UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
For the quarterly period ended September 30, 2013
or
For the transition period from to
Commission File
Number
Exact name of registrants as specified in their charters, address of
principal executive offices and registrants’ telephone number
I.R.S. Employer
Identification Number
120 Tredegar Street
Richmond, Virginia 23219
(804) 819-2000
State or other jurisdiction of incorporation or organization of the registrants: Virginia
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Dominion Resources, Inc. Yes x No ¨ Virginia Electric and Power Company Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Dominion Resources, Inc.
Virginia Electric and Power Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Dominion Resources, Inc. Yes ¨ No x Virginia Electric and Power Company Yes ¨ No x
At September 30, 2013, the latest practicable date for determination, Dominion Resources, Inc. had 580,435,589 shares of common stock outstanding and Virginia Electric and Power Company had 274,723 shares of common stock outstanding. Dominion Resources, Inc. is the sole holder of Virginia Electric and Power Company’s common stock.
This combined Form 10-Q represents separate filings by Dominion Resources, Inc. and Virginia Electric and Power Company. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Virginia Electric and Power Company makes no representations as to the information relating to Dominion Resources, Inc.’s other operations.
COMBINED INDEX
Item 1.
Item 2.
Item 3.
Item 4.
Item 1A.
Item 6.
PAGE 2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Form 10-Q are defined below:
Abbreviation or Acronym
Definition
AFUDC
Allowance for funds used during construction
AMR
Automated meter reading program deployed by East Ohio
AOCI
Accumulated other comprehensive income (loss)
Appalachian Gateway Project
DTI project completed in September 2012 to provide approximately 484,000 Dth per day of firm transportation services for new Appalachian gas supplies in West Virginia and southwestern Pennsylvania to an interconnection with Texas Eastern Transmission, LP at Oakford, Pennsylvania
AROs
Asset retirement obligations
ARP
Acid Rain Program, a market-based initiative for emissions allowance trading, established pursuant to Title IV of the CAA
ATEX line
Appalachia to Texas Express ethane line
bcf
Billion cubic feet
Blue Racer
Blue Racer Midstream, LLC, a joint venture with Caiman
BOD
Board of Directors
BOEM
Bureau of Ocean Energy Management
BP
BP Wind Energy North America Inc.
Brayton Point
Brayton Point power station, a 1,528 MW power station in Somerset, Massachusetts, with three coal-fired units and one unit fired by natural gas or oil
Brunswick County
Brunswick County power station, a 1,358 MW combined cycle, natural gas-fired power station under construction in Brunswick County, Virginia
CAA
Clean Air Act
Caiman
Caiman Energy II, LLC
CAIR
Clean Air Interstate Rule
Carson-to-Suffolk line
Virginia Power 60-mile 500 kV transmission line in southeastern Virginia
CEO
Chief Executive Officer
CERCLA
Comprehensive Environmental Response, Compensation and Liability Act of 1980
CFO
Chief Financial Officer
CO2
Carbon dioxide
COL
Combined Construction Permit and Operating License
Companies
Dominion and Virginia Power, collectively
Cooling degree days
Units measuring the extent to which the average daily temperature is greater than 65 degrees Fahrenheit, calculated as the difference between 65 degrees and the average temperature for that day
Cove Point
Dominion Cove Point LNG, LP
CPCN
Certificate of Public Convenience and Necessity
CSAPR
Cross State Air Pollution Rule
CWA
Clean Water Act
D.C.
District of Columbia
DEI
Dominion Energy, Inc.
DGH
Dominion Gas Holdings, LLC
DOE
Department of Energy
Dominion
The legal entity, Dominion Resources, Inc., one or more of its consolidated subsidiaries (other than Virginia Power) or operating segments or the entirety of Dominion Resources, Inc. and its consolidated subsidiaries
DRS
Dominion Resources Services, Inc.
DSM
Demand-side management
DTI
Dominion Transmission, Inc.
Dth
Dekatherm
DVP
Dominion Virginia Power operating segment
East Ohio
The East Ohio Gas Company, doing business as Dominion East Ohio
Elwood
Elwood power station, a 1,424 MW power station outside Chicago, Illinois, with nine 158 MW natural gas-fired combustion turbines, in which Dominion owned a 50 percent interest (712 MW)
PAGE 3
Energy Capital Partners
A private equity firm with offices in Short Hills, New Jersey and San Diego, California
Enterprise
Enterprise Product Partners, L.P.
EPA
Environmental Protection Agency
EPS
Earnings per share
ESBWR
General Electric-Hitachi’s Economic Simplified Boiling Water Reactor
Fairless
Fairless power station
FERC
Federal Energy Regulatory Commission
Fitch
Fitch Ratings Ltd.
Fowler Ridge
A wind-turbine facility joint venture between Dominion and BP in Benton County, Indiana
FTRs
Financial transmission rights
GAAP
U.S. generally accepted accounting principles
Gal
Gallon
GHG
Greenhouse gas
Heating degree days
Units measuring the extent to which the average daily temperature is less than 65 degrees Fahrenheit, calculated as the difference between 65 degrees and the average temperature for that day
IDA
Industrial Development Authority
Illinois Gas Contracts
A Dominion Retail natural gas book of business consisting of residential and commercial customers in Illinois
INPO
Institute of Nuclear Power Operations
IRS
Internal Revenue Service
ISO
Independent system operator
ISO-NE
ISO New England
Juniper
Juniper Capital L.P.
Kewaunee
Kewaunee nuclear power station
Kincaid
Kincaid power station, a 1,158 MW power station in Kincaid, Illinois, with two 579 MW coal-fired units
kV
Kilovolt
kWh
Kilowatt-hour
Line TPL-2A
An approximately 11-mile, 30-inch gathering line extending from Tuscarawas County, Ohio to Harrison County, Ohio
Line TL-388
A 37-mile, 24-inch gathering line extending from Texas Eastern, LP in Noble County, Ohio to its terminus at Dominion’s Gilmore Station in Tuscarawas County, Ohio
Line TL-404
An approximately 26-mile, 24- and 30- inch gas gathering pipeline that extends from Wetzel County, West Virginia to Monroe County, Ohio
LNG
Liquefied natural gas
MD&A
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MDFA
Massachusetts Development Finance Agency
Meadow Brook-to-Loudoun line
Virginia Power 65-mile 500 kV transmission line that begins in Warren County, Virginia and terminates in Loudoun County, Virginia
Millstone
Millstone nuclear power station
MISO
Midcontinent Independent Transmission System Operator, Inc.
MLP
Master limited partnership
Moody’s
Moody’s Investors Service
MW
Megawatt
MWh
Megawatt hour
NCEMC
North Carolina Electric Membership Corporation
NedPower
A wind-turbine facility joint venture between Dominion and Shell in Grant County, West Virginia
NEIL
Nuclear Electric Insurance Limited
NERC
North American Electric Reliability Corporation
NGLs
Natural gas liquids
North Anna
North Anna nuclear power station
North Carolina Commission
North Carolina Utilities Commission
PAGE 4
Northeast Expansion Project
DTI project completed in November 2012 to provide approximately 200,000 Dth per day of firm transportation services; this project moves supplies from various receipt points in central and southwestern Pennsylvania to a nexus of market pipelines and storage facilities in Leidy, Pennsylvania
NOx
Nitrogen oxide
NPDES
National Pollutant Discharge Elimination System
NRC
Nuclear Regulatory Commission
NSPS
New Source Performance Standards
ODEC
Old Dominion Electric Cooperative
Order 1000
Order issued by FERC adopting new requirements for transmission planning, cost allocation and development
PADEP
Pennsylvania Department of Environmental Protection
PIPP
Percentage of Income Payment Plan
PIR
Pipeline Infrastructure Replacement program deployed by East Ohio
PJM
PJM Interconnection, L.L.C.
ppb
Parts-per-billion
Regulation Act
Legislation effective July 1, 2007, that amended the Virginia Electric Utility Restructuring Act and fuel factor statute, which legislation is also known as the Virginia Electric Utility Regulation Act
RGGI
Regional Greenhouse Gas Initiative
Rider BW
A rate adjustment clause associated with the recovery of costs related to Brunswick County
Riders C1A and C2A
Rate adjustment clauses associated with the recovery of costs related to certain DSM programs approved in the 2011 DSM case
ROE
Return on equity
RSN
Remarketable subordinated note
RTEP
Regional transmission expansion plan
RTO
Regional transmission organization
Salem Harbor
Salem Harbor power station
SEC
Securities and Exchange Commission
Shell
Shell WindEnergy, Inc.
SO2
Sulfur dioxide
Standard & Poor’s
Standard & Poor’s Ratings Services, a division of McGraw Hill Financial, Inc.
State Line
State Line power station
Surry
Surry nuclear power station
U.S.
United States of America
UAO
Unilateral Administrative Order
VIE
Variable interest entity
Virginia Commission
Virginia State Corporation Commission
Virginia Power
The legal entity, Virginia Electric and Power Company, one or more of its consolidated subsidiaries or operating segments or the entirety of Virginia Power and its consolidated subsidiaries
West Virginia Commission
Public Service Commission of West Virginia
PAGE 5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Operating Revenue
Operating Expenses
Electric fuel and other energy-related purchases
Purchased electric capacity
Purchased gas
Other operations and maintenance
Depreciation, depletion and amortization
Other taxes
Total operating expenses
Income from operations
Other income
Interest and related charges
Income from continuing operations including noncontrolling interests before income tax expense
Income tax expense
Income from continuing operations including noncontrolling interests
Loss from discontinued operations(2)
Net Income Including Noncontrolling Interests
Noncontrolling Interests
Net Income Attributable to Dominion
Amounts Attributable to Dominion:
Income from continuing operations, net of tax
Loss from discontinued operations, net of tax
Net income attributable to Dominion
Earnings Per Common Share-Basic
Income from continuing operations
Loss from discontinued operations
Earnings Per Common Share-Diluted
Dividends declared per common share
The accompanying notes are an integral part of Dominion’s Consolidated Financial Statements.
PAGE 6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income including noncontrolling interests
Other comprehensive income (loss), net of taxes:
Net deferred gains (losses) on derivatives-hedging activities(1)
Changes in unrealized net gains on investment securities(2)
Changes in unrecognized pension and other postretirement benefit costs(3)
Amounts reclassified to net income:
Net derivative (gains) losses-hedging activities(4)
Net realized gains on investment securities(5)
Net pension and other postretirement benefit costs(6)
Total other comprehensive income (loss)
Comprehensive income including noncontrolling interests
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Dominion
PAGE 7
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets
Cash and cash equivalents
Customer receivables (less allowance for doubtful accounts of $27 and $28)
Other receivables (less allowance for doubtful accounts of $3 and $4)
Inventories
Derivative assets
Other
Total current assets
Investments
Nuclear decommissioning trust funds
Investment in equity method affiliates
Total investments
Property, Plant and Equipment
Property, plant and equipment
Property, plant and equipment, VIE
Accumulated depreciation, depletion and amortization
Total property, plant and equipment, net
Deferred Charges and Other Assets
Goodwill
Regulatory assets
Total deferred charges and other assets
Total assets
PAGE 8
CONSOLIDATED BALANCE SHEETS—(Continued)
LIABILITIES AND EQUITY
Current Liabilities
Securities due within one year
Securities due within one year, VIE
Short-term debt
Accounts payable
Derivative liabilities
Total current liabilities
Long-Term Debt
Long-term debt
Junior subordinated notes
Remarketable subordinated notes
Total long-term debt
Deferred Credits and Other Liabilities
Deferred income taxes and investment tax credits
Pension and other postretirement benefit liabilities
Regulatory liabilities
Total deferred credits and other liabilities
Total liabilities
Commitments and Contingencies (see Note 15)
Subsidiary Preferred Stock Not Subject to Mandatory Redemption
Equity
Common stock - no par(2)
Other paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total common shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
PAGE 9
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30,
Operating Activities
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Impairment of merchant generation assets
Gains on sales of assets
Depreciation, depletion and amortization (including nuclear fuel)
Rate refunds
Other adjustments
Changes in:
Accounts receivable
Deferred fuel and purchased gas costs, net
Prepayments
Accrued interest, payroll and taxes
Margin deposit assets and liabilities
Other operating assets and liabilities
Net cash provided by operating activities
Investing Activities
Plant construction and other property additions (including nuclear fuel)
Proceeds from sales of assets
Proceeds from sales of securities
Purchases of securities
Restricted cash equivalents
Net cash used in investing activities
Financing Activities
Repayment of short-term debt, net
Issuance of long-term debt
Repayment of long-term debt, including redemption premiums
Repayment of junior subordinated notes
Acquisition of Juniper noncontrolling interest in Fairless
Issuance of common stock
Common dividend payments
Subsidiary preferred dividend payments
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental Cash Flow Information
Significant noncash investing activities:
Accrued capital expenditures
Contribution of assets in exchange for additional ownership interest in Blue Racer
PAGE 10
VIRGINIA ELECTRIC AND POWER COMPANY
Other operations and maintenance:
Affiliated suppliers
Depreciation and amortization
Income before income tax expense
Net Income
Preferred dividends
Balance available for common stock
The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.
PAGE 11
Net income
Changes in unrealized net gains on nuclear decommissioning trust funds(2)
Net derivative losses-hedging activities(3)
Net realized gains on nuclear decommissioning trust funds(4)
Other comprehensive income
Comprehensive income
PAGE 12
Customer receivables (less allowance for doubtful accounts of $10 at both dates)
Other receivables (less allowance for doubtful accounts of $2 and $3)
Inventories (average cost method)
Accumulated depreciation and amortization
Intangible assets, net
PAGE 13
LIABILITIES AND SHAREHOLDER’S EQUITY
Payables to affiliates
Affiliated current borrowings
Preferred Stock Not Subject to Mandatory Redemption
Common Shareholder’s Equity
Accumulated other comprehensive income
Total common shareholder’s equity
Total liabilities and shareholder’s equity
PAGE 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including nuclear fuel)
Affiliated accounts payable
Deferred fuel expenses
Plant construction and other property additions
Purchases of nuclear fuel
Repayment of affiliated current borrowings, net
Repayment of long-term debt
Preferred dividend payments
PAGE 15
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations
Dominion, headquartered in Richmond, Virginia, is one of the nation’s largest producers and transporters of energy. Dominion’s operations are conducted through various subsidiaries, including Virginia Power, a regulated public utility that generates, transmits and distributes electricity for sale in Virginia and northeastern North Carolina.
