Dominion Resources, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2015. The combined filing covers Dominion Resources, Inc. (now known as Dominion Energy, Inc.), Virginia Electric and Power Company and Dominion Gas Holdings, LLC. Dominion operates regulated electric generation, transmission and distribution businesses, regulated gas transmission, storage and distribution operations, and gas gathering and processing activities.
Financial Results and Key Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenue | $3.409 billion | $3.630 billion | $(221) million |
| Income from operations | $1.002 billion | $768 million | +$234 million |
| Operating margin | 29.4% | 21.2% | +8.2 percentage points |
| Net income attributable to Dominion | $536 million | $379 million | +$157 million |
| Net margin | 15.7% | 10.4% | +5.3 percentage points |
| Diluted EPS | $0.91 | $0.65 | +$0.26 |
| Dividends declared per share | $0.6475 | $0.6000 | +$0.0475 |
| Net cash provided by operating activities | $1.131 billion | $753 million | +$378 million |
| Capital and other property additions | $1.014 billion | $1.120 billion | $(106) million |
| Cash and cash equivalents at March 31 | $275 million | $228 million | +$47 million |
- Operating expenses declined to $2.407 billion from $2.862 billion, primarily due to lower electric fuel, energy-related purchases and purchased gas costs. Other operations and maintenance expense increased to $602 million from $425 million.
- Income tax expense increased to $299 million from $186 million. Dominion reported a first-quarter effective tax rate of 35.7% and expected a full-year 2015 effective tax rate of 32% to 34%, including anticipated investment tax credits from merchant solar projects acquired during the year.
- Total assets were $55.156 billion at March 31, 2015, compared with $54.327 billion at December 31, 2014. Total equity increased to $12.416 billion from $11.957 billion.
- Dominion had $3.200 billion of short-term debt, $1.822 billion of securities due within one year, $17.896 billion of long-term debt, $1.373 billion of junior subordinated notes and $2.084 billion of remarketable subordinated notes. Total liabilities were $42.740 billion.
- Dominion had $4.5 billion of revolving credit facilities, $3.2 billion of commercial paper outstanding, $48 million of letters of credit and $1.252 billion of available facility capacity at March 31, 2015.
- Operating cash flow exceeded capital additions, but investing cash flow was negative $1.499 billion, primarily because of the $495 million acquisition of DCGT. Financing cash flow was positive $325 million, including $295 million from common-stock issuance and $425 million of net short-term debt issuance, partly offset by $381 million of common dividends.
Material Changes Versus the Prior Comparable Period
- Net income increased 41% and diluted EPS increased 40%, primarily because Q1 2014 included substantial losses from the repositioning of the producer services business and the electric retail energy marketing business.
- Revenue decreased despite higher regulated electric sales because nonregulated electric sales declined and the retail energy marketing business had been sold in March 2014.
- Net revenue increased $444 million, or 27%, primarily from the absence of the 2014 producer-services and retail-marketing losses, partly offset by lower merchant-generation margins and an $85 million write-off of deferred fuel costs.
- Dominion Generation earnings declined $27 million to $282 million because of lower merchant-generation margins, lower PJM ancillary-service revenue, higher depreciation and outage costs, and other expenses.
- DVP earnings increased $9 million to $140 million, supported by higher FERC transmission equity returns, rate-adjustment-clause revenues and customer usage.
- Dominion Energy earnings were broadly stable at $207 million versus $208 million. A $70 million gain from Marcellus acreage assignments largely offset the absence of prior-year pipeline-asset sale gains and higher expenses.
- Virginia Power net income declined 17% to $269 million. The principal adverse item was the $85 million pre-tax, $52 million after-tax deferred-fuel write-off required by Virginia legislation.
- Dominion Gas net income declined slightly to $161 million from $164 million. Lower gains on pipeline-system sales were substantially offset by gains on Marcellus development-rights assignments.
Guidance, Outlook, Risks and Unusual Items
- Dominion completed the $495 million acquisition of DCGT in January 2015. DCGT owns approximately 1,500 miles of FERC-regulated interstate natural gas pipeline in South Carolina and southeastern Georgia. The preliminary purchase accounting included approximately $250 million of goodwill.
- In March 2015, Dominion Gas recognized a $43 million gain from previously deferred Marcellus acreage revenue and a $27 million gain from a separate acreage conveyance. Deferred revenue remaining under the earlier agreement was approximately $40 million.
- Virginia Power filed its 2015 biennial rate review. Its filing showed a 10.13% ROE for the combined 2013-2014 test periods, within the applicable earnings band. The case remained pending.
- Virginia Power’s fuel-rate filing was approved on an interim basis effective April 1, 2015. The new rate represented an estimated $512 million decrease in fuel revenue when applied to projected sales for the applicable period.
- The final federal coal-combustion-residuals rule published in April 2015 creates obligations to retrofit or close certain ash ponds and perform monitoring and remediation. Virginia Power expected to establish applicable asset-retirement obligations in the second quarter of 2015, potentially materially affecting financial position and cash flows, although rate recovery and the 2014 ash-pond liability may mitigate earnings impact.
- Environmental compliance remains a significant contingency, including MATS, CSAPR, cooling-water-intake requirements, greenhouse-gas rules, coal-ash obligations, Superfund matters and potential additional controls. Certain potential costs cannot yet be estimated.
- Virginia Power is involved in litigation and regulatory matters concerning ash ponds at Chesapeake, Possum Point and Bremo. A $121 million charge was recorded in 2014; the company expected to reverse the contingent liability and recognize an asset-retirement obligation in the second quarter of 2015.
- Other risks include nuclear operations and decommissioning, commodity and interest-rate volatility, counterparty and credit exposure, regulatory rate outcomes, construction and acquisition execution, PJM obligations, weather, cybersecurity and litigation.
- Management reported no material changes to previously disclosed risk factors, debt covenants, contractual obligations or off-balance-sheet arrangements. No debt-covenant defaults were reported, and credit ratings had not changed as of March 31, 2015.
- Disclosure controls and procedures were determined to be effective, with no reported material changes in internal control over financial reporting.
Investor Verification Checklist
- Verify the effect of the $85 million deferred-fuel write-off and the expected treatment of related fuel-rate recovery.
- Assess whether coal-ash compliance obligations and related asset-retirement obligations recorded in Q2 2015 could materially change liabilities, cash flow or rate-recovery assumptions.
- Review the final purchase accounting, financing impact and integration performance of the DCGT acquisition.
- Evaluate the sustainability of Q1 earnings excluding the absence of large 2014 producer-services and retail-marketing losses and excluding Marcellus acreage gains.
- Reconcile reported operating cash flow with capital spending, short-term borrowing, dividend payments and the company’s available credit capacity.
- Monitor the Virginia biennial rate review, fuel-rate proceedings, rate-adjustment clauses and other regulatory approvals affecting future revenue and returns.
- Review exposure to commodity derivatives, collateral requirements, interest-rate changes and investment performance of nuclear decommissioning trusts.
- Confirm the company’s full-year tax-rate outlook and the timing and availability of expected solar investment tax credits.