道明尼資源 (D) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Welcome to Dominion's second quarter earnings conference call.

We now have Mr.

Tom Farrell, Dominion's Chief Executive Officer and other members of management in conference.

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

At the conclusion of management'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 will now turn the call over to Laura Kottkamp, Director of Investor Relations.

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

During this call, we will refer to certain schedules included in this morning's earnings release and pages from our second quarter 2008 earnings release kit.

Schedules and earnings release kit 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 you to call with questions in the time permitted after our prepared remarks, we ask that you use the time to address questions of a strategic nature, or those related to third quarter 2008 guidance.

If you have not done so I encourage to you visit our website, register for e-mail alerts and view our second quarter 2008 earnings documents.

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

The earnings release and other matters 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 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.

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

Those measures include operating earnings before interest and tax, commonly referred to as EBIT.

Reconciliations of such measures to the most directly comparable GAAP financial measures we are able to calculate and report are contained in our earnings release kit.

I will now turn the call over to our CFO, Tom Chewning.

Tom?

Thank you, Laura.

Good morning, everyone.

After I give you an overview of second quarter results and third quarter operating earnings guidance, each of our business unit heads will review second quarter performance and discuss what they foresee for the third quarter.

Following that, our CEO Tom Farrell will comment on several key accomplishments and other items of current interest.

We will then be happy to answer your questions.

Dominion recorded GAAP earnings of $0.51 per share and operating earnings of $0.50 per share for the second quarter of 2008.

You will recall that in the first quarter, we made adjustments for weather and certain tax items which lowered our operating earnings by $0.03 per share.

We made these adjustments to provide a clearer comparison of actual performance to quarterly guidance.

This morning, we will do the same for the second quarter.

Adjusting for weather help, storm damage or negative tax items results in operating income of $0.52 per share for the quarter.

At the top end of our guidance range of $0.47 to $0.52 per share.

As seen on our schedule of these adjustments on Dominion's investor relations website under supplemental schedules, electric utility weather added $0.01 per share earnings as a result of cooling degree days that were above their historic average but abnormally high restoration expenses cost us $0.02 per share.

Additionally, our consolidated effective income tax rate was higher than our guidance.

The variance was driven driven primarily by certain state tax impacts.

Had our effective tax rate been 37% as expected, earnings would have been higher by approximately $10 or $0.02 per share.

Looking ahead to the third quarter, Dominion expects operating earnings in a range of $0.87 to $0.92 per share.

This compares to operating earnings of $0.86 per share in the third quarter of 2007.

Drivers expected to compare favorably to 2007 include higher contributions from our merchant generation business, growth in electric utility sales.

Higher volumes and realized prices for the Company's remaining E&P operations and lower share count.

Expected offsets include a return to normal weather in our electric utility service area.

Higher maintenance and depreciation expenses in our regulated electric and gas businesses.

And certain state income tax legislation enacted in July of 2008.

Complete details of the company's third quarter 2008 guidance can be found on pages 39 through 46 of Dominion's earnings release kit.

In consideration of our year-to-date operating earnings and our limited sensitivity to commodity price changes, we are comfortable in tightening our 2008 operating earnings guidance range from $3.05 to $3.15 per share to $3.10 to $3.15 per share.

We are also raising our 2009 operating earnings outlook from $3.25 to $3.40 per share to $3.30 to $3.45 per share.

This change reflects expected positive impacts of the sale of Marcellus shale drilling rights and higher margins from our generation business.

During the last month, we have fielded a number of calls from investors inquiring about Dominion's liquidity position.

At the end of the second quarter, liquidity was $1.2 billion, compared to $2.3 billion at the end of the first quarter.

The primary reason for this decrease was rising commodity prices resulting in posting of more margin to support our hedges.

We have just closed a $500 million 364-day credit facility that was syndicated to a dozen of our relationship banks.

This new facility combined with a decline in commodity prices since the end of the quarter raises current liquidity to $2.4 billion.

Also, we have restructured the margin requirements on the vast majority of existing hedges to reduce the need to post additional margin should commodity prices rise from present levels.

