道明尼資源 (D) 2015 Q2 法說會逐字稿

Good morning and welcome to the Dominion Resources and Dominion Midstream Partners second-quarter earnings conference call.

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

(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 to the second quarter 2015 earnings conference call for Dominion Resources and Dominion Midstream Partners.

During this call we will refer to certain schedules included in this morning's earnings releases 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 to the schedules.

If you have not done so, I encourage you to visit the Investor Relations page on our website, register for email alerts, and view our second-quarter earnings documents.

Our website addresses are dom.com and dommidstream.com.

In addition to the earnings release kit, we have included a slide presentation on our website that will follow 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 Reports on Form 10-K and our

Quarterly Reports on Form 10-Q for a discussion of factors that may cause results to differ from management's projections, forecasts, estimates and expectations.

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

Reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measures we are able to calculate and report are contained in the earnings release kit, and Dominion Midstream's press release.

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 Dominion's earnings guidance for the third -- third quarter and full-year 2015.

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 Resources reported operating earnings of $0.73 per share for the second quarter of 2015, which was near the top of our guidance range of $0.65 to $0.75 per share.

Weather added about $0.01 per share to earnings, relative to guidance while lower operating expenses contributed about $0.02 per share.

GAAP earnings were $0.70 per share for the second quarter.

The principal difference between GAAP and operating earnings was the charge associated with future ash pond closure costs.

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

Moving to results by operating segment, at Dominion Virginia Power, EBITDA for the second quarter was $374 million, which was in the middle of its guidance range.

Kilowatt hour sales were above expectations due to slightly warmer than normal weather.

Excluding weather, year-to-date sales growth was about 1.5%, above our expectations for the year of about 1%.

Dominion Generation produced EBITDA of $546 million in the second quarter, which was also in the middle of its guidance range.

Favorable weather and utility generation and lower operating expenses and merchant generation were the contributing factors to the strong results.

Second-quarter EBITDA for Dominion Energy was $285 million, which was in the upper half of its guidance range.

Positive drivers were lower operating expenses and higher gas distribution margins.

On a consolidated basis, interest expenses were in line with our expectations, while income taxes were at the upper end of our guidance range.

Overall, we are pleased with the performance of each of our operating segments.

For the second quarter of 2015, Dominion Midstream Partners produced adjusted EBITDA of $19.9 million and distributable cash flow of $19.3 million, all consistent with management's expectations.

On July 17 Dominion Midstream Partners Board of Directors declared a distribution of $0.1875 per-unit, payable on August 14 to unitholders of record on August 4. This distribution represents a 7% increase over last quarter's payment and is consistent with our plan to achieve 22% annual distribution growth for LP shares.

On April 1, Dominion Midstream acquired Dominion Carolina Gas Transmission from Dominion Resources.

We do not expect to drop any more assets into the Partnership this year to reach our projected fourth-quarter annualized distribution rate of $0.85 per-unit.

However, we continue to actively seek acquisitions to support DM's future growth.

Interest by other parties has been active and we are optimistic of additional transactions this year.

As we have said in the past, any acquisition would have same regulated earnings profile DM has today and not carry with it commodity risk.

Moving to cash flow and pricing activities at Dominion, funds from operations were $2.1 billion for the first six months of the year.

Commercial paper and letter of credits outstanding at the end of the quarter were $2.7 billion.

We have $4.5 billion of credit facilities and, taking into account cash and short-term investments, ended the quarter with liquidity of $2 billion.

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

In the financing area we concluded our public equity needs for the year after raising $500 million through the sale of 6.8 million common shares during the first and second quarters.

We accessed the debt markets on two occasions during the quarter with senior note offerings.

In May, Virginia Power issued $700 million in two traunches, half for 10 years and the other half for 30 years.

In June, Dominion issued $500 million of three-year notes.

We plan to come to the market with another parent company debt issue as well as an issue for Dominion gas holdings later this year.

