Dominion Resources, Inc. Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers the quarter and nine months ended September 30, 2016, for Dominion Resources, Inc. (the predecessor name of Dominion Energy, Inc.), Virginia Electric and Power Company (Virginia Power) and Dominion Gas Holdings, LLC. Dominion operates regulated electric generation, transmission and distribution businesses, natural gas transmission, storage, distribution, gathering and processing operations, LNG assets, and merchant generation and renewable projects.
Dominion completed its $4.4 billion acquisition of Dominion Questar on September 16, 2016. Questar contributed $23 million of revenue and $5 million of net income attributable to Dominion during the quarter and nine-month period, respectively.
Key financial metrics
| Dominion consolidated | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Operating revenue | $3,132 million | $2,971 million | $8,651 million | $9,127 million |
| Income from operations | $1,145 million | $1,123 million | $2,808 million | $2,898 million |
| Net income attributable to Dominion | $690 million | $593 million | $1,666 million | $1,542 million |
| Diluted EPS | $1.10 | $1.00 | $2.71 | $2.60 |
| Dividends declared per share | $0.7000 | $0.6475 | $2.1000 | $1.9425 |
- Q3 net income increased 16% and diluted EPS increased 10%; nine-month net income increased 8% and diluted EPS increased 4%.
- Approximate consolidated net-income margin was 22.0% in Q3 2016 versus 20.0% in Q3 2015, and 19.3% for the first nine months versus 16.9% in the prior-year period.
- Net cash provided by operating activities was $3.386 billion for the first nine months, compared with $3.453 billion in 2015.
- Capital additions were $4.536 billion, and the Questar acquisition used $4.372 billion of cash. Net cash used in investing activities was $9.029 billion.
- Financing activities provided $5.287 billion, including $5.730 billion of long-term debt issuance and $2.079 billion of common-stock issuance.
- Cash and cash equivalents declined from $607 million at December 31, 2015 to $251 million at September 30, 2016.
- Total assets increased to $69.599 billion from $58.648 billion, primarily reflecting the Questar acquisition and related goodwill.
- Total liabilities were $53.407 billion. Long-term debt was $28.707 billion, compared with $23.468 billion at year-end 2015; current securities due within one year were $2.931 billion and short-term debt was $3.097 billion.
- Dominion reported $3.093 billion of available capacity under credit facilities at September 30, 2016.
Material changes versus the prior comparable period
- Dominion’s Q3 earnings improvement was driven primarily by higher renewable-energy investment tax credits, increased retail electric sales from higher cooling degree days, and the PJM capacity-performance market introduced in June 2016.
- Year-to-date net revenue increased $259 million after adjusting for energy purchases, despite reported revenue declining $476 million. Lower fuel, purchased-capacity and purchased-gas costs were significant contributors.
- Other operations and maintenance expense increased $201 million in Q3 and $258 million year to date. Drivers included Questar transaction and transition costs, higher labor and benefits, lower shale-rights gains, and labor-contract and work-stoppage costs.
- Income-tax expense decreased $75 million in Q3 and $233 million year to date, primarily because of higher renewable-energy investment tax credits and tax benefits from a tax-authority settlement and legislative changes.
- Dominion Generation net income increased $260 million in Q3 and $164 million year to date, while Dominion Energy net income declined $18 million and $26 million, respectively. Corporate and Other produced a $234 million Q3 net expense, including approximately $46 million after-tax of Questar transaction and transition costs.
- Virginia Power net income increased to $503 million from $385 million in Q3 and to $1.046 billion from $900 million year to date. Dominion Gas net income declined to $83 million from $111 million in Q3 and to $286 million from $357 million year to date.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide a clear full-year earnings or revenue guidance range.
- Management describes operating cash flow as a stable source for planned capital expenditures and dividends, but liquidity depends on continued access to debt and equity markets.
- The Questar acquisition was financed with $1.4 billion of equity units, $1.3 billion of senior notes, a $1.2 billion private-placement term loan and $500 million from an equity issuance. Dominion subsequently agreed to contribute Questar Pipeline to Dominion Midstream for total consideration of approximately $1.3 billion, with proceeds intended to repay the term loan; the transaction was expected to close by year-end 2016.
- Virginia Power recorded a $200 million contingent liability related to a proposed PJM transmission-rate settlement, offset by a $192 million regulatory asset expected to be recovered through Virginia retail rates. FERC had not yet accepted the settlement.
- Potentially material exposures include environmental compliance and ash-pond closure costs, nuclear operations and decommissioning, climate and emissions regulation, pending FERC investigations, transmission and rate proceedings, pipeline and contractor litigation, and construction and permitting risks.
- Virginia Power could face material costs from wastewater, cooling-water intake and coal-ash requirements, although rate recovery may mitigate some impacts. Dominion Gas estimated approximately $25 million of compliance costs for Pennsylvania emissions controls.
- Virginia Power stated that it could not estimate the financial impact of a Sierra Club challenge involving the proposed North Anna nuclear unit, and Dominion and Dominion Gas could not estimate potential impacts from certain methane and emissions regulations.
- Dominion recorded $65 million of organizational-design and severance costs during the first nine months, including $33 million at Virginia Power and $8 million at Dominion Gas. The filing also identifies a $37 million reduction in a postretirement benefit obligation from a plan amendment.
- Dominion’s debt covenants were unchanged and no defaults were reported. Dominion’s maximum debt-to-total-capital covenant was temporarily increased from 65% to 70% through the quarter ending June 30, 2017.
- Forward-looking results remain sensitive to weather, energy prices, interest rates, credit ratings, capital-market access, regulatory decisions, outages, environmental obligations, litigation, cybersecurity and execution of major projects and acquisitions.
Facts investors should verify
- Reconcile reported earnings growth with the unusually large renewable-energy tax credits, tax settlement benefits, PJM capacity-performance revenue and Questar transaction costs.
- Review the post-acquisition debt structure, maturities, variable-rate term loan, equity-unit obligations and the planned Questar Pipeline contribution to Dominion Midstream.
- Assess whether operating cash flow can consistently fund capital spending and dividends while cash balances remain low and debt increases.
- Track FERC’s decision on the approximately $200 million PJM settlement and the related regulatory recovery.
- Evaluate potential environmental, nuclear, ash-pond, wastewater, emissions and climate-compliance expenditures that the filing states could be material or cannot yet estimate.
- Confirm the ultimate outcome and financial exposure from the FERC combustion-turbine investigation, gas-producer litigation, pipeline-contractor litigation and other pending proceedings.
- Verify the pro forma effect of the Dominion Questar acquisition, because reported 2016 results include Questar for only part of the period and transaction-related costs.