations. Over the past three years, cash flow from operating activities has, on average, covered 134 percent of its total construction requirements and provided 81 percent of its total cash requirements. Virginia Power's remaining cash needs are met generally with proceeds from the sale of securities and short-term borrowings. Cash from (used in) financing activities was as follows: - -------------------------------------------------------------------------- 1997 1996 1995 (millions) Issuance of long-term debt $ 270.0 $ 24.5 $ 240.0 Repayment of long-term debt and preferred stock (311.3) (284.1) (439.0) Issuance of securities of subsidiary trust 135.0 Issuance (repayment) of short-term debt (86.2) 143.4 169.0 Common dividend payments (379.9) (385.8) (394.3) Other (49.2) (48.8) (58.0) --------------------------------- Total $(556.6) $(550.8) $(347.3) --------------------------------- Financing activities have represented a net outflow of cash in recent years as strong cash flow from operations and the absence of major construction programs have reduced Virginia Power's reliance on debt financing. Virginia Power has taken advantage of declining interest rates by issuing new debt at lower rates as higher-rate debt has matured. For example, in 1997, $311.3 million of Virginia Power's long-term debt securities matured with an average effective rate of 8.08%. As a partial replacement for this maturing debt, Virginia Power issued $270 million of long-term debt securities during the year with an average effective rate of 6.84%. Virginia Power currently has three shelf registration statements effective with the Securities and Exchange Commission from which it can obtain additional debt capital: $400 million of Junior Subordinated Debentures filed in January 1997, $575 million of First and Refunding Mortgage Bonds, and $200 million of Medium-Term Notes, Series F. The remaining principal amount of debt that can be issued under these registrations totals $915 million. An additional capital resource of $100 million in preferred stock is also registered with the Securities and Exchange Commission. Cash (used in) investing activities was as follows: - -------------------------------------------------------------------------- 1997 1996 1995 (millions) Utility plant expenditures $(397.0) $(393.8) $(519.9) Nuclear fuel (84.8) (90.2) (57.6) Nuclear decommissioning contributions (36.2) (36.2) (28.5) Sale of accounts receivable, net (160.0) Purchase of assets (19.8) (13.7) Other (8.3) (12.5) (11.1) --------------------------------- Total $(546.1) $(546.4) $(777.1) --------------------------------- Investing activities in 1997 resulted in a net cash outflow of $546.1 million, primarily due to $397.0 million of construction expenditures and $84.8 million of nuclear fuel expenditures. The construction expenditures included approximately $252.4 million for transmission and distribution projects, $52.1 million for production projects, $49.7 million for information technology projects and $42.8 million for other projects. CAPITAL REQUIREMENTS CAPACITY - Virginia Power anticipates that kilowatt-hour sales will grow approximately 2.4 percent each year through 2000. We will continue to pursue capacity acquisition plans to meet the anticipated load growth and maintain a high degree of service reliability. The additional capacity may be purchased from others or built by Virginia Power if we can build capacity at a lower overall cost. Virginia Power has long-term purchase agreements with Hoosier (400 Mw) and AEP (500 Mw) which will expire on December 31, 1999. The company presently anticipates adding 584 Mw of market purchases beginning in the year 2000 to meet future load growth. FIXED ASSETS - Virginia Power's construction and nuclear fuel expenditures during 1998, 1999 and 2000 are expected to total $588.1 million, $476.2 million and $395.1 million, respectively. Virginia Power has adopted a plan to improve customer service and is spending in excess of $100 million. Virginia Power estimates that all of these expenditures will be met through cash flow from operations. LONG-TERM DEBT - Virginia Power will require $333.5 million to meet maturities of long-term debt in 1998, which it expects to meet with cash flow from operations and refinancing of debt maturities. Other capital requirements will be met through a combination of sales of securities and short-term borrowings. 39 Dominion UK LIQUIDITY AND CAPITAL RESOURCES Dominion UK funds its capital requirements through cash from operations, long- and short-term debt facilities, and equity contributions from Dominion Resources. In 1997, Dominion UK funded the acquisition of East Midlands and the first of two installments of the windfall profits tax. While the entire windfall profits tax was expensed in 1997, the cash payments are to be made in two installments, half in December 1997 and half in December 1998. Cash flows from operations at East Midlands for 1997 were $(83.4) million and were due primarily to operating profit and working capital management. A comparison is not made to the year 1996 or 1995 because East Midlands did not become a part of Dominion Resources' consolidated entity until 1997. Cash from (used in) financing activities was as follows: - ----------------------------------------------------- 1997 (millions) Contribution from parent $254.3 Issuance of long-term debt 1,898.5 Other 47.6 -------- Total $2,200.4 ======== During 1997, cash from financing activities was primarily due to the funding of the acquisition of East Midlands by contributions from Dominion Resources ($254 million) and the issuance of the following debt: o 321 million pounds sterling ($528 million) under a revolving credit agreement and 200 million pounds sterling ($329 million) under a private bank facility, the proceeds of which were used to fund the purchase of East Midlands, and o $819 million of five- and ten-year Senior notes and 100 million pounds sterling ($165 million) of Eurobonds, which were used to pay down debt borrowed under a short-term credit agreement. o In addition, $54 million was borrowed to fund the acquisition of an additional 40% interest in the Corby Power Station. Cash from (used in ) investing activities was as follows: - ----------------------------------------------------- 1997 (millions) Utility plant expenditures $ (166.9) Purchase of fixed assets (67.3) Purchase of East Midlands (1,901.5) Other 0.3 --------- Total $(2,135.4) ========= During 1997, cash flows used in investing activities was utilized primarily to acquire the outstanding shares of stock in East Midlands, fund the investment in fixed assets, principally on the distribution network, and acquire an additional 40% interest in the Corby Power Station. CAPITAL REQUIREMENTS The projected 1998 capital requirements of Dominion UK include approximately $229 million for capital expenditures, predominantly for the electricity distribution network and the completion of new systems and facilities required for the opening up of competition in the electricity and gas markets. Interest payments are expected to be $216 million and approximately $80 million will also be required for the second and final installment of the windfall profits tax. The capital requirements are expected to be funded by cash generated from operations and other existing financing sources. The company anticipates approximately $300 million of equity contributions from the parent during 1998. To the extent these sources are available, they will be used to repay acquisition debt. Dominion Energy LIQUIDITY AND CAPITAL RESOURCES Dominion Energy funds its capital requirements through cash from 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 $59.8 million in 1997, as compared to 1996, primarily due to: net income from power generation assets in Peru acquired in August 1996; generally higher natural gas prices; and greater production volumes due to the acquisition of natural gas properties in the Gulf Coast area in March 1996 and in Michigan in January 1997. 