Virginia Electric and Power Company 1q06 10Q
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________
FORM
10-Q
____________
(Mark
one)
X
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2006
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 001-02255
VIRGINIA
ELECTRIC AND POWER COMPANY
(Exact
name of registrant as specified in its charter)
VIRGINIA
(State
or other jurisdiction of incorporation or organization)
|
54-0418825
(I.R.S.
Employer Identification No.)
|
|
|
701
EAST CARY STREET
RICHMOND,
VIRGINIA
(Address
of principal executive offices)
|
23219
(Zip
Code)
|
|
|
(804)
819-2000
(Registrant's
telephone number)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
At
March
31, 2006, the latest practicable date for determination, 198,047 shares of
common stock, without par value, of the registrant were outstanding.
PAGE
2
VIRGINIA
ELECTRIC AND POWER COMPANY
INDEX
|
|
Page
Number
|
PART
I. Financial Information
|
Item
1.
|
|
|
|
|
3
|
|
|
4
|
|
|
6
|
|
|
7
|
Item
2.
|
|
14
|
Item
3.
|
|
22
|
Item
4.
|
|
24
|
|
PART
II. Other Information
|
|
Item
1.
|
|
25
|
Item
1A.
|
|
25
|
Item
4.
|
|
26
|
Item
6.
|
|
26
|
VIRGINIA
ELECTRIC AND POWER COMPANY
PART
I. FINANCIAL
INFORMATION
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
|
Three
Months Ended
March
31,
|
|
2006
|
2005
|
|
(millions)
|
Operating
Revenue
|
$1,333
|
$1,358
|
|
|
|
Operating
Expenses
|
|
|
Electric
fuel and energy purchases
|
557
|
474
|
Purchased
electric capacity
|
117
|
128
|
Other
energy-related commodity purchases
|
10
|
13
|
Other
operations and maintenance:
|
|
|
External
suppliers
|
189
|
254
|
Affiliated
suppliers
|
77
|
72
|
Depreciation
and amortization
|
132
|
131
|
Other
taxes
|
45
|
46
|
Total
operating expenses
|
1,127
|
1,118
|
|
|
|
Income
from operations
|
206
|
240
|
|
|
|
Other
income
|
24
|
15
|
|
|
|
Interest
and related charges:
|
|
|
Interest
expense
|
70
|
63
|
Interest
expense—junior subordinated notes payable to affiliated
trust
|
8
|
8
|
Total
interest and related charges
|
78
|
71
|
|
|
|
Income
from continuing operations before income tax expense
|
152
|
184
|
Income
tax expense
|
55
|
69
|
Income
from continuing operations
|
97
|
115
|
Loss
from discontinued operations (net of income tax benefit of $58 in
2005)
|
—
|
(93)
|
|
|
|
Net
Income
|
97
|
22
|
Preferred
dividends
|
4
|
4
|
Balance
available for common stock
|
$ 93
|
$ 18
|
_______________
The
accompanying notes are an integral part of the Consolidated Financial
Statements.
PAGE
4
VIRGINIA
ELECTRIC AND POWER COMPANY
(Unaudited)
|
March
31,
2006
|
December
31,
2005(1)
|
|
(millions)
|
ASSETS
|
|
|
|
|
|
Current
Assets
|
|
|
Cash
and cash equivalents
|
$ 23
|
$ 54
|
Accounts
receivable:
|
|
|
Customers
(less allowance for doubtful accounts of $7 at both dates)
|
616
|
700
|
Other
(less allowance for doubtful accounts of $9 at both dates)
|
47
|
60
|
Affiliates
|
13
|
7
|
Inventories
|
505
|
443
|
Other
|
120
|
102
|
Total
current assets
|
1,324
|
1,366
|
|
|
|
Investments
|
|
|
Nuclear
decommissioning trust funds
|
1,200
|
1,166
|
Other
|
22
|
22
|
Total
investments
|
1,222
|
1,188
|
|
|
|
Property,
Plant and Equipment
|
|
|
Property,
plant and equipment
|
20,487
|
20,317
|
Accumulated
depreciation and amortization
|
(8,152)
|
(8,055)
|
Total
property, plant and equipment, net
|
12,335
|
12,262
|
|
|
|
Deferred
Charges and Other Assets
|
|
|
Regulatory
assets
|
306
|
326
|
Prepaid
pension cost
|
18
|
35
|
Other
|
266
|
272
|
Total
deferred charges and other assets
|
590
|
633
|
|
|
|
Total
assets
|
$15,471
|
$15,449
|
________________
|
(1)
|
The
Consolidated Balance Sheet at December 31, 2005 has been derived
from the
audited Consolidated Financial Statements at that
date.
|
The
accompanying notes are an integral part of the Consolidated Financial
Statements.
PAGE
5
VIRGINIA
ELECTRIC AND POWER COMPANY
CONSOLIDATED
BALANCE SHEETS—(Continued)
(Unaudited)
|
March
31,
2006
|
December
31,
2005(1)
|
|
(millions)
|
LIABILITIES
AND SHAREHOLDER’S EQUITY
|
|
|
|
|
|
Current
Liabilities
|
|
|
Securities
due within one year
|
$ 667
|
$ 618
|
Short-term
debt
|
—
|
905
|
Accounts
payable
|
402
|
415
|
Payables
to affiliates
|
60
|
42
|
Affiliated
current borrowings
|
426
|
12
|
Accrued
interest, payroll and taxes
|
348
|
288
|
Other
|
224
|
212
|
Total
current liabilities
|
2,127
|
2,492
|
|
|
|
Long-Term
Debt
|
|
|
Long-term
debt
|
3,595
|
3,256
|
Junior
subordinated notes payable to affiliated trust
|
412
|
412
|
Notes
payable—other affiliates
|
220
|
220
|
Total
long-term debt
|
4,227
|
3,888
|
|
|
|
Deferred
Credits and Other Liabilities
|
|
|
Deferred
income taxes and investment tax credits
|
2,239
|
2,250
|
Asset
retirement obligations
|
845
|
834
|
Regulatory
liabilities
|
413
|
409
|
Other
|
109
|
86
|
Total
deferred credits and other liabilities
|
3,606
|
3,579
|
Total
liabilities
|
9,960
|
9,959
|
|
|
|
Commitments
and Contingencies (see
Note 9)
|
|
|
|
|
|
Preferred
Stock Not Subject to Mandatory Redemption
|
257
|
257
|
|
|
|
Common
Shareholder’s Equity
|
|
|
Common
stock—no par, 300,000 shares authorized; 198,047 shares
outstanding
|
3,388
|
3,388
|
Other
paid-in capital
|
886
|
886
|
Retained
earnings
|
860
|
842
|
Accumulated
other comprehensive income
|
120
|
117
|
Total
common shareholder's equity
|
5,254
|
5,233
|
|
|
|
Total
liabilities and shareholder's equity
|
$15,471
|
$15,449
|
_______________
(1) The
Consolidated Balance Sheet at December 31, 2005 has been derived from the
audited Consolidated Financial Statements at that date.
The
accompanying notes are an integral part of the Consolidated Financial
Statements.
