道明尼資源 (D) 2003 Q4 法說會逐字稿

Good morning.

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

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

All lines have been placed on mute to prevent any 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 telephone keypad.

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

Thank you.

I will now turn the call over to Mr. Tom Chewning.

Sir, you may begin.

Thank you.

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

Joining me this morning are Tom Capps, our CEO, and Tom Farrell, our COO, as well as other members of our management team.

Our call today will follow a different format from what we've done in the past.

We'll present the usual cautionary language up front, but we'll take a more conversational approach in reviewing results and our outlook for the future.

Rather than spending the majority of our time together discussing detailed business segment numbers, we ask those listening to our call to refer to our press release and to the schedules on our website immediately following our call for specific details.

The website address is www.dom.com/investors.

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 SEC filing, including our most recent annual report on Form 10-K and quarterly report form on Form 10-Q for discussion of factors that may cause results to differ from management's projections, forecasts, estimates, and expectations.

Dominion uses operating earnings as the primary earnings performance measurement for external communications with analysts and investors.

Operating earnings is a non-GAAP or Generally Accepted Accounting Principles measure.

We define operating earnings as reported earnings adjusted to remove the impact of certain items.

Examples include cumulative effects of changes in accounting rules, asset impairment charges and non-recurring events such as Hurricane Isabel.

We do this because we believe that earnings as adjusted, or operating earnings, provide the most meaningful representation of the company's fundamental earnings power.

We also use operating earnings for budgeting and reporting to the Dominion board of directors, as well as for the company's profit-sharing plan.

In addition to operating earnings, we will discuss some other measures of our company's performance that differ from those recognized by GAAP.

You can find a reconciliation of non-GAAP measures to GAAP on our Investor Relations website at www.dom.com/investors under "GAAP Reconciliation."

This morning we will review our fourth quarter and full year 2003 results and provide earnings guidance for 2004 and 2005.

Tom Farrell will provide an update on the process currently taking place in the Virginia general assembly in regards to potential extension of the company's cap electric rate.

Finally, we will review our forecast of cash flows from Devil's Tower and Front Runner in the Gulf of Mexico, both of which will come on line this year, and discuss our Deepwater strategy going forward.

Dominion posted operating earnings of 84 cents per share in the fourth quarter of 2003, as compared $1.13 per share earned in the fourth quarter last year.

For the year we posted operating earnings of $4.55 per share in 2003, as compared to $4.83 for the full year 2002.

On a GAAP basis, we reported a loss of 40 cents per share in the fourth quarter of 2003, compared to $1.12 profit in the fourth quarter of 2002.

And on a GAAP basis, we reported per-share profit of $1.14 for the full year 2003, compared to per-share profit of $4.82 in the full year of 2002.

At full-year 2003 operating earnings of $4.55 per share were fundamentally strong and provide a sound base to grow from in 2004.

In 2003, we incurred a number of significant items that reduced operating earnings by a total of about 18 cents per share.

These include a 4 cent per share impact from the loss sales margin due to Hurricane Isabel, a 3 cent per share impact resulting from the settlement of the Virginia fuel case, and a 6 cent per share mark-to-market timing impact related to hedges on future natural gas production and gas storage positions.

This expense will reverse in 2004 when the positions are settled and the physical gas is produced and sold.

In addition, Dominion refinanced about $800 million in callable debt in the fourth quarter.

The refinancing costs related to calling this debt reduced earnings by about 5 cents per share in the fourth quarter, but it will save nearly $10 million annually in future after-tax interest expenses.

Adjusting for these impacts, operating earnings would have been above the midpoint of our $4.60 to $4.80 per share guidance for 2003..

Additionally 2003 operating earnings per share were reduced by about 10 cents per share from the 11 million share stock issuance we did in May.

While we had not planned to issue this stock, we did not factor it into our original guidance of $4.60 to $4.80 per share, we felt it was prudent to take advantage of favorable market conditions in order to enhance our financial strength and flexibility.

Operating cash flow for 2003 was $2.4 billion, and it would have been about $3 billion if not for special or non-recurring cash uses such as the restoration cost for Hurricane Isabel, buyout of the Gordonville power contract, a discretionary pension contribution, and an increase in deferred fuel balance.

Our key credit metric remains solid after adjusting for these non-recurring items.

Our adjusted FFA to interest codes ratio is 4.0 times and our adjusted debt-to-cap ratio is under 57%.

