Business Context and Reporting Period
This combined Form 10-K covers Dominion Resources, Inc. and wholly owned Virginia Electric and Power Company for the fiscal year ended December 31, 2010. The filing is an annual report, not a standalone fourth-quarter filing. Dominion operated regulated electric generation, transmission and distribution businesses, regulated natural gas transmission, storage and distribution businesses, LNG infrastructure, merchant generation, energy marketing and retail energy businesses. The company reported approximately 27,615 MW of generating capacity, 6,100 miles of electric transmission lines, 56,800 miles of electric distribution lines and 11,000 miles of gas transmission, gathering and storage pipelines.
Dominion announced plans to invest more than $10 billion over five years in regulated electric and natural gas infrastructure. Virginia Power separately announced an approximately $4 billion five-year electric transmission and distribution investment plan.
Financial Results and Key Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Dominion operating revenue | $15.197 billion | $14.798 billion | +$399 million |
| Dominion net income attributable to Dominion | $2.808 billion | $1.287 billion | +118% |
| Dominion diluted EPS | $4.76 | $2.17 | +$2.59 |
| Dominion income from continuing operations | $2.963 billion | $1.261 billion | +$1.702 billion |
| Virginia Power operating revenue | $7.219 billion | $6.584 billion | +$635 million |
| Virginia Power net income | $852 million | $356 million | +$496 million |
| Dominion operating cash flow | $1.825 billion | $3.786 billion | -$1.961 billion |
| Dominion capital expenditures | $3.422 billion | $3.837 billion | -$415 million |
| Dominion total assets | $42.817 billion | $42.554 billion | +$263 million |
| Dominion long-term debt | $15.758 billion | $15.481 billion | +$277 million |
Dominion's reported 2010 earnings included a $1.4 billion after-tax net benefit from the sale of substantially all Appalachian exploration and production operations, a $206 million after-tax workforce-reduction charge, a $127 million after-tax impairment charge on merchant generation facilities, and a $140 million after-tax loss on the sale of Peoples. Consequently, reported earnings and margins were materially affected by unusual items and are not representative of recurring operating performance.
Dominion's operating income was $5.700 billion and income before taxes from continuing operations was $5.037 billion. Income tax expense was $2.057 billion, producing a 40.8% effective tax rate for continuing operations. Virginia Power's income from operations was $1.641 billion, compared with $748 million in 2009.
Dominion's primary segment contributions to net income were DVP $448 million, Dominion Generation $1.291 billion and Dominion Energy $475 million. The Corporate and Other segment provided a $594 million net benefit, principally because of the Appalachian E&P divestiture gain and other specific items.
Cash Flow, Liquidity, Debt and Capital Resources
- Dominion ended 2010 with $62 million of cash and cash equivalents and Virginia Power with $5 million.
- Dominion had approximately $2.0 billion of available capacity under credit facilities at year-end, including $559 million available to Virginia Power.
- Dominion's revolving facilities totaled $3.5 billion, with $1.386 billion of commercial paper and $136 million of letters of credit outstanding.
- Virginia Power had $1.25 billion of revolving facility sub-limits, with $600 million of commercial paper and $91 million of letters of credit outstanding.
- Dominion's debt-to-total-capital ratio under credit agreement definitions was 54%, versus a 65% maximum; Virginia Power's ratio was 46%, also versus a 65% maximum.
- Dominion issued $550 million of long-term notes during 2010 and repaid or repurchased approximately $1.5 billion of long-term debt. Virginia Power issued $300 million of senior notes and repaid or repurchased $347 million of long-term debt.
- Dominion repurchased 21.4 million common shares for approximately $900 million and announced a further $400 million to $700 million repurchase program funded with tax savings.
- Planned capital expenditures were approximately $3.9 billion in 2011, $4.7 billion in 2012 and $4.4 billion in 2013 for Dominion; Virginia Power expected approximately $2.2 billion, $3.0 billion and $3.3 billion, respectively.
- Dominion increased its annual common dividend rate to $1.97 per share in 2011, a 7.7% increase from the 2010 rate of $1.83 per share.
Operating cash flow declined primarily because of lower deferred fuel and gas-cost recoveries, pension contributions, the absence of cash flows from sold Appalachian E&P operations, lower merchant generation margins and rate-refund payments related to the Virginia base-rate settlement. Investing cash flow improved because of approximately $3.45 billion of proceeds from the Appalachian E&P sale and $741 million from the Peoples sale.
