道明尼資源 (D) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Dominion's third quarter earnings conference call.

We now have Mr. Tom Chewning, Dominion's Chief Financial Officer in conference.

[OPERATOR INSTRUCTIONS]

I will now turn the conference over to Tom Chewning.

Mr. Chewning, you may begin.

Thank you.

Good morning and welcome to Dominion's third quarter 2006 earnings call.

Joining me this morning are Tom Farrell, our President and CEO, and other members of our management team.

This morning, I will review actual third quarter 2006 results, give an update on our credit metrics, outline changes to our commodities hedge positions and provide assumptions for the fourth quarter.

Tom Farrell will then report on the conclusions of our strategic review process.

Concurrent with our earnings announcement this morning, we published several supplemental schedules on our website.

We ask that you refer to those exhibits for certain historical quantitative results, as well as our operating assumptions for the fourth quarter.

From time to time during this call, we will refer to certain schedules included in our quarterly earnings release or to pages from our third quarter Earnings Release Kit, both of which were posted this morning to Dominion's website.

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

Let me start by providing the usual cautionary language.

The earnings release, the results of our strategic review, 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 a discussion of factors that may cause results to differ from Management's projections, forecasts, estimates, and expectations.

A discussion of additional risks and uncertainties related to our strategic review can be found in the Important Note to Investor section of the strategic review Supplemental Information Kit posted on our website as well as in today's press release announcing the outcome of our strategic review.

Also on this call, we will discuss the measures about our Company's performance that differ from those recognized by GAAP.

You can find the reconciliation of these non-GAAP measures to GAAP on our Investor Relations website under GAAP reconciliation.

Our third quarter 2006 results were strong.

Dominion had operating earnings of $1.87 per share in the third quarter of 2006 compared to $1.08 per share in the prior year.

This marks the fourth consecutive quarter we have exceeded analyst consensus earnings per share expectations.

A comparison to last year's third quarter is not relevant as we experienced two hurricanes last year.

Additionally, we booked nearly all of our business interruption income in this year's third quarter, which further distorts year-over-year comparisons.

Our review of the third quarter will therefore be in reference to what we expected as the quarter began.

We had a larger than expected increase in gas and oil production and experienced wider margins, mainly attributable to higher than expected market prices.

Weather compared to normal provided us with a slight help, as did sales of excess emissions allowances.

These unanticipated upsides were partially offset by a greater than expected fuel usage driven by the extreme August weather, as well as a small impact from tropical storm Ernesto.

Schedule 4 of our earnings release provides a reconciliation of these assumptions for the third quarter of 2006 to the actual results of our third quarter.

On a GAAP basis, earnings per share for the third quarter of 2006 were $1.85 per share, compared to $0.04 per share the prior year.

You will recall that last year, the effects of both Hurricanes Katrina and Rita were excluded from third quarter operating earnings.

A reconciliation of GAAP to operating earnings for 2005 and 2006 can be found on Schedules 2 and 3 of our earnings release.

Operating cash flow was strong at $1.5 billion due to solid earnings and net positive working capital changes.

Credit metrics improved materially during the quarter.

Adjusted debt to total capital improved by 3.8 percentage points to 51.2%, and adjusted FFO to interest for the last 12 months improved to 3.8 times from 3.7 times at the end of the previous quarter.

Our year-end expectation is to have a coverage ratio of 4.2 times, which is our goal as a strong investment grade credit.

There are several reasons for these improvements.

First, we have had three solid quarters of performance this year.

Second, our negative AOCI balance reflecting the market value of our hedge portfolio has improved by $2.6 billion in the last 12 months as legacy hedges roll off and commodity prices have declined.

And third, we're pleased to report we've completed two of the three initiatives we announced in May to improve our credit metrics.

Specifically, we have and will continue through the end of this year to issue new equity to satisfy demand for direct investment in our stock, which should yield about $140 million in 2006, and we've issued two hybrid securities for $800 million in proceeds, for which we received 50% equity credit from Moody's and S&P and 75% credit from Fitch.

Another initiative, which is to pay down debt with 100% of the proceeds from the sale of People and Hope is pending closure of that transaction, which we expect to occur in the first quarter of 2007.

We finished the third quarter with approximately $5 billion in available liquidity, our strongest position ever.

Cash margin and outstanding letters of credit declined with lower commodity prices, and we received cash due to us from our business interruption claims from Katrina and Rita.

During the third quarter of 2006, we hedged an additional 10 billion cubic feet equivalent of 2007 and 11 billion cubic feet equivalent of 2008 natural gas and oil production.

On the electric side, we hedged an additional 368 megawatts of 2007 and 105 megawatts of 2008 merchant-based load generation in New England.

Details of our current electric, coal, natural gas and oil hedge positions can be found on pages 30 and 31 of our third quarter Earnings Release Kit.

