D

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2002, for Dominion Resources, Inc. (Dominion), a holding company headquartered in Richmond, Virginia. Dominion operates through three primary segments: Dominion Energy (generation, trading, and gas pipelines), Dominion Delivery (regulated electric and gas distribution), and Dominion Exploration & Production (oil and gas). The company serves approximately 2.2 million electric customers and 1.7 million gas customers.

Key Financial Metrics

Note: Operating margin for the six months ended June 30, 2002, was approximately 26.9% ($1,335M income from operations / $4,966M revenue).

Material Changes vs. Prior Period

• Profitability Surge: Net income for the six months ended June 30, 2002, increased by $275 million (86%) compared to the prior year. This was driven by higher gas and oil production volumes following the Louis Dreyfus acquisition and lower interest rates.
• Accounting Changes: The adoption of SFAS No. 142 eliminated goodwill amortization, providing a $44 million benefit to net income for the six-month period. Additionally, extended useful lives for fossil fuel stations reduced depreciation expense by $8 million in the second quarter.
• Revenue Decline: Consolidated operating revenue for the six months decreased by $541 million (9.8%) year-over-year. This was primarily due to lower non-regulated gas sales prices and volumes, partially offset by higher regulated electric sales.
• Segment Performance:
  • Dominion Energy: Net income contribution increased slightly ($4M) despite lower revenue, due to significant expense reductions.
  • Dominion Delivery: Net income increased by $14M, driven by lower purchased gas costs and restructuring benefits.
  • Corporate & Other: Net loss improved significantly (decreased by $232M) due to the absence of a $220M charge for terminated power purchase contracts recorded in 2001.

Guidance, Outlook, Risks, and Unusual Items

• Capital Expenditures: Planned capital expenditures for 2002 are expected to total approximately $2.9 billion, funded by cash from operations and securities sales.
• Acquisitions: Dominion acquired Mirant State Line Ventures for $182 million in June 2002. In July 2002, it agreed to purchase Cove Point LNG for approximately $217 million.
• Legal & Environmental: Dominion is negotiating a settlement regarding Clean Air Act violations at the Mt. Storm Power Station, involving a $5 million civil penalty and a $1.2 billion capital investment program for environmental improvements. A strike by the International Brotherhood of Electrical Workers Local 50 began on August 2, 2002.
• Market Risks: A hypothetical 10% unfavorable change in commodity prices would decrease the fair value of non-trading derivative instruments by approximately $341 million. The company faces risks related to weather sensitivity, regulatory changes in Virginia, and nuclear facility operations.
• Liquidity: In May 2002, Dominion established new joint credit facilities totaling $2 billion to replace maturing facilities. Cash and cash equivalents decreased by $261 million during the six-month period.

Investor Verification Checklist

• Goodwill Amortization Impact: Verify the $44 million benefit from the discontinuance of goodwill amortization under SFAS No. 142 to understand the core operational earnings.
• Environmental Settlement Terms: Monitor the finalization of the Mt. Storm settlement, specifically the $1.2 billion capital commitment and potential additional penalties.
• Strike Resolution: Assess the financial impact of the ongoing labor strike by Local 50 on operations and earnings.
• Commodity Hedging: Review the exposure to commodity price volatility, noting the $341 million sensitivity to a 10% price drop in non-trading derivatives.
• Acquisition Integration: Track the integration and performance of the Louis Dreyfus and State Line acquisitions against projected production volumes.