Note 2. Significant Accounting Policies
As permitted by the rules and regulations of the SEC, Dominion’s and Virginia Power’s accompanying unaudited Consolidated Financial Statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with GAAP. These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012 and their Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013.
In Dominion’s and Virginia Power’s opinion, the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary to present fairly their financial position as of September 30, 2013, their results of operations for the three and nine months ended September 30, 2013 and 2012 and their cash flows for the nine months ended September 30, 2013 and 2012. Such adjustments are normal and recurring in nature unless otherwise noted.
The Companies make certain estimates and assumptions in preparing their Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.
Dominion’s and Virginia Power’s accompanying unaudited Consolidated Financial Statements include, after eliminating intercompany transactions and balances, their accounts and those of their respective majority-owned subsidiaries and those VIEs where Dominion has been determined to be the primary beneficiary.
The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Information for quarterly periods is affected by seasonal variations in sales, rate changes, electric fuel and other energy-related purchases, purchased gas expenses and other factors.
Certain amounts in Dominion’s and Virginia Power’s 2012 Consolidated Financial Statements and Notes have been reclassified to conform to the 2013 presentation for comparative purposes. The reclassifications did not affect the Companies’ net income, total assets, liabilities, equity or cash flows.
Amounts disclosed for Dominion are inclusive of Virginia Power, where applicable.
Note 3. Dispositions
Sale of Illinois Gas Contracts
In June 2013, Dominion completed the sale of Illinois Gas Contracts. The sales price was approximately $32 million, subject to post-closing adjustments. The sale resulted in a gain of approximately $29 million ($18 million after-tax) net of a $3 million write-off of goodwill, and is included in other operations and maintenance expense in Dominion’s Consolidated Statement of Income. The sale of Illinois Gas Contracts did not qualify for discontinued operations classification as it is not considered a component under applicable accounting guidance.
Sale of Brayton Point, Kincaid and Equity Method Investment in Elwood
In March 2013, Dominion entered into an agreement with Energy Capital Partners to sell Brayton Point, Kincaid, and its equity method investment in Elwood.
In the first and second quarters of 2013, Brayton Point’s and Kincaid’s assets and liabilities to be disposed of were classified as held for sale and adjusted to their estimated fair value less cost to sell, resulting in impairment charges totaling $48 million ($28 million after-tax), which are included in discontinued operations in Dominion’s Consolidated Statements of Income. In both periods, Dominion used the market approach to estimate the fair value of Brayton Point’s and Kincaid’s long-lived assets. These were considered Level 2 fair value measurements given that they were based on the agreed-upon sales price.
Dominion’s 50% interest in Elwood was an equity method investment and therefore, in accordance with applicable accounting guidance, the carrying amount of this investment was not classified as held for sale nor were the equity earnings from this investment reported as discontinued operations.
PAGE 16
In August 2013, Dominion completed the sale and received proceeds of approximately $465 million, net of transaction costs. The sale resulted in a $35 million ($25 million after-tax) gain attributable to its equity method investment in Elwood, which is included in other income in Dominion’s Consolidated Statement of Income, which was partially offset by a $17 million ($18 million after-tax) loss attributable to Brayton Point and Kincaid, which includes a $16 million write-off of goodwill and is reflected in loss from discontinued operations in Dominion’s Consolidated Statement of Income.
The following table presents selected information regarding the results of operations of Brayton Point and Kincaid, which are reported as discontinued operations in Dominion’s Consolidated Statements of Income:
Operating revenue
Loss before income taxes
Sale of Salem Harbor and State Line
In the third quarter of 2012, Dominion completed the sale of Salem Harbor. During the second quarter of 2012, Dominion completed the sale of State Line, which ceased operations in March 2012.
The following table presents selected information regarding the results of operations of Salem Harbor and State Line, which are classified in discontinued operations in Dominion’s Consolidated Statements of Income:
PAGE 17
Note 4. Operating Revenue
The Companies’ operating revenue consists of the following:
Electric sales:
Regulated
Nonregulated
Gas sales:
Gas transportation and storage
Total operating revenue
Regulated electric sales
Note 5. Income Taxes
In December 2011, the IRS issued temporary regulations that provide guidance to taxpayers on the treatment of amounts paid to acquire, produce or improve tangible property and of dispositions of such property, including whether expenditures should be deducted as repairs or capitalized and depreciated on tax returns. Upon issuance, the temporary regulations were generally to be effective for expenditures made on or after January 1, 2012. However, in December 2012, in response to public comments received, the IRS amended the temporary regulations to postpone the effective date until January 1, 2014.
In September 2013, the IRS withdrew the December 2011 temporary regulations and issued final regulations. The final regulations include a number of safe harbor tax accounting methods which a taxpayer may choose to elect and, if adopted, will not be challenged by the IRS. In addition, the IRS reissued certain temporary regulations that were also issued concurrently as proposed regulations regarding property dispositions. The final regulations are effective for tax years beginning on or after January 1, 2014. Although changes in tax accounting methods would be effective prospectively, implementation of certain changes will require a calculation of the cumulative effect of the change on prior years. Beginning with the year of the change, this cumulative effect is includible in taxable income over a period assumed to be four years, pending the issuance of IRS procedural guidance.
Dominion and Virginia Power have evaluated tax accounting method changes that may be elected or required by the final regulations. At September 30, 2013, $13 million of deferred tax liabilities have been classified as current in the Companies’ Consolidated Balance Sheets, representing cumulative adjustment amounts expected to be reflected in income for tax purposes during the nine months ending September 30, 2014. Tax accounting method changes in 2014 are not expected to materially affect the Companies’ cash flows, results of operations or financial condition.
PAGE 18
For continuing operations, including noncontrolling interests, the statutory U.S. federal income tax rate reconciles to Dominion’s and Virginia Power’s effective income tax rate as follows:
U.S. statutory rate
Increases (reductions) resulting from:
State taxes, net of federal benefit
Investment and production tax credits
Valuation allowances
AFUDC - equity
Other, net
Effective tax rate
Dominion’s and Virginia Power’s 2013 state income tax expense reflects changes in the amount of income apportioned among states.
Dominion’s effective tax rate in 2012 reflects a $20 million reduction of valuation allowance related to state operating loss carryforwards attributable to Fairless. After considering the results of Fairless’ operations in recent years and a forecast of future operating results reflecting Dominion’s planned purchase of the facility, Dominion concluded that it was more likely than not that the tax benefit of the operating losses would be realized. Significant assumptions included future commodity prices, in particular, those for electric energy produced by Fairless and those for natural gas, as compared to other fuels used for the generation of electricity, which would significantly influence the extent to which Fairless is dispatched by PJM. In August 2013, Dominion purchased Fairless from Juniper per the terms of the lease agreement. See Note 13 in this report for more information.
See Note 5 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012, for a discussion of the Companies’ unrecognized tax benefits. During the nine months ended September 30, 2013, Dominion’s and Virginia Power’s unrecognized tax benefits changed as follows:
Balance at January 1, 2013
Increases - prior period positions
Decreases - prior period positions
Current period positions
Settlements
Expiration of statutes of limitations
Balance at September 30, 2013
Discontinued Operations
Dominion’s effective tax rate for 2013 reflects the impact of goodwill written off in the sale of Kincaid and Brayton Point that is not deductible for tax purposes.
Note 6. Earnings Per Share
The following table presents the calculation of Dominion’s basic and diluted EPS:
Average shares of common stock outstanding - Basic
Net effect of dilutive securities(1)
Average shares of common stock outstanding - Diluted
Earnings Per Common Share - Basic
Earnings Per Common Share - Diluted
PAGE 19
Dominion’s 2013 Series A Equity Units and 2013 Series B Equity Units issued in June 2013 are potentially dilutive securities but were excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2013. See Note 14 in this report for more information. There were no potentially dilutive securities excluded from the calculation of diluted EPS for the three and nine months ended September 30, 2012.
PAGE 20
Note 7. Accumulated Other Comprehensive Income
The following table presents Dominion’s changes in AOCI by component, net of tax:
Three Months Ended September 30, 2013
Beginning balance
Other comprehensive income before reclassifications: gains (losses)
Amounts reclassified from accumulated other comprehensive income(1): (gains) losses
Net current-period other comprehensive income (loss)
Ending balance
Nine Months Ended September 30, 2013
PAGE 21
The following table presents Dominion’s reclassifications out of AOCI by component:
Details about AOCI components
Deferred (gains) and losses on derivatives-hedging activities:
Commodity contracts
Interest rate contracts
Tax
Unrealized (gains) and losses on investment securities:
Realized (gain) loss on sale of securities
Impairment
Unrecognized pension and other postretirement benefit costs:
Actuarial losses
Prior service costs
PAGE 22
Note 8. Fair Value Measurements
Dominion’s and Virginia Power’s fair value measurements are made in accordance with the policies discussed in Note 6 to the Consolidated Financial Statements in their Annual Report on Form 10-K for the year ended December 31, 2012. See Note 9 in this report for further information about their derivatives and hedge accounting activities.
Dominion and Virginia Power enter into certain physical and financial forwards and futures, options, and full requirements contracts, which are considered Level 3 as they have one or more inputs that are not observable and are significant to the valuation. The discounted cash flow method is used to value Level 3 physical and financial forwards, futures, and full requirements contracts. An option model is used to value Level 3 physical and financial options. The discounted cash flow model for forwards and futures calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return, and credit spreads. Full requirements contracts add load shaping and usage factors in addition to the discounted cash flow model inputs. The option model calculates mark-to-market valuations using variations of the Black-Scholes option model. The inputs into the models are the forward market prices, implied price volatilities, mean reversions, risk-free rate of return, the option expiration dates, the option strike prices, price correlations, the original sales prices, and volumes. For Level 3 fair value measurements, forward market prices, implied price volatilities, price correlations, load shaping, and usage factors are considered unobservable. The unobservable inputs are developed and substantiated using historical information, available market data, third-party data, and statistical analysis. Periodically, inputs to valuation models are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third-party pricing sources.
The following table presents Dominion’s and Virginia Power’s quantitative information about Level 3 fair value measurements. The range and weighted average are presented in dollars for market price inputs, years for mean reversion speeds, and percentages for price volatility, price correlations, load shaping, and usage factors.
At September 30, 2013
Assets:
Physical and Financial Forwards and Futures:
Natural Gas(2)
Electricity
FTRs(3)
Liquids
Physical and Financial Options:
Natural Gas
Full Requirements Contracts:
Liabilities:
PAGE 23
Sensitivity of the fair value measurements to changes in the significant unobservable inputs is as follows:
Significant Unobservable Inputs
Position
Change to Input
Impact on Fair
Value
Measurement
Non-recurring Fair Value Measurements
In June 2013, Dominion purchased certain natural gas infrastructure facilities that were previously leased from third parties. The purchase price was based on terms in the lease, which exceeded current market pricing. As a result of the purchase price and expected losses, Dominion recorded an impairment charge of $49 million ($29 million after-tax) in other operations and maintenance expense in its Consolidated Statements of Income, to write down the long-lived assets to their estimated fair values of less than $1 million. As management was not aware of any recent market transactions for comparable assets with sufficient transparency to develop a market approach to fair value, Dominion used the income approach (discounted cash flows) to estimate the fair value of the assets in this impairment test. This was considered a Level 3 fair value measurement due to the use of significant unobservable inputs, including estimates of future production and other commodity prices.
See Note 3 for non-recurring fair value measurements related to Brayton Point and Kincaid.
PAGE 24
Recurring Fair Value Measurements
The following table presents Dominion’s assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions:
Derivatives:
Commodity
Interest rate
Investments(1):
Equity securities:
U.S.:
Large cap
Non-U.S.:
Fixed income:
Corporate debt instruments
U.S. Treasury securities and agency debentures
State and municipal
Cash equivalents and other
At December 31, 2012
PAGE 25
The following table presents the net change in Dominion’s assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category:
Total realized and unrealized gains (losses):
Included in earnings
Included in other comprehensive income (loss)
Included in regulatory assets/liabilities
Transfers out of Level 3
The amount of gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date
PAGE 26
The following table presents Dominion’s classification of gains and losses included in earnings in the Level 3 fair value category:
Total gains (losses) included in earnings
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date
Three Months Ended September 30, 2012
Nine Months Ended September 30, 2012
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The following table presents Virginia Power’s assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions:
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The following table presents the net change in Virginia Power’s assets and liabilities measured at fair value on a recurring basis and included in the Level 3 fair value category:
The gains and losses included in earnings in the Level 3 fair value category were classified in electric fuel and other energy-related purchases in Virginia Power’s Consolidated Statements of Income for the three and nine months ended September 30, 2013 and 2012. There were no unrealized gains or losses included in earnings in the Level 3 fair value category relating to assets/liabilities still held at the reporting date for the three and nine months ended September 30, 2013 and 2012.
Fair Value of Financial Instruments
Substantially all of Dominion’s and Virginia Power’s financial instruments are recorded at fair value, with the exception of the instruments described below, which are reported at historical cost. Estimated fair values have been determined using available market information and valuation methodologies considered appropriate by management. The carrying amount of cash and cash equivalents, customer and other receivables, short-term debt and accounts payable are representative of fair value because of the short-term nature of these instruments. For Dominion’s and Virginia Power’s financial instruments that are not recorded at fair value, the carrying amounts and estimated fair values are as follows:
Long-term debt, including securities due within one year(2)
Securities due within one year, VIE(3)
Junior subordinated notes(3)
Remarketable subordinated notes(3)
Subsidiary preferred stock(4)
Preferred stock(4)
Note 9. Derivatives and Hedge Accounting Activities
Dominion’s and Virginia Power’s accounting policies and objectives and strategies for using derivative instruments are discussed in Note 2 to the Consolidated Financial Statements in their Annual Report on Form 10-K for the year ended December 31, 2012. See Note 8 in this report for further information about fair value measurements and associated valuation methods for derivatives.
