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Executives

Max Kuniansky - Executive Director, IR and Corporate Communications

Paul J. Evanson - Chairman, President and CEO

Philip L. Goulding - Sr. VP and CFO

Analysts

Daniel Eggers - Credit Suisse

Reza Hatefi - Polygon Investment

Lasan Johong - RBC Capital Markets

Brian Russo - Ladenburg Thalmann

Paul Patterson - Glenrock Associates

Ashar Khan - SAC Capital

Daniele Seitz - Dalhman Rose

Edward Heyn - Catapult Capital Management

Rick Shobin - GLG Partners

Greg Gordon - Citigroup

Jeff Gildersleeve - Millennium Partners, Inc.

Ted Olshanski - Scotia Capital, Inc.

Allegheny Energy, Inc. (AYE) Q4 FY07 Earnings Call February 8, 2008 8:30 AM ET

Operator

Good morning. My name is Syndrial, and I will be your conference operator today. At this time, I would like to welcome everyone to the Allegheny Fourth Quarter 2007 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions].

Thank you. And now I would like to turn the call over to Max Kuniansky, Executive Director of Investor Relations and Corporate Communications.

Max Kuniansky - Executive Director, Investor Relations and Corporate Communications

Good morning. If you have to leave the call before it's over, you can listen to the taped replay. It's available until midnight on February 15th, and you can listen to it by telephone, on our website, or by podcast.

Some of our statements will be forward-looking. These statements involve risks and uncertainties and are based on currently available information. Actual results may differ significantly from the results and the outlook we discuss today. Please refer to our earnings news release and our SEC filings regarding factors that may cause actual results to differ from the forward-looking statements made on this call.

Our presentation includes some non-GAAP financial measures. On our website, you'll find the reconciliations required under the SEC's Regulation G. After our prepared remarks, we'll take your questions. We ask that you try to limit your questions to two each, so we have time to get to as many of you as possible.

And now, let me introduce Paul Evanson, Chairman, President and Chief Executive Officer of Allegheny Energy.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Good morning, everyone, and thanks for joining us. I'm pleased to report that 2007 was another year of strong earnings growth for Allegheny Energy. For the full year, consolidated earnings per share were $2.26 on an adjusted basis, an increase of more than 20% year-over-year. Fourth quarter earnings were $0.46 per share on an adjusted basis, up from $0.37 a year ago. Higher market prices, higher generation rates and increased retail sales were the primary drivers.

We had solid top-line growth in both our Generation and Delivery businesses. The Generation segment benefited from market prices that increased nearly 40% over the same period last year. The Delivery business had healthy load growth with a 4% increase in retail sales.

Now, offsetting these improvements in the quarter were increased coal prices and lower generation output due to higher unplanned outages. Problems with wet coal due to heavy December precipitation were a key contributor to the outages. Our availability goal for 2008 remains unchanged at 91%. That would be top decile performance. Obviously, this is a very aggressive goal. Given that top quartile performance is 89% and the best Allegheny has ever achieved was 85%.

Over the last few years, we have made significant investments in the plants, have improved processes and are building a high performance culture. While we are clearly on the right track, our work is not complete. We will be striving to reach the 91% level this year, but my best estimate today is that we will hit the top quartile or 89% for this year.

Now, let me briefly take you through some of the highlights of the past year. First, with upgrades, for Moody's, Standard & Poor's and Fitch, we have regained our investment grade status and we paid a dividend in December of $0.15 per share, our first in five years. On the environmental front, we closed the stack bypass at our Pleasants Power Station, on budget and on schedule in December. This $100 million project will reduce annual emissions of sulfur dioxide by about 40,000 tons. Our scrubber projects at both Fort Martin and Hatfield also remained on budget and on schedule for service in 09.

We continued to make progress on our transmission expansion projects. For the Trans-Allegheny Interstate Line or TrAIL, we made our regulatory filings in all three relevant states; West Virginia, Virginia and Pennsylvania. In West Virginia, we reached a settlement agreement recently with the Consumer Advocate regarding both the need and route for the line. The staff of the West Virginia PSC and their consultants however still disagree with us on a number of issues. Evidentiary hearing took place in January.

In Virginia, the staff of the Commission and their consultants, each recognized the need for the line and concurred with the proposed route. Hearings will begin there later this month. And in Pennsylvania hearings start in late March. We expect to have orders from the Commission in all three states in the May to September timeframe.

We have also made progress at the federal level, and recently reached an agreement in principle with all the interveners in the case on all items including the appropriate return on equity. We'll file the settlement with FERC within the next couple of months and would expect a decision later this year.

During the year, PJM also authorized us to build a second transmission line, which will be called the Potomac-Appalachian Transmission Highline or PATH. That line will run across West Virginia and terminate in Maryland. This project will be owned and operated through a joint venture with American Electric Power. In late December we filed for incentive rate treatment at the FERC. We expect to move forward with state regulatory filings to this project by the end of this year.

One other transmission accomplishment, in December we completed again on budget and on schedule, a $48 million upgrade at our Black Oak Transmission substation. The new equipment, the nation's largest Static VAR Compensator will immediately reduce congestion on the constrained 500 kV Black Oak to Bedington transmission line. This is a project that had previously been approved by FERC for incentive rate treatments.

On the cost side, we continue to control operations and maintenance expenses O&M, holding these costs virtually flat in 2007 compared to the prior year. On the legal front, we resolved our litigation with Merrill Lynch. We'll make $50 million payment to Merrill and they will convey a minority interest in Allegheny Energy supply back to us.

As you will recall, the Court of Appeals had reversed the judgment against us, and remanded the case back to the same trial judge. We believe this is a fair settlement, considering the effort, expense and exposure of continued litigation. It's good to put this last wastage of the failed past behind us.

Finally, we serve a much needed capacity market emerged in PJM during the year. PJM has now conducted four capacity auctions. Our marketing clearing price and the most recent auction was the $174 per megawatt day. The next auction which will be for the 2011-2012 planning year is scheduled to May. Capacity markets will continue to be an important long-term growth driver for us.

