SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
Commission file number 1-8489
DOMINION RESOURCES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1229715
- ---------------------------- ------------
(State or other jurisdiction (I.R.S. employer
incorporation or organization) identification no.)
120 Tredegar Street
Richmond, Virginia 23219
- ------------------- ------------
(Address of principal executive offices) (Zip Code)
(804) 819-2000
-----------------------------
Registrant's telephone number
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
At April 30, 1999, the latest practicable date for determination, 191,960,866
shares of common stock, without par value, of the registrant were outstanding.
1
DOMINION RESOURCES, INC.
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INDEX
-----
Page
Number
------
PART I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Income - Three 3
Months Ended March 31, 1999 and 1998
Consolidated Balance Sheets - March 31, 1999 4-5
and December 31, 1998
Consolidated Statements of Cash Flows 6-7
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Changes in 7
Other Comprehensive Income - Three Months
Ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements 8-18
Item 2. Management's Discussion and Analysis of Financial 19-31
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 32-33
Market Risk
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 34
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 36
2
DOMINION RESOURCES, INC.
------------------------
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
---- ----
(Millions, except per share amounts)
Operating revenues and income:
Virginia Power $ 1,088.4 $1,050.8
East Midlands 550.8
Nonutility 204.6 171.9
-------- -------
1,293.0 1,773.5
-------- -------
Operating expenses:
Fuel, net 218.1 226.1
Purchased power capacity, net 209.9 180.8
Supply and distribution-East Midlands 361.4
Other operation and maintenance 293.3 333.6
Depreciation, depletion
and amortization 178.4 216.9
Other 80.0 74.1
-------- -------
979.7 1,392.9
------ -------
Operating income 313.3 380.6
-------- -------
Other income 33.8 14.9
--------- ----
347.1 395.5
-------- --------
Fixed charges:
Interest charges, net 119.7 161.4
Preferred dividends and distributions
of subsidiary trusts 16.4 16.6
------- --------
136.1 178.0
------- -------
211.0 217.5
----- -----
Provision for income taxes 66.4 66.5
Minority interests 6.1 11.5
------ --------
Income before extraordinary item,
net of tax 138.5 139.5
Extraordinary item, net of tax 254.8 0.0
----- ---
Net income $ (116.3) $ 139.5
======= ======
Average shares of common stock 193.4 193.2
Earnings per common share:
Income before extraordinary item $ 0.72 $ 0.72
Net income $ (0.60) $ 0.72
Dividends paid per common share $ 0.645 $ 0.645
- -----------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
3
DOMINION RESOURCES, INC.
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CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(UNAUDITED)
March 31, December 31,
1999 1998*
---------------------------------------------
(Millions)
Current assets:
Cash and cash equivalents $ 473.2 $ 425.6
Customer accounts receivable, net 663.0 777.8
Other accounts receivable 287.4 256.5
Materials and supplies:
Plant and general 144.8 142.0
Fossil fuel 97.0 95.0
Mortgage loans in warehouse 230.5 140.3
Commodity contract assets 162.8 179.8
Other 331.7 268.3
-------- ---------
2,390.4 2,285.3
-------- ---------
Investments:
Investments in affiliates 447.2 382.1
Available-for-sale securities 500.8 500.0
Nuclear decommissioning trust funds 743.1 705.1
Loans receivable, net 1,765.6 1,686.5
Investments in real estate 89.9 93.9
Other 304.1 263.0
------ --------
3,850.7 3,630.6
-------- --------
Property, plant and equipment: 18,283.9 18,106.0
Less accumulated depreciation, depletion
and amortization 7,601.0 7,469.4
-------- ---------
10,682.9 10,636.6
-------- ---------
Deferred charges and other assets:
Regulatory assets 209.9 620.0
Goodwill 148.4 150.0
Other 206.1 194.5
-------- ---------
564.4 964.5
------ ---------
Total assets $17,488.4 $17,517.0
========= =========
- ------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* The Balance Sheet at December 31, 1998 has been derived from the audited
Consolidated Financial Statements at that date.
4
DOMINION RESOURCES, INC.
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CONSOLIDATED BALANCE SHEETS
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(UNAUDITED)
March 31, December 31,
1999 1998*
--------------------------------------------
(Millions)
Current liabilities:
Securities due within one year $ 493.0 $ 442.9
Short-term debt 658.5 300.8
Accounts payable, trade 625.2 698.5
Accrued interest 112.3 109.1
Accrued payroll 53.5 79.0
Accrued taxes 254.2 175.3
Commodity contract liabilities 232.6 265.8
Other 225.8 266.8
-------- --------
2,655.1 2,338.2
-------- --------
Long-term debt:
Virginia Power 3,448.0 3,464.7
Nonrecourse - nonutility 2,696.2 2,727.9
Dominion UK 54.0 55.6
Other 257.9 3.1
-------- --------
6,456.1 6,251.3
-------- --------
Deferred credits and other liabilities:
Deferred income taxes 1,656.5 1,792.5
Investment tax credits 159.2 221.4
Other 219.7 212.8
-------- --------
2,035.4 2,226.7
-------- --------
Total liabilities 11,146.6 10,816.2
-------- --------
Minority interest 300.3 310.9
-------- --------
Commitments and contingencies
Obligated mandatory redeemable preferred
securities ** 385.0 385.0
-------- --------
Virginia Power preferred stock:
Subject to mandatory redemption 180.0 180.0
-------- --------
Not subject to mandatory redemption 509.0 509.0
-------- --------
Common shareholders' equity:
Common stock - no par 3,831.1 3,933.4
Retained earnings 1,143.4 1,386.4
Accumulated other comprehensive income (23.2) (20.1)
Other 16.2 16.2
-------- --------
4,967.5 5,315.9
-------- --------
Total liabilities & shareholders'
equity $17,488.4 $17,517.0
========= =========
- -------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* The Balance Sheet at December 31, 1998 has been derived from the audited
Consolidated Financial Statements at that date.
** As described in Note (F) to NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, the
7.83% and 8.05% Junior Subordinated Notes totaling $257.7 and $139.2
million principal amounts constitute 100% of the Trusts' assets.
5
DOMINION RESOURCES, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
-------------------------
(Millions)
Cash flows from (used in) operating activities:
Net income $ (116.3) $ 139.5
Adjustments to reconcile net income to net cash:
Depreciation, depletion and amortization 200.4 234.8
Purchase and originations of mortgage loans (630.4) (491.4)
Proceeds from sales and principal collections
of mortgage loans 540.3 450.7
Extraordinary item, net of income taxes 254.8
Changes in assets and liabilities:
Accounts receivable 94.6 61.4
Accounts payable, trade (63.2) (64.2)
Accrued interest and taxes 3.0 36.8
Other changes (80.5) (1.7)
-------- ------
Net cash flows from operating activities 202.7 365.9
-------- ------
Cash flows from (used in) financing activities:
Issuance of common stock 307.7
Repurchase of common stock (107.2)
Issuance of long-term debt 1,123.0 980.4
Issuance of short-term debt 387.0 105.6
Repayment of long-term debt (892.3) (978.4)
Repayment of short-term debt (146.3)
Common dividend payments (124.6) (125.6)
Other (15.9) (27.8)
-------- ------
Net cash flows from financing activities 370.0 115.6
-------- ------
Cash flows from (used in) investing activities:
Utility capital expenditures-(excluding AFC) (155.1) (151.4)
Acquisition of natural gas and independent power
properties (52.3) (13.7)
Loan originations (537.0) (561.1)
Repayment of loan originations 464.3 378.3
Acquisition of businesses (133.2) (189.1)
Sale of business 24.1 99.5
Purchase of securities (50.3) (1.2)
Proceeds from sale of securities 46.5 14.0
Other (132.1) (81.8)
-------- ------
Net cash flows used in investing activities (525.1) (506.5)
-------- ------
Increase (decrease) in cash and cash equivalents 47.6 (25.0)
Cash and cash equivalents at beginning of period 425.6 321.7
-------- ------
Cash and cash equivalents at end of period $ 473.2 $ 296.7
======== ========
6
DOMINION RESOURCES, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
(CONTINUED)
Three Months Ended
March 31,
1999 1998
--------------------------
(Millions)
Supplementary cash flows information:
Cash paid during the period for:
Interest (net of interest capitalized) $ 123.9 $150.3
Income taxes 6.5 8.3
- ------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
DOMINION RESOURCES, INC.
