道明尼資源 (D) 2003 Q1 法說會逐字稿

Good morning.

My name is Latisha and I will be your conference facilitator today.

At this time I would like to welcome everyone to Dominion's first quarter 2003 earnings conference call.

Leading the call will be Tom Chewning, Dominion's Chief Financial Officer.

All lines have been placed on mute to prevent background noise.

After the speakers remarks there will be a question and answer period.

If you would like to ask a question during this time, simply press star then the number 1 on your key pad.

If you would like to withdraw your question, press the pound key.

Thank you, Mr. Chewning, you may begin your conference.

Thank you.

Good morning and thank you for joining us for our first quarter 2003 earnings conference call.

Joining me on the call this morning are Steve Rogers, Vice President and Controller and Tom Wohlfarth, Director of Investor Relations.

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

Please refer to the SEC filings including the most recent annual reports on form 10-K and quarter reports on form 10-Q for discussion of factors that may cause results to differ from management projections, forecasts, estimates and expectations.

Also on the call we will discuss the measures about company performance that differ from those recognized by generally accepted accounting principals or GAAP.

You can find reconciliation of these non-GAAP measures to GAAP on our investor relations website at www.dom.com/investors under the category "What's New".

I will review highlights from the first quarter and the earnings outlook for the remainder 2003 and beyond.

After that, Steve Rogers will cover our first quarter results in more detail.

Then we will take your questions.

By nearly all measures, the first quarter was outstanding.

Dominion posted operating earnings of $1.52 per diluted share in the first quarter of 2003, 27% above the $1.20 per diluted share earned in the first quarter of last year.

Earnings prepared in accordance with Generally Accepted Accounts Principals or GAAP for the first quarter of 2003 were $1.64 per diluted share, 37% [INAUDIBLE].

Dominion utilizes operating earnings as the primary earnings performance measurement for external communications with analyst and investors.

Define it as reported earnings to remove the impact of certain items like severance cost or changes in accounting rules.

We do this because we believe operating earnings provide a more meaningful representation of the earnings power and we use it for budgeting and reporting of Dominion's board of directors and profit sharing plan.

Operating earnings for the first quarter 2003 excludes the following items, all stated on after after tax basis. 180 million or 58 cents a share gain due tow an accounting change related to asset retirement obligation.

A $67 million or 22 cent per share charge due to an accounting change related to energy trading and risk management activity.

A $59 million 18 cent per share charge from certain items related to domain Yon ventures LLC and a 17 million or a six cent charge related to severance cost for workforce reductions announced in January.

These items are reported in the corporate cost center for segment reporting purposes.

Reported earnings per share in the first quarter of 2002 of $1.20 per diluted share were the same as operating earnings.

During the first quarter, the balance sheet improved as debt to capitalization adjusted to include certain off balance sheet debt and equity treatments went from 57.2% at year end to 56.9% at the end of the first quarter.

In addition, interest coverage measured as a ratio of funds from operation to interest expense improve Friday 4.7 times for the 12 months ended December 31, 2002 to 4.9 time fist for the 12 months ended March 31, 2003.

The first quarter operating cash flow which is called net cash provided by operating activities in the GAAP base statement for cash flow nearly doubled to $900 million for the quarter from roughly $400 million for the same period last year.

We are well on the way to producing $3 billion or more in operating cash flow for the full year 2003 compared to 2.4 billion in 2002.

In thinking about the growth in operating cash flow over the past couple of years, it's interesting to note that operating cash flow for the full year 2000 was just $1.3 billion.

Available liquidity stood at about $1.3 billion at the end of the quarter compared to about $1 billion at year end.

There were other positive developments in the first quarter.

Dominion Energy completed a [INAUDIBLE] unit two vessel head replacement, becoming the the first U.S. company to successfully complete a nuclear vessel head replacement.

I'll note that we just completed the vessel head replacement at [INAUDIBLE] unit one, and that unit will be returning to service soon.

Dominion Energy received a license renewal for the North [INAUDIBLE].

Extending the operating lives of these units for 20 years beyond the original license expiration date.

Dominion Delivery serves an additional 40,000 electric and gas franchise customers compared to the same period last year, transporting and delivering nearly 20 million mega watt hours of electricity and more than 166 billion [INAUDIBLE] of natural gas, the company's 3.9 million franchise customers.

