道明尼資源 (D) 2005 Q1 法說會逐字稿

Good morning, and welcome to the Dominion Resources First Quarter 2005 Earnings Conference Call. [OPERATOR INSTRUCTIONS] It is now my pleasure to introduce your host Mr. Tom Chewning Chief Financial Officer.

Sir the floor is yours.

Thank you.

Good morning, and welcome to Dominion's First Quarter 2005 Earnings Call.

Joining me this morning are Tom Capps our CEO, Tom Farrell our COO and numerous other members of the management team.

This morning we will review GAAP and operating earnings of the first quarter and compare actual results to the quarterly forecast.

In addition to financial results, Tom Farrell will be discussing several accomplishments and items of interest that have occurred since our last call in January.

Earnings guidance for the second quarter 2005 will be provided, along with the initial earnings outlook for 2006, 2007, and 2008.

Following our prepared remarks, we'll be happy to answer your questions.

Concurrent with our earnings announcement this morning we published several supplemental schedules on our website and we ask you refer to those exhibits for certain historical quantitative results as well as earnings guidance detail.

Our website address is www.dom.com/investors.

Let me start by providing the usual cautionary language.

The earnings release and other matters that may be discussed on the call today 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 quarterly report on Form 10-Q for discussion of factors that may cause results to differ from managements projections, forecasts, estimates and expectations.

We are very pleased with the financial results of the first quarter.

On a GAAP basis, earnings were $1.25 per share and operating earnings $1.44 per share.

A reconciliation between GAAP and operating earnings can be found in schedule two of this morning's earnings release.

The special items reflected below the line include a $0.13 per share charge related to the acquisition of the Panda-Rosemary NUG facility and $0.06 per share expense for impairments and true-ups and discontinued or non-cooperations.

The upper end of our first quarter guidance was $1.45 per share and we would have recorded exactly that had we not experienced $0.01per share dilution from a higher average share count than originally budgeted.

We have decided to delay issuing the five million sales related to the forward share of equity planned for May until August in order to achieve full year average share count used in our 2005 guidance.

Positive utility weather added $0.03 per share giving us a weather-normalized quarter $1.41 per share.

You'll recall that the $1.45 per share upper end of the range included $0.10 per share from business interruption insurance.

Actual recording insurance proceeds fell $0.02 shy of the upper band.

Positive factors in comparison to guidance were: closing the Dominion New England acquisition a month earlier than planned, receipt of higher prices from unhedged oil sold, realization of positive income from BTP3, increases over anticipated income from our retail supply operations, and Dominion Energy's Producer Services activities, and expense controls and reductions.

These were offset by lower gas and oil production than forecast, losses on oil hedge contracts where we were unable to physically settle and higher prices paid for Virginia fuel.

As in the past, there were income and expense items included in the quarter that were outside of our normal operations.

Income for the net regulatory receivable recorded as a part of the North Carolina Electric Rate Settlement and positive adjustments to tax reserves were almost exactly offset by expensing of previously capitalize PJM startup costs for the Virginia non-jurisdictional operations and expenses recorded to de-hedge oil contracts due to settle from April through December.

We anticipate that most of April through December de-designated oil volumes will be covered by actual oil production or by additional business interruption insurance proceeds.

A detailed reconciliation of actual operating results to quarterly guidance can be found in schedule four of the earnings release.

For the 12 months ended March 31st funds from operations covered our interest expense by 4.6 times up from 4.4 times at the end of the 2004.

Our adjusted debt total cap ratio increased 54.4% to 55.8%.

This increase is a result of higher commodity prices negatively impacting the other comprehensive income or OCI account by over $900 million in the quarter.

We view this change as temporary in nature and should see the OCI balance improve as the hedges roll off in the future.

Available liquidity $1.6 billion at quarter end.

Tom Farrell will review significant items that have occurred since January as well as comment on first quarter operational results, Tom?

Good morning.

Operations continue at excellent levels.

I will review a few specifics in a minute.

Speaking more generally, first, I can report that we have made significant progress on the important goal of eliminating as many risks from our income and cash flow streams as we can.

We have accomplished the following: Extended base electric rates in Virginia until the end of the 2010.

Fuel recovery is frozen but will be reset in mid 2007.

At that time, we will be able to limit volatility in fuel exposure because we'll have enough advanced notice that it could be properly hedged.

While it resulted in a rate reduction, we have a rate moratorium on our pipeline in storage assets until mid 2010, subject to FERC approval.

At the same time we have extended a gathering settlement until the end of the 2008.

Alleged over-earnings among pipelines has been a growing concern for that industry and we're very pleased to be the first to have this rate issue behind us.

We have a base rate moratorium in North Carolina until 2010.

We have agreed to a $12 million pretax annualized rate reduction, about $2 million of which is a reduction in reimbursement for the decommissioning trust.

So about $10 million pretax will affect earnings going forward.

We have replaced all four of the Virginia vessel heads and Millstone Two replacement will be completed shortly.

We integrated into PJM as scheduled on May 1.

So far, so good.