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: - ------------------------------------------------------------------- 1997 1996 1995 (millions) Contribution from parent $ 75.0 $149.3 Issuance of long-term debt $ 107.9 221.7 Repayment of debt (212.7) (8.9) (72.5) Common dividend payments (48.3) (43.3) (31.6) Issuance of intercompany debt 21.9 19.7 32.4 Other 0.2 10.0 9.5 ----------------------------- Total $(131.0) $274.2 $ 87.1 ----------------------------- 40 Cash from (used in) investing activities was as follows: - ------------------------------------------------------------------- 1997 1996 1995 (millions) Purchase of fixed assets $(11.7) $ (15.8) $ (25.1) Purchase of independent power properties (32.3) Purchase of natural gas properties (52.6) (93.3) (71.1) Sale of business 123.3 Sale of trust units 16.4 Acquisition of business (28.0) (228.2) Other (21.2) (16.7) (24.1) ----------------------------- Total $ 9.8 $(354.0) $(136.2) ----------------------------- During 1997, the major source of cash flows from investing activities was the sale of a portion of Dominion Energy's generating business in Peru for $123.3 million. These funds were used primarily to pay down long-term debt. CAPITAL REQUIREMENTS Capital requirements for Dominion Energy in 1998 are forecasted to be approximately $388 million. These requirements consist of: oil and gas expenditures of $52 million and power generation expenditures of $336 million (including the Kincaid acquisition). Sources for these capital requirements will be nonrecourse debt, cash flows from operations, borrowings from the revolving credit facility and, if necessary, equity from Dominion Resources. It should be noted that amounts enumerated above are estimates; consequently, actual amounts may differ. Dominion Capital LIQUIDITY AND CAPITAL RESOURCES Dominion Capital funds its capital requirements through cash from operations, an 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. Cash flows used in operations for 1997 increased by $138.7 million as compared to 1996 primarily due to a decrease in the net cash outflow of mortgage loan activity for Saxon Mortgage. 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. Cash from (used in) financing activities was as follows: - ------------------------------------------------------------------- 1997 1996 1995 (millions) Contribution from parent $162.0 $ 85.0 $150.0 Issuance of long-term debt 3,910.7 104.7 16.1 Repayment of long-term debt (3,865.3) (52.4) (41.5) Common dividend payments (43.1) (30.7) (22.7) Issuance (repayment) of intercompany debt 29.0 79.6 (52.1) Other 32.7 (0.4) (4.5) ----------------------------- Total $226.0 $185.8 $ 45.3 ----------------------------- During 1997, cash flows from financing activities were $226 million, primarily due to the acquisition of the remaining 50 percent interest in First Source Financial, loan originations and investment in marketable debt securities. Cash from (used in) investing activities was as follows: - ------------------------------------------------------------------- 1997 1996 1995 (millions) Investments in affiliates $ (96.0) $(19.5) $(52.4) Loan originations, net (70.0) Other (27.2) (23.9) (32.9) ----------------------------- Total $(193.2) $(43.4) $(85.3) ----------------------------- During 1997, cash flows used in investing activities increased primarily due to the acquisition of the remaining 50 percent interest in First Source Financial and net investment in marketable securities. CAPITAL REQUIREMENTS Dominion Capital's principal focus is growing its financial services companies. First Source Financial will increase its loan portfolio from $970 million to approximately $1.2 billion in 1998. Saxon Mortgage plans to generate over $2 billion in loan originations primarily in the sub-prime credit arena during 1998. Cambrian, a merchant banking enterprise for emerging independent oil and natural gas producers, will expand its loan portfolio to approximately $110 million in 1998. To finance these expansion plans in 1998, Dominion Capital plans to utilize approximately $75 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. 41 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, municipalities, power marketers and other utilities. The Virginia service area comprises about 65 percent of Virginia's total land area, but accounts for over 80 percent of its population. Dominion Resources recently acquired East Midlands in 1997, which is primarily a distribution and supply company. East Midlands operates a distribution system serving a region of some 6,200 square miles in east central England and it supplies electricity to 2.3 million customers, including businesses across the country. The company also operates business subsidiaries active in independent power production, the acquisition and sale of natural gas reserves, financial services, and real estate. Some of the independent power and natural gas projects are located in foreign countries. Net investments of approximately $374.6 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. 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 services rendered, commodities delivered or contracts settled. Dividend income on securities owned is recognized on the ex-dividend date. Interest income is accrued on the unpaid principal balance. INVESTMENTS IN AFFILIATES 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. Costs in excess of net assets acquired from equity investments are amortized over periods not to exceed 40 years. 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 trading is amortized in proportion to the income estimated to be received during the life. PROPERTY, PLANT AND EQUIPMENT Utility plant at Virginia Power and East Midlands is recorded at original cost, which includes labor, materials, services, 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 1997, 1996, and 1995, $3.5 million, $6.3 million, and $14.1 million of interest cost was capitalized, respectively. Major classes of property, plant and equipment and their respective balances are: - ----------------------------------------------------------------- At December 31, 1997 1996 (millions) UTILITY: Production $ 7,973.9 $ 7,691.9 Transmission 1,415.7 1,386.5 Distribution 6,210.7 4,385.4 Other electric 1,127.1 862.9 Plant under construction 240.9 180.1 Nuclear fuel 854.3 843.8 ------------------------- Total utility 17,822.61 5,350.6 ------------------------- NONUTILITY: Natural gas properties 521.8 492.4 Independent power properties 920.3 869.2 Other 254.5 103.6 ------------------------- Total nonutility 1,696.6 1,465.2 ------------------------- Total property, plant and equipment $ 19,519.2 $ 16,815.8 ------------------------- 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 1997, 1996 and 1995. 42 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. Surry North Anna - ----------------------------------------------------------------------- Unit 1 Unit 2 Unit 1 Unit 2 NRC license expiration year 2012 2013 2018 2020 Method of decommissioning DECON DECON DECON DECON (millions) Current cost estimate (1994) dollars $272.4 $274.0 $247.0 $253.6 External trusts balance at December 31, 1997 156.51 151.81 134.2 126.6 1997 contribution to external trusts 10.6 10.8 7.6 7.2 ----------------------------------------- When Virginia Power's nuclear units cease operations, it is obligated to decontaminate or remove radioactive contaminants so that the property will not require Nuclear Regulatory Commission (NRC) oversight. This phase of a nuclear power plant's life cycle is termed decommissioning. While the units are operating, Virginia Power collects from ratepayers amounts that, when combined with investment earnings, will be used to fund this future obligation. The amount being accrued for decommissioning is equal to the amount being collected from ratepayers and is included in depreciation, depletion and amortization expense. The decommissioning collections were $45.8 million, $36.2 million and $28.5 million in 1997, 1996 and 1995, respectively. These dollars are deposited into external trusts through which the funds are invested. Net earnings of the trusts' investments are included in Other Income. In 1997, 1996 and 1995 net earnings were $20.5 million, $16 million and $15.9 million, respectively. The accretion of the decommissioning obligation is equal to the trusts' net earnings and is also recorded in Other Income. Thus, the net impact of the trusts on Other Income is zero. The accumulated provision for decommissioning, which is included in Accumulated Depreciation, Depletion and Amortization in the company's Consolidated Balance Sheets, includes the accrued expense and accretion described above and any unrealized gains and losses on the trusts' investments. At December 31, 1997, the net unrealized gains were $149.5 million, which is an increase of $69 