道明尼資源 (D) 2002 Q2 法說會逐字稿

Please stand by for the commencement of the teleconference of Dominion Resources, Inc., July 18, 2002.

Please stand by.

We're about to begin.

Good day and welcome to the Dominion Resources second quarter earnings conference call.

Today's call is being recorded.

For openings remarks and introductions I would like to turn the conference over to Mr. Tom Chewning, Chief Financial Officer at Dominion Resources. Please go ahead sir.

Thank- you. Good morning.

And thanks for being with us on a delightfully hot morning in Richmond for our second quarter earnings call.

C. Rogers, our controller, and I will be covering second quarter results and also be reviewing the outlook for the remainder of the year.

We also have a Tom Wohlfarth, who's Manager of Investor Relations to assist us in Q&A.

As well as a few other members of management that will remain anonymous unless we need them later on in our conversation.

In response to investor feedback, we provided slides on our website to accompany our verbal comments.

However, you should be able to obtain the relevant information from our audio portion if you don't have access to the slides.

The slides can be viewed at www.dom.com/investors and then you must follow the links to our presentations in order to see the slides.

Before we get started, we're always obligated to provide the standard note of warning.

The earnings release and other matters that may be discussed on the call today contain forward-looking statements and estimates that are subject to various risks and uncertainties.

Please refer to our S.E.C.

filings and including our most recent [INAUDIBLE] form 10-K and quarterly reports on 10-Q for discussion of factors that may cause results to differ from management's projections, forecasts, estimates and expectations.

Now let us begin our review of the second quarter.

For those of you viewing our slides, please go now to slide number 4.

We had an excellent quarter in terms of earnings, which we'll get to next.

But we'd like to mention there were certain milestones reached that we think will help us in the future as well as having an impact in the second quarter.

First we added 1750 megawatts of generation at two plants in Pennsylvania, Armstrong, and Ohio, Troy, 600 megawatts each and also we closed on the state line coal unit that we acquired from Mirant.

So essentially, [INAUDIBLE] we put these units in service, but our units ran a total of over 40,000 megawatt hours in June, which was indeed a very good thing.

We didn't expect this in our budgets.

Also, in the E&P area, we increased oil and gas reserves from 5.1 trillion cubic feet to 5.7 trillion cubic feet or a gain of 11%.

We accomplished this through the drill bit, through a couple of small acquisitions, and also we proved up some [INAUDIBLE] reserves that had related to our acquisition of Dreyfus last year.

We also added 40,000 new customers or meters in our electric and gas businesses on a net basis.

Now let's move on to the quarterly earnings, which you find beginning on slide 5.

As you can see, when we add back the 10 cents per share that was a special charge in 2001 back to our reportable earnings, we had 72 cents in earnings from operations in the second quarter of 2001.

That compares to 97 cents of operating earnings in the second quarter of this year.

There were no net charges against these operating earnings.

And so, our reportable earnings for the second quarter is the same 97 cents.

As you can see, on an operational basis we grew earnings by 35%.

Moving on to slide 6, our year to date earnings, if we take our $1.27 reportable earnings, add back 55 cents per share from our Mirant contract buyouts and the 10 cents per share I mentioned earlier on the Saxon mortgage sale, we had operating earnings of $1.92 for the year to date per six months 2001.

This year we have reported $2.16 per share operating earnings, or an increase of 13% year-over-year.

Moving to slide seven, to normalize our year-to-date earnings, we are adding back the 9 cents per share that we have charged as a corporate hedge in the mark-to-market.

Last year we did not have that corporate hedge, and so, when you add back the effect of the corporate hedge in the second quarter of this year, a cumulative number, we have $2.25 per share versus $1.92.

You'll notice that that 2.25 per share falls within the guidance range of $2.15 to $2.35 that we provided you at year-end of 2001.

Now let's take a look at the impact of weather to really get a better reflection of earnings power, which you'll find on slide 8.

If you add back the corporate hedge of 9 cents and the weather year to date, 12 cents negative to our 2.16 reportable earnings, our operating earnings pro forma was $2.37.

And that certainly is at the upper end or slightly beyond the upper end of the guidance that we gave you at the end of 2001.

Moving now to slide number 9, we are reaffirming our full year 2002 outlook of between 4.90 and 4.95 per share compared to operating earnings of $4.17 last year.

Coming off the year to date actual earnings of $2.16, our guidance for the remaining quarters is $1.45 to $1.55 for the third quarter compared to actual operating earnings of $1.37 per share in third quarter of 2001 and a dollar 20 to a dollar 30 for the fourth quarter compared to 89 cents of actual results in the fourth quarter of last year.

The key drivers of the year-over-year earnings increase for the third and fourth quarters of the year include a $48 million earnings increase associated with the elimination of goodwill, a $75 million earnings pickup for normal weather compared to 2001.

If you'll remember, the second half of 2001 was especially poor utility weather.