We closed on Dominion in New England and had excellent capacity factors in the first quarter.

We have [remissioned] the Clearinghouse to reduce risk and focus resources more on optimizing the Company's assets.

In fact, you will see in our Forms 10-Q filed later today that the sensitivity to trading positions from commodity price movements was significantly reduced over the last quarter.

Still ahead, we have to close on Kewaunee, which should be this quarter, complete FERC proceedings related to LICAP in New England in similar proposals in PJM gained more operational experience in PJM, continued to handle the fuel costs effectively, complete [NLD] rate case in which we're seeking an increase in West Virginia, and meet our production targets at E&P including getting Devil's Tower and Front Runner to full production, and completing the subsea tiebacks at Triton, Goldfinger, Rigel and 17 Hands.

All in all we have made tremendous progress although there's always more to do.

Many of you have asked us if we would be changing our hedging policy.

We have completed our review.

We continue to believe that averaging in over time rather than timing the market is more prudent and lowers the volatility of our earnings.

With that in mind, you should expect us to hedge electric, gas and oil in increasing amounts as we go through time.

For example, as we enter a year, we have likely be hedged in range of 65-80%, including internal hedges.

Significantly less two years out; even less three years out.

In the past we tended to focus on an absolute amount that we would hedge over the lengthy period of time.

Going forward, we will look to a variety of factors to guide our decision making, including market prices relative to the three-year plan, our view of fundamentals and relative commodity values and spreads.

Generation will almost certainly be relatively more hedged than oil and gas because margins are less volatile and the markets are less liquid.

Now these ranges will include our internal hedges as I said.

Such as: E&P production where volumes and revenue are priced dependent, for example, increasing royalty payments.

Virginia Power's fixed fuel clause consumption, E&P's own internal uses and any fixed price contracts of Dominion Retail.

Tom Chewning's going to talk more about 2006, '07 and '08 but I want to assure you that we're paying very close attention to 2005 and the operational excellence that is required to achieve earnings in '05 and future years.

Now for a few specifics on the first quarter.

In -- at Dominion Generation, the Wisconsin Commission has given final approval to Dominion's purchase of the Kewaunee nuclear plant. the unit should return to service late May.

We anticipate closing on this transaction shortly there after.

Millstone Unit Two is currently in a planned refueling outage that began on April 9.

Included in the outage scope is to replacement of the reactor vessel head which will complete all vessel head replacements for the Dominion nuclear feet.

This outage is progressing well.

Millstone Unit Three was forced offline April 17 due to a failed circuit card.

The unit returned to service on April 30.

This will affect second quarter earnings but should not affect year end earnings since the duration and replacement power cost were well within the range of planning assumptions.

Exact impact on the sur -- second quarter will not exceed $0.05 and could be offset somewhat by the final outage schedule of Unit Two.

The Millstone Three outage needs to be kept in perspective.

Nuclear operations across our fleet are excellent.

In the first quarter the nuclear fleet achieved over 99% capacity factor.

Also, during the quarter, we had four units online for more than 300 days.

A Company record.

Availability of fossil units is at a four year high.

Surry Unit Two began a planned refueling outage on April 24 that is progressing very well to date.

The FERC [flycap] proceedings continue for the [Nepal] market.

Arguments before the Administrative Law Judge were completed in April with the recommendation of the full Commission expected by early summer.

We anticipate a final decision in the fall.

Our expectation is LICAP it will be implemented effective January 1, 2006.

Our current guidance for '06, '07, and '08 does includes an assumption for LICAP.

We will not be able to give any more guidance or any specifics on that assumption until after a final FERC order.

At Dominion Energy, Cove Point, on April 15 we filed the application for FERC approval of the Cove Point Expansion Project.

When this expansion goes commercial in 2008 it will nearly double Cove Point's capacity.

On April 1, Dominion Transmission filed with FERC a proposed rate settlement reached with the customers in interest -- interested state commissions.

Rate settlement is expected to reduce pipeline storage income by about $29 million on an annualized basis, as I mentioned earlier.

As a result of a partial year of effect in other offsets the impact this year's earnings is $0.03 per share and does not change our full year earnings guidance five to five ten per share.

We have a variety methods we are reviewing to reduce the full year earnings impact in 2006 and we're making good progress.

While no one likes reduce rates voluntarily we believe the settlement achieves a good balance for Dominion.

We can remain focused on new revenues and cost savings without the distraction of a rate case which we expect to face our colleagues in the industry.

At Dominion Delivery, Dominion Retail had an excellent first quarter.

Net income increased $0.04 per share in the first quarter of 2005 compared to 2004, primarily due to higher natural gas margins.

We also added 50,000 new customers and renewed 95% of those eligible.

In Electric Distribution, Virginia's economy remains very strong.

New connects are significantly ahead of the first quarter of 2004 and ahead of our forecast.

Turning now to E&P.

E&P has had a mixed quarter.

While on target for earnings guidance, a number of issues have caused delays in certain wells and onshore and offshore programs which are being offset by better than forecast total onshore production and insurance proceeds due to lingering effects of Hurricane Ivan.