PAGE
6
VIRGINIA
ELECTRIC AND POWER COMPANY
(Unaudited)
|
Three
Months Ended
March
31,
|
|
2006
|
2005
|
|
(millions)
|
Operating
Activities
|
|
|
Net
income
|
$ 97
|
$ 22
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
Net
realized and unrealized derivative (gains)/losses
|
(5)
|
221
|
Depreciation
and amortization
|
153
|
152
|
Deferred
income taxes and investment tax credits, net
|
(15)
|
(69)
|
Deferred
fuel expenses, net
|
31
|
25
|
Other
adjustments to net income
|
(17)
|
(6)
|
Changes
in:
|
|
|
Accounts
receivable
|
97
|
166
|
Affiliated
accounts receivable and payable
|
12
|
(46)
|
Inventories
|
(63)
|
115
|
Prepaid
pension cost
|
16
|
14
|
Accounts
payable
|
7
|
(31)
|
Accrued
interest, payroll and taxes
|
60
|
57
|
Other
operating assets and liabilities
|
26
|
26
|
Net
cash provided by operating activities
|
399
|
646
|
|
|
|
Investing
Activities
|
|
|
Plant
construction and other property additions
|
(205)
|
(167)
|
Purchases
of nuclear fuel
|
(38)
|
(23)
|
Purchases
of securities
|
(155)
|
(92)
|
Proceeds
from sales of securities
|
156
|
69
|
Other
|
1
|
23
|
Net
cash used in investing activities
|
(241)
|
(190)
|
|
|
|
Financing
Activities
|
|
|
Issuance
(repayment) of short-term debt, net
|
(905)
|
43
|
Issuance
(repayment) of affiliated current borrowings, net
|
414
|
(338)
|
Issuance
of long-term debt
|
1,000
|
—
|
Repayment
of long-term debt
|
(607)
|
(8)
|
Common
dividend payments
|
(76)
|
(131)
|
Preferred
dividend payments
|
(4)
|
(4)
|
Other
|
(11)
|
—
|
Net
cash used in financing activities
|
(189)
|
(438)
|
|
|
|
Increase
(decrease) in cash and cash equivalents
|
(31)
|
18
|
Cash
and cash equivalents at beginning of period
|
54
|
2
|
Cash
and cash equivalents at end of period
|
$ 23
|
$ 20
|
|
|
|
Supplemental
Cash Flow Information
|
|
|
Non-cash
financing activities:
|
|
|
Assumption
of debt related to the acquisition of a non-utility
generating
facility
|
$ —
|
$ 62
|
_______________
The
accompanying notes are an integral part of the Consolidated Financial
Statements.
PAGE
7
VIRGINIA
ELECTRIC AND POWER COMPANY
(Unaudited)
Note
1. Nature of Operations
Virginia
Electric and Power Company (the Company), a Virginia public service company,
is
a wholly-owned subsidiary of Dominion Resources, Inc. (Dominion). We are a
regulated public utility that generates, transmits and distributes electricity
within an area of approximately 30,000 square miles in Virginia and northeastern
North Carolina. We serve approximately 2.3 million retail customer
accounts, including governmental agencies and wholesale customers such as rural
electric cooperatives and municipalities. The Virginia service area comprises
about 65% of Virginia’s total land area but accounts for over 80% of its
population. On May 1, 2005, we became a member of PJM Interconnection, LLC
(PJM), a regional transmission organization (RTO). As a result, we integrated
our control area into the PJM energy markets.
As
discussed in Note 6, on December 31, 2005, we completed a transfer of our
indirect wholly-owned subsidiary, Virginia Power Energy Marketing, Inc. (VPEM),
to Dominion through a series of dividend distributions, in exchange for a
capital contribution. VPEM provides fuel and price risk management services
to
us and other Dominion affiliates and engages in energy trading activities.
Through VPEM, we had trading relationships beyond the geographic limits of
our
retail service territory and bought and sold natural gas, electricity and other
energy-related commodities. As a result of the transfer, VPEM’s results of
operations are no longer included in our Consolidated Financial Statements,
and
our Consolidated Statements of Income for periods prior to the transfer have
been adjusted to reflect VPEM as a discontinued operation. In addition, the
discontinued operations of VPEM are now included in our Corporate segment
results.
We
manage
our daily operations through three primary operating segments: Delivery, Energy
and Generation. In addition, we report our corporate and other functions as
a
segment. Our assets remain wholly owned by our legal subsidiaries.
The
terms
“Company,” “we,” “our” and “us” are used throughout this report and, depending
on the context of their use, may represent any of the following: the legal
entity, Virginia Electric and Power Company, one of Virginia Electric and Power
Company’s consolidated subsidiaries or operating segments or the entirety of
Virginia Electric and Power Company, including our Virginia and North Carolina
operations and our consolidated subsidiaries.
Note
2. Significant Accounting Policies
As
permitted by the rules and regulations of the Securities and Exchange Commission
(SEC), our accompanying unaudited Consolidated Financial Statements contain
certain condensed financial information and exclude certain footnote disclosures
normally included in annual audited consolidated financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America (GAAP). These unaudited Consolidated Financial Statements should
be
read in conjunction with our Consolidated Financial Statements and Notes in
our
Annual Report on Form 10-K for the year ended December
31, 2005.
In
our
opinion, our accompanying unaudited Consolidated Financial Statements contain
all adjustments, including normal recurring accruals, necessary to present
fairly our financial position as of March 31, 2006 and our results of operations
and cash flows for the three months ended March 31, 2006 and 2005.
We
make
certain estimates and assumptions in preparing our Consolidated Financial
Statements in accordance with GAAP. These estimates and assumptions affect
the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses for the periods presented. Actual results may differ
from those estimates.
Our
accompanying unaudited Consolidated Financial Statements include, after
eliminating intercompany transactions and balances, the accounts of the Company
and our majority-owned subsidiaries, and those variable interest entities (VIEs)
where we have been determined to be the primary beneficiary.
PAGE
8
VIRGINIA
ELECTRIC AND POWER COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
We
report
certain contracts and instruments at fair value in accordance with GAAP. Market
pricing and indicative price information from external sources are used to
measure fair value when available. In the absence of this information, we
estimate fair value based on near-term and historical price information and
statistical methods. For individual contracts, the use of differing assumptions
could have a material effect on the contract’s estimated fair value. See Note 2
to the Consolidated Financial Statements in our Annual Report on Form 10-K
for
the year ended December 31, 2005
for more
discussion of our estimation techniques.
The
results of operations for the interim periods are not necessarily indicative
of
the results expected for the full year. Information for quarterly periods is
affected by seasonal variations in sales, electric fuel and energy purchases
and
other factors.
Certain
amounts in our 2005 Consolidated Financial Statements and Notes have been
reclassified to conform to the 2006 presentation.
Note
3. Operating Revenue
Our
operating revenue consists of the following:
|
Three
Months Ended
March
31,
|
|
2006
|
2005
|
|
(millions)
|
Regulated
electric sales
|
$1,298
|
$1,322
|
Other
|
35
|
36
|
Total
operating revenue
|
$1,333
|
$1,358
|
Note
4. Comprehensive Income
The
following table presents total comprehensive income (loss):
|
Three
Months Ended
March
31,
|
|
2006
|
2005
|
|
(millions)
|
Net
income
|
$ 97
|
$ 22
|
Other
comprehensive income (loss):
|
|
|
Net
other comprehensive loss associated with
effective
portion of changes in fair value of
derivatives
designated as cash flow hedges, net
of
taxes and amounts reclassified to earnings
|
(7)
|
(13)
|
Other(1)
|
10
|
(16)
|
Other
comprehensive income (loss)
|
3
|
(29)
|
Total
comprehensive income (loss)
|
$ 100
|
$ (7)
|
________________
(1)
|
Primarily
represents unrealized gains (losses) on investments held in nuclear
decommissioning trusts.
|
PAGE
9
VIRGINIA
ELECTRIC AND POWER COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note
5. Hedge Accounting Activities
We
are
exposed to the impact of market fluctuations in the price of natural gas,
electricity and other energy-related products, as well as currency exchange
and
interest rate risks of our business operations. We use derivative instruments
to
manage our exposure to certain of these risks and designate derivative
instruments as either fair value or cash flow hedges for accounting purposes
as
allowed by Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting
for Derivative Instruments and Hedging Activities.
For the
three months ended March 31, 2006 and 2005, we recognized no hedge
ineffectiveness in net income.
