Business Context and Reporting Period
This combined Form 10-K covers Dominion Resources, Inc., Virginia Electric and Power Company, and Dominion Gas Holdings, LLC for the fiscal year ended December 31, 2014. The filing describes a diversified energy business focused on regulated electric generation, transmission and distribution; regulated natural gas transmission, storage and distribution; merchant generation; LNG infrastructure; and related midstream investments. Dominion served more than 5 million customers in 10 states and operated approximately 24,600 MW of generation capacity, 6,400 miles of electric transmission lines, 57,100 miles of electric distribution lines, and 32,800 miles of natural gas pipelines.
The filing is an annual report rather than a standalone quarterly filing, but it provides unaudited fourth-quarter data. Dominion’s fourth-quarter 2014 revenue was $2.943 billion, net income attributable to Dominion was $243 million, and diluted EPS was $0.42.
Financial Performance and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $12.436 billion | $13.120 billion | Down $684 million |
| Income from operations | $2.721 billion | $3.316 billion | Down $595 million |
| Net income attributable to Dominion | $1.310 billion | $1.697 billion | Down 23% |
| Diluted EPS | $2.24 | $2.93 | Down $0.69 |
| Operating cash flow | $3.439 billion | $3.433 billion | Essentially unchanged |
| Capital expenditures and other property additions | $5.345 billion | $4.065 billion | Increased $1.280 billion |
| Cash and cash equivalents | $318 million | $316 million | Essentially unchanged |
| Total assets | $54.327 billion | $50.096 billion | Increased $4.231 billion |
| Long-term debt | $21.805 billion | $19.330 billion | Increased $2.475 billion |
| Dividends declared per share | $2.40 | $2.25 | Increased 7% |
Calculated consolidated margins were approximately 21.9% for operating income and 10.5% for net income in 2014, compared with approximately 25.3% and 12.9%, respectively, in 2013. The filing does not present a separate consolidated EBITDA measure.
- DVP contributed $502 million of net income, up from $475 million.
- Dominion Generation contributed $1.101 billion, up from $1.031 billion.
- Dominion Energy contributed $677 million, up from $643 million.
- Corporate and Other produced a $970 million net expense, compared with a $452 million net expense in 2013.
- Virginia Power reported $858 million of net income, down from $1.138 billion, while Dominion Gas reported $512 million, up from $461 million.
- Dominion’s credit facilities totaled $4.5 billion, with $1.677 billion of capacity available at December 31, 2014.
- Dominion’s actual debt-to-total-capital ratio under its bank agreements was 59%, below the 65% maximum permitted ratio.
- Credit ratings remained investment grade, although Standard & Poor’s changed its outlook to negative in November 2014.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of the March 2014 sale of the electric retail energy marketing business and the repositioning of producer services, including the termination of natural gas trading and certain energy marketing activities.
- Net income declined primarily because of $248 million of after-tax charges related to Virginia legislation concerning North Anna 3 and offshore wind, a $193 million after-tax charge related to producer-services restructuring, and a $174 million after-tax charge from the Liability Management Exercise.
- Other operations and maintenance expense increased to $2.765 billion from $2.459 billion, reflecting the Virginia legislative charges, higher planned outage costs, and a $121 million pre-tax charge related to a proposed settlement for ash pond closure costs.
- Interest and related charges increased 36% to $1.193 billion, principally because of the Liability Management Exercise and higher debt outstanding.
- Income tax expense fell to $452 million from $892 million, helped by lower pretax income and renewable-energy investment tax credits. Dominion’s effective tax rate was 25.4%, compared with 33.0% in 2013.
- Operating cash flow remained stable despite lower earnings, but investing cash usage increased to $5.181 billion from $3.458 billion because of higher capital spending and lower asset-sale proceeds.
- Dominion issued $6.085 billion of long-term debt and repaid or repurchased approximately $4.0 billion, including redemption premiums. Virginia Power redeemed all outstanding preferred stock during 2014.
- Dominion Midstream completed its initial public offering, generating $392 million of net proceeds; Dominion retained control and consolidated the entity.