Specifically we now have completed six wells at Devil's Tower.

Two wells need to be recompleted so that all eight should be in full production by early fourth quarter.

Front Runner now has three operating wells.

The remaining five should be completed by the second quarter 2006.

Our year end production forecast stands in the range 445 to 450 Bcfe.

A reconciliation of prior guidance is on our website at second quarter '05 guidance and assumptions.

Primary changes are driven by the VPP3 sale which reduced production 20 Bcfe -- or it's already been sold, and delays in obtaining onshore and offshore rigs for well completions in a range from 8 to 13 Bcfe.

We expect additional impacts of six caused by Hurricane Ivan delays to -- which we will to be covered by business interruption insurance.

The gulf is a much harder place to get equipment today than it was even one year ago.

All in all, very good operations in the first quarter, and we're off to a very good start in the second.

I'll turn the call back over to Tom Chewning.

Thank you, Tom.

Second quarter 2005 guidance was a range of 73 to $0.85 per share.

The primary earning growth drivers compared to second quarter of 2004 includes customer growth, contributions from Dominion New England, Cove Point, Kewaunee, and our Producer Services business, higher commodity price realizations at E&P, business interruption insurance, incremental VPP revenues and positive effect for the under recovered fuel expense deferred in the first quarter of 2004 but recognized in second quarter 2004 earnings.

As you may remember, the elimination of fuel deferral accounting did not take place until the Governor's signed Senate Bill 651 into law in April 2004.

These positive contributions are expected to be partially overset by: A return to normal weather.

In the second quarter 2004, the Company benefited by $19 million from warmer than normal weather;

An increase in the under-recovery of Virginia fuel expense due to higher commodity prices;

Lower gas and oil production due to VPP's sales of British Columbia assets and Hurricane Ivan delays; higher DD&A rate and production costs;

The effect of the unplanned outage at Millstone Three; and effect of favorable second quarter 2004 items not expected to recur in the second quarter of 2005, including FAS133 gains recognized from oil options at E&P.

Complete details of our second quarter 2005 guidance can be found on our website under second quarter '05 guidance and assumptions.

As promised on the January call, we are providing our preliminary earnings outlook for 2006 through 2008.

Let me state the obvious.

It is quite early to be giving guidance for next year and even more risky to talk about '07 and '08 in May 2005.

Our goal this morning is to calibrate market expectations to what we forecast for 2006, and to provide you with rough estimates of increment earnings per share growth for '07 and '08.

Much can change in the next eight months so we will provide detailed and confident guidance on '06 earnings either late this year or in January 2006.

Our expected earnings range for 2006 is $5 to $5.25 per share.

A list of expected positive and negative drivers can be found on our website under "2006 to 2008 earnings outlook and assumptions".

You'll notice that we expect to have higher contributions for Millstone due to one less scheduled outage, higher franchise and retail growth, and growing natural gas and oil production.

We should also benefit from higher realized oil and gas prices.

On the other hand, we will be absorbing the impact of a recent pipeline and North Carolina electric rate settlement as well as projected increases and interest rates and employee (inaudible).

Offsetting some of the natural gas and oil production growth will be the ending of our business interruption claim from Hurricane Ivan.

Revenue from this source has no DD&A or production cost associated with it.

In essence this is a 100% margin revenue.

While we're pleased to get production back on stream our income from regular production will be based on normal margins.

Additionally, we forecast higher DD&A rates further reducing production margins.

Higher oil and gas prices will also produce a larger [underrecovery] of Virginia fuel expenses.

Dominion's share count likely will increase by [four point] million shares in May of 2006 when the upper deck convertible securities issue becomes equity.

This will be a source of about $0.09 per share dilution when compared to 2005.

Three specific drivers are very difficult to predict at this point into time and these account for the $0.25 per share range in our share guidance.

As we have previously told the market, Dominion continues to hold conversations with other parties to see if we can swap (inaudible) deepwater reserves for reserves onshore including some reserves not scheduled to be produced until the latter part of this decade.

If we are successful we would increase 2006 production over our present forecast.

We've just begun our participation in PJM.

Over the next eight months we should acquire a clearer sense of the extent that we might import power from the pool to replace output from the more expensive Virginia units.

This would reduce the amount of Virginia fuel underrecovery we would experience in 2006 and beyond.

We should know more about the development and approval of (inaudible) LICAP rates by the end of 2005.

At this time it's simply too early to project precisely.

As mentioned before, as we acquire knowledge and experience of these three potential drivers we will be able to give a tighter and more reliable 2006 earnings guidance range,in the late 2005 or at the beginning of next year.

Now for preliminary guidance for 2007 and 2008.

We have developed a slide showing the major uplift Dominion could have to earnings in 2007 and 2008.

You can find the slide by going to our website and clicking on the link labeled "2006 to 2008 earnings outlook and assumptions" look for the page titled "2007-2008 major growth drivers".

Given the assumptions you see listed on the lefthand side of the page Dominion would have an uplift of $1.63 per share in 2007 in comparison to 2006.