------------------------
CONSOLIDATED STATEMENT OF CHANGES IN OTHER COMPREHENSIVE INCOME
---------------------------------------------------------------
(UNAUDITED)
Three Months Ended
March 31,
1999 1998
-------------------------
(Millions)
Other Comprehensive Income:
Unrealized gains (losses) on
on investment securities:
Pre-tax $ 0.6 $4.5
Tax (expense) benefit (0.2) (1.6)
----- -----
Net of tax 0.4 2.9
Foreign currency translation
adjustment (3.5) 4.8
---- -----
Increase (decrease) in other
comprehensive income (3.1) 7.7
Other comprehensive income at
beginning of period (20.1) (3.4)
------ ----
Other comprehensive income at
end of period $(23.2) $ 4.3
====== =====
- ----------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
7
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(A) DOMINION RESOURCES AND INTERIM REPORTING POLICIES
-------------------------------------------------
NATURE OF OPERATIONS
Dominion Resources is a holding company headquartered in Richmond, Virginia. Its
primary business is Virginia Electric and Power Company (Virginia Power), which
is a regulated public utility. Virginia Power is engaged in the generation,
transmission, distribution and sale of electric energy within a 30,000 square
mile area in Virginia and northeastern North Carolina. It sells electricity to
retail customers (including government agencies) and to wholesale customers such
as rural electric cooperatives, power marketers and municipalities. The Virginia
service area comprises about 65 percent of Virginia's total land area, but
accounts for 80 percent of its population. Virginia Power's wholesale power
group engages in off-system wholesale purchases and sales of electricity and
purchases and sales of natural gas beyond the geographic limits of Virginia
Power's service territory.
Dominion Resources' subsidiary Dominion Energy is engaged in independent power
production and the acquisition and sale of natural gas and oil reserves. Some of
the independent power and natural gas and oil businesses are located in foreign
countries. In Latin America, Dominion Energy is engaged in power generation. In
Canada, Dominion Energy is engaged in natural gas exploration, production and
storage. Dominion Energy's net investment in foreign operations is approximately
$370 million.
Dominion Capital is Dominion Resources' financial services subsidiary. Dominion
Capital's primary business is financial services which includes commercial
lending, merchant banking and residential mortgage lending.
Dominion Resources' United Kingdom subsidiary, Dominion U.K. Holding, Inc., owns
an 80% interest in Corby Power Station, a 350 megawatt natural gas fired
facility located in Northamptonshire, about 90 miles north of London.
Dominion Resources translates foreign currency financial statements by adjusting
balance sheet accounts using the exchange rate at the balance sheet date and
income statement accounts using the average exchange rate for the reporting
period.
Effective December 31, 1998, Dominion Resources adopted SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." Dominion
Resources' has defined Dominion Resources' segments based on product, geographic
location and regulatory environment. Dominion Resources' principal business
segment is Virginia Power.
The other reportable segments for the first three months of 1999 are Dominion
Energy and Dominion Capital. A description of these segments' products and
services are provided above. In 1998 and 1997, the other reportable segments
included Dominion U.K. which was sold by Dominion Resources on July 27, 1998.
A Corporate category includes the corporate costs of Dominion Resources' holding
company plus intercompany eliminations.
8
DOMINION RESOURCES, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(CONTINUED)
GENERAL
In the opinion of Dominion Resources' management, the accompanying unaudited
Consolidated Financial Statements contain all adjustments, consisting only of
normal recurring accruals, with the exception of the extraordinary item as
referred to in Note (B) below, necessary to present fairly the financial
position as of March 31, 1999, the results of operations for the three-month
periods ended March 31, 1999 and 1998, and cash flows for the three-month
periods ended March 31, 1999 and 1998.
These Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and notes included in the Dominion Resources
Annual Report on Form 10-K for the year ended December 31, 1998.
The Consolidated Financial Statements include the accounts of Dominion Resources
and its subsidiaries, with all significant intercompany transactions and
accounts being eliminated on consolidation.
Dominion Resources uses the equity method when accounting for its 80% investment
in Corby Power Ltd. (Corby) as the company believes that Corby's governing
agreements give substantive participating rights to the minority shareholder.
Corby owns and operates a 350-megawatt gas-fired power station in England.
Corby had total revenues of $36.5 million and total expenses (including interest
and taxes) of $29.3 million for the three months ending March 31, 1999.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The results of operations for the interim periods are not necessarily indicative
of the results expected for the full year. Information for quarterly periods is
affected by seasonal variations in sales, rate changes, timing of fuel expense
recovery and other factors.
Certain amounts in the 1998 financial statements have been reclassified to
conform to the 1999 presentation.
As discussed in the Dominion Resources' Form 8-K, filed March 29, 1999, Virginia
Power discontinued the application of Statement of Financial Accounting
Standards No. 71 (SFAS No. 71), Accounting for the Effects of Certain Types of
Regulation, to its generation operations. The effect thereof was an after-tax
charge of $254.8 million. See Note (B) below.
9
DOMINION RESOURCES, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(CONTINUED)
(B) EXTRAORDINARY ITEM - DISCONTINUANCE OF SFAS NO. 71
In 1998, Virginia Power negotiated a settlement with the Virginia State
Corporation Commission (Virginia Commission) that resolved then outstanding rate
proceedings. As part of the settlement, Virginia Power agreed to a a one-time
rate refund paid to customers in 1998 and a two-phased rate reduction and base
rate freeze through February 2002.
On March 25, 1999, the Governor of Virginia signed into law legislation
establishing a detailed plan to restructure the electric utility industry in
Virginia. The major elements of the bill included:
. Phase-in of retail customer choice beginning in 2002 with full retail
customer choice by 2004; the schedule is to be determined by the Virginia
Commission, which has the authority to accelerate or delay implementation
under certain conditions; however, the phase-in of retail customer choice
may not be delayed beyond January 1, 2005;
. No mandatory divestiture of generating assets;
. Deregulation of generation in 2002;
. Capped base rates from January 1, 2001 to July 1, 2007;
. Recovery of net stranded costs through capped rates or a wires charge paid
by those customers opting, while capped rates are in effect, to purchase
energy from a competitive supplier;
. Cost-based recovery of fuel expenses until July 2007;
. Consumer protection safeguards;
. Establishment of default service beginning January 1, 2004; and
. Creation of a Legislative Transition Task Force to oversee the
implementation of the statute.
Under this legislation, Virginia Power's base rates will remain unchanged until
July 2007 and recovery of generation-related costs will continue to be provided
through the capped rates. In addition, under companion legislation enacted by
Virginia in 1999, providers of electric service will be subject to corporate
income taxes in lieu of gross receipts taxes effective in 2001.
As discussed in Dominion Resources' annual report filed on Form 10-K for the
year ended December 31, 1998, the financial statements reflect regulatory assets
and liabilities under cost-based rate regulation in accordance with SFAS No. 71.
Rate-regulated companies are required to write off regulatory assets against
current earnings whenever changes in facts and circumstances result in those
assets no longer satisfying criteria for recognition as defined by SFAS No. 71.
The legislation's deregulation of generation is an event that requires
10
DOMINION RESOURCES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(CONTINUED)
discontinuation of SFAS No. 71 for Virginia Power's generation operations in the
first quarter of 1999. Virginia Power's transmission and distribution operations
continue to meet the criteria for recognition of regulatory assets and
liabilities as defined by SFAS No. 71. In addition, fuel continues to be subject
to deferral accounting.
In order to measure the amount of regulatory assets to be written off, Virginia
Power evaluated to what extent recovery of regulatory assets would be provided
through the capped rates during the transition period. Emerging Issues Task
Force (EITF) Issue No. 97-4, "Deregulation of the Pricing of Electricity Issues
Related to the Application of FASB Statements No. 71, Accounting for the Effects
of Certain Types of Regulation, and No. 101, Regulated Enterprises - Accounting
for the Discontinuance of Application of FASB Statement No. 71" (EITF Issue
97-4), provides guidance about writing off regulatory assets when SFAS No. 71 is
discontinued for only a portion of a utility's operations. The provisions of the
Virginia legislation provide an opportunity to recover generation-related costs,
including certain regulatory assets, through capped rates prior to July 2007.
