道明尼資源 (D) 2007 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 Farrell, Dominion's Chief Executive Officer and Mr.

Tom Chewning, Dominion's Chief Financial Officer in conference.

Please be aware that each of your lines are in a listen-only mode.

At the conclusion of Mr.

Chewning's prepared remarks, we will open the floor for questions.

At that time, instructions will be given as the procedure to follow should you want to ask a question.

I would now like to turn the call over to Laura Kottkamp, Director of Investor Relations.

Laura, please go ahead.

Thanks, Lindsay.

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

During this call, we will refer to certain schedules included in this morning's earnings release or to page from our third quarter 2007 earnings release kit.

These schedules are intended to answer the more detailed discreet questions pertaining to operating statistics and accounting.

Investor Relations will be available after the call for any clarification of these schedules.

While we encourage to you call with questions in the time permitted after our prepared remarks, we ask that you use the time address questions of a strategic nature.

If you have not done so, I encourage you to visit our web site, register for e-mail alerts and view our third-quarter 2007 earnings documents.

Our web site address is www.dom.com/investors.

Now for the usual cautionary language.

The earnings release and other matters that will be discussed on the call today may contain forward-looking statements and estimates that are subject to various risks and uncertainties.

Please refer to our SEC filing, 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 management's projections, forecast, estimates, and expectations.

Also on this call, we will discuss some 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 web site under GAAP reconciliation.

I will now turn the call over to our CEO, Tom Farrell.

Tom.

Thank you, Laura, and good morning.

This morning I am going to discuss our newly aligned business units, provide an update on our growth projects and regulatory status, highlight operational achievements and transactions for the quarter, and comment on the Board's decision to increase our dividend and approve a two-for-one stock split.

Tom Chewning will then review our third-quarter earnings results, explain significant items that are included in GAAP earnings but excluded from operating earnings, touch briefly on our progress to repurchase common shares with net divestiture proceeds, and discuss financing plans for our growth projects, particularly in Virginia.

This quarter, we closed on the last of the E&P property sales with the sale of the mid-continent reserves to lend energy for $2 billion, bringing total gross proceeds from the sale of our non-Appalachian E&P assets for nearly $14 billion.

A separate aspect of the strategic realignment was our reorganization effective October 1st into three operating units.

Dominion Virginia Power which includes the regulated electric distribution and electric transmission operations in Virginia and North Carolina as well as the nonregulated retail energy marketing and customer service operations; Dominion Generation which includes the regulated and unregulated power generation business; and Dominion Energy which includes the natural gas distribution, transmission, gathering and storage operations including Cove Point as well as our Appalachian-based E&P operations and producer services.

This alignment positions us to best execute our growth projects and construction programs beginning in 2008.

In actuality, we have begun to take the necessary steps to realize many of these future plans for projects regulated by the state of Virginia, those under FERC jurisdiction and those in our unregulated portfolio.

We have more than $6 billion in growth CapEx outlined for the next three years for our regulated and unregulated businesses.

We have a number of project applications as well as actual construction running concurrently that position us to begin a decade of new construction.

As most of you are aware, the legislation enacted in April of this year seeks to make Virginia energy independent.

AJM has shrinking reserve margin.

In a market with barriers to building, the market stands to worsen.

Facing a shortage of at least 4,000 megawatts over the next decade for Virginia alone, our legislature wisely took action to close this gap.

Reducing Virginia's reliance on the wholesale markets helps consumers avoid the rate shock that could otherwise have resulted when rate caps expire.

As a result, the legislation provides incentives for utilities to build new generation across the state and bears the backing of many stakeholder groups.

We have responded to our new state policy by actively pursuing a number of projects to begin to close our energy gap.

For example, we have filed for and have already received State Corporation Commission approval for two peaking units at Lady Smith located on the outskirts of the Washington D.C.

suburbs.

That $135 million project is already under construction.

Later today, we will file an application to site a new third peaking unit at Ladysmith.

In July, we filed an application to construct a 585-megawatt Virginia City Hybrid Energy Center clean coal plant in Southwest Virginia.

The project is expected to cost $1.6 billion and to be operational by 2012.

Our filing request an 11.75% return on equity with an additional 200 basis points requested because the facility is carbon-capture compatible.

The plant has already been found to be in the public interest by the State Corporation Commission.

The next stage of the approval process is a hearing scheduled in January.

As specified by law, the commission is expected to render a final order no later than next April.

Later this month, we will apply for combined operating license for our North Anna Unit 3.

Knowing the length and seriousness of the licensing process, Dominion first applied to the NRC in 2003 for an early site permit.

