<PAGE>
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, 2000
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
(State of incorporation)
120 Tredegar Street
Richmond, Virginia 23219
(Address of principal executive offices) (Zip Code)
54-1229715
(I.R.S. Employer Identification No.)
Registrant's telephone number (804) 819-2000
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, 2000 the latest practicable date for determination, 237,768,687
shares of common stock, without par value, of the registrant were outstanding.
<PAGE>
DOMINION RESOURCES, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
PART I. Financial Information
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Statements of Income - Three Months Ended March 31, 2000 and 1999 3
Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 4-5
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2000 and 1999 6
Consolidated Statements of Changes in Other Comprehensive Income - Three Months Ended
March 31, 2000 and 1999 7
Notes to Consolidated Financial Statements 8-17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26-27
PART II. Other Information
Item 1. Legal Proceedings 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28-29
Item 6. Exhibits and Reports on Form 8-K 29
</TABLE>
2
<PAGE>
DOMINION RESOURCES, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
As Adjusted
(Note C)
(Millions, except per share amounts)
<S> <C>
Revenues $2,072 $ 1,293
----- -------
Operating expenses:
Fuel, net 252 220
Purchased power capacity, net 193 210
Purchased gas 257
Liquids, capacity and other products purchased 69
Restructuring and other acquisition-related costs 132
Other operation and maintenance 409 287
Depreciation, depletion and amortization 251 176
Other 97 78
----- -------
1,660 971
----- -------
Operating income 412 322
Other income 24 24
----- -------
436 346
Fixed charges:
Interest charges, net 201 120
Preferred dividends and distributions of subsidiary trusts 18 16
----- -------
219 136
----- -------
Income before income taxes, minority interests, and
extraordinary item 217 210
Provision for income taxes 74 66
Minority interests 2 6
----- -------
Income before extraordinary item 141 138
Extraordinary item, net of tax (255)
----- -------
Net income (loss) $141 $ (117)
===== =======
Average shares of common stock - basic and diluted 223.4 193.4
Basic and diluted earnings per share:
Income before extraordinary item $ 0.63 $ 0.71
Extraordinary Item $ (1.32)
------ -------
Net income (loss) $ 0.63 $ (0.61)
Dividends paid per common share $0.645 $ 0.645
</TABLE>
- --------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
3
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999*
---- -----
As Adjusted
(Note C)
(Millions)
<S> <C>
Current assets:
Cash and cash equivalents $ 390 $ 280
Customer accounts receivable, net 1,163 664
Other accounts receivable 332 269
Materials and supplies 251 254
Mortgage loans in warehouse 238 119
Commodity contract assets 282 362
Unrecovered gas costs 45
Net assets held for sale 709
Other 583
----- -----
229
3,993 2,177
----- -----
Investments:
Investments in affiliates 665 433
Available-for-sale securities 506 512
Nuclear decommissioning trust funds 811 818
Loans receivable, net 2,126 2,049
Investments in real estate 96 86
Other 317 334
----- -----
4,521 4,232
----- -----
Property, plant and equipment:
Property, plant and equipment 27,642 18,703
Acquisition adjustment 3,407
-----
Total property plan and equipment 31,049
Less accumulated depreciation, depletion and amortization 12,953 7,906
----- -----
18,096 10,797
------ ------
Deferred charges and other assets:
Regulatory assets 490 221
Goodwill 141 132
Other 1,789 221
----- -----
2,420 574
----- -----
Total assets $29,030 $17,780
====== ======
</TABLE>
- ------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* The Balance Sheet at December 31, 1999 has been derived from the audited
Consolidated Financial Statements at that date.
4
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999*
---- -----
As Adjusted
(Note C)
(Millions)
<S> <C>
Current liabilities:
Securities due within one year $ 527 $ 536
Short-term debt 5,606 870
Accounts payable, trade 949 711
Accrued interest 167 121
Accrued payroll 68 93
Accrued taxes 238 89
Commodity contract liabilities 274 347
Other 435 232
------- -------
8,264 2,999
------- -------
Long-term debt:
Nonrecourse - nonutility 2,946 2,738
Other 6,376 4,198
--------- --------
9,322 6,936
--------- --------
Deferred credits and other liabilities:
Deferred income taxes 2,859 1,710
Investment tax credits 161 146
Other 719 222
-------- --------
3,739 2,078
------- -------
Total liabilities 21,325 12,013
------ ------
Minority interest 78 99
------- -------
Commitments and contingencies (Note K)
Company obligated mandatory redeemable preferred securities ** 385 385
------- --------
Virginia Power preferred stock:
Not subject to mandatory redemption 509 509
-------- --------
Common shareholders' equity:
Common stock - no par 5,539 3,561
Retained earnings 1,199 1,212
Accumulated other comprehensive income (21) (15)
Other 16 16
-------- --------
6,733 4,774
-------- --------
Total liabilities & shareholders' equity $29,030 $17,780
-======= ========
</TABLE>
- ----------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* The Balance Sheet at December 31, 1999 has been derived from the audited
Consolidated Financial Statements at that date.
**As described in Note (H) to Notes To Consolidated Financial Statements,
the 7.83% and 8.05% Junior Subordinated Notes totaling $258 and $139
million principal amounts constitute 100% of the Trusts' assets.
5
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
(Millions)
<S> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ 141 $ (117)
Adjustments to reconcile net income to net cash:
Depreciation, depletion and amortization 276 201
Extraordinary item, net of income taxes 255
Restructuring and other merger-related costs 125
Changes in assets and liabilities:
Accounts receivable (36) 95
Purchases and originations of mortgage loans (1,028) (630)
Proceeds from sales and principal collections of mortgage loans 908 540
Accounts payable, trade (28) (63)
Other 87 (78)
------- -------
Net cash flows from operating activities 445 203
------- -------
Cash flows from (used in) financing activities:
Issuance of common stock 87
Repurchase of common stock (1,642) (107)
Issuance of long-term debt 1,362 1,123
Issuance of short-term debt 4,525 387
Repayment of long-term debt (1,090) (892)
Repayment of short-term debt (242)
Common dividend payments (201) (125)
Other 54 (16)
-------- ---------
Net cash flows from financing activities 2,853 370
-------- ---------
Cash flows from (used in) investing activities:
Utility capital expenditures (162) (155)
Oil and gas properties and equipment (217) (52)
Loan originations (761) (537)
Repayment of loan originations 676 464
Acquisition of businesses (2,755) (133)
Purchase of securities (13) (50)
Sale of business 42 24
Proceeds from sale of securities 20 46
Other (18) (132)
------- --------
Net cash flows used in investing activities (3,188) (525)
------- --------
Increase in cash and cash equivalents 110 48
Cash and cash equivalents at beginning of period 280 425
-------- -------
Cash and cash equivalents at end of period $ 390 $ 473
======= =======
Noncash transactions from investing and financing activities:
Noncash (stock issuance) portion of CNG acquisition $3,527
</TABLE>
- ----------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
6
<PAGE>
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN OTHER COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
(Millions)
<S><C>
Other Comprehensive Income:
Unrealized gains (losses) on investment securities:
Pre-tax $ (7) $ 1
Tax 2
-----
Net of tax (5) 1
Foreign currency translation adjustments (1) (4)
----- ------
Increase in other comprehensive income (6) (3)
Accumulated other comprehensive income at beginning of period (15) (20)
----- ------
Accumulated other comprehensive income at end of period $(21) $ (23)
===== ======
</TABLE>
- ----------------------
The accompanying notes are an integral part of the Consolidated Financial
Statements.
7
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A) INTERIM REPORTING POLICIES
- -----------------------------------
NATURE OF OPERATIONS
General Organization and Legal Description
Dominion Resources, Inc. (Dominion/the Company) is a holding company
headquartered in Richmond, Virginia. Its principal subsidiaries are Virginia
Electric and Power Company (Virginia Power) and, with the completion of the
acquisition on January 28, 2000, Consolidated Natural Gas Company (CNG).
Virginia Power is a regulated public utility engaged in the generation,
transmission, distribution and sale of electric energy within a 30,000
square-mile area in Virginia and northeastern North Carolina. Virginia Power
sells electricity to retail customers (including governmental agencies) and to
wholesale customers such as rural electric cooperatives, municipalities, power
marketers and other utilities. Virginia Power engages in off-system wholesale
purchases and sales of electricity and purchases and sales of natural gas, and
is developing trading relationships beyond the geographic limits of its retail
service territory.
CNG operates in all phases of the natural gas industry, including exploration
for and production of oil and natural gas in the United States as well as
Canada. Its various regulated retail gas subsidiaries serve approximately 1.9
million residential, commercial, industrial and transportation customers in
Ohio, Pennsylvania, Virginia and West Virginia. Its interstate gas transmission
pipeline system services each of its distribution subsidiaries and
non-affiliated utilities and end use customers in the Midwest, the Mid-Atlantic
and the Northeast states. CNG's exploration and production operations are
conducted in several of the major gas and oil producing basins in the United
States, both onshore and offshore. CNG also holds equity investments in energy
activities in Latin America and Australia.
The results of operations of CNG for the period January 28, 2000 through March
31, 2000 are included in the accompanying consolidated financial statements.
The company's other major subsidiaries are Dominion Energy, Inc. (DEI) and
Dominion Capital, Inc. (DCI). DEI is engaged in independent power production and
the acquisition and sale of natural gas and oil reserves. In Latin America, DEI
was engaged in power generation. See Note (M) for information about the sale of
such interests. In Canada, DEI is engaged in natural gas exploration, production
and storage. DEI's net investment in foreign operations is approximately $175
million at March 31, 2000.
DCI is Dominion Resources' financial services subsidiary. DCI's primary business
is financial services which includes commercial lending, merchant banking and
residential mortgage lending.
In the first quarter of 2000, Dominion created a subsidiary service company,
Dominion Resources Services, Inc. (Services), which will provide certain
services to Dominion's operating subsidiaries. Employees of Dominion Resources
and Virginia Power will perform those functions as employees of Services,
effective February 1, 2000. CNG also has a service company. The functions of
these two service companies are expected to be centralized into a single service
company in 2001.
GENERAL
In the opinion of Dominion's management, the accompanying unaudited Consolidated
Financial Statements contain all adjustments, including normal recurring
accruals, necessary to present fairly the financial position as of March 31,
2000, the results of operations for the three-month periods ended March 31, 2000
and 1999, and cash flows for the three-month periods ended March 31, 2000 and
1999.
These Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements and notes included in the Dominion Annual
Report on Form 10-K for the year ended December 31, 1999 and the CNG Form 8-K
filed on January 27, 2000.
The Consolidated Financial Statements include the accounts of Dominion and its
subsidiaries, with all significant intercompany transactions and accounts being
eliminated on consolidation.
8
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 1999 financial statements have been reclassified to
conform to the 2000 presentation.
Under Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, Dominion's computation of diluted earnings per share is the same as basic
earnings per share.
Segment Reporting
Under SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, Dominion has defined segments based on how the Company's operations
are managed.
On March 3, 2000, Dominion announced a new corporate structure that integrates
CNG's businesses and streamlines operations, positioning Dominion for long-term
growth in the competitive marketplace. Under the structure, Dominion operates
three principal business units:
o Dominion Energy manages Dominion's 20,000-megawatt generation portfolio,
consisting of 85 generating units and power purchase agreements. It also
manages the Company's generation growth strategy; energy trading,
marketing, hedging and arbitrage activities; and gas pipeline and storage
operations.
o Dominion Delivery manages and directs all local electric and gas
distribution systems, as well as customer service and electric
transmission. The delivery business unit also includes the Company's
telecommunications business.
o Dominion Exploration and Production manages Dominion's onshore and offshore
oil and gas exploration and production operations. Operations are located
on the outer continental shelf and deep water areas of the Gulf of Mexico,
selected regions in the lower 48 states and Canada. See note (P).
In addition to the business segments mentioned above, Dominion also reviews the
following as business segments:
o the financial services businesses of DCI; and
o Corporate Operations.
The Corporate Operations category includes:
o corporate costs of Dominion's holding company,
o Corby Power (UK) operations,
o intercompany eliminations,
o restructuring and merger related costs (see Note (B), and
o extraordinary item recorded in the first quarter of 1999. See Note (D).
While Dominion manages its daily operations as described above, assets remain
wholly owned by its legal subsidiaries, Virginia Power, CNG, DEI and DCI.
For more information on business segments, see Note (N).
9
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(B) ACQUISITIONS
CONSOLIDATED NATURAL GAS
General
On January 28, 2000, Dominion acquired CNG's shares of outstanding common stock
for $6.4 billion, consisting of approximately 87 million shares valued at $3.5
billion and approximately $2.9 billion in cash. Dominion has accounted for the
acquisition of CNG's operations that are not subject to cost-based rate
regulation, primarily its oil and gas exploration and production operations,
using the purchase method of accounting. For CNG's interstate pipeline and local
gas distribution businesses that are subject to cost-based rate regulation,
Dominion has accounted for the acquisition in accordance with SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation.
The allocation of the purchase price has been assigned to assets and liabilities
acquired based on the estimated fair value of those assets and liabilities as of
the date of the acquisition. Such allocation was based on the Company's
evaluations. The excess of the purchase price over the fair value of CNG's
operations not subject to cost-based rate regulation and the historical carrying
value of CNG's operations subject to cost of service rate regulation resulted in
an acquisition adjustment of $3.4 billion. The acquisition adjustment is being
amortized on a straight-line basis over the weighted average useful lives of
CNG's gas utility plant and equipment, a period approximating 40 years. As of
March 31, 2000, $13 million of amortization associated with the acquisition
adjustment had been recognized. The results of operations of CNG for the period
January 28, 2000 through March 31, 2000 are included in the accompanying
consolidated financial statements.
The allocation of the purchase provided for the estimated amounts expected to be
realized from the sale of Virginia Natural Gas (VNG) and CNG International,
which are classified as Net Assets Held for Sale at March 31, 2000. See Note (I)
to Consolidated Financial Statements. In addition, the allocation of the
purchase price provides for recognition of liabilities associated with change
in control payments triggered by the acquisition of CNG under certain employment
contracts ($31 million) and seismic licensing agreements ($26 million).
The Company may make adjustments during 2000 to the allocation of the purchase
price for changes in the Company's preliminary assumptions and analyses based on
receipt of additional information, including the following:
o actuarial valuations of CNG's pension and other postretirement benefit
plan obligations and related plan assets and
o proceeds realized from the disposition of assets held for sale.
The following unaudited pro forma combined results of operations for the three
months ended March 31, 2000 and 1999 has been prepared assuming the acquisition
of CNG had occurred at the beginning of each period. The pro forma results are
provided for information only. The results are not necessarily indicative of the
actual results that would have been realized had the acquisition occurred on the
indicated date, nor are they necessarily indicative of future results of
operations of the combined companies.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 2000 March 31, 1999
-------------- --------------
Consolidated Results As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
<S> <C>
(millions, except earnings per share)
Revenues $2,072 $2,439 $1,293 $2,238
Income before extraordinary item $ 141 $ 138 $ 138 $ 180
Net income (loss) $ 141 $ 138 $ (117) $ (75)
Earnings per share:
Income before extraordinary item $ 0.63 $ 0.58 $ 0.71 $ 0.76
Net Income (loss) $ 0.63 $ 0.58 $(0.61) $(0.31)
Average Shares 223.4 238.4 193.4 238.4
</TABLE>
10
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Restructuring
Dominion and its subsidiaries developed and began the implementation of a plan
to restructure the operations of the combined companies. The restructuring plan
includes the following components:
o an involuntary severance program;
o a transition plan to implement operational changes to provide
efficiencies, including the consolidation of post-CNG acquisition
operations and the integration of information technology systems; and
o a voluntary early retirement program.
For the three months ended March 31, 2000, Dominion recognized $132 million of
restructuring and other acquisition-related costs as discussed below.
Restructuring Liability Recognized At March 31, 2000
Dominion established a comprehensive involuntary severance package for salaried
employees whose positions will be eliminated. Severance payments are based on
the individual's base salary and years-of-service at the time of termination.
Under the restructuring plan, approximately 700 employee positions at Dominion
and its subsidiaries have been identified for elimination. Restructuring charges
related to workforce reduction costs approximating $68 million were accrued in
the first quarter of 2000, reflecting management's best estimate of severance
and related costs to be incurred under the plan. At March 31, 2000, a total of
247 positions had been eliminated, resulting in severance payments totaling
approximately $2 million.
Other Restructuring and Acquisition-related Costs
Dominion has implemented a new hedging strategy for its combined operations.
Under its new strategy, Dominion created an enterprise risk management group
with responsibility for managing Dominion's aggregate energy portfolio,
including the related commodity price risk, across its consolidated operations.
Previously, individual business segments managed their respective energy
portfolios and related price risk exposure on a stand-alone basis. Dominion
management believes this new structure should result in a more effective risk
management approach, thus maximizing the value of Dominion's diversified energy
portfolio and market opportunities.
As part of the implementation of the new strategy, Dominion and CNG management
evaluated CNG's hedging strategy associated with its oil and gas operations in
relation to Dominion's combined operations. As a result of the evaluation, CNG
designated its portfolio of derivative contracts that existed at January 28,
2000 as held for purposes other than hedging for accounting purposes. This
action required such contracts to be carried at fair value in the balance sheet
with unrealized gains and losses included in the determination of net income. In
addition, Dominion entered into "offsetting" contracts for those contracts in
the January 28, 2000 portfolio that would not be settled during the first
quarter of 2000. The mark-to-market accounting for these contracts held for
purposes other than hedging resulted in the recognition of losses of $55 million
for the three months ended March 31, 2000. Due to the offsetting portfolio of
derivative contracts, absent any not yet identified, future losses from credit
risk exposure, no additional losses are expected as these derivative contracts
mature through 2003. See Note (O) for further discussion.
Other costs included acquisition-related accelerated depreciation of information
technology systems that will be abandoned on January 1, 2001 and related
conversion costs of $5 million.
Dominion is expected to incur additional charges relating to restructuring and
other acquisition-related activities as business operations are consolidated and
administrative functions are integrated.
Early Retirement Program
On January 28, 2000, Dominion announced an early retirement program (ERP). This
program is a voluntary program for all salaried employees of Dominion, excluding
officers and employees of Dominion, VNG and
11
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CNG International. The early retirement option will provide up to three
additional years of age and three additional years of employee service, subject
to age and service maximums under the companies' retirement plans, for purposes
of the benefit formula under the retirement plans. Employees of CNG and its
participating subsidiaries who have attained age 52 and completed at least 12
years of service as of July 1, 2000 are eligible under the ERP. For Dominion's
other participating subsidiaries, employees who have attained age 52 and
completed at least 5 years of service as of July 1, 2000 are eligible under the
ERP. To elect early retirement, eligible employees must notify the companies
during the period from April 3 through May 17.
The expense and related liability associated with the ERP will be recognized
upon the Company's receipt of eligible employees' election to accept the ERP.
Employees who are involuntarily terminated are also eligible to elect early
retirement under the ERP. However, the amount of severance pay may be subject to
reduction as a result of coordination with the additional retirement plan
benefits provided by the ERP. Whether the ERP is made available to employees
covered by collective bargaining agreements and the period for electing to
retire under the ERP is subject to discussion with union representatives. At
March 31, 2000, the ERP had been accepted by one union.
Other
Other expenses during the first quarter of 2000 included information technology
systems and operations conversion costs of $5 million. These activities included
systems integration, systems configuration and related training. This amount
also included the excess amortization expense attributable to shortening the
useful lives of capitalized software being impacted by systems conversion and
integration. Approximately $2.2 million represented bonuses paid to employees to
retain them during the post-merger transition period.
Dominion is expected to incur additional charges relating to restructuring and
other merger-related activities as business operations are consolidated and
administrative functions are integrated. Other costs may be incurred as a result
of modifying or terminating leases due to closing of duplicate or excess
facilities, termination of service contracts no longer needed, accelerated
depreciation and amortization, or possibly impairment of assets.
The planned workforce reductions and the accelerated write-off of duplicate
information technology software during 2000 and the first quarter of 2001 should
avoid future annualized operating costs of approximately $60 million that would
have otherwise been incurred.
(C) CHANGE IN ACCOUNTING PRINICPLE
- ---------------------------------------
Effective with the acquisition of CNG into a subsidiary of Dominion on January
28, 2000, DEI changed its method of accounting for its oil and gas exploration
and production (E&P) activities to the full cost method of accounting.
Previously, DEI accounted for these activities, which were primarily directed
toward development and exploitation rather than exploration, using the
successful efforts method of accounting.