Looking ahead to the third quarter, Dominion's operating earnings guidance is $0.95 to $1.10 per share compared to operating earnings of $0.93 per share for the third quarter of 2014.

Positive earnings drivers for the quarter compared to last year are a return to normal weather and higher revenues from growth projects.

Negative drivers for the quarter are higher operating expenses and share dilution.

Dominion's operating earnings guidance for the year remains $3.50 to $3.85 per share.

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

As of August 1, we have hedged 94% of our expected 2015 production at [Millstone] and 60% of our expected 2016 production.

So let me summarize my financial review.

Operating earnings were $0.73 per share for the second quarter of 2015, near the top of our guidance range.

Favorable weather and lower expenses were the principal factors for strong performance.

Operating results for Dominion Midstream Partners were in line with management's expectations.

And finally, Dominion's operating earnings guidance for the third quarter of 2015 is $0.95 up to $1.10 per share.

And our operating guidance for the full-year remains $3.50 to $3.85 per share.

I will now turn the call over to Tom Farrell.

Good morning.

Our strong operational and safety performance continued in the second quarter.

Year-to-date, OSHA recordables for each business unit are ahead of or are consistent with their respective targets for the year.

Our nuclear fleet continues to operate well.

The net capacity factor of our six units was 95.4% for the first six months of the year.

Our power generation group also performed well, with record net generation and net capacity factors during the second quarter.

Now for an update on our regulatory activity.

On March 31, in Virginia we filed our review of earnings for 2013 and 2014 showing an earned return of 10.13% which was below the top of the allowed range of 10.7%.

[Interbreeder] testimony was submitted last week and we expect to receive the commission staff testimony next week.

Hearings will commence in September and we expect the commission order by the end of November.

Neither our base rates nor the allowed rate of return are subject to change in this proceeding.

The biennial review process will resume in 2022, covering earnings for the calendar years 2020 and 2121.

We filed our annual integrated resource plan in Virginia and North Carolina on July 1. The filing identifies and evaluates a mix of supply-side and demand-side resources needed to meet customers' needs at the lowest reasonable cost while considering future uncertainty, including the EPA Clean Power Plan, which was of course only in draft form at the time of the filing.

Obviously earlier this week, we saw the final ruling.

We are encouraged by some of the changes made to the original proposal and are evaluating our options to help Virginia comply with the new regulations.

It is clear, however, the plan will require significant new investments in generation and electric transmission in our Virginia service territory, as well as many new opportunities for all aspects of our gas infrastructure businesses.

Now for an update on our growth plans.

Construction of the 1358 megawatt combined cycle facility in Brunswick County was about 75% complete through the second quarter.

There are approximately 1,475 workers on site.

Construction of the air-cooled condenser is 93% complete and installation of major equipment continues for all combustion turbine units.

The facility is on time and on budget for a mid-2016 commercial operation date.

A request for a CPCN and rate rider for the proposed 1588 megawatt Greensville County project was filed July 1. If approved, this three on one combined cycle facility is expected to achieve commercial operation in December 2018.

In January, the Company filed for a rate rider in CPCN for a 20 megawatt solar facility at our Remington power station.

This project is the first step in our plan to invest $700 million to build 400 megawatts of utility scale solar projects in Virginia.

If approved, the facility will be in service by late 2016.

Since our last call, we placed five contracted merchant solar projects into service totaling 81 megawatts.

Another 90 megawatts have been acquired or are under construction for completion this year.

In addition, we acquired a 50% interest in the 320 megawatt solar facility under development in Utah.

Our plan to grow this portfolio to 625 megawatts by the end of 2016 is in place.

We will provide more details on our planned sell down of our merchant solar portfolio next month at the September investor conferences.

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

During the second quarter, $315 million of transmission assets were placed into service, bringing the year-to-date total to $514 million.

Electric transmissions capital budget for growth projects including [NERC, RTEP], maintenance as well as security-related investments will average over $700 million per year through at least the remainder of the decade.

