Dominion Resources, Inc. and Virginia Electric and Power Company (Virginia Power) — 2010 Q2 Form 10-Q
Business context and reporting period
This combined Form 10-Q covers the quarter and six months ended June 30, 2010. Dominion Resources was an integrated energy company involved in regulated and merchant electric generation, electric transmission and distribution, gas transmission and storage, gas distribution, LNG, producer services and energy marketing. Virginia Power was Dominion’s regulated electric utility subsidiary and sole operating subsidiary issuer. The filing was signed August 2, 2010. The request identifies Dominion Energy, but the registrant in this filing is Dominion Resources, Inc.
Financial performance and key metrics
| Dominion Resources | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $3.333 billion | $3.406 billion | $7.501 billion | $7.992 billion |
| Income from operations | $3.110 billion | $889 million | $3.844 billion | $1.553 billion |
| Net income attributable to Dominion | $1.761 billion | $454 million | $1.935 billion | $702 million |
| Diluted EPS | $2.98 | $0.76 | $3.25 | $1.19 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $1.406 billion | $1.902 billion |
| Dividends per common share | $0.4575 | $0.4375 | $0.915 | $0.875 |
Reported Q2 operating margin was approximately 93%, and reported net margin was approximately 53%; both were substantially distorted by the $2.467 billion gain on the Appalachian E&P sale. Excluding that gain, Q2 income from operations was approximately $643 million, or roughly 19% of revenue.
- Six-month net income increased $1.233 billion, principally because of the Appalachian E&P sale gain and lower E&P impairment charges.
- Net revenue declined 4% in both the quarter and year-to-date period. Merchant generation margins declined because of lower volumes, higher nuclear refueling outage days and lower realized prices.
- Regulated electric operations benefited from warmer weather and rate riders. Q2 cooling degree days increased 58%, while electricity delivered increased 5%.
- Dominion’s total assets were $41.788 billion at June 30, 2010, compared with $42.554 billion at December 31, 2009. Common shareholders’ equity was $12.146 billion versus $11.185 billion.
- Dominion held $411 million of cash and cash equivalents. Total long-term debt was $15.349 billion, and securities due within one year were $895 million. Short-term debt was zero at June 30, compared with $1.295 billion at year-end 2009.
- Dominion had $4.603 billion of available credit-facility capacity, against total facilities of $4.772 billion and $169 million of outstanding letters of credit.
Cash flow and capital allocation
- Dominion generated $1.406 billion of operating cash flow, invested $1.654 billion in plant and property additions, and received $3.450 billion from the Appalachian E&P sale and $741 million from the Peoples sale.
- Financing activities used $2.706 billion, including repayment of $1.295 billion of short-term debt, repayment of $411 million of long-term debt, $500 million of share repurchases and $544 million of common dividends.
- Cash increased by $361 million during the first six months, from $50 million to $411 million.
- Management expected sale proceeds to fund taxes, substantially offset 2010 equity needs and planned 2011 market equity issuance, support pension contributions, reduce debt, fund the Dominion Foundation, repurchase shares and offset the impact of Virginia Power’s rate-case settlement.
- Planned Dominion capital expenditures were approximately $3.6 billion in 2010, $3.4 billion in 2011 and $3.8 billion in 2012.
Virginia Power performance
| Virginia Power | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $1.711 billion | $1.675 billion | $3.450 billion | $3.534 billion |
| Net income | $267 million | $149 million | $362 million | $353 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $559 million | $911 million |
| Capital additions | Not provided for quarter | Not provided for quarter | $1.041 billion | $1.125 billion |
Virginia Power’s Q2 net income increased 79%, driven by favorable weather, rate riders and lower outage costs. Six-month net income increased only 3% because workforce-reduction charges and lower operating cash flow offset operating improvements. At June 30, Virginia Power had $15 million of cash, $6.086 billion of long-term debt and $363 million of securities due within one year. It also had $763 million of current borrowings from Dominion.
