道明尼資源 (D) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Dominion Resources, Inc., first quarter 2004 earnings conference call.

At this time all participants have been placed on a listen-only mode and the floor will be opened for question following the presentation.

It is now my pleasure to turn the floor over to your host, Chief Financial Officer Mr. Tom Chewning.

Sir, you may begin.

Thank you, Holly [ph].

Good morning and thank you for joining us for our first quarter 2004 earnings conference call.

Joining me this morning are Tom Capps, our CEO;

Tom Farrell, our COO; and virtually all members of Dominion's management team.

Continuing to develop the format we began on our last earnings conference call, today we will present the usual cautionary language up front and then 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 supplemental schedules that were added to our website concurrent with our earnings announcement.

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

Hopefully, this approach will allow more time for your questions and comments.

Now for the obligatory cautionary language.

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 filings, including our most recent annual report on Form 10-K and quarterly report on Form 10-Q for a 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 measure.

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

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

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 annual 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 first quarter 2004 results, refresh our guidance for 2004 and 2005 earnings and also give our growth expectations for the period after 2005.

Additionally, Paul Koonce will provide a review of Dominion Energy Clearinghouse's first quarter and their forecast for the remainder of 2004 and Duane Radtke will give us an update on Devils Tower and Front Runner.

Now for earnings.

Dominion posted operating earnings of $1.37 per share in the first quarter of 2004 compared to $1.53 per share earnings in the first quarter last year.

On a GAAP basis, we reported net income of $1.36 per share in the first quarter of 2004 compared to net income of $1.64 per share in the first quarter of 2003.

We achieved our first quarter results in spite of pressure on several areas of our business.

While we did benefit by 4 cents per share as a result of colder-than-normal weather, it was more than offset by a negative 6 cents per share mark-to-market impact of our corporate hedge on future 2004 natural gas production.

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

Adjusting for those two items, we would have produced $1.39 per share in operating earnings, at the upper end of our first quarter guidance.

Our earnings guidance always assumes normal weather and no mark-to-market impact from our corporate hedge.

And this during a quarter in which Dominion was not isolated from the impact of dampened volatility in the wholesale energy sector, as reflected in the clearinghouse's results.

You might recall a ten standard deviation in the price of natural gas during the first quarter of 2003 provided opportunity for the clearinghouse to capture substantial income.

As you've seen on our variance reconciliation, we had 32 cents per share less income from our clearinghouse than we earned in the first quarter of 2003.

Paul Koonce will cover this in detail a little later on.

We had an excellent quarter in nearly all of our operations, which enabled us to compensate not only for the lower contribution from the clearinghouse but also for a comparatively mild winter in 2004.

More importantly, cash generation was excellent.

Our preliminary measure of first quarter operating cash flow is $969m.

That is almost $100m greater than the first quarter of 2003, when we had one of our coldest winters in recent memory.

And our key credit metrics remain solid.

For the 12 months ended March 31st, our adjusted funds from operations covered our interest expense by 4.1 times, compared to 4.0 times at the end of last year.

Our adjusted ratio of debt to total capitalization improved .1% and remains below 57% and available liquidity, including cash and cash equivalents of $256m, stood at $753m at the end of the quarter.

It's noteworthy that our liquidity position was increased by $565m that we received last week when the first tranche for the permanent financing of the Fairless Works development closed.

This cash was promptly used to reduce our commercial paper balance.

The first quarter included some other noteworthy developments.

We announced a plan to nearly double the capacity at Cove Point in order to move more natural gas into high-demand mid-Atlantic and Northeast markets.

The terminal expansion projects includes associated pipeline projects and should be completed late in 2008.

In addition, Dominion has signed a letter of intent with a subsidiary of Statoil ASA to contract for the new capacity.

We've made further progress to complete the divestiture of our telecom business, as well as the Australian pipeline assets.

And we agreed to purchase 138-megawatt power station in Mecklenburg County, Virginia, from which power is currently sold to Dominion under a non-utility purchased power contract.

This purchase is consistent with Dominion's continued progress to mitigate its exposure to above-market power purchase contracts.

Our discussion of controlling power generation costs may be the perfect segue for the next topic.

On April 14th, Virginia Governor Mark Warner signed into law legislation which we believe is a positive event for Dominion's future earnings growth potential.

