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Dominion Resources, Inc. (NYSE:D)

Barclays Capital 2013 CEO Energy – Power Conference

September 12, 2013 08:25 am ET

Executives

Thomas Farrell II – Chairman, President & CEO

Analysts

Dan Ford – Barclays Capital

Thomas Farrell II

Thanks, Dan, and good morning everyone. There’s our important note to investors which I remind you all to read when you have time.

Here’s what we’re going to talk about today, and we have quite a few things to talk about and a couple of pieces of news that we’ll get to later in the presentation. So I’ll be going through these topics relatively fast. The one that will be new for sure is our gas financing plan, and of course there was some news about our export project yesterday which many of you I’m sure saw.

So first the growth plan update. Starting in 2007 at what was then the Lehman Conference, we started coming to Dan’s conference and laying out we’d restructured the company in 2006 and ’07. We came in the fall of 2007 and said “Here’s our five-year growth plan. We want to show you projects that we feel comfortable, a high likelihood will happen over what period of time.” We didn’t have any approvals for anything but we had a plan and showed it, and broke it down for each one of our business units.

And ever since that time we’ve come back in the fall to Dan’s conference and the other conferences that follow and laid out “Here’s what’s changed in the last year, and is this still a sustainable five-year growth plan?” So we did that last September of 2012 but we updated it for you at our Analysts Conference which we had in March here in New York. And we’d shown you our plan for 2012 through 2017; we updated it by bringing you into 2013.

And there were two primary differences in this chart and in what you’d seen last September, one which is to actually delete, take out $450 million of growth capital from the Dominion Energy Plan over the period because of Blue Racer. And we’re going to get contributions to get our growth, many of our midstream growth opportunities are going to come through that vehicle which was still pretty new in March. And I’ll bring you an update on that as we go through the presentation.

And the other one was we had reached a confidence level with Cove Point. We’d been talking about Cove Point for some period of time, the export project, but we’d reached a confidence level it would actually occur that we were willing to who it on this slide as dedicated capital. I think I said something like you have to earn your way onto this slide. In our opinion Cove Point had earned its way onto the slide. We had not yet signed the transportation agreements with Sumitomo and Gale but we were very far along in the negotiations by the time we got to the analysts meeting so we felt comfortable that that would occur.

So that was the primary change from last September, so where are we this September? The plan continues. We’ve added 2018 to the plan – you’ll see an extra $2 billion in growth capital in this plan. That’s excluding the Blue Racer joint venture. Again, you will see individual projects, business unit by business unit, named project after named project after named project that support this growth. And I’ll take you through each of the business units.

So a takeaway from our perspective is that this plan is going to continue through the end of the decade at least, and here we are going through 2018 on this slide. I’ll show you the individual plans. There’s an average growth capital spend of $2.6 billion average over the period and it’s basically a $16 billion plan over the next five years. This does not include Blue Racer in it, so we don’t include that capital here.

Alright, so let’s talk about utility generation - $4.6 billion in growth capital between 2013 and ’18. Keep in mind these are all through our Rider program in Virginia, it’s all regulated capital. The up rates we’ve been doing on a series of plants, those are largely finished – when we’re finished with the fall outages they’ll be done. Our biomass conversions – three older, smaller coal plants are being converted to biomass. They will all be completed this year. Actually just this week we got the final order from the State Corporation Commission authorizing the conversion of Bremo which is a 200 megawatt coal-fired plant to natural gas. So that work will commence immediately.

Warren County is well underway as you all know – we talked about that in the Q2 call, how far along it is. It’s on budget and it’s on time. Brunswick County was just recently approved by the State Corporation Commission, that’s a $1.3 billion project – Warren County is $1.1 billion. Brunswick is down on the North Carolina line and is going to replace capacity that’s going to be lost when we close down coal plants in the eastern, far eastern part of the state because of the Mercury Rule in 2015. It will come online in 2016. There are some transmission projects associated with that that I’ll show you as well.

We have a future CC in this plan that’s in our integrated resource plan that we filed last week which shows a gap through 2025, so over the next twelve years or so of 3800 megawatts which has been continuing all along, which matches the PJM’s view of the growth coming to the Virginia service territory – the fastest growing service territory in PJM of any size. There’s one very small utility that has a little bit faster growth rate. PJM is second in that thirteen-state region.