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Derivative assets and liabilities are presented gross on Dominion’s and Virginia Power’s Consolidated Balance Sheets. Dominion’s and Virginia Power’s derivative contracts include both over-the-counter transactions and those that are executed on an exchange or other trading platform (exchange contracts) and centrally cleared. Over-the-counter contracts are bilateral contracts that are transacted directly with a third party. Exchange contracts utilize a financial intermediary, exchange, or clearinghouse to enter, execute, or clear the transactions. Certain over-the-counter and exchange contracts contain contractual rights of setoff through master netting arrangements, derivative clearing agreements, and contract default provisions. In addition, the contracts are subject to conditional rights of setoff through counterparty nonperformance, insolvency, or other conditions.
In general, most over-the-counter transactions and all exchange contracts are subject to collateral requirements. Types of collateral for over-the-counter and exchange contracts include cash, letters of credit, and in some cases other forms of security, none of which are subject to restrictions. Cash collateral is used in the table below to offset derivative assets and liabilities. Certain accounts receivable and accounts payable recognized on Dominion’s and Virginia Power’s Consolidated Balance Sheets, as well as letters of credit and other forms of security, all of which are not included in the tables below, are subject to offset under master netting or similar arrangements and would reduce the net exposure.
The tables below present Dominion’s derivative asset and liability balances by type of financial instrument, before and after the effects of offsetting:
Interest rate contracts:
Over-the-counter
Commodity contracts:
Exchange
Total derivatives, subject to a master netting or similar arrangement
Total derivatives, not subject to a master netting or similar arrangement
Total(1)
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Total
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The following table presents the volume of Dominion’s derivative activity as of September 30, 2013. These volumes are based on open derivative positions and represent the combined absolute value of their long and short positions, except in the case of offsetting transactions, for which they represent the absolute value of the net volume of their long and short positions.
Natural Gas (bcf):
Fixed price(1)
Basis
Electricity (MWh):
Capacity (MW)
Liquids (Gal)(2)
For the three and nine months ended September 30, 2013 and 2012, gains or losses on hedging instruments determined to be ineffective and amounts excluded from the assessment of effectiveness were not material. Amounts excluded from the assessment of effectiveness include gains or losses attributable to changes in the time value of options and changes in the differences between spot prices and forward prices.
The following table presents selected information related to gains (losses) on cash flow hedges included in AOCI in Dominion’s Consolidated Balance Sheet at September 30, 2013:
Commodities:
Gas
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The amounts that will be reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., anticipated sales) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies and will vary from the expected amounts presented above as a result of changes in market prices and interest rates.
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Fair Value and Gains and Losses on Derivative Instruments
The following table presents the fair values of Dominion’s derivatives and where they are presented in its Consolidated Balance Sheets:
September 30, 2013
Total current derivative assets
Noncurrent Assets
Total noncurrent derivative assets(1)
Total derivative assets
LIABILITIES
Total current derivative liabilities
Noncurrent Liabilities
Total noncurrent derivative liabilities(2)
Total derivative liabilities
December 31, 2012
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The following tables present the gains and losses on Dominion’s derivatives, as well as where the associated activity is presented in its Consolidated Balance Sheets and Statements of Income:
Derivatives in cash flow hedging relationships
Derivative Type and Location of Gains (Losses)
Commodity:
Purchased Gas
Total commodity
Interest rate(3)
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Derivatives not designated as hedging instruments
Interest rate(2)
The tables below present Virginia Power’s derivative asset and liability balances by type of financial instrument, before and after the effects of offsetting:
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The following table presents the volume of Virginia Power’s derivative activity as of September 30, 2013. These volumes are based on open derivative positions and represent the combined absolute value of their long and short positions, except in the case of offsetting transactions, for which they represent the absolute value of the net volume of their long and short positions.
Fixed price
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The following table presents the fair values of Virginia Power’s derivatives and where they are presented in its Consolidated Balance Sheets:
Total current derivative assets(1)
Total current derivative liabilities(2)
Total noncurrent derivative liabilities(3)
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The following tables present the gains and losses on Virginia Power’s derivatives, as well as where the associated activity is presented in its Consolidated Balance Sheets and Statements of Income:
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Commodity(2)
Note 10. Investments
Equity and Debt Securities
Rabbi Trust Securities
Marketable equity and debt securities and cash equivalents held in Dominion’s rabbi trusts and classified as trading totaled $100 million and $95 million at September 30, 2013 and December 31, 2012, respectively. Cost method investments held in Dominion’s rabbi trusts totaled $10 million and $14 million at September 30, 2013 and December 31, 2012, respectively.
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Decommissioning Trust Securities
Dominion holds marketable equity and debt securities (classified as available-for-sale), cash equivalents and cost method investments in nuclear decommissioning trust funds to fund future decommissioning costs for its nuclear plants. Dominion’s decommissioning trust funds are summarized below:
Marketable equity securities:
Large Cap
Marketable debt securities:
Corporate bonds
Cost method investments
Cash equivalents and other(2)
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The fair value of Dominion’s marketable debt securities held in nuclear decommissioning trust funds at September 30, 2013 by contractual maturity is as follows:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Presented below is selected information regarding Dominion’s marketable equity and debt securities held in nuclear decommissioning trust funds.
Proceeds from sales
Realized gains(1)
Realized losses(1)
Other-than-temporary impairment losses on investments held in nuclear decommissioning trust funds for Dominion were not material for the three and nine months ended September 30, 2013 and 2012.
In December 2012, Dominion formed Blue Racer with Caiman to provide midstream services to natural gas producers operating in the Utica Shale region in Ohio and portions of Pennsylvania. Blue Racer is an equal partnership between Dominion and Caiman, with Dominion contributing midstream assets and Caiman contributing private equity capital. In March 2013, DTI sold Line TL-404 to Blue Racer and received approximately $47 million in cash proceeds resulting in an approximately $25 million ($14 million after-tax) gain. Phase 1 of the Natrium natural gas processing and fractionation facility was completed in the second quarter of 2013 and was contributed to Blue Racer in the third quarter of 2013, resulting in an increased equity method investment in Blue Racer of $473 million. Also in the third quarter of 2013, East Ohio sold Line TPL-2A and DTI sold Line TL-388 to Blue Racer and received approximately $83 million in cash proceeds resulting in an approximately $75 million ($42 million after-tax) gain.
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Virginia Power holds marketable equity and debt securities (classified as available-for-sale), cash equivalents and cost method investments in nuclear decommissioning trust funds to fund future decommissioning costs for its nuclear plants. Virginia Power’s decommissioning trust funds are summarized below:
The fair value of Virginia Power’s marketable debt securities at September 30, 2013 by contractual maturity is as follows:
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Presented below is selected information regarding Virginia Power’s marketable equity and debt securities.
Other-than-temporary impairment losses on investments held in nuclear decommissioning trust funds for Virginia Power were not material for the three and nine months ended September 30, 2013 and 2012.
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Note 11. Regulatory Assets and Liabilities
Regulatory assets and liabilities include the following:
Regulatory assets:
Deferred rate adjustment clause costs(1)
Derivatives(2)
Unrecovered gas cost(3)
Plant retirement(4)
Regulatory assets-current(5)
Unrecognized pension and other postretirement benefit costs(6)
Income taxes recoverable through future rates(7)
Regulatory assets-non-current
Total regulatory assets
Regulatory liabilities:
PIPP(8)
Regulatory liabilities-current(9)
Provision for future cost of removal and AROs(10)
Decommissioning trust(11)
Regulatory liabilities-non-current
Total regulatory liabilities
Provision for future cost of removal(10)
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At September 30, 2013, approximately $102 million of Dominion’s and $65 million of Virginia Power’s regulatory assets represented past expenditures on which they do not currently earn a return. These expenditures are expected to be recovered within the next two years.
Note 12. Regulatory Matters
Regulatory Matters Involving Potential Loss Contingencies
As a result of issues generated in the ordinary course of business, Dominion and Virginia Power are involved in various regulatory matters. Certain regulatory matters may ultimately result in a loss; however, as such matters are in an initial procedural phase, involve uncertainty as to the outcome of pending reviews or orders, and/or involve significant factual issues that need to be resolved, it is not possible for the Companies to estimate a range of possible loss. For matters for which the Companies cannot estimate a range of possible loss, a statement to this effect is made in the description of the matter. Other matters may have progressed sufficiently through the regulatory process such that the Companies are able to estimate a range of possible loss. For regulatory matters for which the Companies are able to reasonably estimate a range of possible losses, an estimated range of possible loss is provided, in excess of the accrued liability (if any) for such matters. Any estimated range is based on currently available information and involves elements of judgment and significant uncertainties. Any estimated range of possible loss may not represent the Companies’ maximum possible loss exposure. The circumstances of such regulatory matters will change from time to time and actual results may vary significantly from the current estimate. For current matters not specifically reported below, management does not anticipate that the outcome from such matters would have a material effect on Dominion’s or Virginia Power’s financial position, liquidity or results of operations.
FERC - Electric
Under the Federal Power Act, FERC regulates wholesale sales and transmission of electricity in interstate commerce by public utilities. Dominion’s merchant generators sell electricity in the PJM, MISO and ISO-NE wholesale markets under Dominion’s market-based sales tariffs authorized by FERC. Virginia Power purchases and, under its FERC market-based rate authority, sells electricity in the wholesale market. In addition, Virginia Power has FERC approval of a tariff to sell wholesale power at capped rates based on its embedded cost of generation. This cost-based sales tariff could be used to sell to loads within or outside Virginia Power’s service territory. Any such sales would be voluntary.
Rates
In April 2008, FERC granted an application for Virginia Power’s electric transmission operations to establish a forward-looking formula rate mechanism that updates transmission rates on an annual basis and approved an ROE of 11.4%, effective as of January 1, 2008. The formula rate is designed to recover the expected revenue requirement for each calendar year and is updated based on actual costs. The FERC-approved formula method, which is based on projected costs, allows Virginia Power to earn a current return on its growing investment in electric transmission infrastructure.
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In July 2008, Virginia Power filed an application with FERC requesting a revision to its revenue requirement to reflect an additional ROE incentive adder for eleven electric transmission enhancement projects. Under the proposal, the cost of transmission service would increase to include an ROE incentive adder for each of the eleven projects, beginning the year each project enters commercial operation (but not before January 1, 2009). Virginia Power proposed an incentive of 1.5% for four of the projects (including the Meadow Brook-to-Loudoun and Carson-to-Suffolk lines, which were completed in 2011) and an incentive of 1.25% for the other seven projects. In August 2008, FERC approved the proposal, effective September 1, 2008, the incentives were included in the PJM Tariff, and billing for the incentives was made accordingly. In 2012, PJM canceled one of the eleven projects with an estimated cost of $7 million. The total cost for the other ten projects included in Virginia Power’s formula rate for 2013 is $852 million and the remaining projects were completed in 2012. Numerous parties sought rehearing of the FERC order in August 2008. In May 2012, FERC issued an order denying the rehearing requests. In July 2012, the North Carolina Commission filed an appeal of the FERC orders with the U.S. Court of Appeals for the Fourth Circuit. While Virginia Power cannot predict the outcome of the appeal, it is not expected to have a material effect on results of operations.
In March 2010, ODEC and NCEMC filed a complaint with FERC against Virginia Power claiming that approximately $223 million in transmission costs related to specific projects were unjust, unreasonable and unduly discriminatory or preferential and should be excluded from Virginia Power’s transmission formula rate. ODEC and NCEMC requested that FERC establish procedures to determine the amount of costs for each applicable project that should be excluded from Virginia Power’s rates. In October 2010, FERC issued an order dismissing the complaint in part and established hearings and settlement procedures on the remaining part of the complaint. In February 2012, Virginia Power submitted to FERC a settlement agreement to resolve all issues set for hearing. All transmission customer parties to the proceeding joined the settlement. The Virginia Commission, North Carolina Commission and Public Staff of the North Carolina Commission, while not parties to the settlement, did not oppose the settlement. The settlement was accepted by FERC in May 2012 and provides for payment by Virginia Power to the transmission customer parties collectively of $250,000 per year for ten years and resolves all matters other than allocation of the incremental cost of certain underground transmission facilities, which has been briefed pursuant to FERC’s May 2012 order and awaits FERC action. While Virginia Power cannot predict the outcome of the briefing, it is not expected to have a material effect on results of operations.
Other Regulatory Matters
Other than the following matters, there have been no significant developments regarding the pending regulatory matters disclosed in Note 13 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012 and Note 12 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013.
Virginia Regulation
Biennial Review
Pursuant to the Regulation Act, in March 2013, Virginia Power submitted its base rate filings and accompanying schedules in support of the 2013 biennial review of its rates, terms and conditions, as well as of its earnings for test years 2011 and 2012. Virginia Power’s earnings test analysis, as filed, demonstrated it earned an ROE of 10.11% on its generation and distribution services for the combined test period of 2011 and 2012. In September 2013, the Virginia Commission conducted a hearing to receive evidence and public comments regarding Virginia Power’s base rate filings. During the hearing, Virginia Power updated its previous earnings test analysis to demonstrate that it earned an ROE of 10.30% on its generation and distribution services for the applicable test period. Although this ROE is more than 50 basis points below the authorized ROE of 10.9% established in its 2011 biennial review, Virginia Power did not request an increase in base rates for generation or distribution services in this proceeding. No parties to the proceeding asserted that Virginia Power earned above its authorized earnings band for a second consecutive biennial review, meaning that base rates are not statutorily subject to change in this proceeding. The Virginia Commission’s final order must be issued no later than November 28, 2013.
In October 2013, Virginia Power filed a voluntary agreement with the Virginia Commission, proposing to issue a base rate credit of approximately $9 million from its 2012 revenues. This voluntary base rate credit, if approved, would be effective April 1, 2014 and amortized for a twelve-month period. This amount has no effect upon Virginia Power’s past or future earnings test results, and it does not constitute a credit or rate adjustment for purposes of the Regulation Act. This credit is intended to offset and eliminate the revenue requirement increase for customers in certain rate adjustment clause cases resulting from the timing of a Virginia Power securities issuance. A decision on this filing is pending.
