Dominion Energy, Inc. (D) Q3 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to Dominion's Third Quarter Earnings Conference 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 Analysis for our Safe Harbor statement.

Good morning, and welcome to Dominion's Third Quarter 2012 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 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 on these schedules. If you have not done so, I encourage you to visit our website, register for e-mail alerts and view our third quarter 2012 earnings documents. Our website address is www.dom.com/investors. 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 third quarter 2012 operating earnings and our operating earnings guidance for the fourth quarter and full year 2012 and 2013, as well as operating earnings before interest and tax, commonly referred to as EBIT. Reconciliation of such measures to the most directly comparable GAAP financial measures we are able to calculate and report, are contained on Schedules 2 and 3 in Pages 32 to 39 in our earnings release kit. 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 third quarter, as well as our guidance for the fourth quarter of 2012. Tom will update our operating and regulatory activities, as well as review the progress we have made on our growth plan. I will now turn the call over to Mark McGettrick.

Good morning. Dominion's 2012 third quarter operating earnings were $0.92 per share, toward the bottom of our guidance range of $0.90 to $1 per share. Mild weather in our Virginia service territory during the quarter reduced earnings by $0.01 per share when compared to normal. While temperatures, as measured by degree days, were above normal, other factors impacting weather-related demand, principally low humidity, offset the higher temperatures. Although the degree days were above normal in July, they were close to normal in August and below normal in September. Additionally, the highest temperatures during the quarter occurred in the aftermath of the derecho storm in early July, where over 1.2 million of our customers lost power. Full restoration took nearly a week, which prevented us from benefiting from the extreme weather. Through the first 9 months of 2012, mild weather conditions have reduced earnings by a total of $0.17 per share compared to normal. Lower interest expenses and a lower effective tax rate had a positive impact on the results for the quarter. Negative factors in the quarter relative to the midpoint of our guidance range where a storm-related outage at our Hastings processing plant and an unplanned outage at Millstone, due to water temperature limitations that required us to remove Unit 2 from service for almost 2 weeks. Earnings for GAAP purposes were $0.36 per share for the third quarter. Earlier this week, we announced our decision to close the Kewaunee nuclear plant and the associated write-down of the investment in that plant. This was the principal factor for the lower GAAP earnings for the quarter. Other differences between GAAP and operating earnings for the quarter were the results related to the Brayton Point, Kincaid and Elwood Power Stations that we are in the process of selling. Consistent with our treatment of previous transactions, results for these assets were excluded from operating earnings as of this quarter. A reconciliation of 2012 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 third quarter was $242 million, which was just below the midpoint of its guidance range. Lower-than-expected results at Dominion Retail, due to mark-to-market changes, were partially offset by lower-than-expected storm costs and lower operating expenses. Third quarter EBIT for Dominion Energy was $178 million, which was below the bottom of its guidance range. The derecho storm had a negative impact on operations at our Hastings processing plant. This unit was off-line due to a loss of off-site power for several days, which impacted processing volumes and income. The overall weakness in the storage and gas transportation markets also impacted results from both the Gas Transmission and Producer Services businesses. Dominion Generation produced EBIT of $617 million for the third quarter, which was also below the bottom of its guidance range. Mild weather at Virginia Power, lower ancillary service revenues and higher operating expenses were the principal factors driving the results for the regulated Generation business. In the merchant business, the Millstone outage I referred to earlier was the principal driver for lower merchant generation contributions. On a consolidated basis, both interest expenses and income taxes came in better than our estimates. Consistent with past practices, interest expenses associated with the merchant plants are now being -- that are now being sold, have been excluded from operating earnings. State tax benefits, as well as the resolution of some IRS audit issues, helped reduce our overall effective income tax rate to 35% for the quarter compared to our guidance range of 36.5% to 37%. We now expect our effective tax rate for the full year to be