道明尼資源 (D) 2013 Q2 法說會逐字稿

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

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

At this time each of your lines is in a listen-only mode.

At the conclusion of today's presentation we will open the floor for questions.

At that time procedures will be given as to the procedure to follow if you would like to ask a question.

I would now like to turn the call over to Tom Hamlin, Vice President of Investor Relations and Financial Analysis, for the Safe Harbor statement.

Good morning, and welcome to Dominion's second quarter 2013 earnings conference call.

During this call we will refer to certain schedules included in this morning's earnings release and pages from our 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 the Investor Relations page on our website, register for e-mail alerts and view our second quarter 2013 earnings document.

Our website address is www.dom.com.

In addition to the earnings release kit we have included a slide presentation on our website that will guide this morning's discussion.

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 of our Company's performance that differ from those recognized by GAAP.

Those measures include our second quarter 2013 operating earnings and our operating earnings guidance for the third and fourth quarters of 2013, the full year 2013, 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 on Schedules 2 and 3, and pages 8 and 9, in our earnings release kit.

Joining us on the call this morning are our CEO, Tom Farrell; our CFO, Mark McGettrick; and other members of our Management team.

Mark will discuss our earnings results for the second quarter and our guidance for the third and fourth quarters.

Tom will review our operating and regulatory activities for the quarter and review the progress we have made on our growth plans.

I will now turn the call over to Mark McGettrick.

Good morning.

Dominion's operating earnings were $0.62 per share for the second quarter compared to our guidance range of $0.60 to $0.70 per share.

Earnings for the quarter were impacted by lower than expected kilowatt hour sales at Virginia Power, a function of both milder weather and lower than expected economic growth in our commercial and governmental sectors, and operating losses at our producer services business driven by large basis declines.

GAAP earnings were $0.35 per share for the quarter.

The difference between second quarter GAAP and operating earnings were driven by the following charges.

First, we recorded a charge of $70 million associated with the sale of our Brayton Point and Kincaid power stations.

The majority of this charge was driven by cost to redeem debt at both facilities.

We expect to close this transaction in the third quarter of this year with only FERC approval remaining.

Second, we decided to exit all activities in our producers services business except fuel management services for Appalachia producers and Dominion affiliates.

Emerging shale production has fundamentally changed the regional gas markets, all but eliminating seasonal and locational pricing variations.

The mark-to-market value of our open-forward positions resulted in a charge of $24 million.

We expect the sale of the majority of these positions by year-end.

In addition, we terminated lease agreements for two small gas-processing facilities in Ohio and West Virginia, and will mothball these units over the next two years.

These plants were built before the Utica and Marcellus shale potential was known and are not large enough to economically accommodate high-volume shale wells.

Finally, we reflected a $17 million charge in support of our operation and maintenance expense reduction program.

A reconciliation of operating earnings to reported earnings can be found on Schedule 2 of the earnings release kit.

Before moving to operating segment results, let me spend a minute on sales growth.

As we discussed on our last earnings call, first quarter kilowatt hour sales in our Virginia power service territory were below our expectations.

Based upon the momentum and new connects and economic activity we have seen in the second half of last year, we'd expected about 1% weather-normalized growth from our traditional customer base and another 1% increase related to data centers.

However, total weather-normalized sales growth in the first quarter was about 1%.

Growth in the second quarter was less than half that amount.

We are very pleased that weather-normalized residential sales were nearly 2% higher than the same period last year and our data center growth for the same period is up over 12%.

However, we are seeing a significant shortfall in commercial and governmental sales versus our expectations.

It appears the shortfall is driven by lower commercial sales in northern and eastern Virginia and a drop-off in usage by governmental customers in Hampton Roads.

These areas are the most susceptible to impacts from the federal sequestration due to their high military and government support operations.

We believe it is too early to say if these trends will be short term or have a longer-term impact on sales.

As we stated on our first-quarter call, we will be lowering our operating expenses by $100 million to safeguard against a potential sales decline versus our original expectations.

As we will discuss in a moment, most of these expense reductions will occur in the third and fourth quarters.

Now moving to results by operating segment.

At Dominion Virginia Power, EBIT for the second quarter was $254 million, which was outside its guidance range.