We are comfortable that our liquidity position is more than adequate considering the number of hedge contracts we hold.

And the underlying margin requirements.

This concludes my remarks.

I will now pass the call on to Dave Heacock, President of Dominion Virginia Power.

This is Dave's first call s head of Dominion Virginia Power since taking over from Jay Johnson who left us in June to join General Dynamics.

Dave?

Thank you, Tom.

Dominion Virginia Power produced second quarter EBIT of $165 million just outside the guidance range of $166 million to $178 million as shown on page 33 of our earnings release kit.

Severe storm activity drove up O&M expenses by $17 million.

This hurt was partially offset by Dominion Retail's positive financial performance.

Our regularly electric transmission and distribution businesses faced significant operating challenges in the second quarter.

Statistics on lightning strikes, wind speeds, and tornadic activity confirm that portions of our service territory experienced unusually high levels of extreme weather.

Transmission lines were torn down and distribution facilities sustained hurricane type damage in several areas.

Northern Virginia was hit particularly hard experiencing six severe storms in 17 days during June.

Despite the extraordinary level of high-risk situations that our employees have been exposed to during storm restoration, we continue to see improvement in our safety performance in the second quarter of 2008 as compared to 2007.

Year-to-date, most recordable incident rates are down from 2.4 to 1.8.

This is the number of incidents per 100 employees per year.

This quarter we announced our Virginia energy conservation plan which is expected to produce sizable environmental benefits and cost savings to our customers.

The key component of the plan is investment of approximately $600 million in smart grid technologies that will enable energy to be delivered more efficiently to our customers as well as provide improvements in service reliability.

Looking to third quarter guidance shown on page 40 of our earnings release kit, we expect to produce EBIT in the range of $173 million to 188 million, $189 million.

Our expectation is lower than the EBIT produced in the third quarter of last year, primarily due to return to normal weather and higher O&M expenses attributable to target investments and reliability and the 2008 energy conservation demand side management product.

I'll now turn the call over to Paul Koonce.

Thanks, Dave.

Energy's second quarter EBIT of $150 million was toward the high end of our guidance of 137 million to $159 million mainly driven by higher natural gas liquids margins at transmission and better than expected nontraditional sales at Dominion East Ohio.

While we did not meet our margin expectations at producer services, this segment remains poised to capture low risk market opportunities related to its storage and transportation capacity.

2008 is setting up similar to last year at producer services with most of the transportation storage value realized during the transition from summer to winter season.

Energy safety performance is not keeping pace with the general reduction in OSHA recordables we are seeing elsewhere at Dominion.

This is our busiest summer ever at transmission, E&P, and distribution, but even when adjusting for man hours, OSHA incident rates are up.

Year-to-date, our OSHA incident rate is 2.7 versus 2.64 year-to-date 2007.

While these are predominantly first aid incidents not resulting in lost time, we are nevertheless taking a number of steps to further highlight safety.

Operationally, we experienced a 10% quarter over quarter increase of industrial throughput at Dominion East Ohio due to increased steel and refining operations in our service territory.

We're also on pace to have installed over 350,000 automated meters by year end.

When this program is complete it will improve customer service and eliminate the need for estimated bills.

We began installation last year and have got excellent implementation to date.

At E&P reduction is up 14% quarter over quarter excluding royalty interest production.

We drilled 109 new wells this quarter versus 103 wells for the same quarter last year.

As part of this year's drilling program, we've drilled 5 vertical Marcellus wells in Pennsylvania with good success.

These Marcellus wells were drilled in order to strengthen our view of the Marcellus shale value.

To this end, we are pleased with the previously announced sale of the drilling rights to a 2500 foot interval on 205,000 acres and Appalachia to Ontario Resources for $552 million.

This interval includes the target for the Marcellus shale production.

As part of the E&P announcement with Antero, we're in the midst of an open season for Dominion Keystone.

A 1 Bcf per day pipeline to move new Marcellus volumes from the base into markets along the Eastern seaboard.

