DOMINION ENERGY, INC annual report, FY2011

Dominion Resources, Inc. and Virginia Electric and Power Company — FY2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011. The filing is a combined annual report for Dominion Resources, Inc. and its wholly owned utility subsidiary, Virginia Electric and Power Company. The requested “2011 Q4” period is addressed through fourth-quarter and full-year disclosures; the primary filing period is the full fiscal year. The filing predates the company’s later name change to Dominion Energy, Inc.

Business context

Dominion is an integrated energy company focused on regulated electric generation, transmission and distribution; regulated natural-gas transmission, storage and distribution; LNG; and nonregulated merchant generation, energy marketing and retail energy services. The company operated approximately 28,142 MW of generation, served nearly 6 million utility and retail energy customers in 15 states, and employed approximately 15,800 people at year-end.

Primary segments: DVP, Dominion Generation, Dominion Energy, and Corporate and Other.
Virginia Power served approximately 2.4 million electric customers in Virginia and North Carolina.
Management continued prioritizing regulated infrastructure investment to increase earnings stability and reduce commodity-price sensitivity.

Key financial metrics

Dominion, millions except per-share data	2011	2010	Change
Operating revenue	$14,379	$15,197	Down 5%
Income from continuing operations	$1,408	$2,963	Down 53%
Net income attributable to Dominion	$1,408	$2,808	Down 50%
Diluted EPS	$2.45	$4.76	Down $2.31
Operating income	$2,861	$5,700	Down 50%
Cash flow from operations	$2,983	$1,825	Up $1,158
Capital expenditures	$3,652	$3,422	Up $230
Long-term debt	$17,394	$15,758	Up $1,636
Cash and cash equivalents	$102	$62	Up $40

Calculated consolidated operating margin was approximately 19.9% in 2011 versus 37.5% in 2010, and net margin was approximately 9.8% versus 18.5%. Comparisons are substantially affected by the 2010 Appalachian exploration and production asset sale gain.

Dominion’s segment net income: DVP $501 million, Dominion Generation $1,003 million, Dominion Energy $521 million, and Corporate and Other negative $617 million.
Virginia Power revenue was $7,246 million, down slightly from $7,219 million; net income was $822 million, down 4% from $852 million.
Dominion’s utility electricity supplied declined 3% to 82.3 million MWh; merchant generation declined 9% to 43.0 million MWh.
Approximately 84% of utility fuel and purchased-energy costs were subject to deferred fuel accounting or similar recovery mechanisms.
Cash flow from operations exceeded capital expenditures by approximately $669 million, before dividends, debt repayments, share repurchases and other financing uses.

Debt and liquidity

Dominion had $1.65 billion of available capacity under joint revolving credit facilities at year-end, including $1.186 billion under a $3.0 billion facility and $464 million under a $500 million facility.
Dominion had $1.814 billion of commercial paper outstanding and $36 million of letters of credit; Virginia Power had $894 million of commercial paper and $15 million of letters of credit outstanding.
Dominion’s contractual total-debt-to-total-capital ratio was 57%, below a 65% covenant maximum; Virginia Power’s was 47%, also below 65%.
Dominion’s 2011 long-term debt issuances totaled $1.85 billion, while Dominion repaid or repurchased $637 million of long-term debt. Dominion’s year-end long-term debt included $1.451 billion of enhanced junior subordinated notes.
Dominion’s planned capital expenditures were approximately $4.3 billion in 2012, $4.8 billion in 2013 and $3.9 billion in 2014. Virginia Power planned approximately $2.6 billion, $3.0 billion and $2.6 billion, respectively.
Dominion paid $1.97 per common share in dividends during 2011. In 2012, the board established an annual dividend rate of $2.11 per share, a 7.1% increase, subject to future board approval.