Schedule 6 of this morning's earnings release provides details of our fourth quarter earnings drivers and assumptions.

Please note that in addition to the assumptions we normally provide for the quarter, we have also listed several items from the fourth quarter of 2005 that you should keep in mind when developing an estimate of 2006 fourth quarter earnings.

In the fourth quarter of 2005, Dominion reported operating earnings of $1.02 per share.

Fourth quarter 2006 drivers that are expected to compare favorably to fourth quarter 2005 include higher contributions from the Company's merchant generation business, lower underrecovered Virginia fuel expenses, and a small remaining balance of our business interruption insurance proceeds from Hurricanes Katrina and Rita.

Expected offsets include lower margins in the E&P business due to lower expected price realization, the absence of a mark to market benefit from hedges de-designated following the 2005 hurricanes, and a $0.01 per share expense from Tropical Storm Ernesto.

We are reconfirming our full-year 2006 operating earnings guidance range of $5.05 to $5.25 per share, although we would expect actual earnings to fall between the low end of the range and the midpoint assuming normal weather in the fourth quarter.

Three non-operational factors have negatively impacted our 2006 projected results.

Lower than budgeted commodity prices.

Lower than expected business interruption insurance proceeds, and unfavorable utility weather as compared to normal.

In total, these three factors have reduced projected earnings by $0.40 per share.

Of this impact, $0.35 per share can be attributed to the E&P business unit.

That we expect to produce earnings within the original 2006 guidance range in spite of these non-operational impacts is confirmation that the fundamental earnings power of the Company is not only intact, but operationally, Dominion is performing better than planned.

Even more compelling is the fact that the core utility and power generation businesses that will comprise the new Dominion, that is Dominion Delivery, Dominion Energy, and Dominion Generation have been able to more than offset commodity price and utility weather impacts and have produced earnings well ahead of their original plan.

We are not only pleased with results for the first nine months of 2006, we are confident in our future.

Now I'll turn the call over to Tom Farrell for his report on Dominion's strategic review process.

Tom?

Good morning.

Before getting started, please note that we posted a Supplemental Information Kit on our website this morning, and I will refer to several slides in the kit during our discussion.

The kit is intended to provide reference material to help you understand and model the new Dominion.

For the past nine months, we have conducted a review of Dominion's current business strategy.

We considered market data, had multiple conversations with major institutional shareholders, consulted with various advisers and had extensive internal discussions and debate.

We have completed that process and reviewed our preferred approach with our board.

We have concluded that pursuing a sale of all of our E&P reserves with the exception of those located in Appalachia would result in the right mix of assets for Dominion in the long-term.

By redeploying the net cash proceeds of any sale into debt reduction, stock buybacks and expansion of our remaining businesses, we believe shareholders would benefit from solid, reliable growth from a complementary set of assets that are among the best in their industry groups.

The new Dominion would be refocused and stronger and would continue to stand as one of the premier integrated electric and gas utilities available to investors.

Dominion's new profile would be accompanied with one of the strongest electric utility franchise areas in the country.

One of the premier gas LDCs in the country, East Ohio gas.

A successful and growing retail program.

One of the industry's best nuclear operations.

A successful and diverse merchant electric generation portfolio.

One of the nation's most active L&G facilities, with plenty of room to expand.

One of the world's largest natural gas storage systems.

A natural gas pipeline business that ranks among the most efficient and profitable in the industry, and a geographically advantaged and low-risk oil and gas operation with almost 9,000 producing wells and 7,000 prospective drilling sites.

These businesses on a consolidated basis should grow operating earnings per share at a rate of 4 to 6% annually.

A breakdown of this growth profile can be found on slide 9 of the kit.

Dominion's risk profile would be reduced as E&P would be a substantially smaller portion of our consolidated earnings.

We project our Appalachian production to contribute less than 5% of 2008's operating earnings post sale, about the same percentage represented before our merger with CNG in the year 2000.

The sensitivity of Dominion's earnings to movement in the price of oil and gas would be approximately two-thirds lower after a sale.

Moreover, the remaining commodity exposure would be more predictable and easier to hedge going forward.

Our present business mix has made it difficult for our traditional shareholders to understand Dominion.

Despite our best efforts, we have not been able to convince the investment community that the combination of our high-quality E&P reserves and the results delivered by our management team and employees deserve the same earnings credit as more highly-valued utility-type assets.

The percentage of our earnings derived from our E&P business exceeds the comfort level of those investing in the utilities sector.

This is reflected in Dominion's significant discount to its utility peer group.

Our E&P management team and employee have created a great deal of value for our shareholders, but we do not believe it will ever fully be recognized in Dominion's stock price.

At the same time, we expect the premier quality of our reserves, operations, and employee group to produce significant cash proceeds.

After-tax cash would first be used to reduce debt by an amount that would be necessary to maintain our existing credit metric targets.