We are now four years later awaiting the final decision on that permit which we expect very soon.

This is not an expeditious process but we are looking to receive licensing approval before making a large capital investment.

It seems the more prudent path for our shareholders and optically accelerating a multimillion dollar multiyear project.

In addition to our generation build, we have three new transmission lines in the queue.

The first line has been approved as to its need and the commission is finalizing the route.

This pleasant view line will cost about $65 million.

We held public hearings in July and August on the proposed Meadow Brook to Loudoun line which serves a critical need in Northern Virginia.

The evidentiary hearing is scheduled for this coming February.

We expect the State Corporation Commission approval process for this $250 million line to conclude in the fall of next year.

The evidentiary hearing for our Carson to Suffolk line to serve Southeastern Virginia and North Carolina.

A $215 million project is also scheduled for February with a similar time line expected to conclude that process.

Although these lines will fall under FERC rate jurisdiction when cap rate expires at the end of next year, they are under the State Corporation Commission's sitting authority.

We expect these electric transmission projects will be subject to the new formula-based FERC rate-making principles.

We filed that requested FERC last week.

Like Virginia's new regulatory model, this new FERC process contemplates forward-looking reviews, trued-up on an annual basis.

Because electric transmission rates are subject to [rider] treatment under our Virginia law, transmission portion of our rates will be refreshed on a near current basis once they are completed.

All but eliminating regulatory lag for these growth-related projects that are critically necessary to serve Virginia's fast-growing population.

Our gas transmission and storage projects are also progressing.

In September, for example, FERC approved our USA storage project which will provide another 4.4 BCF of gas storage to our network.

Construction will take about two years and we continue on with construction at Cove Point.

For this quarter, we raised the roofs on both LNG storage tanks and remain on schedule for a late 2008 completion.

Finally, our Appalachian E&P operation has 10 rigs running adding over 30 new conventional wells per month.

As we move from a predominantly unregulated entity to a more regulated entity, we will increase the visibility of our new growth projects and their time lines.

We also want to ensure that you know about time lines on transactions as well as rate cases in filings that are under review.

On such matters, in the first week of October, the third Circuit Court of appeals heard oral arguments regarding the sale of Dominion peoples to Equitable.

The court is reviewing the case on an expedited basis and white there is no set time table, we expected the decision this month.

In August, the West Virginia Commission set a deadline for final briefs to be filed on November 16th for the review of our sale application of Hope Gas.

We believe we will prevail on both matters and expect to close by the end of the year.

In late August, Dominion East Ohio filed its first application for an increase in base rates since 1994.

Our file testimony supports 12% return on equity and $73 million revenue requirement increase.

The commission typically issues an opinion and order in such cases 9 to 10 months after the application is made.

Although we have a number of ways through new legislation and the regulatory process to achieve our earnings outlook and long-term growth rate, new build is not the only driver of earnings at Dominion.

This quarter highlighted many of the ways in which we are recognizing value opportunities across our portfolio.

As part of our goals to improve our return on invested capital, for example, Generation completed the sale of its Dresden Electric Energy Generation Facility to AEP for approximately $85 million in what will be - what is an accretive transaction.

In the northeast where peak demand growth has outpaced capacity development, we are well-positioned to receive uplift from our capacity and energy revenues.

We are the largest generator of power in New England, supplying approximately 20% of the market.

With little new construction expected, we can uprate current facilities such as at our Millstone Unit 3 to capitalize on the financial incentives this market provides.

Additionally, as one example of plans to use our proceeds from the E&P sale toward value accretive purposes, Generation executed an agreement with Exelon to terminate a power purchase agreement associated with our State Line plant.

This agreement will add more than $35 million of average annual aftertax cash earnings for the next five years.

That transaction closed last night.

I have discussed with you our numerous growth projects and applications.

Part of our challenge, though, is to ensure while we focus on the future; we not lose sight of delivering excellent result in the present, not just from pride as company but as an obligation to our shareholders.

As we enter our new regulatory environment the Company is incentivized and rewarded for performing at excellent levels.

I am pleased that this quarter our business unit performed again at a superior level.

We met the highest ever peak demand for power while improving customer service and improving our safety record.

On August 8th, we delivered 19,688 megawatt to our Virginia and North Carolina electricity customers, surpassing by 300 megawatts the prior year record -- all-time record.

Our units performed exceptionally well, not just in our Virginia service territory but in our merchant fleet as well.

Across the board, our units our Fossil & Hydro, and Coal units achieved an equivalent availability factor of 93.1%; its third best quarter performance since the year 2000.

