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Dominion Resources, Inc. (D)

Q1 2007 Earnings Call

May 2, 2007 10:00 am ET

Executives:

Joe O'Hare - Director of IR

Tom Chewning - CFO

Tom Farrell - President & CEO

Mark J. Kington - Managing Director, X-10 Capital Management

Analysts:

Greg Gordon – Citigroup

Jonathan Arnold - Merrill Lynch

Hugh Wynne - Sanford Bernstein

Sam Brothwell – Wachovia

Paul Fremont – Jeffries & Co.

Paul Ridzon – KeyBanc

(Inaudible Name) – Morgan Stanley

Shneur Gershuni - UBS

Paul Patterson - Glenrock Associates

Dan Eggers - Credit Suisse

Danielle Seitz - Dahlman Rose

Presentation

Operator

Welcome to Dominion’s first quarter conference call. We now have Mr. Tom Chewning, Dominion’s Chief Financial Officer. Please be aware that each of your lines is 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. Before introducing Tom Chewning, I will turn the conference over to Joe O’Hare, Director of Investor Relations.

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Joe O’Hare

Thank you Lindsay, good morning. Welcome to Dominion’s first quarter earnings conference call. This morning we published several supplemental schedules on our website. We ask that you refer to those exhibits for certain historical quantitative results. From time to time during this call, we will refer to certain schedules included in our quarterly earnings release or to pages from our first quarter earnings release kit. Both of which were posted this morning to Dominion’s website. Our website address is www.dom.com/investors/ir.jsp.

Let me start by providing the usual cautionary language. The earnings release and other matters that may be discussed on the call today contain forward looking statements and estimates that are subject to various risks and uncertainties. Please refer to our SEC filings including our most recent annual report on form 10K and quarterly report on form 10Q for a discussion of factors that may cause results to differ from managers’ projections, estimates, forecasts, and expectations.

Also on this call, we will discuss some measures on the company’s performance that differs from those recognized by GAAP. You will find a reconciliation of these non-GAAP measures to GAAP on our investor relations website under GAAP reconciliation.

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

Tom Chewning

Thank you Joe and good morning. Joining me this morning is Tom Farrell, President and CEO and other members of our management team.

This morning, I will review our first quarter earnings results and how those results reflect the strength of the core businesses that will remain after we success reposition the company. I will then update you on our cash flow credit metrics, liquidity, and hedge positions. Tom Farrell will comment on operational achievements in our business units and the electric utility restructuring legislation recently passed in Virginia, our recent application to reset the Virginia factor, the status of the peoples that hope (inaudible), progress in divesting our non-Appalachia assets and our outlook for future earnings quality business risks growth, and dividend policy. I will conclude by pointing you to an alternative to the 2008 earnings problem we provide on January 31st, and updating you as to when you can expect additional forecasts involving the sales.

Dominion produced operating earnings of $1.50 per share in the first quarter of 2007 compared to $1.64 per share last year. Operating earnings per share at delivery, energy, and generation, increased 9% as compared to last year, strongly affirming the earnings power and positive outlook for the new Dominion.

Customer growth and a return to normal weather in 2007 benefited utility revenue, but brought along with it higher fuel expenses. These files effectively offset each other.

On a GAAP basis, earnings were $1.29 per share for the first quarter of 2007, compared to $1.53 per share last year. The major differences between first quarter 2007 GAAP and operating earnings, relate to asset divesture activity including sales and charges related to our E&P asset divestitures. For all these transactions, GAAP accounting convention requires that we record certain expenses and charges prior to closing, while the recognition of any gains on sales are recorded at the time of closing. These timing differences cause a temporary reduction in common shareholders’ equity that will be reversed once the transaction is complete and the full impact is reflected in our consolidated financial statements.

A reconciliation of GAAP to operating earnings can be found on schedules two and three of our earnings release.

Now on to operating cash flow credit metrics and liquidity. Cash from operations totaled just over $1.2 billion, a 23% increase over last year’s $984 million. Quarter end adjusted debt to total capital was 54.1% compared to 54.5% at year end 2006. The adjusted ratio of FFO to interest for the 12 months ended March 31, 2007 improved to 4.3 times, compared to the 12 month measure of 0.2 times at year end 2006. An adjusted FFO to total debt stood at 22.5% at quarters end, compared to 21.5% at the end of last year.