Under EITF Issue 97-4 such generation-related regulatory assets will continue to
be recognized until they are recovered through capped rates. Generation-related
assets and liabilities that will not be recovered through the capped rates were
written off in the first quarter of 1999, resulting in an after-tax charge to
earnings of $254.8 million. Virginia Power's regulatory assets as of March 31,
1999, and December 31, 1998, are as follows:
March 31, December 31,
1999 1998
-------- --------
Income taxes recoverable through
future rates $ 57.0 $ 438.8
Cost of decommissioning DOE uranium
enrichment facilities 61.6 61.8
Deferred losses on reacquired debt, net 18.8 31.2
Nuclear design basis documentation cost 7.6 20.9
North Anna Unit 3 project termination
costs 9.8
Deferred fuel 34.7 27.7
Other 30.2 29.8
-------- --------
Total $ 209.9 $ 620.0
======== ========
In addition to the write-off of generation-related net regulatory assets
discussed above, the $254.8 million ($1.32 per share) charge included
approximately $18 million, after-tax, of other generation-related assets.
Pursuant to EITF Issue 97-4,a corresponding regulatory asset of $23 million,
representing the amount expected to be recovered during the transition period
related to these assets, was established. The extraordinary item also included
the write-off of approximately $38 million, after-tax, of deferred investment
tax credits.
Also, as discussed in Virginia Power's 1998 Form 10-K, the events or changes in
circumstances that cause discontinuance of SFAS No. 71, and write-off of
regulatory assets, also require a review of utility plant assets and long-term
power purchase contracts for possible impairment. This review is based on
estimates of possible future market prices, load growth, competition and many
11
DOMINION RESOURCES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(CONTINUED)
other assumptions. Virginia Power evaluated its generation assets in accordance
with the provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". These evaluations included
the effects of nuclear decommissioning and other currently identified
environmental expenditures. Based on these analyses which are highly dependent
on the underlying assumptions, no plant write-downs are appropriate at this
time.
Virginia Power reviewed its long-term power purchase commitments for potential
loss in accordance with SFAS No. 5, Accounting for Contingencies, and Accounting
Research Bulletin No. 43, Chapter 4, Inventory Pricing. Based on projections of
possible future market prices for wholesale electricity, the results of the
analyses of Virginia Power's long-term power purchase contracts indicated no
loss recognition is appropriate at this time. Other projections of possible
future market prices indicated a possible loss of $500 million. In the absence
of capped rates as provided by the legislation, the potential exposure related
to Virginia Power's power purchase contracts would be approximately $3.2
billion.
Significant estimates were required in recording the effect of the deregulation
legislation, including the resulting impact on the fair value determination of
generating facilities and estimated purchases under long-term power purchase
contracts. Such projections were based on estimated generation and estimated
future market prices for generation and are subject to future reevaluation.
Virginia Power remains subject to numerous risks including, among others,
exposure to long-term power purchase commitment losses, environmental
contingencies, changes in tax laws, decommissioning costs, inflation, increased
capital costs, and recovery of certain other items. Management believes the
stable rates that are provided until July 2007 by the legislation present a
reasonable opportunity to recover a substantial portion of the Company's
potentially stranded costs as more fully described in Virginia Power's 1998 Form
10-K, in Future Issues - Competition--Exposure to Potentially Stranded Costs,
Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ACCOUNTING CONDITION
AND RESULTS OF OPERATIONS.
(C) PROVISION FOR INCOME TAXES
--------------------------
Income before provision for income taxes, classified by source of income, before
minority interest was as follows:
Three Months Ended
March 31,
1999 1998
---- ----
(Millions)
U.S. $202.3 $175.6
Non U.S. 8.7 41.9
--- ----
Total $211.0 $217.5
===== =====
12
DOMINION RESOURCES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(CONTINUED)
The statutory U.S. federal income tax rate reconciles to the effective income
tax rates as follows:
Three Months Ended
March 31,
1999 1998
---- ----
Percents
--------
U.S. statutory rate 35.0 35.0
Utility plant differences 1.5 1.9
Amortization of investment tax credits (2.0) (2.0)
Preferred dividends of Virginia Power 1.4 1.4
Nonconventional fuel credit (4.0) (2.8)
Benefits and taxes related to foreign
operations (2.0) (5.2)
State taxes, net of federal benefit 2.2 1.0
Other, net (0.6) 1.3
---- ----
Effective tax rate 31.5 30.6
==== ====
The effective income tax rate includes state and foreign income taxes.
(D) COMMON STOCK
------------
At March 31, 1999, there were 300,000,000 shares of common stock authorized of
which 192,004,353 were issued and outstanding. Common shares issued and
purchased during the referenced periods were as follows:
Three Months Ended
March 31,
1999 1998
---- ----
Employee Savings Plans 201,188
Dominion Direct Investment 770,943
Public Offering 6,775,000
Stock Repurchase (2,568,400)
Other 114,647 (61,429)
--------- ---------
Total Shares (2,453,753) 7,685,702
========= =========
On July 20, 1998, the Dominion Resources Board of Directors authorized the
repurchase of up to $650 million (approximately 8 percent) of Dominion Resources
common stock outstanding. Dominion Resources has repurchased $205.7 million to
date and continues to monitor market conditions for opportunities to repurchase
additional shares.
Also, effective August 1, 1998, purchases of shares required by Dominion Direct
Investment and the Employee Savings Plans are being acquired on the open market
instead of issuing new shares.
(E) PREFERRED STOCK - VIRGINIA POWER
--------------------------------
As of March 31, 1999, there were 1,800,000 and 5,090,140 issued and outstanding
shares of preferred stock subject to mandatory redemption and preferred stock
13
DOMINION RESOURCES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(CONTINUED)
not subject to mandatory redemption, respectively. There is a total of
10,000,000 authorized shares of Virginia Power's preferred stock.
(F) OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
-----------------------------------------------------
In December 1997, Dominion Resources established Dominion Resources Capital
Trust I (DR Capital Trust). DR Capital Trust sold 250,000 shares of capital
securities for $250 million, representing preferred beneficial interests and 97
percent beneficial ownership in the assets held by DR Capital Trust.
Dominion Resources issued $257.7 million of 7.83% Junior Subordinated Debentures
(Debentures) in exchange for the $250 million realized from the sale of the
Capital Securities and $7.7 million of common securities of DR Capital Trust.
The common securities represent the remaining 3 percent beneficial ownership
interest in the assets held by DR Capital Trust. The Debentures constitute 100
percent of DR Capital Trust's assets.
In 1995, Virginia Power established Virginia Power Capital Trust I (VP Capital
Trust). VP Capital Trust sold 5,400,000 shares of preferred securities for $135
million, representing preferred beneficial interests and 97% beneficial
ownership in the assets held by VP Capital Trust.
Virginia Power issued $139.2 million of its 1995 Series A, 8.05% Junior
Subordinated Notes (the Notes) in exchange for the $135 million realized from
the sale of the Preferred Securities and $4.2 million of common securities of VP
Capital Trust. The common securities represent the remaining 3% beneficial
ownership interest in the assets held by VP Capital Trust. The Notes constitute
100% of VP Capital Trust's assets.
(G) RECENTLY ADOPTED ACCOUNTING STANDARDS
-------------------------------------
In 1998, the Emerging Issues Task Force reached consensus on Issue No. 98-10,
Accounting for Contracts Involved in Energy Trading and Risk Management
Activities (EITF Issue 98-10). EITF Issue 98-10 requires energy trading
contracts to be recorded at fair value on the balance sheet with the changes in
fair value included in earnings and was effective January 1, 1999. Virginia
Power manages a portfolio of energy contracts which have been recorded at fair
value on the balance sheet with the changes in fair value included in earnings
as required by EITF 98-10. Therefore, the effect of the initial application of
EITF Issue 98-10 at January 1, 1999, was not material to Dominion Resources'
financial statements.