million over the December 31, 1996 amount of $80.5 million. The total accumulated provision for decommissioning at December 31, 1997 was $578.7 million. It was $443.3 million at December 31, 1996. The total estimated cost to decommission Virginia Power's four nuclear units is $1 billion based upon a site-specific study that was completed in 1994. Virginia Power plans to update this estimate in 1998. The cost estimate assumes that the method of completing decommissioning activities is prompt dismantlement. This method assumes that dismantlement and other decommissioning activities will begin shortly after cessation of operations, which under current operating licenses will begin in 2012 as detailed in the table. The FASB is reviewing the accounting for nuclear plant decommissioning. In 1996, FASB 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 unit. If the industry's accounting were changed to reflect FASB's tentative proposal, then the annual provisions for nuclear decommissioning would increase. During its deliberations, the FASB expanded the scope of the project to include similar unavoidable obligations to perform closure and post-closure activities for non-nuclear power plants. Therefore, any forthcoming standard may also change industry plant depreciation practices. Any impact related to other company assets cannot be determined at this time. Independent power properties and East Midland's fixed assets are depreciated using the straight-line method based on estimated useful lives ranging from 30 to 40 years. Natural gas properties are depleted using the units-of-production method. 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. FOREIGN CURRENCY TRANSLATION Dominion Resources translates foreign currency financial statements by adjusting balance sheet accounts using the exchange rate at the balance sheet date and income statement accounts using the average exchange rate for the year. Translation gains and losses are recorded in shareholder's equity. Gains and losses resulting from the settlement of transactions in a currency other than the functional currency are reflected in income. DEFERRED CAPACITY AND FUEL EXPENSES Approximately 90 percent of Virginia Power's fuel expenses and 80 percent of its purchased power capacity expenses incurred as part of providing regulated electric service 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. 43 GOODWILL Goodwill is the excess of the cost of net assets acquired in business combinations over their fair value. It is amortized on a straight-line basis over periods ranging from 25 to 40 years. The company evaluates goodwill for impairment at least annually. 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 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 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 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. LOANS RECEIVABLE, NET Loans receivable are stated at their outstanding principal balance net of the allowance for credit losses and any deferred fees or costs. Origination fees net of certain direct origination costs are deferred and recognized as an adjustment of the yield of the related loans receivable. The allowance for credit losses is established through provisions for credit losses charged against income. Loans deemed to be uncollectible are charged against the allowance for credit losses, and subsequent recoveries, if any, are credited to the allowance. At December 31, 1997, the allowance for credit losses was $17.5 million. MORTGAGE INVESTMENTS In accordance with SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," mortgage investments, which had been held entirely as available for sale as defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," were reclassified as trading securities. Changes in the fair value of the mortgage investments are reported in operating results in the current period. No material gain or loss resulted from the reclassification. 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 AND FUTURES-OTHER THAN TRADING Dominion Resources utilizes futures and forward contracts and derivative instruments, including swaps, caps and collars, to manage exposure to fluctuations in interest rates, foreign currency exchange rates and natural gas and electricity prices. These futures, forwards and derivative instruments are deemed effective hedges when the item being hedged and the underlying financial or commodity instrument show strong historical correlation. Dominion Resources uses deferral accounting to account for futures, forwards and derivative instruments which are designated as hedges. Under this method, gains and losses (including the payment of any premium) related to effective hedges of existing assets and liabilities are recorded on the balance sheet and recognized in earnings in conjunction with earnings of the designated asset or liability. Gains and losses related to effective hedges of firm commitments and anticipated transactions are included in the measurement of the subsequent transaction. Cash flows from derivatives designed as hedges are reported in Net Cash Flows from Operating Activities. DERIVATIVES AND FUTURES-TRADING The fair value method, which is used for those derivative transactions which do not qualify for settlement or deferral accounting, requires that derivatives are carried on the balance sheet at fair value with changes in that value recognized in earnings or stockholder's equity. Virginia Power uses this method for its wholesale power group's trading activities. Options, exchange-for-physical contracts, basis swaps and futures contracts are marked to market with resulting gains and losses reported in earnings. Fixed price forward contracts, initiated for trading purposes, are also marked to market with resulting gains and losses reported in earnings. For exchange-for-physical contracts, basis swaps, fixed price forward contracts, and options which require physical delivery of the underlying commodity, market value reflects management's best estimates considering over-the-counter quotations, time value and volatility factors of the underlying commitments. Futures contracts and options on futures contracts are marked to market based on closing exchange prices. Gains and losses resulting from marking positions to mar- 44 ket are reported in Other Income and Expense. Net gains and losses resulting from futures contracts and options on futures contracts and settlement of basis swaps are included in Operating Expenses. Amortization of option premiums associated with sales and purchases are included in Operating Revenues and Income and Operating Expenses, respectively. Purchased options and options sold are reported in Deferred Charges and Other Assets and in Deferred Credits and Other Liabilities, respectively, until exercise or expiration. Gains and losses are reported in Other Income and Expense. Electric options exercised are reflected in the recording of related purchases or sales of electricity as operating expenses and operating revenues, respectively. Upon expiration, electric options written are recognized in operating revenues and options purchased are recognized in Operating Expenses. Cash flows from trading activities are reported in Net Cash Flows from Operating Activities. CASH Current banking arrangements generally do not require checks to be funded until actually presented for payment. At December 31, 1997 and 1996, the company's accounts payable included the net effect of checks outstanding but not yet presented for payment of $62.3 million and $72.6 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: - -------------------------------------------------------------------- 1997 1996 1995 (millions) CASH PAID DURING THE YEAR FOR: Interest (reduced for net costs of borrowed funds capitalized) $ 439.6 $ 373.0 $ 376.0 Federal income taxes 190.0 169.8 159.6 NON-CASH TRANSACTIONS FROM INVESTING AND FINANCING ACTIVITIES: Note issued in acquisition of business 18.4 47.5 Exchange of securities 51.9 12.1 12.3 Equity contribution for Wolverine acquisition 21.4 RECLASSIFICATION Certain amounts in the 1996 and 1995 Consolidated Financial Statements have been reclassified to conform to the 1997 presentation. NOTE B Taxes - -------------------------------------------------------------------------------- Income before provision for income taxes, classified by source of income, before minority interests was as follows: - -------------------------------------------------------------------- 1997 1996 1995 (millions) U.S. $ 712.7 $ 683.5 $ 609.5 Non-U.S (33.9) 17.5 11.0 --------------------------- Total $ 678.8 $ 701.0 $ 620.5 --------------------------- The provision for income taxes, classified by the timing and location of payment, was as follows: - -------------------------------------------------------------------- 1997 1996 1995 (millions) CURRENT U.S. $ 221.9 $ 153.7 $ 178.4 State 9.1 3.0 0.9 Non-U.S 24.7 4.3 1.7 --------------------------- Total Current 255.7 161.0 181.0 --------------------------- DEFERRED U.S. 22.1 71.9 19.2 State 0.1 3.3 3.8 Non-U.S (28.0) --------------------------- Total Deferred (5.8) 75.2 23.0 --------------------------- Amortization of deferred investment tax credits net (16.9) (16.9) (16.9) --------------------------- Total Provision $ 233.0 $ 219.3 $ 187.1 --------------------------- The components of deferred income tax expense are as follows: - -------------------------------------------------------------------- 1997 1996 1995 (millions) Liberalized depreciation $ 4.1 $ 53.8 $ 56.6 Indirect construction costs 4.9 3.4 (13.8) Other plant related items 5.1 12.6 12.1 Deferred fuel (3.3) 19.1 (2.2) Separation costs 6.5 (2.6) (12.4) MBS basis differences 24.6 Deferred capacity 14.4 3.2 (3.8) Contingent claims (25.9) (0.1) (1.2) Tax rate change (16.6) Deferred state taxes 0.1 3.3 3.8 Other, net (19.7) (17.5) (16.1) --------------------------- Total $ (5.8) $ 75.2 $ 23.0 --------------------------- The statutory U.S. federal income tax rate reconciles to the effective income tax rates as follows: - -------------------------------------------------------------------- 1997 1996 1995 U.S. statutory rate 35% 35% 35% Preferred dividends of Virginia Power 1.8 1.8 2.5 Amortization of investment tax credits (2.5) (2.4) (2.7) Nonconventional fuel credit (3.7) (3.8) (4.5) Benefits and taxes related to foreign operations 4.3 0.2 0.3 State taxes net of federal benefit 0.9 0.6 0.5 Other, net (1.5) (0.1) (0.9) --------------------------- Effective tax rate 34.3% 31.3% 30.2% --------------------------- 45 The effective income tax rate includes state and foreign income taxes. The 1997 budget of the new Labour government in the United Kingdom reduced the corporate income tax rate to 31% effective April 1, 1997. Income tax expense from continuing operations has been reduced by $16.6 million to reflect the decrease in deferred tax liabilities resulting from the 2 percent decrease in the corporate tax rate. Dominion Resources net noncurrent deferred tax liability is attributable to: - ------------------------------------------------------------ 1997 1996 (millions) ASSETS: Deferred investment tax credits $ 84.4 $ 90.3 Other 192.3 ------------------- Total deferred income tax asset 276.7 90.3 ------------------- LIABILITIES: Depreciation method and plant basis differences 1,924.2 1,463.5 Income taxes recoverable through future rates 169.5 168.8 Partnership basis differences 126.4 130.3 Other 75.0 71.0 ------------------- Total deferred income tax liability 2,295.1 1,833.6 ------------------- Net deferred income tax liability $2,018.4 $1,743.3 ------------------- NOTE C 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, 1997 1996 (millions) Deferred capacity expenses $ 47.3 $ 6.1 Income taxes recoverable through future rates 478.9 477.0 Cost of decommissioning DOE uranium enrichment facilities 67.6 73.5 Deferred losses on reacquired debt, net 85.4 91.5 North Anna Unit 3 project termination costs 42.3 73.1 Other 55.1 52.7 ------------------- Total $ 776.6 $ 773.9 ------------------- 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 $776.6 million of regulatory assets at December 31, 1997, Virginia Power does not earn a return on $15.4 million of regulatory assets, effectively excluded from rate base, to be recovered over various recovery periods up to 21 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 $235 million at December 31, 1997. 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. NOTE D Jointly Owned Plants - -------------------------------------------------------------------------------- The following information relates to Virginia Power's proportionate share of jointly owned plants at December 31, 1997. - -------------------------------------------------------------------- Bath County North Pumped Anna Clover Storage Power Power Station Station Station Ownership interest 60.0% 88.4% 50.0% (millions) Utility plant in service $1,072.9 $1,819.4 $ 533.3 Accumulated depreciation 229.1 819.2 26.3 Nuclear fuel 403.6 Accumulated amortization of nuclear fuel 383.4 Construction work in progress 0.1 61.2 1.1 --------------------------- 46 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 E Short-Term Debt - -------------------------------------------------------------------------------- Dominion Resources and its subsidiaries have credit agreements with various expiration dates. These agreements provided for maximum borrowings of $5,402.6 million and $3,882.4 million at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, $1,907.3 million and $714.5 million, respectively, was borrowed under such agreements and classified as long-term debt. Dominion Resources credit agreements supported $403.4 million and $308 million of Dominion Resources commercial paper at December 31, 1997 and 1996, 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. It was renewed on June 6, 1997 for 364 days. The total amount of commercial paper outstanding was $226.2 million and $312.4 million at December 31, 1997 and 1996, respectively. A subsidiary of Dominion Capital also had $85.5 million and $91 million of nonrecourse commercial paper outstanding at December 31, 1997 and 1996, respectively. East Midlands has a commercial paper program with a limit of 200 million pounds sterling ($329 million). The program is supported by 200 million pounds sterling ($329 million) five-year revolving credit facility and is utilized principally to fund its operations. There was no commercial paper outstanding at December 31, 1997. A total of $385.5 million and $390 million of the commercial paper was classified as long-term debt at December 31, 1997 and 1996, 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) 1997 Commercial paper $329.6 5.8% Term-notes 45.5 7.3% ------ Total $375.1 ====== 1996 Commercial paper $320.5 5.5% Term-notes 57.7 7.4% ------ Total $378.2 ====== NOTE F 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) 1997 Equity $185.3 $10.9 $ 5.4 $190.8 e996 Equity $635.8 $ 8.2 $10.1 $633.9 Debt 58.5 58.5 --------------------------------------------------- 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, 1997 and 1996, the proceeds from the sales of available-for-sale securities were $122.2 million and $33.4 million, respectively. The gross realized gains and losses were $12.8 million and $0.5 million for 1997 and $2.4 million and $1 million for 1996, 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, 1997 and 1996 of $8.4 million, net of tax, and $5.6 million, net of tax, respectively. The gross realized gains and losses included in earnings from transfers of securities from the available-for-sale category into the trading category was $5 million and $3.6 million, respectively. The changes in net realized holding gain or loss on trading securities increased earnings during the years ended December 31, 1997 and 1996 by $0.6 million and $3.1 million, respectively. 47 NOTE G Fair Value of Financial Instruments - -------------------------------------------------------------------------------- The fair value amounts of Dominion Resources' 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, 1997 1996 1997 1996 (millions) ASSETS: Cash and cash equivalents $ 321.6 $ 110.8 $ 321.6 $ 110.8 Trading securities 240.7 16.4 240.7 16.4 Mortgage loans in warehouse 88.2 65.8 91.4 67.9 Available-for-sale securities 190.8 692.4 190.8 692.4 Loans receivable 959.0 987.3 Nuclear decommissioning trust funds 569.1 443.3 569.1 443.3 LIABILITIES: Short-term debt $ 375.1 $ 378.2 $ 375.1 $ 378.2 Long-term debt 8,809.6 5,478.3 9,151.0 5,560.3 PREFERRED SECURITIES OF SUBSIDIARY TRUSTS $ 385.0 $ 135.0 $ 387.7 $ 135.0 PREFERRED STOCK $ 180.0 $ 180.0 $ 186.6 $ 185.8 LOAN COMMITMENTS $ 675.9 $ 547.0 DERIVATIVES--RELATING TO: Foreign currency risk $ 9.8 $ (26.8) $ 9.8 Natural gas options in a net receivable (payable) position $ 0.1 $ 0.6 $ 0.8 $ (0.6) ------------------------------------------