about 35% to 35.5%. Moving to cash flow and treasury activities. Funds from operations were $2.8 billion for the first 9 months of 2012. Regarding liquidity, we had $3.5 billion of credit facilities. During the quarter, we extended the term of these credit facilities by an additional year to September 2017. Commercial paper and letters of credit outstanding at the end of the quarter were $1.4 billion and when netted against short-term cash investments, resulted in available liquidity of $2.1 billion. For statements of cash flow and liquidity, please see Pages 14 and 27 of the earnings release kit. Now moving to our financing plans. We issued slightly more than $1 billion of 5-, 10- and 30-year notes for the parent company in September. We were pleased with the market's response to our offering and thank those of you who participated. We had planned to issue an additional $750 million of Virginia Power debt in the fourth quarter, but have decided to push that issue into 2013 based on current cash projections. We have already locked in treasury rates with hedges for a substantial portion of our anticipated 2013 debt needs and have begun to lock in rates for 2014 needs as well. As part of our 2012 and 2013 financing plans, we will issue new shares of common stock through our dividend reinvestment and stock purchase plan, as well as from our compensation and benefit plans, which is expected to raise about $320 million of new equity in each of those years. The expected proceeds from the sale of the 3 merchant power stations should be sufficient to offset any need for market equity in 2013, as well as reduce some of our debt need. Now to earnings guidance. We estimate operating earnings for the fourth quarter within a range of $0.65 to $0.75 per share. This compares with original operating earnings of $0.58 per share for the fourth quarter of 2011, which included about $0.08 per share of weather hurdle. Compared to the fourth quarter of last year, positive drivers for the quarter include a return to normal weather, earnings from our newly-completed growth projects at Dominion Energy, sales growth at Virginia Power and higher Rider-related revenues from our generation growth projects. Negative drivers for the quarter include lower merchant generation margins and a higher effective tax rate. Our operating earnings guidance for the full year 2012 has been $3.10 to $3.35 per share. With normal weather, our year-to-date operating earnings would have been $2.53 per share rather than the $2.36 per share we have reported. Adding the middle of our fourth quarter guidance range to our reported year-to-date operating earnings would result in a full year operating earnings that would be below the bottom of our guidance range. Therefore, absent a cold fourth quarter, it will be difficult for us to achieve full year results that are within that range. However, when adjusted for weather, we expect earnings in the middle of our guidance range, which is 5% to 6% above the $3.05 per share we earned in 2011. Last month, we issued operating earnings guidance for 2013 of $3.20 to $3.50 per share. The middle of this range assumes normal weather and corresponds to a 5% to 6% increase over the middle of our guidance range for 2012. Therefore, the weather hurdle we have experienced in 2012 should have no impact on our growth targets for 2013 and beyond. As to hedging, you can find our hedge positions on Page 29 of the earnings release kit. With the decision to sell the Brayton Point and Kincaid Power Stations and our 50% interest in the Elwood Power Station, we will no longer include these positions in our hedge disclosure. Since our last earnings call, we have made no changes to our hedge position for Millstone. Our sensitivity to a $5 move in New England power prices for the remainder of 2012 is less than $0.01 per share. Our sensitivity to a similar move in 2013 is now only about $0.025 per share. As shown on Slide 9, we have locked in nearly all of our anticipated 2013 output at prices significantly above current market rates. Locking in these positions reduces the risk associated with achieving our earnings growth targets. So let me summarize my financial review. Operating earnings for the third quarter were toward the bottom of our guidance range. Lower interest expenses and a lower effective tax rate had a positive impact on results for the quarter. Negative factors in the quarter relative to midpoint of the guidance range were mild weather, higher operating expenses and unplanned outages at Hastings and Millstone. Our operating earnings guidance for the fourth quarter of 2012 is $0.65 to $0.75 per share. We expect weather-normalized earnings for 2012 to be in the middle of our original guidance range and consistent with our 5% to 6% weather-normalized earnings growth target. And finally, we have issued operating earnings guidance for 2013 of $3.20 to $3.50 per share. The middle of this range assumes normal weather and corresponds to a 5% to 6% increase of the middle of our guidance range for 2012. Thank you, and I'll now turn the call over to Tom Farrell.