At the same time that we were increasing our output, our average speed of answering service calls was over 50% faster than last year, and we saw OSHA recordables reduced by over 30% in both the former energy and delivery company.

We are embarking upon a period of capital growth projects while continuing to deliver operational results at a high level.

Our growth prospects in this quarter's operating results support our outlook for 2008.

We confirm our operating earnings outlook from $6.10 to $6.25 a share in 2008 with annual growth of at least 6% thereafter.

With this view of our future growth and an earnings stream that is more regulated and less volatile after the divestiture of our E&P properties, our Board of Directors last week voted to increase the quarterly common stock dividend.

A higher dividend is a testament for ability to deliver returns to shareholders and the fundmental strength of our company in our business plan.

The increase to $0.79 equates to 11% increase over the current dividend and brings our current payout ratio to slightly more than 50% of our forecasted range of EPS for 2008.

The board also affirmed management's recommendation to establish a policy to achieve a 2010 payout ratio of approximately 55% in line with the average of our utility peer group, and considering our expected operatings per share growth rate, shareholders should expect similar sized dividend rate increases or 11% or more in 2009 and 2010 to reach this payout ratio.

Our Board of Directors also approved a two-for-one stock split.

While you understand that the fundamentals of our stock remain intact and unaffected by this action, you also know that a lower entry point for quality stock often entices new entrance, especially in the retail sector.

These actions signal the Board's confidence in our future earnings stability, as well as it is an indication of management's positive outlook for the direction of our company.

With that, I will turn the call over to Tom Chewning.

Thanks, Tom.

Before I review the third-quarter results I want to discuss the newly aligned business units in terms of how they affect our financial reporting.

We realigned our business units on October 1st as Tom Farrell previously outlined and we will report by these new business segments effective with year-end 2007 results; however, our third-quarter and year-to-date numbers continue to be reported under the former organizational structure including our E&P segment.

Dominion produced operating earnings of $1.72 per share in the third quarter of 2007 compared to $1.88 per share in last year's third quarter.

The decrease is primarily attributable to lower natural gas and oil production due to the sale of our non-Appalachian properties, the absence of a benefit from business interruption insurance recorded in the third quarter of 2006.

Lower contributions from the company's producer services and gas transmission businesses and nonrecurrence of gains from sales of excess emission allowances.

These negatives were partially offset with the recovery of Virginia fuel expenses which returned as a pass through to customers on July 1st.

Higher contributions from the merchant generation businesses.

Lower interest expenses and lower average common shares outstanding.

Complete details of third-quarter 2007 operating earnings compared with third-quarter 2006 can be found on schedules 4 and 5 of our earnings release.

Most significantly, in the wake of our sale of E&P, we saw better-than-forecasted earnings in our delivery, energy and generation areas.

With the realignment of operating units, we anticipate that you will see greater transparency in our earnings drivers within each business unit, beginning with guidance for the first quarter and full 2008 year which will be provided in our January 2008 call.

On a GAAP basis, we recorded $7.24 in the third quarter of 2007, compared to earnings of a $1.85 per share in the third quarter of 2006.

Factors that led to most of the third-quarter gain included in reported earnings but excluded from operating earnings right to the E&P divestiture.

Net against the gain on sale of $2.1 billion, our charges for the de-designation of certain hedges and charges related to the early retirement of debt associated with our debt tender offer.

The resulting net benefit relating to the sale of our E&P businesses in the third quarter was $1.9 billion.

We also took an impairment of $140 million related to the termination of State Line's power purchase agreement and a $55 million charge related to the impairment of certain Dominion capital investments.

A complete reconciliation of GAAP to operating earnings can be found on schedules 2 and 3 of our earnings release.

In light of our termination of the power purchase agreement at State Line, we have new market price exposure in the Midwest.

As part of the termination, the existing coal contracts were assigned to us and account for the majority of expected requirements in 2008 and 2009.

In keeping with our hedging philosophy, energy margins have already been locked in to match these coal purchase volumes.

Over time, we will supplement these existing coal contracts with additional purchases and will match them with energy sales to lock in margin.

For our current hedge provisions, please see the schedules on pages 29, 30 and 31 of the earnings release kit.

You will notice that we have expanded our hedge disclosure to include our positions for the year 2009.

Last quarter, we discussed our debt tender along with reductions in other securities has resulted in a debt reduction of approximately $3.3 billion.

In the third quarter, we completed an equity tender for nearly $58 million shares and then purchased another $4.5 million shares of stock in the open market.

When added to the market purchases we completed in June, we have repurchased nearly $64 million shares for just under $5.8 billion.

The average price to buy back stock was less than we expected.