Available liquidity, including cash and cash equivalents, stood at $781 million at year end.

The year included other noteworthy accomplishments, including the restoration service within two weeks of all of our 1.8 million customers who lost power during Hurricane Isabel.

The vessel heads on all four nuclear units in Virginia were replaced.

The company reached an agreement to acquire the 545-megawatt Kewaunee Nuclear Power Plant in Wisconsin.

The Cove Point LNG facility was successfully reactivated and began full commercial operation.

And we continued to divest our non-core assets.

Dominion received $200 million from the sale of financial assets held by Dominion Capital, and $42 million from the sale of a power plant in Kauai, Hawaii.

Now let's turn to our 2004 guidance.

We expect operating earnings of $4.80 to $5 per share in 2004.

There are a number of factors which we believe will be additive to 2004 earnings, as well as some that will offset these positive earnings drivers.

Please refer to our website for a detailed schedule of key earnings drivers for 2004.

The following items, in addition to the previously mentioned 18 cents of non-recurring impacts in 2003, are expected to add to year-over-year earnings in 2004.

A return to normal weather conditions, E&P production growth, driven partly by initial production from Devil's Tower and Front Runner.

Franchise growth in both electric and gas service areas in Virginia, North Carolina, Ohio, Pennsylvania, and West Virginia.

Increased sales at Millstone due to a higher capacity factor, and higher prices.

Six Sigma cost savings, a full year of earnings at Cove Point.

Savings from the restructuring and buyout of purchase power contracts.

Offsetting these positive earnings drivers are lower margins in the E&P business, driven by higher O&M rates, partially offset by revenues from the sale of gas a under volume metric payment transaction.

Increased pension and benefit costs as a result of the use of a lower discount rate for future obligations.

Lost wheeling revenues in the electric transmission business as a result of our delay in joining PJM and a change in market conditions.

Lower earnings contributions by the clearinghouse, and an increase in the estimated share count from 319 million to 328 million shares.

Operating earnings per share guidance for the first quarter of 2004 is $1.30 to $1.40 per share.

We expect free cash flow in 2004 to be in the $100 to $300 million range.

This is based on expected net operating cash flow of $3.3 to $3.5 billion, capital spending of about $2.4 billion, and dividends of about $840 million.

Looking at 2005, we expect about 5% operating earnings per share growth over 2004, driven by the Kewaunee Nuclear Plant acquisition, an increase in oil and gas production driven largely by full year operation of both Devil's Tower and Front Runner, continued Six Sigma cost savings, franchise gas and electric customer growth, the Cove Point expansion to a 5th storage tank, and free cash flow reinvestment.

This will all be offset partially by increases in O&M related to inflation, increasing interest expenses due to an anticipated rise in rates, and an increase in the estimated average share count of 9 million shares, resulting in an average share count of 337 million shares.

With respect to our operating earnings guidance, Dominion management notes that there can be differences between reported and operating earnings.

However, any such differences have not yet been quantified and therefore, Dominion is not able at this time to provide a corresponding GAAP equivalent for estimated earnings going forward.

As an update to our hedging activity, we have hedged more than 85% of our expected 2004 gas and oil production, 60% of the expected 2005 production, and 40% of the expected 2006 production.

Our guidance assumes about $5 market prices for natural gas on our unhedged production in both 2004 and 2005.

We have hedged about 95% of our generation portfolio in 2004, 90% in 2005, and 85% in 2006.

Further details regarding our hedging position are available on our website.

At this point I'd like to turn the call over to Tom Farrell, our Chief Operating Officer, to provide an update on the rate cap ex extension deliberation at the Virginia assembly.

Tom.

Thanks, Tom.

As a refresher, the restructuring act was originally adopted in Virginia in 1999.

It called for freezing rates until July 1st of 2007.

At that point, the distribution business would be subject to a rate case, the generation business would go to market rate.

In the fall, the governor, a Democrat, and the Attorney General, a Republican, jointly proposed that the rate cap be extended until the end of 2010.

They were concerned about delay, initial delays in competition coming to Virginia, as well as the delay last year under legislation that delayed the amount of -- by a year, when we would join PJM.

That bill we have examined carefully.

We are supporting that bill, as a number of others.

There is a different approach, a couple of different approaches being talked about.

Bills may or may not be submitted to the general assembly to pursue that approach.

One is a complete roll-back of deregulation to cost-of-service regulation, as if the deregulation act had not occurred, and the other is more of a suspend-it-for-now and wait-and-see approach.

