Dominion Resources, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. 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, gas transmission and storage, gas distribution, LNG and energy marketing businesses.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $3.341 billion | $3.333 billion | $7.398 billion | $7.501 billion |
| Net income attributable to Dominion | $336 million | $1.761 billion | $815 million | $1.935 billion |
| Diluted EPS | $0.58 | $2.98 | $1.41 | $3.25 |
| Income from operations | $725 million | $3.110 billion | $1.688 billion | $3.844 billion |
| Net cash from operating activities | Not separately provided | Not separately provided | $1.287 billion | $1.406 billion |
- Q2 operating margin was approximately 21.7%; six-month operating margin was approximately 22.8%. These comparisons are distorted by the $2.467 billion Appalachian exploration and production gain recognized in 2010.
- Six-month net income fell $1.120 billion, principally because the 2010 period included the Appalachian E&P sale gain. Excluding major special items, merchant-generation margins and weather also pressured 2011 results.
- Cash and cash equivalents were $80 million at June 30, 2011, compared with $62 million at December 31, 2010. Dominion generated $1.287 billion from operations, used $1.535 billion in investing activities and received $266 million from financing activities.
- Capital additions were $1.635 billion for the six months. Common dividends paid were $568 million, and Dominion repurchased approximately 13 million shares for $601 million.
- At June 30, total Dominion liabilities were $31.474 billion, including $16.500 billion of long-term debt and $1.786 billion of short-term debt. Virginia Power reported $6.854 billion of long-term debt and $933 million of short-term debt.
- Dominion had $3.5 billion of revolving credit facilities, with $1.659 billion available after commercial paper and letters of credit. Virginia Power had $286 million of available capacity under its joint facilities.
- Virginia Power revenue increased to $1.757 billion in Q2 and $3.514 billion year to date. Net income was $241 million in Q2 and $519 million year to date, versus $267 million and $362 million, respectively, in the prior-year periods.
Material changes versus the prior comparable period
- Dominion’s Q2 and year-to-date earnings declined sharply because the prior-year periods included a $2.467 billion pre-tax gain, or approximately $1.4 billion after tax, from the Appalachian E&P transaction.
- Six-month 2011 results benefited from the absence of 2010 workforce-reduction charges, the Peoples disposal loss and much of the prior-year State Line impairment. These benefits were offset by lower merchant-generation margins, less favorable electric-utility weather and the loss of Appalachian E&P earnings.
- Q2 merchant-generation contribution declined $82 million after tax, reflecting lower margins, higher outage costs and the absence of Kewaunee earnings in the operating segment presentation.
- Regulated utility results were mixed: Virginia Power’s year-to-date net income increased $157 million, but Q2 net income declined $26 million because of less favorable weather and higher planned outage costs.
- Other operations and maintenance expense decreased $283 million year to date, primarily because 2010 included workforce-reduction charges and a larger State Line impairment.
- Interest expense increased $72 million year to date because 2010 included benefits from discontinued hedge accounting for certain interest-rate derivatives.
Outlook, unusual items, risks and contingencies
- Virginia Power received approval for a two-year recovery of approximately $434 million of prior-year under-recovered fuel costs, producing an approximately $319 million rate increase beginning July 1, 2011.
- Virginia Power proposed or pursued additional rate riders for Bear Garden, the Virginia City Hybrid Energy Center, transmission projects, a proposed 1,300-plus MW Warren County gas plant and biomass conversions. Bear Garden began commercial operations in Q2 2011.
- Dominion recorded a $55 million pre-tax impairment charge, or $39 million after tax, for State Line and a $17 million pre-tax severance charge, or $11 million after tax, related to planned merchant-generation closures. State Line is expected to shut down by mid-2014; Salem Harbor units are expected to be retired by June 2014.
- Dominion is pursuing a potential sale of Kewaunee. A sale could result in held-for-sale accounting and an additional impairment charge, but the filing does not provide a clear estimate of any potential amount.
- The EPA’s Cross-State Air Pollution Rule is expected to cause Dominion and Virginia Power to impair substantially all of their emissions allowances in Q3 2011. The filing does not provide a clear impairment amount or estimate the broader financial impact.
- Environmental and regulatory matters include potential Clean Air Act exposure, cooling-water compliance at Brayton Point and North Anna, proposed water and hazardous-air-pollutant rules, and uncertainty regarding manufactured-gas-plant remediation. Several potential impacts cannot currently be estimated and could require significant capital expenditures.
- Dominion expects approximately $150 million of remaining Brayton Point cooling-tower expenditures through 2013, within an estimated total project cost of approximately $600 million.
- The federal appellate court affirmed Dominion’s spent-nuclear-fuel damages award. Dominion expected to receive approximately $155 million during Q3 2011 and recognized a $24 million pre-tax benefit in the first six months.
- Potential liquidity pressures include commodity-price volatility, collateral requirements, counterparty credit risk, refinancing needs and interest-rate changes. A 10% unfavorable commodity-price movement would have reduced the fair value of Dominion’s non-trading commodity derivatives by approximately $253 million at June 30, 2011.
- Management identified no material changes to previously disclosed risk factors, no debt-covenant defaults and no changes in credit ratings. No formal earnings guidance is provided in the filing text.
Most important facts to verify
- Reconcile reported earnings with and without the 2010 Appalachian E&P gain and other special items.
- Assess merchant-generation margin trends, planned retirements, Kewaunee sale prospects and potential impairment exposure.
- Verify the timing and financial effect of Virginia Power fuel, transmission and generation rate riders.
- Evaluate debt maturities, short-term borrowing, revolving-credit availability and collateral requirements.
- Quantify the expected Q3 impairment of emissions allowances following CSAPR and monitor broader environmental compliance costs.
- Review the potential financial impact of cooling-water, Clean Air Act, nuclear-safety and other environmental proceedings.
- Confirm receipt and accounting treatment of the expected spent-nuclear-fuel settlement proceeds.