UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
For the quarterly period ended June 30, 2016
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 ¨
Dominion Gas Holdings, LLC 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
Dominion Gas Holdings, LLC
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
Dominion Gas Holdings, LLC Yes ¨ No x
At July 15, 2016, the latest practicable date for determination, Dominion Resources, Inc. had 625,763,030 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. Dominion Resources, Inc. holds all of the membership interests of Dominion Gas Holdings, LLC.
This combined Form 10-Q represents separate filings by Dominion Resources, Inc., Virginia Electric and Power Company and Dominion Gas Holdings, LLC. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Virginia Electric and Power Company and Dominion Gas Holdings, LLC make no representations as to the information relating to Dominion Resources, Inc.’s other operations.
VIRGINIA ELECTRIC AND POWER COMPANY AND DOMINION GAS HOLDINGS, LLC MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND ARE FILING THIS FORM 10-Q UNDER THE REDUCED DISCLOSURE FORMAT.
COMBINED INDEX
Item 1.
Item 2.
Item 3.
Item 4.
Item 1A.
Item 6.
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GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Form 10-Q are defined below:
Abbreviation or Acronym
Definition
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4
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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 operations including noncontrolling interests before income tax expense
Income tax expense
Net Income Including Noncontrolling Interests
Noncontrolling Interests
Net Income Attributable to Dominion
Earnings Per Common Share
Net income attributable to Dominion - Basic
Net income attributable to Dominion - Diluted
Dividends Declared Per Common Share
The accompanying notes are an integral part of Dominion’s Consolidated Financial Statements.
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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 (losses) on investment securities(2)
Changes in unrecognized pension and other postretirement benefit costs(3)
Amounts reclassified to net income:
Net derivative gains-hedging activities(4)
Net realized gains on investment securities(5)
Net pension and other postretirement benefit costs(6)
Changes in other comprehensive loss from equity method investees(7)
Total other comprehensive income (loss)
Comprehensive income including noncontrolling interests
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Dominion
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CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets
Cash and cash equivalents
Restricted cash and cash equivalents
Customer receivables (less allowance for doubtful accounts of $19 and $32)
Other receivables (less allowance for doubtful accounts of $3 and $2)
Inventories
Prepayments
Other
Total current assets
Investments
Nuclear decommissioning trust funds
Investment in equity method affiliates
Total investments
Property, Plant and Equipment
Property, plant and equipment
Accumulated depreciation, depletion and amortization
Total property, plant and equipment, net
Deferred Charges and Other Assets
Goodwill
Pension and other postretirement benefit assets
Regulatory assets
Total deferred charges and other assets
Total assets
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CONSOLIDATED BALANCE SHEETS—(Continued)
LIABILITIES AND EQUITY
Current Liabilities
Securities due within one year
Short-term debt
Accounts payable
Accrued interest, payroll and taxes
Other(2)
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
Asset retirement obligations
Regulatory liabilities
Total deferred credits and other liabilities
Total liabilities
Commitments and Contingencies (see Note 15)
Equity
Common stock – no par(3)
Retained earnings
Accumulated other comprehensive loss
Total common shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
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CONSOLIDATED STATEMENT OF EQUITY
December 31, 2015
Contributions from SunEdison to Four Brothers and Three Cedars
Sale of interest in merchant solar projects
Purchase of Dominion Midstream common units
Issuance of common stock
Stock awards (net of change in unearned compensation)
Dividends and distributions
Other comprehensive loss, net of tax
June 30, 2016
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
Operating Activities
Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities:
Depreciation, depletion and amortization (including nuclear fuel)
Gains on the sales of assets and equity method investment in Iroquois
Other adjustments
Changes in:
Accounts receivable
Deferred fuel and purchased gas costs, net
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)
Acquisition of solar development projects
Acquisition of DCG
Proceeds from sales of securities
Purchases of securities
Proceeds from assignments of shale development rights
Net cash used in investing activities
Financing Activities
Repayment of short-term debt, net
Repayment and repurchase of short-term notes
Issuance of long-term debt
Repayment and repurchase of long-term debt
Proceeds from sale of interest in merchant solar projects
Common dividend payments
Net cash provided by financing activities
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 and financing activities(1):
Accrued capital expenditures
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VIRGINIA ELECTRIC AND POWER COMPANY
Operating Revenue(1)
Electric fuel and other energy-related purchases(1)
Other operations and maintenance:
Affiliated suppliers
Depreciation and amortization
Income before income tax expense
Net Income
The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.
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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)
Comprehensive income
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Customer receivables (less allowance for doubtful accounts of $13 and $27)
Other receivables (less allowance for doubtful accounts of $1 at both dates)
Affiliated receivables
Inventories (average cost method)
Accumulated depreciation and amortization
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LIABILITIES AND SHAREHOLDER’S EQUITY
Payables to affiliates
Affiliated current borrowings
Common Shareholder’s Equity
Other paid-in capital
Accumulated other comprehensive income
Total common shareholder’s equity
Total liabilities and shareholder’s equity
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Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including nuclear fuel)
Affiliated receivables and payables
Deferred fuel expenses, net
Plant construction and other property additions
Purchases of nuclear fuel
Issuance (repayment) of short-term debt, net
Repayment of affiliated current borrowings, net
Repayment of long-term debt
Common dividend payments to parent
Net cash provided by (used in) financing activities
Increase in cash and cash equivalents
Significant noncash investing activities:
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DOMINION GAS HOLDINGS, LLC
Purchased gas(1)
Other energy-related purchases
Income from operations before income taxes
The accompanying notes are an integral part of Dominion Gas’ Consolidated Financial Statements.
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Net derivative gains-hedging activities(2)
Net pension and other postretirement benefit costs(3)
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Customer receivables (less allowance for doubtful accounts of $1 at both dates)(2)
Other receivables (less allowance for doubtful accounts of $2 at both dates)(2)
Pension and other postretirement benefit assets(2)
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Membership interests
Accumulated other comprehensive loss(2)
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Deferred purchased gas costs, net
Proceeds from sale of equity method investment in Iroquois
Distribution payments to parent
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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 and Dominion Gas. Virginia Power is a regulated public utility that generates, transmits and distributes electricity for sale in Virginia and northeastern North Carolina. Dominion Gas is a holding company that conducts business activities through a regulated interstate natural gas transmission pipeline and underground storage system in the Northeast, mid-Atlantic and Midwest states, regulated gas transportation and distribution operations in Ohio, and gas gathering and processing activities primarily in West Virginia, Ohio and Pennsylvania. Dominion Gas’ principal wholly-owned subsidiaries are DTI, East Ohio and Dominion Iroquois. In August 2016, DTI transferred its gathering and processing facilities to Dominion Gathering and Processing, Inc., a newly-formed wholly-owned subsidiary of Dominion Gas.
Note 2. Significant Accounting Policies
As permitted by the rules and regulations of the SEC, the Companies’ 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 the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015.
In the Companies’ opinion, the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary to present fairly their financial position as of June 30, 2016, their results of operations for the three and six months ended June 30, 2016 and 2015, their cash flows for the six months ended June 30, 2016 and 2015 and Dominion’s statement of equity for the six months ended June 30, 2016. 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.
The Companies’ accompanying unaudited Consolidated Financial Statements include, after eliminating intercompany transactions and balances, their accounts, those of their respective majority-owned subsidiaries and non-wholly-owned entities in which they have a controlling financial interest. For certain partnership structures, income is allocated based on the liquidation value of the underlying contractual arrangements. As of June 30, 2016, Dominion owns the general partner and 64.8% of the limited partner interests in Dominion Midstream. The public’s ownership interest in Dominion Midstream is reflected as noncontrolling interest in Dominion’s Consolidated Financial Statements. Also, as of June 30, 2016, Dominion owns 50% of the units in and consolidates Four Brothers and Three Cedars. SunEdison’s ownership interest in Four Brothers and Three Cedars, as well as Terra Nova Renewable Partners’ 33% interest in certain Dominion merchant solar projects, is reflected as noncontrolling interest in Dominion’s Consolidated Financial Statements. See Note 3 for further information on transactions with SunEdison.
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 the Companies’ 2015 Consolidated Financial Statements and Notes have been reclassified to conform to the 2016 presentation for comparative purposes. The reclassifications did not affect the Companies’ net income, total assets, liabilities, equity or cash flows, except for the reclassification of debt issuance costs as discussed in Note 2 to the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015.
Amounts disclosed for Dominion are inclusive of Virginia Power and/or Dominion Gas, where applicable.
Note 3. Acquisitions and Dispositions
Dominion
Proposed Acquisition of Questar
Pursuant to the terms of the Questar Combination announced in February 2016, upon closing, each share of Questar common stock issued and outstanding immediately prior to the closing will be converted automatically into the right to receive $25 in cash per share, or approximately $4.4 billion in total. In addition, Questar’s debt, which currently totals approximately $1.5 billion is expected to remain outstanding. Dominion entered into agreements with several of its lending banks pursuant to
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which they have unfunded financing commitments to provide a $3.9 billion acquisition facility. In connection with receipt of proceeds from Dominion’s issuance of common stock, the acquisition facility was reduced from $3.9 billion to $3.14 billion in April 2016. See Note 14 for more information. At June 30, 2016, $500 million of such proceeds are included in restricted cash and cash equivalents in Dominion’s Consolidated Balance Sheets. Dominion intends to permanently finance the transaction in a manner that supports its existing credit ratings targets by issuing a combination of common stock, mandatory convertibles and debt at Dominion, and indirectly through the issuance of securities at Dominion Midstream, the proceeds of which will be applied to pay Dominion for certain assets of Questar, which are, subject to relevant approvals, expected to be contributed to Dominion Midstream.
The transaction requires approval of Questar’s shareholders and clearance from the Federal Trade Commission under the Hart-Scott-Rodino Act. In February 2016, the Federal Trade Commission granted antitrust approval of the Questar Combination under the Hart-Scott-Rodino Act. In March 2016, Questar and Dominion filed for review and approval, as required, from the Utah Public Service Commission and the Wyoming Public Service Commission, and provided information regarding the transaction to the Idaho Public Utilities Commission. In May 2016, Questar’s shareholders voted to approve the Questar Combination. The Questar Combination contains certain termination rights for both Dominion and Questar, and provides that, upon termination of the Questar Combination under specified circumstances, Dominion would be required to pay a termination fee of $154 million to Questar and Questar would be required to pay Dominion a termination fee of $99 million. Subject to any remaining required regulatory approvals and meeting closing conditions, Dominion targets closing by the end of 2016.
Non-Wholly-Owned Merchant Solar Projects
Acquisitions of Four Brothers and Three Cedars
In June 2015, Dominion acquired 50% of the units in Four Brothers from SunEdison for $64 million of consideration, consisting of $2 million in cash and a $62 million payable. As of June 30, 2016, an $11 million payable is included in other current liabilities in Dominion’s Consolidated Balance Sheets. Four Brothers’ purpose is to develop and operate four solar projects located in Utah, which will produce and sell electricity and renewable energy credits. The projects are expected to cost approximately $730 million to construct, including the initial acquisition cost. Dominion is obligated to contribute $445 million of capital to fund the construction of the projects and has contributed $370 million through June 30, 2016. The facilities are expected to begin commercial operations by the end of the third quarter of 2016, with generating capacity of approximately 320 MW.
In September 2015, Dominion acquired 50% of the units in Three Cedars from SunEdison for $43 million of consideration, consisting of $6 million in cash and a $37 million payable. As of June 30, 2016, a $7 million payable is included in other current liabilities in Dominion’s Consolidated Balance Sheets. Three Cedars’ purpose is to develop and operate three solar projects located in Utah, which will produce and sell electricity and renewable energy credits. The projects are expected to cost approximately $425 million to construct. Dominion is obligated to contribute $276 million of capital to fund the construction of the projects and has contributed $223 million through June 30, 2016. The facilities are expected to begin commercial operations by the end of the third quarter of 2016, with generating capacity of approximately 210 MW.
