UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
For the quarterly period ended March 31, 2014
or
For the transition period from to
Commission File
Number
Exact name of registrants as specified in their charters, address of
principal executive offices and registrants’ telephone number
I.R.S. Employer
Identification Number
120 Tredegar Street
Richmond, Virginia 23219
(804) 819-2000
State or other jurisdiction of incorporation or organization of the registrants: Virginia
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Dominion Resources, Inc. Yes x No ¨ Virginia Electric and Power Company Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act.
Dominion Resources, Inc.
Virginia Electric and Power Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Dominion Resources, Inc. Yes ¨ No x Virginia Electric and Power Company Yes ¨ No x
At March 31, 2014, the latest practicable date for determination, Dominion Resources, Inc. had 581,608,183 shares of common stock outstanding and Virginia Electric and Power Company had 274,723 shares of common stock outstanding. Dominion Resources, Inc. is the sole holder of Virginia Electric and Power Company’s common stock.
This combined Form 10-Q represents separate filings by Dominion Resources, Inc. and Virginia Electric and Power Company. Information contained herein relating to an individual registrant is filed by that registrant on its own behalf. Virginia Electric and Power Company makes no representations as to the information relating to Dominion Resources, Inc.’s other operations.
COMBINED INDEX
Glossary of Terms
Item 1.
Financial Statements
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 5.
Other Information
Item 6.
Exhibits
PAGE 2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Form 10-Q are defined below:
Abbreviation or Acronym
Definition
AFUDC
Allowance for funds used during construction
AMR
Automated meter reading program deployed by East Ohio
AOCI
Accumulated other comprehensive income (loss)
AROs
Asset retirement obligations
ARP
Acid Rain Program, a market-based initiative for emissions allowance trading, established pursuant to Title IV of the CAA
ASLB
Atomic Safety and Licensing Board
ATEX line
Appalachia to Texas Express ethane line
bcf
Billion cubic feet
Blue Racer
Blue Racer Midstream, LLC, a joint venture with Caiman
BOD
Board of Directors
BP
BP Wind Energy North America Inc.
Brayton Point
Brayton Point power station
BREDL
Blue Ridge Environmental Defense League
CAA
Clean Air Act
Caiman
Caiman Energy II, LLC
CAIR
Clean Air Interstate Rule
Carson-to-Suffolk line
Virginia Power 60-mile 500 kV transmission line in southeastern Virginia
CEO
Chief Executive Officer
CERCLA
Comprehensive Environmental Response, Compensation and Liability Act of 1980
CFO
Chief Financial Officer
CO2
Carbon dioxide
COL
Combined Construction Permit and Operating License
Companies
Dominion and Virginia Power, collectively
Cooling degree days
Units measuring the extent to which the average daily temperature is greater than 65 degrees Fahrenheit, calculated as the difference between 65 degrees and the average temperature for that day
Cove Point
Dominion Cove Point LNG, LP
Cove Point LNG Facility
An LNG import/regasification and storage facility located on the Chesapeake Bay in Lusby, Maryland
CSAPR
Cross State Air Pollution Rule
CWA
Clean Water Act
D.C.
District of Columbia
DEI
Dominion Energy, Inc.
Dominion
The legal entity, Dominion Resources, Inc., one or more of its consolidated subsidiaries (other than Virginia Power) or operating segments or the entirety of Dominion Resources, Inc. and its consolidated subsidiaries
Dominion Gas
The legal entity, Dominion Gas Holdings, LLC, one or more of its consolidated subsidiaries or operating segment, or the entirety of Dominion Gas Holdings, LLC and its consolidated subsidiaries
Dominion Midstream
The legal entity, Dominion Midstream Partners, LP and its wholly-owned subsidiary, Cove Point GP Holding Company, LLC
Dominion NGL Pipelines, LLC
The owner of the 58-mile G-150 pipeline project , which is designed to transport approximately 27,000 barrels per day of NGLs from Natrium to an interconnect with the ATEX line of Enterprise near Follansbee, West Virginia
DRS
Dominion Resources Services, Inc.
Dth
Dekatherm
DTI
Dominion Transmission, Inc.
DVP
Dominion Virginia Power operating segment
East Ohio
The East Ohio Gas Company, doing business as Dominion East Ohio
Elwood
Elwood power station
Energy Capital Partners
A private equity firm with offices in Short Hills, New Jersey and San Diego, California
Enterprise
Enterprise Product Partners, L.P.
EPA
Environmental Protection Agency
PAGE 3
EPC
Engineering, procurement and construction
EPS
Earnings per share
Equity Units
Dominion’s 2013 Series A Equity Units and 2013 Series B Equity Units issued in June 2013
ESBWR
General Electric-Hitachi’s Economic Simplified Boiling Water Reactor
FERC
Federal Energy Regulatory Commission
Flex MMP Stock
Virginia Power’s Flexible Money Market Cumulative Preferred Stock 2002 Series A
Fowler Ridge
A wind-turbine facility joint venture between Dominion and BP in Benton County, Indiana
FTRs
Financial transmission rights
GAAP
U.S. generally accepted accounting principles
Gal
Gallon
GHG
Greenhouse gas
Heating degree days
Units measuring the extent to which the average daily temperature is less than 65 degrees Fahrenheit, calculated as the difference between 65 degrees and the average temperature for that day
INPO
Institute of Nuclear Power Operations
ISO
Independent system operator
ISO-NE
ISO New England
Kewaunee
Kewaunee nuclear power station
Kincaid
Kincaid power station
kV
Kilovolt
Line TL-404
An approximately 26-mile, 24- and 30- inch gas gathering pipeline that extends from Wetzel County, West Virginia to Monroe County, Ohio
LNG
Liquefied natural gas
MD&A
Meadow Brook-to-Loudoun line
Virginia Power 65-mile 500 kV transmission line that begins in Warren County, Virginia and terminates in Loudoun County, Virginia
MGD
Million gallons a day
Millstone
Millstone nuclear power station
MISO
Midcontinent Independent Transmission System Operator, Inc.
MLP
Master limited partnership
Moody’s
Moody’s Investors Service
MW
Megawatt
MWh
Megawatt hour
Natrium
A natural gas and fractionation facility located in Natrium, West Virginia, owned by Blue Racer
NCEMC
North Carolina Electric Membership Corporation
NedPower
A wind-turbine facility joint venture between Dominion and Shell in Grant County, West Virginia
NGLs
Natural gas liquids
North Anna
North Anna nuclear power station
North Carolina Commission
North Carolina Utilities Commission
Northern System
Collection of approximately 131 miles of various diameter natural gas pipelines in Ohio
NOx
Nitrogen oxide
NPDES
National Pollutant Discharge Elimination System
NRC
Nuclear Regulatory Commission
NSPS
New Source Performance Standards
ODEC
Old Dominion Electric Cooperative
Ohio Commission
Public Utilities Commission of Ohio
Order 1000
Order issued by FERC adopting new requirements for transmission planning, cost allocation and development
PIPP
Percentage of Income Payment Plan
PIR
Pipeline Infrastructure Replacement program deployed by East Ohio
PJM
PJM Interconnection, L.L.C.
ppb
Parts-per-billion
PAGE 4
Rider B
A rate adjustment clause associated with the recovery of costs related to the conversion of three of Virginia Power’s coal-fired power stations to biomass
Rider S
A rate adjustment clause associated with the recovery of costs related to the Virginia City Hybrid Energy Center
Rider W
A rate adjustment clause associated with the recovery of costs related to Warren County
ROE
Return on equity
RTO
Regional transmission organization
SEC
Securities and Exchange Commission
Shell
Shell WindEnergy, Inc.
SO2
Sulfur dioxide
Standard & Poor’s
Standard & Poor’s Ratings Services, a division of McGraw Hill Financial, Inc.
U.S.
United States of America
UAO
Unilateral Administrative Order
VIE
Variable interest entity
Virginia City Hybrid Energy Center
A 600 MW baseload carbon-capture compatible, clean coal powered electric generation facility in Wise County, Virginia
Virginia Commission
Virginia State Corporation Commission
Virginia Power
The legal entity, Virginia Electric and Power Company, one or more of its consolidated subsidiaries or operating segments or the entirety of Virginia Power and its consolidated subsidiaries
Warren County
A 1,329 MW combined-cycle, natural gas-fired power station under construction in Warren County, Virginia
PAGE 5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOMINION RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
Operating Revenue
Operating Expenses
Electric fuel and other energy-related purchases
Purchased electric capacity
Purchased gas
Other operations and maintenance
Depreciation, depletion and amortization
Other taxes
Total operating expenses
Income from operations
Other income
Interest and related charges
Income from continuing operations including noncontrolling interests before income tax expense
Income tax expense
Income from continuing operations including noncontrolling interests
Income from discontinued operations
Net Income Including Noncontrolling Interests
Noncontrolling Interests
Net Income Attributable to Dominion
Amounts Attributable to Dominion:
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income attributable to Dominion
Earnings Per Common Share-Basic
Income from continuing operations
Earnings Per Common Share-Diluted
Dividends declared per common share
The accompanying notes are an integral part of Dominion’s Consolidated Financial Statements.
PAGE 6
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income including noncontrolling interests
Other comprehensive income (loss), net of taxes:
Net deferred losses on derivatives-hedging activities(1)
Changes in unrealized net gains on investment securities(2)
Changes in unrecognized pension and other postretirement benefit costs(3)
Amounts reclassified to net income:
Net derivative losses-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
Total other comprehensive income
Comprehensive income including noncontrolling interests
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Dominion
PAGE 7
CONSOLIDATED BALANCE SHEETS
ASSETS
Current Assets
Cash and cash equivalents
Customer receivables (less allowance for doubtful accounts of $23 and $25)
Other receivables (less allowance for doubtful accounts of $4 at both dates)
Inventories
Derivative assets
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
Regulatory assets
Total deferred charges and other assets
Total assets
PAGE 8
CONSOLIDATED BALANCE SHEETS—(Continued)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Securities due within one year
Short-term debt
Accounts payable
Derivative liabilities
Total current liabilities
Long-Term Debt
Long-term debt
Junior subordinated notes
Remarketable subordinated notes
Total long-term debt
Deferred Credits and Other Liabilities
Deferred income taxes and investment tax credits
Regulatory liabilities
Total deferred credits and other liabilities
Total liabilities
Commitments and Contingencies (see Note 15)
Subsidiary Preferred Stock Not Subject to Mandatory Redemption
Common Shareholders’ Equity
Common stock – no par(2)
Retained earnings
Accumulated other comprehensive loss
Total common shareholders’ equity
Total liabilities and shareholders’ equity
PAGE 9
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31,
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 sale of assets
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
Proceeds from sales of securities
Purchases of securities
Proceeds from the sale of assets to Blue Racer
Proceeds from the sale of electric retail energy marketing business
Net cash used in investing activities
Financing Activities
Issuance (repayment) of short-term debt, net
Issuance of long-term debt
Repayment of long-term debt
Repayment of affiliated notes payable
Subsidiary preferred stock redemption
Issuance of common stock
Common dividend payments
Subsidiary preferred dividend payments
Net cash provided by (used in) 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 activities:
Accrued capital expenditures
PAGE 10
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
Preferred dividends
Balance available for common stock
The accompanying notes are an integral part of Virginia Power’s Consolidated Financial Statements.