Based again on the list of assumptions the cumulative uplift in 2006 earnings to 2008 would be $2.59 per share.

Recently, our business planning and market analysis group headed by Diane [Leopold] developed a model to capture the relationship between the increased of fixed and variable cost for oil and gas production as prices rise.

We've taken these rising costs into accountant in the projections you see in the slide 2000 -- 2008 road drivers.

We have not yet calculated other items that either positive or negative earnings impact for 2007 and 2008.

However, it is clear that we will have a significant step-up in earnings from '06 to '07 and from '07 to '08, should commodity strip prices that exist now become realized prices in these years.

You'll also see that the sensitivity to $1 per [MMBU] change in prices is considerable for 2007 and even greater for 2008.

As Tom Farrell discussed earlier, we should be hedging our commodities overtime to reduce the risk to future earnings.

This ends our prepared remarks.

Now we'll be happy to take your questions.

[OPERATOR INSTRUCTIONS] Dan Eggers, Credit Suisse First Boston.

Good morning, guys.

Good morning.

Just a quick question.

With second quarter guidance probably a little lower than -- than what we're looking for, the full year staying the same, are there any big pieces that can conduce second half earnings on a year-over-year basis that we might be overlooking right now?

Dan, all I can say is I won't specifically say what they are because I don't have that right at my fingertips.

But we do internal projections of earnings including this guidance for the second quarter.

And to always check when we come to this meeting as to whether we can reconfirm and we can reconfirm earnings.

So I don't know if anyone around the table has anything specifically they'd like to point out?

As you -- as you look forward over the next two quarters there's some big changes that will occur as you compare it to last year.

One is mild wea -- we experienced milder weather and quarters three and four of last year.

Just normalizing that would be about 34 million after tax.

We incurred some Clearinghouse losses in those two quarters and we'll more than breakeven this year.

That's another 20 million.

So there's some puts and takes here. you have the typical franchise growth of 15 in Kewaunee, we had about 10, and Dominion New England had about 30.

So these are positive drivers over what we experienced last year.

That's Tom Bean who is the Vice President in charge of financial analysis.

And obviously, has his fingers on the details, thanks, Tom.

Thank you.

In Clearinghouse, how much -- it looked like there was some -- probably some help on the quarter.

Is that -- is that right?

And how much have you guys got from there so far?

Go ahead.

This is Paul Koonce.

Yes, Clearinghouse had a good first quarter relative to budgets.

You can see that the first quarter planned guidance was about 9 million better than guidance.

And that really is split into buckets.

One, our transportation and storage optimization, it was colder this winter than was -- than was expected.

So that accounted for about half of the pick-up.

And the other half really relates to our Appalachian aggregation business.

That's a fee income business and with prices where they are, a lot of activity in terms of hedging of future prices for a local producers and we got fee income from that and that accounts for about the other half.

Okay.

Got it.

Kewaunee's going to add 10 million from the -- the pick-up date in -- in , probably, May, is that correct?

You were saying 10 million in the third and fourth quarter.

We're still -- believe it will fall in the guidance range we gave originally.

That was 15 originally, wasn't it?

Yes. 15 for the year.

Okay.

Got it, thank you, guys.

Thank you, Dan.

Steve Fleishman, Merrill Lynch.

Hi, good morning.

Good morning, Steve.

Just a little bit of question first in characterizing the 2006 range in those factors that you mentioned as questionable.

Should we view that as the things that kind of moved the range between the five and 525 on -- on that scale?

Yes.

Okay.

So that gives some sense of characterization of the size of the items?

Yes.

In a way.

Okay.

Yes.

And, then, secondly.

Just to clarify in your 2007-2008 upside drivers you are including the expected cost growths that would occur in E&P along with production and pricing?

Yes, we have.

In other words, we have not included 100% of price uplift from our formal models.

We do take a factor, a growing factor, depending on price that reduces the margin, some of it is variable because it's involved in royalty payments. and severance taxes.

But we've also concluded some relationships of higher fixed prices and DD&A related to -- as prices rise in the industry.

Of course, this is fairly recent for us as prices have really risen and stayed there for a while.

But we -- we are certainly aware that there's not 100% uplift in those.

Our internal work has been done by Di -- Diane Leopold and her group have identified some factors that we use to derive a lower or some hit to margins beyond variable that we've put in here.

Okay.

And, then, just a clarify on the numbers you actually gave here.

Says you're using the April 15 market prices could you just say what those were?

Yes, I'll take that.

If you start with the gas prices, I'll go through two six -- two -- 2006, 2007, and 2008.

The gas price is 739 for '06, 689 for '07, 644 for '08.

Oil prices per bar -- dollars per barrel; 5196 for 2006, 4990 for 2007, and 4830 for 2008.

And then the -- the new pull around the clock prices we incorporated for -- are -- are the April 15 deck is $67.58 for '06, $64.31 for '07, and $61.71 for '08.

Okay.

And obviously, the '06 there's very little volatility and '07 you have these sensitivities.

