道明尼資源 (D) 2009 Q3 法說會逐字稿

Good morning and welcome to Dominion's third quarter earnings conference call.

On the call we have Tom Farrell, CEO, and other members of senior management.

(Operator Instructions) At the conclusion of the presentation we will open the floor for questions.

At that time instructions will be given as to the procedure to follow if you'd like to ask a question.

I'd now like to turn the floor over to Greg Snyder, Director of Investor Relations for the Safe Harbor statement.

Good morning and welcome to Dominion's third quarter earnings conference call.

During this conference call, we will refer to certain schedules included in this morning's earnings release and pages from our third quarter earnings release kit.

The schedule and the earnings release are intended to answer the more detailed questions pertaining to operating statistics and accounting.

Investor Relations will be available after the call for any clarification of these schedules.

While we encourage you to call with questions in the time permitted for our prepared remarks, we ask that you use the time to address questions of a strategic nature or those related to fourth quarter 2009 guidance or our 2010 outlook.

If you have not done so I encourage you to visit our website, register for e-mail alerts, and view our third quarter 2009 earnings documents.

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

In addition to the earnings release kit, we have also added a slide presentation that will guide this morning's discussion that can be accessed through our website.

And now for the usual cautionary language.

The earnings release and other matters that will be discussed on the call today may 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 our 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.

Also on the call, we will discuss some measures about our company's performance that differ from those recognized by GAAP.

Those measures include fourth quarter and full-year 2009 operating earnings guidance and our outlook for 2010, as well as operating earnings before interest and tax, commonly referred to as EBIT.

Reconciliation of such measures to the most directly comparable GAAP financial measures we are able to calculate and report are contained in our earnings release kit.

I will now turn the call over to our Chief Financial Officer, Mark McGettrick.

Thank you, Greg, and good morning, everyone.

Joining me on the call this morning is our CEO, Tom Farrell and other members of our management team.

Tom will update you on regulatory proceedings and other operational and strategic issues following my overview of third quarter financial results and fourth quarter operating earnings guidance.

We will then be glad to take your questions.

Dominion had a strong third quarter.

Operating earnings were $0.99 per share, $0.06 above the upper end of our quarterly guidance range.

These results were driven by good performance from our business units as well as lower financing costs and income taxes.

I will cover these results in more detail in a moment.

When compared to third quarter of 2008 our operating earnings were up $0.05 per share despite one of the mildest July's on record in terms of weather.

You can find a complete reconciliation of operating earnings compared to quarterly guidance on pages 30 through 35 of the earnings release kit.

GAAP earnings was $1.00 per share for the third quarter.

The principle item excluded from operating earnings was a net gain on securities held in the nuclear decommissioning trust which offset an adjustment at our Peoples and Hope subsidiaries which, as you recall, are held for sale.

A reconciliation of GAAP to operating earnings can be found on schedules 2 and 3 of the earnings release kit.

Now, moving to third quarter operating results for our business units.

Third quarter 2009 EBIT for Dominion Virginia Power exceeded the top of our guidance range.

Retail kilowatt hour sales were down 3.5% from the third quarter of 2008, primarily driven by mild weather in July.

We had accounted for this in our earnings guidance.

Adjusted for weather, retail sales were off less than 1% and it should be noted that weather adjusted residential sales were up 1.5% from the same period last year.

Although overall sales were slightly down, Dominion Virginia Power's revenues were up because of higher electric transmission and military privatization revenues.

Third quarter EBIT for Dominion Energy also exceeded the top of our guidance range.

Higher than expected transportation and storage revenues as well as sales of other products and services at gas transmission were key contributors to the strong performance.

Finally at Dominion Generation, third quarter EBIT was in the upper half of our guidance range.

The effect of mild weather in July and an unplanned outage at Millstone Unit 2 had already been incorporated into our guidance.

These results were consistent with our expectations.

At the consolidated level interest expenses in our effective tax rate were lower than expected.

