道明尼資源 (D) 2014 Q1 法說會逐字稿

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

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

(Operator Instructions)

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

Good morning and welcome Dominion's first quarter 2014 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 earning 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 first quarter earnings documents.

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.

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

Those measures include our first quarter operating earnings and our operating earnings guidance for the second quarter and full year 2014, as well operating earns before interest and tax, commonly referred to as EBIT.

Reconciliation of such measures to the most directly comparable GAAP financial measures we were 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 member of the management team.

Mark will discuss our earnings results for the first quarter and our earnings guidance for the second quarter and full year 2014.

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

I will now turn the call over to Mark McGettrick.

Good morning.

Dominion reported operating earnings of $1.04 per share for the first quarter of 2014 which exceeded the top of our guidance range of $0.85 to $1 per share.

While favorable weather in our electric service territory contributed $0.05 per share compared to normal, weather normalized operating earnings were at the very top of our guidance range.

Other factors driving the strong results were improve merchant generation margins, high ancillary revenues and lower operating expenses.

Compared to the first quarter of 2013, our 2014 weather normalized earnings were $0.14 or 16% higher than last year.

GAAP earnings were $0.65 per share for the first quarter.

Charges related to the exit from producer's services and a write off of good will at our unregulated electric retail operations account for the majority of the difference between GAAP and operating earnings.

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

Now, moving to results by operating segment.

At Dominion Virginia Power, EBIT for the first quarter was $269 million, which was above its guidance range.

Kilowatt hour sales were above expectations, largely due to colder than normal weather.

Excluding weather, sales were up about 1% for the quarter, somewhat below expectations, particularly in the commercial sector.

We believe most of this slower growth was due to the numerous snow storms in the area this winter, which resulted in a significant number of commercial and governmental customers being closed for business.

We still expect annual weather normalized sales growth of 1.5%.

First quarter EBIT for Dominion Energy was $344 million, which was also above the top of its guidance range.

The weather conditions this winter resulted in higher throughput at our pipeline and LDC businesses, which along with lower operating expenses, drove to strong results.

Dominion Generation produced EBIT of $561 million in the first quarter, which was above its guidance range.

EBIT from utility generation was above the guidance range because of higher kilowatt hour sales due to cold weather.

Also, revenues from ancillary services were above expectations due to the weather extremes in PJM.

EBIT from merchant generation was above its guidance range because of higher gross margins.

On a consolidated basis, our effective tax rate was 33.5% for the quarter, which was in line with our guidance.

Interest expenses were also in line with our expectations.

Overall, we are very pleased with our first quarter operating results.

Now, moving to cash flow and treasury activities, funds from operations were $802 million for the first quarter.

Regarding liquidity, we had $3.5 billion of credit facilities at the end of first quarter.

Commercial paper and letters of credit outstanding at the end of the quarter were $2.2 billion.

And taking into account cash and short-term investments, we ended the quarter with liquidity of $1.4 billion.

Subject to state corporation commission approval, we will soon be executing a final agreement with our existing credit providers to increase our credit lines by $1 billion from $3.5 billion to $4.5 billion, the terms of which will run for five years.

Dominion Gas Holdings will be added as a potential borrower under these facilities.

For statements of cash flow and liquidity, please see pages 14 and 25 of the earnings release kit.

Now, moving to our financing plans, during the first quarter, we issued $750 million in 10 year and 30 year notes for Virginia Power.

We also issued $400 million in three year notes at the parent company during the quarter.

We are pleased with the market's reception of these offerings and thank those of you who participated.

Our debt plans for the remainder of the year include $1 billion of debt at Dominion Gas Holdings, to refinance some parent company maturities and possibly another debt issue at the parent company.

On March 28, we filed an S-1 registration statement with the Securities and Exchange Commission for an initial public offering of common units representing limited partnership interest in Dominion Midstream Partners LP, a master limited partnership whose initial asset will be a preferred equity interest in Cove Point.

I would refer you to the S-1 filing for questions regarding the MLP, as we are unable to discuss the details of it further on today's call.

On April 4, we filed the Dominion Gas Holdings S4 registration statement with the SEC.

Once the filing process is complete, the 144A bonds we issued last fall will be exchanged into public securities.

Shortly after that, we will file a shelf registration statement with the SEC for future debt issuances by Dominion Gas.

Our equity issuance plans for 2014 include an issue of mandatory convertibles, the proceeds from the MLPs initial public offering, and our dividend reinvestment and other stock purchase plans.