The legislation, designated as Senate Bill 651, provides for, among other things, the extension of the cap rate period in our Virginia service territory.

Base rates are extended through December 31st, 2010.

It also maintains our current fuel recovery factor until July 1st, 2007, and allows for a one-time adjustment to the fuel factor in 2007 for expected fuel costs during the period from July 1, 2007, to December 31, 2010.

Although the risk of fuel movement shifts to our shareholders, we believe we have the appropriate assets and skill sets to create more cash flow, earnings and value during the next three-plus years than we would have-- than would have been possible under the traditional fuel recovery mechanism.

The company will recognize a $23m charge to earnings in the second quarter for fuel expenses no longer recoverable under the new law.

This will be an operating expense rather than a non-operating expense.

There will be an initial cost in 2004 to Dominion's shareholders as a result of the fixing of the fuel recovery rate.

Accordingly, we are lowering our 2004 operating earnings per share guidance to $4.75 to $4.90 from the $4.80 to $5 per share prior to this time.

This is a small price to pay for the extension of our base rate and the opportunity to improve net income in future years.

I and other members of Dominion management look forward to discussing the impacts on future earnings of Senate Bill 651 in our May 6th meeting at The Plaza in New York.

Today we are giving operating earnings guidance for 2005 of $5.10 to $5.20 per share and projecting an annual earnings growth of 5% to 7% for 2006, 2007 and 2008.

Based on a number of positive factors we fully expect that realized operating earnings will be at the top end of this range.

In this regard, we are more bullish than we were at our previous earnings call.

Not much has changed since our last earnings conference call as it pertains to our hedging activity.

Of our estimated equivalent gas production over the remaining nine months of the year, approximately 85% is hedged.

Additionally, about 60% and 40% of expected 2005 and 2006 equivalent production is hedged.

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

Further details regarding our hedging positions on natural gas, oil and generation capacity are available on our website.

At this point, I'd like to turn the call over to Paul Koonce to review Dominion Energy Clearinghouse's first quarter performance and expectations for the remainder of 2004.

Paul?

Thanks, Tom.

Excluding the corporate hedge mark-to-market loss, the clearinghouse experienced a loss of about $5m for the first quarter this year, compared to positive earnings of $93m in the first quarter last year.

While we were very disappointed with our lackluster first quarter results -- we could have performed better -- I will note that most of our variance was due to a change in market conditions this year compared to last, rather than a change in trading strategy or execution.

Three activities led to this quarter's results.

The biggest contributor to the year-over-year decline was relative performance of option positions between the two years.

DEC was long volatility both years and a 10 sigma gas price move in the first quarter of 2003 contributed about $50m in after-tax earnings.

Conversely, this year's options positions lost value to abnormally low volatility.

This extreme swing in year-over-year volatility contributed to the vast majority of year-over-year negative earnings variance.

Another contributor to the year-over-year variance was relative performance of the power trading book.

Both years during the first quarter, DEC was long winter power.

In 2003, that strategy paid off.

In 2004, the same strategy experienced a loss.

Finally, the results were hurt by mark-to-market losses related to forward market positions.

During the first quarter, clearinghouse established forward positions that are based on our fundamental knowledge of the market.

The good news is that as of today, two-thirds of this non-cash loss has already reversed itself, as expected, and so for the second quarter these positions are shaping up nicely.

One last comment about the first quarter this year compared to last.

The year-to-year results help illustrate the conservative nature of the risk/reward strategy we employ at the clearinghouse.

Last year when everything went our way, clearinghouse earned $93m.

This year, with no volatility, the clearinghouse experienced a relatively small loss.

While we would much prefer last year's results versus this year's results, we do pay special attention to the risk/reward profile of the clearinghouse.

For the full year results, DEC is positioned to repeat the year-end estimates of about $65m.

Notable drivers to the performance for the remainder of this year include very strong expected results from our physical coal business, which is an accrual accounting space, improved earnings from producer services activities with our activities in Calgary and the Houston offices, a partial recovery of our first quarter losses in the forward positions that we discussed earlier and reasonable results from the remaining business lines -- power, gas, oil and emissions.

