Dominion reported operating earnings of $1.08/share in the third quarter which fell short of earnings guidance of $1.20-1.25/share, missed Wall Street estimates of $1.18/share and were about 13 cents/share lower than operating earnings in the third quarter of 2004, mainly because of the significant impact that Hurricanes Katrina and Rita had on production, operations and natural gas prices. Nevertheless, Dominion shares fell only slightly because the company sees no long-term impact from the hurricanes.
The company announced unaudited net income in accordance with Generally Accepted Accounting Principles (GAAP) for the third quarter of $15 million (4 cents per share) compared to $337 million ($1.02 per share) for the same period last year. Were it not for the hurricanes, Dominion would have exceeded the upper end of its operating earnings guidance range by 3 cents per share.
"We faced incredible challenges in the third quarter," said CEO Thomas Capps. "Hurricanes Katrina and Rita, both Category 5 storms while in the Gulf of Mexico, and Categories 4 and 3, respectively, when they made landfall, occurred just as we were nearly finished recovering from Hurricane Ivan."
Dominion said the hurricanes caused "only modest physical damage" to Dominion facilities. The biggest setback was their impact on onshore gas processing, which remains to this day a major production bottleneck. Dominion said if the hurricane had not disrupted operations, it would be producing 560 MMcf/d out of the Gulf of Mexico. As it stands now about 140 MMcf/d is still shut in due to damage that should be repaired by the end of the year.
About 14 Bcf of Dominion's oil and gas production was delayed because of the hurricanes, which cut 3Q net income by 20 cents/share and reduced fourth quarter earnings guidance by about 60-65 cents/share.
"These events not only disrupted the natural gas and oil business industrywide, they had a profound effect on our workforce," said Capps. "Immediately following Katrina we went to work finding and safely relocating our employees and their families to Houston." He said during a conference call that more than 400 workers were displaced, most of them still relocated in Houston.
"Fortunately, the impact of the hurricanes on our earnings is only timing in nature," he added.
Dominion recorded a $1.2 billion negative mark to market charge due to the hurricanes and their gas price impact. However, the storms have not changed longer term prospects, company officials said. Dominion expects no impact on its long-term production targets. The company expects 4-6% of annual production growth from 2006 through 2008. It was one of the most active onshore drillers in the nation in the third quarter with 682 net wells drilled.
"While the non-cash charge from de-designating hedges on delayed production had a big impact on our third-quarter GAAP earnings, the effect is temporary since we will record future net income when those volumes are produced. Additionally, we expect to recover proceeds for delayed production through our business interruption insurance, subject to policy deductibles."
The other significant factor impacting Duke earnings was the hot July and August weather that led to a demand increase but also higher fuel costs. Dominion was able to offset the higher fuel costs with sales of emissions credits.
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