D

Business Context and Reporting Period

Company: Dominion Resources, Inc. (Note: Filing text refers to registrant as Dominion Resources, Inc., though metadata indicates Dominion Energy, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: One of the nation's largest producers and transporters of energy, operating through three primary segments: Dominion Virginia Power (DVP), Dominion Energy, and Dominion Generation. Operations include regulated electric and gas utilities, merchant generation, energy marketing, and natural gas exploration and production (E&P) in the Appalachian basin.

Key Financial Metrics

Note: Total Debt calculated as Short-term debt ($2,451) + Long-term debt ($13,051) + Junior subordinated notes ($766) as of September 30, 2008.

Material Changes vs. Prior Period

• Net Income Decline: Net income for the three months ended September 30, 2008, decreased 78% to $508 million compared to $2.3 billion in the same period in 2007. Year-to-date net income decreased 34% to $1.5 billion.
• Primary Driver: The decrease is primarily due to the absence of a $2.1 billion after-tax gain on the sale of the U.S. non-Appalachian E&P business completed in 2007.
• Revenue Growth: Operating revenue increased 18% quarter-over-quarter to $4.2 billion, driven by higher fuel rates, increased producer services revenue, and higher merchant generation prices, partially offset by the loss of E&P revenue.
• Expense Reductions: Operating expenses decreased significantly due to the absence of 2007 charges related to the E&P sale, the Dresden facility impairment, and the State Line power sales agreement termination.
• Interest Charges: Interest and related charges decreased 50% quarter-over-quarter, largely due to the absence of debt extinguishment charges from the 2007 debt tender offer.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items:
  • 2007 Comparables: 2007 results included a $3.6 billion pre-tax gain on the sale of non-Appalachian E&P operations, a $387 million impairment charge for the Dresden facility, and a $259 million extraordinary charge related to the reapplication of SFAS No. 71.
  • 2008 Impairments: Recognized $62 million in impairment losses related to the sale of subordinated notes in a CDO entity held by Dominion Capital, Inc. (DCI).
• Liquidity and Capital Markets: Despite credit market disruptions, the company maintains sufficient liquidity with $2.7 billion of unused capacity under credit facilities. In October 2008, the company borrowed $870 million from credit facilities to reduce exposure to the commercial paper market.
• Strategic Transactions:
  • Peoples and Hope Sale: Agreed to sell regulated gas distribution subsidiaries Peoples and Hope to a subsidiary of Babcock & Brown Infrastructure Fund North America for approximately $910 million. Closing expected in 2009 pending regulatory approvals.
  • Marcellus Shale: Completed assignment of drilling rights for 114,000 acres to Antero Resources for approximately $347 million, retaining a 7.5% overriding royalty interest.
• Risks and Contingencies:
  • Regulatory: Pending approvals for the Peoples and Hope sale; ongoing rate cases in Ohio and West Virginia; FERC review of the Cove Point LNG expansion.
  • Environmental: Uncertainty regarding Clean Air Act compliance (CAMR and CAIR rulings vacated by courts); potential costs associated with greenhouse gas regulations (RGGI).
  • Market Risk: Exposure to commodity price fluctuations and counterparty credit risk, though gross credit exposure is managed via collateral.

Key Facts for Investor Verification

• Impact of 2007 Sale: Verify the extent to which current earnings are normalized versus the 2007 baseline, which was heavily skewed by the $2.1 billion after-tax gain from the E&P divestiture.
• Peoples and Hope Transaction: Monitor the status of regulatory approvals in Pennsylvania and West Virginia required to close the $910 million sale of these subsidiaries.
• Debt and Liquidity: Assess the company's reliance on credit facilities versus commercial paper given the October 2008 shift in borrowing strategy due to market conditions.
• Merchant Generation Performance: Review the contribution of the Dominion Generation segment, which saw a significant increase in net income contribution ($449 million for Q3 2008) driven by higher realized prices.
• Regulatory Asset Reversal: Note the $47 million benefit in Q3 2008 related to the re-establishment of a regulatory asset for Peoples and Hope, impacting the effective tax rate.