Dominion Resources, Inc. 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing is a combined annual report for Dominion Resources, Inc. and its wholly owned subsidiary, Virginia Electric and Power Company, doing business principally as Dominion Virginia Power. The company name in the filing is Dominion Resources, Inc.; the request metadata identifies Dominion Energy, Inc.
Business context
Dominion is an integrated energy company focused on regulated electric generation, transmission and distribution, regulated natural gas transmission, storage and distribution, LNG, and selected nonregulated merchant generation and energy marketing activities. Its assets included approximately 27,500 MW of generation capacity, 6,300 miles of electric transmission lines, 56,900 miles of electric distribution lines, 11,000 miles of gas transmission, gathering and storage pipelines, 21,800 miles of gas distribution pipelines and nearly 6 million customers in 15 states.
Management continued shifting the earnings mix toward regulated infrastructure and away from merchant generation, targeting 80% to 90% of earnings from regulated businesses in 2013 and thereafter.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenue | $13.093 billion | $14.145 billion | Down $1.052 billion |
| Income from continuing operations attributable to Dominion | $324 million | $1.433 billion | Down 77% |
| Net income attributable to Dominion | $302 million | $1.408 billion | Down 79% |
| Diluted EPS | $0.53 | $2.45 | Down $1.92 |
| Dividends declared per share | $2.11 | $1.97 | Up $0.14 |
| Total assets | $46.838 billion | $45.614 billion | Up $1.224 billion |
| Long-term debt | $16.851 billion | $17.394 billion | Down $543 million |
Reported 2012 results included approximately $2.1 billion of pre-tax impairment and other charges, or approximately $1.3 billion after tax, principally associated with Brayton Point, Kincaid and Kewaunee. Excluding these and other special items, management reported consolidated operating earnings of $1.75 billion, or $3.05 per share, used for incentive compensation purposes.
| Cash flow and liquidity metric | 2012 | 2011 |
|---|---|---|
| Net cash provided by operating activities | $4.137 billion | $2.983 billion |
| Net cash used in investing activities | $3.840 billion | $3.321 billion |
| Net cash used in financing activities | $151 million | Net cash provided of $378 million |
| Capital expenditures and property additions | $4.145 billion | $3.652 billion |
| Cash and cash equivalents at year-end | $248 million | $102 million |
| Unused credit facility capacity | $1.062 billion | $1.650 billion |
Dominion's 2012 operating cash flow increased by approximately $1.2 billion, primarily because of higher deferred fuel cost recoveries, lower margin collateral requirements, working-capital changes and income tax refunds. Liquidity remained dependent on operating cash flow, commercial paper, revolving credit facilities and long-term capital markets.
Dominion's total debt-to-total-capital ratio under credit agreements was 60%, compared with a 65% maximum. Virginia Power's ratio was 46%, also below its 65% maximum. Dominion's credit facilities supported $2.412 billion of commercial paper and $26 million of letters of credit at year-end.
Segment results and material changes
- DVP: Net income contribution increased to $559 million from $501 million. Benefits from rate-adjustment clauses, transmission returns and retail energy marketing were partly offset by weaker weather and lower electric deliveries. Electricity delivered declined 2% to 80.8 million MWh.
- Dominion Generation: Net income contribution declined to $874 million from $968 million. Merchant generation margin fell by $109 million after tax, reflecting lower realized power prices, while regulated generation was affected by unfavorable weather and lower ancillary-service results.
- Dominion Energy: Net income contribution increased to $551 million from $521 million. Results benefited from gas transmission assets placed in service and a gain on assets contributed to the Blue Racer joint venture, partly offset by lower producer-services margins and weather.
- Virginia Power: Net income increased to $1.050 billion from $822 million. Improvements reflected the absence of the 2011 coal-plant impairment and Hurricane Irene restoration costs, plus higher rate-adjustment-clause revenue. These benefits were partly offset by severe-storm restoration costs and weaker weather.
- Operating revenue decreased primarily because of lower merchant-generation prices and lower regulated gas-distribution rider revenue. Net revenue was approximately flat because lower fuel and purchased-gas costs substantially offset the revenue decline.
- The company sold State Line and Salem Harbor during 2012. State Line ceased operations in March 2012, and Salem Harbor was sold in the third quarter. Both were presented as discontinued operations.
- Dominion formed the 50%-owned Blue Racer joint venture for Utica Shale gathering, processing, fractionation and NGL transportation. The transaction generated $115 million of cash proceeds and a $43 million after-tax gain.