All of those came -- when the bill was originally adopted, the legislature recognized that this was a complex issue, appointed a committee of ten, six delegates, four senators, to oversee it and become expert in electricity restructuring.

That same body has deliberated all through -- all this period on various aspects of restructuring, and there have been several changes to the restructuring act as we have gone through the years.

The name of that group has changed from the Legislative Transition Task Force to -- it's now called, and it's caused some confusion, it's now called the Commission on Electricity Restructuring.

Some people are confusing it with our state corporation commission.

The commission, the legislative commission, considered these various approaches at a meeting last week.

They voted in support to recommend the bill proposed by the governor and the attorney general.

They voted to recommend that on a vote of nine to one.

They considered the complete rollback bill, and they voted to recommend against that bill nine to one, and they considered the let's-suspend-part-of- this-for-a-period-of-time-and-see-what-happens bill, and they voted against recommending that bill three to seven.

Three in favor of going forward with a suspension, seven opposed.

So, an overwhelming majority have endorsed going forward with de-regulation.

Now, that commission has-- the recommendations of that commission have historically been followed by both the Senate and the House of Delegates.

There's no guarantee of that, but that's the history of how this panel has worked in the various bodies.

The next steps in this are, as of this morning, the bill to suspend for a while had not actually been submitted to the clerk.

It could be later today, but today is the deadline for that.

The senate will consider the attorney general and -- the senate committee will consider the attorney general and governor's bill.

It's scheduled for Monday afternoon.

Thereafter, it would, assuming it passes the senate committee, would finish -- the senate would finish its work on that bill, probably by the end of next week.

Presently scheduled in the House of Delegates is the rollback approach, which is presently scheduled for the first week in February.

These dates, you can't count on them.

This is a fluid legislature.

Everything is a short period of time, so sometimes these schedules change, but that's the present schedule.

And the legislature will recess, adjourn, rather, in the middle of March.

That's all I have.

Thanks, Tom.

Now we'd like to address Dominion's philosophy towards balancing growth with the company's financial strength and flexibility.

As we've been telling investors for some time now, we want to continue to strengthen the balance sheet and to improve the company's financial flexibility.

Although there are no hard and fast guidelines or targets, we will continue to steadily deliver the balance sheet over the foreseeable time horizon while we utilize what we consider to be the most appropriate risk-adjusted credit metrics needed to remain a strong investment grade company when evaluating any new investments.

Our desire to maintain a strong balance sheet and financial flexibility is rooted in the belief that our investors, both equity and fixed income, are better off if Dominion is financially strong and able to take advantage of value-creating opportunities.

The Cove Point and Stateline acquisitions are recent examples of such opportunities and the advantage that financial strength and flexibility provide.

While we will issue equity to support growth, we do not plan to issue equity beyond what we have included in our 2004 and 2005 plan.

Our plans incorporate equity from convertible securities coming due, proceeds from our dividend reinvestment and 401(k) plan, and equity finance the Kewaunee acquisition in the second half of this year.

Now I'd like to discuss our Deepwater oil and gas program.

Investors have recently raised questions about our Deepwater E&P program and how it fits within Dominion's overall business plan.

They have asked whether the high production rates and accompanying high decline rates are consistent with Dominion's integrated strategy to produce steady, low-risk growth and earnings in cash flow.

We believe that over time, Dominion's shareholders will be best served if we continue to rebalance our financial exposure away from the Deepwater program towards investments that produce more predictable returns over a longer time horizon.

However, in the meantime, our Devil's Tower and Front Runner projects, both of which come on line this year, will generate substantial free cash flow for a number of years.

Beginning in 2005, expected net free cash flow through 2010 is sustainable at an average level of more than $250 million per year.

Cumulative net free cash flow over the next ten years should range between $1.8 billion and $2.6 billion.

While our successful Deepwater program has created substantial value and will generate rapid growth in cash flow over the next several years, we will not chase that growth by increasing allocations of capital investment in the Deepwater.

It is our intention to direct this free cash flow toward investment opportunities that more closely match the company's integrated strategy and desired lower risk profile.

Examples of such investments include long-lived onshore gas properties, power plants in the Maine to Maine region, natural gas pipeline and storage assets, debt retirement, dividend increases, or stock buyback.

And, of course, as is the case with any Dominion asset, we will always entertain offers to purchase an interest in any of our Deepwater projects.