The year 2007 was not, however, without some disappointments, particular in regard to our rate cases. In West Virginia, while the Commission reinstated our fuel cost, it reduced our base rates substantially. Our petition for reconsideration is still pending. And in Virginia, the Commission approved in December only $10 million of the $42 million requested in our second attempt to recover increased purchase power cost. We have appealed this decision. Our prior Virginia rate case is also under appeal. But overall, 2007 was a year of solid accomplishments.

Now, let me say a few words about our priorities for this year. Earnings growth remains the top priority, and we are well positioned to deliver solid growth in 08. Keeping our scrubber projects on budget and on schedule is another key priority for this year, as is helping our customers conserve energy and improve efficiency through our watt watches initiative.

There are several significant regulatory and legislative issues that we must address this year. For example, state approvals for TrAIL and federal incentive approval for PATH, as well as under recovery of purchase power cost in Virginia. On the legislative front, the Pennsylvania General Assembly is debating a set of energy proposals and at the federal level Congress will continue to debate climate change proposals. We need to be and are active participants in all these issues.

Our high performance initiatives are delivering strong results. We set goals back in 2004 to get the top-quartile operational and financial performance by the end of this year. We have been making great progress, and achieving our 08 goals will put us in that top tier for most of our key performance metrics, such as supper critical power plant availability, safety and operating costs per unit of output at both, generation and delivery.

So in summary, Allegheny has made good progress in the last 12 months, and we remain very focused on meeting our objectives for this year. With our financial condition restored and strong growth on the horizon, I am excited about where we are headed as a company. We are very well positioned to be a top performing, high growth utility in 2008 and beyond.

Now, let me turn the call over to Phil.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Thank you, Paul. Good morning. Let me begin with our fourth quarter results. For the fourth quarter of 2007, we reported net income of $110 million compared to $65 million a year ago. We are at $0.65 per share in the fourth quarter versus $0.38 in the same period last year. 2007 earnings benefited by $32 million due to the reversal of accrued interest as a result of the resolution of the Merrill Lynch lawsuit.

Adjusting for Merrill Lynch, fourth quarter 2007 net income was $79 million. Last year's adjusted net income of $62 million excludes results from discontinued operations. Adjusted results were $0.46 per share for the quarter just ended, compared to $0.37 a year ago.

For the full year 2007, earnings were $412 million or $2.43 per share, compared to $319 million or $1.89 per share in the prior year. 2007 earnings adjusted for Merrill Lynch were $2.26 per share up from 2006 adjusted earnings per share of $1.83. We do not expect any further direct income statement impact from the Merrill Lynch settlement. Under the settlement agreement, we will pay Merrill Lynch $50 million in 2008. This payment will be accounted for as a purchase of minority interest, which will have a balance sheet impact and no charge to income.

Let me summarize the key factors that impacted the change in adjusted earnings per share for the fourth quarter. A net effect of market prices, marketing contracts and hedging activities increased EPS by $0.10. Prices in our zone averaged $55 per megawatt hour, a 37% increase over the fourth quarter of 2006.

Decreased generation output reduced earnings by $0.08 per share. Plant output decreased by about 811,000 megawatt hours or 7% in the quarter. Higher coal prices reduced EPS by $0.06. Our fully delivered coal price per ton increased from $39 in the fourth quarter of last year to $42 in the fourth quarter of 2007. Higher generation rates in Pennsylvania improved EPS by $0.05.

Our Pennsylvania generation rates increase 8% on January 1st of 2007. This was the second in a series of annual increases scheduled through 2010.

Low growth and weather increased EPS by $0.03, primarily driven by increased residential consumption. Higher PJM capacity revenues contributed $0.02 per share. Reduced interest expense, excluding securitized interest, which is recovered in rates added $0.02 per share. And finally, all other factors increased earnings by $0.01. In total, adjusted earnings per share increased $0.09.

Now, I would like to discuss the quarter-to-quarter changes in each of the primary lines of the income statement. Here is an overview of the changes on a GAAP and adjusted basis. Beginning with the top line, revenues increased by $49 million. Let me summarize the key contributing factors.

Market prices, including PJM capacity revenues improved revenue by $42 million. Higher Pennsylvania generate... generation rates increased revenue by $13 million. Decreased planned output reduced revenues by $28 million, load growth and weather increased T&D retail revenues by $9 million. Retail electricity sales increased 4% over the same period last year.

Increased sales by our supply business to third parties benefited revenues by 13 million. This resulted from supply, selling, energy and associated services to the PJM market instead of its affiliate Allegheny Power. This increase in revenue is entirely offset in purchase power expense. All other factors netted to zero.

Moving from revenues to expenses, fuel costs increased by $20 million period to period. Higher coal prices and SO2 allowance expense were offset by lower generation output. The SO2 allowance expense is related to West Virginia generation and is recoverable through the energy clause.

Purchase power expense increased $15 million, primarily due to increases in Allegheny Power's third-party purchases of energy and associated services and increased PURPA generation purchases.

Deferred energy costs decreased expenses by $6 million due to increases in PURPA generation costs and West Virginia fuel and energy costs which will be recoverable in future periods. O&M expenses increased about $3 million, primarily due to increased special maintenance.

Taxes other than income taxes increased by $10 million. The fourth quarter of 2006 benefited from a decrease in reserves as a result of completed audits. Interest expense excluding the Merrill Lynch settlement and interest on securitized debt was down $5 million. All other pre-tax factors were up $3 million. The net result of all of these items was a $10 million improvement in pre-tax income.

Our tax rate was approximately 35% for the quarter. 2007 taxes benefited from a favorable state income tax settlement. Our effective tax rate for the year was 37.6%. We expect our annual 2008 effective tax rate to be about 38%. This concludes my discussion of the income statement.

Moving on to cash flow. Net cash flow from operations was $263 million in the fourth quarter and $979 million for the year. Capital expenditures were $282 million in the quarter. This includes a 161 million of spending on our scrubbers and transmission expansion projects. Free cash flow excluding capital expenditures for the Fort Martin scrubbers, which are funded through securitization proceeds, was $15 million for the quarter.

Capital expenditures were $873 million for the full year 2007. This is a $150 million below our original 2007 estimate and is attributable to changes in the timing of cash outlays for our two scrubber projects which remain on budget and on schedule. Free cash flow was $202 million in 2007, excluding capital expenditures for the Fort Martin scrubbers. Discretionary cash flow was $177 million after the $25 million dividend payment in December. Our credit metrics continued to improve.

