Business Context and Reporting Period
This combined unaudited Form 10-Q was filed by Dominion Resources, Inc. and its wholly owned subsidiary Virginia Electric and Power Company, doing business as Virginia Power, for the quarter ended March 31, 2011. Dominion is an energy producer and transporter with regulated electric, gas transmission and storage, gas distribution, merchant generation and energy marketing operations. The filing text does not use the current company name “Dominion Energy, Inc.”
Key Financial Metrics
| Dominion Resources, Inc. Consolidated | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $4,057 million | $4,168 million | $(111) million |
| Income from operations | $963 million | $734 million | $229 million |
| Operating margin | 23.7% | 17.6% | Up 6.1 percentage points |
| Net income attributable to Dominion | $479 million | $174 million | $305 million |
| Diluted EPS | $0.82 | $0.29 | $0.53 |
| Net margin | 11.8% | 4.2% | Up 7.6 percentage points |
| Cash flow from operations | $912 million | $1,650 million | $(738) million |
| Capital additions | $806 million | $904 million | $(98) million |
| Cash and cash equivalents | $188 million | $85 million | $103 million |
Dominion paid common dividends of $285 million, or $0.4925 per share, and repurchased more than 6 million shares for approximately $274 million during the quarter. At March 31, 2011, total liabilities were $30.6 billion, including $16.8 billion of long-term debt and $848 million of short-term debt. Dominion had $2.539 billion of available capacity under its joint revolving credit facilities.
Virginia Power reported operating revenue of $1.757 billion, net income of $278 million and operating cash flow of $524 million, compared with $1.739 billion, $95 million and $769 million, respectively, in the prior-year quarter. Its long-term debt was $6.861 billion, short-term debt was $582 million, cash was $80 million, and available revolving-credit capacity was $580 million.
Material Changes Versus the Prior Comparable Period
- Dominion’s earnings improvement primarily reflected the absence of 2010 workforce-reduction charges and the $149 million after-tax loss from the sale of Peoples. The 2011 comparison therefore benefited materially from nonrecurring items.
- Operating and maintenance expense declined $207 million, principally because 2010 included $338 million of workforce-reduction charges. This was partly offset by higher bad-debt expense, a $55 million State Line impairment charge, and higher outage costs.
- Net revenue increased only $7 million despite lower revenue, as lower purchased-gas expense and stronger regulated revenue offset the sale of Appalachian exploration and production operations and weaker merchant-generation margins.
- Merchant-generation earnings declined, with lower realized prices and volumes. Merchant electricity supplied decreased 10% to 11.2 million MWh.
- Operating cash flow fell 45%, primarily because of higher margin-collateral requirements, lower merchant-generation margins, unfavorable weather and working-capital changes. Investing cash use increased because the 2010 period included proceeds from the Peoples sale, while financing cash use improved due to 2011 debt issuance versus substantial 2010 debt repayment.
- Dominion issued $500 million of 4.45% senior notes due 2021 and $400 million of 1.80% senior notes due 2014. Virginia Power remarketed $160 million of bonds supporting the Virginia City Hybrid Energy Center.
- Effective tax rates declined to 39.1% from 47.4% for Dominion and to 38.0% from 47.3% for Virginia Power. The 2010 rates included the effect of health-care legislation; 2011 also included approximately $67 million of Dominion and $33 million of Virginia Power tax adjustments related to bonus-depreciation guidance.
Outlook, Commentary, Risks and Unusual Items
- The filing does not provide a clear consolidated earnings or revenue guidance target. Management states that operations are expected to provide a stable source of cash flow for capital expenditures and dividends, but results remain subject to seasonal and market factors.
- Virginia Power filed its 2011 biennial rate review. Its authorized ROE was 11.9%, with potential customer credits if test-year earnings exceed specified thresholds. Final action was expected by November 30, 2011.
- Annual revenue requirements for Riders R and S increased to $78 million and $199 million, respectively, for the April 2011–March 2012 rate year. Rider updates for DSM programs C1 and C2 were approximately $6 million and $12 million.
- Dominion recorded a $55 million pre-tax, $39 million after-tax impairment of the State Line coal plant and expects the plant may retire before the end of its previously estimated useful life.
- Dominion decided to pursue a sale of the 556 MW Kewaunee nuclear facility. A future sale could result in held-for-sale classification and an impairment charge; completion was not assured.
- Following the Fukushima events, Dominion and Virginia Power expected additional nuclear-safety reviews that could affect future operations or capital requirements.
- Material risks include commodity-price volatility, merchant-generation competition, weather, environmental and climate regulation, nuclear operations, regulatory approvals, construction execution, interest rates, credit ratings, counterparty performance and access to capital markets.
- Dominion’s gross energy-marketing credit exposure was $493 million, with 83% attributable to investment-grade counterparties. A full trigger of credit-related derivative provisions would have required approximately $103 million of additional collateral at March 31, 2011.
- Virginia Power had approximately $1.5 billion of remaining purchase commitments with potential variable-interest-entity counterparties, although management concluded it was not the primary beneficiary and had no additional exposure beyond the commitments.
- Management reported no material changes to debt covenants, no covenant defaults, no material changes to off-balance-sheet arrangements and effective disclosure controls.
Important Facts for Investors to Verify
- Determine how much of the $305 million year-over-year earnings increase is attributable to the absence of 2010 special charges rather than recurring operating improvement.
- Review merchant-generation margins, realized power prices, outage activity and the carrying value or disposition prospects of State Line and Kewaunee.
- Assess the sustainability of cash flow after the 45% decline in operating cash flow, approximately $806 million of quarterly capital additions, dividends and share repurchases.
- Monitor Dominion’s leverage, refinancing needs, credit ratings, $2.539 billion of unused credit capacity and collateral requirements tied to commodity derivatives.
- Follow Virginia Power’s biennial rate review, rider recovery and potential customer-credit obligations, including the requested 12.5% ROE.
- Evaluate potential nuclear-safety capital requirements following Fukushima-related reviews and the status of the North Anna 3 licensing process.
- Verify regulatory, environmental, litigation and guarantee exposures, including Dominion’s stated guarantee limits of $4.715 billion and estimated utilized value of $1.409 billion.