However, unless we would receive substantial value for our shareholders, our decision will be to continue producing oil and gas and receiving cash to then be redeployed into other investments.

In response to investor feedback and requests, we are now providing preliminary cash flow and balance sheet information on our website located at www.dom.com/investors.

Immediately following the call, we will post on our site statistical and financial data for modeling purposes, as well as our detailed reconciliation of 2004 and 2005 guidance.

That concludes our prepared remarks and we'll now open the line for your questions.

At this time I would like to remind everyone, in order to ask a question please press star 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 Jim Von Riesemann of J.P. Morgan.

Good morning everyone.

Good color, I appreciate all the color on all the segments and the conversation, but one thing you didn't address was all the Sarbanes-Oxley stuff that's going on right now, and I note that I think there's about $80 million in loans to 70 people within the senior management.

How do you deal with that coming next year?

That's a good question, because it's certainly a changed game since the Sarbanes-Oxley bill.

As many of you remember, approximately four years ago, management acquired direct interest in Dominion stock through a loan program which at that time was conforming to regulations where the company could supply the differential and interest between our dividend and the interest rate of those borrowings, and also basically guarantee the bank that those loans would be repaid.

Sarbanes-Oxley precludes the company from any involvement in lending money to officers, so when those loans become due in February of 2005, the company cannot assist officers in direct ownership through lending.

Therefore, our board of directors has authorized all those in those loan programs that if they do have vested options, that between now and that maturity date, those people are free to exercise options if they use all proceeds to repay debt.

After that point, the company will have free and clear officer ownership of about 1% of its common stock.

So, obviously, we want to conform to Sarbanes-Oxley, and the clock is ticking, and as the allowable periods are there and available to our officers to sell stock, under SEC regulations, that will occur.

Okay.

Thanks.

And I appreciate that.

That's good information.

Then maybe Mr. Capps can address just some of the M&A environment, what he sees out there, what he doesn't see, what hurdles you guys have before you were to think about doing any large-scale acquisition, if you would even consider one.

Right now, as far as companies, the landscape is kind of barren.

The ones that we probably could acquire, Chewning would have a heart attack, because you'd have to issue so much equity that they would be diluted, and so they're out.

Some other ones we may like to acquire, don't seem to be -- it takes two to tango, and we haven't found anybody to tango go with.

So right now we have no merger acquisition or merger activity going on.

We have been rumored with one particular company, and we have not talked to them.

And if -- and I won't say who the rumor is, but we see no indication they want to do anything, and even if they did, we can't make the numbers work.

So right now, Jim, things are pretty bare.

Okay.

Thanks so much.

Hey, don't let Wohlfarth touch any buttons or light any flames now that he's CFO of the pipeline business.

Your next question comes from Michael Worms of Harris Nesbitt.

Good morning, everyone, and thank you.

A quick question for you.

I wasn't quite clear on the legislative process.

Has there been a bill introduced regarding the extension of the rate freeze?

That bill is being submitted this morning.

Okay.

Fair enough.

And then the second question is, can you just give us an update on Devil's Tower and Front Runner?

Are they coming on line as scheduled?

Yes, we've made a great deal of progress since our last conference call.

The top sides are on, we're commissioning the spar at this moment.

We expect to begin completions in early April,so we're still targeting mid to late May, and Front Runner is still scheduled to be late September or early October.

Great.

And one last question, I guess.

With respect to the fact the company will be probably cash flow positive this year, any thoughts on a dividend increase?

Well, obviously, this is the first time in many years since the C&G merger that we've had an opportunity to be in a net free cash flow position, and with all the favorable impact of tax legislation on dividends and commensurately, the greater value to our shareholders, we will indeed be considering it.

The normal time of year in which we do consider that is October.

That's our traditional annual review of our dividend, so we will be looking at that with our directors in October.

Thank you very much.

I appreciate it.

Your next question comes from Kerry Stevens of Morgan Stanley.

Good morning.

First I wanted to ask, I saw an article about the NRC inspecting some pumps up at Kewaunee, if that was going to cause any delay in that acquisition?

No, we don't anticipate it causing any delay in the acquisition at all.

It's an issue that the Nuclear Management Corporation is dealing with as the current licensee.

By the way, that was Mark McGettrick who is the CEO of our Generation Unit.

Forgive me, because I just don't have these deltas that you guys have laid out year-over-year, so I just wanted to ask some questions.

