道明尼資源 (D) 2010 Q1 法說會逐字稿

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

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

Please be aware that each of your lines is in a listen-only mode.

At the conclusion of the presentation, we will open the call for questions.

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

I would now like to turn the conference over to Greg Snyder, Director of Investor Relations, for the Safe Harbor treatment.

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

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

Schedules in the earnings release kit are intended to answer the more detailed questions pertaining to operating specifics and accounting.

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

If you have not done so, I encourage you to visit our website, register for e-mail alerts, and view our first quarter 2010 earnings documents.

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

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

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 the most annual report 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 this call, we will discuss some measures about our Company's performance that differ from those recognized by GAAP.

Those measures include our second quarter and full year 2010 operating earnings guidance, 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 CFO, Mark McGettrick.

Thank you, Greg.

Good morning, everyone.

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

As most of you know, we will be hosting a meeting for investors and analysts next Friday, May 7th, in New York, where we will lay out our financial and strategic plans.

If you plan to attend, please go to our website and register.

On today's call, I will limit my remarks to the results for the first quarter, and our outlook for the second quarter and full year 2010.

Tom will briefly update you on regulatory proceedings and other operational activities.

We will then take your questions.

Our operating earnings for the first quarter of 2010 were $0.96 per share ,which was above the midpoint of our guidance range.

Earnings from our operating segments were solidly within our range, and were also helped by lower interest expenses.

When comparing these results to first quarter of 2009, our operating earnings were $0.02 per share lower than last year.

This change was driven by lower merchant generation margins, largely due to lower commodity prices.

GAAP earnings were $0.29 per share for the first quarter.

The major differences between GAAP and operating earnings were charges related to our work force reduction programs, a charge related to the new healthcare reform law, and a book loss on our sale of Peoples Gas.

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

Now, moving to results by operating segment.

At Dominion Virginia Power, first quarter operating earnings were flat compared to the first quarter of last year.

Modestly favorable weather, and higher revenues from rate [riders] were offset by storm restoration costs and slightly lower earnings from Dominion Retail.

Results for Dominion Energy in the first quarter were also little changed from the prior period.

Dominion Energy's earnings were down, due to a lower contribution from producer services, which had a very strong first quarter last year, as well as the roll-off of gas and oil production volumes associated with a VPP royalty interest that expired in February 2009.

Offsetting the decline were revenues from the Cove Point expansion ,which went into service in March 2009.

First quarter operating earnings at Dominion Generation were down relative to the first quarter of 2009.

Modestly favorable weather and higher rider-related revenues were more than offset by lower margins from our merchant fleet, due to commodity prices and an unplanned outage in Millstone in January.

In addition to our traditional presentation of operating results from our three business units, we have prepared a number of supplemental schedules in alternative format that can be found on our website following the conclusion of our earnings call.

These supplemental schedules show quarterly EBIT for the legal entity Virginia Power, which includes utility generation, electric transmission and distribution operations, as well as quarterly EBIT for our regulated gas businesses, merchant generation and Dominion Retail.

We hope this provides some of the supplemental information many of you have requested.

Moving to cash flow and treasury activities, on February 1st we closed the sale of Peoples Gas.

Net proceeds of $542 million were used to pay down debt.

Also, as most of you know, on March 15th we announced the sale of our Appalachian E&P operations to Console for $3.475 billion.

We expect to close this sale tomorrow.

We plan to use the net proceeds from the sale to offset the impact of the rate case settlement, offset our need to issue equity over the next two years, repurchase shares, and fund a contribution to our employee pension plans.

We will provide the details of our expected use of proceeds on May 7th.

However, we have begun to repurchase some of our common shares to offset the absence of earnings from our E&P business, and as of yesterday, had purchased 10.8 million shares.

We will talk more about additional share repurchase activity on May 7th.

The sale of our E&P business supports our 2010 earnings range, and is also accretive in 2011 and beyond.

Funds from operations were $878 million in the first quarter, compared to $715 million in the first quarter of 2009.

Because of the continued strong cash flow, we had no need for a previously planned debt issue.

An interest rate hedge related to that planned issue was monetized, reducing total financing costs for the quarter.

Liquidity was also very strong at $4.4 billion on March 31st.

For statements of cash flow and liquidity, please see pages 16 and 36 of the earnings release kit.

Also as we previously outlined, we will be replacing our credit facilities later this year, and expect to operate with $3 billion to $3.5 billion in credit support.

Now to second quarter and full year 2010 guidance.

Dominion expects second quarter 2010 operating earnings in the range of $0.55 to $0.65 per share, compared to operating earnings of $0.68 per share in the second quarter of 2009.