Now, let's turn to the outlook for 2008. Here are the key factors we expect to drive earnings growth for all of 2008 as compared to adjusted 2007 results. We have made some changes from what we presented in October. Let me comment on several items. We have reduced plant availability to a $60 million benefit, which corresponds to reaching the first quartile or 89%. We have executed marketing contracts and hedges on about 8 million megawatt hours of generation at prices that will result in a benefit of $30 million. We still have about 2 million megawatt hours of un-hedged generation in 2008.

Current PJM forward prices are about $5 per megawatt hour above released 2007 prices. We have added $10 million for the impact of the Virginia rate decision.

Coal prices have risen significantly since our last call. We know expect higher coal prices to adversely impact supply by about $50 million, a $10 million increase over our previous estimate.

Let me take a moment to discuss our contracted generation in coal positions. We have contracted over 95% of supplies 2008 coal needs. In 2009 and 10, we have 60% of supplies generation output and coal contracted. For our remaining generation, our primary commodity exposure is to the spread between power prices and coal prices or the dark spread. In 2011 and 2012, we have contracted for over 50% of our expected coal needs, but have minimal generation contracted.

Let me explain how this contracted position affects our commodity exposure. Assuming gas and coal generation each set power prices about 50% of the time, we have minimal exposure to coal prices. But, we have significant exposure to power prices when gas generation is setting the price, and therefore, we are sensitive to both gas prices and marginal heat rates over this period.

The estimated fully delivered prices for all of our existing fixed price coal contracts increased from $44 per ton in 2008 to $47 per ton in 2012. Most of these contracts were established prior to the recent run-up in spot coal prices. We will provide you with updates as we enter into new contracts.

And with that, let me turn it back to the operator for questions.

Question And Answer

Operator

[Operator Instructions].

Max Kuniansky - Executive Director, Investor Relations and Corporate Communications

Operator, we will take the first question.

Operator

Thank you. Your first question comes from the line of Dane Eggers with Credit Suisse.

Daniel Eggers - Credit Suisse

Phil, can you just give us a little more the color around the coal contract and I guess most importantly what sort of price that you guys are seeing in the open market today, where coal is actually getting contracted, and what your flexibility is going to be to take higher sulfur coal as scrubbers get done?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

To a degree, first of all, in 2008 towards the end we weren't... towards the end of 2007 and into 2008 we've more or less finished off our 2008 position, as I said. And the prices were up quite a bit for those contracts as the average price shows on the slides. So, we are clearly in a position short-term right now where prices have moved up on us. There is still an open question as far as what contracted coal prices are going to be in 2009 and 10 and beyond. The longer term contracting discussions, there's only been a few we've been involved in, and I'm not going to talk about pricing from it. But, as it's been the case in some of the past, the producers seem to believe that the run-ups going to last for quite sometime. And it's unclear as to how long the run-up structurally really will last in terms of whether it's six months, a year or two years. It may well be on long-term contracts that we end up with supply contracts that have a frequent market re-openers to try that manage the different... the difference of opinion on when prices will cool or if they cool.

Daniel Eggers - Credit Suisse

And then what about the ability to switch to some higher scrubber coals?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well, I think Dan when you look... at the position that we are showing out overtime all of our contracted coals in the 10, 11, 12 and beyond timeframe are basically scrubber coal. So we've already been taking advantage of that ability. And we locked in a lot of scrubber coal. In fact, those contracts... the long-term contracts we have that are fixed price within inflationary adjustors are now well past 2017 at the kind of pricing we have in our pricing slide. So we took big steps over the last two years to lock scrubber coal in before really scrubber coal moved towards the lower sulfur coal or before all the scrubbers got built. So, in some ways, we are already taking advantage of the knowledge those scrubbers are coming on.

Daniel Eggers - Credit Suisse

Okay. And Paul, I just want other quick one. What are you seeing by way kind of timings for the transmission project. Are they going to be able to get delivered on time and what kind of deadline should we be looking for as far as approvals to the similar [ph] you are going to hit the original targets?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Right. Well, we need the approvals from the three relevant states. West Virginia completed the evidentiary hearing in January last month, and by statute they have to make a decision by May 2nd. In Virginia, the hearing begins in February and then Pennsylvania is the last one in March. So I think we would start seeing decisions in that May probably dragging up to maybe as late as September this year before we get a final decision on all three of the states. And we've been doing a lot of work on deciding and getting that going, and we would hope to start the physical construction then before the end of this year.

Daniel Eggers - Credit Suisse

And if you did that, you would say you'd be on target for delivery in 11?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, we would be.

Daniel Eggers - Credit Suisse

Okay. Thank you.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Okay. Thanks Dan.

Operator

Your next question comes from the line of Reza Hatefi with Polygon Investment.

Reza Hatefi - Polygon Investment

Thank you very much. Paul you mentioned 2008 availability for supercritical's 89 versus your previous guidance of 91. Is that going to trend a little higher in 2009 towards that 91 level or 89 sort of that level is the normalized level now?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, we have goal that... we've always had the goal to get to the first quartile, so 89 gets us there. 91 is still our aspiration for this year and we frankly haven't given up on it. But, we've just thought it was more realistic and conservative, especially given our 07 performance in some of the kind atypical problems we've had that we ought to just lay it out as 89 with 91 as the aspiration. I would tell you as we are going forward, we are really committed to try to get to that 91. It's not, as I indicated an easy goal because it would put us in the top quartile, and we have been making some great improvements on the basic areas that we focused on, particularly tube leaks which is the major cause of outages and they've come down by about a third over the last three or four years. But, we've had some unique issues. In the fourth quarter we had some wet coal problems as I mentioned on the call. We have had some other kind of atypical balance of plant issue. So, we just thought it was more realistic issue that hit the 89 this year and then go beyond that in 09.