You’ll see on here commercial offshore wind – potential additional CAPEX. They had a lease option off of Virginia’s coast last week, about 115,000 acres. We were the winning bidder; it cost us $14 an acre. If any of you all would like a tour of the site we can arrange that. It’s 26 miles out in the ocean and you’ll be able to pick out the acres yourself. [laughter] But we will see how this goes. We have been working with the Department of Energy to get some test turbines out there; we’re looking for some grant money there. They’re in a selection process.

We’ve said all along with this project we are very interested in it but it’s going to have to get approved by our regulators. So it’s going to be part of our rate base, approved by the State Corporation Commission of Virginia. It will be a utility asset or it has less likelihood of being built. So future CC is in those plans. It is necessary. Significant spend of that will start some in ’15, a lot in ’16 and ’17 of course subject to Commission approval.

Alright, Dominion Virginian Power - $5.4 billion over the period. This does include the distribution company in it. I’m not going to talk about the distribution company because that’s distribution substations, customer growth, etc. I’ll concentrate instead on the transmission component, the electric transmission component which is $3.2 billion over the period. And remember with this, this is FERC formula rates that through Virginia’s law are automatically placed into our retail rate structure in Virginia on an annual basis, through an annual true up – the same as the true up that exists with the generation facilities.

So electric transmission, you see these projects – Cannon Branch to Clover Hill, that’s approved, under construction, it’ll be done later this year. Mt. Storm to Doubs is a very large 500KV line that is under construction, will be done next year. Dooms to Bremo is approved and under construction. Clover Hill to Liberty and Skip’s Creek are two big projects that we have here examiner recommendations to go forward with – we’re awaiting final Commission approval. Loudon, there’s a big substation project we’re doing there (inaudible) and those are both projects we don’t need approval for and they’re underway. [Listing to Dunes] is a very large project – it’s been approved but it’s one of these where we’re taking it in and out of service so that it’s available during peak seasons and that’s why construction is through 2016.

So those are all well underway. This business spends $500 million, $600 million, $700 million a year in growth capital through FERC formula rates. I’ll talk about these ones highlighted in yellow for just a minute. Here’s a slide, an example of a slide we showed you in 2010 – so this is four years ago, four conferences ago. We showed you what was the 500 KV loop in Virginia, it’s the backbone of the Virginia system. It was built in the 1960s. You can see Meadowbrook to Loudon was the only thing at that point that was approved and under construction. We were working on the Mt. Storm to Doubs line to seek to get approval for that. So we’re saying here’s our opportunities in 2010 that were available that we thought were necessary investments to keep Virginia’s system reliable.

So what’s going on with that? So we completed Carson Suffolk which wasn’t even on the radar screen. The Meadowbrook to Loudon line has been completed. The loop still exists. Now the yellow, you see these are all well underway. So in 2010 we were thinking about them, except Mt. Storm Doubs we were moving on. But Pleasant View, the Lexington to Dooms line, Cunningham to Elmont, the Bremo line’s there.

And then the Skip’s Creek line is necessary to help with reliability in the peninsula region of the state when we close the coal plants in Chesapeake and Yorktown. Then Brunswick County will come online and Skip’s Creek will help with the reliability in that region. But there still is much more to be done. So the difference between what we’re working on now and what else needs to be done are very large projects that are going to take many years ahead to complete.

Now, this is going to be an issue, this next slide here is an issue that is not in our capital plans right now but it will be as we go ahead. It’s going to be $300 million a year to $500 million a year spread out over the next five to ten years. It’s not huge numbers and we’re not going to be the only utility facing this. After the, you’re all familiar I’m sure with the shooting that took place in a substation in California I guess in the spring, FERC, NERC and all the utilities in the country are looking at “What do we do about that?” It’s sort of a sad state of affairs that you have to worry about a sniper taking out bushings in a substation, but that’s where we are.

And there’s ways to deal with that. It’s not complicated but it’s not inexpensive, and this is all going to depend on how many substations are identified by us and NERC that this is really required. We know we have many and we’re starting to work on it as we go ahead.

This slide is a little bit different for us – competitive electric transmission business. This slide shows you the PJM service territory. PJM is running a series of competitions for reliability, market efficiency, or public policy-related constraint areas. These little green dots are all the places they’ve identified in PJM. There are 24 of them. The first one where they have a competition going on is called the Artificial Island Project – it’s a very exotic name and I have no understanding of why they chose that name. But it’s in New Jersey.

There are I think seven companies that put in proposals, 24 different solutions. We put in three different solutions. Many utilities have outsourced their transmission planning to the RTO. Once they got involved in RTOs they didn’t really see the need for rigorous transmission planning on their own and they’ve let that default to the RTO provider or organizer. We have not done that. We’ve maintained all that expertise in-house and worked very hard on it. We built the Fairless transmission substation, etc. And we knew we had all these projects in Virginia where we wanted to work on the design ourselves rather than relying on a third party.