Available liquidity at the end of the quarter totaled $1.8 billion, compared to $3.2 billion at the end of 2006. This reduction is a result of the exploration in February of a $1 billion, 364 day credit facility, and an increase of $418 million in short term debt. We are bridging our long term debt maturities into short term holdings, in anticipation or using the investment proceeds to permanently retire debt. A reconciliation of these non-GAAP ratios to GAAP can be found on our website under GAAP reconciliation.

Since our January 31st disclosure, there were only minor changes to our natural gas, oil, and generation output hedge positions. We have however, expanded our hedge disclosure to include our 2007 capacity hedge positions in (inaudible) following their RPM auction for the planning period June 2007 through May 2008. For our current hedge positions, please see the schedules on page 28, 29, and 30 of the earnings release kit.

That concludes our review of the first quarter results. I will now turn the call over to Tom Farrell. Tom?

Tom Farrell

Good morning. In our January earnings call, we discussed the importance of safety and operational excellence in order for us to produce the steady and reliable earnings growth we and our fellow shareholders expect. Our first quarter results reflect the strength of the new Dominion. Initiatives under way will insure that we successfully build upon this foundation to deliver strong long term earnings per share and dividend growth.

Dominion Retail is again off to a good start, surpassing its net income of last year’s first quarter by nearly 40%, and adding more than twice the number of new customers compared to the same period of last year.

During the first quarter, Dominion Energy tied its sendout record of 6.3 billion cubic feet. During the month of February, Dominion Energy also experienced a record storage withdrawal of 78 bcf. This represents the largest withdrawal of any February on record. While these measures show the heavy utilization of our system, we have now completed seven winter seasons in a row without a single firm service interruption.

Dominion’s Generation’s units continue to excel in efficiency and safety. Our merchant cold fleet had an equivalent availability factor in excess of 90% this quarter while our nuclear fleet had a capacity factor greater than 95%.

Also (inaudible) and three New England plants, Manchester, Salem, and Braden Point, had superior safety performances in the first quarter with zero accidents to report.

As we enter a new regulatory year in Virginia, operational strength and a focus on safety will serve both our customers and our shareholders well. Virginia’s new hybrid regulatory model will provide Dominion with a competitive return on equity plus incentives not only to achieve continued high levels of customer service but to invest in construction of new electric generation. We’ll have more on that in a moment.

In April, we filed our application for the fuel factor reset, and as of July 1, we will begin an annual fuel rate adjustment with deferred balances for under or over recoveries.

The recently passed legislation, caps the 2007 increase, the total fuel increase, at 4% for residential customers. Without the law, the increase would have been approximately 12%. The balance of our fuel expense will be deferred in accordance with the legislation and is expected to be recovered over the next four months. As the deferred amounts are paved into rates, the 4% cap will have no impact on earnings, except for carrying costs on any deferred fuel expense.

I will note here that the supreme courts recent decision with respect to new source review, will not impact Dominion. Unlike many others, we reached an agreement with EPA in the year 2000. We have almost completed installation of all of the equipment necessary to comply with those rules.

We will not be affected by the very significant cost escalation in equipment and labor. On April 13th, the Pennsylvania Public Utility Commission approved the settlement agreement for Equitable to purchase Dominion Peoples.

Also on April 13th, the Federal Trade Commission filed a complaint seeking to stop Equitable’s proposed acquisition. The complaint alleges that the acquisition would lead to higher prices for the local distribution of natural gas to non-residential customers in some areas of western Pennsylvania.

Both Equitable and Dominion have filed motions to dismiss the complaint. The court is expected to rule on this motion early this month. We believe our position will prevail.

West Virginia Public Service Commission has scheduled hearings to begin on May 7th for Equitable’s acquisition of Dominion Hope. We have not altered our outlook for closing these transactions at mid-year.

As you may have read on Monday, we reached an agreement to sell our Gulf of Mexico operations to NE Petroleum for approximately $4.76 billion. NE is a global energy conserve based in Italy and has a growing presence in the Gulf of Mexico.

We expect the sale to close by early July of this year. The announcement is a significant step in our strategic plan to re-focus on a power generation and energy distribution/transmission storage in retail businesses. NE is purchasing our Gulf of Mexico operations, not only because of the quality of our assets, but because of the quality of our people.

NE is eager to have them join its team. While we are confident that our offshore organization has a bright future with NE, this announcement is bittersweet, because it acknowledges that we will not be able to keep the bulk of Dominion E&P together as a single operation. The contribution that the offshore business unit has made cannot simply be measured in production, reserves or earnings.