Do you have the -- you don't by any chance have the MMBtu average prices for the -- the average of gas and oil?

No.

Okay.

One thing that -- that we wanted to point out is this -- this sensitivity is based upon the entire energy complex which doesn't -- which includes the April prices, et cetera.

Okay.

But you -- when you did this, you used a costs of E&P, for example, that would relate to a price curve like that?

Yes.

So,thus if -- in theory, prices come down, costs may come down a little bit and visa versa?

Yes.

Obviously, it's not entirely symmetrical.

The variable prices will come down symmetrically as they go up.

Severance taxes and royalties.

Some of the fixed costs will have some lag in them.

I guess one last question, which you may not be able to answer.

But if you look out to '07-'08 and you think of all of the other factors that you're not incorporating in here, obviously, you have normal cost growth outside of E&P but then you also have normal growth in customers, et cetera.

Any characterization of all of those functions together?

Is it just too early to -- ?

Well, it's -- it's early, and I don't want this to be construed as guidance.

I mean, it is almost facetious to be talking that far out.

Things can change but we do expect slightly higher interest rates, we do expect higher employee costs.

On the other side of that, as you pointed out, we have positives that we continue to have like growth and we have our six sigma program.

And in my own opinion it's generally that -- that they're not -- there's no major negative driver that's not offset by -- well, there's no major negative driver that we've now, yet, identified and it looks like it's almost a match of positive and negatives in the other categories.

We just did not try to -- to be line-specific here or to draw conclusion.

But I would say it's not a major -- there are no major issues out there that are -- that are looming that we haven't captured.

I'd like to add one thought.

That's one of the themes I was trying to express, Steve, in the opening part of my remarks.

We have been working very hard to eliminate the potential downside risks to revenue streams that's why we took care of the pipeline and that's why we took care of North Carolina.

That's why we've done what we've done in Virginia with the electric.

One other piece here, this slide only includes Millstone uplift.

Doesn't include uplift if there -- should there be any from the other New England plants or any -- any of the rest of the merchant fleet.

This one block there is restricted to Millstone.

Okay.

Thank you very much.

Hugh Wynne, Sanford Bernstein

Good morning.

I just had some relatively (inaudible) questions I hope you can help me with.

Just to confirm with the rescheduling of your share issuance, the expected share count for this year remains 343, is that correct?

That's right, average share count.

Okay.

The numbers you provide now for production of oil and gas, 445 to 450 Bcfe, were we to include the VPI, VPP2, VPP3, is it correct to say that we should be adding 63 Bcfe on top of that number, or is that not right?

Anybody?

Yeah.

Hugh I got that information in front of me somewhere.

I can ask another question while you're looking for it if you like.

Thank you!

Sure.

Okay.

The -- actually why don't we use the time for Mr. Koonce.

Would it be too much to ask for him to -- to re-read his price assumptions?

I think those would be probably valuable for a lot of people on the call.

I'm not sure everyone got hem the first time, I certainly didn't get them all.

This is Tom Bean, I'll repeat that again.

I'll go through gas, oil, and then the New England prices.

This is for 2006 gas prices were $7.39. 2007 was $6.89.

And for 2008, $6.44.

For oil, $51.96.

For '07 it was 49.90.

And for 2008, 48.30.

And then for the New -- New England 7 by 24 around the clock 67.58 for '06. 2007 was $64.31.

And for 2008, $61.71.

Thank you very much I appreciate that.

Hugh, we checked yesterday at close for the strip prices relating to oil and gas and there were some differences.

Some -- some less and some greater.

Actually as of yesterday, for two thou -- gas and oil are right on for 2007 and eight and oil was slightly higher.

Okay.

Okay.

Hugh --

Yes?

Tom, this is Duane.

That -- that 63Bs is correct for all VPPs.

Okay so I add the 63 to 445 to 450 to get how much oil and gas is coming out of the ground, is that -- is that right?

That's correct.

Okay.

And then the final question, your guidance for '07-'08 shows the Millstone contribution adding a $0.30 to '07 visa-vis '06 but only $0.17 to '08, visa vis '06.

Is there any -- any -- can you clarify that a little bit?

And I don't know what extent you're -- you're limited by your reluctance to speak about LICAP, but if you could explain a little bit how this -- this-- this pro -- progresses that would be helpful.

Hugh, actually this is accumulative slide and we lose ground -- we lose $0.13 to '07 in comparison at Millstone because of additional outage that we have.

There's nothing to do with -- well there is some pricing as well, it declines which Tom Bean just -- if you take a look at 64.31 around the clock versus 61.71 there is some decline.

But the bigger -- the bigger impact is because we have another outage.

We have one additional outage in '07 versus '08.

This is accumulative slide so if you looked at it, you have to subtract the 17 from the 30 and it's actually, $13million less.

Okay.

Follow up on one point about hedging and these price decks that Tom Bean has used.

I don't know where this slide shows up on our website, but there is an update on the hedging positions both in generation and in [coal], but also natural gas and oil.

We previously hedged almost nothing for 2008.

