Dominion Resources, Inc. (D)
March 04, 2013 10:00 am ET
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Mark F. McGettrick - Chief Financial Officer and Executive Vice President
Gary L. Sypolt - Executive Vice President and President of DTI
Greg Gordon - ISI Group Inc., Research Division
Jonathan P. Arnold - Deutsche Bank AG, Research Division
Brian Chin - Citigroup Inc, Research Division
Dan Eggers - Crédit Suisse AG, Research Division
If everybody could take their seats, we'll get started. Good morning, morning, welcome. Thank you all for coming. Thanks those of you who are listening on our webcast to our analyst meeting. Before we get started, obligatory safe harbor statement that many of the statements we'll make today constitute forward-looking statements and suggest you consult our SEC documents for a list of the risks and factors that might cause our projections to differ from our current estimates.
We have a pretty full 2 hours for you today. First, we'll have Tom Farrell just going over our strategic plan and our outlook, followed by Mark McGettrick, who will go over the financial side of things, and hopefully, we'll have 30 minutes or more for questions. So at this time, I'll turn it over to our CEO, Tom Farrell.
Thomas F. Farrell
Good morning, everyone. Is there anybody out there? Good morning. Oh, good. Okay. Glad to have you all here. At Dominion, we don't start any meeting without talking about safety. It's our underlying value that drives all the rest of them. You can see here, this is the OSHA recordable rate, which means injuries that -- or accidents that happen in the workplace. It means that for every 200,000 man hours, there's less than 1 incident, which -- so you can see we've cut it down by 2/3 over that period. For your purposes, you may need to think about this or you should be thinking about this as a leading indicator of operational performance, not just across our company but across any utility company. So it's a fact that we think it's important for the safety of our employees. You should be thinking about it, I think, as an indication of operational excellence. Our company is the safest company in the southeast exchange, which is all the southeastern utilities. We ranked #1 in 2012, which is an indication that we're proud of this, we have a long way to go, our people work hard to pull this off.
Okay. Dominion strategy. Before we took you -- take you through the growth plan, we thought it would be useful to show you how we got where we are, talk about why we got where we are, and maybe give you some insight into where we're going from here. So we started 2006 with this story and -- because this is when we started changing our business model.
At this point, you can see here we were about 55% unregulated, and that was going to drive itself closer to 70% unregulated over the next couple of years. We were sitting looking forward. And remember, this was post-Katrina, near the heights of the post-Katrina commodity markets. Gas prices were high, electric prices were high in our merchant business, we had a very large and growing E&P segment. We had some big finds in the Gulf of Mexico. Remember -- may remember the name Devil's Tower, that we're going to be coming online in the near future and that looked good. This was at the height of our merchant power business, over 10,000 megawatts spread from New England through the Midwest. Prices were at high and they were growing. And our earnings from the unregulated businesses are -- we're going to continue to grow, and that's where all of our growth was going to come from. Our regulated businesses were not growing very much at all.
And as we looked at this, we said, "Is this really the right mix for heading forward?" One of the things was, it puts strains on our credit ratings, our liquidity needs were high. We hadn't been able to raise our dividend in, literally, a decade. So we look out [ph], and the next thing we were looking at is by 2010, even our Virginia Power generation would be considered unregulated. We had the deregulation in Virginia at this point and we had a price cap until 2010 and then we would've gone to market, and there had been a lot of political froth going on about deregulation, it was beginning to push back, it was beginning to come. In the mid part of that -- of the last decade, you may remember Constellation, that problem where gas' and electric's rates went up 70% in 1 day. Note -- nothing they've done, it was their price cap came out and we still had post-Katrina levels. So our stock was growing, I mean, our earnings were growing in the unregulated space and we weren't sure that's where we wanted to be.
This is how the market viewed our earnings. We had about a 12% discount on our P/E ratio to our peer group. So we looked at this, we decided we can either stick with the status quo, we can double down and try to get more unregulated earnings, buy another E&P business or more merchant power plants. Some people decided to go further into deregulation at this stage. Or we could go in -- exactly the opposite direction, which is to go far more regulated. And to do that, there's a couple ways to do that, you can either grow your regulated businesses or you can shrink your unregulated businesses or you can do both. We chose the latter, we chose to do both and to go in a far more regulated direction.