While we are clearly disappointed with the net income results in the first quarter, we remain confident in DEC's ability to deliver solid full-year financial results and to add to the overall enterprise in other ways core to the success of Dominion's integrated strategy, including hedging and asset optimization.

Thanks, Paul.

Now I'd like to turn the call over Duane Radtke, who will provide what I expect is a much-anticipated update on our Devils Tower and Front Runner projects in the Gulf of Mexico.

Duane?

Thanks, Tom.

First, on Devils Towers, 75% ownership by Dominion and operated by Dominion, we've made a great deal of progress since our last conference call.

First, the pipelines are completed and we expect that we can accept oil and gas within one week and second, we're on the final stages of completing our first well.

Although our official date is still mid-May, let's just say we're very happy on the status of the schedule.

Second, on Front Runner, which is 37.5% owned by Dominion by operated by Murphy, we're still on schedule for early fourth quarter.

Thanks, Duane.

That concludes our prepared remarks.

We ask you to understand that many of the schedules that were added to our website this morning are accounting-oriented.

Detailed analyses of financial statements are underway as we prepare to file our Form 10-Q.

We request your patience if we defer certain questions relating to matters that will ultimately be addressed in sections of the 10-Q, including results of operations, sources and uses of cash or accounting notes to financial statements.

Also, we would request your indulgence until our meeting on May 6 regarding specific financial and operating impacts of Virginia Senate Bill 651.

We believe the importance, complexity and implications of this legislation require a more thorough discussion than is possible on an earnings call.

Holly [ph], now we'll open the line for questions.

Thank you, sir.

The floor is now open for questions.

If you do have a question, please press star-one on your Touch-Tone phone.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask that while you pose your question that you please pick up the handset to provide optimum sound quality.

Once again, that is star-one to ask a question.

Our first question is coming from Dan Eggers of Credit Suisse First Boston.

Hey, good morning.

Good morning, Dan.

Hey, since we got Duane on the line, let me throw a couple at him first.

Duane, I guess number one, if you could give us a reminder of what we should be expecting for volume additions and kind of progression as the two big fields come on this year that would be helpful?

And if somebody could also respond to what the hedging program is for those volumes and the expectations there as we cover this year?

Sure.

On the volume side, we have said consistently we would expect about 60 BCFE equivalent during the first 12 months of production.

We actually will complete two wells to begin with and then install the remaining six risers and do the balance of the completions probably beginning in-- sometime in the middle of the second quarter.

That takes some of the risk out of loop currents later on in the year.

From a hedging standpoint, we're-- on an oil side, we're essentially fully hedged in '04--

Great, and then--

--if that will help you and on Front Runner I think we've said 40 BCFE equivalent for the first 12 months of production, also.

OK, good.

Thank you.

And the other question on that end, are you seeing any upward pressure on your F&D costs coming into this year with greater drilling activity in the market in general and upward pressure on service prices?

Right.

We're still-- we're seeing cost pressure, obviously, on the drilling rigs and all the equipment.

In the Gulf of Mexico, we're not seeing that, but onshore we are, but we're still staying in our guidance of $1.40 to $1.50.

That's the way we build our models and we would expect this year to fall in that range.

Great.

And I guess one more.

On the cap ex for E&P, how much of that money is going into the onshore versus offshore this year?

I believe it's around 40% would go in the offshore, which is fairly consistent to what we normally do, 35% to 40%, but I would point out that the vast majority of that goes into development and exploitation projects.

Only about 10% of our capital goes into exploration, mostly in the deep water.

Great.

Thank you very much.

Thank you.

Our next question is coming from Carrie Stevens of Morgan Stanley.

Good morning, Carrie.

Hi, good morning.

I noted that you said that you feel more comfortable with the top end of the range, which was a change, and more bullish than your previous call.

I just wanted to confirm, was that the range for '04 or for '05 that you feel more comfortable?

Or both?

We're more comfortable with both.

Obviously, we're closer to the year for '04 after getting through the first quarter and I think that, obviously, everything worked well.

The disappointment we had was we didn't make the money in the clearinghouse we expected, but we think that side of our business will fare well the rest of the year and really wind up where we expect it to be for the year, just in a different format.

A lot of very positive things that are offsetting the initial cost, which we can't really recover, from the amount of fuel that we paid for that we couldn't recover from January 1st to April 14th, so that's the reason we're lowering the guidance, but we're very comfortable with the guidance and more confident now.