The
following table presents selected information related to cash flow hedges
included in accumulated other comprehensive income (loss) (AOCI) in our
Consolidated Balance Sheet at March 31, 2006:
|
AOCI
After-Tax
|
Portion
Expected
to
be Reclassified
to
Earnings
During
the
Next
12 Months
After-Tax
|
Maximum
Term
|
|
(millions)
|
|
Electricity
|
$(5)
|
$(5)
|
6
months
|
Interest
rate
|
1
|
—
|
115
months
|
Foreign
currency
|
17
|
6
|
20
months
|
Total
|
$13
|
$ 1
|
|
The
amounts that will be reclassified from AOCI to earnings will generally be offset
by the recognition of the hedged transactions (e.g., anticipated purchases)
in
earnings, thereby achieving the realization of prices contemplated by the
underlying risk management strategies and will vary from the expected amounts
presented above as a result of changes in market prices, interest rates and
foreign exchange rates.
Note
6. Discontinued Operations—VPEM Transfer
In
the
three months ended March 31, 2005, our discontinued operations included
operating revenue of $239 million and a loss before income taxes of $151
million.
On
December 31, 2005, we completed the transfer of VPEM to Dominion through a
series of dividend distributions. This resulted in a transfer of our negative
investment in VPEM to Dominion in exchange for a capital contribution of $633
million. No gain or loss was recognized on the transfer.
VPEM
provides fuel and price risk management services to us by acting as an agent
for
one of our other indirect wholly-owned subsidiaries. VPEM also engages in energy
trading activities and provides price risk management services to other Dominion
affiliates through the use of derivative contracts. While we owned VPEM, certain
of these derivative contracts were reported at fair value on our Consolidated
Balance Sheets, with changes in fair value reflected in earnings. These price
risk management activities performed on behalf of Dominion affiliates generated
derivative gains and losses that affected our Consolidated Financial
Statements.
As
a
result of the transfer, VPEM’s results of operations are no longer included in
our Consolidated Financial Statements, and our Consolidated Statement of Income
for the three months ended March 31, 2005 has been adjusted to reflect VPEM
as a
discontinued operation, on a net basis.
PAGE
10
VIRGINIA
ELECTRIC AND POWER COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
VPEM’s
results also included the following affiliated transactions for the three months
ended March 31, 2005:
Three
Months Ended March 31,
|
|
2005
|
|
(millions)
|
|
|
|
Purchases
of natural gas, gas transportation and storage services from
affiliates
|
|
$
|
281
|
|
Sales
of natural gas to affiliates
|
|
|
223
|
|
Net
realized gains on affiliated commodity derivative contracts
|
|
|
11
|
|
Affiliated
interest and related charges
|
|
|
3
|
|
Note
7. Variable Interest Entities
Certain
variable pricing terms in some of our long-term power and capacity contracts
cause those contracts to be considered potential variable interests in the
counterparties. As discussed in Note 14 to the Consolidated Financial Statements
in our Annual Report on Form 10-K for the year ended December 31, 2005, three
potential VIEs with which we have existing power purchase agreements (signed
prior to December 31, 2003), have not provided sufficient information for
us to perform our Financial Accounting Standards Board (FASB) Interpretation
No.
46 (revised December 2003), Consolidation
of Variable Interest Entities
(FIN
46R) evaluation.
As
of
March 31, 2006, the requested information has not been received from the
three remaining potential VIEs. We will continue our efforts to obtain
information and will complete an evaluation of our relationship with each of
these potential VIEs if sufficient information is ultimately obtained. We have
remaining purchase commitments with these three potential VIE supplier entities
of $2.0 billion at March 31, 2006. We paid $50 million and $54 million for
electric generation capacity and $36 million and $46 million for electric energy
to these entities for the periods ended March 31, 2006 and 2005,
respectively.
During
2005, we entered into four long-term contracts with unrelated limited liability
corporations (LLCs) to purchase synthetic fuel produced from coal. Certain
variable pricing terms in the contracts protect the equity holders from
variability in the cost of their coal purchases, and therefore, the LLCs were
determined to be VIEs. After completing our FIN 46R analysis, we concluded
that
although our interests in the contracts, as a result of their pricing terms,
represent variable interests in the LLCs, we are not the primary beneficiary.
We
paid $111 million and $22 million to the LLCs for coal and synthetic fuel
produced from coal during the periods ended March 31, 2006 and 2005,
respectively. We are not subject to any risk of loss from the contractual
arrangements, as our only obligation to the VIEs is to purchase the coal and
synthetic fuel that the VIEs provide according to the terms of the applicable
purchase contracts.
In
accordance with FIN 46R, we consolidate the variable interest lessor entity
through which we have financed and leased a power generation project. Our
Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005
reflect net property, plant and equipment of $345 million and $348 million,
respectively, and $370 million of debt related to this entity. The debt is
nonrecourse to us and is secured by the entity’s property, plant and equipment.
Note
8. Significant Financing Transactions
Joint
Credit Facilities and Short-term Debt
We
use
short-term debt, primarily commercial paper, to fund working capital
requirements and as a bridge to long-term debt financing. The level of our
borrowings may vary significantly during the course of the year, depending
upon
the timing and amount of cash requirements not satisfied by cash from
operations. In February 2006, we entered into a $3.0
billion
five-year revolving credit facility with Dominion and Consolidated Natural
Gas
Company (CNG), a wholly-owned subsidiary of Dominion, that replaced our $2.5
billion five-year facility dated May 2005. The $3.0 billion credit
facility
is scheduled to terminate in February 2011. This credit facility is being used
for working capital, as support for the combined commercial paper programs
of
Dominion, CNG and us and other general corporate purposes. This credit facility
can also be used to support up to $1.5 billion of letters of
credit.
PAGE
11
VIRGINIA
ELECTRIC AND POWER COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At
March
31, 2006, total outstanding commercial paper supported by the joint credit
facility was $1.4 billion, none of which were the Company’s borrowings. At March
31, 2006, total outstanding letters of credit supported by the joint credit
facility were $631 million, of which less than $1 million was issued on our
behalf.
At
March
31, 2006, capacity available under the credit facility was $1.0
billion.
Long-term
Debt
In
January 2006, we issued $450 million of 5.4% senior notes that mature in 2016
and $550 million of 6.0% senior notes that mature in 2036. We used the proceeds
from this issuance to repay short-term debt incurred to redeem our $512 million
callable mortgage bonds and a portion of our maturing long-term
debt.
In
February 2006, we entered into a $200 million five-year stand-alone credit
facility that replaced our $200 million three-year facility dated May 2003.
This
credit facility is used to support our long-term variable rate tax-exempt
financings and is scheduled to terminate in February 2011.
During
the three months ended March 31, 2006, we repaid $607 million of our long-term
debt.
Note
9. Commitments and Contingencies
Other
than the matters discussed below, there have been no significant developments
regarding commitments and contingencies as disclosed in Note 21 to the
Consolidated Financial Statements in our Annual Report on Form 10-K for the
year
ended December 31, 2005, nor have any significant new matters arisen during
the
three months ended March 31, 2006.
Environmental
Matters
In
1987,
we and a number of other entities were identified by the Environmental
Protection Agency (EPA) as potentially responsible parties (PRPs) at two
Superfund sites located in Kentucky and Pennsylvania. In 2003, the EPA issued
its Certificate of Completion of remediation for the Kentucky site. Future
costs
for the Kentucky site will be limited to minor operations and maintenance
expenditures. Regarding the Pennsylvania site, in March 2006, a federal district
court approved three consent decrees between the United States and the PRPs,
under which we and certain other PRPs, all of which are utilities, will perform
the site remediation. The remediation costs are expected to be in the range
of
$11 million to $18 million, the majority of which are to be paid by the
non-utility site owners. We currently have an accrued reserve of $2 million
to
meet our potential obligations at these two sites. We
generally seek to recover our costs associated with environmental remediation
from third party insurers. At March 31, 2006, no pending or possible insurance
claims were recognized as an asset or offset against obligations.
