Business Context and Reporting Period
Company: Dominion Resources, Inc. (Dominion)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2005
Headquarters: Richmond, Virginia
Dominion is a fully integrated gas and electric holding company operating primarily in the Northeast, Mid-Atlantic, and Midwest regions of the United States. The company manages operations through four primary segments: Dominion Delivery (regulated electric/gas distribution), Dominion Energy (transmission/storage), Dominion Generation (utility and merchant generation), and Dominion Exploration & Production (E&P). As of December 31, 2005, the company employed approximately 17,400 full-time employees.
Key Financial Metrics
| Metric | 2005 | 2004 |
|---|---|---|
| Operating Revenue | $18,041 million | $13,991 million |
| Net Income | $1,033 million | $1,249 million |
| Diluted EPS | $3.00 | $3.78 |
| Total Assets | $52,660 million | $45,418 million |
| Long-Term Debt | $14,653 million | $15,507 million |
| Cash and Cash Equivalents | $146 million | $361 million |
| Operating Cash Flow | $2,623 million | $2,770 million |
Dividends: $2.68 per share paid in 2005. The quarterly dividend rate was increased to $0.69 per share in January 2006.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 29% to $18.0 billion, driven by a $1.9 billion increase in nonregulated electric sales (due to acquisitions of Dominion New England and Kewaunee) and higher commodity prices.
- Net Income Decline: Net income decreased 17% to $1.033 billion. This decline was primarily due to a $272 million after-tax loss related to the discontinuance of hedge accounting for gas and oil hedges caused by production interruptions from Hurricanes Katrina and Rita.
- Expense Increases: Electric fuel and energy purchases rose 118% to $4.7 billion due to higher commodity prices and the reclassification of certain derivative contracts. Other operations and maintenance expenses increased 11% to $3.1 billion, largely due to the hurricane-related hedge accounting loss.
- Acquisitions: Completed the acquisition of three fossil-fired power stations (Dominion New England) in January 2005 and the Kewaunee nuclear power station in July 2005.
Guidance, Outlook, and Risks
Outlook: Management expects moderate growth in net income per share for 2006. Positive drivers include continued utility customer growth, receipt of business interruption insurance proceeds for hurricane-related delays, and higher realized gas and oil prices. These are expected to be partially offset by a potential decrease in regulated electric sales (assuming normal weather), a full year of reduced gas transmission rates, and higher operating expenses.
Key Risks and Contingencies:
- Regulatory Risk (Virginia): Fuel expenses for Virginia utility operations are significantly in excess of rate recovery due to capped base rates and a frozen fuel factor until July 2007. This creates a risk of cost-recovery shortfalls.
- Weather Sensitivity: Operations are highly sensitive to weather conditions, which affect demand and commodity prices. Hurricanes Katrina and Rita caused significant production interruptions and financial losses in 2005.
- Environmental Compliance: The company faces significant capital expenditures (estimated at $1.1 billion from 2006-2010) to comply with new EPA rules regarding SO2, NOx, and mercury emissions.
- Commodity Price Volatility: Exposure to fluctuations in natural gas, oil, and electricity prices, managed through hedging strategies that may require significant collateral.
- Divestiture: On March 1, 2006, the company agreed to sell two regulated gas distribution subsidiaries (Peoples Natural Gas and Hope Gas) for approximately $969.6 million.
Investor Verification Checklist
- Hedge Accounting Impact: Verify the final settlement of business interruption insurance claims related to Hurricanes Katrina and Rita and the extent to which they offset the $272 million hedge accounting loss.
- Virginia Fuel Factor: Monitor the July 2007 adjustment of the Virginia fuel factor and the potential for continued cost-recovery shortfalls in the interim.
- Environmental CapEx: Track actual capital expenditures against the estimated $1.1 billion required for Clean Air Act compliance (2006-2010).
- Divestiture Closing: Confirm the closing of the $969.6 million sale of gas distribution subsidiaries in Q1 2007 and the associated regulatory approvals.
- Commodity Hedging: Review the company's hedging positions and collateral requirements given the volatility in energy markets.