So as you fast forward -- picked 2010 here, because the last time we were here for an analyst day was in May of 2010. And sort of here's the progress report. So you can see where we were in 2006, that was going to head up closer to 70% deregulated by the time we would have gotten to 2008 or '09. And what happened is in 2007, we started the strategic moves. We sold all of our non-Appalachian E&P businesses. In 2007, early part of '08, our policymakers in Virginia got engaged in a debate over reregulation of Virginia Power. That law was enacted in 2007. Its fifth anniversary was this session and I'll talk about that -- of our legislature, and I'll talk about that in a minute.
The first big proceeding under that new law was the Virginia City Hybrid Energy Center. Would there really be rider treatment? Would it really be for cash earnings as you build the plant? Will it really get the premiums? Lots of questions around the first applications of the law. All of that went as expected as the law has gone as expected over the course of that time. We finished the Cove Point expansion. You can see our target, our earnings mix has gotten to 75-25-ish. By the time we got to 2009, Bear Garden was the next power plant in Virginia that was approved. So people -- and then at the -- as we entered '10, 2010, I think in April, we sold the Appalachian E&P assets. And that was the earnings mix in 2010 actual at the end of the year. And you can see that we had closed the gap with our peers on our P/E, a slight premium at 2010.
So as we entered into '11 and started looking at the landscape then. We saw what you all see, shale gas explosion. We're there in the heart of it. Utica was just beginning to come into people's discussions in 2010 and 2011. And we knew that, that was going to do 2 things. It was going to present us a lot of opportunities in our gas infrastructure business and it was going to continue to put pressure on our merchant business, particularly merchant coal business. So we undertook steps. We started working immediately on the midstream and on Cove Point, and we started taking a hard look at the rest of our merchant fleet.
So to bring us up to date, you see 2011 actuals, they're 75,76, 24. Salem Harbor and State Line were closed and sold. Kewaunee, we tried very hard to come up with a solution for Kewaunee for the employees there, for that region of Wisconsin. These are great jobs and that region of Wisconsin needs great jobs, and it's a great plant. We couldn't figure out a way to make the economics of it work. We couldn't sell it, we couldn't do a power purchase agreement. Led us to the unfortunate conclusion that it had to be decommissioned, and it will be starting in May.
We announced, in the fall, the sale of Brayton Point, Kincaid and Elwood, exiting the merchant coal business entirely, and the Midwest merchant fleet leaving us Millstone, Kincaid -- excuse me, Millstone, Manchester Street and Fairless Works, and we announced this targeted mix of 80% to 90% and a 65% to 70% dividend payout ratio.
So where does that bring us now is we're at a premium to the rest of our sister companies in our peer group. And where are we going from here? And that's what we're going to talk about today. But we view our job as twofold. We need to continue to enhance that premium we have to our peers and we need to deliver the E in the P/E. We need to deliver the earnings growth in the P/E, and we need to increase that premium to our peers.
I've read -- some of you have written that as growth returns to the economy and some money begins to leave this sector when people are less concerned about safety of the utilities in -- which the utility sector provides, that there will be more differentiation in P/Es and those with the most transparent, visible, dependable earnings growth plan will prosper. We'll see if that develops.
So our growth plan review. This is what we're going to do for the next 5 years, 2013 through '17. We're going to build on our strategy of reducing our commodity risk. I think you should consider that part of our plan to be largely finished. We -- we're content with our merchant fleet, at this point, there are no more E&P assets to dispose of. And we have been building all along, and we're going to continue to build and that's where you're going to see our concentration of effort.
Now we showed these plans even a few weeks ago, you would have seen $2 billion on this slide for CapEx per year. We are raising that today to $3 billion, that's attributable to Cove Point, which I'll talk about in a little more detail in a minute.
We have growth in all of our business units. Our local gas distribution company, Dominion East Ohio, we have a $160 million a year PIR program. We have it in Dominion Transmission, we have it in midstream, we have it in Virginia Power in its electric transmission business, distribution business and its generation business. And even in merchant power, there is a little growth this year compared to the significant declines we've seen over the years in that business. And as you all know, I think we're well situated in the Marcellus and Utica shale.