PAGE 11
Net income
Net deferred gains on derivatives-hedging activities(1)
Changes in unrealized net gains on nuclear decommissioning trust funds(2)
Net derivative gains-hedging activities(3)
Net realized gains on nuclear decommissioning trust funds(4)
Other comprehensive income (loss)
Comprehensive income
PAGE 12
Customer receivables (less allowance for doubtful accounts of $11 at both dates)
Other receivables (less allowance for doubtful accounts of $2 at both dates)
Inventories (average cost method)
Accumulated depreciation and amortization
Intangible assets, net
Other(2)
PAGE 13
LIABILITIES AND SHAREHOLDER’S EQUITY
Payables to affiliates
Affiliated current borrowings
Accrued interest, payroll and taxes
Preferred Stock Not Subject to Mandatory Redemption
Common Shareholder’s Equity
Common stock – no par(3)
Other paid-in capital
Accumulated other comprehensive income
Total common shareholder’s equity
Total liabilities and shareholder’s equity
PAGE 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization (including nuclear fuel)
Deferred fuel expenses
Plant construction and other property additions
Purchases of nuclear fuel
Repayment of short-term debt, net
Issuance (repayment) of affiliated current borrowings, net
Preferred stock redemption
Preferred dividend payments
Increase (decrease) in cash and cash equivalents
PAGE 15
COMBINED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations
Dominion, headquartered in Richmond, Virginia, is one of the nation’s largest producers and transporters of energy. Dominion’s operations are conducted through various subsidiaries, including Virginia Power, a regulated public utility that generates, transmits and distributes electricity for sale in Virginia and northeastern North Carolina.
Note 2. Significant Accounting Policies
As permitted by the rules and regulations of the SEC, Dominion’s and Virginia Power’s accompanying unaudited Consolidated Financial Statements contain certain condensed financial information and exclude certain footnote disclosures normally included in annual audited consolidated financial statements prepared in accordance with GAAP. These unaudited Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013.
In Dominion’s and Virginia Power’s opinion, the accompanying unaudited Consolidated Financial Statements contain all adjustments necessary to present fairly their financial position as of March 31, 2014 and their results of operations and cash flows for the three months ended March 31, 2014 and 2013. Such adjustments are normal and recurring in nature unless otherwise noted.
The Companies make certain estimates and assumptions in preparing their Consolidated Financial Statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.
Dominion’s and Virginia Power’s accompanying unaudited Consolidated Financial Statements include, after eliminating intercompany transactions and balances, their accounts and those of their respective majority-owned subsidiaries and those VIEs where Dominion has been determined to be the primary beneficiary.
The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Information for quarterly periods is affected by seasonal variations in sales, rate changes, electric fuel and other energy-related purchases, purchased gas expenses and other factors.
Certain amounts in Dominion’s and Virginia Power’s 2013 Consolidated Financial Statements and Notes have been reclassified to conform to the 2014 presentation for comparative purposes. The reclassifications did not affect the Companies’ net income, total assets, liabilities, equity or cash flows.
Amounts disclosed for Dominion are inclusive of Virginia Power, where applicable.
Note 3. Acquisitions and Dispositions
Acquisition of Solar Development Projects
In March 2014, Dominion completed the acquisition of 100% of the equity interests of six solar development projects in California from Recurrent Energy Development Holdings, LLC for approximately $50 million. The allocation of the purchase price to individual assets is under evaluation by management and has not been finalized.
The projects are expected to cost approximately $450 million once constructed, including the initial acquisition cost. Upon completion, the facilities are expected to generate approximately 139 MW and will provide Dominion with a large utility-scale solar presence in the California market and significantly increase its solar generation portfolio.
Long-term power purchase, interconnection, EPC and operation and maintenance agreements have been executed for each of the projects. Construction of the projects commenced in the first quarter of this year and all of the solar facilities are expected to enter commercial operations in late 2014 or early 2015. Dominion expects to claim federal investment tax credits on the projects.
Sale of Electric Retail Energy Marketing Business
In March 2014, Dominion completed the sale of its electric retail energy marketing business. The proceeds were approximately $187 million, net of transaction costs. The sale resulted in a gain, subject to post-closing adjustments, of approximately $100 million ($57 million after-tax) net of a $31 million write-off of goodwill, and is included in other operations and maintenance expense in Dominion’s Consolidated Statement of Income. The sale of the electric retail energy marketing business did not qualify for discontinued operations classification.
PAGE 16
Sale of Brayton Point, Kincaid and Equity Method Investment in Elwood
In March 2013, Dominion entered into an agreement with Energy Capital Partners to sell Brayton Point, Kincaid, and its equity method investment in Elwood. In August 2013, Dominion completed the sale and received proceeds of approximately $465 million, net of transaction costs.
In the first quarter of 2013, Brayton Point’s and Kincaid’s assets and liabilities to be disposed of were classified as held for sale and adjusted to their estimated fair value less cost to sell, resulting in impairment charges totaling $37 million ($22 million after-tax), which is included in discontinued operations in Dominion’s Consolidated Statements of Income. Dominion used the market approach to estimate the fair value of Brayton Point’s and Kincaid’s long-lived assets. This was considered a Level 2 fair value measurement given that it was based on the agreed-upon sales price.
Dominion’s 50% interest in Elwood was an equity method investment and therefore, in accordance with applicable accounting guidance, the carrying amount of this investment was not classified as held for sale nor were the equity earnings from this investment reported as discontinued operations.
The following table presents selected information regarding the results of operations of Brayton Point and Kincaid, which are reported as discontinued operations in Dominion’s Consolidated Statements of Income:
Operating revenue
Income before income taxes
Assignment of Marcellus Acreage
As discussed in Note 10 to Dominion’s Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2013, DTI closed on agreements with two natural gas producers to convey approximately 100,000 acres of Marcellus Shale development rights underneath several of its natural gas storage fields. In the first quarter of 2014, DTI received $12 million in additional cash proceeds resulting from post-closing adjustments. At March 31, 2014, deferred revenue totaled approximately $89 million, which will be recognized over the remaining terms of the agreements.
See Note 10 for a discussion of transactions related to Blue Racer.
Note 4. Operating Revenue
The Companies’ operating revenue consists of the following:
Electric sales:
Regulated
Nonregulated
Gas sales:
Gas transportation and storage
Total operating revenue
Regulated electric sales
PAGE 17
Note 5. Income Taxes
For continuing operations, including noncontrolling interests, the statutory U.S. federal income tax rate reconciles to Dominion’s and Virginia Power’s effective income tax rate as follows:
U.S. statutory rate
Increases (reductions) resulting from:
State taxes, net of federal benefit
Investment and production tax credits
AFUDC - equity
Other, net
Effective tax rate
As of March 31, 2014, there have been no material changes in Dominion’s and Virginia Power’s 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 Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013 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:
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
There were no potentially dilutive securities excluded from the calculation of diluted EPS for the three months ended March 31, 2014 and 2013.
PAGE 18
Note 7. Accumulated Other Comprehensive Income
The following table presents Dominion’s changes in AOCI by component, net of tax:
Three Months Ended March 31, 2014
Beginning balance
Other comprehensive income before reclassifications: gains (losses)
Amounts reclassified from accumulated other comprehensive income(1): (gains) losses
Net current-period other comprehensive income (loss)
Ending balance
Three Months Ended March 31, 2013
PAGE 19
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
Tax
Unrealized (gains) and losses on investment securities:
Realized (gain) loss on sale of securities
Impairment
Unrecognized pension and other postretirement benefit costs:
Prior service costs
Actuarial (gain) losses
Actuarial (gains) losses
PAGE 20
Note 8. Fair Value Measurements
Dominion’s and Virginia Power’s fair value measurements are made in accordance with the policies discussed in Note 6 to the Consolidated Financial Statements in their Annual Report on Form 10-K for the year ended December 31, 2013. See Note 9 in this report for further information about their derivatives and hedge accounting activities.
Dominion and Virginia Power enter into certain physical and financial forwards, futures and options, 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 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 and Virginia Power’s quantitative information about Level 3 fair value measurements. The range and weighted average are presented in dollars for market price inputs and percentages for price volatility.
At March 31, 2014
Assets:
Physical and Financial Forwards and Futures:
Natural Gas(2)
Electricity
FTRs(3)
Physical and Financial Options:
Natural Gas
Liabilities:
PAGE 21
Sensitivity of the fair value measurements to changes in the significant unobservable inputs is as follows:
Significant Unobservable Inputs
Market Price
Price Volatility
Non-recurring Fair Value Measurements
See Note 3 for a non-recurring fair value measurement related to Brayton Point and Kincaid.
PAGE 22
Recurring Fair Value Measurements
The following table presents Dominion’s assets and liabilities that are measured at fair value on a recurring basis for each hierarchy level, including both current and noncurrent portions:
Derivatives:
Commodity
Interest rate
Investments(1):
Equity securities:
U.S.:
Large cap
Non-U.S.:
Fixed income:
Corporate debt instruments
U.S. Treasury securities and agency debentures
State and municipal
Cash equivalents and other
Restricted cash equivalents
At December 31, 2013
PAGE 23
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 amount of gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date
PAGE 24
The following table presents Dominion’s classification of gains and losses included in earnings in the Level 3 fair value category:
Total gains (losses) included in earnings
The amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets/liabilities still held at the reporting date
PAGE 25
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:
U.S. Large cap
PAGE 26
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 months ended March 31, 2014 and 2013. 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 March 31, 2014 and 2013.
Fair Value of Financial Instruments
Substantially all of Dominion’s and Virginia Power’s financial instruments are recorded at fair value, with the exception of the instruments described below, which are reported at historical cost. Estimated fair values have been determined using available market information and valuation methodologies considered appropriate by management. The carrying amount of cash and cash equivalents, customer and other receivables, short-term debt and accounts payable are representative of fair value because of the short-term nature of these instruments. For Dominion’s and Virginia Power’s financial instruments that are not recorded at fair value, the carrying amounts and estimated fair values are as follows:
Long-term debt, including securities due within one year(2)
Junior subordinated notes(3)
Remarketable subordinated notes(3)
Subsidiary preferred stock(4)
Preferred stock(4)
Note 9. Derivatives and Hedge Accounting Activities
Dominion’s and Virginia Power’s accounting policies and objectives and strategies for using derivative instruments are discussed in Note 2 to the Consolidated Financial Statements in their Annual Report on Form 10-K for the year ended December 31, 2013. See Note 8 in this report for further information about fair value measurements and associated valuation methods for derivatives.