A 15 to 20 million dollar earnings contribution from the franchise growth in our gas and electric service territories, the addition of four more months of the Louis-Dreyfus natural gas production and income, which is expected to add about $30 million to the bottom line, corporate restructuring, which should add about $50 million to earnings, and offsetting that to some degree lower commodity prices, which are expected to reduce earnings by about 50 to 60 million.

And in general other net impact, including the Dominion Energy clearinghouse, Faith in Generation portfolio and interest expense which should have $45 million net per earnings .

In calculating per share, our average share expected to rise from 254.4 million last year to about 281 million in this year's second half.

Now I'd like to turn the call over to our controller, Steve Rogers, to go into the second quarter in a little more detail.

Thanks, Tom.

And good morning, everybody.

Dominion is composed of three core operating segments, Dominion Energy, Dominion Delivery and Dominion Exploration & Production.

In addition, Dominion has a corporate reporting segment that includes Dominion capital and the corporate cost center.

Let's begin with the Dominion Energy segment on slide number 11.

Dominion Energy manages the company's electric generation, gas pipeline business and the Dominion Energy Clearinghouse.

Energy posted earnings of 62 cents per share in the second quarter of 2002 compared with 59 cents per share in the second quarter of 2001.

Sales volume from customer growth in our Virginia and North Carolina electric franchise service areas provided an increase of 2 cents per share.

Higher than normal temperatures in the electric franchise service areas increased earnings by 5 cents per share.

There were 25% more cooling degree days during the second quarter of 2002 as compared to 2001.

Second quarter of 2002 results at the Dominion Energy clearinghouse were about four cents below second quarter 2001 results.

This can be attributed to to two things: first, we had higher G&A expense related to the plant ramp up of staffing to manage a larger Dominion portfolio base and we had lower margins in 2002 due to lower commodity prices.

However, on a year to date basis the Dominion Energy clearinghouse is ahead of the prior year and on target for its planned growth this year.

The timing impact of mark to market gains related to the corporate hedge on 2002 natural gas production contributed five cents to earnings.

And finally, other factors, including share dilution, resulted in a six-cent per share reduction to quarter over quarter earnings.

Moving now to slide number 12, we will discuss the quarterly results for Dominion Delivery.

Dominion Delivery is the company's electric and gas distribution and customer service business.

Dominion Delivery posted earnings of 26 cents per share in the second quarter of 2002 as compared to 19 cents per share in the second quarter of 2001.

Customer growth principally in the electric franchise service area added one cent per share to earnings.

Higher than normal temperatures in the electric franchise service areas boosted earnings by three cents per share.

There were 25% more cooling degree days during the second quarter of 2002 as compared to 2001.

Weather also favorably impacted the gas franchise service areas, increasing earnings by two cents per share quarter over quarter.

There were 24% more heating degree days during the second quarter of 2002 as compared to 2001.

And lower O&M expenses offset share dilution and other factors to improve earnings one cent per share as compared to the second quarter of 2001.

So, let's flip to slide number 13.

Dominion Exploration & Production is the company's gas and oil, exploration and production business.

Dominion Exploration & Production's earnings were 33 cents per share in the second quarter of 2002 compared to 34 cents per share in the second quarter of 2001.

A 40% increase in equivalent gas and oil production principally as a result of the Louis-Dreyfus acquisition improved earnings by 17 cents per share.

Lower average realized gas and oil prices reduced earnings three cents per share.

Average equivalent realized prices were $3.44 per MCFE in the second quarter of 2002 compared to $3.57 per MCFE in the second quarter of 2001.

Earnings decreased 9 cents per share quarter over quarter as a result of higher O&M expenses due to the addition of Louis-Dreyfus natural gas.

And other factors, including share dilution, reduced earnings by six cents per share.

And finally, moving onto slide number 14, let's review results for the corporate cost center, which consists primarily of interest expense on corporate level debt and certain unallocated general and administrative corporate costs.

It also includes Dominion capital results reflecting the performance of its remaining assets.

The corporate and other segment yielded an improvement of 17 cents per share to a net expense of 23 cents per share in the second quarter of 2002 compared to a net expense of 40 cents per share in the second quarter of 2001.

The elimination of goodwill amortization expense resulting from the implementation of new accounting rules improved earnings nine cents per share.

Dominion Capital improved six cents per share as it earned one cent per share in the second quarter of this year as compared to a five-cent per share loss in the second quarter of last year.

Now the factors including share dilution, improved earnings two cents per share.

That concludes our earnings reconciliation.

And we'll now open the call to your questions.

Thank-you, gentlemen.

Today's question-and-answer session will be conducted electronically.

If you would like to ask a question, please press the star key followed by the digit 1 on your touch-tone telephone.

Again, that's star, 1 on your touch-tone telephone if you would like to ask a question.

We'll pause for just a moment to assemble the roster.

And our first question will come from Kit Konolige from Morgan Stanley.

Hi, actually, it's Carrie Stevens.

Hi, Carrie.

How are you Tom? Just a couple of questions.

First, we were hoping you could maybe comment on the outlook for 2003.

I know you reiterated the 10% growth, but could you just maybe give us an update on specific drivers and kinds of your wholesale market expectations going into 2003?

