Dominion Announces Third-Quarter Earnings

Dominion (NYSE: D) announced net income prepared in accordance with Generally Accepted Accounting Principles (GAAP) for the three months ended Sept. 30, 2004, of $337 million ($1.02 per share) compared to a net loss of $256 million (79 cents per share) for the same period last year.

Operating earnings, defined as GAAP earnings adjusted for certain items, were $400 million ($1.21 per share) for the three months ended Sept. 30, 2004, compared to operating earnings of $430 million ($1.33 per share) for the same period in 2003.

Dominion uses operating earnings as the primary performance measurement of its earnings outlook and results for public communications with analysts and investors. Dominion also uses operating earnings internally for budgeting, reporting to the board of directors and for the company's profit sharing plan. Dominion management believes operating earnings provide a more meaningful representation of the company's fundamental earnings power.

Thos. E. Capps, chairman and chief executive officer, said:

"We faced major third-quarter challenges including a mild summer in our electric franchise service area and natural gas and oil production delays resulting from Hurricane Ivan. Additionally, our clearinghouse operations performed below expectations due in part to timing on certain hedge positions."

These negative third-quarter factors reduced earnings by an estimated 5- cents per share resulting from delayed natural gas and oil production caused by Hurricane Ivan, 3-cents per share from milder-than-normal weather, and 5- cents per share from hedge accounting treatment related to certain clearinghouse positions, including natural gas storage and transportation positions.

The delayed production impact of 5-cents per share includes the $9 million that Dominion has previously estimated as its maximum impact from business interruption created by Hurricane Ivan. In addition, Dominion has not yet recorded an insurance-receivable for production delays beyond that estimate. The 3-cent weather impact nets the effect of weather on base rate revenue against related fuel cost savings.

"Weather has always presented Dominion's greatest earnings sensitivity. In the third quarter, we not only withstood the effect of a category 4 hurricane passing directly through the heart of our Gulf of Mexico operations, we also felt the impact of mild temperatures on electricity sales. In consideration of these third-quarter impacts, we now expect to deliver full- year 2004 earnings in the range of $4.68 to $4.75 per share. And, in consideration of lower expectations from the clearinghouse, we are revising our 2005 earnings guidance to $5.00 to $5.20 per share. We expect 5 to 7 percent annual earnings growth thereafter.

"The major factor driving our reduced 2004 earnings guidance is the frozen fuel factor, which became Virginia law just last April. As a result, we're managing our integrated model this year with more hedges on natural gas than needed to realize our optimal earnings power under the new law," Capps said. "This leaves us little or no room to maneuver. We expect it to cost us about 35 cents per share this year, but next year's a new ballgame.

"While we do expect fuel expenses to exceed fuel revenue next year, we are not over-hedged and have more natural gas to act as a natural hedge." In providing operating earnings guidance, Dominion management is aware of potential differences between 2004 operating earnings and GAAP-earnings. In addition to differences recorded through the third quarter, Dominion expects to recognize an after-tax charge of $90 million to $110 million related to the pending acquisition of non-utility generation assets expected to close in the fourth quarter. Until the acquisitions are complete, Dominion management is not able to provide a corresponding GAAP equivalent for 2004 operating earnings per share guidance.

Earnings breakdown by operating segment

Dominion Delivery earned $95 million (29 cents per share) in the third quarter of 2004 compared to $92 million (28 cents per share) in the third quarter of 2003. The increase is primarily attributable to customer growth and other factors, partially offset by the negative effects of weather.

Dominion Energy earned $33 million (10 cents per share) in the third quarter of 2004 compared to $77 million (24 cents per share) in the third quarter of 2003. The decrease is primarily attributable to Dominion Energy Clearinghouse, the net effect of corporate hedges on natural gas production and lower electric transmission margins, partially offset by higher contributions from the Cove Point liquefied natural gas facility.

Dominion Generation earned $193 million (58 cents per share) in the third quarter of 2004 compared to $221 million (68 cents per share) in the third quarter of 2003. The decrease is primarily attributable to electric generation fuel expenses no longer recoverable under amended deregulation legislation and milder weather, partially offset by lower purchased power capacity expenses, customer growth and the absence of certain items recognized in 2003.

Dominion E&P earned $139 million (42 cents per share) in the third quarter of 2004 compared to $98 million (30 cents per share) in the third quarter of 2003. The increase is primarily attributable to revenue recognized from the delivery of reserves sold under volumetric production payment agreements (net of related lower production volumes), higher average realized prices, and the positive impact of marking-to-market certain call options under SFAS 133, partially offset by higher lifting costs and a higher depreciation, depletion and amortization rate.

The impact of the corporate segment on third quarter 2004 GAAP earnings was negative $123 million (37 cents per share) compared to negative $744 million ($2.29 per share) in the third quarter of 2003. The corporate operating earnings impact was negative $60 million (18 cents per share) compared to negative $58 million (17 cents per share) in the third quarter of 2003.
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