Business Context and Reporting Period
This combined Form 10-K covers Dominion Resources, Inc. (now Dominion Energy, Inc.), Virginia Electric and Power Company, and Dominion Gas Holdings, LLC for the fiscal year ended December 31, 2015. Dominion is an integrated energy company focused on regulated electric generation, transmission and distribution; regulated natural gas transmission, storage and distribution; LNG; merchant generation; and related energy services. It served more than 5 million customers in 14 states and operated approximately 24,300 MW of generation capacity, 12,200 miles of gas transmission, gathering and storage pipeline, and 22,000 miles of gas distribution pipeline.
Management expected 80% to 90% of earnings from primary operating segments to come from regulated or long-term contracted businesses. The filing was audited by Deloitte & Touche, which issued unqualified opinions on Dominion’s financial statements and internal control over financial reporting.
Financial Highlights
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $11.683 billion | $12.436 billion | Down 6.1% |
| Income from operations | $3.536 billion | $2.721 billion | Up 30.0% |
| Net income attributable to Dominion | $1.899 billion | $1.310 billion | Up 45% |
| Diluted EPS | $3.20 | $2.24 | Up $0.96 |
| Operating margin | 30.3% | 21.9% | Expanded |
| Net margin | 16.3% | 10.5% | Expanded |
| Cash flow from operations | $4.475 billion | $3.439 billion | Up $1.036 billion |
| Capital expenditures and other property additions | $5.575 billion | $5.345 billion | Up $230 million |
| Total assets | $58.797 billion | $54.327 billion | Up $4.470 billion |
| Long-term debt | $23.616 billion | $21.805 billion | Up $1.811 billion |
Cash and cash equivalents ended at $607 million, compared with $318 million in 2014. Net cash used in investing activities was $6.503 billion, while financing activities provided $2.317 billion. Dominion had $932 million of available capacity under its revolving credit facilities at year-end, against $3.509 billion of commercial paper and $59 million of letters of credit outstanding.
Total contractual cash payments, including debt, interest, leases, purchase obligations and other obligations, were estimated at $52.292 billion. Planned capital expenditures were approximately $6.9 billion in 2016, $4.9 billion in 2017 and $4.3 billion in 2018.
Segment Results
- DVP: Net income contribution was $490 million, down from $502 million. Electricity delivered was 83.9 million MWh, and average electric distribution customer accounts increased 1% to 2.525 million.
- Dominion Generation: Net income contribution was $1.120 billion, up from $1.061 billion, reflecting higher merchant generation output, additional solar facilities, lower outage costs and rate adjustment clause growth.
- Dominion Energy: Net income contribution was $680 million, down from $717 million. Results were pressured by lower NGL prices and the absence of certain Blue Racer asset-sale gains, partly offset by shale-rights gains, gas infrastructure growth and the DCG acquisition.
- Virginia Power: Net income was $1.087 billion, up from $858 million. Operating revenue was $7.622 billion and operating cash flow was $2.555 billion.
- Dominion Gas: Net income was $457 million, down from $512 million. Operating revenue declined to $1.716 billion from $1.898 billion, while operating cash flow increased to $628 million from $471 million.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower commodity prices, lower nonregulated electric and gas sales, and reduced NGL revenue. Purchased gas expense fell $804 million and electric fuel and energy-related purchases fell $675 million.
- Net income and EPS increased substantially because 2015 did not include the large 2014 after-tax charges associated with Virginia legislation concerning North Anna and offshore wind projects, the producer-services restructuring, or the 2014 Liability Management Exercise.
- Net revenue increased 10% despite lower reported revenue, driven by the absence of producer-services losses, higher electric utility rate-adjustment clause revenue, improved merchant generation margins, and the absence of losses from the sold electric retail energy marketing business.
- Dominion acquired DCG for $497 million and acquired various solar projects for $381 million during 2015. Dominion also acquired 50% interests in the Four Brothers and Three Cedars solar projects and Dominion Midstream acquired a 25.93% interest in Iroquois.