Sure.

Well, first, you know, we'll start from our estimate of $1.38 billion for earnings in 2002.

We hope we get normal weather for the full year.

And that costs us about $30 million year to date.

So, we're adding that back.

We'll have P & P volume growth that will account for, between that and a slightly improved margin, $75 million, 60 from volume and 15 from prices going from 3.10 to 3.15 in average realized price.

We can bring on a little over a thousand megawatts of combined cycle.

Generation, we've only put in 10 million for it.

We expect Millstone because of their operational year without much outage to be 15 million.

The clearinghouse will add about 35 million.

We continue to believe our franchise growth area will add about 30 million.

We expect slightly higher interest expense, about 15 million.

We continue to be encouraged by [INAUDIBLE] and have another $25 million in efficiency savings for last year.

We're going to lose, unless Congress takes action, about $30 million in tax credits from Section 29, and then in general we feel that our G & A expenses could rise about 55 million, miscellaneous items.

And so, therefore, we think we go from 4.90, 4.95 to 5.25, 5.30.

Tom, it's Kit, can I follow on with just one specific point you made?

Yes, sir.

On the new power plants that you're bringing on, you have the peakers on in the second quarter, you have some more new combined cycle for '03.

We're hearing from a lot of people that it's -- you know, and by the numbers we run it's a little hard to see certainly in an open market situation how people frankly make any money at all on plants like that.

Can you give us some insight into why you're expecting a positive contribution from these plants?

Well, think first Kit, we put in $10 million this year for the peakers we had that were coming in.

It was 1500 megawatts.

Pleasant came in in the first quarter.

And year to date we probably wouldn't have expected through June to have any usage of them, but we've already run them for over 40,000 megawatt hours.

So, I think the first key to looking at that is how much money do you have on it versus your total growth.

And we had a growth of about $130 million in earnings and only had $10 million in our budget next year for increased generation growth.

So, when you put on a thousand megawatts combined cycle, which we believe will be in the money, even though not a high margin, $10 million from that is not a very significant number.

But believe me, if we didn't think we could make money on it in the long-term, we wouldn't do it.

I think one of the strengths of a company like ours is that we've got so much existing asset base that's earning that on the increment if we don't quite make on the margin what we thought at the new plant, we can still do them.

We don't want to do them if we're not down the road, but if we're down the road on them, bring them into service and not making a huge amount of money, and on the other hand, we're ready when the market rationalized back on supply and demand.

But I think, you know, a lot of people don't think we would have run our combustion turbines this year at all.

And I'm sure we're running them today, as a matter of fact, on a hot day of July, we were glad we had them.

Because if we had lows that we needed to handle, and we needed everything we had in the system, including these new peakers.

And next year we don't know.

It will obviously depends on the weather.

But we think fitting in $10 million in a total budget of $1.5 billion in terms of income is not excessive.

If I could add one thing, too, half of next year's combined cycle is to serve our native load.

So, we've got a $48 average put there.

I guess I just want to follow up from Tom Chewning's comments.

It sounds like a lot of the peakers maybe going right now to serve that type of Pepco load, anyway.

Is that right?

Well, yeah.

We need -- systemwide we need all the generation we now have on peak days.

And that's what peakers are.

In performance we only showed them operating about a 5% capacity.

And so, we never built in a whole lot of run time for them.

I think obviously, you know, Carrie, you know as much as I do about this, the numeric combined cycles operations are a little different, but we need those in Virginia to satisfy the load that continues to grow in Virginia on the ones that [INAUDIBLE].

And we figure those in the mid- Atlantic will be needed, as well.

So, it's not just throwing it up against the wall and hope it sticks.

But at the same time, you know, we don't have perfect knowledge always of when to do things.

We take a look at service area growth, growth in electricity demand and figure out some prices.

And we don't really think that we're far beyond what we need to handle all the different obligations that we have.

We have about 85% of our production for next year, including the additional 1,000 megawatts, that's spoken for already.

And my suspicion is that as we get closer to it, that number will go up.

It always has in the past.

But it certainly won't kill us if we don't hedge the rest of it.

Real quick could you give us an updating on your 2003 EMP hedging, if there's been any changes?

It's approaching 60%, Carrie.

It's up from first quarter, right?

Yes, mm-hmm.

And that straight accrual in our hedge book, we have not put on any corporate hedge at this point.

All right, guys.

Thank-you.

Next we'll hear from Andre Meade of Lazard Asset Management.

It's actually Lazard Freres, not Asset Management.

But a couple questions.

One follow-up on the CTs in the Midwest.

Can you hear me?

Yes.

Good morning.

I'm sorry, but I need that question again.

Well, I didn't finish.

Okay.

For your peakers, Troy, Armstrong, Pleasance in the Midwest, you sort of alluded to them running to sever native load.

And I guess I wanted some clarification that they're needed in your net short at Pepco even with these peakers.

And then, if not, what kind of capacity price do you expect to get from these peakers in the Midwest?

It's not really an area where there's a robust capacity market.

Do you have some bilateral contracts with other parties that you get a capacity payment there?