Long-term power purchase, interconnection and operation and maintenance agreements have been executed for both Four Brothers and Three Cedars. Dominion expects to claim 99% of the federal investment tax credits on the projects.
Dominion owns 50% of the voting interests in Four Brothers and Three Cedars and has a controlling financial interest over the entities through its rights to control operations. The allocation of the $64 million purchase price for Four Brothers resulted in $89 million of property, plant and equipment and $25 million of noncontrolling interest. The allocation of the $43 million purchase price for Three Cedars resulted in $65 million of property, plant and equipment and $22 million of noncontrolling interest. The noncontrolling interest for each entity was measured at fair value using the discounted cash flow method, with the primary components of the valuation being future cash flows (both incoming and outgoing) and the discount rate. Dominion determined its discount rate based on the cost of capital a utility-scale investor would expect, as well as the cost of capital an individual project developer could achieve via a combination of non-recourse project financing and outside equity partners. The acquired assets of Four Brothers and Three Cedars are included in the Dominion Generation operating segment.
Dominion has assumed the majority of the agreements to provide administrative and support services in connection with construction of the projects, operations and maintenance of the facilities and technical management services of the solar facilities. Costs related to services to be provided under these agreements were immaterial for the six months ended June 30, 2016. Subsequent to Dominion’s acquisition of Four Brothers and Three Cedars through June 30, 2016, SunEdison made contributions to Four Brothers and Three Cedars of $265 million in aggregate, which are reflected as noncontrolling interests in Dominion’s Consolidated Balance Sheets.
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In April 2016, SunEdison filed for Chapter 11 bankruptcy; however, this is not expected to have a material adverse effect on Dominion, Four Brothers or Three Cedars.
Wholly-Owned Merchant Solar Projects
The following table presents significant completed acquisitions of wholly-owned merchant solar projects by Dominion in the second quarter of 2015. Long-term power purchase, interconnection and operation and maintenance agreements have been executed for all of the projects. Dominion has claimed federal investment tax credits on the projects. These projects are included in the Dominion Generation operating segment.
Completed Acquisition Date
Seller
ProjectLocation
Project Name(s)
April 2015
June 2015
Sale of Interest in Merchant Solar Projects
In September 2015, Dominion signed an agreement to sell a noncontrolling interest (consisting of 33% of the equity interests) in all of its then currently wholly-owned merchant solar projects, 24 solar projects totaling approximately 425 MW, to SunEdison, including projects discussed in the table above. In December 2015, the sale of interest in 15 of the solar projects closed for $184 million with the sale of interest in the remaining projects completed in January 2016 for $117 million. Upon closing, SunEdison sold its interest in these projects to Terra Nova Renewable Partners. Terra Nova Renewable Partners has a future option to buy all or a portion of Dominion’s remaining 67% ownership in the projects upon the occurrence of certain events, none of which had occurred as of June 30, 2016 nor are expected to occur in the remainder of 2016.
In January 2015, Dominion completed the acquisition of 100% of the equity interests of DCG from SCANA Corporation for $497 million in cash, as adjusted for working capital. DCG owns and operates nearly 1,500 miles of FERC-regulated interstate natural gas pipeline in South Carolina and southeastern Georgia. This acquisition supports Dominion’s natural gas expansion into the Southeast. The allocation of the purchase price resulted in $277 million of net property, plant and equipment, $250 million of goodwill, of which approximately $225 million is expected to be deductible for income tax purposes, and $38 million of regulatory liabilities. The goodwill reflects the value associated with enhancing Dominion’s regulated gas position, economic value attributable to future expansion projects as well as increased opportunities for synergies. The acquired assets of DCG are included in the Dominion Energy operating segment.
On March 24, 2015, DCG converted to a limited liability company under the laws of South Carolina and changed its name from Carolina Gas Transmission Corporation to DCG. On April 1, 2015, Dominion contributed 100% of the issued and outstanding membership interests of DCG to Dominion Midstream in exchange for total consideration of $501 million, as adjusted for working capital. Total consideration to Dominion consisted of the issuance of a two-year, $301 million senior unsecured promissory note payable by Dominion Midstream at an annual interest rate of 0.6%, and 5,112,139 common units, valued at $200 million, representing limited partner interests in Dominion Midstream. The number of units was based on the volume weighted average trading price of Dominion Midstream’s common units for the ten trading days prior to April 1, 2015, or $39.12 per unit. Since Dominion consolidates Dominion Midstream for financial reporting purposes, this transaction was eliminated upon consolidation and did not impact Dominion’s financial position or cash flows.
Dominion Gas
Assignments of Shale Development Rights
In December 2013, Dominion Gas closed an agreement with a natural gas producer to convey over time approximately 79,000 acres of Marcellus Shale development rights underneath one of its natural gas storage fields. The agreement provided for payments to Dominion Gas, subject to customary adjustments, of up to approximately $200 million over a period of nine years, and an overriding royalty interest in gas produced from the acreage. In March 2015, Dominion Gas and the natural gas
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producer closed on an amendment to the agreement, which included the immediate conveyance of approximately 9,000 acres of Marcellus Shale development rights and a two year extension of the term of the original agreement. The conveyance of development rights resulted in the recognition of $43 million ($27 million after-tax) of previously deferred revenue to operations and maintenance expense in Dominion Gas’ Consolidated Statements of Income. In April 2016, Dominion Gas and the natural gas producer closed on an amendment to the agreement, which included the immediate conveyance of a 32% partial interest in the remaining approximately 70,000 acres. This conveyance resulted in the recognition of the remaining $35 million ($21 million after-tax) of previously deferred revenue to operations and maintenance expense in Dominion Gas’ Consolidated Statements of Income.
In March 2015, Dominion Gas conveyed to a natural gas producer approximately 11,000 acres of Marcellus Shale development rights underneath one of its natural gas storage fields and received proceeds of $27 million and an overriding royalty interest in gas produced from the acreage. This transaction resulted in a $27 million ($16 million after-tax) gain, included in other operations and maintenance expense in Dominion Gas’ Consolidated Statements of Income.
In November 2014, Dominion Gas closed on an agreement with a natural gas producer to convey over time approximately 24,000 acres of Marcellus Shale development rights underneath one of its natural gas storage fields. In connection with that agreement, in January 2016, Dominion Gas conveyed approximately 2,000 acres of Marcellus Shale development rights and received proceeds of $5 million and an overriding royalty interest in gas produced from the acreage. This transaction resulted in a $5 million ($3 million after-tax) gain, included in other operations and maintenance expense in Dominion Gas’ Consolidated Statements of Income. Also in connection with that agreement, in July 2016, Dominion Gas conveyed to a natural gas producer approximately 2,000 acres of Marcellus Shale development rights underneath one of its natural gas storage fields and received proceeds of $5 million and an overriding royalty interest in gas produced from the acreage. This transaction resulted in a $5 million ($3 million after-tax) gain.
Note 4. Operating Revenue
The Companies’ operating revenue consists of the following:
Six Months Ended
June 30,
Electric sales:
Regulated
Nonregulated
Gas sales:
Gas transportation and storage
Total operating revenue
Virginia Power
Regulated electric sales
NGL revenue
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Note 5. Income Taxes
For continuing operations, including noncontrolling interests, the statutory United States federal income tax rate reconciles to the Companies’ effective income tax rate as follows:
United States statutory rate
Increases (reductions) resulting from:
State taxes, net of federal benefit
Investment tax credits
Production tax credits
State legislative change
Other, net
Effective tax rate
As of June 30, 2016, there have been no material changes in the Companies’ unrecognized tax benefits or possible changes that could reasonably be expected to occur during the next twelve months. See Note 5 to the Consolidated Financial Statements in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of these unrecognized tax benefits.
Note 6. Earnings Per Share
The following table presents the calculation of Dominion’s basic and diluted EPS:
Net income attributable to Dominion
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
The 2014 Equity Units are potentially dilutive securities but were excluded from the calculation of diluted EPS for the three and six months ended June 30, 2016 and 2015, as the dilutive stock price threshold was not met.
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Note 7. Accumulated Other Comprehensive Income
The following table presents Dominion’s changes in AOCI by component, net of tax:
Three Months Ended June 30, 2016
Beginning balance
Other comprehensive income before reclassifications: gains (losses)
Amounts reclassified from AOCI(1): (gains) losses
Net current-period other comprehensive income (loss)
Ending balance
Three Months Ended June 30, 2015
Six Months Ended June 30, 2016
Six Months Ended June 30, 2015
The following table presents Dominion’s reclassifications out of AOCI by component:
Details About AOCI Components
Affected Line Item in the Consolidated
Statements of Income
Deferred (gains) and losses on derivatives-hedging activities:
Commodity contracts
Interest rate contracts
Foreign currency contracts
Tax
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Unrealized (gains) and losses on investment securities:
Realized (gain) loss on sale of securities
Impairment
Unrecognized pension and other postretirement benefit costs:
Prior service (credit) costs
Actuarial (gains) losses
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The following table presents Dominion Gas’ changes in AOCI by component, net of tax:
Other comprehensive income before reclassifications: losses
Amounts reclassified from AOCI(1): losses
Other comprehensive income before reclassifications: gains
Net current-period other comprehensive income
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The following table presents Dominion Gas’ reclassifications out of AOCI by component:
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Note 8. Fair Value Measurements
The Companies’ fair value measurements are made in accordance with the policies discussed in Note 6 to the Consolidated Financial Statements in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015. See Note 9 in this report for further information about the Companies’ derivatives and hedge accounting activities.
Dominion and Dominion Gas apply fair value measurements to foreign currency swaps used to manage the foreign currency exchange rate risk related to interest and principal payments denominated in foreign currencies. These swaps are designated as cash flow hedges for accounting purposes and are categorized as Level 2.
The inputs and assumptions used in measuring the fair value for foreign currency swaps include the following:
The Companies enter into certain physical and financial forwards, futures, options and swaps, 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 and futures 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. 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, risk-free rate of return, the option expiration dates, the option strike prices, the original sales prices, and volumes. For Level 3 fair value measurements, forward market prices, credit spreads and implied price volatilities 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 quantitative information about Level 3 fair value measurements at June 30, 2016. The range and weighted average are presented in dollars for market price inputs and percentages for credit spreads and price volatility.
Valuation Techniques
Unobservable Input
Assets
Physical and financial forwards and futures:
Natural gas(2)
FTRs
Physical and financial options:
Natural gas
Liabilities
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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 ValueMeasurement
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:
At June 30, 2016
Derivatives:
Commodity
Interest rate
Investments(1):
Equity securities:
United States:
Large cap
REIT
Non-United States:
Fixed income:
Corporate debt instruments
United States Treasury securities and agency debentures
State and municipal
Cash equivalents and other
Foreign currency
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At December 31, 2015
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
Settlements
Transfers out of Level 3
The following table presents Dominion’s classification of gains and losses included in earnings in the Level 3 fair value category. 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 months ended June 30, 2016 and 2015.
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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
The following table presents Virginia Power’s quantitative information about Level 3 fair value measurements at June 30, 2016. The range and weighted average are presented in dollars for market price inputs and percentages for credit spreads and price volatility.
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Impact on Fair
Value Measurement
36
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:
United States large cap
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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 six months ended June 30, 2016 and 2015. 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 six months ended June 30, 2016 and 2015.
The following table presents Dominion Gas’ assets and liabilities for derivatives that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions:
Total Assets
The following table presents the net change in Dominion Gas’ assets and liabilities for derivatives measured at fair value on a recurring basis and included in the Level 3 fair value category:
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The gains and losses included in earnings in the Level 3 fair value category were classified in operating revenue in Dominion Gas’ Consolidated Statements of Income for the three and six months ended June 30, 2015. 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 six months ended June 30, 2016 and 2015.
