Dominion Resources CFO Thomas Chewning expects natural gas prices to average between $3.10 and $3.60 over the next several years. Once the storage surplus is reduced, said Chewning, a tight supply-demand scenario will develop. “[Prices] will be above that sometimes and below that sometimes, but on average, that’s where we think it’s going be,” he told analysts at Lehman Brothers 2002 CEO Energy/Power Conference in New York City Wednesday.

“Unfortunately for our country about 25% of the gas production falls off each year, and we see gas-fired electricity demand growing at 10%/year between now and 2010,” he said. “We think about 27 Tcf of gas will be needed in 2010 (compared to about 20 Tcf today).

“If you have to replace 5 Tcf a year of production and then grow to meet increasing electric demand, you need an additional 0.7 Tcf/year or a total of about 5.7 Tcf/year” of additional supply. He said the industry is lucky to reach 3.9 Tcf of incremental growth over a decade, so reaching 5.7 Tcf will be a long shot and will require increased LNG imports.

“We expect there to be a shortage of gas, and we do expect LNG to play a part, which is why we bought [the Cove Point LNG import terminal in Maryland], but we don’t believe LNG is going to disrupt the market over time,” Chewning said, noting Dominion’s $3.10-60 price forecast.

Dominion has avoided many of the pitfalls of its peers during the recent industry turmoil and struggle in the financial markets. Chewning said he believes it was a combination of good fortune, circumstances and good sense that enabled Dominion to retain a $60-plus share price while many of its peers fell below $35/share and some below $10/share.

“We’re not happy with the misfortune in our sector, but I think one of Dominion’s strengths in this market is that we haven’t stepped in anything deep or big,” he said. “We have always reported trading revenue on a net basis so we didn’t get involved in round-trip trades. We also weren’t located in Houston so we avoided some of the mischief that occurred; evidently it’s kind of a fraternity in the trading community down there. We also didn’t think California would be a market we would want to serve. In fact, we have a Maine-to-MAIN [Mid-America Interconnected Network] focus so we weren’t in California.

“We also got out of most of the international side of the business in 1998 and 1999,” he noted. “We didn’t have the greatest foresight in the world to see all the different problems that emerged, but we did know that the risk-adjusted returns weren’t any good compared to what we could make in the United States; we believed that long before they had problems in Latin America and elsewhere.”

He also said in contrast to many power production companies that are struggling, Dominion has a balanced approach to the generation market. It has 24,000 MW of generation now in the Northeast and is examining the trade-off moving forward on whether to build more plants or buy some assets that are being sold.

“That capital will kind of flow between what’s the best value for our shareholders. We also realize that there’s no perfect fuel mix. But we don’t want to have all of our eggs in one basket. We love nuclear. We like coal. We certainly are long on gas and like gas, and of course we also dabble in wind and hydro and other things that are the green part of the business. We really want to show you that we are trying to be as balanced a company as we can in terms of types of capacity (baseload, intermediate and peaking) and fuel mix.”

He said Dominion currently is a “very strong company with two-to-one cash earnings per share (EPS) to book earnings, and that’s a good relationship to have. The companies that got in trouble had about the reverse: twice as much book income as cash EPS. Cash pays bills so we’ve always been very fond of cash. We’re a little bit sorry that our company wasn’t evaluated on a cash EPS basis for some time. We expect this year to have about $2.7 billion in cash flow…and for next year over $3 billion; this takes out mark-to-market influences and other balance sheet items. It’s hard to predict…but we expect to be about twice earnings of $1.3 billion (this year) and about twice income ($1.5 billion) for 2003.”

About 25% of Dominion’s business is regulated monopolies in electric and gas distribution. Exploration and production makes up 25% of its bottom line and generation, pipeline, storage and marketing activities take up the other 50% of its business.

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