Dominion Resources Earnings Call Nuggets: O&M Reduction and Opportunities Outlook

Dominion Resources Inc (NYSE:D) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

O&M Reduction

Dan Eggers – Credit Suisse: (indiscernible) little more detail on your O&M cutting plans, maybe little more detail on what’s going into to get the $100 million out and as you guys are getting into the program, are you seeing room for additional savings beyond that number at this point?

Mark F. McGettrick – EVP and CFO: Dan, this is Mark. The first part of your question didn’t quite come clear, 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 remeasurement of our pension and OPEB. And let me just touch base on that for a second. We’ve had some staffing reductions around our shortest territory to addresses. Those are essentially complete. We have reduced contractors in support of our maintenance and our capital work and those are also complete. And because of the significant change that has occurred in our staffing levels with the disposition of our merchants plants, specifically Kewaunee, Brayton Point, Elwood, and Kincaid as well as these incremental staff reductions that I just mentioned. We took a remeasurement of our pension and OPEB obligation in June which will also support that $50 million annual savings due to staffing contractors and pension OPEB. So, that’s the first piece. The second piece is, we’re going to reduce between $10 million and $15 million in administrative and general expenses in support of our business units. That process is well on its way and will be completed here shortly. And the remaining reductions are spread across the Company in Maintenance and in outages expense from all of our business units. So, in aggregate, that is the key breakdown for the O&M. Now, in terms of longer-term, we would expect this level of reduction to be able to carry forward beyond this year.

Dan Eggers – Credit Suisse: Mark, have you guys seen more savings opportunities to get into this. You have a bunch of companies this quarter, have talked about additional cuts and kind of bigger changes to the retirement and healthcare benefits and that sort of stuff to try and manage this slow growth environment?

Mark F. McGettrick – EVP and CFO: Well, Dan, if you look across the spectrum, our expenses versus our peers’ operating expenses are quite low in comparison, and I think as we’ve gotten into this $100 million, has been achievable for us, but we really haven’t seen anything incremental to that based on the plans we have thus far.

Dan Eggers – Credit Suisse: Then on the Producer Services business, can you just walk me through for the full year, how much earnings you guys expected from that business and then will there be any residual cost beyond kind of (the exit) and the charge you guys took this quarter?

Mark F. McGettrick – EVP and CFO: To put it in perspective again for Producer Services, it’s less than 2% of our earnings contribution for the Company. It was a supplementary business for our pipeline area and we expected on an annual basis about $40 million in contribution from that business. Going forward, on an 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.

Dan Eggers – Credit Suisse: Then just on the Retail business, you guys have exited Illinois entirely. Where are you guys seeing opportunities in that business and are there signs of margins stabilizing at this point?

Mark F. McGettrick – EVP and CFO: Let me ask Paul Koonce to answer that.

Paul D. Koonce – EVP, Dominion Resources, Inc.; CEO-Energy Infrastructure Group and CEO-Dominion Virginia Power: Good morning, Dan. Where we’re seeing continued opportunity is clearly in Texas. That’s been a good market for us. We were recently ranked number one by J.D. 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 just made sense for us to make sure that we are focusing our efforts on where we can see customer growth.

Dan Eggers – Credit Suisse: I guess just one last question, just on the Blue Racer side of the business. How should we think about additional asset moves from Dominion into Blue Racer kind of over the next 12 or 18 months and is there a list or something we should try to figure out when they make sense to transfer over?

Thomas F. Farrell II – Chairman, President and CEO: This is Tom Farrell. The longer we have spent with our partners at Blue Racer – at Cayman in the partnership Blue Racer joint venture, the more opportunities we found. There is a lot of gas. As we mentioned, there is more – 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 wasn’t contemplated as we started the year. So, it’s an example of the kind of thing – that’s a pretty significant one. But we are finding other opportunities. We can either build or find other assets we have to contribute. And I think it’s also important to recognize that Blue Racer partnership with Cayman is – we are very pleased with it, but it is only limited to Eastern Ohio and a small – 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. So, 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.

Opportunities Outlook

Steven Fleishman – Wolfe Research: Just to follow up on that last question, you mentioned other opportunities in the other regions outside Ohio. Is it possible we might hear something on similar ventures for those in the near future?

Thomas F. Farrell II – Chairman, President and CEO: I’m not going to predict when you might hear something, Steve. We’re managing the businesses we have, but we’re always trying to look at other areas. So, I don’t want to give a timeframe around it, but we have a variety of things we’re looking at.

Steven Fleishman – Wolfe Research: On the sales issue, to the degree that you determine that the sales weakness is sustained due to I guess 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?

Thomas F. Farrell II – Chairman, President and CEO: 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 shown 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’re looking at very carefully in Northern Virginia, in particular Eastern Virginia around the naval base and the air base and some things we have in that part of the state. Commercial sales can come back quite rapidly. So we don’t know, we’re 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. We have – 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, where we are not unaware of what other companies are doing with financial structures. So, we’ve got a lots of things we’re looking at, we have rider revenues. Brunswick has just approved for example. We expect to come to the biennial review as we said previously with our rates – base rates intact. We have electric transmission growth project. So you take all 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’s longer term, we’ll take a look at what that means in the overall context. But we aren’t anywhere near that point right now…

Steven Fleishman – Wolfe Research: Just one last quick question on any more color on Boe and LNG export. I think, we may be kind of passed the 60 days since the last one, approval.

Thomas F. Farrell II – Chairman, President and CEO: We are the – just to make sure we’re all on 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 assistance secretaries of DOE, said they thought they were in a position to issue this permits on going about every 60 days or thereabout. We are pass that 60 day window, Secretary Moniz in the interim has been appointed, and confirmed he is reorganizing the department, he is getting to know us 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, but that study was adequate for their purposes. He examined the Freeport permit, process, found that 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. And we’ve said since March, when we had our Analyst Day that we expect – we get the DOE export permit during 2013 by the end of the year. And we still think that’s the right timeframe.