For electric distribution, kilowatt hour sales were below expectations, partially due to lower than expected load growth and milder than normal weather.

Also, in early June our electric distribution business experienced a storm that affected 330,000 customers.

The cost of [restoration] for this storm was another driver of the lower results.

Electric transmission exceeded guidance due to a wider revenue true-up in higher rate base.

EBIT for Dominion Retail was in the upper half of its guidance range.

Weaker than expected results from the core business were offset by the monetization of a book of business in Illinois due to our decision to redeploy our capital into other markets.

Retail is a maturing business, and you should expect us to routinely shift resources to states where we see better current and future returns, and away from those with lower returns.

Second quarter EBIT for Dominion Energy was $201 million, which was in the lower end of its guidance range.

As I mentioned earlier, we have exited most activities of our producer services business due to the changing fundamentals in the region.

The significant price volatility experienced as we were de-risking producer portfolio resulted in a $12 million EBIT loss, accounting for most of Dominion Energy's short call fall for the quarter.

Dominion Generation produced EBIT of $298 million in the second quarter, which was in the lower end of its guidance range.

Lower than expected kilowatt hour sales and mild weather were the principal factors driving the lower results for the regulated generation business.

EBIT from merchant generation was just above the midpoint of its guidance range.

On a consolidated basis, both interest expenses and income taxes were below our estimates benefiting the earnings for the quarter.

Moving to cash flow and treasury activities, funds from operations were $1.8 billion for the second quarter.

Regarding liquidity, we have $3.5 billion of credit facilities.

Commercial paper and letters of credit outstanding at the end of the quarter were $2.1 billion.

Taking into account cash and short-term investments, we ended the quarter with liquidity of $1.5 billion.

For statements of cash flow and liquidity please see pages 14 and 27 of the earnings release kit.

Moving to our financing plans, we issued $1.1 billion of mandatory convertible securities in June.

We were pleased with the market's response to our offering and thank those of you who participated.

Our financing need for the remainder of the year include about $600 million of debt for Virginia Power and $750 million to $1.2 billion of debt for the parent Company.

Portions of these issuances will be used to meet maturing obligations.

We have locked in treasury rates through hedges for most of these planned issues and the majority of our planned issuances for 2014.

Now to earnings guidance.

As we have discussed on our previous calls, the bulk of our year-over-year operating earnings growth is expected to occur in the second half of the year, particularly in the fourth quarter.

For that reason, we are providing detailed guidance this morning for both the third and fourth quarters of 2013.

This should demonstrate that despite being in the lower half of our guidance ranges for the first and second quarters, we still expect to deliver full-year operating earnings per share in the middle of our $3.20 to $3.50 per share guidance range.

We estimate operating earnings for the third quarter of 2013 within a range of $0.85 to $0.95 per share.

This compares with original operating earnings of $0.92 per share for the third quarter of 2012.

As shown on slide 7, positive drivers for the third quarter include earnings from gas transmission projects, the absence of last year's Long Island Sound heat-related outage at Millstone and higher, [wider] related revenues.

In addition, you should expect a reduction from our regionally planned operating expenses of about $30 million.

Negative drivers for the quarter include higher interest expenses and higher utility generation outage expenses.

We estimate operating earnings for the fourth quarter of 2013 to be in the range of $0.95 to $1.05 per share.

This compares with our originally reported operating earnings of $0.69 per share for the fourth quarter of 2012.

The $0.31 increase from last year's fourth quarter to the midpoint of this year's range represents most of our year-over-year growth we expect for all of 2013.

Let me walk you through the drivers for this growth, which are detailed on slide 8.

To remove unique items from last year's $0.69, we subtract $0.08 per share from last year's initial asset drop into Blue Racer.

Then, we add back $0.05 per share of weather hurt from last year and $0.10 per share due to last year's refueling outage at Millstone.

We are also announcing today that we plan to contribute the TL-388 pipeline to Blue Racer in the fourth quarter.

This drop was not originally anticipated and will add $0.08 per share in the fourth quarter.

The bulk of the operation and maintenance expense cuts we discussed on the last call will show up in the fourth quarter, adding another $0.05 per share.

The next step on the chart shows our normal earnings drivers, which include sales growth, higher rider revenues, and earnings from Blue Racer and our gas infrastructure projects.