As a result of that positive variance, we now have approximately $300 million unspent from our projected divestiture activities.

We have not yet determined how to apply these funds.

Our options include funding another accretive transaction such as the State Line contract buyout, repurchasing additional shares and reducing the year-end 2007 debt balance.

All of these options will be positives to our original divestiture pro forma for 2008.

During the third quarter of 2007, the Company paid down its commercial paper balances from the proceeds of its E&P asset sales.

The only uses of our liquidity facilities as of September 30, 2007 were to support letters of credit issued as collateral for hedge energy volumes.

Including cash and cash equivalent, we ended the quarter with $5 billion of liquidity.

Tom Farrell commented on this quarter's operational results as a testament to the viability of our model and supportive of our outlook for 2008.

Our core units are performing better than forecasted and we set in motion a number growth projects that will add incremental and significant dollars to our rate base going forward.

On the heels of Tom detailing the growth opportunities in Generation and Transmission that are undertaking -- that we are undertaking or plan to undertake in Virginia, I would like to touch on the financing of these projects.

We do not expect to be free cash flow positive in regulatory environments that provide attractive incentives for new required construction.

You can, however, expect us to be free cash flow positive after maintenance CapEx and dividends including the recently announced increase.

We have no plans for a market equity issuance in 2008; however, we do plan for new equity to be issued in 2008 in support of our direct FERC stock purchase plans including our dividend reinvestment program.

Those issuances in addition to the expected convergence of our contingent convertible securities, it provides approximately $200 million in new equity in 2008.

Beginning 2009, in addition to our direct stock purchase plans, you can expect the Company to have smaller, more frequent share issuances in support a 50% equity component in financing our growth projects because these issuances will fund specific, accretive and approved projects we expect that the market will readily accept these transactions.

We are dedicated in maintaining a strong triple B or higher credit rating even with the large expenditures foreseen with our upcoming build projects.

That concludes the financial portion of our quarterly call.

I speak on behalf of all management when I say we are pleased with our strategic realignment and excited for the future.

Lindsay, you may now open up the lines for questions.

(OPERATOR INSTRUCTIONS).

Our first question comes from Dan Eggers with Credit Suisse.

Sir, please go ahead.

Good morning.

Good morning, Dan.

The first question, I guess, just kind of talk about Virginia City a little bit given the opposition which is seen elsewhere in the country's for new coal impact.

What is the appetite in the state?

If there is any risk, what should we be thinking about as far as getting all the approvals there?

Good morning, Dan.

The -- couple of things to keep in mind about Virginia City, it is being built in the coal-producing region of Virginia.

The plant was initially thought of or encouraged by an act of our General Assembly, which established the construction of the coal plant in that region of the state.

It is not only meeting -- helping to meet Virginia's energy needs but also specifically as an economic development project with that portion of our state, which has relatively higher unemployment.

The plant has already been found to be in the public interest by the State Corporation Commission in an initial proceeding that was filed last year.

So we are -- we have every confidence that the plant will be approved.

There are -- there are obviously people concerned about coal as there are every other part of the country but we think we had -- there is an unique situation here.

We do believe the plant will be completed.

I will also point out this is a fluidized bed technology which has very low NOx, SOx and mercury emissions, and we are working with Virginia Tech University on some carbon sequestration projects in the region.

The plant is carbon-capture compatible in its construction and design, so we think we will be able to demonstrate to everyone that it is perfectly appropriate to proceed with that plan.

Great, thank you.

On the State Line decision to -- to unwind that contract.

I know that was planned at one point in time that you considered selling.

Can you just talk about the thought process in deciding that is a core asset that you guys want to hang on to?

How it fits into your portfolio from your perspective?

We -- as part of the marketing of our three peaking units that were sitting there in the Ohio Virginia Valley, basically we included State Line.

We saw more value in State Line than any of the bidders did, so we made the determination to keep it and I am thrilled that we did particularly now that we have been able to buy out the contract with Exelon in a transaction.

We said (inaudible) we could use these funds from the E&P transaction and buy back stock or can we find a transaction that is more accretive than using the funds to buy back stock.

So we talked to Exelon about it and they were willing to discuss it.

The negotiations went on for an extended period of time as you might expect but fortunately, we have been able to consummate that.

It is an excellent plant.

It sits in a perfect spot to serve the needs, right outside the city of Chicago, and we are pretty pleased to be able to get -- capture the market value of that plant now rather than having to wait another four years.

As you know, we have similar contracts at Kincaid, which is twice the size of this plant, same tenure on it.

We have similar contract on our Elwood peaking facilities and we had a contract on our Kiwani (ph) facility that expires a year after these fossil plants.

