Dominion Resources (D – NYSE) February 11, 2008 Rating: NEUTRALRFO “Operating Model Shifts in ‘08” Price and Trading Data EPS estimates - GAAP D Current Price $42.11 Dec 07A Dec 08E S&P 500 1331.29 1Q $0.75 $0.91 52-Week Price Range $49.38 - $40.03 2Q $0.45 $0.72 Shares Outstanding (mil.-diluted) 578.1 3Q $0.86 $0.92 Market Cap (bil.-diluted) 24.6 4Q $0.52 $0.55 Avg. Daily Trading Volume (mil) 3.02 $2.58 $3.10 12-month Target Price NA 3Q08 Valuation Data Debt to Total Capital 27% Book Value/Share $33.61 Price/Book 1.5 Dividend $1.80 Current Yield 3.4% Highlights • E & P sale produces change in business model • Seeking to increase generating capacity • Earnings guidance of $3.05-$3.10/share in 2008 and $3.25-$3.40/share in 2009 • Improved cash flow offers potential of dividend increases Company Summary Dominion Resources Inc., headquartered in Richmond VA, is a holding company for Virginia Power, Consolidated Natural Gas Company, Dominion Energy Inc., and has 26,500 megawatt generation capacity. The company provides electricity to 2.1 million electric customers in Virginia and northeastern North Carolina. D’s revenues can be categorized as residential (47%), commercial (32%), public authority (11%), industrial (9%), and others (1%). Electrical assets include 6,000 miles of transmission lines in Virginia, West Virginia, and North Carolina and generation plants in 11 states. 2006's electrical generation by fuel type was 46% coal, 43% nuclear, 7% natural gas, 3% hydro-electric, and 1% oil. Natural gas is provided to 1.7 million customers in Ohio, For Important Disclosure information regarding the Firm’s rating system, valuation methods and potential conflicts of interest, please refer to page 10 of this report. 1 Pennsylvania, and West Virginia. Gas customers consist of residential (73%), commercial (22%), industrial (4%), and others (1%). D's natural gas assets include 7,800 miles of pipelines and 970 billion cubic feet of gas storage. During 4Q07, D reported earnings of $0.52/share versus $0.04/share during 4Q06. D had full year 2007 operating GAAP earnings of $2.56/share versus $2.53/share for 4Q06. The company's annual dividend was recently increased to $1.58/share from $1.42/share. Business/Recent Developments D altered its business structure with the sale of the Exploration & Production unit. The E&P unit operated 7 major production basins in the US and Canada with 6.5 trillion cubic feet of natural gas/oil reserves and this business was sold to multiple buyers for a total of approximately $14 billion. Proceeds from these sales will be used by D to repurchase shares, lower debt and for potential future dividend increases. D's remaining units are in two primary areas; 1) the electric distribution, generation, and transmission businesses and 2) natural gas distribution and transmission business. D maintained some natural gas storage and its 7,800 miles of transmission pipelines. Additionally, the company will keep approximately 1 Bcf of natural gas production area in Appalachia. Because of these sales, management realigned its business structure into Dominion Virginia Power, Dominion Generation, Dominion Energy, and Dominion Resource Services. The Board of Directors raised the quarterly dividend 11% and declared a 2-for-1 stock split this past November. D recently proposed a conversion of the Bremo Power Station to natural gas fuel as part of a plan to build the Virginia City Hybrid Energy Center in Wise VA. The company purchased a 50% interest in the Fowler Ridge Wind Farm, located near Indianapolis IN, from BP Alternative Energy, adding to D's renewable energy portfolio generating approximately 413 megawatts of power. In another purchase, D agreed to buy power station development project located in Buckingham County VA from Tenaska, an independent power producer. A sale of D's Dominion Peoples and Dominion Hope natural gas distribution companies was terminated due to a delay in gaining regulatory approvals. Federal Regulators approved plans to increase production levels at D's Unit #3 of the Millstone nuclear power plant, potentially raising output to 2,120 megawatts. Recent Earnings Dominion Resources reported 4Q07 earnings from continuing operations of $0.52/share vs. $0.04/share during 4Q06. Results for 4Q06 include $0.34/share in charges due mainly from losses involving discontinued operations. The higher earnings results came from improved contributions from