Business Context and Reporting Period
This combined Form 10-Q was filed by Dominion Resources, Inc. (now associated with Dominion Energy) and its wholly owned subsidiary, Virginia Electric and Power Company (Virginia Power), for the three months ended March 31, 2010. Dominion is an integrated energy company with regulated electric operations, generation, gas transmission and storage, gas distribution, energy marketing, and Appalachian exploration and production operations. Virginia Power generates, transmits, and distributes electricity in Virginia and northeastern North Carolina.
The financial statements are unaudited and should be read with the companies’ 2009 Form 10-K. Interim results are affected by seasonality, weather, fuel costs, rate changes, commodity prices, and other factors.
Key Financial Metrics
| Metric | Dominion 2010 | Dominion 2009 | Change |
|---|---|---|---|
| Operating revenue | $4.168 billion | $4.586 billion | Down $418 million |
| Income from operations | $734 million | $664 million | Up $70 million |
| Income from continuing operations attributable to Dominion | $323 million | $239 million | Up $84 million |
| Net income attributable to Dominion | $174 million | $248 million | Down $74 million |
| Diluted EPS | $0.29 | $0.42 | Down $0.13 |
| Net cash from operating activities | $1.650 billion | $1.481 billion | Up $169 million |
| Capital additions | $877 million | $796 million | Up $81 million |
| Cash and cash equivalents at March 31 | $85 million | $147 million | Down $62 million |
Dominion’s operating margin was approximately 17.6% in 2010 versus 14.5% in 2009. Net margin attributable to Dominion was approximately 4.2% versus 5.4%, primarily because of discontinued-operations losses and special charges.
| Virginia Power Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Operating revenue | $1.739 billion | $1.859 billion | Down $120 million |
| Net income | $95 million | $204 million | Down $109 million |
| Net cash from operating activities | $769 million | $684 million | Up $85 million |
| Plant construction and property additions | $567 million | $515 million | Up $52 million |
At March 31, 2010, Dominion reported total assets of $42.163 billion, total liabilities of $30.855 billion, long-term debt of $15.364 billion, and common shareholders’ equity of $11.051 billion. Virginia Power reported total assets of $20.541 billion, total liabilities of $12.698 billion, long-term debt of $6.093 billion, and common shareholders’ equity of $7.586 billion.
Dominion had $295 million of short-term debt and $1.254 billion of securities due within one year. Its credit facilities had total capacity of $4.772 billion, with $4.271 billion available. Virginia Power also had access to a $120 million credit facility supporting certain tax-exempt financings.
Material Changes Versus the Prior Comparable Period
- Dominion’s net income declined 30%, while Virginia Power’s net income declined 53%.
- Dominion’s net revenue declined 4%, primarily due to lower merchant-generation margins, reduced gas distribution and E&P revenue, weaker producer-services results, and lower retail energy marketing prices. These effects were partly offset by rate-adjustment revenues, a $42 million benefit from discontinuing hedge accounting for certain gas derivatives, and higher gas-transmission revenue.
- Dominion recorded a $338 million workforce-reduction charge, or $206 million after tax; Virginia Power’s portion was $202 million, or $123 million after tax. The program is expected to reduce Dominion’s workforce by approximately 9% and Virginia Power’s by approximately 11% during 2010.
- Dominion completed the sale of Peoples in February 2010, receiving approximately $542 million of after-tax proceeds and recording an after-tax loss of approximately $134 million, including a $79 million goodwill write-off. Peoples was presented as discontinued operations.
- Dominion recorded a $21 million E&P ceiling-test impairment charge, compared with $455 million in the first quarter of 2009.
- Dominion’s operating cash flow increased despite lower earnings, helped by lower tax payments, improved gas-transmission contributions, and favorable working-capital changes. Financing cash use increased to $1.444 billion, primarily from $1.0 billion of short-term debt repayment, $191 million of share repurchases, and $275 million of common dividends.
- Dominion repurchased 4.7 million shares for approximately $191 million during the quarter and repurchased an additional 6.1 million shares for approximately $254 million through April 29, 2010.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Dominion expected the sale of substantially all Appalachian E&P operations to CONSOL Energy to close by April 30, 2010, subject to customary conditions. The transaction was expected to generate approximately $2.3 billion of after-tax proceeds and an after-tax gain of approximately $1.4 billion. Management expected the sale to reduce ongoing capital expenditures by approximately $200 million annually and increase the proportion of earnings from regulated operations.
- Expected sale proceeds were to support 2010 and 2011 equity needs, stock repurchases, employee-benefit contributions, and the effects of Virginia Power’s rate-case settlement.
- Dominion planned capital expenditures of approximately $3.6 billion in 2010, $3.4 billion in 2011, and $3.8 billion in 2012. Virginia Power’s planned capital expenditures were not materially changed from the 2009 Form 10-K.
- Dominion and Virginia Power planned to replace existing credit facilities during the third quarter of 2010 and expected to operate with total facilities ranging from $3.0 billion to $3.5 billion. Management did not expect the reduced facility size to impair funding capacity.
- The Virginia Commission approved a rate settlement in March 2010. It included $400 million of customer credits from 2008 revenues, a $129 million FTR-related customer credit, a freeze of pre-September 1, 2009 base rates through December 1, 2013 subject to statutory exceptions, and specified returns on equity for future rate proceedings.
- Virginia Power’s 2011 earnings review could result in customer credits for earnings exceeding the established return threshold. The company also faces a FERC complaint concerning approximately $223 million of transmission costs; the outcome cannot be predicted.
- Virginia Power had not committed to building a third nuclear unit at North Anna. Further regulatory and environmental review could be required if the reactor design changes.
- Environmental regulation, including greenhouse-gas permitting expected to affect new and modified facilities beginning in 2011, could increase operating and capital costs. The filing states that the financial impact could not yet be determined.
- Dominion reported $127 million of guarantees supporting third parties and equity-method investees. Subsidiary guarantees had stated limits of $4.577 billion and estimated utilized value of $1.366 billion.
- Dominion’s net credit exposure from energy marketing and price-risk activities was $851 million after collateral. A hypothetical 10% unfavorable commodity-price movement would have reduced the fair value of non-trading commodity derivatives by approximately $117 million at March 31, 2010.
- The collective bargaining agreement with Local 69 expired April 1, 2010. Negotiations were continuing, with approximately 1,030 employees represented.
- Dominion expected to contribute approximately $250 million to pension plans in the second quarter of 2010 and $56 million to other postretirement benefit plans during the remainder of 2010.
Most Important Facts for Investors to Verify
- Whether the Appalachian E&P transaction closed as expected and whether the projected proceeds and after-tax gain were realized.
- The final financial effect of the Peoples disposition and the ongoing impact of discontinued operations on comparability.
- Whether workforce reductions produce the projected annualized operating-expense savings of approximately $100 million for Dominion and $50 million for Virginia Power.
- Virginia Power’s exposure to future customer credits, rate reviews, FERC transmission-cost claims, and the approved rate-settlement provisions.
- Liquidity after the planned credit-facility replacement, debt maturities, share repurchases, dividends, capital expenditures, and benefit-plan contributions.
- Exposure to merchant-generation margins, commodity prices, derivative collateral requirements, counterparty credit risk, and investment-market volatility.
- Potential costs and permitting effects from greenhouse-gas and other environmental regulations, as well as nuclear construction and operating risks.