Business Context and Reporting Period
This combined Form 10-K covers Dominion Resources, Inc. and wholly owned Virginia Electric and Power Company for the fiscal year ended December 31, 2009. The filing is annual rather than a standalone fourth-quarter filing, although fourth-quarter results are separately disclosed. Dominion is an integrated energy company with regulated electric distribution and transmission, generation, natural gas transmission and storage, gas distribution, LNG, Appalachian exploration and production, energy marketing and merchant generation operations.
Dominion reported approximately 27,500 MW of generation capacity, 6,000 miles of electric transmission lines, 56,000 miles of electric distribution lines, 12,000 miles of gas transmission, gathering and storage pipelines, 21,700 miles of gas distribution pipeline and approximately 1.3 Tcfe of proved natural gas and oil reserves. Virginia Power is Dominion's regulated electric utility subsidiary.
Financial Results and Key Metrics
| Dominion Resources, Inc. | 2009 | 2008 | Change |
|---|---|---|---|
| Operating revenue | $15.131 billion | $16.290 billion | (7%) |
| Income from operations | $2.629 billion | $3.626 billion | (27%) |
| Net income attributable to Dominion | $1.287 billion | $1.834 billion | (30%) |
| Diluted EPS | $2.17 | $3.16 | ($0.99) |
| Operating margin | 17.4% | 22.3% | Down |
| Net margin | 8.5% | 11.3% | Down |
| Cash from operating activities | $3.786 billion | $2.676 billion | +$1.110 billion |
| Capital expenditures | $3.837 billion | $3.554 billion | +$283 million |
| Long-term debt | $15.481 billion | $14.956 billion | +$525 million |
| Cash and cash equivalents | $48 million | $66 million | Down |
Dominion's operating cash flow exceeded capital expenditures by approximately $49 million before dividends and other financing uses. Year-end unused credit capacity was $3.273 billion against total facility limits of $4.772 billion. Total debt to total capital, calculated under bank agreement definitions, was 56% for Dominion and 48% for Virginia Power, versus a 65% covenant limit.
Dominion paid $1.75 per common share in dividends during 2009, compared with $1.58 in 2008. Virginia Power reported revenue of $6.584 billion, net income of $356 million and operating cash flow of $1.970 billion. Virginia Power's long-term debt was $6.213 billion and year-end cash was $19 million.
Material Changes Versus the Prior Comparable Period
- Dominion net income declined 30% and diluted EPS declined 31%, primarily because of a $435 million after-tax charge related to the proposed Virginia Power rate-case settlement and a $281 million after-tax impairment of Appalachian exploration and production properties.
- Revenue declined mainly from lower regulated electric revenue, lower gas production revenue and lower commodity prices. Merchant generation margins improved by approximately $95 million after tax, and gas transmission earnings benefited from the Cove Point expansion.
- Operating cash flow increased 41%, primarily from higher deferred fuel and gas-cost recoveries, improved merchant generation and gas transmission margins, and favorable working-capital changes.
- Capital spending increased, particularly for utility generation and transmission construction. Dominion's property, plant and equipment increased to $39.036 billion from $35.448 billion.
- Long-term debt increased, while short-term debt declined. Dominion issued $1.535 billion of long-term notes and repaid $447 million of long-term debt during 2009.
- Dominion issued 14 million common shares for $456 million of cash proceeds and expects approximately $400 million of external common equity financing in 2010, potentially offset by monetization of Marcellus Shale acreage.
- Hope was transferred from Corporate and Other to Dominion Energy after management decided to retain it. Peoples remained held for sale at year-end and was sold in February 2010 for approximately $542 million of after-tax proceeds.
Guidance, Outlook, Risks and Unusual Items
Management expected stable growth in 2010 net income per share for Dominion and Virginia Power. The outlook assumed no repeat of the 2009 E&P impairment or Virginia rate-case charge, additional rate-adjustment-clause benefits from Bear Garden and the Virginia City Hybrid Energy Center, limited commodity-price exposure from hedging, favorable interest rates and proceeds from planned Marcellus acreage monetization. Management also expected an after-tax loss and transaction-related expenses from the February 2010 Peoples sale.
Planned capital expenditures were approximately $3.9 billion in 2010, $3.8 billion in 2011 and $4.2 billion in 2012 for Dominion, including $2.5 billion, $2.2 billion and $2.4 billion, respectively, for Virginia Power. Major projects included Bear Garden, the Virginia City Hybrid Energy Center, electric transmission expansions and gas infrastructure.
- The Virginia base-rate proceeding remained material. The filing recorded a $782 million pretax, $477 million after-tax Virginia Power charge, including estimated customer refunds and write-offs of regulatory assets. The final regulatory outcome could differ from the estimate.
- Virginia Power's 2010 rate-adjustment clauses included approximately $91 million for the Virginia City Hybrid Energy Center and $73 million for Bear Garden, subject to revision based on the final authorized return on equity.
- Environmental and regulatory exposure is significant. Dominion expected 2010 and 2011 environmental protection expenses of approximately $268 million and $274 million, respectively, plus environmental capital expenditures of approximately $383 million and $322 million.
- Potential future costs relate to greenhouse-gas regulation, coal combustion byproducts, cooling-water requirements, air-emissions rules and environmental remediation. The filing states that the financial effect of future climate regulation cannot yet be estimated.
- Merchant generation and Appalachian E&P results remain exposed to commodity prices, weather, outages, reserve estimates, drilling results and counterparty credit. Dominion's commodity-related credit exposure was $650 million net of collateral at year-end.
- Nuclear obligations include estimated Dominion decommissioning costs of $4.5 billion and Virginia Power decommissioning costs of $2.2 billion in 2009 dollars. Nuclear decommissioning trust funds totaled $2.625 billion for Dominion and $1.204 billion for Virginia Power.
- Dominion had $261 million of guarantees supporting third parties and equity-method investees, plus subsidiary guarantees with a stated limit of $4.377 billion and an estimated utilized value of $1.388 billion.
- The companies had a $155 million court judgment against the Department of Energy for spent-nuclear-fuel costs, but payment was stayed pending appeal and recovery was uncertain.
Important Facts for Investors to Verify
- Confirm the final Virginia Commission resolution of the 2009 rate case, including customer refunds, authorized ROE and treatment of regulatory assets.
- Reconcile reported GAAP earnings with management's operating earnings measure, particularly the $435 million after-tax rate-case charge, $281 million E&P impairment and $62 million after-tax nuclear ARO benefit.
- Review 2010 cash requirements, planned capital expenditures, equity issuance needs and the proceeds and accounting impact of the Peoples sale.
- Assess debt maturities, credit-facility renewals, covenant headroom and potential collateral requirements on commodity derivatives.
- Evaluate the sensitivity of merchant generation and Appalachian E&P earnings to natural-gas, electricity and emissions-allowance prices.
- Monitor environmental litigation and rulemaking, including EPA proceedings involving State Line and Kincaid, cooling-water requirements and greenhouse-gas regulation.
- Review nuclear decommissioning trust performance, pension and postretirement obligations, insurance coverage and potential funding requirements.
- Verify the filing's legal-entity scope: the source is filed under Dominion Resources, Inc., while the request metadata identifies Dominion Energy, Inc.; the filing does not identify Dominion Energy, Inc. as the registrant.