So my point with that is we have a lot of in-house expertise. We are going to bid… I don’t know if we’ll bid on all 24 of these projects. We will bid on many of these projects and we’ll see how that goes, but none of that is in our CAPEX plans – that $3.2 billion program that I showed you. That would be additive growth capital. On that first one, the Artificial Island Project we’ll know in Q1 who the winner is.

Okay, Dominion Energy. We should really normally include Cove Point in this but we’re going to treat that a little bit separately and I’ll show you why in just a minute. So about $2.4 billion in growth capital over the period. It runs about $400 million a year until you get to the last year and it’s $100 million a year, which is if you go back and look over slides over the years that’s fairly common because these are projects that we develop over time, sign up customers to long-term contracts and they take a certain amount of time to develop.

So as we go through this five-year period that last year will start filling up and it’ll start looking more like the first years - $400 million to $500 million. But these latter years are not as certain, or we’re not as comfortable with latter years as we are in the first years so we don’t show more capital.

Okay, so what have we got going on today? One of the things we want to keep emphasizing with the investment community is we do have Blue Racer, and I’ll talk about Blue Racer, but that’s really limited geographically into a particular business line. Dominion Transmission, Dominion Energy still has on its own, which we own 100%, many, many growth opportunities and we are pursuing all of those. We’re not defaulting everything into Blue Racer.

And here’s just some examples: Natrium phase one you know about, we finished that. That has been contributed to Blue Racer but there’s a methane pipeline project coming out of Natrium which is under construction. The Tioga area expansion, we’ve talked about that for about two years – it is under construction, it will be done later this year. The Allegheny Storage Project is a Dominion Transmission project that’s going to be completed next year. I’ll show you these other three: BP… I don’t think we called it Western Access when we first announced it; I think we had some much less appetizing name for it like Backward Ethane Removal Pipe or something. So you may not recognize it but I’ll show you where it is, the New Market project also.

But we have other transmission projects on here and you’ll see, I’ll talk about Blue Racer and give you an update on Cove Point. But don’t ever forget the pipeline infrastructure replacement projects going on at Dominion East Ohio. We have a rider there, it’s about $130 million a year that’s spent every year in capital. It’s automatically going into our rates. People forget about it but it underlies this whole program. It’s there every year through this period as part of Dominion Energy through its ownership of Dominion East Ohio.

Okay, these projects are the ones I highlighted. Western Access, this is interesting. It’s a phenomenon that’s going on in the region in this basin that I’ll talk about in a minute where long-haul pipes that were bringing gas into this market from the west, from Canada and from the Gulf have excess capacity in them. Because there’s so much gas in the region basis differentials have been displaced, so people are looking at reversing the flows.

This Western Access is an example of that on our system. So this is a $90 million project, $300,000 a day project for a producer and a processing facility that we do not own – a competitor of ours is doing the processing for this producer but it’s being backhauled on our pipe, down this existing pipe that we have. We call it the Western Access pipe. It will be done at the end of next year.

BP Project is a smaller project. It’s a gathering system that we’re building for some Utica wells for BP in the region, and then the New Market project is going the traditional way for us – gas moving from [Leite] up into New York State for some local gas distribution companies. We have final proceeding agreements with those that we will be filing at FERC. That project will be going forward somewhere between $150 million and $180 million and that will take us a couple of years to build out. But those are the kinds of projects that have always been the bread and butter of Dominion Transmission and those are going to continue through this period, this five-year period.

Alright, what’s going on with Blue Racer? Just to re-familiarize you, this map is showing you Eastern Ohio. You can see there’s shaded blue or darker gray, blue-ish gray – those are the counties in which we have the geographic deal with Caiman to create Blue Racer. So it’s only in those counties – they’re actually named counties, and all those little blue dots are wells that are either permitted, drilled or producing in the Utica region. The red lines are the pipes that we are contributing to the Blue Racer pipeline.

The important thing to take from this slide is two things: first, see the growth. Just since the end of December through August the permits have about doubled. Drilled wells have a little bit more than doubled. The producing wells have tripled but only 25% of the drilled wells are producing – only 25% of the drilled wells are producing. And why is that? That’s because there’s not enough infrastructure, there’s not enough gathering, there’s not enough processing to allow the wells to get to market. For those of you who follow only the electric utility industry it’s like having a power plant that doesn’t have a transmission line connected to it. It doesn’t do you any good to be able to create electrons. So there’s a lot of opportunity in Blue Racer’s region for more gathering and processing.