Part of our job here is to see if we can bring some of that locked-up value forward.

Prior to the buy out of the State Line plant, we had about $250 million in pretax margins that we are missing out on because of those long-term contracts we got when we bought those facilities.

So we are working away on that, but at the end, those contracts will expire and we will benefit from that happening.

I guess just one last question.

When -- when do you expect the pieces of Cove Point to come into service?

I think there was kind of a phased start-in from those and should we assume all end of '08 or at least (inaudible) in earlier in '08?

Dan, this is Paul Koonce.

No, you should expect that to come into surface late third quarter or early fourth quarter '08.

Okay.

Thank you.

Thank you for your question, sir.

Next question comes from Daniele Seitz with Dahlman Rose.

Mam, please go ahead.

Thank you.

I was just wondering what is the total capacity of the peak as you intend to build and what will be - what do you anticipate to be the total cost?

Daniele, this is Mark McGettrick.

The two peakers that we've applied for at Lady Smith and it had gotten approved.

In aggregate that 300 megawatts and they are going to cost about $135 million.

It will come on line summer of next year.

The third peaking unit that Tom referenced was an additional unit at Lady Smith which will be 150 megawatts, will cost about $79 million and will come on in the late summer of '09.

Okay and then in the best-case scenario, when do you anticipate to see the beginning of earnings on that coal plant?

I know it could be far in the future but in the best-case scenario.

On the coal plant.

On the coal plant, that regulatory proceeding is scheduled for January of next year.

We are already accruing AFUDC on that plant, but we will see some book earnings next year.

Once the plant is approved, it will get wider treatments and we will begin to get cash earnings beginning 01/01/09 on that.

Great, thank you.

Thank you.

Thank you for your questions.

Our next question comes from Paul Patterson with Glenrock Associates.

Please go ahead, sir.

Good morning, guys.

Good morning, Paul.

Just a few quick questions.

The first one is on the -- the more frequent equity issuances in 2009.

I think you indicated it would be accretive.

Can you just give us a little bit of more of a sense as to kind of the total amount you might be thinking about there?

And then Dominion Capital, what -- what caused the impairment?

And should we - is that finally done?

Is that (inaudible) over with Dominion Capital or is there a potential for other stuff happening considering the credit situation.

I am going to let Scott Hetzer answer the second question and then I will answer the first.

Paul, at Dominion Capital, we have about $200 million of financial assets left.

$125 million of that is in the form of CDOs and mortgage residual which are left over and we are currently talking about a buyer in each case, and the impairment for the third quarter certainly reflects current market conditions for that.

The remaining -- the remainder of that $200 million about $75 million is associated with Vidalia Hydro investment which is strategic and we will plan on that keeping that going forward.

We also have about $167, $168 million of tax assets and 40 of it -- roughly 40 of it are simply prepaid taxes and then the balance about $125 million are deferred taxes, some of which is -- are expected to be released when we actually sell the financial assets I just mentioned, the $125 million.

We are making progress.

We sold another operating company in the third quarter about $30 million.

We are making progress.

This current market disruption has slowed us down just a little bit, but we expect to make more progress either between now and the end of the year, certainly in the '08.

And so the write-offs for the most part look like they are out of the way?

That is correct.

Okay, great.

Paul, on the first question, when we take a look at our cash flow after maintenance CapEx and dividends we do have positive cash flow but not sufficient to fund a 50/50 ratio of equity to debt on our new growth projects.

So we have a situation in which you will have well under a billion dollars of new equity each year in 9 and 10 that we would expect to be breaking up in the form of our dividend reinvestment program that will account for $200 million or more and then obviously fairly relatively small equity offerings.

We are being incented particularly in Virginia due to - we have a 50/50 debt cap structure there and we are getting projected (inaudible) beginning in 2009, so it makes a lot of sense to go ahead and issue that equity rather than let it hang over the market as we are actually collecting rates from our customers that will pay us a return on equity as well as the interest expense on the debt.

Okay.

Great.

Thanks a lot guys.

Sure.

Thank for your question sir.

Our next question comes from Paul Fremont with Jefferies.

Sir, please go ahead.

Hi.

Just a quick question on the 2008 guidance.

There is going to be a remaining stream of earnings that, I think are associated with VPP transactions that you took back in house.

Are those -- should we look at the earnings from those as being included in the 610 to 625 or are those going to be held off as nonrecurring?

They are included in the 610 to 625; however, when we look forward to 2009 and beyond, when they are not going to be there, we still - our plans are still to grow 6% or greater over the EPS of 2008 and 2009.

