Dominion Power 2006 Annual Report Download - page 16

14 DOMINION 2006 Annual Report
MORE THAN EARNINGS, SHARE PRICE:
INCREASED EMPHASIS ON RETURN ON INVESTED CAPITAL (ROIC)
AND DIVIDEND GROWTH
If we complete a sale of the E&P business, we would use
the proceeds to reduce debt and maintain or improve our
existing credit ratings. These actions would boost
earnings by reducing borrowing costs. We also expect to
repurchase shares and/or acquire select assets that would
strengthen our remaining businesses.
Increasing your dividend is another post-sale goal.
We believe that we could pay out a higher percentage of
our earnings in dividends from the remaining businesses
because of their more stable nature. Our directors will
address the issue of a possible change in dividend policy
following any sale.
In early 2007, the board followed through on an
earlier commitment to grow your dividend. It announced
that it expected to increase your annual dividend rate to
$2.84 per share in 2007, up 8 cents a share over your
annual dividend rate of $2.76 in 2006, or 3 percent. In
2006, the board also adopted an 8-cent increase in your
annual dividend rate, an increase of about 3 percent over
2005.
Our shares closed the year at $83.84 per share, up
about 9 percent from $77.20 at the end of 2005. This
share price appreciation and dividend produced a total
shareholder return in excess of 12 percent. In some years,
that might have been acceptable, but we recognize that
it paled next to the performance of our peer group and
the stock market as a whole.
Investors who have owned Dominion shares for a
number of years know that management operates the
company for them, the long-term shareholder. We do not
manage and assess results through the snapshots of
any given quarter or selected 12-month calendar year.
But our share valuation in 2006 illustrates that traditional
utility investors discounted our strong group of largely
regulated operating businesses because they were
paired with a higher-profit, higher-risk E&P business
of considerable size.
As a result, Dominion’s total return in 2006 trailed
those of the Standard & Poor’s 500 Electric Utilities
Index and the S&P 500 Gas Utilities Index, which
produced total returns of more than 23 percent and more
than 26 percent, respectively. Beyond our sector, the S&P
500 delivered a total return of more than 15 percent,
while the Dow Jones Industrial Average returned more
than 19 percent.
2006 GAAP EARNINGS INCREASE
Yet, Dominion ended 2006 by making $3.93 per share
under Generally Accepted Accounting Principles (GAAP),
up 31 percent from GAAP earnings of $3.00 per share in
2005. Excluding certain items, we produced operating
earnings in 2006 of $5.16 per share, up over 13 percent
from operating earnings of $4.56 per share a year earlier,
largely due to the underlying strengths of our businesses.
Turn to page 28 for a reconciliation of our operating earn-
ings to GAAP earnings. Visit www.dom.com to view a
copy of our full 2006 earnings release.
In 2006, our operating earnings were in line with
expectations of $5.05 to $5.25 per share.
OTHER ASSET SALES ENABLE DEBT REDUCTION
As a result of our increased focus on return on invested
capital, we reached an agreement in 2006 to sell our two
smallest natural gas distribution utilities in Pennsylvania
and West Virginia to Pittsburgh-based Equitable
Resources. Together, Dominion Peoples and Dominion
Hope serve less than 12 percent of our 4 million-plus
utility customer base. The two utilities are run by
talented, skilled and energetic workers. Still, we conclud-
ed their value would best be realized if they were
owned by another company.
Pending regulatory approval, we expect to close the
sale of both businesses by mid-2007 for pre-tax proceeds
LETTER, CONTINUED