A number of other projects are either under construction or in late stages of development at transmission.

Under construction this summer are the U.S.A storage project and the Cove Point terminal and related facility.

In addition to the two new LNG storage tanks and related vaporization equipment at Cove Point, the downstream portion of the expansion includes 162 miles of large diameter pipeline, 8 new or expanded compressor stations and eight new storage wells.

We are expecting a certificate for our hub 1 project any day now, and we are preparing FERC applications for our hub 2 and hub 3 projects and our Peer modernization project.

The Peer project will enable Cove Point to receive the most modern and technologically advanced ships in the world.

The Peer modernization project is expected to be completed in late 2011 will require $50 million of new capital and is fully subscribed by satellite.

During this quarter he we also held an open season for Appalachian Gateway project, a combination of gathering, processing and mainline transmission that will increase our gathering capability by 50%, processing capability by 25%, and firm transportation by up to 500 million per day.

The capital cost of Appalachia Gateway is expected to be in the 600 million to $800 million range.

We expect to execute binding preceding agreements with producers before the end of the third quarter.

Looking to third quarter guidance, which you can view on page 41 of the earnings release kit, we project an ebit range of 128 million to $158 million.

The mid-point of which is an increase of approximately $14 million or an 11% increase over third quarter 2007.

We expect earnings to be up due to natural gas liquids margins and higher natural gas prices.

Offset somewhat by higher O&M and higher DD&A.

Now I'd like to turn the call over to Mark McGettrick.

Mark?

Thank you, Paul.

Dominion Generation produced strong second quarter results with earnings before interest and taxes, EBIT of $397 million.

These results were $12 million better or 3% above the high end of our guidance range and $195 million above the second quarter of 2007.

Even removing the positive effect of above normal weather in our utility service area, generation results would still be at the top of our guidance range.

The major drivers of these results were the return to full recovery of fuel in Virginia, stronger wholesale revenues and other margins in our regulated utilities service territory and increased margins at our merchant fleet.

Operational performance for our utility fossil fleet was excellent with the lowest second quarter equivalent forced outage rate in three years at 5%.

Our Nuclear performance was mixed with a 97.3% capacity factor excluding refueling outages and a record setting plan refueling outage at Suri Unit 2.

However, our nuclear merchant fleet planned outages ran 12 days longer than anticipated.

We are very pleased that even with these extended outage days we were able to exceed our earnings guidance range.

In addition to our financial results, I'd like to discuss four other key items impacting generation business since our last call.

First, generation safety performance continues to be excellent.

With our second quarter 2008 OSHA recordable incident rate for our nuclear, and fossil and hydro operations, coming in at 0.24 and 0.79 respectively.

Our Millstone and Suri stations were recertified to voluntary protection program star status and remained the only fully certified fleet in the industry.

Second, new hedging disclosure for our merchant fleet.

As you can see on page 48 of our earnings release kit, we have increased our northeast base load hedge percentages in 2009 to approximately 90% which reflects an average hedge price of $80.

We've also disclosed for the first time our base load average head pricing for 2010 which at Northeast at $80 and PGM at about $56 per megawatt hour.

With our merchant fleet almost completely hedged in 2008 and 2009, we have little exposure to near term dark spread reductions.

Third, our growth plans produced the addition of over 550 megawatts of new generation in our regulated and merchant fleets bringing our entire fleet capability up to approximately 27,000 megawatts.

Additions to our merchant fleet include 82 megawatts of new wind production added as our share of the net power joint venture in West Virginia and 60 megawatts added at our Fairless energy facility in Pennsylvania.

Fourth, we returned our last two units to operation at our sale on Harbor facility in Massachusetts earlier this month.

This completes the restoration of over 700 megawatts to the grid following their forced outage in November 2007.

Finally, looking to third quarter guidance, you can see on page 42 of our earnings guidance kit that we project an EBIT range of 745 million to $818 million, the mid-point of which is an increase of approximately $45 million or 6% over the third quarter of 2007.

We expect the quarters results to be driven by continued strong growth in regulated electric sales and wholesale revenues in our utility fleet and continuous growth in margins in our merchant portfolio.

