Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2001, for Dominion Resources, Inc. (Dominion), a holding company headquartered in Richmond, Virginia. The company operates through three principal business units: Dominion Energy (generation and trading), Dominion Delivery (electric and gas distribution), and Dominion Exploration & Production. The reporting period includes the full integration of Consolidated Natural Gas Company (CNG) operations, acquired in January 2000, and the completion of the Millstone Nuclear Power Station acquisition on March 31, 2001.
Key Financial Metrics
| Metric | Q1 2001 | Q1 2000 |
|---|---|---|
| Operating Revenue | $3,198 million | $2,069 million |
| Net Income | $162 million | $168 million |
| Diluted EPS | $0.65 | $0.75 |
| Operating Cash Flow | $922 million | $445 million |
| Total Assets | $30,505 million | $29,297 million (Dec 31, 2000) |
| Total Liabilities | $22,089 million | $21,410 million (Dec 31, 2000) |
| Short-term Debt | $1,923 million | $3,237 million (Dec 31, 2000) |
| Long-term Debt | $11,799 million | $10,101 million (Dec 31, 2000) |
Note: Q1 2000 Net Income includes a $21 million cumulative effect of a change in accounting principle related to pension costs. Q1 2001 Net Income excludes this item but includes a $136 million after-tax charge for restructuring contracts with non-utility generators.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased by $1,129 million (54%) compared to Q1 2000. This was driven by the inclusion of CNG operations for the full quarter, colder weather increasing regulated sales, and higher wholesale margins.
- Net Income Decline: Despite revenue growth, Net Income decreased by $6 million. This was primarily due to a $136 million after-tax charge for the purchase and termination of long-term power purchase agreements and higher purchased gas costs.
- EPS Reduction: Diluted EPS fell to $0.65 from $0.75. The prior year figure was boosted by a one-time accounting adjustment ($0.09 per share) related to pension costs, which did not recur in 2001.
- Cash Flow Improvement: Operating cash flow more than doubled to $922 million, reflecting strong operational performance and the full-year impact of CNG integration.
- Debt Structure: Short-term debt decreased by $1.3 billion as the company refinanced bridge financing from the CNG acquisition with long-term debt and preferred securities.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted the successful integration of CNG and the strategic acquisition of Millstone Nuclear Power Station ($1.3 billion purchase price). The company adopted SFAS No. 133 (Derivatives and Hedging) on January 1, 2001, resulting in an initial after-tax charge of $183 million to Accumulated Other Comprehensive Income (AOCI), which is expected to be reclassified to earnings over the next 12 months.
Outlook and Future Issues:
- Regulatory Changes: Virginia regulators announced an accelerated timeline for retail electric competition, requiring Dominion to offer choice to all customers by January 1, 2003, rather than the previously planned 2004 date.
- Derivative Accounting Risk: Ongoing interpretations of SFAS No. 133 by the FASB could subject certain long-term power purchase contracts to fair value accounting, potentially increasing earnings volatility.
- Capital Requirements: The company expects to fund capital projects and debt maturities through operating cash flows, short-term borrowings, and long-term debt issuances. $4.3 billion remains available under shelf registrations.
Unusual Items: A $136 million after-tax charge was recorded for restructuring contracts with non-utility generating facilities. Additionally, a $130 million restructuring charge was recorded in Q1 2000 (not 2001) related to the CNG acquisition integration.
Investor Verification Checklist
- Millstone Acquisition Impact: Verify the pro forma financial impact of the Millstone Nuclear Power Station acquisition and the status of Unit 1 decommissioning.
- Derivative Accounting (SFAS 133): Monitor the reclassification of the $183 million AOCI charge to earnings and potential future volatility from fair value accounting on power purchase contracts.
- Regulatory Timeline: Assess the financial implications of the accelerated retail competition mandate in Virginia (effective Jan 1, 2003).
- Debt Refinancing: Confirm the terms and interest rates of the new long-term debt issued to replace short-term bridge financing from the CNG acquisition.
- Gas Price Exposure: Review the sensitivity of Dominion Delivery margins to fluctuating natural gas prices, given the significant increase in purchased gas costs.