First, Andre, if I gave a misimpression, we don't consider just native load our load.

We have, you know, requirements contracts, et cetera.

So, in terms of looking at the 90% of our capacity that's spoken for, and in addition the fact that we have a peak load here in Virginia which is above normal, we're going to have a peak load in the mid-Atlantic and sometimes in the Midwest, so what I'm really referring to is the load in the main to main area that we are part of.

And the system needs -- the system obviously needed those features because they wouldn't ever be dispatched unless they were economically needed.

So, that's the nature of that business.

Now, the peakers that we have outside of the 1500 megawatts that we brought on this year, we've had hedged in terms of contracts in the Midwest, we've contracted about a third of the 1500 megawatts.

So, we've got about a thousand megawatts on the margin.

And as I said before, and I'll say it again, we use a very, very low percentage of capacity on these things, and it is -- you have peakers because you take a look at the load in this area, you realize that sometimes peakers are needed, and we still see in Ohio, in Pennsylvania and in West Virginia, in this area we still think that the market might be overbuilt for a full year.

But in terms of peaking, there are gonna be peaks in the winter and summer, and that's why you've got peakers.

So, we're really happy to have a lot of base load which runs all the time.

And then when we absolutely need to fill obligations, some seeking capacity.

So, we don't feel that we have an alarming risk on these.

Okay.

I mean, basically a peaker will get paid in two ways.

One is when it's very hot and they're needed and they dispatch, like it sounds like they were doing in June.

But another is more a reliability payment, a capacity payment.

Are you expecting any capacity payment from the thousand megawatts that are currently not sold under contract?

I wouldn't say we're only anticipating it.

We'll be working on it, and we are right now working on getting more under contract.

We started this year with the 1500 megawatts on and we had none of them under contract, and now we've got a third done.

However, the economics that we have in our pro forma does include the surety of that.

We make estimates on the run rates unless there is a contract.

So, as I said, this year when we put this program together we thought we'd get about $10 million total income from capacity payments and also from margins when we run.

And I don't think we overestimated at all based upon where we are to date because normally by this time of the year, and I realize June was a lot better this year than last year, but normally we would not be running our peakers.

Okay

Andre, you actually touched on a very important point that's overlooked a lot.

One of the ways that we make money, and the energy clearinghouse is putting together full requirement contracts for load serving energy.

And one of the elements of that, you need to be able to meet peaks.

So, I think sometimes people just look at a peaker and what can it get.

But you have to look at it in the context of being able to serve a load.

Got it.

Okay.

One additional question.

On the Virginia power results, and here I'm looking at the legal entities, not the breakup between energy and delivery, there's pretty strong growth here.

Obviously you had better weather.

But what I'm wondering is how much of this -- I guess there was about a 34% increase, is due to the top line, higher sales, higher weather, more customers, and how much is due to margins improving because you're basically selling under fixed rates and your cost of fuel is falling?

This is Steve Rogers talking.

There's a lot of things that come in and out on Virginia Power, and I don't think I have the exact percentages on exactly how much of it is top line and how much of it is margins.

But all the factors we describe and things that are saving us money, whether it's [INAUDIBLE] revenue growth, clearinghouse activity, a lot of that rolls through Virginia Power.

So, if we have a good quarter, you're going to see a lot of that reflected in their legal entity results.

Andre, we'll try to get that number for you and have it on the website later.

We just didn't prepare that.

Yeah.

Actually, what will be put out on the website is statistical information, and from that you'll be able to see revenue and the full income statement.

I think you can get it from that.

When do you expect to post that?

We usually have it ready about noon. it should be out there.

Great.

Okay.

Thank-you very much.

Thank-you.

Jeff Gilbersliv of Argus Research has our next question.

Good morning.

At clearinghouse, what was the gross margin in the quarter?

Just one sec, please.

Jeff, it's not a question we can't answer.

It's just a question we can't fine the answer to.

Can't find it.

Do you have another question, Jeff, while I'm looking?

Yeah.

Well, also, in tandem with that, whether we're still on target for 90 million.

But moving on, E&P production, it seems like it's been robust in the fist and second quarter.

Are you still aiming for 450 for the year?

Yes, we are.

You know, we haven't been through hurricane season yet, and we'll probably get a clearer view once we get through that.

But we always expect a little bit of lost production.

We're very pleased so far with production, and it's possible that we can exceed -- our hope is that we will exceed 450.

And by the way, we are, to answer one of your previous questions, we are on-line in the clearinghouse to make the contribution they expected [INAUDIBLE].

Yeah. It was around $40 million was the net earnings contribution from the Dominion clearinghouse, which is the way we report it.

And when you look at the full year target for them, the contribution is $90 million.

Their biggest quarter is the third quarter, so they're almost halfway there for the year.

They still have their biggest quarter and the third biggest quarter left, the fourth quarter.

So, they're on target.

They're in good shape.

Okay.

Because I think in the first quarter gross margin was 46 million.

Yes.

The second quarter, when Steve went through the variance, you'll recall they actually had a loss in the second quarter.