Partially offset by return to normal weather in Virginia.

I will now turn the call over to Tom Farrell.

Good morning.

We had an extremely active second quarter in carrying out our strategic plans.

In our fist quarter call, I reviewed a number of significant state and FERC-regulated projects that were awaiting regulatory action.

I'm pleased to report to you today that most of those approvals have now been received.

As important as individual projects are in their own right, their role in collectively positioning us to achieve our overall growth in operating earnings per share of at least 6% annually is equally as important.

We keep a very close eye on meeting the targets in the growth plan we outlined for you early last fall.

Today, I will give you an update on the substantial progress we made during the second quarter and what lies ahead.

As you know, we face a projected shortfall of 4,000 megawatts in our regulated Virginia service territory.

We continue to work to bring new generation and transmission capacity into service as economically and quickly as possible.

New transmission lines to transport the additional megawatts that maintain reliability within the congested areas of our state are vital.

These lines are not always easy to sight or construct.

We are pursuing about a dozen projects in Virginia, two of which are new 500 kb lines.

I'm pleased to report since our last call the Virginia State Corporation Commission hearing examiner has recommended approval of both of those 500 kb lines.

In May, the Carson to Suffolk line and just this past Monday, the key Meadowbrook to Lab line to serve the Washington D.C.

suburbs.

The Meadowbrook line is the final segment of a line that extends from Pennsylvania through West Virginia known as TrAILCo.

Those two segments are still under regulatory review and the recommended approval in Virginia for the Meadowbrook line is conditioned on approvals in Pennsylvania and West Virginia, which are expected soon.

Each of the Virginia 500 kb projects is an approximately $250 million investment.

We hope to have final SEC approvals this fall with in-service dates in 2011.

In light of the challenges these projects and the others present, on July 1, we filed a request with FERC for an enhanced ROE of 125 to 150 basis points on 11 different transmission enhancement projects beginning when each enters commercial operation.

While Meadowbrook to Loudoun and Carson to Suffolk lines we have requested 150 basis point adder to the 11.4% return previously authorized by FERC.

We expect resolution of those requests, which are in line with other rulings by FERC by the end of the year.

Notably, in late June, we received the air permit, excuse me, necessary to begin construction of the Virginia City Hybrid Energy Center.

We began work on the facility immediately.

The plant will bring nearly 600 megawatts online upon its completion in 2012.

The start date allowed us to avoid any significant cost increase in our construction contract and we will not need any regulatory relief due to the delay.

Predictably, several environmental groups have filed appeals of both the SEC approval and of the air permit.

Under Virginia law, the general rule, the actions of state agencies can only be overturned if they are found to be arbitrary and capricious.

That is an extraordinary burden to overcome.

Construction continues and will continue apace.

Also during the quarter, we brought 400 new megawatts online in Virginia.

Our gas fired Laser Smith units three and four added 300 megawatts to the fleet and at four of our gas-fired plants we completed uprights that provided another 100 megawatts to our service territory.

Also in the quarter, we began construction on Lady Smith 5, which will add 150 megawatts next summer.

During the second quarter, we also received notice that the hearing for 580 megawatt Bear Garden combined cycle facility will begin on September 30.

That plant has an estimated in-service date of 2011.

Also in June, we reached a settlement of our fuel case with the SEC staff, the Office of Consumer Counsel and many other intervenors.

The SEC approved the settlement and the new rates became effective July the 1st.

In light of the steep increase in commodity prices, we are deferring as a regulatory asset, a portion of the fuel increase to lessen the impact on our customers.

Additionally in the second quarter, we notified the Department of Energy that we would file a loan guarantee application for a third nuclear reactor at North Amp.

The deadline for filing part one of the application is the end of September and we will be filing it in the near future.

This is one more step in a multiyear process.

Our next steps include obtaining the DOE loan guarantee.

Negotiating an EPC agreement and seeking state corporation commission approval.

Let me emphasize, that we will not take on any undue risk for our customers or debt and equity investors.