Material changes and unusual items
- In April 2010, Dominion sold substantially all Appalachian E&P operations to a CONSOL subsidiary for approximately $3.5 billion. The transaction produced approximately $2.2 billion of after-tax proceeds and an approximately $1.4 billion after-tax gain, including a $134 million goodwill write-off.
- Dominion completed the sale of Peoples in February 2010, receiving approximately $542 million after tax and recording an approximately $132 million after-tax loss, including a $79 million goodwill write-off and post-closing adjustments. Peoples was reclassified as discontinued operations.
- Dominion recorded a $163 million impairment charge, or $95 million after tax, for the State Line coal-fired merchant power station because of low profitability and expected environmental-control requirements.
- Dominion recorded approximately $338 million of pretax workforce-reduction charges, including severance and benefit costs. The six-month after-tax impact of the program was approximately $206 million for Dominion and $123 million for Virginia Power-related operations.
- Dominion recognized a $67 million after-tax benefit from discontinuing hedge accounting for certain interest-rate derivatives, partially offset by subsequent fair-value changes.
- Dominion repurchased 12.2 million shares for approximately $500 million during the first six months and expected to repurchase approximately $910 million of shares during 2010.
- The effective tax rate on continuing operations was 40.6% for Dominion and 40.1% for Virginia Power in the first six months, reflecting health-care legislation effects and nondeductible goodwill related to the dispositions.
Guidance, outlook, risks and contingencies
- The filing does not provide a clear consolidated EPS or revenue guidance range. Management’s quantitative outlook consists primarily of planned capital expenditures, expected use of divestiture proceeds and proposed rate-rider recoveries.
- Virginia Power requested an approximately $82 million annual decrease in fuel-expense recovery for July 2010 through June 2011. Proposed revenue requirements for Riders R and S were approximately $86 million and $200 million, respectively, for the rate year beginning April 2011. Rider T was approved at an approximately $338 million revenue requirement effective September 2010.
- Dominion planned to replace existing credit facilities in the third quarter of 2010 with facilities totaling approximately $3.0 billion to $3.5 billion. Management did not expect the smaller facilities to impair funding ability.
- Key risks include environmental regulation of greenhouse gases, nitrogen oxides, sulfur dioxide and coal combustion byproducts; nuclear operations and spent-fuel obligations; merchant-generation profitability; commodity-price and interest-rate volatility; counterparty and collateral requirements; credit ratings; regulatory approvals; construction delays; weather; outages; and litigation.
- Dominion had $1.7 billion of remaining purchase commitments with potential variable-interest-entity counterparties. Dominion’s net energy-marketing credit exposure was $651 million after collateral, and a credit-trigger event could have required an additional $58 million of collateral.
- The EPA requested information regarding historical operations and capital improvements at Brayton Point and Salem Harbor; the filing states that the outcome could not be predicted.
- Potentially material environmental costs remained uncertain, including future controls at State Line, greenhouse-gas permitting, proposed ozone and Transport Rule requirements, and regulation of coal combustion byproducts.
- Dominion and Virginia Power stated that there were no changes in credit ratings or debt-covenant defaults as of June 30, 2010. Management concluded that disclosure controls were effective.
Most important facts for an investor to verify
- Whether reported earnings growth is being evaluated on an adjusted basis that excludes the Appalachian E&P gain, State Line impairment, workforce-reduction charges, Peoples disposition loss and hedge-accounting effects.
- The sustainability of regulated electric earnings after unusually favorable weather and the implementation of rate riders and fuel-factor changes.
- The effect of lower merchant-generation margins, nuclear refueling outages and environmental compliance costs on future cash flow.
- Execution of planned credit-facility replacements and the use of divestiture proceeds for taxes, debt reduction, pension funding and share repurchases.
- Regulatory and litigation outcomes involving environmental permits, EPA investigations, North Anna, the proposed North Anna nuclear unit and spent-nuclear-fuel receivables.
- Whether Dominion’s operating cash flow can support planned capital expenditures and dividends after the decline from $1.902 billion to $1.406 billion year over year.