Finally, we note the loss of $10 million in anticipated earnings from our producer services business offset by a $10 million fourth quarter pickup due to the expiration of the Millstone generator tax.

Our operating earnings guidance for 2013 remains $3.20 to $3.50 per share.

Operating earnings for the first half of 2013 were $1.44 per share.

Adding the midpoints of our ranges for the third and fourth quarters to the year-to-date earnings will take you to the middle of our guidance range for the entire year.

As to hedging, you can find our hedge positions on page 29 of the earnings release kit.

Since our last earnings call, we have increased our Millstone hedge position from 73% to 80% for 2014 and from 48% to 58% for 2015.

Please note that for our 2014 hedge positions, we showed good growth over previous years.

2014 hedge prices are over 5% higher than 2013, with 80% of the volume hedged.

Let me summarize my financial review.

Operating earnings were $0.62 per share for the second quarter compared to a guidance range of $0.60 to $0.70.

Lower than expected commercial and governmental sales growth and mild weather at Virginia Power, as well as lower contributions from our producers services business were the main negative drivers for the quarter.

Our operating earnings guidance for the third quarter of 2013 is $0.85 to $0.95 per share.

Earnings from our growth projects and reduced operating expenses should drive these results.

Our operating earnings guidance for the fourth quarter of 2013 is $0.95 to $1.05 per share.

Normal weather, the absence of a Millstone outage and new asset drop into Blue Racer and reduced expenses should drive the higher year-over-year results.

Finally, our operating earnings guidance for 2013 remains $3.20 to $3.50 per share.

I will now turn the call over to Tom Farrell.

Good morning.

Each of our business units achieved year-over-year improvements in operations and all but one group improved on record-setting safety performance.

Second quarter net capacity factor of the six remaining Dominion nuclear units was 93%.

Until our April 7 shutdown of North Anna Unit 2 for a scheduled refueling outage, all seven of our then-operating nuclear units operated continuously for 125 days.

Millstone 3 achieved a breaker-to-breaker continuous run of over 500 days.

We continue to move forward on our growth plans.

Construction of a 1,329 megawatt Warren County combined-cycle plant is progressing on schedule and on budget for a late 2014 commercial operation day.

Overall the project is 43% complete, engineering is 91% complete, procurement 99%, and construction 35% complete.

About 1,400 people are presently employed at the site.

Last week the Virginia State Corporation Commission approved the Company's CPCN and rider applications for the Brunswick County power station.

The final notice to proceed was issued to Fluor yesterday and we will immediately begin construction of the 1,358 megawatt 3-on-1 combined-cycle facility and expected to be in service by mid 2016.

The conversion of the Altavista, Southampton, and Hopewell plants from coal to biomass are progressing on schedule and on budget.

The Altavista plant was placed into service last month.

The remaining projects will be operational later this year.

We have a number of electric transmission projects at various stages of regulatory approval and construction.

For example, last week a hearing examiner recommended approval of the Skiffes Creek line to support reliability in Hampton Roads.

Our plans include new investments of over $500 million per year in growth projects, including the systematic rebuild of the 500 kV loop that is the backbone of our transmission network.

Progress in our growth plan for Dominion Energy continues.

The Natrium processing and fractionation plant was placed into service in May.

The Utica region continues to be very active.

Through mid-July, a total of 789 horizontal unit permits had been issued and 387 wells have been drilled.

An increase in 187 wells permitted and 90 wells drilled since the middle of April.

The management team at Blue Racer is actively marketing gatherings and processing services to the producers in the Utica region.

A 200 million cubic feet per day processing plant has been ordered to expand the capacity at Natrium and construction commences this quarter.

This facility will provide the service we had originally planned to fund ourselves that we had called Natrium 2.

Blue Racer has also ordered a second 200 million cubic feet per day processing plant that will be delivered to the Berne site this fall.

To enhance Blue Racer's gathering capacity, we plan to contribute the TL-388 pipeline to the joint venture in the fourth quarter.

A filing with FERC to abandon by sale was approved on July 24.

Blue Racer is finalizing multiple agreements in the southern Utica region with the potential for 150,000 to 200,000 acres to be dedicated to the joint venture, which will be more than enough, at full production, to support both the Natrium Phase II and Berne processing plants.