We believe this, combined with a lower business risk profile, will enable us to maintain or improve our credit ratings at both Dominion and CNG.

We would use the remainder to reduce our share count through stock buybacks unless specific investments are available in our remaining businesses that would provide a superior alternative.

We expect and have been advised that once any sale is completed, our per share earnings times an appropriate industry multiple would result in a higher stock value than if we continue to own our entire E&P portfolio.

I want to make it clear that our strategic review process is complete and that we intend to keep the resulting business profile for the foreseeable future.

However, our review of individual assets in each business unit will continue unabated.

We will work to improve the return on invested capital across the company.

You will appreciate that this has not been a precipitous or an easy decision.

We are blessed with one of the nation's best oil and gas operations and outstanding employees.

It is our belief that not only will Dominion shareholders benefit, but our E&P employees will have more opportunity to apply their skills and talents in a company grounded in the oil and gas industry.

Some of you may wonder why we would retain our Appalachian reserves and production.

There are a number of factors that support this decision.

As you can see on our asset map shown on slide 8 of the information kit, these reserves are located in the middle of our gas pipeline, gathering, and storage businesses.

Oil and gas production activities help us maximize the value of our entire investment in the region.

Drilling costs per well are relatively low and we have experienced a 98% success rate in the region over a long period of time.

The location of this production creates a positive basis differential compared to other producing areas.

Annual depletion rates are low, which reduces capital needed to replace lost production.

Finally, retaining over 1 trillion cubic feet of reserves provides us an indirect hedge to the financial impact of potential CO2 regulation.

There is a lot of industry interest in all of our E&P assets.

We have already fielded several reverse inquiries, even before this announcement today.

A sale of all the reserves to one buyer is our preferred approach for a number of reasons.

We believe we will receive a premium from a strategic buyer and our employees deserve a chance to keep this program together as long as we obtain maximum value.

We will begin a formal sales process in mid-February after our 2006 reserve audit is complete.

Our expectation is that any transaction from this process would close around mid-2007.

During our strategic review, we thoroughly analyzed an IPO spin option and determined that it would not create shareholder value equal to the anticipated value, which we expect to be created by a sale.

We will, however, revisit this option in the event that we do not achieve expected value for our sales process.

For Dominion, today's announcement is not about retrenchment.

It is about refocused growth.

We are looking at significant earnings expansion over the next few years from a variety of factors we have reviewed previously.

Also, we have our sights set on other opportunities.

There are many positive events on the horizon.

For example, starting next July, Dominion Virginia power will revert to a traditional fuel clause.

We will not be eligible for a one-time trueup for periods prior to July 2007.

We will, however, be eligible for trueups in future periods.

Had we functioned under a traditional fuel clause this year, it would have meant more than an expected $300 million in additional operating income for 2006.

We also will benefit next year from higher prices realized for our New England generating units and capacity payments under forward capacity market as well as continued growth in our electric distribution service area.

We are adding about 40,000 new customer accounts per year.

You are also aware of the discussions about building a new coal-fired power station in southwest Virginia.

We are in the process of obtaining an early site permit to build a third nuclear unit at North Anna Power Station, if and when the right regulatory and financial incentives materialize.

And the Cove Point L&G expansion is scheduled to come online in 2008.

We are also looking for other growth opportunities in our remaining core business lines.

We will seek opportunities to produce strong returns on invested capital and to create long-term shareholder value.

With our strategy more clear, and a financially stronger company, we will be positioned to pursue those opportunities.

Today's announcement is a result of a new way of looking at our business.

Earnings and cash flow are important, but so is maximizing the risk/reward ratio of our investments.

Although Dominion pays a sizable dividend from the income we derive from our existing operations, we believe that we could pay out a higher percentage from the remaining businesses, which will have a lower risk and more consistent overall earnings profile than we have today.

It is too early to change our dividend policy, but management will address the possibility of an enhanced quarterly dividend following any transactions related to our strategic decision.

We have been ably assisted in this work by JP Morgan, Lehman Brothers, and Juniper Advisory L.P.

Advising us on market perceptions of our existing and future activities has been Steve Fleishman of Merrill Lynch.

Our legal advisers are Baker Botts and McGuire Woods.

There is much work to do to accomplish a sale of these E&P properties.

Our whole organization is geared up to make it a successful process.

Once again, as I have done on many previous occasions, let me say how much we appreciate the professionalism and excellence demonstrated by Duane Radtke and the entire Dominion E&P team.

I'm now going to turn the call back over to Tom Chewning to discuss some of the financial aspects of the transaction.

Thank you, Tom.

Many of you may want to model the Company's earnings per share following the sale of the E&P reserves.

An important modeling assumption is the estimated sales price of the non-Appalachian asset.

None of us knows exactly what the market will pay for these assets, but we do know that the market is strong.

Industry observers have described these properties as the most attractive to be placed on the market in the last ten years.

