道明尼資源 (D) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to your Dominion Resources fourth- quarter 2004 earnings conference call.

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

Sir, the floor is yours.

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

Joining me this more are Tom Capps, our CEO, Tom Farrell, our COO and numerous members of Dominion's management team.

Today we will present the usual cautionary language up front, and then cover particular areas of interest related to our results, as well as a view going forward.

After our prepared remarks, we will respond to your questions and comments.

Concurrent with our earning announcements, we published several supplemental schedules to our Website.

We ask that you refer to those exhibits for certain historical quantitative results, as well as earnings guidance details.

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

Now, for the obligatory cautionary Language.

The earning 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 10K, and quarterly report on Form 10Q.

For a discussion of factors that may cause results results to differ from managements projection, forecasts, estimates and expectations.

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

Operating earnings is a non-GAAP measure.

We define operating earning as reported earnings or GAAP 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 earning's power.

We also use operating earning 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 where 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 Web site at www.dom.com/investors.

This morning I will summarize our fourth quarter and full 2004 operating results; detail certain items excluded from operating earning, discuss how our financial results compared to expectations, and describe the change in reporting operational results created by our clearing house restructuring.

Then Tom Farrell will provide an update on several items of significance, and in conclusion I will provide details of our first-quarter 2005 earnings guidance.

Dominion posted operating earning of $1.22 per share in the fourth quarter of 2004, as compared to 84 cents per share earned in the fourth quarter last year.

For the year, we posted operating earning of $4.61 per share in 2004; as compared to $4.55 per share for the full year 2003.

On a GAAP basis, we reported earnings of 67 cents per share in the fourth quarter of 2004, compared to a loss of 54 cents per share in the fourth quarter of 2003.

Also on a GAAP basis, we reported per share profit of $3.78 cents per share for the full year 2004 compared to profit of 1 dollar per share in 2003.

This information can be found on schedule one of our press release.

Details of the items excluded from operating earnings are included in schedules two and three of our earnings release and as mentioned earlier can also be found on our Website.

Two fourth- quarter items warrant discussion on this call.

In the fourth quarter, Dominion recorded $112 million after tax charge related to its interest in a 551-megawatt power towing agreement, with a combined cycle facility located in Batesville, Mississippi.

In connection with the company's announcement in December to exit the proprietary trading business, and in keeping with its stated strategy of focusing on activities within the main to main corridor, the company has decide to do divest its contractual interest in the facility, and expects to complete a transaction in the first quarter of 2005.

The charge reflects an updated valuation, based on our intent to complete a transaction in the first quarter.

And an estimate of the consideration that will be required by another party to assume our interest in this long-term contract.

Also in the fourth quarter, Dominion recorded a $64 million after-tax charge following the close of two nonutility generator acquisitions, resulting in an impairment of the power- purchase contract.

The purchase of the Elizabeth River and multi-trade will produce net after- tax savings of approximately $13 million in 2005.

And as demonstration of Dominion's commitment to mitigate above market contracts to purchase power.

The positive impact on 2005 earnings was included in guidance provided on our December 20 call.

The remaining items that net to a loss of $8 million are detailed in Schedule II of our earnings release.

In keeping with an approach we began last quarter, I will compare Dominion's fourth quarter and full year results to guidance.

Details of this reconciliation may be found in Schedule IV of our earnings release.

Dominion fell short of its fourth- quarter earning guidance of $1.29 to $1.36 per share due to warmer than normal weather, higher prices paid for Virginia fuel, lower proprietary trading income as a result of ending of this function earlier than projected, and failure to close the Kewani (ph) nuclear acquisition.

Our fourth quarter E. N. P. income netted to do that given in our quarterly guidance.

We experienced positive income variance of 6 cents per share from higher prices received for gas and oil sold.

However, lower production caused by a slower recovery of operations in the Gulf, following hurricane Ivan caused a 3 cents per share negative variance.

Additionally, Dominion was unable to recognize 3 cents per share of anticipated business interruption insurance revenue, due to the timing and processing of the fourth quarter claims.

Dominion's full year 2004 operating earnings of $4.61 per share compares to our expectations published on January 23, of 2004 of $4.80 to $5 per share.

The overriding facting for Dominion not achieving its original 2004 guidance is a 37 cents per share effect of under recovered Virginia fuel expense.

We did experience a 16 cents per share benefit from higher prices received at E&P.

Additionally, locking in the gains from oil options benefited E&P by 22 cents per share.

But clearinghouse results were 21 cents per share below expectations.

Other factors amounted to a 5 cents per share under run compared to our original guidance, including 2 cents per share for additional tree- trimming and 3 cents per share in service restoration costs.

Finally, share dilution impacted earnings by 4 cents per share compared to our original expectations.