While DEI's previous method of accounting was in accordance with generally
accepted accounting principles, the Company believes that the full cost method
of accounting is preferable for the merged E&P operations of DEI and CNG. CNG's
E&P business is historically larger than DEI's E&P business and consists of
substantial investments in exploration activities. CNG uses the full cost method
of accounting for its E&P activities which management believes better reflects
the economics associated with the discovery and development of oil and gas
reserves. It is anticipated that the strategic direction of the combined E&P
operation will be consistent with CNG's past operations, thus supporting the
adoption of the full cost method of accounting by DEI. In addition to being the
preferable method of accounting based on the intended combined E&P operations of
Dominion, the full cost method of accounting for E&P activities will improve the
comparability of such financial information with other companies in Dominion's
peer group.
12
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
In accordance with Accounting Principles Board Opinion No. 20, Accounting
Changes, prior year financial statements have been restated to reflect this
change on a retroactive basis. The effect of the accounting change on income of
2000 and on income as previously reported for 1999 is immaterial in relation to
the financial statements of the Company taken as a whole.
The balances of retained earnings for 1999 and 2000 have been adjusted for the
effect (net of income taxes) of applying retroactively the new method of
accounting.
(D) EXTRAORDINARY ITEM
In 1999, the Governor of Virginia signed into law legislation establishing a
detailed plan to restructure the electric utility industry in Virginia. Such
legislation will deregulate generation by 2002 with the phase-in of retail
customer choice beginning at that time. Under this legislation, Virginia Power's
base rates will remain generally unchanged until July 2007 and recovery of
generation-related costs will continue to be provided through the capped rates.
The legislation's deregulation of generation required discontinuation of SFAS
No. 71, Accounting for the Effects of Certain Types of Regulation, for Virginia
Power's generation operations in the quarter ended March 31, 1999. Discontinuing
SFAS No. 71 resulted in an after-tax charge of $255 million to write-off
expected unrecoverable generation-related assets and reversal of previously
deferred investment tax credits. Virginia Power's transmission and distribution
operations, CNG's four local gas distribution companies and CNG transmission
operations continue to meet the criteria for recognition of regulatory assets
and liabilities as defined by SFAS No. 71 and Virginia Power's
generation-related fuel expense continues to be subject to deferral accounting.
For further discussion of the impact of deregulation in Virginia on Virginia
Power, see Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes C and Q to the Consolidated Financial Statements
included in Dominion's Annual Report on Form 10-K for the year ended December
31, 1999.
(E) PROVISION FOR INCOME TAXES
Income before provision for income taxes, classified by source of income, and
before minority interest was as follows:
Three Months Ended
March 31,
---------
2000 1999
---- ----
(Millions)
U.S. $208 $202
Non U.S. 9 8
---- ----
Total $217 $210
==== ====
The statutory U.S. federal income tax rate reconciles to the effective income
tax rates as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---- ----
<S><C>
Percents
U.S. Statutory Rate 35.0 35.0
Utility Plant Differences 0.1 1.5
Amortization of Investment Tax Differences (1.7) (2.0)
Preferred Dividends at Virginia Power 1.6 1.4
Nonconventional Fuel Credit (4.9) (4.0)
Benefits and Taxes Related to Foreign Operations (0.7) (2.0)
State Taxes, Net of Federal Benefit 4.7 2.2
Other, net (0.2) (0.6)
---- ----
Effective Tax Rate 33.9 31.5
==== ====
</TABLE>
The effective income tax rate includes state and foreign income taxes.
13
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(F) COMMON STOCK
At March 31, 2000, there were 500,000,000 shares of Dominion common stock
authorized of which 237,735,114 were issued and outstanding. Common shares
issued and purchased during the referenced periods were as follows:
Three Months Ended
March 31,
---------
2000 1999
---- ----
Stock Issued
87,449,202
Stock Exchanged for Cash (32,893,919)
Stock Repurchase (4,904,845) (2,568,400)
Other 1,765,031 114,647
---------- -----------
Total Shares Issued (Purchased) 51,415,469 (2,453,753)
========== ===========
On July 20, 1998, the Dominion Board of Directors authorized the repurchase of
up to $650 million (approximately 8 percent) of Dominion's common stock
outstanding. As of March 31, 2000, Dominion has repurchased $514 million of
common stock and continues to monitor market conditions for opportunities to
repurchase additional shares.
Immediately before the CNG merger, Dominion concluded a reorganization in which
approximately 33 million shares of Dominion common stock were exchanged for
cash. In connection with the acquisition with CNG, Dominion issued approximately
87 million shares of common stock to CNG shareholders. For more information on
the acquisition, see Note (B).
(G) PREFERRED STOCK - VIRGINIA POWER
As of March 31, 2000, Virginia Power's total number of authorized shares for all
preferred stock (whether or not subject to mandatory redemption) was 10 million
shares. There were 1.4 million and 5.1 million issued and outstanding shares of
preferred stock subject to mandatory redemption and preferred stock not subject
to mandatory redemption, respectively.
In March 2000, Virginia Power redeemed 400,000 shares of preferred stock subject
to mandatory redemption. The remaining 1.4 million shares of preferred stock
subject to mandatory redemption are scheduled to be redeemed in September 2000.
Accordingly, Virginia Power has classified the $140 million of preferred stock
subject to mandatory redemption in Securities due within one year at March 31,
2000.
(H) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
In December 1997, Dominion 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% beneficial
ownership in the assets held by DR Capital Trust.
Dominion issued $258 million of 7.83% Junior Subordinated Debentures
(Debentures) in exchange for the $250 million realized from the sale of the
capital securities and $8 million of common securities of DR Capital Trust. The
common securities, which are held by Dominion, represent the remaining 3%
beneficial ownership interest in the assets held by DR Capital Trust. The
Debentures constitute 100% 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 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 million of common securities of VP
Capital Trust. The common securities, which are held by Virginia Power,
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.
14
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(I) NET ASSETS HELD FOR SALE
At March 31, 2000, the Company's net assets held for sale reflects management's
estimate of the proceeds expected to be realized from the disposal of VNG, CNG's
local gas distribution company located in Virginia, and CNG International.
Dominion agreed to spin-off or sell VNG pursuant to conditions set forth by the
Virginia State Corporation Commission and Federal Trade Commission in connection
with their approval of the acquisition of CNG by Dominion. See Note (M) for
additional information on the sale of VNG. After Dominion acquired CNG in the
first quarter of 2000, CNG decided to sell CNG International as part of its
desire to focus on the United States oil and gas markets. CNG International
engages in energy-related activities outside of the United States and holds
equity investments in Australia and Latin America.
The results of operations of approximately $7 million for VNG and CNG
International during the period January 28, 2000 through March 31, 2000 have
been excluded from Dominion's net income and included in the determination of
net assets held for sale. In addition, net assets held for sale include
approximately $11 million associated with interest capitalized during the
post-acquisition holding period.
(J) RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued an Exposure Draft
proposing amendments to SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. If adopted, the proposed new accounting standard will become
effective with the implementation of SFAS No. 133. The Exposure Draft addresses
various implementation issues including expanded availability of exclusions of
normal purchase and normal sale agreements from classification as derivatives.
The Company is in the process of assessing the impact and method of adoption of
SFAS No. 133 and has not estimated the financial impact of adoption. To the
extent that any of the contracts are subject to fair value accounting,
implementing appropriate hedging strategies could possibly mitigate the
potential impact on earnings volatility.
(K) CONTINGENCIES
ENVIRONMENTAL MATTERS
General
Dominion is subject to various federal, state and local laws and regulations
relating to the protection of the environment. These laws and regulations govern
both current and future operations and potentially extend to plant sites
formerly owned or operated by Dominion's subsidiaries, or their predecessors.
Dominion has taken a proactive position with respect to environmental concerns.
As part of normal business operations, subsidiaries periodically monitor their
properties and facilities to identify and resolve potential environmental
matters, and Dominion conducts general environmental audits on a continuing
basis at its operating facilities to monitor compliance with environmental laws
and regulations.
Estimates of liability in the environmental area are based on current
environmental laws and existing technology. The exact nature of environmental
issues which the Company may encounter in the future cannot be predicted.
Additional environmental liabilities may result in the future as more stringent
environmental laws and regulations are implemented and as the company obtains
more specific information about its existing sites and production facilities. At
present, no estimate of any such additional liability, or range of liability
amounts, can be made. However, the amount of any such liabilities could be
material.
Virginia Power
In 1987, the Environmental Protection Agency (EPA) identified Virginia Power and
several other entities as Potentially Responsible Parties (PRPs) at two
Superfund sites located in Kentucky and Pennsylvania. Current cost studies
estimate total remediation costs for the sites to range from $106 million to
$156 million. Virginia Power's proportionate share of the total cost is expected
to be in the range of $2 million to $3 million, based upon allocation formulas
and the volume of waste shipped
15
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
to the sites. Virginia Power has accrued a reserve of $2 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, 2000, any
pending or possible claims were not recognized as an asset or offset against
such obligations of the Company.
In 1999, Virginia Power was notified by the Department of Justice of alleged
noncompliance with the EPA's oil spill prevention, control and countermeasures
(SPCC) plans and facility response plan (FRP) requirements at one of Virginia
Power's power stations. If, in a legal proceeding, such instances of
noncompliance are deemed to have occurred, Virginia Power may be required to
remedy any alleged deficiencies and pay civil penalties. Settlement of this
matter is currently in negotiation and is not expected to be material to
Virginia Power's financial condition or results of operations.
In 1999, Virginia Power identified matters at certain other power stations that
the EPA might view as not in compliance with the SPCC and FRP requirements.
Virginia Power reported these matters to the EPA and its plan for correction
thereof. Presently, the EPA has not assessed any penalties against Virginia
Power, pending its review of Virginia Power's disclosure information. Future
resolution of these matters is not expected to have a material impact on
Virginia Power's financial condition or results of operations.
In 1999, Virginia Power received notices from the Attorneys Generals of
Connecticut and New York, respectively, of their intention to file suit against
Virginia Power for alleged violations of the Clean Air Act. The notices question
whether modifications at certain Virginia Power generating facilities were
properly permitted under the Clean Air Act and allege that emissions from these
facilities have contributed to damage to public health and the environment in
the Northeast. Management believes, based on newspaper reports and other
sources, that it is one of a number of companies with fossil fuel power
generating stations in the southeast and central United States to have received
such notifications. Virginia Power believes that it has obtained the permits
necessary in connection with its generating facilities and that legal
proceedings if pursued by the Attorneys General, would not have a material
adverse effect on its financial condition or results of operations.
In a related development, in May 2000, Virginia Power received a Notice of
Violation (NOV) from the EPA, alleging that Virginia Power is operating its Mt.