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. LOANS 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 TRUSTS 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, 1997 and 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, 1997 and 1996 was immaterial. 48 NOTE H Long-Term Debt - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- At December 31, 1997 1996 (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 $150.0 150.0 1992 Series F, 6.25%, due 1998 75.0 75.0 1989 Series B, 8.875%, due 1999 100.0 100.0 1993 Series C, 5.875%, due 2000 135.0 135.0 Various series, 6.75%-7.625%, due 2007 415.0 215.0 Various series, 6%-8%, due 2001-2004 805.0 805.0 Various series, 5.45%-8.75%, due 2021-2025 1,144.5 1,144.5 ------------------ TOTAL FIRST AND REFUNDING MORTGAGE BONDS 2,824.5 2,923.8 ------------------ OTHER LONG-TERM DEBT: DOMINION RESOURCES: Commercial paper(2) 300.0 300.0 VIRGINIA POWER: Term notes, fixed interest rate, 6.15%-10%, due 1996-2003 551.1 503.1 Tax exempt financings(3): Money market municipals, due 2007-2027(4) 488.6 488.6 Convertible interest rate, due 2022 10.0 DOMINION UK: Eurobonds, fixed rate, 8.125%-12%, due 2006-2016 643.2 Senior notes, fixed rate, 7.10%-7.45%, due 2002-2007 822.6 Revolving credit agreement, due 2001(5) 857.1 342.5 Term loan, due 2002(6) 329.0 Loan notes, due 2007(7) 19.6 Revolving credit agreement, due 1998(8) 27.1 Revolving credit agreement, due 2002(9) 28.0 Finance lease(10) 255.5 Other borrowings(11) 16.4 ------------------ TOTAL OTHER LONG-TERM DEBT 4,348.2 1,634.2 ------------------ NONRECOURSE--NONUTILITY: DOMINION RESOURCES: Bank loans, 9.25%, due 2008 19.7 20.8 DOMINION ENERGY: Revolving credit agreements, due 2001(12) 255.0 320.0 Term loan, fixed rate, 5.445%, due 1998 15.0 35.0 Bank loans, fixed rate, 9.70%-9.92%, due 2005 20.0 32.5 Bank loans, 4.5%-6.64%, due 1996-2024 45.2 53.0 Term loan, due 2002(13) 8.0 DOMINION CAPITAL: Senior notes:(14) Fixed rate, 6.12%, due 2000 50.0 50.0 Fixed rate, 7.60%, due 2003 46.0 46.0 Term note, fixed rate, 12.1%, due 2006 44.6 44.1 Line of Credit, due 1998(15) 57.7 57.2 Note payable, fixed rate, 6.04%, due 2002 50.0 26.8 Term loan, fixed rate, 6.00%, due 1996-1997 5.0 Commercial paper(16) 85.5 90.0 Term loan, fixed rate, 6.5%, due 2001 38.0 47.2 Medium term notes, fixed rates, 4.93%-6.25%, due 1996-1998 134.0 104.0 Term loan, fixed rates, 6.5%-11.25%, due 1996-2001 13.0 13.5 Term loan, due 2008(17) 99.2 Revolving credit agreement(18) 6.8 Revolving credit agreement(19) 675.3 ------------------ TOTAL--NONUTILITY DEBT 1,663.0 945.1 ------------------ LESS AMOUNTS DUE WITHIN ONE YEAR: First and refunding mortgage bonds 225.0 299.3 Loans 433.4 12.0 Nonrecourse--nonutility 955.2 119.7 ------------------ TOTAL AMOUNT DUE WITHIN ONE YEAR 1,613.6 431.0 ------------------ LESS UNAMORTIZED DISCOUNT, NET OF PREMIUM 26.1 24.8 ------------------ TOTAL LONG-TERM DEBT $7,196.0 $5,047.3 ------------------ (1) Substantially all of Virginia Power's property is subject to the lien of the mortgage, securing its First and Refunding Mortgage Bonds. (2) See Note E to the Consolidated Financial Statements. (3) Certain pollution control equipment at Virginia Power's generating facilities has been pledged or conveyed to secure these financings. (4) Interest rates vary based on short-term tax-exempt market rates. For 1997 and 1996, the weighted average daily interest rates were 3.74% and 3.57%, respectively. Although these bonds are re-marketed within a one year period, they are classified as long-term debt because Virginia Power intends to maintain the debt and it is supported by long-term bank commitments. (5) The weighted average interest rate was 6.9% during 1997. (6) The weighted average interest rate was 7.56% during 1997. (7) The weighted average interest rate was 5.81% during 1997. (8) The weighted average interest rate was 7.66% during 1997. (9) The weighted average interest rate was 7.76% during 1997. (10) The weighted average interest rate was 4.6% during 1997. (11) The weighted average interest rate was 7.58% during 1997. (12) The weighted average interest rates during 1997 and 1996 were 6.06% and 5.89%, respectively. (13) The weighted average interest rate was 3.94% during 1997. (14) The Rincon Securities common stock owned by Dominion Capital is pledged as collateral to secure the loan. (15) The weighted average interest rates during 1997 and 1996 were 6.24% and 6.24%, respectively. (16) The weighted average interest rates during 1997 and 1996 were 5.57% and 5.37%, respectively. (17) The weighted average interest rate was 7.67% during 1997. (18) The weighted average interest rate was 5.63% during 1997. (19) The weighted average interest rate was 6.19% during 1997. Maturities (including sinking fund obligations) through 2002 are as follows (in millions): 1998-$1,613.6; 1999-$826; 2000-$349.1; 2001-$432.6; and 2002-$1,098.3. 49 NOTE I 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 1995 through 1997, the following changes in common stock occurred:
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- Shares Shares Shares Outstanding Amount Outstanding Amount Outstanding Amount (millions) Balance at January 1 181.2 $3,471.4 176.4 $3,303.5 172.4 $3,157.6 Changes due to: Dominion Direct Investment 3.7 142.2 1.9 70.9 Automatic Dividend Reinvestment and Stock Purchase Plan 1.4 55.1 2.9 107.6 Stock Purchase Plan for Customers of Virginia Power 1.0 23.2 1.4 45.8 Employee Savings Plan 0.9 34.0 0.5 20.5 0.2 8.3 Wolverine acquisition 1.9 21.4 Stock repurchase and retirement (0.1) (5.5) (0.7 (24.8) Other 0.1 4.6 0.1 3.7 0.2 9.0 ----------------------------------------------------------------- Balance at December 31 187.8 $3,673.6 181.2 $3,471.4 176.4 $3,303.5 -----------------------------------------------------------------
NOTE J 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, 1994 41,186 $41.05 11,076 $29.36 11,076 ============================================================ Awards granted--1995 25,320 $37.63 Exercised/distributed (21,576) $38.60 ------------------------------------------------------------ Balance at December 31, 1995 44,930 $40.92 11,076 $29.36 11,076 ============================================================ Awards granted--1996 79,784 $41.76 Exercised/distributed (29,433) $39.94 (475) $29.63 ------------------------------------------------------------ Balance at December 31, 1996 95,281 $41.61 10,601 $29.34 10,601 ============================================================ Awards granted--1997 53,884 $35.24 Exercised/distributed/forfeited (44,399) $39.42 (4,800) $29.25 ------------------------------------------------------------ Balance at December 31, 1997 104,766 $39.29 5,801 $29.42 5,801 ============================================================
In 1995, the FASB 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 years ended December 31, 1997 and 1996. East Midlands launched sharesave plans in December 1997 under which employees, who enter into Inland Revenue approved savings contract for periods of three or five years, are granted options to purchase shares in Dominion Resources common stock. Under these arrangements options were granted on December 22, 1997, on 149,881 shares to 918 employees under the three year plan and on 514,947 shares to 1,511 employees under the five year plan. No charge has been made to the income statement for the year ended December 31, 1997 with respect to the 20% discount on the market price of the options on their date of issue. The discount will be recorded as compensation expense over the periods of the plans. 