DOMINION ENERGY, INC quarterly report, Q3 FY2010

Dominion Resources, Inc. Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2010. The filing is a combined report for Dominion Resources, Inc. and its wholly owned subsidiary, Virginia Electric and Power Company (Virginia Power). Dominion is an energy company with regulated electric utility, merchant generation, gas transmission and storage, gas distribution, LNG and energy marketing operations.

Financial performance and position

Metric	Q3 2010	Q3 2009	9M 2010	9M 2009
Operating revenue	$3.950 billion	$3.630 billion	$11.451 billion	$11.622 billion
Income from operations	$1.119 billion	$1.088 billion	$4.963 billion	$2.641 billion
Net income attributable to Dominion	$575 million	$594 million	$2.510 billion	$1.296 billion
Diluted EPS	$0.98	$1.00	$4.23	$2.19
Operating cash flow	Not separately provided	Not separately provided	$1.884 billion	$2.982 billion

Q3 operating margin was approximately 28.3%, compared with approximately 30.0% in Q3 2009. Q3 net margin attributable to Dominion was approximately 14.6%, compared with approximately 16.4%.
Year-to-date operating income included a $2.467 billion gain on the sale of substantially all Appalachian exploration and production operations. The resulting year-to-date operating margin is therefore not comparable with the prior period.
At September 30, 2010, Dominion had cash and cash equivalents of $446 million, total assets of $42.229 billion and common shareholders’ equity of $12.095 billion.
Dominion reported total long-term debt of $16.023 billion, including $14.288 billion of long-term debt, $268 million of junior subordinated notes payable to affiliates and $1.467 billion of enhanced junior subordinated notes. Securities due within one year and short-term debt totaled $876 million.
Dominion had approximately $3.4 billion of unused credit facility capacity. Its September 2010 facilities included a $3.0 billion joint revolving facility and a $500 million joint revolving facility.
Dominion paid $810 million of common dividends during the first nine months and reported quarterly dividends of $0.4575 per common share.

Virginia Power

Q3 revenue increased to $2.111 billion from $1.938 billion; net income increased to $380 million from $315 million.
Nine-month revenue increased to $5.561 billion from $5.472 billion; net income increased to $742 million from $668 million.
Virginia Power generated $1.238 billion of operating cash flow and used $1.708 billion in investing activities during the first nine months.
At September 30, Virginia Power had $6.502 billion of long-term debt, $345 million of securities due within one year and short-term debt, and $22 million of cash.

Material changes versus the prior comparable period

Dominion completed the sale of substantially all Appalachian E&P operations in April 2010 for approximately $3.5 billion. The transaction generated approximately $2.2 billion of after-tax proceeds and an approximately $1.4 billion after-tax gain.
Dominion completed the sale of Peoples, its Pennsylvania gas distribution operations, in February 2010. The sale generated approximately $542 million of after-tax proceeds and an approximately $132 million after-tax loss, with related expenses of approximately $27 million.
Year-to-date net income increased by $1.214 billion, principally because of the Appalachian E&P sale gain and substantially lower E&P impairment charges. The improvement was partly offset by workforce-reduction costs, the Peoples sale loss, lower merchant-generation margins and the State Line impairment.
Q3 net income declined by $19 million and diluted EPS declined by $0.02. Favorable weather and stronger regulated electric results were more than offset by lower merchant-generation margins, the absence of Appalachian E&P earnings, lower nuclear decommissioning trust earnings and a higher interim tax provision.
Dominion repurchased 21.4 million common shares for approximately $900 million during the first nine months. The company stated that it did not intend to make additional repurchases using Appalachian E&P sale proceeds as of September 30.
Dominion’s operating cash flow declined by $1.098 billion year over year, primarily because of lower deferred fuel and gas cost recoveries, pension contributions, lower merchant-generation margins and refunds related to the Virginia rate settlement.
Dominion issued $250 million of 2.25% senior notes due 2015. Virginia Power issued $300 million of 3.45% senior notes due 2022.

Guidance, outlook, risks and unusual items

The filing does not provide a clear consolidated earnings guidance range for 2010.
Dominion expected planned capital expenditures of approximately $4.0 billion in 2011 and $5.1 billion in 2012. Virginia Power expected approximately $3.4 billion of capital expenditures in 2012. Increases reflected planned Marcellus-region pipeline expansion, the Warren County power station project and preliminary environmental compliance spending.
Dominion recorded a $163 million pre-tax impairment charge, or $95 million after tax, for the State Line coal-fired merchant power station. The asset was written down to an estimated fair value of $59 million, largely because of low profitability and expected environmental requirements.
Virginia Power recorded a $13 million pre-tax impairment charge, or $8 million after tax, for sulfur dioxide emission allowances not expected to be used.
A workforce-reduction program generated approximately $338 million of pre-tax charges, or $206 million after tax, for Dominion, including severance and related benefit costs.
Virginia Power’s Virginia fuel factor reduction of approximately $82 million annually was approved effective July 1, 2010. Proposed Riders R and S revenue requirements for the rate year beginning April 1, 2011 were approximately $86 million and $200 million, respectively, subject to regulatory proceedings.
Dominion faced potential additional environmental costs from stricter EPA standards for sulfur dioxide, nitrogen dioxide, ozone and the proposed Transport Rule. The ultimate impact could not yet be determined.
Virginia Power’s FERC transmission-cost complaint involved approximately $223 million of disputed costs. FERC dismissed part of the complaint and established hearings and settlement procedures for the remaining portion; the outcome was uncertain.
Virginia Power had approximately $1.6 billion of remaining purchase commitments under contracts with potential variable-interest entities, although management concluded it was not the primary beneficiary and was not subject to additional loss exposure beyond the purchase commitments.
Dominion’s net credit exposure from energy marketing and price-risk activities was $676 million after collateral. A full trigger of credit-related provisions could have required an additional $90 million of collateral at September 30.
The companies identified exposure to weather, commodity prices, merchant-generation margins, nuclear operations, environmental regulation, regulatory approvals, interest rates, credit markets, counterparty defaults, litigation and changing tax rules.
The Dodd-Frank Act could increase costs or margin requirements for derivatives if commercial hedging activities are not exempted; the filing states that the impact could not yet be assessed.

Important facts for investors to verify

Separate recurring earnings from the $1.4 billion after-tax Appalachian E&P sale gain and other unusual items, including the Peoples sale loss, workforce-reduction charges and State Line impairment.
Assess the sustainability of regulated utility earnings given unusually favorable weather, rate riders, fuel-factor changes and pending Virginia and North Carolina regulatory proceedings.
Review Dominion’s debt maturities, refinancing needs, credit ratings, covenant compliance and the availability of its revolving credit facilities.
Evaluate whether lower merchant-generation margins and environmental compliance requirements could lead to further impairments or reduced cash generation.
Monitor planned capital expenditures, including the Warren County project, Marcellus pipeline expansion and potential environmental-control investments.
Review the outcome of the FERC transmission complaint, North Anna nuclear licensing matters, environmental permit appeals and pending spent-nuclear-fuel litigation.
Reconcile reported cash flow with reported earnings, particularly the effect of asset-sale proceeds, pension contributions, rate-settlement refunds, deferred fuel recoveries and stock repurchases.