As for our balance sheet and other credit metrics, free cash flow for the 12 months ending December 31 was $225 million.

This compares to a year end forecast of 683 million.

The primary reasons for the difference were lower than forecasted GAAP net income and lower deferred tax expense.

Lower taxable income diminished our ability to utilize tax benefits currently, resulting in an increase in deferred tax assets and lower deferred tax expense.

However, based on the company's tax profile, we expect to realize these deferred tax benefits in the future.

For the 12 months ended December 31, funds from Operations covered our interest expense by 4.3 times compared to our expectation of 4.4 times at year end.

The difference was due to lower operating cash flow from lower earnings, and lower deferred tax benefit and forecast.

Our adjusted ratio of debt to total capitalization was 54.4 percent compared to our forecast of 53.4 percent.

There were two primary reasons for this difference.

The first was an equity account that was $130 million less than projected due to lower net income.

The second was fact that debt was $460 million higher; primary driven by the $4 million C&G bond we decided to do issue in November.

We chose to boost liquidity for margin purposes in an commodity price environment that was higher than we had projected.

Additionally the sale of our BC gas assets occurred at the end of the year, and we had 476 million U.S. dollars invested at 12/31.

Had we been able to reduce debt at the same time, our debt to cap would have been 53.6 percent which was right on top of our original projection.

We will use this cash to repay debt in the first half of this year.

And including cash and cash equivalent, available liquidity was $2.8 billion at year end up from $1.8 billion at September 30.

As mentioned by Tom Farrell on our December 20 call, the results of clearinghouse transactions will now been included within the business unit in which the transaction supports.

In other words, the clearinghouse will not longer be considered a profit center with it's own C&L.

We realize analysts do not like it when companies recast financial results.

Let me ease your concern.

Schedules posted on our Website reflect 2004 and 2003 results of clearing house, before and after the change.

The reallocation is between energy and generation only, and involves coal and emissions trading.

Dominion has not yet become emissions trading in 2002, and results of coal trading was not material.

Therefore, no recasting of 2002 results is necessary.

Now before I provide our first quarter 2005 earnings guidance, I'll ask Tom Farrell to update you on several operational items.

Thanks, Tom, and good morning.

I am going to provide several updates including our entry into P.

JM, Dominion, New England, Kewani, sale of our British Columbia assets, Panda, and our Gulf of Mexico operations.

We expect our entry into P. JM to occur by May 1.

You will recall that we received first quarter and FERC and Virginia state Corporation Commission approval.

We will complete our hearing in North Carolina this week.

We believe we present a compelling case and are hopeful to have completed all regulatory work in time for May 1.

We closed on the U.S.Gen assets in New England, effective January 1.

The integration of what we now call Dominion New England into the balance of our generation fleet has gone extremely well, and the plants have had very good performance to date.

The addition of these plants makes Dominion the largest generator of electricity in New England.

We are still hopeful that we will close on Kewani by the end of the first quarter.

The public service commission in Wisconsin has granted our motion for reconsideration.

All legal briefing is to be completed by the middle of next month.

We believe the issues are reasonable ones, which we can address to the commissions satisfaction.

We sold substantially all of our oil and gas assets in British Columbia for a total of $476 million U.S.

The sale of 308 BCFE of proved reserves was comprised of five separate transactions resulting in an average sales price of about $1.55 per MCFE.

The proceeds will be traded as a credit to our full cost E&P pool in Canada.

There was $6 million after-tax charge excluded from fourth- quarter operating earnings, which represented the transactions cost.

The cash proceeds will be used to reduce debt.

Additionally, as part of our annual reserve audit we revised downward our Canadian reserves in British Columbia by 236 BCFE.

This revision will be reflected in our year- end 2004 reserves, currently estimated at 5.9 trillion cubic feet equivalent.

This year-end figure includes an upper revision of 129 BCFE in the U.S., or a total revision across all of our E&P division of about 2 percent -- negative 2 percent for 2004.

Revisions to previous reserve estimates occur in a normal course of business.

Since 2001 Dominion has recorded revisions to beginning year reserves to the average about 1 percent up or down, and range from a positive adjustment of 225 BCFE, or 4.6 percent in 2002, to a negative 143 BCFE, or minus 2.3 percent in 2003.

As we announced in December, we have reached an agreement to buy Panda, a 181 megawatt facility in North Carolina.

We have made all necessary filings and are on track to close the transaction this quarter.

You will you recall that hurricane Ivan caused minor damage to the Devil Towers spar, but destroyed the well completion rig.

The spar has been repaired and the replacement rig is now in place.

And as of last weekend in operation.

We expect to complete the remaining five wells during the latter part of the second quarter or early third.

In the meantime, we will continue to receive business interruption payments.

Front runner completions are continuing on schedule.