On a different note, a comment on the Court of Appeals ruling that overturned care.

We have completed our evaluation of the potential outcomes of this decision.

We do not expect any impact on our future earnings outlook.

As we have mentioned in the past, future sales of excess commissions have not been included on our guidance or presumed in our forecast of annual growth and operating earnings of 6% or more annually.

Dominion has always been proactive in our approach to environmental compliance.

But you can expect us to proceed cautiously both in our regulated and merchant fleet until we are certain of the new mandates.

We are focused on executing our build plan to meet a growing demand for power through new plants, upgrades on existing plants and new transmission lines, but we recognize the better technology in our system and demand side management programs for consumers can help reduce the overall amount of electricity consumed.

For this reason, we announced a significant energy conservation plan which Dave Heacock spoke about earlier.

We expect to file for approval of that program by early next year.

We are also working to reach a settlement with intervenors and the Ohio Public Service Commission staff for new rates at Dominion East Ohio.

This will be the first rate-based -- this will be the first base rate increase at that LDC in over 14 years.

The only unresolved issue is rate design.

The Ohio staff supports a straight fixed variable design.

The consumer advocate supports a decoupling design.

We can support either, so we are working hard to bridge this philosophical divide and place new rates into effect.

The sales process for Peoples and Hope concluded at the beginning of this month.

We have a new buyer for these properties and we expect this approval process will not face the same challenges as the last sale.

We expect to close by this time next year.

Many of you have wondered when you should expect additional announcements about our remaining Marcellus acreage in Appalachia which, after the Antero farmout constitutes between 400,000 and 600,000 remaining acres.

While we do not have a set timetable, we are exploring other similar transactions in the region.

We continue to receive unsolicited calls of interest for similar transactions and we are being deliberate as we engage third parties.

You can be sure, though, that we are continuing to explore ways to realize value for our shareholders.

We are keeping our options open including additional farmouts, retaining some acreage or partnering.

We will have more to say on this issue certainly before the end of the year.

Lastly, I would like to discuss the recent court case involving Cove Point.

Last week, the D.C.

Court of Appeals issued a decision on Washington Gas/Light's appeal of the FERC order approving our expansion project.

This project enlarges our terminal and adds related pipeline and natural gas storage facilities on both the Cove Point and Dominion transmission systems.

WGL had argued at FERC that regassified LNG from Cove Point had caused leaks in its distribution system and at the expansion project might increase the problem.

FERC disagreed and found that the leaks resulted from improper manner in which WGL Washington Gas/Light had installed its couplings.

Court of Appeals upheld FERC on that key issue that WGL is responsible for the defects.

However, the Court did remand the case to FERC to better explain its conclusion that the project will not pose a safety hazard.

We expect FERC to act quickly to address this very narrow issue.

On Monday, we filed a motion to expedite resolution of the case.

FERC has already given notice of a technical conference to be held next week on August 6.

Washington Gas/Light itself has stated repeatedly that it's system is ready to receive LNG safely.

We expect FERC to proceed in a manner that will enable the expansion to be implemented as previously planned during the fourth quarter of this year.

We remain focused on our efforts to achieve annual operating earnings per share growth of 6% or more as well as achieving a 2010 dividend payout ratio of 55%.

To do so, we will continue to invest in infrastructure that enables our operations to serve our customers at optimum levels today and in the future.

You'll see us working to address the shortage of power we face in both our regulated and merchant markets through a new build, uprights and demand side management programs.

We are pleased that since we restructured Dominion nearly one year ago, we have consistently demonstrated that we can achieve predictable results and deliver on our forecast.

This success and the continued execution of our business plans in both our regulated and unregulated markets now permit us to raise the lower end of this year's guidance and increase our forecasted earnings range for 2009 as Tom Chewning said a few minutes ago.

I look forward to updating you on our continued execution of our plans during our third quarter call in October.

With that we will turn the call over to questions.

We are ready to go.

Thank you.

(OPERATOR INSTRUCTIONS) If at any time you would like to remove yourself from the question queue, press star two.

