Business context and reporting period
Dominion Resources, Inc. and Virginia Electric and Power Company filed a combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. Dominion operates regulated electric and gas businesses, merchant generation, gas transmission and storage, LNG infrastructure and energy marketing. Virginia Power is Dominion’s regulated electric utility subsidiary.
Financial performance and condition
| Dominion Resources | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Operating revenue | $3.803 billion | $3.950 billion | $11.201 billion | $11.451 billion |
| Income from operations | $833 million | $1.119 billion | $2.521 billion | $4.963 billion |
| Net income attributable to Dominion | $392 million | $575 million | $1.207 billion | $2.510 billion |
| Diluted EPS | $0.69 | $0.98 | $2.10 | $4.23 |
| Operating margin | 21.9% | 28.3% | 22.5% | 43.3% |
| Net margin | 10.3% | 14.6% | 10.8% | 21.9% |
Dominion generated $2.398 billion of operating cash flow in the first nine months, compared with $1.884 billion in 2010. Capital expenditures were $2.616 billion, producing negative investing cash flow of $2.364 billion. Financing cash flow was positive $116 million after $848 million of common dividends and $601 million of share repurchases. Cash and equivalents were $212 million at September 30, 2011, versus $62 million at December 31, 2010.
Dominion reported approximately $19.3 billion of debt, including securities due within one year, short-term debt and long-term debt, compared with approximately $17.6 billion at year-end 2010. Current assets were $5.267 billion versus current liabilities of $5.496 billion. Credit facilities provided $2.590 billion of unused capacity, including $644 million available to Virginia Power. No credit-rating changes or debt-covenant defaults were reported.
Virginia Power’s nine-month revenue increased to $5.691 billion from $5.561 billion, while net income increased to $816 million from $742 million. Third-quarter net income declined to $297 million from $380 million. Virginia Power generated $1.697 billion of operating cash flow, used $1.431 billion in investing activities and ended the period with $24 million of cash.
Material changes versus the prior comparable period
- Third-quarter Dominion net income fell $183 million, primarily due to lower merchant-generation margins, Hurricane Irene restoration costs and a CSAPR-related emissions-allowance impairment.
- Nine-month net income fell $1.303 billion, largely because 2010 included a $2.467 billion pretax gain on the Appalachian exploration and production asset sale. The 2011 comparison also reflects lower merchant-generation margins and less favorable weather.
- Merchant-generation net income contribution decreased $93 million in the third quarter and $202 million year to date, driven by lower realized prices and generation.
- Regulated electric operations benefited from rate-adjustment clauses, increasing Dominion’s electric utility contribution by $18 million in the quarter and $56 million year to date.
- Other operations and maintenance expense increased $97 million in the quarter, principally from $121 million of Hurricane Irene restoration costs and $57 million of emissions-allowance impairment charges. Year to date, expense decreased $186 million because 2010 workforce-reduction charges were not repeated.
- Dominion repurchased approximately 13 million shares for $601 million during the first nine months. In October 2011, management stated it did not plan additional repurchases under that program.
Guidance, outlook, commentary and risks
The filing does not provide a clear consolidated earnings or revenue guidance figure. Management stated that operations were expected to provide a stable source of cash flow for planned capital expenditures and dividends. Planned 2012 and 2013 capital expenditures were approximately $4.2 billion and $3.8 billion for Dominion and $2.5 billion and $2.9 billion for Virginia Power, respectively.
- Virginia Power’s biennial rate review could result in an approximately $143 million customer credit if the commission adopts staff adjustments; no liability was recorded because the outcome remained uncertain. The company requested a prospective 12.5% ROE, while staff recommended 10.67%.
- North Anna’s two reactors were shut down after the August 2011 Virginia earthquake and were awaiting NRC approval to restart. Management expected restart approval in the fourth quarter, but the timing remained uncertain.
- Dominion expects to consolidate the Fairless lease entity, Juniper, beginning in the fourth quarter of 2011, adding approximately $1 billion of property, plant and equipment, $900 million of non-recourse debt and $100 million of noncontrolling interests.
- Dominion accelerated the planned State Line retirement to the first quarter of 2012 and recorded a $15 million pretax closure-related charge in the third quarter.
- Environmental and regulatory risks include CSAPR litigation and potential modifications, Clean Air Act enforcement involving State Line and Kincaid, water-permit matters, remediation obligations and future greenhouse-gas regulation.
- Virginia Power accrued a $35 million liability for expected PJM ancillary-service billing adjustments. The company also had $1.4 billion of remaining purchase commitments under certain potential variable-interest-entity power contracts.
- Dominion reported $364 million of gross credit exposure from energy marketing and risk-management activities. A hypothetical 10% unfavorable commodity-price change would reduce the fair value of non-trading commodity derivatives by approximately $217 million.
Most important facts for investors to verify
- Whether the Virginia rate-review decision resulted in a customer credit, and the final authorized ROE.
- The timing and financial impact of North Anna’s reactor restart and related NRC review.
- The actual accounting impact of consolidating Juniper and the Fairless facility in the fourth quarter.
- Merchant-generation margins, retirement costs and the effect of environmental rules on State Line, Salem Harbor and other coal-fired assets.
- Final outcomes of CSAPR, Clean Air Act, water-permit and CERCLA matters, including potential capital expenditures and penalties.
- Liquidity needs relative to the company’s substantial capital program, debt maturities and commodity-collateral requirements.
- The filing’s unusual items, especially the absence of the 2010 Appalachian E&P gain, Hurricane Irene costs, emissions-allowance impairments and PJM billing adjustments.