DOMINION ENERGY, INC quarterly report, Q3 FY2009

Dominion Resources, Inc. Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2009, filed November 2, 2009. The provided filing is for Dominion Resources, Inc., although the request metadata identifies Dominion Energy, Inc. The filing covers regulated electric utility, gas transmission and distribution, LNG, merchant generation, energy marketing, and Appalachian exploration and production operations.

Financial performance and position

Metric	Three months ended Sept. 30, 2009	Three months ended Sept. 30, 2008	Nine months ended Sept. 30, 2009	Nine months ended Sept. 30, 2008
Operating revenue	$3,648 million	$4,365 million	$11,876 million	$12,117 million
Income from operations	$1,072 million	$1,055 million	$2,679 million	$2,825 million
Net income attributable to Dominion	$594 million	$508 million	$1,296 million	$1,486 million
Diluted EPS	$1.00	$0.87	$2.19	$2.56
Operating cash flow	Not separately provided	Not separately provided	$2,982 million	$1,427 million

Operating margin was approximately 29.4% in the third quarter and 22.6% year to date, compared with approximately 24.2% and 23.3%, respectively, in the comparable 2008 periods.
Third-quarter net income increased 17%, while year-to-date net income declined 13%. Third-quarter results benefited from higher gas transmission contributions, gains on merchant nuclear decommissioning trust investments, improved retail energy marketing results, and lower corporate charges.
Year-to-date results were reduced by a $455 million pre-tax, $281 million after-tax ceiling-test impairment of gas and oil properties, the absence of 2008 tax and regulatory benefits related to the planned sale of Peoples and Hope, and lower E&P production.
Cash flow from operations more than doubled year to date, primarily due to deferred fuel and gas cost recoveries, stronger merchant generation cash contributions, lower outage costs, and reduced customer receivables.
Capital spending and other property additions were $2,753 million year to date, compared with $2,307 million in 2008. Net cash used in investing activities was $2,744 million.
Cash and cash equivalents were $50 million at September 30, 2009, compared with $66 million at December 31, 2008; cash flow statement cash balances, including held-for-sale cash, were $53 million and $71 million, respectively.
Total long-term debt was $16.223 billion at September 30, 2009, up from $14.956 billion at year-end 2008. Securities due within one year were $709 million and short-term debt was $649 million.
Credit facilities totaled $4.772 billion, with $3.803 billion of capacity available. Management reported no debt covenant defaults and no changes in credit ratings during the period; Moody’s had revised Virginia Power’s outlook to positive in April 2009.
Common dividends paid were $0.4375 per share in the quarter and $1.3125 per share year to date, versus $0.395 and $1.185 in the comparable 2008 periods.

Material changes from the prior comparable period

Revenue declined 16% in the third quarter and 2% year to date, primarily because of lower natural gas prices and producer-services activity, lower utility wholesale sales, reduced gas distribution sales, and lower merchant generation prices.
Purchased gas expense declined 60% in the quarter and 28% year to date, while electric fuel expense declined 22% in the quarter but increased 9% year to date because of fuel-rate changes and customer cost recoveries.
Other income increased by $109 million in the quarter and $117 million year to date, mainly because 2009 included net realized gains on merchant nuclear decommissioning trust investments versus losses in 2008.
Year-to-date other operations and maintenance expense increased $286 million, reflecting the E&P impairment and higher employee benefit costs, partly offset by a $103 million pre-tax reduction in nuclear decommissioning asset-retirement obligations and fewer generating-plant outages.
The company issued $350 million of Virginia Power senior notes, $685 million of enhanced junior subordinated notes, and $500 million of senior notes during 2009. It also issued 12 million common shares for $381 million of proceeds.
Dominion continued to classify Peoples and Hope as held for sale under an agreement valued at approximately $910 million, subject to adjustments and Pennsylvania and West Virginia regulatory approvals.
Adoption of new noncontrolling-interest guidance changed the presentation of prior-period amounts. The company also adopted amended other-than-temporary impairment guidance and recorded a $20 million pre-tax, $12 million after-tax reclassification to accumulated other comprehensive income.

Outlook, risks, contingencies and unusual items

Virginia Power’s interim base-rate increase became effective September 1, 2009, subject to refund and final adjustment. The company’s filing requested an annual base-rate increase of approximately $250 million; a hearing was scheduled for January 2010.
Rider T became effective September 1, 2009, authorizing recovery of approximately $218 million over 12 months, including transmission-related costs and RTO-related amounts.
Additional rate proceedings covered demand-side management programs, the Virginia City Hybrid Energy Center, and the Bear Garden generating facility. Outcomes and timing remained uncertain.
The Virginia City Hybrid Energy Center was under construction and expected to operate by 2012. Environmental challenges to its permits continued through an appeal process, although the company stated that the permit amendment did not affect the project.
The planned Peoples and Hope sale remained subject to state approvals and was expected by management to close in 2009. Regulatory proceedings in Pennsylvania and West Virginia remained pending.
Key risks include weather, commodity-price volatility, energy-trading counterparty credit exposure, capital-market access, regulatory and rate decisions, environmental and climate-change requirements, nuclear operations, construction execution, tax matters, litigation, and the timing of asset sales.
At September 30, 2009, energy-marketing gross credit exposure was approximately $990 million, reduced to $710 million after collateral. Approximately 96% of net exposure was to investment-grade counterparties.
Guarantees and other support arrangements included $261 million of issued guarantees to third parties and equity-method investees, a maximum remaining cumulative equity-funding exposure of $153 million through 2019 for certain wind projects, and subsidiary guarantees with a stated limit of $4.678 billion and an estimated utilized value of $1.693 billion.
The company recorded a liability for its expected one-half share of damages in the Clover power-station coal-transportation litigation; the expected amount was approximately $10 million at September 30, 2009.
No ceiling-test impairment was required using post-period-end hedge-adjusted prices, but the filing states that a $107 million pre-tax impairment would have resulted using September 30 prices and a $247 million impairment using unhedged prices.

Most important facts for investors to verify

Confirm that the intended issuer is Dominion Resources, Inc., not Dominion Energy, Inc.
Assess the sustainability of the $2.982 billion year-to-date operating cash flow, including the effect of deferred fuel and gas-cost recoveries and working-capital changes.
Review debt maturities, refinancing needs, interest costs, and the effect of 2009 debt issuance on leverage and liquidity.
Evaluate the recurring earnings impact of the $455 million E&P impairment, nuclear decommissioning ARO reduction, investment gains, and other unusual items.
Monitor Virginia rate cases, fuel-factor proceedings, Rider T, DSM approvals, and recovery of construction-related costs.
Verify the regulatory status and closing prospects of the Peoples and Hope divestiture.
Assess sensitivity to natural-gas and power prices, derivatives, collateral requirements, counterparty exposure, and possible changes in environmental or climate regulation.
Review the company’s commitments, guarantees, litigation exposure, and potential future funding requirements for generation and renewable projects.