Storm Power Station in West Virginia in violation of the Clean Air Act. The NOV
alleges that Virginia Power failed to obtain New Source Review permits prior to
undertaking specified construction projects at the station. EPA alleges that
each of these projects resulted in an increase in the emission of air pollutants
beyond levels that require a New Source Review permit specified under the Clean
Air Act. Violations of the Clean Air Act may result in the imposition of
substantial civil penalties and injunctive relief. Virginia Power believes that
it has obtained the permits necessary in connection with its generating
facilities and will vigorously defend against the allegations in the NOV.
CNG
Voluntary surveys at CNG sites have been conducted to determine the extent of
any possible soil contamination and when contamination has been discovered,
remediation efforts have been undertaken. Further, on August 16, 1990, CNG
Transmission entered into a Consent Order and Agreement with the Commonwealth of
Pennsylvania Department of Environmental Protection (DEP) in which CNG
Transmission has agreed with the DEP's determination of certain violations of
the Pennsylvania Solid Waste Management Act, the Pennsylvania Clean Streams Law
and the rules and regulations promulgated thereunder. No civil penalties have
been assessed. Pursuant to the Order and Agreement, CNG Transmission continues
to perform sampling, testing and analysis, and conducts a program of remediation
at some of its Pennsylvania facilities. Total remediation costs in connection
with these sites and the Order and Agreement are not expected to be material
with respect to the CNG's financial position, results of operations or cash
flows. CNG has recognized an estimated liability amounting to $6 million at
March 31, 2000, for future costs expected to be incurred to remediate or
mitigate hazardous substances at these sites and at facilities covered by the
Order and Agreement.
Inasmuch as certain environmental-related expenditures are expected to be
recoverable in future regulatory proceedings, a regulatory asset has been
recognized amounting to $4 million at March 31, 2000. Also, uncontested claims
amounting to
16
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
$1 million at March 31, 2000, were recognized for environmental-related costs
probable for recovery through joint-interest operating agreements.
CNG Transmission and certain of the gas distribution subsidiaries are subject to
the Federal Clean Air Act (Clean Air Act) and the Federal Clean Air Act
Amendments of 1990 (1990 amendments) which added significantly to the existing
Clean Air Act requirements. As a result of the 1990 amendments, these
subsidiaries were required to install Reasonably Available Control Technology at
some compressor stations to reduce nitrogen oxide emissions and to acquire Title
V permits for major facilities. Progress is on schedule for these permits, with
no major expenditures anticipated.
The 1990 amendments will also require installation of Maximum Available Control
Technology (MACT) to control the emissions of certain hazardous air pollutants
from compressor engines. CNG cannot estimate what its expenditures for
MACT-related controls will be. However, the mandated controls will not affect a
large number of its compressor engines and the related costs are not expected to
be material. Additionally, CNG may be required, under an EPA nitrogen oxide
state implementation program call, to include additional compressor engines in
the control mandates for the 1990 Amendments. The estimated costs of such
federal and/or state imposed hardware additions are not expected to be material.
The total capital expenditures required to comply with the 1990 amendments are
expected to be recoverable through future regulatory proceedings.
CNG is associated with 16 former manufactured gas plant sites, four of which are
currently owned by subsidiaries. Studies conducted by other utilities at their
former manufactured gas plants have indicated that their sites contain coal tar
and other potentially harmful materials. None of the 16 former sites with which
CNG is associated is under investigation by any state or federal environmental
agency, and no investigation or action is currently anticipated. At this time it
is not known if, or to what degree, these sites may contain environmental
contamination. Therefore, CNG is not able to estimate the cost, if any, that may
be required for the possible remediation of these sites.
The DEP has proposed a penalty of $380,000 related to a hydrocarbon spill in
February 1998 at a CNG Transmission facility in Aliquippa, Beaver County,
Pennsylvania. CNG Transmission will settle the matter by contributing $280,000
to a Supplemental Environmental Program (SEP) and $100,000 directly to the DEP.
Under the SEP, several environmental programs will be undertaken which will
benefit the Conservation District of Beaver County, Pennsylvania.
OTHER
Dominion
Dominion has issued guarantees to various third party creditors in relation to
the repayment of debt by certain of its subsidiaries. At March 31, 2000,
Dominion had issued $781 million of guarantees, and the subsidiaries' debt
subject to such guarantees totaled $406 million.
DEI
Subsidiaries of DEI 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.
DCI
As of March 31, 2000, DCI had commitments to fund loans of approximately $689
million.
For additional information regarding Contingencies, see Note (Q) to the Notes to
the Consolidated Financial Statements included in Dominion's Annual Report on
Form 10-K for the year ended December 31, 1999.
17
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(L) LINES OF CREDIT
Dominion Resources and its subsidiaries have credit agreements with various
expiration dates. Dominion and its subsidiaries pay fees in lieu of compensating
balances in connection with these credit agreements. These agreements provided
for maximum borrowings of $9.6 billion. At March 31, 2000, $2.4 billion was
borrowed under such agreements. Dominion and its subsidiaries' credit agreements
supported $5 billion of commercial paper at March 31, 2000. A total of $4.6
billion of the commercial paper was classified as short-term at March 31, 2000.
A significant portion of the commercial paper is supported by credit agreements
that have expiration dates extending beyond one year. Therefore, a total of $364
million of commercial paper was classified as long-term at March 31, 2000. These
borrowings are used primarily to fund the interim financing of the CNG
acquisition and operational needs at Dominion and its subsidiaries.
(M) SUBSEQUENT EVENTS
SALE OF LATIN AMERICAN INTERESTS
In April 2000, Dominion completed the sale of its interests in generation
capacity located in Latin America to Duke Energy International. As previously
reported in Dominion's Annual Report on Form 10-K for the year ended December
31, 1999, DEI had reached an agreement on August 1, 1999, to sell its interests
in approximately 1,200 megawatts of gross generation capacity located in Latin
America. Duke Energy International purchased the interests for approximately
$405 million. Since the announcement of the sale, Duke Energy International and
Dominion transferred ownership of the individual businesses on varying schedules
to meet different regulatory requirements in each country.
SALE OF VIRGINIA NATURAL GAS
On May 8, 2000, Dominion and CNG reached an agreement with AGL Resources Inc.
(AGL) regarding the sale of VNG. AGL will pay from $500 million to $550 million
in cash depending upon the final structure of the sale. The parties expect the
sale to close by December 31, 2000.
(N) BUSINESS SEGMENTS
Dominion manages its operations along three primary business lines, Dominion
Delivery, Dominion Energy and Dominion Exploration and Production. The Company
also manages the following as business segments: o The financial services of DCI
and o Corporate Operations.
CNG's distribution, transmission and exploration and production operations are
included in the segments of Dominion Delivery, Dominion Energy and Dominion
Exploration and Production, respectively.
Corporate operations include the effect of the restructuring and other
merger-related costs.
18
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
See Segment Reporting in Note (A) for a description of these business segments.
Business segment financial information follows for the three month periods ended
March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Dominion
Dominion Dominion Exploration DCI Corporate Consolidated
Delivery Energy and Production Operations Total
(millions, except total
assets)
<S> <C>
Three Months Ended March
31,
2000
Revenues $708 $1,023 $243 $110 $(12) $2,072
Net income (loss) $109 $108 $50 $3 $(129) $141
Total assets at 3/31/00 $7.5 $8.6 $3.2 $3.7 $6.0 $29.0
(billions)
1999
Revenues $280 $852 $47 $108 $6 $1,293
Net income (loss) $45 $70 $10 $13 $(255) $(117)
Total assets at 12/31/99
(billions) $4.6 $7.4 $1.2 $3.6 $0.9 $17.7
</TABLE>
(O) RISK MANAGEMENT-OIL AND GAS OPERATIONS
Dominion has implemented a new hedging strategy for its combined operations.
Under its new strategy, Dominion created an enterprise risk management group
with responsibility for managing Dominion's aggregate energy portfolio,
including the related commodity price risk, across its consolidated operations.
Previously, individual business segments managed their respective energy
portfolios and related price risk exposure on a stand-alone basis. Dominion
management believes this new structure should result in a more effective risk
management approach, thus maximizing the value of Dominion's diversified energy
portfolio and market opportunities.
As part of the implementation of the new strategy, Dominion and CNG management
evaluated CNG's hedging strategy associated with its oil and gas operations in
relation to Dominion's combined operations. As a result of the evaluation, CNG
designated its portfolio of derivative contracts that existed at January 28,
2000 as held for purposes other than hedging for accounting purposes. This
action required a change to mark-to-market accounting where derivative contracts
are carried at fair value in the balance sheet with any future unrealized gains
and losses included in the determination of net income. In addition, CNG entered
into "offsetting" contracts for those contracts in the January 28, 2000
portfolio that would not be settled during the first quarter of 2000. Up to the
date that the offsetting contracts were entered into, the mark-to-market
accounting for the original portfolio resulted in a loss of approximately $55.1
million for the three months ended March 31, 2000. Such loss is included in
Restructuring and Other Acquisition-related Costs. Due to the offsetting
contracts, absent any not yet identified future losses from credit risk
exposure, no additional material losses are expected to result as these
derivative contracts mature through 2003. Related to these contracts, a
liability representing future contract settlements of approximately $97.5
million is reported in Deferred Credits and Other Liabilities - Other at March
31, 2000.
The following chart describes the contracts from the original January 28, 2000
portfolio that have not yet matured, for which offsetting contracts have been
entered, at March 31, 2000:
19
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Original Portfolio
<TABLE>
<CAPTION>
Related Commodity Contract
Type of Instrument Item Quantity Maturity
------------------ ---- -------- --------
<S> <C>
Options ("collars") Natural gas 90 Bcf, on a net basis 2003
Oil 3,850,000 barrels 2000
Swaps Natural gas 108 Bcf 2003
</TABLE>
During the first quarter of 2000, Dominion and its subsidiaries began the
implementation of this strategy by building new portfolios of derivative
contracts and designating them as hedges. At March 31, 2000, unrealized gains
and unrealized losses related to these contracts were approximately $6.2 million
and $31.8 million, respectively. Dominion's hedging portfolio of derivative
contracts related to its oil and gas exploration and production operations at
March 31, 2000 follows:
Current Hedging Portfolio
<TABLE>
<CAPTION>
Hedged Commodity
Type of Instrument Item Quantity Maturity
------------------ ---- -------- --------
<S><C>
Options ("collars") Natural gas 42.1 Bcf, on 2002
a net basis
Oil 3,595,000 barrels 2001
Swaps Natural gas 93.1 Bcf, on 2000
a net basis
Oil 2,631,000 barrels 2000
</TABLE>
The net deferred losses at March 31, 2000 on the current hedging portfolio of
contracts, to the extent realized, should generally be offset by future sales
revenue from oil and gas production.