Okay.

So, the net target's 90 million?

Yeah, for the full year.

There's a lot of quarterly [INAUDIBLE] and things that have to be marked on one day.

But we always try to work on a yearly basis, and it's very difficult to try and get any particular quarter exactly as we outline it particularly in the cheering house.

And the one thing to remember, also, is that we had higher than expected the first quarter because of the whole Enron situation and quite the quality counter-parties and all that.

So, on a year to date basis we're pleased with where we are and we expect to get to the 90.

Is Kevin there to comment on the state of the markets or not?

Yes, Kevin is here.

The state of the markets?

I don't know.

I haven't read the headlines this morning.

Clearly we're in unprecedented territory.

The one thing I would comment on is because the clearinghouse is so integrated with our asset strategy, while there is a lot of volatility right now in the wholesale market with what I consider counter parties, the ultimate load picture has really changed.

And that's really our target anyway, the demands side of the equation.

So, while we live day-to-day with some of the things that are going on in the wholesale market and some of the roller coaster, what we're trying to do is kind of work through this whole issue with everyone else and stay focused on the demands side of the equation.

Okay.

Thanks, Kevin.

And finally, Tom, was that guidance of 5.25 to 5.30?

5.25 to 5.30.

Okay.

Thank-you.

And I would like to remind today's telephone audience that if you do have a question, push star, 1.

Next we'll hear from Paul Ridson of McDonald Investments.

What's the Section 29 business that's rolling off?

I wasn't aware of that before.

Yes, Paul.

We've been in the Section 29 business since the early nineties.

It's not a huge number to us, and we'd love to see Congress act, which we don't think they'll do until mid-November.

There's a lot of momentum for saving that tax credit.

We'll have $30 million in income from Section 29 that rolls off.

Now, the proposed bills in Congress have both new credits for wells that will be drilled prospectively, as well as retaining some, if not all, of the old credits.

But since there's no legislation that's actually passed both Houses, we don't have anything in here other than the loss, which the existing Section 29 tax credit ends at the end of 2002 unless there's new legislation.

We're hopeful that there will be.

There seems to be some agreement on both sides and in both parties that this is a positive thing.

If indeed that happens, we'll have better earnings next year.

What business is that related to?

Oil and gas business.

It's tight SANS credits. [INAUDIBLE] methane. Basically.

We had it in Alabama, Michigan, some in Utah and Appalachia, a tax credit for shallow wells and difficult formations.

Given that your 60% has you on the E&P for '03 and you've got a 3.15 assumption, can you comment on where your 60% is relative to that 3.15?

I would imagine if you did some opportunistic selling here, you could have a little bit of comfort.

We've never given out a hedge number, but you can bet it's not at 3.15 the lower because we really didn't feel compelled to hedge below what we expected to get.

But it looks right now, if things held the way they were, you know, prices are very, very good for next year, even though they fall in the short-term.

They're still very strong for next year, and if we see more production come in, we're certain of it, and rates stay where they are, we'll hedge a higher percentage of it.

But we only took a position on our corporate hedge last year when we realized we thought the market was overbought.

We weren't right necessarily every month.

We were right in February.

We were right again in June and July.

But in between there were some strange things that happened.

But normally we don't hedge.

We just think that the market market is really awful and our budget was just too high.

Right now we think our budgeted prices for gas are very much in line with where the future market is.

Can you give some idea where you expect the '03 hedge to be on the next quarterly conference call? Or is it just too hard given market moves?

It's hard to say. I think, in fact, one of them is where you think the market's going versus where it will be this quarter in terms of the futures market, whether we expect it to go up and down, and how much production we can prove up so that we don't overhedge, if you remember, we hedged about two-thirds of our gas this year in our accrual book, and then the other great amount that we hedged was in a corporate hedge, which we'd never done before.

And unless we think that the market is oversold and not reflective of basic supply and demand, we won't put on another corporate hedge.

And so, therefore, we might wind up next year with less percentage and overall effective hedging than we do this year.

But at the same time we're going to follow a disciplined approach that if we see rates as we prove up production that are above -- at or above budget, we'll continue to hedge.

But I just can't give you much of a guesstimate of what that number will be.

If it should be higher than it is today.

Thank-you very much.

Thank-you, Paul.

Moving on to Jim von Reisemann.

of J. P. Morgan.

Hey, Jim.

Mr. von Rei semann, your line is open, please go ahead.

And we will come back to Mr. von Reisemann.

Okay. Thank-you.

Next we'l l hear from Michael Worms with GKM.

Good morning, Michael.

Good morning, how are you Tom? Congratulation on a good quarter in what is clearly a difficult time.

Just a quick question for you.

And that is with regard to the earnings drivers that you gave us earlier this year, it seems like most of those are on target.

Is there anything that's kind of missing in your target rate now?

Hmm.

Well, we can't control it, but the weather's been missing our target.

Okay.

I don't think anything else is significant.

You know, everything might not be a hundred percent, but if it's not a hundred percent, it's 98 to 100.