Our first question comes from Paul Fremont with Jefferies.

Sir, please go ahead.

Thank you very much.

With respect to the change in guidance next year, you guys have said that it relates to Marcellus, should we assume that it includes some disposition of the remaining properties or is the $0.05 revision related only to the Antero sale?

Well, it's Tom Chewning.

I don't want to isolate that one factor too much.

We do have a range of Marcellus from where we are now to a greater amount but we also have some other changes that go plus and minus.

So the answer is we have many assumptions and we have a low end of the Marcellus assumption and a high end.

Obviously when you start to pick a new number for the low end you get real serious because you want to make sure you don't go below that and the upper end would indicate probably and logically that there would be more Marcellus sales.

As a follow-up on the Marcellus, you've got a royalty interest arrangement I guess as part of your arrangement with Anteros.

When would you expect to begin to receive payment under those wells or under that royalty arrangement?

Paul, this is Paul Koonce.

The agreement has been reached.

Antero is going through and doing a bit of due diligence.

We expect that transaction to close in September.

Antero is making plans to move rigs into the area so they will begin drilling we believe immediately and as soon as they begin production, we'll begin receiving the proceeds on the royalty portion.

So would that be in '09, '010 or?

Certainly we expect we'll begin receiving proceeds as early as '09.

That's going to be a function of how quickly Antero gets their equipment and manpower on site and commence drilling which, again, we believe is going to be before the end of this year.

Thank you very much.

Thank you for your question, sir.

(OPERATOR INSTRUCTIONS).

Our next question comes from Jonathan Arnold with Merrill Lynch.

Good morning, guys.

Good morning, Jon.

Couple of things, you obviously disclosed the hedging on the generation portfolio for 2010, and I believe what you're doing is just disclosing the hedge position but it wasn't necessarily entered into during the second quarter.

Can you confirm that that's accurate and then maybe comment a bit on what kind of time frame when those hedges were put on and how you relayed them to where the market is today?

Jonathan, this is Mark McGettrick.

The hedge percentage I quoted were the actual percentages where we stand today.

If you look at it versus the previous tables, we've increased our hedge percentages at Millstone in '09 by about 6% and at the Northeast coal units about 9% in '09 and about 8% in 2010 from our previous disclosure all in the second quarter.

Okay.

But the 2010 hedges where you're giving us prices for the first time.

I guess we have the historical percentages in formal disclosure?

That's correct.

Then I just had one thing on.

When I look at the quarter, you seem to miss the contracted EBITDA number, I guess, largely in Nepal and you mentioned that you'd run over on your outages.

I was thinking that was just mainly the fact that within Generation that seemed to be offset by a really big upside versus guidance.

The other line right below DD&A, it was on page 35, can you explain what went on there in the utility that was not in any of those specific categories?

Yes, Jonathan.

First, you're right, on the Nepal assets our Millstone added terrain over so that's why we're outside or at the low end of that range there.

In terms of the other category in Virginia, that combination of areas, it includes FTRs, ancillaries, and capacity expenses that were all favorable to our guidance range.

We saw a high degree of congestion in our region during the quarter, and we also had our units operated at a fairly high level in response to ancillary service revenues.

So that was much higher than what we anticipated in our original guidance when we put it out a quarter ago.

Thank you.

One other thing related to Marcellus.

I know some of the other players have been having issues related to water permits and the like.

Can you just help us understand where you stand on that issue and the things to think about there in terms of timing around getting this moving?

Yes.

This is Paul.

We've drilled five vertical Marcellus wells that don't require quite the same degree of water that a horizontal wells requires.

We've had these discussions with Antero.

They've got new thoughts about how they're going to deal with water which we think are very creative and we're looking forward to working with them in the basin to bring about adequate water.

We don't see it as an issue.

Certainly not in West Virginia and certainly not in the Pennsylvania area where's this acreage is involved.

So we don't see it as an issue.

They don't see it as an issue.

As I said, we're looking forward to their getting equipment on the ground so we can help them get their drilling started.

Can you give a bit more color on what you mean by creative ways of handing water?