We have been advised that based on the superior quality of Dominion's E&P assets and reserves, plus development potential, the proceeds we should expect to receive should fall in the upper range of recent comparable transactions.

It would not be appropriate for us to provide you with a forecast of sales proceeds at this time.

Each of you has your own perspective and models when you estimate values of oil and gas properties.

Presumably, all of you would look to what you consider to be comparable recent transactions.

We have found the JS Herold database to be an excellent source of information, and after this call, our Investors Relations Group will be available to direct you to where you may obtain additional information along these lines or to answer other follow-up questions you may have.

A significant determinant of value is the level of proof reserves being sold.

Total estimated reserves as of September 30 are approximately 6.6 trillion cubic feet equivalent, non-Appalachian reserves to be sold are approximately 5.5 trillion cubic feet equivalent.

These are unaudited estimates.

The tax basis for the non-Appalachian reserves is $3.8 billion.

As we move forward, we'll be working to improve the tax profile of the transaction, either through recognition of existing unutilized tax carry forwards or through the tax impacts of any transaction that result from our ongoing asset review process.

Slide 10 of the Supplemental Information Kit provides a number of other key modeling considerations which you may find helpful in estimating the financial impact of this transaction and modeling 2008 earnings per share for the new Dominion.

Although today's strategic decision was not made for short-term market impact, we expect that Dominion's stock price will be greater after completion of the sale, debt requirement and stock buyback processes than it would be if this course was not followed.

This concludes our prepared remarks on both the third quarter results and our decision to market our E&P business.

We are happy to take your questions.

Lindsay, would you open the line?

Thank you.

[OPERATOR INSTRUCTIONS]

Our first question comes from Greg Gordon with Citigroup.

Sir, please go ahead.

Thanks, good morning, gentleman.

Good morning.

So.

I've got several questions.

The first is -- first, let's talk about the strategic review and then I'll circle back to the quarter and year.

First, when we look at your outlook for '07 and '08, and we would at -- can we start -- would it be safe to start by looking at the May 22nd analyst presentation adjusting for note or measurable changes in the commodity price outlook as sort of the base off of which we should then be thinking about how we model this transaction?

Yes, I think you can do exactly what you've just described.

We outlined on May 22nd the earnings expectations as well as sensitivity to commodity prices, so if you'd update that for our recent hedge activity and commodity prices, that's a pretty good base to use.

Okay.

So, the long-term earnings growth rate you're talking about are off that sort of '08 base?

Yes.

Okay.

Second -- Is there anything that we need to be aware of in terms of how the hedge accounting on hedges at the corporate level might impact earnings in this transition?

Are these assets going to be discontinued for earnings perspective?

How should we think about the accounting as we transition from owning these assets to not owning these assets?

Well, I'm going to let Steve Rogers give you kind of an accounting perimeter on this.

But one of the questions I'll answer up front in case it's going to be asked.

In terms of a transaction, we will settle all the outstanding hedges before the transaction is complete or as it is completing.

That is -- if they are sold -- so that part is in the transaction.

But Steve will comment on where we are on the accounting standpoint.

Does that include the VPPs?

We will deal with the VPP as necessary, yes.

Greg, this is Steve Rogers.

If I don't answer your question, just pipe up with another one.

But I think what you're asking is would we leave our hedges in place at this point given this announcement, and right now the hedge relationships that are in place do exist and we continue to leave them in hedge accounting.

How we would evaluate whether they stay in hedge accounting would just depend on what happens with a perspective deal and as we receive offers and as we go through the process and we would obviously keep everybody apprised of that as things develop.

It will be business as usual from an accountant standpoint until there is a particular trip wire, if it occurs.

I'm also assuming the reason that the first choice is to sell rather than spin these assets is to generate the cash necessary to permanently delever the core business?

Well, our preference to sell it as group relates an awful lot to trying to keep our employee base intact, and they've created a tremendous amount of value.

So assuming that we could get the same value through one seller that we could in multiple process, that is our preferred route.

But it doesn't necessarily have to be the route that creates the greatest value.

But we assume that it might.

We don't have any knowledge right now that would tell us which would get the highest value.

Well, I mean, you're giving up -- there's a tremendous amount of tax leakage in an outright sell.

My question is, what's the offsetting benefit to the corporation that makes you prefer a sale to a spin when a spin would obviate the tax leakage.

Greg, when we went through the analysis, we looked very carefully at a spin, whether it was a pure spin or a spin with an IPO.

We compared to the results for the sale, including the tax leakage, which we're going to, as Tom said in his portion, we are going to work hard on, to reduce the tax leakage and we have some opportunities there.

When you look at the results going down either one of those paths, it was clear to us that more shareholder value was created going down the sale path than down the IPO spin path, for a variety of reasons.

We looked at it extremely carefully.

We will deal with a certain amount of debt, but we will have a very significant amount of cash left over which will be used for stock buybacks.