Progress on our growth plan for Dominion Energy continues as well with a 4 billion cubic feet per day of projects underway.

We have previously announced nearly 2 BCF per day of producer outlet projects designed to relieve congestion and move Marcellus and Utica's gas out of the basement.

Five of these are now in service and the four remaining will be in service by the end of next year.

As we complete the producer outlet projects, we have seen a significant increase in demand in both traditional LDCs and new gas-fired generation products as coal plants move to retirement or conversion.

We expect these trends to continue as gas supplies continue to grow from the Marcellus and Utica basins.

We are presently developing over 2 billion cubic feet of demand-side or market-based projects.

Seven of these totaling 600 million a day are expected to be in service by the end of 2017.

Looking forward, there is strong interest for further customer-driven projects throughout our service area, including in our newly acquired Dominion Carolina gas transmission system at Dominion Midstream Partners.

And we expect to be in a position to give additional details later this year.

The Clean Power Plan will greatly enhance those opportunities.

We are continuing to work toward the commencement of construction on the Atlantic Coast pipeline and the related supply header project.

We began the FERC filing process last November and expect to make a formal filing in September.

Surveying is about 80% complete and engineering is about 70% complete.

We awarded the large diameter pipe manufacturing contract in January to Durabond Industries of Pennsylvania and expect to award small diameter pipe contracts in August.

Construction bids were received in May and we expect conclude negotiations by the end of the summer, well ahead of original project plan.

We plan to begin construction on both projects in the fourth quarter of 2016 and commence operations in November 2018.

Now, an update on our Cove Point liquefaction project.

Overall, the project is approximately 31% complete and is on time and on budget.

Engineering nearly 90% complete and approximately 85% of engineered equipment has been procured as of the end of the second quarter.

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

The Brunswick County construction project is proceeding on time and on budget.

We continue to work toward a formal filing with FERC for the Atlantic Coast pipeline and supply header projects next month.

And construction of the Cove Point liquefaction project is continuing on time and on budget.

Thank you, and we are ready to take your questions.

(Operator Instructions) Dan Eggers, Credit Suisse.

On the DM, your M&A opportunities for this year, I guess, A, what are you seeing as far as receptivity of sellers and some pressure on kind of the yield space or the DMLPs or the yieldcos and how do you guys feel about issuing equity on DM right now to supplement an acquisition at this moment?

Dan, this is Mark.

We've had a lot of interest from a number of parties in terms of assets that would fit nicely within a DM portfolio.

If any of those transactions were to materialize between now and the end of the year, we do not expect to issue any equity associated with those -- any public equity associated with those.

And again, I mentioned in the script that we will be sure to focus on only assets that have a very stable, regulated long-term earnings stream.

But we are excited that people really like the DM currency and they think that there may be greater value with the DM currency than what their current earnings streams are within their assets.

So Mark, that means you would cash fund them from what they have available?

Or you would be giving your equity to the seller of the assets?

It could be both.

Okay.

Tom, can you talk a little bit about thoughts on CPP, now that it's made it to the land of final and how you guys see that affecting both the IRP in Virginia and maybe some of the ongoing investments between gas generation and solar and that sort of stuff.

The -- obviously it's a very complicated rule.

It's interesting to take a look -- you have to really look at it state by state.

I'm sure you know that and all those folks listening.

To make broad generalizations about it, I think, is a mistake.

I think you need to look at how each state -- how they have -- what levels they have to comply with, what their existing mix is.

Example, if you look at the Southeastern states and Midwestern states, where our pipeline assets are -- is well-positioned as any.

There are others well-positioned.

I think ours are well-positioned as any, or better.

Gas-fired power will be able to meet the needs with the latest emissions targets, the rates that were published in the final rule.

So we are encouraged by that.

I think that is a good news opportunity for our infrastructure businesses.

We are going to take a hard look at the IRP.