Fair Value of Financial Instruments
Substantially all of the Companies’ 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, restricted cash and cash equivalents, customer and other receivables, short-term debt, affiliated current borrowings, payables to affiliates and accounts payable are representative of fair value because of the short-term nature of these instruments. For the Companies’ 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)
Junior subordinated notes(3)
Remarketable subordinated notes(3)
Long-term debt, including securities due within one year(3)
Long-term debt, including securities due within one year(4)
Note 9. Derivatives and Hedge Accounting Activities
The Companies’ accounting policies, objectives and strategies for using derivative instruments are discussed in Note 2 to the Consolidated Financial Statements in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015. See Note 8 in this report for further information about fair value measurements and associated valuation methods for derivatives.
Derivative assets and liabilities are presented gross on the Companies’ Consolidated Balance Sheets. Dominion’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. Dominion Gas’ and Virginia Power’s derivative contracts consist of over-the-counter transactions. Over-the-counter contracts are bilateral contracts that are transacted directly with a counterparty. 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 the Companies’ 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.
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Balance Sheet Presentation
The tables below present Dominion’s derivative asset and liability balances by type of financial instrument, before and after the effects of offsetting:
Commodity contracts:
Over-the-counter
Exchange
Interest rate contracts:
Total derivatives, subject to a master netting or similar arrangement
Total derivatives, not subject to a master netting or similar arrangement
Total
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Foreign currency contracts:
Volumes
The following table presents the volume of Dominion’s derivative activity at June 30, 2016. 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.
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Natural Gas (bcf):
Fixed price(1)
Basis
Electricity (MWh):
Fixed price
Liquids (Gal)(2)
Interest rate(3)
Foreign currency(3)(4)
Ineffectiveness and AOCI
For the three and six months ended June 30, 2016 and 2015, 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 June 30, 2016:
Commodities:
Gas
Electricity
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, interest rates, and foreign currency exchange 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:
Total current derivative assets(1)
Noncurrent Assets
Total noncurrent derivative assets(2)
Total derivative assets
LIABILITIES
Total current derivative liabilities(3)
Noncurrent Liabilities
Total noncurrent derivative liabilities(4)
Total derivative liabilities
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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:
Operating revenue
Total commodity
Foreign currency(4)
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Derivatives Not Designated as Hedging Instruments
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 at June 30, 2016. 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.
For the three and six months ended June 30, 2016 and 2015, gains or losses on hedging instruments determined to be ineffective were not material.
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The following table presents selected information related to gains (losses) on cash flow hedges included in AOCI in Virginia Power’s Consolidated Balance Sheet at June 30, 2016:
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 interest rates.
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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 noncurrent derivatives liabilities(4)
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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:
Three Months Ended
Commodity(2)
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The tables below present Dominion Gas’ 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 Dominion Gas’ derivative activity at June 30, 2016. 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.
NGLs (Gal)
Foreign currency(1)
The following table presents selected information related to losses on cash flow hedges included in AOCI in Dominion Gas’ Consolidated Balance Sheet at June 30, 2016:
NGLs
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, interest rates, and foreign currency rates.
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The following tables present the fair values of Dominion Gas’ derivatives and where they are presented in its Consolidated Balance Sheets:
Total noncurrent derivatives assets(2)
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The following table presents the gains and losses on Dominion Gas’ derivatives, as well as where the associated activity is presented in its Consolidated Balance Sheets and Statements of Income:
Derivative Type and Location of Gains (Losses):
Foreign currency(3)
Interest rate(2)
Derivative Type and Location of Gains (Losses)
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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 $104 million and $100 million at June 30, 2016 and December 31, 2015, respectively.
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:
Marketable debt securities:
Corporate bonds
Cost method investments
Cash equivalents and other(2)
The fair value of Dominion’s marketable debt securities held in nuclear decommissioning trust funds at June 30, 2016 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
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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 six months ended June 30, 2016 and 2015.
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:
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The fair value of Virginia Power’s marketable debt securities held in nuclear decommissioning trust funds at June 30, 2016 by contractual maturity is as follows:
Presented below is selected information regarding Virginia Power’s marketable equity and debt securities held in nuclear decommissioning trust funds.
Other-than-temporary impairment losses on investments held in nuclear decommissioning trust funds for Virginia Power were not material for the three and six months ended June 30, 2016 and 2015.
Equity Method Investments
Iroquois
Dominion Gas’ equity earnings totaled $9 million and $12 million for the six months ended June 30, 2016 and 2015, respectively. Dominion Gas received distributions from this investment of $11 million and $12 million for the six months ended June 30, 2016 and 2015, respectively. At June 30, 2016 and December 31, 2015, the carrying amount of Dominion Gas’ investment of $98 million and $102 million, respectively, exceeded its share of underlying equity in net assets by $8 million. The difference reflects equity method goodwill and is not being amortized. In May 2016, Dominion Gas sold 0.65% of the non-controlling partnership interest in Iroquois to TransCanada for approximately $7 million, which resulted in a $5 million ($3 million after-tax) gain.
Note 11. Regulatory Assets and Liabilities
Regulatory assets and liabilities include the following:
Regulatory assets:
Deferred rate adjustment clause costs(1)
Deferred nuclear refueling outage costs(2)
Deferred cost of fuel used in electric generation(3)
Regulatory assets-current(4)
Unrecognized pension and other postretirement benefit costs(5)
Derivatives(6)
PJM transmission rates(7)
Income taxes recoverable through future rates(8)
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Regulatory assets-non-current
Total regulatory assets
Regulatory liabilities:
PIPP(9)
Regulatory liabilities-current(10)
Provision for future cost of removal and AROs(11)
Nuclear decommissioning trust(12)
Regulatory liabilities-non-current
Total regulatory liabilities
Regulatory assets-current
Provision for future cost of removal(11)
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Regulatory assets-non-current(13)
Regulatory liabilities-non-current(14)
At June 30, 2016, $293 million of Dominion’s, $272 million of Virginia Power’s and $18 million of Dominion Gas’ 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, the Companies 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, involves elements of judgment and significant uncertainties and may not represent the Companies’ maximum
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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 the Companies’ 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, CAISO and ISO-NE wholesale markets, and to wholesale purchasers in the states of Tennessee, Georgia, California and Utah, 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.
In March 2010, Old Dominion Electric Cooperative and North Carolina Electric Membership Corporation filed a complaint with FERC against Virginia Power claiming, among other issues, that the incremental costs of undergrounding certain transmission line projects were unjust, unreasonable and unduly discriminatory or preferential and should be excluded from Virginia Power’s transmission formula rate. A settlement of the other issues raised in the complaint was approved by FERC in May 2012.
In March 2014, FERC issued an order excluding from Virginia Power’s transmission rates for wholesale transmission customers located outside Virginia the incremental costs of undergrounding certain transmission line projects. FERC found it is not just and reasonable for non-Virginia wholesale transmission customers to be allocated the incremental costs of undergrounding the facilities because the projects are a direct result of Virginia legislation and Virginia Commission pilot programs intended to benefit the citizens of Virginia. The order is retroactively effective as of March 2010 and will cause the reallocation of the costs charged to wholesale transmission customers with loads outside Virginia to wholesale transmission customers with loads in Virginia. FERC determined that there was not sufficient evidence on the record to determine the magnitude of the underground increment and held a hearing to determine the appropriate amount of undergrounding cost to be allocated to each wholesale transmission customer in Virginia. While Virginia Power cannot predict the outcome of the hearing, it is not expected to have a material effect on results of operations.
PJM Transmission Rates
In April 2007, FERC issued an order regarding its transmission rate design for the allocation of costs among PJM transmission customers, including Virginia Power, for transmission service provided by PJM. For new PJM-planned transmission facilities that operate at or above 500 kV, FERC established a PJM regional rate design where customers pay according to each customer’s share of the region’s load. For recovery of costs of existing facilities, FERC approved the existing methodology whereby a customer pays the cost of facilities located in the same zone as the customer. A number of parties appealed the order to the United States Court of Appeals for the Seventh Circuit.
In August 2009, the court issued its decision affirming the FERC order with regard to the existing facilities, but remanded to FERC the issue of the cost allocation associated with the new facilities 500 kV and above for further consideration by FERC. On remand, FERC reaffirmed its earlier decision to allocate the costs of new facilities 500 kV and above according to the customer’s share of the region’s load. A number of parties filed appeals of the order to the United States Court of Appeals for the Seventh Circuit. In June 2014, the court again remanded the cost allocation issue to FERC. In December 2014, FERC issued an order setting an evidentiary hearing and settlement proceeding regarding the cost allocation issue. The hearing only concerns the costs of new facilities approved by PJM prior to February 1, 2013. Transmission facilities approved after February 1, 2013 are allocated on a hybrid cost allocation method approved by FERC and not subject to any court review.
In June 2016, PJM, the PJM transmission owners and state commissions representing substantially all of the load in the PJM market submitted a settlement to FERC to resolve the outstanding issues regarding this matter. Under the terms of the settlement, Virginia Power would be required to pay approximately $200 million to PJM over the next 10 years. Although the settlement agreement has not been accepted by FERC, and the settlement is opposed by a small group of parties to the
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proceeding, Virginia Power believes it is probable it will be required to make payment as an outcome of the settlement. Accordingly, as of June 30, 2016, Virginia Power has recorded a contingent liability of $200 million in other deferred credits and other liabilities, which is offset by a $192 million regulatory asset for the amount that will be recovered through retail rates in Virginia. The remaining $8 million was recorded in other operations and maintenance expense in the Consolidated Statement of Income for the year ended December 31, 2015.
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 the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015 and Note 12 to the Consolidated Financial Statements in the Companies’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.
Regulation Act Legislation
In February 2016, certain industrial customers of APCo petitioned the Virginia Commission to issue a declaratory judgment that Virginia legislation enacted in 2015 keeping APCo’s base rates unchanged until at least 2020 (and Virginia Power’s base rates unchanged until at least 2022) is unconstitutional, and to require APCo to make biennial review filings in 2016 and 2018. Virginia Power intervened to support the constitutionality of this legislation. In July 2016, the Virginia Commission held in a divided opinion that this legislation is constitutional, and the industrial customers appealed this order to the Supreme Court of Virginia. This appeal is pending.
2015 Biennial Review
In May 2016, the Supreme Court of Virginia denied the Attorney General’s unopposed motion to suspend briefing in the previously granted appeals from the Virginia Commission’s orders in Virginia Power’s 2015 biennial review case. The Supreme Court of Virginia later granted leave for the industrial customer appellants to withdraw their appeals, thus concluding this matter.
Virginia Fuel Expenses
In May 2016, the Virginia Commission ordered Virginia Power’s proposed fuel rate decrease to become effective July 1, 2016 on an interim basis. Virginia Power’s proposed fuel rate represents a fuel revenue decrease of $286 million when applied to projected kilowatt-hour sales for the period July 1, 2016 to June 30, 2017. This case is pending.
Solar Facility Projects
In October 2015, Virginia Power filed an application with the Virginia Commission for CPCNs to construct and operate the Scott Solar, Whitehouse, and Woodland solar facilities and related distribution-level interconnection facilities. Virginia Power also applied for approval of Rider US-2 to recover the costs of these projects, which would increase Dominion’s renewable generation by a combined 56 MW at an estimated cost of approximately $130 million, excluding financing costs. In June 2016, the Virginia Commission granted the requested CPCNs and approved a $4 million revenue requirement, subject to true-up on a cost of service basis using a 9.6% ROE for Rider US-2 for the rate year beginning September 1, 2016.
In August 2016, Virginia Power filed an application with the Virginia Commission for a CPCN to construct and operate the Oceana solar facility and related distribution interconnection facilities on land owned by the United States Navy. The facility would begin commercial operations in late 2017 and increase Dominion’s renewable generation by approximately 18 MW at an estimated cost of approximately $40 million, excluding financing costs. The facility is the subject of a public-private partnership whereby the Commonwealth of Virginia, a non-jurisdictional customer, will compensate Virginia Power for the facility’s net electrical energy output. Virginia Power will retire renewable energy certificates on the Commonwealth’s behalf in an amount equal to those generated by the facility. There is no rate adjustment clause associated with this CPCN filing, nor will any costs of the project be recovered from jurisdictional customers. This case is pending.