So, yes, they are included.

They will drop off but we more than make up for it in other ways.

Thank you very much.

Thank you, Paul

Thank you for your question, sir.

The next question comes from Paul Ridzon with Deutsche Bank.

Sir, please go ahead.

Excuse me, Paul Ridzon with KeyBanc.

Can you hear me?

Yes, Paul.

Good morning.

Everybody's named Paul but go ahead.

I think Paul, the boss, is next.

(Laughing).

Just a detail.

The $300 million that you still have sitting, is there kind of a placeholder for that in your guidance or could that the investment opportunity is incremental?

Well, it really won't change the range at this point.

As I say, we will be [on the area] January 31st and update our range for the year.

If anything, it can certainly raise the low end above where we have given it to this point but - and help us get to the top end.

We have several options and so some are more accretive than others, so we won't be able until year end to know what happened with that money, and we will give you more guidance.

So we wouldn't change necessarily our range right now as we haven't accounted for it yet, but it will definitely help.

Okay, thank you very much.

Thank you for your question, sir.

The next question comes from Jonathan Arnold with Merrill Lynch.

Sir, please go ahead.

Good morning.

Hey, Jonathan.

Hello, Jonathan.

Just reading the press release on your statements on the dividend and how people -- we should expect similar sized dividend increases in '09 and '10 to reach the payout ratio and I am guessing you are talking percentages.

And secondly, does that mean the increase we just had effectively -- you see that as a 2008 increase and the next one would be what you would look at late '08 for payment and in '09.

We can't speak for our directors.

They obviously took the decision to go to $0.79 for this quarter.

I think we can, you know, obviously assume that's it unless they get together again, which they can anytime, and decide they want to change it but I would assume that we would get back short of that to having that as an annual rate, and then the increases we would have in '09 would be guided, say, to around a 53% payout ratio and then take earnings for '08, add 6% times 53 if you want to play a modeling game and then add 66% to those earnings and go up to 55%.

But I would think the calendar year '08, just a model for modeling purposes right now would be that the rate of $0.79 a quarter.

Okay, thank you.

One other thing.

I apologize.

I might have missed this.

I believe there was a date in the merger agreement with Equitable on the LDC sales where you -- of November 1st.

I guess that's today to -- to either -- to extend the agreement or not.

Can you just -- has that been extended or does that have a new final date or anything like that?

Jonathan, actually I think the original merger agreement had a June 1st date or something like that.

We have extended that twice and the present state of it is that at the end of November 1st, either party has the right to give notice that they don't want to proceed.

So there's no additional extension drafted up or written up.

We are now in a position sort of if anybody wants to walk, they can walk.

I think that we do not expect that to occur.

We have no indication that that will occur.

We talked to Equitable on a daily basis about proceeding with the transaction.

And as we said in the beginning -- Jonathan you may have missed this part, we expect a decision from the Third Circuit during the month of November on the peoples part of it.

As far as Hope goes in West Virginia, the Commission -- I think the opening briefs are due today and the final briefs are due on the 16th, simultaneous final briefs on the 16th, and they could rule any time thereafter.

All the evidence is done and all that.

It is just now the lawyers are putting in the briefing.

So we are confident that we will prevail on both of those and that we will close by the end of the year.

But you anticipate some further extension.

Let just say kind of open-ended agreement at this point?

Yes.

Okay.

One quick other one if I may.

On Dominion capital, I think I heard this right, you said you will $200 million of financial assets left which 125 were CDOs and mortgage residuals and if your write down in the quarter was 55, so if we grossed that out for taxes it would be around 85.

And if that was all related to the financial asset book, it looks like you might have written that down to say 40% of what is happening on the books for us.

Am I doing that math correctly?

And when you make the statement around -- that's -- that's more or less reflecting the current market.

Is that what you are getting at?

I think you might have written it down about 40%.

Yeah.

But not -- not written down to 50%.

Written down by 40%.

That is what I meant.

Yeah, I think that is about right.

Okay.

Thank you.

Thank you for your question, sir.

The next question comes from Carrie Saint Louis with Fidelity.

Hi.

I just have a couple of quick questions.

Going forward, I was wondering if you could comment how much CP you are expecting to have outstanding.

Are you going to be using that program as largely as you used it historically?

This is Scott Hetzer.

We currently have zero outstanding right now as a result of the proceeds from the divestitures.

As we fund the tax bill in the fourth quarter for December 15th, we expect to use that market and we would expect to have balances somewhere around a billion-and-a-half or so.

And so, you know, we feel very good about that.

We -- we also have some potential to issue some other debt, either Virginia Power or Dominion to reduce some of that exposure.