And how critical is the success of that to what you just said?

I think I would refer to you Antero.

It's their technology and their work process and I think it would probably be best that you pursue that question with them.

Thanks very much, guys.

Thank you.

Thank you for your question, sir.

(OPERATOR INSTRUCTIONS) Our next question comes from Hugh Wynne with Sanford Bernstein.

Please go ahead.

I just wanted to follow-up on the issue of liquidity in the quarter.

I'm looking at your cash flow statement for the second quarter, and I notice that the net cash provided by operating activities of 528 is actually lower than the net cash you had generated in the first quarter of 551.

Seemingly implying that the second quarter did not contribute to net cash.

Well, I think that if you take a look before working capital changes, that's not true.

If you take a look at fleet large working capital items, too, which deal with margin requirements, which were posted which obviously drew down some of our liquidity.

Also, we had tax payments related -- state and federal tax payments related to the sale of our properties last year that weren't made to that quarter.

And I think third, we got, and help me here, deferred fuel was our agreement last year on our fuel cost was to cap the amount of the recovery of the '07 fuel factor, and so in fact, you're right, that it didn't produce as much cash when you consider those items.

But our normal operations did produce--.

No I appreciate that.

I appreciate the three large items.

I just wanted to make sure that I understood exactly what was going on.

Let me just please quickly tell you what I think has happened and perhaps you can correct me if I'm wrong.

I understand on the margin deposit and liabilities which about $590 million, this was your forward sale of electricity at prices below market as the market price rose.

The value of that obligation rose and you had to put up margin and that ate cash there.

Is that right?

Both electric and gas.

It's hedge positions.

I wouldn't say they were contracts with third parts.

But they were market contracts.

Right.

It's our normal mark to market.

In a rising -- an environment where gas prices and power prices are going up.

Right.

Your position is becoming more and more expensive to fulfill.

It is, however, I think if you notice in our remarks about our liquidity at this point, we're back to $2.4 billion in liquidity as of yesterday afternoon, which shows that the impact of a new credit facility, but also over $0.5 billion has come back to us from declining positions.

In addition to that, the two other points, Hugh, I can tell you that the thing that I would lose most sleep over is if I didn't think we had an appropriate liquidity position.

Right.

But in addition to the markets coming down and additional facility, we've changed the underlying margin requirements under most of our contracts.

So if prices go up again, we're not compelled to put up as much of a margin requirement as we did on those contracts before.

Okay that's good.

The deferred fuel is just incomplete recovery of your power generation costs in Virginia?

Yes.

The fuel costs.

Right.

Because we had an agreement last year, I believe we had limited to 4% recovery during the year.

So that shows up and will continue to show up until we collect it in the future.

And you had a nice, positive inflow from deferred income taxes equal to almost a third of your net income.

Is this something that you would expect to be a continuing positive flow of cash for you at more or less this rate or is there anything about the first half that's abnormal?

Hugh, this is Tom, that level we experienced the first half of the year was probably a little bit higher than what we would experience going forward, but we are building a deferred tax balance so we are going have a positive cash flow from that, but that I think $300 million or so is a higher run rate than you would normally see.

The last one is the prepayments.

What is behind the outflow for prepayments?

The prepayments there is just the way that we're -- the way that we manage our quarterly tax liability, and to stay within the Safe Harbors of avoiding tax penalties, we've -- we paid a little bit ahead on our federal income tax, what we project to be our tax liability.

That will work its way out through the balance of the year so that as we approach year end, we will have smaller payments.

Great.

So it's really a cash outflow that you would not see recurring balance of the year.

Great.

Thanks for your patience and I appreciate the detailed responses.

Thank you, Hugh.

Yes.

(OPERATOR INSTRUCTIONS) Our next question comes from Steve Fleishman with Catapult.

Please go ahead.

Hi, gentlemen.

Good morning.

Hi.

Couple clarifying questions.

First on the 2009 guidance.

Just to clarify, if you, let's say had another similar sale to Antero tomorrow, something like that is already incorporated in some way into that range?