Okay, at Natrium 2, and here are some of the projects – we’ve finished before Natrium 2 and Berne. Natrium 2 is under construction; Blue Racer is doing that. Berne, the facility will be delivered this fall. We are contributing and Lewis and Petersburg are two facilities that they’ve announced that will come later in time. This is where the TL-388 line is.

We talked about the TL-388 line in our Q2 call. This was not ever identified as a part of the original Blue Racer timing or schedule for ’13 or ’14 or ’15 so we haven’t moved up something in time, taken it out of ’14 or something like that. It was just seen as an opportunity the way wells were bring drilled that would be useful for Blue Racer. We will drop that sometime during the course of the rest of this year.

It’s important to know that Blue Racer has signed almost 200,000 letters of intent for dedication of about 200,000 acres. About 200,000 drilled acres in this region will be dedicated to these processing plants. That’s the way this business works – you get the acres dedicated, whatever gas comes out of those acres when it’s drilled has to be delivered and processed by us. There’s a lot more of that going on. Blue Racer handles that and they announced a couple of weeks ago that they’ve secured an $800 million credit facility which can be increased to $1 billion to facilitate the growth of the Blue Racer joint venture.

Okay, a couple of new Marcellus opportunities, and this is a Wood Mackenzie slide. Utica gets a lot of headlines but Marcellus is the elephant in the room. It’s very interesting. Starting in 2008 there was almost no production out of the Marcellus. 2013, 10 BCF a day climbing to over 15 BCF a day over the next ten years. This is the Utica laid in on top of it, so you’re going to get up to 20 B’s a day over the next ten years according to Wood Mackenzie.

This is pipeline takeaway that has been announced to deal with the Marcellus gas – 7.5 B’s. Now, there’s another 3, some may say 4, nobody would argue more than 5 – 3’s probably a good number, 4 could be the right number – of B’s that are going to be like our Western Access project where there’s existing capacity that is going to be underutilized by the big pipeline customers and us and others are going to scramble to try to find a way to fill that capacity. Probably a minimum of 3.

Some of it though is a little bit like taking coal to Newcastle, because we’re talking about moving gas from this basin to the Gulf of Mexico where there’s an awful lot of gas, or out west where there’s an awful lot of gas. I don’t know, 3, 4, 5, but the point is that still leaves, if you use all of that 10 more B’s of gas produced in this region starting in ’15 and growing that you’re going to have to have infrastructure for. This is just the pipeline capacity. I’m not talking about the gathering or the processing. So the point is lots and lots of opportunities.

I’m just going to give you one example of one of the things that we’re doing. Now this is an announcement today. When we sold our Appalachian acreage we retained ownership of the mineral rights below all of our gas storage facilities, which we have a trillion cubic feet of gas storage. This represents about 100,000 acres in West Virginia. This is our Fink Kennedy field, our [Wallace Creek] field and then we have two smaller fields. The big field’s about 80,000 acres.

The reason why we retained this gas is we wanted to make sure the drilling that was going to take place in this basin wasn’t going to damage the geology and compromise our storage fields. We are convinced at this point that that is the case. There’s 5000 feet of separation between the Marcellus Shale here and where our gas storage facilities are so we are actually, I think this says we have begun – we’re actually well into this process on marketing these acres. The structure will be an ongoing earnings stream coming from the acres that has little to do with how much gas is produced.

But importantly for us the gathering, processing and transportation that will come out of this field is going to be an integral part of the transaction as we go ahead. And we expect this to be a vehicle that we use for future Blue Racer-style joint ventures in West Virginia. So the announcement today is we’re well into negotiations on this. They may not come to fruition. We expect them to and we’ll announce more about it once that’s all complete.

So the growth plan, the five-year growth plan that we showed you last year will continue through at last 2018 – just about $3 billion a year in growth CAPEX. We have a very successful record we think in carrying out this plan. We’ve been doing it now for seven years. It’s a diverse plan with growth across all the business units. We have, think about it this way – we have a very successful, well-operated, highly reliable electric utility in a very good region but we also have a very fast-growing gas infrastructure business in our backyard. And then we have the Cove Point project which I’ll talk about now.

We have been looking hard at how we’re going to finance this gas growth. There’s a lot coming, a lot of growth we believe, and we also don’t think we’ve been getting – you all may disagree with this: we don’t think the real value of our gas infrastructure business is being reflected in Dominion’s stock. So we thought it was important to find some vehicles to make it more transparent so people could really see the value and compare the assets and their earning streams to others in the sector.