(H) CONTINGENCIES
-------------
VIRGINIA POWER
Nuclear Insurance
The Price-Anderson Act limits the public liability of an owner of a nuclear
power plant to $9.7 billion for a single nuclear incident. Virginia Power is a
member of certain insurance programs that provide coverage for property damage
to members' nuclear generating plants, replacement power and liability in the
event
14
DOMINION RESOURCES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(CONTINUED)
of a nuclear incident. Virginia Power may be subject to retrospective premiums
in the event of major incidents at nuclear units owned by covered utilities
(including Virginia Power).
Effective March 31, 1999, Virginia Power implemented surety bonds to replace the
parent guarantee related to nuclear decommissioning. For additional information,
see Note (T) to THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS included in
Dominion Resources' Annual Report on Form 10-K for the year ended December 31,
1998.
Site Remediation
The Environmental Protection Agency (EPA) has identified Virginia Power and
several other entities as Potentially Responsible Parties (PRPs) at two
Superfund sites located in Kentucky and Pennsylvania. The estimated future
remediation costs for the sites are in the range of $61.8 million to $69.5
million. Virginia Power's proportionate share of the cost is expected to be in
the range of $1.6 million to $2.2 million, based upon allocation formulas and
the volume of waste shipped to the sites. Virginia Power has accrued a reserve
of $1.7 million to meet its obligations at these two sites. Based on a financial
assessment of the PRPs involved at these sites, Virginia Power has determined
that it is probable that the PRPs will fully pay the costs apportioned to them.
Virginia Power generally seeks to recover its costs associated with
environmental remediation from third party insurers. At March 31, 1999, any
pending or possible claims were not recognized as an asset or offset against
recorded obligations of Virginia Power.
DOMINION RESOURCES AND ITS NONUTILITY SUBSIDIARIES
Dominion Resources
Effective July 27, 1998, Dominion Resources guaranteed for 90 days DR Group
Holdings' revolving credit agreement. DR Group Holdings is the indirect holder
of Dominion Resources' 80% ownership interest in the Corby Power Station. The
revolving credit agreement is with Bayerische Landesbank Girozentrale and
National Westminister Bank Plc. As of March 31, 1999, the total commitment and
outstanding balance of the agreement was 33.5 million pounds sterling ($54
million).
On October 30, 1998, DR Group Holdings entered into a revolving credit agreement
with Bayerische Landesbank Girozentrale. The total commitment and outstanding
balance of the agreement is 33.5 million pounds sterling ($56.1 million at
October 30, 1998). The term of the agreement is five years. This agreement
replaces the short-term and five-year credit agreements described above with
Bayerische Landesbank Girozentrale and National Westminister Bank which totaled
33.5 million pounds sterling. Dominion Resources is guarantor to DR Group
Holdings for this revolving credit agreement.
15
DOMINION RESOURCES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(CONTINUED)
Dominion Energy
Subsidiaries of Dominion Energy have general partnership interests in certain of
its energy ventures. These subsidiaries may be required to fund future
operations of these investments, if operating cash flow is insufficient.
Under an agreement related to the acquisition and financing of the Kincaid Power
Station, Dominion Energy's wholly-owned subsidiary, Dominion Energy Construction
Company (DECCO), must make certain improvements to the facility. Dominion Energy
has provided a guarantee of DECCO's financial obligation under this agreement.
Also, until the improvements are completed, Dominion Energy must fund up to
approximately $130 million, less cash generated, in additional equity that may
be required by Kincaid Generation LLC (KGL), the owner of the Kincaid Power
Station. Dominion Resources has guaranteed Dominion Energy's obligation to make
such equity infusions to KGL.
Dominion Capital
As of March 31, 1999, Dominion Capital had commitments to fund loans of
approximately $587 million.
For additional information regarding Contingencies, see Note (T) to THE NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS included in Dominion Resources' Annual Report
on Form 10-K for the year ended December 31, 1998.
(I) LINES OF CREDIT
---------------
Dominion Resources and its subsidiaries have lines of credit, revolving credit
agreements and bank commitments that provide for maximum borrowings of $5,349.8
million. At March 31, 1999, $2,049.7 million had been borrowed under such
agreements. In addition, these credit agreements supported $257.9 million of
Dominion Resources' commercial paper and $641.6 million of non-recourse
commercial paper issued by Dominion Resources' subsidiaries which was
outstanding at March 31, 1999. At March 31, 1999, $321.1 million of Dominion
Resources commercial paper is classified as long-term debt since it is supported
by revolving credit agreements that have expiration dates extending beyond one
year.
(J) LONG-TERM INCENTIVES
--------------------
During the first quarter of 1999, participants in the Dominion Resources, Inc.
Incentive Compensation Plan were awarded by the Board of Directors of Dominion
Resources 5,000 shares of common stock at $44.50 per share and 13,916 shares of
restricted stock at $44.50 per share and 10,842 shares at $42.25 per share.
For the three-month period ended March 31, 1999, 263 shares were issued
associated with exercised stock options from previous awards. As of March 31,
1999, options on 1,863 were exercisable from previous awards under the Dominion
Resources Long-term Incentive Plan.
16
DOMINION RESOURCES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(CONTINUED)
(K) ACQUISITIONS
------------
San Juan Partners L.L.C.
In January 1999, Dominion Energy acquired San Juan Partners, L.L.C., a natural
gas investment company, for an initial price of $90.1 million in cash. On March
26, 1999, Dominion Energy completed the acquisition when San Juan Partners,
L.L.C. purchased all of the assets of the Burlington Resources Coal Seam Gas
Royalty Trust Estate (Trust), consisting principally of the Trust's interest in
certain coal bed methane gas producing properties located in the San Juan Basin
of New Mexico. The net all-cash purchase price of the Trust was $25 million.
(L) BUSINESS SEGMENTS
-----------------
Business segment financial information follows for the three months period ended
March 31, 1999 and 1998. Corporate includes intersegment eliminations.
Virginia Dominion Dominion Dominion Corporate Consolidated
Power Capital Energy UK Operations Total
----- ------- ------ -- ---------- -----
(millions,
except total
assets)
1999
Revenues $1,088.4 $107.6 $97.0 $1,293.0
Net Income $(149.1) $13.4 $20.8 $(1.4) $(116.3)
Total Assets
(billions) $11.5 $3.3 $2.4 $0.3 $17.5
1998
Revenues $1,050.8 $86.8 $85.1 $550.8 $1,773.5
Net Income $89.7 $13.4 $20.7 $22.4 $(6.7) $139.5
Total Assets
at 12/31/98
(billions) $12.0 $3.1 $2.2 $0.2 $17.5
(M) SUBSEQUENT EVENTS
-----------------
Remington Energy Ltd.
In April 1999, Dominion Energy completed its purchase of all of the issued and
outstanding shares of Remington Energy Ltd., (Remington) a publicly traded
natural gas exploration and production company headquartered in Calgary,
Alberta, Canada.
Dominion Energy received tenders for approximately 93 percent of the outstanding
Remington common shares on March 29, 1999 and acquired the remaining shares
through statutory procedures. The total purchase price was $33 million. In
addition, Dominion Energy assumed $260 million of Remington's
17
DOMINION RESOURCES, INC.
------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(CONTINUED)
debt and liabilities.
Revised Merger Offer - Consolidated Natural Gas Company
On May 11, 1999, the Board of Directors of Consolidated Natural Gas Company
(CNG) accepted an amended merger offer made by Dominion Resources on May 10,
1999.
Under the terms of the amended agreement, CNG shareholders will receive
consideration valued at $66.60 per share for each outstanding share of CNG
common stock . The merger consideration will be paid partly in Dominion
Resources common stock and partly in cash. The portion of the merger
consideration to be paid in stock is structured not exceed approximately 60% of
the total consideration.
The amended agreement also provides for a merger transaction which will occur
immediately before the CNG merger and in which approximately 15 to 20 percent of
the Dominion Resources shares outstanding will be acquired by Dominion Resources
for $43.00 per share in cash. The remaining shares will be replaced with new
Dominion Resources shares on a one for one basis.
The funds needed for the cash components of the transaction will be raised
initially through debt which is expected to be replaced over time through other
borrowings, the issuance of equity securities other than common stock and the
divestiture of non-core assets.