As we have stated previously, in addition to growth projects at Blue Racer, we will also growth projects along the Dominion system.

For example, last week Dominion East Ohio signed binding precedent agreements with two customers to provide firm transportation services for over 300 million cubic feet per day from the outlet of a new Utica gas processing facility into nearby interstate pipeline interconnects.

We expect to place this $90 million project into service in the fourth quarter of 2014.

Also last quarter, Dominion Transmission announced a non-binding open season to solicit interest in incremental firm transportation capacity to serve our traditional markets in New York State.

The project contemplates access to the growing supplies in the northern portion of BTI System and delivering it to the Iroquois gas transmission system and to Niagara Mohawk serving Albany, New York.

We have seen significant interest and anticipate signing precedent agreements later this year.

We continue to make progress on our Cove Point liquefaction project.

Last quarter we reported on our Board's final investment decision, the signing of the terminal service agreements and EPC contracts, and the full filing with FERC in the Maryland Public Service Commission.

In May, the Department of Energy issued an export license to the Freeport LNG project, moving us up to second place in the queue.

Subject to regulatory approvals, we expect to commence construction in 2014 with commercial operations expected in late 2017.

Before we open the call for questions, I will give an update on the 2013 biennial review.

Intervenors submitted their testimony last week, and it is important to note that no intervenor, including the Office of Consumer Counsel, opposed the Company's position that Virginia Power's base rates are not subject to downward adjustment because we did not earn above the authorized ROE band.

We expect to receive the staff's testimony later this month.

Hearings are scheduled in September and the decision from the commission is due by the end of November.

To summarize, our business has delivered strong operating and safety performance in the second quarter.

Construction of the Warren County power station is proceeding on time and on budget.

Construction will begin immediately on the Brunswick County power station.

Our Blue Racer joint venture is operating as expected, and both it and Dominion Transmission are capitalizing on the growth opportunities in the Utica and Marcellus shale regions.

We look forward to receiving our export license from DOE by the end of the year, and regulatory approvals to begin construction of our Cove Point liquefaction project.

Thank you and we are ready to take your questions.

Thank you.

At this time we will open the floor for questions.

(Operator Instructions)

Dan Eggers, Credit Suisse.

A little more detail on your O&M cutting plans, maybe a little more detail on what is going into it to get the $100 million out?

As you guys are getting into the program are you seeing room for additional savings beyond that number at this point?

Dan, this is Mark.

The first part of your question didn't quite come through, but I think it was all around O&M.

So, let me address that and if it doesn't then follow up.

The $100 million is really broken down in three main areas.

About $50 million is coming from a reduction in staffing contractors and a re-measurement of our pension and OPEB.

Let me just touch base on that for a second.

We have had some staff reductions around our service territory to address this.

Those are essentially complete.

We have reduced contractors in support of our maintenance in our capital work and those are also complete.

Because of the significant change that has occurred in our staffing levels with the disposition of our merchant plants, specifically Kewaunee, Brayton Point, Elwood and Kincaid as well as these incremental staff reductions that I just mentioned, we took a re-measurement of our pension and OPEB obligation in June, which will also support that $50 million annual savings due to staffing contractors and pension and OPEB.

That is the first piece.

The second piece is we're going to reduce between $10 million to $15 million in administrative and general expenses in support of our business units.

That process is well on its way.

It will be completed here shortly.

The remaining reductions are spread across the Company in maintenance and in outage expense from all of our business units.

So in aggregate, that is the key breakdown for the O&M.

In terms of longer term, we would expect this level of reduction to be able to be carried forward beyond this year.

Mark, are you guys seeing more savings and opportunities as you get into this?

You have a bunch of companies this quarter have talked about additional cuts and bigger changes to retirement and health-care benefits and that sort of stuff to try and manage the slow growth environment.

I think, Dan, if you look across the spectrum, our expenses versus our peers, our operating expenses are quite low in comparison.

I think as we have gotten into this, the $100 million level has been achievable for us, but we really haven't seen anything incremental to that based on the plans we have thus far.

Okay.

Then on the producer services business exit, can you just walk me through it for the full year how much earnings you guys expected from that business?

Will there be any residual cost beyond the exit and the charge you guys took this quarter?

