Dominion Resources, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2012. This combined filing covers Dominion Resources, Inc. and its wholly owned subsidiary Virginia Electric and Power Company, doing business as Virginia Power. Dominion is an energy producer and transporter, while Virginia Power is a regulated electric utility serving Virginia and northeastern North Carolina. Financial statements are unaudited and 2011 amounts were recast for Salem Harbor and State Line discontinued operations.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $3.053 billion | $3.288 billion | $6.515 billion | $7.271 billion |
| Income from operations | $617 million | $733 million | $1.530 billion | $1.726 billion |
| Net income attributable to Dominion | $258 million | $336 million | $752 million | $815 million |
| Diluted EPS | $0.45 | $0.58 | $1.31 | $1.41 |
| Operating margin | 20.2% | 22.3% | 23.5% | 23.7% |
| Net margin | 8.4% | 10.2% | 11.5% | 11.2% |
| Dividends declared per common share | $0.5275 | $0.4925 | $1.0550 | $0.9850 |
- Cash flow: Six-month operating cash flow was $2.398 billion, compared with $1.287 billion in 2011. Capital additions were $1.960 billion, producing negative investing cash flow of $1.864 billion. Financing used $474 million, including $603 million of common dividends. Ending cash was $162 million versus $80 million at June 30, 2011.
- Balance sheet and liquidity: Total assets were $46.416 billion and total liabilities were $34.206 billion at June 30, 2012. Dominion reported $2.141 billion of securities due within one year, $1.530 billion of short-term debt, and $17.003 billion of long-term debt. Credit facilities totaled $3.5 billion, with $1.934 billion available, including $770 million available under Virginia Power’s facilities.
- Virginia Power: Six-month revenue was $3.510 billion, net income was $415 million, and operating cash flow was $1.351 billion. Long-term debt was $6.285 billion, short-term debt was $465 million, and cash was $27 million.
Material Changes Versus Prior Comparable Period
- Dominion’s second-quarter net income declined 23%, and year-to-date net income declined 8%. Virginia Power’s second-quarter net income declined 29%, and year-to-date net income declined 20%.
- Revenue declined primarily because of lower merchant generation prices and volumes, milder weather, lower gas-related revenue, and lower PJM ancillary-service revenue. These effects were partly offset by higher rate-adjustment-clause revenue and improved retail energy marketing results.
- Second-quarter net revenue decreased only $16 million, but operating costs were pressured by $64 million of additional storm damage and service-restoration costs, higher transmission expenditures, depreciation, taxes, and planned outage costs.
- Year-to-date merchant generation contribution declined $98 million after tax, primarily because of lower merchant generation margins and unfavorable weather. DVP’s contribution increased $45 million, while Dominion Energy’s contribution decreased $15 million.
- Operating cash flow increased $1.111 billion, mainly from higher deferred-fuel-cost recoveries, lower margin collateral requirements, lower state income-tax payments, and working-capital changes. Capital spending increased by $325 million.
- The effective tax rate for Dominion’s continuing operations was 34.5% for the first six months, compared with 38.2% in 2011, partly reflecting a $22 million reduction in a valuation allowance.
Outlook, Unusual Items, Risks and Contingencies
- Dispositions: Dominion agreed to sell Salem Harbor; FERC approval was received in July 2012 and closing was expected in the third quarter. The transaction generated a $27 million pretax, $16 million after-tax charge. State Line was sold during the second quarter after retiring in March 2012.
- Storms and discontinued operations: Late-June storms generated a $74 million pretax, $45 million after-tax restoration charge. Salem Harbor and State Line produced a combined $17 million after-tax loss for the first six months, and Kewaunee generated a $23 million after-tax loss.
- Regulatory developments: Virginia Power implemented an interim $389 million reduction in annual fuel revenue effective July 1, 2012. Rider T1, generation riders, demand-side-management programs, and the Biennial Review remain subject to regulatory proceedings and approvals.
- Construction and growth: The Virginia City Hybrid Energy Center began commercial operations in July 2012. Dominion is pursuing a Cove Point LNG export project with planned capacity of approximately 750 million cubic feet per day, subject to definitive agreements, regulatory approvals, litigation, and engineering completion. Virginia Power proposed approximately $151 million of transmission projects, with expected completion by May 2015 subject to approvals.
- Environmental and nuclear risks: Potential costs relate to Clean Air Act matters, CSAPR and particulate standards, cooling-water requirements, Superfund sites, nuclear safety enhancements, spent nuclear fuel, and future climate regulations. The companies stated that several known compliance costs were not expected to be material, but some matters cannot yet be estimated and could be material.
- Contingencies: Virginia Power recorded a $33 million accrual for potential PJM ancillary-service billing adjustments. Dominion had $424 million of net credit exposure after collateral, $86 million of guarantees issued primarily for equity-method investees, and $718 million of estimated utilized value under subsidiary guarantees.
- MF Global: Dominion had approximately $73 million of margin posted with MF Global at the bankruptcy date and had recovered approximately $8 million. The ultimate recovery and timing remain uncertain.
- No formal earnings guidance: The filing does not provide a clear quantitative full-year earnings or revenue guidance figure. Management emphasized stable operating cash flow but cautioned that results depend on weather, commodity prices, regulation, outages, credit markets, environmental compliance, and capital-project execution.
Important Facts for Investors to Verify
- Confirm the final closing and proceeds from the Salem Harbor sale and the completed State Line disposition.
- Assess the sustainability of operating cash flow after considering deferred-fuel recoveries, working-capital movements, and substantially higher capital expenditures.
- Monitor Dominion’s debt maturities, short-term borrowing, credit-facility availability, and exposure to commodity-related collateral requirements.
- Evaluate the effect of Virginia fuel-factor and transmission-rider decisions on future regulated revenue and cash flow.
- Track merchant-generation margins, realized power and gas prices, generation volumes, outage performance, and Kewaunee’s potential sale or impairment.
- Review unresolved environmental, nuclear, PJM, MF Global, spent-fuel, and regulatory matters for changes in estimated exposure.
- Verify the assumptions supporting the $923 million Fairless purchase option and realization of related tax benefits.
- Review the filing’s forward-looking statements and the 2011 Form 10-K risk factors because the filing states that no material changes to previously disclosed risk factors occurred.