We've do the a few things that are working a little better, like higher production and, you know, a few things that aren't as good, like weather.

But our expenses and all that is working really good, which is something we can control.

And we've made up -- obviously made up part of the weather.

And we've continued to try to improve on anything that we can control.

And right now we don't see any levers that we've been pulling that haven't been working.

Great.

I guess you -- it appears that you increased slightly your hedge position on the E&P for 2003.

Has the number changed for 2002, or are you still at the -- I guess the --

No.

Effectively we're up in the 95% area.

When you add the corporate hedge to our normal hedge position, we gotta leave some room here for production if we have a production stoppage due to a hurricane or some other technical reason.

So, we'll never be at a hundred percent.

And finally, on the corporate hedge, is that going to roll over and have an impact in the fourth quarter, as well, or will it all be kind balancing out in the third quarter?

Well, I'm not sure on detail.

It depends if, you know, the possibilities we can take action to get out of the corporate hedge if we like the rates, as well.

But if nothing happens, by the end of the year there would be no residuals on that corporate hedge on mark to markets in the fourth quarter.

There will be some contract selling on that in the fourth quarter.

And then we look at prices at the end of the third quarter versus the second quarter to see if we have a mark.

If nothing changed from today, it would be a lower mark than it is today, which would indicate basically a gain and a settlement.

But it will be zero at the end of the fourth quarter.

I cannot say what it might be in the third quarter.

Thank-you very much.

Thanks, Mike.

Rosalyn Armstrong of SAC Capital has our next question.

Hi, Rosalyn.

Hi, Tom.

On the production volumes, what were the volumes for the second quarter?

I'll let Tom pick that off.

The Dominion E&T for the second quarter was 110 .8.

And then we also have some E&T production at the transmission.

So, total production for the company was about 114.

Okay.

And the 450 that you talk about for '02, that would be analogous to the 114, those -- you're talking about 450 for the total company, including transmission?

Yes.

Okay.

And then what is the target for '03 on production volumes?

It's a 15 -- we've got a 15 to 20% growth for the next two years over the 450 base for 2000.

Okay.

All right.

And then when we look at your first half prices, E&P realized prices, you're running above the 310 guidance for the year.

So, are you comfortable in thinking that on a price basis you might exceed your targets?

Well, actually one little deceptive thing there is just a matter of bookkeeping.

Not "deceptive." That's a bad word these days.

But one thing that's hidden that number is that number is an E&T realized price, and we have a transfer price between the clearinghouse and that unit which doesn't take into effect the corporate hedge.

So, our actual realized prices company wide would be closer to what our budget would be.

We only have a little bit of swing volume out there without being hedged directly or through a corporate hedge.

So, we won't get too much of a pickup, Rosalyn.

I wouldn't go with raising estimates.

We've only got about 4.5 year to date that's been unhedged.

And we don't have much unhedged for the rest of the year, either.

Okay.

So, what you're saying is the 310 for the year is on a slightly different basis than the 344 that you talked about for the second quarter?

Right.

They're not comparable?

Right.

Correct.

Because E&P gets credit for the market.

[INAUDIBLE] that the year-to-date is a loss that would offset that.

The net realized number that we have in our corporate budget is on the entire consolidated basis; whereas, the number we gave you is the number we quickly calculate from just E&P's records.

Right.

It's probably running a little stronger than we thought, but not the way the prices would indicate.

It's not that much higher.

Okay.

Thank-you.

Thank-you, Rosalyn.

Next we'll hear from Steve Fleischmann of Merrill Lynch.

Good morning, Steve.

Hi, Tom.

Good morning.

Aren't you glad we had no special items again?

Yes.

Yes, that's great.

Thanks.

A couple questions.

First, where is the debt to capital at the end of the quarter?

I'm going to ask Steve Rogers to give you that number, then I'll give you some color on that.

At the end of the quarter, the debt to capital is about 58 to 42. 57.5, I'm sorry, to 42.4.

One of the reason is actually, [INAUDIBLE] on a GAAP basis, from the first quarter but don't get too alarmed.

One of the reasons why is because of OCI, which, you know, you never predict.

And we've met with the rating agencies recently, both of them, and they realize that it's something you can't control when you're market to market.

For instance, our corporate hedge.

And that fourth quarter, certainly that number will be smaller because the corporate hedge will be off.

But we do have some other hedges which are good things for the company in years after 2002 that have to be mark to market.

But an even bigger number is if we double-counted or double-charged to earnings dividends.

A quarterly dividends is about $180 million here.

And normally at the end of a quarter, we would have, the second quarter, we'd have two dividend payments.

We actually had three dividend payments in there.

So, we took the $180 million because we declared the dividend, and yet, obviously, in the third quarter, or fourth quarter, there will be only one more dividend charge to earnings this year.

So, our ratios -- I'll give you an answer to an unasked questions, and that is that we expect to be in good shape with the ratings agencies on our debts to cap.

Our goal had been 55%, and we'll be there or right around there.

With any sort of good fortune on weather and other items, we'll be at or above that target.

If we miss it, we'll only miss it on a miniscule amount.