Like I say, our Greensville County plant, for example, will clear all these hurdles.

It provides tremendous customer benefits.

That is the most customer benefit we've had of any of these projects, truly an outstanding opportunity.

We will be looking hard at solar.

The renewable and energy efficiency parts of the rule are slightly convoluted (technical difficulty)

(technical difficulty) do not expect to have any market equity issued for any potential transaction from DM to make sure that we are focused on growing that entity, and growing value for both the DM unitholders and DE shareholders.

I would be curious, just in terms of the recent pushback on the underground project in Virginia, I would just be curious.

What is the latest there in terms of potentially trying to refile that project or next steps more broadly?

We are taking a look at the commission order.

I'm confident we will -- they asked for some more cost justification.

There's a lot of cost justification.

We don't anticipate any difficulty with that.

As a new statute, new proceeding, so we will take a look at what they want us to file and then we will file it and we will proceed from there.

I don't expect any issue on it in the end.

All right, great.

Well, thank you, guys.

Greg Gordon, Evercore ISI.

Sorry to harp on the same subject in some prior questions but one of the other things that seems to have happened in the MLP/yieldco space is, investors rightfully focusing on transaction valuations in terms of the long-term IR for the LP holder, not just the earned -- the dividend growth accretion the comes from those transactions.

And they've been sort of punishing GPs and the LPs of companies that look like they are not disciplined financially.

So can you please go over what your financial metrics you look at in terms of when you look at a drop, when you look at an acquisition, what are the hurdle rates for IRRs and accretion that you hold yourself to?

I'm going to give a general answer to that, because we are not going to disclose what our internal financial rates are.

But as we look at any transaction on DM, we'll look at, is it positive to the discounted cash flow metric, is it positive in terms of long-term IRR, is it positive in terms of strategic long-term value?

Is it positive can we operate it more effectively potentially than the current owners?

And anything we do on DM it's going to, again, fit, I think, the structure that our unitholders are interested in.

And our focus would be -- if we did acquire, it allows us the backlog that we have and grow it even more from the $1.7 billion post-2020 that we've already identified.

So those are the kind of opportunities we are looking at.

I think the Carolina Gas Transmission acquisition fit all those parameters that I outlined for you.

And I think we had any announcement in the future in terms of acquisition, it will meet the hurdle rates that people are expecting or exceed those, and be well-received.

Thanks, and I know that you are -- the focus of the Company appears by -- to be creating shareholder value through the continued growth in the midstream and pipeline businesses.

But there does continue to be consolidation on the utility -- of the utility industry.

So on the utility side of the house, is -- are you still opportunistically considering expanding the regulated utility footprint?

And if the answer to that is yes, what are the criteria that you are looking at there?

Greg, I don't think we've ever said that we were opportunistically looking to expand our utility franchise.

In fact, I am quite certain that we've never said that in the 10 years I've been CEO.

All we have said is that we have been -- we are interested in assets for Dominion Midstream Partners that fit the criteria that Mark mentioned.

I think we are perceived as a management group and the Board of Directors that exercises financial discipline.

And that is the way we will continue to proceed.

But we have never said we are looking around for an electric utility.

Perfect.

Thank you, guys.

Jeremy Tonet, JPMorgan.

You have Chris on for Jeremy.

One quick question on CGT.

You guys, I guess, recently did a prefiling for the $120 million expansion, so I guess looking at the current plan and the current operations at CGT, how is that will running relative to your plan at the time of acquisition?

This is Paul Koonce.

The filing was part of our due diligence process, so it really fits right in line with our expectations.

We did go out for a solicitation of interest in June, just to kind of pulse the community down there to find out what the interest was in additional gas service.

That response was good.

So we hope to add to what was already in the existing portfolio spread.

This is Mark, let me add onto that.

Obviously from initial expectation on CTT, the cash flows have been better than what we anticipated.