To put it in perspective again for producer services, it is less than 2% of our earnings contribution for the Company.

It was a supplementary business for pipeline area and we expected on an annual basis about $40 million in contribution from the business.

Going forward, on annual basis, we would expect a contribution in the $15 million to $20 million range after exiting everything but the fuel management services that we talked about earlier.

Okay, got it.

Then, just on the retail business, you guys have exited Illinois entirely?

Where are you guys seeing opportunities in that business?

Are there signs of margins stabilizing at this point?

Let me ask Paul Koonce to answer that.

The morning, Dan.

Where we're seeing a continued opportunity is clearly in Texas; that's been a good market for us.

We were recently ranked number one by JD Power in the Baltimore market area.

We are seeing good customer growth in the Baltimore area as well as in Ohio and we continue to have a lot of customers we continue to serve in Pennsylvania.

Illinois we just never made any progress, and so it made sense for us to make sure that we are focusing our efforts on where we can get it customer growth.

Okay.

One last question on the Blue Racer side of the business.

How should we think about additional asset moves from Dominion into Blue Racer over the next 12 or 18 months?

Is there a [lift or some move] we should track to figure out when they make sense to transfer over?

Dan, good morning this is Tom Farrell.

The longer we have spent with our partners at Caiman in the partnership Blue Racer joint venture, the more opportunities we have found.

There is a lot of gas, as we mentioned.

There is a big increase in wells being permitted.

Big increase in wells being drilled, particularly in the Utica.

We have a lot of assets sitting there in Ohio where we have this geographic region.

TL-388 was not contemplated as we started the year.

It's an example of the kind of thing -- that's a pretty significant one.

We finding other opportunities we can either build or find other assets we have to contribute.

I think it's also important to recognize that the Blue Racer partnership with Caiman is, we are very pleased with it, but it's only limited to eastern Ohio and a few counties in Pennsylvania.

We have geographic regions in Pennsylvania, West Virginia, ultimately we are expecting, at some point, New York State, which we have a lot of assets, to open up to drilling.

I'm answering a little bit broader than your question.

I think Blue Racer shows us the opportunities there are in this business and not just in that JV but in other areas.

Great, thank you, guys.

Steven Fleishman, Wolfe Research.

Just to follow up on that last question.

You mentioned other opportunities in the other regions outside of Ohio.

Is it possible we might hear something on similar ventures for those in the near future?

I'm not going to predict when you might hear something, Steve.

We are managing the businesses we have, but we are always trying to look at other areas.

I don't want to give a time frame around it, but we have a variety of things we're looking at.

Okay.

If on the sales issue, to the degree that you determine that the sales weakness is sustained due to sequestration or whatever the issue is, how should we think about that in the context of meeting your 5% to 6% growth rate long term?

It's a very good question.

If you break it out, you see that the residential sales growth was pretty good, just about 2% in the quarter.

Data centers was quite good, 12% I think in the quarter.

The issue is showing up in commercial sales, governmental we actually don't expect to be a long-term issue.

We think that was anecdotal to the quarter for a variety of reasons.

The commercial though is an issue that we are looking at very carefully in northern Virginia, in particular, eastern Virginia around the naval base and the air bases and things we have in that part of the state.

Commercial sales can come back quite rapidly.

So, we don't know.

We are not going to make any judgments about what is going on with our sales growth based on really the anomalies in the second quarter, but we are watching it carefully.

As far as the overall 5% to 6% growth, we have a lot of things going on at our Company.

You'll see merchant growth next year in the power prices we have; finally we're through the trough of declining fortunes in merchant power with the sale of the fossil assets, which we will close on this quarter.

We have Blue Racer opportunities.

We have other opportunities in gas infrastructure.

We are not unaware of what other companies are doing with financial structures.

We've got a lots of things we're looking at.

We have rider revenues, Brunswick was just approved for example.

We expect to come through the biennial review, as we said previously, with our base rates intact.

We have transmission growth projects.

You take a those pieces together, we don't see any reason to change our 5% to 6% earnings growth targets at this time.

If the sales issue continues and if we conclude that it is longer term, we will take a look at what that means in the overall context, but we aren't anywhere near that point right now.

One last quick question on any more color on DOE and LNG export?

