Business Context and Reporting Period
This combined, unaudited Form 10-Q covers Dominion Resources, Inc. (now Dominion Energy, Inc.) and its wholly owned utility subsidiary, Virginia Electric and Power Company, for the three months ended March 31, 2012. Dominion operates regulated electric and gas businesses, merchant generation, gas transmission and storage, LNG infrastructure, and energy marketing. Virginia Power generates, transmits, and distributes electricity in Virginia and northeastern North Carolina.
Key Financial Metrics
| Metric | Dominion | Virginia Power |
|---|---|---|
| Operating revenue | $3.492 billion, down from $4.057 billion | $1.754 billion, down from $1.757 billion |
| Net income | $501 million including noncontrolling interests; $494 million attributable to Dominion | $243 million |
| Prior-year net income | $483 million including noncontrolling interests; $479 million attributable to Dominion | $278 million |
| Diluted EPS | $0.86, versus $0.82 | Not applicable |
| Income from operations | $915 million, versus $963 million | $468 million, versus $511 million |
| Net cash from operating activities | $1.623 billion, versus $912 million | $906 million, versus $524 million |
| Capital expenditures and property additions | $981 million | $550 million, including $483 million of construction additions and $67 million of nuclear fuel purchases |
| Cash and cash equivalents at March 31 | $133 million | $28 million |
| Total debt and debt-like obligations | Current securities due within one year and short-term debt totaled $3.188 billion; long-term debt totaled $17.079 billion | Securities due within one year and short-term debt totaled $1.271 billion; long-term debt totaled $6.292 billion |
| Credit facility capacity available | $2.407 billion, including $1.943 billion under the principal $3 billion facility | $980 million under joint facilities, plus a separate $120 million facility |
Dominion's operating margin, measured as income from operations divided by revenue, was approximately 26.2%, compared with 23.7% in the prior-year quarter. Virginia Power's operating margin was approximately 26.7%, compared with 29.1%. Dominion's effective tax rate declined to 34.1% from 39.1%, partly because of a $20 million reduction in a valuation allowance related to state operating loss carryforwards.
Material Changes Versus the Prior Comparable Period
- Dominion's attributable net income increased 3% to $494 million and diluted EPS increased 5% to $0.86.
- Revenue declined $565 million, primarily because of lower nonregulated electric and gas sales, lower gas transportation and storage revenue, and reduced regulated gas distribution rider revenue.
- Net revenue declined 10%. Merchant generation contributed $62 million less after tax because of lower realized prices and PJM ancillary service results; Dominion Energy contributed $20 million less, primarily from lower producer services margins.
- Dominion's results benefited from the absence of the $55 million State Line impairment charge recorded in 2011 and from lower income taxes. Other operations and maintenance expense decreased $214 million, including a $99 million reduction in regulated gas bad-debt expense and the absence of the State Line impairment.
- Virginia Power net income decreased 13% to $243 million. Less favorable weather reduced electric sales; heating degree days decreased 29% and electricity delivered decreased 6%. Rate adjustment clauses and favorable economic effects on customer usage partly offset the decline.
- Operating cash flow improved substantially, driven by higher deferred fuel cost recoveries, lower margin collateral requirements, tax refunds, and working-capital changes. Investing cash use increased because of higher capital expenditures, while financing cash use increased due to greater net debt repayments.
- Dominion's other comprehensive income increased to $199 million from $3 million, principally reflecting favorable changes in derivative hedges and investment securities.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No specific consolidated earnings guidance is provided in the filing text. Management states that quarterly results are seasonal and not necessarily indicative of full-year results.
- Virginia Power's authorized return on equity was reset to 10.9% in the November 2011 Biennial Review Order. Virginia Power appealed the treatment of the effective period to the Supreme Court of Virginia.
- Virginia Power received approval for updated Riders R and S, with revenue requirements of approximately $74 million and $226 million, respectively, for the April 2012–March 2013 rate year. Rider B was approved for biomass conversions at three facilities, with an approximately $6 million revenue requirement and expected renewable capacity additions exceeding 150 MW.
- Virginia Power accrued a $36 million liability for estimated future PJM ancillary-service billing adjustments. A FERC settlement concerning transmission-cost claims would require payments of $250,000 annually for ten years if approved.
- Virginia Power issued $450 million of 2.95% senior notes due 2022 in January 2012. Dominion repurchased approximately $86 million of its September 2006 enhanced junior subordinated notes during the quarter.
- Dominion expects to purchase the Fairless facility in 2013 at an option price of approximately $923 million. The related tax benefit depends on future commodity prices, dispatch levels, and operating performance.
- Environmental and regulatory risks include Clean Air Act enforcement matters, potential remediation and capital costs, nuclear safety enhancements following Fukushima, and ongoing uncertainty regarding CSAPR, RGGI, and other emissions rules. Several matters lack an estimable financial impact.
- Dominion had approximately $73 million of margin posted with MF Global before its bankruptcy and had recovered approximately $8 million by March 31, 2012. The ultimate recovery and potential loss remain uncertain.
- Dominion's gross credit exposure was $531 million and net exposure after collateral was $461 million. A full triggering of credit-related derivative provisions would have required approximately $71 million of additional collateral at quarter-end.
- Cove Point entered precedent agreements for a fully subscribed LNG liquefaction project with planned capacity of approximately 750 million cubic feet per day inlet and 4.5–5 million metric tons per year outlet. The project remains subject to binding agreements, DOE and FERC approvals, environmental review, and engineering studies.
- Management reported no material changes to previously disclosed risk factors, debt covenants, off-balance-sheet arrangements, contractual obligations, or credit ratings, and reported no covenant defaults.
Important Facts for Investors to Verify
- Reconcile the reported earnings improvement with lower revenue, weaker merchant-generation margins, weather effects, tax benefits, and the absence of the prior-year State Line impairment.
- Assess liquidity against near-term securities due within one year, short-term borrowings, capital spending, dividend payments, and potential derivative collateral requirements.
- Monitor regulatory outcomes affecting Virginia Power's ROE, PJM billing adjustments, rate riders, North Carolina rate proceedings, and Cove Point's rate case and export project.
- Evaluate potential exposure from environmental enforcement, nuclear safety requirements, Ward Transformer and manufactured-gas-plant matters, and other contingencies for which the filing provides no clear loss estimate.
- Review Dominion's merchant generation economics, commodity-price sensitivity, counterparty exposure, and the effect of unusually mild weather on demand.