道明尼資源 (D) 2010 Q2 法說會逐字稿

Welcome to the Dominion Resources, Incorporated earnings release conference call.

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

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 would like to ask a question.

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

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

During this call we will refer to certain schedules included in this mornings earnings release and pages from our second quarter earnings release kit.

Schedules in the earnings release kit 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.

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

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

In addition to the earnings release kit, we have included 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 this call, we will discuss some measures about our Company's performance that differ from those recognized by GAAP.

Those measures include our third quarter and full year 2010 and 2011 operating earnings guidance, as well as operating earnings with 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, and good morning, everyone.

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

On today's call, I will discuss the earnings results for the second quarter, our outlook for the third quarter and full year 2010 and our financing plans for the remainder of the year.

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

We will then take your questions.

Dominion had a very strong second quarter.

Our operating earnings were $0.72 per share which was above the top of our guidance range of $0.55 to $0.65 per share.

Warmer than normal weather was the principal positive factor relative to our guidance adding $0.06 per share.

Another factor relative to guidance was lower interest expense.

I'll discuss our financing plans in a minute, but because we anticipate not needing all of the long term debt we had previously planned to issue, the interest rate hedges related to some of those planned issues were closed this quarter.

The associated impact had the effect of lowering our interest expense for the quarter which increased our operating earnings by $0.03 per share.

Excluding these two items, operating earnings for the quarter were still about $0.63 per share, at the upper end of our guidance range.

Lower interest costs and lower operation and maintenance expenses, which are two principal drivers of our 2010 earnings, came in even better than expected.

When comparing our results to the second quarter of 2009, our operating earnings were $0.04 per share higher than last year.

Higher revenues from rate adjustment clauses, favorable weather, lower interest expense, and lower outage costs offset reduced merchant generation margins, the absence of earnings from our Appalachian E&P business and a lower contribution from producer services.

GAAP earnings were $2.98 per share for the second quarter.

The principal difference between GAAP and operating earnings was the $1.4 billion after-tax gain on the sale of our Appalachian E&P operations.

We also took a $95 million charge after-tax to impair our State line power station, triggered by the EPA's new one hour SO2 rule that was finalized during the quarter.

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

Now, moving to the results by operating segment.

At Dominion Virginia Power second quarter EBIT was $219 million, well above the $188 million to $208 million range included in our guidance.

Favorable weather was the principal factor behind the improvement.

EBIT for Dominion Energy in the second quarter was $164 million which was at the mid point of our guidance range.

Higher revenues from our transmission and distribution businesses were offset by a lower contribution from producer services.

Second quarter EBIT from Dominion Generation was $483 million which was well above the second quarter guidance range of $390 million to $435 million.

Favorable weather and lower interest expenses in O&M helped offset lower merchant generation margins.

We are very pleased with these operating segment results.

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

The 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.

Moving to cash flow and treasury activities.

We closed the sale of our Appalachian E&P business to CONSOL Energy on April 30th.

Net proceeds of $2.2 billion are being used, among other things, to offset our equity financing needs, reduce debt, and repurchase shares.

At our May 7th investor and analyst meeting, we outlined our specific plans for the proceeds, including $910 million for share repurchases.

As of that date, we had purchased 12.2 million shares at a cost of approximately $500 million.

We have not repurchased any shares since May 7th.

However, we intend to be in the market periodically through the remainder of the year to complete our share repurchase program.

Our cash flow has been very strong this year and as a result, we have almost no outstanding commercial paper and overall amount of floating rate debt is well below our targeted levels.

Because of this, we have modified our financing plans for the remainder of the year and we will not be moving forward with the number of previously planned debt issues and will increase our use of short-term debt.

We now intend to issue term debt of approximately $300 million at Virginia Power and $500 million at the parent company later this year.

Liquidity was very strong at $5 billion on June 30th.

For statements of cash flow and liquidity, please see Pages 16 and 43 of the earnings release kit.

Also, we are in the midst of replacing our existing credit facilities with two facilities totaling $3.5 billion.

We are in the process of receiving commitments to support our credit needs and expect to close the facilities by the end of the third quarter.

Bank interest in these two facilities has been very strong.

Now to third quarter and full year 2010 guidance.

Dominion expects third quarter 2010 operating earnings in a range of $0.99 to $1.04 per share compared to operating earnings of $0.99 per share in the third quarter of 2009.