I think we are past the 60 days since the last one, approval?

Yes, we -- just to make sure we're all on the same page, Steve's reference, of course, is to when the last permit was issued in May.

One of the -- I think it was one of the assistant secretaries at DOE said they thought they were in a position to issue these permits ongoing about every 60 days or thereabouts.

We are past that sixty-day window.

Secretary Moniz, in the interim, has been appointed and confirmed.

He has reorganized the department.

He is getting to know his folks.

He has said recently that he has examined the studies that were done on the economic impacts for non free-trade agreement countries and indicated that no more studies are needed.

That study was adequate for their purposes.

He examined the Freeport permit process and found it to be properly done.

So all that said, we don't have any particular information that you don't have, but we anticipate more action from the Department of Energy pretty soon.

We have said since March, when we had our analyst day, that we expected to get the DOE export permit during 2013, by the end of the year.

We still think that is the right time frame.

Thank you.

Paul Fremont, Jefferies.

It looks like retail is already, year to date, at the low end of your guidance range.

Should we expect a further decline in the remainder of the year in retail?

Or is retail going to be flat to last year for the second half?

Paul Koonce?

Paul, if you look at where it is and then you look at the third and fourth quarter, when you look at the third quarter last year and the fourth quarter last year they actually had lower-than-expected margins because of some of the mark-to-market value that came in the second-quarter 2012.

When you do a full-year comparison what you ought to see is retail still hitting within its guidance range.

Okay.

I am not quite understanding on producer services, you're talking about an ongoing contribution of $15 million to $20 million, where is that coming from?

Paul?

Producer services over the years really engaged in a number of activities.

One was the supply management, the transportation and storage management for mid-Atlantic and Northeast utilities.

That is the activity that we are stopping.

They're really is no value for us to add in that procurement process.

Those activities that will continue are really fee-based services for small Appalachian producers.

Granted, in light of the Marcellus and Utica, it is a pretty small subset of producers, but they still pay our Dominion field service team a fee for getting gas from point A to point B, aggregating that gas.

Really, that is what we will continue to do.

In addition to really focusing on the gas supply procurement activities for our Virginia Power fleet and our Fairless Works.

As we have built out our gas fleet, that has become a much more important activity and so we will really be focusing our resources on that.

Okay.

My last question is, you showed about $1.3 billion of -- or actually $1.5 billion of interest-rate swaps at the end of the first quarter.

Is that mostly floating to fixed?

Or what makes up those swaps?

It's a mix, Paul.

Some of it is fixed to floating, which we have talked about and it really initiated a number of years ago.

That is the majority of it.

Also some of that is reflected in hedging for future issues that we have for both '13 and '14 in terms of anticipated debt issues.

How much of that would be fixed to floating, on a percentage basis?

I don't have been in front of me.

We will follow up with you after the call on that though.

Okay.

It there any concern there about the effect of rising interest rates on those positions?

No, really not.

They're fairly short-term dated.

I have to tell you, when we put those on three years ago, four years ago now, they have just been terrific for us and they continue to be.

So, they are not longer-term dated to give us any concern on any significant rise.

Thank you.

Stephen Byrd, Morgan Stanley.

I wanted to look longer term at your generation needs beyond Brunswick?

Thinking about if you are in a more muted low growth, perhaps 0.5% or 1% low growth, can you talk broadly about as you think about more generation requirements down the road, how should we be thinking about that longer term?

We file an IRP every year that keeps us up to date.

PJM does its own analysis.

We are still in a deficit situation in Virginia.

We are still catching up with what happened over the course of an entire decade, 2000, but nothing was built in the state whatsoever and we had very rapid growth.

We're still in deficit situation, we are catching up with that.

Brunswick is an important part of that, but you need to remember Brunswick is only replacing plants we're shutting down.

Brunswick did not gain us any ground at all on our short position.

We had to shut down the Chesapeake plants and two of the three units at Yorktown and Brunswick is just aimed at making up that deficit.

We still have a long way to go.

Our plan shows another combined cycle later in this decade.

We're continuing our development of North Anna Unit 3. We do not know what will happen with that.

So, I think you should expect to see this plan continuing through the balance of the decade and our planning horizon has not gotten into 2021 yet.

Understood.