Under the amended agreement, the transaction will be accounted for using the
purchase method rather than pooling of interest accounting which was expected to
apply under the original merger agreement..
The transaction remains subject to approval by the shareholders of both
companies, receipt of opinions of counsel as to the tax-free nature of the stock
to be received by shareholders and approvals of various regulatory agencies at
state and federal levels.
18
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains "forward-looking statements" as defined by the Private
Securities Litigation Reform Act of 1995, including (without limitation)
discussions as to expectations, beliefs, plans, objectives and future financial
performance, or assumptions underlying or concerning matters discussed in this
document. These discussions, and any other discussions, including certain
contingency matters (and their respective cautionary statements) discussed
elsewhere in this report, that are not historical facts, are forward-looking
and, accordingly, involve estimates, projections, goals, forecasts, assumptions
and uncertainties that could cause actual results or outcomes to differ
materially from those expressed in the forward-looking statements.
The business and financial condition of Dominion Resources are influenced by a
number of factors including political and economic risks, market demand for
energy, inflation, capital market conditions, governmental policies, legislative
and regulatory actions (including those of the Federal Energy Regulatory
Commission (FERC), the Environmental Protection Agency, the Department of
Energy, the Nuclear Regulatory Commission, the Virginia Commission and the North
Carolina Utilities Commission), industry and rate structure and legal and
administrative proceedings. Some other important factors that could cause actual
results or outcomes to differ materially from those discussed in the
forward-looking statements include changes in and compliance with environmental
laws and policies, weather conditions and catastrophic weather-related damage,
present or prospective wholesale and retail competition, competition for new
energy development opportunities, pricing and transportation of commodities,
operation of nuclear power facilities, acquisition and disposition of assets and
facilities, recovery of the cost of purchased power, nuclear decommissioning
costs, the ability of Dominion Resources, its suppliers, and its customers to
successfully address Year 2000 compliance issues, exposure to changes in the
fair value of commodity contracts, counter-party credit risk and unanticipated
changes in operating expenses and capital expenditures. All such factors are
difficult to predict, contain uncertainties that may materially affect actual
results, and may be beyond the control of Dominion Resources. New factors emerge
from time to time and it is not possible for management to predict all such
factors, nor can it assess the impact of each such factor on Dominion Resources.
Any forward-looking statement speaks only as of the date on which such statement
is made, and Dominion Resources undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made.
19
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
DOMINION RESOURCES - CONSOLIDATED
- ---------------------------------
RESULTS OF OPERATIONS
Earnings Per Share Three Months Ended
March 31,
1999 1998
---- ----
Virginia Power $(0.77) $0.46
Dominion UK 0.10
Nonutility 0.17 0.16
----- -----
Consolidated $(0.60) $0.72
====== =====
The results of operations for the interim periods are not necessarily
indicative of the results expected for the full year. Information for quarterly
periods is affected by seasonal variations in sales, rate changes, timing of
fuel expense recovery and other factors.
Consolidated earnings decreased $1.32 per share for the first quarter of 1999
when compared to the same time period in 1998. The decrease was due to the
write-off of generation related assets and liabilities at Virginia Power. The
amount of the write-off was $254.8 million, net of tax. The amount was recorded
on the financial statements as an extraordinary item. For more information on
the write-off, see Note (B) to THE NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS.
Operating Revenues and Operating Expenses
Operating revenues and operating expenses decreased by $480.5 million and $413.2
million, respectively during the first quarter of 1999 as compared to the same
period in 1998 primarily due to the sale of East Midlands. For more information
on the sale of East Midlands, see Note (C) Gain on Sale of DR Investments in the
Notes to the Consolidated Financial Statements included in Dominion Resources'
Annual Report on Form 10-K for the year ended December 31, 1998.
Extraordinary Item, Net of Income Tax
Virginia Power recorded a charge to earnings to reflect the write-off of assets
and liabilities related to its generation activities which will not be recovered
through capped rates. For more information on the extraordinary item, see Note
(B) to THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
Contingencies
For information on contingencies, see Note (H) to THE NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS.
20
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities
Cash flows from operating activities for the three months ended March 31, 1999
decreased by $163.2 million as compared to the same period in 1998. The decrease
was primarily due to normal operations and an increase in fuel expenses for
which recovery was not received in the first quarter of 1999.
Cash Flows From Financing Activities
Cash flows from financing activities during the three-month period ending March
31, 1999 were $370 million and were due to the issuance of commercial paper:
. to satisfy the funding needs for loan and mortgage originations at Dominion
Capital; and
. to fund the acquisition of San Juan Partners, L.L.C. at Dominion Energy.
On February 19, 1999, the Board of Directors of Dominion Resources declared a
quarterly common stock dividend of $0.645 per share, payable March 20, 1999 to
holders of record at the close of business March 2, 1999.
In addition, Dominion Resources repurchased 2,568,400 shares of common stock
($107.2 million) during the first quarter of 1999. On July 20, 1998, the
Dominion Resources Board of Directors approved the repurchase of up to $650
million of Dominion Resources common stock.
On March 31, 1999, Dominion Resources increased its bank lines of credit to $600
million by replacing the April 1, 1998, $200 million short-term credit agreement
with a new $300 million 364-day facility. Dominion Resources uses these credit
agreements to support its commercial paper borrowings. The proceeds from these
borrowings are used to finance Dominion Resources' nonutility subsidiaries
working capital for operations.
Cash Flows Used In Investing Activities
Net cash flows used in investing activities during the three-month period ending
March 31, 1999 were $525.1 million. The primary reasons for the cash outflows
were:
. increase in loan originations at Dominion Capital's financial services
subsidiaries;
. utility plant (including nuclear fuel) expenditures at Virginia Power;
. Dominion Energy's acquisition of San Juan Partners, L.L.C.; and
. the funding to expand and upgrade certain independent power plants of
Dominion Energy.
21
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
FUTURE ISSUES
Power Generation Development
On April 14, 1999, Dominion Resources and a subsidiary of Consolidated Natural
Gas Company (CNG) signed an exclusive agreement to develop natural gas-fired
power generation facilities along CNG's natural gas pipeline system. This
agreement is not conditional upon the proposed merger between Dominion Resources
and CNG. For additional information on the proposed merger, see Note (X) to
NOTES TO THE CONSOLIDATED FINANCIAL STATMENTS in Dominion Resources' Annual
Report on Form 10-K for the year ended December 31, 1998.
Under terms of the agreement the companies have identified 45 potential
development sites along CNG's natural gas pipeline network in Ohio,
Pennsylvania, New York, West Virginia and Virginia. Dominion Resources and CNG
affiliates will develop, own or lease, operate and maintain the facilities on a
50-50 ownership basis.
Year 2000 Compliance
Dominion Resources remains on schedule to complete all necessary work to prepare
the company for the year 2000. The following tables summaries our status and
projected timetable:
Percent of Critical Systems Year 2000 Ready
-------------------------------------------
Actual Planned
------ ------------------------
3/31/99 7/31/99 10/31/99
------- ------- --------
Virginia Power 96% 99% 99%*
Dominion Resources 10% 100% 100%
Dominion Energy 62% 84% 100%
Dominion Capital 95% 100% 100%
- ------------
* 100% planned to be ready by 12/31/99
We expect year 2000 costs to be within the range of $35 million and $45 million
dollars of which $17.6 million has been expended as of March 31, 1999. Of this
amount, $30 million to $40 million is for Virginia Power.
Dominion Resources will have all contingency plans identified and tested prior
to year-end 1999.
In addition to our remediation programs directed at our critical information
systems, embedded systems and external relationships, our year 2000 readiness
efforts include evaluation of reasonably likely worst case scenarios and the
development of contingency plans to address how we would respond to problems,
should they occur. Our contingency planning efforts to support continuity of
operations into and beyond the year 2000 are essentially complete. Minor
22
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
updates and final reviews of our contingency plans will be completed during the
second quarter of 1999. Year 2000 contingency plans will be refined and
validated throughout the remainder of 1999.