Rate Adjustment Clauses
Below is a discussion of significant riders associated with various Virginia Power projects:
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North Anna
Virginia Power is considering the construction of a third nuclear unit at a site located at North Anna nuclear power station. If Virginia Power decides to build a new unit, it must first receive a COL from the NRC, approval of the Virginia Commission and certain environmental permits and other approvals. The COL is expected in 2017. Virginia Power has not yet committed to building a new nuclear unit at North Anna nuclear power station.
The motions and petitions filed by BREDL prior to April 2015 were dismissed, and under a previous ruling of the NRC, the contested portion of the COL proceeding remains terminated. The NRC is required to conduct a hearing in all COL proceedings, and if a new contention is not admitted, the mandatory NRC hearing will be uncontested.
In April 2015, BREDL filed a new motion and petition challenging the NRC’s reliance on its rule generically assessing the environmental impacts of continued onsite storage of spent nuclear fuel in licensing proceedings. The BREDL filings were substantially the same as those filed in other COL proceedings in which final environmental impact statements were issued prior to promulgation of the continued storage rule, like North Anna 3. In June 2015, the NRC denied the April 2015 motion and petition.
In August 2015, BREDL filed a petition in the United States Court of Appeals for the District of Columbia Circuit seeking review of the NRC’s June 2015 decision, and Virginia Power intervened. This petition and nine similar petitions relating to other NRC licensing proceedings were held in abeyance pending the outcome of the ongoing judicial review of the NRC’s continued storage rule before the same court. In June 2016, in New York v. NRC, the court upheld the NRC’s continued storage rule. In July 2016, the petitioners in New York v. NRC petitioned for rehearing en banc on their challenge to the continued storage rule, and the court ordered that BREDL’s August 2015 petition pertaining to the application of this rule to North Anna 3, and the similar petitions relating to other NRC proceedings, continue to be held in abeyance until the court’s disposition of the rehearing petition.
Ohio Regulation
PIPP Plus Program
Under the Ohio PIPP Plus Program, eligible customers can make reduced payments based on their ability to pay their bill. The difference between the customer’s total bill and the PIPP amount is deferred and collected under the PIPP Rider in accordance with the rules of the Ohio Commission. In July 2016, East Ohio’s annual update of the PIPP Rider was automatically approved by the Ohio Commission after a 45 day waiting period from the date of the filing. The revised rider rate reflects the recovery over the twelve-month period from July 2016 through June 2017 of projected deferred program costs of approximately $32 million from April 2016 through June 2017, net of a refund for over-recovery of accumulated arrearages of approximately $28 million as of March 31, 2016.
UEX Rider
East Ohio has approval for a UEX Rider through which it recovers the bad debt expense of most customers not participating in the PIPP Plus Program. The UEX Rider is adjusted annually to achieve dollar for dollar recovery of East Ohio’s actual write-offs of uncollectible amounts. In May 2016, East Ohio filed an application with the Ohio Commission requesting approval to increase its UEX Rider to reflect a refund of over-recovered accumulated bad debt expense of approximately $8 million as of March 31, 2016, and recovery of prospective net bad debt expense projected to total approximately $19 million for the twelve-month period from April 2016 to March 2017. This case is pending.
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West Virginia Regulation
In May 2016, Hope filed a PREP application with the West Virginia Commission requesting approval of a projected capital investment for 2017 of $27 million as part of a total five-year projected capital investment of $152 million. The new PREP customer rates would be effective November 1, 2016. This case is pending.
Dominion Carolina Gas
In June 2016, DCG received FERC authorization to construct and operate the approximately $45 million Columbia to Eastover Project facilities, which are expected to be placed into service in the fourth quarter of 2016.
Note 13. Variable Interest Entities
The primary beneficiary of a VIE is required to consolidate the VIE and to disclose certain information about its significant variable interests in the VIE. The primary beneficiary of a VIE is the entity that has both: 1) the power to direct the activities that most significantly impact the entity’s economic performance and 2) the obligation to absorb losses or receive benefits from the entity that could potentially be significant to the VIE.
Dominion owns the general partner interest and 64.8% of the limited partnership interests in Dominion Midstream, which owns a preferred equity interest and the general partner interest in Cove Point. Additionally, Dominion owns the manager and 67% of the membership interest in certain merchant solar facilities, as discussed in Note 2. Dominion has concluded that these entities are VIEs due to the limited partners or members lacking the characteristics of a controlling financial interest. Dominion is the primary beneficiary of Dominion Midstream and the merchant solar facilities, and Dominion Midstream is the primary beneficiary of Cove Point, as they have the power to direct the activities that most significantly impact their economic performance as well as the obligation to absorb losses and benefits which could be significant to them.
Dominion has an initial 45% membership interest in Atlantic Coast Pipeline. See Note 9 to the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015 for more details regarding the nature of this entity. Dominion concluded that Atlantic Coast Pipeline is a VIE because it has insufficient equity to finance its activities without additional subordinated financial support. Dominion has concluded that it is not the primary beneficiary of Atlantic Coast Pipeline as it does not have the power to direct the activities of Atlantic Coast Pipeline that most significantly impact its economic performance, as the power to direct is shared among multiple unrelated parties. Dominion is obligated to provide capital contributions based on its ownership percentage. Dominion’s maximum exposure to loss is limited to its current and future investment.
Dominion and Virginia Power
Dominion and Virginia Power’s nuclear decommissioning trust funds and Dominion’s rabbi trusts hold investments in limited partnerships or similar type entities (see Note 10 for further details). Dominion and Virginia Power concluded that these partnership investments are VIEs due to the limited partners lacking the characteristics of a controlling financial interest. Dominion and Virginia Power have concluded neither is the primary beneficiary as they do not have the power to direct the activities that most significantly impact these VIEs’ economic performance. Dominion and Virginia Power are obligated to provide capital contributions to the partnerships as required by each partnership agreement based on their ownership percentages. Dominion and Virginia Power’s maximum exposure to loss is limited to their current and future investments.
Dominion and Dominion Gas
Dominion previously concluded that Iroquois was a VIE because a non-affiliated Iroquois equity holder had the ability during a limited period of time to transfer its ownership interests to another Iroquois equity holder or its affiliate. At the end of the first quarter of 2016, such right no longer existed and, as a result, Dominion concluded that Iroquois is no longer a VIE.
Virginia Power had long-term power and capacity contracts with five non-utility generators; however, contracts with two of these generators expired in 2015, leaving three non-utility generators with an aggregate summer generation capacity of approximately 418 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 2017 to 2021. Virginia Power is not subject to any risk of loss from these potential VIEs other than its remaining purchase commitments which totaled $357 million as of June 30, 2016. Virginia Power paid $37 million and $55 million for electric capacity and $5 million and $23 million for electric energy to these entities in the
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three months ended June 30, 2016 and 2015, respectively. Virginia Power paid $74 million and $108 million for electric capacity and $12 million and $60 million for electric energy to these entities in the six months ended June 30, 2016 and 2015, respectively.
DTI has been engaged to oversee the construction of, and to subsequently operate and maintain, the projects undertaken by Atlantic Coast Pipeline based on the overall direction and oversight of Atlantic Coast Pipeline’s members. An affiliate of DTI holds a membership interest in Atlantic Coast Pipeline, therefore DTI is considered to have a variable interest in Atlantic Coast Pipeline. The members of Atlantic Coast Pipeline hold the power to direct the construction, operations and maintenance activities of the entity. DTI has concluded it is not the primary beneficiary of Atlantic Coast Pipeline as it does not have the power to direct the activities of Atlantic Coast Pipeline that most significantly impact its economic performance. DTI has no obligation to absorb any losses of the VIE. See Note 17 for information about associated related party receivable balances.
Virginia Power and Dominion Gas
Virginia Power and Dominion Gas purchased shared services from DRS, an affiliated VIE, of $74 million and $29 million for the three months ended June 30, 2016, $83 million and $30 million for the three months ended June 30, 2015, $188 million and $64 million for the six months ended June 30, 2016 and $166 million and $58 million for the six months ended June 30, 2015, respectively. Virginia Power and Dominion Gas determined that neither is the primary beneficiary of DRS as neither has both the power to direct the activities that most significantly impact its economic performance as well as the obligation to absorb losses and benefits which could be significant to it. DRS provides accounting, legal, finance and certain administrative and technical services to all Dominion subsidiaries, including Virginia Power and Dominion Gas. Virginia Power and Dominion Gas have no obligation to absorb more than their allocated shares of DRS costs.
Note 14. Significant Financing Transactions
Credit Facilities and Short-term Debt
The Companies 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 June 30, 2016, 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)
Virginia Power’s short-term financing is supported through its access as co-borrower to the two joint revolving credit facilities. These credit facilities can be used for working capital, as support for the combined commercial paper programs of the Companies and for other general corporate purposes.
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At June 30, 2016, Virginia Power’s share of commercial paper and letters of credit outstanding under its joint credit facilities with Dominion and Dominion Gas, were as follows:
In addition to the credit facility commitments mentioned above, Virginia Power also has a $120 million credit facility. In May 2016, the maturity date for this facility was extended from April 2019 to April 2020. As of June 30, 2016, this facility supports $119 million of certain variable rate tax-exempt financings of Virginia Power.
Dominion Gas’ short-term financing is supported by its access as co-borrower to the two joint revolving credit facilities. These credit facilities can be used for working capital, as support for the combined commercial paper programs of the Companies and for other general corporate purposes.
At June 30, 2016, Dominion Gas’ share of commercial paper and letters of credit outstanding under its joint credit facilities with Dominion and Virginia Power were as follows:
Remarketable Subordinated Notes
In March 2016 and May 2016, Dominion successfully remarketed the $550 million 2013 Series A 1.07% RSNs due 2021 and the $550 million 2013 Series B 1.18% RSNs due 2019, respectively, pursuant to the terms of the related 2013 Equity Units. In connection with the remarketings, the interest rate on the Series A and Series B junior subordinated notes was reset to 4.104% and 2.962%, respectively, payable on a semi-annual basis and Dominion ceased to have the ability to redeem the notes at its option or defer interest payments. At June 30, 2016, the securities are included in junior subordinated notes in Dominion’s Consolidated Balance Sheets. Dominion did not receive any proceeds from the remarketings. Remarketing proceeds belonged to the investors holding the related 2013 Equity Units and were temporarily used to purchase a portfolio of treasury securities. Upon maturity of each portfolio, the proceeds were applied on behalf of investors on the related stock purchase contract settlement date to pay the purchase price to Dominion for issuance of 8.5 million shares of its common stock on both April 1, 2016 and July 1, 2016. See Issuance of Common Stock below for a description of common stock issued by Dominion in April 2016 and July 2016 under the stock purchase contracts.
Enhanced Junior Subordinated Notes
In the first quarter of 2016, Dominion purchased and cancelled $38 million and $4 million of the June 2006 hybrids and the September 2006 hybrids, respectively.
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In July 2016, Dominion launched a tender offer to purchase up to $200 million in aggregate of additional June 2006 hybrids and September 2006 hybrids, which expired on August 1, 2016. In connection with the tender offer, Dominion purchased and cancelled $125 million and $74 million of the June 2006 hybrids and the September 2006 hybrids, respectively. All purchases were conducted in compliance with the applicable replacement capital covenants. Also in July 2016, Dominion issued $800 million of 5.25% July 2016 hybrids. The proceeds were used for general corporate purposes, including to finance the tender offer. The July 2016 hybrids are listed on the New York Stock Exchange under the symbol DRUA.
From time to time, Dominion may reduce its outstanding debt and level of interest expense through redemption of debt securities prior to maturity and repurchases in the open market, in privately negotiated transactions, through additional tender offers or otherwise.