First, regarding Millstone, for the fourth quarter there was quite a large variance year-over-year, if you could maybe elaborate on what was the driver to that.

I think it was 18 cents.

For Millstone?

Yeah.

The main difference for Millstone in the fourth quarter over the fourth quarter of last year was we had a planned refueling outage for Unit 2 at Millstone this year and we had no refueling outage last year.

So coming up in '04 is there an outage?

We have one outage at Millstone in '04, it's in the spring for Unit 3.

Okay.

Great.

And then you gave specific hedging for your portfolio, but I was wondering if you could maybe just detail where Millstone hedged in '04, '05, '06.

95% hedged in '04 and --.

Mark, could you?

Yeah, Millstone is virtually all hedged in '04, and for '05, it's about 90% hedged.

Okay.

So similar numbers.

And then, maybe you could just go over kind of the Delta that you're seeing in the E&P -- the DD&A and the O&M cost, you talked about that.

Could you just kind of allude to what kind of Delta that might be?

The O&M costs '04 to '03 are really driven by a couple of factors.

The main one is when Devils Tower comes on stream, if you will remember, Williams actually built the spar, owns it and the pipeline, so we have to pay a fee to go through that, and it's dilutive to our average cost margin, or our profit margin.

And then, likewise, the VPP, we have to carry all the cost on the VPP, so the overall margin goes down.

Do you have like $1 per mcf of O&M cost you're targeting?

We're still targeting the same number, 85 to 95 cents for '04, and in fact, '03 wound up at about 85.

What about DD&A?

The same, $1.20, to $1.25 is the guidance we're giving.

Okay.

But these one-time costs to Williams and VPP, those are not inclusive in that kind of number?

They would be included in that number.

The guidance would stay the same.

Okay, and then, maybe just lastly, production targets for '04 and '05?

For '04 we're-- excluding the VPP we're saying 6% to 8% growth.

I think at the last quarter we said if we would include the VPP, we would be in the 10% range.

Then for '05 we're saying now 15% to 20%, where before we said 10% to 15%.

All right, great.

Thanks a lot, guys.

Thanks, Kerry.

Your next question comes from Ashar Khan of Foresight Investments.

Good morning.

Just wanted to check, I guess you earlier used to mention the 5% to 7% growth rate going forward, and now I guess the mention 5% for this year and 5% for next year.

Is there now a reduction in the growth rate as you look forward?

I guess in resonance to some of the change in strategy from the NP side, or how should we look at it?

Well, I don't think that we really are changing the range of our growth, at least for 2004 and 2005.

We're giving very early guidance in terms of 2005.

We'd said approximately 5%, Depending on factors that could be 5% to 7%.

But in terms of any change to the long-term growth rate as a result of our allowing our Devil's Tower and Front Runner excess cash flow to be used in other investments, that would probably be much further down the line because that -- our earnings don't really decline there until after 2010.

But perhaps after that point you'll maybe have a slightly lower range from 4% to 6%.

I don't know many companies that can see that far out, but I don't think it's going to be a huge difference in the range.

Okay.

And I don't know, can you just share with us, what is the hedged price right now on the gas side for '04 and '05 on the hedged portion?

I think we have a schedule that will be on the website, and so what we're trying to do is force everybody to look at the website and keep the numbers out of these discussions as much as possible.

Okay.

If you would please be patient and after this call, it will be on the website.

Okay.

I appreciate it.

Thank you.

Your next question comes from Steve Fleischmann of Merrill Lynch.

Hey, Steve.

Hi, guys.

Couple of questions.

On the factors that you noted for the 2004 guidance, do you have any kind of numbers to put against those?

Yes.

They will be on the website.

Those as well?

And just maybe related to that question as well, there was no mention of an impact of the telecom change.

Yeah, that's an asset held for sale, and, therefore, we have not included any forecast for operating earnings because that would be below the line.

Okay.

But isn't that a kind of positive 2004 versus 2003 to earnings?

No, we restated much of the year in 2004. 2003, excuse me.

Okay.

So within the 2003 operating numbers, it excludes the telecom losses?

Not all of it.

All but I think about $3 million of it.

Secondly, the other thing you don't mention is the impact of the merchant plants that are coming on line.

Is that just kind of in the noise, or is that --

Yeah, I think the correct answer is that it's not a big driver in terms of year-over-year. (inaudible) It's about 50% at this point.

If we could hedge the rest of it we would maybe cite that as a year-over-year item, but right at this point it just kind of is a push.

