Business Context and Reporting Period
This combined Form 10-K covers Dominion Resources, Inc. and its wholly owned subsidiary Virginia Electric and Power Company, doing business primarily as Dominion Virginia Power, for the fiscal year ended December 31, 2013. The filing predates the company’s later Dominion Energy branding. Dominion operates regulated electric generation, transmission and distribution, regulated natural gas transmission, storage and distribution, LNG services, merchant generation and energy marketing businesses across the eastern United States.
Dominion served nearly 6 million utility and retail energy customers in 15 states and had approximately 23,600 MW of generation capacity, 10,900 miles of gas transmission, gathering and storage pipelines, and 21,900 miles of gas distribution pipeline. Management’s strategy was to increase the proportion of earnings from regulated and long-term contracted businesses to approximately 80% to 90%.
Key Financial Metrics
| Metric | Dominion 2013 | Dominion 2012 | Change |
|---|---|---|---|
| Operating revenue | $13.120 billion | $12.835 billion | +$285 million |
| Income from continuing operations | $1.789 billion | $1.427 billion | +$362 million |
| Net income attributable to Dominion | $1.697 billion | $302 million | +$1.395 billion |
| Diluted EPS | $2.93 | $0.53 | +$2.40 |
| Dividends declared per share | $2.25 | $2.11 | +$0.14 |
| Cash flow from operating activities | $3.433 billion | $4.137 billion | -$704 million |
| Capital expenditures and property additions | $4.104 billion | $4.145 billion | -$41 million |
| Cash and cash equivalents | $316 million | $248 million | +$68 million |
| Long-term debt | $19.330 billion | $16.851 billion | +$2.479 billion |
| Total assets | $50.096 billion | $46.838 billion | +$3.258 billion |
Dominion’s 2013 operating margin was approximately 25.3%, compared with approximately 22.3% in 2012, based on income from operations of $3.316 billion and $2.858 billion, respectively. The filing does not present a single companywide adjusted EBITDA or free cash flow measure.
Virginia Power reported 2013 operating revenue of $7.295 billion, net income of $1.138 billion, operating cash flow of $2.329 billion, capital expenditures and nuclear fuel purchases of $2.533 billion, cash of $16 million and long-term debt of $7.974 billion. Virginia Power’s net income increased 8% from $1.050 billion in 2012.
Material Changes Versus the Prior Comparable Period
- Dominion’s earnings improvement primarily reflected the absence of the substantial 2012 losses associated with discontinued Brayton Point and Kincaid operations and the 2012 Kewaunee decommissioning decision. The 2012 results included a $1.1 billion after-tax discontinued-operations loss and a $303 million after-tax Kewaunee-related charge.
- 2013 included a $92 million after-tax loss from discontinued operations, a $109 million after-tax charge related to producer-services restructuring and natural gas infrastructure impairment, and a $28 million after-tax charge related to the Virginia Power 2013 Biennial Review Order.
- Regulated electric results benefited from higher heating demand, rate-adjustment-clause revenue and improved transmission returns. Dominion Virginia Power delivered 82.4 million MWh, up 2%, while heating degree days rose 24% and cooling degree days declined 8%.
- Dominion Energy earnings increased by $92 million, primarily from regulated gas transmission growth, a full year of the Appalachian Gateway Project, Blue Racer contributions and Marcellus acreage assignments. Producer-services earnings declined because of unfavorable hedging-price changes and the planned exit from natural gas trading and certain energy-marketing activities.
- Merchant generation and retail energy marketing remained under pressure. Merchant generation output declined 5%, partly because Kewaunee ceased operations in May 2013, and retail energy marketing earnings declined because of lower electric margins.
- Operating cash flow declined because of lower deferred fuel-cost recoveries, higher margin-collateral requirements and weaker retail and merchant margins. Dominion funded a large capital program through operating cash flow, asset-sale proceeds and additional debt.
- Dominion sold Brayton Point, Kincaid and its equity investment in Elwood for approximately $465 million net of transaction costs. It also sold or contributed additional midstream assets to Blue Racer and completed the Fairless facility purchase for $923 million.