Dominion Retail, which is part of Dominion Energy added nearly 300,000 unregulated retail gas and electric customers, increasing the unregulated retail customer base to 1.1 million.

We issued more than $2 billion of debt, most of which will replace existing debt, capturing the benefits of the lowest interest rates [INAUDIBLE] year and corporate bond spreads in recent history.

And Dominion E&P continues its industry leading drilling program by completing more than 250 net wells in the first quarter.

While all of the core business areas performed well, the Dominion Energy clearing house had a particularly strong quarter.

A recent analyst research note referred to this group as the all but forgotten clearing house.

We never forget the experience of this group to the over all strategy.

The principal objective of this group has always has been and continues to be maximization of the value of the energy portfolio.

There wind owes of opportunity that develop from time to time, which this group can exploit and this past quarter was one of them.

Excluding the effects of corporate hedges, they earned about $90 million in the first quarter of 2003 compared to $42 million in the first quarter of 2002.

The first quarter of this year marked a period of extreme price volatility primarily to natural gas and related products and services such as storage and pipeline capacity.

Although we do not expect nor counting on extreme conditions like this to prevail very often, in the normal course of business, we see pockets of volatility and prices locations here and there and every once in a while, short periods of extreme volatility will return.

Companies that are positioned to participate in market news can do well.

Now, I will update earnings guidance.

We expect earnings of 80-90 cents a share in the second quarter of 2003.

We are reaffirming our full year 2003 operating earnings guidance of $4.60 to $4.80 a share.

In addition we believe Dominion has the internal drivers in place to bill earnings at average of 5-7% per year off 2003.

Although there could be differences between operate earnings and reported earnings in the second quarter and the remainder of the year 2003, Dominion is not aware of known and quantifiable differences regarding operating earnings beyond 2003.

Dominion management is not aware of expected differences between operated earnings and reported earnings.

Posted on Dominion's website located at www.dom.com/investors, our presentation materials as well as statistically and financial data that we hope you will find helpful in understanding Dominion's strategy in business model and also in doing financial modeling.

Since there have been a few changes to our 2003 operating and earnings guidance since last earnings call this past January, I will briefly review the vast components of 2003 earnings guidance which continues to support expectation of $4.60 to $4.80 a share in operating earnings for 2003.

Gas and oil equivalent is expected to grow about 3% year over year and average realized prices for 2003 are expected to be about $3.55 per NCF equivalent.

That combination of growth and price increase is expected to produce additional earnings of between $75 to $85 million.

Following a review of the first quarter results, we now expect the Clearinghouse to contribute $20 to $40 million above 2002 compared to prior expectations of flat earnings.

We expected mill stone the full year earnings contribution to increase about $55 million compared to 2002.

As a result of the unplanned mill stone two outage in March, we lowered it to about $40 million.

Franchise growth adds about $35 million to earnings.

The Cove Point is expected to add about $5 million this year.

Six Sigma is targeted to add about $25 million to earnings.

As disclosed in the 2002 10-K, the telecom business is expected to produce an increased loss contribution to Dominion, we expect that to be about $15 million increase in loss contributions to Dominion 2003 compared to 2002.

Weather was expected to reduce earnings year over year by about $45 million.

Adjusting for the first quarter results, which had a positive weather help of $33 million, we now expect weather to reduce earnings year over year about $12 million.

Of course this assumes normal weather for the remainder of the year.

At this point let me recall what happened last year.

We experienced extremely mild weather in the first quarter, which hurt earnings about $15 million compared to normal weather.

Due to better weather than normal the remainder of the year, weather turned completely around and actually helped earnings for the full year of $45 million.

A decrease in the pension credit due to a change in plan return assumptions to the discount rate will reduce earnings about $45 million.

Section 29 tax credit expiration will reduce $36 million and average fully diluted share count is expected in the neighborhood of 310 million shares compared to 282.6 million in 2002.

It's obviously much more pleasant to start off the year ahead of the curve with strong first quarter results.

We can't help but feel pretty bullish.

On the other hand the day is April 16th and there 260 days left in the year.

At the appropriate time we will do 2003 again and provide more specific 2004 guidance.