Overall we are very pleased with our operating results for the third quarter.

Moving to cash flow and treasury activities, cash flow from operations was $1.1 billion in the third quarter and $3 billion for the first nine months of the year.

Liquidity was very strong at $3.9 billion.

For statements of cash flow and liquidity please see pages 15 and 46 of the earnings release kit.

During the quarter we issued $500 million of debt at the parent company and swapped some additional fixed rate debt to floating.

Improvements in the capital markets have reduced our financing costs compared to earlier expectations and should have a positive impact on operating earnings for the remainder of 2009 and 2010.

We have budgeted another $300 million of debt at the parent company during the fourth quarter and will continue to evaluate the need for this issue as the quarter develops.

We entered into pre-issuance hedges early this year at attractive levels for anticipated debt issuances for 2009 and 2010.

These transactions have been very positive for us.

Turning to equity, we have raised $437 million through the first three quarters.

We anticipate raising another $63 million in the fourth quarter through our automatic plans.

In 2010 we still expect to raise $250 million from the automatic issuance plans and only need about $150 million from market issuances.

Now to fourth quarter guidance in our outlook for 2009 and 2010.

Dominion expects fourth quarter 2009 operating earnings in the range of $0.55 to $0.65 per share compared to operating earnings of $0.72 per share in the fourth quarter of 2008.

A summary of the Company's fourth quarter 2009 guidance can be found on pages 36 through 38 of Dominion's earnings release kit.

With our strong results for the first three quarters and our forecast for the fourth quarter, we are able to affirm our 2009 operating earnings guidance of $3.20 to $3.30 per share.

We are also affirming our $3.20 to $3.40 per share operating earnings outlook for 2010.

We base our 2010 outlook on a number of factors including a range of possible outcomes from the Virginia rate case, the current level of forward commodity prices, primarily in the second half of next year, and lower financing costs and operating expenses.

We have also taken steps to further reduce our sensitivity to 2010 commodity prices since our July 31 call.

We have added to our 2010 hedge positions for Millstone and natural gas production.

We have opportunistically hedged monthly and quarterly volumes to take advantage of market movements at levels that support our outlook range.

Our sensitivity to a $1.00 move in natural gas prices in 2010 is now only about $0.09 per share.

We were able to add to our 2011 hedge positions for Millstone as well.

The update to our 2010 and 2011 hedge positions can be found on pages 39 to 41 of our earnings release kit.

I will now turn the call over to Tom Farrell.

Good morning, everyone, and thank you for joining us.

I'm pleased to report that safety performance improved in the third quarter in each of our business units.

Our nuclear fleet continued its excellent operations in the third quarter with a net capacity factor of 97% excluding refueling outages.

Equivalent availability at our large coal units was 94% for the quarter, the highest level since 2006.

At Dominion Energy the pipeline unit executed full contract extensions for firm transportation and storage services with two of its three largest customers at tariff rates.

At Virginia Power we reduced our average minutes out, excluding major storms, to 108 minutes for the rolling 12 months ending September 2009.

This is the lowest level since 2001.

We continue to make progress on our infrastructure growth projects.

At the end of the third quarter the Virginia City Hybrid Energy Center was 50% complete and the Bear Garden Power Station was 23% complete.

Both projects remain on schedule and on budget.

Our two major transmission projects, the Meadow Brook to Loudoun and Carson to Suffolk lines are also on schedule for 2011 in-service date.

All of these projects, totaling over $3 billion in new investment, qualify for enhanced rates of return.

Dominion also announced that it had requested the pre-filing process at FERC for our proposed Appalachian Gateway project.

The $635 million pipeline portion of the project will ensure market access for the participating Appalachian producers by firming up transportation rights.

The gathering expansion estimated at $250 million will construct additional gathering and processing facilities as well.

If approved, construction would begin next year and all of the facilities will be in service by the fall of 2012.

