Dominion Feels The Heat

A funny thing happened when power utility Dominion Resources (NYSE: D  ) was writing its second-quarter earnings report. Somehow, the company came to the conclusion that it is a bad thing for a power company when the weather is hotter than normal. Go figure. Apparently, Dominion would be more profitable in a world where the temperature stays a constant 75 degrees Fahrenheit -- and there is no need for customers to heat or cool their homes.

In the real world, however, summer heat causes people to turn on the A/C and ask Dominion to sell them some more power. When that happened last quarter, Dominion complained that "warmer than normal weather... negatively affected our fuel expense." Well, ofcourse it did. If customers ask you to send them more power, it is only natural that you are going to have to buy more fuel with which to produce that power. Theoretically, a company is supposed to be able to make a profit off the difference between what it pays to produce the power and what it charges to sell the power.

Dominion explained that its expenses to produce electric power "are no longer recoverable under amended deregulation legislation," which sounds a bit strange. If the company charges its customers per unit of energy consumed, it seems logical that the cost of producing electric power would already be built into its tariffs. If any costs are not "recoverable," therefore, it seems likely that this is the result of bad planning on Dominion's part -- that it needed to purchase more natural gas, coal, what have you, to meet its customers' demands. And that it perhaps failed to contract to purchase sufficient amounts of fuel at favorable rates and therefore needed to pay higher "spot" rates -- which were not already built into its cost structure.

While I am only speculating on the above, the company's description of its profits and losses by segment supports this line of reasoning. In addition to citing the higher cost of fuel used for electricity generation, the company also mentioned that it lost money on its hedges against changes in the price of natural gas -- which further suggests faulty planning.

In the end, the company still managed to increase its profits by $11 million over Q2 2003. However, stock dilution of 4% ate up the entire additional profit, leaving per share diluted earnings flat year over year, at $0.76 per dilute share.

Fool contributorRich Smithowns no shares in Dominion.


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