Guarantees
and Surety
Bonds
As
of
March 31, 2006, we had issued $25 million of guarantees primarily to support
commodity transactions of our subsidiaries. We had also purchased $15 million
of
surety bonds for various purposes, including providing workers’ compensation
coverage and obtaining licenses, permits and rights-of-way. Under the terms
of
surety bonds, we are obligated to indemnify the respective surety bond company
for any amounts paid.
Note
10. Credit Risk
We
maintain a provision for credit losses based on factors surrounding the credit
risk of our customers, historical trends and other information. We believe,
based on our credit policies and our March 31, 2006 provision for credit
losses, that it is unlikely that a material adverse effect on our financial
position, results of operations or cash flows would occur as a result of
counterparty nonperformance.
We
sell
electricity and provide distribution and transmission services to customers
in
Virginia and northeastern North Carolina. Management believes that this
geographic concentration risk is mitigated by the diversity of our customer
base, which includes residential, commercial and industrial customers, as well
as rural electric cooperatives and municipalities. Credit risk associated with
trade accounts receivable from energy consumers is limited due to the large
number of customers.
PAGE
12
VIRGINIA
ELECTRIC AND POWER COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Our
exposure to potential concentrations of credit risk results primarily from
sales
to wholesale customers. At March 31, 2006, gross and net credit exposure totaled
$76 million, reflecting the unrealized gains for contracts carried at fair
value
plus any outstanding receivables (net of payables, where netting agreements
exist). Of this amount, 86% related to a single counterparty, however the entire
balance is with investment grade entities. We held no collateral for these
transactions at March 31, 2006.
Note
11. Related Party Transactions
We
engage
in related party transactions primarily with affiliates (Dominion subsidiaries).
Our accounts receivable and payable balances with affiliates are settled based
on contractual terms on a monthly basis, depending on the nature of the
underlying transactions. We are included in Dominion’s consolidated federal
income tax return and participate in certain Dominion benefit plans. The
significant related party transactions are disclosed below.
Transactions
with Affiliates
We
transact with affiliates for certain quantities of natural gas and other
commodities in the ordinary course of business.
Dominion
Resources Services, Inc. (Dominion Services) provides accounting, legal and
certain administrative and technical services to us. In addition, we provide
certain services to affiliates, including charges for facilities and equipment
usage.
The
transactions with Dominion Services and other affiliates are detailed below:
|
Three
Months Ended
March
31,
|
(millions)
|
2006
|
2005
|
Commodity
purchases from affiliates
|
$34
|
$47
|
Commodity
sales to affiliates
|
3
|
4
|
Services
provided by Dominion Services
|
77
|
72
|
Services
provided to other affiliates
|
6
|
6
|
Transactions
with Dominion
We
have
borrowed funds from Dominion under both short-term and long-term borrowing
arrangements. At March 31, 2006 and December 31, 2005, our outstanding
borrowings, net of repayments, under the Dominion money pool for our
nonregulated subsidiaries totaled $39 million and $12 million, respectively.
The
short-term demand note borrowings were $386 million at March 31, 2006. At March
31, 2006 and December 31, 2005, our borrowings from Dominion under a long-term
note totaled $220 million. We incurred net interest charges related to our
short-term and long-term borrowings from Dominion of $2 million and $1 million
in the three months ended March 31, 2006 and 2005, respectively.
Note
12. Operating Segments
We
are
organized primarily on the basis of products and services sold in the United
States. The majority of our revenue is provided through tariff rates. Generally,
such revenue is allocated for management reporting based on an unbundled rate
methodology among our Delivery, Energy and Generation segments. We manage our
operations through the following segments:
Delivery
includes
our regulated electric distribution and customer service business. The Delivery
segment is subject to cost-of-service rate regulation and accordingly, applies
SFAS No. 71, Accounting
for the Effects of Certain Types of Regulation.
Energy
includes
our tariff-based electric transmission operations, which are subject to
cost-of-service rate regulation and accordingly, applies SFAS No.
71.
Generation
includes
our portfolio of electric generating facilities and our energy supply
operations.
PAGE
13
VIRGINIA
ELECTRIC AND POWER COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Corporate
includes
our corporate and other functions, as well as the discontinued operations of
VPEM. The contribution to net income by our primary operating segments is
determined based on a measure of profit that executive management believes
represents the segments’ core earnings. As a result, certain specific items
attributable to those segments are not included in profit measures evaluated
by
executive management in assessing the segment’s performance or allocating
resources among the segments and are instead reported in the Corporate segment.
For the three months ended March 31, 2005, we reported net expenses of $51
million attributable to our operating segments and a $93 million loss from
the
discontinued operations of VPEM in the Corporate segment. No such expenses
were
reported in the Corporate segment in the three months ended March 31, 2006.
The
net expenses in 2005 related to the following items attributable to our
Generation segment:
·
|
A
$77 million ($47 million after-tax) charge resulting from the termination
of a long-term power purchase agreement; and
|
·
|
An
$11 million ($6 million after-tax) charge related to our interest
in a
long-term power tolling contract that was divested in
2005.
|
The
following table presents segment information pertaining to our
operations:
|
Delivery
|
Energy
|
Generation
|
Corporate
|
Consolidated
Total
|
|
(millions)
|
Three
Months Ended March 31, 2006
|
|
|
|
|
|
Operating
revenue
|
$289
|
$52
|
$993
|
$(1)
|
$1,333
|
Net
income
|
67
|
17
|
13
|
—
|
97
|
|
|
|
|
|
|
Three
Months Ended March 31, 2005
|
|
|
|
|
|
Operating
revenue
|
$299
|
$55
|
$1,000
|
$4
|
$1,358
|
Loss
from discontinued operations, net of tax
|
—
|
—
|
—
|
(93)
|
(93)
|
Net
income (loss)
|
82
|
15
|
69
|
(144)
|
22
|
PAGE
14
VIRGINIA
ELECTRIC AND POWER COMPANY
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) discusses the results of operations and general financial condition
of Virginia Electric and Power Company. MD&A should be read in conjunction
with our Consolidated Financial Statements. The terms “Virginia Power,”
“Company,” “we,” “our” and “us” are used throughout this report and, depending
on the context of their use, may represent any of the following: the legal
entity, Virginia Electric and Power Company, one of Virginia Electric and Power
Company’s consolidated subsidiaries or operating segments, or the entirety of
Virginia Electric and Power Company and its consolidated subsidiaries. We are
a
wholly-owned subsidiary of Dominion.
Contents
of MD&A
The
MD&A consists of the following information:
·
|
Forward-Looking
Statements
|
·
|
Segment
Results of Operations
|
·
|
Sources
and Uses of Cash
|
·
|
Future
Issues and Other Matters
|
Forward-Looking
Statements
This
report contains statements concerning our expectations, plans, objectives,
future financial performance and other statements that are not historical facts.
These statements are “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. In most cases, the reader
can
identify these forward-looking statements by such words as “anticipate,”
“estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “plan,” “may” or
other similar words.
We
make
forward-looking statements with full knowledge that risks and uncertainties
exist that may cause actual results to differ materially from predicted results.