We will certainly keep an eye on the market.

As you know during the meltdown -- the liquidity meltdown, we were okay and still acceptable in the market but spreads widened out.

We want to maintain our flexibility and if we think that the markets are running into some sort of train wreck near your end, we will take a capital markets issuance to avoid that.

Okay.

And then turning towards the discussion regarding free cash flow and so forth.

I have a couple of questions here.

So looking at your new CapEx forecast, do you have quite a considerable amount in the growth category?

And I am trying to understand.

So you said you would be free cash flow positive, just assuming the maintenance CapEx?

Maintenance CapEx and dividends, we will have -- we have not released to the market but we have done a three-year projection.

We have positive cash flow in each of those years after maintenance CapEx and payment of dividend.

We do not have sufficient --

Right.

Excess cash flows to fund 50% of those projects.

So we will go to the market and to add dividend reinvestment program -

Right.

To try to keep up pretty much contemporaneously with the expenditures.

Right but your growth CapEx is $2 billion.

I don't assume the free cash flow deficit is that large but I think you mentioned earlier, and I didn't know if I heard this right, it's about a billion of free cash flow deficit?

No I said that the equity that we would need to raise is less than a billion dollars a year.

Okay.

To 50/50.

Okay.

Financing of growth CapEx.

Okay.

Can you just remind us regarding your new credit targets going forward?

I appreciate the commitment to the strong triple B, but what metrics are you specifically targeting and since your not issuing or not planning to issue equity in '08, I am assuming that you will still be achieving your targets in '08 minus the equity issuance.

Carrie, before I turn it to Scott, we will have equity issued in '08.

We will not have it public - Would not anticipate a public issuance.

We will raise about $200 million from our dividend reinvestment program and from some convertible securities that we expect to convert.

It is just that we are not going to have a public capital markets equity issuance.

We don't anticipate it in '08, but I will turn over the question of metric targets to Scott.

And Carrie, the targets that we are using those that are appropriate for what we would consider to be a risk profile 5 company for the triple B plus rating.

That is what we are striving for and we so that at FFO to interest of 3.6 times or greater, FFO to debt, low 20% range, and debt-to-cap, low 50% range.

Okay.

And -- and these targets, when are they -- when are you targeting achieving them?

Because I know you are not at that FFO to debt currently.

About the end of the third year we would expect to be there.

About 2010.

By 2010.

Okay.

All right.

And Carrie, along the way we will be exceeding some of those targets.

Okay.

Because I thought you were high teens for FFO to debt currently.

That's correct.

That's right.

Okay.

But that high teens not expected to drop is what I am saying.

No, it is not.

Okay.

All right.

Thank you.

We thank you for your questions.

Our next question comes from Hugh Wynne with Sanford Bernstein.

Sir, please go ahead.

Hi.

I have two questions.

One just tracking the growth of O&M expense at the Company - I see there was a 46% increase in O&M expense in the consolidated results of the third quarter and then broadly speaking, a 30% increase in O&M expense over the first 9 months of the year.

So, my first question was, what was driving that?

It seems to be primarily in the Generation business.

And then the second question is in order to track the progress of the Virginia City plant and make sure that it makes the various hurdles that could impede it from entering rate base, could you detail the various permits that lie ahead and the deadlines for obtaining a construction at their regulatory approval and so forth.

[Tom] will talk to you on O&M.

I will take the O&M increase and you are right it was really driven at Generation and really three big drivers of that year-over-year change.

One is the way that emission sales are accounted for.

That is actually a credit to O&M expense.

And emissions sales are down this year versus last and that's one of the drivers.

Another is it is just hedging effects as we -- we have seen this in other parts of the business in the past.

Oftentimes the -- when you hedge the impact of the hedging goes through O&M and in this case it actually resulted in a -- in an increase in O&M, but there is an offset in revenue so there is no bottom-line impact because you realize, you know, the realized revenues that was contemplated by the hedging but it has the effect of distorting the O & M.

And then finally, it is also financial transmission rights in a way that that -- that that is a credit to expense as well.

And a big impact that happened this year was we actually -- as we, you know, went back to -- on the fuel loss.

Those credits started going to the fuel cost -- and therefore again - so these are really - is impact that you see end up getting washed out for the most part to the bottom line, but it distorts the O&M line.

And I guess the -- to give another bottom line.

Our margins did not suffer in the third quarter actually.

Our margins were improved across the board.

The -- what, operating income to revenues you mean?

In terms of our -- the way we keep score internally, not GAAP and not (inaudible).

When we take a look, for instance at merchant Generation or Virginia Generation or whatever, expenses have not cut into margins.

