Dominion Resources, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2016. The combined filing covers Dominion Resources, Inc., Virginia Electric and Power Company, and Dominion Gas Holdings, LLC. Dominion’s businesses include regulated electric generation, transmission and distribution; natural gas transmission, storage, distribution, gathering and processing; LNG operations; and merchant generation.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $2,921 million | $3,409 million | $(488) million |
| Income from operations | $882 million | $1,002 million | $(120) million |
| Net income attributable to Dominion | $524 million | $536 million | $(12) million |
| Diluted EPS | $0.88 | $0.91 | $(0.03) |
| Net cash from operating activities | $1,192 million | $1,131 million | +$61 million |
| Capital expenditures and other property additions | $1,497 million | $1,014 million | +$483 million |
| Cash and cash equivalents at March 31 | $218 million | $275 million | $(57) million |
- Operating expenses were $2.039 billion, including $703 million of operations and maintenance expense, $351 million of depreciation, depletion and amortization, and $634 million of electric fuel and energy-related purchases.
- The effective income tax rate decreased to 25.2% from 35.7%, primarily because of higher anticipated renewable-energy investment tax credits.
- Dominion reported total assets of $59.505 billion, total liabilities of $45.490 billion, and total equity of $14.015 billion at March 31, 2016.
- Reported debt included $1.774 billion of securities due within one year, $3.028 billion of short-term debt, and $24.186 billion of long-term debt, including junior and remarketable subordinated notes.
- Dominion had $5.5 billion of joint revolving credit facilities, with $2.415 billion of capacity available after commercial paper and letters of credit.
- The quarterly dividend declared per common share increased to $0.7000 from $0.6475.
Subsidiary Results
- Virginia Power: Revenue was $1.890 billion versus $2.137 billion; net income was $263 million versus $269 million. Operating cash flow increased to $1.171 billion from $961 million, while capital additions were $604 million.
- Dominion Gas: Revenue was $431 million versus $531 million; net income declined to $98 million from $161 million. Operating cash flow decreased to $233 million from $273 million, and capital additions increased to $161 million from $128 million.
Material Changes Versus Q1 2015
- Lower electric and gas sales reflected materially fewer heating degree days. Electric distribution heating degree days declined 20%, while gas distribution heating degree days declined 25%.
- Fuel and purchased-gas costs declined substantially, but the benefit was largely offset by lower revenue, higher operations and maintenance costs, and weaker gas-related results.
- Operations and maintenance expense increased $101 million, primarily due to a $70 million organizational design and workforce-reduction charge, lower gains from shale development-rights transactions, and higher other operating costs.
- Results benefited from the absence of the $85 million deferred-fuel-cost write-off recorded in 2015 and from higher renewable-energy investment tax credits.
- Dominion Energy segment net income declined $41 million, principally because of lower shale development-rights gains and unfavorable gas distribution weather. Dominion Generation declined $17 million and DVP declined $20 million.
- Investing cash use increased because capital expenditures rose, partially offset by the absence of the $495 million DCG acquisition cash outflow recorded in Q1 2015.
- Dominion remarketed $550 million of 2013 Series A remarketable subordinated notes in March 2016. The related notes were reclassified to junior subordinated notes, with interest reset to 4.104% and no remaining ability to defer interest.
Guidance, Outlook, Risks and Unusual Items
- No quantitative full-year earnings guidance is provided in the filing text. Management states that quarterly results are affected by seasonality, weather, rate changes, fuel costs and other factors.
- Dominion announced the proposed $4.4 billion cash acquisition of Questar, with approximately $1.5 billion of Questar debt expected to remain outstanding. Closing was targeted by the end of 2016, subject to shareholder and regulatory approvals. Dominion had $3.9 billion of unfunded acquisition financing commitments, reduced to $3.14 billion after an April 2016 equity issuance.
- In April 2016, Dominion issued 10.2 million shares for $756 million and issued 8.5 million shares under the 2013 Equity Units stock purchase contract.
- Four Brothers and Three Cedars solar projects, totaling approximately 530 MW, were expected to begin commercial operations by the end of Q3 2016. Dominion had contributed $445 million and $144 million, respectively, toward its required project funding through March 31.
- Virginia Power recorded a $200 million contingent liability related to expected PJM transmission cost-allocation obligations, offset by a $192 million regulatory asset expected to be recovered through retail rates.
- Environmental and regulatory exposures include coal ash closure requirements, wastewater controls, air-emissions rules, potential methane and VOC regulation, nuclear matters, and the Ward Transformer Superfund proceeding. Certain potential losses cannot be estimated; some environmental compliance expenditures could be material.
- The filing identifies risks from weather, commodity prices, interest rates, credit and counterparty exposure, capital-market access, regulatory proceedings, environmental compliance, nuclear operations, construction execution, litigation, cybersecurity and the Questar transaction.
- SunEdison filed for Chapter 11 bankruptcy in April 2016. Management did not expect a material adverse effect on Dominion or its jointly owned solar projects, but the projects and related service arrangements should be monitored.
Investor Verification Priorities
- Verify the financing plan, regulatory approvals, closing status and leverage impact of the Questar acquisition.
- Assess recurring earnings excluding the $70 million workforce-reduction charge, renewable-energy tax credits, shale-rights gains and other specific items.
- Monitor cash generation against the elevated capital program, dividend obligations and debt maturities.
- Review regulatory recovery of the $200 million PJM liability and the sustainability of Dominion’s substantial regulatory-asset balances.
- Evaluate exposure to coal ash, wastewater, emissions, nuclear decommissioning and other environmental obligations.
- Track weather-normalized electric and gas demand, merchant generation margins, commodity prices and counterparty credit exposure.