Last year, we farmed out about 115,000 acres of land in the Marcellus Shale formation to Antero at a price of over $3,000 per acre with a retained 7.5% royalty interest.

Dominion owns the right to an additional 450,000 acres of Marcellus formation acreage.

There has been a resurgence of interest in the region as evidenced by several recent transactions at strong prices.

We have had a lot of questions recently from analysts and investors about our plans for the Marcellus acreage.

I want to reiterate that we have no plans to develop this asset ourselves and intend to monetize the acreage over the next two years, depending on market conditions, through an outright sale, farmout, or similar transaction.

Proceeds from any transaction would be used to offset the need to issue new common stock.

I want to give you a brief update on the state of the economy in our Virginia service territory.

The national unemployment rate continues to rise, reaching 9.8% in September.

The rate in Virginia is declining.

It peaked at 7.1% in June and has since declined to 6.7% in September.

Unemployment for the portion of the state served by Dominion is even lower at around 6%.

While Dominion has been affected by the economic downturn, its impact continues to be mitigated by our customer mix and the relative economic strength of our service territory.

New connects for the first nine months of the year were over 23,500, which is on pace to exceed our 2009 forecast of about 30,000.

A recent report by Forbes magazine ranked Virginia as the number one state in the nation for doing business for the fourth consecutive year.

We believe that as we exit the year we will see increasing weather normalized sales and continued revenue growth at Virginia Power.

Now I want to update you on the progress in our regulatory proceedings.

On September 15, we posted our 2010 annual electric transmission rate with PJM.

This FERC-approved formula rate methodology is forward-looking and it has a true-up provision to ensure the full recovery of costs.

It is filed each year to keep revenues and earnings on pace with what we expect to be substantial additional investment in infrastructure that includes NERC related compliance capital and O&M expense.

This year's filing included about $500 million in compliance related CapEx for 2010, which will be reflected in rates beginning on January 1.

About two-thirds of this CapEx qualifies for enhanced rate of return.

Dominion Energy received FERC approval for its Hub 1 and Rural Valley construction projects as well as the pier reinforcement project at Cove Point.

These three projects represent an investment opportunity of about $125 million.

The regulatory proceedings in Virginia continue to move forward.

We expect to receive testimony from the other parties in the case during this quarter.

Hearings are scheduled for January and, if the case is fully litigated, we would expect an order from the Commission in March or April.

Thank you and we are now ready for your questions.

(Operator Instructions) Paul Ridzon with KeyBanc.

Good morning, how are you?

Good morning, Paul.

Did you indicate that Marcellus monetization could eliminate the need for equity or offset the need for equity?

It would depend how much was sold.

Remind us what your equity forecast was?

Equity forecast for 2010 was $250 million through our automatic plans, and about $150 at the market.

And then did you change your language around forward guidance in that you had marked your open position to the current strip as opposed to a point of view number that you had on net gas?

What I mentioned there, Paul, was since we've got a lot of questions about gas price views and the divergence around that, what I try to do, we still give a sensitive per dollar move of natural gas prices and that's $0.09.

But I referenced that at current mark prices we still feel very comfortable with our range of $3.20 to $3.40 for 2010.

So you will probably hear us referencing it to market in the future so that gives you a current gauge as opposed to just a view.

just to clarify, if you took your open book, marked it to the current strip, you would be comfort in your range?

Yes, sir.

Jonathan Arnold with Deutsche Bank.

(Operator Instructions)

Welcome back, Jonathan.

Thank you, guys.

Good morning.

I just was going to pick up on the same theme as Paul did.

If I heard Mark correctly, that comment around current commodity prices, you said primarily in the second half.

Can we read that to mean that you've pretty much closed out your first half exposure and most of your unhedged position is in the second half of 2010?

Yes, Jonathan, we talked at the last couple calls, our intent was focus on the first half because longer term you have a greater chance to reach the range that we have.

So we have closed out most of our hedging position for the first half and our open positions are focused in the third and fourth quarter.