(P) SUPPLEMENTARY FINANCIAL INFORMATION--UNAUDITED
Gas and Oil Producing Activities
As a result of the acquisition of CNG in January 2000, DEI's oil and gas
exploration and production (E&P) activities, when combined with CNG's E&P
activities, meet the definition of "significant" under Statement of Financial
Accounting Standards (SFAS) No. 69, Disclosures about Oil and Gas Producing
Activities. Prior to the acquisition, DEI's E&P operations did not meet the
definition of "significant" and therefore were not subject to disclosure under
SFAS 69.
The following SFAS No. 69 disclosures for CNG and DEI are presented to provide
the reader with information regarding the historical E&P operations of CNG and
DEI. The historical operations are not necessarily indicative of financial
results that would have occurred had the acquisition of CNG occurred on January
1, 1999. Furthermore, the dollar amounts shown below do not reflect Dominion's
accounting basis in the assets of CNG resulting from Dominion's acquisition of
CNG.
As discussed in Note (C), effective with the acquisition of CNG, DEI changed its
method of accounting for its E&P activities from the successful efforts method
to the full cost method. In addition, certain 1999 amounts previously disclosed
by CNG were restated as a result of a change in presenting revenues, royalty
expense and production and reserve statistics.
CNG's and DEI's oil and gas producing activities are located in the United
States and Canada.
20
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Capitalized Costs
The aggregate amounts of costs capitalized for gas and oil producing activities,
and related aggregate amounts of accumulated depreciation and amortization,
follow:
- --------------------------------------------------------------------------------
December 31, 1999 CNG DEI
------------------ --- ---
(In Millions)
Capitalized costs of
Proved properties...... $ 3,735 $ 1,139
Unproved properties.... 480 71
---------- ----------
Subtotal............ 4,215 1,210
---------- ----------
Accumulated depreciation,
depletion and amortization 2,738 276
---------- ----------
Net capitalized costs $ 1,477 $ 934
========== ==========
Total Costs Incurred
The following costs were incurred in gas and oil producing activities during
1999:
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Total United States Canada
---------------------------- ----- ------------- ------
(In Millions)
<S> <C>
CNG:
Property acquisition costs
Proved properties......... $ 171 $ 171 $ ---
Unproved properties....... 33 33 ---
--------- -------- ---------
Subtotal............... 204 204 ---
Exploration costs........... 113 113
Development costs........... 95 95
--------- -------- ---------
Total.................. $ 412 $ 412 $
========= ======== =========
DEI:
Property acquisition costs
Proved properties......... $ 280 $ 121 $ 159
Unproved properties....... 33 3 30
--------- -------- ---------
Subtotal............... 313 124 189
Exploration costs........... 4 2 2
Development costs........... 84 34 50
--------- -------- ---------
Total.................. $ 401 $ 160 $ 241
========= ======== =========
</TABLE>
21
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Results of Operations
The results of operations presented below exclude the impact of interest expense
and corporate overheads attributable to oil and gas production.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Total United States Canada
---------------------------- ------- -------------- ------
(In Millions)
<S> <C>
CNG:
Revenues (net of royalties) from:
Sales to nonaffiliated companies $ 382 $ 377 $ 5
Transfers to other operations.. 52 52 --
--------- -------- ---------
Total....................... 434 429 5
--------- -------- ---------
Less:Production (lifting) costs.. 81 78 3
Depreciation and amortization 224 224
Income tax expense.......... 38 37 1
--------- -------- ---------
Results of operations....... $ 91 $ 90 $ 1
========= ======== =========
DEI:
Revenues (net of royalties) from:
Sales to nonaffiliated companies $ 227 $ 141 $ 86
Transfers to other operations.. -- -- --
--------- -------- ---------
Total....................... 227 141 86
--------- -------- ---------
Less:Production (lifting) costs.. 85 54 31
Depreciation and amortization 73 41 32
Income tax expense.......... (24) (28) 4
---------- --------- ---------
Results of operations....... $ 93 $ 74 $ 19
========= ======== =========
</TABLE>
22
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Company-Owned Reserves
Estimated net quantities of proved gas and oil (including condensate) reserves
in the United States and Canada at December 31, 1999, and changes in the
reserves during the year, are shown in the two schedules which follow. Reserve
estimates are, by their nature, subject to revision. The estimates are made
using all available geological and reservoir data as well as production data and
are expected to change as additional information becomes available.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Total United States Canada
---------------------------- ------ ------------- ------
(In Bcf)
<S> <C>
CNG:
Proved Developed and Undeveloped
Reserves*--Gas
At January 1 .............................. 1,110 1,109 1
Changes in reserves
Extensions, discoveries and other ...... --
additions ............................ 113 113
Revisions of previous estimates ........ (61) (61) --
Production ............................. (153) (153) --
Purchases of gas in place .............. 206 206 --
Sales of gas in place .................. (10) (10)
------ ----- ------
At December 31 ............................ 1,205 1,204 1
====== ===== ======
Proved Developed Reserves*--Gas
At January 1 .............................. 895 894 1
At December 31 ............................ 960 959 1
DEI:
Proved Developed and Undeveloped
Reserves*--Gas
At January 1 .............................. 592 474 118
Changes in reserves
Extensions, discoveries and other
additions ............................. 143 94 49
Revisions of previous estimates ........ 1 24 (23)
Production ............................. (101) (60) (41)
Purchases of gas in place .............. 500 98 402
Sales of gas in place .................. (31) (31) --
------ ----- ------
At December 31 ............................ 1,058 599 459
====== ===== ======
Proved Developed Reserves*--Gas
At January 1 .............................. 592 474 118
At December 31 ............................ 963 599 364
</TABLE>
* Net of royalties.
23
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Total United States Canada
---------------------------- ----- ------------- ------
(In Thousand Bbls)
<S> <C>
CNG:
Proved Developed and Undeveloped
Reserves*--Oil
At January 1 ............................... 46,625 41,854 4,771
Changes in reserves
Extensions, discoveries and other
additions ............................. 6,209 6,034 175
Revisions of previous estimates ......... 5,352 3,325 2,027
Production .............................. (8,545) (8,216) (329)
Purchases of oil in place ............... 806 806 --
Sales of oil in place ................... (1,160) (1,160) --
------- ------- -------
At December 31 ............................. 49,287 42,643 6,644
======= ======= =======
Proved Developed Reserves*--Oil
At January 1 ............................... 34,960 30,189 4,771
At December 31 ..................... ........ 38,934 32,290 6,644
DEI:
Proved Developed and Undeveloped
Reserves*--Oil ................................ 4,076 2,533 1,543
At January 1
Changes in reserves
Extensions, discoveries and other
additions ............................. 4,226 118 4,108
Revisions of previous estimates ......... 8,409 (483) 8,892
Production .............................. (1,416) (551) (865)
Purchases of oil in place ............... 11,203 -- 11,203
Sales of oil in place ................... (888) (888) --
------- ------- -------
At December 31 ............................. 25,610 729 24,881
======= ======= =======
Proved Developed Reserves*--Oil
At January 1 ............................... 4,076 2,533 1,543
At December 31 ............................. 7,845 729 7,116
</TABLE>
* Net of royalties.
24
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein
The following tabulation has been prepared in accordance with the FASB's rules
for disclosure of a standardized measure of discounted future net cash flows
relating to Company-owned proved gas and oil reserve quantities.
<TABLE>
<CAPTION>
December 31, 1999 Total United Canada
--------------------------------------------- ----------- ------- ---------
States
------
(In Millions)
<S><C>
CNG:
Future cash inflows....................... $ 3,996 $ 3,878 $ 118
Less: Future development and production
costs.................................. 907 845 62
Future income tax expense........ 934 918 16
---------- ---------- -----------
Future net cash flows..................... 2,155 2,115 40
Less annual discount (10% a year)......... 802 788 14
---------- ---------- -----------
Standardized measure of discounted future
net cash Flows........................... $ 1,353 $ 1,327 $ 26
========== ========== ===========
DEI:
Future cash inflows....................... $ 3,048 $ 1,222 $ 1,826
Less: Future development and production
costs................................... 1,254 519 735
Future income tax expense........ 597 161 436
---------- ---------- -----------
Future net cash flows..................... 1,197 542 655
Less annual discount (10% a year)......... 553 198 355
---------- ---------- -----------
Standardized measure of discounted future
net cash Flows......................... $ 644 $ 344 $ 300
========== ========== ===========
</TABLE>
In the foregoing determination of future cash inflows, sales prices for gas were
based on contractual arrangements or market prices at year-end. Prices for oil
were based on year end prices received. Future costs of developing and producing
the proved gas and oil reserves reported at the end of the year were based on
costs determined at year end, assuming the continuation of existing economic
conditions. Future income taxes were computed by applying the applicable
statutory tax rate to future pretax net cash flows, less the tax basis of the
properties involved, and giving effect to tax deductions, or permanent
differences and tax credits.
It is not intended that the FASB's standardized measure of discounted future net
cash flows represent the fair market value of the Company's proved reserves. The
Company cautions that the disclosures shown are based on estimates of proved
reserve quantities and future production schedules which are inherently
imprecise and subject to revision, and the 10% discount rate is arbitrary. In
addition, present costs and prices are used in the determinations and no value
may be assigned to probable or possible reserves.
<PAGE>
DOMINION RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following tabulation is a summary of changes between the total standardized
measure of discounted future net cash flows at the beginning and end of 1999 for
CNG.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 (In Millions)
--------------------------------------------------
<S><C>
Standardized measure of discounted future net cash
flows at January 1................................ $ 888
Changes in the year resulting from sales
and transfers of gas and oil produced during
the year, less production costs.............. (353)
Prices and production and development
costs related to future production............. 792
Extensions, discoveries and other additions, less
Production and development costs............. 186
Previously estimated development costs
incurred during the year...................... 57
Revisions of previous quantity estimates........ (213)
Accretion of discount........................... 121
Income taxes.................................... (263)
Purchases and sales of proved reserves in 265
place-net....................................
