First quarter earnings growth in Dominion Resources Inc.’s energy production unit helped to offset losses from lower power demand, the company reported last week, with operating earnings of $322 million ($1.20 a share) compared to $298 million ($1.20) for the same period of 2001. Dominion acknowledged earlier this month that gas hedges and the mild winter would cut into its earnings expectations, which Wall Street analysts had pegged a cent higher.

CEO Thomas E. Capps said, “Despite a 19-cent per share earnings impact from one of the warmest winters on record, and a 13-cent per share timing impact from natural gas corporate hedges,” the company still made progress in strengthening its balance sheet with solid earnings. Among other things, Dominion reduced its debt-to-capitalization ratio to 56.2% at the end of the first quarter, which stood at 59.2% at the end of 2001. The company is on track, Capps said, “to deliver earnings of $4.90 to $4.95 per share this year and 10% average annual growth thereafter.”

Including the corporate hedges, Dominion has hedged 90% of its expected natural gas production and has hedged about 75% of its expected oil production for 2002. In addition, Dominion has hedged more than 50% of expected 2003 natural gas and oil production. There are currently no corporate hedges on 2003 production. In addition, Dominion has hedged 85% to 90% of anticipated sales from its power generation portfolio for this year and next.

By segment, Dominion Energy was down in the quarter because of the hedges. It contributed $141 million (52 cents per share) to first quarter earnings, compared with $160 million (64 cents) a year ago. Also down was Dominion Delivery, which earned $147 million (55 cents) compared with $157 million (63 cents) a year ago.

Dominion Exploration & Production(E&P) jumped in earnings, however, contributing $88 million (33 cents) to first quarter earnings, up from $71 million (29 cents) in 2001. E&P attributed the rise to higher production, which was partially offset by lower averaged realized prices.

While Dominion manages its daily operations through its various business segments, its assets remain wholly owned by its legal subsidiaries, Virginia Electric and Power Co., Consolidated Natural Gas Co. (CNG), and Dominion Energy Inc. (DEI), pending full implementation of electric and gas deregulation legislation in the company’s service areas.

First quarter earnings for Virginia Power were 55 cents per share, compared to 62 cents per share in the first quarter of 2001. CNG’s earnings were 75 cents, compared with 72 cents a year earlier. And DEI earned 5 cents per share, compared with 15 cents in the first quarter of 2001.

Curt Launer, an analyst with Credit Suisse First Boston, said Dominion’s solid business mix would push its earnings and growth through 2003. Dominion’s energy unit will produce about 53% of the company’s earnings this year, and “show growth of about 11% based on new generation on line.” He also predicted 10% growth in 2003. Like the energy unit, the delivery “decline is primarily due to weather partly offset by cost savings. We estimate that this unit will show 26% of earnings and growth of 4% in ’02.” He also sees a 2% growth in the delivery unit in 2003.

Dominion’s E&P unit, said Launer, “is estimated to provide about 20% of earnings and growth of 6% in ’02. An additional 6% growth in E&P in ’03 is based on Dominion’s aggressive hedging of natural gas.” Based on Dominion’s first quarter results, CSFB’s estimates the company’s earnings per share will be $4.90 in 2002 and $5.30 in 2003. It also raised its target price for “Buy” from $70 to $75, an increase from a previous target of a 5% profit/earning premium for the target valuation.

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