You'll see that we've now hedged 49Bcf of gas production at an average price of $6.47.

Which compared to 6.44 Tom Bean mentioned a minute ago.

And we've hedged 5 million barrels of oil production at an average price of $49.36, which compares to $48.30.

Okay.

The upturn at Millstone is -- is something that LICAP contributes to.

Do you expect anything similar for the rest of the New England Fleet or why is that not included in your '07-'08 accumulative incremental earnings?

This is -- Hugh this does not include a change in LICAP.

This -- this is dealing with the fact that we had contracts that were at one rate and we were -- that they come unhedged.

And we're applying the new rates that you see that we were given.

So it is not -- it's really just pricing.

It is a pricing change in the New England market from when we last contracted.

Very good.

And then LICAP -- if -- if LICAP comes through it would be potentially incremental for -- for your the assets in New England?

It would be -- it would be more incremental from '06 versus '05; '07 versus '06 are very close.

Very good.

Thank you very much.

I appreciate your help.

Paul Ridzon, Key McDonald.

I'm looking at the Howard Weil presentation and just -- there's significant differences between the '07 and '08 drivers and particularly sensitivities.

I'm just wondering if you can give details around that?

We've updated the -- .

The biggest change in the sensitivities I believe on the Howard Weil's slide we do not have Millstone.

So the sensitivities would be greater because now we're looking -- I think the sensitivities on that slide were just gas and oil, only?

And it will reflect the update for any hedging that we've done.

Correct.

With -- with the increase in sensitivity it's almost like -- it would appear you've taken some hedges off, though?

No.

Didn't include Millstone.

The slide it -- Howard Weil didn't include a -- an element from Milestone in it.

Now is does so that increases the sensitivity.

We -- we produce a lot of megawatt hours out of Millstone.

Our hedging slide will also show that you we've greatly -- we've increased the hedging at Millstone for '07 is now hedged at 55%.

And in '08, little -- very little.

We have for the first time shown what our hedging price is for the current year at Millstone, it's on that same slide.

So give you some sense of the uplift, it will be coming at Millstone.

Our average hedge price in 2005 is $40.88 a megawatt hour compared to, what you heard is where the present markets are now.

For '06, is 67.50; '07, 64.31; and '08, 61.71.

So where the market curves were on April 15th.

I will say -- it's Tom Chewning again, I'll say that this slide takes into account the hedges we've done to which Tom Farrell is referring.

So this -- this is all sensitivity including the updating of hedges.

So as Tom mentioned earlier, we've reviewed our hedging policy during current years.

We're not going to be talking about our markets that are not liquid and what prices we're receiving as we do kind of complete a year, it's our intention to let the people know what we received but we obviously don't want to do that while we're still negotiating with parties.

Thank you.

Thank you.

Anthony [Codel], Jefferies

Paul, you ready?

Hold on one second.

Thank you.

In terms of the -- in terms of the production level guidance, if you look at sort of the natural decline in the VPP volumes it looks as if in '07, and pos -- well -- it looks as if in '07 that there's an actual decline in the level of volumes adjusting for the fall-offs in VPPs using your adjusted 4 to 4 1/2% increase in production levels.

Is that a reasonable way to read that?

Duane would you like to handle that?

Yes.

Anthony, you're reading that correctly.

If you remember each one of the VPPs have a four year term and it's not a flat production schedule.

It's a shaped production schedule, it declines overtime.

So as you -- if you go through the [nums] of the three VPP's it's just the natural roll-off.

In other words in '07 the first one is completely gone.

So you have less volumes.

And then -- so what would sort of account for that very low level of production level increase, then, that is embedded in your -- in your current forecast guidance?

Well we've gone -- as we said we've gone back and said we're going to say 5 to 6% growth.

The components of that are our current forecast of increased costs still staying within our capital that we want to spend.

And the increased cycle times that we're seeing in our industry, it's just taking us longer to -- to get things done.

Even in [SENORA], our prime asset, where two years ago it would take two weeks to start a well to first production now take three weeks just because of the equipment delays.

Now that's not much if you drill one well; but if you drill 500 it adds up.

So those are the biggest components.

And last question would be is the Company going to provide any type of update on -- in terms of changes in -- in lifting costs or changes in depreciation?

Our current forecast on the guidance we're still staying with.

Where we would on our incremental F&D costs $1.75 to $ 1.85.

DD&A, we're still in the $1.40 to $1.50 range.

And likewise for lifting costs, in the $1.10 to $1.20 range.

We're -- we're staying with that.

Thank you very much.

Thank you, Paul.

Sven Del Pozzo, John S. Herold.

Good morning.

Good morning.

I was looking at the increase in O&M expense specific to the E&P segment between first quarter '05 and first quarter last year.

On percentage terms it's increased even more on a unit basis.

I'm wondering whether the increase is related to -- delays in completion at Front Runner and Devil's Tower and you mentioned that you expect Front Runner to be back possibly at 100% capacity utilization by the second quarter '06.

I'm wondering if, in forecasting lifting costs, can I assume that sometime by the middle of next year there might be a decline or compared to the most recent data you've released the first quarter?