Positive factors for the third quarter of 2010 compared to the prior year include higher rider revenues and normal weather for the rest of the quarter.

Recall that weather in the third quarter of 2009 included the mildest July on record, impacting earnings by about $0.05 per share.

Up to now, weather for July has been above normal.

Factors offsetting these positives include lower merchant generation margins and the absence of earnings from our E&P business.

We are increasing our 2010 operating earnings guidance range to $3.25 to $3.40 per share from $3.20 to $3.40 per share.

This change reflects the strong results for the first half of the year, the warm weather in July and assumes normal weather for the remainder of the year.

Our guidance for 2011 remains $3.10 to $3.40 per share.

GAAP earnings for the full year of 2010 are currently estimated to be about $900 million higher than our projected operating earnings, reflecting the net benefit of recent divestitures and charges related to the workforce reduction plan, the impairment of our State Line plant, and the elimination of certain tax deductions associated with the new healthcare law.

As to hedging, we've added to our hedge positions for Millstone, increasing coverage of expected output to 50% for 2011 and 20% for 2012.

We also increased our hedge position at State Line to 60% for 2011.

Our sensitivity in 2011 to a $5 change in New England Power prices is currently about $0.07 per share.

The update of our hedge positions can be found on Page 33 of our earnings release kit.

Before turning the call over to Tom Farrell, I want to discuss the impact of the recently enacted financial reform legislation on Dominion.

The legislation itself was over 2300 pages long, calls for several hundred new rule making actions on the part of various federal agencies.

The largest potential impact to Dominion would be related to the use of derivatives to hedge our purchase and sale of various energy related commodities.

It is our understanding that as an end-user, we would not be classified as a swap dealer.

It would not be required to clear all of our transactions through an exchange and be subject to increased requirements for collateral.

The House and Senate leaders behind the legislation have made their intentions clear to supplemental correspondence.

They do not intend for end-users such as Dominion to be subject to these additional requirements.

We are actively monitoring the implementation of the new legislation and we'll provide any updates of changes to our assessment.

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 second quarter.

Dominion now ranks number one in total safety performance among the 18 companies in the Southeastern Electric Exchange.

This is an improvement from our low second quartile performance just three years ago.

Our nuclear fleet achieved a capacity factor of 97%, excluding refueling outages and our regulated fossil and hydro utility fleet had a peak season equivalent availability rate of 96%.

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

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

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

During the second quarter, we completed a 75-megawatt upgrade at our North Anna Nuclear Power Station.

At the end of the second quarter, the Virginia City hybrid Energy Center was 66% complete.

The project is proceeding according to plan with approximately 1800 workers on site.

Earlier this month, the 400-ton electric generator stator was delivered to the construction site, marking a major milestone in the construction of the 585-megawatt power station which is scheduled for commercial operation in 2012.

The Bear Garden combined cycle plant was 70% complete at the end of the second quarter.

Construction continues per plan with about 650 workers on site and all major equipment has been delivered.

Assembly of the gas and steam turbines, and installation of the piping and electrical systems continues on schedule.

The transmission line is complete and the switch yard work is in progress.

The 580-megawatt combined cycle plant is scheduled for commercial operation in mid 2011.

Next major addition to our Virginia Power generating fleet is expected to be the Warren County project, a three-on-one combined cycle facility with a projected capacity in excess of 1000 megawatts to be located in northern Virginia.

Dominion held its required air permit informational briefing on May 11 with the objective of obtaining the air permit by the end of the year.

Proposals for the combustion turbines and the steam turbine were received last month.

Last week, we received zoning approval from the County Board of Supervisors.

We expect to file for approval of this plant with the Virginia State Corporation Commission early next year.

With respect to North Anna, last month we submitted an amended combined operating license, incorporating the advanced pressurized water reactor design Mitsubishi Heavy Industries as the selected technology.

Later this fall, the NRC is expected to post its new schedule for our amended COL which we now expect to be issued in 2013.

As we discussed at our May 7th analyst meeting, Dominion's options for the project include constructing it now with a partner or constructing it at a later date, either by ourselves or with a partner.

We are continuing work with Mitsubishi on licensing and project development as we pursue potential partners.

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

Two phases of the 500kV Meadow Brook to Loudoun line are complete and in operation, while work on the final phase is well underway.

Work on the 500kV Carson to Suffolk line is about 30% complete.