Long-term Debt
In May 2016, Dominion Gas issued $150 million of private placement 3.8% Senior Notes that mature in 2031. In June 2016, Dominion Gas issued $250 million of private placement 2.875% Senior Notes that mature in 2023. Also in June 2016, Dominion Gas issued €250 million of private placement 1.45% Senior Notes that mature in 2026. The notes were recorded at $280 million at issuance and included in long-term debt in the Consolidated Balance Sheets at $278 million at June 30, 2016.
Issuance of Common Stock
Dominion maintains Dominion Direct® and a number of employee savings plans through which contributions may be invested in Dominion’s common stock. These shares may either be newly issued or purchased on the open market with proceeds contributed to these plans.
In December 2014, Dominion filed an SEC shelf registration for the sale of debt and equity securities including the ability to sell common stock through an at-the-market program. Also in December 2014, Dominion entered into four separate sales agency agreements to effect sales under the program and pursuant to which it may offer from time to time up to $500 million aggregate amount of its common stock. Sales of common stock can be made by means of privately negotiated transactions, as transactions on the New York Stock Exchange at market prices or in such other transactions as are agreed upon by Dominion and the sales agents and in conformance with applicable securities laws. Following issuances during the first and second quarters of 2015, Dominion has the ability to issue up to approximately $200 million of stock under the 2014 sales agency agreements; however, no additional issuances have occurred under these agreements in 2016.
In both April 2016 and July 2016, Dominion issued 8.5 million shares under the related stock purchase contract entered into as part of Dominion’s 2013 Equity Units. Additionally, Dominion completed a market issuance of equity in April 2016 of 10.2 million shares and receipt of proceeds of $756 million through a registered underwritten public offering. In connection with receipt of these proceeds, the acquisition financing commitments for the Questar Combination were reduced from $3.9 billion to $3.14 billion in April 2016.
Note 15. Commitments and Contingencies
As a result of issues generated in the ordinary course of business, the Companies 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, 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 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 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 the financial position, liquidity or results of operations of the Companies.
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Environmental Matters
The Companies 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.
Air
CAA
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 the Companies’ facilities are subject to the CAA’s permitting and other requirements.
MATS
In December 2011, the EPA issued MATS for coal- and oil-fired electric utility steam generating units. The rule establishes strict emission limits for mercury, particulate matter as a surrogate for toxic metals and hydrogen chloride as a surrogate for acid gases. The rule includes a limited use provision for oil-fired units with annual capacity factors under 8% that provides an exemption from emission limits, and allows compliance with operational work practice standards. Compliance was required by April 16, 2015, with certain limited exceptions. However, in June 2014, the VDEQ granted a one-year MATS compliance extension for two coal-fired units at Yorktown power station to defer planned retirements and allow for continued operation of the units to address reliability concerns while necessary electric transmission upgrades are being completed. These coal units will need to continue operating until at least April 2017 due to delays in transmission upgrades needed to maintain electric reliability, which based on assumptions about the timing for required agency actions and construction schedules are expected to be completed by no earlier than the second quarter of 2017. Therefore, in October 2015, Virginia Power submitted a request to the EPA for an additional one year compliance extension under an EPA Administrative Order. The order was signed by the EPA in April 2016 allowing the Yorktown power station units to operate for up to one additional year, as required to maintain reliable power availability while transmission upgrades are being made.
In June 2015, the United States Supreme Court issued a decision holding that the EPA failed to take cost into account when the agency first decided to regulate the emissions from coal- and oil-fired plants, and remanded the MATS rule back to the United States Court of Appeals for the District of Columbia Circuit. However, the Supreme Court did not vacate or stay the effective date and implementation of the MATS rule. In November 2015, in response to the Supreme Court decision, the EPA proposed a supplemental finding that consideration of cost does not alter the agency’s previous conclusion that it is appropriate and necessary to regulate coal- and oil-fired electric utility steam generating units under Section 112 of the CAA. In December 2015, the District of Columbia Court of Appeals issued an order remanding the MATS rulemaking proceeding back to the EPA without setting aside judgment, noting that EPA had represented it was on track to issue a final finding regarding its consideration of cost. In April 2016, the EPA issued a final supplemental finding that consideration of costs does not alter its conclusion regarding appropriateness and necessity for the regulation. These actions do not change Virginia Power’s plans to close coal units at Yorktown power station or the need to complete necessary electricity transmission upgrades by 2017. Since the MATS rule remains in effect and Dominion is complying with the requirements of the rule, Dominion does not expect any adverse impacts to its operations at this time.
CAIR
The EPA established CAIR with the intent to require significant reductions in SO2 and NOX emissions from electric generating facilities. In July 2008, the United States Court of Appeals for the District of Columbia 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.
CSAPR
Following numerous petitions by industry participants for review and a successful motion for stay, in October 2014, the United States Court of Appeals for the District of Columbia Circuit ordered that the EPA’s motion to lift the stay of CSAPR be granted. Further, the Court granted the EPA’s request to shift the CSAPR compliance deadlines by three years, so that Phase 1 emissions budgets (which would have gone into effect in 2012 and 2013) will apply in 2015 and 2016, and Phase 2 emissions budgets will apply in 2017 and beyond. CSAPR replaced CAIR beginning in January 2015. The cost to comply is not expected to be material to Dominion’s or Virginia Power’s Consolidated Financial Statements. Future outcomes of any additional litigation and/or any action to issue a revised rule, including the EPA’s recent proposal to reduce the ozone season NOX emission budgets beginning in 2017, could affect the assessment regarding cost of compliance.
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Ozone Standards
In October 2015, the EPA issued a final rule tightening the ozone standard, set in 2008, from 75-ppb to 70-ppb. The EPA is expected to complete attainment designations for a new standard by December 2017 and states will have until 2020 or 2021 to develop plans to address the new standard. To comply with the 2008 standard, in April 2016 Dominion submitted the NOX Reasonable Available Control Technology analysis for Unit 5 at Possum Point power station. Until the states have developed implementation plans, the Companies are unable to predict whether or to what extent the new rules will ultimately require additional controls. However, if significant expenditures are required to implement additional controls, it could adversely affect the Companies’ results of operations and cash flows.
NOx and VOC Emissions
In April 2014, the Pennsylvania Department of Environmental Protection issued proposed regulations to reduce NOX and VOC emissions from combustion sources. The regulations were finalized in April 2016. To comply with the regulations, Dominion Gas anticipates installing emission control systems on existing engines at several compressor stations in Pennsylvania. The compliance costs associated with engineering and installation of controls and compliance demonstration with the regulation are expected to be approximately $25 million.
NSPS
In August 2012, the EPA issued the first NSPS impacting new and modified facilities in the natural gas production and gathering sectors and made revisions to the NSPS for natural gas processing and transmission facilities. These rules establish equipment performance specifications and emissions standards for control of VOC emissions for natural gas production wells, tanks, pneumatic controllers, and compressors in the upstream sector. In September 2015, the EPA issued a proposed NSPS (for the oil and natural gas sector) to regulate methane and VOC emissions from new and modified facilities in transmission and storage, gathering and boosting, production and processing facilities. The proposed regulation was finalized in June 2016. All projects which commenced construction after September 2015 will be required to comply with this regulation. Dominion and Dominion Gas are implementing the final regulation. Dominion currently estimates the potential impacts on results of operations, financial condition and/or cash flows related to this matter to be immaterial. Dominion Gas is still evaluating whether potential impacts on results of operations, financial condition and/or cash flows related to this matter will be material.
Methane Emissions
In January 2015, as part of its Climate Action Plan, the EPA announced plans to reduce methane emissions from the oil and gas sector including natural gas processing and transmission sources. In July 2015, the EPA announced the next generation of its voluntary Natural Gas STAR program, the Natural Gas STAR Methane Challenge Program. The proposed program covers the entire natural gas sector from production to distribution, with more emphasis on transparency and increased reporting for both annual emissions and reductions achieved through implementation measures. In March 2016, Dominion joined the EPA as a founding partner in this program for its distribution companies, East Ohio and Hope, and DTI.
In March 2016, as part of President Obama’s Climate Action Plan, the EPA began development of regulations for reducing methane emissions from existing sources in the oil and natural gas sectors. In June 2016, the EPA issued a draft Information Collection Request to collect information on existing sources upstream of distribution in this sector. The final Information Collection Request is expected in the fourth quarter of 2016. Depending on the results of this Information Collection Request effort, the EPA may propose new regulations on existing sources. Dominion and Dominion Gas cannot currently estimate the potential impacts on results of operations, financial condition and/or cash flows related to this matter.
Climate Change Legislation and Regulation
In October 2013, the United States Supreme Court granted petitions filed by several industry groups, states, and the United States Chamber of Commerce seeking review of the United States Court of Appeals for the District of Columbia Circuit’s June 2012 decision upholding the EPA’s regulation of GHG emissions from stationary sources under the CAA’s permitting programs. In June 2014, the United States Supreme Court ruled that the EPA lacked the authority under the CAA to require PSD or Title V permits for stationary sources based solely on GHG emissions. However, the Court upheld the EPA’s ability to require BACT for GHG for sources that are otherwise subject to PSD or Title V permitting for conventional pollutants. In July 2014, the EPA issued a memorandum specifying that it will no longer apply or enforce federal regulations or EPA-approved PSD state implementation plan provisions that require new and modified stationary sources to obtain a PSD permit when GHGs are the only pollutant that would be emitted at levels that exceed the permitting thresholds. In August 2015, the EPA published a final rule rescinding the requirement for all new and modified major sources to obtain permits based solely on their GHG emissions. In addition, the EPA stated that it will continue to use the existing thresholds to apply to sources that are otherwise subject to PSD for conventional pollutants until it completes a new rulemaking either justifying and upholding those thresholds or setting new ones. Some states have issued interim guidance that follows the EPA guidance. Due to uncertainty regarding what additional actions states may take to amend their existing regulations and what action the EPA ultimately takes to address the Court ruling under a new rulemaking, the Companies cannot predict the impact to their financial statements at this time.
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In July 2011, the EPA signed a final rule deferring the need for PSD and Title V permitting for CO2 emissions for biomass projects. This rule temporarily deferred for a period of up to three years the consideration of CO2 emissions from biomass projects when determining whether a stationary source meets the PSD and Title V applicability thresholds, including those for the application of BACT. The deferral policy expired in July 2014. In July 2013, the United States Court of Appeals for the District of Columbia Circuit vacated this rule; however, a mandate making this decision effective has not been issued. Virginia Power converted three coal-fired generating stations, Altavista, Hopewell and Southampton, to biomass during the CO2 deferral period. It is unclear how the court’s decision or the EPA’s final policy regarding the treatment of specific feedstock will affect biomass sources that were permitted during the deferral period; however, the expenditures to comply with any new requirements could be material to Dominion’s and Virginia Power’s financial statements.
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. The Companies must comply with applicable aspects of the CWA programs at their operating facilities.
In October 2014, the final regulations under Section 316(b) of the CWA that govern existing facilities and new units at existing facilities that employ a cooling water intake structure and that have flow levels exceeding a minimum threshold became effective. The rule establishes a national standard for impingement based on seven compliance options, but forgoes the creation of a single technology standard for entrainment. Instead, the EPA has delegated entrainment technology decisions to state regulators. State regulators are to make case-by-case entrainment technology determinations after an examination of five mandatory facility-specific factors, including a social cost-benefit test, and six optional facility-specific factors. The rule governs all electric generating stations with water withdrawals above two MGD, with a heightened entrainment analysis for those facilities over 125 MGD. Dominion and Virginia Power have 14 and 11 facilities, respectively, that may be subject to the final regulations. Dominion anticipates that it will have to install impingement control technologies at many of these stations that have once-through cooling systems. Dominion and Virginia Power are currently evaluating the need or potential for entrainment controls under the final rule as these decisions will be made on a case-by-case basis after a thorough review of detailed biological, technology, cost and benefit studies. While the impacts of this rule could be material to Dominion’s and Virginia Power’s results of operations, financial condition and/or cash flows, the existing regulatory framework in Virginia provides rate recovery mechanisms that could substantially mitigate any such impacts for Virginia Power.