Factors that may cause actual results to differ are often presented with the
forward-looking statements themselves. Additionally, other factors may cause
actual results to differ materially from those indicated in any forward-looking
statement. These factors include but are not limited to:
· Unusual
weather conditions and their effect on energy sales to customers and energy
commodity prices;
· Extreme
weather events, including hurricanes and winter storms, that can cause outages
and property damage to our facilities;
· State
and
federal legislative and regulatory developments, including deregulation and
changes in environmental and other laws and regulations to which we are
subject;
· Cost
of
environmental compliance;
· Risks
associated with the operation of nuclear facilities;
· Fluctuations
in energy-related commodity prices and the effect these could have on our
earnings, liquidity position and the underlying value of our assets;
· Capital
market conditions, including price risk due to marketable securities held as
investments in nuclear decommissioning and benefit plan trusts;
· Fluctuations
in interest rates;
· Changes
in rating agency requirements or credit ratings and the effect on availability
and cost of capital;
· Changes
in financial or regulatory accounting principles or policies imposed by
governing bodies;
· Employee
workforce factors including collective bargaining agreements and labor
negotiations with union employees;
· The
risks
of operating businesses in regulated industries that are subject to changing
regulatory structures;
· Changes
to our ability to recover investments made under traditional regulation through
rates;
· Transitional
issues related to the transfer of control over our electric transmission
facilities to a regional transmission organization; and
· Political
and economic conditions, including the threat of domestic terrorism, inflation
and deflation.
Additionally,
other risks that could cause actual results to differ from predicted results
are
set forth in Item 1A. Risk Factors in this report and in our Annual Report
on Form 10-K for the year ended December 31, 2005.
PAGE
15
VIRGINIA
ELECTRIC AND POWER COMPANY
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Our
forward-looking statements are based on our beliefs and assumptions using
information available at the time the statements are made. We caution the reader
not to place undue reliance on our forward-looking statements because the
assumptions, beliefs, expectations and projections about future events may,
and
often do, differ materially from actual results. We undertake no obligation
to
update any forward-looking statement to reflect developments occurring after
the
statement is made.
Accounting
Matters
Critical
Accounting Policies and Estimates
As
of
March 31, 2006, there have been no significant changes with regard to critical
accounting policies and estimates as disclosed in MD&A in our Annual Report
on Form 10-K for the year ended December 31, 2005. The policies disclosed
included the accounting for: derivative contracts at fair value; long-lived
asset impairment testing; asset retirement obligations; regulated operations
and
income taxes.
Results
of Operations
Presented
below is a summary of our consolidated results for the quarter ended March
31,
2006 and 2005:
First
Quarter
|
2006
|
2005
|
$
Change
|
|
(millions)
|
Net
Income
|
$97
|
$22
|
$75
|
Overview
Net
income for the first quarter of 2006 increased 341% to $97 million. The
increase was due primarily to the absence of $93 million of after-tax losses
incurred in the first quarter of 2005 by the discontinued operations of VPEM.
The results also reflect the unfavorable impacts of higher commodity prices
on
fuel and purchased power expenses and milder weather on customer usage, which
resulted in lower regulated electric sales, partially offset by the absence
of a
first quarter 2005 charge resulting from the termination of a long-term power
purchase agreement.
Analysis
of Consolidated Operations
Presented
below are selected amounts related to our results of operations:
First
Quarter
|
2006
|
2005
|
$
Change
|
|
(millions)
|
|
|
|
|
Operating
Revenue
|
$1,333
|
$1,358
|
$(25)
|
|
|
|
|
Operating
Expenses
|
|
|
|
Electric
fuel and energy purchases
|
557
|
474
|
83
|
Purchased
electric capacity
|
117
|
128
|
(11)
|
Other
energy-related commodity purchases
|
10
|
13
|
(3)
|
Other
operations and maintenance
|
266
|
326
|
(60)
|
Depreciation
and amortization
|
132
|
131
|
1
|
Other
taxes
|
45
|
46
|
(1)
|
Other
income
|
24
|
15
|
9
|
Interest
and related charges
|
78
|
71
|
7
|
Income
tax expense
|
55
|
69
|
(14)
|
Loss
from discontinued operations, net of tax
|
—
|
(93)
|
93
|
PAGE
16
VIRGINIA
ELECTRIC AND POWER COMPANY
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
An
analysis of our results of operations for the first quarter of 2006 compared
to
the first quarter of 2005 follows:
Operating
Revenue decreased
2% to $1.3 billion, due primarily to a $24 million decline in regulated electric
sales resulting from the combined effects of:
·
|
A
$66 million decrease associated with milder weather; which was partially
offset by
|
·
|
A
$21 million increase due to new customer connections;
and
|
·
|
A
$20 million increase in sales to wholesale
customers.
|
Operating
Expenses and Other Items
Electric
fuel and energy purchases expense
increased 18% to $557 million, primarily due to higher commodity prices,
including purchased power and congestion costs associated with PJM and the
purchase of replacement power in connection with a nuclear refueling outage.
This was partially offset by lower customer usage associated with milder
weather.
Purchased
electric capacity expense
decreased 9% to $117 million, primarily
resulting from the termination of a long-term power purchase agreement in
connection with the purchase of the related generating facility in
2005.
Other
operations and maintenance expense
decreased 18% to $266 million, primarily reflecting:
·
|
A
$28 million benefit related to financial transmission rights (FTRs)
granted by PJM used to offset congestion costs associated with PJM
spot
market activity, which are included in Electric
fuel and energy purchases expense;
and
|
·
|
The
net benefit from the absence of the following items recognized in
2005:
|
|
·
|
A
$77 million charge resulting from the termination of a long-term
power
purchase agreement; partially offset
by
|
|
·
|
A
$25 million net benefit resulting from the establishment of certain
regulatory assets in connection with the settlement of the North
Carolina
rate case.
|
These
benefits were partially offset by a
$17
million increase in outage costs primarily due to scheduled outages of certain
of our electric generating facilities.
Other
income
increased 60% to $24 million, primarily reflecting a $6 million increase in
net
realized gains (including investment income) associated with nuclear
decommissioning trust fund investments.
Interest
and related charges increased
10% to $78 million, primarily reflecting higher interest rates on variable
rate
debt.
Loss
from discontinued operations reflects
the losses
incurred in the first quarter of 2005 by the discontinued operations of
VPEM.
PAGE
17
VIRGINIA
ELECTRIC AND POWER COMPANY
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Segment
Results of Operations
Presented
below is a summary of contributions by our operating segments to net income
for
the quarter ended March 31, 2006 and 2005:
First
Quarter
|
2006
|
2005
|
$
Change
|
|
(millions)
|
Delivery
|
$ 67
|
$ 82
|
$(15)
|
Energy
|
17
|
15
|
2
|
Generation
|
13
|
69
|
(56)
|
Primary
operating segments
|
97
|
166
|
(69)
|
Corporate
|
—
|
(144)
|
144
|
Consolidated
|
$ 97
|
$ 22
|
$75
|
Delivery
Delivery
includes our electric distribution system and customer service operations.
Presented below are operating statistics related to our Delivery
operations:
First
Quarter
|
2006
|
2005
|
%
Change
|
Electricity
delivered (million mwhrs)
|
19.5
|
19.9
|
(2)%
|
Degree
days (electric service area):
|
|
|
|
Cooling(1)
|
13
|
—
|
100
|
Heating(2)
|
1,796
|
2,111
|
(15)
|
Electric
delivery customer accounts(3)
|
2,318
|
2,277
|
2
|
mwhrs
=
megawatt hours
(1) Cooling
degree days are the differences between the average temperature for each day
and
65 degrees, assuming the average temperature is greater than 65
degrees.
(2) Heating
degree days are the differences between the average temperature for each day
and
65 degrees, assuming the average temperature is less than 65
degrees.
(3) In
thousands, at period end.