And then the -- I know this will be on the website, but this lower transmission revenue, is that a sizable enough number that it's worth explaining better?

Paul Koonce, who heads that area, will cover that.

Yeah, this time last year we were planning to be in PJM 2004, and we had a transitional or revenue neutrality agreement with the companies that were joining PJM with those companies that were already in PJM.

When the legislature extended the time to join an RTO by one year, that settlement process fell apart.

You know, it is a number that we're focused on.

I don't -- okay, so it's $17 -- a little bit slightly less than that, but about $17 million.

Okay.

Thank you.

Thanks, Steve.

Your next question comes from Paul Patterson of Glen Rock Associates.

Good morning, Paul.

Good morning.

I wanted to ask you guys about the -- well, I guess it's going to be on the website, too, but could you tell me what the depreciation level was for 2003?

It will be on the website.

Okay.

Are we expecting any changes in depreciation or earnings schedule in 2004?

Not of any substance.

It's always something, but not of any significance.

Okay.

Okay, guys.

Well, I'll look forward to looking at the website.

Thanks, Paul.

Our next question comes from Terron Miller of UBS.

How are you today?

Good.

Hope you are.

I'm fine.

Thank you.

Could you give us -- I missed the numbers on cash flow that you cited.

That's the first question.

And the second question is, with reference to balancing growth and continuing to de-lever the balance sheet, do you have some targets that you'd like to share with us for, let's say, the end of '05 on where you think you could get the balance sheet?

Well, we don't have any hard targets, but we think the natural flow of that will probably be between 100 and 200 basis points decline, just from a converts and earnings and et cetera, excess cash flow pay down, and maybe up to -- Scott Hetzer was telling me -- why don't I let Scott answer it.

He's better equipped than I am.

Yeah, there are a number of items that take place in 2004 that will help with the leverage.

Number one, we have the mandatory converts, converting to equity in November.

We've got the fairless lease financing, where we're currently carrying that as debt since we financed on our own and we'll get in $750 million from that financing in '04.

We have additional $160 million of drip and then pre-cash flow, and all that drives us to a improve leverage by some 300 basis points or more for this year, and then for next year we don't have any specific numbers that we're ready to talk about at this point, but we would certainly expect to continue to see some improvement.

And I believe we also have a convert in 2006.

Correct.

Which is already in the plan.

So we know that that de-levering will continue to occur, but we don't have a hard target that we're trying to meet but we certainly are going in the right direction.

In terms of cash flow, we actually, on a GAAP basis, have about $2.4 billion, and because of some non-recurring cash uses that we did not anticipate, it would have been approximately $3 billion, which was about what we expected it to be.

And those non-recurring cash items were for expenses for Hurricane Isabel.

We bought out a note contract at Gordonsville, made about $169 million discretionary payment to take advantage of a tax situation through our pension.

We also had a deferred fuel balance.

And for next year, we expect our cash flow to be $3.3 billion to $3.5 billion dollars.

Thank you.

Your next question comes from Jeff Gildersleeve of Millennium Partners.

Hey, Jeff.

Good morning.

How are you?

Good morning.

Most of my questions were answered.

However, you made some general comments about not chasing growth in the Deepwater areas and looking onshore at some more conservative investments.

Is this, I mean, should we characterize this as a shift or is this consistent -- is this consistent with your strategy as before?

I think it's a clarification of our thinking, because it was a question in the market as to whether we were going to kind of get used to the drug that is fast cash flow and fast decline, and, you know, you have to -- if you really want to chase that, it's kind of like a drug addict, continues to have to take more and more of it to be high.

We had never really had to address this problem before.

It's a good problem to have.

It's a blip in our normal flow.

And Duane Radtke and his people, ever since Duane has gotten there, has been reshaping the portfolio to be more long-lived reserve to increase the average life of our wealth, so it's really a clarification to the market that for reassurance to the market that we are not going to be doubling up our bets in the Deepwater.

At the same time, you know, we are really happy that we've got these discoveries, along with the natural gas discovery at Amazon, so I hope that that clarifies it.

We just -- I think some people were worried about us being on a fast treadmill and having to spend more and more amounts of capital in order to try to sign as prolific programs as we've found so far.

Great.

Thank you.

And I know in the past you've said, from an acquisition standpoint, you will look at everything.

You mentioned mostly assets onshore, gas pipelines, power plants.