Now, to earnings guidance.

Our operating earnings guidance for the second quarter of 2014 is $0.55 to $0.65 per share compared to $0.62 per share for the second quarter of 2013.

Positive factors for the quarter relative to last year include a return to normal weather, higher weather normalized kilowatt hour sales, and higher revenues from electric transmission.

Negative factors include higher interest expense, the absence of contributions from our electric retail business, and higher operating expenses.

Our operating earnings guidance for the year remains at $3.35, to $3.65 per share.

As to hedging, you can find our hedge positions on page 27 of the earnings release kit.

Since our last call, we have increased our Millstone hedge position from 92% to 96% for 2014, and from 23% to 31% for 2016.

So let me summarize my financial review.

Operating earnings were $1.04 per share for the first quarter of 2014 exceeding the top of our guidance range.

Favorable weather, higher merchant margins, higher ancillary revenues and higher throughput at our pipeline and LDC businesses were key factors in the strong performance.

Our financing plan for the remainder of 2014 include a debt offering for Dominion Gas Holdings, an offering of mandatory convertible securities, and the initial public offering of a master limited partnership.

Another debt issue by the parent company is also possible.

And, finally, our operating earnings guidance for the second quarter of 2014 is $0.55 to $0.65 per share.

Our operating earnings guidance for the full year remains $3.35 to $3.65 per share.

I will now turn the call over to Tom Farrell.

Good morning.

Our business units delivered outstanding operational and safety performance in the first quarter, despite the often challenging weather conditions.

On January 7, the Dominion Zone set a new winter peak demand of 19,730 megawatts, an increase of more than 9% above the previous record set in 2007.

On that same day, gas transmission also set a new peak with a one hour send-out equal to 7.65 billion cubic feet per day.

An even higher winter peak electric demand was set on January 30 at 19,785 megawatts.

[Initialer sleet] achieved a capacity factor of nearly 100% and had only two OSHA reportables in the first quarter.

Our power generation's utility fleet achieved a record 12.6 million-megawatt hours of production and maintained capacity factors of 90% to 95% during the worst of the winter weather.

Dominion Energy also delivered strong performance in the quarter.

Our pipeline business had no primary service issues during the extreme weather and delivered a record high seasonal storage turn of 241BCF through the end of March.

Natrium returned to service in January, and for the balance of the quarter, natural gas processing plant reliability was 99% at Natrium, and 100% at Hastings.

All of this was achieved with no lost time or restricted duty incidents during the quarter.

Dominion East Ohio experienced a 14% increase in throughput compared to last year's first quarter because of the weather extremes, yet achieved the best quarterly safety results in the Company's over 100 year history.

We continue to move forward on our growth plan.

Construction of the 1,329 megawatt Warren County combined cycle plant is progressing on schedule and on budget.

All three boilers completed hydrostatic testing during the first quarter and start up and commissioning activities are underway.

Overall, the project is about 80% complete, and 1,200 people are employed at the site.

We expect the project to be in service during the fourth quarter of this year.

Last August, we began construction of the 1,358 megawatt combined cycle facility in Brunswick county and expect that plant to be in service by mid-2016.

Much of the major equipment has been secured, and deliveries to the site have begun.

There are about 450 people currently employed at the site.

Conversion of Bremo units 3 and 4 from coal to natural gas is nearly complete.

Both units achieved first fire on gas in the first quarter.

Tuning and commissioning are underway, and the converted units should be in commercial operation by the middle of this year.

Dominion closed on the acquisition of six solar projects, totaling 139 megawatts from recurrent energy in the first quarter.

Long term power purchase, interconnection, engineering, impairment and construction as well operation and maintenance agreements are been executed for each of the projects.

Construction began in the first quarter, and all of facilities expected to reach commercial operation late this year or early next year.

We are moving forward to identifying and acquiring additional solar projects to support our plan to grow the Company's solar portfolio by up to 250 megawatts.

At Dominion Virginia Power, we have an a number of electric transmission projects at various stages of regulatory approval and construction.

During the first quarter, $116 million of transmission assets were placed into service.

Electric Transmission's capital budget for growth projects in 2014 is over $750 million.

This includes NERC, RTEP, maintenance, as well as security related investments.

Moreover, our project pipeline continues to remain full through at least the remainder of the decade.

Progress in our growth plan for Dominion Energy also continues.

Construction is underway on the Allegheny storage project, and we have begun to accept injections.

Construction has also begun on our Natrium to market project.