Good morning. Each of our business units delivered strong operating performance in the third quarter and in every case, with improving safety performance. Year-to-date, net capacity factor of the 7 Dominion nuclear units, excluding refueling outages, was 99%. Including the 3 refueling outages, the net capacity factor for the 9 -- first 9 months of 2012 was an impressive 95%. Earlier this week, we announced our decision to close and decommission the Kewaunee nuclear power station. Last year, we announced our intention to sell the facility because it no longer fit strategically with our merchant portfolio. However, we were unable to find a buyer for Kewaunee and expect to cease power production in the second quarter of next year and move to safe shutdown. The decommissioning obligation is fully funded. Virginia City Hybrid Energy Center was declared commercial on July 10. The $1.8 billion project was completed safely, on-budget and on-schedule following 4 years of construction. During the third quarter, significant progress was made toward biomass commissioning, which should be completed during the fourth quarter. Construction activities are progressing for the 1,329 megawatt Warren County 3-on-1 combined cycle plant. The EPC contractor has poured the foundations for the major equipment components. This fully-wrapped $1.1 billion project is scheduled for completion in late 2014 and is on-time and on-budget. The company advanced plans for another 1,300-megawatt 3-on-1 combined cycle plant to be located in Brunswick County, Virginia. The facility is expected to be in service in 2016 and should have costs similar to the Warren County plant. We have made progress with equipment procurement, gas supply agreements and permitting is underway. On July 31, Dominion executed the EPC contract with Fluor and issued a limited notice to proceed. We expect to file a CPCN and Rider applications with the Virginia State Corporation Commission next month. The projects to convert the AltaVista, Southhampton and Hopewell Power Stations from coal to biomass are progressing on schedule and on budget. Engineering is 95% complete, and the 3 projects are expected to reach commercial operations prior to the end of next year. The company is proposing to modify the existing Bremo Power Station Units 3 and 4 by converting them to use natural gas instead of coal. A minor air permit modification has been submitted to the Department of Environmental Quality, and a fixed-price EPC contract for this work has been awarded. A CPCN application was filed with the State Corporation Commission in August. Pending the receipt of the required approvals, the station will commence operations on natural gas beginning in the summer of 2014. Dominion Energy continues to make significant progress on its growth program. The Appalachian Gateway Project was placed into service on September 1, on time and below budget. Pipeline expansion will relieve congestion in the region allowing conventional natural gas production to move to market. Both the next -- Northeast Expansion and the Ellisburg to Craigs Projects are expected to be in service next week, on-time and on budget. Development of the Utica Shale formation is proceeding, as demonstrated by the leading indicators of announced well permits and drilling activity. Through early October, the Ohio Department of Natural Resources had issued 413 horizontal well permits to multiple producers with 176 wells drilled to-date. 35 of those wells are now producing. 24 rigs are currently on location in Ohio. Dominion continues to leverage our Ohio and West Virginia infrastructure in support of this rapidly-growing energy supply. The construction of Natrium in Phase I is moving forward. The inlet, outlet and product lines are expected to be complete in November. All major equipment, spheres and towers have been set, and piping and electrical work has been progressing well. Over 900 workers are on-site, working 2 shifts to meet the late December in-service date. As noted in our last earnings call, recent legislation paved the way for Dominion East Ohio to construct new gathering facilities and to convert existing strategically-located pipelines to wet gathering service outside of utility rate regulation. Building on that framework, we have entered into several gathering and processing agreements to date, and we continue to negotiate with many producers and midstream developers. And as disclosed last quarter, Dominion East Ohio is now negotiating with parties who express interest in over 1 billion cubic feet per day of residue gas transportation, moving processed gas from Ohio plant outlets to various downstream interstate pipelines. We're pleased to announce that Dominion East Ohio recently entered into a long-term service agreement with M3 Ohio Gathering to provide significant firm gathering services for wet gas in Northeastern Ohio. Under this agreement, Dominion will receive 180 million cubic feet per day of gas from Utica in conventional wells committed to M3 Ohio, and we'll deliver those volumes to the Kensington processing plant, which is presently under construction. The services will be provided from existing pipeline assets, with limited capital upgrades to support the project. We will begin this gathering service for phases of Kensington that are slated to come online in early 2014. We are continuing to develop a liquefaction project at Cove Point. The project, which is expected to cost between $2.5 billion and $3.5 billion, exclusive of financing costs, has a planned capacity of approximately 750 million cubic feet per day on the inlet and 4.5 million to 5 million metric tons per annum on the outlet. Dominion has continued to receive strong interest from the market and is in advanced negotiations with multiple parties for definitive terminal service agreements. We have made significant progress toward finalizing these agreements and remain confident that the full plant capacity will be contracted by the end of this year. On October 1, a hearing was held in Maryland State Court in our request for declaratory judgment regarding the Sierra Club's challenge to the project. The other party to the agreement at issue is the Maryland Conservation Council, who filed a brief fully supporting Dominion's position. A decision is expected on this matter later this year. The front-end engineering and design studies are on schedule and are progressing well. The FERC prefiling process is also progressing in accordance with plan. Two open-house meetings have been held with the public to discuss the scope of the project. FERC issued its notice of intent to prepare an environmental assessment that will address the potential environmental impact of the construction and operational facility supporting the project. We will provide a more detailed cost estimate early next year as those studies become more defined and we finalize our financing plans. Subject to successful completion of engineering studies, execution of terminal services agreements and after we receive the necessary approvals, we anticipate beginning construction in 2014, with an in-service date in 2017. At Virginia Power, economic growth is continuing to drive improving results. Compared to 2011, weather-adjusted sales are up 1.5% year-to-date. Year-over-year growth in sales to data centers was 9% for both the third quarter and year-to-date. New connects for the third quarter were also well above last year's level. New connects in the first 9 months of 2012 actually are about 30% higher than the comparable period for 2011. On the regulatory front, hearings were held in October on our application for an increase in base rates for our North Carolina service area. The request is for a $53 million increase in base rates, less a $27 million reduction in fuel revenues. The net revenue increase of $26 million incorporates an 11.25% return on equity. We expect the decision by year end. On September 15, a hearing was held in our Virginia Supreme Court appeal of the effective date for the return on equity established by Virginia State Corporation Commission to be used in next year's biannual review. The effective date will establish whether the average authorized return on equity is 10.9% or 11.36%. So including the statutory return on equity collar, the appeal will determine if the return on equity to be used for the biannual review of 2011 and 2012 earnings is 11.4% or 11.86%. We expect the final decision next month. Virginia Power's return on equity computed using GAAP earnings adjusted for rate-making was less than 9% for 2011. Incorporating results through the third quarter of 2012, Virginia Power's similarly-adjusted return on equity for the first 21 months of the 24 months to be covered in the 2011 and '12 biannual review is about 9.5%. So to conclude, all 3 of our business units performed well and together delivered results that met our expectations. We continue to move forward all of our growth plans and expect to deliver 5% to 6% weather-normalized earnings per share growth in 2013 and beyond. Thank you, and we are now ready for your questions.