We obviously would be, because we have a lot more information to on in terms of volumes produced for gas, prices received, expense control, et cetera.

As far as 2005 is concerned, the same thing is true.

We're a little bit closer than we were the last time we got together in terms of knowing detail.

There are a number of operational things that we have accomplished that give us more confidence in, I guess, that number and at least we feel more optimistic that growth is going to be there.

We tried, Carrie, to not just talk about 5% to 7% next year.

Since we lowered guidance for this year, we thought we'd give you a bogey of what we really feel that the range will be, rather than a percentage increase.

That's great.

And then-- but going forward, '06, '07 and '08 and remember in my own words before that it's really difficult to tell six weeks ahead sometimes, much less a few years, but we've been over a lot of different factors and we're going to talk more about that on May the 6th, but there are a lot of things now about this legislation that help us plan differently and operate differently than we did before we knew we would have both rate cap extension and also the fuel responsibility.

And we're real excited about that and we-- as a result of a lot of factors, not just the fuel situation, we feel a lot more positive and actually we feel pretty bullish about the upper end of the 5% to 7% range in '06, '07 and '08.

Great.

Just two quick questions.

I was wondering, since you reduced your EPS guidance, has there been any change to your cash flow forecast for-- you know, I think it was $100m to $300m of free cash flow for the year?

We haven't yet developed a new cash flow change.

I imagine it would be some, but not significant.

OK.

And then just, I noted in your write-up that you mentioned higher DD&A cost at the E&P business and I just wondered if you could just go over-- the $1.40 to $1.50 guidance that you just gave, does that include the DD&A increase that you're seeing there or how should I think about that?

That does include that increase.

OK, great.

Thanks so much.

Thank you.

Our next question is coming from Greg Gordon of Smith Barney.

Hey, Greg.

Thanks.

So I just want to make sure I understand.

The reduction in guidance for this year, I mean, that, simply put, is the impact of the $23m that you're going to have to eat in the second quarter?

There are lots of puts and takes, but if I had to isolate it, your conclusion would be correct.

We wouldn't be lowering guidance today had we been operating under-- from the beginning of the year as if we had this fuel freeze.

We didn't know about it until the legislature took it up and until it was discussed and it became part of a legislative act.

So we built up a regulatory receivable for recapturing fuel that we cannot recapture and we've made some adjustments.

There are a lot of puts and takes, but if we hadn't had that, we would have reaffirmed our $4.80 to $5 range and, quite frankly, would have felt pretty positive about the upper end of it.

Thanks.

And then I know I'll wait for the dirt-- the details of the-- when you come on May 5th, but implicit in that is the assumption that for the remainder of the year you feel that your ongoing operating costs will be sort of at or better than the break point in the legislation, from a generation perspective?

I won't-- we're going to wait for the, as you call it, the dirt and whatever it is, on the 6th.

We actually don't call it dirt.

We think it's pretty good news.

What we want to cover with you is the net impact of that and we'll kind of show you how we're going to operate and we'll also talk about some other aspects of the business that kind of lead us to a net position of reducing our earnings.

So there's some positive factors outside of the fuel and there's some positive work on the fuel situation that you'll hear on May the 6th.

Right.

I just want to be comfortable from a very high level perspective that there's no more sort of near-term negative impacts that you have to incur in order to get to the point where you start to receive the potential benefits, that the 7 cents you incurred in the first quarter is the lion's share of that.

We will ask your indulgence to wait until May the 6th and then we'll let you make your determination of--

All right.

I won't pick on your any more.

Thanks.

Thanks, Greg.

Thank you.

Our next question is coming from Paul Patterson of Glenrock Associates.

Hi, good morning.

Hey, Paul.

It sounds like a couple of my questions are probably going to have to wait until May, so-- May 6th, so let me ask you a few other ones.

Can you give us an idea about what depreciation was, quarter-over-quarter?

Paul, those are on the schedules that are out on the website.

They were posted around 8 o'clock this morning.

OK.

I'll have to find them.

Can you also just elaborate a little bit more on the cash flow that improved by $100m?

Was that changes in working capital or--?

Working capital really wasn't the driver.