And another important thing, probably more important, our funds from operations, total interest is going to be above where they ask us to be.

And that's one that they really pay attention to.

Okay.

Just a couple other quick things.

Was there any significant mark to market income in the quarter outside of, I guess, just the corporate hedge moving around?

No.

For the quarter outside the corporate hedge the mark to market earnings are about 2% of even.

What is that in? Millions?

Excuse me?

Could you say the question again?

What is that in? Millions?

Oh, give me one second.

I got it right here.

It is $9 million for the quarter.

Okay.

And then finally, Tom, just a kind of general thought process, you've had a strategy of looking at M&A activity as a potential growth vehicle for the long-term, I guess.

And we're in this environment where a lot of possibilities are sitting at very maybe attractive prices, but obviously a lot more constraints these days on financing and the like.

What's kind of your general thought on that topic in this environment right now?

I've got a person that can really answer that better than I, Tom Katz, who happens to be with us.

Tom, would you like to answer that one?

I can't believe we kept him quiet so far.

They were sitting on me, Steve.

They were throwing things at me.

I didn't introduce him because I figured nobody would talk to me.

Good to talk to you.

Steve, we're looking at things, we're not narrowing in on anything, as always, something good is going to come out manana.

But a couple of things, it's's going to have to be main to main and it's going to have to be accrued immediately.

There are some things out there, but some of them have so much hair on them, you can't get to them and figure out what they're worth.

So, we're looking at things, but I don't see anything coming up tomorrow or the next day.

I think, Steve, also, to add to that, that we've always been very conscious of our balance sheet and linear targets and fix our balance sheet.

We're not strong enough to acquire and still maintain the balance sheet, and I don't blame them, [INAUDIBLE] have a very skeptical look at how we can acure a balance sheet as in acquisitions, put in a lot of time to secure it.

So anything we do, we're trying to improve our ratios right now, assuming we do an acquisition, we might not have a backslide on that, and if we do, it's because it's an acquisition of cash that's an asset, we need to get that energy support for free, quickly.

So we're very, very cautious at this point.

And we don't feel that we're going to lose a whole lot of opportunities because we think that our model will hold up and that the market will improve but that hopefully our value, or currency will improve and get stronger than others.

See, we really relic our assets and companies because you can do it much quicker and with a lot less recotary hassle.

And if you look down the road who purchased a lot of the assets that were for sale on the east coast, generating assets, a lot of these companies are in financial difficulty, they can't access the debt market or the equity market, and we're hopeful that some of the assets will be coming on the market.

And when they do, we certainly be able to acquire.

So that's kinda what we're looking at.

Okay. Thank-you very much.

Thanks, Steve.

And moving onto David Schanzer of Janney Montgomery Scott.

Morning.

Hey, Dave.

Could you give us an idea of what the conditions, or the outlook is for your nuclear capacity for the balance of the year?

Whether units are available and up running, and what you expect for the next six months.

And then the follow-up on the last question, having to do with acquisitions, has there been any change in thought about acquiring nuclear assets going forward?

I think the other question was on acquisitions, about nuclear

Okay, would you envision, participating and actually this is sort of, longer range question, would you envision participating in any of the initiatives to actually flip up new nuclear units?

I'm sorry.

Would we participate in more nuclear initiatives?

Can't afford them. Too expensive and take too long to build.

You're talking about six or seven billion dollars and six or seven years, and that's scary.

No, I don't, you know, if the pebble did react the 100 megawatt they're playing around with in South Africa works we may take a look.

But that's a 100 megawatt unit.

You build 100 megawatt units a day, it just doesn't make any sense.

So, the answer is no.

Okay.

Was there anything further, Mr.Schanzer?

No, that's it.

Thank-you sir.

And once again it is star, one if you would like to ask a question.

Douglas Distabler of Zimmer Lucas Partners has our next question.

Hi, Tom, how are you?

Fine Doug, I guess all Tom's can answer to that.

Plethora of Tom's

On clearinghouse, I just wanted to clarify the earlier comment.

I got a little confused.

You're talking net income, right, when you talk in terms of that, because there was some talk about gross margin before.

It was net income.

Okay. So, that's net of all the overhead and stuff over there, right?

That's correct.

We report on a net basis.

So, it makes sense for us to report net earnings contributions.

You said you did 46 in the first quarter, negative 6 in the second.

Do you happen to have the '01 actuals for the third and fourth quarters?

So we can kind of just look at what the comps are.

Okay, give me one sec.

It was, let's see, the first half of last year was 17.8 and the fore year was 56.

So, it was like, 38.2 in the second half of last year.

Okay. Great.

And the other question on the '03 gas hedges.

I don't know how well or how liquid or how good these Bloomburg quotes are, but it seems like, if you believe the numbers when you put up an '03 calender strip, that it's really kind of been between 3.50 and $4 for the whole first half of this year, even though the near-term has come off.

Is that kind of a range where we should assume you've been hedging?

Well, Doug, I think,

Nice try, Doug.

Yeah. We don't like to give that out but I don't think you'd be too far off.