Several other transmission projects are in various stages of completion.

We also have a healthy backlog of transmission projects and anticipate investing over $500 million per year for the foreseeable future.

Dominion Energy also made considerable progress in its infrastructure growth program.

Dominion's natural gas pipeline and storage business has a significant list of projects intended to relieve existing congestion within its market area, as well as facilitating the development of the Marcellus Shale formation.

For example, on May 20, Dominion Transmission signed a binding proceed agreement with CONSOL Energy to provide 200,000 decatherms per day of firm transportation service for Marcellus Shale volumes to the market hub in Leidy, Pennsylvania.

This is referred to by us as the Marcellus Northeast Project and is expected to be in service by November 2012.

We also recently signed an agreement to provide 150,000 decatherms per day to move Marcellus Shale volumes to Craigs, New York.

This project too is expected to be in service by November 2012.

On June 1, we filed the Appalachian Gateway Project with FERC, with approval expected by spring of next year.

This project provides nearly 500,000 decatherms per day of firm transportation to the Oakford marketing hub beginning in 2012.

The related gathering enhancement project, which does not require FERC approval, increases gathering and processing capacity for producers within the region.

It will phase into service during 2011 and 2012.

On April 19th, Dominion announced an open season for Marcellus 404, a project designed to provide firm transportation, as well as gathering and processing services for up to 300 million cubic feet per day of high BTU Marcellus natural gas production in portions of West Virginia, Pennsylvania and Ohio.

Fractionation capacity for up to an additional 32,000 barrels per day of natural gas liquids is projected to be added as well.

We are excited about the numerous growth opportunities available to our regulated businesses.

These opportunities extend well beyond the projects I have covered this morning.

Later this year, we will provide more details about our infrastructure growth plans for the next five years.

Now, a few minutes on the progress in our regulatory proceedings and other matters.

With respect to EPA's proposed transport rule, we are evaluating its potential impact on both our Virginia Power and merchant fleets.

It is a complex rule that is likely to be modified as it goes through the process.

As Mark noted, however, our decision to take a charge of State Line in the second quarter was not related to this proposed rule making, but rather primarily to the one-hour SO2 rule which will likely require significant environmental expense at that plant in the future.

We expect to give you a more complete evaluation as the transport rule making progresses.

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

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

Last week, we received an order from the Virginia State Corporation Commission, approving our request to invest $500 million of equity into Virginia Power.

The equity injection is intended to offset the impact of the charges related to the settlement agreement in the Company's base rate case and will restore Virginia Power's equity ratio to about 53%.

On June 30, we filed our annual update to the riders for Virginia City and Bear Garden Power Stations.

These filings cover the financing costs for both projects for 2011, as well as the operating costs for Bear Garden which is expected to be in service by summer of next year.

The change in rates would be effective on April 1, 2011.

Overall, we are quite pleased with the results for the second quarter.

Despite lower commodity prices, we achieved operating earnings well above our guidance range and near the top of the range when weather normalized.

Our infrastructure growth program continues to provide the foundation for sustained earnings growth in the future.

Thank you and we are now ready for your questions.

(Operator Instructions).

Our first question comes from Jonathan Arnold, Deutsche Bank.

Can you hear me?

Good morning, Jonathan.

Hi.

My question relates to the 2011 guidance and what you had said at the analyst meeting.

I believe was the low end of the range would be more or less consistent with mid $5 gas.

With gas being around $5.20 in 2011, are there offsets to that pressure or -- and I think you can update around that.

I think at the analyst meeting you said there might be other levers that would get pulled.

Jonathan, yes.

Gas, as you mentioned, is running in the $5.20, $5.25 range.

That is slightly below what we said.

You should assume for that one item, gas price, that would take us toward the bottom of our range.

But as you can see this year already, we have a lot of other items that we've had a lot of success with and I think we will next year, whether it be O&M expenses, interest expense, or other areas that we'll be able to offset a gas price at this level and maintain the range that we have out there for 2011.

We should take that as you could wear a slightly lower gas price and still be at the low end of the range?

Yes, that's right.

Okay, that was really my main question.

Thank you, guys.

Thank you, Jonathan.

Our next question comes from Paul Fremont, Jefferies.

Hi.

My question was answered.

Thank you very much.

Thank you, Paul.

Our next question comes from Greg Gordon, Morgan Stanley.

Thanks.

I don't have an earnings related question as much as I have a strategic question.