PAGE 27
Derivative assets and liabilities are presented gross on Dominion’s and Virginia Power’s Consolidated Balance Sheets. Dominion’s and Virginia Power’s derivative contracts include both over-the-counter transactions and those that are executed on an exchange or other trading platform (exchange contracts) and centrally cleared. Over-the-counter contracts are bilateral contracts that are transacted directly with a third party. Exchange contracts utilize a financial intermediary, exchange, or clearinghouse to enter, execute, or clear the transactions. Certain over-the-counter and exchange contracts contain contractual rights of setoff through master netting arrangements, derivative clearing agreements, and contract default provisions. In addition, the contracts are subject to conditional rights of setoff through counterparty nonperformance, insolvency, or other conditions.
In general, most over-the-counter transactions and all exchange contracts are subject to collateral requirements. Types of collateral for over-the-counter and exchange contracts include cash, letters of credit, and in some cases other forms of security, none of which are subject to restrictions. Cash collateral is used in the table below to offset derivative assets and liabilities. Certain accounts receivable and accounts payable recognized on Dominion’s and Virginia Power’s Consolidated Balance Sheets, as well as letters of credit and other forms of security, all of which are not included in the tables below, are subject to offset under master netting or similar arrangements and would reduce the net exposure.
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:
Interest rate contracts:
Over-the-counter
Commodity contracts:
Exchange
Total derivatives, subject to a master netting or similar arrangement
Total derivatives, not subject to a master netting or similar arrangement
Total
PAGE 28
Volumes
The following table presents the volume of Dominion’s derivative activity as of March 31, 2014. These volumes are based on open derivative positions and represent the combined absolute value of their long and short positions, except in the case of offsetting transactions, for which they represent the absolute value of the net volume of their long and short positions.
Natural Gas (bcf):
Fixed price(1)
Basis
Electricity (MWh):
Fixed price
Capacity (MW)
Liquids (Gal)(2)
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Ineffectiveness and AOCI
For the three months ended March 31, 2014, 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 March 31, 2014:
Commodities:
Gas
The amounts that will be reclassified from AOCI to earnings will generally be offset by the recognition of the hedged transactions (e.g., anticipated sales) in earnings, thereby achieving the realization of prices contemplated by the underlying risk management strategies and will vary from the expected amounts presented above as a result of changes in market prices and interest rates.
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Fair Value and Gains and Losses on Derivative Instruments
The following table presents the fair values of Dominion’s derivatives and where they are presented in its Consolidated Balance Sheets:
March 31, 2014
Total current derivative assets
Noncurrent Assets
Total noncurrent derivative assets(1)
Total derivative assets
LIABILITIES
Total current derivative liabilities
Noncurrent Liabilities
Interest Rate
Total noncurrent derivative liabilities(2)
Total derivative liabilities
December 31, 2013
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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:
Total commodity
Interest rate(3)
Derivatives not designated as hedging instruments
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The tables below present Virginia Power’s derivative asset and liability balances by type of financial instrument, before and after the effects of offsetting:
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The following table presents the volume of Virginia Power’s derivative activity as of March 31, 2014. 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.
Ineffectiveness
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The following table presents the fair values of Virginia Power’s derivatives and where they are presented in its Consolidated Balance Sheets:
Total current derivative assets(1)
Total current derivative liabilities(2)
Total noncurrent derivatives liabilities (3)
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The following tables present the gains and losses on Virginia Power’s derivatives, as well as where the associated activity is presented in its Consolidated Balance Sheets and Statements of Income:
Commodity(2)
Note 10. Investments
Equity and Debt Securities
Rabbi Trust Securities
Marketable equity and debt securities and cash equivalents held in Dominion’s rabbi trusts and classified as trading totaled $104 million and $107 million at March 31, 2014 and December 31, 2013, respectively. Cost method investments held in Dominion’s rabbi trusts totaled $9 million and $10 million at March 31, 2014 and December 31, 2013, respectively.
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Decommissioning Trust Securities
Dominion holds marketable equity and debt securities (classified as available-for-sale), cash equivalents and cost method investments in nuclear decommissioning trust funds to fund future decommissioning costs for its nuclear plants. Dominion’s decommissioning trust funds are summarized below:
Marketable equity securities:
U.S. Large Cap
Marketable debt securities:
Corporate bonds
Cost method investments
Cash equivalents and other(2)
Large Cap
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The fair value of Dominion’s marketable debt securities held in nuclear decommissioning trust funds at March 31, 2014 by contractual maturity is as follows:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Presented below is selected information regarding Dominion’s marketable equity and debt securities held in nuclear decommissioning trust funds.
Proceeds from sales
Realized gains(1)
Realized losses(1)
Other-than-temporary impairment losses on investments held in nuclear decommissioning trust funds for Dominion were not material for the three months ended March 31, 2014 and 2013.
In December 2012, Dominion formed Blue Racer with Caiman to provide midstream services to natural gas producers operating in the Utica Shale region in Ohio and portions of Pennsylvania. Blue Racer is an equal partnership between Dominion and Caiman, with Dominion contributing midstream assets and Caiman contributing private equity capital. In March 2013, Dominion sold Line TL-404 to Blue Racer and received approximately $47 million in cash proceeds. The sale resulted in a gain of approximately $25 million ($14 million after-tax) which is included in other operations and maintenance expense in Dominion’s Consolidated Statement of Income. Dominion NGL Pipelines, LLC was contributed in January 2014 to Blue Racer, prior to commencement of service, resulting in an increased equity method investment of $155 million, including $6 million of goodwill. In March 2014, Dominion sold the Northern System to Blue Racer and received approximately $84 million in cash proceeds. The sale resulted in a gain of approximately $59 million ($34 million after-tax) net of a $3 million write-off of goodwill, and is included in other operations and maintenance expense in Dominion’s Consolidated Statement of Income.
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Virginia Power holds marketable equity and debt securities (classified as available-for-sale), cash equivalents and cost method investments in nuclear decommissioning trust funds to fund future decommissioning costs for its nuclear plants. Virginia Power’s decommissioning trust funds are summarized below:
The fair value of Virginia Power’s marketable debt securities at March 31, 2014 by contractual maturity is as follows:
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Presented below is selected information regarding Virginia Power’s marketable equity and debt securities.
Other-than-temporary impairment losses on investments held in nuclear decommissioning trust funds for Virginia Power were not material for the three months ended March 31, 2014 and 2013.
Note 11. Regulatory Assets and Liabilities
Regulatory assets and liabilities include the following:
Regulatory assets:
Deferred rate adjustment clause costs(1)
Unrecovered gas cost(2)
Derivatives(3)
Regulatory assets-current(4)
Unrecognized pension and other postretirement benefit costs(5)
Deferred cost of fuel used in electric generation(6)
Income taxes recoverable through future rates(7)
Regulatory assets-non-current
Total regulatory assets
Regulatory liabilities:
PIPP(8)
Regulatory liabilities-current(9)
Provision for future cost of removal and AROs(10)
Decommissioning trust(11)
Regulatory liabilities-non-current
Total regulatory liabilities
Provision for future cost of removal(10)
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At March 31, 2014, approximately $124 million of Dominion’s and $82 million of Virginia Power’s regulatory assets represented past expenditures on which they do not currently earn a return. These expenditures are expected to be recovered within the next two years.
Note 12. Regulatory Matters
Regulatory Matters Involving Potential Loss Contingencies
As a result of issues generated in the ordinary course of business, Dominion and Virginia Power are involved in various regulatory matters. Certain regulatory matters may ultimately result in a loss; however, as such matters are in an initial procedural phase, involve uncertainty as to the outcome of pending reviews or orders, and/or involve significant factual issues that need to be resolved, it is not possible for the Companies to estimate a range of possible loss. For matters for which the Companies cannot estimate a range of possible loss, a statement to this effect is made in the description of the matter. Other matters may have progressed sufficiently through the regulatory process such that the Companies are able to estimate a range of possible loss. For regulatory matters for which the Companies are able to reasonably estimate a range of possible losses, an estimated range of possible loss is provided, in excess of the accrued liability (if any) for such matters. Any estimated range is based on currently available information, involves elements of judgment and significant uncertainties and may not represent the Companies’ maximum possible loss exposure. The circumstances of such regulatory matters will change from time to time and actual results may vary significantly from the current estimate. For current matters not specifically reported below, management does not anticipate that the outcome from such matters would have a material effect on Dominion’s or Virginia Power’s financial position, liquidity or results of operations.
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FERC – Electric
Under the Federal Power Act, FERC regulates wholesale sales and transmission of electricity in interstate commerce by public utilities. Dominion’s merchant generators sell electricity in the PJM, MISO and ISO-NE wholesale markets under Dominion’s market-based sales tariffs authorized by FERC. Virginia Power purchases and, under its FERC market-based rate authority, sells electricity in the wholesale market. In addition, Virginia Power has FERC approval of a tariff to sell wholesale power at capped rates based on its embedded cost of generation. This cost-based sales tariff could be used to sell to loads within or outside Virginia Power’s service territory. Any such sales would be voluntary.
Rates
In April 2008, FERC granted an application for Virginia Power’s electric transmission operations to establish a forward-looking formula rate mechanism that updates transmission rates on an annual basis and approved an ROE of 11.4%, effective as of January 1, 2008. The formula rate is designed to recover the expected revenue requirement for each calendar year and is updated based on actual costs. The FERC-approved formula method, which is based on projected costs, allows Virginia Power to earn a current return on its growing investment in electric transmission infrastructure.
In March 2010, ODEC and NCEMC filed a complaint with FERC against Virginia Power claiming that approximately $223 million in transmission costs related to specific projects were unjust, unreasonable and unduly discriminatory or preferential and should be excluded from Virginia Power’s transmission formula rate. In October 2010, FERC issued an order dismissing the complaint in part and established hearings and settlement procedures on the remaining part of the complaint. In February 2012, Virginia Power submitted to FERC a settlement agreement to resolve all issues set for hearing. The settlement was accepted by FERC in May 2012 and provides for payment by Virginia Power to the transmission customer parties collectively of $250,000 per year for ten years and resolves all matters other than allocation of the incremental cost of certain underground transmission facilities.