DSM Riders C1A and C2A
In August 2013, Virginia Power filed an application with the Virginia Commission to continue Rider C1A and Rider C2A. Virginia Power proposed to continue cost recovery associated with DSM programs that were approved in its 2011 DSM case, as well as its previously approved electric vehicle pilot program. Virginia Power further requested approval to launch three new energy efficiency DSM programs that would be marketed as part of its existing non-residential bundle of DSM offerings. The requested revenue requirements are approximately $1 million for Rider C1A and approximately $35 million for Rider C2A. These amounts include operating expenses for Virginia Power’s proposed and previously approved programs above for
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the rate year beginning May 1, 2014 (including a gross-up or margin on expenses for energy efficiency programs), true-ups of the 2012 calendar year costs for the previously approved programs and carrying costs on the over-/under-recovery of costs. Virginia Power also proposed a combined spending cap of approximately $114 million, inclusive of lost revenues, for its three new DSM programs. This matter is pending.
Virginia Fuel Expenses
In October 2013, Virginia Power filed a voluntary request with the Virginia Commission to reduce its currently-approved fuel factor rate from 2.942 ¢/kWh to 2.572 ¢/kWh effective for usage on and after December 1, 2013, due to an anticipated over-recovery. This request is expected to reduce Virginia Power’s anticipated fuel recoveries through June 30, 2014 by more than $140 million. At September 30, 2013, Virgina Power’s Consolidated Balance Sheet reflected $20 million of other current liabilities and $47 million of noncurrent regulatory liabilities related to fuel recoveries. Virginia Power has requested an order on this request by November 20, 2013.
Bremo Power Station
In September 2013, the Virginia Commission issued its final order approving an amended and reissued CPCN that would allow Virginia Power to convert Bremo Units 3 and 4 from coal to natural gas as their fuel source. The converted units must be in service by July 1, 2014, although this deadline can be extended for good cause. The proposed conversion will preserve 227 MW (net) of existing capacity and is expected to cost approximately $53 million, excluding financing costs.
Brunswick County and Generation Rider BW
In August 2013, three motions for reconsideration were filed with the Virginia Commission, asking that it reconsider its August 2013 final order approving a CPCN for construction of Brunswick County. In August 2013, the Virginia Commission granted the motions for the purpose of continuing its jurisdiction over these matters. Also in August 2013, two notices were filed to appeal the Virginia Commission’s final order to the Supreme Court of Virginia. In September 2013, Virginia Power filed its notices of intent to participate in both appeals as an appellee. These matters are pending.
The Virginia Commission previously approved Rider BW in conjunction with its approval of Brunswick County. In November 2013, Virginia Power requested Virginia Commission approval of its annual update for Rider BW for the twelve-month rate year beginning September 1, 2014, utilizing a 12.5% ROE (inclusive of a 100 basis point statutory enhancement) consistent with the base ROE that Virginia Power has proposed, and which is pending a decision, in its 2013 biennial review case. Virginia Power proposed an approximately $101 million revenue requirement for the rate year. This case is pending.
Virginia Power is considering the construction of a third nuclear unit at a site located at North Anna. In April 2013, Virginia Power decided to replace the reactor design previously selected for a potential unit with ESBWR technology.
If Virginia Power decides to build a new unit, it must first receive a COL from the NRC, the approval of the Virginia Commission and certain environmental permits and other approvals. Virginia Power filed the first of its two-part amendment to the COL application with the NRC in July 2013 to reflect the ESBWR technology, and expects to file the second part of the amendment by the end of 2013. Virginia Power has not yet committed to building a new nuclear unit at North Anna.
FERC - Gas
Natrium-to-Market Project
In September 2013, DTI received FERC authorization to construct the $42 million Natrium-to-Market project. The project is designed to provide 185,000 dekatherms per day of firm transportation from an interconnect between DTI and the Natrium facility to DTI’s interconnect with Texas Eastern Transmission, LP in Greene County Pennsylvania. Four customers have entered into binding precedent agreements for the full project capacity under 8-year and 13-year terms. The project is anticipated to be in service in November 2014.
FERC - Other
Pipeline G-150
In May 2012, Dominion began construction of the $147 million pipeline G-150 project. The pipeline is designed to transport approximately 27,000 barrels per day of ethane from the Natrium facility to an interconnect with the ATEX line of Enterprise near Follansbee, West Virginia. Dominion NGL Pipelines, LLC, a subsidiary of Dominion, owns the 58-mile pipeline and associated equipment. Transportation services on the pipeline will be subject to FERC regulation pursuant to the Interstate Commerce Act. In August 2013, Dominion filed a petition for declaratory order requesting FERC approval, by mid-November 2013, of (1) general rate structure, (2) rate and terms for committed shipper, and (3) rate design for uncommitted shippers. The facilities are anticipated to be available in the first quarter of 2014 following commencement of operation of Enterprise’s ATEX line and resumption of operations at the Natrium facility. Dominion NGL Pipelines, LLC is expected to be contributed to Blue Racer prior to commencement of service.
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Note 13. Variable Interest Entities
As discussed in Note 15 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012, certain variable pricing terms in some of the Companies’ long-term power and capacity contracts cause them to be considered variable interests in the counterparties.
Virginia Power has long-term power and capacity contracts with four non-utility generators with an aggregate summer generation capacity of approximately 870 MW. These contracts contain certain variable pricing mechanisms in the form of partial fuel reimbursement that Virginia Power considers to be variable interests. After an evaluation of the information provided by these entities, Virginia Power was unable to determine whether they were VIEs. However, the information they provided, as well as Virginia Power’s knowledge of generation facilities in Virginia, enabled Virginia Power to conclude that, if they were VIEs, it would not be the primary beneficiary. This conclusion reflects Virginia Power’s determination that its variable interests do not convey the power to direct the most significant activities that impact the economic performance of the entities during the remaining terms of Virginia Power’s contracts and for the years the entities are expected to operate after its contractual relationships expire. The contracts expire at various dates ranging from 2015 to 2021. Virginia Power is not subject to any risk of loss from these potential VIEs other than its remaining purchase commitments which totaled $920 million as of September 30, 2013. Virginia Power paid $53 million and $52 million for electric capacity and $29 million and $27 million for electric energy to these entities in the three months ended September 30, 2013 and 2012, respectively. Virginia Power paid $161 million and $160 million for electric capacity and $74 million and $62 million for electric energy to these entities in the nine months ended September 30, 2013 and 2012, respectively.
Virginia Power purchased shared services from DRS, an affiliated VIE, of approximately $88 million and $86 million for the three months ended September 30, 2013 and 2012, respectively, and $248 million and $238 million for the nine months ended September 30, 2013 and 2012, respectively. Virginia Power determined that it is not the most closely associated entity with DRS and therefore not the primary beneficiary. DRS provides accounting, legal, finance and certain administrative and technical services to all Dominion subsidiaries, including Virginia Power. Virginia Power has no obligation to absorb more than its allocated share of DRS costs.
Dominion leased the Fairless generating facility in Pennsylvania from Juniper, the lessor, which began commercial operations in June 2004. Dominion made annual lease payments of approximately $53 million.
Juniper was formed in 2003 as a limited partnership and was organized for the purpose of acquiring and constructing a number of assets for lease. Such assets were financed with proceeds from the issuance of bank debt, privately placed long-term debt and partnership capital received from Juniper’s general and limited partners. Dominion had no voting equity interest in Juniper. Because Juniper had been subject to the business scope exception, Dominion was not required to evaluate whether Juniper was a VIE prior to October 2011.
Through September 30, 2011, Juniper held various power plant leases, including Fairless. In October 2011, the last lease other than Fairless expired and the related asset was sold by Juniper. With Fairless being its sole remaining asset, Juniper no longer qualified as a business as of October 2011, which required that Dominion determine whether Juniper was a VIE. Dominion concluded Juniper was a VIE because the entity’s capitalization was insufficient to support its operations, the power to direct the most significant activities of the entity was not held by the equity holders, and Dominion guaranteed a portion of the residual value of Fairless. The activities that most significantly impacted Juniper’s economic performance related to the operation of Fairless. The decisions related to the operations of Fairless were made by Dominion and as such, Dominion was considered the primary beneficiary.
Accordingly, Dominion consolidated Juniper in October 2011 and recorded, at fair value, approximately $957 million of property, plant and equipment, $896 million of debt and $61 million of noncontrolling interests. The debt was non-recourse to Dominion and was secured by Juniper’s assets. The annual lease payments made by Dominion to Juniper for Fairless were eliminated in the Consolidated Statements of Income and were excluded from the lease commitments table in Note 22 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012. Dominion did not provide any financial or other support to Juniper that it was not previously contractually required to provide.
In August 2013, the lease expired and Dominion purchased Fairless for $923 million from Juniper per the terms of the lease agreement. However, as Dominion had previously consolidated Juniper, the purchase was accounted for as an equity transaction to acquire the noncontrolling interests from Juniper for $923 million, while Dominion retained control of Fairless. The acquisition resulted in the removal of securities due within one year-VIE and noncontrolling interests from Dominion’s Consolidated Balance Sheet as of September 30, 2013.
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Note 14. Significant Financing Transactions
Credit Facilities and Short-term Debt
Dominion and Virginia Power use short-term debt to fund working capital requirements and as a bridge to long-term debt financings. The levels of borrowing may vary significantly during the course of the year, depending upon the timing and amount of cash requirements not satisfied by cash from operations. In addition, Dominion utilizes cash and letters of credit to fund collateral requirements. Collateral requirements are impacted by commodity prices, hedging levels, Dominion’s credit ratings and the credit quality of its counterparties.
At September 30, 2013, Dominion’s commercial paper and letters of credit outstanding, as well as its capacity available under credit facilities, were as follows:
Joint revolving credit facility(1)
Joint revolving credit facility(2)
Virginia Power’s short-term financing is supported by two joint revolving credit facilities with Dominion. These credit facilities are being used for working capital, as support for the combined commercial paper programs of Dominion and Virginia Power and for other general corporate purposes.
At September 30, 2013, Virginia Power’s share of commercial paper and letters of credit outstanding, as well as its capacity available under its joint credit facilities with Dominion were as follows:
In addition to the credit facility commitments mentioned above, Virginia Power also has a $120 million credit facility. Effective September 2013, the maturity date was extended from September 2017 to September 2018. As of September 30, 2013, this facility supports approximately $119 million of certain variable rate tax-exempt financings of Virginia Power.
Long-term Debt
In January 2013, Virginia Power issued $250 million of 1.2% senior notes and $500 million of 4.0% senior notes that mature in 2018 and 2043, respectively.
In March 2013, Virginia Power issued $500 million of 2.75% senior notes that mature in 2023.
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In March 2013, Virginia Power redeemed the $50 million 2.5% IDA of the Town of Louisa, Virginia Solid Waste and Sewage Disposal Revenue Bonds, Series 2001A, that would have otherwise matured in March 2031. Virginia Power intends to redeem the $10 million 2.5% and the $30 million 2.5% IDA of the Town of Louisa, Virginia Solid Waste and Sewage Disposal Revenue Bonds, Series 1997A and 2000A, that would otherwise mature in April 2022 and September 2030, respectively. The bonds are expected to be redeemed on or before April 1, 2014 at the amount of principal then outstanding plus accrued interest. At September 30, 2013, the bonds were included in securities due within one year in Virginia Power’s Consolidated Balance Sheets.
In connection with the sale of Kincaid, in May 2013 Kincaid redeemed its 7.33% senior secured bonds due June 2020 with an outstanding principal amount of $145 million. The bonds were redeemed for approximately $185 million, including a make-whole premium and accrued interest.
In connection with the sale of Brayton Point, Brayton Point provided notice of defeasance for three series of MDFA tax-exempt bonds, totaling approximately $257 million in outstanding principal amount, that would have otherwise matured in 2036 through 2042. In June 2013, Brayton Point delivered approximately $284 million to fund an irrevocable trust for the purpose of paying maturing principal and interest due through and including the earliest redemption dates of the bonds in 2016 and 2019. The bonds are no longer included in Dominion’s Consolidated Balance Sheet.
In June 2013, Brayton Point obtained bondholder consent and entered into a supplement to the Loan and Trust Agreement for approximately $75 million of variable rate MDFA Solid Waste Disposal Revenue Bonds, Series 2010B due 2041. The supplement and associated assignment agreement changed the sole obligor under the bonds from Brayton Point to Dominion; the bonds continue to be included in Dominion’s Consolidated Balance Sheet.
In August 2013, Virginia Power issued $585 million of 4.65% senior notes that mature in 2043.
Convertible Securities
At September 30, 2013, Dominion had $44 million of outstanding contingent convertible senior notes that are convertible by holders into a combination of cash and shares of Dominion’s common stock under certain circumstances. The conversion feature requires that the principal amount of each note be repaid in cash, while amounts payable in excess of the principal amount will be paid in common stock. The conversion rate is subject to adjustment upon certain events such as subdivisions, splits, combinations of common stock or the issuance to all common stock holders of certain common stock rights, warrants or options and certain dividend increases. As of September 30, 2013, the conversion rate had been adjusted, primarily due to individual dividend payments above the level paid at issuance, to 29.7664 shares of common stock per $1,000 principal amount of senior notes, which represents a conversion price of $33.59. If the outstanding notes as of September 30, 2013 were all converted, it would result in the issuance of approximately 600,000 additional shares of common stock.
The senior notes are eligible for conversion during any calendar quarter when the closing price of Dominion’s common stock was equal to or higher than 120% of the conversion price for at least 20 out of the last 30 consecutive trading days of the preceding quarter. During the nine months ended September 30, 2013, the senior notes were eligible for conversion and approximately $38 million of the notes were converted by holders. The senior notes are eligible for conversion during the fourth quarter of 2013.
Junior Subordinated Notes Payable to Affiliated Trusts
In January 2013, Dominion repaid its $258 million 7.83% unsecured junior subordinated debentures and redeemed all 250 thousand units of the $250 million 7.83% Dominion Resources Capital Trust I capital securities due December 1, 2027. The securities were redeemed at a price of $1,019.58 per capital security plus accrued and unpaid distributions.
Remarketable Subordinated Notes
In June 2013, Dominion issued $550 million of 2013 Series A 6.125% Equity Units and $550 million of 2013 Series B 6% Equity Units, initially in the form of Corporate Units. The Corporate Units are listed on the New York Stock Exchange under the symbols DCUA and DCUB, respectively.
Each Corporate Unit consists of a stock purchase contract and 1/20 interest in a RSN issued by Dominion. The stock purchase contracts obligate the holders to purchase shares of Dominion common stock at a future settlement date prior to the relevant RSN maturity date. The purchase price to be paid under the stock purchase contracts is $50 and the number of shares to be purchased will be determined under a formula based upon the average closing price of Dominion common stock near the settlement date. The RSNs are pledged as collateral to secure the purchase of common stock under the related stock purchase contracts.