As part of our contingency planning process, we have considered and evaluated,
and continue to evaluate, reasonably likely worst case scenarios and their
impact on critical business processes. Based on our evaluations, such potential
scenarios could include the following:
. Minor variations in voltage or frequency with no significant effect on
electric service;
. Temporary loss of a portion of generation capacity, including possibly
non-utility generators; however, such loss is not expected to be
sufficient to adversely affect electric service;
. Temporary loss of some telecommunications functionality and other services
with no impact expected on electric service; and
. Temporary loss of a small portion of commercial and industrial customer
loads due to customer year 2000 issues with no expected adverse impact on
stability of electric service.
When considering these scenarios or others specifically related to our major
subsidiary, Virginia Power, we first take into account that Virginia Power, and
the entire electric power industry, already have extensive contingency plans in
place for many events such as extreme heat, storms, equipment failures, sudden
loss of customer load or sudden loss of a generation unit. Year 2000 contingency
plans address the scenarios recommended in the North American Electric
Reliability Council Year 2000 Contingency Planning Guide, as well as additional
company specific scenarios. For example, one contingency plan prescribes that in
the event voice communications fail, satellite phones will be used to provide
operational information to our operations center and to other utilities.
Our contingency planning efforts also include developing precautionary measures.
Precautionary measures are intended to place us in a position to mitigate the
impact of year 2000 related problems, in the unlikely event problems occur.
Examples of precautionary measures include planned additional staffing in key
operational positions to facilitate quick responses to unusual situations, and
having extra supplies and/or fuel on hand to minimize the impact if we
experience interrupted access to key supplies.
In addition, Virginia Power, is actively participating in industry contingency
planning efforts at the regional and national level. Virginia Power expects to
submit its finalized contingency plans to the North American Electric
Reliability Council in June 1999. Virginia Power successfully participated in
the first nationwide drill by electric utilities on April 9, 1999, coordinated
by the North American Electric Reliability Council. The exercise simulated the
partial failure of some primary voice and data communications to demonstrate the
ability of electric utilities to communicate operating information using backup
systems. No actual communications systems or generating units were shut down
during the exercise. Service to Virginia Power's customers was not affected.
Virginia Power will participate in the second nationwide drill on September 8-9,
1999.
23
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
Dominion Resources cannot estimate or predict the potential adverse
consequences, if any, that could result from a third party's failure to
effectively address the year 2000 issue, but believes that any impact would be
short-term in nature and would not have a material adverse impact on results of
operations. Based on Dominion Resources' and industry analyses to date, we do
not believe the most reasonably likely worst case scenarios identified above, if
they were to occur, would have a material adverse affect on Dominion Resources'
businesses or results of operations.
For additional information, see Year 2000 Compliance, MANAGEMENT'S DISCUSSION
AND ANALYSIS OF OPERATIONS in Dominion Resources' Annual Report on Form 10-K for
the year ended December 31, 1998.
Recently Issued Accounting Standard
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, (SFAS No. 133) is effective for the Company
beginning in 2000. SFAS No. 133 requires that derivative instruments (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at fair value. The
statement requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
The FASB-sponsored Derivatives Implementation Group that is addressing
implementation issues related to SFAS No. 133 has tentatively concluded that
certain long-term power purchase contracts may be considered derivatives under
SFAS No. 133. The Company has not yet quantified the impacts of adopting SFAS
No. 133 and has not yet determined the timing of, or method of, adoption.
VIRGINIA POWER
- --------------
RESULTS OF OPERATIONS
Revenue
Revenue for the three months ended March 31, 1999 varied from the same period in
the prior year primarily due to the following:
Change
(Millions)
Revenue - Electric Service
Customer growth $ 16.7
Weather 27.8
Base rate variance (28.1)
Fuel rate variance (9.5)
Other retail, net .5
------
Total retail 7.4
Other electric service 18.7
------
Total electric service 26.1
------
Revenue - Other 11.5
------
Total revenue $ 37.6
======
24
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
Electric service revenue consists of sales to retail customers in our service
territory at rates authorized by the Virginia and North Carolina Commissions and
sales to cooperatives and municipalities at wholesale rates authorized by FERC.
The primary factors affecting this revenue in the first three months of 1999
were customer growth, weather and changes in rates.
Customer growth - There were 41,565 new customer connections in the twelve
months ended March 31, 1999. These additional customers increased Virginia
Power's revenue by $16.7 million in the first quarter of 1999 compared to the
same period in 1998.
Weather - The cooler weather in the first quarter of 1999, as compared to 1998,
caused customers to use more electricity for heating, which increased retail
revenue by $27.8 million from the previous year. Heating degree days were as
follows:
1999 1998 Normal
---- ---- ------
Heating degree days 1,933 1,739 2,105
Percentage change compared to prior
year 11.2% (6.3)%
Base rates -- In 1998, as part of the settlement to resolve outstanding rate
proceedings, Virginia Power agreed to a two-phased rate reduction, $100 million
effective March 1, 1998 and an additional $50 million effective March 1, 1999,
with a base rate freeze through February 2002. The 1999 deregulation legislation
extended this base rate freeze until July 1, 2007.
Fuel rates - The decrease in fuel rate revenue is attributable to lower fuel
rates in effect during the first quarter of 1999, as compared to the same period
in 1998.
Other Revenues
Other revenue includes sales of electricity beyond our service territory,
natural gas, nuclear consulting services, energy management services and other
revenue. The growth in power marketing and natural gas revenue for the
three-month period ended March 31, 1999, as compared to the same period in 1998,
is primarily due to favorable changes in commodity prices and higher margins in
1999.
Fuel, net
Fuel, net decreased as compared to the first quarter of 1998 due to increased
deferral of fuel expenses as a result of higher fuel costs from changes in
Virginia Power's generation mix and lower fuel rates in 1999.
Purchased Power Capacity, net
Purchased power capacity, net increased as compared to the first quarter of
1998, primarily due to increased expenses associated with the restructuring of
25
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
certain contracts and the discontinuance of deferral accounting for such
expenses. This accounting change resulted from the 1998 rate settlement with the
Virginia Commission.
Operations and Maintenance
Operations and maintenance increased for the three-month period ended March 31,
1999, as compared to the same period in 1998, as a result of increased costs for
significant storm damage in early January.
Extraordinary item--Discontinuance of SFAS No. 71
On March 25, 1999, the Governor of Virginia signed into law legislation
establishing a detailed plan to restructure the electric utility industry in
Virginia. See Note (B) Extraordinary Item - Discontinuance of SFAS No. 71, to
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
Under this legislation, Virginia Power's base rates remain unchanged until July
2007. The legislation's deregulation of generation is an event that requires
discontinuation of SFAS No. 71 for our generation operations although recovery
of generation-related costs continues to be provided through the capped rates
and the wires charge assessed to those customers opting for alternate suppliers.
Our transmission and distribution operations continue to meet the criteria for
recognition of regulatory assets and liabilities as defined by SFAS No. 71. In
addition, cost-based recovery of fuel expenses continues until July 2007.
Under EITF Issue 97-4 generation-related assets and liabilities that will not be
recovered through the capped rates were written off in March 1999, resulting in
an after-tax charge to earnings of $254.8 million.
Contingencies
For information on contingencies, see Note (H) to tHE NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operations
Operating activities resulted in $105.3 million decreased cash flow for the
three-month period ended March 31, 1999 as compared to the same period in 1998.
This decrease was primarily attributable to the timing of certain payments
related to normal operations and an increase in fuel expenses for which recovery
was not received in the first quarter. Internal generation of cash exceeded
Virginia Power's capital requirements during the first quarters of 1999 and
1998.
26
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
Cash Flows Used in Financing Activities
Cash used in financing activities was as follows:
Three Months Ended
March 31,
1999 1998
---- ----
(Millions)
Issuance (repayment) of short-term debt $10.4 $(146.3)
Repayment of long-term debt and preferred stock (40.0)
Payment of dividends (107.2) (108.5)
Other (2.8) (0.3)
------- -------
Total $(139.6) $(255.1)
======= =======
On April 13, 1999, Virginia Power filed a $400 million medium- term note shelf
registration statement with the Securities and Exchange Commission (SEC). The
registration statement became effective on April 30, 1999. The remaining
principal amount of debt that can be issued from the currently effective
medium-term note shelf is only $20 million. Virginia Power has $625 million of
debt capacity under two other shelf registration statements. An additional
capital resource of $100 million in preferred stock also is registered with the
SEC.