Duane do you want to handle that, again?

Sure.

On -- on a quarter-to-quarter basis if you look at what happened, on the increase about $0.04 per Mcfe is due to just increases in the commodities.

So our -- our severance taxes go up.

Then about $0.05 is due to VPP3.

Because if you remember under the volume metric production payments we're still liable for the -- for the operating costs.

So on a per Mcfe basis it goes up and then we've had increases of about a cent.

But you are right on Devil's Tower, as it comes on and we have processing fees that go through the William's facility our average will go up.

But for guidance we're saying because we have other other things that are coming down, the $1.10 to $1.20 is still a good price.

Alright.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] Paul Patterson, Glenrock Associates.

Good morning guys.

Most of my questions have been answered but -- but you made a statement regarding the rate case settlements that you guys have reached and what have you and issues facing the industry.

And I was wondering if you -- that other participants in the industry will probably face and I was wondering if you could elaborate a little bit on that?

Paul, the -- there's a lot of talk among the industry, among [big] commissions, among industrial customers, among LDC customers, that the pipeline industry has -- is earning more than maybe they should.

There's just -- there's a lot of talk about that.

We decided to deal with it directly.

And have done so.

Still subject to FERC approval.

We had a similar issue we -- about five -- four or five year ago with the EPA.

We knew that New Source Review was not going to go away.

That there was a lot of talk about it.

And we decided that it was better for us to be one of the first in to make sure we got the best appropriate resolution of it.

That occurred.

And that's all behind us.

And many of our colleagues are now facing all of those issues that we faced four or five year as go.

So it's just -- it's the way we try to deal with what we think are potential issues.

Trying to clear the decks for what is the possible for to us achieve over the next three years.

Okay.

But on the pipeline side, in your own business, it would -- one would come -- would conclude that there is no -- that you don't have any outstanding issues or any issues that you think will come up again, I mean in terms of what you're earning or what have you.

Because you guys have quite a -- quite a system there.

I mean, there is -- this issue doesn't pertain to you guys anymore with this resolution that you guys just have come up with?

That's correct.

Okay.

Thank you very much.

Leslie Rich, Columbia Management.

Hi.

I wondered if you could walk through the negative impact that you had from the hedge de-designation?

Is that because your production is -- you hedged volumes that you wont actually be producing?

I'm going to ask Steve Rodgers, our Chief Accounting Officer to talk about that.

Yes, the hedge de-designations really, they've kind of rolled around the accounting rules.

And the accounting rules require a certain assurance around the timing of production.

And as we were looking at our forecast, the timing of the production we were seeing was not necessarily matching that of our hedge instruments.

And following certain probabilities that the rules required, we had to go ahead and de-designate some of the hedges and reverse some deferred losses out of OCI and mark those through the end of the quarter.

Several factors contributed to the production and they were then exacerbated by the Hurricane Ivan issues.

However we -- we do think that we will have production to -- to satisfy those hedges as we go over time.

It's just the probabilities weren't strong enough to leave a lot of them in hedge accounting.

And we just have to -- and we also had business interruption insurance that we think will offset some of the losses.

So is that unlikely -- is that likely to sort of unwind by year end or is that something that will carry over to other years?

Yes.

Yes.

This is all 2005 and we think it will unwind.

It's -- Someone had recently described it more or less as the -- as the like the corporate hedge used to be, where we had to mark -- we had to take under FAS133 the deferred marks out of OCI and we also had to mark them to the current market as of March 31st.

And you can see that we -- we settled some contracts in the first quarter, and we've accounted for that.

We've also got others that were charged in that quarter that did not have anything to do with that quarter's production.

So that was an extraneous impact on the quarter, but they they should be recovered one way or the other by year end.

Okay.

And then separately as the new member of PJM do you have any thoughts on the RPM proposals for capacity markets?

That's -- Leslie, so -- [LICAP's] obviously much further along and there's a lot of debate going on among the PJM members of -- of what it ought to look like.

So we really -- we don't have any estimate in anything we're giving you here that is anything to do with PJM's capacity pricing.

We just don't know how that's going to turn itself out -- turn itself as we go through -- something probably will happen though.

And we now have about 20,000 megawatts sitting in PJM, if you include Fairless Works and our [peakers].

Right.

But you also have utility customers that you need to serve under frozen rates.

So I'm just wondering sort of if you thought about it net-net would you be -- tend to be a beneficiary or it would sort of be a break-even or it's too soon to tell?

WE -- we -- it's -- really it's too soon to tell but we don't expect it to be anything -- what we've seen so far we expect to be neutral.

Okay.

Thank you.

David Thickens, Deephaven Capital.

Good morning.

I'm hoping you can give me a little help on the change in kind of the upside from the Howard Weils slide to today, particularly the 2008 side.

Given that the -- the assumptions for -- for upward push from E&P and Howard Weils.

About $0.80 in 2008 and $0.50 the Virginia fuel recovery were based on 650 long term price of gas and your current estimates based on a number of very, very close to that.