[Operator Instructions] Our first question will come from Dan Eggers with Credit Suisse. Dan Eggers - Crédit Suisse AG, Research Division: Tom, just -- I want to make sure I understand on the Cove Point lawsuit in Maryland. I think originally the expectation was there would be a decision toward the end of this month, and then you said by year end in your comments. Is there some slippage on that from a schedule or procedural process? Or do you think that the original expectation is still reasonable?

Dan, I'm not sure where an expectation come, they would come by the end of this month. I don't think we ever said that. But the hearing was October 1, and all the parties agreed that the -- no evidence was needed and the judge could decide the case based on the briefs. There's no change in expected timing. It could come any day. Dan Eggers - Crédit Suisse AG, Research Division: And then on VEPCO with the earned ROE at 9.5% through the first 21 months. Can you just walk through some of the major adjustments, the derecho and those sorts of costs that you guys have in there that the commission might potentially try to address as far as maybe adjusting the ROE and where your position is on the validity of those expenses coming out of the ROE calculation?

Well, there are a variety of them that occurred in 2011, 2012. I wouldn't call them adjustments. They are GAAP earnings, which is what the statute calls for the commission to review. There are, like I said, a number of them. First, one is the VSP that was -- we did the early retirement program that was in -- severance program, which was in 2010. The commission's last biannual review carried $100 million of that negative effect into this biannual review. We have derecho, we have write-off of the cash for allowances -- or care allowances, rather. And one of the important things to keep in mind is we are $0.17 down for weather in 2012, which is what it is. There's no weather adjustment for any rate-making in Virginia whether it's forward-looking rates or for biannual reviews. So there's a number of issues. We have the coal plants in Chesapeake and Yorktown and some others. So there's a list of them. We can be happy to take you through the details of each of them if you have any further questions. Dan Eggers - Crédit Suisse AG, Research Division: Okay. And I guess just the last one, Tom, on when we were looking at the decision to sell the coal plants. I'm kind of surprised that there was no ultimate bid for Kewaunee and the idea of -- actually, selling a nuclear power station is interesting. But what is your level of confidence or what's the level of interest you've had on those plants so far and your timeline is going to help defray some of the equity needs for '13 and maybe in '14.

We have very high interest actually in those plants. We've had many, many parties express interest. I don't think you can compare -- you obviously can do whatever you want. I don't think you should compare Kewaunee to Kincaid, Elwood or Brayton Point Power Station. Kewaunee is a very unfortunate situation. It's a superbly operating plant. There are great people there, but it is a relatively small nuclear facility. In MISO, there's no capacity payments there. Gas prices have reduced the energy prices there, which I think is very difficult for a single-unit nuclear facility to, at least for us, to work in that market. We couldn't make it work and apparently nobody else could either since we found no buyers. But I don't think that's a comparable situation to a Brayton Point, Kincaid.

Our next question will come from Paul Fremont with Jefferies. Paul B. Fremont - Jefferies & Company, Inc., Research Division: The first question is just a clarification, which is based on the fourth quarter guidance of $0.65 to $0.75 effectively, then your annual guidance would really be now $3 to $3.35. Is that fair?

