Business Context and Reporting Period
This combined unaudited Form 10-Q covers Dominion Resources, Inc. (now Dominion Energy), Virginia Electric and Power Company, and Dominion Gas Holdings, LLC for the three and six months ended June 30, 2016. Dominion operates regulated electric generation, transmission and distribution businesses, regulated natural-gas transmission, storage and distribution operations, merchant generation, LNG infrastructure, and gas gathering and processing activities.
Key Financial Metrics
| Dominion consolidated | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $2,598 million | $2,747 million | $5,519 million | $6,156 million |
| Income from operations | $781 million | $773 million | $1,663 million | $1,775 million |
| Net income attributable to Dominion | $452 million | $413 million | $976 million | $949 million |
| Diluted EPS | $0.73 | $0.70 | $1.61 | $1.60 |
| Dividends declared per share | $0.7000 | $0.6475 | $1.4000 | $1.2950 |
| Net cash from operating activities | Not separately provided | Not separately provided | $2,018 million | $2,160 million |
Dominion's approximate consolidated net margin was 17.4% in the second quarter and 17.7% for the first six months, compared with approximately 15.0% and 15.4%, respectively, in the comparable 2015 periods. The filing does not present a consolidated EBITDA measure.
- Cash flow and capital spending: Six-month operating cash flow was $2.018 billion. Capital additions were $3.160 billion, resulting in substantial cash investment needs. Investing cash flow was $(3.725) billion and financing cash flow was $1.477 billion.
- Cash and liquidity: Cash and cash equivalents were $377 million at June 30, 2016, compared with $607 million at December 31, 2015. Restricted cash was $516 million, including $500 million associated with the proposed Questar acquisition. Dominion reported $2.011 billion of available capacity under joint revolving facilities.
- Debt: Dominion reported $3.437 billion of short-term debt, $1.348 billion of securities due within one year, and $24.787 billion of long-term debt, including junior subordinated and remarketable subordinated notes. Total reported debt and securities therefore approximated $29.6 billion.
- Balance sheet: Total assets were $61.369 billion and total equity was $15.452 billion at June 30, 2016, versus $58.648 billion and $13.602 billion, respectively, at year-end 2015.
- Virginia Power: Second-quarter net income was $280 million versus $246 million; six-month net income was $543 million versus $515 million. Six-month operating cash flow was $1.702 billion and long-term debt was $9.562 billion.
- Dominion Gas: Second-quarter net income was $105 million versus $85 million; six-month net income was $203 million versus $246 million. Six-month operating cash flow was $325 million and long-term debt was $3.541 billion.
Material Changes Versus the Prior Comparable Period
- Second-quarter Dominion net income increased 9%, while six-month net income increased 3%. The principal benefits were the absence of 2015 ash-pond and landfill closure charges, lower purchased electric capacity costs, higher shale-rights gains, and higher renewable investment tax credits.
- Revenue declined 5% in the quarter and 10% year to date, primarily because of lower retail electric sales, reduced gas transportation and storage revenue, lower gas sales, and weaker nonregulated generation volumes.
- Unusually mild weather reduced cooling degree days by 34% in the second quarter and 33% year to date in the electric distribution service area. Heating degree days declined 13% year to date.
- Merchant generation results weakened because of increased planned and unplanned outage days. Dominion Generation net income fell $79 million in the quarter and $96 million year to date.
- Dominion Energy segment net income increased $33 million in the quarter but decreased $8 million year to date. The quarterly increase included a $21 million after-tax benefit from shale development-rights transactions; year-to-date results reflected the absence of a comparable 2015 gain.
- Dominion recorded $65 million of organizational-design and severance costs in the first six months, including $40 million after tax. Virginia Power recorded $33 million and Dominion Gas $8 million of pretax costs.
- Common stock issuance generated $1.458 billion of financing cash flow, including a $756 million underwritten offering in April and 8.5 million shares issued under equity-unit purchase contracts. Average diluted shares increased to 607.6 million from 591.2 million year to date.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- The filing does not provide a clear consolidated earnings or revenue guidance figure.
- Dominion targeted closing the approximately $4.4 billion Questar acquisition by the end of 2016. Questar debt of approximately $1.5 billion was expected to remain outstanding. The transaction remained subject to regulatory approvals and other closing conditions; termination fees were $154 million for Dominion and $99 million for Questar under specified circumstances.
- Virginia Power recorded a $200 million contingent liability for a proposed PJM transmission settlement, offset by a $192 million regulatory asset expected to be recovered through Virginia retail rates. FERC had not yet accepted the settlement at the reporting date.
- Virginia Power's proposed fuel-rate decrease represented a projected $286 million revenue reduction for the period beginning July 1, 2016, subject to the pending regulatory process.
- Environmental and regulatory exposure includes coal-ash closure obligations, wastewater requirements, emissions and methane regulation, climate-change rules, nuclear safety and decommissioning matters, and potential remediation costs. The filing states that some potential environmental impacts could be material but cannot currently be estimated.
- Dominion's guarantees had a stated limit of $6.124 billion and an estimated utilized value of $1.244 billion. Dominion also had $120 million of surety bonds and $52 million of authorized letters of credit.
- SunEdison filed for Chapter 11 bankruptcy in April 2016. Dominion did not expect a material adverse effect on Dominion or its jointly owned solar projects.
- In July 2016, after the reporting date, Dominion entered into a $365 million corporate-office construction and lease arrangement with potential recourse if specified termination or sale shortfalls occur.
- Principal market risks are commodity prices, interest rates, investment values, counterparty credit, weather, regulatory outcomes, construction execution, nuclear operations, environmental compliance, cybersecurity, and access to capital markets.
Important Facts for Investors to Verify
- Questar transaction closing, permanent financing, regulatory approvals, and the effect of assumed Questar debt on leverage and credit ratings.
- Actual cash generation relative to capital expenditures, dividends, and acquisition funding requirements.
- Debt maturities, interest costs, credit-facility availability, and the effect of the remarketed equity-unit notes on financing flexibility.
- Weather-normalized electric and gas demand, merchant-generation outage performance, and the sustainability of shale-rights and renewable tax-credit benefits.
- Resolution and rate recovery of the proposed PJM settlement and the Virginia fuel-rate proceeding.
- Updated estimates for coal-ash, wastewater, climate, emissions, nuclear, and other environmental obligations.
- Whether the organizational-design charges and other specific items are nonrecurring and how reported earnings compare with underlying operating performance.