And if I could add one more thing to that.

The equation of creating value, if we had a spin, our shareholders would have two pieces of paper.

The litmus test would be if those two pieces of paper are worth more than one piece of paper.

You're taking significant risk on IPO value.

There is usually an IPO discount.

And if you take a look at the pure play E&P companies and their multiples, our analysis did not show a gain for our employees in that scenario.

The reason that we keep it open is two-fold.

One because we want to make sure that we can realize what we expect to realize on a sale process.

And secondly, markets change.

So, if the multiples of the stocks change, et cetera, it might bring it back into play.

That was the analysis on recent market data and also the other factor is that when you have tax leakage, a 37% tax rate, even if we didn't improve it, you've got to compare that to premiums being paid over market values of E&P company and it's kind of a cancellation of the tax leakage by the amount of premiums going normally paid in these transactions.

Two more questions.

One, I didn't hear or maybe I missed what you think can do to improve your tax basis or offset some of the tax leakage?

And then, on the quarter, you said there were three factors that lowered the quarter and the year's expectations and several factors that improved in the core business that allowed you to stay within the range.

Can you reiterate those, please?

Greg, this is Steve Rogers again.

On the tax question, as Tom mentioned, we're going to look at our available tax loss carry forwards and also, some other potential other transactions that may come up as part of the asset review to try to minimize the tax impactment.

I guess, one thing I'd comment on there, if you look at our 2005 tax disclosure in the 10-K, it would look on paper that there's some very large tax yields that are available and in place to shield some of the cash impact.

I want to caution that some of our activity this year in 2006 our normal business at Dominion's People and Hope sale have reduced those carry forwards significantly through the end of September.

So the ultimate use of these carry forwards and tax credits will depend on proceeds received, structures of transactions and things like that.

But on a net basis, we think in that area we could probably get up to about $300 million of federal and state income tax cash benefits to help shield the tax impact of the transaction.

On the other side of that, that's what we have today.

In our asset review process, should we find transactions that would create income and may or may not have tax losses associated with them, but would also improve our ROIC going forward, those are things we're not going to quantify for you, because we have to go through the review process.

But obviously we'll be incented at this time should we create, and we expect to create, large capital gains that we would be looking for opportunities to win-win a situation where the market is willing to value assets that we hold on a much higher multiple than what we traditionally have done.

As you've seen in the marketing, not only of two LDCs, but also some generation properties in the Midwest.

Greg, this is Jay.

Your second question involves the factors that impacted 2006 projected results, and we saw lower commodity prices than expected going into the year.

We did receive lower business interruption and insurance proceeds than we originally guided.

And weather in the utility sector -- area was lower than expected.

What we're saying is those three factors were offset through other operations and that a large majority of those items are really included in the E&P business, 35 out of the $0.40.

Thank you, gentlemen.

Thank you.

Thank you for your question, sir.

Our next question comes from Dan Eggers with Credit Suisse.

Sir, please go ahead.

Good morning, guys.

Good morning, Dan.

Not to be asking for what are you going to do for me tomorrow already, but can you just give a little comment on the thoughts about main to main?

Does that change at all, or do you broaden the scope for the ongoing businesses with the move beyond E&P?

At least you gave us ten minutes into the call, Dan, to ask that question.

It's 39 minutes.

I was talking about in the Q&A portion.

I'm glad you did ask the question.

Some may recall that in the May 22nd presentation that we did in Boston, we said that we were not longer going to restrict ourselves to main to main.

That we are going to look anywhere east of the Mississippi river-ish.

Sort of states just west of the Mississippi river and everything east of the Mississippi river and we will continue to do that and look for all the alternatives we can that are in these pipeline business, storage business, electric business, generation business, et cetera.

Okay.

I guess, Duane, since we might not have anymore opportunities to ask you this, can you just talk little bit about the drilling program for the fourth quarter and are there any big projects out there that could get moved from P2, P3, to P1 situation before final audit at year end?

Sure, Dan.

The projects continue.

The entre program we continue to expand.

If you look at the details in the Q and the K, with number of wells that we drilled were on a substantially higher pace than even last year.

So we do continue to expand those programs.

On the offshore, for the most part, it's business as usual.

Devil's Tower is on at 40,000 a day.

We're doing a sidetrack at Frontrunner.

It's just normal things.

As part of the ordinary process of doing reserves, obviously we'll take into account all of the additional drilling that takes place in the fourth quarter.

But nothing outside the ordinary.

So no big push at the end here?

Well, we have a push every year.

One last question.

Just thinking about it in earnings composition perspective.

As the generation fleet in Virginia goes to a competitive market and you look at the size of the merchant fleet already, you guys again are going to be, not year to year explicitly, but longer term more exposed to commodity prices, probably more than half even as we look out.

Is there anything we should look at from an earnings balance perspective, even in a post-E&P era source how much commodity price exposure you want?