- Dominion announced plans to sell or retire additional merchant assets, including Brayton Point, Kincaid, Elwood and Kewaunee. Kewaunee was expected to cease generation in the second quarter of 2013 and enter decommissioning.
Capital program, guidance and outlook
- Dominion expected 2013 net income per share to increase from 2012, supported by the absence of 2012 merchant-asset impairments, normalized weather, approximately 2% weather-normalized electric sales growth, rate-adjustment-clause revenue and contributions from gas projects placed in service in 2012.
- Offsets included higher interest expense, operations and maintenance costs, and depreciation.
- Planned Dominion capital expenditures were approximately $4.7 billion in 2013, $4.2 billion in 2014 and $3.3 billion in 2015. Virginia Power planned approximately $2.6 billion, $3.0 billion and $2.3 billion, respectively.
- Major projects included Warren County, a projected 1,329 MW natural-gas plant targeted for late 2014; biomass conversions of three coal facilities; transmission upgrades; gas infrastructure; and potential Brunswick County generation and Cove Point LNG export facilities.
- Federal legislation enacted January 2, 2013 extended 50% bonus depreciation for qualifying capital expenditures. Dominion expected cash tax savings of approximately $250 million in 2013 and $350 million in 2014; Virginia Power expected approximately $200 million and $250 million, respectively.
- Dominion increased its target dividend payout ratio to 65% to 70% and established a 2013 annual dividend rate of $2.25 per share, a 6.6% increase over 2012, subject to board approval.
Risks, contingencies and unusual items
- Merchant generation remained exposed to weak power prices, natural-gas prices, capacity markets, environmental compliance costs and asset impairment risk.
- Regulated earnings depended on rate recovery, authorized returns, fuel and transmission riders, and regulatory treatment of storm damage, retirements and environmental costs. Virginia Power's authorized base ROE was reduced to 10.9%, inclusive of a 50-basis-point renewable portfolio standard incentive.
- Environmental requirements involving MATS, air-quality standards, cooling-water intake, coal combustion by-products, greenhouse gases and regional haze could require material capital expenditures or accelerate plant retirements.
- Nuclear risks included plant operations, spent-fuel disposal, decommissioning funding, insurance limitations and potential new NRC requirements. Dominion recorded a $246 million increase in nuclear decommissioning asset-retirement obligations, primarily due to the planned Kewaunee shutdown.
- Dominion had $1.705 billion of asset-retirement obligations, including approximately $1.5 billion related to its nuclear facilities. Nuclear decommissioning trusts totaled $3.330 billion for Dominion and $1.515 billion for Virginia Power.
- Dominion was in settlement discussions with the EPA concerning alleged Clean Air Act violations at State Line, Kincaid and Brayton Point. It had accrued $13 million for its estimated probable loss, although the ultimate exposure could differ.
- Other contingencies included Ward Transformer Superfund proceedings, former manufactured-gas-plant sites, litigation concerning environmental permits, DOE spent-fuel recovery claims and potential changes to derivatives regulation.
- Dominion's financial exposure to energy-marketing counterparties was $512 million at year-end, and a credit downgrade could have required approximately $110 million of additional collateral under derivative agreements.
- Dominion had $42.155 billion of contractual cash payments, including $18.988 billion of long-term debt principal, $16.266 billion of interest and $4.987 billion of purchase obligations and leases. Virginia Power's total contractual cash payments were $16.771 billion.
Investor verification checklist
- Verify the reconciliation between GAAP net income of $302 million, reported EPS of $0.53, and operating earnings of $1.75 billion or $3.05 per share.
- Review the final valuation, sale timing and debt treatment for Brayton Point, Kincaid and Elwood, and the actual costs and obligations associated with Kewaunee decommissioning.
- Assess whether the planned shift toward 80% to 90% regulated earnings is being achieved and whether merchant-generation exits improve cash flow and credit metrics.
- Confirm regulatory decisions affecting Virginia Power's ROE, rate-adjustment clauses, coal-plant retirements, storm-cost recovery and proposed generation projects.
- Reconcile planned capital expenditures with operating cash flow, debt maturities, commercial-paper usage and available revolving-credit capacity.
- Evaluate environmental, nuclear, cybersecurity, counterparty, derivative-collateral and pension risks, including exposures for which the filing does not provide a reliable maximum loss estimate.
- Verify the expected cash-tax benefits from bonus depreciation and the effect of the 2013 Virginia Regulation Act amendments on future returns and rate recovery.