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 outside Virginia to wholesale transmission customers in Virginia. FERC determined that there was not sufficient evidence on the record to determine the magnitude of the underground increment and ordered a hearing to determine the appropriate amount of undergrounding cost to be allocated to each wholesale transmission customer in Virginia. The hearing is held in abeyance pending settlement proceedings ordered by FERC. While Virginia Power cannot predict the outcome of the hearing and settlement proceedings, it is not expected to have a material effect on results of operations.
Other Regulatory Matters
Other than the following matters, there have been no significant developments regarding the pending regulatory matters disclosed in Note 13 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013.
Virginia Regulation
Rate Adjustment Clauses
Below are developments to significant riders associated with various Virginia Power projects:
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North Anna COL
Virginia Power is considering the construction of a third nuclear unit at a site located at North Anna. 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. In April 2013, Virginia Power decided to replace the reactor design previously selected for a potential unit with ESBWR technology. Virginia Power filed the first of its two-part amendment to the COL application with the NRC in July 2013 to reflect the ESBWR technology and filed the second part of the amendment in December 2013. The COL is expected in 2016. Virginia Power has not yet committed to building a new nuclear unit at North Anna.
In February 2014, BREDL filed a petition with NRC seeking to stay final decision making in the COL proceeding until a rulemaking petition filed by a number of environmental groups several weeks earlier is resolved. The suspension request and underlying petition for rulemaking are based on analyses of the consequences of a spent fuel pool fire, but none of the analyses relates specifically to the ESBWR design. Substantially identical suspension petitions and contentions were filed by various intervenor groups in other licensing proceedings pending before the NRC. In March 2014, BREDL filed a motion to reopen the COL proceeding on seismic issues under a previous ruling of the ASLB. No other issues were raised by BREDL in its filing. Virginia Power and the NRC Staff have filed answers opposing both the motion and petition.
North Anna and Offshore Wind Legislation
In April 2014, the Virginia Governor signed legislation into law that permits Virginia Power to recover 70% of the costs previously deferred or capitalized related to the development of a third nuclear unit located at North Anna and the development of offshore wind facilities through December 31, 2013 as part of the 2013 and 2014 base rates. Virginia Power has deferred or capitalized costs totaling $577 million for these projects as of December 31, 2013, substantially all of which relate to North Anna. For the portion of these previously deferred or capitalized costs allocable to customers in Virginia, Virginia Power will recognize 70% as a charge against net income in 2014. The remaining deferred or capitalized costs, as well as costs incurred after December 31, 2013, continue to be eligible for inclusion in a future rate adjustment clause. The legislation goes into effect July 1, 2014.
Ohio Regulation
PIR Program
In 2008, East Ohio began PIR, aimed at replacing approximately 20% of its pipeline. In February 2014, East Ohio filed an application with the Ohio Commission requesting approval to adjust the PIR cost recovery rates for 2013 costs. The application includes a gross plant investment for 2013 of $164 million, a cumulative gross plant investment of $674 million and an estimated revenue requirement of $89 million. This application was approved by the Ohio Commission in April 2014.
FERC Regulation
DTI Settlement
In mid-2013, DTI received concerns about its fuel retainage percentages and apparent over-recovery of fuel costs during certain time periods reflected in its annual fuel reports. In December 2013, DTI submitted for FERC approval of a stipulation and agreement addressing, among other things, reductions in its fuel retainage percentages and a rate moratorium through 2016. In February 2014, FERC approved the stipulation and agreement.
The revised fuel retainage percentages became effective January 1, 2014. DTI began assessing the reduced fuel retainage percentages on March 1, 2014, and as a result provided refunds totaling nearly $10 million. The refunds reflect, with interest, the value of the difference between the actual quantities of fuel retained for the months of January and February and the quantities that would have been retained using the reduced percentages. The reduction in fuel retention is expected to reduce DTI’s revenues by approximately $35 million in 2014.
Note 13. Variable Interest Entities
As discussed in Note 15 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013, certain variable pricing terms in some of the Companies’ long-term power and capacity contracts cause them to be considered variable interests in the counterparties.
Virginia Power has long-term power and capacity contracts with four non-utility generators with an aggregate summer generation capacity of approximately 870 MW. These contracts contain certain variable pricing mechanisms in the form of partial fuel reimbursement that Virginia Power considers to be variable interests. After an evaluation of the information provided by these entities, Virginia Power was unable to determine whether they were VIEs. However, the information they provided, as well as Virginia Power’s knowledge of generation facilities in Virginia, enabled Virginia Power to conclude that, if they were VIEs, it would not be the primary beneficiary. This conclusion reflects Virginia Power’s determination that its variable interests do not convey the power to direct the most significant activities that impact the economic performance of the entities during the remaining terms of Virginia Power’s contracts and for the years the entities are expected to operate after its contractual relationships expire. The contracts expire at various dates ranging from 2015 to 2021. Virginia Power is not subject
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to any risk of loss from these potential VIEs other than its remaining purchase commitments which totaled $807 million as of March 31, 2014. Virginia Power paid $56 million and $55 million for electric capacity and $54 million and $20 million for electric energy to these entities in the three months ended March 31, 2014 and 2013, respectively.
Virginia Power purchased shared services from DRS, an affiliated VIE, of approximately $108 million and $77 million for the three months ended March 31, 2014 and 2013, respectively. Virginia Power determined that it is not the most closely associated entity with DRS and therefore not the primary beneficiary. DRS provides accounting, legal, finance and certain administrative and technical services to all Dominion subsidiaries, including Virginia Power. Virginia Power has no obligation to absorb more than its allocated share of DRS costs.
Note 14. Significant Financing Transactions
Credit Facilities and Short-term Debt
Dominion and Virginia Power use short-term debt to fund working capital requirements and as a bridge to long-term debt financings. The levels of borrowing may vary significantly during the course of the year, depending upon the timing and amount of cash requirements not satisfied by cash from operations. In addition, Dominion utilizes cash and letters of credit to fund collateral requirements. Collateral requirements are impacted by commodity prices, hedging levels, Dominion’s credit ratings and the credit quality of its counterparties.
At March 31, 2014, Dominion’s commercial paper and letters of credit outstanding, as well as its capacity available under credit facilities, were as follows:
Joint revolving credit facility(1)
Joint revolving credit facility(2)
Virginia Power’s short-term financing is supported by two joint revolving credit facilities with Dominion. These credit facilities are being used for working capital, as support for the combined commercial paper programs of Dominion and Virginia Power and for other general corporate purposes.
At March 31, 2014, Virginia Power’s share of commercial paper and letters of credit outstanding, as well as its capacity available under its joint credit facilities with Dominion were as follows:
In addition to the credit facility commitments mentioned above, Virginia Power also has a $120 million credit facility with a maturity date of September 2018. As of March 31, 2014, this facility supports approximately $119 million of certain variable rate tax-exempt financings of Virginia Power.
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Long-term Debt
In February 2014, Virginia Power issued $350 million of 3.45% senior notes, and $400 million of 4.45% senior notes, that mature in 2024, and 2044, respectively.
In March 2014, Dominion issued $400 million of 1.25% senior notes that mature in 2017.
In February 2014, Virginia Power provided notice to redeem the $10 million 2.5% and the $30 million 2.5% Industrial Development Authority of the Town of Louisa, Virginia Solid Waste and Sewage Disposal Revenue Bonds, Series 1997A and 2000A, that would otherwise mature in April 2022 and September 2030, respectively. At March 31, 2014, the bonds were included in securities due within one year in Virginia Power’s Consolidated Balance Sheets. In April 2014, Virginia Power redeemed the bonds for $40 million, the amount of principal then outstanding plus accrued interest.
Convertible Securities
At March 31, 2014, Dominion had $40 million of outstanding contingent convertible senior notes that are convertible by holders into a combination of cash and shares of Dominion’s common stock under certain circumstances. The conversion feature requires that the principal amount of each note be repaid in cash, while amounts payable in excess of the principal amount will be paid in common stock. The conversion rate is subject to adjustment upon certain events such as subdivisions, splits, combinations of common stock or the issuance to all common stock holders of certain common stock rights, warrants or options and certain dividend increases. As of March 31, 2014, the conversion rate had been adjusted, primarily due to individual dividend payments above the level paid at issuance, to 29.9961 shares of common stock per $1,000 principal amount of senior notes, which represents a conversion price of $33.34. If the outstanding notes as of March 31, 2014 were all converted, it would result in the issuance of approximately 600,000 additional shares of common stock.
The senior notes are eligible for conversion during any calendar quarter when the closing price of Dominion’s common stock was equal to or higher than 120% of the conversion price for at least 20 out of the last 30 consecutive trading days of the preceding quarter, the notes are called for redemption by Dominion and upon the occurrence of certain other conditions. During the first quarter of 2014, the senior notes were eligible for conversion and approximately $3 million of the notes were converted by holders into $3 million of common stock. The senior notes are eligible for conversion during the second quarter of 2014.
Preferred Stock
In February 2014, Virginia Power provided irrevocable notice to redeem all 1,250,000 outstanding shares of its Flex MMP Stock. In March 2014, Virginia Power redeemed the stock at a price of $100 per share plus accumulated and unpaid dividends at a rate reset in March 2011 of 6.12%. Dividends ceased accumulating on the stock upon payment of the redemption price, thus the rate was not reset in March 2014.
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 January 2014, Dominion began purchasing its common stock on the open market for these plans. In April 2014, Dominion began issuing new common shares for these direct stock purchase plans.
Note 15. Commitments and Contingencies
As a result of issues generated in the ordinary course of business, Dominion and Virginia Power are involved in legal proceedings before various courts and are periodically subject to governmental examinations (including by regulatory authorities), inquiries and investigations. Certain legal proceedings and governmental examinations involve demands for unspecified amounts of damages, are in an initial procedural phase, involve uncertainty as to the outcome of pending appeals or motions, and/or involve significant factual issues that need to be resolved, such that it is not possible for the Companies to estimate a range of possible loss. For such matters that the Companies cannot estimate, a statement to this effect is made in the description of the matter. Other matters may have progressed sufficiently through the litigation or investigative processes such that the Companies are able to estimate a range of possible loss. For legal proceedings and governmental examinations for which the Companies are able to reasonably estimate a range of possible losses, an estimated range of possible loss is provided, in excess of the accrued liability (if any) for such matters. Any accrued liability is recorded on a gross basis with a receivable also recorded for any probable insurance recoveries. Estimated ranges of loss are inclusive of legal fees and net of any anticipated insurance recoveries. Any estimated range is based on currently available information, involves elements of judgment and significant uncertainties and may not represent the Companies’ maximum possible loss exposure. The circumstances of such legal proceedings and governmental examinations will change from time to time and actual results may vary significantly from the current estimate. For current proceedings not specifically reported below, management does not anticipate that the liabilities, if any, arising from such proceedings would have a material effect on Dominion’s or Virginia Power’s financial position, liquidity or results of operations.