Dominion makes quarterly interest payments on the RSNs and quarterly contract adjustment payments on the stock purchase contracts, at the rates described below. Dominion may defer payments on the stock purchase contracts and the RSNs for one or
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more consecutive periods but generally not beyond the purchase contract settlement date. If payments are deferred, Dominion may not make any cash distributions related to its capital stock, including dividends, redemptions, repurchases, liquidation payments or guarantee payments. Also, during the deferral period, Dominion may not make any payments on or redeem or repurchase any debt securities that are equal in right of payment with, or subordinated to, the RSNs.
Dominion has recorded the present value of the stock purchase contract payments as a liability offset by a charge to additional paid-in capital in equity. Interest payments on the RSNs are recorded as interest expense and stock purchase contract payments are charged against the liability. Accretion of the stock purchase contract liability is recorded as imputed interest expense. In calculating diluted EPS, Dominion applies the treasury stock method to the Equity Units. These securities did not have an effect on diluted EPS for the third quarter of 2013.
Under the terms of the stock purchase contracts, assuming no anti-dilution or other adjustments, Dominion will issue between 8.4 million and 9.9 million shares of its common stock in both April 2016 and July 2016. A total of 22.5 million shares of Dominion’s common stock has been reserved for issuance in connection with the stock purchase contracts.
Selected information about Dominion’s Equity Units is presented below:
Issuance Date
6/7/2013
Regulated Natural Gas Financing Plans
In September 2013, Dominion announced the formation of DGH, a first tier subsidiary holding company for the majority of Dominion’s regulated natural gas businesses. Specifically, Dominion transferred direct ownership of East Ohio, DTI and Dominion Iroquois, Inc., the latter of which holds a 24.72% general partnership interest in Iroquois Gas Transmission System, L.P., to DGH on September 30, 2013. Dominion intends to seek approval from the West Virginia Commission in 2014 for the transfer of direct ownership of Hope Gas, Inc. to DGH. DGH issued $1.2 billion principal amount of unsecured senior notes in a private placement on October 22, 2013 and will be the primary financing entity for Dominion’s regulated natural gas businesses. DGH expects to become an SEC registrant in 2014. DGH used the proceeds from the October 2013 offering to settle intercompany long-term notes from Dominion and to repay a portion of its intercompany revolving credit agreement balances with Dominion.
Note 15. Commitments and Contingencies
As a result of issues generated in the ordinary course of business, Dominion and Virginia Power are involved in legal proceedings before various courts and are periodically subject to governmental examinations (including by regulatory authorities), inquiries and investigations. Certain legal proceedings and governmental examinations involve demands for unspecified amounts of damages, are in an initial procedural phase, involve uncertainty as to the outcome of pending appeals or motions, and/or involve significant factual issues that need to be resolved, such that it is not possible for the Companies to estimate a range of possible loss. For such matters that the Companies cannot estimate, a statement to this effect is made in the description of the matter. Other matters may have progressed sufficiently through the litigation or investigative processes such that the Companies are able to estimate a range of possible loss. For legal proceedings and governmental examinations for which the Companies are able to reasonably estimate a range of possible losses, an estimated range of possible loss is provided, in excess of the accrued liability (if any) for such matters. Any accrued liability is recorded on a gross basis with a receivable also recorded for any probable insurance recoveries. Estimated ranges of loss are inclusive of legal fees and net of any anticipated insurance recoveries. Any estimated range is based on currently available information and involves elements of judgment and significant uncertainties. Any estimated range of possible loss may not represent the Companies’ maximum possible loss exposure. The circumstances of such legal proceedings and governmental examinations will change from time to time and actual results may vary significantly from the current estimate. For current proceedings not specifically reported below, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material effect on Dominion’s or Virginia Power’s financial position, liquidity or results of operations.
Environmental Matters
Dominion and Virginia Power are subject to costs resulting from a number of federal, state and local laws and regulations designed to protect human health and the environment. These laws and regulations affect future planning and existing operations. They can result in increased capital, operating and other costs as a result of compliance, remediation, containment and monitoring obligations.
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Air
The CAA, as amended, is a comprehensive program utilizing a broad range of regulatory tools to protect and preserve the nation’s air quality. At a minimum, states are required to establish regulatory programs to address all requirements of the CAA. However, states may choose to develop regulatory programs that are more restrictive. Many of Dominion’s and Virginia Power’s facilities are subject to the CAA’s permitting and other requirements.
The EPA established CAIR with the intent to require significant reductions in SO2 and NOX emissions from electric generating facilities. In July 2008, the U.S. Court of Appeals for the D.C. Circuit issued a ruling vacating CAIR. In December 2008, the Court denied rehearing, but also issued a decision to remand CAIR to the EPA. In July 2011, the EPA issued a replacement rule for CAIR, called CSAPR, that required 28 states to reduce power plant emissions that cross state lines. CSAPR established new SO2 and NOx emissions cap and trade programs that were completely independent of the current ARP. Specifically, CSAPR required reductions in SO2 and NOx emissions from fossil fuel-fired electric generating units of 25 MW or more through annual NOx emissions caps, NOx emissions caps during the ozone season (May 1 through September 30) and annual SO2 emission caps with differing requirements for two groups of affected states.
Following numerous petitions by industry participants for review and motions for stay, the U.S. Court of Appeals for the D.C. Circuit issued a ruling in December 2011 to stay CSAPR pending judicial review. In February and June 2012, the EPA issued technical revisions to CSAPR that were not material to Dominion. In August 2012, the court vacated CSAPR in its entirety and ordered the EPA to implement CAIR until a valid replacement rule is issued. In October 2012, the EPA filed a petition requesting a rehearing of the court’s decision, which was denied in January 2013. The mandate vacating CSAPR was issued in February 2013. In March 2013, the EPA and several environmental groups filed petitions with the U.S. Supreme Court requesting review of the decision to vacate and remand CSAPR. In June 2013, the U.S. Supreme Court granted the EPA’s petition seeking review of the D.C. Circuit’s decision that vacated and remanded CSAPR. With respect to Dominion’s generation fleet, the cost to comply with CAIR is not expected to be material. Future outcomes of litigation and/or any additional action to issue a revised rule could affect the assessment regarding cost of compliance.
In May 2012, the EPA issued final designations for the 75-ppb ozone air quality standard. Several Dominion electric generating facilities are located in areas impacted by this standard. As part of the standard, states will be required to develop and implement plans to address sources emitting pollutants which contribute to the formation of ozone. Until the states have developed implementation plans, Dominion is unable to predict whether or to what extent the new rules will ultimately require additional controls.
In February 2008, Dominion received a request for information pursuant to Section 114 of the CAA from the EPA. The request concerned historical operating changes and capital improvements undertaken at State Line and Kincaid. In April 2009, Dominion received a second request for information. Dominion provided information in response to both requests. Also in April 2009, Dominion received a Notice and Finding of Violations from the EPA claiming violations of the CAA New Source Review requirements, NSPS, the Title V permit program and the stations’ respective State Implementation Plans. In May 2010, Dominion received a request for information pursuant to Section 114 of the CAA from the EPA. The request concerned historical operating changes and capital improvements undertaken at Brayton Point.
Dominion believes that it complied with applicable laws and the EPA regulations and interpretations in effect at the time the work in question took place. Dominion entered into settlement discussions with the U.S. government and reached an agreement to settle the allegations. In April 2013, the U.S. government lodged a consent decree and complaint with the U.S. District Court for the Central District of Illinois that resolves all alleged violations at State Line, Kincaid and Brayton Point. The settlement mandates the closure of State Line, installation of certain control technology at Kincaid and Brayton Point, the achievement of certain emissions limitations, payment of a civil penalty of $3 million and funding of $10 million in environmental mitigation projects. The consent decree underwent a 30-day public comment period and the U.S. government has filed a motion with the court requesting that the decree be entered as lodged. In July 2013, the court entered the consent decree, concluding the enforcement action. Dominion previously accrued a liability of $13 million related to this matter. State Line ceased operations in March 2012 and was sold in June 2012. The installation of pollution control technology was in progress at Kincaid and had been completed at Brayton Point. In August 2013, Dominion sold Kincaid and Brayton Point. Under the terms of the sale transaction, Dominion retained the $13 million liability associated with the settlement agreement. Dominion has paid the civil penalty and is implementing the environmental mitigation projects.
Water
The CWA, as amended, is a comprehensive program requiring a broad range of regulatory tools including a permit program to authorize and regulate discharges to surface waters with strong enforcement mechanisms. Dominion and Virginia Power must comply with all aspects of the CWA programs at their operating facilities.
In September 2010, Millstone’s NPDES permit was reissued under the CWA. The conditions of the permit require an evaluation of control technologies that could result in additional expenditures in the future. The report summarizing the results
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of the evaluation was submitted in August 2012 and is under review by the Connecticut Department of Energy and Environmental Protection. Dominion cannot currently predict the outcome of this review. In October 2010, the permit issuance was appealed to the state court by a private plaintiff. The permit is expected to remain in effect during the appeal. Dominion is currently unable to make an estimate of the potential financial statement impacts related to this matter.
Solid and Hazardous Waste
The CERCLA, as amended, provides for immediate response and removal actions coordinated by the EPA in the event of threatened releases of hazardous substances into the environment and authorizes the U.S. government either to clean up sites at which hazardous substances have created actual or potential environmental hazards or to order persons responsible for the situation to do so. Under the CERCLA, as amended, generators and transporters of hazardous substances, as well as past and present owners and operators of contaminated sites, can be jointly, severally and strictly liable for the cost of cleanup. These potentially responsible parties can be ordered to perform a cleanup, be sued for costs associated with an EPA-directed cleanup, voluntarily settle with the U.S. government concerning their liability for cleanup costs, or voluntarily begin a site investigation and site remediation under state oversight.
From time to time, Dominion or Virginia Power may be identified as a potentially responsible party to a Superfund site. The EPA (or a state) can either allow such a party to conduct and pay for a remedial investigation, feasibility study and remedial action or conduct the remedial investigation and action itself and then seek reimbursement from the potentially responsible parties. Each party can be held jointly, severally and strictly liable for the cleanup costs. These parties can also bring contribution actions against each other and seek reimbursement from their insurance companies. As a result, Dominion or Virginia Power may be responsible for the costs of remedial investigation and actions under the Superfund law or other laws or regulations regarding the remediation of waste. Except as noted below, the Companies do not believe this will have a material effect on results of operations, financial condition and/or cash flows.
In September 2011, the EPA issued a UAO to Virginia Power and 22 other parties, ordering specific remedial action of certain areas at the Ward Transformer Superfund site located in Raleigh, North Carolina. Virginia Power does not believe it is a liable party under CERCLA based on its alleged connection to the site. In November 2011, Virginia Power and a number of other parties notified the EPA that they are declining to undertake the work set forth in the UAO.
The EPA may seek to enforce a UAO in court pursuant to its enforcement authority under CERCLA, and may seek recovery of its costs in undertaking removal or remedial action. If the court determines that a respondent failed to comply with the UAO without sufficient cause, the EPA may also seek civil penalties of up to $37,500 per day for the violation and punitive damages of up to three times the costs incurred by the EPA as a result of the party’s failure to comply with the UAO. Virginia Power is currently unable to make an estimate of the potential financial statement impacts related to the Ward Transformer matter.
Dominion has determined that it is associated with 17 former manufactured gas plant sites, three of which pertain to Virginia Power. Studies conducted by other utilities at their former manufactured gas plant sites have indicated that those sites contain coal tar and other potentially harmful materials. None of the former sites with which Dominion and Virginia Power are associated is under investigation by any state or federal environmental agency. At one of the former sites, Dominion is conducting a state-approved post closure groundwater monitoring program and an environmental land use restriction has been recorded. Another site has been accepted into a state-based voluntary remediation program. Dominion is currently evaluating the nature and extent of the contamination from this site as well as potential remedial options, but is not yet able to estimate the future remediation costs. Due to the uncertainty surrounding these sites, Dominion is unable to make an estimate of the potential financial statement impacts related to these sites.
Climate Change Legislation and Regulation
Massachusetts, Rhode Island, Connecticut, and Maryland, among other states, have joined RGGI, a multi-state effort to reduce CO2 emissions in the Northeast implemented through state specific regulations. Under the initiative, aggregate CO2 emissions from power plants in participating states are required to be stabilized at current levels from 2009 to 2015. Further reductions from current levels would be required to be phased in starting in 2016 such that by 2019 there would be a 10% reduction in participating state power plant CO2 emissions. During 2012, RGGI underwent a program review, and in February 2013, revisions to the RGGI model rule were issued that include a reduction of the regional CO2 emissions cap from 165 million tons to 91 million tons beginning in January 2014, with an additional 2.5% reduction per year through 2020. The revisions also include changes to compliance demonstration requirements for regulated entities, offset and cost containment mechanisms. The RGGI states are in the process of conducting the regulatory and/or legislative processes required to amend existing state regulations to implement the RGGI program changes. Dominion is in the process of evaluating these revisions as to potential impacts on Dominion’s operations in RGGI states. However, as a result of the recent sales of several power plants located in these states, Dominion does not expect that RGGI will have a material effect on operations, financial condition, and/or cash flows.
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Natrium and Blue Racer
In January 2011, Dominion announced the development of a natural gas processing and fractionation facility in Natrium, West Virginia, and in July 2011 it executed a contract for the construction of the first phase of the facility. The first phase of the project is fully contracted and was placed into service in May 2013. In August 2013, the Natrium natural gas processing and fractionation facility was contributed to the Blue Racer joint venture. In September 2013, the Natrium facility was shut down following a fire at the plant. This matter is not anticipated to have a material impact on Dominion’s financial condition, results of operations, and/or cash flows.
Nuclear Matters
In March 2011, a magnitude 9.0 earthquake and subsequent tsunami caused significant damage at the Fukushima Daiichi nuclear power station in northeast Japan. These events have resulted in significant nuclear safety reviews required by the NRC and industry groups such as INPO. Like other U.S. nuclear operators, Dominion has been gathering supporting data and participating in industry initiatives focused on the ability to respond to and mitigate the consequences of design-basis and beyond-design-basis events at its stations.
