Dominion Resources, Inc. and Virginia Electric and Power Company — Form 10-Q Summary
Business context and reporting period
This combined, unaudited Form 10-Q covers the quarter and nine months ended September 30, 2012. The registrants were Dominion Resources, Inc. and its wholly owned regulated utility subsidiary, Virginia Electric and Power Company, doing business as Virginia Power. Operations include regulated electric generation, transmission and distribution; merchant generation; natural gas distribution, transportation and storage; LNG; and energy marketing.
Key financial metrics
| Dominion Resources | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Operating revenue | $3,411 million | $3,745 million | $9,926 million | $11,016 million |
| Income from operations | $518 million | $828 million | $2,048 million | $2,554 million |
| Net income attributable to Dominion | $209 million | $392 million | $961 million | $1,207 million |
| Diluted EPS | $0.36 | $0.69 | $1.68 | $2.10 |
| Operating margin | 15.2% | 22.1% | 20.6% | 23.2% |
| Net margin | 6.1% | 10.5% | 9.7% | 11.0% |
| Cash flow from operations | — | — | $3,462 million | $2,398 million |
| Capital expenditures and other property additions | — | — | $2,884 million | $2,616 million |
Dominion's balance sheet at September 30, 2012 included $81 million of cash and cash equivalents, $46.9 billion of total assets, $34.8 billion of total liabilities, $17.1 billion of long-term debt, $1.4 billion of short-term debt and $11.9 billion of total equity. Credit facilities totaled $3.5 billion, with $2.1 billion of capacity available. Common dividends declared were $0.5275 per share for the quarter and $1.5825 per share year to date.
Virginia Power reported Q3 operating revenue of $2,086 million, net income of $415 million and year-to-date operating revenue of $5,596 million and net income of $830 million. Year-to-date operating cash flow was $2,287 million, capital additions were $1,402 million, cash was $21 million, long-term debt was $6.3 billion and total liabilities were $14.8 billion.
Material changes versus the prior comparable period
- Dominion's Q3 net income fell 47% and year-to-date net income fell 20%; diluted EPS declined $0.33 in Q3 and $0.42 year to date.
- Revenue declined 9% in Q3 and 10% year to date, primarily from lower merchant-generation and nonregulated gas revenues and less favorable weather. Lower energy purchase costs partly offset the revenue decline.
- Other operations and maintenance expense increased $275 million in Q3 and $162 million year to date. The primary driver was $435 million of Kewaunee impairment and related charges, including a $378 million long-lived-asset impairment.
- Dominion's year-to-date operating cash flow increased $1.1 billion, primarily from higher deferred fuel recoveries, lower margin collateral requirements, working-capital changes and income tax refunds.
- Virginia Power's Q3 net income increased 40% and year-to-date net income increased 2%, primarily because 2011 included Hurricane Irene restoration costs and SO2 allowance impairment charges. These benefits were partly offset by less favorable weather and 2012 storm costs.
- Dominion completed the sale of Salem Harbor and sold State Line during 2012. Their results were classified as discontinued operations, including a $27 million pretax Salem Harbor sale-related charge.
- Credit facilities were extended in September 2012, primarily to September 2017. Dominion issued $1.05 billion of senior notes in September, while Virginia Power issued $450 million of 2.95% senior notes in January.
Guidance, outlook, commentary, risks and unusual items
- Management expected Kewaunee to cease generation in the second quarter of 2013, subject to a grid reliability review, and to begin decommissioning. Approximately $50 million of additional pretax exit-plan charges were anticipated, principally employee retention costs.
- Dominion decided to pursue the sale of Brayton Point, Kincaid and its interest in Elwood. Their carrying value was approximately $2.0 billion at September 30, 2012; management concluded they were not impaired at that date, but future impairment or sale losses remained possible.
- Dominion stated that Kewaunee's decommissioning trust was expected to fund expected decommissioning costs and that the Kewaunee decision was not expected to negatively affect liquidity.
- The Cove Point LNG export project was estimated at $2.5 billion to $3.5 billion, with potential construction beginning in 2014 and service in 2017, subject to customer agreements, approvals and engineering. One precedent agreement was terminated in October 2012; negotiations with Sumitomo and other potential customers continued.
- Material contingencies include EPA Clean Air Act proceedings, for which Dominion accrued $13 million; the Ward Transformer Superfund matter, for which Virginia Power could not estimate potential financial impact; unresolved nuclear spent-fuel recovery claims; and recovery of approximately $56 million of remaining MF Global margin claims, for which timing and ultimate recovery were uncertain.
- Virginia Power accrued $33 million for estimated future PJM ancillary-service billing adjustments. Several Virginia and North Carolina rate proceedings remained pending, including proceedings involving fuel rates, transmission riders and base rates.
- Key ongoing risks include weather, commodity prices, merchant-generation margins, regulatory and environmental requirements, nuclear operations and decommissioning, capital-market access, counterparty credit, interest rates, litigation and asset-retirement decisions. Management reported no material changes to previously disclosed risk factors.
Facts investors should verify
- Whether Kewaunee's 2013 shutdown and decommissioning proceed as planned and whether the anticipated additional charges are recorded.
- The timing, terms and regulatory approvals for any sale of Brayton Point, Kincaid or Elwood, and the potential impairment exposure on the approximately $2.0 billion carrying value.
- Future merchant-generation margins, wholesale power prices and the impact of weather on regulated electricity demand.
- Resolution of Virginia and North Carolina rate cases, the PJM billing-adjustment proceeding and Virginia Power's Biennial Review appeal.
- Progress, customer commitments and final investment approval for the Cove Point LNG export project.
- Cash requirements for capital expenditures, dividends, debt maturities and nuclear decommissioning, relative to the reported $2.1 billion of available Dominion credit capacity.
- Potential financial exposure from EPA, Superfund, spent-fuel, MF Global and other legal or regulatory contingencies where the filing states that losses cannot yet be estimated.