As I look at how you guys have evolved the Company, in terms of your strategic focus and the amount of capital and the amount of potentially high return projects that you have in the regulated asset portfolio which is your core competency, are there circumstances under which you would continue to divest asset portfolios that are highly commodity cyclical, like the Northeast asset portfolio?

Good morning, Greg.

We look at all of our assets on a continuous basis.

We have return on invested capital hurdles that we expect our assets to perform to and as you've seen in the past, if they are not performing at levels we expect and we don't see a way to get them to perform at levels that we desire in a reasonable period of time, then we'll either divest them.

Or in some cases, we may choose to shut it down.

We've talked, for example, about the possibility of Salem Harbor of shutting down an individual unit within the Salem Harbor Station.

We continue to look at all of that and we will continue to do so.

We don't have any plan at the moment to do some strategic sale of any of our assets.

Okay.

I asked the question because I see a lot of high return projects and a lot of capital spending in your regulated businesses.

You inferred from your comments earlier that you intend to give us some more visibility on the length of that opportunity which I would infer it is substantial.

You've done some very good things to fund the financing needs for that over the intermediate term, in terms of selling your shale position for instance and you've positioned the Company extremely well.

I just wonder whether having a merchant portfolio that's sub scale, when you have all of these other opportunities and needs for funding, make sense in the long run.

Well, it's certainly a legitimate question, Greg, that we will continue to monitor.

You're quite right.

I would remind all of us here, if you recall our May 7th presentation and you look at the way our capital spending has flowed in this quarter and will continue to flow out into the foreseeable future, it's almost entirely going into regulated projects.

We will continue to increase our regulated content.

There's two ways to increase regulated content; grow your regulated content and shrink your commodity expenses -- content.

We have done both over the course of the last few years by disposing of our E&P business.

The shale sale, as you mentioned, reduced our commodity exposure by an additional 20% this year.

We've focused on both, but our concentration at the moment is on continuing to expand the regulated projects through building out organically.

Thank you very much.

Thank you, Greg.

Thank you.

Our next question comes from Paul Patterson, Glenrock Associates.

How are you?

Good morning, Paul.

I want to just -- and I'm sorry if I missed it, but the State Line impairment, could you go over that a little bit as to what exactly happened there and what the book value now of the plant is?

Paul, EPA came out with a new one-hour SO2 rule where they used to have a 24-hour SO2 rule and they've tightened that down considerably.

The states have to have compliance plans from 2014 to 2017 I think is the flexibility that they have.

Based on that rule, it's apparent that State Line would need significant capital improvements on the environmental side to meet those requirements in the future.

We're not going to make a significant capital investment in State Line.

We will run that facility as long as we possibly can and comply with all of the rules as long as we can, but we are not going to make a capital infusion there.

We took an impairment on that plant and the resulting book value right now is between $60 million and $70 million.

What's the expected life now of the plant with this new rule?

We haven't set an expected life.

But again, I referenced that the states have a three-year window that they have to come up with implementation plans so we'll see how it will be.

But again, I think the key takeaway here for us today and for everyone listening is that it will require significant CapEx at this plant and that we are not going to invest that in the future.

Is there any decrease in depreciation as a result of this impairment charge?

There would be a decrease in depreciation because we have shortened the depreciation period, but in terms of earnings you should assume we're earnings neutral to it.

Okay.

Then on the stock buyback, you guys mentioned that since May 7 you haven't bought back any if I understood you correctly.

Right?

That's correct.

What I'm wondering is, how should we think about why you guys -- because there have been a decrease -- of course we don't know exactly when and what price you bought it back at, but how should we think about the philosophy of the repurchase?

Because I understood that you guys were thinking of buying it back pretty much throughout the balance of the year and just wondering why you guys are kept out of the market?

That's a very good question and let me give you a little background on it.

We talked about May 7 that we bought back 12 million shares for about $500 million and that leaves us with 10 million or 11 million shares left to buyback.

We had bought those shares back in a very tight window of about 40 to 45 days, so there was a pressure on the stock from a buying standpoint based on us being in the market.

We wanted to stay out of the market for about 30 days or so, let the stock stabilize, trade on its own.

We anticipated getting back into the market in June of this year to continue our stock buyback on a periodic basis.

However, it was very apparent to us in early June that we were going to have a significantly better quarter than what we had previously disclosed in our guidance range.

