Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2001, for Dominion Resources, Inc. (Dominion), a holding company headquartered in Richmond, Virginia. Dominion operates through three primary segments: Dominion Energy (generation, trading, and gas pipelines), Dominion Delivery (regulated electric and gas distribution), and Dominion Exploration & Production (oil and gas). The company is also in the process of winding down its financial services subsidiary, Dominion Capital, Inc. (DCI), following the sale of Saxon Capital, Inc. in July 2001.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2001 | Six Months Ended June 30, 2000 |
|---|---|---|
| Operating Revenue | $5,507 million | $4,120 million |
| Net Income | $318 million | $70 million |
| Diluted EPS | $1.27 | $0.30 |
| Operating Cash Flow | $1,019 million | $718 million |
| Total Assets | $32,253 million | $29,297 million |
| Total Debt (Short + Long Term) | $13,621 million | $13,338 million |
| Cash and Equivalents | $476 million | $360 million |
Note: Total Debt calculated as Short-term debt ($1,491M) + Long-term debt ($12,130M) for 2001; Short-term debt ($3,237M) + Long-term debt ($10,101M) for 2000.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 34% year-over-year to $5.5 billion, driven by the full inclusion of Consolidated Natural Gas (CNG) operations and the acquisition of the Millstone Nuclear Power Station.
- Profitability Surge: Net income rose to $318 million from $70 million. This improvement is largely attributable to the absence of significant restructuring charges in 2001 compared to $392 million in restructuring and acquisition-related costs recorded in the first half of 2000.
- Segment Performance:
- Dominion Energy: Net income increased $95 million due to Millstone acquisition and higher non-regulated sales.
- Dominion Delivery: Net income increased $34 million, reflecting CNG inclusion and customer growth, offset by milder weather in the second quarter.
- Exploration & Production: Net income increased $47 million due to higher oil and gas prices (up 11-13%) and increased gas production.
- Corporate/Other: Net expenses decreased $90 million due to the lack of 2000-era restructuring charges, though offset by a $136 million charge for terminating non-utility generating contracts and a $24.5 million loss on the sale of Saxon Capital.
- Accounting Changes: Dominion adopted SFAS No. 133 (Derivatives) on January 1, 2001, resulting in a one-time after-tax charge of $183 million to accumulated other comprehensive income (AOCI).
Guidance, Outlook, and Risks
- Regulatory Environment: Dominion is navigating the transition to a competitive retail electric market in Virginia, with full customer choice required by January 1, 2003. The company is also seeking approval for an index-based fuel recovery mechanism.
- Acquisitions and Divestitures: The company completed the $1.3 billion acquisition of Millstone Nuclear Power Station. It also finalized the sale of Saxon Capital, Inc., marking a significant step in exiting its financial services business.
- Accounting Standards: Dominion will adopt SFAS No. 142 (Goodwill) on January 1, 2002, which will cease goodwill amortization. It will also adopt SFAS No. 143 (Asset Retirement Obligations) in 2003, which may impact the recognition of nuclear decommissioning liabilities.
- Market Risks: The company faces exposure to commodity price volatility (natural gas, oil, electricity) and interest rate fluctuations. A hypothetical 10% adverse change in commodity prices could decrease the fair value of derivative contracts by approximately $143 million.
- Legal Proceedings: Dominion is involved in a lawsuit regarding alleged fraudulent mismeasurement of gas volumes on federal leases; the company believes the resolution will not have a material adverse effect.
Investor Verification Checklist
- Restructuring Charges: Verify the $136 million charge related to the termination of long-term power purchase agreements with non-utility generators and its impact on future operating costs.
- Millstone Integration: Confirm the final purchase price allocation for the Millstone Nuclear Power Station and the status of Unit 1 decommissioning.
- Derivative Exposure: Review the $183 million AOCI charge from SFAS 133 adoption and the timeline for its reclassification to earnings over the next 12 months.
- Debt Refinancing: Monitor the repayment of short-term bridge financing related to the CNG acquisition and the issuance of new long-term debt to fund capital projects.
- Regulatory Approvals: Track the Virginia State Corporation Commission's decision on the proposed fuel recovery mechanism and the separation of generation and delivery operations.