Paul, this is Mark. We did not change the $3.10 to $3.35. But what we wanted to give everybody color on today is that with the range we gave for the fourth quarter, we're going to need $0.04 or $0.05 of weather, cold up to normal weather, to get into the original guidance range of $3.10 to $3.35. So we've kind of bounded it for everybody. But the most important thing we think to focus on there is that with the ranges out there, when you normalize for weather, we are right in the middle of our weather-normalized 5% to 6% growth off last year.

Okay. Second question would be, when you talk about sort of the interest expense on power plants being excluded, would the bulk of the interest savings at corporate and other also be financing costs associated with those plants? Or is it just a generation that we should be looking at in terms of the interest savings?

Yes, the interest savings this month that was taken out of operating earnings was about $17 million, and that's what you should expect in the fourth quarter as well from the sale of the merchant plants. Paul B. Fremont - Jefferies & Company, Inc., Research Division: Okay. Because the total interest savings was closer to $50 million, so can you at all walk us through what the driver was for the...

Are you talking quarter-over-quarter? Year-over-year? What are we talking about? Paul B. Fremont - Jefferies & Company, Inc., Research Division: Third quarter 2012 versus third quarter 2011. It looked like the consolidated interest savings was close to $50 million.

Yes, I think we'll need to walk you through that, Paul, on that number. There's only one other item that impacted interest year-over-year of significance, other than our focus. Now we have refinanced a lot of debt. Year-over-year, debt has improved '12 over '11, which has lowered our interest expense. We have the non-offs of the merchant plants, which I referenced was to $17 million. And we did have one interest rate swap we settled in the third quarter of this year, which was about $10 million. So the way I would describe it is you take the $10 million plus the $17 million, which we've referenced and the rest of it has to do with efficiencies around refinancing of the portfolio. Paul B. Fremont - Jefferies & Company, Inc., Research Division: Okay. And last question would be, there's a significant increase I think at VEPCO in terms of operating and maintenance expense there. What would have been the driver there?

Again, what period are you talking about? Paul B. Fremont - Jefferies & Company, Inc., Research Division: Again, the third quarter '12 over third quarter '11. It looks like interest -- O&M expense is up like $20 million?

I'll ask Paul Koonce to go ahead and take that.

Yes, you're right. That is net in the kit. That's electric transmission-related O&M, so it's Rider-related O&M, so it's offset in the revenue. So it really has no earnings impact.

Our next question will come from Greg Gordon with ISI Group.

So the -- just to be clear -- just to clear up the -- from the last question, if the -- you earned $2.36 for the 9 months ending and the guidance is $0.65 to $0.75, then before the weather add-back, you'd be between $3.01 and $3.11, is that fair?

Yes.

Okay, great. Other than the biannual review, is it right that you're also going to probably have a base rate case next year? And can you talk about what will be adjudicated in that versus what won't be adjudicated in that given the way the legislation works? I mean, is ROE going to be addressed or is ROE already sort of set through the biannual rate review and it's really just a review of operating cost and capital. I'm just a little unclear on how this all works together.

Sure, Greg. The way the statute works, if you -- the collar -- you have to over-earn above the collar in 2 consecutive rate reviews in order for there to be a consideration of a reduction in your rates. And so it has to be above the 50 basis points twice, the collar, twice, consecutively. In order to ask for a base rate increase, you only have to be below the 50-basis-point collar once. We believe we will be significantly below the 50-basis-point collar at the end of the biannual review, which means that we -- triggers the possibility of a rate increase, so that we anticipate -- and the way the commission ruled last year was that we should -- if there's going to be a base rate case, it should be filed at the same time as the biannual review. So the ROE issue will be basically the same in both of them, but we will be filing for all of our increased costs that we've been associated with, the run rate we've had at the company. There'll be more traditional rate cases. Of course, you don't have any of the Riders in there. The earnings from the transmission, electric transmission or from the generation Riders are not included in the rate review and would not be included in a base rate review.

Great. And a reset of the return on equity would also not be in -- a part of that case or would it?

The review of the ROE is in both a biannual review and in a rate case.

Our next question will come from Paul Patterson with Glenrock Associates.

With the $17 million of debt associated with the plants, I was a little confused by that. How does that actually work? I mean, is that going with the plants? Is that going to be...

Paul, what we've done consistent with any of the divestitures that we've had is we take out the EBIT contribution from operating, nonoperating, and we take out the interest expense for financing, whatever the asset might be. We did it with the Peoples transaction. We did it with Hope. We did it with Kewaunee. We've done it with all of them. But the asset base here is fairly big, so it's kind of stuck out where it's a larger number. But we've always taken out both sides, and we'll continue to do that until the plant is sold.

