Business Context and Reporting Period
Combined unaudited Form 10-Q filed November 3, 2014, for the quarter and nine months ended September 30, 2014, covering Dominion Resources, Inc. (now Dominion Energy, Inc.), Virginia Electric and Power Company, and Dominion Gas Holdings, LLC. Dominion operates regulated electric generation, transmission and distribution, natural gas transmission, storage, distribution, gathering and processing, LNG, and merchant generation businesses.
Key Financial Metrics
| Dominion Resources, Inc. | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Operating revenue | $3,050 million | $3,432 million | $9,493 million | $9,935 million |
| Income from operations | $921 million | $1,034 million | $2,083 million | $2,512 million |
| Net income attributable to Dominion | $529 million | $569 million | $1,067 million | $1,266 million |
| Diluted EPS | $0.90 | $0.98 | $1.83 | $2.19 |
| Operating margin | 30.2% | 30.1% | 21.9% | 25.3% |
| Net margin | 17.3% | 16.6% | 11.2% | 12.7% |
- Operating cash flow was $2.410 billion for the first nine months, down from $2.950 billion in 2013. Capital expenditures and other property additions were $3.742 billion, producing negative free cash flow before financing.
- Cash and cash equivalents were $218 million at September 30, 2014, versus $316 million at December 31, 2013.
- Total long-term debt was $20.666 billion, including $17.210 billion of long-term debt, $1.373 billion of junior subordinated notes and $2.083 billion of remarketable subordinated notes. Short-term debt was $2.629 billion.
- Dominion had $1.840 billion of available capacity under joint revolving credit facilities, against $2.629 billion of commercial paper and $31 million of letters of credit outstanding.
- Common dividends declared were $0.6000 per share in the third quarter and $1.8000 per share year to date.
- Virginia Power reported nine-month revenue of $5.765 billion and net income of $707 million, compared with $5.550 billion and $939 million, respectively, in 2013.
- Dominion Gas reported nine-month revenue of $1.388 billion and net income of $364 million, compared with $1.404 billion and $321 million, respectively, in 2013.
Material Changes Versus the Prior Comparable Period
- Dominion’s third-quarter net income declined 7% and diluted EPS declined $0.08, primarily because of lower gains on asset sales to Blue Racer and a $43 million pre-tax charge associated with Virginia legislation concerning North Anna 3 and offshore wind development.
- Year-to-date net income declined 16%, primarily because of the North Anna and offshore wind charge and a $319 million pre-tax net loss associated with repositioning the producer services business. These items were partly offset by the absence of 2013 discontinued-operation losses and improved merchant-generation margins.
- Revenue declined 11% in the third quarter and 4% year to date. The decrease reflected the exit from or reduction of producer services and electric retail energy marketing activities, partly offset by higher regulated electric revenue and merchant-generation margins.
- Other operations and maintenance expense increased $89 million in the third quarter and $96 million year to date, including the Virginia legislative charge, higher planned outage costs and lower gains on asset sales.
- Virginia Power’s year-to-date net income decreased 25%, driven mainly by the North Anna and offshore wind charge and a one-time depreciation-study charge. A $43 million pre-tax charge was recognized in the third quarter, with approximately $44 million expected in the fourth quarter.
- Dominion Gas year-to-date net income increased 13%, primarily because 2013 included impairment charges for natural gas infrastructure assets. Third-quarter net income decreased 18% because of lower gains on related-party asset sales.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide a clear consolidated earnings-per-share or revenue guidance range.
- Planned Dominion capital expenditures were approximately $5.6 billion for 2014, $4.8 billion for 2015 and $5.4 billion for 2016. Virginia Power planned approximately $3.0 billion, $2.6 billion and $3.0 billion, respectively.
- Major growth projects include solar developments, the Atlantic Coast Pipeline, Cove Point liquefaction, Western Access II, the Supply Header Project and Leidy South. The Atlantic Coast Pipeline is expected to cost $4.5 billion to $5.0 billion, excluding financing costs, and remains subject to regulatory approvals.
- Virginia approved an increased fuel rate representing approximately $300 million of annual revenue, while Virginia Power agreed to defer recovery of 50% of its estimated $268 million jurisdictional deferred fuel balance to the 2015–2016 fuel year.
- Key risks include regulatory and rate decisions, environmental compliance, coal-combustion residuals, climate-change requirements, nuclear operations and spent-fuel obligations, severe weather, commodity and interest-rate volatility, counterparty credit exposure, capital-market access, construction execution, litigation and cybersecurity.
- Cove Point liquefaction approvals were subject to rehearing and stay requests after quarter-end. Dominion identified potential risks from construction delays, cost overruns, financing, regulatory conditions, LNG export authorization and customer or counterparty performance.
- Dominion’s guarantees had a stated limit of $4.533 billion and an estimated utilized value of $1.403 billion at September 30, 2014. Dominion’s credit exposure was $129 million, and additional collateral of $117 million could have been required if specified credit-related triggers were fully activated.
- Dominion completed the sale of its electric retail energy marketing business for approximately $187 million of proceeds and recorded an approximately $100 million pre-tax gain, net of a goodwill write-off.
- Dominion issued $1 billion of 2014 Equity Units in July 2014, potentially requiring issuance of 11.5 million to 14.3 million common shares in July 2017.
Important Facts for Investors to Verify
- Reconcile reported earnings with the substantial Virginia legislative charges, producer-services losses, depreciation-study charge and asset-sale gains.
- Assess whether operating cash flow remains sufficient to fund the elevated capital program, dividends and debt maturities without continued reliance on debt financing.
- Review debt maturity schedules, commercial-paper utilization, credit-facility availability and the effect of the Equity Units and other hybrid securities on leverage and dilution.
- Monitor recovery of deferred fuel costs, regulatory assets, rate-adjustment clauses and the potential fourth-quarter North Anna and offshore wind charge.
- Evaluate permitting, financing, construction and counterparty risks for Cove Point, Atlantic Coast Pipeline and other major projects.
- Review environmental and legal contingencies, including coal-ash regulation, Possum Point, Ward Transformer, former manufactured-gas sites and Cove Point regulatory matters.
- Confirm the effect of post-quarter-end transactions, including Virginia Power’s preferred-stock redemption, additional debt issuance, the Dominion Midstream Partners IPO and the replacement of Dominion’s June 2009 hybrid securities.