In all, eight wells should be at full operation by the ends of the third quarter.

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

Thank you, Tom.

On December 20, we published our complete earnings guidance for the full year 2005, including assumptions and hedging information.

A reconciliation of full year 2005 guidance, to 2004 actual results can be found on our Website under 2005 earnings guidance.

Our first- quarter guidance range is $1.35 to $1.45 cents per share.

A detailed reconciliation to the $1.37 per share recorded in the first quarter of 2004 can also be found on our Website.

In providing 2005 operating earnings guidance, Dominion management is aware of potential differences between operating earnings and GAAP earnings.

Dominion estimates that after - tax charge of between 40 to $45 million related to the pending acquisition of the Panda generation facility, expected to close in the first quarter.

Until the acquisition is completed, Dominion management is not able to estimate the corresponding GAAP equivalent for 2005 operating earnings guidance.

The primary drivers compared to the first quarter of 2004 include customer growth, lower net purchase power capacity expenses, overall higher production and prices at E& P, and contributions from the newly acquired Dominion New England asset, which are partially offset by the increasing under recovery of Virginia fuel expense, and the return of normal weather for the first quarter.

You might recall, that we experienced an 8 cents per share under recovery of Virginia fuel for last year's first quarter, but could not record this until after Senate bill 651 was signed into law in the second quarter.

Also, we were benefited by 5 cents per share of above normal utility weather in the first quarter of 2004.

Throughout the call I have referenced items that can be found on our Website.

Those of you on our distribution list, should this morning have received an e-mail detailing our most recent enhancements to the Investor Relations Section of our Website.

The recent improvements are designed to ease printing our complete earnings release and related documents.

Additionally, we have reorganized certain materials with the intent of making it easier for you to find and access.

We appreciate your continual feedback, and look to make further improvements in 2005.

That concludes our prepared remarks.

We will now open the lines for your questions.

(Operator Instructions) Our first question is coming from Dan Eggers of Credit Suisse First Boston.

Please go ahead.

Good morning.

First question on Clearinghouse, I thought the fourth quarter was looking a little more a little more comfortable, as far as trying to recoup the first months losses?

Can you talk about what happened there, and is there anything residual that could benefit here as we go into '05?

Well, really Clearing house was pretty much right on, except for a small amount of proprietary trading that we had built into the guidance for the fourth quarter.

As you know, we made the decision to terminate proprietary trading, and we closed our books down and took the position that we are there present rather than riding them out to the end of the year, which could have given us the income we projected.

But we decided it was the right thing to do, and the right time to do it.

I don't think there is anything residual at all for 2005.

We had a 21 cents per share loss in proprietary trading in 2004 , and by not having it that saves us 21 cents.

So there should be no costs.

There will be a 21-cent pick up just roughly from that next year directly from that?

Thats correct, right?

Yes.

My other question on the E&P reserve side, --can you -- the 5.9 at year- end is obviously down from '03 but you guys hold assets, can you remind us what assets in the magnitude of reserve sold this year?

Sure, Dan.

This is Duane In total, we sold almost 400 BCF, when you include Canada and the BPP.

And we had negative revisions of about 130, of that 130 in total across the company, 35 of those were due to deepwater (inaudible) relief, because prices were higher, we lost those.

So, when you add those two together and take into account the additions that's how we get down to the 5.9.

So, separate from the adjustments your reserve replacement this year was worth 120 percent give or take?

I think it was around 140 if you exclude revisions.

For the sales, I mean, excuse me.

One more, can you explain the mismatch in timing on the business interruption insurance?

And it looks like a lot of the swing in the first quarter is going to be dependent upon whether or not you get recovery in the first quarter.

Can you explain, so we understand how recovery works and what got in the way in the fourth quarter?

Sure, Dan, this is Scott Hetzer.

We had a negative variance of $10 million for BI in the fourth quarter, and it really does have to do with timing.

It has to do with a couple of items that the -- several issues that the underwriters needed more time to work through, and we are doing that right now.

We believe we will collect it in 2005.

And there were a couple of items that just were -- a question that could not be resolved by the end of the year for us to be able to file and book our claim.

So, we will carry that discussion into 2005, and we do expect to recover it in '05.

Dan, just to amplify a little bit., we had to cut our books off for the claim on December 15, just because, you might imagine, you knew the end of the year -- and getting it over to London, which is where our major underwriters are, took some time.

The actual standard for booking it, has to be that the claim is accepted, as well as the underwriters have to sign a confirmation letter with their underwriters.

So, we actually received this year, cash, believe it or not , in the same amount or a little bit higher than the book income we had.

The reasons, the variance for the quarter is so large is because, we don't know when we send in this proof of claim at the end of the quarter how long it will take to process.