In September 2015, the EPA released a final rule to revise the Effluent Limitations Guidelines for the Steam Electric Power Generating Category. The final rule establishes updated standards for wastewater discharges that apply primarily at coal and oil steam generating stations. Affected facilities are required to convert from wet to dry or closed cycle coal ash management, improve existing wastewater treatment systems and/or install new wastewater treatment technologies in order to meet the new discharge limits. Virginia Power has eight facilities that may be subject to additional wastewater treatment requirements associated with the final rule. The expenditures to comply with these new requirements are expected to be material.
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 United States 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 United States government concerning their liability for cleanup costs, or voluntarily begin a site investigation and site remediation under state oversight.
From time to time, Dominion, Virginia Power, or Dominion Gas 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, Virginia Power, or Dominion Gas 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.
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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 and 12 of which pertain to Dominion Gas. 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 the Companies 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. Virginia Power is currently evaluating the nature and extent of the contamination from this site as well as potential remedial options. Preliminary costs for options under evaluation for the site range from $1 million to $22 million. Due to the uncertainty surrounding the other sites, the Companies are unable to make an estimate of the potential financial statement impacts.
See below for discussion on ash pond and landfill closure costs.
Other Legal Matters
The Companies are defendants in a number of lawsuits and claims involving unrelated incidents of property damage and personal injury. Due to the uncertainty surrounding these matters, the Companies are unable to make an estimate of the potential financial statement impacts; however, they could have a material impact on results of operations, financial condition and/or cash flows.
Appalachian Gateway
Following the completion of the Appalachian Gateway project in 2012, DTI received multiple change order requests and other claims for additional payments from a pipeline contractor for the project. In July 2013, DTI filed a complaint in United States District Court for the Eastern District of Virginia for breach of contract as well as accounting and declaratory relief. The contractor filed a motion to dismiss, or in the alternative, a motion to transfer venue to Pennsylvania and/or West Virginia, where the pipelines were constructed. DTI filed an opposition to the contractor’s motion in August 2013. In November 2013, the court granted the contractor’s motion on the basis that DTI must first comply with the dispute resolution process. In July 2015, the contractor filed a complaint against DTI in United States District Court for the Western District of Pennsylvania. In August 2015, DTI filed a motion to dismiss, or in the alternative, a motion to transfer venue to Virginia. In March 2016, the Pennsylvania court granted the motion to dismiss and transferred the case to the United States District Court for the Eastern District of Virginia. In April 2016, the Virginia court issued an order staying the proceedings and ordering mediation. A mediation occurred in May 2016 but was unsuccessful. In July 2016, DTI filed a motion to dismiss. This case is pending. DTI has accrued a liability of $6 million for this matter. Dominion Gas cannot currently estimate additional financial statement impacts, but there could be a material impact to its financial condition and/or cash flows.
Ash Pond and Landfill Closure Costs
In September 2014, Virginia Power received a notice from the Southern Environmental Law Center on behalf of the Potomac Riverkeeper and Sierra Club alleging CWA violations at Possum Point power station. The notice alleges unpermitted discharges to surface water and groundwater from Possum Point power station’s historical and active ash storage facilities. A similar notice from the Southern Environmental Law Center on behalf of the Sierra Club was subsequently received related to Chesapeake power station. In December 2014, Virginia Power offered to close all of its coal ash ponds and landfills at Possum Point power station, Chesapeake and Bremo power stations as settlement of the potential litigation. While the issue is open to potential further negotiations, the Southern Environmental Law Center declined the offer as presented in January 2015 and, in March 2015, filed a lawsuit related to its claims of the alleged CWA violations at Chesapeake power station. Virginia Power filed a motion to dismiss in April 2015, which was denied in November 2015. A trial was held in June 2016. This case is pending. As a result of the December 2014 settlement offer, Virginia Power recognized a charge of $121 million in other operations and maintenance expense in its Consolidated Statements of Income in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2014.
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In April 2015, the EPA’s final rule regulating the management of CCRs stored in impoundments (ash ponds) and landfills was published in the Federal Register. The final rule regulates CCR landfills, existing ash ponds that still receive and manage CCRs, and inactive ash ponds that do not receive, but still store CCRs. Virginia Power currently operates inactive ash ponds, existing ash ponds, and CCR landfills subject to the final rule at eight different facilities. The enactment of the final rule in April 2015 created a legal obligation for Virginia Power to retrofit or close all of its inactive and existing ash ponds over a certain period of time, as well as perform required monitoring, corrective action, and post-closure care activities as necessary. In April 2016, the EPA announced a partial settlement with certain environmental and industry organizations that had challenged the final CCR rule in the United States Court of Appeals for the District of Columbia Circuit. As part of the settlement, certain exemptions included in the final rule for inactive ponds that closed by April 2018 will be removed, resulting in inactive ponds ultimately being subject to the same requirements as existing ponds. In June 2016, the court issued an order approving the settlement, which requires the EPA to modify provisions in the final CCR rule concerning inactive ponds. Virginia Power does not believe this change will substantially impact its closure plans for inactive ponds.
In 2015, Virginia Power recorded a $386 million ARO related to future ash pond and landfill closure costs. Recognition of the ARO also resulted in a $99 million incremental charge recorded in other operations and maintenance expense in its Consolidated Statement of Income, a $166 million increase in property, plant, and equipment associated with asset retirement costs, and a $121 million reduction in other noncurrent liabilities related to reversal of the contingent liability described above since the ARO obligation created by the final CCR rule represents similar activities. Virginia Power is in the process of obtaining the necessary permits to complete the work. In February and March 2016, respectively, two parties filed administrative appeals in the Circuit Court for the City of Richmond challenging certain provisions, relating to ash pond dewatering activities, of Possum Point power station’s wastewater discharge permit issued by the VDEQ in January 2016. One of those parties withdrew its appeal in June 2016. Virginia Power cannot predict the financial impact associated with the remaining appeal, but believes that it will not be material. The actual AROs related to the CCR rule may vary substantially from the estimates used to record the increased obligation in 2015.
Cove Point
Dominion is constructing the Liquefaction Project at the Cove Point facility, which would enable the facility to liquefy domestically-produced natural gas and export it as LNG. In September 2014, FERC issued an order granting authorization for Cove Point to construct, modify and operate the Liquefaction Project. In October 2014, several parties filed a motion with FERC to stay the order and requested rehearing. In May 2015, FERC denied the requests for stay and rehearing.
Two parties have separately filed petitions for review of the FERC order in the United States Court of Appeals for the District of Columbia Circuit, which petitions have been consolidated. Separately, one party requested a stay of the FERC order until the judicial proceedings are complete, which the court denied in June 2015.
In July 2016, the court denied one party’s petition for review of the FERC order authorizing the Liquefaction Project. The court also issued a decision remanding the other party’s petition for review of the FERC order to FERC for further explanation of FERC’s decision that a previous transaction with an existing import shipper was not unduly discriminatory. Cove Point believes that on remand FERC will be able to justify its decision.
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 the Institute of Nuclear Power Operations. Like other United States 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 requiring 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 have been implemented. The information requests issued by the NRC request each reactor to reevaluate the seismic and external flooding hazards at their site using present-day methods and information, conduct
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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. The walkdowns of each unit have been completed, audited by the NRC and found to be adequate. Reevaluation of the emergency communications systems and staffing levels was completed as part of the effort to comply with the orders. Reevaluation of the seismic and external flooding hazards is expected to continue through 2018. Dominion and Virginia Power do not currently expect that compliance with the NRC’s information requests will materially impact their financial position, results of operations or cash flows during the implementation period. The NRC staff is evaluating the implementation of the longer term Tier 2 and Tier 3 recommendations. Dominion and Virginia Power do not expect material financial impacts related to compliance with Tier 2 and Tier 3 recommendations.
Guarantees, Surety Bonds and Letters of Credit
At June 30, 2016, Dominion had issued $73 million of guarantees, primarily to support equity method investees. No significant amounts related to these guarantees have been recorded. As of June 30, 2016, Dominion’s exposure under these guarantees was $43 million, primarily related to certain reserve requirements associated with non-recourse financing.
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 June 30, 2016, Dominion had issued the following subsidiary guarantees:
Subsidiary debt(2)
Commodity transactions(3)
Nuclear obligations(4)
Cove Point(5)
Solar(6)
Other(7)
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Additionally, at June 30, 2016, Dominion had purchased $120 million of surety bonds, including $69 million at Virginia Power and $21 million at Dominion Gas, and authorized the issuance of letters of credit by financial institutions of $52 million 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
The Companies’ accounting policies for credit risk are discussed in Note 23 to the Consolidated Financial Statements in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015.
At June 30, 2016, Dominion’s credit exposure related to energy marketing and price risk management activities totaled $111 million. Of this amount, investment grade counterparties, including those internally rated, represented 88%. No single counterparty, whether investment grade or non-investment grade, exceeded $31 million of 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 June 30, 2016 and December 31, 2015, Dominion would have been required to post an additional $4 million and $12 million, respectively, of collateral to its counterparties. The collateral that would be required to be posted 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 not posted any collateral at June 30, 2016 or December 31, 2015 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 June 30, 2016 and December 31, 2015 was $13 million and $49 million, respectively, which does not include the impact of any offsetting asset positions. Credit-related contingent provisions for Virginia Power and Dominion Gas were not material as of June 30, 2016 and December 31, 2015. See Note 9 for further information about derivative instruments.
Note 17. Related-Party Transactions
Virginia Power and Dominion Gas engage in related-party transactions primarily with other Dominion subsidiaries (affiliates). Virginia Power’s and Dominion Gas’ 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 and Dominion Gas are included in Dominion’s consolidated federal income tax return. Dominion’s transactions with equity method investments are described in Note 10. 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 physical forwards and options, to manage commodity price risks associated with purchases of natural gas. As of June 30, 2016, Virginia Power’s derivative assets and liabilities with affiliates were each $36 million and $3 million, respectively. As of December 31, 2015, Virginia Power’s derivative assets and liabilities with affiliates were $13 million and $22 million, respectively. See Note 9 for more information.
Virginia Power participates in certain Dominion benefit plans described in Note 18. In Virginia Power’s Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, amounts due to Dominion associated with these benefit plans included in other deferred credits and other liabilities were $356 million and $316 million, respectively, and amounts due from Dominion at June 30, 2016 and December 31, 2015 included in other deferred charges and other assets were $98 million and $77 million, respectively.
DRS and other affiliates provide accounting, legal, finance and certain administrative and technical services to Virginia Power. In addition, Virginia Power provides certain services to affiliates, including charges for facilities and equipment usage.
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Presented below are Virginia Power’s significant transactions with DRS and other affiliates:
Commodity purchases from affiliates
Services provided by affiliates(1)
Services provided to affiliates
Virginia Power has borrowed funds from Dominion under short-term borrowing arrangements. Virginia Power had no short-term demand note borrowings from Dominion as of June 30, 2016. There were $376 million in short-term demand note borrowings from Dominion as of December 31, 2015. Virginia Power had no outstanding borrowings under the Dominion money pool for its nonregulated subsidiaries as of June 30, 2016 and December 31, 2015. Interest charges related to Virginia Power’s borrowings from Dominion were immaterial for the three and six months ended June 30, 2016 and 2015.
There were no issuances of Virginia Power’s common stock to Dominion for the three and six months ended June 30, 2016 and 2015.
Transactions with Related Parties
Dominion Gas transacts with affiliates for certain quantities of natural gas and other commodities at market prices in the ordinary course of business. Additionally, Dominion Gas provides transportation and storage services to affiliates. Dominion Gas also enters into certain other contracts with affiliates, which are presented separately from contracts involving commodities or services. As of June 30, 2016 and December 31, 2015, all of Dominion Gas’ commodity derivatives were with affiliates. See Notes 7 and 9 for more information.