It was just better generation of cash by our operations.

OK.

Although earnings were pretty much kind of flattish, right?

Yeah.

Yeah.

I'd say so.

You know, the cash--

Is there any particular part of the business, I guess, or is there anything you can point to or--?

Paul, This is Scott Hetzer.

The increase in cash flow from operations was $87m and about $50m of that came from higher cash income and then about $30m-some of that, $36m or so, from change in working capital.

OK.

Thanks a lot, guys.

Thank you.

Our next question is coming from Steve Fleishman of Merrill Lynch.

Hi, Steve.

Hi, gentlemen.

I actually wanted to go to the quarter-to-quarter variance page and maybe, first on Duane at E&P, could you explain the-- I guess the 9 cent reduction in O&M expense?

What's driving that?

Sure, Steve.

Yeah, any other questions, or just that--

Well, and I guess on the reduction in production, is that all related to the VPP?

Right.

Right.

Or is it something else?

No.

First, on the production side, it is related to the VPP.

If we would have basically exclude the VPP, we'd by up almost about 4 Bs, so that's all related to that.

We had a really good quarter from a producing standpoint.

OK.

On the op ex standpoint, when you look at the quarter-to-quarter, there were some things back in the first quarter of '03 that were one-time expenses, some bad debt expense and some legal accruals that we went to and then the other thing, you know, in our O&M line, that's where the FAS 133 positives and negatives flow through.

And we had a very large positive gain in the first quarter, which will have to be reversed out through '06, so it's a timing-- timing issue on some of that.

What we like to look at is the lifting cost and if you'll remember, last year we averaged about 83 cents and we're at 88 cents in the first quarter, which is right in the middle of our guidance and 3 cents of that is due to higher oil and gas prices and about a penny of it is the VPP and a penny is something else.

OK.

How much was the FAS 133 in the O&M?

What was the size of that?

Six cents out of the nine.

Six cents.

OK.

And, Tom, on the corporate and other line, where you show a 6 cent positive variance, quarter-to-quarter, I guess if you exclude the corporate hedge hurt this quarter, that would actually be a 12 cent variance, positive?

Well, yeah, we wouldn't put it there, but--

The corporate hedge, actually, is in Dominion Energy's results.

OK.

It's in Dominion Energy.

Yeah.

OK.

So then the benefit at corporate and other, is that just general expense cutting or is there anything else?

I mean, that's a decent improvement.

I'll let Steve Rogers answer that.

It's about a nickel of it is general expense cutting and a little bit of other income stuff that flows through corporate and other, but primarily it's expenses.

And then you've got a penny benefit from share dilution.

It goes the other way from-- dilutes the operating units but has a bigger denominator for expenses.

OK.

And then I guess my final question is on Dominion Capital.

There were some additional write-offs there this quarter.

What's the remaining value on the books of Dominion Capital and are you expecting any additional write-offs?

Well, I think we've got about $700m more in assets there, Steve.

I think in terms of assets-- I've got to be cautious in terms of you never know what things will be valued.

But I'll specifically feature the fact that we've already cleared out an awful lot of what we consider to be the troublesome parts of our portfolio and particularly when it relates to-- a lot of the charges have been for the acceleration of pre-payments in our former mortgage company and credit losses, Steve, in those-- what we call our residuals.

And we took a pretty aggressive stance this quarter in terms of changing our attitude towards both pre-payment speed and credit losses to reflect more of what had happened in 2003 and early 2004 versus the normal, historical five-year average.

So we feel like we've got a pretty good handle on that.

There is also another investment there that we wrote off and we consider its market value down.

I can't really and would never want to venture to peg what will happen in the future, but I think we're real comfortable that we've-- that things will decelerate in regards to the Dominion Capital portfolio in terms of impairment.

OK, great.

I look forward to May 6th.

Thanks.

Thank you.

So do we.

Thank you.

Our next question is coming from David Schanzer of Janney Montgomery Scott.

Good morning.

Hey, David.

I had, I think, most of my questions answered, but I did want to ask one other question and that had to do with Dominion Generation.

Do you guys actually have an availability factor, comparing the two quarters, for Millstone handy or can we get that offline?

Don't have it handy.

I would say, though, in general, the generation was up about 10% '04 to '03 at Millstone due to an unplanned outage in the first quarter of '03 of about 21 days.