In July 2011, an NRC task force provided initial recommendations based on its review of the Fukushima Daiichi accident and in October 2011 the NRC staff prioritized these recommendations into Tiers 1, 2 and 3, with the Tier 1 recommendations consisting of actions which the staff determined should be started without unnecessary delay. In December 2011, the NRC Commissioners approved the agency staff’s prioritization and recommendations, and that same month an appropriations act directed the NRC to require reevaluation of external hazards (not limited to seismic and flooding hazards) as soon as possible.
Based on the prioritized recommendations, in March 2012, the NRC issued orders and information requests requiring specific reviews and actions to all operating reactors, construction permit holders and combined license holders based on the lessons learned from the Fukushima Daiichi event. The orders applicable to Dominion require implementation of safety enhancements related to mitigation strategies to respond to extreme natural events resulting in the loss of power at plants, and enhancing spent fuel pool instrumentation. The orders require prompt implementation of the safety enhancements and completion of implementation within two refueling outages or by December 31, 2016, whichever comes first. Implementation of these enhancements is currently in progress. The information requests issued by the NRC request each reactor to reevaluate the seismic and flooding hazards at their site using present-day methods and information, conduct walkdowns of their facilities to ensure protection against the hazards in their current design basis, and to reevaluate their emergency communications systems and staffing levels. Dominion and Virginia Power do not currently expect that compliance with the NRC’s March 2012 orders and information requests will materially impact their financial position, results of operations or cash flows during the approximately four-year implementation period. The NRC staff is evaluating the implementation of the longer term Tier 2 and Tier 3 recommendations. Dominion and Virginia Power are currently unable to estimate the potential financial impacts related to compliance with Tier 2 and Tier 3 recommendations.
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Nuclear Operations
Nuclear Insurance
The Price-Anderson Amendments Act of 1988 provides the public up to $13.6 billion of liability protection per nuclear incident, via obligations required of owners of nuclear power plants, and allows for an inflationary provision adjustment every five years. Dominion and Virginia Power have purchased $375 million of coverage from commercial insurance pools for each reactor site with the remainder provided through a mandatory industry retrospective rating plan. In the event of a nuclear incident at any licensed nuclear reactor in the U.S., the Companies could be assessed up to $127 million for each of their licensed reactors not to exceed $19 million per year per reactor. There is no limit to the number of incidents for which this retrospective premium can be assessed.
Effective June 7, 2013 for Kewaunee and July 1, 2013 for Millstone and Virginia Power’s nuclear units, the levels of nuclear property insurance coverage were reduced to the following:
Virginia Power(1)
The Companies’ nuclear property insurance coverage for Millstone, Surry and North Anna exceeds the NRC minimum requirement for nuclear power plant licensees of $1.06 billion per reactor site. Kewaunee meets the NRC minimum requirement of $1.06 billion. This includes coverage for premature decommissioning and functional total loss. The NRC requires that the proceeds from this insurance be used first, to return the reactor to and maintain it in a safe and stable condition and second, to decontaminate the reactor and station site in accordance with a plan approved by the NRC. Nuclear property insurance is provided by NEIL, a mutual insurance company, and is subject to retrospective premium assessments in any policy year in which losses exceed the funds available to the insurance company. Dominion’s and Virginia Power’s maximum retrospective premium assessment for the current policy period is $71 million and $39 million, respectively. Based on the severity of the incident, the board of directors of the nuclear insurer has the discretion to lower or eliminate the maximum retrospective premium assessment. Dominion and Virginia Power have the financial responsibility for any losses that exceed the limits or for which insurance proceeds are not available because they must first be used for stabilization and decontamination.
Millstone and Virginia Power also purchase accidental outage insurance from NEIL to mitigate certain expenses, including replacement power costs, associated with the prolonged outage of a nuclear unit due to direct physical damage. Under this program, the Companies are subject to a retrospective premium assessment for any policy year in which losses exceed funds available to NEIL. Dominion’s and Virginia Power’s maximum retrospective premium assessment for the current policy period is $19 million and $9 million, respectively. Kewaunee’s accidental outage policy for replacement power costs was canceled on February 1, 2013.
ODEC, a part owner of North Anna, and Massachusetts Municipal Wholesale Electric Company and Green Mountain Power Corporation, part owners of Millstone’s Unit 3, are responsible to Dominion and Virginia Power for their share of the nuclear decommissioning obligation and insurance premiums on applicable units, including any retrospective premium assessments and any losses not covered by insurance.
Guarantees
At September 30, 2013, Dominion had issued $68 million of guarantees, primarily to support equity method investees. No significant amounts related to these guarantees have been recorded. As of September 30, 2013, Dominion’s exposure under these guarantees was $38 million, primarily related to certain reserve requirements associated with non-recourse financing.
In addition to the above guarantees, Dominion and its partners, Shell and BP, may be required to make additional periodic equity contributions to NedPower and Fowler Ridge in connection with certain funding requirements associated with their respective non-recourse financings. As of September 30, 2013, Dominion’s maximum remaining cumulative exposure under these equity funding agreements was $90 million through 2019 and its maximum annual future contributions could range from approximately $4 million to $19 million.
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Dominion also enters into guarantee arrangements on behalf of its consolidated subsidiaries, primarily to facilitate their commercial transactions with third parties. To the extent that a liability subject to a guarantee has been incurred by one of Dominion’s consolidated subsidiaries, that liability is included in the Consolidated Financial Statements. Dominion is not required to recognize liabilities for guarantees issued on behalf of its subsidiaries unless it becomes probable that it will have to perform under the guarantees. Terms of the guarantees typically end once obligations have been paid. Dominion currently believes it is unlikely that it would be required to perform or otherwise incur any losses associated with guarantees of its subsidiaries’ obligations.
At September 30, 2013, Dominion had issued the following subsidiary guarantees:
Subsidiary debt(2)
Commodity transactions(3)
Nuclear obligations(4)
Cove Point(5)
Other(6)
Surety Bonds and Letters of Credit
As of September 30, 2013, Dominion had purchased $146 million of surety bonds, including $59 million at Virginia Power, and authorized the issuance of letters of credit by financial institutions of $18 million, including $1 million at Virginia Power, to facilitate commercial transactions by its subsidiaries with third parties. Under the terms of surety bonds, the Companies are obligated to indemnify the respective surety bond company for any amounts paid.
Note 16. Credit Risk
Dominion’s and Virginia Power’s accounting policies for credit risk are discussed in Note 23 to the Consolidated Financial Statements in their Annual Report on Form 10-K for the year ended December 31, 2012.
At September 30, 2013, Dominion’s credit exposure totaled $205 million. Of this amount, investment grade counterparties, including those internally rated, represented 63%. No counterparty exposure exceeded 10% of Dominion’s total exposure.
Credit-Related Contingent Provisions
The majority of Dominion’s derivative instruments contain credit-related contingent provisions. These provisions require Dominion to provide collateral upon the occurrence of specific events, primarily a credit rating downgrade. If the credit-related contingent features underlying these instruments that are in a liability position and not fully collateralized with cash were fully triggered as of September 30, 2013 and December 31, 2012, Dominion would have been required to post an additional $48 million and $110 million, respectively, of collateral to its counterparties. The collateral that would be required to be posted
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includes the impacts of any offsetting asset positions and any amounts already posted for derivatives, non-derivative contracts and derivatives elected under the normal purchases and normal sales exception, per contractual terms. Dominion had posted approximately $3 million and $4 million in collateral at September 30, 2013 and December 31, 2012, respectively, related to derivatives with credit-related contingent provisions that are in a liability position and not fully collateralized with cash. The collateral posted includes any amounts paid related to non-derivative contracts and derivatives elected under the normal purchases and normal sales exception, per contractual terms. The aggregate fair value of all derivative instruments with credit-related contingent provisions that are in a liability position and not fully collateralized with cash as of September 30, 2013 and December 31, 2012 was $86 million and $163 million, respectively, which does not include the impact of any offsetting asset positions. Credit-related contingent provisions for Virginia Power were not material as of September 30, 2013 and December 31, 2012. See Note 9 for further information about derivative instruments.
Note 17. Related Party Transactions
Virginia Power engages in related party transactions primarily with other Dominion subsidiaries (affiliates). Virginia Power’s receivable and payable balances with affiliates are settled based on contractual terms or on a monthly basis, depending on the nature of the underlying transactions. Virginia Power is included in Dominion’s consolidated federal income tax return and participates in certain Dominion benefit plans. A discussion of significant related party transactions follows.
Transactions with Affiliates
Virginia Power transacts with affiliates for certain quantities of natural gas and other commodities in the ordinary course of business. Virginia Power also enters into certain commodity derivative contracts with affiliates. Virginia Power uses these contracts, which are principally comprised of commodity swaps, to manage commodity price risk associated with purchases of natural gas. As of September 30, 2013 and December 31, 2012, Virginia Power’s derivative liabilities with affiliates were not material.
DRS and other affiliates provide accounting, legal, finance and certain administrative and technical services to Virginia Power.
Presented below are significant transactions with DRS and other affiliates:
Commodity purchases from affiliates
Services provided by affiliates
Virginia Power has borrowed funds from Dominion under short-term borrowing arrangements. There were $243 million in short-term demand note borrowings from Dominion as of December 31, 2012. There were no short-term demand note borrowings from Dominion as of September 30, 2013. Virginia Power’s outstanding borrowings, net of repayments, under the Dominion money pool for its nonregulated subsidiaries totaled $192 million as of December 31, 2012. There were no borrowings as of September 30, 2013. Interest charges related to Virginia Power’s borrowings from Dominion were not material for the three and nine months ended September 30, 2013 and 2012.
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Note 18. Employee Benefit Plans
The components of Dominion’s provision for net periodic benefit cost were as follows:
Three Months Ended September 30,
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service credit
Amortization of net loss
Settlements and curtailments(1)
Net periodic benefit cost
Amortization of prior service cost (credit)
Settlements and curtailments(1)(2)
Pension and Other Postretirement Plan Remeasurement
Dominion remeasured all of its pension and other postretirement benefit plans in the second quarter of 2013. The remeasurement resulted in a reduction in the pension benefit obligation of approximately $354 million and a reduction in the accumulated postretirement benefit obligation of approximately $78 million. The impact of the remeasurement on net periodic benefit cost (credit) was recognized prospectively from the remeasurement date. The remeasurement is expected to reduce net periodic benefit cost for 2013 by approximately $36 million, excluding the impacts of curtailments. The discount rate used for the remeasurement was 4.8% for the pension plans and 4.7% for the other postretirement benefit plans. All other assumptions used for the remeasurement were consistent with the measurement as of December 31, 2012.
Employer Contributions
During the nine months ended September 30, 2013, Dominion made no contributions to its defined benefit pension plans or other postretirement benefit plans. Dominion expects to contribute approximately $12 million to its other postretirement benefit plans through Voluntary Employees’ Beneficiary Associations during the remainder of 2013.
Note 19. Goodwill
The changes in Dominion’s carrying amount and segment allocation of goodwill are presented below:
Balance at December 31, 2011(1)
Asset disposition adjustment
Balance at December 31, 2012(1)
Balance at September 30, 2013(1)
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Note 20. Operating Segments
Dominion and Virginia Power are organized primarily on the basis of products and services sold in the U.S. A description of the operations included in the Companies’ primary operating segments is as follows:
Primary Operating Segment
Description of Operations
Virginia
Power
In addition to the operating segments above, the Companies also report a Corporate and Other segment.
The Corporate and Other Segment of Dominion includes its corporate, service company and other functions (including unallocated debt) and the net impact of operations that are expected to be or are currently discontinued. In addition, Corporate and Other includes specific items attributable to Dominion’s operating segments that are not included in profit measures evaluated by executive management in assessing the segments’ performance or allocating resources among the segments.
In the second quarter of 2013, Dominion commenced a restructuring of its producer services business, which aggregates natural gas supply, engages in natural gas trading and marketing activities and natural gas supply management and provides price risk management services to Dominion affiliates. The restructuring will result in the termination of natural gas trading and certain energy marketing activities. As a result, the earnings impact from natural gas trading and certain energy marketing activities has been included in the Corporate and Other Segment of Dominion.
In the nine months ended September 30, 2013, Dominion reported after-tax net expense of $148 million for specific items in the Corporate and Other segment, with $144 million of these net expenses attributable to its operating segments. In the nine months ended September 30, 2012, Dominion reported after-tax net expense of $413 million for specific items in the Corporate and Other segment, with $422 million of these net expenses attributable to its operating segments.
The net expense for specific items in 2013 primarily related to the impact of the following items:
The net expense for specific items in 2012 primarily related to the impact of the following items:
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The Corporate and Other Segment of Virginia Power primarily includes specific items attributable to its operating segments that are not included in profit measures evaluated by executive management in assessing the segments’ performance or allocating resources among the segments.
In the nine months ended September 30, 2013 and 2012, Virginia Power reported after-tax net expense of $5 million and $41 million, respectively, for specific items in the Corporate and Other segment, all of which was attributable to its operating segments.
The net expense for specific items in 2012 primarily related to the impact of a $69 million ($42 million after-tax) charge reflecting restoration costs associated with damage caused by late June 2012 summer storms, attributable to DVP.
The following table presents segment information pertaining to Dominion’s operations:
Total revenue from external customers
Intersegment revenue
Net income (loss) attributable to Dominion
Intersegment sales and transfers for Dominion are based on contractual arrangements and may result in intersegment profit or loss that is eliminated in consolidation.
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The following table presents segment information pertaining to Virginia Power’s operations:
Net income (loss)
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MD&A discusses Dominion’s and Virginia Power’s results of operations and general financial condition. MD&A should be read in conjunction with the Companies’ Consolidated Financial Statements.
Contents of MD&A
MD&A consists of the following information:
Forward-Looking Statements
This report contains statements concerning Dominion’s and Virginia Power’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by such words as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “plan,” “may,” “target” or other similar words.
Dominion and Virginia Power make forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to differ materially from predicted results. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additionally, other factors may cause actual results to differ materially from those indicated in any forward-looking statement. These factors include but are not limited to:
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Additionally, other risks that could cause actual results to differ from predicted results are set forth in Item 1A. Risk Factors in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012 and in Dominion’s and Virginia Power’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.
Dominion’s and Virginia Power’s forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. The Companies caution the reader not to place undue reliance on their forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Dominion and Virginia Power undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.