The rules for booking this amount of revenue are very strict under GAAP, and therefore, if you got the money in or they had a proof of claim presented on April 1st, and accept on April 1st, you wouldn't book anything.

So, we -- we are very comfortable and confident that the full year recovery is going to be there , but we just can't tell what quarter it's going to be in.

And therefore, with that the reason , that we really basically have a zero number in the low end, which doesn't mean that we won't get that money or we won't book that revenue.

It just means that it has to be all done by March 31.

That's the reason that we have been so, I guess, expansive in our range.

So the cash in hand piece, that will count as earnings, which you've already received in cash, you can now treat as earnings? or is there a greater mechanism?

Actually , we didn't have to get the cash.

The thing that was nice was that we had the recognition and the cash.

As long the underwriters have said that it's due us, if they haven't actually transmitted the cash, we could still book it.

In this case they were very much parallel.

Got it.

Thank you.

Thank you.

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

Please go ahead.

Good morning, fellows.

Good morning, Greg.

As I look at the cash flow statement, and I'm looking back at free- cash flow projections that you made earlier in the year.

I will admit, this may not be -- what I'm looking at -- may not be the most recent..

It look like you guys came in below your free- cash flow expectations for the year by a reasonably significant amount.

It look like you had projected a little over 600 million in free- cash flow, and came in a little under over 250 million in free-cash flow.

Am I not looking at an accurate comparison?

Can we go over--

No, we stated that -- we stated that -- in our remarks.

I'm sorry, I must have drifted off for a second.

Have you given 2005 cash flow projection or have you just given 2005 operating earnings guidance?

Yeah, Greg, the forecast for free- cash flow in 2005 is on our Website.

It's between 200 and $300 million.

One of the things that came in lighter was deffered taxes?

It looks like you had been projecting a little over 800 million and you came in at around 550.

Was there any particular reason why that was off your projection?

Yes.

Because we had lower GAAP income , we also could use benefit.

And therefore, that number will swing with income.

As we said earlier, before we fully expect to make enough money to use those deferred assets, as they carry forward.

So they swing from one period to the next.

We have recorded higher net income.

We were able to utilize more of that tax benefit.

So it's kind of a double whammy.

When you have tax benefits, if you don't make your income.

You don't get the income or the tax benefit from it.

Great.

Last question, when I look at the pluses and minuses on the full year '04 earnings reconciliation schedule 6.

And I look at stuff, that's either sort of trading related, or related to corporate hedging, which you guys on a going forward basis aren't going to do, your know, negative 37 from Clearinghouse, negative 4 from the Corporate hedge, plus 10 from coal trading, and then sort of plus 22 from the coal -- from the -- I'm sorry, from the oil options.

Those are all basically things that we should assume are operating for GAAP purposes, but non-recurring on a go forward basis?

Or do you still think you have the opportunity to trade around your coal position?

We still have some coal positions that remain from where we were in 2004 that we will benefit from in 2005 and 2006.

Great.

Thanks, guys.

Thank you.

Our next question is coming from Paul Fremont of Jefferies.

Please go ahead.

Thanks.

First question, really I want to make sure you are on the conference call affirming your '05 guidance that you provided on December 20, of 5 to 510.

Oh, absolutely.

If we didn't do that -- that's an omission.

We certainly have no reason to believe from what we saw in the fourth quarter that any of the shortfall we had from our estimates there have anything to do with '05.

Even though it's real early in the year and certain thing have already changed.

They've been both positive and negative.

So we are right back where we thought we would be in terms of that earnings guide.

And I was trying to point out ,maybe not two eloquently, that compared to the first quarter last year, where we had a $1.37, if you get back to normal weather and you apply the 8 cents per share of unrecovered fuel, that we didn't really recognize until the second quarter, but which was experienced in the first quarter, you get a comparison of a range of $1.35 to $1.45 to an actual quarter on the same basis of $1.24.

So the earnings power that we have increased production, U.S.

Gen, et cetera, is exactly doing what we thought would it do.

So our earnings power from a forecast for the first quarter of this year compared to last year is very appropriate.

And we certainly are reaffirmling the 5 to 510 per share.

Then going back to the December 20 conference call, if I look at the reconciliation of fourth quarter, which of those items were you not aware of at December 20th that would have caused the shortfall in the fourth quarter?

5 cents per share for weather, most definitely, and the 3 cents per share of business interruption, that we thought, at that time, we would receive, be able to, is at least 8 cents.

I'm picking those two out, because weather, as you know, even taking January and we started out extremely with bad utility weather the first part of January , and then we had a few really cold days.

In December, we had the same situation.

I think we had a record day on December 20th and around it.

Instead of continuing on, we got milder.

So the 5 cents of weather is just no way we know definitively on the 20th.

And also on the 20th of December, we felt, we would have another amount of about 10 million more from business interruption that we filed.