Positive factors for the second quarter of 2010 compared to the prior year include higher rider revenues, the benefit of recent staff reductions, other O&M expense reductions, and a reduced share count.

Factors offsetting these positives include lower merchant generation margins, a planned refueling outage at Millstone and a lack of our E&P business -- earnings from our E&P business beginning on May 1st.

The main driver to focus on when comparing the second quarter 2010 to the second quarter of 2009 is the seasonal refueling outage at Millstone.

This single item is expected to reduce quarter on quarter operating earnings by approximately $0.09 per share.

On a year-over-year basis, this is only a timing issue, since we will have no Millstone refueling outages this Fall, as we did in 2009.

GAAP earnings for the second quarter of 2009 were $454 million or $0.76 per share.

You should expect second quarter 2010 GAAP earnings to be significantly higher than last year, due to the closing of our E&P sale.

We are affirming our 2010 operating earnings guidance of $3.20 to $3.40 per share today.

Despite the decline in power prices over the past few months, we remain confident in our ability to deliver earnings within the range, due to our merchant fleet being almost completely hedged, as well as a number of other positive factors.

These include a larger than expected number of employees electing to accept a voluntary separation plan offer, additional O&M expense savings, and lower financing costs due to strong cash flow.

Again, please note that we have no Millstone refueling outage this fall.

We plan to discuss the details supporting our 2010 and 2011 guidance, and public our earnings guidance kit on May 7th.

One driver of our earnings guidance that we can update is our sensitivity to changes to commodity prices.

As we mentioned on the last call, we have completed our hedging program for 2010, but continue to see some pressure from lower commodity prices and compressed [dark] spreads on our open positions.

Our sensitivity to a $5 change in New England power prices for the remainder of 2010 is less than $0.02 per share.

We have added to our 2011 hedge positions for Millstone and our New England coal units, increasing the coverage of expected output to 40% and 30% respectively.

The update of our hedged positions can be found on page 33 of our earnings release kit.

Before turning the call over to Tom Farrell, let me outline the topics for our analyst meeting next week.

Tom will discuss Dominion's strategic repositioning over the last four years, and the steps we plan to take over the next few years.

He will also cover our dividend policy, and other investment considerations.

I will be providing the detailed financial outlook and our consolidated earnings drivers, including our O&M expense management, our CapEX plans, and our financing plan.

I will discuss the details behind our operating earnings guidance for 2010, our outlook for 2011, and expectations for normalized longer-term growth.

Once again, I encourage you to go to our website and register if you plan to attend.

I will now turn the call over to Tom Farrell.

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

Our operating and safety performance continued to be excellent during the first quarter.

Our nuclear fleet achieved a capacity factor of 98% in our regulated [fossil] and hydro utility fleet had an equivalent availability rate of 90%.

Our merchant, fossil and hydro fleet achieved an equivalent availability of nearly 94%, its best first quarter since 2006.

We also continued to improve the reliability of our electric transmission and distribution systems.

We were recently ranked number one among our southeast peers in transmission system reliability.

Our pipeline business was ranked number one in customer value and customer satisfaction among its pipeline piers in the northeast in a recent customer survey.

We continue to make good progress on our regulated growth projects.

At the end of the first quarter, the Virginia City Hybrid Energy Center was 61% complete, and the Bear Garden power station was 57% complete.

Both of these projects remain on schedule and on budget.

Our two major electric transmission projects are also on schedule to be fully in service in 2011.

All of these major products, totaling over $3 billion in new investment, are earning enhanced rates of return.

Dominion Energy placed its Rural Valley gas transmission project into service on April 1st.

Construction of the pier expansion at Cove Point started on March 15th.

Last week we announced the Marcellus 404 Project.

This project, which we target to be in service by 2012, is designed to provide firm and interruptable transportation, as well as gathering and processing services, for up to 300 million cubic feet per day.

We will discuss this effort and our broader infrastructure growth program in greater detail at next week's analyst meeting.

Now a few minutes on the progress in our regulatory proceedings.

On March 11th, the Virginia State Corporation Commission approved the settlement agreement that had been reached by all parties in our base rate case.

The authorized return on equity for base rates was set at 11.9%, creating an earnings band for the 2011 biannual review earnings tests of 11.4 to 12.4%.

The agreement also set the ROE at 12.3%; the rate riders for our Virginia City and Bear Garden generation projects.

The State Corporation Commission also issued a ruling on our demand-side management filing, approving five programs proposed by the Company.

Riders to recover the $28.1 million annual revenue requirement from the approved programs will be effective on May 1st.

During the first quarter we also filed for a $46 million increase in base rate and fuel revenues for our North Carolina service territory.

We expect a decision in that proceeding before the end of the year.

Overall, we are pleased with the results for the first quarter.