One reason that we confirmed earlier that we didn't need to drop anything else in 2015, and so, only being associated with that entity for five months or so now, we are very pleased with the way it operates, very pleased with the growth potential that it has.

And again, we believe that there is more opportunities to improve cash flow coming out of South Carolina than what we initially anticipated in January.

Thanks, that's helpful.

That's it for me.

Angie Storozynski, Macquarie.

I'd like to go back to the Dominion Midstream.

So you mentioned that you would be pursuing some -- potentially pursuing other acquisitions even later this year.

Now, the fact that you are not going to finance them with equity, should we imply that those are not going to be big acquisitions?

I'm basically trying to figure out if there is a way to accelerate the IDR payments to make the increased cash flow from this entity more visible to Dominion shareholders.

[You kind of said] that you created the structure to actually create value for Dominion shareholders and I think we are still waiting a little bit for the recognition of the value creation.

Angie, this is Mark.

(technical difficulty) in terms of size, (technical difficulty) too material to DM what we are looking at, but not material to a D balance sheet.

So our focus really is what assets are out there that may fit our portfolio that would allow us to build a backlog long term, and stay and support our 22% distribution growth.

We do not anticipate advancing any drops to do that.

This would just be a matter of it fits the profile but has good future growth.

But I would say they would not be significant in terms of size, from what we are looking at right now.

Okay.

Now separately, on the Cove Point expansion, can you comment if there has been any movement on your long-term contracts supporting that entity?

Like, any attempts to renegotiate contracts, given the lower LNG demand worldwide?

No.

Okay, that was easy.

So lastly, some of the strength in your second-quarter earnings have to do with the cost efficiencies.

I see that you are showing increased operating costs of a drag on third-quarter results.

So should that imply that this is just the timing of O&M?

I think that's a fair representation.

Okay, thank you.

Steve Fleischman, Wolfe Research.

The Utica details that you used to give, you don't have any.

I'm just curious maybe at a high level you can give us an update on your kind of -- what you are seeing in the Utica, which seems like it's pretty good.

In past calls, we have provided the state level kind of number of permitted wells, drilled wells and producing wells.

And just looking at the information since February 9, the number of permitted wells were up 202.

The number of wells drilled are up 231.

The number of wells producing are up 200.

So we still see a lot of activity in Ohio.

Really, what we are starting to focus on are really the five counties that Blue Racer really serves, Guernsey, Belmont, Noble, Monroe and Washington County.

And if you looked at permits statewide, they look like they are leveling off.

They are still issuing permits, leveling off.

But if you look at these five counties, they are continuing to increase month over month.

So we see that as positive.

Okay.

And just maybe at a high level, Tom, is it given the continued growth in your kind of core areas, should we expect further maybe new project, new CapEx plan in midstream gas when you do your update?

We've got a lot of things we're working on.

We will do our best to make sure we give you as much clarity as we can in the fall.

Okay, thank you.

Paul Patterson, Glenrock Associates.

Just a few quick ones remaining here; just the cold residuals, the one-timer, are we finished with that, do you think?

Is that sort of we are one and done with respect to --?

Yes, I think it's two and done.

We reserved some in December, I think, Paul.

And then we've have had -- spent a lot of time through the last six month looking at -- we need to keep this in context, of course.

We don't have -- there are many other of our colleagues in the industry have a lot more of these [bonds] than we do.

We do have some bonds that we will deal with them.

We fine-tuned it.

We don't think it's that significant an expense, but it's obviously significant money.

But we are going to clean them up in compliance with all the EPA regulations.

So that's a long way of saying yes, I think we believe that is all we will have to do.

Okay, great.

Then, the SUP order, the strategic undergrounding thing, last week the order -- the last part of it sort of mentions that, although it's not included in their analysis for denying the application, they mentioned sort of an overall rates, the context of overall rates for customers.

So they say it's not part of the other (technical difficulty) they are doing this, but basically, they draw attention to it.

