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Dominion Resources Inc. (D - Snapshot Report) reported third quarter 2012 operating earnings of 92 cents per share, falling short of the Zacks Consensus Estimate by 5.2% and the year-ago earnings by 3.2%. Dominion’s earnings were at lower end of the guidance of 90 cents–$1.00.

Operating earnings for the quarter were $526 million, declining 2.8% from $541 million in the year-ago quarter.

Unplanned outages at Millstone Unit 2 and Hastings Extraction Plant, coupled with soft numbers at Dominion Retail and milder-than-normal weather in electric service territory induced the company to post weak results. However, lower interest expenses and a lower effective tax rate limited the downside.

Including losses of $281 million due to planned shutdown of Kewaunee nuclear merchant power station, loss of $45 million from Brayton Point, Kincaid, Elwood operations, loss of $5 million from discontinued operations - State Line & Salem Harbor, net gain of $2 million in nuclear decommissioning trust funds and $12 million positive impact from other items, Dominion reported net income of $209 million or 36 cents a share in the quarter. This compares unfavorably with $392 million or 69 cents a share in the third quarter of 2011.

Operational Update

Dominion’s operating revenue of $3.4 billion in the third quarter declined 8.9% from the year-ago quarter. Lower revenue across all segments induced the decline. Revenue also fell short of the Zacks Consensus Estimate of $3.7 billion.

Total operating expenses in the third quarter reached $2.89 billion, inching down 0.8% year over year. The decline was due to lower electric fuel and other energy related purchases, decline in purchased electric capacity and purchased gas.

The company’s earnings before interest and tax were $518 million, down 37.4% year over year.

Segment Update

Dominion Virginia Power segment recorded revenue of $842 million in the third quarter of 2012, down 10.7% year over year.

Operating earnings in the quarter declined 4.8% year over year to $119 million.

Dominion Energy reported revenue of $572 million, down 9.3% year over year.

Operating earnings came in at $104 million, up 9.5% year over year.

Dominion Generation’s revenue declined 14.4% year over year to $1.9 billion.

Segment operating earnings decreased 7.9% over the prior-year quarter to $363 million.

Other Key Highlights

Dominion’s business segments continue to make significant progress on the infrastructure development front.

At Dominion Energy, the Appalachian Gateway Project was placed into service. Two other projects providing transportation services of Marcellus Shale volumes – Ellisburg to Craigs and Northeast Expansion are scheduled to be in-service in November.

At the Generation segment, construction is underway at the 1,329-megawatt, gas-fired power station in Warren County, Virginia and is scheduled for completion in late 2014.

Dominion filed application with the Virginia State Corporation Commission for a coal-to-natural gas conversion of its 227-megawatt Bremo Power Station. It also intends to file regulatory applications in the fourth quarter of 2012 for its next gas-fired generating facility, in Brunswick County, Virginia and is expected to come online in 2016.  

Further, the coal-to-biomass conversions of Altavista, Southampton and Hopewell, which are expected to come online by 2013 end, are progressing on track.

Financial Update

Dominion exited the quarter with cash and cash equivalents of $81 million, down from $102 million at the end of 2011.

Long-term debt at quarter end decreased to $15.5 billion from $15.7 billion at 2011 end.

Cash provided by operating activities in the first nine months augmented to approximately $3.5 billion from $2.4 billion in the year-ago period.

Capital expenditure in the first nine months amounted to $2.9 billion, up from $2.6 billion in the year-ago period.

Looking into 2012

Dominion expects to deliver fourth quarter operating earnings in a range of 65 to 75 cents per share. The company guided the range based on expected higher rate adjustment clause earnings, growth in electric service territory, normal weather in electric service territory and increased revenue from growth projects.

However, these positives are to be weighed upon by lower merchant generation margins and escalation in operating expenses.

Dominion affirmed full year 2012 operating earnings in a band of $3.10–$3.35 per share and unveiled 2013 operating earnings guidance of $3.20–$3.50 per share.

Peer Comparison

American Electric Power Co. Inc. (AEP - Analyst Report), which competes with Dominion, reported operating earnings of $1.02, in line with the Zacks Consensus Estimate. However, it was below the year-ago figure of $1.17.

The year-over-year decline reflects the negative impact of customer switching in Ohio, drought and associated low-water conditions that hampered river transportation business. Moreover, restoration costs associated with the June 29 storm that led to lack of power supply to 1.4 million customers in five states also hurt the company’s performance. However, these were partially offset by cost control and positive rate changes across multiple jurisdictions.

Quarterly revenue at American Electric Power was $4,156 million, missing the Zacks Consensus Estimate by $461 million. The figure also fell below the year-ago figure of $4,333 million.

Zacks Rank

The quantitative Zacks #3 Rank (short-term Hold rating) for Dominion indicates no clear directional pressure on the stock over the near term.

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