Following up on thinking about low growth, you mentioned Hampton Roads in your remarks about the slowdown in governmental customers.

When you all think about further government slowdown in spending, not just in military heavy Hampton Roads area but also in the Virginia as well, do have a sense for the outlook for power demands from the governmental side of things under a variety of scenarios?

How much of a risk or an opportunity is that going forward over the next 12 months?

Government load for us is larger than you find at many utilities.

It is above 10%.

We by contrast have much lower industrial load than many utilities have.

Where we are seeing it, I think I said a few minutes ago that the slowdown in governmental load in the Hampton Roads area that we saw in the second quarter we think is an anomaly and do not expect that to continue.

There is a variety of reasons around that.

The issue is more concentrated really in northern Virginia, the commercial sector, which is where what they used to call the beltway bandits or the defense contractors and all the think tanks that are there serving the government.

We are going to watch that very closely and see how it progresses over the course of the year.

We do not expect to change the overall need to close the gaps we have in generation in Virginia.

It is not that it's important part of our growth, but it is not -- it doesn't overwhelm the rest of it.

You need to keep the mind our residential usage grew 2% year to date, which is pretty healthy, and that is 40% of our load.

Good point.

Thank you very much.

Paul Patterson, Glenrock Associates.

Just on the sales growth, was that the numbers that you were giving, Mark, was that weather adjusted or just what was that?

That was weather normalized.

It's on an early -- slide 4 of this deck.

All weather normalized.

Okay.

In terms of the data centers, that is in what, commercial or governmental?

It's shown in commercial, but we showed on this slide separate because we thought it was important that data centers we're still seeing very strong growth, so we broke it out of commercial.

Otherwise, commercial would show a growth of about 0.8%, almost 1%, and I think that masks what the real commercial growth is.

We broke it out separate and show data centers separately at the 12% and commercial growth slightly negative for the year.

Okay.

With the Brayton and Kincaid, just what happened there?

I thought you guys have already wrote this thing down and you got the sale set up.

What happened and is that finally over?

Nothing really happened.

We were hoping that the sale would be complete in the second quarter, waiting for FERC approval.

FERC has a defined timeframe in which they review these and that actually doesn't expire until middle of September, but we thought we might get it in the second quarter.

So, we are going to wait and go ahead and retire and defease that debt at the same time we got the proceeds in, but because it wasn't approved we decided to go ahead and take care of that and just get it behind us.

It was part of our plan initially, as part of our financing plan initially, so we just went ahead and took care of that one open item in the quarter.

Okay.

Finally, just a Millstone quick question, here.

The expiration of the Millstone tax, what is the expected annual impact of that?

Also, with the NEPOOL reliability issues associated with natural gas, that they're talking about in terms of some rule changes potentially in terms of fuel supply for fossil power plants, just how do you see that impacting the market in New England?

I know you guys are nuclear, but just in general, does that benefit you guys in the future or are we already seeing it pretty much right now in the market?

Let me answer the first part of the question and Dave Christian will answer the second part.

First part, in terms of the tax, the tax was a burden on us of about $40 million a year.

In a normal operating year it's based on run time of the units, so planned outages could change that a little bit.

That tax will expire in the third quarter, and so that will go away.

That's why we showed on one of our slides today that in the fourth quarter we would have a pickup year over year of about $10 million.

On the ISO New England reliability studies that are underway, we've got market policy people that are participating in that process because we are a key stakeholder, but I think fundamentally we are not seeing anything negative coming out of that.

We are absolutely participating in the stakeholder process.

Would you stand to benefit though because you guys aren't -- assume the calls should be pushed upon merchant gas guys and you guys are not really fossil?

We are essentially base-load running all the time.

I think it would be speculative to predict any particular upside to that.

Okay, thanks.

Paul, just to remind you, the only gas unit we have left in the Northeast is Manchester.

It's already dual fuel.

It has a lot of optionality that some of those old units don't have.

Okay, great.

Thanks a lot.

Jonathan Arnold, Deutsche Bank.

I have one question on the TL-388 drop-down.

I'm just passing that back to the Blue Racer trajectory slide that you gave at the analyst day, is this something that would have been part of the '14, '15 outlook and it's being pulled forward, or was this an asset that wasn't really contemplated for drop-down before?