Presented
below, on an after-tax basis, are the key factors impacting Delivery’s net
income contribution:
|
First
Quarter
|
|
2006
vs. 2005
|
|
Increase
(Decrease)
|
|
(millions)
|
Regulated
electric sales:
|
|
Weather
|
$ (9)
|
Customer
growth
|
3
|
2005
North Carolina rate case settlement
|
(6)
|
Other
|
(3)
|
Change
in net income contribution
|
$(15)
|
PAGE
18
VIRGINIA
ELECTRIC AND POWER COMPANY
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Energy
Energy
includes our electric transmission operations. Presented below, on an after-tax
basis, are the key factors impacting Energy’s net income contribution:
|
First
Quarter
|
|
2006
vs. 2005
|
|
Increase
(Decrease)
|
|
(millions)
|
RTO
start-up and integration costs(1)
|
$ 4
|
Regulated
electric sales:
|
|
Weather
|
(2)
|
Customer
growth
|
1
|
Other
|
(1)
|
Change
in net income contribution
|
$ 2
|
(1)
|
Reflects
the absence of a charge incurred in 2005 for the write-off of certain
previously deferred start-up and integration costs associated with
joining
an RTO that were primarily allocable to Virginia non-jurisdictional
and
wholesale customers.
|
Generation
Generation
includes our portfolio of electric generating facilities, power purchase
agreements and energy supply operations. Presented below are operating
statistics related to our Generation operations:
First
Quarter
|
2006
|
2005
|
%
Change
|
Electricity
supplied (million mwhrs)
|
19.5
|
19.9
|
(2)%
|
mwhrs
=
megawatt hours
Presented
below, on an after-tax basis, are the key factors impacting Generation’s net
income contribution:
|
First
Quarter
|
|
2006
vs. 2005
|
|
Increase
(Decrease)
|
|
(millions)
|
Fuel
expenses in excess of rate recovery
|
$(32)
|
Regulated
electric sales:
|
|
Weather
|
(19)
|
Customer
growth
|
6
|
Outage
costs
|
(10)
|
2005
North Carolina rate case settlement
|
(10)
|
Interest
expense
|
(4)
|
Energy
supply margin(1)
|
6
|
Capacity
expenses
|
7
|
Change
in net income contribution
|
$(56)
|
(1)
|
The
increase in energy supply margin primarily reflects a net benefit
related
to FTRs in excess of congestion
costs.
|
PAGE
19
VIRGINIA
ELECTRIC AND POWER COMPANY
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Corporate
Corporate
includes our corporate and other functions as well as the discontinued
operations of VPEM. Presented below are the Corporate segment’s after-tax
results.
|
First
Quarter
|
|
2006
|
2005
|
|
(millions)
|
VPEM
discontinued operations
|
$—
|
$(93)
|
Specific
items attributable to operating segments
|
—
|
(51)
|
Net
income (loss)
|
$—
|
$(144)
|
In
2005,
we reported a net loss of $144 million in our Corporate segment which included
$93 million of losses incurred in the first quarter of 2005 related to the
discontinued operations of VPEM, as well as the following items attributable
to
the Generation segment:
·
|
A
$77 million ($47 million after-tax) charge resulting from the termination
of a long-term power purchase agreement;
and
|
·
|
An
$11 million ($6 million after-tax) charge related to our interest
in a
long-term power tolling contract that was divested in
2005.
|
Sources
and Uses of Cash
We
depend
on both internal and external sources of liquidity to provide working capital
and to fund capital requirements. Short-term cash requirements not met by cash
provided by operations are generally satisfied with proceeds from short-term
borrowings. Long-term cash needs are met through sales of securities and
additional long-term debt financings.
Operating
Cash Flows
As
presented on our Consolidated Statements of Cash Flows, net cash flows provided
by operating activities were $399 million and $646 million during the first
quarters of 2006 and 2005, respectively. We
believe
that our operations provide a stable source of cash flow sufficient to
contribute to planned levels of capital expenditures and to maintain or grow
our
dividends to Dominion.
Our
operations are subject to risks and uncertainties that may negatively impact
the
timing or amounts of operating cash flows. See discussion of such factors in
Operating
Cash Flows
in
MD&A in our Annual Report on Form 10-K for the year ended December 31,
2005.
Credit
Risk
Our
exposure to potential concentrations of credit risk results primarily from
sales
to wholesale customers. Presented below is a summary of our gross exposure
as of
March 31, 2006 for these activities. We calculate our gross credit exposure
for
each counterparty as the unrealized fair value of derivative contracts plus
any
outstanding receivables (net of payables, where netting agreements exist),
prior
to the application of collateral. We held no collateral for these transactions
at March 31, 2006.
PAGE
20
VIRGINIA
ELECTRIC AND POWER COMPANY
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
Gross
Credit
Exposure
|
|
(millions)
|
Investment
grade(1)
|
$10
|
Non-investment
grade
|
—
|
No
external ratings:
|
|
Internally
rated—investment grade(2)
|
66
|
Internally
rated—non-investment grade
|
—
|
Total
|
$76
|
(1)
|
Designations
as investment grade are based on minimum credit ratings assigned
by
Moody’s Investors Service (Moody’s) and Standard & Poor’s Rating
Group, a division of the McGraw-Hill Companies, Inc. (Standard &
Poor’s). This category is comprised of two counterparties, whose combined
exposures represented approximately 13% of the total gross credit
exposure.
|
(2)
|
The
five largest counterparty exposures, combined, for this category
represented approximately 87% of the total gross credit
exposure.
|
Investing
Cash Flows
During
the first quarters of 2006 and 2005, investing activities resulted in net cash
outflows of $241 million and $190 million, respectively. Significant investing
activities in the first quarter of 2006 included:
·
|
$205
million for environmental upgrades, routine capital improvements
of
generation facilities and construction and improvements of electric
transmission and distribution
assets;
|
·
|
$155
million for purchases of securities held as investments in our nuclear
decommissioning trusts; and
|
·
|
$38
million for nuclear fuel expenditures; partially offset
by
|
·
|
$156
million of proceeds from sales of securities held as investments
in our
nuclear decommissioning trusts.
|
Financing
Cash Flows and Liquidity
We
rely
on banks and capital markets as significant sources of funding for capital
requirements not satisfied by the cash provided by our operations. As discussed
in Credit
Ratings and
Debt Covenants
below,
our ability to borrow funds or issue securities and the return demanded by
investors are affected by our credit ratings. In addition, the raising of
external capital is subject to meeting certain regulatory requirements,
including obtaining regulatory approval from the Virginia State Corporation
Commission (Virginia Commission).
Under
the
new rules of the Securities Act of 1933, we meet the definition of a well-known
seasoned issuer. This allows us to use an automatic shelf registration statement
to register offerings of securities for cash proceeds.
As
presented on our Consolidated Statements of Cash Flows, net cash flows used
in
financing activities were $189 million and $438 million, respectively, for
the
first quarters of 2006 and 2005.
See
Note
8 to our Consolidated Financial Statements for further information regarding
our
credit facilities, liquidity and significant financing transactions. Also see
Note 11 to our Consolidated Financial Statements for further information
regarding our borrowings from Dominion.
Credit
Ratings and Debt Covenants
Credit
ratings are intended to provide banks and capital market participants with
a
framework for comparing the credit quality of securities and are not a
recommendation to buy, sell or hold securities. In Credit
Ratings
and
Debt
Covenants
of
MD&A in our Annual Report on Form 10-K for the year ended December 31, 2005,
we discussed our use of capital markets and the impact of credit ratings on
the
accessibility and costs of using these markets, as well as various covenants
present in the enabling agreements underlying our debt. As of March 31, 2006,
our credit ratings reflect Moody’s credit rating downgrade for our senior
unsecured debt securities and short-term commercial paper. Moody’s concluded
that the downgrade was principally due to the effect of higher fuel costs and
other expenses in excess of rate recovery on our financial performance. In
April
2006, Fitch Ratings (Fitch) affirmed its BBB+ rating of the Company and defined
the outlook for the Company as stable. There have been no other changes in
our
credit ratings nor changes to or events of default under our debt covenants.