Would -- if the right fit came along, would you still be interested in a whole company versus an asset, or how do you feel about that?

Oh, hell yes.

There we go.

But it has to be accretive.

It has to be immediately accretive.

We wouldn't dilute earnings to acquire anybody.

Okay.

One last little question.

The Section 12 tax credits.

Section 29, I believe

I'm sorry, Section 29.

Those went away.

I think their energy bill stalled out.

It may come up again.

Can you remind us how much that contributed to earnings in prior years, and also if you have any sense of where their energy bill is going now?

We had about $35 million in '02.

Obviously nothing in '03, because they had expired at the end of '02.

The earlier numbers we were looking at for an annual pickup were around $17 million under the legislation that almost got passed, and we certainly are hopeful that Congress will enact that.

There wasn't much contention about the Section 29 provision of the energy bill, as you might recall.

It was tripped up by some other factors, and I think that this administration is trying hard to get that energy bill back on track early in this year.

Thank you.

Your next question comes from Jonathan Mogul of H.M.

Energy Capital.

Hi, guys.

Just a quick question.

You mentioned briefly that for '04 and '05 you were assuming $5 gas prices.

Would you have an equivalent on the oil side?

About $25 would be that equivalent.

And that's for both '04 and '05?

Yes.

Okay.

Thanks a lot.

Appreciate it.

Your next question comes from David Chancellor of Janney, Montgomery, & Scott.

Good morning.

On your Schedule 3, I don't know whether this is on the website, but under Corporate and Other, you're showing an improvement in expenses and share dilution of 5 cents.

I was wondering if you could give us a little bit of color on that.

Is that mostly Six Sigma?

Well, the share dilution on the expense side is a positive, so a lot of it is just share dilution driving us, and then some Six Sigma and just some efficiencies and things like that.

Nothing really sticks out, it's a bunch of little things that add up.

What was the effect-- do you have a number on the effect of Six Sigma overall for the corporation?

Six Sigma this year was over $60 million pre-tax and savings and revenue increases, which I think brings us up to over $170 million in the last two years, so we had a goal of about $40 to $45 million and we just blew right through it.

In addition to that we're optimistic that we've got over 500 project that have been identified that we've got to get to, and we are real excited about Six Sigma.

Two years in a row we've blown away our expectations, and I think there's a lot of forward momentum on that program and a continuing ramp-up in acceptance by employees in all areas of the company.

Is this something that's changing your outlook for next year as well?

Are you ramping up your expectations for Six Sigma in terms of the actual number?

No, we're actually being kind of conservative.

I think we're looking at the $40 to $50 million side of things rather than the $75 (million).

I don't think we're trying to say that we're negative on it, but we've always had the theory that, as time goes on, it's tougher to find things than when you start, because there's so much more of a population out there.

We haven't had a big company acquisition since the beginning of 2000, so we don't have as many expanding opportunities as a result of having more consolidated that merger, but I wouldn't be surprised that we go over that amount.

We just try not to be overly optimistic on it.

Great.

Thanks.

Your next question comes from Michael Goldenberg of Loomis Management.

Good morning, guys.

Hey, Mike.

Hey, just wanted to see, I know previously you've given guidance as to what your average hedging prices for E&P were.

Would you have these numbers for us today?

Yes, they will be on the website today.

Oh, okay.

Great.

I think that's it.

Good luck, guys.

Thanks, Mike.

Your next question comes from Sven Delpazzo of JS Harold.

Good morning.

This question is directed to Duane Radtke.

I was interested in normalizing the operating costs for the fees paid to Williams.

Would you be able to give me any indication of how the fee -- what the fee structure is and how much it is?

We can't divulge the exact costs under our agreements with Williams, and I can tell you this, the pipeline and the spar together cost over $400 million, and our fees will not pay for all of that.

In other words, it's intended to be a regional hub at some time for Williams, but obviously if you do some calculations, that 5 cents across there you get some idea of what the gross fees are.

Okay.

All right.

Thank you.

Your next question is a follow-up from Kerry Stevens of Morgan Stanley.

Hi.

I just wanted to ask about the Kewaunee issuance.

What's the thinking on issuing equity for Kewaunee?

We put that for modeling purposes, about a $200 million acquisition, so we include in our share count the equivalent of about $100 million.

As to whether or not we actually make any market issuance for that, that's still debatable, but we wanted to make sure that if other things hadn't happened and we were still concerned about balance sheet at that time, that we wouldn't omit that.