Other (principally timing of production)........ (127)
-----------
Standardized measure of discounted future net
cash flows at December 31........................ $ 1,353
===========
</TABLE>
Although DEI has not disclosed a standardized measure of discounted future net
cash flows prior to the December 31, 1999 disclosure shown above, the Company is
providing information regarding certain changes in the standardized measure
during 1999 that remain embedded in the standardized measure at December 31,
1999. The following changes did not result from changes in estimates:
Year Ended December 31, 1999 (In Millions)
--------------------------------------------------
Extensions, discoveries and other additions, less
production and development costs............. $ 80
Purchases of proved reserves in place ............ 253
For sales and transfers of gas and oil produced during the year, see the Results
of Operations section of this note. For the effect of development costs incurred
during 1999, see the preceding section entitled Total Costs Incurred.
26
<PAGE>
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 are influenced by a number of
factors including political and economic risks, market demand for energy,
inflation, capital market conditions, and other general and specific economic
conditions in the Company's service areas, governmental policies, legislative
and regulatory actions (including those of the Federal Energy Regulatory
Commission (FERC), the Securities and Exchange Commission (SEC), the
Environmental Protection Agency, the Department of Energy, the Nuclear
Regulatory Commission, various state regulatory commissions), 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, effects of the acquisition of CNG,
recovery of the cost of purchased power, nuclear decommissioning costs, 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. 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.
Any forward-looking statement speaks only as of the date on which such statement
is made, and Dominion 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.
Business Segments
On March 3, 2000, Dominion announced a new corporate structure that integrates
CNG's businesses and streamlines operations, positioning Dominion for long-term
growth in the competitive market place. For more information on the Company's
operating segments see Segment Reporting in Note (A) to Consolidated Financial
Statements.
27
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Dominion has structured its Management's Discussion and Analysis of Financial
Condition and Results of Operations to reflect the business segments.
Certain activities discussed under Liquidity and Capital Resources are currently
evaluated based on existing legal entities rather than the operating segments
defined by the new organizational structure because we continue to analyze these
matters internally by legal entity.
RESULTS OF OPERATIONS
We have organized our discussion of Results of Operations into the following
subsections:
1. Dominion - Consolidated
2. Dominion Energy
3. Dominion Delivery
4. Dominion Exploration and Production
5. DCI
<TABLE>
<CAPTION>
Three Months Ended March 31,
Net Income and Earnings Per Share
Net Income Earnings Per Share
(millions, except per share amounts)
------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C>
Dominion Energy $108 $ 70 $0.49 $ 0.36
Dominion Delivery 117 45 0.52 0.23
Dominion Exploration and Production 50 10 0.22 0.05
DCI 3 13 0.01 0.07
Corporate Operations (137) (255) (0.61) (1.32)
---- ------ ----- ------
Consolidated $141 $(117) $0.63 $(0.61)
==== ====== ===== ======
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 conditions and rate changes.
</TABLE>
1. DOMINION - CONSOLIDATED
Revenues
Consolidated earnings increased for the first quarter of 2000 when compared to
the same time period in 1999. The growth in net income reflects the increase in
revenues of $779 million that was primarily due to:
o the inclusion of revenues of CNG's various businesses from the time of the
CNG acquisition on January 28, 2000 until the end of the first quarter
2000;
o increased electric service revenue at Dominion Delivery and Dominion
Energy; and
o higher oil and gas revenues at Dominion Exploration and Production.
These activities were offset by the decrease in other revenues at Dominion
Energy.
Operating Expenses
Consolidated operating expenses increased by $689 million for the first three
months of 2000 as compared to the same period in 1999, because of:
o the inclusion of the operating expenses of CNG's various operating
businesses from the time of the acquisition until the end of the first
quarter 2000;
o the impact of restructuring and other acquisition-related costs; and
o increase in fuel, net and operation and maintenance costs at Dominion
Energy.
These increases were offset by:
o lower purchased power capacity expense and depreciation and
amortization at Dominion Energy; and
o lower operations and maintenance costs at Dominion Delivery.
28
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Interest Charges, Net
Interest charges, net increased by $81 million during the three-month period
ended March 31, 2000, as compared to the same period in 1999 primarily due to:
o the interest on the debt incurred to finance the acquisition of CNG,
and
o the interest expense of CNG.
Extraordinary Item, Net of Tax
Extraordinary item, net of tax consists of a charge to earnings for the
write-off of assets and liabilities related to Virginia Power's generation
activities which will not be recovered through capped regulated rates. For more
information on the extraordinary item, see Note (D) to Consolidated Financial
Statements.
2. DOMINION ENERGY
The business segment Dominion Energy includes primarily the combined generation
operations of Virginia Power and DEI plus the gas pipeline and storage
operations of CNG.
Dominion Energy's net income for the first quarter of 2000 increased by $38
million as compared to the same period in 1999. The addition of CNG's
transmission and storage businesses provided $34 million to Dominion Energy's
net income. The change in net income from non-CNG sources of $4 million was
attributable to the following:
Revenues
Revenues increased for the three months ending March 31, 2000 as compared to the
same period in 1999, primarily due to increased electric service revenue
resulting from growth in customer base. The increase was offset partially by
lower revenues associated with power and gas marketing and trading activities
and a decrease in nonutility electric revenues.
Total Operating Expenses
Operating expenses, decreased for the first three months of 2000 when compared
to the same period in 1999, primarily due to:
o lower purchased power capacity costs because of the expiration of two
major long-term power purchase contracts as of December 31, 1999;
o lower depreciation and amortization reflecting the amortization of certain
terminated construction projects in the first quarter of 1999 with no such
expenses occurring in the current quarter.
The reduction in operating expenses was partially offset by the increase in
fuel, net primarily due to increased energy purchases and the inclusion of
previously deferred fuel expenses being recovered in current fuel rates.
3. DOMINION DELIVERY
The business segment Dominion Delivery consists primarily of Virginia Power's
electric transmission and distribution system and CNG's gas distribution system.
Dominion Delivery's net income for the first quarter of 2000 increased by $72
million as compared to the same period in 1999. The addition of CNG's
distribution business provided $57 million to Dominion Delivery's earnings
contribution. The additional earnings contribution of $15 million was
attributable to the following.
Revenues
Revenues increased for the three months ending March 31, 2000 as compared to the
same period in 1999, primarily due to increased electric service revenue
resulting from electric transmission services.
29
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Total Operating Expenses
Operating expenses decreased for the first three months of 2000 when compared to
the same period in 1999, primarily due to lower costs in the first quarter of
2000 associated with storm-related service restoration activities.
4. DOMINION EXPLORATION AND PRODUCTION
Dominion Exploration and Production consists of the gas and oil operations of
DEI and CNG.
Dominion Exploration and Production's net income for the first quarter of 2000
increased by $40 million as compared to the same period in 1999. The addition of
CNG's exploration and production business provided $23 million to Dominion
Exploration and Production's earnings contribution. The additional earnings
contribution of $17 million was attributable to the following:
Revenues
Revenues increased for the three months ending March 31, 2000 as compared to the
same period in 1999, primarily due to increased oil and gas production resulting
from the acquisition of Remington Energy, Ltd. in April 1999, as well as
significantly higher market prices for oil and gas.
Total Operating Expenses
Operating expenses increased for the first three months of 2000 when compared to
the same period in 1999, primarily due to higher operation and maintenance costs
as a result of increased oil and gas production.
5. DCI
DCI's net income decreased during the first quarter 2000, as compared to the
same period in 1999, primarily due to lower securitization gains, higher
interest expense and higher operating expenses at the financial services units.
These activities were offset, in part, by higher interest and fee income. Higher
interest income and expense occurred due to the rise in interest rates.
Operating expenses increased due to higher general and administrative expenses
and higher loan loss reserves.
The real estate and other non-core operating results were lower during the first
three months of 2000 as compared to the same period in 1999 due to significantly
lower water flow at the Vidalia hydro facility.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Certain activities discussed under Liquidity and Capital Resources are currently
evaluated based on existing legal entities rather than operating segments
defined by the new organizational structure. References are made to specific
operating segments as appropriate.
We have organized our discussion of Liquidity and Capital Resources into the
following subsections:
1. Dominion - Consolidated
2. Virginia Power
3. DEI
4. DCI
5. CNG
1. DOMINION - CONSOLIDATED
Cash Flows From Financing Activities
Financing activities provided cash flows of $2.9 billion during the first
quarter of 2000 primarily due to the issuance of
30
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
$4.4 billion of short-term debt to finance the acquisition of CNG and the
reorganization discussed in Note (F) of the Consolidated Financial Statements.
For more information on the CNG acquisition, see Note (B) to the Consolidated
Financial Statements.
On February 18, 2000, the Board of Directors of Dominion declared a quarterly
common stock dividend of $0.645 per share, payable March 20, 2000, to holders of
record at the close of business March 1, 2000.
On March 31, 1999, Dominion increased its bank lines of credit to $601 million
by replacing the April 1, 1998, $200 million short-term credit agreement with a
new $300 million, 364-day facility. Dominion uses these credit agreements to
support its commercial paper borrowings. The proceeds from these borrowings are
used to finance Dominion nonutility subsidiaries' working capital requirements.
Cash Flows Used In Investing Activities
Net cash flows used in investing activities during the first three months of
2000 were $3.2 billion. The primary reasons for the cash outflows were utility
plant (including nuclear fuel) expenditures at Virginia Power and CNG, plus the
cash paid as part of the acquisition of CNG.
2. VIRGINIA POWER
Cash Flows From Operations
Cash flows from operations for the first quarter of 2000 increased when compared
to the same period in 1999 primarily due to normal operations.
Cash Flows Used in Financing Activities
In March 2000, Virginia Power issued $220 million in aggregate principal of
variable-rate medium-term notes maturing in 2002. Virginia Power also entered a
swap agreement as a hedge to synthetically convert these variable-rate notes to
fixed rate debt. Under the swap agreement, Virginia Power will pay a 7.27% fixed
rate. Virginia Power issued the notes primarily to satisfy the retirement during
the first quarter of 2000 of approximately $57 million of outstanding debt and
preferred stock and repayments in April 2000 of $169 million of outstanding
debt.
Virginia Power has a commercial paper program that is supported by two credit
facilities totaling $500 million. Net borrowings under the program were $185
million at March 31, 2000, a decrease of $193 million from amounts outstanding
at December 31, 1999. Borrowings under these facilities are used to fund working
capital requirements and may vary significantly during the course of the year
depending upon the timing and amount of cash requirements not satisfied by
current cash provided from operations.
As of March 31, 2000, Virginia Power has $520 million of remaining principal
amount under currently effective shelf registrations with the Securities and
Exchange Commission available to meet capital requirements.