Our folks in New Orleans have been an integral part of Dominion culture and have been influential in defining what we are as an organization. We wish them well in their future endeavors. We continue to pursue the disposition of our onshore E&P operation except those in the Appalachian basins, and expect to make further announcements in the near future.

We caution you to wait for the developments when considering the results of the offshore sale on Dominion’s ongoing earnings power, in addition to the sales prices of any future transactions. Other important information are not yet ready for disclosure, including our effective tax rate, targeted credit metrics in view of recent legislative changes in Virginia, and ultimately the amount of cash that will be available to repurchase common stock.

As you probably expect, we will have nothing further to say on this topic this morning. We are actively working to complete our Peoples and Hope transactions and execute on our E&P asset dispositions.

As we complete our repositioning, we will focus on deploying capital on projects with attractive returns that will provide stable and predictable earnings and cash flow in the coming years.

The disposition of our E&P assets will reduce Dominion’s commodity price earnings sensitivity by about two thirds. Over time, with future growth coming largely from gas and electric operations, having little or no commodity price exposure, we expect further reductions in earnings volatility.

As a result, not only will Dominion’s earnings per share grow, we believe the value that investor’s place on those earnings will expand as well. We have a new regulatory environment in Virginia within a territory right for additional supply.

We also have merchant plants in pipeline and storage in areas that are primed for growth and expansion. PJM has predicted that electricity and demand in Dominion’s service territory will increase 4,000 megawatts over the next 10 years and 1,700 megawatts just by the year 2010.

It is the fastest growing region within all of PJM. Infrastructure to service this demand growth does not exist and cannot be expanded overnight. But Virginia’s hybrid regulatory model provides Dominion the necessary incentives to satisfy that demand growth.

Not only are we assured competitive returns on equity, the new law also provides premium incentives to build new base load plants, including coal and nuclear, combined cycle gas, and renewables.

The first step is our announced proposal to add 300 megawatts of natural gas fired electric generation at our Ladysmith tower station near Fredricksburg. These units should be online in mid to late 2008.

On April 19th, we filed our application with the State Corporation Commission to construct 65 miles of high voltage transmission lines to serve our Northern Virginia market at a cost of $243 million. And later this week, we plan to file a second application with the SEC to construct another 60 miles of high voltage lines to serve the rapidly growing Hampton Roads region at a cost of $180 million.

We have also completed the first stage of planning and development to construct a 500-600 megawatt clean coal plant in Southwest Virginia. We recently awarded an EPC contract to the Shaw group for the first phase. That includes engineering and major equipment selection in plan to file with the State Corporation Commission before the Fall of this year for approval to construct that plant. Nuclear Regulatory Commissions, Atomic Safety and Licensing Board recently completed hearing testimony on our early site permit to construct.

The NRC staff supports Dominion’s proposal and has issued a permit in draft form. The plan to file for a combined operations license later this year and also expect to receive a site permit by the end of 2007.

As was announced yesterday, we awarded to General Electric a contract to secure on our behalf, critical long (inaudible) components for possible next generation nuclear powered units. Numerous growth opportunities also exist outside of Virginia.

Upgrades to our merchant plants are a low cost, high return expansion option. The plant upgrade a Millstone 3 and additional upgrade opportunities at (inaudible) and PJM, and New England coal stations, will allow us to supply additional power in very attractive merchant markets.

And across the Northeast, we plan continued investments in pipeline and storage that will create favorable returns on capital. In short term, in addition to our Coal Point expansion in US based storage projects. We have completed a successful open season.

Our pipeline project is designed to take gas from our lighting hub to interconnect with the proposed Millennium project. Binding preceding agreements are currently being negotiated. Though it is dependant upon the future of Millennium, this project could be in service by November 2009. We continue discussions related to further expansions of Coal Point and will be announcing plans to significantly expand Dominion’s transmissions storage business in the near future.

Recent court rulings on cost allocation within PJM and a pending rate settlement with the Coal Point Ellen G facility are the latest examples of the constructive regulatory environment in which Dominion operates.

Operational excellence from our transmission team will continue to reward Dominion’s shareholders. We also had the proper incentives and continuing obligation to improve customer service and operational efficiency throughout all of our businesses. In Virginia, we will earn competitive returns on equity, but also with the potential of enhanced returns if we meet or exceed established performance measures.

