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Dominion's Realignment Cuts Profit 78%; Still Beats Guidance

Without the gain from the sale of nearly all of its exploration and production (E&P) assets a year ago, Dominion's 3Q2008 net income dropped 78%, the company reported late last week. The diversified Richmond, VA-based energy producer and transporter said that despite the sharp drop, it still beat its guidance for the quarter.

For the three months ended Sept. 30, the company posted net income of $508 million, 87 cents/share, compared to net income of $2.3 billion, $3.62/share, for the same period in 2007, which primarily reflected the benefit from the sale of the majority of the company's non-Appalachian E&P operations (see NGI, Aug. 6, 2007). Dominion announced during the summer of 2007 that it was realigning its business units and services company to reflect the company's refocused strategic positioning on regulated and energy infrastructure businesses (see NGI, Aug. 20, 2007).

Operating earnings for 3Q2008 amounted to $545 million, 94 cents/share, compared to operating earnings of $551 million, 86 cents/share, for the same period in 2007. Operating earnings are adjusted for certain items, the company said.

"Amid the present economic turmoil and despite unfavorable weather, our quarterly earnings exceeded the top end of our provided guidance," said Dominion CEO Thomas F. Farrell II. "Year to date, we continue to see strong results, driven by our generation and energy infrastructure businesses. We feel comfortable affirming our full year guidance of $3.10 to $3.15 operating earnings per share, as well as our 2009 outlook of $3.30 to $3.45 operating earnings per share."

The company noted that the increase in 3Q2008 operating earnings per share as compared to 2007 is primarily attributable to higher margins from the merchant generation business, higher contributions from the producer services business and accretion due to share repurchases in 2007. Dominion said the positives were partially offset by a higher effective tax rate and milder-than-normal weather in the company's electric utility service area.

Looking ahead, Dominion said it expects 4Q2008 operating earnings of 67-72 cents/share. This compares to operating earnings of 52 cents per share in 4Q2007. Drivers expected to compare favorably to 2007 include higher contributions from the merchant generation business, lower outage expenses at the utility generation business, higher contributions from the gas distribution and gas transmission businesses and higher margins from the company's remaining exploration and production operations.

Expected offsets include the absence of earnings from Peoples Natural Gas and Hope Gas Inc.; lower contributions from the company's producer services business; higher depreciation and amortization expense at the electric utility; and higher interest expense.

After failing to sell its natural gas utilities in Pennsylvania and West Virginia to Pittsburgh-based Equitable Resources, Dominion this summer announced plans to sells its Dominion Peoples and Dominion Hope gas distribution companies to a San Francisco-based infrastructure investment fund for $910 million (see NGI, July 7).

Dominion's asset portfolio includes approximately 27,000 MW of generation, 1.1 Tcfe of proved natural gas and oil reserves, 14,000 miles of natural gas transmission, gathering and storage pipeline and 6,000 miles of electric transmission lines. Dominion serves retail energy customers in 12 states.

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