I will turn over to Steve Rogers to review the 2003 results.

Thanks, Tom.

The following varying reconciliation of first quarter 2003 versus first quarter 2002 operating earnings per share can be found on Dominion's investor home page at www.dom.com/investors.

Supporting operational statistics, such as retail gas and electric sales, degree day information, gas and oil production, and average realized prices are also located on the website. 2002 segment results have been restated to reflect the transfer of the electric transmission operations from Dominion Delivery to Dominion Energy.

All variances are stated as first quarter 2003 actual results as compared to the first quarter of 2002.

We will start with Dominion Energy.

Dominion Energy manages the company's electric generation and transmission business, natural gas pipeline and storage business, to Dominion Energy Clearinghouse and Dominion Retail.

Dominion Energy earned 89 cents per share in the first quarter of 2003 compared to 58 cents per share in the first quarter of 2002.

Customer growth in our electric franchise service area increased earnings two cents per share.

Weather in the electric franchise service area increased earnings 17 cents per share.

A change in the allocation of electric based revenues from energy to delivery reduced energy earnings by four cents per share.

Excluding all corporate hedge effects, Dominion Energy Clearinghouse results increased earnings 18 cents per share.

Lower net losses related to corporate hedges of natural gas production increased earnings by six cents per share.

Mill stone's performance increased six cents per share.

Other factors decreased one cent per share and finally share dilution reduced earnings 13 cents per share.

We are now moving to Dominion Delivery.

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

Deliver also manages the company's telecommunications joint venture.

Dominion delivery posted 51 cents per share in the first quarter of 2003 as compared to 49 cents per share in the first quarter of 2002.

Customer growth in our electric and gas franchise service areas increased earnings one cent per share.

Weather in the electric franchise service area increased earnings seven cents per share.

Weather in the gas franchise service area increased nine cents per share.

A change in the allocation of electric based revenues from energy to delivery increased deliveries earnings by four cents per share.

Performance of the telecommunications business reduced earnings three cents per share.

Higher expenses including outage, maintenance and reliability expense reduced earnings eight cents per share.

Share dilution reduced earnings eight cents per share.

Dominion E&P.

Dominion Expiration and Production is the companies gas and oil exploration and production business.

Dominion Exploration and Productions earnings with 34 cents per share in the first quarter of 2003 compared to 33 cents per share in the first quarter of 2002.

Higher average realized gas and oil prices increased earnings 21 cents per share.

Increased expenses reduced earnings nine cents per share.

The expiration of section 29 production tax credits reduced earnings three cents per share.

Other factors reduced earnings three cents per share and share dilution by five cents per share.

The corporate cost center consists primarily of interest expense on corporate level debt and certain unallocated general and administrated corporate costs it also includes Dominion capital results reflecting the performance of remaining assets.

The corporate and other segments incurred net expenses of 22 cents per share in the first quarter of 2003 compared to net expenses of 20 cents per share in the first quarter of 2002.

Dominion capital earnings were lower by five cents per share and share dilution increased earnings three cents per share.

That concludes our earnings reconciliation and we will open the call to your questions.

At this time I would like to remind everyone that in order to ask a question, please press start then the number 1 on your telephone keypad.

We'll pause for just a moment to compile the Q-and-A roster.

Your first question comes from Andre Meade with Lazard.

Good morning, Andre.

Can you hear me?

Okay, sorry.

A few questions.

One, of the 18-cent gain at the Clearinghouse, how much is related to recognizing the accrual earnings from contracts you previously recognized as mark to market and wrote down as part of the accounting rule changes?

I don't believe we have that number.

I don't believe it's usually significant.

The total charge was 67 million.

I guess what's the duration?

If you are asking how much came back in?

Yeah.

That 67 million was over a fair amount of time.

We will get that for you later.

We didn't think it rose to significant --.

The other aspect too is that the 67 million itself does not come back into earnings.

What happens is you have positions when you settle them, you earn on an accrual basis what you earn on the contract.

That wouldn't hit the P&L under old rules.

That's what I was trying to figure out.

That's right.

Going to your E&P business, an average of 355.

You can give an update on how much is hedged this year.

I assume it's the vast majority.

How much have you hedged in '04 and what's your average realized price on that part you hedged?