Reza Hatefi - Polygon Investment

Great. And talking about the coal, obviously with the coal prices ripping up the last few months, has they also... has this resulted in the forward PJM energy curves going up? I mean, are these higher coal prices being reflected in higher off-peak prices in the forward curves... and the long-term forward curves and we still haven't seen that?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

To some degree, what we know is when you are actually get down to the actual physical market in PJM, that then current coal prices we will directly drive realized prices, as will gas prices and emission allowance prices and overall supply and demand of that day. But there is absolutely no question that for the periods of time when coal units are setting price that in a sense the marginal coal price of that day is what's going to drive price along with the other factors. I would say that if you look at it from mid-year of last year say July of 2007 and look to today and kind of jump out forward prices for '09, you do see that forward prices around the clock in PJM Western Hub have moved up reasonably healthily over that period; $7 to $8 of increase. And if do the math on the spot price of coal and the BTU conversions and kind of the dark spread implication of it, the coal prices have probably moved up on an $8 to $9 level.

So the market does appear... now some of that's probably gas price moving but the market does appear to be moving with coal price to a degree initially [ph].

Reza Hatefi - Polygon Investment

And your newly disclosed 2012 coal hedges at $47, when again were these hedges placed?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well they have been placed over the last two and half years, some more currently, some further back. Each of them have their own unique circumstances. Included in that position is our forward-looking arrangements with Alliance Resources which we have talked about in the past that looks like it's pretty clearly going to a firm coal commitment based on the last six months of developments.

There's some other contracts that have been introduced in more recent times. But each one has their own circumstance. So I don't know that they are indicative over what the next contract would be. But I do know that the series of contracts that take us out to 12 as I said before keep going, and in fact, we have in all the way out to 2017, we still have close to maybe a little over 40% of our supply coal units hedged.

Reza Hatefi - Polygon Investment

And just finally and fairly on, I think, it was the last call you mentioned that you expected capacity prices to fall more in line with rest of pool. Of course rest of pool went from 102 to 174. I just wanted to get your feel as to what you foresee for the future in terms of capacity prices and Allegheny Energy?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes. Well this Reza was the fourth auction that PJM had and it did came in a little a higher than what we were thinking back few months ago. The next auction is for the 11, 12 period and it will be in May and we really don't want to predict the price. But I'd say we really need to stay in prices that are high enough to support new generation for the region. That's the whole purpose of us to incent although the main purpose is to incent new generation. The 11, 12 auction has different elements and the coal price has been up from $198 of megawatt a day up to $285. So that's on the plus side. PJM has TrAIL and service in the 11, 12 period. So that's on the plus but as you know Duquesne load which is about 38... 3200 megawatts will be leaving PJM, and there's still I think a question on the 3000 megawatts, the capacity that's interconnected to Duquesne whether that's in or how much of it. So, that's a minus to maybe getting close to and even.

So those are some of the factors and it's a pretty complex calculation and we will see where it comes out.

Reza Hatefi - Polygon Investment

Thank you very much.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Lasan Johong with RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Good morning. A couple of quick ones. What was the FERC incentive rate that you actually got on TrAIL and Black Oak?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

On TrAIL, we have reached an agreement but the parties... part of the agreement is we don't disclose anything and until the thing is totally finalized. So, I really can't say anything on that.

Lasan Johong - RBC Capital Markets

Okay. Paul, have you felt or has Allegheny felt any repercussions from the current economic malaise?

Paul J. Evanson - Chairman, President and Chief Executive Officer

On the delivery side, I wouldn't say, we have seen that at all. Our sales were up, industry may be down a little bit. So I would say we haven't seen in a loss there and we haven't quite seen it yet on the generation although the movement in fuel prices of course is where we will see and now get reflected but we really haven't seen it in the output.

Lasan Johong - RBC Capital Markets

Okay. And on your O&M cost, the target was $705 million or best than $705 million and you guys obviously beat that by a mile quite a while back. But this sounds like O&M expense are coming back up. Is there any prospects or O&M expenses coming back down or are we going to continue to see something in the range of that $705 million going forward?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well $700 million is kind of the level we thought makes sense on a consistent basis although we constantly push and improve productivity and drive it down. But recognize that when you see the numbers going forward, there will be some increases for two reasons, one of which is when the scrubbers start coming in '09, there is an O&M cost to that, people cost, et cetera, to that part of it. So that drives it a little bit. And then when we... as the transmission lines TrAIL gets spilled on the FERC, we get this formulaic recovery monthly. So whatever our cost are, we basically recover them.

So there is definitely some O&M although it's not huge on transmission. But there is some, but the good news is it's immediately recoverable. So that's a little bit of a less concern than on kind of a traditional O&M. So we are going to stay focused on trying to maintain it leveled or a little bit less adjusted for those formulaic recoveries in scrubbers.

Lasan Johong - RBC Capital Markets

Got you. Phillip, real quickly, generally speaking with the range of CO2 legislation being counter played out there, are we going to experience generally a no effect from CO2 legislation or generally slightly negative effect from CO2 legislation. How are you thinking about that?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well I think no effects pretty improbable. So I... if those are my choices I will take slightly negative. But it's too early. It's a little too early to start quantifying it. Obviously we have some level of protection in that coal is on the margin, a fair amount of time in the region.

Lasan Johong - RBC Capital Markets

Yes, you are right.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

So that we are certainly less exposed than other companies that might be in a more gas intensified market.

Lasan Johong - RBC Capital Markets

That's right, okay. Thanks.

Operator

Your next question comes from the line of Brian Russo with Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

Good morning.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Good morning.

Brian Russo - Ladenburg Thalmann

Most of my questions have been asked and answered but could you just tell us how much coal you expect to burn in 2008? Is approximately 19 million tons is that accurate?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

That's a reasonably guess, yes.

Brian Russo - Ladenburg Thalmann

Okay, and then secondly as supply margin widen and start generating were meaningful free cash flow? I am just wondering if you could comment on possible uses of that free cash?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well our immediate priorities for free cash flow will be funding our equity components of our TrAIL and PATH transmission lines. We've obviously got a dividend to pay now and we will certainly look longer-term at increasing that dividend on a periodic basis. And we are always evaluating the best use of the cash beyond that. We are always looking for new investment opportunities that can create shareholder value and we will always try to guard that cash as you shareholders would want us to and do the best use we can with it.

