Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2003, for Dominion Resources, Inc. (Dominion), a holding company headquartered in Richmond, Virginia. Dominion operates through three primary segments: Dominion Energy (generation, transmission, trading), Dominion Delivery (regulated distribution), and Dominion Exploration & Production (gas and oil). The filing reflects significant accounting changes adopted in early 2003, including SFAS No. 143 (Asset Retirement Obligations) and EITF 02-3 (Energy Trading Contracts).
Key Financial Metrics
| Metric (Millions) | Q2 2003 | Q2 2002 | YTD 2003 | YTD 2002 |
|---|---|---|---|---|
| Operating Revenue | $2,635 | $2,332 | $6,220 | $4,966 |
| Operating Expenses | $2,077 | $1,707 | $4,676 | $3,631 |
| Income from Operations | $558 | $625 | $1,544 | $1,335 |
| Net Income | $240 | $272 | $748 | $593 |
| Diluted EPS | $0.76 | $0.97 | $2.39 | $2.16 |
| Cash from Operations (YTD) | $1,484 | $832 | ||
| Long-Term Debt | $14,092 | $12,060 | ||
| Cash & Equivalents | $133 | $291 |
Note: YTD Net Income for 2003 includes a $113 million after-tax gain from the cumulative effect of accounting changes.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 13% year-over-year for the six months ended June 30, 2003, driven by higher nonregulated electric and gas sales, increased gas and oil production revenues, and colder weather in the first quarter.
- Profitability: While YTD Net Income increased 26% to $748 million, this was significantly boosted by a one-time $113 million accounting gain. Excluding this, core earnings were impacted by higher operating expenses, particularly purchased gas costs and fuel expenses.
- Segment Performance:
- Dominion Energy: Net income rose to $451 million (YTD) due to higher merchant generation volumes and favorable gas trading margins, offset by higher fuel costs.
- Dominion Delivery: Net income increased to $211 million (YTD), aided by colder weather and customer growth, though share dilution reduced EPS contribution.
- Exploration & Production: Net income rose to $201 million (YTD) driven by higher realized commodity prices for gas and oil.
- Balance Sheet: Long-term debt increased by approximately $2 billion, reflecting new issuances to fund capital expenditures and the acquisition of Dominion Fiber Ventures (DFV) senior notes.
Guidance, Outlook, Risks, and Unusual Items
Accounting Changes (Unusual Items)
- SFAS No. 143: Adoption of Asset Retirement Obligations resulted in a $180 million after-tax gain (cumulative effect) and a $1.5 billion liability recognition for nuclear decommissioning and pipeline abandonment.
- EITF 02-3: Rescission of EITF 98-10 changed the accounting for energy trading contracts from fair value to accrual basis, resulting in a $67 million after-tax loss (cumulative effect).
- Net Impact: The combined effect of these changes increased YTD 2003 Net Income by $113 million.
Outlook and Risks
- Regulatory Environment: Dominion faces capped electric rates in Virginia until 2007, creating risks for cost recovery. The company is seeking approval for retail access pilot programs and a 2004 fuel factor increase to recover under-recoveries.
- Environmental Compliance: A settlement regarding Mt. Storm Power Station violations involves a $5 million penalty and an estimated $1.2 billion in capital expenditures for air quality improvements.
- Telecommunications: The DFV joint venture continues to face market headwinds. Dominion recorded $100 million in charges related to DFV in the first half of 2003, including asset impairments and costs to acquire senior notes.
- Market Risk: Significant exposure to commodity price volatility and counterparty credit risk in energy trading. A 10% unfavorable change in non-trading commodity prices could decrease fair value by approximately $456 million.
- Off-Balance Sheet: Effective July 1, 2003, Dominion will consolidate variable interest entities, adding approximately $657 million in assets and $688 million in debt to the balance sheet.
Investor Verification Checklist
- Accounting Adjustments: Verify the sustainability of earnings by excluding the $113 million one-time gain from accounting changes (SFAS 143 and EITF 02-3).
- DFV Exposure: Monitor the financial health of the Dominion Fiber Ventures (DFV) joint venture, which incurred significant charges and may require further capital or write-downs.
- Debt Consolidation: Confirm the impact of the upcoming July 1, 2003 consolidation of variable interest entities on leverage ratios and debt covenants.
- Regulatory Filings: Track the status of the Virginia State Corporation Commission's approval of the 2004 fuel factor application and retail access pilot programs.
- Environmental Costs: Assess the capital budget allocation for the $1.2 billion environmental commitment related to the Mt. Storm settlement.