01—Abstract
Summary
Summary of the 10-K filed March 20, 1998. Cited figures are marked; the original filing is the authoritative source.
Dominion Resources' 1997 10-K shows a company in transition: its core Virginia Power utility remains the earnings engine, while 1997 was dominated by the $2.2 billiona acquisition of UK distributor East Midlands Electricity.
Consolidated revenues rose to $7,677.6 millionb from $4,854.0 million, but reported net income fell 15.4% to $399.2 million ($2.15 per share) from $472.1 million, largely because of a one-time $156.6 million (about $0.85 per share) UK windfall profits tax. Excluding that charge, earnings from operations rose 17.7% to $555.8 million ($3.00 per share). Virginia Power contributed $433.4 million of net income, and nonutility businesses (Dominion Energy, Dominion Capital, Dominion UK) supplied roughly 20% of earnings from operations outside the regulated utility.
The balance sheet expanded sharply, with total assets rising to $20.2 billionc from $14.9 billion and long-term debt increasing to $7.2 billion from $5.0 billion, mainly from East Midlands financing. Management is working to replace the interim acquisition debt with equity, and the January 1998 common stock offering of roughly $275 million was the first step. Investors should weigh the growth in nonutility earnings and international exposure against a higher leverage profile, currency and regulatory risk in the UK, and an unresolved Virginia rate proceeding that could cut rates by more than $200 million, according to opposing parties.
Looking ahead, the key uncertainties are Virginia's electric restructuring legislation, the pending rate case with hearings scheduled for spring 1998, FERC's review of Virginia Power's market-based rate authority, and the potential for stranded costs as competition arrives. Dominion's management is pursuing growth in natural gas production, independent power, and financial services, while cutting costs through the Vision 2000 program, which management expects to save $80 million to $90 milliond annually.
02—Key points
Key Highlights
- Revenue grew 58% to $7.68 billion in 1997, driven by the East Midlands acquisition ($1.97 billion contribution) and higher Virginia Power wholesale marketing and gas sales.
- Reported net income fell 15.4% to $399.2 million ($2.15/share) due to a one-time $156.6 million UK windfall profits tax; excluding it, earnings from operations rose 17.7% to $555.8 million ($3.00/share).
- Virginia Power remains the core: $5.08 billion in revenue and $433.4 million in net income, with 1997 sales of 85,962 million kWh, up 17.2%, largely from wholesale growth.
- Nonutility earnings grew strongly: Dominion Capital net income rose 58% to $45.1 million on Saxon Mortgage securitizations, and Dominion Energy's oil and gas output rose 18% to 59 Bcfe.
- Total assets increased to $20.2 billion from $14.9 billion and long-term debt rose to $7.2 billion from $5.0 billion, largely from the $2.2 billion East Midlands purchase financed initially with interim debt.
- Pending Virginia rate proceeding carries a potential rate reduction; Staff proposed $95.6 million and opposing parties more than $200 million, with hearings scheduled for spring 1998.
- Dominion has begun replacing acquisition debt with equity, including the January 1998 sale of about $275 million of common stock and $250 million of 7.83% capital securities issued in December 1997.
03—Questions
Frequently Asked Questions
Why did reported earnings decline in 1997 even though the business grew?
Consolidated net income fell to $399.2 million from $472.1 million because of a one-time UK windfall profits tax of $156.6 million, or $0.85 per share, levied on East Midlands and other British utilities. Before that charge, earnings from operations rose 17.7% to $555.8 million, or $3.00 per share. The charge is non-recurring, though it reduced 1997 results substantially.
How much of Dominion's earnings come from outside the regulated Virginia utility?
Management states that investments outside Virginia Power accounted for approximately 20% of consolidated earnings from operations in 1997. Those businesses include Dominion UK (East Midlands), Dominion Energy (power generation and natural gas), and Dominion Capital (financial services). Virginia Power's balance available for common stock was $433.4 million.
What is the main financial risk from the East Midlands acquisition?
The $2.2 billion purchase was initially 100% debt-financed. Long-term debt at Dominion UK rose to $2.67 billion, and the plan calls for about 40% of the cost to be refinanced with equity, with roughly $275 million raised in January 1998. Investors should watch how fully and quickly the equity component is completed, and the company's exposure to pound sterling and UK regulatory price reviews, including a further 3% supply price cut from April 1999.
What regulatory events could materially affect Virginia Power in 1998?
The Virginia Commission is considering reducing base rates, with the Commission Staff proposing a $95.6 million reduction and opposing parties seeking more than $200 million; hearings begin in late April or May 1998. Separately, FERC will hold a hearing in June 1998 on whether transmission constraints give Virginia Power generation dominance, which could limit its market-based rate authority. Virginia legislation on competition is also pending, and the company says it cannot yet predict the outcome.
What growth drivers and cost actions is management emphasizing?
Management is growing nonutility businesses in power generation, natural gas production, and financial services. Dominion Capital plans over $2 billion in Saxon Mortgage loan originations in 1998, and Dominion Energy projects about $388 million of 1998 capital spending, including the Kincaid plant acquisition. On costs, the Vision 2000 restructuring is expected to save $80 million to $90 million annually, though those savings are partly offset by salary increases and growth staffing. Year 2000 costs are estimated at $100 million to $150 million.
04—Continue