Both projects are on budget and on schedule to commence full service by November.

Last fall, we announced several new pipeline expansion projects.

The New Market project will provide expanded service to two LDCs in New York state for 15 years, beginning in November, 2016.

We are currently preparing the FERC application for this project.

In addition, we have had continued success in providing incremental transportation service as a result of the growing production within our region.

We describe these as producer outlet projects, taking advantage of the flexibility of Dominion Energy's pipeline network to provide incremental services with shorter lead times and relatively small capital investment.

On our last earnings call, we announced binding precedent agreements for firm transportation service for six such projects covering 1.2BCF per day by 2016.

Today, we're announcing another such project.

The Lebanon West 2 project will provide 130,000 dekatherms per day of firm transportation service for 20 years to move Marcellus production from Butler County, Pennsylvania to Lebanon, Ohio.

Precedent agreements have been signed, and the project is expected to be operational in late 2016.

Finally, on April 16, the Company commenced the Dominion southeast reliability project, a non-binding open season for firm transportation services through a new pipeline extending from the Marcellus and Utica production regions to markets in Virginia and North Carolina.

Subject to FERC approval, firm transportation service is anticipated to be available as early as November, 2018.

Utica region continues to be very active.

Through the middle of April, a total of 1,218 horizontal Utica permits have been issued, and 829 wells have been drilled, an increase of 17% in wells permitted and 22% in wells drilled in just the past three months.

The number of producing wells has increased by 44% from 270 to 389, also in just the past three months.

Based on this Utica activity, our Blue Racer joint venture continues to execute its business plan.

Dominion contributed the G150 pipeline in January and the northern gathering system in March.

These are the last of the originally planned asset contributions to the joint venture.

Blue Racer's Natrium 1 processing and fractionation plant returned to service in January and has operated nearly 100% capacity since then.

A second 200 million cubic feet per day processing facility, we refer to as Natrium 2, became operational this month, and is expected to be at full capacity by the end of the second quarter.

Fractionation capacity at Natrium will be expanded from 46,000 barrels per day up to 126,000 barrels per day by March of next year.

In addition, a 200 million cubic feet per day processing plant at the Berne site is under construction, and is expected to begin operations this fall.

Blue Racer has entered into long term acreage dedication agreements totaling more than 300,000 acres and continues to expand its acreage commitments and facilities to support its growth plan.

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

On February 27, the pine line and hazardous materials safety administration, referred to as PHMSA, issued its no objections letter to FERC, marking another significant milestone in the FERC permitting process.

On March 12 FERC issued its notice of schedule and set May 15 for issuance of an environmental assessment.

We anticipate receiving our construction permit from FERC this summer.

We also expect Maryland public service commission to approve the CPCN and air permit for the site next month.

Subject to and immediately following these regulatory and other approvals, we expect to commence construction with commercial operation in late 2017.

Before we answer questions, I want to update you on a couple of other Virginia regulatory matters.

Earlier this month, Virginia Governor Terry McCauliffe signed legislation allowing Dominion Virginia Power to set up a long term program to place about 4,000 miles of the system's most vulnerable distribution lines underground.

The measure authorizes the Company to spend up to $175 million per year on the program, with Virginia state corporation commission approval.

Cost recovery for the project will come from a rate adjustment clause, also subject to commission approval.

The Governor also signed legislation that will help the Company preserve options for a third nuclear unit at North Anna power station, and for development of offshore wind facilities.

It calls for the write off of 70% of the development costs incurred through the end of last year, which will be recovered through existing base rates.

The write off will be spread over the second, third and fourth quarters of 2014.

So to summarize, our business has delivered strong operating and safety performance in the first quarter.

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

Our Blue Racer joint venture, Dominion East Ohio, and Dominion Transition -- Transmission all continue to capitalize on the growth opportunities in the Marcellus and Utica shale regions.

We look forward to receiving our remaining regulatory approvals to begin construction of our Cove Point liquefaction project.

And, finally, we look forward to our initial public offering by Dominion Midstream Partners later this year.

Thank you, and we are ready for your questions.

(Operator Instructions)

Our first question will come from Angie Storozynski with Macquarie.

How are you?

I wanted to ask you a couple of questions about the growth on the energy side.

So, first of all, how big -- what is the capacity of the pipeline that will be going to the southeast?

I understand that the open season is not over yet, but it looks like it's just one week left.

So, that's one.

And two is: Given all of the growth in Utica and Marcellus, and your different entities that are growing in those shales, how should we think about it?