Okay. The write-offs, if you look year-over-year, we just see a lot of write-offs. I'm just sort of wondering, should we basically -- how should we think about these nonrecurring expenses going forward? Are we pretty much -- do you think we're pretty much through with the merchant write-off experience? Or I guess, also, I guess anything at the utility or what have you, I mean how should we think about sort of recurring, nonrecurring expenses, if you follow me?

Well, I think it is fair to say over the last 2, 3 years we've had quite a few nonoperating expenses as we've reshaped the portfolio, some positive, some negative. Peoples was a positive expense in the sale that we've had there. But I think we're nearing the end of that, if not at the end. So we think '13 after the resolution of the merchant assets that are currently out for sale, I think you should see pretty clean operating versus nonoperating expenses going forward.

Okay. And then on the EDGE, that program that you guys have, which you didn't highlight in this presentation but you have in previous ones. So if you just sort of elaborate to us how about you think that might impact Dominion, specifically, but just also any industry impact this algorithm that you guys have come up with?

Well, first off, with respect to Dominion, we're not forecasting. It is part of our earnings other than -- what we hope to get out of it next year is in the 5% to 6% per share earnings growth projection or forecast. It depends -- the product works, that's for sure. How many people we're able to show that to and sell it to and its potential impacts, we're going to -- it's not just going to be in the United States. It's also -- I think it works everywhere, particularly useful I think in Europe to meet their energy efficiency mandatory targets. But we'll see. I can't forecast for you yet what it will do to Dominion's earnings growth, positive way or what it would do to the industry at large. But there's no question I don't think -- the algorithm works. It allows you to certainly reduce your fuel expense across your system.

And -- okay. But we can't get really a sense of -- do you have any idea when we might get a better idea as to what the impact might be or is it just sort of too much whatchamacallit?

I think we'll probably not be able to give you any real good view of that until 2014.

Our next question will come from Steve Fleishman with Bank of America.

A couple of questions. Just first on the utility sales. The -- Tom, you mentioned the strong data centers and new connects. Overall sales look down some, I assume some of that's weather. But industrial is also down. Could you just give more color on the sales growth this year and thoughts on outlook for that?

We'll ask Paul Koonce to do that for you, Steve.

Yes, if you look at what's in the kit. Certainly, that's actual sales which take into account sort of the weather impact that we experienced in the third quarter and really the absence of derecho weather, mostly. But as Mark mentioned in the call, September was certainly below. We are seeing strong growth. Tom mentioned 1.5% year-to-date weather-normalized sales. We've mentioned in previous quarters that there's been some ramp-rate demand around data centers. We saw that pick up. So I think from quarter-to-quarter, you're going to see a little lumpiness there. But from a revenue standpoint, those customers have contract minimum demand, so we're protected. But I see -- I think you see that kind of coming through a little bit this quarter. Industrial sales are down about 100,000 megawatt hours. Of course, that's against the total system of about 23 million for the quarter. We're not a very intense industrial marketplace with sort of a Northern Virginia, Central and Eastern Virginia. And it is just kind of a lot of small numbers added up. I would say if you looked at our top 5 industrial customers, their consumption is up, so that's good. So what you see in the kit is really the actual sales based on the weather. But when we kind of peel it back, we have seen very strong megawatt hour sales to data centers and generally, kind of accumulation of new connects over the last 12 months.

Steve, this is Mark. The only thing I'd add to Paul's comments was, to your -- and you referenced to weather. Quarter-over-quarter, weather was about $0.06 better last year than this year. And so there wasn't a weather extreme in the actual numbers as well.

Okay. One other separate question on the Cove Point and LNG export. The -- I assume you need to get the court ruling to finalize these terminal agreements?

No.

Okay. And then I guess also, do you need kind of the DOE report and final outlook on how much LNG export is allowed to be able to finalize the agreements?

No, Steve, because they'll all be contingent on us getting the permit and having the right to -- they'll all be contingent on us getting the DOE export permit, getting the FERC environmental permit and winning the Cove Point lawsuit. So the fact that there are -- those -- these 3 things are out there doesn't mean we won't sign these contracts by the end of the year. We believe we will sign the contracts by the end of the year, but they will have in them like all of our -- anything that needs a permit in the future will have a provision that says, if we don't get the permit, then the shippers don't have to obviously pay us anything. So I don't think that's anything out of the ordinary.

Our next question will come from Julien Smith with UBS.

So quick question, going back on the fourth quarter comments here. Obviously, we're a little bit into the fourth quarter here. What is the weather year-on-year versus normal, if you will?

I think we're best -- better talk about that in January, Julien, because the weather quarters here are really November -- the weather months, I should say, are November and December. October's not an influence during the fourth quarter much at all.