Post completion of our strategic repositioning, we expect the board of directors to reassess dividend policy and to move Dominion's payout ratio in line with its utility peers.

I will now turn the call back over to Tom for his concluding remarks.

Tom Chewning

Following the call, we will post on our website an alternative 2008 new Dominion indicative model. This alternative model begins with actual 2006 results for the new Dominion operating units: Dominion Energy, Dominion Delivery, and Dominion Generation, adjusted for normal weather, and other items such as franchise growth and commodity prices. We do not plan to discuss the model on the call today. However, our investor relations team will be available after the call to answer any questions you may have about the model or other matters of interest.

Also, as we stated on January 31, we expect to issue updated modeling information following the completion of our E&P divestiture process, and offer full-year guidance in January of 2008. We intend to provide greater detail of the drivers and characteristics of our remaining businesses to better highlight their earnings power and value.

This concludes our prepared remarks. Lindsay, open up the lines, please.

Question-and-Answer Session

Operator

Thank you. At this time we'll open the floor for questions. If you would like to ask a question, please press Star One on your touch tone phone now. If at anytime you would like to remove yourself from the queue, please press Star Two.

Our first question comes from Greg Gordon with Citigroup. Sir, please go ahead.

Greg Gordon – Citigroup

Thank you, good morning.

Tom Farrell

Good morning Greg.

Greg Gordon – Citigroup

On the subject of the asset sales, I understand your caution that there were multiple factors involved in getting to the bottom-line impact for the company, what the overall net proceeds are, tax bases, etc. And you also mentioned the amount of debt / target credit metrics you would be looking at, post asset sale, in lieu of the change in the regulatory structure in Virginia.

I would presume that while you’re not going to give us specifics here, that the direction there is positive. Is it wrong to presume that, all things being equal, the risk profile and/or the risk rating of the company, from the perspective of the rating agencies, should be lower, not higher? And therefore the amount of debt you might need to retire would therefore be, if anything, less than what you had previously projected. Is that a fair presumption?

Scott Hetzer

Greg, this is Scott Hetzer. That is a fair presumption. But we're not giving specifics because we haven't completed our work, and we're not sure how we will adjust our credit metric targets as a result of this lower-risk profile. But your presumption is correct.

Greg Gordon – Citigroup

OK guys. Thank you.

Tom Farrell

Thank you, Greg.

Operator

Thank you. Our next question comes from Jonathan Arnold with Merrill Lynch. Sir, please go ahead.

Jonathan Arnold - Merrill Lynch

Good morning. Tom, I was hoping you could talk a little bit about future strategy overall, once you've completed dispossession of E&P. A lot of what you've been doing lately has been designed to reduce the risk profile of the company. Can you see a scenario where you might make a similar decision related to the merchant business?

Tom Chewning

Thank you Jonathan for calling in. Our primary focus will be in the areas that I listed in the opening discussion. We will be pursuing our obligation to meet the demand growth in Virginia through the construction of new base-load power plants that should enjoy, not only a fair rate of return competitive with our peers, but also enjoy, in the case of nuclear, 200 basis points premium.

The same is true for carbon capture ready coal, 100 basis-point premium for standard coal, and for combined cycle plants. Renewables hit a 200 basis-point premium, and if we hit the targets, we get an additional 50 basis-point premium added to our entire rate base. So we will be pursuing that as our primary focus along with, side-by-side, expanding our pipeline operations, and our storage facilities.

At the same time, we have a lot of opportunities to expand through uprates of our merchant fleet. Now, your question was, will we be looking at disposing of the merchant fleet, and the answer is no.

Jonathan Arnold - Merrill Lynch

Thank you.

Operator

Thank you. Our next question comes from Hugh Wynne with Sanford Bernstein. Please go ahead.

Hugh Wynne - Sanford Bernstein

Good morning. I had a question regarding your disclosures on the impact of the PJM capacity payments. On page 30 of your release, you now provide an average capacity hedge price for (inaudible), and you provide an average capacity hedge price for Eastern MAAC, but you don't appear to offer an average capacity hedge price for the rest of market. Instead there's a line that says “average rest-of-market capacity purchase price”. Could you explain what that means and what is the hedge price for the rest of market?

Mark J. Kington

Hugh, this is Mark Kington. At the bottom of page 30, it shows you 1705 megawatts for rest of market, and the subsequent lines below that show our hedge position is un-hedged and what the average capacity price is for our short position at Virginia Power.

Tom Chewning

And Hugh, that's a blended rate between what was hedged and what the clearing price from the...

