Dominion Energy, Inc. (formerly Dominion Resources, Inc.) — Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers Dominion Resources, Inc. and its wholly owned regulated utility subsidiary, Virginia Electric and Power Company, for the three months ended March 31, 2014. Dominion operates regulated electric and gas businesses, merchant generation, gas transmission and storage, LNG infrastructure and related energy activities. Virginia Power generates, transmits and distributes electricity in Virginia and northeastern North Carolina.
Financial performance and key metrics
| Metric | Dominion | Virginia Power |
|---|---|---|
| Operating revenue | $3.630 billion, compared with $3.523 billion | $1.983 billion, compared with $1.781 billion |
| Net income | $379 million attributable to Dominion, compared with $495 million | $324 million, compared with $287 million |
| Diluted EPS | $0.65, compared with $0.86 | Not applicable in the filing’s consolidated presentation |
| Net cash from operations | $753 million, compared with $1.052 billion | $600 million, compared with $707 million |
| Capital expenditures and property additions | $1.120 billion, compared with $904 million | $691 million, compared with $592 million, plus $68 million of nuclear fuel purchases |
| Cash and cash equivalents at March 31, 2014 | $228 million | $24 million |
| Total long-term debt | $20.458 billion | $8.719 billion |
Dominion’s operating margin, measured as income from operations divided by operating revenue, declined to approximately 21.2% from 26.4% in the prior-year quarter. Virginia Power’s comparable operating margin increased to approximately 30.9% from 29.8%.
Dominion’s total assets were $50.586 billion and total liabilities were $38.753 billion at March 31, 2014. Dominion declared a common dividend of $0.6000 per share, compared with $0.5625 in the prior-year quarter. Dominion’s effective income tax rate was 32.7%, compared with 36.5%; Virginia Power’s rate was 37.8% in both periods.
Dominion had $1.291 billion of available capacity under its revolving credit facilities, including $694 million available to Virginia Power. Dominion’s commercial paper outstanding was $1.972 billion, and Virginia Power’s was $503 million. Management reported no changes in credit ratings, no material covenant changes and no events of default.
Material changes versus the prior comparable period
- Dominion net income declined 23% and diluted EPS declined $0.21, primarily because of the repositioning of the producer services business and losses associated with the electric retail energy marketing business.
- Dominion’s net revenue declined $349 million, or 17%, despite higher reported revenue, largely because of the termination of natural gas trading and certain energy marketing activities, higher purchased power costs and lower regulated gas rider revenue.
- Dominion Generation net income increased $55 million, supported by higher merchant-generation margins, favorable weather and higher PJM ancillary-service revenue.
- Dominion’s regulated electric segment net income increased $15 million, primarily due to colder weather, rate-adjustment-clause revenue and storm-related factors. Dominion Energy net income increased $29 million, including higher Blue Racer gains.
- Virginia Power net income increased 13%, primarily from colder weather, higher rate-adjustment-clause revenue and PJM ancillary-service revenue. These benefits were partly offset by higher operating, outage, depreciation and interest costs.
- Operating cash flow declined for both registrants, while capital spending increased. Dominion’s financing cash flow improved to a $78 million inflow from a $403 million outflow, largely due to net debt issuance.
- Dominion completed the sale of its electric retail energy marketing business for approximately $187 million and recorded an approximately $100 million pretax gain, net of a $31 million goodwill write-off.
- Dominion sold the Northern System to Blue Racer for approximately $84 million and recorded an approximately $59 million pretax gain. It also acquired six California solar development projects for approximately $50 million; total expected project cost is approximately $450 million for approximately 139 MW of capacity.
- Virginia Power issued $750 million of senior notes in February 2014 and redeemed all outstanding Flex MMP preferred stock for approximately $125 million.
Guidance, outlook, risks and unusual items
The filing does not provide a clear quantitative earnings or revenue guidance range. Management stated that the sale of the retail energy marketing business and completion of the producer services repositioning were not expected to have a material negative impact on liquidity. Operations are expected to remain a stable source of cash to fund capital expenditures and dividends, but quarterly results are affected by seasonality and weather.
- Dominion recorded a $193 million after-tax net loss related to the producer services repositioning and a $33 million after-tax net loss related to the retail energy marketing business in the first quarter’s specific items.
- New environmental requirements could materially increase compliance, remediation and capital costs, including rules involving greenhouse gases, cooling-water intakes, wastewater discharges and air emissions.
- Nuclear operating, decommissioning, spent-fuel, licensing and safety requirements remain significant risks. Dominion stated that current Fukushima-related compliance work was not expected to be material, but potential future Tier 2 and Tier 3 requirements could not yet be estimated.
- Virginia Power has not committed to constructing a third North Anna nuclear unit. Legislation enacted in April 2014 permits recovery of 70% of certain previously deferred or capitalized North Anna and offshore-wind costs; Virginia Power expects to recognize the applicable charge against 2014 net income.
- Virginia Power’s remaining purchase commitments with potential variable-interest entities totaled $807 million at March 31, 2014.
- Dominion reported $69 million of issued guarantees with $54 million of exposure, maximum remaining cumulative equity-funding exposure of $80 million through 2019, and subsidiary guarantees with a stated limit of $4.358 billion and estimated utilized value of $995 million.
- Dominion’s credit exposure was $242 million. A hypothetical 10% unfavorable change in commodity prices would have reduced the fair value of its non-trading commodity derivatives by approximately $170 million at March 31, 2014.
- Management identified weather, commodity prices, counterparty credit, interest rates, access to capital, regulatory and environmental changes, nuclear operations, construction execution, litigation, cybersecurity and market competition as key forward-looking risks. No material changes to previously disclosed risk factors were reported.
Most important facts for an investor to verify
- Whether the producer services losses and retail energy marketing divestiture represent largely nonrecurring items or signal a sustained reduction in Dominion’s earnings base.
- The sustainability of higher regulated electric earnings, including the effects of weather, rate riders, PJM revenues and future fuel-cost recovery.
- Capital-spending requirements and funding needs for solar, transmission, LNG, nuclear and other infrastructure projects.
- Debt maturities, refinancing requirements, credit ratings and the remaining availability under revolving credit facilities.
- The potential 2014 earnings impact of the North Anna and offshore-wind cost-recovery legislation.
- Potential costs and timing associated with environmental, climate-change, water-intake, wastewater and nuclear regulatory requirements.
- The valuation and cash-flow implications of Blue Racer transactions, the California solar projects and the proposed Dominion Midstream partnership offering.
- The filing’s detailed commitments, guarantees, derivative exposures and pending legal or regulatory proceedings, including matters for which the potential loss cannot currently be estimated.