Okay. All right. And then secondly, a little bit on weather again. The derecho impact, can you quantify that within the weather number that you included there at all, specific to the derecho?

Are we talking about in terms of Hastings? Are we talking about in terms of Virginia Power or...

Actually, maybe perhaps both.

Okay. Hastings cost us about $0.01.

Okay. And then the derecho when it comes to DBPs?

DBP, it's a couple cents it cost us.

All right, great. And then maybe just kind of following up on the last question on Cove Point. As far as providing incremental data points, as far as financing plans, et cetera, would you need to get resolution in terms of DOE export authority prior to giving us clarity there? Or would you be kind of willing to provide us that clarity early '13 regardless of what happens with DOE here?

I think we'll be able to give you our plans because they'll be based upon the TSA agreements and the feed studies, the actual final estimates on the capital costs. The DOE permit will come when it comes. The economic impact analysis was originally going to be issued in the summertime and then somehow or other, it seems to have gotten caught up in this ongoing election thing.

Actually, as far as it goes to the DOE, I'd be curious. I mean, do you expect there to be a limitation on the total quantity of exportable LNG? I mean, what kind of conditions here are we talking about, if any?

We don't know that. The -- there's -- let me just -- let me go back some. I haven't been here that long, but I've been here long enough to have seen charts where we were going -- people were going to build 300 to 400 gas-fired power plants all over the United States. This was the hot thing. Everybody's going to do that. And then we saw, I don't know how many LNG imports facilities were going to be built. 30 of them or something like 43 of them were going to get built. And I think about 3 of them got built. We have lots and lots and lots of announcements around LNG exporting. In our situation, we have -- we already have an import facility. We have the terminal, we have the pipes, we have the storage. We have a pipe that goes directly into the Marcellus and Utica Shale that's dedicated to Cove Point. All we need to do is build the liquefier. So the environmental impacts are, we believe, very modest. We think that's what the FERC review will demonstrate. There's not going to be another one built on the East Coast of the United States, I do not believe. So we were early in the queue. We're not first in the queue, we're not second in the queue, but we're in the top 25%, first 25% in the queue. We're going about this just in a very workmanlike manner. We're not paying much attention to all the other announcements. We're dealing with our customers and our feed studies, our financing plans, and we have to deal with the Sierra Club on this one particular issue and forging ahead with the FERC process. So we're going to keep at it every day, step-by-step. And we believe we will get all the necessary approvals, but that all still remains to be seen.

Our next question comes from Steven Byrd with Morgan Stanley.

Wondered if you could talk a little bit about Dominion Retail and just general trends you're seeing in terms of levels of competition, margins, et cetera. Any trends that you're seeing in that business?

Well, Paul Koonce will take that.

Yes, as you know, the trend is competition, no question, and margin pressure. But if you looked at Dominion Retail from the first quarter kit to the second quarter kit to what was put out this morning, what you will see is that we've been able to hold steady at about 700,000 electric customers, about 550,000 gas customers, and our products and services business continues to expand. So what we've seen is competition. We've been able to hold our customer count steady in the face of that competition. And with the cost of supplies, we've actually been able to improve our margins a little bit. But it's a daily challenge and one that we're well aware of. What will happen if we get on a price uptrend? What we see is customers tend to shop less because they know they're going to be getting a higher price. So in some respects, we view that as a good thing. But during this downturn, it's been tough.

Okay, great. And then just a follow-up question on the question on interest expense relating to the assets for sale. Just to be clear, there would be some debt that would go with the assets potentially?

That's yet to be determined. We're evaluating that. It could be part of a package or it might not be. It depends what -- who the buyer will be and what the best result will be for our shareholders.

Our next question will come from Angie Storozynski with Macquarie.

Just wanted to go back to the question about retail. I mean, if it's true that there's no further deterioration in the customer count as far as electric customers are concerned, but it is a pretty significant pullback year-over-year? And then secondly, I'm just trying to figure out your sale -- or pending sale of merchant power plants, how is it going to tie into your growth and margins in the retail business?

Why don't we have Paul answer the first one, Angie.

Yes, I'll answer the first one, then I'll turn it back to Mark to talk about the power plants. The year-over-year difference has persisted throughout the year, and that is principally related to a decision we made last December to turn back a fairly large block of customers where we did not believe we could beat the price to compare and maintain our margin. And we did not think it was worth maintaining the volume and commodity risk without commensurate margin. So that was a decision that we made last December, and it's persisted throughout. And frankly, we've got one more quarter where you'll see that. So I think, to me, the relevant number is how have we done since that decision has been made. And if you look back, as I mentioned earlier, at the first quarter kit and second quarter kit, you'll see that we've been holding really steady. With respect to the merchant power plant sales, I'll turn that back over to Mark.