Hugh Wynne - Sanford Bernstein

OK, so the $0.88 is the blended rate you're getting on the 1705, is that correct?

Tom Chewning

Yes.

Hugh Wynne - Sanford Bernstein

And the $3.76 above that, the average capacity hedge price, that's what you're getting on the 97% of the 1306. Is that right?

Tom Chewning

Now, that is also a blended rate on the total.

Hugh Wynne - Sanford Bernstein

OK, just has a different name, but it's the same thing?

Tom Chewning

Well, in English, the top is Fairless Works, and the bottom is Virginia Power.

Hugh Wynne - Sanford Bernstein

But the $3.76 is a blended price, and the $0.88 is a blended price, they are the same?

Tom Chewning

Correct.

Hugh Wynne - Sanford Bernstein

What is the duration of these hedges? Are you going to continue to be hedged at this rate through 2008?

Tom Chewning

I think when we put disclosure out later for 2008, the hedge positions will change significantly. We've just went into this year, and early in this year, fairly heavily hedged. So similar to the Northeast, I think you'll see those percentages change when we disclose here.

Hugh Wynne - Sanford Bernstein

Very good, thank you.

Operator

Thank you. Our next question comes from Sam Brothwell with Wachovia. Please go ahead.

Sam Brothwell – Wachovia

Hi, good morning.

Tom Farrell

Good morning.

Sam Brothwell – Wachovia

Now that you've sold the first of the E&P, is there a scenario under which the remainder might be done in some form other than an auction?

Tom Farrell

We have all of our options on the table with respect to the dispossession of the balance of the assets.

Sam Brothwell – Wachovia

OK, thanks.

Operator

Thank you. Our next question comes from Paul Fremont with Jeffries. Sir, please go ahead.

Paul Fremont – Jeffries & Co.

Thank you. You talked a little bit about investment opportunities in the merchant fleet and particularly New England. Can you just remind us, is there still standing (inaudible) that's necessary essentially to bring those plants up to state environmental requirements, and by which date do you have to make up your mind, in terms of making those investments?

Tom Farrell

We have already made up our minds with respect to the investments and we are on schedule to meet those. We will complete the rest of that work, I believe... 2112 is the last expenditure that will go into that plant. We installed SCRs already, so we are already taking care of the NOx requirements, and what we're working on now is the sulphured oxide and mercury requirements.

Paul Fremont – Jeffries & Co.

And with respect to (inaudible), are those numbers included right now in your estimated capital spending numbers, or is that a decision yet to be made?

Tom Farrell

They’ve been in there since we bought the plant. They’ve been in our forecasts since we’ve bought both plants.

Paul Fremont – Jeffries & Co.

OK, thank you.

Operator

Thank you. Our next question comes from Paul Ridzon with KeyBanc. Sir, please go ahead.

Paul Ridzon – KeyBanc

Good morning. You indicated you’d like to expand your presence in transmission and storage. Is that, are you thinking build or buy, along those lines? And can you give a sense of when you could see some visibility on that?

Tom Farrell

It’s largely build, through expansions off of our existing system.

Tom Chewning

We’ve been working on quite a few things. We mentioned one this morning, that’s some new information. And we expect to have a series of them over the course of the next year.

Paul Ridzon – KeyBanc

And you indicated, post the re-structuring you’d like to bring your payout to an industry norm. Is kind of 60% kind of what you have in mind when you think about a norm?

Tom Farrell

It depends on what group you use, but somewhere between 55-60% is where our standards are.

Paul Ridzon – KeyBanc

And then lastly, with the results of the Gulf of Mexico behind you, how incrementally better do you feel about that? And from what you’re seeing is that indicative of what you might see on beyond-shore pricing?

Tom Farrell

Well, as I said during my remarks, I certainly can’t ask you from asking questions but I can not answer them. So, I appreciate very much your interest, we are as interested in it as you are. And I think it’s just better policy for us not to comment any further on the position.

Paul Ridzon – KeyBanc

I understand. Thank you very much.

Tom Farrell

Thank you very much.

Operator

Thank you. Our next question comes from (inaudible) with Morgan Stanley. Please go ahead.

(Inaudible Name) – Morgan Stanley

Thank you. Good morning. Just, coming back to Hugh Wynne’s question a little bit on the capacity payments. You guys are net short effectively, but long through (inaudible), now, if you build new capacity short, and actually end up long, can you guys keep the excess capacity sales, or is that still going to flow back as a credit to customers?