It's quite possible in something that small that we wouldn't issue specific equity, but we have it in the plan anyway.

Okay.

And then lastly, do you know how much the clearing house contributed in '03?

$64 million.

$64 million.

Great.

Thanks again.

Your next question comes from Daniele Seitz of Maxcor Financial.

Hi. (inaudible) You provided the guidance for the first quarter.

Were there any assumptions as to normal weather or anything for the 130 to 140?

Are you referring to the first quarter?

First quarter, yes.

Yeah, first quarter the drivers of that are normal weather.

We had about a $33 million help in first quarter of '02, so you would subtract that, and then Millstone's going to add about $17 million versus the prior year.

And then as you will recall, Dominion Energy Clearing House in the first quarter made $90 million, and that was -- there was a ten sigma move in gas prices, so to be conservative, we're actually pulling $50 million.

We're assuming they're not going to make $90 million in the first quarter so we have reduced that $50 million.

We have restructured some note contracts, and for the full year that helps earnings about $45 million, but for the first quarter it's about $12 million.

And just a myriad of other factors helps about $20 million.

It's like, you know, Cove Point, Six Sigma, growth, et cetera.

So that's kind of how you -- we'll have that 326 million shares.

Okay.

Yes, right.

I just was wondering, because it seems that the weather was a little bit more extreme in the northeast, and I was just wondering if that was accounted for in your numbers.

We're using normal weather, and we hope we have better -- more heating degree days.

We wish we were the utility in Boston for the last few weeks.

The other question I had was that you mentioned $5 price assumption, and that compares for, in '03, to what number?

I believe we used -- the actual number was $5.39, but I believe when we started last year we were using something like $4.50 for spot gas and, you know, so what we were using $5 for, Daniele, is only for unhedged gas.

Right, right, I heard, yes, right, okay.

That makes sense.

Thank you so much.

Thank you.

Your next question comes from Paul Ridzon of McDonald Investments.

Hey, Paul.

How are you?

Good.

Question, the Section 29 tax credits, is that coal bed methane or what's that related to that could come back with favorable energy legislation?

Coal bed methane is in that group.

I believe there are also other tight sand formations that would qualify for Section 29.

Back to M&A, I guess I can assume from the comments, I'm only going to be cutting you one check a month for awhile?

Yeah, I think so.

I would say definitely so, unless you should be just a nice guy and want to pay us bi-monthly, then we'll take two.

That's only a rumor.

We have had no conversations, and, you know, we think there's probably a takeover premium in that stock now already, and the numbers don't work at any premium at all, so, you know, things happen, but we haven't had any kind of indication.

Do the numbers not work from an immediate accretion standpoint, or if you look out at '06-type numbers with cash flow?

We don't like to get into our financial models, but obviously the biggest game in any merger where there's stock involved is the relative PE, and I think if you take a look at that particular company's PE, it's quite above what we consider to be its prospect or its path, so in relation to ours it's an outgrowth rate and our recent past as well as our future, we just, you know, we're on the odd side of a PE ratio that we can't explain to you.

Fair enough.

Thank you very much.

Your next question comes from Paul Cheng of Lehman Brothers.

Hey, Paul.

Hey, Tom, how are you doing?

I just thought I'd follow up.

You commented on the E&P, the cash flow, the $1.8 to $2.6 billion.

That's free cash flow through 2010 beginning in 2005 from Devil's Tower and Front Runner.

Can you talk about what assumptions are behind that?

Well, basically what we have on the low end would be production of our estimate of proven and possible reserves, and we would use our hedge prices to the extent we've hedged, and we'd use the current market strip for the remainder.

The upper bound of that is production from Devil's Tower, adjacent blocks, and Front Runner on all three points of proven probable and possible, and we would be using the hedge prices to the extent we know them on that production, and we would also be using a flat pricing of about $4.50 per mcf of gas, and I believe $24.50 for oil.

And then on Millstone, I'm sorry, on Millstone, the impact for the fourth quarter, that 18 cents, does that include any potential gain that you got from the decommissioning trust?

I'm not sure that we had any on the Millstone trust specifically.

I'm sorry, I can't answer that question.

Okay.

Thank you.

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

I will now turn the call back over to Mr. Chewning for any closing remarks.

Again, we thank you very much for being with us this morning and we look forward to a cold winter and talking to you again in April.

Good morning.

This concludes today's conference call.

You may disconnect at this time.