Cash Flows Used in Investing Activities
During the quarter ended March 31, 2000, Virginia Power's investing activities
resulted in net cash outflows of $178 million. These activities included plant
and nuclear fuel expenditures of $162 million. Generation-related projects
totaled approximately $87 million and included continued construction of four
150 MW combustion turbines, expected to be completed by midyear 2000,
environmental upgrades, and routine capital improvements. Virginia Power spent
approximately $71 million on transmission and distribution-related projects
reflecting routine capital improvements and expenditures associated with new
connections. Remaining plant and equipment expenditures of $4 million reflect
Virginia Power's continued investment in information technology and other
general projects.
31
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
There have been no significant changes in the planned levels of spending for
capacity and other capital projects and maturities of securities as disclosed in
MD&A included in Virginia Power's Annual Report on Form 10-K for the year ended
December 31, 1999. Virginia Power expects to fund its capital requirements and
maturities with cash flow from operations and a combination of sales of
securities and short-term borrowings.
3. DEI
Cash Flows From Operating Activities
Cash flows from operations for the three months ended March 31, 2000 decreased
by $20 million, as compared to the same period in 1999, primarily due to timing
of payments for normal business operations.
Cash Flows From Investing Activities
During the first three months of 2000, cash flows from investing activities were
$22 million primarily due to sale of DEI's Latin American assets, offset by the
purchase of natural gas properties.
4. DCI
Cash Flows Used In Operating Activities
DCI's cash flows used in operations for the first three months of 2000 increased
by $44 million as compared to the same period for 1999 primarily due to
increased net mortgage originations and sales, offset by normal operations.
Cash Flows From Financing Activities
During the first quarter of 2000, DCI's cash flows from financing activities
were $192 million to satisfy funding needs for loan originations and purchases
and originations of mortgages.
Cash Flows Used In Investing Activities
During the first three months of 2000, DCI's cash flows used in investing
activities were $108 million primarily due to the funding for mortgage and
commercial lending activities.
5. CNG
Cash Flows From Operations
Since the acquisition date of January 28, 2000, CNG contributed approximately
$270 million to operating cash flows since its acquisition on January 28, 2000.
Cash Flows Used In Financing Activities
Since the acquisition date of January 28, 2000, CNG `s cash flows used in
financing activities were $141 million primarily due to the repayment of
commercial paper and the payment of dividends.
Cash Flows Used In Investing Activities
Since the acquisition date of January 28, 2000, CNG's cash flows used in
investing activities were $179 million primarily due to plant construction and
other property additions.
32
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
FUTURE ISSUES
- -------------
DOMINION RESOURCES - CONSOLIDATED
Recently Issued Accounting Standards
The Financial Accounting Standards Board has issued an Exposure Draft proposing
amendments to Statement of Financial Accountings Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. If adopted, the
proposed new accounting standard will become effective with the implementation
of SFAS No. 133. The Exposure Draft addresses various implementation issues
including expanded availability of exclusions of normal purchase and normal sale
agreements from classification as derivatives. The Company is in the process of
assessing the impact and method of adoption of SFAS No. 133 and has not
estimated the financial impact of adoption. To the extent that any of the
contracts are subject to fair value accounting, implementing appropriate hedging
strategies could possibly mitigate the potential impact on earnings volatility.
Future Restructuring Charges
Dominion is expecting to incur additional charges relating to restructuring and
other acquisition-related activities as business operations are consolidated and
administrative functions are integrated. Other costs may be incurred as a result
of modifying or terminating leases due to closing of duplicate or excess
facilities, termination of service contracts no longer needed and, accelerated
depreciation in 2000 of information technology systems that will be abandoned on
January 1, 2001. The planned workforce reductions and the accelerated
depreciation in 2000 of information technology systems that will be abandoned on
January 1, 2001 should avoid future annualized operating costs of approximately
$60 million that would have otherwise been incurred. See Note (B) to
Consolidated Financial Statements for further discussion of restructuring
activities and related costs.
Telecommunications Business
VPS Communications, Inc. (VPSC), an indirect subsidiary of Dominion is a
Virginia public service company authorized to provide interexchange and local
exchange telecommunications service. Dominion has recently announced plans for
VPSC to expand its activities as a competitive provider of telecommunications
services in Virginia and, ultimately, regionally. VPSC expects initially to
continue acting primarily as a wholesaler, providing telecommunications service
over fiber optic cable to third parties with relationships to business and
consumer end users. Management anticipates that VPSC's fiber optic cable network
can largely overlay Dominion's network of electric and natural gas rights of
way, thus increasing utilization of these extensive company resources.
Dominion's investments, for the current fiscal year, estimated at approximately
$85 million, will provide funds necessary for VPSC to begin development of a
facilities-based high-bandwidth capacity telecommunications network throughout
the eastern United States.
VIRGINIA POWER
Competition-Legislative Initiatives
Virginia
In March 1998, the Virginia Commission issued an Order Establishing
Investigation with regard to independent system operators, regional power
exchanges and retail access pilot programs. The Order instructed Virginia Power
and American Electric Power-Virginia (AEP) each to design and file a retail
access pilot program. In response, Virginia Power filed a report describing the
details, objectives and characteristics of our proposed retail access pilot
program and a hearing was held. On April 28, 2000, the Virginia Commission
entered a Final Order adopting, with certain exceptions, the Hearing Examiner's
recommendations, including the Hearing Examiner's market price methodology.
Pursuant to the Final Order, Virginia Power's pilot program will begin on
September 1, 2000 and will initially give approximately 35,000 customers the
ability to choose their electric supplier. The program will be expanded to
include approximately 71,000 customers by January 2001. A final order from the
Virginia Commission on the interim rules governing electric and gas retail pilot
programs in Virginia is expected early in the second quarter of 2000.
33
<PAGE>
DOMINION RESOURCES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
In April 2000, the Virginia Commission entered an order proposing regulations
governing the functional separation of the generation, retail transmission, and
distribution of incumbent electric utilities under the Virginia Electric Utility
Restructuring Act (the Act). Pursuant to the Act, Virginia electric utilities
are required to file their functional separation plans with the Virginia
Commission by January 1, 2001. Comments on the Commission's proposed functional
separation rules are due by May 22, 2000.
North Carolina
In April 2000, a study commission, established by the North Carolina General
Assembly to explore the future of electric service in North Carolina, developed
a proposal to provide full retail competition to North Carolina by January 1,
2006, with a phase-in beginning on January 1, 2005 of up to 50% of each power
supplier's customer load. These recommendations will be part of a report to be
given to the General Assembly scheduled to begin in May 2000. The study
commission will recommend to the 2001 General Assembly specific legislative
language necessary to accomplish its recommendations including a proposal
regarding resolution of certain issues concerning municipal power agency debt.
Clear Air Act Matters
The Virginia Department of Environmental Quality (DEQ) is proposing to impose a
plant wide ozone season NOx emission limit of 0.15 lb/mmBtu at the Possum Point
Power Station beginning in May 2003 as part of a State Implementation Plan to
address ozone levels in Northern Virginia, which is classified as a serious
ozone non-attainment area. Given the age of the existing units at Possum Point
and the high probability of additional control requirements in the future,
Virginia Power evaluated various options to optimize the ability to continue to
operate these units in a cost-effective manner while providing the Northern
Virginia area with a reliable source of electricity. Based on this evaluation,
Virginia Power recently announced the planned replacement of 465 MW of existing
coal-fired generation at Possum Point with a new, cleaner combined cycle gas
unit at an estimated capital cost of $280 million.
In May 2000, Virginia Power received a Notice of Violation (NOV) from the EPA,
alleging that Virginia Power is operating the Mt. Storm Power Station in West
Virginia in violation of the Clean Air Act. The NOV alleges that Virginia Power
failed to obtain New Source Review permits prior to undertaking specified
construction projects at the station. EPA alleges that each of these projects
resulted in an increase in the emission of air pollutants beyond levels that
require a New Source Review permit specified under the Clean Air Act. Violations
of the Clean Air Act may result in the imposition of substantial civil penalties
and injunctive relief. Virginia Power believes that it has obtained the permits
necessary in connection with its generating facilities and will vigorously
defend against the allegations in the NOV. See Note (K) for further discussion
of this matter.
YEAR 2000 COMPLIANCE
- --------------------
DOMINION CONSOLIDATED
Dominion experienced a successful transition to the Year 2000 and through
February 29, 2000. Our transmission and distribution systems, generating units
and newly acquired natural gas production, transmission, and distributions
systems continued to operate smoothly through the transition periods. Customers
have not lost power or experienced natural gas service interruptions as a result
of a Year 2000 problem. Dominion expects no significant Year 2000 problems in
the future.
Actual Year 2000 costs, excluding CNG, of $31 million have been expended as of
March 31, 2000. Additional costs throughout the remainder of 2000 are not
expected to be significant.
Dominion cannot estimate or predict the potential adverse consequences that
could result from a third party's failure to effectively address remaining Year
2000 issues, if any, but believe that any impact would be short-term in nature
and would not have a material adverse impact on results of operations.
34
<PAGE>
DOMINION RESOURCES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
MARKET RATE SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
- -----------------------------------------------------
Dominion 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's outstanding debt as well as its commercial,
consumer, and mortgage lending activities. Currency risk exists principally
through DEI's investments in Canada and CNG International's investments in
Argentina and Australia. Dominion is exposed to equity price risk through
various portfolios of equity securities. Commodity price risk is experienced in
Dominion Energy and Dominion Exploration and Production. They are exposed to
effects of market shifts in the prices they receive and pay for natural gas and
electricity.
Dominion uses derivative commodity instruments to hedge electric operations, gas
production and procurement operations and as part of its trading activities.
Dominion 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 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.
Interest Rate Risk - Non-Trading Activities
Dominion manages interest rate risk exposure by maintaining a mix of fixed and
variable rate debt. In addition, Dominion enters into interest rate sensitive
derivatives such as swaps, forwards and futures contracts.
Commodity Price Risk - Non-Trading Activities
Dominion Exploration and Production (the post-merger combined oil and gas
operations of DEI and CNG) is exposed to the impact of market fluctuations in
the sales price received for natural gas and oil. To reduce price risk caused by
market fluctuations, Dominion Exploration and Production generally follows a
policy of hedging a portion of its natural gas and oil sales commitments by
selecting derivative commodity instruments whose historical price fluctuations
correlate strongly with those of the production being hedged. Dominion
Exploration and Production enters into options, swaps, and collars to mitigate a
loss in revenues, should natural gas or oil prices decline in future production
periods. Dominion Exploration and Production also mitigates price risk by
entering into fixed price sale agreements with physical purchasers of natural
gas.
