Dominion Resources Inc. reported last Thursday that fourth quarter net income for the company rose significantly over a year ago due to a variety of factors, including higher production levels and expanded growth in its customer base. Nevertheless, it said it plans to dramatically tighten its capital spending in 2003 and beyond to boost cash flow.

Including after-tax charges, reported net income was $339 million, or $1.12 per share, in the fourth quarter compared to a loss of $117 million, or minus 45 cents a share, in the same period in 2001, the Richmond, VA-based energy company said. For the entire year, Dominion reported its net income more than doubled to nearly $1.4 billion, or $4.82 a share, from $544 million, or $2.15 a share, in 2001. It said its annual earnings were 5 cents a share lower due to a mark-to-market accounting loss on natural gas hedges related to expected 2003 production.

Dominion’s quarterly earnings were at the bottom of the range projected by Wall Street analysts. A group of 16 analysts had expected company earnings to fall within a range of $1.12-$1.20 a share, with the average pegged at $1.15 a share, according to Thomson First Call. The company’s stock price rose 2.7% ($1.43) to $54.43 a share immediately following the earnings announcement, but fell slightly to $53.50 in early trading Friday.

Credit Suisse analyst Curt Launer said Thursday his target stock price for Dominion remained at $58.

Dominion said it expects its operating earnings to “decline modestly” in 2003 to a range of $4.60-$4.80 a share. However, it noted it was positioned to grow earnings by 5-7% annually after 2003 and continue paying the company’s $2.58/share annual dividend.

Corporate revenues for the fourth quarter rose to $2.706 billion from $2.507 billion in the year-earlier period, but fell during 2002 to $10.218 billion from $10.558 billion in 2001.

The company said it expanded its position in the energy marketplace during the past year with the acquisition of the Cove Point liquefied natural gas (LNG) facility in Maryland, the “successful integration” of Louis Dreyfus Natural Gas into the corporation, the addition of 2,015 MW of new power generation, a 24% increase in gas and oil reserves to 6.1 Tcf equivalent, and the addition of more than 46,000 customers to its energy customer base.

On the downside, however, Dominion reported it intends to reduce planned capital investments to about $2.5 billion in 2003 and to about $2.2 billion in 2004 to increase cash flow. The company estimated its cash flow was $2.8 billion last year.

It further announced last week it launched a tender and consent offering to buy back notes associated with $665 million in debt in its telecommunications unit, Dominion Fiber Ventures. The company said it was seeking the consent of the note holders to remove the note downgrade triggers, and was tendering to purchase all of the outstanding notes. “While management never considered the trigger provisions to pose a liquidity concern, we have decided to take these steps to eliminate the ‘headline risk’ associated with having debt triggers,” said Chairman and CEO Thomas E. Capps.

In a segment-by-segment breakdown, the company said Dominion Exploration & Production (E&P) contributed $380 million in earnings for the year, up from $320 million in 2001 due largely to higher production, which it noted was offset by lower average realized prices, increased expenses and share dilution. For the fourth quarter, the E&P business had earnings of $109 million, compared to $86 million in the year-earlier period.

Dominion Energy, the company’s power generation business, turned in profits of $770 million for the entire 2002, up slightly from $723 million in 2001. The segment was negatively affected by corporate hedges on gas production and other factors, but these were partially offset by customer growth, favorable weather in the electric franchise area and lower taxes, the company said. Dominion Energy earned $185 million during the fourth quarter, compared to $127 million during the same period in 2001.

The Dominion Delivery (transmission and distribution) business saw profits of $455 million during 2002, compared to $367 million a year ago, due again to favorable temperatures, customer growth and reduced expenses, it noted. As for the quarter, Dominion Delivery earned $125 million in contrast to $93 million during the comparable quarter in 2001.

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