Guidance, Outlook, Risks and Unusual Items
Management expected 2014 net income per share to increase from 2013, assuming normal weather, approximately 1.5% growth in weather-normalized electric sales, growth from electric and gas infrastructure projects, and a lower effective tax rate. Offsetting factors included higher depreciation, operating and maintenance costs, interest expense and the planned exit from nonregulated electric retail energy marketing. Dominion expected approximately $300 million of 2014 cash-tax savings from bonus depreciation; Virginia Power expected approximately $285 million.
Planned capital expenditures were approximately $5.6 billion in 2014, $4.6 billion in 2015 and $4.2 billion in 2016 for Dominion, including the Cove Point liquefaction project. Virginia Power planned approximately $3.0 billion, $2.5 billion and $2.3 billion, respectively. Cove Point was expected to cost approximately $3.4 billion to $3.8 billion, excluding financing costs, with a targeted in-service date in late 2017, subject to regulatory approvals and litigation.
- Regulatory and rate risk: Earnings depend on recovery of costs and approved returns from state commissions and FERC. Virginia Power’s 2013 Biennial Review established a 10.0% ROE for relevant future proceedings and resulted in a $55 million pre-tax charge.
- Environmental risk: Compliance with MATS, air-quality, cooling-water, wastewater, coal-ash and greenhouse-gas requirements could require material capital expenditures, facility conversions or retirements. Chesapeake and Yorktown coal units were expected to retire by 2015 and as early as 2016, respectively.
- Construction and project risk: Warren County, Brunswick County, transmission projects and Cove Point face permitting, construction, cost-overrun, schedule, financing and operating risks. Proposed Virginia legislation could have required a 70% write-off of $570 million of North Anna nuclear-development costs in 2014.
- Commodity and merchant-generation risk: Wholesale power prices, natural gas and NGL prices, generation dispatch, outages and hedging results can materially affect earnings and liquidity. Trading derivatives had a net unrealized loss of $86 million at December 31, 2013.
- Liquidity and credit risk: Dominion had $1.562 billion of available capacity under joint revolving credit facilities, while Virginia Power had $407 million. Dominion’s debt-to-total-capital ratio under credit agreements was 58%, versus a 65% limit; Virginia Power’s was 47% versus the same limit. Standard & Poor’s downgraded Dominion senior unsecured debt to BBB+ in October 2013, although ratings outlooks were stable.
- Nuclear and decommissioning risk: Dominion’s nuclear decommissioning trusts totaled $3.903 billion against estimated costs of $4.161 billion for its units; Virginia Power’s trusts totaled $1.765 billion against estimated costs of $1.917 billion. Kewaunee ceased generation and began decommissioning in 2013.
- Operational, cybersecurity and weather risk: Severe storms, outages, aging infrastructure, nuclear incidents, natural-gas incidents, terrorism and cyberattacks could disrupt service, increase costs and create liabilities.
- Contingencies: Dominion reported $4.421 billion of stated-limit subsidiary guarantees, with an estimated utilized value of $606 million. Legal, environmental and regulatory matters remain subject to uncertain outcomes; the filing states that some potential losses cannot currently be estimated.
Most Important Facts for Investors to Verify
- Confirm the company identity and period: this is a 2013 annual Form 10-K for Dominion Resources, Inc., not a quarterly filing and not a filing under the later Dominion Energy name.
- Reconcile reported EPS of $2.93 with continuing-operations EPS of $3.09 and isolate the $92 million discontinued-operations loss and other 2013 special items.
- Assess whether operating cash flow of $3.433 billion can support the planned multibillion-dollar capital program, dividends and debt service without continued reliance on debt issuance or asset sales.
- Review debt maturities, including approximately $1.505 billion of Dominion long-term debt due in 2014 and $58 million for Virginia Power, plus short-term debt and commercial paper.
- Track regulatory decisions affecting Virginia Power’s rate-adjustment clauses, fuel recovery, ROE, coal retirements and North Anna development costs.
- Verify the timing, cost, financing, regulatory approvals, customer commitments and litigation status of the Cove Point liquefaction project.
- Evaluate the sensitivity of merchant generation, producer services, derivatives and collateral requirements to commodity prices and credit ratings.
- Review nuclear decommissioning trust sufficiency, Kewaunee liabilities, spent-fuel receivables and potential future NRC compliance costs.