D

Business Context and Reporting Period

Company: Dominion Resources, Inc. (Note: Filing text identifies registrant as Dominion Resources, Inc., though metadata lists Dominion Energy, Inc.)
Reporting Period: Quarterly Report (Form 10-Q) for the period ended June 30, 2006.
Business Overview: A fully integrated gas and electric holding company headquartered in Richmond, Virginia. Operations are managed through four primary segments: Dominion Delivery (regulated electric/gas distribution and retail marketing), Dominion Energy (transmission, storage, and producer services), Dominion Generation (utility and merchant generation), and Dominion Exploration & Production (E&P). The company also maintains a Corporate segment.

Key Financial Metrics

Note: Operating margin for the six months ended June 30, 2006, was approximately 17.0% ($1,443 million income from operations / $8,513 million revenue).

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased 52% to $161 million for the quarter and 9% to $695 million year-to-date compared to 2005.
  • Quarterly Drivers: Absence of $135 million in business interruption insurance proceeds received in 2005 (Hurricane Ivan) and an $85 million impairment charge on a Dominion Capital, Inc. (DCI) investment.
  • Year-to-Date Drivers: Similar insurance absence, a $162 million charge for the write-off of regulatory assets related to the pending sale of Peoples and Hope gas subsidiaries, higher fuel expenses, and the DCI impairment. These were partially offset by increased gas/oil production and higher realized commodity prices.
• Revenue Trends: Operating revenue decreased 2% in the quarter ($3,556 million vs. $3,646 million) but increased 2% year-to-date ($8,513 million vs. $8,382 million).
  • Increases: Driven by higher gas and oil production volumes and prices, and increased sales of purchased oil under buy/sell arrangements.
  • Decreases: Driven by lower non-utility coal sales, reduced gas trading volumes, and the absence of insurance proceeds.
• Expense Increases: "Other operations and maintenance" expenses rose significantly (74% quarterly, 24% YTD) due to the regulatory asset write-off, DCI impairment, and higher incentive compensation. Interest charges increased 14% quarterly due to higher rates on variable debt.

Guidance, Outlook, Risks, and Unusual Items

• Pending Divestitures: The company entered an agreement to sell two regulated gas distribution subsidiaries (Peoples and Hope) for approximately $970 million. A $162 million pre-tax charge was recognized in 2006 for the write-off of regulatory assets associated with this sale. The transaction is expected to close in Q1 2007.
• Insurance Risks: Insurers terminated certain coverages for E&P operations (offshore property damage, business interruption) due to hurricane activity. The company entered a six-month weather derivative contract as an alternative, though it offers less protection than previous policies. The company expects to receive over $300 million in insurance proceeds from Hurricanes Katrina and Rita in Q3 2006.
• DCI Impairment: An $85 million charge was recorded for an other-than-temporary decline in the fair value of subordinated notes held by DCI. Additionally, DCI consolidated a Collateralized Debt Obligation (CDO) entity in June 2006.
• Regulatory Matters: Virginia passed Senate Bill 262, changing the fuel factor adjustment mechanism starting July 2007. FERC approved plans to expand the Cove Point LNG terminal and Dominion Transmission facilities.
• Accounting Changes: Adopted SFAS No. 123R (Share-Based Payment) effective Jan 1, 2006. Adopted EITF 04-13 regarding buy/sell agreements, presenting them on a net basis where applicable.

Investor Verification Checklist

• Divestiture Closing: Verify the timing and final terms of the Peoples and Hope sale, including the realization of the expected $970 million proceeds and the tax impact of the regulatory asset write-off.
• Insurance Recovery: Monitor the receipt of the expected $300 million+ in insurance proceeds from Hurricanes Katrina and Rita in Q3 2006.
• E&P Insurance Gap: Assess the financial impact of the lack of traditional business interruption and property damage insurance for Gulf of Mexico operations and the effectiveness of the new weather derivative contract.
• DCI Asset Disposition: Track the progress of the sale of the impaired DCI investment and the consolidation impact of the CDO entity.
• Commodity Hedging: Review the exposure to commodity price fluctuations given the significant derivative positions (approx. $1.2 billion gross credit exposure) and the impact of hedge accounting adjustments.