That was Mark McGettrick who is the CEO of Dominion Generation.

OK, great.

Thank you.

Thank you.

Our next question is coming from Hugh Wynne of Sanford Bernstein.

Hey, Hugh.

Hi.

I have some accounting questions that maybe you can help me with.

The first is, I wonder if you might explain why it is that the corporate hedge, if it's designed to hedge future cash flows, is resulting in an impact on earnings rather than other comprehensive income?

Well, the way the accounting standards and procedures work -- and Steve Rogers is trying to stop me, but since he's in accounting, he'll generally give you the opposed answer.

The standard is, that you have to know at the time that you have the hedge put on that there is a 70% or greater probability that you know exactly where the gas will come from, in what month and what basin.

And although we are certain at that time that we are not over-hedging, we cannot put it in accrual space.

It has to be in mark-to-market space.

So we know a couple things.

Number one, once you have it in mark-to-market space, even though as you get closer you then find that you know where those molecules are coming from and in what month, you cannot move that to accrual space.

So that's why it remains in mark-to-market space.

The second thing we know, that as production is there and these contracts settle, these hedges settle, that that reverses during the year.

I don't necessarily think it-- you can't argue with FASB about mark-to-market accounting.

We don't really think that it makes all the common sense in the world, but that's the reason we have to do it.

I hope, Hugh, that answers your question.

Yeah, no, I think that makes sense.

The second accounting question I wanted to raise with you was simply why is this $23m after-tax charge to earnings falling in the second quarter as opposed to being taken now?

Are you referring to the deferred fuel?

Yep.

The reason is that the bill was signed subsequent to March 31st and there's very specific guidance regarding new legislation that tells you when you need to record impairments and that guidance directed us to recording it in the second quarter.

OK, great.

And then my last question, if I could, is just could you please repeat for me the impact of FAS 133 on the O&M improvement at E&P?

Repeat the reason or the amount?

The reason.

OK.

Duane, do you want to handle that one?

Sure.

We're required, under FAS 133, to reflect any gains or losses around our hedging transaction.

There's really three components to it that we have to evaluate at the end of each quarter.

One is the ineffectiveness of the hedges, one is the value of the option premiums because we have some options that are around, particularly the oil, and then any de-designation of the hedges.

And, you know, the market conditions change, obviously, on a quarter-to-quarter basis and it's not unusual -- and this has to be reflected in mark-to-market space -- and, again, these gains will reverse over the next 33 months, because that's the timing period of these hedges.

And it's not unusual for us to have that.

Again, last year our O&M appeared to be high because we had the negative, the opposite.

We actually a debit against it rather than a credit.

OK.

So the O&M improved this quarter because of the positive effect of mark-to-market of your hedges?

That's exactly right.

OK.

And, again, that's why we like to look at the lifting cost, which would be around 88 cents for the first quarter.

Thank you very much.

Thanks, Hugh.

Thank you.

Our next question is coming from Michael Goldenberg [ph] of Borman Fields [ph].

Yes, Michael.

Hey, good morning, guys.

I just wanted to ask you on the clearinghouse, how much money do you generally expect to make from the business in Q2, Q3 and Q4, I guess for the rest of '04?

I know you don't specifically give guidance for the clearinghouse, but just in terms of expectations

Yeah, we-- This is Paul Koonce.

We don't-- are really not prepared to give quarter-to-quarter guidance for the clearinghouse, just because we really can't tell you which quarters present themselves in terms of where the volatility will occur.

You know, obviously, summer is an important period for the clearinghouse, depending on how power prices behave and the other fuels and how they interact with each other and the options that flow from that for the clearinghouse to source from different areas.

But we look at it, really, on a full-year basis and we can say with some confidence, over the full year period, that, you know, what we have already committed to in the books in accrual space, plus what we expect to occur over the balance of the year in terms of volatility, whether it occurs in the second quarter, third quarter or fourth, that we believe year-over-year, we'll come back flat to last year's earnings, which were about $65m.

Sixty-five million?

But to try to segment it into quarter-to-quarter, it's just too difficult.

No, that's fine.

But that's about the annual run rate that you generally expect the clearinghouse to produce, about $60m to $70m?

