Dominion Resources, Inc. 2009 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
The filing is for Dominion Resources, Inc. (the source metadata identifies Dominion Energy, Inc.) for the quarter and six months ended June 30, 2009. Dominion operates regulated electric generation, transmission and distribution businesses; regulated natural gas transmission, storage and distribution operations; LNG facilities; merchant generation; energy marketing; and Appalachian natural gas exploration and production. The company reports through Dominion Virginia Power, Dominion Energy, Dominion Generation, and Corporate and Other.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2009 | Three Months Ended June 30, 2008 | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Operating revenue | $3.450 billion | $3.399 billion | $8.228 billion | $7.752 billion |
| Operating income | $902 million | $711 million | $1.607 billion | $1.770 billion |
| Net income attributable to Dominion | $454 million | $298 million | $702 million | $978 million |
| Diluted EPS | $0.76 | $0.51 | $1.19 | $1.69 |
| Net margin | 13.2% | 8.8% | 8.5% | 12.6% |
| Operating margin | 26.1% | 20.9% | 19.5% | 22.8% |
| Cash flow from operating activities | Not separately provided | Not separately provided | $1.902 billion | $536 million |
Second-quarter net income increased 52%, while year-to-date net income declined 28%. The quarter benefited from a nuclear asset-retirement-obligation revision, improved merchant-generation margins, fewer scheduled generating-plant outages, higher nuclear decommissioning trust earnings, and increased gas-transmission earnings following the Cove Point expansion.
At June 30, 2009, cash and cash equivalents were $64 million, compared with $66 million at December 31, 2008. Total liabilities were $30.230 billion and total common shareholders’ equity was $11.010 billion. Long-term debt was $13.956 billion; total long-term debt, including junior subordinated notes, was $15.707 billion. Securities due within one year and short-term debt totaled $1.788 billion.
Credit facilities totaled $5.239 billion, with $3.757 billion of capacity available. Six-month capital expenditures and property additions were $1.788 billion of net investing cash use, including $1.707 billion for plant construction and other property additions. The company paid $516 million of common dividends during the first six months and dividends per common share increased to $0.4375 in the second quarter from $0.395.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 2%, driven by higher regulated and nonregulated electric sales, stronger merchant-generation volumes, retail-energy-marketing growth, and Cove Point expansion revenue. These gains were partly offset by lower gas and oil prices, lower gas distribution sales, and reduced producer-services revenue.
- Second-quarter operating expenses declined $140 million despite a $212 million increase in electric fuel and energy-related purchases. Purchased gas expense declined $267 million and other operations and maintenance expense declined $107 million.
- Year-to-date operating revenue increased 6%, but operating income fell $163 million and net income declined $276 million.
- Year-to-date results included a $455 million pretax, $281 million after-tax ceiling-test impairment charge on gas and oil properties, reflecting lower natural gas and oil prices.
- Year-to-date 2008 benefited from a $136 million reversal of deferred tax liabilities related to the planned sale of Peoples and Hope and a $47 million pretax regulatory-asset benefit. These benefits did not recur in 2009.
- Net cash from operations increased by $1.366 billion, primarily because of deferred fuel and gas-cost recoveries, stronger merchant-generation cash contributions, lower outage costs, and reduced commodity-hedging collateral requirements.
- In June 2009, Dominion issued $350 million of 5.0% senior notes and $685 million of 8.375% enhanced junior subordinated notes. It also issued 10 million common shares for $314 million during the first six months.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a clear consolidated earnings or revenue guidance range. Management expects the sale of Peoples and Hope to close in 2009, subject to Pennsylvania and West Virginia regulatory approvals. Assets held for sale were $1.345 billion and related liabilities were $540 million at June 30, 2009.
- The gas and oil business remains exposed to commodity-price volatility. Management stated that further price deterioration could cause another ceiling-test impairment at September 30, 2009; any such charge would not affect cash flow but could be material to earnings.
- Virginia regulatory proceedings include a base-rate filing, fuel-factor recovery, transmission and PJM cost recovery, demand-side-management programs, and rate-adjustment clauses for the Virginia City Hybrid Energy Center and Bear Garden. Outcomes could materially affect earnings, cash flow, and customer rates.
- The company reported $416 million of issued guarantees supporting third parties and equity-method investees, including exposure related to wind projects. Subsidiary guarantees had stated limits of $4.322 billion and estimated utilized value of $1.700 billion.
- Energy-marketing activities had gross credit exposure of $1.273 billion and net exposure after collateral of $869 million. A full triggering of credit-related derivative provisions would require an additional $42 million of collateral.
- Environmental matters include EPA allegations involving the State Line and Kincaid power stations, Maryland wetlands and water-pollution claims relating to Cove Point construction, North Anna water-discharge litigation, and potential Brayton Point cooling-tower costs estimated at approximately $670 million.
- Potential future greenhouse-gas regulation could materially increase compliance costs, but the filing states that the financial impact cannot currently be predicted.
- Dominion was not selected in the Department of Energy’s announced group for federal loan-guarantee negotiations for the proposed North Anna nuclear unit and had not committed to building the unit.
- The company adopted SFAS 160 and new other-than-temporary-impairment guidance in 2009. The latter produced a $20 million pretax, $12 million after-tax cumulative accounting adjustment to accumulated other comprehensive income.
Most Important Facts for Investors to Verify
- Verify the final outcomes and timing of the Peoples and Hope divestiture and related regulatory approvals.
- Track natural gas and oil prices and the September 30, 2009 ceiling test for potential additional impairment charges.
- Review Virginia Commission and FERC decisions affecting base rates, fuel recovery, transmission costs, DSM programs, and generation-construction riders.
- Assess leverage, refinancing needs, credit-facility availability, and the effect of the new senior and junior subordinated debt on interest expense.
- Evaluate commodity-derivative valuations, collateral requirements, counterparty exposure, and sensitivity to market-price changes.
- Monitor environmental, nuclear, water-discharge, and Clean Air Act proceedings, including potential Brayton Point cooling-tower expenditures.
- Distinguish recurring operating performance from unusual items, especially the E&P impairment, nuclear ARO reduction, prior-year tax benefit, and regulatory-asset benefit.