Why have we seen the uplift from the Virginia fuel recovery effectively double given that there's no change in the pricing assumptions and we've seen a, 40% around -- more than a 40% increase in the uplift from E&P?

Well, I'll tell you how we got the uplift from Virginia.

So maybe that answers the question?

And I'll -- I don't have the Howard Weil slide.

The Howard Weil Slide showed 45 to $0.55 was the range for uplift in 2008.

And I'm just wondering in how, in a month, you're estimate of uplift from that can have changed -- can have doubled?

That's a -- that's a cumulative slide.

If you look at -- take $0.99, take away $0.54 you will get $0.45 which is what we have as the uplift compared to '07.

This is a cumulative slide.

Was your Howard Weil slide not cumulative?

I mean, my understanding is that was cumulative as well.

Well I'll tell you how we got this number, okay.

And I don't -- can go back to Howard Weil.

We estimate on the price decks that we gave you an underrecovery of -- of Virginia fuel over $300 million in '06.

And, therefore, I don't know how, what the number was at the Howard Weil conference, or what the date it was used, or whatever.

I don't have that deck in front of me.

I'm just saying this is a fresh deck as of April 15, you heard the deck.

If, in fact, those prices are there, that is our loss, we'll recover $0.54 in one year and 45 the next.

And that will -- the difference there really relates to the time of year of the fuel reset being in July, so there is a little bit of difference one year to the other instead of being 50/50.

So this is a very precise number based upon the assumptions that we're using for prices as of April 15th.

I -- I just can't go back and tell you about how it was calculated at Howard Weil.

This is today's best information.

I just -- my -- my problem is that I just can't see how your assumptions can change by factor of two in the course of a month when the price deck that you're telling us is imputed in those assumptions hasn't changed.

Dave, this is Joe here.

First let me -- first let me say that the slide in Howard Weil was a cumulative slide .

As is the new one.

Correct.

Okay.

So there's -- it is an apples-to-apples comparison in terms of the cumulative effect in '08 compared to '07, or compared to previous periods.

The assumptions in the Howard Weil slide for natural gas were $6.50 and that was based on just the top end of our natural gas -- long term natural gas outlook.

It wasn't bases on any price deck or price strip, I should say.

But you told us that the '08 assumptions that went into the slide you gave us today was a gas price in 2008 of $6.44.

So it's with -- effectively unchanged, if anything, it's a -- modestly below what you're assumption was.

Right. and really, the only way I can answer that is that we don't have prepared, a reconciliation of the presentation today to the Howard Weil information.

And we -- we'll need to go back and take a look at that.

All right.

Hold on a second, Dave.

There's one other piece I -- as I recall the Howard Weil slide, I think we were assuming about a 3% or 3 1/2% production growth in oil and gas.

And this one shows 5%, which is the low end of our present expectations.

So that's -- that part of it is -- you're going to -- there's more production included.

So that would help -- that would help explain part of the change in the E&P assumptions.

But that doesn't impact the Vir -- the Virginia fuel recovery at all, does it?

The Virginia fuel recovery is what Tom Chewning told you minute ago.

Is we, in our present plan, in the forecast using the April 15 price deck, we have a higher underrecovery in '06 than was expected when we put the Howard Weil slide together.

And so what you're seeing is -- is a greater drag in '06 being reversed in '07 and '08.

Okay.

Okay.

So it's just the expectation that earnings will be lower now in '06 than you had previously thought as part that have?

That the -- that the underrecovery from Virginia Power would be higher.

Now I'm not commenting on '06 earnings.

I'm saying, that our '06 earnings guidance is what it is.

It's 5 to 5 1/4.

But what this -- what this block did, it's all it ever done, is take what we expected to be the underrecovery in fuel in '06, reset it, July 1st in '07, using the price deck which is now April 15th.

So there was an anticipated, higher -- this slide shows an anticipated higher underrecovery for fuel in '06, than previously shown.

And so what you're getting is, since that's going to be higher, there's a higher reversal factor, appearing in '07 and '08.

Are these slides showing [Deltas] -- but I thought the slides were showing cumulative Deltas versus '05 earnings.

There showing it versus '06 earnings?

'06.

'06 earnings.

Okay.

And therefore, and I'm not sure what the -- if it was the same slide at -- at Howard Weil.

But I think you're right in saying that as we have calibrated, we have not given, I think, '06 guidance at that time.

And as we calibrate '06 guidance this morning, it is anticipated in that guidance that there is about a $0.99 per share underrecovery of fuel in 2006.

So that could explain, since we didn't have '06 before, that could explain the difference today.

Okay.

Thank you.

Thank you.

Thank you ladies and gentlemen, we have reached the end of our allotted time.

Mr. Chewning do you have any closing remarks?

I'd just like to thank everybody for joining us this morning.

Just a reminder that our second quarter earnings release is scheduled for Wednesday, August the 3rd.

Enjoy the rest of your day.

Good morning.

Thank you this does conclude this morning's teleconference.

You may disconnect your lines and enjoy your day.