Material Changes Versus the Prior Comparable Period
- Electric utility results benefited from favorable weather, higher customer sales and increased rate-adjustment-clause revenue. Cooling degree days increased 42% and electricity delivered increased 4%.
- Merchant generation margins declined by approximately $356 million in net revenue because of lower realized prices, higher fuel costs, lower nuclear generation results and the expiration of certain power-sales contracts.
- Dominion Energy results declined by $42 million, principally because Appalachian E&P operations were sold and producer-services margins weakened. Gas transmission revenue benefited from the Cove Point expansion.
- The 2009 Virginia base-rate settlement charge did not recur in 2010. The settlement included customer credits, rate freezes through December 2013, an 11.9% authorized ROE for the base-rate review and a waiver of recovery of approximately $197 million of deferred RTO costs beginning in 2011.
- Virginia Power's 2010 earnings benefited from the absence of the $427 million after-tax 2009 base-rate settlement charge, favorable weather and rate riders, but were reduced by a $123 million after-tax workforce-reduction charge.
- Dominion's regulated electric and gas businesses became a larger strategic focus as the company reduced exposure to exploration and production and sought to reduce commodity-price sensitivity.
Guidance, Outlook, Risks and Unusual Items
Management expected Dominion's 2011 earnings per share to decline from 2010 because of lower merchant-generation margins, more planned outages, normalized weather and the absence of Appalachian E&P earnings. Offsetting factors included recovering electric demand, rate-adjustment-clause revenue from Bear Garden and the Virginia City Hybrid Energy Center, lower operating costs and reduced outage costs. Management expected 5% to 6% growth in operating-business net income per share in 2012 versus 2011.
Bonus depreciation legislation was expected to reduce cash taxes by approximately $1.2 billion to $2.1 billion for Dominion and $600 million to $1.2 billion for Virginia Power during 2011 through 2013. Management planned to use tax savings for share repurchases and debt reduction rather than market equity issuance in 2011 and 2012.
- Bear Garden, a 580 MW natural-gas facility, was approximately 94% complete and expected to enter service in the second quarter of 2011. The Virginia City Hybrid Energy Center, a 585 MW facility, was approximately 79% complete and expected to enter service in summer 2012.
- The potential third nuclear unit at North Anna remained uncommitted; development had been slowed, ODEC indicated it intended to withdraw, and required NRC, regulatory and environmental approvals remained outstanding.
- Environmental compliance was expected to require significant spending. Dominion estimated approximately $2.4 billion and Virginia Power approximately $2.0 billion of environmental capital expenditures during 2011–2015.
- Key regulatory uncertainties included greenhouse-gas rules, air-quality standards for SO2 and NOx, mercury and hazardous-air-pollutant rules, coal-combustion by-product regulation and cooling-water intake requirements.
- The EPA had issued a Notice and Finding of Violations concerning State Line and Kincaid under the Clean Air Act. Dominion could not predict the outcome, and an adverse resolution could materially affect future results or cash flows.
- Dominion had a pending appeal involving approximately $155 million of federal spent-nuclear-fuel damages; Virginia Power had recognized a $174 million receivable for amounts considered probable of recovery. Payment depended on resolution of the appeal.
- Dominion's energy-marketing activities had $591 million of net credit exposure after collateral at year-end. A hypothetical 10% unfavorable commodity-price change would have reduced the fair value of non-trading commodity derivatives by approximately $183 million.
- Nuclear decommissioning obligations, pension and postretirement liabilities, weather, outages, commodity prices, counterparty performance, credit ratings, financing access and regulatory rate decisions remained material risks.
Most Important Facts for Investors to Verify
- Separate recurring operating earnings from the $1.4 billion after-tax Appalachian E&P divestiture benefit and other 2010 unusual items.
- Review the decline in operating cash flow and whether planned capital spending, dividends, repurchases and debt reduction can be funded without materially increasing leverage.
- Assess merchant-generation exposure to low power and commodity prices, planned nuclear and fossil outages, and environmental compliance costs.
- Track Virginia and North Carolina rate proceedings, rate-adjustment-clause recoveries, customer credits and the potential effect of future ROE reviews.
- Verify the completion, cost and regulatory status of Bear Garden, Virginia City, transmission projects and other major capital programs.
- Evaluate pending environmental, cooling-water, Clean Air Act and spent-nuclear-fuel matters, including potential cash-flow effects.
- Reconcile management's 2011 guidance with the absence of E&P earnings, normalized weather, lower merchant margins and expected tax benefits.
- Confirm debt maturities, credit-facility availability, derivative collateral requirements and credit-rating stability.