Angie, on merchant sales here, we have never tied our Retail business to our power generation business. They do not contract back from those units the resale into the wholesale market or we're contracted with other counterparties. So retail back-to-back out of the wholesale market, so there's no tie to all of that.

Okay. And my second question is about Cove Point and the fact that you haven't really told us anything about financing. I mean when I look at your midstream business, you're obviously completing your existing projects, but we haven't really heard about any new projects. It seems like Natrium 2 has been pushed out, and you haven't really made any announcements about new projects. Is it somewhat related to the Cove Point expansion in a way that you are holding onto cash and your debt financing capabilities because you might be needed to finance Cove Point? Or is this simply the general lack of projects in the midstream business that you would consider attractive?

Angie, we have had some announcements around additional midstream thing, which -- some of which -- a couple of which we announced today. But they are modest compared to the string of them that you heard from us in 2011. A lot of that does have to do with the fact that we are at this point concentrating on completing the Cove Point terminal services agreements, which we expect to have by the end of the year and concentrating again on the engineering work that's being done around getting those feed studies completed so that we can finalize the rest of those plans. So I'd say it's a combination of both, but largely more -- I would weight it more toward our concentration on Cove Point at this point. If you remember last fall, fall of '11, when we laid out our growth plan, we had -- we said there was about $1 billion in potential projects that we didn't have in our growth plan and were not part of our 5% to 6% earnings growth, but they were out there. We were working on them. I said early in September this year that we were replacing that $1 billion with the additional $2.5 million to $3.5 million from Cove Point. And Cove Point, similarly, is not in our 5% to 6% earnings growth plan that we've developed for you in talking about in '13, '14, '15, et cetera, because Cove Point won't come online until 2017. But we've also said before, we are looking at a variety of ways to finance Cove Point to make sure that it doesn't curtail our growth plans while it is in the middle of its construction.

I know, but my worry is simply that you're waiting for a decision to go ahead with Cove Point and that could potentially impede your near-term growth prospects because you're holding onto cash without deploying it, right?

I wouldn't -- I can understand your concern, Angie, but I don't think you should have it. We are going along -- ahead with many other projects. We have a lot of negotiations going on in the midstream. We don't have anything to announce today other than the ones we've already announced. The fact that we're working on Cove Point doesn't mean we're not working on other midstream activities. We are, and we'll continue to announce things as they become available to us.

Our last question will come from Michael Lapides with Goldman Sachs.

Guys, this may be a Paul Koonce question, just real quick and there are actually 2 of them here, so I have a follow-up. On Dominion Retail, when you break out your customer accounts, Paul, you've touched at length about the electric side, and the gas decline year-over-year wasn't that big. But what's up is actually customers you put in that products and services category. Can you just really define what that is? I mean, are these folks who are buying both gas and electricity or are they buying something else?

Michael, yes, great question. These are customers who are buying what we call products and services that are really function like in-home warranties. We've got a waterline protection plan. So if a waterline breaks, the pay so much a month; if the waterline breaks, we'll repair it. In the in-home wiring, we have some surge protection-type products. So what we typically do is lead with a commodity product and then we try to cross-sell as best we can these other products into the home. But we don't -- in terms of the products and services business, we have a network of contractors that we rely on to perform that work. We're not doing that work, but as part of a contractor network. So it's just a way to cross-sell an existing customer with an additional product and improve our revenue streams.

Okay. Any other -- a kind of follow-on to that. If I look at electricity volumes in the quarter at Dominion Retail, first is customer account. Customer account's down. Volumes are up about 10%. What's -- and this is coming off a prior year third quarter where weather was hot in a large part of the country. What's going on?

Yes, Michael, good observation there. We did have 4.4 million megawatt hour sales in the third quarter of '12 versus 4 million in the third quarter of '11, and that really relates to aggregation. We have done about 4 aggregation transactions. And in that case, you don't get the customer accounts, but you get the volumes. And so as aggregation becomes more and more of it, it's going to be more difficult to kind of make that connection.

Got it. And last item, just where do you -- within your regulated sort of Virginia Power, within your regulated customer account, are you putting the data centers in industrial? Just kind of looking at that decline from 530 to 510 industrial customers year-over-year.

Yes. Again, we put them in the commercial account. They use a lot of megawatt hour sales, but they're commercial customers in our accounts here.

Ladies and gentlemen, we have reached the end of our call. You may disconnect your lines and enjoy your day.