It was an asset that was not contemplated.

It was not a pull forward from 2014 or 2015 plan.

As we look at that it should be incremental then to that slide?

Correct.

Okay great, thank you, Tom.

Can I ask one other thing?

On the third quarter, you referenced this outage expense number that is going to weigh on the third quarter.

You've listed quite a number of positives that this is going to offset.

Can you give us a little more color on what is going on there?

Yes.

Jonathan this is, Mark.

We have a nuclear outage, planned outage, refueling outage scheduled in the third quarter of this year, which we did not have one the third quarter of last year.

It's just a planned nuke outage, it's not near performance in the --?

Yes.

Okay.

I think that's it.

Thank you, guys.

Julien Smith, UBS.

First quick question if you could clarify on the cost cuts, what is the annualized impact as it stands today for '14?

I know you talked about a number of different numbers but just make sure we are crystal clear about that?

We told you in the range of $100 million annually and that you should expect $30 million in the third quarter.

I think we gave you, actually, cents per share in the fourth quarter, but if you do the math it is about $40 million in the fourth quarter.

We have seen about $20 million to $30 million thus far.

Alright, so a full $100 million by 2014?

Excuse me, could you say that again?

The full $100 million annualized by 2014, right?

I did not hear you, that is correct.

On the governmental sales, clearly it seems as if sequestration is impacting it.

Was this a one-time drop and you are seeing it flatten out?

Or is there a continued degradation, if you will, that you have seen of late?

I'm just trying to get a sense as to, again, looking towards '14 and onwards, if this has happened and we are re-base lining or is there a continual change going on here?

Julien, this is Paul Koonce.

Tom mentioned anecdotal evidence on the governmental side in his remarks.

What we're seeing there are two aircraft carriers that are not in port.

They prefer we not talk about that, but that's why we see the drop in governmental sales.

We expect that that will return.

Okay.

Alright, fair enough.

There is nothing else really driving that?

That is the primary factor?

Correct.

Okay, thank you very much.

Paul Ridzon, KeyBanc.

You mentioned other companies doing some financial engineering.

What are your latest thoughts on that front?

Financial engineering -- is that a reference to MLPs for example?

MLPs, yield cos, there's all kinds of things going on.

We are well aware of what other companies are doing.

We have looked at MLPs over the years and concluded in the past that it was not an advantage to our shareholders to start an MLP or have an MLP.

We are continuing to examine that issue taking into account present market conditions and what our present asset base is.

Thank you.

Brian Chin, Bank of America Merrill Lynch.

Just wanted to be clear on the asset drop downs into Blue Racer.

TL-388 is new, but Natrium 2 and Berne are not incrementally new, is that correct?

Natrium 1 is an asset that was in the original plan to drop into Blue Racer.

Natrium 2 and Berne are joint venture projects that they are developing now.

They're not drop downs.

Okay great, that helps clarify.

Also, I think in your analyst day slide deck you had indicated there was a generic combined cycle gas plant beyond Brunswick.

Has there been any update or developments on that, or when can we expect to see any developments on that front?

That was showed again in the RP we filed and still in the plans.

I think if you look at our website you will see in our investor book where that shows up in the development process.

It's really more '18, '19 timeframe that it would become operational.

Excellent, great, thank you.

Michael Lapides, Goldman Sachs.

Real quick, just want to think through the merchant generation business because now you are down to really just a handful of assets.

Obviously, one big one.

How do you think about that business relative to the broader portfolio, the broader mix of assets and businesses you own and whether you think about that as being core to the long term of Dominion or not necessarily as big of a contributor and as core as some of your other businesses?

It is not as big a contributor as it once was obviously, but we consider these stations, Millstone, Manchester, and Fairless Works to be core to our continuing operations.

Do you think about this business as a business -- okay, you have now shrunk it and pared it back and now you would try and grow it from there?

Or is it still in the, hey, you're still in harvest mode for one or two of the assets going forward?

Or is just pure stabilization from here?

We are passed harvesting.

These are the assets that we want to maintain and it will grow with the markets.

Got it, okay.

Thanks, Tom, much appreciated.

Thank you.

This does conclude this morning's teleconference.

You may disconnect your lines and enjoy your day.