Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2000, for Dominion Resources, Inc. (Dominion). The reporting period is significantly impacted by the acquisition of Consolidated Natural Gas Company (CNG) on January 28, 2000, for approximately $6.4 billion. Dominion operates through three primary business units: Dominion Energy (generation and trading), Dominion Delivery (distribution and transmission), and Dominion Exploration & Production. The company is also in the process of divesting its financial services subsidiary, Dominion Capital, Inc. (DCI), and certain international assets to comply with regulatory requirements following the CNG merger.
Key Financial Metrics
| Metric (Millions, except per share) | Three Months Ended Sept 30, 2000 |
Three Months Ended Sept 30, 1999 |
Nine Months Ended Sept 30, 2000 |
Nine Months Ended Sept 30, 1999 |
|---|---|---|---|---|
| Revenues | $2,351 | $1,663 | $6,479 | $4,271 |
| Operating Income | $666 | $492 | $1,164 | $1,114 |
| Net Income | $260 | $235 | $330 | $238 |
| Diluted EPS (Net Income) | $1.09 | $1.23 | $1.41 | $1.24 |
| Cash Flow from Operations | N/A | N/A | $1,288 | $835 |
| Total Assets | $29,822 | N/A | N/A | N/A |
| Total Liabilities | $22,237 | N/A | N/A | N/A |
| Long-Term Debt | $11,322 | N/A | N/A | N/A |
| Short-Term Debt | $3,613 | N/A | N/A | N/A |
Note: 1999 figures are as restated. Net income for the nine months ended Sept 30, 2000, includes a $21 million benefit from a change in accounting principle for pension costs and excludes a $255 million extraordinary loss recorded in Q1 1999.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased by 41% ($688 million) for the quarter and 52% ($2.2 billion) for the nine months, primarily driven by the inclusion of CNG's operations.
- Restructuring Costs: Dominion recognized $411 million in restructuring and acquisition-related costs for the nine months ended September 30, 2000. This includes $172 million in impairment losses related to the exit strategy for DCI and $55 million in mark-to-market losses on CNG derivative contracts.
- Interest Expense: Fixed charges increased by $339 million for the nine-month period, largely due to interest on debt incurred to finance the CNG acquisition.
- Asset Base: Total assets grew from $17.8 billion (Dec 31, 1999) to $29.8 billion (Sept 30, 2000), reflecting the CNG acquisition and a $3.5 billion acquisition adjustment.
- Divestitures: The company completed the sale of its 80% interest in Corby Power Limited ($73 million) and is in the process of selling Virginia Natural Gas (VNG) and CNG International assets.
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management expects the restructuring plan to reduce future annualized operating costs by approximately $102 million. The company is actively divesting non-core assets, including DCI businesses and international holdings, to focus on the "Main to Maine" U.S. market. Dominion plans to acquire the Millstone Nuclear Power Station in Connecticut for approximately $1.3 billion, expected to close by April 2001.
Risks and Contingencies
- Regulatory and Legal: Virginia Power faces a Notice of Violation from the EPA and lawsuits from state Attorneys General regarding alleged Clean Air Act violations at the Mt. Storm Power Station. Additionally, Virginia's electric utility restructuring legislation mandates functional separation of generation and distribution by 2002.
- Accounting Changes: Implementation of SFAS No. 133 (Derivatives) in Q1 2001 is expected to have a material impact on earnings and equity, though the exact amount is not yet estimated.
- DCI Divestiture: The company must divest DCI within three years per SEC order. While exit strategies are underway, additional impairment charges may be incurred as plans are finalized.
- Market Risk: A hypothetical 10% increase in interest rates would decrease annual earnings by approximately $41 million. A 10% unfavorable change in commodity prices would decrease the fair value of derivative contracts by approximately $38 million.
Investor Verification Checklist
- Debt Levels: Verify the sustainability of the increased debt load ($11.3 billion long-term, $3.6 billion short-term) incurred for the CNG acquisition and the Millstone purchase.
- DCI Impairments: Monitor future quarters for additional impairment charges related to the divestiture of Dominion Capital, Inc. (DCI) assets.
- Regulatory Outcomes: Track the resolution of the EPA Clean Air Act violations and the approval of Virginia Power's functional separation plan.
- Divestiture Proceeds: Confirm the timing and final proceeds from the sales of VNG, CNG International, and DCI assets to ensure they meet the projected $1.5 billion target for debt reduction.
- Accounting Impact: Review Q1 2001 filings for the cumulative effect of adopting SFAS No. 133 on derivative instruments.