Dominion Resources Inc. is considering a shake up of its wide-ranging business operations that may include a spin-off or sale of its profitable exploration and production (E&P) business and some nonstrategic assets next year. The move, said CEO Tom Farrell last week, will allow the company to refocus on its utility operations.

Speaking at the Lehman Brothers CEO Energy/Power Conference in New York City, Farrell told financial analysts that Dominion’s business model is now under review. Decisions on what to do going forward will be made early in 2007, he said.

“An ongoing asset review is under way, which is expected to improve” overall earnings, Farrell said. “Whatever we do going forward, we have better opportunities for our business than we have today. We’re in an interesting position. We can enhance shareholder value by disposing of something — all of the E&P business…all of it is on the table. We don’t have to go after anything.” A final decision will depend on “what’s right for Dominion Resources in the long term.”

Among other things, Farrell said an initial public offering may be considered for the E&P unit because management believes the business is undervalued in the marketplace. The E&P unit is among the company’s most profitable.

“The E&P outlook is promising,” Farrell said. “We’ve got an uplift coming from E&P…We’re coming off a base of tremendous growth there… We’ve had a strong Gulf of Mexico performance, and developments online are expected in 2007 and 2008.”

Dominion E&P had 5,894 Bcfe of proved reserves at year-end 2004, with daily production at 1,178 Bcfe/d. Its reserves are located in the Appalachian/Michigan basin, the Permian Basin, the Rocky Mountains, the Midcontinent, the Gulf of Mexico, along the Gulf Coast and in Canada.

The company also is considering the sale of other “nonstrategic” assets, including local distribution companies and power plants, but Farrell did not offer any details. Dominion Resources owns about 7,800 miles of natural gas pipeline and the nation’s largest natural gas storage system, with about 950 Bcf of storage capacity. The portfolio also includes about 28,100 MW of power generation and 6,000 miles of electric transmission lines.

“We’re watching the indicative valuations in the market and starting to narrow our options,” he said. “Everything is remaining on schedule, and we’re continuing to deliver financial and operational results.” But the CEO said that with strong pipeline performance and growing utility operations, “we’re focused on delivery in 2006, 2007 and 2008 with excellent resources.”

The price of natural gas also will weigh on what may be sold. “Gas prices and what impact they have if they are 10 to 15% higher or lower…, it’s not something we’re going to ignore in the decision-making process. The issue here is a long-term one…[about] what is the right future for Dominion Resources in the longer term.

“In the first half of 2007,” said Farrell, “the strategic review is what it is and what should this company look like in five to 10 years…Whatever commodity price exists, that will be important, but…the price may or may not determine what happens. We may decide to do nothing. But we’re looking out longer than what gas prices are.”

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