D

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, for Dominion Resources, Inc. (Dominion), a holding company headquartered in Richmond, Virginia. Dominion operates through four primary segments: Dominion Delivery (regulated electric/gas distribution), Dominion Energy (transmission/storage), Dominion Generation (merchant generation), and Dominion Exploration & Production (E&P). The reporting period was significantly impacted by Hurricanes Katrina and Rita, which disrupted Gulf of Mexico production, and the acquisition of the Kewaunee nuclear power station in July 2005.

Key Financial Metrics

Third Quarter Specifics: Net income for the three months ended September 30, 2005, was $15 million ($0.04 per diluted share), a significant decline from $337 million ($1.02 per share) in the same period of 2004.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 27% year-to-date to $12.9 billion, driven by a $1.4 billion increase in nonregulated electric sales (due to acquisitions of Dominion New England and Kewaunee) and higher energy trading volumes.
• Profitability Decline: Net income decreased 25% year-to-date to $776 million. The third quarter saw a 96% drop in net income compared to 2004.
• Expense Increases: "Other operations and maintenance" expenses rose 32% year-to-date, primarily due to a $556 million loss from the discontinuance of hedge accounting related to hurricane disruptions. Electric fuel and energy purchases increased 107% due to higher commodity prices and accounting reclassifications.
• Balance Sheet Shifts: Derivative liabilities increased significantly, with current derivative liabilities rising from $2.9 billion to $9.4 billion, reflecting higher commodity prices and margin requirements.

Outlook, Risks, and Unusual Items

• Hurricane Impact: Hurricanes Katrina and Rita caused a temporary shutdown of approximately 555 million cubic feet per day of gas and oil production. This triggered a $556 million pre-tax loss ($357 million after-tax) due to the discontinuance of hedge accounting for forecasted sales that could not occur. Dominion expects business interruption insurance to mitigate some financial impact.
• Acquisitions: Dominion completed the acquisition of the Kewaunee nuclear power station for approximately $192 million in July 2005.
• Regulatory Environment: The Energy Policy Act of 2005 was signed in August, repealing the Public Utility Holding Company Act of 1935 in February 2006. New EPA rules regarding SO2, NOx, and mercury emissions will require significant future compliance investments.
• Liquidity and Debt: Dominion issued $2.3 billion in long-term debt during the nine-month period. Credit facilities remain robust with $4.25 billion in committed lines, though collateral requirements for derivatives have increased due to volatile commodity prices.
• Capital Expenditures: Planned capital expenditures for 2005 are expected to total approximately $4.1 billion, with 2006 projected at $3.2 billion.

Investor Verification Checklist

• Insurance Recovery: Verify the status and expected payout of business interruption insurance claims related to Hurricanes Katrina and Rita, given the $556 million hedge accounting loss.
• Production Resumption: Monitor the timeline for the resumption of Gulf of Mexico production, which remains off-line due to third-party infrastructure damage.
• Commodity Hedging: Assess the ongoing impact of high commodity prices on derivative margin requirements and liquidity, as evidenced by the surge in derivative liabilities.
• Regulatory Compliance Costs: Evaluate the financial impact of new EPA emission rules (Clean Air Interstate Rule and Clean Air Mercury Rule) on future capital and operating expenditures.
• Debt Covenants: Confirm continued compliance with debt-to-capital ratios (currently 61% for Dominion Resources, Inc.) amidst increased borrowing and potential future margin calls.