Business Context and Reporting Period
Combined Form 10-Q filed August 6, 2015, for the quarter and six months ended June 30, 2015. The registrants are Dominion Resources, Inc. (now Dominion Energy, Inc.), Virginia Electric and Power Company, and Dominion Gas Holdings, LLC. Operations comprise regulated electric generation, transmission and distribution; natural gas transmission, storage, distribution, gathering and processing; merchant generation; LNG; and renewable energy investments.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $2.747 billion, down from $2.813 billion | $6.156 billion, down from $6.443 billion |
| Income from operations | $773 million, up from $394 million | $1.775 billion, up from $1.162 billion |
| Net income attributable to Dominion | $413 million, up from $159 million | $949 million, up from $538 million |
| Diluted EPS | $0.70, up from $0.27 | $1.60, up from $0.92 |
| Operating margin | Approximately 28.1%, versus 14.0% | Approximately 28.8%, versus 18.0% |
| Net margin | Approximately 15.0%, versus 5.7% | Approximately 15.4%, versus 8.4% |
- Net cash provided by operating activities was $2.160 billion, compared with $1.447 billion in the prior-year period.
- Investing cash outflows were $3.084 billion, including $2.370 billion of construction and property additions, $230 million of solar-project acquisitions and $497 million for the DCGT acquisition.
- Financing cash inflows were $877 million. Dominion issued $1.2 billion of long-term debt, issued $647 million of common stock and paid $765 million of common dividends.
- Cash and cash equivalents declined to $271 million from $318 million at December 31, 2014.
- At June 30, 2015, Dominion had $2.622 billion of short-term debt, $19.597 billion of long-term debt, $1.373 billion of junior subordinated notes and $2.084 billion of remarketable subordinated notes. Total long-term debt was $23.054 billion.
- Dominion reported $4.5 billion of revolving credit facilities, with $1.822 billion available after $2.622 billion of commercial paper and $56 million of letters of credit. No material debt-covenant changes or defaults were reported.
- Dividends declared per common share increased to $0.6475 from $0.6000 for the quarter and to $1.2950 from $1.2000 year to date.
Subsidiary Results
- Virginia Power second-quarter net income was $246 million versus $69 million; year-to-date net income was $515 million versus $393 million. Revenue increased 5% for the quarter and 6% year to date.
- Dominion Gas second-quarter net income was $85 million versus $93 million; year-to-date net income was $246 million versus $257 million. Higher interest expense and the absence of the prior-year Northern System sale gain offset operating improvements.
Material Changes Versus the Prior Comparable Period
- Dominion’s earnings improvement primarily reflected the absence of the $287 million pre-tax charge recognized in 2014 for North Anna 3 and offshore wind costs, as well as the absence of 2014 producer-services losses and electric retail energy marketing losses.
- Second-quarter net revenue increased 11% despite lower reported operating revenue, driven by higher electric utility revenue, rate-adjustment clauses, weather-related retail sales and improved merchant-generation margins. Lower fuel, purchased gas and other operating costs also benefited results.
- Year-to-date operating cash flow increased $713 million, primarily from higher deferred-fuel recoveries, rate-adjustment-clause revenue and the absence of producer-services losses.
- Dominion completed the $497 million acquisition of DCGT, a South Carolina and southeastern Georgia interstate gas pipeline system, and contributed it to Dominion Midstream in April 2015.
- Dominion acquired a 50% interest in Four Brothers, a Utah solar-project portfolio. Dominion is obligated to contribute $445 million toward approximately $730 million of expected project costs; commercial operations are expected in the third quarter of 2016.
- Second-quarter 2015 included a $45 million pre-tax charge for incremental future ash-pond and landfill closure costs under the federal coal-combustion-residuals rule. Virginia Power also recorded a $325 million asset-retirement obligation, partly offset by reversal of a $121 million contingent liability.
- Year-to-date 2015 included an $85 million write-off of deferred fuel costs related to Virginia legislation and a $17 million pre-tax PJM billing adjustment. These items were substantially smaller than the significant 2014 charges.
- Dominion issued $1.1 billion of common stock through its at-the-market program and a registered offering during the first half of 2015 and stated that planned 2015 market equity issuances were complete.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide a clear quantitative earnings or revenue guidance range. Management states that operations are expected to provide a stable source of cash flow to fund planned capital expenditures and maintain or grow the dividend, while noting that cash flows and borrowing needs can vary materially during the year.
- Major forward-looking risks include weather, extreme events, commodity prices, counterparty credit, interest rates, capital-market access, credit ratings, regulatory rate decisions, PJM market rules, nuclear operations, construction execution and cybersecurity.
- Environmental and regulatory exposure is significant. Potential impacts from the Clean Power Plan, emissions and water regulations, coal-ash closure requirements, climate-related rules and future environmental controls could be material, although the filing states that Virginia rate mechanisms may mitigate some Virginia Power costs.
- Virginia Power proposed or pursued multiple rate-adjustment clauses, including approximately $668 million for Rider T1, $250 million for Rider S, $118 million for Rider W, $74 million for Rider R and $30 million for Rider B. Rider U, initially proposed at $28 million and revised to $24 million, was denied in July 2015, subject to possible alternative filings.
- Virginia Power had approximately $530 million of remaining purchase commitments under contracts with potential variable-interest entities. Dominion also reported $6.524 billion of stated-limit subsidiary guarantees, with an estimated utilized value of $1.794 billion.
- Dominion’s energy-marketing credit exposure was $276 million gross and $188 million net of collateral. Fully triggered credit-related derivative provisions would have required approximately $18 million of additional collateral at June 30, 2015.
- Other matters requiring monitoring include ash-pond litigation, Ward Transformer environmental proceedings, Appalachian Gateway contractor claims, nuclear licensing for North Anna 3, transmission-rate proceedings and future compliance costs for environmental rules.
Important Facts for Investors to Verify
- Verify the extent to which 2015 earnings growth reflects the absence of unusually large 2014 charges rather than recurring operating improvement.
- Review the estimated cost, timing and rate-recovery treatment of coal-ash closure and landfill obligations, including the $325 million asset-retirement obligation.
- Assess leverage, upcoming maturities, commercial-paper reliance and the remaining $1.822 billion of revolving-credit capacity.
- Evaluate required capital contributions and execution risk for DCGT, Four Brothers and other solar and pipeline projects.
- Monitor pending regulatory proceedings, rate-adjustment clauses, environmental rules and litigation for potential effects on cash flow and recoverability.
- Reconcile reported operating revenue, net revenue, segment results and specific items when assessing sustainable margins and earnings.