Brian Russo - Ladenburg Thalmann

Okay. And then lastly what exactly is the timing of scrubber installation completion, is it before the summer of '09?

Paul J. Evanson - Chairman, President and Chief Executive Officer

It varies by plant. We have three units at Hatfield and two at Ford Martin. The Hatfield one will start in the first quarter and continue into the summer and then Fort Martin will be done. I think it's pretty close towards the end of the year.

Brian Russo - Ladenburg Thalmann

All right, thank you very much.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Okay.

Operator

Your next question comes from the line of Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates

Good morning guys.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Good morning Paul.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Good morning Paul.

Paul Patterson - Glenrock Associates

I want to ask just first a really simple technical question. What was the impact of the $979 million, what was the impact of working capital on the operating cash flow? The second question that I have sort have just a sort of follow up on all the questions on coal, when we look at the last two slides are all these coal contracts associated with the non-regulated part of the business?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes, the last is supply business.

Paul Patterson - Glenrock Associates

Right. Okay.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

That's how we structured both of those slides.

Paul Patterson - Glenrock Associates

Just want to clarify that. And then when we just be looking... I mean you got the difference in coal quality and what have you that you guys have projected? If you look at contracts being done with what you're looking at in terms of burn for different quality coals in 2009, what kind of numbers are we looking at in terms of what prices might be out there?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

It's just to... frankly most... our burn is increasingly becoming scrubber coal...

Paul Patterson - Glenrock Associates

Right.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

But it's frankly too early to judge. I don't yet know what prices are going to be for incremental contracts in '09 and especially in 10. And I certainly sense upward pressure in '09. I don't know how much that will push price up, it's every contract, it's own unique circumstances. So it's just too early for me to judge but I'll definitely update you and everyone else as we enter into contracts.

Paul Patterson - Glenrock Associates

Okay. Do you have the working capital number close by?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Just a second. It's a pretty small component of it, it's less than 10% of it.

Paul Patterson - Glenrock Associates

Negative or positive?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

It was a help.

Paul Patterson - Glenrock Associates

It was a help of about 10%?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes, a little less.

Paul Patterson - Glenrock Associates

Okay, thanks.

Operator

Your next question comes from the line of Ashar Khan with SAC Capital.

Ashar Khan - SAC Capital

Phil, I wanted to understand how much is under recovery in Virginia costing us in '08 in terms of what kind of ROE are you earning in that business? And secondly, I just wanted to get a little bit mid of path as to how do we go about getting this recovery and the agreement and is there a possibility if things don't work out to kind of sell this territory, I just wanted to get a better clue is to how the under recovery gets, I guess, eliminated as we go through the year?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Right. Well Ashar, I would like to give you an ROE number but it's going to be a little tough because unfortunately we have... under-recovered purchase power cost will run about $100 million or so over the next 12 month. So there's no earnings at all. In fact it's a large loss. We only have about a $160 million, $170 million of rate base in Virginia to begin with. So in a normal year where you would makes $10 million maybe after-tax of profit, so here we are going to be losing a lot of money. So it clearly is a unsatisfactory situation. And we are doing everything we can regulatorily, judiciarily or legislatively and otherwise to improve the situation. We will be going back to the commission before July 1st which they have asked us to do to calculate what the purchase power recovery will be for the 12 months beginning July '08. We got the $10 million annualized increase but only takes us to June 30th. So we go to that period.

It's our view that when we get January '09 under the new Virginia legislation that since default service ends we will now be entitled to full recovery and that our MOU, that infamous MOU will terminate at that point in time. So that I think our reading of the law and we'll see how the commission decides that and so we're really looking and trying to do exploring every alternative possible to include this just as soon as we can. But we think we have a problem at least for the next 12 months.

Ashar Khan - SAC Capital

Okay. And then Phil I just wanted to clarify the tonnage that is burned on the unregulated plant is how much of coal? I mean you've got some regulated --

Philip L. Goulding - Senior Vice President and Chief Financial Officer

About 75% of the total burn.

Ashar Khan - SAC Capital

About 75% of the total burn. Okay, thank you.

Operator

Thank you. Your next question comes from the line of Daniele Seitz with Dalhman Rose.

Daniele Seitz - Dalhman Rose

I just have one more... a couple of more questions, and what is the FERC ROE that you are requesting for the second line?

Paul J. Evanson - Chairman, President and Chief Executive Officer

14.3.

Daniele Seitz - Dalhman Rose

And when do you anticipate to get a sense of what FERC is willing to give?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well, I think we'll get a sense on TrAIL before we get the path sense because we have an agreement with all the interveners which does go to FERC and we'll see whether they approve that.

Daniele Seitz - Dalhman Rose

Most of them will have the same ROEs, they are not separate?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

No, not necessarily... different timeframes, different projects, different technology, et cetera. So they may be more or less of... that of course does not match. But I'd just I will give you a good indicated Daniele where it's going to come out.

Daniele Seitz - Dalhman Rose

Okay. I was also wondering if you are getting... you anticipate to get some credits in '09 and '10 or at least not have to continue paying more emission credits in those years. How do you visualize your emission credit purchases?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well, we visualize... once we get 2010 beyond and SO2 allowances, we think we will have small degree of access credit after our scrubbers get done. And as the scrubbers get done that position will reduce over the intermediate period.

Daniele Seitz - Dalhman Rose

And do you have any... a sense of where you are high at this time, how much do you purchase?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

On allowances?

Daniele Seitz - Dalhman Rose

Yes.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well we have in our 2008 growth drivers, Daniele. We indicate and this is for supply also. We indicate that SO2 allowance cost will... are estimated about $30 million negative growth driver. That's based on an estimate of needing to purchase about 50,000 tons of allowances in the year.

Daniele Seitz - Dalhman Rose

Great. And if I was looking at the longer-term payout ratio, let say 2011. What do you sense would be a normal goal for you? I mean, I know, you are ramping up slowing but I was wondering --?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

What, I am sorry --

Daniele Seitz - Dalhman Rose

Dividend payout ratio?

Max Kuniansky - Executive Director, Investor Relations and Corporate Communications

Dividend?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Dividend? Are you are saying dividend?