To answer your second question first, we hedged about 60% for next year.

We never have and we will not release what our realized prices are on hedges.

We hedged about 80% of reduction for this year.

Got it.

A couple of small questions.

I know you put out a press release on cancelling the person facility.

What about fairless works?

Is that technically on the books?

It's a real project.

And I'll ask Tom Farrell who has been in charge of that project for sometime to comment.

Good morning.

We have gone full speed ahead on fairless works and will come online 1100 mega watts next summer. [INAUDIBLE] to the Philadelphia suburbs.

Okay.

Related to the person contract and the pipeline, I think I talked to you guys last year at some point.

There was a contract that you were supplying power to the municipalities in the area and you were able to use accrual treatment if you had person but would be forced to use mark to market if you didn't.

Is that still the case with the new accounting rules?

No.

Now it's accrual without the plant too?

Yes.

Okay.

And just to make clear, all we said is we're will not going to build at the [INAUDIBLE] county site.

We didn't say what we will do to serve the contract.

Two quick ones.

The nuclear life extension, what impact that will have on the DNA line?

We recognized that.

We recognized that over a year ago.

You assume you got that.

And then lastly, you sold some small MP assets to Spindle Top last month.

Should we expect more of these sales?

I think you guys discussed potentially putting some of the off shore assets on the market.

Is that something you are pursuing?

I would not anticipate, we never talk about acquisition and divestitures because it's too problematic to predict.

I wouldn't assume anything else, and we always review portfolios of all our assets to see whether we can trade assets or whether we can sell some and improve our lot by buying others.

I wouldn't assume anything else.

Andre, I think we will have to let somebody else.

I'm done, thank you.

Your next question is from Raymond Niles with Smith Barney.

Good morning, thank you.

I would like to ask the hedging question for generation, the one you answered for E&P.

You can give us a sense of where you stand now on your contract percentages?

I would love to get the contracted power prices if you can give that.

I will ask Tom Farrell to cover that again.

Over 90% hedged for '03 on all of the power business.

About 85% hedged for '04, a similar number for '05.

Just about 87% for next year.

About 83% for '05.

I don't think we have stated.

I will have to ask Tom Wohlfarth.

I don't think we stated what the price is because it's all across-the-board.

We have the Virginia units hedged into our deregulation plan with our price cap, mill stone's hedged at one price and state line at another, etc..

You don't have a blended average price?

I mean the bulk of it being the jurisdictional piece which is the $48 on average.

The merchant piece which is the smaller piece we have not given those numbers.

The second question is, the power volatility was also up quite a bit in the quarter.

Is that, did you guys make any money in that?

Are you having much activity there or was there a loss there?

How should we think about that?

For Clearinghouse.

We couldn't hear the first.

I'm sorry, power volatility was also up in addition gas volatility in the quarter.

I'm wondering was that a factor at all earnings wise one way or the other and can you characterize just your level of activity in the power markets versus gas.

Kevin Howell, who runs our Clearinghouse operations here and he can answer that question.

Yeah, I think you're right.

The volatility across all the commodities was pretty high in the quarter and across-the-board, the Clearinghouse executed well on the volatility.

Again, I would remind you a lot of the Clearinghouse activity is dovetailed in with the assets of the company.

When we talk about results on power, it's working with the unregulated units, it's working clear with the mill stone and some of the other units.

The Clearinghouse had a good quarter in power.

How does that compare with the gas results?

Was it third as large?

We were fairly well balanced and, you know, if you've heard me talk before about my goals for the Clearinghouse, I will always say that the three things that are important to me are balance.

The second and balanced and the third's balanced.

We had a very balanced first quarter across gas and electricity on our results.

Okay, thank you.

Your next question is from Donato Eassey with Royalist Research.

Good morning and congratulations on an excellent quarter.

You touched on this a bit and may not be able to answer it all.

I can't help but being curious on the Texas gas assets that were up for sale and whether you were interested in giving the -- why you didn't or what is the asset complexion that you would like Dominion to carry forward from here?

And again, recognizing what you said a moment ago and that was the question, thank you.

Thos.

Capps is our CEO, chief strategist, he happens to be in the room and I will refer that to him.

We were interested.