You're talking about in 2011?

Yes.

We'll see how that works its way through.

The generation fleet in Virginia will go to what we expect to be -- we'll have to see, but our expectation is it that we'll be a PJM style market rate, because that's the RTO that we're in and that's what the legislation calls for assuming that the commission finds that it's a competitive market which we believe that it is aggressively competitive market.

That sits out there, Dan, and we'll work our way toward that, but we've got a few years to deal with that.

Okay.

Thank you.

Thank you for your question, sir.

Our next question comes from Terran Miller with UBS.

Please go ahead.

Good morning.

Good morning.

A couple of three questions, if I might.

Number one is, can you quantify how much of the VPPs will be removed from the rating agency's calculations on debt?

Number two is, do you think you're going to have any issues moving proceeds CNG up to Dominion under the indentures.

Terran, this is Scott Hetzer.

Hello, Scott.

Good morning.

First off, on the VPPs, we just need to work through that, through the sales process.

And once it's all said and done and we know exactly how that's going to be treated, then we would expect the rating agencies to make the appropriate adjustment.

Okay.

Just how much are they imputing it at this point?

I'm sorry?

How much are they imputing at this point?

I'll give you a number in just a second.

The second part of your question, in terms of getting proceeds from CNG to Dominion.

It's early to talk about what we'll do with use of proceeds and exactly which debt we would retire.

We have retained counsel, we are reviewing and have reviewed all of the relevant financing agreements and we certainly think we've got the ability and flexibility to do what we're talking about doing in terms of asset sales and debt reduction.

In terms of specifics where the debt's retired, it's too early to go into that.

Okay.

And can you remind us what your debt targets are for either CNG and/or for Dominion?

The debt targets will remain the same.

Of course this is going to reduce our risk profile and our credit metrics -- the targets for the credit metrics will stay the same.

For FFO to interest, we expect to produce greater than or equal to 4.2 times coverage, and for debt-to-cap, we expect to be less than or equal to 50%.

Okay.

Thank you very much.

Okay, Terran, in response to your earlier question, the debt adjustment right now for the VPPs is just over 300 million.

Thank you.

Thank you for your question, sir.

Our next question comes from Hugh Wynne with Sanford Bernstein.

Please go ahead.

I was just hoping to get a little more clarity around how to model the balance sheet impact of the sale.

I assume that the way in which you would allocate proceeds to the repurchase of capital would be to ensure that your adjusted debt-to-capitalization ratio met your 50% target and your adjusted FFO to interest ratio met your 4.2 times target to the extent that the after-tax proceeds of the sale were in excess of the amounts required to pay debt to meet those targets and that excess would be applied to share repurchase or is that too ambitious?

Yes, that's -- that would be a fair statement.

Okay.

Just trying clarify something I thought I heard earlier.

Did you all state that you had approximately $300 million of unutilized tax loss carry forward that you could apply against the taxable gain from the sale of E&P or did I miss-hear that?

Hugh, this is Steve Rogers.

We think that we could probably use up to $300 million depending on tax profile at the time, and deals and all of that, but that is our estimate at this point.

Okay.

Very good, thank you, then.

Thank you for your question.

Our next question comes from Jonathan Arnold with Merrill Lynch.

Please go ahead.

Good morning, guys.

Can you hear me?

Good morning Jonathan

A couple of questions.

Just want to pick up on something Greg was asking about.

On the slide where you talk about on a pro forma basis, E&P would have been 40% of 2008 on status quo type basis.

Are we to assume that's an adjusted mark to market 2008 and are you referring that to just the piece you're selling, or to the overall E&P business.

I think we were referring if we kept the entirety of our E&P business as we know it today.

Okay.

Our next question --

I had a follow-up as well.

And is there an update on your Midwest generation -- the generation after sales in the Midwest of when you'd expect to make a decision on those?

No, nothing to announce yet, Jonathan.

Thank you.

Thank you for your question, sir.

Our question comes from Rebecca Followill with Howard Weil.

Please go ahead.

Good morning.

Several questions for you.

You said that you would reduce your debt sufficient to maintain your current credit metrics.

Can you give us specifically how much that is?

Another on the discontinued operations.

Can you clarify, again, what point it would go to discontinued operations on the earnings, and then I've got two more, but I'll wait on those.

Rebecca, on the first one, we're going to stop short of giving you an exact dollar amount.

Although I know you well enough to know you'll get very close to what we'll probably need to do combined with Scott said earlier about our debt to cap and FFO to interest coverages.

But obviously it's not absolutely putting a [micromer] on a mud pedal, but you'll get very close.

That's our first order of business is to keep our credit metrics in tact while our credit profile is improving.

In terms of asset held for sale, we have certainly not tripped the different conventions that would create that situation and it would probably be when, Steven was saying, something was specific that a transaction was being actionable.

