Business Context and Reporting Period
Company: Dominion Resources, Inc. (Dominion)
Reporting Period: Fiscal year ended December 31, 2004
Business Overview: Dominion is a fully integrated gas and electric holding company headquartered in Richmond, Virginia. It operates through four primary segments: Dominion Generation (electric utility and merchant fleet), Dominion Energy (transmission, storage, LNG, and trading), Dominion Delivery (electric and gas distribution), and Dominion Exploration & Production (gas and oil). The company focuses on the "MAIN to Maine" region, serving approximately 40% of the nation's energy demand.
Key Financial Metrics
| Metric | 2004 | 2003 |
|---|---|---|
| Operating Revenue | $13,972 million | $12,078 million |
| Net Income | $1,249 million | $318 million |
| Diluted EPS | $3.78 | $1.00 |
| Operating Cash Flow | $2,839 million | $2,355 million |
| Total Assets | $45,446 million | $43,546 million |
| Long-Term Debt | $15,507 million | $15,776 million |
| Cash and Cash Equivalents | $389 million | $126 million |
Note: 2003 results were significantly impacted by a $642 million loss from discontinued telecommunications operations.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 16% to $13.97 billion, driven by higher regulated electric sales (due to fuel rate settlements and customer growth), increased nonregulated gas sales, and higher gas and oil production revenue.
- Profitability Surge: Net income increased $931 million (293%) compared to 2003. This improvement is largely attributable to the absence of the $642 million loss from discontinued telecommunications operations recorded in 2003.
- Segment Performance:
- Exploration & Production: Net income contribution rose $180 million due to higher commodity prices, business interruption insurance revenue from Hurricane Ivan, and VPP revenue recognition.
- Generation: Net income contribution increased slightly, offset by higher fuel expenses in excess of rate recovery in Virginia.
- Energy: Net income contribution decreased $156 million due to losses in energy trading and marketing activities.
- Unusual Items: 2004 results included a $112 million after-tax charge for the valuation of a long-term power tolling contract and $61 million in after-tax losses related to discontinued oil hedges due to Hurricane Ivan.
Guidance, Outlook, and Risks
Outlook: Management expects growth in net income per share in 2005, driven by utility customer growth, reduced capacity expenses, and contributions from newly acquired USGen power stations and the expected Kewaunee nuclear plant acquisition. Cash flow from operations is projected to increase.
Material Risks and Contingencies:
- Regulatory Risk (Virginia): Capped base rates and locked-in fuel factors through 2010 expose the company to cost-recovery shortfalls if fuel costs rise significantly above fixed rates.
- Environmental Compliance: Potential for significant capital expenditures due to new EPA regulations regarding mercury, nickel, and NOx emissions, as well as cooling water intake rules.
- Commodity Price Volatility: Exposure to fluctuations in natural gas, oil, and electricity prices, particularly in merchant generation and exploration segments.
- Acquisition Uncertainty: The $220 million acquisition of the Kewaunee nuclear plant is pending a rehearing by the Wisconsin Public Service Commission.
- Divestiture Obligations: Required to divest remaining assets of Dominion Capital, Inc. (DCI) by January 2006 under SEC order.
Investor Verification Checklist
- Virginia Rate Cap Impact: Verify the extent of fuel cost overruns relative to the capped rates and the timeline for the one-time fuel factor adjustment in 2007.
- Kewaunee Acquisition Status: Confirm the outcome of the Wisconsin Public Service Commission rehearing regarding the $220 million nuclear plant purchase.
- Environmental Capital Expenditures: Review the estimated $700 million capital requirement for SO2 and NOx emission controls between 2005 and 2009.
- DCI Divestiture Progress: Monitor the timeline and financial impact of divesting remaining DCI assets by the January 2006 deadline.
- Merchant Fleet Performance: Assess the profitability of the merchant generation fleet in the context of current wholesale power prices and fuel costs.