50 NOTE K Obligated Mandatorily Redeemable Preferred Securities of Dominion Resources and Virginia Power Subsidiary Trusts - -------------------------------------------------------------------------------- In December 1997, Dominion Resources established Dominion Resources Capital Trust I (DR Capital Trust). DR Capital Trust sold 250,000 shares of Capital Securities for $250 million, representing preferred beneficial interests and 97 percent beneficial ownership in the assets held by DR Capital Trust. Dominion Resources issued $257.7 million of 7.83% Junior Subordinated Debentures (Debentures) in exchange for the $250 million realized from the sale of the Capital Securities and $7.7 million of common securities of DR Capital Trust. The common securities represent the remaining 3 percent beneficial ownership interest in the assets held by DR Capital Trust. The Debentures constitute 100 percent of DR Capital Trust assets. The Debentures are due December 1, 2027. The distribution rate on the Capital Securities and the interest rate on the Debentures are each subject to increase if Dominion Resources and DR Capital Trust do not comply with an agreement they made to exchange the Capital Securities and the Debentures, which were not registered under the securities laws at the time of issuance, for registered substantially identical securities within 180 days after the date of original issuance. Dominion Resources may redeem the Debentures prior to December 1, 2007 under certain conditions at a specified redemptive price. The Debentures may be redeemed on or after December 1, 2007 at another redemptive price. The Capital Securities are subject to mandatory redemption upon repayment of the Debentures at maturity or earlier redemption. At redemption, each Capital Security shall be entitled to receive a liquidation amount of $1,000 plus accumulated distributions from December 8, 1997. VP Capital Trust I (VP Capital Trust) was established as a subsidiary of Virginia Power for the sole purpose of selling $135 million of preferred securities (5.4 million shares at $25 par) in 1995. These securities represent preferred beneficial interests and 97 percent beneficial ownership in the assets held by VP Capital Trust. Virginia Power concurrently issued $139.2 million of its 1995 Series A, 8.05% Junior Subordinated Notes (the Notes) in exchange for the $135 million realized from the sale of the preferred securities and $4.2 million of common securities of VP Capital Trust. The preferred securities and the common securities represent the total beneficial ownership interest in the assets held by VP Capital Trust. The Notes are the sole assets of VP Capital Trust. The preferred securities are subject to mandatory redemption upon repayment of the Notes at a liquidation amount of $25 plus accrued and unpaid distributions, including interest. The Notes are due September 30, 2025. However, that date may be extended up to an additional ten years if certain conditions are satisfied. NOTE L 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 involuntary liquidation, dissolution or winding-up of Virginia Power, each share is entitled to receive $100 per share plus accrued dividends. Dividends are cumulative. Virginia Power preferred stock subject to mandatory redemption at December 31, 1997 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. There were no redemptions of preferred stock during 1997 and 1996. In 1995 Virginia Power redeemed 417,319 shares of its $7.30 dividend preferred stock subject to mandatory redemption. At December 31, 1997 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(3) 500,000 100.00 MMP 6/87(3) 750,000 100.00 MMP 10/88(3) 750,000 100.00 MMP 6/89(3) 750,000 100.00 MMP 9/92 series A(3) 500,000 100.00 MMP 9/92 series B(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 1997, 1996, and 1995, including fees for broker/dealer agreements, were 4.71%, 4.48%, and 4.93%, respectively. During the years 1995 through 1997, the following shares were redeemed: - ------------------------------------------------------ Year Dividend Shares 1995 $7.45 400,000 1995 7.20 450,000 ---------------- 51 NOTE M Retirement Plan, Postretirement Benefits and Other Benefits - -------------------------------------------------------------------------------- RETIREMENT PLAN Dominion Resources' Retirement Plan covers virtually all employees of Dominion Resources and its subsidiaries except for its U.K. subsidiary, East Midlands. 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 majority of East Midlands' employees joined a pension plan that is administered for the United Kingdom's electricity industry. The assets of this plan are held in a separate trustee-administered fund that is actuarially valued every three years. East Midlands and its participating employees contribute to their pension plan. The components of the provision for net periodic pension expense were as follows: 1997 1996 1995 - -------------------------------------------------------------------------- Non Total U.S. U.S. U.S. U.S. Year ending December 31, Plans Plan Plan Plan Plan (millions) Service costs benefits earned during the year $ 50.1 $ 27.5 $ 22.6 $ 26.7 $ 23.4 Interest cost on projected benefit obligation 147.2 64.2 83.0 61.1 54.9 Actual return on plan assets (231.0) (136.1) (94.9) (92.9) (172.3) Net amortization and deferral 65.9 65.9 30.6 114.9 --------------------------------------------- Net periodic pension cost $ 32.2 $ 21.5 $ 10.7 $ 25.5 $ 20.9 --------------------------------------------- The following table sets forth the Plan's funded status: 1997 1996 - ------------------------------------------------------------------------------- Non Total U.S U.S. U.S. As of December 31, Plans Plan Plan Plan (millions) Actuarial present value of benefit obligations: Accumulated benefit obligation: Vested $1,730.9 $646.6 $1,084.3 $586.7 Non Vested 79.0 77.5 1.5 73.3 ---------------------------------------- $1,809.9 $724.1 $1,085.8 $660.0 ---------------------------------------- Projected benefit obligation for service rendered to date 2,111.7 945.3 1,166.4 852.2 Plan assets at fair value, primarily listed stocks and corporate bonds 2,299.6 966.4 1,333.2 845.0 ---------------------------------------- Plan assets in excess of (less than) projected benefit obligation 187.9 21.1 166.8 (7.2) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions (73.9) 15.8 (89.7) 40.4 Unrecognized prior service cost 4.1 4.1 4.7 Unrecognized net asset at January 1, being recognized over 16 years beginning 1986 (18.5) (18.5) (21.8) ---------------------------------------- Prepaid pension cost included in other assets $99.6 $22.5 $77.1 $16.1 ---------------------------------------- Significant assumptions used in determining net periodic pension cost and the projected benefit obligation were: 1997 1996 - --------------------------------------------------------------------------- Non U.S. U.S. U.S. As of December 31, Plan Plan Plan Discount rates 7.75% 6.75% 8.0% Rates of increase in compensation levels 5.0% 4.75% 5.0% Expected long-term rate of return 9.5% 7.00% 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 benefit plans, the companies reserve the right to change, modify or terminate the plans. Net periodic postretirement benefit expense for 1997 and 1996 was as follows: - ---------------------------------------------------------------------------- Year ending December 31, 1997 1996 (millions) Service cost $ 12.7 $ 12.3 Interest cost 25.4 24.2 Return on plan assets (25.3) (16.6) Amortization of transition obligation 12.1 12.1 Net amortization and deferral 13.4 7.2 ------------------ Net periodic postretirement benefit expense $ 38.3 $ 39.2 ------------------ The following table sets forth the funded status of the plan: - ---------------------------------------------------------------------------- As of December 31, 1997 1996 (millions) Fair value of plan assets $176.6 $133.0 ------------------ Accumulated postretirement benefit obligation: Retirees $225.5 $202.7 Active plan participants 139.4 125.0 ------------------ Accumulated postretirement benefit obligation 364.9 327.7 ------------------ Accumulated postretirement benefit obligation in excess of plan assets (188.3) (194.7) Unrecognized transition obligation 181.9 194.1 Unrecognized net experience gain (1.3) (3.0) ------------------ Accrued postretirement benefit cost $ (7.7) $ (3.6) ------------------ 52 A one percent increase in the health care cost trend rate would result in an increase of $5.1 million in the service and interest cost components and a $39.9 million increase in the accumulated postretirement benefit obligation. Significant assumptions used in determining the postretirement benefit obligation were: - --------------------------------------------------------------------------- 1997 1996 Discount rates 7.75% 8.0% Assumed return on plan assets 9.0% 9.0% Medical cost trend rate 6% for first year 7% for first year 5% for second year 6% for second year Scaling down to Scaling down to 4.75% beginning in 4.75% beginning in the year 2000 the year 2000 ------------------------------------------ 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. Employer provided health care benefits are not common in the United Kingdom due to the country's national health care