They went for more than we put in and that's all I'll say.

We were -- They went for a lot of money.

Let me put it at that.

How about that going forward?

We will look.

If we can buy anything that is immediately going with our over all strategy of main to main or gas or something, we would be interested.

We are not going to pay for an asset.

That's why we didn't get the Texas gas.

Thank you very much and continued success.

Thank you.

The next question is from Isabel Housen with Morgan Stanley.

Congratulation and all my questions have been addressed.

Thank you.

Thank you, Isabel.

Your next question is from Paul Patterson with Glen Ross Association.

Hi, how you?

Fine, Pau.

And you?

Okay.

The cash flow which was impressive, what caused the cash flow to be so strong for the first quarter?

The cash flow could have been better.

The primary driver of the cash flow is the strong fundamental results.

And the reality of it is I think that I haven't done the final analysis on it, but we actually had whenever you have a situation like that with strong sales, in regulated entities, gas entities, cash flow actually gets held back a little bit because it's the fuel and that cash will come in and I think really if you normalize first quarter cash flow for that, it probably would have been maybe $200 maybe $300 million higher than it was.

I think Paul accountants have said high quality earnings for the first quarter that we interpreted as being cash and book earnings that are very, very close.

When you add back depreciation and you get to those kind of numbers, of 900 million, the other thing is that even though we did have to expend a lot of working capital to support the high gas prices for LBC's and also margin requirements as they went up, we were able to collect a good amount of receivables particularly in the electric service territory in the first quarter and in gas.

Because we had a strong December.

It was a good story all-around.

I think the success is bringing in cash and doing it consistently and growing the cash flow and it was a good quarter that way.

Okay.

In terms of the clearinghouse, I think you said that you are now expecting $20-40 million more in 2003 versus 2002?

Uh-huh.

I calculate $55 million just for the first quarter alone.

It was 90 million.

For the whole --.

For the quarter.

For the quarter itself?

I guess what I'm wondering in 20-40 million would indicate you are being conservative in terms of what you think the expectation will be.

That $20-40 million in addition what you guys had in 2002.

It would seem that that would indicate you are pretty conservative on what you think Clearinghouse will do for the rest of the year.

We are being conservative and not letting the people in the Clearinghouse have that expectation.

Okay.

Then finally, you guys managed outage maintenance for O&M at the utility and you guys sent say what caused the O&M at the E&P.

Can you elaborate on that and whether it will recur?

Say that again.

You guys mentioned outage and maintenance increasing O&M expense.

I believe you said that.

Maybe I have you wrong on delivery.

It seems they had an increase on O&M as well and I was wondering if you can elaborate a little more on that.

From a delivery basis it would have been weather caused in some time and we had some activity and not significant as what occurred in North Carolina, but we had some ice in the first quarter that -- and in the year before, the first quarter was so warm that we would have welcomed ice or some of it.

This was the major reason and that E&P questioned the role and it's Duane Radke.

There were really three components, of course, with the higher gas prices and oil prices we had higher severance taxes and likewise we had higher production on the on shore and when you have that mix change, you have a little bit higher component of LOE.

Thank you very much.

Thanks, Paul.

The next question is from Jeff Gildersleeve with Argus Research.

Good morning.

Good job here.

Looking at -- most of my questions have been answered, but I wonder if you had a sense of the section 29 tax credit and while that expired, does it seem like there is hope of that being revived in the future?

I will give you numbers and let Thos.

Capps talk about the prospects or maybe we should give the prospects first then I'll give you some numbers then as they happen.

I think the real question is, is the Senate going to come with the bill?

If the Senate comes with the bill, then it can be reconciled in conference.

We are optimistic about section 29, although I think this year if it had been like it had been it would have been 10 or 11 cents for us.

The way we read the bill this time won't be near that much.

I think to use dollars rather than cents, this was about $36 million last year in credit and we would expect between $10 and $15 million under the current Bill, the differences is that rate is changed and you have a partial year and there are some limits in the production that get the credit.

Going forward, the next year we would expect under the current draft at least from the house, about $15-20 million.

We would like to have that money.

Don't get us wrong.

That's not a dollar for dollar exchange.

We are hopeful it will come.

Great.

Secondly, mill stone, could you discuss within limits how the plant is operate and what the output situation is like there.

