Dominion Resources, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2013. The combined filing covers Dominion Resources, Inc. and its wholly owned regulated utility subsidiary, Virginia Electric and Power Company (Virginia Power). Dominion operates electric generation, transmission and distribution, natural gas transmission, storage and distribution, LNG and related energy businesses.
Financial performance and position
| Metric | Dominion 2013 | Dominion 2012 | Change |
|---|---|---|---|
| Operating revenue | $3.523 billion | $3.397 billion | +$126 million, 4% |
| Income from operations | $930 million | $918 million | +$12 million |
| Net income attributable to Dominion | $495 million | $494 million | +$1 million |
| Diluted EPS | $0.86 | $0.86 | No change |
| Operating margin | 26.4% | 27.0% | Down approximately 60 basis points |
| Net margin | 14.1% | 14.5% | Down approximately 40 basis points |
| Cash flow from operations | $1.052 billion | $1.623 billion | -$571 million |
| Capital expenditures and other property additions | $904 million | $981 million | -$77 million |
| Cash and cash equivalents at March 31 | $35 million | $133 million | Down $98 million year over year |
- Dominion’s total assets were $47.116 billion and total liabilities were $35.931 billion at March 31, 2013. Common shareholders’ equity was $10.868 billion.
- Debt included $17.277 billion of long-term debt, $2.003 billion of short-term debt, $1.193 billion of securities due within one year and $852 million of securities due within one year associated with a variable-interest entity.
- Dominion had $3.5 billion of revolving credit facilities, with $1.478 billion available after commercial paper and letters of credit. Virginia Power had $587 million of available capacity under its joint facilities.
- Dominion declared quarterly dividends of $0.5625 per common share, compared with $0.5275 in the prior-year quarter.
- Virginia Power revenue increased to $1.781 billion from $1.754 billion, while net income increased to $287 million from $243 million. Its operating margin was approximately 29.8%, compared with 26.7% in the prior-year quarter.
Material changes versus the prior comparable period
- More favorable weather increased electric utility sales; heating degree days in Dominion’s electric distribution area increased 40%, and electricity delivered increased 8% to 21.1 million MWh.
- Dominion’s regulated electric operations benefited from higher customer sales and rate-adjustment-clause revenue. Regulated natural gas transmission revenue also increased, primarily following the September 2012 completion of the Appalachian Gateway Project.
- These benefits were partly offset by a $51 million decline in retail energy marketing activities, primarily from price-risk-management activities, and a $19 million decline in merchant generation operations due primarily to lower generation output.
- Net cash from operating activities declined substantially because of lower deferred fuel-cost recoveries, higher net margin-collateral requirements and the absence of 2012 income-tax refunds. More favorable weather partially offset these effects.
- Dominion issued $1.250 billion of long-term debt, repaid $712 million of long-term debt and repaid $258 million of affiliated notes. Virginia Power issued $1.250 billion of senior notes during the quarter.
- Dominion’s segment earnings were mixed: Dominion Energy increased $30 million, while Dominion Virginia Power declined $24 million and Dominion Generation declined $6 million. Virginia Power’s net income increased $44 million, led by regulated generation and distribution operations.
Guidance, outlook, unusual items and risks
- The filing does not provide a specific consolidated earnings or EPS guidance figure. Management states that operations are expected to provide stable cash flow to fund planned capital expenditures and maintain or grow dividends.
- Dominion expects capital expenditures of approximately $5.1 billion in 2013, $5.1 billion in 2014 and $4.3 billion in 2015. The increase from the prior forecast primarily reflects the Cove Point liquefaction project.
- Dominion agreed to sell Brayton Point, Kincaid and its 50% interest in Elwood for approximately $472 million, subject to customary adjustments and FERC approval. Brayton Point and Kincaid were classified as held for sale, with a $37 million pretax impairment charge, or $22 million after tax.
- Dominion contributed Line TL-404 to Blue Racer in exchange for approximately $47 million in cash and recorded an approximately $25 million pretax gain, or $14 million after tax. The Natrium processing and fractionation facility was expected to be completed and contributed in the second quarter of 2013.
- The Cove Point liquefaction project is expected to cost approximately $3.4 billion to $3.8 billion, excluding financing costs, with potential service beginning in 2017. The project remained subject to DOE, FERC, Maryland and other approvals, and litigation was on appeal. Dominion disclosed risks involving financing, construction delays, cost overruns, regulatory approvals and counterparty performance.
- An April 2013 Clean Air Act consent decree would require closure of State Line, pollution-control technology at Kincaid and Brayton Point, a $3 million civil penalty and $10 million of environmental mitigation projects. Dominion had previously accrued $13 million and would retain that liability after the planned asset sales.
- Other material risk areas include weather, commodity prices, energy trading and counterparty credit, interest rates, environmental compliance, nuclear operations, regulatory proceedings, capital-market access and unplanned outages. Dominion’s gross energy-trading credit exposure was $552 million, or $551 million after collateral.
- Virginia Power filed its 2013 biennial rate review without requesting a base-rate increase. Its reported 2011–2012 ROE was 10.11% versus an authorized 10.9%; the Virginia Commission was expected to issue a final order by November 28, 2013. The company requested an 11.5% ROE for 2014.
Most important facts for investors to verify
- Confirm the timing, FERC approval and final proceeds from the Brayton Point, Kincaid and Elwood dispositions, including the treatment of the $37 million impairment.
- Monitor Dominion’s very low period-end cash balance, reliance on short-term debt and available revolver capacity, together with its debt maturities and collateral requirements.
- Assess whether operating cash flow can support the approximately $5.1 billion 2013 capital program, dividends and Cove Point funding requirements.
- Track Cove Point’s regulatory approvals, construction cost, financing, service agreements, litigation and exposure to reduced import-contract revenue beginning in 2017.
- Review the outcome of Virginia Power’s biennial rate review and related rider proceedings, including potential customer credits or rate changes.
- Evaluate exposure to environmental settlements, Clean Air Act compliance, nuclear requirements, commodity-price volatility and derivative valuation changes.
- Distinguish recurring operating earnings from weather benefits, investment gains, the Blue Racer contribution gain and discontinued-operation effects.