system. Accordingly, East Midlands does not provide health care benefits to the majority of its employees. NOTE N 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 has resulted in outsourcing, decentralization, reorganization and downsizing for portions of Virginia Power's operations. As part of this process, Virginia Power has evaluated 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 $18.4 million, $64.9 million and $117.9 million in 1997, 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 1998, 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 as management identifies the positions to be eliminated. Severance payments are being made over a period not to exceed twenty months. Through December 31, 1997, management had identified 1,977 positions to be eliminated. The recognition of severance costs resulted in a charge to operations in 1997, 1996 and 1995 of $12.5 million, $49.2 million and $51.2 million, respectively. At December 31, 1997, 1,619 employees have been terminated and severance payments totaling $74 million have been paid. Virginia Power estimates that these staffing reductions will result in annual savings in the range of $80 million to $90 million for its restructured operations. However, such savings are being offset by salary increases, outsourcing costs and increased payroll costs associated with staffing for growth opportunities. 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 $3.8 million, $7.8 million and $8.1 million in 1997, 1996 and 1995, respectively. Virginia Power estimated that its annual future purchased power costs, including energy payments, would be reduced by up to $0.8 million, $5.8 million and $147 million for the 1997, 1996 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. 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. NOTE O Accelerated Cost Recovery - -------------------------------------------------------------------------------- In this increasingly competitive environment, Virginia Power has concluded that it is appropriate to utilize available savings and cost reductions, such as those generated by the Vision 2000 program (see Note N), 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 stranded costs. Virginia Power identified savings of $38.4 million in 1997 and $26.7 million in 1996 which were used to establish a reserve for expected adjustments to regulatory assets. (See Note Q). NOTE P Derivative Transactions - -------------------------------------------------------------------------------- Dominion Resources uses derivative financial instruments for the purposes of managing interest rate, natural gas price and foreign currency risks. 53 INTEREST RATE RISKS Saxon Mortgage, enters into forward delivery contracts, financial futures and options contracts for the purpose of reducing exposure to the effects of changes in interest 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, 1997, Saxon has outstanding liabilities related to its hedging positions with certain counter parties a notional amount of $552.9 million. The deferred hedging losses, net, at December 31, 1997 and 1996 were immaterial. FOREIGN CURRENCY RISKS In May 1997, Dominion UK issued $819 million of Yankee bonds. The bonds are denominated in U.S. dollars, exposing the company to foreign currency risk. Coincident with the issuance of the debt, Dominion UK acquired cross currency swaps to mitigate the foreign currency risk. The swaps are in effect until the debt matures in five and ten years, respectively. The cash settlement and the periodic payments under the hedge are treated as yield adjustments to the underlying debt and recognized over the period the bonds are outstanding. The notional amount of these swaps at December 31, 1997 was $819 million and the deferred hedging losses, net as of December 31, 1997 were immaterial. 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 REGULATORY MATTERS In March, 1997, the Virginia Commission issued an order that Virginia Power's base rates be made interim and subject to refund as of March 1, 1997. This order was the result of the Commission Staff's report on its review of Virginia Power's 1995 Annual Information Filing which concluded that the company's present rates would cause Virginia Power to earn in excess of its authorized return on equity. The Staff found that, for purposes of establishing rates prospectively, a rate reduction of $95.6 million may be necessary in order to realign rates to the authorized level. Virginia Power filed an Alternative Rate Plan (ARP) in March 1997 based on 1996 financial information. Subsequently, the Commission consolidated the proceeding concerned with the 1995 Annual Informational Filing with the proceeding that includes the ARP proposed by the company. Opposing parties in the rate proceeding have made filings recommending rate reductions in excess of $200 million. The company is currently studying the filings of those parties. The Commission Staff is scheduled to make further filings in late February 1998. Hearings are scheduled to begin in late April 1998. CONSTRUCTION PROGRAM Virginia Power has made substantial commitments in connection with its construction program and nuclear fuel expenditures, which are estimated to total $588.1 million (excluding AFC) for 1998. Virginia Power presently estimates that all of its 1998 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, 1997, there were 57 nonutility generating facilities under contract to provide Virginia Power 3,277 megawatts of dependable summer capacity. The following table shows the minimum commitments as of December 31, 1997 for power purchases from utility and nonutility suppliers. Commitments - ----------------------------------------------------- (millions) Capacity Other 1998 $ 813.5 $154.9 1999 816.7 156.7 2000 723.8 92.0 2001 716.0 83.7 2002 721.1 81.5 After 2002 9,069.6 388.2 -------------------- Total $12,860.7 $957.0 -------------------- Present value of the total $ 5,878.0 $553.3 -------------------- 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 1997, 1996, and 1995 were $1,381 million, $1,183 million, and $1,093 million, respectively. For discussion of Virginia Power's efforts to restructure certain purchased power contracts (see Note N). FUEL PURCHASE COMMITMENTS Virginia Power's estimated fuel purchase commitments for the next five years for system generation are as follows (millions): 1998-$293; 1999-$233; 2000-$144; 2001-$144; and 2002-$127. 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 54 sites. As of December 31, 1997, Virginia Power had accrued a reserve of $1.7 million to meet its obligations at these two sites. Based on a financial assessment of the PRPs involved at these sites, Virginia Power has determined that it is probable that the PRPs will fully pay the costs apportioned to them. Virginia Power generally seeks to recover its costs associated with environmental remediation from third-party insurers. At December 31, 1997 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 $12.3 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 $37 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. 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 $8.7 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 $47.4 million. Management believes the possibility of such support to Dominion Energy is remote. Dominion Resources is guarantor to Dominion UK's revolving credit agreement. The revolving credit agreement is with Union Bank of Switzerland and various lending institutions. The total commitment of the agreement is 700 million pounds sterling ($1.2 billion). Under the agreement, Dominion Resources has guaranteed the prompt payment in full of amounts outstanding. In addition, if Dominion UK fails to pay when due any of the amounts outstanding, Dominion Resources is obligated to promptly pay the amount outstanding. This agreement expires on November 12, 2001. Dominion UK Dominion UK's indirect subsidiary, Corby Power Limited, has entered into long-term commitments to purchase gas. The contract commenced on October 1, 1993 and terminates on September 30, 2008. The following table shows the net present value of the commitments as of December 31, 1997. - ------------------------------------------- Commitments (millions) 1998 $ 82.3 1999 82.3 2000 88.8 2001 92.1 2002 93.8 After 2002 605.3 -------- Total $1,044.6 -------- Present value of the total $ 683.5 ======== Dominion Energy Dominion Energy, through certain wholly-owned subsidiaries, has general partnership interests in certain of its energy ventures. Accordingly, such subsidiaries 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, 1997 no payments have been required. 