- Dominion issued $2.550 billion of senior notes and repaid or repurchased $892 million of long-term debt. Common equity issuance generated approximately $783 million of net cash proceeds, contributing to share dilution.
- Virginia legislation required an $85 million write-off of deferred fuel costs in the first quarter of 2015. The Virginia Commission also ordered approximately $20 million of customer bill credits following its biennial review.
- Virginia Power recorded a $386 million asset-retirement obligation related primarily to future coal-ash pond and landfill closure costs, including a $99 million incremental expense charge.
Guidance, Outlook, Risks and Unusual Items
Management expected 2016 net income per share to increase compared with 2015. The outlook assumed more normal electric-utility weather, approximately 1% growth in weather-normalized electric sales, continued rate-adjustment clause and gas-infrastructure growth, lower charges for deferred fuel and ash-pond costs, and a lower effective tax rate from investment tax credits. Offsetting factors included higher depreciation, higher operating and maintenance costs, and share dilution.
Dominion’s major growth projects included the approximately $1.4 billion Cove Point Liquefaction Project, expected to enter service in late 2017; the $4.5 billion to $5.0 billion Atlantic Coast Pipeline, expected in late 2018 subject to approvals; Brunswick County generation, expected in mid-2016; and Greensville County generation, subject to regulatory approval.
- Regulatory risk is significant. Virginia base rates were frozen until at least December 1, 2022, and biennial reviews were suspended for test periods beginning in 2015 through 2019. This limits recovery flexibility if costs rise or assets are retired early.
- Environmental requirements, including the Clean Power Plan, Clean Air Act rules, coal-combustion-residual requirements, wastewater standards, methane controls and potential CSAPR changes, could require material capital and operating expenditures. The Clean Power Plan was stayed by the U.S. Supreme Court in February 2016.
- Coal-ash litigation and closure obligations remain material. The filing states that actual asset-retirement obligations may vary substantially from current estimates.
- Dominion faces execution, permitting, financing and stakeholder risks on multiple large infrastructure projects, including the Atlantic Coast Pipeline and Cove Point Liquefaction Project.
- Merchant generation and NGL activities remain exposed to commodity prices, market demand, outages, counterparty credit and changes in wholesale-market design.
- Nuclear operations carry risks involving safety, spent fuel, decommissioning, insurance, NRC requirements and potential extended outages. Nuclear decommissioning trust funds totaled approximately $4.183 billion for Dominion and $1.945 billion for Virginia Power at year-end.
- Dominion announced in February 2016 a proposed acquisition of Questar for approximately $4.4 billion in cash plus assumed debt of approximately $1.6 billion. The transaction required shareholder and regulatory approvals and carried a potential $154 million termination fee payable by Dominion under specified circumstances.
- Standard & Poor’s downgraded Dominion’s issuer rating to BBB+ and senior unsecured debt rating to BBB in February 2016; Fitch and Moody’s ratings remained investment grade with stable outlooks as of February 23, 2016.
Most Important Facts for Investors to Verify
- Reconcile the 45% earnings increase with the absence of significant 2014 special charges and assess the sustainability of underlying segment earnings.
- Review liquidity relative to $3.509 billion of commercial paper, scheduled debt maturities, planned capital spending and the proposed Questar acquisition.
- Assess the effect of the Virginia rate freeze, customer credits, pending rider cases and the appeal of the 2015 Biennial Review Order.
- Verify the cost, schedule, permitting status and financing plan for Cove Point, Atlantic Coast Pipeline, Brunswick County, Greensville County and other major projects.
- Evaluate coal-ash closure estimates, related litigation, environmental compliance costs and the potential for further asset-retirement obligations.
- Monitor credit-rating changes, interest-rate exposure, collateral requirements and debt-covenant headroom.
- Assess commodity-price sensitivity in merchant generation, NGL processing and gas gathering, including the effect of lower natural gas and NGL prices on producer activity and volumes.
- Review the Questar transaction terms, required approvals, financing mix, integration assumptions and potential impact on leverage, ratings and shareholder dilution.