That's a matter of having an awful lot of underwriters, and some of them completing the paperwork and the processing of it, and others not.

The last question is, if I look through the segment results, it looks as if O&M spending, particularly at delivery and energy, are up significantly quarter over quarter.

Some of that I guess is the tree trimming that you talked about?

Absolutely.

Is that the primary cause of that or?

That would be the primary in the delivery on -- and the same thing would be in transmission.

At energy.

At energy.

Thank you.

Thank you.

Our next question is coming from Bishar (ph) Khan of SAP Capital.

Please go ahead.

Good morning.

Could you help us a little bit, your first quarter is one of your strongest quarters.

That you're starting off with a lower base and I realize some of the business interruption and weather and things.

But, you know, as we look out your same quarter one could come out slightly flat versus first quarter of next year.

If you look at your guidance.

So how does is this like 40-cent Delta to kind of achieve the midpoint of your '05 guidance?

How can we see that as we monitor it for the remaining three quarters?

How will that fold in in the remaining three quarters of the year?

Well, first I would like to go back to what I might have made a comment, maybe you didn't get it, we made $4.61 per share this year.

We've got a budget that's 39 cents higher than that on the low side.

In the first quarter of last year, if you compare our guidance this year, to the guidance last year, we actually made $1.24.

The midpoint of our range for the first quarter is $1.40.

That's 16 cents per share better than we did in the first quarter of last year.

On a forecast basis, to the actual.

To what really should have been the actual, under normalized weather.

So I don't feel that we are all behind.

And the assets that we have that we didn't have last year in terms of U.S.

Gen and also, the situation where production is higher and prices are higher, will make the second quarter a higher guidance quarter, and third quarter higher guidance quarter, and fourth quarter a guidance higher.

So, I don't -- If we thought that first- quarter guidance was indicative that we weren't going to make $5, then we wouldn't have given it to you.

Because it's part of, it's the one quarter of the four that we put together.

That's just the way we divided it.

Okay.

Can I just understand the 5 cents from Dominion New England in the first quarter, how that happens?

Can you just attribute the accretion?

Is that how it's coming?

We didn't have it at all in the first quarter of last year.

Okay.

So, you know, we take a look at -- we closed it end at the year, so it's here and so, and as you know, it's been cold up there than it's been down here.

And so that's how we expect to make it.

Okay.

So then just going back to, I probably didn't hear it properly, why is there -- why is there a range on the business interruption?

Can I just ask you?

Once again, we made that answer, you might not have heard it, the answer is that in order to book this revenue, we have to have a proof of claims to the underwriters that they accept, as well as a confirmation letter to Deloitte.

If we send it to them and they accept it , and all the paper is completed by March 31st, we can book up to 30 some million dollars worth of estimated loss.

On the other hand, if they all agree to that on the April 1st, we would book nothing.

So the answer is, that during 2005, we will achieve the revenue from business interruption that we got in our budget but it might not be " any " in the first quarter.

It might be in the second quarter.

Or the third quarter.

Okay.

So it's basically the best -- it's just basically a delaying factor, either the best case scenario is you get all of it in the first quarter or the worse case scenario is it comes in in the second or third quarter?

Is that the way to look at it?

That's the way, just purely a timing issue.

Okay.

Okay.

I really appreciate it.

Thank you.

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

Please go ahead.

Good morning.

Can you hear me?

I wanted to ask you about the impact of the, I'm sorry if I missed it, the $112 millions, which you did mention but I got a little distracted, what's the impact of that going forward?

The fact that you are not going to have that to tolling arrangement?

It's really negligible in terms of an earnings situation.

That contract was in mark-to-market space.

So we could never really determine what earnings would be, or put anything in budgets one way or the other.

The actual movements mainly were mark-to-market from one quarter to the next.

So, we had nothing in it for 2005 or beyond.

And it really won't change our earnings guidance or our outlook at all.

You guys had this mark-to-market but when you actually sold it, in other words, when you actually had to sell it , it lost $112 million?

Well, there are a lot of reasons for that versus the Marks.

For one thing, what a Mark is based upon a theoretical situation.

This would be, the estimates we had are from parties who would buy it and you have a buyers market.

And also, they are not going to pay us for managing it and our Clearing house did actively manage the contract.

So the reason you get a difference and disconnect between what your future value might be, and what your present value might be, is the fact that you are selling it into a market as you've seen with many other companies, where the company's want to discharge this type of trading contract. and they are taking pretty deep discounts to do it.

In a similar way, that companies are selling power plants that are underwater, and are having to take deep discounts.

Sure.

This is sort of -- sort of -- so far up on that, I mean, its going forward -- do you see any other tolling arrangements that might be sold, or anything like that?