It seems like a favorable environment if anything is running off.

Mill stone both units are operating extremely well right now and anticipate that for the balance of the year.

And on the output side?

Are you asking what's hedged there?

Right.

Over 90% hedged for this year.

And '04?

50% hedged for next year at the moment.

We are constantly in the market as we are the E&P production as we are with the rest of the units.

That's where it is right now.

Great.

Thank you very much.

The next question is from David Schanzer with Janney Montgomery.

Good morning.

I total, if the arithmetic is correct, about 33 cents from weather from energy and delivery.

All classes of service.

Could you give us an idea of what that would have been compared to normal had '02 been a normal year?

Compared to a normal year?

Uh-huh.

It would be about $33 million less.

Add $33 million to normal and last year it was 50 million negative versus normal.

A change of about $83 million from one quarter, the first quarter one year to the next, but to normal [OVERLAPPING SPEAKERS] The Dominion would have been about 17 million less and the other 16 would have been in the generation unit in Dominion Energy.

Okay.

And then a follow-up to Paul's question about O&M.

Could you give us a sense of what the rest of the year will look like, assuming normal weather?

From an O&M standpoint.

I don't see that O&M in delivery or energy will be any different than normal.

Our budgets wouldn't change from what we have budgeted back in September, no guidance change.

I will ask Duane Radke to cover E&P if he anticipates there will be unusual O&M increases at E&P.

No, we don't expect any.

Obviously if the -- strip stays higher we will see higher severance tacks, but the margin will increase also.

Thank you.

Your next question is from Michael Worms with GKM.

Good morning and congratulations on a great quarter.

A couple of questions for you.

One, could you kind of go over the regulatory situation one more time for me in Virginia as it pertains to the RTO etc..

Tom Farrell will be glad to answer that.

The general assembly past a law in the past session that suspended entry into an RTO until July of next year, it mandated that you enter an RTO by July of next year, but it suspended it until that period of time, we are going ahead as we have always planned to file to enter PGAM and expect that that will resolve itself over the next year.

As far as the rest of the deregulation plan, it's still in place and going along exactly as designed.

Thank you.

I believe you are one of the few company that is puts out a press release talking about the sale of stock options.

Can you talk about that and just --.

Be glad to.

Thanks for the question.

I think we might be unique in putting out preannouncement.

This is the second preannouncement.

Number one, granted these options at the OCM committee of the board, part of the option grant is that we would support the bonuses and future grants if we sold the options without their permission.

Legally we can sell options at any time.

If we did, we would forfeit without committee approval without other benefits.

The board takes a look each year at year end and discusses usually in February whether or not they thank it's prudent for management to be allowed to sell stock or not those factors would probably be performance driven and market perception driven.

They took a look at performance last year and expectations of this year and said if you want to liquefy and diversify, you are free to do so.

One of the rules as you know, Michael, we have multiples of salary guideline that is we must meet in direct ownership.

If anybody exercises an option and has not met the guidelines, they must convert it into stock.

In reality, what we have is a situation in which we have talked to a major investor and they know we are among the angels in direct ownership and probably have the largest dollar amount of officer ownership.

These option exercises will not result in any decrease in the amount of investment that any of the officers have in Dominion.

It's simply a diversification tool for them and allows them to recognize some tangible regular benefits for the work that's done in the market's acceptance of the work and also avoids a bunching that we would have as you know.

We have stock loans that mature in 2005 and we don't want to get into a situation where we have both stock loans maturing and a bunch of options to be exercised.

Part of that process is to avoid that unbundling.

When we called our largest investor, last year in assets, they think it was appropriate. "I hate to hurt your feelings, but you are not my only investor either."

And I think you guys ought to diversify and liquefy a little bit.

As you can see, it's not a very large amount of stock when you divide it by the number of people who are potentially going to exercise.

I hope I answered the question.

Yes.

Thank you very much.

One last question for you.

You can give us a schedule of the react to heavy placements yet to come.

The reactor head replacements I will ask Tom Farrell to give that schedule.

North [INAUDIBLE] is, all the vessel head work is complete and the unit is in start up.

One of the surrey units will come down Sunday.

With an expected -- we expect all these outages to take about 55 to 60 days.

