D

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 1999, for Dominion Resources, Inc. (Registrant). The company is a holding company headquartered in Richmond, Virginia, with principal business segments including Virginia Power (regulated utility), Dominion Energy (independent power and natural gas), and Dominion Capital (financial services). The reporting period is significantly impacted by new Virginia legislation signed on March 25, 1999, restructuring the state's electric utility industry and mandating the discontinuance of SFAS No. 71 for generation operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Extraordinary Charge: Net income swung from a profit of $139.5 million in Q1 1998 to a loss of $116.3 million in Q1 1999. This is primarily due to a one-time, after-tax extraordinary charge of $254.8 million ($1.32 per share) resulting from the write-off of generation-related regulatory assets following Virginia's deregulation legislation.
• Revenue Decline: Consolidated operating revenues decreased by $480.5 million (27%) compared to Q1 1998. This decline is largely attributed to the sale of the East Midlands subsidiary in 1998, which is no longer included in the current period.
• Core Earnings Stability: Excluding the extraordinary item, income before extraordinary items remained relatively flat at $138.5 million in 1999 versus $139.5 million in 1998, indicating stable underlying operational performance.
• Debt Increase: Total debt increased by approximately $562 million, driven by the issuance of long-term debt ($1,123 million) and short-term debt ($387 million) to fund acquisitions (San Juan Partners) and mortgage originations, partially offset by repayments.

Guidance, Outlook, and Risks

• Regulatory Outlook: Virginia legislation mandates a base rate freeze until July 2007 and introduces retail customer choice starting in 2002. While generation is deregulated, the company expects to recover stranded costs through capped rates and a "wires charge."
• Merger Activity: Dominion Resources has an amended merger agreement with Consolidated Natural Gas Company (CNG). The deal values CNG shares at $66.60 and includes a cash buyback of 15-20% of Dominion's own shares at $43.00 per share. The transaction is subject to shareholder and regulatory approval.
• Year 2000 Compliance: The company is on schedule for Y2K readiness. As of March 31, 1999, 96% of Virginia Power's critical systems were ready. Total estimated costs are $35-$45 million, with $17.6 million already expended.
• Market Risks: Significant exposure exists regarding long-term power purchase contracts. Without the capped rates provided by legislation, potential losses could reach $3.2 billion. Additionally, the company faces commodity price risks in natural gas and electricity trading.
• Contingencies: The company faces potential environmental remediation costs at Superfund sites (estimated $1.6-$2.2 million share) and nuclear decommissioning obligations.

Investor Verification Checklist

• Extraordinary Item Impact: Verify the $254.8 million write-off calculation and the specific regulatory assets excluded from recovery under the new Virginia law.
• CNG Merger Terms: Confirm the final approval status of the CNG merger and the specific mechanics of the 15-20% cash buyback of Dominion shares.
• Debt Structure: Review the increase in short-term debt ($658.5 million) and the reliance on commercial paper to fund non-utility operations.
• Power Purchase Contracts: Assess the sensitivity of long-term power purchase contracts to future market prices, noting the disclosed potential $500 million loss exposure in certain scenarios.
• Y2K Contingency Plans: Review the finalized contingency plans for Virginia Power, particularly regarding communication failures and generation capacity loss.