Virginia Power has a commercial paper program that is supported by two credit
facilities totaling $500 million. Proceeds from the sale of commercial paper are
primarily used to provide working capital. Net borrowings under the program were
$232.1 million at March 31, 1999.
Cash Flows Used in Investing Activities
Cash used in investing activities was as follows:
Three Months Ended
March 31,
1999 1998
---- ----
(Millions)
Plant expenditures (excluding AFC-other funds) $(137.1) $ (83.7)
Nuclear fuel (excluding AFC-other funds) (18.0) (20.8)
Nuclear decommissioning contributions (7.8) (21.6)
Other (0.2) 3.1
------- -------
Total $(163.1) $(123.0)
======= =======
Investing activities for the first three months of 1999 resulted in a net cash
outflow of $163.1 million primarily due to $137.1 million of construction
expenditures, $18.0 million of nuclear fuel expenditures and $7.8 million of
contributions to nuclear decommissioning trusts. Of the construction
expenditures, Virginia Power spent approximately $70.6 million on transmission
and distribution projects, $56.4 million on production projects and $9.7 million
on general support facilities.
27
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
FUTURE ISSUES
Competition
On March 25, 1999, the Governor of Virginia signed into law legislation
establishing a detailed plan to restructure the electric utility industry in
Virginia which will provide for customer choice beginning in 2002. Under this
legislation, Virginia Power's base rates will remain unchanged until July 2007
and recovery of generation-related costs will continue to be provided through
the capped rates and the wires charge assessed to those customers opting for
alternate suppliers. In the absence of the capped rates, Virginia Power would be
exposed, on a pre-tax basis, to approximately $3.2 billion of potential losses
related to long-term power purchase commitments and an additional $0.5 billion
of potential losses in generation-related regulatory assets.
The legislation's deregulation of generation is an event that requires
discontinuation of SFAS No. 71 for our generation operations. Our transmission
and distribution operations continue to meet the criteria for recognition of
regulatory assets and liabilities as defined by SFAS No. 71. In addition,
cost-based recovery of fuel expenses continues until July 2007.
Virginia Power is subject to a base rate freeze at reduced revenue levels until
July 2007. In addition, Virginia Power remains subject to numerous risks
including, among others, exposure to long-term power purchase commitment losses,
environmental contingencies, changes in tax laws, decommissioning costs,
inflation, increased capital costs, and recovery of certain other items.
Virginia Power believes the stable rates that are provided until July 2007 by
the legislation present a reasonable opportunity to recover a substantial
portion of Virginia Power's potentially stranded costs as more fully described
in Virginia Power's 1998 Form 10-K, see Competition--Exposure to Potentially
Stranded Costs, Item 7, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
For additional information, see Extraordinary Item--Discontinuance of SFAS No.
71, Note (B) to THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
DOMINION ENERGY
- ---------------
RESULTS OF OPERATIONS
Net income during the first quarter ending March 31, 1999 was comparable to the
first quarter ending March 31, 1998.The 1999 financial results reflect higher
earnings from oil and gas operations, offset by a lower contribution from its
foreign power businesses.
28
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows From Operating Activities
Cash flows from operations for the three months ended March 31, 1999 decreased
by $8.6 million as compared to the same period in 1998 reflecting the
consistency of net income between the two periods and the effect of immaterial
fluctuations due to normal operating activities.
Cash Flows From Financing Activities
Cash from (used in) financing activities was as follows:
Three Months Ended
March 31,
1999 1998
---- ----
(Millions)
Issuance of debt $ 146.8 $ 162.5
Investment from parent 85.0
Dividend payment (13.0) (12.3)
Other 00.0 (0.3)
------- -------
Total $ 218.8 $ 149.9
======= =======
During the first three months of 1999, cash flows from financing activities were
$218.8 million primarily due to intercompany borrowings to fund the acquisition
of San Juan Partners, L.L.C. and an equity contribution from Dominion Energy's
parent.
Cash Flows Used In Investing Activities
Cash from (used in) investing activities was as follows:
Three Months Ended
March 31,
1999 1998
---- ----
(Millions)
Investment in natural gas assets $ (12.6) $ 1.0
Investment in power generation assets (39.7) (14.7)
Purchase of fixed assets (18.9) (32.4)
Acquisition of business (133.2) (189.1)
Sale of business 24.1 99.5
Other (51.5) (48.5)
------- -------
Total $(231.8) $(184.2)
======= =======
During the first three months of 1999 cash flows used in investing activities
were $231.8 million primarily due to the acquisition of San Juan Partners,
L.L.C. in addition to continued expansion and development of power generation
assets.
29
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
Future Issues
Sale of Power
In April 1999, Elwood Energy LLC, (Elwood Energy) a joint venture between
subsidiaries of Dominion Energy and subsidiaries of Peoples Energy Corporation
signed agreements with Commonwealth Edison Company (ComEd) and Engage Energy US,
L.P. (Engage) to sell all generating capacity from its natural gas-fired
facility. Under the agreements, ComEd and Engage will each purchase one-half of
the power produced by Elwood Energy.
DOMINION CAPITAL
- ----------------
RESULTS OF OPERATIONS
Dominion Capital's net income in the first quarter ending March 31, 1999 was
comparable to the same period in 1998. The financial results reflect higher
earnings due to the improved performance from its four core financial services
operating units, which was offset by losses from non-core operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows Used In Operating Activities
Dominion Capital's cash flows used in operations for the three months ended
March 31, 1999 increased by $35.7 million as compared to the same period for
1998 primarily due to an increase in cash outflows from net mortgage
originations and sales.
Cash Flows From Financing Activities
Cash from financing activities was as follows:
Three Months Ended
March 31,
1999 1998
---- ----
(Millions)
Issuance of long-term debt $ 847.1 $ 812.8
Repayment of long-term debt (843.6) (722.6)
Issuance of commercial paper 367.0 67.7
Investment from parent 25.0 24.1
Dividend payment (17.3) (14.2)
Issuance (repayment) of intercompany debt (189.8) 32.0
------- -------
Total $ 188.4 $ 199.8
======= =======
During the first three months of 1999, Dominion Capital's cash flows from
financing activities were $188.4 million primarily due to funding needs for loan
and mortgage originations during the period.
30
DOMINION RESOURCES, INC.
------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
(CONTINUED)
Cash Flows Used In Investing Activities
Cash used in investing activities was as follows:
Three Months Ended
March 31,
1999 1998
---- ----
(Millions)
Loan originations $ (537.1) $ (561.1)
Repayments of loan originations 464.3 378.3
Purchase of securities (50.3) (1.2)
Proceeds from sale of securities 46.5 13.6
Other (53.4) 12.4
-------- --------
Total $ (130.0) $ (158.0)
======== ========
During the first three months of 1999, Dominion Capital's cash flows used in
investing activities were $130 million primarily due to net loan originations
and residual interest retained.
31
DOMINION RESOURCES, INC.
------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE
------------------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
MARKET RATE SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
Dominion Resources is exposed to market risk because it utilizes financial
instruments, derivative financial instruments and derivative commodity
instruments. The market risks inherent in these instruments are represented by
the potential loss due to adverse changes in commodity prices, equity security
prices, interest rates and foreign currency exchange rates as described below.
Interest rate risk generally is related to Dominion Resources' and its
subsidiaries' outstanding debt as well as their commercial, consumer, and
mortgage lending activities. Currency risk exists principally through Dominion
Energy's investments in Canada and some debt denominated in European currencies
associated with Dominion Energy's investment in South America. Dominion
Resources is exposed to equity price risk through various portfolios of equity
securities. Commodity price risk is experienced in Dominion Resources'
subsidiaries Dominion Energy and Virginia Power. They are exposed to effects of
market shifts in the sales prices they receive and pay for natural gas and
electricity.
Dominion Resources uses derivative commodity instruments to hedge exposures of
underlying electric, gas production, and gas procurement operations and is also
involved in trading activities, which also use these instruments.
Dominion Resources is also exposed to price risk associated with the
nonfinancial assets and liabilities of power production operations, including
underlying fuel requirements and natural gas operations.