Despite a soft economy and lower commodity prices, we were able to deliver operating earnings above the midpoint of our guidance range.

We look forward to discussing our plans for the next few years with you at next week's meeting.

Thank you, and we are now ready for your questions.

(Operator Instructions)

Our first question comes from Hugh Wynne with Sanford C.

Bernstein.

I had a question regarding the two largest changes in earnings in the quarter, and I think those were the $0.12 earnings erosion in merchant generation margin and the $0.09 contribution to operating earnings at corporate and other.

My question was whether the scale of these changes is expected to be similar in future quarters, or whether they are important one-off drivers that are affecting these items?

This is Mark.

On the merchant margins, that will depend on what the outage schedules are quarter-over-quarter.

But in general, you should expect that our merchant margins will continue to be down quarter-over-quarter compared to the previous.

It just -- it will be tweaked by the number of nuclear (inaudible) that we have.

Right.

On the corporate items, the tax rate that we quoted last year to assume in the guidance for 2010 was 37%.

That was the tax rate that showed up in corporate this quarter, and you should assume about a 37% tax rate for the remainder of the year.

The other item in corporate that we referenced was taking advantage of an interest rate hedge that we had on a debt issue that was based on a cash flow that we currently have that we did not need to issue, and we took that into income in the quarter.

It is uncertain whether there will be additional hedges released to income for the remainder of the year, and that will depend on what our cash position is as we move throughout the year.

If you recall, though, in the Spring of 2009 we hedged all of our anticipated debt issuances for not for only 2009 and 2010, so we will see what our position is as we go out throughout the year and we will determine whether we need to issue the debt or whether we will take advantage of the [end of money] hedges that currently exist.

What was the EPS contribution of taking that hedge into income in the quarter?

About $23 million.

Thank you very much.

Our next question comes from Paul Fremont with Jefferies.

(Operator Instructions)

A follow-up on that, should we then assume that once the hedges play through, that the interest -- the year interest expense would go to a level that is essentially higher than what you are showing right now?

Yes, you should.

I guess my second question is with respect to the Marcellus announcement that you guys made, have you indicated to what extent that investment will add to the existing processing capability of your mid-stream plants?

No, we have not.

That is an item that we will talk about on May 7th, and how that impacts our going forward plans.

Thank you very much.

Our next question comes from Angie Storozynski with Macquarie Capital.

First question is about Dominion Retail.

I see the volume has almost doubled -- electric volumes at least doubled year-over-year.

You mentioned that there was a lower earnings contribution from this business, which sounds a little bit strange, given the weak power prices and higher volumes?

I will let Paul Koonce, who runs Retail as part of Dominion Virginia Power, answer that question.

Thank you.

This is Paul.

We did have a very good first quarter.

We added about 245,000 net new customers, and we do have a pickup in volumes year-over-year.

Really offsetting the success somewhat was the gas book.

In the markets were we provide gas retail service, the weather and the economy reduced consumption, and we did experience some slightly per-unit margins.

So those two factors really led to the results in the first quarter.

As you know, gas will be much less part of the book in the second and the third quarter, so we actually expect to see the benefits of that electric book really to show through.

Looking at the volumes of the electric business, is there any target that you are trying to achieve?

Are you growing this business even more, or the [kind of] volumes is pretty much where you want to stay?

Good question.

We are constantly trying to grow that business.

Right now, we have about 19 different offers out in the various States and markets where we operate, so we are constantly looking to add customers.

But it takes a variety of factors to cause us to want to have a successful campaign.

You have to look at the billing type.

You have to look at whether we can save customers money.

You have to look at whole suite of elements that lead us to determine that we can conduct a successful campaign, but we are constantly assessing that.

Angie, this is Mark.

We will talk about Dominion Retail as well next week, where we will provide you longer-term plans and what our anticipated long-term growth rate will be.

Okay, thank you.

I'm sure that you will be talking about my second question as well, but any comments about your views about the future of your [need pull] power plants?

Just purely looking at the level of hedged power prices for 2011, there's a considerable reduction in the average hedged price for an equal base load.

Granted that it works both ways, if power prices pickup, there is upside, but you are trying to move towards more regulated business, if I understand?

Would you consider, for instance, selling some of those plants?

Angie, this is Tom Farrell.

Good morning.

We will talk about those kinds of issues next Friday.

Okay.

Thank you.

Thank you.

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

Mr.

McGettrick, do you have any closing remarks?

We look forward to seeing everybody at next week's May 7th meeting.

If you can't attend in person, it will be webcast.

I think it will give you a very clear look for the next several years on where we are headed, both financially and strategically, and we appreciate your time today.

Thank you.

This does conclude this morning's teleconference.

You may disconnect your lines, and enjoy your day.