We would have to get to some more definition around a specific or a proposed transaction, get a little further down the road and analyze it as we go.

There's very prescriptive rules we would have to follow.

Okay.

And then why put on additional hedges at this point when you're looking to sell?

And then finally, on the Appalachian properties, any plans to change the strategy there?

There's a lot of activity going on with horizontal drilling and full drilling by having a smaller business.

Any plans to possibly change that strategy?

With respect to the hedging activity during the third quarter, if that's what you're asking, Rebecca?

Yes, I'm asking two different questions.

I'm sorry.

We came to this decision towards the end of the third quarter.

We had said from the beginning that we were going to continue business as usual as we went through the process.

So we did that.

We saw what we thought were very good prices, but we have said the last couple of years that we were going to average in over time in various percentages and we continue that activity through the third quarter.

We have reached the hedge targets that we have in our plan at present.

So we'll continue to look at that as we go along, but I wouldn't expect a great deal more hedging, at least in the E&P side over the next few months.

With respect to the Appalachian business plan, we will be looking very hard at expanding that business any way we can as we go through time because the rest of the company will be growing at a fairly rigorous pace in '07 and '08 and '09, and we're very satisfied with the profile of the Appalachian reserve.

We've been there for a very long time.

Dominion have been there for at least 15 years.

We know the people, we know the assets, we have great relationships with all the suppliers in that region.

We will be looking at expanding there in various ways.

Thank you.

Thank you for your questions, ma'am.

Our next question comes from Paul Fremont with Jeffries.

Please go ahead.

Thank you.

First question would be -- I know you haven't really commented on what you expect in term of proceeds on the transaction, but generally speaking, can you comment on whether you would expect to see the transaction dilutive or accretive to your earnings per share?

What we're looking at is -- depends on obviously what the proceeds are.

While it may be dilutive to earnings per share initially, we expect in particular when the multiple -- we expect a multiple expansion to occur.

We traded a very significant discount to other electric utilities and pipeline companies and we expect as -- and have been advised by our advisers that as we go through the process and we begin to enjoy multiple expansion that we will increase shareholder value.

Second question is, can you indicate to us sort of on a gross basis the amount of debt that would be affected by the sale and would the provision in that debt be that that debt essentially would become either due and payable, or do the debt holders have to give permission if it's beyond a certain percent in terms of asset sales.

Paul, this is Scott, first off, there's about $2.9 billion of debt at C&G.

We expect to take in proceeds much greater than that.

We would be looking to retire debt elsewhere in the portfolio.

As far as which specific debt issues would be retired, it's, as I said earlier, it's much to early to determine that.

In terms of ability to transact a sale, as I said earlier, we've retained council and have reviewed all relevant covenants and all of the documents and believe we have the flexibility to do that.

But is there also a change in status at the -- there's like $7 billion of debt at the Dominion Resources or Holding Company level.

Does that -- does anything happen based on an asset sale to that debt?

No, it does not.

And then my last question -- well -- my last question would be, you were expecting, I think, something on the order of 114 Bcfe sales on the quarter.

You came in like five above that.

Can you describe what would have caused sort of a variance to your guidance expectation that you put out.

And also, given the very strong performance in the third quarter, what would -- what would be the difficulty in sort of getting to the high end of your guidance range on the year.

First part I'll ask Duane to cover and Joe O'Hare to cover the second.

Sure, Paul, good question.

The production was up mostly in the offshore.

We had a continuation of the strong performance we had in the first half, which is a combination of timing when we built our models and our plan as to when we would able to bring this production back on.

And also some of the early performance in some of the reservoirs were stronger than what we had predicted in our models.

But likewise, the onshore continues to expand and we're having some great results there and actually go back to Dan's question earlier too.

That certainly is going to be a driver towards where we looked at for year-end reserves.

We've had a great year and a great reserve placements particularly in the third quarter.

Programs are doing very, very well.

And on the year in terms of guidance.

Paul, this is Joe.

If you take a look at Schedule 6 in the earnings release, you probably haven't had a lot of time this morning to model that out, but there's a couple of negative factors in comparison to the fourth quarter of '05 that's really going to produce not a favorable comparison.

You have to add that to the year-to-date.

Two things namely.

One is average realized price expectation of the E&P are affected certainly by market price compared to last year as well as the fact that some of the hedge prices have actually been recognized in prior periods in some of these FAS 123 mark to market gains.

If you model out the E&P margin expectation, that's going to be a little low.

Plus you have benefits of FAS 123R from the fourth quarter of '05 that don't recur in fourth quarter '06.

We'll be happy to work through the details of modeling that with you.

But, I think it's all clear if you look at the variables on page 6 --- or Schedule 6, excuse me.

Thank you.

Thank you for your question, sir.

Our next question comes from Sam Brothwell with Wachovia.

Hi, good morning.

Hey, Sam.