Dominion Gas participates in certain Dominion benefit plans as described in Note 18. In Dominion Gas’ Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, amounts due from Dominion associated with these benefit plans included in noncurrent pension and other postretirement benefit assets were $674 million and $652 million, respectively, and amounts due to Dominion at June 30, 2016 and December 31, 2015 included in other deferred credits and other liabilities were immaterial.
DRS and other affiliates provide accounting, legal, finance and certain administrative and technical services to Dominion Gas. Dominion Gas provides certain services to related parties, including technical services. The amounts recognized for these services were as follows:
Purchases of natural gas and transportation and storage services from affiliates
Sales of natural gas and transportation and storage services to affiliates
Services provided by related parties(1)
Services provided to related parties(2)
The following table presents affiliated and related-party activity reflected in Dominion Gas’ Consolidated Balance Sheets:
Other receivables(1)
Customer receivables from related parties
Imbalances receivable from affiliates(2)
Affiliated notes receivable(3)
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Dominion Gas’ borrowings under the intercompany revolving credit agreement with Dominion were immaterial and $95 million as of June 30, 2016 and December 31, 2015, respectively. Interest charges related to Dominion Gas’ total borrowings from Dominion were immaterial for the three and six months ended June 30, 2016 and 2015.
Note 18. Employee Benefit Plans
In the first quarter of 2016, the Companies announced an organizational design initiative that will reduce their total workforces during 2016. The goal of the organizational design initiative was to streamline leadership structure and push decision making lower while also improving efficiency. During the six months ended June 30, 2016, Dominion recorded a $65 million ($40 million after-tax) charge, including $33 million ($20 million after-tax) at Virginia Power and $8 million ($5 million after-tax) at Dominion Gas, primarily reflected in other operations and maintenance expense in their Consolidated Statements of Income due to severance pay and other costs related to the organizational design initiative. The terms of the severance under the organizational design initiative were consistent with the Companies’ existing severance plans.
The components of Dominion’s provision for net periodic benefit cost (credit) were as follows:
Three Months Ended June 30,
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Amortization of net actuarial loss
Net periodic benefit cost (credit)
Employer Contributions
During the six months ended June 30, 2016, 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 VEBAs during the remainder of 2016.
Dominion Gas participates in certain Dominion benefit plans as described in Note 21 to the Consolidated Financial Statements in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015. See Note 17 for more information.
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The components of Dominion Gas’ provision for net periodic benefit credit for employees represented by collective bargaining units were as follows:
Net periodic benefit credit
During the six months ended June 30, 2016, Dominion Gas made no contributions to its defined benefit pension plans or other postretirement benefit plans. Dominion Gas expects to contribute approximately $12 million to its other postretirement benefit plans through VEBAs, for both employees represented by collective bargaining units and employees not represented by collective bargaining units, during the remainder of 2016.
Note 19. Operating Segments
The Companies are organized primarily on the basis of products and services sold in the United States. A description of the operations included in the Companies’ primary operating segments is as follows:
Primary Operating Segment
Description of Operations
Virginia
Power
DominionGas
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 discontinued or sold. 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 in allocating resources.
In the six months ended June 30, 2016, Dominion reported an after-tax net expense of $37 million for specific items in the Corporate and Other segment, with $26 million of these net expenses attributable to its operating segments. In the six months ended June 30, 2015, Dominion reported an after-tax net expense of $64 million for specific items in the Corporate and Other segment, with $62 million of these net expenses attributable to its operating segments.
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The net expense for specific items attributable to Dominion’s operating segments in 2016 primarily related to the impact of the following item:
The net expense for specific items in 2015 primarily related to the impact of the following items, all of which were attributable to Dominion Generation:
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.
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 in allocating resources.
In the six months ended June 30, 2016, Virginia Power reported an after-tax net expense of $19 million for specific items in the Corporate and Other segment, all of which was attributable to its operating segments. In the six months ended June 30, 2015, Virginia Power reported an after-tax net expense of $87 million for specific items in the Corporate and Other segment, all of which was attributable to its operating segments.
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The net expense for specific items attributable to Virginia Power’s operating segments in 2016 primarily related to the impact of the following item:
The following table presents segment information pertaining to Virginia Power’s operations:
Net income (loss)
The Corporate and Other Segment of Dominion Gas primarily includes specific items attributable to Dominion Gas’ operating segment that are not included in profit measures evaluated by executive management in assessing the segment’s performance or in allocating resources and the effect of certain items recorded at Dominion Gas as a result of Dominion’s basis in the net assets contributed.
In the six months ended June 30, 2016, Dominion Gas reported an after-tax net expense of $2 million for specific items in the Corporate and Other segment, all of which was attributable to its operating segment. In the six months ended June 30, 2015, Dominion Gas reported no amounts for specific items in the Corporate and Other segment.
The net expense for specific items in 2016 primarily related to an $8 million ($5 million after-tax) charge related to an organizational design initiative.
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The following table presents segment information pertaining to Dominion Gas’ operations:
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MD&A discusses Dominion’s results of operations and general financial condition and Virginia Power’s and Dominion Gas’ results of operations. MD&A should be read in conjunction with the Companies’ Consolidated Financial Statements. Virginia Power and Dominion Gas meet the conditions to file under the reduced disclosure format, and therefore have omitted certain sections of MD&A.
Contents of MD&A
MD&A consists of the following information:
Forward-Looking Statements
This report contains statements concerning the Companies’ 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,” “continue,” “target” or other similar words.
The Companies 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 the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015.
The Companies’ 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. The Companies 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 June 30, 2016, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in MD&A in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015. 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 and employee benefit plans.
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Results of Operations
Presented below is a summary of Dominion’s consolidated results:
Second Quarter
Diluted EPS
Year-To-Date
Overview
Second Quarter 2016 vs. 2015
Net income attributable to Dominion increased 9%, primarily due to the absence of charges related to ash pond and landfill closure costs at certain utility generation facilities, a decrease in electric utility capacity related expenses and an increase in gains from agreements to convey shale development rights underneath several natural gas storage fields. These increases were partially offset by a decrease in electric utility sales to retail customers from a reduction in cooling degree days.
Year-To-Date 2016 vs. 2015
Net income attributable to Dominion increased 3%, primarily due to the absence of the write-off of deferred fuel costs associated with Virginia legislation enacted in February 2015 and higher anticipated renewable energy investment tax credits. These increases were partially offset by a decrease in electric utility sales to retail customers from reductions in cooling and heating degree days and organizational design initiative costs.
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 1%, primarily reflecting:
These decreases were partially offset by a $30 million increase from electric utility operations, primarily reflecting:
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Other operations and maintenance decreased 6%, primarily reflecting:
These decreases were partially offset by:
Income tax expense decreased 20%, primarily due to higher anticipated renewable energy investment tax credits ($21 million) and the impact of a state legislative change ($17 million).
These decreases were partially offset by an $83 million increase from electric utility operations, primarily reflecting:
Other operations and maintenance increased 4%, primarily reflecting:
These increases were partially offset by:
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Income tax expense decreased 32%, primarily due to higher anticipated renewable energy investment tax credits ($90 million), lower pretax income ($48 million) and the impact of a state legislative change ($17 million).
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:
DVP
Dominion Generation(1)
Dominion Energy(1)
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)
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Presented below, on an after-tax basis, are the key factors impacting DVP’s net income contribution:
2016 vs. 2015
Increase (Decrease)
Regulated electric sales:
Weather
FERC transmission equity return
Storm damage and service restoration
Share dilution
Change in net income contribution
Dominion Generation
Presented below are selected operating statistics related to Dominion Generation’s operations:
Electricity supplied (million MWh):
Utility
Merchant
Degree days (electric utility service area):
Presented below, on an after-tax basis, are the key factors impacting Dominion Generation’s net income contribution:
Renewable energy investment tax credits(1)
Capacity related expenses
Outage costs
Merchant generation margin
Rate adjustment clause equity return
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Dominion Energy
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):
Average retail energy marketing customer accounts (thousands)(1)
Presented below, on an after-tax basis, are the key factors impacting Dominion Energy’s net income contribution:
Gas distribution margin:
Assignment of shale development rights
Retail energy marketing operations
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:
Renewable energy investment tax credits
Total other corporate operations
Total net income (expense)
EPS impact
Total Specific Items
Corporate and Other includes specific items attributable to Dominion’s primary operating segments that are not included in profit measures evaluated by executive management in assessing those segments’ performance or in allocating resources. See Note 19 to the Consolidated Financial Statements in this report for discussion of these items in more detail.
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Presented below is a summary of Virginia Power’s consolidated results:
Net income increased 14%, primarily due to the absence of charges related to ash pond and landfill closure costs at certain utility generation facilities, a decrease in capacity related expenses and an increase in rate adjustment clause revenue. These increases were partially offset by a decrease in sales to retail customers from a reduction in cooling degree days.
Net income increased 5%, primarily due to the absence of the write-off of deferred fuel costs associated with Virginia legislation enacted in February 2015, a decrease in capacity related expenses and a decrease in charges related to ash pond and landfill closure costs at certain utility generation facilities. These increases were partially offset by a decrease in sales to retail customers from reductions in cooling and heating degree days.
Presented below are selected amounts related to Virginia Power’s results of operations:
An analysis of Virginia Power’s results of operations follows:
Net revenueincreased 2%, primarily reflecting:
Other operations and maintenance decreased 13%, primarily reflecting:
Income tax expense increased 20%, primarily due to higher pre-tax income.
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Net revenue increased 3%, primarily reflecting:
Other operations and maintenance decreased 1%, primarily reflecting:
Presented below is a summary of Dominion Gas’ consolidated results:
Net income increased 24%, primarily due to an increase in gains from agreements to convey shale development rights underneath several natural gas storage fields.
Net income decreased 17%, primarily due to a decrease in gas transportation and storage activities and a decrease in gains from agreements to convey shale development rights underneath several natural gas storage fields.
Presented below are selected amounts related to Dominion Gas’ results of operations:
An analysis of Dominion Gas’ results of operations follows:
Net revenue decreased 4%, primarily reflecting:
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Other operations and maintenance decreased 40%, primarily reflecting:
Other income increased $5 million, primarily due to a gain on the sale of 0.65% of the non-controlling partnership interest in Iroquois.
Interest and related charges increased 28%, primarily due to higher interest expense on long-term debt resulting from a debt issuance in November 2015.
Income tax expense increased 24%, primarily reflecting higher pre-tax income.
Net revenue decreased 9%, primarily reflecting:
Other operations and maintenance expense was $198 million for both the six months ended June 30, 2016 and 2015. These amounts reflect the impact of the following items:
Interest and related charges increased 29%, primarily due to higher interest expense on long-term debt resulting from a debt issuance in November 2015.
Income tax expense decreased 18%, primarily reflecting lower pre-tax income.
Liquidity and Capital Resources
Dominion depends 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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In September 2015, Dominion initiated a program to purchase from the market up to $50 million of common units representing limited partner interests in Dominion Midstream. The common units may be acquired by Dominion over the 12 month period following commencement of the program at the discretion of management. During the six months ended June 30, 2016, Dominion purchased approximately 489,000 common units for $13 million. Dominion still has the ability to purchase $12 million of common units under the program.
Given the sufficiency of operating and other cash flows at the Dominion level, no dividends were declared or paid to Dominion by either Virginia Power or Dominion Gas during the first quarter of 2016. During the second quarter of 2016, no dividends were declared or paid to Dominion by Virginia Power.
At June 30 2016, Dominion had $2.0 billion of unused capacity under its credit facilities.
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 decrease in cash and cash equivalents
Cash and cash equivalents at June 30
Operating Cash Flows
Net cash provided by Dominion’s operating activities decreased $142 million, primarily due to higher net margin collateral requirements and the impact from unfavorable weather in 2016, partially offset by higher deferred fuel cost recoveries in its Virginia jurisdiction.
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.
Dominion’s 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 the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015.