Dominion Resources uses the Sensitivity Analysis methodology to disclose the
quantitative information for the interest rate, commodity price and foreign
exchange risks. Sensitivity analysis provides a presentation of the potential
loss of future earnings, fair values, or cash flows from market risk sensitive
instruments over a selected time period due to one or more hypothetical changes
in interest rates, foreign currency exchange rates, commodity prices, or other
similar price changes. The Tabular Presentation methodology is used to disclose
equity price market risk. The tabular presentation of summarized information
requires disclosure of key terms and information for market risk sensitive
instruments.
Interest Rate Risk Non-Trading Activities
Dominion Resources manages its interest rate risk exposure by maintaining a mix
of fixed and variable rate debt. In addition, Dominion Resources enters into
interest rate sensitive derivatives. Examples of these derivatives are swaps,
forwards and futures contracts.
Dominion Resources, as part of its routine risk management policy, reviews the
level of market risk it faces.
32
DOMINION RESOURCES, INC.
------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE
------------------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
(CONTINUED)
-----------
Electric and Gas Commodity Price Risk Trading Activities
As part of its strategy to market energy from its generation capacity and to
manage related risks, Virginia Power manages a portfolio of derivative commodity
contracts held for trading purposes. These contracts are sensitive to changes in
the prices of natural gas and electricity. Virginia Power employs established
policies and procedures to manage the risks associated with these price
fluctuations and uses various commodity instruments, such as futures, swaps and
options, to reduce risk by creating offsetting market positions. In addition,
Virginia Power seeks to use its generation capacity, when not needed to serve
customers in our service territory, to satisfy commitments to sell energy.
Based on the sensitivity analysis methodology discussed previously in this
section, Virginia Power has determined a hypothetical loss by calculating a
hypothetical fair value for each contract assuming a 10 percent unfavorable
change in the market prices of the related commodity and comparing it to the
fair value of the contracts based on market prices at March 31, 1999 and
December 31, 1998. This hypothetical 10 percent change in commodity prices would
have resulted in a hypothetical loss of approximately $7.2 million and $13.5
million in the fair value of our commodity contracts as of March 31, 1999 and
December 31, 1998, respectively.
The sensitivity analysis does not include the price risks associated with
utility operations and utility fuel requirements, since these costs are
generally provided for through our capped rates, nor does it include risks that
are either nonfinancial or nonquantifiable. In addition, provisions are made in
the financial statements to address credit risk.
The risk associated with Dominion Resources' use of these instruments has not
materially changed from that discussed in Market Rate Sensitive Instruments and
Risk Management under MANAGEMENT'S DISCUSSION AND ANALYSIS OF CASH FLOWS AND
FINANCIAL CONDITION included in Dominion Resources' Annual Report on Form 10-K
for the year ended December 31, 1998.
33
DOMINION RESOURCES, INC.
------------------------
PART II. - OTHER INFORMATION
----------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Dominion Resources Annual Shareholders Meeting was held on April 16, 1999 and
the following issues were voted on by shareholders.
ELECTION OF DIRECTORS
The following Directors were elected to the Board of Directors for terms
expiring in the year 2000:
Votes
-----
Director For Withheld
- -------- --- --------
John W. Harris 168,820,145 3,122,656
Kenneth A. Randall 168,639,451 3,303,350
Judith B. Warrick 168,789,054 3,153,747
David A. Wollard 168,756,521 3,186,280
As a result of the Amendments to the Articles of Incorporation as described
below, the following incumbent Directors' terms will also expire in the year
2000.
Director
- --------
John B. Adams
Benjamin J. Lambert
Richard L. Leatherwood
Frank S. Royal
John B. Bernhardt
Thos. E. Capps
S. Dallas Simmons
Robert H. Spilman
AMENDMENTS TO DOMINION RESOURCES ARTICLES OF INCORPORATION
Shareholders approved the amendments to Dominion Resources Articles of
Incorporation to eliminate the classification of the Board of Directors and to
increase the number of Directors to a maximum number of 17 members as follows:
Votes Broker
For Against Abstained Non-Votes
--- ------- --------- ---------
141,652,286 8,453,778 2,280,682 19,556,056
INCENTIVE COMPENSATION PLAN
Shareholders approved the amendments to Dominion Resources Employee Incentive
Compensation Plan as follows:
Votes
For Against Abstained
--- ------- ---------
149,592,479 19,094,648 3,255,675
34
DOMINION RESOURCES, INC.
------------------------
PART II. - OTHER INFORMATION
----------------------------
(CONTINUED)
ITEM 5. OTHER INFORMATION
- --------------------------
THE COMPANY
The Merger
With respect to the previously reported merger agreement between Dominion
Resources and Consolidated Natural Gas Company (CNG), on May 11, 1999, the CNG
Board of Directors accepted Dominion Resources' amended merger offer which
guarantees a fixed value of $66.60 for each share of CNG. The merger
consideration will be paid partly in Dominion Resources common stock and partly
in cash. In addition, the amended merger agreement also includes a first step
merger in which approximately 15 to 20 percent of the outstanding Dominion
Resources shares will be reacquired by Dominion Resources for $43.00 per share
in cash. For additional information, see Note (M) in NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS.
Restructuring
Dominion Resources announced in April 1999, a reorganization of its energy
businesses, effective May 1, along functional lines with the following areas of
focus:
. power generation/off-systems transactions;
. bulk power delivery and distribution; and
. oil and gas development, exploration and operation.
By 2002, when deregulation of generation is anticipated in Virginia, Dominion
Resources plans to conduct all of its power generation/off-systems businesses
through a new subsidiary (Dominion Generation, Inc.). No generating assets are
expected to be transferred from the Virginia Power corporate entity nor is it
anticipated that these assets will be operated by any entity other than Virginia
Power until deregulation. During this transition period, both Virginia Power and
Dominion Energy may use the name Dominion Generation to refer to their
generation activities.
VIRGINIA POWER
Competition
For a discussion on Virginia legislation requiring competition beginning in 2002
see Note (B) to THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS and VIRGINIA
POWER-Future Issues-Competition under MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Future Sources of Power
Virginia Power has requested approval from the Virginia Commission to construct
four gas-fired turbine generators in Virginia. At a January 1999 hearing the
Virginia Commission determined that the Rules Governing the Use of Bidding
Programs to Purchase Electricity from Other Power Suppliers apply to this
proposed transaction. The Virginia Commission ordered Virginia Power to issue a
Request for Proposals (RFP) and also ordered the Virginia Commission Staff to
review the solicitation process and set an expedited schedule requiring bidders
to submit responses no later than March 26, 1999. After a review of the bids,
the Virginia Commission Staff issued a report to the Virginia Commission with
its recommendations and the Virginia Commission
35
DOMINION RESOURCES, INC.
------------------------
PART II. - OTHER INFORMATION
----------------------------
(CONTINUED)
issued another Order allowing bidders under the RFP to file a response to that
report. Virginia Power is currently awaiting action by the Virginia Commission.
Virginia Power has obtained the applicable zoning permits for the construction
of the generators and have applied for other required environmental permits.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
3(i)- Articles of Incorporation as in effect April 16, 1999 (filed
herewith).
3(ii)- Bylaws as in effect April 16, 1999 (filed herewith).
10(i)- Dominion Resources, Inc. Incentive Compensation Plan as
restated effective April 16, 1999 (Exhibit 99, Form S-8
Registration Statement, File No. 333-78173, incorporated by
reference).
10(ii)- Employment agreement dated April 16, 1999 between Dominion
Resources and Thos. E. Capps (filed herewith).
10(iii)- Alliance Agreement, dated April 14, 1999, between Dominion
Resources, Inc. and CNG Power Company (filed herewith).
11- Statement re: computation of per share earnings (included in
this Form 10-Q on page 3)
27- Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K
Dominion Resources filed a report on Form 8-K, dated March 29, 1999,
relating to Virginia Power's effect of the final legislation the
Governor of Virginia signed into law establishing the restructuring of
the electric utility industry in Virginia.
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOMINION RESOURCES, INC.
Registrant
BY JAMES L. TRUEHEART
------------------------
James L. Trueheart
Senior Vice President and Controller
(Principal Accounting Officer)
May 14,1999
37