What goes through Blue Racer; what goes through Dominion Energy; and what is ultimately ending at the MLP?

Sorry for the long question.

Thank you.

I'm going to ask Paul Koonce to answer those questions.

Good morning, Angie.

The first question on the open season in the southeast pipe -- we're in what I would call a sensitive phase of the scoping.

So, we're not really prepared to talk about pipe size or number of miles.

I would just say that we have substantial assets already with our gas transmission business throughout the Marcellus and the Utica.

We certainly saw the need for gas infrastructure in the Virginia/North Carolina region coming out of this February, and the reliability issues associated with that.

And we also know the customers in the communities that are served throughout that area.

So, we are bullish on the southeast pipe.

As you noted, the open season is not closed yet.

We are still gathering expressions of interest, and really expect more to come later this Summer.

On the Utica and Marcellus question, and what goes to Blue Racer and what comes to Dominion, we have a defined business plan and operating area for Blue Racer.

It's defined as really southeastern Ohio, and it really is to gather and process gas, and it's been doing that very well, as Tom noted in his comments.

So, that really is what goes to the joint venture: gathering and processing associated with the [west] Utica and southeastern Ohio, and we have not expanded the joint venture beyond that footprint.

So, those activities in West Virginia and Pennsylvania would remain Dominion.

Okay.

And just one follow-up question.

Given the pickup in drilling and permitting of wells in Utica, where do you expect the gas to go?

Do you expect that most of the transportation would be to the south, the southeast, or more to the, say, Illinois/Chicago area?

Angie, I would just say that given the size of the basin, now producing 13, 14 BCF, and some projections have it at 20 BCF or greater by the end of the decade, I think you're going to see gas flowing in all directions.

Clearly there's a need to New England.

We've already defined a need in the mid-Atlantic, and of course, I think the Tallgrass folks are -- have had a successful open season, to reverse flow the Rockies Express pipeline back to Chicago.

So, I think you're seeing gas move in a lot of different directions.

Thank you.

Our next question will come from Steve Fleishman with Wolfe Research.

Hi, good morning.

Couple questions.

First, just curious: In the Utica discussion and the chart you provide, the producing wells seem to have kind of flattened out relative to the drilled and permitted.

Is there any bigger-picture explanation of that?

Steve, I think they have increased significantly.

And continuing to be the bottleneck is there's not enough infrastructure, gathering systems, pipeline systems, to get the gas to market.

So, they have to wait before they can start producing.

That's why we're still very excited about all the prospects we have in that region.

Okay.

Second question is just: What was the impact of the Blue Racer contributions in the quarter?

Steve, quarter over quarter, it was about a $20-million incremental pickup from the first quarter of 2013.

And is there maybe like an absolute amount from these two new contributions?

The absolute amount is about $34 million.

Okay.

And just on the nuclear write-off and the like, can you tell us how much you expect to be expensing over those three quarters, in total?

Yes, Steve, we'll start in the second quarter, and start expensing it between now and the end of the year.

We'll have to catch up in the second quarter for the 2013 and the first quarter of this year.

So, second-quarter write-off will now be much larger, and then much smaller third and fourth.

You should think around $400 million.

And that will be, obviously, excluded from your guidance.

It will be charged to our GAAP earnings.

Okay.

One last question, kind of big picture: When you think about all the continued movement in natural gas, Marcellus, Utica, other regions, some of the new projects you're starting to announce, should we expect that there's likely another big ramp-up in capital spend in the gas business when you start updating your five-year plans?

I think, Steve, I'm not sure it would be a substantial run-up in it.

We have always set aside some capital for growth, particularly on these producer outlet projects that don't have much capital to be invested.

But certainly, if we're successful with the long pipe, that would be something that would be incremental capital to what we have out there already.

And again, based on just the interest that we have thus far, we usually update everybody in the Fall.

If that activity continues at the pace it is today, it is certainly possible that the capital could go up between now and the five-year window that we always talk about.

Okay.

Thank you.

Thank you.

Next question comes from Michael Weinstein with UBS.

Hi, guys.

Just to follow up on that a little bit.

So, are the new producer outlet projects, the southeast reliability project, is that incremental to the 5% to 6% growth rate as well?

And are other projects, as we hear about them, is that all incremental to 5% to 6%?

First, the producer outlets projects are supportive of our 5% to 6% growth.