That's correct.

And really, I mean, last year was a good example of how it changes.

Last year the earnings really fell in the first quarter because of some defensive things we were doing to preserve that value.

The balance of the year was pretty much flat.

This year we think that there is a setup for a reverse of that.

And my other question was on your generation unit.

With the fixed prices that you'll now be collecting in Virginia, how much BCFs do your gas plants, approximately, need per year for production and do you do any hedging for that or do you generally try to do the dirty hedging through E&P?

Gas output, in terms of generation, is about 5% of the megawatt hours produced and in terms of the hedging, I think we'll talk more about that at the May 6th meeting.

What is that 5%, just in terms of BCFs?

Do you have that number ready?

I have it in terms of megawatt hours.

It's about 4 million megawatt hours.

OK.

Thank you very much, gentlemen.

Thank you.

Our next question is coming from Ron Barone of UBS.

Good morning.

Could you give us an idea of the movement in the decommissioning trust during the quarter?

We don't have that information too granularly, but, Joe O'Hare, do you want to take a stab at what we can offer here?

Yeah, actually we do have some of that information.

I believe it was a positive $6m, after tax, in the first quarter of 2004 and that compares to a large loss in the first quarter of 2003, which I know you're familiar with, Ron.

Sorry, Ron, I misinterpreted your question.

Joe got the right answer.

I was thinking you were trying to take the value of our decommissioning trust rather than what we had to record in income and I know that's a special interest of yours.

OK.

Thank you.

One other question, at the risk of being shot down, can you give us an idea of or a preview of how you're going to manage the dynamics of commodity price risk, given the new legislation?

Will there be changes in the VAR, what variables will you be watching?

I think that's why we scheduled a full meeting on May the 6th and I'll give you-- I would rather give you the full answer on May the 6th.

Well, maybe not the full, but as much full as-- as much as we can do.

I can just tell you there's a whole group of people who now have the target of managing fuel and, for the first time, we're responsible for it in a non-pass-through way, so it allows us an awful lot of freedoms.

Along with the responsibility, it also allows us the freedom to operate physical assets and to do our financial assets and all in a very non-traditional way, so to speak, versus a regulated utility that passes through fuel.

So we will be showing you on May the 6th, Ron, a lot of examples of how our operations will change, how our contracting will change, et cetera.

Great.

Kind of thought I'd get shot down.

Look forward to seeing you in May.

Thank you.

I thought I was kind.

Thank you.

Our next question is coming from Paul Ridzon of Key McDonald.

Hey, Paul.

Good morning.

How are you?

Fine.

Devils Tower and Front Runner, is that output included in the 85% for 2004?

Yes.

All the hedging is included in our forecast of production for both those fields.

What sort of delay would it take on either one before you'd probably, well, be coming up short and having to go to spot to fulfill some obligations?

We--

Well, I mean, right now we're saying we're quite happy with the schedule.

I wouldn't want to say that we are going to be doing that.

We feel very comfortable with the production for this year.

We were cautious, you know, obviously, didn't want to open up unintentionally a hedge, so--

Right.

--we're not in any danger of that.

OK.

And secondly, your coal hedge, is that something you can talk about now for your electric needs or is that going to wait 'til May 6th?

That will wait until may 6th.

Great.

Thank you very much.

Thank you.

Our next question is coming from Ted Olshinsky [ph] of Scotia.

Yes.

Hi, good morning.

Hey, Ted.

The first question is, I was wondering if you could provide us with an update on your discussions with Standard & Poor's and, you know, what their current thinking is and whether or not they've laid out credit benchmarks for your company to meet in order to avoid being downgraded?

Scott Hetzer, our Treasurer, who really maintains that relationship on a regular basis, is going to answer that.

Sure.

Ted, they haven't changed the benchmarks.

We're aware of what they are for a BBB+ company with the risk profile that we have and we have our own internal targets which are about 50% on debt to cap and FFO to interest north of four times.

And for the quarter we were at just under 57%, as Tom Chewning reported, looking at debt to cap and we have a lot of improvement coming this year.

We have about 300 basis points improvement coming in our debt to total capital.

We finished the quarter at 4.1 times fully adjusted FFO to interest.

So we're at or certainly close to our target for that and looking at good favorable cash flow for the year.

