D

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2000, for Dominion Resources, Inc. (Dominion). The reporting period is significantly impacted by the acquisition of Consolidated Natural Gas Company (CNG), which was completed on January 28, 2000. Dominion operates through three primary business units: Dominion Energy (generation and trading), Dominion Delivery (distribution and transmission), and Dominion Exploration and Production (oil and gas). The company also manages financial services (DCI) and corporate operations.

Key Financial Metrics

Note: Q1 1999 figures include an extraordinary charge of $255 million related to Virginia Power deregulation.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased by $779 million (60%) primarily due to the inclusion of CNG's operations post-acquisition, increased electric service revenue, and higher oil and gas prices.
• Profitability Turnaround: Net income swung from a loss of $117 million in Q1 1999 to a profit of $141 million in Q1 2000. The prior year loss was driven by a one-time $255 million extraordinary charge for deregulation-related asset write-offs.
• Debt Expansion: Total debt increased significantly to finance the CNG acquisition. Short-term debt rose to $5.6 billion (from $870 million), largely due to commercial paper issuances to fund the transaction.
• Restructuring Costs: Dominion recognized $132 million in restructuring and acquisition-related costs in Q1 2000. This included $68 million for severance, $55 million in mark-to-market losses on CNG derivative contracts reclassified as non-hedging, and $5 million in IT conversion costs.
• Accounting Change: Effective with the CNG acquisition, Dominion changed its accounting for oil and gas exploration and production from the successful efforts method to the full cost method.

Guidance, Outlook, and Risks

• Future Restructuring: Management expects to incur additional charges related to restructuring and integration as operations are consolidated. Planned workforce reductions and IT write-offs are expected to avoid approximately $60 million in future annualized operating costs.
• Asset Sales: Dominion agreed to sell Virginia Natural Gas (VNG) to AGL Resources for $500–$550 million, with closing expected by December 31, 2000. The company also completed the sale of its Latin American generation interests to Duke Energy International for approximately $405 million.
• Regulatory Risks:
  • Virginia Deregulation: A retail access pilot program is set to begin September 1, 2000, introducing competition for approximately 35,000 customers.
  • Environmental Compliance: Virginia Power received a Notice of Violation (NOV) from the EPA regarding the Mt. Storm Power Station for alleged Clean Air Act violations. The company intends to vigorously defend against these allegations.
• Market Risk: A hypothetical 10% unfavorable change in oil and natural gas prices would result in a $47 million decrease in the fair value of derivative contracts. A similar 10% change in commodity prices for trading activities would result in a $6 million loss.

Investor Verification Checklist

• Acquisition Integration: Verify the progress of CNG integration and the realization of projected synergies, specifically the $60 million in annualized cost savings.
• Debt Servicing: Monitor the company's ability to service the increased debt load ($14.9 billion total debt) and the refinancing of short-term commercial paper used for the acquisition.
• Environmental Litigation: Track the outcome of the EPA Notice of Violation regarding Mt. Storm Power Station and potential penalties or remediation costs.
• Derivative Exposure: Assess the impact of the new enterprise risk management strategy and the $55 million mark-to-market loss recognized on CNG derivatives.
• Regulatory Timeline: Confirm the implementation schedule for the Virginia retail access pilot program and functional separation rules.