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Environmental Matters
Dominion and Virginia Power are subject to costs resulting from a number of federal, state and local laws and regulations designed to protect human health and the environment. These laws and regulations affect future planning and existing operations. They can result in increased capital, operating and other costs as a result of compliance, remediation, containment and monitoring obligations.
Air
The CAA, as amended, is a comprehensive program utilizing a broad range of regulatory tools to protect and preserve the nation’s air quality. At a minimum, states are required to establish regulatory programs to address all requirements of the CAA. However, states may choose to develop regulatory programs that are more restrictive. Many of Dominion’s and Virginia Power’s facilities are subject to the CAA’s permitting and other requirements.
The EPA established CAIR with the intent to require significant reductions in SO2 and NOX emissions from electric generating facilities. In July 2008, the U.S. Court of Appeals for the D.C. Circuit issued a ruling vacating CAIR. In December 2008, the Court denied rehearing, but also issued a decision to remand CAIR to the EPA. In July 2011, the EPA issued a replacement rule for CAIR, called CSAPR, that required 28 states to reduce power plant emissions that cross state lines. CSAPR established new SO2 and NOx emissions cap and trade programs that were completely independent of the current ARP. Specifically, CSAPR required reductions in SO2 and NOx emissions from fossil fuel-fired electric generating units of 25 MW or more through annual NOx emissions caps, NOx emissions caps during the ozone season (May 1 through September 30) and annual SO2 emission caps with differing requirements for two groups of affected states.
Following numerous petitions by industry participants for review and motions for stay, the U.S. Court of Appeals for the D.C. Circuit issued a ruling in December 2011 to stay CSAPR pending judicial review. In February and June 2012, the EPA issued technical revisions to CSAPR that were not material to Dominion. In August 2012, the court vacated CSAPR in its entirety and ordered the EPA to implement CAIR until a valid replacement rule is issued. In October 2012, the EPA filed a petition requesting a rehearing of the court’s decision, which was denied in January 2013. The mandate vacating CSAPR was issued in February 2013. In March 2013, the EPA and several environmental groups filed petitions with the U.S. Supreme Court requesting review of the decision to vacate and remand CSAPR. In June 2013, the U.S. Supreme Court granted the EPA’s petition seeking review of the D.C. Circuit’s decision that vacated and remanded CSAPR. With respect to Dominion’s generation fleet, the cost to comply with CAIR is not expected to be material. Future outcomes of litigation and/or any additional action to issue a revised rule could affect the assessment regarding cost of compliance.
In May 2012, the EPA issued final designations for the 75-ppb ozone air quality standard. Several Dominion electric generating facilities are located in areas impacted by this standard. As part of the standard, states will be required to develop and implement plans to address sources emitting pollutants which contribute to the formation of ozone. Until the states have developed implementation plans, Dominion is unable to predict whether or to what extent the new rules will ultimately require additional controls.
Water
The CWA, as amended, is a comprehensive program utilizing a broad range of regulatory tools including a permit program to authorize and regulate discharges to surface waters with strong enforcement mechanisms. Dominion and Virginia Power must comply with applicable aspects of the CWA program at their operating facilities.
In September 2010, Millstone’s NPDES permit was reissued under the CWA. The conditions of the permit require an evaluation of control technologies that could result in additional expenditures in the future. The report summarizing the results of the evaluation was submitted in August 2012 and is under review by the Connecticut Department of Energy and Environmental Protection. Dominion cannot currently predict the outcome of this review. In October 2010, the permit issuance was appealed to the state court by a private plaintiff. The permit is expected to remain in effect during the appeal. Dominion is currently unable to make an estimate of the potential financial statement impacts related to this matter.
Solid and Hazardous Waste
The CERCLA, as amended, provides for immediate response and removal actions coordinated by the EPA in the event of threatened releases of hazardous substances into the environment and authorizes the U.S. government either to clean up sites at which hazardous substances have created actual or potential environmental hazards or to order persons responsible for the situation to do so. Under the CERCLA, as amended, generators and transporters of hazardous substances, as well as past and present owners and operators of contaminated sites, can be jointly, severally and strictly liable for the cost of cleanup. These potentially responsible parties can be ordered to perform a cleanup, be sued for costs associated with an EPA-directed cleanup, voluntarily settle with the U.S. government concerning their liability for cleanup costs, or voluntarily begin a site investigation and site remediation under state oversight.
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From time to time, Dominion or Virginia Power may be identified as a potentially responsible party to a Superfund site. The EPA (or a state) can either allow such a party to conduct and pay for a remedial investigation, feasibility study and remedial action or conduct the remedial investigation and action itself and then seek reimbursement from the potentially responsible parties. Each party can be held jointly, severally and strictly liable for the cleanup costs. These parties can also bring contribution actions against each other and seek reimbursement from their insurance companies. As a result, Dominion or Virginia Power may be responsible for the costs of remedial investigation and actions under the Superfund law or other laws or regulations regarding the remediation of waste. Except as noted below, the Companies do not believe this will have a material effect on results of operations, financial condition and/or cash flows.
In September 2011, the EPA issued a UAO to Virginia Power and 22 other parties, ordering specific remedial action of certain areas at the Ward Transformer Superfund site located in Raleigh, North Carolina. Virginia Power does not believe it is a liable party under CERCLA based on its alleged connection to the site. In November 2011, Virginia Power and a number of other parties notified the EPA that they are declining to undertake the work set forth in the UAO.
The EPA may seek to enforce a UAO in court pursuant to its enforcement authority under CERCLA, and may seek recovery of its costs in undertaking removal or remedial action. If the court determines that a respondent failed to comply with the UAO without sufficient cause, the EPA may also seek civil penalties of up to $37,500 per day for the violation and punitive damages of up to three times the costs incurred by the EPA as a result of the party’s failure to comply with the UAO. Virginia Power is currently unable to make an estimate of the potential financial statement impacts related to the Ward Transformer matter.
Dominion has determined that it is associated with 17 former manufactured gas plant sites, three of which pertain to Virginia Power. Studies conducted by other utilities at their former manufactured gas plant sites have indicated that those sites contain coal tar and other potentially harmful materials. None of the former sites with which Dominion and Virginia Power are associated is under investigation by any state or federal environmental agency. At one of the former sites, Dominion is conducting a state-approved post closure groundwater monitoring program and an environmental land use restriction has been recorded. Another site has been accepted into a state-based voluntary remediation program. Dominion is currently evaluating the nature and extent of the contamination from this site as well as potential remedial options. Preliminary costs for options under evaluation for the site range from $1 million to $22 million. A remedy has not been selected. Due to the uncertainty surrounding the other sites, Dominion is unable to make an estimate of the potential financial statement impacts.
Climate Change Legislation and Regulation
In April 2012, the EPA published proposed NSPS for GHG emissions for new electric generating units. This proposed rule set national emission standards for new coal, oil, integrated gasification, and combined cycle units larger than 25MW. The proposed rule covered CO2 only and does not apply to existing sources. The proposed rule also does not apply to any new or existing biomass units. In June 2013, the President of the U.S. released a Climate Action Plan focusing on ways to meet the national GHG reduction goal of 17% from 2005 levels by 2020. Pursuant to the Presidential Memorandum issued in conjunction with the Climate Action Plan, the EPA withdrew the April 2012 proposal and re-proposed the NSPS standards for new sources on January 8, 2014 and is expected to finalize the rule in 2014 or early 2015. The Presidential Memorandum also directed the EPA to propose a rule for reconstructed, modified and existing sources of GHG emissions no later than June 2014, and issue a final rule no later than June 2015, to provide guidelines to the states to achieve the required GHG reductions. In March 2014, a national Strategy to Reduce Methane Emissions was published as part of the Climate Action Plan. The plan outlines a strategy to further reduce both domestic and international methane emissions from a number of key sources, including the oil and natural gas industry, and outlines the Administration’s efforts to improve measurement of these emissions. In April 2014, the EPA published five white papers on methane emissions and potential mitigation options related to the oil and gas industry. Dominion currently cannot predict the direct or indirect financial impact on operations from these GHG initiatives, but believes the expenditures to comply with any new requirements could be material.
In October 2013, the U.S. Supreme Court granted petitions filed by several industry groups, states, and the U.S. Chamber of Commerce seeking review of the D.C. Circuit Court’s June 2012 decision upholding the EPA’s regulation of GHG under the CAA. The court’s decision could potentially impact EPA’s continued implementation of current Prevention of Significant Deterioration regulations applicable to stationary sources in relation to GHG. It is not anticipated, however, that the court’s decision would affect the EPA’s development of the GHG NSPS rules for new or existing sources, as the authority for those rules comes from a different section of the CAA than what is at issue in the Supreme Court case. It is uncertain at this time whether the court’s decision will have any material impact on Dominion’s operations.
In July 2011, the EPA signed a final rule deferring the need for Prevention of Significant Deterioration and Title V permitting for CO2 emissions for biomass projects. This rule temporarily deferred for a period of up to 3 years the consideration of CO2 emissions from biomass projects when determining whether a stationary source meets the Prevention of Significant
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Deterioration and Title V applicability thresholds, including those for the application of best available control technology. In July 2013, the U.S. Court of Appeals for the D.C. 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 will affect biomass sources that were permitted during the deferral period, however the expenditures to comply with any new requirements could be material.
Nuclear Matters
In March 2011, a magnitude 9.0 earthquake and subsequent tsunami caused significant damage at the Fukushima Daiichi nuclear power station in northeast Japan. These events have resulted in significant nuclear safety reviews required by the NRC and industry groups such as INPO. Like other U.S. nuclear operators, Dominion has been gathering supporting data and participating in industry initiatives focused on the ability to respond to and mitigate the consequences of design-basis and beyond-design-basis events at its stations.
In July 2011, an NRC task force provided initial recommendations based on its review of the Fukushima Daiichi accident and in October 2011 the NRC staff prioritized these recommendations into Tiers 1, 2 and 3, with the Tier 1 recommendations consisting of actions which the staff determined should be started without unnecessary delay. In December 2011, the NRC Commissioners approved the agency staff’s prioritization and recommendations, and that same month an appropriations act directed the NRC to require reevaluation of external hazards (not limited to seismic and flooding hazards) as soon as possible.