Thank you very much.

Paul Patterson with Glenrock Associates.

(Operator Instructions)

Good morning, guys.

Good morning, Paul.

Just on that theme, what's driving you guys to be more comfortable with the market price in terms of using that as opposed to what you were doing previously?

Is it cost cutting that you go guys are doing?

Is it a change in the market price itself?

What is it that makes you feel more comfortable about it?

We said, Paul, on the last call, when we got a lot of questions on the view that if you thought our view was reasonable, then you should probably be in the upper part of our range.

If you took more of a market view, or at that point the current price view, you'd probably be closer to the bottom end of the range.

What we just try to do today is to say we still believe it's possible to get into the $6.25 to $6.75 range.

But everyone that's focused on market strips today, we just referenced where we would be on that market strip, and that would be we were comfortable that we were in our range for 2010.

Okay, then with respect to Dominion retail, it seems like you made $0.02 in the quarter for it.

I was just wondering with what you're seeing there, out there -- I know you guys recently made an initiative into PPL territory for 2010 -- what you see out there strategically in terms of what you might be able to accomplish in that.

And incidentally, was the $0.02 a cash item, or was that a recognition of contract values on a mark to market basis?

Paul, I'm going to ask Paul Koonce to answer that in one second, but let me close out the gas issue.

Just to make sure everyone is following the disclosures on the hedging.

And note that we did make significant progress in our hedges for 2010, where we increased our Millstone hedges by 10% up to 70% for next year and we increased our natural gas hedges by a little over 10%, almost 11%, so we're 70% hedged.

So based on historical levels we're approaching very, very close year-end numbers as we have in terms of hedge levels over the last several years.

With that I will turn it over to Paul to address Dominion retail.

Thanks, Mark.

With respect to the $0.02 that's cash, these are sales to households, retail accounts, and the accounting around that is very straightforward.

In terms of the outlook, with commodity prices declining over the past year, there have been opportunities to add customers throughout NEPOOL, PJM and ERCOT, and we just very steadily added customers and you're seeing that reflected in the earnings.

So we should probably see that increasing over time?

It's just a good steady organic growth as we see opportunities to add customers, and of course key to that is what is the utility's price to compare.

As we have opportunities to provide customers savings versus what they would buy from the incumbent utility, that creates an opportunity to add customers, but that's the strategy.

Okay, thank you very much.

(Operator Instructions) Daniel Eggers, Credit Suisse.

Good morning, Dan.

Good morning.

First question, can you guys just share your thoughts on the outcome from the NEPOOL capacity auction and any ramifications that could have on your generating fleet, as far as maybe delisting some of the assets or reconfiguring where you sell them?

The capacity auction, Dan, we've always said is going to clear at the floor based on the demand side resources that are up there and also the drop-off in demand.

So we see that situation at the floor, and, of course, after this auction, the structure changes a little bit.

But I think there's going to be a little capacity built in the northeast and with the demand side there, if there's not a strong rebound in terms of growth, that the auction is going to continue to clear at a very low level.

Okay.

Then looking out to 2010, can you share your thoughts on O&M cost expectations, inflation, assumptions embedded in your numbers?

You guys have done a pretty good job of managing costs so far this year.

Is there room to continue on that front?

Dan, I think we'd like to address the specifics for '10 after we get a rate order from the Virginia Commission, and then we can lay out exactly what we're looking at in terms of both financing costs, (inaudible) expenditures and we can get greater color on what the Virginia Commission is going to award in terms of the current case.

Okay.

Tom, big picture, when you think about the 2010, not specifics, but from a business driver perspective, obviously natural gas prices are an issue, the rate case is an issue.

Are there any other major swing factors as you look out to next year that we should be thinking about?

I think you've summed those up.

The construction projects, the electric transmission projects, the Bear Garden and the Virginia City under the Virginia legislation, as we continue to build those, we continue to have those reflected in our rates as we build them.