I think most of mine have been hit, but one thing that occurs to me, now that you're principally focused in Appalachia on the gas business and you have some other gas assets that would qualify, would you consider looking at an MLP structure for any of those things?

We'll continue to look at anything we can do to enhance return on invested capital and shareholder returns as we go along, Sam.

But I don't want anybody -- I want to make it clear as I said before, we're finished looking at our mix of assets here.

We are very content with what we are attaining going forward with.

We think they are top of class in every single industry sector and they are performing at peak levels.

We're not -- we will -- we will always look at what we can do to increase shareholder value, but the mix of asset, the review of whether we should be in this business or that business is at an end.

Okay, thank you very much.

Thank you for your question.

Our next question comes from Brook Glenn Mullin with JPMorgan.

Hey brook --- [ inaudible] your last name.

Yes, that was good.

If you look at the cost structure for the Appalachian properties, I assume that those are better than your portfolio as a whole.

Could you give us a sense of what the listing cost and the DD&A on just the Appalachian portfolio would be, or at least a range.

Brook, we're going to lay out any of the drivers and assumptions related to the continuing businesses or remaining businesses, I guess I should say, at the appropriate time, most likely in the first quarter of 2007.

We haven't broke out those costs at this time and we're really not prepared to do it today.

I would look for the drivers and assumptions at after the turn of the year.

Is it fair to assume though that those would be lower than the portfolio as a whole?

I'm not really sure.

I think I would rather wait.

That's a broad question and you've got all sorts of reserves so I don't think that's -- gave you an answer one way or the other, still wouldn't lead you to a good conclusion.

Thank you.

Thank you for your question.

Our next question comes from Matthew [Lemmy] with UBS.

Good morning guys, it's actually [Schnager Shooney] with UBS.

Just a couple of quick questions.

Most of mine were answered at the beginning.

With that said, I wanted to gauge your commitment in terms of selling the E&P assets excluding Appalachia.

In particular, I'm assuming you have price points of what you would like to see out of the different areas and so forth.

If you don't achieve those price points, would you consider once the auction process is over that you would consider keeping the longer live reserves, but more focused on selling the shorter live reserves?

We think there's very little likelihood that we will not get the value that we will be looking far.

We've had very expert advisers in here looking at our assets and they describe them to us as the best set of assets to be offered for sale in the last ten years.

That said, if we don't get the levels we're looking for, we will take a look at doing -- we'll reconsider the IPO spin option.

After that, we'll take a look at other alternatives as well.

But I do not expect to get to that spot.

Okay.

One last question, just on the strategic review.

You'd said earlier that it is ongoing but you'll continue reviewing on an individual asset basis.

Given your strategic review and so forth, will you be more focused on organic growth CapEx or strategic bolt-on acquisitions, or is there still a possibility that there are some assets that you still may sell but they'll be more on an individual asset basis?

I think both -- either -- you said there's an or in the middle of that -- I think both are correct.

We'll be looking at organic growth.

We'll look at buying additional generating assets, pipeline assets, storage assets.

We'll continue to grow our retail business.

We'll lack at expansion in Appalachia, but we will be looking as we have been over the last couple of years at how individual assets are performing and compare that to how the rest of the Company is performing and if we can't see a way to fix it, we'll sell it.

Okay, fair enough.

When you say that you're looking to grow some -- potentially buy some assets and so forth, would you actually consider swapping some E&P assets that are up for sell for a -- for example a pipeline or storage asset that is of interest with another company?

We have been down that path before and unfortunately you don't really get any tax advantage out of that because it's not a like-kind exchange that would qualify particularly will.

But we would be happy to consider it if we found the right set of assets and we found a tax advantage to it.

Okay, thank you very much.

Thank you for your question, sir.

Ladies and gentlemen, we have reached the end of our allotted time.

Mr. Chewning, do you have any closing remarks?

I do and Tom Farrell does.

Tom?

I want to thank you all for listening.

I want to make it clear that we are not selling the E&P business because we feel that we have to for any particular reason.

Our E&P company is performing at exceptional levels.

Market prices are very good for these type of assets.

We are selling it in a situation in which we consider ourselves to be in a position of strength, moving from a position of strength into a subsequent position of strength.

The people that have worked with us there have done a tremendous job and we're very pleased that they've been part of Dominion and we have high expectations for them working with us through the balance of this process.

And we are -- it was a decision that we did not reach easily, but it's one we think is in the best interest of the shareholders over the long-term and the employees.

Thank you.

Just a reminder, our forms 10-Q will be filed with the SEC later today.

Our fourth quarter earnings release is scheduled for Wednesday, January 31, 2007.

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

We will be at the EI conference in Las Vegas next week, and we look forward to seeing many of you there.

Please enjoy the rest of your day.

Thank you very much.

Thank you.

That does concludes today's teleconference.

You may now disconnect your lines at this time and please have a wonderful day.