Based on the prioritized recommendations, in March 2012, the NRC issued orders and information requests requiring specific reviews and actions to all operating reactors, construction permit holders and combined license holders based on the lessons learned from the Fukushima Daiichi event. The orders applicable to Dominion require implementation of safety enhancements related to mitigation strategies to respond to extreme natural events resulting in the loss of power at plants, and enhancing spent fuel pool instrumentation. The orders require prompt implementation of the safety enhancements and completion of implementation within two refueling outages or by December 31, 2016, whichever comes first. Implementation of these enhancements is currently in progress. The information requests issued by the NRC request each reactor to reevaluate the seismic and flooding hazards at their site using present-day methods and information, conduct walkdowns of their facilities to ensure protection against the hazards in their current design basis, and to reevaluate their emergency communications systems and staffing levels. The updated seismic analyses are complete, and only North Anna requires further evaluation in accordance with the NRC’s approved guidance. Dominion and Virginia Power do not currently expect that compliance with the NRC’s March 2012 orders and information requests will materially impact their financial position, results of operations or cash flows during the approximately four-year implementation period. The NRC staff is evaluating the implementation of the longer term Tier 2 and Tier 3 recommendations. Dominion and Virginia Power are currently unable to estimate the potential financial impacts related to compliance with Tier 2 and Tier 3 recommendations.
Guarantees
At March 31, 2014, Dominion had issued $69 million of guarantees, primarily to support equity method investees. No significant amounts related to these guarantees have been recorded. As of March 31, 2014, Dominion’s exposure under these guarantees was $54 million, primarily related to certain reserve requirements associated with non-recourse financing.
In addition to the above guarantees, Dominion and its partners, Shell and BP, may be required to make additional periodic equity contributions to NedPower and Fowler Ridge in connection with certain funding requirements associated with their respective non-recourse financings. As of March 31, 2014, Dominion’s maximum remaining cumulative exposure under these equity funding agreements was $80 million through 2019 and its maximum annual future contributions could range from approximately $4 million to $19 million.
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.
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At March 31, 2014, Dominion had issued the following subsidiary guarantees:
Subsidiary debt(2)
Commodity transactions(3)
Nuclear obligations(4)
Cove Point(5)
Solar(6)
Other(7)
Surety Bonds and Letters of Credit
As of March 31, 2014, Dominion had purchased $148 million of surety bonds, including $60 million at Virginia Power, and authorized the issuance of letters of credit by financial institutions of $237 million, including $53 million at Virginia Power, to facilitate commercial transactions by its subsidiaries with third parties. Under the terms of surety bonds, the Companies are obligated to indemnify the respective surety bond company for any amounts paid.
Note 16. Credit Risk
Dominion’s and Virginia Power’s accounting policies for credit risk are discussed in Note 23 to the Consolidated Financial Statements in their Annual Report on Form 10-K for the year ended December 31, 2013.
At March 31, 2014, Dominion’s credit exposure totaled $242 million. Of this amount, investment grade counterparties, including those internally rated, represented 61%. No counterparty exposure exceeded 10% of Dominion’s total exposure.
Credit-Related Contingent Provisions
The majority of Dominion’s derivative instruments contain credit-related contingent provisions. These provisions require Dominion to provide collateral upon the occurrence of specific events, primarily a credit rating downgrade. If the credit-related contingent features underlying these instruments that are in a liability position and not fully collateralized with cash were fully triggered as of March 31, 2014 and December 31, 2013, Dominion would have been required to post an additional $38 million and $146 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 posted approximately $46 million and $76 million in collateral at March 31, 2014 and December 31, 2013, respectively, related to derivatives with credit-related contingent provisions that are in a liability position and not fully collateralized with cash. The collateral posted includes any amounts paid related to non-derivative contracts and derivatives elected under the normal
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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 March 31, 2014 and December 31, 2013 was $122 million and $169 million, respectively, which does not include the impact of any offsetting asset positions. Credit-related contingent provisions for Virginia Power were not material as of March 31, 2014 and December 31, 2013. See Note 9 for further information about derivative instruments.
Note 17. Related Party Transactions
Virginia Power engages in related party transactions primarily with other Dominion subsidiaries (affiliates). Virginia Power’s receivable and payable balances with affiliates are settled based on contractual terms or on a monthly basis, depending on the nature of the underlying transactions. Virginia Power is included in Dominion’s consolidated federal income tax return and participates in certain Dominion benefit plans. In Virginia Power’s Consolidated Balance Sheets at March 31, 2014 and December 31, 2013, amounts due to Dominion associated with these benefit plans included in other deferred credits and other liabilities were $163 million and $147 million, respectively, and amounts due from Dominion at March 31, 2014 included in other deferred charges and other assets were $8 million. A discussion of significant related party transactions follows.
Transactions with Affiliates
Virginia Power transacts with affiliates for certain quantities of natural gas and other commodities in the ordinary course of business. Virginia Power also enters into certain commodity derivative contracts with affiliates. Virginia Power uses these contracts, which are principally comprised of commodity swaps, to manage commodity price risk associated with purchases of natural gas. As of March 31, 2014 and December 31, 2013, Virginia Power’s derivative assets and liabilities with affiliates were not material.
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.
Presented below are 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. There were $159 million and $97 million in short-term demand note borrowings from Dominion as of March 31, 2014 and December 31, 2013, respectively. Virginia Power had no outstanding borrowings, net of repayments under the Dominion money pool for its nonregulated subsidiaries as of March 31, 2014 and December 31, 2013. Interest charges related to Virginia Power’s borrowings from Dominion were not material for the three months ended March 31, 2014 and 2013.
Note 18. Employee Benefit Plans
The components of Dominion’s provision for net periodic benefit cost (credit) were as follows:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost (credit)
Amortization of net loss
Net periodic benefit cost (credit)
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Employer Contributions
During the three months ended March 31, 2014, Dominion made no contributions to its defined benefit pension plans or other postretirement benefit plans. Dominion expects to contribute approximately $12 million to its other postretirement benefit plans through Voluntary Employees’ Beneficiary Associations during the remainder of 2014.
Note 19. Operating Segments
Dominion and Virginia Power are organized primarily on the basis of products and services sold in the U.S. A description of the operations included in the Companies’ primary operating segments is as follows:
Primary Operating Segment
Description of Operations
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 allocating resources among the segments.
In January of 2014, Dominion announced it would exit the electric retail energy marketing business. Dominion completed the sale in March 2014. As a result, the earnings impact from electric retail energy marketing business has been included in the Corporate and Other Segment of Dominion for 2014.
In the second quarter of 2013, Dominion commenced a repositioning of its producer services business, which aggregates natural gas supply, engages in natural gas trading and marketing activities and natural gas supply management and provides price risk management services to Dominion affiliates. The repositioning was completed in the first quarter of 2014 and resulted in the termination of natural gas trading and certain energy marketing activities. As a result, the earnings impact from natural gas trading and certain energy marketing activities has been included in the Corporate and Other Segment of Dominion for 2014.
In the three months ended March 31, 2014, Dominion reported an after-tax net expense of $228 million for specific items in the Corporate and Other segment, with $217 million of these net expenses attributable to its operating segments. In the three months ended March 31, 2013, Dominion reported an after-tax net benefit of $19 million for specific items in the Corporate and Other segment, with $17 million of these net benefits attributable to its operating segments.
The net expense for specific items in 2014 primarily related to the impact of the following items:
The net benefit for specific items in 2013 primarily related to the impact of the following items:
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The Corporate and Other Segment of Virginia Power primarily includes specific items attributable to its operating segments that are not included in profit measures evaluated by executive management in assessing the segments’ performance or allocating resources among the segments.
There were no material net benefit or expense items in the Corporate and Other segment in the three months ended March 31, 2014 or 2013.
The following table presents segment information pertaining to Dominion’s operations:
2014
Total revenue from external customers
Intersegment revenue
Net income (loss) attributable to Dominion
2013
Loss from discontinued operations
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 following table presents segment information pertaining to Virginia Power’s operations:
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MD&A discusses Dominion’s and Virginia Power’s results of operations and general financial condition. MD&A should be read in conjunction with the Companies’ Consolidated Financial Statements.
Contents of MD&A
MD&A consists of the following information:
Forward-Looking Statements
This report contains statements concerning Dominion’s and Virginia Power’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. In most cases, the reader can identify these forward-looking statements by such words as “anticipate,” “estimate,” “forecast,” “expect,” “believe,” “should,” “could,” “plan,” “may,” “continue,” “target” or other similar words.
Dominion and Virginia Power make forward-looking statements with full knowledge that risks and uncertainties exist that may cause actual results to differ materially from predicted results. Factors that may cause actual results to differ are often presented with the forward-looking statements themselves. Additionally, other factors may cause actual results to differ materially from those indicated in any forward-looking statement. These factors include but are not limited to:
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Additionally, other risks that could cause actual results to differ from predicted results are set forth in Item 1A. Risk Factors in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013.
Dominion’s and Virginia Power’s forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made. The Companies caution the reader not to place undue reliance on their forward-looking statements because the assumptions, beliefs, expectations and projections about future events may, and often do, differ materially from actual results. Dominion and Virginia Power undertake no obligation to update any forward-looking statement to reflect developments occurring after the statement is made.
Accounting Matters
Critical Accounting Policies and Estimates
As of March 31, 2014, there have been no significant changes with regard to the critical accounting policies and estimates disclosed in MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013. The policies disclosed included the accounting for regulated operations, AROs, income taxes, derivative contracts and other instruments at fair value, goodwill and long-lived asset impairment testing, employee benefit plans and unbilled revenue.
Results of Operations
Presented below is a summary of Dominion’s consolidated results:
First Quarter
Diluted EPS
Overview
First Quarter 2014 vs. 2013
Net income attributable to Dominion decreased 23% primarily due to the repositioning of its producer services business which was completed in the first quarter of 2014, partially offset by the impact of higher margins from merchant generation operations and more favorable weather on electric utility operations.
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Analysis of Consolidated Operations
Presented below are selected amounts related to Dominion’s results of operations:
Net revenue
An analysis of Dominion’s results of operations follows:
Net revenue decreased 17%, primarily reflecting:
These decreases were partially offset by:
Other operations and maintenance decreased 32%, primarily reflecting:
Other income decreased 54%, primarily due to lower realized gains (net of investment income) on nuclear decommissioning trust funds ($27 million) and a decrease in the equity component of AFUDC ($12 million).
Income tax expense decreased 35%, primarily reflecting lower pre-tax income in 2014.