For sensitivity analysis purposes, the fair value of Dominion Exploration and
Production's oil and natural gas financial derivative contracts are determined
from option pricing models which take into account the market prices of oil and
natural gas in future periods, the volatility of the market prices in each
period, as well as the time value factors of the underlying commitments. In most
instances, market prices and volatility are determined from quoted prices on the
futures exchange.
Dominion Exploration and Production has determined a hypothetical decrease in
fair value for its oil and natural gas financial derivative contracts assuming a
10% unfavorable change in market prices and comparing it to the fair value of
the contracts based on market prices at March 31, 2000. This hypothetical 10%
change in market prices would have resulted in a decrease in fair value of
approximately $47 million as of March 31, 2000. If this sensitivity analysis had
been used at December 31, 1999, an unfavorable 10% change in market prices would
have resulted in an estimated decrease in the fair value for CNG's and DEI's oil
and natural gas financial derivative contracts of $46 million and $9 million,
respectively.
The impact of a change in oil and natural gas commodity prices on Dominion
Exploration and Production's oil and natural gas derivative financial contracts
at a point in time is not necessarily representative of the results that will be
realized when such contracts are ultimately settled. Net losses from oil and
natural gas financial derivative contracts used for hedging purposes, to the
extent realized, should generally be offset by future sales revenue from oil and
gas production.
36
<PAGE>
DOMINION RESOURCES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
(CONTINUED)
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 its 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, 2000 and
December 31, 1999. This hypothetical 10 percent change in commodity prices would
have resulted in a hypothetical loss of approximately $6 million and $5 million
in the fair value of its commodity contracts as of March 31, 2000 and December
31, 1999, respectively.
The sensitivity analysis does not include the price risks associated with
utility fuel requirements, including those underlying utility fuel requirements.
In the normal course of business, we also face risks that are either
nonfinancial or nonquantifiable. Such risks principally include credit risk,
which is not reflected in the sensitivity analysis above.
37
<PAGE>
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
VIRGINIA POWER
In May 2000, Virginia Power received a Notice of Violation (NOV) from the
Environmental Protection Agency (EPA), alleging that Virginia Power is operating
the Mt. Storm Power Station in West Virginia in violation of the Clean Air Act.
The NOV alleges that Virginia Power failed to obtain New Source Review permits
prior to undertaking specified construction projects at the station. EPA alleges
that each of these projects resulted in an increase in the emission of air
pollutants beyond levels that require a New Source Review permit specified under
the Clean Air Act. Violations of the Clean Air Act may result in the imposition
of substantial civil penalties and injunctive relief. Virginia Power believes
that it has obtained the permits necessary in connection with its generating
facilities and will vigorously defend against the allegations in the NOV. See
Note (K) to Consolidated Financial Statements for a further discussion.
CNG
A class action suit was filed by Quinque Operating Company and others against
approximately 300 defendants, including CNG and several of its subsidiaries in
Stevens County, Kansas. The cases have been consolidated with the Grynberg case,
as previously reported, and have been stayed pending the ruling on the motion to
dismiss.
CNG's interstate natural gas pipeline, Dominion Transmission, Inc is involved in
several proceedings before the Enforcement Section of the Office of the General
Counsel at the Federal Energy Regulatory Commission. These proceedings concern
an audit of Dominion Transmission's compliance with marketing affiliate
regulations, certain storage well drilling practices, and a matter affecting
capacity allocation for the pipeline's services. These proceedings are in
various stages of discovery and their outcome cannot be determined at this time.
The Company does not anticipate that these proceedings will result in a material
adverse effect to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Dominion's Annual Shareholders Meeting was held on April 28, 2000 and the
following matters were voted on by shareholders.
ELECTION OF DIRECTORS
The following Directors were elected to the Board of Directors for a one year
term or until next year's annual meeting.
<TABLE>
<CAPTION>
VOTES
-----
NOMINEE FOR WITHHELD
------- --- --------
<S> <C>
William C. Barrack, Jr 201,783,475 5,471,885
John B. Bernhardt 202,021,678 5,233,682
Thos. E. Capps 201,845,269 5,410,091
George A. Davidson, Jr. 201,551,785 5,703,575
Raymond E. Galvin 201,887,173 5,368,187
John W. Harris 202,323,343 4,932,017
Benjamin J. Lambert, III 202,096,079 5,159,281
Richard L. Leatherwood 202,273,301 4,982,059
Paul E. Lego 201,706,115 5,552,245
Margaret A. McKenna 201,876,024 5,379,336
Steven A. Minter 201,993,303 5,262,057
Kenneth A. Randall 201,975,016 5,280,344
Frank S. Royal, M.D. 201,988,476 5,266,884
S. Dallas Simmons 202,253,342 5,002,018
Robert H. Spilman 201,925,732 5,329,628
David A. Wollard 202,246,044 5,009,316
</TABLE>
38
<PAGE>
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
INCENTIVE COMPENSATION PLAN
Shareholders approved the amendments to Dominion Resources Incentive
Compensation Plan as follows:
<TABLE>
<CAPTION>
Votes
-----
Broker
For Against Abstained Non Votes
--- ------- --------- ---------
<S> <C>
154,047,131 20,298,128 4,422,181 28,487,920
</TABLE>
ITEM 5. OTHER INFORMATION
- --------------------------
THE COMPANY
For a discussion of Dominion's final sale of its Latin American generation
interests see Note (M) to Consolidated Financial Statements.
VIRGINIA POWER
Regulation
Virginia
In March 1998, the Virginia State Corporation Commission issued an Order
Establishing Investigation with regard to independent system operators, regional
power exchanges and retail access pilot programs. The Order instructed Virginia
Power and American Electric Power-Virginia (AEP) each to design and file a
retail access pilot program. In response, we filed a report describing the
details, objectives and characteristics of our proposed retail access pilot
program and a hearing was held. On April 28, 2000, the Virginia Commission
entered a Final Order adopting, with certain exceptions, the Hearing Examiner's
recommendations, including the Hearing Examiner's market price methodology.
Pursuant to the Final Order, Virginia Power's pilot program will begin on
September 1, 2000 and will initially give approximately 35,000 customers the
ability to choose their electric supplier. The program will be expanded to
include approximately 71,000 customers by January 2001. A final order from the
Virginia Commission on the interim rules governing electric and gas retail pilot
programs in Virginia is expected early in the second quarter of 2000.
In April 2000, the Virginia Commission entered an order proposing regulations
governing the functional separation of the generation, retail transmission, and
distribution of incumbent electric utilities under the Virginia Electric Utility
Restructuring Act (the Act). Pursuant to the Act, Virginia electric utilities
are required to file their functional separation plans with the Virginia
Commission by January 1, 2001. Comments on the Commission's proposed functional
separation rules are due by May 22, 2000.
North Carolina
In April 2000, a study commission, established by the North Carolina General
Assembly to explore the future of electric service in North Carolina, developed
a proposal to provide full retail competition to North Carolina by January 1,
2006, with a phase-in beginning on January 1, 2005 of up to 50% of each power
supplier's customer load. These recommendations will be part of a report to be
given to the General Assembly scheduled to begin in May 2000.
Environmental
The Virginia Department of Environmental Quality is proposing to impose a plant
wide ozone season Nox emission limit of 0.15 lb/mmBtu at the Possum Point Power
Station beginning in May 2003, as part of a State Implementation Plan to address
ozone levels in Northern Virginia. For more details, see Future Issues under
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
39
<PAGE>
DOMINION RESOURCES, INC.
PART II. - OTHER INFORMATION
(CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
<TABLE>
<CAPTION>
(a) Exhibits:
<S> <C>
18- Letter re: Change in Accounting Principles (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).
</TABLE>
(b) Reports on Form 8-K
Dominion filed an amended Form 8-K/A, dated March 24, 2000, which
included pro forma financial statements relating to the merger with
Consolidated Natural Gas Company.
40
<PAGE>
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
Group Vice President and Controller
(Principal Accounting Officer)
May 12, 2000
41
<PAGE>
Exhibit 18
May 8, 2000
Dominion Resources, Inc.
Richmond, Virginia
Dear Sirs/Madams:
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
March 31, 2000, of the facts relating to your change in the method of
accounting for oil and gas properties from the successful efforts method to the
full cost method. We believe, on the basis of the facts so set forth and
other information furnished to us by appropriate officials of the Company,
that the accounting change described in your Form 10-Q is to an alternative
accounting principle that is preferable under the circumstances.
We have not audited any consolidated financial statements of Dominion Resources,
Inc. and subsidiaries as of any date or for any period subsequent to December
31, 1999. Therefore, we are unable to express, and we do not express, an
opinion on the facts set forth in the above-mentioned Form 10-Q, on the related
information furnished to us by officials of the Company, or on the financial
position, results of operations, or cash flows of Dominion Resources, Inc.
and subsidiaries as of any date or for any period subsequent to December 31,
1999.
Yours truly,
/s/ Deloitte & Touche LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $11,748
<OTHER-PROPERTY-AND-INVEST> 10,869
<TOTAL-CURRENT-ASSETS> 3,993
<TOTAL-DEFERRED-CHARGES> 2,420
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 29,030
<COMMON> 5,539
<CAPITAL-SURPLUS-PAID-IN> 16
<RETAINED-EARNINGS> 1,178
<TOTAL-COMMON-STOCKHOLDERS-EQ> 6,733
385
509
<LONG-TERM-DEBT-NET> 9,322
<SHORT-TERM-NOTES> 5,606
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 387
140
<CAPITAL-LEASE-OBLIGATIONS> 27
<LEASES-CURRENT> 15
<OTHER-ITEMS-CAPITAL-AND-LIAB> 5,906
<TOT-CAPITALIZATION-AND-LIAB> 29,030
<GROSS-OPERATING-REVENUE> 2,072
<INCOME-TAX-EXPENSE> 74
<OTHER-OPERATING-EXPENSES> 1,660
<TOTAL-OPERATING-EXPENSES> 1,660
<OPERATING-INCOME-LOSS> 412
<OTHER-INCOME-NET> 24
<INCOME-BEFORE-INTEREST-EXPEN> 436
<TOTAL-INTEREST-EXPENSE> 219
<NET-INCOME> 141
10
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 201
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 445
<EPS-BASIC> $0.63
<EPS-DILUTED> $0.63
</TABLE>