Margins have actually improved.

Operating income as a percentage of revenue has declined I believe, right?

But it is either (inaudible) there and I just want an explanation of the O&M.

That's all right.

I think the explanation has been pretty solid here and that is that sometimes like sales with emissions really -- we haven't did any emission sales which we pointed out, so that changes O&M, but thank you for your question, but I will say this that one of my jobs as CFO is to take a look at expenses and expense controls in the Company is - on our records is way ahead on expense control this year, and looking at margins in the third quarter and margins for the year, they are positive as what we projected them to be.

Okay.

Thanks.

On the Virginia City side.

Hugh, Mark McGettrick, again.

There is really two key milestones in terms of approvals and permitting.

We touched on one.

We filed for this facility in July of last year.

Regulators have a schedule where they will hear the case in early January and are required by statute to have an order within an 9-month period, so that would put it right the end of March, first part of April, so there will be a certificate process.

The only major permit that you have to get in getting your plan approved is a air permit.

We expect to draft an air permit to be out for public comment within the next couple of weeks, and that time frame in terms of approval coincides really with the approval by the regulators on the certificate, so we would expect that late March.

Okay.

That is very simple.

You basically have two approvals, the SEC certificate in March, early April draft, and then the air permit that is expected to be out at the same time.

And that's the end of the story as far as pending approvals?

Any approvals of significance.

That's true.

Okay.

All right.

Well, thank you very much.

Thank you, Hugh.

Thank you for your question sir.

The next question comes from Rudy Tolentino with Morgan Stanley.

Please go ahead.

Hi.

As far as State Line goes, would there be any environmental upgrades needed you know to comply with any state laws?

Right now, we don't anticipate any significant upgrades for State Line over the next three or four years.

We may look at putting a SNCR in it on one or both of those units next decade but nothing in the next three or four years.

Okay.

Back to Hugh's question on the O&M.

Did the Exelon transaction and Dresden impairment - did that flow through O&M at Generation?

Rudy, it would not be on any operating earnings measures.

Okay.

So -- on page 20, the -- the 401 bill was --

Yeah, that has nothing to do with that transaction.

Okay.

Thank you.

Thank you for your question, sir.

Our next question comes from Steve Fleischman with Catapult Partners.

Sir, please go ahead.

Yes, hi, thank you.

Couple of questions.

First on the proceeds from the E&P sales.

Just to check the numbers - you said $5.8 billion of share repurchase and then its $240 million for the contract buyout.

Well, actually you are using about $139 million for the contract buyout after tax.

Oh, okay.

So if we -- if we took -- that would then been 5.94.

So basically that would imply that you were expecting, you know, another 300 on top of that as available to use.

Correct.

So -- okay.

Got you.

And secondly, in the -- in the certificate case on the coal plant, are they still reviewing whether you need this power and if this is the best way to get this power or are they just reviewing the regulatory treatment of the plant?

The plant has already been deemed in the public need.

They will look -- and there has been testimony filed in terms of the economic viability of the coal plant versus other options.

So they will look at that but main proceeding will be around prudency of cost as dictated by the legislation.

This plant has to be built in very specific areas.

It has to be coal.

It has to buy coal from Virginia local mines.

And so the vast majority of the review will be, did we pick the right technology at the right price for the region that we have been mandated to build in.

Okay.

One last question.

And you probably won't answer it, but just -- on the -- on the hedging data that you gave for Millstone and New England going out one more year, is there anyway to give a sense of - at least within the '08 guidance where Millstone and the coal plant or at least Millstones which you have given is hedged?

The percent hedge is on the schedule, Steve.

We won't answer price.

Okay.

You will give that -- it's just important in terms of looking off of '08 for future prices to know where that is hedged.

Right.

Okay.

As we roll through that and we get more under our belt, we will release that.

That has been our custom is to not release it until we were pretty much out of the market.

And Steve now with the realignment of the Company, I mean you can't expect us to give you kind of more clarity on how to look at the business lines within the Company, and, you know, certainly the area of merchant Generation is an area we are looking at very hard.

Okay, great, Thank you.

Thank you, Steve.

Thank you for your questions, Mr.

Fleishman.

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

Mr.

Chewning, do you have any closing remarks?

Yes, Lindsay, thank you.

Just a reminder that our Form 10-Q will be filed with the SEC later on today and fourth-quarter earnings release is scheduled for January 31, 2008.

We would like to thank everyone for joining us this morning and wish you a pleasant fall.

We will see many of you next week at the EI conference in Florida.

Good day

Thank you.

That does conclude today's teleconference.

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