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Segment Results of Operations
Segment results include the impact of intersegment revenues and expenses, which may result in intersegment profit and loss. Presented below is a summary of contributions by Dominion’s operating segments to net income attributable to Dominion:
(millions, except EPS)
DVP(1)
Dominion Generation(1)
Dominion Energy
Primary operating segments
Corporate and Other
Consolidated
Presented below are selected operating statistics related to DVP’s operations:
Electricity delivered (million MWh)
Degree days (electric distribution service area):
Cooling
Heating
Average electric distribution customer accounts (thousands)(1)
Presented below, on an after-tax basis, are the key factors impacting DVP’s net income contribution:
2014 vs. 2013
Increase (Decrease)
Regulated electric sales:
Weather
FERC transmission equity return
Storm damage and service restoration
Change in net income contribution
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Dominion Generation
Presented below are selected operating statistics related to Dominion Generation’s operations:
Electricity supplied (million MWh):
Utility
Merchant(1)
Degree days (electric utility service area):
Average retail energy marketing customer accounts (thousands)(2)(3)
Presented below, on an after-tax basis, are the key factors impacting Dominion Generation’s net income contribution:
Merchant generation margin
Retail electric energy marketing 2013 earnings(1)
PJM ancillary services
Outage costs
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):
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Presented below, on an after-tax basis, are the key factors impacting Dominion Energy’s net income contribution:
Blue Racer(1)
Gas distribution margin:
Presented below are the Corporate and Other segment’s after-tax results:
Specific items attributable to operating segments
Specific items attributable to corporate operations
Total specific items
Other corporate operations
Total net expense
EPS impact
Total Specific Items
Corporate and Other includes specific items that are not included in profit measures evaluated by management in assessing segment performance or in allocating resources among the segments. See Note 19 to the Consolidated Financial Statements in this report for discussion of these items.
Other Corporate Operations
Net expenses decreased primarily reflecting increased investment tax credits in Dominion’s 2014 estimated annual effective rate for income taxes.
Presented below is a summary of Virginia Power’s consolidated results:
Net income increased by 13% primarily due to the impact of more favorable weather.
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Presented below are selected amounts related to Virginia Power’s results of operations:
An analysis of Virginia Power’s results of operations follows:
Net revenue increased 11%, primarily reflecting:
Other operations and maintenanceincreased 7%, primarily reflecting:
Other income decreased 40%, primarily due to a decrease in the equity component of AFUDC.
Interest and related charges increased 15%, primarily due to higher long-term debt interest expense resulting from debt issuances in August 2013 and February 2014.
Income tax expense increased 13%, primarily reflecting higher pre-tax income in 2014.
Presented below is a summary of contributions by Virginia Power’s operating segments to net income:
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Presented below are operating statistics related to Virginia Power’s DVP segment:
Presented below, on an after-tax basis, are the key factors impacting Virginia Power’s DVP segment’s net income contribution:
Presented below are operating statistics related to Virginia Power’s Dominion Generation segment:
Presented below, on an after-tax basis, are the key factors impacting Virginia Power’s Dominion Generation segment’s net income contribution:
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Liquidity and Capital Resources
Dominion and Virginia Power depend on both internal and external sources of liquidity to provide working capital and as a bridge to long-term debt financings. Short-term cash requirements not met by cash provided by operations are generally satisfied with proceeds from short-term borrowings. Long-term cash needs are met through issuances of debt and/or equity securities.
At March 31, 2014, Dominion had $1.3 billion of unused capacity under its credit facilities, including $694 million of unused capacity under joint credit facilities available to Virginia Power.
The sale of the electric retail energy marketing business and completion of the producer services repositioning in 2014 are not expected to have a material negative impact on Dominion’s liquidity.
A summary of Dominion’s cash flows is presented below:
Cash and cash equivalents at January 1
Cash flows provided by (used in):
Operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at March 31
A summary of Virginia Power’s cash flows is presented below:
Net increase (decrease) in cash and cash equivalents
Operating Cash Flows
Net cash provided by Dominion’s operating activities decreased by $299 million, primarily due to the repositioning of Dominion’s producer services business, lower deferred fuel cost recoveries in its Virginia jurisdiction and lower margins from nonregulated retail energy marketing operations. The decrease was partially offset by lower net margin collateral requirements and changes in other working capital items.
Net cash provided by Virginia Power’s operating activities decreased by $107 million, primarily due to lower deferred fuel cost recoveries; partially offset by the impact of favorable weather, higher revenue from rate adjustment clauses and net changes in other working capital items.
Dominion believes that its operations provide a stable source of cash flow to contribute to planned levels of capital expenditures and maintain or grow the dividend on common shares. Virginia Power believes that its operations provide a stable source of cash flow to contribute to planned levels of capital expenditures and provide dividends to Dominion.
The Companies’ operations are subject to risks and uncertainties that may negatively impact the timing or amounts of operating cash flows, which are discussed in Item 1A. Risk Factors in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013.
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Credit Risk
Dominion’s exposure to potential concentrations of credit risk results primarily from its energy marketing and price risk management activities. Presented below is a summary of Dominion’s credit exposure as of March 31, 2014 for these activities. Gross credit exposure for each counterparty is calculated prior to the application of collateral and represents outstanding receivables plus any unrealized on- or off-balance sheet exposure, taking into account contractual netting rights.
Investment grade(1)
Non-investment grade(2)
No external ratings:
Internally rated—investment grade(3)
Internally rated—non-investment grade(4)
Investing Cash Flows
Net cash used in Dominion’s investing activities increased by $57 million, primarily due to higher capital expenditures partially offset by higher proceeds from sales of assets.
Net cash used in Virginia Power’s investing activities increased by $121 million, primarily due to higher capital expenditures.
Financing Cash Flows and Liquidity
Dominion and Virginia Power rely on capital markets as significant sources of funding for capital requirements not satisfied by cash provided by their operations. As discussed further in Credit Ratings and Debt Covenants in MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013, the Companies’ ability to borrow funds or issue securities and the return demanded by investors are affected by credit ratings. In addition, the raising of external capital is subject to certain regulatory requirements, including registration with the SEC and, in the case of Virginia Power, approval by the Virginia Commission.
Each of the Companies meets the definition of a well-known seasoned issuer under SEC rules governing the registration, communications and offering processes under the Securities Act of 1933, as amended. The rules provide for a streamlined shelf registration process to provide registrants with timely access to capital. This allows the Companies to use automatic shelf registration statements to register any offering of securities, other than those for exchange offers or business combination transactions.
In 2014, net cash provided by Dominion’s financing activities was $78 million as compared to net cash used in financing activities of $403 million in 2013, primarily due to net debt issuances in 2014 as compared to net debt repayments in 2013.
In 2014, net cash provided by Virginia Power’s financing activities was $184 million as compared to net cash used in financing activities of $77 million in 2013, primarily due to higher net debt issuances; partially offset by the redemption of preferred stock in 2014.
See Note 14 to the Consolidated Financial Statements in this report for further information regarding Dominion’s and Virginia Power’s credit facilities, liquidity and significant financing transactions.
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 Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013, there is a discussion on the use of capital markets by the Companies, as well as the impact of credit ratings on the accessibility and costs of using these markets. As of March 31, 2014, there have been no changes in the Companies’ credit ratings.
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Debt Covenants
In the Debt Covenants section of MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013, there is a discussion on the various covenants present in the enabling agreements underlying the Companies’ debt. As of March 31, 2014, there have been no material changes to debt covenants, nor any events of default under the Companies’ debt covenants.
Future Cash Payments for Contractual Obligations and Planned Capital Expenditures
As of March 31, 2014, there have been no material changes outside the ordinary course of business to Dominion’s or Virginia Power’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, 2013.
Use of Off-Balance Sheet Arrangements
As of March 31, 2014, 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, 2013.
Future Issues and Other Matters
The following discussion of future issues and other information includes current developments of previously disclosed matters and new issues arising during the period covered by, and subsequent to, the dates of Dominion’s and Virginia Power’s Consolidated Financial Statements that may impact the Companies’ future results of operations, financial condition and/or cash flows. This section should be read in conjunction with Item 1. Business and Future Issues and Other Matters in MD&A in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013.
Dominion and Virginia Power are subject to costs resulting from a number of federal, state and local laws and regulations designed to protect human health and the environment. These laws and regulations affect future planning and existing operations. They can result in increased capital, operating and other costs as a result of compliance, remediation, containment and monitoring obligations. See Note 22 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013 and Note 15 in this report for additional information on various environmental matters.
The CWA is a comprehensive program utilizing a broad range of regulatory tools including a permit program to authorize and regulate discharges to surface waters with strong enforcement mechanisms. Dominion and Virginia Power must comply with applicable aspects of the CWA program at their operating facilities. In July 2004, the EPA published regulations under CWA Section 316(b) that govern existing utilities that employ a cooling water intake structure and that have flow levels exceeding a minimum threshold. In April 2008, the U.S. Supreme Court granted an industry request to review the question of whether Section 316(b) authorizes the EPA to compare costs with benefits in determining the best technology available for minimizing “adverse environmental impact” at cooling water intake structures. The U.S. Supreme Court ruled in April 2009 that the EPA has the authority to consider costs versus environmental benefits in selecting the best technology available for reducing impacts of cooling water intakes at power stations. It is currently unknown how the EPA will interpret the ruling in its ongoing rulemaking activity addressing cooling water intakes as well as how the states will implement this decision. In April 2011, the EPA published the proposed rule related to Section 316(b) in the Federal Register, and agreed to publish a final rule no later than July 27, 2012. The EPA has delayed the final rule several times and has most recently announced that a final rule will be issued no later than May 16, 2014.
The rule in its proposed form seeks to establish a uniform national standard for impingement, but forgoes the creation of a single technology standard for entrainment. Instead, the EPA proposes to delegate entrainment technology decisions to state regulators. State regulators are to make case-by-case entrainment technology determinations after an examination of nine facility-specific factors, including a social cost-benefit test.
The proposed rule governs all electric generating stations with water withdrawals above two MGD, with a heightened entrainment analysis for those facilities over 125 MGD. Under this proposal, Dominion has 14 facilities that may be subject to these proposed regulations. If finalized as proposed, 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 cannot estimate the need or potential for entrainment controls under the proposed 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. However, the impacts of this proposed rule may be material to the Companies’ results of operations, financial condition and/or cash flows.
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In June 2013, the EPA issued a proposed rule to revise the Effluent Limitations Guidelines for the Steam Electric Power Generating Category. The proposed rule establishes updated standards for wastewater discharges at coal, oil, gas, and nuclear steam generating stations. Affected facilities could be required to convert from wet to dry coal ash management, improve existing wastewater treatment systems and/or install new wastewater treatment technologies in order to meet the new discharge limits. The EPA is subject to a consent decree requiring that it take final action on the proposed rule by September 30, 2015. Dominion and Virginia Power currently cannot predict the direct or indirect financial impact on operations from these rule revisions, but believes the expenditures to comply with any new requirements could be material.
Legal Matters
See Item 3. Legal Proceedings in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013, and Notes 12 and 15 to the Consolidated Financial Statements and Part II, Item 1. Legal Proceedings in this report for additional information on various legal matters.
Regulatory Matters
See Note 13 to the Consolidated Financial Statements in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013 and Note 12 in this report for additional information on various regulatory matters.