Tom Farrell

We would expect that to get covered for that and in the first rate case for any capacity payments that we’d have to make for a short position. If we go long, so there’s a sharing mechanism that’s been defined in terms of all systems sales, if we get into a long position, where we’d share with customers.

(Inaudible Name) – Morgan Stanley

OK, got it. And if I could switch topics real quick for one final question. Could you guys share any views on how liquefaction capacity in the part of the gas chain is potentially going to affect your ability to further expand the co-point terminal??

Tom Farrell

We continue to watch the liquefaction market and every indication is that there will be available liquefaction capacity in the 20-12, 20-14 timeframe, which syncs up with when we’re looking at further expansions at COPoint. So we don’t see that really causing any delay in our plans.

(Inaudible Name) – Morgan Stanley

OK, got it. Thank you, then.

Operator

Thank you. Our next question comes from Shneur Gershuni with UBS Securities. Please go ahead.

Operator

We seem to have lost Mr. Gershuni. Our next question comes from Paul Patterson with Glenrock Associates. Sir, please go ahead.

Paul Patterson - Glenrock Associates

Good morning, guys. The $16 million in litigations reserves, what’s that about?

Tom Chewning

That’s the result of the, we took a look at the results in the case, that the part that we purchased from MySource in Appalachia in West Virginia. This is a royalty case that was held there.

We’re in a different court. We think we have different circumstances. We do not expect to lose the case, we expect to prevail. But out of abundance of caution we set aside a reserve.

Paul Patterson - Glenrock Associates

OK great. And then the last 12 month ROE for the utility, excluding the unrecovered fuel, can you tell us what that is?

Tom Farrell

I’m sorry, could you repeat that question please?

Paul Patterson - Glenrock Associates

The last 12 months, the 12 ROE, the regulated ROE that you’d estimate for the utility if you were to exclude the unrecovered fuel portion of it.

Tom Chewning

OK, well in the 2005 annual information filing, if you adjust for fuel in the recovery and an equity adjustment at Virginia Power, the ROE was 15%. We have not yet filed the 2006 AIF, but looking at the 10K, indications are it would be about 15% or more. We’ll have to take a closer look once the 2006 AIF is filed. And that includes the fuel adjustment.

Paul Patterson - Glenrock Associates

That includes the fuel adjustment?

Tom Chewning

Of $404 million after tax.

Paul Patterson - Glenrock Associates

OK, so that includes that, and then what about the retail energy marketing operations, is that part of it as well?

Tom Farrell

No, it is not.

Paul Patterson - Glenrock Associates

OK.

Tom Chewning

And Paul, let me restate, actually in 2006 the fuel was $364 million. The 404 applies to 2005.

Paul Patterson - Glenrock Associates

OK, great. Thank you very much.

Operator

Thank you. Our next question comes from Dan Eggers with Credit Suisse.

Dan Eggers - Credit Suisse

Good morning. Question on, we know about the Millstone expansion but could you just give a little more color on what you guys see at (inaudible) and some of the other assets as has far as potential upgrades are concerned?

Tom Farrell

Dan, we have an opportunity, we think, to upgrade that based on some inlet cooling opportunities which we could do fairly quickly, and we’ll make a final determination on that here probably within the next month or two.

Then at BreakPoint, we’re looking at a turbine uprate where particularly (inaudible), and again, we’re pretty far the road on that, determining what the economics are, and we would expect within the next couple of months to also confirm where we’re going to be on that.

Dan Eggers - Credit Suisse

By order of magnitude I know you don’t have it pinned down, but ballpark, of what kind of size we’re talking about?

Tom Farrell

I would think on the Fairless works, it could be anywhere from 75-120 megawatts, and on Braden, maybe between 15-30 megawatts.

Dan Eggers - Credit Suisse

OK, got it. On the environmental plan for New England, you guys were out early as far as that capital spending in your numbers. Are there updated numbers or updated figures that would go along with those obligations just given the inflation we’ve seen across the industry?

Tom Chewning

Now we have spent about $250 million already and we have about $350 million to spend over the course of the next five years.

Dan Eggers - Credit Suisse

Got it, OK. And then, we’re not talking about the E&P sale, but the decision on Canada to retain those assets for E&P, and how that kind of fits into the portfolio?

Tom Chewning

No, I’m sorry if I said something that led you to that conclusion. Canada is part of, we consider that to be part of the onshore, non-Appalachian assets.