Material changes versus the prior comparable period

Net income and diluted EPS fell sharply because 2010 included an approximately $1.4 billion after-tax gain from the Appalachian E&P sale. That business was no longer a comparable earnings contributor in 2011.
Merchant-generation margin declined by approximately $288 million after tax, reflecting lower realized power prices and lower generation. Management cited sustained low commodity prices as a continuing pressure.
Less favorable weather reduced electric utility earnings; cooling degree days fell 9% and heating degree days fell 12% from 2010.
Regulated earnings benefited from rate-adjustment clauses, increased transmission returns and lower labor costs following the 2010 workforce reduction program.
Dominion recorded after-tax charges of approximately $139 million for utility coal-plant balances not expected to be recovered because of anticipated retirements, $59 million for Hurricane Irene restoration costs, $39 million related to Kewaunee operations, and $34 million for excess SO2 emissions allowances affected by CSAPR.
Virginia Power’s 2011 earnings included the same $139 million after-tax coal-plant charge and $59 million of Hurricane Irene restoration costs, partly offset by higher rate-adjustment-clause earnings and lower workforce-related costs.
Dominion consolidated the Fairless generating facility lessor, Juniper, as a variable-interest entity in the fourth quarter. This added approximately $957 million of property, plant and equipment, $896 million of nonrecourse debt and $61 million of noncontrolling interests.
Dominion repurchased approximately 13 million common shares for $601 million in 2011 and stated that it did not plan additional repurchases under that program in 2012.

Guidance, outlook, risks and unusual items

Management expected Dominion and Virginia Power to increase net income on a per-share basis in 2012. Expected positives included the absence of 2011 unusual charges, 2%–2.5% weather-normalized electric-sales growth, regulated construction projects and associated rate-adjustment revenue, lower operating and maintenance costs, lower interest expense and tax benefits from bonus depreciation. Dominion estimated cash tax savings of approximately $475 million in 2012 and $700 million in 2013; Virginia Power estimated approximately $500 million of 2012 cash tax savings.

Virginia Power’s 2011 biennial review resulted in an authorized base ROE of 10.9% and an expected customer refund of approximately $81 million, including the $78 million ordered refund. Virginia Power sought rehearing and appealed the order.
Merchant generation remains exposed to low power and capacity prices, fuel costs, contract expirations, outages, environmental compliance costs and counterparty risk.
Major capital projects include the 585 MW Virginia City Hybrid Energy Center, the more than 1,300 MW Warren County facility, transmission expansions, gas infrastructure, biomass conversions and potential LNG export facilities. Projects remain subject to regulatory approvals, construction risk and cost overruns.
Coal and merchant-unit retirements were accelerated or announced, including State Line in early 2012 and Salem Harbor units. Certain Chesapeake and Yorktown coal units were expected to retire in 2015–2016 under MATS compliance assumptions.
Environmental and regulatory risks include MATS, CSAPR, greenhouse-gas rules, cooling-water requirements, coal-combustion by-product rules, pipeline-safety requirements and potential Clean Air Act enforcement. The EPA’s CSAPR was stayed pending judicial review.
Nuclear risks include post-Fukushima regulatory requirements, potential modifications and outages, spent-fuel management, decommissioning costs and insurance limitations. North Anna returned to service in November 2011 after the August earthquake.
Dominion had approximately $73 million of initial margin posted with MF Global at its October 2011 bankruptcy; it had recovered approximately $8 million by the filing date and could not estimate the ultimate recovery.
Dominion disclosed a $504 million net energy-marketing credit exposure after collateral at year-end, with $88 million of additional collateral potentially required if specified credit-related triggers were fully activated.
Dominion’s outstanding contractual cash payments totaled approximately $42.5 billion, including $18.7 billion of long-term debt principal and $15.7 billion of interest payments. Virginia Power’s total was approximately $17.8 billion.

Facts an investor should verify

Reconcile 2011 earnings with and without the $139 million coal-retirement charge, Hurricane Irene costs, emissions-allowance impairment, Kewaunee losses and other specific items.
Assess the sustainability of regulated rate-adjustment revenue after the Virginia Commission reduced the authorized base ROE to 10.9% and ordered customer refunds.
Review merchant-generation exposure to power prices, fuel prices, contract expirations and planned retirements.
Verify funding capacity for the $4.3 billion of 2012 Dominion capital expenditures and the effect of debt maturities, commercial paper and collateral requirements.
Monitor regulatory outcomes involving MATS, CSAPR, greenhouse gases, cooling water, pipeline safety and the EPA’s Clean Air Act proceedings.
Review the status and recoverability of the MF Global margin claim, environmental contingencies, the potential sale of Kewaunee and the Fairless nonrecourse debt and residual-value guarantee.
Confirm the assumptions supporting nuclear decommissioning trusts, pension liabilities and regulatory-asset recovery.