Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 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 company serves approximately 2.3 million electric and 1.7 million gas retail customers. Notable operational changes include Virginia Power's integration into the PJM Interconnection regional transmission organization on May 1, 2005, and the acquisition of the Kewaunee nuclear power station in July 2005 (post-period).
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2005 |
Three Months Ended June 30, 2004 |
Six Months Ended June 30, 2005 |
Six Months Ended June 30, 2004 |
|---|---|---|---|---|
| Operating Revenue | $3,637 | $3,040 | $8,369 | $6,919 |
| Net Income | $332 | $251 | $761 | $688 |
| Diluted EPS | $0.97 | $0.76 | $2.23 | $2.10 |
| Operating Cash Flow | N/A | N/A | $1,370 | $1,536 |
| Short-Term Debt | $1,282 | $573 | $1,282 | $573 |
| Long-Term Debt | $15,139 | $15,507 | $15,139 | $15,507 |
| Cash & Equivalents | $44 | $361 | $44 | $361 |
Note: Balance sheet figures represent period-end status. Operating cash flow is reported for the six-month period only.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 19.6% year-over-year for the quarter ($3,637M vs. $3,040M) and 21.0% for the six months ($8,369M vs. $6,919M). This was driven by higher nonregulated electric sales (up 106% QoQ) and nonregulated gas sales, partially offset by a 2% decline in regulated electric sales due to milder weather.
- Profitability: Net income rose 32.3% for the quarter and 10.6% year-to-date. The increase was primarily due to higher contributions from the Dominion Energy and E&P segments, driven by the absence of prior-year trading losses and higher realized commodity prices.
- Expense Increases: Electric fuel and energy purchases surged 64% in the quarter ($943M vs. $575M) due to higher commodity prices and the reclassification of certain derivative contracts from trading to non-trading purposes. Liquids, pipeline capacity, and other purchases increased 48% due to higher coal costs.
- Segment Performance:
- Dominion E&P: Net income contribution increased $26M (Q2) and $9M (YTD) due to business interruption insurance settlements (Hurricane Ivan) and higher oil production, offset by lower gas production volumes.
- Dominion Delivery: Net income contribution decreased $23M (Q2) due to unfavorable weather and higher interest expenses.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Corporate Charges: The "Corporate and Other" segment reported a net expense of $48M (Q2) and $159M (YTD), including a $47M after-tax charge for terminating a long-term power purchase agreement and $8M related to divesting a power tolling contract.
- Accounting Changes: Certain commodity derivative contracts were reclassified from "held for trading" to "held for non-trading" effective January 1, 2005, impacting the presentation of revenue and expenses.
- Discontinued Operations: Losses from discontinued telecommunications operations were $7M in the prior year quarter; no such losses were recorded in 2005 following the sale in May 2004.
- Outlook & Risks:
- Regulatory: New EPA rules (Clean Air Interstate Rule and Clean Air Mercury Rule) will require significant emission reductions, potentially increasing compliance costs. The Virginia Restructuring Act caps base rates until 2010, exposing the company to fuel price risk.
- Market Risk: A hypothetical 10% unfavorable change in commodity prices would decrease the fair value of non-trading derivatives by approximately $688 million. Credit exposure to trading counterparties totaled $1.09 billion gross ($1.07 billion net of collateral).
- Liquidity: Cash and cash equivalents decreased significantly to $44M from $361M at year-end 2004. However, the company maintains $4.0 billion in committed credit facilities with $1.3 billion unused capacity.
Investor Verification Checklist
- Derivative Valuation: Verify the impact of the reclassification of derivative contracts from trading to non-trading on future earnings volatility and cash flow.
- Commodity Hedging: Assess the exposure to margin calls given the $1.07 billion net credit exposure and the sensitivity of non-trading derivatives to price fluctuations.
- Regulatory Compliance Costs: Monitor the financial impact of the new EPA emission rules and the Virginia fuel factor statute on future operating margins.
- Liquidity Position: Review the significant drawdown in cash equivalents ($317M decrease YTD) against the $1.3 billion available credit capacity to ensure sufficient working capital.
- DCI Divestiture: Confirm the timeline and financial impact of the required divestiture of Dominion Capital, Inc. (DCI) holdings by January 2006.