01—Abstract
Summary
Summary of the 10-K filed March 8, 1995. Cited figures are marked; the original filing is the authoritative source.
Dominion Resources, Inc. reported 1994 net income of $478.2 milliona, or $2.81 per share, down 7.4% from $516.6 million ($3.12 per share) in 1993.
The decline was driven mainly by Virginia Power, whose contribution fell 15.6% to $2.38b per share, reflecting lower base revenues, a $41.6 million workforce reduction charge tied to early retirement and voluntary separation programs, and weaker residential sales. The nonutility businesses partly offset this, rising to $0.43 per share from $0.30, largely on a $28.9 million after-tax gain from the sale of Black Warrior Trust units. Return on average common equity fell to 10.6% from 12.2%, and the dividend rose modestly to $2.55 per share, though the payout ratio climbed to about 91% from 80%.
The filing also highlights significant governance and regulatory risk. Following a multi-year dispute between Dominion Resources and its utility subsidiary, Virginia Power, the Virginia State Corporation Commission opened proceedings into the holding company structure and related affiliate arrangements. The Commission staff's January 1995 report questioned about $60 millionc (net present value) of coal transportation costs, and a February 1995 Consent Order requires Commission approval before Dominion Resources can remove Virginia Power's directors or officers, or amend its articles or bylaws, until July 1996.
Both companies' CEOs also announced plans to retire in July 1996. Management states it cannot predict the ultimate outcome.
Looking ahead, Virginia Power faces a $1.9 billiond construction and nuclear fuel budget for 1995-1997, with Clover Units 1 and 2 expected online in 1995 and 1996, and an estimated $481 million Clean Air Act compliance program. Nonutility growth depends heavily on natural gas prices and international independent power projects, and the company's cost structure continues to be shaped by roughly $16.5 billion in total capability, including 3,244 MW of nonutility purchased power contracts.
02—Key points
Key Highlights
- Net income fell 7.4% to $478.2 million, and EPS declined 9.9% to $2.81 from $3.12, with Virginia Power's per-share contribution down 15.6% to $2.38.
- Return on average common equity dropped to 10.6% from 12.2%, and the dividend payout ratio rose to 90.7% from 79.5%.
- Nonutility earnings rose 43% to $0.43 per share, aided by a $28.9 million after-tax gain on the sale of Black Warrior Trust units and by growth in natural gas reserves to 325 BCFE.
- Virginia Power recorded a $41.6 million pre-tax charge for early retirement and voluntary separation programs covering about 1,400 employees, which cut EPS by 16 cents.
- Corporate governance dispute with the Virginia Commission produced a Consent Order requiring Commission approval for certain board and management changes at Virginia Power through July 1996, and both CEOs plan to retire in July 1996.
- Virginia Power's 1995-1997 construction and nuclear fuel budget totals about $1.9 billion, with the Clover coal plant (50% share, $533 million) due online in 1995 and 1996.
- Environmental exposure includes an estimated $481 million capital cost and $128 million in annual incremental costs to meet Phase II Clean Air Act requirements.
03—Questions
Frequently Asked Questions
Why did Dominion Resources' earnings decline in 1994?
Earnings fell 7.4% to $478.2 million mainly because Virginia Power's base revenues declined after a February 1994 Virginia Commission rate order that lowered the allowed return on equity to 11.4%. Residential kilowatt-hour sales also fell, and the company absorbed a $41.6 million workforce reduction cost. Nonutility gains, including the Black Warrior Trust sale, partially offset these pressures.
Is the dividend safe given the higher payout ratio?
The dividend increased to $2.55 per share from $2.48, but the payout ratio rose to roughly 91% from about 80% because earnings declined. The filing does not discuss dividend policy directly, so the sustainability of the payout depends on future earnings recovery, particularly from Virginia Power's rate cases and nonutility growth.
What is the main governance risk for shareholders?
The Virginia Commission has extensively scrutinized the relationship between Dominion Resources and Virginia Power. Staff recommendations include potential financial constraints and new regulatory authority over the holding company, and a Consent Order restricts the parent's ability to change Virginia Power's board or management until July 1996. Management says it cannot predict the outcome.
How exposed is the nonutility business to commodity prices?
Nonutility earnings depend significantly on natural gas prices because most reserves were acquired as proven or producing properties, with profitability tied to market prices and tax credits that expire in 2002. The international power business in Argentina and Belize carries currency and political risks, though management says it manages these by limiting investments to stable developing countries.
What are the major capital spending commitments ahead?
Virginia Power budgeted $684 million for 1995 construction and nuclear fuel, including $262 million for distribution and $70 million for North Anna Unit 2 steam generator replacement. Over 1995-1997, total spending is estimated at about $1.9 billion. Management expects about 82% of 1995 construction spending to be funded from operating cash flow.
04—Continue