Dominion Resources Inc. on Tuesday reported a 12.6% drop in its net income for the first quarter over a year ago due mostly to reduced profits from its energy trading and marketing arm and lower electric transmission margins.
The Richmond, VA-based energy corporation posted reported net income of $444 million, or $1.36 per share, for the period ended March 31 of this year, compared to $508 million, or $1.64 per share, for the same period in 2003.
Dominion further said it expects to recognize a $23 million after-tax charge to earnings in the second quarter for fuel expenses that will no longer be recoverable under a new law. As a result, it lowered its operating earnings guidance for 2004 to a range of $4.75 to $4.90 from the previous range of $4.80 to $5 per share. The company projected operating earnings of $5.10 to $5.20 per share for 2005, with further growth (5-7% annually) expected through 2006-2008.
The company took its biggest hit in the Dominion Energy segment, which contributed $69 million, or 21 cents per share, in the first quarter compared to $173 million, or 56 cents per share, in the year-earlier period. Dominion attributed the poor performance to the diminished earnings of its wholesale energy trading operation and reduced power transmission margins.
All of the company’s other operations — pipelines and transmission, power generation and exploration and production — achieved slightly improved earnings during the first period.
“While we did benefit by four cents per share as a result of colder than normal weather [this winter], it was more than offset by a negative six-cent per share mark-to-market impact of our corporate hedge on future 2004 natural gas production,” said Chairman Thomas E. Capps. Earnings were further hurt by “abnormally low volatility” during the first quarter, the company said.
Despite the lower first-quarter results, Dominion COO Thomas F. Farrell said the company was in good shape financially. First-quarter operating cash flow was $969 million, almost $100 million more than in the same period in 2003, he told analysts during a webcast briefing Tuesday.
The company’s credit position “remains solid,” with debt-to-total capitalization below 57%, according to Farrell. Moreover, he estimated that Dominion’s available liquidity at the end of the first quarter was $753 million.
Farrell further reported the company made significant progress during the period in expanding its core assets and ridding itself of non-core operations. It announced a plan to double the capacity of its Cove Point liquefied natural gas (LNG) operation to serve growing demand in the Mid-Atlantic energy markets, he said. The expansion, which includes a pipeline project, is targeted for completion in late 2008.
Dominion made further headway in its plans to divest its telecommunications business, as well as its Australian pipeline outfit, Farrell said. It also agreed to purchase a 138 MW power generation station in Virginia.
The planned purchase of the facility dovetails with a new Virginia law that will extend the capped rate period for customers in Dominion’s service territory in the state, he noted. The new law is a “positive component for Dominion’s future potential earnings growth” because it extends existing base electric rates through the end of the decade, and allows the company to recover its fuel costs through July 1, 2007. After that date, the risk of fuel expense will shift to the company’s shareholders.
The anticipation of that risk caused Dominion to lower projected operating earnings for this year. But this is a “small price to pay for the extension of our base rate and the opportunity to improve that income in future years,” Farrell said.
Looking to the Gulf of Mexico, the company reported that the Devil’s Tower production facility, which is 75% owned by Dominion, is nearing completion, with the drilling of the first well entering final stages and associated pipeline facilities expected to be ready to accept oil and natural gas within a week.
The Front Runner production facility in the Gulf, of which Dominion is a 37% owner, is on track to be completed in the fourth quarter of the year, Dominion said. It expects Front Runner production to reach 40 Bcf in the first year of operation.
The company estimated that about 40% of its capital budget is geared to the offshore, primarily in development and exploitation projects. Only 10% of capital goes into exploration mainly in the deep water.
As for its hedging activity, Dominion estimated that approximately 85% of its gas production is hedged for 2004. The company said it expects to hedge 60% and 40% of equivalent production in 2005 and 2006, respectively.
On the power side, it said it has hedged approximately 95% of its generation portfolio this year, and plans to reduce it to 90% in 2005 and 85% in 2006.
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