Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 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. Following the acquisition, Dominion reorganized into three primary business units: Dominion Energy (generation and trading), Dominion Delivery (distribution and transmission), and Dominion Exploration & Production. The company is also subject to SEC requirements to divest its financial services subsidiary, Dominion Capital, Inc. (DCI).
Key Financial Metrics
| Metric (Millions) | Three Months Ended June 30, 2000 |
Three Months Ended June 30, 1999 |
Six Months Ended June 30, 2000 |
Six Months Ended June 30, 1999 |
|---|---|---|---|---|
| Revenues | $2,056 | $1,315 | $4,128 | $2,608 |
| Operating Income | $66 | $300 | $480 | $622 |
| Net Income (Loss) | $(106) | $120 | $35 | $3 |
| Diluted EPS (Basic) | $(0.45) | $0.63 | $0.15 | $0.02 |
| Operating Cash Flow | N/A | N/A | $718 | $428 |
| Total Assets | $29,098 | N/A | N/A | N/A |
| Total Liabilities | $21,711 | N/A | N/A | N/A |
| Short-term Debt | $5,627 | N/A | N/A | N/A |
| Long-term Debt | $9,258 | N/A | N/A | N/A |
Note: 1999 figures are restated to reflect accounting changes and the CNG acquisition pro forma where applicable in the source text.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased by $741 million (56%) for the quarter and $1.5 billion (58%) for the six months, primarily driven by the inclusion of CNG's operations.
- Net Loss: The company reported a net loss of $106 million for the quarter compared to a net income of $120 million in the prior year. This decline is attributed to significant non-recurring charges.
- Restructuring and Acquisition Costs: Dominion recognized $262 million in restructuring and acquisition-related costs for the quarter and $391 million for the six months. This includes severance, integration costs, and a $55 million mark-to-market loss on CNG's derivative portfolio.
- DCI Impairment: A major factor in the loss was the impairment and re-valuation of DCI assets totaling $292 million, with $172 million classified as restructuring costs due to the mandated exit strategy.
- Debt Levels: Short-term debt surged to $5.6 billion (from $870 million at year-end 1999) to finance the CNG acquisition, though long-term debt issuances in June and July 2000 began to refinance this interim borrowing.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Divestitures: Dominion is actively divesting non-core assets to reduce debt. Agreements are in place to sell Virginia Natural Gas (VNG) for $500-$550 million, CNG International's Argentine assets for $145 million, and its interest in Corby Power for $80 million. Total proceeds from these divestitures are expected to exceed $1.5 billion.
- Acquisitions: On August 7, 2000, Dominion agreed to acquire the Millstone Nuclear Power Station for approximately $1.3 billion, expected to close by April 2001. Management expects this to be accretive to earnings by approximately 5 cents per share in the first two full years.
- DCI Exit Strategy: The company is winding down DCI's financial services businesses as required by the SEC. No new loans are being originated by certain DCI subsidiaries, and asset sales are planned for the third quarter of 2000.
Risks and Contingencies
- Regulatory and Legal: Virginia Power faces a Notice of Violation from the EPA and lawsuits from the Attorneys General of New York and Connecticut regarding alleged Clean Air Act violations at the Mt. Storm Power Station. The company intends to vigorously defend these claims.
- Market Risk: A hypothetical 10% increase in interest rates would decrease annual earnings by approximately $50 million. A 10% unfavorable change in commodity prices would decrease the fair value of oil and gas derivatives by approximately $48 million.
- Restructuring Uncertainty: Additional charges may be incurred as the integration of CNG and the exit from DCI continue.
Investor Verification Checklist
- Debt Refinancing: Verify the successful conversion of the $5.6 billion short-term debt (used for the CNG acquisition) into long-term debt to assess interest rate exposure and liquidity stability.
- Divestiture Closing: Monitor the regulatory approval and closing dates for the VNG, CNG International, and Corby Power sales to confirm the expected $1.5 billion+ debt reduction.
- DCI Asset Valuation: Review the progress of the DCI exit strategy and the realization of values from the sale of First Source and First Dominion Capital assets, given the $292 million impairment already taken.
- Legal Proceedings: Track the resolution of the Clean Air Act litigation regarding Mt. Storm Power Station to assess potential future penalties or operational restrictions.
- Millstone Acquisition: Confirm the closing of the Millstone Nuclear Power Station acquisition and the associated financing terms.