Business Context and Reporting Period
This Form 10-Q covers Dominion Resources, Inc. for the quarterly and nine-month periods ended September 30, 1999. Dominion Resources is a holding company headquartered in Richmond, Virginia, with principal operations in regulated electric utility services (Virginia Power), independent power production and natural gas (Dominion Energy), and financial services (Dominion Capital). The reporting period is significantly impacted by the deregulation of Virginia's electric generation industry, the pending merger with Consolidated Natural Gas Company (CNG), and the divestiture of international assets.
Key Financial Metrics
| Metric (Millions) | Three Months Ended 9/30/99 | Three Months Ended 9/30/98 | Nine Months Ended 9/30/99 | Nine Months Ended 9/30/98 |
|---|---|---|---|---|
| Operating Revenues | $1,662.5 | $1,544.3 | $4,270.8 | $4,903.0 |
| Operating Income | $486.5 | $435.6 | $1,095.6 | $883.3 |
| Net Income | $232.1 | $424.6 | $233.2 | $481.4 |
| Diluted EPS (Net Income) | $1.21 | $2.17 | $1.21 | $2.47 |
| Cash and Equivalents | $357.0 | $425.6 | $357.0 | $965.1 |
| Total Debt (Short + Long Term) | $7,767.0 | $6,552.1 | $7,767.0 | $6,552.1 |
| Operating Cash Flow (9mo) | N/A | N/A | $835.2 | $828.3 |
Note: Total Debt calculated as Short-term debt ($909.9M) + Long-term debt ($6,857.1M) as of Sept 30, 1999.
Material Changes vs. Prior Period
- Net Income Decline: Net income for the nine months ended September 30, 1999, decreased to $233.2 million from $481.4 million in the prior year. This represents a $1.26 per share decrease in earnings.
- Extraordinary Charge: A significant after-tax charge of $254.8 million was recorded in the first quarter of 1999 due to the discontinuation of SFAS No. 71 (regulatory accounting) for Virginia Power's generation operations following Virginia's deregulation legislation. This charge included the write-off of generation-related assets and deferred investment tax credits.
- Asset Sales and Impairments:
- East Midlands: The 1998 period included a $332.3 million gain on the sale of East Midlands operations, which was absent in 1999.
- Latin America: Dominion Energy recognized an impairment loss of $18.1 million (after-tax) in Q3 1999 related to the pending sale of Latin American power generation interests to Duke Energy International.
- Operating Expenses: Operating expenses for the nine months decreased to $3,175.2 million from $4,019.7 million in 1998, largely due to the absence of East Midlands operations and the one-time rate refund recorded in 1998.
- Interest Charges: Net interest charges decreased by $94.2 million year-over-year due to the sale of East Midlands and the associated reduction in debt.
Guidance, Outlook, and Risks
- CNG Merger: Dominion Resources is in the final stages of merging with Consolidated Natural Gas Company (CNG). Regulatory approvals from state commissions, the FTC, and FERC have been granted conditionally; SEC approval is pending. The merger requires the divestiture of Virginia Natural Gas (VNG) and Dominion Capital (financial services subsidiary).
- Virginia Deregulation: Virginia Power faces a base rate freeze until July 2007. While this provides stability, the company faces risks regarding the recovery of stranded costs and exposure to long-term power purchase commitments if capped rates are not maintained.
- Legal and Environmental:
- Clean Air Act: Notices of intent to sue were received from Connecticut and New York regarding alleged violations at generating facilities. Dominion believes these will not have a material adverse effect.
- Superfund Sites: Virginia Power is a Potentially Responsible Party (PRP) at two sites with estimated total remediation costs of $106M-$156M; Dominion's share is estimated at $1.7M-$2.8M.
- Year 2000 Compliance: The company is on schedule for Y2K readiness, with 99% of critical systems at Virginia Power and 100% at Dominion Capital ready as of September 30, 1999. Estimated total costs are $30M-$40M.
- Market Risk: The company utilizes derivatives to hedge commodity price risks. A hypothetical 10% unfavorable change in oil/gas prices would decrease fair value by approximately $23.4 million.
Investor Verification Checklist
- Merger Status: Confirm the final approval status of the CNG merger with the SEC and the timeline for the divestiture of Dominion Capital and Virginia Natural Gas.
- Stranded Cost Recovery: Verify the regulatory mechanisms in place to ensure the recovery of the $3.2 billion in potential stranded costs under the new Virginia deregulation framework.
- Latin American Sale: Monitor the closing of the sale of Latin American assets to Duke Energy International and the realization of the $405 million proceeds.
- Legal Proceedings: Track the status of the Clean Air Act notices from Connecticut and New York to ensure no material penalties are assessed.
- Debt Structure: Review the impact of the CNG merger on the consolidated debt load and credit ratings, given the increase in total debt to $7.77 billion.