Accounting Matters
Critical Accounting Policies and Estimates
As of September 30, 2013, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012. The policies disclosed included the accounting for regulated operations, AROs, income taxes, derivative contracts and other instruments at fair value, goodwill and long-lived asset impairment testing, employee benefit plans and unbilled revenue.
Results of Operations
Presented below is a summary of Dominion’s consolidated results:
Third Quarter
Diluted EPS
Year-To-Date
Overview
Third Quarter 2013 vs. 2012
Net income attributable to Dominion increased by $360 million primarily due to the absence of charges recorded in 2012 following management’s decision to cease operations and begin decommissioning Kewaunee in 2013 and gains from the sale of assets to Blue Racer.
Year-To-Date 2013 vs. 2012
Net income attributable to Dominion increased by 32% primarily due to the absence of charges recorded in 2012 following management’s decision to cease operations and begin decommissioning Kewaunee in 2013, an increase in regulated natural gas transmission operations, and gains from the sale of assets to Blue Racer. Unfavorable drivers include lower margins from retail energy marketing activities and merchant generation operations.
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Analysis of Consolidated Operations
Presented below are selected amounts related to Dominion’s results of operations:
Net revenue
An analysis of Dominion’s results of operations follows:
Net revenue decreased 2%, primarily reflecting:
These decreases were partially offset by:
Other operations and maintenance decreased 52%, primarily reflecting:
Other income increased 54%, primarily due to a gain on the sale of Dominion’s equity method investment in Elwood.
Interest and related charges increased 10%, primarily due to the absence of favorable mark to market recorded in 2012 on freestanding interest rate derivatives.
Income tax expense increased $162 million, primarily reflecting higher pre-tax income in 2013.
Loss from discontinued operations primarily reflects the sale of Brayton Point and Kincaid, which were reclassified to discontinued operations in the first quarter of 2013.
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Net revenue decreased 1%, primarily reflecting:
Other operations and maintenance decreased 23%, primarily reflecting:
Other income increased 28%, primarily due to higher realized gains (including investment income) on nuclear decommissioning trust funds ($37 million) and a gain on the sale of Dominion’s equity method investment in Elwood ($35 million), partially offset by a decrease in earnings from equity method investments ($12 million).
Income tax expense increased 23%, primarily reflecting higher pre-tax income in 2013.
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Segment Results of Operations
Segment results include the impact of intersegment revenues and expenses, which may result in intersegment profit and loss. Presented below is a summary of contributions by Dominion’s operating segments to net income attributable to Dominion:
(millions, except EPS)
Dominion Generation
Dominion Energy
Primary operating segments
Corporate and Other
Consolidated
Presented below are selected operating statistics related to DVP’s operations:
Electricity delivered (million MWh)
Degree days (electric distribution service area):
Cooling
Heating
Average electric distribution customer accounts (thousands)(1)
Average retail energy marketing customer accounts (thousands)(1)
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Presented below, on an after-tax basis, are the key factors impacting DVP’s net income contribution:
2013 vs. 2012
Increase (Decrease)
Regulated electric sales:
Weather
FERC transmission equity return
Retail energy marketing operations(1)
Storm damage and service restoration(2)
Other operations and maintenance expenses
Depreciation
Change in net income contribution
Presented below are selected operating statistics related to Dominion Generation’s operations:
Electricity supplied (million MWh):
Utility
Merchant(1)
Degree days (electric utility service area):
Presented below, on an after-tax basis, are the key factors impacting Dominion Generation’s net income contribution:
2013 vs. 2012Increase (Decrease)
Merchant generation margin
Rate adjustment clause equity return
PJM ancillary services
Outage costs
Share dilution
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Presented below are selected operating statistics related to Dominion Energy’s operations:
Gas distribution throughput (bcf):
Sales
Transportation
Heating degree days (gas distribution service area)
Average gas distribution customer accounts (thousands)(1):
Presented below, on an after-tax basis, are the key factors impacting Dominion Energy’s net income contribution:
Producer services margin(1)
Gas transmission margin
Gains from sale of assets to Blue Racer
Presented below are the Corporate and Other segment’s after-tax results:
Specific items attributable to operating segments
Specific items attributable to corporate operations
Total specific items
Other corporate operations
Total net expense
EPS impact
Total Specific Items
Corporate and Other includes specific items that are not included in profit measures evaluated by management in assessing segment performance or in allocating resources among the segments. See Note 20 to the Consolidated Financial Statements in this report for discussion of these items.
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Presented below is a summary of Virginia Power’s consolidated results:
Net income decreased by 7% primarily due to the impact of less favorable weather on utility operations.
Net income increased by 13% primarily due to an increase in rate adjustment clause revenue, the impact of more favorable weather on utility operations, and the absence of restoration costs associated with damage caused by late June 2012 summer storms.
Presented below are selected amounts related to Virginia Power’s results of operations:
An analysis of Virginia Power’s results of operations follows:
Net revenue decreased 4%, primarily reflecting a decrease in sales to retail customers largely due to a decrease in cooling degree days ($35 million).
Other operations and maintenance decreased 4%, primarily reflecting:
Other taxes increased 33%, primarily reflecting the absence of a benefit recognized in 2012 for excess use taxes previously paid.
Income tax expense decreased 16%, primarily reflecting lower pre-tax income in 2013 and changes in the amount of income apportioned among states.
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Net revenue increased 2%, primarily reflecting:
Other operations and maintenance decreased 8%, primarily reflecting:
Depreciation and amortization increased 10%, primarily due to property additions.
Presented below is a summary of contributions by Virginia Power’s operating segments to net income:
Presented below are operating statistics related to Virginia Power’s DVP segment:
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Presented below, on an after-tax basis, are the key factors impacting Virginia Power’s DVP segment’s net income contribution:
Storm damage and service restoration(1)
Presented below are operating statistics related to Virginia Power’s Dominion Generation segment:
Presented below, on an after-tax basis, are the key factors impacting Virginia Power’s Dominion Generation segment’s net income contribution:
Liquidity and Capital Resources
Dominion and Virginia Power depend on both internal and external sources of liquidity to provide working capital and as a bridge to long-term debt financings. Short-term cash requirements not met by cash provided by operations are generally satisfied with proceeds from short-term borrowings. Long-term cash needs are met through issuances of debt and/or equity securities.
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At September 30, 2013, Dominion had $1.3 billion of unused capacity under its credit facilities, including $764 million of unused capacity under joint credit facilities available to Virginia Power.
The dispositions of certain merchant generation facilities during 2012 and the decommissioning and sale of certain other merchant generation facilities in 2013 are not expected to have a material negative impact on Dominion’s liquidity.
A summary of Dominion’s cash flows is presented below:
Cash and cash equivalents at January 1
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at September 30
A summary of Virginia Power’s cash flows is presented below:
Operating Cash Flows
Net cash provided by Dominion’s operating activities decreased $512 million, primarily due to lower deferred fuel cost recoveries in its Virginia jurisdiction, higher net margin collateral requirements, higher income tax payments, and lower margins from retail energy marketing activities and merchant generation operations. The decrease was partially offset by lower rate refund payments and an increase in regulated natural gas transmission operations.
Net cash provided by Virginia Power’s operating activities decreased by $251 million, primarily due to lower deferred fuel cost recoveries, partially offset by lower rate refund payments.
Dominion believes that its operations provide a stable source of cash flow to contribute to planned levels of capital expenditures and maintain or grow the dividend on common shares. Virginia Power believes that its operations provide a stable source of cash flow to contribute to planned levels of capital expenditures and provide dividends to Dominion.
The Companies’ operations are subject to risks and uncertainties that may negatively impact the timing or amounts of operating cash flows, which are discussed in Item 1A. Risk Factors in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012 and in Part II, Item 1A. Risk Factors in Dominion’s and Virginia Power’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013.
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Credit Risk
Dominion’s exposure to potential concentrations of credit risk results primarily from its energy marketing and price risk management activities. Presented below is a summary of Dominion’s credit exposure as of September 30, 2013 for these activities. Gross credit exposure for each counterparty is calculated prior to the application of collateral and represents outstanding receivables plus any unrealized on- or off-balance sheet exposure, taking into account contractual netting rights.
Investment grade(1)
Non-investment grade(2)
No external ratings:
Internally rated - investment grade(3)
Internally rated - non-investment grade(4)
Investing Cash Flows
Net cash used in Dominion’s investing activities decreased $436 million, primarily due to the proceeds from the sale of Brayton Point, Kincaid, and equity method investment in Elwood and the net proceeds from the sale of assets to Blue Racer, partially offset by higher capital expenditures.
Net cash used in Virginia Power’s investing activities increased $397 million, primarily due to higher capital expenditures.
Financing Cash Flows and Liquidity
Dominion and Virginia Power rely on capital markets as significant sources of funding for capital requirements not satisfied by cash provided by their operations. As discussed further in Credit Ratings and Debt Covenants in MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012, the Companies’ ability to borrow funds or issue securities and the return demanded by investors are affected by credit ratings. In addition, the raising of external capital is subject to certain regulatory requirements, including registration with the SEC and, in the case of Virginia Power, approval by the Virginia Commission.
Each of the Companies meets the definition of a well-known seasoned issuer under SEC rules governing the registration, communications and offering processes under the Securities Act of 1933, as amended. The rules provide for a streamlined shelf registration process to provide registrants with timely access to capital. This allows the Companies to use automatic shelf registration statements to register any offering of securities, other than those for exchange offers or business combination transactions.
In 2013, net cash used in Dominion’s financing activities decreased $136 million, primarily reflecting higher net debt issuances, partially offset by the acquisition of the Juniper noncontrolling interest in Fairless and higher common dividend payments.
Net cash used in Virginia Power’s financing activities decreased $679 million, primarily due to net debt issuances in 2013 as compared to net debt repayments in 2012, partially offset by higher common dividend payments.
In June 2013, Dominion issued $550 million of 2013 Series A 6.125% Equity Units and $550 million of 2013 Series B 6% Equity Units, initially in the form of Corporate Units. Dominion used the net proceeds from the sale of Equity Units for general corporate purposes, including repayment of short-term debt, and to fund its growth plan, including the Cove Point liquefaction project. Dominion intends to use the proceeds from the settlement of the stock purchase contracts to repay debt issued, or displace debt that may otherwise be issued, in part to fund capital expenditures or for other corporate purposes as soon as practicable following such settlement. See Note 14 to the Consolidated Financial Statements in this report for further information regarding Dominion’s and Virginia Power’s credit facilities, liquidity and significant financing transactions.
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Credit Ratings
Credit ratings are intended to provide banks and capital market participants with a framework for comparing the credit quality of securities and are not a recommendation to buy, sell or hold securities. In October 2013, Standard & Poor’s affirmed Dominion’s corporate credit rating of A- but lowered the rating for Dominion’s senior unsecured debt securities to BBB+ from A- to reflect greater structural subordination at Dominion due to new debt at DGH. Also in October 2013, Fitch, Moody’s and Standard & Poor’s assigned a BBB+, A3 and A- rating, respectively, to the senior unsecured notes at DGH. See Note 14 in this report for more information.
Debt Covenants
In the Debt Covenants section of MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012, there is a discussion on the various covenants present in the enabling agreements underlying the Companies’ debt. As of September 30, 2013, there have been no material changes to debt covenants, nor any events of default under the Companies’ debt covenants.
Future Cash Payments for Contractual Obligations and Planned Capital Expenditures
As of September 30, 2013, there have been no material changes outside the ordinary course of business to Dominion’s or Virginia Power’s contractual obligations as disclosed in MD&A in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2012.
As of September 30, 2013, Dominion’s planned capital expenditures for 2013, 2014 and 2015 are expected to total approximately $5.1 billion, $5.1 billion and $4.3 billion, respectively. The increase in planned capital expenditures, as compared to the amounts originally forecasted in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2012, primarily reflects the planned construction of the Cove Point liquefaction project in Maryland. There have been no material changes to Virginia Power’s planned capital expenditures.
Use of Off-Balance Sheet Arrangements
As of September 30, 2013, there have been no material changes in the off-balance sheet arrangements disclosed in MD&A in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2012.
Future Issues and Other Matters
The following discussion of future issues and other information includes current developments of previously disclosed matters and new issues arising during the period covered by, and subsequent to, the dates of Dominion’s and Virginia Power’s Consolidated Financial Statements that may impact the Companies’ future results of operations, financial condition and/or cash flows. This section should be read in conjunction with Item 1. Business and Future Issues and Other Matters in MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012 and Future Issues and Other Matters in MD&A in Dominion’s and Virginia Power’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013.
Dominion and Virginia Power are subject to costs resulting from a number of federal, state and local laws and regulations designed to protect human health and the environment. These laws and regulations affect future planning and existing operations. They can result in increased capital, operating and other costs as a result of compliance, remediation, containment and monitoring obligations. See Note 22 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012, and Note 15 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013 and in this report for additional information on various environmental matters.
In April 2012, the EPA published proposed NSPS for GHG emissions for new electric and generating units. This proposed rule set national emission standards for new coal, oil, integrated gasification, and combined cycle units larger than 25MW. The proposed rule covered CO2 only and does not apply to existing sources. The proposed rule also does not apply to any new or existing simple cycle combustion turbine units or biomass units. In June 2013, the President of the U.S. released a Climate Action Plan focusing on ways to meet the national GHG reduction goal of 17% from 2005 levels by 2020. Pursuant to the Presidential Memorandum issued in conjunction with the Climate Action Plan and based on over 2.5 million comments received, the EPA re-proposed the NSPS standards for new sources in September 2013 and is expected to finalize the rule by June 2014. The EPA is expected to officially withdraw the 2012 new source proposal on the same day the re-proposed rule is issued in the Federal Register. The Presidential Memorandum also directed the EPA to propose a rule for reconstructed, modified and existing sources no later than June 2014, and issue a final rule no later than June 2015, to provide guidelines to the states to achieve the required GHG reductions. Dominion currently cannot predict with certainty the direct or indirect financial impact on operations from these rule revisions, but believes the expenditures to comply with any new requirements could be material.