So what my question is, is the question is basically how do you look at the rate impact that we are seeing here?

I know you guys are very cognizant of the rate impacts for customers and CapEx and what have you.

How do you look in terms of general about the Clean Power Plan, everything going on here, what the rate outlook might be for customers?

Paul, thank you for that question.

We spent a lot of time looking at not only -- take for example, the IRP.

We gave five or six different approaches, depending upon -- we were sort of guessing -- educated guess as to what the clean power plant would look like.

We will obviously take another look at it.

But the cost to our customer is a paramount thing for us.

We spent a lot of time looking at that.

We pace things as a result of that.

Now if you look at the GAAP we still have, we are producing our own generation.

If you go back five years, we could have justified building two or three of these plants all at one time to meet our customers' needs.

But we didn't think that was the appropriate way to deal with rate.

We start from a very strong position.

We are 20% below the national average in rates.

We are among the lowest on the East Coast.

We have one of the lowest industrial rates in the entire country.

So we work very, very hard at keeping really strong operations, particularly in our generation fleet, to keep costs down, the reliability for our customers.

As these things go along, we've taken into account all through that process.

I don't find it remarkable that a commission would say that they are concerned about rate pressure.

I hope that all commissions are concerned about rate pressure.

Okay, great.

And just finally on Dominion Edge, with the clean power plant and what have you, and other initiatives, I know you guys have done some rollouts here.

How has that gone?

And do you see any additional opportunity there?

Edge is a -- just to remind everybody, a software product that we developed here.

We have multiple patents on that does voltage control in real time, instantaneous information and can be verified.

The cost savings can be verified through a separate process.

So quite a few utilities, co-ops have adopted it and are in the process of installing it.

There are a lot more looking at it, and some very large ones.

So I think the clean power plant, they got rid of the energy efficiency as one of the methods but they still give you some incentives, of course, if you wait until 2020.

Okay great, thanks a lot.

Shahriar Pourreza, Guggenheim Partners.

It sounds like the clean power plants could lead to some additional growth opportunities.

Any sense on whether Virginia will submit a state implementation plan, file a lawsuit?

And then maybe you can just touch on whether we are looking at a regional approach or state-specific?

Our governor, Governor McAuliffe, I think I am pretty sure I read, has already stated that they intend to -- that the State of Virginia will file a state implementation plan.

He said that before as the EPA was going through it.

So I wouldn't anticipate any lawsuits from Virginia.

And obviously we will be working with the governor's environmental quality people, along with the reliability regulators to help, make sure they have all the information they need to form the best plan for Virginia.

So a lot of the growth -- we are definitely going to have to do a lot more in Virginia.

But there is a lot of this growth is also going to happen in the gas infrastructure businesses.

People talk about renewables being built and they will be built.

But as you all know, you have to back up all those renewables with gas-fired power plants.

So we think there is a lot of opportunity.

And if you look at it state by state, the region where our pipeline operates, gas will work.

Got it.

And then just lastly, on Atlantic Coast, are we still comfortable at 1.5 B's per day?

Or is there -- are we still -- is there an opportunity to upsize that?

It is signed up for 1.5 now.

And I think we've said previously that it is easy to expand it to 500 a day, but it is just by adding compression.

But we are still obviously in the prefiling process but we will file at FERC formally next month.

Got, got it.

And just lastly on DTI, is there any opportunity to potentially drop down ETI sooner than 2018?

Or is there some covenants on the debt that will not allow you to?

There are issues around the debt, but we have no intention of -- I don't think we've ever talked about DTI before any time.

It's out in the future.

What we are talking about dropping right now is Cove Point.

The Atlantic Coast pipeline, Blue Racer, and all time when necessary meet the 22% distribution growth rate that we have been meeting so far and will meet over the balance of the period.

Excellent, thanks a lot.

Thank you.

This does conclude this morning's teleconference and you may disconnect your line and enjoy your day.