One of the surrey units will come down this Sunday and expected back early June.

And the second surrey unit, the last of the units to be -- to have their vessel heads replaced will be in the fall refueling outage.

On the North end of one replacement in terms of outage time, how did that compare to the first one you did?

Much shorter than the first one.

The first one of course we had taken down for refueling outage and began our preliminary inspections to the vessel head decided we were going to take -- repairing it was going to take as long as it would take us to replace it.

We had to get the vessel head over from France and all the rest of that routine.

That took I guess it was late September until middle of January.

That north ended two outage.

Number one was significantly shorter.

Thank you very much.

I appreciate it.

Your next question comes from Hugh Wendt with Sanford Bernstein.

I was hoping to get clarification about some of the more long-term trends in earnings which the numbers events.

What I'm basically looking at are about 33 cents of improvement attributable to weather. 18 cents attributable to energy Clearinghouse.

That helped a lot by volatility this quarter.

If I look at the other items which are likely to stick with us longer like the O&M at delivery, the O&M at E&P.

The share dilution effect and the telecommunications business, I see negative adjustments.

I see earnings being negatively affected.

I wonder if you could perhaps guide me through what the long-term implications of that might be and whether it's likely to reverse.

First I feel like Donald Rumsfeld.

I hate for someone to think the sky is falling after this quarter.

I think it's a real over statement for to you think that selectively pick O&M that you say will be repeatable when we don't believe and already answered that questions and don't believe the increases will necessarily be repeatable unless the margins continue to grow.

I might add that we don't go line item by line item, but we had a number of expenses in the first quarter that we have not discussed.

It will not be repeatable in the future.

I can assure you from my position as CFO that we have probably more unusual expenses in the first quarter than we normally have and I fully expect that there was more downside of the quarter in those items than going forward in the upside potential.

I think the earnings power is without question, we do not have a situation in which this quarter in any way can be construed in its success as fore telling a negative future in terms of growth.

Can I get background on the eight cent increase in O&M at delivery?

Sure, if you hold on for one second.

The eight cents higher expense is related to we had outage maintenance reliability cost because the weather, the things that happened in the first quarter just maintaining the equipment and doing things to the equipment so they would be ready for weather that was coming.

Just because of the increase in revenues, we had about a penny in bad debt.

A little bit of increase in salaries, we had pension adjustments because of changes in the assumptions and then just a couple other minor things.

Basically a mishmash of things that were a pen to two cents.

On the E&P side, I think I heard that the increase in O&M was attributable in part higher on shore production and adverse tax treatment, is that right?

I couldn't say adverse tax treatment.

We say higher taxes with we have higher revenue.

Right.

Okay.

That part is going on and Duane did said and I might ask him to comment that lifting costs were higher because of the [INAUDIBLE] quarter of on shore versus off shore.

I might point you to the fact that in the beginning of next year, in 2004, we will be large production off shore from [INAUDIBLE] front-runner.

Each quarter will be different in that respect.

I would not say we have an ongoing O&M negative in the E&P business.

Okay.

Is it correct to say that E&P was affected by higher depreciation rates or am I wrong in that?

No.

Thank you.

Appreciate it.

Your next question is from Steve Fleishman with Merrill Lynch.

Hi, Steve.

Hi, Tom or should I say, Toms.

When you go through the drivers and numbers for each business line, you mentioned that you now have this 33 million first quarter weather benefit in the numbers and then you also have the higher, little bit higher assumptions for Clearinghouse now because of the strong and the only offset you mentioned is slightly lower.

Mill stone income.

The net-net of all that looks like higher numbers for the year from what you mentioned.

The only other thing I can see is looks like production assumptions are down a bit for production growth.

Is that --.

Not really.

We expected a 3% production growth this year we budgeted that in there .

I think, Steve, honestly the answer is we are being somewhat cautious, but these numbers have indicated if we had normal weather, we would be at the upper end of our $4.60 to $4.80.

That's pretty obvious.

We just try as we also do to not run away with expectations over a quarter.

We certainly didn't expect at the end of first quarter last year that we would wind up having $90 million increase in favorable weather for the second, third, and fourth quarters.

We want everybody to give us a little bit of time for weather to continue on.