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 June 30, 2016 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)
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Investing Cash Flows
Net cash used in Dominion’s investing activities increased $641 million, primarily due to higher capital expenditures and the restricted cash for the Questar Combinations, partially offset by the absences of Dominion’s acquisition of DCG and the acquisition of solar development projects in 2015.
Financing Cash Flows and Liquidity
Dominion relies on capital markets as significant sources of funding for capital requirements not satisfied by cash provided by its operations. As discussed further in Credit Ratings and Debt Covenants in MD&A in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015, the 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 for certain issuances.
Dominion currently 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 Dominion to use automatic shelf registration statements to register any offering of securities, other than those for exchange offers or business combination transactions.
Net cash provided by Dominion’s financing activities increased $600 million, primarily reflecting an increase in common stock issuances.
See Note 14 to the Consolidated Financial Statements in this report for further information regarding Dominion’s credit facilities, liquidity and significant financing transactions.
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 the Credit Ratings section of MD&A in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015, there is a discussion on the use of capital markets by Dominion as well as the impact of credit ratings on the accessibility and costs of using these markets.
In March 2016, Fitch Ratings Ltd. and Standard & Poor’s changed the rating for Dominion’s junior subordinated debt securities to account for its inability to defer interest payments on the remarketed 2013 Series A RSNs. Junior subordinated debt securities with an interest deferral feature are rated one notch lower by Fitch Ratings Ltd. and Standard & Poor’s (BBB-) than junior subordinated debt securities without an interest deferral feature (BBB). See Note 14 to the Consolidated Financial Statements for a description of the remarketed notes. As of June 30, 2016, there have been no additional changes in Dominion’s credit ratings.
Debt Covenants
In the Debt Covenants section of MD&A in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015, there is a discussion on the various covenants present in the enabling agreements underlying Dominion’s debt. As of June 30, 2016, there have been no material changes to debt covenants, nor any events of default under Dominion’s debt covenants. Pursuant to a waiver received in April 2016, the 65% maximum debt to total capital ratio in Dominion’s credit agreements will, with respect to Dominion only and upon closing of the Questar Combination, be temporarily increased to 70% until the end of the fourth fiscal quarter following closing (including the fiscal quarter in which the closing occurs).
Future Cash Payments for Contractual Obligations and Planned Capital Expenditures
As of June 30, 2016, there have been no material changes outside the ordinary course of business to Dominion’s contractual obligations nor any material changes to planned capital expenditures as disclosed in MD&A in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015.
Use of Off-Balance Sheet Arrangements
As of June 30, 2016, with the exception of the leasing arrangement described herein, 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, 2015.
Leasing Arrangement
In July 2016, Dominion signed an agreement with a lessor to construct and lease a new corporate office property in Richmond, Virginia. The lessor is providing equity and has obtained financing commitments from debt investors to fund the project costs, totaling $365 million. The project is expected to be completed by mid-2019. Dominion has been appointed to act as the
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construction agent for the lessor, during which time Dominion will request cash draws from the the lessor and debt investors to fund all project costs. If the project is terminated under certain events of default, Dominion could be required to pay up to 89.9% of the then funded amount. For specific full recourse events, Dominion could be required to pay up to 100% of the then funded amount.
The five-year lease term will commence once construction is substantially complete and the facility is able to be occupied. At the end of the initial lease term, Dominion can (i) extend the term of the lease for an additional five years, subject to the approval of the participants, at current market terms, (ii) purchase the property for an amount equal to the project costs or, (iii) subject to certain terms and conditions, sell the property to a third party using commercially reasonable efforts to obtain the highest cash purchase price for the property. If the project is sold and the proceeds from the sale are insufficient to repay the investors for the project costs, Dominion may be required to make a payment to the lessor, up to 87% of project costs, for the difference between the project costs and sale proceeds.
The respective transactions have been structured so that Dominion is not considered the owner during construction for financial accounting purposes and, therefore, will not reflect the construction activity in its consolidated financial statements. The financial accounting treatment of the lease agreement will be impacted by the new accounting standard issued in February 2016. Dominion will be considered the owner of the leased property for tax purposes, and as a result, will be entitled to tax deductions for depreciation and interest expense.
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 Consolidated Financial Statements that may impact 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 the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015 and Future Issues and Other Matters in MD&A in the Companies’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.
Dominion is 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 the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015, and Note 15 to the Consolidated Financial Statements in this report for additional information on various environmental matters.
In August 2015, the EPA issued final carbon standards for existing fossil fuel power plants. Known as the Clean Power Plan, the rule uses a set of measures for reducing emissions from existing sources that includes efficiency improvements at coal plants, displacing coal-fired generation with increased utilization of natural gas combined cycle units and expanding renewable resources. The new rule requires states to impose standards of performance limits for existing fossil fuel-fired electric generating units or equivalent statewide intensity-based or mass-based CO2 binding goals or limits. States are required to submit interim plans to the EPA by September 2016 identifying how they will comply with the rule, with final plans due by September 2018. The EPA also proposed a federal plan and model trading rules that, when finalized, states can adopt or that would be put in place if, in response to the final guidelines, a state either does not submit a state plan or its plan is not approved by the EPA. Virginia Power’s most recent integrated resources plan filed in May 2016 includes four alternative plans that represent plausible compliance strategies with the rule as proposed, and which include additional coal unit retirements and additional low or zero-carbon resources. The final rule has been challenged in the United States Court of Appeals for the District of Columbia Circuit. In February 2016, the United States Supreme Court issued a stay of the Clean Power Plan until the disposition of the petitions challenging the rule now before the Court of Appeals, and, if such petitions are filed in the future, before the United States Supreme Court. Dominion does not know whether these legal challenges will impact the submittal deadlines for the state implementation plans. Also in February 2016, the Governor of Virginia announced that it will continue development of a state plan. Until all court challenges have been resolved, the state plans are developed and the EPA approves the plans, Dominion cannot predict the potential financial statement impacts. However, Dominion believes the potential expenditures to comply based on the four alternative plans discussed in the most recent integrated resources plan will be material.
Legal Matters
See Item 3. Legal Proceedings in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015, Notes 12 and 15 to the Consolidated Financial Statements in the Companies’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and Notes 12 and 15 to the Consolidated Financial Statements and Item 1. Legal Proceedings in this report for additional information on various legal matters.
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Regulatory Matters
See Note 13 to the Consolidated Financial Statements in the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015, and Note 12 to the Consolidated Financial Statements in the Companies’ Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and in this report for additional information on various regulatory matters.
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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 in this report. The reader’s attention is directed to those paragraphs for discussion of various risks and uncertainties that may impact the Companies.
Market Risk Sensitive Instruments and Risk Management
The Companies’ 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 and Dominion’s and Dominion Gas’ natural gas procurement and marketing 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 and future issuances of debt. In addition, the Companies are exposed to investment price risk through various portfolios of equity and debt securities.
The following sensitivity analysis estimates the potential loss of future earnings or fair value from market risk sensitive instruments over a selected time period due to a 10% change in commodity prices or interest rates.
Commodity Price Risk
To manage price risk, Dominion and Virginia Power hold commodity-based derivative instruments held for non-trading purposes associated with purchases and sales of electricity, natural gas and other energy-related products and Dominion Gas holds commodity-based financial derivative instruments held for non-trading purposes associated with purchases and sales of natural gas and other energy-related products.
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 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 would have resulted in a decrease in fair value of $20 million and $24 million of Dominion’s commodity-based derivative instruments as of June 30, 2016 and December 31, 2015, respectively.
A hypothetical 10% decrease in commodity prices would have resulted in a decrease in the fair value of $54 million and $42 million of Virginia Power’s commodity-based derivative instruments as of June 30, 2016 and December 31, 2015, respectively.
A hypothetical 10% increase in commodity prices would have resulted in a decrease in fair value of $6 million and $5 million of Dominion Gas’ commodity-based derivative instruments as of June 30, 2016 and December 31, 2015, respectively.
The impact of a change in energy commodity prices on the Companies’ commodity-based 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-based financial 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. Physical commodity-based derivative instruments will be recognized as a gross revenue or expense based upon the transaction price and volume.
Interest Rate Risk
The Companies 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 the Companies, a hypothetical 10% increase in market interest rates would not have resulted in a material change in earnings at June 30, 2016 or December 31, 2015.
The Companies may also use forward-starting interest rate swaps and interest rate lock agreements as anticipatory hedges.
As of June 30, 2016, Dominion and Virginia Power had $3.1 billion and $1.8 billion, respectively, in aggregate notional amounts of these interest rate derivatives outstanding. A hypothetical 10% decrease in market interest rates would have resulted
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in a decrease of $52 million and $42 million, respectively, in the fair value of Dominion’s and Virginia Power’s interest rate derivatives at June 30, 2016. As of December 31, 2015, Dominion, Virginia Power and Dominion Gas had $4.6 billion, $2.0 billion and $250 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 $71 million, $52 million and $2 million, respectively, in the fair value of Dominion’s, Virginia Power’s and Dominion Gas’ interest rate derivatives at December 31, 2015.
In June 2016, Dominion Gas entered into foreign currency swaps with the purpose of hedging the foreign currency exchange risk associated with Euro denominated debt. As of June 30, 2016, Dominion Gas had $280 million (€250 million) in aggregate notional amounts of these foreign currency swaps outstanding. A hypothetical 10% increase in market interest rates would not have resulted in a material change in earnings at June 30, 2016.
The impact of a change in interest rates on the Companies’ 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 Dominion’s and Virginia Power’s Consolidated Balance Sheets at fair value.
Dominion recognized net realized gains (including investment income) on nuclear decommissioning and rabbi trust investments of $67 million and $102 million for the six months ended June 30, 2016 and 2015, respectively, and $184 million for the year ended December 31, 2015. 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 $98 million for the six months ended June 30, 2016. Dominion recorded in AOCI and regulatory liabilities, a net decrease in unrealized gains on these investments of $62 million for the six months ended June 30, 2015 and $157 million for the year ended December 31, 2015.
Virginia Power recognized net realized gains (including investment income) on nuclear decommissioning trust investments of $32 million and $38 million for the six months ended June 30, 2016 and 2015, respectively, and $88 million for the year ended December 31, 2015. 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 $53 million for the six months ended June 30, 2016. Virginia Power recorded in AOCI and regulatory liabilities, a net decrease in unrealized gains on these investments of $21 million for the six months ended June 30, 2015 and $76 million for the year ended December 31, 2015.
Dominion sponsors pension and other postretirement employee benefit plans that hold investments in trusts to fund employee benefit payments. Virginia Power and Dominion Gas employees participate in these plans. Differences between actual and expected returns on plan assets are accumulated and amortized during future periods. As such, any investment-related declines in these trusts will result in future increases in the net periodic cost recognized for employee benefit plans and will be included in the determination of the amount of cash to be contributed to the employee benefit plans.
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ITEM 4. CONTROLS AND PROCEDURES
Senior management of each of Dominion, Virginia Power, and Dominion Gas, including Dominion’s, Virginia Power’s, and Dominion Gas’ CEO and CFO, evaluated the effectiveness of each of their respective Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, each of Dominion’s, Virginia Power’s, and Dominion Gas’ CEO and CFO have concluded that each of their respective Company’s disclosure controls and procedures are effective.
There were no changes in Dominion’s, Virginia Power’s, or Dominion Gas’ internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companies’ internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Companies 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.
See the following for discussions on various environmental and other regulatory proceedings to which the Companies are a party, which information is incorporated herein by reference:
ITEM 1A. RISK FACTORS
The Companies 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 the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015, 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 the Companies’ Annual Report on Form 10-K for the year ended December 31, 2015. 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 in this report.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Period
4/1/16-4/30/16
$1.18 billion
5/1/16-5/31/16
6/1/16-6/30/16
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ITEM 6. EXHIBITS
Exhibit
Description
97
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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.
Registrant
/s/ Michele L. Cardiff
Michele L. Cardiff
Vice President, Controller and
Chief Accounting Officer
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EXHIBIT INDEX
100
101