Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2002, for Dominion Resources, Inc. (Dominion), a holding company headquartered in Richmond, Virginia. Dominion operates through three primary segments: Dominion Energy (generation, trading, and pipelines), Dominion Delivery (regulated electric and gas distribution), and Dominion Exploration & Production (oil and gas). The company serves approximately 2.2 million electric customers and 1.7 million gas customers.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2002 | Q1 2001 |
|---|---|---|
| Operating Revenue | $2,634 | $3,198 |
| Operating Expenses | $1,923 | $2,702 |
| Income from Operations | $711 | $496 |
| Net Income | $322 | $162 |
| Diluted Earnings Per Share | $1.20 | $0.65 |
| Cash Flow from Operations | $412 | $922 |
| Total Debt (Short-term + Long-term) | $13,054 | $14,006 |
| Cash and Cash Equivalents | $648 | $486 |
Material Changes vs. Prior Period
- Net Income Surge: Net income increased by $160 million (99%) to $322 million. This was primarily driven by a one-time after-tax charge of $136 million taken in Q1 2001 related to the purchase of non-utility generating plants and the discontinuance of goodwill amortization effective Jan 1, 2002, which added $22 million to net income.
- Revenue Decline: Operating revenue decreased $564 million (18%) to $2,634 million. The decline was largely due to comparably milder weather reducing demand for regulated electric and gas sales, and lower natural gas prices impacting non-regulated gas sales.
- Expense Reduction: Operating expenses decreased $779 million (29%) to $1,923 million, reflecting lower purchased gas costs due to milder weather and lower commodity prices.
- Segment Performance:
- Dominion Energy: Net income contribution decreased $19 million due to lower revenues from milder weather and lower gas prices, partially offset by Millstone power plant operations.
- Dominion Delivery: Net income contribution decreased $10 million due to milder weather reducing sales volumes.
- Dominion Exploration & Production: Net income contribution increased $17 million to $88 million, driven by increased production from the Louis Dreyfus acquisition, despite lower average realized prices.
Guidance, Outlook, and Risks
- Accounting Changes: Dominion adopted SFAS No. 142 (Goodwill and Intangible Assets) on Jan 1, 2002, eliminating goodwill amortization. The company is currently performing the transitional goodwill impairment test, with results expected by the end of Q2 2002. SFAS No. 143 (Asset Retirement Obligations) will be adopted Jan 1, 2003; the financial impact is not yet determined.
- Regulatory Environment: Effective Jan 1, 2002, Virginia's electric generation market opened to competition. Dominion faces risks regarding cost recovery shortfalls and stranded costs under capped electric rates until July 2007.
- Market Risks:
- Commodity Prices: A hypothetical 10% unfavorable change in commodity prices would decrease the fair value of non-trading derivative instruments by approximately $282 million.
- Interest Rates: A 10% increase in market interest rates would decrease annual earnings by approximately $5 million.
- Acquisitions: Dominion agreed to acquire Mirant State Line Ventures, Inc. for approximately $182 million, expected to close in Q2 2002.
- Liquidity: The company raised $1.8 billion in Q1 2002 through long-term debt and common stock issuances to repay debt and fund capital expenditures. Cash flow from operations decreased significantly due to margin deposit payments and lower receivable collections compared to the prior year.
Investor Verification Checklist
- Goodwill Impairment Test: Verify the outcome of the SFAS No. 142 transitional goodwill impairment test expected in Q2 2002, as this could materially affect earnings.
- Weather Sensitivity: Monitor weather patterns in Virginia and the Mid-Atlantic, as milder weather significantly reduced Q1 2002 revenues and earnings.
- Commodity Hedging: Review the valuation of derivative contracts and the potential impact of volatile natural gas and electricity prices on future earnings.
- Regulatory Decisions: Track the Virginia State Corporation Commission's decisions regarding the separation of generation and delivery operations and rate recovery mechanisms.
- Debt Structure: Note the issuance of $330 million in equity-linked debt securities and the associated future share issuance obligations (6.7M to 8.1M shares in 2004).