And also, in just the respect with the GAAP adjustments?

I mean, are we completely finished with Dominion Telecom, and Dominion Capital and --

First question, we have no other tolling agreements that would be subject to this at all.

It was our sole and only, and part of our ending of proprietary trading.

It was a contract that had to be managed to have any value.

We decided rather than to keep that as an outlyer as we get rid of it.

In terms of Telecom -- Telecom is entirely over in a sense of adjustments.

Negative adjustments.

-- negative adjustments.

Could be a positive but don't want to bet on that.

As far as Dominion capital is concerned, major asset of variability from quarter to quarter would be the residuals we have on our mortgage portfolio, currently do unto about 60 to $70 million worth of value.

And that relates to credit experience and prepayment experience.

Very difficult to predict but that's the magnitude of it.

It's only 60 to 70 million of it left.

Period.

We certainly are going to collect some of it.

Okay.

And so when you mentioned about the deferred taxes being able to be recovered, is that basically getting GAAP closer to what operating numbers?

Or is that because you are also expecting, perhaps, a gain in 2005?

It's mainly because we expect income to cover it rather than gain.

Okay.

Thanks a lot.

Thank you, Paul.

Our next question is coming from Scott fuller of Morgan Stanley.

Please go ahead.

Hi, Scott.

Scott?

Excuse me, Scott, your line is live.

Can you please make sure your phone is muted sir.

We will move on to the next question.

Our next question is coming from Tom O'Neill of Lehman Brothers.

Please go ahead.

Good morning.

Good morning.

Was curious if you can remind us how much Clearinghouse income is in the 2005 guidance embedded in the subsidiaries?

10 to $20 million.

Okay.

Then, just a question on one of the slides you presented on December 20th, which showed forecasted E&P unit costs.

Is that applicable to just 2005?

And then if so, what's the expectation with regard to lifting costs as we go out?

In the guidance that we had given for, say lifting costs, this is Duane, we used 1 dollar to $1.10, and we kept it flat in our plan going out.

Obviously, we relook at that every year, depending on the cost structure and a lot of that has to do with what the market is on prices for the commodity going forward.

Okay.

And then one final question on E&P.

You did a $1.80 of operational earnings.

I am just curious to the extent that you can't -- what that number -- might look like if you were experiencing dry holes under successful efforts?

If it would be materially different at all?

We don't know.

I mean we have not done that calculation.

Okay.

Thank you.

Thank you.

Thank you.

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

Please go ahead.

Hi, guys.

Maybe, Dwayne, if you could go through the differences, I think your forecasting E&P production for '05 is now like 466?

Actually, I think it's closer to 486.

Let's say 480 to 490 to give us a little change.

Okay.

And the difference between that and it had been middle of last year about 545?

Right.

I don't have -- the schedule we gave you in December, the majority of that is due to the BP P, the sale of Canada, let's see, we have it right here.

BPP2 is about 25 B's, British Columbia is 31 B's, Ivan is 17, and then we have some miscellaneous for about 10.

Okay.

So there's no real material change in the -- the kind of core production growth.

It's just more of these transactional things?

That is absolutely correct, Steve.

Okay.

Thank you.

Thank you.

Our next question is coming from Rebecca Fallowil of Howard Riles.

Please go ahead.

Another question on E&P, I may have misheard what you talked about, but sounds like you said you had three wells on at Deviles Tower, and a fourth was going to come on, or five wells would come on in the second or third quarter.

Is that correct?

That's correct.

We actually had four on, and we had mechanical problem with one of the wells that we couldn't repair without the rig.

So we now have three wells producing.

So we have the complete four and repaired the fifth one.

And the front runner, what is your timing for putting on those wells?

We are in the middle of the second well right now.

And I think Tom said third quarter, but I think that was before we changed the estimate of putting in the additional risers and everything so it's probably going to be fourth quarter.

Second well should be on sometime in February.

Then just gradually throughout the year getting the remaining wells on?

That's correct.

After the second well, we will run the risers and then go back to completion.

And then any update on Thunder Hawk?

Drilling the second well right now.

Then finally on the BC, you closed on that in January but the effective date of the sale was December 31?

Is that why the reserves were taken out at year end?

They were all closed by December 31.

The effective dates were a little bit earlier from a cash transaction.

Thank you.

Thank you.

Our next question is coming from Michael Worms of Harris Nesbitt.

Please go ahead.

Good morning, everybody.

Just a quick question for you.

Tom, you mentioned that already so far in 2005 there have been some positives and negatives.

Could you go over what's been happening so far?

Frankly, I'm not going to quantify them, we still despite the fact that we've had a few frigid days of weather, if we are using an average that doesn't lead us to anything on January 27th.