Daniele Seitz - Dalhman Rose

Sorry, yes.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

So, I have already spelt rigging [ph] looking SO2. Dividend... you are asking what are dividend policy is and what it... how it may change over the longer-term?

Daniele Seitz - Dalhman Rose

Longer term, yes I understand that, you are ramping up. Just I know it.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Right. Well we haven't adopted the formal policy. But I think it's reasonable to think that; a) we are going to be adjusting it annually, probably in October or December of every year. I think it's likely we will maintain the payout ratio that we have which is a low ratio but nonetheless if our earnings grow the way with the way the plan is that dividend will be increasing proportionately. So I think we will see a continued increased dividend at a good growth rate.

Daniele Seitz - Dalhman Rose

Great, thank you.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Thank you Daniel.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Operator, we have a couple of people who are having trouble getting into the queue. Could you remind everyone again how to ask a question.

Operator

Yes sir. [Operator Instructions]. Your next question comes from the line of Edward Heyn with Catapult Capital Management.

Edward Heyn - Catapult Capital Management

Hello, can you hear me?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes we can, good morning.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Good morning.

Edward Heyn - Catapult Capital Management

Hi. Phil just first a quick clarification, you made some mentions of contracts out to 2017. Did you say that that was about 40% of your hedge position? Is that... did I hear that correctly?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes, that in 2017 and I just picked that year because it's five years further, that we have over 40% of supplies total needs hedged.

Edward Heyn - Catapult Capital Management

And at relatively comparable prices to the stuff you have given.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes, they all had escalators, but yet, yes, they are mostly inflationary and/or acts of government pass through also like the Mine Safety Act and that kind of thing.

Edward Heyn - Catapult Capital Management

Then could you just give us... you walked through the slide kind of on your hedging philosophy and kind of how... can you just walk through again how you feel you are levered towards different trends in the market and how being 60% hedged on coal but open on all your pricing kind of impacts you as commodity prices move?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes, that's fair, and that's where I will focus. I mean I will just summarize quickly in '09 and '10, we've got because we are balanced in our power and coal, we've really got exposure to the dark spread. And we have 40% of our position which is about 15 million megawatt hours phasing the dark spread. So that has sensitivity to it. But frankly, that's got both gas sensitivity and coal sensitivity to it and some are moving for us and some are moving against us. And it's too early to say what it's all going to mean.

Probably more importantly in '11 and on for a lot of years if you think of us being 50% hedged in coal and if you just assume to make it simple that half the time gas generation is setting price and half the time coal generation is setting price then you take the next step and say, okay, let's say the bought coal is locking in the input cost for the gas and then non-bought coal is going to pass through whatever the price actually is in that time period is going to pass through and get recovered in the power price because coal units are setting price.

A bit of a mouthful but where that takes you is that basically if 50% of the time the coal... you have minimal to know coal exposure as long as we contract our coal in a way that stays fairly close to where the markets are as the power is sold.

Edward Heyn - Catapult Capital Management

Okay. And then so in 2011 where you are actually 60% hedged, isn't it... wouldn't actually be if coal went up, you would actually make more margin on to that kind of analysis?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes, that's the truth that we are actually, I guess, technically long coal in '11 especially since up until TrAIL gets done; it's improbable the 50% rule is going to apply. So we are at 60% and frankly coal is probably on the margin for us more than 50% of the time. So it's kind of an out phenomenon but higher coal prices probably benefit us economically.

Edward Heyn - Catapult Capital Management

Interesting. And then a just quick question on the trail line, you just mentioned. Was the trail line in the RPM auction that was just cleared last week?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes PJM, no, PJM included in the next auction, the '11,'12.

Paul J. Evanson - Chairman, President and Chief Executive Officer

To the 11 and '12 auction.

Edward Heyn - Catapult Capital Management

Okay. Is it right to state... we saw on the last clearing auction that the overall zones, there was a flattening of zonal pricing where everyone received the same price. Do you think that all things being equal, the TrAIL line being added kind of will continue that trend?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes, I think that's the most important part of TrAIL line being added is that it just hopefully keep thing flat. I mean we got to assess ultimately what Duquesne departing and how much of that generation comes back and to have a real clear answer on that. We probably won't know till the auction clears in later this year.

Edward Heyn - Catapult Capital Management

Okay, great. Thanks a lot, guys.

Operator

Your next question comes from the line of Rick Shobin with GLG.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Rick?

Rick Shobin - GLG Partners

When we talk to a bunch of the coal companies just with regards to supply of coal and how they sign contracts, a lot of them states that or most of them state that they have re-openers and even if they sign contracts and prices move dramatically either up or down, there is all re-openers, adjusters things that cause the prices to ratchet up or down. So I'm just wondering... I mean it doesn't necessarily have to be specific to your company, but just in general for coal contracts, how do they work, are they... can you get just a fixed price that's adjusted by inflation so even if coal goes from $45 to $120 a ton, you're not impacted really at all?

Paul J. Evanson - Chairman, President and Chief Executive Officer

So we have.

Rick Shobin - GLG Partners

Or is every contract different? I mean how do they work?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Every contract is different, that's how they work. Everything in negotiation. As I stated we have done that with governmental legislation passthroughs and other kind of big events that the coal producers with need to protect themselves. We have done that for the fixed price coal obligations that I have shown in the slides.

In fact, we have some contracts that have re-openers. I am not including the volume once the re-opener comes in either slide. So we have signed a number of contracts that don't have re-openers, don't have the deviation clauses. I would say that the more typical contract does but if you look for unique circumstances you can with certain suppliers under certain circumstances it's a good thing for both the sides to be able to get certainty.

Rick Shobin - GLG Partners

And so... I mean if we look at your coal supply needs, there's a good probability that your coal supply is higher, contracts are higher than the actual contracts that have firm... prices that are firm. Is that correct?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well I guess, yes. I have some coal supply arrangements that I am not showing as contract; that they are the contracts, it is supply contracted, but it's not fixed price yet. So it doesn't really affect the commodity risk of the company.