PAGE
21
VIRGINIA
ELECTRIC AND POWER COMPANY
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Our
credit ratings as of May 1, 2006 follow:
|
Fitch
|
Moody’s
|
Standard
& Poor’s
|
Mortgage
bonds
|
A
|
A3
|
A
|
Senior
unsecured (including tax-exempt) debt securities
|
BBB+
|
Baa1
|
BBB
|
Preferred
securities of affiliated trust
|
BBB
|
Baa2
|
BB+
|
Preferred
stock
|
BBB
|
Baa3
|
BB+
|
Commercial
paper
|
F2
|
P-2
|
A-2
|
Cash
Flows from Discontinued Operations
The
impact of VPEM’s operations on our 2005 Consolidated Statement of Cash Flows is
presented below. We do not expect the transfer of VPEM to Dominion to have
a
negative impact on our future liquidity.
First
Quarter
|
2005
|
|
(millions)
|
Operating
cash flows
|
$167
|
Investing
cash flows
|
110
|
Financing
cash flows
|
(271)
|
Future
Cash Payments for Contractual Obligations
As
of
March 31, 2006, there have been no material changes outside the ordinary course
of business to the contractual obligations disclosed in MD&A in our Annual
Report on Form 10-K for the year ended December 31, 2005.
Future
Issues and Other Matters
The
following discussion of future issues and other information includes current
developments of previously disclosed matters and new issues arising during
the
period covered by and subsequent to our Consolidated Financial Statements.
This
section should be read in conjunction with Future
Issues and Other Matters
in
MD&A in our Annual Report on Form 10-K for the year ended December 31,
2005.
Virginia
Fuel Factor
In
April
2006, the Virginia General Assembly passed Senate Bill 262, a substitute energy
bill with a provision that would change the way our Virginia jurisdictional
fuel
factor is set during the three and one-half year period beginning July 1,
2007.
The
fuel
factor amendment:
·
|
Allows
annual fuel rate adjustments for three twelve-month periods beginning
July
1, 2007 and one six-month period beginning July 1, 2010 (unless capped
rates are terminated earlier under the Virginia Restructuring
Act);
|
·
|
Allows
a “true-up” at the end of each of the twelve-month periods to account for
differences between projections and actual recovery of fuel costs
during
the prior twelve months; and
|
·
|
Authorizes
the Virginia Commission to defer up to 40% of any fuel factor increase
approved for the first twelve-month period, with recovery of the
deferred
amount over the two and one-half year period beginning July 1, 2008
(under
current law, such a deferral is not
possible).
|
The
amendment would not allow us to collect any unrecovered fuel expenses incurred
prior to July 1, 2007. The Governor of Virginia has until May 19, 2006 to act
on
the bill. With the Governor’s signature, the bill would become law effective
July 1, 2006.
PAGE
22
VIRGINIA
ELECTRIC AND POWER COMPANY
ABOUT
MARKET RISK
The
matters discussed in this Item may contain “forward-looking statements” as
described in the introductory paragraphs under Part I, Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
of this
Form 10-Q. The
reader’s attention is directed to those paragraphs for discussion of various
risks and uncertainties that may affect our future.
Market
Risk Sensitive Instruments and Risk Management
Our
financial instruments, commodity contracts and related financial derivative
instruments are exposed to potential losses due to adverse changes in commodity
prices, interest rates, foreign currency exchange rates and equity security
prices as described below. Commodity price risk is due to our exposure to market
shifts for prices received and paid for natural gas, electricity and other
commodities. Interest rate risk is generally related to our outstanding debt.
We
are exposed to foreign currency exchange rate risks related to our purchases
of
fuel and fuel services denominated in foreign currencies. In addition, we are
exposed to equity price risk through various portfolios of equity securities.
The
following sensitivity analysis estimates the potential loss of future earnings
or fair value from market risk sensitive instruments over a selected time period
due to a 10% unfavorable change in commodity prices, interest rates and foreign
currency exchange rates.
Commodity
Price Risk
To
manage
price risk, we primarily hold commodity based financial derivative instruments
for nontrading purposes associated with the purchase of electricity. As
discussed in Note 8 to
our
Consolidated Financial Statements in our Annual Report on Form 10-K for the
year
ended December 31, 2005,
we
completed the transfer of VPEM to Dominion on December 31, 2005. As a result,
at
December 31, 2005, we did not have significant exposure to commodity price
risk associated with financial derivative instruments. As part of VPEM’s
strategy to market energy and manage related risks prior to its transfer to
Dominion on December 31, 2005, it maintained commodity-based financial
derivative instruments held for both trading and nontrading purposes.
The
derivatives used to manage our commodity price risk are executed within
established policies and procedures and may include instruments such as futures,
forwards, swaps and options that are sensitive to changes in the related
commodity prices. For sensitivity analysis purposes, the fair value of
commodity-based financial derivative instruments is determined based on models
that consider the market prices of commodities in future periods, the volatility
of the market prices in each period, as well as the time value factors of the
derivative instruments. Prices and volatility are principally determined based
on actively quoted market prices.
A
hypothetical 10% unfavorable change in commodity prices would have resulted
in a
decrease of approximately $7 million in the fair value of our non-trading
commodity-based financial derivatives as of March 31, 2006. At December 31,
2005, we did not have significant exposure to commodity price risk associated
with financial derivative instruments.
The
impact of a change in energy commodity prices on our non-trading commodity-based
financial derivative instruments at a point in time is not necessarily
representative of the results that will be realized when such contracts are
ultimately settled. Net losses from derivative commodity instruments used for
hedging purposes, to the extent realized will generally be offset by recognition
of the hedged transaction, such as expenses from power purchases.
Interest
Rate Risk
We
manage
our interest rate risk exposure predominantly by maintaining a portfolio of
fixed and variable rate debt. We also enter into interest rate sensitive
derivatives, including interest rate swaps and interest rate lock agreements.
For financial instruments outstanding at March 31, 2006 and December 31, 2005,
a
hypothetical 10% increase in market interest rates would decrease annual
earnings by approximately $4 million and $6 million, respectively.
Foreign
Currency Exchange Risk
We
have
foreign currency exchange risk exposure associated with anticipated future
purchases of nuclear fuel and nuclear fuel processing services denominated
in
foreign currencies. We manage certain of these risks by utilizing currency
forward contracts. As a result of holding these contracts as hedges, our
exposure to foreign currency risk for these purchases is minimal. A hypothetical
10% unfavorable change in relevant foreign exchange rates would have resulted
in
a decrease of approximately $5 million and $6 million in the fair value of
currency forward contracts held by us at March 31, 2006 and December 31, 2005,
respectively.
PAGE
23
VIRGINIA
ELECTRIC AND POWER COMPANY
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT
MARKET RISK
(Continued)
Investment
Price Risk
We
are
subject to investment price risk due to marketable securities held as
investments in nuclear decommissioning trust funds. These marketable securities
are reported on our Consolidated Balance Sheets at fair value. We recognized
net
realized gains (including investment income) on nuclear decommissioning trust
investments of $17 million for the three months ended March 31, 2006 and $32
million for the year ended December 31, 2005. We recorded, in AOCI, net
unrealized gains on decommissioning trust investments of $15 million for the
three months ended March 31, 2006 and $10 million for the year ended December
31, 2005.
Dominion
sponsors employee pension and other postretirement benefit plans, in which
our
employees participate, that hold investments in trusts to fund benefit payments.
To the extent that the values of investments held in these trusts decline,
the
effect will be reflected in our recognition of the periodic cost of such
employee benefit plans and the determination of the amount of cash that we
will
contribute to the employee benefit plans.