Dominion is pursuing a liquefaction project at Cove Point, which would enable the facility to liquefy domestically-produced natural gas and export it as LNG. Dominion is party to an agreement with the Sierra Club restricting activities on portions of the Cove Point property. In May 2012, in response to claims by the Sierra Club, Cove Point filed a complaint for declaratory judgment to confirm its right to construct the project. In January 2013, a Maryland circuit court issued declaratory judgment confirming Cove Point’s right to build liquefaction facilities. In February 2013, the Sierra Club filed a notice of appeal with the Maryland Court of Special Appeals. In February 2014, the Maryland Court of Special Appeals affirmed the circuit court’s ruling that Cove Point may locate, construct and operate a liquefaction plant at the Cove Point LNG Facility and export LNG from the Cove Point LNG Facility. In April 2014, the Sierra Club petitioned the Maryland Court of Appeals, Maryland’s highest court, to review the rulings of the circuit court and the Maryland Court of Special Appeals. The Maryland Court of Appeals has the discretion to accept or decline the appeal petition. This case is pending. Dominion believes that the agreement with the Sierra Club permits it to locate, construct and operate a liquefaction plant at the Cove Point LNG facility.
Master Limited Partnership
In March 2014, Dominion formed Dominion Midstream to own, operate and develop natural gas infrastructure assets. Also in March 2014, Dominion Midstream filed a Registration Statement on Form S-1 with the SEC relating to its proposed initial public offering of common units representing limited partner interests. Dominion Midstream’s initial asset is expected to consist of a preferred equity interest in Cove Point, which owns and operates liquefied natural gas import, storage, regasification and transportation assets.
Dominion Gas Holdings
In April 2014, Dominion Gas filed a Registration Statement on Form S-4 with the SEC relating to the exchange offer of its unsecured senior notes issued in a private placement in October 2013 for registered unsecured senior notes with substantially identical terms. Dominion Gas expects to become an SEC registrant in the second quarter of 2014.
Lebanon West II Producer Outlet Project
In the first quarter of 2014, DTI executed a binding precedent agreement for the Lebanon West II Project. The project is expected to cost approximately $112 million and provide 130,000 Dth per day of firm transportation service from Butler County, Pennsylvania to an interconnect with Texas Gas Pipeline in Lebanon, Ohio. In 2014, DTI expects to file an application to request FERC authorization to construct and operate the project facilities, which are expected to be in service in the fourth quarter of 2016.
Electric Transmission Projects
In March 2014, Virginia Power submitted an application to the Virginia Commission for approval of the following facilities: (1) the Remington CT-Warrenton 230 kV double circuit transmission line, (2) the Vint Hill-Wheeler and Wheeler-Loudoun 230 kV transmission lines, (3) the 230 kV Vint Hill Switching Station, and (4) the 230 kV Wheeler Switching Station. The estimated total investment in these projects is approximately $109 million.
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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 of this Form 10-Q. The reader’s attention is directed to those paragraphs for discussion of various risks and uncertainties that may impact Dominion and Virginia Power.
Market Risk Sensitive Instruments and Risk Management
Dominion’s and Virginia Power’s financial instruments, commodity contracts and related financial derivative instruments are exposed to potential losses due to adverse changes in commodity prices, interest rates and equity security prices as described below. Commodity price risk is present in Dominion’s and Virginia Power’s electric operations and Dominion’s gas procurement operations due to the exposure to market shifts in prices received and paid for electricity, natural gas and other commodities. The Companies use commodity derivative contracts to manage price risk exposures for these operations. Interest rate risk is generally related to their outstanding debt. In addition, they are exposed to investment price risk through various portfolios of equity and debt securities.
The following sensitivity 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% unfavorable change in commodity prices or interest rates.
Commodity Price Risk
To manage commodity price risk, Dominion and Virginia Power primarily hold commodity-based financial derivative instruments held for non-trading purposes associated with purchases and sales of electricity, natural gas and other energy-related products.
The repositioning of Dominion’s producer services business was completed in the first quarter of 2014. This, combined with Dominion’s sale of its electric retail energy marketing business, has reduced Dominion’s commodity price risk exposure.
The derivatives used to manage commodity price risk are executed within established policies and procedures and may include instruments such as futures, forwards, swaps, options and FTRs that are sensitive to changes in the related commodity prices. For sensitivity analysis purposes, the hypothetical change in market prices of commodity-based financial derivative instruments is determined based on models that consider the market prices of commodities in future periods, the volatility of the market prices in each period, as well as the time value factors of the derivative instruments. Prices and volatility are principally determined based on observable market prices.
A hypothetical 10% unfavorable change in commodity prices of Dominion’s non-trading commodity-based financial derivative instruments would have resulted in a decrease in fair value of approximately $170 million and $171 million as of March 31, 2014 and December 31, 2013, respectively.
A hypothetical 10% unfavorable change in commodity prices would not have resulted in a material change in the fair value of Virginia Power’s non-trading commodity-based financial derivatives as of March 31, 2014 or December 31, 2013.
The impact of a change in energy commodity prices on Dominion’s and Virginia Power’s non-trading commodity-based financial derivative instruments at a point in time is not necessarily representative of the results that will be realized when the contracts are ultimately settled. Net losses from commodity derivative instruments used for hedging purposes, to the extent realized, will generally be offset by recognition of the hedged transaction, such as revenue from physical sales of the commodity.
Interest Rate Risk
Dominion and Virginia Power manage their interest rate risk exposure predominantly by maintaining a balance of fixed and variable rate debt. They also enter into interest rate sensitive derivatives, including interest rate swaps and interest rate lock agreements. For variable rate debt and interest rate swaps designated under fair value hedging and outstanding for Dominion and Virginia Power, a hypothetical 10% increase in market interest rates would not have resulted in a material change in earnings at March 31, 2014 or December 31, 2013.
Dominion and Virginia Power may also use forward-starting interest rate swaps and interest rate lock agreements as anticipatory hedges. As of March 31, 2014, Dominion and Virginia Power had $2.2 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 approximately $37 million and $4 million, respectively, in the fair value of Dominion’s and Virginia Power’s interest rate derivatives at March 31, 2014. As of December 31, 2013, Dominion and Virginia Power had $1.1 billion and $600 million, respectively, in aggregate notional amounts of these interest rate derivatives outstanding. A hypothetical 10% decrease in market interest rates would have resulted in a decrease of approximately $20 million and $13 million, respectively, in the fair value of Dominion’s and Virginia Power’s interest rate derivatives at December 31, 2013.
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The impact of a change in interest rates on Dominion’s and Virginia Power’s interest rate-based financial derivative instruments at a point in time is not necessarily representative of the results that will be realized when the contracts are ultimately settled. Net gains and/or losses from interest rate derivative instruments used for hedging purposes, to the extent realized, will generally be offset by recognition of the hedged transaction.
Investment Price Risk
Dominion and Virginia Power are subject to investment price risk due to securities held as investments in nuclear decommissioning and rabbi trust funds that are managed by third-party investment managers. These trust funds primarily hold marketable securities that are reported in the Consolidated Balance Sheets at fair value.
Dominion recognized net realized gains (including investment income) on nuclear decommissioning and rabbi trust investments of $47 million, $69 million and $163 million for the three months ended March 31, 2014 and 2013 and for the year ended December 31, 2013, respectively. Net realized gains and losses include gains and losses from the sale of investments as well as any other-than-temporary declines in fair value. Dominion recorded, in AOCI and regulatory liabilities, a net increase in unrealized gains on these investments of $18 million, $146 million and $417 million for the three months ended March 31, 2014 and 2013 and for the year ended December 31, 2013, respectively.
Virginia Power recognized net realized gains (including investment income) on nuclear decommissioning trust investments of $23 million, $18 million and $52 million for the three months ended March 31, 2014 and 2013 and for the year ended December 31, 2013, respectively. Net realized gains and losses include gains and losses from the sale of investments as well as any other-than-temporary declines in fair value. Virginia Power recorded, in AOCI and regulatory liabilities, a net increase in unrealized gains on these investments of $8 million, $75 million and $193 million for the three months ended March 31, 2014 and 2013 and for the year ended December 31, 2013, respectively.
Dominion sponsors pension and other postretirement employee benefit plans that hold investments in trusts to fund employee benefit payments. Virginia Power employees participate in these plans. 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 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.
ITEM 4. CONTROLS AND PROCEDURES
Senior management of each of Dominion and Virginia Power, including Dominion’s and Virginia Power’s CEO and CFO, evaluated the effectiveness of each of their respective Companies’ disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation process, each of Dominion’s and Virginia Power’s CEO and CFO have concluded that each of their respective Companies’ disclosure controls and procedures are effective.
There were no changes in either Dominion’s or Virginia Power’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, either of the Companies’ internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Dominion and Virginia Power are alleged to be in violation or in default under orders, statutes, rules or regulations relating to the environment, compliance plans imposed upon or agreed to by the Companies, or permits issued by various local, state and/or federal agencies for the construction or operation of facilities. Administrative proceedings may also be pending on these matters. In addition, in the ordinary course of business, the Companies and their subsidiaries are involved in various legal proceedings.
See the following for discussions on various environmental and other regulatory proceedings to which the Companies are parties:
ITEM 1A. RISK FACTORS
Dominion’s and Virginia Power’s businesses are influenced by many factors that are difficult to predict, involve uncertainties that may materially affect actual results and are often beyond the Companies’ control. A number of these risk factors have been identified in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013, which should be taken into consideration when reviewing the information contained in this report. There have been no material changes with regard to the risk factors previously disclosed in Dominion’s and Virginia Power’s Annual Report on Form 10-K for the year ended December 31, 2013. For other factors that may cause actual results to differ materially from those indicated in any forward-looking statement or projection contained in this report, see Forward-Looking Statements in MD&A.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ISSUER PURCHASES OF EQUITY SECURITIES
Period
1/1/14-1/31/14
$1.18 billion
2/1/14-2/28/14
3/1/14-3/31/14
ITEM 5. OTHER INFORMATION
In 2002, Virginia Power established and issued its Flex MMP Stock. As discussed in Note 14 to the Consolidated Financial Statements in this report, Virginia Power redeemed all outstanding shares of the Flex MMP Stock. As such, the Articles of Amendment establishing the Flex MMP Stock are now obsolete and are no longer required. Effective April 28, 2014, the Virginia Power BOD approved the removal of the Articles of Amendment to Virginia Power’s Articles of Incorporation that established its Flex MMP Stock.
The text of the foregoing amendment to Virginia Power’s Articles of Incorporation is included in the Amended and Restated Articles of Incorporation which is filed herewith as Exhibit 3.1.b.
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ITEM 6. EXHIBITS
ExhibitNumber
Description
Virginia
Power
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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
Vice President, Controller and
Chief Accounting Officer
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EXHIBIT INDEX
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