Rick Shobin - GLG Partners

When you look at just other players in the industry and I mean it seems like you have a... from the way that the coal company explained it, it seems like you guys have a significant portion of contract that have firmed up whereas they... the coal company seem to be under the impression that even tough they've locked in tonnage they can still have like ratchet... ratchet up coal prices. Does that mean that other companies may be impacted more so than you guys are just because you've been better negotiating.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

I don't know better negotiating, just some of our counterparties have... there have been unique circumstances where it's been a win for both of us to kind of lock in and know what that price is going to be. I think it's true that some of the larger companies would shy away from those kinds of contracts. But we certainly over the last three years have looked for those opportunities and pursued them vigorously when they've appeared.

Rick Shobin - GLG Partners

And my last thing is... question is, do you think that ability that ability to get those kinds of contracts where you can actually see the visible price that locks in over extended period of time. Isn't that, you think, a lot of that has to do with mine proximity? See where your plant station is?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

It's got so many different factors. Certainly it has to do with where the mine is and how easy the mine can deliver to other places, right. So if you've got a mine they are really based on logistics and interconnections, your plant is really the most realistic place for it to sell its coal, well then it's more likely you can get that kind of contract.

Rick Shobin - GLG Partners

Thank you very much.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Sure.

Operator

Thank you. Your next question comes from the line of Greg Gordon with Citi.

Greg Gordon - Citigroup

Guys, I did some basic math on your incremental hedges from your EI presentation to now, and it looks like you hedged 2010 and 2011 on the margin at around $49 or $50 a ton. And that would be consistent with the switch from compliance coals to higher sulfur coal. I think a lot of people look at the Bloomberg screen and they see spot hole at $65, $70 a ton on compliance and they just assume that that's the price you're going to be paying. Is my math consistent, is that algebra right?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Not quite to the spot and that the $49 to $50 if that is the calculation and I know you're good at math would be a fully delivered cost and your spot prices would be a mine mount cost, or in the rail at the mine. So you would have to add delivery to your $65 also. But I wouldn't want to leave the impression that there is other opportunities for us where we could just buy coal at those kind of prices, and we will have to see.

Greg Gordon - Citigroup

But that is... but that math makes sense that your delivered costs on those incremental hedges was in the... roughly in the $50 range?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well, I just say that the position we just disclosed make sense and it's been checked carefully and the positions we've disclosed in the past make sense and have been checked carefully.

Greg Gordon - Citigroup

And when I look at the PJM West price relative to forward coal prices, they look like they have actually for '09 and '10 co-related quite well basically up in the last month. And then the run up in prices and coal has been sort of more aggressive than the run up in the price in power. You sort of said earlier that, if you saw that in the market on the forward curve, you could just basically hold your power and sell it, but where there is a much higher probability that on the margin, the dark spread's going to compensate you, right? So you have the flexibility if you think that the dark spread on the forward curve is incorrect, to not sell forward and just sell spot when you have a higher probability of being compensated. Is that a fair --

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Yes, absolutely, it's fair. That... we've that option and we would certainly consider that in making our decisions of whether to hedge or to hold our megawatt hours to sell on spot.

Greg Gordon - Citigroup

Okay. So in '09 and '10, when you are along the dark spread, you have to manage that risk and then '11 and beyond you really along gas and hate rate?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Exactly, correct.

Greg Gordon - Citigroup

Thank you guys.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Thanks Greg.

Operator

Thank you. Your next question comes from Chris Charlton with Millennium.

Jeff Gildersleeve - Millennium Partners, Inc.

Hi. It's Jeff Gildersleeve. Good morning. I just want to circle back on the difference between the compliance coal and the scrubber high-sulfur coal. Were you seeing a pretty substantial spread between those products in the forward years, and just wondered if you could confirm that.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well, there is definitely a difference between where we have historically contracted our scrubber coal as we are showing on our slides, and where the compliance coal is currently quoted in the forwards. But I... there's not a visible forwards for scrubber coal. So we just don't... and as I said, we have a lot of contracting yet to be done. So I don't know how to comment on where it stands today.

Jeff Gildersleeve - Millennium Partners, Inc.

And what... as far as forward contracting, what sulfur content are you typically looking at? In the £4 to £5 range or £6 plus?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Well I mean, we are rapidly heading towards most of our coal or scrubber coal. And so, we are able to go up to £6 or even a little above that.

Jeff Gildersleeve - Millennium Partners, Inc.

Okay.

Paul J. Evanson - Chairman, President and Chief Executive Officer

And we are also to go £4.5, if that's best opportunity.

Jeff Gildersleeve - Millennium Partners, Inc.

Right. Thank you very much.

Operator

Thank you. Your next question comes from the lines of Ted Olshanski with Scotia Capital

Ted Olshanski - Scotia Capital, Inc.

Yes. Good morning. In light of the fact that your 2007 CapEx came in below expectations, can you provide us with an updated CapEx expectations for 2008?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Certainly. A question... we now expect 2008 to come in at about $1.35 billion.

Ted Olshanski - Scotia Capital, Inc.

Okay.

Philip L. Goulding - Senior Vice President and Chief Financial Officer

And that's got obviously assumptions around the speed of approval and major capital expenditures on the TrAIL project and also has some assumptions around the PATH project starting to spend capital.

Ted Olshanski - Scotia Capital, Inc.

Okay. And regarding those two transmission lines, do you have an estimate right now regarding how much you expect to spend on those two lines?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

About... those two together, about $300 million in 2008.

Ted Olshanski - Scotia Capital, Inc.

Okay. And I was just wondering the... just by my rough calculations it seems like you are probably not free cash flow positive during 2008. And I was wondering, do you expect to meet the shortfall through the restricted funds on your balance sheet through cash or do you expect to excess the debt markets?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Right. Well, first to answer the first half of your question, if you do the math and look at the increase of capital, but then also look at the growth drivers to come out to roughly free cash flow neutral in 2008. Now that will depend on how fast the capital really gets spent. It also depends on a little, whether we pay a little bit of cash taxes and what happens to working capital. So that could go negative a little bit. And then of course, we've got... without a dividend increase, we would have $100 million of dividends to pay for the year. So, our discretionary cash flow would be negative in 2008. And I think our thinking on that is how would we fund that negative discretionary cash flow is, we are working on financing our TrAIL project and getting that financing in place and once that's in place, 50% of our TrAIL expenditures will be funded through debt, and that would leave our overall cash flows fine. But for some reason we needed it, we've got a little under $800 million of revolver capacity also.