Maybe at the end of the third quarter, if we had normal weather for the second and third, we will be in a better position to hone in on some of these pluses.

I think your observation is right.

We have a little bit more pluses than minuses that we put out.

Okay.

Could you repeat what the capital was at the end of the quarter?

Yes.

Want me to take it?

Scott Hetzer can handle that.

Steve, on GAAP basis, debt-to-cap was 56.8% and higher than it was at the end of the year on a GAAP basis primarily because of two reasons.

One, we did the 700 million in telecom and 700 million of debt at Dominion to pay off the telecom debt.

That went from off balance sheet to on balance sheet.

Also we issued 400 million at Virginia Power in the first quarter to prefund obligations we have later in the year.

Between those two items and then the fact that we were having a fair amount of cash invested at the end of the quarter partially because of prefundings.

We had 200 million payable April, 1st at Virginia Power, so those are the item that is took it up a little bit.

Absent those items we would have seen a nice improvement.

Can you give us what the cash number was at the end of the quarter?

Cash and investments.

Yeah, cash and cash equivalents were almost 500 million. 498 at the end of the quarter.

If you add that to our lines of liquidity, we had about 1.8 billion in liquidity and I mentioned earlier in prepared remarks when you take a look at the adjusted debt to cap which is not GAAP, but we have to live with in terms of the agencies, at least this would be the least common denominator or the worst situation for us on a debt to cap in their eyes.

We had on that ratio we were 57.2% at the end of 2002 and 56.9 at the end of the first quarter.

Although our GAAP number looks worse, our actual number improved as far as the agency.

The movement of off balance she, on balance sheet and prefunding we did that will not stick.

We would expect this number to continue to improve throughout the year.

You mentioned your coverage ratios and your cash flow to debt still in the low 20% area.

We didn't comment on that.

We didn't comment and cash flow --.

He is looking to funds from operation.

Funds from operation to total debt was 23.1% for the the 12 months ended March 31st. 23.1% on a GAAP basis and 20.4% with the adjustments that one of the rating agency makes, the most stringent side of adjustments.

And, Steve, let me follow-up quickly on this adjusted debt to cap number.

We don't get into detail on what adjustments the different rating agents are making.

Each makes their own observations and adjustments.

It's hard to plug an adjusted number.

I guess the most conservative is the adjustments that S&P makes that would take debt to cap to 58.1%.

Okay just quickly front-runner and devil's tower, the same schedule as a few months ago?

No change in that.

We still expect devil's tower to be on in the first quarter of '04 and front-runner sometime in the second half of '04.

Thank you.

The next question is from Doug DeStatler with [INAUDIBLE] Capital.

Good morning.

How are you, Tom?

Good.

I have a follow-up on an earlier question on the E&P hedging.

Just being in our position and not knowing the depth of the markets, are the forward prices that we see on Bloomberg, are those proxies for where you could have hedged the gas or can you not?

Can you transact in volumes such that those are good proxies not having any others for us to use where you hedged the '04 production?

Doug, you know, you are trying to back into an answer and of course, those markets move day to day, but when we do hedge, we make sure we don't move the market.

There is enough liquidity for us within a day period even with fairly large volumes to be able to realize prices close to what you see on the screen.

Okay.

Terrific.

Thank you.

The next question is from Mark Levin with Davenport and Company.

Congratulations on a great quarter.

Following up on Steve's question with regard to the balance sheet and debt to cap, you may have mentioned it before and I might have forgot, but do you have a target for either adjusted debt to capital or GAAP debt to capital for the end of this year or where do you think it could be and I would ask that with regard to 2004 as well.

Thank you.

We don't get into specifics, but certainly we expect debt to cap both on a GAAP and adjusted basis to come down.

We think the target that the rating agencies are looking for for our rating be double eight, triple D plus, is in the low 50s and maybe 50% in several years.

Certainly we have a plan getting us there, but we don't comment on specific targets each year.

Great, thank you.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Mr. Chewning, do you have any closing remarks?

Thank you very much for being with us today.

It's obviously a good day to be the CFO for a shareholder or CEO or any officer for Dominion.

We look forward to talking with you at the end of the second quarter.

Thank you very much.

Thank you for participating in today's conference.

You may now disconnect.