the merchant generation business, lower unrecovered Virginia fuel expenses, increased regulated electric sales, declines in interest expense, and accretion due to D's share repurchase program. These were partially offset by higher salaries/wages/benefits expenses, increased outage costs at D's generating units, and lower earnings resulting from the sale of the non-Appalachian exploration & production units. On a quarter-to-quarter basis, GAAP based operating revenues declined to $3.7 billion from $3.9 billion. The Dominion Virginia Power unit's profits declined to $82 million from $105 million due higher wages/salaries/benefits expenses, increased outside service/reliability and Dominion retail expenses. Dominion Energy's grew to $113 million from $91 million benefiting from an increase in regulated gas sales (weather related), improvements in gas transmission operations and production services, and higher gas/oil production and prices. Dominion Generation rose to $133 million from $81 million. This unit's results were driven by higher electric sales from weather/customer growth, increased merchant generation margins, sales of emission allowances, ancillary service revenues, lower interest and unrecovered fuel expenses. Overall earnings were helped by D's share repurchase program by lowering the amount of outstanding shares and accounting for $0.11/share in profits. Our Thoughts D's earnings came in pretty much in line with expectations showing quarter over quarter improvement. For the full year 2007 D operating earnings produced profits of $2.56/share vs $2.53/share. 2007 was a transition for D sold the majority of its oil & gas businesses and used the proceeds to reduce debt, buyback shares, and increase its common stock dividend. Given the company's new business structure/focus on segment profitability, good local regulatory environment, and lack of charges from discontinued operations incurred during 2007, there is the potential for earnings growth in 2008/2009. Going forward, management gave 1Q08 earnings guidance of $0.89-$0.94/share, $3.05-$3.15/share in 2008, and $3.25-$3.40/share in 2009. These guidance numbers appear achievable given potential cash flow growth driven by D's business mix and operating model. Cash flow growth could allow the company to increase its dividend annually during the next 3 years. Trading at 14x our projected 2008 earnings estimate of $3.10/shares, and paying a 3.7% dividend yield, D seems fairly valued. We rate D NEUTRAL. Risks There are no guarantees D will be able to achieve annual earnings growth in the future. Fluctuating commodity prices paid for fueling generating plants, future air emission regulation compliance costs, and/or changing utility regulations could negatively affect earnings. Profits could be adversely impacted by a rising interest rate environment, future plant decommissioning costs, and rising operational expenses. D's stock could be adversely impacted by negative equity markets, failure to comply with Sarbanes Oxley guidelines, or terrorist attacks. Steven F. Marascia Research Analyst 804-344-3806 firstname.lastname@example.org Important Disclosures Dominion Resources Price Chart 60.00 50.00 40.00 30.00 20.00 10.00 0.00 2/4/05 4/4/05 6/4/05 8/4/05 2/4/06 4/4/06 6/4/06 8/4/06 2/4/07 4/4/07 6/4/07 8/4/07 2/4/08 10/4/05 12/4/05 10/4/06 12/4/06 10/4/07 12/4/07 11/3/04 $58.16 Initiate NEUTRAL Steven Marascia certifies, with respect to the companies or securities that he analyzes, that (1) the views expressed in this report accurately reflect his personal views about all of the subject companies and securities and (2) no part of his compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Steven Marascia owns shares of Dominion Resources. Anderson & Strudwick and employees of Anderson & Strudwick may own shares of Dominion Resources Stock ratings used in this report are defined as follows: (1) Outperform – The stock’s total return including dividends is expected to exceed the industry or market average by at least 10% over the next twelve months. (2) Neutral – The stock’s total return including dividends is expected to be in line with the industry or market average of +/- 10% over the next twelve months. (3) Underperform – The Stock’s total return including dividends is expected to be below the industry or market average by 10% or more over the next twelve months. 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