But the other thing would be that we used in our assumption a pension discount rate of 6.25 percent, when the actual calculation was made over which we really have no discretion under the different regulations that we have for pension discounting.

Is a 6 percent discount rather than a 6.25.

That's about a $10 million annual difference.

We do think, however, though that some of the earnings in that pension account will offset most of that.

And then,of course, on a positive side, the biggest positive is that we had in our budget a February close for U.S.Gen, which is now Dominion New England and we got it done a month early.

When I say that there's always something moving around, it is, and for this early in the year it's been just as much positive as negative.

One other question for you.

Have you indicated what the balance sheet might look like at the end of 2005?

Yeah, Michael, this is Scott Hetzer.

Our projection are for further improvement and we have it declining closer to 50 percent at the end of 2005.

Thank you very much.

Have a good day.

Thank you, Mike.

Thank you.

Our next question is coming from Paul Risson(ph) Key McDonald.

Please go ahead.

Hi, Paul.

How are you?

Can you give us a little assurance that these issues with the business interruption insurance are only timing issues and there's been no challenges to any claims or anything like that?

This is Scott Hetzer again.

There are a couple of items that are up for discussion.

And some are miscellaneous, one has to do with the deductible period, whether it's ten days, which is defined in the policy, or an additional two that it would take to start production after the storm.

One has to do with new wells that were drilled after September 15, which is the date of the storm.

One has to do with the contract price.

So there are a number of different issues.

But we feel in our conversation with our brokers and the adjuster, that we are very solid in our claims.

That they are covered.

It's just a matter of -- we think timing, and working it through with the underwriters.

And we've got a lot of time in 2005 to do that.

Are you bracketed kind of -- best case, worse case Deltas?

We have and we have taken some of that into consideration in the guidance that we have for 2005.

Thank you very much.

Thank you.

Our next question is coming from William Meads of Newberger Berman.

Good morning, guys.

How ya doing?

Quick question on the cash flow.

So I understand what went on in '04 but I was wondering if that shortfall has affected your financing or were you counting on that money for anything?

Has that changed your --

No.

Okay.

Good.

And then if you could just give us a little more color on -- your estimated '05 cash flow.

You know, whats your level of confidence there.

Whats the variables?

Yeah, We said earlier- We have projections of positive precast flow of 200 million.

We feel very good about that.

We will certainly add, that there are a couple of items that are very difficult to predict, including deferred taxes and we've seen in the fourth quarter of 2004.

So, we see no reason, we have certainly taken a look at the projections that we have put out at the end of December for cash flow for 2005 and of course, at this point, we see no reason to revise them.

How much of that 2 to 300 million is the deferred taxes?

I dont have any that number in front of me.

It's a pretty significant number.

It's between 6 and 700 million.

You know its interesting Will, I guess we're a victim of quarter to quarter.

When we began the year, we gave a free cash flow status between 1 and $300 million.

We wound up at the end of the year with 225 million, which I think is in that range.

But during the year, we, you know, things got better.

We possibly got too optimistic and certainly, the fourth quarter or any short fall, hurt in terms of that calculation.

But we have a pretty good year.

And we did increase our dividend during that fourth quarter, paid out a little bit more money, and still had a 225 million.

It showed that we managed CapEx extremely well.

And the way we look at life, is if our cash flow for some reason in '05 is not progressing as we thought, quarter- quarter, we just manage our capital expenditures in order to take care of it.

Okay Will, This is Joe here.

I want to correct the number.

It actually might be between 5 and 6.

The detail of all the free cash flow calculations is on that website.

Under GAPP reconciliation.

Okay.

Thanks a lot.

Thank you.

Our next question is coming from Danielle Place of (inaudible) MaxCore.

Please go ahead.

Thanks you.

Most of my questions have been answered, but given what you know about the fuel expense since the fourth quarter is out.

Have there been any changes at to your forecast for 2005?

And what are the negatives - if that is negative, what is your positive --?

Well, thats a good question.

The reason we had a little higher fuel expense, was entirely driven by - by prices, rather than by volumes.

And unlike '05 , we have enough unhedged oil and gas production , it should -- our estimate of fuel expenses be lower as prices got higher.

Also, our estimate of revenues of E&P would be higher in a parallel way.

So, we are not here saying that, we'll under recover in 36 million dollars in fuel exactly, if it was in our budget, but if its higher than that, we'll have E & P revenues.

If its lower than that, its because the prices will probably have lower revenue in E & P revenues as well.

So its a very much a balance situation fully hedged firmly in '05 and nothing in the fourth quarter on the item has any real concern for us in terms of our relative earning power for next year.

Oh great.

And as far as the Kiwani conditions, anything that will change your anticipated winter?

Now, the positions that were raised as concerns by the Chairman of the Commission of Wisconsin, we think we have addressed, and will continue to address, have no impact on the financial results for the Kiwani sale.