Dan Eggers - Credit Suisse

OK, got it. Thank you guys.

Tom Farrell

You’re welcome.

Operator

Our next question comes from Shneur Gershuni with UBS. Please go ahead.

Shneur Gershuni – UBS

Sorry about that before guys, I had some phone challenges. I don’t want to beat this to death and so forth, but if I can just focus on the E&P segment for a little bit. With the sell of the Gulf assets, which were arguably one of your most volatile of the E&P assets with respect to earnings and so forth, it appears to have been a successful sale and so forth. Is there any thought or reconsidering of keeping some of the onshore assets if you don’t get the pricing that you’re looking for with respect to, let’s say, the Rockies or some of the other onshore assets.

Tom Farrell

No. But we will consider, if we don’t get the pricing, that we’re looking for in the sale, we’ll consider a spin-off. We’re going to retain the Appalachian assets, but we made our decision about this last fall and we haven’t seen anything that’s going to change our minds.

Shneur Gershuni – UBS

And then secondly, with respect to the Appalachian assets, are there plans of indications to sort of target some of the deep zones right now that some of the other firms have been talking about with respect to the prospect in the Appalachian reserve?

Tom Farrell

Yes.

Shneur Gershuni – UBS

Is it something that you’d be targeting sooner rather than later, or is this more an ‘08/’09 type of story?

Tom Farrell

Well, it’s something we’ve been looking at already. I think I probably should leave it there.

Shneur Gershuni – UBS

OK, thank you very much.

Tom Farrell

Thank you.

Operator

Our next question comes from Danielle Seitz with Dahlman Rose. Please go ahead.

Danielle Seitz - Dahlman Rose

Thank you. I just was wondering, you are mentioning the construction of a 300-megawatt combine cycle plant in Virginia. Do you have a sense already of the type of budget that’s supposed to be done by late ’08, in terms of cost per kilowatt?

Tom Farrell

Danielle, that project estimated we’re on between $120 and $140 million.

Danielle Seitz - Dahlman Rose

Oh OK. And I guess the other plants are for longer term aside from the additions that you have already mentioned. The larger plants like the coal plants etc, those are really scheduled for much later?

Tom Farrell

Yeah.

Danielle Seitz - Dahlman Rose

OK. This will be sufficient in terms of additional capacity or would you have to make some new contracts, some purchase power contracts over the next two or three years?

Tom Farrell

We may look at some purchase power contracts or renewing some contracts that are expiring, but the plants that Tom Farrell referenced, it would have to be a significant construction program to meet the 4,000 megawatt integral demand here in the next 10 years. So there will be additional plants identified either through up rates or new plants here in the near future to support that construction, but we may well again renew some contracts or extend some contracts.

Danielle Seitz - Dahlman Rose

I’m assuming also that the extension of (inaiudible), are you looking for something similar to what you have just done or something even more involved?

Tom Farrell

It’d be very similar to what we’ve just done, adding tanks with capacity to contract for long periods of time.

Danielle Seitz - Dahlman Rose

Great, thank you.

Tom Farrell

Thank you.

Operator

Our next question comes from Jonathan Arnold from Merrill Lynch.

Jonathan Arnold - Merrill Lynch

Thanks for the follow up, guys. I just wanted to ask a question on the gas deliveries. They were down pretty sharply in the quarter despite whether having been considerably more favorable and a custom account only being down a little. Could you talk to some of the dynamics there, what’s driving that number? It was off in residential about 11%.

Joe O'Hare

Jonathan, this is Joe. We’re really not prepared to discuss that line item detail on the call. There’s going to be, the 10Q will be filed later today and that will be covered in the filings if you have questions after that, please give Investor Relations a call.

Jonathan Arnold - Merrill Lynch

OK.

Tom Farrell

Thank you.

Operator

Ladies and Gentleman, we have reached the end of our allotted time, Mr Chewning, do you have any closing remarks?

Tom Chewning

Yes, Lindsey, thank you. Just as reminder that our forms 10Q will be filed with the SEC later and our second quarter earnings release is scheduled for Wednesday, August 1st, 2007. We’d like to thank everybody for joining us this morning and we look forward to talking with you in August. Good day.

Operator

Thank you. That does conclude today’s teleconference. You may now disconnect your lines at this time and please have a wonderful day.

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Source: Dominion Resources Q1 2007 Earnings Call Transcript
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