And I think the way you should think about all these smaller projects are: We're focused on significant growth in the energy business, and they are supportive of the 5% to 6%, if the long haul southeast pipe were to go as a multi-year construction period.

So, it's really outside of what we have shown everybody in terms of Cap Ex and what that growth rate would be, beyond 2018.

So, I think it's too early to say on that.

But until we let everybody know otherwise, you should assume all the projects that are being announced on the energy are supportive of the 5% to 6%.

And on Cove Point, at what point -- I guess this Summer, are you going to be in a position to be talking about an IPO at that point?

I know you're waiting for approvals.

Is the Summer approval from FERC going to be the final one that you're waiting for?

Well, we're in the approval process now with the SEC on our S-1; so, we really don't want to talk about any more timing issues than that.

But previously, we have said that mid-year or so is what we thought would be a reasonable period.

And I think -- certainly mid-year third quarter probably makes sense.

Okay.

Thank you very much.

Thank you.

Thank you.

Our next question will come from Jonathan Arnold with Deutsche Bank.

Good morning, guys.

Good morning, Jonathan.

Could I just ask, given the news on the screen today, one of your neighbors being acquired, if you could give us a sense of your current thinking about where that type of bolt-on M&A might fit within Dominion's potential strategic plan, if at all?

And maybe any specific comments on whether you look to a PEPCO or not?

We don't have any comments, Jonathan, on M&A activity, other than to say: We've got a five-year growth plan that takes us, we think, a long way, gaining 5% to 6% growth all the way along the path.

We never comment on M&A activity.

Thank you.

Thank you.

Our next question comes from Daniel Eggers with Credit Suisse.

Good morning, guys.

Good morning, Dan.

I just have a couple questions, I guess, maybe on the system performance in the quarter, but I don't know if Paul will want to talk about it.

But how the gas system performed through the Winter from a storage perspective.

And then, how the refill process is going, and the soundness of the reservoir, and whether you're seeing folks show interest and maybe looking at storage investment again, given volatility and delivery concerns.

Dan, this is Paul Koonce.

Yes, we had a really strong Winter.

We were really pleased with the operational performance of all of our storage across the system.

And as Tom noted, we had a record turn of about 241 BCF.

As you will recall, our customers actually own the space in storage.

So, the rate that they fill storage is really their call.

We report that information to EIA, and it's publicly available.

And if you look, you'll see that their injections are a little bit ahead of where they were this time last year.

Obviously, they took more out, so we take that as a positive this early in the year that they are buying and injecting gas.

And I think it does strengthen the interest in storage, certainly as it relates to our thoughts about a new pipeline in the southeast.

The nature of that load will be somewhat on and off, and so I think our storage capabilities, I think, play nicely into that.

So, we needed this Winter to remind folks why they contract for firm transportation and firm storage, and it performed, and I think we should be rewarded for that.

Hopefully, we'll see some projects result.

Paul, would you determine that you've just seen an up-take in all sorts of maybe end-use customer interest in signing more firm contracts or getting more capacity, just because bandwidth was more constrained this year?

I'm sorry, Dan.

I really didn't understand the question.

Okay.

Are you seeing your end-use customers, the LDCs and folks like that, showing more interest in signing contracts or expanding their -- the capacity they take from you guys just based on the volatility this Winter?

Yes, we've certainly seen some customers that had contracts that were expiring renew and extend their contract.

So, that's the first thing that I take as a positive.

We're still meeting with our customers following this Winter, and assessing their needs, but we have a couple other customers that have expressed a desire to increase capacity.

So, hopefully we will be announcing something along those lines later this year.

Certainly, the interest is up.

There has been, honestly, somewhat of a stand-off between producers and LDC trying to see who's going to build the next incremental capacity.

Is it going to be the producer to get us gas out of the basin, or is it going to be the customer to secure reliability?

And frankly, following this Winter, I think we're beginning to see some movement back to LDC customers placing a premium on the reliability, as they should.

Great, thank you.

I guess, maybe to clarify on the impairments you guys are going to take on the development side, how does that get calculated into the earned ROEs from a Virginia oversight perspective on the biannual review process.

It will go toward the GAAP earnings calculation in the two-year biannual review.

So, we would mark down -- from the recurring number we'd normally look at, we'd mark that down by about $400 million pre-tax to look at that comparable ROE over the two-year period?

Yes, that's right.

Okay, very good.

Thank you, guys.

Thanks, Dan.

Thank you.

This does conclude this morning's teleconference.

You may disconnect your lines, and enjoy your day.