Ted Olshanski - Scotia Capital, Inc.

Okay, great. Thank you.

Operator

[Operator Instructions]. You do have a follow-up question from Lasan Johong with RBC Capital Markets.

Lasan Johong - RBC Capital Markets

Phil, if I heard you correctly, you're saying that generally speaking, higher coal prices could benefit you in the... particularly in the other years. If that's the case then do you have an opportunity to maybe sell some of your current low price coal contracts and maybe capitalize on buying into higher coal prices. I'm not sure how that math will work that way but is that what I'm hearing?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

It's not... it certainly wouldn't be our intent. We are more about securing coal for our generation profitability, and we are not overbought [ph] in coal in any way long term. So no, I wouldn't think that we would sell. My comment was really specifically about 2011. We are much more balanced kind of out beyond 2011. We are more neutral to coal. We are not long or short, depending on what assumption you have for gas unit selling price versus coal unit selling price.

Lasan Johong - RBC Capital Markets

So basically this would be kind of a marginal thing at best anyway, so why bother?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Well, I guess I'd spend a lot of my time figuring out how to get our coal bought and this has been... I guess if we had a point of view that something crazy was going to happen, we might sell some, but it is not a place we spend a lot of our energy.

Paul J. Evanson - Chairman, President and Chief Executive Officer

It's not like gas contract that can trade on a market either, right?

Lasan Johong - RBC Capital Markets

Exactly. But then you can sell to another utility for example.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Possibly. But --

Philip L. Goulding - Senior Vice President and Chief Financial Officer

No, it's not our primary focus. We like the new contracts.

Lasan Johong - RBC Capital Markets

Great. Thank you.

Max Kuniansky - Executive Director, Investor Relations and Corporate Communications

Thanks Lasan.

Operator

Thank you. You do have a follow-up question from Reza Hatefi with Polygon Investment.

Reza Hatefi - Polygon Investment

Could you give us an update on your filing in Pennsylvania for pricing of 2010 or 2011 power, and going forward?

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes. We have filed a plan with a PUC. They assigned it to an administrative law judge. Hearings have already been set forth to begin on March 31st. And I think we would probably expect the PUC decision by the end of July, which will enable us to launch our first procurement probably in the fall of this year. And our proposal pretty much follows the PUC's guidance lines that were issued in back in the May of last year, Reza.

Reza Hatefi - Polygon Investment

And how does this dovetail with the legislative issues in Pennsylvania. I mean I guess it seems like sort of also is dependent on what the outcome is there or maybe you can talk about that a little bit.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes. To some degree. The legislation, I mean this has been discussed now for probably six-plus months, and in some way we are still kind of early in the process and there are just so many variety of proposals in that Pennsylvania legislation, now from energy efficiency, conservations, smart metering. Of course the Energy Fund is very important to the Governor and how it's funded, there isn't some and say draconian proposals relative to rate charts introduced. My sense is it's not going to meaningfully change, how we procure it and how that gets pass through the customers, could be impacted by the legislation. And I think, we still are in negotiation and posturing going on and frankly, my sense is in the end, we going to see a constructive set of rules coming out of Pennsylvania.

Reza Hatefi - Polygon Investment

And, Phil, I think catch what you... what the 2008 CapEx was. But could you repeat that and could you give us a little flavor for 09 and 10 CapEx?

Philip L. Goulding - Senior Vice President and Chief Financial Officer

Sure. The 2008 CapEx, our current estimate is $1.35 billion. And then 2009 and 10, would drop off, but stay above a $1 billion in all likelihood.

Reza Hatefi - Polygon Investment

And then the $1.35 billion in 08 how much is that for supply and how much is regulated?

Paul J. Evanson - Chairman, President and Chief Executive Officer

I don't have that break out exactly that way. We tend to talk about the major projects and $300 million of it is our TrAIL and PATH projects, and then $340 million is our Hatfield scrubber project and the $295 million is our Fort Martin scrubber project.

Reza Hatefi - Polygon Investment

And just finally, earlier questioner was asking about Virginian and you mentioned it's...this under recovery is hurting it by about $100 million, and the rate base is only a kind of $160 million or $170 million. Obviously that sounds like a big disconnect because if there was a $100 million under recovery you would think, it would go at bankrupt. But is that not happening because it's... Virginia is under the Potomac Edison balance sheet which is of course a much bigger balance sheet than just the Virginia jurisdiction?

Paul J. Evanson - Chairman, President and Chief Executive Officer

That's... yes that is the case.

Reza Hatefi - Polygon Investment

So, really, I guess --

Paul J. Evanson - Chairman, President and Chief Executive Officer

But it's not something obviously we are going want to see continue, nor the other states to any extended period of time. And as you say, there is a massive disconnect here.

Reza Hatefi - Polygon Investment

Great. Thank you very much.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Okay. Thanks a lot.

Operator

And at this time, there are no further... you do have a follow-up question from Greg Gordon with Citi.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Greg, welcome back.

Greg Gordon - Citigroup

Just following up on Reza's question. I know it's a delicate political situation. But, I mean how the governments of the other states that Potomac operates in, and are the regulators been sort of made privy to the fact that the credit of their distribution utility is potentially at risk, because of Virginia's sort of public policy on these power prices. How do we see this playing out and over what timeframe? Because it is.... you have been soft-peddling this, but it's beyond an untenable situation? You'd potentially... you could potentially sink the distribution utility for three states.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes, I don't think I was been soft pedaling it, Greg. I think it's a very serious situation and one that I've said is just unacceptable for any extended period. And we are looking at every option and doing every thing possible to stop those losses, on the legislative-regulatory front, on political front, on every other manner to try to stop this and it's one of our highest priorities for this year.

Greg Gordon - Citigroup

Thank you.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Okay. I think that's the last set of questions then. Operator, is that right?

Operator

Yes sir.

Paul J. Evanson - Chairman, President and Chief Executive Officer

Yes. Well, thank you all very much for participating. It's been a good active discussion. Thank you.

Operator

Thank you ladies and gentlemen. This does concludes today's Allegheny fourth quarter 2007 earnings conference call. You may now disconnect.

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