Okay. So for the unedged portion then, to meet your blended rate gas price, this could come off a fair amount.

Is that fair to say?

Well, that's why we hedged.

Right

It could come off some. I mean, you know, obviously, there's a lot that's unhedged.

And it depends on how far off you go.

Right.

We've got a little bit of margin but, the important thing with us right now, is we think next year, we're going to represent more of the fundamental supply and demand.

Right.

Then this year did, when we were going through this time when the price of gas was very, very high and we couldn't understand that.

Right.

We understand next year, so we, that's why we took a corporate hedge position because we thought the market was really gonna fair.

It did in February, and recently it got tense a little bit.

Next year seems to be more fundamental.

And I'm not ruling out that we would take a corporate hedge position if we really felt the market was turning.

But right now, we really, kinda, like what we see, and we would hedge more if we had more known production.

Right.

But right now, it's a little early.

But that's- but the market that we've seen is kind of where the market that you've seen, presumably, for kind of an altery calender strip.

Right.

Okay.

We don't have a controlling view right now but you got it.

Okay. Thanks a lot.

Thanks, Doug.

Next we'll hear from Sam Nagia of Credit Lyonnais Securities

Hi guys.

Hey, Sam.

One quick question. What was the tax rate during the quarter? And I apologize for using the earnings release but I didn't find it.

It was about 35%.

... 3-15... Right around 35. 34-8.

Okay. And this is versus what in the first quarter- in the second quarter of last year?

Second quarter of last year was... 6 divided by... it was 44, around 44 last year.

And what could be some of the reasons for the discrepancy? I mean I understand 35% is more normalized anyway.

So probably, last year, second quarter was more abnormal.

Yeah, that would be that.

Okay.

Yeah. The full year, last year was around 38, so it wasn't too far off from normal. Yeah, 35, and you do have quarterly swing.

So, it's hard to look at a quarter and discern anything.

The reconciliation in the rates is something we do as part of the 10-Q process and it will be in the 10-Q.

And we'll have that done shortly.

That works for me. Thank-you.

Thank-you, Sam.

And moving on to Paul DeBass from Value Line.

Hi, can you go over your Cap-X plans and financing plans?

We'll go over the Cap-X first. Tom Wohlfarth will be [INAUDIBLE].

There's one, not much difference than what we did in the fourth this year.

Might change for next year related to the cancellation of a proposed coal plant, electric plant.

Tom?

Yeah, the previous Cap-X that I think we had put out there was around 3.5 billion.

And since then we had, I think you might have recalled, a cancellation of a coal-fired plant that I think was gonna come on in 2006 but we were going to start spending capital.

That, and we also deferred a peaker, that we previously had in the budget.

Those are the two biggest things.

And so, we're looking at somewhere around 4 to 500 million left in Cap-X 2003 than we will previously.

Right around 3 billion.

On our financing plan for next year, we've had about 250 million of market issuance of equity and support along with the normally driven investment folder.

So we're pretty much staying with that number at this point, Paul.

It's 250 million plus DRIP. How much is DRIP normally?

Somewhere between 150 and 200 million.

And the, you know, it's still holding up, I guess that some people don't want to buy a utility plot, especially those that already own them.

I will say this, Cap-X we've removed is not diluted to our earnings forecast.

'Cause those were expenditures that were actually negative to earnings until completed.

So, that doesn't hurt our earnings forecast.

Was there any financing in the second half of this year?

We, as you know, on March 13th, fixed level of equity and [INAUDIBLE] were conversed.

We certainly had some fixed income securities to sell but maybe take advantage of some low-rates, et cetera.

But we have no other plan of equity.

Always leave the options open, and if the bid comes on then we need to explore it.

So other than that, [INAUDIBLE].

Okay, thank-you.

Thank-you.

Next is Jeff Dieder from [INAUDIBLE].

My questions have been answered, thank-you.

Moving on to Zack Schweiber of SilCap.

Hi guys, Josh Haber from SilCap. Congratulations.

Just a question on operating cash-flow for the quarter.

The cash-flow for the quarter.

The cash-flow, well we, one of the changes we were going to make during this quarter in something something debt to cash-flow operation

The preliminary cash-flow for the quarter was about four times what it was last year.

I think it was somewhere around 400, 500 million.

I wanna caution you though, that the cash-flow, that is preliminary because there's a lot of work that goes in to making sure things are classified properly.

Between operating, investing and financing.

And, so treat that as a very preliminary number.

Okay, thank-you.

Thanks, Josh.

Well, we want to thank you all for being on the conference call today.

And look forward to being back with you, again in October, you know, the third quarter.

We know it's been a rough time for all of you as it has been for us.

And we pledge to you, we're gonna continue to run the business like we always have.

We're very optimistic that our model works, we're optimistic we can chart these rough waters and get through and when we come out on the end of it we're going to be the premiere company that you expect us to be.

So we appreciate your interest and your support, and look forward to being back with on this call in a few months.

Thank-you.

Thank-you gentlemen. That does conclude today's teleconference. We thank you for your participation.