- Dominion acquired and developed several solar projects, including projects totaling approximately 179 MW that were acquired during 2014, and continued construction of regulated and contracted infrastructure.
Guidance, Outlook, Risks, Contingencies and Unusual Items
Management expected 2015 net income per share to increase from 2014. The outlook assumed more normal weather, approximately 1% growth in weather-normalized electric sales, additional rate-adjustment-clause revenue, continued electric and gas infrastructure growth, and the absence of several 2014 charges. These benefits were expected to be partly offset by higher depreciation, operating and maintenance expenses, and a higher effective tax rate. Dominion also established a 2015 annual dividend rate of $2.59 per share, an 8% increase over the 2014 rate, and targeted a 70% to 75% payout ratio.
- Major growth projects included the approximately $2.6 billion Cove Point Liquefaction Project, the $4.5 billion to $5.0 billion Atlantic Coast Pipeline, Brunswick County generation, electric-grid modernization, solar projects, and multiple gas transmission projects. Planned capital expenditures were approximately $5.8 billion in 2015, $5.6 billion in 2016, and $4.6 billion in 2017.
- The Cove Point Liquefaction Project began construction in October 2014 and was expected to enter service in late 2017. The project was fully subscribed under 20-year agreements, but faced permitting appeals, construction, counterparty, cost-overrun and execution risks.
- Atlantic Coast Pipeline remained subject to FERC, state and other approvals, land-rights acquisition, stakeholder opposition, construction and partner-funding risks. Dominion owned 45% and did not control the project.
- Environmental compliance was a significant risk. Potential impacts from greenhouse-gas regulation, the Clean Power Plan, coal-combustion residual requirements, cooling-water rules, air-quality standards and methane regulation could require material expenditures, asset retirements or impairments.
- Virginia Power’s coal ash facilities were subject to litigation and regulatory requirements. The company recorded a $121 million charge after offering to close certain ash ponds and landfills; negotiations remained unresolved at year-end.
- Regulatory decisions could affect cost recovery, authorized returns, fuel rates, transmission revenue and the treatment of deferred costs. February 2015 Virginia legislation subsequently suspended most base-rate reviews through 2019 and limited the ability to recover certain unusual costs through base-rate increases.
- Other significant risks included weather, severe storms, nuclear operations and decommissioning, commodity-price volatility, merchant-generation competition, counterparty credit, access to capital markets, interest rates, cybersecurity, pipeline integrity and construction delays.
- Dominion reported $49.940 billion of total contractual cash payments, including $23.200 billion of scheduled debt principal, $17.745 billion of interest payments, and substantial fuel, capacity, pipeline and other purchase obligations.
- Dominion reported guarantees with a stated limit of $6.366 billion and an estimated utilized value of $1.453 billion. Management stated that material losses from subsidiary guarantees were not expected.
Most Important Facts an Investor Should Verify
- Reconcile 2014 reported EPS of $2.24 with the significant after-tax charges and assess normalized earnings excluding those items.
- Review the sustainability of the $3.439 billion operating cash flow against planned capital expenditures, dividends and debt maturities.
- Examine leverage, refinancing needs, commercial-paper usage, credit-facility availability and the potential effect of the negative Standard & Poor’s outlook.
- Track regulatory treatment of Virginia Power’s base rates, fuel costs, rate-adjustment clauses and potential customer refunds.
- Assess the total cost, schedule, approvals, customer commitments and counterparty credit supporting Cove Point and Atlantic Coast Pipeline.
- Evaluate exposure to coal-ash closure, environmental remediation, greenhouse-gas regulation, cooling-water requirements and potential generation retirements.
- Review nuclear decommissioning trust sufficiency, spent-fuel recovery claims, insurance limits and potential retrospective assessments.
- Confirm the effect of the electric retail marketing sale and producer-services exit on the company’s future revenue mix and commodity-risk exposure.
- Verify the status of the North Anna 3 licensing process and whether future costs remain eligible for regulatory recovery.