55 Dominion Capital At December 31, 1997, Dominion Capital had commitments to fund loans of approximately $672.9 million. NOTE R Acquisitions - -------------------------------------------------------------------------------- EAST MIDLANDS ACQUISITION AND FINANCING In the first quarter of 1997, Dominion Resources acquired 100% indirect ownership of East Midlands by means of a cash tender offer commenced on November 22, 1996. Total consideration for the acquisition was $2.2 billion. The acquisition has been accounted for using the purchase method of accounting. The excess of the purchase price over the net assets acquired resulted in goodwill of $1.7 billion. (Net assets acquired consists of the fair value of tangible and identifiable intangible assets less the fair value of liabilities assumed by the purchaser.) The goodwill is being amortized over a 40-year period. The following unaudited pro forma combined results of operations for the twelve months ended December 31, 1996 has been prepared assuming the acquisition of East Midlands had occurred at the beginning of the period. The pro forma results are provided for information only. The results are not necessarily indicative of the actual results that would have been realized had the acquisition occurred on the indicated dates, nor are they necessarily indicative of future results of operations of the combined companies. Twelve Months Ended December 31, - ------------------------------------------------------------------------- 1997 1996 As As Reported Reported Pro Forma CONSOLIDATED RESULTS (millions, except earnings per share amounts) Revenues $7,677.6 $4,854.0 $6,924.2 Net income* $ 399.2 $ 472.1 $ 598.8 Earnings per share* $ 2.15 $ 2.65 $ 3.36 -------------------------------- *1997 results include ($156.6) windfall profits tax ($0.85 per share). NOTE S Subsequent Events - -------------------------------------------------------------------------------- On January 21, 1998, Dominion Resources issued 6.5 million shares of common stock. On January 27, 1998, the company sold an additional 275 thousand shares. Proceeds from the sale amounted to approximately $275 million. A portion of the funds was used to pay down part of the five-year revolving credit facility used to finance the purchase of East Midlands. NOTE T Business Segments - -------------------------------------------------------------------------------- The company's principal business segments include Virginia Power, Dominion UK, Dominion Energy, Dominion Capital and corporate. The company's business segment information was: BUSINESS SEGMENTS - ------------------------------------------------------------------------------ 1997 1996 1995 (millions, except identifiable assets amounts) OPERATING REVENUES AND INCOME Virginia Power $5,079.0 $4,420.9 $4,351.9 Dominion UK 1,970.1 Dominion Capital 295.7 177.5 105.4 Dominion Energy 332.8 255.6 175.8 -------------------------------------- Consolidated $7,677.6 $4,854.0 $4,633.1 -------------------------------------- OPERATING INCOME Virginia Power $1,019.3 $1,010.0 $971.9 Dominion UK 246.6 Dominion Capital 157.1 81.9 50.2 Dominion Energy 71.4 36.6 35.3 Corporate (17.4) (18.7) (31.0) -------------------------------------- Consolidated $1,477.0 $1,109.8 $1,026.4 -------------------------------------- IDENTIFIABLE ASSETS (billions) Virginia Power $ 12.0 $ 11.8 $ 11.8 Dominion UK 4.4 Dominion Capital 2.1 1.1 0.9 Dominion Energy 1.6 1.6 1.1 Corporate 6.1 5.6 5.0 Eliminations (6.0) (5.2) (4.9) -------------------------------------- Consolidated $ 20.2 $ 14.9 $ 13.9 -------------------------------------- DEPRECIATION AND AMORTIZATION Virginia Power $ 584.3 $ 536.4 $ 503.5 Dominion UK 131.3 Dominion Capital 17.5 6.8 3.0 Dominion Energy 85.0 69.9 42.6 Corporate 1.2 2.1 1.9 -------------------------------------- Consolidated $ 819.3 $ 615.2 $ 551.0 -------------------------------------- CAPITAL EXPENDITURES Virginia Power $ 481.8 $ 484.0 $ 577.5 Dominion UK 234.2 Dominion Capital 7.8 17.7 1.9 Dominion Energy 11.7 176.0 25.1 Corporate 17.7 1.3 0.4 -------------------------------------- Consolidated $ 753.2 $ 679.0 $ 604.9 -------------------------------------- 56 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 - ------------------------------------------------------------------------------ 1997 1996 (millions, except per share amounts) REVENUES AND INCOME First Quarter $1,891.4 $1,223.9 Second Quarter 1,655.1 1,088.3 Third Quarter 2,094.3 1,327.3 Fourth Quarter 2,036.8 1,214.5 ----------------------------- Year $7,677.6 $4,854.0 ----------------------------- INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTERESTS First Quarter $ 255.0 $ 224.2 Second Quarter 124.3 144.3 Third Quarter 153.2 244.9 Fourth Quarter 146.3 87.6 ----------------------------- Year $ 678.8 $ 701.0 ----------------------------- NET INCOME First Quarter $ 169.9 $ 150.2 Second Quarter 79.1 94.2 Third Quarter 50.4 162.2 Fourth Quarter 99.8 65.5 ----------------------------- Year $ 399.2 $ 472.1 ----------------------------- EARNINGS PER SHARE First Quarter $ 0.92 $ 0.85 Second Quarter 0.43 0.53 Third Quarter 0.27 0.91 Fourth Quarter 0.53 0.36 ----------------------------- Year $ 2.15 $ 2.65 ----------------------------- 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 413/8-351/2 443/8-375/8 Second Quarter 363/4-331/4 401/4-370/0 Third Quarter 381/4-355/16 40-367/8 Fourth Quarter 427/8-347/8 41-371/8 ----------------------------- Year 427/8-331/4 443/8-367/8 ----------------------------- In the third quarter of 1997, East Midlands recorded a liability of approximately $157 million to reflect the anticipated one-time windfall tax levied by the UK government. The tax was levied on regional electric companies in the United Kingdom and is based on the privatized utilities' excess profits. East Midlands paid one-half of the tax levy in December 1997. The remaining payment is due in December 1998. Certain accruals were recorded in 1997 and 1996 that are not ordinary, recurring adjustments, consisting of restructuring (see Note N) and accelerated costs recovery (see Note O). Restructuring--Virginia Power expensed $0, $6.3 million, $1.4 million and $10.7 million during the first, second, third and fourth quarters of 1997, respectively, and $5.4 million, $19.3 million, $4.6 million and $35.6 million during the same periods in 1996. Accelerated cost recovery--Amounts reserved for accelerated cost recovery were $0, $2.7 million, $28.3 million and $7.3 million during the first, second, third and fourth quarters of 1997, respectively, and $26.7 million during the fourth quarter of 1996. Charges for restructuring and accelerated cost recovery reduced Balance Available for Common Stock by $0, $5.8 million, $19.3 million, and $11.7 million for the first, second, third, and fourth quarters of 1997, respectively and $3.5 million, $12.5 million, $3.0 million and $40.6 million for the same periods in 1996. 57 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 1997 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 Chief Executive Officer Controller 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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Richmond, Virginia February 9, 1998 EX-21 11 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 12 EX-23 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement File No. 333-02769, File No. 333-35501 and 333-46043 of Dominion Resources, Inc. on Form S-3 and Registration Statement File No. 33-62705, File No. 333-02733, File No. 333-09167 File No. 333-25587 and File No. 333-42553 of Dominion Resources, Inc. on Forms S-8 of our report dated February 9, 1998, appearing in and incorporated by reference in the Annual Report on Form 10-K of Dominion Resources, Inc. for the year ended December 31, 1997. /s/ Deloitte & Touche LLP - ---------------------------------- DELOITTE & TOUCHE LLP Richmond, Virginia March , 1998 EX-27 13 FDS -- DOMINION RESOURCES, INC.
UT 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 11,357 3,592 2,273 2,971 0 20,193 3,674 12 1,354 5,040 180 509 7,196 375 0 0 1,614 0 5 5 5,269 20,193 7,678 233 6,201 6,201 1,477 (123) 1,354 675 399 36 0 478 0 1,262 2.15 2.15
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