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On October 15, 2013, the U.S. Supreme Court granted petitions filed by several industry groups, states, and the Chamber of Commerce seeking review of the D.C. Circuit Court’s June 2012 decision upholding the EPA’s regulation of GHG under the CAA. The court’s decision could potentially impact the EPA’s continued implementation of current Prevention of Significant Deterioration regulations applicable to stationary sources in relation to GHG. It is not anticipated, however, that the court’s decision would affect the EPA’s development of the GHG NSPS rules for new sources, or existing sources, as the authority for those rules comes from a different section of the CAA than what is at issue in the Supreme Court case. It is uncertain at this time whether the court’s decision will have any material impact on Dominion’s operations.
Regulatory Matters
See Note 13 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012 and Note 12 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013, June 30, 2013 and in this report for additional information on various regulatory matters.
Legal Matters
See Item 3. Legal Proceedings in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012, Notes 12 and 15 to the Consolidated Financial Statements and Part II, Item 1. Legal Proceedings in Dominion’s and Virginia Power’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013, June 30, 2013 and in this report for additional information on various legal matters.
Cove Point Liquefaction Project
Dominion is pursuing a liquefaction project at Cove Point, which would enable the facility to liquefy domestically-produced natural gas for export as LNG. In September 2013, the DOE conditionally authorized Dominion to export LNG from Cove Point to non-free trade agreement countries. Subject to environmental review by FERC and final FERC approval, the Cove Point facility is authorized to export at a rate of 770 million cubic feet of natural gas per day for a period of 20 years. The DOE previously authorized Dominion to export to countries with free trade agreements. Following receipt of regulatory and other approvals, construction of liquefaction facilities could begin in 2014 with an in-service date in 2017.
Master Limited Partnership Plans
In September 2013, Dominion announced its plans to form an MLP in 2014 by contributing certain of its midstream natural gas assets to the MLP initially and over time. Dominion is currently considering assets other than those owned by DGH, including interests in Cove Point and Dominion’s share of the Blue Racer joint venture.
Marcellus Shale
In October 2013, DTI signed agreements with two counterparties to assign lease rights for approximately 90,000 acres of Marcellus shale rights underneath several of its gas storage fields. The agreements provide for payments to DTI, subject to customary adjustments, of approximately $190 million over a period of nine years, and an overriding royalty interest in gas produced from the acreage. The assignments are expected to close in the fourth quarter of 2013. Dominion continues to receive indications of interest in its Marcellus Shale acreage and expects to conclude similar transactions in the fourth quarter of 2013 and in 2014.
New Market Project
In September 2013, DTI executed binding precedent agreements with several local distribution company customers for the New Market Project. The project is expected to provide 112,000 dekatherms per day of firm transportation service from Leidy, Pennsylvania to interconnects with Iroquois Gas Transmission and Niagara Mohawk Power Corporation’s distribution system in the Albany, New York market. In 2014, DTI expects to file an application to request FERC authorization to construct and operate the project facilities, which are expected to be in service in the fourth quarter of 2016.
Western Access Project
East Ohio has signed long term precedent agreements with two customers to move processed gas from the outlet of new gas processing facilities to interconnections with multiple interstate pipelines. System enhancements are expected to be complete by November 1, 2014, and are anticipated to total $90 million.
Virginia Offshore Wind
Virginia Power is developing a commercial offshore wind generation project. In December 2012, BOEM announced that, in 2013, it would auction approximately 113,000 acres of federal land off the Virginia coast as a single lease for construction of offshore wind turbines. During the third quarter of 2013, Virginia Power bid $1.6 million and won the lease, which would allow for development of an offshore wind turbine farm capable of generating up to 2,000 MW of electricity. BOEM has several milestones that Virginia Power must meet to keep the lease with the final milestone being the submittal of a construction and operations plan within five years of signing the lease. Once Virginia Power submits a plan, BOEM has an undetermined amount of time to perform an environmental analysis and approve the plan. Subject to a final decision on pursuing the project, construction would be contingent on the receipt of applicable approvals.
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Solar Investment Fund
In 2012, Dominion formed Tredegar Solar Fund I, an entity managed by Dominion’s Alternative Energy Solutions group and focused on unregulated residential solar projects. The Fund owns residential roof-top solar systems that are originated and administered by Clean Power Finance, Inc., a provider of solar finance products, in which Dominion has a small indirect equity investment. The systems are subject to power purchase agreements with third parties. In September 2013, Dominion’s BOD approved an incremental investment in the Fund, for a total authorized investment of $55 million. The Fund has originations in process of approximately $38 million and assets in service of approximately $9 million as of October 2013.
Electric Transmission Projects
Loudoun-Pleasant View Rebuild Project
In October 2013, Virginia Power filed an application with the Virginia Commission for the rebuild of the existing 500 kV Loudoun-Pleasant View Line in Loudoun County, Virginia. This project, which is estimated to cost $31 million and to be in service by June 2016, is intended to address projected NERC reliability criteria matters and to replace aging infrastructure.
Pleasant View Capacitor Bank Expansion
In August 2013, the Virginia Commission issued a final order granting Virginia Power’s request for a CPCN to construct and operate the Pleasant View Capacitor Bank Expansion project. Specifically, the Virginia Commission authorized Virginia Power to build the new Goose Creek 500 kV switching station and the new Pleasant View-to-Goose Creek 500 kV transmission line, and to reconfigure the existing Pleasant View-to-Brambleton and Pleasant View-to-Doubs 500 kV transmission lines to connect to this new switching station, along with additional facilities related to the project. The estimated total project cost according to Virginia Power’s application was approximately $16 million. The Virginia Commission’s approval order notes that the project will occur entirely on property owned by Virginia Power, and states that all work must be done by June 1, 2014, although this deadline can be extended for good cause shown.
PJM - RTEP Projects
As part of PJM’s annual RTEP process, in October 2013, PJM authorized the following electric transmission reliability projects:
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The matters discussed in this Item may contain “forward-looking statements” as described in the introductory paragraphs under Part I, Item 2. MD&A of this Form 10-Q. The reader’s attention is directed to those paragraphs for discussion of various risks and uncertainties that may impact Dominion and Virginia Power.
Market Risk Sensitive Instruments and Risk Management
Dominion’s and Virginia Power’s financial instruments, commodity contracts and related financial derivative instruments are exposed to potential losses due to adverse changes in commodity prices, interest rates and equity security prices as described below. Commodity price risk is present in Dominion’s and Virginia Power’s electric operations, Dominion’s gas procurement operations, and Dominion’s energy marketing and trading operations due to the exposure to market shifts in prices received and paid for electricity, natural gas and other commodities. The Companies use commodity derivative contracts to manage price risk exposures for these operations. Interest rate risk is generally related to their outstanding debt. In addition, they are exposed to investment price risk through various portfolios of equity and debt securities.
The following sensitivity analyses estimate the potential loss of future earnings or fair value from market risk sensitive instruments over a selected time period due to a 10% unfavorable change in commodity prices or interest rates.
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Commodity Price Risk
To manage price risk, Dominion and Virginia Power primarily hold commodity-based financial derivative instruments for non-trading purposes associated with purchases and sales of electricity, natural gas and other energy-related products. As part of its strategy to market energy and to manage related risks, Dominion also holds commodity-based financial derivative instruments for trading purposes.
In the second quarter of 2013, Dominion commenced a restructuring of its producer services business, which aggregates natural gas supply, engages in natural gas trading and marketing activities and natural gas supply management and provides price risk management services to Dominion affiliates. The restructuring will result in the termination of natural gas trading and certain energy marketing activities. The restructuring is intended to reduce producer services’ earnings volatility, and is not expected to have a material impact on Dominion’s business.
The derivatives used to manage commodity price risk are executed within established policies and procedures and may include instruments such as futures, forwards, swaps, options and FTRs that are sensitive to changes in the related commodity prices. For sensitivity analysis purposes, the hypothetical change in market prices of commodity-based financial derivative instruments is determined based on models that consider the market prices of commodities in future periods, the volatility of the market prices in each period, as well as the time value factors of the derivative instruments. Prices and volatility are principally determined based on observable market prices.
A hypothetical 10% unfavorable change in commodity prices of Dominion’s non-trading commodity-based financial derivative instruments would have resulted in a decrease in fair value of approximately $162 million and $126 million as of September 30, 2013 and December 31, 2012, respectively. A hypothetical 10% unfavorable change in commodity prices of Dominion’s commodity-based financial derivative instruments held for trading purposes would have resulted in a decrease in fair value of approximately $8 million and $18 million as of September 30, 2013 and December 31, 2012, respectively.
A hypothetical 10% unfavorable change in commodity prices would not have resulted in a material change in the fair value of Virginia Power’s non-trading commodity-based financial derivatives as of September 30, 2013 or December 31, 2012.
The impact of a change in energy commodity prices on Dominion’s and Virginia Power’s non-trading commodity-based financial derivative instruments at a point in time is not necessarily representative of the results that will be realized when the contracts are ultimately settled. Net losses from commodity derivative instruments used for hedging purposes, to the extent realized, will generally be offset by recognition of the hedged transaction, such as revenue from physical sales of the commodity.
Interest Rate Risk
Dominion and Virginia Power manage their interest rate risk exposure predominantly by maintaining a balance of fixed and variable rate debt. They also enter into interest rate sensitive derivatives, including interest rate swaps and interest rate lock agreements. For variable rate debt and interest rate swaps designated under fair value hedging and outstanding for Dominion and Virginia Power, a hypothetical 10% increase in market interest rates would not have resulted in a material change in earnings at September 30, 2013 or December 31, 2012.
Dominion and Virginia Power may also use forward-starting interest rate swaps and interest rate lock agreements as anticipatory hedges. As of September 30, 2013, Dominion and Virginia Power had $1.8 billion and $600 million, respectively, in aggregate notional amounts of these interest rate derivatives outstanding. A hypothetical 10% decrease in market interest rates would have resulted in a decrease of approximately $30 million and $12 million, respectively, in the fair value of Dominion’s and Virginia Power’s interest rate derivatives at September 30, 2013. As of December 31, 2012, Dominion and Virginia Power had $1.8 billion and $750 million, respectively, in aggregate notional amounts of these interest rate derivatives outstanding. A hypothetical 10% decrease in market interest rates would have resulted in a decrease of approximately $21 million and $9 million, respectively, in the fair value of Dominion’s and Virginia Power’s interest rate derivatives at December 31, 2012.
The impact of a change in interest rates on Dominion’s and Virginia Power’s interest rate-based financial derivative instruments at a point in time is not necessarily representative of the results that will be realized when the contracts are ultimately settled. Net gains and/or losses from interest rate derivative instruments used for hedging purposes, to the extent realized, will generally be offset by recognition of the hedged transaction.
Investment Price Risk
Dominion and Virginia Power are subject to investment price risk due to securities held as investments in nuclear decommissioning and rabbi trust funds that are managed by third-party investment managers. These trust funds primarily hold marketable securities that are reported in the Consolidated Balance Sheets at fair value.
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Dominion recognized net realized gains (including investment income) on nuclear decommissioning and rabbi trust investments of $126 million, $87 million and $126 million for the nine months ended September 30, 2013 and 2012 and for the year ended December 31, 2012, respectively. Net realized gains and losses include gains and losses from the sale of investments as well as any other-than-temporary declines in fair value. Dominion recorded, in AOCI and regulatory liabilities, a net increase in unrealized gains on these investments of $225 million, $239 million and $210 million for the nine months ended September 30, 2013 and 2012 and for the year ended December 31, 2012, respectively.
Virginia Power recognized net realized gains (including investment income) on nuclear decommissioning trust investments of $36 million, $32 million and $53 million for the nine months ended September 30, 2013 and 2012 and for the year ended December 31, 2012, respectively. Net realized gains and losses include gains and losses from the sale of investments as well as any other-than-temporary declines in fair value. Virginia Power recorded, in AOCI and regulatory liabilities, a net increase in unrealized gains on these investments of $116 million, $101 million and $89 million for the nine months ended September 30, 2013 and 2012 and for the year ended December 31, 2012, respectively.
Dominion sponsors pension and other postretirement employee benefit plans that hold investments in trusts to fund employee benefit payments. Virginia Power employees participate in these plans. If the values of investments held in these trusts decline, it will result in future increases in the periodic cost recognized for such employee benefit plans and will be included in the determination of the amount of contributions to be made to the employee benefit plans.
ITEM 4. CONTROLS AND PROCEDURES
Senior management of each of Dominion and Virginia Power, including Dominion’s and Virginia Power’s CEO and CFO, evaluated the effectiveness of each of their respective Companies’ disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, each of Dominion’s and Virginia Power’s CEO and CFO have concluded that each of their respective Companies’ disclosure controls and procedures are effective.
There were no changes in either Dominion’s or Virginia Power’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, either of the Companies’ internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Dominion and Virginia Power are alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans imposed upon or agreed to by the Companies, or permits issued by various local, state and/or federal agencies for the construction or operation of facilities. Administrative proceedings may also be pending on these matters. In addition, in the ordinary course of business, the Companies and their subsidiaries are involved in various legal proceedings. Other than the matters discussed below, there have been no material changes to the legal proceedings reported in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012.
In June 2013, DTI received a draft Consent Assessment of Civil Penalty from the PADEP in connection with an accidental release from a leaking underground pipe at one of DTI’s compressor stations in Pennsylvania. DTI self reported the release in December 2011 and promptly conducted remediation. In August 2013, DTI and PADEP agreed to a Consent Assessment that included a penalty of $192,000, which DTI has paid. The resolution of the Consent Assessment is not expected to have a material effect on Dominion.
See the following for discussions on various environmental and other regulatory proceedings to which the Companies are parties:
ITEM 1A. RISK FACTORS
Dominion’s and Virginia Power’s businesses are influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond the Companies’ control. A number of these risk factors have been identified in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard to the risk factors previously disclosed in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2012 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2013. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see Forward-Looking Statements in MD&A.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Period
7/1/13-7/31/13
$1.18 billion
8/1/13-8/31/13
9/1/13-9/30/13
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ITEM 6. EXHIBITS
Exhibit
Description
VirginiaPower
3.1.a
3.1.b
3.2.a
3.2.b
4
4.1
12.1
12.2.a
12.2.b
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31.a
31.b
31.c
31.d
32.a
32.b
99
101
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Ashwini Sawhney
Ashwini Sawhney
Vice President – Accounting and Controller
(Chief Accounting Officer)
Vice President – Accounting
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EXHIBIT INDEX
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