We did not think it would be prudent to buyback stock knowing that information, and that information not being public so we elected not to buyback any stock until we disclosed what our actual earnings were for the second quarter.

Okay.

Great.

I really appreciate it.

Thanks a lot.

Thank you.

Our next question comes from Paul Ridzon, KeyBanc.

As you look at the spectrum of projects you have in the Marcellus, there's some that are FERC regulated, others that are not.

What do you think the range of potential ROEs on those projects could be?

Well, they tend to be -- Paul, good morning.

They tend to be in the midteens as they're developed and they are fairly similar.

The gathering ones that are not FERC regulated, we can get done faster obviously because you don't have the regulatory process to go through, but we have to be just as careful with environmental and construction and operation obviously as you do with the larger pipeline, but that's the target that we see, midteens.

And then just any update on your proposed alternative to path and how that could unfold over the coming months?

I'll give you just a quick sentence on it and let Paul Koonce talk about more of the detail, but we have filed path with PJM and it will go through its process.

I expect we'll hear more about its -- what its potential is in the fall.

Paul go ahead.

Yes.

Just where this stands, all of the information has been provided to PJM as part of its [R-tech] process.

We have a [T-ACK] meeting in August.

We have provided construction plans because if you're going to take the line out of service, there needs to be a lot of planning around when that happens.

We'll provide all of that information.

There will be a T-ACT meeting in August where we'll review some of that information.

Then ultimately, we expect that PJM will issue its R-tech plan that will address all of these issues in the September tim frame.

We should have a final answer by September?

Yes.

We should know what the buildout plan looks like in the September timeframe.

Thank you for the update.

Thank you.

Our last question comes from Hugh Wynne, Sanford Bernstein.

Good morning and congratulations on a good quarter.

I just wanted to ask a few questions on the outlook for the merchant generation margin, in part given your disclosures around State Line.

I noticed that merchant generation margin in the second quarter was about $0.16 short of what you had earned in the similar quarter last year and that's down from the first quarter when I think merchant generation margin had been down by about $0.12 compared to last year.

Looking forward, it appears that the State Line plant will be taken out of service because you're not going to scrub it.

My question is, is the trajectory of merchant generation earnings playing out this year and next year, broadly as you had expected?

Or have things deteriorated, possibly in light of these new environmental regulations so that the expectations have declined?

Hugh, this is Mark.

Expectations have been pretty much in line with what we thought.

Again, you referenced the State Line.

That is not a near term issue.

That's a long term issue.

State Line will be running for a long time to come.

If you look at this year and next year, in terms of any environmental rules versus what our expectations were on merchant contributions, they haven't changed at all.

I'd reference you back to our May 7th presentation for this year, where we talked about what we expected in terms of merchant margins versus '09 for the rest of the year, which said that our merchant margins would be impacted about $0.14 to $0.18 per share year-over-year for the second half.

That's right in line with what we think they are going to be.

We're comfortable with what we have out there for 2010 and 2011 on merchant.

The environmental, we see as a much longer term issue.

Again, the only one that has clarity near term, based on environmental rule is Salem, but that clarity is only that they aren't going to invest any capital in it.

The question is going to be, just how long we can run it.

We are going to run it as long as we can.

2010 and 2011 were basically hitting the expectations for merchant generation margin.

Salem and State Line, we can probably expect will be retired after that, but are we looking then at the 2012/2014 timeframe, given the transport rule requirements?

I think transport rule is too early to speculate on to see where it's going to go.

It's up for comment now.

We'll see what the final rules are there, but we've always been very clear on Salem.

After we've tried to delist that unit in the capacity market and I think, Hugh, you're very close to the subject, but there's competing forces here.

One is on the environmental side and they are coming out with rules from EPA.

The other is on a reliability side, which the ISOs and FERC have a keen interest in and we have Salem caught in the middle of both of those.

Our committment is on Salem, we'll run it as long as we can, on State Line, as long as we can, provided we're in compliance.

We're going to let the ISOs and EPA organizations decide what the long term life is, based on their two interests.

Excellent.

Thank you very much.

Thanks a lot.

Thank you.

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

Mr.

McGettrick, do you have any closing remarks?

Yes.

Thank you very much.

Just a reminder that our Forms 10-Q are expected to be filed with the SEC in the next few days and our third quarter earnings release was scheduled for October 29th.

Thank you for joining us today.