D

Business Context and Reporting Period

Company: Dominion Resources, Inc. (Note: Filing lists registrant as Dominion Resources, Inc., though request metadata references Dominion Energy, Inc.)
Reporting Period: Quarterly Report (Form 10-Q) for the period ended September 30, 2004.
Business Overview: A holding company with principal subsidiaries including Virginia Electric and Power Company (Virginia Power), Consolidated Natural Gas Company (CNG), and Dominion Energy, Inc. (DEI). Operations are managed through four primary segments: Dominion Generation, Dominion Energy, Dominion Delivery, and Dominion Exploration & Production. The company has substantially exited the core operating businesses of Dominion Capital, Inc. (DCI) and is required to divest remaining holdings by January 2006.

Key Financial Metrics

Note: Total Debt calculated as Short-term debt ($348M) + Long-term debt ($15,164M) as of September 30, 2004.

Material Changes vs. Prior Comparable Period

• Revenue Growth: Operating revenue increased 15% year-over-year for the quarter ($3,292M vs. $2,853M) and 13% for the nine-month period ($10,211M vs. $9,062M). Growth was driven by higher regulated electric sales (due to fuel rate settlements and customer growth) and increased nonregulated gas sales.
• Profitability Surge: Net income for the quarter turned from a loss of $256 million in 2003 to a profit of $337 million in 2004. This significant improvement is largely attributable to the absence of a $582 million after-tax loss from discontinued telecommunications operations recorded in the prior year.
• Operating Expenses: Electric fuel and energy purchases increased 37% ($612M vs. $447M) primarily due to the elimination of fuel deferral accounting in Virginia, resulting in the recognition of fuel expenses exceeding amounts recovered in fixed rates. Purchased gas expenses rose 28%.
• Segment Performance:
  • Generation: Net income contribution decreased $28 million due to higher fuel costs.
  • Energy: Net income contribution decreased $44 million due to losses in energy trading and marketing.
  • Exploration & Production: Net income contribution increased $41 million due to higher realized prices and VPP revenue recognition.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • Hurricane Ivan: Resulted in a $61 million after-tax loss due to the discontinuance of hedge accounting for oil hedges following production interruptions in the Gulf of Mexico.
  • Telecommunications Divestiture: The company sold its telecom operations in May 2004. The buyer, Elantic Telecom, filed for Chapter 11 bankruptcy in July 2004; Dominion is assessing potential exposure.
  • Accounting Changes: Adoption of FSP FAS 142-2 and FIN 46R had no material impact on results, though FIN 46R required consolidation of certain special purpose entities.
• Outlook and Guidance:
  • Capital Expenditures: Planned for 2004 are approximately $2.7 billion; 2005 is expected to be $2.9 billion.
  • Dividends: Declared a quarterly dividend of $0.665 per share (increase of $0.02), with expectations of further increases in 2005.
  • Acquisitions: Agreed to purchase three generating stations from USGen New England for $656 million (expected close March 2005) and the Kewaunee nuclear plant for $225 million.
  • Divestitures: Intends to market for sale its British Columbia natural gas and oil production assets.
• Risks:
  • Regulatory: Exposure to cost-recovery shortfalls due to capped base rates in Virginia and uncertainty regarding the Virginia Restructuring Act.
  • Market: Volatility in energy commodity prices and credit risk associated with energy trading counterparties.
  • Environmental: Potential costs related to EPA regulations on cooling water intake structures and nitrogen oxide/sulfur dioxide reductions.

Investor Verification Checklist

• Telecom Exposure: Verify the extent of Dominion's financial exposure resulting from the Chapter 11 bankruptcy of Elantic Telecom, the buyer of its discontinued telecom operations.
• Fuel Cost Recovery: Monitor the impact of the elimination of fuel deferral accounting in Virginia on future earnings, specifically the risk of fuel expenses exceeding rate recovery.
• Derivative Valuation: Review the fair value of energy-related derivative instruments (current net unrealized gain of $102M) and the sensitivity of these values to commodity price fluctuations.
• Acquisition Financing: Confirm the funding sources and closing conditions for the pending $656 million USGen New England acquisition and the $225 million Kewaunee plant purchase.
• Divestiture Progress: Track the status of the required divestiture of remaining Dominion Capital, Inc. (DCI) holdings by the January 2006 deadline.