So we are today announcing, forming today an LLC called Dominion Gas Holdings. This is going to be aimed at debt issuances, issuing its own bonds. It’s going to be the owner of Dominion Transmission, East Ohio Gas, our interest in the Iroquois Pipeline which I think we own 24% of the Iroquois Pipeline. We need regulatory approval from the West Virginia Commission to move Hope Gas into this structure; we will seek that. We think this will give a very transparent view to the world of what those assets are really worth.

So this is what it’s going to look like. The entity is formed. Over the next few weeks we will reorganize the subsidiaries underneath it. We are going to issue debt from this entity in Q4. It won’t be public because we have to go through the registration process with the Securities and Exchange Commission but we will start that process and we will issue public debt, well at least it’ll be a repotting company by the end of Q2 next year. We think this will give a very transparent way to see what these assets are worth.

So this will be the corporate structure: Virginia Power, Dominion Gas, and then Cove Point, Blue Racer and our merchant gen. So that leads I’m sure inevitably to the next question – Dominion Gas for debt, “What other vehicles or how else are you going to show the value of these assets?” which leads to the MLP question which we’ve had ongoing at Dominion for about ten years. We’ve looked at MLP structures over and over and over again. We’ve never been convinced that the time was right, that we had the right assets for this or that there was enough differentiation in our PE and what we thought the PE should be if we were getting the full value of those assets.

So the question is “Is it time for an MLP?” and we’ve decided that yes, it is the time for an MLP and we are going to form an MLP. We’ve talked to our Board about it at length. It takes us a certain amount of time to form an MLP. We’re going to get to that but we are going to, sometime during the course of 2014, probably in the first half we will form Dominion MLP which will be the general partner with the idea of contributing over time Cove Point and Blue Racer after we get to equalization – our ownership interest in Blue Racer.

Remember, Cove Point has existing import contracts that go through the middle of the next decade so there is an earnings stream there. We don’t have to wait until 2017 for the export project to be completed. Those two by themselves should be around $1 billion of EBITDA which doesn’t make you one of the largest but should put you in the top ten MLP structures in the country. And you should keep in mind that these other assets we have are eligible for contribution to an MLP at some point which would be another $1 billion of EBITDA.

So it is our intention to form an MLP that will become a public registrant sometime during the course of next year. We have talked to our Board about this repeatedly and they are in complete agreement.

Okay, alright. So we had to change this slide last night, the Cove Point slide, because we had the DOA export. It actually says in your printed books “First in the queue” I think is what you’ll see here. As you know we received the approval yesterday from the Department of Energy. We’re very excited about that, our customers are very excited about that. That leaves two approvals left. We have to get an air permit for the power plant at our facility and a FERC permit which we filed for quite a long time ago and we expect to get by the spring of next year, and then we will start construction. This is obviously a great step forward for us and we think frankly for the country and the development of the basin.

We showed you this slide at our Analysts Conference. We just want to remind you that this asset is not a traditional utility asset. It’s a regulated-like asset in that it has 20-year take or pay contracts from highly credit-worthy partners but it’s not, because it throws off so much cash it is constantly accretive. So it’s not just going to be a depreciating asset where its earning stream starts to come online which happens with utility assets. Because it throws off so much cash your models ought to have buying back stock or deferring issuing stock and paying down debt. So it will continue to grow over the period.

A regulatory update, actually I’m running out of time. Everybody’s filed their testimony; the hearing starts next week. We stated in our testimony that we did not over earn in a two-year biannual period – everybody agreed with that. All the parties agreed with that. Consumer counsel agreed with that, staff agreed with that, all the (inaudible) agreed with that. As a practical matter that means that our rates cannot be subject to being lowered until 2018.

Alright, investment consideration – our dividend’s gone up 7% a year on average. Our target is 65% to 70% payout ratio, so you should continue to see at least for a few more years until we get to that level continued growth at that level and that will follow our earnings growth.

So the summary, I’m out of time. I can’t talk anymore. Thank you for being here, goodbye. [laughter]

Dan Ford – Barclays Capital

And thanks, Tom. It’s probably best that we just take this to the breakout session. I’m sure there’ll be some questions because there’s been a lot of material, and unfortunately I can’t join you because I’ve got some of those questions too. But the breakout’s going to be in Liberty 5 and I’d like to thank Tom.

Question-and-Answer Session

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