Yes, into the -- it's a pretty wide range.

Right.

So we've got to be careful on the bottom end of that.

As I said before, I think the upper end of that implies some more.

And you did mention, Tom, that obviously when you updated this, there are some things that got better, which I think you said are Marcellus and generation, but maybe some things that also got -- had some pressures, any flavor on what some of the pressures are?

You just kind of cost inflation type of thing or?

It's more maybe some additional CapEx expenditures for which we would have to have more interest expense and that sort of thing.

Nothing that stands out in them in some sort of big number, but there's always a lot of pluses and minuses from what we do.

We just try to capture the big ones but nothing alarming.

But I think the market has a tendency that every time you give guidance, something positive happens, that they just add it to both ends of the guidance.

I just want to remind everybody that if you run a business with as many moving parts as we do, you make a lot of assumptions and not all of them turn out.

One thing has been our declining commodity prices since we first gave those numbers so that that's not an uplift in this forecast.

Yes.

And then one other question for Mark.

I wonder if you can just give us an update on how you are dealing with coal, just delivery supply and particularly your merchant generation?

Is everything going okay there?

And also what your thought is on where the dark spread is right now?

Would you even want to hedge any of your generation in New England at this point?

Has the dark spread really contracted there?

Steve, we -- on the coal delivery side, we don't have any issues here at all whether it be international or domestic our supply both for BP and the merchant is fine.

In terms of the dark spread, we did lay off about 8% of our coal supply and corresponding (inaudible) in the second quarter.

We got pretty favorable pricing on that.

So as people are looking at these very, very high Central App and international coal prices, they're moving around dramatically.

For example, just in the last three weeks, they dropped $20.

So the signal you have out there on a spot price isn't necessarily what might be reflective by certain vendors that might take a year or two contract from you.

We're going to be very selective in how we lock coal in and lock power at the same time but we did in the last several months get some, we think, attractive margins by locking in new supplies of coal and energy for or units in 2010 and we'll continue to look for that.

Thanks, guys.

Thank you.

Thank you for your question, sir.

Our next question comes from Jonathan Arnold with Merrill Lynch.

Please go ahead.

Yes.

A follow-up, guys.

I just wanted to ask if there's any -- do you have any kind of broad update to the CapEx numbers that you have most recently laid out?

Where should we look for those most recent ones?

I'm not sure if you disclosed any in any of the schedules on the web today?

Havn't seen them.

Jonathan, the most recent CapEx is with our most recent presentation or in the I.R.

reference book.

We haven't updated that since the beginning of the year.

Right now that CapEx plan, kind of supports our earnings outlook.

So we wouldn't update that without updating our complete model.

It's not our interest to update specific line items without doing a comprehensive update.

The earliest you would see any update on CapEx is the fall.

Did I hear Tom Chewning correctly there is some upward movement on the CapEx in aggregate?

There's the potential for that Jonathan, on incremental projects we have, particularly the wind area because we found more opportunities there.

That's -- the reason we haven't updated that is because until we really identify specific projects, we don't just throw in capital.

But that doesn't mean -- into an exhibit, but that doesn't mean that internally when we don't take that into account in terms of the need to borrow money, et cetera.

So there are a lot of -- I don't want you guys to think that we believe for a second that we capture everything about next year in these models.

But we do a lot of range calculations and some of them involve less capital and some of them involve more capital.

Then we come out as we always do in the beginning of the next year and give you a plan that we feel we will follow.

And I think that what we've done this year is that we followed our CapEx budget pretty carefully, but not every line item has been followed in the same way that we created it.

We've managed our CapEx to the numbers that we thought we needed to do for the year.

Thank you.

Thank you.

Thank you for your question, sir.

We have now reached the end of our allotted time.

Mr.

Chewning, do you have any closing remarks?

Yes.

I'd just like to thank all of you ladies and gentlemen who have been on the call this morning and remind you that our 10-Q will be filed later today.

Our next earnings release is scheduled for Thursday October 30.

We wish you an enjoyable remainder of the summer.

Good day.