As far as their position right now, they put out a brief note yesterday on the rate cap extension and you can refer to their website for that, but in general they said that it's favorable for credit quality, which we certainly agree with.

So--

OK--

--any further detail--

I'm sorry.

When do you expect that you'll be able to hit your target debt to capital ratio of 50%?

Well, we don't put out a specific timeframe for that, but we do have significant improvement this year and for next year, as well.

We have significant free cash flow for next year.

We also have a lot of hedges that are under water that are reflected in OCI right now that when they settle, that will unwind, as well, and between the two, we have a significant improvement.

So each year takes us a lot closer to that-- each year for '04 and '05 takes us a lot closer to that target.

We have a convertible security in November of this year that will-- that's a part of that 300 basis points.

In addition to what Scott said about 2005 cash flow, we also have a convert in 2006, so--

Yes.

Just to give you a little more color on why we expect a 300 basis point improvement in debt to cap this year, in addition to the mandatory convert, which automatically converts to equity in November, of $413m, we also closed on the Fairless permanent financing last week.

We took the first tranche down, $565m.

We take the second tranche down in August, which is another $225m.

Each of those will go to repay commercial paper and will improve leverage.

Now the rating agencies, now that that's going to be a leased facility, will make a debt imputation, but the amount that they impute back on as debt is substantially lower than the amount that we were carrying from building that plant.

So between those two things and the equity that we receive this year, which we budget at $160m from dividend reinvestment and customer stock purchase plan, the combination of those three items really gives us a great deal of comfort with where our debt to cap is going to be at the end of the year.

OK.

That was a great answer.

I appreciate all the detail.

I did have one other question regarding the trading and marketing operations.

It wasn't clear to me, there was, you know, obviously a fairly significant difference in performance at the clearinghouse operation.

It wasn't really clear to me whether or not that was all non-cash hedges that will reverse or whether just part of that was non-cash and part of it was cash.

So I was wondering if somebody could clear that up for me.

Sure.

This is Paul Koonce.

There were three components that I alluded to earlier.

One was the option positions that essentially, with low volatility, expired with no value.

So we were out the cash expense associated with the options.

The other piece was the power trading, where we had some modest length and because of decline in power prices, the cash settlement in those resulted in cash losses.

Now those two cash pieces were offset by what we call mid-month trading and other activities.

So the cash impact of the clearinghouse was plus or minus zero.

The clearinghouse reported about $5m negative net income, which is associated with the forward non-cash positions that I talked about and related to those positions, as we've said already, about two-thirds of that value has been recovered.

So on a cash basis, it was plus or minus break even, while the reported basis was about $5m negative net income.

OK.

That clears it up.

Thank you.

Thank you.

Our next question is coming from Theresa Ho [ph] of Salomon Brothers Asset Management.

Hey, Theresa.

Hi, good morning.

I just had one question on Front Runner.

If I'm not mistaken, I think you had indicated previously that the first 12 months production would be about BCFE as opposed to the 40 that you're saying now.

Are you adjusting the production levels and, if so, what is the driver behind that?

Theresa, this is Duane.

I'll go back and check, but I believe we've always said 40.

It's not been a change.

It's really a reflection that the Front Runner field is quite a bit larger than DT, so when you just take a look at projected decline rates on the individual wells, it just gives us more production in the first 12 months.

OK.

I had just 90 BCFE for both, so I wasn't sure if that was reflecting Devils Tower or Front Runner.

Devils Tower has always been around 60 for the first 12 calendar months and then 40 Bs on Front Runner.

OK.

Well, thank you.

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

Mr. Chewning, do you have any closing remarks?

Well, we do thank you for being with us this morning and we look forward very much to what we think will be an exciting and unique presentation on May the 6th.

I guess we're the first energy company to take on this risk in our traditional business and we want to show you how we're organized to do that and some of the exciting options we have.

And we'll also have all of Dominion's top management available and, although not a part of the program itself, which will be really related to the Senate bill, we will also answer questions at the end of that session that you might have on any part of our company, as well as give you an update, as you probably want, on Devils Tower and Front Runner.

Thank you very much.

See you on May the 6th. 'Bye-bye.

This concludes today's Dominion first quarter conference call.

You may now disconnect your lines and have a great day.