So that's an important driver to continue to make progress on those.

We're obviously quite pleased to be on budget and on schedule in all of those projects, the electric transmission and the power generation.

We have a number of projects at the pipeline that we mentioned.

Our pipeline projects, there's some bigger ones, like Appalachian Gateway, and potentially downstream the joint venture with Williams for the Keystone pipeline.

But we are sort of almost constantly building out, adding compression, doing looping, adding $35 million here, $50 million there, that don't get the headlines that people pay attention to, but they continue to grow the rate base of that pipeline.

Since Dominion acquired Consolidated Natural Gas, that system has more than doubled its rate base and we continue along with those projects.

So there's lots of opportunities for us to continue to grow our infrastructure, carrying out plan we announced three years ago which is to concentrate on building our regulated asset base organically.

That's why 90% of our growth capital has been going into regulated projects.

Great.

Thank you.

See you guys next week.

Thank you, Dan.

[Char Paraza] with Citi Investment Research.

Three questions on your 2010 guidance.

If gas comes in below $6.75, could we assume you won't hit the low end of your guidance range?

Second question is, what debt co recovery are you assuming in your guidance range?

I know you are assuming a variety of outcomes, but does the top end of your range assume full recovery?

And what kind of load assumptions as far as industrial load are you assuming for 2010?

Stabilization or some growth?

Let me take the first and third.

It's Mark McGettrick.

First on the gas price.

We've said a number of times that there are four key factors in our 2010 guidance.

One is rate case assumptions.

The second is our commodity prices.

The third are O&M expenses.

The fourth are financing and taxes.

And to look at a single one of those and make assumptions on a range for commodity or rate case assumptions, et cetera, would be a mistake.

So to answer your question if we fall below $6.75 are we outside the range, the answer to that is no, that we have other levers in the Company that we can look at to try to offset that if it falls more than $1.00 below.

Tom will answer the second question.

Which is -- I was just trying to understand it -- what are our assumptions for the outcome in the rate case, which, as we've said since we filed the rate case on March 31, the case is sitting at the Commission.

What we're asking for is public record.

And what we're including in our guidance is a wide variety of potential outcomes.

And it's forecast, by the way, not guidance, for 2010.

Right.

In terms of industrial sales, first of all, we're very light on industrial sales anyway, compared to almost all other utilities.

Our industrial sales were down about 9% third quarter over third quarter.

And our expectation for next year is that industrial sales will stabilize, increase only modestly, but the main drivers for our sales in the state are residential and commercial and we're already starting to see stabilization in growth, and we expect growth coming out of the year for both those areas.

Okay, thanks.

My question has been answered.

(Operator Instructions) Mike Bolte, Wells Fargo.

Hi, guys.

On the Marcellus acreage, did I hear you guys say you have 450,000 remaining acres?

Because I was wondering, I thought maybe previously it was like a broader range.

I was wondering if that's like a refinement or I just heard wrong or how to look at that.

We had said I believe, Mike, we estimated between 400,000 and 500,000 acres remaining.

What we have been doing over the last really, I guess almost six months, and is now complete, is going through to make sure that we've been looking at every lease we have.

So we haven't bought this acreage.

This is all acreage that's under existing leases, and we needed to make sure that we had drilled the wells to hold the lease, the validity of the lease, so that when we take Marcellus acreage to market, that the buyers can see that that acreage is actually secure.

So we have completed that work and it totals 450,000 acres.

Again, perfect, thanks.

Thank you.

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

Mr.

McGettrick, do you have any closing remarks?

Yes, thank you.

We'd like the thank everybody for joining us this morning.

Just a reminder that our Form 10-Qs are expected to be filed with the SEC early next week and our year-end 2009 release is scheduled for January 28.

Thanks again for joining us, and we hope to see a number of you at EEI next week.

Thank you.

This does conclude this morning's teleconference.

You may disconnect your lines and enjoy your day.