Dominion Resources, which up until now has largely avoided the collapse in energy stocks, saw its shares tumble 10% Monday to $52.33 in response to a reduced earnings outlook for 2003. The prospective reduction will come mainly from a pending equity sale that is designed to strengthen Dominion’s balance sheet and debt coverage ratios to meet stricter standards from the credit ratings agencies, which are concerned with the heightened risk in the energy industry.

Dominion reaffirmed its 2002 earnings per share expectations of $4.90 to $4.95, an 18% increase over 2001. But the company said its 2003 earnings will be flat to up 4% compared to its previous expectation of 7% growth. The equity sale is expected to reduce 2003 earnings by as much as 17 cents per share.

“We have always told our investors that Dominion is committed to maintaining its strong investment grade credit ratings (BBB+),” said CEO Thomas Capps. “Our investors, both debt and equity, have told us this is very important to them as well. Through this move to strengthen the balance sheet, Dominion will be in a position to increase the earnings and cash flow growth after 2003.”

The company also reported that a host of other factors will hold earnings down in 2003: increased security costs at its six nuclear units; a higher expected level of pension expense; expenses associated with new accounting for asset retirement obligations as a result of the new accounting standard FAS 143; costs associated with joining PJM; lengthened nuclear outages as a result of a recent NRC directive related to vessel head inspections (Dominion intends to replace all its vessel heads) and flat trading and marketing earnings over the expected level in 2002. These impacts will be partially offset by certain positive factors including higher oil and gas prices and the State Line and Cove Point acquisitions.

Despite the large number of negatives being announced, Capps said Dominion is remains content that its “integrated business model has enabled it to withstand the temporary cyclical downturn in market conditions and other factors that have more severely affected most of our peers.

“Much of the reduction in the outlook is due to non-cash items, such as accounting for asset retirement obligations. Cash flow remains strong, and we expect to generate about $2.5 billion in net cash flow from operating activities in 2002 and from $2.8 to $3.0 billion in 2003.”

UBS Warburg analyst Ronald J. Barone said he thought the market overreacted to the news. Nonetheless, he lowered his projections on Dominion earnings to $4.95 from $5.15/share (Street is $5.29) and cut his 12-month stock price target for the company to $67 from $70/share. “We initiated coverage of Dominion Resources on Aug. 21 with moderately lower than Street/guidance projections, reflecting our conservative stance on several of these variables, particularly marketing and trading results and higher pension expense,” said Barone in an equity research note. “However we were not considering the need for incremental equity or extended outages from its recent vessel head replacement decision and thus are lowering our projections and price target accordingly.”

Barone still holds Dominion at a “buy” rating, reflecting his view that the company “remains one of the most fundamentally sound/asset heavy/well-run diversified energy plays throughout the entire natural gas and power universe with a highly attractive dividend yield that we deem very safe.”

Dominion has 24,000 MW of generation, 5.7 Tcfe of natural gas reserves, 7,600 miles of natural gas transmission pipeline and the nation’s largest underground natural gas storage system with more than 950 Bcf of storage capacity. The company’s utilities also serve 3.8 million gas and electric customers in five states and its unregulated marketing companies serve nearly one million unregulated retail customers in eight states.

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