Just a delay?

Thats all?

Yeah.

Thanks.

Thanks very much.

Thats all.

Thank you our next question is coming from Robert Rubin (ph) of Deutsche Bank.

Please go ahead.

Good morning guys.

A couple of quick ones.

First, regarding cash flow in '05, if you look at the 2004, if you look at the 2004 cash flow statements, the company was simple cash -- free cash flow negative by about 961 million if you include working capital.

You made up the shortfall through equity and thats how you got you debt reduction for the year.

Would you be willing to issue equity again in '05 in the event that the company were short from a cash flow perspective?

Well, thats a good fixed income question Robert.

I am on both sides of the fence now though.

Oh I think though --- You know what Tom, I think thats a question from both sides of the fence, actually.

Well, the answer is "No".

We are fine with our plan to lower our debt equity relationship.

There are a lot of moving parts in working capital as you well know.

And we feel our cash position was pretty strong last year.

A lot stronger than we anticipate.

And we will continue to have one.

But, we're not going to start issuing equity every time we have a 50 or 100 million dollar change in one of these numbers.

We think our financial strenth is certainly obvious, and our cash flows are very good.

We just dont anticipate that we are going to try to chase a purely dead equity relationship.

I agree with you.

I think its the right decision.

I was just making sure.

Second question, management succession, theirs been a lot of talk in the market place, as to sort of -- you know as to what - whats the oldest Tom's plans are.

You know, can you guys give us some clarity as to which Tom is most likely to be running the company in '05, '06, '07?

Well, look at me as a short-timer.

I'm not going to give you and exact date, but I dont plan to stay around forever.

Does that anser your question?

You know what, it gives me a little color.

Okay.

You know what, if you dont want to give me any more than that, then I won't push you.

I dont want to give you any more than that.

Then I won't push you.

Thanks guys!

Thank you.

Our next question is coming from Leslie Rich of Columbian Management.

Please go ahead.

Hi, all my questions have actually been answered.

Thank you.

Thank you Leslie.

Thank you our next question is coming from Nathan Judge of Atlantic Equities.

Please go ahead.

Hey Nathan.

Hello, could you just give us an update on what natural gas price strip you're looking for in your assumption in 2005?

Its $6.18 for the year.

I think we have poorly assumption phases.

It has like 660 in the first quarter, or something in the neighborhood.

It's on our website.

For the 6.18 is an average for the year rather than a quarterly number.

Thats right.

For the quarter, Nathan, its 663 and for full year oil is 39.60 and for the quarter, its just over $41.00 dollars.

Within a change from the fourth quarter December guidance that I think you provided 6.31.

Is there any change from that?

No, we provided 6.18 on the December 20 call.

And could just update us on the intentions on the forward equity sale?

Yes, we originally had 10 million shares available.

We brought back 2 million of those by the third part, third week in December.

In our guidance for next year, we have accessing 5 million shares of the 8 million remaining.

The intention at this point to be acquiring the other 3 million shares to cover that short position held by Merrill Lynch.

So, that is our plan.

Yes, If Kiwani was for whatever reason delayed in perhaps 2006 or no essentially done for whatever reason, would you still going ahead with (inaudible) measures?

No, we would - would have less.

Okay, thank you very much.

Thank you.

Thank you.

Our next question is coming from Michael Goldenburg of Luminus Management.

Please go ahead.

Good morning guys.

Hey Michael.

I just wanted to ask you on the working capital adjustment for 2004.

Could you please explain again how you went from negative 536 to positive 128 from GAAP to free cash flow calculations?

Michael, we dont have that detail in front of us.

We can certainly follow up with you.

Okay.

I mean it seems to be a pretty large swing.

And I guess the next question, would be stemming from 2005 your free cash flow number assume zero working capital adjustments, to the best of your knowledge, are their items that are already slatted to change the working capital one way or another significantly as you look into 2005?

No.

Michael, we dont -- we dont try to predict working capital because it does move around on us so much.

Just look at the GAAP measures the last year or two or maybe even three.

There has been a significant working capital amount that was a cash drain.

I was wondering if there was any pattern or just a bunch of runoffs that -- you know, may or may not occur.

We do not see a pattern at this time.

Its something we watch, but it does not seem to be a pattern.

Or anything that concerns us.

Okay.

Thank you.

Ladies and gentlemen, we have reached our allotted time.

Mr Chewning, do you have any closing remarks?

Thank you.

I would just like to thank everybody for being on our call this morning.

And just a reminder that our first quarter earnings release is scheduled for Wednesday, May the 4th.

Ladies and gentlemen, we thank you for joining us.

Enjoy the rest of your day.

Thank you very much.

Thank you.

That concludes today's teleconference.

Have a wonderful day.