PAGE
24
VIRGINIA
ELECTRIC AND POWER COMPANY
Senior
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures as of
the
end of the period covered by this report. Based on this evaluation process,
the
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective. There were no changes in
our
internal control over financial reporting that occurred during the last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
In
accordance with FIN 46R, we have included in our Consolidated Financial
Statements a VIE through which we have financed and leased a power generation
project. Our Consolidated Balance Sheet as of March 31, 2006 reflects $347
million of net property, plant and equipment and deferred charges and $370
million of related debt attributable to the VIE. As this VIE is owned by
unrelated parties, we do not have the authority to dictate or modify, and
therefore cannot assess, the disclosure controls and procedures or internal
control over financial reporting in place at this entity.
PAGE
25
VIRGINIA
ELECTRIC AND POWER COMPANY
PART
II. - OTHER INFORMATION
From
time
to time, we are alleged to be in violation or in default under orders, statutes,
rules or regulations relating to the environment, compliance plans imposed
upon
or agreed to by us, or permits issued by various local, state and federal
agencies for the construction or operation of facilities. Administrative
proceedings may also be pending on these matters. In addition, in the ordinary
course of business, we are involved in various legal proceedings. Management
believes that the ultimate resolution of these proceedings will not have a
material adverse effect on our financial position, liquidity or results of
operations. See Future
Issues and Other Matters
in
MD&A and Environmental
Matters
in Note
9 to our Consolidated Financial Statements for discussions on various
environmental and regulatory proceedings to which we are a party.
In
March
2004, the State of North Carolina filed a petition with the EPA under Section
126 of the Clean Air Act seeking additional nitrogen oxide and sulfur dioxide
reductions from electrical generating units in thirteen states, claiming
emissions from the electrical generating units in those states are contributing
to air quality problems in North Carolina. We have electrical generating units
in two of the thirteen states. In March 2006, the EPA issued a final rulemaking
through which it denied the North Carolina petition on the basis that the
implementation of the Clean Air Interstate Rule (CAIR) adequately addresses
the
air quality issues identified by North Carolina. Therefore, we do not anticipate
additional expenditures in relation to this matter.
ITEM
1A. RISK FACTORS
Our
business is influenced by many factors that are difficult to predict, involve
uncertainties that may materially affect actual results and are often beyond
our
control. We have identified a number of these risk factors in our Annual Report
on Form 10-K for the year ended December 31, 2005, which factors should be
taken
into consideration when reviewing the information contained in this report.
With
the exception of the risk factors below, which have been modified to take into
account a March downgrade by Moody’s of our credit rating and certain recent
changes to the Virginia fuel factor regulations, there have been no material
changes with regard to the risk factors previously disclosed in our most recent
Form 10-K. For other factors that may cause actual results to differ materially
from those indicated in any forward-looking statement or projection contained
in
this report, see Forward-Looking
Statements
in
MD&A.
Changing
rating agency requirements could negatively affect our growth and business
strategy.
As of
May 1, 2006, our senior unsecured debt is rated BBB, stable outlook, by Standard
& Poor’s; Baa1, stable outlook, by Moody’s; and BBB+, stable outlook, by
Fitch. In order to maintain our current credit ratings in light of existing
or
future requirements, we may find it necessary to take steps or change our
business plans in ways that may adversely affect our growth and earnings. A
reduction in our credit ratings by Standard & Poor’s, Moody’s or Fitch
could increase our borrowing costs and adversely affect operating
results.
We
are exposed to cost-recovery shortfalls because of capped base rates and
amendments to the fuel factor statute in effect in
Virginia.
Under
the Virginia Restructuring Act, as amended in 2004, our base rates (excluding,
generally, a fuel factor with limited adjustment provisions, and certain other
allowable adjustments) remain capped through December 31, 2010 unless
modified or terminated consistent with the Virginia Restructuring Act. Although
the Virginia Restructuring Act allows for the recovery of certain
generation-related costs during the capped rates period, we remain exposed
to
numerous risks of cost-recovery shortfalls. These include exposure to stranded
costs, future environmental compliance requirements, certain tax law changes,
costs related to hurricanes or other weather events, inflation, the cost of
obtaining replacement power during unplanned plant outages and increased capital
costs.
In
addition, under the 2004 amendments to the Virginia fuel factor statute, our
current Virginia fuel factor provisions are locked-in until the earlier of
July 1, 2007 or the termination of capped rates by order of the Virginia
Commission, with no deferred fuel accounting. The 2004 amendments provide for
a
one-time adjustment of our fuel factor, effective July 1, 2007 through December
31, 2010 (unless capped rates are terminated earlier), with no adjustment for
previously incurred over-recovery or under-recovery. In April 2006, the Virginia
General Assembly approved Senate Bill 262 further amending the fuel factor
statute. If signed by the Governor, Senate Bill 262 will institute annual fuel
rate adjustments for three twelve-month periods beginning July 1, 2007 and
one
six-month period beginning July 1, 2010. Beginning with the July 1, 2008
adjustment, the recalculation of the fuel factor would account for differences
between projections and actual recovery of fuel costs during the preceding
twelve-month period. As a result of the current
PAGE
26
VIRGINIA
ELECTRIC AND POWER COMPANY
PART
II. - OTHER INFORMATION
(Continued)
locked-in
fuel factor we are exposed to fuel price and other risks. These risks include
exposure to increased costs of fuel, including purchased power costs,
differences between our projected and actual power generation mix and generating
unit performance (which affects the types and amounts of fuel we use) and
differences between fuel price assumptions and actual fuel prices.
On
April
28, 2006, by consent in lieu of the annual meeting, Dominion Resources, Inc.,
the sole holder of all the voting common stock of the Company, elected the
following persons to serve as Directors: Thomas F. Farrell, II and Thomas N.
Chewning.
(a)
Exhibits:
|
|
|
3.1
|
Restated
Articles of Incorporation, as in effect on October 28, 2003 (Exhibit
3.1,
Form 10-Q for the quarter ended September 30, 2003, File No. 1-2255,
incorporated by reference).
|
|
3.2
|
Bylaws,
as amended, as in effect on April 28, 2000 (Exhibit 3, Form 10-Q
for the
period ended March 31, 2000, File No. 1-2255, incorporated by
reference).
|
|
4
|
Virginia
Electric and Power Company agrees to furnish to the Securities and
Exchange Commission upon request any other instrument with respect
to
long-term debt as to which the total amount of securities authorized
does
not exceed 10% of its total consolidated assets.
|
|
10.1
|
$3.0
billion Five-Year Credit Agreement dated February 28, 2006 among
Dominion
Resources, Inc., Virginia Electric and Power Company, Consolidated
Natural
Gas Company, JPMorgan Chase Bank, N.A., as Administrative Agent,
Citibank,
N.A., as Syndication Agent and Barclays Bank PLC, The Bank of Nova
Scotia
and Wachovia Bank, National Association, as Co-Documentation Agents
and
other lenders named therein (Exhibit 10.1, Form 8-K filed March 3,
2006,
File No. 1-2255, incorporated by reference).
|
|
12.1
|
Ratio
of earnings to fixed charges (filed herewith).
|
|
12.2
|
Ratio
of earnings to fixed charges and preferred dividends (filed
herewith).
|
|
31.1
|
Certification
by Registrant’s Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
31.2
|
Certification
by Registrant’s Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
32
|
Certification
to the Securities and Exchange Commission by Registrant’s Chief Executive
Officer and Chief Financial Officer, as required by Section 906 of
the
Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
99
|
Condensed
consolidated earnings statements (unaudited) (filed
herewith).
|
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
VIRGINIA
ELECTRIC AND POWER COMPANY
Registrant
|
|
|
May
3, 2006
|
/s/
Steven A.
Rogers
|
|
Steven
A. Rogers
Senior
Vice President
(Principal
Accounting Officer)
|
|
|